UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 20-F
(Mark One)
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________
OR
|_| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report ________________
Commission File Number 1-14966
CNOOC LIMITED
[CHINESE LANGUAGE OMITTED]
(Exact name of Registrant as specified in its charter)
-------------------------
Hong Kong
(Jurisdiction of incorporation or organization)
-------------------------
65th Floor, Bank of China Tower
One Garden Road, Central
Hong Kong
(Address of principal executive offices)
-------------------------
Securities registered or to be registered pursuant to Section 12(b) of
the Act.
Title of each class Name of each exchange on which registered
American depositary shares, each representing 100 shares of
par value HK$0.02 per share..................................................... New York Stock Exchange, Inc.*
Shares of par value HK$0.02 per share.............................................. New York Stock Exchange, Inc.**
Securities registered or to be registered pursuant to Section 12(g) of
the Act. None (Title of Class)
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act. None (Title of Class)
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by
the annual report.
Shares, par value HK$0.02 per share................................................ 41,054,675,375*
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes |X| No |_|
If this report is an annual or transition report, indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
Yes |X| No |_|
Note - Checking the box above will not relieve any registrant required
to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant is required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, nor a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark which financial statement item the Registrant has
elected to follow.
Item 17 |_| Item 18 |X|
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes |_| No |_|
---------
* As of December 31, 2005, the number of shares outstanding was
41,054,675,375. As a result of placing existing shares and subscription of new
shares as announced by CNOOC (BVI) Limited on April 27, 2006, we allotted
2,272,727,273 new shares on May 11, 2006. The number of shares outstanding
immediately after the placing and allotment was 43,327,402,648.
** Not for trading, but only in connection with the registration of American
depositary shares.
Table of Contents
Page
TERMS AND CONVENTIONS..............................................................................................................1
FORWARD-LOOKING STATEMENTS.........................................................................................................5
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS................................................................6
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..............................................................................6
ITEM 3. KEY INFORMATION......................................................................................................6
A. Selected Financial Data..............................................................................................6
B. Capitalization and Indebtedness.....................................................................................10
C. Reasons for the Offer and Use of Proceeds...........................................................................10
D. Risk Factors........................................................................................................10
ITEM 4. INFORMATION ON THE COMPANY..........................................................................................20
A. History and Development.............................................................................................20
B. Business Overview...................................................................................................23
ITEM 4A. UNRESOLVED STAFF COMMENTS...........................................................................................68
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS........................................................................68
A. Operating Results...................................................................................................68
B. Liquidity and Capital Resources.....................................................................................81
C. Research and Development, Patents and Licenses, etc.................................................................88
D. Trend Information...................................................................................................88
E. Off-Balance Sheet Arrangements......................................................................................88
F. Tabular Disclosure of Contractual Obligations.......................................................................88
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..........................................................................89
A. Directors and Senior Management.....................................................................................89
B. Compensation of Directors and Officers..............................................................................96
C. Board Practice......................................................................................................96
D. Employees..........................................................................................................100
E. Share Ownership....................................................................................................100
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..................................................................105
A. Major Shareholders.................................................................................................105
B. Related Party Transactions.........................................................................................105
C. Interests of Experts and Counsel...................................................................................114
ITEM 8. FINANCIAL INFORMATION..............................................................................................114
A. Consolidated Statements and Other Financial Information............................................................115
B. Significant Changes................................................................................................116
ITEM 9. THE OFFER AND LISTING..............................................................................................117
ITEM 10. ADDITIONAL INFORMATION.............................................................................................118
A. Share Capital......................................................................................................118
B. Memorandum and Articles of Association.............................................................................118
C. Material Contracts.................................................................................................121
D. Exchange Controls..................................................................................................121
E. Taxation...........................................................................................................122
F. Dividends and Paying Agents........................................................................................125
G. Statement by Experts...............................................................................................125
H. Documents on Display...............................................................................................125
I. Subsidiary Information.............................................................................................126
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.........................................................126
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.............................................................127
i
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES....................................................................128
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.......................................128
A. Material Modifications to the Instruments Defining the Rights of Security Holders..................................128
B. Material Modifications to the Rights of Registered Securities by Issuing or Modifying any other Class of
Securities.........................................................................................................128
C. Withdrawal or Substitution of a Material Amount of the Assets Securing any Registered Securities...................128
D. Change of Trustees or Paying Agents for any Registered Securities..................................................128
E. Use of Proceeds....................................................................................................128
ITEM 15. CONTROLS AND PROCEDURES............................................................................................128
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT...................................................................................128
ITEM 16B. CODE OF ETHICS.....................................................................................................128
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................................................................129
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.........................................................130
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.............................................130
PART III
ITEM 17. FINANCIAL STATEMENTS...............................................................................................131
ITEM 18. FINANCIAL STATEMENTS...............................................................................................131
ITEM 19. EXHIBITS...........................................................................................................131
ii
TERMS AND CONVENTIONS
Definitions
Unless the context otherwise requires, references in this annual report
to:
o "CNOOC" are to our controlling shareholder, China National Offshore Oil
Corporation, a PRC state-owned enterprise, and its affiliates, excluding
us and our subsidiaries;
o "CNOOC Limited," are to CNOOC Limited, a Hong Kong limited liability
company and the registrant of this annual report;
o "Our company," "we," "our" or "us" are to CNOOC Limited and its
subsidiaries;
o "China" or "PRC" are to the People's Republic of China, excluding for
purposes of geographical reference in this annual report, the Hong Kong
Special Administrative Region, the Macau Special Administrative Region
and Taiwan;
o "Hong Kong Stock Exchange" or "HKSE" are to The Stock Exchange of Hong
Kong Limited;
o "Hong Kong Stock Exchange Listing Rules" are to the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited;
o "HK$" are to Hong Kong dollar, the legal currency of the Hong Kong
Special Administrative Region;
o "JPY" are to Japanese yen, the legal currency of Japan;
o "Rmb" are to Renminbi, the legal currency of the PRC;
o "Rupiah" are to Indonesian Rupiah, the legal currency of the Republic of
Indonesia; and
o "US$" are to U.S. dollar, the legal currency of the United States of
America.
Conventions
We have translated amounts from Renminbi into U.S. dollars solely for
the convenience of the reader at the noon buying rate in New York for cable
transfers payable in foreign currencies as certified for customs purposes by
the Federal Reserve Bank of New York on December 30, 2005 of US$1.00=Rmb
8.0702. We have also translated amounts in Hong Kong dollars solely for the
convenience of the reader at the rate of HK$7.80 to US$1.00, the linked
exchange rate between such currencies under policies of the Hong Kong
government in effect on December 31, 2005. We make no representation that the
Renminbi amounts or Hong Kong dollar amounts could have been, or could be,
converted into U.S. dollars at those rates on December 31, 2005, or at all.
For further information on exchange rates, see Item 3 "Key
Information--Selected Financial Data."
Totals presented in this annual report may not total correctly due to
rounding of numbers.
Our "average net realized price" for oil and gas in each period is
derived from a numerator divided by a denominator, where:
o the numerator is equal to the sum of (i) revenues from our oil and gas
sales offshore China for the applicable period; (ii) the 30% ownership
share of revenues from gas sales for the applicable period from our
associated company, Shanghai Petroleum and Natural Gas Company Limited;
and (iii) the revenues from oil and gas sales for the applicable period
from our overseas interests; while:
o the denominator is equal to the sum of (i) the volume of oil and gas
sales offshore China for the applicable period; (ii) 30% of the volume
of gas sales for the applicable period from our associated company,
Shanghai Petroleum and Natural Gas Company Limited; and (iii) the volume
of oil and gas sales for the applicable period from our overseas
interests.
1
Our "net proved reserves" consist of our percentage interest in
reserves, including our 100% interest in the independent oil and gas
properties and our participating interest in the properties covered under the
production sharing contracts in the PRC, less: (a) an adjustment for our share
of royalties payable by us to the PRC government and our participating
interest in share oil payable to the PRC government under the production
sharing contracts, and (b) an adjustment for production allocable to foreign
partners under the PRC production sharing contracts as reimbursement for
exploration expenses attributable to our participating interest; and plus (i)
our 5.3% participating interest in North West Shelf Project in Australia, and
(ii) our participating interest in the properties covered under the production
sharing contracts in Indonesia less an adjustment for share oil attributable
to the Indonesian government and the domestic market obligation. In this
annual report, we use "share oil" to refer to the portion of production that
must be allocated to the relevant government entity or company under our
production sharing contracts.
Net proved reserves do not include any deduction for production taxes
payable by us, which are included in our operating expenses. Net production is
calculated in the same way as net proved reserves. Unless otherwise noted, all
information in this annual report relating to oil and natural gas reserves is
based upon estimates prepared by us. In calculating barrels-of-oil equivalent,
or BOE, amounts, we have assumed that 6,000 cubic feet of natural gas equals
one BOE, with the exception of natural gas from certain fields which is
converted using the actual heating value of the natural gas.
Glossary of Technical Terms
Unless otherwise indicated in the context, references to:
o "API gravity" means the American Petroleum Institute's scale for
specific gravity for liquid hydrocarbons, measured in degrees. The
lower the API gravity, the heavier the liquid and, generally, the
lower its commercial value. For example, asphalt has an API
gravity of eight degrees, West Texas Intermediate, a benchmark
crude oil, has an API of 40 degrees, and gasoline has an API
gravity of 50 degrees.
o "appraisal well" means an exploration well drilled after a
successful wildcat well to gain more information on a newly
discovered oil or gas reserve.
o "condensate" means light hydrocarbon liquids separated from
natural gas in the field through condensation when natural gas is
exposed to surface temperature and pressure. This group generally
includes slightly heavier hydrocarbons than natural gas liquids,
such as pentane. It is combined with crude oil production and
reserve figures.
o "crude oil" means crude oil and liquids, including condensate,
natural gas liquids and liquefied petroleum gas.
o "development cost" means, for a given period, costs incurred to
obtain access to proved reserves and to provide facilities for
extracting, treating, gathering and storing the oil and gas.
o "dry hole" means an exploration well that is not commercial (i.e.,
economically feasible to develop). Dry hole costs include the full
costs for such drilling and are charged as an expense.
o "exploration well" means a wildcat or appraisal well.
o "lifting cost" means, for a given period, costs incurred to
operate and maintain wells and related equipment and facilities,
including applicable operating costs of support equipment and
facilities and other costs of operating and maintaining those
wells and related equipment and facilities, plus production taxes.
Also known as production cost. The U.S. dollar amount of the
lifting cost in this annual report may be different from what we
disclosed in Hong Kong annual report due to the usage of different
conversion rates.
2
o "natural gas liquids" means light hydrocarbons that can be
extracted in liquid form from natural gas through special
separation plants. This group includes typically lighter liquid
hydrocarbons than condensate, such as butane, propane and ethane.
It is combined with crude oil production but not with crude oil
reserve figures.
o "net wells" means a party's working interest in wells.
o "proved developed reserves" means proved reserves of oil and
natural gas that can be expected to be recovered through existing
wells with existing equipment and operating methods.
o "proved reserves" means estimated quantities of crude oil and
natural gas that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e.,
prices and costs as of the date the estimate is made.
o "proved undeveloped reserves" means proved reserves that are
expected to be recovered from new wells in undrilled areas, or
from existing wells where significant expenditure is required for
completion.
For further definitions relating to reserves:
o "reserve replacement ratio" means, for a given year, total
additions to proved reserves divided by production during the
year.
o "reserve-to-production ratio" means the ratio of proved reserves
to annual production of crude oil or, with respect to natural gas,
to wellhead production excluding flared gas.
o "seismic data" means data recorded in either two-dimensional (2D)
or three-dimensional (3D) form from sound wave reflections off of
subsurface geology. This is used to understand and map geological
structures for exploratory purposes to predict the location of
undiscovered reserves.
o "success" means a discovery of oil or gas by an exploration well.
Such an exploration well is a successful well and is also known as
a discovery. A successful well is commercial, which means there
are enough hydrocarbon deposits discovered for economical
recovery.
o "success rate" means the total number of successful exploration
wells divided by the total number of exploration wells drilled in
a given period. Success rate can be applied to wildcat wells or
appraisal wells in general.
o "wildcat well" means an exploration well drilled in an area or
rock formation that has no known reserves or previous discoveries.
References to:
o bbls means barrels, which is equivalent to approximately 0.134
tons of oil (33 degrees API);
o mmbbls means million barrels;
o BOE means barrels-of-oil equivalent;
o BOE per day means barrels-of-oil equivalent per day;
o million BOE means million barrels-of-oil equivalent;
o mcf means thousand cubic feet;
3
o mmcf means million cubic feet;
o bcf means billion cubic feet, which is equivalent to approximately
283.2 million cubic meters;
o BTU means British Thermal Unit, a universal measurement of energy;
and
o km means kilometers, which is equivalent to approximately 0.62
miles.
4
FORWARD-LOOKING STATEMENTS
This annual report includes "forward-looking statements" within the
meaning of the United States Private Securities Litigation Reform Act of 1995.
All statements, other than statements of historical facts, included in this
annual report that address activities, events or developments which we expect
or anticipate will or may occur in the future are forward-looking statements.
The words "believe," "intend," "expect," "anticipate," "project," "estimate,"
"predict" and similar expressions are also intended to identify such
forward-looking statements.
These forward-looking statements address, among others, such issues as:
o the amount and nature of future exploration, development and other
capital expenditures,
o wells to be drilled or reworked,
o oil and gas prices and demand,
o future earnings and cash flow,
o development projects,
o exploration prospects,
o estimates of proved oil and gas reserves,
o potential reserves,
o development and drilling potential,
o drilling prospects,
o expansion and other development trends of the oil and gas
industry,
o business strategy,
o production of oil and gas,
o development of undeveloped reserves,
o expansion and growth of our business and operations, and
o our estimated financial information.
These statements are based on assumptions and analyses made by us in
light of our experience and our perception of historical trends, current
conditions and expected future developments, as well as other factors we
believe are appropriate under the circumstances. However, whether actual
results and developments will meet our expectations and predictions depend on
a number of risks and uncertainties which could cause our actual results,
performance and financial condition to differ materially from our expectation.
For a description of such risks and uncertainties, see "Item 3-Key
Information-Risk Factors."
Consequently, all of the forward-looking statements made in this annual
report are qualified by these cautionary statements. We cannot assure that the
actual results or developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected effect on us or our
business or operations.
5
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable, but see "Item 6--Directors, Senior Management and
Employees--Directors and Senior Management."
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
You should read our selected historical consolidated financial data set
forth below in conjunction with our consolidated financial statements and
their notes under "Item 18--Financial Statements" and "Item 5--Operating and
Financial Review and Prospects" in this annual report.
On June 6, 2002, Ernst & Young replaced Arthur Andersen & Co as our
independent public accountants. For a discussion on such change of
accountants, see "Item 3--Key Information--Risk Factors--Risks relating to our
business--You may not be able to assert claims against Arthur Andersen, our
independent public accountants for periods prior to 2002, nor may you be able
to assert claims against our current independent public accountants for
financial statements previously audited by Arthur Andersen" and "Item
5--Operating and Financial Review and Prospects--Change of Accountants."
The Hong Kong Institute of Certified Public Accountants issued a number
of new standards and interpretations, effective January 1, 2005, which are
applicable to our financial statements for the fiscal year ended on December
31, 2005. Certain prior year amounts have been restated upon adoption of such
new policies, details of which are included in note 2.4 to our consolidated
financial statements under "Item 18--Financial Statements" in this annual
report.
We have prepared and presented our consolidated financial statements in
accordance with Hong Kong generally accepted accounting principles ("Hong Kong
GAAP"). For an explanation of the reconciliation of our net income and
shareholders' equity to U.S. generally accepted accounting principles ("US
GAAP"), see note 37 to our consolidated financial statements under "Item
18--Financial Statements" in this annual report.
6
Year ended December 31,
--------------------------------------------------------------------------------
2001(g) 2002 2003 2004 2005 2005
-------- -------- -------- -------- -------- -------
Rmb Rmb Rmb Rmb Rmb US$
-------- -------- -------- -------- -------- -------
(in millions, except per share and per ADS data)
Income Statement Data:
Hong Kong GAAP (Restated) (Restated) (Restated)
Operating revenues:
Oil and gas sales............................ 17,561 23,779 28,117 36,886 53,418 6,619
Marketing revenues........................... 2,537 2,377 12,399 18,191 15,901 1,970
Other income................................. 722 217 434 145 137 17
-------- -------- -------- -------- -------- -------
Total operating revenues..................... 20,820 26,374 40,950 55,222 69,456 8,606
-------- -------- -------- -------- -------- -------
Expenses:
Operating expenses........................... (2,329) (3,775) (4,513) (5,070) (5,935) (735)
Production taxes............................. (884) (1,023) (1,239) (1,726) (2,597) (322)
Exploration expenses......................... (1,039) (1,318) (848) (1,316) (1,294) (160)
Depreciation, depletion and amortization..... (2,567) (4,020) (4,643) (5,455) (5,965) (739)
Dismantlement................................ (90) (126) (167) (202) (253) (31)
Impairment losses related to property,
plant and equipment.......................... -- -- -- -- (90) (11)
Crude oil and product purchases.............. (2,453) (2,326) (12,295) (17,963) (15,704) (1,946)
Selling and administrative expenses.......... (616) (1,033) (e) (1,250) (e) (1,104) (e) (1,370) (170)
Others....................................... (618) (31) (350) (46) (76) (10)
-------- -------- -------- -------- -------- -------
(10,596) (13,652) (25,305) (32,882) (33,284) (4,124)
-------- -------- -------- -------- -------- -------
Interest income................................. 318 148 184 207 359 44
Finance costs................................... (117) (295) (355) (442) (1,100) (136)
Exchange gains (losses), net.................... 235 (114) (7) 29 287 36
Short term investment income.................... 221 193 124 72 248 31
Share of profits of associates................. 90 165 220 344 307 38
Non-operating income (expenses), net............ 35 (71) 315 519 28 4
-------- -------- -------- -------- -------- -------
Income before tax............................... 11,006 12,748 16,125 23,070 36,301 4,498
Tax............................................. (3,048) (3,541) (4,628) (6,931) (10,978) (1,360)
-------- -------- -------- -------- -------- -------
Net income...................................... 7,958 9,207 11,497 16,139 25,323 3,138
======== ======== ======== ======== ======== =======
Net income per share (basic)(a)(b).............. 0.20 0.22 0.28 0.39 0.62 0.08
Net income per share (diluted)(a)(c)............ 0.20 0.22 0.28 0.39 0.61 0.08
Net income per ADS (basic)(a)(b)................ 20.04 22.42 27.99 39.31 61.68 7.64
Net income per ADS (diluted)(a)(c).............. 20.04 22.40 27.97 39.19 61.01 7.56
Dividend per share(a)
Special interim dividend declared in
place of 2003 final dividend(d)............. -- -- -- 0.060 -- --
Interim...................................... 0.022 0.024 0.030 0.030 0.052 0.006
Interim (in US$)............................. 0.003 0.003 0.004 0.004 -- --
Special interim.............................. -- -- 0.038 0.050 0.052 0.006
Special interim (in US$)..................... -- -- 0.005 0.006 -- --
Proposed final(d)............................ 0.032 0.032 0.026 0.030 0.103 0.013
Proposed final (in US$)(d)................... 0.004 0.004 0.003 0.004 -- --
Proposed special final(d).................... -- 0.032 0.038 0.050 -- --
Proposed special final (in US$)(d)........... -- 0.004 0.005 0.006 -- --
U.S. GAAP Operating revenues:
Oil and gas sales............................... 17,561 23,779 28,117 36,886 53,418 6,619
Marketing revenues.............................. 2,537 2,377 12,399 18,191 15,901 1,970
Other income.................................... 722 217 434 145 137 17
-------- -------- -------- -------- -------- -------
Total operating revenues........................ 20,820 26,374 40,950 55,222 69,456 8,606
-------- -------- -------- -------- -------- -------
Net Income...................................... 7,920 9,086 11,980 16,176 25,343 3,140
Net income per share (basic)(a)(b).............. 0.20 0.22 0.29 0.39 0.62 0.08
Net income per share (diluted)(a)(c)............ 0.20 0.22 0.29 0.39 0.61 0.08
7
Year ended December 31,
--------------------------------------------------------------------------------
2001(g) 2002 2003 2004 2005 2005
-------- -------- -------- -------- -------- -------
Rmb Rmb Rmb Rmb Rmb US$
-------- -------- -------- -------- -------- -------
(in millions, except per share and per ADS data)
Net income per ADS (basic)(a)(b)................ 19.95 22.12 29.17 39.40 61.73 7.65
Net income per ADS (diluted)(a)(c).............. 19.95 22.13 29.14 39.28 61.06 7.57
As of December 31,
--------------------------------------------------------------------------------
2001(g) 2002 2003 2004 2005 2005
-------- -------- -------- -------- -------- -------
Rmb Rmb Rmb Rmb Rmb US$
-------- -------- -------- -------- -------- -------
(in millions)
Balance Sheet Data:
Hong Kong GAAP (Restated) (Restated) (Restated)
Cash and cash equivalents....................... 6,394 7,839 14,400 14,092 8,992 1,114
Time deposits with maturities over three months. 2,050 4,690 2,323 8,603 12,200 1,512
Short term investments.......................... 8,896 6,531 5,684 5,444 13,847 1,716
Current assets.................................. 20,030 24,486 29,263 35,293 44,421 5,504
Property, plant and equipment, net.............. 23,828 35,797 (f) 42,849 (f) 57,182 (f) 66,625 8,256
Investment in associates........................ 462 537 1,118 1,327 1,402 174
Intangible assets............................... -- -- -- -- 1,300 161
Long term available-for-sale financial assets... -- -- -- -- 1,017 126
Total assets.................................... 44,320 60,820 (f) 73,229 (f) 93,802 (f) 114,765 14,221
Current liabilities............................. 4,392 7,134 9,307 10,402 13,616 1,687
Long term bank loans, net of current portion.... 3,256 941 890 865 24 3
Long term guaranteed notes ..................... -- 4,071 8,142 16,313 16,532 2,049
Total long term liabilities..................... 6,617 13,393 17,461 26,957 27,546 3,413
Total liabilities............................... 11,009 20,527 26,768 37,359 41,162 5,100
Shareholders' equity............................ 33,311 40,293 (e),(f) 46,461 (e),(f) 56,443 (e),(f) 73,603 9,120
U.S. GAAP
Total assets.................................... 44,062 60,444 73,234 93,846 114,809 14,226
Total long term liabilities..................... 6,617 13,393 17,461 26,957 27,546 3,413
Shareholders' equity............................ 33,053 40,344 46,496 56,487 73,647 9,126
---------
(a) On March 17, 2004, our shareholders approved a five-for-one stock split
of our shares. The stock split was effected by dividing each of our
issued and unissued shares of HK$0.10 each into five shares of HK$0.02
each, and to increase the board lot size for trading on the Hong Kong
Stock Exchange from 500 shares of HK$0.10 each to 1,000 subdivided
shares of HK$0.02 each. The ratio of our ADSs listed on the New York
Stock Exchange also changed such that each ADS now represents 100
subdivided shares of HK$0.02 each, as opposed to 20 shares of HK$0.10
each prior to the stock split. As such, per share amounts of our shares
have been adjusted retroactively for the stock split.
(b) Net income per share (basic) and net income per ADS (basic) for 2001
have been computed, without considering the dilutive effect of the
shares underlying our share option scheme, by dividing net income by the
weighted average number of shares and the weighted average number of
ADSs of 39,706,916,525 and 397,069,165 respectively (based on a ratio of
100 shares to one ADS) for the period. Net income per share (basic) and
net income per ADS (basic) for 2002 have been computed, without
considering the dilutive effect of the shares underlying our share
option scheme, by dividing net income by the weighted average number of
shares and the weighted average number of ADSs of 41,070,828,275 and
410,708,283 respectively (based on a ratio of 100 shares to one ADS) for
the period. Net income per share (basic) and net income per ADS (basic)
for 2003 have been computed, without considering the dilutive effect of
the shares underlying our share option scheme, by dividing net income by
the weighted average number of shares and the weighted average number of
ADSs of 41,070,828,275 and 410,708,283 respectively (based on a ratio of
100 shares to one ADS) for the period. Net income per share (basic) and
net income per ADS (basic) for 2004 have been computed, without
considering the dilutive effect of the shares underlying our share
option scheme and convertible bonds, by dividing net income by the
weighted average number of shares and the weighted average number of
ADSs of 41,060,240,659 and 410,602,407 respectively (based on a ratio of
100 shares to one ADS) for the period. Net income per share (basic) and
net income per ADS (basic) for 2005 have been computed, without
considering the dilutive effect of the shares underlying our share
option scheme and convertible bonds, by dividing net income by the
weighted average number of shares and the weighted average number of
ADSs of 41,054,499,982 and 410,545,000 respectively (based on a ratio of
100 shares to one ADS) for the period.
(c) Net income per share (diluted) and net income per ADS (diluted) for 2001
have been computed, after considering the dilutive effect of the shares
underlying our share option scheme, using 39,711,444,015 and 397,114,440
respectively. Net income per share (diluted) and net income per ADS
(diluted) for 2002 have been computed, after considering the dilutive
effect of the shares underlying our share option scheme, using
41,096,426,920 and 410,964,269 respectively. Net income per share
(diluted) and net income per ADS (diluted) for 2003 have been computed,
after considering the dilutive effect of the shares underlying our share
option scheme, by using 41,110,339,095 and 411,103,391 respectively. Net
income per share (diluted) and net income per ADS (diluted) for 2004
have been computed, after considering the dilutive effect of the shares
underlying our share option scheme and convertible bonds, by using
41,179,513,436 and 411,795,134 respectively. Net income per share
(diluted) and net income per ADS (diluted) for 2005 have been computed,
after considering the dilutive effect of the shares underlying our share
option scheme and convertible bonds, by using 42,386,055,766 and
423,860,558 respectively.
(d) The proposed final dividend and special final dividend for 2003 were
cancelled and replaced by the special interim dividend of HK0.06 per
share declared and paid in 2004.
(e) In periods prior to 2005, no recognition and measurement of share-based
transactions in which employees (including directors) were granted share
options in our company were required until such options were exercised
by the employees, at which time the share capital and share premium were
credited with the proceeds received. In 2005, we have adopted the
provisions of Hong Kong Financial Reporting Standard ("HKFRS")
retrospectively to all stock options granted from the date of our
incorporation. Under HKFRS 2, when employees (including directors)
render services as consideration for equity transactions
("equity-settled transaction"), the cost of equity-settled transaction
is measured by reference to the fair value on the date on which the
instrument is granted.
8
(f) Certain prior year amounts have been restated upon adoption of new Hong
Kong accounting policies, details of which are included in note 2.2 to
our financial statements (under HK GAAP). In prior periods, we
classified the on-shore processing plants as land and buildings and
depreciated over 30-50 years on a straight-line basis. Upon the adoption
of HKAS 16, we have retrospectively reclassified our property, plant and
equipment into two categories: oil and gas properties, and vehicles and
office equipment. We have reclassified the onshore terminals previously
classified as land and buildings to oil and gas properties as they will
be used in similar operations and are expected to have similar economic
useful lives. We have also changed our accounting policy retrospectively
for 2002, 2003 and 2004 to state the onshore terminals at cost instead
of valuation and to amortize those terminals by the unit-of-production
method on a property-by-property basis.
(g) The 2001 selected consolidated income statement data and consolidated
balance sheet data were audited by Arthur Anderson & Co., which
voluntarily relinquished its license to practice public accounting in
2002. Our current auditors, Ernst & Young, have not reaudited the
financial statements of 2001. As such, no restatement was made for 2001
as the impacts on the consolidated financial statements are considered
not material.
Year ended December 31,
--------------------------------------------------------------------------------
2001(g) 2002 2003 2004 2005 2005
-------- -------- -------- -------- -------- -------
Rmb Rmb Rmb Rmb Rmb US$
-------- -------- -------- -------- -------- -------
Other Financial Data:
Hong Kong GAAP
Capital expenditures paid........................ 4,343 6,833 8,272 12,843 16,606 2,058
Cash provided by (used for):
Operating activities....................... 11,759 14,742 17,819 22,328 32,154 3,984
Investing activities....................... (11,366) (11,724) (9,513) (24,607) (29,349) (3,637)
Financing activities....................... 3,204 (1,573) (1,745) 1,970 (7,786) (965)
Ratio of total debt to total
capitalization(1).............................. 12.3% 11.6% 16.2% 23.3% 19.1% 19.1 %
U.S. GAAP
Cash provided by (used for):
Operating activities....................... 11,759 14,742 17,819 22,328 32,154 3,984
Investing activities....................... (11,366) (11,724) (9,513) (24,607) (29,349) (3,637)
Financing activities....................... 3,204 (1,573) (1,745) 1,970 (7,786) (965)
Ratio of cash provided by operating
activities to gross interest expense(2)...... 37.2x 36.4x 35.1x 39.4x 41.5x 41.5x
Ratio of total debt to cash provided by
operating activities............................. 0.4x 0.4x 0.5x 0.8x 0.5x 0.5x
Net income....................................... 7,920 9,086 11,980 16,176 25,343 3,140
Net income margin(3)............................. 38.0% 34.5% 29.3% 29.3% 36.5% 36.5%
Ratio of net income to gross interest expense(2). 25.1x 22.4x 23.6x 28.5x 32.7x 32.7x
Ratio of total debt to net income................ 0.6x 0.6x 0.8x 1.1x 0.7x 0.7x
Ratio of total debt to total capitalization(1)... 12.4% 11.8% 16.3% 23.4% 19.1% 19.1%
--------------
(1) Total capitalization excludes current portion of long-term debt.
(2) Gross interest expense includes capitalized interest.
(3) Net income margin represents net income as a percentage of our total
operating revenues, as computed under U.S. GAAP.
We publish our financial statements in Renminbi. Unless otherwise
indicated, all translations from Renminbi to U.S. dollars have been made at a
rate of Rmb 8.0702 to US$1.00, the noon buying rate as certified for customs
purposes by the Federal Reserve Bank of New York on December 30, 2005. We do
not represent that Renminbi or U.S. dollar amounts could be converted into
U.S. dollars or Renminbi, as the case may be, at any particular rate, the rate
below or at all.
The following table sets forth the noon buying rates for U.S. dollars in
New York City for cable transfers in Renminbi as certified for customs
purposes by the Federal Reserve Bank of New York for the periods indicated:
Noon Buying Rate
------------------------------------------------
Period End Average(1) High Low
------ ------ ------ ------
(Rmb per US$1.00)
2001........................ 8.2766 8.2772 8.2786 8.2676
2002........................ 8.2800 8.2772 8.2800 8.2669
2003........................ 8.2767 8.2771 8.2800 8.2765
2004........................ 8.2765 8.2768 8.2774 8.2764
2005........................ 8.0702 8.1998 8.2765 8.0702
December 2005............... 8.0702 -- 8.0808 8.0702
January 2006................ 8.0608 -- 8.0702 8.0596
February 2006............... 8.0415 -- 8.0616 8.0415
9
March 2006.................. 8.0167 -- 8.0505 8.0167
April 2006.................. 8.0165 -- 8.0248 8.0040
May 2006.................... 8.0215 -- 8.0300 8.0005
---------
(1) Determined by averaging the noon buying rates on the last business day
of each month during the relevant period.
As of June 6, 2006, the noon buying rate for cable transfers in Renminbi
as certified for customs purposes by the Federal Reserve Bank of New York was
Rmb 8.0120 to US$1.00.
The Hong Kong dollar is freely convertible into the U.S. dollar. Since
1983, the Hong Kong dollar has been linked to the U.S. dollar. The Hong Kong
government has also stated that it has no intention of imposing exchange
controls in Hong Kong and that the Hong Kong dollar will remain freely
convertible into other currencies, including the U.S. dollar. However, we
cannot assure that the Hong Kong government will maintain the link at HK$7.80
to US$1.00 or at all.
The following table sets forth the noon buying rates for U.S. dollars in
New York City for cable transfers in Hong Kong dollars as certified for
customs purposes by the Federal Reserve Bank of New York for the periods
indicated.
Noon Buying Rate
------------------------------------------------
Period End Average(1) High Low
------ ------ ------ ------
(HK$ per US$1.00)
2001........................ 7.7980 7.7996 7.8004 7.7970
2002........................ 7.7988 7.7996 7.8095 7.7970
2003........................ 7.7640 7.7864 7.8001 7.7285
2004........................ 7.7723 7.7891 7.8010 7.7632
2005........................ 7.7533 7.7755 7.7999 7.7514
December 2005............... 7.7533 -- 7.7548 7.7514
January 2006................ 7.7561 -- 7.7571 7.7506
February 2006............... 7.7584 -- 7.7618 7.7564
March 2006.................. 7.7597 -- 7.7620 7.7570
April 2006.................. 7.7529 -- 7.7598 7.7529
May 2006.................... 7.7567 -- 7.7575 7.7510
---------
(1) Determined by averaging the noon buying rates on the last business day
of each month during the relevant period.
As of June 6, 2006, the noon buying rate for cable transfers in Hong
Kong dollars as certified for customs purposes by the Federal Reserve Bank of
New York was HK$7.7596 to US$1.00.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
Risks relating to our business
Our business, revenues and profits fluctuate with changes in oil and gas
prices
Even relatively modest declines in crude oil prices may adversely affect
our business, revenues and profits. Our profitability is determined in large
part by the difference between the prices received for the crude oil we
produce and the costs of exploring for, developing, producing and selling
these products.
10
Prices for crude oil fluctuate widely in response to relatively minor
changes in the supply and demand for oil, market uncertainty and various other
factors that are beyond our control, including:
o political developments in petroleum producing regions;
o the ability of the Organization of Petroleum Exporting Countries
and other petroleum producing nations to set and maintain
production levels and prices;
o the price and availability of other energy sources, such as coal;
o domestic and foreign government regulations;
o weather conditions; and
o overall economic conditions.
Our revenues and net income have increased significantly in the past
five years, mainly due to increasing oil prices. However, we can not assure
that oil price will remain high in the future. In 2005, oil prices for West
Texas Intermediate, the international benchmark for crude oil, rose 44.9% from
US$42.13 per barrel on January 3, 2005 to US$61.04 per barrel on December 30,
2005. The conflict and turmoil in the Middle East in the past three years
raised concerns about the security and availability of ample supplies to meet
growing global demand. West Texas Intermediate reached a high in 2005 of
US$69.82 per barrel on August 30, 2005 and was US$72.50 per barrel on June 6,
2006. For a description of oil prices in recent years, see "Item
4--Information on the Company--Business Overview--Sales and Marketing--Sales
of Offshore Crude Oil--Pricing" in this annual report. Any future declines in
oil and gas prices would adversely affect our revenues and net income.
The prices for the natural gas we sell are determined by negotiations
between us and the prospective buyers. Our typical contracts with gas buyers
include provisions for periodic resets and adjustment formulas that depend on
a basket of crude oil prices and inflation as well as various other factors.
These resets and adjustment formulas can result in natural gas price
fluctuations which may adversely affect our business, results of operations
and financial condition.
Lower oil and gas prices may result in the write-off of higher cost
reserves and other assets and may lower our earnings or cause losses. Lower
oil and natural gas prices may also reduce the amount of oil and natural gas
we can produce economically and render existing contracts that we have entered
into uneconomical. For further details regarding the effects of oil and gas
price fluctuations on our financial condition and results of operations, see
"Item 5--Operating and Financial Review and Prospects."
The oil and gas reserve estimates in this annual report may require
substantial revision as a result of future drilling, testing and production
The reliability of reserves estimates depends on a number of factors,
including:
o the quality and quantity of technical and economic data;
o the prevailing oil and gas prices for our production;
o the production performance of reservoirs;
o extensive engineering judgments; and
o royalty and share oil policies in the PRC and foreign countries
and regions where we have operations or assets.
Many of the factors, assumptions and variables involved in estimating
reserves are beyond our control and may prove to be incorrect over time.
Consequently, the results of drilling, testing and
11
production may require substantial upward or downward revisions in our initial
reserves data. For more information on our oil and gas reserves data, see
"Item 4--Information on the Company--Business Overview--Oil and Natural Gas
Reserves."
Any failure to develop our proved undeveloped reserves and gain access
to additional reserves could impair our ability to achieve certain growth
objectives
Our ability to achieve certain growth objectives depends upon our
success in finding and acquiring or gaining access to additional reserves.
Future drilling, exploration and acquisition activities may not be successful.
If our exploration and development activities or acquisition of properties
containing proved reserves are unsuccessful, our total proved reserves will
decline.
Approximately 50.9% of our proved reserves were undeveloped as of
December 31, 2005. Our future success will depend on our ability to develop
these reserves in a timely and cost-effective manner. There are various risks
in developing reserves, including construction, operational, geophysical,
geological and regulatory risks.
Our future prospects largely depend on our capital expenditure plans,
which are subject to various risks
The oil and gas exploration and production business is capital
intensive. We currently plan to spend US$2,233.2 million to develop our oil
and gas properties and US$457.8 million for exploration in 2006. In addition
to these amounts, we may make additional capital expenditures and investments
to implement our business strategy.
The ability to maintain and increase our revenues, net income and cash
flows depends upon continued capital spending. We adjust our capital
expenditure and investment budget each year. Our capital expenditure plans are
subject to a number of contingencies, some of which are beyond our control.
These variables include:
o our ability to generate sufficient cash flows from operations to
finance our capital expenditures, investments and other
requirements;
o the availability and terms of external financing;
o changes in crude oil and natural gas prices, which may affect cash
flows from operations and capital expenditure and investment
plans;
o the mix of exploration and development activities conducted on an
independent basis and under production sharing contracts;
o new investment opportunities that may be presented to us,
including international investment opportunities and liquefied and
other natural gas projects;
o approvals required from foreign governments for certain capital
expenditures and investments outside the PRC;
o our ability to obtain sufficient foreign currency to finance our
capital expenditures; and
o economic, political and other conditions in the PRC and in foreign
countries and regions where we have operations.
Therefore, our actual capital expenditures and investments in the future
may differ significantly from our current planned amounts. There can be no
assurance that we will be able to execute our capital expenditure program on
schedule or as planned.
12
Any failure to implement our natural gas business strategy may adversely
affect our business and financial position
As part of our business strategy and to meet increasing market demand in
China, we continue to expand our natural gas business. This strategy involves
a number of risks and uncertainties including the following:
o we have limited experience in investing in liquefied natural gas
facilities, gas transmission and distribution systems, and
overseas upstream natural gas properties;
o any additional capital expenditures that are necessary to
implement our natural gas strategy could divert resources from our
core oil and gas exploration and production business and require
us to seek additional financing;
o our new natural gas operations may face additional competition
from a number of international and PRC companies. In particular,
PetroChina Company Limited, or PetroChina, has constructed natural
gas pipelines to link its natural gas fields located in the
western part of China to the eastern coastal regions;
o our new natural gas activities may subject us to additional
government regulation in China and foreign countries and regions;
o our overseas natural gas businesses are subject to economic and
political risks in the relevant countries and regions. See "--We
are exposed to operating risks in some foreign countries and
regions as a result of our acquisition of oil and gas interests
located in these regions;"
o we do not have the same preferential rights or access to natural
gas businesses or overseas natural gas investments that we enjoy
with respect to our upstream natural gas business offshore China;
and
o we are evaluating the options to invest in CNOOC's liquefied
natural gas projects in China. However, we have not decided
whether to exercise these options. The options are subject to
various conditions, including the receipt of certain governmental
approvals.
Due to the above factors or other reasons, we may fail to implement our
natural gas strategy successfully.
The infrastructure and demand for natural gas in the PRC may proceed at
a slower pace than our planned increase in production
Our proposed expansion of natural gas production in China is currently
constrained by a lack of natural gas transmission and supply infrastructure
and an underdeveloped natural gas market. Construction of transmission and
supply pipelines and other infrastructure depends on many factors, many of
which are beyond our control, such as funding, costs of land acquisition,
national and local government approvals, and timely completion of
construction. Development of the natural gas market depends on the
establishment of long-term natural gas supply contracts with natural gas
utilities or large end-users, such as power and chemical plants. The demand of
these buyers for natural gas could be affected by a number of regulatory and
market factors, such as regulation of coal prices, government power and
utility policies, chemical commodity cycles, electricity pricing and demand,
and environmental policies.
CNOOC largely controls us and we regularly enter into related party
transactions with CNOOC and its affiliates
CNOOC indirectly owned 66.41% of our shares as of June 6, 2006. As a
result, CNOOC is able to control the composition of our board of directors,
determine the timing and amount of our dividend payments and otherwise control
us. Although CNOOC is required to comply with provisions in the Hong
13
Kong Stock Exchange Listing Rules relating to protection for minority
shareholders, there can be no assurance that CNOOC will act in a manner that
benefits all of our shareholders. If CNOOC takes actions that favor its
interests over ours, our results of operations and financial position may be
adversely affected. We regularly enter into transactions with CNOOC and its
affiliates, including China Oilfield Services Limited and Offshore Oil
Engineering Company Limited. For the year ended December 31, 2005, sales to
CNOOC and its affiliates accounted for 38.3% of our total revenues. For
further details, see "Item 7--Major Shareholders and Related Party
Transactions." Our transactions with CNOOC and its affiliates constitute
connected transactions under the Hong Kong Stock Exchange Listing Rules.
However, We must obtain the prior approval of the Hong Kong Stock Exchange to
engage in some of these transactions and may also be required to obtain the
prior approval of our independent directors and our independent shareholders.
If we do not obtain these approvals, we may not be allowed to execute these
transactions and our business operations and financial condition could be
adversely affected.
Under current PRC law, CNOOC has the exclusive right to enter into
production sharing contracts with foreign oil and gas companies for petroleum
exploration and production offshore China. CNOOC has undertaken to us that it
will transfer all of its rights and obligations under any new production
sharing contracts to us, except those relating to its administrative
functions. PRC law restricts us from contracting directly with foreign
enterprises for these purposes without CNOOC. The interests of CNOOC in
entering into production sharing contracts with international oil and gas
companies may differ from our interests, especially with respect to the
criteria for determining whether, and on what terms, to enter into production
sharing contracts. Our future business development may be adversely affected
if CNOOC does not enter into new production sharing contracts on terms that
are acceptable to us.
Our business performance relies heavily on our sales to several major
customers and a substantial drop in sales to any of these customers could have
a material adverse effect on our results of operations
We sell a significant proportion of our production to CNOOC and its
affiliates and China Petroleum & Chemical Corporation, or Sinopec. For the
years ended December 31, 2003, 2004 and 2005, sales to CNOOC and its
affiliates accounted for 20.3%, 25.3% and 38.3%, respectively, of our total
operating revenues, while sales to Sinopec accounted for 17.0%, 19.3% and
22.5%, respectively, of our total operating revenues. CNOOC has a controlling
interest in us. However, our transactions with CNOOC and its affiliates are on
commercial terms and CNOOC does not guarantee our sales volume or profit
margin. Sinopec has its own oil and gas fields and has the right to import
crude oil directly from the international market. We do not have any long-term
sales contracts with CNOOC and its affiliates or Sinopec. Our business,
results of operations and financial condition would be adversely affected if
either CNOOC and its affiliates or Sinopec significantly reduces their crude
oil purchases from us and we cannot find another ready buyer in the
international market to purchase our crude oil at comparable prices.
The PRC petroleum and natural gas industries are highly competitive and
our success depends on several factors
We compete in the PRC and international markets for customers, capital
financing and business opportunities, including desirable oil and gas
prospects. The performance of our competitors may also affect the
international market price for comparable crude oil, which in turn would
likely affect the price of our crude oil. Our principal competitors in the PRC
market are PetroChina and Sinopec. For further details, see "Item
4--Information on the Company--Business Overview--Competition."
We are the dominant player in the oil and gas industry offshore China.
Currently, we are the only company permitted to engage in oil and gas
exploration offshore China in cooperation with foreign oil and gas companies.
Any change to PRC law that allows new entrants to conduct oil and gas
exploration activities offshore China in cooperation with international oil
and gas companies could increase the competition for new oil and gas
properties offshore China.
CNOOC has undertaken to us that so long as it retains a controlling
interest in us and our securities are listed on the Hong Kong Stock Exchange,
the New York Stock Exchange or other securities
14
trading systems in other parts of the world, we will have the exclusive right
to exercise CNOOC's rights to engage in offshore oil and gas exploration,
development, production and sales in the PRC and that it will not compete with
us in such business. However, CNOOC's controlling interest in us may not
continue in the future and CNOOC's undertaking may be subject to
interpretative challenges. See "Item 4--Information on the Company--History
and Development--Corporate Structure" and "Item 7--Major Shareholders and
Related Party Transactions."
Exploration, development and production risks and natural disasters
affect our operations and could result in losses that are not covered by
insurance
Our petroleum exploration, development and production operations are
subject to various risks, including pipeline ruptures and spills, fires,
explosions, encountering formations with abnormal pressures, blowouts,
cratering and natural disasters. Any of these risks could result in loss of
hydrocarbons, environmental pollution and other damage to our properties and
the properties of operators under production sharing contracts. In addition,
we face the risk that we may not discover any economically productive natural
gas or oil reservoirs. The costs of drilling, completing and operating wells
also are uncertain and are subject to numerous factors beyond our control,
including:
o weather conditions;
o natural disasters;
o availability of equipment and services;
o equipment shortages and delays; and
o lack of adequate transportation facilities.
We maintain insurance coverage against some, but not all, potential
losses. We do not maintain business interruption insurance for all of our oil
and gas fields. We may suffer material losses resulting from uninsurable or
uninsured risks or insufficient insurance coverage.
For further information on insurance coverage, see "Item 4--Information
on the Company--Business Overview--Operating Hazards and Uninsured Risks."
Some foreign countries and regions in which we have operations or may
have operations in the future may not have diplomatic or trade relations with
other countries and may be subject to trade or economic sanctions imposed by
such other countries
We currently have operations and assets in various foreign countries and
regions, including Indonesia, Australia, Canada, Morocco, Nigeria and Myanmar.
We may expand our operations into other countries to further enhance our
reserve base and diversify our geographic risk profile. While these countries
in which we have operations or may have operations in the future may maintain
an amicable relationship with China, some of them may not have diplomatic or
trade relations with other countries and may be subject to trade or economic
sanctions imposed from time to time by such other countries. We will endeavor
to limit our investment and scale of operations in these foreign jurisdictions
to minimize our exposure, but we cannot assure that the operations and assets
that we currently have or in the future may have in foreign countries and
regions will not be affected by trade or economic sanctions that may be
imposed by other countries due to their deteriorated relations with each
other. Our business and results of operations may be adversely affected if
such sanctions are imposed and result in interruption of our overseas
operations or non-accessibility of our overseas assets for a significant
period of time.
We are exposed to operating risks in some foreign countries and regions
as a result of our acquisition of oil and gas interests located in these
regions
We have acquired interests in oil and gas properties located in various
foreign countries and regions, including Indonesia, Australia, Canada,
Morocco, Nigeria and Myanmar. See "Item 4--
15
Information on the Company--Business Overview--Principal Oil and Gas
Regions--Overseas Activity," "--Natural Gas Business--Overseas Activity" and
"Item 5--Operating and Financial Review and Prospects--Operating
Results--Acquisitions and Overseas Activities." These interests are subject to
operating risks in their respective regions, including economic and political
risks.
Our non-PRC interests are subject to the laws and regulations of these
non-PRC jurisdictions respectively, including those relating to the
development, production, marketing, pricing, transportation and storage of
crude oil and natural gas, taxation and environmental and safety matters. In
addition, our overseas operations generally are subject to production sharing
arrangements with production sharing partners. As we expand to different
countries, we may become exposed to various operating risks in each of these
jurisdictions. Our non-PRC interests may be adversely affected by changes in
governmental policies or social instability or other political, economic or
diplomatic developments in or affecting these foreign nations which are not
within our control including, among other things, a change in crude oil or
natural gas pricing policy, the risks of war and terrorism, expropriation,
nationalization, renegotiation or nullification of existing concessions and
contracts, taxation policies, foreign exchange and repatriation restrictions,
changing political conditions, foreign exchange rate fluctuations and currency
controls.
We may not be able to obtain external financing that is acceptable to us
for business development purposes
From time to time, we may need to procure external debt and equity
financing to implement our development plans and fund our other business
requirements.
Our ability to obtain external financing is subject to various
uncertainties, including:
o our results of operations, financial condition and cash flows;
o the amount of capital that other PRC and Hong Kong entities may
seek to raise in the international capital markets;
o economic, political and other conditions in the PRC and Hong Kong;
o the PRC government's policies relating to foreign currency
borrowings; and
o conditions in the PRC, Hong Kong and international capital
markets.
If we are unable to obtain sufficient funding for our operations or
development plans, our business, revenues, net income and cash flows could be
adversely affected. For additional information on our capital expenditure
plans and financing requirements, see "Item 5--Operating and Financial Review
and Prospects--Liquidity and Capital Resources."
Once we issue debt securities or otherwise incur indebtedness, we become
subject to risks that impact the underlying principal of such indebtedness.
While all our current debt securities are rated investment grade by rating
agencies, we cannot assure that such ratings will not change due to internal
or external factors. These factors may be beyond our control. Even if there is
no default or event of default on our part, a market perception of an
increased likelihood of a default may have a material adverse effect on our
outstanding indebtedness as well as on our business operations.
You may not be able to assert claims against Arthur Andersen, our
independent public accountants for periods prior to 2002, nor may you be able
to assert claims against our current independent public accountants for
financial statements previously audited by Arthur Andersen
On June 6, 2002, we terminated the engagement of Arthur Andersen & Co as
our independent public accountants. Prior to that date, Arthur Andersen had
audited our financial statements. Our selected historical financial data for
the year ended, and as of, December 31, 2001 set forth in "Item 3--Key
Information--Selected Financial Data" were based on our financial statements
audited by Arthur Andersen. On June 15, 2002, Arthur Andersen was convicted of
federal obstruction of justice charges in
16
connection with the U.S. government's investigation of Enron Corporation. On
August 31, 2002, Arthur Andersen voluntarily relinquished its licenses to
practice public accountancy in all states of the United States, thereby
effectively ceasing to exist as a global accounting firm. Accordingly, it may
be difficult or impossible for you to assert any claims against, or recover
any damages from, Arthur Andersen, in respect of this annual report, including
in respect of the financial statements previously audited by Arthur Andersen.
Moreover, our current independent public accountants, Ernst & Young, have not
reaudited the financial statements previously audited by Arthur Andersen.
Therefore, it is highly unlikely that you will be able to assert claims
against, or recover any damages from, Ernst & Young, in respect of the
financial statements that were previously audited by Arthur Andersen.
Risks relating to the PRC petroleum industry
A change in PRC petroleum industry regulations could have an adverse
effect on our operations
The PRC government exercises control over the PRC petroleum industry,
including with respect to licensing, exploration, production, distribution,
pricing, taxation, imports and exports and allocation of various resources. In
the past, we have benefited from various favorable PRC government policies,
laws and regulations that have been enacted to encourage the development of
the offshore petroleum industry. See "Item 4--Information on the
Company--Regulatory Framework--Special Policies Applicable to the Offshore
Petroleum Industry in China." We cannot assure that the legal regime affecting
our businesses will remain substantially unchanged or that we will continue to
benefit from favorable PRC government policies.
In addition, existing PRC regulations require us to apply for and obtain
various PRC government licenses and other approvals, including in some cases
approvals for amendments and extensions of existing licenses and approvals, to
conduct exploration and development activities offshore China. If we are
unable to obtain any necessary approvals, our reserves and production would be
adversely affected. See "Item 4--Information on the Company--Regulatory
Framework."
Increasing competition from foreign companies as a result of China's
entry into the World Trade Organization may adversely affect our business
Effective December 11, 2001, the PRC became a member of the World Trade
Organization, or WTO. China's WTO commitments require it, within five years
from the date of China's accession to the WTO, to lift restrictions that
prohibit foreign companies from directly selling crude and processed oil in
China. The sale of natural and liquefied petroleum gas is not specifically
dealt with under China's market-access commitments relating to distribution
services (as is the case with crude and processed oil). On April 6, 2004, the
PRC Ministry of Commerce promulgated the Measures for the Administration on
Foreign Investment in Commercial Fields, which generally allow foreign
companies, through foreign-invested enterprises, to engage in retail and
wholesale businesses other than those subject to special administration by the
PRC government such as direct sale of crude and processed oil in China. The
lifting of the restrictions on distribution of natural liquefied petroleum gas
and the subsequent lifting of the restrictions on distribution of crude and
processed oil in accordance with China's WTO commitments may increase
competition and may adversely affect our business.
We may be penalized if we fail to comply with existing or future
environmental laws and regulations
Our business is subject to environmental protection laws and regulations
in the PRC, as well as other jurisdictions, which, among other things:
o impose fees for the discharge of waste substances;
o require the payment of fines and damages for serious environmental
pollution; and
17
o provide that the government may, at its discretion, close or
suspend any facility which fails to comply with orders requiring
it to cease or cure operations causing environmental damage.
We believe that all of our facilities and operations are in material
compliance with the requirements of the relevant environmental protection laws
and regulations. However, amendment of existing laws or regulations may impose
additional or more stringent requirements. In addition, our compliance with
such laws or regulations may require us to incur significant capital
expenditures or other obligations or liabilities, which could create a
substantial financial burden on us. For a further discussion of the
environmental regulations, particularly those in the PRC, see "Item
4--Information on the Company--Business Overview--Environmental Regulation."
Risks relating to the PRC
PRC economic and political conditions may adversely affect our
operations
Most of our businesses, assets and operations are located in the PRC.
The economic system of the PRC differs from the economies of most developed
countries in many respects, including:
o government investment;
o level of development;
o control of capital investment;
o control of foreign exchange; and
o allocation of resources.
The economy of the PRC has been undergoing a transformation from a
planned economy to a market-oriented economy. In recent years the PRC
government has implemented economic reform measures emphasizing
decentralization, utilization of market forces in the development of the PRC
economy and a higher level of management autonomy. These economic reform
measures have and will continue to subject our businesses to some uncertainty.
In the future, our operating results could be adversely affected by changes to
the laws and regulations that govern our industry and changes in the PRC
political and economic systems.
The PRC economy has experienced significant growth since 1978, but the
growth has been uneven both geographically and among various sectors of the
economy. The PRC government has implemented various policies from time to time
to restrain the rate of such economic growth, control inflation and otherwise
regulate economic expansion. In addition, the PRC government has attempted to
control inflation by controlling the prices of basic commodities. Severe
measures or other actions by the PRC government, such as placing additional
controls on prices of petroleum and petroleum products, could restrict our
business operations and adversely affect our financial position.
Government control of currency conversion and future movements in
exchange rates may adversely affect our operations and financial condition
A portion of our Renminbi revenue may need to be converted into other
currencies by our wholly owned principal operating subsidiary in the PRC to
meet our foreign currency obligations. We have substantial requirements for
foreign currency, including:
o debt service on foreign currency denominated debt;
o overseas acquisitions of oil and gas properties;
o purchases of imported equipment; and
18
o payment of dividends declared in respect of shares held by
international investors.
Our wholly owned subsidiary in the PRC may undertake current account
foreign exchange transactions without prior approval from the State
Administration for Foreign Exchange. It has access to current account foreign
exchange so long as it can produce commercial documents evidencing such
transactions and provided that they are processed through certain banks in
China. Foreign exchange transactions under the capital account, including
principal payments with respect to foreign currency denominated obligations,
will be subject to the registration requirements of the State Administration
for Foreign Exchange.
The value of the Renminbi against Hong Kong dollar, U.S. dollar and
other currencies fluctuates and is affected by, among other things, changes in
China's political and economic conditions. Since 1994, the conversion of
Renminbi into foreign currencies, including Hong Kong and U.S. dollars, has
been based on rates set by the People's Bank of China. The official exchange
rate for the conversion of Renminbi into U.S. dollar has generally been stable
during the past 10 years. On July 21, 2005, China reformed its foreign
exchange regime by moving into a managed floating exchange rate system based
on market supply and demand with reference to a basket of currencies. Renminbi
would no longer be pegged to the U.S. dollar. From that day to December 31,
2005, Renminbi appreciated about 2.5% against the U.S. dollar. Changes in the
PRC government's currency policies may lead to further fluctuations in the
exchange rates for the conversion of Renminbi into foreign currencies which
could have an uncertain effect on our business and operating results.
For further information on foreign exchange risks, foreign exchange
rates and hedging activities, see "Item 3--Key Information--Selected Financial
Data" and "Item 11--Qualitative and Quantitative Disclosure about Market
Risk." However, we may be unable to hedge our exposure to foreign currencies
fully and future Renminbi exchange rate movements could adversely affect our
results of operations and financial condition. Since we receive substantially
all of our revenues and express our profits in Renminbi, any devaluation of
the Renminbi may also materially and adversely affect the value of, and any
dividends payable on our shares and American depositary shares in foreign
currency terms.
Certain legal restrictions on dividend distribution may have a material
adverse effect on our cash flows
We are a holding company. Our exploration, development, production and
sales businesses are owned and conducted through various wholly owned
subsidiaries, including CNOOC China Limited, our wholly foreign-owned
enterprise in the PRC. Accordingly, our future cash flows will consist
principally of dividends from our subsidiaries. The subsidiaries' ability to
pay dividends to us is subject to PRC regulations, including restriction that
companies may pay dividends only out of net income determined in accordance
with PRC accounting standards and regulations. In addition, under PRC laws,
CNOOC China Limited is required to allocate at least 10% of its net profit to
a reserve fund until the balance of the fund has reached 50% of its registered
capital. Such reserve is not distributable as cash dividends. Therefore, there
is a risk that we could not maintain sufficient cash flows due to these
restrictions on dividend distribution.
The interpretation and enforcement of PRC laws and regulations is
subject to some uncertainty
The PRC legal system is based on statutory law. Under this system, prior
court decisions may be referred to but are not binding. Since 1979, the PRC
government has been developing a comprehensive system of commercial laws and
considerable progress has been made in the promulgation of laws and
regulations dealing with economic matters, such as corporate organization and
governance, foreign investments, commerce, taxation and trade. Because these
laws, regulations and legal requirements are relatively new, and because of
the limited volume of published cases and judicial interpretations and the
non-binding nature of prior court decisions, the interpretation and
enforcement of these laws, regulations and legal requirements involve some
uncertainty.
The PRC government underwent substantial reforms after the National
People's Congress meeting in March 2003. The PRC government has reiterated its
policy of furthering reforms in the
19
socialist market economy. No assurance can be given that these changes will
not have an adverse effect on business conditions in China generally or on our
business in particular.
Risks relating to our ADSs and shares
Additional shares or ADSs eligible for public sale could adversely
affect the price of our shares or ADSs
Sales, or the real or perceived possibility of sales, of a significant
number of additional shares in the public market could adversely affect
prevailing market prices for our shares and ADSs. As of June 6, 2006, CNOOC,
through its wholly owned subsidiaries, CNOOC (BVI) Limited and Overseas Oil &
Gas Corporation Ltd., held approximately 66.41% of our shares and the rest of
our shares were held by public investors, including institutional and
corporate investors. We cannot predict the effect, if any, that sales of our
shares, including sales of large positions held by institutional and corporate
investors, or the availability of our shares for future sale, will have on the
market price of our shares or ADSs.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT
Our legal and commercial name is CNOOC Limited. We were incorporated
with limited liability on August 20, 1999 in Hong Kong under the Companies
Ordinance of Hong Kong. Our business registration number in Hong Kong is
685974. Under the third section of our Memorandum of Association, we may do
anything which we are permitted to do by any enactment or rule of law. Our
head office is located at 65th Floor, Bank of China Tower, One Garden Road,
Central, Hong Kong, and our telephone number is 852-2213-2500. We have
appointed CT Corporation System, 111 Eighth Avenue, New York, New York 10011,
as our agent for service of process.
The PRC government established CNOOC, our controlling shareholder, as
the state-owned offshore petroleum company of China in 1982 under the
Regulation of the People's Republic of China on Exploitation of Offshore
Petroleum Resources in Cooperation with Foreign Enterprises, whereby CNOOC
assumed overall responsibility for the administration and development of PRC
offshore petroleum operations with foreign oil and gas companies. Prior to
March 2003, CNOOC was regulated and supervised by the State Economic and Trade
Commission. Since March 2003, the PRC government has undergone substantial
reform. The National Development and Reform Commission has succeeded the State
Economic and Trade Commission as the primary coordinator for the petroleum
industry.
Prior to CNOOC's internal business reorganization in 1999, CNOOC and its
various affiliates performed both commercial and administrative functions
relating to petroleum exploration and development offshore China, including:
o exercising the exclusive right to cooperate with foreign partners
in offshore petroleum exploration, development, production and
sales activities, and taking participating interests in production
sharing contracts;
o organizing international bidding for offshore petroleum
exploitation;
o conducting independent exploration, development, production and
sales activities in independently operated oil and gas fields
offshore China;
o awarding projects to and signing bilateral contracts with foreign
partners for offshore petroleum exploitation;
o reviewing and confirming appraisal reports and overall development
plans required under production sharing contracts; and
20
o obtaining from the PRC government all approvals, permits,
licenses, consents and special policies necessary under production
sharing contracts.
Reorganization
Pursuant to CNOOC's internal business reorganization in 1999, CNOOC
transferred all of its then and current operational and commercial interests
in its offshore petroleum business to us. As a result, we and our subsidiaries
are the only vehicle through which CNOOC engages in petroleum exploration,
development, production and sales activities both within and outside China.
The assets and liabilities primarily relating to the offshore petroleum
business that were transferred to us in the reorganization included:
o 37 production sharing contracts and one geophysical survey
agreement;
o 8 independent development and production projects;
o a 30% interest in Shanghai Petroleum and Natural Gas Company
Limited;
o the land use rights to terminal facilities in Nanhai, Weizhou and
the western part of the Bohai Bay; and
o loans from, and swap agreements with, various PRC and foreign
banks.
In addition, CNOOC transferred 917 employees to us to facilitate the
transfer of the oil and natural gas businesses previously operated by CNOOC.
CNOOC retained its commercial interests in operations and projects not
related to oil and gas exploration and production, including:
o a petrochemical project in Huizhou, Guangdong Province;
o a fertilizer plant in Hainan Province; and
o a liquefied natural gas project in Guangdong Province.
CNOOC also retained all of its administrative functions, which it
performed prior to the reorganization, including:
o organizing international bidding for offshore petroleum
exploitation;
o awarding projects to and signing bilateral contracts with foreign
partners for offshore petroleum exploitation;
o approving any extension of the period for the completion of the
appraisal work on petroleum discovery under the production sharing
contracts; and
o submitting the overall development plans, reports of the oil and
gas fields and the environmental impact statements related to the
production sharing contracts to the PRC governmental authorities.
Undertakings
CNOOC has undertaken to us that:
21
o we will enjoy the exclusive right to exercise all of CNOOC's
commercial and operational rights under the PRC laws and
regulations relating to the exploration, development, production
and sales of oil and natural gas offshore China;
o it will transfer to us all of CNOOC's rights and obligations under
any new production sharing contracts and geophysical exploration
operations, except those relating to CNOOC's administrative
functions;
o it will not engage or be interested, directly or indirectly, in
oil and natural gas exploration, development, production and sales
in or outside the PRC;
o we will be able to participate jointly with CNOOC in negotiating
new production sharing contracts and to set out our views to CNOOC
on the proposed terms of new production sharing contracts;
o we will have unlimited and unrestricted access to all data,
records, samples and other original data owned by CNOOC relating
to oil and natural gas resources;
o we will have an option to make investment in liquefied natural gas
projects that CNOOC invested or proposed to invest, and CNOOC will
at its own expense help us to procure all necessary government
approvals needed for our participation in these projects; and
o we will have an option to participate in other businesses related
to natural gas in which CNOOC invested or proposed to invest, and
CNOOC will procure all necessary government approvals needed for
our participation in such business.
The undertakings from CNOOC will cease to have any effect:
o if we become a wholly owned subsidiary of CNOOC;
o if our securities cease to be listed on any stock exchange or
automated trading system; or
o 12 months after CNOOC or any other PRC government-controlled
entity ceases to be our controlling shareholder.
Organizational Structure
CNOOC indirectly owned or controlled an aggregate of approximately
66.41% of our shares as of June 6, 2006. There have been no changes to our
corporate structure since such date. Accordingly, CNOOC continues to be able
to exercise all the rights of a controlling shareholder, including electing
our directors and voting to amend our articles of association. Although CNOOC
has retained a controlling interest in us, the management of our business will
be our directors' responsibility.
The following chart sets forth our controlling entities and our
principal subsidiaries as of June 6, 2006.
22
--------------------------
China National Offshore
Oil Corporation
(PRC)
--------------------------
|
| 100%
|
--------------------------
Overseas Oil & Gas
Corporation, Ltd(1)
(Bermuda)
--------------------------
|
| 100%
|
--------------------------
CNOOC (BVI) Limited
(British Virgin Islands)
--------------------------
-------------------------- |
Public Shareholders and |
Corporate Investors \ | 66.41%
\ 33.59% |
-------------------------- \ |
\ --------------------------
\ CNOOC Limited
\ (Hong Kong)
--------------------------
|
|
|
----------------------------------------------------------------------------------------------
| | | |
| 100% | 100% | 100% | 100%
| | | |
-------------------------- -------------------------- -------------------------- --------------------------
CNOOC China Offshore Oil Finance
International CNOOC China (Singapore) Subsidiaries(5)
Limited(2) Limited(3) International Pte. Ltd.(4) (British Virgin Islands)
(British Virgin Islands) (PRC) (Singapore)
-------------------------- -------------------------- -------------------------- --------------------------
(1) Overseas Oil & Gas Corporation, Ltd also directly owns five shares of
our company.
(2) Owner of our overseas interests in petroleum exploration and production
businesses and operations.
(3) Owner of substantially all of our PRC petroleum exploration and
production businesses, operations and properties.
(4) Business vehicle through which we engage in sales and marketing
activities in the international markets.
(5) Include CNOOC Finance (2002) Limited, the financing vehicle through
which we issued our US$500 million 6.375% guaranteed notes due 2012,
CNOOC Finance (2003) Limited, the financing vehicle through which we
issued our US$200 million 4.125% guaranteed notes due 2013 and US$300
million 5.5% guaranteed notes due 2033, and CNOOC Finance (2004)
Limited, the financing vehicle through which we issued our US$1 billion
zero coupon guaranteed convertible bonds due 2009. These finance
companies are our wholly owned subsidiaries with our company as their
sole corporate director.
Capital Expenditures
Our capital expenditures in 2003, 2004 and 2005 amounted to Rmb 12,372.5
million, Rmb 18,622.0 million and Rmb 17,469.5 million (US$2,164.7 million) ,
respectively. For 2006, we have budgeted approximately US$3.08 billion for
capital expenditures, approximately US$316.3 million of which is budgeted for
general exploration activities offshore China and approximately US$1,860.1
million is budgeted for development activities offshore China. We expect to
fund our capital expenditures with our cash flows from operations and our
borrowings. For further details about our capital expenditures, see "Item
5--Operating and Financial Review and Prospects--Liquidity and Capital
Resources--Capital Expenditures and Investments."
B. BUSINESS OVERVIEW
Overview
We are an oil and gas company engaged in the exploration, development
and production of crude oil and natural gas primarily offshore China. We are
the dominant producer of crude oil and natural gas offshore China and the only
company permitted to conduct exploration and production activities with
foreign oil and gas companies offshore China. As of December 31, 2005, we had
estimated net proved reserves of 2,362.6 million BOE, comprised of 1,457.4
million barrels of crude oil and condensate and 5,430.9 billion cubic feet of
natural gas. For 2005, our net production averaged 356,868 barrels per day of
23
crude oil, condensate and natural gas liquids and 389.6 million cubic feet per
day of natural gas, which together totaled 424,108 BOE per day.
Our net proved reserves increased from 1,787.1 million BOE as of
December 31, 2001 to 2,362.6 million BOE as of December 31, 2005 which
represents a compound annual growth rate of 7.2%. Based on net proved
reserves, we are one of the largest independent oil and gas exploration and
production companies in the world. In the petroleum industry, an "independent"
company owns oil and gas reserves independently of other downstream assets,
such as refining and marketing assets, whereas an integrated company owns
downstream assets in addition to oil and gas reserves. As of December 31,
2005, approximately 50.9% of our net proved reserves were classified as net
proved undeveloped. We plan to spend US$1,860.1 million developing our
reserves primarily offshore China and US$316.3 million for exploration
primarily offshore China in 2006.
We conduct exploration, development, production and sale activities
through both independent operations and production sharing contracts with
foreign partners. We have added to our reserves in recent years primarily
through our independent operations. As of December 31, 2005, independent
properties accounted for 61.9% of our total net proved reserves and
independent net proved undeveloped reserves accounted for 67.2% of our total
net proved undeveloped reserves. We are the operator of all of our independent
producing properties. For the year ended December 31, 2005, production from
our independent properties accounted for 45.5% of our total net production.
Our controlling shareholder, CNOOC, has the exclusive right to enter
into contracts with international oil and gas companies to conduct exploration
and production activities offshore China. Under these production sharing
contracts, we have the sole right to acquire, at no cost, participating
interests in any successful discovery offshore China made by our foreign
partners. Our foreign partners can recover their exploration costs under the
production sharing contracts only if a commercially viable discovery is made.
As of December 31, 2005, we had approximately 28 foreign partners under our
existing production sharing contracts offshore China, all of which are
international oil and gas companies, including Agip, BP, Burlington Resources,
Chevron, ConocoPhillips, Devon Energy, Husky, Kerr-McGee, Newfield Exploration
and Royal Dutch Shell. As of December 31, 2005, we were a party to 34
production sharing contracts offshore China. We are currently the operator or
joint operator of most of the properties developed under our production
sharing contracts.
