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, 2002
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
[NAME OF COMPANY IN CHINESE CHARACTERS]
(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 Name of each exchange
Each class On which Registered
---------- -------------------
American Depositary Shares, each representing 20 shares of
par value HK$0.10 per share.................................................................. New York Stock Exchange, Inc.
Shares of par value HK$0.10 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$0.10 per share..............................8,214,165,655
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) or the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant as 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|
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* Not for trading, but only in connection with the registration of American
Depositary Shares.
Table of Contents
Page
----
Certain Terms and Conventions....................................................................................................3
Currencies and Exchange Rates....................................................................................................7
Forward-Looking Statements.......................................................................................................9
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS............................................................10
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..........................................................................10
ITEM 3. KEY INFORMATION..................................................................................................10
A. Selected Financial Data.................................................................................10
B. Capitalization and Indebtedness.........................................................................13
C. Reasons for the Offer and Use of Proceeds...............................................................13
D. Risk Factors............................................................................................14
ITEM 4. INFORMATION ON THE COMPANY.......................................................................................23
A. History and Development.................................................................................23
B. Business Overview.......................................................................................26
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.....................................................................73
A. Operating Results.......................................................................................73
B. Liquidity and Capital Resources.........................................................................86
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.......................................................................94
A. Directors and Senior Management.........................................................................94
B. Compensation of Directors and Officers..................................................................96
C. Board Practice..........................................................................................97
D. Employees...............................................................................................98
E. Share Ownership.........................................................................................98
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...............................................................101
A. Major Shareholders.....................................................................................101
B. Related Party Transactions.............................................................................101
C. Interests of Experts and Counsel.......................................................................106
ITEM 8. FINANCIAL INFORMATION...........................................................................................107
A. Consolidated Statements and Other Financial Information................................................107
B. Significant Changes....................................................................................108
ITEM 9. THE OFFER AND LISTING...........................................................................................110
ITEM 10. ADDITIONAL INFORMATION..........................................................................................111
A. Share Capital..........................................................................................111
B. Memorandum and Articles of Association.................................................................111
C. Material Contracts.....................................................................................113
D. Exchange Controls......................................................................................113
E. Taxation...............................................................................................113
F. Dividends and Paying Agents............................................................................116
G. Statement by Experts...................................................................................116
H. Documents on Display...................................................................................117
I. Subsidiary Information.................................................................................117
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK......................................................117
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..........................................................118
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.................................................................119
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS....................................119
A. Material Modifications to the Rights to Securities Holders.............................................119
B. Use of Proceeds........................................................................................119
ITEM 15. CONTROLS AND PROCEDURES.........................................................................................119
ITEM 16. RESERVED........................................................................................................119
PART III
ITEM 17. FINANCIAL STATEMENTS............................................................................................120
ITEM 18. FINANCIAL STATEMENTS............................................................................................120
ITEM 19. EXHIBITS........................................................................................................120
2
CERTAIN TERMS AND CONVENTIONS
Definitions
Unless the context otherwise requires, references in this annual report
to:
o "CNOOC" are to our parent, China National Offshore Oil Corporation,
a PRC state-owned enterprise, and its affiliates, excluding us and
our subsidiaries;
o "CNOOC Limited," "we," "our" and "us" are to CNOOC Limited, a Hong
Kong limited liability company and the registrant of this annual
report, and its subsidiaries;
o "China" or the "PRC" are to the People's Republic of China,
excluding for purposes of this annual report Hong Kong, Macau and
Taiwan;
o "Hong Kong Stock Exchange" are to The Stock Exchange of Hong Kong
Limited;
o "HK$" are to Hong Kong dollars;
o "JPY" are to Japanese yen;
o "Rmb" are to Renminbi, the currency of the PRC;
o "Rupiah" are to Indonesian Rupiah, the currency of the Republic of
Indonesia; and
o "US$" are to U.S. dollars, the 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, 2002 of US$1.00=Rmb
8.2800. We have also translated amounts in Hong Kong dollars solely for the
convenience of the reader at the rate of HK$7.8000 to US$1.00, the linked
exchange rate between such currencies under policies of the Hong Kong
government in effect on December 31, 2002. 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, 2002, or at all.
For further information on exchange rates, see "Currencies and Exchanges
Rates."
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 oil and 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 oil and 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.
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 Indonesia; 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
3
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
Indonesian production sharing contracts to Pertamina, the Indonesian
state-owned oil and gas company 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. 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 and technical
assistance 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 "adjusted finding and development cost per BOE" means, for a given
period, the sum of (a) total finding costs incurred divided by the
sum of discoveries, extensions, and revisions of prior estimates of
net proved reserves and (b) the sum of (i) total development costs
and (ii) the amount of expected future development costs of proved
undeveloped reserves divided by the sum of (iii) proved undeveloped
reserves and (iv) the sum of undeveloped reserves converted to
developed reserves. This measure is used to account for expected
future development costs for existing reserves in addition to
finding and development costs already incurred.
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.
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, and revisions of prior estimates
of net proved reserves.
4
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 a further definition of reserves:
o "reserve replacement ratio" means, for a given year, gross 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 not necessarily 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 exploration wells in general.
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);
5
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.
6
CURRENCIES AND EXCHANGE RATES
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 8.2800 to US$1.00, the noon buying rate as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 2002. 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 rate 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:
Noon Buying Rate
----------------
Period End Average(1) High Low
------ --- ---------- ---- ---
(Rmb per US$1.00)
1998........................................................... 8.3008 8.2991 8.3100 8.2778
1999........................................................... 8.2795 8.2785 8.2800 8.2770
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
November 2002.................................................. 8.2773 -- 8.2774 8.2771
December 2002.................................................. 8.2800 -- 8.2800 8.2771
January 2003................................................... 8.2768 -- 8.2800 8.2766
February 2003.................................................. 8.2775 -- 8.2800 8.2768
March 2003..................................................... 8.2774 -- 8.2776 8.2770
April 2003..................................................... 8.2771 -- 8.2774 8.2769
2003 (through May 9, 2003)..................................... 8.2768 -- 8.2800 8.2766
----------
(1) Determined by averaging the noon buying rates on the last business day of each month during the relevant period.
As of May 9, 2003, the noon buying rate for cable transfers in Renminbi
as certified for customs purposes by the Federal Reserve Bank of New York was
Rmb 8.2768 to US$1.00.
7
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$1.00 or at all.
The following table sets forth the noon buying rate for U.S. dollars in
New York City for cable transfers in Hong Kong dollars as certified for
customs purposes by the Federal Reserve Bank of New York for the periods
indicated.
Noon buying rate
----------------
Period End Average(1) High Low
------ --- ---------- ---- ---
(HK$ per US$1.00)
1998...................................................... 7.7476 7.7465 7.7595 7.7355
1999...................................................... 7.7740 7.7599 7.7814 7.7457
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
November 2002............................................. 7.7988 -- 7.8000 7.7987
December 2002............................................. 7.7988 -- 7.7992 7.7980
January 2003.............................................. 7.8001 -- 7.8001 7.7988
February 2003............................................. 7.7991 -- 7.8000 7.7989
March 2003................................................ 7.7995 -- 7.7995 7.7987
April 2003................................................ 7.7991 -- 7.7998 7.7991
2003 (through May 9, 2003)................................ 7.7991 -- 7.8001 7.7987
----------
(1) Determined by averaging the noon buying rates on the last business day of each month during the relevant period.
As of May 9, 2003, 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$7.7991 to US$1.00.
8
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.
9
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
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 attached to this annual report and "Item 5--Operating and
Financial Review and Prospects" in this annual report. The following selected
income statement data and cash flow data for the year ended December 31, 2002
and the selected balance sheet data as of December 31, 2002 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 flow data for the 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. The selected
income statement data and cash flow data for the years ended December 31, 1998
and 1999 and the selected balance sheet data as of December 31, 1998 and 1999
are derived from our consolidated financial statements audited by Arthur
Andersen & Co, which are not included in this annual report.
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 December 31, 2001, 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."
Our financial information reflects our October 1999 reorganization and
has been prepared as if our current structure had been in existence at the
beginning of the relevant periods. The following financial information may not
necessarily reflect our results of operations, financial position and cash
flow in the future or what they would have been had we been a separate,
stand-alone entity during the periods presented. We have prepared and
presented our consolidated financial statements in accordance with Hong Kong
GAAP. For an explanation of the reconciliation of our net income and
shareholders' equity to U.S. GAAP, see note 38 to our consolidated financial
statements attached to this annual report.
10
Year ended December 31,
-------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
-------- ---------- -------- ---------- -------- ---------
Rmb Rmb Rmb Rmb Rmb US$
-------- ---------- -------- ---------- -------- ---------
(in millions)
Income Statement Data:
Hong Kong GAAP
Operating revenues:
Oil and gas sales...................................... 7,814 11,398 18,819 17,561 23,779 2,872
Marketing revenues..................................... 1,488 3,805 5,126 2,537 2,377 287
Other income........................................... 10 108 279 722 217 26
-------- ---------- -------- ---------- -------- ---------
Total operating revenues............................... 9,312 15,311 24,224 20,820 26,374 3,185
-------- ---------- -------- ---------- -------- ---------
Expenses:
Operating expenses..................................... (1,954) (1,855) (2,124) (2,329) (3,775) (456)
Production taxes....................................... (383) (579) (1,037) (884) (1,023) (124)
Exploration expenses................................... (584) (247) (553) (1,039) (1,318) (159)
Depreciation, depletion and amortization............... (1,954) (2,373) (2,578) (2,567) (4,020) (486)
Dismantlement.......................................... (188) (177) (104) (90) (126) (15)
Crude oil and product purchases........................ (1,432) (3,737) (5,098) (2,453) (2,326) (281)
Selling and administrative expenses.................... (650) (517) (456) (616) (1,007) (122)
Other.................................................. (109) (5) (217) (618) (31) (4)
-------- ---------- -------- ---------- -------- ---------
(7,254) (9,490) 12,167) (10,596) (13,626) (1,647)
-------- ---------- -------- ---------- -------- ---------
Interest income........................................... 117 54 237 318 148 18
Interest expenses......................................... (608) (662) (475) (117) (295) (36)
Exchange gain (loss), net................................. (303) (432) 381 235 (114) (14)
Investment income......................................... -- -- -- 221 193 23
Share of profit of an associate.......................... -- 13 218 90 165 20
Non-operating profit (loss), net.......................... 580 (1) (195) 35 (71) (9)
-------- ---------- -------- ---------- -------- ---------
Income before tax......................................... 1,844 4,833 12,223 11,006 12,774 1,540
Tax....................................................... (295) (722) (1,926) (3,048) (3,541) (428)
-------- ---------- -------- ---------- -------- ---------
Net income................................................ 1,549 4,111 10,297 7,958 9,233 1,112
======== ========== ======== ========== ======== =========
Net income per share (basic & diluted)(a)................. 0.26 0.69 1.63 1.00 1.12 0.14
Net income per ADS(a)..................................... 5.16 13.70 32.53 20.04 22.48 2.71
U.S. GAAP
Operating revenues:
Oil and gas sales......................................... 7,814 11,398 18,819 17,561 23,779 2,872
Marketing revenues........................................ 1,488 3,805 5,126 2,537 2,377 287
Other income.............................................. 10 108 279 722 217 26
-------- ---------- -------- ---------- -------- ---------
Total operating revenues.................................. 9,312 15,311 24,224 20,820 26,374 3,185
-------- ---------- -------- ---------- -------- ---------
Net Income................................................ 1,549 4,113 10,302 7,920 9,088 1,098
Net income per share (basic & diluted)(a)................. 0.26 0.69 1.63 1.00 1.11 0.13
Net income per ADS(a)..................................... 5.16 13.71 32.55 19.95 22.13 2.67
----------
(a) Net income per share and net income per ADS for the years ended December
31, 1998 and 1999 have been computed by dividing net income by the number
of shares and the number of ADSs of 6,000,000,000 and 300,000,000,
respectively (based on a ratio of 20 shares to one ADS), outstanding
immediately after our reorganization in 1999. Net income per share and
net income per ADS for 2000 have been computed by dividing net income by
the weighted average number of shares and the weighted average number of
ADSs of 6,331,114,421 and 316,555,721 respectively (based on a ratio of
20 shares to one ADS) for the period. Similarly, net income per share and
net income per ADS for 2001 have been computed, after considering the
dilutive effect of the shares underlying our share option scheme, using
7,942,288,803 and 397,114,440 respectively. Net income per share and net
income per ADS for 2002 have been computed, after considering the
dilutive effect of the shares underlying our share option scheme, using
8,219,285,384 and 410,964,269, respectively.
11
Year ended December 31,
-------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
-------- ---------- -------- ---------- -------- ---------
Rmb Rmb Rmb Rmb Rmb US$
-------- ---------- -------- ---------- -------- ---------
(in millions)
Balance Sheet Data:
Hong Kong GAAP
Cash and cash equivalents.................................. 426 879 2,797 6,394 7,839 947
Time deposits with maturities over three months............ -- -- 3,425 2,050 4,690 566
Short-term investments..................................... -- -- 300 8,896 6,531 789
Current assets............................................. 2,102 4,987 9,472 20,030 24,487 2,957
Property, plant and equipment, net......................... 18,963 20,907 22,654 23,828 36,072 4,357
Investment in an associate................................. 260 274 471 462 537 65
Total assets............................................... 21,325 26,168 32,597 44,320 61,096 7,378
Current liabilities........................................ 2,813 9,177 8,768 4,392 7,134 862
Long-term bank loans, net of current portion............... 8,333 6,033 4,749 3,256 941 114
US$500 million 6.375% guaranteed notes due 2012............ -- -- -- -- 4,071 492
Total long-term liabilities................................ 12,153 8,607 7,707 6,617 13,393 1,618
Total liabilities.......................................... 14,966 17,784 16,475 11,009 20,527 2,479
Shareholders' equity....................................... 6,359 8,384 16,122 33,311 40,568 4,900
U.S. GAAP
Total assets............................................... 21,325 26,000 32,330 44,062 59,984 7,244
Total long-term liabilities................................ 12,153 7,562 7,707 6,617 13,393 1,618
Shareholders' equity....................................... 6,359 9,261 15,855 33,053 39,884 4,817
12
Year ended December 31,
-------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
-------- ---------- -------- ---------- -------- ---------
Rmb Rmb Rmb Rmb Rmb US$
-------- ---------- -------- ---------- -------- ---------
(in millions, except percentages and ratios)
Other Financial Data:
Hong Kong GAAP
Capital expenditures paid................................. 3,576 4,070 4,404 4,343 6,833 825
Cash provided by (used for):(1)
Operating activities................................ 3,942 7,323 13,233 11,759 14,597 1,763
Investing activities................................ (2,952) (4,442) (7,861) (11,366) (11,724) (1,416)
Financing activities................................ (895) (2,428) (3,454) 3,204 (1,428) (172)
EBITDE(2)................................................. 5,364 8,630 15,315 14,366 18,499 2,235
EBITDE margin(3).......................................... 57.6% 56.4% 63.2% 69.0% 70.1% 70.1%
Ratio of EBITDE to gross interest expense(4).............. 7.5x 12.3x 32.2x 45.5x 45.7x 45.7x
Ratio of total debt to EBITDE............................. 1.9x 1.1x 0.4x 0.3x 0.3x 0.3x
Ratio of total debt to total capitalization(5)............ 68.3% 63.1% 27.5% 12.3% 11.6% 11.6%
U.S. GAAP
Cash provided by (used for):
Operating activities(6)............................. 3,942 7,323 13,233 11,759 14,597 1,763
Investing activities................................ (2,952) (4,442) (7,861) (11,366) (11,724) (1,416)
Financing activities................................ (895) (2,428) (3,454) 3,204 (1,428) (172)
Ratio of cash provided by operating activities to gross
interest expense(4)(7)................................. 5.5x 10.5x 27.9x 37.2x 44.6x 44.6x
Ratio of total debt to cash provided by operating
activities(7).......................................... 2.5x 1.2x 0.4x 0.4x 0.4x 0.4x
Net income(7)............................................. 1,549 4,113 10,302 7,920 9,088 1,098
Net income margin(6)(8)................................... 16.6% 26.9% 42.5% 38.0% 34.5% 34.5%
Ratio of net income to gross interest expense(4)(7)....... 2.2x 5.9x 21.7x 25.1x 27.8x 27.8x
Ratio of total debt to net income(7)...................... 6.5x 2.2x 0.6x 0.6x 0.6x 0.6x
EBITDE(2)................................................. 5,364 8,630 15,315 14,319 18,483 2,232
EBITDE margin(3).......................................... 57.6% 56.4% 63.2% 68.8% 70.1% 70.1%
Ratio of EBITDE to gross interest expense(4).............. 7.5x 12.3x 32.2x 45.4x 56.6x 56.6x
Ratio of total debt to EBITDE............................. 1.9x 1.1x 0.4x 0.3x 0.3x 0.3x
Ratio of total debt to total capitalization(5)............ 68.3% 59.5% 27.9% 12.4% 11.8% 11.8%
----------
(1) In accordance with a new accounting pronouncement, SSAP 15 "Cash Flow Statements," the presentation of cash flow for 1998,
1999, 2000 and 2001 conforms to the presentation of cash flow for 2002. For further information on HK SSAP 15, see "Item
5--Operating and Financial Review and Prospects--Recent Accounting Pronouncements."
(2) 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."
(3) 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.
(4) Gross interest expense includes capitalized interest.
(5) Total capitalization excludes current portion of long-term debt.
(6) 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.
(7) We have included net income data in this table because we believes 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.
(8) Net income margin represents net income as a percentage of our total operating revenues, as computed under U.S. GAAP.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
13
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
four years, principally due to the volatility of world oil prices. Over the
past year, oil prices rose 62% from US$19.84 per barrel on January 1, 2002 to
US$32.20 per barrel on December 31, 2002. In the last half of 2002, worldwide
oil prices rose due to increasing political and economic turmoil in Venezuela
and the conflict in Iraq. These uncertainties, together with the conflict in
Iraq, raised concerns about the security and availability of ample supplies to
meet growing demand, although oil prices recently have fallen. The
international benchmark crude oil, West Texas Intermediate, was US$27.72
barrel on May 9, 2003. 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;
o the production performance of reservoirs;
o extensive engineering judgments; and
14
o consistency in the PRC government's 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 60.6% of our proved reserves were undeveloped as of
December 31, 2002. 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 approximately US$2.7
billion to develop our oil and gas properties and approximately US$308 million
for independent exploration from 2003 through the end of 2004. 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
flow 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 flow 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
flow 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 PRC government approvals required for certain capital expenditures
and investments;
o our ability to obtain sufficient foreign currency to finance our
capital expenditures; and
o economic, political and other conditions in the PRC and Hong Kong.
Therefore, our actual future capital expenditures and investments 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.
15
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, is constructing natural
gas pipelines to link its natural gas fields 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;
o our overseas natural gas businesses are subject to economic and
political risks, particularly in Indonesia. See "--We may be exposed
to certain operating risks in Indonesia and Australia 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 an option to make an investment in CNOOC's
liquefied natural gas project in Guangdong Province. However, we
have not decided whether to exercise this option. This option is
subject to various conditions, including 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.
CNOOC largely controls us and we regularly enter into related party
transactions with CNOOC and its affiliates. CNOOC indirectly owns, through
CNOOC (BVI) Limited, a wholly owned subsidiary, an aggregate of approximately
70.6% of our shares. 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 Finance
Corporation Limited. For the year ended December 31, 2002, sales to CNOOC and
its affiliates accounted for approximately 16.5% 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
16
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.
A substantial drop in sales to any of our three main customers could have
a material adverse affect on our results of operations. We sell a significant
proportion of our production to China Petroleum & Chemical Corporation, or
Sinopec, PetroChina and the Castle Peak Power Company. For the years ended
December 31, 2000, 2001 and 2002, sales to Sinopec accounted for approximately
26.1%, 30.2% and 26.1% respectively, of our total operating revenues, while
sales to PetroChina were approximately 6.0%, 6.3% and 4.5% respectively, of
our total operating revenues. Both PetroChina and Sinopec are majority owned
by the PRC government. We sell a significant portion of our natural gas to
Castle Peak Power Company Limited in Hong Kong under a long-term take-or-pay
contract. For the years ended December 31, 2000, 2001 and 2002, sales to this
customer were approximately 5.0%, 5.8% and 4.7% respectively, of our total
operating revenues.
Both PetroChina and Sinopec have their own oil and gas fields and have
the right to import crude oil directly from the international market. We do
not have any long-term sales contracts with Sinopec or PetroChina. Our
business, results of operations and financial condition would be adversely
affected if either Sinopec or PetroChina significantly reduces its purchases
of crude oil from us and we cannot find another ready buyer for our crude oil
in the international market.
The PRC offshore 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. We
are the only company authorized to engage oil and gas exploration offshore
China in cooperation with international oil and gas companies. Any change to
PRC law that allows new entrants into the offshore petroleum industry 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 results 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;
17
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."
We may be exposed to certain operating risks in Indonesia and Australia
as a result of our acquisition of oil and gas interests located in these
regions. We acquired interests in oil and gas properties located offshore
Indonesia in April 2002 and January 2003 and recently entered into conditional
agreements to acquire interests in Australia's North West Shelf Project. See
"Item 4--Information on the Company--Business Overview--Principal Oil and Gas
Regions--Overseas Activity," "Item 4--Information on the Company--Business
Overview--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 certain operating risks in their
respective regions, including economic and political risks. Although these
properties historically have not experienced problems from civil unrest or
regulatory disputes, the political and economic environment in these regions
could impact the financial position, results of operations and prospects of
these properties.
Our Indonesian interests are subject to the laws and regulations of
Indonesia, 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, the operations are subject to
production sharing arrangements with Pertamina, the Indonesian state-owned oil
and gas company, which is currently the sole entity authorized to manage
Indonesia's petroleum resources on behalf of the Indonesian government. Our
Indonesian interests may be adversely affected by changes in governmental
policies or social instability or other political, economic or diplomatic
developments in or affecting Indonesia 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, Rupiah/U.S. dollar exchange rate fluctuations and currency
controls. If we successfully acquire the interests in Australia's North West
Shelf Project, we could face similar risks in Australia.
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. 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. Although the partners in the Tangguh LNG project have entered into a
25-year supply contract beginning in 2007 to provide up to 2.6 million tons of
liquefied natural gas per annum to a liquefied natural gas terminal being
developed by CNOOC, our controlling shareholder, in Fujian Province, China,
this single contract may not be sufficient to make the project commercially
viable. We cannot assure you that the parties to the project will be able to
secure sufficient 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 flow;
o the amount of capital that other PRC and Hong Kong entities may seek
to raise in the international capital markets;
18
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 flow 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 to our business operations.
You may not be able to assert claims against Arthur Andersen, our
independent public accountants for periods prior to December 31, 2001, 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, including the financial statements for the
two-year period ended December 31, 2001 attached to this annual report. Our
selected historical financial data for the years ended, and as of, December
31, 1998 and 1999 set forth in "Item 3--Key Information--Selected Financial
Data" were also 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 that are included in this annual report.
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 and
included in this annual report.
Risks relating to the PRC petroleum industry
A change in PRC petroleum industry regulations could have an adverse
affect 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. Recently, the PRC government underwent substantial reform. As of
the date of this annual report, we cannot assure you that the legal regime
affecting our businesses will remain substantially unchanged. Since the
reorganization, the Ministry of Commerce 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 State Economic and Trade Commission had been the prime
coordinator for the petroleum industry.
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 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."
19
Certain restrictions on foreign companies will be lifted as a result of
China's entry into the World Trade Organization and 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). Accordingly, foreign
participation in the sale of such products may be permitted within one year of
accession in the form of minority-owned joint ventures and, within two years
of accession, through wholly owned subsidiaries without any equity
restrictions.
We may be harmed if we fail to comply with existing or future
environmental laws and regulations. Our business is subject to PRC
environmental protection laws and regulations which:
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 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;
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 20 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.
20
In March 2003, several countries, including China, experienced an
outbreak of a new and highly contagious form of atypical pneumonia now known
as "severe acute respiratory syndrome" or "SARS." The severity of the outbreak
in certain municipalities, such as Beijing, and provinces, such as Guangdong
Province, has affected general commercial activity. While the long-term impact
of the SARS outbreak is unclear at this time, the prolonged existence of SARS
could have a negative impact on the PRC economy and, in turn, have a material
adverse effect on our results of operations.
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.
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 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 do not have plans to do so. For further
information on foreign exchange risks, foreign exchange rates and hedging
activities, see "Currencies and Exchange Rates" and "Item 11--Qualitative and
Quantitative Disclosure about Market Risk."
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. In particular, the regulatory framework for the
securities industry in China is at an early stage of development. The China
Securities Regulatory Commission, or CSRC, is responsible for administering
and regulating the national securities markets and drafting regulations for
the regulation of the national securities markets. Regulations of the State
Council and the relevant implementing measures of CSRC, such as provisions
dealing with acquisitions of listed PRC companies and disclosure of
information, apply to listed companies in general without being confined to
companies listed on any particular stock exchange. Hence these provisions
apply to our company. Because these laws, regulations and legal requirements
are relatively new, and because of the limited volume of published cases and
judicial
21
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 recently 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
April 30, 2003, CNOOC, through its wholly owned subsidiary, CNOOC (BVI)
Limited, held approximately 70.6% of our shares and the rest of our shares
were held by public investors, including institutional and corporate
investors. As of April 30, 2003, CNOOC (BVI) Limited has not sold any of its
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.
Pursuant to the registration rights agreement we entered into with our
strategic investor and corporate investors, we have agreed to indemnify these
investors for certain liabilities that it may have under the Securities Act.
Resale of the shares or ADSs in the United States by our strategic investor
and corporate investors may only be done pursuant to an effective registration
statement or an exemption from the registration requirements of the Securities
Act. We have entered into registration rights agreements with our strategic
investor and corporate investors whereby we have agreed to register the
securities of these investors if they so request. We have agreed to pay for
the cost of any such registration and to indemnify these investors for certain
liabilities that they may have under the Securities Act which relate to the
registration statement that would have to be filed and the annual report that
would have to be delivered to purchasers, in the event of a resale by any such
investor. There is a risk that we will be required to indemnify our strategic
investor and corporate investors pursuant to the registration rights
agreements.
22
ITEM 4. INFORMATION ON THE COMPANY
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. 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 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
State Economic and Trade Commission has been succeeded by the newly
established State Development and Reform Commission.
Prior to CNOOC's internal business reorganization, which took effect as
of October 1, 1999, CNOOC and its various subsidiaries and affiliates
performed commercial and administrative functions, including:
o exercising the exclusive right to cooperate with foreign partners in
offshore petroleum exploration, development, production and sales
activities, and taking up to a 51% or more participating interest 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;
o the land use rights to terminal facilities in Nanhai, Weizhou and
the western part of the Bohai Bay; and
23
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 has 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 Province.
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 neither CNOOC nor any of its affiliates will 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, for which no consideration will be payable
by us to CNOOC, to make any investment in liquefied natural gas
projects that CNOOC has invested or proposes 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
o we will have an option, for which no consideration will be payable
by us to CNOOC, to participate in other businesses related to
natural gas in which CNOOC has invested or proposes
24
to invest, and CNOOC will at its own expense 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 70.6%
of our shares as of April 30, 2003. There have been no changes to our
corporate structure since April 30, 2003. 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 our company, the
management of our business will be our directors' responsibility.
The following chart sets forth our controlling entities and our principal
subsidiaries as of December 31, 2002.
----------------------------
| China National Offshore |
| Oil Corporation |
| (PRC) |
----------------------------
|
| 100%
|
----------------------------
| Overseas Oil & Gas |
| Corporation Ltd. |
| (Bermuda) |
----------------------------
|
| 100%
|
----------------------------
| |
| CNOOC (BVI) Limited |
| (British Virgin Islands) |
| |
--------------------------- ----------------------------
| |\ |
| Public Shareholders and | \ | 70.61%
| Corporate Investors | \ 29.39% |
| | \ ----------------------------
--------------------------- \ | CNOOC Limited |
\ | (Hong Kong) |
----------------| |
----------------------------
|
|
----------------------------------------------------------------------------------------------------------
| | | |
| 100% | 100% | 100% | 100%
| | | |
---------------------------- ---------------------------- ------------------------------ ----------------------------
| CNOOC | | | | China Offshore Oil | | CNOOC Finance |
| International | | CNOOC China | | (Singapore) | | (2002) Limited(4) |
| Limited(1) | | Limited(2) | | International Pte. Ltd.(3) | | (British Virgin Islands) |
| (British Virgin Islands) | | (PRC) | | (Singapore) | | |
---------------------------- --------------------------- ------------------------------ ----------------------------
-----------------
(1) Owner of our overseas interests in petroleum exploration and production
businesses and operations.
(2) Owner of substantially all of our PRC petroleum exploration and
production businesses, operations and properties.
(3) Business vehicle through which we engage in sales and marketing
activities in the international markets.
(4) Financing vehicle through which we issued our US$500 million 6.375%
guaranteed notes due 2012.
25
B. BUSINESS OVERVIEW
Overview
We are an oil and gas company engaged in the exploration, development,
production and sale 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, 2002,
we had estimated net proved reserves of 2,015.8 million BOE, comprised of
1,424.4 million barrels of crude oil and condensate and 3,547.9 billion cubic
feet of natural gas. For the year 2002, our net production averaged 298,625
barrels per day of crude oil, condensate and natural gas liquids and 272.6
million cubic feet per day of natural gas, which together totaled 346,639 BOE
per day.
Our net proved reserves increased from 668 million BOE as of December 31,
1995 to 2,015.8 million BOE as of December 31, 2002, which represents a
compound annual growth rate of 17.1%. 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, 2002, approximately 60.6%
of our net proved reserves were classified as net proved undeveloped. We plan
to spend approximately US$2.7 billion developing our reserves offshore China
and approximately US$308 million for independent exploration offshore China
from 2003 through 2004.
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, 2002, independent
properties accounted for approximately 53.2% of our total net proved reserves
and approximately 56.0% of our total net proved undeveloped reserves. We are
the operator of all of our independent producing properties. For the year
ended December 31, 2002, production from our independent properties accounted
for 46.3% of total net production.
Through our parent company, CNOOC, we have 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, up to a 51%
participating interest 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, 2002, we had approximately 28 foreign partners
under our production sharing contracts offshore China, all of which are
international oil and gas companies, including Agip, BP, Burlington Resources,
ChevronTexaco, ConocoPhillips, Devon Energy, Husky, Kerr-McGee, Newfield
Exploration and Royal Dutch Shell. As of December 31, 2002, we were a party to
31 production sharing contracts and one joint study agreement. We are
currently the operator or joint operator of most of the properties developed
under our production sharing contracts. In the early years of our existence,
we conducted most of our activities through production sharing contracts.
Production sharing contracts have enabled us to develop technical and
management expertise and provided us with the cash flow necessary to increase
our independent exploration and production activities.
Natural gas is becoming an increasingly important part of our business
strategy because of rapidly growing domestic demand. In view of the domestic
natural gas supply shortfall forecasted by the Chinese government, 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 entered into an agreement to
acquire interests in gas reserves located in 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 has invested or proposes to invest, including an option for us to
acquire CNOOC's 33% interest in a liquefied natural gas terminal being
constructed in Guangdong Province, China. Furthermore, in connection with this
option, CNOOC will at its own expense procure all necessary PRC government
approvals needed for our participation in the related projects or businesses.
On April 19, 2002, we completed the acquisition of Repsol YPF, S.A.'s
interest in a portfolio of oil and gas production sharing and technical
assistance contracts in areas located offshore and onshore Indonesia. The
acquisition was implemented retroactively from January 1, 2002. Under the
terms of the acquisition, we
26
paid a consideration of US$585 million, subject to a final oil price
adjustment. See note 5 to our consolidated financial statements attached to
this annual report. The assets include a 65.3% interest in the South East
Sumatra production sharing contract, a 36.7% interest in the Offshore North
West Java production sharing contract, a 25.0% interest in the West Madura
production sharing contract, a 50.0% interest in the Poleng technical
assistance contract and a 16.7% interest in the Blora production sharing
contract.
CNOOC, our parent company and controlling shareholder, was formed in 1982
when the Regulations of the People's Republic of China on Exploitation of
Offshore Petroleum Resources in Cooperation with Foreign Enterprises gave
CNOOC the exclusive right to enter into production sharing contracts with
foreign partners to conduct exploration and production activities offshore
China. As a result of CNOOC's October 1999 reorganization, we became the only
entity through which CNOOC engages in the upstream petroleum business. CNOOC
continues to perform administrative functions relating to our upstream
petroleum business. For further details regarding this reorganization, see
"Item 4--Information on the Company--History and Development" and "Item
7--Major Shareholders and Related Party Transactions--Related Party
Transactions."
Competitive Strengths
We believe that our historical success and future prospects are directly
related to a combination of our strengths, including the following:
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, 2002 and average net daily
production for the year ended December 31, 2002, we had a
reserve-to-production ratio of approximately 15.9 years. As of December 31,
2002, approximately 60.6% 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. As
of December 31, 2002, a total of 797 exploration wells had been drilled
offshore China. 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 2002, a total of 674 exploration
wells have been drilled offshore China, including 430 wildcat wells with a
success rate of approximately 37.5%. Between the beginning of 1999 and
December 31, 2002, we made 15 discoveries and foreign parties made 15
discoveries offshore China.
Successful independent exploration and development record. From the
inception of CNOOC in 1982 to December 31, 2002, we achieved a success rate of
approximately 50% on our 177 offshore China independent wildcat wells, while
our foreign partners achieved a success rate of approximately 29% on their 253
offshore China wildcat wells. Reserve additions from independent operations
have accounted for approximately 67% of our total reserve additions offshore
China since the beginning of 1997. Between late 1995 and the end of 2002, we
completed seven of our major independent development projects on time and
under budget.
Competitive cost structure. For the year ended December 31, 2002, our
total offshore China lifting costs were US$3.92 per BOE. Total lifting costs
for independent operations offshore China were US$3.89 per
27
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. Our average finding and development cost for the
three years ended December 31, 2002 was US$4.59 per BOE, or US$4.54 per BOE as
adjusted for the estimated future costs of developing proved undeveloped
reserves. We believe that this 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.
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 gas fields 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
entered into an agreement to acquire interests in gas reserves located in 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 has invested or proposes to invest, which
includes an option to acquire CNOOC's interest in a liquefied natural gas
terminal in Guangdong Province, China. 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 a share
option scheme 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, 2002, approximately 60.6% 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.
28
We plan to spend approximately US$2.7 billion from 2003 through the year 2004
to develop our net proved undeveloped reserves offshore China.
Add to our reserves through independent exploration and production
sharing contracts. 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$308 million from 2003 through 2004 on independent
exploration activities. We plan to augment independent exploration efforts and
reduce capital requirements and exploration risks by continuing to enter into
production sharing contracts with foreign partners. We currently have
identified 23 drilling prospects. In 2003, we plan to drill approximately 33
exploration wells, acquire approximately 16,100 kilometers of 2D seismic data
and acquire approximately 1,180 square kilometers of 3D seismic data
independently. Our foreign partners under existing production sharing
contracts plan to drill approximately 10 to 11 exploration wells, acquire
approximately 1,500 kilometers of 2D seismic data and acquire approximately
923 square kilometers of 3D seismic data in 2003.
Capitalize on the growing demand for natural gas in China. The Chinese
government forecasts significant growth in domestic natural gas demand and has
promoted the use of natural gas as a clean and more efficient fuel. We plan to
capitalize on this growth potential 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 option to invest in the planned
Guangdong liquefied natural gas project; 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. In April 2002, we completed the acquisition
of certain Indonesian assets from Repsol YPF. These assets increased our near
term production and leveraged our expertise and experience in offshore oil and
gas activities. We have also completed an acquisition of the equivalent of a
12.5% interest in Indonesia's Tangguh LNG project in January 2003 and have
signed a key terms agreement to acquire an aggregate interest of approximately
5.56% in the reserves and upstream production of Australia's 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 gas market 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, 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.
