SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
The Securities Exchange Act of 1934
For the month of August, 2006
CHINA PETROLEUM & CHEMICAL CORPORATION
A6, Huixindong Street,
Chaoyang District Beijing, 100029
People's Republic of China
Tel: (8610) 6499-0060
(Indicate by check mark whether the registrant files or will file
annual reports under cover of Form 20-F or Form 40-F.)
Form 20-F X Form 40-F _____
---------
(Indicate by check mark whether the registrant by furnishing the
information contained in this form is also thereby furnishing the information
to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act
of 1934.)
Yes ____ No X
---------
(If "Yes" is marked, indicate below the file number assigned to
registrant in connection with Rule 12g3-2(b): 82-__________.) N/A
This Form 6-K consists of:
The 2006 interim report of China Petroleum & Chemical Corporation (the
"Registrant"), made by the Registrant in English on August 25, 2006.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
China Petroleum & Chemical Corporation
By: /s/ Chen Ge
-----------
Name: Chen Ge
Title: Secretary to the Board of Directors
Date: August 28, 2006
CONTENTS
2 Company Profile
3 Principal Financial Data and
Indicators
8 Changes in Share Capital and
Shareholdings of Principal
Shareholders
10 Chairman's Statement
12 Business Review and
Prospects
17 Management's Discussion and
Analysis
29 Significant Events
37 Directors, Supervisors,
Senior Management
38 Financial Statements
115 Documents for Inspection
116 Confirmation from the
Directors and Senior Management
This interim report contains "forward-looking statements". All statements,
other than statements of historical facts, that address business activities,
events or developments that the Company expects or anticipates will or may
occur in the future (including, but not limited to projections, targets,
reserves and other estimates and business plans) are forward-looking
statements. The actual results or developments of the Company may differ
materially from those indicated by these forward-looking statements as a result
of various factors and uncertainties. The Company makes the forward-looking
statements referred to herein as at 25 August 2006 and, unless otherwise
required by the relevant regulatory authorities, undertakes no obligation to
update these statements.
IMPORTANT NOTICE: THE BOARD OF DIRECTORS OF CHINA PETROLEUM & CHEMICAL
CORPORATION ("SINOPEC CORP.") AND ITS DIRECTORS WARRANT THAT THERE ARE NO
MATERIAL OMISSIONS, OR MISREPRESENTATIONS OR MISLEADING STATEMENTS CONTAINED IN
THIS INTERIM REPORT AND SEVERALLY AND JOINTLY ACCEPT FULL RESPONSIBILITY FOR
THE AUTHENTICITY, ACCURACY AND COMPLETENESS OF THE INFORMATION CONTAINED IN
THIS INTERIM REPORT. MR. YAO ZHONGMIN AND MR. FAN YIFEI, DIRECTORS OF SINOPEC
CORP., DID NOT ATTEND THE THIRD MEETING OF THE THIRD SESSION OF THE BOARD FOR
REASONS OF OFFICIAL DUTIES. MR. YAO ZHONGMIN, DIRECTOR OF SINOPEC CORP.,
AUTHORISED MR. CHEN TONGHAI, MR. FAN YIFEI, DIRECTOR OF SINOPEC CORP.,
AUTHORISED MR. WANG TIANPU TO VOTE ON THEIR BEHALF IN RESPECT OF THE
RESOLUTIONS PUT FORWARD IN THE MEETING OF THE BOARD. MR. CHEN TONGHAI, CHAIRMAN
OF THE BOARD, MR. WANG TIANPU, PRESIDENT AND DIRECTOR, MR. DAI HOULIANG,
DIRECTOR, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER AND MR. LIU YUN,
HEAD OF THE ACCOUNTING DEPARTMENT WARRANT THE AUTHENTICITY AND COMPLETENESS OF
THE FINANCIAL STATEMENTS CONTAINED IN THIS INTERIM REPORT.
THE FINANCIAL STATEMENTS FOR THE SIX-MONTH PERIOD ENDED 30 JUNE 2006 OF SINOPEC
CORP. AND ITS SUBSIDIARIES ("THE COMPANY") PREPARED IN ACCORDANCE WITH THE PRC
ACCOUNTING RULES AND REGULATIONS, AND INTERNATIONAL FINANCIAL REPORTING
STANDARDS ("IFRS") HAVE BEEN AUDITED BY KPMG HUAZHEN AND KPMG, RESPECTIVELY,
AND BOTH FIRMS HAVE ISSUED STANDARD UNQUALIFIED OPINIONS ON THE FINANCIAL
STATEMENTS CONTAINED IN THIS INTERIM REPORT.
COMPANY PROFILE
Sinopec Corp. is the first company in REPRESENTATIVE ON SECURITIES PLACES WHERE THE INTERIM REPORT IS
China listed on the stock exchanges in MATTERS AVAILABLE FOR INSPECTION
Hong Kong, New York, London and Mr. Huang Wensheng China: Board Secretariat
Shanghai, and is also an integrated China Petroleum & Chemical
energy and chemical company with REGISTERED ADDRESS, PLACE OF Corporation
upstream, midstream and downstream BUSINESS AND CORRESPONDENCE ADDRESS 6A Huixindong Street,
operations. The principal operations of 6A Huixindong Street Chaoyang District, Beijing, PRC
the Company include: exploring for and Chaoyang District
developing, producing and trading crude Beijing, PRC USA: Citibank, N.A.
oil and natural gas; processing crude Postcode: 100029 388 Greenwich St., 14th floor
oil, producing petroleum products and Tel: 86-10-64990060 New York, NY 10013 USA
trading, transporting, distributing and Fax: 86-10-64990022
marketing petroleum products; producing, Website: http://www.sinopec.com UK: Citibank N. A.
distributing and trading petrochemical Email: ir@sinopec.com Citigroup Centre
products. Sinopec Corp.'s basic media@sinopec.com Canada Square
information is as follows: Canary Wharf
PLACE OF BUSINESS IN HONG KONG London E14 5LB UK
LEGAL NAME 12th Floor, Office Tower, Convention Plaza
[GRAPHIC OMITTED] 1 Harbour Road, Wanchai, Hong Kong PLACES OF LISTING OF SHARES, STOCK
NAMES AND STOCK CODES
CHINESE ABBREVIATION NEWSPAPERS FOR INFORMATION
[GRAPHIC OMITTED] DISCLOSURE A Share: Shanghai Stock Exchange
Mainland China: Stock name: SINOPEC CORP
ENGLISH NAME China Securities Journal Stock code: 600028
China Petroleum & Chemical Shanghai Securities News
Corporation Securities Times H Share: Hong Kong Stock Exchange
Stock name: SINOPEC CORP
ENGLISH ABBREVIATION Hong Kong: Stock code: 0386
Sinopec Corp. Hong Kong Economic Times
South China Morning Post (English) ADR: New York Stock Exchange
LEGAL REPRESENTATIVE Stock name: SINOPEC CORP
Mr. Chen Tonghai INTERNET WEBSITE PUBLISHING INTERIM Stock code: SNP
REPORT DESIGNATED BY THE CHINA
AUTHORISED REPRESENTATIVES SECURITIES REGULATORY COMMISSION London Stock Exchange
Mr. Wang Tianpu, Mr. Chen Ge http://www.sse.com.cn Stock name: SINOPEC CORP
Stock code: SNP
SECRETARY TO THE BOARD OF DIRECTORS
Mr. Chen Ge
2
PRINCIPAL FINANCIAL DATA AND INDICATORS
1 FINANCIAL DATA AND INDICATORS PREPARED IN ACCORDANCE WITH THE PRC
ACCOUNTING RULES AND REGULATIONS
(1) Financial data and indicators of the Company for the first half of
2006
At 30 June At 31 December Changes from the
2006 2005 end of last year
Items RMB millions RMB millions (%)
Current assets 161,351 141,896 13.71
Current liabilities 211,744 167,792 26.19
Total assets 568,888 520,572 9.28
Shareholders' funds
(excluding minority
interests) 228,510 215,623 5.98
Net assets per share
(RMB/share) (Fully diluted) 2.636 2.487 5.98
Adjusted net assets
per share (RMB/share) 2.570 2.426 5.94
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Changes over the
Six-month periods ended 30 June same period of
2006 2005 the preceding year
Items RMB millions RMB millions (%)
Net profit 20,679 18,044 14.60
Net profit before
extraordinary gains
and losses 20,776 18,087 14.87
Return on net assets (%) 9.05 9.13 (0.08)
(Fully diluted) percentage point
Return on net assets (%) 9.20 9.29 (0.09)
(Weighted average) percentage point
Earnings per share (RMB/share)
(Fully diluted) 0.239 0.208 14.60
Earnings per share (RMB/share)
(Weighted average) 0.239 0.208 14.60
Net cash flow from
operating activities 25,166 25,044 0.49
----------------------------------------------------------------------------------------
Items under extraordinary gains and losses and corresponding amounts:
Six-month period ended 30 June 2006
(Income)/Expense
Items RMB millions
Gain on disposal of long-term equity investments (24)
Written back of provisions for impairment losses in
previous years (339)
Non-operating expenses:
(excluding impairment losses on assets provided in
accordance with the Accounting Regulations for
Business Enterprises) 640
Of which:Loss on disposal of fixed assets 43
Employee reduction expenses 48
Donations 40
Non-operating income (132)
Tax effect (48)
Total 97
--------------------------------------------------------------------------------------------
3
(2) Appendix to income statement prepared in accordance with the PRC
Accounting Rules and Regulations
Six-month period ended Six-month period ended
30 June 2006 30 June 2005
Return on net assets (%) Return on net assets (%)
Fully Weighted Fully Weighted
Items diluted average diluted average
Profit from principal operations 26.16 26.60 29.29 29.78
Operating profit 13.64 13.88 15.76 16.03
Net profit 9.05 9.20 9.13 9.29
Net profit before extraordinary gains and losses 9.09 9.25 9.15 9.31
Six-month period ended Six-month period ended
30 June 2006 30 June 2005
Earnings per share Earnings per share
Fully Weighted Fully Weighted
diluted average diluted average
Items RMB RMB RMB RMB
Profit from principal operations 0.689 0.689 0.667 0.667
Operating profit 0.360 0.360 0.359 0.359
Net profit 0.239 0.239 0.208 0.208
Net profit before extraordinary gains and losses 0.240 0.240 0.209 0.209
(3) Significant changes of items in the financial statements Descriptions
and reasons for changes of financial data during the reporting period
where the fluctuation is more than 30%, or the fluctuation in such
item is 5% or more of the total assets or 10% or more of the profit
before taxation.
At 30 At 31
June December Increase/(Decrease)
2006 2005 Amount Percentage Reasons of Changes
Items RMB millions RMB millions RMB millions (%)
Advance payments 7,313 5,051 2,262 44.78 Mainly due to the increase in prepayments
for purchases of crude oil and raw materials
Long-term equity 27,392 14,146 13,246 93.64 Mainly due to the increase of equity
investments investment differences from privatisations
of subsidiaries and investments in associates
Construction in progress 62,628 48,073 14,555 30.28 Mainly due to the increase in construction
projects according to current year's
investment plan
Short-term loans 46,785 16,124 30,661 190.16 Mainly due to higher demand in working capital'
Other payables 6,105 1,830 4,275 233.61 Mainly due to the accrual of special oil income
levy
Accrued expenses 1,483 512 971 189.65 Mainly due to the increase in accrued and
unpaid production and operating costs
Minority interests 20,118 29,383 (9,265) (31.53) Mainly due to the acquisitions of minority
interests in subsidiaries
4
(3) Significant changes of items in the financial statements (Continued)
Six month periods
ended 30 June Increase/(Decrease)
2006 2005 Amount Percentage Reasons of Changes
Items RMB millions RMB millions RMB millions (%)
Income from principal 481,988 359,248 122,740 34.17 Please refer to Management's Discussion and
operations Analysis
Cost of sales 409,298 293,181 116,177 39.61 Please refer to Management's Discussion and
Analysis
Sales taxes and 12,918 8,204 4,714 57.46 Mainly due to the accrual of special oil
surcharges income levy
Non-operating expenses 674 1,109 (435) (39.22) Please refer to Management's Discussion and
Analysis
Minority interests 161 2,101 (1,940) (92.34) Mainly due to the acquisitions of minority
interests in subsidiaries
Reversal of unrecognised (11) (113) 102 (90.27) Mainly due to the written-back of unrecognised
investment losses investment losses exceeding the carrying value
of long-term equity investment
(4) Details of provisions for assets Unit: RMB millions
At the Increase Written Written At the
beginning in the back for off for Other end of
Items Lines of the period period the period the period changes the period
Allowance for doubtful accounts 1 6,652 99 (91) (22) -- 6,638
Of which: Allowance for doubtful
accounts
for accounts receivable 3,140 77 (48) (1) -- 3,168
Allowance for doubtful
accounts for
other receivables 3,512 22 (43) (21) -- 3,470
Provision for diminution in value of
short-term investments 2 -- -- -- -- -- --
Provision for diminution in value of
inventories 3 892 250 (248) (2) -- 892
Provision for impairment losses on
long-term investments 4 327 41 -- (8) -- 360
Of which:Long-term equity investments 327 41 -- (8) -- 360
Provision for impairment losses on fixed assets 5 6,234 34 -- (1) -- 6,267
Of which: Land and buildings 351 29 -- -- (28) 352
Oil and gas properties 843 -- -- -- -- 843
Oil depots, storage tanks and
service stations 917 5 -- (1) 149 1,070
Plant, machinery, equipment and others 4,123 -- -- -- (121) 4,002
Provision for impairment losses on
intangible assets 6 -- -- -- -- -- --
Provision for impairment losses on
construction in progress 7 -- -- -- -- -- --
Provision for impairment losses on
entrusted loans 8 -- -- -- -- -- --
Total 14,105 424 (339) (33) -- 14,157
5
2 FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS PREPARED IN
ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
Changes over
the same period
Six-month periods ended 30 June of the preceding
2006 2005 year (%)
Items RMB millions RMB millions
Operating profit 34,238 33,682 1.65
Profit attributable to equity shareholders of the Company 21,406 19,653 8.92
Return on capital employed (%) note 5.46 6.17 (0.71)
percentage point
Basic earnings per share (RMB/share) 0.247 0.227 8.92
Net cash flow from operating activities 21,478 21,082 1.88
Note: Return on capital employed = operating profit x (1 - income tax rate)/capital employed
At 30 June At 31 December Changes from the
2006 2005 end of last year (%)
Items RMB millions RMB millions
Current assets 165,170 145,291 13.68
Current liabilities 215,165 170,649 26.09
Total assets 586,915 537,321 9.23
Total equity attributable to equity shareholders of the Company 237,159 223,556 6.08
Net assets per share (RMB/share) 2.735 2.578 6.08
Adjusted net assets per share (RMB/share) 2.670 2.518 6.04
3 MAJOR DIFFERENCES BETWEEN AUDITED FINANCIAL STATEMENTS PREPARED UNDER THE
PRC ACCOUNTING RULES AND REGULATIONS AND IFRS
(1) Analysis of the effects of major differences between the net profit
under the PRC Accounting Rules and Regulations and the profit for the
period under IFRS:
Six-month periods
ended 30 June
2006 2005
Items RMB millions RMB millions
Net profit under the PRC Accounting Rules and Regulations 20,679 18,044
Adjustments:
Equity investment differences 394 1,169
Capitalisation of general borrowing costs, net of depreciation effect 294 216
Depreciation of oil and gas properties 290 417
Acquisition of Sinopec National Star 58 58
Reduced amortisation on revaluation of land use rights 13 9
Unrecognised losses of subsidiaries 11 113
Reduced depreciation on government grants 6 1
Pre-operating expenditures (16) 442
Disposal of oil and gas properties, net of depreciation effect (177) (209)
Effects of the above adjustments on taxation (146) (607)
Minority interests 158 2,116
Profit for the period under IFRS 21,564 21,769
6
(2) Analysis of the effects of major differences between the
shareholders' funds under the PRC Accounting Rules and Regulations
and total equity under IFRS:
At 30 June At 31 December
2006 2005
Items RMB millions RMB millions
Shareholders' funds under the PRC Accounting Rules and Regulations 228,510 215,623
Adjustments:
Equity investment differences 594 200
Capitalisation of general borrowing costs 2,406 2,112
Depreciation of oil and gas properties 12,523 12,233
Acquisition of Sinopec National Star (2,520) (2,578)
Revaluation of land use rights (940) (953)
Government grants (582) (588)
Pre-operating expenditures (38) (22)
Disposal of oil and gas properties 2,883 3,060
Effects of the above adjustments on taxation (5,677) (5,531)
Minority interests 20,027 29,440
Total equity under IFRS 257,186 252,996
7
CHANGES IN SHARE CAPITAL AND SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERS
1 CHANGES IN THE SHARE CAPITAL OF SINOPEC CORP.
There were no changes in the total number of shares and equity structure
of Sinopec Corp. during the reporting period.
2 SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERS
As at 30 June 2006, there were a total of 227,849 shareholders of Sinopec
Corp., of which 219,385 were holders of domestic A Shares and 8,464 were
holders of overseas H Shares.
(1) Top ten shareholders as at 30 June 2006 Unit: 1,000 shares
Number of
shares held
at the end of
the reporting Percentage Nature of Non-tradable Pledges, lock-ups
Name of shareholders period of shares held shareholders shares held or trusts
China Petrochemical Corporation 61,757,325 71.23% State-owned 61,757,325 Nil
HKSCC (Nominees) Limited 16,684,625 19.24% Foreign Nil Unknown
China Cinda Asset Management Corp. (1) 2,848,886 3.29% State-owned 2,848,886 Nil
China Orient Asset Management Corp. (1) 1,296,410 1.50% State-owned 1,296,410 Nil
China Development Bank (1) 632,570 0.73% State-owned 632,570 Nil
GuoTai JunAn Corp. 590,821 0.68% State-owned 586,760 255,150
(pledged)/
38,230
(locked up)
China Life Corp.,-Participating-
Individual Participating-005L-FH002
Shanghai 98,021 0.11% State-owned Nil Nil
China Life (Group) - Conventional
-Ordinary Insurance Product 57,340 0.07% State-owned Nil Nil
Guangfa Stratrgic Selected Mixed
Securities Fund 52,891 0.06% State-owned Nil Nil
International Finance-Standard Chartered -
CITIGROUP GLOBAL MARKETS LIMITED 39,284 0.05% Foreign Nil Nil
Explanation for the relationships among the Among the top ten shareholders, except that China Life Corp.,
above Eshareholders or any actions in concert: -Participating- Individual Participating-005L-FH002 Shanghai and
China Life (Group) - Conventional -Ordinary Insurance Product are
both subordinates to China Life Insurance (Group) Company, Sinopec
Corp. is not aware of any connection or actions in concert among
the above shareholders.
Note 1: According to the Equity Transfer Agreements between China Petrochemical Corporation ("Sinopec Group
Company") and each of China Cinda Asset Management Corp., China Orient Asset Management Corp. and China
Development Bank respectively, China Cinda Asset Management Corp., China Orient Asset Management Corp. and
China Development Bank shall each transfer their entire shareholdings of Sinopec Corp. to Sinopec Group
Company. For detailed information, please refer to Significant Events in this report.
8
(2)Top ten shareholders with tradable shares as at 30 June 2006 Unit: 1,000 shares
Number of tradable
shares held
at end of the Nature of
Name of shareholders reporting period shares
HKSCC (Nominees) Limited 16,684,625 H share
China Life Corp.,-Participating-Individual Participating-005L-FH002
Shanghai 98,021 A share
China Life (Group) - Conventional-Ordinary Insurance Product 57,340 A share
Guangfa Stratrgic Selected Mixed Securities Fund 52,891 A share
International Finance-Standard Chartered -
CITIGROUP GLOBAL MARKETS LIMITED 39,284 A share
CIFM China Balanced Fund 37,138 A share
Jinghong Securities Investment Fund 36,607 A share
BOCI Sustained Growth Equity Securities Investment Fund 32,203 A share
Tongsheng Securities Investment Fund 31,532 A share
Yinfeng Securities Investment Fund 31,388 A share
Explanation for the relationships among the above Among the top ten shareholders, except that China
shareholders or any actions in concert: Life Corp.,-Participating Individual Participating-
005L-FH002 Shanghai and China Life (Group) -
Conventional-Ordinary Insurance Product are both
subordinates to China Life Insurance (Group)
Company, Sinopec Corp. is not aware of any
connection or actions in concert among the above
shareholders.
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(3)Information disclosed by the shareholders of H Shares according to the Securities and Futures Ordinance as at 30 June 2006
Approximate
percentage
Number of share of Sinopec Corp's
interests held or interests
Name of shareholders Nature regarded as held (share) (H share) (%)
J.P. Morgan Chase & Co. Beneficial owner 137,949,210 0.82(L)
Investment manager 805,357,086 4.80(L)
Custodian corporation 771,990,035 4.60(L)(P)
------------------------------------------------------------------------------------------------------------------------------------
Credit Suisse Group Corporate 997,124,580 5.94(L)
754,104,300 4.49(S)
48,538,200 0.29(P)
------------------------------------------------------------------------------------------------------------------------------------
Alliance Bernstein L.P. Corporate 986,511,840 5.88(L)
------------------------------------------------------------------------------------------------------------------------------------
UBS AG Beneficial owner 478,366,173 2.85(L)
109,468,745 0.65(S)
Warrant equity 38,308,000 0.23(L)
5,597,900 0.03(S)
Corporate 335,375,700 2.00(L)
10,000,000 0.06(S)
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Templetonne Asset Management L.P. Investment manager 848,691,395 5.06(L)
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Note: (L): Long position, (S): Short position, (P): Lending pool
3 CHANGES IN THE CONTROLLING SHAREHOLDERS AND THE EFFECTIVE CONTROLLERS
There was no change in the controlling shareholders or the effective
controllers during the reporting period.
9
CHAIRMAN'S STATEMENT
Dear shareholders,
On 24 May 2006, the third session of the Board of Directors was elected at 2005
Annual General Meeting of Sinopec Corp. Having been nominated and elected to
chair the Board of Directors successively, I would like to thank all the
shareholders and the Board as a whole for the trust and confidence placed in
me.
Confronted with the market situations featured by soaring global crude prices,
tight domestic control over prices of refined oil products, as well as
significant fluctuation in the petrochemical prices during the first half of
2006, Sinopec Corp. has fully leveraged its integrated business portfolio,
deepened reforms, accelerated structural adjustments to assets, expanded
resources, and consolidated market position, which, in turn, led to our
delivery of good results in both reform and operations. During the reporting
period, the privatisation and delisting of several listed subsidiaries,
including Sinopec Zhenhai Refining and Chemical Co. Ltd., Sinopec Yangzi
Petrochemical Co., Ltd, Sinopec Qilu Petrochemical Co., Ltd, Zhongyuan Oil &
Gas Hi-tech Co., Ltd, Sinopec Shengli Oil Field Dynamic (Group) Co., Ltd and
Sinopec Wuhan Phoenix Company Limited, have been accomplished. According to the
PRC Accounting Rules and Regulations, in the first half of 2006, the Company's
net profit was RMB 20.679 billion, representing an increase of 14.6% over that
of the first half of 2005. According to the International Financial Reporting
Standards, profit attributable to shareholders of the Company was RMB 21.406
billion, up by 8.92% over that of the first half of 2005. The Board has decided
a distribution of interim dividend of RMB 0.04 per share.
Since listing, through continuous reform and development over the years, the
Company has established an organisational framework for its managerial system
and mechanism necessitated by market economy and corporate governance. The
portfolio and quality of its integrated energy and chemical assets have been
significantly upgraded, which have resulted in expanded scale of operations,
enhanced profitability and competitiveness. China Petrochemical Corporation,
whose core assets are represented by Sinopec Corp., ranks 23rd in 2006 Fortune
500.
At present, we have entered a phase featuring high oil prices, compounded by
cyclic fluctuation as is typical of the petrochemical sector. Against the
background, an important mission for the Board is to leverage the opportunities
presented by the steady growth in domestic demand for energy and chemical
products, and overcome numerous challenges such as market fluctuation and
intensified competition, so as to attain further advancement and improve the
overall competitiveness of Sinopec Corp. in the global arena. During the three
years to come, the Board will continue the policy of "reform, adjustment,
innovation and development", further evolve corporate governance practices, and
take more steps to transform the Company into a resource-conservation and
environmental-friendly enterprise, with an ultimate goal of achieving balanced
and sustainable development.
The Board will continue to develop corporate governance practices, undertake
further reforms of management system and mechanism, reinforce efficacy of the
Board of Directors, while giving full play to the role of the independent
directors, as well as the three specialised committees under the Board, with an
aim to enhance informed decision-making. The reform orientated to a sole-tier
legal entity structure will be pushed forward, hence, to achieve an integration
of internal managerial resources, more centralised decision-making process for
significant business activities and material resources, as well as enhancement
on the managerial functions of Sub Business Units. Driven by domestic and
overseas regulatory requirements, as well as the need for reform and
development to improve efficacy of the overall management, the Company will
further empower its internal controls, and improve risk management.
The Company shall speed up adjustments to the layout and portfolios of assets
as well as corporate structure. The key is to expand resources and markets, and
align refining and chemicals capacity with markets demand and resource
availability.
Resource expansion remains as the first priority. From the strategic
perspective, the Company will take measures to maintain stability in
production and recoverable reserves of the existing mature blocks in Eastern
China. While, in northeast Sichuan and Tahe area where new reserves and
structural belts have been discovered, a strategy of expansion will be
implemented, with accelerated pace of exploration along with construction of
new production capacity to obtain increased reserve and production.
Furthermore, researching efforts for promising blocks will be conducted in
the back-up areas. It is expected that by 2008, production of crude oil will
reach 42 million tonnes and natural gas will reach 10 billion cubic meters.
10
Expand markets extensively, rationalise the marketing network, and
consolidate the Company's position in the market. Brand value will be
exploited through marketing and distribution of refined oil products. Both
retail and direct sales volume will be expanded, and the percentage of sales
improved. In the marketing of chemicals, advantages of unified marketing will
be employed, with direct sales expanded, customer service improved, hence
market competitiveness enhanced. We expect that by 2008, the sales volume of
refined oil products will reach 120 million tonnes, among which, retail shall
account for 75 million tonnes. We also expect that chemical products sold
through direct sales shall account for 65% of total sales volume by 2008.
As an important value-added link between resources and markets, our
refining and chemical business will operate on a large scale basis through
resource optimisation, improvement in quality, product mix, and economic
returns, consistent adjustment to the layout and portfolio of assets, and
intensified industrial concentration. As a result, three regional large scale
refining and chemical groups shall take shape around the Yangtze River Delta,
the Pearl River Delta, and the Bohai Bay area. It is estimated that by 2008,
crude oil processing capacity will reach 187 million tonnes, and ethylene
capacity will reach 7.1 million tonnes.
Accelerate the construction of modern logistics systems, and improve
modern logistics facilities such as pipelines and terminals for crude oil,
refined oil products and natural gas. The Company shall optimise resource
flow with modern information technology, so as to ensure safe and efficient
handling and shipping of resources. We expect that by 2008, the receiving and
unloading capacity of major crude oil terminals will reach 150 million
tonnes, crude oil and refined oil products pipelines will respectively total
6,300 km and 7,600 km in length, with around 90% of crude oil and 40% of
refined oil be transported by pipelines.
Global operations and trading will be expanded as a new growth area
for the Company, through further leveraging synergies in its integrated
operations, which, will play more important roles in ensuring safe and stable
supply of oil and gas resources, and rational adjustment to its industrial
structures.
Sinopec Corp. will continue with technological and scientific innovation to add
value to its assets. The Company's abilities to achieve original innovation,
integrated innovation and innovation by assimilation shall be strengthened. In
particular, the Company will develop a series of core proprietary technologies
in the field of oil & gas exploration and production as well as efficient
resource utilisation, so as to improve the Company's overall technological
competency.
As a large energy and chemical company, Sinopec will continue the
implementation of the HSE management system, attaching importance to resource
and environment conservation. Clean production will be achieved through
advances in science and technology. More efforts will be done to promote a
recycling economy through reinforced management on resource conservation and
comprehensive utilisation, with an aim to achieve low consumption, low emission
and high efficiency, and to build the Company into a resource-saving and
environmental-friendly enterprise. We expect that by 2008, an obvious reduction
in fresh water consumption, overall energy consumption and COD emission will be
achieved as compared with that in 2005.
The Board and I believe that, with joint efforts of the Board of Directors, the
Supervisory Committee, as well as our management and employees, and in pursuit
of building up an integrated energy and chemical company with strong
competitive edges in the international market, Sinopec Corp. will continue to
grow with the strategy of "expanding resources, exploring markets, enhancing
competitiveness" that are underpinned by corporate reforms and strive for a
balanced and sustainable development, which is the common interest of our
shareholders, customers, employees, the society and the Company.
][GRAPHIC OMITTED]
Chen Tonghai
Chairman
Beijing, China
25 August 2006
11
BUSINESS REVIEW AND PROSPECTS
BUSINESS REVIEW
In the first half of 2006, the Chinese economy continued to grow at a rapid
rate, with a GDP growth rate of 10.9%, and demand for petroleum and
petrochemical products kept increasing. According to the Company's statistics,
apparent domestic consumption of refined oil products (i.e. gasoline, diesel
and kerosene) and consumption of ethylene equivalent increased by 7.1% and 6.3%
respectively over that of the same period last year.
During the reporting period, international oil prices kept increasing, and the
price of chemical products maintained at high level. Due to the tight control
on domestic prices of refined oil products, the price gap between domestic and
overseas markets remained wide, despite two upward adjustments on the domestic
price. The Company responded flexibly to the changing markets by fully
leveraging advantage of integrated business structure, extensively expanding
oil & gas resources, accelerating structural adjustments, strengthening the
linkage between production and sales, optimising resource allocation and
consolidating its dominant position in market. As a result, both the production
volume and financial returns maintained stable growth.
1 PRODUCTION AND OPERATIONS
(1) Exploration and Production Segment
In the first half of 2006, the international crude oil prices kept
increasing. The average Brent crude price was USD 66.56 per barrel,
representing an increase of 29.49% over that of the first half of 2005. The
average crude price realised by the Company during the first half of 2006
was RMB 3,309.71 per tonne, representing an increase of 42.88% over that of
the same period last year.
In the first half of 2006, the Company strengthened its innovation in oil &
gas exploration theory and technology, in particular, in the marine facies
sedimentation theory and technology, and accelerated exploration. It
resulted in a series of important discoveries, represented by the discovery
of Puguang Gas Field.
[GRAPHIC OMITTED]
Trend of International Crude Prices
12
In oilfield development and production, by seizing the opportunities of
increasing crude oil price, the Company optimised and accelerated
construction of new production capacity. A series of major capacity
building projects were put into operation. Efforts are also made to
stabilise production in mature oil fields by restoring marginal wells and
conducting specialised water treatments. As a result, the overall
production in mature oilfield improved. In respect of natural gas
development, more efforts were made in Daniudi Gas Field in Erdos basin in
North China. The preparations for development of Puguang Gas Field in
northeast Sichuan Province were accelerated.
In the first half of 2006, the Company achieved a new record in both oil
and gas production, with 140.89 million barrels of crude oil and 126.2
billion cubic feet of natural gas produced, representing a year on year
increase of 3.07% and 20.42% respectively.
Summary of Operations of Exploration and Production Segment
Six-month periods
ended June 30 Changes
2006 2005 (%)
Crude oil production (mmbbls) (1) 140.89 136.69 3.07
Natural gas production (bcf) 126.2 104.8 20.42
Newly added proved reserve of crude oil (mmbbls) 143.89 85.69 67.92
Newly added proved reserve of natural gas (bcf) (2) 175.5 518.1 (66.13)
At June 30 At December 31 Changes
2006 2005 (%)
Proved reserve of crude oil at the end of the reporting period (mmbbls) 3,297 3,294 0.09
Proved reserve to natural gas at the end of the reporting period(2) (bcf) 3,001.0 2,951.7 1.67
Note 1: Crude oil production is converted at 1 tonne = 7.1 barrels, and
natural gas production is converted at 1 cubic meter = 35.31 cubic
feet.
Note 2: Natural gas reserve of Puguang Gas Field is not included.
(2) Refining Segment
In the first half of 2006, the Company continued to run the refining
facilities at full-load and increased refined oil production along with
improvement on the overall quality of refined oil products to meet market
demands. By fully leveraging on the Ningbo-Shanghai-Nanjing crude oil
pipeline and the newly operated Yizheng-Changling crude oil pipeline and
optimising resource allocation, the Company achieved cost savings in both
crude oil transportation and storage. The Company increased the refining
throughput of sour and heavy crude oil in order to reduce purchase cost of
crude oil. In addition, the Company strived to increase the production
volume of high value-added products through optimised production plan and
product mix which resulted in further improvement in both light products
yield and overall refining yield.
13
Summary of Operations of Refining Segment
Six-month periods
ended June 30 Changes
2006 2005 (%)
Crude throughput (million tonnes) 71.68 68.08 5.29
of which: sour crude throughput (million tonnes) 17.60 16.87 4.33
Gasoline, diesel and kerosene output (million tonnes) 42.73 41.02 4.17
of which: Gasoline (million tonnes) 11.23 11.32 (0.80)
Diesel (million tonnes) 28.32 26.31 7.64
Kerosene including jet fuel (million tonnes) 3.18 3.39 (6.19)
Light chemical feedstock (million tonnes) 11.47 10.16 12.89
Light products yield (%) 74.81 74.24 0.57 percentage
point
Overall refining yield (%) 93.73 93.11 0.62 percentage
point
Note:Crude throughput is converted at 1 tonne = 7.35 barrels.
(3) Marketing and Distribution
In the first half of year 2006, the Company proactively took measures to
maintain its position in the market by organising and mobilising resources,
making structural adjustments, fully leveraging transportation and storage
facilities such as the southwest refined oil pipeline. As a result of
improved service-oriented awareness and service quality, both proportion of
sales to end customers and annual throughput per station further improved.
As a result, the Company's position in the refined oil market continually
strengthened. The Company was also active in developing non-fuel
businesses, including establishment of a strategic partnership with
McDonald's. The customer base for IC fueling cards continued to grow, with
an aggregate of over 11 million petrol IC cards issued.
Summary of Operations of Marketing and Distribution Segment
Six-month periods
ended June 30 Changes
2006 2005 (%)
Total domestic sales volume of refined oil
products (million tonnes) 54.32 50.77 6.99
of which: retail volume (million tonnes)35.33 29.56 19.52
direct sales volume (million tonnes) 9.69 10.39 (6.74)
wholesale volume (million tonnes) 9.30 10.82 (14.05)
Total No. of service stations 29,198 30,352 (3.80)
of which: No. of self-operated service stations 27,628 26,870 2.82
No. of franchised service stations 1,570 3,482 (54.91)
Average annual throughput per station (tonne) 2,558 2,200 16.27
14
(4) Chemicals
In the first half of 2006, the Company fully leveraged the newly built
production capacity and strengthened operation management on facilities to
ensure safe, stable, sustained, full-load and optimal operation of major
facilities. The production of ethylene and other major chemical products,
such as synthetic resins, etc., significantly increased. The Company
continued to reinforce product mix improvement, with more high value-added
products.
In the first half of 2006, the intensive operations of the Chemical Sales
Company and its improved adaptabily to market conditions resulted in a
steady growth in the Company's proportion of direct sales, which laid a
solid foundation for maximisation of the overall returns of the Chemicals
Segment.
Summary of Production of Major Production of Chemical Operation Unit: thousand tonnes
Six-month periods
ended June 30 Changes
2006 2005 (%)
Ethylene 3,031 2,434 24.53
Synthetic Resin 4,184 3,528 18.59
Synthetic fiber monomers and polymers 3,577 3,152 13.48
Synthetic fiber 770 756 1.85
Synthetic rubber 318 308 3.25
Urea 906 998 (9.22)
Note: 100% production of two ethylene joint ventures, namely BASF-YPC and
Shanghai Secco was included.
2 COST SAVING
In the first half of 2006, the Company took various measures to reduce
costs, such as optimising resource allocation and fully leveraging the
modern logistics system to reduce transportation costs, further increasing
the throughtput of sour and heavy crude oil to reduce procurement costs,
optimising the operation of facilities to reduce material and energy
consumption, improving utilisation of oil and water wells and intensifying
treatment of heavy viscous oils. In the first half of 2006, the Company
effectively saved RMB 1.382 billion in cost. Of the total cost saved, the
Exploration and Production Segment, the Refining Segment, the Marketing and
Distribution Segment and the Chemicals Segment achieved cost saving of RMB
396 million, RMB 348 million, RMB 287 million and RMB 351 million
respectively.
3 CAPITAL EXPENDITURES
In the first half of 2006, the Company's total capital expenditure was RMB
30.452 billion. Among which, the capital expenditure for Exploration and
Production Segment was RMB 11.676 billion. With the investment, the Company
achieved a number of important exploration results through strengthening
progressive exploration and preliminary exploration in new blocks. The
newly built production capacity of crude oil and natural gas was 2.95
million tonnes per year and 758 million cubic meters per year respectively.
The capital expenditure for Refining Segment was RMB 5.121 billion. With
the investment, the construction of Yizheng-Changling crude oil pipeline
was completed; the refinery projects including Guangzhou, Yanshan and
Qingdao Projects made smooth progress. The capital expenditure in Chemicals
Segment was RMB 5.93 billion. With the investment, the PX and PTA expansion
project in Sinopec Yangzi was completed and commenced production; the
second round of Maoming Ethylene revamping project, Fujian Integrated
Project and Tianjin ethylene project as well as the fertiliser coal
gasification projects were proceeding as planned. The capital expenditure
in Marketing and Distribution Segment was RMB 6.685 billion. With the
investment, the construction and acquisition of service stations in key
areas started to turn in an initial pay-off; with the newly added 353
service stations, the marketing network was further improved. The capital
expenditure for Corporate and Others amounted to RMB 1.04 billion.