Natural gas is becoming an increasingly important part of our business
strategy because of rapidly growing domestic demand. In view of increasing
demand for natural gas, we have continued to develop our natural gas reserves
and invested in liquefied natural gas related upstream projects outside the
PRC. We continue to explore for natural gas and develop natural gas
properties. We have acquired interests in gas reserves located in Tangguh,
Indonesia and the North West Shelf of Australia. In addition, CNOOC, our
controlling shareholder, has granted us an option to invest in liquefied
natural gas projects or other natural gas related business in which CNOOC
invested or proposed to invest. The terms of this option require us, if we
exercise the option, to reimburse CNOOC for any contribution CNOOC has made
with respect to the facility together with interest calculated at the
prevailing market rate.
Competitive Strengths
We believe that our historical success and future prospects are directly
related to a combination of our strengths, including the following:
o large proved reserve base with significant exploitation
opportunities;
o sizable operating areas with demonstrated exploration potential;
o successful independent exploration and development record;
o competitive cost structure;
o reduced risks and access to capital and technology through
production sharing contracts;
24
o strategic position in China's growing natural gas markets; and
o experienced management team.
Large proved reserve base with significant exploitation opportunities
Based on net proved reserves as of December 31, 2005 and average net
daily production for the year ended December 31, 2005, we had a
reserve-to-production ratio of 15.3 years. As of December 31, 2005,
approximately 50.9% of our net proved reserves were classified as net proved
undeveloped. We expect our production to grow significantly as these
undeveloped properties begin production.
Sizable operating area with demonstrated exploration potential
The offshore China exploration area is approximately 1.3 million square
kilometers in size, about twice as large as the U.S. Gulf of Mexico
exploration area. Only limited exploration has been conducted in Western South
China Sea and East China Sea. Since CNOOC's inception in 1982 to the end of
2005, a total of 820 exploration wells have been drilled offshore China,
including 526 wildcat wells with a success rate of approximately 35%. During
the past five years ended December 31, 2005, we made 31 discoveries and
foreign partners announced 17 discoveries offshore China.
Successful independent exploration and development record.
From the inception of CNOOC in 1982 to December 31, 2005, we achieved a
success rate of approximately 44% on our 237 offshore China independent
wildcat wells, while our foreign partners achieved a success rate of
approximately 28% on their 289 offshore China wildcat wells. As of December
31, 2005, independent properties accounted for 61.9% of our total net proved
reserves and independent net proved undeveloped reserves accounted for 67.2%
of our total net proved undeveloped reserves. In 2005, we completed four of
our major independent development projects on time and under budget.
Competitive cost structure
For the year ended December 31, 2005, our total offshore China lifting
costs were US$6.34 per BOE. Total lifting costs for independent operations
offshore China were US$5.86 per BOE during the same period. Lifting costs
consist of operating expenses and production taxes. We have kept our offshore
China lifting costs low through various measures including more efficient use
of existing offshore facilities, the linking of employee bonuses to cost
reduction and the adoption of new technology in our operations. We believe
that such cost structure allows us to compete effectively even in a low crude
oil price environment.
Reduced risks and access to capital and technology through production
sharing contracts
Production sharing contracts help us minimize our offshore China finding
costs, exploration risks and capital requirements because our foreign partners
are responsible for all costs associated with exploration. Our foreign
partners recover their exploration costs only if a commercially viable
discovery is made.
Strategic position in China's growing natural gas markets
The proximity of our natural gas reserves to the major demand areas in
the coastal regions of China provides us with a competitive advantage over
other natural gas suppliers in China, whose natural gas reserves are located
primarily in northwest and southwest China. We have natural gas fields near
many of China's rapidly growing coastal areas, including Hong Kong, Shanghai
and Guangzhou. We have also acquired interests in gas reserves located in
Tangguh, Indonesia and the North West Shelf of Australia. In addition, CNOOC
has granted us an option to invest in liquefied natural gas projects or other
natural gas related businesses in the PRC in which CNOOC invested or proposed
to invest. For further information, see "--Natural Gas Business."
25
Experienced management team
Our senior management team has extensive experience in the oil and gas
industry, and most of our executives have been with the CNOOC group since its
inception in 1982. We evolved from a company heavily reliant on production
sharing contracts with foreign partners to a company with a balance of both
independent and production sharing contract operations. Our management team
and staff have had the opportunity to work closely with foreign partners both
within and outside China. We have implemented international management
practices including incentive compensation schemes for our employees. In
addition, we have adopted share option schemes for our employees. See "Item
6--Directors, Senior Management and Employees--Share Ownership."
Business Strategy
We intend to continue expanding our oil and gas exploration and
production activities and, where appropriate, to continue making strategic
investments in natural gas businesses. While our expansion strategy will
continue to focus primarily on offshore China, we may also consider overseas
acquisition opportunities that may be presented to us. The principal
components of our strategy are as follows:
o increase production primarily through the development of our net
proved undeveloped reserves;
o add to our reserves through independent exploration and production
sharing contracts;
o capitalize on the growing demand for natural gas in China;
o selectively pursue acquisitions to ensure long-term production
growth, geographical reserves risk diversification, and to further
our natural gas strategy;
o maintain operational efficiency and low production costs; and
o maintain financial flexibility through prudent financial
practices.
Increase production primarily through the development of our net
proved undeveloped reserves
As of December 31, 2005, approximately 50.9 % of our proved reserves
were classified as net proved undeveloped, which gives us the opportunity to
achieve substantial production growth even without additional reserve
discoveries, assuming that we will be able to develop these reserves more
quickly than we deplete our currently producing reserves. We are currently
undertaking a number of large development projects located primarily in the
Bohai Bay and the Western South China Sea, which we expect to substantially
increase production. We plan to spend approximately US$1,860.1 million in 2006
to develop our net proved undeveloped reserves offshore China. We also plan to
spend approximately US$373.1 million to develop our overseas reserves in 2006.
Add to our reserves through independent exploration and production
sharing contracts
We plan to concentrate our independent exploration efforts in existing
operating areas. We plan to spend approximately US$457.8 million in 2006 on
exploration activities. We plan to increase independent exploration efforts
while continuing to enter into production sharing contracts with foreign
partners to lower capital requirements and exploration risks. In 2006, we plan
to drill approximately 67 exploration wells, and acquire independently
approximately 25,300 kilometers and 4,050 square kilometers of 2D seismic data
and 3D seismic data, respectively. Our foreign partners under existing
production sharing contracts plan to drill approximately 22 exploration wells,
and acquire approximately 13,200 kilometers and 5,320 square kilometers of 2D
seismic data and 3D seismic data, respectively, in 2006.
Capitalize on the growing demand for natural gas in China
26
We plan to capitalize on the growth potential of the PRC natural gas
market through the following initiatives:
o continue to develop natural gas fields and focus independent
exploration efforts on natural gas;
o evaluate whether to exercise the options to invest in CNOOC's
liquefied natural gas projects in China; and
o evaluate investment opportunities in related natural gas
businesses that will help develop markets for our natural gas
production.
To the extent we invest in businesses and geographic areas where we have
limited experience and expertise, we plan to structure our investments as
alliances or partnerships with parties possessing the relevant experience and
expertise.
Selectively pursue acquisitions to ensure long-term production growth,
geographical reserves risk diversification, and to further our natural gas
strategy
We plan to make selective acquisitions that will meet one or more of our
strategic objectives of enhancing our production profile, diversifying our
reserve base and geographic risk profile and furthering our natural gas
strategy. In addition, we evaluate acquisition opportunities based on our
expected economic return criteria. In 2004 and 2005, we, Golden Aaron Pte.
Ltd. and China Global Construction Limited. formed a joint venture and entered
into six production sharing contracts with Myanmar Oil and Gas Enterprise. We
act as the operator under these production sharing contracts. In early 2005,
through our wholly owned subsidiary CNOOC Canada Limited, we acquired a 16.69%
interest in MEG Energy Corp. at a consideration of 150 million Canadian
dollars. In April 2006, we completed the acquisition of a 45% working interest
in an offshore oil-mining license "OML 130" in Nigeria for a cash
consideration of US$2.268 billion. On April 28, 2006, through our wholly-owned
subsidiary CNOOC Africa Limited, we signed production sharing contracts for
six blocks with a total area of 115,343 square kilometers in Kenya.
We are continuously implementing our natural gas strategy. In April,
2006, we signed Farm-in Agreements with BHP Billiton Limited and Kerr-McGee
Australia Exploration and Production Pty Ltd through our subsidiary, CNOOC
Australia E&P Pty Ltd, and obtained a 25% interest in four Exploration Permits
in the Outer Browse Basin of Australia. We believe these upstream
participation will enhance our natural gas strategy as well as provide us with
access to other gas-rich basins for further growth opportunities.
Maintain operational efficiency and low production costs
We will continue to maintain our low cost structure and operational
efficiency through the following initiatives:
o Apply up-to-date drilling, production and offshore engineering
technology to our operations through our oilfield service
providers. This technology includes long-range extension wells,
multilateral wells, advanced formation testing, multi-phase
transmission, monolayer pipeline and subsea technology, minimal
structure techniques and suction foundation technology;
o Proactively manage service contracts and cooperate with our
oilfield service providers to improve exploration efficiency and
reduce exploration costs. This measure includes using operational
techniques such as cluster drilling, which reduces drilling time
by one-third and lowers the related costs by up to 40%; and
o Maintain high production volume levels on an individual well basis
and increase the productivity of producing wells.
27
Maintain financial flexibility through prudent financial practices
Currently, we have a strong financial profile with a low leverage ratio.
We intend to maintain our financial strength by managing key measures such as
capital expenditures, cash flows and fixed charge coverage. We intend to
actively manage our accounts receivable and inventory positions to enhance
liquidity and improve profitability. We will continue to monitor our foreign
currency denominated debt and to minimize our exposure to foreign exchange
rate fluctuations.
Selected Operating and Reserves Data
The following table sets forth our operating data and our net proved
reserves as of the time and for the periods indicated.
Year ended December 31,
------------------------------
2003 2004 2005
-------- -------- --------
Net Production:
Oil (daily average bbls/day).................. 306,464 319,436 356,868
Gas (daily average mmcf/day).................. 291.0 364.1 389.6
Oil equivalent (BOE/day)...................... 356,729 382,513 424,108
Average net realized prices:
Oil (per bbl)........................... US$28.11 US$35.41 US$47.31
Gas (per mcf)........................... 2.87 2.75 2.82
Offshore China lifting costs (per BOE)........ 4.66 5.31 6.34
Overseas lifting costs (per BOE)(1)........... 9.27 10.72 12.41
Net Proved Reserves (end of period):
Oil (mmbbls).................................. 1,436.1 1,455.6 1,457.4
Gas (bcf)..................................... 4,154.4 4,646.6 5,430.9
Total (million BOE)........................... 2,128.5 2,230.0 2,362.6
Proved developed reserves (million BOE)....... 914.6 1,080.7 1,159.8
Annual reserves replacement ratio............. 187% 173% 186%
Estimated reserves life (years)............... 16.3 15.9 15.3
Standardized measure of discounted future
net cash flow (million Rmb)................. 109,800 125,387 199,427
---------
(1) Overseas lifting costs reflect lifting costs associated with our
operations in Indonesia and are calculated using the net entitlement
method.
Our finding and development costs per BOE reported in prior years was
calculated by dividing the net reserve change for each reporting period
(excluding production and sales) into the costs incurred for the period, as
reported in the "Costs Incurred" disclosure required by Statement of Financial
accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities." Due to the timing of the related costs incurred to find and
develop such proved reserves, this often includes quantities of proved
reserves for which a majority of the costs of development have not yet been
incurred. Conversely, it also often includes costs to develop proved reserves
that had been added in earlier years. Because it may not necessarily represent
total finding and development costs for projects under way or may not be
indicative of expected future finding and development costs, we discontinued
reporting such information.
At our request, Ryder Scott Company, an independent petroleum
engineering consulting company, carried out an independent evaluation of the
reserves of selected properties as of December 31, 2003, 2004 and 2005. For
further information regarding our reserves, see "Item 3--Key Information--Risk
Factors--Risks relating to our business--The oil and gas reserve estimates in
this annual report may require substantial revision as a result of future
drilling, testing and production" and "--Oil and Natural Gas Reserves."
28
The following table sets forth summary information with respect to our
estimated net proved reserves of crude oil and natural gas as of the dates
indicated.
Net proved reserves Net proved reserves
at December 31, at December 31, 2005
------- ------- ------- ----- -------
2003 2004 Developed Undeveloped Total
------- ------- --------- ----------- -------
Bohai Bay:
Crude oil (mmbbls)................................. 990.4 974.6 452.0 468.2 920.2
Natural gas (bcf).................................. 566.6 706.2 304.4 436.3 740.7
------- ------- --------- ----------- -------
Total (million BOE):............................ 1,084.8 1,092.3 502.7 541.0 1,043.7
======= ======= ========= =========== =======
Independent (million BOE).................... 556.3 605.5 336.0 286.4 622.4
Production sharing contracts (million BOE)... 528.5 486.8 166.7 254.6 421.3
Western South China Sea:
Crude oil (mmbbls)................................. 173.7 189.7 77.6 128.1 205.7
Natural gas (bcf).................................. 2,564.0 2,484.8 1,733.5 870.4 2,604.0
------- ------- --------- ----------- -------
Total (million BOE):............................ 601.0 603.8 366.5 273.2 639.7
======= ======= ========= =========== =======
Independent (million BOE).................... 476.7 482.6 264.7 266.5 531.2
Production sharing contracts (million BOE)... 124.3 121.2 101.8 6.7 108.5
Eastern South China Sea:
Crude oil (mmbbls)................................. 154.8 168.0 112.0 99.2 211.2
Natural gas (bcf).................................. 548.2 730.8 -- 784.2 784.2
------- ------- --------- ----------- -------
Total (million BOE):............................ 246.1 289.8 112.0 229.9 341.9
======= ======= ========= =========== =======
Independent (million BOE).................... 141.1 183.8 39.6 180.7 220.3
Production sharing contracts (million BOE)... 105.0 106.0 72.4 49.2 121.6
East China Sea:
Crude oil (mmbbls)................................. 13.9 21.5 2.8 18.4 21.2
Natural gas (bcf).................................. 275.3 403.4 60.0 342.2 402.2
------- ------- --------- ----------- -------
Total (million BOE):............................ 59.8 88.7 12.8 75.4 88.2
======= ======= ========= =========== =======
Independent (million BOE).................... 12.7 88.7 12.8 75.4 88.2
Production sharing contracts (million BOE)... 47.1 -- -- -- --
Overseas:
Crude oil (mmbbls)................................. 103.4 101.9 77.1 22.0 99.1
Natural gas (bcf).................................. 200.3 321.4 532.4 367.5 899.9
------- ------- --------- ----------- -------
Total (million BOE):............................ 136.8 155.5 165.8 83.3 249.1
======= ======= ========= =========== =======
Independent (million BOE).................... -- -- -- -- --
Production sharing contracts (million BOE)... 136.8 155.5 165.8 83.3 249.1
Total:
Total crude oil (mmbbls)........................... 1,436.1 1,455.6 721.5 735.9 1,457.4
Total natural gas (bcf)............................ 4,154.3 4,646.6 2,630.3 2,800.6 5,430.9
------- ------- --------- ----------- -------
Total (million BOE):............................ 2,128.5 2,230.0 1,159.9 1,202.7 2,362.6
======= ======= ========= =========== =======
Independent (million BOE).................... 1,186.9 1,360.5 653.2 809.0 1,462.2
Production sharing contracts (million BOE)... 941.6 869.5 506.7 393.7 900.4
29
New Contracts Signed in 2005
In 2005, our controlling shareholder, CNOOC, signed seven petroleum
contracts offshore China as follows:
Interest of
Partner(s) in the
Exploration Phase Date of
No. Basin Block Partner (%) Agreement Area (km(2)
------------------------------------------------------------------------------------------------------------------------------------
1 Pearl River Mouth Kerr-McGee China Petroleum Ltd. 100% 02/04/2005 9,729
Basin 43/11
2 East China Sea 25/34 Primeline Energy China Limited/ 100% 03/24/2005 7,006
Primeline Petroleum Corporation
3 Pearl River Mouth 28/20 Texas American Resources-Asia, 100% 10/18/2005 7,625
Basin Inc.
4 Pearl River Mouth 03/27 Texas American Resources-Asia, 100% 10/18/2005 10,569
Basin Inc.
5 Pearl River Mouth 42/05 Devon Energy China, Ltd. 100% 12/06/2005 6,939
Basin
6 Pearl River Mouth 16/05 New Field China, LDC 100% 12/12/2005 2,064
Basin
7 Pearl River Mouth 17/08 New Field China, LDC 100% 12/12/2005 7,106
Basin
In 2005 and the first four months of 2006, we signed 11 overseas
petroleum contracts or agreements as follows:
Our Participating Date of
No. Country Block Partners Interest (%) Agreement Area (km(2))
------------------------------------------------------------------------------------------------------------------------------------
1 Myanmar C1 Golden Aaron Pte Limited HQCEC 81.25 01/25/05 16,988
2 Myanmar C2 Golden Aaron Pte Limited HQCEC 81.25 01/25/05 26,506
3 Myanmar M2 Golden Aaron Pte Limited HQCEC 81.25 01/25/05 9,653
4 Equatorial Guinea S GEPetrol 75 02/17/06 2,287
5 Morocco RAS TAFELNEY Vanco 11.25 04/21/05 14,000
6 Nigeria OML130 Total 45 01/09/06 1,295
Petrobras
SAPETRO
30
7 Nigeria OPL229 EERL 35 01/27/06 1,376
AMNI
AERD
BOGI
8 Philippines SC57 PNOC-EC 51 04/02/06 2,881.5
9 Australia WA-301-P BHPB 25 04/03/06 7,430
10 Australia WA-303-P BHPB 25 04/03/06 13,570
WA-304-P Kerr McGee
WA-305-P
11 Kenya Block 1, Block 100 04/28/06 115,342
9, Block 10A,
L2, L3, L4
Exploration and Production
Summary
We currently conduct exploration, development and production activities
primarily in four areas offshore China:
o the Bohai Bay;
o the Western South China Sea;
o the Eastern South China Sea; and
o the East China Sea.
31
[GRAPHIC OMITTED]
In addition, we hold several equity interests in oil and gas properties
in foreign countries and regions including Indonesia, Australia, Canada,
Morocco, Nigeria and Myanmar. See "--Overseas Activity," "--Natural Gas
Business--Overseas Activity" and "Item 5--Operating and Financial Review and
Prospects--Operating Results--Acquisitions and Overseas Activities."
As of December 31, 2005, we had estimated net proved reserves of 2,362.6
million BOE, comprised of 1,457.4 million barrels of crude oil and condensate
and 5,430.9 billion cubic feet of natural gas. As of December 31, 2005, we had
interests in 41 producing properties and 49 properties under development and
appraisal offshore China. In 2005, seven properties offshore China commenced
production. For 2005, net production averaged 356,868 barrels per day of crude
oil, condensate and natural gas liquids and 389.6 million cubic feet per day
of natural gas, which together totaled 424,108 BOE per day, representing a
10.9% increase over the annual average daily production for 2004.
We conduct our exploration, development and production activities
independently as well as through production sharing contracts with foreign
partners. A production sharing contract contains provisions regarding the
exploration, development, production and operation of an oil and gas field and
the formula through which foreign partners may recover exploration,
development and production costs and share in the production after the
successful development of petroleum reserves. See "--Production Sharing
Contracts--Offshore China" for a detailed discussion of these arrangements.
32
We also conduct exploration efforts through geophysical survey
agreements with foreign companies. These geophysical survey agreements allow
international oil and gas companies to conduct geophysical studies before
deciding whether to negotiate a production sharing contract with CNOOC. If a
foreign partner decides to enter into a production sharing contract with
CNOOC, the costs and expenses that the foreign partner incurs in conducting
geophysical exploration may be recovered during the production period by the
foreign partner, subject to our confirmation. See "--Geophysical Survey
Agreements" for a detailed discussion of these arrangements. As of December
31, 2005, we were not a party to any geophysical survey agreements, although
we may enter into such agreements in the future.
The offshore China exploration area is approximately 1.3 million square
kilometers in size. We currently have rights to operate independently or in
conjunction with international oil and gas companies in 134 exploration blocks
covering approximately 627,271 square kilometers. We have access to 902,476
kilometers of 2D seismic data and 45,217 square kilometers of 3D seismic data.
From the beginning of CNOOC's operations in 1982 to December 31, 2005, a total
of 820 exploration wells have been drilled, including 526 wildcat wells, with
a success rate of approximately 35%. During this period we achieved a success
rate of approximately 44% on 237 independent exploration wildcat wells, while
our foreign partners achieved a success rate of approximately 28% on their 289
exploration wildcat wells.
Oil and Natural Gas Reserves
We have a large base of net proved undeveloped reserves as a result of
our exploration successes. As of December 31, 2005, approximately 50.9% of our
net proved reserves were classified as net proved undeveloped. We are
undertaking a number of large development projects located primarily in the
Bohai Bay and the Western South China Sea and expect these projects to
substantially increase our production.
Our "net proved reserves" consist of our percentage interest in
reserves, including our 100% interest in the independent oil and gas
properties and our participating interest in the properties covered under the
production sharing contracts in PRC, less: (a) an adjustment for our share of
royalties payable by us to the PRC government and our participating interest
in share oil payable to the PRC government under the production sharing
contracts, and (b) an adjustment for production allocable to foreign partners
under the PRC production sharing contracts as reimbursement for exploration
expenses attributable to our participating interest; and plus (i) our 5.3%
participating interest in North West Shelf Project in Australia, and (ii) our
participating interest in the properties covered under the production sharing
contracts in Indonesia less an adjustment for share oil attributable to the
Indonesian government and the domestic market obligation. Net proved reserves
do not include any deduction for production taxes, which are included in our
operating expenses. Net production is calculated in the same way as net proved
reserves.
We explore and develop our reserves offshore China under exploration and
production licenses granted by the PRC government. The PRC government
generally grants exploration licenses for individual blocks while production
licenses generally are granted for individual fields. All of our proved
reserves are under production licenses granted by the PRC government.
At our request, Ryder Scott Company, an independent petroleum
engineering consulting company, evaluated our selected properties as of
December 31, 2003, 2004 and 2005. For further information regarding our
reserves, see "Item 3--Key Information--Risk Factors--Risks relating to our
business--The oil and gas reserves data in this annual report may require
substantial revisions as a result of future drilling, testing and production."
The following tables set forth net proved crude oil reserves, net proved
natural gas reserves and total net proved reserves, as of the dates indicated,
for our independent and production sharing contract operations in each of our
operating areas.
33
Total Net Proved Crude Oil Reserves
(mmbbls)
As of December 31, As of December 31, 2005
-------------------- ----------------------------------------------
2003 2004 Developed Undeveloped Total
------- ------- --------- ----------- -------
Offshore China
Independent
Bohai Bay.......................... 474.3 487.8 285.3 213.6 498.9
Western South China Sea............ 135.2 147.6 43.2 125.8 169.0
Eastern South China Sea............ 56.6 69.1 39.6 56.9 96.5
East China Sea..................... 4.6 21.5 2.8 18.4 21.2
------- ------- --------- ----------- -------
Total......................... 670.8 726.0 370.9 414.7 785.6
Production Sharing Contracts
Bohai Bay.......................... 516.1 486.8 166.7 254.6 421.3
Western South China Sea............ 38.5 42.0 34.5 2.3 36.8
Eastern South China Sea............ 98.1 98.8 72.4 42.3 114.7
East China Sea..................... 9.3 -- -- -- --
------- ------- --------- ----------- -------
Total......................... 662.0 627.6 273.6 299.2 572.8
Combined
Bohai Bay.......................... 990.4 974.6 452.0 468.2 920.2
Western South China Sea............ 173.7 189.7 77.6 128.1 205.7
Eastern South China Sea............ 154.8 168.0 112.0 99.2 211.2
East China Sea..................... 13.9 21.5 2.8 18.4 21.2
------- ------- --------- ----------- -------
Total......................... 1,332.7 1,353.8 644.4 713.9 1,358.3
Overseas(1)
Indonesia.......................... 103.4 101.9 62.7 11.0 73.7
North West Shelf, Australia........ -- -- 14.4 11.0 25.4
------- ------- --------- ----------- -------
Total.............................. 103.4 101.9 77.1 22.0 99.1
Total.................................... 1,436.1 1,455.6 721.5 735.9 1,457.4
======= ======= ========= =========== =======
---------
(1) As of December 31, 2005, our net proved reserves attributable to
overseas operations were derived mainly from Indonesia and Australia. We
conduct our operations in Indonesia through production sharing contracts
and technical assistance contracts. In Australia, we hold interests in
the North West Shelf project.
Total Net Proved Natural Gas Reserves
(bcf)
As of December 31, As of December 31, 2005
-------------------- ----------------------------------------------
2003 2004 Developed Undeveloped Total
------- ------- --------- ----------- -------
Offshore China
Independent
Bohai Bay......................... 491.9 706.2 304.4 436.3 740.7
Western South China Sea........... 2,049.3 2,009.7 1,329.4 844.4 2,173.8
Eastern South China Sea........... 506.9 687.7 -- 742.8 742.8
East China Sea.................... 48.7 403.4 60.0 342.2 402.2
------- ------- --------- ----------- -------
Total........................ 3,096.8 3,807.0 1,693.8 2,365.8 4,059.6
Production Sharing Contracts
Bohai Bay......................... 74.7 -- -- -- --
Western South China Sea........... 514.7 475.1 404.1 26.0 430.1
Eastern South China Sea........... 41.2 43.0 -- 41.3 41.3
East China Sea.................... 226.7 -- -- -- --
------- ------- --------- ----------- -------
Total........................ 857.3 518.1 404.1 67.3 471.4
Combined
Bohai Bay ....................... 566.6 706.2 304.4 436.3 740.7
Western South China Sea........... 2,564.0 2,484.8 1,733.5 870.4 2,603.9
Eastern South China Sea........... 548.2 730.8 -- 784.2 784.2
East China Sea.................... 275.3 403.4 60.0 342.2 402.2
------- ------- --------- ----------- -------
Total........................ 3,954.1 4,325.2 2,097.9 2,433.1 4,531.0
34
As of December 31, As of December 31, 2005
-------------------- ----------------------------------------------
2003 2004 Developed Undeveloped Total
------- ------- --------- ----------- --------
Overseas(1)
Indonesia......................... 200.3 321.4 154.6 142.2 296.9
North West Shelf, Australia....... -- -- 377.7 225.3 603.0
------- ------- --------- ----------- --------
Total........................ 200.3 321.4 532.3 367.5 899.9
Total................................... 4,154.4 4,646.6 2,630.3 2,800.6 5,430.9
======= ======= ========= =========== ========
---------
(1) As of December 31, 2005, our net proved reserves attributable to
overseas operations were derived mainly from Indonesia and Australia. We
conduct our operations in Indonesia through production sharing contracts
and technical assistance contracts. In Australia, we hold interests in
the North West Shelf project.
Total Net Proved Reserves
(million BOE)
As of December 31, As of December 31, 2005
-------------------- ----------------------------------------------
2003 2004 Developed Undeveloped Total
------- ------- --------- ----------- --------
Offshore China
Independent
Bohai Bay......................... 556.3 605.5 336.0 286.4 622.4
Western South China Sea........... 476.7 482.6 264.7 266.5 531.2
Eastern South China Sea........... 141.1 183.7 39.6 180.7 220.3
East China Sea.................... 12.7 88.7 12.8 75.4 88.2
------- ------- --------- ----------- --------
Total........................ 1,186.9 1,360.5 653.1 809.0 1,462.1
Production Sharing Contracts
Bohai Bay......................... 528.5 486.8 166.7 254.6 421.3
Western South China Sea........... 124.3 121.2 101.8 6.7 108.5
Eastern South China Sea........... 105.0 106.0 72.4 49.2 121.6
East China Sea.................... 47.1 -- -- -- --
------- ------- --------- ----------- --------
Total........................ 804.9 714.0 340.9 310.5 651.4
Combined
Bohai Bay......................... 1,084.8 1,092.3 502.7 541.0 1,043.7
Western South China Sea........... 601.0 603.8 366.5 273.2 639.7
Eastern South China Sea........... 246.1 289.8 112.0 229.9 341.9
East China Sea.................... 59.8 88.7 12.8 75.4 88.2
------- ------- --------- ----------- --------
Total........................ 1,991.7 2,074.6 994.0 1,119.5 2,113.5
Overseas(1)
Indonesia......................... 136.7 155.5 88.5 34.7 123.2
North West Shelf, Australia....... -- -- 77.3 48.6 125.9
------- ------- --------- ----------- --------
Total........................ 136.7 155.5 165.8 83.3 249.1
Total................................... 2,128.5 2,230.0 1,159.8 1,202.7 2,362.6
======= ======= ========= =========== ========
---------
(1) As of December 31, 2005, our net proved reserves attributable to
overseas operations were derived mainly from Indonesia and Australia. We
conduct our operations in Indonesia through production sharing contracts
and technical assistance contracts. In Australia, we hold interests in
the North West Shelf project.
Oil and Natural Gas Production
The following tables show average daily net oil production, net natural
gas production, and average net total production for the periods indicated.
Oil production comprises crude oil, condensate and natural gas liquids.
35
Average Daily Net Production of Crude Oil
(bbls per day)
Year ended December 31,
---------------------------------
2003 2004 2005
------- ------- -------
Offshore China
Independent
Bohai Bay......................... 98,790 94,769 118,605
Western South China Sea........... 27,547 26,737 24,913
Eastern South China Sea........... 13,708 19,497 20,047
East China Sea.................... 2,536 2,121 1,706
------- ------- -------
Total........................ 142,581 143,123 165,271
Production Sharing Contracts
Bohai Bay......................... 30,716 39,744 60,235
Western South China Sea........... 33,397 29,136 24,103
Eastern South China Sea........... 59,273 77,492 83,694
East China Sea.................... - - -
------- ------- -------
Total........................ 123,386 146,372 168,032
Combined
Bohai Bay......................... 129,506 134,512 178,840
Western South China Sea........... 60,944 55,873 49,016
Eastern South China Sea........... 72,981 96,989 103,741
East China Sea.................... 2,536 2,121 1,706
------- ------- -------
Total........................ 265,967 289,495 333,303
Overseas(1)
Indonesia......................... 40,497 29,941 23,565
------- ------- -------
Total........................ 40,497 29,941 23,565
Total................................... 306,464 319,436 356,868
======= ======= =======
-----------
(1) As of December 31, 2005, our net production attributable to overseas
operations were derived entirely from our operations in Indonesia. We
conduct our operations in Indonesia through production sharing contracts
and technical assistance contracts.
Average Daily Net Production of Natural Gas
(mmcf per day)
Year ended December 31,
2003 2004 2005
Offshore China
Independent
Bohai Bay......................... 47.1 47.7 49.1
Western South China Sea........... 29.1 83.7 99.4
Eastern South China Sea........... - - -
East China Sea.................... 14.2 17.1 18.3
------- ------- -------
Total........................ 90.4 148.5 166.8
Production Sharing Contracts
Bohai Bay......................... - - -
Western South China Sea........... 98.7 131.6 130.1
Eastern South China Sea........... - - -
East China Sea.................... - - -
------- ------- -------
Total........................ 98.7 131.6 130.1
Combined
Bohai Bay......................... 47.1 47.7 49.1
Western South China Sea........... 127.8 215.2 229.6
Eastern South China Sea........... - - -
East China Sea.................... 14.2 17.1 18.3
------- ------- -------
Total........................ 189.1 280.0 296.9
Overseas(1)
Indonesia......................... 101.9 84.1 92.7
------- ------- -------
Total........................ 101.9 84.1 92.7
Total................................... 291.0 364.1 389.6
======= ======= =======
-----------
(1) As of December 31, 2005, our net production attributable to overseas
operations were derived entirely from our operations in Indonesia. We
conduct our operations in Indonesia through production sharing contracts
and technical assistance contracts.
36
Average Daily Net Production
(BOE per day)
Year ended December 31,
---------------------------------
2003 2004 2005
------- ------- -------
Offshore China
Independent
Bohai Bay......................... 106,637 102,725 126,786
Western South China Sea........... 32,391 40,683 41,486
Eastern South China Sea........... 13,708 19,497 20,047
East China Sea.................... 4,908 4,963 4,751
------- ------- -------
Total........................ 157,644 167,868 193,069
Production Sharing Contracts
Bohai Bay......................... 30,716 39,744 60,235
Western South China Sea........... 51,619 53,454 48,097
Eastern South China Sea........... 59,274 77,492 83,694
East China Sea.................... - - -
------- ------- -------
Total........................ 141,609 170,690 192,026
Combined
Bohai Bay......................... 137,353 142,469 187,020
Western South China Sea........... 84,010 94,137 89,583
Eastern South China Sea........... 72,981 96,989 103,741
East China Sea.................... 4,908 4,963 4,751
------- ------- -------
Total........................ 299,252 338,558 385,095
Overseas(1)
Indonesia......................... 57,477 43,955 39,013
------- ------- -------
Total........................ 57,477 43,955 39,013
------- ------- -------
Total................................... 356,729 382,513 424,108
======= ======= =======
-----------
(1) As of December 31, 2005, our net production attributable to overseas
operations were derived entirely from our operations in Indonesia. We
conduct our operations in Indonesia through production sharing contracts
and technical assistance contracts.
Principal Oil and Gas Regions
Bohai Bay
The Bohai Bay holds our largest net proved reserves and, for the year
ended December 31, 2005, was our largest producing area for crude oil and
natural gas. The Bohai Bay exploration area is located in the northeastern
part of China, approximately 200 kilometers east of Beijing and is
approximately 58,100 square kilometers in size. As of December 31, 2005, we
had rights to operate, independently or in conjunction with international oil
and gas companies, in 15 blocks covering approximately 43,244 square
kilometers of the total Bohai Bay exploration area. Our operating area
contains oil and gas fields in shallow waters with typical depths ranging from
10 to 30 meters. The crude oil is generally of heavy gravity ranging from 15
to 20 degrees API. As of December 31, 2005, net proved reserves in this region
were 920.2 million barrels of crude oil and condensate and 740.7 billion cubic
feet of natural gas, totaling 1,043.7 million BOE and representing
approximately 44.2% of our total net proved reserves.
The Bohai Bay has been a prolific area with significant oil discoveries
in recent years and will continue to be one of our principal areas for
exploration in the near future. In 2005, we independently drilled in this area
11 wildcat wells, six of which were successful, and four appraisal wells, two
of which were successful. In 2005, our foreign partners drilled in this area
four wildcat wells, three of which were successful, and three appraisal wells,
one of which was successful. We and our foreign partners made six and three
discoveries, respectively, in this area in 2005.
37
The following table sets forth principal exploration blocks under
exploration licenses for both our independent operations and our production
sharing contracts in the Bohai Bay as of December 31, 2005. All exploration
licenses expiring on or before June 6, 2006 are being renewed.
Exploration License
(Commencement-
Blocks Block Area (km(2)) Expiration)
--------------------------------------------------------------------------------
Middle of Bohai Bay 4,974 04/26/04~04/26/06
Southern Bohai Bay 3,679 06/08/04~06/08/06
Western Bohai Bay 1,895 06/08/04~06/08/06
Western Liaodong Bay 3,344 03/31/00~04/08/06
Eastern Liaodong Bay 2,829 07/02/01~07/02/06
Eastern Bozhong 1,861 05/30/04~05/30/06
Bohai Block 09/11 843 04/05/04~04/05/06
Bohai Block 06/17 2,586 02/20/03~02/20/07
Bohai Block 02/31 4,990 05/29/03~05/29/07
Bohai Block 11/19 3,068 06/08/04~06/08/06
Bohai Block 05/36 2,721 04/07/05~02/10/07
Eastern Bohai Block 11/05 3,601 02/10/04~02/10/06
Western Bohai Block 11/05 2,897 02/01/04~02/01/06
Bohai Block 09/18 2,234 02/04/05~02/04/07
Bohai Block 04/36 1,691 09/23/05~09/23/07
--------------------------------------------------------------------------------
Total 43,213
During the year ended December 31, 2005, we independently acquired 2,770
kilometers of 2D seismic data and 775 square kilometers of 3D seismic data and
our foreign partners acquired 21 square kilometers of 3D seismic data in the
Bohai Bay. We have an aggregate of approximately 181,663 kilometers and 10,530
square kilometers of independent 2D and 3D seismic data, respectively, in the
Bohai Bay. We also have access through our production sharing contract
partners to approximately 66,903 kilometers and 9,177 square kilometers of
additional 2D and 3D seismic data, respectively, in this area. Our exploration
capital expenditures for 2005 were US$84.3 million. In 2006, we plan to drill
24 exploration wells in the Bohai Bay.
For 2005, net production in this region averaged 178,840 barrels per day
of crude oil, condensate and natural gas liquids and 49.1 million cubic feet
per day of natural gas, representing approximately 44.1% of our total daily
net production. Our development capital expenditures for the Bohai Bay for
2005 were US$856.4 million.
The following table sets forth our principal oil and gas properties
under production in the Bohai Bay as of December 31, 2005.
Average Net Net
Production Reserves as of
for year 2005 December 31, 2005
Name of Block Major Oil and Gas Field Our Interest (BOE per day) (million BOE)
----------------------------------------------------------------------------------------------------------------------------------
Liaoxi Jinzhou20-2, Jinzhou9-3, Suizhong36-1, 100% 104,680 323.0
Luda4-2, Luda5-2, Luda10-1
----------------------------------------------------------------------------------------------------------------------------------
09/18 Chengbei 100% 4,229 5.5
----------------------------------------------------------------------------------------------------------------------------------
Boxi Qikou18-1, Qikou18-2, Qikou17-2, Qikou17-3 100% 10,008 18.5
----------------------------------------------------------------------------------------------------------------------------------
05/36 Nanbao35-2 100% 21,914 121.3
------------------------------------------
Qinghuangdao32-6 75.5%
----------------------------------------------------------------------------------------------------------------------------------
11/05 Penglai19-3 51% 7,422 132.5
----------------------------------------------------------------------------------------------------------------------------------
Bonan Bozhong34-2, Bozhong34-4, Bozhong28-1, 100% 21,797 184.4
Bozhong26-2,
------------------------------------------
38
Average Net Net
Production Reserves as of
for year 2005 December 31, 2005
Name of Block Major Oil and Gas Field Our Interest (BOE per day) (million BOE)
----------------------------------------------------------------------------------------------------------------------------------
Bozhong25-1/25-1S 83.8%
----------------------------------------------------------------------------------------------------------------------------------
04/36 Caofeidian11-1, Caofeidian11-2, 51% 16,970 28.8
Caofeidian11-3, Caofeidian11-5
----------------------------------------------------------------------------------------------------------------------------------
The following table sets forth our principal oil and gas properties under
development in the Bohai Bay as of December 31, 2005.
Net
Reserves as of
December 31, 2005
Name of Block Major Oil and Gas Field Our Interest (million BOE)
--------------------------------------------------------------------------------------------------------
Liaoxi Jinzhou21-1, Jinzhou25-1S 100% 90.6
--------------------------------------------------------------------------------------------------------
Bozhong Qinhuangdao33-1, Bozhong3-1, Bozhong3-2 100% 9.8
--------------------------------------------------------------------------------------------------------
Boxi Caofeidian18-1, Caofeidian18-2, Qikou18-9, 100% 20.1
Bozhong13-1
--------------------------------------------------------------------------------------------------------
11/05 Penglai25-6 51% 10.5
--------------------------------------------------------------------------------------------------------
04/36&05/36 Caofeidian12-1, Caofeidian12-1S 51% 13.8
--------------------------------------------------------------------------------------------------------
Bonan Bozhong34-1, Bozhong34-1S, Bozhong34-3, 100% 28.3
Bozhong34-5
--------------------------------------------------------------------------------------------------------
Liaodong Luda27-2, Luda32-2 100% 37.4
--------------------------------------------------------------------------------------------------------
11/19 Bozhong19-4, Bozhong26-2N 100% 19.1
--------------------------------------------------------------------------------------------------------
Western South China Sea
The Western South China Sea has been our most important natural gas
producing area. The Western South China Sea is located in the southern part of
China southwest of Hong Kong and is approximately 712,480 square kilometers in
size. As of December 31, 2005, we had rights to operate, independently or in
conjunction with international oil and gas companies, in 34 blocks covering
approximately 180,507 square kilometers of the Western South China Sea
exploration area. Typical water depths in this region range from 40 meters to
120 meters. The crude oil produced is of medium to light gravity, ranging from
27 to 41 degrees API. As of December 31, 2005, we had net proved reserves of
205.7 million barrels of crude oil and condensate and 2,603.9 billion cubic
feet of natural gas in this region, totaling 639.7 million BOE and
representing 27.1% of our total net proved reserves.
The Western South China Sea is one of our least explored areas but will
become increasingly important as the markets for natural gas in the southern
part of China develop. In 2005, we independently drilled in this area six
wildcat wells, three of which were successful, and three appraisal wells,
three of which were successful. In 2005, our foreign partners drilled in this
area four wildcat wells, one of which was successful. We and our foreign
partners made three discoveries and one discovery, respectively, in this area
in 2005.
The following table sets forth the principal exploration blocks under
exploration licenses for both our independent operations and our production
sharing contracts in the Western South China Sea as of December 31, 2005.
Licenses expire on or before June 6, 2006 are being renewed.
Exploration License
Block Area (Commencement-
Blocks (km2) Expiration)
------------------------------------------------------------------------------
Weizhou 12 (Beibu Gulf) 6,980 05/11/01~05/11/06
Yulin 35 (Beibu Gulf) 6,050 05/11/01~05/11/06
Weizhou 26 (Beibu Gulf) 4,358 11/05/03~05/11/06
39
Ledong 01 (Yinggehai) 6,543 12/03/03~12/03/05
Lingtou 20 (Yinggehai) 2,692 08/30/00~08/30/07
Lingao 11 (Yinggehai) 4,117 05/11/01~05/11/06
Songtao 22 (Qiongdongnan) 4,063 05/11/01~05/11/06
Songtao 31 (Qiongdongnan) 5,264 05/11/01~05/11/06
Lingshui 18 (Qiongdongnan) 7,738 08/06/02~08/06/07
Yangjiang 31 (Pearl River Mouth Basin) 6,003 12/03/03~12/03/05
Qionghai 28 (Pearl River Mouth Basin) 5,208 05/11/01~05/11/06
Wenchang 11 (Pearl River Mouth Basin) 4,901 05/11/01~05/11/06
North Wanan-21 A 6,801 09/30/05~09/30/07
North Wanan-21 B 6,118 09/30/05~09/30/07
North Wanan-21 C 6,372 09/30/05~09/30/07
North Wanan-21 D 6,126 09/30/05~09/30/07
------------------------------------------------------------------------------
Total 89,334
During the year ended December 31, 2005, we independently acquired 5,664
kilometers of 2D seismic data and 787 square kilometers of 3D seismic data and
our foreign partners acquired 186,504 kilometers of 2D seismic data and 8,844
square kilometers of 3D seismic data in the Western South China Sea. We have
an aggregate of approximately 186,504 kilometers and 8,844 square kilometers
of independent 2D and 3D seismic data, respectively, in the Western South
China Sea. We also have access through our production sharing contract
partners to approximately 106,907 kilometers and 4,656 square kilometers of
additional 2D and 3D seismic data, respectively, in this area. Our exploration
capital expenditures for the Western South China Sea for 2005 were US$76.0
million. In 2006, we plan to drill 18 exploration wells in the Western South
China Sea area.
For 2005, net production in this region averaged 49,016 barrels per day
of crude oil, condensate and natural gas liquids and 229.6 million cubic feet
per day of natural gas, representing approximately 21.1% of our total daily
net production. Our development capital expenditures for the Western South
China Sea for 2005 were US$161.3 million.
The following table sets forth our principal oil and gas properties
under production in the Western South China Sea area as of December 31, 2005.
Average net Net
Production Reserves as of
for year 2005 December 31, 2005
Name of Block Major Oil and Gas Field Our Interest (BOE per day) (million BOE)
------------------------------------------------------------------------------------------------------------------------------------
Yulin35 Weizhou Oil Field 100% 25,864 46.4
------------------------------------------------------------------------------------------------------------------------------------
Yangjiang31 Wenchang13-1, Wenchang13-2 60% 23,077 30.1
------------------------------------------------------------------------------------------------------------------------------------
Ledong01 Yacheng13-1 51% 25,020 76.2
------------------------------------------------------------------------------------------------------------------------------------
Changjiang25 Dongfang1-1 100% 15,622 223.1
------------------------------------------------------------------------------------------------------------------------------------
The following table sets forth our principal oil and gas properties
under development in the Western South China Sea area as of December 31, 2005.
Net
Reserves as of
December 31, 2005
Name of Block Major Oil and Gas Field Our Interest (million BOE)
---------------------------------------------------------------------------------------------------------------------
Yangjiang31/32 Wenchang8-3, Wenchang14-3, Wenchang15-1, 100% 123.6
Wenchang19-1, Wenchang9-2, Wenchang9-3,
Wenchang10-3
---------------------------------------------------------------------------------------------------------------------
Ledong01 Yacheng13-4, Ledong22-1, Ledong15-1 100% 101.8
---------------------------------------------------------------------------------------------------------------------
Yulin35 Weizhou6-1, Weizhou11-1, Weizhou11-1N, 100% 38.5
Weizhou11-4N, Weizhou6-10,
-----------------------------------------------------------------------
Weizhou12-8 51%
---------------------------------------------------------------------------------------------------------------------
40
Eastern South China Sea
The Eastern South China Sea is currently one of our most important oil
producing areas in terms of its contribution to our total production and
sales. The Eastern South China Sea exploration area is located in the southern
part of China, directly southeast of Hong Kong, and is approximately 174,420
square kilometers in size. As of December 31, 2005, we had rights to operate,
independently or in conjunction with international oil and gas companies, in
38 blocks covering approximately 193,704 square kilometers in the Eastern
South China Sea exploration area. This area includes the important Pearl River
Mouth Basin. Typical water depths in this region range from 100 meters to 120
meters. The crude oil produced is of medium to light gravity, ranging from 30
to 40 degrees API. As of December 31, 2005, we had net proved reserves of
211.2 million barrels of crude oil and condensate and 784.2 billion cubic feet
of natural gas in this region, totaling 341.9 million BOE and representing
approximately 14.5% of our total net proved reserves.
In 2005, we independently drilled in this area six wildcat wells, all of
which were unsuccessful, and one appraisal well, which was successful. In
2005, our foreign partners drilled in this area four wildcat wells, one of
which was successful, and one appraisal wells, which was successful. Our
foreign partners made one discovery in this area in 2005.
The following table sets forth the principal exploration blocks under
exploration licenses for both our independent operations and our production
sharing contracts in the Eastern South China Sea as of December 31, 2005. All
exploration licenses expiring on or before June 6, 2006 are being renewed.
Exploration License
Block Area (Commencement-
Blocks (km(2) Expiration)
--------------------------------------------------------------------------------
Xijiang 04 (Pearl River Mouth Basin) 7,969 05/11/01~05/11/06
Xijiang 33 (Pearl River Mouth Basin) 4,983 05/12/05~05/12/07
Lufeng 06 (Pearl River Mouth Basin) 4,457 05/11/01~05/11/06
Huizhou 31 (Pearl River Mouth Basin) 3,074 05/11/01~05/11/06
Enping 15 (Pearl River Mouth Basin) 5,833 05/11/01~05/11/06
Enping 10 (Pearl River Mouth Basin) 6,547 05/11/01~05/11/06
Panyu 33 (Pearl River Mouth Basin) 4,830 05/11/01~05/11/06
Liuhua 07 (Pearl River Mouth Basin) 4,172 05/11/01~05/11/06
Dongsha 04 (Pearl River Mouth Basin) 5,295 05/11/01~05/11/06
Kaiping 14 (Pearl River Mouth Basin) 7,753 05/11/01~05/11/06
Kaiping 32 (Pearl River Mouth Basin) 8,104 05/11/01~05/11/06
Dongsha 32(Pearl River Mouth Basin) 7,350 11/05/03~11/05/10
Liwan 14 (Pearl River Mouth Basin) 7,752 05/11/01~05/11/06
Zijin 27 (Pearl River Mouth Basin) 5,396 05/11/01~05/11/06
15/20 (Pearl River Mouth Basin) 1,895 05/11/00~10/16/06
16/02 (Pearl River Mouth Basin) 3,495 03/31/01~03/31/07
Baiyun 15 (Pearl River Mouth Basin) 6,463 05/11/01~05/11/06
Huizhou 30 (Pearl River Mouth Basin) 5,862 05/11/01~05/11/06
Lufeng 08 (Pearl River Mouth Basin) 4,684 06/06/05~06/06/07
16/05 (Pearl River Mouth Basin) 3,007 03/31/00~03/31/07
--------------------------------------------------------------------------------
Total 108,921
During the year ended December 31, 2005, we independently acquired 6,512
kilometers of 2D seismic data and 1,111 square kilometers of 3D seismic data
and our foreign partners acquired 3,153 kilometers of 2D seismic data in the
Eastern South China Sea area. We have an aggregate of approximately 72,817
kilometers and 3,769 square kilometers of independent 2D seismic data and 3D
seismic data, respectively, in the Eastern South China Sea. We also have
access through our production sharing contract partners to approximately
112,415 kilometers and 6,431 square kilometers of additional
41
2D and 3D seismic data, respectively, in this area. Our exploration capital
expenditures for the Eastern South China Sea for 2005 were US$52.9 million. We
plan to drill 3 exploration wells in the Eastern South China Sea in 2006.
For 2005, net production in this region averaged approximately 103,741
barrels per day of crude oil, condensate and natural gas liquids, representing
approximately 24.5% of our total daily net production. Our development capital
expenditures for this region for 2005 were US$554.1 million.
The following table sets forth our principal oil and gas properties
under production in the Eastern South China Sea as of December 31, 2005.
Average Net Net
Production Reserves as of
for year 2005 December 31, 2005
Name of Block Major Oil and Gas Field Our Interest (BOE per day) (million BOE)
------------------------------------------------------------------------------------------------------------------------------------
Huizhou14 Huizhou Oil Fields 51% 18,117 22.0
------------------------------------------------------------------------------------------------------------------------------------
16/19 Huzhou19-3, Huizhou19-2, Huizhou19-1 51% 2,782 21.6
------------------------------------------------------------------------------------------------------------------------------------
15/12 Xijiang24-3 51% 16,576 15.0
------------------------------------------------------------------------------------------------------------------------------------
Xijiang24 Xijiang30-2 40% 10,788 8.5
------------------------------------------------------------------------------------------------------------------------------------
Huizhou31 Liuhua11-1 100% 18,699 29.8
------------------------------------------------------------------------------------------------------------------------------------
16/05 Lufeng13-1 25% 3,513 20.6
------------------------------------------------------------------
Lufeng13-2 100%
------------------------------------------------------------------------------------------------------------------------------------
Lufeng08 Lufeng22-1 25% 2,382 2.4
------------------------------------------------------------------------------------------------------------------------------------
15/34 Panyu4-2, Panyu5-1 51% 30,885 29.7
------------------------------------------------------------------------------------------------------------------------------------
The following table sets forth our principal oil and gas properties
under development in the Eastern South China Sea as of December 31, 2005.
Net
Reserves as of
Our December 31, 2005
Name of Block Major Oil and Gas Field Interest (million BOE)
--------------------------------------------------------------------------------
Liuhua07 Panyu30-1, Liuhua19-5 100% 96.7
--------------------------------------------------------------------------------
Panyu33 Panyu34-1 100% 30.7
--------------------------------------------------------------------------------
Xijiang04 Xijiang23-1 100% 47.2
--------------------------------------------------------------------------------
15/34 Panyu11-6 51% 2.6
--------------------------------------------------------------------------------
Huizhou14 Huizhou21-1(G) 51% 9.1
--------------------------------------------------------------------------------
Huizhou16 Huizhou25-1, Huizhou25-3 51% 6.1
--------------------------------------------------------------------------------
East China Sea
The East China Sea is the least explored area of our four principal
regions offshore China, and an area that we expect to become an important
natural gas production base in the future. The East China Sea is approximately
339,580 square kilometers in size and is located east of Shanghai. As of
December 31, 2005, we had rights to operate, independently or in conjunction
with international oil and gas companies, in 47 blocks (excluding the Pinghu
block) covering approximately 209,816 square kilometers of the total East
China Sea. On August 19, 2003, CNOOC, Sinopec, Pecten Orient Company of the
United States (a subsidiary company of Shell) and Unocal reached an agreement
to explore, develop and market natural gas, oil and condensate in Xihu Trough,
East China Sea. Under the agreement CNOOC owned 30% of the project and
accordingly, we acquired a 30% working interest in the project from CNOOC. In
September 2004, Pecten Orient and Unocal exited the project and as a result,
our working interest in the Xihu Trough project was increased to 50%. The
project comprises three exploration and two development contract areas of the
Xihu Trough covering approximately 22,000 square kilometers. The first
development under the contracts will be in the Chunxiao development area,
which is expected to
42
come on stream in the first half of 2006. The total block area of the Xihu
Trough is approximately 59,565 square kilometers. Typical water depths in this
region are approximately 90 meters and the crude oil and condensate are of
light gravity. As of December 31, 2005, our net proved reserves in the Xihu
Trough were 18.1 million barrels of crude oil and condensate and 365.7 billion
cubic feet of natural gas, totaling 79.1 million BOE and representing 3.7% of
our total net proved reserves. We are the operator of the project.
In 2005, we and our foreign partners drilled no wells in this area.
The following table sets forth the principal exploration blocks under
existing exploration licenses or pending exploration licenses for both our
independent operations and our production sharing contracts in the East China
Sea as of December 31, 2005. All exploration licenses expiring on or before
June 6, 2006 are being renewed.
Exploration License
Block Area (Commencement-
Blocks (km2) Expiration)
--------------------------------------------------------------------------------
North Yellow Sea 6,471 05/25/01~05/25/06
Northern Trough (Northern South Yellow Sea) 912 08/30/00~08/30/07
Xihu Hangzhou 26 (East China Sea) 3,642 03/31/03~03/31/07
Xihu Hangzhou 17 (East China Sea) 4,227 08/28/01~08/28/08
Xihu Huangyan 04 (East China Sea) 2,848 08/28/01~08/28/08
Xihu Zhenhai 01 (East China Sea) 1,536 08/28/01~08/28/08
Lishui 33 (East China Sea) 2,999 12/05/05~07/01/09
Wenzhou 21 (East China Sea) 1,437 12/05/05~07/01/07
East China Sea 25/34 7,017 12/05/05~12/05/07
Kunshan Block 02 (East China Sea) 2,628 05/11/01~05/11/06
Jinhua Block 12 (East China Sea) 6,931 05/11/01~05/11/06
Tiantai 32 (East China Sea) 5,400 07/17/01~07/17/06
Fuzhou Block 02 (East China Sea) 3,064 05/11/01~05/11/06
Taibei Block 27 (East China Sea) 7,379 07/09/01~07/09/06
Taoyuan 07 (East China Sea) 6,457 07/09/01~07/09/06
Jilong 25 (East China Sea) 5,692 07/09/01~07/09/06
--------------------------------------------------------------------------------
Total 68,640
During the year ended December 31, 2005, we independently acquired 940
square kilometers of 3D seismic data. We have an aggregate of approximately
115,990 kilometers and 1,317 square kilometers of independent 2D and 3D
seismic data, respectively, in the East China Sea area. We also have access
through our production sharing contract partners to approximately 48,255
kilometers and 475 square kilometers, respectively, of additional 2D and 3D
seismic data in this area. Our exploration capital expenditures for the East
China Sea for 2005 were US$6.3 million. We plan to drill one exploration well
in this area in 2006.
For 2005, our net production in this region averaged 1,706 barrels per
day of crude oil, condensate and natural gas liquids and 18.3 million cubic
feet per day of natural gas, representing 1.1% of our total daily net
production. Our development capital expenditures for the East China Sea for
2005 were US$105.0 million.
The following table sets forth the principal oil and gas properties
under production or development in the East China Sea as of December 31, 2005.
43
Average net Net
production Reserves as of
for year 2005 December 31, 2005
Name of Block Major Oil and Gas Field Our Interest (BOE per day) (million BOE)
-------------------------------------------------------------------------------------------------------------
Under Production
-------------------------------------------------------------------------------------------------------------
Pinghu Pinghu Gas Field 30% 4,751 9.1
-------------------------------------------------------------------------------------------------------------
Under Development
-------------------------------------------------------------------------------------------------------------
Xihu Trough Canxue, Duanqiao, 50% - 79.2
Chunxiao, Tianwaitian,
Baoyunting, Wuyunting
-------------------------------------------------------------------------------------------------------------
Overseas Activity
In early 2003 and 2004, we acquired interests in the Tangguh LNG project
located in Indonesia. The Tangguh LNG partners have signed contracts to
provide liquefied natural gas to South Korea and North America. For further
details of these interests, see "--Natural Gas Business--Overseas Activity."
In December 2004, we completed the North West Shelf Project acquisition.
We acquired a 25% stake in the China LNG Joint Venture, a new joint venture
established within the NWS Gas Project. Under the terms of the transaction, We
also acquired approximately a 5.3% interest in certain production licences,
retention leases and an exploration permit of the NWS Gas Project, and a right
to participate in future exploration undertaken over and above the proven
reserves. See "--Natural Gas Business--Overseas Activity."
In April 2002, our wholly owned subsidiary, CNOOC Southeast Asia
Limited, acquired subsidiaries in Indonesia formerly owned by Repsol YPF, S.A.
These Indonesian subsidiaries together hold a portfolio of interests in oil
and gas production sharing and technical assistance contracts in areas located
offshore and onshore Indonesia. The main businesses of the Indonesian
subsidiaries are the exploration, development and production of oil and gas
offshore and onshore Indonesia. Their main assets comprise a portfolio of
interests in four production sharing contracts and a technical assistance
contract in that region. We estimate that our net proved reserves of the
assets in Indonesia as of December 31, 2005 were approximately 123.2 million
BOE.
The interests owned by the Indonesian subsidiaries comprise the
following assets:
o South East Sumatra Production Sharing Contract. The Indonesian
subsidiaries own a 65.5409% interest in the South East Sumatra
production sharing contract. This contract area covers
approximately 8,100 square kilometers located offshore Sumatra and
is the largest of the assets held by the Indonesian subsidiaries.
It is operated and majority-owned by us. It is also one of the
largest offshore oil developments in Indonesia and has produced
more than one billion barrels of oil in over 20 years of
production. The concession expires in 2018.
o Offshore North West Java Production Sharing Contract. The
Indonesian subsidiaries own a 36.7205% interest in the Offshore
North West Java production sharing contract. This contract area
covers approximately 13,800 square kilometers in the Southern Java
Sea, offshore Jakarta and has produced more than one billion BOE
in over 20 years of production. It is operated by a member of the
BP group and currently produces crude oil and natural gas. Its
natural gas is sold to the Indonesia State Electric Company and
the Indonesia State Gas Utility Company. The concession expires in
2017.
o West Madura Production Sharing Contract and Poleng Technical
Assistance Contract. These subsidiaries own a 25.0% interest in
the West Madura production sharing contract and a 50.0% interest
in the Poleng technical assistance contract. These contract areas
are located offshore Java, near the island of Madura and the Java
city of Surabaya and cover approximately 1,600 square kilometers
combined. Kodeco Energy Company is the operator for the West
Madura production sharing contract and Korea Development Company
is the
44
operator for the Poleng technical assistance contract, each
assisted by certain of the Indonesian subsidiaries. These contract
areas currently produce crude oil and natural gas. Their natural
gas is sold to the Indonesia State Electric Company. The West
Madura production sharing contract expires in May 2011. The Poleng
technical assistance contract expires in December 2013. Three new
oil and gas discoveries were made in this area in 2003.
o Blora Production Sharing Contract. The Indonesian subsidiaries own
a 16.7% interest in the Blora production sharing contract. This
contract area lies entirely onshore Java and covers an area of
approximately 4,800 square kilometers. There has been no
production of crude oil or natural gas from this concession. The
current operator is Coparex Blora. The concession expires in 2026.
The remaining interests in the above assets at the time of our
acquisition were owned by independent third parties, including Lundin
Petroleum, BP, Kodeco, Kalila Energy, BG Group, Pertamina, INPEX, Kanematsu,
Nissho Iwai, Nisseki Mitsubishi, Paladin Resources, C. Itoh and Co. and
Amerada Hess.
In addition to our Indonesian subsidiaries and the acquisition of
interests in the Tangguh LNG project, we have a 39.51% participating interest
in a production sharing contract in the Malacca Strait in Indonesia.
On May 3, 2004, we, through our wholly owned subsidiary CNOOC Morocco
Limited, acquired from Vanco Energy Corporation an 11.25% interest in a
petroleum agreement for Ras Tafelney offshore Morocco.
In 2004 and 2005, we, Golden Aaron Pte. Ltd. and China Global
Construction Limited. formed a joint venture and entered into six production
sharing contracts with Myanmar Oil and Gas Enterprise. We act as the operator
under these production sharing contracts. In early 2005, through our wholly
owned subsidiary CNOOC Canada Limited, we acquired a 16.69% interest in MEG
Energy Corp. for a consideration of 150 million Canadian dollars.
In June 2005, we made an offer to merge with Unocal for US$67 per share,
or a total consideration of approximately US$18.5 billion. However, in light
of considerable uncertainties and risks associated with the political climate
in the United States, we withdrew the offer on August 2, 2005.
In January 2006, we signed an agreement with South Atlantic Petroleum
Limited to acquire a 45% working interest in an offshore oil-mining license
"OML 130" in Nigeria for a cash consideration of US$2.268 billion. The
acquisition was completed in April 2006. On January 27, 2006, CNOOC Africa
Limited, a wholly-owned subsidiary of CNOOC International Ltd., signed an
agreement of share sale and purchase deed with ARED Projects Nigeria Limited
to acquired a 35% working interest in an offshore oil prospecting license "OPL
229" in Nigeria. CNOOC Africa Limited will pay US$ 60 million for the
acquisition. In addition, we signed a production sharing contract for block S
in Equatorial Guinea. Block S is an exploration block and covers a total area
of approximately 2,287 square kilometers in the south offshore Equatorial
Guinea.
On April 28, 2006, through our wholly-owned subsidiary CNOOC Africa
Limited, we signed production sharing contracts (PSCs) for six blocks in
Kenya. These six blocks, namely Block 1, Block 9, Block 10A, L2, L3, and L4
are located in the three basins of LAMU, ANZA and MANDERA. The total area is
115,343 square kilometers.
As of December 31, 2005, our net proved reserves in our overseas
properties were 99.1 million barrels of crude oil and 899.9 billion cubic feet
of natural gas. For 2005, net production from our overseas properties averaged
23,565 barrels per day of crude oil, condensate and natural gas liquids and
92.7 million cubic feet of natural gas, representing approximately 6.6% and
23.8%, respectively, of our total daily net production of crude oil and total
daily net production of natural gas. Our interests in the production sharing
contracts are held by our wholly owned subsidiaries.
45
We currently conduct all of our international oil sales through China
Offshore Oil (Singapore) International Pte. Ltd., our wholly owned Singapore
subsidiary. In the past, this subsidiary also engaged in oil trading
activities.
The following table sets forth our principal overseas oil and gas
properties under production or development as of December 31, 2005.
Average net Net
production Reserves as of
for year 2005 December 31, 2005
Name of Block Major Oil and Gas Field (BOE per day) (million BOE)
----------------------------------------------------------------------------------------------------------------
Under Production
----------------------------------------------------------------------------------------------------------------
Indonesia South East Sumatra, Offshore North West Java, 39,013 123.2
West Madura, Poleng, and Malacca Strait
----------------------------------------------------------------------------------------------------------------
Under Development
----------------------------------------------------------------------------------------------------------------
Australia North West Shelf - 125.9
----------------------------------------------------------------------------------------------------------------
Indonesia Tangguh - -
----------------------------------------------------------------------------------------------------------------
Other Oil and Gas Data
Production Cost Data
The following table sets forth average sales prices per barrel of crude
oil, condensate and natural gas liquids sold, average sales prices per
thousand cubic feet of natural gas sold and production costs per BOE produced
for each of our independent, production sharing contract and combined
operations for the periods indicated.
Year ended December 31,
---------------------------------
2003 2004 2005
----- ----- -----
(US$) (US$) (US$)
Average Sales Prices of Petroleum Produced
Per Barrel of Crude Oil, Condensate and Natural Gas Liquids Sold........................ 28.11 35.41 47.31
Per Thousand Cubic Feet of Natural Gas Sold............................................. 2.87 2.75 2.82
Offshore China Average Lifting Costs per BOE Produced
Independent............................................................................. 4.78 5.28 5.86
Production Sharing Contracts............................................................ 4.53 5.35 6.81
Offshore China Average.................................................................. 4.66 5.31 6.34
Overseas Average Lifting Costs per BOE Produced
Net Entitlement......................................................................... 9.27 10.72 12.41
Drilling and Productive Wells
The following table sets forth our exploratory and productive wells
drilled offshore China as of December 31, 2005 by independent and production
sharing contract operations in each of our operating areas. It includes
exploratory and productive wells drilled offshore China prior to our inception
in 1982.
As of December 31, 2005
-------------------------------------------------------------------------------
Western Eastern
South South East
Total Bohai Bay China Sea China Sea China Sea Overseas
------ --------- ----------- --------- --------- --------
Independent
Net Exploratory Wells......................... 525 312 170 27 16 -
Net Productive Wells.......................... 574.4 453 88 28 5.4 -
Crude Oil..................................... 541.7 437 74 28 2.7 -
Natural Gas................................... 32.7 16 14 - 2.7 -
46
Production Sharing Contracts
Net Exploratory Wells......................... 20.3 3.8 1.2 0.5 2.6 12.2
Net Productive Wells*......................... 965.4 229.9 20 78.7 - 636.8
Crude Oil..................................... 918.5 229.9 14.4 78.2 - 596.0
Natural Gas................................... 46.9 - 5.6 0.5 - 40.8
Totals
Net Exploratory Wells......................... 545.3 315.8 171.2 27.5 18.6 12.2
Net Productive Wells.......................... 1539.8 682.9 108 106.7 5.4 636.8
Crude Oil..................................... 1460.2 666.9 88.4 106.2 2.7 596.0
Natural Gas................................... 79.6 16 19.6 0.5 2.7 40.8
---------
*Excluding abandoned wells.
Drilling Activity
The following tables set forth our net exploratory and development wells
broken down by independent and production sharing contract operations in each
of our operating areas for the years ended December 31, 2005, 2004 and 2003.
Year ended December 31, 2005
------------------------------------------------------------------------
Western Eastern
South South East
Bohai China China China
Total Bay Sea Sea Sea Overseas
----- ----- ------- ------- ----- --------
Independent
Net Exploratory Wells Drilled................. 31 15 9 7 - -
Successful................................. 15 8 6 1 - -
Dry........................................ 16 7 3 6 - -
Net Development Wells Drilled................. 84 68 14 2 - -
Successful................................. 84 68 14 2 - -
Dry........................................ - - - - - -
Production Sharing Contracts
Net Exploratory Wells Drilled................. 6.3 3.8 1.2 - - 1.3
Successful................................. 3.8 3.8 - - - -
Dry........................................ 2.5 - 1.2 - - 1.3
Net Development Wells Drilled................. 54 42 - 4 2 6
Successful................................. 54 42 - 4 2 6
Dry........................................ - - - - - -
Year ended December 31, 2004
------------------------------------------------------------------------
Western Eastern
South South East
Bohai China China China
Total Bay Sea Sea Sea Overseas
----- ----- ------- ------- ----- --------
Independent
Net Exploratory Wells Drilled................. 36 19 8 6 3 -
Successful................................. 21 14 3 4 - -
Dry........................................ 15 5 5 2 3 -
Net Development Wells Drilled................. 42 34 4 2 2 -
Successful................................. 42 34 4 2 2 -
Dry........................................ - - - - - -
Production Sharing Contracts
Net Exploratory Wells Drilled................. 4.6 - - - 0.6 4
Successful................................. 3.3 - - - 0.3 3
Dry........................................ 1.3 - - - 0.3 1
Net Development Wells Drilled................. 73 62 - 11 - -
Successful................................. 73 62 - 11 - -
Dry........................................ - - - - - -
47
Year ended December 31, 2003
------------------------------------------------------------------------
Western Eastern
South South East
Bohai China China China
Total Bay Sea Sea Sea Overseas
----- ----- ------- ------- ----- --------
Independent
Net Exploratory Wells Drilled................. 28.0 16.0 5.0 7.0 - -
Successful................................. 14.0 6.0 3.0 5.0 - -
Dry........................................ 14.0 10.0 2.0 2.0 - -
Net Development Wells Drilled................. 20.1 11.1 9.0 - - -
Successful................................. 20.1 11.1 9.0 - - -
Dry........................................ - - - - - -
Production Sharing Contracts
Net Exploratory Wells Drilled................. 3.5 - - 0.5 - 3.0
Successful................................. - - - - - -
Dry........................................ 3.5 - - 0.5 - 3.0
Net Development Wells Drilled................. 78.0 42.9 - 3.1 - 32.0
Successful................................. 72.0 42.9 - 3.1 - 26.0
Dry........................................ 6.0 - - - - 6.0
Natural Gas Business
Natural gas is becoming an increasingly important part of our business
strategy. We intend to exploit our natural gas reserves to meet rapidly
growing demand in the PRC for natural gas. In light of increasing demand for
natural gas in the PRC, we have made strategic investments in liquefied
natural gas projects outside the PRC and may continue to do so in the future.