29
Maintain financial flexibility through conservative financial practices.
We will continue to emphasize conservative financial management 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 flow 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 and for the periods indicated.
Year ended December 31,
--------------------------------------------------------------
2000 2001 2002
---------- ---------- ----------
Net Production:
Oil (daily average bbls/day)............................... 206,347 228,873 298,625
Gas (daily average mmcf/day)............................... 197.9 195.0 272.6
Oil equivalent (BOE/day)................................... 239,335 261,379 346,639
Average net realized prices:
Oil (per bbl)........................................ US$28.21 US$23.34 US$24.35
Gas (per mcf)........................................ 3.09 3.08 2.98
Offshore China lifting costs (per BOE)(1).................. 4.45 4.16 3.92
Overseas lifting costs (per BOE)(1)(2)..................... -- -- 9.06
Three-year average finding and development
costs (per BOE)(3)....................................... US$2.77 US$4.86 US$4.59
Adjusted three-year average finding and
development costs (per BOE)(4)........................... US$3.82 US$4.15 US$4.54
Net Proved Reserves (end of period):
Oil (mmbbls)............................................... 1,215.8 1,245.9 1,424.4
Gas (bcf).................................................. 3,249.7 3,247.6 3,547.9
Total (million BOE)........................................ 1,757.4 1,787.1 2,015.8
Proved developed reserves (million BOE).................... 638.6 710.0 794.3
Annual reserves replacement ratio.......................... 104% 131% 281%
Estimated reserves life (years)............................ 20.1 18.7 15.9
Present value of estimated future net revenues before
income taxes (discounted at 10%) (million Rmb)........... 108,423 69,860 140,798
Standardized measure of discounted future net cash
flow (million Rmb)....................................... 93,391 51,082 100,141
----------
(1) Includes operating expenses and production taxes. During the years ended December 31, 2000 and 2001, our overseas operations
were not material and our overseas lifting costs were included in our offshore China lifting costs for those years.
(2) Overseas lifting costs reflect lifting costs associated with our operations in Indonesia and are calculated using the net
entitlement method.
(3) The three-year average finding and development costs for each of 2000, 2001 and 2002 are calculated by taking the sum of
total costs incurred for exploration and development of oil and gas fields in immediately preceding three-year period and
dividing it by the sum of the reserve additions, extensions and revisions for the same three years.
(4) Because a high percentage of our net proved reserves are classified as proved undeveloped, we also presented the adjusted
three-year average finding and development cost to reflect the estimated future costs of developing these proved undeveloped
reserves as of December 31, 2000, 2001 and 2002, as estimated by Ryder Scott Company. The actual future costs of developing
these reserves may differ from these estimates. See the definition of "adjusted finding and development cost per BOE" in
"Certain Oil and Gas Terms."
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, 2000, 2001 and 2002. 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."
30
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, 2002
----------------------------- --------------------------------------
2000 2001 Developed Undeveloped Total
-------------- ------------ ------------ ------------- -----------
Bohai Bay:
Crude oil (mmbbls).......................................... 923.9 961.3 381.1 611.4 992.5
Natural gas (bcf)........................................... 591.4 629.1 182.1 416.5 598.6
-------------- ------------ ------------ ------------- -----------
Total (million BOE):..................................... 1,022.4 1,066.2 411.4 680.9 1,092.3
============== ============ ============ ============= ===========
Independent (million BOE)............................. 774.2 689.7 326.8 268.3 595.1
Production sharing contracts (million BOE)............ 248.2 376.5 84.6 412.6 497.2
Western South China Sea:
Crude oil (mmbbls).......................................... 141.1 131.6 99.0 61.4 160.4
Natural gas (bcf)........................................... 2,593.0 2,421.5 499.6 2,011.6 2,511.2
-------------- ------------ ------------ ------------- -----------
Total (million BOE):..................................... 573.3 535.1 182.3 396.6 578.9
============== ============ ============ ============= ===========
Independent (million BOE)............................. 372.0 373.3 50.9 383.3 434.2
Production sharing contracts (million BOE)............ 201.3 161.8 131.4 13.3 144.7
Eastern South China Sea:
Crude oil (mmbbls).......................................... 136.8 132.2 58.9 61.4 120.3
Natural gas (bcf)........................................... -- -- -- 42.8 42.8
-------------- ------------ ------------ ------------- -----------
Total (million BOE):..................................... 136.8 132.2 58.9 68.6 127.5
============== ============ ============ ============= ===========
Independent (million BOE)............................. -- -- -- -- --
Production sharing contracts (million BOE)............ 136.8 132.2 58.9 68.6 127.5
East China Sea:
Crude oil (mmbbls).......................................... 4.5 12.4 2.9 9.6 12.5
Natural gas (bcf)........................................... 65.3 197.0 42.1 137.3 179.4
-------------- ------------ ------------ ------------- -----------
Total (million BOE):..................................... 15.4 45.2 9.9 32.5 42.4
============== ============ ============ ============= ===========
Independent (million BOE)............................. 15.4 45.2 9.9 32.5 42.4
Production sharing contracts (million BOE)............ -- -- -- -- --
Overseas:
Crude oil (mmbbls).......................................... 9.5 8.4 114.8 23.9 138.7
Natural gas (bcf)........................................... -- -- 101.5 114.4 215.9
-------------- ------------ ------------ ------------- -----------
Total (million BOE):..................................... 9.5 8.4 131.8 42.9 174.7
============== ============ ============ ============= ===========
Independent (million BOE)............................. -- -- -- -- --
Production sharing contracts (million BOE)............ 9.5 8.4 131.8 42.9 174.7
Total:
Total crude oil (mmbbls).................................... 1,215.8 1,245.9 656.7 767.7 1,424.4
Total natural gas (bcf)..................................... 3,249.7 3,247.6 825.2 2,722.7 3,547.9
-------------- ------------ ------------ ------------- -----------
Total (million BOE):..................................... 1,757.4 1,787.1 794.3 1,221.5 2,015.8
============== ============ ============ ============= ===========
Independent (million BOE)............................. 1,161.6 1,108.2 387.6 684.1 1,071.7
Production sharing contracts (million BOE)............ 595.8 678.9 406.7 537.4 944.1
31
New Contracts Signed in 2002
In 2002, our parent, CNOOC, signed four petroleum contracts and two
supplemental development agreements.
New Oil Contracts Signed in 2002
Interest of Drill
No. Basin Block Partner Partners (%) Date of Agreement Area (km2) Obligation (wells)
------------------------------------------------------------------------------------------------------------------------------------
1 Pearl River Mouth Chaotai OPIC 50% 2002-5-16 15,400 3
2 Beibu Gulf 23/15 Husky 100% 2002-9-23 1,327 1
3 Beibu Gulf 23/20 Husky 100% 2002-9-23 1,543 1
4 Pearl River Mouth 40/30 Husky 100% 2002-12-6 6,704 1
(Deepwater Area)
New Supplemental Development Agreements Signed in 2002
Date of
No. Agreements Block Type Partner Interest (%) Agreement Area (km2)
------------------------------------------------------------------------------------------------------------------------------------
1 CFD11-1/2 04/36 Development Kerr-McGee/ 40.1/8.9 2002.09.06 91
Development Supplemental Supplemental Sino-American
Agreement Agreement Energy
2 BZ25-1/1S 11/19 Unitized Development Chevron/Texaco 16.2 2002.10.11 218
Unitized Development Agreement
Agreement
32
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 Indonesia, including a 39.5% participating interest in a production sharing
contract in the Malacca Strait, interests in production sharing contracts and
a technical assistance contract we acquired from Repsol YPF in April 2002 and
interests in the Tangguh LNG project, which we recently acquired. We also
expect to complete an acquisition for natural gas reserves offshore Australia
by the end of 2003. See "--Overseas Activity," "--Natural Gas
Business--
33
Overseas Activity" and "Item 5--Operating and Financial Review and
Prospects--Operating Results--Acquisitions and Overseas Activities."
As of December 31, 2002, we had estimated net proved reserves of 2,015.8
million BOE, comprised of 1,424.4 million barrels of crude oil and condensate
and 3,547.9 billion cubic feet of natural gas. As of December 31, 2002, we had
interests in 25 producing properties and 29 properties under development and
appraisal offshore China. We are the operator or joint operator of 21 oil and
gas properties under production. In 2002, three properties offshore China
commenced production. For the year 2002, net production averaged 298,625
barrels per day of crude oil, condensate and natural gas liquids and 272.6
million cubic feet per day of natural gas, which together totaled 346,639 BOE
per day, representing a 32.6% increase over the annual average daily
production for the year 2001.
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 in 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, 2002, we were not a party to any geophysical survey agreements, although
we may enter such agreements in the future.
The offshore China exploration area is approximately 1.3 million square
kilometers in size. We currently have the exclusive right to operate
independently or in conjunction with international oil and gas companies in
approximately 601,700 square kilometers of the total offshore China
exploration area. We currently have rights to operate independently or in
conjunction with international oil and gas companies in 133 exploration blocks
covering approximately 572,486 square kilometers. We have access to
approximately 822,700 kilometers of 2D seismic data and approximately 33,700
square kilometers of 3D seismic data. From the beginning of CNOOC's operations
in 1982 to December 31, 2002, a total of 674 exploration wells have been
drilled, including 430 wildcat wells, with a success rate of approximately
37.5%. During this period we achieved a success rate of approximately 50% on
177 exploration wildcat wells which were drilled independently, while foreign
partners achieved a success rate of approximately 29% on their 253 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, 2002, approximately 60.6% of net
proved reserves were classified as net proved undeveloped. We are currently
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 Indonesia, 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 Indonesian
production sharing contracts to Pertamina, the Indonesian state-owned oil and
gas company, 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. 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.
34
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. We have production
licenses for all of our proved reserves.
At our request, Ryder Scott Company, an independent petroleum engineering
consultant, evaluated our selected properties as of December 31, 2000, 2001
and 2002. 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, 2002
-------------------------- ---------------------------------------------------
2000 2001 Developed Undeveloped Total
----------- ------------- ----------------- ------------------- -----------
Offshore China
Independent
Bohai Bay 675.7 589.9 296.6 211.2 507.8
Western South China Sea..................... 76.4 71.7 47.9 60.5 108.4
Eastern South China Sea..................... -- -- -- -- --
East China Sea.............................. 4.5 12.4 2.8 9.7 12.5
----------- ------------- ----------------- ------------------- -----------
Total 756.6 674.0 347.3 281.4 628.7
Production Sharing Contracts
Bohai Bay 248.2 371.4 84.5 400.2 484.7
Western South China Sea..................... 64.7 59.9 51.1 0.9 52.0
Eastern South China Sea..................... 136.8 132.2 58.9 61.4 120.3
East China Sea.............................. -- -- -- -- --
----------- ------------- ----------------- ------------------- -----------
Total 449.7 563.5 194.5 462.5 657.0
Combined
Bohai Bay 923.9 961.3 381.1 611.4 992.5
Western South China Sea..................... 141.1 131.6 99.0 61.4 160.4
Eastern South China Sea..................... 136.8 132.2 58.9 61.4 120.3
East China Sea.............................. 4.5 12.4 2.8 9.7 12.5
----------- ------------- ----------------- ------------------- -----------
Total 1,206.3 1,237.5 541.8 743.9 1,285.7
Overseas(1)
Indonesia 9.5 8.4 114.9 23.8 138.7
----------- ------------- ----------------- ------------------- -----------
Total 9.5 8.4 114.9 23.9 138.7
----------- ------------- ----------------- ------------------- -----------
Total 1,215.8 1,245.9 656.7 767.7 1,424.4
=========== ============= ================= =================== ===========
----------
(1) We do not conduct independent overseas operations. Our overseas
operations are conducted through production sharing contracts and
technical assistance contracts.
35
Total Net Proved Natural Gas Reserves
(bcf)
As of December 31, As of December 31, 2002
---------------------------- ---------------------------------------------
2000 2001 Developed Undeveloped Total
--------- --------- --------------- ----------------- ---------
Offshore China
Independent
Bohai Bay 591.4 598.9 182.1 342.1 524.2
Western South China Sea...................... 1,773.6 1,809.2 17.5 1,936.7 1,954.2
Eastern South China Sea...................... -- -- -- -- --
East China Sea............................... 65.3 197.0 42.1 137.3 179.4
--------- --------- --------------- ----------------- ---------
Total 2,430.3 2,605.1 241.7 2,416.1 2,657.7
Production Sharing Contracts
Bohai Bay -- 30.2 -- 74.5 74.5
Western South China Sea...................... 819.4 612.3 482.0 75.0 557.0
Eastern South China Sea...................... -- -- -- 42.8 42.8
East China Sea............................... -- -- -- -- --
--------- --------- --------------- ----------------- ---------
Total 819.4 642.5 482.0 192.2 674.2
Combined
Bohai Bay 591.4 629.1 182.1 416.6 598.6
Western South China Sea...................... 2,593.0 2,421.5 499.6 2,011.5 2,511.2
Eastern South China Sea...................... -- -- -- 42.8 42.8
East China Sea............................... 65.3 197.0 42.1 137.3 179.4
--------- --------- --------------- ----------------- ---------
Total 3,249.7 3,247.6 723.7 2,608.3 3,332.0
Overseas(1)
Indonesia -- -- 101.5 114.4 216.0
--------- --------- --------------- ----------------- ---------
Total -- -- 101.5 114.4 216.0
--------- --------- --------------- ----------------- ---------
Total 3,249.7 3,247.6 825.2 2,722.7 3,547.9
========= ========= =============== ================= =========
----------
(1) We do not conduct independent overseas operations. Our overseas
operations are conducted through production sharing contracts and
technical assistance contracts.
36
Total Net Proved Reserves
(million BOE)
As of December 31, As of December 31, 2002
---------------------------- ---------------------------------------------
2000 2001 Developed Undeveloped Total
---------- --------- --------------- --------------- -----------
Offshore China
Independent
Bohai Bay 774.2 689.7 326.9 268.3 595.2
Western South China Sea........................ 372.0 373.3 50.9 383.3 434.1
Eastern South China Sea........................ -- -- -- -- --
East China Sea................................. 15.4 45.2 9.9 32.5 42.4
---------- --------- --------------- --------------- -----------
Total 1,161.6 1,108.2 387.6 684.1 1,071.7
Production Sharing Contracts
Bohai Bay 248.2 376.5 84.6 412.6 497.1
Western South China Sea........................ 201.3 161.8 131.4 13.4 144.8
Eastern South China Sea........................ 136.8 132.2 58.9 68.6 127.5
East China Sea................................. -- -- -- -- --
---------- --------- --------------- --------------- -----------
Total 586.3 670.5 274.9 494.5 769.4
Combined
Bohai Bay 1,022.4 1,066.2 411.5 680.9 1,092.3
Western South China Sea........................ 573.3 535.1 182.3 396.6 578.9
Eastern South China Sea........................ 136.8 132.2 58.9 68.6 127.5
East China Sea................................. 15.4 45.2 9.9 32.5 42.4
---------- --------- --------------- --------------- -----------
Total 1,747.9 1,778.7 662.5 1,178.5 1,841.0
Overseas(1)
Indonesia 9.5 8.4 131.8 42.9 174.7
---------- --------- --------------- --------------- -----------
Total 9.5 8.4 131.8 42.9 174.7
---------- --------- --------------- --------------- -----------
Total 1,757.4 1,787.1 794.3 1,221.5 2,015.8
========== ========= =============== ================ ===========
----------
(1) We do not conduct independent overseas operations. Our overseas
operations are conducted through production sharing contracts and
technical assistance contracts.
37
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,
---------------------------------------------------------------------------
2000 2001 2002
----------- ----------- -----------
Offshore China
Independent
Bohai Bay 63,797 97,612 110,989
Western South China Sea........................ 45,828 40,377 35,724
Eastern South China Sea........................ -- -- --
East China Sea................................. 3,557 3,967 3,223
----------- ----------- -----------
Total 113,182 141,956 149,936
Production Sharing Contracts
Bohai Bay -- 2,366 16,767
Western South China Sea........................ 606 900 21,186
Eastern South China Sea........................ 90,097 81,404 73,792
East China Sea................................. -- -- --
----------- ----------- -----------
Total 90,703 84,670 111,745
Combined
Bohai Bay 63,797 99,978 127,756
Western South China Sea........................ 46,434 41,277 56,910
Eastern South China Sea........................ 90,097 81,404 73,792
East China Sea................................. 3,557 3,967 3,223
----------- ----------- -----------
Total 203,885 226,626 261,681
Overseas(1)
Indonesia 2,462 2,247 36,944
----------- ----------- -----------
Total 2,462 2,247 36,944
----------- ----------- -----------
Total 206,347 228,873 298,625
=========== =========== ===========
----------
(1) We do not conduct independent overseas operations. Our overseas
operations are conducted through production sharing contracts and
technical assistance contracts.
38
Average Daily Net Production of Natural Gas
(mmcf per day)
Year ended December 31,
-----------------------------------------------------------------------
2000 2001 2002
----------- ----------- ----------
Offshore China
Independent
Bohai Bay 45.8 46.2 47.2
Western South China Sea....................... -- -- 4.4
Eastern South China Sea....................... -- -- --
East China Sea................................ 7.8 9.8 12.4
----------- ----------- ----------
Total 53.6 56.0 64.0
Production Sharing Contracts
Bohai Bay -- -- --
Western South China Sea....................... 144.3 139.0 137.9
Eastern South China Sea....................... -- -- --
East China Sea................................ -- -- --
----------- ----------- ----------
Total 144.3 139.0 137.9
Combined
Bohai Bay 45.8 46.2 47.2
Western South China Sea....................... 144.3 139.0 142.2
Eastern South China Sea....................... -- -- --
East China Sea................................ 7.8 9.8 12.4
----------- ----------- ----------
Total 197.9 195.0 201.8
Overseas(1)
Indonesia -- -- 70.8
----------- ----------- ----------
Total -- -- 70.8
----------- ----------- ----------
Total 197.9 195.0 272.6
=========== =========== ==========
----------
(1) We do not conduct independent overseas operations. Our overseas
operations are conducted through production sharing contracts and
technical assistance contracts.
39
Average Daily Net Production
(BOE per day)
Year ended December 31,
--------------------------------------------------------------
2000 2001 2002
------------- ----------- -------------
Offshore China
Independent
Bohai Bay 71,437 105,322 118,845
Western South China Sea............................... 45,828 40,377 36,456
Eastern South China Sea............................... -- -- --
East China Sea........................................ 4,853 5,599 5,283
------------- ----------- -------------
Total 122,118 151,298 160,584
Production Sharing Contracts
Bohai Bay -- 2,366 16,767
Western South China Sea............................... 24,658 24,063 46,747
Eastern South China Sea............................... 90,097 81,404 73,792
East China Sea........................................ -- -- --
------------- ----------- -------------
Total 114,755 107,833 137,306
Combined
Bohai Bay 71,437 107,688 135,612
Western South China Sea............................... 70,486 64,440 83,203
Eastern South China Sea............................... 90,097 81,404 73,792
East China Sea........................................ 4,853 5,599 5,283
------------- ----------- -------------
Total 236,873 259,132 297,890
Overseas(1)
Indonesia 2,462 2,247 48,749
------------- ----------- -------------
Total 2,462 2,247 48,749
------------- ----------- -------------
Total 239,335 261,379 346,639
============= =========== =============
----------
(1) We do not conduct independent overseas operations. Our overseas
operations are conducted 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, 2002, 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, 2002, we
had rights to operate independently or in conjunction with international oil
and gas companies in 16 blocks covering approximately 42,419 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, 2002, net proved reserves in this region were
992.5 million barrels of crude oil and condensate and 598.6 billion cubic feet
of natural gas, totaling 1,092.3 million BOE and representing approximately
54.2% 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. Nine discoveries were made in 2002, including
six by us and three by foreign partners.
40
The following table sets forth principal exploration blocks under an
exploration license to us for both our independent operations and our
production sharing contracts in the Bohai Bay as of December 31, 2002.
Approximate Exploration License Independent
block area -------------------------------- 2003 exploration
(km2) Partner(s) Commencement Expiration exploration drilling planned
Block date date drilling for 2003
-------------------------- ------------- ---------------------- ------------ ---------- ----------- -----------------
Independent
------------------------------------------------------------------------------------------------------------------------------------
Middle of Bohai Bay 5,310 -- 08/16/02 08/16/04 2 6
------------------------------------------------------------------------------------------------------------------------------------
Southern Bohai Bay(1) 573 -- 10/08/00 10/08/02 -- 2
------------------------------------------------------------------------------------------------------------------------------------
Western Bohai Bay(1) 1,913 -- 03/29/01 03/29/03 1 --
------------------------------------------------------------------------------------------------------------------------------------
Liaodong Bay 3,344 -- 01/31/00 04/08/06 12 7
------------------------------------------------------------------------------------------------------------------------------------
Eastern Liaodong Bay 2,829 -- 07/02/01 07/02/06 -- --
------------------------------------------------------------------------------------------------------------------------------------
PSCs (2)
------------------------------------------------------------------------------------------------------------------------------------
05/36 1,250 Kerr-McGee, Newfield, 02/10/02 02/10/04 2 N/A(3)
Sino-American Energy
------------------------------------------------------------------------------------------------------------------------------------
06/17(1) 2,587 ChevronTexaco, Carigali 02/01/01 02/01/03 1 N/A(3)
------------------------------------------------------------------------------------------------------------------------------------
Eastern 11/05 3,601 Phillips, 08/16/02 02/10/04 -- N/A(3)
Phillips Bohai
------------------------------------------------------------------------------------------------------------------------------------
Western 11/05 4,076 Phillips, 02/10/02 02/10/04 -- N/A(3)
Phillips Bohai
------------------------------------------------------------------------------------------------------------------------------------
11/19(1) 3,186 ChevronTexaco 03/28/01 03/28/03 -- N/A(3)
------------------------------------------------------------------------------------------------------------------------------------
09/18 2,226 Kerr-McGee 04/04/01 04/04/04 -- N/A(3)
------------------------------------------------------------------------------------------------------------------------------------
02/31(1) 3,936 ChevronTexaco, Carigali 04/06/01 04/06/03 5 N/A(3)
------------------------------------------------------------------------------------------------------------------------------------
04/36 1,694 Kerr-McGee, 12/31/01 12/31/03 4 N/A(3)
Sino-American Energy
------------------------------------------------------------------------------------------------------------------------------------
11/26(1)(4) 3,190 Shell 10/08/00 10/08/02 -- N/A(3)
------------------------------------------------------------------------------------------------------------------------------------
Other(5)
------------------------------------------------------------------------------------------------------------------------------------
----------
(1) An application has been submitted to extend the exploration license.
(2) One production sharing contract expired in 2002, although the
exploration license for the block area covered by the production sharing
contract remains in effect. One well was drilled in this block during
2002.
(3) Not applicable.
(4) Since this production sharing block area is located within an
independent block, its validity period depends on the exploration
license granted to the related independent block. To avoid
double-counting, the area attributable to this production sharing block
has not been included in the total contract area of the related
independent block.
(5) We have exploration rights in the Bohai Bay for two additional blocks
covering an aggregate area of approximately 2,703 square kilometers.
During the year ended December 31, 2002, we acquired approximately 680
square kilometers of 3D seismic data and our foreign partners acquired
approximately 1,150 square kilometers of 3D seismic data in the Bohai Bay. We
have independently acquired an aggregate of approximately 171,100 kilometers
and 6,230 square kilometers of 2D and 3D seismic data, respectively, in the
Bohai Bay. We also have access through our production sharing contract
partners to approximately 66,900 kilometers and 8,480 square kilometers,
respectively, of additional 2D and 3D seismic data in this area. During the
year of 2002, we drilled seven wildcat wells, five of which were successful,
and eight appraisal wells, seven of which were successful. During the same
period, our production sharing contract partners drilled five wildcat wells,
two of which were successful, and eight appraisal wells, seven of which were
successful. Our exploration capital expenditures for 2002 were US$54.6
million. In 2003, we plan to drill 15 exploration wells in the Bohai Bay.
For 2002, net production in this region averaged 127,756 barrels per day
of crude oil, condensate and natural gas liquids and 47.2 million cubic feet
per day of natural gas, representing approximately 39.1% of our
41
total daily net production. As of December 31, 2002, we were undertaking 10
development projects in the Bohai Bay. Our development capital expenditures
for the Bohai Bay for 2002 were US$261.1 million.
The following table sets forth our principal oil and gas properties under
production in the Bohai Bay as of December 31, 2002.
Net proved
Average net Number Actual or expected reserves as of
production of net production December 31, 2002
Our or year 2002 productive commencement (million
Block/Field Operator Partner(s) interest BOE per day) wells year BOE)
-------------------- --------------- --------------- ---------- -------------- ---------- ------------------ ------------------
Liaoxi
------------------------------------------------------------------------------------------------------------------------------------
Suizhong 36-1 CNOOC Limited -- 100% 72,636 244 1993 222.9
------------------------------------------------------------------------------------------------------------------------------------
Jinzhou 9-3 CNOOC Limited -- 100% 14,671 43 1999 37.5
------------------------------------------------------------------------------------------------------------------------------------
Jinzhou 20-2 CNOOC Limited -- 100% 9,002 11 1992 49.5
------------------------------------------------------------------------------------------------------------------------------------
Boxi
------------------------------------------------------------------------------------------------------------------------------------
Qikou 18-1 CNOOC Limited -- 100% 2,953 6 1997 5.2
------------------------------------------------------------------------------------------------------------------------------------
Qikou 17-3 CNOOC Limited -- 100% 1,688 9 1997 1.5
------------------------------------------------------------------------------------------------------------------------------------
Qikou 17-2 CNOOC Limited -- 100% 11,143 29 2000 18.4
------------------------------------------------------------------------------------------------------------------------------------
Chengbei oilfield CNOOC Limited -- 100% 4,158 52 1985 11.9
------------------------------------------------------------------------------------------------------------------------------------
Qinhuangdao 32-6 CNOOC Limited BPCEPC, 51% 16,762 80 2001 85.6
ChevronTexaco
------------------------------------------------------------------------------------------------------------------------------------
Bonan
------------------------------------------------------------------------------------------------------------------------------------
Bozhong 34-2/4 CNOOC Limited -- 100% 2,594 25 1990 3.3
------------------------------------------------------------------------------------------------------------------------------------
11/05
------------------------------------------------------------------------------------------------------------------------------------
Penglai 19-3 Phillips China Phillips Bohai 51% 5 4 2002 123.0
------------------------------------------------------------------------------------------------------------------------------------
42
The following table sets forth our principal oil and gas properties under
development in the Bohai Bay as of December 31, 2002.
Actual or expected
production Net proved reserves as
Our commencement of December 31, 2002
Block/Field Operator Partner(s) interest year (million BOE)
--------------------------- ----------------- -------------------- ------------ ------------------ ---------------------------
Liaoxi
------------------------------------------------------------------------------------------------------------------------------------
Luda 4-2 CNOOC Limited -- 100% 2005 9.0
------------------------------------------------------------------------------------------------------------------------------------
Luda 5-2 CNOOC Limited -- 100% 2005 33.1
------------------------------------------------------------------------------------------------------------------------------------
Luda 10-1 CNOOC Limited -- 100% 2005 34.4
------------------------------------------------------------------------------------------------------------------------------------
Jinzhou 21-1 CNOOC Limited -- 100% 2008 13.1
------------------------------------------------------------------------------------------------------------------------------------
Boxi
------------------------------------------------------------------------------------------------------------------------------------
Qikou 18-9 CNOOC Limited -- 100% 2008 3.5
------------------------------------------------------------------------------------------------------------------------------------
Qikou 18-2 CNOOC Limited -- 100% 2004 6.1
------------------------------------------------------------------------------------------------------------------------------------
Bozhong
------------------------------------------------------------------------------------------------------------------------------------
Nanbao 35-2 CNOOC Limited -- 100% 2005 75.7
------------------------------------------------------------------------------------------------------------------------------------
Bonan
------------------------------------------------------------------------------------------------------------------------------------
Bonan oilfields CNOOC Limited -- 100% 2004 68.3
------------------------------------------------------------------------------------------------------------------------------------
Bozhong 25-1/25-1s CNOOC Limited ChevronTexaco 84% 2004 229.6
------------------------------------------------------------------------------------------------------------------------------------
11/05
------------------------------------------------------------------------------------------------------------------------------------
Penglai 25-6 ConocoPhillips Phillips Bohai 51% 2008 10.7
------------------------------------------------------------------------------------------------------------------------------------
04/36
------------------------------------------------------------------------------------------------------------------------------------
CFD 11-1 Kerr-McGee Sino-American Energy 51% 2004 40.4
------------------------------------------------------------------------------------------------------------------------------------
CFD 11-2 Kerr-McGee Sino-American Energy 51% 2004 7.9
------------------------------------------------------------------------------------------------------------------------------------
CFD 18-1 Kerr-McGee Sino-American Energy 51% 2004 1.7
------------------------------------------------------------------------------------------------------------------------------------
Western South China Sea
The Western South China Sea has been our most important natural gas
producing area, and was our second largest producing area for the year ended
December 31, 2002. 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. The most important exploration areas in the Western South China Sea
are the Beibu Gulf, the Yinggehai Basin, and the Qiongdongnan Basin. As of
December 31, 2002, we had rights to operate independently or in conjunction
with international oil and gas companies in 36 blocks covering approximately
166,803 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, 2002, we had net proved reserves of 160.4
million barrels of crude oil and condensate and 2,511.2 billion cubic feet of
natural gas in this region, totaling 578.9 million BOE and representing
approximately 28.7% 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, 2002, we drilled 17
wildcat wells, two of which were successful, and three appraisal wells, one of
which was successful. Our production sharing contract partners drilled one
wildcat well, which was unsuccessful, in this area and did not drill any
appraisal wells.
43
The following table sets forth the principal exploration blocks under an
exploration license to us for both our independent operations and our
production sharing contracts in the Western South China Sea as of December 31,
2002.
Independent
Exploration License exploration
Approximate -------------------------- 2002 drilling
block area Commencement Expiration exploration planned
Block (km2) Partner(s) date date drilling for 2003
------------------------------------ ------------- ------------ ------------ ---------- ----------- -----------
Independent
------------------------------------------------------------------------------------------------------------------------------------
Ledong 01 6,543 -- 12/03/01 12/03/03 4 --
------------------------------------------------------------------------------------------------------------------------------------
Changjiang 25 5,811 -- 12/03/01 12/03/03 7 2
------------------------------------------------------------------------------------------------------------------------------------
Weizhou 12 6,980 -- 05/11/01 05/11/06 -- --
------------------------------------------------------------------------------------------------------------------------------------
Yulin 35 6,050 -- 05/11/01 05/11/06 1 --
------------------------------------------------------------------------------------------------------------------------------------
Qionghai 28 5,208 -- 05/11/01 05/11/06 -- 1
------------------------------------------------------------------------------------------------------------------------------------
Qiongdongnan Songtao 22 4,063 -- 05/11/01 05/11/06 1 --
------------------------------------------------------------------------------------------------------------------------------------
Qiongdongnan Songtao 31 5,264 -- 05/11/01 05/11/06 1 --
------------------------------------------------------------------------------------------------------------------------------------
Qiongdongnan Songtao 18 2,566 -- 03/31/00 12/16/05 1 --
------------------------------------------------------------------------------------------------------------------------------------
Wenchang 20 4,979 -- 05/11/01 05/11/06 1 1
------------------------------------------------------------------------------------------------------------------------------------
Lingao 11 4,117 -- 05/11/01 05/11/06 1 --
------------------------------------------------------------------------------------------------------------------------------------
Lingao 15 6,080 -- 05/11/01 05/11/06 3 --
------------------------------------------------------------------------------------------------------------------------------------
Baodao 16 7,583 -- 08/08/02 08/08/07 -- --
------------------------------------------------------------------------------------------------------------------------------------
Baodao 30 6,341 -- 08/07/02 08/07/07 -- --
------------------------------------------------------------------------------------------------------------------------------------
PSCs
------------------------------------------------------------------------------------------------------------------------------------
Wanganbei (A, B, C, D) (1) 25,418 Crestone 10/01/01 10/01/03 -- N/A(3)
------------------------------------------------------------------------------------------------------------------------------------
39/05(2) 5,700 Husky 12/03/01 12/03/03 -- N/A(3)
------------------------------------------------------------------------------------------------------------------------------------
22/12(2) 608 Rec Oil, Bligh 05/11/01 05/11/06 1 N/A(3)
Petsec Petroleum, Oil
Australia
------------------------------------------------------------------------------------------------------------------------------------
23/20(2) 1,543 Husky 05/11/01 05/11/06 -- N/A(3)
------------------------------------------------------------------------------------------------------------------------------------
23/15(2) 1,327 Husky 05/11/01 05/11/06 -- N/A(3)
------------------------------------------------------------------------------------------------------------------------------------
Other(4)
------------------------------------------------------------------------------------------------------------------------------------
----------
(1) The Wanganbei block area consists of four blocks.
(2) Since this production sharing block area is located within an
independent block, its validity period depends on the exploration
license granted to the related independent block. To avoid
double-counting, the area attributable to this production sharing block
has not been included in the total block area of the related independent
block.
(3) Not applicable.
(4) We have exploration rights in the Western South China Sea region for 15
additional blocks covering an aggregate area of approximately 60,622
square kilometers.
During the year ended December 31, 2002, we acquired approximately 712
square kilometers of 3D seismic data and our foreign partners acquired
approximately 460 square kilometers of 3D seismic data in the Western South
China Sea. We have independently acquired an aggregate of approximately
159,550 kilometers and 7,010 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
106,900 kilometers and 3,670 square kilometers of additional 2D and 3D seismic
data, respectively, in this area. Our exploration capital expenditures for the
Western South China Sea for 2002 were US$68.9 million. In 2003, we plan to
drill four exploration wells in the Western South China Sea area.
For the year ended December 31, 2002, net production averaged 56,910
barrels per day of crude oil, condensate and natural gas liquids and 142.2
million cubic feet per day of natural gas, representing approximately 24.0% of
total daily net production. Our development capital expenditures for the
Western South China Sea for 2002 were US$268.5 million.
44
The following table sets forth the principal oil and gas
properties in the Western South China Sea area that were under production or
development as of December 31, 2002.