15
In addition, the total capital expenditure for joint ventures amounted to
RMB 179 million.
BUSINESS PROSPECTS
Looking into the second half of 2006, China's economy will continue to grow
rapidly and demands for petroleum and petrochemical products will increase
steadily, while international crude price is expected to remain high. Domestic
refineries will face considerable operations pressure, and due to the effects
of high raw materials price and other factors, the price of chemical products
is expected to remain high. In addition, under China's WTO accession
commitment, China will fully open its domestic wholesale market for refined oil
products by the end of 2006, which will result in intensified market
competition.
Confronted with the complicated market situation, the Company will adopt
flexible operating strategies, deepen reforms, strengthen management, optimise
resources and make structural adjustments while organising various production
and operation activities in the following manner:
In Exploration and Production Segment, the Company will continue to stick to
the strategy of resources and endeavor to increase oil and gas production. The
Company intends to focus on building production capacity in Tahe Oilfield in
western China and Erdos blocks, while taking actions to improve management with
an aim of stabilising production and comprehensive adjustment in the mature
oilfields, so as to stabilise and increase reserves. The preparation for gas
exploration in northeast Sichuan will be accelerated. In the second half of
2006, the Company plans to produce 20.16 million tonnes of crude oil and 3.5
billion cubic meters of natural gas.
In Refining Segment, the Company will adhere to the strategy of diversified
sources of crude oil, strive to increase the refining throughput of sour and
heavy crude to reduce the procurement cost of crude oil. In addition, the
Company will optimise its product mix by increasing the production of value
added products such as BTX products to reduce losses and improve returns. In
the second half of 2006, the Company plans to process 73.30 million tonnes of
crude oil.
In Marketing and Distribution Segment, the Company will closely monitor the
market trend, make timely adjustments to operations while making appropriate
resource deployment. The modern logistics system will be brought into full play
by optimising resource allocation. Operational management will also be
strengthened, and sales structure optimised to improve economic returns. In the
second half of 2006, the Company will target its total domestic sales volume of
refined oil products at 56.0 million tonnes.
In Chemicals Segment, the Company will focus on successful start-up of new
facilities and maintain safe and stable operation of the existing facilities.
The product mix will also be optimised, and the linkage between production and
sales will be strengthened to produce more profitable products to meet robust
demand so as to increase profitability. In addition, the Company will fully
leverage the specialised operation of the newly established chemical sales
company to improve its overall competitiveness. In the second half of 2006, the
Company plans to produce 3.03 million tonnes of ethylene.
In the second half of 2006, the Company will continue to adhere to the
operation guidelines featuring "reform, adjustment, innovation and
development", work hard and aggressively, endeavoring to fulfill the annual
production and operation targets, and maintain its good performance.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S AUDITED FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES. PART OF
THE FINANCIAL INFORMATION PRESENTED IN THIS SECTION ARE DERIVED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS THAT HAVE BEEN PREPARED IN ACCORDANCE
WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
1 CONSOLIDATED RESULTS OF OPERATIONS
In the first half of 2006, the Company's turnover and other operating
revenues were RMB 493.1 billion and the operating profit was RMB 34.2
billion, representing an increase of 33.8% and 1.7% over the same period of
2005 respectively. These results were largely attributable to the
significant increase in international crude price and the fact that by
seizing the favourable opportunities of steady growth of the domestic
economy, the Company proactively developed the market, increased oil and
gas production, optimised crude oil processing structure, and increased the
production of chemical products and sales of refined oil products.
The following table sets forth the major items in the consolidated income
statement of the Company for the indicated periods:
Six-month periods
ended June 30
2006 2005 Changes
RMB millions (%)
Turnover and other operating revenues 493,128 368,454 33.8
Of which: Turnover 481,988 359,248 34.2
Other operating revenues 11,140 9,206 21.0
Operating expenses (458,890) (334,772) 37.1
Of which: Purchased crude oil, products, and
operating supplies and expenses (400,215) (283,036) 41.4
Selling, general and administrative expenses (16,429) (15,510) 5.9
Depreciation, depletion and amortisation (16,504) (15,155) 8.9
Exploration expenses, including dry holes (3,085) (3,355) (8.0)
Personnel expenses (9,197) (8,536) 7.7
Employee reduction expenses (48) (100) (52.0)
Taxes other than income tax (12,918) (8,204) 57.5
Other operating expenses, net (494) (876) (43.6)
Operating profit 34,238 33,682 1.7
Net finance costs (3,142) (2,566) 22.4
Investment income and share of profits less losses from associates 578 598 (3.3)
Profit before taxation 31,674 31,714 (0.1)
Taxation (10,110) (9,945) 1.7
Profit for the period 21,564 21,769 (0.9)
Attributable to: Equity shareholders of the Company 21,406 19,653 8.9
Minority interests 158 2,116 (92.5)
17
(1) Turnover and other operating revenues
In the first half of 2006, the Company's turnover and other operating
revenues were RMB 493.1 billion, of which turnover was RMB 482.0 billion,
representing an increase of 34.2% over the first half of 2005. These
results were largely attributable to the increase in international crude
oil price, and the Company's effort in expanding sales volume of our
petroleum and petrochemical products and optimising our sales and marketing
structure. In the first half of 2006, the Company's other operating revenue
was RMB 11.1 billion, representing an increase of 21.0% over the first half
of 2005. This was mainly due to the increase of raw materials sales to
Sinopec Group Company and to third parties during the period.
The following table lists the Company's external sales volume, average
realised prices and the respective rate of changes between the first half
of 2006 and the first half of 2005 for the Company's major products:
Average realised price
Sales Volume (RMB/tonne, RMB/
(thousand tonnes) thousand cubic meters)
Six-month periods Rate of Six-month periods Rate of
ended June 30 changes ended June 30 changes
2006 2005 (%) 2006 2005 (%)
Crude oil 2,710 2,569 5.5 3,290 2,367 39.0
Natural gas (million cubic meters) 2,600 1,962 32.5 745 658 13.2
Gasoline 15,986 14,609 9.4 4,968 4,151 19.7
Diesel 35,109 32,571 7.8 4,259 3,514 21.2
Kerosene, including jet fuel 2,702 3,086 (12.4) 4,301 3,414 26.0
Basic chemical feedstock 4,941 3,836 28.8 5,336 4,948 7.8
Synthetic fiber monomers and polymer 1,704 1,412 20.7 8,602 9,026 (4.7)
Synthetic resin 3,523 2,898 21.6 9,485 9,144 3.7
Synthetic fiber 825 784 5.2 10,723 11,499 (6.7)
Synthetic rubber 382 303 26.1 13,911 12,394 12.2
Chemical fertiliser 928 1,004 (7.6) 1,699 1,463 16.1
Most of crude oil and a small portion of natural gas produced by the
Company were internally used for refining and chemical production and the
remaining were sold to the refineries owned by Sinopec Group Company and
other customers. In the first half of 2006, turnover from crude oil and
natural gas that were sold externally by the Exploration and Production
Segment amounted to RMB 12.1 billion, representing an increase of 40.3%
over the first half of 2005, accounting for 2.5% of the Company's total
turnover and other operating revenues. The increase was mainly due to
significant increases in crude oil prices as well as the increase in price
and sales volume of natural gas.
The Company's Refining Segment and Marketing and Distribution Segment sell
refined oil products (mainly consisting of gasoline, diesel, jet fuel,
kerosene and other refined oil products) to third parties. In the first
half of 2006, the external sales revenue of refined oil products by these
two segments were RMB 321.8 billion, accounting for 65.3% of the Company's
turnover and other operating revenues, representing an increase of 32.0%
compared with that in the first half of 2005. The increase was mainly due
to the increased prices of refined oil products and our proactive efforts
in increasing sales volume, optimisng sales and marketing structure and
expanding the markets of other refined oil products. The sales revenue of
gasoline, diesel and kerosene was RMB 240.6 billion, accounting for 74.8%
of the total turnover of refined oil products, representing an increase of
29.6% over the same period in 2005. The turnover of other refined oil
products was RMB 81.2 billion, accounting for 25.2% of the total turnover
of refined oil products, representing an increase of 39.6% compared with
the first half of 2005.
The Company's external turnover of chemical products was RMB 92.7 billion,
accounting for 18.8% of its turnover and other operating revenues,
representing an increase of 24.0% compared with the first half of 2005. The
increase was mainly due to the fact that the Company utilitised the new
production capacity resulting in higher sales volume.
18
(2) Operating expenses
In the first half of 2006, the Company's operating expenses were RMB 458.9
billion, representing an increase of 37.1% over the first half of 2005. The
operating expenses mainly consisted of the following:
Purchased crude oil, products and operating supplies and expenses
The Company's purchase of crude oil, products and operating supplies and
expenses were RMB 400.2 billion, representing an increase of 41.4% over the
first half of 2005, accounting for 87.2% of the total operating expenses,
of which:
Purchased crude oil expenses was RMB 207.7 billion, representing an
increase of 40.1% over the first half of 2005, accounting for 45.3% of the
total operating expenses, up by 1.0 percentage point over the first half of
2005.
To meet the increasing demands in the fast growing Chinese economy, the
Company increased its throughput of crude oil purchased externally. In the
first half of 2006, the throughput of the Company's crude oil purchased
externally was RMB 56.05 million tonnes (excluding amounts processed for
third parties), representing an increase of 6.9% compared with the same
period in 2005. Average cost for crude oil processed which were purchased
externally in the first half of 2006 was RMB 3,706 per tonne (equivalent to
USD 62.8 per barrel), representing an increase of 31.1% compared with the
first half of 2005.
In the first half of 2006, the Company's other purchase expenses were RMB
192.5 billion, representing an increase of 42.8% over the first half of
2005, accounting for 42.0% of the total operating expenses. The increase
was mainly due to the increased costs of purchased refined oil products and
chemical feedstock externally.
Selling, general and administrative expenses
In the first half of 2006, the Company's selling, general and
administrative expenses totalled RMB 16.4 billion, representing an increase
of 5.9% over the first half of 2005. This increase was mainly due to the
increased operating leases charges, research and development costs, natural
resources compensation fees, and costs of supporting units.
Depreciation, depletion and amortisation
In the first half of 2006, the Company's depreciation, depletion and
amortisation were RMB 16.5 billion, representing an increase of 8.9%
compared with the first half of 2005. The increase was mainly due to the
additions of fixed assets.
Exploration expenses
In the first half of 2006, the Company's exploration expenses were RMB 3.1
billion, representing a decrease of 8.0% compared with the first half of
2005. This was mainly due to the decrease of geological and geophysical
exploration expenses.
Personnel expenses
In the first half of 2006, the Company's personnel expenses were RMB 9.2
billion, representing an increase of 7.7% compared with the first half of
2005. The increase was largely due to the remuneration reforms initiated by
the Company in the second half of 2005.
Employee reduction expenses
In the first half of 2006, in accordance with the Company's voluntary
employee reduction plan, the Company recorded employee reduction expenses
of approximately RMB 50 million relating to the reduction of approximately
1,000 employees.
Taxes other than income tax
In the first half of 2006, the Company's taxes other than income tax were
RMB 12.9 billion, representing an increase of 57.5% over the first half of
2005. The increase was mainly attributable to the accrual of RMB 3.7
billion as special oil income levy imposed by the Chinese government effect
from 26 March 2006, and an increase of RMB 740 million in consumption tax
as a result of the increase in sales volume of gasoline and diesel and the
increase in the number of items subject to consumption taxes.
Other operating expenses, net
In the first half of 2006, the Company's other operating expenses, net were
RMB 0.5 billion, representing a decrease of 43.6% compared with the first
half of 2005. This was mainly due to the decrease in the impairment losses
on long-lived assets.
(3) Operating profit
In the first half of 2006, the Company's operating profit was RMB 34.2
billion, representing an increase of 1.7% over the first half of 2005.
(4) Net finance costs
In the first half of 2006, the Company's net finance costs were RMB 3.1
billion, representing an increase of 22.4% compared with the first half of
2005, which was mainly due to the increase of crude oil price and expanded
scale of operation, leading to an increase in short term loan as a result
of more capital being employed by operating activities such as purchase of
inventories.
(5) Profit before tax
In the first half of 2006, the Company's profit before tax was RMB 31.7
billion, representing a decrease of 0.1% over the first half of 2005.
(6) Taxation
In the first half of 2006, the Company's income tax was RMB 10.1 billion,
representing an increase of 1.7% over the first half of 2005.
(7) Profit attributable to minority interests
In the first half of 2006, the Company's profit attributable to minority
interests were RMB 0.2 billion, representing a decrease of 92.5% compared
with the first half of 2005. The decrease was mainly as a result of
acquisition of minority interests of the five subsidiaries by the Company.
(8) Profit attributable to equity shareholders of the Company
In the first half of 2006, the Company's profit attributable to equity
shareholders of the Company was RMB 21.4 billion, representing an increase
of 8.9% over the first half of 2005.
19
2 DISCUSSION ON RESULTS OF SEGMENT OPERATION
The Company divides its operations into four business segments, namely
Exploration and Production Segment, Refining Segment, Marketing and
Distribution Segment and Chemicals Segment, and Corporate and Others.
Unless otherwise specified, the inter-segment transactions have not been
eliminated from financial data discussed in this section. In addition, the
operating revenue data of each segment include other operating revenues of
the segment.
The following table shows the operating revenues by each segment, the
contribution of external sales and inter-segment sales as a percentage of
operating revenues before elimination of inter-segment sales, and the
contribution of external sales as a percentage of consolidated operating
revenues (i.e. after elimination of inter-segment sales) for the periods
indicated.
As a percentage of As a percentage of
consolidated operating consolidated operating
revenue before elimination revenue after elimination
Operating revenues of inter-segment sales of inter-segment sales
Six-month periods Six-month periods Six-month periods
ended June 30 ended June 30 ended June 30
2006 2005 2006 2005 2006 2005
RMB millions (%) (%)
Exploration and Production Segment
External Sales(1) 16,855 12,278 2.1 2.0 3.4 3.3
Inter-segment sales 53,362 35,745 6.6 5.9
Operating revenue 70,217 48,023 8.7 7.9
Refining Segment
External sales(1) 51,012 38,934 6.3 6.4 10.3 10.6
Inter-segment sales 220,301 172,035 27.1 28.4
Operating revenue 271,313 210,969 33.4 34.8
Marketing and Distribution Segment
External sales(1) 273,435 207,296 33.7 34.1 55.4 56.2
Inter-segment sales 1,962 1,320 0.2 0.2
Operating revenue 275,397 208,616 33.9 34.3
Chemicals Segment
External sales(1) 96,248 77,681 11.8 12.8 19.5 21.1
Inter-segment sales 5,271 8,335 0.6 1.4
Operating revenue 101,519 86,016 12.4 14.2
Corporate and Others
External sales(1) 55,578 32,265 6.9 5.3 11.4 8.8
Inter-segment sales 38,335 21,228 4.7 3.5
Operating revenue 93,913 53,493 11.6 8.8
Operating revenue before elimination
of inter-segment sales 812,359 607,117 100.0 100.0
Elimination of inter-segment sales (319,231) (238,663)
Consolidated operating revenue 493,128 368,454 100.0 100.0
Note 1: Including other operating revenues.
20
The following table sets forth the operating revenues, operating expenses and
operating profit/(loss) by each segment before elimination of the inter-segment
transactions for the periods indicated, and the rate of changes from the first
half of 2005 to 2006.
Six-month periods ended June 30 Rate of
2006 2005 changes
RMB millions (%)
Exploration and Production Segment
Operating revenues 70,217 48,023 46.2
Operating expenses 36,873 30,228 22.0
Operating profit 33,344 17,795 87.4
Refining Segment
Operating revenues 271,313 210,969 28.6
Operating expenses 287,923 212,265 35.6
Operating profit/(loss) (16,610) (1,296) 1,181.6
Marketing and Distribution Segment
Operating revenues 275,397 208,616 32.0
Operating expenses 264,636 201,973 31.0
Operating profit 10,761 6,643 62.0
Chemicals Segment
Operating revenues 101,519 86,016 18.0
Operating expenses 94,321 75,201 25.4
Operating profit 7,198 10,815 (33.4)
Corporate and others
Operating revenues 93,913 53,493 75.6
Operating expenses 94,368 53,768 75.5
Operating profit/(loss) (455) (275) 65.5
(1) Exploration and Production Segment
Most of the crude oil and a small portion of the natural gas produced by
the Exploration and Production Segment were used for the Company's refining
and chemicals operations. Most of the natural gas and a small portion of
crude oil produced by the Company were sold to refineries owned by Sinopec
Group Company and third party customers.
In the first half of 2006, the operating revenues of this segment were RMB
70.2 billion, representing an increase of 46.2% over the first half of
2005, which was mainly due to the increase in the sales volume and realised
price of crude oil compared with the first half of 2005.
In the first half of 2006, this segment sold 18.73 million tonnes of crude
oil and 2.72 billion cubic meters of natural gas, representing an increase
of 4.2% and 36.2% respectively compared with those in the first half of
2005. The average realised price of crude oil was RMB 3,310 per tonne
(equivalent to USD 58.1/barrel), representing an increase of 42.9% over the
first half of 2005. The average realised price of natural gas was RMB 748
per thousand cubic meters, representing an increase of 13.3% over the first
half of 2005.
In the first half of 2006, the operating expenses of this segment were RMB
36.9 billion, representing an increase of 22.0% over the first half of
2005. The increase was mainly due to the following reasons:
The increase of RMB 3.7 billion in special oil income levy which was
imposed by the government since 26 March 2006.
The increase of RMB 500 million in taxes associated with the
increased sales volume and price of crude oil compared with the first half
of 2005.
The increase of RMB 1.1 billion in other operating expenses
(other operating revenue also increased by RMB 1.1 billion), primarily due
to the increase in sales of materials compared with the first half of
2005.
The increase of RMB 1 billion in depreciation, depletion and
amortisation mainly resulted from the increase in depreciation charge on
newly acquired assets.
In the first half of 2006, in response to the rise of international crude
oil prices, the Company seized this opportunity to increase production of
crude oil through utilising marginal reserves and enhancing recovery
activities. It resulted an increase in lifting cost of crude oil and
natural gas by 12.4% from RMB 410 per tonne (equivalent to USD 6.98 per
barrel) to RMB 461 per tonne (equivalent to USD 8.09 per barrel) compared
with the first half of 2005.
In the first half of 2006, this segment's operating profit was RMB 33.3
billion, representing an increase of 87.4% over the first half of 2005.
(2) Refining Segment
The business activities of the Refining Segment consist of purchasing crude
oil from the Exploration and Production Segment and third parties,
processing crude oil into petroleum products, selling of gasoline, diesel
and kerosene including jet fuel to the Marketing and Distribution Segment
and selling of other petroleum products to domestic and overseas customers.
In the first half of 2006, this segment's operating revenues were RMB 271.3
billion, representing an increase of 28.6% over the first half of 2005. The
increase was mainly due to the increase in the realised prices and sales
volumes of various refined oil products.
21
The following table sets forth the sales volumes, average realised prices
and the rate of changes of the Company's major refined oil products of the
segment from the first half of 2005 and the first half of 2006.
Sales Volume Average realised price
(thousand tonnes) (RMB/tonne)
Six-month periods Rate of Six-month periods Rate of
ended June 30 changes ended June 30 changes
2006 2005 (%) 2006 2005 (%)
Gasoline 10,651 10,323 3.2 4,282 3,451 24.1
Diesel 28,140 25,792 9.1 3,782 3,218 17.5
Chemical feedstock 13,035 12,781 2.0 4,405 3,456 27.5
Other refined oil products 17,174 16,263 5.6 3,466 2,846 21.8
In the first half of 2006, the sales revenues of gasoline by the segment
were RMB 45.6 billion, representing an increase of 28.0% over the first
half of 2005, accounting for 16.8% of this segment's operating revenues.
In the first half of 2006, the sales revenues of diesel by the segment were
RMB 106.4 billion, representing an increase of 28.2% over the first half of
2005, accounting for 39.2% of this segment's operating revenues.
In the first half of 2006, the sales revenues of chemical feedstock by the
segment were RMB 57.4 billion, representing an increase of 30.0% over the
first half of 2005, accounting for 21.2% of this segment's operating
revenues. The extent of increase in the sales revenues of chemical
feedstock was higher than that in the sales revenues of gasoline and
diesel, which was mainly due to tight domestic control over gasoline and
diesel prices, which resulted in smaller price increase in gasoline and
diesel than that in chemical feedstock.
In the first half of 2006, the sales revenues of refined oil products other
than gasoline, diesel and chemical feedstock were RMB 59.5 billion,
representing an increase of 28.5% over the first half of 2005, accounting
for 21.9% of this segment's operating revenues.
In the first half of 2006, this segment's operating expenses were RMB 287.9
billion, representing an increase of 35.6% over the first half of 2005,
which was primarily due to the increase in crude oil price and its refining
throughput.
In the first half of 2006, the average cost of crude oil processed was RMB
3,654 per tonne (approximately USD 61.95/barrel), representing an increase
of 33.1% over the first half of 2005. Refining throughput was 70.23 million
tonnes (excluding amounts processed for third parties), representing an
increase of 6.6% over the first half of 2005. In the first half of 2006,
the total costs of crude oil processed were RMB 256.6 billion, representing
an increase of 41.9%, accounting for 89.1% of the segment's operating
expenses, up by 3.9 percentage points over the first half of 2005.
In the first half of 2006, although international crude oil prices
remaining at a higher level, the Chinese government continued to implement
tight control over domestic prices of refined oil products. As a result,
the Refining Segment recorded a negative refining margin of RMB 93 per
tonne (equivalent to negative USD 1.57 per barrel) (defined as the sales
revenues less the crude oil costs and refining feedstock costs and taxes
other than income tax divided by the throughput of crude oil and refining
feedstock), representing a decrease of RMB 234 per tonne (equivalent to USD
3.89 per barrel) compared with RMB 141 per tonne (equivalent to USD 2.32
per barrel) in the first half of 2005.
In the first half of 2006, the unit refining cash operating cost (defined
as operating expenses less the purchase cost of crude oil and refining
feedstock, depreciation and amortisation, taxes other than income tax,
other operating expenses; and divided by the throughput of crude oil and
refining feedstock) was RMB 118 per tonne (equivalent to USD 2.00 per
barrel), which was consistent with the first half of 2005.
In the first half of 2006, operating loss of this segment was RMB 16.6
billion, representing a increase of RMB 15.3 billion in operating loss over
the first half of 2005.
22
(3) Marketing and Distribution Segment
The business of Marketing and Distribution Segment includes purchasing
refined oil products from the Refining Segment and third parties,
conducting wholesale and direct sale to domestic users, and retailing,
distributing refined oil products through the segment's retail and
distribution network, as well as providing services related to product
sales.
In the first half of 2006, the operating revenues of this segment were RMB
275.4 billion, up by 32.0% over the first half of 2005. The increase was
mainly due to the increases in sales volume and prices of refined oil
products and the continuous optimisation of the sales structure, which
further increased the retail proportion of gasoline and diesel.
In the first half of 2006, the operating revenues from sales of gasoline
and diesel were RMB 230.6 billion, accounting for 83.7% of the operating
revenues of this segment. The percentage of retail sales volume of gasoline
and diesel in the total sales volume of gasoline and diesel increased from
56.8% in the first half of 2005 to 62.8% in the first half of 2006,
representing an increase of 6 percentage points. The percentage of sales
volume of gasoline and diesel by direct sales in the total sales volume
decreased from 20.0% in the first half of 2005 to 17.7% in the first half
of 2006, representing a decrease of 2.3 percentage points. The percentage
of wholesale volume in the total sales volume of gasoline and diesel
decreased from 23.3% in the first half of 2005 to 19.6% in the first half
of 2006, representing a decrease of 3.7 percentage points.
The following table sets forth the sales volumes, average realised prices,
and respective rate of changes of the four product categories in the first
half of 2005 and 2006, including detailed information of different sales
channels for gasoline and diesel:
Sales volume Average realised price
(thousand tonnes) (RMB/tonne)
Six-month periods Rate of Six-month periods Rate of
ended June 30 changes ended June 30 changes
2006 2005 (%) 2006 2005 (%)
Gasoline 16,045 14,660 9.4 4,967 4,150 19.7
Of which: Retail 11,543 10,040 15.0 5,078 4,293 18.3
Direct sales 1,576 1,429 10.3 4,745 3,904 21.5
Wholesale 2,926 3,191 (8.3) 4,650 3,810 22.0
Diesel 35,454 32,866 7.9 4,256 3,510 21.3
Of which: Retail 20,778 16,935 22.7 4,310 3,635 18.6
Direct sales 7,528 8,057 (6.6) 4,397 3,501 25.6
Wholesale 7,148 7,874 (9.2) 3,952 3,249 21.6
Kerosene 2,684 3,058 (12.2) 4,300 3,412 26.0
Fuel oil 7,308 6,459 13.1 2,989 2,099 42.4
In the first half of 2006, the operating expenses of the segment were RMB
264.6 billion, representing an increase of 31.0% compared with that in the
first half of 2005, mainly due to increase of procurement costs, of which
purchasing costs of gasoline and diesel were RMB 208.8 billion,
representing an increase of 31.3% over that in the first half of 2005, and
accounted for 78.9% of the segment's operating expenses. In the first half
of 2006, average purchase prices of gasoline and diesel increased by 25.2%
and 18.7% respectively, compared with that in the first half of 2005, to
RMB 4,390 per tonne and RMB 3,885 per tonne respectively. The purchasing
volume of gasoline and diesel increased by 9.4% and 7.9% respectively,
compared with that in the first half of 2005, to 16.04 million tonnes and
35.45 million tonnes respectively.
In the first half of 2006, the segment's cash operating cost per tonne of
refined oil products (defined as the operating expenses less the purchasing
costs, taxes other than income tax, depreciation and amortisation, and
divided by the sales volume) was RMB 149.75 per tonne, representing a
decrease of 0.1% compared with that in the first half of 2005.
In the first half of 2006, the Marketing and Distribution Segment's
operating profit was RMB 10.8 billion, representing an increase of 62.0%
compared with the first half of 2005.
23
(4) Chemicals Segment
The business activities of the Chemicals Segment include purchasing
chemical feedstock from the Refining Segment and third parties, producing,
marketing and distributing petrochemical and inorganic chemical products.
In the first half of 2006, operating revenues of the Chemicals Segment were
RMB 101.5 billion, representing an increase of 18.0% over the first half of
2005, which was primarily due to the increase in sales volume and prices of
major chemical products.
The sales revenue mainly generated from the Company's six categories of
chemical products (i.e. basic organic chemicals, synthetic resin, synthetic
rubber, synthetic fiber monomers and polymers, synthetic fiber and chemical
fertiliser) totaled approximately RMB 94.1 billion, representing an
increase of 25.0% over the first half of 2005, and accounted for 92.7% of
the operating revenues of this segment.
The following table lists the sales volumes, average realised price and
rates of change of each of these six categories of chemical products of
this segment in the first half of 2005 and 2006.
Sales volume Average realised price
(thousand tonnes) (RMB/tonne)
Six-month periods Rate of Six-month periods Rate of
ended June 30 changes ended June 30 changes
2006 2005 (%) 2006 2005 (%)
Basic organic chemicals 5,625 4,454 26.3 5,262 4,885 7.7
Synthetic fiber monomers and polymers 1,715 1,420 20.8 8,595 9,018 (4.7)
Synthetic resin 3,636 2,899 25.4 9,318 9,144 1.9
Synthetic fiber 825 784 5.2 10,726 11,499 (6.7)
Synthetic rubber 397 303 31.0 13,848 12,393 11.7
Chemical fertiliser 928 1,005 (7.7) 1,706 1,463 16.6
In the first half of 2006, operating expenses of the Chemicals Segment were
RMB 94.3 billion, representing an increase of 25.4% over the first half of
2005. The increase was primarily due to increase in the price of feedstock
as well as increased expenses for various raw materials and ancillary
materials associated with the significant increased production of chemical
products. Of which:
The purchasing costs for raw materials, operating supplies and
other related expenses increased by approximately RMB 19.5 billion
compared with the first half of 2005 was mainly due to the increase in the
consumption of raw materials and ancillary materials and rise in their
unit prices. Of which, the consumption of naphtha increased by 930
thousand tonnes, and the unit cost of raw materials increased by RMB 931
per tonne to RMB 4,512 per tonne in the first half of 2006 when compared
with the same period of 2005.
In the first half of 2006, operating profit of Chemicals Segment was RMB 7.2
billion, representing a decrease of 33.4% over the first half of 2005. The
percentage of operating profit of the Chemicals Segment in the Company's total
operating profit decreased from 32.1% in the first half of 2005 to 21.0% in the
first half of 2006, representing a decrease of 11.1%.
(5) Corporate and Others
The business activities of corporate and others mainly consist of import
and export business activities of the subsidiaries, research and
development activities of the Company, and managerial activities of its
headquarters.
In the first half of 2006, the operating revenues generated from corporate
and others was RMB 93.9 billion, representing an increase of 75.6% over the
first half of 2005. The increase was largely as a result of increased
revenues generated by its trading companies through increased trading
volume in importing and exporting of crude oil and refined oil products and
other business transactions.
In the first half of 2006, the operating expenses were RMB 94.4 billion,
representing an increase of 75.5% over the first half of 2005. This
increase was mainly due to the increase in the purchasing costs of its
trading subsidiaries associated with the increase in its operating revenue.
In the first half of 2006, the operating losses were RMB 0.5 billion,
representing an increase in losses by RMB 0.2 billion compared with that in
the first half of 2005.
24
3 ASSETS, LIABILITIES, EQUITY AND CASH FLOWS
(1) Assets, liabilities, and equity Units: RMB millions
At June 30, At December 31,
2006 2005 Changes
Total assets 586,915 537,321 49,594
Current assets 165,170 145,291 19,879
Non-current assets 421,745 392,030 29,715
Total liabilities 329,729 284,325 45,404
Current liabilities 215,165 170,649 44,516
Non-current liabilities 114,564 113,676 888
Total equity attributable to the
equity shareholders of the
Company 237,159 223,556 13,603
Share capital 86,702 86,702 --
Reserves 150,457 136,854 13,603
Minority interests 20,027 29,440 (9,413)
Total equity 257,186 252,996 4,190
At 30 June 2006, the Company's total assets were RMB 586.9 billion,
representing an increase of RMB 49.6 billion compared with that at the end
of 2005, of which:
The current assets increased by RMB 19.9 billion from those at
the end of 2005 to RMB 165.2 billion. The change was mainly due to the
increase in inventories by RMB 16.4 billion during the first half of 2006,
of which, crude oil and other feedstock increased by RMB 10.5 billion, and
finished goods increased by RMB 5.1 billion. In the first half of 2006,
with significant increase in the income from principal operations, trade
accounts receivable and bills receivable increased by RMB 3.6 billion,
prepaid expenses and other current assets increased by RMB 3.8 billion.
The Company also further reinforced the centralised fund management and,
as a result, cash and cash equivalents and time deposits decreased by RMB
4 billion.
The non-current assets increased by RMB 29.7 billion from those
at the end of 2005 to RMB 421.7 billion. The change was primarily
attributable to additions of property, plant and equipment and
construction in progress of RMB 15.8 billion which were in line with the
annual investment plan, and the increase in goodwill of RMB 11.7 billion
due to privatisations of subsidiaries.
At 30 June 2006, the Company's total liabilities were RMB 329.7 billion,
representing an increase of RMB 45.4 billion compared with that at the end
of 2005, of which:
The current liabilities increased by RMB 44.5 billion from those
at the end of 2005 to RMB 215.2 billion. Such increases were mainly caused
by an increase of RMB 31.3 billion in short term debts due to expansion of
production and operations, and the increase in other payables of RMB 12.7
billion (which primarily include an increase of RMB 5 billion in other
payables to the Sinopec Group Company and fellow subsidiaries, and an
increase of RMB 3.7 billion in special oil income levy payable).
The non-current liabilities increased by RMB 0.9 billion from
those at the end of 2005 to RMB 114.6 billion. This was mainly due to
increase in long-term loans as a result of the implementation of
investment projects.
At 30 June 2006, the Company's total equity attributable to equity
shareholders of the Company was RMB 237.2 billion, representing an increase
of RMB 13.6 billion compared with that at the end of 2005, which was due to
increase of reserves.
25
(2) Cash Flow
In the first half of 2006, cash and cash equivalents decreased by RMB 3.8
billion from RMB 13.7 billion as at 31 December 2005 to RMB 9.9 billion as
at 30 June 2006.
The following table sets forth the major items on the consolidated cash
flow statements for the first half of 2006 and the first half of 2005.
Units: RMB millions
Six-month periods
ended June 30
Major items of cash flows 2006 2005 Changes
Net cash flow from operating activities 21,478 21,082 396
Net cash flow from investing activities (54,327) (31,400) (22,927)
Net cash flow from financing activities 29,050 7,553 21,497
Net decrease in cash and cash equivalents (3,799) (2,765) (1,034)
Net cash flow from operating activities was RMB 21.5 billion.
Mainly due to: In the first half of 2006, profit before taxation was RMB
31.7 billion, after adjusting the non-cash expense and non-operating
activities items by RMB 20.6 billion, mainly including depreciation,
depletion and amortisation of RMB 16.5 billion, interest expenses of RMB
3.5 billion, and the dry holes costs of RMB 1.4 billion.
Operating profit before changes in working capital was RMB 52.3 billion.
After deducting cash outflow caused by increase in inventory, such as crude
oil, of RMB 15.6 billion, and cash outflow from changes in operating
receivables, payables and other assets of RMB 600 million, cash generated
from operations was RMB 36.1 billion. Upon deduction of cash outflows due
to payment of income tax of RMB 11.2 billion and payment of interest of RMB
3.4 billion, the net cash generated from operating activities was RMB 21.5
billion.
Net cash used in investing activities was RMB 54.3 billion, which was
mainly used for:
The Company's capital expenditure of RMB 27.2 billion;
Acquisitions of subsidiaries' minority interests of RMB 22 billion;
Exploratory wells expenditure of RMB 3.4 billion.
Net cash flow generated from financing activities was RMB 29.1 billion.
This was mainly derived from increase in bank loans.
(3) Contingent Liability
At 30 June 2006, the amount of guarantees provided by the Company in
respect of banking facilities granted to associates amounted to
approximately RMB 95 million.
4 CAPITAL EXPENDITURES
Please refer to "Capital Expenditure" in the section headed "Business
Review and Prospects".
5 ANALYSIS OF FINANCIAL STATEMENTS PREPARED UNDER THE PRC ACCOUNTING
RULES AND REGULATIONS
The major differences between the Company's financial statements prepared
under the PRC Accounting Rules and Regulations and IFRS are set out in
Section (C) of the financial statements of the Company on page 110 to page
111 of this report.
26
The following table sets forth each of its segments' income from principal
operations, cost of sales, sales taxes and surcharges and profit from
principal operations, as prepared under the PRC Accounting Rules and
Regulations:
Six-month periods
ended June 30
2006 2005
RMB millions RMB millions
Income from principal operations
Exploration and Production Segment 65,497 44,396
Refining Segment 268,982 209,118
Marketing and Distribution Segment 275,115 208,083
Chemicals Segment 97,944 83,066
Others 93,681 53,248
Elimination of inter-segment sales (319,231) (238,663)
Consolidated income from principal operations 481,988 359,248
Cost of sales, sales taxes and surcharge
Exploration and Production Segment 24,457 17,920
Refining Segment 284,044 208,147
Marketing and Distribution Segment 253,015 190,761
Chemicals Segment 87,039 68,283
Others 92,217 52,619
Elimination of costs of inter-segment sales (318,556) (236,345)
Consolidated costs, sales taxes and surcharge 422,216 301,385
Profit from principal operations
Exploration and Production Segment 39,647 23,738
Refining Segment (14,344) 1,391
Marketing and Distribution Segment 22,100 17,322
Chemicals Segment 10,905 14,783
Others 1,464 629
Consolidated profit from principal operations 59,772 57,863
Consolidated net profit 20,679 18,044
Profit from principal operations: In the first half of 2006, the realised
profit from principal operations by the Company was RMB 59.8 billion,
representing an increase of RMB 1.9 billion. This increase was mainly due
to the significant increase in international crude oil prices and all
efforts the company made, following the pace of the steady growth of the
domestic economy, in expanding the market proactively, expanding production
volume of crude oil and natural gas, optimising crude oil processing
structure, increasing production of chemicals and increasing sales volume
of refined oil products.
Net profit: In the first half of 2006, the Company's net profit was RMB
20.7 billion, representing an increase of RMB 2.6 billion, or 14.6% over
the first half of 2005.
27
Financial data prepared under the PRC Accounting Rules and Regulations:
At June 30 At December 31
2006 2005 Changes
RMB millions RMB millions
Total assets 568,888 520,572 48,316
Long-term liabilities 108,516 107,774 742
Shareholder's funds 228,510 215,623 12,887
Analysis of changes:
Total assets: As at 30 June 2006, the Company's total assets were RMB 568.9
billion, representing an increase of RMB 48.3 billion compared with that at
the end of 2005. The change was mainly because of an increase of RMB 15.2
billion in fixed assets, in addition, the increase of RMB 19.5 billion in
current assets caused by the increase in inventory of crude oil, refined
oil products and other items in response to the increase of production
volume and price and the increase of RMB 13.2 billion in long term equity
investments mainly due to acquisitions of minority interests of
subsidiaries.
Long-term liabilities: As at 30 June 2006, the Company's long-term
liabilities were RMB 108.5 billion, representing an increase of RMB 0.7
billion compared with that at the end of 2005.