PRC Activity
CNOOC, our controlling shareholder, has granted us an option to invest
in liquefied natural gas projects or other natural gas related businesses in
which CNOOC has invested or proposed to invest. The terms of this option
require us, if we exercise the option, to reimburse CNOOC for any contribution
CNOOC has made with respect to the facility together with interest calculated
at the prevailing market rate. CNOOC's major liquefied natural gas projects in
the PRC include:
Guangdong LNG Facility. CNOOC is currently engaged in a project to build
China's first proposed liquefied natural gas import facility in Guangdong
Province in southern China. We have not entered into any negotiations with
CNOOC on the detailed terms under which we may exercise our option to acquire
CNOOC's interest in this facility. CNOOC has committed to take a 33% ownership
interest in the project. Other partners include Hong Kong Electric Holding
Company and Hong Kong & China Gas Company Limited, each committed to 3%
ownership interests, and five customers of the proposed facility who have
collectively committed to a 31% ownership interest. Through a competitive
selection process, BP Global Investment Limited was selected as the foreign
partner to take the remaining 30% interest in the project.
The project involves the construction of a receiving terminal with
capacity of 3.7 million tonnes per year and a 380-kilometer trunk line.
Project construction began in the third quarter of 2003. The facility is
scheduled to commence operations in 2006.
Fujian Development. In October 2001, CNOOC signed an agreement with the
Fujian provincial government on natural gas market development in Fujian
Province. The agreement provides for a joint investment commitment to increase
natural gas supply and gas market development in Fujian Province. Both parties
are committed to sourcing gas, including liquefied natural gas, from all
viable sources, including from offshore production and overseas. The parties
also agreed to invest in gas-fired power plants and related infrastructure.
The parties contemplate that the Tangguh LNG project in Indonesia will supply
liquefied natural gas to this project. In August 2002, CNOOC announced that
China's second LNG terminal would be built in Fujian by CNOOC and its
partners. CNOOC owns a 60% interest in the
48
project. Construction for the project began in the third quarter of 2003. The
project is scheduled to commence operations in 2008.
Zhejiang Development. In March 2004, CNOOC signed an agreement with
Zhejiang provincial government to jointly develop China's third LNG terminal
in Zhejiang. The joint development will include construction of an LNG
re-gasification terminal, a gas trunk line and a gas-fired power plant. CNOOC
will take a 51% interest in the project, with a Zhejiang government affiliate
and a Ningbo city government affiliate taking a 29% interest and a 20%
interest, respectively, in the project. Based on current plan and estimate,
phase one construction of the project will be completed in 2008.
Shanghai LNG Project. In September 2004, CNOOC signed an agreement with
a Shanghai municipal government affiliate to build a liquefied natural gas
import facility in Shanghai. This project involves the construction of a
receiving terminal and a submarine trunk line. Based on current arrangements,
CNOOC will take a 45% equity interest in the project, with the Shanghai
partner taking the remaining 55% interest. Based on current plan and estimate,
phase one construction of the project will be completed in 2008.
Overseas Activity
On January 1, 2003, we acquired BP Muturi Limited, which owned a 44.0%
interest in the Muturi production sharing contract offshore Indonesia, and BP
Wiriagar Limited's 42.4% interest in the Wiriagar production sharing contract
offshore Indonesia for a consideration of approximately US$275 million. The
Muturi production sharing contract and Wiriagar production sharing contract,
together with the Berau production sharing contract, make up the Tangguh LNG
project. The Tangguh LNG project is a greenfield project located offshore
Indonesia and is one of the largest natural gas projects in Asia. On May 12,
2004, we completed our acquisition of an additional 20.767% interest in the
Muturi production sharing contract from British Gas International Limited for
a consideration of US$105.1 million. As a result, our interest in the Muturi
production sharing contract increased to 64.767%.
Our interests in these production sharing contracts represent 16.96% of
the total reserves and upstream production of the Tangguh LNG project. The
remaining interests in the Tangguh LNG project are held by BP Berau, BP
Muturi, BP Wiriagar, MI Berau, Nippon, KG Berau, KG Wiriagar and Indonesia
Natural Gas Resources Muturi. The partners in the Tangguh LNG project have
applied to the Indonesia government to consolidate the three production
sharing contracts and expect that BP will serve as the operator for the
project.
In connection with our acquisition of interests in the Tangguh LNG
project, the partners in the Tangguh LNG project entered into a conditional
25-year supply contract to provide up to 2.6 million tonnes of liquefied
natural gas per year to a liquefied natural gas terminal project in Fujian
Province, China. Supply of liquefied natural gas under this supply contract is
expected to begin in 2009. In July 2004, the Tangguh PSC partners signed the
LNG sales and purchases agreement("SPA") with POHANG Steel Co to provide up to
0.55 million tonnes per annum ("mtpa") LNG for 20 years. In August 2004,
the Tangguh PSC partners signed the LNG SPA with K-Power. Co. Ltd. to provide
up to 0.6 mtpa LNG for 20 years. In October 2004, the Tangguh PSC partners
signed the LNG SPA with Sempra Energy LNG Marketing Corp. to provide up to
3.615 mtpa LNG for 20 years.
Given the proximity of the Tangguh LNG project to many major industrial
and commercial areas, we expect the project to secure additional LNG supply
contracts in the near future.
In May 2003, we signed an agreement with the original North West Shelf
project partners to acquire an aggregate interest of 5.3% in the reserves and
upstream production of Australia's North West Shelf project for a
consideration of US$348 million. We completed this acquisition in December
2004. We booked 125.9 million BOE of gas reserves from this project in 2005.
Woodside Petroleum is the operator for the project.
Pursuant to the agreement, we also acquired a 25% interest in the China
LNG Joint Venture established by the six original partners to supply liquefied
natural gas from the North West Shelf project
49
to a liquefied natural gas terminal currently being developed by CNOOC, our
controlling shareholder, and various partners in Guangdong Province, China.
The terms of this transaction require us to pay the other partners in the
North West Shelf project for gas production and processing services provided
over the term of the China LNG Joint Venture. We are also required to make an
upfront tariff payment of approximately US$180 million in relation to
liquefied natural gas processing facilities. The partners of the project
signed a 25-year LNG supply agreement in December 2004 to provide liquefied
natural gas to the Guangdong liquefied natural gas terminal starting 2006.
On October 24, 2003, we entered into an agreement with the joint venture
participants of the Gorgon natural gas project in Australia based on a
memorandum of understanding, under which we agreed to acquire certain interest
in the upstream production and reserves of the Gorgon natural gas project. The
memorandum of understanding expired in March 2005.
In April, 2006, we signed Farm-in Agreements with BHP Billiton Limited
and Kerr-McGee Australia Exploration and Production Pty Ltd through our
subsidiary, CNOOC Australia E&P Pty Ltd, and obtained a 25% interest in four
Exploration Permits in the Outer Browse Basin of Australia.
To the extent we invest in businesses and geographic areas where we have
limited experience and expertise, we plan to structure our investments as
alliances and partnerships with parties possessing the relevant experience and
expertise.
Segment Information
The following table shows the breakdown of our total consolidated
operating revenues for each of the periods indicated and the percentage
contribution of each revenue component to our total operating revenues:
Year ended December 31,
------------------------------------------------------------------------------
2003 2004 2005
------------------- --------------------- ----------------------
Rmb'000 % Rmb'000 % Rmb'000 %
---------- ----- ---------- ----- ---------- -----
Independent operations................... 12,049,054 29.4 16,104,429 29.2 24,419,997 35.2
Production sharing contracts............. 20,231,534 49.4 24,396,521 44.2 38,179,412 55.0
Trading businesses....................... 12,398,661 30.3 18,191,353 32.9 15,901,325 22.9
Unallocated and elimination.............. (3,728,976) (9.1) (3,470,240) (6.3) (9,044,991) (13.1)
---------- ----- ---------- ----- ---------- -----
Total operating revenues................. 40,950,273 100.0 55,222,063 100.0 69,455,743 100.0
---------- ----- ---------- ----- ---------- -----
We are mainly engaged in the exploration, development and production of
crude oil and natural gas primarily offshore China. For the year ended
December 31, 2005, approximately 56.1% of our total revenue was contributed by
PRC customers. Our overseas activities are mainly conducted in Indonesia,
Australia, Myanmar and Nigeria.
Sales and Marketing
Sales of Offshore Crude Oil
We sell crude oil and natural gas to the PRC market through our wholly
owned PRC subsidiary, CNOOC China Limited, and sell to the international
market through our wholly owned subsidiary, China Offshore Oil (Singapore)
International Pte. Ltd., located in Singapore.
We submit production and sales plans to the National Development and
Reform Commission each year. Based on information provided by China's three
crude oil producers, PetroChina, Sinopec and us, the National Development and
Reform Commission compiles an overall national plan to coordinate sales. Our
sales of crude oil to the international market also require us to obtain
export licenses issued by the PRC Ministry of Commerce. Historically, we have
been able to obtain all required export licenses.
50
Pricing
We price our crude oil with reference to prices for crude oil of
comparable quality in the international market, including a premium or
discount mutually agreed upon by us and our customers according to market
conditions at the time of the sale. Prices are quoted in U.S. dollars, but
domestic sales are billed and paid in Renminbi. We currently produce three
types of crude oil: Nanhai Light, Medium Grade and Heavy Crude. The table
below sets forth the sales and marketing volumes, pricing benchmarks and
average realized prices for each of these three types of crude oil for the
periods indicated.
Year ended December 31,
------------------------------
2003 2004 2005
-------- -------- --------
Sales and Marketing Volumes (benchmark)
(mmbbls)(1)
Nanhai Light (APPI(2) Tapis(3))............... 20.4 13.1 18.4
Medium Grade (Daqing OSP(4)).................. 69.6 91.8 85.3
Heavy Crude (APPI(2) Duri(5))................. 60.2 63.9 86.7
Average Realized Prices (US$/bbl)(6)
Nanhai Light.................................. US$30.27 US$41.24 US$54.52
Medium Grade.................................. 29.45 37.57 51.88
Heavy Crude................................... 26.56 31.78 42.81
Benchmark Prices (US$/bbl)
APPI(2) Tapis(3) ............................. US$29.59 US$40.68 US$57.05
Daqing OSP(4) ................................ 28.94 36.55 52.56
APPI(2) Duri(5) .............................. 25.46 31.92 42.48
ICP Duri...................................... 27.11 32.09 46.01
ICP(7) Cinta.................................. 28.04 35.62 51.14
ICP Widuri.................................... 28.05 35.65 51.19
West Texas Intermediate (US$/bbl)............. US$31.07 US$41.44 US$61.04
---------
(1) Includes the sales volumes of us and our foreign partners under
production sharing contracts.
(2) Asia petroleum price index.
(3) Tapis is a light crude oil produced in Malaysia.
(4) Daqing official selling price. Daqing is a medium crude oil produced in
northeast China.
(5) Duri is a heavy crude oil produced in Indonesia.
(6) Includes the average realized prices of us and our foreign partners
under production sharing contracts.
(7) Indonesian crude price.
The international benchmark crude oil price, West Texas Intermediate,
was US$61.13 per barrel as of December 30, 2005 and US$72.50 per barrel as of
June 6, 2006.
Markets and Customers
We sell most of our crude oil production in the PRC domestic market. We
also sell to customers in South Korea, Japan, the United States and Australia,
as well as to crude oil traders in the spot market. For the years ended
December 31, 2003, 2004 and 2005, we sold approximately 73.5%, 81.2% and
70.9%, respectively, of our crude oil in the PRC, and exported approximately
26.5%, 18.8% and 29.1%, respectively.
Most of our crude oil production sales in the PRC domestic market are to
refineries and petrochemical companies that are affiliates of Sinopec,
PetroChina and CNOOC, our controlling shareholder. Sales volume to Sinopec has
been high historically because most of the PRC refineries and petrochemical
companies were affiliates of Sinopec. After the restructuring of the PRC
petroleum industry in July 1998, some refineries and petrochemical companies
were transferred to PetroChina from Sinopec. For the years ended December 31,
2003, 2004 and 2005, sales to Sinopec were approximately
51
36.8%, 38.4% and 41.9%, respectively, and sales to PetroChina were
approximately 7.7%, 7.0% and 5.0%, respectively, of our total crude oil sales
in the PRC domestic market. Together these two customers accounted for
approximately 44.5%, 45.4% and 46.9%, respectively, of our total crude oil
sales in the PRC domestic market. For the same periods, sales to affiliates of
CNOOC were approximately 43.9%, 41.2% and 48.0%, respectively, of our total
crude oil sales in the PRC domestic market. For further information about our
sales to CNOOC-affiliated companies, please see note 27 to our consolidated
financial statements attached to this annual report.
The following table presents, for the periods indicated, our revenues
sourced in the PRC and outside the PRC:
Year ended December 31,
----------------------------
2003 2004 2005
------ ------ ------
(Rmb in millions,
except percentages)
Revenues sourced in the PRC................... 25,416 30,453 38,993
Revenues sourced outside the PRC.............. 15,534 24,769 30,463
------ ------ ------
Total revenues................................ 40,950 55,222 69,456
====== ====== ======
% of revenues sourced outside the PRC......... 37.9% 44.9% 43.9%
Sales Contracts
We sign sales contracts with our oil customers for each shipment. Sales
contracts are standard form contracts containing ordinary commercial terms
such as quality, quantity, price, delivery and payment. All sales are made on
free-on-board terms. Some of our customers are required to make payments
within 30 days after the shipper takes possession of the crude oil cargo at
our delivery points. Some of them are required to make prepayment or provide
guarantee letters or letter of credit. As of December 31, 2003, 2004 and 2005,
most of our account receivables were aged within six months. During the years
ended December 31, 2003, 2004 and 2005, the accounts receivable turnover were
approximately 47.5 days, 42.3 days and 32.6 days, respectively. Doubtful
accounts provision during the years ended December 31, 2003, 2004 and 2005
were Rmb 1.5 million, nil and nil, respectively.
We have a credit control policy, including credit investigation of
customers and periodic assessment of credit terms. Sales clerks are directly
responsible for liaising with customers on the collection of receivables
within the credit terms.
We price our crude oil in U.S. dollars. PRC customers are billed and
make actual payments in Renminbi based on the exchange rate prevailing at the
bill of lading date, while overseas customers are billed and are required to
make payments in U.S. dollars within 30 days of the bill of lading date.
Sales of Natural Gas from Offshore China
Driven by environmental and efficiency concerns, the PRC government is
increasingly encouraging residential and industrial use of natural gas to meet
primary energy needs. In 1989, in order to encourage natural gas production,
the PRC government adopted a favorable royalty treatment, which provides a
royalty exemption for natural gas production up to two billion cubic meters
(70.6 billion cubic feet or 11.8 million BOE) per year as compared to a
royalty exemption available for crude oil production of up to one million tons
or approximately seven million BOE per year. The favorable treatment also
includes lower royalty rates on incremental increases in natural gas
production as compared with the royalty rates for crude oil production.
Since 1989, the PRC government has adopted the following sliding scale
of royalty payments of up to 3% of the annual gross production of natural gas:
52
Annual gross production Royalty rate
Less than 2 billion cubic meters................................. -
2-3.5 billion cubic meters....................................... 1.0%
3.5-5 billion cubic meters....................................... 2.0%
Above 5 billion cubic meters..................................... 3.0%
We sell a large portion of our offshore China natural gas production to
Hong Kong and Hainan Province. In December 1992, Castle Peak Power in Hong
Kong signed a long-term gas supply contract under which it agreed to buy from
the partners approximately 102.4 billion cubic feet of natural gas per year on
a take-or-pay basis until 2015. Gas prices are quoted and paid in U.S.
dollars. The payments are made in U.S. dollars on a monthly basis and are
reconciled annually. Castle Peak Power purchased approximately 38.4% of our
total offshore China natural gas production for the year ended December 31,
2005. We sold the remaining of our total offshore China natural gas production
to mainland China customers, including Hainan Fertilizer, Hainan Yangpu Power,
Shandong Yantai Zhongshi Gas and Hainan Refinery.
The price of gas sold to the PRC market is determined by negotiations
between us and the buyers based on market conditions. Contracts typically
consist of a base price with provisions for annual or seasonal resets and
adjustment formulas which depend on a basket of crude oil prices, inflation
and various other factors.
Procurement of Services
We usually outsource work in connection with the acquisition and
processing of seismic data, reservoir studies, well drilling services, wire
logging and perforating services and well control and completion service to
independent third parties or our connected parties.
In the development stage, we normally employ independent third parties
for single point mooring and floaring production storage and offloading, or
FPSO, services and both independent third parties and CNOOC affiliates for
other services by entering into contracts with them. We conduct a bidding
process to determine who we employ to construct platforms, terminals and
pipelines, to drill production wells and to install offshore production
facilities. Both independent third parties and CNOOC affiliates participate in
the bidding process. We are closely involved in the design and management of
services by contractors and exercise extensive control over their performance,
including their costs, schedule, quality and HSE (health, safety, and
environment) measures.
Competition
Domestic Competition
The petroleum industry is highly competitive. We compete in the PRC and
in international markets for customers as well as capital to finance our
exploration, development and production activities. Our principal competitors
in the PRC market are PetroChina and Sinopec.
We price our crude oil on the basis of comparable crude oil prices in
the international market. The majority of our customers for crude oil are
refineries affiliated with Sinopec and PetroChina to which we have been
selling crude oil, from time to time, since 1982. Based on our dealings with
these refineries, we believe that we have established a stable business
relationship with them.
We are the dominant player in the oil and gas industry offshore China
and are the only company permitted to engage in oil and gas exploration and
production offshore China in cooperation with foreign parties. We may face
increasing competition in the future from other petroleum companies in
obtaining new PRC offshore oil and gas properties, or, as a result of changes
in current PRC laws or regulations permitting an expansion of existing
companies' activities or new entrants into the industry.
As part of our business strategy, we intend to expand our natural gas
business to meet rapidly increasing domestic demand. Our competitors in the
PRC natural gas market are PetroChina and, to a lesser extent, Sinopec. Our
principal competitor, PetroChina, is the largest supplier of natural gas in
China in terms of volume of natural gas supplied. PetroChina's natural gas
business benefits from strong
53
market positions in Beijing, Tianjin, Hebei Province and northern China. We
intend to develop related natural gas businesses in China's coastal provinces,
where we may face competition from PetroChina and, to a lesser extent,
Sinopec. We believe that our extensive natural gas resources base, the
proximity of these resources to the markets in China, our relatively advanced
technologies and our experienced management team will enable us to compete
effectively in the domestic natural gas market.
Foreign Competition and the World Trade Organization
Imports of crude oil are subject to tariffs, import quotas, handling
fees and other restrictions. The PRC government also restricts the
availability of foreign exchange with which the imports must be purchased. The
combination of tariffs, quotas and restrictions on foreign exchange has, to
some extent, limited the competition from imported crude oil.
In line with the general progress of its economic reform programs, the
PRC government has agreed to reduce import barriers as part of its WTO
commitments. As a result of China joining the World Trade Organization as a
full member on December 11, 2001, it is required to further reduce its import
tariffs and other trade barriers over time, including with respect to certain
categories of petroleum and crude oil. Notwithstanding China's WTO related
concessions, crude and processed oil remain, for the time being, subject to
restrictions on import rights and only certain designated state-owned
enterprises may import crude and processed oil. Sinopec, PetroChina and
several other domestic companies have received permission to import crude oil
on their own. At present, foreign owned or foreign invested entities and other
none-state-owned enterprises are subject to certain import quotas.
PRC Fiscal Regimes for Offshore Crude Oil and Natural Gas Activities
We conduct exploration and production operations either independently or
jointly with foreign partners under our production sharing contracts. The PRC
government has established different fiscal regimes for crude oil and natural
gas production from our independent operations and from our production sharing
contracts.
Royalties paid to the PRC government are based on our gross production
from both independent operations and oil and gas fields under production
sharing contracts. The amount of the royalties varies up to 12.5% based on the
annual production of the relevant property. The PRC government has provided
companies such as ours with a royalty exemption for up to approximately one
million tons, or seven million BOE, per year for our crude oil production and
for up to 70.6 billion cubic feet, or approximately 11.8 million BOE, per year
for our natural gas production. The limits in these exemptions apply to our
total production from both independent properties and properties under
production sharing contracts. In addition, we pay production taxes to the PRC
government equal to 5% of our crude oil and gas produced independently and 5%
of our crude oil and gas produced under production sharing contracts.
Under our production sharing contracts, production of crude oil and gas
is allocated among us, the foreign partners and the PRC government according
to a formula contained in the contracts. Under this formula, a percentage of
production under our production sharing contracts is allocated to the PRC
government as its share oil. For more information about the allocation of
production under the production sharing contracts, see "--Production Sharing
Contracts--Offshore China--Production Sharing Formula."
We cannot give any assurance that the fiscal regime outlined above will
not change significantly in the future.
Production Sharing Contracts
Offshore China
When exploration and production operations offshore China are conducted
through a production sharing contract, the operator of the oil or gas field
must submit a detailed evaluation report upon discovery of petroleum reserves.
If such a discovery is determined commercially viable pursuant to the
procedures set forth in the production sharing contract, an overall
development plan must be submitted to
54
a joint management committee established under the production sharing contract
for its review and adoption. After that, the overall development plan must
also be submitted to CNOOC. After CNOOC confirms the overall development plan,
CNOOC submits it to the National Development and Reform Commission for
approval. After receiving the governmental approval, the parties to the
production sharing contract may begin the commercial development of the oil
and gas field.
As part of the reorganization in 1999, CNOOC transferred all of its
economic interests and obligations under its then existing production sharing
contracts to us and our subsidiaries. It also undertook to transfer its future
production sharing contracts to us and our subsidiaries. As of December 31,
2005, we had 34 production sharing contracts.
Under PRC law, the negotiation of a production sharing contract is a
function that only a state-owned national company, such as CNOOC, may perform.
This function cannot be transferred to us because we are a pure commercial
entity. Since the reorganization, under the terms of its undertaking with us,
CNOOC, after entering into production sharing contracts with international oil
and gas companies, is required to assign immediately to us all of its economic
interests and obligations under the production sharing contracts. For further
details, see "Item 4--Information on the Company--History and Development" and
"Item 7--Major Shareholders and Related Party Transactions--Related Party
Transactions."
New production sharing contracts are entered into between CNOOC and
foreign partners primarily through bidding organized by CNOOC and direct
negotiation.
Bidding Process
The bidding process typically involves the following steps:
o CNOOC, with the approvals of the PRC government, determines which
blocks are open for bidding and prepares geological information
packages and bidding documentation for these blocks;
o CNOOC invites foreign enterprises to bid;
o potential bidders are required to provide information, including
estimates of minimum work commitments, exploration costs and
percentage of share oil payable to the PRC government; and
o CNOOC evaluates each bid and negotiates a production sharing
contract with the successful bidder.
Under CNOOC's undertaking with us, we may participate with CNOOC in all
negotiations of new production sharing contracts.
The term of a production sharing contract typically lasts for 30 years
and has three distinct phases:
o Exploration. The exploration period shall be divided into three
phases with three, two and two years for each phase, and may be
extended with the consent of CNOOC and the approval of relevant
PRC regulatory authorities. During this period, exploratory and
appraisal work on the exploration block is conducted in order to
discover petroleum and to enable the parties to determine the
commercial viability of any petroleum discovery.
o Development. The development period begins on the date on which
the relevant PRC regulatory authorities approve the overall
development plan, which outlines the recoverable reserves and
schedule for developing the discovered petroleum reserves. The
development phase ends when the design, construction,
installation, drilling and related research work for the
realization of petroleum production as provided in the overall
development plan have been completed.
55
o Production. The production period begins when commercial
production commences and usually lasts for 15 years. The
production period may be extended upon approval of the PRC
government.
Minimum Work Commitment
Under production sharing contracts that involve exploration activities,
the foreign partners must complete a minimum amount of work during the
exploration period, generally including:
o drilling a minimum number of exploration wells;
o producing a fixed amount of seismic data; and
o incurring a minimum amount of exploration expenditures.
Foreign partners are required to bear all exploration costs during the
exploration period. However, such exploration costs can be recovered according
to the production sharing formula after commercial discoveries are made and
production begins. During the exploration period, foreign partners are
required to return 25% of the contract area, excluding the development and
production areas, to CNOOC at the end of each phase of the exploration period.
At the end of the exploration period, all areas, excluding the development
areas, production areas and areas under evaluation, must be returned to CNOOC.
Participating Interests
Pursuant to production sharing contracts, we have the right to take
participating interests in any oil or gas field discovered in the contract
area and may exercise this right after the foreign partners have made
commercially viable discoveries. The foreign partners retain the remaining
participating interests.
Production Sharing Formula
A chart illustrating the production sharing formula under our production
sharing contracts is shown below.
Percentage of annual gross
production Allocation
--------------------------------------------------------------------------------
5.0% Production tax payable to the PRC government, or
VAT(1)
0.0% -- 12.5%(2) Royalty oil payable to the PRC government
50.0% -- 62.5%(2) Cost recovery oil allocated according to the
following priority:
1. recovery of current year operating costs
by us and foreign partner(s);
2. recovery of earlier exploration costs by
foreign partner(s);
3. recovery of development costs by us and
foreign partner(s) based on participating
interests;(3) and
4. any excess, allocated to the remainder
oil.
32.5%(3) Remainder oil allocated according to the
following formula:
1. (1-X) multiplied by 32.5% represents
share oil payable to the PRC government;
and
2. X multiplied by 32.5% represents
remainder oil distributed according to
each partner's participating interest.(4)
---------
(1) The production tax is also referred to as "value-added tax" (VAT) in PRC
production sharing contracts.
(2) Assumes annual gross production of more than four million metric tons,
approximately 30 million barrels of oil. For lower amounts of
production, the royalty rate will be lower and the cost recovery will be
greater than 50.0% by the amount that the royalty rate is less than
12.5%.
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(3) The ratio "X" is agreed in each production sharing contract based on
commercial considerations and ranges from 8% to 100%.
(4) See "--Principal Oil and Gas Regions" for our participating interest
percentage in our production sharing contracts.
The first 5.0% of the annual gross production is paid to the PRC
government as production tax. The PRC government is also entitled to a royalty
payment equal to the next 0% to 12.5% of the annual gross production based on
the following sliding scale:
Royalty
Annual gross production of oil(1) rate
-------------------------------------------------------------------------------
Less than 1 million tons............................................. 0.0%
1-1.5 million tons................................................... 4.0%
1.5-2.0 million tons................................................. 6.0%
2.0-3.0 million tons................................................. 8.0%
3.0-4.0 million tons................................................. 10.0%
Above 4 million tons................................................. 12.5%
---------
(1) The sliding scale royalty for natural gas reaches a maximum at 3.0%.
Depending on the percentage of the PRC government's royalty payment, an
amount equal to the next 50.0% to 62.5% of the annual gross production is
allocated to the partners for cost recovery purposes. This amount is allocated
according to the following priority schedule:
o recovery of operating costs incurred by the partners during the
year;
o recovery of exploration costs, excluding interest accrued thereon,
incurred but not yet recovered by foreign partners during the
exploration period; and
o recovery of development investments incurred but not yet
recovered, and interest accrued in the current year, according to
each partner's participating interest.
The remaining 32.5% of the annual gross production, which is referred to
as the remainder oil, is distributed to each of the PRC government, us and the
foreign partners according to a "ratio X" agreed to by CNOOC and the foreign
partners in the production sharing contracts. An amount of oil and gas equal
to the product of the remainder oil and one minus the "ratio X" is first
distributed to the PRC government as share oil. The balance of the remainder
oil, which is referred to as the allocable remainder oil, is then distributed
to us and the foreign partners based on each party's participating interest.
We pay production tax and royalty to the PRC government on a monthly
basis for oil and natural gas production. At the end of each month, we
calculate the production tax and royalty payable and file this information
with the PRC tax bureau for current month payment. We make adjustments for any
overpayment or underpayment of production tax and royalty at the end of the
year.
The foreign partners have the right to either take possession of their
allocable remainder oil for sale in the international market, or sell such
crude oil to us for resale in the PRC market.
Management and Operator
Under each production sharing contract, a party will be designated as an
operator to undertake the execution of the production sharing contract which
includes:
o preparing work programs and budgets;
o procuring equipment and materials relating to operations;
o establishing insurance programs; and
o issuing cash-call notices to the parties to the production sharing
contract to raise funds.
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A joint management committee, which usually consists of six or eight
persons, is set up under each production sharing contract to perform
supervisory functions, and each of us and the foreign partners as a group has
the right to appoint an equal number of representatives to form the joint
management committee. The chairman of the joint management committee is the
chief representative designated by us and the vice chairman is the chief
representative designated by the foreign partners as a group. The joint
management committee has the authority to make decisions on matters including:
o reviewing and approving operational and budgetary plans;
o determining the commercial viability of each petroleum discovery;
o reviewing and adopting the overall development plan; and
o approving significant procurements and expenditures, and insurance
coverage.
Daily operations of a property subject to a production sharing contract
are carried out by the designated operator. The operator is typically
responsible for determining and executing operational and budgetary plans and
all routine operational matters. Upon discovery of petroleum reserves, the
operator is required to submit a detailed overall development plan to the
joint management committee.
After the foreign partner has fully recovered its exploration and
development costs under production sharing contracts in which the foreign
partner is the operator, we have the exclusive right to take over the
operation of the particular oil or gas field. With the consent of the foreign
partner, we may also take over the operation before the foreign partner has
fully recovered its exploration and development costs.
Ownership of Data and Assets
All data, records, samples, vouchers and other original information
obtained by foreign partners in the process of exploring, developing and
producing offshore petroleum become the property of CNOOC as a state-owned
national oil company under PRC law. Through CNOOC, we have unlimited and
unrestricted access to the data.
Our foreign partners and we have joint ownership in all of the assets
purchased, installed or constructed under the production sharing contract
until either:
o the foreign partners have fully recovered their development costs,
or
o upon the expiration of the production sharing contract.
After that, as a state-owned national oil company under PRC law, CNOOC
will assume ownership of all of the assets under the production sharing
contracts; our foreign partners and we retain the exclusive right to use the
assets during the production period.
Abandonment Costs
Any party to our production sharing contracts must give prior written
notice to the other party or parties if it plans to abandon production of the
oil or gas field within the contracted area. If the other party or parties
agree to abandon production from the oil or gas field, all parties pay
abandonment costs in proportion to their respective percentage of
participating interests in the field. If we decide not to abandon production
upon notice from a foreign partner, all of such foreign partner's rights and
obligations under the production sharing contract in respect of the oil or gas
field, including the responsibilities for payment of abandonment costs,
terminate automatically. We bear the abandonment costs if we decide to abandon
production after an initial decision to proceed with production. In 2005, we
accrued for dismantlement costs of approximately Rmb 100 million for oil and
gas fields governed by production sharing contracts.
Production Tax
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The PRC production tax rate on the oil and natural gas produced under
production sharing contracts is currently 5%.
Overseas
In addition to our production sharing arrangements in the PRC, we have
made production sharing arrangements in several foreign countries and regions,
including Indonesia, Australia, Morocco, Nigeria and Myanmar etc.
We have interests in production sharing contracts and a technical
assistance contract in Indonesia. Indonesian oil and gas activities are
currently supervised and controlled by BP MIGAS, the executive agency for
upstream oil and gas activities in Indonesia. Under current Indonesian law, BP
MIGAS is the sole entity authorized to manage Indonesia's oil and gas
resources on behalf of the Indonesian government and to enter into agreements
with foreign and domestic companies, functions previously conducted by
Pertamina.
BP MIGAS enters into production sharing arrangements with private energy
companies. The arrangements allow such private companies to explore and
develop oil and gas in specified areas in exchange for a percentage interest
in the production from such areas. These production sharing arrangements are
mainly governed by production sharing contracts, as well as by technical
assistance contracts, each of which is described further below. Upon entering
into a production sharing arrangement, the operator commits to spending a
specified sum of capital to implement an agreed work program.
Production sharing arrangements in Indonesia are based on the following
principles:
o contractors are responsible for all investments (exploration,
development and production);
o a contractor's investment and production costs are recovered from
production;
o the profit split between the Indonesian government and contractors
is based on production after the cost recovery, domestic market
oil, etc;
o ownership of tangible assets remains with the Indonesian
government; and
o overall control lies with BP MIGAS on behalf of the Indonesian
government.
An original production sharing contract is awarded to explore for and to
establish commercial hydrocarbon reserves in a specified area prior to
commercial production. The contract is generally awarded for a number of years
depending on the contract terms, subject to discovery of commercial quantities
of oil and gas within a certain period. The term of the exploration period can
generally be extended by agreement between the contractor and BP MIGAS. The
contractor is generally required to relinquish specified percentages of the
contract area by specified dates unless such designated areas correspond to
the surface area of any field in which oil and gas has been discovered.
BP MIGAS is typically responsible for managing all production sharing
contract operations, assuming and discharging the contractor from all taxes
(other than Indonesian corporate taxes, taxes on interest, dividends and
royalties and others as set forth in the production sharing contract),
obtaining approvals and permits needed by the project and approving the
contractor's work program and budget. The responsibilities of a contractor
under a production sharing contract generally include advancing necessary
funds, furnishing technical aid and preparing and executing the work program
and budget. In return, the contractor may freely lift, dispose of and export
its share of crude oil and retain the proceeds obtained from its share.
The contractor generally has the right to recover all finding and
developing costs, as well as operating costs, in each production sharing
contract against available revenues generated after deduction of first tranche
production of oil and gas, or FTP. Under FTP terms, the parties are entitled
to take and receive an annually agreed percentage of production from each
production zone or formation each year,
59
prior to any deduction for recovery of operating costs, investment credits and
handling of production. FTP for each year is generally shared between the
Indonesian government and the contractor in accordance with the standard
sharing splits. The balance is available for cost recovery. Post-cost
recovery, the Indonesian government is entitled to a specified profit share of
crude oil production and of natural gas production. Under each production
sharing arrangement, the contractor is obligated to pay Indonesian corporate
taxes on its specified profit share at the Indonesian corporate tax rate in
effect at the time the agreement is executed.
Production sharing contracts in Indonesia have long included a provision
known as the domestic market obligation, or DMO, under which a contractor must
sell a specified percentage of its crude oil to the local market at a reduced
price. After the first five years of a field's production, the contractor is
required to supply, the lesser of (i) 25% of the contractor's before-tax share
of total crude oil production or (ii) the contractor's share of profit oil.
This reduced price varies from contract to contract and is calculated at the
point of export.
The new Indonesian Oil and Gas Law, which came into force on November
23, 2001, stipulates a gas DMO, under which the contractor must sell up to 25%
of its gas entitlement to the domestic market, although it is not clear at
what price this gas must be sold. Production sharing contract parties have
stated that they would prefer that this price be determined on the open
market, and that it be recognized that if there are pre-existing gas sale
agreements, or if the project produces LNG for export, the obligation to sell
gas into the local market may not be feasible.
Technical assistance contracts are awarded when a field has prior or
existing production. The oil or gas production is divided into non-shareable
and shareable portions. The non-shareable portion represents the expected
production from the field at the time the technical assistance contract is
signed and is retained by Pertamina. The shareable portion represents the
additional production resulting from the operator's investment in the field
and is split in the same way as for an original production sharing contract as
described above.
We also have interests in production sharing contracts in various
countries, including Morocco, Nigeria and Myanmar. On May 3, 2004, we, through
our wholly owned subsidiary CNOOC Morocco Limited, acquired from Vanco Energy
Corporation an 11.25% interest in a petroleum agreement for Ras Tafelney
offshore Morocco. In 2004 and 2005, we, Golden Aaron Pte. Ltd. and China
Global Construction Limited formed a joint venture in Myanmar and had entered
into six production sharing contracts as of June 8, 2005. In January 2006, we
acquired a 35% working interest in the contract for OPL 229 in Nigeria. In
April 2006, we acquired a 45% interest in offshore Nigerian oil mining license
"OML 130".
On February 17, 2006, we signed a production sharing contract for block
S in Equatorial Guinea. On April 28, 2006, through our wholly-owned subsidiary
CNOOC Africa Limited, we signed production sharing contracts for six blocks in
Kenya. We will act as the operator under these production sharing contracts.
Geophysical Survey Agreements
Historically, we conducted our exploration operations through
geophysical survey agreements with leading international oil and gas companies
through production sharing contracts. For the year ended December 31, 2005, we
did not enter into any geophysical survey agreements with third parties, but
may enter such agreements in the future.
Geophysical survey agreements are designed for foreign petroleum
companies to conduct certain geophysical exploration before they decide
whether to enter into production sharing contract negotiations with CNOOC.
Geophysical survey agreements usually have a term of less than two years.
International oil and gas companies must complete all of the work confirmed by
both parties in the agreements and bear all the costs and expenses. If a
foreign partner decides to enter into a production sharing contract with
CNOOC, the costs and expenses that the foreign partner incurs in conducting
geophysical survey may be recovered by the foreign partner in the production
period subject to our confirmation. CNOOC
60
has the sole ownership of all data and information obtained by the foreign
partner during the geophysical survey, and, through CNOOC, we have access to
all such data.
Under PRC law, the negotiation of a geophysical survey agreement is a
function that only a state-owned national company, such as CNOOC, can perform.
As part of its reorganization in 1999, CNOOC transferred to us all its
commercial rights under a geophysical survey agreement, which has since been
completed. In the future, CNOOC has agreed to assign to us all of its
commercial rights under any geophysical survey agreements it enters into with
international oil and gas companies.
Operating Hazards and Uninsured Risks
Our operations are subject to hazards and risks inherent in the
drilling, production and transportation of crude oil and natural gas,
including pipeline ruptures and spills, fires, explosions, encountering
formations with abnormal pressures, blowouts, cratering and natural disasters,
any of which can result in loss of hydrocarbons, environmental pollution and
other damage to our properties and the properties of operators under
production sharing contracts. In addition, certain of our crude oil and
natural gas operations are located in areas that are subject to tropical
weather disturbances, some of which can be severe enough to cause substantial
damage to facilities and interrupt production.
As protection against operating hazards, we maintain insurance coverage
against some, but not all, potential losses, including the loss of wells,
blowouts, pipeline leakage or other damage, certain costs of pollution control
and physical damages on certain assets. Our insurance coverage includes oil
and gas field properties and construction insurance, marine hull insurance,
protection and indemnity insurance, drilling equipment insurance, marine cargo
insurance and third party and comprehensive general liability insurance. We
also carry business interruption insurance for Pinghu Field. In Indonesia, the
operators of the production sharing contracts in which we participate are
required by local law to purchase insurance policies customarily taken out by
international petroleum companies. As of December 31, 2005, we paid an annual
insurance premium of approximately Rmb 163.1 million to maintain our insurance
coverage. We believe that our level of insurance is adequate and customary for
the PRC petroleum industry and international practices. However, we may not
have sufficient coverage for some of the risks we face, either because
insurance is not available or because of high premium costs. See "Item 3--Key
Information--Risk Factors--Risks relating to our business--Exploration,
development and production risks and natural disasters affect our operations
and could result in losses that are not covered by insurance."
For the year ended December 31, 2005, we did not have any uninsured
losses.
Research and Development
Historically, we used research and development services provided by
CNOOC's affiliates, including CNOOC Research Center, as well as other
international research entities. In July 2003, we established our own research
center, CNOOC (China) Limited Research Center, to undertake most of our
research and development activities. During the years ended December 31, 2003,
2004 and 2005, our research and development costs were approximately Rmb 165.8
million, Rmb 268.5 million and Rmb 401.6 million, respectively.
Our research efforts have focused on:
o enhancing oil recovery in offshore China heavy oil fields;
o engineering and developing deepwater fields;
o engineering and developing marginal fields; and
o developing new offshore exploration technology and new exploration
areas.
We are also studying various ways of utilizing our existing reserves
including:
61
o building more accurate reservoir models;
o re-processing existing seismic and log data to locate potential
areas near existing fields to be integrated into existing
production facilities; and
o researching ways to reduce development risks for marginal fields
and to group fields into joint developments to share common
facilities.
For further information regarding our agreement with CNOOC Research
Center, see "Item 7--Major Shareholders and Related Party
Transactions--Related Party Transactions--Categories of Connected
Transactions--Research and development services."
Regulatory Framework
Government Control
The PRC government owns all of China's petroleum resources and exercises
regulatory control over petroleum exploration and production activities in
China. We are required to obtain various governmental approvals, including
those from the Ministry of Land and Resources, the State Administration for
Environmental Protection, the National Development and Reform Commission and
the Ministry of Commerce before we are permitted to conduct production
activities. Our sales are coordinated by the National Development and Reform
Commission. For joint exploration and production with foreign enterprises, we
are required to obtain various governmental approvals, through CNOOC,
including those from:
o the Ministry of Land and Resources, for a permit for exploration
blocks, an approval of a geological reserve report submitted
through CNOOC;
o the Ministry of Land and Resources or the National Development and
Reform Commission to designate such blocks as an area for foreign
cooperation;
o the Ministry of Commerce for the production sharing contracts
between CNOOC and the foreign enterprises;
o the State Administration for Environmental Protection for an
environmental impact report submitted through CNOOC;
o the National Development and Reform Commission for an overall
development plan submitted through CNOOC; and
o the Ministry of Land and Resources, for an extraction permit.
Since the conclusion of the meeting of the National People's Congress in
March 2003, the PRC government has undergone substantial reform. It is
believed that market-oriented reforms will continue.
Special Policies Applicable to the Offshore Petroleum Industry in China
Since the early 1980s, the PRC government has adopted policies and
measures to encourage the development of the offshore petroleum industry.
These policies and measures, which were applicable to CNOOC's operations prior
to the reorganization, became applicable to our operations in accordance with
an undertaking agreement between us and CNOOC. As approved by the relevant PRC
government authorities, including the Ministry of Land and Resources and the
Ministry of Commerce, these policies and measures have provided us with the
following benefits:
62
o the exclusive right to explore for, develop and produce petroleum
offshore China in cooperation with international oil and gas
companies and to sell this petroleum in China;
o the flexibility to set our prices in accordance with international
market prices and determine where to sell our crude oil, with only
minimal supervision from the PRC government;
o a favorable 5% production tax on the crude oil and natural gas we
produce both independently and under production sharing contracts,
rather than the 17% rate generally applicable to the independent
production of domestic petroleum companies in China; and
o production from one of our major gas fields, Yacheng 13-1, is
exempt from the PRC royalties under an approval by the State Tax
Bureau in May 1989 and the 5% production tax applicable to the oil
and gas produced under other production sharing contracts in
accordance with an approval by the Ministry of Finance in August
1985. Our natural gas revenues from Yacheng 13-1 for each of the
five years ended December 31, 2001, 2002, 2003, 2004 and 2005
represented approximately 7.3%, 5.6%, 3.6%, 3.2% and 2.3%,
respectively, of our total oil and natural gas sales in those
years.
Although we historically have benefited from the foregoing special
policies, we cannot assure that such policies will continue in the future. We
are also regulated by the PRC government in various other aspects of our
business and operations, including required government approvals for new
independent development and production projects and new production sharing
contracts. For a further discussion of ways in which we are regulated by the
PRC government, see "--Government Control."
Policies Applicable to International Oil and Gas Companies Operating Offshore
China
The PRC government encourages foreign participation in offshore
petroleum exploration and production through exclusive cooperation with CNOOC.
In 1982, the State Council promulgated the Regulation of the People's Republic
of China on Exploitation of Offshore Petroleum Resources in Cooperation with
Foreign Enterprises, which grants to CNOOC the exclusive right to enter into
joint cooperation arrangements with foreign enterprises for offshore petroleum
exploration and production. From 1982 to 2000, CNOOC successfully completed
several rounds of bidding for offshore petroleum exploration and production
projects, and many international oil and gas companies have been involved and
awarded exploration blocks for joint exploration, development and production
with CNOOC.
In October 2001, the State Council amended the regulation referred to
above as a part of the comprehensive review of all business laws and
regulations by the Chinese government to ensure their compliance with its WTO
commitments. The amendment revised such terms in the law governing offshore
exploration as restrictive provisions on technology transfers and domestic
components requirements in procurement. The removal of these restrictions will
provide a level playing field for all oilfield service contractors, domestic
or international. These amendments are expected to benefit CNOOC's businesses
as well as our exploration and production business and further increase
production sharing contract activities offshore China. CNOOC will continue to
enjoy the exclusive right to conduct production sharing contract activities
with foreign contractors and is entitled to all rights and privileges under
the previous regulation. The regulation also states that CNOOC, as a
state-owned enterprise, is to be in charge of all efforts to exploit petroleum
resources with contractors in Chinese waters. Currently, international oil and
gas companies can only undertake offshore petroleum exploration and production
activities in China after they have entered into a production sharing contract
with CNOOC.
In March 2006, the State Council issued the Decision to Impose a Levy on
Special Oil Income and the Ministry of Finance promulgated the Management
Rules on the Administration of Special Oil Income Levy, effective March 26,
2006. According to the rules, the Ministry of Finance will impose a special
oil income levy on any income derived from the sales by an oil exploration and
production company of locally produced crude oil at a price which exceeds
US$40 per barrel. The special oil income levy will be collected on a quarterly
basis. As the international oil prices, exchange rate of Renminbi and our
crude oil production fluctuate, the full impact on us as a result of the
implementation of the Special oil income levy cannot be ascertained at this
time.
63
Environmental Regulation
Our operations are required to comply with various applicable
environmental laws and regulations, including PRC laws and regulations
administered by the central and local government environmental protection
bureaus for our operations in China. We are also subject to the environmental
rules introduced by governments in whose jurisdictions our onshore logistical
support facilities are located. The State Administration for Environmental
Protection sets national environmental protection standards and local
environmental protection bureaus may set stricter local standards.
The relevant environment protection bureau must approve or review each
stage of a project. We must file an environmental impact statement or, in some
cases, an environmental impact assessment outline before an approval can be
issued. The filing must demonstrate that the project conforms to applicable
environmental standards. The relevant environmental protection bureau
generally issues approvals and permits for projects using modern pollution
control measurement technology.
The PRC national and local environmental laws and regulations impose
fees for the discharge of waste substances above prescribed levels, require
the payment of fines for serious violations and provide that the PRC national
and local governments may at their own discretion close or suspend any
facility which fails to comply with orders requiring it to cease or cure
operations causing environmental damage.
For the year ended December 31, 2005, we did not experience any major
incident of oil spillage.
The PRC environmental laws require offshore petroleum developers to pay
abandonment costs. Our financial statements include provisions for costs
associated with the dismantlement of oil and gas fields during the years ended
December 31, 2003, 2004 and 2005 of approximately Rmb 167.3 million, Rmb 201.6
million and Rmb 252.9 million, respectively.
Environmental protection and prevention costs and expenses in connection
with the operation of offshore petroleum exploitation are covered under each
individual production sharing contract. Environmental protection and
prevention costs and expenses represented on average approximately 4% of our
annual operating costs relating to projects constructed offshore China during
the three years ended December 31, 2005. Each platform has its own
environmental protection and safety staff responsible for monitoring and
operating the environmental protection equipment. However, no assurance can be
given that the PRC government will not impose new or stricter regulations
which would require additional environmental protection expenditures.
We are not currently involved in any environmental claims and believe
that our environmental protection systems and facilities are adequate for us
to comply with applicable national and local environmental protection
regulations.
Legal Proceedings
We are not a defendant in any material litigation, claim or arbitration,
and know of no pending or threatened proceeding which would have a material
adverse effect on our financial condition.
Patents and Trademarks
We own or have licenses to use two trademarks which are of value in the
conduct of our business. CNOOC is the owner of the "CNOOC" trademark. Under
two non-exclusive license agreements between CNOOC and us, we have obtained
the right to use this trademark for a nominal consideration.
Real Properties
Our corporate headquarters is located in Hong Kong. We also lease
several other properties from CNOOC in China and Singapore. The rental
payments under these lease agreements are determined with
64
reference to market rates. For further details regarding the terms of these
leases, see "Item 7--Major Shareholders and Related Party
Transactions--Related Party Transactions--Categories of Connected
Transactions--Lease agreement in respect of the Nanshan Terminal," and
"--Lease and property management services."
We own the following main property interests in the PRC:
o land, various buildings and structures at Xingcheng JZ 20-2
Natural Gas Separating Plant, Dongyao Village, Shuangsu Township,
Xingcheng City, Liaoning Province;
o land, various buildings and structures located at Boxi Processing
Plant, South of Jintang Subway, Tanggu District, Tianjin City;
o land, various buildings and structures at Weizhou Terminal
Processing Plant, Weizhou Island, Weizhou Town, Beihai City,
Guangxi Zhuang Autonomous Region;
o a parcel of land at Suizhong 36-1 Base, Xiaolihuang Village,
Gaoling Town, Suizhong County, Liaoning Province;
o land, various buildings and structures located at Bonan Processing
Plant, Jimu Island, Longgang Development Zone, Longkou City,
Shandong Province;
o land, various buildings and structures located at Dongfang 1-1
Processing Plant, Shugang Road, Dongfang City, Hainan Province;
o 50% interest in land, various buildings and structures located at
Panyu-Huizhou Gas Processing Plant, Huandao North Road, Hengqin
Town, Zhuhai City, Guangdong Province; and
o land, various buildings and structures located at Chunxiao Gas
Processing Plant, Chunxiao Road, Chunxiao Town, Beilun District,
Ningbo City, Zhejiang Province.
Employees and Employee Benefits
During the years ended December 31, 2003, 2004 and 2005, we employed
2,447 persons, 2,524 persons and 2,696 persons, respectively. Of the 2,696
employees we employed as of December 31, 2005, approximately 72.4% were
involved in petroleum exploration, development and production activities,
approximately 7.1% were involved in accounts and finance work and the
remainder were senior management, coordinators of production sharing contracts
and safety and environmental supervisors. Workers for the operation of the oil
and gas fields, maintenance personnel and ancillary service workers are hired
on a contract basis.
We have a trade union that:
o protects employees' rights;
o organizes educational programs;
o assists in the fulfillment of economic objectives;
o encourages employee participation in management decisions; and
o assists in mediating disputes between us and individual employees.
We have not been subjected to any strikes or other labor disturbances
and believe that relations with our employees are good.
65
The total remuneration of employees includes salary, bonuses and
allowances. Bonus for any given period is based primarily on individual and
our performance. Employees also receive subsidized housing, health benefits
and other miscellaneous subsidies.
We have implemented an occupational health and safety program similar to
that employed by other international oil and gas companies. Under this
program, we closely monitor and record health and safety incidents and
promptly report them to government agencies and organizations. On March 15,
2000, we finalized and implemented our occupational health and safety program.
We believe this program is broadly in line with the United States government's
Occupational Safety & Health Administration guidelines.
All full-time employees in the PRC are covered by a government-regulated
pension. The PRC government is responsible for the pension of these retired
employees. We are required to contribute monthly approximately 9% to 22% of
our employees' salaries, with each employee contributing 4% to 8% of his or
her salary for retirement. The contributions vary from region to region.
Our Indonesian subsidiaries employ approximately 900 employees,
including approximately 50 expatriates. We provide benefits to expatriates
that we believe to be in line with customary international practices. Our
local staff in Indonesia enjoy welfare benefits mandated by Indonesian labor
laws.
For further details regarding retirement benefits, see note 31 to our
consolidated financial statements attached to this annual report.
Health, Safety and Environmental Policy
We are committed to the promotion of the concept and culture of health,
safety and environmental ("HSE") protection among all the staff. The oil and
gas field development projects that were started during the year all underwent
simultaneous reviews on HSE protection in accordance with the laws of the PRC.
In 2005, nearly all the staff from the management to the operational level
participated in our HSE training sessions. In addition, the scope of our HSE
training has been extended to the employees of contractors. More than 10,000
person-time from our contractors participated in our training sessions in
2005.
In 2005, we also placed considerable emphasis on safety in helicopter,
diving and vehicle operations. Professional auditors were hired to conduct
annual safety audit and safety checks on 11 leased helicopters. In 2006, we
plan to carry out special audits on diving operations.
We introduced the system of occupation health profiles to all branches
in order to strengthen the health management of offshore operating staff in
addition to requiring them to submit health certificates. The submitted health
data is to be analyzed so as to offer the staff proactive and constructive
advices on health improvement.
As an International Association of Oil and Gas Producer (OGP) member, we
assisted OGP in organizing the "Workshop on Safety Management of Offshore
Accidents" in 2005.
In 2005, we organized a large-scale offshore emergency drill. There were
over 300 participants, including our offshore service contractors and
transportation service contractors. We continued to work with other entities
to set up Oil Spill Response Base in Tangguh, Longkou, Weizhou and Zhuhai. We
believe such initiatives strengthened our capability in handling offshore oil
spill emergencies.
In 2005, we made sustained progress in respect of HSE management. During
the year, we were neither involved in any material injury liability case,
spillage or pollution incidents, nor subject to any safety-related liability
claims for losses of over US$120,000. Our OSHA Statistics results continued to
be above average when compared with international peers.
We seek to align our operations with international standards and have
been applying for the ISO14000 environmental management qualification for our
oilfields. By the end of 2005, our
66
Qinhuangdao 32-6 oilfield and Wenchang oilfields were certified under the
ISO14000 environmental management system.
We are a member of the "National Offshore Oil Spillage Response Plan"
organized by the State Oceanic Administration. In 2005, we continued to conduct
researches and participated in discussions on issues relating to resources
sharing and risk assessment in the event of oil spillage offshore China. We also
continued to cooperate with the Bohai Bay Oil Spillage Awareness Center and
facilitated the establishment of the oil spillage response organizations in the
South China Sea.
In accordance with changes to the statistical requirements of the U.S.
Occupational Safety and Health Administration, or OSHA, we revised our internal
documentation procedures to keep abreast with OSHA's standard, which uses OGP
reporting methods to record the differences and standards of particular
incidents. We have also adopted new OSHA and incident reporting forms in order
to better meet the requirements of international associations such as OGP and
API. We deliver working hour statistics and incident reports to investors and
API on a quarterly basis.
Human Resources Development
As an oil and gas exploration and production company operating in highly
competitive markets, we depend in large part on our employees for effective and
efficient operations. We devote significant resources to train our technical
employees. During 2005, we held 818 training workshops, which were attended by
12,215 participants. To ensure smooth implementation of our overseas strategy,
we have established an international human resources system to attract and
retain talents in the international market. During the year, we completed the
"Compensation Administration and Adjustment Plan". We also introduced various
incentive schemes, including the "Project Team Incentive Scheme" and the "New
discovery Incentive Scheme". With respect to overseas staff, we continued to
improve our remuneration policy to make it competitive in the international
market. We also started to build up an international recruitment database to
support our overseas business expansion.
We have adopted four stock option schemes for our senior management since
February 4, 2001, and granted options under three of the schemes.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
You should read the following discussion and analysis in conjunction with
our consolidated financial statements, selected historical consolidated
financial data and operating and reserves data, in each case together with the
accompanying notes, contained in this annual report. Our consolidated financial
statements have been prepared in accordance with Hong Kong GAAP, which differ in
certain material respects from U.S. GAAP. Note 38 to our consolidated financial
statements attached to this annual report provides an explanation of our
reconciliation to U.S. GAAP of net income and shareholders' equity. Certain
statements set forth below constitute "forward-looking statements" within the
meaning of the United States Private Securities Litigation Reform Act of 1995.
See "Forward-Looking Statements."
Overview
We are an oil and gas company engaged in the exploration, development and
production of crude oil and natural gas primarily offshore China. We are the
dominant producer of crude oil and natural gas offshore China and the only
company permitted to conduct exploration and production activities with
international oil and gas companies offshore China. As of December 31, 2005, we
had estimated net proved reserves of 2,362.6 million BOE, comprised of 1,457.4
million barrels of crude oil and condensate
67
and 5,430.9 billion cubic feet of natural gas. In 2005, our net production
averaged 356,868 barrels per day of crude oil, condensate and natural gas
liquids and 389.6 million cubic feet per day of natural gas, which together
totaled 424,108 BOE per day.
Our revenues and profitability are largely determined by our production
volume and the prices we realize for our crude oil and natural gas, as well as
the costs of our exploration and development activities. Although crude oil
prices depend on various market factors and have been volatile historically, our
production volume has increased steadily over the past few years.
The following table sets forth our net production of crude oil, condensate
and natural gas liquids and net income for the periods indicated.
Year ended December 31,
-----------------------------------------------------------
2001 2002 2003 2004 2005
------- ------- ------- ------- -------
Net production of crude oil,
condensate and natural gas
liquids (BOE/day) ........... 228,874 298,625 306,464 319,436 356,868
Net production of natural gas
(mmcf/day) .................. 195.0 272.6 291.0 364.1 389.6
Net income (Rmb in millions)
(Restated) .................. 7,957.6 9,207.0 11,497.0 16,139.0 25,323.1
We sold 46.9% of our crude oil production in 2005 to customers affiliated
with Sinopec or PetroChina in the PRC domestic market. We sold 38.4% of our
natural gas production offshore China in 2005 to Castle Peak Power Company
Limited in Hong Kong under a long-term take-or-pay contract.
For a further description of these factors and certain other factors
affecting our financial performance, see "Item 3--Key Information--Risk
Factors."
Relationship with CNOOC
Prior to the October 1999 reorganization of CNOOC, we did not exist as a
separate legal entity and our business and operations were conducted by CNOOC
and its various affiliates. In connection with the reorganization, CNOOC's oil
and gas exploration, development, production and sales business and operations
conducted both inside and outside China were transferred to us. See "Item
4--Information on the Company--History and Development--Corporate Structure,"
"Item 7--Major Shareholders and Related Party Transactions" and note 27 to our
consolidated financial statements attached to this annual report.
Before the reorganization, certain PRC affiliates of CNOOC provided
various materials, utilities and ancillary services for CNOOC's exploration and
production activities. In connection with the reorganization, we entered into
various agreements under which we continued to use various services and
properties provided by these CNOOC affiliates. These agreements include: (i) a
materials, utilities and ancillary services supply agreement; (ii) technical
service agreements; (iii) agreements for the sale of crude oil, condensate oil
and liquefied petroleum gas; (iv) various lease agreements with other affiliates
of CNOOC for office and residential premises used by us; and (v) a research and
development services agreement with China Offshore Oil Research Center for the
provision of general geophysical exploration services, comprehensive exploration
research services, information technology services and seismic study. We have
renewed these agreements on substantially the same terms. In 2002, CNOOC
consolidated most of its oilfield services operations and established China
Oilfield Services Limited. This CNOOC affiliate now provides most of the
technical services to us.
For a description of the services provided under these agreements, see
"Item 7--Major Shareholders and Related Party Transactions."
Acquisitions and Overseas Activities
On January 1, 2003, we acquired BP Muturi Limited, which owned a 44.0%
interest in the Muturi production sharing contract offshore Indonesia, and BP
Wiriagar Limited's 42.4% interest in the Wiriagar
68
production sharing contract offshore Indonesia for a total consideration of
approximately US$275 million. The Muturi production sharing contract and
Wiriagar production sharing contract, together with the Berau production sharing
contract, make up the Tangguh LNG project. Our interests in these production
sharing contracts represented approximately 12.5% of the total reserves and
upstream production of the Tangguh LNG project. On May 12, 2004, we completed
our acquisition of an additional 20.767% interest in the Muturi production
sharing contract from the BG Group. As a result, our interests in these
production sharing contracts now represent 16.96% of the total reserves and
upstream production of the Tangguh LNG project. The remaining interests are held
by BP Berau, BP Muturi, BP Wiriagar, MI Berau, Nippon, BG, KG Berau, KG Wiriagar
and Indonesia Natural Gas Resources Muturi. The Tangguh LNG project is a
greenfield project located offshore Indonesia and represents one of the largest
natural gas projects in Asia.
In connection with our acquisition of interests in the Tangguh LNG
project, the partners in the Tangguh LNG project entered into a conditional
25-year supply contract to provide up to 2.6 million tonnes of liquefied natural
gas per year to a liquefied natural gas terminal project in Fujian Province,
China. Supply of liquefied natural gas under this supply contract is expected to
begin in 2008.
In May 2003, we signed an agreement with the original North West Shelf
project partners to acquire an aggregate interest of 5.3% in the upstream
production and reserves of the North West Shelf project for a consideration of
US$348 million, plus an upfront tariff payment relating to certain LNG
processing facilities amounting to US$180 million. We also agreed to acquire a
25% interest in the China LNG joint venture established by the North West Shelf
project partners to supply liquefied natural gas from the North West Shelf
project to a liquefied natural gas terminal currently being developed by CNOOC,
our controlling shareholder, and various partners in Guangdong Province, China.
We completed the acquisition in December 2004. Our share of reserves from this
project is expected to be approximately 1.2 trillion cubic feet of natural gas.
Our share of natural gas together with associated liquids is expected to be
approximately 210 million BOE. The partners of the project signed a 25-year LNG
supply agreement in December 2004 to provide liquefied natural gas to the
Guangdong liquefied natural gas terminal starting 2006. Woodside Petroleum is
the operator for the project. See "Item 4--Information on the Company--Business
Overview--Natural Gas Business--Overseas Activity."
On October 24, 2003, we entered into an agreement with the joint venture
participants of the Gorgon natural gas project in Australia based on a
memorandum of understanding previously entered into with them, under which we
agreed to acquire certain interest in the upstream production and reserves of
the Gorgon natural gas project. The memorandum of understanding expired in March
2005.
At the end of 2004, we and Golden Aaron Pte. Ltd. and China Global
Construction Limited formed a joint venture in Myanmar and entered into six
production sharing contracts as of June 8, 2005. We will act as the operator
under these production sharing contracts.
In early 2005, through our wholly owned subsidiary CNOOC Belgium BVBA, we
acquired a 16.69% interest in MEG Energy Corp., a Canada based oil sand company,
at a consideration of 150 million Canadian dollars.
On January 8, 2006, we signed an agreement with South Atlantic Petroleum
Limited to acquire a 45% working interest in an offshore oil-mining license 130
"OML 130" in Nigeria for a cash consideration of US$2.268 billion. The
acquisition was completed in April 2006. We also acquired a 35% working interest
in the contract for OPL 229 in Nigeria for a consideration of US$60 million. On
February 17, 2006, we signed a production sharing contract for block S in
Equatorial Guinea.
On April 28, 2006, through our wholly-owned subsidiary CNOOC Africa
Limited, we signed production sharing contracts for six blocks with a total area
of 115,343 square kilometers in Kenya.
Production Sharing Contracts Offshore China
We conduct a significant amount of our offshore China oil and gas
activities through production sharing contracts with international oil and gas
companies. Under these production sharing contracts, our
69
foreign partners are required to bear all exploration costs during the
exploration period. The parties to the contracts may recover exploration costs
after commercial discoveries are made and production begins. The amount of
exploration costs recoverable is derived from a production sharing formula set
forth in each contract. Our production sharing contracts provide us with the
option to take participating interests in properties covered by the production
sharing contracts which we may exercise after the foreign partners have made
viable commercial discoveries. The foreign partners retain the remaining
participating interests. We and the foreign partners fund our development and
operating costs according to our respective participating interests. Based on a
formula contained in the applicable contract, we are entitled to allocate
specified amounts of the annual gross production of petroleum from those
producing fields. See "Item 4--Information on the Company--Business
Overview--Production Sharing Contracts--Offshore China--Production Sharing
Formula."
Before we exercise our option to take a participating interest in a
production sharing contract, we do not account for the exploration costs
incurred, as these costs were incurred by our foreign partners. After we
exercise the option to take a participating interest in a production sharing
contract, we account for the oil and gas properties using the "proportional
method" under which we recognize our share of development costs, revenues and
expenses from such operations based on our participating interest in the
production sharing contracts. See note 5 to our consolidated financial
statements attached to this annual report.
The foreign partners have the right to either take possession of their
petroleum for sale in the international market or sell their petroleum to us for
resale in the PRC market. See "Item 4--Information on the Company--Business
Overview--Production Sharing Contracts--Offshore China."
As described above, production of crude oil and natural gas is allocated
among us, our foreign partners and the PRC government according to a formula
contained in the production sharing contracts. We have excluded the government's
share oil from net sales in our historical consolidated financial statements.
Since our historical consolidated financial statements already exclude the
government's share oil from our net sales figure, we do not expect any future
share oil payments to affect our results of operations or operating cash flows
differently than the effects reflected in our historical consolidated financial
statement. For information regarding the historical amounts of government share
oil payable to the government, see note 5 to our consolidated financial
statements attached to this annual report. For information regarding treatment
of the PRC government's share oil, see "Item 4--Information on the
Company--Business Overview--Production Sharing Contracts--Offshore
China--Production Sharing Formula."
Shanghai Petroleum and Natural Gas Company Limited, which owns the Pinghu
field, is our associated company. Our 30% equity interest in this company is
accounted for using the equity method, under which our proportionate share of
the net income or loss of Shanghai Petroleum and Natural Gas Company Limited is
included in our consolidated statements of income as a share of income or loss
of the associated company.
Our cost structures for production sharing contracts and for independent
operations are different. The total expenses per unit of production under
production sharing contracts are generally higher due to our foreign partners'
use of expatriate staff, who generally command higher wages, as well as
administrative and overhead costs that may be allocated by the operators, a
higher percentage of capital expenditures and larger proportion of imported
equipment.
Production from Independent Operations offshore China versus Production from
Production Sharing Contracts offshore China
Historically we have cooperated with foreign partners under production
sharing contracts, which have provided us with the expertise to undertake our
independent operations more effectively. The percentage of our net production
arising from independent operations offshore China was 52.7%, 49.6% and 50.2%,
respectively, for the years ended December 31, 2003, 2004 and 2005,
respectively. Although
70
we will continue to focus on independent operations, we plan to continue seeking
appropriate opportunities to cooperate with foreign partners under production
sharing contracts.
Provision for dismantlement
Prior to 2002, we estimated future dismantlement costs for our oil and gas
properties and accrued the costs over the economic lives of the assets using the
unit-of-production method. We estimated future dismantlement costs for oil and
gas properties with reference to the estimates provided from either internal and
external engineers after taking into consideration the anticipated method of
dismantlement required in accordance with then current legislation and industry
practice. In 2002, we changed the method of accounting for the provision for
dismantlement in compliance with Hong Kong Statement of Standard Accounting
Practice or HK SSAP 28 (HKAS 37 replaced HK SSAP 28 in 2005), "Provisions,
contingent liabilities and contingent assets." HK SSAP 28 requires the provision
to be recorded for a present obligation whether that obligation is legal or
constructive. The associated cost is capitalized and the liability is discounted
and accretion expense is recognized using the credit adjusted risk-free rate in
effect when the liability is initially recognized. The dismantlement costs for
the years ended December 31, 2003, 2004 and 2005 were Rmb 167.3 million, Rmb
201.6 million and Rmb 252.9 million, respectively. The accrued liability is
reflected in our consolidated balance sheet under "provision for dismantlement."
See note 28 to our consolidated financial statements attached to this annual
report.
Production Imbalance
We account for oil overlifts and underlifts using the entitlement method,
under which we record overlifts as liabilities and underlifts as assets. An
overlift occurs when we sell more than our percentage interest of oil from a
property subject to a production sharing contract. An underlift occurs when we
sell less than our participating interest of oil from a property under a
production sharing contract. During the historical periods presented in our
consolidated financial statements attached to this annual report, we had no gas
imbalances. We believe that production imbalance has not had a significant
effect on our operations, liquidity or capital resources.
Allowances for Doubtful Accounts
We evaluate our accounts receivable by considering the financial condition
of our customers, their past payment history and credit standing and other
specific factors, including whether the accounts receivable in question are
under dispute. We make provisions for accounts receivable when they are overdue
for six months and we are concerned about our ability to collect them. For the
year ended December 31, 2003, 2004 and 2005, allowances for doubtful accounts
were not material in the context of total operating expenses and did not have a
material effect on our results of operations or financial condition.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with Hong
Kong GAAP. The preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of our assets and
liabilities, the disclosure of our contingent assets and liabilities as of the
date of our financial statements and the reported amounts of our revenues and
expenses during the periods reported. Management makes these estimates and
judgments based on historical experience and other factors that are believed to
be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. We believe that the
following significant accounting policies may involve a higher degree of
judgment in the preparation of our consolidated financial statements. For
additional discussion of our significant accounting policies, see note 3 to our
consolidated financial statements attached to this annual report.
Oil and Gas Properties
For oil and gas properties, we have adopted the successful efforts method
of accounting. As a result, we capitalize initial acquisition costs of oil and
gas properties and recognize impairment of initial
71
acquisition costs based on exploratory experience and management judgment. Upon
discovery of commercial reserves, we transfer acquisition costs to proved
properties and capitalize the costs of drilling and equipping successful
exploratory wells, all development costs, and the borrowing costs arising from
borrowings used to finance the development of oil and gas properties before they
are substantially ready for production. We treat the costs of unsuccessful
exploratory wells and all other related exploration costs as expenses when
incurred. We amortize capitalized acquisition costs of proved properties by the
unit-of-production method on a property-by-property basis based on the total
estimated units of proved reserves. We estimate future dismantlement costs for
oil and gas properties with reference to the estimates provided from either
internal or external engineers after taking into consideration the anticipated
method of dismantlement required in accordance with current legislation and
industry practices. The associated cost is capitalized and the liability is
discounted and an accretion expense is recognized using the credit-adjusted
risk-free interest rate in effect when the liability is initially recognized.