Average net
production Number
for year 2002 of net
Our (BOE per productive
Block/Field Operator Partner(s) interest day) wells
-------------------------- ------------ ----------- -------- ------------- -----------
Production
---------------------------------------------------------------------------------------------------------------------
Yinggehai
---------------------------------------------------------------------------------------------------------------------
Yacheng 13-1 BP Kufpec 51% 26,953 6
---------------------------------------------------------------------------------------------------------------------
Yulin 35
---------------------------------------------------------------------------------------------------------------------
Weizhou 11-4 CNOOC Limited -- 100% 18,821 45
---------------------------------------------------------------------------------------------------------------------
Weizhou 12-1 CNOOC Limited -- 100% 17,635 17
---------------------------------------------------------------------------------------------------------------------
Yangjiang 39/05
---------------------------------------------------------------------------------------------------------------------
Wenchang 13-1/13-2 CNOOC Limited Husky 60% 19,794 13
---------------------------------------------------------------------------------------------------------------------
Development
---------------------------------------------------------------------------------------------------------------------
Yulin 35
---------------------------------------------------------------------------------------------------------------------
Weizhou 12-1 North CNOOC Limited -- 100% -- --
---------------------------------------------------------------------------------------------------------------------
Changjiang 25
---------------------------------------------------------------------------------------------------------------------
Dongfang 1-1 CNOOC Limited -- 100% -- --
---------------------------------------------------------------------------------------------------------------------
Yangjiang 31 and 32
---------------------------------------------------------------------------------------------------------------------
Wenchang 8-3 CNOOC Limited -- 100% -- --
---------------------------------------------------------------------------------------------------------------------
Wenchang 19-1 CNOOC Limited -- 100% -- --
---------------------------------------------------------------------------------------------------------------------
Ledong 01
---------------------------------------------------------------------------------------------------------------------
Ledong 15-1/22-1 CNOOC Limited -- 100% -- --
---------------------------------------------------------------------------------------------------------------------
Net proved
Actual or reserves as of
expected December 31,
production 2002
commencement (million
Block/Field year BOE
-------------------------- ------------ ------------------
Production
-------------------------------------------------------------------------
Yinggehai
-------------------------------------------------------------------------
Yacheng 13-1 1995 98.3
-------------------------------------------------------------------------
Yulin 35
-------------------------------------------------------------------------
Weizhou 11-4 1993 21.2
-------------------------------------------------------------------------
Weizhou 12-1 1999 29.6
-------------------------------------------------------------------------
Yangjiang 39/05
-------------------------------------------------------------------------
Wenchang 13-1/13-2 2002 46.5
-------------------------------------------------------------------------
Development
-------------------------------------------------------------------------
Yulin 35
-------------------------------------------------------------------------
Weizhou 12-1 North 2004 21.5
-------------------------------------------------------------------------
Changjiang 25
-------------------------------------------------------------------------
Dongfang 1-1 2003 218.5
-------------------------------------------------------------------------
Yangjiang 31 and 32
-------------------------------------------------------------------------
Wenchang 8-3 2005 11.6
-------------------------------------------------------------------------
Wenchang 19-1 2007 26.1
-------------------------------------------------------------------------
Ledong 01
-------------------------------------------------------------------------
Ledong 15-1/22-1 2009 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, 2002, we had rights to operate
independently or in conjunction with international oil and gas companies in 36
blocks covering approximately 164,550 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, 2002, we had net proved reserves of
120.3 million barrels of crude oil and condensate and 42.8 billion cubic feet
of natural gas in this region, totaling 127.5 million BOE and representing
approximately 6.3% of our total net proved reserves.
During the year ended December 31, 2002, we drilled four wildcat wells,
two of which were successful, and one successful appraisal well. Our
production sharing contract partners drilled two unsuccessful wildcat wells
and did not drill any appraisal wells in this area.
45
The following table sets forth the principal exploration blocks that are
under an existing exploration license or pending exploration license to us for
both our independent operations and our production sharing contracts in the
Eastern South China Sea as of December 31, 2002.
Exploration License
Approximate ---------------------------------- 2002
block area Commencement Expiration exploration
Block (km2) Partner(s) date date drilling
-------------------- ----------- -------------- ------------ ----------- -----------
Independent
----------------------------------------------------------------------------------------------------------------------------------
Huizhou 31 3,074 -- 05/11/01 05/11/06 --
----------------------------------------------------------------------------------------------------------------------------------
Enping 15 5,833 -- 05/11/01 05/11/06 --
----------------------------------------------------------------------------------------------------------------------------------
Enping 10 6,547 -- 05/11/01 05/11/06 --
----------------------------------------------------------------------------------------------------------------------------------
Panyu 33 4,830 -- 05/11/01 05/11/06 --
----------------------------------------------------------------------------------------------------------------------------------
Liuhua 07 4,172 -- 05/11/01 05/11/06 4
----------------------------------------------------------------------------------------------------------------------------------
Chaotai 7,834 -- 05/14/02 05/14/07 --
----------------------------------------------------------------------------------------------------------------------------------
Xijiang 04 7,969 -- 05/11/01 05/11/06 1
----------------------------------------------------------------------------------------------------------------------------------
Lufeng 08 4,723 -- 05/11/01 05/11/06 --
----------------------------------------------------------------------------------------------------------------------------------
Huizhou 30 5,862 -- 05/11/01 05/11/06 --
----------------------------------------------------------------------------------------------------------------------------------
PSCs
----------------------------------------------------------------------------------------------------------------------------------
16/19(1) 415 Agip, 10/08/00 03/31/02 --
ChevronTexaco
----------------------------------------------------------------------------------------------------------------------------------
15/34 5,124 Devon, Burlington 08/30/00 02/28/04 1
----------------------------------------------------------------------------------------------------------------------------------
16/02 3,498 Devon, 03/31/00 03/31/07 --
Energy Development
Corporation
----------------------------------------------------------------------------------------------------------------------------------
15/12 1,895 Shell, Phillips 10/16/00 10/16/06 --
----------------------------------------------------------------------------------------------------------------------------------
15/35(1) 1,439 Devon, Burlington 08/10/01 01/31/03 --
----------------------------------------------------------------------------------------------------------------------------------
27/10(2) 6,546 Devon, 10/09/01 10/09/03 1
Energy Development
Corporation
----------------------------------------------------------------------------------------------------------------------------------
16/08(1) 541 Agip, ChevronTexaco 04/29/01 04/29/03 --
----------------------------------------------------------------------------------------------------------------------------------
16/05 3,009 Devon, 03/31/00 03/31/07 --
Energy Development
Corporation
----------------------------------------------------------------------------------------------------------------------------------
Other(4)
----------------------------------------------------------------------------------------------------------------------------------
Independent
exploration
drilling planned
Block for 2003
-------------------- ------------------
Independent
---------------------------------------------
Huizhou 31 --
---------------------------------------------
Enping 15 --
---------------------------------------------
Enping 10 --
---------------------------------------------
Panyu 33 --
---------------------------------------------
Liuhua 07 4
---------------------------------------------
Chaotai 1
---------------------------------------------
Xijiang 04 --
---------------------------------------------
Lufeng 08 3
---------------------------------------------
Huizhou 30 --
---------------------------------------------
PSCs
---------------------------------------------
16/19(1) N/A(3)
---------------------------------------------
15/34 N/A(3)
---------------------------------------------
16/02 N/A(3)
---------------------------------------------
15/12 N/A(3)
---------------------------------------------
15/35(1) N/A(3)
---------------------------------------------
27/10(2) N/A(3)
---------------------------------------------
16/08(1) N/A(3)
---------------------------------------------
16/05 N/A(3)
---------------------------------------------
Other(4)
---------------------------------------------
--------------
(1) An application has been submitted to extend the exploration license.
(2) Since this production sharing block area is located within an
independent block, its validity period depends on the exploration
license granted to the related independent block. To avoid
double-counting, the area attributable to this production sharing block
has not been included in the total contract area of the related
independent block.
(3) Not applicable.
(4) We have exploration rights in this Eastern South China Sea region for 21
additional blocks covering an aggregate area of approximately 94,789
square kilometers.
For the year ended December 31, 2002, we acquired 6,400 kilometers of 2D
seismic data and 1,330 square kilometers of 3D seismic data, while our foreign
partners acquired approximately 970 kilometers of 2D seismic data and 782
square kilometers of 3D seismic data in the Eastern South China Sea area. We
have an aggregate of approximately 55,600 kilometers of independent 2D seismic
data and 1,330 square kilometers of 3D seismic data in the Eastern South China
Sea. We also have access through our production sharing contract partners to
approximately 107,700 kilometers and 6,090 square kilometers of additional 2D
and 3D seismic data, respectively, in this area. Our exploration capital
expenditures for the Eastern South China Sea for 2002 were US$42.0 million. We
plan to drill eight exploration wells in the Eastern South China Sea in 2003.
46
For the year ended December 31, 2002, net production averaged
approximately 73,792 barrels per day of crude oil, representing approximately
21.3% of our total daily net production. Our development capital expenditures
for this region for 2002 were US$122.0 million.
The following table sets forth our principal oil and gas properties under
production in the Eastern South China Sea as of December 31, 2002.
Average net
production Number
for year 2002 of net
Our (BOE per productive
Production Block/Field Operator Partner(s) interest day) wells
-------------------------- ------------ ----------- -------- ------------- -----------
16/08
----------------------------------------------------------------------------------------------------------------------
Huizhou 21-1 CACT Agip, 51% 3,015 8
ChevronTexaco
----------------------------------------------------------------------------------------------------------------------
Huizhou 26-1 CACT Agip, 51% 13,427 11
ChevronTexaco
----------------------------------------------------------------------------------------------------------------------
Huizhou 32-2 CACT Agip, 51% 3,269 5
ChevronTexaco
----------------------------------------------------------------------------------------------------------------------
Huizhou 32-3 CACT Agip, 51% 7,113 6
ChevronTexaco
----------------------------------------------------------------------------------------------------------------------
Huizhou 32-5 CACT Agip, 51% 4,541 2
ChevronTexaco
----------------------------------------------------------------------------------------------------------------------
15/11
----------------------------------------------------------------------------------------------------------------------
Xijiang 24-3 CNOOC Limited, Shell 51% 16,732 11
ConocoPhillips
----------------------------------------------------------------------------------------------------------------------
15/22
----------------------------------------------------------------------------------------------------------------------
Xijiang 30-2 CNOOC Limited, Shell 40% 14,202 10
ConocoPhillips
----------------------------------------------------------------------------------------------------------------------
29/04
----------------------------------------------------------------------------------------------------------------------
Liuhua 11-1 CNOOC Limited, Kerr-McGee 51% 7,139 13
BPCEPC-Liuhua
----------------------------------------------------------------------------------------------------------------------
16/06
----------------------------------------------------------------------------------------------------------------------
Lufeng 13-1 JHN JHN 25% 2,697 5
----------------------------------------------------------------------------------------------------------------------
17/22
----------------------------------------------------------------------------------------------------------------------
Lufeng 22-1 CNOOC Limited, Statoil Statoil 25% 1,657 1
----------------------------------------------------------------------------------------------------------------------
Net proved
Actual or reserves as of
expected December 31,
production 2002
commencement (million
Production Block/Field year BOE
-------------------------- ------------ ------------------
16/08
-----------------------------------------------------------------------
Huizhou 21-1 1990 2.5
-----------------------------------------------------------------------
Huizhou 26-1 1991 14.4
-----------------------------------------------------------------------
Huizhou 32-2 1995 1.5
-----------------------------------------------------------------------
Huizhou 32-3 1995 6.4
-----------------------------------------------------------------------
Huizhou 32-5 1999 2.8
-----------------------------------------------------------------------
15/11
-----------------------------------------------------------------------
Xijiang 24-3 1994 12.4
-----------------------------------------------------------------------
15/22
-----------------------------------------------------------------------
Xijiang 30-2 1995 9.2
-----------------------------------------------------------------------
29/04
-----------------------------------------------------------------------
Liuhua 11-1 1996 6.0
-----------------------------------------------------------------------
16/06
-----------------------------------------------------------------------
Lufeng 13-1 1993 2.9
-----------------------------------------------------------------------
17/22
-----------------------------------------------------------------------
Lufeng 22-1 1997 0.8
-----------------------------------------------------------------------
47
The following table sets forth our principal oil and gas properties under
development as of December 31, 2002.
Net proved
Actual or expected reserves as of
Our production December 31, 2002
Block/Field Operator Partner(s) interest commencement year (million BOE)
----------------- -------- ---------- --------- ------------------- -----------------
16/08
---------------------------------------------------------------------------------------------------------------------------------
Huizhou 21-1 Gas CACT Agip, 51% 2005 9.5
ChevronTexaco
---------------------------------------------------------------------------------------------------------------------------------
16/19
---------------------------------------------------------------------------------------------------------------------------------
Huizhou 19-1 CACT Agip, 51% 2006 2.0
ChevronTexaco
---------------------------------------------------------------------------------------------------------------------------------
Huizhou 19-2 CACT Agip, 51% 2005 12.5
ChevronTexaco
---------------------------------------------------------------------------------------------------------------------------------
Huizhou 19-3 CACT Agip, 51% 2004 11.2
ChevronTexaco
---------------------------------------------------------------------------------------------------------------------------------
15/34
---------------------------------------------------------------------------------------------------------------------------------
Panyu 4-2 Devon Burlington 51% 2003 16.4
---------------------------------------------------------------------------------------------------------------------------------
Panyu 5-1 Devon Burlington 51% 2003 17.0
---------------------------------------------------------------------------------------------------------------------------------
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 is approximately
339,580 square kilometers in size and is located east of Shanghai. As of
December 31, 2002, we had rights to operate independently or in conjunction
with international oil and gas companies in 45 blocks (excluding the Pinghu
block) covering approximately 198,713 square kilometers of the total East
China Sea. We also own a 50% working interest in the Xihu Trough area within
the East China Sea. We and Sinopec, our joint venture partner, have formed a
joint management committee and established the East China Sea Xihu Oil and Gas
Operating Company to oversee the development of this region. 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, 2002, our net proved
reserves in the Xihu Trough were 8.9 million barrels of crude oil and
condensate and 127.1 billion cubic feet of natural gas, totaling 30.1 million
BOE and representing less than 1.5% of our total net proved reserves. We
acquired our interest in the project from CNOOC and are the operator of the
project.
During the year ended December 31, 2002, we drilled two appraisal wells,
one of which was successful, in cooperation with Sinopec in our independent
blocks. We drilled one wildcat well that was successful during 2002. Our
foreign partners did not drill any exploration wells in this area in 2002.
48
The following table sets forth the principal exploration blocks under an
existing exploration license or pending exploration license to us for both our
independent operations and our production sharing contracts in the East China
Sea as of December 31, 2002.
Exploration License
Approximate ---------------------------------- 2002
block area Commencement Expiration exploration
Block (km2) Partner(s) date date drilling
-------------------- ----------- -------------- ------------ ----------- -----------
Independent
-----------------------------------------------------------------------------------------------------------------------------------
Pinghu(1) N/A Sinopec National Star, N/A N/A --
Shanghai Municipal
Government
----------------------------------------------------------------------------------------------------------------------------------
Huangyan 04 2,848 -- 08/28/01 08/28/08 3
----------------------------------------------------------------------------------------------------------------------------------
Hangzhou 17 4,227 -- 08/28/01 08/28/08 --
----------------------------------------------------------------------------------------------------------------------------------
Zhenghai 01 1,536 -- 08/28/01 08/28/08 --
----------------------------------------------------------------------------------------------------------------------------------
Fuyang 27 2,526 -- 08/28/01 08/28/08 --
----------------------------------------------------------------------------------------------------------------------------------
Lishui-Jiaojiang Trough 6,767 -- 03/31/00 11/28/05 --
----------------------------------------------------------------------------------------------------------------------------------
Western Wunansha 242 -- 03/31/00 12/16/05 --
----------------------------------------------------------------------------------------------------------------------------------
Dalian 16 6,471 -- 05/11/01 05/11/06 --
----------------------------------------------------------------------------------------------------------------------------------
Yantai 04 6,111 -- 05/11/01 05/11/06 --
----------------------------------------------------------------------------------------------------------------------------------
Lishui 30 4,085 -- 07/01/02 07/01/09 --
----------------------------------------------------------------------------------------------------------------------------------
Qingdao 34 5,745 -- 12/07/02 12/07/06 --
----------------------------------------------------------------------------------------------------------------------------------
PSCs
----------------------------------------------------------------------------------------------------------------------------------
32/32 513 Primeline Energy, 07/11/02 07/11/04 --
Primetime Petroleum
----------------------------------------------------------------------------------------------------------------------------------
Other(3)
----------------------------------------------------------------------------------------------------------------------------------
Independent
exploration
drilling planned
Block for 2003
-------------------- ------------------
Independent
------------------------------------------------
Pinghu(1) --
------------------------------------------------
Huangyan 04 6
------------------------------------------------
Hangzhou 17 --
-----------------------------------------------
Zhenghai 01 --
------------------------------------------------
Fuyang 27 --
------------------------------------------------
Lishui-Jiaojiang Trough --
------------------------------------------------
Western Wunansha --
------------------------------------------------
Dalian 16 --
------------------------------------------------
Yantai 04 --
------------------------------------------------
Lishui 30 --
------------------------------------------------
Qingdao 34 --
------------------------------------------------
PSCs
------------------------------------------------
32/32 N/A(2)
------------------------------------------------
Other(3)
------------------------------------------------
----------
(1) This field is covered by a production license to the Shanghai Petroleum
and Natural Gas Company in which we have a 30% interest. The production
license will expire on December 1, 2020.
(2) Not applicable.
(3) We have exploration rights in this East China Sea region for 34
additional blocks covering an aggregate area of approximately 157,642
square kilometers.
During the year ended December 31, 2002, we acquired 8,050 kilometers of
2D seismic data in this area. We have independently acquired an aggregate of
approximately 107,430 kilometers and 377 square kilometers, respectively, of
2D and 3D seismic data in the East China Sea area. We also have access through
our production sharing contract partners to approximately 47,520 kilometers
and 475 square kilometers, respectively, of additional 2D and 3D seismic data
in this area. Our exploration capital expenditures for the East China Sea for
2002 were US$18.0 million. We plan to drill six exploration wells with other
parties, and our foreign partners currently have no plans to drill any
exploration wells in the East China Sea in 2003.
For the year ended December 31, 2002, our net production in this region
averaged 3,223 barrels per day of crude oil, condensate and natural gas
liquids and 12.4 million cubic feet per day of natural gas, representing 1.5%
of total daily net production. Our development capital expenditures for the
East China Sea for 2002 were US$52.2 million.
49
The following table sets forth the principal oil and gas properties under
production or development in the East China Sea as of December 31, 2002.
Average net
production Number
for year 2002 of net
Our (BOE per productive
Block/Field Operator Partner(s) interest day) wells
---------------- ------------ ----------- -------- ------------- -----------
Production
-----------------------------------------------------------------------------------------------------------------
Pinghu(1)
-----------------------------------------------------------------------------------------------------------------
Pinghu (I) CNOOC Limited Sinopec National Star, 30% 5,283 5
Shanghai Municipal
Government
-----------------------------------------------------------------------------------------------------------------
Development
-----------------------------------------------------------------------------------------------------------------
Pinghu(1)
-----------------------------------------------------------------------------------------------------------------
Pinghu (II) CNOOC Limited Sinopec National Star, 30% -- --
Shanghai Municipal
Government
-----------------------------------------------------------------------------------------------------------------
Xihu Trough
-----------------------------------------------------------------------------------------------------------------
Canxue CNOOC Limited Sinopec 50% -- --
-----------------------------------------------------------------------------------------------------------------
Duanqiao CNOOC Limited Sinopec 50% -- --
-----------------------------------------------------------------------------------------------------------------
Net proved
Actual or reserves as of
expected December 31,
production 2002
commencement (million
Block/Field year BOE
-------------------------- ------------ ------------------
Production
------------------------------------------------------------------------------
Pinghu(1)
------------------------------------------------------------------------------
Pinghu (I) 1998 9.9
------------------------------------------------------------------------------
Development
------------------------------------------------------------------------------
Pinghu(1)
------------------------------------------------------------------------------
Pinghu (II) 2006 2.4
------------------------------------------------------------------------------
Xihu Trough
------------------------------------------------------------------------------
Canxue 2007 11.6
------------------------------------------------------------------------------
Duanqiao 2008 18.5
------------------------------------------------------------------------------
----------
(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, we acquired interests in the Tangguh LNG project located
in Indonesia. For further details of these interests, see "--Natural Gas
Business--Overseas Activity."
In October 2002, we entered into a key terms agreement to acquire
interests in natural gas reserves located in the North West Shelf of
Australia. 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 acquisition of the Indonesian subsidiaries
was consistent with our plan to expand our production and reserves.
Furthermore, we believe the acquisition represented a unique opportunity to
acquire producing assets that fit with our offshore expertise and experience.
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, 2002 were
approximately 167.1 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 65.3% 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 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
50
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.
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. As of
December 31, 2002, our net proved reserves in this property were 7.6 million
barrels of crude oil. For 2002, net production from this property averaged
2,579 barrels per day of crude oil, condensate and natural gas liquids,
representing approximately 0.7% of total daily net production. Production has
been declining in recent years due to water cut increases and natural
production declines. Our interests in the production sharing contract are held
by our wholly owned subsidiaries.
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 has also engaged in oil trading
activities.
51
The following table sets forth the principal oil and gas properties under
production in our overseas interests as of December 31, 2002. There is no data
for the number of productive wells and actual or expected production
commencement year because we only recently acquired our interests in these
properties from other parties.
Average Net
production for
Our year 2002
PSCs Operator Partner(s) interest (BOE per day)
------------------------ ----------------- ------------------------------- -------------- --------------
Repsol
-----------------------------------------------------------------------------------------------------------------------------------
INPEX Sumatra 65.3% 24,921
KNOC Sumatra
MC Oil & Gas Sumatra
South East Sumatra CNOOC Limited Paladin Indonesia (Sunda)
Paladin UK (Southeast Sumatra)
Paladin Resources (Bahamas)
CNOOC Limited
-----------------------------------------------------------------------------------------------------------------------------------
CNOOC ONWJ 36.7% 15,405
INPEX Jaws
MC Oil and Gas Java
Offshore North West Java BP C. ITOH Energy
Paladin Resources (Sunda)
BP West Java
-----------------------------------------------------------------------------------------------------------------------------------
Pertamina 25.0% 1,895
West Madura Kodeco Energy CNOOC Madura
KODECO Energy
-----------------------------------------------------------------------------------------------------------------------------------
Poleng(1) Korea Development CNOOC Poleng 50.0% 3,945
Korea Development
-----------------------------------------------------------------------------------------------------------------------------------
CNOOC Blora 16.7% --
Blora Lundin Blora Paladin Resources
Amerada Hess
Lundin Blora
-----------------------------------------------------------------------------------------------------------------------------------
Malacca
-----------------------------------------------------------------------------------------------------------------------------------
CNOOC Limited 39.5% 2,579
OOGC Mallaca
Malacca Strait Kondur Petroleum Mallaca Petroleum
Imbang Tata Alam
Kondur Petroleum
-----------------------------------------------------------------------------------------------------------------------------------
Net proved reserves as
of December 31, 2002
PSCs (million BOE)
------------------------ -----------------------
Repsol
-------------------------------------------------------------
South East Sumatra 87.42
-------------------------------------------------------------
Offshore North West Java 64.86
-------------------------------------------------------------
West Madura 8.29
-------------------------------------------------------------
Poleng(1) 6.52
-------------------------------------------------------------
Blora --
-------------------------------------------------------------
Malacca
-------------------------------------------------------------
Malacca Strait 7.63
-------------------------------------------------------------
----------
(1) Our interest in this contract area is in the form of a technical
assistance contract.
52
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,
----------------------------------------
2000 2001 2002
------- ------ ------
(US$)
Average Sales Prices of Petroleum Produced
Per Barrel of Crude Oil, Condensate and Natural Gas Liquid Sold.......... 28.21 23.34 24.35
Per Thousand Cubic Feet of Natural Gas Sold.............................. 3.09 3.08 2.98
Offshore China Average Lifting Costs per BOE Produced(1)
Independent.............................................................. 4.00 3.88 3.89
Production Sharing Contracts............................................. 4.86 4.51 3.95
Offshore China Average................................................... 4.45 4.16 3.92
Overseas Average Lifting Costs per BOE Produced(1)
Net Entitlement.......................................................... -- -- 9.06
----------
(1) Our overseas operations during the years ended December 31, 2000 and 2001
were not material and the related lifting costs have been included in our
offshore China lifting costs for those years.
Drilling and Productive Wells
The following table sets forth our exploratory and productive wells
drilled offshore China as of December 31, 2002 by independent and production
sharing contract operations in each of our operating areas. There is no data
for exploratory and productive wells drilled overseas because we only recently
acquired our interests in these properties from other parties.
As of December 31, 2002
----------------------------------------------------------------------------------
Total Western South Eastern South East China
Offshore China Bohai Bay China Sea China Sea Sea
-------------- --------- ------------- ------------- ----------
Independent
Net Exploratory Wells................. 430.0 262.0 148.0 7.0 13.0
Net Productive Wells.................. 431.5 373.0 54.0 -- 4.5
Crude Oil............................. 418.1 362.0 54.0 -- 2.1
Natural Gas........................... 13.4 11.0 -- -- 2.4
Production Sharing Contracts
Net Exploratory Wells................. 2.0 -- -- -- 2.0
Net Productive Wells.................. 175.1 83.1 18.2 73.8 --
Crude Oil............................. 168.5 83.1 12.6 72.8 --
Natural Gas........................... 6.6 -- 5.6 1.0 --
Totals
Net Exploratory Wells................. 432.0 262.0 148.0 7.0 15.0
Net Productive Wells.................. 606.6 456.1 72.2 73.8 4.5
Crude Oil............................. 586.6 445.1 66.6 72.8 2.1
Natural Gas........................... 20.0 11.0 5.6 1.0 2.4
53
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 year ended December 31, 2002.
Year ended December 31, 2002
---------------------------------------------------------------------------------
Western Eastern
South China South China East China
Total Bohai Bay Sea Sea 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
Year ended December 31, 2001
---------------------------------------------------------------------------------
Western Eastern
South China South China East China
Total Bohai Bay Sea Sea Sea Overseas
----- --------- ----------- ----------- ----------- --------
Independent
Net Exploratory Wells Drilled.......... 13.0 4.0 6.0 1.0 2.0 --
Successful.......................... 5.0 2.0 2.0 1.0 -- --
Dry................................. 8.0 2.0 4.0 -- 2.0 --
Net Development Wells Drilled.......... 76.0 76.0 -- -- -- --
Successful.......................... 76.0 76.0 -- -- -- --
Dry................................. -- -- -- -- -- --
Production Sharing Contracts
Net Exploratory Wells Drilled.......... 1.0 -- -- -- 1.0 --
Successful.......................... -- -- -- -- -- --
Dry................................. 1.0 -- -- -- 1.0 --
Net Development Wells Drilled.......... 41.7 34.7 4.8 -- 0.6 1.6
Successful.......................... 40.7 34.7 3.8 -- 0.6 1.6
Dry................................. 1.0 -- 1.0 -- -- --
54
Year ended December 31, 2000
---------------------------------------------------------------------------------
Western Eastern
South China South China East China
Total Bohai Bay Sea Sea Sea Overseas
----- --------- ----------- ----------- ----------- --------
Independent
Net Exploratory Wells Drilled.......... 12.0 5.0 4.0 1.0 2.0 --
Successful.......................... 6.0 5.0 1.0 -- -- --
Dry................................. 6.0 -- 3.0 1.0 2.0 --
Net Development Wells Drilled.......... 65.2 61.0 3.0 -- 1.2 --
Successful.......................... 65.2 61.0 3.0 -- 1.2 --
Dry................................. -- -- -- -- -- --
Production Sharing Contracts
Net Exploratory Wells Drilled.......... 1.4 -- -- -- 1.0 0.4
Successful.......................... 1.0 -- -- -- 1.0 --
Dry................................. 0.4 -- -- -- -- 0.4
Net Development Wells Drilled.......... 24.4 22.4 -- -- -- 2.0
Successful.......................... 24.4 22.4 -- -- -- 2.0
Dry................................. -- -- -- -- -- --
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 domestic demand for natural gas. Because of a domestic natural gas
shortfall forecasted by the Chinese government, 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 has invested or proposes to invest. CNOOC is currently involved in the
following large-scale natural gas projects.
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. CNOOC has granted us the option to acquire CNOOC's
interest in the project. 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. We have not entered into any negotiations with CNOOC on the
detailed terms under which we may acquire CNOOC's interest in this facility.
CNOOC has committed to take a 33% ownership interest in the project. Other
partners include Hongkong Electric and Hong Kong and China Gas, 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 three million metric tons per year, a 215-kilometer trunkline and
two branch trunklines with a total length of 111 kilometers. Project
construction is expected to begin in the second quarter of 2003. The facility
is scheduled to commence operations in 2006. The total cost of the facility is
estimated to be approximately US$600 million. CNOOC will help us procure all
necessary government approvals for our participation in this project should we
exercise our option. We are currently evaluating the exercise of this option
and may exercise it at any time.
Zhejiang Network. In September 2001, CNOOC signed an agreement with
Zhejiang Provincial Energy Group Company Limited and Zhejiang Southeast
Electric Power Company Limited to invest in a joint venture to develop an
intra-provincial natural gas distribution network. CNOOC will hold a 37%
equity interest in the joint venture company. We have an option to take
CNOOC's share in the joint venture company in an arrangement similar to our
option for the Guangdong liquefied natural gas project. The business scope of
the joint venture includes the construction, operation and management of
natural gas pipelines, the intra-
55
provincial wholesale and distribution of natural gas, and the
development of gas-fired power plants and other natural gas related
infrastructure and projects.
Shandong Pipeline. In September 2001, CNOOC signed an agreement with the
Shandong Province Development Planning Commission and Shandong International
Trust & Investment Corporation in connection with the construction of a gas
pipeline and the importation of liquefied natural gas in Shandong Province. A
steering committee was established by the parties to study the prospect of gas
utilization in Shandong Province, including the feasibility of constructing a
main gas pipeline in Shandong and importing liquefied natural gas to Shandong
through Qingdao. CNOOC intends to use gas resources from the Bohai Bay. CNOOC
expects that natural gas from the Bohai Bay will land in Longkou of Shandong
Province in 2003, which can be further transported to Qingdao and Yantai in
Shandong Province by pipeline. The pipeline between Longkou and Yantai will be
95 kilometers; the pipeline between Longkou and Qingdao will be 2,101
kilometers.
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 of
increasing natural gas supply and gas market development in Fujian Province by
both parties. 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. We have the option to take CNOOC's working interest in
the project and have recently acquired an interest in the Tangguh LNG project
in Indonesia, which will supply liquefied natural gas to this project.
Overseas Activity
On January 1, 2003, we acquired BP Muturi Limited, which owns 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 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
represents one of the largest natural gas projects in Asia.
Our interests in these two production sharing contracts represent
approximately 12.5% 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 (34.2%), BP Muturi (0.2%), BP Wiriagar (2.7%), MI Berau
(16.3%), Nippon (12.2%), BG (10.7%), KG Berau (8.6%), KG Wiriagar (1.4%) and
Indonesia Natural Gas Resources Muturi (1.1%). 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.
Before acquiring interest in the Tangguh LNG project, the partners in the
Tangguh LNG project entered into a conditional 25-year supply contract
beginning in 2007 to provide up to 2.6 million tons of liquefied natural gas
per year to a liquefied natural gas terminal project in Fujian Province,
China. In addition, a repurchase agreement was entered into 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.
See "--PRC Activity--Fujian Development." 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 October 2002, we entered into a key terms agreement to acquire an
aggregate interest of approximately 5.56% in the reserves and upstream
production of Australia's North West Shelf Gas Project for approximately
US$365.6 million, subject to certain adjustments. Under the terms of this
agreement, we would purchase our interest from the six current partners to
this project: BHP Billiton, BP, ChevronTexaco, Japan
56
Australia LNG (MIMI), Shell and Woodside Energy. 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 would
be approximately 210 million BOE. Woodside Petroleum is the operator for the
project.
Under the terms of this agreement, we would also acquire a 25% interest
in the China LNG Joint Venture, which is being established by the six current
partners to supply liquefied natural gas from the North West Shelf Gas 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 Gas Project for gas production and processing services
provided over the term of the China LNG Joint Venture. We expect to complete
our acquisition of the interests in the North West Shelf Gas Project and China
LNG Joint Venture in 2003. See "Item 4--Information on the Company--Business
Overview--Natural Gas Business--Overseas Activity."
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.
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 State Economic and Trade
Commission each year. Based on information provided by China's three crude oil
producers, PetroChina, Sinopec and us, the State Development and Planning
Commission compiles an overall national plan for coordinating sales. We have
been allowed to determine where we sell our production, both domestically and
internationally. Our sales of crude oil to the international market also
require us to obtain export licenses issued by the Ministry of Foreign Trade
and Economic Cooperation. Historically, we have obtained all required export
licenses.
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.
57
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,
---------------------------------------------------------------------
2000 2001 2002
------------ ------------ -----------
Sales and Marketing Volumes (benchmark)
(mmbbls)(1)
Nanhai Light (APPI(2) Tapis(3))................ 39.1 32.2 26.4
Medium Grade (Daqing OSP(4))................... 58.3 57.1 64.7
Heavy Crude (APPI(2) Duri(5)).................. 25.4 37.4 52.7
Average Realized Prices (US$/bbl)(6)
Nanhai Light................................... US$29.49 US$24.96 US$24.79
Medium Grade................................... 28.98 24.16 25.92
Heavy Crude.................................... 26.53 21.01 22.79
Benchmark Prices (US$/bbl)
APPI(2) Tapis(3) .............................. US$29.53 US$24.99 US$25.49
Daqing OSP(4) ................................. 28.53 23.92 24.95
APPI(2) Duri(5) ............................... 26.39 21.26 21.94
ICP(7) Cinta(8)................................ -- -- 24.08
ICP Widuri(9).................................. -- -- 24.08
West Texas Intermediate (US$/bbl).............. US$30.35 US$25.89 US$26.16
----------
(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$31.21 per barrel as of December 31, 2002 and US$27.72 per barrel as of May
9, 2003.
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, 2000, 2001 and 2002, we sold approximately 67.0%, 79.9% and
85.1%, respectively, of our crude oil in the PRC, and exported approximately
33.0%, 20.1% and 14.9%, 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 industry in July 1998, some refineries and petrochemical companies
were transferred to PetroChina from Sinopec. As a result, sales to Sinopec
decreased and sales to PetroChina increased. For the years ended December 31,
2000, 2001 and 2002, sales to Sinopec were approximately 52.8%, 52.7% and
44.7%, respectively, and sales to PetroChina were approximately 12.6%, 13.8%
and 7.7%, respectively, of total crude oil sales in the PRC domestic market.
Together these two customers accounted for approximately 65.4%, 66.5% and
52.4%, respectively, of the total crude oil sales in the PRC domestic market.
For further information about our sales to CNOOC-affiliated companies, please
see note 27 to our consolidated financial statements attached to this annual
report.
58
In recent years, we have diversified our domestic client base by
targeting companies not affiliated with Sinopec or PetroChina. These targeted
companies typically are involved in bitumen processing, fuel blending and
mixing, power generation and production of fertilizer feed stocks. We plan to
continue our efforts to diversify our client base.
The following table presents, for the periods indicated, our revenues
sourced in the PRC and outside the PRC:
Year ended December 31,
-------------------------------------------------------------------
2000 2001 2002
---------- ------- ---------
(Rmb in millions, except percentages)
Revenues sourced in the PRC................ 17,559 18,105 22,781
Revenues sourced outside the PRC........... 6,665 2,715 3,593
---------- ------- ---------
Total revenues............................. 24,224 20,820 26,374
========== ======= =========
% of revenues sourced outside the PRC...... 27.5% 13.0% 13.6%
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. PRC customers are required to make payments within 30
days after the shipper takes possession of the crude oil cargo at our delivery
points. During the years ended December 31, 2000, 2001 and 2002, the accounts
receivable turnover were approximately 39.5 days, 32.3 days and 32.7 days,
respectively. Doubtful accounts provision during the years ended December 31,
2000, 2001 and 2002 were Rmb 15.7 million, Rmb 10.7 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%
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 in
Hong Kong. The remaining offshore China natural gas production is sold to
customers in mainland China. Of the 73.6 billion cubic feet of natural gas
that we produced offshore China in the year ended December 31, 2002, 50.3
billion cubic feet was produced from the Yacheng 13-1 gas field in the Western
South China Sea. This field is governed by a
59
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 62.3% of our
total offshore China natural gas production for the year ended December 31,
2002. 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. The remaining 37.7% of our total offshore China natural gas production
in the year ended December 31, 2002 was sold to PRC customers, including
Hainan Fertilizer, Hainan Power, Shanghai Gas, Jingxi Chemical, Xinao Gas,
Tianjin Binhai Power and Tianjin Binhai 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 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 CNOOC 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 both customers and 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 authorized 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.
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.
60
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. All import quotas and licenses for
processed oil are expected to be eliminated by 2004. 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 and
PetroChina have received permission to import crude oil on their own. At
present, there is no timetable for allowing foreign owned or foreign invested
entities to import crude or processed oil into the PRC.
The PRC government recently underwent substantial reform. No assurance
can be given that the reorganization will not have a significant effect on the
implementation of China's WTO commitments.
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."
The PRC government recently underwent substantial reform. No assurance
can be given that the fiscal regime outlined above will not change
significantly in the future.