Shareholders' equity: As at 30 June 2006, the shareholders' equity of the
Company were RMB 228.5 billion, representing an increase of RMB 12.9
billion compared with that at the end of 2005. The change was mainly as a
result of (1) a realised net profit of RMB 20.7 billion in the first half
of 2006; and (2) final dividend of RMB 7.8 billion for 2005 declared in the
first half of 2006.
6 SIGNIFICANT DIFFERENCES BETWEEN THE FINANCIAL STATEMENTS PREPARED UNDER
IFRS AND US GAAP
The significant differences between the Company's financial statements
prepared under IFRS and US GAAP are set out in Section (D) of the financial
statements of the Company on page 112 to page 114 of this report.
28
SIGNIFICANT EVENTS
1 CORPORATE GOVERNANCE
During the reporting period, Sinopec Corp. further strengthened corporate
governance practices in accordance with domestic and overseas regulations
and circumstances of the Company; members of the Third Session of the Board
of Directors and the Third Session of the Supervisory Committee were
elected, senior management was also appointed; the new members of the Board
of Directors, Supervisory Committee and senior management systematically
studied relevant domestic and overseas securities rules and regulations;
the Articles of Association and its appendices were further amended and
revised; the revised internal control system and detailed implementing
rules came into full effect.
2 COMPLIANCE WITH CODE ON CORPORATE GOVERNANCE PRACTICES
During the reporting period, Sinopec Corp. complied with all the
requirements of the Code of Corporate Governance Practices, Appendix 14 to
the Main Board Listing Rules of The Stock Exchange of Hong Kong Limited.
3 ELECTION OF THE MEMBERS OF THE THIRD SESSION OF THE BOARD OF DIRECTORS AND
THE THIRD SESSION OF THE SUPERVISORY COMMITTEE AND APPOINTMENT OF SENIOR
MANAGEMENT The term of the Second Session of the Board of Directors and the
Second Session of the Supervisory Committee ended in the first half of
2006. At the annual general meeting of shareholders for 2005 held on 24 May
2006 ("2005 Annual General Meeting"), members of the Third Session of the
Board of Directors and Third Session of the Supervisory Committee were
elected, and at the first meeting of the Third Session of the Board of
Directors held on 24 May 2006, senior management was appointed. Please
refer to the Section titled "Directors, Supervisors and Other Senior
Management" for the name list of the members of the Third Session of the
Board of Directors, the Third Session of the Supervisory Committee and the
newly appointed senior management.
4 AMENDMENT TO THE ARTICLES OF ASSOCIATION
Amendments to the Articles of Association of Sinopec Corp. and its
appendices were approved at the 2005 Annual General Meeting. For further
details, please refer to the circular mailed to holders of H shares on 4
April 2006 as well as the proceedings of the 2005 Annual General Meeting
posted by Sinopec Corp. on the website of the Shanghai Stock Exchange
(www.sse.com.cn).
5 DIVIDEND DISTRIBUTION FOR THE YEAR ENDED 31 DECEMBER 2005 AND INTERIM
DIVIDEND DISTRIBUTION PLAN FOR THE SIX-MONTH PERIOD ENDED 30
JUNE 2006
(1)Dividend distribution for the year ended 31 December 2005
As approved at the 2005 Annual General Meeting of Sinopec Corp, a final
cash dividend of RMB 0.09 (inclusive of tax) per share for the year
ended 31 December 2005 was distributed, which amounted to an aggregate
of RMB 7.803 billion. On 30 June 2006, Sinopec Corp. distributed the
2005 year end dividend to shareholders whose names appeared on the
register of members of Sinopec Corp. on 16 June 2006.
For the year 2005, total cash dividend of RMB 0.13 (inclusive of tax)
per share was distributed, and the total cash dividend amounted to RMB
11.271 billion.
(2)Interim dividend distribution plan for the six-month period ended 30
June 2006 According to the provisions of the Articles of Association
of Sinopec Corp., the interim dividend distribution plan for the
six-month period ended 30 June 2006 was approved at the third meeting
of the Third Session of the Board of Directors. An interim cash
dividend of RMB 0.04 (inclusive of tax) per share will be distributed
based on the total number of shares of 86,702.439 million as at 30
June 2006. The total cash dividend amounts to RMB 3.468 billion.
The interim dividend will be distributed on or before Thursday, 28
September 2006 to the shareholders whose names appear on the register of
members of Sinopec Corp. on Wednesday, 13 September 2006.
To be entitled to the interim dividend, holders of H shares shall lodge
their share certificate(s) and transfer documents with Hong Kong
Registrars Limited at Shops 1712-1716, 17/F., Hopewell Center, 183
Queen's Road East, Wanchai, Hong Kong for registration of transfer, no
later than 4:00pm on Tuesday, 12 September 2006. The register of members
of the H shares of Sinopec Corp. will be closed from Wednesday, 13
September 2006 to Tuesday, 19 September 2006 (both dates inclusive).
Dividends will be denominated and declared in Renminbi. Dividends for
domestic shares will be paid in Renminbi and dividends for foreign
shares will be paid in Hong Kong dollars. The exchange rate for
dividends to be paid in Hong Kong dollars is the average of the basic
exchange rate of Hong Kong dollar to Renminbi published by the People's
Bank of China during the week prior to the date of declaration of
dividends, being Friday, 25 August 2006.
29
6 THE DISCOVERY OF LARGE-SCALE MARINE FACIES GAS FIELD -- PUGUANG GAS FIELD
The Company discovered the largest and most abundant marine facies natural
gas field - Puguang Gas Field -- in northeast Sichuan Province. According
to the appraisal undertaken by the Mineral Resource Reserve Evaluation
Center under the Ministry of Land and Resources, reserve in Puguang Gas
Field is estimated to be 251.071 billion cubic meters, with technically
recoverable reserve of 188.304 billion cubic meters. Puguang Gas Field
meets the conditions for commercial development.
7 THE TRANSFER OF STATE OWNED SHARES TO SINOPEC GROUP COMPANY. FROM CHINA
ORIENT ASSET MANAGEMENT CORPORATION, CHINA CINDA ASSET MANAGEMENT
CORPORATION AND CHINA DEVELOPMENT BANK During the reporting period, China
Orient Asset Management Corporation ("China Orient"), China Cinda Asset
Management Corporation ("Cinda") and China Development Bank ("CDB"), all of
which are shareholders of Sinopec Corp., entered into equity transfer
agreements with Sinopec Group Company on 29 April 2006, 6 June 2006 and 17
August 2006 respectively, pursuant to which China Orient, Cinda and CDB
respectively transferred 1,296.41 million (approximately 1.5% of the total
shares of Sinopec Corp.), 2,848,886,224 (approximately 3.3% of the total
shares of Sinopec Corp.) and 632.57 million (approximately 0.7% of the
total shares of Sinopec Corp.) state-owned shares to Sinopec Group Company.
The respective total cash considerations of RMB 3,150,276,300.00, RMB
7,207,682,100.00, and RMB 1,537,145,100.00 will be paid to China Orient,
Cinda and CDB by China Petrochemical Corporation. The equity transfer
agreement with China Orient has been approved by the State-owned Assets
Supervision and Administration Commission ("SASAC") and the Ministry of
Finance. The equity transfer agreement with Cinda has been approved by
SASAC but is pending approval by the Ministry of Finance while the equity
transfer agreement with CDB is pending approval by SASAC and the Ministry
of Finance.
8 INCREASE OF EQUITY INVESTMENT IN SINOPEC FINANCE COMPANY LIMITED
On 31 March 2006, Sinopec Corp. and Sinopec Group Company entered into an
arrangement ("Arrangement") with Sinopec Finance Co., Ltd. ("Sinopec
Finance"), under which, the registered capital of Sinopec Finance increased
to RMB 6 billion from RMB 2.5 billion. Sinopec Corp. and Sinopec Group
Company injected RMB 1,602.3 million and 897.7 million respectively into
Sinopec Finance. Upon completion of the Arrangement, the equity holding of
Sinopec Corp. in Sinopec Finance increased to 49% from 38.22%, while the
equity holding of Sinopec Group Company in Sinopec Finance increased to 51%
from 61.78%. Please refer to the relevant announcements published in the
China Securities Journal, Shanghai Securities News and Securities Times in
Mainland China and Hong Kong Economic Times and South China Morning Post in
Hong Kong on 3 April 2006 for details.
9 SPECIAL OIL INCOME LEVY
The Chinese government imposed a special oil income levy on the revenue
derived from the sales of domestically produced crude oil by any company
engaged in oil exploration and production at a price which exceeds a
certain level starting from 26 March 2006. The special oil income levy
system consists of 5 levels and will be calculated and charged according to
the progressive ad valorem rates on the excess amounts. The levy will be
calculated on a monthly basis and charged and collected on a quarterly
basis. The applicable level of the special oil income levy will be
determined based on the weighted average price of the crude oil sold in a
particular month. The level of levy will be determined based on US dollar
per barrel which starts at US$ 40 per barrel. Please refer to the relevant
announcements published in the China Securities Journal, Shanghai
Securities News and Securities Times in Mainland China and Hong Kong
Economic Times and South China Morning Post in Hong Kong on 4 April 2006
for details.
10 ISSUANCE OF CORPORATE BONDS AND INTEREST PAYMENT
On 24 February 2004, Sinopec Corp. issued RMB 3.5 billion corporate bond in
the domestic market with a term of 10 years, AAA credit rating, carrying a
fixed coupon rate of 4.61%. On 28 September 2004, the said corporate bonds
were listed on the Shanghai Stock Exchange. For further details, please
refer to Sinopec Corp.'s announcements published in China Securities
Journal, Shanghai Securities News, and Securities Times in Mainland China,
and Hong Kong Economic Times and South China Morning Post in Hong Kong on
24 February 2004 and 28 September 2004. On 24 February 2006, Sinopec Corp.
paid the full amount of coupon interest for the second interest payment
year.
11 ISSUANCE OF SHORT-TERM COMMERCIAL PAPER
On 19 September 2005, Sinopec Corp. convened the first extraordinary
general meeting of shareholders for 2005, at which a special resolution was
passed for issuance of short-term commercial paper. For details, please
refer to Sinopec Corp.'s announcements published in China Securities
Journal, Shanghai Securities News, and Securities Times in Mainland China,
and Hong Kong Economic Times and South China Morning Post in Hong Kong on
20 September 2005. 2006 first tranche of commercial paper with a term of
183 days, carrying a rate of 2.668% was issued on 16 May 2006 to
institutional investors in China's inter-bank commercial paper market,
totaling RMB 10 billion at face value.
30
12 THE TRANSFER OF STATE-OWNED LEGAL PERSON SHARES OF CHINA PHOENIX HELD BY
SINOPEC CORP.
On 18 October 2005, Sinopec Corp. and China Changjiang National Shipping
(Group) Corporation ("Changhang Group") entered into a equity transfer
agreement, under which, Sinopec Corp. agreed to transfer to Changhang Group
a total of 211,423,651 state-owned legal person shares held by Sinopec
Corp. in Sinopec Wuhan Phoenix Company Limited ("China Phoenix")
(representing 40.72% of the total issued share capital of China Phoenix)
and repurchase the operating assets of China Phoenix. For further details,
please refer to the "Report on Changes of Shareholdings in Sinopec Wuhan
Phoenix Company Limited" dated 20 October 2005 published by Sinopec Corp.
on the website of the Shanghai Stock Exchange. The proposed asset
restructuring of China Phoenix was approved by the China Securities
Regulatory Commission ("CSRC") on 29 April 2006. The relevant equity
transfer procedures were completed by Sinopec Corp. and Changhang Group on
10 July 2006.
13 MERGER BY ABSORPTION OF ZHENHAI REFINERY AND CHEMICALS
Pursuant to the agreement entered into between Ningbo Yonglian Co., Ltd.
("Ningbo Yonglian") and Sinopec Zhenhai Refining and Chemicals Company
Limited ("ZRCC") on 12 November 2005, Ningbo Yonglian purchased the listed
H shares of ZRCC from its shareholders at a unit price of HK$ 10.60 per
share in cash, amounting to a total consideration of HK$ 7.672 billion. For
further details, please refer to Sinopec Corp.'s announcements published in
China Securities Journal, Shanghai Securities News and Securities Times in
Mainland China and Hong Kong Economic Times and South China Morning Post in
Hong Kong on 14 November 2005. The proposed merger had been approved on 12
January 2006 at the general meeting of shareholders and the general meeting
of independent shareholders of ZRCC and approved by the shareholders of
Ningbo Yonglian, as well as by domestic and overseas securities regulatory
authorities. ZRCC was delisted on 24 March 2006.
14 TENDER OFFER BY SINOPEC CORP. TO FOUR A-SHARE SUBSIDIARIES
On 25 February 2006, the 24th meeting of the Second Session of the Board
of Directors of Sinopec Corp. approved its voluntary tender offers to
acquire all the tradable shares of Sinopec Qilu Petrochemical Co., Ltd.
("Sinopec Oilu") at a price of RMB 10.18 per share, all the tradable
shares of Sinopec Yangzi Petrochemical Co., Ltd. ("Sinopec Yangzi") at a
price of RMB 13.95 per share, all the tradable shares of Sinopec Zhongyuan
Oil & Gas Hi-tech Co., Ltd. ("Sinopec Zhongyuan Oil & Gas") at a price of
RMB 12.12 per share, and all the tradable shares of Sinopec Shengli Oil
Field Dynamic (Group) Co., Ltd. at a price of RMB 10.30 per share and all
the non-tradable shares (including non-tradable shares held by investors
other than Sinopec Corp.) of Sinopec Shengli Oil Field Dynamic (Group)
Co., Ltd. at a price of RMB 5.60 per share. Sinopec Qilu was delisted on
24 April 2006, and Sinopec Yangzi, Zhongyuan Oil & Gas and Sinopec Shengli
Oil Field Dynamic (Group) Co., Ltd. were delisted on 21 April 2006. For
further details, please refer to relevant announcements published in China
Securities Journal, Shanghai Securities News and Securities Times in
Mainland China on 16 February and 6 March 2006 (Sinopec Shengli Oilfield
Daming (Group) Co., Ltd.'s announcement was only published in China
Securities Journal and Securities Times).
15 MAJOR PROJECTS
(1)CONSTRUCTION OF TIANJIN ONE MILLION TONNES PER ANNUM ETHYLENE PROJECT
Construction of Sinopec Tianjin one million tonnes per annum ("tpa")
ethylene and associated facilities project started on 26 June 2006. This
project comprises three parts, which are respectively ethylene project,
revamping of refinery and thermal power generation facilities, at a
total investment of about RMB 20.8 billion.
(2)ZRCC ONE MILLION TPA ETHYLENE PROJECT
ZRCC one million tpa ethylene and associated facilities project was
approved by the State Council in March 2006. The total investment is
approximately RMB 21.9 billion. The project consists of the ethylene
project and the expansion of thermal power generation facilities.
Initial preparatory work has commenced.
16 DE-REGISTRATION OF SINOPEC SHENGLI OIL FIELD COMPANY LIMITED
Sinopec Corp. de-registered Sinopec Shengli Oilfield Co., Ltd. and on 16
January 2006 established Shengli Oilfield Company. Prior to the
de-registration, Sinopec Shengli Oilfield Co., Ltd. was a wholly owned
subsidiary of Sinopec. Corp.
17 THE COMPANY HAS NOT BEEN INVOLVED IN ANY MATERIAL LITIGATIONS AND
ARBITRATIONS DURING THE REPORTING PERIOD
31
18 CONNECTED TRANSACTIONS
(1)Connected transactions entered into by the Company during the reporting
period During the reporting period, the aggregate amount of major and
frequent connected transactions incurred between the Company and the
connected parties was RMB 103.119 billion, of which, incoming trade
amounted to RMB 48.349 billion, and outgoing trade amounted to RMB
54.770 billion (including RMB 54.716 billion of sales of products and
services). Details of the connected transactions incurred during the
reporting period are set out in the Note 30 to the financial statements
prepared under the IFRS in this report.
All connected transactions incurred during the reporting period have
been carried out in compliance with its respective agreements as
published in the relevant announcements.
The following table sets out the principal operations categorised by
business segments and the details of the connected transactions,
including income from principal operations and cost of sales for each
business segment, extracted from the Company's financial statements
prepared under the PRC Accounting Rules and Regulations:
Year-on-year
increase/ Year-on-year
decrease of Year-on-year increase/
Income from income from increase/ decrease of
Categorised by principal Gross profit principal decrease of gross profit
business segments operations Cost of sales ratio operations cost of sales ratio
(RMB million) (RMB million) (%) note (1) (%) (%) (percentage point)
Exploration and Production 65,497 19,596 60.53 47.53 13.83 7.06
Refining 268,982 276,547 (5.33) 28.63 37.37 (6.00)
Chemicals 97,944 86,849 11.13 17.91 27.90 (6.67)
Marketing and Distribution 275,115 252,663 8.03 32.21 32.64 (0.30)
Others 93,681 92,198 1.56 75.93 75.27 0.38
Elimination of inter-segment sales (319,231) (318,556) -- -- -- --
Total 481,988 409,297 12.40 34.17 39.61 (3.71)
Of which: connected transactions
note (2) 47,194 44,163 5.40 48.43 53.47 (3.67)
Pricing policy for (1) Government-prescribed prices and government-guided prices are adopted for products or items if
connected transactions such prices are available;
(2) Where there is no government-prescribed price or government-guided price for products or
items, the market price (inclusive of bidding price) will apply;
(3) Where none of the above is applicable, the price will be decided based on the reasonable
cost incurred plus sales taxes and reasonable profit. Reasonable cost means the average
production cost of products by the same type of enterprises within regions with proximity
using the same kind of raw materials. Reasonable profit means profit margin of not more than 6%
of the cost incurred based on the current interest rate level set by the government.
Note 1: Gross profit ratio = profit from principal operations/income from
principal operations.
Note 2: During the reporting period, the total amount of connected
transactions of the products sold and the services provided by the
Company to Sinopec Group Company was RMB 29.853 billion.
32
(2)Continuing connected transactions
When listed in 2000, Sinopec Corp. and Sinopec Group Company executed a
series of agreements regarding continuing connected transactions,
including the Mutual Supply Agreement, the Community Service Agreement,
the Land Use Right Leasing Agreement, Property Leasing Agreement, the
Intellectual Property License Agreement, the Agency Agreement and the
SPI Fund Document. On 24 December 2003, the Stock Exchange of Hong Kong
Limited granted a conditional waiver of three years (from 2004 to 2006)
to Sinopec Corp. from strict compliance with relevant requirements of
the Hong Kong Listing Rules in relation to the continuing connected
transactions. The waiver will expire on 31 December 2006.
It is expected that Sinopec Corp. will continue to conduct the relevant
continuing connected transactions after the expiry of the waiver period.
Sinopec Corp. has entered into supplemental agreements in relation to
the connected transactions with Sinopec Group Company on 31 March 2006.
The relevant supplemental agreements will apply to the continuing
connected transactions of the Company to be conducted after 1 January
2007.
The proposal regarding continuing connected transactions for the
three-year period from 2007 to 2009 was approved at the 2005 Annual
General Meeting. For further details, please refer to Sinopec Corp.'s
announcements published in China Securities Journal, Shanghai Securities
News and Securities Times in Mainland China and Hong Kong Economic Times
and South China Morning Post in Hong Kong on 3 April 2006.
(3)Connected transaction between Sinopec Corp. and its subsidiary Sinopec
Kantons Holdings Limited At the second meeting of the Third Session of
the Board of Directors of Sinopec Corp. held on 10 July 2006, Sinopec
Kantons Holdings Limited ("Sinopec Kantons"), a controlled subsidiary
of Sinopec Corp., is approved to acquire 30% equity interest in Huade
Petrochemical Company Limited of Dayawan, Huizhou City at a cash
consideration of RMB 594 million through its wholly owned subsidiary
Kanton International Investment Limited; and Sinopec Corp. is approved
to acquire 100% equity interest in Kantons Gas Station Investment
Management Company Limited located in Guangzhou Free Trade Zone at a
cash consideration of RMB 170 million (of which RMB 17 million was paid
to acquire 10% equity interest which constitutes a connected
transaction). For further details, please refer to relevant
announcements published in China Securities Journal, Shanghai
Securities News and Securities Times in Mainland China and Hong Kong
Economic Times and South China Morning Post in Hong Kong on 11 July
2006.
19 ACQUISITIONS, DISPOSALS AND RESTRUCTURINGS OF ASSETS
Aside from the tender offer to four listed A-share subsidiaries (reference
is made to Item 14) and the assets restructuring of China Phoenix
(reference is made to Item 12), there is no other major acquisition,
disposal or restructuring of assets during the reporting period.
20 SIGNIFICANT TRUSTEESHIP, SUB-CONTRACT AND LEASE
During this reporting period, Sinopec Corp. did not have any significant
trusteeship, sub-contract or lease of any other company's assets, nor
placed its assets to or under any other company's trusteeship, sub-contract
or lease which were required to be disclosed.
21 DURING THIS REPORTING PERIOD, SINOPEC CORP. DID NOT ENTRUST ANY OUTSIDE
PARTY TO CARRY OUT CASH ASSETS MANAGEMENT ON ITS BEHALF
33
22 MATERIAL GUARANTEE CONTRACTS AND STATUS OF IMPLEMENTATION
External guarantees provided by the Company (not including guarantees
provided to its controlled subsidiaries)
Whether
for
Date of a
Occurrence Amount Whether connected
(Date of RMB completed party
Obligor Execution) millions Type of guarantee Term or not (note 1)
Shanghai Secco
Petrochemical Co., Ltd. 9 February 2002 2,830 Joint and several liability 9 February 2002 - 20 December 2021 No Yes
Shanghai Secco
Petrochemical Co., Ltd. 9 February 2002 4,062 Joint and several liability 9 February 2002 - 20 December 2013 No Yes
BASF-YPC Co., Ltd. 7 March 2003 4,680 Joint and several liability 7 March 2003 - 31 December 2008 No Yes
Yueyang Sinopec Shell Coal
Gasification Co., Ltd. 10 December 2003 377 Joint and several liability 10 December 2003 - 10 December 2017 No Yes
Fujian Zhangzhao Expressway
Service Company Limited 21 January 2003 10 Joint and several liability 21 January 2003 - 31 October 2007 No Yes
Total amount of guarantee provided during the reporting period note (2) RMB 20 million
Total amount of guarantee outstanding at the end of the reporting period note (2) RMB 12,015 million
Guarantees provided by Sinopec Corp. for its controlled subsidiaries
Total amount of guarantee provided for its controlled subsidiaries during the reporting period None
Total amount of guarantee for its controlled subsidiaries outstanding at the end of the
reporting period RMB 2,561 million
Total amount of guarantee provided by Sinopec Corp. (including those provided
for its controlled subsidiaries)
Total guarantee amount note (3) RMB 14,576 million
Total amount of guarantee as a percentage of the Sinopec Corp. net assets 6.3%
Of which:
Amount of guarantee provided for shareholders, effective controlling parties or their connected parties None
Amount of debt guarantee provided directly or indirectly for the
companies with liabilities to assets ratio of over 70% RMB 179 million
The amount of guarantee in excess of 50% of the net assets None
Sum of the above three guaranteed items note (4) RMB 179 million
Note 1:As defined in the Listing Rules of the Shanghai Stock Exchange.
Note 2:Total amount of guarantee provided during the reporting period and
total amount of guarantee outstanding at the end of the reporting
period include the external guarantees provided by controlled
subsidiaries. The amount assumed by Sinopec Corp. is the aggregate
of total amount of the external guarantees provided by each
controlled subsidiary multiplied by Sinopec Corp. respective
shareholdings in the controlled subsidiary.
Note 3:Total guarantee amount is the sum of the amount of guarantee
outstanding at the end of the reporting period (excluding the
guarantees provided for controlled subsidiaries) and the total
amount of guarantees for controlled subsidiaries outstanding at the
end of the reporting period.
Note 4:"Sum of the above three guaranteed amounts" is the aggregate of
"amount of guarantee provided for shareholders, effective
controlling parties or their connected parties", "amount of debt
guarantee provided directly or indirectly for the companies with
liabilities to asset ratio of over 70%" and "the amount of guarantee
in excess of 50% of the net asset". Any guarantee qualifying under
all three of the above shall be counted once only.
34
Material Guarantees under Performance
At the fourteenth meeting of the First Session of the Board of Directors of
Sinopec Corp., the Board approved Sinopec Corp. to provide conditional
guarantee in both domestic and foreign currencies for the Shanghai Secco
project loan, and the amount of guarantee was equivalent to RMB 6.992 billion.
For further details, please refer to Sinopec Corp.'s results announcement for
the year 2001 published in China Securities Journal, Shanghai Securities News
and Securities Times in Mainland China and Hong Kong Economic Times and South
China Morning Post in Hong Kong on 2 April 2002 .
At the fourteenth meeting of the First Session of the Board of Directors of
Sinopec Corp., the Board approved the proposal regarding Sinopec Corp.'s
provision of guarantee for completion of construction of the BASF-YPC projects.
On 7 March 2003, Sinopec Corp. entered into guarantee agreements for the
completion of construction of the BASF-YPC project with domestic and foreign
banks, whereby it guaranteed 40% of a domestic and foreign currencies
denominated loan equivalent to approximately RMB 11.7 billion provided by such
banks to BASF-YPC Co., Ltd. for completion of construction.
At the twenty-second meeting of the First Session of the Board of Directors of
Sinopec Corp., the Board approved the proposal regarding Sinopec Corp.'s
provision of equity pledge for the BASF-YPC project loan on the condition that
BASF should provide equity pledge on the same terms.
At the twenty-second meeting of the First Session of the Board of Directors of
Sinopec Corp., the Board also approved the proposal regarding Sinopec Corp.'s
provision of guarantee for Yueyang Sinopec Shell Coal Gasification Co., Ltd. in
the amount of RMB 377 million.
At the thirteenth meeting of the Second Session of the Board of Directors of
Sinopec Corp, the Board approved the provision of a credit line guarantee
equivalent to RMB 2.421 billion to China International United Petroleum &
Chemical Co., Ltd.
Independent' directors of Sinopec Corp. have carefully reviewed the external
guarantees of Sinopec Corp. and confirmed that they have no different opinion.
23 FUND PROVIDED BETWEEN CONNECTED PARTIES Unit: RMB millions
Relation with Fund to Fund from
Connected Parties the Company connected parties connected parties
Net fund Net fund
provided Balance provided Balance
Sinopec Group Company Controlling shareholder 420 2,908 5,243 10,661
and its controlled entity
Other Connected Parties Associates (11) 506 -- --
Total 409 3,414 5,243 10,661
Of which: RMB 420 million fund (net) was provided by the Company to China
Petrochemical Corporation during the reporting period, and the balance at
the end of the reporting period is RMB 2.91 billion.
24 USE OF FUND AND ITS EFFECTS AND REPAYMENT PLAN AS OF THE REPORTING PERRIOD
Not applicable
25 PERFORMANCE OF THE COMMITMENTS BY SINOPEC CORP. AND ITS SHAREHOLDER HOLDING
5% OR MORE OF THE TOTAL ISSUED SHARE CAPITAL, NAMELY, CHINA PETROCHEMICAL
CORPORATION As at the end of the reporting period, the major undertakings
given by Sinopec Group Company include:
(a) Complying with the agreements concerning connected transactions;
(b) Solving the issues arising from the land use rights certificates and
property ownership rights certificates within a specified period of
time;
(c) Implementing the Reorganisation Agreement (defined in the Prospectus
for the Issuance of H Shares);
(d) Granting licenses for intellectual property rights;
(e) Avoiding competition within the industry; and
(f) Giving up the business competition and conflict of interests with
Sinopec Corp.
Details of the above commitments were included in the prospectus for the
issuance of A shares published by Sinopec Corp. in China Securities
Journal, Shanghai Securities News, and Securities Times in Mainland China
on 22 June 2001.
During the reporting period, Sinopec Corp. was not aware of itself or the
above-mentioned principal shareholders having breached the above
commitments.
26 AUDITORS
At the 2005 Annual General Meeting, KPMG Huazhen and KPMG were reappointed
as the domestic and overseas auditors of the Company for the year of 2006
respectively, and the Board of Directors was authorised to determine the
remunerations for them. The audit fee accrued for the first half of 2006
was RMB 24 million. The financial statements for the first half of 2006
have been audited by KPMG Huazhen and KPMG. The signing certified public
accountants of KPMG Huazhen are Wu Wei and Zhang Jingjing.
35
27 APPLICATION OF THE MODEL CODE
Sinopec Corp. adopts and applies the Model Code for Securities Transactions
by Directors of Listed Issuers, Appendix 10 to the Listing Rules stipulated
by the Hong Kong Stock Exchange, to regulate securities transactions of
directors. Each of the directors confirms that he has complied with the
requirements set out under the Model Code for Securities Transactions by
Directors of Listed Issuers during the reporting period.
28 REPURCHASE, SALE AND REDEMPTION OF SHARES
Apart from those as disclosed in Items 12, 13, and 14 above, Sinopec Corp.
or any of its subsidiaries, has not repurchased, sold or redeemed any
securities of Sinopec Corp. or its subsidiaries during the reporting
period.
29 INTERESTS OF DIRECTORS, SUPERVISORS AND OTHER MEMBERS OF THE SENIOR
MANAGEMENT IN THE SHARE CAPITAL
As of 30 June 2006, none of the directors, supervisors or senior
management of Sinopec Corp. had any interest in any shares of Sinopec
Corp.
During the reporting period, none of the directors, supervisors or senior
management or any of their respective associates had any interests and
short positions in any shares, debentures or related shares of Sinopec
Corp. or its associated corporations (as defined in Part XV of the
Securities and Futures Ordinance) which were required to be notified to
Sinopec Corp. and the Hong Kong Stock Exchange pursuant to Division 7 and 8
of Part XV of the Securities and Futures Ordinance or which were required
pursuant to section 352 of the Securities and Futures Ordinance to be
entered in the register referred to therein, or which were required to be
notified to Sinopec Corp. and the Hong Kong Stock Exchange pursuant to the
Model Code for Securities Transactions Entered by Directors of Listed
Companies as specified in the Listing Rules of The Stock Exchange of Hong
Kong Limited (including those interests and short positions that are deemed
to be such, or are regarded to be owned in accordance with the relative
provisions under the Securities and Futures Ordinance).
30 OTHER SIGNIFICANT EVENTS
During this reporting period, neither Sinopec Corp., the Board of Directors
of Sinopec Corp., nor the directors were subject to any investigation from
the CSRC, nor was there any administrative penalty or circular of criticism
issued by the CSRC, the Securities and Futures Commission of Hong Kong and
the Securities and Exchange Commission of the United States, nor any
reprimand published by the Shanghai Stock Exchange, the Hong Kong Stock
Exchange, the New York Stock Exchange or the London Stock Exchange.
31 DOMESTIC SHARE REFORM ON NON-TRADABLE SHARES
Sinopec Corp. initiated domestic A share reform on non-tradable shares on
21 August, 2006. All the shareholders holding non-tradable shares intend to
grant 2.8 shares for every ten tradable shares held by the shareholders as
consideration. All shareholders holding non-tradable shares of Sinopec
Corp. have made commitments of not trading their shares which have acquired
the trading rights within the legal lock up period.
The above domestic A share reform is to be submitted to A share
shareholders' general meeting for approval. Please refer to the
announcement on A Share Reform of Sinopec Corp. published on 28 August,
2006.
36
DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT
Members of the Third Session of the Board of Directors, Third Session of the
Supervisory Committee, and senior management are as the following:
DIRECTORS
Name Gender Age Position in Sinopec
Chen Tonghai Male 57 Chairman
Zhou Yuan Male 58 Vice chairman
Wang Tianpu Male 43 Director, president
Zhang Jianhua Male 41 Director, senior vice president
Wang Zhigang Male 49 Director, senior vice president
Dai Houliang Male 42 Director, senior vice president, CFO
Liu Zhongli Male 71 Independent, non-executive director
Shi Wanpeng Male 69 Independent, non-executive director
Li Deshui Male 62 Independent, non-executive director
Yao Zhongmin Male 54 Director
Fan Yifei Male 42 Director
SUPERVISORS
Name Gender Age Position in Sinopec
Wang Zuoran Male 55 Chairman of Supervisory Committee
Zhang Youcai Male 64 Vice chairman of Supervisory Committee,
independent supervisor
Kang Xianzhang Male 58 Supervisor
Zou Huiping Male 45 Supervisor
Li Yonggui Male 66 Independent supervisor
Su Wensheng Male 49 Employee representative supervisor
Zhang Jitian Male 58 Employee representative supervisor
Cui Guoqi Male 53 Employee representative supervisor
Li Zhonghua Male 55 Employee representative supervisor
OTHER MEMBERS OF SENIOR MANAGEMENT
Name Gender Age Position in Sinopec
Cai Xiyou Male 44 Senior vice president
Zhang Kehua Male 52 Vice president
Zhang Haichao Male 49 Vice president
Chen Ge Male 44 Secretary to the Board
37
REPORT OF THE PRC AUDITORS
[KPMG HUAZHEN GRAPHIC OMITTED]
To the Shareholders of China Petroleum & Chemical Corporation:
We have audited the accompanying Company's consolidated balance sheet and
balance sheet at 30 June 2006, and the consolidated income statement and profit
appropriation statement, income statement and profit appropriation statement,
consolidated cash flow statement and cash flow statement for the six-month
period ended 30 June 2006. The preparation of these financial statements is the
responsibility of the Company's management. Our responsibility is to express an
audit opinion on these financial statements based on our audit.
We conducted our audit in accordance with China's Independent Auditing
Standards of the Certified Public Accountants. Those standards require that we
plan and perform the audit to obtain reasonable assurance as to whether the
financial statements are free from material misstatement. An audit includes
examination, on a test basis, of evidence supporting the amounts and
disclosures in the financial statements, an assessment of the accounting
policies used and significant estimates made by the Company's management in the
preparation of the financial statements, as well as evaluating the overall
financial statements presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the above-mentioned financial statements comply with the
requirements of the Accounting Standards for Business Enterprises and the
Accounting Regulations for Business Enterprises issued by the Ministry of
Finance of the People's Republic of China and present fairly, in all material
respects, the Company's consolidated financial position and financial position
at 30 June 2006, and the consolidated results of operations, results of
operations, consolidated cash flows and cash flows for the six-month period
ended 30 June 2006.
KPMG Huazhen Certified Public Accountants
Registered in the People's
Republic of China
8/F, Office Tower E2 Wu Wei
Oriental Plaza Zhang Jingjing
No.1, East Chang An Ave.
Beijing, The People's Republic of China 25 August 2006
Post Code: 100738
38
(A) FINANCIAL STATEMENTS PREPARED UNDER THE PRC ACCOUNTING RULES AND REGULATIONS
CONSOLIDATED BALANCE SHEET
at 30 June 2006
At 30 June At 31 December
Note 2006 2005
RMB millions RMB millions
Assets
Current assets
Cash at bank and in hand 4 10,777 14,747
Bills receivable 5 7,825 7,143
Trade accounts receivable 6 17,449 14,532
Other receivables 7 12,491 11,487
Advance payments 8 7,313 5,051
Inventories 9 105,496 88,936
-----------------------------------------------------------------------------------------------------------------------------
Total current assets 161,351 141,896
Long-term equity investments (Including equity investment differences
of RMB 13,549 million (2005: RMB 2,003 million)) 10 27,392 14,146
Fixed assets
Fixed assets, at cost 589,872 572,465
Less: Accumulated depreciation 282,226 265,611
Net book value of fixed assets before impairment losses 11 307,646 306,854
Less: Provision for impairment losses on fixed assets 11 6,267 6,234
Net book value of fixed assets 301,379 300,620
Construction materials 12 419 555
Construction in progress 13 62,628 48,073
Total fixed assets 364,426 349,248
Intangible assets and other assets
Intangible assets 14 5,835 5,924
Long-term deferred expenses 15 4,088 3,657
Total intangible assets and other assets 9,923 9,581
Deferred tax assets 16 5,796 5,701
Total assets 568,888 520,572
------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' funds
Current liabilities
Short-term loans 17 46,785 16,124
Bills payable 18 27,198 23,243
Trade accounts payable 19 50,636 52,967
Receipts in advance 20 14,624 14,086
Wages payable 3,369 3,436
Staff welfare payable 1,074 1,052
Taxes payable 21 4,105 5,262
Other payables 22 6,105 1,830
Other creditors 23 30,656 24,161
Accrued expenses 24 1,483 512
Short-term debentures payable 27 10,891 9,921
Current portion of long-term loans 25 14,818 15,198
Total current liabilities 211,744 167,792
------------------------------------------------------------------------------------------------------------------------------
Long-term liabilities
Long-term loans 26 104,232 103,492
Debentures payable 27 3,500 3,500
Other long-term liabilities 28 784 782
Total long-term liabilities 108,516 107,774
------------------------------------------------------------------------------------------------------------------------------
Total liabilities 320,260 275,566
Minority interests 20,118 29,383
Shareholders' funds
------------------------------------------------------------------------------------------------------------------------------
Share capital 29 86,702 86,702
Capital reserve 30 37,121 37,121
Surplus reserves 31 36,096 34,028
Unrecognised investment losses (583) (594)
Retained profits (Including cash dividend declared after the balance sheet date
of RMB 3,468 million (2005: Proposed cash dividend of RMB 7,803 million)) 39 69,174 58,366
Total shareholders' funds 228,510 215,623
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' funds 568,888 520,572
------------------------------------------------------------------------------------------------------------------------------
These financial statements have been approved by the Board of Directors on 25
August 2006.
Chen Tonghai Wang Tianpu Dai Houliang Liu Yun
Chairman Director and President Director, Senior Vice President Head of Accounting
(Authorised representative) and Chief Financial Officer Division
The notes on pages 47 to 75 form part of these financial statements.
