china_petroleum.htm


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 6-K
 
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
The Securities Exchange Act of 1934

For the month of August, 2008

CHINA PETROLEUM & CHEMICAL CORPORATION
A6, Huixindong Street,
Chaoyang District Beijing, 100029
People's Republic of China
Tel: (8610) 6499-0060

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)
 
Form 20-F     ü          Form 40-F _____

(Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. )
 
Yes ____                    No     ü  

(If "Yes" is marked, indicate below the file number assigned to registrant in connection with Rule 12g3-2(b): 82-__________.)
 
N/A




 

This Form 6-K consists of:

1.  
an announcement on continuing connected transaction of China Petroleum & Chemical Corporation (the “Registrant”), made by the Registrant on August 22, 2008;
   
2.  
an announcement of the 2008 interim results of the Registrant made by the Registrant on August 22, 2008; and
   
3.  
2008 interim report of the Registrant.
 
 

Document 1
 
 
 
The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this announcement, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

 
(a joint stock limited company incorporated in the People’s Republic of China with limited liability)
 
(Stock Code: 0386)

CONTINUING CONNECTED TRANSACTION

On 31 March 2006, Sinopec Corp. issued an announcement pursuant to the HK Listing Rules with respect to various continuing connected transactions, including matters relating to the Land Use Rights Leasing Agreement.
 
The Land Use Rights Leasing Agreement governs the leasing of land use rights by Sinopec Corp. from the Sinopec Group. On 22 August 2008, Sinopec Corp. and Sinopec Group Company entered into a Land Use Rights Leasing Agreement Amendment Memo pursuant to which various terms are amended. Details of the amendments are set out in this announcement. As a result of the amendment, the annual cap applicable to transactions under the Land Use Rights Leasing Agreement has been revised.
 
As Sinopec Group Company is a shareholder of approximately 75.84% interests in Sinopec Corp., Sinopec Group Company and its associates will constitute connected persons of Sinopec Corp. under the HK Listing Rules and the transactions under the Land Use Rights Leasing Agreement will constitute continuing connected transactions of Sinopec Corp. As each of the applicable percentage ratios for the transactions under the revised Land Use Rights Leasing Agreement falls below 2.5%, the transactions will be subject to the reporting and announcement requirements under Rule 14A.34 of the HK Listing Rules, and independent shareholders’ approval will not be required.

1.       LAND USE RIGHTS LEASING AGREEMENT

1.1     Background

On 31 March 2006, Sinopec Corp. issued an announcement pursuant to the HK Listing Rules with respect to various continuing connected transactions, including matters relating to the Land Use Rights Leasing Agreement.

According to the Land Use Rights Leasing Agreement, Sinopec Group Company agreed to lease certain parcels of land with an area of approximately 437,000,000 square metres. The parcels of land which will be leased will mainly be used for operating main production facilities, ancillary production facilities and certain petrol stations operated by Sinopec Corp.

Regarding authorised land for operation owned by members of the Sinopec Group, land for industrial use are leased to the Company for a term of 50 years and land for commercial use for 40 years. Regarding land over which members of the Sinopec Group have been granted land use rights with consideration, they are leased for a term up to the date of expiry of the respective land use rights certificates. The term of the lease in each case commenced from 1 January 2000. The Company may require members of the Sinopec Group to renew the term of the lease by giving notice to it twelve months before the expiry of the lease.

Rents under the Land Use Rights Leasing Agreement are payable to the Sinopec Group Company quarterly at the amount of one fourth of the annual rent.

The annual cap for 2007 to 2009 applicable to the Land Use Rights Leasing Agreement is RMB3.5 billion. Such annual cap for 2008 has not been exceeded up to the date of this announcement.

Historical Transaction Value
 

 
The historical annual values for the transactions under the Land Use Rights Leasing Agreement for each of the three years ended 31 December 2005, 2006 and 2007 are set out below:

 
Historical transaction values for
the year ended 31 December
Transactions
2005
2006
2007
 
(RMB millions)
       
Transactions under Land Use Rights Leasing Agreement
2.557
3.241
3.234

Sinopec Corp. has no prior transactions with Sinopec Group Company and its ultimate beneficial owners which would require to be aggregated with the transactions under the Land Use Rights Leasing Agreement under Listing Rule 14A.25.

1.2     Land Use Rights Leasing Agreement Amendment Memo

On 22 August 2008, Sinopec Corp. and Sinopec Group Company entered into a Land Use Rights Leasing Agreement Amendment Memo pursuant to which various terms are amended.

Parties:

Sinopec Corp., for and on behalf of itself and its subsidiaries (as lessee)

Sinopec Group Company, for and on behalf of itself and members of the Sinopec Group (as landlord)

Principal terms:

Pursuant to the provisions of the Land Use Rights Leasing Agreement Amendment Memo, the annual total rent payable thereunder will be adjusted to approximately RMB4.3 billion and the area of land use rights subject to leasing will be revised to approximately 416,000,000 square metres.

Other provisions of the Land Use Rights Leasing Agreement will remain unchanged.

As a result of the above changes and also taking into account possible payment of additional rent as a result of potential business expansion, Sinopec Corp. estimates that the total annual rent payable under the Land Use Rights Leasing Agreement, the annual cap applicable to the transactions under the Land Use Rights Leasing Agreement for each of the two years ending 31 December 2008 and 2009 respectively will be adjusted to RMB4.5 billion.

1.3     Reasons for entering into the Land Use Rights Leasing Agreement Amendment Memo

Due to a substantial increase in land values in China as a result of the growing economy, the issue by the PRC Government of “Order of the State Council of The People’s Republic of China (No.483) which increased land tax by threefolds, the level of rent paid by Sinopec Corp. at present is far below market levels. After negotiations between Sinopec Corp. and Sinopec Group Company, as the continue use of the relevant land is crucial to the ongoing operation of the Company, Sinopec Corp. and Sinopec Group Company have agreed that the rent level for 2008 should be brought closer to market levels. To ensure that the rent payable by Sinopec Corp. for 2008 will remain to be on normal commercial terms, a PRC qualified property valuer, Beijing Zhongdi Real Estate Appraisal Co. Ltd, was appointed to value the adjusted rent and it has concluded that it is still lower than market level.

2.       THE HK LISTING RULES REQUIREMENTS

As Sinopec Group Company is a shareholder of approximately 75.84% interests in Sinopec Corp., Sinopec Group Company and its associates will constitute connected persons of Sinopec Corp. under the HK Listing Rules and the transactions under the Land Use Rights Leasing Agreement will constitute continuing connected transactions of Sinopec Corp. As each of the applicable percentage ratios for the transactions under the revised Land Use Rights Leasing Agreement falls below 2.5%, the transactions will be subject to the reporting and announcement requirements under Rule 14A.34 of the HK Listing Rules, and independent shareholders’ approval will not be required.
 

 
The transactions under the Land Use Rights Leasing Agreement are conducted in the ordinary and usual course of business of the Company. Such transactions will continue to be conducted on an arm’s length basis and on terms that are fair and reasonable to the Company. Owing to the long-term co-operation relationship between the Company and the Sinopec Group and the advantages, good reputation and gigantic scale of the Sinopec Group in various aspects, the Board is of the opinion that the entering into of such transactions on an continuing basis is essential to the continuation of Sinopec Corp’s business and will be beneficial to the Company as they will facilitate the business operation and growth of the Company and reduce the unnecessary risks which might incur during the course of operation.

The Board (including the independent directors) considers that the aforesaid amendments to the connected transactions are based on normal commercial terms in accordance with the principles of fairness and justice, the relevant amendments are fair and reasonable, and the revised annual capare reasonable and fair to and in the interests of Sinopec Corp. and the shareholders as a whole, which do not harm Sinopec Corp. and its independent shareholders’ interest.

3.        GENERAL INFORMATION

The principal operations of Sinopec Corp. and its subsidiaries include: exploring for and developing, producing and trading crude oil and natural gas; processing crude oil into refined oil products, producing refined oil products and trading, transporting, distributing and marketing refined oil products; producing, distributing and trading chemical products.

The business scope of the Sinopec Group Company covers: industrial investments and investment management; exploration and development, production and construction, storage and transportation and sale of petroleum and natural gas resources; the wholesale of gasoline, kerosene and diesel; production, storage and transportation and sale of petrochemical and related products; the design, implementation and construction of petroleum and petrochemical installations; maintenance and repair of petroleum and petrochemical installations; the research, development, implementation and related consulting services of technology; IT and energy substitute products; and the import and export of self-produced products and third parties’ products and technologies (other than those prohibited by the state).

4.        DEFINITIONS

In this announcement, the following expressions have the meanings set out below unless otherwise indicated in the context:

 
“associates”
has the meaning ascribed to it in the HK Listing Rules;
 
 
“Board”
 
the board of directors of Sinopec Corp.;
 
 
“Company”
 
Sinopec Corp. and its subsidiaries;
 
 
“Directors”
 
the directors of Sinopec Corp.;
 
 
“HK Listing Rules”
 
the Rules Governing the Listing of Securities on the Stock Exchange;
 
 
“Land Use Rights Leasing Agreement”
 
the land use rights leasing agreement dated 3 June 2000 (as amended) regarding the leasing of certain land use rights by the Sinopec Group to the Company;
 
 
“Land Use Rights Leasing Agreement Amendment Memo”
 
an amendment memo to the Land Use Rights Leasing Agreement dated 22 August 2008 entered by Sinopec Corp. and Sinopec Group Company
 
 
“RMB”
 
the lawful currency of the People’s Republic of China;
 
 
“Sinopec Corp.”
 
China Petroleum & Chemical Corporation, a joint stock limited company incorporated in the PRC with limited liability;
 
 
“Sinopec Group”
 
the Sinopec Group Company and its subsidiaries (other than the Company);
 
 
 
 
 
 
 
“Sinopec Group Company”
 
 
 
China Petrochemical Corporation, being the controlling shareholder of Sinopec Corp.;
 
 
“Stock Exchange”
 
The Stock Exchange of Hong Kong Limited;



 
By Order of the Board
 China Petroleum & Chemical Corporation
 Chen Ge
 Secretary to the Board of Directors

Beijing, PRC, 22 August 2008

As at the date of this Announcement, the directors of Sinopec Corp are Messrs. Su Shulin*, Zhou Yuan*, Wang Tianpu#, Zhang Jianhua#, Wang Zhigang#, Dai Houliang#, Fan Yifei*, Yao Zhongmin*, Shi Wanpeng+, Liu Zhongli+ and Li Deshui+.

# Executive Directors

* Non-executive Directors

+ Independent Non-executive Directors

 
 
Document 2
 
 
(a joint stock limited company incorporated in the People’s Republic of China with limited liability)
 
(Stock Code:386)

Announcement of the 2008 Interim Results

§1
Important Notice

1.1
The Board of Directors and the Supervisory Board of China Petroleum & Chemical Corporation (“Sinopec Corp.”) and its directors, supervisors and senior management warrant that there are no material omissions, or misrepresentations or misleading statements contained in this announcement and severally and jointly accept full responsibility for the authenticity, accuracy and completeness of the information contained in this announcement.

 
This announcement is a summary of the interim report. The entire report is also contained in the website of the Shanghai Stock Exchange (www.sse.com.cn) and Sinopec Corp. (www.sinopec.com). The investors should read the interim report for more details.

1.2
No Director, supervisors and senior management has any doubt as to, or the inability to warrant, the truthfulness, accuracy and completeness of the interim report.

1.3
Mr. Shi Wanpeng, Mr. Li Deshui, Mr. Yao Zhongmin and Mr. Fan Yifei, Directors of Sinopec Corp., did not attend the meeting of the Board for reasons of official duties. Mr. Shi Wanpeng and Mr. Li Deshui, Director of Sinopec Corp., authorised Mr. Liu Zhongli and Mr. Yao Zhongmin and Mr. Fan Yifei, Directors of Sinopec Corp., authorised Mr. Wang Tianpu to vote on their behalf in respect of the resolutions put forward in the meeting of the Board.

1.4
The financial statements for the six-month period ended 30 June 2008 of Sinopec Corp. and its subsidiaries (“the Company”) prepared in accordance with the PRC Accounting Standards for Business Enterprises (“ASBE”), and International Financial Reporting Standards (“IFRS”) have been audited by KPMG Huazhen and KPMG, respectively, and both firms have issued standard unqualified opinions on the financial statements.

1.5
There is no occupancy of non-operating funds by the substantial shareholders of Sinopec Corp.

1.6 
Mr. Su Shulin, Chairman of the Board, Mr. Wang Tianpu, President, Mr. Dai Houliang, Director, Senior Vice President and Chief Financial Officer and Mr. Liu Yun, Head of the Accounting Department warrant the authenticity and completeness of the financical statements contained in this announcement.
 
 

 
§2
Basic Information of Sinopec Corp.

 
2.1
Basic Information of Sinopec Corp.

 
SINOPEC
SINOPEC
SINOPEC
  
Stock name
CORP
CORP
CORP
中國石化
         
Stock code
386
SNP
SNP
600028
         
Place of listing
Hong Kong
New York Stock
London Stock
Shanghai Stock
 
Stock Exchange
Exchange
Exchange
Exchange
         
 
Authorized Representatives
Secretary to the
Board of
Directors
Representative on Securities
Matters
 
         
Name
Mr. Wang
Mr. Chen Ge
Mr. Chen Ge
Mr. Huang
 
Tianpu
    
Wensheng
         
Address
6A Huixindong Street, Chaoyang District, Beijing, PRC
      
         
Tel
64990060
64990060
64990060
64990060
         
Fax
64990022
64990022
64990022
64990022
         
E-mail
ir@sinopec.com/media@sinopec.com

 
2.2
Principal accounting data and financial indicators

 
2.2.1    Principal accounting data and financial indicators for the first half of 2008 prepared in accordance with ASBE

 
2.2.1.1    Principal accounting data and financial indicators

 
At 30 June
At 31 December
Changes from the
 
2008
2007
end of last year
Items
RMB millions
RMB millions
(%)
       
Total assets
820,556
718,572
14.2
Shareholders’ equity attributable to equity
      
 shareholders of the Company
305,471
300,949
1.5
Net assets per share (RMB) (Fully diluted)
3.523
3.471
1.5
Adjusted net assets per share (RMB)
3.437
3.391
1.4
       
 
Six-month periods
ended 30 June
Changes over the
 
same period of
 
2008
2007
the preceding year
Items
RMB millions
RMB millions
(%)
       
Operating (loss) / profit
(23,784)
53,285
(144.6)
Profit before taxation
9,516
52,701
(81.9)
Net profit attributable to equity shareholders
of the Company
      
9,339
35,110
(73.4)
Net (loss) / profit before extraordinary gain and loss
(17,445)
34,924
(150.0)
 
 
Return on net assets (%)
3.06
12.31
(9.25)
     
percentage points
Basic earnings per share (RMB)
0.108
0.405
(73.4)
Basic (loss) / earnings per share before   extraordinary gain and loss (RMB)
      
(0.201)
0.403
(150.0)
Diluted earnings per share (RMB)
0.076
0.405
(81.0)
Net cash flow from operating activities
5,986
64,700
(90.7)
Net cash flow from operating activities
 per share (RMB)
      
0.069
0.746
(90.7)

 
2.2.1.2    Extraordinary items

√ applicable    □ inapplicable

 
Extraordinary items and corresponding amounts:

 
Six-month period
 
ended 30 June 2008
 
(Income)/expense
Items
RMB millions
   
Loss on disposal of fixed assets
23
Employee reduction expenses
199
Donations
77
Gain on disposal of investments
(198)
Other non-operating income and expenses
2
Written back of provisions for impairment losses made
  
 in previous years
(159)
Grants
(33,402)
Subtotal
(33,458)
Tax effect
　5,572
   
Total
(27,886)
   
Attributable to:Equity shareholders of the Company
(26,784)
Minority interests
(1,102)

 
2.2.2    Principal accounting data and financial indicators of the Company for the first half of 2008 from the financial statements prepared in accordance with IFRS

 
Six-month periods ended 30 June
Changes over
the same
period of the
preceding year
 
2008
2007
Items
RMB millions
RMB millions
(%)
       
Operating profit
7,222
53,584
(86.5)
Profit attributable to equity
      
 shareholders of the Company
8,255
36,375
(77.3)
Return on capital employed (%) Note
1.33
8.21
(6.88)
     
percentage points
Basic earnings per share (RMB)
0.095
0.420
(77.3)
Diluted earnings per share (RMB)
0.064
0.420
(84.8)
Net cash flow generated from
 operating activities
  
62,295
  
2,640
(95.8)
 
 
 
Net cash flow generated from
 operating activities per share
 (RMB)
      
   
0.030
0.718
(95.8)

 
Note:Return on capital employed = operating profit x (1 - income tax rate)/capital employed

     
Changes from
 
At 30 June
At 31 December
the end of
 
2008
2007
last year
Items
RMB millions
RMB millions
(%)
       
Total assets
838,469
732,725
14.4
Total equity attributable to
      
 equity shareholders
      
 of the Company
310,871
307,433
1.1
Net assets per share (RMB)
3.586
3.546
1.1
Adjusted net assets per share
 (RMB)
      
3.499
3.466
1.0
       
 
2.2.3    Differences between financial statements prepared under ASBE and IFRS

√ applicable    □ inapplicable

 
2.2.3.1    Analysis of effects of major differences between the net profit under ASBE and the profit for the period under IFRS

 
Six-month periods ended 30 June
 
2008
2007
Items
RMB millions
RMB millions
     
Net profit under ASBE
9,415
36,574
Adjustments:
    
 Oil and gas properties
(1,334)
91
 Reduced amortisation on revaluation
    
  of land use rights
15
15
 Effects of the above adjustments on taxation
  237
 1,162
 
－－－－－－－－
－－－－－－－－
     
Profit for the period under IFRS
 8,333
37,842
 
＝＝＝＝＝＝＝＝
＝＝＝＝＝＝＝＝

 
2.2.3.2    Analysis of effects of major differences between the shareholders’ funds under ASBE and total equity under IFRS:

 
At 30 June
At 31 December
 
2008
2007
Items
RMB millions
RMB millions
     
Shareholders’ equity under ASBE
331,299
326,347
Adjustments:
    
 Oil and gas properties
10,005
11,339
 Revaluation of land use rights
(1,027)
(1,042)
 Effects of the above adjustments on taxation
 (3,649)
 (3,886)
 
－－－－－－－－
－－－－－－－－
     
     
Total equity under IFRS
336,628
332,758
 
＝＝＝＝＝＝＝＝
＝＝＝＝＝＝＝＝

§3
Changes in share capital and shareholdings of the principal shareholders

 
3.1
Statement of changes in share capital

□ applicable    √ inapplicable

 
3.2
Top ten shareholders and shareholders of shares without selling restrictions
 
 

 
 
As at 30 June 2008, there were a total of 1,290,016 shareholders of Sinopec Corp., of which 1,283,242 were holders of A Shares and 6,774 were holders of H Shares. The public float of Sinopec Corp. satisfied the minimum requirements under The Rules Governing The Listing of Securities on The Stock Exchange of Hong Kong Limited (“Hong Kong Listing Rules”).

 
Top ten shareholdersUnit: 1,000 Shares

   
As a percentage
Number of
    
   
of total
shares held
Number
  
   
shares
at the end
of shares
Number of
 
Nature of
at the end of
of reporting
with selling
pledges or
Name of Shareholders
shareholders
reporting period
period
restrictions
lock-ups
   
(%)
      
           
China Petrochemical Corporation
State-owned shares
75.84
65,758,044
61,422,922
0
HKSCC (Nominees) Limited
H shares
19.26
16,700,144
0
N/A
Guotai Junan Securities Co., Ltd
A Shares
0.44
377,906
0
38,230
E Fund 50 Stock Index
          
 Investment Fund
A Shares
0.12
104,190
0
0
Bosera Thematic Sector
          
 Stock Investment Fund
A Shares
0.11
95,519
0
0
Huabao Xingye Selected Sector
          
 Stock Investment Fund
A Shares
0.06
53,998
0
0
Shanghai Stock Exchange 50 Tradable
          
 Open-ended Securities Index
          
 Investment Fund
A Shares
0.05
46,797
0
0
Tongde Securities Investment Fund
A Shares
0.05
45,606
0
0
National Social Security Fund
          
 106 Portfolio
A Shares
0.05
40,000
0
0
Shanghai Stock Exchange Dividend
          
 Tradable Open-ended Securities
          
  Index Investment Fund
A Shares
0.04
34,890
0
0

Top ten shareholders of shares
 without selling restrictions
Unit: 1,000 shares
   
     
 
Number of
Type of
Name of Shareholders
shares held
shares
     
HKSCC (Nominees) Limited
16,700,144
H shares
China Petrochemical Corporation
4,335,122
A Shares
Guotai Junan Securities Co., Ltd.
377,906
A Shares
E Fund 50 Stock Index Investment Fund
104,190
A Shares
Bosera Thematic Sector Stock Investment Fund
95,519
A Shares
Huabao Xingye Selected Sector Stock Investment Fund
53,998
A Shares
Shanghai Stock Exchange 50 Tradable
    
 Open-ended Securities Index Investment Fund
46,797
A Shares
Tongde Securities Investment Fund
45,606
A Shares
National Social Security Fund 106 Portfolio
40,000
A Shares
Shanghai Stock Exchange Dividend Tradable
    
 Open-ended Securities Index Investment Fund
34,890
A Shares
 

 
Statement on the connected relationship or activity in concert among the aforementioned shareholders:

We are not aware of any connection or activities in concert among the top ten shareholders of floating stock.

 
3.3
Changes in the controlling shareholders and the effective controllers in the reporting period

□ applicable    √ inapplicable

§4.
Information about the directors, supervisors and senior management

 
4.1
The engagement or dismissal of Directors, Supervisors and Other Members of the Senior Management

□ applicable    √ inapplicable

 
4.2
Information about the changes in the shares held by the directors, supervisors and senior management

□ applicable    √ inapplicable

 
As at 30 June 2008, none of the directors, supervisors or senior management of Sinopec Corp. had any interest in any shares of Sinopec Corp.

 
During the reporting period, none of Sinopec Corp.’s directors, supervisors or senior management or any of their respective associates had any interests or short positions in any shares, debentures or related shares of Sinopec Corp. or its associated corporations (as defined in Part XV of the Securities and Futures Ordinance) which were required to be notified to Sinopec Corp. and the Hong Kong Stock Exchange pursuant to Division 7 and 8 of Part XV of the Securities and Futures Ordinance or which were required pursuant to section 352 of the Securities and Futures Ordinance to be entered in the register referred to therein, or which were required to be notified to Sinopec Corp. and the Hong Kong Stock Exchange pursuant to the Model Code for Securities Transactions Entered by Directors of Listed Companies as specified in the Listing Rules of The Stock Exchange of Hong Kong Limited (including those interests and short positions that are deemed to be such, or are regarded to be owned in accordance with the relative provisions under the Securities and Futures Ordinance). All of the directors of Sinopec Corp. confirmed that they have complied with the Model Code for Securities Transactions.

§5.
Business Review and Prospects and Management’s Discussion and Analysis

 
5.1
Business Review

 
In the first half of 2008, the Chinese economy continued to grow steadily and rapidly, with a GDP growth rate of 10.4%. Apparent domestic consumption of oil products (inclusive of gasoline, diesel and kerosene) and ethylene equivalent consumption increased by 13.9% and 2.5% respectively over the same period last year.

 
In the first half of 2008, confronted with complicated and severe business conditions featured by soaring crude oil prices and tight control on price of oil products in domestic market, the Company managed to increase oil and gas production, speed up structure adjustment, and took a variety of measures to increase the supply of oil products and made efforts to guarantee the domestic market supply of oil products through optimised production and operation activities, improved management, increased profitability through taping potentials, conserving energy and reducing emissions, and realised steady growth in oil and gas production, refinery throughput, sales volume of oil products and the production of major chemical products.

 
5.1.1    Production and Operations

 
(1)    Exploration and Production Segment

 
In the first half of 2008, the international crude oil prices soared, and the average price of Platt’s Brent spot price was US$ 109.14/barrel, increased by 72.53% over the same period last year.

 
In exploration, the Company made new progress in petroleum exploration in Tahe oil field, in natural gas exploration in the surrounding areas of Puguang gas field in northeastern Sichuan, western Sichuan and the southern area in Songlao basin, and in the exploration of concealed oil and natural gas reserves in the matured fields in the east of China.

 
With respect to development, through such measures as strengthening the comprehensive adjustments in the matured fields, optimising the construction process of production capacity in the new blocks and enhancing the development of low-grade reserves and speeding up the pace of increasing recovery rate, the Company has yielded marked achievements in increasing both oil and gas reserves and production. Moreover, the construction of Sichuan-East China Gas project has been progressing smoothly. In the first half of this year, the Company produced 147.38 million barrels of crude oil, increased by 2.4%, and produced 144.2 billion cubic feet of natural gas, increased by 3.3% over the same period last year.
 

 
 
Summary of Operations of Exploration and Production Segment

 
Six-month periods
ended 30 June
  
 
Changes
 
2008
2007
(%)
       
Crude oil production (mmbbls)
147.38
143.88
2.4
Natural gas production (bcf)
144.2
139.6
3.3
Newly added proved reserve of
      
 crude oil (mmbbls)
158.74
147.88
7.3
Newly added proved reserve of
      
 natural gas (bcf)
186.9
158.6
17.8
       
 
At 30
At 31
  
 
June
December
Changes
 
2008
2007
(%)
       
Proved reserve of crude oil (mmbbls)
3,035
3,024
0.4
Proved reserve of natural gas (bcf)
6,373.6
6,330.8
0.7
       
 
Note:Crude oil production is converted at 1 tonne = 7.1 barrels, and natural gas production is converted at 1 cubic meter = 35.31 cubic feet.

 
(2)Refining Segment

 
In the first half of 2008, in order to meet market demand, the Company made efforts to keep refinery facilities running safely and at full capacity and increased the output of oil products. It also optimised crude oil resources and tried to reduce the purchasing cost of crude oil, reinforced structural adjustment of products mix and increased the production of high value-added products such as high-grade gasoline, vigorously promoted the sales of petroleum products other than gasoline, diesel or kerosene, produced clean oil products meeting national IV standard. Being a cooperation partner of 2008 Beijing Olympic Games, the Company provides oil products in major hosting cities. In the first half of 2008, the refinery throughput increased by 6.7% over the same period last year, and the output of oil products increased by 10.1%, among which, gasoline had a 7.7% increase and diesel with an increase of 13.0% over the same period last year.

 
Summary of Operations of Refining Segment

   
Six-month periods
ended 30 June
  
   
Changes
   
2008
2007
(%)
         
Refinery throughput (million tonnes)*
Gasoline, diesel and kerosene production
84.25
78.94
6.7
     
 (million tonnes)
51.52
46.80
10.1
 Of which:
Gasoline (million tonnes)
13.78
12.79
7.7
 
Diesel (million tonnes)
33.80
29.91
13.0
 
Kerosene, including jet fuel
      
 
 (million tonnes)
3.94
4.10
(3.9)
Light chemical feedstock
 (million tonnes)
      
12.07
12.26
(1.5)
Light products yield (%)
  
74.68
73.93
0.75
       
percentage
       
point
Refinery yield (%)
  
93.87
93.73
0.14
       
percentage
       
point

 
*Refinery throughput is converted at 1 tonne = 7.35 barrels.
 

 
 
(3)Marketing and Distribution Segment

 
In the first half of 2008, the Company constantly optimise its sales networks, intensified awareness of service and improved service quality, collected resources through various channels and timely arranged the imports of oil products, optimised the allocation and transport of oil products, reduced transportation cost and managed to guarantee sufficient supply of oil products in the domestic market and actively promoted sales of oil products with high octane number. The total sales volume of refined oil products reached 63 million tonnes, increased by 8.8% compared with that of the same period last year, among which retail had a 19.2% increase than that of the same period last year. In its coping with the rare snow storm in South China as well as the earthquake in Wenchuan, the Company promptly initiated its contingency plan, made all-out efforts to guarantee the supply of refined oil products, and adopted such means as movable gas-filling and manual delivery of oil products, thus ensuring the supply of refined oil products in the disaster-stricken areas.

Summary of Operations of Marketing and Distribution Segment

   
Six-month periods
ended 30 June
  
   
Changes
   
2008
2007
(%)
         
Total domestic sales volume of refined
        
 oil products (million tonnes)
63.02
57.92
8.8
 Of which:
Retail volume
      
 
 (million tonnes)
42.91
36.01
19.2
 
Direct sales volume
      
 
 (million tonnes)
10.37
10.15
2.2
 
Wholesale volume
      
 
 (million tonnes)
9.73
11.77
(17.3)
 
Total number of service
      
 
 stations
29,188
28,898
1.0
 Of which:
Number of company-
      
 
 operated service
      
 
 stations
28,551
28,153
1.4
 
Number of franchised
      
 
 service stations
637
745
(14.5)
Average annual throughput per station
      
 (tonne)
  
3,006
2,558
17.5

 
(4)Chemicals Segment

 
In the first half of 2008, the Company took the advantage of concentrated sales and made great efforts to expand the chemical market, coped with the market changes in a flexible way and organised the production and sales of products with market appeals, endeavored to increase profits, improved management, consolidated the raw material optimisation and product structure optimisation, vigorously promoted new technologies and tried hard to increase the output of high added-value products. Ethylene production reached 3.307 million tonnes, a 1.0% increase on a year-on-year basis, and the production of synthetic resin reached 4.923 million tonnes, an increase of 3.1% over the same period last year. Synthetic rubber production reached 0.46 million tonnes, increased by 27.8% over the same period last year

Summary of Production of
Major Chemical Products
    
Unit: 1000 tonnes
       
 
Six-month periods
ended 30 June
  
 
Changes
 
2008
2007
(%)
       
Ethylene
3,307
3,273
1.0
Synthetic resin
4,923
4,774
3.1
Synthetic fiber monomer and polymer
3,768
3,938
(4.3)
Synthetic fiber
681
721
(5.5)
Synthetic rubber
460
360
27.8
Urea
685
813
(15.7)

 
Note:100% production of two ethylene joint ventures, namely BASF-YPC and SHANGHAI SECCO was included.
 
 

 
 
5.1.2    Cost Saving

 
In the first half of 2008, the Company took various measures to reduce costs, including: fully leveraging the modern logistics system to optimise resources allocation and reduce transportation costs, tapping the potentials of refining capacities for lower quality crude, reducing purchasing costs of crude oil, optimising operation of facilities and reducing energy and material consumption. In the first half of 2008, the Company effectively saved RMB 1.703 billion in cost. Of the total cost saved, the exploration and production segment, the refining segment, the marketing and distribution segment and the chemicals segment achieved cost saving of RMB 577 million, RMB 341 million, RMB 315 million and RMB 470 million respectively.

 
5.1.3    Energy Saving and Emission Reduction

 
In the first half of 2008, the Company made remarkable achievements in energy saving and emission reduction. We established SINOPEC Energy-saving Monitoring Center and Energy-saving Technical Service Center, introduced reporting system on energy-saving activities, initiated benchmarking activities for assessing energy efficiencies within the industry, continued to conduct the publicising and education work of energy-saving and emission reduction, vigorously promoted such advanced energy-saving technologies as pulsed electric desalting, and aromatics extraction of pygas. In the first half of this year, our energy intensity, industrial water consumption and COD in discharged waste water dropped by 6.6%, 11.8% and 15.0% respectively over the same period last year.

 
5.1.4    Capital Expenditures

 
In the first half of 2008, the Company’s total capital expenditure was RMB 36.536 billion. Among which, capital expenditure for exploration and development was RMB 20.981 billion. The newly-built production capacity of crude oil and natural gas was 2.79 million tonnes per year and 480 million cubic-meters per year respectively. The capital expenditure for refining segment was RMB 3.849 billion, green-field and expansion refinery projects in Qingdao, Gaoqiao, Wuhan and Luoyang have been put into production. Caofeidian crude oil jetty project has realised mechanical completion. The capital expenditure in chemicals segment was RMB 5.907 billion. Yangzi Petrochemicals Butadiene project with a capacity of 100,000 tonnes per year was put into operation, and Tianjin, Zhenhai ethylene and Jinling PX project are underway as scheduled. The capital expenditure in marketing and distribution segment was RMB 4.548 billion. The sales network of oil products was furthered optimised and 195 service stations were newly built. The capital expenditure for corporate and others amounted to RMB 1.251 billion.

 
5.2
Principal Operations categorised by business segments

 
The following table sets out the principal operations categorised by business segments and the details of the connected transactions, including income from principal operations and cost of sales for each business segment, extracted from the Company’s financial statements prepared under ASBE:

       
Increase/
Increase/
  
       
decrease
decrease
  
       
of Income
of Cost
  
       
from principal
of principal
Increase/
 
Income from
Cost of
  
operations
operations
decrease
 
principal
principal
Gross profit
on a year-
on a year-
of gross
 
operations
operations
margin
on-year basis
on-year basis
profit margin
Segment
(RMB millions)
(RMB millions)
(%)Note
(%)
(%)
(%)
             
Exploration and production
96,659
43,341
29.5
54.1
18.9
(6.7)
Refinery
392,200
460,239
(18.8)
27.4
57.8
(20.7)
Marketing and distribution
390,939
373,425
4.3
26.7
28.4
(1.3)
Chemicals
132,005
127,389
3.4
14.1
19.5
(4.1)
Corporate and others
411,237
411,873
(0.2)
103.2
103.4
(0.1)
Elimination of
            
 inter segment sales
(688,257)
(685,177)
N/A
N/A
N/A
N/A
 
－－－－
－－－－－
－－－－
－－－－－
－－－－
－－－－－
             
Total
734,783
731,090
(3.4)
23.3
47.6
(10.4)
 
＝＝＝＝
＝＝＝＝＝
＝＝＝＝
＝＝＝＝＝
＝＝＝＝
＝＝＝＝＝

 
Note:Gross profit margin= (income from principal operations - cost of principal operations, taxes and surcharges) / income from principal operations
 
 

 
 
The total amount of connected transactions of products sold and the services provided by the Company to Sinopec Group Company was RMB42.132 billion in this reporting period.

 
5.3
Principal operations in different regions

□ applicable    √ inapplicable

 
5.4
Operations of associate companies

□ applicable    √ inapplicable

 
5.5
Reasons of material changes in the principal operations and their structure

□ applicable    √ inapplicable

 
5.6
Reasons of material changes in the principal operations’ earning power (gross profit ratio) as compared to the preceding year

□ applicable    √ inapplicable

 
5.7
Reasons of changes in profit composition as compared to that in the preceding year

√ applicable    □ inapplicable

 
Part of the financial information discussed below is extracted from the audited financial statements prepared in accordance with IFRS.

 
In the first half of 2008, the Company’s turnover, other operating revenues and other income were RMB 768.2 billion, and the operating profit was RMB 7.2 billion, representing an increase of 36.2%, and a decrease of 86.5% respectively over the same period of 2007. This was mainly because of the sharp increase in crude oil prices which resulted in significant losses in the Company’s refining business.

 
5.7.1    Turnover, other operating revenues and other income

 
In the first half of 2008, the Company’s turnover, other operating revenues and other income were RMB 768.2 billion, of which turnover was RMB 722.4 billion, representing an increase of 31.0% over the first half of 2007. This was mainly due to the increase in prices of crude oil, refined oil and chemical products and the Company’s efforts in expanding the sales volume of petroleum and petrochemical products and optimized the sales and marketing structure. In the first half of 2008, the Company’s other operating revenues were RMB 12.4 billion, representing a decrease of 1.2% over the first half of 2007. In the first half of 2008, the Company recognised a subsidy of RMB 33.4 billion.

 
The following table lists the Company’s external sales volume of major products, their average realised prices and the respective rate of changes between the first half of 2008 and the first half of 2007 for the Company’s major products:

 
Sales Volume
(thousand tonnes)
Average realised price
(RMB/tonne, RMB/
thousand cubic meters)
 
 
 
Six-month periods
ended 30 June
Change
Six-month periods
ended 30 June
Change
 
 
2008
2007
(%)
2008
2007
(%)
             
Crude oil
2,344
2,034
15.2
4,275
2,807
52.3
Natural gas (million cubic
            
 meters)
3,034
2,863
6.0
886
794
11.6
Gasoline
19,019
17,103
11.2
5,976
5,282
13.1
Diesel
41,420
37,222
11.3
5,350
4,595
16.4
Kerosene, including jet fuel
4,383
3,467
26.4
5,719
4,663
22.6
Basic chemical feedstock
4,956
5,082
(2.5)
6,817
6,081
12.1
Synthetic fiber monomer
            
 and polymer
1,856
1,990
(6.7)
9,324
8,837
5.5
Synthetic resin
3,895
3,858
1.0
11,210
10,026
11.8
 
 
Synthetic fiber
710
768
(7.6)
11,268
11,562
(2.5)
Synthetic rubber
535
431
24.1
17,703
13,239
33.7
Chemical fertiliser
692
785
(11.8)
1,759
1,685
4.4

 
Most of crude oil and a small portion of natural gas produced by the Company were internally used for refining and chemical production and the remaining were sold to other customers. In the first half of 2008, turnover from crude oil and natural gas that were sold externally by the exploration and production segment amounted to RMB 13.9 billion, representing an increase of 58.5% compared with the first half of 2007, accounting for 1.8% of the Company’s turnover, other operating revenues and other income. The change was mainly due to the increase in price and sales volume of crude oil compared to the first half 2007.

 
The Company’s refining segment, marketing and distribution segment sell petroleum products (mainly consisting of gasoline, diesel, kerosene, which are referred to as oil products and other refined petroleum products) to third parties. In the first half of 2008, the external sales revenue of petroleum products by these two segments were RMB 459.3 billion, representing an increase of 27.5% compared with that in the first half of 2007, accounting for 59.8% of the Company’s turnover, other operating revenues and other income. The increase was mainly due to the increased prices of oil products and our proactive efforts in increasing sales volume, optimising the marketing structure, and expanding the markets of other refined petroleum products. The sales revenue of gasoline, diesel and kerosene was RMB 360.3 billion, representing an increase of 29.8% over the same period in 2007, accounting for 78.4% of the sales revenue of petroleum products. Turnover of other refined petroleum products was RMB 99.0 billion, representing an increase of 19.6% compared with the first half of 2007, accounting for 21.6% of the sales revenue of petroleum products.

 
The Company’s external sales revenue of chemical products was RMB 115.4 billion, representing an increase of 10.3% compared with the first half of 2007, accounting for 15.0% of its turnover, other operating revenues and other income. The increase was mainly due to the increase in the price of chemical products.

 
5.7.2    Operating expenses

 
In the first half of 2008, the Company’s operating expenses were RMB 761.0 billion, representing an increase of 49.1% over the first half of 2007. The operating expenses mainly consisted of the following:

 
Purchased crude oil, products and operating supplies and expenses

 
In the first half of 2008, purchased crude oil, products and operating supplies and expenses were RMB 674.1 billion, representing an increase of 53.3% over the first half of 2007, accounting for 88.6% of the total operating expenses, of which:

 
Purchased crude oil expenses were RMB 355.2 billion, representing an increase of 70.4% over the first half of 2007, accounting for 46.7% of the total operating expenses, increased by 5.8 percentage points over the first half of 2007.

 
With the rapid growth of economy and market demand in China, the processing volume of crude oil purchased from the third parties increased accordingly. Throughput of crude oil that was purchased externally in the first half of 2008 was 66.7 million tonnes (excluding the amount processed for third parties), increased by 10.4% over the first half of 2007; average cost of crude oil purchased externally is RMB 5,326 per tonne, increased by 54.4% over the first half of 2007.

 
The Company’s other purchasing expenses were RMB 318.9 billion, representing an increase of 37.8% over the first half of 2007, accounting for 41.9% of the total operating expenses. This was mainly due to the significant increase in the cost of gasoline, diesel and other feedstock purchased externally.

 
Selling, general and administrative expenses

 
The Company’s selling, general and administrative expenses totaled RMB 18.2 billion in the first half of 2008, representing an increase of 3.3% over the first half of 2007.

 
Depreciation, depletion and amortisation

 
Depreciation, depletion and amortisation were RMB 22.4 billion, representing an increase of 15.2% compared with the first half of 2007. This was mainly due to the expansion of the Company’s investment scale and the additions in property, plant and equipment.

 
Exploration expenses

 
In the first half of 2008, exploration expenses were RMB 4.7 billion, representing a decrease of 17.3% compared with the first half of 2007.
 

 
 
Personnel expenses

 
In the first half of 2008, personnel expenses were RMB 12.6 billion, representing an increase of 17.1% compared with the first half of 2007.

 
Employee reduction expenses

 
In the first half of 2008, according to the Company’s voluntary employee reduction plan, the Company undertook employee reduction expenses of approximately RMB 0.2 billion for 3,600 employees.

 
Taxes other than income tax

 
In the first half of 2008, the Company’s taxes other than income tax were RMB 28.5 billion, an increase of 96.8% compared with the first half of 2007, and this was mainly due to an increase of special levy on crude oil income by RMB 13.3 billion; meanwhile, consumption tax increased by RMB 1 billion as a result of the sales increase of gasoline and diesel, etc.

 
Other operating expenses (net)

 
In the first half of 2008, Company’s other operating expenses (net) were RMB 0.2 billion, representing a decrease of 89.4%, compared with the first half of 2007. This was mainly due to the decrease in impairment losses on long-lived assets compared with the first half of 2007.

 
5.7.3    Operating profit

 
In the first half of 2008, the Company’s operating profit was RMB 7.2 billion, representing a decrease of 86.5% over the first half of 2007.

 
5.7.4    Net finance costs

 
In the first half of 2008, the Company’s net finance costs were RMB 0.7 billion, representing a decrease of 80.8% compared with the first half of 2007. This was mainly due to an increase of RMB 3.9 billion on the unrealised gain on embedded derivatives component of convertible bonds and an increase of RMB 0.9 billion in exchange gain (net) compared with the first half of 2007.

 
5.7.5    Profit before tax

 
In the first half of 2008, the Company’s profit before taxation was RMB 8.2 billion, representing a decrease of 84.5% over the first half of 2007.

 
5.7.6    Tax benefit/(expense)

 
In the first half of 2008, the Company’s tax benefit was RMB 0.1 billion.

 
5.7.7    Profit attributable to minority interests

 
In the first half of 2008, the Company’s profit attributable to minority interests were RMB 0.1 billion, representing a decrease of 94.7% compared with the first half of 2007. This was mainly due to the decrease of profit from consolidated subsidiaries such as Sinopec Shanghai Petrochemical Company Limited, Sinopec Hainan Refining and Chemical Company Limited and Sinopec Qingdao Refining and Chemical Company.

 
5.7.8    Profit attributable to equity shareholders of the Company

 
In the first half of 2008, the Company’s profit attributable to equity shareholders of the Company was RMB 8.26 billion, representing a decrease of 77.3% against the first half of 2007.

 
5.8
Use of the proceeds from share issue

 
5.8.1    Use of the proceeds from share issue

□ applicable    √ inapplicable

 
5.8.2    Change of projects
 
 

 
□ applicable√ inapplicable

 
5.9
Business prospects and operating plan for the second half

√ applicable    □ inapplicable

Looking into the second half of 2008, the Company believes China’s economy is expected to maintain growth momentum. It is expected that in the second half of this year the international prices of crude oil will remain high, the domestic refining business will still be under pressure and the demand growth for chemical products may slow down.

In the second half of this year, the Company shall continue to take flexible operational strategies, intensify management and make optimal arrangement for various production and operation activities.

In exploration and development segment, the Company will speed up the exploration in such key regions as Tahe and northeastern Sichuan, actively tap the potentials of the existing oil fields, and further improve recovery rate. In the second half of 2008, the Company plans to produce 21.24 million tonnes of crude oil and 4.2 billion cubic meters of natural gas.

In refining segment, the Company shall continue to operate at its full capacity on the basis of ensuring safe and stable production to ensure market supplies, optimise the purchase and allocation of crude oil resources, make efforts to reduce the costs of crude oil, further adjust product structure and increase the output of high value-added products. In the second half of 2008, the Company plans to refine 89.75 million tonnes of crude oil.

In marketing and distribution segment, the Company will continue to meticulously organise the allocation and transport of refined oil products, make efforts to guarantee the market supplies of refined oils products and ensure the oil supplies for the Olympic games and the reconstruction of disaster-stricken areas and key industries. Meanwhile, the Company shall intensify the arrangement of resources, optimise the flow and storage and transportation of resources and improve profitability from the sales. In the second half of 2008, the Company plans to a total domestic sales volume of oil products at 64 million tonnes.

In chemicals segment, the Company shall optimise raw materials, product structure and unit operation, intensify the implementation of energy-saving and material consumption, consolidate the linkage of production, sales and research, promote developments of new products, and increase the production of high value-added products. In the second half of 2008, the Company plans to produce 3.26 million tonnes of ethylene.

In the second half of 2008, we shall continue to optimise our production and operation activities, improve management, increase profit through taping potentials, reducing energy consumption and reducing emissions, and strive to fulfill the production and business goals of the whole year.

 
5.10
Caution and explanation as to the anticipated loss of accumulated net profits from the beginning of the year to the end of the next reporting period or significant changes over the same period of last year

 
Since the beginning of the year, with the soaring international crude oil prices and the tight control over domestic oil products prices, prices of crude oil and oil products were inverted, which, resulted in significant losses of the Company’s refining segment. The Company’s overall profitability dropped substantially. Through preliminary estimation by the finance division, the Company expects that net profit for the first three quarters of this year shall drop more than 50 percent compared with the same period last year.

 
5.11
Explanation of the management about the auditors’ Ònon-standard opinionÓ for the reporting period

□ applicable    √ inapplicable

 
5.12
Explanation of the management about the subsequent changes and the follow up actions of the matters in connection with the auditors’ Ònon-standard opinionÓ in the last financial year

□ applicable    √ inapplicable

§6
Significant events

 
6.1
Acquisition, sale of assets and assets reorganisation

 
6.1.1Acquisition and purchase of assets
 

 
         
Whether
Whether all the
  
 
To trade and
    
To the end of
Affiliate
associated
Whether all the
Counterparty
to be acquired
    
the reporting
Transaction
property right
associated debtor
and/or ultimate
or placement
    
period, net profit
or not (if yes,
has been
and creditor has
controlling
Since the date
The date of
  
contributed to the
give pricing
transferred
been shifted
party
of purchase
purchase
Trading price
listed company
principle)
or not
or not
               
China
Asset of
June 30th, 2008
RMB1.624
No
yes, assessed
yes
yes
Petroleum
oilfield
  
billion
  
Price
    
Corporation
downhole
            
 
maintenance
            

 
6.1.2    Disposition and sale of assets

□ applicable    √ inapplicable

 
6.1.3    Progress and impact on financial positon and operating results of the relevant event after the issue of asset reorgansation report or announcement of acquition and sale of assets

□ applicable    √ inapplicable

 
6.2
Material guarantee contracts and status of implementation

 
External guarantees provided by the Company (not including guarantees provided for its controlled subsidiaries)

 
Date of
            
 
Occurrence
Guarantee
          
 
( Date of
Amount
      
Whether
Whether for
 
Execution of
(RMB
      
Completed
a Connected
Obligors
the Agreement)
million)
  
Type of Guarantee
Term
or not
Party 1
               
Yueyang SINOPEC Shell Coal
              
 GasificationCorporation Co., Ltd.
10 December 2003
377
  
Joint and Several Liability
10 December 2003 -
No
Yes
         
10 December 2017
    
Shanghai Gaoqiao-SK Solvent Co., Ltd.
22 September 2006
      
22 September 2006 -
    
         
22 September 2011
    
 
24 November 2006
      
24 November 2006 -
    
         
24 November 2011
    
 
30 March 2007
      
30 March 2007 -
    
         
30 March 2012
    
 
16 April 2007
Total 75
  
Joint and Several Liability
16 April 2007 -
No
Yes
         
16 April 2012
    
Fujian Refining and Petrochemical
6 September 2007
9,166
  
Joint and Several Liability
6 September 2007 -
No
Yes
 Company Limited
        
31 December 2015
    
Balance of guarantee by Sinopec
              
 Yangzi Petrochemical for
              
 its associates and joint ventures
  
114
      
No
Yes
Balance of guarantee by
              
 Sinopec Shanghai Petrochemical for
              
 its associates and joint ventures
  
17
      
No
Yes
Balance of guarantee by
              
 Sinopec Sales Company Limited for
              
 its associates and joint ventures
  
75
      
No
Yes
Total amount of guarantee provided during
              
 the reporting period 2
            
26
 
 
Total amount of guarantee outstanding
              
 at the end of the reporting period 2
            
9,824
               
Guarantees provided by Sinopec Corp. for its controlled subsidiaries
      
Total amount of guarantee for the controlling subsidiaries during the reporting period
None
Total amount of guarantee for the controlling subsidiaries outstanding at the end of the reporting period
2,228
               
Total amount of guarantee by the Company (including those provided for the controlling subsidiaries)
  
Total amount of guarantee 3
  
12,052
Total amount of guarantee as a percentage of the Company’s net assets
  
3.6%
               
Amount of guarantee provided for shareholders, effective controllers and connected parties
  
None
Amount of debt guarantee provided directly or indirectly for the companies with liabilities to asset ratio of over 70%
  
82
Amount of guarantee in excess of 50% of the total net assets
  
None
               
Total amount of guarantee of the above three items 4
  
82

 
Note 1:As defined in the Listing Rules of the Shanghai Stock Exchange.

 
Note 2:Total amount of guarantee provided during the reporting period and total amount of guarantees outstanding at the end of the reporting period include the guarantees provided by the controlled subsidiaries to external parties. The amount of guarantees assumed by Sinopec Corp. is the amount of the external guarantees provided by each controlling subsidiary multiplied by Sinopec Corp.’s respective shareholding in the controlled subsidiary.

 
Note 3:Total amount of guarantee is the aggregate of the amount of guarantee outstanding at the end of the reporting period (excluding the guarantees provided for controlling subsidiaries) and the amount of guarantees for controlling subsidiaries outstanding at the end of the reporting period.

 
Note 4:“Total amount of guarantee of the above three items” is the aggregate of “amount of guarantee provided for shareholders, effective controllers and connected parties”, “amount of debt guarantees provided directly or indirectly for companies with liabilities to asset ratio of over 70%” and “the amount of guarantees in excess of 50% of net assets”.

 
6.3
Non-operating funds provided between connected parties

□ applicable    √ inapplicable

 
6.4
Material litigation and arbitration

□ applicable    √ inapplicable

 
6.5
Explanations of other significant events, their impact and proposed solutions

√ applicable    □ inapplicable

 
6.5.1    The shares of other listed companies held by the Company and status of investments in shares and securities

√ applicable    □ inapplicable

         
Book value
Book value
  
       
Amount
at the end
at the beginning
  
     
 Number of
of initial
of reporting
of reporting
Accounting
Item
Stock Code
Abbreviation
shares held
investment
period
period
items
               
1
384(Hong Kong)
China Gas
210
HK$ 128
RMB 136
RMB 136
Long-term
   
Holding
million
million
million
million
equity investment
Total
    
—
HK$ 128
RMB 136
RMB 136
—
       
million
million
million
  

 
6.5.2    Stocks of unlisted finance enterprises and companies to be listed held by the Company

□ applicable    √ inapplicable

 
6.5.3    5% above shareholders additional commitments regarding the restricted A Shares

□ applicable    √ inapplicable
 

 
 
6.5.4    Significant Events

 
Sichuan-to-East China Gas Project

 
Sichuan-to-East China Gas Project is an important project in the State’s Eleventh Five-Year Plan. This project consists of two parts. One part is Puguang gas field exploration, development and gas treatment project, the other part is the pipeline project between Puguang gas field and Shanghai. It is expected that the major part of the project will be completed in 2009.

 
Qingdao refinery project

 
The Qingdao refinery, with 10 million tpa of refining capacity, commenced construction in June 2005, and was put into production on May 24, 2008.

 
Tianjin one million tpa ethylene project

 
Tianjin ethylene project includes 12.5 million tpa of refining technical innovation project, 1 million tpa ethylene project and downstream ancillary facilities. The total investment expects to be RMB 26.8 billion. The project construction started in June 2006. It is proceeding smoothly now and will be completed by the end of 2009.

 
Zhenhai one million tpa ethylene project

 
Zhenhai ethylene project with an investment of RMB 21.9 billion, which mainly consists of 1 million tpa ethylene and downstream supporting facilities and auxiliary utilities. The construction of the project commenced in November 2006 and is currently progressing smoothly. The project is expected to be completed in 2010.

 
6.5.5    Issuance of bonds with warrants in domestic market

 
Sinopec Corp. issued RMB 30 billion bonds with warrants on 20 February 2008. The Bonds with Warrants have a 6-year term and 0.8% per annum fixed coupon rate, and the 3.03 billion warrants were distributed with exercise ratio of 2 for 1 and a term of 2 years. The bonds and warrants were listed on Shanghai Stock Exchange on 4 March 2008. The proceeds from issuance will be used to fund the Sichuan-East China Gas Project, Tianjin 1 million tonnes per annum (tpa) ethylene project, Zhenhai 1 million tpa ethylene project and repayment of bank loans. The proceeds from the exercise of warrants, if exercised, will be used to fund Tianjin 1 million tpa ethylene project, Zhenhai 1 million tpa ethylene project, Wuhan ethylene project, repayment of bank loans or replenishment of working capital of Sinopec Corp.

 
6.5.6    Subsidies

 
In recent years, the international crude oil prices rose sharply and the prices of domestic oil products are controlled tightly, which brought about the situation that oil products and crude oil prices had inverted. To ensure stable supply to the oil products market, the Company proactively adopted various measures to increase the supply of oil products in the market, which has achieved remarkable effect and has also led to the significant loss in the Company’s refining business. In March 2008, the Company received subsidies of RMB 12.3 billion, of which RMB 4.9 billion has been included in the income of 2007, and RMB 7.4 billion was included in the income of the first quarter of 2008.

 
From April 1, 2008, the government began to subsidise the Company for the losses suffered from processing of imported crude oil, and put into effect the VAT refund policy for the Company for imported refined oil products. In the second quarter, the Company recorded a total subsidy of RMB 22.93 billion, and RMB 3.07 billion of VAT refund for imported refined oil products.

 
6.5.7    Dividend distribution for the year ended 31 December 2007

 
As approved at the 2007 Annual General Meeting of Sinopec Corp., a final cash dividend of RMB 0.115 (inclusive of tax) per share for 2007 was distributed, which amounted to a total cash dividend of RMB 9.971 billion. On 30 June 2008, Sinopec Corp. distributed the final dividend for 2007 to shareholders whose names appeared on the register of members of Sinopec Corp. on 13 June 2008.

 
For the year of 2007, total cash dividend of RMB 0.165 (inclusive of tax) per share was distributed and the total cash dividend amounted to RMB 14.306 billion.

 
6.5.8    Interim dividend distribution plan for the six-month period ended 30 June 2008

 
With the authorisation of 2007 Annual General Meeting, the interim dividend distribution plan for the six-month period ended 30 June 2008 was approved at the twenty third meeting of the Third Session of the Board of Directors. An interim cash dividend of RMB 0.03 (inclusive of tax) per share will be distributed based on the total number of shares of 86,702.439 million as at 30 June 2008. The total cash dividend amounts to RMB2.601 billion.
 

 
 
The interim dividend will be distributed on or before Monday, 29 September 2008 to the shareholders whose names appear on the register of members of Sinopec Corp. on Friday, 19 September 2008.

 
To be entitled to the interim dividend, holders of H shares shall lodge their share certificate(s) and transfer documents with Hong Kong Registrars Limited at the 46th floor., Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, for registration of transfer, by no later than 4:00pm on Friday, 12 September 2008. The register of members of the H shares of Sinopec Corp. will be closed from Monday, 15 September 2008, to Friday, 19 September 2008 (both dates inclusive).

 
Dividends will be denominated and declared in Renminbi. Dividends for domestic shares will be paid in Renminbi and dividends for foreign shares will be paid in Hong Kong dollars. The exchange rate for dividends to be paid in Hong Kong dollars is the average of the basic exchange rate of Hong Kong dollar to Renminbi published by the People’s Bank of China during the week prior to the date of declaration of dividends, being Friday, 22 August 2008.

§7
Financial Statements

 
The followings are the financial statements of China Petroleum & Chemical Corporation (“the Company”) and its subsidiaries (“the Group”) for the six months ended 30 June 2008, which are extracted from the audited interim financial statements prepared in accordance with the PRC Accounting Standards for Business Enterprises and International Financial Reporting Standards (“IFRS”) with 2007 comparatives.

 
7.1
Auditors’ opinion

Financial statements    □ Unaudited    √ Audited

Auditors’ opinion    √ Standard unqualified opinion    □ Not Standard opinion
 

 
To the Shareholders of
China Petroleum & Chemical Corporation:

We have audited the accompanying financial statements of China Petroleum & Chemical Corporation (the “Company”), which comprise the consolidated balance sheet and balance sheet as at 30 June 2008, and the consolidated income statement and income statement, consolidated statement of changes in equity and statement of changes in equity, consolidated cash flow statement and cash flow statement for the six-month period ended 30 June 2008, and notes to the financial statements.

1.
MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

 
The Company’s management is responsible for the preparation of these financial statements in accordance with the Accounting Standards for Business Enterprises (2006) issued by the Ministry of Finance of the People’s Republic of China. This responsibility includes: (1) designing, implementing and maintaining internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error; (2) selecting and applying appropriate accounting policies; and (3) making accounting estimates that are reasonable.

2.
AUDITOR’S RESPONSIBILITY

 
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with China’s Auditing Standards for the Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

 
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

3.
OPINION

 
In our opinion, the financial statements comply with the requirements of the Accounting Standards for Business Enterprises (2006) issued by the Ministry of Finance of the People’s Republic of China and present fairly, in all material respects, the Company’s consolidated financial position and financial position as at 30 June 2008, and the consolidated results of operations, results of operations, consolidated cash flows and cash flows for the six-month period ended 30 June 2008.