Production Sharing Contracts
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 State Development and Planning 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 existing production sharing
contracts to us and our subsidiaries. As of December 31,
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2002, we had 22 production sharing contracts in the production and development
stage, and 11 contracts in the exploration stage.
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.
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
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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
Under production sharing contracts, CNOOC has the right to take up to a
51% participating interest 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:
o recovery of current year operating
costs by us and foreign partner(s);
o recovery of earlier exploration costs
by foreign partner(s);
o recovery of development costs by us
and foreign partner(s) based on
participating interests;(3) and
o any excess, distributed according to
each partner's participating
interest.(3)
32.5% (2) Remainder oil allocated according to the following formula:
o (1-X) multiplied by 32.5% represents
share oil payable to the PRC
government; and
o 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.
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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% - 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
crude 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;
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.
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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
agrees 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 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 gas
field, 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 2002, we
incurred abandonment costs of approximately Rmb 204.0 million.
Production Tax
The PRC production tax rate on the oil and natural gas produced under
production sharing contracts is currently 5%.
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Overseas
In addition to our production sharing arrangements in the PRC, we also
have interests in production sharing contracts and a technical assistance
contract in Indonesia, including interests in the Malacca Strait, interests
from an acquisition we completed in April 2002 and interests in the Tangguh
LNG project we acquired in January 2003.
Indonesian oil and gas activities are currently governed by Pertamina,
the Indonesian state-owned oil and gas company founded in 1968. Under
Indonesian law, Pertamina is currently the sole entity authorized to manage
Indonesia's oil and gas resources on behalf of the Indonesian government and
is empowered to enter into agreements with foreign and domestic companies.
Pertamina is expected to become a limited liability company in 2003 pursuant
to legislation enacted in 2001.
Pertamina 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 management control lies with Pertamina 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 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 Pertamina. 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.
Pertamina 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 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
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.
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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 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.
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,
2002, 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 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
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taken out by international petroleum companies. As of December 31, 2002, we
maintained approximately Rmb 34 billion in insurance coverage and paid an
annual insurance premium of approximately Rmb 243 million to maintain that
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, 2002, the amount of our total losses not
covered by insurance was approximately Rmb 107 million.
Research and Development
During each of the three years ended December 31, 2000, 2001 and 2002, we
used research and development services provided by CNOOC-affiliates, including
China Offshore Oil Research Center, as well as other international entities.
We are developing more efficient and effective approaches to explore for new
reserves. 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:
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.
During the three years ended December 31, 2000, 2001 and 2002, we spent
approximately Rmb 104 million, Rmb 109 million and Rmb 110 million,
respectively, on general research and development activities.
For further information regarding our agreement with the China Offshore
Oil 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. Prior to March 2003, we were required to obtain various governmental
approvals, including those from the Ministry of Land and Resources, the State
Administration for Environmental Protection, the State Development and
Planning Commission and the Ministry of Foreign Trade and Economic Cooperation
before we were permitted to conduct production activities. For joint
exploration and production with foreign enterprises, we were 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 State Development and
Planning Commission to designate such blocks as an area for foreign
cooperation;
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o the Ministry of Foreign Trade and Economic Cooperation 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 State Development and Planning Commission for an overall
development plan submitted through CNOOC; and
o the Ministry of Land and Resources, for an extraction permit.
Although our sales were coordinated by the State Development and Planning
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. The State
Development and Planning Commission has been replaced by the State Development
and Reform Commission. The latter's mission is to propose economic and social
development policy and provide guidance to the various government ministries
on reform of the overall economic structure. The State Economic and Trade
Commission and the Ministry of Foreign Trade and Economic Cooperation have
been replaced by the Ministry of Commerce, whose functions include regulating
the domestic market, attracting foreign investment, and providing assistance
to domestic companies competing overseas. The newly formed State Asset
Commission is expected to exercise certain functions formerly held by the
State Economic and Trade Commission. The functions of these new administrative
bodies remain unclear, but 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 Foreign Trade and Economic Cooperation, these policies and
measures have provided us with the following benefits:
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 gas fields, 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 six years ended December 31,
1997, 1998, 1999, 2000, 2001 and 2002 represented approximately
8.7%, 12.5%, 10.4%, 6.7%, 7.3% and 5.6%, 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."
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Policies Applicable to International Oil and Gas Companies Operating in
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.
Environmental Regulation
Our operations in China are required to comply with various PRC
environmental laws and regulations administered by the central and local
government environmental protection bureaus. 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
Environmental Protection Bureau 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 three year period ended December 31, 2002, we experienced a total
of two incidents of crude oil discharge with a total volume of approximately
240 barrels being wrongfully discharged and spilled offshore, for which fines
in an aggregate amount of Rmb 31,900 (US$3,853) were imposed. None of the
incidents nor the aggregate amount of such fines had a material adverse effect
on our business or results of operations.
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, 2000, 2001 and 2002 of approximately Rmb
104 million, Rmb 90 million and Rmb 126 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 approximately 1.425% of our average
operating costs relating to projects constructed offshore China during the
three years ended December 31, 2002. Each platform has its own environmental
protection and safety staff responsible for monitoring and operating the
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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 believes
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 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.
Employees and Employee Benefits
During the years ended December 31, 2000, 2001 and 2002, we employed
1,007 persons, 1,081 persons and 2,047 persons, respectively. Our number of
employees increased significantly in 2002 due to the acquisition of our
interests in oil and gas projects in Indonesia during that year. Of the 2,047
employees we employed as of December 31, 2002, approximately 81.8% were
involved in petroleum exploration, development and production activities,
approximately 10.9% 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;
71
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 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 an average of approximately
12% to 22.5% of our employees' basic salaries, with each employee contributing
4% to 7% of his or her base salary for retirement. The contributions vary from
region to region.
Our Indonesian subsidiaries employ approximately 1,000 employees,
including approximately 30 managerial staff and technicians. We provide
employee benefits to expatriate staff that we believe to be in line with
customary international practices. Our non-expatriate employees in Indonesia
enjoy welfare benefits mandated by Indonesia labor laws.
For further details regarding retirement benefits, see note 31 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 also established an HSE policy for
our overseas operations. The HSE policy for our operations offshore China
focuses on increasing our employees' awareness of health, safety and
environmental issues in the workplace. 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.
The HSE policy for our overseas operations includes setting annual safety
targets, conducting year-end evaluations, creating emergency contact lists,
recording incidents accurately and reviewing management performance in this
area.
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 inspects on
the helicopters used in our operations offshore China.
Human Resources Development
As an oil and gas exploration and development company operating in highly
competitive markets, our success depends in large part on our employees'
abilities. We devote significant resources to training our technical
employees. During 2002, we held 388 training workshops, which were attended by
8,482 participants. We are also dedicated to developing the skills of our
senior management. In 2002, we partnered with the New York University Leonard
N. Stern School of Business to organize a financial training workshop for our
senior management. In addition, we organized an industry specific training
program with Oklahoma State University, and a management workshop for our
senior managers with the China-Europe International Business School.
72
ITEM 5. Operating and Financial Review and Prospects
A. OPERATING RESULTS
The following discussion and analysis should be read 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 38 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 December 31, 2001, 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,
production and sale 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, 2002,
we had estimated net proved reserves of 2,015.8 million BOE, comprised of
1,424.4 million barrels of crude oil and condensate and 3,547.9 billion cubic
feet of natural gas. For the year 2002, our net production averaged 298,625
barrels per day of crude oil, condensate and natural gas liquids and 272.6
million cubic feet per day of natural gas, which together totaled 346,639 BOE
per day.
Our revenues and profitability are largely determined by our production
volume and the prices we charge for our crude oil and natural gas, as well as
the costs of our exploration and development activities. 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,
--------------------------------------------------------
1999 2000 2001 2002
-------- -------- ------- --------
Net production of crude oil, condensate and
natural gas liquids (BOE/day)................ 174,745 206,347 228,874 298,625
Net production of natural gas (mmcf/day)........ 204.4 197.9 195.0 272.6
Net income (Rmb in millions).................... 4,111.1 10,296.6 7,957.6 9,232.8
Most of our crude oil production is sold in the PRC domestic market to
customers affiliated with Sinopec or PetroChina. Most of our natural gas
production is sold 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 27 to our
consolidated financial statements attached to this annual report.
73
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 new 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 China Offshore Oil
Research Center for the provision of general geophysical exploration services,
comprehensive exploration research services, information technology services
and seismic study. 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 owns 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 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 two production sharing contracts represent
approximately 12.5% of the total reserves and upstream production of the
Tangguh LNG project. The remaining interests are held by BP Berau (34.2%), BP
Muturi (0.2%), BP Wiriagar (2.7%), MI Berau (16.3%), Nippon (12.2%), BG
(10.7%), KG Berau (8.6%), KG Wiriagar (1.4%) and Indonesia Natural Gas
Resources Muturi (1.1%). The Tangguh LNG project is a greenfield project
located offshore Indonesia and represents one of the largest natural gas
projects in Asia.
Before acquiring our interest in the Tangguh LNG project, the partners in
the Tangguh LNG project entered into a conditional 25-year supply contract
beginning in 2007 to provide up to 2.6 million tons of liquefied natural gas
per year to a liquefied natural gas terminal project in Fujian Province,
China.
On October 21, 2002, we entered into a key terms agreement to acquire an
aggregate interest of approximately 5.56% in the reserves and upstream
production of Australia's North West Shelf Gas Project for approximately
US$365.6 million subject to certain adjustments. Under the terms of this
agreement, we will purchase our interest from the six current partners to this
project: BHP Billiton, BP, ChevronTexaco, Japan Australia LNG (MIMI), Shell
and Woodside Energy. 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 would be approximately 210 million BOE.
Woodside Petroleum is the operator for the project.
Under the terms of this agreement, we would also acquire a 25% interest
in the China LNG Joint Venture, which is being established by the six current
partners to supply liquefied natural gas from the North West Shelf Gas 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 Gas Project for gas production and processing services
provided over the term of the China LNG Joint Venture. We expect to complete
our acquisition of the interests in the North West Shelf Gas Project and China
LNG Joint Venture in 2003. See "Item 4--Information on the Company--Business
Overview--Natural Gas Business--Overseas Activity."
On April 19, 2002, we completed the acquisition of Repsol YPF, S.A.'s
interests in a portfolio of oil and gas production sharing and technical
assistance contracts in contract areas located offshore and onshore Indonesia.
The agreement took effect as of January 1, 2002. Under the terms of the
acquisition, we paid a consideration of US$585 million, subject to a final oil
price adjustment. See note 5 to our consolidated financial statements attached
to this annual report. The assets include a 65.3% interest in the South East
Sumatra production sharing contract, a 36.7% interest in the Offshore North
West Java production sharing contract, a direct 25.0% interest in the West
Madura production sharing contract, a 50.0% interest in the Poleng technical
assistance contract and a 16.7% interest in the Blora production sharing
contract.
We completed our acquisition of the Repsol subsidiaries on April 19,
2002. For accounting purposes, the operations from these acquired subsidiaries
are included in our consolidated financial statements from
74
April 1, 2002. The profit accrued to us prior to April 1, 2002 has been
treated as a purchase price reduction. See note 5 to our consolidated
financial statements attached to this annual report.
Further details of the Repsol acquisition are discussed under "Item
4--Information on the Company--Business Overview--Principal Oil and Gas
Regions--Overseas Activity."
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
a participating interest 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 51% 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 6 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, 2000, 2001 and 2002, the percentage of foreign
partners' oil that was resold by us in the PRC market amounted to
approximately 53%, 57% and 50%, 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 flow 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 8 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."
We have one associated company, Shanghai Petroleum and Natural Gas
Company Limited, which owns the Pinghu field. 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.
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.
75
Production from Independent Operations versus Production from Production
Sharing Contracts
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 51.6%, 58.4% and 53.9%
for the years ended December 31, 2000, 2001 and 2002, 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 estimate future dismantlement costs for our oil and gas
properties and accrue the costs over the economic lives of the assets using
the unit-of-production method. We estimate 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 current
legislation and industry practice. During the year, 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, 2000, 2001 and 2002 was
Rmb 103.6 million, Rmb 90.4 million and Rmb 126.1 million, respectively. The
accrued liability is reflected in our consolidated balance sheet under
"provision for dismantlement." See notes 3 and 28 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, 2000, 2001 and 2002, 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:
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.
76
EBITDE is not a standard measure under either U.S. or Hong Kong GAAP.
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,
-----------------------------------------------------------
-------------- -------------- ------------- --------------
1998 1999 2000 2001
-------------- -------------- ------------- --------------
Rmb Rmb Rmb Rmb
(in millions)
Net Income........................................................ 1,549 4,113 10,302 7,920
Tax ........................................................... 295 722 1,926 3,048
Interest income and exchange gain/(loss), net.................. 794 1,000 (143) (436)
Depreciation, depletion and amortization....................... 1,954 2,371 2,573 2,558
Dismantlement costs............................................ 188 177 104 90
Exploration expenses........................................... 584 247 553 1,039
Impairment losses related to property, plant and equipment.....
-- -- -- 100
-------------- -------------- ------------- --------------
EBITDE............................................................ 5,364 8,630 15,315 14,319
-------------- -------------- ------------- --------------
Year ended December 31,
-----------------------------
-------------- --------------
2002 2002
-------------- --------------
(in millions)
Rmb US$
Net Income........................................................ 9,088 1,098
Tax ........................................................... 3,482 421
Interest and exchange gain/(loss), net......................... 261 30
Depreciation, depletion and amortization....................... 4,011 485
Dismantlement costs............................................ 323 39
Exploration expenses........................................... 1,318 159
Impairment losses related to property, plant and equipment.....
-- --
-------------- --------------
EBITDE............................................................ 18,483 2,232
-------------- --------------
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.
77
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,
---------------------------------------
1998 1999 2000
------------ ------------ ------------
Rmb Rmb Rmb
(in millions)
Cash provided by operating activities......................................... 3,942 7,323 13,233
plus/(less): movements in working capital.................................. (70) 164 326
plus/(less): returns on investments and servicing of finance............... 598 651 317
plus: taxation paid........................................................ 52 198 880
plus: short-term investment income......................................... -- -- --
plus/(less): recovery (provision) for doubtful debts....................... (58) 5 58
plus: share of profit of an associate...................................... -- 13 218
plus/(less): gain on sale/loss on disposals and write-off of property, plant
and equipment.............................................................. 575 -- (220)
other adjustments.......................................................... (259) 29 (50)
less: realized and unrealized holding gains from available-
for-sale marketable securities......................................... -- -- --
plus: exploration expenses................................................. 584 247 553
------------ ------------ ------------
EBITDE........................................................................ 5,364 8,630 15,315
------------ ------------ ------------
Year ended December 31,
---------------------------------------
2001 2002 2002
------------ ------------ ------------
Rmb Rmb US$
(in millions)
Cash provided by operating activities......................................... 11,759 14,597 1,763
plus/(less): movements in working capital.................................. (583) 4 --
plus/(less): returns on investments and servicing of finance............... (346) (181) (22)
plus: taxation paid........................................................ 2,611 2,846 343
plus: short-term investment income......................................... 221 193 23
plus/(less): recovery (provision) for doubtful debts....................... 5 -- --
plus: share of profit of an associate...................................... 90 165 20
plus/(less): gain on sale/loss on disposals and write-off of property, plant
and equipment.............................................................. (457) (437) (52)
other adjustments.......................................................... 23 (12) (1)
less: realized and unrealized holding gains from available-
for-sale marketable securities......................................... (43) (10) (1)
plus: exploration expenses................................................. 1,039 1,318 159
------------ ------------ ------------
EBITDE........................................................................ 14,319 18,483 2,232
------------ ------------ ------------
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 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 4 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 judgement. 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
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
78
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 significant
timing differences to the extent it is probable that the liability will
crystallize in the foreseeable future. We do not recognize a deferred tax
asset until its realization is assured beyond reasonable doubt.
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 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
79
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,
---------------------------------------------------------------------------------------
2000 2001 2002
------------------------ ------------------------- --------------------
(Rmb in millions, except percentages, production data and prices)
Revenues:
Oil and gas sales: (1)
Crude oil.................... 17,189 71.0% 15,916 76.4% 21,498 81.5%
Natural gas.................. 1,630 6.7 1,645 7.9 2,281 8.7
--------- ------- --------- ------- ---------- ------
Total oil and gas sales...... 18,819 77.7% 17,561 84.3% 23,779 90.2%
Marketing revenues.............. 5,126 21.2 2,537 12.2 2,377 9.0
Other income.................... 279 1.1 722 3.5 217 0.8
--------- ------- --------- ------- ---------- ------
Total revenues............... 24,224 100.0% 20,820 100.0% 26,374 100.0%
========= ======= ========= ======= ========== ======
Net production (million BOE):
Crude oil....................... 75.5 86.2% 83.5 87.5% 109.0 86.2%
Natural gas..................... 12.1 13.8 11.9 12.5 17.5 13.8
--------- ------- --------- ------- ---------- ------
Total net production......... 87.6 100.0% 95.4 100.0% 126.5 100.0%
========= ======= ========= ======= ========== ======
Average net realized prices:
Crude oil (per bbl).......... US$28.21 US$23.34 US$24.35
Natural Gas (per mcf)........ 3.09 3.08 2.98
----------
(1) These figures do not include our revenues from the Pinghu gas field.
80
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,
---------------------------------------------------
2000 2001 2002
------------ ------------- -----------
Operating Revenues:
Oil and gas sales........................................ 77.7% 84.3% 90.2%
Marketing revenues....................................... 21.1 12.2 9.0
Other income............................................. 1.2 3.5 0.8
------------ ------------ -----------
Total revenues..................................... 100.0% 100.0% 100.0%
============ ============ ===========
Expenses:
Operating expenses....................................... (8.8)% (11.2)% (14.3)%
Production taxes......................................... (4.3) (4.2) (3.9)
Exploration costs........................................ (2.3) (5.0) (5.0)
Depreciation, depletion and amortization................. (10.6) (12.3) (15.2)
Dismantlement ........................................... (0.4) (0.4) (0.5)
Crude oil and product purchases.......................... (21.0) (11.8) (8.8)
Selling and administrative expenses...................... (1.9) (3.0) (3.8)
Other.................................................... (0.9) (3.0) (0.1)
---------- ---------- ----------
(50.2)% (50.9)% (51.6)%
---------- ---------- ----------
Interest income................................................ 1.0 1.5 0.5
Interest expenses.............................................. (2.0) (0.5) (1.1)
Exchange gain (loss), net...................................... 1.6 1.1 (0.4)
Investment income.............................................. -- 1.1 0.7
--------- --------- ----------
Share of profit of an associate................................ 0.9 0.4 0.6
Non-operating profit (loss), net............................... (0.8) 0.2 (0.3)
-------- --------- ---------
Income before tax.............................................. 50.5 52.9 48.4
Tax............................................................ (8.0) (14.6) (13.4)
-------- --------- ---------
Net income..................................................... 42.5% 38.3% 35.0%
======== ========= ==========
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;"
81
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. Before May 1, 2001, we paid an additional 0.5%
local surcharge on the oil and gas that we produced independently.
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 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 an associate."
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 to Pertamina, the Indonesian state-owned oil and
gas company, 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.
2002 versus 2001
Our oil and gas sales for the year 2002 were Rmb 23,779.3 million
(US$2,871.9 million), an increase of Rmb 6,218.5 million (US$751.0 million),
or 35.4%, from Rmb 17,560.8 million in the year 2001. The increase primarily
reflects the rise in our production level, as well as the increase in global
crude oil prices during 2002. Of the increase in oil and gas sales, Rmb
5,417.0 million (US$654.2 million) was attributable to our increased
production volume, while Rmb 801.5 million (US$96.8 million) was attributable
to the rise in crude oil prices. In 2002, as a result of the commencement of
production in our new oil and gas properties as well as our successful
acquisition of overseas oil and gas properties, our production volume
increased significantly compared to 2001. Our net production level in 2002
increased by 33% compared to the same period last year, one of the highest
growth years in our history. The net crude oil and condensate production
volume per day was 298,625 barrels in 2002, compared to 228,873 barrels in
2001, an increase of 30.5%. Our Indonesian oil and gas operations accounted
for 15% of the increase in our production volume. Production volume increases
offshore China primarily resulted from the commencement of production at our
new oil and gas properties, including new platforms in Suizhong 36-1 (Phase
II), Qinhuangdao 32-6, Wenchang 13-1 and Wenchang 13-2. Our daily average
production for natural gas in 2002 was 272.6 million cubic feet, an increase
of 77.6 cubic feet, or 39.8%, from 195.0 million cubic feet in 2001. The
increase was primarily attributable to contributions from our Indonesian
operations. Our crude oil sales prices are determined in accordance with
international crude oil prices. The average realized price for our crude oil
was US$24.35 per barrel in 2002, an increase of US$1.01, or 4.3%, compared to
US$23.34 per barrel in 2001. The average realized price of natural gas was
US$2.98 per thousand cubic feet in 2002, a decrease of US$0.10, or 3.2%, from
US$3.08 per thousand cubic feet in 2001. The decrease was due to the lower
realized price of natural gas from our Indonesian properties relative to the
realized price of natural gas from our offshore China properties.
Our marketing revenues in 2002 were Rmb 2,377.5 million (US$287.1
million), a decrease of Rmb 159.5 million (US$19.3 million), or 6.3%, from Rmb
2,537.0 million in 2001.
Our other income, reported on a net basis in 2002, was Rmb 217.1 million
(US$26.2 million) and consisted primarily of project management and handling
fees. This was at a similar level to 2001. In 2001, our other income on a net
basis was Rmb 203.7 million, which was derived from our other income of Rmb
721.7 million less corresponding costs of Rmb 517.9 million.
82
Our operating expenses were Rmb 3,775.3 million (US$456.0 million) in
2002, an increase of Rmb 1,446.2 million (US$174.7 million), or 62.1%, from
Rmb 2,329.1 million in 2001. The increase primarily resulted from operating
expenses in connection with the Indonesian oil and gas properties and the
commencement of operations in new properties offshore China. The operating
expenses for the Indonesian oil and gas properties were Rmb 1,237.8 million
(US$149.5 million) in 2002. On a unit of production basis, operating expenses
were Rmb 30.3 (US$3.66) per BOE in 2002, which were higher than operating
expenses of Rmb 24.9 per BOE in 2001. The increase was largely attributable to
the higher operating expenses on a unit of production basis for the Indonesian
oil and gas properties, resulting from the different fiscal regime applicable
to Indonesia. Our operating expenses excluding Indonesia in 2002 were Rmb 23.6
(US$2.85) per BOE.
Our production taxes for the year 2002 were Rmb 1,023.0 million (US$123.6
million), an increase of 15.8%, or Rmb 139.2 million (US$16.8 million) from
Rmb 883.8 million in 2001. The increase was due to an increase in sales
revenues in 2002.
Our exploration costs for the year 2002 were Rmb 1,318.3 million
(US$159.2 million), an increase of Rmb 279.0 million (US$33.7 million), or
26.8%, from Rmb 1,039.3 million in 2001. The increase primarily resulted from
a higher level of exploration activities.
Our depreciation, depletion and amortization expenses for 2002 were Rmb
4,019.5 million (US$485.4 million), an increase of Rmb 1,452.6 million
(US$175.4 million), or 56.6%, from Rmb 2,566.9 million in 2001. On a unit of
production basis, depreciation, depletion and amortization expenses for the
year 2002 were Rmb 32.3 (US$3.90) per BOE, an increase of 17.5% compared to
Rmb 27.5 (US$3.32) per BOE in 2001. The primary reason for the increase was
the newly acquired Indonesian oil and gas properties, and the commencement of
production at new oil and gas properties offshore China.
Our dismantlement costs for the year 2002 was Rmb 126.1 million (US$15.2
million), an increase of Rmb 35.7 million (US$4.3 million), or 39.5%, from Rmb
90.4 million in 2001. The increase was primarily due to an upward revision of
the estimated dismantlement costs and the commencement of production at new
oil and gas properties offshore China.
We had no impairment losses related to oil and gas assets in 2002.
Our crude oil and product purchases for the year 2002 were Rmb 2,326.3
million (US$281.0 million), a decrease of Rmb 127.0 million (US$15.3 million),
or 5.2%, from Rmb 2,453.3 million in 2001. We handle crude oil sales in China
for our foreign partners. Upon their request, we purchase their share of crude
oil for resale in China, since we are one of the only three companies
authorized to market and sell crude oil in the PRC. We do not have control
over our foreign partners' decisions regarding the sale of their share of
production, and therefore have no control over the volume that we may be asked
to handle in any particular period.
Our selling and administrative expenses for the year 2002 were Rmb
1,006.5 million (US$121.6 million), an increase of Rmb 391.1 million (US$47.2
million), or 63.6%, from Rmb 615.4 million in 2001. On a unit of production
basis, selling and administrative expenses were Rmb 8.1 (US$0.98) per BOE in
2002, an increase of 22.7% from Rmb 6.6 per BOE in 2001. The primary reason
for the increase was the Rmb 272.1 million (US$32.9 million) selling and
administrative expenses incurred in connection with the acquisition of
Indonesian oil and gas properties and the commencement of production at the
new oil and gas properties offshore China. Our selling and administrative
expenses excluding Indonesia in 2002 were Rmb 6.8 (US$0.82) per BOE.
Our net interest expense for 2002 was Rmb 146.9 million (US$17.7
million), an increase of Rmb 348.0 million (US$42.0 million) from a net
interest income of Rmb 201.1 million in 2001. This increase was primarily due
to interest expense associated with US$500 million guaranteed notes in 2002,
which led to an increase in interest expense of Rmb 135.0 million (US$16.3
million). Further, the net interest expenses recognized under SSAP 28, which
we adopted in 2002, relating to dismantlement costs were Rmb 77.9 million
(US$9.4 million).
Our exchange loss for 2002 was Rmb 113.8 million (US$13.7 million)
compared with an exchange gain of Rmb 235.4 million in 2001. The decrease was
partly attributable to exchange rate fluctuations related to our Japanese
yen-denominated loans in 2002. On December 27, 2002, we prepaid a sum of JPY
21,162 million in Japanese yen-denominated loans, after which our outstanding
Japanese yen-denominated loans were
83
JPY 1,357 million. Since the outstanding amount of our Japanese
yen-denominated loans is hedged using foreign currency swaps, we do not expect
similar exchange gains or losses in the future.
Our investment income for 2002 was Rmb 193.3 million (US$23.3 million), a
decrease of Rmb 27.4 million (US$3.3 million), or 12.4%, from Rmb 220.7
million in 2001. The decrease was primarily due to a decline in short-term
interest rates in 2002.
Our share of profit of an associate for the year 2002 was Rmb 165.4
million (US$20.0 million), an increase of Rmb 75.4 million (US$9.1 million),
or 83.8%, from Rmb 90.0 million in 2001. This item reflected our share of
profit generated by Shanghai Petroleum and Natural Gas Company Limited, our
associated company. This company experienced a decrease in its amortization
cost resulting from an increase in exploitable reserves.
Our non-operating loss for the year 2002 was Rmb 71.4 million (US$8.6
million), a decrease of Rmb 106.3 million (US$12.8 million) from non-operating
profit of Rmb 34.9 million in 2001, primarily due to the losses incurred in
the disposal of certain assets in 2002.
Our taxation for the year 2002 was Rmb 3,541.4 million (US$427.7
million), an increase of Rmb 493.2 million (US$59.6 million), or 16.2%, from
Rmb 3,048.2 million in 2001. The primary reason for the increase was the
increase in profit before tax. The effective tax rate for both 2001 and 2002
was 27.2%. See "--Taxation."
Our consolidated net income after tax was Rmb 9,232.8 million (US$1,115.4
million) in 2002, an increase of Rmb 1,275.2 million (US$154.0 million), or
16.0%, from Rmb 7,957.6 million in 2001.
2001 versus 2000
Our oil and gas sales for the year 2001 were Rmb 17,560.8 million, a
decrease of Rmb 1,258.5 million, or 6.7%, from Rmb 18,819.3 million in 2000.
Due to lower oil prices, our oil and gas sales from properties already
operating prior to 2001 decreased approximately Rmb 3,351.5 million, which was
partially offset by approximately Rmb 2,093.0 million in additional sales
brought on by the commencement of operations at new oil and gas properties in
2001. Our average net realized crude oil price was US$23.34 per barrel in
2001, a decrease of US$4.87, or 17.3%, from US$28.21 per barrel in 2000, due
to decreases in international oil prices. Our average net realized natural gas
price was US$3.08 per thousand cubic feet in 2001, essentially unchanged from
US$3.09 per thousand cubic feet in 2000. Net crude oil and condensate
production in 2001 averaged approximately 228,873 barrels per day, an increase
of 22,572 barrels, or 10.9% compared to 206,347 barrels per day in 2000. The
increase in production primarily resulted from the commencement of production
at new oil properties during 2001, including Suizhong 36-1 (Phase II), Qikou
17-2 and Qinhuangdao 32-6. Net natural gas production in 2001 averaged 195.0
million cubic feet per day, a decrease of approximately 2.9 million cubic
feet, or 1.5%, from 197.9 million cubic feet per day in 2000. This decrease
was primarily due to the increased thermal capacity of natural gas produced at
Yacheng 13-1, which caused lower consumption of such natural gas by the
contract user of Yacheng 13-1.
Our marketing revenues for the year 2001 were Rmb 2,537.0 million, a
decrease of Rmb 2,589.0 million, or 50.5%, from Rmb 5,126.0 million in 2000.
Our other income was Rmb 721.7 million in 2001, an increase of Rmb 443.1
million, or 159.0%, compared to Rmb 278.6 million in 2000. The increase in
other income primarily resulted from increases in project management fees and
handling fees for production sharing contract blocks.
Our operating expenses for the year 2001 were Rmb 2,329.1 million, an
increase of Rmb 205.0 million, or 9.7%, from Rmb 2,124.1 million in 2000,
primarily due to increased costs associated with the commencement of
productions at new oil and gas properties. On a unit of production basis,
operating expenses in the year 2001 was Rmb 24.9 per BOE, compared to Rmb 24.8
per BOE in 2000.
Our production taxes for the year 2001 were Rmb 883.8 million, a decrease
of Rmb 152.9 million, or 14.7%, from Rmb 1,036.7 million in 2000. The decrease
was primarily due to lower sales revenue caused by significant drops in oil
prices.
Our exploration costs for the year 2001 were Rmb 1,039.3 million, an
increase of Rmb 486.4 million, or 88.0%, from Rmb 552.9 million in 2000
primarily due to the higher investment in significantly increasing
84
exploration work in 2001 and the writing-off of expenses associated with
exploration work on wells for uncertain reserves in earlier years.
Our depreciation, depletion and amortization expenses for the year 2001
were Rmb 2,566.9 million, a decrease of Rmb 11.0 million, or 0.4%, from Rmb
2,577.9 million in 2000. On a unit of production basis, depreciation,
depletion and amortization expenses for the year 2001 was Rmb 27.5 per BOE, a
decrease of Rmb 2.5, or 8.3%, compared to Rmb 30.0 per BOE in 2000. The
primary reason for the decrease was that the increase in proved reserves in
certain high-production oil and gas fields resulted in a decrease in the unit
depreciation, depletion and amortization cost of those fields, thereby leading
to the decrease in our total depreciation, depletion and amortization cost.
Our dismantlement costs for the year 2001 was Rmb 90.4 million, a
decrease of Rmb 13.2 million, or 12.7%, from Rmb 103.6 million in 2000. The
decrease was due to full provisioning of the allowance for certain mature
fields in earlier years.
Our impairment losses related to oil and gas assets were Rmb 99.7 million
for the year 2001, which reflected the estimated impairment resulting from two
oilfields not being expected to fully recover their net book values through
future cash flow.
Our crude oil and product purchases for the year 2001 were Rmb 2,453.3
million, a decrease of Rmb 2,644.5 million, or 51.9%, from Rmb 5,097.8 million
in 2000.
Our selling and administrative expenses for the year 2001 were Rmb 615.4
million, an increase of Rmb 159.4 million, or 35.0%, from Rmb 456.0 million in
2000. On a unit of production basis, selling and administrative expenses were
Rmb 6.6 per BOE in 2001, an increase of Rmb 1.3, or 25.0% from Rmb 5.3 per BOE
in 2000. The relative increase resulted from a combination of the following
factors: in 2000, selling and administrative expenses were lower, in part due
to the recovery of Rmb 57.7 million in doubtful accounts; in 2001, we made a
Rmb 40.0 million provision for staff and workers bonus and welfare funds in
accordance with a resolution of our board of directors; there was an increase
of salary and staff benefits as a result of employee compensation reform; and
there was also an increase of public facilities, office administrative,
telecommunication and travelling expenses as a result of greater business
volume and higher office rents.
Our net interest income for the year 2001 was Rmb 201.1 million, an
increase of Rmb 439.5 million, or 184.4%, from a net interest expense of Rmb
238.4 million in 2000. This increase was due to an increase in interest income
resulting from significantly higher cash balances after our initial public
offering in 2001 and lower interest expenses resulting from lower outstanding
balances in respect of long-term indebtedness.
Our net exchange gain for the year 2001 was Rmb 235.4 million, a decrease
of Rmb 145.9 million compared to Rmb 381.3 million in 2000.
Our investment income for 2001 was Rmb 220.7 million, which represented
the income generated from investing the unused net proceeds from our initial
public offering in low-risk short-term money market funds. There was no
investment income in 2000.
Our share of profit of an associate for the year 2001 was Rmb 90.0
million, a decrease of Rmb 128.3 million, or 58.8%, compared to a gain of Rmb
218.3 million in 2000. Our associated company experienced a decrease in profit
in 2001 as compared to 2000 primarily due to an increase in its exploration
costs and an increase in its amortization cost resulting from lower
exploitable reserves, as well as a decline in 2001 in the realized price of
its condensate.
Our net non-operating profit for the year 2001 was Rmb 34.9 million, an
increase of Rmb 230.9 million from a net non-operating loss of Rmb 196.0
million in 2000, primarily due to the losses incurred in the disposal of
certain assets in 2000.
Our taxation for the year 2001 was Rmb 3,048.2 million, an increase of
Rmb 1,122.1 million, or 58.3%, from Rmb 1,926.1 million in 2000. The primary
reason for the increase was that the period for which our PRC subsidiary
enjoyed preferential enterprise income tax treatment expired after 2000 and
the applicable enterprise income tax rate for our PRC subsidiary was adjusted
from 15% to the normal rate of 30% for enterprises with foreign investment
under the Laws of the PRC for Joint Venture Using Chinese and Foreign
Investment with effect from 2001.
85
Our consolidated net income was Rmb 7,957.6 million in 2001, a decrease
of Rmb 2,339.0 million, or 22.7%, from Rmb 10,296.6 million in 2000.
B. LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes cash flow for the periods presented:
Year ended December 31,
-----------------------------------------------------
2000 2001 2002
------------- ------------ -----------
(Rmb in millions)
Cash provided by (used for):
Operating activities.................................... 13,233 11,759 14,597
Investing activities.................................... (7,861) (11,366) (11,724)
Financing activities.................................... (3,454) 3,204 (1,428)
------------ ---------- -----------
1,918 3,597 1,445
============ ========== ============
Net increase in cash and cash equivalents..................
Cash Provided by Operations
Cash provided by operations in 2002 amounted to Rmb 17,262.0 million
(US$2,084.8 million), an increase of Rmb 3,237.0 million (US$390.9 million),
or 23.1%, from Rmb 14,025.0 million in 2001. In addition to an increase in
profit before tax of Rmb 1,768.4 million (US$213.6 million), the increase in
cash provided by operations was also due in part to adjustments related to an
increase in net interest expenses of Rmb 348.0 million (US$42.0 million), an
increase in net exchange loss of Rmb 375.1 million (US$45.3 million), an
increase in depreciation, depletion and amortization expenses of Rmb 1,452.6
million (US$175.4 million), an increase in dismantlement costs of Rmb 35.7
million (US$4.3 million), a decrease in short-term investment income of Rmb
27.4 million (US$3.3 million) and an increase in amortization of a discount
for long-term guaranteed notes of Rmb 6.1 million (US$0.7 million).