Impairment of Assets
We make an assessment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, or when there is
any indication that an impairment loss previously recognized for an asset in
prior years may no longer exist or may have decreased. In any event, we would
make an estimate of the asset's recoverable amount, which is calculated as the
higher of the asset's value in use or its net selling price. We recognize an
impairment loss only if the carrying amount of an asset exceeds its recoverable
amount. We charge an impairment loss to the income statement in the period in
which it arises unless the asset is carried at a revalued amount. For a revalued
asset, we account for the impairment loss in accordance with the relevant
accounting policy for such revalued asset. A previously recognized impairment
loss is reversed only if there has been a change in our estimates used to
determine the recoverable amount of an asset. However, no reversal may put the
value of the asset higher than the carrying amount that we would have determined
(net of any depreciation/amortization) had no impairment loss been recognized
for the asset in prior years.
A reversal of an impairment loss is credited to the income statement in
the period in which it arises, unless the asset is carried at a revalued amount,
when the reversal of the impairment loss is accounted for in accordance with the
relevant accounting policy for that revalued asset.
Provisions
We recognize a provision when a present obligation (legal or constructive)
has arisen as a result of a past event and it is probable that a future outflow
of resources will be required to settle the obligation so long as a reliable
estimate can be made of the amount of the obligation. When the effect of
discounting is material, the amount recognized for a provision is the present
value at the balance sheet date of the future expenditures expected to be
required to settle the obligation. The increase in the discounted present value
amount arising from the passage of time is included in finance costs in the
income statement. We make provisions for dismantlement based on the present
value of our future costs expected to be incurred, on a property-by-property
basis, in respect of our expected dismantlement and abandonment costs at the end
of the related oil exploration and recovery activities.
Deferred Tax
Deferred tax is provided, using the liability method, on all temporary
differences at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Recognition of Revenue from Oil and Gas Sales and Marketing
We recognize revenue when it is probable that the economic benefits will
flow to us and when the revenue can be measured reliably. For oil and gas sales,
our revenues represent the invoiced value of sales of oil and gas attributable
to our interests, net of royalties and any government share oil that is lifted
and sold on behalf of the PRC government. Sales are recognized when the
significant risks and rewards
72
of ownership of oil and gas have been transferred to customers. Oil and gas
lifted and sold by us above or below our participating interests in any
production sharing contract result in overlifts and underlifts. We record these
transactions in accordance with the entitlement method under which overlifts are
recorded as liabilities and underlifts are recorded as assets at year-end oil
prices. Settlement will be in kind when the liftings are equalized or in cash
when production ceases. We enter into gas sales contracts with customers which
typically contain take-or-pay clauses. These clauses require our customers to
take a specified minimum volume of gas each year. If a customer fails to take
the minimum volume of gas, the customer must pay for the gas even though it did
not take the gas. The customer can offset the deficiency payment against any
future purchases in excess of the specified volume. We record any deficiency
payment as deferred revenue which is included in other payables until any
make-up gas is taken by the customer or the expiry of the contract. Our
marketing revenues represent sales of oil purchased from the foreign partners
under our production sharing contracts and revenues from the trading of oil
through our subsidiary in Singapore. The title, together with the risks and
rewards of the ownership of such oil purchased from the foreign partners, are
transferred to us from the foreign partners and other unrelated oil and gas
companies before we sell such oil to our customers. The cost of the oil sold is
included in crude oil and product purchases.
Results of Operations
Overview
The following table summarizes the components of our revenues and net
production as percentages of our total revenues and total net production for the
periods indicated:
Year ended December 31,
------------------------------------------------------------------------------
2003 2004 2005
------------------------ ------------------------ ------------------------
(Rmb in millions, except percentages, production data and prices)
Revenues:
Oil and gas sales: (1)
Crude oil ................. 25,792 63.0% 34,081 61.7% 50,361 72.5%
Natural gas ............... 2,325 5.7% 2,805 5.1% 3,057 4.4%
---------- ---------- ---------- ---------- ---------- ----------
Total oil and gas sales ... 28,117 68.7% 36,886 66.8% 53,418 76.9%
Marketing revenues .......... 12,398 30.3% 18,191 32.9% 15,901 22.9%
Other income ................ 435 1.1% 145 0.3% 137 0.2%
---------- ---------- ---------- ---------- ---------- ----------
Total revenues ............ 40,950 100.0% 55,222 100.0% 69,456 100.0%
========== ========== ========== ========== ========== ==========
Net production (million BOE):
Crude oil ................... 111.9 85.9% 116.9 83.5% 130.3 84.2%
Natural gas ................. 18.3 14.1% 23.1 16.5% 24.5 15.8%
---------- ---------- ---------- ---------- ---------- ----------
Total net production ...... 130.2 100.0% 140.0 100.0% 154.8 100.0%
========== ========== ========== ========== ========== ==========
Average net realized prices:
Crude oil (per bbl)...... US$28.11 US$35.41 US$47.31
Natural Gas (per mcf).... 2.87 2.75 2.82
-------------------------
(1) These figures do not include our revenues from the Pinghu gas field.
The following table sets forth, for the periods indicated, certain income
and expense items in our consolidated income statements as a percentage of total
revenues:
Year ended December 31,
----------------------------------------
2003 2004 2005
---------- ---------- ----------
Operating Revenues: (based on restated amounts)
Oil and gas sales ........................................ 68.7% 66.8% 76.9%
Marketing revenues ....................................... 30.2 32.9 22.9
Other income ............................................. 1.1 0.3 0.2
---------- ---------- ----------
Total revenues ....................................... 100.0% 100.0% 100.0%
========== ========== ==========
Expenses:
Operating expenses ....................................... (11.0)% (9.2)% (8.5)%
73
Production taxes ......................................... (3.0) (3.1) (3.7)
Exploration costs ........................................ (2.1) (2.4) (1.9)
Depreciation, depletion and amortization ................. (11.3) (9.9) (8.6)
Dismantlement ............................................ (0.4) (0.4) (0.4)
Impairment losses related to property, plant and equipment (0.0) (0.0) (0.1)
Crude oil and product purchases .......................... (29.9) (32.5) (22.6)
Selling and administrative expenses ...................... (3.1) (1.9) (2.0)
Other .................................................... (0.9) (0.1) (0.1)
---------- ---------- ----------
(61.7)% (59.5)% (47.9)%
---------- ---------- ----------
Interest income ............................................... 0.4% 0.4% 0.5%
Finance costs ................................................. (0.9) (0.8) (1.6)
Exchange gain (loss), net ..................................... (0.0) 0.1 0.4
Short term investment income .................................. 0.3 0.1 0.4
Share of profit of an associate ............................... 0.5 0.6 0.4
Non-operating profit (loss), net .............................. 0.8 0.9 0.0
---------- ---------- ----------
Income before tax ............................................. 39.4 41.8 52.3
Tax ........................................................... (11.3) (12.6) (15.8)
---------- ---------- ----------
Net income .................................................... 28.1% 29.2% 36.5%
========== ========== ==========
Calculation of Revenues
China
We report total revenues, which consist of oil and gas sales, marketing
revenues and other income, in our consolidated financial statements attached to
this annual report. With respect to revenues derived from our offshore China
operations, oil and gas sales represent gross oil and gas sales less royalties
and share oil payable to the PRC government. These amounts are calculated as
follows:
o gross oil and gas sales consist of our percentage interest in
total oil and gas sales, comprised of (i) a 100% interest in our
independent oil and gas properties and (ii) our participating
interest in the properties covered under our production sharing
contracts, less an adjustment for production allocable to foreign
partners under our production sharing contracts as reimbursement
for exploration expenses attributable to our participating
interest;
o royalties represent royalties we pay to the PRC government on
production with respect to each of our oil and gas fields. The
amount of royalties varies from 0% up to 12.5% based on the annual
production of the relevant property. We pay royalties on oil and
gas we produce independently and under production sharing
contracts;
o government share oil, which is only paid on oil and gas produced
under production sharing contracts, is calculated as described
under "--Overview--Production Sharing Contracts Offshore China;"
o other income mainly represents project management fees charged to
our foreign partners and handling fees charged to end
customers--both fees are recognized when the services are
rendered; and
o we pay production taxes to the PRC government that are equal to 5%
of the oil and gas we produce independently and under production
sharing contracts. Our oil and gas sales are not reduced by
production taxes. Production taxes are included in our expenses
under "production taxes."
Marketing revenues represent our sales of our foreign partners' oil and
gas produced under our production sharing contract and purchased by us from our
foreign partners under such contracts as well as from international oil and gas
companies through our wholly owned subsidiary in Singapore. Net marketing
revenues represent the marketing revenues net of the cost of purchasing oil and
gas from foreign partners and from international oil and gas companies. Our
foreign partners have the right to
74
either take possession of their oil and gas for sale in the international market
or to sell their oil and gas to us for resale in the PRC market.
Our share of the oil and gas sales of our associated company is not
included in our revenues, but our share of the profit or loss of our associated
company is included in our consolidated statements of income under "share of
profit of associates."
Indonesia
The oil and gas sales from our subsidiaries in Indonesia consist of our
participating interest in the properties covered under the relevant production
sharing contracts, less adjustments for share oil payable under our Indonesian
production sharing contracts and for a domestic market obligation under which
the contractor must sell a specified percentage of its crude oil to the local
Indonesian market at a reduced price.
2005 versus 2004
The discussions under "--2005 versus 2004" are based on the restated
amounts, where applicable, as a result of the adoption of new HKFRSs. See note
2.4 to our consolidated financial statements under "Item 18-Financial Statement"
in this annual report.
Consolidated Net Profit
Our consolidated net income after tax was Rmb 25,323.1 million (US$3,137.9
million) in 2005, an increase of Rmb 9,184.0 million (US$1,138.0 million), or
56.9%, from Rmb 16,139.1 million in 2004.
Revenue
Our oil and gas sales for 2005 were Rmb 53,417.7 million (US$6,619.1
million), an increase of Rmb 16,531.7 million (US$2,048.5 million), or 44.8%,
from Rmb 36,886.0 million in 2004. The increase primarily reflects the rise in
global crude oil prices and production grants. Our sales volume of crude oil and
natural gas in 2005 increased by 11.6% and 6.8%, respectively, as compared to
2004. The average realized price for our crude oil was US$47.31 per barrel in
2005, an increase of US$11.9, or 33.6% from US$35.41 per barrel in 2004. The
average realized price of natural gas was US$2.82 per thousand cubic feet in
2005, an increase of US$0.07, or 2.6%, from US$2.75 per thousand cubic feet in
2004.
In 2005, our net marketing profit, which were derived from marketing
revenue less purchase cost of crude oil and oil products, were Rmb 197.2 million
(US$24.4 million), a decrease of Rmb 30.7 million (US$3.8 million), or 13.5%,
from Rmb 227.9 million in 2004. Since we are one of the three companies that
have the right to sell crude oil in China, upon request by our production
sharing contract partners, we may purchase the oil of these partners for sale in
China. However, the amount of oil we may purchase and sell in China depends on
our foreign partners and, therefore, we cannot control the amount of crude oil
that we are able to sell for any specific period. In 2005, marketing revenue
from our wholly-owned subsidiary, CNOOC China Limited, was Rmb 9,430.8 million
(US$1,168.6 million), representing an increase of Rmb 1,688.2 million (US$209.2
million) from Rmb 7,742.6 million in 2004. The net marketing profit, however,
decreased Rmb 71.6 million, or 45.7%, from Rmb 156.6 million in 2004. The
decrease was primarily due to the significant reduction in sales margin which
was mainly influenced by market prices in the local markets. The net marketing
profit from our wholly-owned subsidiary, China Offshore Oil (Singapore)
International Pte Ltd., was Rmb 112.2 million (US$13.9 million), an increase of
Rmb 40.9 million, or 57.4%, from Rmb 71.3 million in 2004.
Our other income, reported on a net basis, was derived from our other
income less corresponding costs. In 2005, the total other income was Rmb 59.7
million (US$7.4 million), a decrease of Rmb 39.1 million (US$4.8 million) from
Rmb 98.8 million in 2004. The decrease was primarily due to the lower service
fees received from our production sharing contract projects.
75
Expenses
Operating expenses. Our operating expenses were Rmb 5,934.6 million
(US$735.4 million) in 2005, an increase of Rmb 864.3 million (US$107.1 million),
or 17.0%, from Rmb 5,070.3 million in 2004. The increase was mainly attributable
to the commencement of production of seven new oil and gas fields in China in
2005. Operating expenses in 2005 were Rmb 38.8 (US$4.8) per BOE, an increase of
5.7% from Rmb 36.7 per BOE in 2004. Operating expenses for our offshore China
operations in 2005 were Rmb 32.5 (US$4.0) per BOE, representing an increase of
8.7% from 2004. The increase was mainly attributable to the higher service fees,
supply vessels, equipment lease, maintenance materials, chemicals and fuel,
resulting from the higher international crude oil price. Operating expenses for
our offshore Indonesia operations were Rmb 100.2 (US$12.4) per BOE, an increase
of 13.0% over 2004. The increase in operating expenses per barrel for our
Indonesian oil fields was due to lower net production volume based on their
profit sharing models. Based on working interest production, operating expenses
for our offshore Indonesia operations in 2005 were Rmb 48.7 (US$6.0) per BOE.
Production taxes. Our production taxes for 2005 were Rmb 2,596.5 million
(US$321.7 million), an increase of Rmb 870.8 million (US$107.9 million), or
50.5% from Rmb 1,725.7 million in 2004. The increase was primarily due to the
increased income from oil and gas sales.
Exploration costs. Our exploration costs for 2005 were Rmb 1,293.7 million
(US$160.3 million), a slight decrease of Rmb 22.5 million (US$2.8 million), or
1.7%, from Rmb 1,316.2 million in 2004, as a result of an increase in
capitalization of investment in exploration activities.
Depreciation, depletion and amortization expenses. Our depreciation,
depletion and amortization expenses for 2005 were Rmb 5,964.7 million (US$739.1
million), an increase of Rmb 509.6 million (US$63.1 million), or 9.3%, from Rmb
5,455.1 million in 2004. On a unit of production basis, depreciation, depletion
and amortization expenses for 2005 were Rmb 39.0 (US$4.8) per BOE, as compared
to Rmb 39.5 per BOE in 2004.
Dismantlement costs. Our dismantlement costs for 2005 were Rmb 252.9
million (US$31.3 million), an increase of Rmb 51.3 million (US$6.4 million),
from Rmb 201.6 million in 2004. The increase was primarily due to the increased
dismantling costs resulting from the commencement of production at new oil and
gas fields and a revision of the dismantlement liabilities for certain existing
oil and gas fields. Our dismantlement costs were Rmb 1.7 (US$0.2) per BOE, a
corresponding increase from Rmb 1.5 per BOE in 2004.
Impairment losses related to property, plant and equipment. Our impairment
losses for 2005 were Rmb 90.2 million (US$11.2 million). The impairment was due
to the downward revision of the reserve of BZ34-2/4 and HZ19-3 oil and gas
fields. The average impairment costs were Rmb 0.6 (US$0.07) per BOE.
Selling and administrative expenses. Our selling and administrative
expenses for 2005 were Rmb 1,370.4 million (US$169.8 million), an increase of
Rmb 266.1 million (US$33.0 million), or 24.1%, from Rmb 1,104.3 million in 2004.
Of which, our selling and administrative expenses of companies in China in 2005
were Rmb 6.3 (US$0.8) per BOE, an increase of 14.5% over 2004.
Compared with 2004, the increase was mainly attributable to an increase in
management fees related to the increased number of production sharing contract
projects under production, and increases in labor costs and general research
expenditure in 2005.
Finance costs, net of interest income
Our net finance costs for 2005 was Rmb 741.2 million (US$91.8 million), an
increase of 215.5%, from the net interest expenses of Rmb 235.0 million in 2004.
On the one hand, our interest income increased by Rmb 152.4 million from Rmb
206.9 million in 2004 to Rmb 359.3 million in 2005. On the other hand, the
finance costs increased significantly mainly due to the interest expenses on our
US$1 billion bonds issued in December 2004, the losses on fair value changes of
the embedded derivative component of the convertible bonds and the effect of
increased amount of provision of dismantlement arising from the passage of time.
The increases due to the factors mentioned above were Rmb 164.4
76
million (US$20.4 million), Rmb 373.1 million (US$46.2) and Rmb 79.2 million
(US$9.8 million), respectively.
Exchange Gain/Loss, net
Our net exchange gain for 2005 was Rmb 287.0 million (US$35.6 million), an
increase of Rmb 257.7 million (US$31.9 million), from net exchange gains of Rmb
29.3 million in 2004. Compared with 2004, the increased exchange gains mainly
came from the Chinese government's efforts on the improvement of rate-forming
mechanism and the following appreciation of Renminbi in the second half of the
year.
Investment Income
Our short term investment income for 2005 was Rmb 247.9 million (US$30.7
million), a significant increase of Rmb 175.5 million (US$21.7 million), or
242.4%, from Rmb 72.4 million in 2004. For the purpose of improving performance
of current assets portfolio, we increased the investment in financial
instruments such as money market funds. Benefiting from the structural changes
in the investment portfolio and the influence from the market, we obtained a
favorable return in this year.
Share of Profits of Associates
In 2005, there were gains from our investments in Shanghai Petroleum and
Natural Gas Company Limited and CNOOC Finance Corporation Limited. Of them,
share of profit from Shanghai Petroleum and Natural Gas Company Limited was Rmb
261.8 million (US$32.4 million), representing a decrease of 12.1% from 2004,
which was mainly due to the change in tax rate from favorable rate of 16.5% to
normal rate of 33.0% and resulting from the increased income tax payment of
2005. Share of profit from CNOOC Finance Corporation Limited was Rmb 45.3
million (US$5.6 million) during the period, relatively comparable to that from
2004.
Non-operating Income/Expenses, Net
Our net non-operating income for 2005 was Rmb 28.6 million (US$3.5
million), as compared to non-operating income of Rmb 519.2 million for 2004. In
2004, the net non-operating income represented the tax refund from re-investment
in China.
Income tax
Our income tax for 2005 was Rmb 10,977.8 million (US$1,360.3 million), an
increase of Rmb 4,047.0 million (US$501.5 million), or 58.4%, from Rmb 6,930.8
million in 2004. The primary reason for the increase was the increase in profit
before tax. The effective tax rate for 2005 was 30.2%, slightly higher than the
effective rate of 30.0% in 2004.
2004 versus 2003
The discussions under "--2004 versus 2003" are based on the restated
amounts, where applicable, as a result of the adoption of new HKFRSs. See note
2.4 to our consolidated financial statements under "Item 18 - Financial
Statements" in this annual report.
Consolidated Net Profit
Our consolidated net income after tax was Rmb 16,139.1 million in 2004, an
increase of Rmb 4,641.4 million, or 40.4%, from Rmb 11,497.7 million in 2003.
Revenue
77
Our oil and gas sales for 2004 were Rmb 36,886.0 million, an increase of
Rmb 8,769.2 million or 31.2%, from Rmb 28,116.8 million in 2003. The increase
primarily reflects the rise in global crude oil prices and our higher production
level. Our sales of crude oil and natural gas in 2004 increased by 5% and 26%,
respectively, as compared to 2003. The average realized price for our crude oil
was US$35.41 per barrel in 2004, an increase of US$7.3, or 26.0% from US$28.11
per barrel in 2003. The average realized price of natural gas was US$2.75 per
thousand cubic feet in 2004, a decrease of US$0.12, or 4.2%, from US$2.87 per
thousand cubic feet in 2003. The decrease was due to the increased weighting of
production of low-priced gas fields.
In 2004, our net marketing profit, which were derived from marketing
revenue less purchase cost of crude oil and oil products, were Rmb 227.9
million, an increase of Rmb 124.5 million, or 120.3%, from Rmb 103.4 million in
2003. Since we are one of the three companies that have the right to sell crude
oil in China, upon request by our production sharing contract partners, we may
purchase the oil of these partners for sale in China. However, the amount of oil
we may purchase and sell in China depends on our foreign partners and,
therefore, we cannot control the amount of crude oil that we are able to sell
for any specific period. In 2004, our marketing profit from our wholly owned
subsidiary, China Offshore Oil (Singapore) International Pte Ltd., was Rmb 71.3
million, an increase of 36.1% from Rmb 52.4 million in 2003.
Our other income, reported on a net basis, was derived from our other
income less corresponding costs. In 2004, the total other income was Rmb 98.8
million, an increase of Rmb 14.3 million (US$1.7 million) from Rmb 84.5 million
in 2003.
Expenses
Operating expenses. Our operating expenses were Rmb 5,070.3 million in
2004, an increase of Rmb 557.5 million, or 12.4%, from Rmb 4,512.8 million in
2003. The increase primarily resulted from the increased operating expenses in
connection with the commencement of operations in new properties. Operating
expenses were Rmb 36.7 per BOE in 2004, an increase of 4.2% from Rmb 35.2 per
BOE in 2003. Operating expenses offshore China in 2004 were Rmb 29.9 per BOE, an
increase of 10.7% from Rmb 27.0 per BOE in 2003. Operating expenses offshore
Indonesia were Rmb 88.7 per BOE, an increase of 15.6% from Rmb 76.7 per BOE in
2003. The increases were primarily due to the high international crude oil
prices and an increase in operating expenses per barrel for our Indonesian
oilfields due to their lower production volume based on their profit sharing
model. Based on working interest production, operating expenses for our offshore
Indonesia operations in 2004 were Rmb 42.0 per BOE, which were in line with the
operating expenses for our offshore Indonesia operations in the previous year.
Production taxes. Our production taxes for 2004 were Rmb 1,725.7 million,
an increase of Rmb 487.1 million, or 39.3%, from Rmb 1,238.6 million in 2003.
The increase was primarily due to increase in oil and gas sales in 2004.
Exploration costs. Our exploration costs for 2004 were Rmb 1,316.2
million, an increase of Rmb 468.1 million, or 55.2%, from Rmb 848.1 million in
2003. The increase was primarily due to a significant increase in exploration
activities. In 2004, some successful exploration wells were written off because
we did not expect to develop these wells within the next couple years. The
write-off amount was Rmb 155.8 million.
Depreciation, depletion and amortization expenses. Our depreciation,
depletion and amortization expenses for 2004 were Rmb 5,455.1 million, an
increase of Rmb 812.3 million, or 17.5%, from Rmb 4,642.8 million in 2003. On a
unit of production basis, depreciation, depletion and amortization expenses for
2004 were Rmb 39.5 per BOE, an increase of 9.2% compared to Rmb 36.2 per BOE in
2003. The primary reason for the increase was the higher amortization costs for
the oilfields that commenced operations in 2004 and the lower production level
of the Indonesian oilfields. Based on our profit sharing model, our production
level of our Indonesian oilfields is directly affected by oil price fluctuation.
78
Dismantlement costs. Our dismantlement costs for 2004 were Rmb 201.6
million, an increase of Rmb 34.3 million, or 20.5%, from Rmb 167.3 million in
2003. The increase was primarily due to the increased dismantlement costs
resulting from the commencement of production at new oil and gas properties. On
a unit production basis, our dismantlement costs were Rmb 1.5 per BOE, an
increase of 15.3% compared to Rmb 1.3 per BOE in 2003.
Selling and administrative expenses. Our selling and administrative
expenses for 2004 were Rmb 1, 104.3 million, a decrease of Rmb 145.9 million, or
11.7%, from Rmb 1,250.3 million in 2003. The primary reason for the decrease was
a decrease in labor costs resulting from the direct charge of some labor costs
to specific projects and the replacement of some foreign employees that received
higher salaries with local employees. On a unit of production basis, selling and
administrative expenses were Rmb 8.0 per BOE in 2004, a decrease of 19.1% from
Rmb 9.7 per BOE in 2003. Our selling and administrative expenses in China in
2004 were Rmb 5.5 per BOE, a decrease of 17.9% from 2003.
Net interest expenses/income
Our net interest expense for 2004 was Rmb 235.0 million, an increase of
Rmb 63.6 million, or 37.1%, from Rmb 171.4 million in 2003. The increase was
primarily due to the interest expenses on our US$500 million bonds issued in
2003. Rmb 94.8 million of the increase in interest expense was attributable to
our long term guaranteed notes.
Exchange Gain/Loss, net
Our net exchange gain for 2004 was Rmb 29.3 million, compared with a net
exchange loss of Rmb 6.7 million in 2003. The exchange gain in 2004 was mainly
attributable to our foreign currency swaps for our yen-denominated loans.
Short Term Investment Income
Our short term investment income for 2004 was Rmb 72.4 million, a decrease
of Rmb 51.1 million, or 41.4%, from Rmb 123.5 million in 2003. The decrease was
primarily due to the structural change to our investment portfolio, where we
disposed of some of our investment in corporate bonds and reinvested the
proceeds in market funds.
Share of Profit of Associates
Our share of profit of associates for 2004 was Rmb 344.5 million, an
increase of Rmb 124.2 million, or 56.4%, from Rmb 220.3 million in 2003. This
item reflected our share of profit generated by Shanghai Petroleum and Natural
Gas Company Limited resulting primarily from increases in production and oil
prices and our share of profit generated by CNOOC Finance Corporation Limited.
Non-operating Income/Expenses, Net
Our net non-operating income for 2004 was Rmb 519.2 million, compared to
non-operating income of Rmb 315 million for 2003. In 2004, the net non-operating
income was mainly due to the tax refund from re-investment in China.
Income tax
Our income tax for 2004 was Rmb 6,930.8 million, an increase of Rmb
2,303.0 million, or 49.8%, from Rmb 4,627.8 million in 2003. The primary reason
for the increase was the increase in profit before tax. In 2003, we received Rmb
252.0 million tax rebate for using domestic equipment. The effective tax rate
for 2004 was 30.0%, as compared with the effective rate of 28.7% in 2003.
79
B. LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our cash flows for the periods presented:
Year ended December 31,
-----------------------------------
2003 2004 2005
--------- --------- ---------
(Rmb in millions)
Cash provided by (used for):
Operating activities ................ 17,819 22,328 32,154
Investing activities ................ (9,513) (24,607) (29,349)
Financing activities ................ (1,745) 1,970 (7,787)
--------- --------- ---------
Net increase/(decrease) in cash and cash
equivalents ...................... 6,561 (309) (4,982)
========= ========= =========
Cash Provided by Operations
Net cash generated from operating activities in 2005 amounted to Rmb
32,153.8 million (US$3,984.3 million), representing an increase of Rmb 9,825.9
million (US$1,217.6 million), or 44.0% from Rmb 22,327.9 million in 2004. The
increase was primarily due to an increase in profit before tax of Rmb 13,231.0
million (US$1,639.5 million), an increase in depreciation, depletion and
amortization expenses of Rmb 509.7 million (US$63.2 million), an increase in
finance costs of Rmb 658.7 million (US$81.6 million), an increase in provision
for inventory of Rmb 35.8 million (US$4.4 million), an increase in dismantlement
costs of Rmb 51.2 million (US$6.3 million), a decrease in share of profits of
associates of Rmb 37.4 million (US$4.6 million), an increase in amortization of
discount of long term guaranteed notes of Rmb 26.3 million (US$3.3 million), and
an increase in impairment losses related to property, plant and equipment of Rmb
90.2 million (US$11.2 million).
Increase of cash flow was also partially offset by an increase of income
tax paid of Rmb 2,447.2 million (US$303.2 million), an increase in our finance
exchange gain and loss of Rmb 257.8 million (US$31.9 million), an increase in
investment income received of Rmb 175.5 million (US$21.7 million), a decrease in
the loss on disposal and write off of property, plant and equipment of Rmb 14.3
million (US$1.8 million), an increase in interest income of Rmb 152.4 million
(US$18.9 million) and a decrease in compensation cost for share based payment of
Rmb 17.5 million (US$2.2 million).
In another aspect, compared with 2004, the increase in operating cash flow
was partially attributable to the increase in changes of working capital, mainly
due to the increase in changes of current assets from operating activities
excluding cash and bank balances of Rmb 2,103.9 million (US$260.7 million), and
a simultaneous increase in changes of current liabilities from operating
activities of Rmb 71.0 million (US$8.8 million).
Capital Expenditures and Investments
Net cash outflow from investing activities in 2005 was Rmb 29,349.2
million (US$3,636.7 million), representing an increase of Rmb 4,742.0 million
(US$587.6 million), from Rmb 24,607.2 million in 2004. In line with our use of
"successful efforts" method of accounting, total capital expenditures and
investments primarily include successful exploration and development
expenditures and purchasing costs of oil and gas properties. Total capital
expenditures were Rmb 17,469.5 million (US$2,164.7 million) in 2005,
representing a decrease of Rmb 1,152.5 million (US$142.8 million), or 6.2%, from
Rmb 18,622.0 million in 2004.
The capital expenditures in 2005 mainly comprised of Rmb 875.8 million
(US$108.5 million) for capitalized exploration activities, Rmb 15,729.7 million
(US$1,949.1 million) for development activities, and Rmb 1,017.0 million
(US$126.0 million) for acquiring 16.69% equity interest in MEG, netting off a
tax refund of Rmb 153.0 million (US$ 19.0 million) for the North West Shelf
project in Australia. Our development expenditures in 2005 related principally
to the development of PanYu 30-1, Bozhong 25-1/25-1S, PL19-3 phase II and NanPu
35-2 oil and gas fields.
80
In addition, cash outflow was attributable to the increase in time
deposits with maturities over three months of Rmb 3,597 million (US$445.7
million), and the net purchase of available-for-sale financial assets of Rmb
8,282.7 million (US$1,026.3 million).
Total capital expenditures were Rmb 18,622.0 million in 2004, an increase
of Rmb 6,249.5 million, or 50.5%, from Rmb 12,372.5 million in 2003. The capital
expenditures in 2004 included Rmb 783.5 million for capitalized exploration
activities, Rmb 12,059.4 million for development activities, and Rmb 5,779.1
million for acquiring the Tangguh LNG project, the North West Shelf project and
other oil and gas properties. Our development expenditures in 2004 related
principally to the development of Bozhong 25-1/25-1S, Luda, Bonan and Caofeidian
oil and gas fields. In addition, cash outflow in 2004 was in part attributable
to an increase in time deposits with maturities over three months of Rmb 6,280
million, which was partially offset by cash inflow from net disposal of
short-term investment of Rmb 294.8 million.
For 2006, we have budgeted approximately US$3.08 billion for capital
expenditures, approximately US$316.3 million of which is budgeted for general
exploration activities offshore China, approximately US$1,860.1 million of which
is budgeted for development activities offshore China and approximately US$514.5
million of which is budgeted for our exploration and development activities
overseas.
The following table sets forth actual or budgeted capital expenditures on
an accrual basis for our key operating areas for the periods indicated.
Year ended December 31,
-------------------------
2005(1) 2006(2)
---------- ----------
Operating Area: (US$ in millions)
Bohai Bay
Development ................................... 856.4 1,099.5
Exploration ................................... 84.3 136.5
Western South China Sea
Development ................................... 161.3 441.3
Exploration ................................... 76.0 113.4
East China Sea
Development ................................... 105.0 30.3
Exploration ................................... 6.3 12.1
East South China Sea
Development ................................... 554.1 271.5
Exploration ................................... 52.9 32.9
Other Offshore China
Development ................................... -- 17.4
Exploration ................................... 13.4 21.4
Overseas
Development ................................... 288.5 373.1
Exploration ................................... 19.6 141.4
---------- ----------
Total ...................................... 2,217.7 2,690.8
========== ==========
-----------------------
(1) Figures for 2005 represent our actual spending for capital expenditure
purposes.
(2) Figures for 2006 represent our budgeted capital expenditures.
In addition to the budgeted development and exploration expenditures
relating to the oil and gas properties described above, we may make additional
capital expenditures and investments in these periods consistent with our
business strategy. See "Item 4--Information on the Company--Business
Overview--Business Strategy."
Our ability to maintain and grow our revenues, net income and cash flows
depends upon continued capital spending. We adjust our capital expenditure and
investment budget on an annual basis. Our capital expenditure plans are subject
to a number of risks, contingencies and other factors, some of
81
which are beyond our control. Therefore, our actual future capital expenditures
and investments will likely be different from our current planned amounts, and
such differences may be significant. See "Item 3--Key Information--Risk
Factors--Risks relating to our business--Our future prospects largely depend on
our capital expenditure plans, which are subject to various risks."
Financing activities
The net cash outflow arising from financing activities in 2005 was Rmb
7,786.4 million (US$964.8 million) as compared to a net cash inflow of Rmb
1,970.5 million from financing activities in 2004. There was no issuance of debt
financing instruments or bank loan increase in 2005. The net cash outflow in
2005 was primarily due to the distribution of dividends of Rmb 7,772.2 million
(US$963.1 million) and the repayment of bank loans of Rmb 18.7 million (US$2.3
million). Some cash inflow was generated by the proceeds from the exercise of
share options of Rmb 4.5 million (US$0.6 million) in 2005.
We had net cash inflows from financing activities of Rmb 1,970.5 million
in 2004, primarily attributable to the convertible bond issuance which generated
cash inflow of approximately Rmb 8,154.1 million. The cash inflows were
partially offset by our repayment of Rmb 21.1 million in bank loans, dividend
distributions of Rmb 6,101.4 million and a cash outflow of Rmb 61.2 million
resulting from our share repurchases in 2004.
We have debt service obligations consisting of principal and interest
payments on our outstanding indebtedness. The following table summarizes the
maturities of our long-term debt outstanding as of December 31, 2005. As of the
date this annual report is filed, we have not incurred any material long-term
debt since December 31, 2005.
Debt maturities (principal only)
------------------------------------------------------------------
Original currency
-------------------------------------- Total Rmb Total US$
Due by December 31, US$ JPY Rmb equivalents equivalents
------------------------ ---------- ---------- ---------- ---------- ----------
(in millions, except percentages)
2006 ................... 100.0 271.5 -- 825.7 102.3
2007-2009 .............. 1,000.0 271.4 -- 8,088.9 1,002.3
2010-2011 .............. -- -- -- -- --
2011 and beyond ........ 1,000.0 -- -- 8,070.2 1,000.0
Total ............... 2,100.0 542.9 -- 16,984.8 2,104.6
Percentage of total debt 99.8% 0.2% -- 100.0% 100.0%
As of June 6, 2006, we had a total U.S. dollar debt of US$2,100.0 million
and a total foreign currency debt of US$2,104.6 million.
After we became a separate entity in October 1999, we paid a dividend of
Rmb 1,045.4 million in 1999 and declared and paid a final dividend of Rmb
6,426.4 million in 2000. In 2002, 2003 and 2004, we paid dividends totaling Rmb
2,265.1 million, Rmb 5,403.7 million and Rmb 6,101.4 million, respectively. In
2005, we declared and paid dividends totaling Rmb 7,772.2 million (US$963.1
million). The payment and the amount of any dividends in the future will depend
on our results of operations, cash flows, financial condition, the payment by
our subsidiaries of cash dividends to us, future prospects and other factors
which our directors may consider relevant. The amount of dividends we paid
historically is not indicative of the dividends that we will pay in the future.
We believe our future cash flows from operations, borrowing capacity and
funds raised from our debt offerings will be sufficient to fund planned capital
expenditures and investments, debt maturities and working capital requirements
through at least 2006. Several large financial institutions have expressed an
interest in supporting our business development, although we have not entered
into any agreements for additional financing with these institutions. However,
our ability to obtain adequate financing to satisfy our capital expenditure and
debt service requirements may be limited by our financial condition and results
of operations and the liquidity of international and domestic financial markets,
including the following factors:
82
o Any failure by us to achieve timely rollover, extension or
refinancing of our short-term debt may result in our inability to
meet our obligations in connection with debt service, accounts
payable and/or other liabilities when they become due and payable.
o Our primary operating subsidiary is a PRC incorporated company.
Therefore, prior to accessing the international capital markets we
will be subject to limitations imposed by various PRC government
authorities, including the State Administration for Foreign
Exchange, depending on the type of international financing raised.
We may also need to obtain PRC government support for any project
involving significant capital investment in the operations of our
PRC subsidiary.
o In addition, financing sources often look to similarly situated
entities when determining whether, and at what rates, to provide
financing. Successful or unsuccessful financing by Hong Kong and
PRC entities similarly situated to us could have an impact on our
ability to obtain external financing.
See "Item 3--Key Information--Risk Factors--Risks relating to our
business--Our future prospects largely depend on our capital expenditure plans,
which are subject to various risks" and "--We may not be able to obtain external
financing that is acceptable to us for business development purposes."
Employee Benefits
When we became a separate entity as a result of CNOOC's reorganization in
October 1999, CNOOC retained all liabilities for retirement benefits for its
employees, both former and current, who had not been transferred to us. As
compensation for CNOOC's retention of liabilities for retirement benefits
payable to approximately 7,000 retired CNOOC employees who were previously
engaged in the oil and gas business that was transferred to us in the
reorganization, we made a one-time payment to CNOOC of Rmb 1,660.0 million in
2001.
All of our full-time employees in the PRC are covered by a
government-regulated pension plan and are entitled to an annual pension at their
retirement dates. The PRC government is responsible for the pension liabilities
to these retired employees under this government pension plan. The actual
pension payable to each retiree is subject to a formula based on the status of
the individual pension account, general salary and inflation movements. We are
required to make annual contributions to the government pension plan at rates
ranging from 9% to 22% of our employees' salaries. The related pension costs are
expensed as incurred.
The expenses attributable to mandatory contributions under the current
government pension plan are included in our historical consolidated statements
of income under either operating expenses for our production staff or selling
and administrative expenses for our administrative staff. We expect that, under
the current PRC rules and regulations regarding employee retirement benefits,
the future costs of the current government plan will be comparable to our
historical costs, subject to customary increases largely in line with salary
increases of our employees.
We are required to make contributions to a mandatory provident fund at a
rate of 5% of the base salaries for full-time employees in Hong Kong. The costs
are expensed as incurred.
Our Indonesian subsidiaries employ approximately 900 employees, including
approximately 50 expatriates. We provide benefits to expatriates that we believe
to be in line with customary international practices. Our local staff in
Indonesia enjoy welfare benefits mandated by Indonesia labor laws.
Holding Company Structure
We are a holding company. Our entire petroleum exploration, development,
production and sales business in the PRC is owned and conducted by CNOOC China
Limited, our wholly foreign-owned enterprise in the PRC. Our entire petroleum
exploration, development and production business outside the PRC is owned and
conducted by CNOOC International Limited, our wholly-owned subsidiary
83
incorporated in the British Virgin Islands. International sales of crude oil are
conducted by China Offshore Oil (Singapore) International Pte. Ltd., our
wholly-owned subsidiary incorporated in Singapore. Accordingly, our future cash
flows will consist principally of dividends from our subsidiaries. The
subsidiaries' ability to pay dividends to us is subject to various restrictions,
including legal restrictions in their jurisdictions of incorporation. For
example, legal restrictions in the PRC permit payment of dividends only out of
net income determined in accordance with PRC accounting standards and
regulations. In addition, under PRC law, CNOOC China Limited is required to set
aside a portion of its net income each year to fund certain reserve funds. These
reserves are not distributable as cash dividends.
Inflation/Deflation
According to the China Statistical Bureau, China experienced an overall
national deflation rate, as represented by the general consumer price index, of
1.2% in 2003, an overall inflation rate of 3.9% in 2004 and an overall inflation
rate of 1.8% in 2005. Neither the deflation nor the inflation has had a
significant impact on our results of operations in the respective years.
U.S. GAAP Reconciliation
Our consolidated financial statements are prepared in accordance with Hong
Kong GAAP, which differ in certain material respects from U.S. GAAP. These
differences relate primarily to the treatment of impairment of long-lived assets
and the treatment for convertible bonds. For differences between Hong Kong GAAP
and U.S. GAAP that affect our net income or shareholders' equity. Please refer
to note 38 to our consolidated financial statements attached to this annual
report.
Taxation
We are subject to income taxes on an entity basis on income arising in or
derived from the tax jurisdictions in which we and each of our subsidiaries are
domiciled and operate. We are not liable for income taxes in Hong Kong as we
currently do not have any assessable income from Hong Kong sources. Pursuant to
a notice issued by the State Administration of Taxation in March 2001, we are
entitled to all tax benefits conferred by Chinese law on foreign invested
enterprises.
Our PRC subsidiary, absent exemptions, is subject to enterprise income tax
at the rate of 33%. Following the October 1999 reorganization, our PRC
subsidiary became a wholly foreign owned enterprise and accordingly was exempted
from 3% local surcharges, reducing its enterprise income tax rate to the current
rate of 30%. The PRC enterprise income tax is levied based on taxable income
including income from operations as well as other components of earnings, as
determined in accordance with the generally accepted accounting principles in
the PRC, or PRC GAAP. Besides income taxes, our PRC subsidiary also pays certain
other taxes, including:
o production taxes equal to 5% of independent production and
production under production sharing contracts; and
o business tax of 5% on other income.
Our subsidiary in Singapore, China Offshore Oil (Singapore) International
Pte. Ltd., is subject to income tax at the rate of 10% and 20% for its oil
trading activities and other income-generating activities, respectively. Our
subsidiaries that own interests in oil properties in Indonesia along the Malacca
Strait are subject to corporate and branch profit tax of 44%. The nine
subsidiaries of Repsol-YPF, S.A. in Indonesia acquired by us during 2002 are all
subject to corporate and dividend tax at rates ranging from 43.125% to 51.875%.
None of our other subsidiaries were subject to any income taxes in their
respective jurisdictions for the years presented.
We calculate deferred taxation to account for temporary differences
between our tax bases, which is used for income tax reporting and prepared in
accordance with applicable tax guidelines, and our accounting bases, which is
prepared in accordance with applicable financial reporting requirements. Major
temporary differences include accelerated amortization allowances for oil and
gas properties,
84
which are offset in part by provision for dismantlement and a provision for
impairment of property, plant and equipment and write-off of unsuccessful
exploratory drilling. As of December 31, 2003, 2004 and 2005, we had Rmb 5,783.2
million, Rmb 6,688.5 million and Rmb 6,827.9 million (US$846.1 million),
respectively, in net deferred tax liabilities. See note 13 to our consolidated
financial statements attached to this annual report.
Change of Accountants
On June 6, 2002, we terminated the engagement of Arthur Andersen & Co as
our independent public accountants. Prior to such date, Arthur Andersen had
audited our consolidated financial statements, including financial statements as
of and for the year ended December 31, 2001 presented in "Item 3--Selected
Financial Data." On June 15, 2002, Arthur Andersen was convicted of federal
obstruction of justice charges in connection with the U.S. government's
investigation of Enron Corporation. On August 31, 2002, Arthur Andersen
voluntarily relinquished its licenses to practice public accountancy in all
states of the United States and, accordingly, cannot furnish any written consent
to the issue of this annual report with the inclusion of its reports in the form
and context in which they are included. For a discussion of risks related to
Arthur Andersen, see "Item 3--Key Information--Risk Factors--Risks relating to
our business--You may not be able to assert claims against Arthur Andersen, our
independent public accountants for periods prior to 2002, nor may you be able to
assert claims against our current independent public accountants for financial
statements previously audited by Arthur Andersen."
On June 6, 2002, we appointed Ernst & Young as our independent
accountants. Ernst & Young audited our consolidated financial statements for the
year period ended December 31, 2003, 2004 and 2005 included in this annual
report.
Impact of Recently Issued Accounting Standards
U.S. GAAP
In December 2004, the Financial Accounting standards Board ("FASB"),
issued SFAS No. 153, "Exchanges of Non-monetary Assets an amendment of APB
Opinion No. 29". This Statement, which addresses the measurement of exchanges of
non-monetary assets, is effective prospectively for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of this
Statement is not expected to impact our consolidated financial position or
results of operations.
In December 2004, the FASB issued Statement No. 123 (revised 2004),
"Share-Based Payment" (FAS No.123R), which replaces FAS No. 123 and supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees." FAS No. 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values beginning with the first interim period after June 15, 2005, with early
adoption encouraged. Under the SEC's rules, FAS No. 123R is effective for us
beginning January 1, 2006. The pro forma disclosures previously permitted under
FAS No. 123 are no longer an alternative to financial statement recognition. We
believe the adoption of the FAS No. 123R will have no material impact on our
consolidated financial position or results of operations as we currently account
for the stock options under the fair value recognition provision of FAS No. 123.
In 2005, the FASB has finalized an amendment to Statement No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies" (FAS No.
19) that change the way oil and gas producers account for deferred exploratory
drilling costs. The new standard would relax the one-year limitation, so long as
oil and gas reserves have been discovered and an enterprise "is making
sufficient progress assessing the reserves and the economic and operating
viability of the project." We believe the adoption of amendment to FAS No. 19
will have no material impact on our consolidated financial position or results
of operations. This amendment is effective for the first reporting period
beginning after April 4, 2005.
In March 2005, the FASB issued FASB Interpretation Number 47 (FIN No.
47), "Accounting for Conditional Asset Retirement Obligations". The
interpretation clarifies the requirement to record
85
abandonment liabilities arising from legal obligations when the asset retirement
depends on a conditional future event. FIN No. 47 requires that the uncertainty
about the timing or method of settlement of a conditional asset retirement
obligation be factored into the measurement of the liability when sufficient
information available. FIN No. 47 is effective for fiscal years ending after
December 15, 2005 and application of the interpretation did not change our
calculation of abandonment obligations.
In May 2005, the FASB issued SFAS No.154, iss.Accounting Changes and
Error Corrections,i<168>a replacement of APB Opinion No.20, iss.Accounting
Changesi<168> and SFAS No.3, iss.Reporting Accounting Changes in Interim
Financial Statementsi<168> (" SFAS No.154 "). SFAS No.154 changes the
requirements for the accounting for, and reporting of, a change in accounting
principle. Previously, voluntary changes in accounting principles were generally
required to be recognized by way of a cumulative effect adjustment within net
income during the period of the change. SFAS No.154 requires retrospective
application to prior periods' financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of the
change. SFAS No.154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005; however, the statement does not change the
transition provisions of any existing accounting pronouncements. We do not
believe adoption of SFAS No.155 will have a material effect on our financial
position, cash flows or results of operations.
In February 2006, the FASB issued SFAS No.155 "Accounting for Certain
Hybrid Financial Instruments, an amendment of FASB Statements No.133 and 140"
("SFAS No.155"). SFAS No.155 clarifies certain issues relating to embedded
derivatives and beneficial interests in securitized financial assets, including
permitting fair value measurement for any hybrid financial instrument that
contains an embedded derivative, eliminating the prohibition on a qualifying
special-purpose entity from holding certain derivative instruments, and
providing clarification that concentrations of credit risk in the form of
subordination are not embedded derivatives. The provisions of SFAS No.155 are
effective for all financial instruments acquired or issued after fiscal years
beginning after September 15, 2006. We do not believe adoption of SFAS No.154
will have a material effect on our financial position, cash flows or results of
operations.
Hong Kong GAAP
The Hong Kong Institute of Certified Public Accountants has issued a
number of new and revised HKFRSs, some of which are not mandatory for the
current year financial statements. The following new and revised HKFRSs,
although not early adopted by us, will have an impact on our financial
statements once applied. Unless otherwise stated, the following HKFRSs are
effective for accounting periods beginning on or after January 1, 2006:
HKAS 1 Amendment Capital Disclosures
HKAS 21 Amendment The effects of Changes in Foreign Exchange Rate -
Net Investment in a Foreign Operation
HKAS 39 Amendment Cash Flow Hedge Accounting of Forecast Intragroup
Transactions
HKAS 39 Amendment The Fair Value Option
HKFRSs 1 & 6 Amendments First-time Adoption of Hong Kong Financial
Reporting Standards and Exploration for and
Evaluation of Mineral Resources
HKFRS 6 Exploration for and Evaluation of Mineral Resources
HKFRS 7 Financial Instruments: Disclosures
HK(IFRIC)-Int 4 Determining whether an Arrangement contains a Lease
HK(IFRIC)-Int 5 Rights to Interests arising from Decommissioning,
Restoration and Environmental Rehabilitation Funds
HKAS 1 Amendment shall be applied for accounting periods beginning on or
after January 1, 2007. The revised standard will affect the disclosure of
qualitative information about our objective, policies and processes for
managing capital; quantitative data about what we regard as capital; and
compliance with any capital requirements and the consequences of any
non-compliance.
86
HKFRS 6 deals with the accounting for exploration for and evaluation of
mineral resources, including oil and gas. We do not expect the adoption of
HKFRS 6 to have any significant impact on our results of operations and
financial position.
HKFRS 7 has modified the disclosure requirements of HKAS 32 relating to
financial instruments, and will replace HKAS 32. This HKFRS shall be applied
for accounting periods beginning on or after January 1, 2007.
Except as stated above, we do not expect the adoption of the other
pronouncements listed above to have any significant impact on our financial
statements in the period of initial application.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
See "Item 4--Information on the Company--Business Overview--Research and
Development" and "Item 7--Major Shareholders and Related Party
Transactions--Related Party Transactions--Categories of Connected
Transactions--Research and Development Services."
D. TREND INFORMATION
Crude oil price is a major driver of our results of operation. We price
our crude oil with reference to the international crude oil prices, which have
fluctuated considerably over the years. On January 3, 2005 the international
benchmark crude oil, West Texas Intermediate, was US$42.13 per barrel. As of
June 6, 2006, it was US$72.50 per barrel. In addition, continued political and
economic uncertainties in Iraq and threat of terrorism worldwide raise concerns
about the security and availability of ample supplies to meet growing demand. It
is expected that crude oil price will remain relatively high in 2006. For more
information about crude oil prices, see "Item 3--Key Information--Risk
Factors--Risks Relating to Our Business--Our business, revenues and profits
fluctuate with changes in oil and gas prices," "Item 4--Information on the
Company--Business Overview--Sales and Marketing--Sales of Offshore Crude
Oil--Pricing," and "Item 5--Operating and Financial Review and
Prospects--Operating Results--Results of Operations--2005 versus 2004."
In additional to crude oil, natural gas is becoming an increasingly
important part of our business. The Chinese government promotes the use of
natural gas as a clean and efficient fuel. Demand for natural gas in the PRC is
likely to increase significantly. We have expanded and will continue to expand
our natural gas business and intend to exploit our natural gas reserves to meet
growing demand for natural gas. For more information about our natural gas
business, see "Item 3--Key Information--Risk Factors--Risks Relating to Our
Business--Any failure to implement our natural gas business strategy may
adversely affect our business and financial position," "--The infrastructure and
demand for natural gas in the PRC may proceed at a slower pace than our planned
increase in production," "Item 4--Information on the Company--Business
Overview--Competitive Strengths--Strategic Position in China's Growing Natural
Gas Market" and "--Natural Gas Business."
E. OFF-BALANCE SHEET ARRANGEMENTS
None
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table sets forth information regarding our contractual
obligations for the periods indicated.
Payments due by period
--------------------------------------------------------------
Contractual Obligations Less than More than
Total 1 year 1-3 years 3-5 years 5 years
---------- ---------- ---------- ---------- ----------
Rmb'000 Rmb'000 Rmb'000 Rmb'000 Rmb'000
87
Long-term debt obligations ......................... 17,381,846 825,674 24,392 8,538,453 7,993,327
Operating lease obligations ........................ 1,576,067 340,318 409,191 294,682 531,876
Other long-term liabilities reflected on our balance
sheet under Hong Kong GAAP ..................... 4,161,663 -- -- -- 4,161,663
---------- ---------- ---------- ---------- ----------
Total ..................................... 23,119,576 1,165,992 433,583 8,833,135 12,686,866
========== ========== ========== ========== ==========
As of December 31, 2005, we had the following capital commitments,
principally for the construction and purchase of property, plant and equipment:
Capital Commitments 2005 2004
------------------- ---------- ----------
Rmb'000 Rmb'000
Contracted for............................................ 7,511,100 9,568,971
Authorized, but not contracted for........................ 23,736,582 20,331,504
As of December 31, 2005, we had unutilized banking facilities amounting to
approximately Rmb 33,450.8 million (US$4,145.0 million) as compared to Rmb
20,662.1 million as of December 31, 2004.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
In accordance with Hong Kong law and our articles of association, our
affairs are managed by our board of directors. The board of directors has 12
members, including five independent non-executive directors.
The table below sets forth information about our directors and senior
officers:
Name Year of Birth Position
------------------- ------------- -----------------------------------------
Chengyu Fu......... 1951 Chairman of Board of Directors and Chief
Executive Officer
Han Luo............ 1953 Director
Longsheng Jiang.... 1945 Director (retired on June 1, 2005)
Shouwei Zhou....... 1950 Director and President
Xinghe Cao......... 1949 Director (since August 31, 2005)
Zhenfang Wu........ 1952 Director (since August 31, 2005)
Guangqi Wu......... 1957 Director and Compliance Officer (since
June 1, 2005)
Hua Yang........... 1961 Director (since August 31, 2005),
Executive Vice President and Chief
Financial Officer
Edgar W.K. Cheng... 1943 Independent Non-executive Director (since
May 24, 2006)
Sung Hong Chiu..... 1947 Independent Non-executive Director
Kenneth S. Courtis. 1946 Independent Non-executive Director
(retired on May 24, 2006)
88
Evert Henkes....... 1943 Independent Non-executive Director
Lawrence J. Lau.... 1944 Independent Non-executive Director (since
August 31, 2005)
Erwin 1940 Independent Non-executive Director
Schurtenberger..... (resigned on April 1, 2005)
Aloysius Hau Yin 1948 Independent Non-executive Director (since
Tse................ June 8, 2005)
Yunshi Cao......... 1945 Senior Vice President, General Counsel
and Company Secretary (retired on April
18, 2006)
Victor Zhikai Gao.. 1962 Senior Vice President, General Counsel
and Company Secretary (since April 18,
2006)
Jian Liu........... 1958 Executive Vice President
Wei Chen........... 1958 Senior Vice President and General
Director of CNOOC China Limited Beijing
Research Center
Guohua Zhang....... 1960 Senior Vice President and General Manager
of CNOOC China Limited Shanghai Branch
Ning Li............ 1964 Senior Vice President and General Manager
of CNOOC China Limited Shenzhen Branch
Bi Chen............ 1961 Vice President and General Manager of
CNOOC China Limited Tianjin Branch
Weilin Zhu......... 1956 Vice President and General Manager of
Exploration Department
Mingcai Zhu........ 1956 Vice President and President of CNOOC
International Limited
Zhi Fang........... 1962 Vice President and President of CNOOC
Southeast Asia Ltd.
We have a management team with extensive experience in the oil and gas
industry. As a result of our cooperation with international oil and gas
companies, the management team and staff have had the opportunity to work
closely with foreign partners both within and outside China. Such opportunities,
in conjunction with management exchange programs with foreign partners, have
provided valuable training to our personnel in international management
practices. A description of the business experience and present position of each
director and executive officer is provided below. Our principal executive
offices are located at 65th Floor, Bank of China Tower, One Garden Road,
Central, Hong Kong.
Directors
Chengyu Fu received a B.S. degree in geology from the Northeast Petroleum
Institute in China and a Master's degree in petroleum engineering from the
University of Southern California in the United States. He has over 30 years of
experience in the oil industry in the PRC. He previously worked in China's
Daqing, Liaohe and Huabei oil fields. He joined CNOOC, our controlling
shareholder, in 1982 and has since been appointed as the Chairman of the
Management Committee formed through a joint venture between CNOOC, BP Amoco,
Chevron, Texaco, Phillips Petroleum, Shell and Agip. From 1994
89
to 1995, Mr. Fu was the Deputy General Manager of China Offshore Oil Eastern
South China Sea Corporation, a subsidiary of CNOOC. In December 1995, he was
appointed as the Vice President of Phillips China Inc. and the General Manager
of the Xijiang Development Project. In 1999, Mr. Fu was appointed as the General
Manager of China Offshore Oil Eastern South China Sea Corporation, a subsidiary
of CNOOC. In 2000, Mr. Fu was appointed as the Vice President of CNOOC.
Subsequently, he was appointed as our Executive Vice President, President and
Chief Operating Officer in 2001. In August 2002 he became the Chairman and Chief
Executive Officer of China Oilfield Services Limited ("COSL"), a company listed
on The Stock Exchange of Hong Kong Limited and a subsidiary of CNOOC. In October
2003, Mr. Fu was appointed as the President of CNOOC. He was also appointed as
our Chairman of the Board of Directors and Chief Executive Officer with effect
from October 16, 2003. In November 2003, Mr. Fu resigned from his Chief
Executive Officer position in COSL. He also serves as the Chairman of the Board
of Directors of CNOOC Finance Corporation Limited, a subsidiary of CNOOC, as
well as CNOOC China Limited and CNOOC International Limited, both being our
subsidiaries. Mr. Fu was appointed our Executive Director with effect from
August 23, 1999.
Han Luo received a doctorate degree from the Petroleum University in
China. He has over 30 years of experience in the oil industry in the PRC. He
joined CNOOC in 1982. From 1993 to 1999, Mr. Luo served as the Vice President of
China Offshore Oil Eastern South China Sea Corporation and concurrently as the
Chairman of the CACT (CNOOC-AGIP-Chevron-Texaco) operators group, and the
Executive Vice President of China Offshore Oil East China Sea Corporation, a
subsidiary of CNOOC. In 1999, he served as the General Manager of CNOOC China
Limited's Shanghai Branch. Mr. Luo is a Vice President of CNOOC, a position he
has held since 2000. He also serves as the Chairman of the Board of Directors of
Zhonghai Trust & Investment Co., Ltd., a subsidiary of CNOOC, and the Director
of CNOOC China Limited, our subsidiary. Mr. Luo was appointed as our Executive
Director with effect from December 20, 2000.
Longsheng Jiang received a B.S. degree from the Beijing Petroleum
Institute in China. He has over 35 years of experience in the oil industry in
the PRC. He was appointed as a Director of our company in December 2000 and has
been the Vice President of CNOOC since 1998. From 1994 to 1998, he was the
General Manager of China Offshore Oil Southern Drilling Company. From 1991 to
1994, Mr. Jiang served as the Deputy Chief Drilling Engineer and was later
appointed as the Chief Drilling Engineer of China Offshore Oil Western South
China Sea Corporation. He joined CNOOC in 1982. Mr. Jiang retired from our board
of director with effect from June 1, 2005.
Shouwei Zhou received a doctorate degree from the Southwest Petroleum
Institute in China and is a senior engineer. He joined CNOOC in 1982. Mr. Zhou
served as the Deputy General Manager of China Offshore Oil Bohai Corporation, a
subsidiary of CNOOC and the General Manager of CNOOC China Limited Tianjin
Branch. He was appointed as our Executive Vice President in September 1999 and
our President in July 2002. Since 2000, Mr. Zhou has been the Vice President of
CNOOC. Mr. Zhou serves as the Director and the President of CNOOC China Limited
and the Director of CNOOC International Limited, both being our subsidiaries. He
also serves as the Chairman of CNOOC Southeast Asia Limited, our wholly-owned
subsidiary since April 2003. Mr. Zhou became the chairman of Offshore Oil
Engineering Company Limited, a listed company in Shanghai Stock Exchange and a
subsidiary of CNOOC, on December 6, 2003. Mr. Zhou was appointed as our
Executive Director with effect from August 23, 1999.
Xinghe Cao graduated from Tianjin Politics and Law Management College
majoring in Economic Laws and later studied for MBA in Capital University of
Economics and Business. Mr. Cao has forty years of experience in the petroleum
industry since he started work in 1965. He worked for Shengli oilfield and
Dagang oilfield before he joined CNOOC in 1982. From 1985 to 1996, Mr. Cao
worked as Manager of Bohai Oil Commercial Company and later as the Manager of
Bohai Oil Transportation Company, both being the subsidiaries of CNOOC. From
1996 to 2003, he worked as Deputy General Manager and General Manager of CNOOC
Bohai Corporation successively. From April 2003 to July 2004, Mr. Cao worked as
the Assistant President of CNOOC. He became the Vice President of CNOOC in
August 2004. Mr. Cao also serves as the Chairman of the Board of Directors of
CNOOC
90
Base Group Limited, a subsidiary of CNOOC. Mr. Cao was appointed as our
Executive Director with effect from August 31, 2005.
Zhenfang Wu is a senior engineer and graduated with a bachelor's degree
from Dalian University of Technology, majoring in Offshore Petroleum Engineering
and Construction. He later studied for EMBA in Shanghai Jiao Tong University.
Mr. Wu joined the petroleum industry in 1971. He joined CNOOC in 1982. From 1993
to 1997, he was Deputy General Manager of CNOOC Nanhai West Corporation. He
became the President of CNOOC Chemical Limited in 2000. He was also the Chairman
of the Board of Directors of Fudao Fertilizer Limited and CNOOC Chemical Limited
from 2001 to 2003 and 2003 to 2005 respectively. From 2003 to 2004, Mr. Wu was
Assistant President of CNOOC. In August 2004, he became the Vice President of
CNOOC. Mr. Wu also serves as the Chairman of a number of subsidiaries of CNOOC
(including Guangdong Dapeng LNG Company Limited, CNOOC Fujian Natural Gas
Limited, CNOOC Oil & Petrochemicals Co., Ltd. and CNOOC Zhejiang Ningbo LNG Co.,
Ltd.), the Chairman and President of CNOOC Gas and Power Limited and the Vice
Chairman of Shanghai Petroleum and Natural Gas Company Limited. Mr. Wu was
appointed as our Executive Director with effect from August 31, 2005.
Guangqi Wu is a geologist and graduated with a Bachelor of Science degree
from the Ocean University of China, majoring in Marine Geology. He also holds a
master's degree in Management from the China Petroleum University. Mr. Wu joined
CNOOC in 1982. He became the Deputy General Manager of CNOOC Oil Technical
Services Company, a subsidiary of CNOOC, in 1994. Mr. Wu was appointed as
Director of the Administration Department of CNOOC in 1995 and became the
Director of the Ideology Affairs Department of CNOOC in 2001. Mr. Wu was
appointed Assistant President in 2003, and has been the Vice President of CNOOC
since 2004. Mr. Wu has also served as an Independent Non-executive Director of
China Yangtze Power Limited, a company listed on the Shanghai Stock Exchange,
since May 2003, and our Compliance Officer since June 1, 2005. Mr. Wu was
appointed as our Executive Director with effect from June 1, 2005.
Hua Yang is an engineer and graduated from Petroleum University with a
B.S. degree in Petroleum Engineering. He also received a MBA degree from the
Sloan School of Management at MIT as a Sloan Fellow. Mr. Yang joined CNOOC in
1982 and has over 23 years' experience in petroleum exploration and production.
Mr. Yang spent the first-eleven year of his career with China Offshore Oil
Research Center to serve as a number of positions including the Director of
Field Development Department, the Manager for Reservoir Engineering Department,
the Project Manager and Team Leaders. Mr. Yang spent his second-twelve year with
international business, corporate finance and capital market in our Company and
its subsidiaries. From 1993 to 1999, he served as our Deputy Chief Geologist,
our Deputy Director and our Acting Director for Overseas Development Department
and the Vice President of CNOOC International Limited, our wholly-owned
subsidiary. In 1999, he became our Senior Vice President and then became our
Executive Vice President in December 2005. From 2002 to 2003, Mr. Yang was the
Director and President of CNOOC Southeast Asia Limited, our wholly-owned
subsidiary. He was appointed as our Chief Financial Officer with effect from
January 1, 2005. He also serves as the Director of CNOOC International Limited
and CNOOC Southeast Asia Limited. Mr. Yang was appointed as our Executive
Director with effect from August 31, 2005.
Independent Non-executive Directors
Edgar W.K. Cheng was a graduate from the University of Notre Dame and the
Medical College of Wisconsin, USA. He was Clinical Associate Professor of
Medicine at Cornell University Medical College and practiced medicine and
conducted clinical research at the Memorial Sloan-Kettering Cancer Centre in New
York. Dr. Cheng was a former Chairman of the University Grants Commission in
Hong Kong, and a member of the Education Commission. Dr. Cheng has been in many
other financial market positions such as Chairman of the Stock Exchange of Hong
Kong, Vice-Chairman and non-executive director of the Hang Seng Bank Ltd., Vice
President of the International Federation of Stock Exchange, Founding Chairman
of the Hong Kong Securities Institute, Member of the Board of Directors of the
Hong Kong Futures Exchange Ltd., and Member of the Conference Board's Global
Advisory Council. He was appointed by the Chinese Government as a Hong Kong
Affairs Advisor (1991 - 1997). He became a
91
Member of the Preparatory Committee and also the Selection Committee for the
Hong Kong Special Administrative Region of the National People's Congress (1996
- 1997). Dr. Cheng served as the Head of the Central Policy Unit of the
Government of Hong Kong Special Administrative Region from 1999 - 2001. He is at
present Chairman of the Council of the Chinese University of Hong Kong, the
Chairman of the World-Wide Investment Co. Ltd. and a member of the Board of
Directors of the Hong Kong Institute for Monetary Research, non-executive
director of the Standard Chartered Bank (Hong Kong) Ltd, independent director of
Goldman Sachs Gao Hua Securities Co. Ltd, a member of The Greater Pearl River
Delta Business Council, a member of the Commission on Strategic Development as
well as the Vice-Chairman of the Council for Sustainable Development. He is also
a member of the 10th Chinese People's Political Consultative Conference National
Committee. Dr. Cheng was appointed as our Independent Non-executive Director
with effect from May 24, 2006.
Sung Hong Chiu received an LL.B. degree from the University of Sydney. He
is admitted as a solicitor of the Supreme Court of New South Wales and
the High Court of Australia. He has over thirty years' experience in legal
practice and is a director of a listed company in Australia. Mr. Chiu is
the founding member of the Board of Trustees of Australian Nursing Home
Foundation and served as the General Secretary of the Australian Chinese
Community Association of New South Wales. Mr. Chiu was appointed as our
Independent Non-executive Director with effect from September 7, 1999.
Erwin Schurtenberger is a senior advisor to the China Training Center for
Senior Personnel Management Officials. He received a Ph.D. Degree in Economics
and was trained in political science and philosophy at the University of Paris.
He was the Ambassador of Switzerland to the People's Republic of China, the
Democratic People's public of Korea and the Republic of Mongolia from 1988 to
1995. He joined the Swiss Foreign Services in 1969. Over the years, he held
various diplomatic positions in Bangkok, Hong Kong, Beijing and Tokyo. He also
served as the Ambassador of Switzerland to Iraq. He has been an independent
business advisor to various European multinationals, American groups and
humanitarian aid organizations. He was the President of the Swiss-Asia
Foundation. He serves on the boards of directors of ROBERT BOSCH RBint, BUHLER
GROUP Switzerland, FIRMENICH-China, TAIKANG Life Insurance and WINTERTHUR
Insurances (Asia). Dr. Schurtenberger resigned from our board of directors with
effect from April 1, 2005.
Kenneth S. Courtis was the Managing Director of Goldman Sachs and Vice
Chairman of Goldman Sachs Asia and retired in March 2006. He specializes in
economics and strategy throughout the Asia-Pacific region as well as in Europe
and North America. After graduating with honors from Glendon College in Toronto,
Dr. Courtis received an M.A. in international economics from Sussex University,
England, an M.B.A. in finance and strategy from the European Institute of
Business Administration and a Ph.D. from the Institute of Economic and Political
Studies in Paris. Prior to joining Goldman Sachs, he served as Chief Asia
Economist and Strategist for Deutsche Bank. Dr. Courtis was appointed as our
Independent Non-executive Director with effect from November 11, 2002 and
retired from our board of directors with effect from May 24, 2006.
Evert Henkes served as the CEO of Shell global chemical business from 1998
to 2003. Since joining Shell in 1973, he held various executive positions
worldwide, including Managing Director of Shell Chemicals UK Ltd., Managing
Director of Shell UK, President of Billiton Metals, Shell's Metals Coordinator,
Shell's Chemical Coordinator, and Director of Strategy & Business Services of
Shell International Chemicals Ltd. He also served as directors in regional and
global industrial bodies, including CEFIC and ICCA. He is also a director of
Tate & Lyle Plc, SembCorp Industries Ltd. and Outokumpu Oy. Mr. Henkes was
appointed as our Independent Non-executive Director with effect from September
16, 2003.
Lawrence J. Lau is an economist and graduated with a B.S. degree (with
Great Distinction) in Physics and Economics from Stanford University in 1964,
and received his M.A. and Ph.D. degrees in Economics from the University of
California at Berkeley in 1966 and 1969 respectively. Professor Lau joined the
faculty of the Department of Economics at Stanford University in 1966, becoming
Professor of Economics in 1976 and the first Kwoh-Ting Li Professor of Economic
Development at Stanford University in 1992. From 1992 to 1996, he served as a
Co-Director of the Asia-Pacific Research Center
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at Stanford University, and from 1997 to 1999, as the Director of the Stanford
Institute for Economic Policy Research. He was also awarded the honorary degree
of Doctor of Social Sciences by the Hong Kong University of Science and
Technology in 1999. Professor Lau has authored or edited five books and
published more than one hundred and sixty articles and notes in professional
journals. Professor Lau is an Honorary Professor of a large number of
universities and institutions in mainland China such as the Institute of Systems
Science at the Chinese Academy of Sciences, Jilin University, Nanjing
University, Renmin University of China, Shantou University, Southeast University
and the School of Economics and Management, Tsinghua University. In July 2004,
Professor Lau assumed office as Vice-Chancellor of The Chinese University of
Hong Kong. He currently provides useful public service to the local community in
his capacity as member of the Executive Committee of the HKSAR Government's
Commission on Strategic Development, the Advisory Committee of the Independent
Commission Against Corruption, and the Steering Committee on Innovation and
Technology. He also serves on the Board of Directors of the Hong Kong Science
and Technology Park Corporation as an independent non-executive director, as
well as the Far EasTone Corporation as an independent director and the Shin Kong
Financial Holdings Corporation as an independent supervisor, both listed
companies in Taiwan. Professor Lau was appointed as our Independent
Non-executive Director with effect from August 31, 2005.