KPMG Huazhen
Certified Public Accountants
 
Registered in the People’s Republic of China
   
 
Zhang Jingjing
 
Zhang Yansheng
   
Beijing, The People’s Republic of China
22 August 2008
 

 
 
7.2
The Group’s and the Company’s financial statements with comparatives

 
7.2.1    Financial statements prepared under the PRC Accounting Standards for Business Enterprises

 
Balance Sheet

 
At 30 June 2008
At 31 December 2007
 
The Group
The Company
The Group
The Company
 
RMB millions
RMB millions
RMB millions
RMB millions
         
Assets
        
Current assets
        
 Cash at bank and in hand
9,774
3,974
8,364
3,105
 Bills receivable
8,938
3,264
12,851
6,377
 Trade accounts receivable
43,084
15,639
22,947
13,547
 Other receivables
20,224
18,234
11,822
18,209
 Advance payments
14,406
13,441
9,402
9,252
 Inventories
163,488
113,537
116,049
65,901
 Other current assets
127
80
100
23
 
－－－－－－－
－－－－－－－
－－－－－－－
－－－－－－－
Total current assets
260,041
168,169
181,535
116,414
 
----------------
----------------
----------------
----------------
         
Non-current assets
        
 Long-term equity investments
31,189
84,240
31,335
85,784
 Fixed assets
365,785
291,729
361,148
290,082
 Construction in progress
105,503
98,598
95,408
80,720
 Intangible assets
16,730
11,371
15,232
10,322
 Goodwill
15,707
—
15,690
—
 Long-term deferred expenses
6,348
5,273
5,842
4,995
 Deferred tax assets
18,037
16,205
10,192
9,418
 Other non-current assets
1,216
90
2,190
735
 
－－－－－－－
－－－－－－－
－－－－－－－
－－－－－－－
         
         
Total non-current assets
560,515
507,506
537,037
482,056
 
----------------
----------------
----------------
----------------
 
－－－－－－－
－－－－－－－
－－－－－－－
－－－－－－－
         
Total assets
820,556
675,675
718,572
598,470
 
＝＝＝＝＝
＝＝＝＝＝
＝＝＝＝＝
＝＝＝＝＝
         
Liabilities and shareholders’ equity
        
Current liabilities
        
 Short-term loans
67,229
20,001
36,954
21,952
 Bills payable
17,563
9,615
12,162
8,613
 Trade accounts payable
126,669
90,363
93,049
58,932
 Receipts in advance
27,448
23,325
25,082
23,412
 Staff costs payable
7,091
6,234
5,905
5,282
 Taxes payable
9,324
9,870
17,562
15,383
 Other payables
65,617
111,658
47,503
65,729
 Short-term debentures payable
—
—
10,074
10,074
 Current portion of non-current liabilities
18,785
18,033
13,466
12,813
 
－－－－－
－－－－－
－－－－－
－－－－－
         
Total current liabilities
339,726
289,099
261,757
222,190
 
----------------
----------------
----------------
----------------
         
Non-current liabilities
        
 Long-term loans
75,920
55,554
77,708
67,055
 Debentures payable
62,479
62,479
42,606
42,606
 Provisions
8,168
7,714
7,613
7,002
 
 
 Deferred tax liabilities
1,471
577
1,492
584
 Other non-current liabilities
1,493
587
1,049
601
         
Total non-current liabilities
149,531
126,911
130,468
117,848
 
----------------
----------------
----------------
----------------
         
Total liabilities
489,257
416,010
392,225
340,038
 
----------------
----------------
----------------
----------------
         
Shareholders’ equity
        
 Share capital
86,702
86,702
86,702
86,702
 Capital reserve
43,545
43,427
38,391
38,175
 Surplus reserves
65,392
65,392
64,797
64,797
 Retained profits
        
  (Including cash dividend declared
        
  after the balance sheet date of
        
  RMB 2,601 million
        
  (2007: Proposed cash dividend
        
  of RMB 9,971 million))
109,832
64,144
111,059
68,758
 
－－－－－
－－－－－
－－－－－
－－－－－
         
Shareholders’ equity attributable
        
 to equity shareholders of the Company
305,471
259,665
300,949
258,432
Minority interests
25,828
—
25,398
—
 
－－－－－
－－－－－
－－－－－
－－－－－
         
Total shareholders’ equity
331,299
259,665
326,347
258,432
 
----------------
----------------
----------------
----------------
         
Total liabilities and shareholders’ equity
820,556
675,675
718,572
598,470
 
＝＝＝＝＝
＝＝＝＝＝
＝＝＝＝＝
＝＝＝＝＝

Income Statement

   
Six-month periods
ended 30 June 2008
Six-month periods
ended 30 June 2007
   
   
The Group
The Company
The Group
The Company
   
RMB millions
RMB millions
RMB millions
RMB millions
           
Operating income
734,783
519,484
563,870
408,967
Less:
Cost of sales
679,678
471,044
461,426
330,838
 
Sales taxes and surcharges
28,451
25,332
14,456
11,996
 
Selling expenses
11,885
9,667
9,535
8,122
 
Administrative expenses
18,721
15,384
17,139
13,478
 
Financial expenses
3,658
3,735
2,760
2,256
 
Exploration expenses,
        
 
 including dry holes
4,728
4,728
5,717
5,715
 
Impairment losses
16,079
15,758
1,535
1,577
Add:
Fair value gain/(loss)
2,956
2,956
(897)
(897)
 
Investment income
1,677
4,806
2,880
9,264
   
－－－－－－
－－－－－－
－－－－－－
－－－－－－
           
Operating (loss) / profit
(23,784)
(18,402)
53,285
43,352
Add:
Non-operating income
33,765
22,669
169
111
Less:
Non-operating expenses
465
415
753
580
   
＝＝＝＝＝＝
＝＝＝＝＝＝
＝＝＝＝＝＝
＝＝＝＝＝＝
           
Profit before taxation
9,516
3,852
52,701
42,883
Less:
Income tax expense
101
(2,100)
16,127
10,814
   
－－－－－－
－－－－－－
－－－－－－
－－－－－－
           
Net profit
9,415
5,952
36,574
32,069
 
＝＝＝＝＝＝
＝＝＝＝＝＝
＝＝＝＝＝＝
＝＝＝＝＝＝
           
 
 
Including:
Net profit made by acquiree
        
 
 before the consolidation
—
  
217
  
   
＝＝＝＝＝＝
  
＝＝＝＝＝＝
  
           
Attributable to:
        
 Equity shareholders of the Company
9,339
  
35,110
  
 Minority interests
76
  
1,464
  
 
＝＝＝＝＝＝
  
＝＝＝＝＝＝
  
           
Basic earnings per share
0.11
  
0.40
  
 
＝＝＝＝＝＝
  
＝＝＝＝＝＝
  
           
Diluted earnings per share
0.08
  
0.40
  
 
＝＝＝＝＝＝
  
＝＝＝＝＝＝
  

Cash Flow Statement

 
Six-month periods
ended 30 June 2008
Six-month periods
ended 30 June 2007
 
 
The Group
The Company
The Group
The Company
 
RMB millions
RMB millions
RMB millions
RMB millions
         
Cash flows from operating activities:
        
Cash received from sale of goods
        
 and rendering of services
843,591
607,618
645,091
471,896
Rentals received
149
88
145
81
Grants received
28,308
20,384
—
—
Other cash received relating to
        
 operating activities
2,399
29,785
1,675
4,915
 
－－－－－
－－－－－－
－－－－－
－－－－－－
         
Sub-total of cash inflows
874,447
657,875
646,911
476,892
 
----------------
----------------
----------------
----------------
         
Cash paid for goods and services
(788,688)
(550,198)
(512,024)
(369,376)
Cash paid for operating leases
(3,116)
(2,792)
(3,000)
(2,874)
Cash paid to and on behalf of employees
(11,694)
(8,604)
(9,579)
(7,498)
Value added tax paid
(19,548)
(16,484)
(22,101)
(16,977)
Income tax paid
(13,326)
(10,517)
(16,787)
(12,798)
Taxes paid other than value added
        
 tax and income tax
(24,993)
(21,312)
(13,163)
(10,787)
Other cash paid relating to
        
 operating activities
(7,096)
(7,851)
(5,557)
(3,507)
 
－－－－－
－－－－－－
－－－－－
－－－－－－
         
Sub-total of cash outflows
(868,461)
(617,758)
(582,211)
(423,817)
 
----------------
----------------
----------------
----------------
 
－－－－－
－－－－－－
－－－－－
－－－－－－
Net cash flow from operating activities
5,986
40,117
64,700
53,075
 
----------------
----------------
----------------
----------------
         
Cash flows from investing activities:
        
Cash received from sale of investments
1,049
771
758
173
Dividends received
1,192
7,021
1,668
8,744
Net cash received from sale of fixed
        
 assets and intangible assets
109
103
158
66
Cash received on maturity of time
        
 deposits with financial institutions
466
44
510
389
Other cash received relating
        
 to investing activities
197
102
370
199
 
－－－－－
－－－－－－
－－－－－
－－－－－－
         
Sub-total of cash inflows
3,013
8,041
3,464
9,571
 
----------------
----------------
----------------
----------------
         
Cash paid for acquisition of fixed
        
 assets and intangible assets
(44,880)
(41,469)
(40,756)
(31,506)
 
 
Cash paid for purchase of investments
(2,675)
(3,570)
(1,037)
(5,999)
Cash paid for purchase of time
        
 deposits with financial institutions
(1,106)
(45)
(3,178)
(468)
Cash paid for acquisition
        
 of subsidiaries, net
—
—
(7,116)
(3,500)
 
－－－－－
－－－－－－
－－－－－
－－－－－－
         
Sub-total of cash outflows
(48,661)
(45,084)
(52,087)
(41,473)
 
----------------
----------------
----------------
----------------
 
－－－－－
－－－－－－
－－－－－
－－－－－－
         
Net cash flow from investing activities
(45,648)
(37,043)
(48,623)
(31,902)
 
----------------
----------------
----------------
----------------
Cash flows from financing activities:
        
Cash received from contribution
        
 from minority shareholders
1,065
—
194
—
Cash received from issuance
        
 of convertible bonds,
        
 net of issuance costs
29,850
29,850
11,368
11,368
Cash received from issuance
        
 of corporate bonds
—
—
5,000
5,000
Cash received from borrowings
431,302
279,437
316,769
205,534
 
－－－－－
－－－－－－
－－－－－
－－－－－－
         
Sub-total of cash inflows
462,217
309,287
333,331
221,902
 
----------------
----------------
----------------
----------------
         
Cash repayments of corporate bonds
(10,000)
(10,000)
(10,000)
(10,000)
Cash repayments of borrowings
(396,247)
(287,551)
(323,035)
(218,890)
Cash paid for dividends, profits
        
 distribution or interest expenses
(14,570)
(13,657)
(13,284)
(12,249)
Dividends paid to minority shareholders
        
 by subsidiaries
(642)
—
(219)
—
Distributions to Sinopec Group Company
(285)
(285)
—
—
 
－－－－－
－－－－－－
－－－－－
－－－－－－
         
Sub-total of cash outflows
(421,744)
(311,493)
(346,538)
(241,139)
 
----------------
----------------
----------------
----------------
 
－－－－－
－－－－－－
－－－－－
－－－－－－
         
Net cash flow from financing activities
40,473
(2,206)
(13,207)
(19,237)
 
----------------
----------------
----------------
----------------
         
Effects of changes in foreign exchange rate
(41)
—
(7)
—
 
----------------
----------------
----------------
----------------
 
－－－－－
－－－－－－
－－－－－
－－－－－－
         
Net increase in cash and cash equivalents
770
868
2,863
1,936
 
＝＝＝＝＝
＝＝＝＝＝＝
＝＝＝＝＝
＝＝＝＝＝＝
 

 
Consolidated Statement of Changes In Equity

           
Total
    
           
shareholders’
    
           
equity
    
           
attributable
    
           
to equity
  
Total
   
Share
Capital
Surplus
Retained
shareholders of
Minority
shareholders’
   
capital
reserve
reserves
profits
the Company
interests
equity
   
RMB millions
RMB millions
RMB millions
RMB millions
RMB
millions
RMB millions
RMB
millions
                 
Balance at 1 January 2007
86,702
38,553
59,519
74,608
259,382
22,417
281,799
Changes in equity for the period
              
1.
Net profit
—
—
—
35,110
35,110
1,464
36,574
2.
Gain and loss recognised
              
 
 directly in equity
              
 
 – Unrealised gain for the
              
 
   change in fair value
              
 
   of available-for- sale
              
 
   financial assets,
              
 
   net of deferred tax
—
170
—
—
170
127
297
   
－－－
－－－
－－－－
－－－
－－－－
－－－
－－－－
                 
Sub-total of 1&2
—
170
—
35,110
35,280
1,591
36,871
3.
Appropriation:
              
 
– Appropriation to
              
 
  surplus reserves
—
—
3,207
(3,207)
—
—
—
 
– Dividend declared
—
—
—
(9,537)
(9,537)
—
(9,537)
4.
Distributions to minority
              
 
 interests net of contributions
—
—
—
—
—
(25)
(25)
   
－－－
－－－
－－－－
－－－
－－－－
－－－
－－－－
                 
Balance at 30 June 2007
86,702
38,723
62,726
96,974
285,125
23,983
309,108
 
＝＝＝
＝＝＝
＝＝＝＝
＝＝＝
＝＝＝＝
＝＝＝
＝＝＝＝
                 
Balance at 1 January 2008
86,702
38,391
64,797
111,059
300,949
25,398
326,347
Changes in equity for the period
              
1.
Net profit
—
—
—
9,339
9,339
76
9,415
2.
Gain and loss recognised
              
 
 directly in equity
              
 
 – Unrealised loss for the
              
 
   change in fair value
              
 
   of available-for- sale
              
 
   financial assets, net
              
 
   of deferred tax
—
(1,666)
—
—
(1,666)
(69)
(1,735)
 
 – Issuance of the Bonds
              
 
   with Warrants
—
6,879
—
—
6,879
—
6,879
   
－－－
－－－
－－－－
－－－
－－－－
－－－
－－－－
                 
Sub-total of 1&2
—
5,213
—
9,339
14,552
7
14,559
                 
3.
Appropriation:
              
 
– Appropriation to
              
 
  surplus reserves
—
—
595
(595)
—
—
—
 
– Dividend declared
—
—
—
(9,971)
(9,971)
—
(9,971)
4.
Contributions from
              
 
 minority interests,
              
 
 net of distributions
—
—
—
—
—
423
423
5.
Distribution to Sinopec
              
 
 Group Company
—
(59)
—
—
(59)
—
(59)
   
－－－
－－－
－－－－
－－－
－－－－
－－－
－－－－
                 
Balance at 30 June 2008
86,702
43,545
65,392
109,832
305,471
25,828
331,299
 
＝＝＝
＝＝＝
＝＝＝＝
＝＝＝
＝＝＝＝
＝＝＝
＝＝＝＝
 

 
Statement of Changes In Equity

           
Total
   
Share
Capital
Surplus
Retained
shareholders’
   
capital
reserve
reserves
profits
equity
   
RMB millions
RMB millions
RMB millions
RMB millions
RMB  millions
Balance at 1 January 2007
86,702
36,526
59,329
33,415
215,972
Changes in equity for the period
          
1.
Net profit (as previously
          
 
 reported)
—
—
—
24,476
24,476
2.
Investment income from
          
 
 subsidiaries
—
—
—
7,593
7,593
   
－－－－－
－－－－－
－－－－－
－－－－－
－－－－－
             
Sub-total of 1&2 (as restated)
—
—
—
32,069
32,069
             
3.
Appropriation:
          
 
– Appropriation to
          
 
  surplus reserves
—
—
3,207
(3,207)
—
 
– Dividend declared
—
—
—
(9,537)
(9,537)
   
－－－－－
－－－－－
－－－－－
－－－－－
－－－－－
             
Balance at 30 June 2007
86,702
36,526
62,536
52,740
238,504
 
＝＝＝＝＝
＝＝＝＝＝
＝＝＝＝＝
＝＝＝＝＝
＝＝＝＝＝
             
Balance at 1 January 2008
86,702
38,175
64,797
68,758
258,432
Changes in equity for the period
          
1.
Net profit
—
—
—
5,952
5,952
2.
Gain and loss recognised
          
 
 directly in equity
          
 
 – Unrealised loss for the
          
 
   change in fair value
          
 
   of available-for- sale
          
 
   financial assets, net
          
 
   of deferred tax
—
(1,568)
—
—
(1,568)
 
 – Issuance of the Bonds
          
 
   with Warrants
—
6,879
—
—
6,879
   
－－－－－
－－－－－
－－－－－
－－－－－
－－－－－
             
Sub-total of 1&2
—
5,311
—
5,952
11,263
             
3.
Appropriation:
          
 
– Appropriation to
          
 
  surplus reserves
—
—
595
(595)
—
 
– Dividend declared
—
—
—
(9,971)
(9,971)
4.
Distribution to Sinopec
          
 
 Group Company
—
(59)
—
—
(59)
   
－－－－－
－－－－－
－－－－－
－－－－－
－－－－－
             
Balance at 30 June 2008
86,702
43,427
65,392
64,144
259,665
 
＝＝＝＝＝
＝＝＝＝＝
＝＝＝＝＝
＝＝＝＝＝
＝＝＝＝＝
 

 
 
7.2.2    Financial statements prepared under International Financial Reporting Standards

 
Consolidated income statement

 
Six-month periods
ended 30 June
 
 
2008
2007
 
RMB millions
RMB millions
     
Turnover and other operating revenues
    
 Turnover
722,429
551,361
 Other operating revenues
12,354
12,509
 
－－－－－－－
－－－－－－
     
     
 
734,783
563,870
 
-----------
-----------
     
Other income
33,402
—
 
-----------
-----------
     
Operating expenses
    
 Purchased crude oil, products and operating
    
  supplies and expenses
(674,068)
(439,844)
 Selling, general and administrative expenses
(18,221)
(17,637)
 Depreciation, depletion and amortisation
(22,435)
(19,470)
 Exploration expenses, including dry holes
(4,728)
(5,717)
 Personnel expenses
(12,626)
(10,786)
 Employee reduction expenses
(199)
(150)
 Taxes other than income tax
(28,451)
(14,456)
 Other operating expenses, net
(235)
(2,226)
 
－－－－－－－
－－－－－－
     
Total operating expenses
(760,963)
(510,286)
 
-----------
-----------
     
     
Operating profit
7,222
53,584
 
-----------
-----------
     
Finance costs
    
 Interest expense
(5,563)
(3,912)
 Interest income
212
372
 Unrealised gain/(loss) on embedded derivative
    
  component of the Convertible Bonds
2,956
(897)
 Foreign exchange loss
(367)
(66)
 Foreign exchange gain
2,060
846
 
－－－－－－－
－－－－－－
     
Net finance costs
(702)
(3,657)
 
-----------
-----------
     
Investment income
319
666
 
-----------
-----------
Share of profits less losses from associates
    
 and jointly controlled entities
1,358
2,214
 
-----------
-----------
 
－－－－－－－
－－－－－－
     
Profit before taxation
8,197
52,807
Tax benefit/(expense)
136
(14,965)
 
－－－－－－－
－－－－－－
     
Profit for the period
8,333
37,842
 
＝＝＝＝＝＝＝
＝＝＝＝＝＝
     
     
Attributable to:
    
 Equity shareholders of the Company
8,255
36,375
 Minority interests
78
1,467
 
－－－－－－－
－－－－－－
     
Profit for the period
8,333
37,842
 
＝＝＝＝＝＝＝
＝＝＝＝＝＝
     
 
 
Dividends payable to equity shareholders
    
 of the Company attributable to the period:
    
Interim dividend declared after the balance sheet date
2,601
4,335
 
＝＝＝＝＝＝＝
＝＝＝＝＝＝
     
Earnings per share:
    
 Basic earnings per share
0.10
0.42
 
＝＝＝＝＝＝＝
＝＝＝＝＝＝
     
 Diluted earnings per share
0.06
0.42
 
＝＝＝＝＝＝＝
＝＝＝＝＝＝
 

 
Consolidated balance sheet

 
At 30 June
At 31 December
 
2008
2007
 
RMB millions
RMB millions
     
Non-current assets
    
 Property, plant and equipment
378,384
375,142
 Construction in progress
105,503
95,408
 Goodwill
15,507
15,490
 Interest in associates
15,981
16,865
 Interest in jointly controlled entities
13,520
12,723
 Investments
2,064
3,194
 Deferred tax assets
18,278
10,439
 Lease prepayments
9,730
8,224
 Long-term prepayments and other assets
10,792
10,124
 
－－－－－－
－－－－－－
     
Total non-current assets
569,759
547,609
 
-----------
-----------
     
Current assets
    
 Cash and cash equivalents
8,466
7,696
 Time deposits with financial institutions
1,308
668
 Trade accounts receivable, net
43,084
22,947
 Bills receivable
8,938
12,851
 Inventories
163,474
116,032
 Prepaid expenses and other current assets
43,440
24,922
 
－－－－－－
－－－－－－
     
Total current assets
268,710
185,116
 
-----------
-----------
     
Current liabilities
    
 Short-term debts
64,758
44,654
 Loans from Sinopec Group Company and
    
  fellow subsidiaries
21,256
15,840
 Trade accounts payable
126,669
93,049
 Bills payable
17,563
12,162
 Accrued expenses and other payables
113,093
89,171
 Income tax payable
5,070
10,479
 
－－－－－－
－－－－－－
     
Total current liabilities
348,409
265,355
 
-----------
-----------
 
－－－－－－
－－－－－－
     
Net current liabilities
(79,699)
(80,239)
 
-----------
-----------
 
－－－－－－
－－－－－－
     
 

 
Total assets less current liabilities
490,060
467,370
 
-----------
-----------
     
Non-current liabilities
    
 Long-term debts
101,529
83,134
 Loans from Sinopec Group Company
    
  and fellow subsidiaries
36,870
37,180
 Deferred tax liabilities
5,372
5,636
 Other liabilities
9,661
8,662
 
－－－－－－
－－－－－－
     
     
Total non-current liabilities
153,432
134,612
 
-----------
-----------
 
－－－－－－
－－－－－－
     
 
336,628
332,758
 
＝＝＝＝＝＝
＝＝＝＝＝＝
     
Equity
    
 Share capital
86,702
86,702
 Reserves
224,169
220,731
     
     
Total equity attributable to equity shareholders
    
 of the Company
310,871
307,433
Minority interests
25,757
25,325
 
－－－－－－
－－－－－－
     
Total equity
336,628
332,758
 
＝＝＝＝＝＝
＝＝＝＝＝＝


Consolidated Statement of Changes in Equity
(Amounts in millions)
                 
Total equity
    
                 
attributable
    
                 
to equity
    
         
Statutory
Discretionary
    
shareholders
    
 
Share
Capital
Share
Revaluation
surplus
surplus
Other
Retained
of the
Minority
Total
 
capital
reserve
premium
reserve
reserve
reserve
reserves
earnings
Company
interests
equity
 
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
                       
Balance at 1 January 2007
86,702
(21,590)
18,072
24,752
32,094
27,000
1,758
95,546
264,334
22,323
286,657
Net income recognised
                      
 directly in equity:
                      
 Unrealised gain for the
                      
  change in fair value of
                      
  available-for-sale
                      
  financial assets,
                      
  net of deferred tax
—
—
—
—
—
—
170
—
170
127
297
 Effect of change in tax rate
—
—
—
—
—
—
(54)
—
(54)
17
(37)
Profit for the period
—
—
—
—
—
—
—
36,375
36,375
1,467
37,842
 
－－
－－
－－
－－
－－
－－－
－－
－－
－－
－－
－
                       
Total recognised income
                      
 for the period
—
—
—
—
—
—
116
36,375
36,491
1,611
38,102
Final dividend for 2006
—
—
—
—
—
—
—
(9,537)
(9,537)
—
(9,537)
Adjustment to statutory
                      
 surplus reserve
—
—
—
—
235
—
—
(235)
—
—
—
Appropriation
—
—
—
—
3,207
—
—
(3,207)
—
—
—
Revaluation surplus realised
—
—
—
(150)
—
—
—
150
—
—
—
Realisation of deferred tax
                      
 on lease prepayments
—
—
—
—
—
—
(4)
4
—
—
—
Transfer from retained
                      
 earnings to other reserves
—
—
—
—
—
—
185
(185)
—
—
—
Distributions to minority
                      
 interests net of
                      
 contributions
—
—
—
—
—
—
—
—
—
(25)
(25)
 
－－
－－
－－
－－
－－
－－－
－－
－－
－－
－－
－
                       
Balance at 30 June 2007
86,702
(21,590)
18,072
24,602
35,536
27,000
2,055
118,911
291,288
23,909
315,197
 
＝＝
＝＝
＝＝
＝＝
＝＝
＝＝＝
＝＝
＝＝
＝＝
＝＝
＝
                       
Balance at 1 January 2008
86,702
(22,652)
18,072
24,114
37,797
27,000
3,100
133,300
307,433
25,325
332,758
Net income/(loss) recognised
                      
 directly in equity:
                      
 Unrealised loss for the
                      
  change in fair value of
                      
  available-for-sale
                      
  financial assets,
                      
  net of deferred tax
—
—
—
—
—
—
(1,666)
—
(1,666)
(69)
(1,735)
Profit for the period
—
—
—
—
—
—
—
8,255
8,255
78
8,333
 
－－
－－
－－
－－
－－
－－－
－－
－－
－－
－－
－
                       
Total recognised income and
                      
 expenses for the period
—
—
—
—
—
—
(1,666)
8,255
6,589
9
6,598
Issuance of the Bonds
                      
 with Warrants
—
6,879
—
—
—
—
—
—
6,879
—
6,879
Final dividend for 2007
—
—
—
—
—
—
—
(9,971)
(9,971)
—
(9,971)
Appropriation
—
—
—
—
595
—
—
(595)
—
—
—
Revaluation surplus realised
—
—
—
(122)
—
—
—
122
—
—
—
Realisation of deferred tax
                      
 on lease prepayments
—
—
—
—
—
—
(4)
4
—
—
—
Distribution to Sinopec
                      
 Group Company
—
(59)
—
—
—
—
—
—
(59)
—
(59)
Contributions from minority
                      
 interests net of
                      
 distributions
—
—
—
—
—
—
—
—
—
423
423
                       
                       
Balance at 30 June 2008
86,702
(15,832)
18,072
23,992
38,392
27,000
1,430
131,115
310,871
25,757
336,628
 
＝＝
＝＝
＝＝
＝＝
＝＝
＝＝＝
＝＝
＝＝
＝＝
＝＝
＝


Consolidated Cash Flow Statement
(Amounts in millions)

 
Six-month periods
ended 30 June
 
 
2008
2007
 
RMB
RMB
     
Net cash generated from operating activities
2,640
62,295
 
-----------
-----------
     
Investing activities
    
 Capital expenditure
(41,837)
(35,707)
 Exploratory wells expenditure
(2,907)
(4,320)
 Purchase of investments, investments in associates
    
  and subsidiaries, net of cash acquired
(2,675)
(4,653)
 Proceeds from disposal of investments
    
  and investments in associates
1,049
758
 Proceeds from disposal of property,
    
  plant and equipment
109
125
 Purchase of time deposits with financial institutions
(1,106)
(3,178)
 Proceeds from maturity of time deposits
    
  with financial institutions
466
510
 
－－－－－－
－－－－
     
Net cash used in investing activities
(46,901)
(46,465)
 
-----------
-----------
     
Financing activities
    
 Proceeds of issuance of convertible bonds,
    
  net of issuance costs
29,850
11,368
 Proceeds of issuance of corporate bonds
—
5,000
 Proceeds from bank and other loans
431,302
316,769
 Repayments of corporate bonds
(10,000)
(10,000)
 Repayments of bank and other loans
(396,247)
(323,035)
 Distributions to minority interests
(642)
(219)
 Contributions from minority interests
1,065
194
 Dividend paid
(9,971)
(9,537)
 Distributions to Sinopec Group Company
(285)
(3,500)
 
－－－－－－
－－－－
     
Net cash generated from/(used in) financing activities
45,072
(12,960)
 
-----------
-----------
 
－－－－－－
－－－－

Net increase in cash and cash equivalents
811
2,870
Cash and cash equivalents at 1 January
7,696
7,063
Effect of foreign exchange rate changes
(41)
(7)
 
－－－－－－
－－－－－
     
Cash and cash equivalents at 30 June
8,466
9,926
 
＝＝＝＝＝＝
＝＝＝＝＝

7.3 
In the reporting period, there was no change to the accounting policies, accounting estimate or audit methods.

7.4 
In the reporting period, there was no adjustment to accounting errors.

7.5 
In the reporting period, there was no significant change to the scope of consolidation of the financial statements.

§8
Repurchase, Sales and Redemption of shares

 
Apart from the disclosures above, Sinopec Corp. or any of its subsidiaries have not repurchased, sold or redeemed any listed securities of Sinopec Corp. or its subsidiaries during the reporting period.
   
 
 
§9
Application of the Model Code

 
In this reporting period, no director has infringed the requirements set out under the Model Code for Securities Transactions by Directors of Listed Issuers, Appendix 10 to the Hong Kong Listing Rules.

§10
Corporate Governance Practices

 
Sinopec Corp. has complied with the code provisions of the Code on Corporate Governance Practice contained in Appendix 14 to the Hong Kong Listing Rules.

§11
Review of Financial Results

 
The financial results for the six months ended 30 June 2008 have been reviewed with no disagreement by the Audit Committee of Sinopec Corp.

§12
The interim report containing all the information required by paragraphs 46(1) to (9) of Appendix 16 to the Hong Kong Listing Rules will be published on the website of the Hong Kong Stock Exchange in due course.

 
This announcement is published in both English and Chinese languages. The Chinese version shall prevail.

By Order of the Board
Su Shulin
Chairman

Beijing, the PRC, 22 August 2008

As at the date of this Announcement, the directors of Sinopec Corp are Messrs. Su Shulin*, Zhou Yuan*, Wang Tianpu#, Zhang Jianhua#, Wang Zhigang#, Dai Houliang#, Fan Yifei*, Yao Zhongmin*, Shi Wanpeng+, Liu Zhongli+ and Li Deshui+.

# Executive Directors
* Non-executive Directors
+ Independent Non-executive Directors  
 
 
 
 
Document 3
 
 
CONTENTS
 
2
Company Profile
3
Principal Financial Data and
 
Indicators
5
Changes in Share Capital and
 
Shareholdings of Principal
 
Shareholders
7
Business Review and Prospects
12
Management’s Discussion and
 
Analysis
25
Significant Events
31
Directors, Supervisors and
 
Senior Management
32
Financial Statements
131
Documents for Inspection
132
Confirmation from the
 
Directors and Senior Management












 

This interim report contains Òforward-looking statementsÓ. All statements, other than statements of historical facts, that address business activities, events or developments that the Company expects or anticipates will or may occur in the future (including, but not limited to projections, targets, reserves and other estimates and business plans) are forward-looking statements. The actual results or developments of the Company may differ materially from those indicated by these forward-looking statements as a result of various factors and uncertainties. The Company makes the forward-looking statements referred to herein as at 22 August 2008 and, unless otherwise required by the relevant regulatory authorities, undertakes no obligation to update these statements.
 
1
 
 
IMPORTANT NOTICE: THE BOARD OF DIRECTORS AND THE SUPERVISORY BOARD OF CHINA PETROLEUM & CHEMICAL CORPORATION (ÒSINOPEC CORP.Ó) AND ITS DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT WARRANT THAT THERE ARE NO MATERIAL OMISSIONS, OR MISREPRESENTATIONS OR MISLEADING STATEMENTS CONTAINED IN THIS INTERIM REPORT AND SEVERALLY AND JOINTLY ACCEPT FULL RESPONSIBILITY FOR THE AUTHENTICITY, ACCURACY AND COMPLETENESS OF THE INFORMATION CONTAINED IN THIS INTERIM REPORT. THERE IS NO OCCUPANCY OF NON-OPERATING FUNDS BY THE SUBSTANTIAL SHAREHOLDER OF THE COMPANY. MR. SHI WANPENG, MR. LI DESHUI, MR. YAO ZHONGMIN AND MR. FAN YIFEI, DIRECTORS OF SINOPEC CORP., DID NOT ATTEND THE TWENTY THIRD MEETING OF THE THIRD SESSION OF THE BOARD FOR REASONS OF OFFICIAL DUTIES. MR. SHI WANPENG AND LI DESHUI, DIRECTORS OF SINOPEC CORP., AUTHORISED MR. LIU ZHONGLI AND MR. YAO ZHONGMIN AND MR. FAN YIFEI, DIRECTORS OF SINOPEC CORP., AUTHORISED MR. WANG TIANPU TO VOTE ON THEIR BEHALF IN RESPECT OF THE RESOLUTIONS PUT FORWARD IN THE MEETING OF THE BOARD. MR. SU SHULIN, CHAIRMAN OF THE BOARD, MR. WANG TIANPU, DIRECTOR AND PRESIDENT, MR. DAI HOULIANG , DIRECTOR, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER AND MR. LIU YUN, HEAD OF THE ACCOUNTING DEPARTMENT WARRANT THE AUTHENTICITY AND COMPLETENESS OF THE FINANCIAL STATEMENTS CONTAINED IN THIS INTERIM REPORT.

THE FINANCIAL STATEMENTS FOR THE SIX-MONTH PERIOD ENDED 30 JUNE 2008 OF SINOPEC CORP. AND ITS SUBSIDIARIES (ÒTHE COMPANYÓ) PREPARED IN ACCORDANCE WITH THE PRC ACCOUNTING STANDARDS FOR BUSINESS ENTERPRISES (ÒASBEÓ), AND INTERNATIONAL FINANCIAL REPORTING STANDARDS (ÒIFRSÓ) HAVE BEEN AUDITED BY KPMG HUAZHEN AND KPMG, RESPECTIVELY, AND BOTH FIRMS HAVE ISSUED STANDARD UNQUALIFIED OPINIONS ON THE FINANCIAL STATEMENTS CONTAINED IN THIS INTERIM REPORT.

 
 
COMPANY PROFILE
Sinopec Corp. is the first company in China listed on the stock exchanges in Hong Kong, New York, London and Shanghai, and is also an integrated energy and chemical company with upstream, midstream and downstream operations. The principal operations of the Company include: exploring for and developing, producing and trading crude oil and natural gas; processing crude oil, producing petroleum products and trading, transporting, distributing and marketing petroleum products; producing, distributing and trading petrochemical products. Sinopec Corp.’s basic information is as follows:
 
LEGAL NAME
中国石油化工股份有限公司
 
CHINESE ABBREVIATION
中國石化
 
ENGLISH NAME
China Petroleum & Chemical Corporation
 
ENGLISH ABBREVIATION
Sinopec Corp.
 
LEGAL REPRESENTATIVE
Mr. Su Shulin
 
AUTHORISED REPRESENTATIVES
Mr. Wang Tianpu, Mr. Chen Ge
 
SECRETARY TO THE BOARD OF DIRECTORS
Mr. Chen Ge
  
REPRESENTATIVE ON SECURITIES
MATTERS
Mr. Huang Wensheng
 
REGISTERED ADDRESS, PLACE OF BUSINESS AND CORRESPONDENCE ADDRESS
 
6A Huixindong Street
Chaoyang District
Beijing, PRC
Postcode: 100029
Tel: 86-10-64990060
Fax: 86-10-64990022
Website: http://www.sinopec.com
Email: ir@sinopec.com
          media@sinopec.com
 
PLACE OF BUSINESS IN HONG KONG
20th Floor, Office Tower, Convention Plaza
1 Harbour Road, Wanchai, Hong Kong
 
NEWSPAPERS FOR INFORMATION
DISCLOSURE
Mainland China:
China Securities Journal
Shanghai Securities News
Securities Times
 
Hong Kong:
China Daily (English)
Wen Wei Po
 
INTERNET WEBSITE PUBLISHING INTERIM REPORT
DESIGNATED BY THE CHINA SECURITIES
REGULATORY COMMISSION
http://www.sse.com.cn
  
PLACES WHERE THE INTERIM REPORT IS AVAILABLE FOR INSPECTION
 
China: Board Secretariat
China Petroleum & Chemical
Corporation
6A Huixindong Street,
Chaoyang District, Beijing, PRC
 
USA:   Citibank, N.A.
388 Greenwich Street, 14th floor
New York, NY 10013 USA
 
UK:     Citibank N. A.
Citigroup Centre
Canada Square
Canary Wharf
London E14 5LB UK
 
PLACES OF LISTING OF SHARES, STOCK NAMES
AND STOCK CODES
 
A Share:            Shanghai Stock Exchange
Stock name: SINOPEC CORP
Stock code: 600028
 
H Share:           Hong Kong Stock Exchange
Stock name: SINOPEC CORP
Stock code: 386
 
ADR:                 New York Stock Exchange
Stock name: SINOPEC CORP
Stock code: SNP
 
London Stock Exchange
Stock name: SINOPEC CORP
Stock code: SNP

 
 
 
 
 
2
PRINCIPAL FINANCIAL DATA AND INDICATORS
1
FINANCIAL DATA AND INDICATORS PREPARED IN ACCORDANCE WITH THE PRC ACCOUNTING STANDARDS FOR BUSINESS ENTERPRISES (ÒASBEÓ)

 
At 30 June
At 31 December
Changes from the
 
2008
2007
end of last year
Items
RMB millions
RMB millions
(%)
Total assets
820,556
718,572
14.2
Shareholders’ equity attributable to equity shareholders of the Company 
305,471
300,949
1.5
Net assets per share (RMB) (Fully diluted)
3.523
3.471
1.5
Adjusted net assets per share (RMB)
3.437
3.391
1.4
       
     
Changes over the
 
Six-month periods ended 30 June
same period of
 
2008
2007
the preceding year
Items
RMB millions
RMB millions
(%)
Operating (loss) / profit
(23,784)
53,285
(144.6)
Profit before taxation
9,516
52,701
(81.9)
Net profit attributable to equity shareholders of the Company
9,339
35,110
(73.4)
Net (loss) / profit before extraordinary gain and loss
(17,445)
34,924
(150.0)
Return on net assets (%)
3.06
12.31
(9.25) percentage points
Basic earnings per share (RMB)
0.108
0.405
(73.4)
Basic (loss) / earnings per share before extraordinary gain and loss (RMB)
(0.201)
0.403
(150.0)
Diluted earnings per share (RMB)
0.076
0.405
(81.0)
Net cash flow from operating activities
5,986
64,700
(90.7)
Net cash flow from operating activities per share (RMB)
0.069
0.746
(90.7)

Extraordinary items and corresponding amounts:

 
Six-month period ended 30 June 2008
 
(Income)/expense
Items
RMB millions
   
Loss on disposal of fixed assets
23
Employee reduction expenses
199
Donations
77
Gain on disposal of investments
(198)
Other non-operating income and expenses
2
Written back of provisions for impairment losses made in previous years
(159)
Grants
(33,402)
Subtotal
(33,458)
Tax effect
5,572
Total
(27,886)
Attributable to: Equity shareholders of the Company
(26,784)
    Minority interests
(1,102)
 
 
3

 
2    FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS (ÒIFRSÓ)

     
Changes over
     
the same
 
Six-month periods ended 30 June
period of the
 
2008
2007
preceding year
Items
RMB millions
RMB millions
(%)
       
Operating profit
7,222
53,584
(86.5)
Profit attributable to equity shareholders of the Company
8,255
36,375
(77.3)
Return on capital employed (%) Note
1.33
8.21
(6.88)
percentage points
       
Basic earnings per share (RMB)
0.095
0.420
(77.3)
Diluted earnings per share (RMB)
0.064
0.420
(84.8)
Net cash flow generated from operating activities
2,640
62,295
(95.8)
Net cash flow generated from operating activities per share (RMB)
0.030
0.718
(95.8)

 
Note:
Return on capital employed = operating profit x (1 - income tax rate)/capital employed
       
     
Changes from
 
At 30 June
At 31 December
the end of
 
2008
2007
last year
Items
RMB millions
RMB millions
(%)
       
Total assets
838,469
732,725
14.4
Total equity attributable to equity shareholders of the Company
310,871
307,433
1.1
Net assets per share (RMB)
3.586
3.546
1.1
Adjusted net assets per share (RMB)
3.499
3.466
1.0

3
MAJOR DIFFERENCES BETWEEN AUDITED FINANCIAL STATEMENTS PREPARED UNDER ASBE AND IFRS

 
(1)
Analysis of effects of major differences between the net profit under ASBE and the profit for the period under IFRS

 
Six-month periods ended 30 June
 
2008
2007
Items
RMB millions
RMB millions
     
Net profit under ASBE
9,415
36,574
Adjustments:
    
 
Oil and gas properties
(1,334)
91
 
Reduced amortisation on revaluation of land use rights
15
15
 
Effects of the above adjustments on taxation
237
1,162
Profit for the period under IFRS
8,333
37,842

 
(2)
Analysis of effects of major differences between the shareholders’ equity under ASBE and total equity under IFRS

 
At 30 June
At 31 December
 
2008
2007
Items
RMB millions
RMB millions
     
Shareholders’ equity under ASBE
331,299
326,347
Adjustments:
    
 
Oil and gas properties
10,005
11,339
 
Revaluation of land use rights
(1,027)
(1,042)
 
Effects of the above adjustments on taxation
(3,649)
(3,886)
Total equity under IFRS
336,628
332,758
 
4
 
CHANGES IN SHARE CAPITAL AND SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERS
1
CHANGES IN THE SHARE CAPITAL OF SINOPEC CORP.
 
There were no changes in the total number of shares or equity structure of Sinopec Corp. during the reporting period.

2
SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERS
 
As at 30 June 2008, there were a total of 1,290,016 shareholders of Sinopec Corp., of which 1,283,242 were holders of A Shares and 6,774 were holders of H Shares. The public float of Sinopec Corp. satisfied the minimum requirements under the Listing Rules of the Hong Kong Stock Exchange.

 
(1)    Top ten shareholders
 
Unit: 1,000 Shares

           
           
   
As a percentage
Number of
    
   
of total
shares held
Number of
  
   
shares
at the end
shares
Number of
 
Nature of
at the end of
of reporting
with selling
pledges or
Name of Shareholders
shareholders
reporting period
period
restrictions
lock-ups
   
(%)
      
           
China Petrochemical Corporation
State-owned shares
75.84
65,758,044
61,422,922
0
HKSCC (Nominees) Limited
H shares
19.26
16,700,144
0
N/A
Guotai Junan Securities Co., Ltd
A Shares
0.44
377,906
0
38,230
E Fund 50 Stock Index
          
Investment Fund
A Shares
0.12
104,190
0
0
Bosera Thematic Sector
          
Stock Investment Fund
A Shares
0.11
95,519
0
0
Huabao Xingye Selected Sector
          
Stock Investment Fund
A Shares
0.06
53,998
0
0
Shanghai Stock Exchange 50 Tradable
          
Open-ended Securities Index
          
Investment Fund
A Shares
0.05
46,797
0
0
Tongde Securities Investment Fund
A Shares
0.05
45,606
0
0
National Social Security Fund
          
106 Portfolio
A Shares
0.05
40,000
0
0
Shanghai Stock Exchange Dividend
          
Tradable Open-ended Securities
          
Index Investment Fund
A Shares
0.04
34,890
0
0

 
(2)    Top ten shareholders of shares without selling restrictions
 
Unit: 1,000 shares
     
 
Number of
Type of
Name of Shareholders
shares held
shares
     
HKSCC (Nominees) Limited
16,700,144
H shares
China Petrochemical Corporation
4,335,122
A Shares
Guotai Junan Securities Co., Ltd.
377,906
A Shares
E Fund 50 Stock Index Investment Fund
104,190
A Shares
Bosera Thematic Sector Stock Investment Fund
95,519
A Shares
Huabao Xingye Selected Sector Stock Investment Fund
53,998
A Shares
Shanghai Stock Exchange 50 Tradable Open-ended Securities
    
Index Investment Fund
46,797
A Shares
Tongde Securities Investment Fund
45,606
A Shares
National Social Security Fund 106 Portfolio
40,000
A Shares
Shanghai Stock Exchange Dividend Tradable Open-ended Securities
    
Index Investment Fund
34,890
A Shares
     

 
Statement on the connected relationship or activity in concert among the aforementioned shareholders:

 
We are not aware of any connection or activities in concert among the top ten shareholders of floating stock.
 
5

 
(3)Number of shares held by top ten holders of shares with selling restrictions and selling conditions
  
 
Unit: 1,000 shares

   
Number of shares
Date when the
Number of additional
  
No.
Shareholders
with selling
shares could be traded
shares could be traded
Selling
 
with selling restrictions
 restrictions
through listing
through listing
restrictions
           
1
China Petrochemical Corporation
61,422,922
10 October, 2008
4,335,122
2 years
   
57,087,800
12 October, 2009
57,087,800
3 years

 
(4)
Information disclosed by the shareholders of H Shares according to the Securities and Futures Ordinance as at 30 June 2008

     
Approximate
     
percentage of
   
Number of shares
Sinopec Corp.’s
 
Capacity of
interests held or
interests
Name of shareholders
interests held
regarded as held
(H Share) (%)
       
JPMorgan
Beneficial owner
357,648,198(L)
2.13
   
203,962,143(S)
1.22
 
Investment manager
763,608,467(L)
4.55
 
Custodian corporation/
616,126,287(L)
3.67
 
approved lending agent
    
AllianceBernstein L.P.
Investment manager
1,341,000,879(L)
7.99
 
Interests of corporation controlled
    
 
by the substantial shareholder
169,354,820(L)
1.01
UBS AG
Beneficial owner
868,929,878(L)
5.18
   
469,446,719(S)
2.80
 
Person having security interests in shares
94,363,975(L)
0.56
   
90,135,314(S)
0.54
 
Interests of corporation controlled
    
 
by the substantial shareholder
251,308,679(L)
1.50
   
60,369,000(S)
0.36
Templeton Asset Management Limited
Investment manager
1,155,786,105(L)
6.89

 
Note:
(L): Long position, (S): Short position

3
CHANGES IN THE CONTROLLING SHAREHOLDERS AND THE EFFECTIVE CONTROLLER
 
There was no change in the controlling shareholders or the effective controller during the reporting period.
 
6

 
BUSINESS REVIEW AND PROSPECTS
BUSINESS REVIEW
In the first half of 2008, the Chinese economy continued to grow steadily and rapidly, with a GDP growth rate of 10.4%. Apparent domestic consumption of oil products (inclusive of gasoline, diesel and kerosene) and ethylene equivalent consumption increased by 13.9% and 2.5% respectively over the same period last year.

In the first half of 2008, confronted with complicated and severe business conditions featured by soaring crude oil prices and tight control on price of oil products in domestic market, the Company managed to increase oil and gas production, speed up structure adjustment, and took a variety of measures to increase the supply of oil products and made efforts to guarantee the domestic market supply of oil products through optimised production and operation activities, improved management, increased profitability through taping potentials, conserving energy and reducing emissions, and realised steady growth in oil and gas production, refinery throughput, sales volume of oil products and the production of major chemical products.

1
PRODUCTION AND OPERATIONS

(1)
Exploration and Production Segment
 
In the first half of 2008, the international crude oil prices soared, and the average price of Platt’s Brent spot price was US$ 109.14/barrel, increased by 72.53% over the same period last year.
 
 
 
7
 
 
In exploration, the Company made new progress in petroleum exploration in Tahe oil field, in natural gas exploration in the surrounding areas of Puguang gas field in northeastern Sichuan, western Sichuan and the southern area in Songlao basin, and in the exploration of concealed oil and natural gas reserves in the matured fields in the east of China.
 
 
With respect to development, through such measures as strengthening the comprehensive adjustments in the matured fields, optimising the construction process of production capacity in the new blocks and enhancing the development of low-grade reserves and speeding up the pace of increasing recovery rate, the Company has yielded marked achievements in increasing both oil and gas reserves and production. Moreover, the construction of Sichuan-East China Gas project has been progressing smoothly. In the first half of this year, the Company produced 147.38 million barrels of crude oil, increased by 2.4%, and produced 144.2 billion cubic feet of natural gas, increased by 3.3% over the same period last year.

 
Summary of Operations of Exploration and Production Segment

 
Six-month periods
  
 
ended 30 June
Changes
 
2008
2007
(%)
       
Crude oil production (mmbbls)
147.38
143.88
2.4
Natural gas production (bcf)
144.2
139.6
3.3
Newly added proved reserve of crude oil (mmbbls)
158.74
147.88
7.3
Newly added proved reserve of natural gas (bcf)
186.9
158.6
17.8
       
 
At 30 June
At 31 December
Changes
 
2008
2007
(%)
       
Proved reserve of crude oil (mmbbls)
3,035
3,024
0.4
Proved reserve of natural gas (bcf)
6,373.6
6,330.8
0.7

 
Note:
Crude oil production is converted at 1 tonne = 7.1 barrels, and natural gas production is converted at 1 cubic meter = 35.31 cubic feet.

(2)
Refining Segment
 
In the first half of 2008, in order to meet market demand, the Company made efforts to keep refinery facilities running safely and at full capacity and increased the output of oil products. It also optimised crude oil resources and tried to reduce the purchasing cost of crude oil, reinforced structural adjustment of products mix and increased the production of high value-added products such as high-grade gasoline, vigorously promoted the sales of petroleum products other than gasoline, diesel or kerosene, produced clean oil products meeting national IV standard. Being a cooperation partner of 2008 Beijing Olympic Games, the Company provides oil products in major hosting cities. In the first half of 2008, the refinery throughput increased by 6.7% over the same period last year, and the output of oil products increased by 10.1%, among which, gasoline had a 7.7% increase and diesel with an increase of 13.0% over the same period last year.

 
Summary of Operations of Refining Segment

   
Six-month periods
  
   
ended 30 June
Changes
   
2008
2007
(%)
         
Refinery throughput (million tonnes)*
84.25
78.94
6.7
Gasoline, diesel and kerosene production (million tonnes)
51.52
46.80
10.1
 
Of which:
Gasoline (million tonnes)
13.78
12.79
7.7
 
Diesel (million tonnes)
33.80
29.91
13.0
 
Kerosene, including jet fuel (million tonnes)
3.94
4.10
(3.9)
Light chemical feedstock (million tonnes)
12.07
12.26
(1.5)
Light products yield (%)
  
74.68
73.93
0.75 percentage
       
point
Refinery yield (%)
  
93.87
93.73
0.14 percentage
       
point

 
*
Refinery throughput is converted at 1 tonne = 7.35 barrels.
 
 
8

 
(3)
Marketing and Distribution
 
In the first half of 2008, the Company constantly optimise its sales networks, intensified awareness of service and improved service quality, collected resources through various channels and timely arranged the imports of oil products, optimised the allocation and transport of oil products, reduced transportation cost and managed to guarantee sufficient supply of oil products in the domestic market and actively promoted sales of oil products with high octane number. The total sales volume of refined oil products reached 63 million tonnes, increased by 8.8% compared with that of the same period last year, among which retail had a 19.2% increase than that of the same period last year. In its coping with the rare snow storm in South China as well as the earthquake in Wenchuan, the Company promptly initiated its contingency plan, made all-out efforts to guarantee the supply of refined oil products, and adopted such means as movable gas-filling and manual delivery of oil products, thus ensuring the supply of refined oil products in the disaster-stricken areas.

 
Summary of Operations of Marketing and Distribution Segment

   
Six-month periods
  
   
ended 30 June
Changes
   
2008
2007
(%)
         
Total domestic sales volume of refined oil products (million tonnes)
63.02
57.92
8.8
 
Of which:
Retail volume (million tonnes)
42.91
36.01
19.2
 
Direct sales volume (million tonnes)
10.37
10.15
2.2
 
Wholesale volume (million tonnes)
9.73
11.77
(17.3)
Total number of service stations
  
29,188
28,898
1.0
 
Of which:
Number of company-operated service stations
28,551
28,153
1.4
 
Number of franchised service stations
637
745
(14.5)
Average annual throughput per station (tonne)
3,006
2,558
17.5
 

(4)
Chemicals
 
In the first half of 2008, the Company took the advantage of concentrated sales and made great efforts to expand the chemical market, coped with the market changes in a flexible way and organised the production and sales of products with market appeals, endeavored to increase profits, improved management, consolidated the raw material optimisation and product structure optimisation, vigorously promoted new technologies and tried hard to increase the output of high added-value products. Ethylene production reached 3.307 million tonnes, a 1.0% increase on a year-on-year basis, and the production of synthetic resin reached 4.923 million tonnes, an increase of 3.1% over the same period last year. Synthetic rubber production reached 0.46 million tonnes, increased by 27.8% over the same period last year

 
Summary of Production of Major Chemical Products
     
Unit: 1000 tonnes
       
 
Six-month periods
  
 
ended 30 June
Changes
 
2008
2007
(%)
       
Ethylene
3,307
3,273
1.0
Synthetic resin
4,923
4,774
3.1
Synthetic fiber monomer and polymer
3,768
3,938
(4.3)
Synthetic fiber
681
721
(5.5)
Synthetic rubber
460
360
27.8
Urea
685
813
(15.7)

 
Note:
100% production of two ethylene joint ventures, namely BASF-YPC and SHANGHAI SECCO was included.
 
9
 
2
COST SAVING
 
In the first half of 2008, the Company took various measures to reduce costs, including: fully leveraging the modern logistics system to optimise resources allocation and reduce transportation costs, tapping the potentials of refining capacities for lower quality crude, reducing purchasing costs of crude oil, optimising operation of facilities and reducing energy and material consumption. In the first half of 2008, the Company effectively saved RMB 1.703 billion in cost. Of the total cost saved, the exploration and production segment, the refining segment, the marketing and distribution segment and the chemicals segment achieved cost saving of RMB 577 million, RMB 341 million, RMB 315 million and RMB 470 million respectively.

3
ENERGY SAVING AND EMISSION REDUCTION
 
In the first half of 2008, the Company made remarkable achievements in energy saving and emission reduction. We established SINOPEC Energy-saving Monitoring Center and Energy-saving Technical Service Center, introduced reporting system on energy-saving activities, initiated benchmarking activities for assessing energy efficiencies within the industry, continued to conduct the publicising and education work of energy-saving and emission reduction, vigorously promoted such advanced energy-saving technologies as pulsed electric desalting, and aromatics extraction of pygas. In the first half of this year, our energy intensity, industrial water consumption and COD in discharged waste water dropped by 6.6%, 11.8% and 15.0% respectively over the same period last year.

4
CAPITAL EXPENDITURE
 
In the first half of 2008, the Company’s total capital expenditure was RMB 36.536 billion. Among which, capital expenditure for exploration and development was RMB 20.981 billion. The newly-built production capacity of crude oil and natural gas was 2.79 million tonnes per year and 480 million cubic-meters per year respectively. The capital expenditure for refining segment was RMB 3.849 billion, green-field and expansion refinery projects in Qingdao, Gaoqiao, Wuhan and Luoyang have been put into production. Caofeidian crude oil jetty project has realised mechanical completion. The capital expenditure in chemicals segment was RMB 5.907 billion. Yangzi Petrochemicals Butadiene project with a capacity of 100,000 tonnes per year was put into operation, and Tianjin, Zhenhai ethylene and Jinling PX project are underway as scheduled. The capital expenditure in marketing and distribution segment was RMB 4.548 billion. The sales network of oil products was furthered optimised and 195 service stations were newly built. The capital expenditure for corporate and others amounted to RMB 1.251 billion.
 
 
10

BUSINESS PROSPECTS
 
Looking into the second half of 2008, the Company believes China’s economy is expected to maintain growth momentum. It is expected that in the second half of this year the international prices of crude oil
will remain high, the domestic refining business will still be under pressure and the demand growth for chemical products may slow down.

In the second half of this year, the Company shall continue to take flexible operational strategies, intensify management and make optimal arrangement for various production and operation activities.

In exploration and development segment, the Company will speed up the exploration in such key regions as Tahe and northeastern Sichuan, actively tap the potentials of the existing oil fields, and further improve recovery rate. In the second half of 2008, the Company plans to produce 21.24 million tonnes of crude oil and 4.2 billion cubic meters of natural gas.

In refining segment, the Company shall continue to operate at its full capacity on the basis of ensuring safe and stable production to ensure market supplies, optimise the purchase and allocation of crude oil resources, make efforts to reduce the costs of crude oil, further adjust product structure and increase the output of high value-added products. In the second half of 2008, the Company plans to refine 89.75 million tonnes of crude oil.

In marketing and distribution segment, the Company will continue to meticulously organise the allocation and transport of refined oil products, make efforts to guarantee the market supplies of refined oils products and ensure the oil supplies for the Olympic games and the reconstruction of disaster-stricken areas and key industries. Meanwhile, the Company shall intensify the arrangement of resources, optimise the flow and storage and transportation of resources and improve profitability from the sales. In the second half of 2008, the Company plans to a total domestic sales volume of oil products at 64 million tonnes.

In chemicals segment, the Company shall optimise raw materials, product structure and unit operation, intensify the implementation of energy-saving and material consumption, consolidate the linkage of production, sales and research, promote developments of new products, and increase the production of high value-added products. In the second half of 2008, the Company plans to produce 3.26 million tonnes of ethylene.

In the second half of 2008, we shall continue to optimise our production and operation activities, improve management, increase profit through taping potentials, reducing energy consumption and reducing emissions, and strive to fulfill the production and business goals of the whole year.
 
11

MANAGEMENT’S DISCUSSION AND ANALYSIS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY’S AUDITED INTERIM FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES. PARTS OF THE FOLLOWING CONCERNED FINANCIAL DATA WERE ABSTRACTED FROM THE COMPANY’S AUDITED INTERIM FINANCIAL STATEMENTS THAT HAVE BEEN PREPARED ACCORDING TO THE INTERNATIONAL FINANCIAL REPORTING STANDARDS.

1
CONSOLIDATED RESULTS OF OPERATIONS
 
In the first half of 2008, the Company’s turnover, other operating revenues and other income were RMB 768.2 billion, and the operating profit was RMB 7.2 billion, representing an increase of 36.2%, and a decrease of 86.5% respectively over the same period of 2007. This was mainly because of the sharp increase in crude oil prices which resulted in significant losses in the Company’s refining business.

 
The following table sets forth major revenue and expense items in the consolidated income statement of the Company for the indicated periods:

 
Six-month periods ended 30 June
  
 
2008
2007
Change
 
RMB millions
RMB millions
(%)
       
Turnover, other operating revenues and other income
768,185
563,870
36.2
 
Of which: Turnover
722,429
551,361
31.0
 
Other operating revenues
12,354
12,509
(1.2)
 
Other income
33,402
—
N/A
Operating expenses
(760,963)
(510,286)
49.1
Of which: Purchased crude oil, products, and operating supplies and expenses
(674,068)
(439,844)
53.3
 
Selling, general and administrative expenses
(18,221)
(17,637)
3.3
 
Depreciation, depletion and amortization
(22,435)
(19,470)
15.2
 
Exploration expenses, including dry holes
(4,728)
(5,717)
(17.3)
 
Personnel expenses
(12,626)
(10,786)
17.1
 
Employee reduction expenses
(199)
(150)
32.7
 
Taxes other than income tax
(28,451)
(14,456)
96.8
 
Other operating expenses, net
(235)
(2,226)
(89.4)
Operating profit
7,222
53,584
(86.5)
Net finance costs
(702)
(3,657)
(80.8)
Investment income and share of profits less losses from associates and
      
jointly controlled entities
1,677
2,880
(41.8)
Profit before taxation
8,197
52,807
(84.5)
Tax benefit/(expense)
136
(14,965)
(100.9)
Profit for the period
8,333
37,842
(78.0)
Attributable to:
      
 
Equity shareholders of the Company
8,255
36,375
(77.3)
 
Minority interests
78
1,467
(94.7)

(1)
Turnover, other operating revenues and other income
 
In the first half of 2008, the Company’s turnover, other operating revenues and other income were RMB 768.2 billion, of which turnover was RMB 722.4 billion, representing an increase of 31.0% over the first half of 2007. This was mainly due to the increase in prices of crude oil, refined oil and chemical products and the Company’s efforts in expanding the sales volume of petroleum and petrochemical products and optimized the sales and marketing structure. In the first half of 2008, the Company’s other operating revenues were RMB 12.4 billion, representing a decrease of 1.2% over the first half of 2007. In the first half of 2008, the Company recognised a subsidy of RMB 33.4 billion.
 
 
 
12

 
 
The following table sets forth the Company’s external sales volume, average realised price and the respective changes of the Company’s major products between the first half of 2008 and the first half of 2007:

   
Average realised price
 
Sales Volume
(RMB/tonne, RMB/
 
(thousand tonnes)
thousand cubic meters)
 
Six-month periods
  
Six-month periods
  
 
ended 30 June
Change
ended 30 June
Change
 
2008
2007
(%)
2008
2007
(%)
             
Crude oil
2,344
2,034
15.2
4,275
2,807
52.3
Natural gas (million cubic meters)
3,034
2,863
6.0
886
794
11.6
Gasoline
19,019
17,103
11.2
5,976
5,282
13.1
Diesel
41,420
37,222
11.3
5,350
4,595
16.4
Kerosene, including jet fuel
4,383
3,467
26.4
5,719
4,663
22.6
Basic chemical feedstock
4,956
5,082
(2.5)
6,817
6,081
12.1
Synthetic fiber monomer
            
 
and polymer
1,856
1,990
(6.7)
9,324
8,837
5.5
Synthetic resin
3,895
3,858
1.0
11,210
10,026
11.8
Synthetic fiber
710
768
(7.6)
11,268
11,562
(2.5)
Synthetic rubber
535
431
24.1
17,703
13,239
33.7
Chemical fertiliser
692
785
(11.8)
1,759
1,685
4.4
 
 
Most of crude oil and a small portion of natural gas produced by the Company were internally used for refining and chemical production and the remaining were sold to other customers. In the first half of 2008, turnover from crude oil and natural gas that were sold externally by the exploration and production segment amounted to RMB 13.9 billion, representing an increase of 58.5% compared with the first half of 2007, accounting for 1.8% of the Company’s turnover, other operating revenues and other income. The change was mainly due to the increase in price and sales volume of crude oil compared to the first half 2007.

 
The Company’s refining segment, marketing and distribution segment sell petroleum products (mainly consisting of gasoline, diesel, kerosene, which are referred to as oil products and other refined petroleum products) to third parties. In the first half of 2008, the external sales revenue of petroleum products by these two segments were RMB 459.3 billion, representing an increase of 27.5% compared with that in the first half of 2007, accounting for 59.8% of the Company’s turnover, other operating revenues and other income. The increase was mainly due to the increased prices of oil products and our proactive efforts in increasing sales volume, optimising the marketing structure, and expanding the markets of other refined petroleum products. The sales revenue of gasoline, diesel and kerosene was RMB 360.3 billion, representing an increase of 29.8% over the same period in 2007, accounting for 78.4% of the sales revenue of petroleum products. Turnover of other refined petroleum products was RMB 99.0 billion, representing an increase of 19.6% compared with the first half of 2007, accounting for 21.6% of the sales revenue of petroleum products.

 
The Company’s external sales revenue of chemical products was RMB 115.4 billion, representing an increase of 10.3% compared with the first half of 2007, accounting for 15.0% of its turnover, other operating revenues and other income. The increase was mainly due to the increase in the price of chemical products.
 
13
 
(2)
Operating expenses
 
In the first half of 2008, the Company’s operating expenses were RMB 761.0 billion, representing an increase of 49.1% over the first half of 2007. The operating expenses mainly consisted of the following:

 
Purchased crude oil, products and operating supplies and expenses
 
In the first half of 2008, purchased crude oil, products and operating supplies and expenses were RMB 674.1 billion, representing an increase of 53.3% over the first half of 2007, accounting for 88.6% of the total operating expenses, of which:

 
Purchased crude oil expenses were RMB 355.2 billion, representing an increase of 70.4% over the first half of 2007, accounting for 46.7% of the total operating expenses, increased by 5.8 percentage points over the first half of 2007.