The increase was partially offset by the growth in our share of income of
associated companies of Rmb 75.4 million (US$9.1 million), a decrease in
provision for impairment of property, plant and equipment of Rmb 99.7 million
(US$12.0 million) and a decrease in loss on disposals and write-off of
property, plant and equipment of Rmb 19.0 million (US$2.3 million).
In addition, operating cash flow was adversely affected by an increase in
current liabilities from operating activities of Rmb 500.8 million (US$60.5
million), and a simultaneous increase in current assets excluding cash and
bank balances of Rmb 504.7 million (US$61.0 million). See note 32 to our
consolidated financial statements beginning on page F-1.
Cash provided by operations in 2001 decreased Rmb 1,473.2 million, or
11.1%, to Rmb 11,759.5 million from Rmb 13,232.7 million in 2000. The decrease
resulted from a decrease in profit before tax of Rmb 1,216.8 million,
adjustments related to a decrease in net interest expenses of Rmb 439.5
million and an increase in short-term investment gains of Rmb 274.3 million.
The decrease in cash flow was partly offset by a non-cash write-off of
exploration dry hole expenses and disposal of fixed assets of Rmb 236.7
million, non-cash impairment losses related to oil and gas assets of Rmb 99.7
million, a decrease in share of profit of an associated company of Rmb 128.3
million and a decrease in unrealized foreign exchange gain of Rmb 62.9
million.
In addition, operating cash flow was favorably affected by a net decrease
in working capital. The decrease in working capital resulted from an increase
of Rmb 268.4 million in accounts payable and accrued liabilities and a
decrease of Rmb 314.9 million in accounts receivable and other current assets.
As of December 31, 2002, we had a working capital surplus of Rmb 17,352.1
million (US$2,095.7 million), an increase of Rmb 1,713.6 million (US$207.0
million) from Rmb 15,638.5 million (US$1,888.7 million) in 2001. The increase
mainly resulted from an increase in accounts receivable of Rmb 1,869.1 million
(US$225.8 million), an increase in inventory of Rmb 221.3 million (US$26.7
million), an increase in other receivables of Rmb 645.2 million (US$77.9
million) and a decrease in current portion of long-term bank loans of Rmb
934.3 million (US$112.8 million). Accounts receivable as of December 31, 2002
were significantly higher than the corresponding figures as of December 31,
2001 primarily as a result of significantly higher sales in December 2002
compared with December 2001. As we settle our crude oil sales
86
based on 30-day payment terms, which is the industry practice, our total sales
volume and sale prices on a rolling basis significantly affect accounts
receivable. This increase in working capital was partially offset by an
increase in accounts payable and accrued liabilities of Rmb 2,967.4 million
(US$358.5 million), an increase in taxes payable of Rmb 491.0 million (US$59.3
million) and an increase in amounts due to a related company and parent
company of Rmb 218.7 million (US$26.4 million). Our higher accounts payable as
of December 31, 2002, reflected increased purchases of materials and supplies
associated with our capital expenditure program and also included an accrual
for a routine payment obligation to operators of certain production sharing
contracts, which was paid subsequent to the date of the balance sheet.
Capital Expenditures and Investments
In line with our use of the successful efforts method of accounting,
historical capital expenditures and investments primarily include successful
exploration and development expenditures. Total capital expenditures were Rmb
11,566.9 million (US$1,397.0 million) in 2002, an increase of Rmb 7,224.3
million (US$872.5 million), or 166.4%, from Rmb 4,342.6 million (US$524.5
million) in 2001. The capital expenditure in 2002 included Rmb 585.6 million
(US$70.7 million) for capitalized exploration activities, Rmb 6,247.1 million
(US$754.5 million) for development activities, and Rmb 4,734.2 million
(US$517.8 million) for acquiring Indonesian oilfields. Our development
expenditures in 2002 related principally to the development of Suizhong 36-1
(Phase II), Qinhuangdao 32-6, Wenchang 13-1, Wenchang 13-2, Penglai 19-3 and
Panyu 4-2/5-1.
Total capital expenditures were Rmb 4,342.6 million in 2001, a decrease
of Rmb 61.4 million, or 1.4%, from Rmb 4,404.0 million in 2000. The capital
expenditures in 2001 included Rmb 311.5 million for capitalized exploration
activities and Rmb 4,013.1 million for development activities. Our development
expenditures in 2001 related principally to the development of Suizhong 36-1
(Phase II) and Qinhuangdao 32-6 and Wenchang 13-1, Wenchang 13-2 and Dongfang
1-1.
Our total capital expenditures for general exploration and development
activities for 2002 was approximately US$978 million. Over the next two years,
we have budgeted approximately US$3.5 billion for capital expenditures,
approximately US$308 million of which is budgeted for general exploration
activities offshore China and approximately US$2.7 billion is budgeted for
development activities offshore China.
The following table sets forth actual or budgeted capital expenditures
for our key operating areas for the periods indicated.
Year ended December 31,
-----------------------------------------------
2002(1) 2003(2) 2004(2)
---------- ---------- ----------
Operating Area: (US$ in millions)
Bohai Bay
Development.................................. 261 588 1,080
Exploration.................................. 55 63 51
Western South China Sea
Development.................................. 269 158 258
Exploration.................................. 69 25 37
East China Sea
Development.................................. 52 137 116
Exploration.................................. 18 20 20
East South China Sea
Development.................................. 122 152 168
Exploration.................................. 42 43 49
Overseas
Development.................................. 90 359 140
---------- ---------- ----------
Total.................................. 978 1,545 1,919
========== ========== ==========
----------
(1) Figures for 2002 represent our actual spending for capital expenditure
purposes.
(2) Figures for 2003 and 2004 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
87
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 flow
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
We had net cash outflows from financing activities of Rmb 1,428.1 million
(US$172.5 million) in 2002, resulting primarily from our repayment of Rmb
3,367.3 million (US$406.7 million) in bank loans and dividend distributions of
Rmb 2,265.1 million (US$273.6 million). Of the total bank loans that we
repaid, we prepaid Rmb 2,956.0 million (US$357.0 million), including JPY
21,162 million in Japanese yen-denominated debt, US$103.4 million in
dollar-denominated debt and Rmb 639.0 million in Renminbi-denominated debt.
This cash outflow was offset by cash inflow of Rmb 4,059.3 million (US$490.3
million) resulting from our March 2002 offering of US$500 million in 6.375%
guaranteed notes due 2012.
We have debt service obligations consisting of principal and interest
payments on our outstanding indebtedness. The following table summarizes the
maturities of our long-term debt outstanding as of December 31, 2002. As of
the date this annual report is filed, we have not incurred any material
long-term debt since December 31, 2002.
Debt maturities principal only
---------------------------------------------------------------------------------
Original currency
------------------------------------------- Total Rmb Total US$
Due by December 31, US$ JPY Rmb equivalents equivalents
------------------ ----------- ------------ ------------ ------------- ---------------
(in millions, except percentages)
2003........................................ 31.4 271.5 18.9 297.5 35.9
2004-2006................................... 100.0 814.4 38.4 922.4 111.4
2007-2008................................... -- 271.5 -- 18.7 2.3
2009 and beyond............................. 500.0 -- -- 4,140.0 500.0
Total.................................... 631.4 1,357.4 57.3 5,378.6 649.6
Percentage of total debt.................... 97.2% 1.7% 1.1% 100.0% 100.0%
In early 2003, we prepaid a further US$31.4 million in U.S.
dollar-denominated debt and all of our then existing Renminbi-denominated
debt. As of April 30, 2003, we had a total U.S. dollar debt of US$600.0
million and a total foreign currency debt of US$611.3 million. Through our
debt offering and prepayment of debt, we extended the average maturity of our
debt portfolio from three years to approximately eight years, and, through the
prepayment of the majority of our Japanese yen-denominated debt, largely
eliminated our Japanese yen exposure risk and improved our debt structure.
In 2001, we had net cash inflows from financing activities of Rmb 3,204.1
million. Net cash flow from financing activities in 2001 resulted primarily
from Rmb 10,101.6 million in proceeds from our initial public offering,
including the exercise of the related over-allotment option, in early 2001 and
short-term bank loans of Rmb 2,500 million, offset in part by cash outflows of
Rmb 4,268.5 million for dividends paid, Rmb 3,497.5 million for repayment of
bank loans and Rmb 1,660.0 million for retirement fund payments to our parent
company. See "--Employee Benefits."
After we became a separate entity as part of CNOOC's reorganization in
October 1999, we paid dividends of Rmb 1,045.4 million in March 2000 and
declared a dividend of Rmb 6,426.4 million on December 20, 2000, which was
paid in full prior to February 1, 2001. On August 27, 2001, we declared a
dividend of Rmb 871.8 million, which was paid in full prior to October 31,
2001. On June 6, 2002, we declared a dividend of Rmb 1,306.7 million (US$157.8
million), which was paid in full by June 19, 2002. On August 23, 2002, we
declared a divided of Rmb 958.3 million (US$115.7 million), which was paid in
full by September 27, 2002. The payment and the amount of any dividends in the
future will depend on our results of operations, cash flow, financial
condition, the payment by our subsidiaries of cash dividends to us, future
88
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 flow from operations, borrowing capacity and
the proceeds of our initial public offering will be sufficient to fund planned
capital expenditures and investments, debt maturities and working capital
requirements through at least 2004. 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 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 financings 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
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 12% to 22.5% of our employees' base
salaries. The related pension costs are expensed as incurred.
When we became a separate entity as part 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.
For the years ended December 31, 2000, 2001 and 2002, our retirement
expenses attributed to the current government plan were Rmb 12.8 million, Rmb
6.4 million and Rmb 7.0 million, respectively.
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.
Our Indonesian subsidiaries employ approximately 1,000 employees,
including approximately 30 managerial staff and technicians. We provide
expatriate staff with employee benefits that we believe to be in
89
line with customary international practices. Our non-expatriate employees in
Indonesia enjoy welfare benefits mandated by Indonesia labor laws.
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 flow 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 deflation rate in 2000, 2001 and 2002, as represented by the general
consumer price index, of 0.4%, 0.7% and 0.8%, respectively. The deflation has
not had a significant impact on our results of operations in those 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 38 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 will be 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 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.
90
Our subsidiary in Singapore, China Offshore Oil (Singapore) International
Pte. Ltd., is subject to income tax at the rate of 10% and 26% 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 branch profit tax at a rate of 48%. 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 timing 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
timing 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 drillings. As of December 31, 2001 and 2002, we had
Rmb 1,763.6 million (US$213.0) million and Rmb 6,141.1 million (US$741.9
million), respectively, in net deferred tax liabilities. The increase was
primarily due to the acquisition of the Indonesia properties. See note 14 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 two-year period 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 December 31, 2001, 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 year ended December 31, 2002 included in this annual report.
Recent Accounting Pronouncements
United States
SFAS No. 143 "Accounting for Asset Retirement Obligations"
On August 15, 2001, SFAS No. 143 "Accounting for Asset Retirement
Obligations" was released and will be effective for the fiscal years beginning
after June 15, 2002. This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived assets. Further, under this statement, the liability
is discounted and accretion expense is recognized using the credit-adjusted
risk-free interest rate in effect when the liability was initially recognized.
According to the existing accounting policies adopted to prepare the
financial statements, we estimate future dismantlement and site restoration
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 and the extent of site restoration
required in accordance with current legislation and industry practice. This
new practice also requires the liability to be discounted and the accretion
expenses to be recognized using the credit-adjusted risk-free interest rate in
effect when the liability was initially recognized.
Adoption of the statement will likely result in increase in both our cost
of assets and total amount of liabilities as presented under U.S. GAAP. We are
currently assessing these matters and have not yet determined whether or the
extent to which they will affect the financial statements.
91
Hong Kong
The following recently-issued and revised Hong Kong Society of
Accountants Statements of Standard Accounting Practice, or SSAPs, are
effective for the first time for the current year's financial statements:
o SSAP 1 (Revised) - "Presentation of financial statements;"
o SSAP 11 (Revised) - "Foreign currency translation;"
o SSAP 15 (Revised) - "Cash flow statements;"
o SSAP 34 - "Employee benefits;"
o Interpretation 14 - "Evaluating the substance of transactions
involving the legal form of a lease;"
o Interpretation 15 - "Business combinations - `Date of exchange' and
fair value equity instruments;" and
o Interpretation 18 - "Consolidation and equity method - Potential
voting rights and allocation of ownership interests."
These SSAPs prescribe new accounting measurement and disclosure
practices. The major effects on our accounting policies and on the amounts
disclosed in these financial statements of adopting these SSAPs and
Interpretations are summarized as follows:
SSAP 1 (Revised) prescribes the basis for the presentation of financial
statements and sets out guidelines for their structure and minimum
requirements for their content. The principal impact of the revision to this
SSAP is that a consolidated statement of changes in equity is now presented in
place of the consolidated statement of recognized gains and loses that was
previously required and in place of our reserves note.
SSAP 11 (Revised) prescribes the basis for the translation of foreign
currency translations and financial statements. The principal impact of the
revision of this SSAP on our consolidated financial statements is that the
income statement of overseas subsidiaries is now translated into Renminbi at
the exchange rates on the date of the transaction, or at an approximation
thereto, whereas previously they were translated at the exchange rates at the
balance sheet date. The adoption of the revised SSAP 11 has had no material
effect on our financial statements.
SSAP 15 (Revised) prescribes the revised format for the cash flow
statement. The principal impact of the revision of this SSAP is that the
consolidated cash flow statement now presents cash flow under three headings,
cash flow from operating, investing and financing activities, rather than the
five headings previously required. In addition, cash flow from overseas
subsidiaries arising during the year are now translated into Renminbi at the
exchange rates on the date of the transaction or at an approximation thereto,
whereas previously they were translated at the exchange rate on the balance
sheet date.
SSAP 34 prescribes the principles to be applied for recognition,
measurement and disclosures for employee short-term and long-term benefits. In
addition, disclosure is now required in respect of our share option scheme
as detailed in note 29 to our consolidated financial statements. This share
option scheme disclosure is similar to the Hong Kong Stock Exchange
listing rules disclosure previously included in the report of the directors
which are now required to be included in the notes to the financial statements
as a consequence of the SSAP. The SSAP requirements have not had a material
effect on the amounts previously recorded in the financial statements,
therefore no prior year adjustment has been required.
In addition, SSAP 12 (Revised) - "Income taxes" was recently issued as
revised and is effective for financial years beginning or after January 1,
2003. SSAP 12 (Revised) requires full provision for deferred taxes using the
liability method. Under this new approach, the tax is calculated using tax
rates expected to be in effect when the timing difference occurs. In prior
periods, we provided deferred taxes for timing differences only to the extent
that it was probable a liability or asset would crystallize in the foreseeable
future. The new method of accounting for deferred income tax is similar to the
method that has been used under U.S.
92
GAAP. For the year ended December 31, 2002, there was no difference in the
amount of deferred income tax we recognized under Hong Kong and U.S. GAAP. We
do not believe the revised SSAP will have a significant impact on our
financial position or results of operations under Hong Kong GAAP.
93
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 nine
members, including four independent non-executive directors.
Our current directors and senior officers are as follows:
Age as of
December 31,
Name 2002 Position
--------------------------------------- ------------ -----------------------------------------------------------------
Liucheng Wei........................... 56 Chairman of the Board of Directors and Chief Executive Officer
Chengyu Fu............................. 51 Director
Longsheng Jiang........................ 57 Director
Shouwei Zhou........................... 51 Director and President
Han Luo................................ 49 Director
Chak Kwong So.......................... 58 Independent Non-executive Director
Sung Hong Chiu......................... 56 Independent Non-executive Director
Kenneth Courtis........................ 57 Independent Non-executive Director
Erwin Schurtenberger................... 63 Independent Non-executive Director
Ke Ru.................................. 59 Executive Vice President
Yunshi Cao............................. 57 Senior Vice President, Company Secretary and General Counsel
Mark Qiu............................... 39 Chief Financial Officer and Senior Vice President
Hua Yang............................... 41 Senior Vice President
Wei Chen............................... 45 Senior Vice President
Mr. Kenneth Courtis and Dr. Erwin Schurtenberger, two of our independent
non-executive directors, were appointed in November 2002. Mr. Longsheng Jiang
and Mr. Han Luo were appointed in December 2000. All other directors,
including other independent non-executive directors, were appointed in
September 1999.
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
Liucheng Wei received a B.S. degree from China Petroleum Institute and a
graduate degree in Business Administration from the Chinese Academy of Social
Sciences. He is a senior economist and has over 30 years' experience in the
oil industry in the PRC. He was appointed as Chairman of the Board of
Directors and Chief Executive Officer of our company in September 1999. Mr.
Wei is also the President of CNOOC, a
94
position he has held since November 1998. From 1993 to 1998, he served as Vice
President of CNOOC. He joined CNOOC in 1982.
Chengyu Fu received a B.S. degree from 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 28 years' experience in
the petroleum industry in the PRC. He was appointed as director in September
1999 and previously served as our Chief Operating Officer and President. He
currently is a director and the Chief Executive Officer and Chairman of China
Oilfield Services Limited, another majority-owned subsidiary of CNOOC. Mr. Fu
is also a Vice President of CNOOC. In 1999, Mr. Fu was the General Manager of
China Offshore Oil Eastern South China Sea Corporation, a subsidiary of CNOOC.
From 1995 to 1999, he served as Vice President and General Manager of Xijiang
Operations of ConocoPhillips China Inc. From 1994 to 1995, he served as Deputy
General Manager of China Offshore Oil Eastern South China Sea Corporation. He
joined CNOOC in 1982.
Longsheng Jiang received a B.S. degree from Beijing Petroleum Institute
in China. He has over 31 years' experience in the oil and gas industry in the
PRC. He was appointed as our director in December 2000. From 1982 to 1994, Mr.
Jiang served as chief engineer of China Offshore Oil Western South China Sea
Corporation. From 1995 to 1998, he was the general manager of China Offshore
Oil Southern Drilling Company. Mr. Jiang is a Vice President of CNOOC, a
position he has held since 1998. He joined CNOOC in 1982.
Shouwei Zhou received a Ph.D. degree from Southwest China Petroleum
Institute and is a senior engineer. He was appointed as our director and
Executive Vice President in September 1999 and as President in August 2002.
Mr. Zhou is also a Vice President of CNOOC. From 1994 to 1999, Mr. Zhou was
the Deputy Manager of China Offshore Oil Bohai Corporation, a subsidiary of
CNOOC, and has been the President of China Offshore Oil Bohai Corporation
since 1999. He joined CNOOC in 1982.
Han Luo received a doctor's degree from China Petroleum University. He
has over 26 years' experience in the oil industry in the PRC. He was appointed
as our director in December 2000. From 1993 to 1998, Mr. Luo served as Vice
President of China Offshore Oil Eastern South China Sea Corporation and
concurrently the chief representative of CNOOC in the CACT operating group,
and executive Vice President of China Offshore Oil East China Sea Corporation.
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.
Independent Non-executive Directors
Chak Kwong So is the Chairman of the board of directors and chief
executive of the MTR Corporation Limited. He has been a Non-Executive Director
of The Hongkong and Shanghai Banking Corporation Limited since January 2000.
Mr. So began his career with the Hong Kong government. He joined the private
sector in 1978, serving in various posts in the securities, finance and
property industries. Mr. So also served as Executive Director of the Hong Kong
Trade Development Council from 1985 to 1992. Mr. So is the President of the
Chartered Institute of Logistics and Transport. He is also a Vice President of
the International Association of Public Transport and is the Chairman of its
Asia-Pacific Division. He also serves on a number of other committees and
organizations, including the Hong Kong/European Union Business Cooperation
Committee, Independent Commission Against Corruption--Operations Review
Committee, the Employers' Federation of Hong Kong, the Hong Kong Management
Association and the Community Chest of Hong Kong.
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 26 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 the Australian Nursing Home Foundation and
served as the General Secretary of the Australian Chinese Community
Association of New South Wales.
Kenneth Courtis is 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. degree from the Institute of Economic and Political
95
Studies in Paris. Prior to joining Goldman Sachs, he served as Chief Asia
Economist and Strategist for Deutsche Bank.
Erwin Schurtenberger has served as the Ambassador of Switzerland to the
People's Republic of China, the Democratic People's Republic of Korea, the
Republic of Mongolia and the Republic of Iraq. He joined the Swiss Foreign
Services in 1969. He has also been an independent business advisor to various
European multinationals, American groups and humanitarian aid organizations
such as Credit Suisse Financial Services, Novartis and Bunge. Dr.
Schurtenberger currently serves on the board of directors of Robert Bosch
RBint., Buhler Group Switzerland, Firmenich, Sire Holding, CIBA China and
Winterthur Insurances (Asia). He is also a senior advisor to the China
Training Center for Senior Personnel Management Officials. Dr. Schurtenberger
received a Ph.D. degree in economics and was trained in political science and
philosophy.
Company Secretary
Yunshi Cao is our Company Secretary, General Counsel and a Senior Vice
President. He is also the General Counsel and the Director of the Legal
Department of CNOOC, a position he has held since 1999. He joined CNOOC in
1982. Mr. Cao is a senior economist and licensed lawyer in the PRC. He has
extensive experience in production sharing contracts and over 30 years'
experience in the oil industry. He received a B.S. degree from the China
Petroleum Institute and studied law at Columbia University School of Law.
Senior Management
Ke Ru serves as an Executive Vice President of our company and is
responsible for our offshore petroleum exploration. Mr. Ru is a geologist,
graduated from China Petroleum Institute and was a Visiting Scholar at the
University of Oklahoma. He has over 30 years' experience in exploration,
geophysical and geological research in China. He joined CNOOC in 1982 and was
President of the Research Institute of China Offshore Oil Western South China
Sea Corporation and Chief Geologist of CNOOC.
Mark Qiu serves as our Chief Financial Officer and a Senior Vice
President. Prior to joining us, Dr. Qiu worked at Salomon Smith Barney and
last served as the Head of Oil and Gas Investment Banking Group Asia. Prior to
that, Dr. Qiu served as a Vice President at ARCO China Inc., a subsidiary of
Atlantic Richfield Corporation (ARCO) and later as a Corporate Federal
Government Relations Director of ARCO in Washington D.C. He was a Sloan Fellow
and received an MBA degree from Massachusetts Institute of Technology and a
doctoral and master degree in Decision Sciences from the University of Texas
at Arlington. Dr. Qiu joined CNOOC in 2001.
Hua Yang is a Senior Vice President of our company and President of CNOOC
International Limited. He is a senior engineer and is responsible for our
overseas operations. He received his B.S. degree from China Petroleum
Institute. He has over 20 years' experience in petroleum exploration and
production. Mr. Yang joined CNOOC in 1982 and was Acting Director of the
Overseas Development Department of CNOOC.
Wei Chen is a Senior Vice President and General Manager of our
Administration Department. 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 M.B.A.
degree from Tsinghua University. He has over 20 years' experience in petroleum
exploration and production. Mr. Chen joined CNOOC in 1984 and previously
served as the Deputy Manager for the development department of the CNOOC
Research Center, the Deputy Manager of the Overseas Research Department, the
Manager of the Information Department, the Deputy Director of the Research
Center and the General Manager of our Human Resources Department.
B. COMPENSATION OF DIRECTORS AND OFFICERS
Each of the directors (other than independent non-executive directors)
entered into a service contract with us for a term of three years made
effective as of February 28, 2001, the date on which our shares commenced
trading on the Hong Kong Stock Exchange, 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 salary for Mr. Liucheng Wei (the Chairman of the Board
and Chief Executive Officer), Mr. Chengyu Fu (Director) and Mr.
Shouwei Zhou (Director and President) during the
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initial three years shall be HK$2,480,000, 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 his then
current salary;
o the Chairman of the Board and the other directors (other than
independent non-executive directors) shall be entitled to a maximum
annual paid leave of 30 days and 25 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 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
shall be HK$388,000, subject to an annual increase as determined by
the board of directors not exceeding 15% of his then current salary;
and
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 complete
financial year during which his appointment subsists.
The aggregate amount 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, 2000, 2001 and
2002 was approximately Rmb 2.5 million (US$301,932), Rmb 8.3 million (US$1.0
million) and Rmb 9.5 million (US$1.1 million), respectively, while the amount
paid to our executive officers for the same periods was approximately Rmb 1.3
million (US$157,005), Rmb 5.2 million (US$628,019) and Rmb 8.0 million
(US$966,184) respectively. Under our pension contribution plan for 2002, we
set aside an aggregate amount of Rmb 210,000 (US$25,362) and Rmb 310,000
(US$37,440) for pension and similar benefits in kind for the directors (other
than independent non-executive directors) and executive officers respectively.
The directors (other than independent non-executive directors) and the
executive officers contributed an additional Rmb 50,000 (US$6,039) and Rmb
79,000 (US$9,541), respectively, to the pension contribution plan for 2002.
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
other employees, see "--Share Ownership" below.
C. BOARD PRACTICE
Audit and Other Committees
The audit committee consists of two independent non-executive directors.
Its primary duties are to review and supervise the financial reporting process
and our internal control system.
We have established a compensation committee. It consists of three
independent non-executive directors and one non-executive director. The
primary duties of the compensation committee are to manage share option
schemes and to formulate our remuneration policy.
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. Kenneth Courtis and Erwin Schurtenberger, two
of our independent non-executive directors, were members of the International
Advisory Board prior to their election to the board of directors in November
2002. On March 20, 2003, we announced that Peter Sutherland and Cornelius
Herkstroter have joined our International Advisory Board to fill the vacancies
created by the departures of Mr. Curtis and Mr. Schurtenberger.
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Set forth below is information on the current members of our
International Advisory Board.
Name Biographical Information
----------------------------- ----------------------------------------------------------------
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.
Henry A. Kissinger 56th Secretary of State of the United States and former
Assistant to the President for National Security Affairs. Born
in Germany in May 1923, he received his Ph.D. degree from
Harvard University in 1954.
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. 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.
D. EMPLOYEES
See "Item 4--Information on the Company--Business Overview--Employees and
Employee Benefits."
E. SHARE OWNERSHIP
On June 6, 2002, we adopted a new share option scheme to comply with new
requirements issued by the Hong Kong Stock Exchange. Our new share option
scheme provides for the grant of options to our employees, including
non-executive directors. Under this share option scheme, the compensation
committee of our board of directors may from time to time propose to the board
of directors to award a specific member of share options to particular
employees. Options granted under this scheme are exercisable in accordance
with the following vesting schedule:
o one-third of the shares underlying the option vest on the first
anniversary of the date of the grant;
o one-third of the shares underlying the option vest on the second
anniversary of the date of the grant; and
o one-third of the shares underlying the option vest on the third
anniversary of the date of the grant.
The option period may commence on any day after the option is granted,
but must end within 10 years from the date of the grant. The maximum number of
shares to be issued under our share option scheme may not exceed 10% of our
issued share capital as of June 6, 2002. If we increase our share capital, our
shareholders in a general meeting may increase the maximum number of shares
that may be issued under our share option scheme provided such increase does
not exceed 10% of our issued share capital as of the date of such increase.
The total number of shares that may be issued upon exercise of all outstanding
options, however, may not exceed 30% of our issued share capital under any
circumstances.
Unless separately approved by our shareholders in a general meeting with
the relevant participant and his or her associates abstaining from voting, the
maximum number of shares in respect of which options may
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be granted to any participant together with any shares issued in respect of
options which have been exercised by that participant and any shares which
would be issued upon the exercise of the outstanding options granted to that
participant in any 12 month period up to the date of the latest grant may not
exceed 1% of our issued share capital.
Under the new share option scheme, the consideration payable by a
participant for the grant of an option is HK$1.00. The exercise price for our
share options is determined by our board of directors at the grant date, but
may not be set below a minimum price which is the highest of:
o the closing price of our shares on the Hong Kong Stock Exchange as
stated in its quotation sheets on the date of the grant of the
options;
o the average closing price of our shares on the Hong Kong Stock
Exchange as stated in its quotation sheets for the five trading days
immediately preceding the date of the grant of the options; or
o the nominal value of one share.
Any grant of share options to a connected person (as defined in the Hong
Kong Stock Exchange listing rules) must be approved by our independent
non-executive directors (excluding any independent non-executive director who
may be the recipient of the options).
On March 12, 2001, our board of directors, under a pre-global offering
share option scheme adopted on February 4, 2001, granted options in 4,620,000
shares to directors and senior management at an exercise price of HK$5.95 per
share. The options granted under this scheme are exercisable in accordance
with the following vesting schedule:
o 50% of the shares underlying the option vest 18 months after the
date of the grant; and
o 50% of the shares underlying the option vest 30 months after the
date of the grant.
On August 27, 2001, under the original share option scheme that was
adopted shortly after our initial public offering, our board of directors
granted options in 8,820,000 shares to directors and senior management at an
exercise price of HK$6.16 per share. The vesting schedule for these options is
the same as the vesting schedule under our current share option scheme. On
February 24, 2003, our board of directors granted options in 8,410,000 shares
to members of our senior management at an exercise price HK$10.54 per share.
For further details about our share option scheme, see notes 29 and
37(ii) to our consolidated financial statements attached to this annual
report.
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As at December 31, 2002, our directors and employees had the following
personal interests in options to subscribe for shares granted under our share
option schemes:
Number of shared involved in the options Closing price per share
Outstanding as of immediately before the
---------------------------------------- date on which the Exercise Price
Name of Grantee January 1, 2002 December 31, 2002 Date of Grant options were granted (HK$)
----------------- --------------- ----------------- ---------------- ------------------------- --------------
Directors:
Wei Liucheng 500,000 500,000 March 12, 2001 -- 5.95
500,000 500,000 August 27, 2001 7.30 6.16
Fu Chengyu 350,000 350,000 March 12, 2001 -- 5.95
350,000 350,000 August 27, 2001 7.30 6.16
Jiang Longsheng 280,000 280,000 March 12, 2001 -- 5.95
230,000 230,000 August 27, 2001 7.30 6.16
Zhou Shouwei 280,000 280,000 March 12, 2001 -- 5.95
350,000 350,000 August 27, 2001 7.30 6.16
Luo Han 280,000 280,000 March 12, 2001 -- 5.95
230,000 230,000 August 27, 2001 7.30 6.16
Employees:
Other Employees 2,930,000 2,930,000 March 12, 2001 -- 5.95
7,160,000 7,160,000 August 27, 2001 7.30 6.16
As of December 31, 2002, no options grantender our share option scheme
and our pre-global offering share option scheme have been exercised.
As of December 31, 2002, 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.
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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 December 31, 2002. As of April
30, 2003, there have been no changes in ownership of our outstanding shares by
major shareholders.
Shareholder Number of Shares Owned Percentage
--------------------- ----------------------------- --------------
CNOOC................ 5,800,000,000 70.61%
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 70.6% of our issued share capital, some of these transactions
constitute connected transactions under the Hong Kong Stock Exchange listing
rules and are regulated by the Hong Kong Stock Exchange.
Under the Hong Kong Stock Exchange listing rules, each connected
transaction 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 allowed us to apply for a waiver from strict compliance with the
listing rules to engage in these transactions. The waiver typically
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 connected transactions before it
would grant us the new waiver. As an interested shareholder, CNOOC abstained
from the shareholder vote on the proposed connected transactions. We appointed
an independent board committee to advise the independent shareholders on
whether the terms of the proposed 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 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 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
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o Sales of crude oil, condensate oil and liquefied petroleum gas.
Contracts with foreign petroleum companies. As part of our restructuring,
and 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
remains 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 CNOOC
subsidiaries 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;
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 CNOOC subsidiaries and us, the facilities
and ancillary products and services are provided at:
(i) state-prescribed prices; or
(ii) where there is no state-prescribed price, market prices, including
the local or national market prices; or
102
(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 listing rules with
respect to any supplemental agreements.
For the three years ended December 31, 2002, the amounts we paid to CNOOC
subsidiaries for these services were approximately Rmb 793 million, Rmb 815
million and Rmb 789 million, respectively, representing 3.3%, 3.9% and 3.0%,
respectively, of our total revenues.
Technical services. Various CNOOC subsidiaries, including China Oilfield
Services Limited and CNOOC Offshore Oil Engineering Company Limited, provide
us with technical and labor services for its 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.
For the three years ended December 31, 2002, the amounts we paid to CNOOC
subsidiaries for these services were approximately Rmb 2,038 million, Rmb
2,367 million and Rmb 3,280 million, respectively, representing 8.4%, 11.4%
and 12.4%, respectively, of our total revenue. 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 CNOOC subsidiaries and
affiliates, including the China Offshore Oil Research Center, provide 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.
We pay the China Offshore Oil Research Center an annual fee of Rmb 110
million for general research and development services. We occasionally also
hire the Research Center through an open bidding process for specific research
and development projects. For specific projects during the three years ended
December 31, 2002, we paid the China Offshore Oil Research Center
approximately Rmb 52 million, Rmb 50 million and Rmb 57 million, respectively,
representing approximately 0.2%, 0.2% and 0.2%, respectively, of our total
revenues.
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
103
agreements are based on normal commercial terms. For the three years ended
December 31, 2002, the aggregate rentals and management fees payable by us to
CNOOC and its subsidiaries were approximately Rmb 49 million, Rmb 46 million
and Rmb 54 million, respectively.
Sales of crude oil, condensate oil and liquefied petroleum gas. We sell
crude oil, condensate oil and liquefied petroleum gas to CNOOC affiliates 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, 2002, CNOOC subsidiaries paid us approximately Rmb 508 million,
Rmb 1,814 million and Rmb 4,362 million, respectively, representing
approximately 2.1%, 8.7% and 16.5% of our total revenues for the respective
periods.
Waiver Conditions
The new waiver granted to us by the Hong Kong Stock Exchange to us
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;
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 ongoing connected transactions in each year as
required by Rule 14.25(1)(A) to (D) of the Hong Kong Stock
Exchange listing rules (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:
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Transaction Annual Limit Basis for Determining the Annual Limits
-----------------------------------------------------------------------------------------------
Materials, 10% of our audited Under our initial waiver, the annual
utilities and consolidated total limit for this category was 3.91% of our
ancillary revenues in the total revenues. The new annual limit is
services supply preceding financial year based on past transaction amounts and
agreements future projections. We believe that new
projects warrant the additional
flexibility.
Technical In respect of the three Our original waiver from the Hong Kong
services financial years ending Stock Exchange limited this category of
December 31, 2005, Rmb connected transactions to Rmb 2,367
5,853 million, Rmb 7,338 million for the year ended December 31,
million and Rmb 4,880 2002. The new annual limits take into
million, respectively consideration continued expansion of
existing oilfields and the development
of two new oilfields in the Bohai Bay,
which are expected to enter production
by the end of year 2004.
Research and In respect of the three Under our initial waiver, the limit for
development financial years ending this category was Rmb 52 million per
services for December 31, 2005, Rmb year. The new annual limits are based on
particular 141 million, Rmb 148 the amounts in prior years and a
projects million and Rmb 153 projection of our future needs for such
million, respectively services.
Sales of crude In respect of the three Our original waiver from the Hong Kong
oil, condensate financial years ending Stock Exchange limited this category of
oil and December 31, 2005, 42%, transactions to Rmb 1,950 million
liquefied 56% and 82%, (representing 18% of our audited
petroleum gas respectively, of our consolidated revenues for the year ended
audited consolidated December 31, 2002). The new annual
total revenues in the limits are based on the amount of past
preceding financial year sales and expected increases in this
category because of the ongoing
development of existing oilfields and
the development of two new oilfields in
the Bohai Bay. The increases also
reflect our anticipated need to use
CNOOC's 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 Rmb 110 million The annual limit for this category of
research and connected transactions is the same as
development the limit under the previous waiver from
services the Hong Kong Stock Exchange and takes
agreement into consideration our anticipated need
for these services.
Lease and Rmb 78 million Under our initial waiver, the maximum
management amount of this category was Rmb 49
services million. The new waiver amount is based
on possible future expansion and the
unavailability of alternative providers.