39
BALANCE SHEET
at 30 June 2006
At 30 June At 31 December
Note 2006 2005
RMB millions RMB millions
Assets
Current assets
Cash at bank and in hand 4 3,993 5,124
Bills receivable 5 1,948 1,334
Trade accounts receivable 6 11,198 8,826
Other receivables 7 15,882 9,604
Advance payments 8 7,268 4,118
Inventories 9 56,488 49,862
-----------------------------------------------------------------------------------------------------------------------------
Total current assets 96,777 78,868
Long-term equity investments (Including equity investment differences of
RMB 13,549 million (2005: RMB 2,017 million)) 10 109,926 133,203
Fixed assets
Fixed assets, at cost 431,592 294,206
Less: Accumulated depreciation 206,560 123,747
Net book value of fixed assets before impairment losses 11 225,032 170,459
Less: Provision for impairment losses on fixed assets 11 4,195 4,191
Net book value of fixed assets 220,837 166,268
Construction materials 12 419 555
Construction in progress 13 52,586 38,937
-----------------------------------------------------------------------------------------------------------------------------
Total fixed assets 273,842 205,760
Intangible assets and other assets
Intangible assets 14 4,307 4,238
Long-term deferred expenses 15 2,879 2,656
Total intangible assets and other assets 7,186 6,894
Deferred tax assets 16 5,408 3,203
Total assets 493,139 427,928
-----------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' funds
Current liabilities
Short-term loans 17 35,699 6,940
Bills payable 18 20,389 19,077
Trade accounts payable 19 34,565 28,833
Receipts in advance 20 11,430 12,491
Wages payable 2,710 2,525
Staff welfare payable 686 514
Taxes payable 21 2,062 2,075
Other payables 22 5,823 527
Other creditors 23 30,800 22,914
Accrued expenses 24 994 173
Short-term debentures payable 27 9,900 9,921
Current portion of long-term loans 25 12,958 12,144
-----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 168,016 118,134
Long-term liabilities
Long-term loans 26 91,167 89,113
Debentures payable 27 3,500 3,500
Other long-term liabilities 28 727 315
Total long-term liabilities 95,394 92,928
Total liabilities 263,410 211,062
Shareholders' funds
Share capital 29 86,702 86,702
Capital reserve 30 37,797 37,797
Surplus reserves 31 36,096 34,028
Retained profits (Including cash dividend declared after the balance sheet date
of RMB 3,468 million (2005: Proposed cash dividend of RMB 7,803 million)) 39 69,134 58,339
Total shareholders' funds 229,729 216,866
Total liabilities and shareholders' funds 493,139 427,928
-----------------------------------------------------------------------------------------------------------------------------
These financial statements have been approved by the Board of Directors on 25
August 2006.
Chen Tonghai Wang Tianpu Dai Houliang Liu Yun
Chairman Director and President Director, Senior Vice President Head of Accounting
(Authorised representative) and Chief Financial Officer Division
The notes on pages 47 to 75 form part of these financial statements.
40
CONSOLIDATED INCOME STATEMENT AND PROFIT APPROPRIATION STATEMENT for the
six-month period ended 30 June 2006
Six-month periods
ended 30 June
Note 2006 2005
RMB millions RMB millions
Income from principal operations 32 481,988 359,248
Less: Cost of sales 409,298 293,181
Sales taxes and surcharges 33 12,918 8,204
Profit from principal operations 59,772 57,863
Add: Profit from other operations 490 447
Less: Selling expenses 10,711 10,359
Administrative expenses 11,771 10,600
Financial expenses 34 3,522 2,852
Exploration expenses, including dry holes 35 3,085 3,355
-----------------------------------------------------------------------------------------------------------------------------------
Operating profit 31,173 31,144
Add: Investment income/(loss) 36 184 (742)
Non-operating income 132 133
Less: Non-operating expenses 37 674 1,109
-----------------------------------------------------------------------------------------------------------------------------------
Profit before taxation 30,815 29,426
-----------------------------------------------------------------------------------------------------------------------------------
Less: Income tax 38 9,964 9,168
Minority interests 161 2,101
Add: Reversal of unrecognised investment losses (11) (113)
-----------------------------------------------------------------------------------------------------------------------------------
Net profit 20,679 18,044
Add: Retained profits at the beginning of the period 58,366 37,124
-----------------------------------------------------------------------------------------------------------------------------------
Distributable profits 79,045 55,168
Less: Transfer to statutory surplus reserve 31 2,068 1,804
Transfer to statutory public welfare fund 31 -- 1,804
Distributable profits to shareholders 76,977 51,560
Less: Distribution of ordinary shares' dividend 39 7,803 6,936
Retained profits at the end of the period (Including cash dividend declared after
the balance sheet date of RMB 3,468 million (2005: RMB 3,468 million)) 39 69,174 44,624
-----------------------------------------------------------------------------------------------------------------------------------
These financial statements have been approved by the Board of Directors on 25
August 2006.
Chen Tonghai Wang Tianpu Dai Houliang Liu Yun
Chairman Director and President Director, Senior Vice President Head of Accounting
(Authorised representative) and Chief Financial Officer Division
The notes on pages 47 to 75 form part of these financial statements.
41
INCOME STATEMENT AND PROFIT APPROPRIATION STATEMENT for the six-month period
ended 30 June 2006
Six-month periods
ended 30 June
Note 2006 2005
RMB millions RMB millions
Income from principal operations 32 331,021 241,340
Less: Cost of sales 274,683 212,726
Sales taxes and surcharges 33 10,626 5,386
-------------------------------------------------------------------------------------------------------------------------------
Profit from principal operations 45,712 23,228
Add: Profit from other operations 167 175
Less: Selling expenses 6,557 6,609
Administrative expenses 9,530 6,141
Financial expenses 34 2,542 1,852
Exploration expenses, including dry holes 35 3,063 2,678
Operating profit 24,187 6,123
Add: Investment income 36 6,845 20,934
Non-operating income 54 99
Less: Non-operating expenses 37468 432
Profit before taxation 30,618 26,724
Less: Income tax 389,952 8,694
Net profit 20,666 18,030
Add: Retained profits at the beginning of the period 58,339 37,124
Distributable profits 79,005 55,154
Less: Transfer to statutory surplus reserve 31 2,068 1,804
Transfer to statutory public welfare fund 31 -- 1,804
-------------------------------------------------------------------------------------------------------------------------------
Distributable profits to shareholders 76,937 51,546
Less: Distribution of ordinary shares' dividend 39 7,803 6,936
Retained profits at the end of the period (Including cash dividend declared after
the balance sheet date of RMB 3,468 million (2005: RMB 3,468 million)) 39 69,134 44,610
-------------------------------------------------------------------------------------------------------------------------------
These financial statements have been approved by the Board of Directors on 25
August 2006.
Chen Tonghai Wang Tianpu Dai Houliang Liu Yun
Chairman Director and President Director, Senior Vice President Head of Accounting
(Authorised representative) and Chief Financial Officer Division
The notes on pages 47 to 75 form part of these financial statements.
42
CONSOLIDATED CASH FLOW STATEMENT
for the six-month period ended 30 June 2006
Six-month periods
ended 30 June
Note 2006 2005
RMB millions RMB millions
Cash flows from operating activities
Cash received from sale of goods and rendering of services 571,761 423,708
Rentals received 94 89
Other cash received relating to operating activities 1,728 1,787
--------------------------------------------------------------------------------------------------------------------------------
Sub-total of cash inflows 573,583 425,584
Cash paid for goods and services (494,403) (349,021)
Cash paid for operating leases (2,882) (2,691)
Cash paid to and on behalf of employees (9,310) (8,272)
Value added tax paid (14,455) (14,217)
Income tax paid (11,197) (12,424)
Taxes paid other than value added tax and income tax (10,028) (8,986)
Other cash paid relating to operating activities (6,142) (4,929)
--------------------------------------------------------------------------------------------------------------------------------
Sub-total of cash outflows (548,417) (400,540)
Net cash flow from operating activities (a) 25,166 25,044
Cash flows from investing activities
Cash received from sale of investments 163 63
Dividends received 380 362
Net cash received from sale of fixed assets and intangible assets 166 201
Cash received on maturity of time deposits with financial institutions 629 527
Other cash received relating to investing activities 251 168
--------------------------------------------------------------------------------------------------------------------------------
Sub-total of cash inflows 1,589 1,321
Cash paid for acquisition of fixed assets and intangible assets (30,715) (26,339)
Cash paid for acquisition of fixed assets and intangible assets of jointly controlled entities (238) (1,896)
Cash paid for purchase of investments (2,180) (706)
Cash paid for purchase of time deposits with financial institutions (465) (334)
Cash paid for acquisition of operating assets and related liabilities
from Sinopec Group Company -- (3,128)
Cash paid for acquisition of subsidiaries (21,971) (4,088)
Sub-total of cash outflows (55,569) (36,491)
--------------------------------------------------------------------------------------------------------------------------------
Net cash flow from investing activities (53,980) (35,170)
Cash flows from financing activities
Cash received from contribution from minority shareholders 82 86
Cash received from issuance of corporate bonds 10,846 --
Cash received from borrowings 342,626 292,505
Cash received from borrowings of jointly controlled entities 39 2,603
--------------------------------------------------------------------------------------------------------------------------------
Sub-total of cash inflows 353,593 295,194
Cash repayments of corporate bonds (10,000) --
Cash repayments of borrowings (312,086) (281,804)
Cash paid for dividends, profits distribution or interest expenses (6,277) (5,515)
Dividends paid to minority shareholders by subsidiaries (215) (514)
--------------------------------------------------------------------------------------------------------------------------------
Sub-total of cash outflows (328,578) (287,833)
Net cash flow from financing activities 25,015 7,361
Effects of changes in foreign exchange rate (7) --
Net decrease in cash and cash equivalents (b) (3,806) (2,765)
--------------------------------------------------------------------------------------------------------------------------------
The notes on pages 47 to 75 form part of these financial statements.
43
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
(a) Reconciliation of net profit to cash flows from operating activities
Net profit 20,679 18,044
Add:Provision/(Reversal of) for allowance for doubtful accounts 8 (156)
Provision for diminution in value of inventories 2 70
Depreciation of fixed assets 16,292 15,107
Amortisation of intangible assets 341 305
Impairment losses on fixed assets 34 397
Impairment losses on long-term investments 41 35
Net loss on disposal of fixed assets and intangible assets 13 21
Financial expenses 3,522 2,852
Dry hole costs 1,398 1,325
Investment (income)/loss (225) 707
Deferred tax liabilities (less: assets) (95) (747)
Increase in inventories (15,621) (15,026)
Increase in operating receivables (6,996) (6,599)
Increase in operating payables 5,612 6,608
Minority interests 161 2,101
--------------------------------------------------------------------------------------------------------------------------------
Net cash flow from operating activities 25,166 25,044
(b) Net decrease in cash and cash equivalents
Cash and cash equivalents at the end of the period 9,939 13,616
Less: Cash and cash equivalents at the beginning of the period 13,745 16,381
Net decrease in cash and cash equivalents (3,806) (2,765)
--------------------------------------------------------------------------------------------------------------------------------
These financial statements have been approved by the Board of Directors on 25
August 2006.
Chen Tonghai Wang Tianpu Dai Houliang Liu Yun
Chairman Director and President Director, Senior Vice President Head of Accounting
(Authorised representative) and Chief Financial Officer Division
The notes on pages 47 to 75 form part of these financial statements.
44
CASH FLOW STATEMENT
for the six-month period ended 30 June 2006
Six-month periods
ended 30 June
Note 2006 2005
RMB millions RMB millions
Cash flows from operating activities
Cash received from sale of goods and rendering of services 393,543 290,762
Rentals received 43 45
Other cash received relating to operating activities 1,012 1,450
--------------------------------------------------------------------------------------------------------------------------------
Sub-total of cash inflows 394,598 292,257
Cash paid for goods and services (329,071) (254,608)
Cash paid for operating leases (2,553) (2,084)
Cash paid to and on behalf of employees (6,848) (4,640)
Value added tax paid (11,552) (6,338)
Income tax paid (9,078) (2,837)
Taxes paid other than value added tax and income tax (7,248) (5,878)
Other cash paid relating to operating activities (9,075) (12,269)
--------------------------------------------------------------------------------------------------------------------------------
Sub-total of cash outflows (375,425) (288,654)
Net cash flow from operating activities (a) 19,173 3,603
Cash flows from investing activities
Cash received from sale of investments 69 62
Dividends received 2,625 15,910
Net cash received from sale of fixed assets and intangible assets 91 104
Cash received on maturity of time deposits with financial institutions 89 184
Other cash received relating to investing activities 120 57
--------------------------------------------------------------------------------------------------------------------------------
Sub-total of cash inflows 2,994 16,317
Cash paid for acquisition of fixed assets and intangible assets (25,186) (18,044)
Cash paid for purchase of investments (2,450) (1,161)
Cash paid for acquisition of operating assets and related liabilities
from Sinopec Group Company -- (3,128)
Cash paid for acquisition of subsidiaries (21,971) (4,088)
--------------------------------------------------------------------------------------------------------------------------------
Sub-total of cash outflows (49,607) (26,421)
Net cash flow from investing activities (46,613) (10,104)
Cash flows from financing activities
Proceeds from issuance of corporate bonds 9,868 --
Proceeds from borrowings 252,155 186,066
--------------------------------------------------------------------------------------------------------------------------------
Sub-total of cash inflows 262,023 186,066-
Cash repayments of corporate bonds (10,000) --
Cash repayments of borrowings (220,681) (176,629)
Cash paid for dividends, profits distribution or interest expenses (4,944) (4,359)
--------------------------------------------------------------------------------------------------------------------------------
Sub-total of cash outflows (235,625) (180,988)
Net cash flow from financing activities 26,398 5,078
Net decrease in cash and cash equivalents (b) (1,042) (1,423)
--------------------------------------------------------------------------------------------------------------------------------
The notes on pages 47 to 75 form part of these financial statements.
45
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
(a) Reconciliation of net profit to cash flow from operating activities
Net profit 20,666 18,030
Add:(Reversal of)/provision for allowance for doubtful accounts (14) 11
Provision for diminution in value of inventories -- 1
Depreciation of fixed assets 12,015 7,539
Amortisation of intangible assets 187 203
Impairment losses on fixed assets 5 5
Impairment losses on long-term investments 4 7
Net (income)/loss on disposal of fixed assets and intangible assets (1) 19
Financial expenses 2,542 1,852
Dry hole costs 1,398 990
Investment income (4,571) (13,292
Deferred tax liabilities (less: assets) (139) 1,317
Increase in inventories (6,281) (5,172)
(Increase)/decrease in operating receivables (15,385) 3,304
Increase/(decrease) in operating payables 8,747 (11,211)
Net cash flow from operating activities 19,173 3,603
----------------------------------------------------------------------------------------------------------------------------------
(b) Net decrease in cash and cash equivalents
Cash and cash equivalents at the end of the period 3,972 4,628
Less: Cash and cash equivalents at the beginning of the period 5,014 6,051
Net decrease in cash and cash equivalents (1,042) (1,423)
These financial statements have been approved by the Board of Directors on 25
August 2006.
Chen Tonghai Wang Tianpu Dai Houliang Liu Yun
Chairman Director and President Director, Senior Vice President Head of Accounting
(Authorised representative) and Chief Financial Officer Division
The notes on pages 47 to 75 form part of these financial statements.
46
NOTES ON THE FINANCIAL STATEMENTS
for the six-month period ended 30 June 2006
1 STATUS OF THE COMPANY
China Petroleum & Chemical Corporation (the "Company") was established on
25 February 2000 as a joint stock limited company.
According to the State Council's approval to the "Preliminary Plan for the
Reorganisation of China Petrochemical Corporation" ( the "Reorganisation"),
the Company was established by China Petrochemical Corporation ("Sinopec
Group Company"), which transferred its core businesses together with the
related assets and liabilities at 30 September 1999 to the Company. Such
assets and liabilities had been valued jointly by China United Assets
Appraisal Corporation, Beijing Zhong Zheng Appraisal Company, CIECC Assets
Appraisal Corporation and Zhong Fa International Properties Valuation
Corporation ("registered valuers"). The net asset value was determined at
RMB 98,249,084,000. The valuation was reviewed and approved by the Ministry
of Finance (the "MOF") (Cai Ping Zi [2000] No. 20 "Comments on the Review
of the Valuation Regarding the Formation of a Joint Stock Limited Company
by China Petrochemical Corporation").
In addition, pursuant to the notice Cai Guan Zi [2000] No. 34 "Reply to the
Issue Regarding Management of State-Owned Equity by China Petroleum and
Chemical Corporation" issued by the MOF, 68.8 billion domestic state-owned
shares with a par value of RMB 1.00 each were issued to Sinopec Group
Company, the amount of which is equivalent to 70% of the above net asset
value transferred from Sinopec Group Company to the Company in connection
with the Reorganisation.
Pursuant to the notice Guo Jing Mao Qi Gai [2000] No. 154 "Reply on the
Formation of China Petroleum and Chemical Corporation", the Company
obtained the approval from the State Economic and Trade Commission on 21
February 2000 for the formation of a joint stock limited company.
The Company took over the exploration, development and production of crude
oil and natural gas, refining, chemicals and related sales and marketing
business of Sinopec Group Company after the establishment of the Company.
Pursuant to the resolution passed at the Extraordinary General Meeting held
on 24 August 2001, the Company acquired the entire equity interest of
Sinopec National Star Petroleum Company ("Sinopec National Star") from
Sinopec Group Company for a consideration of RMB 6.45 billion.
Pursuant to the resolution passed at the Board of Directors' meeting held
on 28 October 2003, the Company acquired the principal assets and
associated liabilities related to the 380 kiloton ethylene production and
distribution equipment from Sinopec Group Maoming Petrochemical Company
("Sinopec Maoming"), for a consideration of RMB 3.3 billion (hereinafter
referred to as the "Acquisition of Ethylene Assets").
Pursuant to the resolution passed at the Board of Directors' meeting held
on 29 December 2003, the Company acquired the entire operating assets and
liabilities of Tahe Oilfield Petrochemical Factory ("Tahe Petrochemical")
and Xi'an Petrochemical Main Factory ("Xi'an Petrochemical") from Sinopec
Group Company, for considerations of RMB 0.14 billion and RMB 0.22 billion,
respectively (hereinafter referred to as the "Acquisition of Refining
Assets").
Pursuant to the resolutions passed at the Extraordinary General Meeting
held on 21 December 2004, the Company acquired certain operating assets and
associated liabilities of refining, petrochemicals, catalysts and gas
stations (the "Acquisition of Acquired Assets") from Sinopec Group Company
for a consideration of RMB 5.36 billion. In connection with these
acquisitions, the Group disposed of certain assets and liabilities related
to its oilfield downhole operation (the "Disposal of Downhole Assets") to
Sinopec Group Company for a consideration receivable of RMB 1.71 billion,
resulting in a net consideration of RMB 3.65 billion payable to Sinopec
Group Company.
2 SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies adopted by the Company and its
subsidiaries (the "Group") are in conformity with the Accounting Standards
for Business Enterprises and "Accounting Regulations for Business
Enterprises" and other relevant regulations issued by the Ministry of
Finance of the PRC.
(a)Accounting year
The accounting year of the Group is from 1 January to 31 December.
(b)Basis of consolidation
The Group prepared the consolidated financial statements according to
"Accounting Regulations for Business Enterprises" and Cai Kuai Zi [1995]
No.11 "Provisional regulations on consolidated financial statements"
issued by the MOF.
The consolidated financial statements include the financial statements
of the Company and all of its principal subsidiaries. A subsidiary is a
company held by the Company directly or indirectly, of more than 50%
(excluding 50%) of the equity interest, or the Company holds less than
50% of the equity interest of a company but has effective controlling
power. The consolidated income statement of the Company only includes
the results of the subsidiaries during the period when the Company holds
more than 50% of the equity interests or holds less than 50% of equity
interest but has effective controlling power. The effect of minority
interests on equity and profit/loss attributable to minority
shareholders are separately shown in the consolidated financial
statements. For those subsidiaries whose assets and results of operation
are not significant and have no significant effect on the Group's
consolidated financial statements, the Company does not consolidate
these subsidiaries, but accounts for under the equity method in the
long-term equity investments.
Where the accounting policies adopted by the subsidiaries are different
from the policies adopted by the Company, the financial statements of
the subsidiaries have been adjusted in accordance with the accounting
policies adopted by the Company on consolidation. All significant
inter-company balances and transactions, and any unrealised gains
arising from inter-company transactions, have been eliminated on
consolidation.
For those jointly controlled entities which the Company has joint
control with other investors under contractual arrangement, the Company
consolidates their assets, liabilities, revenues, costs and expenses
based on the proportionate consolidation method according to its
percentage of holding of equity interest in those entities in the
consolidated financial statements.
47
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c)Basis of preparation and measurement basis
The financial statements of the Group have been prepared on an accrual
basis under the historical costs convention, unless otherwise stated.
(d)Reporting currency and translation of foreign currencies The Group's
reporting currency is Renminbi.
Foreign currency transactions during the period are translated into
Renminbi at exchange rates quoted by the People's Bank of China ("PBOC
rates") prevailing on the transaction dates. Foreign currency monetary
assets and liabilities are translated into Renminbi at the PBOC rates at
the balance sheet date. Exchange gains and losses on foreign currency
translation, except for those directly relating to the construction of
fixed assets (see note 2(i)), are dealt with in the income statement.
The results of overseas subsidiaries are translated into Renminbi at the
annual/period average PBOC rates. The balance sheet items are translated
into Renminbi at the PBOC rates at the balance sheet date. The resulting
exchange gains or losses are accounted for as foreign currency exchange
differences.
(e)Cash equivalents
Cash equivalents held by the Group are short-term and highly liquid
investments which are readily convertible into known amounts of cash and
are subject to an insignificant risk of change in value.
(f)Allowance for doubtful accounts
Trade accounts receivable showing signs of uncollectibility are
identified individually and allowance is then made based on the
probability of being uncollectible. In respect of trade accounts
receivable showing no sign of uncollectibility, allowance is made with
reference to the ageing analysis and management's estimation based on
past experience. Allowances for other receivables are determined based
on the nature and corresponding collectibility. Specific approval from
management is required for allowances made in respect of significant
doubtful accounts.
(g)Inventories
Inventories, other than spare parts and consumables, are stated at the
lower of cost and net realisable value.
Inventories are measured at their actual cost upon acquisition. The cost
of inventories is calculated using the weighted average method. In
addition to the purchase cost of raw material, work in progress and
finished goods include direct labour and an appropriate allocation of
manufacturing overheads.
Any excess of the cost over the net realisable value of each item of
inventories is recognised as a provision for diminution in the value of
inventories. Net realisable value is the estimated selling price in the
normal course of business less the estimated costs to completion and the
estimated expenses and related taxes to make the sale.
Spare parts and consumables are stated at cost less any provision for
obsolescence. Consumables are expensed when being consumed.
Inventories are recorded by perpetual method.
(h)Long-term equity investments
Where the Group has the power to control, jointly control or exercise
significant influence over an investee enterprise, the investment is
accounted for under the equity method whereby the investment is
initially recorded at cost and adjusted thereafter for any post
acquisition change in the Group's share of the shareholders' funds in
the investee enterprise.
Equity investment difference, which is the difference between the
initial investment cost and the Group's share of shareholders' funds of
the investee enterprise, is accounted for as follows:
-- Any excess of the initial investment cost over the share of
shareholders' funds of the investee enterprise is amortised on a
straight-line basis. The amortisation period is determined according
to the investment period as stipulated in the relevant agreement, or
not more than 10 years if the investment period is not specified in
the agreement. The unamortised balance is included in long-term
equity investments at the period end.
-- Any shortfall of the initial investment cost over the share of
shareholders' funds of the investee is recognised in capital reserve
- reserve for equity investment acquired after the issuance of Cai
Kuai [2003] No.10 "Questions and answers on implementing Accounting
Regulations for Business Enterprises and related accounting standards
(II)". If the investment was acquired before the issuance of Cai Kuai
[2003] No.10 "Questions and answers on implementing Accounting
Regulations for Business Enterprises and related accounting standards
(II)", such shortfall is amortised on a straight-line basis over the
investment period as stipulated in the relevant agreement, or 10
years if the investment period is not specified in the agreement. The
unamortised balance is included in long-term equity investments at
the period end.
Where the Group does not control, jointly control or exercise
significant influence over an investee enterprise, the investment is
accounted for under the cost method, stating it at the initial
investment cost. Investment income is recognised when the investee
enterprise declares a cash dividend or distributes profits.
Upon the disposal or transfer of long-term equity investments, the
difference between the proceeds received and the carrying amount of the
investments is recognised in the income statement.
The Group makes provision for impairment losses on long-term equity
investments (see note 2(w)).
48
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(i)Fixed assets and construction in progress
Fixed assets represent the assets held by the Group for use in the
production of goods and for administrative purposes with useful life
over 1 year and comparatively high unit value.
Fixed assets are stated in the balance sheet at cost or revalued amount
less accumulated depreciation and impairment losses (see note 2(w)).
Construction in progress is stated in the balance sheet at cost or
revalued amount less impairment losses (see note 2(w)). The revalued
amount represents the amount of assets, which is determined by
revaluation carried out in accordance with the relevant rules and
regulations.
All direct and indirect costs related to the purchase or construction of
fixed assets, incurred before the assets are ready for their intended
uses, are capitalised as construction in progress. Those costs include
borrowing costs (including foreign exchange differences arising from the
loan principal and the related interest) on specific borrowings for the
construction of the fixed assets during the construction period.
Construction in progress is transferred to fixed assets when the asset
is ready for its intended use. No depreciation is provided against
construction in progress.
Fixed assets of the Group are depreciated using the straight-line method
over their estimated useful lives. The estimated useful lives and the
estimated rate of residual values adopted for respective classes of
fixed assets are as follows:
Estimated
Estimated rate of
useful lives residual value
Land and buildings 15-45 years 3%-5%
Oil and gas properties 10-14 years 0%-3%
Plant, machinery, equipment, vehicles
and others 4-18 years 3%
Oil depots and storage tanks 8-14 years 3%
Service stations 25 years 3%-5%
(j)Oil and gas properties
Costs of development wells and the related support equipment are
capitalised. The cost of exploratory wells is initially capitalised as
construction in progress pending determination of whether the well has
found proved reserves. Exploratory well costs are charged to expenses
upon the determination that the well has not found proved reserves.
However, in the absence of a determination of the discovery of proved
reserves, exploratory well costs are not carried as an asset for more
than one year following completion of drilling. If, after one year has
passed, a determination of the discovery of proved reserves cannot be
made, the exploratory well costs are impaired and charged to expense.
All other exploration costs, including geological and geophysical costs,
are charged to the income statement in the period as incurred.
(k)Intangible assets
Intangible assets are stated in the balance sheet at cost or revalued
amount less accumulated amortisation and provision for impairment losses
(see note 2(w)). Amortisation is provided on a straight-line basis. The
amortisation period is the shorter of the contracted beneficial period
and the effective period stipulated by law. Amortisation is provided
over 10 years if it is not specified in contracts or stipulated by law.
Intangible assets include exploration and production right. Exploration
and production right are amortised on a straight-line basis over the
average period of the production rights of the related oil fields.
(l)Pre-operating expenditures
Except for the acquisition and constructions of fixed assets, all
expenses incurred during the start-up period are aggregated in long-term
deferred expenses and then fully charged to the income statement in the
month operations commence.
(m)Debentures payable
Debentures payable is stated in the balance sheet based on the proceeds
received upon issuance. Interest expenses are calculated based on actual
interest rate.
The premium/discount on debentures is amortised on a straight-line
basis, over the period from the issue date to the maturity date.
(n)Revenue recognition
Revenues associated with the sale of crude oil, natural gas, petroleum
and chemical products and all other items are recorded when the customer
accepts the goods and the significant risks and rewards of ownership and
title have been transferred to the buyer. No revenue is recognised if
there are significant uncertainties regarding recovery of the
consideration due, the possible return of goods, or when the amount of
revenue and the costs incurred or to be incurred in respect of the
transaction cannot be measured reliably.
Revenue from the rendering of services only involving in one accounting
year is recognised in the income statement upon completion. If a
transaction lasts more than one accounting years, when the outcome of
the transaction involving the rendering of services can be estimated
reliably, revenue from the rendering of services is recognised in the
income statement in proportion to the stage of completion of the
transaction based on the progress of work performed; or when the outcome
of the transaction involving the rendering of services cannot be
estimated reliably, revenues recognised only to the extent that costs
incurred are expected to be recoverable.
Interest income is recognised on a time proportion basis according to
the principal outstanding and the applicable rate.
49
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(o) Income tax
Income tax is recognised using the tax effect accounting method. Income
tax for the period comprises current tax payable and movement of
deferred tax assets and liabilities.
Current tax is calculated at the applicable tax rate on taxable income.
Deferred tax is provided using the liability method, for timing
differences between accounting profit before tax and the taxable income
arising from the differences in the tax and accounting treatment of
income and expenses or loss.
The tax value of losses expected to be available for utilisation against
future taxable income is set off against the deferred tax liability
within the same legal tax unit and jurisdiction. A valuation allowance
is provided for the tax value of losses to reduce the deferred tax asset
to the amount that is more likely than not to be realised through future
taxable income.
(p) Borrowing costs
Borrowing costs incurred on specific borrowings for the construction of
fixed assets are capitalised into the cost of the fixed assets during
the construction period until the fixed assets are ready for their
intended uses.
Except for the above, other borrowing costs are recognised as financial
expenses in the income statement when incurred.
(q) Repairs and maintenance expenses
Repairs and maintenance expenses are recognised in the income statement
when incurred.
(r) Environmental expenditures
Environmental expenditures relating to circumstances arising as a result
of the current or past businesses are recognised in the income statement
when incurred.
(s) Research and development costs
Research and development costs are recognised in the income statement
when incurred.
(t) Operating leases
Operating lease payments are charged as expenses on a straight-line
basis over the period of the respective leases.
(u) Dividends
Cash dividends appropriated to shareholders are recognised in the income
statement and profit appropriation statement when approved. Cash
dividends proposed or approved after the balance sheet date but before
the date on which the financial statements are authorised for issue are
separately disclosed under shareholders' funds in the balance sheet.
(v) Retirement benefits
Pursuant to the relevant laws and regulations in the PRC, the Group has
joined a defined contribution retirement plan for the employees arranged
by a governmental organisation. The Group makes contributions to the
retirement scheme at the applicable rate(s) based on the employees'
salaries. The contributions are charged to the income statement on an
accrual basis. After the payment of the contributions under the
retirement plan, the Group does not have any other obligations in this
respect.
(w) Provision for impairment
The carrying amounts of assets (including long-term equity investments,
fixed assets, construction in progress, intangible assets and other
assets) are reviewed regularly to determine whether their recoverable
amounts have declined below their carrying amounts. Assets are tested
for impairment whenever events or changes in circumstances indicate that
their recorded carrying amounts may not be recoverable. When such a
decline has occurred, the carrying amount is reduced to the recoverable
amount. The amount by which the carrying amount is reduced is the
impairment loss.
The recoverable amount is the greater of the net selling price and the
present value of the estimated future cash flows arising from the
continuous use of the asset and from the disposal of the asset at the
end of its useful life.
Provision for impairment loss is calculated on an item by item basis and
recognised as an expense in the income statement. However, when a
deficit between the initial investment cost and the Group's share of the
shareholders' funds of the investee enterprise has been credited to the
capital reserve, any impairment losses for long-term equity investment
are firstly set off against the difference initially recognised in the
capital reserve relating to the investment and any excess impairment
losses are then recognised in the income statement.
If there is an indication that there has been a change in the estimates
used to determine the recoverable amount and as a result the estimated
recoverable amount is greater than the carrying amount of the asset, the
impairment loss recognised in prior years is reversed. Reversals of
impairment losses are recognised in the income statement. Impairment
losses are reversed to the extent of the asset's carrying amount that
would have been determined had no impairment loss been recognised in
prior years. In respect of the reversal of an impairment loss for a
long-term equity investment, the reversal starts with the impairment
losses that had previously been recognised in the income statement and
then the impairment losses that had been charged to capital reserve.
(x) Related parties
If the Group has the power, directly or indirectly, to control, jointly
control or exercise significant influence over another party, or vice
versa, or where the Group and one or more parties are subject to common
control from another party, they are considered to be related parties.
Related parties may be individuals or enterprises.
50
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(y) Provisions and contingent liabilities
Provisions are recognised when the Group has a present obligation as a
result of a past event, it is probable that an outflow of economic
benefits will be required to settle the obligations and a reliable
estimate can be made.
Where it is not probable that the settlement of the above obligation
will cause an outflow of economic benefits, or the amount of the outflow
cannot be estimated reliably, the obligation is disclosed as a
contingent liability.
3 TAXATION
Major taxes applicable to the Group and the Company comprise income tax,
consumption tax, resources tax, value added tax and special oil income
levy.
Income tax rate is 33% and that of certain branches and subsidiaries is
15%.
Consumption tax is levied on gasoline and diesel at rates of RMB 277.6 per
tonne and RMB 117.6 per tonne respectively. Effective from 1 April 2006,
the MOF prescribed additional taxable refined oil products. New tax rates
levied upon naphtha, solvent oil, lubricant oil, fuel oil and jet fuel oil
are RMB 277 per tonne, RMB 256.4 per tonne, RMB 225.2 per tonne, RMB 101.5
per tonne and RMB 124.6 per tonne respectively. The consumption tax on jet
fuel oil is temporarily exempted while those for naphtha, solvent oil,
lubricant oil and fuel oil are temporarily imposed on 30% of the taxable
amounts.
For the period from 1 January 2005 to 30 June 2005, resources tax was
levied on crude oil and natural gas at rates ranging from RMB 8 per tonne
to RMB 30 per tonne and RMB 2 to RMB 15 per 1,000 cubic metres
respectively. Since 1 July 2005, resources tax is levied on crude oil and
natural gas at rates ranging from RMB 14 per tonne to RMB 30 per tonne and
RMB 7 to RMB 15 per 1,000 cubic metres respectively.
Value added tax rate for liquefied petroleum gas, natural gas and certain
agricultural products is 13% and that for other products is 17%.
With effective from 26 March 2006, the MOF imposed a special oil income
levy on any income derived from the sale of locally produced crude oil by
an oil exploration and production entity exceeding a certain level of
selling price. The levy starts at USD 40 per barrel and the rates range
from 20% to 40%.
The branches, subsidiaries and jointly controlled entities granted with tax
concession are set out below:
Name of branches, subsidiaries
and jointly controlled entities Preferential tax rate Reasons for granting concession
Sinopec National Star Xinan Branch 15% Tax preferential policy in the western part of China
-----------------------------------------------------------------------------------------------------------------------------------
Sinopec National Star Xibei Branch 15% Tax preferential policy in the western part of China
Sinopec Southern Exploration Branch 15% Tax preferential policy in the western part of China
Sinopec Shanghai Petrochemical Company Limited 15% The first batch of joint stock enterprise which
successfully got listed overseas
-----------------------------------------------------------------------------------------------------------------------------------
Sinopec Yizheng Chemical Fibre Company Limited 15% The first batch of joint stock enterprise which
successfully got listed overseas
-----------------------------------------------------------------------------------------------------------------------------------
Sinopec Yangzi Petrochemical Company Limited 15% High technology enterprise
Sinopec Zhongyuan Petroleum Company Limited 15% High technology enterprise
Petro-CyberWorks Information Technology Company Limited 15% High technology enterprise
Shanghai Secco Petrochemical Company Limited 2-year exemption and Foreign investment enterprise
3-year 50% reduction
-----------------------------------------------------------------------------------------------------------------------------------
BASF-YPC Company Limited 2-year exemption and Foreign investment enterprise
3-year 50% reduction
-----------------------------------------------------------------------------------------------------------------------------------
51
4 CASH AT BANK AND IN HAND
The Group
At 30 June 2006 At 31 December 2005
Original Exchange Original Exchange
currency rates RMB currency rates RMB
millions millions millions millions
Cash in hand
Renminbi 16 207
Cash at bank
Renminbi 8,740 9,229
US Dollars 100 7.9956 803 76 8.0702 616
Hong Kong Dollars 73 1.0294 75 63 1.0403 66
Japanese Yen 345 0.0695 24 277 0.0687 19
Euro 1 10.1313 13 2 9.5797 21
9,671 10,158
Deposits at related parties
Renminbi 1,105 4,588
US Dollars -- 7.9956 1 -- 8.0702 1
Total cash at bank and in hand 10,777 14,747
The Company
At 30 June 2006 At 31 December 2005
Original Exchange Original Exchange
currency rates RMB currency rates RMB
millions millions millions millions
Cash in hand
Renminbi 11 12
Cash at bank
Renminbi 3,701 3,075
US Dollars -- 7.9956 3 1 8.0702 10
Hong Kong Dollars 4 1.0294 4 -- -- --
3,719 3,097
Deposits at related parties
Renminbi 273 2,026
US Dollars -- 7.9956 1 -- 8.0702 1
Total cash at bank and in hand 3,993 5,124
Deposits at related parties represent deposits placed at Sinopec Finance
Company Limited. Deposits interest is calculated based on market rate.
5 BILLS RECEIVABLE
Bills receivable represents mainly the bills of acceptance issued by banks
for sales of goods and products.