 
With the rapid growth of economy and market demand in China, the processing volume of crude oil purchased from the third parties increased accordingly. Throughput of crude oil that was purchased externally in the first half of 2008 was 66.7 million tonnes (excluding the amount processed for third parties), increased by 10.4% over the first half of 2007; average cost of crude oil purchased externally is RMB 5,326 per tonne, increased by 54.4% over the first half of 2007.

 
The Company’s other purchasing expenses were RMB 318.9 billion, representing an increase of 37.8%
 
over the first half of 2007, accounting for 41.9% of the total operating expenses. This was mainly due to the significant increase in the cost of gasoline, diesel and other feedstock purchased externally.

 
Selling, general and administrative expenses
 
The Company’s selling, general and administrative expenses totaled RMB 18.2 billion in the first half of 2008, representing an increase of 3.3% over the first half of 2007.

 
Depreciation, depletion and amortisation
 
Depreciation, depletion and amortisation were RMB 22.4 billion, representing an increase of 15.2% compared with the first half of 2007. This was mainly due to the expansion of the Company’s investment scale and the additions in property, plant and equipment.

 
Exploration expenses
 
In the first half of 2008, exploration expenses were RMB 4.7 billion, representing a decrease of 17.3% compared with the first half of 2007.

 
Personnel expenses
 
In the first half of 2008, personnel expenses were RMB 12.6 billion, representing an increase of 17.1% compared with the first half of 2007.

 
Employee reduction expenses
 
In the first half of 2008, according to the Company’s voluntary employee reduction plan, the Company undertook employee reduction expenses of approximately RMB 0.2 billion for 3,600 employees.

 
Taxes other than income tax
 
In the first half of 2008, the Company’s taxes other than income tax were RMB 28.5 billion, an increase of 96.8% compared with the first half of 2007, and this was mainly due to an increase of special levy on crude oil income by RMB 13.3 billion; meanwhile, consumption tax increased by RMB 1 billion as a result of the sales increase of gasoline and diesel, etc.

 
Other operating expenses, net
 
In the first half of 2008, Company’s other operating expenses (net) were RMB 0.2 billion, representing a decrease of 89.4%, compared with the first half of 2007. This was mainly due to the decrease in impairment losses on long-lived assets compared with the first half of 2007.

(3)
Operating profit
 
In the first half of 2008, the Company’s operating profit was RMB 7.2 billion, representing a decrease of 86.5% over the first half of 2007.

(4)
Net finance costs
 
In the first half of 2008, the Company’s net finance costs were RMB 0.7 billion, representing a decrease of 80.8% compared with the first half of 2007. This was mainly due to an increase of RMB 3.9 billion on the unrealised gain on embedded derivatives component of convertible bonds and an increase of RMB 0.9 billion in exchange gain (net) compared with the first half of 2007.

(5)
Profit before taxation
 
In the first half of 2008, the Company’s profit before taxation was RMB 8.2 billion, representing a decrease of 84.5% over the first half of 2007.

(6)
Tax benefit/(expense)
 
In the first half of 2008, the Company’s tax benefit was RMB 0.1 billion.

(7)
Profit attributable to minority interests of the Company
 
In the first half of 2008, the Company’s profit attributable to minority interests were RMB 0.1 billion, representing a decrease of 94.7% compared with the first half of 2007. This was mainly due to the decrease of profit from consolidated subsidiaries such as Sinopec Shanghai Petrochemical Company Limited, Sinopec Hainan Refining and Chemical Company Limited and Sinopec Qingdao Refining and Chemical Company.

(8)
Profit attributable to equity shareholders of the Company
  In the first half of 2008, the Company’s profit attributable to equity shareholders of the Company was RMB 8.26 billion, representing a decrease of 77.3% against the first half of 2007.
 
14
 
2
DISCUSSION ON RESULTS OF SEGMENT OPERATION
 
The Company manages its operations in four business segments, namely exploration and production segment, refining segment, marketing and distribution segment and chemicals segment, and corporate and others. Unless otherwise specified, the inter-segment transactions have not been eliminated from financial data discussed in this section. In addition, the operating revenue data of each segment include Òother operating revenuesÓ and Òother incomeÓ of the segment.

 
The following table shows the operating revenues by each segment, the contribution of external sales and inter-segment sales as a percentage of operating revenues before elimination of inter-segment sales, and the contribution of external sales as a percentage of consolidated operating revenues (i.e. after elimination of inter-segment sales) for the periods indicated
 
.


   
As a percentage of
As a percentage of
   
consolidated operating
consolidated operating
   
revenue before elimination
revenue after elimination
 
Operating revenues
of inter-segment sales
of inter-segment sales
 
Six-month periods
Six-month periods
Six-month periods
 
ended 30 June
ended 30 June
ended 30 June
 
2008
2007
2008
2007
2008
2007
 
RMB millions
(%)
(%)
             
Exploration and Production Segment
            
 
External salesnote
20,345
14,464
1.4
1.5
2.6
2.6
 
Inter-segment sales
76,314
48,260
5.2
4.8
    
 
Operating revenues
96,659
62,724
6.6
6.3
    
Refining Segment
            
 
External salesnote
100,698
55,785
6.9
5.6
13.1
9.9
 
Inter-segment sales
319,384
252,109
22.0
25.3
    
 
Operating revenues
420,082
307,894
28.9
30.9
    
Marketing and Distribution Segment
            
 
External salesnote
394,781
307,307
27.1
30.8
51.4
54.5
 
Inter-segment sales
1,678
1,240
0.1
0.1
    
 
Operating revenues
396,459
308,547
27.2
30.9
    
Chemicals Segment
            
 
External salesnote
118,188
108,390
8.1
10.9
15.4
19.2
 
Inter-segment sales
13,817
7,330
1.0
0.7
    
 
Operating revenues
132,005
115,720
9.1
11.6
    
Corporate and Others
            
 
External salesnote
134,173
77,924
9.2
7.8
17.5
13.8
 
Inter-segment sales
277,064
124,424
19.0
12.5
    
 
Operating revenues
411,237
202,348
28.2
20.3
    
Operating revenue before elimination
            
of inter-segment sales
  
1,456,442
997,233
100.0
100.0
  
Elimination of inter-segment sales
(688,257)
(433,363)
        
Consolidated operating revenues
768,185
563,870
    
100.0
100.0

Note:
Including other operating revenues and other income.

15
 
The following table sets forth the operating revenues, operating expenses and operating profit/(loss) by each segment before elimination of the inter-segment transactions for the periods indicated, and the changes from the first half of 2007 to the first half
 
of 2008.

 
Six-month periods ended 30 June
  
 
2008
2007
Change
 
RMB millions
(%)
       
Exploration and Production Segment
      
 
Operating revenues
96,659
62,724
54.1
 
Operating expenses
69,561
39,974
74.0
 
Operating profit
27,098
22,750
19.1
Refining Segment
      
 
Operating revenues
420,082
307,894
36.4
 
Operating expenses
466,103
302,164
54.3
 
Operating (loss) /profit
(46,021)
5,730
—
Marketing and Distribution Segment
      
 
Operating revenues
396,459
308,547
28.5
 
Operating expenses
374,125
291,752
28.2
 
Operating profit
22,334
16,795
33.0
Chemicals Segment
      
 
Operating revenues
132,005
115,720
14.1
 
Operating expenses
127,472
107,178
18.9
 
Operating profit
4,533
8,542
(46.9)
Corporate and others
      
 
Operating revenues
411,237
202,348
103.2
 
Operating expenses
411,959
202,581
103.4
 
Operating loss
(722)
(233)
—

(1)
Exploration and Production Segment
 
Most of the crude oil and a small portion of the natural gas produced by the exploration and production segment were used for the Company’s refining and chemical operations. Most of the natural gas and a small portion of crude oil produced by the Company were sold externally to other customers.

 
In the first half of 2008, the operating revenues of this segment were RMB 96.7 billion, representing an increase of 54.1% over the first half of 2007.
 
This is mainly attributable to the increase in both the price and sales volume of crude oil.

 
In the first half of 2008, this segment sold 19.61 million tonnes of crude oil and 3.331 billion cubic meters of natural gas, representing an increase of 2.2% and 8.6% respectively compared with those in the first half of 2007. The average realised price of crude oil and natural gas were RMB 4,365 per tonne and RMB 917 per thousand cubic meters respectively, representing an increase of 56.3% and 14.6% respectively over the first half of 2007.

 
In the first half of 2008, the operating expenses of this segment were RMB 69.6 billion, representing an increase of 74.0% over the first half of 2007. The increase was mainly due to the following reasons:

 
l    Special levy on crude oil income increased by RMB 13.3 billion over the first half of 2007.

 
l    External purchase of raw material and other costs increased by RMB 11.1 billion over the first half of 2007.

 
l    The increase of RMB 2.8 billion in depreciation, depletion and amortisation mainly resulted from the continuous investment in assets.

 
l    Other operating expenses increased by RMB 1.3 billion over the first half of 2007, mainly due to the increase in the cost of materials as a result of the increase in sales of these materials.

 
In the first half of 2008, international price of crude oil kept soaring, and the Company seized this opportunity to increase the production of crude oil by tapping more marginal oil reserves and enhanced recovery efforts, which resulted in an increase in lifting cost of crude oil by 9.8% compared with the first half of 2007, from RMB 550 per tonne to RMB 604 per tonne.

 
In the first half of 2008, this segment’s operating profit was RMB 27.1 billion, representing an increase of 19.1% over the first half of 2007.

(2)
Refining Segment
 
Business activities of the refining segment include purchasing crude oil from third parties and the exploration and production segment of the Company and processing crude oil into refined petroleum products, among which, gasoline, diesel and kerosene are sold to the marketing and distribution segment of the Company. Part of the chemical feedstock are sold to the chemicals segment of the Company. Other refined petroleum products are sold to both domestic and overseas customers.

 
In the first half of 2008, operating revenues of this segment was RMB 420.1 billion, representing an increase of 36.4% over the first half of 2007. This was mainly attributable to the increase in the sales volume and prices of refined petroleum products over the first half of 2007 and grant income of RMB 27.9 billion.

16
 
The following table sets forth the sales volumes, average realised prices and the changes of the Company’s major oil products of the segment in the first half of 2007 and the first half of 2008.

 
Sales Volume
Average realised price
 
(thousand tonnes)
(RMB/tonne)
 
Six-month periods
  
Six-month periods
  
 
ended 30 June
Change
ended 30 June
Change
 
2008
2007
(%)
2008
2007
(%)
             
Gasoline
13,245
11,279
17.4
5,165
4,539
13.8
Diesel
33,090
29,616
11.7
4,561
3,943
15.7
Chemical feedstock
12,154
12,902
(5.8)
6,217
4,645
33.8
Other refined petroleum products
20,367
20,761
(1.9)
4,662
3,729
25.0

 
In the first half of 2008, the sales revenues of gasoline were RMB 68.4 billion, representing an increase of 33.6% over the first half of 2007, accounting for 16.3% of this segment’s operating revenues.

 
In the first half of 2008, the sales revenues of diesel were RMB 150.9 billion, representing an increase of 29.3% over the first half of 2007, accounting for 35.9% of this segment’s operating revenues.

 
In the first half of 2008, the sales revenues of chemical feedstock were RMB 75.6 billion, representing an increase of 26.1% over the first half of 2007, accounting for 18.0% of this segment’s operating revenues.

 
In the first half of 2008, the sales revenues of refined petroleum products other than gasoline, diesel and
 
 
chemical feedstock were RMB 94.9 billion, representing an increase of 22.7% over the first half of 2007, accounting for 22.6% of this segment’s operating revenues.

 
In the first half of 2008, this segment’s operating expenses were RMB 466.1 billion, representing an increase of 54.3% over the first half of 2007, mainly attributable to the increases in crude oil price and refinery throughput.

 
In the first half of 2008, the average cost of crude oil processed was RMB 5,171 per tonne, representing an increase of 54.7% over the first half of 2007. Refinery throughput was 81.64 million tonnes (excluding volume processed for third parties), representing an increase of 7.8% over the first half of 2007. In the first half of 2008, the total costs of crude oil processed were RMB 422.2 billion, representing an increase of 66.7%, accounting for 90.6% of the segment’s operating expenses, increased by 6.8 percentage points over the first half of 2007.

 
In the first half of 2008, due to the soaring international crude oil prices, refinery processing costs increased greatly, however, the government continued to implement controls on the prices of domestic refined oil products, and the magnitude of price increase of oil products was at a lesser extent than that of the increase in the cost of crude oil, resulting in a sharp decrease in refining margin compared with the first half of 2007. In the first half of 2008, the refining margin (defined as the sales revenues less the crude oil costs and refining feedstock costs and taxes other than income tax, and divided by the throughput of crude oil and refining feedstock) of the Company was at a loss of RMB 752 per tonne, representing a decrease of RMB 1,017 per tonne compared with refining margin of RMB 265 per tonne in the first half of 2007.

 
In the first half of 2008, the unit refining cash operating cost (defined as operating expenses less the purchase cost of crude oil and refining feedstock, depreciation and amortisation, taxes other than income tax and other operating expenses, and divided by the throughput of crude oil and refining feedstock) was RMB 130 per tonne, representing a decrease of RMB 11 per tonne, compared with RMB 141 per tonne in the first half of 2007.

 
In the first half of 2008, this segment incurred an operating loss of RMB 46.0 billion, and a decrease of profits of RMB 51.8 billion compared with the first half of 2007.

(3)
Marketing and Distribution Segment
 
The business of marketing and distribution segment includes purchasing refined oil products
 
from the refining segment and third parties, conducting wholesale and direct sales to domestic customers and retailing, distributing oil products through the segment’s retail and distribution network, as well as
 
providing related services.

 
In the first half of 2008, the operating revenues of this segment were RMB 396.5 billion, increased by 28.5% over the first half of 2007. This was mainly attributed to the increase in the demand for oil products in domestic market and the improvements in the Company’s marketing structure.

 
In the first half of 2008, the operating revenues from sales of gasoline and diesel were RMB 336.4 billion, accounting for 84.8% of the operating revenues of this segment. The percentage of retail sales in the total sales volume of gasoline and diesel increased from the 61.6% in the first half of 2007 to 66.0% in the first half of 2008, an increase of 4.4 percentage points; the percentage of direct sales in the total sales volume of gasoline and diesel increased from the 18.1% in the first half of 2007 to 21.4% in the first half of 2008, an increase of 3.3 percentage points; the percentage of wholesale in the total sales volume of gasoline and diesel dropped from the 20.3% in the first half of 2007 to 12.6% in the first half of 2008, a decrease of 7.7 percentage points.

17

 
The following table sets forth the sales volumes, average realised prices, and respective rate of changes of the four product categories in the first half of 2007 and 2008, including detailed information of different sales channels for gasoline and diesel:

 
Sales Volume
Average realised price
 
(thousand tonnes)
(RMB/tonne)
 
Six-month periods
  
Six-month periods
  
 
ended 30 June
Change
ended 30 June
Change
 
2008
2007
(%)
2008
2007
(%)
     
 
     
Gasoline
19,008
17,082
11.3
5,976
5,284
13.1
 
Of which:
Retail
14,843
12,748
16.4
6,044
5,442
11.1
 
Direct sales
1,440
1,301
10.7
5,791
4,815
20.3
 
Wholesale
2,725
3,033
(10.2)
5,706
4,817
18.5
Diesel
41,645
37,420
11.3
5,350
4,594
16.5
 
Of which:
Retail
25,190
20,842
20.9
5,328
4,726
12.7
 
Direct sales
11,550
8,536
35.3
5,460
4,539
20.3
 
Wholesale
4,905
8,042
(39.0)
5,207
4,311
20.8
Kerosene
4,364
3,452
26.4
5,721
4,663
22.7
Fuel oil
5,883
6,495
(9.4)
3,749
2,842
31.9

 
In the first half of 2008, the operating expenses of the segment were RMB 374.1 billion, representing an increase of 28.2% compared with that in the first half of 2007. This was mainly due to the significant increase in the purchase cost of oil products.

 
In the first half of 2008, the segment’s cash operating cost per tonne of refined oil products (defined as the operating expenses less the purchasing costs, taxes other than income tax, depreciation and amortisation, and divided by the sales volume) was RMB 152.9 per tonne, representing an increase of 14.3% compared with that in the first half of 2007.

 
In the first half of 2008, the marketing and distribution segment’s operating profit was RMB 22.3 billion, representing an increase of 33.0% compared with the first half of 2007.

(4)
Chemicals Segment
 
The business activities of the chemicals segment include purchasing chemical feedstock from the refining segment and third parties, producing, marketing and distributing petrochemical and inorganic chemical products.

 
In the first half of 2008, operating revenues of the chemicals segment were RMB 132.0 billion, representing an increase of 14.1% over the first half of 2007, which was primarily due to the increase in prices of major chemical products.

 
The sales revenue mainly generated from the Company’s six categories of chemical products (namely basic organic chemicals, synthetic resin, synthetic rubber, synthetic fiber monomer and polymer, synthetic fiber and chemical fertiliser) totaled approximately RMB 123.8 billion, representing an increase of 13.2% over the first half of 2007, accounting for 93.8% of the operating revenues of this segment.

18
 
The following table sets forth the sales volumes, average realised price and rates of change of each of the six categories of chemical products of this segment in the first half of 2007 and 2008.

 
Sales Volume
Average realised price
 
(thousand tonnes)
(RMB/tonne)
 
Six-month periods
  
Six-month periods
  
 
ended 30 June
Change
ended 30 June
Change
 
2008
2007
(%)
2008
2007
(%)
             
Basic organic chemicals
6,368
6,270
1.6
6,788
5,848
16.1
Synthetic fiber monomers
            
  and polymers
1,885
1,997
(5.6)
9,337
8,832
5.7
Synthetic resin
3,943
3,910
0.8
11,182
9,981
12.0
Synthetic fiber
710
768
(7.6)
11,268
11,562
(2.5)
Synthetic rubber
544
443
22.8
17,739
13,223
34.2
Chemical fertiliser
692
787
(12.1)
1,759
1,710
2.9

 
In the first half of 2008, operating expenses of the chemicals segment were RMB 127.5 billion, representing an increase of 18.9% over the first half of 2007. This is mainly attributable to the influence resulting from the price increase and consumption of feedstock and ancillary materials, which contributed to an increase of RMB 21.2 billion in the purchasing cost of raw materials and operating supplies and other related expenses as compared with the first half of 2007.

 
In the first half of 2008, operating profit of the chemicals segment was RMB 4.5 billion, representing a decrease of 46.9% over the first half of 2007.

(5)
Corporate and Others
 
The business activities of corporate and others mainly consist of import and export business activities of the subsidiaries, research and development activities of the Company, and managerial activities of the headquarters.

 
In the first half of 2008, the operating revenues generated from corporate and others was RMB 411.2 billion, representing an increase of 103.2%
 
over the first half of 2007. The increase was largely as a result of increased revenues generated by the trading companies through increased trading volume in importing and exporting of crude oil and refined oil products and self-managed business.

 
In the first half of 2008, the operating expenses were RMB 412.0 billion, representing an increase of 103.4% over the first half of 2007. This was mainly due to the increase in the purchasing costs associated with the increase in the trading company’s operating revenues.

 
The operating expenses exceeded sales revenue by RMB 0.7 billion, and the operating loss increased by RMB 0.5 billion over the first half of 2007.
 
19
3
ASSETS, LIABILITIES, EQUITY AND CASH FLOWS
 
 
(1)Assets, liabilities and equity
 
Units: RMB millions

 
At 30 June
At 31 December
Amount of
 
2008
2007
changes
       
Total assets
838,469
732,725
105,744
 
Current assets
268,710
185,116
83,594
 
Non-current assets
569,759
547,609
22,150
Total liabilities
501,841
399,967
101,874
 
Current liabilities
348,409
265,355
83,054
 
Non-current liabilities
153,432
134,612
18,820
Total equity attributable to the equity
      
 
shareholders of the Company
310,871
307,433
3,438
 
Share capital
86,702
86,702
—
 
Reserves
224,169
220,731
3,438
Minority interests
25,757
25,325
432
Total equity
336,628
332,758
3,870

 
At 30 June 2008, the Company’s total assets were RMB 838.5 billion, representing an increase of RMB 105.7 billion compared with that at the end of 2007, ofwhich:
 
 ¦
  
Current assets increased by RMB 83.6 billion from that at the end of 2007 to RMB 268.7 billion. This was mainly attributable to the fact that the high prices of the feedstock such as crude oil caused an increase in inventory by RMB 47.4 billion, and due to an increase of prepaid VAT and tariff and other accounts receivable, prepaid expenses and other current assets increased by RMB 18.5 billion. Due to the significant increase of sales revenue, the accounts receivable and bills receivable increased by RMB 16.2 billion.
     
¦
  
Non-current assets increased by RMB 22.2 billion from that by the end of 2007 to RMB 569.8 billion. This was mainly because ­property, plants and equipment, and construction in progress which formed through implementation of projects in line with the annual investment plan was increased by RMB 13.3 billion. The increase in lease prepayments and deferred tax assets were RMB 9.3 billion.
 
 
At 30 June 2008, the Company’s total liabilities were RMB 501.8 billion, representing an increase of RMB 101.9 billion compared with that at the end of 2007, of which:
 
 ¦
  
Current liabilities increased by RMB 83.1 billion from those at the end of 2007 to RMB 348.4 billion. This was mainly because accounts payable increased by RMB 33.6 billion due to the rise of such feedstock as the crude oil, an increase of short-term debt of RMB 25.5 billion, and an increase of accrued expenses and other payables of RMB 23.9 billion.
     
¦
  
Non-current liabilities increased by RMB 18.8 billion from those at the end of 2007 to RMB 153.4 billion. This was mainly because in the first half of the year the Company issued RMB 30 billion of bonds with warrants.
 
At 30 June 2008, the Company’s total equity attributable to equity shareholders of the Company was RMB 310.9 billion, representing an increase of RMB 3.4 billion compared with that at the end of 2007, which was due to increase of reserves.
 
20
 
(2)
Cash Flow
 
In the first half of 2008, cash and cash equivalents increased by RMB 0.8 billion from RMB 7.7 billion as at 31 December 2007 to RMB 8.5 billion as at 30 June 2008.

 
The following table sets forth the major items on the consolidated cash flow statements for the first half of 2008 and the first half of 2007.

 
Units: RMB millions

 
Six-month periods
  
 
ended 30 June
Changes
Major items of cash flows
2008
2007
in amount
       
Net cash generated from operating activities
2,640
62,295
(59,655)
Net cash used in investing activities
(46,901)
(46,465)
(436)
Net cash generated from / (used in) financing activities
45,072
(12,960)
58,032
Net increase in cash and cash equivalents
811
2,870
(2,059)

 
Net cash generated from operating activities was RMB 2.6 billion.

 
These were mainly from: In the first half of 2008, profit before taxation was RMB 8.2 billion and depreciation, depletion and amortisation was RMB 22.4 billion; in addition, changes in inventory and other assets, as well as accounts receivable and accounts payable related to operating activities increased cash outflow by RMB 11.4 billion and cash outflow for payment of income tax was RMB 13.3 billion.

 
Net cash used in investing activities was RMB 46.9 billion, which was mainly
 
used for:

 
l    The Company’s capital expenditure of RMB 41.8 billion;

 
l    Exploratory wells expenditure of RMB 2.9 billion.

 
The net cash generated from the financing activities was RMB 45.1 billion, mainly:

 
l    Cash of RMB 29.9 billion received by issuing bonds with warrants.

 
l    A net increase of bank and other loans of RMB 35.1 billion;

 
l    Repayments of RMB 10.0 billion of short-term corporate bonds;

 
l    Distributed RMB 10.0 billion of dividend for the year of 2007

(3)
Contingent Liability
 
At 30 June 2008, the amount of guarantees provided by the Company in respect of banking facilities granted
 
to associates and jointly controlled entities amounted to approximately
 
RMB 9.8 billion.

4
CAPITAL EXPENDITURES
  Please refer to ÒCapital ExpenditureÓ in the section headed ÒBusiness Review and ProspectsÓ.
 
21
 
5
ANALYSIS OF FINANCIAL STATEMENTS PREPARED UNDER ASBE
 
The major differences between the Company’s financial statements prepared under ASBE and IFRS are set out in Section C of the financial statements of the Company on page 130 of this report.

 
(1)
Under ABSE, the operating income, operating cost, sales taxes and surcharges and operating profit are as follows:

 
Six-month periods ended 30 June
 
2008
2007
 
RMB millions
RMB millions
     
Operating income
    
 
Exploration and Production Segment
96,659
62,724
 
Refining Segment
392,200
307,894
 
Marketing and Distribution Segment
390,939
308,547
 
Chemicals Segment
132,005
115,720
 
Corporate and Others
411,237
202,348
 
Elimination of inter-segment sales
(688,257)
(433,363)
 
Consolidated operating income
734,783
563,870
Operating cost, sales taxes and surcharges
    
 
Exploration and Production Segment
61,573
40,909
 
Refining Segment
469,539
300,480
 
Marketing and Distribution Segment
374,157
291,404
 
Chemicals Segment
127,528
107,091
 
Corporate and Others
411,922
202,581
 
Elimination of inter-segment sales costs
(685,177)
(432,657)
 
Consolidated operating cost, sales taxes and surcharges
759,542
509,808
Operating (loss)/profit
    
 
Exploration and Production Segment
28,546
22,740
 
Refining Segment
(73,879)
5,783
 
Marketing and Distribution Segment
16,782
17,143
 
Chemicals Segment
4,477
8,629
 
Corporate and Others
(685)
(233)
 
Financial expenses, investment income and fair value gain/(loss)
975
(777)
 
Consolidated operating (loss)/profit
(23,784)
53,285
Net profit attributable to equity shareholders of the Company
9,339
35,110

 
Operating profit:  In the first half of 2008, the operating loss incurred by the Company was RMB 23.8 billion, representing a decrease of profit by RMB 77.1 billion compared with the first half of 2007. This was mainly attributable to the huge loss in the refining segment which was caused by the price increase of crude oil.

 
Net profit: In the first half of 2008, the net profit attributable to the equity shareholders of the Company was RMB 9.3 billion, a decrease of RMB 25.8 billion compared with the first half of 2007, representing a decrease of 73.4%.
 
22
 
 
(2)
Financial data prepared under ASBE:

 
At 30 June
At 31 December
  
 
2008
2007
Changes
 
RMB millions
RMB millions
RMB millions
       
Total assets
820,556
718,572
101,984
Long-term liabilities
149,531
130,468
19,063
Shareholders’ equity
331,299
326,347
4,952

 
Analysis of changes:

 
Total assets: As at 30 June 2008, the Company’s total assets were RMB 820.6 billion, representing an increase of RMB 102.0 billion compared with that at the end of 2007, which was caused by the increase of RMB 47.4 billion in inventory as a result of the price increase of crude oil and other raw materials, and the increase of RMB 31.1 billion in accounts receivable and other current assets. The increase in long-lived assets, including fixed assets and construction in progress, was RMB 23.5 billion which is in line with the investment plan.

 
Long-term liabilities: As at 30 June 2008, the Company’s long-term liabilities were RMB 149.5 billion, representing an increase of RMB 19.1 billion compared with that at the end of 2007. This was mainly because in the first half of the year the Company issued RMB 30.0 billion of bonds with warrants.

 
Shareholders’ equity: As at 30 June 2008, the shareholders’ equity of the Company were RMB 331.3 billion, representing an increase of RMB 5.0 billion compared with that at the end of 2007. This was mainly because the capital reserve increased by RMB 6.9 billion due to the issuing of bonds with warrants.

23
 
(3)
Income from principal operations categorised by business segments

       
Increase/
Increase/
  
       
decrease
decrease
  
       
of Income
of Cost
  
       
from principal
of principal
Increase/
 
Income from
Cost of
  
operations
operations
decrease
 
principal
principal
Gross profit
on a year-
on a year-
of gross
 
operations
operations
margin
on-year basis
on-year basis
profit margin
Segment
(RMB millions)
(RMB millions)
(%)Note
(%)
(%)
(%)
             
Exploration and production
96,659
43,341
29.5
54.1
18.9
(6.7)
Refinery
392,200
460,239
(18.8)
27.4
57.8
(20.7)
Marketing and distribution
390,939
373,425
4.3
26.7
28.4
(1.3)
Chemicals
132,005
127,389
3.4
14.1
19.5
(4.1)
Corporate and others
411,237
411,873
(0.2)
103.2
103.4
(0.1)
Elimination of inter segment sales
(688,257)
(685,177)
N/A
N/A
N/A
N/A
Total
734,783
731,090
(3.4)
23.3
47.6
(10.4)

 
Note:
Gross profit margin= (income from principal operations - cost of principal operations, taxes and surcharges) / income from principal operations

24
 
SIGNIFICANT EVENTS
1
CORPORATE GOVERNANCE
 
(1)
During the reporting period, Sinopec Corp. continued to standardize its operation and improve corporate governance. According to the relative requirements of China Securities Regulatory Commission (CSRC), the company fulfilled the rectification measures of governance over special events. It revised and amended Working System of Independent Directors, Working Rules of the Audit Committee and made better use of the function of independent directors and Board committees. The Company continued to carry out the internal control system which had been revised and enriched. With better information disclosure and investor relations activities, the transparency of the Company was enhanced.

 
(2)
During the reporting period, neither Sinopec Corp. nor the directors, supervisors, senior management, controlling shareholders, actual controller thereof were subject to any investigation by the CSRC, nor was there any administrative penalty or circular of criticism released by the CSRC, the Securities and Futures Commission of Hong Kong and the Securities and Exchange Committee of the United States, nor any reprimand by the Shanghai Stock Exchange, the Hong Kong Stock Exchange, the New York Stock Exchange or the London Stock Exchange.

 
(3)
During the reporting period, none of Sinopec Corp.’s directors, supervisors and other members of the senior management held any shares of Sinopec Corp. All of the directors confirmed that they have complied with the Model Code for Securities Transactions. During this reporting period, none of the directors, supervisors or other members of the senior management or any of their respective associates had any interests and short positions (including those that are deemed to be such, or regarded as owned in accordance with relevant provisions of the Securities and Futures Ordinance) in any shares or debentures or related shares of Sinopec Corp. or its associated corporations (as defined in Part XV of the Securities and Futures Ordinance) which are required to notify Sinopec Corp. and the Hong Kong Stock Exchange pursuant to Division 7 and 8 of Part XV of the Securities and Futures Ordinance or which are required pursuant to section 352 of the Securities and Futures Ordinance to be entered in the register referred to therein, or which are required to notify Sinopec Corp. and the Hong Kong Stock Exchange pursuant to the Model Code for Securities Transactions Entered by Directors of Listed Companies as specified in the Listing Rules of the Hong Kong Stock Exchange (including those interests and short positions that are deemed to be such, or are regarded to be owned in accordance with the relative provisions under the Securities and Futures Ordinance).

2
COMPLIANCE WITH CODE ON CORPORATE GOVERNANCE PRACTICES
 
During the reporting period, Sinopec Corp. complied with all the requirements of the Code on Corporate Governance Practices set out in Appendix 14 to the Listing Rules of The Stock Exchange of Hong Kong Limited.

3
DIVIDEND DISTRIBUTION FOR THE YEAR ENDED 31 DECEMBER 2007 AND INTERIM DIVIDEND DISTRIBUTION PLAN FOR THE SIX-MONTH PERIOD ENDED 30 JUNE 2008

 
(1)
Dividend distribution for the year ended 31 December 2007
 
As approved at the 2007 Annual General Meeting of Sinopec Corp., a final cash dividend of RMB 0.115 (inclusive of tax) per share for 2007 was distributed, which amounted to a total cash dividend of RMB 9.971 billion. On 30 June 2008, Sinopec Corp. distributed the final dividend for 2007 to shareholders whose names appeared on the register of members of Sinopec Corp. on 13 June 2008.

 
For the year of 2007, total cash dividend of RMB 0.165 (inclusive of tax) per share was distributed and the total cash dividend amounted to RMB 14.306 billion.

 
(2)
Interim dividend distribution plan for the six-month period ended 30 June 2008
 
With the authorisation of 2007 Annual General Meeting, the interim dividend distribution plan for the six-month period ended 30 June 2008 was approved at the twenty third meeting of the Third Session of the Board of Directors. An interim cash dividend of RMB 0.03 (inclusive of tax) per share will be distributed based on the total number of shares of 86,702.439 million as at 30 June 2008. The total cash dividend amounts to 2.601 billion.

 
The interim dividend will be distributed on or before Monday, 29 September 2008 to the shareholders whose names appear on the register of members of Sinopec Corp. on Friday, 19 September 2008.

 
To be entitled to the interim dividend, holders of H shares shall lodge their share certificate(s) and transfer documents with Hong Kong Registrars Limited at the 46th floor., Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, for registration of transfer, by no later than 4:00pm on Friday, 12 September 2008. The register of members of the H shares of Sinopec Corp. will be closed from Monday, 15 September 2008, to Friday, 19 September 2008 (both dates inclusive).

 
Dividends will be denominated and declared in Renminbi. Dividends for domestic shares will be paid in Renminbi and dividends for foreign shares will be paid in Hong Kong dollars. The exchange rate for dividends to be paid in Hong Kong dollars is the average of the basic exchange rate of Hong Kong dollar to Renminbi published by the People’s Bank of China during the week prior to the date of declaration of dividends, being Friday, 22 August 2008.
 
 
 
25
4
ISSUANCE OF BONDS WITH WARRANTS IN DOMESTIC MARKET
 
Sinopec Corp. issued RMB 30 billion bonds with warrants on 20 February 2008. The Bonds with Warrants have a 6-year term and 0.8% per annum fixed coupon rate, and the 3.03 billion warrants were distributed with exercise ratio of 2 for 1 and a term of 2 years. The bonds and warrants were listed on Shanghai Stock Exchange on 4 March 2008. The proceeds from issuance will be used to fund the Sichuan-East China Gas Project, Tianjin 1 million tonnes per annum (tpa) ethylene project, Zhenhai 1 million tpa ethylene project and repayment of bank loans. The proceeds from the exercise of warrants, if exercised, will be used to fund Tianjin 1 million tpa ethylene project, Zhenhai 1 million tpa ethylene project, Wuhan ethylene project, repayment of bank loans or replenishment of working capital of Sinopec Corp.

5
SUBSIDIES
 
In recent years, the international crude oil prices rose sharply and the prices of domestic oil products are controlled tightly, which brought about the situation that oil products and crude oil prices had inverted. To ensure stable supply to the oil products market, the Company proactively adopted various measures to increase the supply of oil products in the market, which has achieved remarkable effect and has also led to the significant loss in the Company’s refining business. In March 2008, the Company received subsidies of RMB 12.3 billion, of which RMB 4.9 billion has been included in the income of 2007, and RMB 7.4 billion was included in the income of the first quarter of 2008.

 
From April 1, 2008, the government began to subsidise the Company for the losses suffered from processing of imported crude oil, and put into effect the VAT refund policy for the Company for imported refined oil products. In the second quarter, the Company recorded a total subsidy of RMB 22.93 billion, and RMB 3.07 billion of VAT refund for imported refined oil products.

6
CORPORATE BONDS ISSUANCE AND INTEREST PAYMENTS
 
On February 24, 2004, Sinopec Corp. successfully issued 10-year term domestic corporate bonds which amounted to RMB 3.5 billion with a credit rating of AAA and a fixed coupon rate of 4.61%. On September 28, 2004, the aforementioned corporate bonds were listed on the Shanghai Stock Exchange. For further details, please refer to Sinopec Corp.’s announcement published in China Securities Journal, Shanghai Securities News, and Securities Times in Mainland China, and South China Morning Post and Hong Kong Economic Times in Hong Kong on February 24, 2004 and September 28, 2004, respectively. By February 25, 2008, Sinopec Corp. had paid the full amount of coupon interest for the fourth interest payment year.

7
IMPORTANT PROJECTS

 
(1)
Sichuan-to-East China Gas Project
 
Sichuan-to-East China Gas Project is an important project in the State’s Eleventh Five-Year Plan. This project consists of two parts. One part is Puguang gas field exploration, development and gas treatment project, the other part is the pipeline project between Puguang gas field and Shanghai. It is expected that the major part of the project will be completed in 2009.

 
(2)
Qingdao refinery project
 
The Qingdao refinery, with 10 million tpa of refining capacity, commenced construction in June 2005, and was put into production on May 24, 2008.

 
(3)
Tianjin ethylene project
 
Tianjin ethylene project includes 12.5 million tpa of refining technical innovation project, 1 million tpa ethylene project and downstream ancillary facilities. The total investment expects to be RMB 26.8 billion. The project construction started in June 2006. It is proceeding smoothly now and will be completed by the end of 2009.

 
(4)
Zhenhai ethylene project
 
Zhenhai ethylene project with an investment of RMB 21.9 billion, which mainly consists of 1 million tpa ethylene and downstream supporting facilities and auxiliary utilities. The construction of the project commenced in November 2006 and is currently progressing smoothly. The project is expected to be completed in 2010.
 
26
 
8.
DURING THE REPORTING PERIOD, NO SIGNIFICANT LITIGATION, ARBITRATION MATTERS HAPPENED IN SINOPEC CORP.

9
CONNECTED TRANSACTIONS

 
(1)
CONNECTED TRANSACTIONS IN THE REPORTING PERIOD
 
Upon listing in 2000, Sinopec Corp. and Sinopec Group Company entered into a number of agreements in respect of continuing connected transactions, including the agreements for mutual supplies, community services, leasing of land use rights, property leasing, the intellectual property license, the agent service for product sales and the SPI Fund Document. Sinopec Corp. and Sinopec Group Company entered into a Supplementary Agreement of Connected Transactions on 31 March 2006 which is applicable to the continuing connected transactions of the Company from 1 January 2007. The proposal of continuing connected transactions for the three-year period from 2007 to 2009 was approved at the 2005 Annual General Meeting of Shareholders held on 24 May 2006.

 
During the reporting period, the aggregate amount of connected transactions actually occurred was RMB 149.586 billion, of which incoming trade accounted for RMB 57.371 billion and outgoing trade accounted for RMB 92.215 billion (including product sales and services amounting to RMB 92.166 billion). The products and services provided by Sinopec Group Company (procurement, storage, transportation, exploration and production services and production-related services) to the Company amounted to RMB 42.613 billion, representing 5.6% of the Company’s operating expenses. The auxiliary and community services provided by Sinopec Group Company to the Company amounted to RMB 0.805 billion, representing 0.11% of the Company’s operating expenses. The product sales from the Company to Sinopec Group Company amounted to RMB 42.132 billion, representing 5.73% of the Company’s operating revenue. The land leasing fees to be paid to Sinopec Group Company amounted to RMB 1.548 billion. Please refer to Note 32 of the report’s financial statements prepared under IFRS for particulars of the connected transactions actually occurred during this reporting period. The aforementioned connected transactions which occurred during this reporting period have been implemented in accordance with the announced relevant agreements.

 
(2)
OTHER CONNECTED TRANSACTIONS
 
The twenty first meeting of the Third Session of the Board was held on 26 June 2008, at which the ÒProposal Concerning the Acquisition of the Downhole Operation Assets of Maintenance Nature from the Wholly-owned Entities of Sinopec Group CompanyÓ were reviewed and approved. According to the proposals, Sinopec Corp. will acquire all the downhole operation assets of maintenance nature, the relevant business and associated liabilities owned by Sinopec Group Company.

 
The acquisition price is RMB 1.624 billion and Sinopec Corp. uses its own funds for payment. The acquisition of the target assets can effectively satisfy the demands for the downhole operation services from the oil production plants owned by Sinoepec Corp. and maintain the steady and orderly daily production of these oilfields. After the Acquisition, the synergy between the oil production business and the downhole operation business of Sinopec Corp. will be achieved and the management system for oilfield production will be streamlined. Further, the numbers of operations will be reduced and costs on production will be saved, as such, the acquisition of the target assets will enhance the production efficiency and further reduce the existing connected transactions between Sinopec Corp. and Sinopec Group Company. For details, please see the announcement published in the China Securities Journal, Shanghai Securities News and Securities Times on June 27, 2008 and on the website of Shanghai Stock Exchange (http://www.sse.com.cn) and Hong Kong Stock Exchange (http://www.hkex.com.hk).

10
SIGNIFICANT TRUSTEESHIP, CONTRACTING AND LEASE
 
During this reporting period, Sinopec Corp. did not omit the disclosure of significant trusteeship, contracting or lease of any other company’s assets, nor placed its assets to or under any other company’s trusteeship, contracting or lease which were subject to disclosure.
 
27
 
11
DURING THIS REPORTING PERIOD, SINOPEC CORP. DID NOT ENTRUST ANY THIRD PARTY TO CARRY OUT CASH ASSETS MANAGEMENT ON ITS BEHALF

12
MATERIAL GUARANTEE CONTRACTS AND STATUS OF IMPLEMENTATION

 
External guarantees provided by the Company (not including guarantees provided for its controlled subsidiaries)

 
Date of
          
 
Occurrence
          
 
( Date of
Guarantee
    
Whether
Whether for
 
Execution of
Amount
    
Completed
a Connected
Obligors
the Agreement)
(RMB million)
Type of Guarantee
Term
or not
Party 1
             
Yueyang SINOPEC Shell Coal
            
     GasificationCorporation Co., Ltd.
12 December 2003
377
Joint and Several Liability
10 December 2003 - 10 December 2017
No
Yes
Shanghai Gaoqiao-SK Solvent Co., Ltd.
22 September 2006
    
22 September 2006 - 22 September 2011
    
 
24 November 2006
    
24 November 2006 - 24 November 2011
    
 
30 March 2007
    
30 March 2007 - 30 March 2012
    
 
16 April 2007
Total 75
Joint and Several Liability
16 April 2007 - 16 April 2012
No
Yes
Fujian Refining and
            
    Petrochemical Company Limited
6 September 2007
9,166
Joint and Several Liability
6 September 2007 - 31 December 2015
No
Yes
Balance of guarantee by Sinopec
        
 
 
    Yangzi Petrochemical for
            
    its associates and joint ventures
114
  
No
Yes
    
Balance of guarantee by
            
    Sinopec Shanghai Petrochemical for
            
    its associates and joint ventures
17
  
No
Yes
    
Balance of guarantee by 
            
    Sinopec Sales Company Limited for
            
    its associates and joint ventures
75
  
No
Yes
    
Total amount of guarantee provided during the reporting period 2
          
26
Total amount of guarantee outstanding at the end of the reporting period 2
          
9,824
             
Guarantees provided by Sinopec Corp. for its controlled subsidiaries
            
Total amount of guarantee for the controlling subsidiaries during the reporting period
          
None
Total amount of guarantee for the controlling subsidiaries outstanding at the end of the reporting period
          
2,228
             
Total amount of guarantee by the Company (including those provided for the controlling subsidiaries)
            
Total amount of guarantee 3
          
12,052
Total amount of guarantee as a percentage of the Company’s net assets
          
3.6%
           
 
Amount of guarantee provided for shareholders, effective controllers and connected parties
          
None
Amount of debt guarantee provided directly or indirectly for the companies with liabilities to asset ratio of over 70%
          
82
Amount of guarantee in excess of 50% of the total net assets
          
None
             
Total amount of guarantee of the above three items 4
          
82

Note 1:
As defined in the Listing Rules of the Shanghai Stock Exchange.

Note 2:
Total amount of guarantee provided during the reporting period and total amount of guarantees outstanding at the end of the reporting period include the guarantees provided by the controlled subsidiaries to external parties. The amount of guarantees assumed by Sinopec Corp. is the amount of the external guarantees provided by each controlling subsidiary multiplied by Sinopec Corp.’s respective shareholding in the controlled subsidiary.

Note 3:
Total amount of guarantee is the aggregate of the amount of guarantee outstanding at the end of the reporting period (excluding the guarantees provided for controlling subsidiaries) and the amount of guarantees for controlling subsidiaries outstanding at the end of the reporting period.
   
 Note 4:      ÒTotal amount of guarantee of the above three itemsÓ is the aggregate of Òamount of guarantee provided for shareholders, effective controllers and connected partiesÓ, Òamount of debt guarantees provided directly or indirectly for companies with liabilities to asset ratio of over 70%Ó and Òthe amount of guarantees in excess of 50% of net assetsÓ.

28
      
Material Guarantees under Performance
At the twenty-second meeting of the First Session of the Board of Directors, the Board approved the proposal for Sinopec Corp. to provide guarantee for Yueyang Sinopec Shell Coal Gasification Co., Ltd. in the amount of RMB 377 million.

At the thirteenth meeting of the Second Session of the Board of Directors, the Board approved the proposal for Sinopec Corp. to provide a credit line guarantee to China International United Petroleum and Chemicals Co., Ltd. in the amount equivalent to RMB 2.057 billion.

At the eighth meeting of the Third Session of the Board of Directors, the Board approved the proposal for Sinopec Corp. to provide guarantee equivalent to RMB 9.166 billion to Fujian United Petrochemical Company Limited for the Fujian refining and ethylene joint venture project.

13
NON-OPERATING FUNDS PROVIDED BETWEEN CONNECTED PARTIES
 
Not applicable

14
OCCUPATION OF FUNDS AND THE SOLUTION 
 
Not Applicable 

15
PERFORMANCE OF THE COMMITMENTS BY SINOPEC GROUP COMPANY.
 
As at the end of the reporting period, the major commitments given by Sinopec Group Company were as follows:

 
i
Complying with the connected transaction agreements;

 
ii
Solving the issues regarding legality of the land use rights certificates and property ownership rights certificates within a specified period of time;

 
iii
Implementing the Re-organisation Agreement

 
iv
Granting licenses for intellectual property rights;

 
v
Refraining from involvement in competition within the industry; and

 
vi
Withdrawing from the business competition and conflict of interests with Sinopec Corp.

 
Details of the above commitments were included in the prospectus for the issuance of A shares of Sinopec Corp. published in China Securities Journal, Shanghai Securities News, and Securities Times in Mainland China on 22 June 2001.

 
During the reporting period, Sinopec Corp. was not aware of any breach of the above major commitments by Sinopec Group Company.

16
AUDITORS
 
At the 2007 Annual General Meeting of Shareholders of the Company held on 26 May 2008, KPMG Huazhen and KPMG were reappointed as the domestic and overseas auditors of the Company for the year of 2008 respectively. In addition, the Board of Directors was authorized to determine the remuneration for the auditors. The accrued audit fee for the first half of 2008 was RMB 31 million. The financial statements for the first half of 2008 have been audited by KPMG Huazhen and KPMG. The signing certified public accountants of KPMG Huazhen are Zhang Jingjing and Zhang Yansheng.

17
REPURCHASE, SALE AND REDEMPTION OF SHARES
 
Sinopec Corp. or any of its subsidiaries have not repurchased, sold or redeemed any listed securities of Sinopec Corp. or its subsidiaries during the reporting period.
 
29
 
 
(1)
Status of investment in shares and securities

         
Book value
Book value
    
       
Amount
at the end
at the beginning
    
     
Number of
of initial
of reporting
of reporting
  
Accounting
Item
Stock Code
Abbreviation
shares held
investment
period 
period 
  
items
                 
1
384(Hong Kong)
China Gas Holding
210  
HK$ 128
RMB 136 
RMB 136
  
Long-term
     
million
million
million
million
  
equity investment
Total
    
—
HK$ 128
RMB 136
RMB 136
  
—
       
million
million
million
    

 
(2)
Shareholding of non-listed financial enterprises
 
Not applicable

 
(3)
5% above shareholders’ additional commitments regarding the restricted A shares in 2008
 
Not applicable

 
(4)
Major changes in profitability, asset quality and creditability of the guarantor of convertible bonds
 
Not applicable

19
PROFIT WARNING AND DESCRIPTION FOR THE PROJECTION OF POSSIBLE NET LOSSES OR SIGNIFICANT DECREASE IN TERMS OF AGGREGATE NET PROFIT FROM THE BEGINNING OF THE YEAR TO THE NEXT REPORTING PERIOD COMPARED WITH THE CORRESPONDING PERIOD LAST YEAR.
 
Since the beginning of the year, with the soaring international crude oil prices and the tight control over domestic oil products prices, prices of crude oil and oil products were inverted, which, resulted in significant losses of the Company’s refining segment. The Company’s overall profitability dropped substantially. Through preliminary estimation by the finance division, the Company expects that net profit for the first three quarters of this year shall drop more than 50 percent compared with the same period last year. 
 
30
 
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Members of the Third Session of the Board of Directors, Third Session of the Supervisory Board, and the other members of the senior management are as the follows:

 
DIRECTORS

Name
Gender
Age
Position in the Board of Directors.
       
Su Shulin
Male
46
Chairman
Zhou Yuan
Male
60
Vice Chairman
Wang Tianpu
Male
45
Director, President
Zhang Jianhua
Male
43
Director, Senior Vice President
Wang Zhigang
Male
51
Director, Senior Vice President
Dai Houliang
Male
44
Director, Senior Vice President, CFO
Liu Zhongli
Male
73
Independent Non-executive Director
Shi Wanpeng
Male
71
Independent Non-executive Director
Li Deshui
Male
64
Independent Non-executive Director
Yao Zhongmin
Male
56
Director
Fan Yifei
Male
44
Director

 
SUPERVISORS

Name
Gender
Age
Position in the Supervisory Board
       
Wang Zuoran
Male
57
Chairman
Zhang Youcai
Male
66
Vice Chairman, Independent Spervisor
Kang Xianzhang
Male
60
Supervisor
Zou Huiping
Male
47
Supervisor
Li Yonggui
Male
68
Independent Supervisor
Su Wensheng
Male
51
Employee Representative Supervisor
Zhang Jitian
Male
60
Employee Representative Supervisor
Cui Guoqi
Male
55
Employee Representative Supervisor
Li Zhonghua
Male
57
Employee Representative Supervisor

 
OTHER MEMBERS OF SENIOR MANAGEMENT

Name
Gender
Age
Position in Sinopec Corp.
       
Cai Xiyou
Male
46
Senior Vice President
Zhang Kehua
Male
54
Vice President
Zhang Haichao
Male
51
Vice President
Jiao Fangzheng
Male
45
Vice President
Chen Ge
Male
46
Secretary to the Board of Directors

31
 
REPORT OF THE PRC AUDITORS

To the Shareholders of
China Petroleum & Chemical Corporation:

We have audited the accompanying financial statements of China Petroleum & Chemical Corporation (the ÒCompanyÓ), which comprise the consolidated balance sheet and balance sheet as at 30 June 2008, and the consolidated income statement and income statement, consolidated statement of changes in equity and statement of changes in equity, consolidated cash flow statement and cash flow statement for the six-month period ended 30 June 2008, and notes to the financial statements.

1.
MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

 
The Company’s management is responsible for the preparation of these financial statements in accordance with the Accounting Standards for Business Enterprises (2006) issued by the Ministry of Finance of the People’s Republic of China. This responsibility includes: (1) designing, implementing and maintaining internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error; (2) selecting and applying appropriate accounting policies; and (3) making accounting estimates that are reasonable.

2.
AUDITOR’S RESPONSIBILITY

 
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with China’s Auditing Standards for the Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

 
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

3.
OPINION

 
In our opinion, the financial statements comply with the requirements of the Accounting Standards for Business Enterprises (2006) issued by the Ministry of Finance of the People’s Republic of China and present fairly, in all material respects, the Company’s consolidated financial position and financial position as at 30 June 2008, and the consolidated results of operations, results of operations, consolidated cash flows and cash flows for the six-month period ended 30 June 2008.

 

KPMG Huazhen
Certified Public Accountants
 
Registered in the People’s Republic of China
   
 
Zhang Jingjing
 
Zhang Yansheng
   
Beijing, The People’s Republic of China
22 August 2008

32

(A)
FINANCIAL STATEMENTS PREPARED UNDER THE PRC ACCOUNTING STANDARDS FOR BUSINESS ENTERPRISES
 
CONSOLIDATED BALANCE SHEET
 
at 30 June 2008
   
At 30 June
At 31 December
 
Note
2008
2007
   
RMB millions
RMB millions
       
Assets
      
Current assets
      
 
Cash at bank and in hand
5
9,774
8,364
 
Bills receivable
6
8,938
12,851
 
Trade accounts receivable
7
43,084
22,947
 
Other receivables
8
20,224
11,822
 
Advance payments
9
14,406
9,402
 
Inventories
10
163,488
116,049
 
Other current assets
  
127
100
Total current assets
  
260,041
181,535
Non-current assets
      
 
Long-term equity investments
11
31,189
31,335
 
Fixed assets
12
365,785
361,148
 
Construction in progress
13
105,503
95,408
 
Intangible assets
14
16,730
15,232
 
Goodwill
15
15,707
15,690
 
Long-term deferred expenses
16
6,348
5,842
 
Deferred tax assets
17
18,037
10,192
 
Other non-current assets
  
1,216
2,190
Total non-current assets
  
560,515
537,037
Total assets
  
820,556
718,572
Liabilities and shareholders’ equity
      
Current liabilities
      
 
Short-term loans
19
67,229
36,954
 
Bills payable
20
17,563
12,162
 
Trade accounts payable
21
126,669
93,049
 
Receipts in advance
22
27,448
25,082
 
Staff costs payable
23
7,091
5,905
 
Taxes payable
24
9,324
17,562
 
Other payables
25
65,617
47,503
 
Short-term debentures payable
28
—
10,074
 
Current portion of non-current liabilities
26
18,785
13,466
Total current liabilities
  
339,726
261,757
Non-current liabilities
      
 
Long-term loans
27
75,920
77,708
 
Debentures payable
28
62,479
42,606
 
Provisions
29
8,168
7,613
 
Deferred tax liabilities
17
1,471
1,492
 
Other non-current liabilities
  
1,493
1,049
Total non-current liabilities
  
149,531
130,468
Total liabilities
  
489,257
392,225
Shareholders’ equity
      
 
Share capital
30
86,702
86,702
 
Capital reserve
31
43,545
38,391
 
Surplus reserves
32
65,392
64,797
 
Retained profits
      
 
(Including cash dividend declared after the balance sheet date of
      
 
RMB 2,601 million (2007: Proposed cash dividend of RMB 9,971 million))
  
109,832
111,059
Shareholders’ equity attributable to equity shareholders of the Company
  
305,471
300,949
Minority interests
  
25,828
25,398
Total shareholders’ equity
  
331,299
326,347
Total liabilities and shareholders’ equity
  
820,556
718,572

These financial statements have been approved by the board of directors on 22 August 2008.

Su Shulin
Wang Tianpu
Dai Houliang
Liu Yun
Chairman
Director, President
Director, Senior Vice President
Head of Corporate
(Authorised representative)
  
and Chief Financial Officer
Finance Department


The notes on pages 41 to 88 form part of these financial statements.
 
33
 
BALANCE SHEET
at 30 June 2008
   
At 30 June
At 31 December
 
Note
2008
2007
   
RMB millions
RMB millions
       
Assets
      
Current assets
      
 
Cash at bank and in hand
5
3,974
3,105
 
Bills receivable
6
3,264
6,377
 
Trade accounts receivable
7
15,639
13,547
 
Other receivables
8
18,234
18,209
 
Advance payments
9
13,441
9,252
 
Inventories
10
113,537
65,901
 
Other current assets
  
80
23
Total current assets
  
168,169
116,414
Non-current assets
      
 
Long-term equity investments
11
84,240
85,784
 
Fixed assets
12
291,729
290,082
 
Construction in progress
13
98,598
80,720
 
Intangible assets
14
11,371
10,322
 
Long-term deferred expenses
16
5,273
4,995
 
Deferred tax assets
17
16,205
9,418
 
Other non-current assets
  
90
735
Total non-current assets
  
507,506
482,056
Total assets
  
675,675
598,470
Liabilities and shareholders’ equity
      
Current liabilities
      
 
Short-term loans
19
20,001
21,952
 
Bills payable
20
9,615
8,613
 
Trade accounts payable
21
90,363
58,932
 
Receipts in advance
22
23,325
23,412
 
Staff costs payable
23
6,234
5,282
 
Taxes payable
24
9,870
15,383
 
Other payables
25
111,658
65,729
 
Short-term debentures payable
28
—
10,074
 
Current portion of non-current liabilities
26
18,033
12,813
Total current liabilities
  
289,099
222,190
Non-current liabilities
      
 
Long-term loans
27
55,554
67,055
 
Debentures payable
28
62,479
42,606
 
Provisions
29
7,714
7,002
 
Deferred tax liabilities
17
577
584
 
Other non-current liabilities
587
601
  
Total non-current liabilities
  
126,911
117,848
Total liabilities
  
416,010
340,038
Shareholders’ equity
      
 
Share capital
30
86,702
86,702
 
Capital reserve
31
43,427
38,175
 
Surplus reserves
32
65,392
64,797
 
Retained profits
      
 
(Including cash dividend declared after the balance sheet date of
      
 
RMB 2,601 million (2007: proposed cash dividend of RMB 9,971 million))
  
64,144
68,758
Total shareholders’ equity
  
259,665
258,432
Total liabilities and shareholders’ equity
  
675,675
598,470

These financial statements have been approved by the board of directors on 22 August 2008.

Su Shulin
Wang Tianpu
Dai Houliang
Liu Yun
Chairman
Director, President
Director, Senior Vice President
Head of Corporate
(Authorised representative)
  
and Chief Financial Officer
Finance Department


The notes on pages 41 to 88 form part of these financial statements.
 
34
 
CONSOLIDATED INCOME STATEMENT
for the six-month period ended 30 June 2008
   
Six-month periods
   
ended 30 June
 
Note
2008
2007
   
RMB millions
RMB millions
       
Operating income
33
734,783
563,870
Less:
Cost of sales
33
679,678
461,426
 
Sales taxes and surcharges
34
28,451
14,456
 
Selling expenses
  
11,885
9,535
 
Administrative expenses
  
18,721
17,139
 
Financial expenses
35
3,658
2,760
 
Exploration expenses, including dry holes
36
4,728
5,717
 
Impairment losses
37
16,079
1,535
Add:
Fair value gain/(loss)
38
2,956
(897)
 
Investment income
39
1,677
2,880
Operating (loss) / profit
  
(23,784)
53,285
Add:
Non-operating income
40
33,765
169
Less:
Non-operating expenses
41
465
753
Profit before taxation
  
9,516
52,701
Less:
Income tax expense
42
101
16,127
Net profit
  
9,415
36,574
Including:
Net profit made by acquiree before the consolidation
  
—
217
Attributable to:
      
 
Equity shareholders of the Company
  
9,339
35,110
 
Minority interests
  
76
1,464
Basic earnings per share
53
0.11
0.40
Diluted earnings per share
53
0.08
0.40

These financial statements have been approved by the board of directors on 22 August 2008.

Su Shulin
Wang Tianpu
Dai Houliang
Liu Yun
Chairman
Director, President
Director, Senior Vice President
Head of Corporate
(Authorised representative)
  
and Chief Financial Officer
Finance Department

The notes on pages 41 to 88 form part of these financial statements.
 
35
 
INCOME STATEMENT
for the six-month period ended 30 June 2008
   
Six-month periods
   
ended 30 June
 
Note
2008
2007
   
RMB millions
RMB millions
       
Operating income
33
519,484
408,967
Less:
Cost of sales
33
471,044
330,838
 
Sales taxes and surcharges
34
25,332
11,996
 
Selling expenses
  
9,667
8,122
 
Administrative expenses
  
15,384
13,478
 
Financial expenses
35
3,735
2,256
 
Exploration expenses, including dry holes
36
4,728
5,715
 
Impairment losses
37
15,758
1,577
Add:
Fair value gain/(loss)
38
2,956
(897)
 
Investment income
39
4,806
9,264
Operating (loss) / profit
    
(18,402)
43,352
Add:
Non-operating income
40
22,669
111
Less:
Non-operating expenses
41
415
580
Profit before taxation
    
3,852
42,883
Less:
Income tax expense
42
(2,100)
10,814
         
Net profit
  
5,952
32,069

These financial statements have been approved by the board of directors on 22 August 2008.

Su Shulin
Wang Tianpu
Dai Houliang
Liu Yun
Chairman
Director, President
Director, Senior Vice President
Head of Corporate
(Authorised representative)
  
and Chief Financial Officer
Finance Department

The notes on pages 41 to 88 form part of these financial statements.