Aloysius Hau Yin Tse is a fellow of The Institute of Chartered Accountants
in England and Wales, and the Hong Kong Institute of Certified Public
Accountants ("HKICPA"). Mr. Tse is a past president of the HKICPA. He joined
KPMG in 1976 and became a partner in 1984 and retired in March 2003. Mr. Tse was
a non-executive Chairman of KPMG's operations in the PRC and a member of the
KPMG China advisory board from 1997 to 2000. Mr. Tse is currently an independent
non-executive director of China Construction Bank Corporation, China Telecom
Corporation Limited, Wing Hang Bank, Limited and Linmark Group Limited,
companies listed on The Stock Exchange of Hong Kong Limited. Mr. Tse is also the
chairman of the International Advisory Council of the People's Municipal
Government of Wuhan. Mr. Tse was appointed as our Independent Non-executive
Director with effect from June 8, 2005.
Company Secretary
Victor Zhikai Gao graduated from Suzhou University in 1981 with a B.A.
degree in English Literature and from Beijing University of Foreign Studies
in 1983 with a M.A. degree in English Literature. Mr. Gao obtained a M.A.
degree in Political Science from Yale Graduate School in 1990 and a J.D.
degree from Yale Law School in 1993. Mr. Gao is a licensed attorney-at-law
in the State of New York, and was a licensed financial advisor with the
Securities and Futures Commission of Hong Kong from 1994 to 1999. Mr. Gao's
extensive previous working experiences included services with the Chinese
Ministry of Foreign Affairs in Beijing, the United Nations Secretariat in
New York City, Milbank Tweed Hadley & McCloy in New York City, Morgan
Stanley in Hong Kong, China International Capital Corporation in Beijing and
Hong Kong, PCCW and Henderson (China) Investment Co., Ltd. Mr. Gao was the
China Policy Advisor with the Securities and Futures Commission of Hong Kong
between 1999 and 2000. Mr. Gao was appointed as our Senior Vice President,
General Counsel and Company Secretary with effect from April 18, 2006.
Other Members of Senior Management
Jian Liu Born in 1958, Mr. Liu is the Executive Vice President of the
Company. He graduated from Huazhong University of Science and Technology with a
B.S. degree and received his MBA degree from Tianjin University in 2000. He is
responsible for the management of oil/gas field development and production. Mr.
Liu joined CNOOC in 1982. He served as the manager of CNOOC Bohai Corporation,
the Deputy General Manager of the Tianjin Branch, the General Manager of the
Zhanjiang Branch, the Senior Vice President and General Manager of the
Department of Development and Production at CNOOC.
Wei Chen Born in 1958, Mr. Chen is a Senior Vice President of the Company
and General Director of the CNOOC China Limited Research Center. He received his
B.S. degree from Petroleum
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University and holds an MBA degree from Tsinghua University. He has over 23
years of experience in petroleum exploration and production. Mr. Chen joined
CNOOC in 1984 and previously served as the Deputy Manager for the Exploration
and Development Department of CNOOC Research Center, the Deputy Manager of the
Overseas Research Department, the Manager of the Information Department, the
Deputy Director of CNOOC Research Center and the General Manager of the Human
Resources Department of CNOOC, and the Senior Deputy General Manager & General
Manager of our Administration Department of CNOOC Limited.
Guohua Zhang Born in 1960, Mr. Zhang is a Senior Vice President of the
company and General Manager of CNOOC China limited-Shanghai. He graduated from
Qingdao Oceanographic Institute with a B.S. degree. He studied in the Business
Institute of University of Alberta in Canada in 2001. He joined CNOOC in 1982
and served as Manager of the Exploration Department of China Offshore Oil Naihai
West Corporation, Chief Geologist of CNOOC Research Center, Assistant to General
Manager of CNOOC China Limited and General Manager of CNOOC limited Exploration
Department.
Ning Li Born in 1963, Mr. Li is a Senior Vice President of the Company and
General Manager of CNOOC Limited Shenzhen Branch. He received his B.S. degree
from Petroleum University of China and holds a MBA degree from Tianjin
University. Mr. Li joined CNOOC in 1983 and served as Vice President of Design &
Engineering Corporation of CNOOC, Vice General Manager of Engineering Department
of CNOOC, General Manager of DongFang 1-1 project, Vice General Manager of CNOOC
Limited Zhanjiang Branch and General Manager of Engineering Department. Mr. Li
was appointed as Senior Vice President of CNOOC Limited in 2003.
Bi Chen Born in 1961, Mr. Chen is a Vice President of CNOOC Limited and
General Manager of CNOOC China Limited-Tianjin. He graduated from the
Development Department of Southwest Petroleum Institute, and acquired the
Bachelor of Engineering. He received a Master's degree in Petroleum Engineering
Department of Edinburgh Heriot-Watt University in 1988. He has received a degree
of Master of Business Administration from Tsinghua University in 2000. Mr. Chen
joined CNOOC in 1982. He served as the Deputy Manager of CNOOC Nanhai West
Corporation Oil Production Company, Director of Production Section of the
Development and Production Department of CNOOC Limited Deputy Manager and then
General Manager of Development and Production Department of CNOOC Limited.
Weilin Zhu Born in 1956, Mr. Zhu is a Vice President and General Manager
of Exploration Department. He graduated from Tongji University with a Ph.D
degree. Mr. Zhu joined CNOOC in 1982. He served as the General Geologist of
CNOOC Research Center, the Deputy Manager and Chief Manager of Exploration
Department of CNOOC Limited, and the General Manager of the Zhanjiang Branch.
Mingcai Zhu Born in 1956, Mr. Zhu is a Vice President of CNOOC Limited and
General Manager of CNOOC International Limited. He graduated from South West
Petroleum Institute with B.S. degree and received a MBA degree from the
Management School of Lancaster University in UK. Mr. Zhu joined CNOOC in 1985.
He served as the Vice President of CNOOC Bohai Corporation, the General Manager
of Tianjin Branch and the President of Shenzhen Branch.
Zhi Fang Born in 1962, Mr. Fang is a Vice President of CNOOC Limited and
the President of CNOOC Southeast Asia Ltd. and is responsible for the company's
businesses in Indonesia. He graduated from Zhejiang University with a B.S.
degree and was conferred a MBA degree by the University of Birmingham in 1995.
Mr. Fang joined CNOOC in 1982. He served as Deputy Director of the Research
Center and Manager of Exploration and Development Department in China National
Offshore Oil Nanhai East Corporation, Deputy General Manager of CNOOC-AMOCO
Liuhua Joint Operating Group, Deputy General Manager and General Manager of
CNOOC China Limited Shenzhen Branch during his career in the domestic
operations.
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B. COMPENSATION OF DIRECTORS AND OFFICERS
Each of the executive directors entered into a service contract with a 12
month term and on a 12 month rolling basis as determined by our board of
directors or our shareholders. Particulars of these contracts are in all
material respects identical except as indicated below:
o the annual salaries for Mr. Chengyu Fu and Mr. Shouwei Zhou during
the initial three years are HK$1,880,000 and HK$1,680,000,
respectively;
o the chairman of our board of director and each other director (other
than independent non-executive directors) shall be entitled to a
maximum annual paid leave of 30 working days and 25 working days,
respectively;
o each of the directors (other than independent non-executive
directors) is entitled to the use of an apartment as his residence
and the use of a car provided free of charge by us together with
certain other benefits and reimbursements;
o the annual salary for each of the other directors (other than
independent non-executive directors) during the initial three years
is HK$388,000; and
o we may, at our sole discretion, pay director (other than independent
non-executive directors) a bonus in such amount as the board of
directors may determine in respect of each completed financial year.
The salaries for Mr. Chengyu Fu and Mr. Shouwei Zhou were HK$3,952,381 and
HK$3,095,238, respectively, for 2005. The aggregate amounts of salaries, housing
allowances, other allowances and benefits in kind paid to our directors (other
than independent non-executive directors) during the years ended December 31,
2003, 2004 and 2005 were approximately Rmb 10.7 million, Rmb 7.8 million and Rmb
20.3 million (US$2.5 million), respectively, while the amounts paid to our
executive officers for the same periods were approximately Rmb 11.0 million, Rmb
12.6 million and Rmb 14.0 million (US$1.7 million), respectively. Under our
pension plan for 2005, we set aside an aggregate amount of Rmb 104,000
(US$12,886.9) for pension and similar benefits in kind for our directors (other
than independent non-executive directors) and our executive officers. Our
directors (other than independent non-executive directors) and executive
officers contributed an additional Rmb 104,000 (US$12,886.9) to the pension plan
for 2005. Each director's annual compensation, including salary, allowances,
pension and benefits in kind, is disclosed in Note 11 to our consolidated
financial statements under Item 18 in this annual report. For further details
regarding employee compensation, see "Item 4--Information on the
Company--Business Overview--Employees and Employee Benefits." For further
details regarding share options granted to our directors, officers and
employees, see "--Share Ownership" below.
C. BOARD PRACTICE
Audit and Other Committees
We have established an audit committee, a remuneration committee and a
nomination committee. Our audit committee meets at least twice a year and is
responsible for reviewing the completeness, accuracy and fairness of our
accounts, evaluating our auditing scope and procedures, and evaluating internal
control systems. The committee is also responsible for setting up internal
monitoring systems so as to allow our board of directors to monitor our
financial position, protect our assets, and prevent major errors resulting from
financial reporting or loss. Our board of directors is responsible for these
systems and appropriate delegations and guidance have been made. The audit
committee regularly reports to the board of directors. Since May 25, 2006, our
audit committee consists of Mr. Aloysius Hau Yin Tse, Mr. Sung Hong Chiu and
Professor Lawrence J. Lau.
The primary responsibilities of our remuneration committee are to review
information in respect of our executives' remuneration, share option schemes,
performance appraisal systems and retirement plans. Since May 25, 2006, our
remuneration committee consists of Mr. Sung Hong Chiu, Mr. Evert Henkes, Mr.
Aloysius Hau Yin Tse and Mr. Xinghe Cao.
95
The primary responsibilities of our nomination committee include
nominating candidates for directors subject to our board of directors' approval,
conducting routine examination of the structure, scale and composition of our
board of directors, and review the leadership capabilities of our directors in
order to ensure that we remain competitive. Since May 25, 2006, our nomination
committee consists of Mr. Han Luo, Dr. Edgar W.K. Cheng and Professor Lawrence
J. Lau.
For information on our audit committee finance expert and our code of
ethics, see "Item 16A--Audit Committee Finance Expert," and "Item 16B--Code of
Ethics."
International Advisory Board
On October 29, 2001, we announced the establishment of an International
Advisory Board with globally well-respected political figures and corporate
leaders as members. The purpose of the International Advisory Board is to
provide the management with strategic advice on world events and macro issues
that may impact our development. Chengyu Fu, Chairman of our board of director,
is the Chairman of the International Advisory Board.
96
Set forth below is information on the current members of our International
Advisory Board.
Name Biographical Information
------------------- ---------------------------------------------------------
Chengyu Fu See "--A. Directors and Senior Management--Directors"
Erwin Schurtenberger The Ambassador of Switzerland to the People's Republic of
China, the Democratic People's Republic of Korea and the
Republic of Mongolia from 1988 to 1995. He joined the
Swiss Foreign Services in 1969. Over the years, he held
various diplomatic positions in Bangkok, Hong Kong,
Beijing and Tokyo. He also served as the Ambassador of
Switzerland to Iraq. He has been an independent business
advisor to various European multinationals, American
groups and humanitarian aid organizations. He was the
President of the Swiss-Asia Foundation. He serves on the
Boards of ROBERT BOSCH RBint and its International
Advisory Board, BUHLER GROUP Switzerland, FIRMENICH-China,
TAIKANG Life Insurance, WINTERTHUR Insurances (Asia). Dr.
Schurtenberger is also a senior advisor to the China
Training Center for Senior Personnel Management Officials.
He is a graduate in both political science and philosophy
of the University of Paris and received a Ph.D. Degree in
Economics. Dr Schurtenberger was a director on our board
of directors from November 11, 2002 to April 1, 2005.
Simon Murray Chairman of General Enterprise Management Services Limited
(GEMS), a private equity fund management company owned by
Simon Murray & Associates Limited. Formerly, the Executive
Chairman of Asia Pacific for the Deutsche Bank Group, and
the Group Managing Director of Hutchison Whampoa Ltd. He
is currently a Director of a number of companies that
include Hutchison Whampoa, Cheung Kong Holdings, Orient
Overseas (International) Limited, Compagnie Financiere
Richemont SA and Sino-Forest Corporation.
Edward S. Steinfeld Assistant professor at the MIT Sloan School of Management.
He received both his undergraduate and doctoral training
at Harvard University. As a China specialist, he has
conducted extensive firm-level research in China.
Charles Freeman Became Chairman of Projects International, Inc. in 1995,
after an extensive career in the U.S. Government spanning
three decades and numerous senior positions, including
U.S. Ambassador to Saudi Arabia and Assistant Secretary of
Defense for International Security Affairs. He is
currently president of the Middle East Policy Council,
co-chair of the U.S. China Policy Foundation, vice-chair
of the Atlantic Council, and a trustee of the Institute
for Defense Analyses, among other positions. Ambassador
Freeman attended the National Autonomous University of
Mexico and received his A.B. from Yale University as well
as a J.D. from the Harvard Law School. He is the author of
two widely circulated books on statecraft and diplomacy:
The Diplomat's Dictionary and Arts of Power.
Summary of Significant Differences in Corporate Governance Practices for
Purposes of Section 303A.11 of the New York Stock Exchange Listed Company
Manual
We are incorporated under the laws of Hong Kong. The principal trading
market for our shares is the Hong Kong Stock Exchange. In addition, because our
ordinary shares are registered with the United States Securities and Exchange
Commission and are listed on the New York Stock Exchange (the "NYSE"), we are
subject to certain corporate governance requirements. However, many of the
corporate governance rules in the NYSE Listed Company Manual (the "NYSE
Standards") do not apply to us as a "foreign private issuer" and we are
permitted to follow the corporate governance practices in Hong Kong in lieu of
most corporate governance standards contained in the NYSE Standards. Section
303A.11 of the NYSE Standards requires NYSE-listed foreign private issuers to
describe the significant differences between their corporate governance
practices and the corporate governance standards applicable to U.S.
97
domestic companies listed on the NYSE ("U.S. domestic issuers"). We set forth
below a brief summary of such significant differences.
1. Board and Committee Independence
While NYSE Standards require U.S. domestic issuers to have a majority of
independent directors, we are not subject to this requirement. Five of our
twelve directors are independent non-executive directors.
NYSE Standards require U.S. domestic issuers to schedule an executive
session at least once a year to be attended by only independent directors. We
are not subject to such requirement and our independent directors attend all
board meetings where possible.
NYSE Standards require U.S. domestic issuers to disclose a method for
interested parties to communicate directly with the presiding director or with
non-management directors as a group. We are not subject to such requirement and
we have not adopted such a method yet.
2. Audit Committee
If an audit committee member simultaneously serves on the audit committees
of more than three public companies, and the listed company does not limit the
number of audit committees on which its audit committee members serve to three
or less, then in each case, the boards of directors of U.S. domestic issuers are
required to determine that such simultaneous service would not impair the
ability of such member to effectively serve on its audit committee and disclose
such determination in its annual proxy statement or annual report. We are not
subject to such requirement and we have not addressed this in our audit
committee charter.
NYSE Standards require audit committees of U.S. domestic issuers to
discuss guidelines and policies that govern the process by which risk assessment
and risk management are handled and include such responsibilities in their audit
committee charters. We are not subject to such requirement and our audit
committee charter does not have such provision. Our audit committee charter only
provides that our audit committee shall review with our auditors and the
Director of Internal Audit the scope, adequacy and effectiveness of our
corporate accounting and financial controls, and any related significant
findings regarding risks or exposures and consider recommendations for
improvement of such controls according to the Hong Kong Stock Exchange Listing
Rules.
3. Remuneration Committee
NYSE Standards require U.S. domestic issuers to have a compensation
committee composed entirely of independent directors. We are not subject to such
requirement and have a remuneration committee that consists of three independent
non-executive directors and one executive director.
NYSE Standards require U.S. domestic issuers to address in their
remuneration committee charters matters regarding committee member removal and
committee structure and operations (including authority to delegate to
subcommittees). We are not subject to such requirement and we have not addressed
this in our remuneration committee charter.
NYSE Standards require remuneration committees of U.S. domestic issuers to
produce a remuneration committee report annually and include such report in
their annual proxy statements or annual reports on Form 10-K. We are not subject
to such requirement and we have not addressed this in our remuneration committee
charter. We disclose the amounts of compensation of our directors on a named
basis and the five highest paid employees in our annual reports according to the
requirements of Hong Kong Stock Exchange Listing Rules.
4. Nomination Committee
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While NYSE Standards require U.S. domestic issuers to have only
independent directors on their nomination committee, we are not subject to such
requirement and our nomination committee consists of two independent
non-executive directors and one executive director.
NYSE Standards require U.S. domestic issuers to address in their
nomination committee charters matters regarding committee member removal and
committee structure and operations (including authority to delegate to
subcommittees). We are not subject to such requirement and we have not addressed
this in our nomination committee charter.
NYSE Standards require U.S. domestic issuers to adopt and disclose
corporate governance guidelines. They must state in their annual proxy
statements or annual reports that such corporate governance guidelines are
available on their website and in print form to any shareholder who requests it.
We are not subject to such requirement. We have adopted a set of corporate
governance guidelines in accordance with the Hong Kong Stock Exchange Listing
Rules, including a code of ethics, to govern various aspects of our corporate
governance. We have posted the code of ethics on our website.
D. EMPLOYEES
See "Item 4--Information on the Company--Business Overview--Employees and
Employee Benefits."
E. SHARE OWNERSHIP
We have adopted the following share option schemes for the grant of
options to our directors, senior management and other eligible grantees:
1. Pre-Global Offering Share Option Scheme (as defined below);
2. 2001 Share Option Scheme (as defined below);
3. 2002 Share Option Scheme (as defined below); and
4. 2005 Share Option Scheme (as defined below).
Under these share option schemes, the remuneration committee of our board
of directors had, and will, from time to time propose for our board's approval
for the recipient of and the number of shares underlying each option. The
maximum aggregate number of shares (including those that could be substituted
for under the Pre-Global Offering Share Option Scheme, the 2001 Share Option
Scheme, the 2002 Share Option Scheme and the 2005 Share Option Scheme) which may
be granted shall not exceed 10% of our total issued share capital as of December
31, 2005, being the date on which our shareholders approved the 2005 Share
Option Scheme, excluding shares issued upon exercise of options granted under
these schemes from time to time.
Pre-Global Offering Share Option Scheme
On February 4, 2001, we adopted a pre-global offering share option scheme
or the Pre-Global Offering Share Option Scheme. Pursuant to the Pre-Global
Offering Share Option Scheme:
1. options for an aggregate of 23,100,000 shares have been granted;
2. the subscription price per share is HK$1.19; and
3. the period during which an option may be exercised is as follows:
(a) 50% of the rights to exercise the options shall vest 18 months
after the date of the grant; and
(b) 50% of the rights to exercise the options shall vest 30 months
after the date of the grant.
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The exercise periods for options granted under the Pre-Global Offering
Share Option Scheme shall end not later than 10 years from March 12, 2001. No
further options may be granted under the Pre-Global Offering Share Option
Scheme.
2001 Share Option Scheme
On February 4, 2001, we adopted a share option scheme, or the 2001 Share
Option Scheme for the purposes of recognizing the contribution that certain
individuals had made to our company and attracting and retaining the best
available personnel to our company. Pursuant to the 2001 Share Option Scheme:
1. options for an aggregate of 44,100,000 shares have been granted;
2. the subscription price per share is HK$1.232; and
3. the period during which an option may be exercised is as follows:
(a) one-third of the rights to exercise the options shall vest on
the first anniversary of the date of the grant;
(b) one-third of the rights to exercise the options shall vest on
the second anniversary of the date of the grant; and
(c) one-third of the rights to exercise the options shall vest on
the third anniversary of the date of the grant.
The exercise periods for options granted under the 2001 Share Option
Scheme shall end not later than 10 years from August 27, 2001.
In view of the amendments to the relevant provisions of Hong Kong Stock
Exchange Listing Rules regarding the requirements of share option schemes of a
Hong Kong listed company effective on September 1, 2001, no further options will
be granted under the 2001 Share Option Scheme.
2002 Share Option Scheme
In June 2002, we adopted a new share option scheme, or the 2002 Share
Option Scheme. Under the 2002 Share Option Scheme, our directors may, at their
discretion, invite employees, including executive directors, of our company or
any of our subsidiaries, to take up options to subscribe for our shares. The
maximum number of shares which may be granted under the 2002 Share Option Scheme
to any individual in any 12-month period up to the next grant shall not exceed
1% of our total issued share capital from time to time.
According to the 2002 Share Option Scheme, the consideration payable by a
grantee for the grant of an option will be HK$1.00. The subscription price of a
share payable by a grantee upon the exercise of an option is determined by our
directors at their discretion at the date of grant, except that such price may
not be set below a minimum price which is the highest of:
1. the nominal value of our share on the date of the grant of the
option;
2. the average closing price of the shares on the HKSE as stated in the
HKSE's quotation sheets for the five trading days immediately
preceding the date of grant of the option; and
3. the closing price of the shares on the HKSE as stated in the HKSE's
quotation sheets on the date of grant of the option.
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On February 24, 2003, our board of directors approved to grant options in
respect of 42,050,000 shares to our directors and senior management under the
2002 Share Option Scheme. The exercise price for such options is HK$2.108 per
share. The closing market price immediately before the date on which such
options were granted was HK$2.11 per share. Such options granted under the 2002
Share Option Scheme may be exercised, in whole or in part, in accordance with
the following vesting schedule:
1. one-third of the rights to exercise the options shall vest on the
first anniversary of the date of the grant;
2. one-third of the rights to exercise the options shall vest on the
second anniversary of the date of the grant; and
3. one-third of the rights to exercise the options shall vest on the
third anniversary of the date of the grant.
The exercise periods for the above options granted under the 2002 Share
Option Scheme shall end not later than 10 years from February 24, 2003.
On February 5, 2004, our board of directors approved a grant of options
in respect of 50,700,000 shares to our directors and senior management under the
2002 Share Option Scheme. The exercise price for such options is HK$3.152 per
share. The closing market price immediately before the date on which such
options were granted was HK$3.146 per share. Such options granted under the 2002
Share Option Scheme may be exercised, in whole or in part, in accordance with
the following vesting schedule:
1. one-third of the rights to exercise the options shall vest on the
first anniversary of the date of the grant;
2. one-third of the rights to exercise the options shall vest on the
second anniversary of the date of the grant; and
3. one-third of the rights to exercise the options shall vest on the
third anniversary of the date of the grant.
The exercise periods for the above options granted under the 2002 Share
Option Scheme shall end not later than 10 years from February 5, 2004.
On August 31, 2005, our board of directors approved a grant of options in
respect of 65,870,000 shares to our directors and senior management under the
2002 Share Option Scheme. The exercise price of such options is HK$5.62 per
share. The closing market price immediately before the date on which such
options were granted was HK$5.75 per share. Such options granted under the 2002
Share Option Scheme may be exercised, in whole or in part, in accordance with
the following vesting schedule:
1. one-third of the rights to exercise the options shall vest on the
first anniversary of the date of the grant;
2. one-third of the rights to exercise the options shall vest on the
second anniversary of the date of the grant; and
3. one-third of the rights to exercise the options shall vest on the
third anniversary of the date of the grant.
The exercise periods for the above options granted under the 2002 Share
Option Scheme shall end not later than 10 years from August 31, 2005.
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2005 Share Option Scheme
We had undertaken a review of the 2002 Share Option Scheme in 2005 and
noted that certain provisions could be clarified and improved. Accordingly, our
board had proposed, and on December 31, 2005, we adopted a new share option
scheme, or the 2005 Share Option Scheme and terminated the 2002 Share Option
Scheme. Upon termination of the 2002 Share Option Scheme, no further options may
be granted under the 2002 Share Option Scheme, but in all other respects the
provisions of the 2002 Share Option Scheme shall remain in force. The
outstanding options under the 2002 Share Option Scheme shall continue to be
subject to the provisions of the 2002 Share Option Scheme, and the adoption of
the 2005 Share Option Scheme will not in any way affect the terms of the
exercise of such outstanding options.
Under the 2005 Share Option Scheme, our board will have the authority to
grant options to subscribe for shares to our directors, officers and employees
and or of our subsidiaries, and any other persons who in sole discretion of our
board have contributed or will contribute to our group. Unless approved by our
shareholders, the total number of shares issued and to be issued upon exercise
of the options granted to each individual (including exercised and unexercised
options) under the 2005 Share Option Scheme or any other share option scheme
adopted by us, in any 12 months period, must not exceed 1% of the shares in
issue.
According to the 2005 Share Option Scheme, the consideration payable by a
grantee for the grant of an option will be HK$1.00. The subscription price of a
share payable by a grantee upon the exercise of an option will be determined by
our directors at their discretion at the date of the grant, except that such
price may not be set below a minimum price which is the highest of:
1. the nominal value of our share on the date of the grant of the
option;
2. the average closing price of the shares on the HKSE as stated in the
HKSE's quotation sheets for the five trading days immediately
preceding the date of the grant of the option; and
3. the closing price of the shares on the HKSE as stated in the HKSE's
quotation sheet on the date of the grant of the option.
The period within which the options must be exercised, as well as any
minimum holding period or performance targets which apply to the options, will
be specified by our board at the time of grant. The exercise periods for options
granted under the 2005 Share Option Scheme shall end not later than 10 years
from the date of the grant of the option. During the year, no options have been
granted or exercised under the 2005 Share Option Scheme.
As of December 31, 2005, our directors and employees had the following
personal interests in options to subscribe for shares granted under our share
option schemes:
Number of shares involved in
the options outstanding as of
------------------------------- -------------------------------------
Closing
price per
share
immediately
before the Exercise
December 31, date of Price
Name of Grantee January 1, 2005 2005 Date of Grant Date of Expiration*** grant (HK$)** (HK$)
--------------- --------------- ------------ ----------------- --------------------- ------------- --------
Directors:
Chengyu Fu 1,750,000 1,750,000 March 12, 2001 March 12, 2011 1.23 1.19
1,750,000 1,750,000 August 27, 2001 August 27, 2011 1.46 1.232
1,150,000 1,150,000 February 24, 2003 February 24, 2013 2.09 2.108
2,500,000 2,500,000 February 5, 2004 February 5, 2014 3.13 3.152
102
- 3,500,000 August 31, 2005 August 31, 2015 5.75 5.62
Han Luo 1,400,000 1,400,000 March 12, 2001 March 12, 2011 1.23 1.19
1,150,000 1,150,000 August 27, 2001 August 27, 2011 1.46 1.232
1,150,000 1,150,000 February 24, 2003 February 24, 2013 2.09 2.108
1,150,000 1,150,000 February 5, 2004 February 5, 2014 3.13 3.152
- 1,610,000 August 31, 2005 August 31, 2015 5.75 5.62
Longsheng Jiang* 1,400,000 1,400,000 March 12, 2001 March 12, 2011 1.23 1.19
1,150,000 1,150,000 August 27, 2001 August 27, 2011 1.46 1.232
1,150,000 766,700 February 24, 2003 February 24, 2013 2.09 2.108
1,150,000 383,300 February 5, 2004 February 5, 2014 3.13 3.152
Shouwei Zhou 1,400,000 1,400,000 March 12, 2001 March 12, 2011 1.23 1.19
1,750,000 1,750,000 August 27, 2001 August 27, 2011 1.46 1.232
1,750,000 1,750,000 February 24, 2003 February 24, 2013 2.09 2.108
1,750,000 1,750,000 February 5, 2004 February 5, 2014 3.13 3.152
- 2,450,000 August 31, 2005 August 31, 2015 5.75 5.62
Xinghe Cao - 800,000 August 31, 2005 August 31, 2015 5.75 5.62
Zhenfang Wu - 800,000 August 31, 2005 August 31, 2015 5.75 5.62
Guangqi Wu - 1,610,000 August 31, 2005 August 31, 2015 5.75 5.62
Hua Yang 1,150,000 1,150,000 March 12, 2001 March 12, 2011 1.23 1.19
1,150,000 1,150,000 August 27, 2001 August 27, 2011 1.46 1.232
1,150,000 1,150,000 February 24, 2003 February 24, 2013 2.09 2.108
1,150,000 1,150,000 February 5, 2004 February 5, 2014 3.13 3.152
- 1,610,000 August 31, 2005 August 31, 2015 5.75 5.62
Sung Hong Chiu 1,150,000 1,150,000 February 5, 2004 February 5, 2014 3.13 3.152
Evert Henkes 1,150,000 1,150,000 February 5, 2004 February 5, 2014 3.13 3.152
Erwin 1,150,000 0 February 5, 2004 February 5, 2014 3.13 3.152
Schurtenberger*
Kenneth S Courtis 1,150,000 1,150,000 February 5, 2004 February 5, 2014 3.13 3.152
Employees:
Other Employees 6,550,000 4,850,000 March 12, 2001 March 12, 2011 1.23 1.19
22,650,000 19,150,000 August 27, 2001 August 27, 2011 1.46 1.232
26,500,000 21,999,900 February 24, 2003 February 24, 2013 2.09 2.108
35,850,000 30,783,400 February 5, 2004 February 5, 2014 3.13 3.152
- 49,500,000 August 31, 2005 August 31, 2015 5.75 5.62
---------------------
* Mr. Longsheng Jiang retired as our Executive Director with effect from
June 1, 2005 and Dr. Erwin Schurtenberger resigned as our Independent
Non-executive Director with effect from April 1, 2005.
** Adjustment has been made to take account of the subdivision of issued and
unissued shares of HK$0.10 each into five shares of HK$0.02 each effective
on March 17, 2004.
*** The share options are only exercisable by the grantees upon the vesting of
such share options.
As of June 6, 2006, 2,300,100 options granted under our share option
schemes have been exercised. The weighted average closing price of our shares on
the day immediately preceding the exercise of the options was HK$4.04.
On April 1, 2005, Dr. Erwin Schurtenberger resigned from our board. He
also surrendered the share options we granted to him upon resignation.
The share options exercised during the year ended December 31, 2005
resulted in the issue of 2,300,100 ordinary shares and new share capital of Rmb
49,000 and share premium of Rmb 4,451,000. No share options had been cancelled
during the year ended December 31, 2005.
As of December 31, 2005, we had 169,063,300 share options outstanding
under these share option schemes which represented approximately 0.4% of our
shares in issues as of that date.
For further details about our share option schemes, see notes 11 and 29 to
our consolidated financial statements attached to this annual report.
103
As of June 6, 2006, none of our directors and employees owned 1% or more
of our shares including the shares underlying the stock options granted as of
that date.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth information regarding the ownership of our
outstanding shares by major shareholders as of June 6, 2006.
Shareholder Number of Shares Owned Percentage
--------------------------- ------------------------ ------------
CNOOC(1).................. 28,772,727,273 66.41%
------------------------
(1) CNOOC owns our shares indirectly through its wholly owned subsidiaries,
CNOOC (BVI) Limited and Overseas Oil & Gas Corporation, Ltd.
As of June 6, 2006, CNOOC's interest in our company was reduced from
approximately 70.64% to approximately 66.41% as a result of placing
2,500,000,000 existing shares to independent investors and subscribing
2,272,727,273 new shares by CNOOC (BVI) Limited.
Our major shareholder listed above does not have different voting rights.
Except as set forth in the above table, we are not aware of any holders of more
than 5% of our shares. Except as disclosed above, we are not aware of any
significant changes in the percentage ownership of our major shareholder over
the course of the past three years. To our knowledge, no arrangements are
currently in place that could lead to a change of control of our company.
As of June 6, 2006, 8,661,634 American depositary shares were outstanding
in the United States, representing approximately 2% of our then outstanding
shares. At such date, the number of registered American depositary share holders
in the United States was 24.
B. RELATED PARTY TRANSACTIONS
Overview
We regularly enter into transactions with related parties, including
CNOOC, its subsidiaries and associates, as defined under the Hong Kong Stock
Exchange Listing Rules. Since CNOOC indirectly owns an aggregate of
approximately 66.41% of our issued share capital, some of these transactions
constitute connected transactions under the Rules Governing the Listing of
Securities on The Stock Exchange of Hong Kong Limited, or the Hong Kong Stock
Exchange Listing Rules, and are regulated by the Hong Kong Stock Exchange.
Under the Hong Kong Stock Exchange Listing Rules, many of these connected
transactions normally would require full disclosure and the prior approval of
our independent shareholders. However, since the connected transactions are
carried out in the ordinary and usual course of business and occur on a regular
basis on normal commercial terms and on terms that are fair and reasonable as
far as our shareholders are concerned, the Hong Kong Stock Exchange has granted
us a waiver from strict compliance with requirements of the Hong Kong Stock
Exchange Listing Rules for the period from January 1, 2003 to December 31, 2005,
and we have also obtained independent shareholders' approval at our
extraordinary general meeting on December 31, 2005 for the continuing connected
transactions for the period from January 1, 2006 to December 31, 2007. The
continuing connected transactions are newly categorized into different
categories, and each category of connected transactions are subject to annual
caps and other conditions as specified below.
We originally obtained a waiver from the Hong Kong Stock Exchange on April
3, 2001, shortly after our shares were listed on the Hong Kong Stock Exchange.
This waiver expired on December 31, 2002, and we renewed the waiver with the
Hong Kong Stock Exchange on January 7, 2003. The renewed
104
waiver covers the period from January 1, 2003 to December 31, 2005. Following
the amendments to the Hong Kong Stock Exchange Listing Rules in March 2004,
waivers for connected transactions from the Hong Kong Stock Exchange are no
longer required, and we are only required to obtain independent shareholders'
approval for continuing connected transactions. Accordingly, we obtained
independent shareholders' approval for our continuing connected transactions
with CNOOC, its subsidiaries and associates for the period from January 1, 2006
to December 31, 2007 using a new categorization.
Existing Categories of Connected Transactions
Our ongoing connected transactions in respect of which we were granted a
waiver for the period from January 1, 2003 to December 31, 2005 consist of the
following eight categories:
o Contracts with foreign petroleum companies;
o Trademark license agreements;
o Lease agreement in respect of the Nanshan terminal;
o Provision of materials, utilities and ancillary services;
o Technical services;
o Research and development services;
o Lease and property management services; and
o Sales of crude oil, condensate oil and liquefied petroleum gas.
Contracts with foreign petroleum companies. In preparation for our initial
public offering, CNOOC transferred to us all of its rights and obligations under
all existing and any future production sharing contracts with various
international oil and gas companies. As required by PRC law, CNOOC retained
certain administrative functions and will remain a party to the production
sharing contracts. PRC law requires CNOOC, which is a State-owned entity, to
negotiate and conclude an initial production sharing contract with a foreign
partner offshore China. New production sharing contracts continue to be entered
into between CNOOC and foreign partners, primarily through bidding organized by
CNOOC and, to a lesser extent, through direct negotiation.
Trademark license agreements. CNOOC has licensed to us two "CNOOC"
trademarks under non-exclusive license agreements that will expire on September
8, 2008. We paid a nominal amount of Rmb 1,000 for each of the trademarks. The
registrations for the two trademarks will expire on December 6, 2008 and April
20, 2009, respectively. CNOOC has undertaken that so long as it is our
controlling shareholder, it will renew the trademark registrations to enable us
to continue using them without any additional consideration.
Lease agreement in respect of the Nanshan Terminal. Under an agreement
dated September 9, 1999, CNOOC has granted us the right to use the Nanshan
Terminal, Yacheng 13-1, free-of-charge for a period of 20 years. We use the
property to process natural gas.
Provision of materials, utilities and ancillary services. Various
affiliates of CNOOC provide us with the use of certain facilities and ancillary
services and products, including:
o materials for offshore oil and gas production (including cement,
diesel oil, mud, fuels, barite and paint);
o oil and gas production labor services;
o warehousing and storage;
105
o road transportation services;
o telecommunication and network services;
o wharf services;
o construction services, including the construction of roads, piers,
buildings, plants and embankment;
o major equipment maintenance and repair works;
o medical, child care and social welfare services;
o water, electricity and heat supply;
o security and fire services; technical training; accommodation;
o repair and maintenance of buildings; and
o catering services.
Under agreements between these affiliates of CNOOC and us, the facilities
and ancillary products and services are to be provided at:
(i) state-prescribed prices; or
(ii) where there is no state-prescribed price, market prices, including
the local or national market prices or the prices at which CNOOC's
affiliates previously provided the relevant materials, utilities and
ancillary services to independent third parties; or
(iii) when neither (i) nor (ii) is applicable, the cost to CNOOC's
associates of providing the relevant materials, utilities and
ancillary services, including the cost of sourcing or purchasing
from third parties, plus a margin of not more than 5%, before any
applicable taxes.
The prices, volumes and other terms of the agreements are reviewed by the
parties annually. If any of the terms are amended, the parties must enter into a
supplemental agreement no later than 60 days prior to the end of the financial
year preceding the financial year in which the amendment takes effect. If the
parties fail to reach an agreement by then, the existing terms of the supply
agreement will continue to apply until the parties agree on the terms of the
supplemental agreement. We have undertaken to the Hong Kong Stock Exchange that
we will comply with the provisions of the Hong Kong Stock Exchange Listing Rules
with respect to any supplemental agreements.
For the years ended December 31, 2003, 2004 and 2005, the amounts we paid
to affiliates of CNOOC for these services were approximately Rmb 1,018 million,
Rmb 1,296 million and Rmb 2,996 million, respectively, representing 2.5%, 2.3%
and 4.3%, respectively, of our total revenues in that year.
Technical services. Various affiliates of CNOOC, including China Oilfield
Services Limited and Offshore Oil Engineering Company Limited, provide us with
technical services for our offshore oil and gas production activities,
including:
o offshore drilling;
o ship tugging, oil tanker transportation and security services;
o well surveys, well logging, well cementing and other related
technical services;
106
o collection of geophysical data, ocean geological prospecting, and
data processing;
o platform fabrication service and maintenance; and
o design, construction, installation and test of offshore and
onshore production facilities.
For the years ended December 31, 2003, 2004 and 2005, the amounts we paid
to affiliates of CNOOC for these services totaled approximately Rmb 3,828
million, Rmb 6,362 million and Rmb 6,651 million, respectively, representing
9.3%, 11.5% and 9.6%, respectively, of our total revenue in that year. We
generally conduct an open bidding process to select these services providers and
the charges for these services are based on arm's-length negotiations between
the parties and reflect considerations such as volume of sales, length of
contracts, overall customer relationship and other market factors.
Research and development services. Various affiliates of CNOOC, including
China Offshore Oil Research Center, have been providing us with research and
development services, including:
o geophysical exploration services;
o seismic data processing;
o comprehensive exploration research services; and
o information technology services.
In July 2003, we established our own research center department, CNOOC
China Limited Research Center, to undertake most of our research and development
activities. In March 2006, we established CNOOC China Limited Beijing Research
Center as a branch.
During the years ended December 31, 2003, 2004 and 2005, we paid
approximately Rmb 56 million, Rmb 8 million and Rmb 8 million, respectively, to
China Offshore Oil Research Center for its provision of general research and
development services. We occasionally also hired research institutes, including
China Offshore Oil Research Center, through an open bidding process for specific
research and development projects.
Lease and property management services. We have entered into lease and
property management agreements with CNOOC and its affiliates for premises
located in Beijing, Tianjin, Zhanjiang, Shanghai and Shenzhen in the PRC and in
Singapore. Most of the premises are necessary for our operations, and the
agreements are based on normal commercial terms. For the years ended December
31, 2003, 2004 and 2005, the aggregate rentals and management fees payable by us
to CNOOC and its affiliates were approximately Rmb 57 million, Rmb 77 million
and Rmb 77 million, respectively.
Sales of crude oil, condensate oil and liquefied petroleum gas. We sell
crude oil, condensate oil and liquefied petroleum gas to affiliates of CNOOC
that engage in the downstream petroleum business. The prices for these products
are based on prices in the international market. For the years ended December
31, 2003, 2004 and 2005, the affiliates of CNOOC paid us approximately Rmb 8,324
million, Rmb 13,946 million and Rmb 26,576 million, respectively, representing
approximately 20.3%, 25.3% and 38.3% of our total revenues for the respective
periods.
Waiver Conditions
The waiver granted by the Hong Kong Stock Exchange to us in January 2003
in respect of ongoing connected transactions for the period from January 1, 2003
to December 31, 2005 contains the following typical conditions:
i. in relation to the ongoing connected transactions referred to in the
paragraphs headed "Contracts with foreign petroleum companies,"
"Trademark license agreements" and "Lease agreement in respect of
the Nanshan Terminal" the transactions, and the respective
107
agreements (if any) governing such transactions, must be on terms
that are fair and reasonable so far as our shareholders are
concerned and in relation to the ongoing connected transactions
referred to in the paragraphs headed "Provision of materials,
utilities and ancillary services," "Technical services," "Research
and development services," "Lease and property management services"
and "Sales of crude oil, condensate oil and liquefied petroleum gas"
the transactions, and the respective agreements (if any) governing
such transactions must be:
a. entered into by us in our ordinary and usual course of
business;
b. either on normal commercial terms or, where there is no
available comparison, on terms no less favorable than those
available to or from independent third parties; and
c. on terms that are fair and reasonable so far as our
shareholders are concerned;
ii. brief details of the continuing connected transactions in each year
as required by Rule 14.25(1)(A) to (D) of the Hong Kong Stock
Exchange Listing Rules then in force before March 31, 2004 (i.e.,
the date or period of the transaction, the parties thereto and a
description of their connected relationship, a brief description of
the transaction and the purpose of the transaction, the total
consideration and the terms, and the nature and the extent of the
interest of the connected person in the transaction), must be
disclosed in our annual report and accounts for the relevant year;
iii. our independent non-executive directors must review annually the
transactions and confirm, in our annual report and accounts for the
year in question, that such transactions have been conducted in the
manner stated in (i) above and, where applicable, within the annual
limit stated in (v) below;
iv. our auditors must carry out review procedures annually in relation
to the connected transactions and must confirm in writing whether
the transactions:
a. received the approval of our board of directors;
b. have been entered into in accordance with the pricing policies
as stated in our financial statements; and
c. have been entered into in accordance with the terms of the
agreement governing the transactions or, where there is no
agreement, on terms that are not less favorable than terms
available to or from independent third parties;
For the purpose of the above review by our auditors, CNOOC has
undertaken to us that it will provide the auditors with access to its
relevant accounting records;
v. the aggregate annual volume of transactions shall not exceed the
proposed annual limits set out in the following table:
------------------------------------------------------------
Transaction Annual Limit
------------------------------------------------------------
Materials, utilities and 10% of our audited consolidated
ancillary services supply total revenues in the preceding
agreements financial year
------------------------------------------------------------
Technical services In respect of the three financial
years ending December 31, 2005,
Rmb 5,853 million, Rmb 7,338
million and Rmb 7,218* million,
respectively
------------------------------------------------------------
108
------------------------------------------------------------
Research and development In respect of the three financial
services for particular years ending December 31, 2005,
projects Rmb 141 million, Rmb 148 million
and Rmb 153 million, respectively
------------------------------------------------------------
Sales of crude oil, In respect of the three financial
condensate oil and years ending December 31, 2005,
liquefied petroleum gas 42%, 56% and 82%, respectively,
of our audited consolidated total
revenues in the preceding
financial year
------------------------------------------------------------
General research and Rmb 110 million
development services
agreement
------------------------------------------------------------
Lease and management Rmb 78 million
services
------------------------------------------------------------
* On December 31, 2005, we proposed a revised cap for the category
of technical services of continuing connected transactions at the
extraordinary general meeting and obtained the approval of our
independent shareholders.
vi. we undertook that if any of the terms of the agreements or
arrangements referred to above are altered or if we enter into any
new agreements with any connected persons (within the meaning of
the Hong Kong Stock Exchange Listing Rules) in the future or if the
limits stated in (v) above are exceeded, we will comply with the
standard disclosure and shareholder approval provisions in the Hong
Kong Stock Exchange Listing Rules unless we apply for and obtain a
separate waiver from the Hong Kong Stock Exchange.
New Categories of Continuing Connected Transactions
In order to present a more coherent, logical and understandable picture to
shareholders, and also to enable our company to monitor the status of connected
transactions following each category more effectively going forward, we adopted
a new categorization for continuing connected transactions, and obtained
independent shareholders' approval at our extraordinary general meeting on
December 31, 2005. The new categorization of continuing connected transactions,
which are discloseable under the Hong Kong Stock Exchange Listing Rules and
applicable to our company for the period from January 1, 2006 to December 31,
2007, are set out below:
o Provision of exploration, oil and gas development, oil and gas
production as well as marketing, management and ancillary services
by CNOOC and/or its associates to us;
o Provision of management, technical, facilities and ancillary
services, including the supply of materials from us to CNOOC and/or
its associates;
o Sales of petroleum and natural gas products by us to CNOOC and/or
its associates.
Since the establishment of CNOOC, certain associates of CNOOC specialized
in exploration, oil and gas development, oil and gas production, as well as
marketing, management and ancillary services provided these services to us
through bidding process. We will continue to use these services provided by
associates of CNOOC, including but not limited to China Oilfield Services
Limited, or COSL, Offshore Oil Engineering Co., Ltd., or CNOOC Engineering and
CNOOC Oil Base Group Limited, or COBGL. CNOOC also provides certain of these
services from time to time. The services provided by CNOOC and/or its associates
are set out below.
109
Provision of exploration, oil and gas development, oil and gas production as
well as marketing, management and ancillary services by CNOOC and/or its
associates to us
(a) Provision of exploration and support services to us. The services
provided by CNOOC and/or its associates to us on exploration operations
include:
o well site survey;
o seismic data acquisition and processing;
o integrated exploration research services;
o exploration well operation;
o related technical services on exploration well;
o tow-boat, transportation and safety services; and
o other related technical and supporting services.
(b) Provision of oil and gas development and support services to us. The
services provided by CNOOC and/or its associates to us on oil and gas
development operations include:
o platform survey;
o drilling and completion well operation;
o related technical services on drilling and completion;
o design, construction, installation and tuning of production
facilities;
o shipping transportation;
o provision of materials;
o integrated research on development techniques; and
o other related technical and supporting services.
(c) Provision of oil and gas production and support services to us. The
services provided by CNOOC and/or its associates to us on oil and gas
production operations are set out below. In addition, the scope of business of
these companies also include various facilities and ancillary services, such as
provision of different types of materials, medical and employee welfare
services, maintenance and repair of major equipments and supply of water,
electricity and heat to us, some of which may not be available from independent
third parties or available on comparable terms.
o integrated research on production techniques;
o well workover;
o shipping transportation;
o oil tanker transportation;
o provision of materials;
o maintenance of platform;
o repair of equipment and pipeline;
o production operations;
o oil and gas production labour services;
o warehousing and storage;
o lease of equipment and building;
o road transportation services;
o telecommunication and network services;
o wharf services;
o construction services, including roads, wharf, buildings,
factories and water barrier;
o maintenance and repair of major equipment;
o medical, childcare and social services;
o provision of water, electricity and heat;
110
o security and fire services;
o technical training;
o accommodation;
o maintenance and repair of buildings;
o catering services; and
o other related technical and supporting services.
(d) Provision of marketing, management and ancillary services to us.
CNOOC and/or its associates provide marketing, administration and management,
management of oil and gas operations and integrated research services to us, as
well as other ancillary services relating to the exploration, development,
production and research activities of us. Details of these services are set out
below:
o marketing services;
o management;
o staff recruitment;
o publishing;
o telecommunications;
o leases of properties;
o property management;
o water, electricity and heat supply;
o car rental;
o integrated services such as record keeping, filing, repair
of computer, catering and photocopying; and
o integrated research.
In addition, as part of providing administration and management services to
us, CNOOC and/or its associates leased certain premises. In addition to leasing
these properties, CNOOC and/or its associates also provided management services
in respect of certain properties leased to us.
(e)FPSO vessel lease agreements. We lease floating production, storage and
offloading (FPSO) vessel from COBGL for use in oil and gas production operations
at market prices on normal commercial terms which are calculated on a daily
basis. FPSO vessels are usually located next to the offshore oil platforms and
are an integrated facility used by us during its offshore oil and gas production
for processing, storage and channelling of crude oil. The terms of FPSO vessel
leases are usually determined based on the expected term of oil and gas
exploration, development and production. We currently lease a FPSO vessel for a
term of 20 years from an associate of CNOOC, with such term being determined
based on the expected term of oil and gas exploration, development and
production.
Provision of management, technical, facilities and ancillary services,
including the supply of materials to CNOOC and/or its associates.
In addition to providing various services to us, CNOOC and/or its associates may
also utilise various types of management, facilities and ancillary services,
including the supply of materials provided by us from time to time. The services
that may be provided by us to CNOOC and/or its associates include:
o technical consulting;
o technology transfer;
o management;
o technical research services; and
o other supporting services.
111
Sales of petroleum and natural gas products by us to CNOOC and/or its
associates.
(a) Sales of petroleum and natural gas products. We may sell petroleum
and natural gas products, including crude oil, condensate oil, liquefied
petroleum gas, natural gas and liquefied natural gas, to CNOOC and/or its
associates which engage in downstream petroleum business.
(b)Long term sales of natural gas and liquefied natural gas. We sell
natural gas to CNOOC and/or its associates which engage in the downstream
petroleum business. We have also invested and acquired interests in liquefied
natural gas related upstream projects in Tangguh, Indonesia and the North West
Shelf of Australia. It is also envisaged that from time to time we may sell
liquefied natural gas explored from these gas reserves mentioned above and
other gas reserves in which we may invest in the future to CNOOC and/or its
associates.
Disclosure and/or Independent Shareholders' approval requirements
Under the Hong Kong Stock Exchange Listing Rules, the following
categories amongst the new categories of continuing connected transactions are
exempted from the independent shareholders' approval requirement but are
subject to the reporting and announcement requirements set out in Rules 14A.45
to 14A.47 of the Hong Kong Stock Exchange Listing Rules:
o Marketing, management and ancillary services;
o FPSO vessel leases; and
o Provision of management, technical, facilities and ancillary
services, including the supply of materials from us to CNOOC and/or
its associates.
Under the Hong Kong Stock Exchange Listing Rules, the following
categories amongst the new categories of continuing connected transactions, or
the Non-Exempt Continuing Connected Transactions, are subject to the reporting,
announcement and independent shareholders' approval requirements:
o Provision of exploration, oil and gas development, oil and gas
production as well as marketing, management and ancillary services
by CNOOC and/or its associates to us;
(a) Exploration and support services;
(b) Oil and gas field development and support services;
(c) Oil and gas field production and support services;
o Sales of petroleum and natural gas products by us to CNOOC and/or
its associates
(a) Sales of petroleum and natural gas products;
(b) Long term Sales of natural gas and liquefied natural gas.
We have obtained independent shareholders' approval at our extraordinary
general meeting on December 31, 2005 for the Non-Exempt Continuing Connected
Transactions on the condition that:
i. The annual amount of each category of the Non-Exempt Continuing
Connected Transactions shall not exceed the applicable Proposed Cap
set out in the following table:
The continuing connected
transactions Caps
Provision of exploration, oil and gas development, oil and gas production
as well as marketing, management and ancillary services by CNOOC and/or
its associates to us
112
(a) Exploration and support services For the two years ending 31
December 2007, Rmb 2,117 million
and Rmb 2,293 million, respectively
(b) Oil and gas field development and For the two years ending 31
support services December 2007, Rmb 7,628 million
and Rmb 10,458 million,
respectively
(c) Oil and gas field production and For the two years ending 31
support services December 2007, Rmb 3,935 million
and Rmb 4,132 million, respectively
(d) Marketing, management and ancillary For the two years ending 31
services December 2007, Rmb 478 million and
Rmb 504 million, respectively
(e) FPSO vessel leases For the two years ending 31
December 2007, Rmb 453 million and
Rmb 463 million, respectively
Provision of management, technical, facilities and ancillary services, including
the supply of materials from us to CNOOC and/or its associates
Provision of management, technical, For the two years ending 31
facilities and ancillary services, December 2007, Rmb 50 million and
including the supply of materials to CNOOC Rmb 100 million, respectively
and/or its associates
Sales of petroleum and natural gas products by us to CNOOC and/or its associates
(a) Sales of petroleum and natural gas For the two years ending 31
products December 2007, Rmb 33,469 million
and Rmb 44,199 million,
respectively
(b) Long term sales of natural gas and For the two years ending 31
liquefied natural gas December 2007, Rmb 1,960 million
and Rmb 3,599 million, respectively
ii. (i) The Non-Exempt Continuing Connected Transactions will be
entered into in our usual and ordinary course of businesses
and either (A) on normal commercial terms or (B) if there is
no available comparison, on terms no less favourable to us
than terms available from independent third parties; and
(ii) The Non-Exempt Continuing Connected Transactions will be
entered into in accordance with the relevant Comprehensive
Framework Agreements and on terms that are fair and
reasonable and in the interests of the Shareholders as a
whole.
We will comply with other relevant provisions of the Hong Kong Stock
Exchange Listing Rules in relation to each category of the Non-Exempt Continuing
Connected Transactions.
For further information regarding related party transactions, see note 27 to
our consolidated financial statements attached to this annual report.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
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A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See pages beginning on page F-1 following Item 19.
Legal Proceedings
We are not a defendant in any material litigation, claim or arbitration,
and we know of no pending or threatened proceeding which would have a material
adverse effect on our financial condition.
Dividend Distribution Policy
We intend to declare and pay dividends in the future. The payment and the
amount of any dividends will depend on our earnings, capital expenditure
requirements, financial conditions, future prospects and other factors which our
directors may consider relevant. In addition, CNOOC, as our controlling
shareholder, will be able to influence our dividend policy. Holders of our
shares will be entitled to receive such dividends declared by our board of
directors pro rata according to the amounts paid up or credited as paid up on
the shares. Subject to the factors described above, we currently intend to
pursue a dividend policy consistent with other international oil and gas
exploration and production companies. Based on current share prices and
dividends of international oil and gas exploration and production companies, we
currently intend to target an initial dividend yield of approximately 1% to 3%.
Dividends may be paid only out of our distributable profits as permitted
under Hong Kong law, which does not restrict the payment of dividends to
nonresident holders of our securities. To the extent profits are distributed as
dividends, such portion of profits will not be available to be reinvested in our
operations.
Holders of our ADSs will be entitled to receive dividends, subject to the
terms of the deposit agreement, to the same extent as holders of our shares,
less the fees and expenses payable under the deposit agreement. Cash dividends
will be paid to the depositary in Hong Kong dollars and, will be converted by
the depositary into U.S. dollars and paid to holders of ADSs. Stock dividends,
if any, will be distributed to the depositary and will be distributed by the
depositary, in the form of additional ADSs, to holders of the ADSs.
Following the reorganization of CNOOC and our establishment as a separate
legal entity in October 1999, we paid a dividend of Rmb 1,045.4 million in 1999
and declared and paid a final dividend of Rmb 6,426.4 million in 2000. In 2001,
2002 and 2003, we declared and paid dividends totaling Rmb 871.1 million, Rmb
2,265.1 million and Rmb 5,403.7 million, respectively. In 2004, we declared
dividends totaling Rmb 6,101.4 million and paid dividends totaling Rmb 6,091.4
million. The difference between the amount of dividends declared and paid in
2004 was because that we repurchased and canceled some of our shares in 2004.
Out of the total dividends declared and paid in 2004, Rmb 2,617.5 million
(US$316.3 million) was attributable to a special interim dividend to replace the
2003 final dividend and final special dividend proposed by our board of
directors in 2003. In 2005, we declared and paid dividends totaling Rmb 7,772.2
million (US$963.1 million). The amount of dividends we paid historically is not
indicative of the dividends that we will pay in the future.
Substantially all our dividend payments result from dividends paid to us
by CNOOC China Limited. CNOOC China Limited must follow the laws and regulations
of the PRC and its articles of association in determining its dividends. As a
wholly foreign owned enterprise in China, CNOOC China has to provide for a
reserve fund and staff and workers' bonus and welfare fund, each of which is
appropriated from net profit after taxation but before dividend distribution
according to the prevailing accounting rules and regulations in the PRC. CNOOC
China is required to allocate at least 10% of its net profit to the reserve fund
until the balance of this fund has reached 50% of its registered capital.
Appropriations to the staff and workers' bonus and welfare fund, which are
determined at the discretion of CNOOC China's directors, are charged to expense
as incurred in the consolidated financial statements, which were prepared under
Hong Kong GAAP. None of CNOOC China's contributions to these statutory funds may
be used for dividend purposes.
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For the years ended December 31, 2003, 2004 and 2005, CNOOC China Limited
made the following appropriations to the statutory reserves:
For the year ended For the year ended For the year ended
December 31, 2003 December 31, 2004 December 31, 2005
----------------- ----------------- -----------------
Percentage Rmb Percentage Rmb Percentage Rmb
of Net Profits (in millions) of Net Profits (in millions) of Net Profits (in millions)
-------------- ------------- -------------- ------------- -------------- -------------
Reserve fund ............... 10% 818.1 10% 1,363.1 10% 2,268.4
Staff and workers' bonus and
welfare fund ............ -- -- -- -- -- --
B. SIGNIFICANT CHANGES
First Quarter 2006 Financial and Operating Results
During the first quarter of 2006, our unaudited revenues from the sale of
oil and gas were Rmb 16.4 billion. Our daily average crude oil production was
383,519 barrels per day during this period, compared to 351,579 barrels per day
in 2005, while our daily average natural gas production was 390 million cubic
feet per day, compared to 348 million cubic feet per day in 2005. The average
net realized price of our crude oil was US$58.13 per barrel during the first
quarter of 2006, compared to US$41.73 per barrel in 2005, while the average net
realized price of our natural gas was US$3.10 per thousand cubic feet, compared
to US$2.92 per thousand cubic feet in 2005.
Change of Directors and Management
On April 18, 2006, Mr. Yunshi Cao ceased to be our Senior Vice President,
General Counsel and Company Secretary. On the same day, Mr. Victor Zhikai Gao
was appointed as our Senior Vice President, General Counsel and Company
Secretary.
On May 24, 2006, Dr. Kenneth S. Courtis retired as an Independent
Non-executive Director of our Company in accordance with the retirement
provisions in article 97 of our articles of association, following the
conclusion of our annual general meeting. On the same day, Dr. Edgar W. K.
Cheng was elected by our shareholders as an Independent Non-executive Director.
Effective May 25, 2006, the composition of our board committees is set
forth in the table below.
Audit Committee Nomination Committee Remuneration Committee
--------------- -------------------- ----------------------
Before From Before From Before From
May 25, 2006 25 May, 2006 May 25, 2006 25 May, 2006 May 25, 2006 25 May, 2006
------------ ------------ ------------ ------------ ------------ ------------
Chairman Sung Hong Chiu Aloysius Hau Yin, Han Luo Han Luo Sung Hong Chiu Sung Hong Chiu
Tse
(Financial Expert)
Members Kenneth S. Courtis Sung Hong Chiu Sung Hong Chiu Edgar W. K. Cheng Evert Henkes Evert Henkes
(Financial Expert)
Aloysius Hau Yin Lawrence J. Lau Lawrence J. Lau Lawrence J. Lau Aloysius Hau Aloysius Hau Yin
Tse Yin Tse Tse
Aloysius Hau Xinghe Cao
Yin Tse
Total 3 3 4 3 3 4
Placing Existing Shares and Subscription of New Shares
On April 27, 2006, we entered into a Placing Agreement and a Subscription
Agreement with CNOOC (BVI) Limited (the "Vendor"), a wholly-owned subsidiary of
CNOOC. At the time of the agreements, the Vendor held 28,999,999,995 of our
issued shares and pursuant to the Placing Agreement, the Vendor agreed to place
2,500,000,000 shares in our share capital to independent investors at HK$6.15
per share. Within 14 days of the Placing Agreement, the Vendor will, pursuant to
the Subscription Agreement, subscribe for 2,272,727,273 new shares at HK$6.15
per share (the "Subscription").
115
The Placing Shares represent approximately 6.09% of our issued share
capital of 41,054,675,375 shares and approximately 5.77% of our issued share
capital as enlarged by the Subscription. The net proceeds from the Subscription
of approximately HK$13.78 billion will be used to finance our continuing capital
expenditure requirements in relation to the OML 130 in offshore Nigeria, as well
as our general working capital needs.
As the Subscription was completed before the record date of May 16, 2006
for the 2005 final dividends of HK$0.10 per Share declared by our board of
directors on March 24, 2006, the Shares under the Subscription will be entitled
to the final dividends. We would therefore be required to pay an amount of
additional dividends of HK$227,272,727. As a result, our aggregate final
dividends payable for the year ended December 31, 2005 would be
HK$4,332,740,265.
ITEM 9. THE OFFER AND LISTING
Not applicable, except for Item 9.A.4 and Item 9.C.
We listed our shares on the Hong Kong Stock Exchange and our ADSs on the
New York Stock Exchange in February 2001. Our shares are listed on the Hong Kong
Stock Exchange under the stock code "883" and our ADSs are listed on the New
York Stock Exchange under the symbol "CEO." On March 17, 2004, our shareholders
approved a five-for-one stock split of our shares. The stock split was effected
by dividing each of our issued and unissued shares of HK$0.10 each into five
shares of HK$0.02 each. The ratio of our American depositary shares listed on
the New York Stock Exchange also changed such that each ADS now represents 100
subdivided shares of HK$0.02 each, as opposed to 20 shares of HK$0.10 each prior
to the stock split. The following table sets forth, for the periods indicated,
the high and low closing prices per share, as reported on the Hong Kong Stock
Exchange and adjusted retroactively to reflect the stock split, and per ADS, as
reported on the New York Stock Exchange.
Hong Kong Stock Exchange New York Stock Exchange
------------------------ -----------------------
Period High Low High Low
(HK$ per share) (US$ per ADS)
2001.................... 1.74 1.20 21.85 15.70
2002.................... 2.33 1.48 29.44 19.01
2003.................... 3.54 1.96 42.78 23.83
2004.................... 4.53 2.75 58.73 35.00
2005.................... 6.05 3.80 76.73 48.16
2004 Financial Quarters
1st Quarter........... 3.4 2.95 43.65 38.80
2nd Quarter........... 3.45 2.65 44.23 35.00
3rd Quarter........... 4.07 3.20 52.60 41.75
4th Quarter........... 4.53 3.97 58.73 51.21
2005 Financial Quarters
1st Quarter........... 4.525 3.800 56.34 48.16
2nd Quarter........... 4.650 3.950 58.78 49.82
3rd Quarter........... 6.05 4.600 76.73 59.13
4th Quarter........... 5.60 4.825 71.95 61.70
2006 Financial Quarter
1st Quarter........... 6.80 5.25 88.03 69.19
Last Six Months
December 2005......... 5.60 5.25 71.95 67.40
January 2006.......... 6.55 5.25 86.31 69.19
February 2006......... 6.80 6.30 88.03 81.99
March 2006............ 6.60 5.90 85.62 77.16
April 2006............ 6.85 6.00 87.90 78.00
May 2006.............. 6.55 5.85 83.50 73.90
--------------
116
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
We were incorporated with limited liability on August 20, 1999 in Hong
Kong under the Companies Ordinance of Hong Kong. Our company registration number
in Hong Kong is 685974. Under section three of our memorandum of association, we
have the capacity and the rights, powers and privileges of a natural person and
in addition and without limit, we may do anything which we are permitted to do
by any enactment or rule of law. The following are summaries of provisions of
our memorandum of association and articles of association and the Companies
Ordinance (Chapter 32 of the Laws of Hong Kong). For further details, you should
read our memorandum of association which was filed as an exhibit to our
registration statement on Form F-1 (Registration No.333-10862) and our articles
of association, as amended, which is filed as an exhibit to this annual report.
Issue of Shares
Under the Companies Ordinance of Hong Kong, our directors may, without
prior approval of the shareholders, offer to allot new shares in our company to
existing shareholders pro rata. Our directors may not allot new shares of our
company in any other manner without the prior approval of our shareholders in a
general meeting. Any approval given at a general meeting shall continue in force
from the date of the passing of the resolution until the earliest of:
o the conclusion of the next annual general meeting,
o the expiration of the period within which the next annual general
meeting is required by any applicable laws or our articles of the
association to be held, or
o the revocation or variation of the authority given under an
ordinary resolution of the shareholders, in a general meeting of
our company.
If such approval is given, the unissued shares of our company shall be at
the disposal of the board of directors. Our directors may offer, allot, grant
options over or otherwise dispose of the unissued shares to persons at such
times and for such consideration and upon such terms and conditions as our
directors may determine, subject to the restrictions under the Hong Kong Stock
Exchange Listing Rules.
In accordance with Hong Kong Stock Exchange Listing Rules, any such
approval of the shareholders must be limited to shares with an aggregate nominal
value not exceeding 20% of the aggregate value of our share capital in issue as
of the date of granting such approval plus the aggregate nominal amount of share
capital repurchased by us since the granting of such approval.
Dividends
Subject to the Companies Ordinance of Hong Kong, the shareholders in a
general meeting may declare dividends to be paid to shareholders. However, under
our articles of association, dividends cannot be declared in excess of the
amount recommended by our board of directors.
In addition to dividends declared in a general meeting, our board of
directors may declare and pay to the shareholders interim dividends as appear to
our board of directors to be justified by our financial position. Our board of
directors may also pay any fixed dividend on any shares of our company
semi-annually or at other suitable intervals, whenever our financial position,
in their opinion, justifies such payment.
117
Winding Up
If we are wound up, the liquidator may, with the sanction of a special
resolution, divide among our shareholders in specie or in kind the whole or any
part of our assets or vest any part of our assets in trustees upon such trusts
for the benefit of our shareholders or any of them as the resolution shall
provide.
Voting Rights
Under the Companies Ordinance of Hong Kong, any action to be taken by the
shareholders in a general meeting requires the affirmative vote of either an
ordinary or a special resolution passed at such meeting.
o An ordinary resolution is a resolution passed by the majority of
shareholders that are entitled to, and do, vote in person or by
proxy at a general meeting;
o A special resolution is a resolution passed by not less than 75% of
shareholders that are entitled to, and do, vote in person or by
proxy at a general meeting.
Generally, resolutions of shareholders are passed by ordinary resolution.
However, the Companies Ordinance of Hong Kong provides that some matters may
only be passed as special resolutions. These matters include, for example:
o alteration of the object clause;
o alteration of the articles;
o change of a company's name;
o reduction of share capital; and
o voluntary winding up.
Voting at any meeting of shareholders is by a show of hands unless a poll
is demanded. If voting is by a show of hands, every shareholder who is present
at the meeting in person or by proxy has one vote. On a poll, every shareholder
who is present in person or by proxy has one vote for every share held or
represented by him. A poll may be demanded by:
o the chairman of the meeting;
o at least three members present in person (or in the case of a
member being a corporation, by its duly authorized representative)
or by proxy and entitled to vote at the meeting;
o any member or members present in person (or in the case of a member
being a corporation, by its duly authorized representative) or by
proxy and representing in the aggregate not less than 10% of the
total voting rights of all members having the right to attend and
vote at the meeting; or
o any member or members present in person (or in the case of a member
being a corporation, by its duly authorized representative) or by
proxy and holding shares conferring a right to attend and vote at
the meeting on which there have been paid up sums in the aggregate
equal to not less than 10% of the total sum paid up on all shares
conferring that right.
Any action to be taken by the shareholders requires the affirmative vote
of the requisite majority of the shares at a meeting of shareholders. There are
no cumulative voting rights. Accordingly, the
118
holders of a majority of the shares voting for the election of directors can
elect all the directors if they choose to do so.
General Meetings
We are required to hold an annual general meeting of shareholders each
year within 15 months from the date of our last annual general meeting. We may
also hold extraordinary general meetings of shareholders from time to time. Our
board of directors may convene an extraordinary general meeting at will, and
shall on requisition in accordance with the Companies Ordinance of Hong Kong,
proceed to convene an extraordinary general meeting. Our annual general meeting
and any extraordinary general meeting called for the purpose of passing a
special resolution requires at least 21 days' prior notice, and any other
general meeting requires at least 14 days' prior notice. The notice must specify
the place, day and time of the meeting and, in the case of special business, the
general nature of that business. The quorum for a general meeting is two
shareholders present in person or by proxy. If within thirty minutes from the
time appointed for the meeting a quorum is not present, the meeting, if convened
upon requisition in accordance with the Companies Ordinance of Hong Kong, must
be dissolved; but in any other case it must stand adjourned to the same day in
the next week at the same time and place, or to such other day, time and place
as the Chairman of the meeting may determine. If at such adjourned meeting a
quorum is not present within thirty minutes from the time appointed for the
meeting, the member or members present in person or by proxy shall be a quorum
and may transact the business for which the meeting is called.
Modification of Rights
Subject to the Companies Ordinance of Hong Kong, any of the rights
attaching to any class of shares, unless otherwise provided for by the terms of
issue of the shares of that class, may be varied or abrogated with the written
consent of the holders of not less than 75% of the issued shares of that class
or with the sanction of a special resolution passed at a separate general
meeting of the holders of shares of that class.
Borrowing Powers
Our board of directors may exercise all the powers of our company to
borrow money and to mortgage or charge all or any part of our undertaking,
property and assets, whether present or future, and uncalled capital. Our board
of directors may issue debentures, debenture stock, bonds or other securities of
our company, whether outright or as collateral security for any debt, liability
or obligation of our company or of any third party. These borrowing powers are
subject to variation by a special resolution of our company.