6 TRADE ACCOUNTS RECEIVABLE
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Amounts due from subsidiaries -- -- 7,309 6,252
-------------------------------------------------------------------------------------------------------------------------------
Amounts due from Sinopec Group Company
and fellow subsidiaries 2,001 3,049 821 518
-------------------------------------------------------------------------------------------------------------------------------
Amounts due from associates 534 572 4 10
Amounts due from jointly controlled entities 503 505 162 229
Amounts due from others 17,579 13,546 5,507 4,136
-------------------------------------------------------------------------------------------------------------------------------
20,617 17,672 13,803 11,145
-------------------------------------------------------------------------------------------------------------------------------
Less: Allowance for doubtful accounts 3,168 3,140 2,605 2,319
Total 17,449 14,532 11,198 8,826
-------------------------------------------------------------------------------------------------------------------------------
52
6 TRADE ACCOUNTS RECEIVABLE (Continued) Allowance for doubtful accounts is
analysed as follows:
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Balance at 1 January 3,140 3,671 2,319 2,837
--------------------------------------------------------------------------------------------------------------------------------
Provision for the period/year 77 328 22 186
Written back for the period/year (48) (503) (29) (424)
Written off for the period/year (1) (356) (1) (280)
Transferred from subsidiaries -- -- 294 --
--------------------------------------------------------------------------------------------------------------------------------
Balance at 30 June/31 December 3,168 3,140 2,605 2,319
--------------------------------------------------------------------------------------------------------------------------------
Ageing analysis on trade accounts receivable is as follows:
The Group
At 30 June 2006 At 31 December 2005
Amount Allowance Amount Allowance
RMB RMB RMB RMB
millions % millions % millions % millions %
Within one year 16,985 82.4 48 0.3 14,320 81.0 49 0.3
--------------------------------------------------------------------------------------------------------------------------------
Between one and two years 381 1.8 82 21.5 279 1.6 101 36.2
Between two and three years 284 1.4 119 41.9 158 0.9 115 72.8
Over three years 2,967 14.4 2,919 98.4 2,915 16.5 2,875 98.6
--------------------------------------------------------------------------------------------------------------------------------
Total 20,617 100.0 3,168 17,672 100.0 3,140
--------------------------------------------------------------------------------------------------------------------------------
The Company
At 30 June 2006 At 31 December 2005
Amount Allowance Amount Allowance
RMB RMB RMB RMB
millions % millions % millions % millions %
Within one year 10,811 78.3 46 0.4 8,721 78.1 45 0.5
--------------------------------------------------------------------------------------------------------------------------------
Between one and two years 312 2.3 78 25.0 164 1.5 52 31.7
Between two and three years 254 1.8 94 37.0 95 0.9 70 73.7
Over three years 2,426 17.6 2,387 98.4 2,165 19.5 2,152 99.4
--------------------------------------------------------------------------------------------------------------------------------
Total 13,803 100.0 2,605 11,145 100.0 2,319
--------------------------------------------------------------------------------------------------------------------------------
Major trade accounts receivable of the Group at 30 June 2006 are set out
below:
Percentage on
trade accounts
Name of debtor Balance receivable
RMB millions %
North Petroleum International Company Limited 1,044 5.1
Sinochem Singapore Petroleum International Company Limited 543 2.6
Qingdao Petrochemical Plant 497 2.4
Exxon Mobil Sales and Supply Corporation 284 1.4
Mitsubishi Corporation 276 1.3
Major trade accounts receivable of the Group at 31 December 2005 are set
out below:
Percentage on
trade accounts
Name of debtor Balance receivable
RMB millions %
Guangdong Nanhua Petroleum Company Limited 921 5.2
Dongxing Oil Industry Limited 697 3.9
Sinopec Railway Oil Marketing Company Limited 330 1.9
SK Corporation 232 1.3
Sinochem Singapore Petroleum International Company Limited 216 1.2
Except for the balances disclosed in Note 40, there is no amount due from
shareholders who hold 5% or more voting right of the Company included in
the balance of trade accounts receivable.
During the six-month periods ended 30 June 2006 and 2005, the Group and the
Company had no individually significant trade accounts receivable been
fully or substantially provided for.
During the six-month periods ended 30 June 2006 and 2005, the Group and the
Company had no individually significant write off or recover of doubtful
debts which had been fully or substantially provided for in prior years.
At 30 June 2006 and 31 December 2005, the Group and the Company had no
individually significant trade accounts receivable that aged over three
years.
53
7 OTHER RECEIVABLES
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Amounts due from subsidiaries -- -- 8,471 1,740
Amounts due from Sinopec Group Company
and fellow subsidiaries 3,316 3,059 2,675 2,708
Amounts due from associates 493 521 394 501
Amounts due from others 12,152 11,419 8,035 7,855
15,961 14,999 19,575 12,804
Less: Allowance for doubtful accounts 3,470 3,512 3,693 3,200
Total 12,491 11,487 15,882 9,604
Allowance for doubtful accounts is analysed as follows:
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Balance at 1 January 3,512 3,496 3,200 3,423
Provision for the period/year 22 446 14 176
Written back for the period/year (43) (415) (21) (386)
Written off for the period/year (21) (15) (31) (13)
Transferred from subsidiaries -- -- 531 --
Balance at 30 June/31 December 3,470 3,512 3,693 3,200
Ageing analysis of other receivables is as follows:
The Group
At 30 June 2006 At 31 December 2005
Amount Allowance Amount Allowance
RMB RMB RMB RMB
millions % millions % millions % millions %
Within one year 10,185 63.8 12 0.1 9,167 61.1 15 0.2
Between one and two years 582 3.7 35 6.0 676 4.5 33 4.9
Between two and three years 469 2.9 254 54.2 447 3.0 338 75.6
Over three years 4,725 29.6 3,169 67.1 4,709 31.4 3,126 66.4
Total 15,961 100.0 3,470 14,999 100.0 3,512
The Company
At 30 June 2006 At 31 December 2005
Amount Allowance Amount Allowance
RMB RMB RMB RMB
millions % millions % millions % millions %
Within one year 13,637 69.7 9 0.1 7,127 55.7 5 0.1
--------------------------------------------------------------------------------------------------------------------------------
Between one and two years 530 2.7 30 5.7 491 3.8 19 3.9
Between two and three years 740 3.8 539 72.8 748 5.8 622 83.1
Over three years 4,668 23.8 3,115 66.7 4,438 34.7 2,554 57.5
--------------------------------------------------------------------------------------------------------------------------------
Total 19,575 100.0 3,693 12,804 100.0 3,200
--------------------------------------------------------------------------------------------------------------------------------
Major other receivables of the Group at 30 June 2006 are set out below:
Percentage on
Name of debtor Particulars Balance other receivables
RMB millions %
China Petrochemical Corporation Current Account 1,500 9.4
Jinhuang Real Estate Company Limited Current Account 208 1.3
Ningbo Taiyi Real Estate Company Limited Current Account 192 1.2
Qingdao Qirun Petrochemical Company Limited Current Account 165 1.0
China Petroleum Sales Nanchang Jiaoqu Company Limited Current Account 148 0.9
54
7 OTHER RECEIVABLES (Continued)
Major other receivables of the Group at 31 December 2005 are set out below:
Percentage on
Name of debtor Particulars Balance other receivables
RMB millions %
China Petrochemical Corporation Current Account 1,507 10.0
Fujian Quanzhou Qu Finance Bureau Current Account 375 2.5
Jinhuang Real Estate Company Limited Current Account 208 1.4
Ningbo Taiyi Real Estate Company Limited Current Account 192 1.3
Qingdao Qirun Petrochemical Company Limited Current Account 162 1.0
Except for the balances disclosed in Note 40, there is no amount due from
shareholders who hold 5% or more voting right of the Company included in
the balance of other receivables.
During the six-month periods ended 30 June 2006 and 2005, the Group and the
Company had no individually significant other receivables been fully or
substantially provided for.
During the six-month periods ended 30 June 2006 and 2005, the Group and the
Company had no individually significant write off or recover of doubtful
debts which had been fully or substantially provided for in prior years.
At 30 June 2006 and 31 December 2005, the Group and the Company had no
individually significant other receivables that aged over three years.
8 ADVANCE PAYMENTS
All advance payments are aged within one year.
Except for the balances disclosed in Note 40, there is no amount due from
shareholders who hold 5% or more voting right of the Company included in
the balance of advance payments.
9 INVENTORIES
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Raw materials 63,874 53,350 30,719 25,471
Work in progress 9,587 9,422 4,691 4,659
Finished goods 28,308 23,163 18,691 17,980
Spare parts and consumables 4,619 3,893 2,801 2,061
106,388 89,828 56,902 50,171
Less: Provision for diminution in value of inventories 892 892 414 309
105,496 88,936 56,488 49,862
All of the above inventories are purchased or self-manufactured.
Provision for diminution in value of inventories is mainly against finished
goods and spare parts.
Provision for diminution in value of inventories is analysed as follows:
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Balance at 1 January 892 906 309 394
-----------------------------------------------------------------------------------------------------------------------
Provision for the period/year 250 262 -- 64
Written back for the period/year (248) (180) -- (81)
Written off (2) (96) (1) (68)
Transferred from subsidiaries -- -- 106 --
-----------------------------------------------------------------------------------------------------------------------
Balance at 30 June/31 December 892 892 414 309
-----------------------------------------------------------------------------------------------------------------------
The cost of inventories recognised as costs and expenses by the Group and
the Company amounted to RMB 416,500 million (2005: RMB 298,803 million) and
RMB 281,369 million (2005: RMB 218,070 million) for the six-month period
ended 30 June 2006, respectively.
55
10 LONG-TERM EQUITY INVESTMENTS
The Group
Unlisted Provision
stock and Equity for
Listed stock other equity investment impairment
investment investment differences losses Total
RMB millions RMB millions RMB millions RMB millions RMB millions
At 1 January 2006 823 11,647 2,003 (327) 14,146
Addition for the period -- 2,159 11,940 -- 14,099
Share of profits less losses from investments
accounted for under the equity method 19 428 -- -- 447
Long-term equity investments transferred
to a subsidiary (494) -- -- -- (494)
Dividends receivable/received -- (236) -- -- (236)
Disposal for the period -- (143) -- -- (143)
Amortisation for the period -- -- (394) -- (394)
Movement of provision for impairment losses -- -- -- (33) (33)
At 30 June 2006 348 13,855 13,549 (360) 27,392
The Company
Unlisted Provision
stock and Equity for
Listed stock other equity investment impairment
investment investment differences losses Total
RMB millions RMB millions RMB millions RMB millions RMB millions
At 1 January 2006 48,564 82,725 2,017 (103) 133,203
Addition for the period -- 12,669 11,927 -- 24,596
Reclassification (32,304) 32,304 -- -- --
Share of profits less losses from investments
accounted for under the equity method (654) 5,608 -- -- 4,954
Dividends receivable/received (430) (2,183) -- -- (2,613)
Disposal for the period -- (72) -- -- (72)
Acquired equity interests in subsidiaries (Note) -- (49,746) -- -- (49,746)
Amortisation for the period -- -- (395) -- (395)
Movement of provision for impairment losses -- -- -- (1) (1)
At 30 June 2006 15,176 81,305 13,549 (104) 109,926
Note: During the six-month period ended 30 June 2006, the Company acquired
all the assets and liabilities of Sinopec Shengli Oilfield Company
Limited and Sinopec Beijing Yanhua Petrochemical Company Limited
("Beijing Yanhua"). The above companies no longer existed as at 30
June 2006.
Provision for impairment losses is analysed as follows:
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Balance at 1 January 327 353 103 155
Addition for the period/year 41 77 4 14
Written back for the period/year -- (17) -- --
Written off (8) (86) (3) (66)
Balance at 30 June/31 December 360 327 104 103
At 30 June 2006 and 31 December 2005, the Group and the Company had no
individually significant long-term equity investments which had been
provided for.
Other equity investments represent the Group's interests in PRC domiciled
enterprises which are mainly engaged in non-oil and gas and chemical
activities and operations. This includes non-consolidated investments which
the Group has over 50% equity interest but the costs of investment are not
significant or the Group has no control on the entities. Stock investments
of the Company represent investments in subsidiaries, associates and
jointly controlled entities. Details of the Company's principal
subsidiaries are set out in Note 41.
56
10 LONG-TERM EQUITY INVESTMENTS (Continued)
At 30 June 2006, details of listed stock investment of the Group
(associates) are as follows:
Share of
Percentage profits
of equity accounted Market
Type of interest Initial Balance at for under Balance at price at
equity No. of held by investment 1 January the equity 30 June 30 June
Name of investee enterprise interest shares the Group cost 2006 method 2006 2006*
millions RMB millions RMB millions RMB millions RMB millions RMB millions
Sinopec Shandong Taishan Legal person
Petroleum Company Limited shares 186 38.68% 124 329 19 348 1,068
----------------------------------------------------------------------------------------------------------------------------------
* Information of market price is sourced from Shenzhen Stock Exchange.
At 30 June 2006, details of principal unlisted stock and other equity
investment of the Group (including associates) are as follows:
Share of
Percentage profits/(loss)
Initial of equity Balance at Addition accounted Dividends Balance
investment Investment interest 1 January for the for under the receivable/ at 30 June
Name of investee enterprise cost period held by 2006 period equity method received 2006
RMB millions the Group RMB millions RMB millions RMB millions RMB millions RMB millions
Sinopec Finance Company
Limited (i) (ii) 1,205 -- 49% 1,517 1,507 117 -- 3,141
China Aviation Oil Supply
Company Limited (ii) 1,102 -- 29% 1,102 -- -- -- 1,102
Shanghai Petroleum National
Gas Corporation (i) (ii) 300 -- 30% 958 -- 9 -- 967
Shanghai Chemical Industry
Park Development
Company Limited (ii) 608 30 years 38% 659 -- 3 -- 662
China Shipping & Sinopec Suppliers
Company Limited (ii) 438 -- 50% 509 -- 24 -- 533
Sinopec Changjiang Fuel
Company Limited (ii) 190 20 years 50% 253 -- 41 (32) 262
Hunan Highway Industrial Development
Company Limited (i) (ii) 215 -- 49% 221 -- 2 -- 223
Beijng International Trust
and Investment Company Limited 200 -- 8% 200 -- -- -- 200
Zhejiang Express Petroleum Development
Company Limited (i) (ii) 174 30 years 50% 177 -- (19) -- 158
China Gas Holdings Ltd 136 -- 11% 136 -- -- -- 136
Sinopec Railway Oil Marketing
Company Limited (ii) 74 20 years 50% 126 -- 21 (32) 115
(i)These entities are principal associates of the Company.
(ii) These entities are principal associates of the Group.
No provision for individually significant impairment losses or individually
significant equity investment difference was made for the long-term equity
investments as set out above.
At 30 June 2006, the Group's and the Company's proportion of the total
investments to the net assets was 12% (2005: 7%) and 48% (2005: 61%),
respectively.
At 30 June 2006, the Group's and the Company's equity investment
differences represent mainly the equity investment differences resulting
from the acquisitions of the equity interests of Beijing Yanhua, Sinopec
Zhenhai Refining and Chemical Company Limited, Sinopec Qilu Petrochemical
Company Limited, Sinopec Yangzi Petrochemical Company Limited, Sinopec
Zhongyuan Petroleum Company Limited and Sinopec Shengli Oilfield Dynamic
Company Limited. The equity investment differences are amortised on a
straight-line basis over 10 years. The carrying values of the equity
investment differences as at 30 June 2006 are RMB 12,497 million.
57
11 FIXED ASSETS
The Group - by segment
Exploration Marketing
and and
production Refining distribution Chemicals Others Total
RMB millions RMB millions RMB millions RMB millions RMB millions RMB millions
Cost/valuation:
At 1 January 2006 189,126 122,009 76,673 180,183 4,474 572,465
Addition for the period 14 92 168 181 161 616
Transferred from construction in progress 4,747 4,555 3,907 1,804 156 15,169
Acquisition of a subsidiary 2,071 -- -- -- -- 2,071
Reclassification -- 557 -- (557) -- --
Disposals (36) (96) (101) (199) (17) (449)
At 30 June 2006 195,922 127,117 80,647 181,412 4,774 589,872
Accumulated depreciation:
At 1 January 2006 94,741 61,160 13,476 94,685 1,549 265,611
Depreciation charge for the period 6,227 3,431 1,626 4,809 199 16,292
Acquisition of a subsidiary 592 -- -- -- -- 592
Reclassification -- 1,235 -- (1,235) -- --
Written back on disposal (16) (60) (44) (141) (8) (269)
At 30 June 2006 101,544 65,766 15,058 98,118 1,740 282,226
Net book value:
At 30 June 2006 94,378 61,351 65,589 83,294 3,034 307,646
At 31 December 2005 94,385 60,849 63,197 85,498 2,925 306,854
The Company - by segment
Exploration Marketing
and and
production Refining distribution Chemicals Others Total
RMB millions RMB millions RMB millions RMB millions RMB millions RMB millions
Cost/valuation:
At 1 January 2006 72,478 91,960 67,548 58,840 3,380 294,206
Addition for the period 14 90 163 6 117 390
Transferred from construction in progress 4,484 3,890 3,107 689 124 12,294
Transferred from subsidiaries 107,948 1,548 -- 15,656 -- 125,152
Transferred to subsidiaries -- -- (239) -- -- (239)
Reclassification -- (709) -- 709 -- --
Disposals (5) (92) (86) (16) (12) (211)
At 30 June 2006 184,919 96,687 70,493 75,884 3,609 431,592
Accumulated depreciation:
At 1 January 2006 29,346 46,261 12,809 34,263 1,068 123,747
Depreciation charge for the period 5,879 2,576 1,472 1,980 108 12,015
Transferred from subsidiaries 60,961 759 -- 9,262 -- 70,982
Transferred to subsidiaries -- -- (64) -- -- (64)
Reclassification -- (3) -- 3 -- --
Written back on disposal (4) (56) (40) (14) (6) (120)
At 30 June 2006 96,182 49,537 14,177 45,494 1,170 206,560
Net book value:
At 30 June 2006 88,737 47,150 56,316 30,390 2,439 225,032
At 31 December 2005 43,132 45,699 54,739 24,577 2,312 170,459
58
11 FIXED ASSETS (Continued)
The Group - by asset class
Plant,
Oil depots, machinery,
Oil storage tanks equipment,
Land and and gas and service vehicles and
buildings properties stations others Total
RMB millions RMB millions RMB millions RMB millions RMB millions
Cost/valuation:
At 1 January 2006 49,318 169,941 72,217 280,989 572,465
Addition for the period 243 -- 136 237 616
Transferred from construction in progress 345 4,653 5,632 4,539 15,169
Acquisition of a subsidiary 519 1,313 -- 239 2,071
Reclassification 1,415 1 (1,238) (178) --
Disposals (102) (3) (41) (303) (449)
At 30 June 2006 51,738 175,905 76,706 285,523 589,872
Accumulated depreciation:
At 1 January 2006 21,130 85,896 12,738 145,847 265,611
Depreciation charge for the period 925 5,876 1,634 7,857 16,292
Acquisition of a subsidiary 49 468 -- 75 592
Reclassification 179 2 (278) 97 --
Written back on disposal (36) (3) (19) (211) (269)
At 30 June 2006 22,247 92,239 14,075 153,665 282,226
Net book value:
At 30 June 2006 29,491 83,666 62,631 131,858 307,646
At 31 December 2005 28,188 84,045 59,479 135,142 306,854
The Company - by asset class
Plant,
Oil depots, machinery,
Oil storage tanks equipment,
Land and and gas and service vehicles and
buildings properties stations others Total
RMB millions RMB millions RMB millions RMB millions RMB millions
Cost/valuation:
At 1 January 2006 25,278 64,142 64,056 140,730 294,206
Addition for the period 81 -- 100 209 390
Transferred from construction in progress 187 4,442 4,825 2,840 12,294
Transferred from subsidiaries 3,261 101,287 -- 20,604 125,152
Transferred to subsidiaries -- -- (239) -- (239)
Reclassification (1,271) 1 2,025 (755) --
Disposals (17) (3) (34) (157) (211)
At 30 June 2006 27,519 169,869 70,733 163,471 431,592
Accumulated depreciation:
At 1 January 2006 10,329 27,358 11,943 74,117 123,747
Depreciation charge for the period 471 5,596 1,447 4,501 12,015
Transferred from subsidiaries 1,054 55,576 -- 14,352 70,982
Transferred to subsidiaries -- -- (64) -- (64)
Reclassification (271) 2 710 (441) --
Written back on disposal (8) (3) (16) (93) (120)
At 30 June 2006 11,575 88,529 14,020 92,436 206,560
Net book value:
At 30 June 2006 15,944 81,340 56,713 71,035 225,032-
At 31 December 2005 14,949 36,784 52,113 66,613 170,459
The fixed assets and construction in progress of the Group at 30 September
1999 were revalued by registered valuers in the PRC. The valuation was
reviewed and approved by the MOF (Note 1). Surplus on revaluation was RMB
29,093 million and deficit on revaluation was RMB 3,210 million. A net
surplus on revaluation of RMB 25,883 million was resulted which has been
incorporated in the Group's financial statements since the year ended 31
December 1999.
In accordance with the relevant rules and regulations in respect of the
acquisition of Sinopec National Star, the fixed assets and construction in
progress of Sinopec National Star have been revalued by a firm of
independent valuers in the PRC. Surplus on revaluation of RMB 541 million
has been incorporated in the Group's financial statements since the year
ended 31 December 2001.
In accordance with the relevant rules and regulations in respect of the
Acquisition of Ethylene Assets, the fixed assets and construction in
progress of Sinopec Maoming have been revalued by a firm of independent
valuers in the PRC. Deficit on revaluation of RMB 86 million has been
incorporated in the Group's financial statements since the year ended 31
December 2003.
59
11 FIXED ASSETS (Continued)
In accordance with the relevant rules and regulations in respect of the
Acquisition of Refining Assets, the fixed assets and construction in
progress of Tahe Petrochemical and Xi'an Petrochemical have been revalued
by a firm of independent valuers in the PRC. Surplus on revaluation of RMB
82 million has been incorporated in the Group's financial statements since
the year ended 31 December 2003.
In accordance with the relevant rules and regulations in respect of the
Acquisition of Acquired Assets, the related fixed assets and construction
in progress have been revalued by a firm of independent valuers in the PRC.
Surplus on revaluation of RMB 492 million has been incorporated in the
Group's financial statements since the year ended 31 December 2004.
At 30 June 2006, the carrying amounts of fixed assets that were pledged by
the Group and the Company were RMB 109 million (2005: RMB 83 million) and
RMB nil (2005: RMB 10 million), respectively.
Provision for impairment losses on fixed assets is analysed as follows:
The Group - by segment
Exploration Marketing
and and
production Refining distribution Chemicals Total
RMB millions RMB millions RMB millions RMB millions RMB millions
At 1 January 2006 843 11 1,270 4,110 6,234
Addition for the period -- -- 5 29 34
Written off for the period -- -- (1) -- (1)
At 30 June 2006 843 11 1,274 4,139 6,267
The Company - by segment
Exploration Marketing
and and
production Refining distribution Chemicals Total
RMB millions RMB millions RMB millions RMB millions RMB millions
At 1 January 2006 780 11 1,241 2,159 4,191
Written off for the period -- -- (1) -- (1)
At 30 June 2006 780 11 1,245 2,159 4,195
The Group - by asset class
Plant,
Oil depots, machinery,
storage tanks equipment,
Land and Oil and gas and service vehicles
buildings properties stations and others Total
RMB millions RMB millions RMB millions RMB millions RMB millions
At 1 January 2006 351 843 917 4,123 6,234
Addition for the period 29 -- 5 -- 34
Reclassification (28) -- 149 (121) --
Written off for the period -- -- (1) -- (1)
At 30 June 2006 352 843 1,070 4,002 6,267
The Company - by asset class
Plant,
Oil depots, machinery,
storage tanks equipment,
Land and Oil and gas and service vehicles
buildings properties stations and others Total
RMB millions RMB millions RMB millions RMB millions RMB millions
At 1 January 2006 154 780 935 2,322 4,191
Addition for the period -- -- 5 -- 5
Reclassification 21 -- (22) 1 --
Written off for the period -- -- (1) -- (1)
At 30 June 2006 175 780 917 2,323 4,195
Provision for impairment losses recognised on fixed assets of the Chemicals
Segment of the Group of RMB 29 million (2005: RMB 392 million) for the
six-month period ended 30 June 2006 relate to certain chemicals production
facilities that are held for use. The carrying values of these facilities
were written down to their recoverable amounts that were determined based
on the appraised value of the production facilities. The primary factor
resulting in the provision for impairment losses of the Chemicals Segment
was due to higher operating and production costs caused by the increase in
the prices of raw materials that are not expected to be recovered through
an increase in selling price.
60
11 FIXED ASSETS (Continued)
Provision for impairment losses recognised on fixed assets of the Marketing
and Distribution Segment of the Group of RMB 5 million (2005: RMB 5
million) for the six-month period ended 30 June 2006 primarily relate to
certain service stations that were closed during the period. In measuring
the amounts of impairment charges, the carrying amounts of these assets
were compared to the present value of the expected future cash flows of the
assets, as well as information about sales and purchases of similar
properties in the same geographic area.
At 30 June 2006 and 31 December 2005, the Group and the Company had no
individually significant fixed assets which were temporarily idle or
pending for disposal.
At 30 June 2006 and 31 December 2005, the Group and the Company had no
individually significant fully depreciated fixed assets which were still in
use.
12 CONSTRUCTION MATERIALS
At 30 June 2006 and 31 December 2005, the Group's and the Company's
construction materials mainly represent the actual cost of materials such
as steel and copper to be used for construction projects.
13 CONSTRUCTION IN PROGRESS
The Group
Exploration Marketing
and and
production Refining distribution Chemicals Others Total
RMB millions RMB millions RMB millions RMB million RMB millions RMB millions
At 1 January 2006 10,884 14,185 9,956 10,902 2,146 48,073
Addition for the period 13,060 4,956 6,347 5,622 879 30,864
Addition for the period of jointly
controlled entities 73 -- -- 96 -- 169
Acquisition of a subsidiary 89 -- -- -- -- 89
Dry hole costs written off (1,398) -- -- -- -- (1,398)
Transferred to fixed assets (4,747) (4,555) (3,907) (1,804) (156) (15,169)
At 30 June 2006 17,961 14,586 12,396 14,816 2,869 62,628
The interest rates per annum at which borrowing costs were capitalised
during the six-month period ended 30 June 2006 by the Group ranged from
3.6% to 5.9% (2005: 3.3% to 6.6%).
The Group's proportionate share of the jointly controlled entities'
construction in progress at 30 June 2006 in the exploration and production
and the Chemicals Segments were RMB 2,961 million (2005: RMB 2,888 million)
and RMB 592 million (2005: RMB 504 million), respectively.
At 30 June 2006, major construction projects of the Group are as follows:
Accumulated
interest
At Addition/ At capitalised at
Budgeted 1 January (decrease) 30 June Percentage of Source of 30 June
Project name amount 2006 for the period 2006 completion funding 2006
RMB millions RMB millions RMB millions RMB millions RMB millions
The Group
1,000,000 tonnes Ethylene Bank loans &
Reconstruction and Expansion Project 7,494 2,517 2,358 4,875 65% self-financing 78
Middle East Sour Crude Processing
and Clean Fuel Production Bank loans &
Supporting Project 4,438 2,450 1,333 3,783 85% self-financing 25
Yizheng-Changling Crude Oil Bank loans &
Pipeline Project 4,820 3,887 (1,825) 2,062 84% self-financing 46
Bank loans &
10,000,000 tonnes Refinery Plant Reform 2,521 1,029 567 1,596 63% self-financing 27
Chaoyang Square Project 2,800 1,106 288 1,394 50% Self-financing --
61
13 CONSTRUCTION IN PROGRESS (Continued)
The Company
Exploration Marketing
and and
production Refining distribution Chemicals Others Total
RMB millions RMB millions RMB millions RMB million RMB millions RMB millions
At 1 January 2006 7,651 13,202 8,353 7,693 2,038 38,937
Addition for the period 12,699 3,640 5,073 4,228 537 26,177
Transferred from subsidiaries 927 -- -- 237 -- 1,164
Dry hole costs written off (1,398) -- -- -- -- (1,398)
Transferred to fixed assets (4,484) (3,890) (3,107) (689) (124) (12,294)
At 30 June 2006 15,395 12,952 10,319 11,469 2,451 52,586
The interest rates per annum at which borrowing costs were capitalised for
the six-month period ended 30 June 2006 by the Company ranged from 3.6% to
5.9% (2005: 3.3% to 6.6%).
14 INTANGIBLE ASSETS
The Group
Exploration
Computer and
software Technical production
license know-how right Others Total
RMB millions RMB millions RMB millions RMB millions RMB millions
Cost:
At 1 January 2006 1,033 2,946 3,163 1,316 8,458
Addition for the period 6 86 -- 160 252
At 30 June 2006 1,039 3,032 3,163 1,476 8,710
Accumulated Amortisation:
At 1 January 2006 673 1,156 585 120 2,534
Amortisation charge for the period 34 141 58 108 341
At 30 June 2006 707 1,297 643 228 2,875
Net book value:
At 30 June 2006 332 1,735 2,520 1,248 5,835
At 31 December 2005 360 1,790 2,578 1,196 5,924
Except for the exploration and production right, the above intangible
assets were acquired from third parties. The Company acquired Sinopec
National Star together with the exploration and production right from
Sinopec Group Company. The exploration and production right was valued with
reference to the proved reserves of the associated oil fields. The
amortisation period of the exploration and production right was 27 years.
The amortisation periods of other intangible assets range from 4 to 40
years. At 30 June 2006, the remaining amortisation period of the
exploration and production right was 21.5 years.
The Company
Exploration
Computer and
software Technical production
license know-how right Others Total
RMB millions RMB millions RMB millions RMB millions RMB millions
Cost:
At 1 January 2006 825 1,318 3,163 971 6,277
Addition for the period 6 50 -- 54 110
Transferred from subsidiaries -- 208 -- -- 208
At 30 June 2006 831 1,576 3,163 1,025 6,595
Accumulated Amortisation:
At 1 January 2006 586 803 585 65 2,039
Amortisation charge for the period 20 80 58 29 187
Transferred from subsidiaries -- 62 -- -- 62
At 30 June 2006 606 945 643 94 2,288
Net book value:
At 30 June 2006 225 631 2,520 931 4,307
At 31 December 2005 239 515 2,578 906 4,238
Except for the exploration and production right, the above intangible
assets were acquired from third parties. The Company acquired Sinopec
National Star together with the exploration and production right from
Sinopec Group Company. The exploration and production right was valued with
reference to the proved reserves of the associated oil fields. The
amortisation period of the exploration and production right was 27 years.
The amortisation periods of other intangible assets range from 4 to 40
years. At 30 June 2006, the remaining amortisation period of the
exploration and production right was 21.5 years.
62
15 LONG-TERM DEFERRED EXPENSES
Long-term deferred expenses primarily represent prepaid rental expenses
over one year and catalysts expenditures.
16 DEFERRED TAX ASSETS AND LIABILITIES
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Current
Receivables and inventories 4,116 3,900 3,929 1,635
Non-current
Fixed assets 1,557 1,642 1,463 1,553
Tax value of losses 97 128 -- --
Others 26 31 16 15
Deferred tax assets 5,796 5,701 5,408 3,203
17 SHORT-TERM LOANS
The Group's and the Company's short-term loans represent:
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Short-term bank loans 39,664 15,392 28,223 3,094
Loans from Sinopec Group Company and
fellow subsidiaries 7,121 732 7,476 3,846
Total 46,785 16,124 35,699 6,940
The Group's and the Company's weighted average interest rates per annum on
short-term loans were 4.9% (2005: 4.0%) and 4.8% (2005: 3.2%) respectively
at 30 June 2006. The majority of the above loans are unsecured.
Except for the balance disclosed in Note 40, there is no amount due to
shareholders who hold 5% or more voting right of the Company included in
the balance of short-term loans.
At 30 June 2006 and 31 December 2005, the Group and the Company had no
significant overdue short-term loan.
18 BILLS PAYABLE
Bills payable primarily represents bank accepted bills for the purchase of
material, goods and products. The repayment term is normally from three to
six months.
19 TRADE ACCOUNTS PAYABLE
The ageing analysis of trade accounts payable is as follows:
The Group
At 30 June 2006 At 31 December 2005
RMB millions % RMB millions %
Within 3 months 41,549 82.1 40,932 77.3
Between 3 and 6 months 7,212 14.2 10,542 19.9
Over 6 months 1,875 3.7 1,493 2.8
Total 50,636 100.0 52,967 100.0
The Company
At 30 June 2006 At 31 December 2005
RMB millions % RMB millions %
Within 3 months 27,350 79.1 22,129 76.7
Between 3 and 6 months 5,650 16.4 5,792 20.1
Over 6 months 1,565 4.5 912 3.2
Total 34,565 100.0 28,833 100.0
Except for the balances disclosed in Note 40, there is no amount due to
shareholders who hold 5% or more voting right of the Company included in
the balance of trade accounts payable.
At 30 June 2006 and 31 December 2005, the Group and the Company had no
individually significant trade accounts payable aged over three years.
63
20 RECEIPTS IN ADVANCE
Except for the balances disclosed in Note 40, there is no amount due to
shareholders who hold 5% or more voting right of the Company included in
the balance of receipts in advance.
At 30 June 2006 and 31 December 2005, the Group and the Company had no
individually significant receipts in advance aged over one year.
21 TAXES PAYABLE
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Value added tax (2,019) (2,240) (1,916) (1,796)
Consumption tax 1,211 1,348 938 1,031
Income tax 3,934 5,029 2,252 2,494
Business tax 44 45 35 25
Other taxes 935 1,080 753 321
Total 4,105 5,262 2,062 2,075
The provision for PRC current income tax is based on a statutory rate of
33% of the assessable income of the Group and the Company as determined in
accordance with the relevant tax rules and regulations of the PRC during
the six-month period ended 30 June 2006 and year ended 31 December 2005,
except for certain branches and subsidiaries of the Company, which are
taxed at a preferential rate of 15%, and certain jointly controlled
entities of the Company, which are entitled to a tax holiday of a tax-free
period for the first two years and a 50% reduction in income tax for the
following three years.
22 OTHER PAYABLES
At 30 June 2006 and 31 December 2005, the Group's and the Company's other
payables primarily represent payables for special oil income levy,
resources compensation fee and education surcharge.
23 OTHER CREDITORS
At 30 June 2006 and 31 December 2005, the Group's and the Company's other
creditors primarily represent payables for constructions.
Except for the balances disclosed in Note 40, there is no amount due to
shareholders who hold 5% or more voting right of the Company included in
the balance of other creditors.
At 30 June 2006 and 31 December 2005, the Group and the Company had no
individually significant other creditors aged over three years.
24 ACCRUED EXPENSES
At 30 June 2006 and 31 December 2005, the Group's and the Company's accrued
expenses primarily represent accrued interest expenses, repair and
maintenance expenses, research and development expenses and other
production expenses.
25 CURRENT PORTION OF LONG-TERM LOANS
The Group's and the Company's current portion of long-term loans represent:
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Long-term bank loans-
- Renminbi loans 12,243 11,952 11,675 9,694
- Japanese Yen loans 611 615 611 615
- US Dollar loans 1,438 2,206 469 1,710
- Euro loans 23 24 23 24
- Hong Kong Dollar loans 48 82 -- --
14,363 14,879 12,778 12,043
Long-term bank loans of jointly controlled entities
- Renminbi loans 112 82 -- --
- US Dollar loans 141 111 -- --
253 193 -- --
Long-term other loans
- Renminbi loans 26 22 4 --
- US Dollar loans 2 4 2 1
28 26 6 1
Long-term loans from
Sinopec Group Company and fellow subsidiaries
- Renminbi loans 174 100 174 100
Total current portion of long-term loans 14,818 15,198 12,958 12,144
At 30 June 2006 and 31 December 2005, the Group and the Company had no
significant overdue long-term loan.
64
26 LONG-TERM LOANS
The Group's and the Company's long-term loans represent:
The Group The Company
At 30 June At 31 December At 30 June At 31 December
Interest rate and final maturity 2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Third parties debts
Long-term bank loans
Renminbi loans Interest rates ranging from interest free
to 6.3% per annum at 30 June 2006
with maturities through 2013 63,409 59,769 60,075 54,792
Japanese Yen loans Interest rates ranging from 2.6%
to 5.8% per annum at 30 June 2006
with maturities through 2024 3,096 3,394 3,096 3,394
US Dollar loans Interest rates ranging from interest free
to 7.4% per annum at 30 June 2006
with maturities through 2031 2,816 5,056 1,440 3,571
Euro loans Fixed rate at 6.7% per annum
at 30 June 2006 with
maturities through 2010 104 117 104 117
Hong Kong Dollar loans Floating rate at Hong Kong
Prime Rate plus 0.8% to 1.1% per annum at 30
June 2006
with maturities through 2007 48 94 -- --
Less: Current portion 14,363 14,879 12,778 12,043
Long-term bank loans 55,110 53,551 51,937 49,831
Long-term bank loans of jointly controlled entities
Renminbi loans Floating rate at 90% of PBOC's base
lending rate per annum at 30 June 2006
with maturities through 2021 5,580 5,710 -- --
US Dollar loans Floating rate at London Interbank
Offer Rate plus 0.4% to 0.7% per annum at 30
June 2006 with
maturities through 2021 4,198 4,296 -- --
Less: Current portion 253 193 -- --
Long-term bank loans of jointly controlled entities 9,525 9,813 -- --
Other long-term loans
Renminbi loans Interest rates ranging from interest free
to 5.0% per annum at 30 June 2006
with maturities through 2008 124 170 23 37
US Dollar loans Interest rates ranging from interest free
to 2.0% per annum at 30 June 2006
with maturities through 2015 48 51 33 34
Less: Current portion 28 26 6 1
Other long-term loans 144 195 50 70
Long-term loans from Sinopec Group Company and fellow subsidiaries
Renminbi loans Interest rates ranging from interest free to
5.4% per annum at 30 June 2006 with
maturities through 2020 39,554 39,962 39,354 39,312
Less: Current portion 174 100 174 100
Long-term loans from Sinopec Group Company and fellow subsidiaries 39,380 39,862 39,180 39,212
Long-term loans of jointly controlled entities from
Sinopec Group Company and fellow subsidiaries
-
Renminbi loans Floating rate at 90% of PBOC's base
lending rate applicable to three-year tenor
loan per annum at 30 June 2006
with maturities through 2021 73 71 -- --
Long-term loans of jointly controlled entities from Sinopec Group
Company and fellow subsidiaries 73 71 -- --
104,232 103,492 91,167 89,113
65
26 LONG-TERM LOANS (Continued)
The maturity analysis of the Group's and the Company's long-term loans is
as follows:
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Between one and two years 24,619 18,787 22,881 16,420
Between two and five years 32,746 39,142 27,616 34,771
After five years 46,867 45,563 40,670 37,922
Total long-term loans 104,232 103,492 91,167 89,113
At 30 June 2006, the Group and the Company had secured loans from third
parties amounting to RMB 62 million (2005: RMB 35 million) and RMB nil
(2005: RMB 13 million) respectively. At 30 June 2006, the Group had loans
secured by long-term investments from third parties amounting to RMB 3,722
million (2005: RMB 3,899 million). All long-term other loans are unsecured.