 
 
36
 

 
CONSOLIDATED CASH FLOW STATEMENT
for the six-month period ended 30 June 2008
   
Six-month periods
   
ended 30 June
 
Note
2008
2007
   
RMB millions
RMB millions
       
Cash flows from operating activities:
      
 
Cash received from sale of goods and rendering of services
  
843,591
645,091
 
Rentals received
  
149
145
 
Grants received
  
28,308
—
 
Other cash received relating to operating activities
  
2,399
1,675
Sub-total of cash inflows
  
874,447
646,911
 
Cash paid for goods and services
  
(788,688)
(512,024)
 
Cash paid for operating leases
  
(3,116)
(3,000)
 
Cash paid to and on behalf of employees
  
(11,694)
(9,579)
 
Value added tax paid
  
(19,548)
(22,101)
 
Income tax paid
  
(13,326)
(16,787)
 
Taxes paid other than value added tax and income tax
  
(24,993)
(13,163)
 
Other cash paid relating to operating activities
  
(7,096)
(5,557)
Sub-total of cash outflows
  
(868,461)
(582,211)
       
         
Net cash flow from operating activities
44(a)
5,986
64,700
Cash flows from investing activities:
      
 
Cash received from sale of investments
  
1,049
758
 
Dividends received
  
1,192
1,668
 
Net cash received from sale of fixed assets and intangible assets
  
109
158
 
Cash received on maturity of time deposits with financial institutions
  
466
510
 
Other cash received relating to investing activities
  
197
370
 
Sub-total of cash inflows
  
3,013
3,464
 
Cash paid for acquisition of fixed assets and intangible assets
  
(44,880)
(40,756)
 
Cash paid for purchase of investments
  
(2,675)
(1,037)
 
Cash paid for purchase of time deposits with financial institutions
  
(1,106)
(3,178)
 
Cash paid for acquisition of subsidiaries, net
  
—
(7,116)
 
Sub-total of cash outflows
  
(48,661)
(52,087)
         
Net cash flow from investing activities
  
(45,648)
(48,623)
 
Cash flows from financing activities:
      
 
Cash received from contribution from minority shareholders
  
1,065
194
 
Cash received from issuance of convertible bonds, net of issuance costs
  
29,850
11,368
 
Cash received from issuance of corporate bonds
  
—
5,000
 
Cash received from borrowings
  
431,302
316,769
 
Sub-total of cash inflows
  
462,217
333,331
 
Cash repayments of corporate bonds
  
(10,000)
(10,000)
 
Cash repayments of borrowings
  
(396,247)
(323,035)
 
Cash paid for dividends, profits distribution or interest expenses
  
(14,570)
(13,284)
 
Dividends paid to minority shareholders by subsidiaries
  
(642)
(219)
 
Distributions to Sinopec Group Company
  
(285)
—
 
Sub-total of cash outflows
  
(421,744)
(346,538)
         
Net cash flow from financing activities
  
40,473
(13,207)
Effects of changes in foreign exchange rate
  
(41)
(7)
       
Net increase in cash and cash equivalents
44(b)
770
2,863

These financial statements have been approved by the board of directors on 22 August 2008.

Su Shulin
Wang Tianpu
Dai Houliang
Liu Yun
Chairman
Director, President
Director, Senior Vice President
Head of Corporate
(Authorised representative)
  
and Chief Financial Officer
Finance Department


 



The notes on pages 41 to 88 form part of these financial statements.


 
37
 

CASH FLOW STATEMENT
for the six-month period ended 30 June 2008
     
Six-month periods
     
ended 30 June
   
Note
2008
2007
     
RMB millions
RMB millions
         
Cash flows from operating activities:
      
 
Cash received from sale of goods and rendering of services
  
607,618
471,896
 
Rentals received
  
88
81
 
Grants received
  
20,384
—
 
Other cash received relating to operating activities
  
29,785
4,915
 
Sub-total of cash inflows
  
657,875
476,892
 
Cash paid for goods and services
  
(550,198)
(369,376)
 
Cash paid for operating leases
  
(2,792)
(2,874)
 
Cash paid to and on behalf of employees
  
(8,604)
(7,498)
 
Value added tax paid
  
(16,484)
(16,977)
 
Income tax paid
  
(10,517)
(12,798)
 
Taxes paid other than value added tax and income tax
  
(21,312)
(10,787)
 
Other cash paid relating to operating activities
  
(7,851)
(3,507)
 
Sub-total of cash outflows
  
(617,758)
(423,817)
         
Net cash flow from operating activities
44(a)
40,117
53,075
         
Cash flows from investing activities:
      
 
Cash received from sale of investments
  
771
173
 
Dividends received
  
7,021
8,744
 
Net cash received from sale of fixed assets and intangible assets
  
103
66
 
Cash received on maturity of time deposits with financial institutions
  
44
389
 
Other cash received relating to investing activities
  
102
199
 
Sub-total of cash inflows
  
8,041
9,571
 
Cash paid for acquisition of fixed assets and intangible assets
  
(41,469)
(31,506)
 
Cash paid for purchase of investments
  
(3,570)
(5,999)
 
Cash paid for purchase of time deposits with financial institutions
  
(45)
(468)
 
Cash paid for acquisition of subsidiaries, net
  
—
(3,500)
 
Sub-total of cash outflows
  
(45,084)
(41,473)
         
Net cash flow from investing activities
  
(37,043)
(31,902)
Cash flows from financing activities:
      
 
Cash received from issuance of convertible bonds, net of issuance costs
  
29,850
11,368
 
Cash received from issuance of corporate bonds
  
—
5,000
 
Cash received from borrowings
  
279,437
205,534
 
Sub-total of cash inflows
  
309,287
221,902
 
Cash repayments of corporate bonds
  
(10,000)
(10,000)
 
Cash repayments of borrowings
  
(287,551)
(218,890)
 
Cash paid for dividends, profits distribution or interest expenses
  
(13,657)
(12,249)
 
Distribution to Sinopec Group Company
  
(285)
—
 
Sub-total of cash outflows
  
(311,493)
(241,139)
         
Net cash flow from financing activities
  
(2,206)
(19,237)
         
Net increase in cash and cash equivalents
44(b)
868
1,936
These financial statements have been approved by the board of directors on 22 August 2008.

Su Shulin
Wang Tianpu
Dai Houliang
Liu Yun
Chairman
Director, President
Director, Senior Vice President
Head of Corporate
(Authorised representative)
  
and Chief Financial Officer
Finance Department

The notes on pages 41 to 88 form part of these financial statements.


 
38
 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the six-month period ended 30 June 2008
             
Total
    
             
shareholders’
    
             
equity
    
             
attributable
    
             
to equity
  
Total
     
Share
Capital
Surplus
Retained
shareholders of
Minority
shareholders’
     
capital
reserve
reserves
profits
the Company
interests
equity
     
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
                   
Balance at 1 January 2007
86,702
38,553
59,519
74,608
259,382
22,417
281,799
Changes in equity for the period
              
1.
Net profit
—
—
—
35,110
35,110
1,464
36,574
2.
Gain and loss recognised directly in equity
              
 
–
Unrealised gain for the change in fair value of available-for- sale financial assets, net of deferred tax
—
170
—
—
170
127
297
Sub-total of 1&2
—
170
—
35,110
35,280
1,591
36,871
3.
Appropriation:
              
 
–
Appropriation to surplus reserves
—
—
3,207
(3,207)
—
—
—
 
–
Dividend declared (Note 43)
—
—
—
(9,537)
(9,537)
—
(9,537)
4.
Distributions to minority interests net of contributions
—
—
—
—
—
(25)
(25)
Balance at 30 June 2007
86,702
38,723
62,726
96,974
285,125
23,983
309,108
                   
             
Total
    
             
shareholders’
    
             
equity
    
             
attributable
    
             
to equity
  
Total
     
Share
Capital
Surplus
Retained
shareholders of
Minority
shareholders’
     
capital
reserve
reserves
profits
the Company
interests
equity
     
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
                   
Balance at 1 January 2008
86,702
38,391
64,797
111,059
300,949
25,398
326,347
Changes in equity for the period
              
1.
Net profit
  
—
—
—
9,339
9,339
76
9,415
2.
Gain and loss recognised directly in equity
              
 
–
Unrealised loss for the change in fair value of available-for- sale financial assets, net of deferred tax (Note 31)
—
(1,666)
—
—
(1,666)
(69)
(1,735)
 
–
Issuance of the Bonds with Warrants (Note 31)
—
6,879
—
—
6,879
—
6,879
Sub-total of 1&2
—
5,213
—
9,339
14,552
7
14,559
3.
Appropriation:
              
 
–
Appropriation to surplus reserves (Note 32)
—
—
595
(595)
—
—
—
 
–
Dividend declared (Note 43)
—
—
—
(9,971)
(9,971)
—
(9,971)
4.
Contributions from minority interests, net of distributions
—
—
—
—
—
423
423
5.
Distribution to Sinopec Group Company (Note 31)
—
(59)
—
—
(59)
—
(59)
                   
Balance at 30 June 2008
86,702
43,545
65,392
109,832
305,471
25,828
331,299
These financial statements have been approved by the board of directors on 22 August 2008.

Su Shulin
Wang Tianpu
Dai Houliang
Liu Yun
Chairman
Director, President
Director, Senior Vice President
Head of Corporate
(Authorised representative)
  
and Chief Financial Officer
Finance Department

The notes on pages 41 to 88 form part of these financial statements.


 
39
 

STATEMENT OF CHANGES IN EQUITY
for the six-month period ended 30 June 2008
                                     
Total
  
             
Share
    
Capital
    
Surplus
    
Retained
    
shareholders’
  
             
capital
    
reserve
    
reserves
    
profits
    
equity
  
             
RMB millions
    
RMB millions
    
RMB millions
    
RMB millions
    
RMB millions
  
                                         
 
Balance at 1 January 2007
       86,702       36,526       59,329       33,415       215,972  
 
Changes in equity for the period
                                          
    1.    
Net profit (as previously reported)
       —       —       —       24,476       24,476  
    2.    
Investment income from subsidiaries (Note 39)
       —       —       —       7,593       7,593  
 
Sub-total of 1&2 (as restated)
       —       —       —       32,069       32,069  
    3.    
Appropriation:
                                      
                  –  
Appropriation to surplus reserves
     —       —       3,207       (3,207 )     —  
                  –  
Dividend declared (Note 43)
     —       —       —       (9,537 )     (9,537 )
 
Balance at 30 June 2007
       86,702       36,526       62,536       52,740       238,504  
                                                     
                                               
Total
  
               
Share
    
Capital
    
Surplus
    
Retained
    
shareholders’
  
               
capital
    
reserve
    
reserves
    
profits
    
equity
  
               
RMB millions
    
RMB millions
    
RMB millions
    
RMB millions
    
RMB millions
  
                                                     
 
Balance at 1 January 2008
       86,702       38,175       64,797       68,758       258,432  
 
Changes in equity for the period
                                          
    1.    
Net profit
       —       —       —       5,952       5,952  
    2.    
Gain and loss recognised directly in equity
                                          
            –    
Unrealised loss for the change in fair value of available-for- sale financial assets, net of deferred tax (Note 31)
     —       (1,568 )     —       —       (1,568 )
            –    
Issuance of the Bonds with Warrants (Note 31)
     —       6,879       —       —       6,879  
 
Sub-total of 1&2
       —       5,311       —       5,952       11,263  
    3.    
Appropriation:
                                          
            –    
Appropriation to surplus reserves (Note 32)
     —       —       595       (595 )     —  
            –    
Dividend declared (Note 43)
     —       —       —       (9,971 )     (9,971 )
    4.    
Distribution to Sinopec Group Company (Note 31)
       —       (59 )     —       —       (59 )
 
Balance at 30 June 2008
       86,702       43,427       65,392       64,144       259,665  

These financial statements have been approved by the board of directors on 22 August 2008.

Su Shulin
Wang Tianpu
Dai Houliang
Liu Yun
Chairman
Director, President
Director, Senior Vice President
Head of Corporate
(Authorised representative)
  
and Chief Financial Officer
Finance Department

The notes on pages 41 to 88 form part of these financial statements.


 
40
 

NOTES ON THE INTERIM FINANCIAL STATEMENTS
for the six-month period ended 30 June 2008
 
1
STATUS OF THE COMPANY
 
China Petroleum & Chemical Corporation (the ÒCompanyÓ) was established on 25 February 2000 as a joint stock limited company.
 
 
According to the State Council’s approval to the ÒPreliminary Plan for the Reorganisation of China Petrochemical CorporationÓ ( the ÒReorganisationÓ), the Company was established by China Petrochemical Corporation (ÒSinopec Group CompanyÓ), which transferred its core businesses together with the related assets and liabilities at 30 September 1999 to the Company. Such assets and liabilities had been valued jointly by China United Assets Appraisal Corporation, Beijing Zhong Zheng Appraisal Company, CIECC Assets Appraisal Corporation and Zhong Fa International Properties Valuation Corporation (Òregistered valuersÓ). The net asset value was determined at RMB 98,249,084,000. The valuation was reviewed and approved by the Ministry of Finance (the ÒMOFÓ) (Cai Ping Zi [2000] No. 20 ÒComments on the Review of the Valuation Regarding the Formation of a Joint Stock Limited Company by China Petrochemical CorporationÓ).
 
 
In addition, pursuant to the notice Cai Guan Zi [2000] No. 34 ÒReply to the Issue Regarding Management of State-Owned Equity by China Petroleum and Chemical CorporationÓ issued by the MOF, 68.8 billion domestic state-owned shares with a par value of RMB 1.00 each were issued to Sinopec Group Company, the amount of which is equivalent to 70% of the above net asset value transferred from Sinopec Group Company to the Company in connection with the Reorganisation.
 
 
Pursuant to the notice Guo Jing Mao Qi Gai [2000] No. 154 ÒReply on the Formation of China Petroleum and Chemical CorporationÓ, the Company obtained the approval from the State Economic and Trade Commission on 21 February 2000 for the formation of a joint stock limited company.
 
 
The Company took over the exploration, development and production of crude oil and natural gas, refining, chemicals and related sales and marketing business of Sinopec Group Company after the establishment of the Company.
 
 
The Company and its subsidiaries (the ÒGroupÓ) engage in the oil and gas and chemical operations and businesses, including:
 
 
    (1)
the exploration, development and production of crude oil and natural gas;
 
 
    (2)
the refining, transportation, storage and marketing of crude oil and petroleum product, and
 
 
    (3)
the production and sale of chemicals.
 
 
Pursuant to the resolution passed at the Directors’ meeting on 28 December 2007, the Group acquired the equity interests of Zhanjiang Dongxing Petrochemical Company Limited, Sinopec Hangzhou Oil Refinery Plant, Yangzhou Petrochemical Plant, Jiangsu Taizhou Petrochemical Plant and Sinopec Qingjiang Petrochemical Company Limited (collectively ÒRefinery PlantsÓ) from Sinopec Group Company, for a total cash consideration of RMB 2,468 million (hereinafter referred to as the ÒAcquisition of Refinery PlantsÓ).
 
 
As the Group and Refinery Plants are under the common control of Sinopec Group Company, the Acquisition of Refinery Plants is considered as Òcombination of entities under common controlÓ. The results of operations for the six-month period ended 30 June 2007 previously reported by the Group have been restated to include the results of the Refinery Plants.
 
2
BASIS OF PREPARATION
 
 
    (1)
Statement of compliance with the Accounting Standards for Business Enterprises (ÒASBEÓ)
 
The financial statements have been prepared in accordance with the requirements of ASBE issued by the MOF in 2006. These financial statements present truly and completely the consolidated financial position and financial position, the consolidated results of operations and results of operations and the consolidated cashflows and cashflows of the Group.
 
 
These financial statements also comply with the disclosure requirements of ÒRegulation on the Preparation of Information Disclosures of Companies Issuing Public Shares, No.15: General Requirements for Financial ReportsÓ revised by the China Securities Regulatory Commission (ÒCSRCÓ) in 2007.
 
 
    (2)
Accounting year
 
The accounting year of the Group is from 1 January to 31 December.
 
 
    (3)
Measurement basis
 
The financial statements of the Group have been prepared under the historical cost convention, except for the assets and liabilities set out below:
 
—
available-for-sale financial assets (see Note 3(11))
 
—
convertible bonds (see Note 3(11))
 
 
   (4)
Reporting currency
 
The Company’s and most of its subsidiaries’ reporting currency are Renminbi. The Group’s consolidated financial statements are presented in Renminbi.
 
 
 
41
 
 
3
SIGNIFICANT ACCOUNTING POLICIES
 
   
   (1)
Business combination and consolidated financial statements
 
           (a)
Business combination involving entities under common control
 
A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. The assets and liabilities that the acquirer receives in the acquisition are accounted for at the acquiree’s carrying amount on the acquisition date. The difference between the carrying amount of the acquired net assets and the carrying amount of the consideration paid for the acquisition (or the total nominal value of shares issued) is recognised in the share premium of capital reserve, or the retained profits in case of any shortfall in the share premium of capital reserve. The acquisition date is the date on which the acquirer effectively obtains control of the acquiree.
 
           (b)
Business combination involving entities not under common control
 
A business combination involving entities or businesses not under common control is a business combination in which all of the combining entities or businesses are not ultimately controlled by the same party or parties both before and after the business combination. The cost of a business combination paid by the Group is the aggregate of the fair value at the acquisition date of assets given, liabilities incurred or assumed, and equity securities issued by the Group, in exchange for control of the acquiree plus any cost directly attributable to the business combination. Difference between the fair value and carrying amount of disposed asset is recognised in the income statement for the period. The acquisition date is the date on which the Group effectively obtains control of the acquiree.
 
 
The Group allocates the cost of a business combination on the acquisition date and recognises the fair value of the acquiree’s various identifiable assets, liabilities or contingent liabilities as they are acquired.
 
 
The excess of the cost of business combination over the fair value of the identifiable net assets acquired is recognised as goodwill (Note 3(9)).
 
 
When the cost of business combination is less than the fair value of the identifiable net assets acquired, the difference is charged to the income statement.
 
           (c)
Consolidated financial statements
 
The consolidated financial statements comprise the Company and its subsidiaries. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights, such as warrants and convertible bonds, that are currently exercisable or convertible, are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
 
 
Where the Company combines a subsidiary during the reporting period through a business combination involving entities under common control, the financial statements of the subsidiary are included in the consolidated financial statements as if the combination had occurred at the beginning of the earliest comparative period presented or, if later, at the date that common control was established. Therefore the opening balances and the comparative figures of the consolidated financial statements are restated. In the preparation of the consolidated financial statements, the subsidiary’s assets, liabilities and results of operations are included in the consolidated balance sheet and the consolidated income statement, respectively, based on their carrying amounts in the subsidiary’s financial statements, from the date that common control was established.
 
 
Where the Company acquires a subsidiary during the reporting period through a business combination involving entities not under common control, the identifiable assets, liabilities and results of operations of the subsidiaries are consolidated into consolidated financial statements from the date that control commences, base on the fair value of those identifiable assets and liabilities at the acquisition date.
 
 
Minority interest is presented separately in the consolidated balance sheet within equity. Net profit or loss attributable to minority shareholders is presented separately in the consolidated income statement below the net profit line item.
 
 
Where the amount of losses attributable to the minority shareholders of a subsidiary exceeds the minority shareholders’ portion of the equity of the subsidiary, the excess, and any further losses attributable to the minority shareholders, are allocated against the equity attributable to the Company except to the extent that the minority shareholders have a binding obligation under the articles of association or an agreement and are able to make additional investment to cover the losses. If the subsidiary subsequently reports profits, such profits are allocated to the equity attributable to the Company until the minority shareholders’ share of losses previously absorbed by the Company has been recovered.
 
 
Where the accounting policies and accounting period adopted by the subsidiaries are different from those adopted by the Company, adjustments are made to the subsidiaries’ financial statements according to the Company’s accounting policies and accounting period. Intra-group balances and transactions, and any unrealised profit or loss arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.
 
 
 
42
 
 
3
SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
    
   (2)
Translation of foreign currencies
 
Foreign currency transactions are, on initial recognition, translated into Renminbi at the spot exchange rates quoted by the People’s Bank of China (ÒPBOC ratesÓ) at the transaction dates.
 
 
Foreign currency monetary items are translated at the PBOC rates at the balance sheet date. Exchange differences, except for those directly related to the acquisition, construction or production of qualified assets (see Note 3(17)), are recognised as income or expenses in the income statement. Non-monetary items denominated in foreign currency measured at historical cost are not translated. Non-monetary items denominated in foreign currency that are measured at fair value are translated using the exchange rates at the date when the fair value was determined. The difference between the translated amount and the original currency amount is recognised as capital reserve, if it is classified as available-for-sale financial assets; or charged to the income statement if it is measured at fair value through profit or loss.
 
 
The assets and liabilities of foreign operation are translated to Renminbi at the spot exchange rates at the balance sheet date. The equity items, excluding ÒRetained profitsÓ, are translated into Renminbi at the spot exchange rates at the transaction dates. The income and expenses of foreign operation are translated into Renminbi at the spot exchange rates on the transaction dates. The resulting exchange differences are separately presented in the balance sheet within equity. Upon disposal of a foreign operation, the cumulative amount of the exchange differences recognised in which relate to that foreign operation is transferred to income statement in the period in which the disposal occurs.
 
 
   (3)
Cash and cash equivalents
 
Cash and cash equivalents comprise cash on hand, demand deposits, short-term and highly liquid investments which are readily convertible into known amounts of cash and are subject to an insignificant risk of change in value.
 
 
   (4)
Inventories
 
Inventories are stated at the lower of cost and net realisable value.
 
 
Cost includes the cost of purchase and processing, and other cost. Inventories are stated at cost upon acquisition. The cost of inventories is calculated using the weighted average method. In addition to the cost of purchase of raw material, work in progress and finished goods include direct labour and an appropriate allocation of manufacturing overhead costs.
 
 
Any excess of the cost over the net realisable value of each item of inventories is recognised as a provision for diminution in the value of inventories. Net realisable value is the estimated selling price in the normal course of business less the estimated costs to completion and the estimated expenses and related taxes to make the sale.
 
 
Consumables, packaging and other ancillary materials are expensed or recognised as the costs of related assets when being consumed.
 
 
Inventories are recorded by perpetual method.
 
 
   (5)
Long-term equity investments
 
           (a)
Investment in subsidiaries
 
In the Group’s consolidated financial statements, investment in subsidiaries are accounted for in accordance with the principles described in Note 3(1)(c).
 
 
In the Company’s financial statements, investments in subsidiaries are accounted for using the cost method. The investments are stated at cost less impairment losses (see Note 3(10)) in the balance sheet. At initial recognition, such investments are measured as follows:
 
 
The initial investment cost of a long-term equity investment obtained through a business combination involving entities under common control is the book value of the acquired entities’ net asset at the combination date. The difference between the initial investment cost and the carrying amounts of the consideration given is adjusted to share premium in capital reserve. If the balance of the share premium is insufficient, any excess is adjusted to retained profits.
 
 
The initial investment cost of a long-term equity investment obtained through a business combination involving entities not under common control is the cost of business combination determined at the acquisition date.
 
 
An investment in a subsidiary acquired otherwise than through a business combination is initially recognised at actual purchase cost if the Group acquires the investment by cash, or at the fair value of the equity securities issued if an investment is acquired by issuing equity securities, or at the value stipulated in the investment contract or agreement if an investment is contributed by investors.
 
 
 
43
 
 
3
SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
       
(5)
Long-term equity investments (Continued)
 
          (b)
Investment in jointly controlled entities and associates
 
A jointly controlled entity is an entity of which the Group can exercise joint control with other venturers. Joint control represents the contractual agreement of sharing of control over the entity’s economic activities, limited to economic activities related to significant financial and operating policies that require agreement of all venturers.
 
 
An associate is an entity of which the Group has significant influence. Significant influence represents the right to participate in the financial and operating policy decisions of the investee but is not control or joint control over the establishment of these policies.
 
 
An investment in a jointly controlled entity or an associate is accounted for using the equity method, unless the investment is classified as held for sale. The investment is classified as held for sale when the Group has made a decision and signed a non-cancellable agreement on the transfer of the investment with the transferee, and the transfer is expected to be completed within one year. The investment held for sale is measured at the lower of its carrying amount and fair value less costs to sell. Any excess of its carrying amount over fair value less costs to sell is recognised as a provision for impairment loss of the investment.
 
 
Impairment losses on investment in jointly controlled entities and associates are measured according to Note 3(10).
 
 
The initial cost of investment in jointly controlled entities and associates is stated at the consideration paid if the investment is made in cash, or at the fair value of the non-monetary assets exchanged for the investment. The difference between the fair value of the non-monetary assets being exchanged and its carrying amount is charged to the income statement.
 
 
The Group’s accounting treatments when adopting the equity method include:
 
 
Where the initial investment cost of a long-term equity investment exceeds the Group’s interest in the fair value of the investee’s identifiable net assets at the time of acquisition, the investment is initially recognised at the initial investment cost. Where the initial investment cost is less than the Group’s interest in the fair value of the investee’s identifiable net assets at the time of acquisition, the investment is initially recognised at the investor’s share of the fair value of the investee’s identifiable net assets, and the difference is charged to income statement.
 
 
After the acquisition of the investment, the Group recognises its share of the investee’s net profits or losses, as investment income or losses, and adjusts the carrying amount of the investment accordingly. Once the investee declares any cash dividends or profits distributions, the carrying amount of the investment is reduced by that attributable to the Group.
 
 
The Group recognises its share of the investee’s net profits or losses after making appropriate adjustments to align the accounting policies or accounting periods with those of the Group based on the fair values of the investee’s individual separately identifiable assets at the time of acquisition. Unrealised profits and losses resulting from transactions between the Group and its associates or jointly controlled entities are eliminated for the part attributable to the Group calculated based on its share of the associates or jointly controlled entities. Unrealised losses resulting from transactions between the Group and its associates or jointly controlled entities are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.
 
 
The Group discontinues recognising its share of net losses of the investee after the carrying amount of the long-term equity investment and any long-term interest that in substance forms part of the Group’s net investment in the associate or the jointly controlled entity is reduced to zero, except to the extent that the Group has an obligation to assume additional losses. Where net profits are subsequently made by the associate or jointly controlled entity, the Group resumes recognising its share of those profits only after its share of the profits exceeds the share of losses not recognised.
 
          (c)
Other long-term equity investments
 
Other long-term equity investments refer to investments for which the Group does not have the rights to control, have joint control or exercise significant influence over the investees, and for which the investments are not quoted in an active market and their fair value cannot be reliably measured.
 
 
The initial investment cost in these entities is originally recognised in the same way as the initial investment cost and measurement principles for investment in jointly controlled entities and associates, and subsequently accounted for under the cost method. As at the balance sheet date, the Group makes provision for impairment losses on such investments according to Note 3(10).
 
          
(6)
Fixed assets and construction in progress
 
Fixed assets represent the tangible assets held by the Group using in the production of goods, rendering of services and for operation and administrative purposes with useful life over 1 year.
 
 
Fixed assets are stated in the balance sheet at cost less accumulated depreciation and impairment losses (see Note 3(10)). Construction in progress is stated in the balance sheet at cost less impairment losses (see Note 3(10)).
 
 
The cost of a purchased fixed asset comprises the purchase price, related taxes, and any directly attributable expenditure for bringing the asset to working condition for its intended use. The cost of self-constructed assets includes the cost of materials, direct labour, capitalised borrowing costs (see Note 3(17)), and any other costs directly attributable to bringing the asset to working condition for its intended use. Costs of dismantling and removing the items and restoring the site on which the related assets located are included in the initial cost.
 
 
Construction in progress is transferred to fixed assets when the asset is ready for its intended use. No depreciation is provided against construction in progress.
 
 
Where the individual component parts of an item of fixed asset have different useful lives or provide benefits to the Group in different patterns thus necessitating use of different depreciation rates or methods, they are recognised as a separate fixed asset.
 
 
The subsequent costs including the cost of replacing part of an item of fixed assets are recognised in the carrying amount of the item if the recognition criteria are satisfied, and the carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of fixed assets are recognised in income statement as incurred.
 
 
Gains or losses arising from the retirement or disposal of an item of fixed asset are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in income statement on the date of retirement or disposal.
 
 
 
44
 
 
3
SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 
      (6)
Fixed assets and construction in progress (Continued)
 
Fixed assets are depreciated using the straight-line method over their estimated useful lives. The estimated useful lives and the estimated rate of residual values adopted for respective classes of fixed assets are as follows:
 
   
Estimated
Estimated rate
   
useful life
of residual value
       
 
Plant and buildings
15-45 years
3%-5%
 
Oil and gas properties
10-14 years
0%-3%
 
Oil depots, storage tanks and service stations
8-25 years
3%-5%
 
Machinery, equipment, vehicles and others
4-18 years
3%

 
Useful lives, residual values and depreciation methods are reviewed at at least each year end.
 
         
(7)
Oil and gas properties
 
Costs of development wells and related support equipment are capitalised. The cost of exploratory wells is initially capitalised as construction in progress pending determination of whether the well has found proved reserves. Exploratory well costs are charged to expenses upon the determination that the well has not found proved reserves. However, in the absence of a determination of the discovery of proved reserves, exploratory well costs are not carried as an asset for more than one year following completion of drilling. If, after one year has passed, a determination of the discovery of proved reserves cannot be made, the exploratory well costs are impaired and charged to expense. All other exploration costs, including geological and geophysical costs, are charged to the income statement in the period as incurred.
 
 
Gains and losses on the disposal of proved oil and gas properties are not recognised unless the disposal encompasses an entire property. The proceeds on such disposals are credited to the carrying amounts of oil and gas properties.
 
 
The Group estimates future dismantlement costs for oil and gas properties with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with the industry practices. These estimated future dismantlement costs are discounted at credit-adjusted risk-free rate and are capitalised as oil and gas properties, which are subsequently amortised as part of the costs of the oil and gas properties.
 
 
      (8)
Intangible assets
 
Intangible assets, where the estimated useful life is finite, are stated in the balance sheet at cost less accumulated amortisation, where the estimated useful life is finite and provision for impairment losses (see Note 3(10)). The cost of intangible assets less residual value and impairment losses is amortised on a straight-line basis over the expected useful lives.
 
 
An intangible asset is regarded as having an indefinite useful life and is not amortised when there is no foreseeable limit to the period over which the asset is expected to generate economic benefits for the Group.
 
 
Intangible assets include exploration and production rights. Exploration and production rights are amortised on a straight-line basis over the average period of the production rights of the related oil fields.
 
 
      (9)
Goodwill
 
Goodwill represents the excess of cost of business combination over the Group’s interest in the fair value of the identifiable net assets of the acquiree under the business combination involving entities not under common control.
 
 
Goodwill arising on the acquisition of a minority interest in a subsidiary represents the excess of the cost of the additional investment over the carrying amount of the net asset acquired at the date of exchange.
 
 
Goodwill is not amortised and is stated at cost less accumulated impairment losses (see Note 3 (10)). On disposal of an asset group or a set of asset groups, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.
 
 
   (10)
Impairment of non-financial long-term assets
 
Internal and external sources of information are reviewed at each balance sheet date for indications that the following assets, including fixed assets, construction in progress, goodwill, intangible assets and investments in subsidiaries, associates and jointly controlled entities may be impaired.
 
 
Assets are tested for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The recoverable amounts of goodwill and intangible assets with uncertain useful lives are estimated annually no matter there are any indications of impairment. Goodwill is tested for impairment together with related asset units or groups of asset units.
 
 
An asset unit is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets. An asset unit comprises related assets that generate associated cash inflows. In identifying an asset unit, the Group primarily considers whether the asset unit is able to generate cash inflows independently as well as the management style of production and operational activities, and the decision for the use or disposal of asset.
 
 
The recoverable amount is the greater of the fair value less costs to sell and the present value of expected future cash flows generated by the asset (or asset unit, set of asset units).
 
 
Fair value less costs to sell of an asset is based on its selling price in an arm’s length transaction less any direct costs attributable to the disposal. Present value of expected future cash flows is the estimation of future cash flows to be generated from the use of and upon disposal of the asset, discounted at an appropriate pre-tax discount rate over the assets remaining useful life.


 
45
 
 
3
SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 
  (10)
Impairment of non-financial long-term assets (Continued)
 
If the recoverable amount of an asset is less than its carrying amount, the carrying amount is reduced to the recoverable amount. The amount by which the carrying amount is reduced is recognised as an impairment loss in the income statement. A provision for impairment loss of the asset is recognised accordingly. Impairment losses related to an asset unit or a set of asset units first reduce the carrying amount of any goodwill allocated to the asset unit or set of asset units, and then reduce the carrying amount of the other assets in the asset unit or set of asset units on a pro rata basis. However, that the carrying amount of an impaired asset will not be reduced below the higher of its individual fair value less costs to sell (if determinable) and the present value of expected future cash flows (if determinable).
 
 
Impairment losses for assets are not reversed.
 
 
  (11)
Financial Instruments
 
Financial instruments of the Group include cash and cash equivalents, bond investments, equity securities other than long-term equity investments, receivables, payables, loans, bonds payable, and share capital, etc.
 
          (a)
Recognition and measurement of financial assets and financial liabilities
 
The Group recognises a financial asset or a financial liability on its balance sheet when the Group enters into and becomes a party to the underlining contract of the financial instrument.
 
 
The Group classifies financial assets and liabilities into different categories at initial recognition based on the purpose of acquiring assets and assuming liabilities: financial assets and financial liabilities at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets and other financial liabilities.
 
 
Financial assets and financial liabilities are initially recognised at fair value. For financial asset or financial liability of which the change in its fair value is recognised in income statement, the relevant transaction cost is recognised in the income statement. The transaction costs for other financial assets or financial liabilities are included in the initially recognised amount. Subsequent to initial recognition financial assets and liabilities are measured as follows:
 
 
—
Financial asset or financial liability with change in fair value recognised in the income statement (including financial asset or financial liability held for trading)
 
 
Financial assets, financial liabilities and derivative instruments held by the Group for the purpose of selling or repurchasing in short term. These financial instruments are initially measured at fair value with subsequently changes in fair value recognised in income statement.
 
 
—
Receivables
 
 
Receivables are non-derivative financial assets with fixed or determinable recoverable amount and with no quoted price in active market. After the initial recognition, loans and receivables are measured at amortised cost using the effective interest rate method.
 
 
—
Held-to-maturity investment
 
 
Held-to-maturity investment includes non-derivative financial assets with fixed or determinable recoverable amount and fixed maturity that the Group has the positive intention and ability to hold to maturity.
 
 
After the initial recognition, held-to-maturity investments are stated at amortised cost using the effective interest rate method.
 
 
—
Available-for-sale financial assets
 
 
Available-for-sale financial assets include non-derivative financial assets that are designated as available for sales and other financial assets which do not fall into any of the above categories. Investments in equity instruments that do not have quoted market prices in active markets and whose fair value cannot be reliably measured are stated at cost.
 
 
Other than the above equity instrument investments whose the fair values cannot be measured reliably, other available-for-sale financial assets are initially stated at fair values. The gains or losses arising from changes in the fair value are directly recognised in equity, except for the impairment losses and exchange differences from monetary financial assets denominated in foreign currencies, which are recognised in the income statement. The cumulative gains and losses previously recognised in equity are transferred to the income statement when the available-for-sale financial assets are derecognised.
 
 
—
Other financial liabilities
 
 
Financial liabilities other than the financial liabilities at fair value through profit or loss are classified as other financial liabilities.
 
 
Among other financial liabilities, financial guarantees are contracts that require the issuer (i.e. the guarantor) to make specified payments to reimburse the beneficiary of the guarantee (the holder) for a loss the holder incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Where the Group issues a financial guarantee, subsequent to initial recognition, the guarantee is measured at the higher of the amount initially recognised less accumulated amortisation and the amount of a provision determined in accordance with the principles of contingent liabilities (see Note 3(14)).
 
 
Except for the other financial liabilities described above, subsequent to initial recognition, other financial liabilities are measured at amortised cost using the effective interest method.
 

 
46
 

3
SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 
   (11)
Financial Instruments (Continued)
 
           (b)
Impairment of financial assets
 
The carrying amount of financial assets (except those financial assets stated at fair value with changes in the fair values charged to income statement) are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, impairment loss is provided.
 
 
—
Receivables and held-to-maturity investments
 
 
Held-to-maturity investments are assessed for impairment on an individual basis. Receivables are assessed for impairment both on an individual basis and on a collective group basis.
 
 
Where impairment is assessed on an individual basis, an impairment loss in respect of a receivable or held-to-maturity investment is calculated as the excess of its carrying amount over the present value of the estimated future cash flows (exclusive of future credit losses that have not been incurred) discounted at the original effective interest rate. All impairment losses are recognised in income statement.
 
 
The assessment is made collectively where receivables share similar credit risk characteristics (including those having not been individually assessed as impaired), based on their historical loss experiences, and adjusted by the observative figures reflecting present economic conditions.
 
 
Impairment loss on receivables and held-to-maturity investments is reversed in the income statement if evidence suggests that the financial assets’ carrying amounts have increased and the reason for the increase is objectively as a result of an event occurred after the recognition of the impairment loss. The reversed carrying amount shall not exceed the amortised cost if the financial assets had no impairment recognised.
 
 
—
Available-for-sale financial assets and other long-term equity investments
 
 
Available-for-sale financial assets are assessed for impairment on an individual basis.
 
 
When available-for-sale financial assets are impaired, despite not derecognised, the cumulative losses resulted from the decrease in fair value which had previously been recognised directly in shareholders’ equity, are reversed and charged to income statement.
 
 
Impairment loss of available-for-sale debt instrument is reversed, if the reason for the subsequent increase in fair value is objectively as a result of an event occurred after the recognition of the impairment loss. Impairment loss for available-for-sale equity instrument is not reversed through income statement.
 
 
For other long-term equity investments (see Note 3(5)(c)), the amount of the impairment loss is stated as the difference between the carrying amount of the investment and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss is not reversed.
 
          (c)
Determination of fair value
 
Fair value of financial asset or financial liability is determined with reference to quoted market price in active market without adjusting for transaction costs that may be incurred upon future disposal or settlement is used to establish the fair value of financial asset or financial liability. For a financial asset held or a financial liability to be assumed, the quoted price is the current bid price and, for a financial asset to be acquired or a financial liability assumed, it is the current asking price.
 
 
If no active market exists for a financial instrument, a valuation technique is used to establish the fair value. Valuation techniques include using arm’s length market transactions between knowledge, willing parties; reference to the current fair value of other instrument that is substantially the same; discounted cash flows and option pricing model. The Group calibrates the valuation technique and tests it for validity periodically.
 
         (d)
Convertible bonds
 
 
(i)
Convertible bonds that contain an equity component
 
Convertible bonds that can be converted to equity share capital at the option of the holder, where the number of shares that would be issued on conversion and the value of the consideration that would be received at that time do not vary, are accounted for as compound financial instruments which contain both a liability component and an equity component.
 
 
At initial recognition the liability component of the convertible bonds is measured as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option. Any excess of proceeds over the amount initially recognised as the liability component is recognised as the equity component. Transaction costs that relate to the issue of the convertible bonds are allocated to the liability and equity components in proportion to the allocation of proceeds.
 
 
The liability component is subsequently carried at amortised cost. The interest expense recognised in the income statement on the liability component is calculated using the effective interest method. The equity component is recognised in the capital reserve until either the bond is converted or redeemed.
 
 
If the bond is converted, the capital reserve, together with the carrying amount of the liability component at the time of conversion, is transferred to share capital and share premium as consideration for the shares issued. If the bond is redeemed, the capital reserve is transferred to retained profits.
 

 
47
 

3
SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 
  (11)
Financial Instruments (Continued)
 
             (d)
Convertible bonds (Continued)
 
 
(ii)
Other convertible bonds
 
Convertible bonds issued with a cash settlement option and other embedded derivative features are split into liability and derivative components.
 
 
At initial recognition, the derivative component of the convertible bonds is measured at fair value. Any excess of proceeds over the amount initially recognised as the derivative component is recognised as the liability component. Transaction costs that relate to the issue of the convertible bonds are allocated to the liability and derivative components in proportion to the allocation of proceeds. The portion of the transaction costs relating to the liability component is recognised initially as part of the liability. The portion relating to the derivative component is recognised immediately as an expense in the income statement.
 
 
The derivative component is subsequently remeasured at each balance sheet date and any gains or losses arising from change in the fair value are recognised in the income statement. The liability component is subsequently carried at amortised cost until extinguished on conversion or redemption. The interest expense recognised in the income statement on the liability component is calculated using the effective interest method. Both the liability and the related derivative components are presented together for financial statements reporting purposes.
 
 
If the convertible bonds are converted, the carrying amounts of the derivative and liability components are transferred to share capital and share premium as consideration for the shares issued. If the convertible bonds are redeemed, any difference between the amount paid and the carrying amounts of both components is recognised in the income statement.
 
             (e)
Derecognition of financial assets and financial liabilities
 
The Group derecognises a financial asset when the contractual right to receive cash flows from the financial asset expires, or where the Group transfers substantially all risks and rewards of ownership.
 
 
On derecognition of a financial asset, the difference between the following amounts is recognised in income statement:
 
 
—
the carrying amounts; and
 
 
—
the sum of the consideration received and any cumulative gain or loss that had been recognised directly in equity.
 
 
Where the obligations for financial liabilities are completely or partially discharged, the entire or part of financial liabilities are derecognised.
 
               (f)
Equity instruments
 
An equity instrument is a contract that the holder of which entitles the Company’s residual assets.
 
 
The consideration received from the issue of equity instruments less transaction costs is recognised in share capital and capital reserve.
 
 
The consideration paid for the repurchase of the Company’s issued equity instruments plus the associated transaction costs is charged to the shareholders’ equity.
 
 
  (12)
Employee benefits
 
Employee benefits include various payments and other related expenses paid in exchange for services rendered by employees. When an employee has rendered service to the Group during an accounting period, the Group shall recognise the employee benefits payable (other than termination benefits) as a liability and charged to the cost of an asset or as an expense in the same time.
 
            (a)
Retirement benefits
 
Pursuant to the relevant laws and regulations in the PRC, the Group participates in various defined contribution retirement plans organised by the respective divisions in municipal and provincial governments for its staff. The Group is required to make contributions to the retirement plans in accordance with the contribution rates and basis as defined by the municipal and provincial governments. The contributions are charged to the income statement on an accrual basis. When employees retire, the respective divisions are responsible for paying their basic retirement benefits. The Group does not have any other obligations in this respect.
 
             (b)
Housing fund and other social insurance
 
In addition to retirement benefits, the Group makes contributions to housing fund and other social insurance such as basic medical insurance, unemployment insurance, work injury insurance and maternity insurance, etc. for its employees in accordance with the relevant rules and regulations. The Group makes monthly contributions to the housing fund and the above insurance based on the applicable rates based on the employees’ salaries. The contributions are charged to the income statement on an accrual basis.
 
             (c)
Termination benefits
 
The Group recognises termination benefits if it decides to terminate an employee’s employment before the employment contract has expired, or makes an offer to an employee for voluntary redundancy. The termination benefits, which are the liabilities payable on termination, are recognised in the income statement when both of the following conditions have been satisfied:
 
 
—
the Group has a detailed formal plan for the termination of employment or makes an offer to employees for voluntary redundancy, which will be implemented shortly; and
 
 
—
the Group is not allowed to withdraw from the termination or the voluntary redundancy being offered unilaterally.
 

 
48
 

3
SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 
  (13)
Income tax
 
Current tax and deferred tax are recognised in the income statement except to the extent that they relate to items recognised directly in equity, in which case, they are recognised in equity.
 
 
Current tax is the expected tax payable calculated at the applicable tax rate on taxable income for the period, and any adjustment to tax payable in respect of previous year.
 
 
Deferred tax assets and liabilities are recognised based on deductible temporary differences and taxable temporary differences respectively. Temporary difference is the difference between the carrying amounts of assets and liabilities and their tax bases including unused tax losses and unused tax credits able to be utilised in subsequent years. Deferred tax assets are recognised to the extent that it is probable that future taxable income will be available to offset deductible temporary differences.
 
 
Temporary differences arise in a transaction, which is not a business combination, and at the time of transaction, does not affect accounting profit or taxable profit (or unused tax losses), will not result in deferred tax. Temporary differences arising from the initial recognition of goodwill will not result in deferred tax.
 
 
The amounts of deferred tax assets and liabilities are recognised based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities using tax rates enacted and relevant tax laws at the balance sheet date.
 
 
  (14)
Provisions and contingent liabilities
 
Provisions are recognised when the Group has a present obligation as a result of a contingent event, it is probable that an outflow of economic benefits will be required to settle the obligations and a reliable estimate can be made. Where the effect of time value of money is material, provisions are determined by discounting the expected future cash flows.
 
 
In terms of a possible obligation resulting from a past transaction or event, whose existence will only be confirmed by the occurrence or non-occurrence of future events, or a present obligation resulting from a past transaction or event, where it is not probable that the settlement of the above obligation will cause an outflow of economic benefits, or the amount of the outflow cannot be estimated reliably, the possible or present obligation is disclosed as a contingent liability.
 
 
Provisions for future dismantlement costs are initially recognised based on the present value of the future costs expected to be incurred in respect of the Group’s expected dismantlement and abandonment costs at the end of related oil and gas exploration and development activities. Any subsequent change in the present value of the estimated costs, other than the change due to passage of time which is regarded as interest costs, is reflected as an adjustment to the provision of oil and gas properties.
 
 
A provision for onerous contracts is recognised when the economic benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract.
 
 
  (15)
Revenue recognition
 
Revenue is the total inflow of economic benefits generated from the Group’s normal activities, which causes shareholders’ equity to increase but is unrelated to shareholder’s injection of capital. Revenue is recognised in the income statement when it is probable that the economic benefits will flow to the Group, the revenue and costs can be measured reliably and the following respective conditions are met:
 
            (a)
Revenues from sales of goods
 
Revenue from the sales of goods is recognised when all of the general conditions stated above and following conditions are satisfied:
 
 
—
the significant risks and rewards of ownership and title have been transferred to buyers;
 
 
—
the Group does not retain the management rights, which is normally associated with owner, on goods sold and has no control over the goods sold.
 
 
Revenue from the sale of goods is measured at fair value of the considerations received or receivable under the sales contract or agreement.
 
            (b)
Revenues from rendering services
 
When the outcome of a transaction involving the rendering of services can be estimated reliably at the balance sheet date, revenue from rendering of services is recognised in the income statement by reference to the stage of completion of the transaction based on the proportion of services performed to date to the total services to be performed.
 
 
When the outcome of rendering the services cannot be estimated reliably, revenues are recognised only to the extent that the costs incurred are expected to be recoverable. If the costs of rendering of services are not expected to be recoverable, the costs are charged to the income statement when incurred, and revenues are not recognised.
 
            (c)
Interest income
 
Interest income is recognised on a time proportion basis with reference to the principal outstanding and the applicable effective interest rate.
 
 
  (16)
Government grants
 
Government grants are the gratuitous monetary assets or non-monetary assets that the Group receives from the government, excluding capital injection by the government as an investor. Special funds such as investment grants allocated by the government, if clearly defined in official documents as part of Òcapital reserveÓ are dealt with as capital contributions, and not regarded as government grants.
 

 
49
 

3
SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 
  (16)
Government grants (Continued)
 
Government grants are recognised when there is reasonable assurance that the grants will be received and the Group is able to comply with the conditions attaching to them. Government grants in the form of monetary assets are recorded based on as the amount received or receivable, whereas non-monetary assets are measured at fair value.
 
 
Government grants received in relation to assets are recorded as deferred income, and recognised evenly in the income statement over the assets’ useful lives. Government grants received in relation to revenue are recorded as deferred income, and recognised as income in future periods as compensation when the associated future expenses or losses arise; or directly recognised as income in the current period as compensation for past expenses or losses.
 
 
  (17)
Borrowing costs
 
Borrowing costs incurred on borrowings for the acquisition, construction or production of qualified assets are capitalised into the cost of the related assets.
 
 
Except for the above, other borrowing costs are recognised as financial expenses in the income statement when incurred.
 
 
  (18)
Repairs and maintenance expenses
 
Repairs and maintenance (including overhauling expenses) expenses are recognised in the income statement when incurred.
 
 
  (19)
Environmental expenditures
 
Environmental expenditures that relate to current ongoing operations or to conditions caused by past operations is expensed as incurred.
 
 
  (20)
Research and development costs
 
Research and development costs are recognised in the income statement when incurred.
 
 
  (21)
Operating leases
 
Operating lease payments are charged as expenses on a straight-line basis over the period of the respective leases.
 
 
  (22)
Dividends
 
Dividends and distributions of profits proposed in the profit appropriation plan which will be authorised and declared after the balance sheet date, are not recognised as a liability at the balance sheet date and are separately disclosed in the notes to the financial statements.
 
 
  (23)
Related parties
 
Parties are considered to be related to the Group if the Group controls, jointly controls or exercises significant influence over another party, or vice versa, or where the Group and the party are subject to common control, joint control or significant influence from another party. Related parties may be individuals or enterprises. Where enterprises are subject to state control but are otherwise unrelated, they are not related parties. The Group’s related parties include but not limited to the following:
 
(a)
the holding company of the Company;
 
(b)
the subsidiaries of the Company;
 
(c)
the parties that are subject to common control with the Company;
 
(d)
investors which exercise joint control over the Group;
 
(e)
investors which exercise significant influence over the Group;
 
(f)
jointly controlled entities of the Group;
 
(g)
associates of the Group;
 
(h)
the major individual investors of the Group and a close family member of such individuals;
 
(i)
the member of key management personnel of the Group, and a close family member of such individuals;
 
(j)
the member of key management personnel of the Company’s holding company;
 
(k)
close family member of key management personnel of the Company’s holding company; and
 
(l)
an entity which is under control, joint control or significant influence of major individual investor, key management personnel or a close family of such individuals.
 
 
 (24)
Segment reporting
 
A business segment is a distinguishable component of the Group that is engaged in providing products or services and is subject to risks and rewards that are different from those of other segments.
 
 
The segments were determined primarily because the Group manages its exploration and production, refining, marketing and distribution, chemicals, and corporate and others businesses separately. The reportable segments are each managed separately because they manufacture and/or distribute distinct products with different production processes and due to their distinct operating and gross margin characteristics. In view of the fact that the Company and its subsidiaries operate mainly in the PRC, no geographical segment information is presented.
 

 
50
 

3
SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 
 (24)
Segment reporting (Continued)
 
The Group evaluates the performance and allocates resources to its operating segments on an operating income basis, without considering the effects of finance costs or investment income. Corporate administrative costs and assets are not allocated to the operating segments; instead, operating segments are billed for direct corporate services. Inter-segment transfer pricing is based on cost plus an appropriate margin, as specified by the Group’s policy.
 
 
Assets and liabilities dedicated to a particular segment’s operations are included in that segment’s total assets and liabilities. Assets which benefit more than one segment or are considered to be corporate assets are not allocated. ÒUnallocated assetsÓ consists primarily of cash at bank and in hand, deferred tax assets, long-term deferred expenses and other non-current assets. ÒUnallocated liabilitiesÓ consists primarily of short-term and long-term loans, income tax payable, deferred tax liabilities and other non-current liabilities.
 
 
Unallocated profit and loss items consist primarily financial expenses, investment income, non-operating income and expenses and income tax expenses.
 
4
TAXATION
 
Major types of tax applicable to the Group and the Company are income tax, consumption tax, resources tax, value added tax and special oil income levy.
 
 
The Corporate Income Tax Law of the People’s Republic of China (Ònew tax lawÓ) took effect on 1 January 2008. According to the new tax law, the income tax rate applicable to the Group is changed to 25% from 1 January 2008; however, certain entities previously taxed at a preferential rate are subject to a transition period during which their tax rate will gradually be increased to the unified rate of 25% over a five-year period starting from 1 January 2008.
 
 
Based on the new tax law, the income tax rate applicable to the Group, except for certain entities of the Group, is changed from 33% to 25% from 1 January 2008. Based on a tax notice issued by the State Council on 26 December 2007, the applicable tax rates for foreign investment enterprises operating in special economic zones, which were previously taxed at the preferential rate of 15%, are 18%, 20%, 22%, 24% and 25% for the years ending 31 December 2008, 2009, 2010, 2011 and 2012, respectively. According to the same notice, the applicable tax rate for entities operating in the western region of the PRC which were granted a preferential tax rate of 15%, remains at 15% for the years ending 31 December 2008, 2009 and 2010 and will be increased to 25% from 1 January 2011.
 
 
Consumption tax is levied on gasoline, diesel, naphtha, solvent oil, lubricant oil, fuel oil and jet fuel oil at a rate of RMB 277.6 per tonne, RMB 117.6 per tonne, RMB 277.0 per tonne, RMB 256.4 per tonne, RMB 225.2 per tonne, RMB 101.5 per tonne and RMB 124.6 per tonne respectively. Before 1 January 2008, the consumption tax on naphtha, solvent oil, lubricant oil and fuel oil are temporarily imposed on 30% of the taxable amounts. Effective from 1 January 2008, whole amount of consumption tax was imposed on naphtha, solvent oil, lubricant oil and fuel oil. The consumption tax on jet fuel oil is temporarily exempted. From 1 January 2008 to 31 December 2010, the consumption tax on the imported naphtha and domestic naphtha used as raw material for the production of ethylene and aromatic hydrocarbon are exempted.
 
 
Resources tax is levied on crude oil and natural gas at rates ranging from RMB 14 per tonne to RMB 30 per tonne and RMB 7 to RMB 15 per 1000 cubic metre, respectively.
 
 
Value added tax rate for liquefied petroleum gas, natural gas and certain agricultural products is 13% and that for other products is 17%.
 
 
The Ministry of Finance imposed a special oil income levy on any income derived from the sale by an oil exploration and production enterprise of locally produced crude oil exceeding a standard price. The levy starts at USD 40 per barrel and the imposed rate ranges from 20% to 40%.
 
 
The branches and subsidiaries granted with tax concession are set out below:

 
 
Name of branches and subsidiaries
Preferential tax rate
Reasons for granting concession
       
 
Sinopec National Star Xinan Branch
15%
Tax preferential policy in the western part of China
 
Sinopec National Star Xibei Branch
15%
Tax preferential policy in the western part of China
 
Tahe Oilfield Petrochemical Factory
15%
Tax preferential policy in the western part of China
 
Zhanjiang Dongxing Petrochemical Company Limited
18%
Foreign investment enterprise
 
Sinopec Hainan Refining and Chemical Company Limited
2-year exemption and
3-year 50% reduction
Foreign investment enterprise

 
51
 

5
CASH AT BANK AND IN HAND
 
 
The Group
 
 
   
At 30 June 2008
    
At 31 December 2007
  
 
Original
Exchange
  
Original
Exchange
  
 
currency
rates
RMB
currency
rates
RMB
 
millions
  
millions
millions
  
millions
             
Cash in hand
            
 
Renminbi
    
157
    
108
Cash at bank
            
 
Renminbi
    
8,343
    
6,846
 
US Dollars
70
6.8591
477
103
7.3046
754
 
Hong Kong Dollars
176
0.8792
155
323
0.9364
302
 
Japanese Yen
93
0.0645
6
172
0.0641
11
 
Euro
3
10.8302
33
—
10.6669
5
       
9,171
    
8,026
Deposits at related parties
            
 
Renminbi
    
603
    
338
Total cash at bank and in hand
    
9,774
    
8,364
 
The Company

 
 
               
     
At 30 June 2008
    
At 31 December 2007
  
   
Original
Exchange
  
Original
Exchange
  
   
currency
rates
RMB
currency
rates
RMB
   
millions
  
millions
millions
  
millions
               
Cash in hand
            
 
Renminbi
    
57
    
24
Cash at bank
            
 
Renminbi
    
3,441
    
2,947
 
US Dollars
—
6.8591
2
1
7.3046
4
       
3,500
    
2,975
Deposits at related parties
            
 
Renminbi
    
474
    
130
Total cash at bank and in hand
    
3,974
    
3,105

 
Deposits at related parties represent deposits placed at Sinopec Finance Company Limited. Deposits interest is calculated based on market rate.
 
 
At 30 June 2008, time deposits with financial institutions of the Group and the Company amounted to RMB 1,308 million (2007: RMB 668 million) and RMB 27 million (2007: RMB 26 million), respectively.
 
6
BILLS RECEIVABLE
 
Bills receivable represents mainly the bills of acceptance issued by banks for sales of goods and products.
 
 
At 30 June 2008, the Group’s and the Company’s outstanding endorsed bills (with recourse) amounted to RMB 6,747 million and RMB 6,504 million, respectively, all of which are due before 31 December 2008.
 
7
TRADE ACCOUNTS RECEIVABLE

 
The Group
The Company
 
At 30 June
At 31 December
At 30 June
At 31 December
 
2008
2007
2008
2007
 
RMB millions
RMB millions
RMB millions
RMB millions
         
Amounts due from subsidiaries
—
—
9,327
9,378
Amounts due from Sinopec Group Company
9,482
2,240
2,062
680
 
and fellow subsidiaries
        
Amounts due from associates and jointly controlled entities
4,262
1,750
1,407
1,445
Amounts due from others
32,138
21,839
5,221
4,407
 
45,882
25,829
18,017
15,910
Less: Allowance for doubtful accounts
2,798
2,882
2,378
2,363
Total
43,084
22,947
15,639
13,547

 
52
 


7
TRADE ACCOUNTS RECEIVABLE (Continued)
 
Ageing analysis on trade accounts receivable is as follows:
 
 
 
The Group
 
At 30 June 2008
At 31 December 2007
       
Percentage
      
Percentage
   
Percentage
  
of allowance
  
Percentage
  
of allowance
   
of total
  
to accounts
  
of total
  
to accounts
 
Amount
 accounts
Allowance
receivable
Amount
accounts
Allowance
receivable
 
RMB
receivable
RMB
balance
RMB
receivable
RMB
balance
 
millions
%
millions
%
millions
%
millions
%
                 
                 
Within one year
42,869
93.4
5
0.0
22,757
88.1
85
0.4
Between one and two years
77
0.2
24
31.2
253
1.0
97
38.3
Between two and three years
261
0.6
174
66.7
402
1.6
309
76.9
Over three years
2,675
5.8
2,595
97.0
2,417
9.3
2,391
98.9
Total
45,882
100.0
2,798
  
25,829
100.0
2,882
  
                 
 
The Company
 
At 30 June 2008
At 31 December 2007
       
Percentage
      
Percentage
   
Percentage
  
of allowance
  
Percentage
  
of allowance
   
of total
  
to accounts
  
of total
  
to accounts
 
Amount
accounts
Allowance
receivable
Amount
accounts
Allowance
receivable
 
RMB
receivable
RMB
balance
RMB
receivable
RMB
balance
 
millions
%
millions
%
millions
%
millions
%
                 
                 
Within one year
15,442
85.7
5
0.0
13,382
84.1
36
0.3
Between one and two years
62
0.3
22
35.5
169
1.1
51
30.2
Between two and three years
211
1.2
124
58.8
206
1.3
145
70.4
Over three years
2,302
12.8
2,227
96.7
2,153
13.5
2,131
99.0
Total
18,017
100.0
2,378
  
15,910
100.0
2,363
  

 
At 30 June 2008 and 31 December 2007, the total amounts of the top five trade accounts receivable of the Group are set out below:
     
 
At 30 June
At 31 December
 
2008
2007
     
Total amount (RMB millions)
10,458
7,598
Ageing
Within 1 year
Within 1 year
Percentage to the total balance of trade accounts receivable
22.8%
29.4%

 
At 30 June 2008, the Group’s and the Company’s trade accounts receivable due from related parties amounted to RMB 13,744 million and RMB 12,796 million (2007: RMB 3,990 million and RMB 11,503 million), representing 30.0% and 71.0% (2007: 15.4% and 72.3%) of the total trade accounts receivable.
 
 
Except for the balances disclosed in Note 45, there is no amount due from shareholders who hold 5% or more voting right of the Company included in the balance of trade accounts receivable.
 
 
During the six-month periods ended 30 June 2008 and 2007, the Group and the Company had no individually significant trade accounts receivable been fully or substantially provided allowance for doubtful accounts.
 
 
During the six-month periods ended 30 June 2008 and 2007, the Group and the Company had no individually significant write-off or recovery of doubtful debts which had been fully or substantially provided for in prior years.
 
 
At 30 June 2008 and 31 December 2007, the Group and the Company had no individually significant trade accounts receivable that aged over three years.
 