The proposed increase in the annual limits for the transactions is
primarily a result of the continued expansion in our business scope
and operations, including the ongoing development of existing
oilfields and the development of two new oilfields in the Bohai Bay.
The proposed annual limits for the transactions take into
consideration the two new oilfields in the Bohai Bay; and
105
vi. we will undertake 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's 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's listing
rules unless we apply for and obtain a separate waiver from the
Hong Kong Stock Exchange.
In addition to these connected transactions, from time to time we place
cash deposits with CNOOC Finance Corporation Limited, or CNOOC Finance. CNOOC
Finance is a wholly owned subsidiary of CNOOC and operates as a non-bank
finance company under the supervision of the People's Bank of China. As of
December 31, 2002, we had cash and cash equivalents and time deposits
aggregating Rmb 2,740 million placed with CNOOC Finance. Our interest income
from deposits placed with CNOOC Finance during the year 2002 was approximately
Rmb 3.5 million.
For further information regarding related party transactions, see note 27
to our consolidated financial statements attached to this annual report.
Directors' Interests
Our directors have no interest in any business which competes or might
compete with our businesses.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
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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 dividends of Rmb 1,045.4 million in
March 2000 and declared a dividend of Rmb 6,426.4 million on December 20,
2000, which was paid in full prior to February 1, 2001. On August 27, 2001, we
declared a dividend of Rmb 871.8 million, which was paid in full prior to
October 31, 2001. On June 6, 2002, we declared a dividend of Rmb 1,306.7
million (US$157.8 million), which was paid in full by June 19, 2002. On August
23, 2002, we declared a divided of Rmb 958.3 million (US$115.7 million), which
was paid in full by September 27, 2002. 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.
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For the years ended December 31, 2000, 2001 and 2002, 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, 2000 December 31, 2001 December 31, 2002
----------------- ----------------- -----------------
Percentage Rmb Percentage Rmb Percentage Rmb
of Net Profits (in millions) of Net Profits (in millions) of Net Profits (in millions)
Reserve fund...................... 10% 847.5 10% 587.0 10% 697.1
Staff and workers' bonus and
welfare fund...................... -- -- 0.7% 40.0 -- --
Prior to our reorganization, CNOOC China was not required to make
contributions to these reserve funds. Because the appropriations for these
funds are determined annually by CNOOC China's board of directors based on
year-end financial statements, there were no appropriations to these funds for
the year ended December 31, 2000.
B. SIGNIFICANT CHANGES
Development and Production
On February 27, 2003, we announced the drilling of a successful wildcat
well in Bozhong 34-1S-1 in southern Bohai Bay. The well was drilled on the
Bozhong 34-1S structure located about 3 kilometers southeast of the Bozhong
34-2 producing oilfield.
On December 31, 2002, we began to produce oil from the Penglai 19-3
oilfield in the Bohai Bay. Penglai 19-3 is China's largest offshore oilfield.
As of December 31, 2002, our share of net proved reserves in the Penglai 19-3
field was 123 million BOE. The project is a production sharing contract
between ConocoPhillips and us. We hold a 51% participating interest in it.
On July 11, 2002, we announced that we commenced commercial production at
our Wenchang project located in the Western South China Sea, approximately 400
kilometers southwest of Hong Kong and 140 kilometers east of Hainan Island,
China. The Wenchang project consists of the Wenchang 13-1 and 13-2 fields. We
are the operator of both fields and hold a 60% working interest in the
project. The average net production for 2002 from the Wenchang project was
19,794 BOE per day.
Acquisitions
On March 7, 2003, we entered into an agreement with a subsidiary of the
BG Group to acquire an interest in the North Caspian Sea Project in
Kazakhstan, subject to certain conditions including the waiver of certain
preemptive rights held by the current partners to the project. On May 9, 2003,
some current partners to the project elected to exercise their preemptive
rights and, accordingly, we did not acquire any interest in the project.
On January 1, 2003, we acquired BP Muturi Limited, which owns a 44.0%
interest in the Muturi production sharing contract, and BP Wiriagar Limited's
42.4% interest in the Wiriagar production sharing contract for a total of
approximately US$275 million. The Muturi and Wiriagar production sharing
contracts, 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 represents one of the largest natural gas projects in
Asia. Our interests in these two production sharing contracts represent
approximately 12.5% 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 (34.2%), BP Muturi (0.2%), BP Wiriagar Ltd. (2.7%), MI Berau
(16.3%), Nippon (12.2%), BG (10.7%), KG Berau (8.6%), KG Wiriagar (1.4%) and
Indonesia Natural Gas Resources Muturi (1.1%).
In October 2002, we entered into a key terms agreement to acquire an
aggregate interest of approximately 5.56% in the reserves and upstream
production of Australia's North West Shelf Gas Project for approximately
US$365.6 million, subject to certain adjustments. Under the terms of this
agreement, we would purchase our interest from the six current partners to
this project: BHP Billiton, BP, ChevronTexaco, Japan Australia LNG (MIMI),
Shell and Woodside Energy. 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
108
liquids would be approximately 210 million BOE. Woodside Petroleum is the
operator for the project. Under the terms of the agreement, we would also
acquire a 25% interest in the China LNG Joint Venture, which is being
established by the six current partners to supply liquefied natural gas from
the North West Shelf Gas Project to a liquefied natural gas terminal currently
being developed by CNOOC and various partners in Guangdong Province, China. We
expect to complete our acquisition of the interests in the North West Shelf
Gas Project and China LNG Joint Venture in 2003. See "Item 4--Information on
the Company--Natural Gas Business--Overseas Activity."
First Quarter 2003 Financial and Operating Results
On March 30, 2003, we announced certain information relating to our
revenues, expenditures and production results for the first quarter of 2003.
Our financial data for this period has not been audited by our independent
public accountants, and is presented here only for your information. You
should not unduly rely on this financial or production data.
During the first quarter of 2003, our revenues from the sale of oil and
gas were Rmb 7.5 billion (US$905.8 million). Our daily average crude oil
production was 308,777 barrels per day during this period, compared to 298,625
barrels per day in 2002, while our daily average natural gas production was
242 million cubic feet per day, compared to 272.6 million cubic feet per day
in 2002. The average net realized price of our crude oil was US$30.33 per
barrel during the first quarter of 2003, compared to US$24.35 per barrel in
2002, while the average net realized price of our natural gas was US$2.99 per
thousand cubic feet, compared to US$2.98 per thousand cubic feet in 2002. The
higher average net realized price of our crude oil during the recent quarterly
period primarily reflected the impact of the Iraqi conflict on oil prices.
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ITEM 9. THE OFFER AND LISTING
Not applicable, except for Item 9.A.4 and Item 9.C.
Our H shares are listed on the Hong Kong Stock Exchange under the stock
code "883" and our ADSs, each representing 20 H shares, are listed on the New
York Stock Exchange under the symbol "CEO." The following table sets forth,
for the periods indicated, the high and low closing prices per H share, as
reported on the Hong Kong Stock Exchange, and per ADS, as reported on the New
York Stock Exchange.
Hong Kong Stock Exchange New York Stock Exchange
------------------------ ------------------------
Period High Low High Low
(HK$ per share) (US$ per ADS)
2001*............................... 8.70 6.00 22.00 15.70
2002................................ 11.65 7.40 29.44 19.01
2001 Financial Quarters
1st Quarter*..................... 7.30 6.80 18.48 15.70
2nd Quarter...................... 8.70 6.20 22.00 16.00
3rd Quarter...................... 8.50 7.00 21.75 18.10
4th Quarter...................... 8.15 6.90 20.70 17.35
2002 Financial Quarters
1st Quarter...................... 9.70 7.40 24.92 19.01
2nd Quarter...................... 10.95 9.35 27.60 23.84
3rd Quarter...................... 11.65 9.60 29.44 24.88
4th Quarter...................... 11.10 9.35 28.48 24.00
2003 Financial Quarters
1st Quarter...................... 10.95 9.80 28.15 25.11
Last Six Months
November 2002.................... 10.10 9.35 26.48 24.00
December 2002.................... 10.50 9.55 26.95 24.21
January 2003..................... 10.50 9.80 26.93 25.11
February 2003.................... 10.95 10.15 27.87 26.02
March 2003....................... 10.90 10.05 28.15 25.75
April 2003....................... 10.45 9.90 26.96 25.18
* We listed our H shares on the Hong Kong Stock Exchange and our ADSs on
the New York Stock Exchange in February 2001.
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ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
We are incorporated with limited liability on August 20, 1999 in Hong
Kong under the Companies Ordinance. 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 and articles of association which
were filed as exhibits to our registration statement on Form F-1 (Registration
No. 333-10862) and we incorporate them in this annual report by reference.
Issue of Shares
Under the Companies Ordinance of Hong Kong, our directors may, without
prior approval of the shareholders, offer to issue new shares in our company
to existing shareholders pro rata. The directors may not issue 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,
dividends will not 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 on
any other dates, whenever our financial position, in their opinion, justifies
such payment.
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.
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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.
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.
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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 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 "Currencies and Exchange Rates" 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.
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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 16% on corporations and at a maximum rate of
15% 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$1.125 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$2.25 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 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.
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
114
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, or other entity that is taxable as a corporation
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" (a "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 are passive. 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.
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.
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
115
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.
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.
116
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
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 nine 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. Our domestic oil and gas prices
are quoted in U.S. dollars based on international U.S. dollar oil prices.
Therefore we believe we are largely able to offset Renminbi exchange rate
risk. In the past three years, our major foreign currency risk arose from our
Japanese yen-denominated loan. On December 31, 2002, the outstanding amount of
our Japanese yen-denominated loan was JPY 1,357 million. Since the outstanding
amount of our Japanese yen loan is hedged using foreign currency swaps, we do
not expect significant exchange gains or losses on this outstanding amount 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.
As of December 31, 2002, our total outstanding debt, including both
foreign currency-denominated and Renminbi-denominated loans, was US$649.4
million, US$31.4 million of which was floating rate debt and US$618.0 million
of which was fixed rate debt. After our prepayment of certain debt in early
2003 and as of April 30, 2003, all of our outstanding long-term loans were
fixed rate debt.
117
The following table sets for additional information about the expected
maturity dates of our outstanding debt as of December 31, 2002.
Fair value
as of
2008 December 31,
2003 2004 2005 2006 2007 and after Total 2002
------ ----- ------ ------ ----- ----------- ------- ------------
(Rmb in millions, except percentages)
Long-term debt, including current portion
Fixed rate.................................. 76 19 19 846 19 -- 979 1,389
Average interest rate....................... 8.185% 8.495% 8.592% 8.692% 4.000% --
Variable rate............................... 260 -- -- -- -- -- 260 260
Average interest rate....................... 1.383% -- -- -- -- --
6.375% long-term guaranteed notes
Fixed rate.................................. -- -- -- -- -- 4,140 4,140 4,482
Average interest rate....................... 6.375% 6.375% 6.375% 6.375% 6.375% 6.375%
The above table takes into account our early repayment of certain loans
prior to May 13, 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.
118
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
As of December 31, 2002, we had used all the net offering proceeds from
our initial public offering in February 2001 as follows:
o US$1,030 million to fund our capital expenditures and investments,
including approximately US$570 million to finance our acquisition of
Indonesian oil and gas assets from Repsol YPF, S.A.; and
o US$200 million to CNOOC in respect of retirement benefits payable to
retired CNOOC employees.
There was no material change in the use of proceeds as described in the
prospectus relating to our initial public offering.
Further details of the Repsol acquisition are discussed under "Item
4--Information on the Company--Business Overview--Principal Oil and Gas
Regions--Overseas Activity."
ITEM 15. CONTROLS AND PROCEDURES
(a) Within the 90 days prior to the filing date of this annual report, we
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 and as of the date of our evaluation, 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 16. RESERVED
119
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 3.1 to our Registration Statement on
Form F-1 filed with the Securities and Exchange Commission
(File Number: 333-10862).
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.
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).
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).
120
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).
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).
121
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).
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).
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).
122
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). 8 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).
10.2 Sarbanes-Oxley Act of 2002 Section 906 Certification
furnished (not filed) to the Securities and Exchange
Commission.
123
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 of its behalf.
CNOOC Limited
By: /s/ Yunshi Cao
---------------------------------------------
Name: Yunshi Cao
Title: Company Secretary, General Counsel
and Senior Vice President
Date: May 13 , 2003
124
Certification
I, Liucheng Wei, Chairman and Chief Executive Officer of CNOOC Limited,
certify that:
1. I have reviewed this annual report on Form 20-F of CNOOC Limited;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flow of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
By: /s/ Liucheng Wei
------------------------------------------
Name: Liucheng Wei
Title: Chairman & Chief Executive Officer
125
Certification
I, Mark Z.L. Qiu, Chief Financial Officer and Senior Vice President of CNOOC
Limited, certify that:
1. I have reviewed this annual report on Form 20-F of CNOOC Limited;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flow of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
By: /s/ Mark Z.L. Qiu
------------------------------------
Name: Mark Z.L. Qiu
Title: Chief Financial Officer
and Senior Vice President
126
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
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
Copy of Report of Independent Public Accountants previously issued by
Arthur Andersen & Co ................................................................................................. F-4
Consolidated income statements for the years ended December 31, 2002, 2001,
and 2000.............................................................................................................. F-5
Consolidated balance sheets as of December 31, 2002 and 2001............................................................ F-7
Consolidated statements of changes in equity for the years ended December 31, 2002,
2001, and 2000........................................................................................................ F-8
Consolidated cash flow statements for the years ended December 31, 2002,
2001, and 2000........................................................................................................ F-9
Notes to the consolidated financial statements.......................................................................... F-10
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of CNOOC Limited
(incorporated in Hong Kong with limited liability)
We have audited the accompanying consolidated balance sheet of CNOOC Limited
(the "Company") and its subsidiaries (the "Group") as of December 31, 2002,
and the related consolidated statement of income, changes in equity and cash
flows for the year then ended. 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. The financial
statements of CNOOC Limited and its subsidiaries for the years ended December
31, 2000 and 2001 were audited by other auditors who have ceased operations
and whose report dated March 27, 2002 expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America and auditing standards established by
the Hong Kong Society of 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. An audit
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 audit provides a reasonable basis for our
opinion.
In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CNOOC
Limited and its subsidiaries as of December 31, 2002 and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in Hong Kong ("Hong Kong GAAP").
Hong Kong GAAP does not conform to generally accepted accounting principles in
the United States of America. A description of the significant differences
between those two generally accepted accounting principles and the effect of
those differences on net income and shareholders' equity is set forth in Note
38 to the consolidated financial statements.
/s/ Ernst & Young
----------------------------
Ernst & Young
Certified Public Accountants
Hong Kong
March 27, 2003
F-3
The following is a copy of the report previously issued by Arthur
Andersen & Co in connection with CNOOC Limited's Form 20-F Annual Report
for fiscal year 2001 filed with the Securities and Exchange Commission
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of CNOOC Limited:
We have audited the accompanying consolidated balance sheets of CNOOC Limited
(established in the Hong Kong Special Administrative Region, the People's
Republic of China) and its subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of income, recognised gains and losses and
cash flows for the years ended December 31, 2001, 2000 and 1999. These
financial statements are the responsibility of the management of CNOOC
Limited. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America and auditing standards established
by the Hong Kong Society of Accountants. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
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 accompanying consolidated financial statements referred to
above present fairly, in all material respects, the financial positions of
CNOOC Limited and its subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and cash flows for the years ended December 31,
2001, 2000 and 1999 in conformity with accounting principles generally
accepted in Hong Kong ("Hong Kong GAAP").
Hong Kong GAAP does not conform to generally accepted accounting principles in
the United States of America. A description of the significant differences
between those two generally accepted accounting principles and the effect of
those differences on net income and shareholders' equity is set forth in Note
36 to the consolidated financial statements.
ARTHUR ANDERSEN & CO
Certified Public Accountants
Hong Kong
March 27, 2002
F-4
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(All amounts expressed in thousands, except per share data)
Notes 2000 2001 2002 2002
--------- ------------ ------------ -------------- ------------
RMB'000 RMB'000 RMB'000 US$'000
REVENUE
Oil and gas sales 8,27 18,819,323 17,560,788 23,779,294 2,871,895
Marketing revenues 9 5,126,015 2,537,032 2,377,469 287,134
Other income 278,580 721,737 217,052 26,214
------------ ------------ -------------- ------------
24,223,918 20,819,557 26,373,815 3,185,243
------------ ------------ -------------- ------------
EXPENSES
Operating expenses (2,124,078) (2,329,130) (3,775,334) (455,958)
Production taxes (1,036,729) (883,768) (1,023,049) (123,557)
Exploration expenses (552,869) (1,039,297) (1,318,323) (159,218)
Depreciation, depletion and
amortisation (2,577,882) (2,566,920) (4,019,532) (485,451)
Dismantlement 28 (103,569) (90,367) (126,139) (15,234)
Impairment losses related to 17
4 property, plant and equipment -- (99,675) -- --
Crude oil and product purchases 9 (5,097,765) (2,453,312) (2,326,338) (280,959)
Selling and administrative
expenses 10 (456,002) (615,389) (1,006,540) (121,563)
Other (217,599) (517,876) (30,866) (3,728)
------------ ------------ -------------- ------------
(12,166,493) (10,595,734) (13,626,121) (1,645,668)
------------ ------------ -------------- ------------
PROFIT FROM OPERATING ACTIVITIES 12,057,425 10,223,823 12,747,694 1,539,575
Interest income 236,624 317,706 147,870 17,859
Interest expenses 11 (475,004) (116,634) (294,792) (35,603)
Exchange (loss)/gain, net 381,336 235,409 (113,814) (13,746)
Investment income -- 220,650 193,277 23,343
Share of profit of an associate 218,326 89,963 165,387 19,974
Non-operating (loss)/income, net (196,031) 34,941 (71,379) (8,621)
------------ ------------ -------------- ------------
PROFIT BEFORE TAX 12,222,676 11,005,858 12,774,243 1,542,781
Tax 14 (1,926,076) (3,048,227) (3,541,416) (427,707)
------------ ------------ -------------- ------------
NET PROFIT 10,296,600 7,957,631 9,232,827 1,115,074
============ ============ ============== ===========
The accompanying notes are an integral part of these financial statements.
F-5
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS (CONT'D)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(All amounts expressed in thousands, except per share data)
Notes 2000 2001 2002 2002
------- ----------- --------- --------- -------
RMB'000 RMB'000 RMB'000 US$'000
DIVIDENDS
Final 15 6,426,424 -- 1,306,740 157,819
Interim 15 -- 871,194 958,314 115,738
----------- -------- --------- -------
6,426,424 871,194 2,265,054 273,557
=========== ========= ========= =======
EARNINGS PER SHARE
Basic 16 RMB 1.63 RMB 1.00 RMB 1.12 US$ 0.14
Diluted 16 RMB 1.63 RMB 1.00 RMB 1.12 US$ 0.14
DIVIDEND PER SHARE
Final 15 RMB 0.98 N/A RMB 0.16 US$ 0.02
Interim 15 N/A RMB 0.11 RMB 0.12 US$ 0.01
EARNINGS PER ADS
Basic 16 RMB 32.53 RMB 20.04 RMB 22.48 US$ 2.71
Diluted 16 RMB 32.53 RMB 20.04 RMB 22.47 US$ 2.71
The accompanying notes are an integral part of these financial statements.
F-6
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
(All amounts expressed in thousands)
Notes 2001 2002 2002
---------- ----------- ---------- ---------
RMB'000 RMB'000 US$'000
NON-CURRENT ASSETS
Property, plant and equipment, net 17 23,827,499 36,071,820 4,356,500
Investment in an associate 18 461,990 537,377 64,901
----------- ---------- ---------
24,289,489 36,609,197 4,421,401
----------- ---------- ---------
CURRENT ASSETS
Accounts receivable, net 19 1,194,180 3,063,266 369,960
Inventories and supplies 20 627,337 848,605 102,489
Due from related companies 27 176,519 453,290 54,745
Other current assets 692,595 1,060,955 128,135
Short-term investments 21 8,895,804 6,531,278 788,801
Time deposits with maturities over three months 27 2,050,000 4,690,000 566,425
Cash and cash equivalents 27 6,393,724 7,839,114 946,753
----------- ---------- ---------
20,030,159 24,486,508 2,957,308
----------- ---------- ---------
TOTAL ASSETS 44,319,648 61,095,705 7,378,709
----------- ---------- ---------
CURRENT LIABILITIES
Accounts payable 22 591,624 2,659,743 321,225
Other payables and accrued liabilities 23 813,146 1,712,408 206,813
Current portion of long-term bank loans 24 1,231,840 297,518 35,932
Due to the parent company 26, 27 125,493 270,438 32,662
Due to related companies 27 157,823 231,592 27,970
Tax payable 1,471,750 1,962,765 237,049
----------- ---------- ---------
4,391,676 7,134,464 861,651
----------- ---------- ---------
NON-CURRENT LIABILITIES
Long-term bank loans 24 3,255,699 941,093 113,659
6.375% long-term guaranteed notes 25 -- 4,071,184 491,689
Provision for dismantlement 28 1,598,130 2,239,320 270,449
Deferred tax liabilities 14 1,763,637 6,141,156 741,685
----------- ---------- ---------
6,617,466 13,392,753 1,617,482
----------- ---------- ---------
CAPITAL AND RESERVES
Issued capital 29 876,978 876,978 105,915
Reserves 30 32,433,528 39,691,510 4,793,661
----------- ---------- ---------
33,310,506 40,568,488 4,899,576
----------- ---------- ---------
TOTAL EQUITY AND LIABILITIES 44,319,648 61,095,705 7,378,709
========== ========== =========
The accompanying notes are an integral part of these financial statements.
F-7
CNOOC LIMITED AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(All amounts expressed in thousands of Renminbi)
Cumulative
Share Share Revaluation translation Statutory Retained
capital premium reserve reserve reserve earnings Total
--------- ---------- ------------ -------------- ---------- ------------ ------------
Balances at January 1, 2000 642,000 7,124,955 170,598 -- 100,874 345,813 8,384,240
Net profit for the year -- -- -- -- -- 10,296,600 10,296,600
Appropriation to statutory\
reserve -- -- -- -- 847,464 (847,464) --
Dividends (Note 15) -- -- -- -- -- ( 6,426,424) ( 6,426,424)
Net proceeds from Private
Placements 59,181 3,710,483 -- -- -- -- 3,769,664
Surplus on revaluation of properties -- -- 104,073 -- -- -- 104,073
Foreign currency translation
differences -- -- -- ( 6,350) -- -- ( 6,350)
--------- ---------- ------------ -------------- ---------- ----------- ------------
Net gain not recognised in the
income statement -- -- -- ( 6,350) -- -- ( 6,350)
--------- ---------- ------------ -------------- ---------- ----------- -----------
Balances at January 1, 2001 701,181 10,835,438 274,671 ( 6,350) 948,338 3,368,525 16,121,803
Issuance of ordinary shares 175,797 9,925,767 -- -- -- -- 10,101,564
Net profit for the year -- -- -- -- -- 7,957,631 7,957,631
Appropriation to statutory
reserve -- -- -- -- 587,022 ( 587,022) --
Dividends (Note 15) -- -- -- -- -- ( 871,194) ( 871,194)
Foreign currency translation
differences -- -- -- 702 -- -- 702
--------- ---------- ------------ -------------- ---------- ----------- ------------
Net gain not recognised in the
income statement -- -- -- 702 -- -- 702
--------- ---------- ------------ -------------- ---------- ----------- ------------
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 (Note 3) -- -- -- -- -- 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 (Note 15) -- -- -- -- -- ( 2,265,054) ( 2,265,054)
Foreign currency translation
differences -- -- -- ( 7,948) -- -- ( 7,948)
--------- ---------- ------------ -------------- ---------- ----------- ------------
Net loss not recognised in the
income statement -- -- -- ( 7,948) -- -- ( 7,948)
--------- ---------- ------------ -------------- ---------- ----------- ------------
Balances at December 31, 2002 876,978 20,761,205 274,671 ( 13,596) 2,232,410 16,436,820 40,568,488
========= ========== ============ ============== ========== ============ ============
The accompanying notes are an integral part of these financial statements.
F-8
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(All amounts expressed in thousands)
Notes 2000 2001 2002 2002
-------- ----------- ------------ ------------ -----------
RMB'000 RMB'000 RMB'000 US$'000
OPERATING ACTIVITIES
Cash generated from operations 32(a) 14,429,703 14,024,982 17,261,970 2,084,779
Income taxes paid ( 880,080) ( 2,611,450) ( 3,013,279) ( 363,923)
Income tax refund -- -- 167,065 20,177
Interest received 163,461 317,706 147,870 17,859
Dividends received 21,000 99,000 90,000 10,870
Short-term investment income received -- 53,641 79,679 9,623
Interest paid ( 501,383) ( 124,422) ( 136,222) ( 16,452)
----------- ------------ ------------ -----------
Net cash from operating activities 13,232,701 11,759,457 14,597,083 1,762,933
----------- ------------ ------------ -----------
INVESTING ACTIVITIES
Additions of property, plant and equipment (4,403,968) ( 4,342,622) ( 6,832,746) ( 825,211)
Proceeds from disposals of property, plant and
equipment 27,148 6,313 446 54
Acquisition of subsidiaries 32(b) -- -- ( 4,734,174) ( 571,760)
(Increase)/decrease in time deposits with
maturities over three months (3,424,512) 1,374,512 ( 2,640,000) ( 318,841)
Additions of short-term investments ( 300,000) ( 8,699,312) ( 3,399,413) ( 410,557)
Disposals of short-term investments -- 308,506 5,882,305 710,423
Increase in amounts due from related companies 240,726 ( 13,831) -- --
----------- ------------ ------------ -----------
Net cash used in investing activities (7,860,606) (11,366,434) (11,723,582) (1,415,892)
----------- ------------ ------------ -----------
FINANCING ACTIVITIES
Issue of 6.375% long-term guaranteed notes -- -- 4,059,345 490,259
Net proceeds from Private Placement 3,769,664 -- -- --
Repayment of bank loans (3,371,657) ( 3,497,533) ( 3,367,347) ( 406,684)
Dividends paid (4,074,466) ( 4,268,517) ( 2,265,054) ( 273,557)
Increase/ (decrease) in amount due to the parent
company 47,256 ( 1,657,004) 144,945 17,505
Proceeds from issue of share capital -- 10,101,564 -- --
Proceeds from new bank loans 339,423 2,500,000 -- --
Increase in amounts due to related companies ( 164,570) 25,564 -- --
----------- ------------ ------------ -----------
Net cash (used in)/from financing activities (3,454,350) 3,204,074 ( 1,428,111) ( 172,477)
----------- ------------ ------------ -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,917,745 3,597,097 1,445,390 174,564
Cash and cash equivalents at beginning of year 878,882 2,796,627 6,393,724 772,189
----------- ------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR 2,796,627 6,393,724 7,839,114 946,753
=========== ============ ============ ===========
ANALYSIS OF BALANCES OF CASH AND
CASH EQUIVALENTS
Cash and bank balances 2,796,627 6,393,724 7,839,114 946,753
=========== ============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-9
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED 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 sales of crude oil, natural gas
and other petroleum.
In the opinion of directors, the ultimate holding company is China
National Offshore Oil Corporation ("CNOOC"), a company established in the
PRC.
As of December 31, 2002, we had direct or indirect interests in the
following principal subsidiaries. All of these entities are private
limited companies and were owned by the parent company upon their
incorporation/establishment except for CNOOC International Limited and
CNOOC Finance (2002) Limited which were owned by the Company upon its
incorporation and nine subsidiaries which were newly acquired from
Repsol-YPF, S.A. during the year.
Particulars of the principal subsidiaries are as follows:
Place and date of Nominal value Percentage of
incorporation/ of issued equity
registration and ordinary share attributable to
Name operations capital the Company Principal activities
--------------------------------- ------------------ -------------- --------------- --------------------
Directly held subsidiaries:
CNOOC China Limited Tianjin, the PRC RMB10 billion 100% Offshore petroleum
September 15, 1999 exploration, development,
production and sales in
the PRC
CNOOC International Limited British Virgin Islands US$2 100% Investment holding
August 23, 1999
China Offshore Oil Singapore S$3 million 100% Sales and marketing of
(Singapore) International May 14,1993 petroleum outside of the
Pte., Ltd. PRC
CNOOC Finance (2002) Limited British Virgin Islands US$1,000 100% Bond issuance
January 24, 2002
Indirectly held subsidiaries*:
Malacca Petroleum Limited Bermuda US$12,000 100% Investment holding
November 2, 1995
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% Investment holding
November 2, 1995
F-10
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
1. CORPORATE INFORMATION (CONT'D)
Place and date of incorporation/ Nominal value of issued
Name registration and operations ordinary share capital
---------------------------- -------------------------------- -----------------------
CNOOC Southeast Asia Limited Bermuda US$12,000
May 16, 1997
CNOOC ONWJ Ltd. Labuan, F.T., Malaysia US$1
March 27, 2002
CNOOC SES Ltd. Labuan, F.T., Malayisa US$1
March 27, 2002
CNOOC Poleng Ltd. Labuan, F.T., Malayisa US$1
March 27, 2002
CNOOC Madura Ltd. Labuan, F.T., Malayisa US$1
March 27, 2002
CNOOC Blora Ltd. Labuan, F.T., Malayisa US$1
March 27, 2002
Percentage of equity
attributable to the
Name Company Principal activities
---------------------------- -------------------- ----------------------------------------
CNOOC Southeast Asia Limited 100% Investment holding
CNOOC ONWJ Ltd. 100% Offshore petroleum exploration,
development and production in Indonesia
CNOOC SES Ltd. 100% Offshore petroleum exploration,
development and production in Indonesia
CNOOC Poleng Ltd. 100% Offshore petroleum exploration,
development and production in Indonesia
CNOOC Madura Ltd. 100% Offshore petroleum exploration,
development and production in Indonesia
CNOOC Blora Ltd. 100% Offshore petroleum exploration,
development and production in Indonesia
* Indirectly held through CNOOC International Limited.
During the year, the Group acquired nine subsidiaries of
Repsol-YPF, S.A. Subsequent to the acquisition, a restructuring
was performed whereby all the assets and liabilities acquired
from the subsidiaries of Repsol-YPF, S.A. were transferred to
the newly established companies in Labuan, F.T., Malaysia.
Further details of this acquisition are included in note 5 to
the financial statements.
The above table lists the subsidiaries of the Company which, in
the opinion of the directors, principally affected the results
for the year or formed a substantial portion of the net assets
of the Group. To give details of other subsidiaries would, in
the opinion of the directors, result in particulars of
excessive length.
F-11
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
2. IMPACT OF NEW AND REVISED STATEMENTS OF STANDARD ACCOUNTING PRACTICE
("SSAPs")
The following recently-issued and revised SSAPs and related Interpretations
are effective for the first time for the current year's financial statements:
SSAP 1 (Revised) : "Presentation of financial statements"
SSAP 11 (Revised) : "Foreign currency translation"
SSAP 15 (Revised) : "Cash flow statements"
SSAP 34 : "Employee benefits"
Interpretation 14 : "Evaluating the substance of transactions involving
the legal form of a lease"
Interpretation 15 : "Business combinations - "Date of exchange" and fair
value of equity instruments"
Interpretation 18 : "Consolidation and equity method - Potential voting
rights and allocation of ownership interests"
These SSAPs prescribe new accounting measurement and disclosure
practices. The major effects on the Group's accounting policies
and on the amounts disclosed in these financial statements of
adopting these SSAPs and Interpretations are summarised as
follows:
SSAP 1 (Revised) prescribes the basis for the presentation of
financial statements and sets out guidelines for their
structure and minimum requirements for the content thereof. The
principal impact of the revision to this SSAP is that a
consolidated statement of changes in equity is now presented on
page F-8 of the financial statements in place of the
consolidated statement of recognised gains and losses that was
previously required and in place of the Group reserves note.
SSAP 11 (Revised) prescribes the basis for the translation of
foreign currency transactions and financial statements. The
principal impact of the revision of this SSAP on the
consolidated financial statements is that the income statement
of overseas subsidiaries are now translated to Renminbi at the
exchange rates at the dates of the transactions, or at an
approximation thereto, whereas previously they were translated
at the exchange rates at the balance sheet date. The adoption
of the revised SSAP 11 has had no material effect on the
financial statements.
F-12
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
2. IMPACT OF NEW AND REVISED STATEMENTS OF STANDARD ACCOUNTING PRACTICE
("SSAPs") (CONT'D)
SSAP 15 (Revised) prescribes the revised format for the cash
flow statement. The principal impact of the revision of this
SSAP is that the consolidated cash flow statement now presents
cash flows under three headings, cash flows from operating,
investing and financing activities, rather than the five
headings previously required. In addition, cash flows from
overseas subsidiaries arising during the year are now
translated to Renminbi at the exchange rates at the dates of
the transactions, or at an approximation thereto, whereas
previously they were translated at the exchange rates at the
balance sheet date.
SSAP 34 prescribes the principles to be applied for
recognition, measurement and disclosures for employee
short-term and long-term benefits. In addition, disclosures are
now required in respect of the Company's share option scheme,
as detailed in Note 29 to the financial statements. These share
option scheme disclosures are similar to the Listing Rules
disclosures previously included in the Report of the Directors,
which are now required to be included in the notes to the
financial statements as a consequence of the SSAP. The SSAP
requirements have not had a material effect on the amounts
previously recorded in the financial statements, therefore no
prior year adjustment has been required.
3. CHANGE IN ACCOUNTING POLICY
During the year, the Group changed its method of accounting for
the provision for dismantlement to comply with SSAP 28
"Provisions, contingent liabilities and contingent assets".
SSAP 28 requires a provision to be recorded for a present
obligation whether that obligation is legal or constructive.
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 effect of this change in accounting policy was to increase
retained earnings and property, plant and equipment, as of
January 1, 2002 by RMB298,156,268 and RMB736,848,177
respectively, and to increase the provision for dismantlement
and deferred tax liabilities as of January 1, 2002 by
RMB310,910,651 and RMB127,781,258 respectively. No adjustment
was made to the prior year amounts as the impact on the
financial statements for the year ended December 31, 2001 was
not material.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
These financial statements have been prepared in accordance
with Hong Kong Statements of Standard Accounting Practice,
accounting principles generally accepted in Hong Kong ("Hong
Kong GAAP") and the requirements of the Hong Kong Companies
Ordinance. They have been prepared under the historical cost
convention as modified by the revaluation of land and buildings
and short-term investments. The significant differences between
Hong Kong GAAP and generally accepted accounting principles in
the United States of America ("US GAAP") are set forth in Note
38 to the financial statements.
F-13
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Basis of consolidation
The consolidated financial statements include the financial
statements of the Company and its subsidiaries for the year
ended December 31, 2002. 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.
Impairment of assets
An assessment is made 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 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 or 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-14
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
4. 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 life 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 treated as expenses when 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 expenditures 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-15
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
4. 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
which 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 annual rate estimated to write
off 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 life. The Group estimates the useful lives of
vehicles and office equipment to be 5 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.
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 Company's interests in subsidiaries are stated at cost less any impairment
losses.
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 associate
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.
F-16
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Trade and other receivables
Trade and other receivables are stated at their cost, after provision for
doubtful accounts.
Inventories and supplies
Inventories consist primarily of oil and supplies consist
mainly of items for repair 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.
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.
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 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.
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, and assets similar in nature to cash
which are not restricted to use.
F-17
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
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 finance costs in the income statement.
Provisions for dismantlement are made based on the present
value of the future costs expected to be incurred, on a site by
site basis, in respect of the Group's 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
significant timing differences to the extent it is probable
that the liability will crystallise in the foreseeable future.
A deferred tax asset is not recognised until its realisation is
assured beyond reasonable doubt.