Except for the balances disclosed in Note 40, there is no amount due to
shareholders who hold 5% or more voting right of the Company included in
the balance of long-term loans.
27 DEBENTURES PAYABLE
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Short-term corporate bonds (i) 10,891 9,921 9,900 9,921
Corporate bonds (ii) 3,500 3,500 3,500 3,500
(i)The Company issued six-month corporate bonds with a face value at RMB 10
billion to corporate investors in PRC debenture market on 24 October
2005, at a discounted value of RMB 98.75 per RMB 100 par value. The
effective yield of the bonds was 2.54% per annum. The Company redeemed
the bonds at face value in April 2006.
A subsidiary of the Company issued 270-day corporate bonds with a face
value at RMB 1 billion to corporate investors in PRC debenture market on
23 February 2006, at a discounted value of RMB 97.78 per RMB 100 par
value. The bonds have an effective yield of 3.07% per annum and mature
in November 2006.
The Company issued 183-day corporate bonds with a face value at RMB 10
billion to corporate investors in PRC debenture market on 16 May 2006,
at a discounted value of RMB 98.68 per RMB 100 par value. The bonds have
an effective yield of 2.67% per annum and mature in November 2006.
(ii) The Company issued ten-year corporate bonds of RMB 3.5 billion to PRC
citizens as well as PRC legal and non-legal persons on 24 February 2004
with a fixed interest rate at 4.61% per annum and annual interest
payment schedule. Interest payable for the current period was included
in accrued expenses.
28 OTHER LONG-TERM LIABILITIES
Other long-term liabilities primarily represent provision for future
dismantlement of oil and gas properties, the costs arising from
environmental restoration and payables for specific research and
development projects.
29 SHARE CAPITAL
The Group and the Company
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Registered, issued and fully paid:
67,121,951,000 domestic state-owned A shares of RMB 1.00 each 67,122 67,122
16,780,488,000 H shares of RMB 1.00 each 16,780 16,780
2,800,000,000 A shares of RMB 1.00 each 2,800 2,800
86,702 86,702
The Company was established on 25 February 2000 with a registered capital
of 68.8 billion state-owned domestic shares with a par value of RMB 1.00
each, which were all held by Sinopec Group Company (see Note 1).
Pursuant to the resolutions passed in the Extraordinary General Meeting of
the Company held on 25 July 2000 and the approval from relevant
authorities, the Company issued 15,102,439,000 H shares with a par value of
RMB 1.00 each in its initial global offering in October 2000. The shares
include 12,521,864,000 H shares and 25,805,750 American Depositary Shares
("ADSs", each representing 100 H shares) at prices of HK$ 1.59 and US$
20.645 respectively. As part of the offering, 1,678,049,000 shares were
offered in placing to Hong Kong and overseas investors.
In July 2001, the Company issued 2,800,000,000 domestic listed A shares
with a par value of RMB 1.00 each at RMB 4.22.
All the domestic ordinary shares and H shares rank pari passu in all
material aspects.
KPMG Huazhen had verified the above paid-in capital. The capital
verification reports, KPMG-C (2000) CV No. 0007, KPMG-C (2001) CV No. 0002
and KPMG-C (2001) CV No. 0006 were issued on 22 February 2000, 27 February
2001 and 23 July 2001 respectively.
66
30 CAPITAL RESERVE
The movements in capital reserve are as follows:
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Capital reserve 37,121 37,121 37,797 37,797
--------------------------------------------------------------------------------------------------------------------------------
The capital reserve represents mainly: (i) the difference between the total
amount of the par value of shares issued and the amount of the net assets
transferred from Sinopec Group Company in connection with the
Reorganisation; and (ii) share premiums, representing the excess of cash
paid by investors over their proportionate shares in share capital in
connection with the issuances of H shares and A shares by the Company.
31 SURPLUS RESERVES
Movements in surplus reserves are as follows:
The Group and the Company
Statutory Statutory Discretionary
surplus public surplus
reserve welfare fund reserve Total
RMB millions RMB millions RMB millions RMB millions
At 1 January 2005 9,558 9,558 7,000 26,116
Appropriation of net profit 3,956 3,956 -- 7,912
At 31 December 2005 13,514 13,514 7,000 34,028
At 1 January 2006 13,514 13,514 7,000 34,028
Appropriation of net profit 2,068 -- -- 2,068
Statutory public welfare fund transferred
to statutory surplus reserve (Note) 13,514 (13,514) -- --
At 30 June 2006 29,096 -- 7,000 36,096
The Articles of Association of the Company and the following profit
appropriation plans had been approved at the Extraordinary General Meeting
held on 25 July 2000:
(a) 10% of the net profit is transferred to the statutory surplus reserve;
(b) 5% to 10% of the net profit is transferred to the statutory public
welfare fund; and
(c) after the transfer to the statutory surplus reserve and the statutory
public welfare fund, a transfer to discretionary surplus reserve can be
made upon the passing of a resolution at the shareholders' meeting.
Note: According to the Company Law of the PRC which was revised on 27
October 2005, the Company is no longer required to make profit
appropriation to the statutory public welfare fund commencing from 1
January 2006. Pursuant to the notice "Cai Qi [2006] No. 67" issued by
the MOF, the balance of this fund as at 31 December 2005 was
transferred to the statutory surplus reserve.
32 INCOME FROM PRINCIPAL OPERATIONS
The income from principal operations represents revenue from sales of crude
oil, natural gas, petroleum and chemical products net of value added tax.
The Group's segmental information is set out in Note 45.
For the six-month period ended 30 June 2006, revenue from sales to top five
customers amounted to RMB 37,239 million (2005: RMB 26,877 million) which
accounted for 8% (2005: 7%) of income from principal operations of the
Group.
33 SALES TAXES AND SURCHARGES
The Group The Company
Six-month periods Six-month periods
ended 30 June ended 30 June
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Consumption tax 6,644 5,906 4,948 4,278
Special oil income levy 3,652 -- 3,554 --
City construction tax 1,409 1,332 1,109 652
Education surcharge 694 649 535 325
Resources tax 407 221 394 58
Business tax 112 96 86 73
Total 12,918 8,204 10,626 5,386
67
34 FINANCIAL EXPENSES
The Group The Company
Six-month periods Six-month periods
ended 30 June ended 30 June
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Interest expenses incurred 4,176 3,399 2,907 2,195
Less: Capitalised interest expenses (254) (268) (209) (172)
Net interest expenses 3,922 3,131 2,698 2,023
Interest income (250) (168) (120) (57)
Foreign exchange losses 52 40 39 17
Foreign exchange gains (202) (151) (75) (131)
Total 3,522 2,852 2,542 1,852
35 EXPLORATION EXPENSES
Exploration expenses include geological and geophysical expenses and
written off of dry hole costs.
36 INVESTMENT INCOME/(LOSS)
The Group The Company
Six-month periods Six-month periods
ended 30 June ended 30 June
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Investment income accounted for under the cost method 172 97 12 17
Amortisation of equity investment differences (394) (1,169) (395) (1,170)
Impairment losses of investment (41) (35) (4) --
Investment income accounted for under the equity method 447 365 7,232 22,087
Total 184 (742) 6,845 20,934
37 NON-OPERATING EXPENSES
The Group The Company
Six-month periods Six-month periods
ended 30 June ended 30 June
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Loss on disposal of fixed assets 43 109 24 88
Impairment losses on fixed assets 34 397 5 5
Fines, penalties and compensation 37 111 33 107
Donations 40 128 31 105
Employee reduction expenses (Note) 48 100 17 --
Others 472 264 358 127
Total 674 1,109 468 432
Note: During the six-month period ended 30 June 2006, in accordance with the
Group's voluntary employee reduction plan, the Group recorded employee
reduction expenses of RMB 48 million (2005: RMB 100 million) relating
to the reduction of approximately 1,000 employees (2005: 1,800
employees).
38 INCOME TAX
The Group The Company
Six-month periods Six-month periods
ended 30 June ended 30 June
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Provision for PRC income tax for the period 9,819 9,438 9,851 6,865
Deferred taxation (95) (747) (139) 1,317
Adjustment for provision for income tax
in respect of proceeding year 240 477 240 512
Total 9,964 9,168 9,952 8,694
39 DIVIDENDS
(a)Dividends of ordinary shares declared after the balance sheet date
Pursuant to the Articles of Association of the Company and the
resolution passed at the Board of Directors' meeting on 25 August 2006,
an interim dividend for the year ending 31 December 2006 of RMB 0.04
(2005: RMB0.04) per share totalling RMB 3,468 million (2005: RMB3,468
million) was declared.
(b)Dividends of ordinary shares declared during the period
Pursuant to the shareholders' approval at the Annual General Meeting on
24 May 2006, a final dividend of RMB 0.09 per share totalling RMB 7,803
million in respect of the year ended 31 December 2005 was declared and
paid on 30 June 2006.
Pursuant to the shareholders' approval at the Annual General Meeting on
18 May 2005, a final dividend of RMB 0.08 per share totalling RMB 6,936
million in respect of the year ended 31 December 2004 was declared and
paid on 27 June 2005.
68
40 RELATED PARTIES AND RELATED PARTY TRANSACTIONS
(a)Related parties having the ability to exercise control over the Group
The name of the company : China Petrochemical Corporation
Registered address : No. 6A, Huixin East Street,
Chaoyang District, Beijing
Principal activities : Processing crude
oil into refined products and
petrochemical products,
petrochemical products which
include: petrochemical
products made from crude oil
and natural gas; production,
sale and import and export of
synthetic fibre and synthetic
fibre monomer.
Relationship with the Group : Ultimate holding company
Types of legal entity : State-owned
Authorised representative : Chen Tonghai
Registered capital : RMB 104,912 million
There is no movement in the above registered capital for the period
ended 30 June 2006.
At 30 June 2006, Sinopec Group Company held 71.23% shares of the Company
and there is no change on percentage shareholding during this reporting
period.
(b)Related parties not having the ability to exercise control over the Group
Related parties under common control of a parent company with the
Company: Sinopec Finance Company Limited Qingdao Petrochemical Company
Sinopec Shengli Petroleum Administration Bureau Guangdong Nanhua
Petroleum Company Limited Zhanjiang Dongxing Petroleum Corporation
Company Limited Jinling Petrochemical Company Limited Baling
Petrochemical Company Limited Sinopec Zhongyuan Petroleum Exploration
Bureau
Associates of the Company:
Sinopec Railway Oil Marketing Company Limited
Sinopec Changjiang Fuel Company Limited
China Shipping & Sinopec Suppliers Company Limited
Jointly controlled entities of the Group:
Shanghai Secco Petrochemical Company Limited
BASF-YPC Company Limited
Yueyang Sinopec and Shell Coal Gasification Company Limited
Block A Oil Field in the Western Area Chengdao in Bohai Bay
(c)The principal related party transactions carried out in the ordinary
course of business are as follows:
Six-month periods ended 30 June
Note 2006 2005
RMB millions RMB millions
Sales of goods (i) 54,716 36,976
Purchases (ii) 30,243 20,134
Transportation and storage (iii) 777 893
Exploration and development services (iv) 9,490 7,692
Production related services (v) 4,795 3,757
Ancillary and social services (vi) 842 912
Operating lease charges (vii) 1,715 1,565
Agency commission income (viii) 33 29
Intellectual property license fee paid (ix) -- 9
Interest received (x) 21 21
Interest paid (xi) 487 507
Net deposits withdrawn from related parties (xii) 3,483 2,874
Net loans obtained from/(paid to) related parties (xiii) 5,983 (3,325)
The amounts set out in the table above in respect of the six-month
periods ended 30 June 2006 and 2005 represent the relevant costs to the
Group and income from related parties as determined by the corresponding
contracts with the related parties.
At 30 June 2006 and 31 December 2005, there were no guarantees given to
banks by the Group in respect of banking facilities to Sinopec Group
Company and fellow subsidiaries.
The directors of the Company are of the opinion that the above
transactions with related parties were conducted in the ordinary course
of business and on normal commercial terms or in accordance with the
agreements governing such transactions.
69
40 RELATED PARTIES AND RELATED PARTY TRANSACTIONS (Continued)
Notes:
(i) Sales of goods represent the sale of crude oil, intermediate
petrochemical products, petroleum products and ancillary
materials.
(ii) Purchases represent the purchase of material and utility supplies
directly related to the Group's operations such as the
procurement of raw and ancillary materials and related services,
supply of water, electricity and gas.
(iii) Transportation and storage represent the cost for the use of
railway, road and marine transportation services, pipelines,
loading, unloading and storage facilities.
(iv) Exploration and development services comprise direct costs
incurred in the exploration of crude oil such as geophysical,
drilling, well testing and well measurement services.
(v) Production related services represent ancillary services rendered
in relation to the Group's operations such as equipment repair
and general maintenance, insurance premium, technical research,
communications, fire fighting, security, product quality testing
and analysis, information technology, design and engineering,
construction which includes the construction of oilfield ground
facilities, refineries and chemical plants, manufacture of
replacement parts and machinery, installation, project management
and environmental protection.
(vi) Ancillary and social services represent expenditures for social
welfare and support services such as educational facilities,
media communication services, sanitation, accommodation,
canteens, property maintenance and management services.
(vii) Operating lease charges represent the rental paid to Sinopec
Group Company for operating leases in respect of land, buildings
and equipments.
(viii) Agency commission income represents commission earned for acting
as an agent in respect of sales of products and purchase of goods
of certain entities owned by Sinopec Group Company.
(ix) Intellectual property license fee represents reimbursement paid
to Sinopec Group Company for fees required to maintain the
validity of certain licenses for trademarks, patents, technology
and computer software.
(x)Interest received represents interest received from deposits placed
with Sinopec Finance Company Limited, a finance company
controlled by Sinopec Group Company. The applicable interest rate
is determined in accordance with the prevailing saving deposit
rate.
(xi) Interest paid represents interest charges on the loans obtained
from Sinopec Group Company and Sinopec Finance Company Limited.
(xii) Deposits withdrawn from related parties represent net deposits
withdrawn from Sinopec Finance Company Limited.
(xiii) The Group obtained/repaid loans from/to Sinopec Group Company and
Sinopec Finance Company Limited. The calculated periodic balance
of average loan for the six-month period ended 30 June 2006,
which is based on monthly average balances, was RMB 44,240
million (2005: RMB 42,518 million).
In connection with the Reorganisation, the Company and Sinopec Group
Company entered into a number of agreements under which 1) Sinopec Group
Company will provide goods and products and a range of ancillary, social
and supporting services to the Group and 2) the Group will sell certain
goods to Sinopec Group Company. These agreements impacted the operating
results of the Group for the period ended 30 June 2006. The terms of
these agreements are summarised as follows:
(a) The Company entered into an Agreement for Mutual Provision of
Products and Ancillary Services ("Mutual Provision Agreement")
with Sinopec Group Company in which Sinopec Group Company has
agreed to provide the Group with certain ancillary production
services, construction services, information advisory services,
supply services and other services and products. While each of
Sinopec Group Company and the Company is permitted to terminate
the Mutual Provision Agreement upon at least six months' notice,
Sinopec Group Company agrees not to terminate the agreement if
the Group is unable to obtain comparable services from a third
party. The pricing policy for these services and products
provided by Sinopec Group Company to the Group is as follows:
o the government-prescribed price;
o where there is no government-prescribed price, the government
guidance price;
o where there is neither a government-prescribed price nor a
government guidance price, the market price; or
o where none of the above is applicable, the price to be agreed
between the parties, which shall be based on a reasonable cost
incurred in providing such services plus a profit margin not
exceeding 6%.
(b) The Company has entered into an Agreement for Provision of
Cultural and Educational, Health Care and Community Services with
Sinopec Group Company effective from 1 January 2000 in which
Sinopec Group Company has agreed to provide the Group with
certain cultural, educational, health care and community services
on the same pricing terms and termination conditions as agreed to
in the above Mutual Provision Agreement.
(c) The Company has entered into a number of lease agreements with
Sinopec Group Company to lease certain land and buildings at a
rental of approximately RMB 2,557 million and RMB 568 million,
respectively, per annum. The Company and Sinopec Group Company
can renegotiate the rental amount every three years for land and
every year for buildings, such amount not to exceed the market
price as determined by an independent third party. The Group has
the option to terminate these leases upon six months notice to
Sinopec Group Company.
(d) The Company has entered into agreements with Sinopec Group
Company effective from 1 January 2000 under which the Group has
been granted the right to use certain trademarks, patents,
technology and computer software developed by Sinopec Group
Company. The Group will reimburse Sinopec Group Company for fees
required to maintain the validity of these licenses.
(e) The Company has entered into a service station franchise
agreement with Sinopec Group Company under which its service
station and retail stores would exclusively sell the refined
products supplied by the Group.
70
40 RELATED PARTIES AND RELATED PARTY TRANSACTIONS (Continued)
(d)Balances with related parties
The balances with the Group's related parties at 30 June 2006 and 31
December 2005 are as follows:
The ultimate holding company Other related companies
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Cash and cash equivalents -- -- 1,106 4,589
Trade accounts receivable -- -- 3,038 4,126
Advance payments and other receivables 1,500 1,507 2,329 1,986
Trade accounts payable -- -- 2,908 3,005
Receipts in advance -- -- 1,467 1,726
Other creditors 6,461 986 4,200 4,432
Short-term loans -- -- 7,121 732
Long-term loans (including current portion) (Note) -- -- 39,627 40,033
Note: The Sinopec Group Company had lent an interest free loan for 20
years amounted to RMB 35,561 million to the Group through Sinopec
Finance Company Limited which was included in the long-term loans.
41 PRINCIPAL SUBSIDIARIES
The Company's principal subsidiaries are limited companies operating in the
PRC and had been consolidated into the Group's financial statements for the
six-month period ended 30 June 2006. Except for Sinopec Kantons Holdings
Limited, which is incorporated in Bermuda, the companies below are
incorporated in the PRC. The following list contains only the particulars
of subsidiaries which principally affected the results or assets of the
Group:
Percentage of
Registered equity interest
capital/paid-up held by the
Name of enterprise capital Group Principal activities
RMB millions %
China Petrochemical International 1,704 00.00 Trading of crude oil and petrochemical products
Company Limited
Sinopec Sales Company Limited 1,700 00.00 Marketing and distribution of refined petroleum products
Sinopec Zhenhai Refining and Chemical 2,524 00.00 Manufacturing of intermediate petrochemical products
Company Limited ("Sinopec Zhenhai") (i) and petroleum products
Sinopec Qilu Petrochemical Company 1,950 99.76 Manufacturing of intermediate petrochemical products
Limited ("Sinopec Qilu") (ii) and petroleum products
Sinopec Yangzi Petrochemical Company 2,330 99.81 Manufacturing of intermediate petrochemical products
Limited ("Sinopec Yangzi") (ii) and petroleum products
Sinopec Zhongyuan Petroleum Company 875 99.35 Exploration and production of crude oil and natural gas
Limited ("Sinopec Zhongyuan") (ii)
Shengli Oil Field Dynamic Company 364 97.71 Exploration and production of crude oil and distribution
Limited ("Dynamic") (ii) of petrochemical products
Sinopec Fujian Petrochemical Company 2,253 50.00 Manufacturing of plastics, intermediate petrochemical
Limited (iii) products and petroleum products
Sinopec Shanghai Petrochemical 7,200 55.56 Manufacturing of synthetic fibres, resin and plastics,
Company Limited intermediate petrochemical products and
petroleum products
Sinopec Shijiazhuang Refining Chemical 1,154 79.73 Manufacturing of intermediate petrochemical products
Company Limited and petroleum products
Sinopec Kantons Holdings Limited HK$104 72.40 Trading of crude oil and petroleum products
Sinopec Wuhan Petroleum Group Company 147 46.25 Marketing and distribution of refined petroleum products
Limited (iii)
Sinopec Wuhan Phoenix Company 519 40.72 Manufacturing of petrochemical products and petroleum
Limited (iii) products
Sinopec Yizheng Chemical Fibre Company 4,000 42.00 Production and sale of polyester chips
fibres and polyester
Limited (iii)
Zhongyuan Petrochemical Company Limited 2,400 93.51 Manufacturing of chemical products
Sinopec Shell (Jiangsu) Petrochemical 830 60.00 Marketing and distribution of refined petroleum products
Marketing Company Limited
BP Sinopec (Zhejiang) Petrochemical 800 60.00 Marketing and distribution of refined petroleum products
Company Limited
Sinopec Qingdao Refining and Chemical 800 85.00 Manufacturing of intermediate petrochemical products
Company Limited and petroleum products
71
41 PRINCIPAL SUBSIDIARIES (Continued)
(i) During the period, the Group acquired the entire 723,754,468 H shares,
representing approximately 28.7% of the issued share capital of
Sinopec Zhenhai at HK$ 10.60 per share. The total consideration
required to be paid by the Group is approximately RMB 7,930 million
which will be settled in cash. The excess of the cost of purchase over
the carrying value of the underlying assets and liabilities (on a
proportionate share) was RMB 4,043 million, which was recorded as
equity investment differences.
(ii) During the period, the Group acquired the shares not held by the Group
in Sinopec Qilu, Sinopec Yangzi, Sinopec Zhongyuan and Dynamic of
17.71%, 14.83%, 28.50%, and 71.38%, respectively. The total
consideration paid by the Group was approximately RMB 14,041 million
which was settled in cash. The excess of the cost of purchase over the
share of carrying value of the underlying assets and liabilities was
RMB 7,766 million, which was recorded as equity investment
differences.
(iii) The Company consolidated the results of these entities because the
Company controlled the board of these entities and had the power to
govern their financial and operating policies.
42 PRINCIPAL JOINTLY CONTROLLED ENTITIES
At 30 June 2006, the Group's and the Company's principal jointly controlled
entities are as follows:
Percentage
Percentage of equity
of equity interest
interest held by the
Registered capital/ held by the Company's
Name of jointly controlled entities paid-up capital Company subsidiaries Principal activities
% %
Shanghai Secco Petrochemical Registered capital 30.00 20.00 Manufacturing and distribution
Company Limited USD 901,440,964 of petrochemical products
----------------------------------------------------------------------------------------------------------------------------
BASF-YPC Company Limited Registered capital 30.00 10.00 Manufacturing and distribution
RMB 8,793,000,000 of petrochemical products
----------------------------------------------------------------------------------------------------------------------------
Yueyang Sinopec and Shell Coal Registered capital 50.00 -- Manufacturing and distribution
Gasification Company Limited USD 45,588,700 of industrial gas
----------------------------------------------------------------------------------------------------------------------------
Block A Oil Field in the Western -- -- 43.00 Exploration and production of
Area Chengdao in Bohai Bay crude oil and natural gas
----------------------------------------------------------------------------------------------------------------------------
43 COMMITMENTS
Operating lease commitments
The Group and the Company lease service stations and other equipment through
non-cancellable operating leases. These operating leases do not contain
provisions for contingent lease rentals. None of the rental agreements
contain escalation provisions that may require higher future rental
payments.
At 30 June 2006, the future minimum lease payments of the Group and the
Company under operating leases are as follows:
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Within one year 3,665 3,593 3,447 3,424
--------------------------------------------------------------------------------------------------------------------------
Between one and two years 3,480 3,442 3,369 3,363
--------------------------------------------------------------------------------------------------------------------------
Between two and three years 3,417 3,388 3,333 3,319
--------------------------------------------------------------------------------------------------------------------------
Between three and four years 3,383 3,357 3,304 3,292
--------------------------------------------------------------------------------------------------------------------------
Between four and five years 3,318 3,353 3,252 3,290
--------------------------------------------------------------------------------------------------------------------------
After five years 93,831 95,176 92,294 93,601
--------------------------------------------------------------------------------------------------------------------------
TOTAL 111,094 112,309 108,999 110,289
==========================================================================================================================
Capital commitments
At 30 June 2006, capital commitments are as follows:
At 30 June At 31 December
2006 2005
RMB millions RMB millions
THE GROUP
--------------------------------------------------------------------------------------------------------------------------
Authorised and contracted for 61,682 71,666
--------------------------------------------------------------------------------------------------------------------------
Authorised but not contracted for 64,617 84,213
--------------------------------------------------------------------------------------------------------------------------
126,299 155,879
--------------------------------------------------------------------------------------------------------------------------
JOINTLY CONTROLLED ENTITIES
--------------------------------------------------------------------------------------------------------------------------
Authorised and contracted for 2,018 2,160
--------------------------------------------------------------------------------------------------------------------------
Authorised but not contracted for 4 60
2,022 2,220
--------------------------------------------------------------------------------------------------------------------------
THE COMPANY
--------------------------------------------------------------------------------------------------------------------------
Authorised and contracted for 50,841 55,496
--------------------------------------------------------------------------------------------------------------------------
Authorised but not contracted for 35,507 45,938
--------------------------------------------------------------------------------------------------------------------------
86,348 101,434
==========================================================================================================================
These capital commitments relate to oil and gas exploration and development,
refining and chemical production capacity expansion projects, the
construction of service stations and oil depots, and capital contributions
to the Group's investments and interests in associates.
72
43 COMMITMENTS (Continued)
Exploration and production licenses
Exploration licenses for exploration activities are registered with the
Ministry of Land and Resources. The maximum term of the Group's exploration
licenses is 7 years, and may be renewed twice within 30 days prior to
expiration of the original term with each renewal being for a two-year term.
The Group is obligated to make progressive annual minimum exploration
investment relating to the exploration blocks in respect of which the
license is issued. The Ministry of Land and Resources also issues production
licenses to the Group on the basis of the reserve reports approved by
relevant authorities. The maximum term of a full production license is 30
years unless a special dispensation was given by the State Council. The
maximum term of the production licenses issued to the Group is 55 years as a
special dispensation was given by the State Council. The Group's production
license is renewable upon application by the Group 30 days prior to
expiration.
The Group is required to make payments of exploration license fees and
production right usage fees to the Ministry of Land and Resources annually
which are expensed as incurred. Payments incurred were approximately RMB 12
million for the period ended 30 June 2006 (2005: RMB 25 million).
Estimated future annual payments are as follows:
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Within one year 158 107 158 74
--------------------------------------------------------------------------------------------------------------------------
Between one and two years 101 112 101 81
--------------------------------------------------------------------------------------------------------------------------
Between two and three years 64 59 64 49
--------------------------------------------------------------------------------------------------------------------------
Between three and four years 63 67 63 58
--------------------------------------------------------------------------------------------------------------------------
Between four and five years 31 56 31 49
--------------------------------------------------------------------------------------------------------------------------
After five years 236 239 236 108
--------------------------------------------------------------------------------------------------------------------------
TOTAL 653 640 653 419
==========================================================================================================================
44 CONTINGENT LIABILITIES
(a) The Company has been advised by its PRC lawyers that, except for
liabilities constituting or arising out of or relating to the business
assumed by the Company in the Reorganisation, no other liabilities were
assumed by the Company, and the Company is not jointly and severally
liable for other debts and obligations incurred by Sinopec Group Company
prior to the Reorganisation.
(b) At 30 June 2006, guarantees given by the Group and the Company to banks
in respect of banking facilities granted to the parties below are as
follows:
The Group The Company
At 30 June At 31 December At 30 June At 31 December
2006 2005 2006 2005
RMB millions RMB millions RMB millions RMB millions
Subsidiaries -- -- 2,561 2,583
------------------------------------------------------------------------------------------------------------------------
Associates and jointly
controlled entities 95 79 11,959 11,986
------------------------------------------------------------------------------------------------------------------------
Total 95 79 14,520 14,569
========================================================================================================================
The Company monitors the conditions that are subject to the guarantees
to identify whether it is probable that a loss has occurred, and
recognises any such losses under guarantees when those losses are
estimable. At 30 June 2006 and 31 December 2005, it is not probable that
the Company will be required to make payments under the guarantees. Thus
no liability has been accrued for a loss related to the Company's
obligation under the guarantees arrangement.
Environmental contingencies
To date, the Group has not incurred any significant expenditure for
environmental remediation, is currently not involved in any environmental
remediation, and has not accrued any amounts for environmental remediation
relating to its operations. Under existing legislation, management believes
that there are no probable liabilities that will have a material adverse
effect on the financial position or operating results of the Group. The PRC
government, however, has moved and may move further towards more rigorous
enforcement of applicable laws, and towards the adoption of more stringent
environmental standards. Environmental liabilities are subject to
considerable uncertainties which affect the Group's ability to estimate the
ultimate cost of remediation efforts. These uncertainties include: i) the
exact nature and extent of the contamination at various sites including, but
not limited to refineries, oil fields, service stations, terminals and land
development areas, whether operating, closed or sold; ii) the extent of
required cleanup efforts; iii) varying costs of alternative remediation
strategies; iv) changes in environmental remediation requirements; and v)
the identification of new remediation sites. The amount of such future cost
is indeterminable due to such factors as the unknown magnitude of possible
contamination and the unknown timing and extent of the corrective actions
that may be required. Accordingly, the outcome of environmental liabilities
under proposed or future environmental legislation cannot reasonably be
estimated at present, and could be material. The Group paid normal routine
pollutant discharge fee of approximately RMB 667 million for the period
ended 30 June 2006 (2005: RMB 107 million).
Legal contingencies
The Group is a defendant in certain lawsuits as well as the named party in
other proceedings arising in the ordinary course of business. While the
outcomes of such contingencies, lawsuits or other proceedings cannot be
determined at present, management is of the opinion that any resulting
liabilities will not have a material adverse effect on the financial
position or operating results of the Group.
73
45 SEGMENTAL INFORMATION
The Group has five operating segments as follows:
(i) Exploration and production - which explores and develops oil fields,
produces crude oil and natural gas and sells such products to the
Refining Segment of the Group and external customers.
(ii) Refining - which processes and purifies crude oil, which is sourced
from the Exploration and Production Segment of the Group and external
suppliers, and manufactures and sells petroleum products to the
chemicals and Marketing and Distribution Segments of the Group and
external customers.
(iii) Marketing and distribution - which owns and operates oil depots and
service stations in the PRC, and distributes and sells refined
petroleum products (mainly gasoline and diesel) in the PRC through
wholesale and retail sales networks.
(iv) Chemicals - which manufactures and sells petrochemical products,
derivative petrochemical products and other chemical products to
external customers.
(v) Others - which largely comprise the trading activities of the import
and export companies of the Group and research and development
undertaken by other subsidiaries.
The segments were determined primarily because the Group manages its
exploration and production, refining, marketing and distribution, chemicals,
and others businesses separately. The reportable segments are each managed
separately because they manufacture and/or distribute distinct products with
different production processes and due to their distinct operating and gross
margin characteristics. In view of the fact that the Company and its
subsidiaries operate mainly in the PRC, no geographical segment information
is presented.
The Group evaluates the performance and allocates resources to its operating
segments on an operating income basis, without considering the effects of
finance costs or investment income. The accounting policies of the Group's
segments are the same as those described in the significant accounting
policies (see Note 2). Corporate administrative costs and assets are not
allocated to the operating segments; instead, operating segments are billed
for direct corporate services. Inter-segment transfer pricing is based on
cost plus an appropriate margin, as specified by the Group's policy.
Reportable information on the Group's operating segments is as follows:
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Income from principal operations
------------------------------------------------------------------------------------------------------------
Exploration and production
------------------------------------------------------------------------------------------------------------
External sales 12,135 8,651
------------------------------------------------------------------------------------------------------------
Inter-segment sales 53,362 35,745
------------------------------------------------------------------------------------------------------------
65,497 44,396
------------------------------------------------------------------------------------------------------------
Refining
------------------------------------------------------------------------------------------------------------
External sales 48,681 37,083
------------------------------------------------------------------------------------------------------------
Inter-segment sales 220,301 172,035
------------------------------------------------------------------------------------------------------------
268,982 209,118
------------------------------------------------------------------------------------------------------------
Marketing and distribution
------------------------------------------------------------------------------------------------------------
External sales 273,153 206,763
------------------------------------------------------------------------------------------------------------
Inter-segment sales 1,962 1,320
------------------------------------------------------------------------------------------------------------
275,115 208,083
------------------------------------------------------------------------------------------------------------
Chemicals
------------------------------------------------------------------------------------------------------------
External sales 92,673 74,731
------------------------------------------------------------------------------------------------------------
Inter-segment sales 5,271 8,335
------------------------------------------------------------------------------------------------------------
97,944 83,066
------------------------------------------------------------------------------------------------------------
Others
------------------------------------------------------------------------------------------------------------
External sales 55,346 32,020
------------------------------------------------------------------------------------------------------------
Inter-segment sales 38,335 21,228
------------------------------------------------------------------------------------------------------------
93,681 53,248
------------------------------------------------------------------------------------------------------------
Elimination of inter-segment sales (319,231) (238,663)
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Consolidated income from principal operations 481,988 359,248
------------------------------------------------------------------------------------------------------------
Cost of sales, sales taxes and surcharges
------------------------------------------------------------------------------------------------------------
Exploration and production 24,457 17,920
------------------------------------------------------------------------------------------------------------
Refining 284,044 208,147
------------------------------------------------------------------------------------------------------------
Marketing and distribution 253,015 190,761
------------------------------------------------------------------------------------------------------------
Chemicals 87,039 68,283
------------------------------------------------------------------------------------------------------------
Others 92,217 52,619
------------------------------------------------------------------------------------------------------------
Elimination of inter-segment cost of sales (318,556) (236,345)
------------------------------------------------------------------------------------------------------------
Consolidated cost of sales, sales taxes and surcharges 422,216 301,385
------------------------------------------------------------------------------------------------------------
Profit from principal operations
------------------------------------------------------------------------------------------------------------
Exploration and production 39,647 23,738
------------------------------------------------------------------------------------------------------------
Refining (14,344) 1,391
------------------------------------------------------------------------------------------------------------
Marketing and distribution 22,100 17,322
------------------------------------------------------------------------------------------------------------
Chemicals 10,905 14,783
------------------------------------------------------------------------------------------------------------
Others 1,464 629
------------------------------------------------------------------------------------------------------------
Consolidated profit from principal operations 59,772 57,863
============================================================================================================
74
46 POST BALANCE SHEET EVENTS
On 10 July 2006, one of the subsidiaries of the Group, Sinopec Kantons
Holdings Limited, entered into two equity acquisition agreements with
Guangzhou Petrochemical Plant ("GPC"), a wholly-owned subsidiary of Sinopec
Group Company, and Guangzhou Zhong Guan An Tai Petrochemical Company Limited
("GZGAT"), a wholly-owned subsidiary of GPC. Pursuant to the agreements, the
Group will acquire 30% of the equity interests of Hua De Petrochemical
Company Limited ("Huade") from GPC at a cash consideration of RMB 594
million and the remaining 10% of the equity interests of Kantons Gas Station
Investment and Management Company Limited ("KGSIM") from GZGAT at a cash
consideration of RMB 17 million. These transactions were approved by the
independent shareholders of Sinopec Kantons Holdings Limited on 18 August
2006 and are subject to the approval from the relevant PRC governmental and
regulatory bodies.
47 EXTRAORDINARY GAINS AND LOSSES
Pursuant to "Questions and answers in the prepayment of information
disclosures of companies issuing public shares, No.1 -- Extraordinary gain
and loss" (2004 revised), the extraordinary gains and losses of the Group
are as follows:
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Extraordinary gains and losses for the period:
-------------------------------------------------------------------------------------------------------------------------------
Loss on disposal of fixed assets 43 109
-------------------------------------------------------------------------------------------------------------------------------
Employee reduction expenses 48 100
-------------------------------------------------------------------------------------------------------------------------------
Donations 40 128
-------------------------------------------------------------------------------------------------------------------------------
(Gain)/ loss on disposal of long-term equity investments (24) 1
-------------------------------------------------------------------------------------------------------------------------------
Other non-operating income and expenses, excluding impairment losses on long-lived assets 377 242
-------------------------------------------------------------------------------------------------------------------------------
Written back of provisions for impairment losses in previous years (339) (516)
-------------------------------------------------------------------------------------------------------------------------------
Tax effect (48) (21)
-------------------------------------------------------------------------------------------------------------------------------
TOTAL 97 43
===============================================================================================================================
48 OTHER SIGNIFICANT EVENTS
The Group had no any other significant event required to disclose as at the
approval date of these financial statements.
75
REPORT OF THE INTERNATIONAL AUDITORS
[KPMG LOGO GRAPHIC OMITTED]
To the Shareholders of
China Petroleum & Chemical Corporation
(Established in The People's Republic of China with limited liability)
We have audited the interim financial statements on pages 77 to 109 which have
been prepared in accordance with International Financial Reporting Standards
promulgated by the International Accounting Standards Board.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The Company's directors are responsible for the preparation of interim financial
statements which give a true and fair view. In preparing interim financial
statements which give a true and fair view it is fundamental that appropriate
accounting policies are selected and applied consistently, that judgements and
estimates are made which are prudent and reasonable and that the reasons for any
significant departure from applicable accounting standards are stated.
It is our responsibility to form an independent opinion, based on our audit, on
those interim financial statements and to report our opinion solely to you, as a
body, and for no other purpose. We do not assume responsibility towards or
accept liability to any other person for the contents of this report.