8
OTHER RECEIVABLES
 
 
The Group
The Company
 
At 30 June
At 31 December
At 30 June
At 31 December
 
2008
2007
2008
2007
 
RMB millions
RMB millions
RMB millions
RMB millions
         
Amounts due from subsidiaries
—
—
6,016
8,689
Amounts due from Sinopec Group Company and fellow subsidiaries
9,223
6,438
9,022
5,819
Amounts due from associates and jointly controlled entities
1,742
313
1,293
230
Amounts due from others
12,242
8,147
5,243
6,875
 
23,207
14,898
21,574
21,613
Less: Allowance for doubtful accounts
2,983
3,076
3,340
3,404
Total
20,224
11,822
18,234
18,209
         

 
53
 


8
OTHER RECEIVABLES (Continued)
       Ageing analysis of other receivables is as follows:
 

 
The Group
 
At 30 June 2008
At 31 December 2007
       
Percentage
      
Percentage
   
Percentage
  
of allowance
  
Percentage
  
of allowance
   
of total
  
to other
  
of total
  
to other
 
Amount
 other
Allowance
receivables
Amount
other
Allowance
receivables
 
RMB
receivables
RMB
balance
RMB
receivables
RMB
balance
 
millions
%
millions
%
millions
%
millions
%
                 
Within one year
17,601
75.8
32
0.2
8,779
58.9
46
0.5
Between one and two years
1,250
5.4
36
2.9
1,707
11.5
44
2.6
Between two and three years
462
2.0
68
14.7
497
3.3
133
26.8
Over three years
3,894
16.8
2,847
73.1
3,915
26.3
2,853
72.9
Total
23,207
100.0
2,983
  
14,898
100.0
3,076
  

 
The Company
 
At 30 June 2008
At 31 December 2007
       
Percentage
      
Percentage
   
Percentage
  
of allowance
  
Percentage
  
of allowance
   
of total
  
to other
  
of total
  
to other
 
Amount
 other
Allowance
receivable­s
Amount
other
Allowance
receivables
 
RMB
receivables
RMB
balance
RMB
receivables
RMB
balance
 
millions
%
millions
%
millions
%
millions
%
                 
Within one year
16,535
76.6
12
0.1
16,501
76.3
16
0.1
Between one and two years
476
2.2
22
4.6
482
2.2
28
5.8
Between two and three years
302
1.4
39
12.9
312
1.4
39
12.5
Over three years
4,261
19.8
3,267
76.7
4,318
20.1
3,321
76.9
Total
21,574
100.0
3,340
  
21,613
100.0
3,404
  

 
At 30 June 2008 and 31 December 2007, the total amounts of the top five other receivables of the Group are set out below:

 
At 30 June
At 31 December
 
2008
2007
     
Total amount (RMB millions)
9,360
6,398
Ageing
From within
From within
 
one year to
one year to
 
over three years
over three years
Percentage to the total balance of other receivables
40.3%
42.9%

 
 
At 30 June 2008, the Group’s and the Company’s other receivables due from related parties amounted to RMB 10,965 million and RMB 16,331 million (2007: RMB 6,751 million and RMB 14,738 million), representing 47.2% and 75.7% (2007: 45.3% and 68.2 %) of the total of other receivables.
 
 
Except for the balances disclosed in Note 45, there is no amount due from shareholders who hold 5% or more voting right of the Company included in the balance of other receivables.
 
 
During the six-month periods ended 30 June 2008 and 2007, the Group and the Company had no individually significant other receivables been fully or substantially provided allowance for doubtful accounts.
 
 
During the six-month periods ended 30 June 2008 and 2007, the Group and the Company had no individually significant write-off or recovery of doubtful debts which had been fully or substantially provided for in prior years.
 
 
At 30 June 2008 and 31 December 2007, except for the current account with Sinopec Group Company, the Group and the Company had no individually significant other receivables that aged over three years.
 
9
ADVANCE PAYMENTS
 
All advance payments are aged within one year.
 
 
Except for the balances disclosed in Note 45, there is no amount due from shareholders who hold 5% or more voting right of the Company included in the balance of advance payments.

 
54
 


10
INVENTORIES
 
 
The Group
The Company
 
At 30 June
At 31 December
At 30 June
At 31 December
 
2008
2007
2008
2007
 
RMB millions
RMB millions
RMB millions
RMB millions
         
Raw materials
110,007
70,756
84,320
37,886
Work in progress
19,642
11,823
14,568
8,001
Finished goods
47,119
35,040
28,988
22,652
Spare parts and consumables
3,341
3,002
1,963
1,683
 
180,109
120,621
129,839
70,222
Less: Provision for diminution in value of inventories
16,621
4,572
16,302
4,321
 
163,488
116,049
113,537
65,901
 
 
Provision for diminution in value of inventories is mainly against raw materials. For the six-month period ended 30 June 2008, the provision for diminution in value of inventories of the Group and the Company was primarily due to the costs of inventories of the refining segment were higher than their net realisable value.
 
11
LONG-TERM EQUITY INVESTMENTS
     The Group
 
               
     
Investments
    
Provision
  
     
in jointly
Investments
Other
for
  
     
controlled
in
equity
impairment
  
     
entities
associates
investments
losses
Total
     
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
               
Balance at 1 January 2008
  
12,723
16,865
2,052
(305)
31,335
Additions for the period
  
2,318
283
91
—
2,692
Share of profits less losses from
            
 
investments accounted for under
            
 
the equity method
  
497
861
—
—
1,358
Change of capital reserve from
            
 
investments accounted for under
            
 
the equity method
  
—
(1,568)
—
—
(1,568)
Dividends receivable/received
  
(2,018)
(380)
—
—
(2,398)
Disposals for the period
  
—
(80)
(168)
—
(248)
Movement of provision for
            
 
impairment losses
  
—
—
—
18
18
Balance at 30 June 2008
  
13,520
15,981
1,975
(287)
31,189
 
The Company
 
     
Investments
    
Provision
  
     
in jointly
Investments
Other
for
  
   
Investments in
controlled
in
equity
impairment
  
   
subsidiaries
entities
associates
investments
losses
Total
   
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
               
Balance at 1 January 2008
65,110
7,040
12,602
1,150
(118)
85,784
Additions for the period
3,429
—
221
75
—
3,725
Share of profits less losses from investments
            
 
accounted for under the equity method
—
536
570
—
—
1,106
Change of capital reserve from investments
            
 
accounted for under the equity method
—
—
(1,568)
—
—
(1,568)
Dividends receivable/received
—
(1,326)
(170)
—
—
(1,496)
Disposals for the period
—
—
(64)
(148)
—
(212)
Acquired equity interests in a subsidiary (Note)
(3,059)
—
—
—
—
(3,059)
Movement of provision for impairment losses
—
—
—
—
(40)
(40)
Balance at 30 June 2008
65,480
6,250
11,591
1,077
(158)
84,240
 
 
Note:
During the six-month period ended 30 June 2008, the Company acquired all the assets and liabilities of Sinopec Zhongyuan Petroleum Company Limited. The above company no longer existed as at 30 June 2008.
 
 
Details of the Company’s principal subsidiaries are set out in Note 47.

 
55
 

11
LONG-TERM EQUITY INVESTMENTS (Continued)
 
At 30 June 2008, principal associates of the Group and the Company are as follows:
 
     
Percentage of
    
   
Percentage of
equity/voting
    
   
equity/voting
right held by
    
 
Registered capital/­
right held by
the Company’s
    
Name of associates
paid-up capital
the Company
subsidiaries
  
Principal activities
 
%
%
      
           
Sinopec Finance Company Limited
Registered capital
RMB 6,000,000,000
49.00
—
  
Provision of non-banking financial services
China Aviation Oil Supply Company Limited
Registered capital
RMB 3,800,000,000
—
29.00
  
Marketing and distribution of refined petroleum products
Shanghai Petroleum National Gas Corporation
Registered capital
RMB 900,000,000
30.00
—
  
Exploration and production of crude oil and natural gas
Shanghai Chemical Industry Park
Development Company Limited
Registered capital
RMB 2,372,439,000
—
38.26
  
Planning, development and operation of the Chemical Industry Park in Shanghai, the PRC
China Shipping & Sinopec Suppliers Company Limited
Registered capital RMB 876,660,000
—
50.00
  
Transportation of petroleum products
Sinopec Shandong Taishan Petroleum Company Limited
480,793,320 ordinary shares of RMB 1.00 each
24.57
—
  
Sale of petroleum products and
decoration of service gas stations
 
 
At 30 June 2008, details of principal associates of the Group and the Company are as follows:
 
       
Change of
    
     
Share of
capital
    
     
profits from
reserve from
    
     
investments
investments
    
     
accounted
accounted
    
 
Initial
Balance at
for under
for under
Dividends
Balance at
 
investment
1 January
the equity
the equity
receivable/
30 June
Name of associates
cost
2008
method
method
received
2008
 
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
             
Sinopec Finance Company Limited
2,712
6,459
562
(1,568)
—
5,453
China Aviation Oil Supply Company Limited
1,102
1,250
93
—
—
1,343
Shanghai Petroleum National Gas Corporation
300
997
102
—
(120)
979
Shanghai Chemical Industry Park Development Company Limited
608
927
7
—
(4)
930
China Shipping & Sinopec Suppliers Company Limited
438
538
15
—
(23)
530
Sinopec Shandong Taishan Petroleum
            
Company Limited
124
356
27
—
—
383
 
 
At 30 June 2008, the Group’s and the Company’s principal jointly controlled entities are as follows:
 
     
Percentage of
  
     
equity/
  
   
Percentage of
voting right
  
   
equity/voting
held by the
  
 
Registered capital/
right held by
Company’s
  
Name of jointly controlled entities
paid-up capital
the Company
subsidiaries
Principal activities
 
%
%
    
         
Shanghai Secco Petrochemical Company Limited
Registered capital USD 901,440,964
30.00
20.00
Manufacturing and distribution of petrochemical products
BASF-YPC Company Limited
Registered capital
RMB 8,793,000,000
30.00
10.00
Manufacturing and distribution of petrochemical products
Yueyang Sinopec and Shell Coal
   Gasification Company Limited
Registered capital
USD 45,588,700
50.00
—
Manufacturing and distribution of industrial gas
Fujian Refining and Petrochemical
   Company Limited
Registered capital USD 1,654,000,000
—
50.00
Manufacturing and distribution of petrochemical products

 
56
 


 
11
LONG-TERM EQUITY INVESTMENTS (Continued)
 
At 30 June 2008, details of principal jointly controlled entities of the Group and the Company are as follows:
 
       
Share of
    
       
profits/
    
       
(losses) from
    
       
investments
    
       
accounted for
    
 
Initial
Balance at
Additions
under the
Dividends
Balance at
 
investment
1 January
for the
equity
receivable/
30 June
Name of jointly controlled entities
cost
2008
period
method
received
2008
 
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
             
Shanghai Secco Petrochemical Company Limited
3,722
4,889
—
604
(1,250)
4,243
BASF-YPC Company Limited
3,517
5,388
—
205
(768)
4,825
Yueyang Sinopec and Shell Coal Gasification Company Limited
189
78
—
(30)
—
48
Fujian Refining and Petrochemical Company Limited
4,890
2,368
2,318
(282)
—
4,404
   
12,723
2,318
497
(2,018)
13,520
 
The Group’s effective interest share of the jointly controlled entities’ net assets, operating revenue and net profit are as follows:
 
 
At 30 June
At 31 December
 
2008
2007
 
RMB millions
RMB millions
     
Net assets
13,520
12,723
     
 
Six-month periods ended 30 June
 
2008
2007
 
RMB millions
RMB millions
     
Operating revenue
13,951
9,333
Net profit
497
1,625
 
 
Other equity investments represent the Group’s interests in PRC privately owned enterprises which are mainly engaged in non-oil and natural gas and chemical activities and operations. This includes non-consolidated investments which the Group has over 50% equity interest but the Group has no control on the entities.
 
 
For the six-month period ended 30 June 2008, the Group and the Company had no individually significant long-term investments which had been provided for impairment losses.

 
57
 



12
FIXED ASSETS
 
 
The Group – by segment
 
 
Exploration
  
Marketing
      
 
and
  
and
      
 
production
Refining
distribution
Chemicals
Others
Total
 
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
             
Cost/valuation:
            
Balance at 1 January 2008
292,050
157,486
91,155
181,124
6,198
728,013
Additions for the period
357
80
51
1
128
617
Transferred from construction in progress
7,165
13,593
2,456
781
115
24,110
Acquisition of Downhole Assets
3,001
—
—
—
—
3,001
Reclassifications
12,321
(6,793)
(3,484)
(6,241)
4,197
—
Reclassification to other assets
—
(246)
(242)
(28)
(192)
(708)
Disposals
(22)
(109)
(206)
(444)
(4)
(785)
Balance at 30 June 2008
314,872
164,011
89,730
175,193
10,442
754,248
             
Accumulated depreciation:
            
Balance at 1 January 2008
150,433
74,465
21,752
108,899
2,378
357,927
Depreciation charge for the period
9,494
4,412
2,170
4,126
429
20,631
Acquisition of Downhole Assets
1,459
—
—
—
—
1,459
Reclassifications
16,897
(6,625)
(3,814)
(7,603)
1,145
—
Reclassification to other assets
—
—
(6)
(1)
(10)
(17)
Written back on disposals
(22)
(81)
(73)
(119)
(1)
(296)
Balance at 30 June 2008
178,261
72,171
20,029
105,302
3,941
379,704
Provision for impairment losses:
            
Balance at 1 January 2008
2,111
894
2,050
3,883
—
8,938
Additions for the period
—
—
128
3
—
131
Reclassifications
(108)
33
—
75
—
—
Written off for the period
—
(23)
(52)
(235)
—
(310)
Balance at 30 June 2008
2,003
904
2,126
3,726
—
8,759
             
Net book value:
            
Balance at 30 June 2008
134,608
90,936
67,575
66,165
6,501
365,785
             
Balance at 31 December 2007
139,506
82,127
67,353
68,342
3,820
361,148
 
 
The Company – by segment
 
 
Exploration
  
Marketing
      
 
and
  
and
      
 
production
Refining
distribution
Chemicals
Others
Total
 
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
             
Cost/valuation:
            
Balance at 1 January 2008
255,222
135,380
77,351
107,841
4,066
579,860
Additions for the period
356
78
51
—
127
612
Transferred from construction in progress
6,548
4,105
2,266
320
69
13,308
Transferred from a subsidiary
9,673
—
—
—
—
9,673
Acquisition of Downhole Assets
3,001
—
—
—
—
3,001
Reclassifications
26,529
(12,378)
(6,565)
(8,351)
765
—
Reclassification to other assets
—
(62)
(63)
—
(1)
(126)
Disposals
(22)
(107)
(174)
(400)
—
(703)
Balance at 30 June 2008
301,307
127,016
72,866
99,410
5,026
605,625
Accumulated depreciation:
            
Balance at 1 January 2008
130,567
67,413
19,381
63,518
1,722
282,601
Depreciation charge for the period
8,858
3,607
1,839
2,627
344
17,275
Transferred from a subsidiary
5,764
—
—
—
—
5,764
Acquisition of Downhole Assets
1,459
—
—
—
—
1,459
Reclassifications
27,662
(11,987)
(6,776)
(9,383)
484
—
Reclassification to other assets
—
—
(6)
—
—
(6)
Written back on disposals
(22)
(81)
(60)
(93)
—
(256)
Balance at 30 June 2008
174,288
58,952
14,378
56,669
2,550
306,837
Provision for impairment losses:
            
Balance at 1 January 2008
2,042
876
1,950
2,309
—
7,177
Additions for the period
—
—
120
3
—
123
Transferred from a subsidiary
63
—
—
—
—
63
Reclassifications
(109)
35
1
73
—
—
Written off for the period
—
(23)
(47)
(234)
—
(304)
Balance at 30 June 2008
1,996
888
2,024
2,151
—
7,059
             
Net book value:
            
Balance at 30 June 2008
125,023
67,176
56,464
40,590
2,476
291,729
             
Balance at 31 December 2007
122,613
67,091
56,020
42,014
2,344
290,082

 
58
 

12
FIXED ASSETS (Continued)
 
 
The Group – by asset class
 
     
Oil
    
     
depots,
    
     
storage
Machinery,
  
   
Oil
tanks and
equipment,
  
 
Land and
and gas
service
vehicles and
  
 
buildings
properties
stations
others
Total
 
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
           
Cost/valuation:
          
Balance at 1 January 2008
46,300
267,240
97,000
317,473
728,013
Additions for the period
186
341
32
58
617
Transferred from construction in progress
852
6,790
3,152
13,316
24,110
Acquisition of Downhole Assets
548
—
—
2,453
3,001
Reclassifications
13,189
8,937
16,730
(38,856)
—
Reclassification to other assets
(463)
—
(20)
(225)
(708)
Disposals
(45)
—
(165)
(575)
(785)
Balance at 30 June 2008
60,567
283,308
116,729
293,644
754,248
Accumulated depreciation:
          
Balance at 1 January 2008
24,227
138,846
21,376
173,478
357,927
Depreciation charge for the period
933
8,765
2,407
8,526
20,631
Acquisition of Downhole Assets
236
—
—
1,223
1,459
Reclassifications
(2,021)
17,002
9,483
(24,464)
—
Reclassification to other assets
(6)
—
(4)
(7)
(17)
Written back on disposals
(11)
—
(47)
(238)
(296)
Balance at 30 June 2008
23,358
164,613
33,215
158,518
379,704
Provision for impairment losses:
          
Balance at 1 January 2008
760
2,072
1,927
4,179
8,938
Additions for the period
1
—
116
14
131
Reclassifications
264
(121)
(220)
77
—
Written off for the period
(13)
—
(48)
(249)
(310)
Balance at 30 June 2008
1,012
1,951
1,775
4,021
8,759
           
Net book value:
          
Balance at 30 June 2008
36,197
116,744
81,739
131,105
365,785
           
Balance at 31 December 2007
21,313
126,322
73,697
139,816
361,148

 
59
 


12
FIXED ASSETS (Continued)
 
 
The Company – by asset class
 
     
Oil
    
     
depots,
    
     
storage
Machinery,
  
   
Oil
tanks and
equipment,
  
 
Land and
and gas
service
vehicles and
  
 
buildings
properties
stations
others
Total
 
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
           
Cost/valuation:
          
Balance at 1 January 2008
31,404
236,727
85,233
226,496
579,860
Additions for the period
186
336
32
58
612
Transferred from construction in progress
524
6,209
1,656
4,919
13,308
Transferred from a subsidiary
219
8,820
115
519
9,673
Acquisition of Downhole Assets
548
—
—
2,453
3,001
Reclassifications
11,618
17,916
10,957
(40,491)
—
Reclassification to other assets
(56)
—
(20)
(50)
(126)
Disposals
(31)
—
(135)
(537)
(703)
Balance at 30 June 2008
44,412
270,008
97,838
193,367
605,625
Accumulated depreciation:
          
Balance at 1 January 2008
14,255
120,969
20,031
127,346
282,601
Depreciation charge for the period
693
8,191
1,988
6,403
17,275
Transferred from a subsidiary
65
5,326
92
281
5,764
Acquisition of Downhole Assets
236
—
—
1,223
1,459
Reclassifications
2,277
26,300
6,498
(35,075)
—
Reclassification to other assets
—
—
(4)
(2)
(6)
Written back on disposals
(8)
—
(39)
(209)
(256)
Balance at 30 June 2008
17,518
160,786
28,566
99,967
306,837
Provision for impairment losses:
          
Balance at 1 January 2008
586
2,008
1,890
2,693
7,177
Additions for the period
1
—
116
6
123
Transferred from a subsidiary
—
63
—
—
63
Reclassifications
224
(120)
(265)
161
—
Written off for the period
(7)
—
(48)
(249)
(304)
Balance at 30 June 2008
804
1,951
1,693
2,611
7,059
           
Net book value:
          
Balance at 30 June 2008
26,090
107,271
67,579
90,789
291,729
           
Balance at 31 December 2007
16,563
113,750
63,312
96,457
290,082
 
 
Note:
 
 
The additions to the exploration and production segment and oil and gas properties of the Group and the Company for the six-month period ended 30 June 2008 included RMB 291 million (2007: RMB 183 million) and RMB 270 million (2007: RMB 171 million), respectively, of estimated dismantlement costs for site restoration.
 
 
At 30 June 2008, the carrying amounts of fixed assets that were pledged by the Group and the Company were RMB 64 million (2007: RMB 141 million) and RMB 10 million (2007: RMB 31 million), respectively.
 
 
Provision for impairment losses recognised on fixed assets of the chemicals segment of the Group of RMB 3 million (2007: RMB 318 million) for the six-month period ended 30 June 2008 relate to certain chemicals production facilities that are held for use. The carrying values of these facilities were written down to their recoverable values that were determined based on the asset held for use model using the present value of estimated future cash flows of the production facilities. The primary factor resulting in the provision for impairment losses of the chemicals segment was due to higher operating and production costs caused by the increase in the prices of raw materials that are not expected to be recovered through an increase in selling price of relevant goods.
 
 
Provision for impairment losses recognised on fixed assets of the marketing and distribution segment of the Group of RMB 128 million (2007: RMB 1,194 million) for the six-month period ended 30 June 2008 primarily relate to certain service stations that were closed during the period. In measuring the amounts of impairment charges, the carrying amounts of these assets were compared to the present value of the expected future cash flows of the assets, as well as information about sales and purchases of similar properties in the same geographic area.
 
 
At 30 June 2008 and 31 December 2007, the Group and the Company had no individually significant fixed assets which were temporarily idle or pending for disposal.
 
 
At 30 June 2008 and 31 December 2007 the Group and the Company had no individually significant fully depreciated fixed assets which were still in use.

 
 
60
 

 
13
CONSTRUCTION IN PROGRESS
 
 
The Group
             
 
Exploration
  
Marketing
      
 
and
  
and
      
 
production
Refining
distribution
Chemicals
Others
Total
 
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
             
Cost/valuation:
            
Balance at 1 January 2008
34,441
26,144
13,040
16,744
5,236
95,605
Additions for the period
22,036
3,807
4,731
5,784
749
37,107
Dry hole costs written off
(1,156)
—
—
—
—
(1,156)
Reclassifications
97
2,217
(210)
(2,104)
—
—
Transferred to fixed assets
(7,165)
(13,593)
(2,456)
(781)
(115)
(24,110)
Reclassification to other assets
(2)
(3)
(810)
(1)
(928)
(1,744)
Balance at 30 June 2008
48,251
18,572
14,295
19,642
4,942
105,702
Provision for impairment losses:
            
Balance at 1 January 2008
—
(154)
(43)
—
—
(197)
Additions for the period
—
—
(2)
—
—
(2)
Balance at 30 June 2008
—
(154)
(45)
—
—
(199)
             
Net book value:
            
Balance at 30 June 2008
48,251
18,418
14,250
19,642
4,942
105,503
             
Balance at 31 December 2007
34,441
25,990
12,997
16,744
5,236
95,408
 
 
The interest rates per annum at which borrowing costs were capitalised during the six-month period ended 30 June 2008 by the Group ranged from 3.8% to 7.0% (2007: 3.6% to 6.8%).
 
 
At 30 June 2008, major construction projects of the Group are as follows:
 
             
Accumulated
             
interest
   
At
Additions
At
    
capitalised at
 
Budgeted
1 January
for the
30 June
Percentage of
Source of
30 June
Project name
amount
2008
period
2008
completion
fundings
2008
 
RMB millions
RMB millions
RMB millions
RMB millions
    
RMB millions
               
Sichuan-East China Gas Pipeline Project
22,261
11,155
2,593
13,748
62%
Bank loans & self-financing
100
Tianjin 1,000,000 tonnes per year Ethylene
26,846
5,373
2,323
7,696
29%
Bank loans &
107
Construction Project
          
self-financing
  
15,000 million cubic per year Natural Gas
33,700
9,496
4,855
14,351
43%
Bank loans &
182
Capacity Improvement Project
          
self-financing
  
Zhenhai 1,000,000 tonnes per year Ethylene
23,497
2,614
1,845
4,459
19%
Bank loans &
37
Construction Project
          
self-financing
  
Caofeidian Imported Crude Oil Port Project
3,058
2,700
100
2,800
92%
Bank loans & self-financing
94
               
 
The Company
 
 
Exploration
  
Marketing
      
 
and
  
and
      
 
production
Refining
distribution
Chemicals
Others
Total
 
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
             
Cost/valuation:
            
Balance at 1 January 2008
34,248
16,755
10,884
13,795
5,233
80,915
Additions for the period
21,001
3,352
3,795
5,154
712
34,014
Transferred from a subsidiary
42
—
—
—
—
42
Dry hole costs written off
(1,156)
—
—
—
—
(1,156)
Reclassifications
26
1,353
(218)
(1,161)
—
—
Transferred to fixed assets
(6,548)
(4,105)
(2,266)
(320)
(69)
(13,308)
Reclassification to other assets
(2)
(3)
(700)
(1)
(1,006)
(1,712)
Balance at 30 June 2008
47,611
17,352
11,495
17,467
4,870
98,795
Provision for impairment losses:
            
Balance at 1 January 2008
—
(154)
(41)
—
—
(195)
Additions for the period
—
—
(2)
—
—
(2)
Balance at 30 June 2008
—
(154)
(43)
—
—
(197)
             
Net book value:
            
Balance at 30 June 2008
47,611
17,198
11,452
17,467
4,870
98,598
Balance at 31 December 2007
34,248
16,601
10,843
13,795
5,233
80,720
 
 
The interest rates per annum at which borrowing costs were capitalised for the six-month period ended 30 June 2008 by the Company ranged from 3.8% to 7.0% (2007: 3.6% to 6.8%).

 
61
 


14
INTANGIBLE ASSETS
 
 
The Group
 
       
Oilfield
    
       
exploration
    
       
and
    
       
production
    
       
right and
    
 
Land use
  
Non-patent
operation
    
 
rights
Patents
technology
rights
Others
Total
 
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
             
Cost:
            
Balance at 1 January 2008
10,634
2,566
1,149
5,127
1,100
20,576
Additions for the period
136
277
89
50
45
597
Other transfer in
1,563
13
—
2
18
1,596
Transferred to other assets
(381)
(11)
—
—
(405)
(797)
Disposals
(2)
—
—
(6)
—
(8)
Balance at 30 June 2008
11,950
2,845
1,238
5,173
758
21,964
Accumulated Amortisation:
            
Balance at 1 January 2008
1,460
1,893
440
904
647
5,344
Amortisation charge for the period
166
104
54
109
50
483
Transferred to other assets
(342)
(10)
—
—
(238)
(590)
Written back on disposals
—
—
—
(3)
—
(3)
Balance at 30 June 2008
1,284
1,987
494
1,010
459
5,234
             
             
Net book value:
            
Balance at 30 June 2008
10,666
858
744
4,163
299
16,730
Balance at 31 December 2007
9,174
673
709
4,223
453
15,232
 
 
Except for the oilfield exploration and production right, the above intangible assets were acquired from third parties. The Company acquired Sinopec National Star together with the oilfield exploration and production right from Sinopec Group Company. The exploration and production right was valued with reference to the proved reserves of the associated oil fields. The amortisation period of the oilfield exploration and production right was 27 years. At 30 June 2008, the remaining amortisation period of the oilfield exploration and production right was 19.5 years.
 
 
The Company
             
             
       
Oilfield
    
       
exploration
    
       
and
    
       
production
    
       
right and
    
 
Land use
  
Non-patent
operation
    
 
rights
Patents
technology
rights
Others
Total
 
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
             
Cost:
            
Balance at 1 January 2008
5,225
2,203
1,025
5,042
483
13,978
Additions for the period
81
—
89
46
39
255
Transferred from subsidiaries
—
—
2
—
10
12
Other transfer in
1,127
2
—
—
18
1,147
Transferred to other assets
(25)
—
—
—
—
(25)
Disposals
(2)
—
—
(6)
—
(8)
Balance at 30 June 2008
6,406
2,205
1,116
5,082
550
15,359
Accumulated Amortisation:
            
Balance at 1 January 2008
333
1,733
365
900
325
3,656
Amortisation charge for the period
116
68
37
107
—
328
Transferred from subsidiaries
—
—
1
—
6
7
Written back on disposals
—
—
—
(3)
—
(3)
Balance at 30 June 2008
449
1,801
403
1,004
331
3,988
             
             
Net book value:
            
Balance at 30 June 2008
5,957
404
713
4,078
219
11,371
Balance at 31 December 2007
4,892
470
660
4,142
158
10,322
 
 
Except for the oilfield exploration and production right, the above intangible assets were acquired from third parties. The Company acquired Sinopec National Star together with the oilfield exploration and production right from Sinopec Group Company. The oilfield exploration and production right was valued with reference to the proved reserves of the associated oil fields. The amortisation period of the oilfield exploration and production right was 27 years. At 30 June 2008, the remaining amortisation period of the oilfield exploration and production right was 19.5 years.

 
62
 


15
GOODWILL
 
 
The Group
 
2008
 
RMB millions
   
Balance at 1 January
15,690
Net additions and exchange adjustments
17
Balance at 30 June
15,707
Less: Impairment losses
—
Net balance at 30 June
15,707
 
 
Goodwill is allocated to the following Group’s cash-generating units:
 
   
At 30 June
At 31 December
   
2008
2007
   
RMB millions
RMB millions
       
Sinopec Beijing Yanshan Branch (ÒSinopec YanshanÓ)
  
1,157
1,157
Sinopec Zhenhai Refining and Chemical Branch (ÒSinopec ZhenhaiÓ)
  
4,043
4,043
Sinopec Qilu Branch (ÒSinopec QiluÓ)
  
2,159
2,159
Sinopec Yangzi Petrochemical Company Limited (ÒSinopec YangziÓ)
  
2,737
2,737
Sinopec Zhongyuan Oil Field Branch (ÒSinopec ZhongyuanÓ)
  
1,500
1,500
Sinopec Shengli Oil Field Dynamic Company Limited (ÒDynamicÓ)
  
1,361
1,361
Hong Kong service stations
  
925
1,004
Multiple units without individually significant goodwill
  
1,825
1,729
   
15,707
15,690
 
 
Goodwill represents the excess of cost of purchase over the fair value of the underlying assets and liabilities. The recoverable amounts of Sinopec Yanshan, Sinopec Zhenhai, Sinopec Qilu, Sinopec Yangzi, Sinopec Zhongyuan, Dynamic and Hong Kong service stations are determined based on value in use calculations. These calculations use cash flow projections based on financial budgets approved by the management covering a one year period and pre-tax discount rates primarily ranging from 13.9% to 16.9%. Cash flows beyond the one-year period are maintained constant. Management believes any reasonably possible change in the key assumptions on which these entities’ recoverable amounts are based would not cause these entities’ carrying amounts to exceed their recoverable amounts.
 
 
Key assumptions used for the value in use calculations for these entities are the gross margin and sales volume. Management determined the budgeted gross margin based on the gross margin achieved in the period immediately before the budget period and its expectation for the development of international crude oil prices. The sales volume was based on the production capacity and/or the sales volume in the period immediately before the budget period.
 
16
LONG-TERM DEFERRED EXPENSES
 
Long-term deferred expenses primarily represent prepaid rental expenses over one year and catalysts expenditures.

 
63
 

17
DEFERRED TAX ASSETS AND LIABILITIES
 
The Group
               
   
Assets
Liabilities
Net balance
   
At
At
At
At
At
At
   
30 June
31 December
30 June
31 December
30 June
31 December
   
2008
2007
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
               
Current
            
Receivables and inventories
7,638
3,836
—
—
7,638
3,836
Accruals
6,565
2,613
—
—
6,565
2,613
Non-current
            
Fixed assets
2,681
2,705
(1,407)
(1,376)
1,274
1,329
Tax value of losses carried forward
1,029
176
—
—
1,029
176
Available-for-sale financial assets
—
—
(64)
(116)
(64)
(116)
Embedded derivative component
            
 
of the Convertible Bonds
64
803
—
—
64
803
Others
60
59
—
—
60
59
Deferred tax assets/(liabilities)
18,037
10,192
(1,471)
(1,492)
16,566
8,700
 
The Company
   
Assets
Liabilities
Net balance
   
At
At
At
At
At
At
   
30 June
31 December
30 June
31 December
30 June
31 December
   
2008
2007
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
               
Current
            
Receivables and inventories
7,490
3,709
—
—
7,490
3,709
Accruals
6,546
2,594
—
—
6,546
2,594
Non-current
            
Fixed assets
2,065
2,259
(577)
(584)
1,488
1,675
Embedded derivative component
            
 
of the Convertible Bonds
64
803
—
—
64
803
Others
40
53
—
—
40
53
Deferred tax assets/(liabilities)
16,205
9,418
(577)
(584)
15,628
8,834
 
 
Movements in the deferred tax assets and liabilities are as follows:
 
 
The Group
   
Recognised in­­
    
 
Balance at
consolidated
Recognised in
Balance at
 
1 January
income
capital
30 June
 
2008
statement
reserve
2008
 
RMB millions
RMB millions
RMB millions
RMB millions
         
Current
        
Receivables and inventories
3,836
3,802
—
7,638
Accruals
2,613
3,952
—
6,565
Non-current
        
Fixed assets
1,329
(55)
—
1,274
Tax value of losses carried forward
176
853
—
1,029
Available-for-sale financial assets
(116)
—
52
(64)
Embedded derivative component of the Convertible Bonds
803
(739)
—
64
Others
59
1
—
60
Net deferred tax assets
8,700
7,814
52
16,566
 
The Company
 
Balance at
Recognised
Balance at
 
1 January
in income
30 June
 
2008
statement
2008
 
RMB millions
RMB millions
RMB millions
       
Current
      
Receivables and inventories
3,709
3,781
7,490
Accruals
2,594
3,952
6,546
Non-current
      
Fixed assets
1,675
(187)
1,488
Embedded derivative component of the Convertible Bonds
803
(739)
64
Others
53
(13)
40
Net deferred tax assets
8,834
6,794
15,628
       

 
64
 


18
IMPAIRMENT LOSSES
 
At 30 June 2008, impairment losses of the Group are analysed as follows:
 
     
Balance at
Provision for
Written back
Written off
Balance at
   
Note
1 January 2008
the period
for the period
for the period
30 June 2008
     
RMB millions
RMB­­ millions
RMB millions
RMB millions
RMB millions
               
Allowance for doubtful accounts
            
Included:
Trade accounts receivable
7
2,882
66
(79)
(71)
2,798
 
Other receivables
8
3,076
9
(60)
(42)
2,983
     
5,958
75
(139)
(113)
5,781
Provision for diminution in
            
 
value of inventories
10
4,572
16,030
(20)
(3,961)
16,621
Long-term equity investments
11
305
—
—
(18)
287
Fixed assets
12
8,938
131
—
(310)
8,759
Construction in progress
13
197
2
—
—
199
Total
  
19,970
16,238
(159)
(4,402)
31,647
 
 
At 30 June 2008, impairment losses of the Company are analysed as follows:
 
     
Balance at
Provision for
Written back
Written off
Transferred from
Balance at
   
Note
1 January 2008
the period
for the period
for the period
a subsidiary
30 June 2008
     
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
                 
Allowance for doubtful accounts
              
Included:
Trade accounts receivable
7
2,363
62
(75)
(4)
32
2,378
Other receivables
8
3,404
4
(50)
(18)
—
3,340
     
5,767
66
(125)
(22)
32
5,718
Provision for diminution in
              
 
value of inventories
10
4,321
15,712
(20)
(3,711)
—
16,302
Long-term equity investments
11
118
—
—
(13)
53
158
Fixed assets
12
7,177
123
—
(304)
63
7,059
Construction in progress
13
195
2
—
—
—
197
Total
  
17,578
15,903
(145)
(4,050)
148
29,434
 
 
See the note of each class of assets for the reason for its impairment losses recognised for the period.
 
19
SHORT-TERM LOANS
 
The Group’s and the Company’s short-term loans represent:
         
 
The Group
The Company
    
 
At 30 ­June
At 31 December
At 30 June
At 31 December
 
2008
2007
­2008
2007
 
RMB millions
RMB millions
RMB millions
RMB millions
         
Short-term bank loans
46,243
21,294
7,753
7,429
Loans from Sinopec Group Company and fellow subsidiaries
20,986
15,660
12,248
14,523
Total
67,229
36,954
20,001
21,952
 
 
The Group’s and the Company’s weighted average interest rates per annum on short-term loans were 5.1% (2007: 5.4%) and 5.8% (2007: 5.4%), respectively at 30 June 2008. The majority of the above loans are by credit.
 
 
Except for the balances disclosed in Note 45, there is no amount due to shareholders who hold 5% or more voting right of the Company included in the balance of short-term loans.
 
 
At 30 June 2008 and 31 December 2007, the Group and the Company had no significant overdue short-term loan.
 
20
BILLS PAYABLE
 
Bills payable primarily represented bank accepted bills for the purchase of material, goods and products. The repayment term is normally within one year.
 
21
TRADE ACCOUNTS PAYABLE
 
Except for the balances disclosed in Note 45, there is no amount due to shareholders who hold 5% or more voting right of the Company included in the balance of trade accounts payable.
 
 
At 30 June 2008 and 31 December 2007, the Group and the Company had no individually significant trade accounts payable aged over one year.
 
22
RECEIPTS IN ADVANCE
 
Except for the balances disclosed in Note 45, there is no amount due to shareholders who hold 5% or more voting right of the Company included in the balance of receipts in advance.
 
 
At 30 June 2008 and 31 December 2007, the Group and the Company had no individually significant receipts in advance aged over one year.

 
65
 


23
­STAFF COSTS PAYABLE
 
At 30 June 2008 and 31 December 2007, the Group’s and the Company’s staff costs payable primarily represented wages payable and social insurance payable.
 
24
­TAXES PAYABLE
 
 
The Group
The Company
    
 
At 30 ­June
At 31 December
At 30 June
At 31 December
 
2008
2007
2008
2007
 
RMB millions
RMB millions
RMB millions
RMB millions
         
Value-added tax
(10,540)
(2,828)
(7,327)
(2,351)
Consumption tax
1,431
2,018
1,078
1,592
Income tax
5,070
10,479
3,138
8,979
Special oil income levy
10,076
4,508
10,060
4,211
Resources tax
1,588
1,327
1,445
1,176
Other taxes
1,699
2,058
1,476
1,776
Total
9,324
17,562
9,870
15,383
 
25
OTHER PAYABLES
 
At 30 June 2008 and 31 December 2007, the Group’s and the Company’s other payables primarily represented payables for constructions and provision for onerous contracts for purchase of crude oil.
 
 
Except for the balances disclosed in Note 45, there is no amount due to shareholders who hold 5% or more voting right of the Company included in the balance of other payables.
 
 
At 30 June 2008 and 31 December 2007, the Group and the Company had no individually significant other payables aged over three years.
 
 
At 30 June 2008, the Group has entered into certain non-cancellable purchase commitment contracts of crude oil for delivery in the six-month period ending 31 December 2008. Due to the distortion of the correlation of domestic refined petroleum product prices and the crude oil prices, the Group has determined that the economic benefits to be derived from processing the crude oil under these purchase contracts would be lower than the unavoidable cost of meeting the Group’s obligations under these purchase contracts. Consequently, a provision for onerous contracts of RMB 22,400 million (2007: RMB 6,700 million) was recognised in accordance with the policy set out in Note 3(14) at 30 June 2008.
 
26
CURRENT PORTION OF NON-CURRENT LIABILITIES
 
The Group’s and the Company’s current portion of non-current liabilities represent:
 
 
The Group
The Company
    
 
At 30 June
At 31 December
At 30 June
At 31 December
 
2008
2007
2008
2007
 
RMB millions
RMB millions
RMB millions
RMB millions
         
Long-term bank loans
        
 
– Renminbi loans
18,000
11,659
17,410
11,073
 
– Japanese Yen loans
265
356
265
356
 
– US Dollar loans
126
218
93
175
 
– Euro loans
93
26
93
26
   
18,484
12,259
17,861
11,630
Long-term other loans
        
 
– Renminbi loans
24
1,022
—
1,000
 
– US Dollar loans
7
5
2
3
 
31
1,027
2
1,003
Long-term loans from Sinopec Group Company and fellow subsidiaries
        
 
– Renminbi loans
270
180
170
180
         
Total current portion of non-current liabilities
18,785
13,466
18,033
12,813
 
 
At 30 June 2008 and 31 December 2007, the Group and the Company had no significant overdue long-term loan.


 
66
 


27
LONG-TERM LOANS
 
The Group’s and the Company’s long-term loans represent:
 
   
The Group
The Company
   
At 30 June
At 31 December
At 30 June
At 31 December
 
Interest rate and final maturity
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
Third parties debts
          
Long-term bank loans
          
Renminbi loans
Interest rates ranging from interest free
        
 
to 9.1% per annum at 30 June 2008
        
 
with maturities through 2018
45,523
46,912
32,688
36,762
Japanese Yen loans
Interest rates ranging from 2.6%
        
 
to 3.0% per annum at 30 June 2008
        
 
with maturities through 2024
1,976
2,147
1,976
2,147
US Dollar loans
Interest rates ranging from interest free
        
 
to 7.4% per annum at 30 June 2008
        
 
with maturities through 2031
7,689
1,189
555
857
Euro loans
Interest rate ranging from 6.6%
        
 
to 6.7% per annum at 30 June 2008
        
 
with maturities through 2011
264
78
264
78
Hong Kong Dollar loans
Floating rate at Hong Kong Interbank Offer
        
 
Rate plus 0.5% per annum at 31 December 2007,
        
 
paid off at 30 June 2008
—
375
—
—
Less: Current portion
  
18,484
12,259
17,861
11,630
Long-term bank loans
  
36,968
38,442
17,622
28,214
Long-term other loans
          
Renminbi loans
Interest rates ranging from interest free
        
 
to 5.2% per annum at 30 June 2008
        
 
with maturities through 2011
2,075
3,075
2,006
3,006
US Dollar loans
Interest rates ranging from interest free
        
 
to 2% per annum at 30 June 2008
        
 
with maturities through 2015
38
38
28
28
Less: Current portion
  
31
1,027
2
1,003
Long-term other loans
  
2,082
2,086
2,032
2,031
Long-term loans from Sinopec Group Company and fellow subsidiaries
        
Renminbi loans
Interest rates ranging from interest free
        
 
to 7.3% per annum at 30 June 2008
        
 
with maturities through 2020
37,140
37,360
36,070
36,990
Less: Current portion
  
270
180
170
180
Long-term loans from Sinopec Group Company and fellow subsidiaries
36,870
37,180
35,900
36,810
           
Total
  
75,920
77,708
55,554
67,055
 
 
The maturity analysis of the Group’s and the Company’s long-term loans is as follows:

 
The Group
The Company
At 30 June
2008
RMB millions
At 31 December
2007
RMB millions
At 30 June
2008
RMB millions
At 31 December
2007
RMB millions
         
Between one and two years
13,594
19,604
9,097
17,375
Between two and five years
21,514
18,292
9,669
12,787
After five years
40,812
39,812
36,788
36,893
Total long-term loans
75,920
77,708
55,554
67,055

At 30 June 2008, the Group and the Company had loans from third parties secured by fixed assets amounting to RMB 59 million (2007: RMB 87 million) and RMB 6 million (2007: RMB 26 million). The remaining long-term loans are by credit.

Except for the balances disclosed in Note 45, there is no amount due to shareholders who hold 5% or more voting right of the Company included in the balance of long-term loans.

 
 
67
 

 
28
DEBENTURES PAYABLE
 
 
 
The Group
The Company
 
At 30 June
At 31 December
At 30 June
At 31 December
 
2008
2007
2008
2007
 
RMB millions
RMB millions
RMB millions
RMB millions
         
Short-term corporate bonds (i)
—
10,074
—
10,074
Debentures payable:
        
 
– Corporate Bonds (ii)
28,500
28,500
28,500
28,500
 
– Convertible Bonds (iii)
10,560
14,106
10,560
14,106
 
– Convertible Bonds with Warrants (iv)
23,419
—
23,419
—
 
62,479
42,606
62,479
42,606
         
 
 
 
(i)
The Company issued 182-day corporate bonds of face value at RMB 10 billion to corporate investors in the PRC debenture market on 22 October 2007 at par value of RMB 100. The effective yield of the 182-day corporate bond is 4.12% per annum. The corporate bonds were redeemed in April 2008.
 
 
(ii)
The Company issued ten-year corporate bonds of RMB 3.5 billion to PRC citizens as well as PRC legal and non-legal persons on 24 February 2004. The ten-year corporate bond bears a fixed interest rate of 4.61% per annum and interest is paid annually. Interest payable for the current period was included in other payables.
 
 
The Company issued ten-year corporate bonds of RMB 5 billion to corporate investors in the PRC on 10 May 2007. The ten-year corporate bond bears a fixed interest rate of 4.20% per annum and interest is paid annually. Interest payable for the current period was included in other payables.
 
 
The Company issued five-year corporate bonds of RMB 8.5 billion to corporate investors in the PRC on 13 November 2007. The five-year corporate bond bears a fixed interest rate of 5.40% per annum and interest is paid annually. Interest payable for the current period was included in other payables.
 
 
The Company issued ten-year corporate bonds of RMB 11.5 billion to corporate investors in the PRC on 13 November 2007. The ten-year corporate bond bears a fixed interest rate of 5.68% per annum and interest is paid annually. Interest payable for the current period was included in other payables.
 
 
(iii)
On 24 April 2007, the Company issued zero coupon convertible bonds due 2014 with an aggregate principal amount of HK$11.7 billion (the ÒConvertible BondsÓ).  The Convertible Bonds are convertible into H shares of the Company from 4 June 2007 onwards at a price of HK$10.76 per share, subject to adjustment for, amongst other things, subdivision or consolidation of shares, bonus issues, rights issues, capital distribution, change of control and other events, which have a dilutive effect on the issued share capital of the Company.  Unless previously redeemed, converted or purchased and cancelled, the Convertible Bonds will be redeemed on the maturity date at 121.069% of the principal amount.  The Company has an early redemption option at any time after 24 April 2011 (subject to certain criteria) and a cash settlement option when the holders exercise their conversion right.  The holders also have an early redemption option to require the Company to redeem all or some of the Convertible Bonds on 24 April 2011 at an early redemption amount of 111.544% of the principal amount.
 
 
At 30 June 2008, the carrying amounts of liability and derivative components of the Convertible Bonds were RMB 9,696 million and RMB 864 million, respectively. No conversion of the Convertible Bonds has occurred up to 30 June 2008.
 
 
At 30 June 2008 and 31 December 2007, the fair value of the derivative component of the Convertible Bonds was calculated using the Black-Scholes Model. The following are the major inputs used in the Black-Scholes Model:
 
 
   
At 30 June
  
At 31 December
   
2008
  
2007
         
 
Stock price of underlying shares
HKD 7.30
  
HKD 11.78
 
Conversion price
HKD 10.76
  
HKD 10.76
 
Volatility
39%
  
46%
 
Average risk free rate
3.66%
  
3.60%
 
Average expected life
4.3 years
  
4.8 years
         
 
 
 
Any change in the major inputs into the Black-Scholes Model will result in changes in the fair value of the derivative component. The change in the fair value of the conversion option from 31 December 2007 to 30 June 2008 resulted in a fair value gain of RMB 2,956 million (2007 : fair value loss of RMB 897 million), which has been recorded as Òfair value gain/(loss)Ó in the income statement for the six-month period ended 30 June 2008.
 
 
The initial carrying amount of the liability component is the residual amount, which is the cash proceeds from issuance of debentures after deducting the allocated issuance cost of the Convertible Bonds relating to the liability component and the fair value of the derivative component as at 24 April 2007. Interest expense is calculated using the effective interest method by applying the effective interest rate of 4.19% to the adjusted liability component. Should the aforesaid derivative component not have been separated out and the entire Convertible Bonds is considered as the liability component, the effective interest rate would have been 3.03%.
 
 

 
68
 
 
 
28 DEBENTURES PAYABLE (Continued)

 
 
 
(iv)
On 26 February 2008, the Company issued convertible bonds with stock warrants due 2014 with an aggregate principal amount of RMB 30 billion in the PRC (the ÒBonds with WarrantsÓ). The Bonds with Warrants with fixed interest rate of 0.8% per annum and interest payable annually, were issued at par value of RMB 100. The Bonds with Warrants were guaranteed by Sinopec Group Company. Each lot of the Bonds with Warrants, comprising ten Bonds with Warrants are entitled to warrants (the ÒWarrantsÓ) to subscribe 50.5 A shares of the Company during the 5 trading days prior to 3 March 2010 at an initial exercise price of RMB 19.68 per share, subject to adjustment for, amongst other things, cash dividends, subdivision or consolidation of shares, bonus issues, rights issues, capital distribution, change of control and other events which have a dilutive effect on the issued share capital of the Company.
     
 
 
As at 30 June 2008, the exercise price of the Warrants was adjusted to RMB 19.49 per share as a result of the final dividend in respect of the year ended 31 December 2007 declared during the six-month period ended 30 June 2008.
 
 
The initial recognition of the liability component of the Bond with Warrants is measured as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option. Interest expense is calculated using the effective interest method by applying the effective interest rate of 5.40% to the liability component. The excess of proceeds from the issuance of the Bonds with Warrants, net of issuance costs, over the amount initially recognised as the liability component is recognised as the equity component in capital reserve until either the Warrants is exercised or expired. Should the equity component not be separated out and the entire Bonds with Warrants is considered as the liability component, the effective interest rate would have been 0.8%. The initial carrying amounts of liability and equity components of the Bonds with Warrants were RMB 22,971 million and RMB 6,879 million upon issuance, respectively.
 
29
PROVISIONS
 
Provision primarily represents provision for future dismantlement costs of oil and gas properties. As at and before 31 December 2006, the Group did not have legal obligation nor constructive obligation to take any dismantlement measures for its retired oil and gas properties. During the six-month period ended 30 June 2007, due to the rising environmental concern in the PRC, the Group has committed to the PRC government to establish certain standardised measures for the dismantlement of its retired oil and gas properties by making reference to the industry practices and is thereafter constructively obligated to take dismantlement measures of its retired oil and gas properties. During the six-month period ended 30 June 2008, the Group and the Company recognised provisions of RMB 291 million and RMB 270 million (2007: RMB 183 million and RMB 141 million) in respect of its obligations for the dismantlement of its retired oil and gas properties, and accretion expenses of RMB 206 million and RMB 206 million (2007: RMB 155 million and RMB 155 million), respectively. At 30 June 2008, the aggregate amount of provision in respect of the obligations for the dismantlement of the Group’s and the Company’s retired oil and gas properties were RMB 8,041 million (2007: RMB 7,544 million) and RMB 7,724 million (2007: RMB 7,248 million), respectively.
 
30
SHARE CAPITAL
 
 
   
The Group and the Company
   
At 30 June
  
At 31 December
   
2008
  
2007
   
RMB millions
  
RMB millions
         
 
Registered, issued and fully paid:
      
 
69,921,951,000 domestic listed A shares of RMB 1.00 each
69,922
  
69,922
 
16,780,488,000 overseas listed H shares of RMB 1.00 each
16,780
  
16,780
   
86,702
  
86,702


 
The Company was established on 25 February 2000 with a registered capital of 68.8 billion domestic state-owned domestic shares with a par value of RMB 1.00 each, which were all held by Sinopec Group Company (Note 1).
 
 
Pursuant to the resolutions passed at an Extraordinary General Meeting of the Company held on 25 July 2000 and the approval from relevant authorities, the Company issued 15,102,439,000 H shares with a par value of RMB 1.00 each in its initial global offering in October 2000. The shares include 12,521,864,000 H shares and 25,805,750 American Depositary Shares (ÒADSsÓ, each representing 100 H shares) at prices of HK$1.59 and US$ 20.645 respectively. As part of the offering, 1,678,049,000 shares were offered in placing to Hong Kong and overseas investors.
 
 
In July 2001, the Company issued 2,800,000,000 domestic listed A shares with a par value of RMB 1.00 each at RMB 4.22.
 
 
On 25 September 2006, the shareholders of listed A shares accepted the proposal offered by the shareholders of state-owned A shares whereby the shareholders of state-owned A shares agreed to transfer 2.8 state-owned A shares to shareholders of listed A shares for every 10 listed A shares they held, in exchange for the approval for the listing of all state-owned A shares. 66,337,951,000 domestic stated-owned A shares have been granted trading right upon settlement of the above consideration. The 784,000,000 stated-owned A shares paid to the shareholders of the listed A shares were tradable on 10 October 2006.
 
 
All the domestic ordinary shares and H shares rank pari passu in all material aspects.
 
 
KPMG Huazhen had verified the above paid-in capital. The capital verification reports, KPMG-C (2000) CV No. 0007, KPMG-C (2001) CV No. 0002 and KPMG-C (2001) CV No. 0006 were issued on 22 February 2000, 27 February 2001 and 23 July 2001 respectively.


 
69
 

 
31
CAPITAL RESERVE
 
The movements in capital reserve are as follows:


   
The Group
The Company
   
At 30 June
At 31 December
At 30 June
At 31 December
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
 
Balance at 1 January
38,391
38,553
38,175
36,526
 
Change in fair value of available-for-sale financial assets,
        
 
net of deferred tax (i)
(1,666)
2,892
(1,568)
2,711
 
Issuance of the Bond with Warrants (ii)
6,879
—
6,879
—
 
Acquisition of Refinery plants, net of contributions from
        
 
Sinopec Group Company (Note 1)
—
(2,400)
—
(1,062)
 
Transferred to retained profits and surplus reserves (iii)
—
(654)
—
—
 
Distribution to Sinopec Group Company (iv)
(59)
—
(59)
—
 
Balance at 30 June/31 December
43,545
38,391
43,427
38,175
 
 
The capital reserve represents mainly: (a) the difference between the total amount of the par value of shares issued and the amount of the net assets transferred from Sinopec Group Company in connection with the Reorganisation; (b) share premiums derived from issuances of H shares and A shares by the Company and excess of cash paid by investors over their proportionate shares in share capital; and (c) adjustment for change in fair value of available-for-sale financial assets.
 
 
(i)
The available-for-sale financial assets held by the Group and the Company are carried at fair value with any change in fair value, net of deferred tax, recognised directly in capital reserve.
 
 
(ii)
In February 2008, the Company issued the Bonds with Warrants in the PRC. The fair value of the relevant warrants was recognised in capital reserve.
 
 
(iii)
During the year ended 31 December 2007, the Group acquired the Refinery Plants (Note 1). According to the accounting policy of business combination involving entities under common control (Note 3(1)(a)), the Group’s proportionate shares in retained profits and surplus reserves of Refinery Plants on the acquisition date, were transferred out from capital reserve.
 
 
(iv)
During the six-month period ended 30 June 2008, the Group acquired certain assets and liabilities, relating to the oil field downhole operations (the ÒDownhole AssetsÓ) from Sinopec Group Company. The difference between the consideration paid over the amount of the net asset acquired from the Downhole Assets was recognised in capital reserve.
 
32
SURPLUS RESERVES
 
Movements in surplus reserves are as follows:


   
The Group and the Company
   
Statutory
Discretionary
    
   
surplus
surplus
    
   
reserve
reserve
  
Total
   
RMB millions
RMB millions
  
RMB millions
           
 
Balance at 1 January 2008
37,797
27,000
  
64,797
 
Appropriation
595
—
  
595
 
Balance at 30 June 2008
38,392
27,000
  
65,392
 
 
 
The Articles of Association of the Company and the PRC Company Law have set out the following profit appropriation plans:
 
 
(a)
10% of the net profit is transferred to the statutory surplus reserve;
 
 
(b)
After the transfer to the statutory surplus reserve, a transfer to discretionary surplus reserve can be made upon the passing of a resolution at the shareholders’ meeting.
 
 
 
70
 

33
OPERATING INCOME AND COST OF SALES



   
The Group
    
The Company
   
Six-month periods ended 30 June
    
Six-month periods ended 30 June
   
2008
2007
    
2008
2007
   
RMB millions
RMB millions
    
RMB millions
RMB millions
               
 
Income from principal operations
722,429
551,361
    
508,127
398,573
 
Income from other operations
12,354
12,509
    
11,357
10,394
 
Total
734,783
563,870
    
519,484
408,967
 
 
 
The income from principal operations represents revenue from sales of crude oil, natural gas, petroleum and chemical products net of value added tax. Cost of sales primarily represents the products cost related to the principal operations. The Group’s segmental information is set out in Note 50.
 
 
For the six-month period ended 30 June 2008, revenue from sales to top five customers amounted to RMB 61,148 million (2007: RMB 37,409 million) which accounted for 8% (2007: 7%) of total operating income of the Group.
 
34
SALES TAXES AND SURCHARGES
 

   
The Group
The Company
   
Six-month periods ended 30 June
Six-month periods ended 30 June
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
 
Consumption tax
8,553
7,586
6,760
 6,050
 
Special oil income levy
16,544
3,290
15,652
3,067
 
City construction tax
1,760
1,919
1,509
1,501
 
Education surcharge
958
1,038
838
832
 
Resources tax
437
443
417
416
 
Business tax
199
180
156
130
 
Total
28,451
14,456
25,332
11,996


35   FINANCIAL EXPENSES

     
The Group
    
The Company
  
     
Six-month periods ended 30 June
    
Six-month periods ended 30 June
  
     
2008
    
2007
    
2008
    
2007
  
     
RMB millions
    
RMB millions
    
RMB millions
    
RMB millions
  
                           
 
Interest expenses incurred
     5,707       4,065       4,695       2,953  
 
Less: Capitalised interest expenses
     350       308       182       182  
 
Net interest expenses
     5,357       3,757       4,513       2,771  
 
Accretion expenses
     206       155       206       155  
 
Interest income
     (212 )     (372 )     (102 )     (199 )
 
Foreign exchange loss
     367       66       63       7  
 
Foreign exchange gain
     (2,060 )     (846 )     (945 )     (478 )
 
Total
     3,658       2,760       3,735       2,256  

36
EXPLORATION EXPENSES
 
Exploration expenses include geological and geophysical expenses and written off of dry hole costs.
 
37
IMPAIRMENT LOSSES
 
 

 
     
The Group
    
The Company
  
     
Six-month periods ended 30 June
    
Six-month periods ended 30 June
  
     
2008
    
2007
    
2008
    
2007
  
     
RMB millions
    
RMB millions
    
RMB millions
    
RMB millions
  
                           
 
Receivables
     (64 )     (69 )     (59 )     (28 )
 
Inventories
     16,010       (38 )     15,692       (19 )
 
Fixed assets
     131       1,485       123       1,467  
 
Construction in progress
     2       157       2       157  
 
Total
     16,079       1,535       15,758       1,577  

 
71
 
 
 
38
FAIR VALUE GAIN/(LOSS)
 
 
   
The Group and the Company
Six-month periods
ended 30 June
   
   
   
2008
2007
   
RMB millions
RMB millions
       
 
Fair value gain/(loss) on the derivative component of the Convertible Bonds (Note 28(iii))
2,956
(897)
 
 
39
INVESTMENT INCOME
 
 
 
   
The Group
 Six-month periods ended 30 June
The Company
Six-month periods ended 30 June
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
 
Investment income from Subsidiaries (Note)
—
—
3,598
7,593
 
Investment income from associates and jointly controlled entities
1,358
2,214
1,106
1,497
 
Other investment income
319
666
102
174
 
Total
1,677
2,880
4,806
9,264
 
 
Note:
Before 2007, investments in subsidiaries of the Company were accounted for under the equity method. Therefore, cash dividends of RMB 7,593 million distributed by subsidiaries of the Company in respect of prior years were reduced the carrying amount of investments in subsidiaries during the six-month period ended 30 June 2007. According to the requirement of the ÒChina Accounting Standards Bulletin No.1Ó, issued by the MOF in November 2007, the Company’s investments in subsidiaries are accounted for using the cost method effective from the acquisition date, and the cash dividends of subsidiaries received by the Company are recognised as investment income accordingly. Retrospective adjustment is made to the comparative figures of the Company’s financial statements for the six-month period ended 30 June 2007, as previously reported. The change does not have impact on the comparative financial statements of the Group.
     
40
NON-OPERATING INCOME
 
 
   
The Group
Six-month periods ended 30 June
The Company
 Six-month periods ended 30 June
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
 
Gain on disposal of fixed assets
120
54
105
44
 
Grant (Note)
33,402
—
22,358
—
 
Others
243
115
206
67
 
Total
33,765
169
22,669
111
 
 
Note:
During the six-month period ended 30 June 2008, the Group recognised grant income of RMB 33,402 million (2007: RMB nil). These grants were for compensation of losses incurred due to the distortion of the correlation of domestic refined petroleum product prices and the crude oil prices, and the measures taken by the Group to stabilise the supply in the PRC refined petroleum product market during the six-month period ended 30 June 2008. There are no unfulfilled conditions and other contingencies attached to the receipts of these grants. There is no assurance that the Group will continue to receive such grant in the future.
     
41
NON-OPERATING EXPENSES
 
   
The Group
Six-month periods ended 30 June
The Company
 Six-month periods ended 30 June
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
 
Loss on disposal of fixed assets
23
344
21
279
 
Fines, penalties and compensation
55
19
53
18
 
Donations
77
45
71
17
 
Others
310
345
270
266
 
Total
465
753
415
580
 

 
72
 

 
42
INCOME TAX EXPENSE
 
 
   
The Group
Six-month periods ended 30 June
The Company
Six-month periods ended 30 June
   
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
 
Provision for PRC income tax for the period
7,699
16,154
4,589
10,920
 
Deferred taxation
(7,814)
(276)
(6,761)
(355)
 
    Adjustment for provision for income tax in respect of
       proceeding year
216
249
72
249
 
Total
101
16,127
(2,100)
10,814
 
 
 
Reconciliation between actual tax expense and accounting profit at applicable tax rates is as follows:
 
   
The Group
Six-month periods ended 30 June
The Company
Six-month periods ended 30 June
   
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
 
Profit before taxation
9,516
52,701
3,852
42,883
 
    Expected PRC income tax expense at a statutory tax
       rate of 25% (2007: 33%)
2,379
17,391
963
14,151
 
Tax effect of non-deductible expenses
200
302
62
234
 
Tax effect of non-taxable income
(2,715)
(1,136)
(2,661)
(3,222)
 
Tax effect of differential tax rate (Note)
(234)
(972)
(536)
(795)
 
Tax effect of tax losses not recognised
255
38
—
—
 
    Adjustment for provision for income tax in respect
        of proceeding year
216
249
72
249
 
Tax credit for domestic equipment purchases
—
(500)
—
(500)
 
Effect of change in tax rate on deferred tax
—
755
—
697
 
Actual tax expense
101
16,127
(2,100)
10,814
 
 
 
Note:
The provision for PRC current income tax is based on a statutory rate of 25% (2007: 33%) of the assessable income of the Group as determined in accordance with the relevant income tax rules and regulations of the PRC, except for certain entities of the Group, which are taxed at preferential rates of 15% .
     