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 government share of
allocable 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 result 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 entered into a gas sales contract with a customer which contains
take-or-pay clauses. The clauses require the customer to take a specified
minimum volume of gas each year. If the minimum volume of gas is not
taken, the customer must pay for the deficiency gas, even though the gas
is not taken. The customer 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 the customer or the expiry of
the contract.
F-18
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Revenue recognition (cont'd)
(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, are
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.
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.
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.
F-19
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Research and development costs
Research costs are charged to the income statement as incurred.
Development expenditure (other than relating to oil and gas
properties discussed above) incurred on projects is capitalised
and deferred only when the projects are clearly defined; the
expenditure is separately identifiable and can be measured
reliably, and 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.
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 rates of exchange
ruling at the transaction dates. Monetary assets and
liabilities denominated in foreign currencies at the balance
sheet date are translated at the applicable rates of exchange
ruling at that date. Exchange differences are dealt with in the
income statement.
On consolidation, the financial statements of overseas
subsidiaries and an associate are translated into RMB using the
net investment method, whereby assets and liabilities are
translated at the rates of exchange prevailing at the balance
sheet date and income and expenses are translated at the
weighted average rates of exchange during the year. Share
capital, share premium account and retained earnings are
translated at historical rates. The resulting translation
differences are included in the cumulative translation reserve.
For the convenience of the readers, translation of amounts from
RMB into United States dollars ("US$") has been made at the
rate of US$1.00=RMB8.28 on December 31, 2002. No representation
is made that RMB amounts could have been, or could be,
converted into US$ at the rate on December 31, 2002, or at any
other rate.
Retirement and termination benefits
The Group provides 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 22.5% of employees' basic
salaries. The Group's contributions to defined contribution
plans are charged to expense in the year to which they relate.
Share options scheme
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.
F-20
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Repairs, maintenance and overhaul costs
Repairs, maintenance and overhaul costs are normally charged to the income
statement as operating expenses in the period in which they are incurred.
Financial instruments
The Group has currency swap contracts with financial
institutions which are not designated as hedging instruments
and are carried at fair value, with any changes in fair value
thereof included in the income statement.
Dividends
Final dividends proposed by the directors are classified as a
separate allocation of retained earnings within capital and
reserves in 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 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.
Operating leases
Leases of assets under which substantially all the risks and
rewards of ownership are retained by the lessor are classified
as operating leases. Lease payments under an operating lease
are recognised as an expense on a 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.
F-21
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
5. ACQUISITION
During the year, the Company acquired nine subsidiaries of
Repsol-YPF, S.A. which holds a portfolio of operated and
non-operated interests in oil and gas production sharing and
technical assistance contracts in contract areas located
offshore and onshore of Indonesia. The assets acquired included
a 65.3% interest in the Offshore Southeast Sumatra Contract
Area production sharing contract, a 36.7% interest in the
Offshore Northwest Java Contract Area production sharing
contract, a 25.0% interest in the West Madura Offshore Block
production sharing contract, a 50.0% interest in the Poleng
Field technical assistance contract and a 16.7% interest in the
Blora Block production sharing contract. The aggregate cash
consideration for the acquisition was a total cash
consideration of US$585 million which was adjusted for a
working capital adjustment. The effective date of the purchase
agreement was January 1, 2002 and the profit of the acquired
companies would accrue to the Group from that date. The
acquisition was completed on April 19, 2002. For practical
reasons, the operations of the acquired companies are included
in the Company's consolidated financial statements from April
1, 2002. The profit that had accrued to the Group prior to
April 1, 2002 has been treated as a purchase price reduction.
Subsequent to the acquisition, the Company established five
companies in Labuan, Malaysia and transferred the assets and
liabilities of these nine subsidiaries of Repsol-YPF, S.A. to
the five companies established in Labuan.
The transfer of the assets and liabilities were completed by December 30,
2002. The Company was in the process of winding up the acquired companies as
of December 31, 2002.
The following unaudited pro forma consolidated financial information reflects
the results of the operation of the Company for the years ended December 31,
2002 and 2001, as if the acquisition described above had completed on January
1, 2001.
Pro forma financial results
2001 2002
---------- ----------
Total revenue 24,953,612 27,306,093
Income before tax 12,171,582 13,092,812
Profit after tax 8,563,807 9,397,483
========== ==========
Earnings per share - Basic RMB1.04 RMB1.14
========== ==========
- Diluted RMB1.04 RMB1.14
========== ==========
F-22
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
6. PRODUCTION SHARING CONTRACTS
PRC
For production sharing contracts in the PRC, the foreign party 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.
The Group has the option to take a participating interest as
mutually agreed by both participants 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.
Part of the 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 interests 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 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.
F-23
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
6. PRODUCTION SHARING CONTRACTS (CONT'D)
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.
7. SEGMENT INFORMATION
The Group is organised on a world-wide 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 production sharing contracts with foreign
partners, independent operations 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
7. SEGMENT INFORMATION (CONT'D)
(a) Business segments (cont'd)
The following tables present revenue, profit and certain asset, liability
and expenditure information for the Group's business segments.
Independent operations
----------------------------------------
Segment revenue 2000 2001 2002
---------------
RMB'000 RMB'000 RMB'000
Sales to external customers:
Oil and gas sales 9,283,228 9,845,019 10,318,549
Marketing revenues - - -
Intersegment revenues - - -
Other income 161,790 558,368 43,513
------- ------- ------
Total 9,445,018 10,403,387 10,362,062
--------- ---------- ----------
Segment results
---------------
Operating expenses (894,813) (1,183,252) (1,268,360)
Production taxes (526,491) (525,454) ( 556,583)
Exploration costs (523,633) (955,475) (1,241,759)
Depreciation, depletion and amortisation (1,443,045) (1,531,184) (1,635,131)
Dismantlement (49,145) (41,530) (72,751)
Impairment losses related to property, plant and
equipment - (60,907) -
Crude oil and product purchases - - -
Selling and administrative expenses (33,146) (35,686) (38,548)
Other (133,976) (514,655) -
Interest income - - -
Interest expense (262,274) (69,437) (62,081)
Exchange (loss)/gain, net - - -
Investment income - - -
Share of profit of an associate - - -
Non-operating (loss)/gain, net (221,442) 18,267 (85,414)
Tax - - -
--------- --------- ---------
Net profit 5,357,053 5,504,074 5,401,435
--------- --------- ---------
Other information
-----------------
Segment assets 15,592,100 15,422,016 16,899,455
Investment in an associate - - -
Total assets 15,592,100 15,422,016 16,899,455
Segment liabilities (4,795,521) (4,254,418) (3,033,327)
Capital expenditures 3,326,893 1,922,074 2,770,640
========= =========== =========
Production sharing contracts
---------------------------------------
Segment revenue 2000 2001 2002
---------------
RMB'000 RMB'000 RMB'000
Sales to external customers:
Oil and gas sales 8,859,606 7,023,926 13,460,745
Marketing revenues - - -
Intersegment revenues 676,489 691,843 1,023,547
2
Other income 107,390 123,31 133,108
------- ---- ------ -------
1
Total 9,643,485 7,839,08 14,617,400
--------- -------- ----------
Segment results
---------------
Operating expenses (1,229,265) (1,145,878) (2,506,974)
Production taxes ( 510,238) ( 355,544) ( 466,466)
Exploration costs (29,236) (83,822 (76,564)
Depreciation, depletion and amortisation (1,130,820) (1,035,736) (2,384,401)
Dismantlement (54,424) (48,837) (53,388)
Impairment losses related to property, plant and
equipment - (38,768) -
Crude oil and product purchases - - (1,023,547)
Selling and administrative expenses (99) (100) (553,537)
Other - - (30,866)
Interest income - - 3,831
Interest expense (171,230) (13,871) (17,100)
Exchange (loss)/gain, net - - 794
Investment income - - -
Share of profit of an associate - - -
Non-operating (loss)/gain, net - - (220)
Tax - - -
--------- -------- ---------
Net profit 6,518,173 5,116,52 7,508,962
--------- -------- ---------
Other information
-----------------
Segment assets 9,829,861 10,295,857 22,446,447
Investment in an associate - - -
Total assets 9,829,861 10,295,857 22,446,447
Segment liabilities (3,878,273) (3,372,175) (10,200,032)
Capital expenditures 1,244,159 2,398,60(1) 4,396,933
========= ========== =========
Trading business
----------------------------------------
Segment revenue 2000 2001 2002
---------------
RMB'000 RMB'000 RMB'000
Sales to external customers:
Oil and gas sales - - -
Marketing revenues 5,802,504 3,228,875 2,377,469
Intersegment revenues - - -
Other income - - -
- - -
Total 5,802,504 3,228,875 2,377,469
--------- --------- ---------
Segment results
---------------
Operating expenses - - -
Production taxes - - -
Exploration costs - - -
Depreciation, depletion and amortisation - - -
Dismantlement - - -
Impairment losses related to property, plant and
equipment - - -
Crude oil and product purchases (5,774,254) (3,145,155) (2,326,338)
Selling and administrative expenses - - -
Other - - -
Interest income - - -
Interest expense - - -
Exchange (loss)/gain, net - - -
Investment income - - -
Share of profit of an associate - - -
Non-operating (loss)/gain, net - - -
Tax - - -
------ ------ ------
Net profit 28,250 83,720 51,131
------ ------ ------
Other information
-----------------
Segment assets - 368,670 630,704
Investment in an associate - - -
Total assets - 368,670 630,704
Segment liabilities - (106,862) (21,665)
Capital expenditures - - -
========= ======== =========
Unallocated
----------------------------------------
Segment revenue 2000 2001 2002
---------------
RMB'000 RMB'000 RMB'000
Sales to external customers:
Oil and gas sales - - -
Marketing revenues - - -
Intersegment revenues - - -
Other income 9,400 40,057 40,431
----- ------ ------
Total 9,400 40,057 40,431
----- ------ ------
Segment results
---------------
Operating expenses - - -
Production taxes - (2,770) -
Exploration costs - - -
Depreciation, depletion and amortisation (4,017) - -
Dismantlement - - -
Impairment losses related to property, plant and
equipment - - -
Crude oil and product purchases - - -
Selling and administrative expenses (422,757) (579,603) (414,455)
Other (83,623) (3,221) -
Interest income 236,624 317,706 144,039
Interest expense (41,500) (33,326) (215,611)
Exchange (loss)/gain, net 381,336 235,409 (114,608)
Investment income - 220,650 193,277
Share of profit of an associate 218,326 89,963 165,387
Non-operating (loss)/gain, net 25,411 16,674 14,255
Tax (1,926,076) (3,048,227) (3,541,416)
---------- ----------- -----------
Net profit (1,606,876) (2,746,688) (3,728,701)
---------- ----------- -----------
Other information
-----------------
Segment assets 6,704,417 17,771,115 20,581,722
Investment in an associate 471,027 461,990 537,377
Total assets 7,175,444 18,233,105 21,119,099
Segment liabilities 7,801,808) (3,275,687) (7,272,193)
Capital expenditures 13,291 18,063 37,652
========= ======== =========
Eliminations
--------------------------------------
Segment revenue 2000 2001 2002
---------------
RMB'000 RMB'000 RMB'000
Sales to external customers:
Oil and gas sales - - -
Marketing revenues - - -
Intersegment revenues (676,489) (691,843) (1,023,547)
Other income - - -
Total
Segment results
---------------
Operating expenses - - -
Production taxes - - -
Exploration costs - - -
Depreciation, depletion and amortisation - - -
Dismantlement - - -
Impairment losses related to property, plant and
equipment - - -
Crude oil and product purchases 676,489 691,843 1,023,547
Selling and administrative expenses - - -
Other - - -
Interest income - - -
Interest expense - - -
Exchange (loss)/gain, net - - -
Investment income - - -
Share of profit of an associate - - -
Non-operating (loss)/gain, net - - -
Tax - - -
Net profit
Other information
-----------------
Segment assets - - -
Investment in an associate - - -
Total assets - - -
Segment liabilities - - -
Capital expenditures - - -
Consolidated
------------------------------------------
Segment revenue 2000 2001 2002
---------------
RMB'000 RMB'000 RMB'000
Sales to external customers:
Oil and gas sales 18,142,834 16,868,945 23,779,294
Marketing revenues 5,802,504 3,228,875 2,377,469
Intersegment revenues - - -
Other income 278,580 721,737 217,052
------- ------- -------
Total 24,223,918 20,819,557 26,373,815
---------- ---------- ----------
Segment results
---------------
Operating expenses (2,124,078) (2,329,130) (3,775,334)
Production taxes (1,036,729) ( 883,768) (1,023,049)
Exploration costs (552,869) (1,039,297) (1,318,323)
Depreciation, depletion and amortisation (2,577,882) (2,566,920) (4,019,532)
Dismantlement (103,569) (90,367) (126,139)
Impairment losses related to property, plant and
equipment - (99,675) -
Crude oil and product purchases (5,097,765) (2,453,312) (2,326,338)
Selling and administrative expenses (456,002) (615,389) (1,006,540)
Other (217,599) (517,876) (30,866)
Interest income 236,624 317,706 147,870
Interest expense (475,004) (116,634) (294,792)
Exchange (loss)/gain, net 381,336 235,409 (113,814)
Investment income - 220,650 193,277
Share of profit of an associate 218,326 89,963 165,387
Non-operating (loss)/gain, net (196,031) 34,941 (71,379)
Tax (1,926,076) (3,048,227) (3,541,416)
---------- --------- ---------
Net profit 10,296,600 7,957,631 9,232,827
---------- --------- ---------
Other information
-----------------
Segment assets 32,126,378 43,857,658 60,558,328
Investment in an associate 471,027 461,990 537,377
Total assets 32,597,405 44,319,648 61,095,705
Segment liabilities (16,475,602) (11,009,142) (20,527,217)
Capital expenditures 4,584,343 4,338,738 7,205,225
========= ============ =========
F-25
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
7. 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 is an oil and gas entity mainly engaged in the exploration,
development and production of crude oil and natural gas offshore China.
Approximately 86% of the total revenue of the Group is contributed by PRC
customers, therefore, the Group's activities are conducted predominantly
in the PRC. An analysis by geographical segment is as follows:
PRC Outside PRC
------------------------------------------- ----------------------------------------
2000 2001 2002 2000 2001 2002
---------- ---------- ---------- --------- --------- -----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
External sales 17,559,042 18,104,658 22,781,301 6,664,876 2,714,899 3,592,514
Segment assets 32,432,338 43,783,409 50,647,452 165,067 536,239 10,448,253
Capital expenditures 4,566,554 4,311,241 6,453,798 17,789 27,497 751,427
Total
--------------------------------------------
2000 2001 2002
---------- ---------- ----------
RMB'000 RMB'000 RMB'000
External sales 24,223,918 20,819,557 26,373,815
Segment assets 32,597,405 44,319,648 61,095,705
Capital expenditures 4,584,343 4,338,738 7,205,225
(c) An analysis of sales to the major customers by business segment is as
follows:
2000 2001 2002
---------- --------- ----------
RMB'000 RMB'000 RMB'000
Production sharing contracts
China Petroleum & Chemical Corporation 1,850,239 2,861,847 3,707,536
PetroChina Company Limited 690,853 1,126,127 1,187,571
Castle Peak Power Company Limited 1,199,090 1,205,649 1,247,639
--------- --------- ---------
3,740,182 5,193,623 6,142,746
--------- --------- ---------
Independent operations
China Petroleum & Chemical Corporation 4,474,822 3,420,685 3,183,341
PetroChina Company Limited 767,576 194,460 -
--------- --------- ---------
5,242,398 3,615,145 3,183,341
--------- --------- ---------
8,982,580 8,808,768 9,326,087
========= ========= =========
8. OIL AND GAS SALES
2000 2001 2002
---------- --------- ----------
RMB'000 RMB'000 RMB'000
Gross sales 21,747,888 19,663,251 26,086,646
Royalties ( 208,885) ( 283,014) ( 464,113)
PRC government share oil ( 2,719,680) ( 1,819,449) ( 1,843,239)
--------- --------- ---------
18,819,323 17,560,788 23,779,294
========= ============ ============
F-26
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
9. MARKETING PROFIT
2000 2001 2002
---------- --------- ----------
RMB'000 RMB'000 RMB'000
Marketing revenues 5,126,015 2,537,032 2,377,469
Crude oil and product purchases ( 5,097,765) ( 2,453,312) ( 2,326,338)
-------------- -------------- --------------
28,250 83,720 51,131
============== ============== ===============
10. SELLING AND ADMINISTRATIVE EXPENSES
2000 2001 2002
---------- --------- ----------
RMB'000 RMB'000 RMB'000
Salary and staff benefits 172,593 228,782 390,376
Utility and office expenses 70,069 89,462 100,502
Recovery of doubtful accounts (57,658) (4,966) -
Transportation and entertainment 60,682 64,923 64,319
Rentals and maintenance 89,184 121,483 75,738
Selling expenses 36,481 38,069 38,548
Other 84,651 77,636 337,057
---------- ------------ ---------
456,002 615,389 1,006,540
========== ============ ==========
11. INTEREST EXPENSES
2000 2001 2002
---------- --------- ----------
RMB'000 RMB'000 RMB'000
Interest on bank loans which are:
- wholly repayable within five years 241,749 219,045 177,156
- not wholly repayable within five years 191,755 81,634 -
Interest expense to the parent company 41,500 8,415 -
Interest on long-term guaranteed notes - - 215,028
Other borrowing costs - 6,510 12,426
---------- ---------- ----------
Total interest 475,004 315,604 404,610
Less: Amount capitalised in property, plant
and equipment - ( 198,970) ( 187,714)
---------- ---------- ----------
475,004 116,634 216,896
Other finance costs:
Increase in discounted amount of provisions arising
from the passage of time (note 28) - - 77,896
---------- ---------- ----------
475,004 116,634 294,792
========== ========== ==========
The interest rates used for interest capitalisation represented
the cost of capital from raising the related borrowings and
varied from 2.35% to 9.15% per annum for the year ended
December 31, 2002 (2001: 2.35% to 9.15%, 2000: Nil).
F-27
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
12. DIRECTORS' REMUNERATION
Directors' remuneration disclosed pursuant to the Listing Rules
and Section 161 of the Companies Ordinance is as follows:
2000 2001 2002
---------- --------- ----------
RMB'000 RMB'000 RMB'000
Fees for executive directors - - -
Fees for non-executive directors - 890 890
Other emoluments for executive directors
- Basic salaries and allowances 400 6,106 6,654
- Bonus 440 560 1,109
- Pension scheme contribution 160 207 214
- Other 1,500 1,500 1,500
The number of directors whose remuneration fell within the following bands is as follows:
Number of Directors
------------------------------------------------
2000 2001 2002
--------------- --------------- -----------
Nil to HK$1,000,000 7 6 8
HK$1,000,001- HK$1,500,000 - - -
HK$1,500,001- HK$2,000,000 - 2 2
HK$2,000,001- HK$2,500,000 - - 1
HK$2,500,001- HK$3,000,000 - 1 -
--------------- ---------------- -------------
7 9 11
=============== ================ =============
There was no arrangement under which a director waived or
agreed to waive any remuneration during the years ended December 31, 2002,
2001 and 2000.
13. FIVE HIGHEST PAID INDIVIDUALS
The five highest paid individuals during the year are as follows:
2000 2001 2002
--------------- --------------- -----------
RMB'000 RMB'000 RMB'000
Basic salaries and allowances 400 7,280 8,227
Bonus 440 1,280 2,518
Pension scheme contributions 160 416 505
Other 1,500 1,500 2,732
Number of directors 5 4 4
Number of employees - 1 1
F-28
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
13. FIVE HIGHEST PAID INDIVIDUALS (CONT'D)
The number of highest paid individuals whose remuneration fell
within the following bands is as follows:
Number of Senior Executives
--------------------------------------------
2000 2001 2002
----------- ----------- -------------
Up to HK$1,000,000 5 1 1
HK$1,500,001 - HK$2,000,000 - 2 2
HK$2,500,001 - HK$3,000,000 - 2 1
HK$4,500,001 - HK$5,000,000 - - 1
----------- ----------- ------------
5 5 5
=========== =========== ============
14. 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 operate. 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.
Moreover, CNOOC China Limited was entitled to a 50% reduction of
enterprise income tax for three years until end of year 2000.
Starting from January 1, 2001, CNOOC China Limited is subject to
enterprise income tax at the normal rate of 30%.
The Company's subsidiary in Singapore, China Offshore Oil
(Singapore) International Pte. Ltd., is subject to income tax at
the rate of 10% and 26%, for its oil trading activities and other
income generating activities respectively. The Company's
subsidiaries owning interests in oil properties in Indonesia
along the Malacca Strait are subject to corporate and dividend
tax of 44%. The nine subsidiaries of Repsol-YPF, S.A. in
Indonesia acquired by the Company during the year are all subject
to corporate and branch profit tax at a rate of 48%. All of the
Company's other subsidiaries are not subject to any income taxes
in their respective jurisdictions for the year presented.
F-29
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
14. TAX (CONT'D)
(i) Income tax (cont'd)
An analysis of the provision for tax in the consolidated income
statement was as follows:
2000 2001 2002
--------- ----------- -------
RMB'000 RMB'000 RMB'000
Overseas income taxes
- Current 43,873 20,401 406,493
- Deferred - - 26,094
PRC enterprise income tax
- Current 1,600,608 2,715,409 2,786,938
- Deferred 281,595 312,417 321,891
----------- ----------- ----------
Tax charge for the year 1,926,076 3,048,227 3,541,416
=========== =========== ==========
With the tax holiday exemption, current income tax liabilities of
our subsidiary in the PRC were reduced by approximately
RMB1,920,730,000 for the year ended December 31, 2000. The tax
holiday exemption also increased the net income per share by
RMB0.30 for the year ended December 31, 2000.
The reconciliation of the statutory PRC enterprise income tax
rate to the effective income tax rate of the Group was as
follows:
2000 2001 2002
-------------- ------------- --------------
% % %
Statutory PRC enterprise income tax rate 33.0 33.0 33.0
Effect of tax holiday (15.0) - -
Effect of tax exemption granted (3.0) (3.0) (3.0)
Effect of future tax rate changes on originating
timing differences 1.2 - -
Effect of different tax rates for overseas
subsidiaries 0.3 (1.2) 0.2
Tax effect of additional depreciation on
revaluation and other permanent differences (0.7) (1.1) (0.4)
Tax credit from government - - (2.1)
-------------- ------------ --------------
Effective income tax rate 15.8 27.7 27.7
============== ============ ===============
F-30
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
14. TAX (CONT'D)
(i) Income tax (cont'd)
The tax effect of significant timing differences of the Group was
as follows:
2001 2002
---------------- ----------
RMB'000 RMB'000
Deferred tax assets
- Provision for retirement and termination benefits - 86,602
- Provision for dismantlement 479,439 671,796
- Provision for impairment of property, plant and
equipment and write-off of unsuccessful
exploratory drillings 1,880,791 933,636
--------- ----------
2,360,230 1,692,034
--------- ----------
Deferred tax liabilities
- Accelerated amortisation allowance for oil and gas
properties (4,123,867) (7,833,190)
---------- ----------
Net deferred tax liabilities (1,763,637) (6,141,156)
=========== ===========
There were no significant unprovided deferred taxes in respect of the year (2001: Nil ).
(ii) Other taxes
The Company's PRC subsidiary pays the following 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.
15. DIVIDENDS
2000 2001 2002
---------- ----------- ----------
RMB'000 RMB'000 RMB'000
Final - HK$0.15 (2001: Nil; 2000: RMB0.98)
per ordinary share 6,426,424 - 1,306,740
Interim - HK$0.11 (2001: HK$0.10; 2000: Nil)
per ordinary share - 871,194 958,314
------------ ----------- -----------
6,426,424 871,194 2,265,054
============= =========== ===========
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 and financial condition 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
company. As the controlling shareholder, CNOOC will be able to influence
the Company's dividend policy.
F-31
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
15. DIVIDENDS (CONT'D)
Cash dividends to the shareholders in Hong Kong will be paid in Hong Kong
dollars and dividends to the ADS 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 ADSs.
On December 20, 2000, our board of directors proposed a dividend of
RMB0.98 per share, totalling approximately RMB6,426,424,000, to our
shareholders for the year ended December 31, 2000. The dividend
distribution was approved by the shareholders in their annual general
meeting held on February 4, 2001.
On August 27, 2001, the board of directors declared a 2001 interim
dividend of HK$0.10 per share, totalling approximately RMB871,194,000 to
its shareholders, which was paid in October 2001.
On March 27, 2002, the board of directors proposed a final dividend of
HK$0.15 per share, totalling approximately RMB1,306,740,000 to its
shareholders for the year ended December 31, 2001. The dividend
distribution was approved by the shareholders in an annual meeting held
on June 6, 2002 and the dividend was paid in June 2002. On August 23,
2002, the board of directors declared an interim dividend of HK$0.11 per
share, totalling approximately RMB958,314,000 to its shareholders.
16. EARNINGS PER SHARE AND PER ADS
The calculations of basic and diluted earnings per share are based on:
2000 2001 2002
------------------- ------------------- -----------------
Earnings
--------
Net profit attributable to shareholders,
used in the basic and diluted earnings
per share calculations RMB10,296,600,000 RMB7,957,631,000 RMB9,232,827,000
Shares
------
Weighted average number of ordinary shares
in issue during the year used in basic
earnings per share calculation 6,331,114,421 7,941,383,305 8,214,165,655
Weightedaverage number of ordinary shares
assumed issued at no consideration on
deemed exercise of all share options
outstanding during the year - 905,498 5,119,729
------------------- ------------------- ---------------------
Weighted average number of ordinary shares
used in diluted earnings per share
calculation 6,331,114,421 7,942,288,803 8,219,285,384
=================== =================== ======================
Net income per ADS for the three years ended December 31, 2002
has been computed by dividing net income by the number of ADS outstanding.
Each ADS represented 20 shares.
F-32
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
17. PROPERTY, PLANT AND EQUIPMENT, NET
Movements in property, plant and equipment were:
2002
------------------------------------------------------------------------
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 the year
As previously reported 41,177,459 824,781 57,900 42,060,140
Cumulative effect of change in
accounting policy (Note 3) 1,515,088 - - 1,515,088
----------------- ----------------- ------------------- ---------------
At beginning of year as restated 42,692,547 824,781 57,900 43,575,228
Additions 7,419,956 - 37,653 7,457,609
Acquisition of subsidiaries 8,646,487 - - 8,646,487
Disposals and write-offs ( 438,011) - ( 2,011) ( 440,022)
Exchange realignment 801 - 178 979
----------------- ----------------- ------------------- ---------------
End of year 58,321,780 824,781 93,720 59,240,281
================= ================= =================== ===============
Analysis of cost or valuation
At cost 58,321,780 - 93,720 58,415,500
At revaluation - 824,781 - 824,781
----------------- ----------------- ------------------- ---------------
58,321,780 824,781 93,720 59,240,281
================= ================= =================== ===============
Accumulated depreciation, depletion and
amortisation:
At beginning of the year
As previously reported ( 18,154,653) ( 55,653) ( 22,335) ( 18,232,641)
Cumulative effect of change in
accounting policy (Note 3) ( 778,240) - - ( 778,240)
----------------- ----------------- ------------------- ---------------
At beginning of year as restated ( 18,932,893) ( 55,653) ( 22,335) ( 19,010,881)
Depreciation provided during the year ( 4,126,625) ( 25,374) ( 7,110) ( 4,159,109)
Disposals - - 1,777 1,777
Exchange realignment ( 82) - ( 166) ( 248)
----------------- ----------------- ------------------- ---------------
End of year ( 23,059,600) ( 81,027) ( 27,834) ( 23,168,461)
================= ================= =================== ===============
Net book value:
Beginning of year as restated 23,759,654 769,128 35,565 24,564,347
================= ================= =================== ===============
End of year 35,262,180 743,754 65,886 36,071,820
================= ================= =================== ===============
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 58,321,780 550,110 93,720 58,965,610
Accumulated depreciation, depletion and
amortisation ( 23,059,600) ( 55,131) ( 27,834) ( 23,142,565)
----------------- ----------------- ------------------- ---------------
35,262,180 494,979 65,886 35,823,045
================= ================= =================== ===============
F-33
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
17. PROPERTY, PLANT AND EQUIPMENT, NET (CONT'D)
2001
------------------------------------------------------------------------
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 37,319,924 824,781 39,837 38,184,542
Additions 4,320,675 - 18,063 4,338,738
Disposals and write-offs ( 463,140) - - ( 463,140)
----------------- ---------------- -------------------- --------------
End of year 41,177,459 824,781 57,900 42,060,140
----------------- ---------------- -------------------- --------------
Analysis of cost or valuation
At cost 41,177,459 - 57,900 41,235,359
At revaluation - 824,781 - 824,781
----------------- ---------------- -------------------- --------------
41,177,459 824,781 57,900 42,060,140
================= ================ ==================== ===============
Accumulated depreciation,
depletion and amortisation:
At beginning of year ( 15,482,082) ( 30,280) ( 17,805) ( 15,530,167)
Depreciation provided during the year ( 2,572,896) ( 25,373) ( 4,530) ( 2,602,799)
Impairment during the year
recognised in income statement ( 99,675) - - ( 99,675)
----------------- ---------------- -------------------- --------------
End of year ( 18,154,653) ( 55,653) ( 22,335) ( 18,232,641)
================= ================ ==================== ===============
Net book value:
Beginning of year 21,837,842 794,501 22,032 22,654,375
================= ================ ==================== ===============
End of year 23,022,806 769,128 35,565 23,827,499
================= ================ ==================== ===============
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 41,177,459 550,110 57,900 41,785,469
Accumulated depreciation,
depletion and amortisation ( 18,154,653) ( 38,914) ( 22,335) ( 18,215,902)
----------------- ---------------- -------------------- --------------
23,022,806 511,196 35,565 23,569,567
================= ================ ==================== ===============
Impairment loss for the year ended December 31, 2001, represented the
estimated impairment resulting from downward revision of the reserves of
certain oil fields.
Land and buildings are held outside Hong Kong with lease terms of 50
years.
F-34
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
The land and buildings were revalued by an independent valuer, Sallmanns
(Far East) Limited, Chartered Surveyors (the "Valuer") as of 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 were previously granted by the
PRC government at no cost.
The revaluation surplus of approximately RMB104,073,000 arising from the
revaluation of the land and buildings as at December 31, 2000 has been
recorded by us.
F-35
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
18. INVESTMENT IN AN ASSOCIATE
Investment in an associate represents 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 sales in the South Yellow Sea
and East China Sea areas. The issued and paid-up capital of SPC is
RMB900,000,000.
2001 2002
------------------------- --------------------------
RMB'000 RMB'000
Unlisted shares, at cost 270,000 270,000
Accumulated share of profit 290,990 357,377
Dividends received ( 99,000) ( 90,000)
---------- ----------
461,990 537,377
========== ==========
The directors are of the opinion that the underlying value of the
investment in an associate is not less than the carrying amount of the
associate as of December 31, 2002 and 2001.
19. ACCOUNTS RECEIVABLE, NET
2001 2002
------------------------- --------------------------
RMB'000 RMB'000
Trade receivables 1,204,907 3,063,266
Less: Provision for doubtful accounts ( 10,727) -
------------ ---------------
1,194,180 3,063,266
============ ===============
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 of December 31, 2002 and 2001, substantially all the
accounts receivable were aged within six months.
20. INVENTORIES AND SUPPLIES
2001 2002
------------------------- --------------------------
RMB'000 RMB'000
Materials and supplies 428,991 585,431
Oil in tanks 198,346 263,174
----------- --------------
627,337 848,605
============ ==============
F-36
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
21. SHORT-TERM INVESTMENTS
As of December 31, 2002 and 2001, short-term investments mainly
represented investments in liquidity funds and were stated at fair value
at the balance sheet date.
Details were as follows:
2001 2002
------------------------- --------------------------
RMB'000 RMB'000
Liquidity funds 7,675,622 5,537,191
Corporate bonds 1,177,991 951,876
Common stock 42,191 42,211
----------- ----------
8,895,804 6,531,278
=========== ===========
22. ACCOUNTS PAYABLE
As of December 31, 2002 and 2001, substantially all the accounts payable
were aged within six months.
23. OTHER PAYABLES AND ACCRUED LIABILITIES
2001 2002
------------------------- --------------------------
RMB'000 RMB'000
Accrued payroll and welfare payable 132,773 149,501
Provision for retirement and termination benefit - 211,321
Accrued expenses 434,766 793,823
Advances from customers 86,301 60,101
Royalties payable - 208,214
Other payables 159,306 289,448
---------- ----------
813,146 1,712,408
=========== ==========
As of December 31, 2002, deferred revenue from gas sales contract
amounted to approximately RMB5,582,000 (2001: RMB5,581,000) and was
included in other payables.
F-37
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
24. LONG-TERM BANK LOANS
As of December 31, 2002 and 2001, 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 2001 2002
---------------------------------------------------- ------------------- ---------------
RMB'000 RMB'000
RMB denominated Floating prevailing market rate adjusted
bank loans annually with maturities through 2006 670,000 -
Fixed interest rate at 5.94% per annum
through 2005 66,270 57,270
US$ denominated Floating LIBOR rate with maturities
bank loans through 2003 1,177,761 259,907
Fixed interest rate of 9.15% per annum with
maturities through 2006 827,660 827,730
Japanese Yen Fixed interest rate ranging from 2.35% to
denominated 5.15% per annum, with maturities through 2007 1,745,848 93,704
bank loans ------------------- ---------------
4,487,539 1,238,611
Less: current portion of long-term bank loans ( 1,231,840) ( 297,518)
------------------- ---------------
3,255,699 941,093
=================== ===============
As of December 31, 2002, LIBOR was approximately 1.4% per annum (2001:
2.0% per annum).
As of December 31, 2002, all the bank loans of the Group were unsecured
and approximately RMB259,907,000 (2001: RMB991,537,000) of the
outstanding borrowings were guaranteed by CNOOC.
The maturities of long-term bank loans are as follows:
2001 2002
--------------------- -------------------
RMB'000 RMB'000
Balances due:
- Within one year 1,231,840 297,518
- After one year but within two years 794,593 27,541
- After two years but within three years 462,564 48,341
- After three years but within four years 483,364 846,471
- After four years but within five years 1,231,423 18,740
--------------------- -------------------
4,203,784 1,238,611
- More than five years 283,755 -
--------------------- -------------------
4,487,539 1,238,611
Amount due within one year shown under current liabilities (1,231,840) (297,518)
--------------------- -------------------
3,255,699 941,093
===================== ==================
F-38
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
24. LONG-TERM BANK LOANS (CONT'D)
Supplemental information with respect to long-term bank loans:
Maximum
Weighted amount Average amount Weighted average
For the year ended Balance at average interest outstanding outstanding interest rate
December 31, year end rate at year end during the year during the year* during the year**
--------------------- ------------- ---------------------- ------------------- ------------------- ----------------------
RMB'000 RMB'000 RMB'000
2000 5,746,377 6.28% 8,908,583 7,017,601 6.18%
2001 4,487,539 5.03% 5,746,377 5,116,958 5.66%
2002 1,238,611 7.19% 4,487,539 2,863,075 6.11%
* The average amount outstanding is computed by dividing the total of
outstanding principal balances as of January 1 and December 31 by two.
** The weighted average interest rate is computed by dividing the total
of weighted average interest rates as of January 1 and December 31 by
two.
25. 6.375% 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$500,000,000 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.
26. BALANCES WITH THE PARENT COMPANY
As of December 31, 2002 and 2001, the balances with CNOOC were unsecured,
interest-free and repayable on demand.
27. RELATED PARTY TRANSACTIONS
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, the provision of bank guarantees and
various other commercial arrangements.