BASIS OF OPINION
We conducted our audit in accordance with Hong Kong Standards on Auditing issued
by the Hong Kong Institute of Certified Public Accountants. An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the interim financial statements. It also includes an assessment
of the significant estimates and judgements made by the directors in the
preparation of the interim financial statements, and of whether the accounting
policies are appropriate to the Group's circumstances, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance as to whether the interim
financial statements are free from material misstatement. In forming our opinion
we also evaluated the overall adequacy of the presentation of information in the
interim financial statements. We believe that our audit provides a reasonable
basis for our opinion.
OPINION
In our opinion, the interim financial statements give a true and fair view of
the state of affairs of the Group as at 30 June 2006 and of the Group's profit
and cash flows for the six-month period ended 30 June 2006 and have been
properly prepared in accordance with International Financial Reporting Standards
promulgated by the International Accounting Standards Board.
KPMG
Certified Public Accountants
Hong Kong, China, 25 August 2006
76
(B) INTERIM FINANCIAL STATEMENTS PREPARED UNDER INTERNATIONAL FINANCIAL
REPORTING STANDARDS ("IFRS")CONSOLIDATED INCOME STATEMENT
for the six-month period ended 30 June 2006
(Amounts in millions, except per share data)
Six-month periods
ended 30 June
Note 2006 2005
RMB RMB
Turnover and other operating revenues
----------------------------------------------------------------------------------------------------------------------------
Turnover 3 481,988 359,248
----------------------------------------------------------------------------------------------------------------------------
Other operating revenues 4 11,140 9,206
----------------------------------------------------------------------------------------------------------------------------
493,128 368,454
----------------------------------------------------------------------------------------------------------------------------
Operating expenses
----------------------------------------------------------------------------------------------------------------------------
Purchased crude oil, products and operating supplies and expenses (400,215) (283,036)
----------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 5 (16,429) (15,510)
----------------------------------------------------------------------------------------------------------------------------
Depreciation, depletion and amortisation (16,504) (15,155)
----------------------------------------------------------------------------------------------------------------------------
Exploration expenses, including dry holes (3,085) (3,355)
----------------------------------------------------------------------------------------------------------------------------
Personnel expenses 6 (9,197) (8,536)
----------------------------------------------------------------------------------------------------------------------------
Employee reduction expenses 7 (48) (100)
----------------------------------------------------------------------------------------------------------------------------
Taxes other than income tax 8 (12,918) (8,204)
----------------------------------------------------------------------------------------------------------------------------
Other operating expenses, net 9 (494) (876)
----------------------------------------------------------------------------------------------------------------------------
Total operating expenses (458,890) (334,772)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Operating profit 34,238 33,682
----------------------------------------------------------------------------------------------------------------------------
Finance costs
----------------------------------------------------------------------------------------------------------------------------
Interest expense 10 (3,542) (2,845)
----------------------------------------------------------------------------------------------------------------------------
Interest income 250 168
----------------------------------------------------------------------------------------------------------------------------
Foreign exchange losses (52) (40)
----------------------------------------------------------------------------------------------------------------------------
Foreign exchange gains 202 151
----------------------------------------------------------------------------------------------------------------------------
Net finance costs (3,142) (2,566)
----------------------------------------------------------------------------------------------------------------------------
Investment income 131 62
----------------------------------------------------------------------------------------------------------------------------
Share of profits less losses from associates 447 536
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Profit before taxation 31,674 31,714
----------------------------------------------------------------------------------------------------------------------------
Taxation 11 (10,110) (9,945)
----------------------------------------------------------------------------------------------------------------------------
Profit for the period 21,564 21,769
----------------------------------------------------------------------------------------------------------------------------
Attributable to:
----------------------------------------------------------------------------------------------------------------------------
Equity shareholders of the Company 21,406 19,653
----------------------------------------------------------------------------------------------------------------------------
Minority interests 158 2,116
----------------------------------------------------------------------------------------------------------------------------
Profit for the period 21,564 21,769
----------------------------------------------------------------------------------------------------------------------------
Dividend payable to equity shareholders of the Company
attributable to the period:
----------------------------------------------------------------------------------------------------------------------------
Interim dividend declared after the balance sheet date 12 3,468 3,468
----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share 13 0.25 0.23
============================================================================================================================
The notes on pages 82 to 109 form part of these interim financial statements.
77
CONSOLIDATED BALANCE SHEET
at 30 June 2006
(Amounts in millions)
At 30 June At 31 December
Note 2006 2005
RMB RMB
Non-current assets
----------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment 14 315,737 314,573
----------------------------------------------------------------------------------------------------------------------------
Construction in progress 15 62,879 48,267
----------------------------------------------------------------------------------------------------------------------------
Goodwill 16 13,934 2,203
----------------------------------------------------------------------------------------------------------------------------
Investments 17 3,150 2,926
----------------------------------------------------------------------------------------------------------------------------
Interest in associates 18 10,693 9,217
----------------------------------------------------------------------------------------------------------------------------
Deferred tax assets 24 6,167 6,072
----------------------------------------------------------------------------------------------------------------------------
Lease prepayments 1,935 1,908
----------------------------------------------------------------------------------------------------------------------------
Long-term prepayments and other assets 20 7,250 6,864
----------------------------------------------------------------------------------------------------------------------------
Total non-current assets 421,745 392,030
----------------------------------------------------------------------------------------------------------------------------
Current assets
----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 9,939 13,745
----------------------------------------------------------------------------------------------------------------------------
Time deposits with financial institutions 838 1,002
----------------------------------------------------------------------------------------------------------------------------
Trade accounts receivable 21 17,449 14,532
----------------------------------------------------------------------------------------------------------------------------
Bills receivable 21 7,825 7,143
----------------------------------------------------------------------------------------------------------------------------
Inventories 22 105,894 89,474
----------------------------------------------------------------------------------------------------------------------------
Prepaid expenses and other current assets 23 23,225 19,395
----------------------------------------------------------------------------------------------------------------------------
Total current assets 165,170 145,291
----------------------------------------------------------------------------------------------------------------------------
Current liabilities
----------------------------------------------------------------------------------------------------------------------------
Short-term debts 25 65,199 40,411
----------------------------------------------------------------------------------------------------------------------------
Loans from Sinopec Group Company and fellow subsidiaries 25 7,295 832
----------------------------------------------------------------------------------------------------------------------------
Trade accounts payable 26 50,636 52,967
----------------------------------------------------------------------------------------------------------------------------
Bills payable 26 27,198 23,243
----------------------------------------------------------------------------------------------------------------------------
Accrued expenses and other payables 27 60,903 48,167
----------------------------------------------------------------------------------------------------------------------------
Income tax payable 3,934 5,029
----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 215,165 170,649
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Net current liabilities (49,995) (25,358)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Total assets less current liabilities 371,750 366,672
----------------------------------------------------------------------------------------------------------------------------
Non-current liabilities
----------------------------------------------------------------------------------------------------------------------------
Long-term debts 25 68,279 67,059
----------------------------------------------------------------------------------------------------------------------------
Loans from Sinopec Group Company and fellow subsidiaries 25 39,453 39,933
----------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities 24 6,048 5,902
----------------------------------------------------------------------------------------------------------------------------
Other liabilities 784 782
----------------------------------------------------------------------------------------------------------------------------
Total non-current liabilities 114,564 113,676
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
257,186 252,996
----------------------------------------------------------------------------------------------------------------------------
Equity
----------------------------------------------------------------------------------------------------------------------------
Share capital 28 86,702 86,702
----------------------------------------------------------------------------------------------------------------------------
Reserves 150,457 136,854
----------------------------------------------------------------------------------------------------------------------------
Total equity attributable to equity shareholders of the Company 237,159 223,556
----------------------------------------------------------------------------------------------------------------------------
Minority interests 20,027 29,440
----------------------------------------------------------------------------------------------------------------------------
Total equity 257,186 252,996
============================================================================================================================
Approved and authorised for issue by the board of directors on 25 August 2006.
CHEN TONGHAI WANG TIANPU DAI HOULIANG
Chairman Director and President Director, Senior Vice President
and Chief Financial Officer
The notes on pages 82 to 109 form part of these interim financial statements.
78
CONSOLIDATED CASH FLOW STATEMENT for the six-month period ended 30 June 2006
(Amounts in millions)
Six-month periods
ended 30 June
Note 2006 2005
RMB RMB
Net cash generated from operating activities (a) 21,478 21,082
-----------------------------------------------------------------------------------------------------------------------------
Investing activities
-----------------------------------------------------------------------------------------------------------------------------
Capital expenditure (27,212) (22,341)
-----------------------------------------------------------------------------------------------------------------------------
Exploratory wells expenditure (3,351) (3,027)
-----------------------------------------------------------------------------------------------------------------------------
Capital expenditure by jointly controlled entities (238) (1,896)
-----------------------------------------------------------------------------------------------------------------------------
Purchase of investments and investments in associates (2,048) (505)
-----------------------------------------------------------------------------------------------------------------------------
Proceeds from disposal of investments and investments in associates 163 63
-----------------------------------------------------------------------------------------------------------------------------
Proceeds from disposal of property, plant and equipment 166 201
-----------------------------------------------------------------------------------------------------------------------------
Acquisitions of minority interests in subsidiaries (21,971) (4,088)
-----------------------------------------------------------------------------------------------------------------------------
Purchase of time deposits with financial institutions (465) (334)
-----------------------------------------------------------------------------------------------------------------------------
Maturity of time deposits with financial institutions 629 527
-----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (54,327) (31,400)
-----------------------------------------------------------------------------------------------------------------------------
Financing activities
-----------------------------------------------------------------------------------------------------------------------------
Proceeds from bank and other loans 342,626 292,505
-----------------------------------------------------------------------------------------------------------------------------
Proceeds from bank and other loans of jointly controlled entities 39 2,603
-----------------------------------------------------------------------------------------------------------------------------
Proceeds of issuance of corporate bonds 10,846 --
-----------------------------------------------------------------------------------------------------------------------------
Repayments of bank and other loans (312,086) (281,804)
-----------------------------------------------------------------------------------------------------------------------------
Repayments of corporate bonds (10,000) --
-----------------------------------------------------------------------------------------------------------------------------
Distributions to minority interests (215) (514)
-----------------------------------------------------------------------------------------------------------------------------
Contributions from minority interests 82 86
-----------------------------------------------------------------------------------------------------------------------------
Dividend paid (2,242) (2,195)
-----------------------------------------------------------------------------------------------------------------------------
Distributions to Sinopec Group Company -- (3,128)
-----------------------------------------------------------------------------------------------------------------------------
Net cash generated from financing activities 29,050 7,553
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,799) (2,765)
-----------------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes (7) --
Cash and cash equivalents at 1 January 13,745 16,381
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at 30 June 9,939 13,616
=============================================================================================================================
The notes on pages 82 to 109 form part of these interim financial statements.
79
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
for the six-month period ended 30 June 2006
(Amounts in millions)
(a) Reconciliation of profit before taxation to net cash generated from operating activities
Six-month periods
ended 30 June
2006 2005
RMB RMB
Operating activities
----------------------------------------------------------------------------------------------------------------------
Profit before taxation 31,674 31,714
----------------------------------------------------------------------------------------------------------------------
Adjustments for:
----------------------------------------------------------------------------------------------------------------------
Depreciation, depletion and amortisation 16,504 15,155
----------------------------------------------------------------------------------------------------------------------
Dry hole costs 1,398 1,325
----------------------------------------------------------------------------------------------------------------------
Share of profits less losses from associates (447) (536)
----------------------------------------------------------------------------------------------------------------------
Investment income (131) (62)
----------------------------------------------------------------------------------------------------------------------
Interest income (250) (168)
----------------------------------------------------------------------------------------------------------------------
Interest expense 3,542 2,845
----------------------------------------------------------------------------------------------------------------------
Unrealised foreign exchange gains (54) (150)
----------------------------------------------------------------------------------------------------------------------
Loss on disposal of property, plant and equipment, net 13 20
----------------------------------------------------------------------------------------------------------------------
Impairment losses on long-lived assets 34 397
----------------------------------------------------------------------------------------------------------------------
Operating profit before changes in working capital 52,283 50,540
----------------------------------------------------------------------------------------------------------------------
Increase in trade accounts receivable (2,710) (5,488)
----------------------------------------------------------------------------------------------------------------------
Increase in bills receivable (662) (544)
----------------------------------------------------------------------------------------------------------------------
Increase in inventories (15,615) (14,957)
----------------------------------------------------------------------------------------------------------------------
Increase in prepaid expenses and other current assets (3,778) (522)
----------------------------------------------------------------------------------------------------------------------
Decrease/(increase) in lease prepayments 26 (295)
----------------------------------------------------------------------------------------------------------------------
Increase in long-term prepayments and other assets (672) (1,451)
----------------------------------------------------------------------------------------------------------------------
(Decrease)/increase in trade accounts payable (2,540) 9,984
----------------------------------------------------------------------------------------------------------------------
Increase/(decrease) in bills payable 3,900 (3,904)
----------------------------------------------------------------------------------------------------------------------
Increase in accrued expenses and other payables 5,845 3,050
----------------------------------------------------------------------------------------------------------------------
Increase/(decrease) in other liabilities 2 (117)
----------------------------------------------------------------------------------------------------------------------
Cash generated from operations 36,079 36,296
----------------------------------------------------------------------------------------------------------------------
Interest received 251 168
----------------------------------------------------------------------------------------------------------------------
Interest paid (4,035) (3,320)
----------------------------------------------------------------------------------------------------------------------
Investment and dividend income received 380 362
----------------------------------------------------------------------------------------------------------------------
Income tax paid (11,197) (12,424)
----------------------------------------------------------------------------------------------------------------------
Net cash generated from operating activities 21,478 21,082
======================================================================================================================
The notes on pages 82 to 109 form part of these interim financial statements.
80
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the six-month period ended 30 June 2006
(Amounts in millions)
Statutory
Share Capital Share Revaluation surplus
capital reserve premium reserve reserve
RMB RMB RMB RMB RMB
Balance at 1 January 2005 86,702 (19,217) 18,072 27,998 9,558
-----------------------------------------------------------------------------------------------------------------------------------
Profit for the period - - - - -
Final dividend for 2004 (Note 12) - - - - -
Appropriation (Note (a) and (b)) - - - - 1,804
Revaluation surplus realised - - - (60) -
Realisation of deferred tax on land use rights - - - - -
Acquisitions of minority interests in subsidiaries - - - - -
Distributions to minority interests net of contributions - - - - -
-----------------------------------------------------------------------------------------------------------------------------------
Balance at 30 June 2005 86,702 (19,217) 18,072 27,938 11,362
-----------------------------------------------------------------------------------------------------------------------------------
Balance at 1 January 2006 86,702 (19,217) 18,072 26,342 13,514
-----------------------------------------------------------------------------------------------------------------------------------
Profit for the period - - - - -
Final dividend for 2005 (Note 12) - - - - -
Appropriation (Note (a)) - - - - 2,068
Statutory public welfare fund transferred to
statutory surplus reserve (Note (b)) - - - - 13,514
-----------------------------------------------------------------------------------------------------------------------------------
Revaluation surplus realised - - - (57) -
Realisation of deferred tax on land use rights - - - - -
Acquisitions of minority interests in subsidiaries (Note 16) - - - - -
Distributions to minority interests net of contributions - - - - -
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 30 JUNE 2006 86,702 (19,217) 18,072 26,285 29,096
===================================================================================================================================
[table continued 1]
Statutory
public Discretionary
welfare surplus Other Retained
fund reserve reserves earnings
RMB RMB RMB RMB
Balance at 1 January 2005 9,558 7,000 247 53,122
------------------------------------------------------------------------------------------------------------------------------
Profit for the period - - - 19,653
Final dividend for 2004 (Note 12) - - - (6,936)
Appropriation (Note (a) and (b)) 1,804 - - (3,608)
Revaluation surplus realised - - - 60
Realisation of deferred tax on land use rights - - (2) 2
Acquisitions of minority interests in subsidiaries - - - -
Distributions to minority interests net of contributions - - - -
------------------------------------------------------------------------------------------------------------------------------
Balance at 30 June 2005 11,362 7,000 245 62,293
------------------------------------------------------------------------------------------------------------------------------
Balance at 1 January 2006 13,514 7,000 242 77,387
------------------------------------------------------------------------------------------------------------------------------
Profit for the period - - - 21,406
Final dividend for 2005 (Note 12) - - - (7,803)
Appropriation (Note (a)) - - - (2,068)
Statutory public welfare fund transferred to
statutory surplus reserve (Note (b)) (13,514) - - -
------------------------------------------------------------------------------------------------------------------------------
Revaluation surplus realised - - - 57
Realisation of deferred tax on land use rights - - (4) 4
Acquisitions of minority interests in subsidiaries (Note 16) - - - -
Distributions to minority interests net of contributions - - - -
------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 30 JUNE 2006 - 7,000 238 88,983
===================================================================================================================================
[table continued 2]
Total equity
attributable
to equity
shareholders
of the Minority Total
Company interests equity
RMB RMB RMB
Balance at 1 January 2005 193,040 31,046 224,086
-----------------------------------------------------------------------------------------------------------------------
Profit for the period 19,653 2,116 21,769
Final dividend for 2004 (Note 12) (6,936) - (6,936)
Appropriation (Note (a) and (b)) - - -
Revaluation surplus realised - - -
Realisation of deferred tax on land use rights - - -
Acquisitions of minority interests in subsidiaries - (2,931) (2,931)
Distributions to minority interests net of contributions - (1,212) (1,212)
-----------------------------------------------------------------------------------------------------------------------
Balance at 30 June 2005 205,757 29,019 234,776
-----------------------------------------------------------------------------------------------------------------------
Balance at 1 January 2006 223,556 29,440 252,996
-----------------------------------------------------------------------------------------------------------------------
Profit for the period 21,406 158 21,564
Final dividend for 2005 (Note 12) (7,803) - (7,803)
Appropriation (Note (a)) - - -
Statutory public welfare fund transferred to
statutory surplus reserve (Note (b)) - - -
-----------------------------------------------------------------------------------------------------------------------
Revaluation surplus realised - - -
Realisation of deferred tax on land use rights - - -
Acquisitions of minority interests in subsidiaries (Note 16) - (9,178) (9,178)
Distributions to minority interests net of contributions - (393) (393)
-----------------------------------------------------------------------------------------------------------------------
BALANCE AT 30 JUNE 2006 237,159 20,027 257,186
-----------------------------------------------------------------------------------------------------------------------
Notes:
(a) According to the Company's Articles of Association, the Company is required
to transfer 10% of its net profit, as determined in accordance with the PRC
Accounting Rules and Regulations, to statutory surplus reserve until the
reserve balance reaches 50% of the registered capital. The transfer to this
reserve must be made before distribution of a dividend to shareholders.
Statutory surplus reserve can be used to make good previous years' losses,
if any, and may be converted into share capital by the issue of new shares
to shareholders in proportion to their existing shareholdings or by
increasing the par value of the shares currently held by them, provided that
the balance after such issue is not less than 25% of the registered capital.
During the six-month period ended 30 June 2006, the Company transferred RMB
2,068 million (2005: RMB 1,804 million), being 10% of the current period's
net profit determined in accordance with the PRC Accounting Rules and
Regulations, to this reserve.
(b) Before 1 January 2006, according to the Company's Articles of Association,
the Company was required to transfer 5% to 10% of its net profit, as
determined in accordance with the PRC Accounting Rules and Regulations, to
the statutory public welfare fund. This fund could only be utilised on
capital items for the collective benefits of the Company's employees such as
the construction of dormitories, canteen and other staff welfare facilities.
The transfer to this fund must be made before distribution of a dividend to
shareholders.
Pursuant to the Company's Articles of Associations and a resolution passed
at the Directors' meeting on 26 August 2005, the directors authorised to
transfer RMB 1,804 million for the six-month period ended 30 June 2005,
being 10% of the net profit for the six-month period ended 30 June 2005
determined in accordance with the PRC Accounting Rules and Regulations, to
this fund.
According to the Company Law of the PRC which was revised on 27 October
2005, the Company is no longer required to make profit appropriation to the
statutory public welfare fund commencing from 1 January 2006. Pursuant to
the notice OCai Qi [2006] No. 67O issued by the Ministry of Finance, the
balance of this fund as at 31 December 2005 was transferred to the statutory
surplus reserve.
(c) The usage of the discretionary surplus reserve is similar to that of
statutory surplus reserve.
(d) According to the Company's Articles of Association, the amount of retained
earnings available for distribution to equity shareholders of the Company is
the lower of the amount determined in accordance with the PRC Accounting
Rules and Regulations and the amount determined in accordance with IFRS. At
30 June 2006, the amount of retained earnings available for distribution was
RMB 52,337 million (2005: RMB 20,591 million), being the amount determined
in accordance with IFRS. Interim dividend of RMB 3,468 million (2005: RMB
3,468 million) proposed after the balance sheet date has not been recognised
as a liability at the balance sheet date.
(e) The capital reserve represents (i) the difference between the total amount
of the par value of shares issued and the amount of the net assets
transferred from Sinopec Group Company in connection with the Reorganisation
and (ii) the difference between the considerations paid over the amount of
the net assets acquired from Sinopec National Star, Sinopec Maoming, Xi'an
Petrochemical, Tahe Petrochemical, Tianjin Petrochemical, Luoyang
Petrochemical, Zhongyuan Petrochemical, Guangzhou Petrochemical and Catalyst
Plants.
(f) The application of the share premium account is governed by Sections 168 and
169 of the PRC Company Law.
The notes on pages 82 to 109 form part of these interim financial statements.
81
NOTES ON THE INTERIM FINANCIAL STATEMENTS
for the six-month period ended 30 June 2006
1 PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION
Principal activities
China Petroleum & Chemical Corporation (the OCompanyO) is an energy and
chemical company that, through its subsidiaries (hereinafter collectively
referred to as the OGroupO), engages in fully integrated oil and gas and
chemical operations in the People's Republic of China (the OPRCO). Oil and
gas operations consist of exploring for, developing and producing crude oil
and natural gas; transporting crude oil, natural gas and products by
pipelines; refining crude oil into finished petroleum products; and
marketing crude oil, natural gas and refined petroleum products. Chemical
operations include the manufacture and marketing of a wide range of
chemicals for industrial uses.
Organisation
The Company was established in the PRC on 25 February 2000 as a joint stock
limited company as part of the reorganisation (the OReorganisationO) of
China Petrochemical Corporation (OSinopec Group CompanyO), the ultimate
holding company of the Group and a ministry-level enterprise under the
direct supervision of the State Council of the PRC. Prior to the
incorporation of the Company, the oil and gas and chemical operations of the
Group were carried on by oil administration bureaux, petrochemical and
refining production enterprises and sales and marketing companies of Sinopec
Group Company.
As part of the Reorganisation, certain of Sinopec Group Company's core oil
and gas and chemical operations and businesses together with the related
assets and liabilities were transferred to the Company. On 25 February 2000,
in consideration for Sinopec Group Company transferring such oil and gas and
chemical operations and businesses and the related assets and liabilities to
the Company, the Company issued 68.8 billion domestic state-owned ordinary
shares with a par value of RMB 1.00 each to Sinopec Group Company. The
shares issued to Sinopec Group Company on 25 February 2000 represented the
entire registered and issued share capital of the Company at that date. The
oil and gas and chemical operations and businesses transferred to the
Company related to (i) the exploration, development and production of crude
oil and natural gas, (ii) the refining, transportation, storage and
marketing of crude oil and petroleum products, and (iii) the production and
sale of chemicals (collectively the OPredecessor OperationsO).
Basis of presentation
Pursuant to the resolution passed at the Extraordinary General Meeting held
on 24 August 2001, the Company acquired the entire equity interest of
Sinopec National Star Petroleum Company (OSinopec National StarO) from
Sinopec Group Company for a consideration of RMB 6.45 billion (hereinafter
referred to as the OAcquisition of Sinopec National StarO).
Pursuant to the resolution passed at the Directors' meeting on 28 October
2003, the Group acquired the equity interest of Sinopec Group Maoming
Petrochemical Company (OSinopec MaomingO) from Sinopec Group Company, for a
consideration of RMB 3.3 billion which was paid in 2004 (hereinafter
referred to as the OAcquisition of Ethylene AssetsO).
Pursuant to the resolution passed at the Directors' meeting on 29 December
2003, the Group acquired the equity interest of Xi'an Petrochemical Main
Factory (OXi'an PetrochemicalO) and Tahe Oilfield Petrochemical Factory
(OTahe PetrochemicalO) from Sinopec Group Company, for considerations of RMB
221 million and RMB 135 million, respectively which were paid in 2004
(hereinafter referred to as the OAcquisition of Refining AssetsO).
Pursuant to the resolutions passed at the Extraordinary General Meeting held
on 21 December 2004, the Group acquired the equity interest of Sinopec Group
Tianjin Petrochemical Company (OTianjin PetrochemicalO), Sinopec Group
Luoyang Petrochemical General Plant (OLuoyang PetrochemicalO), Zhongyuan
Petrochemical Company Limited. (OZhongyuan PetrochemicalO), Sinopec Group
Guangzhou Petrochemical General Plant (OGuangzhou PetrochemicalO) and
certain catalyst plants (OCatalyst PlantsO) from Sinopec Group Company for a
total consideration of RMB 3,128 million which was paid in 2005 (hereinafter
referred to as the OAcquisition of Petrochemical and Catalyst AssetsO).
As the Group, Sinopec National Star, Sinopec Maoming, Xi'an Petrochemical,
Tahe Petrochemical, Tianjin Petrochemical, Luoyang Petrochemical, Zhongyuan
Petrochemical, Guangzhou Petrochemical and Catalyst Plants are under the
common control of Sinopec Group Company, the Acquisition of Sinopec National
Star, the Acquisition of Ethylene Assets, the Acquisition of Refining Assets
and the Acquisition of Petrochemical and Catalyst Assets are considered as
Ocombination of entities under common controlO which are accounted in a
manner similar to a pooling-of-interests (Oas-if pooling-of-interests
accountingO). Accordingly, the assets and liabilities acquired from Sinopec
National Star, Sinopec Maoming, Xi'an Petrochemical, Tahe Petrochemical,
Tianjin Petrochemical, Luoyang Petrochemical, Zhongyuan Petrochemical,
Guangzhou Petrochemical and Catalyst Plants have been accounted for at
historical cost. In connection with these acquisitions, certain assets,
primarily property, plant and equipment and construction in progress, were
retained by Sinopec Group Company. The assets retained by Sinopec Group
Company and the considerations paid by the Company for these acquisitions
were treated as equity transactions.
The accompanying interim financial statements have been prepared in
accordance with IFRS promulgated by the International Accounting Standards
Board (OIASBO). IFRS includes International Accounting Standards (OIASO) and
related interpretations. These interim financial statements also comply with
the applicable disclosure provisions of the Rules Governing the Listing of
Securities on the Stock Exchange of Hong Kong Limited. A summary of the
principal accounting policies adopted by the Group is set out in Note 2.
These accounting policies have been consistently applied by the Group.
The accompanying interim financial statements are prepared on the historical
cost basis as modified by the revaluation of certain property, plant and
equipment (Note 14).
The preparation of the interim financial statements in accordance with IFRS
requires management to make judgement, estimates and assumptions that affect
the application of policies and reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
interim financial statements and the reported amounts of revenues and
expenses during the period. The estimates and associated assumptions are
based on historical experience and various other factors that are believed
to be reasonable under the circumstances, the results of which form the
basis of making the judgements about carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from those estimates.
82
1 PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION (Continued)
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the
period of the revision and future periods if the revision affects both
current and future periods.
Key assumptions and estimation made by management in the application of IFRS
that have significant effect on the interim financial statements and have a
significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities in the next financial year are disclosed in Note 35.
2 PRINCIPAL ACCOUNTING POLICIES
(a) Basis of consolidation
The consolidated interim financial statements comprise the Company and
its subsidiaries, and the Group's interest in associates and jointly
controlled entities.
(i) Subsidiaries
Subsidiaries are those entities controlled by the Company. Control
exists when the Company has the power, directly or indirectly, to
govern the financial and operating policies of an entity so as to
obtain benefits from its activities.
The interim financial statements of subsidiaries are included in the
consolidated interim financial statements from the date that control
effectively commences until the date that control effectively
ceases.
Minority interests at the balance sheet date, being the portion of
the net assets of subsidiaries attributable to equity interests that
are not owned by the Company, whether directly or indirectly through
subsidiaries, are presented in the consolidated balance sheet and
statement of changes in equity within equity, separately from equity
attributable to the equity shareholders of the Company. Minority
interests in the results of the Group are presented on the face of
the consolidated income statement as an allocation of the total
profit or loss for the period between minority interests and the
equity shareholders of the Company.
The particulars of the Group's principal subsidiaries are set out in
Note 33.
(ii) Interest in associates
An associate is an entity, not being a subsidiary, in which the
Group exercises significant influence over its management.
Significant influence is the power to participate in the financial
and operating policy decisions of the investee but is not control or
joint control over those policies.
Investments in associates are accounted for in the consolidated
interim financial statements using the equity method from the date
that significant influence commences until the date that significant
influence ceases.
(iii) Jointly controlled entities A jointly controlled entity is an
entity over which the Group can exercise joint control with other
venturers. Joint control is the contractually agreed sharing of
control over an economic activity.
Investments in jointly controlled entities are accounted for in the
consolidated interim financial statements on a proportionate
consolidation basis. Under this method, the Group combines its
proportionate share of the jointly controlled entity's turnover and
expenses with each major turnover and expense caption of the Group's
income statement and combines its proportionate share of the jointly
controlled entity's assets and liabilities with each major asset and
liability caption of the Group's balance sheet, from the date that
joint control commences until the date that joint control ceases.
(iv) Transactions eliminated on consolidation
Inter-company balances and transactions and any unrealised gains
arising from inter-company transactions are eliminated on
consolidation. Unrealised gains arising from transactions with
associates and jointly controlled entities are eliminated to the
extent of the Group's interest in the entity. Unrealised losses are
eliminated in the same way as unrealised gains, but only to the
extent that there is no evidence of impairment.
(b) Translation of foreign currencies
The presentation currency of the Group is Renminbi. Foreign currency
transactions during the period are translated into Renminbi at the
applicable rates of exchange quoted by the People's Bank of China
(OPBOCO) prevailing on the transaction dates. Foreign currency monetary
assets and liabilities are translated into Renminbi at the PBOC's rates
at the balance sheet date.
Exchange differences, other than those capitalised as construction in
progress, are recognised as income or expense in the income statement.
(c) Cash and cash equivalents Cash equivalents consist of time deposits
with financial institutions with an initial term of less than three
months when purchased. Cash equivalents are stated at cost, which
approximates fair value.
(d) Trade accounts and other receivables
Trade accounts and other receivables are initially recognised at fair
value and thereafter stated at amortised cost less impairment losses
for bad and doubtful debts (Note 2(l)).
83
2 PRINCIPAL ACCOUNTING POLICIES (Continued)
(e) Inventories
Inventories, other than spare parts and consumables, are stated at the
lower of cost and net realisable value. Cost includes the cost of
purchase computed using the weighted average method and, in the case of
work in progress and finished goods, direct labour and an appropriate
proportion of production overheads. Net realisable value is the
estimated selling price in the ordinary course of business, less the
estimated costs of completion and the estimated costs necessary to make
the sale.
Spare parts and consumables are stated at cost less any provision for
obsolescence.
(f) Property, plant and equipment
An item of property, plant and equipment is initially recorded at cost,
less accumulated depreciation and impairment losses (Note 2(l)). The
cost of an asset comprises its purchase price, any directly
attributable costs of bringing the asset to working condition and
location for its intended use. Subsequent to the revaluation (Note 14),
which was based on depreciated replacement costs, property, plant and
equipment are carried at revalued amount, being the fair value at the
date of the revaluation less any subsequent accumulated depreciation
and impairment losses. Revaluations are performed periodically to
ensure that the carrying amount does not differ materially from that
which would be determined using fair value at the balance sheet date.
The Group recognises in the carrying amount of an item of property,
plant and equipment the cost of replacing part of such an item when
that cost is incurred if it is probable that the future economic
benefits embodied with the item will flow to the Group and the cost of
the item can be measured reliably. All other expenditure is recognised
as an expense in the income statement in the period in which it is
incurred.
Gains or losses arising from the retirement or disposal of an item of
property, plant and equipment, other than oil and gas properties, are
determined as the difference between the net disposal proceeds and the
carrying amount of the item and are recognised as income or expense in
the income statement on the date of retirement or disposal. On disposal
of a revalued asset, the related revaluation surplus is transferred
from the revaluation reserve to retained earnings.
Depreciation is provided to write off the cost/revalued amount of items
of property, plant and equipment, other than oil and gas properties,
over its estimated useful life on a straight-line basis, after taking
into account its estimated residual value, as follows:
Buildings 15 to 45 years
Plant, machinery, equipment, oil depots,
storage tanks and others 4 to 18 years
Service stations 25 years
Where parts of an item of property, plant and equipment have different
useful lives, the cost or valuation of the item is allocated on a
reasonable basis between the parts and each part is depreciated
separately. Both the useful life of an asset and its residual value, if
any, are reassessed annually.
(g) Oil and gas properties
The Group uses the successful efforts method of accounting for its oil
and gas producing activities. Under this method, costs of development
wells and the related support equipment are capitalised. The cost of
exploratory wells is initially capitalised as construction in progress
pending determination of whether the well has found proved reserves.
The impairment of exploratory well costs occurs upon the determination
that the well has not found proved reserves. Exploratory wells that
find oil and gas reserves in any area requiring major capital
expenditure are expensed unless the well has found a sufficient
quantity of reserves to justify its completion as a producing well if
the required capital expenditure is made, and drilling of the
additional exploratory wells is under way or firmly planned for the
near future. However, in the absence of a determination of the
discovery of proved reserves, exploratory well costs are not carried as
an asset for more than one year following completion of drilling. If,
after one year has passed, a determination of the discovery of proved
reserves cannot be made, the exploratory well costs are impaired and
charged to expense. All other exploration costs, including geological
and geophysical costs, other dry hole costs and annual lease rentals,
are expensed as incurred. Capitalised costs relating to proved
properties are amortised at the field level on a unit-of-production
method. The amortisation rates are determined based on oil and gas
reserves estimated to be recoverable from existing facilities over the
shorter of the economic lives of crude oil and natural gas reservoirs
and the terms of the relevant production licenses.
Gains and losses on the disposal of proved oil and gas properties are
not recognised unless the disposal encompasses an entire property. The
proceeds on such disposals are credited to the carrying amounts of oil
and gas properties.
(h) Lease prepayments
Lease prepayments represent land use rights paid to the relevant
government authorities. Land use rights are carried at cost less
accumulated amortisation and impairment losses (Note 2(l)).
Amortisation is provided to write off the cost of lease prepayments on
a straight-line basis over the respective periods of the rights.
(i) Construction in progress
Construction in progress represents buildings, oil and gas properties,
various plant and equipment under construction and pending
installation, and is stated at cost less impairment losses (Note 2(l)).
Cost comprises direct costs of construction as well as interest
charges, and foreign exchange differences on related borrowed funds to
the extent that they are regarded as an adjustment to interest charges,
during the periods of construction.
Construction in progress is transferred to property, plant and
equipment when the asset is substantially ready for its intended use.
No depreciation is provided in respect of construction in progress.
84
2 PRINCIPAL ACCOUNTING POLICIES (Continued)
(j) Goodwill
Goodwill represents amounts arising on acquisition of subsidiaries,
associates or jointly controlled entities. Goodwill represents the
difference between the cost of acquisition and the fair value of the
net identifiable assets acquired.
Goodwill is stated at cost less accumulated impairment losses. Goodwill
is allocated to cash-generating units and is tested annually for
impairment (Note 2(l)). In respect of associates, the carrying amount
of goodwill is included in the carrying amount of the interest in
associates.
(k) Investments
Investments in equity securities, other than investments in associates,
that do not have a quoted market price in an active market and whose
fair value cannot be reliably measured are recognised in the balance
sheet at cost less impairment losses (Note 2(l)).
(l) Impairment of assets
(i) Impairment of trade accounts receivable, other receivables and
investment in equity securities other than investments in
associates are accounted as follows:
Trade accounts receivable, other receivables and investment in
equity securities other than investments in associates are
reviewed at each balance sheet date to determine whether there is
objective evidence of impairment. If any such evidence exists, an
impairment loss is determined and recognised. The impairment loss
is measured as the difference between the carrying amount of the
financial asset and the estimated future cash flows, discounted at
the current market rate of return for a similar financial asset
where the effect of discounting is material. Impairment losses for
trade accounts and other receivables are reversed if in a
subsequent period the amount of the impairment loss decreases.
Impairment losses for investment in equity securities are not
reversed.
(ii) Impairment of other long-lived assets is accounted as follows:
The carrying amounts of other long-lived assets, including
property, plant and equipment, construction in progress, lease
prepayment and investments in associates, are reviewed
periodically in order to assess whether the recoverable amounts
have declined below the carrying amounts. These assets are tested
for impairment whenever events or changes in circumstances
indicate that their recorded carrying amounts may not be
recoverable. When such a decline has occurred, the carrying amount
is reduced to the recoverable amount. For goodwill, the
recoverable amount is estimated at each balance sheet date.
The recoverable amount is the greater of the fair value less costs
to sell and the value in use. In determining the value in use,
expected future cash flows generated by the asset are discounted
to their present value using a pre-tax discount rate that reflects
current market assessments of time value of money and the risks
specific to the asset. Where an asset does not generate cash
inflows largely independent of those from other assets, the
recoverable amount is determined for the smallest group of assets
that generates cash inflows independently (i.e. a cash-generating
unit).