43
DIVIDENDS
     
 
(a)
Dividends of ordinary shares declared after the balance sheet date
   
Pursuant to the Articles of Association of the Company and the resolution passed at the Board of Directors’ meeting on 22 August 2008, an interim dividend for the year ending 31 December 2008 of RMB 0.03 (2007: RMB 0.05) per share totalling RMB 2,601 million (2007: RMB 4,335 million) was declared.
     
 
(b)
Dividends of ordinary shares declared during the period
   
Pursuant to the shareholders’ approval at the Annual General Meeting on 26 May 2008, a final dividend of RMB 0.115 per share totalling RMB 9,971 million in respect of the year ended 31 December 2007 was declared and paid on 30 June 2008.
     
   
Pursuant to the shareholders’ approval at the Annual General Meeting on 29 May 2007, a final dividend of RMB 0.11 per share totalling RMB 9,537 million in respect of the year ended 31 December 2006 was declared and paid on 29 June 2007.
 
 

 
73
 

 
44
SUPPLEMENTAL INFORMATION TO THE CASH FLOW STATEMENT
     
 
(a)
Reconciliation of net profit to cash flows from operating activities:
 
 
   
The Group
Six-month periods ended 30 June
The Company
Six-month periods ended 30 June
   
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
Net profit
9,339
35,110
5,952
32,069
Add:
Impairment losses on assets
16,079
1,535
15,758
1,577
 
Depreciation of fixed assets
20,631
19,214
17,275
13,874
 
Amortisation of intangible assets
483
372
328
258
 
Dry hole costs
1,156
2,157
1,156
2,157
 
Net (gain)/loss on disposal of fixed assets
(97)
290
(84)
235
 
Fair value (gain)/loss
(2,956)
897
(2,956)
897
 
Financial expenses
3,658
2,760
3,735
2,256
 
Investment income
(1,677)
(2,880)
(4,806)
(9,264)
 
(Increase)/decrease in deferred tax assets
(7,845)
160
(6,754)
90
 
Increase/(decrease) in deferred tax liabilities
31
(436)
(7)
(445)
 
Increase in inventories
(63,427)
(11,007)
(63,269)
(1,292)
 
Increase in operating receivables
(25,220)
(12,401)
(3,429)
(10,321)
 
Increase in operating payables
55,755
27,465
77,218
20,984
 
Minority interests
76
1,464
—
—
Net cash flow from operating activities
5,986
64,700
40,117
53,075
 
 
 
(b)
Net change in cash and cash equivalents:
 
   
The Group
Six-month periods ended 30 June
The Company
Six-month periods ended 30 June
   
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
 
Cash balance at the end of the period
157
49
57
5
 
Less: Cash balance at the beginning of the period
108
15
24
5
 
Add:  Cash equivalents at the end of the period
8,309
9,877
3,890
4,694
 
Less: Cash equivalents at the beginning of the period
7,588
7,048
3,055
2,758
 
Net increase of cash and cash equivalents
770
2,863
868
1,936
 
 
 
(c)
The analysis of cash and cash equivalents held by the Group and the Company is as follows:
 
   
The Group
The Company
   
At 30 June
At 31 December
At 30 June
At 31 December
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
 
Cash
        
   
– Cash in hand
157
108
57
24
   
– Demand deposits
8,309
7,588
3,890
3,055
 
Cash and cash equivalents at the end of the period
8,466
7,696
3,947
3,079
 
 

 
74
 

 
45
RELATED PARTIES AND RELATED PARTY TRANSACTIONS
         
 
(a)
Related parties having the ability to exercise control over the Group
         
   
The name of the company
:
China Petrochemical Corporation
   
Organisation code
:
10169286-X
   
Registered address
:
No. 6A, Huixin East Street, Chaoyang District, Beijing
   
Principal activities
:
Processing crude oil into refined products and petrochemical products, petrochemical products which include: petrochemical products made from crude oil and natural gas; production, sale and import and export of synthetic fibre and synthetic fibre monomer.
   
Relationship with the Group
:
Ultimate holding company
   
Types of legal entity
:
State-owned
   
Authorised representative
:
Su Shulin
   
Registered capital
:
RMB 104,912 million
         
   
There is no movement in the above registered capital for the six-month period ended 30 June 2008.
         
   
For the six-month period ended 30 June 2008, Sinopec Group Company held 75.84% shares of the Company and there is no change on percentage shareholding during this reporting period.
         
 
(b)
Related parties not having the ability to exercise control over the Group
         
   
Related parties under common control of a parent company with the Company:
   
Sinopec Finance Company Limited
   
Sinopec Shengli Petroleum Administration Bureau
   
Sinopec Zhongyuan Petroleum Exploration Bureau
   
Qingdao Petrochemical Company
   
Sinopec Assets Management Corporation
   
Sinopec Engineering Incorporation
   
Sinopec Century Bright Capital Investment Limited
   
Sinopec Petroleum Storage and Reserve Limited
         
   
Associates of the Group:
   
Sinopec Railway Oil Marketing Company Limited
   
China Aviation Oil Supply Company Limited
   
Sinopec Changjiang Fuel Company Limited
   
BPZR (Ningbo) LPG Co., Ltd
         
   
Jointly controlled entities of the Group:
   
Shanghai Secco Petrochemical Company Limited
   
BASF-YPC Company Limited
   
Yueyang Sinopec and Shell Coal Gasification Company Limited
   
Fujian Refining and Petrochemical Company Limited
         
 
(c)
The principal related party transactions with Sinopec Group Company and fellow subsidiaries, associates and jointly controlled entities, which were carried out in the ordinary course of business, are as follows:
 
 
     
The Group
Six-month periods ended 30 June
The Company
Six-month periods ended 30 June
     
   
Note
2008
2007
2008
2007
     
RMB millions
RMB millions
RMB millions
RMB millions
             
 
Sales of goods
(i)
92,166
73,102
47,178
40,268
 
Purchases
(ii)
35,355
32,481
15,091
19,747
 
Transportation and storage
(iii)
540
527
480
431
 
Exploration and development services
(iv)
13,799
13,345
13,452
12,764
 
Production related services
(v)
4,357
6,466
4,067
3,672
 
Ancillary and social services
(vi)
805
801
795
786
 
Operating lease charges
(vii)
1,949
1,858
1,821
1,747
 
Agency commission income
(viii)
36
40
—
—
 
Interest received
(ix)
13
16
58
6
 
Interest paid
(x)
566
347
416
313
 
Net deposits (placed with)/withdrawn
   from related parties
(xi)
(265)
194
(344)
59
 
Net loans obtained from/(repaid to)
   related parties
(xii)
5,106
(900)
(3,195)
(1,293)
 
 
The amounts set out in the table above in respect of the six-month periods ended 30 June 2008 and 2007 represent the relevant costs to the Group and the Company and income from related parties as determined by the corresponding contracts with the related parties.
   
 
At 30 June 2008 and 31 December 2007, there were no guarantees given to banks by the Group and the Company in respect of banking facilities to Sinopec Group Company and fellow subsidiaries.
 
 

 
75
 

 
45
RELATED PARTIES AND RELATED PARTY TRANSACTIONS (Continued)
       
 
(c)
The principal related party transactions with Sinopec Group Company and fellow subsidiaries, associates and jointly controlled entities, which were carried out in the ordinary course of business, are as follows: (Continued)
  
       
   
The directors of the Company are of the opinion that the above transactions with related parties were conducted in the ordinary course of business and on normal commercial terms or in accordance with the agreements governing such transactions.
  
       
   
Notes:
  
       
   
(i)
Sales of goods represent the sale of crude oil, intermediate petrochemical products, petroleum products and ancillary materials.
       
   
(ii)
Purchases represent the purchase of material and utility supplies directly related to the Group’s operations such as the procurement of raw and ancillary materials and related services, supply of water, electricity and gas.
       
   
(iii)
Transportation and storage represent the cost for the use of railway, road and marine transportation services, pipelines, loading, unloading and storage facilities.
       
   
(iv)
Exploration and development services comprise direct costs incurred in the exploration and development of crude oil such as geophysical, drilling, well testing and well measurement services.
       
   
(v)
Production related services represent ancillary services rendered in relation to the Group’s operations such as equipment repair and general maintenance, insurance premium, technical research, communications, fire fighting, security, product quality testing and analysis, information technology, design and engineering, construction which includes the construction of oilfield ground facilities, refineries and chemical plants, manufacture of replacement parts and machinery, installation, project management and environmental protection.
       
   
(vi)
Ancillary and social services represent expenditures for social welfare and support services such as educational facilities, media communication services, sanitation, accommodation, canteens, property maintenance and management services.
       
   
(vii)
Operating lease charges represent the rental paid to Sinopec Group Company for operating leases in respect of land, buildings and equipments.
       
   
 (viii)
Agency commission income represents commission earned for acting as an agent in respect of sales of products and purchase of materials for certain entities owned by Sinopec Group Company.
       
   
(ix)
Interest received represents interest received from deposits placed with Sinopec Finance Company Limited, a finance company controlled by Sinopec Group Company. The applicable interest rate is determined in accordance with the prevailing saving deposit rate.
       
   
(x)
Interest paid represents interest charges on the loans and advances obtained from Sinopec Group Company and Sinopec Finance Company Limited.
       
   
(xi)
Deposits placed with/withdrawn from related parties represent net deposits placed with/withdrawn from Sinopec Finance Company Limited.
       
   
(xii)
The Group obtained loans from/repaid loans to Sinopec Group Company and Sinopec Finance Company Limited. The calculated periodic balance of average loan for six-month period ended 30 June 2008, which is based on monthly average balances, was RMB 49,653 million (2007: RMB 45,941 million).
       
 
In connection with the Reorganisation, the Company and Sinopec Group Company entered into a number of agreements under which 1) Sinopec Group Company will provide goods and products and a range of ancillary, social and supporting services to the Group and 2) the Group will sell certain goods to Sinopec Group Company. These agreements impacted the operating results of the Group for the six-month period ended 30 June 2008. The terms of these agreements are summarised as follows:
       
 
(a)
The Company entered into a non-exclusive Agreement for Mutual Provision of Products and Ancillary Services (ÒMutual Provision AgreementÓ) with Sinopec Group Company effective from 1 January 2000 in which Sinopec Group Company has agreed to provide the Group with certain ancillary production services, construction services, information advisory services, supply services and other services and products. While each of Sinopec Group Company and the Company is permitted to terminate the Mutual Provision Agreement upon at least six months’ notice, Sinopec Group Company has agreed not to terminate the agreement if the Group is unable to obtain comparable services from a third party. The pricing policy for these services and products provided by Sinopec Group Company to the Group is as follows:
       
   
|
the government-prescribed price;
   
|
where there is no government-prescribed price, the government guidance price;
   
|
where there is neither a government-prescribed price nor a government guidance price, the market price; or
   
|
where none of the above is applicable, the price to be agreed between the parties, which shall be based on a reasonable cost incurred in providing such services plus a profit margin not exceeding 6%.
       
 
(b)
The Company has entered into a non-exclusive Agreement for Provision of Cultural and Educational, Health Care and Community Services with Sinopec Group Company effective from 1 January 2000 in which Sinopec Group Company has agreed to provide the Group with certain cultural, educational, health care and community services on the same pricing terms and termination conditions as agreed to in the above Mutual Provision Agreement.
       
 
(c)
The Company has entered into a series of lease agreements with Sinopec Group Company to lease certain land and buildings at a rental of approximately RMB 3,234 million and RMB 568 million, respectively, per annum. The Company and Sinopec Group Company can renegotiate the rental amount every three years for land and every year for buildings, however such amount can not exceed the market price as determined by an independent third party. The Group has the option to terminate these leases upon six months’ notice to Sinopec Group Company.
       
 
(d)
The Company has entered into agreements with Sinopec Group Company effective from 1 January 2000 under which the Group has been granted the right to use certain trademarks, patents, technology and computer software developed by Sinopec Group Company.
       
 
(e)
The Company has entered into a service stations franchise agreement with Sinopec Group Company effective from 1 January 2000 under which its service stations and retail stores would exclusively sell the refined products supplied by the Group.
       
 
Pursuant to the resolutions passed at the Directors’ meeting held on 26 June 2008, the Group acquired the Downhole Assets from Sinopec Group Company, primarily fixed assets with net book value of RMB 1,542 million, for a cash consideration of RMB 1,624 million, which approximated the net carrying value of the assets and liabilities of the Downhole Assets.
 
 

 
76
 

 
45
RELATED PARTIES AND RELATED PARTY TRANSACTIONS (Continued)
     
 
(d)
Balances with Sinopec Group Company and fellow subsidiaries, associates and jointly controlled entities
 
The balances with the Group’s related parties at 30 June 2008 and 31 December 2007 are as follows:
 
 
   
The ultimate holding company
Other related companies
   
At 30 June
At 31 December
At 30 ­June
At 31 December
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
 
Cash and cash equivalents
—
—
603
338
 
Trade accounts receivable
—
—
13,744
3,990
 
Advance payments and other receivables
8,073
5,364
3,946
1,718
 
Trade accounts payable
—
—
7,282
5,472
 
Receipts in advance
—
—
1,744
1,531
 
Other payables
317
243
11,714
11,133
 
Short-term loans
—
—
20,986
15,660
 
Long-term loans (including current portion) (Note)
—
—
37,140
37,360
 
 
 
Note:
The Sinopec Group Company had lent an interest-free loan for 20 years amounted to RMB 35,561 million to the Group through Sinopec Finance Company Limited which was included in the long-term loans.
     
 
As at and for the six-month period ended 30 June 2008, and as at and for the year ended 31 December 2007, no individually significant impairment losses for bad and doubtful debts were recorded in respect of amounts due from Sinopec Group Company and fellow subsidiaries, associates and jointly controlled entities.
     
(e)
Key management personnel emoluments
 
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including directors and supervisors of the Group. The key management compensations are as follows:
 
 
   
Six-month periods
ended 30 June
   
   
2008
2007
   
RMB thousands
RMB thousands
       
 
Short-term employee benefits
4,031
2,469
 
Retirement scheme contributions
158
91
   
4,189
2,560
 
 

 
77
 

 
46
PRINCIPAL ACCOUNTING ESTIMATES AND JUDGEMENTS
  
 
The Group’s financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the financial statements. The Group bases the assumptions and estimates on historical experience and on various other assumptions that the Group believes to be reasonable and which form the basis for making judgements about matters that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.
     
 
The selection of critical accounting policies, the judgements and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing the financial statements. The principal accounting policies are set forth in Note 3. The Group believes the following critical accounting policies involve the most significant judgements and estimates used in the preparation of the financial statements.
     
 
(a)
Oil and gas properties and reserves
   
The accounting for the exploration and production segment’s oil and gas activities is subject to accounting rules that are unique to the oil and gas industry. There are two methods to account for oil and gas business activities, the successful efforts method and the full cost method. The Group has elected to use the successful efforts method. The successful efforts method reflects the volatility that is inherent in exploring for mineral resources in that costs of unsuccessful exploratory efforts are charged to expense as they are incurred. These costs primarily include dry hole costs, seismic costs and other exploratory costs. Under the full cost method, these costs are capitalised and written-off or depreciated over time.
     
   
Engineering estimates of the Group’s oil and gas reserves are inherently imprecise and represent only approximate amounts because of the subjective judgements involved in developing such information. There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and gas reserves can be designated as ÒprovedÓ. Proved and proved developed reserves estimates are updated at least annually and take into account recent production and technical information about each field. In addition, as prices and cost levels change from year to year, the estimate of proved and proved developed reserves also changes. This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in related depreciation rates.
     
   
Future dismantlement costs for oil and gas properties are estimated with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with industry practices in the similar geographic area, including estimation of economic life of oil and gas properties, technology and price level. The present values of these estimated future dismantlement costs are capitalised as oil and gas properties with equivalent amounts recognised as provisions for dismantlement costs.
     
   
Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depreciation expense, impairment expense and future dismantlement costs. Depreciation rates are determined based on estimated proved developed reserve quantities (the denominator) and capitalised costs of producing properties (the numerator). Producing properties’ capitalised costs are amortised based on the straight-line method.
     
 
(b)
Impairment for assets
   
If circumstances indicate that the net book value of a long-lived asset may not be recoverable, the asset may be considered ÒimpairedÓ, and an impairment loss may be recognised in accordance with ÒASBE 8 – Impairment of AssetsÓ. The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. For goodwill, the recoverable amount is estimated annually. The recoverable amount is the greater of the net selling price and the value in use. It is difficult to precisely estimate selling price because quoted market prices for the Group’s assets or cash-generating units are not readily available. In determining the value in use, expected cash flows generated by the asset or the cash-generating unit are discounted to their present value, which requires significant judgement relating to level of sale volume, selling price and amount of operating costs. The Group uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sale volume, selling price and amount of operating costs.
     
 
(c)
Depreciation
   
Fixed assets are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. The Group reviews the estimated useful lives of the assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group’s historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.
     
 
(d)
Allowances for doubtful accounts
   
The Group estimates impairment losses for bad and doubtful debts resulting from the inability of the customers to make the required payments. The Group bases the estimates on the ageing of the accounts receivable balance, customer credit-worthiness, and historical write-off experience. If the financial condition of the customers were to deteriorate, actual write-offs would be higher than estimated.
     
 
(e)
Allowance for diminution in value of inventories
   
If the costs of inventories fall below their net realisable values, an allowance for diminution in value of inventories is recognised. Net realisable value represents the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. The Group bases the estimates on all available information, including the current market prices of the finished goods and raw materials, and historical operating costs. If the actual selling prices were to be lower or the costs of completion were to be higher than estimated, the actual allowance for diminution in value of inventories could be higher than estimated.
 
 

 
78
 

 
46
PRINCIPAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued)
     
 
(f)
Provision for onerous contracts for purchases of crude oil
   
A provision for onerous contracts is recognised when the expected economic benefits to be derived by the Group from a contact for purchase of crude oil are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the estimated cost of terminating the purchase contract and the estimated net cost of continuing with the contract. The Group bases the estimates on all available information, including the current market prices of crude oil and refined petroleum products, and historical operating costs. If the actual purchase prices of crude oil or the costs of completion were to be higher, or the actual selling prices of refined petroleum products were to be lower, the actual losses incurred under the onerous contracts could be higher than the estimated provision.
     
47
PRINCIPAL SUBSIDIARIES
 
The Company’s principal subsidiaries are limited companies operating in the PRC and had been consolidated into the Group’s financial statements for the six-month period ended 30 June 2008. Except for Sinopec Kantons Holdings Limited and Sinopec (Hong Kong) Limited, which are incorporated in Bermuda and Hong Kong, respectively, the companies below are incorporated in the PRC. The following list contains only the particulars of subsidiaries which principally affected the results or assets of the Group:
 
 
 
 
 
 
Name of enterprise
 
 
Registered
capital/paid-up
capital
RMB millions
Percentage of
equity interest
/voting right
held by the
Group
% 
  
 
 
 
 
Principal activities
 
 
(a)
Subsidiaries acquired through group restructuring:
   
    China Petrochemical International
         Company Limited
1,663
100.00
  
Trading of petrochemical products and equipment
   
 Sinopec Sales Company Limited
1,700
100.00
  
Marketing and distribution of refined petroleum products
   
    Sinopec Yangzi Petrochemical
         Company Limited
16,337
100.00
  
Manufacturing of intermediate petrochemical products and petroleum products
   
    Sinopec Fujian Petrochemical
         Company Limited (i)
2,253
50.00
  
Manufacturing of plastics, intermediate petrochemical products and petroleum products
             
   
    Sinopec Shanghai Petrochemical
         Company Limited
7200
55.56
  
Manufacturing of synthetic fibres, resin and plastics, intermediate petrochemical products and petroleum products
             
   
Sinopec Kantons Holdings Limited
HKD 104
72.34
  
Trading of crude oil and petroleum products
   
    Sinopec Wuhan Petroleum Group
         Company Limited (i)
147
46.25
  
Marketing and distribution of refined petroleum products
             
   
    Sinopec Yizheng Chemical Fibre
         Company Limited (i)
4000
42.00
  
Production and sale of polyester chips and polyester fibres
             
   
    China International United Petroleum
        and Chemical Company Limited
3,040
100.00
  
Trading of crude oil and petrochemical products
   
Sinopec (Hong Kong) Limited
HKD 5,477
100.00
  
Trading of crude oil and petrochemical products
 
(b)
Subsidiaries established by the Group:
        
   
    Sinopec Shell (Jiangsu) Petroleum
        Marketing Company Limited
830
60.00
  
Marketing and distribution of refined petroleum products
   
    BP Sinopec (Zhejiang) Petroleum
        Company Limited
800
60.00
  
Marketing and distribution of refined petroleum products
   
    Sinopec Qingdao Refining and
        Chemical Company Limited
800
85.00
  
Manufacturing of intermediate petrochemical products and petroleum products
   
Sinopec Senmei (Fujian) Petroleum Ltd.
1,840
55.00
  
Marketing and distribution of refined petroleum products
 
(c)
Subsidiaries acquired through business combination under common control:
    
   
    Sinopec Zhongyuan Petrochemical
        Company Limited
2,400
93.51
  
Manufacturing of chemical products
   
    Sinopec Hainan Refining and Chemical
        Company Limited
3,986
75.00
  
Manufacturing of intermediate petrochemical products and petroleum products
 
 
 
(i)
The Group consolidated the financial statements of the entity because the Group controlled the board of this entity and had the power to govern its financial and operating policies.
 
 

 
79
 

 
48
COMMITMENTS
   
 
Operating lease commitments
 
The Group and the Company lease land and buildings, service stations and other equipment through non-cancellable operating leases. These operating leases do not contain provisions for contingent lease rentals. None of the rental agreements contain escalation provisions that may require higher future rental payments.
   
 
At 30 June 2008, the future minimum lease payments of the Group and the Company under operating leases are as follows:
 
   
The Group
The Company
   
At 30 June
At 31 December
At 30 June
At 31 December
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
 
Within one year
5,159
4,620
5,051
4,373
 
Between one and two years
5,072
4,497
4,974
4,365
 
Between two and three years
4,890
4,477
4,823
4,351
 
Between three and four years
4,818
4,407
4,789
4,292
 
Between four and five years
4,795
4,465
4,771
4,355
 
After five years
114,364
119,726
114,228
116,590
 
Total
139,098
142,192
138,636
138,326
 
 
Capital commitments
 
At 30 June 2008 and 31 December 2007, the capital commitments are as follows:
 
 
   
The Group
The Company
   
At 30 June
At 31 December
At 30 June
At 31 December
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
 
Authorised and contracted for
122,056
130,816
110,496
118,506
 
Authorised but not contracted for
105,490
114,854
96,350
83,626
 
Total
227,546
245,670
206,846
202,132
 
 
 
These capital commitments relate to oil and gas exploration and development, refining and petrochemical production capacity expansion projects and the construction of service stations and oil depots.
   
 
Exploration and production licenses
 
Exploration licenses for exploration activities are registered with the Ministry of Land and Resources. The maximum term of the Group’s exploration licenses is 7 years, and may be renewed twice within 30 days prior to expiration of the original term with each renewal being for a two-year term. The Group is obligated to make progressive annual minimum exploration investment relating to the exploration blocks in respect of which the license is issued. The Ministry of Land and Resources also issues production licenses to the Group on the basis of the reserve reports approved by relevant authorities. The maximum term of a full production license is 30 years unless a special dispensation is given by the State Council. The maximum term of the production licenses issued to the Group is 80 years as a special dispensation was given by the State Council. The Group’s production license is renewable upon application by the Group 30 days prior to expiration.
   
 
The Group is required to make payments of exploration license fees and production right usage fees to the Ministry of Land and Resources annually which are expensed as incurred. Payments incurred were approximately RMB 210 million for the six-month period ended 30 June 2008 (2007: RMB 303 million).
   
 
Estimated future annual payments are as follows:
 
   
The Group
The Company
   
At 30 June
At 31 December
At 30 June
At 31 December
   
2008
2007
2008
2007
   
RMB millions
RMB millions
RMB millions
RMB millions
           
 
Within one year­
168
218
168
218
 
Between one and two years
98
150
98
150
 
Between two and three years
42
66
42
66
 
Between three and four years
21
20
21
20
 
Between four and five years
19
19
19
19
 
Thereafter
696
656
696
656
 
Total
1,044
1,129
1,044
1,129
 
 
 
The implementation of commitments in previous period and the Group’s commitments did not have material discrepancy.
 

 
80
 

 
49
CONTINGENT LIABILITIES
 
(a)
The Company has been advised by its PRC lawyers that, except for liabilities constituting or arising out of or relating to the business assumed by the Company in the Reorganisation, no other liabilities were assumed by the Company, and the Company is not jointly and severally liable for other debts and obligations incurred by Sinopec Group Company prior to the Reorganisation.
     
 
(b)
At 30 June 2008, guarantees given by the Group and the Company to banks in respect of banking facilities granted to the parties below are as follows:
 
 
     
The Group
The Company
     
At 30 June
At 31 December
At 30 June
At 31 December
     
2008
2007
2008
2007
     
RMB millions
RMB millions
RMB millions
RMB millions
             
   
Subsidiaries
—
—
2,228
2,361
   
Associates and jointly controlled entities
9,838
9,812
9,618
9,618
   
Total
9,838
9,812
11,846
11,979
             
             
    The Group monitors the conditions that are subject to the guarantees to identify whether it is probable that a loss has occurred, and recognises any such losses under guarantees when those losses are estimable. At 30 June 2008 and 31 December 2007, it is not probable that the Group will be required to make payments under the guarantees. Thus no liability has been accrued for a loss related to the Group’s obligation under these guarantee arrangements.
 
 
     
 
Environmental contingencies
  
 
Under existing legislation, management believes that there are no probable liabilities that will have a material adverse effect on the financial position or operating results of the Group. The PRC government, however, has moved, and may move further towards more rigorous enforcement of applicable laws, and towards the adoption of more stringent environmental standards. Environmental liabilities are subject to considerable uncertainties which affect the Group’s ability to estimate the ultimate cost of remediation efforts. These uncertainties include i) the exact nature and extent of the contamination at various sites including, but not limited to refineries, oil fields, service stations, terminals and land development areas, whether operating, closed or sold, ii) the extent of required cleanup efforts, iii) varying costs of alternative remediation strategies, iv) changes in environmental remediation requirements, and v) the identification of new remediation sites. The amount of such future cost is indeterminable due to such factors as the unknown magnitude of possible contamination and the unknown timing and extent of the corrective actions that may be required. Accordingly, the outcome of environmental liabilities under proposed or future environmental legislation cannot reasonably be estimated at present, and could be material. The Group paid normal routine pollutant discharge fees of approximately RMB 1,113 million for the six-month period ended 30 June 2008 (2007: RMB 1,098 million).
     
 
Legal contingencies
  
 
The Group is a defendant in certain lawsuits as well as the named party in other proceedings arising in the ordinary course of business. While the outcomes of such contingencies, lawsuits or other proceedings cannot be determined at present, management believes that any resulting liabilities will not have a material adverse effect on the financial position or operating results of the Group.
     
50
SEGMENT REPORTING
  
 
The Group has five operating segments as follows:
  
     
 
(i)
Exploration and production – which explores and develops oil fields, produces crude oil and natural gas and sells such products to the refining segment of the Group and external customers.
     
 
(ii)
Refining – which processes and purifies crude oil, which is sourced from the exploration and production segment of the Group and external suppliers, and manufactures and sells petroleum products to the chemicals and marketing and distribution segments of the Group and external customers.
     
 
(iii)
Marketing and distribution – which owns and operates oil depots and service stations in the PRC, and distributes and sells refined petroleum products (mainly gasoline and diesel) in the PRC through wholesale and retail sales networks.
     
 
(iv)
Chemicals – which manufactures and sells petrochemical products, derivative petrochemical products and other chemical products to external customers.
     
 
(v)
Others – which largely comprise the trading activities of the import and export companies of the Group and research and development undertaken by other subsidiaries.
     
 
The segments were determined primarily because the Group manages its exploration and production, refining, marketing and distribution, chemicals, and others businesses separately. The reportable segments are each managed separately because they manufacture and/or distribute distinct products with different production processes and due to their distinct operating and gross margin characteristics. In view of the fact that the Company and its subsidiaries operate mainly in the PRC, no geographical segment information is presented.
   
 
The Group evaluates the performance and allocates resources to its operating segments on an operating income basis, without considering the effects of finance costs or investment income. The accounting policies of the Group’s segments are the same as those described in the principal accounting policies (Note 3). Corporate administrative costs and assets are not allocated to the operating segments; instead, operating segments are billed for direct corporate services. Inter-segment transfer pricing is based on cost plus an appropriate margin, as specified by the Group’s policy.
 

 
81
 

 
50
SEGMENT REPORTING (Continued)
 
Reportable information on the Group’s operating segments is as follows:
 
 
 
 
         
Six-month periods ended 30 June
         
2008
RMB millions
2007
RMB millions
 
Income from principal operations
      
 
Exploration and production
          
   
External sales
  
13,883
8,758
   
Inter-segment sales
  
76,314
48,260
       
90,197
57,018
 
Refining
          
   
External sales
    
70,478
53,208
   
Inter-segment sales
    
319,384
252,109
         
389,862
305,317
 
Marketing and distribution
        
   
External sales
    
388,801
307,083
   
Inter-segment sales
    
1,678
1,240
         
390,479
308,323
 
Chemicals
          
   
External sales
    
115,363
104,598
   
Inter-segment sales
    
13,817
7,330
         
129,180
111,928
 
Others
          
   
External sales
    
133,904
77,714
   
Inter-segment sales
    
277,064
124,424
         
410,968
202,138
 
Elimination of inter-segment sales
  
(688,257)
(433,363)
             
 
Income from principal operations
  
722,429
551,361
 
Income from other operations
      
   
Exploration and production
    
6,462
5,706
   
Refining
    
2,338
2,577
   
Marketing and distribution
    
460
224
   
Chemicals
    
2,825
3,792
   
Others
    
269
210
   
Income from other operations
  
12,354 
12,509 
         
 
Consolidated operating income
  
734,783
563,870
         
 
Operating profit/(loss)
      
 
By segment
          
   
Exploration and production
    
28,546
22,740
   
Refining
    
(73,879)
5,783
   
Marketing and distribution
    
16,782
17,143
   
Chemicals
    
4,477
8,629
   
Others
    
(685)
(233)
 
Total segment operating (loss)/profit
  
(24,759)
54,062
 
Financial expenses
      
(3,658)
(2,760)
 
Fair value gain/(loss)
      
2,956
(897)
 
Investment income
      
1,677
2,880
 
Operating (loss)/profit
      
(23,784)
53,285
 
Add: Non-operating income
      
33,765
169
 
Less: Non-operating expenses
      
465
753
 
Profit before taxation
      
9,516
52,701
 
Less: Income tax expense
      
101
16,127
 
Net profit
      
9,415
36,574
 
 
Assets and liabilities dedicated to a particular segment’s operations are included in that segment’s total assets and liabilities. Assets which benefit more than one segment or are considered to be corporate assets are not allocated. ÒUnallocated assetsÓ consists primarily of cash and cash equivalents, equity investments and deferred tax assets. ÒUnallocated liabilitiesÓ consists primarily of bank loans, income tax payable and deferred tax liabilities.
   
 
Investments in and share of profits from associates and jointly controlled entities are included in the segments in which the associates and jointly controlled entities operate. Information on associates and jointly controlled entities is included in Note 11. Additions to long-lived assets by operating segment are included in Notes 12 and 13.
 

 
82
 

 
50
SEGMENT REPORTING (Continued)
 
 
   
At 30 June
At 31 December
   
2008
2007
   
RMB millions
RMB millions
       
 
Assets
    
 
Segment assets
    
   
Exploration and production
199,823
184,942
   
Refining
241,870
192,687
   
Marketing and distribution
139,812
125,596
   
Chemicals
119,333
121,482
   
Others
52,422
36,608
 
Total segment assets
753,260
661,315
 
Investment in associates and jointly controlled entities
 
 
   
Exploration and production
1,503
1,080
   
Refining
5,978
3,915
   
Marketing and distribution
5,487
5,355
   
Chemicals
11,190
12,176
   
Others
5,343
7,062
 
Aggregate investment in associates and jointly controlled entities
29,501
29,588
 
Unallocated assets
37,795
27,669
   
 
 
 
Total assets
820,556
718,572
 
Liabilities
 
 
 
Segment liabilities
 
 
   
Exploration and production
46,551
44,816
   
Refining
66,468
44,593
   
Marketing and distribution
34,007
29,668
   
Chemicals
19,222
20,454
   
Others
89,492
51,783
 
Total segment liabilities
255,740
191,314
 
Unallocated liabilities
233,517
200,911
 
Total liabilities
489,257
392,225
 
 
 
Segment capital expenditure is the total cost incurred during the period to acquire segment assets (including fixed assets, construction in progress and intangible assets) that are expected to be used for more than one year.
 
 
   
Six-month periods ended 30 June
   
2008
2007
   
RMB millions
RMB millions
       
 
Capital expenditure for the period
    
   
Exploration and production
20,981
18,277
   
Refining
3,849
6,292
   
Marketing and distribution
4,548
4,922
   
Chemicals
5,907
3,296
   
Others
1,251
1,071
     
36,536
33,858
 
Depreciation, depletion and amortisation for the period
    
   
Exploration and production
9,532
8,191
   
Refining
4,444
4,298
   
Marketing and distribution
2,312
2,074
   
Chemicals
4,254
4,607
   
Others
572
416
     
21,114
19,586
 
Impairment losses on long-lived assets for the period
    
   
Exploration and production
—
25
   
Refining
—
923
   
Marketing and distribution
130
571
   
Chemicals
3
123
     
133
1,642
 
 

 
83
 

 
51
FINANCIAL INSTRUMENTS
  
     
 
Overview
  
 
Financial assets of the Group include cash at bank, equity investments, trade accounts receivable, bills receivable, advance payments and other receivables. Financial liabilities of the Group include short-term and long-term loans, trade accounts payable, bills payable, debentures payable and advances from third parties. The Group has no derivative instruments that are designated and qualified as hedging instruments at 30 June 2008 and 31 December 2007.
     
 
The Group has exposure to the following risks from its use of financial instruments:
     
 
|
credit risk;
     
 
|
liquidity risk; and
     
 
|
market risk.
     
 
The Board of Directors has overall responsibility for the establishment, oversight of the Group’s risk management framework, and developing and monitoring the Group’s risk management policies.
     
 
The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. Internal audit department undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Group’s audit committee.
     
 
Credit risk
  
 
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s deposits placed with financial institutions and receivables from customers. To limit exposure to credit risk relating to deposits, the Group primarily places cash deposits only with large financial institution in the PRC with acceptable credit ratings. The majority of the Group’s trade accounts receivable relate to sales of petroleum and chemical products to related parties and third parties operating in the petroleum and chemical industries. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade accounts receivable. The Group maintains an impairment loss for doubtful accounts and actual losses have been within management’s expectations. No single customer accounted for greater than 10% of total trade accounts receivable.
     
 
The carrying amounts of cash at bank, time deposits with financial institutions, trade accounts and bills receivables, and other current assets, represent the Group’s maximum exposure to credit risk in relation to financial assets.
     
 
Liquidity risk
  
 
Liquidity risk is the risk that the Group will not be able to meet its financial obligation. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed capital conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group prepares monthly cash flow budget to ensure that they will always have sufficient liquidity to meet its financial obligation as they fall due. The Group arranges and negotiates financing with financial institutions and maintains a certain level of standby credit facilities to reduce the liquidity risk.
     
 
At 30 June 2008, the Group had standby credit facilities with several PRC financial institutions which allowed the Group to borrow up to RMB 172,000 million (2007: RMB 164,500 million) on an unsecured basis, at a weighted average interest rate of 5.247 % (2007: 5.619%). At 30 June 2008, the Group’s outstanding borrowings under these facilities were RMB 21,519 million (2007: RMB 13,269 million) and were included in short-term loans.
 
 

 
84
 

 
51
FINANCIAL INSTRUMENTS (Continued)
   
 
Liquidity risk (Continued)
 
The following table sets out the remaining contractual maturities at the balance sheet date of the Group’s and the Company’s financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on prevailing rates current at the balance sheet date) and the earliest date the Group and the Company would be required to repay:
   
 
The Group
 
   
At 30 June 2008
   
Carrying
amount
RMB millions
Total
contractual
undiscounted
cash flow
RMB millions
Within 1 year
or on demand
RMB millions
More than 1
year but less
than 2 years
RMB millions
More than 2
years but less
than 5 years
RMB millions
More than
5 years
RMB millions
               
 
Short-term loans
67,229
68,821
68,821
—
—
—
 
Current portion of non-current liabilities
18,785
19,469
19,469
—
—
—
 
Long-term loans
75,920
83,372
2,410
15,585
23,769
41,608
 
Debentures payable
62,479
83,541
1,723
1,724
13,441
66,653
   
224,413
255,203
92,423
17,309
37,210
108,261
 
 
   
At 31 December 2007
   
Carrying
amount
RMB millions
Total
contractual
undiscounted
cash flow
RMB millions
Within 1 year
or on demand
RMB millions
More than 1
year but less
than 2 years
RMB millions
More than 2
years but less
than 5 years
RMB millions
More than
5 years
RMB millions
 
 
 
 
               
 
Short-term loans
36,954
38,058
38,058
—
—
—
 
Current portion of non-current liabilities
13,466
14,095
14,095
—
—
—
 
Short-term debentures payable
10,074
10,201
10,201
—
—
—
 
Long-term loans
77,708
84,854
2,422
21,551
20,151
40,730
 
Debentures payable
42,606
54,340
1,484
1,484
12,912
38,460
   
180,808
201,548
66,260
23,035
33,063
79,190
 
 
 
The Company
 
 
   
At 30 June 2008
   
Carrying
amount
RMB millions
Total
contractual
undiscounted
cash flow
RMB millions
Within 1 year
or on demand
RMB millions
More than 1
year but less
than 2 years
RMB millions
More than 2
years but less
than 5 years
RMB millions
More than
5 years
RMB millions
 
 
 
 
               
 
Short-term loans
20,001
20,562
20,562
—
—
—
 
Current portion of non-current liabilities
18,033
18,700
18,700
—
—
—
 
Long-term loans
55,554
58,684
1,201
10,024
10,600
36,859
 
Debentures payable
62,479
83,541
1,723
1,724
13,441
66,653
   
156,067
181,487
42,186
11,748
24,041
103,512
 
 
 
   
At 31 December 2007
   
Carrying
amount
RMB millions
Total
Total
contractual
undiscounted
cash flow
RMB millions
Within 1 year
or on demand
RMB millions
More than 1
year but less
than 2 years
RMB millions
More than 2
years but less
than 5 years
RMB millions
More than
5 years
RMB millions
   
   
   
   
   
               
 
Short-term loans
21,952
22,634
22,634
—
—
—
 
Current portion of non-current liabilities
12,813
13,403
13,403
—
—
—
 
Short-term debentures payable
10,074
10,201
10,201
—
—
—
 
Long-term loans
67,055
71,312
1,783
18,725
13,824
36,980
 
Debentures payable
42,606
54,340
1,484
1,484
12,912
38,460
   
154,500
171,890
49,505
20,209
26,736
75,440
 
 

 
85
 

 
51
FINANCIAL INSTRUMENTS (Continued)
  
     
 
Market risk
  
 
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.
     
 
(a)
Currency risk
   
Currency risk arises on financial instruments that are denominated in a currency other than the functional currency in which they are measured. The Group’s currency risk exposure primarily relates to short-term and long-term loans denominated in US Dollars, Japanese Yen and Hong Kong Dollars.
     
   
The Group has no hedging policy on foreign currency balances, and principally reduces the currency risk by monitoring the level of foreign currency.
     
   
Included in short-term and long-term loans of the Group are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:
 
 
   
The Group
The Company
   
At 30 June
At 31 December
At 30 June
At 31 December
   
2008
2007
2008
2007
   
millions
millions
millions
millions
           
 
US Dollars
USD 5,620
USD 780
USD 558
USD 121
 
Japanese Yen
JPY 30,631
JPY 33,494
JPY 30,631
JPY 33,494
 
Hong Kong Dollars
HKD 12,061
HKD 15,135
HKD 12,011
HKD 15,064
 
 
 
A 5% strengthening of Renminbi against the following currencies at 30 June 2008 and 31 December 2007 would have increased net profit for the period and retained profits of the Group by the amounts shown below. This analysis has been determined assuming that the change in foreign exchange rates had occurred at the balance sheet date and had been applied to the foreign currency balances to which the Group has significant exposure as stated above, and that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 31 December 2007.
 
 
   
The Group
   
At 30 June
At 31 December
   
2008
2007
   
RMB millions
RMB millions
       
 
US Dollars
1,445
191
 
Japanese Yen
74
72
 
Hong Kong Dollars
398
475
 
 
   
Other than the amounts as disclosed above, the amounts of other financial assets and liabilities of the Group are substantially denominated in the functional currency of respective entity of the Group.
     
 
(b)
Interest rate risk
   
The Group’s interest rate risk exposure arises primarily from its short-term and long-term loans. Loans carrying interest at variable rates and at fixed rates expose the Group to cash flow interest rate risk and fair value interest rate risk respectively. The interest rates and terms of repayment of short-term and long-term loans of the Group are disclosed in Note 19 and Note 27, respectively.
     
   
As at 30 June 2008, it is estimated that a general increase/decrease of 100 basis points in variable interest rates, with all other variables held constant, would decrease/increase the Group’s net profit for the year and retained profits by approximately RMB 451 million (for the year ended 31 December 2007: RMB 154 million). This sensitivity analysis has been determined assuming that the change in interest rates had occurred at the balance sheet date and the change was applied to the Group’s loans outstanding at that date with exposure to cash flow interest rate risk. The analysis is performed on the same basis for 31 December 2007.
     
 
Equity price risk
 
The Group is exposed to equity price risk arising from changes in the Company’s own share price to the extent that the Company’s own equity instruments underlie the fair values of derivatives of the Group. At 30 June 2008, the Group is exposed to this risk through the derivative embedded in the Convertible Bonds issued by the Company as disclosed in Note 28.
     
 
At 30 June 2008, it is estimated that an increase of 20% in the Company’s own share price would decrease the Group’s net profit for the period and retained profits by approximately RMB 485 million (for the year ended 31 December 2007: RMB 1,280 million); a decrease of 20% in the Company’s own share price would increase the Group’s net profit for the period and retained profits by approximately RMB 350 million (for the year ended 31 December 2007: RMB 1,285 million). This sensitivity analysis has been determined assuming that the changes in the Company’s own share price had occurred at the balance sheet date and that all other variables remain constant.
 
 

 
86
 

 
51
FINANCIAL INSTRUMENTS (Continued)
   
 
Fair values
 
The fair values of the Group’s financial instruments (other than long-term indebtedness and investment securities) approximate their carrying amounts due to the short-term maturity of these instruments. The fair values of long-term indebtedness are estimated by discounting future cash flows using current market interest rates offered to the Group for debt with substantially the same characteristics and maturities ranging 5.71% to 7.74% (2007: 5.40% to 6.97%). The following table presents the carrying amount and fair value of the Group’s long-term indebtedness other than loans from Sinopec Group Company and fellow subsidiaries at 30 June 2008 and 31 December 2007:
 
   
At 30 June
At 31 December
   
2008
2007
   
RMB millions
RMB millions
       
 
Carrying amount
120,044
96,420
 
Fair value
119,059
95,600
 
 
 
The Group has not developed an internal valuation model necessary to make the estimate of the fair value of loans from Sinopec Group Company and fellow subsidiaries as it is not considered practicable to estimate their fair value because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive based on the Reorganisation of the Group, its existing capital structure and the terms of the borrowings.
   
 
The fair value of available-for-sale financial assets, which amounted to RMB 370 million as at 30 June 2008 (2007: RMB 653 million) was based on quoted market price on a PRC stock exchange. Unquoted other investments in equity securities are individually and in the aggregate not material to the Group’s financial condition or results of operations. There are no listed market prices for such interests in the PRC and, accordingly, a reasonable estimate of fair value could not be made without incurring excessive costs. The Group intends to hold these unquoted equity investments for long term purpose.
   
 
Except for the above items, the financial assets and liabilities of the Group are carried at amounts not materially different from their fair values as at 30 June 2008 and 31 December 2007.
   
52
EXTRAORDINARY GAIN AND LOSS
 
Pursuant to ÒQuestions and answers in the prepayment of information disclosures of companies issuing public shares, No.1 – Extraordinary gain and lossÓ (2007 revised), the extraordinary gains and losses of the Group are as follows:
   
 
   
Six-month periods ended 30 June
   
2008
2007
   
RMB millions
RMB millions
       
 
Extraordinary gain and loss for the period:
    
 
Loss on disposal of fixed assets
23
344
 
Employee reduction expenses
199
150
 
Donations
77
45
 
Gain on disposal of investments
(198)
(581)
 
Other non-operating income and expenses, excluding impairment losses on long-lived assets
2
196
 
Written back of provisions for impairment losses in previous years
(159)
(155)
 
Grants
(33,402)
—
 
Net profit of subsidiaries generated from a business combination involving entities
   under common control before acquisition date
—
(217)
       
   
(33,458)
(218)
 
Tax effect
5,572
—
 
Total
(27,886)
(218)
 
Attributable to:
    
   
Equity shareholders of the Company
(26,784)
(186)
   
Minority interests
(1,102)
(32)
 

 
87
 

 
53
BASIC AND DILUTED EARNINGS PER SHARE
  
 
The calculation of basic earnings per share for the six-month period ended 30 June 2008 is based on the profit attributable to the equity shareholders of the Company of RMB 9,339 million (2007: RMB 35,110 million) and the weighted average number of shares of 86,702,439,000 (2007: 86,702,439,000) in issue during the period.
     
 
The calculation of diluted earnings per share for the six-month period ended 30 June 2008 is based on the profit attributable to equity shareholders of the Company of RMB 6,680 million and the weighted average number of shares of 87,789,799,595 calculated as follows:
     
 
(i)
Profit attributable to equity shareholders of the Company (diluted)
 
     
   
Six-month period
   
ended 30 June
   
2008
   
RMB millions
     
 
Profit attributable to equity shareholders of the Company
9,339
 
After tax effect of finance expenses of the Convertible Bonds
(442)
 
After tax effect of fair value gain on embedded derivative component of the Convertible Bonds
(2,217)
 
Profit attributable to equity shareholders of the Company (diluted)
6,680
 
 
 
(ii)
Weighted average number of shares (diluted)
 
 
   
Six-month period
   
ended 30 June
   
2008
     
 
Weighted average number of shares at 30 June
86,702,439,000
 
Effect of conversion of the Convertible Bonds
1,087,360,595
 
Weighted average number of shares (diluted) at 30 June
87,789,799,595
 
 
 
The calculation of diluted earnings per share excludes the effect of the Bonds with Warrants, since its effect was anti-diluted for the six-month period ended 30 June 2008.
   
 
For the six-month period ended 30 June 2007, diluted earnings per share is calculated on the same basis as basic earnings per share, since the effect of the Convertible Bonds was anti-dilutive for that period.
   
54
NON-ADJUSTING POST BALANCE SHEET EVENTS
 
On 22 August 2008, the board of directors approved the proposal to issue RMB 20 billion corporate bonds in the PRC, subject to the approvals from the relevant PRC regulatory bodies.
 
 
88

 
REPORT OF THE INTERNATIONAL AUDITORS
 
 
To the Shareholders of
China Petroleum & Chemical Corporation
(Established in The People’s Republic of China with limited liability)
 
We have audited the interim financial statements of China Petroleum & Chemical Corporation (the “Company”) set out on pages 90 to 129, which comprise the consolidated balance sheet as at 30 June 2008, and the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash flow statement for the six-month period then ended, and a summary of significant accounting policies and other explanatory notes.
 
DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
The directors of the Company are responsible for the preparation and the true and fair presentation of these interim financial statements in accordance with International Financial Reporting Standards promulgated by the International Accounting Standards Board. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of interim financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
 
AUDITOR’S RESPONSIBILITY
Our responsibility is to express an opinion on these interim financial statements based on our audit. This report is made solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of the report.
 
We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the interim financial statements are free from material misstatement.
 
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the interim financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the interim financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and true and fair presentation of the interim financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the interim financial statements.
 
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OPINION
In our opinion, the interim financial statements give a true and fair view of the state of affairs of the Group as at 30 June 2008 and of the Group’s profit and cash flows for the six-month period then ended in accordance with International Financial Reporting Standards promulgated by the International Accounting Standards Board.
 
 
 
 
 
KPMG
Certified Public Accountants
8th Floor, Prince’s Building
10 Chater Road
Central, Hong Kong
 
22 August 2008
 
 
89
 
 
(B)
INTERIM FINANCIAL STATEMENTS PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”)
 
CONSOLIDATED INCOME STATEMENT
 
for the six-month period ended 30 June 2008
 
(Amounts in millions, except per share data)
 
     
Six-month periods
     
ended 30 June
   
Note
2008
2007
     
RMB
RMB
Turnover and other operating revenues
      
Turnover
3
722,429
551,361
Other operating revenues
4
12,354
12,509
   
734,783
563,870
Other income
5
33,402
—
Operating expenses
      
Purchased crude oil, products and operating supplies and expenses
  
(674,068)
(439,844)
Selling, general and administrative expenses
6
(18,221)
(17,637)
Depreciation, depletion and amortisation
  
(22,435)
(19,470)
Exploration expenses, including dry holes
  
(4,728)
(5,717)
Personnel expenses
7
(12,626)
(10,786)
Employee reduction expenses
8
(199)
(150)
Taxes other than income tax
9
(28,451)
(14,456)
Other operating expenses, net
10
(235)
(2,226)
Total operating expenses
  
(760,963)
(510,286)
         
Operating profit
  
7,222
53,584
Finance costs
      
Interest expense
11
(5,563)
(3,912)
Interest income
  
212
372
Unrealised gain/(loss) on embedded derivative component of the Convertible Bonds
  
2,956
(897)
Foreign exchange loss
  
(367)
(66)
Foreign exchange gain
  
2,060
846
Net finance costs
  
(702)
(3,657)
Investment income
  
319
666
Share of profits less losses from associates and jointly controlled entities
  
1,358
2,214
         
Profit before taxation
  
8,197
52,807
Tax benefit/(expense)
12
136
(14,965)
         
Profit for the period
  
8,333
37,842
Attributable to:
      
Equity shareholders of the Company
  
8,255
36,375
Minority interests
  
78
1,467
         
Profit for the period
  
8,333
37,842
Dividends payable to equity shareholders of the Company attributable to the period:
      
Interim dividend declared after the balance sheet date
13
2,601
4,335
Earnings per share:
14
    
Basic earnings per share
  
  0.10
0.42
Diluted earnings per share
 
  0.06
0.42
 
 
 
 
 
The notes on pages 95 to 129 form part of these interim financial statements.
 
90
 
 
CONSOLIDATED BALANCE SHEET
at 30 June 2008
(Amounts in millions)
 
 
   
At 30 June
At 31 December
 
Note
2008
2007
   
RMB
RMB
Non-current assets
      
Property, plant and equipment
15
378,384
375,142
Construction in progress
16
105,503
95,408
Goodwill
17
15,507
15,490
Interest in associates
18
15,981
16,865
Interest in jointly controlled entities
19
13,520
12,723
Investments
20
2,064
3,194
Deferred tax assets
25
18,278
10,439
Lease prepayments
  
9,730
8,224
Long-term prepayments and other assets
21
10,792
10,124
Total non-current assets
  
569,759
547,609
Current assets
      
Cash and cash equivalents
  
8,466
7,696
Time deposits with financial institutions
  
1,308
668
Trade accounts receivable, net
22
43,084
22,947
Bills receivable
22
8,938
12,851
Inventories
23
163,474
116,032
Prepaid expenses and other current assets
24
43,440
24,922
Total current assets
  
268,710
185,116
Current liabilities
      
Short-term debts
26
64,758
44,654
Loans from Sinopec Group Company and fellow subsidiaries
26
21,256
15,840
Trade accounts payable
27
126,669
93,049
Bills payable
27
17,563
12,162
Accrued expenses and other payables
28
113,093
89,171
Income tax payable
  
5,070
10,479
Total current liabilities
  
348,409
265,355
       
Net current liabilities
  
(79,699)
(80,239)
       
Total assets less current liabilities
  
490,060
467,370
Non-current liabilities
      
Long-term debts
26
101,529
83,134
Loans from Sinopec Group Company and fellow subsidiaries
26
36,870
37,180
Deferred tax liabilities
25
5,372
5,636
Other liabilities
29
9,661
8,662
Total non-current liabilities
  
153,432
134,612
       
   
336,628
332,758
Equity
      
Share capital
30
86,702
86,702
Reserves
  
224,169
220,731
Total equity attributable to equity shareholders of the Company
  
310,871
307,433
Minority interests
  
25,757
25,325
Total equity
  
336,628
332,758
       
 
Approved and authorised for issue by the board of directors on 22 August 2008.
 
 
Su Shulin
Wang Tianpu
Dai Houliang
Chairman
Director, President
Director, Senior Vice President
   
and Chief Financial Officer
 
 
 
The notes on pages 95 to 129 form part of these interim financial statements.
 
 
91
 
 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the six-month period ended 30 June 2008
(Amounts in millions)
 
 
 
 
 
 
 
Share
Capital
RMB
 
 
 
 
Capital
Reserve
RMB
 
 
 
 
Share
Premium
RMB
 
 
 
 
Revaluation
reserve
RMB
 
 
 
Statutory
surplus
reserve
RMB
 
 
 
Discretionary
surplus
reserve
RMB
 
 
 
 
Other
reserves
RMB
 
 
 
 
Retained
earnings
RMB
Total equity
attributable
to equity shareholders
of the
Company
RMB
 
 
 
 
Minority
interests
RMB
 
 
 
 
Total
equity
RMB
Balance at 1 January 2007
86,702
(21,590)
18,072
24,752
32,094
27,000
1,758
95,546
264,334
22,323
286,657
Net income recognised directly in equity:
                      
Unrealised gain for the change in fair value of available-for-sale financial assets, net of deferred tax
—
—
—
—
—
—
170
—
170
127
297
Effect of change in tax rate (Note 25(i))
—
—
—
—
—
—
(54)
—
(54)
17
(37)
Profit for the period
—
—
—
—
—
—
—
36,375
36,375
1,467
37,842
Total recognised income for the period
—
—
—
—
—
—
116
36,375
34,491
1,611
38,102
Final dividend for 2006 (Note 13)
—
—
—
—
—
—
—
(9,537)
(9,537)
—
(9,537)
Adjustment to statutory surplus reserve (Note (a))
—
—
—
—
235
—
—
(235)
—
—
—
Appropriation (Note (a))
—
—
—
—
3,207
—
—
(3,207)
—
—
—
Revaluation surplus realised
—
—
—
(150)
—
—
—
150
—
—
—
Realisation of deferred tax on lease prepayments
—
—
—
—
—
—
(4)
4
—
—
—
Transfer from retained earnings to other reserves
—
—
—
—
—
—
185
(185)
—
—
—
Distributions to minority interests net of contributions
—
—
—
—
—
—
—
—
—
(25)
(25)
Balance at 30 June 2007
86,702
(21,590)
18,072
24,602
35,536
27,000
2,055
118,911
291,288
23,909
315,197
 
 
 
 
 
Share
Capital
RMB
Capital
Reserve
RMB
Share
Premium
RMB
Revaluation
reserve
RMB
Statutory
surplus
reserve
RMB
Discretionary
surplus
reserve
RMB
Other
reserves
RMB
Retained
earnings
RMB
Total equity
attributable
to equity shareholders
of the
Company
RMB
Minority
interests
RMB
Total
equity
RMB
                       
                       
Balance at 1 January 2008
86,702
(22,652)
18,072
24,114
37,797
27,000
3,100
133,300
307,433
25,325
332,758
Net income/(loss) recognised directly in equity:
                      
Unrealised loss for the change in fair value of available-for-sale financial assets, net of deferred tax
—
—
—
—
—
—
(1,666)
—
(1,666)
(69)
(1,735)
Profit for the period
—
—
—
—
—
—
—
8,255
8,255
78
8,333
Total recognised income and expenses for the period
—
—
—
—
—
—
(1,666)
8,255
6,589
9
6,598
Issuance of the Bonds with Warrants (Note 26(g))
—
6,879
—
—
—
—
—
—
6,879
—
6,879
Final dividend for 2007 (Note 13)
—
—
—
—
—
—
—
(9,971)
(9,971)
—
(9,971)
Appropriation (Note (a))
—
—
—
—
595
—
—
(595)
—
—
—
Revaluation surplus realised
—
—
—
(122)
—
—
—
122
—
—
—
Realisation of deferred tax on lease prepayments
—
—
—
—
—
—
(4)
4
—
—
—
Distribution to Sinopec Group Company (Note (e))
—
(59)
—
—
—
—
—
—
(59)
—
(59)
Contributions from minority interests net of distributions
—
—
—
—
—
—
—
—
—
423
423
Balance at 30 June 2008
86,702
(15,832)
18,072
23,992
38,392
27,000
1,430
131,115
310,871
25,757
336,628
 
Notes:
 
(a)
According to the Company’s Articles of Association, the Company is required to transfer 10% of its net profit in accordance with the PRC Accounting Standards for Business Enterprises (“ASBE”) to statutory surplus reserve until the reserve balance reaches 50% of the registered capital. Before 1 January 2007, the net profit for this purpose was determined in accordance with the PRC Accounting Rules and Regulations and RMB 3,207 million was transferred to this reserve for the six month period ended 30 June 2007. On 1 January 2007, the group adopted the ASBE issued by the Ministry of Finance of the PRC (the “MOF”) on 15 February 2006, which resulted in certain PRC accounting policies being changed and applied retrospectively. The statutory surplus reserve, amounting to RMB 235 million, has been adjusted accordingly. The adjustment to the statutory surplus reserve was reflected as a movement during the six-month period ended 30 June 2007.
   
 
The transfer to this reserve must be made before distribution of a dividend to shareholders. Statutory surplus reserve can be used to make good previous years’ losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholdings or by increasing the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital.
   
 
During the six-month period ended 30 June 2008, the Company transferred RMB 595 million, being 10% of the current period’s net profit determined in accordance with the ASBE, to this reserve.
   
(b)
The usage of the discretionary surplus reserve is similar to that of statutory surplus reserve.
   
(c)
According to the Company’s Articles of Association, the amount of retained earnings available for distribution to equity shareholders of the Company is the lower of the amount determined in accordance with ASBE and the amount determined in accordance with International Financial Reporting Standards (“IFRS”). At 30 June 2008, the amount of retained earnings available for distribution was RMB 64,144 million (2007: RMB 68,758 million), being the amount determined in accordance with ASBE. Interim dividend of RMB 2,601 million (2007: RMB 4,335 million) proposed after the balance sheet date has not been recognised as a liability at the balance sheet date.
   
(d)
The capital reserve represents (i) the difference between the total amount of the par value of shares issued and the amount of the net assets transferred from Sinopec Group Company in connection with the Reorganisation (ii) the difference between the considerations paid over the amount of the net assets of certain entities and related operations acquired from Sinopec Group Company and (iii) the equity component of the Bonds with Warrants.
   
(e)
Pursuant to the resolution passed at the Directors’ meeting on 26 June 2008, the Group acquired certain assets and liabilities, related to the oilfield downhole operation (the “Downhole Assets”) from Sinopec Group Company. The difference between the consideration paid over the amount of the net asset acquired from the Downhole Assets was treated as an equity transaction.
   
(f)
The application of the share premium account is governed by Sections 168 and 169 of the PRC Company Law.
   
 
 
The notes on pages 95 to 129 form part of these interim financial statements.
 