Interested Transactions
Subject to the exceptions described below, none of our directors may vote
on any contract, arrangement or proposal in which the director or any of his or
her associates is materially interested. For this purpose, existence of material
interest is presumed if a company, in which the director and/or his or her
associates beneficially own 5% or more of any class of its shares or voting
rights, is materially interested in the transaction. Our directors may, however,
vote on the following matters:
o any contract or arrangement to give security or indemnity to the
director or his or her associates for money lent or obligations
undertaken by such director or his or her associates at the request
of or for the benefit of our company or subsidiaries;
o any contract or arrangement to give security or indemnity to a
third party for our debts or debts of our subsidiaries for which
such director or his or her associates assumed responsibility by
giving guarantee or security;
119
o any contract or arrangement concerning offering of securities by us
(or any company which we may promote or be interested in
purchasing) for which the director or his or her associates
participate in the underwriting or sub-underwriting;
o any contract or arrangement in which the director or his or her
associates are interested only by virtue of their interest in our
securities;
o any contract or arrangement concerning any other company in which
the director or his or her associates are interested as an officer
or executive or a shareholder in which the director or his or her
associates are beneficially interested in shares of that company
other than a company in which they in aggregate beneficially own
more than 5% of the issued shares of any class or voting rights;
o any proposal or arrangement concerning employee benefits that do
not provide privileges to our directors or their associates,
including employee share schemes and retirement, death or
disability benefits schemes; and
o any proposal or arrangement concerning the adoption, modification
or operation of any employees' share scheme involving the issue or
grant of options over shares or other securities by us to, or for
the benefit of, our employees or employees of our subsidiaries
under which the director or his or her associates may benefit.
C. MATERIAL CONTRACTS
Incorporated by reference to our registration statement on Form F-1
(Registration No.333-10862) and annual reports on Form 20-F for fiscal years
2003, 2004 and 2005 (File No.1-14966), to which most of our current material
contracts were filed as exhibits. For additional information on our material
contracts, see "Item 7--Major Shareholders and Related Party
Transactions--Related Party Transactions" and "Item 19--Exhibits."
D. EXCHANGE CONTROLS
A portion of our Renminbi revenue may need to be converted into other
currencies by our wholly owned principal operating subsidiary in the PRC, CNOOC
China Limited, to meet our foreign currency obligations. We have substantial
requirements for foreign currency, including:
o debt service on foreign currency denominated debt;
o overseas acquisitions of oil and gas properties;
o purchases of imported equipment; and
o payment of dividends declared in respect of shares held by
international investors.
CNOOC China Limited may undertake current account foreign exchange
transactions without prior approval from the State Administration for Foreign
Exchange. It has access to current account foreign exchange so long as it can
produce commercial documents evidencing such transactions and provided that they
are processed through certain banks in China. Foreign exchange transactions
under the capital account, including principal payments with respect to foreign
currency denominated obligations, will be subject to the registration
requirements of the State Administration for Foreign Exchange.
Since 1994, the conversion of Renminbi into Hong Kong and United States
dollars has been based on rates set by the People's Bank of China, which are set
daily based on the previous day's PRC interbank foreign exchange market rate and
current exchange rates on the world financial markets. The PRC government has
stated publicly that it intends to make Renminbi freely convertible in the
future. On July 21, 2005, China reformed its foreign exchange regime by moving
into a managed floating exchange rate system based on market supply and demand
with reference to a basket of currencies. Renminbi
120
would no longer be pegged to the U.S. dollar. From that day to December 31,
2005, Renminbi appreciated about 2.5% against the U.S. dollar. However, we
cannot predict when the PRC government will allow free conversion of Renminbi
into foreign currencies. Changes in the PRC government's currency policies may
lead to further fluctuations in the exchange rates for the conversion of
Renminbi into foreign currencies which could have an uncertain effect on our
business and operating results. Since the benchmark oil and gas prices are
usually in U.S. dollars, the appreciation of Renminbi against U.S. dollars will
decrease our revenues derived from oil and gas sales while such effects may be
partially offset by decreases in the costs of imported equipment denominated in
U.S. dollar and our debt servicing payments in U.S. dollar. Except for our
Yen-denominated debts, we do not hedge exchange rate fluctuations between the
Renminbi and foreign currencies and currently have no plans to do so. For
further information on foreign exchange risks, foreign exchange rates and
hedging activities, see "Item 3--Key Information--Selected Financial Data" and
"Item 11--Qualitative and Quantitative Disclosure about Market Risk."
E. TAXATION
The taxation of income and capital gains of holders of our shares or ADSs
is subject to the laws and practices of Hong Kong and of jurisdictions in which
holders of our shares or ADSs are resident or otherwise subject to tax. The
following is a summary of taxation provisions that are anticipated to be
material based on current law and practice, is subject to change and does not
constitute legal or tax advice. The discussion does not deal with all possible
tax consequences relating to an investment in our shares or ADSs. In particular,
the discussion does not address the tax consequences under state, local and
other laws, such as non-Hong Kong and non-U.S. federal laws. Accordingly, we
urge you to consult your tax adviser regarding the tax consequences of an
investment in our shares and ADSs. The discussion is based upon laws and
relevant interpretations in effect as of the date of this annual report, all of
which are subject to changes. There is no reciprocal tax treaty in effect
between Hong Kong and the United States.
Hong Kong
Tax on Dividends
Under the current practices of the Hong Kong Inland Revenue Department, no
tax is payable in Hong Kong in connection with dividends paid by us.
Profits Tax
No tax is imposed in Hong Kong in respect of capital gains from the sale
of property, such as the shares and ADSs. Trading gains from the sale of
property by persons carrying on a trade, profession or business in Hong Kong
where such gains are derived from or arise in Hong Kong from such trade,
profession or business will be chargeable to Hong Kong profits tax which is
currently imposed at the rate of 17.5% on corporations and at a maximum rate of
16% on individuals. Gains from sales of the shares effected on the Hong Kong
Stock Exchange will be considered to be derived from or arise in Hong Kong.
Liability for Hong Kong profits tax would thus arise in respect of trading gains
from sales of shares or ADSs realized by persons carrying on a business of
trading or dealing in securities in Hong Kong.
Stamp Duty
Hong Kong stamp duty, currently charged at the rate of HK$1.00 per
HK$1,000 or part thereof on the higher of the consideration for or the value of
the shares, will be payable by the purchaser on every purchase and by the seller
on every sale of shares. For example, a total of HK$2.00 per HK$1,000 or part
thereof is currently payable on a typical sale and purchase transaction
involving shares. In addition, a fixed duty of HK$5 is currently payable on any
instrument of transfer of shares. The withdrawal of shares upon the surrender of
ADRs, and the issuance of ADRs upon the deposit of shares, will also attract
stamp duty at the rate described above for sale and purchase transactions unless
the withdrawal or deposit does not result in a change in the beneficial
ownership of the shares under Hong Kong law. The issuance of the ADRs upon the
deposit of shares issued directly to the depositary or for the account of the
121
depositary does not attract stamp duty. No Hong Kong stamp duty is payable upon
the transfer of ADSs outside Hong Kong.
Estate Duty
The shares are Hong Kong property under Hong Kong law, and accordingly
such shares may be subject to estate duty on the death of the beneficial owner
of such shares, regardless of the place of the owner's residence, citizenship or
domicile. We cannot assure that the Hong Kong Inland Revenue Department will not
treat the ADRs as Hong Kong property that may be subject to estate duty on the
death of the beneficial owner of the ADR even if the ADRs are located outside
Hong Kong at the date of such death. Hong Kong estate duty is imposed on a
progressive scale from 5% to 15%. The rate of and the threshold for estate duty
has, in the past, been adjusted on a fairly regular basis. No estate duty is
payable when the aggregate value of the dutiable estate does not exceed HK$7.5
million, and the maximum rate of duty of 15% applies when the aggregate value of
the dutiable estate exceeds HK$10.5 million. The Hong Kong Government is
considering abolishing estate duty in Hong Kong.
United States
Federal Income Tax Considerations
The following is a summary of United States federal income tax
considerations that are anticipated to be material for U.S. Holders, as defined
below. This summary is based upon existing United States federal income tax law,
which is subject to change, possibly with retroactive effect. This summary does
not discuss all aspects of United States federal income taxation which may be
important to particular investors in light of their individual investment
circumstances, such as investors subject to special tax rules including:
partnerships, financial institutions, insurance companies, broker-dealers,
tax-exempt organizations, and, except as described below, non-U.S. Holders, or
to persons that will hold our shares or ADSs as part of a straddle, hedge,
conversion, or constructive sale transaction for United States federal income
tax purposes or that have a functional currency other than the United States
dollar, all of whom may be subject to tax rules that differ significantly from
those summarized below. In addition, this summary does not discuss any foreign,
state, or local tax considerations. This summary assumes that investors will
hold our shares or ADSs as "capital assets" (generally, property held for
investment) under the United States Internal Revenue Code. Each prospective
investor is urged to consult its tax advisor regarding the United States
federal, state, local, and foreign income and other tax considerations of the
purchase, ownership, and disposition of our shares or ADSs.
For purposes of this summary, an U.S. Holder is a beneficial owner of
shares or ADSs that is for United States federal income tax purposes:
o an individual who is a citizen or resident of the United States;
o a corporation, partnership or other entity created in or organized
under the laws of the United States or any State or political
subdivision thereof;
o an estate the income of which is includible in gross income for
United States federal income tax purposes regardless of its
source;
o a trust the administration of which is subject to the primary
supervision of a United States court and which has one or more
United States persons who have the authority to control all
substantial decisions of the trust; or
o a trust that was in existence on August 20, 1996, was treated as a
United States person, for United States federal income tax
purposes, on the previous day, and elected to continue to be so
treated.
A beneficial owner of our shares or ADSs that is not a U.S. Holder is
referred to herein as a "Non-U.S. Holder."
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A foreign corporation will be treated as a "passive foreign investment
company" or "PFIC", for United States federal income tax purposes, if 75% or
more of its gross income consists of certain types of "passive" income or 50% or
more of its assets produce or are held for the production of passive income.
Based on our current and projected income, assets, and activities, we presently
believe that we are not a PFIC and do not anticipate becoming a PFIC. This is,
however, a factual determination made on an annual basis. Because the
classification of certain of our interests for United States federal income tax
purposes is uncertain and the PFIC rules are subject to administrative
interpretation, however, no assurance can be given that we are not or will not
be treated as a PFIC. The discussion below under "U.S. Holders-Dividends" and
"U.S. Holders-Sale or Other Disposition of Shares or ADSs," assumes that we will
not be subject to treatment as a PFIC for United States federal income tax
purposes.
U.S. Holders
For United States federal income tax purposes, a U.S. Holder of an ADS
will be treated as the owner of the proportionate interest of the shares held by
the depositary that is represented by an ADS and evidenced by such ADS.
Accordingly, no gain or loss will be recognized upon the exchange of an ADS for
the holders' proportionate interest in the shares. A U.S. Holder's tax basis in
the withdrawn shares will be the same as the tax basis in the ADS surrendered
therefore, and the holding period in the withdrawn shares will include the
period during which the holder held the surrendered ADS.
Dividends. Any cash distributions paid by us out of our earnings and
profits, as determined under United States federal income tax principles, will
be subject to tax as ordinary dividend income and will be includible in the
gross income of a U.S. Holder upon receipt. Cash distributions paid by us in
excess of our earnings and profits will be treated as a tax-free return of
capital to the extent of the U.S. Holder's adjusted tax basis in our shares or
ADSs, and after that as gain from the sale or exchange of a capital asset.
Dividends paid in Hong Kong dollars will be includible in income in a United
States dollar amount based on the United States dollar to Hong Kong dollar
exchange rate prevailing at the time of receipt of such dividends by the
depositary, in the case of ADSs, or by the U.S. Holder, in the case of shares
held directly by such U.S. Holder. U.S. Holders should consult their tax
advisors regarding the United States federal income tax treatment of any foreign
currency gain or loss recognized on the subsequent conversion of Hong Kong
dollars received as dividends to United States dollars. Dividends received on
shares or ADSs will not be eligible for the dividends received deduction allowed
to corporations.
Under current law, "qualified dividend income" received by an individual
for taxable years beginning after December 31, 2002 and for taxable years
beginning before January 1, 2009 is subject to United States federal income tax
rates lower than those applicable to ordinary income. The top federal income tax
rate on such qualified dividend income received by an individual is 15% or 5%
for those individuals whose incomes fall in the 10 or 15% brackets. Based upon
our existing and anticipated future operations and current assets, we believe
that we are a "qualified foreign corporation" and that our dividends paid to
U.S. Holders who are individuals will be eligible to be treated as "qualified
dividend income" provided that such U.S. Holders satisfy applicable holding
period requirements with respect to the ADSs and other applicable requirements.
Dividends paid by foreign corporations that are classified as PFICs are not
eligible to be treated as "qualified dividend income". See "PFIC Considerations"
below.
Dividends received on shares or ADSs will be treated, for United States
federal income tax purposes, as foreign source income. A U.S. Holder may be
eligible, subject to a number of complex limitations, to claim a foreign tax
credit in respect of any foreign withholding taxes imposed on dividends received
on shares or ADSs. U.S. Holders who do not elect to claim a foreign tax credit
for federal income tax withheld may instead claim a deduction, for United States
federal income tax purposes, in respect of such withholdings, but only for a
year in which the U.S. Holder elects to do so for all creditable foreign income
taxes.
In addition, the United States Treasury has expressed concerns that
parties to whom depositary shares are pre-released may be taking actions that
are inconsistent with the claiming of foreign tax credits by the holders of
ADSs. Accordingly, the analysis of the creditability of foreign withholding
taxes could be affected by future actions that may be taken by the United States
Treasury.
123
Sale or Other Disposition of Shares or ADSs. A U.S. Holder will recognize
capital gain or loss upon the sale or other disposition of shares or ADSs in an
amount equal to the difference between the amount realized upon the disposition
and the U.S. Holder's adjusted tax basis in such shares or ADSs, as each is
determined in U.S. dollars. Any such capital gain or loss will be long-term if
the shares or ADSs have been held for more than one year and will generally be
United States source gain or loss. The claim of a deduction in respect of a
capital loss, for United States federal income tax purposes, may be subject to
limitations. If a U.S. Holder receives Hong Kong dollars for any such
disposition, such U.S. Holder should consult its tax advisor regarding the
United States federal income tax treatment of any foreign currency gain or loss
recognized on the subsequent conversion of the Hong Kong dollars to United
States dollars.
PFIC Considerations
If we were to be classified as a PFIC in any taxable year, a U.S. Holder
would be subject to special rules generally intended to reduce or eliminate any
benefits from the deferral of United States federal income tax that a U.S.
Holder could derive from investing in a foreign company that does not distribute
all of its earnings on a current basis. In such event, a U.S. Holder of the
shares or ADSs may be subject to tax at ordinary income tax rates on (i) any
gain recognized on the sales of the shares or ADSs and (ii) any "excess
distribution" paid on the shares or ADSs (generally, a distribution in excess of
125% of the average annual distributions paid by us in the three preceding
taxable years). In addition, a U.S. Holder may be subject to an interest charge
on such gain or excess distribution. Prospective investors are urged to consult
their tax advisors regarding the potential tax consequences to them if we are or
do become a PFIC, as well as certain elections that may be available to them to
mitigate such consequences.
Non-U.S. Holders
An investment in shares or ADSs by a Non-U.S. Holder will not give rise to
any United States federal income tax consequences unless:
o the dividends received or gain recognized on the sale of the shares
or ADSs by such person is treated as effectively connected with the
conduct of a trade or business by such person in the United States
as determined under United States federal income tax law, or
o in the case of gains recognized on a sale of shares or ADSs by an
individual, such individual is present in the United States for 183
days or more and certain other conditions are met.
In order to avoid back-up withholding on dividend payments made in the
United States, a Non-U.S. Holder of the shares or ADSs may be required to
complete, and provide the payer with, an Internal Revenue Service Form W-8BEN,
or other documentary evidence, certifying that such holder is an exempt foreign
person.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are also subject to the informational requirements of the Exchange Act
and accordingly file reports and other information with the Securities and
Exchange Commission. You may inspect and copy our reports and other information
we file with the Securities and Exchange Commission at the public reference
facilities maintained by the Securities and Exchange Commission at 100 F Street,
NE, Washington, D.C. 20549. You may also inspect such documents at the office of
the New York Stock Exchange, Wall Street, New York, New York 10005. Copies of
such material may also be obtained from the Public Reference Section of the
Securities and Exchange Commission at 100 F Street, NE,
124
Washington, D.C. 20549, at prescribed rates. You may obtain information
regarding the Washington D.C. Public Reference Room by calling the Securities
and Exchange Commission at 1-800-SEC-0330 or by contacting the Securities and
Exchange Commission over the internet at its website at http://www.sec.gov.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk exposures primarily consist of fluctuations in oil and gas
prices, exchange rates and interest rates.
Commodity Price Risks
We are exposed to fluctuations in prices of crude oil and natural gas.
International oil and gas prices are volatile and this volatility has a
significant effect on our net sales and net income. We do not hedge market risk
resulting from fluctuations in oil and gas prices. See "--Overview" and "Item
3--Key Information--Risk Factors--Risks relating to our business--Our business,
revenues and profits fluctuate with changes in oil and gas prices."
Currency Risk
Our foreign exchange exposure gives rise to market risk associated with
exchange rate movements.
Substantially all of our oil and gas sales are denominated in Renminbi and
U.S. dollars. In the last ten years, the PRC government's policy of maintaining
a stable exchange rate and China's ample foreign reserves have contributed to
the stability of the Renminbi. On July 21, 2005, China reformed its foreign
exchange regime by moving into a managed floating exchange rate system based on
market supply and demand with reference to a basket of currencies. Renminbi
would no longer be pegged to the U.S. dollar. From that day to December 31,
2005, Renminbi appreciated about 2.5% against the U.S. dollar. However, the
Chinese government has not yet determined if or when the exchange rate will be
deregulated. Since the benchmark oil and gas prices are usually in U.S. dollars,
the appreciation of Renminbi against U.S. dollars will decrease our revenues
derived from oil and gas sales while such effects may be partially offset by
decreases in the costs of imported equipment denominated in U.S. dollar and our
debt servicing payments in U.S. dollar.
As of December 31, 2005, the balance of our Yen-denominated loans was only
Rmb 37.3 million. Since we have hedged our Yen loans against foreign currency
swaps, we do not expect any exchange risk relating to Japanese Yen in the
future.
For a discussion of our currency risk, see "Item 3--Key Information--Risk
Factors--Risks relating to the PRC-- Government control of currency conversion
and future movements in exchange rates may adversely affect our operations and
financial condition."
Interest Rate Risk
We are exposed to interest rate risk arising from our loans. An upward
fluctuation in interest rates increases the cost of new debt. We may use
interest rate swap transactions, from time to time, to hedge our interest rate
exposure when considered appropriate, based on existing and anticipated market
conditions.
As of December 31, 2005, the interest rates for our outstanding debts were
fixed. The term of the weighted average balance was approximately eight years.
The average interest rate payable by the Group is favorable under the
environment of interest rate hike. We do not currently engage in any interest
rate hedging activities.
125
The following table sets forth additional information about the expected
maturity dates of our outstanding debt as of December 31, 2005.
Fair value
as of
2011 December
2006 2007 2008 2009 2010 and after Total 31, 2005
--------- --------- --------- --------- --------- --------- --------- ---------
(Rmb in millions, except percentages)
Long-term debt, including current
portion
Fixed rate ............ 825.7 18.7 -- -- -- -- 844.4 869
Average interest rate . 8.956% 4.1% -- -- -- -- -- --
Long-term guaranteed notes
Fixed rate ............ -- -- -- 8,070.2 -- 8,070.2 16,140.4 16,592
Average interest rate . 3.331% 3.331% 3.331% 3.381% 5.663% 5.663% -- --
The above table takes into account our early repayment of certain loans in
2003. For additional discussions of our market risks, see "Item 3--Key
Information--Risk Factors."
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
126
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
A. MATERIAL MODIFICATIONS TO THE INSTRUMENTS DEFINING THE RIGHTS OF
SECURITY HOLDERS
None.
B. MATERIAL MODIFICATIONS TO THE RIGHTS OF REGISTERED SECURITIES BY
ISSUING OR MODIFYING ANY OTHER CLASS OF SECURITIES
None.
C. WITHDRAWAL OR SUBSTITUTION OF A MATERIAL AMOUNT OF THE ASSETS SECURING ANY
REGISTERED SECURITIES
Not applicable.
D. CHANGE OF TRUSTEES OR PAYING AGENTS FOR ANY REGISTERED SECURITIES
Not applicable.
E. USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a) We have carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective and designed to ensure that material
information relating to us and our consolidated subsidiaries as required to be
disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported as and when required.
(b) There were no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors had determined that Dr. Kenneth S. Courtis, our
independent non-executive director, was an audit committee financial expert
serving on our audit committee. Dr. Courtis was independent as defined in the
listing standards of the New York Stock Exchange. Effective May 25, 2006, Mr.
Aloysius Hau Yin Tse has been designated by our board as an audit committee
financial expert upon Dr. Courtis' retirement. Mr. Tse is independent as
defined in the listing standards of the New York Stock Exchange.
ITEM 16B. CODE OF ETHICS
127
Our board of directors adopted a code of ethics ("Code of Ethics") on
August 28, 2003 to provide guidelines to our senior management and directors in
legal and ethical matters as well as the sensitivities involved in reporting
illegal and unethical matters. The Code of Ethics covers such areas as
supervisory rules, insider dealing, market malpractices, conflict of interests,
company opportunities, protection and proper use of our assets as well as
reporting requirements.
All our directors and senior management members are required to
familiarize themselves with and follow the Code of Ethics to ensure that our
operations are honest and legal. Violations of the rules will be disciplined
and serious offences will result in dismissals.
We reviewed our Code of Ethics and adopted the revised code of ethics
(the "New Code of Ethics") in 2005, as part of our continuing efforts to
improve our corporate governance standards. The New Code of Ethics clarified
the scope of senior management, and expanded the applicability of prohibitions
against insider trading and other market misconduct to any "manager, secretary
of, or any other person involved in the management of, a corporation." Other
revisions made in the New Code of Ethics are technical or administrative in
nature. We have provided all our directors and senior officers with a copy of
the New Code of Ethics and require them to comply with the New Code of Ethics,
so as to ensure our operation is proper and lawful. We will take disciplinary
actions towards any act which is in breach of the New Code of Ethics. Any
change or waiver, explicit or implicit, with respect to our code of ethics,
must be disclosed to our shareholders either in our annual report or on our
internet website, www.cnoocltd.com.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed for professional services rendered by our
principal accountants for the audit of our annual financial statements or
services that are normally provided by the accountants in connection with
statutory and regulatory filings or engagements were Rmb 6.8 million for 2004
and Rmb 8.0 million (US$1.0 million) for 2005.
Audit-Related Fees
The aggregate fees billed for assurance and related services by our
principal accountants that are reasonably related to the performance of the
audit or review of our financial statements and are not reported under "Audit
Fees" were Rmb 993,180 for 2004 and Rmb 2,098,252 (US$260,000) for 2005. The
audit-related services provided included accounting advice, transaction support
services and advisory to our implementation of Section 404 of the
Sarbanes-Oxley Act.
Tax Fees
The aggregate fees billed for professional service rendered by the
principal accountant for tax compliance, tax advice and tax planning were Rmb
99,318 for 2004 and nil for 2005.
All other fees
The aggregate fees billed for products and services provided by our
principal accountant, other than the services reported above, were nil for
fiscal year 2004 and 2005.
Audit Committee's pre-approval policies and procedures
The audit committee under our board of directors is responsible for the
appointment, compensation and oversight of the work of our independent auditor.
In 2003, our audit committee adopted a policy calling for the audit committee's
pre-approval for the engagement of independent auditor for audit and permitted
non-audit services. Our board of directors has also ratified the policy and
procedures. Under this audit committee policy, proposed services may be
pre-approved by the audit committee either on an annual basis or on a
case-by-case basis. Appendices to the audit committee policy
128
sets forth (1) the audit, audit-related, tax and other services that may be
subject to the general annual pre-approval of the audit committee; (2)
non-audit services of a routine and recurring nature that may be subject to
specific pre-approval from the audit committee on a case-by-case basis; and (3)
a list of prohibited non-audit services. The audit committee will periodically
review and revise these attached lists based on its subsequent determinations.
The audit committee policy also provides for procedures to establish annual fee
levels or budgets for pre-approved services and ratios between different
categories of pre-approved services. In addition, the audit committee policy
contains provisions that deal with compliance, monitoring, reporting and other
related matters.
During 2005, all of the audit-related services, and all of tax fees paid
to our principal accountant were approved by the audit committee. Our principal
accountant audited our financial statements for 2005 solely through its
full-time, permanent employees, without involvement of its part-time or
temporary employees.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
No purchases of equity securities by US or any affiliated purchaser
during the period covered by this annual report.
129
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See pages beginning on page F-1 following Item 19.
ITEM 19. EXHIBITS
The following documents are filed as part of this annual report:
Exhibit
Number Document
1.1 Articles of Association of the Registrant, as amended in 2005.
1.2 Memorandum of Association of the Registrant, incorporated by
reference to Exhibit 3.2 to our Registration Statement on Form
F-1 filed with the Securities and Exchange Commission (File
Number: 333-10862).
2.1 Form of Indenture, incorporated by reference to Exhibit 2.1 to
our annual report on Form 20-F for fiscal year 2002 filed with
the Securities and Exchange Commission (File Number: 1-14966).
2.2 Trust Deed dated December 15, 2004 among CNOOC Limited, CNOOC Finance
(2004) Limited and J.P. Morgan Corporate Trustee Services Limited,
incorporated by reference to Exhibit 2.2 to our annual report on Form
20-F for fiscal year 2004 filed with the Securities and Exchange
Commission (File Number: 1-14966).
4.1 The Asset Swap Agreement dated July 20, 1999 between CNOOC and
Offshore Oil Company Limited, incorporated by reference to Exhibit
10.1 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.2 The Asset Allocation Agreement dated July 20, 1999 between CNOOC and
Offshore Oil Company Limited, incorporated by reference to Exhibit
10.2 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.3 The Reorganization Agreement dated September 13, 1999 between CNOOC,
Offshore Oil Company Limited and CNOOC Limited, incorporated by
reference to Exhibit 10.3 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File Number:
333-10862).
4.4 Form of the Equity Transfer Agreement between CNOOC and CNOOC Limited,
incorporated by reference to Exhibit 10.4 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.5 Form of the Transfer Agreement dated October 1, 1999 between
CNOOC and Offshore Oil Company Limited regarding the transfer of
the rights and obligations of CNOOC under the 37 production
sharing contracts and one geophysical exploration agreement,
incorporated by reference to Exhibit 10.5 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
130
4.6 Form of Equity Transfer Agreement between China Offshore Oil East
China Sea Corporation and Offshore Oil Company Limited regarding the
transfer of the rights and obligations under Joint Venture Contract of
Shanghai Petroleum and Natural Gas Company Limited dated July 28, 1992
to Offshore Oil Company Limited, incorporated by reference to Exhibit
10.6 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.7 Transfer Agreement dated September 9, 1999 between CNOOC and Offshore
Oil Company Limited regarding the transfer of the rights and
obligations of CNOOC under the Natural Gas Sale and Purchase Contract
dated December 22, 1992 to Offshore Oil Company Limited, incorporated
by reference to Exhibit 10.7 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File Number:
333-10862).
4.8 Transfer Agreement dated September 9, 1999 between CNOOC and Offshore
Oil Company Limited regarding the transfer of the rights and
obligations of CNOOC under the Natural Gas Sale and Purchase Contract
dated November 7, 1992 to Offshore Oil Company Limited, incorporated
by reference to Exhibit 10.8 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File Number:
333-10862).
4.9 Transfer Agreement dated September 9, 1999 among CNOOC, Offshore Oil
Company Limited, the four PRC subsidiaries and CNOOC's affiliates
regarding the transfer of the rights and obligations of the technical
services agreements to Offshore Oil Company Limited, incorporated by
reference to Exhibit 10.9 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File Number:
333-10862).
4.10 Nanshan Terminal Leasing Agreement dated September 9, 1999 between
CNOOC, Hainan China Oil and Offshore Natural Gas Company and Offshore
Oil Company Limited, incorporated by reference to Exhibit 10.10 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.11 Trademark License Agreement dated September 9, 1999 between CNOOC,
Offshore Oil Company Limited and CNOOC Limited, incorporated by
reference to Exhibit 10.11 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File Number:
333-10862).
4.12 Trademark License Agreement dated September 9, 1999 between China
Offshore Oil Marketing Company, CNOOC Limited and Offshore Oil Company
Limited and CNOOC Limited, incorporated by reference to Exhibit 10.12
to our Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.18 Property Leasing Agreement dated September 9, 1999 between Wui Hai
Enterprise Company Limited and Offshore Oil Company Limited in respect
of the office premises at 6th, 7th and 8th Floors, CNOOC Plaza, No. 6
Dong Zhi Men Wai Xiao Jie, Beijing, incorporated by reference to
Exhibit 10.18 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.19 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil Western South China Sea Corporation and Offshore Oil
Company Limited in respect of the office premises at 1st to 9th
Floors, Nantiao Road, Potou District Zhangjiang, Guangdong,
incorporated by reference to Exhibit 10.19 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.20 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil Bohai Corporation and Offshore Oil Company Limited in
respect of the office premises at 1st to 7th Floors and 9th Floor,
2-37 He Kou Jie, Tanggu District, Tianjin, incorporated by reference
to Exhibit 10.20 to our Registration Statement on Form F-1 filed with
the Securities and Exchange Commission (File Number: 333-10862).
131
4.21 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil East China Sea Corporation and Offshore Oil Company
Limited in respect of the office premises at 20th, 22nd and 23rd
Floors, 583 Ling Ling Road, Shanghai, the PRC, incorporated by
reference to Exhibit 10.21 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File Number:
333-10862).
4.22 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil Eastern South China Sea Corporation and Offshore Oil
Company Limited in respect of the office premises at 3rd Floor and 6th
to 11th Floors, 1 Second Industrial Road, Shekou, Shenzhen, the PRC,
incorporated by reference to Exhibit 10.22 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.23 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil Bohai Corporation and Offshore Oil Company Limited
in respect of the Chengbei Warehouse, Chengbei Road, Tanggu
District, Tianjin City, the PRC, incorporated by reference to
Exhibit 10.23 to our Registration Statement on Form F-1 filed
with the Securities and Exchange Commission (File Number:
333-10862).
4.24 Property Leasing Agreement dated September 9, 1999 between Overseas
Oil & Gas Corporation Ltd. and China Offshore Oil (Singapore)
International Pte. Ltd. in respect of the residential premises at
10-01 and 17-002 Aquamarine Tower, 50 Bayshore Road, 13-05 Jade Tower,
60 Bayshore Road, Singapore, incorporated by reference to Exhibit
10.24 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.25 Suizhong Pier Agreement dated September 9, 1999 between Offshore Oil
Company Limited and China Offshore Bohai Corporation, incorporated by
reference to Exhibit 10.25 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File Number:
333-10862).
4.26 Form of Novation Agreement among CNOOC, CNOOC China Limited, the
Banks and other financial institution and the Fuji Bank Limited
Hong Kong Branch, as agent, in respect of the transfer of the
US$110 million syndicated loan, incorporated by reference to
Exhibit 10.26 to our Registration Statement on Form F-1 filed
with the Securities and Exchange Commission (File Number:
333-10862).
4.27 Form of the Undertaking Agreement between CNOOC and CNOOC Limited,
incorporated by reference to Exhibit 10.27 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.28 Service Agreement between CNOOC Limited and Chengyu Fu.
4.29 Service Agreement between CNOOC Limited and Han Luo.
4.30 Service Agreement between CNOOC Limited and Shouwei Zhou.
4.31 Service Agreement between CNOOC Limited and Xinghe Cao.
4.32 Service Agreement between CNOOC Limited and Zhenfang Wu.
4.33 Service Agreement between CNOOC Limited and Guangqi Wu.
4.34 Service Agreement between CNOOC Limited and Hua Yang.
4.35 Form of Pre-Global Offering Share Option Scheme for the Senior
Management of CNOOC Limited, incorporated by reference to Exhibit
10.31 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.36 Form of Share Option Scheme for the Senior Management of CNOOC
Limited, incorporated by reference to Exhibit 10.32 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.37 CNOOC Limited Share Option Scheme adopted on December 31, 2005
132
4.38 Subscription Agreement dated March 17, 2000 among CNOOC Limited,
CNOOC (BVI) Limited, Overseas Oil & Gas Corporation, Ltd., et
al., incorporated by reference to Exhibit 10.33 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.39 Subscription Agreement dated May 31, 2000 among CNOOC Limited,
CNOOC (BVI) Limited, Overseas Oil & Gas Corporation, Ltd. and
Hutchison International Limited, incorporated by reference to
Exhibit 10.34 to our Registration Statement on Form F-1 filed
with the Securities and Exchange Commission (File Number:
333-10862).
4.40 Subscription Agreement dated May 31, 2000 among CNOOC Limited, CNOOC
(BVI) Limited, Overseas Oil & Gas Corporation, Ltd. and Hong Kong
Electric Holdings Limited, incorporated by reference to Exhibit 10.35
to our Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.41 Subscription Agreement dated June 28, 2000 among CNOOC Limited, CNOOC
(BVI) Limited, Overseas Oil & Gas Corporation, Ltd., et al.,
incorporated by reference to Exhibit 10.36 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.42 Corporation Placing Agreement dated February 6, 2001 among CNOOC
Limited, China National Offshore Oil Corporation, Shell Eastern
Petroleum (Pte) Limited and Merrill Lynch Far East Limited,
incorporated by reference to Exhibit 10.37 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.43 Equity Transfer Agreement dated September 5, 2003 between CNOOC China
Limited and CNOOC (Summary Translation), incorporated by reference to
Exhibit 4.38 to our annual report on Form 20-F for fiscal year 2003
filed with the Securities and Exchange Commission (File Number:
1-14966).
4.44 Framework Agreement dated April 8, 2004 with CNOOC Finance Corporation
Limited (Summary Translation), incorporated by reference to Exhibit
4.39 to our annual report on Form 20-F for fiscal year 2003 filed with
the Securities and Exchange Commission (File Number: 1-14966).
4.45 Framework Agreement dated December 8, 2005 with CNOOC (Summary
Translation)
4.46 Framework Agreement dated December 8, 2005 with China Oilfield
Services Limited (Summary Translation)
4.47 Framework Agreement dated December 8, 2005 with Offshore Oil
Engineering Co., Ltd (Summary Translation)
4.48 Supplemental Agreement to the Undertaking agreement with CNOOC,
dated December 8, 2005
4.49 Sale and Purchase Agreement, dated January 8, 2006 between CNOOC
Exploration & Production Limited and South Atlantic Petroleum Limited
(certain statements, marked with an asterisk in brackets [*], have
been omitted from this agreement pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended, and the omitted materials have been
filed separately in paper form with the Securities and Exchange
Commission).
8.1 List of Subsidiaries
10.1 Letter from CNOOC Limited dated May 23, 2002 regarding receipt of
certain representations from Arthur Andersen & Co pursuant to the
requirements of the Securities and Exchange Commission, incorporated
by reference to Exhibit 10 to our annual report on Form 20-F for
fiscal year 2001 filed with the Securities and Exchange Commission
(File Number: 1-14966).
11.1 Code of Ethics for Directors and Senior Officers, as amended in
2005.
12.1 Certification by the Chief Executive Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002.
133
12.2 Certification by the Chief Financial Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002.
13.1 Sarbanes-Oxley Act of 2002 Section 906 Certification furnished to (not
filed with) the Securities and Exchange Commission.
134
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
CNOOC Limited
By: /s/Victor Zhikai Gao
---------------------------------
Name: Victor Zhikai Gao
Title: Senior Vice President,
General Counsel and Company
Secretary
Date: June 26, 2006
135
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-1
INDEX TO FINANCIAL STATEMENTS
Page
CNOOC LIMITED AND ITS SUBSIDIARIES
Report of Independent Public Accountants............................. F-3
Consolidated income statements for the years ended December 31, 2005,
2004, and 2003..................................................... F-4
Consolidated balance sheets as of December 31, 2005 and 2004......... F-6
Consolidated statements of changes in equity for the years ended
December 31, 2005, 2004, and 2003.................................. F-7
Consolidated cash flow statements for the years ended December 31,
2005, 2004, and 2003............................................... F-9
Notes to the consolidated financial statements....................... F-10
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
CNOOC Limited
(Incorporated in Hong Kong with limited liability)
We have audited the accompanying consolidated balance sheets of CNOOC Limited
(the "Company") and its subsidiaries (the "Group") as of December 31, 2005 and
2004, and the related consolidated income statements, changes in
shareholders' equity and cash flows for each of the three years ended December
31, 2005, 2004 and 2003. These financial statements are the responsibility of
the management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and Hong Kong Standards on Auditing
issued by the Hong Kong Institute of Certified Public Accountants. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. We were not engaged to perform an audit of the
Company's internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Group as of
December 31, 2005 and 2004 and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2005, in conformity with accounting principles generally accepted in Hong
Kong ("Hong Kong GAAP").
Accounting principles generally accepted in Hong Kong vary in certain
significant respects from accounting principles generally accepted in the
United States of America. Information relating to the nature and effect of
such differences is presented in note 38 to the consolidated financial
statements.
As discussed in note 2.2 to the financial statements, in 2005 the company
changed its classification of property, plant and equipment, its method of
accounting for land and buildings, its method of accounting for investments in
equity and debts securities and convertible bonds, and its method of
accounting for share-based transactions, upon the adoption of recently issued
Hong Kong Financial Reporting Standards.
/s/ Ernst & Young
-----------------------------------------
Ernst & Young
Certified Public Accountants
Hong Kong
March 24, 2005
F-3
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Notes 2003 2004 2005 2005
---------- ----------------- ----------------- ------------------ ---------------
RMB'000 RMB'000 RMB'000 US$'000
(Restated) (Restated)
REVENUE
Oil and gas sales 7,27 28,116,831 36,886,019 53,417,669 6,619,126
Marketing revenues 8 12,398,661 18,191,353 15,901,325 1,970,376
Other income 434,781 144,691 136,749 16,944
----------------- ----------------- ------------------ ---------------
40,950,273 55,222,063 69,455,743 8,606,446
----------------- ----------------- ------------------ ---------------
EXPENSES
Operating expenses ( 4,512,809) ( 5,070,344) ( 5,934,598) ( 735,372)
Production taxes ( 1,238,598) ( 1,725,674) ( 2,596,543) ( 321,745)
Exploration expenses ( 848,072) ( 1,316,160) ( 1,293,687) ( 160,304)
Depreciation, depletion and
amortisation ( 4,642,753) ( 5,455,062) ( 5,964,740) ( 739,107)
Dismantlement 28 ( 167,326) ( 201,637) ( 252,857) ( 31,332)
Impairment losses related to
property, plant and equipment - - (90,190) (11,176)
Crude oil and product
purchases 8 (12,295,238) ( 17,963,461) ( 15,704,100) ( 1,945,937)
Selling and administrative
expenses 9 ( 1,250,270) ( 1,104,348) ( 1,370,368) ( 169,806)
Others ( 350,232) ( 45,844) ( 77,062) ( 9,548)
----------------- ----------------- ------------------ ---------------
( 25,305,298) ( 32,882,530) ( 33,284,145) ( 4,124,327)
----------------- ----------------- ------------------ ---------------
PROFIT FROM OPERATING ACTIVITIES 15,644,975 22,339,533 36,171,598 4,482,119
Interest income 183,576 206,872 359,294 44,521
Financial costs 10 ( 354,940) ( 441,825) ( 1,100,532) ( 136,370)
Exchange gains/(losses), net ( 6,746) 29,269 287,027 35,566
Investment income 123,483 72,438 247,893 30,717
Share of profit of associates 220,263 344,469 307,075 38,050
Non-operating income/(expenses), net 314,968 519,206 28,579 3,543
----------------- ----------------- ------------------ ---------------
PROFIT BEFORE TAX 16,125,579 23,069,962 36,300,934 4,498,146
Tax 13 ( 4,627,836) ( 6,930,826) ( 10,977,812) ( 1,360,290)
----------------- ----------------- ------------------ ---------------
NET PROFIT 11,497,743 16,139,136 25,323,122 3,137,856
================= ================= ================== ===============
The accompanying notes are an integral part of these financial statements.
F-4
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS (CONT'D)
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Notes 2003 2004 2005 2005
--------- ---------------- --------------- --------------- --------------
RMB'000 RMB'000 RMB'000 US$'000
(Restated) (Restated)
DIVIDENDS
Special interim dividend
declared in place of 2003
final dividend * -- 2,617,526 -- --
Interim 14 1,220,132 1,306,451 2,138,128 264,941
Special interim 14 1,568,741 2,177,418 2,138,128 264,941
Proposed final* 14 1,050,460 1,310,022 4,250,391 526,678
Proposed special final* 14 1,575,691 2,183,371 -- --
---------------- --------------- --------------- --------------
5,415,024 9,594,788 8,526,647 1,056,560
================ =============== =============== ==============
DIVIDENDS PER SHARE
Special interim dividend -- RMB0.060 -- --
declared in place of 2003
final dividend*
Interim 14 RMB0.030 RMB0.030 RMB0.052 US$ 0.006
Special interim 14 RMB0.038 RMB0.050 RMB0.052 US$ 0.006
Proposed final* 14 RMB0.026 RMB0.030 RMB0.103 US$ 0.013
Proposed special final* 14 RMB0.038 RMB0.050 -- --
EARNINGS PER SHARE
Basic 15 RMB0.28 RMB0.39 RMB0.62 US$ 0.08
Diluted 15 RMB0.28 RMB0.39 RMB0.61 US$ 0.08
EARNINGS PER ADS
Basic 15 RMB27.99 RMB39.31 RMB61.68 US$ 7.64
Diluted 15 RMB27.97 RMB39.19 RMB61.01 US$ 7.56
* The proposed final dividend and special final dividend for 2003 were cancelled and replaced by the special interim
dividend declared in 2004.
The accompanying notes are an integral part of these financial statements.
F-5
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Notes 2004 2005 2005
-------------- -------------------- ------------------ -----------------
RMB'000 RMB'000 US$'000
(Restated)
NON-CURRENT ASSETS
Property, plant and equipment, net 16 57,182,026 66,625,167 8,255,702
Intangible assets 17 -- 1,299,643 161,042
Investments in associates 18 1,327,109 1,401,839 173,706
Available-for-sale financial assets -- 1,017,000 126,019
-------------------- ------------------ -----------------
58,509,135 70,343,649 8,716,469
-------------------- ------------------ -----------------
CURRENT ASSETS
Accounts receivable, net 19 4,276,489 5,277,784 653,984
Inventories and supplies 20 1,147,294 1,199,626 148,649
Due from related companies 27 1,173,374 2,099,197 260,117
Other current assets 556,931 806,115 99,887
Available-for-sale financial assets
/Short term investments 21 5,444,113 13,846,935 1,715,811
Time deposits with maturities over
three months 8,603,000 12,200,000 1,511,735
Cash and cash equivalents 27 14,091,524 8,991,758 1,114,193
-------------------- ------------------ -----------------
35,292,725 44,421,415 5,504,376
-------------------- ------------------ -----------------
TOTAL ASSETS 93,801,860 114,765,064 14,220,845
==================== ================== =================
CURRENT LIABILITIES
Accounts payable 22 3,102,024 2,867,678 355,342
Other payables and accrued liabilities 23 4,191,024 5,206,943 645,206
Current portion of long term bank loans 24 24,364 825,674 102,311
Due to the parent company 26,27 370,060 488,482 60,529
Due to related companies 27 211,425 759,934 94,166
Tax payable 13 2,503,466 3,467,505 429,668
-------------------- ------------------ -----------------
10,402,363 13,616,216 1,687,222
-------------------- ------------------ -----------------
NON-CURRENT LIABILITIES
Long term bank loans 24 865,211 24,392 3,022
Long term guaranteed notes 25 16,313,550 16,531,780 2,048,497
Provision for dismantlement 28 3,089,448 4,161,663 515,683
Deferred tax liabilities 13 6,688,498 6,827,916 846,065
-------------------- ------------------ -----------------
26,956,707 27,545,751 3,413,267
-------------------- ------------------ -----------------
CAPITAL AND RESERVES
Issued capital 29 876,586 876,635 108,626
Reserves 30 55,566,204 72,726,462 9,011,730
-------------------- ------------------ -----------------
56,442,790 73,603,097 9,120,356
-------------------- ------------------ -----------------
TOTAL EQUITY AND LIABILITIES 93,801,860 114,765,064 14,220,845
==================== ================== =================
The accompanying notes are an integral part of these financial statements.
F-6
CNOOC LIMITED AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Share
premium Statutory
Issued and capital Asset Cumulative and non-
share redemption revaluation translation distributive Other Retained
capital reserve reserve reserve reserve reserve earnings
--------- ----------- ------------ ----------- ------------ ------- --------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Balances at January 1, 2003 as
previously reported 876,978 20,761,205 274,671 ( 13,596) 2,232,410 - 16,436,820
Cumulative adjustment for the
adoption of HKFRS 2 (note 2.2) - - - - - 25,755 ( 25,755)
Cumulative adjustment for the
adoption of HKAS 16 (note 2.2) - - ( 274,671) - - - -
--------- ----------- ------------ ----------- ------------ ------- --------
Balances at January 1 2003
as restated 876,978 20,761,205 - (13,596) 2,232,410 25,755 16,411,065
Exchange realignment - - - 36,243 - - -
--------- ----------- ------------ ----------- ------------ ------- --------
Total income and expenses for the
year recognised directly in equity - - - 36,243 - - -
Net profit for the year as restated - - - - - - 11,497,743
--------- ----------- ------------ ----------- ------------ ------- --------
Total income and expenses for the
year - - - 36,243 - - 11,497,743
Appropriation to statutory reserve - - - - 818,079 - (818,079)
2002 final dividends - - - - - - (1,307,408)
2002 special final dividends - - - - - - (1,307,408)
2003 interim dividends - - - - - - (1,220,132)
2003 special interim dividends - - - - - - (1,568,741)
Transfer to/(from) reserve - - - - 5,000,000 - (5,000,000)
Equity-settled share option expense - - - - - 37,747 -
--------- ----------- ------------ ----------- ------------ ------- --------
Balances at December 31, 2003 as
restated 876,978 20,761,205 - 22,647 8,050,489 63,502 16,687,040
========= =========== ============ =========== ============ ======= ==========
Balances at January 1, 2004 as
previously reported 876,978 20,761,205 274,671 22,647 8,050,489 - 16,750,542
Cumulative adjustment for the
adoption of HKFRS 2 (note 2.2) - - - - - 63,502 (63,502)
Cumulative adjustment for the
adoption of HKAS 16 (note 2.2) - - (274,671) - - - -
--------- ----------- ------------ ----------- ------------ ------- --------
Balances at January 1, 2004
as restated 876,978 20,761,205 - 22,647 8,050,489 63,502 16,687,040
Exchange realignment - - - ( 42,301) - - -
--------- ----------- ------------ ----------- ------------ ------- --------
Total income and expenses for the
year recognised directly in equity - - - ( 42,301) - - -
Net profit for the year as restated - - - - - - 16,139,136
--------- ----------- ------------ ----------- ------------ ------- --------
Total income and expenses for the
year - - - (42,301) - - 16,139,136
Repurchases of shares (392) - - - - - (60,761)
Transfer of reserve upon
share repurchases - 392 - - - - (392)
2004 special interim dividend
declared in place of 2003 final
dividends - - - - - - (2,617,526)
2004 interim dividends - - - - - - (1,306,451)
2004 special interim dividends - - - - - - (2,177,418)
Appropriation to statutory reserve - - - - 1,363,121 - (1,363,121)
Equity-settled share option expenses - - - - - 46,642 -
--------- ----------- ------------ ----------- ------------ ------- --------
Balances at 31 December 2004
as restated 876,586 20,761,597 - (19,654) 9,413,610 110,144 25,300,507
========= =========== ============ =========== ============ ======= ==========
Total
-----------
RMB'000
Balances at January 1, 2003 as
previously reported 40,568,488
Cumulative adjustment for the
adoption of HKFRS 2 (note 2.2) -
Cumulative adjustment for the
adoption of HKAS 16 (note 2.2) (274,671)
-----------
Balances at January 1 2003
as restated 40,293,817
Exchange realignment 36,243
-----------
Total income and expenses for the
year recognised directly in equity 36,243
Net profit for the year as restated 11,497,743
-----------
Total income and expenses for the year 11,533,986
Appropriation to statutory reserve -
2002 final dividends (1,307,408)
2002 special final dividends (1,307,408)
2003 interim dividends (1,220,132)
2003 special interim dividends (1,568,741)
Transfer to/(from) reserve -
Equity-settled share option expense 37,747
-----------
Balances at December 31, 2003 as
restated 46,461,861
===========
Balances at January 1, 2004 as
previously reported 46,736,532
Cumulative adjustment for the
adoption of HKFRS 2 (note 2.2) -
Cumulative adjustment for the
adoption of HKAS 16 (note 2.2) (274,671)
-----------
Balances at January 1, 2004
as restated 46,461,861
Exchange realignment ( 42,301)
-----------
Total income and expenses for the
year recognised directly in equity ( 42,301)
Net profit for the year as restated 16,139,136
-----------
Total income and expenses for the
year 16,096,835
Repurchases of shares (61,153)
Transfer of reserve upon
share repurchases -
2004 special interim dividend
declared in place of 2003 final
dividends (2,617,526)
2004 interim dividends (1,306,451)
2004 special interim dividends (2,177,418)
Appropriation to statutory reserve -
Equity-settled share option expenses 46,642
-----------
Balances at 31 December 2004
as restated 56,442,790
===========
F-7
CNOOC LIMITED AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN EQUITY (CONT'D)
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Share
premium Statutory
Issued and capital Asset Cumulative and non-
share redemption revaluation translation distributive Other Retained
capital reserve reserve reserve reserve reserve earnings
--------- ----------- ----------- ----------- ----------- ---------- ----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Balances at January 1 2005
as previously reported 876,586 20,761,597 274,671 (19,654) 9,413,610 -- 25,410,651
Cumulative adjustment for the
adoption of HKFRS 2 (note 2.2) - - - - - 110,144 (110,144)
Cumulative adjustment for the
adoption of HKAS 16 (note 2.2) - - (274,671) - - - -
--------- ----------- ----------- ----------- ----------- ---------- ----------
Balances at January 1 2005
as restated 876,586 20,761,597 - (19,654) 9,413,610 110,144 25,300,507
Changes in fair value of
available-for-sale investments - - - - - 69,069 -
Exchange realignment - - - (493,289) - - -
--------- ----------- ----------- ----------- ----------- ---------- ----------
Total income and expenses for the
year recognised directly in equity - - - (493,289) - 69,069 -
Net profit for the year - - - - - - 25,323,122
--------- ----------- ----------- ----------- ----------- ---------- ----------
Total income and expenses for the
year - - - (493,289) - 69,069 25,323,122
2004 final dividends - - - - - - (3,495,962)
2005 interim dividends - - - - - - (4,276,256)
Exercise of share options 49 4,451 - - - - -
Appropriation to statutory reserve - - - - 2,268,364 - (2,268,364)
Equity-settled share option expenses - - - - - 29,123 -
--------- ----------- ----------- ----------- ----------- ---------- ----------
Balances at 31 December 2005 876,635 20,766,048 - (512,943) 11,681,974 208,336 40,583,047
========= =========== =========== =========== =========== ========== ==========
Total
-----------
RMB'000
Balances at January 1 2005
as previously reported 56,717,461
Cumulative adjustment for the
adoption of HKFRS 2 (note 2.2) -
Cumulative adjustment for the
adoption of HKAS 16 (note 2.2) (274,671)
-----------
Balances at January 1 2005
as restated 56,442,790
Changes in fair value of
available-for-sale investments 69,069
Exchange realignment (493,289)
-----------
Total income and expenses for the
year recognised directly in equity (424,220)
Net profit for the year 25,323,122
-----------
Total income and expenses for the
year 24,898,902
2004 final dividends (3,495,962)
2005 interim dividends (4,276,256)
Exercise of share options 4,500
Appropriation to statutory reserve -
Equity-settled share option expenses 29,123
-----------
Balances at 31 December 2005 73,603,097
===========
* These reserve accounts comprise the consolidated reserves of RMB72,726,462,000 (2004: RMB55,566,204,000
(restated), 2003: RMB45,584,883,000 (restated)), in the consolidated balance sheet.
The accompanying notes are an integral part of these financial statements.
F-8
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Notes 2003 2004 2005 2005
------ ------------- -------------- ------------- ----------------
RMB'000 RMB'000 RMB'000 US$'000
OPERATING ACTIVITIES
Cash generated from operations 32(a) 21,142,911 29,705,761 41,695,648 5,166,619
Income taxes paid ( 3,514,807) ( 7,402,280) ( 9,849,454) ( 1,220,472)
Income tax refund - - - -
Interest received 183,576 206,871 359,294 44,521
Dividends received 90,000 135,000 232,346 28,791
Short term investments income received 55,840 4,626 45,785 5,673
Interest paid ( 138,801) ( 322,118) ( 329,797) ( 40,866)
------------- ------------- ------------- --------------
Net cash inflow from operating activities 17,818,719 22,327,860 32,153,822 3,984,266
------------- ------------- ------------- --------------
INVESTING ACTIVITIES
Acquisition of and prepayment for oil and gas
properties 32(b) ( 4,100,900) ( 5,779,140) ( 864,007) ( 107,061)
Additions of property, plant and equipment ( 8,271,564) ( 12,842,905) ( 16,605,548) ( 2,057,638)
Proceeds from disposals of property, plant and
equipment - - - -
Investment in an associate ( 450,000) - - -
(Increase)/decrease in time deposits with
maturities over three months 2,367,000 ( 6,280,000) ( 3,597,000) ( 445,714)
Purchase of available-for-sale financial
assets/ short term investments ( 8,144,702) ( 5,735,093) ( 21,487,478) ( 2,662,571)
Disposals of available-for-sale financial
assets/ short term investments 9,087,581 6,029,946 13,204,817 1,636,244
------------- ------------- ------------- --------------
Net cash outflow from investing activities ( 9,512,585) ( 24,607,192) ( 29,349,216) ( 3,636,740)
-------------- ------------- ------------- --------------
FINANCING ACTIVITIES
Proceeds from issuance of long term guaranteed
notes 3,995,773 8,154,085 - -
Repayment of bank loans ( 336,938) ( 21,075) ( 18,654) ( 2,312)
Dividends paid ( 5,403,689) ( 6,101,395) ( 7,772,218) ( 963,076)
Share repurchases - ( 61,153) - -
Proceeds from exercise of share options - - 4,500 558
-------------- ------------- ------------- --------------
Net cash (outflow)/inflow from financing
activities ( 1,744,854) 1,970,462 ( 7,786,372) ( 964,830)
-------------- ------------- ------------- --------------
NET INCREASE/(DECREASE)IN CASH AND CASH EQUIVALENTS 6,561,280 ( 308,870) ( 4,981,766) ( 617,304)
Cash and cash equivalents at beginning of year 7,839,114 14,400,394 14,091,524 1,746,118
Effect of foreign exchange rate changes, net - - ( 118,000) ( 14,621)
-------------- ------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 14,400,394 14,091,524 8,991,758 1,114,193
-------------- ------------- ------------- --------------
ANALYSIS OF BALANCES OF CASH AND CASH
EQUIVALENTS
Cash and cash equivalents balances 14,400,394 14,091,524 8,991,758 1,114,193
============== ============== ============= =============
The accompanying notes are an integral part of these financial statements.
F-9
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
1. CORPORATE INFORMATION
CNOOC Limited (the "Company") was incorporated in the Hong Kong Special
Administrative Region ("Hong Kong"), the People's Republic of China (the
"PRC") on 20 August 1999 to hold the interests in certain entities
whereby creating a group comprising the Company and its subsidiaries.
During the year, the Company and its subsidiaries (hereinafter
collectively referred to as the "Group") were principally engaged in the
exploration, development, production and sale of crude oil, natural gas
and other petroleum products.
The registered office address is 65/F, Bank of China Tower, 1 Garden
Road, Hong Kong.
In the opinion of the directors, the parent and the ultimate holding
company is China National Offshore Oil Corporation ("CNOOC"), a company
established in the PRC.
Particulars of the principal subsidiaries are as follows:
Nominal value of
issued and paid Percentage of
Place and date of /registered equity
incorporation/ ordinary share attributable
Name establishment capital to the Group Principal activities
--------------------------- --------------------- ------------------- ------------- --------------------
Directly held subsidiaries:
CNOOC China Limited Tianjin, the PRC RMB15 billion 100% Offshore petroleum
September 15, 1999 exploration,
development,
production and sale
in the PRC
CNOOC International Limited British Virgin US$2 100% Investment holding
Islands
August 23, 1999
China Offshore Oil Singapore S$3 million 100% Sale and marketing
(Singapore) International May 14, 1993 of petroleum outside
Pte., Ltd. of the PRC
CNOOC Finance (2002) Limited British Virgin US$1,000 100% Bond issuance
Islands
January 24, 2002
CNOOC Finance (2003) Limited British Virgin US$1,000 100% Bond issuance
Islands
April 2, 2003
CNOOC Finance (2004) Limited British Virgin US$1,000 100% Bond issuance
Islands
December 9, 2004
Indirectly held subsidiaries*:
Malacca Petroleum Limited Bermuda US$12,000 100% Offshore petroleum
November 2, 1995 exploration,
development and
production in
Indonesia
F-10
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
1. CORPORATE INFORMATION (CONT'D)
Nominal value of
issued and paid Percentage of
Place and date of /registered equity
incorporation/ ordinary share attributable to
Name establishment capital the Group Principal activities
----------------------------- --------------------- ----------------- --------------- --------------------
Indirectly held subsidiaries* (cont'd):
OOGC America, Inc. State of Delaware, US$1,000 100% Investment holding
United States of
America
September 2, 1997
OOGC Malacca Limited Bermuda US$12,000 100% Offshore petroleum
November 2, 1995 exploration,
development and
production in
Indonesia
CNOOC Southeast Asia Limited Bermuda US$12,000 100% Investment holding
May 16, 1997
CNOOC ONWJ Ltd. Labuan, F.T., US$1 100% Offshore petroleum
Malaysia exploration,
March 27, 2002 development and
production in
Indonesia
CNOOC SES Ltd. Labuan, F.T., US$1 100% Offshore petroleum
Malaysia exploration,
March 27, 2002 development and
production in
Indonesia
CNOOC Poleng Ltd. Labuan, F.T., US$1 100% Offshore petroleum
Malaysia exploration,
March 27, 2002 development and
production in
Indonesia
CNOOC Madura Ltd. Labuan, F.T., US$1 100% Offshore petroleum
Malaysia exploration,
March 27, 2002 development and
production in
Indonesia
CNOOC Blora Ltd. Labuan, F.T., US$1 100% Onshore petroleum
Malaysia exploration,
March 27, 2002 development and
production in
Indonesia
F-11
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
1. CORPORATE INFORMATION (CONT'D)
Nominal value of
issued and paid Percentage of
Place and date of /registered equity
incorporation/ ordinary share attributable to
Name establishment capital the Group Principal activities
----------------------------- ------------------- ---------------- --------------- --------------------
Indirectly held subsidiaries* (cont'd):
CNOOC NWS Private Ltd. Singapore S$1 100% Offshore petroleum
October 8, 2002 exploration,
development and
production in
Australia
CNOOC Wiriagar Overseas Ltd. British Virgin US$1 100% Offshore petroleum
Islands exploration,
January 15, 2003 development and
production in
Indonesia
CNOOC Muturi Ltd. The Isle of Man US$7,780,700 100% Offshore petroleum
February 8, 1996 exploration,
development and
production in
Indonesia
* Indirectly held through CNOOC International Limited.
The above table lists the subsidiaries of the Company which, in the
opinion of the directors, principally affected the results for the
year or formed a substantial portion of the net assets of the Group.
To give details of other subsidiaries would, in the opinion of the
directors, result in particulars of excessive length.
2.1 BASIS OF PREPARATION
These financial statements have been prepared in accordance with Hong
Kong Financial Reporting Standards ("HKFRSs") (which also include
Hong Kong Accounting Standards ("HKASs") and Interpretations) issued
by the Hong Kong Institute of Certified Public Accountants
("HKICPA"), accounting principles generally accepted in Hong Kong
("Hong Kong GAAP") and the disclosure requirements of the Hong Kong
Companies Ordinance. They have been prepared under the historical
cost convention except for available-for-sale investments and
derivative financial instruments which have been measured at fair
value. These financial statements are presented in Renminbi ("RMB")
and all values are rounded to the nearest thousand (RMB'000) except
when otherwise indicated.
Basis of consolidation
The consolidated financial statements include the financial
statements of the Company and its subsidiaries for the year ended
December 31, 2005. The results of subsidiaries are consolidated from
the date of acquisition being the date on which the Group obtains
control and continue to be consolidated until the date that such
control ceases. All significant intercompany transactions and
balances within the Group are eliminated on consolidation.
The acquisition of subsidiaries or an interest in a joint venture or
associate during the year has been accounted for using the purchase
method of accounting. This method involves allocating the cost of the
business combinations to the fair value of the assets acquired, and
liabilities and contingent liabilities assumed at the date of
acquisition. The cost of the acquisition is measured at the aggregate
of the fair value of the assets given, equity instruments issued (if
any) and liabilities incurred or assumed at the date of exchange,
plus costs directly attributable to the acquisition.
F-12
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
2.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS
("HKFRSs")
The Hong Kong Institute of Certified Public Accountants has issued a
number of new Hong Kong Financial Reporting Standards, Hong Kong
Accounting Standards and interpretations, herein collectively referred
to as the new HKFRSs, which are generally effective for accounting
periods beginning on or after January 1, 2005. The following new and
revised HKFRSs affect the Group and are adopted for the first time for
the current year's financial statements:
HKAS 1 Presentation of Financial Statements
HKAS 2 Inventories
HKAS 7 Cash Flow Statements
HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
HKAS 10 Events after the Balance Sheet Date
HKAS 12 Income Taxes
HKAS 14 Segment Reporting
HKAS 16 Property, Plant and Equipment
HKAS 17 Leases
HKAS 18 Revenue
HKAS 19 Employee Benefits
HKAS 21 The Effects of Changes in Foreign Exchange Rates
HKAS 23 Borrowing Costs
HKAS 24 Related Party Disclosures
HKAS 27 Consolidated and Separate Financial Statements
HKAS 28 Investments in Associates
HKAS 31 Interests in Joint Ventures
HKAS 32 Financial Instruments: Disclosure and Presentation
HKAS 33 Earnings per Share
HKAS 36 Impairment of Assets
HKAS 37 Provisions, Contingent Liabilities and Contingent Assets
HKAS 38 Intangible Assets
HKAS 39 Financial Instruments: Recognition and Measurement
HKAS 39 Amendment Transition and Initial Recognition of Financial Assets and Financial Liabilities
HKFRS 2 Share-based Payment
HKFRS 3 Business Combinations
The adoption of HKASs 1, 2, 7, 8, 10, 12, 14, 17, 18, 19, 21, 23, 24,
27, 28, 31, 33, 36, 37, 38 and HKFRS 3 has no material impact on the
accounting policies of the Group and the methods of computation in the
Group's financial statements. The impacts of adopting other HKFRSs are
detailed as follows:
(a) HKAS 16 - Property, Plant and Equipment
In prior years, the Group's property, plant and equipment were
classified into three categories: oil and gas properties, land
and buildings (representing the onshore terminals for oil and gas
processing), and vehicles and office equipment. Land and
buildings were stated at valuation less accumulated depreciation.
Depreciation for land and buildings is calculated on the
straight-line basis at an annual rate estimated to write off the
valuation of each asset over its expected useful life, ranging
from 30 to 50 years.
According to HKAS 16, property, plant and equipment are required
to be categorised by major component and different useful lives,
if any, should be applied in calculating the depreciation.
F-13
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
2.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS
("HKFRSs")(CONT'D)
(a) HKAS 16 - Property, Plant and Equipment (continued)
Upon the adoption of HKAS 16, the Group has classified its
property, plant and equipment into two categories: oil and gas
properties and vehicles and office equipment. The Group has
reclassified the onshore terminals previously classified as land
and buildings to oil and gas properties as they will be used in
similar operations and are expected to have similar economic
useful lives.
The Group has also decided to change its accounting policy to
state the onshore terminals at cost instead of valuation and to
amortise those terminals by the unit-of-production method on a
property-by-property basis computed based on the total estimated
units of proved developed reserves instead of the straight line
method. Management believes the new policy will provide more
relevant information and consistent accounting approach for oil
and gas related assets.
The effect of this change in accounting policy is to decrease
both property, plant and equipment and the revaluation reserve
as at January 1, 2005 and 2004 by RMB 274,671,000. No adjustment
was made to the prior years' amounts as the impact on the prior
years' consolidated income statements was not material. The
effects of the above changes are summarized in note 2.4 to the
financial statements.
(b) HKASs 32 and 39 - Financial Instruments
(i) Investments in equity and debt securities
In prior periods, the Group classified its investments in short
term debt and equity securities as short term investments which
were not intended to be held on a continuing basis and those
investments were stated at fair value at the balance sheet date,
on an individual investment basis. The gains or losses arising
from changes in the fair value of such securities were credited
or charged to the income statement in the period in which they
arose.
Upon the adoption of HKAS 39, these securities held by the Group
at January 1, 2005 in the amount of RMB 5,444,113,000 were
designated as available-for-sale investments under the
transitional provisions of HKAS 39 and accordingly are stated at
fair value with gains or losses being recognised as a separate
component of equity until subsequent derecognition or
impairment.
(ii) Convertible bonds
In prior periods, convertible bonds were stated at amortised
cost.
Upon the adoption of HKAS 32 and HKAS 39, the Group's
convertible bonds issued with a cash settlement option and other
derivative features are split into liability and derivative
components based on their fair values for measurement purposes.
The effects of the above changes are summarised in note 2.4 to
the financial statements. In accordance with HKAS 32,
comparative amounts have been restated.
F-14
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
2.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS
("HKFRSs")(CONT'D)
(c) HKFRS 2 - Share-based Payment
In prior periods, no recognition and measurement of share-based
transactions in which employees (including directors) were
granted share options over shares in the Company were required
until such options were exercised by employees, at which time the
share capital and share premium were credited with the proceeds
received.
Upon the adoption of HKFRS 2, when employees (including
directors) render services as consideration for equity
instruments ("equity-settled transactions"), the cost of
equity-settled transactions with employees is measured by
reference to the fair value at the date at which the instruments
are granted.
The main impact of HKFRS 2 on the Group is the recognition of the
cost of these transactions and a corresponding entry to equity
for employee share options. The revised accounting policy for
share-based payment transactions is described in more detail in
note 3 "Summary of significant Accounting Policies" below.
The Group has adopted the provisions of HKFRS 2 retrospectively
to all stock options granted from the date of its incorporation.
The effects of adopting HKFRS 2 are summarized in note 2.4 to the
financial statements.
2.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING
STANDARDS
The HKICPA has issued a number of new and revised HKFRSs that are not
mandatory for these financial statements. The Group has not early
applied these HKFRSs in these financial statements. The following new
and revised HKFRSs, although not early adopted by the Group, will have
impact on the Group's financial statements in the period of initial
application. Unless otherwise stated, the following HKFRSs are effective
for accounting periods beginning on or after January 1, 2006:
HKAS 1 Amendment Capital Disclosures
HKAS 21 Amendment The effects of Changes in Foreign
Exchange Rate - Net Investment in a
Foreign Operation
HKAS 39 Amendment Cash Flow Hedge Accounting of Forecast
Intragroup Transactions
HKAS 39 Amendment The Fair Value Option
HKFRSs 1 & 6 Amendments First-time Adoption of Hong Kong
Financial Reporting Standards and
Exploration for and Evaluation of Mineral
Resources
HKFRS 6 Exploration for and Evaluation of Mineral
Resources
HKFRS 7 Financial Instruments: Disclosures
HK(IFRIC)-Int 4 Determining whether an Arrangement
contains a Lease
HK(IFRIC)-Int 5 Rights to Interests arising from
Decommissioning, Restoration and
Environmental Rehabilitation Funds
The HKAS 1 Amendment shall be applied for accounting periods beginning
on or after January 1, 2007. The revised standard will affect the
disclosures about qualitative information about the Group's objective,
policies and processes for managing capital; quantitative data about
what the Company regards as capital; and compliance with any capital
requirements and the consequences of any non-compliance.
F-15
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
2.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING
STANDARDS (CONT'D)
HKFRS 6 deals with the accounting for exploration for and evaluation of
mineral resources, including oil and gas. This HKFRS should be applied
for accounting periods beginning on or after January 1, 2006. The Group
expects that the adoption of HKFRS 6 will not have any significant
impact on its results of operations and financial position.
HKFRS 7 will replace HKAS 32 and has modified the disclosure
requirements of HKAS 32 relating to financial instruments. This HKFRS
shall be applied for accounting periods beginning on or after January
1, 2007.
Except as stated above, the Group expects that the adoption of the
other pronouncements listed above will not have any significant impact
on the Group's financial statements in the period of initial
application.