F-39
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
27. RELATED PARTY TRANSACTIONS (CONT'D)
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:
Notes 2000 2001 2002
-------------------- ----------- -----------
RMB'000 RMB'000 RMB'000
Included in exploration costs:
Provision of geological and geophysical services (ii) 55,295 139,659 100,738
Provision of research and development services (iii) 109,880 89,999 95,507
Provision of drilling services (ii) 106,150 389,847 396,814
Included in operating expenses:
Provision of technical services (ii) 254,276 44,044 68,130
Provision of research and development services (iii) 51,853 29,587 46,226
Provision of oil transportation services (i) 171,490 68,399 200,709
Provision of production related services (i) 597,579 579,207 208,730
Provision of materials, utilities and ancillary services (i) 163,828 148,149 470,030
Included in selling and administrative expenses:
Rental of office lease (iv) 49,089 45,524 54,421
Provision of research and development services (iii) - 40,763 25,621
Provision of other ancillary services 31,748 87,557 110,407
Included in interest expense:
Interest income from a related company 25 - -
Interest expense to CNOOC 41,500 8,415 -
Capitalised under property, plant and equipment:
Provision of oil and gas property construction services (ii) 865,549 1,341,545 1,837,573
Provision of drilling services (ii) 445,414 285,834 591,749
Provision of well measurement services (ii) 140,065 97,633 83,883
(i) Provision of 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 for a term of three years from September 9, 1999.
F-40
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
27. RELATED PARTY TRANSACTIONS (CONT'D)
(i) Provision of materials, utilities and ancillary services (cont'd)
The materials, utilities and ancillary services are provided at:
- state-prescribed prices; or
- where there is no state-prescribed price, 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,
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.
On December 5, 2002, the Group has renewed the agreement for the
term of three years from December 31, 2002.
(ii) Technical services
CNOOC China Limited has entered into technical service agreements
with specialised companies formed by CNOOC.
According to the agreements, the Group uses the technical services
provided by these specialised companies, 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.
The technical services are provided by the related companies at
prices on an arms-length negotiation on normal commercial terms or
on terms no less favourable than those available to independent
third parties, under prevailing market conditions.
F-41
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
27. RELATED PARTY TRANSACTIONS (CONT'D)
(iii) Research and development services
Under the terms of a general research and development services
agreement with CNOOC's subsidiary, China Offshore Oil Research
Centre (the "Centre"), the Group pays the Centre for a term of
three years from September 9, 1999, with an annual amount of
RMB110,000,000, for the provision of such services, including:
- geophysical exploration services;
- seismic data processing;
- comprehensive exploration research services; and
- information technology services.
On December 5, 2002, the Company renewed the agreement for a term
of three years from December 31, 2002. Under the agreement, the
Group will pay the Centre RMB140,000,000, RMB150,000,000 and
RMB160,000,000 respectively.
(iv) Lease agreements
The Group has entered into lease agreements with affiliates of
CNOOC for the leasing of various office, warehouse and residential
premises for a three-year term commencing September 9, 1999. The
lease charges were based on the prevailing market rates at the
inception of the leases.
On December 5, 2002, the Group has renewed the lease agreements
for the terms of three years from December 31, 2002.
((v) Sales of crude oil, condensate oil and liquefied petroleum gas
The Group sells crude oil, condensate 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, 2002, the total sales amounted to approximately RMB
4,361,852,000 (2001: RMB1,814,197,000, 2000: RMB507,677,000).
As of December 31, 2002, the Group had cash and cash equivalents and time
deposits aggregating RMB2,740 million (2001: Nil) placed with CNOOC
Finance Corporation Limited ("CNOOC Finance"), a wholly-owned subsidiary
of CNOOC. CNOOC Finance is a non-bank finance company supervised by the
People's Bank of China ("PBOC") and the Company is one of its customers.
The interest rates offered by CNOOC Finance were same as the rates
promulgated by the PBOC which were applicable to accounts deposits with
PRC banks or finance companies. The interest income received for the year
ended 31 December 2002 was approximately RMB3,516,000 (2001: Nil, 2000:
Nil).
F-42
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
27. RELATED PARTY TRANSACTIONS (CONT'D)
In addition to the recurring transactions described above, pursuant to a
conditional agreement dated August 27, 2001, the Group will acquire
interests in certain oil and natural gas fields in the Xihu Trough in the
East China Sea of the PRC from CNOOC for a total consideration of
US$45,000,000. As of December 31, 2002, the transaction had not been
completed and the legal title of the reserves had not been passed to the
Group. The amount paid for the interests is included in the property,
plant and equipment in the balance sheet as of December 31, 2002.
28. PROVISION FOR DISMANTLEMENT
Provision for dismantlement represents the estimated costs of dismantling
offshore oil platforms and abandoning oil and gas properties. Provision
for dismantlement has been classified under long-term liabilities. As
detailed in Note 3 above, the Group changed its method of accounting for
the provision for dismantlement during the year. As such, the associated
cost is capitalised and the liability is discounted and an accretion
expense is recognised during 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 17. The prior year income statement charges were calculated using
the unit-of-production method on the estimated total undiscounted
dismantlement costs.
The details of the provision for dismantlement were as follows:
2001 2002
-------------------- -----------------------
RMB'000 RMB'000
At beginning of year:
As previously reported 1,507,763 1,598,130
Cumulative effect of change in accounting policy (Note 3) - 310,911
-------------------- -----------------------
As restated 1,507,763 1,909,041
Additional provision based on unit-of-production method 90,367 -
Additions during the year and capitalised in oil and gas
properties - 252,383
Increase in discounted amount of provisions arising from
the passage of time - 77,896
------------------ ----------------------
End of year 1,598,130 2,239,320
=================== ========================
29. SHARE CAPITAL
Shares
Number of Shares Share capital
---------------- -------------
HK$'000
Authorised:
Ordinary shares of HK$0.10 each at
December 31, 2002 and 2001 15,000,000,000 1,500,000
================= =============
F-43
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
29. SHARE CAPITAL (CONT'D)
Shares (cont'd)
Share capital
Number of Shares capital equivalent of
Shares HK$'000 RMB'000
--------------- --------------- --------------
Issued and fully paid:
Ordinary shares of HK$0.10 each at January 1, 2001 6,557,575,755 655,758 701,181
Issue of shares during the initial public offering (i) 1,656,589,900 165,659 175,797
--------------- --------------- --------------
At December 31, 2001 8,214,165,655 821,417 876,978
============== =============== ==============
Ordinary shares of HK$0.10 each at January 1 and
December 31, 2002 8,214,165,655 821,417 876,978
(i) The Company completed its initial public offering in 2001 and the
details were as follow:
- issued 1,442,426,000 shares of HK$0.10 each at HK$6.01 per
share and in the form of ADSs were listed on The Stock Exchange
of Hong Kong Limited ("HKSE") and the New York Stock Exchange
on February 28, 2001 and February 27, 2001, respectively; and
- issued 214,163,900 shares of HK$0.10 each at HK$6.01 per share
on March 23, 2001 upon the exercise of an over-allotment option
by the underwriters of the global offering.
The net proceeds from the initial public offering (including the
exercise of the over-allotment option) amounted to
approximately RMB10,101,564,000, after deducting expenses of
approximately RMB288,058,000.
Share options
The Company has share option schemes which provide for the grant of
options to the Company's senior management. Under these share option
schemes in accordance with SSAP 34, 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 scheme provide for 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 scheme 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 4,620,000 shares have been granted;
2. the subscription price per share is HK$5.95; 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.
F-44
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
29. SHARE CAPITAL (CONT'D)
Share options (cont'd)
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 8,820,000 shares have been granted;
2. the subscription price per share is HK$6.16; and
3. 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 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. 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 months period up to the next grant shall not exceed
1% of the total issued share capital of the Company from time to time.
F-45
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
29. SHARE CAPITAL (CONT'D)
Share options (cont'd)
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
grant, except that such price may not be set below a minimum price which
is the highest of:
1. the nominal value of a share;
2. 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
3. the closing price of the shares on the HKSE as stated in the HKSE's
quotation sheets on the date of grant of the option.
The period under which an option may be exercised is as follows:
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 the date on which the
option is granted.
No options granted under the share option scheme and the pre-global
offering share option scheme have been exercised since the date 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,
2002 was 9,864,167.
F-46
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
30. RESERVES
According to the laws and regulations of the PRC and articles of
association of CNOOC China Limited, CNOOC China Limited is required to
provide for certain statutory funds, namely, general reserve fund and
staff and workers' bonus and welfare funds, which are appropriated from
net profit and 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 staff and workers' bonus and welfare
funds, which is determined at the discretion of CNOOC China Limited's
directors, is charged to expense 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 increase capital.
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 of December 31, 2002, the general reserve fund appropriated amounted
to RMB2,232,410,000 (2001: RMB1,535,360,000), representing approximately
22.3% (2001: 15.4%) of the total registered capital of CNOOC China
Limited.
As of December 31, 2002 and 2001, the distributable profits of the
Company amounted to approximately RMB 2,939,757,000 and RMB220,127,000
respectively.
Included in retained earnings is an amount of RMB456,377,000 (2001:
RMB311,990,000), being the retained earnings attributable to an
associate.
The cumulative translation reserves and revaluation reserves have been
established and will be dealt with in accordance with the accounting
policies adopted for foreign currency translation and the revaluation of
land and buildings.
31. 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 equal
to their basic salaries at their retirement dates. 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 12% to 22.5% of the
employees' basic salaries.
The contribution made by the Group to the PRC government pension plan for
the year ended December 31, 2002 amounted to approximately RMB7,042,000
(2001: RMB6,392,000, 2000: RMB12,842,000).
The Company is required to make contributions to a defined contribution
of a mandatory provident fund at a rate of 5% of the basic salaries for
all full time employees in Hong Kong. The related pension costs are
treated expenses as incurred.
F-47
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
31. RETIREMENT AND TERMINATION BENEFITS (CONT'D)
The Group provides retirement and termination benefits for all local
employees in Indonesia in accordance with Indonesia labour law, while the
employee benefits provides to expatriate staff in accordance with the
relevant employment contracts. The Company has adopted an accounting policy
to record liabilities for the retirement and termination benefits. The
provisions for retirement and termination benefits in Indonesia for the
year ended December 31, 2002 amounted to approximately RMB46,350,000 (2001:
Nil, 2000: Nil).
32. NOTES TO THE CASH FLOW STATEMENT
(a) Reconciliation of profit before tax to cash generated from operations
2000 2001 2002
------------ ------------ ------------
RMB'000 RMB'000 RMB'000
Profit before tax 12,222,676 11,005,858 12,774,243
Adjustments for:
Interest income ( 236,624) ( 317,706) ( 147,870)
Interest expense 475,004 116,634 294,792
Exchange losses/(gains), net ( 324,178) ( 261,305) 113,814
Share of profit of an associate ( 218,326) ( 89,963) ( 165,387)
Short-term investment income -- ( 220,650) ( 193,277)
Depreciation, depletion and amortisation 2,577,882 2,566,920 4,019,532
Provision for impairment of property, plant and
equipment -- 99,675 --
Recovery of doubtful accounts ( 57,658) ( 4,966) --
Loss on disposals and write-off of property,
plant and equipment 220,146 456,827 437,799
Dismantlement 103,569 90,367 126,139
Amortisation of discount of long-term
guaranteed notes -- -- 6,100
------------ ------------ -------------
Operating cash flows before movements in
working capital 14,762,491 13,441,691 17,265,885
Decrease in accounts receivables 1,146,613 726,976 497,959
(Increase)/decrease in inventories and supplies ( 2,438) 35,422 ( 20,211)
Increase in other current assets ( 39,386) ( 447,473) ( 705,664)
Increase in amounts due from related
companies -- -- ( 276,771)
Increase/(decrease) in accounts payable, other
payables and accrued liabilities ( 1,440,278) 379,233 353,452
Increase/(decrease) in other taxes payable 2,701 ( 110,867) 73,551
Increase in amounts due to related companies -- -- 73,769
------------ ------------ -------------
Cash generated from operations 14,429,703 14,024,982 17,261,970
============ ============ =============
F-48
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
32. NOTES TO THE CASH FLOW STATEMENT (CONT'D)
(b) Acquisition of subsidiaries
2000 2001 2002
----------- ----------- -----------
RMB'000 RMB'000 RMB'000
Net assets acquired:
Property, plant and equipment, net -- -- 8,646,487
Other current assets -- -- 35,175
Inventories and supplies -- -- 187,619
Accounts receivable -- -- 2,367,045
Cash and bank balances -- -- 1,652
Accounts payable -- -- ( 1,577,214)
Other payables and accrued liabilities -- -- ( 952,911)
Tax payable -- -- ( 70,247)
Deferred tax -- -- ( 3,901,780)
----------- ----------- ------------
-- -- 4,735,826
=========== =========== ============
Satisfied by:
Cash -- -- 4,735,826
=========== =========== ============
An analysis of the net outflow of cash and cash equivalents in
respect of the acquisition of subsidiaries is as follows:
2000 2001 2002
----------- ----------- -----------
RMB'000 RMB'000 RMB'000
Cash consideration -- -- 4,735,826
Cash and bank balances acquired -- -- ( 1,652)
----------- ----------- ------------
Net outflow of cash and cash equivalents in
respect of the acquisition of subsidiaries -- -- 4,734,174
=========== =========== ============
On April 19, 2002, the Group acquired nine subsidiaries of
Repsol-YPF, S.A. which held a portfolio of operated and non-operated
interests in oil and gas production sharing and technical assistance
contracts in contract areas located offshore and onshore Indonesia.
Further details of the transaction are included in note 5 to the
financial statements.
The subsidiaries acquired during the year contributed RMB3,317
million to turnover and RMB464 million to the consolidated profit
after tax for the year ended December 31, 2002.
(c) Major non-cash transaction
The cash generated from operations of RMB17,634,448,000 did not take
into account of a transfer of prepayment of RMB372,479,000 recorded
in 2001 to property, plant and equipment relating to acquisition of
interests in certain oil and natural gas fields in the Xihu Trough
in the East China Sea of the PRC from CNOOC for a total
consideration of US$45,000,000.
F-49
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
33. CONTINGENT LIABILITIES
As of December 31, 2002 and 2001, there were no material contingent
liabilities not provided for in the financial statements.
34. COMMITMENTS
(i) Capital commitments
As of 31 December 2002 and 2001, the Group had the following capital
commitments, principally for the construction and purchase of
property, plant and equipment:
2001 2002
-------------- ------------
RMB'000 RMB'000
Contracted for 1,606,700 1,715,173
Authorised, but not contracted for 5,183,690 9,060,722
As of December 31, 2002, the Group had unutilised banking facilities
amounted to approximately RMB31,646,389,000 (2001:
RMB7,599,371,000).
(ii) General research and development commitments
According to the general research and development services agreement
with the Centre renewed on December 5, 2002, the Group agreed to pay
the Centre for a term of three years from December 31, 2002, an
annual amount of RMB140,000,000, RMB150,000,000 and RMB160,000,000
respectively for provision of general geophysical exploration
services, comprehensive exploration research services, information
technology services and seismic data processing. As of December 31,
2002, commitments for research and development services to be
provided by the Centre amounted to approximately RMB450,000,000
(2001: RMB83,382,500).
(iii) Operating lease commitments
Operating lease commitments as of December 31, 2002 amounted to
approximately RMB50,645,000 (2001: RMB94,079,000) and were as
follows:
2001 2002
------------- -----------
RMB'000 RMB'000
Commitment due:
- Within one year 48,789 47,017
- After one year but within two years 45,290 2,131
- After two years but within three years -- 1,497
------------ ----------
94,079 50,645
=========== ==========
F-50
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
34. COMMITMENTS (CONT'D)
(iv) Commitment to invest in an Australian gas project
In August 2001, the Company signed a Memorandum of Understanding to
explore the feasibility of acquiring an equity interest in certain oil
and gas assets in a large natural gas field in Australia, and to
develop the natural gas market in coastal China. In November 2001, the
Company entered into a Heads of Agreement to establish a joint venture
to develop Northwest Shelf gas in Australia. The Company has agreed to
co-invest in the development of Australia's Northwest Shelf gas
project and to produce and process liquefied natural gas to sell to
the China markets, subject to the joint venture successfully bidding
for the contract to supply liquefied natural gas to an import facility
in Guangdong Province, in which CNOOC, the parent company, has an
equity interest.
On October 21, 2002, the Company entered into a definitive agreement
with Northwest Shelf Venture partner to acquire an interest up to
5.56% in the North West Shelf Gas Project ("NWS Gas Project") titles
and assume a 25% interest in the China LNG Joint Venture for a total
consideration of US$366 million.
(v) Commitments to invest in an Indonesian gas project
In September 2002, the Company entered into a Heads of Agreement to
acquire a participating interest in the reserves and upstream
production of the proposed joint venture known as the Tangguh LNG
project of Indonesia ("Tangguh LNG project"). The Heads of Agreement
provides for the Company to acquire from BP an equivalent 12.5% stake
in the Tangguh LNG project for approximately US$275 million through
the acquisition of certain interests in PSCs. 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 LNG Supply Contract to provide up to 2.6 million
tonnes per annum of LNG to the Fujian LNG terminal project in China,
beginning in 2007. Subsequent to December 31, 2002, the Company
completed the acquisition (which was effective as of January 1, 2003)
for a consideration of US$275 million.
In addition, a repurchase agreement was entered into whereby put
options and call options are granted to the Company and the sellers,
respectively, to sell or to repurchase the interests in the
above-mentioned PSCs. The options are exercisable if
1) the LNG Supply Contract is terminated due to the non-satisfaction
of the conditions precedent to the LNG Supply Contract; or
2) the LNG Supply Contract is otherwise legally ineffective
on or before December 31, 2004. The exercise prices of the options are
determined based on the original consideration paid plus adjustments
stipulated in the repurchase agreement.
F-51
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
34. COMMITMENTS (CONT'D)
(vi) Financial instruments
(a) Currency swap contracts
As of December 31, 2002 and 2001, the Group had currency swap
contracts with a financial institution to sell United States
dollars in exchange for Japanese Yen in order to hedge against
future repayments of certain Japanese Yen denominated loans. The
hedged Japanese Yen loans bore interest at fixed rate of 4.5% per
annum. The interest stipulated in the swap contract for the
United States dollars was floating LIBOR rate.
The details are as follows:
2001 2002
Weighted Weighted
average average
Notional contractual Notional contractual
contract amount exchange rate contract amount exchange rate
(JPY'000) (JPY/US$) (JPY'000) (JPY/US$)
Year
2002 271,470 95.00 -- --
2003 271,470 95.00 271,470 95.00
2004 271,470 95.00 271,470 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 amounts 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
RMB1,388,720,000 as of December 31, 2002 and comparably
approximated their book value as of December 31, 2001.
The estimated fair value of 6.375% long-term guaranteed
notes based on current market interest rates was
approximately RMB4,482,378,000 as of December 31, 2002.
F-52
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
35. 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) Interest rate risk
The directors of the Company believe that the exposure to interest
rate risk of financial assets and liabilities as of December 31, 2002
was not significant. The interest rates and terms of repayment of our
long-term bank loans are disclosed in Note 24.
(c) Currency risk
Substantially all of the revenue-generating operations of the Group
are transacted in US$ for overseas sales and RMB for domestic sales.
On January 1, 1994, the PRC government abolished the dual rate system
and introduced single rate of exchange as quoted by the People's Bank
of China. However, the unification of the exchange rate does not imply
free convertibility of RMB into foreign currencies. As foreign
exchange transactions continue to take place either through the
People's Bank of China or other banks authorised to buy and sell
foreign currencies at the exchange rates quoted by the People's Bank
of China, approval of foreign currency payment by the People's Bank of
China or other institution requires submitting a payment application
form together with suppliers' invoices, shipping documents and signed
contracts.
(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-53
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
35. CONCENTRATION OF RISKS (CONT'D)
(e) Customer risk
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.
2000 2001 2002
---- ---- ----
RMB'000 RMB'000 RMB'000
China Petroleum & Chemical Corporation 6,325,061 6,282,532 6,890,877
PetroChina Company Limited 1,458,429 1,320,587 1,187,571
Castle Peak Power Company Limited 1,199,090 1,205,649 1,247,639
36. ADDITIONAL FINANCIAL INFORMATION
As of December 31, 2002, net current assets and total assets
less current liabilities of the Group amounted to approximately
RMB 17,352,044,000 and RMB 53,961,241,000 (2001: RMB
15,638,483,000 and RMB39,927,972,000), respectively.
37. SUBSEQUENT EVENTS
(i) Material acquisition
Subsequent to the year end, on March 7, 2003, the Company entered into
an agreement with BG International Limited ("BG"), a wholly-owned
subsidiary of BG Group, to acquire from BG a 1/12th (8.33%) interest
in the North Caspian Sea Project (the "Project") in Kazakhstan for
US$615 million (subject to certain adjustments). The partners of the
Project include ENI-Agip (operator), BG Group, ConocoPhillips,
ExxonMobil, INPEX, Shell and TotalFinaElf. Completion of the
acquisition is subject to a number of conditions including the wavier
of certain pre-emption rights and receipt of governmental approvals.
(ii) Share Options
On February 24, 2003, the board of directors approved to grant options
in respect of 8,410,000 shares to the Company's senior management
under the share option scheme approved in June 2002. The exercise
price for the options is HK$10.54 per share. Options granted under
this scheme may be exercised, in whole or in part, in accordance with
the following vesting schedule:
- one-third of the shares underlying the options shall vest on the
first anniversary of the date of the grant;
- one-third of the shares underlying to the options shall vest on
the second anniversary of the date of the grant; and
- one-third of the shares underlying the options shall vest on the
third anniversary of the date of the grant.
F-54
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
37. SUBSEQUENT EVENT (CONT'D)
(iii) Dividends
On March 27, 2003, the board of directors proposed a final
dividend of HK$0.15 per share, totalling HK$1,232,124,848
(equivalent of RMB1,307,407,676) and a special dividend of
HK$0.15 per share, totalling HK$1,232,124,848 (equivalent to
RMB1,307,407,676) to its shareholders for the year ended December
31, 2002. The proposed dividend distribution is subject to
shareholders approval in their forth coming annual general
meeting.
38. 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 is based on the revalued
amount. Additional depreciation arising from the revaluation for
the year ended December 31, 2002 was approximately RMB9,156,000
(2001: RMB9,156,000). Under US GAAP, property, plant and
equipment is required to be stated at cost. Accordingly, no
additional depreciation, depletion and amortisation from the
revaluation is recognised under US GAAP.
(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 current
period 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 current period
earnings and included in other comprehensive income.
F-55
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
38. 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
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 was
issued in August 2001 and is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 retains the requirements of
SFAS No. 121 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 held and used
until it is disposed of.
SFAS 144 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.
For the year ended December 31, 2002, there were no impairment
losses recognised under Hong Kong GAAP and US GAAP.
(iv) Stock compensation plans
As described in Note 29 to the financial statements, as of
December 31, 2002, the Group had two stock option plans. The
Group applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for these stock option plans.
Accordingly, compensation costs that have been recognised for the
stock option plans were RMB5,631,500 for the year ended December
31, 2002 (2001: RMB2,755,000). Had compensation costs for the
Group's stock option plans been determined based on the fair
value at the grant dates for awards under the plans consistent
with the method of SFAS No. 123, the Group's net income and
earnings per share for the year ended December 31, 2002 would
have been reduced to the pro forma amounts indicated below:
F-56
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
38. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(a) Net profit and net equity (cont'd)
(iv) Stock compensation plans (cont'd)
Pro forma As reported
-------------------------------------
2001 2002 2002
---------- ---------- ---------
RMB'000 RMB'000 RMB'000
Net income 7,912,150 9,085,917 9,088,371
Earnings per share
- Basic RMB1.00 RMB1.11 RMB1.11
- diluted RMB1.00 RMB1.11 RMB1.11
Weighted average fair value of the options at the grant dates for
awards under the plans was RMB3.10 per share which was estimated
using the Black-Scholes model with the following assumptions:
dividend yield of 2.0%, an expected life of five years; expected
volatility of 44%; and risk-free interest rates of 5.25%.
Weighted average exercise price of the stock options was HK$6.09
per share.
(v) Provision for dismantlement
HK GAAP require the provision of dismantlement to be recorded for
a present obligation whether that obligation is legal or
constructive. The associated cost is capitalised and the
liability is discounted and accretion expense is recognised using
the credit-adjusted risk-free interest rate in effect when the
liability is initially recognised. However, under US GAAP, the
provisions for dismantlement are provided on a unit-of-production
basis over field lives, there is no corresponding tangible fixed
asset.
The impact on the consolidated balance sheet as of December 31,
2002 is summarised below:
Increase (Decrease) in caption heading December 31, 2002
-------------------------------------- -----------------
RMB'000
Property, plant and equipment, net (863,093)
Provision for dismantlement (240,077)
Deferred tax liabilities (186,904)
Reserves (436,112)
F-57
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
38. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(a) Net profit and net equity (cont'd)
Effects on net profit and net equity of differences between Hong
Kong GAAP and US GAAP are summarised below:
Net profit
-----------------------------------------------
2000 2001 2002
-------------- ------------- -------------
RMB'000 RMB'000 RMB'000
As reported under Hong Kong GAAP 10,296,600 7,957,631 9,232,827
Impact of US GAAP adjustments:
- Reversal of additional depreciation, depletion
and amortisation arising from the revaluation surplus
on land and buildings 5,687 9,156 9,156
- Unrealised holding gains from available-for-sale marketable
securities -- ( 43,796) ( 36,965)
- Realised holding gains from available-for-sale marketable
securities -- -- 26,940
- Additional dismantlement based on unit-of-production method -- -- ( 197,079)
- Impact of income tax -- -- 59,124
- Recognition of stock compensation cost -- ( 2,755) ( 5,632)
---------- --------- ---------
As restated under US GAAP 10,302,287 7,920,236 9,088,371
========== ========= =========
Net income per share under US GAAP
- Basic RMB 1.63 RMB 1.00 RMB 1.11
======== ======== ========
- Diluted RMB 1.63 RMB 1.00 RMB 1.11
======== ======== ========
F-58
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
38. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(a) Net profit and net equity (cont'd)
Net equity
-----------------------------
2001 2002
----------- ------------
RMB'000 RMB'000
As reported under Hong Kong GAAP 33,310,506 40,568,488
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 charges arising from the revaluation
surplus on land and buildings 16,739 25,895
- Cumulative adjustment for provision for dismantlement -- ( 436,112)
---------- ----------
As restated under US GAAP 33,052,574 39,883,600
========== ==========
There are no 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, 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.
2000 2001 2002
---------- ----------- -----------
RMB'000 RMB'000 RMB'000
Net income under US GAAP 10,302,287 7,920,236 9,088,371
Other comprehensive income:
Foreign currency translation adjustments (6,350) 702 ( 7,948)
Unrealised gains on short-term investments 43,796 36,965
Less: reclassification adjustment for realised
gains included in net income -- -- ( 26,940)
---------- --------- ---------
Comprehensive income under US GAAP 10,295,937 7,964,734 9,090,448
========== ========= =========
F-59
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
38. 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 Accumulated
currency Unrealised gains other
translation on short-term comprehensive
adjustments investments income
----------- ----------- ------
RMB'000 RMB'000 RMB'000
Balance at January 1, 2001 ( 6,350) -- ( 6,350)
Current year change 702 43,796 44,498
--------- -------- --------
Balance at January 1, 2002 ( 5,648) 43,796 38,148
Reversal of current year realised gains -- ( 26,940) ( 26,940)
Current year change ( 7,948) 36,965 29,017
--------- -------- --------
Balance at December 31, 2002 ( 13,596) 53,821 40,225
========= ======== ========
(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, the derivative contract was recorded
as "other current liabilities" in the consolidated balance sheet at
fair value. For the year ended December 31, 2002, the Group recognised
related changes in fair value, a gain of RMB14,485,000 (2001:
RMB29,134,000), and included the amount in "exchange (loss)/gain, net"
in the consolidated income statement.
(d) Accounting for asset retirement obligations
On August 15, 2001, SFAS No. 143 "Accounting for asset retirement
obligation" ("SFAS No. 143") was released and will be effective for
the fiscal years beginning after June 15, 2002. The Statement requires
that the fair value of a liability for an asset retirement obligation
be recognised in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement
costs are capitalised as part of the carrying amount of the long-lived
assets. Further, under the Statement, the liability is discounted and
accretion expense is recognised using the credit-adjusted risk-free
interest rate in effect when the liability was initially recognised.
Adoption of the statement will likely result in increase in both costs
of assets and total liabilities. The Group is currently assessing
these matters and has not yet determined whether or the extent to
which they will affect the financial statements.
F-60
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
38. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(e) 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.
(f) Deferred income taxes
Under Hong Kong GAAP, the Group provides deferred taxes for timing
differences only to the extent that it is probable a liability or
asset will crystallise in the foreseeable future. US GAAP requires
full provision for deferred taxes under the asset and liability method
on all temporary differences. In August 2002, a revised accounting
standard SSAP 12 "Income Taxes" was issued in Hong Kong. The revised
standard is effective for accounting periods beginning on or after
January 1, 2003 and requires full provision for deferred taxes similar
to US GAAP.
For Hong Kong GAAP purposes, deferred taxes are provided using the
liability method whereby it is calculated using tax rates estimated to
be applicable when timing differences reverse.
For US GAAP purposes, deferred tax assets and liabilities are
recognised for the expected future tax consequences of existing
differences between financial reporting and tax reporting bases of
assets and liabilities, and loss or tax credit carry forwards using
enacted tax rates expected to be in effect when these differences are
realised. Valuation allowances are recorded for deferred tax assets
for which it is more likely than not that such assets will be
realised.
For the year ended December 31, 2002, there was no difference on the
amounts of deferred income taxes recognised under Hong Kong GAAP and
US GAAP.
(g) 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-61
CNOOC LIMITED
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
Statements 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 reserve 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, 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.
The proved developed and undeveloped reserves for Indonesia in 2000 and
2001 were less than 1% to the total and no separate disclosure was
presented.
Proved developed and undeveloped reserves (net of royalties and government
share oil):
PRC (Indonesia) (Total)
----- ----------- -------
Oil Natural gas Oil Natural gas Oil Natural gas
(Mmbbls) (Bcf) (Mmbbls) (Bcf) (Mmbbls) (Bcf)
------- ----- ------- ----- ------- -----
December 31, 1999 1,242 3,332 -- -- 1,242 3,332
Discoveries and extensions 76 5 -- -- 76 5
Sales of reserves (41) -- -- -- (41) --
Production (75) (72) -- -- (75) (72)
Revisions of prior estimates 14 (15) -- -- 14 (15)
------ ------ ------ ------ ------ ------
December 31, 2000 1,216 3,250 -- -- 1,216 3,250
Discoveries and extensions 199 166 -- -- 199 166
Production (84) (71) -- -- (84) (71)
Revisions of prior estimates (52) (97) -- -- (52) (97)
------ ------ ------ ------ ------ ------
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
====== ====== ====== ====== ====== ======
F-62
CNOOC LIMITED
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
(Mmbbls) (Bcf) (Mmbbls) (Bcf) (Mmbbls) (Bcf)
------- ----- ------- ----- ------- -----
December 31, 2000 546 558 -- -- 546 558
December 31, 2001 582 765 -- -- 582 765
December 31, 2002 542 724 115 101 657 825
(b) Results of operations
2002
2000 2001 -----------------------------------------------
PRC PRC PRC Indonesia Total
--- --- --- --------- -----
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Net sales to customers 18,819,323 17,560,788 20,280,746 3,498,548 23,779,294
Operating expenses (2,124,078) (2,329,130) (2,440,210) (1,335,124) (3,775,334)
Production taxes (1,036,729) (883,768) (1,023,049) -- (1,023,049)
Exploration (552,869) (1,039,297) (1,286,670) (31,653) (1,318,323)
Depreciation, depletion
and amortisation (2,577,882) (2,566,920) (3,121,381) (898,151) (4,019,532)
----------- ----------- ----------- ----------- -----------
12,527,765 10,741,673 12,409,436 1,233,620 13,643,056
Income tax expenses (2,265,847) (3,992,578) (3,816,008) (592,138) (4,408,146)
----------- ----------- ----------- ----------- -----------
Result of operations 10,261,918 6,749,095 8,593,428 641,482 9,234,910
=========== =========== =========== =========== ===========
(c) Capitalised costs
2002
2000 2001 -----------------------------------------------
PRC PRC PRC Indonesia Total
--- --- --- --------- -----
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Proved oil and
gas properties 36,323,472 40,748,848 46,426,684 9,605,744 56,032,428
Unproved oil and gas
properties 996,452 428,611 521,880 -- 521,880
Accumulated depreciation,
depletion and amortisation (15,482,082) (18,154,653) (21,161,905) (993,316) (22,155,221)
----------- ----------- ----------- ----------- -----------
Net capitalised costs 21,837,842 23,022,806 25,786,659 8,612,428 34,399,087
=========== =========== =========== =========== ===========
F-63
CNOOC LIMITED
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(All amounts expressed in Renminbi unless otherwise stated)
(d) Costs incurred
2002
2000 2001 --------------------------------------------
PRC PRC PRC Indonesia Total
--- --- --- --------- -----
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Acquisition costs -- -- -- 4,735,826 4,735,826
Exploration costs 610,159 996,121 1,519,683 32,405 1,552,088
Development cost 4,176,555 3,958,357 5,458,199 750,532 6,208,731
---------- ---------- ---------- ---------- ----------
Total costs incurred 4,786,714 4,954,478 6,977,882 5,518,763 12,496,645
========== ========== ========== ========== ==========
(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 proven 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$28 as of December 31, 2002 (2001: US$17; 2000: US$22).
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.
Present value of estimated future net cash flows:
2002
2000 2001 ---------------------------------------
Notes PRC PRC PRC Indonesia Total
----- --- --- --- --------- -----
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Future cash inflows (1) 326,513,363 261,339,180 389,025,791 37,242,644 426,268,435
Future production costs (73,402,341) (74,404,378) (89,657,677) (22,386,603) (112,044,280)
Future development costs (2) (31,279,348) (38,640,756) (44,699,729) (5,381,081) (50,080,810)
Future income taxes (30,833,803) (39,097,483) (73,757,925) (4,301,926) (78,059,851)
----------- ----------- ----------- ---------- -----------
Future net cash flows 190,997,871 109,196,563 180,910,460 5,173,034 186,083,494
10% discount factor (3) (97,607,274) (58,114,105) (84,478,856) (1,463,589) (85,942,445)
----------- ----------- ----------- ---------- -----------
Standardised measure 93,390,597 51,082,458 96,431,604 3,709,445 100,141,049
=========== =========== =========== ========== ===========
F-64
CNOOC LIMITED
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)
(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 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.
Changes in the standardised measure of discounted future net cash flows:
2000 2001 2002
---- ---- ----
Standardised measure, beginning of year 87,722,457 93,390,597 51,082,458
Sales of production, net of royalties and production (15,658,516) (14,347,890) (18,980,911)
costs
Net change in prices, net of royalties and production 578,121 (32,289,445) 58,471,355
costs
Extensions discoveries and improved recovery, net of 5,417,977 9,985,707 14,603,893
related future costs
Change in estimated future development costs 3,433,517 (9,651,681) (13,947,849)
Development costs incurred during the year 4,176,555 3,958,357 6,208,731
Revisions in quantity estimates 830,236 (3,272,326) (3,301,510)
Accretion of discount 10,361,478 10,846,714 6,873,378
Net change in income taxes 815,779 (3,241,861) (23,296,206)
Purchase of properties -- -- 15,899,375
Sales of property (2,865,132) -- --
Changes in timing and other (1,421,875) (4,295,714) 6,528,335
---------- ---------- -----------
Standardised measure, end of year 93,390,597 51,082,458 100,141,049
========== ========== ===========
F-65
EXHIBIT INDEX
Exhibit
Number Document Page
------ -------- ----
1.1 Articles of Association of the Registrant, incorporated by reference to Exhibit 3.1
to our Registration Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
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. Ex-6
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).
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).
Ex-1
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).
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).
Ex-2
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).
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).
Ex-3
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).
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).
Ex-4
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).
8 List of Subsidiaries. Ex-61
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).
10.2 Sarbanes-Oxley Act of 2002 Section 906 Certification furnished (not filed) to the Ex-62
Securities and Exchange Commission
Ex-5