 
92
 
 
CONSOLIDATED CASH FLOW STATEMENT
for the six-month period ended 30 June 2008
(Amounts in millions)
 
   
Six-month periods
   
ended 30 June
 
Note
2008
2007
   
RMB
RMB
       
Net cash generated from operating activities
(a)
2,640
62,295
Investing activities
      
Capital expenditure
  
(41,837)
(35,707)
Exploratory wells expenditure
  
(2,907)
(4,320)
Purchase of investments, investments in associates and subsidiaries, net of cash acquired
  
(2,675)
(4,653)
Proceeds from disposal of investments and investments in associates
  
1,049
758
Proceeds from disposal of property, plant and equipment
  
109
125
Purchase of time deposits with financial institutions
  
(1,106)
(3,178)
Proceeds from maturity of time deposits with financial institutions
  
466
510
Net cash used in investing activities
  
(46,901)
(46,465)
Financing activities
      
Proceeds of issuance of convertible bonds, net of issuance costs
  
29,850
11,368
Proceeds of issuance of corporate bonds
  
—
5,000
Proceeds from bank and other loans
  
431,302
316,769
Repayments of corporate bonds
  
(10,000)
(10,000)
Repayments of bank and other loans
  
(396,247)
(323,035)
Distributions to minority interests
  
(642)
(219)
Contributions from minority interests
  
1,065
194
Dividend paid
  
(9,971)
(9,537)
Distributions to Sinopec Group Company
  
(285)
(3,500)
Net cash generated from/(used in) financing activities
  
45,072
(12,960)
       
Net increase in cash and cash equivalents
  
811
2,870
Cash and cash equivalents at 1 January
  
7,696
7,063
Effect of foreign exchange rate changes
  
(41)
(7)
Cash and cash equivalents at 30 June
  
8,466
9,926
 
 
 
 
 
The notes on pages 95 to 129 form part of these interim financial statements.
 
 
93
 
 
(a)
Reconciliation of profit before taxation to net cash generated from operating activities
 
 
Six-month periods
ended 30 June
 
 
2008
RMB
2007
RMB
 
Operating activities
    
Profit before taxation
8,197
52,807
Adjustments for:
    
Depreciation, depletion and amortisation
22,435
19,470
Dry hole costs
1,156
2,157
Share of profits less losses from associates and jointly controlled entities
(1,358)
(2,214)
Investment income
(319)
(666)
Interest income
(212)
(372)
Interest expense
5,563
3,912
Unrealised foreign exchange gain
(1,985)
(629)
(Gain)/loss on disposal of property, plant and equipment, net
(97)
290
Impairment losses on long-lived assets
133
1,642
Unrealised (gain)/loss on embedded derivative component of convertible bonds
(2,956)
897
Operating profit before changes in working capital
30,557
77,294
Increase in trade accounts receivable
(19,278)
(9,735)
Increase/(decrease) in bills receivable
3,914
(445)
Increase in inventories
(47,420)
(10,997)
Increase in prepaid expenses and other current assets
(15,257)
(1,164)
Increase in lease prepayments
(1,506)
(3,084)
Decrease in long-term prepayments and other assets
1,623
2,906
Increase in trade accounts payable
32,768
17,163
Increase/(decrease) in bills payable
5,401
(1,467)
Increase in accrued expenses and other payables
27,902
9,948
Increase in other liabilities
472
372
Cash generated from operations
19,176
80,791
Interest received
197
370
Interest paid
(4,599)
(3,747)
Investment and dividend income received
1,192
1,668
Income tax paid
(13,326)
(16,787)
Net cash generated from operating activities
2,640
62,295
 
 
 
 
The notes on pages 95 to 129 form part of these interim financial statements.
 
 
94
 
 
NOTES ON THE INTERIM FINANCIAL STATEMENTS
for the six-month period ended 30 June 2008
 
1
PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PREPARATION
   
 
Principal activities
 
China Petroleum & Chemical Corporation (the “Company”) is an energy and chemical company that, through its subsidiaries (hereinafter collectively referred to as the “Group”), engages in fully integrated oil and gas and chemical operations in the People’s Republic of China (the “PRC”). Oil and gas operations consist of exploring for, developing and producing crude oil and natural gas; transporting crude oil, natural gas and products by pipelines; refining crude oil into finished petroleum products; and marketing crude oil, natural gas and refined petroleum products. Chemical operations include the manufacture and marketing of a wide range of chemicals for industrial uses.
   
 
Organisation
 
The Company was established in the PRC on 25 February 2000 as a joint stock limited company as part of the reorganisation (the “Reorganisation”) of China Petrochemical Corporation (“Sinopec Group Company”), the ultimate holding company of the Group and a ministry-level enterprise under the direct supervision of the State Council of the PRC. Prior to the incorporation of the Company, the oil and gas and chemical operations of the Group were carried on by oil administration bureaux, petrochemical and refining production enterprises and sales and marketing companies of Sinopec Group Company.
   
 
As part of the Reorganisation, certain of Sinopec Group Company’s core oil and gas and chemical operations and businesses together with the related assets and liabilities were transferred to the Company. On 25 February 2000, in consideration for Sinopec Group Company transferring such oil and gas and chemical operations and businesses and the related assets and liabilities to the Company, the Company issued 68.8 billion domestic state-owned ordinary shares with a par value of RMB 1.00 each to Sinopec Group Company. The shares issued to Sinopec Group Company on 25 February 2000 represented the entire registered and issued share capital of the Company at that date. The oil and gas and chemical operations and businesses transferred to the Company related to (i) the exploration, development and production of crude oil and natural gas, (ii) the refining, transportation, storage and marketing of crude oil and petroleum products, and (iii) the production and sale of chemicals (collectively the “Predecessor Operations”).
   
 
Basis of preparation
 
Pursuant to the resolution passed at the Directors’ meeting on 28 December 2007, the Group acquired the controlling equity interests of Zhanjiang Dongxing Petrochemical Company Limited, Sinopec Hangzhou Oil Refinery Plant, Yangzhou Petrochemical Plant, Jiangsu Taizhou Petrochemical Plant and Sinopec Qingjiang Petrochemical Company Limited (collectively “Refinery Plants”) from Sinopec Group Company, for total cash consideration of RMB 2,468 million (hereinafter referred to as the “Acquisition of Refinery Plants”).
   
 
As the Group and Refinery Plants are under the common control of Sinopec Group Company, the Acquisition of Refinery Plants has been reflected in the accompanying consolidated financial statements as combination of entities under common control in a manner similar to a pooling-of-interests. Accordingly, the assets and liabilities of Refinery Plants have been accounted for at historical cost and the consolidated financial statements of the Company prior to the acquisitions have been restated to include the results of operations and the assets and liabilities of Refinery Plants on a combined basis. The difference between the consideration paid over the amount of the net asset of Refinery Plants was accounted for as an equity transaction.
   
 
The results of operation previously reported by the Group for the six-month period ended 30 June 2007 have been restated to include the results of operations of Refinery Plants on a combined basis as set out below.
 
   
The Group,
    
   
as previously
Refinery
The Group,
   
reported
Plants
as restated
   
RMB
RMB
RMB
   
millions
millions
millions
 
Operating revenue
566,830
(2,960)*
563,870
 
Profit attributable to the equity shareholders of the Company
36,190
185
36,375
 
Basic and diluted earnings per share (RMB)
0.42
—
0.42
 
 
  *
Refinery Plants sold its petroleum products primarily to the Group as well as purchasing crude oil primarily from the Group. These transactions between the Group and Refinery Plants have been eliminated on combination, resulting in a reduction in the operating revenue. All other significant balances and transactions between the Group and Refinery Plants have been eliminated on combination.
 
 
The accompanying interim financial statements have been prepared in accordance with IFRS promulgated by the International Accounting Standards Board (“IASB”). IFRS includes International Accounting Standards (“IAS”) and related interpretations. These interim financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited. A summary of the principal accounting policies adopted by the Group are set out in Note 2. These accounting policies have been consistently applied by the Group.
   
 
The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (Note 38).
   
 
The accompanying interim financial statements are prepared on the historical cost basis as modified by the revaluation of certain property, plant and equipment (Note 2(f)) and the remeasurement of available-for-sale financial assets (Note 2(k)) and derivative component of the convertible bonds (Note 2(o)) to their fair values.
   
 
The preparation of the interim financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim financial statements and the reported amounts of revenues and expenses during the period. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
   
 
 
95
 
 
1
PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PREPARATION (Continued)
   
 
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
     
 
Key assumptions and estimation made by management in the application of IFRS that have significant effect on the interim financial statements and have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the following financial year are disclosed in Note 37.
     
2
PRINCIPAL ACCOUNTING POLICIES
     
 
(a)
Basis of consolidation
   
The consolidated interim financial statements comprise the Company and its subsidiaries, and the Group’s interest in associates and jointly controlled entities.
     
   
(i)
Subsidiaries
     
Subsidiaries are those entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
       
     
The interim financial statements of subsidiaries are included in the consolidated interim financial statements from the date that control effectively commences until the date that control effectively ceases.
       
     
Minority interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheet and statement of changes in equity within equity, separately from equity attributable to the equity shareholders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the period between minority interests and the equity shareholders of the Company.
       
     
The particulars of the Group’s principal subsidiaries are set out in Note 35.
 
(ii)
Associates and jointly controlled entities
   
An associate is an entity, not being a subsidiary, in which the Group exercises significant influence over its management. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
     
   
A jointly controlled entity is an entity which operates under a contractual arrangement between the Group and other parties, where the contractual arrangement establishes that the Group and one or more of the other parties share joint control over the economic activity of the entity.
     
   
Investments in associates and jointly controlled entities are accounted for using the equity method from the date that significant influence or joint control commences until the date that significant influence or joint control ceases.
     
 
(iii)
Transactions eliminated on consolidation
   
Inter-company balances and transactions and any unrealised gains arising from inter-company transactions are eliminated on consolidation. Unrealised gains arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group’s interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
 
 
(b)
Translation of foreign currencies
   
The presentation currency of the Group is Renminbi. Foreign currency transactions during the period are translated into Renminbi at the applicable rates of exchange quoted by the People’s Bank of China (“PBOC”) prevailing on the transaction dates. Foreign currency monetary assets and liabilities are translated into Renminbi at the PBOC’s rates at the balance sheet date.
       
   
Exchange differences, other than those capitalised as construction in progress, are recognised as income or expense in the “finance costs” section of the income statement.
       
 
(c)
Cash and cash equivalents
   
Cash equivalents consist of time deposits with financial institutions with an initial term of less than three months when purchased. Cash equivalents are stated at cost, which approximates fair value.
       
 
(d)
Trade, bills and other receivables
   
Trade, bills and other receivables are initially recognised at fair value and thereafter stated at amortised cost less impairment losses for bad and doubtful debts (Note 2(l)). Trade, bills and other receivables are derecognised if the Group’s contractual rights to the cash flows from these financial assets expire or if the Group transfers these financial assets to another party without retaining control or substantially all risks and rewards of the assets.
 
 
96
 
 
2
PRINCIPAL ACCOUNTING POLICIES (Continued)
 
 
(e)
Inventories
   
Inventories, other than spare parts and consumables, are stated at the lower of cost and net realisable value. Cost includes the cost of purchase computed using the weighted average method and, in the case of work in progress and finished goods, direct labour and an appropriate proportion of production overheads. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.
     
   
Spare parts and consumables are stated at cost less any provision for obsolescence.
     
 
(f)
Property, plant and equipment
   
An item of property, plant and equipment is initially recorded at cost, less accumulated depreciation and impairment losses (Note 2(l)). The cost of an asset comprises its purchase price, any directly attributable costs of bringing the asset to working condition and location for its intended use. Subsequent to the revaluation, which was based on depreciated replacement costs, required by the relevant PRC regulations in connection with the Reorganisation and certain acquisitions made in prior years from Sinopec Group Company, property, plant and equipment are carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses. Revaluations are performed periodically to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date. The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other expenditure is recognised as an expense in the income statement in the period in which it is incurred.
     
   
Gains or losses arising from the retirement or disposal of an item of property, plant and equipment, other than oil and gas properties, are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised as income or expense in the income statement on the date of retirement or disposal. On disposal of a revalued asset, the related revaluation surplus is transferred from the revaluation reserve to retained earnings.
     
   
Depreciation is provided to write off the cost/revalued amount of items of property, plant and equipment, other than oil and gas properties, over its estimated useful life on a straight-line basis, after taking into account its estimated residual value, as follows:
 
 
Buildings
15 to 45 years
 
Plant, machinery, equipment, oil depots, storage tanks and others
4 to 18 years
 
Service stations
25 years
 
   
Where parts of an item of property, plant and equipment have different useful lives, the cost or valuation of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reassessed annually.
     
 
(g)
Oil and gas properties
   
The Group uses the successful efforts method of accounting for its oil and gas producing activities. Under this method, costs of development wells and the related support equipment are capitalised. The cost of exploratory wells is initially capitalised as construction in progress pending determination of whether the well has found proved reserves. The impairment of exploratory well costs occurs upon the determination that the well has not found proved reserves. Exploratory wells that find oil and gas reserves in any area requiring major capital expenditure are expensed unless the well has found a sufficient quantity of reserves to justify its completion as a producing well if the required capital expenditure is made, and drilling of the additional exploratory wells is under way or firmly planned for the near future. However, in the absence of a determination of the discovery of proved reserves, exploratory well costs are not carried as an asset for more than one year following completion of drilling. If, after one year has passed, a determination of the discovery of proved reserves cannot be made, the exploratory well costs are impaired and charged to expense. All other exploration costs, including geological and geophysical costs, other dry hole costs and annual lease rentals, are expensed as incurred. Capitalised costs relating to proved properties are amortised at the field level on a unit-of-production method. The amortisation rates are determined based on oil and gas reserves estimated to be recoverable from existing facilities over the shorter of the economic lives of crude oil and natural gas reservoirs and the terms of the relevant production licenses.
     
   
Gains and losses on the disposal of proved oil and gas properties are not recognised unless the disposal encompasses an entire property. The proceeds on such disposals are credited to the carrying amounts of oil and gas properties.
     
   
The Group estimates future dismantlement costs for oil and gas properties with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with the industry practices. These estimated future dismantlement costs are discounted at credit-adjusted risk-free rate and are capitalised as oil and gas properties, which are subsequently amortised as part of the costs of the oil and gas properties.
     
 
(h)
Lease prepayments
   
Lease prepayments represent land use rights paid to the relevant government authorities. Land use rights are carried at cost less accumulated amortisation and impairment losses (Note 2(l)).The cost of lease prepayments are charged to expense on a straight-line basis over the respective periods of the rights.
 
 
97
 
 
2
PRINCIPAL ACCOUNTING POLICIES (Continued)
   
 
 
(i)
Construction in progress
   
Construction in progress represents buildings, oil and gas properties, various plant and equipment under construction and pending installation, and is stated at cost less impairment losses (Note 2(l)). Cost comprises direct costs of construction as well as interest charges, and foreign exchange differences on related borrowed funds to the extent that they are regarded as an adjustment to interest charges, during the periods of construction.
     
   
Construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use.
     
   
No depreciation is provided in respect of construction in progress.
     
 
(j)
Goodwill
   
Goodwill represents amounts arising on acquisition of subsidiaries, associates or jointly controlled entities. Goodwill represents the difference between the cost of acquisition and the fair value of the net identifiable assets acquired.
     
   
Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment (Note 2(l)). In respect of associates or jointly controlled entities, the carrying amount of goodwill is included in the carrying amount of the interest in the associate or jointly controlled entity.
     
 
(k)
Investments
   
Investment in available-for-sale equity securities are carried at fair value with any change in fair value recognised directly in equity. When these investments are derecognised or impaired, the cumulative gain or loss previously recognised directly in equity is recognised in the income statement. Investments in equity securities, other than investments in associates and jointly controlled entities, that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are recognised in the balance sheet at cost less impairment losses (Note 2(l)).
     
 
(l)
Impairment of assets
     
 
 
(i)
Trade accounts receivable, other receivables and investment in equity securities that do not have an quoted market price in an active market, other than investments in associates and jointly controlled entities are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, an impairment loss is determined and recognised.
     
   
The impairment loss is measured as the difference between the asset’s carrying amount and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material, and is recognised as an expense in the income statement. Impairment losses for trade and other receivables are reversed through the income statement if in a subsequent period the amount of the impairment losses decreases. Impairment losses for equity securities are not reversed.
     
 
(ii)
Impairment of other long-lived assets is accounted as follows:
     
   
The carrying amounts of other long-lived assets, including property, plant and equipment, construction in progress, lease prepayments, and investments in associates and jointly controlled entities, are reviewed at each balance sheet date to identify indicators that the assets may be impaired. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. For goodwill, the recoverable amount is estimated at each balance sheet date.
     
   
The recoverable amount is the greater of the fair value less costs to sell and the value in use. In determining the value in use, expected future cash flows generated by the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).
     
   
The amount of the reduction is recognised as an expense in the income statement unless the asset is carried at revalued amount for which an impairment loss is recognised directly against any related revaluation reserve to the extent that the impairment loss does not exceed the amount held in the revaluation reserve for that same asset. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then, to reduce the carrying amount of the other assets in the unit on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.
     
   
The Group assesses at each balance sheet date whether there is any indication that an impairment loss recognised for an asset, except in the case of goodwill, in prior years may no longer exist. An impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. A subsequent increase in the recoverable amount of an asset, when the circumstances and events that led to the write-down or write-off cease to exist, is recognised as an income unless the asset is carried at revalued amount. Reversal of an impairment loss on a revalued asset is credited to the revaluation reserve except for impairment loss which was previously recognised as an expense in the income statement; a reversal of such impairment loss is recognised as an income. The reversal is reduced by the amount that would have been recognised as depreciation had the write-down or write-off not occurred. An impairment loss in respect of goodwill is not reversed.
 
 
98
 
 
2
PRINCIPAL ACCOUNTING POLICIES (Continued)
   
 
 
(m)
Trade, bills and other payables
   
Trade, bills and other payables are initially recognised at fair value and thereafter stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.
     
 
(n)
Interest-bearing borrowings
   
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value recognised in the income statement over the period of borrowings using the effective interest method.
     
 
(o)
Convertible bonds
 
 
(i)
Convertible bonds that contain an equity component
     
   
Convertible bonds that can be converted to equity share capital at the option of the holder, where the number of shares that would be issued on conversion and the value of the consideration that would be received at that time do not vary, are accounted for as compound financial instruments that contain both a liability component and an equity component.
     
   
At initial recognition, the liability component of the convertible bonds is measured as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option. Any excess of proceeds over the amount initially recognised as the liability component is recognised as the equity component. Transaction costs that relate to the issuance of the convertible bonds are allocated to the liability and equity components in proportion to the allocation of proceeds.
     
   
The liability component is subsequently carried at amortised cost. The interest expense on the liability component is calculated using the effective interest method. The equity component is recognised in the capital reserve until the bond is converted or redeemed.
     
   
If the bond is converted, the capital reserve, together with the carrying amount of the liability component at the time of conversion, is transferred to share capital and share premium as consideration for the shares issued. If the bond is redeemed, the capital reserve is transferred to retained earnings.
     
 
(ii)
Other convertible bonds
     
   
Convertible bonds issued with a cash settlement option and other embedded derivative features are accounted for as compound financial instruments that contain a liability component and a derivative component.
     
   
At initial recognition, the derivative component of the convertible bonds is measured at fair value. Any excess of proceeds over the amount initially recognised as the derivative component is recognised as the liability component. Transaction costs that relate to the issue of the convertible bonds are allocated to the liability and derivative components in proportion to the allocation of proceeds. The portion of the transaction costs relating to the liability component is recognised initially as part of the liability. The portion relating to the derivative component is recognised immediately as an expense in the income statement.
     
   
The derivative component is subsequently remeasured at each balance sheet date and any gains or losses arising from change in the fair value are recognised in the income statement. The liability component is subsequently carried at amortised cost until extinguished on conversion or redemption. The interest expense on the liability component is calculated using the effective interest method. Both the liability and the related derivative components are presented together for financial statements reporting purposes.
     
   
If the convertible bonds are converted, the carrying amounts of the derivative and liability components are transferred to share capital and share premium as consideration for the shares issued. If the convertible bonds are redeemed, any difference between the amount paid and the carrying amounts of both components is recognised in the income statement.
 
(p)
Provisions and contingent liability
 
A provision is recognised for liability of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made.
   
 
When it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
   
 
Provisions for future dismantlement costs are initially recognised based on the present value of the future costs expected to be incurred in respect of the Group’s expected dismantlement and abandonment costs at the end of related oil and gas exploration and development activities. Any subsequent change in the present value of the estimated costs, other than the change due to passage of time which is regarded as interest cost, is reflected as an adjustment to the provision and oil and gas properties.
   
 
A provision for onerous contracts is recognised when the expected economic benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract.
 
 
99
 
 
2
PRINCIPAL ACCOUNTING POLICIES (Continued)
 
   
(q)
Revenue recognition
     
Revenues associated with the sale of crude oil, natural gas, petroleum and chemical products and ancillary materials are recorded when the customer accepts the goods and the significant risks and rewards of ownership and title have been transferred to the buyer. Revenue from the rendering of services is recognised in the income statement upon performance of the services. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, the possible return of goods, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably.
       
     
Interest income is recognised on a time apportioned basis that takes into account the effective yield on the asset.
       
     
Government grants relating to the purchase of assets used for technology improvements are initially recorded as long-term liabilities when there is reasonable assurance that the grants will be received and thereafter offset against the cost of the related assets upon the transfer of these assets to property, plant and equipment. The grants are recognised as income over the useful life of these property, plant and equipment by way of reduced depreciation charges.
       
     
A government grant that becomes receivable as compensation for expenses or losses already incurred with no future related costs is recognised as an income in the period in which it becomes receivable.
       
   
(r)
Borrowing costs
     
Borrowing costs are expensed in the income statement in the period in which they are incurred, except to the extent that they are capitalised as being attributable to the construction of an asset which necessarily takes a period of time to get ready for its intended use.
       
   
(s)
Repairs and maintenance expenditure
     
Repairs and maintenance expenditure is expensed as incurred.
       
   
(t)
Environmental expenditures
     
Environmental expenditures that relate to current ongoing operations or to conditions caused by past operations are expensed as incurred.
       
     
Liabilities related to future remediation costs are recorded when environmental assessments and/or cleanups are probable and the costs can be reasonably estimated. As facts concerning environmental contingencies become known to the Group, the Group reassesses its position both with respect to accrued liabilities and other potential exposures.
       
   
(u)
Research and development expense
     
Research and development expenditures are expensed in the period in which they are incurred. Research and development expense amounted to RMB 1,176 million for the six-month period ended 30 June 2008 (2007: RMB 1,212 million).
       
   
(v)
Operating leases
     
Operating lease payments are charged to the income statement on a straight-line basis over the period of the respective leases.
       
   
(w)
Employee benefits
     
The contributions payable under the Group’s retirement plans are recognised as expenses in the income statement as incurred and according to the contribution determined by the plans. Further information is set out in Note 33.
       
     
Termination benefits, recorded as employee reduction expenses in the income statement, are recognised when, and only when, the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.
       
   
(x)
Income tax
     
Income tax comprises current and deferred tax. Current tax is calculated on taxable income by applying the applicable tax rates. Deferred tax is provided using the balance sheet liability method on all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes only to the extent that it is probable that future taxable income will be available against which the assets can be utilised. Deferred tax is calculated on the basis of the enacted tax rates that are expected to apply in the period when the asset is realised or the liability is settled. The effect on deferred tax of any changes in tax rates is charged or credited to the income statement, except for the effect of a change in tax rate on the carrying amount of deferred tax assets and liabilities which were previously charged or credited to equity.
       
     
The tax value of losses expected to be available for utilisation against future taxable income is set off against the deferred tax liability within the same legal tax unit and jurisdiction to the extent appropriate, and is not available for set-off against the taxable profit of another legal tax unit. The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that the related tax benefit will be realised.
       
   
(y)
Dividends
     
Dividends are recognised as a liability in the period in which they are declared.
       
 
 
100
 
 
2
PRINCIPAL ACCOUNTING POLICIES (Continued)
   
 
 
(z)
Segmental reporting
   
A business segment is a distinguishable component of the Group that is engaged in providing products or services and is subject to risks and rewards that are different from those of other segments.
     
   
The segments were determined primarily because the Group manages its exploration and production, refining, marketing and distribution, chemicals, and corporate and others businesses separately. The reportable segments are each managed separately because they manufacture and/or distribute distinct products with different production processes and due to their distinct operating and gross margin characteristics. In view of the fact that the Company and its subsidiaries operate mainly in the PRC, no geographical segment information is presented.
     
   
The Group evaluates the performance and allocates resources to its operating segments on an operating income basis, without considering the effects of finance costs or investment income. Corporate administrative costs and assets are not allocated to the operating segments; instead, operating segments are billed for direct corporate services. Inter-segment transfer pricing is based on cost plus an appropriate margin, as specified by the Group’s policy.
     
   
Assets and liabilities dedicated to a particular segment’s operations are included in that segment’s total assets and liabilities. Assets which benefit more than one segment or are considered to be corporate assets are not allocated. “Unallocated assets” consists primarily of cash and cash equivalents, time deposits with financial institutions, investments, deferred tax assets and other non-current assets. “Unallocated liabilities” consists primarily of short-term and long-term debts, loans from Sinopec Group Company and fellow subsidiaries, income tax payable and deferred tax liabilities.
     
   
Interest in and share of profits from associates and jointly controlled entities are included in the segments in which the associates and jointly controlled entities operate.
     
 
3
TURNOVER
 
Turnover represents revenue from the sales of crude oil, natural gas, petroleum and chemical products, net of value-added tax.
   
4
OTHER OPERATING REVENUES
 
   
Six-month periods
ended 30 June
   
   
2008
2007
   
RMB millions
RMB millions
 
Sale of materials, service and others
12,205
12,364
 
Rental income
149
145
   
12,354
12,509
 
5
OTHER INCOME
 
During the six-month period ended 30 June 2008, the Group recognised grant income of RMB 33,402 million (2007: RMB nil). These grants were for compensation of losses incurred due to the distortion of the correlation of domestic refined petroleum product prices and the crude oil prices, and the measures taken by the Group to stabilise the supply in the PRC refined petroleum product market during the six-month period ended 30 June 2008. There are no unfulfilled conditions and other contingencies attached to the receipts of these grants. There is no assurance that the Group will continue to receive such grant in the future.
   
6
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
The following items are included in selling, general and administrative expenses:
 
 
   
Six-month periods
ended 30 June
   
   
2008
2007
   
RMB millions
RMB millions
 
Operating lease charges
2,656
2,587
 
Impairment losses:
    
   
– trade accounts receivable
66
19
   
– other receivables
9
19
 
7
PERSONNEL EXPENSES
 
   
Six-month periods
ended 30 June
   
   
2008
2007
   
RMB millions
RMB millions
 
Consumption tax
8,553
7,586
 
Special oil income levy
16,544
3,290
 
City construction tax
1,760
1,919
 
Education surcharge
958
1,038
 
Resources tax
437
443
 
Business tax
199
180
   
28,451
14,456
       
 
 
101
 
8
EMPLOYEE REDUCTION EXPENSES
 
In accordance with the Group’s voluntary employee reduction plan, the Group recorded employee reduction expenses of RMB 199 million (2007: RMB 150 million) payable during the six-month period ended 30 June 2008 in respect of the voluntary termination of approximately 3,600 (2007: 2,300) employees.
   
9
TAXES OTHER THAN INCOME TAX
 
 
   
Six-month periods
ended 30 June
   
   
2008
2007
   
RMB millions
RMB millions
 
Consumption tax
8,553
7,586
 
Special oil income levy
16,544
3,290
 
City construction tax
1,760
1,919
 
Education surcharge
958
1,038
 
Resources tax
437
443
 
Business tax
199
180
   
28,451
14,456
       
 
 
Consumption tax is levied on producers of gasoline, diesel, naphtha, fuel oil, jet fuel, lubricant oil and solvent oil based on a tariff rate applied to the volume of sales. Special oil income levy is levied on oil exploration and production entities based on the progressive rates ranging from 20% to 40% on the portion of the monthly weighted average sales price of the crude oil produced in the PRC exceeding USD 40 per barrel. City construction tax is levied on an entity based on its total amount of value-added tax, consumption tax and business tax.
   
 
10
OTHER OPERATING EXPENSES, NET
 
   
Six-month periods
ended 30 June
   
   
2008
2007
   
RMB millions
RMB millions
 
Fines, penalties and compensations
48
15
 
Donations
77
45
 
(Gain)/loss on disposal of property, plant and equipment, net
(97)
290
 
Impairment losses on long-lived assets (Note)
133
1,642
 
Others
74
234
   
235
2,226
       
 
Note:
 
 
(i)
Impairment losses recognised on long-lived assets of the chemicals segment was RMB 3 million (2007: RMB 123 million) for the six-month period ended 30 June 2008. These impairment losses relate to certain chemicals production facilities that are held for use. The carrying values of these facilities were written down to their recoverable amounts that were determined based on the asset held for use model using the present value of estimated future cash flows of the production facilities. The primary factor resulting in the impairment losses on long-lived assets of the chemicals segments was due to higher operating and production costs caused by the increase in the prices of raw materials that are not expected to be fully recovered through an increase in selling price.
     
 
(ii)
Impairment losses recognised on long-lived assets of the marketing and distribution segment of RMB 130 million (2007: RMB 571 million) for the six-month period ended 30 June 2008 primarily relate to certain service stations and certain construction in progress that were closed or abandoned during the period. In measuring the amounts of impairment charges, the carrying amounts of these assets were compared to the present value of the expected future cash flows of the assets, as well as information about sales and purchases of similar properties in the same geographic area.
     
 
(iii)
Impairment losses recognised on long-lived assets of the refining segment was RMB 923 million for the six-month period ended 30 June 2007. These impairment losses relate to certain refining production facilities that are held for use and a construction in progress. The carrying values of these facilities were written down to their recoverable amounts that were determined based on the asset held for use model using the present value of estimated future cash flows of the production facilities. The primary factor resulting in the impairment losses on long-lived assets of the refining segments was due to higher operating and production costs caused by the increase in the prices of raw materials that are not expected to be fully recovered through an increase in selling price.
     
 
(iv)
The factors resulting in the exploration and production (“E&P”) segment impairment losses of RMB 25 million for the six-month period ended 30 June 2007 were unsuccessful development drilling and high operating and development costs for certain small oil fields. The carrying values of these E&P properties were written down to a recoverable amount which was determined based on the present values of the expected future cash flows of the assets. The oil and gas pricing was a factor used in the determination of the present values of the expected future cash flows of the assets and had an impact on the recognition of the asset impairment.
     
 
 
102
 
 
11
INTEREST EXPENSE
 
         
     
Six-month periods
ended 30 June
     
     
2008
2007
     
RMB millions
RMB millions
         
Interest expense incurred
  
5,707
4,065
Less: Interest expense capitalised*
  
(350)
(308)
     
5,357
3,757
Accretion expenses (Note 29)
  
206
155
         
Interest expense
  
5,563
3,912
         
*
Interest rates per annum at which borrowing costs were capitalised for construction in progress
3.8% to 7.0%
3.6% to 6.8%
 
12
TAX (BENEFIT)/EXPENSE
 
Tax (benefit)/expense in the consolidated income statement represents:
 
 
Six-month periods
ended 30 June
 
 
2008
2007
 
RMB millions
RMB millions
Current tax
    
– Provision for the period
7,699
16,212
– Under-provision in prior years
216
191
Deferred taxation (Note 25)
(8,051)
(1,438)
 
(136)
14,965
 
 
Reconciliation between tax expense and accounting profit at applicable tax rates is as follows:
     
 
Six-month periods
ended 30 June
 
 
2008
2007
 
RMB millions
RMB millions
Profit before taxation
8,197
52,807
Expected PRC income tax expense at a statutory tax rate of 25% (2007: 33%)
2,049
17,426
Tax effect of non-deductible expenses
200
302
Tax effect of non-taxable income
(2,715)
(1,078)
Tax effect of differential tax rate (i)
(141)
(930)
Tax effect of tax losses not recognised
255
38
Under-provision in prior years
216
191
Tax credit for domestic equipment purchases
—
(500)
Effect of change in tax rate on deferred tax (ii)
—
(484)
Tax (benefit)/expense
(136)
14,965
     
 
Substantially all income before income tax and related tax expense is from PRC sources.
 
 
Note:
   
 
(i)
The provision for PRC current income tax is based on a statutory rate of 25% (2007: 33%) of the assessable income of the Group as determined in accordance with the relevant income tax rules and regulations of the PRC, except for certain entities of the Group, which are taxed at a preferential rate of 15%.
   
 
(ii)
On 16 March 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the People’s Republic of China (“new tax law”), which takes effect on 1 January 2008. According to the new tax law, a unified corporate income tax rate of 25% is applied to PRC entities; however certain entities previously taxed at a preferential rate are subject to a transition period during which their tax rate will gradually be increased to the unified rate of 25% over a five year period starting from 1 January 2008.
   
 
Based on the new tax law, the income tax rate applicable to the Group, except for certain entities of the Group, is reduced from 33% to 25% from 1 January 2008. Based on a tax notice issued by the State Council on 26 December 2007, the applicable tax rates for entities operating in special economic zones, which were previously taxed at the preferential rate of 15%, are 18%, 20%, 22%, 24% and 25% for the years ending 31 December 2008, 2009, 2010, 2011 and 2012, respectively. According to the same notice, the applicable tax rate for entities operating in the western region of the PRC which were granted a preferential tax rate of 15% from 2004 to 2010, remains at 15% for the years ending 31 December 2008, 2009 and 2010 and will be increased to 25% from 1 January 2011.
   
 
 
103
 
 
13
DIVIDENDS
 
Dividends payable to equity shareholders of the Company attributable to the period represent:
 
   
Six-month periods
ended 30 June
   
   
2008
2007
   
RMB millions
RMB millions
 
Interim dividends declared after the balance sheet date of RMB 0.03 per share
    
 
     (2007: RMB 0.05 per share)
2,601
4,335
       
 
Pursuant to the Company’s Articles of Association and a resolution passed at the Directors’ meeting on 22 August 2008, the directors authorised to declare the interim dividends for the year ending 31 December 2008 of RMB 0.03 (2007: RMB 0.05) per share totalling RMB 2,601 million (2007: RMB 4,335 million) proposed after the balance sheet date has not been recognised as a liability at the balance sheet date.
 
 
Dividends payable to equity shareholders of the Company attributable to the previous financial year, approved and paid during the period represent:
 
     
Six-month periods
ended 30 June
     
     
2008
2007
     
RMB millions
RMB millions
 
Final dividends in respect of the previous financial year, approved and
    
 
     paid during the period of RMB 0.115 per share (2007: RMB 0.11 per share)
9,971
9,537
         
 
 
Pursuant to the shareholders’ approval at the Annual General Meeting on 26 May 2008, a final dividend of RMB 0.115 per share totalling RMB 9,971 million in respect of the year ended 31 December 2007 was declared and paid on 30 June 2008.
   
 
Pursuant to the shareholders’ approval at the Annual General Meeting on 29 May 2007, a final dividend of RMB 0.11 per share totalling RMB 9,537 million in respect of the year ended 31 December 2006 was declared and paid on 29 June 2007.
   
14
BASIC AND DILUTED EARNINGS PER SHARE
 
The calculation of basic earnings per share for the six-month period ended 30 June 2008 is based on the profit attributable to equity shareholders of the Company of RMB 8,255 million (2007: RMB 36,375 million) and the weighted average number of shares of 86,702,439,000 (2007: 86,702,439,000) in issue during the period.
   
 
The calculation of diluted earnings per share for the six-month period ended 30 June 2008 is based on the profit attributable to equity shareholders of the Company of RMB 5,596 million and the weighted average number of shares of 87,789,799,595 calculated as follows:
   
 
(i) Profit attributable to equity shareholders of the Company (diluted)
 
   
Six-month period
   
ended 30 June
   
2008
   
RMB millions
 
Profit attributable to equity shareholders of the Company
8,255
 
After tax effect of finance costs of the Convertible Bonds
(442)
 
After tax effect of unrealised gain on embedded derivative component of the Convertible Bonds
(2,217)
 
Profit attributable to equity shareholders of the Company (diluted)
5,596
 
 
(ii) Weighted average number of shares (diluted)
 
   
Six-month period
   
ended 30 June
   
2008
   
Number of
   
shares
 
Weighted average number of shares at 30 June
86,702,439,000
 
Effect of conversion of the Convertible Bonds
1,087,360,595
 
Weighted average number of shares (diluted) at 30 June
87,789,799,595
     
 
The calculation of diluted earnings per share excludes the effect of the Bonds with Warrants (note 26), since its effect was anti-diluted for the six-month period ended 30 June 2008. For the six-month period ended 30 June 2007, diluted earnings per share is calculated on the same basis as basic earnings per share, since the effect of the Convertible Bonds was anti-dilutive for that period.
 
 
104
 
 
15
PROPERTY, PLANT AND EQUIPMENT
   
 
By segment
 
 
Exploration
  
Marketing
  
Corporate
  
 
and
  
and
  
and
  
 
production
Refining
distribution
Chemicals
others
Total
 
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
Cost/valuation:
            
Balance at 1 January 2007
241,364
151,956
86,108
176,717
4,869
661,014
Additions
5,578
31
75
29
152
5,865
Transferred from construction in progress
5,880
990
1,644
2,921
764
12,199
Acquisition of subsidiaries (ii)
—
—
2,636
—
—
2,636
Disposals
(11)
(143)
(1,239)
(425)
(16)
(1,834)
             
Balance at 30 June 2007
252,811
152,834
89,224
179,242
5,769
679,880
Balance at 1 January 2008
284,183
157,486
91,155
181,124
6,198
720,146
Additions
357
80
51
1
128
617
Transferred from construction in progress
7,165
13,593
2,456
781
115
24,110
Acquisition of Downhole Assets (Note 32)
3,001
—
—
—
—
3,001
Reclassification
12,321
(6,793)
(3,484)
(6,241)
4,197
—
Reclassification to lease prepayments
and other assets
—
(246)
(242)
(28)
(192)
(708)
Disposals
(22)
(109)
(206)
(444)
(4)
(785)
             
Balance at 30 June 2008
307,005
164,011
89,730
175,193
10,442
746,381
             
Accumulated depreciation:
            
Balance at 1 January 2007
112,050
69,257
17,154
104,959
1,837
305,257
Depreciation charge for the period
8,125
4,248
2,040
4,438
320
19,171
Acquisition of subsidiaries (ii)
—
—
991
—
—
991
Impairment losses for the period
25
770
567
123
—
1,485
Written back on disposals
(1)
(90)
(339)
(335)
(11)
(776)
             
Balance at 30 June 2007
120,199
74,185
20,413
109,185
2,146
326,128
Balance at 1 January 2008
130,683
75,359
23,802
112,782
2,378
345,004
Depreciation charge for the period
10,889
4,412
2,170
4,126
429
22,026
Acquisition of Downhole Assets (Note 32)
1,459
—
—
—
—
1,459
Impairment losses for the period
—
—
128
3
—
131
Reclassification
16,789
(6,592)
(3,814)
(7,528)
1,145
—
Reclassification to lease prepayments
and other assets
—
—
(6)
(1)
(10)
(17)
Written back on disposals
(22)
(104)
(125)
(354)
(1)
(606)
             
Balance at 30 June 2008
159,798
73,075
22,155
 109,028
3,941
367,997
             
Net book value:
            
             
Balance at 1 January 2007
129,314
82,699
68,954
71,758
3,032
355,757
             
Balance at 30 June 2007
132,612
78,649
68,811
70,057
3,623
353,752
             
Balance at 1 January 2008
153,500
82,127
67,353
68,342
3,820
375,142
             
Balance at 30 June 2008
147,207
90,936
67,575
66,165
6,501
378,384
 
 
105
 
 
15
PROPERTY, PLANT AND EQUIPMENT (Continued)
 
 
By asset class
 
     
Oil depots,
Plant,
  
     
storage tanks
machinery,
  
   
Oil and gas
and service
equipment
  
 
Buildings
properties
stations
and others 
Total
 
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
           
Cost/valuation:
          
Balance at 1 January 2007
47,379
218,693
90,249
304,693
661,014
Additions
91
5,479
59
236
5,865
Transferred from construction in progress
35
5,621
1,998
4,545
12,199
Acquisition of subsidiaries (ii)
1,528
—
1,001
107
2,636
Reclassification
(746)
(27)
1,028
(255)
—
Disposals
(750)
—
(417)
(667)
(1,834)
           
Balance at 30 June 2007
47,537
229,766
93,918
308,659
679,880
Balance at 1 January 2008
46,300
259,373
97,000
317,473
720,146
Additions
186
341
32
58
617
Transferred from construction in progress
852
6,790
3,152
13,316
24,110
Acquisition of Downhole Assets (Note 32)
548
—
—
2,453
3,001
Reclassification
13,189
8,937
16,730
(38,856)
—
Reclassification to lease prepayments
and other assets
(463)
—
(20)
(225)
(708)
Disposals
(45)
—
(165)
(575)
(785)
           
Balance at 30 June 2008
60,567
275,441
116,729
293,644
746,381
           
Accumulated depreciation:
          
Balance at 1 January 2007
22,728
102,382
17,868
162,279
305,257
Depreciation charge for the period
849
7,496
2,153
8,673
19,171
Acquisitions of subsidiaries (ii)
511
—
381
99
991
Impairment losses for the period
203
—
384
898
1,485
Reclassification
(338)
(9)
529
(182)
—
Written back on disposals
(139)
—
(139)
(498)
(776)
           
Balance at 30 June 2007
23,814
109,869
21,176
171,269
326,128
Balance at 1 January 2008
24,987
119,057
23,303
177,657
345,004
Depreciation charge for the period
933
10,160
2,407
8,526
22,026
Acquisition of Downhole Assets (Note 32)
236
—
—
1,223
1,459
Impairment losses for the period
1
—
116
14
131
Reclassification
(1,757)
16,881
9,263
(24,387)
—
Reclassification to lease prepayments
and other assets
(6)
—
(4)
(7)
(17)
Written back on disposals
(24)
—
(95)
(487)
(606)
           
Balance at 30 June 2008
24,370
146,098
34,990
162,539
367,997
           
Net book value:
          
Balance at 1 January 2007
24,651
116,311
72,381
142,414
355,757
           
Balance at 30 June 2007
23,723
119,897
72,742
137,390
353,752
           
Balance at 1 January 2008
21,313
140,316
73,697
139,816
375,142
           
Balance at 30 June 2008
36,197
129,343
81,739
131,105
378,384
 
 
Note:
 
 
(i)
The additions to the exploration and production segment and oil and gas properties for the six-month period ended 30 June 2008 included RMB 291 million (2007: RMB 5,427 million) of estimated dismantlement costs for site restoration (Note 29).
     
 
(ii)
 During the six-month period ended 30 June 2007, the Group acquired the entire equity interests of certain service stations companies incorporated in Hong Kong (“Hong Kong service stations”).
 
 
106
 
 
16
CONSTRUCTION IN PROGRESS
 
 
Exploration
  
Marketing
  
Corporate
  
 
and
  
and
  
and
  
 
production
Refining
distribution
Chemicals
others
Total
 
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
RMB millions
Balance at 1 January 2007
16,420
15,439
10,288
7,025
3,699
52,871
Additions
20,232
6,271
4,248
3,226
867
34,844
Dry hole costs written off
(2,157)
—
—
—
—
(2,157)
Transferred to property, plant and equipment
(5,880)
(990)
(1,644)
(2,921)
(764)
(12,199)
Reclassification to lease prepayments
and other assets
—
(84)
(191)
(843)
(21)
(1,139)
Impairment losses for the period
—
(153)
(4)
—
—
(157)
Balance at 30 June 2007
28,615
20,483
12,697
 6,487
3,781
72,063
Balance at 1 January 2008
34,441
25,981
12,998
16,752
5,236
95,408
Additions
22,036
3,807
4,731
5,784
749
37,107
Dry hole costs written off
(1,156)
—
—
—
—
(1,156)
Reclassification
97
2,226
(211)
(2,112)
—
—
Transferred to property, plant and equipment
(7,165)
(13,593)
(2,456)
(781)
(115)
(24,110)
Reclassification to lease prepayments
and other assets
(2)
(3)
(810)
(1)
(928)
(1,744)
Impairment losses for the period
—
—
(2)
—
—
(2)
Balance at 30 June 2008
48,251
18,418
14,250
19,642
 4,942
105,503
             
 
As at 30 June 2008, the amount of capitalised cost of exploratory wells included in construction in progress related to the exploration and production segment was RMB 7,479 million (2007: RMB 6,294 million). The geological and geophysical costs paid during the six-month period ended 30 June 2008 were RMB 1,819 million (2007: RMB 1,844 million).
 
17
GOODWILL
 
 
2008
2007
 
RMB millions
RMB millions
Cost:
    
Balance at 1 January
15,490
14,325
Net additions and exchange adjustments
17
882
     
Balance at 30 June
15,507
15,207
Accumulated impairment losses:
    
Balance at 1 January and 30 June
—
—
Net book value:
    
Balance at 1 January
15,490
14,325
     
Balance at 30 June
15,507
15,207
 
Impairment tests for cash-generating units containing goodwill
Goodwill is allocated to the following Group’s cash-generating units:
 
 
At 30 June
At 31 December
 
2008
2007
 
RMB millions
RMB millions
Sinopec Beijing Yanshan Branch (“Sinopec Yanshan”)
1,157
1,157
Sinopec Zhenhai Refining and Chemical Branch (“Sinopec Zhenhai”)
3,952
3,952
Sinopec Qilu Branch (“Sinopec Qilu”)
2,159
2,159
Sinopec Yangzi Petrochemical Company Limited (“Sinopec Yangzi”)
2,737
2,737
Sinopec Zhongyuan Oil Field Branch (“Sinopec Zhongyuan”)
1,391
1,391
Sinopec Shengli Oil Field Dynamic Company Limited (“Dynamic”)
1,361
1,361
Hong Kong service stations
925
1,004
Multiple units without individual significant goodwill
1,825
 1,729
 
15,507
15,490
 
Goodwill represents the excess of the cost of purchase over the fair value of the underlying assets and liabilities. The recoverable amounts of Sinopec Yanshan, Sinopec Zhenhai, Sinopec Qilu, Sinopec Yangzi, Sinopec Zhongyuan, Dynamic and Hong Kong service stations are determined based on value in use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a one-year period and pre-tax discount rates primarily ranging from 13.9% to 16.9%. Cash flows beyond the one-year period are maintained constant. Management believes any reasonably possible change in the key assumptions on which these entities’ recoverable amounts are based would not cause these entities’ carrying amounts to exceed their recoverable amounts.
 
Key assumptions used for the value in use calculations for these entities are the gross margin and sales volume. Management determined the budgeted gross margin based on the gross margin achieved in the period immediately before the budget period and its expectation for the development of international crude oil prices. The sales volume was based on the production capacity and/or the sales volume in the period immediately before the budget period.
 
 
 
 
107


18
INTEREST IN ASSOCIATES
 
 
At 30 June
At 31 December
 
2008
2007
 
RMB millions
RMB millions
Share of net assets
15,981
16,865
 
 
 
The Group’s investments in associates are with companies primarily engaged in the oil and gas and chemical operations in the PRC. These investments are individually and in the aggregate not material to the Group’s financial condition or results of operations for all periods presented. The principal investments in associates, all of which are incorporated in the PRC, are as follows:
 
       
Percentage
  
     
Percentage
of equity
  
     
of equity
held by the
  
 
Form of
Particulars of issued
held by the
Company’s
  
Name of company
business structure
and paid up capital
Company
subsidiaries
Principal activities
     
%
%
  
Sinopec Finance Company Limited
Incorporated
Registered capital
RMB 6,000,000,000
49.00
—
Provision of non-banking financial services
China Aviation Oil Supply
  Company Limited
Incorporated
Registered capital
RMB 3,800,000,000
—
29.00
Marketing and distribution of refined petroleum products
Shanghai Petroleum National Gas
  Corporation
Incorporated
Registered capital
RMB 900,000,000
30.00
—
Exploration and production of crude
oil and natural gas
Shanghai Chemical Industry Park
  Development Company Limited
Incorporated
Registered capital
RMB 2,372,439,000
—
38.26
Planning, development and operation of the Chemical Industry Park in Shanghai, the PRC
China Shipping & Sinopec Suppliers
  Company Limited
Incorporated
Registered capital
RMB 876,660,000
—
50.00
Transportation of petroleum products
Sinopec Shandong Taishan Petroleum
  Company Limited
Incorporated
480,793,320 ordinary
shares of RMB 1.00 each
24.57
—
Sale of petroleum products and decoration of service stations
 
 
19
INTEREST IN JOINTLY CONTROLLED ENTITIES
 
 
At 30 June
At 31 December
 
2008
2007
 
RMB millions
RMB millions
Share of net assets
13,520
12,723
 
 
 
The Group’s principal interests in jointly controlled entities are primarily engaged in the chemical operations in the PRC as follows:
 
Name of company
 
Form of
business structure
 
Particulars of issued
and paid up capital
 
 
Percentage of equity
held by the
 Company
%
Percentage
of equity
held by the
Company’s
subsidiaries
%
Principal activities
 
Shanghai Secco Petrochemical
   Company Limited
Incorporated
Registered capital USD 901,440,964
30.00
20.00
Manufacturing and distribution of petrochemical products
BASF-YPC Company Limited
Incorporated
Registered capital RMB 8,793,000,000
30.00
10.00
Manufacturing and distribution of petrochemical products
Yueyang Sinopec and Shell Coal
  Gasification Company Limited
Incorporated
Registered capital USD 45,588,700
50.00
—
Manufacturing and distribution of industrial gas
Fujian Refining and Petrochemical
  Company Limited
Incorporated
Registered capital USD 1,654,000,000
—
50.00
Manufacturing and distribution of petrochemical products
 

 
108
 

 
19
INTEREST IN JOINTLY CONTROLLED ENTITIES (Continued)
 
The Group’s effective interest share of the jointly controlled entities’ results of operations, financial condition and cash flows are as follows:
 
 
 
   
Six-month periods
ended 30 June
   
2008
RMB millions
2007
RMB millions
   
 
Results of operations:
    
 
Operating revenue
13,951
9,333
 
Expenses
(13,454)
(7,708)
 
Net profit
497
1,625
 
 
   
At 30 June
2008
RMB millions
At 31 December
2007
RMB millions
 
Financial condition:
    
 
Current assets
11,002
6,736
 
Non-current assets
24,816
22,229
 
Current liabilities
(7,831)
(5,313
 
Non-current liabilities
(14,467)
(10,929)
 
Net assets
13,520
12,723
 
 
   
Six-month periods
 ended 30 June
   
2008
RMB millions
2007
RMB millions
 
Cash flows:
    
 
Net cash (used in)/generated from operating activities
(1,371)
2,155
 
Net cash used in investing activities
(2,715)
(37)
 
Net cash generated from/(used in) financing activities
4,649
(1,818)
 
 
20
INVESTMENTS
 
   
At 30 June
2008
RMB millions
At 31 December
2007
RMB millions
 
Available-for-sale equity securities, listed and at quoted market price
370
653
 
Other investments in equity securities, unlisted and at cost
1,981
2,846
   
2,351
3,499
 
Less: Impairment losses for investments
(287)
(305)
   
2,064
3,194
 
 
 
Unlisted investments represent the Group’s interests in PRC privately owned enterprises which are mainly engaged in non-oil and gas activities and operations.
   
21
LONG-TERM PREPAYMENTS AND OTHER ASSETS
 
Long-term prepayments and other assets primarily represent prepaid rental expenses over one year, computer software, catalysts and operating rights of service stations.
   
22
TRADE ACCOUNTS RECEIVABLES, NET AND BILLS RECEIVABLES
 
 
   
At 30 June
2008
RMB millions
At 31 December
2007
RMB millions
   
   
 
Amounts due from third parties
32,138
21,839
 
Amounts due from Sinopec Group Company and fellow subsidiaries
9,482
2,240
 
Amounts due from associates and jointly controlled entities
4,262
1,750
   
45,882
25,829
 
Less: Impairment losses for bad and doubtful debts
(2,798)
(2,882)
   
43,084
22,947
 
Bills receivable
8,938
 12,851
   
52,022
35,798
 
 
 
The ageing analysis of trade accounts and bills receivables (net of impairment losses for bad and doubtful debts) is as follows:
 
 
   
At 30 June
At 31 December
   
2008
RMB millions
2007
RMB millions
   
 
Within one year
51,802
35,523
 
Between one and two years
53
156
 
Between two and three years
87
93
 
Over three years
 80
 26
   
52,022
35,798
 
 

 
109
 

 
22
TRADE ACCOUNTS RECEIVABLES, NET AND BILLS RECEIVABLES (Continued)
 
Impairment losses for bad and doubtful debts are analysed as follows:
 
 
   
2008
RMB millions
2007
RMB millions
   
 
Balance at 1 January
2,882
3,345
 
Impairment losses recognised for the period
66
19
 
Reversal of impairment losses
(79)
(90)
 
Written off
(71)
(39)
 
Balance at 30 June
2,798
3,235
 
 
 
Sales are generally on a cash term. Credit is generally only available for major customers with well-established trading records. Amounts due from Sinopec Group Company and fellow subsidiaries are repayable under the same terms.
 
 
23
INVENTORIES
 
 
   
At 30 June
2008
RMB millions
At 31 December
2007
RMB millions
   
   
 
Crude oil and other raw materials
109,993
70,739
 
Work in progress
19,642
11,823
 
Finished goods
47,119
35,040
 
Spare parts and consumables
3,341
 3,002
   
180,095
120,604
 
Less: Allowance for diminution in value of inventories
(16,621)
(4,572)
   
163,474
116,032
 
 
 
The cost of inventories recognised as an expense in the consolidated income statement amounted to RMB 697,324 million for the six-month period ended 30 June 2008 (2007: RMB 464,459 million), including the write-down of inventories amounted to RMB 16,030 million (2007: RMB 10 million), primarily in the refining segment, and the reversal of write-down of inventories made in prior years amounted to RMB 3,981 million (2007: RMB 79 million), that mainly arose from the sales of inventories. The write-down of inventories and the reversals of write-down of inventories were recorded in purchased crude oil, products and operating supplies and expenses in the consolidated income statement.
 
 
24
PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
 
   
At 30 June
2008
RMB millions
At 31 December
2007
RMB millions
   
   
 
Advances to third parties
2,263
1,418
 
Amounts due from Sinopec Group Company and fellow subsidiaries
10,232
6,719
 
Other receivables
5,813
1,597
 
Purchase deposits
3,959
3,817
 
Prepayments in connection with construction work and equipment purchases
5,856
4,683
 
Prepaid value-added tax and customs duty
13,530
6,325
 
Amounts due from associates and jointly controlled entities
1,787
363
   
43,440
24,922
 
25
DEFERRED TAX ASSETS AND LIABILITIES
 
Deferred tax assets and deferred tax liabilities are attributable to the items detailed in the table below:
 
   
Assets
Liabilities
Net balance
   
At 30 June
2008
RMB millions
At 31 December
2007
RMB millions
At 30 June
2008
RMB millions
At 31 December
2007
RMB millions
At 30 June
2008
RMB millions
At 31 December
2007
RMB millions
   
   
 
Current
            
 
Receivables and inventories
7,643
3,841
—
—
7,643
3,841
 
Accruals
6,565
2,613
—
—
6,565
2,613
 
Non-current
            
 
Property, plant and equipment
2,615
2,641
(1,407)
(1,376)
1,208
1,265
 
Accelerated depreciation
—
—
(3,901)
(4,144)
(3,901)
(4,144)
 
Tax value of losses carried forward
1,029
176
—
—
1,029
176
 
Lease prepayments
302
306
—
—
302
306
 
Available-for-sale financial assets
—
—
(64)
(116)
(64)
(116)
 
Embedded derivative component
  of the Convertible Bonds
64
803
—
—
64
803
 
Others
60
59
—
—
60
59
 
Deferred tax assets/(liabilities)
18,278
10,439
(5,372)
(5,636)
12,906
4,803
 

 
110
 

 
25
DEFERRED TAX ASSETS AND LIABILITIES (Continued)
 
As at 30 June 2008, certain subsidiaries of the Company did not recognise the tax value of losses carried forward of RMB 4,833 million (2007: RMB 3,813 million), because it was not probable that the related tax benefit will be realised. The tax value of these losses carried forward of RMB 341 million, RMB 720 million, RMB 1,167 million, RMB 1,373 million, RMB 412 million and RMB 820 million will expire in 2008, 2009, 2010, 2011, 2012 and 2013, respectively.
   
 
Based on management’s assessment of the probability that taxable profit will be available over the period which the deferred tax assets can be realised or utilised, deferred tax asset of RMB 255 million (2007: RMB 38 million) were not recorded for the six-month period ended 30 June 2008. In assessing the probability, both positive and negative evidence was considered, including whether it is probable that the operations will have future taxable profits over the periods which the deferred tax assets are deductible or utilised and whether the tax losses result from identifiable causes which are unlikely to recur.
   
 
Movements in the deferred tax assets and liabilities are as follows:
 
 
   
Balance at
1 January
2007
RMB millions
Recognised in
consolidated
income
statement
RMB millions
Acquisitions
of
subsidiaries
RMB millions
Recognised
in other
reserve
RMB millions
Balance at
30 June
2007
RMB millions
   
   
   
   
 
Current
          
 
Receivables and inventories
3,532
40
—
—
3,572
 
Accruals
865
(37)
—
—
828
 
Non-current
          
 
Property, plant and equipment
601
574
(47)
—
1,128
 
Accelerated depreciation
(4,657)
513
—
—
(4,144)
 
Tax value of losses carried forward
105
44
—
—
149
 
Lease prepayments (i)
351
(4)
—
(37)
310
 
Available-for-sale financial assets (ii)
(4)
—
—
(92)
(96)
 
Embedded derivative component
   of the Convertible Bonds
—
296
—
—
296
 
 
Others
50
12
—
—
62
 
Net deferred tax assets/(liabilities)
843
1,438
(47)
(129)
2,105
 
 
   
Balance at
1 January
2008
RMB millions
Recognised in
consolidated
income
statement
RMB millions
Recognised
in other
reserve
RMB millions
Balance at
30 June
2008
RMB millions
   
   
   
   
 
Current
        
 
Receivables and inventories
3,841
3,802
—
7,643
 
Accruals
2,613
3,952
—
6,565
 
Non-current
        
 
Property, plant and equipment
1,265
(57)
—
1,208
 
Accelerated depreciation
(4,144)
243
—
(3,901)
 
Tax value of losses carried forward
176
853
—
1,029
 
Lease prepayments
306
(4)
—
302
 
Available-for-sale financial assets (ii)
(116)
—
52
(64)
 
Embedded derivative component
  of the Convertible Bonds
803
(739)
—
64
 
Others
59
1
—
60
 
Net deferred tax assets
4,803
8,051
52
12,906
 
 
 
Note:
     
 
(i)
The amount recognised in equity represents the effect of change in tax rate on deferred tax assets previously recognised directly in equity as a result of the new tax law.
     
 
(ii)
The amount recognised in equity represents the deferred tax effect of change in fair value of available-for-sale financial assets which was recognised directly in equity.
 

 
111
 

 
26
SHORT-TERM AND LONG-TERM DEBTS AND LOANS FROM SINOPEC GROUP COMPANY AND FELLOW SUBSIDIARIES
   
 
Short-term debts represent:
 
 
   
At 30 June
2008
RMB millions
At 31 December
2007
RMB millions
   
   
 
Third parties’ debts
    
 
Short-term bank loans
46,243
21,294
 
Current portion of long-term bank loans
18,484
12,259
 
Current portion of long-term other loans
31
1,027
   
64,758
34,580
 
Corporate bonds (a)
—
10,074
       
   
64,758
44,654
 
Loans from Sinopec Group Company and fellow subsidiaries
    
 
Short-term loans
20,986
15,660
 
Current portion of long-term loans
270
180
   
21,256
15,840
       
   
86,014
60,494
 
 
 
The Group’s weighted average interest rate on short-term loans was 5.1% (2007: 5.4 %) at 30 June 2008.
   