2.4 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES
(a) Effect on the consolidated balance sheet
Effect of adopting
---------------------------------------------
At January 1, 2005 HKAS 16# HKFRS 2#
Effect of new policies Property, plant Recognition of
Increase/(decrease) and equipment share-based payment Total
RMB'000 RMB'000 RMB'000
Assets
Property, plant and equipment, net (274,671) -- (274,671)
-----------
Liabilities/equity
Asset revaluation reserve (274,671) -- (274,671)
Other reserves -- 110,144 110,144
Retained earnings -- (110,144) (110,144)
-----------
(274,671)
-----------
Effect of adopting
-------------------------------------------------------------------
HKAS 16# HKASs 32 HKAS 39* HKFRS 2#
At December 31, 2005 and 39* Change in Recognition of
Effect of new policies Property, plant Convertible classification of share-based
Increase/(decrease) and equipment bonds equity investments payment Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Assets
Property, plant and equipment, net (274,671) -- -- -- (274,671)
------------
Liabilities/equity
Long term guaranteed notes -- 373,060 -- -- 373,060
Asset revaluation reserve (274,671) -- -- -- (274,671)
Other reserves -- -- 69,069 139,267 208,336
Retained earnings -- (373,060) (69,069) (139,267) (581,396)
------------
(274,671)
------------
F-16
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
2.4 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES (CONT'D)
(b) Effects on the balances of equity at January 1, 2003, 2004 and 2005
Effect of adopting
---------------------------------------------
HKAS 16# HKFRS 2#
Effect of new policies Property, plant Recognition of
Increase/(decrease) and equipment share-based payment Total
RMB'000 RMB'000 RMB'000
January 1, 2003
Asset revaluation reserve (274,671) -- (274,671)
Other reserves -- 25,755 25,755
Retained earnings -- (25,755) (25,755)
------------
(274,671)
------------
January 1, 2004
Asset revaluation reserve (274,671) -- (274,671)
Other reserves -- 63,502 63,502
Retained earnings -- (63,502) (63,502)
(274,671)
------------
January 1, 2005
Asset revaluation reserve (274,671) -- (274,671)
Other reserves -- 110,144 110,144
Retained earnings -- (110,144) (110,144)
------------
(274,671)
------------
* Adjustments taken effect prospectively from January 1, 2005.
# Adjustments taken effect retrospectively.
(c) Effect on the consolidated income statement for the years ended
December 31, 2005, 2004 and 2003
Effect of adopting
---------------------------------------------------
HKAS 16 HKAS 39 HKFRS 2
Recognition of
Property, plant Convertible share-based
Effect of new policies and equipment bonds payment Total
RMB'000 RMB'000 RMB'000 RMB'000
Year ended December 31, 2005
Increase in depreciation,
depletion and amortisation 19,269 -- -- 19,269
Increase in a loss on embedded
derivatives in convertible bonds -- 373,060 -- 373,060
Increase in selling and
administrative expenses -- -- 29,123 29,123
------------------------------------------------------------------------
Total decrease in profit 19,269 373,060 29,123 421,452
------------------------------------------------------------------------
Year ended December 31, 2004
Increase in selling and
administrative expenses -- -- 46,642 46,642
------------------------------------------------------------------------
Total decrease in profit -- -- 46,642 46,642
------------------------------------------------------------------------
Year ended December 31, 2003
Increase in selling and
administrative expenses -- -- 37,747 37,747
------------------------------------------------------------------------
Total decrease in profit -- -- 37,747 37,747
------------------------------------------------------------------------
There was no material impact on basic earnings per share and diluted earnings per share for the years ended December
31, 2005, 2004 and 2003 for the adoption of the above new policies.
F-17
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Subsidiaries
A subsidiary is a company in which the Company, directly or indirectly,
controls more than half of its voting power or issued share capital or
controls the composition of its Board of Directors.
The results of subsidiaries are included in the Company's income
statement to the extent of dividends received and receivable. The
Company's interests in subsidiaries are stated at cost less any
impairment losses.
Associates
An associate is an entity, not being a subsidiary or a
jointly-controlled entity, in which the Group has a long term interest
of generally not less than 20% of the equity voting rights and over
which it is in a position to exercise significant influence.
The Group's share of the post-acquisition results and reserves of the
associates are included in the consolidated income statement and
consolidated reserves, respectively. The Group's proportionate interests
in the associates are stated in the consolidated balance sheet at the
Group's share of net assets under the equity method of accounting, less
any impairment losses.
Joint Ventures
Certain of the group's activities are conducted through joint
arrangements, including the production sharing arrangements detailed in
note 5 below. These arrangements are a form of joint venture whereby a
contractual arrangement exists between two or more parties to undertake
an economic activity that is subject to joint control. These joint
arrangements are included in the consolidated financial statements in
proportion to the group's interests in the income, expenses, assets and
liabilities of these arrangements.
Related parties
A party is considered to be related to the Group if:
(a) the party directly or indirectly through one or more intermediaries,
(i) controls, is controlled by, or is under common control with, the
Group ; (ii) has an interest in the Group that gives it significant
influence over the Group; or (iii) has joint control over the Group;
(b) the party is an associate;
(c) the party is a jointly controlled entity;
(d) the party is a member of the key management personnel of the Group
or its parent;
(e) the party is a close member of the family of any individual referred
to in (a) or (d); or
(f) the party is an entity that is controlled, jointly controlled or
significantly influenced by or for which significant voting power in
such entity resides with, directly or indirectly, any individual
referred to in (d) or (e).
F-18
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Impairment of assets
Where an indication of impairment exists, or when annual impairment
testing for an asset (other than inventories and financial assets) is
required, the asset's recoverable amount is estimated. An asset's
recoverable amount is calculated as the higher of the asset's or
cash-generating unit's value in use and its fair value less costs to
sell, and is determined for an individual asset, unless the asset does
not generate cash inflows that are largely independent of those from
other assets or groups of assets, in which case, the recoverable amount
is determined for the cash-generating unit to which the asset belongs.
An impairment loss is recognised only if the carrying amount of an asset
exceeds its recoverable amount. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value
of money and the risks specific to the asset. An impairment loss is
charged to the income statement in the period in which it arises.
An assessment is made at each reporting date as to whether there is any
indication that previously recognised impairment losses may no longer
exist or may have decreased. If such indication exists, the recoverable
amount is estimated.
A previously recognised impairment loss is reversed only if there has
been a change in the estimates used to determine the recoverable amount
of an asset, however not to an amount higher than the carrying amount
that would have been determined (net of any depreciation/amortisation),
had no impairment loss been recognised for the asset in prior years.
A reversal of an impairment loss is credited to the income statement in
the period in which it arises, unless the asset is carried at a revalued
amount, in which case the reversal of the impairment loss is accounted
for in accordance with the relevant accounting policy for that revalued
asset.
F-19
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Property, plant and equipment
Property, plant and equipment comprise oil and gas properties, and
vehicles and office equipment.
(i) Oil and gas properties
For oil and gas properties, the successful efforts method of
accounting is adopted. The Group capitalises initial acquisition
costs of oil and gas properties. Impairment of initial acquisition
costs is recognised based on exploratory experience and management
judgment. Upon discovery of commercial reserves, acquisition costs
are transferred to proved properties. The costs of drilling and
equipping successful exploratory wells, all development
expenditures on construction, installation or completion of
infrastructure facilities such as platforms, pipelines, processing
plants and the drilling of development wells, including those
renewals and betterments which extend the economic lives of the
assets, and the borrowing costs arising from borrowings used to
finance the development of oil and gas properties before they are
substantially ready for production are capitalised. The costs of
unsuccessful exploratory wells and all other exploration costs are
expensed as incurred.
Exploratory wells are evaluated for economic viability within one
year of completion. Exploratory wells that discover potentially
economic reserves in areas where major capital expenditure will be
required before production would begin and when the major capital
expenditure depends upon successful completion of further
exploratory work remain capitalised and are reviewed periodically
for impairment.
Productive oil and gas properties and other tangible and
intangible costs of producing properties are amortised using the
unit-of-production method on a property-by-property basis under
which the ratio of produced oil and gas to the estimated remaining
proved developed reserves is used to determine the depreciation,
depletion and amortisation provision. Costs associated with
significant development projects are not depleted until commercial
production commences and the reserves related to those costs are
excluded from the calculation of depletion.
Capitalised acquisition costs of proved properties are amortised
by the unit-of-production method on a property-by-property basis
computed according to the total estimated units of proved
reserves.
The Group estimates future dismantlement costs for oil and gas
properties with reference to the estimates provided from either
internal or external engineers after taking into consideration the
anticipated method of dismantlement required in accordance with
current legislation and industry practices. The associated cost is
capitalised and the liability is discounted and an accretion
expense is recognised using the credit-adjusted risk-free interest
rate in effect when the liability is initially recognised. No
market-risk premium has been included in the Company's calculation
of asset retirement obligations balances since no reliable
estimate can be made by the Company.
F-20
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Property, plant and equipment (cont'd)
(ii) Vehicles and office equipment
Vehicles and office equipment are stated at cost less accumulated
depreciation and impairment losses. The straight-line method is
adopted to depreciate the cost less any estimated residual value
of these assets over their expected useful lives. The Group
estimates the useful lives of vehicles and office equipment to be
five years.
Where parts of an item of property, plant and equipment have different
useful lives, the cost of that item is allocated on a recoverable basis
among the parts and each part is depreciated separately.
Residual values, useful lives and the depreciation method are reviewed
and, adjusted if appropriate, at each balance sheet date.
An item of property, plant and equipment is derecognised upon disposal
or where no future economic benefits are expected from its use or
disposal. Any gain or loss on disposal or retirement recognised in the
income statement in the year that the asset is derecognised is the
difference between the net sales proceeds and the carrying value of the
relevant asset.
Intangible assets
The useful lives of intangible assets are assessed to be either finite
or indefinite. Intangible assets with finite lives are amortised over
the useful economic life and assessed for impairment whenever there is
an indication that the intangible asset may be impaired.
The amortisation period and the amortisation method for an intangible
asset with a finite useful life are reviewed as least at each balance
sheet date.
Research and development costs
All research costs are charged to the income statement as incurred.
Expenditure (other than relating to oil and gas properties discussed
above) incurred on projects to develop new products is capitalised and
deferred only when the Group can demonstrate the technical feasibility
of completing the intangible asset so that it will be available for use
or sale, its intention to complete and its ability to use or sell the
asset, how the asset will generate future economic benefits, the
availability of resources to complete the project and the ability to
measure reliably the expenditure during the development. Product
development expenditure which does not meet these criteria is expensed
when incurred. No development costs were capitalised during the year.
F-21
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Investments and other financial assets
Applicable to the year ended December 31, 2004:
Short term investment
Short term investments are investments in debt and equity securities not
intended to be held on a continuing basis and are stated at their fair
values on the basis of their quoted market prices at the balance sheet
date, on an individual investment basis. The gains or losses arising
from changes in the fair value of a security are credited or charged to
the income statement in the period in which they arise.
Applicable to the year ended December 31, 2005:
Financial assets in the scope of HKAS 39 are classified as financial
assets at fair value through profit or loss, loans and receivables,
held-to-maturity investments, and available-for-sale financial assets,
as appropriate. When financial assets are recognised initially, they are
measured at fair value, plus, in the case of investments not at fair
value through profit or loss, directly attributable transaction costs.
The Group determines the classification of its financial assets after
initial recognition and, where allowed and appropriate, re-evaluates
this designation at the balance sheet date.
All regular way purchases and sales of financial assets are recognised
on the trade date i.e., the date that the Group commits to purchase the
asset. Regular way purchases or sales are purchases or sales of
financial assets that require delivery of assets within the period
generally established by regulation or convention in the marketplace.
(a) Financial assets at fair value through profit or loss
Financial assets classified as held for trading are included in the
category "financial assets at fair value through profit or loss".
Financial assets are classified as held for trading if they are
acquired for the purpose of selling in the near term. Derivatives
are also classified as held for trading unless they are designated
and effective hedging instruments. Gains or losses on investments
held for trading are recognised in the income statement.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market.
They arise when the Group provides money, goods or services directly
to a debtor with no intention of trading the receivable. They are
included in current assets, except for those with maturities greater
than 12 months after the balance sheet date, which are included in
non-current assets. Loans and receivables are included in trade and
other receivables in the balance sheet.
(c) Held-to-maturity investments
During this year, the Group did not hold any investments assets in
this category.
F-22
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Investments and other financial assets (continued)
(d) Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative
financial assets in listed and unlisted equity securities that are
designated as available-for-sale or are not classified in any of the
other categories. After initial recognition available-for-sale
financial assets are measured at fair value with gains or losses
being recognised as a separate component of equity until the
investment is derecognised or until the investment is determined to
be impaired at which time the cumulative gain or loss previously
reported in equity is included in the income statement.
When the fair value of unlisted equity securities can not be
reliably measured because (a) the variability in the range of
reasonable fair value estimates is significant or that investment or
(b) the probabilities of the various estimates within the range
cannot be reasonably assessed and used in estimating fair value,
such securities are stated at cost less any impairment losses.
Fair Value
The fair value of investments that are actively traded in organised
financial markets is determined by reference to quoted market bid price
at the close of business at the balance sheet date. For investments
where there is no active market, fair value is determined using
valuation techniques. Such techniques include using recent arm's length
market transactions; reference to the current market value of another
instrument which is substantially the same; a discounted cash flow
analysis; and option pricing models.
Impairment of financial assets (Applicable to the year ended
December 31, 2005)
The Group assesses at each balance sheet date whether there is any
objective evidence that a financial asset or group of financial assets
is impaired.
Assets carried at amortised cost
If there is objective evidence that an impairment loss on loans and
receivables carried at amortised cost has been incurred, the amount of
the loss is measured as the difference between the asset's carrying
amount and the present value of estimated future cash flows (excluding
future credit losses that have not been incurred) discounted at the
financial asset's original effective interest rate (i.e., the effective
interest rate computed at initial recognition). The carrying amount of
the asset is reduced either directly or through the use of an allowance
account. The amount of the impairment loss is recognised in profit or
loss.
The Group first assesses whether objective evidence of impairment exists
individually for financial assets that are individually significant, and
individually or collectively for financial assets that are not
individually significant. If it is determined that no objective evidence
of impairment exists for an individually assessed financial asset,
whether significant or not, the asset is included in a group of
financial assets with similar credit risk characteristics and that group
is collectively assessed for impairment. Assets that are individually
assessed for impairment and for which an impairment loss is or continues
to be recognised are not included in a collective assessment of
impairment.
F-23
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Impairment of financial assets (Applicable to the year ended December
31, 2005) (continued)
If, in a subsequent period, the amount of the impairment loss decreases
and the decrease can be related objectively to an event occurring after
the impairment was recognised, the previously recognised impairment loss
is reversed. Any subsequent reversal of an impairment loss is recognised
in the income statement, to the extent that the carrying value of the
asset does not exceed its amortised cost at the reversal date.
Available-for-sale financial assets If an available-for-sale asset is
impaired, an amount comprising the difference between its cost (net of
any principal payment and amortisation) and its current fair value, less
any impairment loss previously recognised in profit or loss, is
transferred from equity to the income statement. Impairment losses on
equity instruments classified as available-for-sale are not reversed
through profit or loss.
Derecognition of financial assets (applicable to the year ended December
31, 2005) A financial asset (or, where applicable, a part of a financial
asset or part of a group of similar financial assets) is derecognised
where:
o the rights to receive cash flows from the asset have expired;
o the Group retains the rights to receive cash flows from the asset,
but has assumed an obligation to pay in full without material
delay to a third party under a "pass-through" arrangement; or
o the Group has transferred its rights to receive cash flows from
the asset and either (a) has transferred substantially all the
risks and rewards of the asset, or (b) has neither transferred nor
retained substantially all the risks and rewards of the asset, but
has transferred control of the asset.
Where the Group has transferred its rights to receive cash flows from an
asset and has neither transferred nor retained substantially all the
risks and rewards of the asset nor transferred control of the asset, the
asset is recognised to the extent of the Group's continuing involvement
in the asset. Continuing involvement that takes the form of a guarantee
over the transferred asset is measured at the lower of the original
carrying amount of the asset and the maximum amount of consideration
that the Group could be required to repay.
Where continuing involvement takes the form of a written and/or
purchased option (including a cash settled option or similar provision)
on the transferred asset, the extent of the Group's continuing
involvement is the amount of the transferred asset that the Group may
repurchase, except that in the case of a written put option (including a
cash-settled option or similar provision) on an asset measured at fair
value, where the extent of the Group's continuing involvement is limited
to the lower of the fair value of the transferred asset and the option
exercise price.
F-24
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Interest-bearing loans and borrowings
All loans and borrowings are initially recognised at the fair value of
the consideration received less directly attributable transaction costs.
After initial recognition, interest-bearing loans and borrowings are
subsequently measured at amortised cost using the effective interest
method.
Gains and losses are recognised in net profit or loss when the
liabilities are derecognised as well as through the amortisation
process.
Convertible bonds
The Group's convertible bonds issued with a cash settlement option and
other embedded derivative features are split into liability and
derivative components according to their fair values for measurement
purposes.
The fair value of the liability component is determined using the market
rate for an equivalent non-convertible bond on the issuance of
convertible bonds and this amount is carried as a long term liability on
the amortised cost basis until extinguished on conversion or redemption.
The derivative component is remeasured at each balance sheet date and
any gains or losses arising from change in the fair value are recognised
in the income statement. Both the liability and the related embedded
derivative components are presented together for financial statements
reporting purposes.
Derecognition of financial liabilities (applicable to the year ended
December 31, 2005)
A financial liability is derecognised when the obligation under the
liability is discharged or cancelled or expires.
When an existing financial liability is replaced by another from the
same lender on substantially different terms, or the terms of an
existing liability are substantially modified, such an exchange or
modification is treated as a derecognition of the original liability and
a recognition of a new liability, and the difference between the
respective carrying amounts is recognised in profit or loss.
Derivative financial instruments (applicable to the year ended
December 31, 2005)
The Group uses currency swaps to hedge its risks associated with
currency exchange fluctuations. Such derivative financial instruments
are initially recognised at fair value on the date on which a derivative
contract is entered into and are subsequently remeasured at fair value.
Derivatives are carried as assets when the fair value is positive and as
liabilities when the fair value is negative.
Any gains or losses arising from changes in fair value on derivatives
that do not qualify for hedge accounting are taken directly to net
profit or loss for the year.
The fair value of currency swap contracts is determined by reference to
market values for similar instruments.
F-25
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Inventories and supplies
Inventories consist primarily of oil and supplies consist mainly of
items for repairs and maintenance of oil and gas properties. Inventories
are stated at the lower of cost and net realisable value. Costs of
inventories and supplies represent purchase or production cost of goods
and are determined on a weighted average basis. Net realisable value is
based on estimated selling prices less any estimated costs to be
incurred to completion and disposal. Supplies are capitalised to
property, plant and equipment when used for renewals and betterments of
oil and gas properties and have resulted in an increase in the future
economic values of oil and gas properties or are recognised as expenses
when used.
Cash and cash equivalents
For the purpose of the consolidated cash flow statement, cash and cash
equivalents comprise cash on hand and demand deposits, and short term
highly liquid investments which are readily convertible into known
amounts of cash and which are subject to an insignificant risk of
changes in value, and have a short maturity of generally within three
months when acquired, less bank overdrafts which are payable on demand
and form an integral part of the Group's cash management.
For the purpose of the balance sheet, cash and cash equivalents comprise
cash on hand and at banks, and term deposits with maturities of three
months or less which are not restricted to use.
Provisions
A provision is recognised when a present obligation (legal or
constructive) has arisen as a result of a past event and it is probable
that a future outflow of resources will be required to settle the
obligation, provided that a reliable estimate can be made of the amount
of the obligation.
When the effect of discounting is material, the amount recognised for a
provision is the present value at the balance sheet date of the future
expenditures expected to be required to settle the obligation. The
increase in the discounted present value amount arising from the passage
of time is included in finance costs in the income statement.
Provisions for dismantlement are made based on the present value of the
future costs expected to be incurred, on a property-by-property basis,
in respect of the Group's expected dismantlement and abandonment costs
at the end of the related oil exploration and recovery activities.
F-26
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Income tax
Income tax comprises current and deferred tax. Income tax is recognised
in the income statement or in equity if it relates to items that are
recognised in the same or a different period directly in equity.
Current tax assets and liabilities for the current and prior periods are
measured at the amount expected to be recovered from or paid to the
taxation authorities.
Deferred tax is provided, using the liability method, on all temporary
differences at the balance sheet date between the tax bases of assets
and liabilities and their carrying amounts for financial reporting
purposes.
Deferred tax liabilities are recognised for all taxable temporary
differences:
o Except where the deferred tax liability arises from the initial
recognition of an asset or liability in a transaction that is not
a business combination and, at the time of the transaction,
affects neither the accounting profit nor taxable profit or loss;
and
o in respect of taxable temporary differences associated with
investments in subsidiaries and associates, except where the
timing of the reversal of the temporary differences can be
controlled and it is probable that the temporary differences will
not reverse in the foreseeable future.
o Deferred tax assets are recognised for all deductible temporary
differences, carry forward of unused tax credits and unused tax
losses, to the extent that it is probable that taxable profit will
be available against which the deductible temporary differences,
and the carry forward of unused tax credits and unused tax losses
can be utilised, except where the deferred tax asset relating to
the deductible temporary differences arises from the initial
recognition of an asset or liability in a transaction that is not
a business combination and, at the time of the transaction,
affects neither the accounting profit nor taxable profit or loss;
and
o in respect of deductible temporary differences associated with
investments in subsidiaries and associates, deferred tax assets
are only recognised to the extent that it is probable that the
temporary differences will reverse in the foreseeable future and
taxable profit will be available against which the temporary
differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the
deferred tax asset to be utilised. Conversely, previously unrecognised
deferred tax assets are reassessed at each balance sheet date and are
recognised to the extent that it is probable that sufficient taxable
profit will be available to allow all or part of the deferred tax asset
to be utilised.
Deferred tax assets and liabilities are measured at the tax rates that
are expected to apply to the period when the asset is realised or the
liability is settled, based on tax rates (and tax laws) that have been
enacted or substantially enacted at the balance sheet date.
Deferred tax assets and deferred tax liabilities are offset, if a
legally enforceable right exists to set off current tax assets against
current tax liabilities and the deferred taxes relate to the same
taxable entity and the same taxation authority.
F-27
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Revenue recognition
Revenue is recognised when it is probable that the economic benefits
will flow to the Group and when the revenue can be measured reliably, on
the following bases:
(i) Oil and gas sales
Oil and gas sales represent the invoiced value of sales of oil and
gas attributable to the interests of the Group, net of royalties and
PRC government share oil that are lifted and sold on behalf of the
PRC government. Sales are recognised when the significant risks and
rewards of ownership of oil and gas have been transferred to
customers.
Oil and gas lifted and sold by the Group above or below the Group's
participating interests in the production sharing contracts result
in overlifts and underlifts. The Group records these transactions in
accordance with the entitlement method under which overlifts are
recorded as liabilities and underlifts are recorded as assets at
year end oil prices. Settlement will be in kind when the liftings
are equalised or in cash when production ceases.
The Group has entered into gas sales contracts with customers which
contain take-or-pay clauses. The clauses require those customers to
take a specified minimum volume of gas each year. If the minimum
volume of gas is not taken, those customers must pay for the
deficiency gas, even though the gas is not taken. Those customers
can offset the deficiency payment against any future purchases in
excess of the specified volume. The Group records any deficiency
payments as deferred revenue which is included in other payables
until any make-up gas is taken by those customers or the expiry of
the contracts.
(ii) Marketing revenues
Marketing revenues represent sales of oil purchased from the foreign
partner under the production sharing contracts and revenues from the
trading of oil through the Company's subsidiary in Singapore. The
title, together with the risks and rewards of the ownership of such
oil purchased from the foreign partners, is transferred to the Group
from the foreign partners and other unrelated oil and gas companies
before the Group sells such oil to its customers. The cost of the
oil sold is included in crude oil and product purchases.
(iii) Other income
Other income mainly represents project management fees charged to
the foreign partners and handling fees charged to customers and is
recognised when the services are rendered.
(iv) Dividend income
Dividend income is recognised when the shareholders' right to
receive payment has been established.
(v) Interest income
Interest income from deposits placed with banks and other financial
instruments is recognised on a time proportion basis taking into
account the effective yield on the assets.
F-28
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Employee benefits
Share-based payment transactions
The Company has adopted share option schemes for the purpose of providing
incentives and rewards to eligible participants who contribute to the
success of the Group's operations. Employees (including directors) of the
Group will from time to time receive remuneration in the form of
share-based payment transactions, whereby employees render services as
consideration for equity instruments ("equity-settled transactions").
The cost of equity-settled transactions with employees is measured by
reference to the fair value at the date at which they are granted. The
fair value is determined by using a Black-Scholes model, further details
of which are given in note 31. In valuing equity-settled transactions, no
account is taken of any performance conditions, other than conditions
linked to the price of the shares of the Company, if applicable.
The cost of equity-settled transactions is recognised, together with a
corresponding increase in equity, over the period in which the
performance and/or service conditions are fulfilled, ending on the date
on which the relevant employees become fully entitled to the award (the
"vesting date"). The cumulative expenses recognised for equity-settled
transactions at each balance sheet date until the vesting date reflects
the extent to which the vesting period has expired and the Group's best
estimate of the number of equity instruments that will ultimately vest.
The charge or credit to the income statement for a period represents the
movement in cumulative expense recognised as at the beginning and end of
that period.
No expense is recognised for awards that do not ultimately vest, except
for awards where vesting is conditional upon a market condition, which
are treated as vesting irrespective of whether or not the market
condition is satisfied, provided that all other performance conditions
are satisfied.
Where the terms of an equity-settled award are modified, as a minimum, an
expense is recognised as if the terms had not been modified. In addition,
an expense is recognised for any modification, which increases the total
fair value of the share-based payment arrangement, or is otherwise
beneficial to the employee as measured at the date of modification.
Where an equity-settled award is cancelled, it is treated as if it had
vested on the date of cancellation, and any expenses not yet recognised
for the award is recognised immediately. However, if a new award is
substituted for the cancelled award, and is designated as a replacement
award on the date that it is granted, the cancelled and new awards are
treated as if they were a modification of the original award, as
described in the previous paragraph. The Group has adopted the provisions
of HKFRS 2 retrospectively to all stock options granted from the date of
its incorporation.
The dilutive effect of outstanding options is reflected as additional
share dilution in the computation of earnings per share.
F-29
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Retirement and termination benefits
The Group participates in defined contribution plans in accordance with
local laws and regulations for full-time employees in the PRC and other
countries in which it operates. The plans provide for contributions
ranging from 5% to 22% of the employees' basic salaries. The Group's
contributions to these defined contribution plans are charged to expense
in the year to which they relate.
Dividends
Final and special final dividends proposed by the directors are
classified as a separate allocation of retained earnings within the
equity section of the balance sheet, until they have been approved by the
shareholders in a general meeting. When these dividends have been
approved by the shareholders and declared, they are recognised as a
liability.
Interim and special interim dividends are simultaneously proposed and
declared, because the Company's memorandum and articles of association
grant the directors the authority to declare interim dividends.
Consequently, interim dividends are recognised immediately as a liability
when they are proposed and declared.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or
production of qualifying assets, i.e. assets that necessarily take a
substantial period of time to get ready for their intended use or sale,
are capitalised as part of the cost of those assets. The capitalisation
of such borrowing costs ceases when the assets are substantially ready
for their intended use or sale.
To the extent that funds are borrowed specifically for the purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for
capitalisation on that asset is determined as the actual borrowing costs
incurred on that borrowing during the period less any investment income
on the temporary investment of those borrowings.
To the extent that funds are borrowed generally and used for the purpose
of obtaining a qualifying asset, the amount of borrowing costs eligible
for capitalisation is determined by applying a capitalisation rate to the
expenditures on that asset. The capitalisation rate is the weighted
average of the borrowing costs applicable to the borrowings of the group
that are outstanding during the period, other than borrowings made
specifically for the purpose of obtaining a qualifying asset. The amount
of borrowing costs capitalised incurred during a period should not exceed
the amount of borrowing cost incurred during that period.
Borrowing costs include interest charges and other costs incurred in
connection with the borrowing of funds, including amortisation of
discounts or premiums relating to the borrowing, and amortisation of
ancillary costs incurred in connection with arranging the borrowing.
F-30
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Foreign currencies
These financial statements are presented in RMB. Each entity in the Group
maintains its books and records in its own functional currency. Foreign
currency transactions are initially recorded using the functional
currency rates ruling at the date of transaction. Monetary assets and
liabilities denominated in foreign currencies are retranslated at the
functional currency rates of exchange ruling at the balance sheet date.
Exchange differences are dealt with in the income statement. Non-monetary
items that are measured in terms of historical cost in a foreign currency
are translated using the exchange rates at the dates of the initial
transactions. Non-monetary items measured at fair value in a foreign
currency are translated using the exchange rates at the date when the
fair value was determined.
On consolidation, the balance sheet of the Company and the overseas
subsidiaries, other than the subsidiaries in the PRC, are translated into
RMB at the exchange rates ruling at the balance sheet date and, their
income statements are translated into RMB at the weighted average
exchange rates for the year. The resulting translation differences are
included in the cumulative translation reserve.
For the purpose of the consolidated cash flow statement, the cash flows
of overseas subsidiaries are translated into RMB at the exchange rates
ruling at the dates of the cash flows. Frequently recurring cash flows of
overseas subsidiaries which arise throughout the year are translated into
RMB at the weighted average exchange rates for the year.
Repairs, maintenance and overhaul costs
Repairs, maintenance and overhaul costs are normally charged to the
income statement as operating expenses in the period in which they are
incurred.
Operating leases
Leases where substantially all the rewards and risks of ownership of
assets remain with the lessor are accounted for as operating leases.
Where the Company is the lessee, rentals payable under the operating
leases are charged to the income statement on the straight-line basis
over the lease terms.
Contingencies
Contingent liabilities are not recognised in the financial statements.
They are disclosed unless the possibility of an outflow of resources
embodying economic benefits is remote.
A contingent asset is not recognised in the financial statements, but are
disclosed when an inflow of economic benefits is probable.
F-31
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Subsequent events
Post-year-end events that provide additional information about the
Company's position at the balance sheet date or those that indicate the
going concern assumption is not appropriate (adjusting events) are
reflected in the financial statements. Post-year-end events that are not
adjusting events are disclosed in the notes when material.
Use of estimates
The preparation of financial statements in conformity with Hong Kong GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
The most significant estimates pertain to proved oil and gas reserve
volumes and the future development, purchase price allocation, provision
for dismantlement and impairment as well as estimates relating to certain
oil and gas revenues and expenses. Actual amounts could differ from those
estimates and assumptions. More details are given in notes 3, 16 and 28.
F-32
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
4. ACQUISITIONS
During the year, the Group completed the acquisition of the North West
Shelf Project ("NWS Project"), including an interest of approximately
5.3% in the NWS Project and a 25% interest in the China LNG Joint
Venture, a new joint venture established within the NWS Project. The
Group acquired the NWS Project to expand its upstream oil and gas
reserves and production. The Group's participation in the NWS Project has
not started commercial operations.
Details of the net assets acquired are as follows:
Purchase consideration: RMB'000
-------------
Consideration paid 4,341,783
Direct costs relating to the acquisition 87,522
--------------
Total purchase consideration 4,429,305
--------------
The assets and liabilities arising from the acquisition are as follows:
RMB'000
--------------
Oil and gas properties 3,129,662
Intangible assets - gas processing rights 1,299,643
--------------
Net assets acquired 4,429,305
--------------
Purchase consideration settled in cash 4,429,305
--------------
The purchase price allocation set out above is still preliminary, pending
the confirmation of the tax basis of the underlying assets.
The interest of the Group in the NWS Project has been charged to the
other partners of the Project as security for certain of the Group's
liabilities relating to the Project.
In addition, the Company, through its wholly-owned subsidiary, has signed
an agreement with a Canadian based company, MEG Energy Corporation
("MEG"), to acquire a 16.69% equity interest in MEG. The Company
completed the transaction and paid C$150 million (equivalent of RMB1,017
million) for the acquisition of 13,636,364 common shares of MEG in March
2005. MEG is principally engaged in the exploitation and production of
oil sands. The investment in the unlisted shares of this company is
accounted for as a non-current available-for-sales asset and is stated at
cost less any impairment.
F-33
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
5. PRODUCTION SHARING CONTRACTS
PRC
For production sharing contracts in the PRC, the foreign parties to the
contracts ("foreign partners") are normally required to bear all
exploration costs during the exploration period and such exploration
costs can be recovered according to the production sharing formula after
commercial discoveries are made and production begins.
After the initial exploration stage, the development and operating costs
are funded by the Group and the foreign partners according to their
respective participating interests.
In general, the Group has the option to take up to 51% participating
interest in a production sharing contract and may exercise such option
after the foreign partners have independently undertaken all the
exploration risks and costs and made viable commercial discoveries.
After the Group exercises its option to take a participating interest in
a production sharing contract, the Group accounts for the oil and gas
properties using the proportional method under which the Group recognises
its share of development costs, revenues and expenses from such
operations according to its participating interest in the production
sharing contract. The Group does not account for either the exploration
costs incurred by its foreign partners or the foreign partners' share of
development costs and revenues and expenses from such operations.
Part of the annual gross production of oil and gas in the PRC is
distributed to the PRC government as settlement of royalties which are
payable pursuant to a sliding scale. The Group and the foreign partners
also pay the value-added tax to the tax bureau at a pre-determined rate.
In addition, there is a pre-agreed portion of oil and gas designated to
recover all exploration costs, development costs, operating costs
incurred and related interest according to the participating interests
between the Group and the foreign partners. Any remaining oil after the
foregoing priority allocations is first distributed to the PRC government
as government share oil on a pre-determined ratio pursuant to a sliding
scale, and then distributed to the Group and the foreign partners
according to their respective participating interests. As the government
share is not included in the Group's interest in the annual production,
the net sales of the Group do not include the sales revenue of the
government share oil.
The foreign partners have the right either to take possession of their
allocable remainder oil for sale in the international market, or to
negotiate with the Group to sell their allocable remainder oil to the
Group for sale in the PRC market.
Overseas
The Group and the other partners to the overseas production sharing
contracts are required to bear all exploration, development and operating
costs according to their respective participating interests. Exploration,
development and operating costs which qualify for recovery can be
recovered according to the production sharing formula after commercial
discoveries are made and production begins.
The Group's net interest in the production sharing contracts in overseas
consists of its participating interest in the properties covered under
the relevant production sharing contracts, less oil and gas distributed
to the local government and the domestic market obligation.
F-34
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
6. SEGMENT INFORMATION
Segment information is presented by way of two segment formats: (i) on a
primary segment reporting basis, by business segment; and (ii) on a
secondary segment reporting basis, by geographical segment.
Intersegment transactions: segment revenue, segment expenses and segment
performance include transfers between business segments and between
geographical segments. Such transfers are accounted for at cost. Those
transfers are eliminated on consolidation.
(a) Business segments
The Group is organised on a worldwide basis into three major
operating segments. The Group is involved in the upstream
operating activities of the petroleum industry that comprise
independent operations, production sharing contracts with foreign
partners and trading business. These segments are determined
primarily because the senior management makes key operating
decisions and assesses performance of the segments separately. The
Group evaluates the performance of each segment based on profit or
loss from operations before income taxes.
F-35
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
6. SEGMENT INFORMATION (CONT'D)
(a) Business segments (cont'd)
The following table presents revenue, profit and certain assets,
liabilities and expenditures information for the Group's business
segments for the years ended December 31, 2005 and 2004.
Independent operations Production sharing contracts
------------------------------------------------------------------------------------------
Segment revenue 2003 2004 2005 2003 2004 2005
--------------- ------------ ------------ ------------ ------------ ------------ -----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Restated) (Restated) (Restated) (Restated)
Sales to external customers:
Oil and gas sales 12,040,587 15,177,621 22,808,733 16,076,244 21,708,398 30,608,936
Marketing revenues -- -- -- -- -- --
Intersegment revenues -- 920,669 1,598,171 3,730,797 2,551,181 7,467,429
Other income 8,468 6,139 13,093 424,493 136,942 103,047
------------ ------------ ------------ ------------ ------------ ------------
Total 12,049,055 16,104,429 24,419,997 20,231,534 24,396,521 38,179,412
------------ ------------ ------------ ------------ ------------ ------------
Segment results
---------------
Operating expenses (1,579,004) (1,828,614) (2,095,273) (2,933,805) (3,241,730) (3,839,325)
Production taxes (626,897) (775,210) (1,154,771) (611,701) (950,464) (1,441,772)
Exploration costs (590,541) (1,136,055) (1,025,993) (257,531) (180,105) (267,694)
Depreciation, depletion and amortisation (1,855,983) (2,235,064) (2,554,896) (2,786,770) (3,219,998) (3,409,844)
Dismantlement (96,206) (117,310) (152,796) (71,120) (84,327) (100,061)
Impairment loss related to property,
plant and equipment -- -- (39,494) -- -- (50,696)
Crude oil and product purchases -- (920,669) (1,598,171) (3,730,797) (2,551,181) (7,467,429)
Selling and administrative expenses (62,247) (50,721) (39,486) (666,369) (557,521) (676,062)
Others (36,406) -- -- (313,826) (45,844) (77,062)
Interest income -- -- -- 14,302 2,077 7,328
Finance costs (60,358) (135,119) (183,325) (20,817) (64,956) (94,885)
Exchange gains/(losses), net -- -- -- 124 (15,308) (5,119)
Investments income -- -- -- -- -- --
Share of profit of associates -- -- -- -- -- --
Non-operating income/(expenses), net -- -- -- -- -- --
Tax -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net profit 7,141,413 8,905,667 15,575,792 8,853,224 13,487,164 20,756,791
------------ ------------ ------------ ------------ ------------ ------------
Other segment information
-------------------------
Segment assets 36,087,581 21,120,584 25,054,275 26,821,223 37,851,716 51,125,491
Investment in associates -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ----------
Total assets 36,087,581 21,120,584 25,054,275 26,821,223 37,851,716 51,125,491
Segment liabilities (3,554,720) (3,913,905) (5,187,124) (12,620,113) (11,453,307) (12,876,516)
Capital expenditure 5,960,071 6,309,397 7,806,927 2,264,625 13,145,839 8,914,306
============ ============ ============ ============ ============ ============
Trading business
--------------------------------------------
Segment revenue 2003 2004 2005
--------------- ------------ ------------ ------------
RMB'000 RMB'000 RMB'000
(Restated) (Restated)
Sales to external customers:
Oil and gas sales -- -- --
Marketing revenues 12,398,661 18,191,353 15,901,325
Intersegment revenues -- -- --
Other income -- -- --
------------ ------------ ------------
Total 12,398,661 18,191,353 15,901,325
------------ ------------ ------------
Segment results
---------------
Operating expenses -- -- --
Production taxes -- -- --
Exploration costs -- -- --
Depreciation, depletion and amortisation -- -- --
Dismantlement -- -- --
Impairment loss related to property, plant
and equipment -- -- --
Crude oil and product purchases (12,295,238) (17,963,461) (15,704,100)
Selling and administrative expenses -- -- --
Others -- -- --
Interest income -- -- --
Finance costs -- -- --
Exchange gains/(losses), net -- -- --
Investments income -- -- --
Share of profit of associates -- -- --
Non-operating income/(expenses), net -- -- --
Tax -- -- --
------------ ------------ ------------
Net profit 103,423 227,892 197,225
------------ ------------ ------------
Other segment information
-------------------------
Segment assets 2,629,009 1,712,212 2,413,195
Investment in associates -- -- --
------------ ------------ ------------
Total assets 2,629,009 1,712,212 2,413,195
Segment liabilities (2,173,828) (809,663) (667,336)
Capital expenditure -- -- --
============ ============ ============
Unallocated Eliminations
----------------------------------------------------------------------------
Segment revenue 2003 2004 2005 2003 2004
--------------- ------------ ------------ ------------ ------------ ------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Restated) (Restated) (Restated) (Restated)
Sales to external customers:
Oil and gas sales -- -- -- -- --
Marketing revenues -- -- -- -- --
Intersegment revenues -- -- -- (3,730,797) (3,471,850)
Other income 1,820 1,610 20,609 -- --
------------ ------------ ------------ ------------ ------------
Total 1,820 1,610 20,609 (3,730,797) (3,471,850)
------------ ------------ ------------ ------------ ------------
Segment results
---------------
Operating expenses -- -- -- -- --
Production taxes -- -- -- -- --
Exploration costs -- -- -- -- --
Depreciation, depletion and amortisation -- -- -- -- --
Dismantlement -- -- -- -- --
Impairment loss related to property, plant
and equipment -- -- -- -- --
Crude oil and product purchases -- -- -- 3,730,797 3,471,850
Selling and administrative expenses (521,654) (496,106) (654,820) -- --
Others -- -- -- -- --
Interest income 169,274 204,795 351,966 -- --
Finance costs (273,765) (241,750) (822,322) -- --
Exchange gains/(losses), net (6,870) 44,577 292,146 -- --
Investments income 123,483 72,438 247,893 -- --
Share of profit of associates 220,263 344,469 307,075 -- --
Non-operating income/(expenses), net 314,968 519,206 28,579 -- --
Tax (4,627,836) (6,930,826) (10,977,812) -- --
------------ ------------ ------------ ------------ ------------
Net profit (4,600,317) (6,481,587) (11,206,686) -- --
------------ ------------ ------------ ------------ ------------
Other segment information
-------------------------
Segment assets 6,848,849 31,790,239 34,770,264 -- --
Investment in associates 1,117,640 1,327,109 1,401,839 -- --
------------ ------------ ------------ ------------ ------------
Total assets 7,966,489 33,117,348 36,172,103 -- --
Segment liabilities (8,419,109) (21,182,195) (22,430,991) -- --
Capital expenditure 46,868 164,775 144,442 -- --
============ ============ ============ ============ ============
Consolidated
------------------------------------------------------------
Segment revenue 2005 2003 2004 2005
--------------- ------------ ------------ ------------ ------------
RMB'000 RMB'000 RMB'000 RMB'000
(Restated) (Restated)
Sales to external customers:
Oil and gas sales -- 28,116,831 36,886,019 53,417,669
Marketing revenues -- 12,398,661 18,191,353 15,901,325
Intersegment revenues (9,065,600) -- -- --
Other income -- 434,781 144,691 136,749
------------ ------------ ------------ ------------
Total (9,065,600) 40,950,273 55,222,063 69,455,743
------------ ------------ ------------ ------------
Segment results
---------------
Operating expenses -- (4,512,809) (5,070,344) (5,934,598)
Production taxes -- (1,238,598) (1,725,674) (2,596,543)
Exploration costs -- (848,072) (1,316,160) (1,293,687)
Depreciation, depletion and amortisation -- (4,642,753) (5,455,062) (5,964,740)
Dismantlement -- (167,326) (201,637) (252,857)
Impairment loss related to property, plant
and equipment -- -- -- (90,190)
Crude oil and product purchases 9,065,600 (12,295,238) (17,963,461) (15,704,100)
Selling and administrative expenses -- (1,250,270) (1,104,348) (1,370,368)
Others -- (350,232) (45,844) (77,062)
Interest income -- 183,576 206,872 359,294
Finance costs -- (354,940) (441,825) (1,100,532)
Exchange gains/(losses), net -- (6,746) 29,269 287,027
Investments income -- 123,483 72,438 247,893
Share of profit of associates -- 220,263 344,469 307,075
Non-operating income/(expenses), net -- 314,968 519,206 28,579
Tax -- (4,627,836) (6,930,826) (10,977,812)
------------ ------------ ------------ ------------
Net profit -- 11,497,743 16,139,136 25,323,122
------------ ------------ ------------ ------------
Other segment information
-------------------------
Segment assets -- 72,386,662 92,474,751 113,363,225
Investment in associates -- 1,117,640 1,327,109 1,401,839
------------ ------------ ------------ ------------
Total assets -- 73,504,302 93,801,860 114,765,064
Segment liabilities -- (26,767,770) (37,359,070) (41,161,967)
Capital expenditure -- 8,271,564 19,620,011 16,865,675
============ ============ ============ ============
F-36
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
6. SEGMENT INFORMATION (CONT'D)
(b) Geographical segments
In determining the Group's geographical segments, revenues and
results are attributed to the segments based on the location of
the Group's customers, and assets are attributed to the segments
based on the location of the Group's assets.
The Group mainly engaged in the exploration, development and
production of crude oil and natural gas in offshore China. Any
activities outside the PRC are mainly conducted in Indonesia,
Australia, Canada and Singapore. The following table presents
revenue and certain asset and expenditure information for the
Group's geographical segments for the years ended December 31,
2005 and 2004.
PRC Outside PRC Total
---------------------------------- ---------------------------------- -----------------------------------
2003 2004 2005 2003 2004 2005 2003 2004 2005
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Restated) (Restated) (Restated) (Restated)
External sales 25,416,466 30,453,453 38,992,740 15,533,807 24,768,610 30,463,003 40,950,273 55,222,063 69,455,743
Segment assets 61,357,931 75,023,500 92,845,974 12,146,371 18,778,360 21,919,090 73,504,302 93,801,860 114,765,064
Capital expenditures 7,727,171 12,014,894 14,496,690 544,393 7,605,117 2,368,985 8,271,564 19,620,011 16,865,675
(c) An analysis of sales to major customers by business segment is as
follows:
2003 2004 2005
----------- ----------- -----------
RMB'000 RMB'000 RMB'000
Production sharing contracts
China Petroleum & Chemical Corporation 3,848,361 6,932,008 9,996,768
PetroChina Company Limited 1,446,169 1,944,709 1,410,369
Castle Peak Power Company Limited 841,285 1,070,436 1,107,314
----------- ----------- -----------
6,135,815 9,947,153 12,514,451
----------- ----------- -----------
Independent operations
China Petroleum & Chemical Corporation 3,126,708 3,702,058 5,628,968
PetroChina Company Limited -- -- 365,830
----------- ----------- -----------
3,126,708 3,702,058 5,994,798
----------- ----------- -----------
9,262,523 13,649,211 18,509,249
=========== =========== ===========
7. OIL AND GAS SALES
2003 2004 2005
----------- ----------- -----------
RMB'000 RMB'000 RMB'000
Gross sales 30,556,967 39,955,702 57,988,465
Royalties (478,454) (610,055) (708,537)
PRC government share oil (1,961,682) (2,459,628) (3,862,259)
----------- ----------- -----------
28,116,831 36,886,019 53,417,669
=========== =========== ===========
F-37
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
8. MARKETING PROFIT
2003 2004 2005
----------- ----------- -----------
RMB'000 RMB'000 RMB'000
Marketing revenues 12,398,661 18,191,353 15,901,325
Crude oil and product purchases (12,295,238) (17,963,461) (15,704,100)
----------- ----------- -----------
103,423 227,892 197,225
=========== =========== ===========
9. SELLING AND ADMINISTRATIVE EXPENSES
2003 2004 2005
----------- ----------- -----------
RMB'000 RMB'000 RMB'000
(Restated) (Restated)
Salary and staff benefits 393,165 311,649 392,791
Utility and office expenses 90,801 115,817 143,204
Transportation and entertainment 74,218 75,675 94,590
Rentals and maintenance 107,310 128,579 111,426
Management fee 219,771 218,087 243,730
Selling expenses 30,686 36,015 32,983
(Reversal) of/Provision for inventory obsolescence 8,745 (2,710) 33,088
Other 325,574 221,236 318,556
----------- ----------- -----------
1,250,270 1,104,348 1,370,368
=========== =========== ===========
10. FINANCE COSTS
2003 2004 2005
----------- ----------- -----------
RMB'000 RMB'000 RMB'000
Interest on bank loans which are:
- wholly repayable within five years 81,539 80,829 98,892
Interest on long term guaranteed notes 391,005 485,812 671,849
Other borrowing costs 34,933 163 3,773
----------- ----------- -----------
Total interest 507,477 566,804 774,514
Less: Amount capitalised in property, plant
and equipment (note 16) (245,783) (244,686) (245,987)
----------- ----------- -----------
261,694 322,118 528,527
Other finance costs:
Increase in discounted amount of provisions arising from
the passage of time (note 28) 93,246 119,707 198,945
Loss on embedded derivative component in convertible bonds -- -- 373,060
----------- ----------- -----------
354,940 441,825 1,100,532
=========== =========== ===========
The interest rates used for interest capitalisation represented the
cost of capital from raising the related borrowings and varied from
4.1% to 9.2% per annum for the year ended December 31, 2005(2004:4.1%
to 9.2%, 2003:4.1% to 9.15%).
F-38
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
11. DIRECTORS' REMUNERATION AND SHARE OPTION BENEFITS
Directors' remuneration and share option benefits for the year,
disclosed pursuant to the Listing Rules and Section 161 of the Companies
Ordinance, are as follows:
2003 2004 2005
RMB'000 RMB'000 RMB'000
------------ ------------ ------------
(Restated) (Restated)
Fees for executive directors -- -- --
Fees for non-executive directors** 1,000 851 2,360
Other emoluments for executive directors
- Basic salaries and allowances and benefit in kind** 7,752 7,756 12,988
- Bonus 2,100 -- --
- Pension scheme contribution 207 62 104
------------ ------------ ------------
Amount paid/payable during the year 11,059 8,669 15,452
Share option benefits* 7,295 9,208 8,561
------------ ------------ ------------
18,354 17,877 24,013
============ ============ ============
F-39
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
11. DIRECTORS' REMUNERATION AND SHARE OPTION BENEFITS (CONT'D)
(a) Independent non-executive directors
The fees paid/payable to independent non-executive directors
during the year were as follows:
2004 2005
RMB'000 RMB'000
---------------------
So Chak Kwong -- --
Chiu Sung Hong 213 619
Evert Henks 213 619
Kenneth S Courtis 213 619
Erwin Schurtenberger 213 350
Tse Hau Yin, Aloysius -- 153
Lawrence J. Lau -- --
=====================
Professor Lawrence J. Lau, appointed as the independent non-executive
director of the Company on August 31, 2005, waived his remuneration in
2005.
(b) Executive directors and independent non-executive directors
Salaries, Amount
allowances Performance Pension paid/payable
and benefits related scheme during Share option
Fees** In kind** bonuses contributions the year benefits* Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
----------------------------------------------------------------------------------------------
2005
Executive directors:
Chengyu Fu -- 4,411 -- -- 4,411 2,236 6,647
Shouwei Zhou -- 3,519 -- 82 3,601 1,653 5,254
Han Luo -- 1,291 -- -- 1,291 1,086 2,377
Xinghe Cao -- 430 -- -- 430 269 699
Zhenfang Wu -- 430 -- -- 430 269 699
Guangqi Wu -- 1,377 -- -- 1,377 542 1,919
Hua Yang -- 967 -- 22 989 1,086 2,075
Longsheng Jiang -- 563 -- -- 563 55 618
----------------------------------------------------------------------------------------------
Independent non-executive
directors:
Chiu Sunghong 619 -- -- -- 619 437 1,056
Evert Henks 619 -- -- -- 619 437 1,056
Kenneth S Courtis 619 -- -- -- 619 437 1,056
Tse Hau Yin, Aloysius 350 -- -- -- 350 -- 350
Erwin Schurtenberger*** 153 -- -- -- 153 54 207
Lawrence J. Lau -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------
F-40
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
11. DIRECTORS' REMUNERATION AND SHARE OPTION BENEFITS (CONT'D)
(b) Executive directors and independent non-executive directors
(cont'd)
Salaries, Amount
allowances Performance Pension paid/payable
and benefits related scheme during Share option
Fees** In kind** bonuses contributions the year benefits* Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
---------------------------------------------------------------------------------------------
2004
Executive directors:
Chengyu Fu -- 3,934 -- -- 3,934 2,077 6,011
Han Luo -- 561 -- -- 561 1,107 1,668
Shouwei Zhou -- 2,710 -- 62 2,772 1,685 4,457
Longsheng Jiang -- 551 -- -- 551 1,107 1,658
---------------------------------------------------------------------------------------------
Independent non-executive
directors:
Chiu Sunghong 213 -- -- -- 213 808 1,021
Evert Henks 213 -- -- -- 213 808 1,021
Kenneth S Courtis 213 -- -- -- 213 808 1,021
Erwin Schurtenberger 213 -- -- -- 213 808 1,021
---------------------------------------------------------------------------------------------
* During the year, certain directors were granted share options in
respect of their services to the Group under the applicable share
option schemes of the Company, further details of which are set
out in note 29 to the financial statements. Share option benefits
represent the fair value at grant date of share options issued
under the share option schemes of the Company amortised to the
income statement during the year disregarding whether the options
have been exercised or not, and have been disclosed in accordance
with HKFRS 2. No share options were exercised by the directors
during the year.
** Fees and salaries, allowances and benefits in kind represent the
gross amount (before Hong Kong individual salary tax) paid/
payable to individual directors.
*** On April 1, 2005, Mr. Erwin Schurtenberger surrendered 1,150,000
share options following his resignation as an independent
non-executive director of the Company.
Save as disclosed above, there was no arrangement under which a director
waived or agreed to waive any remuneration during the year.
F-41
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
12. FIVE HIGHEST PAID EMPLOYEES
The five highest paid employees during the year included three (2004:
Nil, 2003: Nil) directors and two (2004: five, 2003: five) non-directors
are as follows:
2003 2004 2005
------------ ------------ ------------
RMB'000 RMB'000 RMB'000
(Restated) (Restated)
Basic salaries, allowances and benefits in kind* 18,600 20,509 15,843
Bonus 2,550 4,589 471
Pension scheme contributions 1,332 1,509 542
------------ ------------ ------------
Amount paid/payable during the year 22,482 26,607 16,856
Share option benefits** -- 1,107 4,975
------------ ------------ ------------
22,482 27,714 21,831
============ ============ ============
Number of directors -- -- 3
Number of employees 5 5 2
*Salaries, allowances and benefits in kind represent the gross amount
(before Hong Kong individual salary tax) paid/payable to individual
employees.
**Share option benefits represent fair value at grant date of share
options issued under the share option schemes of the Company amortised
to the income statement during the year disregarding whether the options
have been exercised or not, and have been disclosed in accordance with
HKFRS2. No share options were exercised by the relevant employees during
the year.
The number of highest paid employees whose remuneration fell within the
following bands is as follows:
Number of employees
------------------------------
2004 2005
------------ ------------
Nil to HK$3,000,000 - 1
HK$3,000,001- HK$3,500,000 1 1
HK$3,500,001- HK$4,000,000 1 -
HK$4,000,001- HK$4,500,000 1 1
HK$4,500,001- HK$5,000,000 - -
HK$5,000,001- HK$5,500,000 - 1
HK$5,500,001- HK$6,000,000 1 -
HK$6,000,001- HK$8,000,000 - 1
HK$8,000,001- HK$8,500,000 1 -
------------ ------------
5 5
============ ============
During the year, share options were granted to certain of the five
highest paid employees in respect of their services to the Group,
further details of which are included in the disclosures in note 29 to
the financial statements.
F-42
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
13. TAX
(i) Income tax
The Company and its subsidiaries are subject to income taxes on an
entity basis on profit arising in or derived from the tax
jurisdictions in which they are domiciled and operated. The
Company is not liable for profits tax in Hong Kong as it does not
have any assessable income currently sourced from Hong Kong.
The Company's subsidiary in the PRC, CNOOC China Limited, is a
wholly foreign-owned enterprise. It is exempt from the 3% local
surcharge and is subject to an enterprise income tax of 30% under
the prevailing tax rules and regulations.
The Company's subsidiary in Singapore, China Offshore Oil
(Singapore) International Pte Ltd., is subject to income tax at
rates of 10% and 20%, for its oil trading activities and other
income generating activities, respectively. The Company's
subsidiaries owning interests in oil and gas properties in
Indonesia along the Malacca Strait are subject to corporate and
dividend tax at the rate of 44%. The Company's subsidiaries owning
interests in oil and gas properties in Indonesia acquired from
Repsol YPF, S.A. are subject to corporate and dividend tax at the
rate of 43.125% to 51.875%. All of the Company's other
subsidiaries are not subject to any income taxes in their
respective jurisdictions for the year presented.
An analysis of the provision for tax in the consolidated income
statement was as follows:
2003 2004 2005
------------ ------------ ------------
RMB'000 RMB'000 RMB'000
Overseas income taxes
- Current 654,988 755,568 845,390
- Deferred (179,134) (170,118) 14,907
PRC enterprise income tax
- Current 3,623,157 6,411,417 9,912,426
- Deferred 528,825 (66,041) 205,089
------------ ------------ ------------
Tax charge for the year 4,627,836 6,930,826 10,977,812
============ ============ ============
A reconciliation of the statutory PRC enterprise income tax rate to the
effective income tax rate of the Group is as follows:
2003 2004 2005
------------ ------------ ------------
% % %
(Restated) (Restated)
Statutory PRC enterprise income tax rate 33.0 33.0 33.0
Effect of tax exemption granted (3.0) (3.0) (3.0)
Effect of different tax rates for overseas subsidiaries (0.1) 0.3 0.5
Tax credit from government (1.4) (0.6) (0.3)
Tax effect on other permanent differences 0.2 0.3 0.0
------------ ------------ ------------
Effective income tax rate 28.7 30.0 30.2
============ ============ ============
F-43
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
13. TAX (CONT'D)
(i) Income tax (cont'd)
The tax effect of significant temporary differences of the Group
was as follows:
2003 2004 2005
---------- ---------- ----------
RMB'000 RMB'000 RMB'000
Deferred tax assets
- Provision for retirement and termination benefits 114,758 112,150 98,696
- Provision for dismantlement 775,725 926,834 1,248,498
- Provision for impairment of property, plant and
equipment and write-off of unsuccessful
exploratory drillings 759,454 869,286 886,402
---------- ---------- ----------
1,649,937 1,908,270 2,233,596
---------- ---------- ----------
Deferred tax liabilities
- Accelerated amortisation allowance for oil and gas properties (7,433,133) (8,596,768) (9,061,512)
---------- ---------- ----------
Net deferred tax liabilities (5,783,196) (6,688,498) (6,827,916)
========== ========== ==========
As at December 31, 2005, there was no significant unrecognised deferred
tax liability (2004: Nil) for taxes that would be payable on the
unremitted earnings of certain of the Group's subsidiaries and
associates as the Group had no liability to additional tax should such
amounts be remitted.
There are no income tax consequences attaching to the payment of
dividends by the Company to its shareholders.
(ii) Other taxes
The Company's PRC subsidiary pays the following other taxes:
-- Production taxes equal to 5% of independent production and
production under production sharing contracts; and
-- Business tax of 3% to 5% on other income.
14. DIVIDENDS
On August 30, 2005, the Board of Directors declared an interim dividend
of HK$0.05 per share (2004: HK$0.03 per share), totaling
HK$2,052,733,769 (equivalent to approximately RMB2,138,128,000) (2004:
RMB1,306,451,000); and a special interim dividend of HK$0.05 per share
(2004: HK$0.05 per share), totaling HK$2,052,733,769 (equivalent to
approximately RMB2,138,128,000) (2004: RMB2,177,418,000). In addition,
the Company paid a special interim dividend in 2004 of HK$0.06 per
share, totaling HK$2,464,249,697 (equivalent to approximately
RMB2,617,526,000) in place of its 2003 final dividend.
F-44
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
14. DIVIDENDS (CONT'D)
The Board of Directors have recommended a final dividend of HK$0.10 per
ordinary share, totaling HK$4,105,467,538 (approximately equivalent to
RMB4,250,391,000) for the year ended December 31, 2005.
The payment of future dividends will be determined by the Company's
Board of Directors. The payment of dividends will depend upon, among
other things, future earnings, capital requirements, financial
conditions and general business conditions of the Company. The Company's
ability to pay dividends will also depend on the cash flows determined
by the dividends, if any, received by the Company from its subsidiaries
and associates. As the controlling shareholder, CNOOC will be able to
influence the Company's dividend policy.
Cash dividends to the shareholders in Hong Kong will be paid in Hong
Kong dollars. Cash dividends to the American Depositary Receipts ("ADR")
holders will be paid to the depositary in Hong Kong dollars and will be
converted by the depositary into United States dollars and paid to the
holders of ADRs.
15. EARNINGS PER SHARE
2003 2004 2005
--------------- --------------- ---------------
RMB'000 RMB'000 RMB'000
(Restated) (Restated)
Earnings
--------
Net profit from ordinary activities attributable
to shareholders for the year for the
purpose of basic earnings per share 11,497,743 16,139,136 25,323,122
Interest expense and losses recognised on the
derivative component of
convertible bonds -- -- 537,469
Net profit from ordinary activities attributable to
shareholders for the year for the purpose
of diluted earnings per share 11,497,743 16,139,136 25,860,591
Shares (after Stock Split)
Number of shares
Weighted average number of ordinary
shares for the purpose or basic earnings
per share before effects of shares
repurchased and share options exercised 41,070,828,275 41,070,828,275 41,052,375,275
Effects of shares repurchased -- (10,587,616) --
Effects of shares options exercised -- -- 2,124,707
--------------- --------------- ---------------
Weighted average number of ordinary shares for the
purpose of basic earnings per share 41,070,828,275 41,060,240,659 41,054,499,982
--------------- --------------- ---------------
Effect of dilutive potential ordinary shares
under the shares option scheme 39,510,820 66,720,503 38,861,432
Effect of dilutive potential ordinary shares for convertible bonds -- 52,552,274 1,292,694,352
--------------- --------------- ---------------
Weighted average number of ordinary shares for the purpose of diluted
earnings per share 41,110,339,095 41,179,513,436 42,386,055,766
=============== =============== ===============
F-45
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
15. EARNINGS PER SHARE (CONT'D)
Net income per ADS for the three years ended December 31, 2005 has been
computed by dividing net income by the number of ADS outstanding. Each
ADS represented 100 shares.
The calculation of basic earnings per share amounts is based on the net
profit for the year and the weighted average number of ordinary shares
in issue during the year.
The calculation of diluted earnings per share amounts is based on the
net profit for the year, adjusted to reflect the interest expense and
losses recognised on the derivative component of the convertible bonds.
The weighted average number of ordinary shares used in the calculation
is the ordinary shares in issue during the year, as used in the basic
earnings per share calculation, and the weighted average number of
ordinary shares assumed to have been issued at no consideration on the
deemed exercise or conversion of all the dilutive potential ordinary
shares into ordinary shares.
F-46
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
16. PROPERTY, PLANT AND EQUIPMENT, NET
Movements in the property, plant and equipment of the Group are as
follows:
2005
---------------------------------------------------------
Vehicles and
Oil and gas Land and office
properties buildings equipment Total
------------ ------------ ------------ ------------
RMB'000 RMB'000 RMB'000 RMB'000
Cost:
At beginning of the year as previously reported 89,917,894 941,578 187,705 91,047,177
Cumulative adjustment for the adoption of HKAS 16 666,907 (941,578) - (274,671)
------------ ------------ ------------ ------------
At beginning of the year as restated 90,584,801 - 187,705 90,772,506
Additions 17,500,195 - 146,226 17,646,421
Acquisition (including prepayments) - - - -
Transfer from prepayment to intangible assets upon
completion of acquisition (1,299,643) - - (1,299,643)
Purchase price adjustment (152,993) - - (152,993)
Disposals and write-off - - (14,511) (14,511)
Exchange realignment (504,132) - (6) (504,138)
------------ ------------ ------------ ------------
End of year 106,128,228 - 319,414 106,447,642
============ ============ ============ ============
Accumulated depreciation, depletion and amortisation:
At beginning of the year as previously reported (33,414,136) (132,455) (43,889) (33,590,480)
Cumulative adjustment for the adoption of HKAS 16 (132,455) 132,455 - -
------------ ------------ ------------ ------------
At beginning of the year as restated (33,546,591) - (43,889) (33,590,480)
Depreciation provided during the year (6,176,784) - (57,248) (6,234,032)
Impairment recognised in the income statement during the
year (90,190) - -- (90,190)
Disposals - - 4,881 4,881
Exchange realignment 87,346 - - 87,346
------------ ------------ ------------ ------------
End of year (39,726,219) - (96,256) (39,822,475)
============ ============ ============ ============
Net book value:
Beginning of year as previously reported 56,503,758 809,123 143,816 57,456,697
============ ============ ============ ============
Beginning of the year as restated 57,038,210 - 143,816 57,182,026
============ ============ ============ ============
End of year 66,402,009 -- 223,158 66,625,167
============ ============ ============ ============
F-47
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
16. PROPERTY, PLANT AND EQUIPMENT, NET (CONT'D)
2004
---------------------------------------------------------
Vehicles and
Oil and gas Land and office
properties buildings equipment Total
------------ ------------ ------------ ------------
RMB'000 RMB'000 RMB'000 RMB'000
Cost:
At beginning of the year as previously reported 70,137,828 824,781 139,902 71,102,511
Cumulative adjustment for the adoption of HKAS 16 550,110 (824,781) - (274,671)
------------ ------------ ------------ ------------
At beginning of the year as restated 70,687,938 - 139,902 70,827,840
Additions 12,962,164 - 47,977 13,010,141
Acquisition (including prepayments) 6,934,951 - - 6,934,951
Disposals and write-off (3) - (174) (177)
Exchange realignment (249) - - (249)
------------ ------------ ------------ ------------
End of year 90,584,801 - 187,705 90,772,506
============ ============ ============ ============
Accumulated depreciation, depletion and amortisation:
At beginning of year as previously reported (27,839,105) (106,401) (33,204) (27,978,710)
Cumulative adjustment for the adoption of HKAS 16 (106,401) 106,401 - -
------------ ------------ ------------ ------------
At beginning of the year as restated (27,945,506) - (33,204) (27,978,710)
Depreciation provided during the year (5,601,168) - (10,882) (5,612,050)
Disposals - - 5 5
Exchange realignment 83 - 192 275
------------ ------------ ------------ ------------
End of year (33,546,591) - (43,889) (33,590,480)
============ ============ ============ ============
Net book value:
Beginning of the year as previously reported 42,298,723 718,380 106,698 43,123,801
============ ============ ============ ============
Beginning of the year as restated 42,742,432 - 106,698 42,849,130
============ ============ ============ ============
End of year 57,038,210 - 143,816 57,182,026
============ ============ ============ ============
Included in the current year additions was an amount of approximately
RMB245,987,000 (2004: RMB244,686,000) in respect of interest capitalised
in property, plant and equipment.
F-48
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
17. INTANGIBLE ASSETS
During the year, the Company completed the acquisition of the NWS
Project. Accordingly, the consideration allocated to the gas processing
rights is recorded as an intangible asset and will be amortised upon the
commercial production of the liquefied natural gas using the unit of
production method.
18. INVESTMENTS IN ASSOCIATES
Investments in associates represent (1) a 30% equity interest of CNOOC
China Limited in Shanghai Petroleum and Natural Gas Company Limited
("SPC"). SPC was incorporated on September 7, 1992 in the PRC with
limited liability and is principally engaged in offshore petroleum
exploration, development, production and sale in the South Yellow Sea
and East China Sea areas. The issued and paid-up capital of SPC is
RMB900 million; and (2) a 31.8% equity interest of CNOOC China Limited
in CNOOC Finance Corporation Limited. CNOOC Finance Corporation Limited
was incorporated on June 14, 2002 in the PRC with limited liability and
is principally engaged in deposit-taking, transfer, settlement, loan,
discounting and other financing services to CNOOC and its member
entities. The issued and paid-up capital of CNOOC Finance Corporation
Limited is RMB1,415 million.
2004 2005
------------ ------------
RMB'000 RMB' 000
Share of net assets 1,327,109 1,401,839
============ ============
F-49
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
19. ACCOUNTS RECEIVABLE, NET
The Group's trading terms with its customers are mainly on credit,
except for new customers, where payment in advance is normally required.
The customers are required to make payment within 30 days after the
delivery of oil and gas. Trade receivables are non-interest-bearing.
As at December 31, 2005 and 2004, substantially all the accounts
receivable were aged within six months.
20. INVENTORIES AND SUPPLIES
2004 2005
--------- ---------
RMB'000 RMB'000
Materials and supplies 879,300 969,915
Oil in tanks 274,029 268,834
Less: Provision for inventories obsolescence (6,035) (39,123)
--------- ---------
1,147,294 1,199,626
========= =========
21. AVAILABLE-FOR-SALE FINANCIAL ASSETS (CURRENT) /SHORT TERM INVESTMENTS
As at December 31, 2005 and 2004, available-for-sale financial asset
mainly represented investments in liquidity funds and were stated at
fair value at the balance sheet date. Details of the available-for-sale
financial asset were as follows:
2004 2005
------------ ------------
RMB'000 RMB'000
Unlisted investments, at fair value
Liquidity funds 3,763,959 13,185,139
Corporate bonds 1,639,956 199,877
Common stock 40,198 --
------------ ------------
Listed investments, at fair value
Common stock -- 461,919
------------ ------------
5,444,113 13,846,935
============ ============
The fair values of listed investments are based on quoted market prices.
The fair values of unlisted investments are based on the prices quoted
by fund managers. The directors believe that the estimated fair values
quoted by fund managers, which are recorded in the consolidated balance
sheet, and the related changes in fair values, which are recorded in the
consolidated balance sheet or income statement, are reasonable, and that
they are the most appropriate values at the balance sheet date.
During the year, the gross gain of the Group's and the Company's
available-for-sale investments recognised directly in equity amounted to
RMB69,069,142 and RMB64,900,590.
F-50
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
22. ACCOUNTS PAYABLE
As at December 31, 2005 and 2004, substantially all the accounts
payable were aged within six months. The accounts payable are
non-interest-bearing and are normally settled within six months.
23. OTHER PAYABLES AND ACCRUED LIABILITIES
2004 2005
------------ ------------
RMB'000 RMB'000
Accrued payroll and welfare payable 156,706 178,872
Provision for retirement and termination benefits 292,128 239,591
Accrued expenses 2,818,785 3,411,784
Advances from customers 12,588 22,238
Royalties payable 142,638 297,139
Other payables 768,179 1,057,319
------------ ------------
4,191,024 5,206,943
============ ============
Other payables are non-interest-bearing and have an average term within
six months. The fair value of the currency swaps of RMB4,725,000 (2004:
RMB2,581,000) are included in the other payables of the Group.