 
Long-term debts comprise:
 
 
     
At 30 June
At 31 December
   
Interest rate and final maturity
2008
2007
     
RMB millions
RMB millions
 
Third parties’ debts
      
 
Long-term bank loans
      
 
Renminbi denominated
Interest rates ranging from interest free to
9.1% per annum at 30 June 2008 with maturities
through 2018
45,523
46,912
 
Japanese Yen denominated
Interest rates ranging from 2.6% to 3.0% per annum
at 30 June 2008 with maturities through 2024
1,976
2,147
 
US Dollar denominated
Interest rates ranging from interest free to 7.4%
per annum at 30 June 2008 with maturities
through 2031
7,689
1,189
 
Euro denominated
Interest rates ranging from 6.6% to 6.7% per annum
at 30 June 2008 with maturity through 2011
264
78
 
Hong Kong Dollar denominated
Floating rate at Hong Kong Interbank Offer Rate
plus 0.5% per annum at 31 December 2007;
paid off as at 30 June 2008
—
375
     
55,452
50,701
 
Long-term other loans
      
 
Renminbi denominated
Interest rates ranging from interest free to 5.2%
per annum at 30 June 2008 with maturities
through 2011
2,075
3,075
 
US Dollar denominated
Interest rates ranging from interest free to 2%
per annum at 30 June 2008 with maturities
through 2015
38
38
     
2,113
3,113
 

 
112
 

 
26
SHORT-TERM AND LONG-TERM DEBTS AND LOANS FROM SINOPEC GROUP COMPANY AND FELLOW SUBSIDIARIES (Continued)
 
     
At 30 June
At 31 December
   
Interest rate and final maturity
2008
2007
     
RMB millions
RMB millions
 
Corporate bonds
      
 
Renminbi denominated
Fixed interest rate at 4.61% per annum at
30 June 2008 with maturity in
February 2014 (b)
3,500
3,500
 
 
   
Fixed interest rate at 4.20% per annum at
30 June 2008 with maturity in May 2017(c)
5,000
5,000
 
   
Fixed interest rate at 5.40% per annum at
30 June 2008 with maturity in November 2012 (d)
8,500
8,500
 
   
Fixed interest rate at 5.68% per annum at
30 June 2008 with maturity in November 2017 (e)
11,500
11,500
 
     
28,500
28,500
 
Convertible bonds
      
 
Hong Kong Dollar denominated
Zero coupon Convertible Bonds with maturity
in April 2014 (f)
10,560
14,106
 
 
Renminbi denominated
Bonds with Warrants with fixed interest rate at
0.8% per annum and maturity in February 2014 (g)
23,419
—
 
     
33,979
14,106
         
 
Total third parties’ long-term debts
  
120,044
96,420
 
Less: Current portion
  
(18,515)
(13,286)
     
101,529
83,134
 
Long-term loans form Sinpec Group
   Company and fellow subsidiaries
      
 
 
Renminbi denominated
Interest rates ranging from interest free to 7.3%
per annum at 30 June 2008 with maturities
through 2020
37,140
37,360
 
 
 
Less: Current portion
  
(270)
(180)
     
36,870
37,180
         
     
138,399
120,314
 
 
 
Note:
     
 
(a)
The Company issued 182-day corporate bonds of face value at RMB 10 billion to corporate investors in the PRC debenture market on 22 October 2007 at par value of RMB 100. The effective yield of the 182-day corporate bond is 4.12% per annum. The Company redeemed the corporate bonds in April 2008.
     
 
(b)
The Company issued ten-year corporate bonds of RMB 3.5 billion to PRC citizens as well as PRC legal and non-legal persons on 24 February 2004. The ten-year corporate bond bears a fixed interest rate of 4.61% per annum and interest is paid annually. These corporate bonds were guaranteed by Sinopec Group Company.
     
 
(c)
The Company issued ten-year corporate bonds of RMB 5 billion to corporate investors in the PRC on 10 May 2007. The ten-year corporate bond bears a fixed interest rate of 4.20% per annum and interest is paid annually. These corporate bonds were guaranteed by Sinopec Group Company.
     
 
(d)
The Company issued five-year corporate bonds of RMB 8.5 billion to corporate investors in the PRC on 13 November 2007. The five-year corporate bond bears a fixed interest rate of 5.40% per annum and interest is paid annually. These corporate bonds were guaranteed by Sinopec Group Company.
     
 
(e)
The Company issued ten-year corporate bonds of RMB 11.5 billion to corporate investors in the PRC on 13 November 2007. The ten-year corporate bond bears a fixed interest rate of 5.68% per annum and interest is paid annually. These corporate bonds were guaranteed by Sinopec Group Company.
 

 
113
 

 
26
SHORT-TERM AND LONG-TERM DEBTS AND LOANS FROM SINOPEC GROUP COMPANY AND FELLOW SUBSIDIARIES (Continued)
     
 
(f)
On 24 April 2007, the Company issued zero coupon convertible bonds due 2014 with an aggregate principal amount of HK$11.7 billion (the ÒConvertible BondsÓ). The Convertible Bonds are convertible into H shares of the Company from 4 June 2007 onwards at a price of HK$10.76 per share, subject to adjustment for, amongst other things, subdivision or consolidation of shares, bonus issues, rights issues, capital distribution, change of control and other events which have a dilutive effect on the issued share capital of the Company. Unless previously redeemed, converted or purchased and cancelled, the Convertible Bonds will be redeemed on the maturity date at 121.069% of the principal amount. The Company has an early redemption option at any time after 24 April 2011 (subject to certain criteria) and a cash settlement option when the holders exercise their conversion right. The holders also have an early redemption option to require the Company to redeem all or part of the Convertible Bonds on 24 April 2011 at an early redemption amount of 111.544% of the principal amount.
     
   
At 30 June 2008, the carrying amounts of liability and derivative components of the Convertible Bonds were RMB 9,696 million (2007: RMB 10,159 million) and RMB 864 million (2007: RMB 3,947 million), respectively. No conversion of the Convertible Bonds has occurred up to 30 June 2008.
     
   
As at 30 June 2008 and 31 December 2007, the fair value of the derivative component of the Convertible Bonds was calculated using the Black-Scholes Model. The following are the major inputs used in the Black-Scholes Model:
 
 
   
At 30 June
At 31 December
   
2008
2007
 
Stock price of underlying shares
HKD 7.30
HKD 11.78
 
Conversion price
HKD 10.76
HKD 10.76
 
Volatility
39%
46%
 
Average risk free rate
3.66%
3.60%
 
Average expected life
4.3 years
4.8 years
 
 
   
Any change in the major inputs into the model will result in changes in the fair value of the derivative component of the Convertible Bonds. The change in the fair value of the conversion option from 31 December 2007 to 30 June 2008 resulted in an unrealised gain of RMB 2,956 million (2007: an unrealised loss of RMB 897 million), which has been recorded in the Òfinance costsÓ section of the consolidated income statement for the six-month period ended 30 June 2008.
     
   
The initial carrying amount of the liability component is the residual amount, which is after deducting the allocated issuance cost of the Convertible Bonds relating to the liability component and the fair value of the derivative component as at 24 April 2007. Interest expense is calculated using the effective interest method by applying the effective interest rate of 4.19% to the liability component. Should the aforesaid derivative component not be separated out and the entire Convertible Bonds is considered as the liability component, the effective interest rate would have been 3.03%.
     
 
(g)
On 26 February 2008, the Company issued bonds with stock warrants due 2014 with an aggregate principal amount of RMB 30 billion in the PRC (the ÒBonds with WarrantsÓ). The Bonds with Warrants, which bear a fixed interest rate of 0.8% per annum payable annually, were issued at par value of RMB 100. The Bonds with Warrants were guaranteed by Sinopec Group Company. Every ten Bonds with Warrants are entitled to warrants (the ÒWarrantsÓ) to subscribe 50.5 A shares of the Company during the 5 trading days prior to 3 March 2010 at an initial exercise price of RMB 19.68 per share, subject to adjustment for, amongst other things, cash dividends, subdivision or consolidation of shares, bonus issues, rights issues, capital distribution, change of control and other events which have a dilutive effect on the issued share capital of the Company.
     
   
As at 30 June 2008, the exercise price of the Warrants was adjusted to RMB 19.49 per share as a result of the final dividend in respect of the year ended 31 December 2007 declared during the six-month period 30 June 2008.
     
   
The initial recognition of the liability component of the Bond with Warrants is measured as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option. Interest expense is calculated using the effective interest method by applying the effective interest rate of 5.40% to the liability component. The excess of proceeds from the issuance of the Bonds with Warrants, net of issuance costs, over the amount initially recognised as the liability component is recognised as the equity component in capital reserve until either the Warrants is exercised or expired. Should the equity component not be separated out and the entire Bonds with Warrants is considered as the liability component, the effective interest rate would have been 0.8%. The initial carrying amounts of liability and equity components of the Bonds with Warrants were RMB 22,971 million and RMB 6,879 million upon issuance, respectively.
     
 
Third parties’ loans of RMB 59 million of the Group at 30 June 2008 (2007: RMB 87 million) were secured by certain of the Group’s property, plant and equipment. The net book value of property, plant and equipment of the Group pledged as security amounted to RMB 74 million at 30 June 2008 (2007: RMB 141 million).
     
27
TRADE ACCOUNTS AND BILLS PAYABLES
 
 
   
At 30 June
At 31 December
   
2008
2007
   
RMB millions
RMB millions
 
Amounts due to third parties
119,387
87,577
 
Amounts due to Sinopec Group Company and fellow subsidiaries
4,400
3,522
 
Amounts due to associates and jointly controlled entities
2,882
1,950
   
126,669
93,049
 
Bills payable
17,563
12,162
   
144,232
105,211
 
 
 
The maturities of trade accounts and bills payables are as follows:
 
 
   
At 30 June
At 31 December
   
2008
2007
   
RMB millions
RMB millions
 
Due within 1 month or on demand
105,944
75,401
 
Due after 1 month but within 6 months
38,228
29,609
 
Due after 6 months
60
201
   
144,232
105,211
 

 
114
 

 
28
ACCRUED EXPENSES AND OTHER PAYABLES
 
 
   
At 30 June
At 31 December
   
2008
2007
   
RMB millions
RMB millions
 
Amounts due to Sinopec Group Company and fellow subsidiaries
13,775
12,907
 
Accrued expenditures
31,069
29,260
 
Provision for onerous contracts for purchases of crude oil (Note)
22,400
6,700
 
Taxes other than income tax
10,826
8,836
 
Receipts in advance
25,704
23,551
 
Advances from third parties
1,051
1,103
 
Others
8,268
6,814
   
113,093
89,171
 
 
 
Note:
   
 
As at 30 June 2008, the Group has entered into certain non-cancellable purchase commitment contracts of crude oil for delivery in the six-month period ending 31 December 2008. Due to the distortion of the correlation of domestic refined petroleum product prices and the crude oil prices, the Group has determined that the economic benefits to be derived from processing the crude oil under these purchase contracts would be lower than the unavoidable cost of meeting the Group’s obligations under these purchase contracts. Consequently, a provision for onerous contracts of RMB 22,400 million (2007: RMB 6,700 million) was recognised in accordance with the policy set out in Note 2(p) as at 30 June 2008.
   
29
OTHER LIABILITIES
   
 
Other liabilities primarily represent provision for future dismantlement costs of oil and gas properties. As at and before 31 December 2006, the Group did not have legal obligation nor constructive obligation to take any dismantlement measures for its retired oil and gas properties. During the six-month period ended 30 June 2007, due to the rising environmental concern in the PRC, the Group has committed to the PRC government to establish certain standardised measures for the dismantlement of its retired oil and gas properties by making reference to the industry practices and is thereafter constructively obligated to take dismantlement measures of its retired oil and gas properties. During the six-month period ended 30 June 2008, the Group recognised an additional provision of RMB 291 million (2007: RMB 5,427 million) in respect of its obligations for the dismantlement of its retired oil and gas properties, and accretion expenses of RMB 206 million (2007: RMB 155 million). As at 30 June 2008, the aggregate amount of provision in respect of the obligations for the dismantlement of the Group’s retired oil and gas properties was RMB 8,041 million (2007: RMB 7,544 million).
   
30
SHARE CAPITAL
 
 
   
At 30 June
At 31 December
   
2008
2007
   
RMB millions
RMB millions
 
Registered, issued and fully paid:
    
 
69,921,951,000 domestic listed A shares of RMB 1.00 each
69,922
69,922
 
16,780,488,000 overseas listed H shares of RMB 1.00 each
16,780
16,780
   
86,702
86,702
 
 
 
 
The Company was established on 25 February 2000 with a registered capital of 68.8 billion domestic state-owned shares with a par value of RMB 1.00 each. Such shares were issued to Sinopec Group Company in consideration for the assets and liabilities of the Predecessor Operations transferred to the Company (Note 1).
   
 
Pursuant to the resolutions passed at an Extraordinary General Meeting held on 25 July 2000 and approvals from relevant government authorities, the Company is authorised to increase its share capital to a maximum of 88.3 billion shares with a par value of RMB 1.00 each and offer not more than 19.5 billion shares with a par value of RMB 1.00 each to investors outside the PRC. Sinopec Group Company is authorised to offer not more than 3.5 billion shares of its shareholdings in the Company to investors outside the PRC. The shares sold by Sinopec Group Company to investors outside the PRC would be converted into H shares.
   
 
In October 2000, the Company issued 15,102,439,000 H shares with a par value of RMB 1.00 each, representing 12,521,864,000 H shares and 25,805,750 American Depositary Shares (ÒADSsÓ, each representing 100 H shares), at prices of HK$ 1.59 per H share and US$ 20.645 per ADS, respectively, by way of a global initial public offering to Hong Kong and overseas investors. As part of the global initial public offering, 1,678,049,000 domestic state-owned ordinary shares of RMB 1.00 each owned by Sinopec Group Company were converted into H shares and sold to Hong Kong and overseas investors.
   
 
In July 2001, the Company issued 2.8 billion domestic listed A shares with a par value of RMB 1.00 each at RMB 4.22 by way of a public offering to natural persons and institutional investors in the PRC.
   
 
On 25 September 2006, the shareholders of listed A shares accepted the proposal offered by the shareholders of state-owned A shares whereby the shareholders of state-owned A shares agreed to transfer 2.8 state-owned A shares to shareholders of listed A shares for every 10 listed A shares they held, in exchange for the approval for the listing of all state-owned A shares. In October 2006, 67,121,951,000 domestic state-owned A shares became listed A shares.
   
 
All A shares and H shares rank pari passu in all material aspects.
 

 
115
 

 
30
SHARE CAPITAL (Continued)
   
 
Capital management
 
The Group optimises the structure of its capital, comprising equity and loans. In order to maintain or adjust the capital structure, the Group may issue new shares, adjust the capital expenditure plan, sell assets to reduce debt, or adjust the proportion of short-term and long-term loans. The Group monitors capital on the basis of debt-to-equity ratio, which is calculated by dividing long-term loans (excluding current portion), including long-term debts and loans from Sinopec Group Company and fellow subsidiaries, by the total of equity attributable to equity shareholders of the Company and long-term loans (excluding current portion), and liability-to-asset ratio, which is calculated by dividing total liabilities by total assets. The Group’s strategy is to make appropriate adjustments according to the operating and investment needs and the changes of market conditions, and to maintain the debt-to-equity ratio and the liability-to-asset ratio at a range considered reasonable by management. As at 30 June 2008, the debt-to-equity ratio and the liability-to-asset ratio of the Group were 30.8% (2007: 28.1%) and 59.9% (2007: 54.6%), respectively.
   
 
The schedule of the contractual maturities of loans and commitments are disclosed in Notes 26 and 31, respectively.
   
 
There were no changes in the Group’s approach to capital management during the period. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.
   
31
COMMITMENTS AND CONTINGENT LIABILITIES
   
 
Operating lease commitments
 
The Group leases land and buildings, service stations and other equipment through non-cancellable operating leases. These operating leases do not contain provisions for contingent lease rentals. None of the rental agreements contain escalation provisions that may require higher future rental payments.
   
 
At 30 June 2008 and 31 December 2007, the future minimum lease payments under operating leases are as follows:
 
 
   
At 30 June
At 31 December
   
2008
2007
   
RMB millions
RMB millions
 
Within one year
5,159
4,620
 
Between one and two years
5,072
4,497
 
Between two and three years
4,890
4,477
 
Between three and four years
4,818
4,407
 
Between four and five years
4,795
4,465
 
Thereafter
114,364
119,726
   
139,098
142,192
 
 
 
Capital commitments
 
At 30 June 2008 and 31 December 2007, capital commitments are as follows:
 
 
   
At 30 June
At 31 December
   
2008
2007
   
RMB millions
RMB millions
 
Authorised and contracted for
122,056
130,816
 
Authorised but not contracted for
105,490
114,854
   
227,546
245,670
 
 
 
These capital commitments relate to oil and gas exploration and development, refining and petrochemical production capacity expansion projects, the construction of service stations and oil depots.
   
 
Exploration and production licenses
 
Exploration licenses for exploration activities are registered with the Ministry of Land and Resources. The maximum term of the Group’s exploration licenses is 7 years, and may be renewed twice within 30 days prior to expiration of the original term with each renewal being for a two-year term. The Group is obligated to make progressive annual minimum exploration investment relating to the exploration blocks in respect of which the license is issued. The Ministry of Land and Resources also issues production licenses to the Group on the basis of the reserve reports approved by relevant authorities. The maximum term of a full production license is 30 years unless a special dispensation is given by the State Council. The maximum term of production licenses issued to the Group is 80 years as a special dispensation was given to the Group by the State Council. The Group’s production license is renewable upon application by the Group 30 days prior to expiration.
   
 
The Group is required to make payments of exploration license fees and production right usage fees to the Ministry of Land and Resources annually which are expensed as incurred. Payments incurred were approximately RMB 210 million for the six-month period ended 30 June 2008 (2007: RMB 303 million).
 

 
116
 

 
31
COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
   
 
Exploration and production licenses (Continued)
 
Estimated future annual payments are as follows:
 
 
   
At 30 June
At 31 December
   
2008
2007
   
RMB millions
RMB millions
 
Within one year
168
218
 
Between one and two years
98
150
 
Between two and three years
42
66
 
Between three and four years
21
20
 
Between four and five years
19
19
 
Thereafter
696
656
   
1,044
1,129
 
 
 
Contingent liabilities
 
(a)
The Company has been advised by its PRC lawyers that, except for liabilities constituting or arising out of or relating to the business assumed by the Company in the Reorganisation, no other liabilities were assumed by the Company, and the Company is not jointly and severally liable for other debts and obligations incurred by Sinopec Group Company prior to the Reorganisation.
     
 
(b)
At 30 June 2008 and 31 December 2007, guarantees given to banks in respect of banking facilities granted to the parties below are as follows:
 
 
     
At 30 June
At 31 December
     
2008
2007
     
RMB millions
RMB millions
   
Associates and jointly controlled entities
9,838
9,812
 
 
   
The Group monitors the conditions that are subject to the guarantees to identify whether it is probable that a loss has occurred, and recognises any such losses under guarantees when those losses are estimable. At 30 June 2008 and 31 December 2007, it is not probable that the Group will be required to make payments under the guarantees. Thus no liability has been accrued for a loss related to the Group’s obligation under these guarantee arrangements.
     
 
Environmental contingencies
 
Under existing legislation, management believes that there are no probable liabilities that will have a material adverse effect on the financial position or operating results of the Group. The PRC government, however, has moved, and may move further towards more rigorous enforcement of applicable laws, and towards the adoption of more stringent environmental standards. Environmental liabilities are subject to considerable uncertainties which affect the Group’s ability to estimate the ultimate cost of remediation efforts. These uncertainties include i) the exact nature and extent of the contamination at various sites including, but not limited to refineries, oil fields, service stations, terminals and land development areas, whether operating, closed or sold, ii) the extent of required cleanup efforts, iii) varying costs of alternative remediation strategies, iv) changes in environmental remediation requirements, and v) the identification of new remediation sites. The amount of such future cost is indeterminable due to such factors as the unknown magnitude of possible contamination and the unknown timing and extent of the corrective actions that may be required. Accordingly, the outcome of environmental liabilities under proposed or future environmental legislation cannot reasonably be estimated at present, and could be material. The Group paid normal routine pollutant discharge fees of approximately RMB 1,113 million for the six-month period ended 30 June 2008 (2007: RMB 1,098 million).
     
 
Legal contingencies
 
The Group is a defendant in certain lawsuits as well as the named party in other proceedings arising in the ordinary course of business. While the outcomes of such contingencies, lawsuits or other proceedings cannot be determined at present, management believes that any resulting liabilities will not have a material adverse effect on the financial position or operating results of the Group.
 

 
117
 

 
32
RELATED PARTY TRANSACTIONS
 
Parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control or jointly control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party of the Group.
     
 
(a)
Transactions with Sinopec Group Company and fellow subsidiaries, associates and jointly controlled entities
   
The Group is part of a larger group of companies under Sinopec Group Company, which is owned by the PRC government, and has significant transactions and relationships with Sinopec Group Company and fellow subsidiaries. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.
     
   
The principal related party transactions with Sinopec Group Company and fellow subsidiaries, associates and jointly controlled entities, which were carried out in the ordinary course of business, are as follows:
 
 
       
Six-month periods
 ended 30 June
     
Note
2008
2007
       
RMB millions
RMB millions
   
Sales of goods
(i)
92,166
73,102
   
Purchases
(ii)
35,355
32,481
   
Transportation and storage
(iii)
540
527
   
Exploration and development services
(iv)
13,799
13,345
   
Production related services
(v)
4,357
6,466
   
Ancillary and social services
(vi)
805
801
   
Operating lease charges
(vii)
1,949
1,858
   
Agency commission income
(viii)
36
40
   
Interest received
(ix)
13
16
   
Interest paid
(x)
566
347
   
Net deposits (placed with)/withdrawn from related parties
(xi)
(265)
194
   
Net loans obtained from/(repaid to) related parties
(xii)
5,106
(900)
 
 
 
The amounts set out in the table above in respect of the six-month periods ended 30 June 2008 and 2007 represent the relevant costs to the Group and income from related parties as determined by the corresponding contracts with the related parties.
     
 
At 30 June 2008 and 31 December 2007, there were no guarantees given to banks by the Group in respect of banking facilities to Sinopec Group Company and fellow subsidiaries. Guarantees given to banks by the Group in respect of banking facilities to associates and jointly controlled entities are disclosed in Note 31.
     
 
The directors of the Company are of the opinion that the above transactions with related parties were conducted in the ordinary course of business and on normal commercial terms or in accordance with the agreements governing such transactions.
     
 
Notes:
     
 
   
(i)
Sales of goods represent the sale of crude oil, intermediate petrochemical products, petroleum products and ancillary materials.
       
   
(ii)
Purchases represent the purchase of materials and utility supplies directly related to the Group’s operations such as the procurement of raw and ancillary materials and related services, supply of water, electricity and gas.
       
   
(iii)
Transportation and storage represent the cost for the use of railway, road and marine transportation services, pipelines, loading, unloading and storage facilities.
       
   
(iv)
Exploration and development services comprise direct costs incurred in the exploration and development such as geophysical, drilling, well testing and well measurement services.
       
   
(v)
Production related services represent ancillary services rendered in relation to the Group’s operations such as equipment repair and general maintenance, insurance premium, technical research, communications, fire fighting, security, product quality testing and analysis, information technology, design and engineering, construction which includes the construction of oilfield ground facilities, refineries and chemical plants, manufacture of replacement parts and machinery, installation, project management and environmental protection.
       
   
(vi)
Ancillary and social services represent expenditures for social welfare and support services such as educational facilities, media communication services, sanitation, accommodation, canteens, property maintenance and management services.
       
   
(vii)
Operating lease charges represent the rental paid to Sinopec Group Company for operating leases in respect of land, buildings and equipment.
       
   
(viii)
Agency commission income represents commission earned for acting as an agent in respect of sales of products and purchase of materials for certain entities owned by Sinopec Group Company.
       
   
(ix)
Interest received represents interest received from deposits placed with Sinopec Finance Company Limited, a finance company controlled by Sinopec Group Company. The applicable interest rate is determined in accordance with the prevailing saving deposit rate. The balance of deposits at 30 June 2008 was RMB 603 million (2007: RMB 338 million).
 

 
118
 

 
32
RELATED PARTY TRANSACTIONS (Continued)
  
       
 
(a)
Transactions with Sinopec Group Company and fellow subsidiaries, associates and jointly controlled entities (Continued)
       
   
(x)
Interest paid represents interest charges on the loans and advances obtained from Sinopec Group Company and Sinopec Finance Company Limited.
       
   
(xi)
Deposits placed with/withdrawn from related parties represent net deposits placed with/withdrawn from Sinopec Finance Company Limited.
       
   
(xii)
The Group obtained loans from and repaid loans to Sinopec Group Company and fellow subsidiaries.
       
   
In connection with the Reorganisation, the Company and Sinopec Group Company entered into a number of agreements under which 1) Sinopec Group Company will provide goods and products and a range of ancillary, social and supporting services to the Group and 2) the Group will sell certain goods to Sinopec Group Company. The terms of these agreements are summarised as follows:
       
 
(a)
The Company has entered into a non-exclusive Agreement for Mutual Provision of Products and Ancillary Services (ÒMutual Provision AgreementÓ) with Sinopec Group Company effective from 1 January 2000 in which Sinopec Group Company has agreed to provide the Group with certain ancillary production services, construction services, information advisory services, supply services and other services and products. While each of Sinopec Group Company and the Company is permitted to terminate the Mutual Provision Agreement upon at least six months notice, Sinopec Group Company has agreed not to terminate the agreement if the Group is unable to obtain comparable services from a third party. The pricing policy for these services and products provided by Sinopec Group Company to the Group is as follows:
       
   
l
the government-prescribed price;
       
   
l
where there is no government-prescribed price, the government-guidance price;
       
   
l
where there is neither a government-prescribed price nor a government-guidance price, the market price; or
       
   
l
where none of the above is applicable, the price to be agreed between the parties, which shall be based on a reasonable cost incurred in providing such services plus a profit margin not exceeding 6%.
       
 
(b)
The Company has entered into a non-exclusive Agreement for Provision of Cultural and Educational, Health Care and Community Services with Sinopec Group Company effective from 1 January 2000 in which Sinopec Group Company has agreed to provide the Group with certain cultural, educational, health care and community services on the same pricing terms and termination conditions as agreed to in the above Mutual Provision Agreement.
       
 
(c)
The Company has entered into a series of lease agreements with Sinopec Group Company to lease certain land and buildings at a rental of approximately RMB 3,234 million and RMB 568 million, respectively, per annum. The Company and Sinopec Group Company can renegotiate the rental amount every three years for land and every year for buildings, however such amount cannot exceed the market price as determined by an independent third party. The Group has the option to terminate these leases upon six months notice to Sinopec Group Company.
       
 
(d)
The Company has entered into agreements with Sinopec Group Company effective from 1 January 2000 under which the Group has been granted the right to use certain trademarks, patents, technology and computer software developed by Sinopec Group Company.
       
 
(e)
The Company has entered into a service stations franchise agreement with Sinopec Group Company effective from 1 January 2000 under which its service stations and retail stores would exclusively sell the refined products supplied by the Group.
       
 
Pursuant to the resolutions passed at the Directors’ meeting held on 26 June 2008, the Group acquired the Downhole Assets from Sinopec Group Company, primarily property, plant and equipment with net book value of RMB 1,542 million, for a cash consideration of RMB 1,624 million, which approximated the net carrying value of the assets and liabilities of the Downhole Assets.
       
 
Amounts due from/to Sinopec Group Company and fellow subsidiaries, associates and jointly controlled entities included in the following accounts captions are summarised as follows:
 
 
   
At 30 June
At 31 December
   
2008
2007
   
RMB millions
RMB millions
 
Trade accounts receivable
13,744
3,990
 
Prepaid expenses and other current assets
12,019
7,082
 
Total amounts due from Sinopec Group Company and fellow subsidiaries,
   associates and jointly controlled entities
25,763
11,072
 
 
Trade accounts payable
7,282
5,472
 
Accrued expenses and other payables
13,775
12,907
 
Short-term loans and current portion of long-term loans from Sinopec
   Group Company and fellow subsidiaries
21,256
15,840
 
 
Long-term loans excluding current portion of long-term loans from Sinopec
   Group Company and fellow subsidiaries
36,870
37,180
 
 
Total amounts due to Sinopec Group Company and fellow subsidiaries,
   associates and jointly controlled entities
79,183
71,399
 

 
 
119
 
 
 
32
RELATED PARTY TRANSACTIONS (Continued)
     
 
(a)
Transactions with Sinopec Group Company and fellow subsidiaries, associates and jointly controlled entities (Continued)
   
Amounts due from/to Sinopec Group Company and fellow subsidiaries, associates and jointly controlled entities, other than short-term loans and long-term loans, bear no interest, are unsecured and are repayable in accordance with normal commercial terms. The terms and conditions associated with short-term loans and long-term loans payable to Sinopec Group Company and fellow subsidiaries are set out in Note 26.
     
   
As at and for the six-month period ended 30 June 2008, and as at and for the year ended 31 December 2007, no significant impairment losses for bad and doubtful debts were recorded in respect of amounts due from Sinopec Group Company and fellow subsidiaries, associates and jointly controlled entities.
     
 
(b)
Key management personnel emoluments
   
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including directors and supervisors of the Group. The key management personnel compensations are as follows:
 
 
Six-month periods
ended 30 June
   
2008
2007
   
RMB’000
RMB’000
 
Short-term employee benefits
4,031
2,469
 
Retirement scheme contributions
158
91
   
4,189
2,560
 
 
 
Total emoluments are included in Òpersonnel expensesÓ as disclosed in Note 7.
  
       
 
(c)
Contributions to defined contribution retirement plans
  
   
The Group participates in various defined contribution retirement plans organised by municipal and provincial governments for its staff. The details of the Group’s employee benefits plan are disclosed in Note 33. As at 30 June 2008 and 31 December 2007, the accrued contribution to post-employment benefit plans was not material.
       
 
(d)
Transactions with other state-controlled entities in the PRC
  
   
The Group is a state-controlled energy and chemical enterprise and operates in an economic regime currently dominated by entities directly or indirectly controlled by the PRC government through its government authorities, agencies, affiliations and other organisations (collectively referred as Òstate-controlled entitiesÓ).
       
   
Apart from transactions with Sinopec Group Company and fellow subsidiaries, the Group has transactions with other state-controlled entities include but not limited to the following:
       
   
l
sales and purchase of goods and ancillary materials;
       
   
l
rendering and receiving services;
       
   
l
lease of assets;
       
   
l
depositing and borrowing money; and
       
   
l
use of public utilities.
       
   
These transactions are conducted in the ordinary course of the Group’s business on terms comparable to those with other entities that are not state-controlled. The Group has established its procurement policies, pricing strategy and approval process for purchases and sales of products and services which do not depend on whether the counterparties are state-controlled entities or not.
 

 
120
 

 
32
RELATED PARTY TRANSACTIONS (Continued)
       
 
(d)
Transactions with other state-controlled entities in the PRC (Continued)
  
   
Having considered the transactions potentially affected by related party relationships, the entity’s pricing strategy, procurement policies and approval processes, and the information that would be necessary for an understanding of the potential effect of the related party relationship on the financial statements, the directors are of the opinion that the following related party transactions require disclosure of numeric details:
       
   
(i)
Transactions with other state-controlled energy and chemical companies
     
The Group’s major domestic suppliers of crude oil and refined petroleum products are China National Petroleum Corporation and its subsidiaries (ÒCNPC GroupÓ) and China National Offshore Oil Corporation and its subsidiaries (ÒCNOOC GroupÓ), which are state-controlled entities.
       
     
During the six-month period ended 30 June 2008, the aggregate amount of crude oil purchased by refining segment from CNPC Group and CNOOC Group and refined petroleum purchased by marketing and distribution segment from CNPC Group was RMB 65,811 million (2007: RMB 33,747 million).
       
     
The aggregate amounts due from/to CNPC Group and CNOOC Group are summarised as follows:
 
     
At 30 June
At 31 December
     
2008
2007
     
RMB millions
RMB millions
   
Trade accounts receivable
561
326
   
Prepaid expenses and other current assets
247
934
   
Total amounts due from CNPC Group and CNOOC Group
808
1,260
   
Trade accounts payable
4,560
3,494
   
Accrued expenses and other payables
504
371
   
Total amounts due to CNPC Group and CNOOC Group
5,064
3,865
 
 
   
(ii)
Transactions with state-controlled banks
     
The Group deposits its cash with several state-controlled banks in the PRC. The Group also obtains short-term and long-term loans from these banks in the ordinary course of business. The interest rates of the bank deposits and loans are regulated by the PBOC. The Group’s interest income from and interest expense to these state-controlled banks in the PRC are as follows:
 
 
     
Six-month periods
 ended 30 June
     
2008
2007
     
RMB millions
RMB millions
   
Interest income
185
321
   
Interest expense
3,619
3,189
 
 
   
The amounts of cash deposited at and loans from state-controlled banks in the PRC are summarised as follows:
 
 
   
At 30 June
At 31 December
   
2008
2007
   
RMB millions
RMB millions
 
Cash and cash equivalents
7,519
6,522
 
Time deposits with financial institutions
1,053
647
 
Total deposits at state-controlled banks in the PRC
8,572
7,169
 
Short-term loans and current portion of long-term loans
54,647
27,813
 
Long-term loans excluding current portion of long-term loans
36,782
37,338
 
Total loans from state-controlled banks in the PRC
91,429
65,151
 

 
121
 

 
33
EMPLOYEE BENEFITS PLAN
 
As stipulated by the regulations of the PRC, the Group participates in various defined contribution retirement plans organised by municipal and provincial governments for its staff. The Group is required to make contributions to the retirement plans at rates ranging from 18.0% to 23.0% of the salaries, bonuses and certain allowances of its staff. A member of the plan is entitled to a pension equal to a fixed proportion of the salary prevailing at his or her retirement date. The Group has no other material obligation for the payment of pension benefits associated with these plans beyond the annual contributions described above. The Group’s contributions for the six-month period ended 30 June 2008 were RMB 1,505 million (2007: RMB 1,201 million).
     
34
SEGMENTAL REPORTING
 
The Group has five operating segments as follows:
     
 
(i)
Exploration and production, which explores and develops oil fields, produces crude oil and natural gas and sells such products to the refining segment of the Group and external customers.
     
 
(ii)
Refining, which processes and purifies crude oil, that is sourced from the exploration and production segment of the Group and external suppliers, and manufactures and sells petroleum products to the chemicals and marketing and distribution segments of the Group and external customers.
     
 
(iii)
Marketing and distribution, which owns and operates oil depots and service stations in the PRC, and distributes and sells refined petroleum products (mainly gasoline and diesel) in the PRC through wholesale and retail sales networks.
     
 
(iv)
Chemicals, which manufactures and sells petrochemical products, derivative petrochemical products and other chemical products mainly to external customers.
     
 
(v)
Corporate and others, which largely comprises the trading activities of the import and export companies of the Group and research and development undertaken by other subsidiaries.
     
 
Reportable information on the Group’s business segments is as follows:
 
 
Six-month periods
ended 30 June
   
2008
2007
   
RMB millions
RMB millions
 
Turnover
    
 
Exploration and production
    
   
External sales
13,883
8,758
   
Inter-segment sales
76,314
48,260
     
90,197
57,018
 
Refining
    
   
External sales
70,478
53,208
   
Inter-segment sales
319,384
252,109
     
389,862
305,317
 
Marketing and distribution
    
   
External sales
388,801
307,083
   
Inter-segment sales
1,678
1,240
     
390,479
308,323
 
Chemicals
    
   
External sales
115,363
104,598
   
Inter-segment sales
13,817
7,330
     
129,180
111,928
 
Corporate and others
    
   
External sales
133,904
77,714
   
Inter-segment sales
277,064
124,424
     
410,968
202,138
 
Elimination of inter-segment sales
(688,257)
(433,363)
       
 
Turnover
722,429
551,361
 
Other operating revenues
    
 
Exploration and production
6,462
5,706
 
Refining
2,338
2,577
 
Marketing and distribution
460
224
 
Chemicals
2,825
3,792
 
Corporate and others
269
210
 
Other operating revenues
12,354
12,509
 
Other income
    
 
Refining
27,882
—
 
Marketing and distribution
5,520
—
 
Total other income
33,402
—
       
 
Turnover, other operating revenues and other income
768,185
563,870
 

 
122
 

 
34
SEGMENTAL REPORTING (Continued)
 
 
   
Six-month periods
 ended 30 June
   
2008
2007
   
RMB millions
RMB millions
 
Result
    
 
Operating profit/(loss)
    
 
By segment
    
 
– Exploration and production
27,098
22,750
 
– Refining
(46,021)
5,730
 
– Marketing and distribution
22,334
16,795
 
– Chemicals
4,533
8,542
 
– Corporate and others
(722)
(233)
 
Total operating profit
7,222
53,584
 
Share of profits less losses from associates and jointly controlled entities
    
 
– Exploration and production
104
87
 
– Refining
(228)
71
 
– Marketing and distribution
333
179
 
– Chemicals
812
1,635
 
– Corporate and others
337
242
 
Aggregate share of profits less losses from associates and jointly controlled entities
1,358
2,214
 
Finance costs
    
 
Interest expense
(5,563)
(3,912)
 
Interest income
212
372
 
Unrealised gain/(loss) on embedded derivative component of the Convertible Bonds
2,956
(897)
 
Foreign exchange loss
(367)
(66)
 
Foreign exchange gain
2,060
846
 
Net finance costs
(702)
(3,657)
 
Investment income
319
666
       
 
Profit before taxation
8,197
52,807
 
Taxation benefit/(expense)
136
(14,965)
 
Profit for the period
8,333
37,842
 
 
 
Information on associates and jointly controlled entities is included in Notes 18 and 19. Additions to long-lived assets by operating segment are included in Notes 15 and 16.
 
 
   
At 30 June
At 31December
   
2008
2007
   
RMB millions
RMB millions
 
Assets
    
 
Segment assets
    
 
– Exploration and production
209,603
198,945
 
– Refining
248,801
193,956
 
– Marketing and distribution
140,240
127,047
 
– Chemicals
119,564
120,988
 
– Corporate and others
52,723
34,285
 
Total segment assets
770,931
675,221
 
Interest in associates and jointly controlled entities
    
 
– Exploration and production
1,503
1,080
 
– Refining
5,978
3,915
 
– Marketing and distribution
5,487
5,355
 
– Chemicals
11,190
12,176
 
– Corporate and others
5,343
7,062
 
Aggregate interest in associates and jointly controlled entities
29,501
29,588
 
Unallocated assets
38,037
27,916
       
 
Total assets
838,469
732,725
 
Liabilities
    
 
Segment liabilities
    
 
– Exploration and production
47,343
45,185
 
– Refining
73,399
46,017
 
– Marketing and distribution
34,435
31,118
 
– Chemicals
19,453
20,786
 
– Corporate and others
89,792
51,804
 
Total segment liabilities
264,422
194,910
 
Unallocated liabilities
237,419
205,057
 
Total liabilities
501,841
399,967
 

 
123
 

 
34
SEGMENTAL REPORTING (Continued)
 
Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one year.
 
 
   
Six-month periods
ended 30 June
   
2008
2007
   
RMB millions
RMB millions
 
Capital expenditure
    
 
Exploration and production
20,981
18,277
 
Refining
3,849
6,292
 
Marketing and distribution
4,548
4,922
 
Chemicals
5,907
3,296
 
Corporate and others
1,251
1,071
   
36,536
33,858
 
Depreciation, depletion and amortisation
    
 
Exploration and production
10,927
8,148
 
Refining
4,434
4,296
 
Marketing and distribution
2,312
2,074
 
Chemicals
4,248
4,594
 
Corporate and others
514
358
   
22,435
19,470
 
Impairment losses on long-lived assets
    
 
Exploration and production
—
25
 
Refining
—
923
 
Marketing and distribution
130
571
 
Chemicals
3
123
   
133
1,642
 
 
35
PRINCIPAL SUBSIDIARIES
 
At 30 June 2008, the following list contains the particulars of subsidiaries which principally affected the results, assets and liabilities of the Group.
 
 


   
Particulars
        
   
of issued
Type of
Percentage
    
 
Name of company
capital
legal entity
of equity
  
Principal activities
   
(millions)
  
%
    
 
China Petrochemical International
  Company Limited
RMB 1,663
Limited
company
100.00
  
Trading of petrochemical products and
equipment
 
Sinopec Sales Company Limited
RMB 1,700
Limited
100.00
  
Marketing and distribution of refined petroleum products
 
Sinopec Yangzi Petrochemical
  Company Limited
RMB 16,337
Limited
company
100.00
  
Manufacturing of intermediate petrochemical products and petroleum products
 
Sinopec Fujian Petrochemical
  Company Limited (i)
RMB 2,253
Limited
company
50.00
  
Manufacturing of plastics, intermediate petrochemical products and petroleum products
 
Sinopec Shanghai Petrochemical
  Company Limited
RMB 7,200
Limited
company
55.56
  
Manufacturing of synthetic fibres, resin and plastics, intermediate petrochemical products and petroleum products
 
Sinopec Kantons Holdings Limited
HKD 104
Limited
company
72.34
  
Trading of crude oil and petroleum products
 
Sinopec Wuhan Petroleum Group
  Company Limited (i)
RMB 147
Limited
company
46.25
  
Marketing and distribution of refined petroleum products
 
Sinopec Yizheng Chemical Fibre
  Company Limited (i)
RMB 4,000
Limited
company
42.00
  
Production and sale of polyester chips and polyester fibres
 
Sinopec Zhongyuan Petrochemical
  Company Limited
RMB 2,400
Limited
company
93.51
  
Manufacturing of petrochemical products
 
Sinopec Shell (Jiangsu) Petroleum
  Marketing Company Limited
RMB 830
Limited
company
60.00
  
Marketing and distribution of refined petroleum products
 
BP Sinopec (Zhejiang) Petroleum
  Company Limited
RMB 800
Limited
company
60.00
  
Marketing and distribution of refined petroleum products
 
Sinopec Qingdao Refining and
  Chemical Company Limited
RMB 800
Limited
company
85.00
  
Manufacturing of intermediate petrochemical products and petroleum products
 
China International United Petroleum
  and Chemical Company Limited
RMB 3,040
Limited
company
100.00
  
Trading of crude oil and petrochemical products
 
Sinopec Hainan Refining and
  Chemical Company Limited
RMB 3,986
Limited
company
75.00
  
Manufacturing of intermediate petrochemical products and petroleum products
 
Sinopec (Hong Kong) Limited
HKD 5,477
Limited
company
100.00
  
Trading of crude oil and petrochemical products
 
Sinopec Senmei (Fujian)
  Petroleum Ltd.
RMB 1,840
Limited
company
55.00
  
Marketing and distribution of refined petroleum products

 
124
 

 
35
PRINCIPAL SUBSIDIARIES (Continued)
  
 
Except for Sinopec Kantons Holdings Limited and Sinopec (Hong Kong) Limited, which are incorporated in Bermuda and Hong Kong respectively, all of the above principal subsidiaries are incorporated in the PRC.
 
   (i)  The Group consolidated the financial statements of the entity because the Group controlled the board of this entity and had the power to govern its financial and operating policies.
   
36
FINANCIAL INSTRUMENTS
     
 
Overview
  
 
Financial assets of the Group include cash and cash equivalents, time deposits with financial institutions, investments, trade accounts receivable, bills receivable, amounts due from Sinopec Group Company and fellow subsidiaries, advances to third parties, amounts due from associates and jointly controlled entities, and other receivables. Financial liabilities of the Group include short-term and long-term debts, loans from Sinopec Group Company and fellow subsidiaries, trade accounts payable, bills payable, amounts due to Sinopec Group Company and fellow subsidiaries and advances from third parties. The Group has no derivative instruments that are designated and qualified as hedging instruments at 30 June 2008 and 31 December 2007.
     
 
The Group has exposure to the following risks from its use of financial instruments:
     
 
l
credit risk;
     
 
l
liquidity risk;
     
 
l
market risk; and
     
 
l
equity price risk
     
 
The Board of Directors has overall responsibility for the establishment, oversight of the Group’s risk management framework, and developing and monitoring the Group’s risk management policies.
     
 
The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. Internal audit department undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Group’s audit committee.
     
 
Credit risk
 
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s deposits placed with financial institutions and receivables from customers. To limit exposure to credit risk relating to deposits, the Group primarily places cash deposits only with large financial institution in the PRC with acceptable credit ratings. The majority of the Group’s trade accounts receivable relate to sales of petroleum and chemical products to related parties and third parties operating in the petroleum and chemical industries. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade accounts receivable. The Group maintains an impairment loss for doubtful accounts and actual losses have been within management’s expectations. No single customer accounted for greater than 10% of total trade accounts receivable. The details of the Group’s credit policy for and quantitative disclosures in respect of the Group’s exposure on credit risk relating to trade receivables are set out in Note 22.
     
 
The carrying amounts of cash and cash equivalents, time deposits with financial institutions, trade accounts and bills receivables, and other receivables, represent the Group’s maximum exposure to credit risk in relation to financial assets.
     
 
Liquidity risk
  
 
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group prepares monthly cash flow budget to ensure that they will always have sufficient liquidity to meet its financial obligation as they fall due. The Group arranges and negotiates financing with financial institutions and maintains a certain level of standby credit facilities to reduce the liquidity risk.
     
 
At 30 June 2008, the Group has standby credit facilities with several PRC financial institutions which allowed the Group to borrow up to RMB 172,000 million (2007: RMB 164,500 million) on an unsecured basis, at 5.247% (2007: 5.619%). At 30 June 2008, the Group’s outstanding borrowings under these facilities were RMB 21,519 million (2007: RMB 13,269 million) and were included in short-term debts.
 
 
 
125

 
36
FINANCIAL INSTRUMENTS (Continued)
 
The following table sets out the remaining contractual maturities at the balance sheet date of the Group’s financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on prevailing rates current at the balance sheet date) and the earliest date the Group would be required to repay:
 
 
       
At 30 June 2008
    
   
Carrying
amount
RMB millions
Total
contractual
undiscounted
cash flow
RMB millions
Within 1
 year or on
demand
RMB millions
More than 1
 year but less
than 2 years
RMB millions
More than 2
years but less
than 5 years
RMB millions
More than
5 years
RMB millions
 
Short-term debts
64,758
66,559
66,559
—
—
—
 
Long-term debts
101,529
129,670
4,041
16,726
36,733
72,170
 
Loans from Sinopec
Group Company and
fellow subsidiaries
58,126
58,974
21,823
583
477
36,091
 
Trade accounts payable
126,669
126,669
126,669
—
—
—
 
Bills payable
17,563
17,667
17,667
—
—
—
 
Accrued expenses and
other payables
54,163
54,163
54,163
—
—
—
   
422,808
453,702
290,922
17,309
37,210
108,261
 
 
 
       
At 31 December 2007
    
   
Carrying
amount
RMB millions
Total
contractual
undiscounted
cash flow
RMB millions
Within 1
 year or on
demand
RMB millions
More than 1
 year but less
than 2 years
RMB millions
More than 2
years but less
than 5 years
RMB millions
More than
5 years
RMB millions
 
Short-term debts
44,654
45,869
45,869
—
—
—
 
Long-term debts
83,134
101,886
3,906
22,708
31,643
43,629
 
Loans from Sinopec
Group Company and
fellow subsidiaries
53,020
53,793
16,485
327
1,420
35,561
 
 
 
Trade accounts payable
93,049
93,049
93,049
—
—
—
 
Bills payable
12,162
12,233
12,233
—
—
—
 
Accrued expenses and
other payables
50,084
50,084
50,084
—
—
—
 
   
336,103
356,914
221,626
23,035
33,063
79,190
 
 
 
Currency risk
 
Currency risk arises on financial instruments that are denominated in a currency other than the functional currency in which they are measured. The Group’s currency risk exposure primarily relates to short-term and long-term debts and loans from Sinopec Group Company and fellow subsidiaries denominated in US Dollars, Japanese Yen and Hong Kong Dollars.
   
 
The Group has no hedging policy on foreign currency balances, and principally reduces the currency risk by monitoring the level of foreign currency.
   
 
Included in short-term and long-term debts and loans from Sinopec Group Company and fellow subsidiaries of the Group are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:
 
 
   
At 30 June
At 31December
   
2008
2007
   
millions
millions
 
US Dollars
USD 5,620
USD 780
 
Japanese Yen
JPY 30,631
JPY 33,494
 
Hong Kong Dollars
HKD 12,061
HKD 15,135
 
 
 
A 5 percent strengthening of Renminbi against the following currencies at 30 June 2008 and 31 December 2007 would have increased profit for the period/year and retained earnings of the Group by the amounts shown below. This analysis has been determined assuming that the change in foreign exchange rates had occurred at the balance sheet date and had been applied to the foreign currency balances to which the Group has significant exposure as stated above, and that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2007.
 
   
At 30 June
At 31December
   
2008
2007
   
RMB millions
RMB millions
 
US Dollars
1,445
191
 
Japanese Yen
74
72
 
Hong Kong Dollars
398
475
 
 
Other than the amounts as disclosed above, the amounts of other financial assets and liabilities of the Group are substantially denominated in the functional currency of respective entity of the Group.
 

 
126
 

 
36
FINANCIAL INSTRUMENTS (Continued)
   
 
Interest rate risk
 
The Group’s interest rate risk exposure arises primarily from its short-term and long-term debts. Debts carrying interest at variable rates and at fixed rates expose the Group to cash flow interest rate risk and fair value interest rate risk respectively. The interest rates of short-term and long-term debts, and loans from Sinopec Group Company and fellow subsidiaries of the Group are disclosed in Note 26.
   
 
As at 30 June 2008, it is estimated that a general increase/decrease of 100 basis points in variable interest rates, with all other variables held constant, would decrease/increase the Group’s profit for the period and retained earnings by approximately RMB 451 million (for the year ended 31 December 2007: RMB 154 million). This sensitivity analysis has been determined assuming that the change in interest rates had occurred at the balance sheet date and the change was applied to the Group’s debts outstanding at that date with exposure to cash flow interest rate risk. The analysis is performed on the same basis for 2007.
   
 
Equity price risk
 
The Group is exposed to equity price risk arising from changes in the Company’s own share price to the extent that the Company’s own equity instruments underlie the fair values of derivatives of the Group. At 30 June 2008, the Group’s exposure to equity price risk is the derivative embedded in the Convertible Bonds issued by the Company as disclosed in Note 26(f).
   
 
As at 30 June 2008, it is estimated that an increase of 20% in the Company’s own share price would decrease the Group’s profit for the period and retained earnings by approximately RMB 485 million (for the year ended 31 December 2007: RMB 1,280 million); a decrease of 20% in the Company’s own share price would increase the Group’s profit for the period and retained earnings by approximately RMB 350 million (for the year ended 31 December 2007: RMB 1,285 million). This sensitivity analysis has been determined assuming that the changes in the Company’s own share price had occurred at the balance sheet date and that all other variables remain constant.
   
 
Fair values
 
The disclosures of the fair value estimates, methods and assumptions, set forth below for the Group’s financial instruments, are made to comply with the requirements of IFRS 7 and IAS 39 and should be read in conjunction with the Group’s consolidated financial statements and related notes. The estimated fair value amounts have been determined by the Group using market information and valuation methodologies considered appropriate. However, considerable judgement is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Group could realise in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
   
 
The fair values of the Group’s financial instruments (other than long-term indebtedness and investment securities) approximate their carrying amounts due to the short-term maturity of these instruments. The fair values of long-term indebtedness are estimated by discounting future cash flows using current market interest rates offered to the Group for debt with substantially the same characteristics and maturities ranging 5.71% to 7.74% (2007: 5.40% to 6.97%). The following table presents the carrying amount and fair value of the Group’s long-term indebtedness other than loans from Sinopec Group Company and fellow subsidiaries at 30 June 2008 and 31 December 2007:
 
 
   
At 30 June
At 31December
   
2008
2007
   
RMB millions
RMB millions
 
Carrying amount
120,044
96,420
 
Fair value
119,059
95,600
 
 
 
The Group has not developed an internal valuation model necessary to make the estimate of the fair value of loans from Sinopec Group Company and fellow subsidiaries as it is not considered practicable to estimate their fair value because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive based on the Reorganisation of the Group, its existing capital structure and the terms of the borrowings.
   
 
The fair value of available-for-sale financial assets, which amounted to RMB 370 million as at 30 June 2008 (2007: RMB 653 million) was based on quoted market price on a PRC stock exchange. Unquoted other investments in equity securities are individually and in the aggregate not material to the Group’s financial condition or results of operations. There are no listed market prices for such interests in the PRC and, accordingly, a reasonable estimate of fair value could not be made without incurring excessive costs. The Group intends to hold these unquoted other investments in equity securities for long term purpose.
   
37
ACCOUNTING ESTIMATES AND JUDGEMENTS
 
The Group’s financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the interim financial statements. The Group bases the assumptions and estimates on historical experience and on various other assumptions that the Group believes to be reasonable and which form the basis for making judgements about matters that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.
   
 
The selection of critical accounting policies, the judgements and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing the interim financial statements. The principal accounting policies are set forth in Note 2. The Group believes the following critical accounting policies involve the most significant judgements and estimates used in the preparation of the interim financial statements.
 

 
127
 

 
37
ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued)
   
 
Oil and gas properties and reserves
 
The accounting for the exploration and production’s oil and gas activities is subject to accounting rules that are unique to the oil and gas industry. There are two methods to account for oil and gas business activities, the successful efforts method and the full cost method. The Group has elected to use the successful efforts method. The successful efforts method reflects the volatility that is inherent in exploring for mineral resources in that costs of unsuccessful exploratory efforts are charged to expense as they are incurred. These costs primarily include dry hole costs, seismic costs and other exploratory costs. Under the full cost method, these costs are capitalised and written-off or depreciated over time.
   
 
Engineering estimates of the Group’s oil and gas reserves are inherently imprecise and represent only approximate amounts because of the subjective judgements involved in developing such information. There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and gas reserves can be designated as ÒprovedÓ. Proved and proved developed reserves estimates are updated at least annually and take into account recent production and technical information about each field. In addition, as prices and cost levels change from year to year, the estimate of proved and proved developed reserves also changes. This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in related depreciation rates.
   
 
Future dismantlement costs for oil and gas properties are estimated with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with industry practices in similar geographic area, including estimation of economic life of oil and gas properties, technology and price level. The present values of these estimated future dismantlement costs are capitalised as oil and gas properties with equivalent amounts recognised as provisions for dismantlement costs.
   
 
Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depreciation expense, impairment expense and future dismantlement costs. Depreciation rates are determined based on estimated proved developed reserve quantities (the denominator) and capitalised costs of producing properties (the numerator). Producing properties’ capitalised costs are amortised based on the units of oil or gas produced.
   
 
Impairment for long-lived assets
 
If circumstances indicate that the net book value of a long-lived asset may not be recoverable, the asset may be considered ÒimpairedÓ, and an impairment loss may be recognised in accordance with IAS 36 ÒImpairment of AssetsÓ. The carrying amounts of long-lived assets are reviewed at each balance sheet date in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. For goodwill, the recoverable amount is estimated annually. The recoverable amount is the greater of the net selling price and the value in use. It is difficult to precisely estimate selling price because quoted market prices for the Group’s assets or cash-generating units are not readily available. In determining the value in use, expected cash flows generated by the asset or the cash-generating unit are discounted to their present value, which requires significant judgement relating to level of sale volume, selling price and amount of operating costs. The Group uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sale volume, selling price and amount of operating costs.
   
 
Depreciation
 
Property, plant and equipment, other than oil and gas properties, are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. The Group reviews the estimated useful lives of the assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group’s historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.
   
 
Impairment for bad and doubtful debts
 
The Group estimates impairment losses for bad and doubtful debts resulting from the inability of the customers to make the required payments. The Group bases the estimates on the ageing of the accounts receivable balance, customer credit-worthiness, and historical write-off experience. If the financial condition of the customers were to deteriorate, actual write-offs would be higher than estimated.
   
 
Allowance for diminution in value of inventories
 
If the costs of inventories fall below their net realisable values, an allowance for diminution in value of inventories is recognised. Net realisable value represents the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. The Group bases the estimates on all available information, including the current market prices of the finished goods and raw materials, and historical operating costs. If the actual selling prices were to be lower or the costs of completion were to be higher than estimated, the actual allowance for diminution in value of inventories could be higher than estimated.
   
 
Provision for onerous contracts for purchases of crude oil
 
A provision for onerous contract is recognised when the expected economic benefits to be derived from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the estimated cost of terminating the purchase contract and the estimated net cost of continuing with the contract. The Group bases the estimates on all available information, including the current market prices of crude oil and finished goods, and historical operating costs. If the actual purchase prices of crude oil or the costs of completion were to be higher, or the actual selling prices of finished goods were to be lower, the actual losses incurred under the onerous contracts could be higher than the estimated provision.
 

 
128
 

 
38
POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE ANNUAL ACCOUNTING PERIOD ENDING 31 DECEMBER 2008
 
Up to the date of issue of these interim financial statements, the IASB has issued a number of amendments, new standards and interpretations which are not yet effective for the annual accounting period ending 31 December 2008 and which have not been adopted in these interim financial statements.
   
 
The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application and has so far concluded that the adoption of these amendments, new standards and new interpretations is unlikely to have a significant impact on the Group’s results of operations and financial position.
   
39
POST BALANCE SHEET EVENT
 
On 22 August 2008, the board of directors approved the proposal to issue RMB 20 billion corporate bonds in the PRC, subject to the approvals from the relevant PRC regulatory bodies.
   
40
IMMEDIATE AND ULTIMATE HOLDING COMPANIES
 
The directors consider the immediate and ultimate holding companies of the Group as at 30 June 2008 is Sinopec Group Company, a state-owned enterprise established in the PRC. This entity does not produce financial statements available for public use.
 

 
129
 

 
(C)
DIFFERENCES BETWEEN FINANCIAL STATEMENTS PREPARED UNDER ASBE AND IFRS
   
Other than the differences in the classifications of certain financial statements captions and the accounting for the items described below, there are no material differences between the Group’s financial statements prepared under ASBE and IFRS. The reconciliation presented below is included as supplemental information, is not required as part of the basic financial statements and does not include differences related to classification, display or disclosures. Such information has not been subject to independent audit or review. The major differences are:
   
(i)
Oil and gas properties
 
The difference is primarily due to that oil and gas properties are depreciated on a straight-line basis under ASBE. Under IFRS, oil and gas properties are depreciated on the unit of production method.
   
(ii)
Revaluation of land use rights
 
Under ASBE, land use rights are carried at revalued amount. Under IFRS, land use rights are carried at historical cost less amortisation. Accordingly, the surplus on the revaluation of land use rights, credited to revaluation reserve, was eliminated.
   
 
Effects of major differences between the net profit under ASBE and the profit for the period under IFRS are analysed as follows:
 
 
     
Six-month periods ended 30 June 
   
Note
2008
2007
     
RMB millions
RMB millions
 
Net profit under ASBE
  
9,415
36,574
 
Adjustments:
      
   
Oil and gas properties
(i)
(1,334)
91
   
Reduced amortisation on revaluation of land use rights
(ii)
15
15
   
Effects of the above adjustments on taxation
  
237
1,162
 
Profit for the period under IFRS*
  
8,333
37,842
 
 
 
Effects of major differences between the shareholders’ funds under ASBE and the total equity under IFRS are analysed as follows:
 
 
     
At 30 June
At 31 December
   
Note
2008
2007
     
RMB millions
RMB millions
 
Shareholders’ funds under ASBE
  
331,299
326,347
 
Adjustments:
      
   
Oil and gas properties
(i)
10,005
11,339
   
Revaluation of land use rights
(ii)
(1,027)
(1,042)
   
Effects of the above adjustments on taxation
  
(3,649)
(3,886)
 
Total equity under IFRS*
  
336,628
332,758
 
 
 
*
The above figures are extracted from the financial statements prepared in accordance with IFRS which have been audited by KPMG.
 

 
130
 

 
DOCUMENTS FOR INSPECTION
  
   
The following documents will be available for inspection during normal business hours at the legal address of Sinopec Corp. from Friday, 22 August 2008 by the relevant regulatory authorities and shareholders in accordance with the Articles of Association of Sinopec Corp. and the laws and regulations of the PRC:
   
1
The original interim report for the first half of 2008 signed by the Chairman of Sinopec Corp.;
   
2
The original audited financial statements and audited consolidated financial statements of Sinopec Corp. prepared in accordance with IFRS and the ASBE for the six-month period ended 30 June 2008 signed by Mr. Su Shulin, Chairman of Sinopec Corp., Mr. Wang Tianpu, Director, President of Sinopec Corp., Mr. Dai Houliang, Director, Senior Vice President and Chief Financial Officer of Sinopec Corp. and Mr. Liu Yun, Head of the Accounting Department of Sinopec Corp.;
   
3
The original auditors’ reports on the above financial statements signed by the auditors; and
   
4
All original documents and announcements published by Sinopec Corp. in the newspapers specified by the China Securities Regulatory Commission during the reporting period.
 
 
 
 
 
 
 
 
 
 
 
By Order of the Board
Su Shulin
Chairman
 
Beijing, PRC, 22 August 2008

 
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CONFIRMATION FROM THE DIRECTORS AND SENIOR MANAGEMENT
 
In accordance with the relevant provisions and requirements of the Securities Law of the People’s Republic of China and Information Disclosure Management Measures of Listed Companies issued by CSRC, as the directors of the Board and senior management of Sinopec Corp., we have carefully reviewed the 2008 interim report of Sinopec Corp. and concluded that this interim report truly and objectively represents the business performance of Sinopec Corp. in the first half of 2008, contains no false representations, misleading statements or material omissions and complies with the requirements of the China Securities Regulatory Commission and other relevant regulatory bodies.
 
Signatures of the Directors and Senior Management:
 
Signatures 1
Signatures 2
 
22 August 2008
 
 
This interim report is published in both English and Chinese. Should any conflict regarding meaning arises, the Chinese version shall prevail.
 
 
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