24. LONG TERM BANK LOANS
As at December 31, 2005, the long term bank loans of the Group were used
primarily to finance the development of oil and gas properties and to
meet working capital requirements.
Effective interest rate and final maturity 2004 2005
---------------------------------------------- --------- ---------
RMB'000 RMB'000
US$ denominated bank loans Effective interest rate of 9.2% per annum with
maturities through to 2006 827,650 812,759
Japanese Yen denominated bank loans Effective interest rate of 4.1% per annum with
maturities through to 2007 61,925 37,307
--------- ---------
889,575 850,066
Less: Current portion of long term bank loans (24,364) (825,674)
--------- ---------
865,221 24,392
========= =========
As at December 31, 2005 and 2004, all the bank loans of the Group were
unsecured and none of the outstanding borrowings were guaranteed by
CNOOC.
F-51
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
24. LONG TERM BANK LOANS (CONT'D)
The maturities of the long term bank loans are as follows:
2004 2005
------------ ------------
RMB'000 RMB'000
Balances due:
- Within one year 24,364 825,674
- After one year but within two years 846,471 24,392
- After two years but within three years 18,740 -
- After three years but within four years - -
- After four years but within five years - -
889,575 850,066
------------ ------------
Amount due within one year shown under current liabilities (24,364) (825,674)
------------ ------------
865,211 24,392
============ ============
Supplemental information with respect to long term bank loans:
Maximum Average Weighted
Weighted amount amount average
average outstanding outstanding interest rate
Balance interest rate during the during the during the
For the year ended at year end at year end year year* year**
December 31 RMB'000 RMB'000 RMB'000
------------------- ----------- ----------- ----------- ----------- -------------
2005 850,066 8.98% 889,575 869,821 8.89%
2004 889,575 8.81% 910,193 899,884 8.37%
* The average amount outstanding is computed by dividing the total
of outstanding principal balances as at January 1 and December 31
by two.
** The weighted average interest rate is computed by dividing the
total of weighted average interest rates as at January 1 and
December 31 by two.
F-52
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
25. LONG TERM GUARANTEED NOTES
Long term guaranteed notes comprised the following:
(i) The principal amount of US$500 million of 6.375% guaranteed notes
due in 2012 issued by CNOOC Finance (2002) Limited, a wholly-owned
subsidiary of the Company. The obligations of CNOOC Finance (2002)
Limited in respect of the notes are unconditionally and
irrevocably guaranteed by the Company.
(ii) The principal amount of US$200 million of 4.125% guaranteed notes
due in 2013 and the principal amount of US$300 million of 5.500%
guaranteed notes due in 2033 issued by CNOOC Finance (2003)
Limited, a wholly-owned subsidiary of the Company. The obligations
of CNOOC Finance (2003) Limited in respect of the notes are
unconditionally and irrevocably guaranteed by the Company.
(iii) The principal amount of US$1 billion zero coupon guaranteed
convertible bonds due in 2009, unconditionally and irrevocably
guaranteed by, and convertible into shares of the Company issued
by CNOOC Finance (2004) Limited, a wholly-owned subsidiary of the
Company, on December 15, 2004. The bonds are convertible from
January 15, 2005 onwards at a price of HK$6.075 per share, subject
to adjustment for, among other things, the subdivision or
consolidation of shares, bond issues, rights issues, capital
distribution and other dilutive events. The conversion price was
adjusted to HK$5.97 per share on June 7, 2005 as a result of the
declaration of the final and special final dividends for 2004 by
the Company. Unless previously redeemed, converted or purchased
and cancelled, the bonds will be redeemed on the maturity date at
105.114% of the principal amount. CNOOC Finance (2004) Limited has
an early redemption option at any time after December 15, 2007
(subject to certain criteria) and a cash settlement option when
the holders exercise their conversion right. The bondholders also
have an early redemption option to require CNOOC Finance (2004) to
redeem all or part of the bonds on December 15, 2007 at an early
redemption amount of 103.038% of the principal amount.
26. BALANCES WITH THE PARENT COMPANY
As at December 31, 2005 and 2004, the balances with CNOOC were
unsecured, interest-free and were repayable on demand.
27. RELATED PARTY TRANSACTIONS
The Group has entered into several agreements with CNOOC and its
affiliates, which govern the provision of materials, utilities and
ancillary services, the provision of technical services, the provision
of research and development services, and various other commercial
arrangements.
In addition to the transactions and balances detailed elsewhere in these
financial statements, the Group had the following material transactions
with related parties during the year:
F-53
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
27. RELATED PARTY TRANSACTIONS (CONT'D)
2003 2004 2005
--------- --------- ---------
Notes RMB'000 RMB'000 RMB'000
Materials, utilities and ancillary services 1,018,066 1,295,598 2,995,772
Technical services (i) 3,828,282 6,362,206 6,651,240
Research and development services (ii) 83,280 7,800 8,110
Lease and property management services (iii) 56,867 76,721 77,273
(iv)
Included in:
Exploration expenses 487,293 960,031 753,534
Operating expenses 1,176,601 1,405,877 1,972,431
Selling and administrative expenses 191,349 326,004 337,816
Capitalised under property, plant and equipment 3,131,252 5,050,413 6,668,614
(i) Materials, utilities and ancillary services
CNOOC China Limited has entered into materials, utilities and
ancillary services supply agreements with the affiliates of CNOOC.
Under these agreements, the affiliates of CNOOC provide to CNOOC
China Limited various materials, utilities and ancillary services.
The materials, utilities and ancillary services are provided at:
-- state-prescribed prices; or
-- where there is no state-prescribed price, at market prices,
including the local or national market prices or the prices
at which CNOOC's affiliates previously provided the relevant
materials, utilities and ancillary services to independent
third parties; or
-- where neither of the prices mentioned above is applicable,
at the cost to CNOOC's affiliates of providing the relevant
materials, utilities and services, including the cost of
sourcing or purchasing from third parties, plus a margin of
not more than 5% before any applicable taxes.
(ii) Technical services
Various affiliates of CNOOC, including China Oilfield Services
Limited and Offshore Oil Engineering Company Limited, provide the
Group with technical services for the Group's offshore oil and gas
production activities, including:
-- offshore drilling;
-- ship tugging, oil tanker transportation and security
services;
-- well survey, well logging, well cementation and other
related technical services;
-- collection of geophysical data, ocean geological
prospecting, and data processing;
-- platform fabrication service and maintenance; and
-- design, construction, installation and test of offshore and
onshore production facilities.
The price for technical services was determined based on local
market prices.
F-54
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
27. RELATED PARTY TRANSACTIONS (CONT'D)
(iii) Research and development services
The Group has revised the original research and development
services agreement with China Offshore Oil Research Centre (the
"Centre"), CNOOC's subsidiary, due to the restructuring of
operations in 2003, and only pays the Centre for particular
research and development services. These research and development
services were determined at local market prices.
(iv) Lease and property management services
The Group has entered into lease and property management services
agreements with the affiliates of CNOOC for the leasing of various
office, warehouse and residential premises. Lease charges reflect
the fair and reasonable commercial market rent and management
fees.
(v) Sale of crude oil, condensated oil and liquefied petroleum gas
The Group sells crude oil, condensated oil and liquefied petroleum
gas to CNOOC's affiliates which engage in the downstream petroleum
business at the international market price. For the year ended
December 31, 2005, the total sales amounted to approximately
RMB26,576,247,000 (2004: RMB13,945,565,000).
In the prior year, the Company, through its wholly-owned
subsidiary, China Offshore Oil (Singapore) International Pte.,
Ltd. imported oil into the PRC for trading, using CNOOC's import
license. The total sales to its customers through such
arrangements amounted to approximately RMB447 million while the
commission paid by the third party customers to CNOOC amounted to
approximately RMB2.7 million for the year ended December 31, 2004.
No such trading by using CNOOC's import license occurred during
the year.
(vi) Transactions with CNOOC Finance Corporation Limited
The Company entered into a Framework Agreement with CNOOC Finance
Corporation Limited ("CNOOC Finance") on April 8, 2004. Under the
Framework Agreement, the Group utilises the financial services
provided by CNOOC Finance, a 31.8% owned associate company of the
Company that is also a subsidiary of CNOOC. Such services include
placing of the Group's cash deposits with CNOOC Finance, and
settlement services for transactions between the Group and other
entities including CNOOC and its subsidiaries. Pursuant to the
Framework Agreement, the financial services provided by CNOOC
Finance also include provision of loan. The charges by CNOOC
Finance for its financial services to the Group are based on the
pricing policies of CNOOC Finance. Such pricing policies are
subject to People's Bank of China guidelines, including the
interest rates and foreign exchange rates, as well as guidelines
published by PRC self-regulatory bodies, such as associations of
finance companies. Based on these guidelines, CNOOC Finance has
limited discretion in setting its prices.
For the year ended December 31, 2005, the maximum outstanding
balance for deposits (including interest received in respect of
these deposits) placed with CNOOC Finance amounted to
approximately RMB3,922,468,000 (2004: RMB5,300,381,000).
F-55
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
28. PROVISION FOR DISMANTLEMENT
Provision for dismantlement represents the estimated costs of
dismantling offshore oil platforms and abandoning oil and gas
properties. The provision for dismantlement has been classified under
long term liabilities. The associated cost is capitalised and the
liability is discounted and an accretion expense is recognised using the
credit-adjusted risk-free interest rate in effect when the liability is
initially recognised. The current year's income statement charge
represents the amortisation charge on the dismantlement liabilities
capitalised in accordance with HKAS 37 and is included in the
accumulated depreciation, depletion and amortisation in note 16.
The details of the provision for dismantlement are as follows:
2004 2005
------------ ------------
RMB'000 RMB'000
At beginning of year: 2,646,800 3,089,448
Additions during the year and capitalised in oil
and gas properties 322,941 873,270
Increase in discounted amount of provisions arising
from the passage of time 119,707 198,945
------------ ------------
At the end of year 3,089,448 4,161,663
============ ============
29. SHARE CAPITAL
Shares (after subdivision of shares*)
Issued
share capital
Share capital equivalent
Number of Shares HK$'000 of RMB'000
---------------- ---------------- ----------------
Authorised:
Ordinary shares of HK$0.02 each
at December 31, 2005 and 2004 75,000,000,000 1,500,000
================ ================
Issued and fully paid:
Ordinary shares of HK$0.02 each
As at January 1, 2004 41,070,828,275 821,417 876,978
Repurchased and cancelled (18,453,000) (369) (392)
---------------- ---------------- ----------------
As at December 31, 2004 41,052,375,275 821,048 876,586
Exercise of options 2,300,100 46 49
---------------- ---------------- ----------------
As at December 31, 2005 41,054,675,375 821,094 876,635
================ ================ ================
* Adjustment has been made to take account of the subdivision of
issued and unissued shares of HK$0.10 each into five shares of
HK$0.02 each effective March 17, 2004.
The repurchase of the Company's shares during the prior year was
effected by the directors, pursuant to the mandate from shareholders
received at the last annual general meeting.
F-56
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
29. SHARE CAPITAL (CONT'D)
Share option schemes
The Company has adopted the following share option schemes for the grant
of options to the Company's Directors, senior management and other
eligible grantees:
1. Pre-Global Offering Share Option Scheme (as defined below);
2. 2001 Share Option Scheme (as defined below);
3. 2002 Share Option Scheme (as defined below); and
4. 2005 Share Option Scheme (as defined below).
Under these share option schemes, the Remuneration Committee of the
Company's Board of Directors will from time to time propose for the
Board's approval for the recipient of and the number of shares
underlying each option. The maximum aggregate number of shares
(including those that could be substituted for under the Pre-Global
Offering Share Option Scheme, the 2001 Share Option Scheme, the 2002
Share Option Scheme and the 2005 Share Option Scheme) which may be
granted shall not exceed 10% of the total issued share capital of the
Company as at December 31, 2005, being the date on which the
shareholders of the Company approved a new share option scheme,
excluding shares issued upon exercise of options granted under these
schemes from time to time.
Pre-Global Offering Share Option Scheme
On February 4, 2001, the Company adopted a pre-global offering share
option scheme (the "Pre-Global Offering Share Option Scheme"). Pursuant
to the Pre-Global Offering Share Option Scheme:
1. options for an aggregate of 23,100,000 shares have been granted;
2. the subscription price per share is HK$1.19; and
3. the period during which an option may be exercised is as follows:
(a) 50% of the rights to exercise the options shall vest 18
months after the date of the grant; and
(b) 50% of the rights to exercise the options shall vest 30
months after the date of the grant.
The exercise periods for options granted under the Pre-Global Offering
Share Option Scheme shall end not later than 10 years from March 12,
2001. No further options may be granted under the Pre-Global Offering
Share Option Scheme.
2001 Share Option Scheme
On February 4, 2001, the Company adopted a share option scheme (the
"2001 Share Option Scheme") for the purposes of recognising the
contribution that certain individuals had made to the Company and
attracting and retaining the best available personnel to the Company.
Pursuant to the 2001 Share Option Scheme:
1. options for an aggregate of 44,100,000 shares have been granted;
2. the subscription price per share is HK$1.232; and
3. the period during which an option may be exercised is as follows:
(a) one-third of the rights to exercise the options shall vest
on the first anniversary of the date of the grant;
F-57
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
29. SHARE CAPITAL (CONT'D)
Share option schemes (cont'd)
2001 Share Option Scheme (cont'd)
(b) one-third of the rights to exercise the options shall vest
on the second anniversary of the date of the grant; and
(c) one-third of the rights to exercise the options shall vest
on the third anniversary of the date of the grant.
The exercise periods for options granted under the 2001 Share Option
Scheme shall end not later than 10 years from August 27, 2001.
In view of the amendments to the relevant provisions of the Rules
Governing the Listing of Securities on The Stock Exchange of Hong Kong
Limited (the "Listing Rules") regarding the requirements of share option
schemes of a Hong Kong listed company effective on September 1, 2001, no
further options will be granted under the 2001 Share Option Scheme.
2002 Share Option Scheme
In June 2002, the Company adopted a new share option scheme (the "2002
Share Option Scheme").
Under the 2002 Share Option Scheme, the Directors may, at their
discretion, invite employees, including Executive Directors, of the
Company or any of its subsidiaries, to take up options to subscribe for
shares in the Company. The maximum number of shares which may be granted
under the 2002 Share Option Scheme to any individual in any 12-month
period up to the next grant shall not exceed 1% of the total issued
share capital of the Company from time to time.
According to the 2002 Share Option Scheme, the consideration payable by
a participant for the grant of an option will be HK$1.00. The
subscription price of a share payable by a participant upon the exercise
of an option is determined by the Directors at their discretion at the
date of grant, except that such price may not be set below a minimum
price which is the highest of:
1. the nominal value of the share of the Company on the date of the
grant of the option;
2. the average closing price of the shares on The Stock Exchange of
Hong Kong Limited ("HKSE") as stated in the HKSE's quotations
sheets for the five trading days immediately preceding the date of
grant of the option; and
3. the closing price of the shares on the HKSE as stated in the
HKSE's quotations sheets on the date of grant of the option.
On February 24, 2003, the Board of Directors approved to grant options
in respect of 42,050,000 shares to the Company's Directors and senior
management under the 2002 Share Option Scheme. The exercise price for
such options is HK$2.108 per share. The closing market price immediately
before the date on which such options were granted was HK$2.11 per
share. Such options granted under the 2002 Share Option Scheme may be
exercised, in whole or in part, in accordance with the following vesting
schedule:
1. one-third of the rights to exercise the options shall vest on the
first anniversary of the date of the grant;
2. one-third of the rights to exercise the options shall vest on the
second anniversary of the date of the grant; and
3. one-third of the rights to exercise the options shall vest on the
third anniversary of the date of the grant.
F-58
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
29. SHARE CAPITAL (CONT'D)
Share option schemes (cont'd)
2002 Share Option Scheme (cont'd)
The exercise period for the above options granted under the 2002 Share
Option Scheme shall end not later than 10 years from February 24, 2003.
On February 5, 2004, the Board of Directors approved a grant of options
in respect of 50,700,000 shares to the Company's Directors and senior
management under the 2002 Share Option Scheme. The exercise price for
such options is HK$3.152 per share. The closing market price immediately
before the date on which such options were granted was HK$3.146 per
share. Such options granted under the 2002 Share Option Scheme may be
exercised, in whole or in part, in accordance with the following vesting
schedule:
1. one-third of the rights to exercise the options shall vest on the
first anniversary of the date of the grant;
2. one-third of the rights to exercise the options shall vest on the
second anniversary of the date of the grant; and
3. one-third of the rights to exercise the options shall vest on the
third anniversary of the date of the grant.
The exercise period for the above options granted under the 2002 Share
Option Scheme shall end not later than 10 years from February 5, 2004.
On August 31, 2005, the Board of Directors approved a grant of options
in respect of 65,870,000 shares to the Company's Directors and senior
management under the 2002 Share Option Scheme. The exercise price of
such options is HK$5.62 per share. The closing market price immediately
before the date on which such options were granted was HK$5.75 per
share. Such options granted under the 2002 Share Option Scheme may be
exercised, in whole or in part, in accordance with the following vesting
schedule:
1. one-third of the rights to exercise the options shall vest on the
first anniversary of the date of the grant;
2. one-third of the rights to exercise the options shall vest on the
second anniversary of the date of the grant; and
3. one-third of the rights to exercise the options shall vest on the
third anniversary of the date of the grant.
The exercise period for the above options granted under the 2002 Share
Option Scheme shall end not later than 10 years from August 31, 2005.
2005 Share Option Scheme
The Company had undertaken a review of the 2002 Share Option Scheme in
2005 and noted that certain provisions could be clarified and improved.
Accordingly, the Board had proposed, and on December 31, 2005, the
Company adopted a new share option scheme ("2005 Share Option Scheme")
and terminated the 2002 Share Option Scheme. Upon termination of the
2002 Share Option Scheme, no further options may be granted under the
2002 Share Option Scheme, but in all other respects the provisions of
the 2002 Share Option Scheme shall remain in force. The outstanding
options under the 2002 Share Option Scheme shall continue to be subject
to the provisions of the 2002 Share Option Scheme, and the adoption of
the 2005 Share Option Scheme will not in any way affect the terms of the
exercise of such outstanding options.
F-59
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
29. SHARE CAPITAL (CONT'D)
Share option schemes (cont'd)
2005 Share Option Scheme (cont'd)
Under the 2005 Share Option Scheme, the Board of the Company will have
the authority to grant options to subscribe for shares to the Directors,
officers and employees of the Company and its subsidiaries, and any
other persons who in sole discretion of the Board have contributed or
will contribute to the Group. Unless approved by the shareholders, the
total number of shares issued and to be issued upon exercise of the
options granted to each individual (including exercised and unexercised
options) under the 2005 Share Option Scheme or any other share option
scheme adopted by the Company, in any 12 months period, must not exceed
1% of the shares in issue.
According to the 2005 Share Option Scheme, the consideration payable by
a participant for the grant of an option will be HK$1.00. The
subscription price of a share payable by a participant upon the exercise
of an option will be determined by the Directors at their discretion at
the date of the grant, except that such price may not be set below a
minimum price which is the highest of:
1. the nominal value of the share of the Company on the date of the
grant of the option;
2. the average closing price of the shares on the HKSE as stated in
the HKSE's quotations sheets for the five trading days immediately
preceding the date of the grant of the option; and
3. the closing price of the shares on the HKSE as stated in the
HKSE's quotations sheet on the date of the grant of the option.
The period within which the options must be exercised, as well as any
minimum holding period or performance targets which apply to the
options, will be specified by the Board of the Company at the time of
grant. The exercise period for options granted under the 2005 Share
Option Scheme shall end not later than 10 years from the date of the
grant of the option. During the year, no options have been granted or
exercised under the 2005 Share Option Scheme.
F-60
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
29. SHARE CAPITAL (CONT'D)
Share option schemes (cont'd)
During the year ended December 31, 2005, the movements in the options
granted under all of the above share option schemes were as follows:
Number of share options
-----------------------------------------------------------------------------------------------------
Granted Exercised Forfeited Expired At 31
Name of category At January 1, during during during during December Date of grant of
of participant 2005 the year the year the year the year 2005 share options
----------------------------------------------------------------------------------------------------------------------------------
Executive Directors
Chengyu Fu 1,750,000 -- -- -- -- 1,750,000 March 12, 2001
1,750,000 -- -- -- -- 1,750,000 August 27, 2001
1,150,000 -- -- -- -- 1,150,000 February 24, 2003
2,500,000 -- -- -- -- 2,500,000 February 5, 2004
-- 3,500,000 -- -- -- 3,500,000 August 31, 2005
Han Luo 1,400,000 -- -- -- -- 1,400,000 March 12, 2001
1,150,000 -- -- -- -- 1,150,000 August 27, 2001
1,150,000 -- -- -- -- 1,150,000 February 24, 2003
1,150,000 -- -- -- -- 1,150,000 February 5, 2004
-- 1,610,000 -- -- -- 1,610,000 August 31, 2005
Shouwei Zhou 1,400,000 -- -- -- -- 1,400,000 March 12, 2001
1,750,000 -- -- -- -- 1,750,000 August 27, 2001
1,750,000 -- -- -- -- 1,750,000 February 24, 2003
1,750,000 -- -- -- -- 1,750,000 February 5, 2004
-- 2,450,000 -- -- -- 2,450,000 August 31, 2005
Longsheng Jiang * 1,400,000 -- -- -- -- 1,400,000 March 12, 2001
1,150,000 -- -- -- -- 1,150,000 August 27, 2001
1,150,000 -- -- 383,300 -- 766,700 February 24, 2003
1,150,000 -- -- 766,700 -- 383,300 February 5, 2004
-- 1,610,000 -- 1,610,000 -- -- August 31, 2005
----------------------------------------------------------------------------------------------------------------------------------
Price of Weighted average
Company's price of the
shares Company's shares
----------------------------------------------
Exercise Immediately Immediately
price before the before the
Name of category Exercise period of of share grant date exercise At exercise
of participant share options** options of options date date
HK$ HK$ HK$ HK$
------------------------------------------------------------------------------------------------------------------------
Executive Directors
Chengyu Fu March 12, 2001 to March 12, 2011 1.19 1.23 -- --
August 27, 2001 to August 27, 2011 1.232 1.46 -- --
February 24, 2003 to February 24, 2013 2.108 2.09 -- --
February 5, 2004 to February 5, 2014 3.152 3.13 -- --
August 31, 2005 to August 31, 2015 5.62 5.75 -- --
Han Luo March 12, 2001 to March 12, 2011 1.19 1.23 -- --
August 27, 2001 to August 27, 2011 1.232 1.46 -- --
February 24, 2003 to February 24, 2013 2.108 2.09 -- --
February 5, 2004 to February 5, 2014 3.152 3.13 -- --
August 31, 2005 to August 31, 2015 5.62 5.75 -- --
Shouwei Zhou March 12, 2001 to March 12, 2011 1.19 1.23 -- --
August 27, 2001 to August 27, 2011 1.232 1.46 -- --
February 24, 2003 to February 24, 2013 2.108 2.09 -- --
February 5, 2004 to February 5, 2014 3.152 3.13 -- --
August 31, 2005 to August 31, 2015 5.62 5.75 -- --
Longsheng Jiang * March 12, 2001 to March 12, 2011 1.19 1.23 -- --
August 27, 2001 to August 27, 2011 1.232 1.46 -- --
February 24, 2003 to February 24, 2013 2.108 2.09 -- --
February 5, 2004 to February 5, 2014 3.152 3.13 -- --
August 31, 2005 to August 31, 2015 5.62 5.75 -- --
------------------------------------------------------------------------------------------------------------------------
F-61
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
29. SHARE CAPITAL (CONT'D)
Share option schemes (cont'd)
Number of share options
-------------------------------------------------------------------------------------
Granted Exercised Forfeited Expired At 31
Name of category At January 1, during during during during December Date of grant of
of participant 2005 the year the year the year the year 2005 share options
-----------------------------------------------------------------------------------------------------------------------------------
Xinghe Cao -- 800,000 -- -- -- 800,000 August 31, 2005
Zhenfang Wu -- 800,000 -- -- -- 800,000 August 31, 2005
Guangqi Wu -- 1,610,000 -- -- -- 1,610,000 August 31, 2005
Hua Yang 1,150,000 -- -- -- -- 1,150,000 March 12, 2001
1,150,000 -- -- -- -- 1,150,000 August 27, 2001
1,150,000 -- -- -- -- 1,150,000 February 24, 2003
1,150,000 -- -- -- -- 1,150,000 February 5, 2004
-- 1,610,000 -- -- -- 1,610,000 August 31, 2005
-----------------------------------------------------------------------------------------------------------------------------------
Non-executive Directors
Chiu Sung Hong 1,150,000 -- -- -- -- 1,150,000 February 5, 2004
Evert Henkes 1,150,000 -- -- -- -- 1,150,000 February 5, 2004
Kenneth S Courtis 1,150,000 -- -- -- -- 1,150,000 February 5, 2004
Erwin Schurtenberger* 1,150,000 -- -- 1,150,000 -- -- February 5,2004
Other Employees
In aggregate 6,550,000 -- -- 1,700,000 -- 4,850,000 March 12, 2001
22,650,000 -- 1,150,000 2,350,000 -- 19,150,000 August 27, 2001
26,500,000 -- 766,700 3,733,400 -- 21,999,900 February 24,2003
35,850,000 -- 383,400 4,683,200 -- 30,783,400 February 5,2004
-- 51,880,000 -- 2,380,000 -- 49,500,000 August 31, 2005
-----------------------------------------------------------------------------------------------------------------------------------
Total 124,250,000 65,870,000 2,300,100 18,756,600 -- 169,063,300
-----------------------------------------------------------------------------------------------------------------------------------
Price of Weighted average
Company's price of the
shares Company's shares
--------------------------------------------
Exercise Immediately Immediately
price before the before the At exercise
Name of category Exercise period of of share grant date exercise date of
of participant share options** options of options date options
HK$ HK$ HK$ HK$
-----------------------------------------------------------------------------------------------------------------------------
Xinghe Cao August 31, 2005 to August 31, 2015 5.62 5.75 -- --
Zhenfang Wu August 31, 2005 to August 31, 2015 5.62 5.75 -- --
Guangqi Wu August 31, 2005 to August 31, 2015 5.62 5.75 -- --
Hua Yang March 12, 2001 to March 12, 2011 1.19 1.23 -- --
August 27, 2001 to August 27, 2011 1.232 1.46 -- --
February 24 2003 to February 24, 2013 2.108 2.09 -- --
February 5 2004 to February 5, 2014 3.152 3.13 -- --
August 31, 2005 to August 31, 2015 5.62 5.75 -- --
-----------------------------------------------------------------------------------------------------------------------------
Non-executive Directors
Chiu Sung Hong February 5, 2004 to February 5, 2014 3.152 3.13 -- --
Evert Henkes February 5, 2004 to February 5, 2014 3.152 3.13 -- --
Kenneth S Courtis February 5, 2004 to February 5, 2014 3.152 3.13 -- --
Erwin Schurtenberger* February 5, 2004 to February 5, 2014 3.152 3.13 -- --
Other Employees
In aggregate March 12, 2001 to March 12, 2011 1.19 1.23 -- --
August 27, 2001 to August 27, 2011 1.232 1.46 4.03 4.05
February 24, 2003 to February 24, 2013 2.108 2.09 4.16 4.19
February 5, 2004 to February 5, 2014 3.152 3.13 3.85 3.93
August 31, 2005 to August 31, 2015 5.62 5.75 -- --
-----------------------------------------------------------------------------------------------------------------------------
Total
-----------------------------------------------------------------------------------------------------------------------------
* Mr. Erwin Schurtenberger resigned as an Independent Non-executive
Director of the Company on April 1, 2005 and Mr. Jiang Longsheng retired
as an Executive Director of the Company on June 1, 2005.
** The share options are only exercisable by the relevant grantees upon the
vesting of such share options. The vesting of the Company's share
options is by stage and the details are disclosed above.
F-62
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
29. SHARE CAPITAL (CONT'D)
Share option schemes (cont'd)
The fair value of the share options granted during the year was
HK$103,811,616.
The fair value of equity-settled share options granted during the year was
estimated as at the date of grant, using the Black-Scholes model, taking into
account the terms and conditions upon which the options were granted.
The following table lists the assumptions to the model used for the year ended
December 31, 2005:
Dividend yield 2%
Expected volatility 31%
Risk-free interest rate 4.57%
Expected life of option 5 years
Weighted average share price HK$5.62
The expected life of the options is based on the historical data and is not
necessarily indicative of the exercise patterns that may occur. The expected
volatility reflects the assumption that the historical volatility is
indicative of future trends, which may also not necessarily be the actual
outcome. No other feature of the options granted was incorporated into the
measurement of fair value. Any changes to the above assumptions may affect the
estimation of the fair value of the option.
2,300,100 share options granted under the 2002 Share Option Scheme and the
2001 Share Option Scheme have been exercised since the respective dates of
grant and up to the date when the Board of Directors approved the financial
statements. On April 1, 2005, Mr. Erwin Schurtengberger surrendered 1,150,000
share options following his resignation as an independent non-executive
director of the Company. The weighted average closing price of the shares
immediately on the day before the exercise of the options was HK$4.04.
The share options exercised during the year resulted in the issue of 2,300,100
ordinary shares of the Company and new share capital of RMB49,000 and share
premium of RMB4,451,000.
The total number of options exercisable as of December 31, 2005 was
70,416,522. No share options had been cancelled during the year ended December
31, 2005.
At the balance sheet date, the Company had 169,063,300 share options
outstanding under these share options schemes which represented approximately
0.4% of the Company's shares in issues as at that date. The exercise in full
of the remaining share options would, under the present capital structure of
the Company, result in the issue of 169,063,300 additional ordinary shares of
the Company and additional share capital of RMB3,517,531 and share premium of
RMB602,823,748.
F-63
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
30. RESERVES
According to the laws and regulations of the PRC and the articles of
association of CNOOC China Limited, CNOOC China Limited is required to
provide for certain statutory funds, namely, the general reserve fund
and staff and workers' bonus and welfare funds, which are appropriated
from net profit (after making good losses from previous years), but
before dividend distribution.
CNOOC China Limited is required to allocate at least 10% of its net
profit as reported in accordance with the generally accepted accounting
principles in the PRC ("PRC GAAP") to the general reserve fund until the
balance of such fund has reached 50% of its registered capital. The
general reserve fund can only be used, upon approval by the relevant
authority, to offset against accumulated losses or to increase capital.
Appropriation to the staff and workers' bonus and welfare funds, which
is determined at the discretion of CNOOC China Limited's directors, is
expensed as incurred under Hong Kong GAAP. The staff and workers' bonus
and welfare funds can only be used for special bonuses or collective
welfare of employees, and assets acquired through this fund shall not be
taken as assets of CNOOC China Limited.
As at December 31, 2005, the general reserve fund appropriated amounted
to RMB6,681,974,000 (2004: RMB4,413,610,000), representing approximately
44.5% (2004: 29.4%) of the total registered capital of CNOOC China
Limited.
Included in retained earnings is an amount of RMB1,146,530,000 (2004:
RMB877,109,000), being the retained earnings attributable to associates.
The Company's ability to distribute dividends will largely depends on
the dividends it receives from its subsidiaries. The dividends
distributable by the Company's subsidiaries to the Company are
determined in accordance with the relevant accounting principle required
by the local authorities. As of December 31, 2005, the aggregate amount
of the subsidiaries' retained earnings available for distributions to
the Company amounted to approximately RMB30,275,453,000 (2004:
RMB16,652,414,000).
31. RETIREMENT AND TERMINATION BENEFITS
All the Group's full-time employees in the PRC are covered by a
government regulated pension, and are entitled to an annual pension. The
PRC government is responsible for the pension liabilities to these
retired employees. The Group is required to make annual contributions to
the government-regulated pension at rates ranging from 9% to 22% of the
employees' basic salaries.
The Company is required to make contributions to a defined contribution
mandatory provident fund at a rate of 5% of the basic salaries of all
full-time employees in Hong Kong. The related pension costs are expensed
as incurred.
F-64
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
31. RETIREMENT AND TERMINATION BENEFITS (CONT'D)
The Group provides retirement and termination benefits for all local
employees in Indonesia in accordance with Indonesian labour law, and
provides employee benefits to expatriate staff in accordance with the
relevant employment contracts. The Group has adopted an accounting
policy to record liabilities for the retirement and termination
benefits.
32. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
(a) Reconciliation of profit before tax to cash generated from
operations
2003 2004 2005
------------ ------------ ------------
RMB'000 RMB'000 RMB'000
(Restated) (Restated)
Profit before tax 16,125,579 23,069,962 36,300,934
Adjustments for:
Interest income (183,576) (206,872) (359,294)
Finance costs 354,940 441,825 1,100,532
Exchange losses/(gains), net 6,746 (29,269) (287,027)
Share of profit of associates (220,263) (344,469) (307,075)
Investments income (123,483) (72,438) (247,893)
(Reversal) of/provision for inventory obsolescence 8,745 (2,710) 33,088
Depreciation, depletion and amortisation 4,642,753 5,455,062 5,964,740
Loss on disposals and write-off of property, plant and equipment 39,818 155,876 141,574
Dismantlement 167,326 201,637 252,857
Amortisation of discount of long term guaranteed notes 11,276 15,634 41,959
Impairment losses related to property, plant and equipment -- -- 90,190
Equity-settled share option expenses 37,747 46,642 29,123
------------ ------------ ------------
Operating cash flows before movements in working capital 20,867,608 28,730,880 42,753,708
Increase in accounts receivable (1,185,304) (27,466) (1,001,296)
Increase in inventories and supplies (129,678) (96,307) (108,405)
Decrease/(increase)in other current assets 312,559 267,168 (342,087)
Increase in amounts due from related companies (302,993) (417,091) (925,824)
Increase/(decrease)in an amount due to the parent company (105,785) 205,407 118,422
Increase in accounts payable, other payables and accrued liabilities 1,448,645 1,318,415 677,522
Decrease in other taxes payable (4,772) (12,447) (24,900)
(Decrease)/increase in amounts due to related companies 242,631 (262,798) 548,508
------------ ------------ ------------
Cash generated from operations 21,142,911 29,705,761 41,695,648
============ ============ ============
F-65
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
32. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (CONT'D)
(b) Acquisitions
2003 2004 2005
------------ ------------ ------------
RMB'000 RMB'000 RMB'000
Acquisitions
Net assets acquired:
Property, plant and equipment, net 1,579,726 4,686,857 3,129,662
Intangible assets -- -- 1,299,643
Accounts receivable -- 453 --
Other current assets 8,959 66,744 --
Inventories and supplies 122,777 -- --
Cash and bank balances 17,580 -- --
Accounts payable (8,294) (81,547) --
Other payables and accrued liabilities (47,983) -- --
Tax payable -- -- --
Deferred tax liabilities -- (1,141,461) --
------------ ------------ ------------
1,672,765 3,531,046 4,429,305
Prepayment for NWS Project -- 4,693,809 --
Prepayment for Tangguh Project 2,445,715 -- --
Acquisition of interests of MEG -- -- 1,017,000
------------ ------------ ------------
4,118,480 8,224,855 5,446,305
============ ============ ============
Satisfied by:
Prepayment made in 2004 -- 2,445,715 4,582,298
Cash paid (including cash calls for Tangguh Project) 4,118,480 5,779,140 --
Cash paid for the interests of MEG -- -- 1,017,000
Tax refund from the NWS Project (152,993)
------------ ------------ ------------
4,118,480 8,224,855 5,446,305
============ ============ ============
An analysis of the net outflow of cash and cash equivalents in respect of the
acquisitions is as follows:
2003 2004 2005
------------ ------------ ------------
RMB'000 RMB'000 RMB'000
Cash
Cash consideration 4,118,480 5,779,140 1,017,000
Cash and bank balances acquired (17,580) -- --
Cash received for tax refund of the NWS project -- -- (152,993)
------------ ------------ ------------
Net outflow of cash and cash equivalents 4,100,900 5,779,140 864,007
============ ============ ============
Further details of the acquisition of the NWS Project and MEG Project
are included in note 4 to the financial statements. The purchase price
allocations for NWS Project are still preliminary pending the
confirmation of the tax basis of the underlying assets.
The interest in MEG has been included under long term available-for-sale
financial assets.
33. CONTINGENT LIABILITIES
As of December 2005 and 2004, there were no material contingent
liabilities not provided for in the financial statements.
F-66
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
34. COMMITMENTS
(i) Capital commitments
As at December 31, 2005, the Group and the Company had the
following capital commitments, principally for the construction
and purchase of property, plant and equipment:
2004 2005
----------- -----------
RMB'000 RMB'000
Contracted for 9,568,971 7,511,100
Authorised, but not contracted for 20,331,504 23,736,582
As at December 31, 2005, the Group had unutilised banking
facilities amounting, to approximately RMB33,450,791,000 (2004:
RMB20,662,120,000).
(ii) Operating lease commitments
(a) Office properties
The Group leases certain of its office properties under
operating lease arrangements, leases properties are
negotiated for terms ranging from 10 months to 3 years.
As at December 31, 2005, the Group had total minimum lease
payments under non-cancelable operating leases falling due
as follows:
2004 2005
------------ ------------
RMB'000 RMB'000
Commitments due:
- Within one year 24,824 157,181
- After one year but within two years 549 22,351
- After two year but within five years -- 23,972
------------ ------------
25,373 203,504
============ ============
(b) Plant and equipment
The Group leases certain of its plant and equipment under
operating lease arrangements for a term of 10 years.
As at December 31, 2005, the Group had total minimum lease
payments under non-cancelable operating lease falling due as
follows:
2004 2005
------------ ------------
RMB'000 RMB'000
Commitments due:
- Within one year 149,360 183,137
- After one year but within two years 597,442 183,137
- After two year but within five years 1,834,023 1,006,289
------------ ------------
2,580,825 1,372,563
============ ============
F-67
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
34. COMMITMENTS (CONT'D)
(iii) Financial instruments
(a) Currency swap contracts
As at December 31, 2005, the Group had a currency swap
contract with a financial institution to sell United States
dollars in exchange for Japanese Yen in order to hedge
against future repayments of certain Japanese Yen
denominated loans. The hedged Japanese Yen loans bore
interest at a fixed rate of 4.5% per annum. The interest
stipulated in the swap contract for the United States
dollars was the floating LIBOR rate.
The details are as follows:
2004 2005
------------------------------ --------------------------
Weighted Weighted
Notional average Notional average
contract contractual contract contractual
amount exchange rate amount exchange rate
(JPY'000) (JPY/US$) (JPY'000) (JPY/US$)
Year
2005 271,470 95.00 -- --
2006 271,470 95.00 271,470 95.00
2007 271,470 95.00 271,470 95.00
(b) Fair value of financial instruments
The carrying value of cash and cash equivalents, time
deposits, available-for-sale investments, accounts
receivables, other current assets, accounts payable and
other payables approximated to fair value due to the short
maturity of these instruments.
The estimated fair value of long term bank loans based on
current market interest rates was approximately
RMB868,886,000 as at December 31, 2005 (2004:
RMB967,770,000).
The estimated fair value of long term guaranteed notes based
on current market interest rates was approximately RMB
16,592,412,000 as at December 31, 2005 (2004:
RMB16,428,934,000).
F-68
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
35. CONCENTRATION OF RISKS
(a) Credit risk
The carrying amount of cash and cash equivalents, time deposits,
liquidity funds and bond investments, accounts receivable and
other receivables, and due from related parties and other current
assets except for prepayments represents our maximum exposure to
credit risk in relation to financial assets.
The majority of the Group's accounts receivable is related to
sales of oil and natural gas to third party customers. The Group
performs ongoing credit evaluations of the customers' financial
condition and generally do not require collateral on accounts
receivable. The Group maintains a provision for doubtful accounts
and actual losses have been within management's expectation.
No other financial assets carry a significant exposure to credit
risk.
(b) Currency risk
Substantially all of the Group's oil and gas sales are denominated
in Renminbi and US dollars. In the past decade, the PRC
government's policy of maintaining a stable exchange rate and
China's ample foreign reserves has contributed to the stability of
the Renminbi. Starting from July 21, 2005, China reformed the
exchange rate regime by moving into a managed floating exchange
rate regime based on market supply and demand with reference to a
basket of currencies. Renminbi would no longer be pegged to the US
dollar. From that day to December 31, 2005, Renminbi has
appreciated by approximately 2.5% against US dollars.
The appreciation of Renminbi against US dollars may have the
following impact on the Group. On one hand, since the benchmark
oil and gas prices are usually in US dollars, the Group's oil and
gas sales may decrease due to the depreciation of US dollars
against Renminbi. On the other hand, the depreciation of US
dollars against Renminbi will also decrease the Group's costs for
imported equipment and materials, most of which are denominated in
US dollars. In addition, the debt repayment by the Group will
decrease since more than 99% of the Group's debts are also
denominated in U.S. dollars.
As of the end of 2005, the balance of the yen-denominated loans
was only RMB37,307,000. Since the Group has hedged the yen loans
against foreign currency swaps, the Group does not expect any
exchange risk relating to Japanese yen in the future.
(c) Interest rate risk
As of the end of 2005, the interest rates for all balance of our
debts were fixed. The term of the weighted average balance was
approximately 8 years. The average interest rate payable by the
Group is favorable under the environment of interest rate hike.
(d) Business risk
The major operations are conducted in the PRC, Indonesia and
Australia and accordingly are subject to special considerations
and significant risks not typically associated with investments in
equity securities of the United States of America and Western
European companies. These include risks associated with, among
others, the oil and gas industry, the political, economic and
legal environments, influence of the national authorities over
price setting and competition in the industry.
F-69
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
35. CONCENTRATION OF RISKS (CONT'D)
(e) Concentration of customers
A substantial portion of the oil and gas sales of the Group is
made to a small number of customers on an open account basis.
Details of the sales to these customers are as follows:
2003 2004 2005
------------ ----------- -----------
RMB'000 RMB'000 RMB'000
China Petroleum & Chemical Corporation 6,975,069 10,634,066 15,625,736
PetroChina Company Limited 1,446,169 1,944,709 1,776,199
Castle Peak Power Company Limited 841,285 1,070,436 1,107,314
36. ADDITIONAL FINANCIAL INFORMATION
As at December 31, 2005, net current assets and total assets less
current liabilities of the Group amounted to approximately
RMB30,805,199,000 and RMB101,148,848,000 (2004: RMB24,890,362,000 and
RMB83,399,497,000 (restated)), respectively.
37. SUBSEQUENT EVENT
On January 8, 2006, the Company signed a definitive agreement with South
Atlantic Petroleum Limited ("SAPETRO") to acquire a 45% working interest
in an offshore oil mining license 130 "OML 130" in Nigeria for a cash
consideration of US$2.268 billion, subject to adjustment. Conditional
on, among other things, the approval of the Nigerian National Petroleum
Corporation ("NNPC") and the PRC government, the transaction is expected
to be completed in the first half of 2006.
On January 27, 2006, CNOOC Africa Limited, a wholly-owned subsidiary of
the Company, signed an agreement to acquire from AERD Projects Nigeria
Limited a 35% of right to Oil Prospecting Licence 229 "OPL229" in
Nigeria for US$ 60 million in cash, subject to adjustments.
38. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP
(a) Net profit and net equity
(i) Short term investments
In 2003, according to Hong Kong GAAP, available-for-sale
investments in marketable securities were measured at fair
value and related unrealised holding gains and losses are
included in the current period's earnings. According to US
GAAP, such investments are also measured at fair value and
classified in accordance with Statement of Financial
Accounting Standards ("SFAS") No.115. Under US GAAP, related
unrealised gains and losses on available-for-sale securities
were excluded from the current period's earnings and
included in other comprehensive income.
F-70
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
38. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(a) Net profit and net equity (continued)
(ii) Impairment of long-lived assets
Under Hong Kong GAAP, impairment charges are recognised when
a long-lived asset's carrying amount exceeds the higher of
an asset's fair value less costs to sell and value in use,
which incorporates discounting the asset's estimated future
cash flows.
Under US GAAP, long-lived assets are assessed for possible
impairment in accordance with SFAS No.144, "Accounting for
the impairment or disposal of long-lived assets". SFAS No.
144 requires the Group to (a) recognise an impairment loss
only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and (b) measure
an impairment loss as the difference between the carrying
amount and fair value of the asset. SFAS No. 144 requires
that a long-lived asset to be abandoned, exchanged for a
similar productive asset, or distributed to owners in a
spin-off be considered as held and used until it is disposed
of.
SFAS No. 144 also requires the Group to assess the need for
an impairment of capitalised costs of proved oil and gas
properties and the costs of wells and related equipment and
facilities on a property-by-property basis. If an impairment
is indicated based on undiscounted expected future cash
flows, then an impairment is recognised to the extent that
net capitalised costs exceed the estimated fair value of the
property. Fair value of the property is estimated by the
Group using the present value of future cash flows. The
impairment was determined based on the difference between
the carrying value of the assets and the present value of
future cash flows. It is reasonably possible that a change
in reserve or price estimates could occur in the near term
and adversely impact management's estimate of future cash
flows and consequently the carrying value of properties.
In addition, under Hong Kong GAAP, a subsequent increase in
the recoverable amount of an asset (other than goodwill and
available-for-sale equity investments) is reversed to the
income statement to the extent that an impairment loss on
the same asset was previously recognised as an expense when
the circumstances and events that led to the write-down or
write-off cease to exist. The reversal is reduced by the
amount that would have been recognised as depreciation had
the write-down or write-off not occurred. Under US GAAP, an
impairment loss establishes a new cost basis for the
impaired asset and the new cost basis should not be adjusted
subsequently other than for further impairment losses.
For the year ended December 31, 2005, an impairment of
approximately RMB90,190,000 was recognised under Hong Kong
GAAP and US GAAP.
(iii) Acquisition of CNOOC Finance
Under HK GAAP, the Company adopted the purchase method to
account for the acquisition of 31.8% equity interest in
CNOOC Finance in December 2003. Under the purchase method,
the acquired results are included in the consolidated
results of operations of the Company from the date of the
acquisition.
As the Company and CNOOC Finance are under common control of
CNOOC, under US GAAP, the acquisition is considered to be a
transfer of businesses under common control and the acquired
assets and liabilities are accounted at historical cost in a
manner similar to the pooling of interests method.
Accordingly, the consolidated financial statements for all
periods presented have been retroactively restated as if the
current structure and operations had been in existence since
inception. The cash consideration paid by the Company is
treated as an equity transaction in the year of the
acquisition for US GAAP purpose.
F-71
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
38. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(a) Net profit and net equity (continued)
(iv) Accounting for convertible bonds
With effect from January 1, 2005, under HKAS 32 Financial
Instruments: Disclosure and Presentation, financial
instruments with cash settlement options and other
derivative components will need to be bifurcated into a debt
component and a derivative component. The derivative
component is marked to market at each balance sheet date and
the differences will be charged/credited to the income
statement. The debt component is stated at amortised cost.
The requirements of HKAS 32 have been applied
retrospectively with comparative amounts restated.
Under US GAAP, convertible bonds are subject to different
rules on the bifurcation of the debt and derivative
components. However, there is no significant difference on
the accounting treatment adopted under HK GAAP and US GAAP
for the Group's convertible bonds.
(v) Provision for dismantlement
HK GAAP requires the provision for dismantlement to be
recorded for a present obligation whether that obligation is
legal or constructive. The associated cost is capitalized
and the liability is discounted and accretion expense is
recognised using the credit-adjusted risk-free interest rate
in effect when the liability is initially recognised.
Prior to 2003, the Company accrued for dismantlement costs
on a unit-of-production basis under SFAS No.19, "Financial
accounting and reporting by oil and gas producing companies"
under US GAAP. The Company adopted SFAS No.143 "Accounting
for asset retirement obligations" on January 1, 2003. SFAS
No.143 requires that the fair value of a liability for an
asset retirement obligation be recognised in the period in
which it is incurred if a reasonable estimate of fair value
can be made. The associated asset retirement costs are
capitalised as part of the carrying amount of long-lived
asset. The liability is discounted and accretion expense is
recognised using the credit-adjusted risk-free interest rate
in effect when the liability is initially recognised. The
impact of the adoption of SFAS No.143 is included in the
cumulative effect of change in accounting policy for
dismantlement liabilities below.
F-72
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
38. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(a) Net profit and net equity (continued)
The effects on net profit of the above significant differences between Hong
Kong GAAP and US GAAP are summarised below:
Net Profit
----------------------------------------------
2003 2004 2005
---------- ---------- ----------
RMB'000 RMB'000 RMB'000
(Restated) (Restated)
As reported under Hong Kong GAAP 11,497,743 16,139,136 25,323,122
Impact of U.S GAAP adjustments:
- Equity accounting for the results of CNOOC Finance 30,913 - -
- Unrealised holding gains from available-for-sale
investments in marketable securities (21,503) 25,228 -
- Realised holding gains from available-for-sale
marketable securities 27,088 2,972 -
- Other 9,156 9,156 20,036
---------- ---------- ----------
Income before cumulative effect of change in accounting policy 11,543,397 16,176,492 25,343,158
Cumulative effect of change in accounting policy for dismantlement
liabilities 436,112 - -
---------- ---------- ----------
Net profit under US GAAP 11,979,509 16,176,492 25,343,158
========== ========== ==========
Net profit per share under US GAAP
-Basic
Before cumulative effect of change in accounting policy for
dismantlement liabilities
Cumulative effect of change in accounting policy for
dismantlement liabilities RMB0.28 RMB0.39 RMB0.62
RMB0.01 - -
---------- ---------- ----------
RMB0.29 RMB0.39 RMB0.62
========== ========== ==========
-Diluted
Before cumulative effect of change in accounting policy for
dismantlement liabilities RMB0.28 RMB0.39 RMB0.61
Cumulative effect of change in accounting policy for dismantlement
liabilities RMB0.01 - -
---------- ---------- ----------
RMB0.29 RMB0.39 RMB0.61
========== ========== ==========
There are no significant differences between Hong Kong GAAP and US GAAP
that affect net equity.
F-73
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
38. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(b) Comprehensive income
According to SFAS No. 130, "Reporting comprehensive income", the Group
is required to include a statement of other comprehensive income for
revenues and expenses, gains and losses which under US GAAP are included
in comprehensive income and excluded from net income.
2003 2004 2005
RMB'000 RMB'000 RMB'000
------------------------------------------
Net income under US GAAP 11,979,509 16,176,492 25,343,158
Other comprehensive income:
Foreign currency translation adjustments 36,243 (42,301) (493,289)
Unrealised gains /(losses) on available-for-sale
investments/Short term investments 21,503 (25,228) 69,069
Less: Reclassification adjustment for gains
included in net income (27,088) (2,972) (20,036)
------------------------------------------
Comprehensive income under US GAAP 12,010,167 16,105,991 24,898,902
------------------------------------------
Roll forward of accumulated other comprehensive income components are as
follows:
Unrealised
Foreign gains on Accumulated
currency available other
translation -for-sale comprehensive
adjustments investments income
RMB'000 RMB'000 RMB'000
------------------------------------------
Balance at January 1, 2003 (13,596) 53,821 40,225
Reversal of current year's realised gains -- (27,088) (27,088)
Current year's change 36,243 21,503 57,746
-----------------------------------------
Balance at January 1, 2004 22,647 48,236 70,883
Reversal of current year's realised gains -- (2,972) (2,972)
Current year's change (42,301) (25,228) (67,529)
-----------------------------------------
Balance at December 31, 2004 (19,654) 20,036 382
Reversal of current year realised gains -- (20,036) (20,036)
Current year's change (493,289) 69,069 (424,220)
-----------------------------------------
Balance at December 31, 2005 (512,943) 69,069 (443,874)
-----------------------------------------
F-74
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
38. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(c) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and
expenses during the reporting period. The most significant
estimates pertain to proved oil and gas reserve volumes and the
future development, provision for dismantlement as well as
estimates relating to certain oil and gas revenues and expenses.
Actual amounts could differ from those estimates and assumptions.
(d) Segment reporting
The Group's segment information is based on the segmental
operating results regularly reviewed by the Group's chief
operating decision maker. The accounting policies used are the
same as those used in the preparation of the Group's consolidated
Hong Kong GAAP financial statements.
(e) Impact of Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board
("FASB") issued SFAS No.153, "Exchange of Non-monetary Asset an
amendment of APB Opinion No.29".This Statement, which address the
measurement of exchange of non-monetary assets, is effective
prospectively for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of this
Statement is not expected to impact the Company's consolidated
financial position or results of operations.
In December 2004, the FASB issued Statement No. 123 (revised
2004), "Share Based Payment" (FAS No.123R), which replaces FAS
No.123 and superseded APB Opinion No.25, "Accounting For Stock
Issued to Employees". FAS No.123R requires all share-based
payments to employees, including grants of employee stock options,
to be recognised in the financial statement based on their fair
values beginning with the first interim period after June 15,
2005, with early adoption encouraged. Under the SEC's rule, FAS
No.123R is now effective for the Company beginning January 1,
2006, The proforma disclosures previously permitted under FAS No
123 no longer will be an alternative to financial statement
recognition. The Company believes the adoption of the FAS No. 123R
will have no material impact on its consolidated financial
statement as the Company currently accounts for the stock options
under the fair value recognition provision of FAS No. 123.
In 2005, the FASB has finalized an amendment to statement No.19,
"Financial Accounting and Reporting by Oil and Gas Producing
Companies" ("FAS No. 19") that change the way oil and gas
producers account for deferred exploratory drilling costs. The new
standard would relax the one-year limitation, so long as oil and
gas reserves have been discovered and an enterprise "is making
sufficient progress assessing the reserves and the economic and
operating viability of the project." We believe the adoption of
amendment to FAS No. 19 will have no material impact on its
consolidated financial position or results of operations.
F-75
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
38. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(e) Impact of Recently Issued Accounting Standards (continued)
In March 2005, the FASB issued FASB Interpretation Number 47("FIN
No.47"), "Accounting for conditional asset retirement
obligations". The interpretation clarifies the requirement to
record abandonment liabilities stemming from legal obligations
when the retirement depends on a conditional future event. FIN
No.47 requires that the uncertainty about the timing or method of
settlement of a conditional retirement obligation be factored into
the measurement of the liability when sufficient information
exists. FIN No.47 is effective for fiscal years ending after
December 15, 2005 and application of the interpretation did not
change how abandonment obligations are currently calculated by the
Company.
In May 2005, the FASB issued FAS No. 154, i(degree)Accounting
Changes and Error Corrections,i+/- a replacement of APB Opinion
No. 20, i(degree)Accounting Changesi+/- and FAS No. 3,
i(degree)Reporting Accounting Changes in Interim Financial
Statementsi+/- (i(degree)FAS No. 154i+/-). FAS No.154 changes the
requirements for the accounting for, and reporting of, a change in
accounting principle. Previously, voluntary changes in accounting
principles were generally required to be recognised by way of a
cumulative effect adjustment within net income during the period
of the change. FAS No. 154 requires retrospective application to
prior periodsi- financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative
effect of the change. FAS No. 154 is effective for accounting
changes made in fiscal years beginning after December 15, 2005;
however, the statement does not change the transition provisions
of any existing accounting pronouncements. The Company does not
believe adoption of FAS No. 154 will have a material effect on its
financial position, cash flows or results of operations.
In February 2006, the FASB issued FAS No. 155 "Accounting for
Certain Hybrid Financial Instruments, an amendment of FASB
Statements No. 133 and 140" ("FAS No.155"). FAS No. 155 clarifies
certain issues relating to embedded derivatives and beneficial
interests in securitized financial assets, including permitting
fair value measurement for any hybrid financial instrument that
contains an embedded derivative, eliminating the prohibition on a
qualifying special-purpose entity from holding certain derivative
instruments, and providing clarification that concentrations of
credit risk in the form of subordination are not embedded
derivatives. The provisions of FAS No. 155 are effective for all
financial instruments acquired or issued after fiscal years
beginning after September 15, 2006. The Company does not believe
adoption of FAS No. 155 will have a material effect on its
financial position, cash flows or results of operations.
F-76
CNOOC LIMITED AND ITS SUBSIDIARIES
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(All amounts expressed in Renminbi unless otherwise stated)
The following disclosures are included in accordance with the United States
Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and
Gas Producing Activities". The disclosures are categorized by the geographical
areas in which the Group conducts oil and gas activities. Except for PRC and
Indonesia, the information on the other geographical areas, such as Australia,
Myanmar and Morocco, etc., are combined in the following disclosures as
"Others", among which all the other projects are still in exploration or joint
study stage except that the North West Shelf Project in Australia is in
development stage.
(a) Reserve quantity information
Crude oil and natural gas reserve estimates are determined through
analysis of geological and engineering data which appear, with
reasonable certainty, to be recoverable at commercial rates in the
future from known oil and natural gas reservoirs under existing economic
and operating conditions.
Estimates of crude oil and natural gas reserves have been made by
independent engineers. The Group's net proved reserves consist of its
percentage interest in reserves, comprised of a 100% interest in its
independent oil and gas properties and its participating interest in the
properties covered under the production sharing contracts in PRC, less
(a) an adjustment for the Group's share of royalties payable by the
Group to the PRC government and the Group's participating interest in
share oil payable to the PRC government under the production sharing
contracts, and less (b) an adjustment for production allocable to
foreign partners under the PRC production sharing contracts as
reimbursement for exploration expenses attributable to the Group's
participating interest, and plus (a) its participating interest in the
properties in Australia, and (b) the participating interest in the
properties covered under the production sharing contracts in Indonesia
less an adjustment of share oil attributable to the Indonesian
government and the domestic market obligation.
Proved developed and undeveloped reserves (net of royalties and PRC
government share oil):
PRC Indonesia Others Total
Oil Natural gas Oil Natural gas Oil Natural gas Oil Natural gas
(mmbls) (bcf) (mmbls) (bcf) (mmbls) (bcf) (mmbls) (bcf)
---------------------------------------------------------------------------------------------------
December 31, 2002 1,287 3,333 138 215 -- -- 1,425 3,548
Purchase of reserves 53 142 -- -- -- -- 53 142
Discoveries and extensions 114 506 1 2 -- -- 115 508
Production (97) (69) (15) (37) -- -- (112) (106)
Revisions of prior estimates (24) 42 (21) 20 -- -- (45) 62
---------------------------------------------------------------------------------------------------
December 31, 2003 1,333 3,954 103 200 -- -- 1,436 4,154
Purchase of reserves 6 161 -- -- -- -- 6 161
Discoveries and extensions 129 414 4 157 -- -- 133 571
Production (106) (103) (11) (31) -- -- (117) (134)
Revisions of prior estimates (8) (101) 5 (5) -- -- (3) (106)
---------------------------------------------------------------------------------------------------
December 31, 2004 1,354 4,325 101 321 -- -- 1,455 4,646
Purchase of reserves -- -- -- -- 25 603 25 603
Discoveries and extensions 133 314 -- 17 -- -- 133 331
Production (122) (108) (9) (34) -- -- (131) (142)
Revisions of prior estimates (7) -- (19) (7) -- -- (26) (7)
---------------------------------------------------------------------------------------------------
December 31, 2005 1,358 4,531 73 297 25 603 1,456 5,431
===================================================================================================
(a) Reserve quantity information (cont'd)
F-77
CNOOC LIMITED AND ITS SUBSIDIARIES
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(All amounts expressed in Renminbi unless otherwise stated)
Proved developed reserves:
PRC Indonesia Others Total
Oil Natural gas Oil Natural gas Oil Natural gas Oil Natural gas
(mmbls) (bcf) (mmbls) (bcf) (mmbls) (bcf) (mmbls) (bcf)
---------------------------------------------------------------------------------------
December 31, 2003 459 2,054 91 135 -- -- 550 2,189
December 31, 2004 617 2,134 85 138 -- -- 702 2,272
December 31, 2005 644 2,098 63 155 14 378 721 2,631
=======================================================================================
(b) Results of operations
2003 2004
PRC Indonesia Others Total PRC Indonesia Others Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
---------------------------------------------------------------------------------------------------------
Net sales to customers 23,644,659 4,472,172 -- 28,116,831 32,723,277 4,162,742 -- 36,886,019
Operating expenses (2,903,094) (1,609,715) -- (4,512,809) (3,643,182) (1,427,162) -- (5,070,344)
Production taxes (1,238,598) -- -- (1,238,598) (1,725,674) -- -- (1,725,674)
Exploration (764,165) (83,907) -- (848,072) (1,202,203) (113,957) -- (1,316,160)
Accretion expense (93,246) -- -- (93,246) (119,707) -- -- (119,707)
Depreciation,
depletion and
amortisation
(including
dismantlement) (3,700,349) (1,109,730) -- (4,810,079) (4,670,988) (985,711) -- (5,656,699)
---------------------------------------------------------------------------------------------------------
14,945,207 1,668,820 -- 16,614,027 21,361,523 1,635,912 -- 22,997,435
Income tax expenses (4,483,562) (719,695) -- (5,203,257) (6,408,457) (705,487) -- (7,113,944)
---------------------------------------------------------------------------------------------------------
Result of operations 10,461,645 949,125 -- 11,410,770 14,953,066 930,425 -- 15,883,491
=========================================================================================================
2005
PRC Indonesia Others Total
RMB'000 RMB'000 RMB'000 RMB'000
-------------------------------------------------------
Net sales to customers 48,778,934 4,638,735 -- 53,417,669
Operating expenses (4,507,915) (1,426,683) -- (5,934,598)
Production taxes (2,596,543) -- -- (2,596,543)
Exploration (1,169,067) (77,842) (46,779) (1,293,688)
Accretion expense (198,945) -- -- (198,945)
Depreciation,
depletion and
amortisation
(including
dismantlement) (5,360,745) (856,775) -- (6,217,520)
-------------------------------------------------------
34,945,719 2,277,435 (46,779) 37,176,375
Income tax expenses (10,483,716) (995,885) -- (11,479,601)
-------------------------------------------------------
Result of operations 24,462,003 1,281,550 (46,779) 25,696,774
=======================================================
(c) Capitalised costs
2003 2004
PRC Indonesia Others Total PRC Indonesia Others Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
-----------------------------------------------------------------------------------------------------------------
Proved oil and gas
Properties 57,537,676 9,440,843 -- 66,978,519 70,931,798 10,100,116 -- 81,031,914
Unproved oil and gas
Properties 713,594 -- -- 713,594 437,513 4,696,237 -- 5,133,750
Accumulated
depreciation,
depletion and
amortization (25,740,836) (2,098,269) -- (27,839,105) (30,462,658) (3,083,933) -- (33,546,591)
-----------------------------------------------------------------------------------------------------------------
Net capitalised
costs 32,510,434 7,342,574 -- 39,853,008 40,906,653 11,712,420 -- 52,619,073
==============================================================================================================
2005
PRC Indonesia Others Total
RMB'000 RMB'000 RMB'000 RMB'000
---------------------------------------------------------
Proved oil and gas
Properties 85,960,339 11,241,345 3,129,662 100,331,346
Unproved oil and gas
Properties 267,432 5,529,450 -- 5,796,882
Accumulated
depreciation,
depletion and
amortization (35,875,926) (3,850,293) -- (39,726,219)
---------------------------------------------------------
Net capitalised costs 50,351,845 12,920,502 3,129,662 66,402,009
=========================================================
F-78
CNOOC LIMITED AND ITS SUBSIDIARIES
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(All amounts expressed in Renminbi unless otherwise stated)
(d) Costs incurred
2003 2004
PRC Indonesia Others Total PRC Indonesia Others Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
-----------------------------------------------------------------------------------------------
Acquisition costs 1,579,726 -- -- 1,579,726 -- 3,531,046 -- 3,531,046
Exploration costs 1,225,926 102,067 -- 1,327,993 1,806,556 137,361 -- 1,943,917
Development costs* 7,489,472 512,064 -- 8,001,536 11,693,183 645,501 -- 12,338,684
----------------------------------------------------------------------------------------------
Total costs incurred 10,295,124 614,131 -- 10,909,255 13,499,739 4,313,908 -- 17,813,647
===============================================================================================
2005
PRC Indonesia Others** Total
RMB'000 RMB'000 RMB'000 RMB'000
------------- -----------------------------------
Acquisition costs -- -- 4,546,285 4,546,285
Exploration costs 1,878,931 111,219 46,779 2,036,929
Development costs* 14,423,266 2,328,200 -- 16,751,466
------------------------------------------------------
Total costs incurred 16,302,197 2,439,419 4,593,064 23,334,680
======================================================
* The development costs include estimated future dismantlement costs
of dismantling offshore oil platforms and gas properties.
** The amounts include prepayments made in 2004 for the NWS Project
of RMB 4,693,809,000 and a tax refund of RMB152,993,000 related to
the acquisition of the NWS Project received in 2005.
(e) Standardised measure of discounted future net cash flows and changes
therein
In calculating the standardised measure of discounted future net cash
flows, year-end constant price and cost assumptions were applied to the
Group's estimated annual future production from proven reserves to
determine future cash inflows. Year end average realised oil prices used
in the estimation of proved reserves and calculation of the standardised
measure were US$48 as at December 31, 2005 (2004: US$32; 2003: US$30).
Future development costs are estimated based upon constant price
assumptions and assume the continuation of existing economic, operating
and regulatory conditions. Future income taxes are calculated by
applying the year-end statutory rate to estimate future pre-tax cash
flows after provision for the tax cost of the oil and natural gas
properties based upon existing laws and regulations. The discount was
computed by application of a 10% discount factor to the estimated future
net cash flows.
Management believes that this information does not represent the fair
market value of the oil and natural gas reserves or the present value of
estimated cash flows since no economic value is attributed to potential
reserves, the use of a 10% discount rate is arbitrary, and prices change
constantly from year-end levels.
F-79
CNOOC LIMITED AND ITS SUBSIDIARIES
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(All amounts expressed in Renminbi unless otherwise stated)
(e) Standardised measure of discounted future net cash flows and changes
therein (cont'd)
Present value of estimated future net cash flows:
2003 2004
Notes PRC Indonesia Others Total PRC Indonesia Others Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
--------------------------------------------------------------------------------------------------------------
Future cash
inflows (1) 422,329,692 30,135,721 -- 452,465,413 467,336,822 37,198,784 -- 504,535,606
Future
production
Costs (106,854,167) (17,532,095) -- (124,386,262) (115,267,250) (20,472,914) -- (135,740,164)
Future
development
Costs (2) (52,917,280) (4,114,091) -- (57,031,371) (60,319,348) (6,709,341) -- (67,028,689)
Future income
taxes (72,124,755) (3,346,547) -- (75,471,302) (78,717,296) (4,001,019) -- (82,718,315)
---------------------------------------------------------------------------------------------------------------
Future net
cash flows (3) 190,433,490 5,142,988 -- 195,576,478 213,032,928 6,015,510 -- 219,048,438
10% discount
factor (84,550,531) (1,226,300) -- (85,776,831) (91,755,987) (1,905,679) -- (93,661,666)
---------------------------------------------------------------------------------------------------------------
Standardised measure 105,882,959 3,916,688 -- 109,799,647 121,276,941 4,109,831 -- 125,386,772
===============================================================================================================
2005
PRC Indonesia Others Total
RMB'000 RMB'000 RMB'000 RMB'000
---------------------------------------------------------------
Future cash inflows 661,693,176 40,919,470 21,855,452 724,468,098
Future production
Costs (156,122,249) (19,370,535) (3,742,250) (179,235,034)
Future development
Costs (69,918,424) (7,481,211) (4,497,517) (81,897,152)
Future income taxes (119,326,469) (5,678,110) (2,759,755) (127,764,334)
---------------------------------------------------------------
Future net cash flows 316,326,034 8,389,614 10,855,930 335,571,578
10% discount factor (128,177,514) (2,494,083) (5,472,748) (136,144,345)
---------------------------------------------------------------
Standardised measure 188,148,520 5,895,531 5,383,182 199,427,233
===============================================================
(1) Future cash flows consist of the Group's 100% interest in the
independent oil and gas properties and the Group's participating
interest in the properties under production sharing contracts in PRC
less (a) an adjustment for the royalties payable to the PRC government
and share oil payable to the PRC government under production sharing
contracts and (b) an adjustment for production allocable to foreign
partners under the PRC production sharing contracts for exploration
costs attributable to the Group's participating interest, plus (a) its
participating interest in the properties in Australia, and (b) the
participating interest in the properties covered under the production
sharing contracts in Indonesia, less an adjustment of share oil
attributable to Indonesian government and the domestic market
obligation.
(2) Future development costs include the estimated costs of drilling future
development wells and building the production platforms.
(3) Future net cash flows have been prepared taking into consideration
estimated future dismantlement costs of dismantling offshore oil
platforms and gas properties.
Changes in the standardised measure of discounted future net cash flows:
2003 2004 2005
RMB'000 RMB'000 RMB'000
------------ ------------ ------------
Standardised measure, beginning of year 100,141,049 109,799,647 125,386,772
Sales of production, net of royalties and production costs (22,345,781) (30,090,001) (44,886,528)
Net change in prices, net of royalties and production costs 22,321,949 17,826,421 99,412,030
Extensions discoveries and improved recovery,
net of related future costs 13,790,936 20,772,271 26,693,961
Change in estimated future development costs (14,673,054) (21,766,234) (18,500,061)
Development costs incurred during the year 7,718,863 11,768,916 15,592,789
Revisions in quantity estimates (2,942,902) (1,954,130) (3,087,240)
Accretion of discount 13,428,654 14,202,072 17, 132,630
Net change in income taxes (6,290,099) (5,515,547) (29,228,637)
Purchase of properties 5,363,142 2,352,004 8,981,882
Changes in timing and other (6,713,110) 7,991,353 1,929,635
------------ ------------ ------------
Standardised measure, end of year 109,799,647 125,386,772 199,427,233
============ ============ ============
F-80