The amount of the reduction is recognised as an expense in the
consolidated income statement unless the asset is carried at
revalued amount for which an impairment loss is recognised
directly against any related revaluation reserve to the extent
that the impairment loss does not exceed the amount held in the
revaluation reserve for that same asset. Impairment losses
recognised in respect of cash-generating units are allocated first
to reduce the carrying amount of any goodwill allocated to the
cash-generating unit and then, to reduce the carrying amount of
the other assets in the unit on a pro rata basis, except that the
carrying value of an asset will not be reduced below its
individual fair value less costs to sell, or value in use, if
determinable.
The Group assesses at each balance sheet date whether there is any
indication that an impairment loss recognised for an asset, except
in the case of goodwill, in prior years may no longer exist. An
impairment loss is reversed if there has been a favourable change
in the estimates used to determine the recoverable amount. A
subsequent increase in the recoverable amount of an asset, when
the circumstances and events that led to the write-down or
write-off cease to exist, is recognised as an income unless the
asset is carried at revalued amount. Reversal of an impairment
loss on a revalued asset is credited to the revaluation reserve
except for impairment loss which was previously recognised as an
expense in the income statement; a reversal of such impairment
loss is recognised as an income. The reversal is reduced by the
amount that would have been recognised as depreciation had the
write-down or write-off not occurred. An impairment loss in
respect of goodwill is not reversed.
(m) Trade accounts and other payables
Trade accounts and other payables are initially recognised at fair
value and thereafter stated at amortised cost unless the effect of
discounting would be immaterial, in which case they are stated at cost.
(n) Interest-bearing borrowings
Interest bearing borrowings are recognised initially at fair value less
attributable transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost with any
difference between cost and redemption value being recognised in profit
or loss over the period of borrowings using the effective interest
method.
(o) Provisions and contingent liability
A provision is recognised for liability of uncertain timing or amount
when the Group has a legal or constructive obligation arising as a
result of a past event, it is probable that an outflow of economic
benefits will be required to settle the obligation and a reliable
estimate can be made.
When it is not probable that an outflow of economic benefits will be
required, or the amount cannot be estimated reliably, the obligation is
disclosed as a contingent liability, unless the probability of outflow
of economic benefits is remote. Possible obligations, whose existence
will only be confirmed by the occurrence or non-occurrence of one or
more future events are also disclosed as contingent liabilities unless
the probability of outflow of economic benefits is remote.
85
2 PRINCIPAL ACCOUNTING POLICIES (Continued)
(p) Revenue recognition
Revenues associated with the sale of crude oil, natural gas, petroleum
and chemical products and ancillary materials are recorded when the
customer accepts the goods and the significant risks and rewards of
ownership and title have been transferred to the buyer. Revenue from
the rendering of services is recognised in the income statement upon
performance of the services. No revenue is recognised if there are
significant uncertainties regarding recovery of the consideration due,
the possible return of goods, or when the amount of revenue and the
costs incurred or to be incurred in respect of the transaction cannot
be measured reliably.
Interest income is recognised on a time apportioned basis that takes
into account the effective yield on the asset.
Government grants relating to the purchase of assets used for
technology improvements are initially recorded as long-term liabilities
when there is reasonable assurance that they will be received and
thereafter offset against the cost of the related assets upon the
transfer of these assets to property, plant and equipment. The grants
are recognised as an income over the useful life of these property,
plant and equipment by way of reduced depreciation.
A government grant that becomes receivable as compensation for expenses
or losses already incurred with no future related costs shall be
recognised as income of the period in which it becomes receivable.
(q) Borrowing costs
Borrowing costs are expensed in the income statement in the period in
which they are incurred, except to the extent that they are capitalised
as being attributable to the construction of an asset which necessarily
takes a period of time to get ready for its intended use.
(r) Repairs and maintenance expenditure
Repairs and maintenance expenditure is expensed as incurred.
(s) Environmental expenditures
Environmental expenditures that relate to current ongoing operations or
to conditions caused by past operations are expensed as incurred.
Liabilities related to future remediation costs are recorded when
environmental assessments and/or cleanups are probable and the costs
can be reasonably estimated. As facts concerning environmental
contingencies become known to the Group, the Group reassesses its
position both with respect to accrued liabilities and other potential
exposures.
(t) Research and development costs
Research and development costs are recognised as expenses in the period
in which they are incurred.
(u) Operating leases
Operating lease payments are charged to the income statement on a
straight-line basis over the period of the respective leases.
(v) Retirement benefits
The contributions payable under the Group's retirement plans are
recognised as expenses in the income statement as incurred and
according to the contribution determined by the plans. Further
information is set out in Note 31.
(w) Income tax
Income tax comprises current and deferred tax. Current tax is
calculated on taxable income by applying the applicable tax rates.
Deferred tax is provided using the balance sheet liability method on
all temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
taxation purposes. Deferred tax is calculated on the basis of the
enacted tax rates that are expected to apply in the period when the
asset is realised or the liability is settled.
The tax value of losses expected to be available for utilisation
against future taxable income is set off against the deferred tax
liability within the same legal tax unit and jurisdiction to the extent
appropriate, and is not available for set-off against the taxable
profit of another legal tax unit. Deferred tax assets are reduced to
the extent that it is no longer probable that the related tax benefit
will be realised.
(x) Dividends
Dividends are recognised as a liability in the period in which they are
declared.
(y) Segmental reporting
A business segment is a distinguishable component of the Group that is
engaged in providing products or services and is subject to risks and
rewards that are different from those of other segments.
3 TURNOVER
Turnover represents revenue from the sales of crude oil, natural gas,
petroleum and chemical products, net of value-added tax.
86
4 OTHER OPERATING REVENUES
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Sale of materials, service and others 11,046 9,117
-------------------------------------------------------------------------------
Rental income 94 89
-------------------------------------------------------------------------------
11,140 9,206
================================================================================
5 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The following items are included in selling, general and administrative
expenses:
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Research and development costs 1,120 736
-------------------------------------------------------------------------------
Operating lease charges 2,426 2,101
-------------------------------------------------------------------------------
Impairment losses:
-------------------------------------------------------------------------------
- trade accounts receivable 77 76
---------------------------------------------------------------------------
- other receivables 22 218
============================================================================
6 PERSONNEL EXPENSES
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Wages and salaries 6,834 6,339
-------------------------------------------------------------------------------
Staff welfare 923 794
-------------------------------------------------------------------------------
Contributions to retirement schemes 959 930
-------------------------------------------------------------------------------
Social security contributions 481 473
-------------------------------------------------------------------------------
9,197 8,536
================================================================================
7 EMPLOYEE REDUCTION EXPENSES
In accordance with the Group's voluntary employee reduction plan, the Group
recorded employee reduction expenses of RMB 48 million (2005: RMB 100
million) during the six-month period ended 30 June 2006 in respect of the
voluntary termination of approximately 1,000 (2005: 1,800) employees.
8 TAXES OTHER THAN INCOME TAX
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Consumption tax 6,644 5,906
-------------------------------------------------------------------------------
Special oil income levy 3,652 --
-------------------------------------------------------------------------------
City construction tax 1,409 1,332
-------------------------------------------------------------------------------
Education surcharge 694 649
-------------------------------------------------------------------------------
Resources tax 407 221
-------------------------------------------------------------------------------
Business tax 112 96
-------------------------------------------------------------------------------
12,918 8,204
================================================================================
Consumption tax is levied on producers of gasoline, diesel, naphtha, fuel
oil, jet fuel, lubricant oil and solvent oil based on a tariff rate applied
to the volume of sales. Effective 26 March 2006, a special oil income levy
has been levied on oil exploration and production entities based on the
progressive ad valorem rates on the excess of sale at a price which exceeds
USD 40 per barrel. City construction tax is levied on an entity based on its
total amount of value-added tax, consumption tax and business tax.
87
9 OTHER OPERATING EXPENSES, NET
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Fines, penalties and compensations 35 108
-------------------------------------------------------------------------------
Donations 40 128
-------------------------------------------------------------------------------
Loss on disposal of property, plant
and equipment, net 13 20
-------------------------------------------------------------------------------
Impairment losses on long-lived assets (Note) 34 397
-------------------------------------------------------------------------------
Others 372 223
-------------------------------------------------------------------------------
494 876
================================================================================
Note:
Impairment losses recognised on long-lived assets of the Chemicals Segment
were RMB 29 million (2005: RMB 392 million) for the six-month period ended
30 June 2006. These impairment losses relate to certain chemical production
facilities that are held for use. The carrying values of these facilities
were written down to their recoverable amounts that were determined based on
the appraised values of the production facilities. The primary factor
resulting in the impairment losses on long-lived assets of the Chemicals
Segment was due to higher operating and production costs caused by the
increase in the prices of raw materials that are not expected to be
recovered through an increase in selling price.
Impairment losses recognised on long-lived assets of the Marketing and
Distribution Segment of RMB 5 million (2005: RMB 5 million) for the
six-month period ended 30 June 2006 primarily relate to certain service
stations that were closed during the period. In measuring the amounts of
impairment charges, the carrying amounts of these assets were compared to
the present value of the expected future cash flows of the assets, as well
as information about sales and purchases of similar properties in the same
geographic area.
10 INTEREST EXPENSE
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Interest expense incurred 4,176 3,399
--------------------------------------------------------------------------------
Less: Interest expense capitalised* (634) (554)
--------------------------------------------------------------------------------
INTEREST EXPENSE 3,542 2,845
--------------------------------------------------------------------------------
* Interest rates per annum at which
borrowing costs were capitalised
for construction in progress 3.6% to 5.9% 3.4% to 6.1%
-------------------------------------------------------------------------------
11 TAXATION
Taxation in the consolidated income statement represents:
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Current tax
-------------------------------------------------------------------------------
- Provision for the period 9,819 9,608
---------------------------------------------------------------------------
- Under-provision in prior years 240 477
---------------------------------------------------------------------------
Deferred taxation 51 (140)
-------------------------------------------------------------------------------
10,110 9,945
================================================================================
A reconciliation between actual tax expense and accounting profit at
applicable tax rates is as follows:
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Profit before taxation 31,674 31,714
-------------------------------------------------------------------------------
Expected PRC income tax expense at a
statutory tax rate of 33% 10,453 10,466
-------------------------------------------------------------------------------
Tax effect of non-deductible expenses 379 234
-------------------------------------------------------------------------------
Tax effect of non-taxable income (400) (222)
-------------------------------------------------------------------------------
Tax effect of differential tax rate on
subsidiaries' income (Note) (1,161) (870)
-------------------------------------------------------------------------------
Tax effect of tax losses not
recognised for deferred tax 600 15
-------------------------------------------------------------------------------
Under-provision in prior years 240 477
-------------------------------------------------------------------------------
Tax credit for domestic equipment purchases (1) (155)
-------------------------------------------------------------------------------
Actual tax expense 10,110 9,945
===============================================================================
Substantially all income before income tax and related tax expense is
from PRC sources.
Note:
The provision for PRC current income tax is based on a statutory rate of 33%
of the assessable income of the Group as determined in accordance with the
relevant income tax rules and regulations of the PRC, except for certain
entities of the Group, which are taxed at a preferential rate of 15%.
88
12 DIVIDENDS
Dividends payable to equity shareholders of the Company attributable to the
period represent:
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Interim dividends declared after the
balance sheet date of RMB 0.04
per share (2005: RMB 0.04 per share) 3,468 3,468
----------------------------------------------------------------------------
Pursuant to the Company's Articles of Association and a resolution passed at
the Directors' meeting on 25 August 2006, the directors authorised to
declare the interim dividends for the year ending 31 December 2006 of RMB
0.04 (2005: RMB 0.04) per share totalling RMB 3,468 million (2005: RMB 3,468
million). Interim dividend of RMB 3,468 million (2005: RMB 3,468 million)
proposed after the balance sheet date has not been recognised as a liability
at the balance sheet date.
Dividends payable to equity shareholders of the Company attributable to the
previous financial year, approved and paid during the period represent:
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Final dividends in respect of the previous
financial year, approved and paid during
the period of RMB 0.09 per share
(2005: RMB 0.08 per share) 7,803 6,936
----------------------------------------------------------------------------
Pursuant to the shareholders' approval at the Annual General Meeting on 24
May 2006, a final dividend of RMB 0.09 per share totalling RMB 7,803 million
in respect of the year ended 31 December 2005 was declared and paid on 30
June 2006.
Pursuant to the shareholders' approval at the Annual General Meeting on 18
May 2005, a final dividend of RMB 0.08 per share totalling RMB 6,936 million
in respect of the year ended 31 December 2004 was declared and paid on 27
June 2005.
13 BASIC EARNINGS PER SHARE
The calculation of basic earnings per share for the six-month period ended
30 June 2006 is based on the profit attributable to equity shareholders of
the Company of RMB 21,406 million (2005: RMB 19,653 million) and the
weighted average number of shares of 86,702,439,000 (2005: 86,702,439,000)
during the period.
The amount of diluted earnings per share is not presented as there were no
dilutive potential ordinary shares in existence during the periods
presented.
14 PROPERTY, PLANT AND EQUIPMENT
By segment:
Exploration Marketing Corporate
and and and
production Refining distribution Chemicals others Total
RMB millions RMB millions RMB millions RMB millions RMB millions RMB millions
COST/VALUATION:
-----------------------------------------------------------------------------------------------------------------------------------
Balance at 1 January 2005 192,076 116,910 65,345 163,222 4,092 541,645
-----------------------------------------------------------------------------------------------------------------------------------
Additions 8 85 77 96 147 413
-----------------------------------------------------------------------------------------------------------------------------------
Transferred from construction
in progress 3,386 3,173 5,918 15,420 95 27,992
-----------------------------------------------------------------------------------------------------------------------------------
Proportionate share of a
new jointly controlled entity - - - 1,028 - 1,028
-----------------------------------------------------------------------------------------------------------------------------------
Disposals (97) (84) (220) (102) (18) (521)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 30 JUNE 2005 195,373 120,084 71,120 179,664 4,316 570,557
-----------------------------------------------------------------------------------------------------------------------------------
Balance at 1 January 2006 211,112 121,866 77,021 180,103 4,474 594,576
-----------------------------------------------------------------------------------------------------------------------------------
Additions 14 92 168 181 161 616
-----------------------------------------------------------------------------------------------------------------------------------
Transferred from construction
in progress 4,747 4,632 4,097 1,860 156 15,492
-----------------------------------------------------------------------------------------------------------------------------------
Acquisition of a subsidiary 2,071 - - - - 2,071
-----------------------------------------------------------------------------------------------------------------------------------
Reclassification - 557 - (557) - -
-----------------------------------------------------------------------------------------------------------------------------------
Disposals (36) (96) (101) (172) (17) (422)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 30 JUNE 2006 217,908 127,051 81,185 181,415 4,774 612,333
-----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEPRECIATION:
-----------------------------------------------------------------------------------------------------------------------------------
Balance at 1 January 2005 94,028 56,580 13,465 92,042 1,407 257,522
-----------------------------------------------------------------------------------------------------------------------------------
Depreciation charge for the period 5,233 3,296 1,372 4,872 134 14,907
-----------------------------------------------------------------------------------------------------------------------------------
Impairment losses for the period - - 5 392 - 397
-----------------------------------------------------------------------------------------------------------------------------------
Written back on disposals (87) (58) (95) (54) (6) (300)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 30 JUNE 2005 99,174 59,818 14,747 97,252 1,535 272,526
-----------------------------------------------------------------------------------------------------------------------------------
Balance at 1 January 2006 102,210 61,132 14,812 100,300 1,549 280,003
-----------------------------------------------------------------------------------------------------------------------------------
Depreciation charge for the period 6,119 3,469 1,637 4,797 199 16,221
-----------------------------------------------------------------------------------------------------------------------------------
Acquisition of a subsidiary 592 - - - - 592
-----------------------------------------------------------------------------------------------------------------------------------
Impairment losses for the period - - 5 29 - 34
-----------------------------------------------------------------------------------------------------------------------------------
Reclassification - 1,235 - (1,235) - -
-----------------------------------------------------------------------------------------------------------------------------------
Written back on disposals (16) (60) (45) (125) (8) (254)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 30 JUNE 2006 108,905 65,776 16,409 103,766 1,740 296,596
===================================================================================================================================
NET BOOK VALUE:
-----------------------------------------------------------------------------------------------------------------------------------
At 1 January 2005 98,048 60,330 51,880 71,180 2,685 284,123
-----------------------------------------------------------------------------------------------------------------------------------
AT 30 JUNE 2005 96,199 60,266 56,373 82,412 2,781 298,031
At 1 January 2006 108,902 60,734 62,209 79,803 2,925 314,573
AT 30 JUNE 2006 109,003 61,275 64,776 77,649 3,034 315,737
===================================================================================================================================
89
14 PROPERTY, PLANT AND EQUIPMENT (Continued)
By asset class:
Oil depots, Plant,
storage tanks machinery,
Oil and gas and service equipment
Buildings properties stations and others Total
RMB millions RMB millions RMB millions RMB millions RMB millions
COST/VALUATION:
----------------------------------------------------------------------------------------------------------------------------------
Balance at 1 January 2005 44,854 173,564 60,533 262,694 541,645
-----------------------------------------------------------------------------------------------------------------------------------
Additions 43 1 63 306 413
-----------------------------------------------------------------------------------------------------------------------------------
Transferred from construction in progress 1,222 3,130 5,219 18,421 27,992
-----------------------------------------------------------------------------------------------------------------------------------
Proportionate share of a
new jointly controlled entity 182 - - 846 1,028
-----------------------------------------------------------------------------------------------------------------------------------
Disposals (117) (59) (156) (189) (521)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 30 JUNE 2005 46,184 176,636 65,659 282,078 570,557
----------------------------------------------------------------------------------------------------------------------------------
Balance at 1 January 2006 46,154 191,927 73,117 283,378 594,576
-----------------------------------------------------------------------------------------------------------------------------------
Additions 243 - 136 237 616
-----------------------------------------------------------------------------------------------------------------------------------
Transferred from construction
in progress 345 4,653 5,822 4,672 15,492
-----------------------------------------------------------------------------------------------------------------------------------
Acquisition of a subsidiary 519 1,313 - 239 2,071
-----------------------------------------------------------------------------------------------------------------------------------
Reclassification 1,415 1 (1,238) (178) -
-----------------------------------------------------------------------------------------------------------------------------------
Disposals (75) (3) (41) (303) (422)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 30 JUNE 2006 48,601 197,891 77,796 288,045 612,333
----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEPRECIATION:
----------------------------------------------------------------------------------------------------------------------------------
Balance at 1 January 2005 20,308 85,143 11,781 140,290 257,522
-----------------------------------------------------------------------------------------------------------------------------------
Depreciation charge for the period 761 4,902 1,209 8,035 14,907
-----------------------------------------------------------------------------------------------------------------------------------
Impairment losses for the period - - 5 392 397
-----------------------------------------------------------------------------------------------------------------------------------
Written back on disposals (42) (50) (60) (148) (300)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 30 JUNE 2005 21,027 89,995 12,935 148,569 272,526
----------------------------------------------------------------------------------------------------------------------------------
Balance at 1 January 2006 21,404 93,364 13,730 151,505 280,003
----------------------------------------------------------------------------------------------------------------------------------
Depreciation charge for the period 886 5,768 1,656 7,911 16,221
-----------------------------------------------------------------------------------------------------------------------------------
Acquisition of a subsidiary 49 468 - 75 592
-----------------------------------------------------------------------------------------------------------------------------------
Impairment losses for the period 29 - 5 - 34
-----------------------------------------------------------------------------------------------------------------------------------
Reclassification 151 2 (129) (24) -
-----------------------------------------------------------------------------------------------------------------------------------
Written back on disposals (20) (3) (20) (211) (254)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 30 JUNE 2006 22,499 99,599 15,242 159,256 296,596
===================================================================================================================================
NET BOOK VALUE:
----------------------------------------------------------------------------------------------------------------------------------
At 1 January 2005 24,546 88,421 48,752 122,404 284,123
----------------------------------------------------------------------------------------------------------------------------------
AT 30 JUNE 2005 25,157 86,641 52,724 133,509 298,031
-----------------------------------------------------------------------------------------------------------------------------------
At 1 January 2006 24,750 98,563 59,387 131,873 314,573
-----------------------------------------------------------------------------------------------------------------------------------
AT 30 JUNE 2006 26,102 98,292 62,554 128,789 315,737
===================================================================================================================================
The Group's proportionate share of the jointly controlled entities' net book
value of property, plant and equipment at 30 June 2006 in the exploration
and production and the Chemicals Segments were RMB 377 million (2005: RMB
398 million) and RMB 14,720 million (2005: RMB 14,889 million),
respectively.
As required by the relevant PRC regulations with respect to the
Reorganisation, the property, plant and equipment of the Group at 30
September 1999 were valued for each asset class by China United Assets
Appraisal Corporation, Beijing Zhong Zheng Appraisal Company, CIECC Assets
Appraisal Corporation and Zhong Fa International Properties Valuation
Corporation, independent valuers registered in the PRC, on a depreciated
replacement cost basis. The value of property, plant and equipment was
determined at RMB 159,788 million. The surplus on revaluation of RMB 32,320
million, net of amounts allocated to minority interests, was incorporated in
the financial statements of the Group at 31 December 1999.
In connection with the Acquisition of Sinopec National Star, the property,
plant and equipment of Sinopec National Star were revalued at 31 December
2000, by a firm of independent valuers and approved by the Ministry of
Finance. The value of property, plant and equipment of Sinopec National Star
pursuant to the valuation, based on a depreciated replacement cost basis,
was determined at RMB 4,373 million, resulting in a surplus on revaluation
of RMB 1,136 million, net of amounts allocated to minority interests.
In connection with the Acquisition of Ethylene Assets, the property, plant
and equipment of Sinopec Maoming were revalued at 30 June 2003, by a firm of
independent valuers in accordance with the relevant rules and regulations.
The value of property, plant and equipment of Sinopec Maoming pursuant to
the valuation, based on a depreciated replacement cost basis, was determined
at RMB 5,100 million, which approximated the net historical carrying value
of the assets.
In connection with the Acquisition of Refining Assets, the property, plant
and equipment of the Refining Assets were revalued at 31 October 2003, by a
firm of independent valuers in accordance with the relevant rules and
regulations. The value of property, plant and equipment of the Refining
Assets pursuant to the valuation, based on a depreciated replacement cost
basis, was determined at RMB 461 million, which approximated the net
historical carrying value of the assets.
In connection with the Acquisition of Petrochemical and Catalyst Assets, the
property, plant and equipment of the Petrochemical and Catalyst Assets were
revalued at 30 June 2004, by a firm of independent valuers in accordance
with the relevant rules and regulations. The value of property, plant and
equipment of the Petrochemical and Catalyst Assets pursuant to the
valuation, based on a depreciated replacement cost basis, was determined at
RMB 11,895 million, which approximated the net historical carrying value of
the assets.
In accordance with IAS 16, subsequent to these revaluations, which was based
on depreciated replacement costs, property, plant and equipment are carried
at revalued amount, being the fair value at the date of the revaluation less
any subsequent accumulated depreciation and impairment losses. Revaluation
is performed periodically to ensure that the carrying amount does not differ
materially from that which would be determined using fair value at the
balance sheet date. Based on a revaluation performed as of 31 December 2004,
which was based on depreciated replacement costs, the carrying value of
property, plant and equipment did not differ materially from their fair
value.
90
15 CONSTRUCTION IN PROGRESS
Exploration Marketing Corporate
and and and
production Refining distribution Chemicals others Total
RMB millions RMB millions RMB millions RMB millions RMB millions RMB millions
Balance at 1 January 2005 9,262 8,459 13,781 13,170 1,513 46,185
----------------------------------------------------------------------------------------------------------------------------------
Additions 11,352 3,366 6,307 2,146 249 23,420
----------------------------------------------------------------------------------------------------------------------------------
Additions by jointly
controlled entities 396 - - 1,500 - 1,896
----------------------------------------------------------------------------------------------------------------------------------
Proportionate share of a new
jointly controlled entity - - - 5,461 - 5,461
----------------------------------------------------------------------------------------------------------------------------------
Dry hole costs written off (1,325) - - - - (1,325)
----------------------------------------------------------------------------------------------------------------------------------
Transferred to property,
plant and equipment (3,386) (3,173) (5,918) (15,420) (95) (27,992)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 30 JUNE 2005 16,299 8,652 14,170 6,857 1,667 47,645
==================================================================================================================================
Balance at 1 January 2006 10,884 14,339 10,336 10,562 2,146 48,267
----------------------------------------------------------------------------------------------------------------------------------
Additions 13,060 5,029 6,517 5,749 879 31,234
----------------------------------------------------------------------------------------------------------------------------------
Additions by jointly
controlled entities 73 - - 106 - 179
----------------------------------------------------------------------------------------------------------------------------------
Acquisition of a subsidiary 89 - - - - 89
----------------------------------------------------------------------------------------------------------------------------------
Dry hole costs written off (1,398) - - - - (1,398)
----------------------------------------------------------------------------------------------------------------------------------
Transferred to property,
plant and equipment (4,747) (4,632) (4,097) (1,860) (156) (15,492)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 30 JUNE 2006 17,961 14,736 12,756 14,557 2,869 62,879
==================================================================================================================================
The Group's proportionate share of the jointly controlled entities'
construction in progress at 30 June 2006 in the exploration and production
and the Chemicals Segments were RMB 2,961 million (2005: RMB 2,888 million)
and RMB 592 million (2005: RMB 504 million), respectively.
As at 30 June 2006, the amount of capitalised cost of exploratory wells
included in the Group's construction in progress in the Exploration and
Production Segment was RMB 5,313 million (2005: RMB 3,573 million). The
geological and geophysical costs paid during the six-month period ended 30
June 2006 were RMB 1,732 million (2005: RMB 2,083 million).
16 GOODWILL
2006 2005
RMB millions RMB millions
COST:
--------------------------------------------------------------------------
Balance at 1 January 2,203 383
--------------------------------------------------------------------------
Additions 11,731 1,358
--------------------------------------------------------------------------
BALANCE AT 30 JUNE 13,934 1,741
--------------------------------------------------------------------------
ACCUMULATED IMPAIRMENT LOSSES:
--------------------------------------------------------------------------
Balance at 1 January and 30 June -- --
--------------------------------------------------------------------------
NET BOOK VALUE:
--------------------------------------------------------------------------
Balance at 1 January 2,203 383
--------------------------------------------------------------------------
BALANCE AT 30 JUNE 13,934 1,741
--------------------------------------------------------------------------
Impairment tests for cash-generating units containing goodwill
Goodwill is allocated to the following Group's cash-generating units:
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Sinopec Beijing Yanshan Branch (OSinopec YanshanO) 1,157 1,157
---------------------------------------------------------------------------------------------------------
Sinopec Zhenhai Refining and Chemical Company Limited (OSinopec ZhenhaiO) 3,952 --
---------------------------------------------------------------------------------------------------------
Sinopec Qilu Petrochemical Company Limited (OSinopec QiluO) 2,159 --
---------------------------------------------------------------------------------------------------------
Sinopec Yangzi Petrochemical Company Limited (OSinopec YangziO) 2,737 --
---------------------------------------------------------------------------------------------------------
Sinopec Zhongyuan Petroleum Company Limited (OSinopec ZhongyuanO) 1,391 --
---------------------------------------------------------------------------------------------------------
Shengli Oil Field Dynamic Company Limited (ODynamicO) 1,361 --
---------------------------------------------------------------------------------------------------------
Multiple units without significant goodwill 1,177 1,046
---------------------------------------------------------------------------------------------------------
13,934 2,203
=========================================================================================================
During the six-month period ended 30 June 2006, the Group acquired
additional equity interests in Sinopec Zhenhai, Sinopec Qilu, Sinopec
Yangzi, Sinopec Zhongyuan and Dynamic of 28.7%, 17.7%, 14.8%, 28.5% and
71.4%, respectively. The total consideration paid by the Group was
approximately RMB 21,971 million which was settled in cash. The excess of
the cost of purchase over the fair value of the underlying assets and
liabilities (on a proportionate share) in Sinopec Zhenhai, Sinopec Qilu,
Sinopec Yangzi, Sinopec Zhongyuan and Dynamic were RMB 3,952 million, RMB
2,159 million, RMB 2,737 million, RMB 1,391 million and RMB 1,361 million,
respectively, which were recorded as goodwill.
The recoverable amounts of each of the above cash-generating units will be
determined based on value in use calculations. These calculations will use
cash flow projections primarily based on respective financial budgets,
covering a one-year period, approved by management and pre-tax discount
rates that reflect current market assessments of the time value of money and
specific risks relating to the relevant business segment.
During the year ended 31 December 2005, the Group acquired the entire
1,012,000,000 H shares, representing approximately 29.99% of the issued
share capital of Sinopec Beijing Yanshan Petrochemical Company Limited from
minority interests shareholders at HK$ 3.80 per share. The total
consideration paid by the Group was approximately RMB 4,088 million which
was settled in cash. The excess of the cost of purchase over the share of
fair value of the underlying assets and liabilities was RMB 1,157 million,
which was recorded as goodwill and allocated to Sinopec Yanshan.
91
17 INVESTMENTS
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Unlisted investments, at cost 3,510 3,253
---------------------------------------------------------------------------
Less: Impairment losses (360) (327)
---------------------------------------------------------------------------
3,150 2,926
============================================================================
Unlisted investments represent the Group's interests in PRC domiciled
enterprises which are mainly engaged in non-oil and gas activities and
operations. The Group has no significant investments in marketable
securities.
The impairment losses relating to investments for the six-month period ended
30 June 2006 amounted to RMB 41 million (2005: RMB 40 million).
18 INTEREST IN ASSOCIATES
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Share of net assets 10,693 9,217
--------------------------------------------------------------------------
The Group's investments in associates are with companies primarily engaged
in the oil and gas and chemical operations in the PRC. These investments are
individually and in the aggregate not material to the Group's financial
condition or results of operations for all periods presented. The share of
associates' taxation for the six-month period ended 30 June 2006 was RMB 180
million (2005: RMB 170 million). The principal investments in associates,
all of which are incorporated in the PRC, are as follows:
Percentage of
Form of Percentage equity held by
business Particulars of issued of equity held the Company's
Name of company structure and paid up capital by the Company subsidiaries Principal activities
% %
Sinopec Shandong Taishan Incorporated 480,793,320 ordinary 38.68 - Trading of petroleum
Petroleum and Company shares of RMB 1.00 each products decoration of
Limited (Taishan)* service gas stations
--------------------------------------------------------------------------------------------------------------------------------
Sinopec Finance Company Incorporated Registered capital 49.00 - Provision of non-banking
Limited RMB 6,000,000,000 financial services
--------------------------------------------------------------------------------------------------------------------------------
Shanghai Petroleum National Incorporated Registered capital 30.00 - Exploration and
Gas Corporation RMB 900,000,000 production of crude oil
and natural gas oil
--------------------------------------------------------------------------------------------------------------------------------
Shanghai Chemical Industry Incorporated Registered capital - 38.26 Planning, development
Park Development RMB 2,372,439,000 and operation of the
Company Limited Chemical Industry Park
in Shanghai, the PRC
--------------------------------------------------------------------------------------------------------------------------------
China Shipping & Sinopec Incorporated Registered capital - 50.00 Transportation of
Suppliers Company Limited RMB 876,660,000 petroleum products
--------------------------------------------------------------------------------------------------------------------------------
China Aviation Oil Supply Incorporated Registered capital - 29.00 Marketing and
Company Limited RMB 3,800,000,000 distribution of refined
petroleum products
--------------------------------------------------------------------------------------------------------------------------------
During the six-month period ended 30 June 2006, the Group acquired 71.38%
equity interests in Dynamic, which was previously an associate of the Group
and, thereafter, Dynamic became a subsidiary of the Group (Note 16).
* Shares of Taishan are listed on the Shenzhen Stock Exchange. Shares held
by the Company are domestic state-owned A shares which are not admitted
for trading in any stock exchange in the PRC. The market value of the
Company's investments in Taishan based on the quoted market price was RMB
1,068 million (2005: RMB 547 million) at 30 June 2006.
92
19 INTEREST IN JOINTLY CONTROLLED ENTITIES
The Group's principal interests in jointly controlled entities are primarily
engaged in the oil and gas and chemical operations in the PRC, principal
interests in jointly controlled entities are as follows:
Percentage of
Form of Percentage equity held by
business Particulars of issued of equity held the Company's
Name of company structure and paid up capital by the Company subsidiaries Principal activities
% %
Shanghai Secco Petrochemical Incorporated Registered capital 30.00 20.00 Manufacturing and
Company Limited USD 901,440,964 distribution of
petrochemical products
--------------------------------------------------------------------------------------------------------------------------------
BASF-YPC Company Limited Incorporated Registered capital 30.00 10.00 Manufacturing and
RMB 8,793,000,000 distribution of
petrochemical products
--------------------------------------------------------------------------------------------------------------------------------
Yueyang Sinopec and Shell Coal Incorporated Registered capital 50.00 - Manufacturing and
Gasification Company Limited USD 45,588,700 distribution of
industrial gas
--------------------------------------------------------------------------------------------------------------------------------
Block A Oil Field in the Unincorporated - - 43.00 Exploration and
Western Area Chengdao production of crude
in Bohai Bay oil and natural gas
--------------------------------------------------------------------------------------------------------------------------------
Included in the consolidated interim financial statements are the following
items that represent the Group's proportionate share of the jointly
controlled entities' results of operations, financial conditions and cash
flows.
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Results of operations:
-------------------------------------------------------------------------------------------------------------------------
Operating revenue 8,397 2,421
Expenses (7,362) (2,745)
-------------------------------------------------------------------------------------------------------------------------
Net profit/(loss) 1,035 (324)
=========================================================================================================================
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Financial conditions:
--------------------------------------------------------------------------------------------------------------------------
Current assets 3,716 2,631
--------------------------------------------------------------------------------------------------------------------------
Non-current assets, primarily property, plant and equipment and construction in progress
with net book values of RMB 15,097 million (2005: RMB 15,287 million) and
RMB 3,553 million (2005: RMB 3,392 million), respectively 19,075 19,522
--------------------------------------------------------------------------------------------------------------------------
Current liabilities (2,426) (2,543)
--------------------------------------------------------------------------------------------------------------------------
Non-current liabilities, primarily long-term bank loans of RMB 9,778 million
(2005: RMB 10,006 million) (9,897) (10,177)
--------------------------------------------------------------------------------------------------------------------------
Net assets 10,468 9,433
--------------------------------------------------------------------------------------------------------------------------
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Cash flows:
--------------------------------------------------------------------------------------------------------------------------
Net cash generated from/(used in) operating activities 819 (984)
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (238) (1,896)
--------------------------------------------------------------------------------------------------------------------------
Net cash generated from financing activities 14 3,047
--------------------------------------------------------------------------------------------------------------------------
20 LONG-TERM PREPAYMENTS AND OTHER ASSETS
Long term prepayments and other assets primarily represent prepaid rental
expenses over one year, computer software and catalysts.
93
21 TRADE ACCOUNTS AND BILLS RECEIVABLES
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Amounts due from third parties 17,579 13,546
--------------------------------------------------------------------------------------------------------------------------
Amounts due from Sinopec Group Company and fellow subsidiaries 2,001 3,049
--------------------------------------------------------------------------------------------------------------------------
Amounts due from associates 534 572
--------------------------------------------------------------------------------------------------------------------------
Amounts due from jointly controlled entities 503 505
--------------------------------------------------------------------------------------------------------------------------
20,617 17,672
--------------------------------------------------------------------------------------------------------------------------
Less: Impairment losses for bad and doubtful debts (3,168) (3,140)
--------------------------------------------------------------------------------------------------------------------------
17,449 14,532
--------------------------------------------------------------------------------------------------------------------------
Bills receivable 7,825 7,143
--------------------------------------------------------------------------------------------------------------------------
25,274 21,675
==========================================================================================================================
The ageing analysis of trade accounts and bills receivables (net of
impairment losses for bad and doubtful debts) is as follows:
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Within one year 24,762 21,414
--------------------------------------------------------------------------------------------------------------------------
Between one and two years 299 178
--------------------------------------------------------------------------------------------------------------------------
Between two and three years 165 43
--------------------------------------------------------------------------------------------------------------------------
Over three years 48 40
--------------------------------------------------------------------------------------------------------------------------
25,274 21,675
==========================================================================================================================
Sales are generally on a cash term. Credit is generally only available for
major customers with well-established trading records. Amounts due from
Sinopec Group Company and fellow subsidiaries are repayable under the same
terms.
22 INVENTORIES
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Crude oil and other raw materials 63,853 53,333
--------------------------------------------------------------------------------------------------------------------------
Work in progress 9,587 9,422
--------------------------------------------------------------------------------------------------------------------------
Finished goods 28,308 23,163
--------------------------------------------------------------------------------------------------------------------------
Spare parts and consumables 5,038 4,448
--------------------------------------------------------------------------------------------------------------------------
106,786 90,366
--------------------------------------------------------------------------------------------------------------------------
Less: Allowance for diminution in value of inventories (892) (892)
--------------------------------------------------------------------------------------------------------------------------
105,894 89,474
==========================================================================================================================
The cost of inventories recognised as an expense in the consolidated income
statement amounted to RMB 416,865 million for six-month period ended 30 June
2006 (2005: RMB 293,438 million), including the write-down of inventories
amounted to RMB 250 million (2005: RMB 131 million) and the reversal of
write-down of inventories made in prior years amounted to RMB 250 million
(2005: RMB 101 million) mainly arising from the sales of inventories.
23 PREPAID EXPENSES AND OTHER CURRENT ASSETS
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Advances to third parties 1,638 1,754
--------------------------------------------------------------------------------------------------------------------------
Amounts due from Sinopec Group Company and fellow subsidiaries 3,307 2,954
--------------------------------------------------------------------------------------------------------------------------
Other receivables 2,914 1,781
--------------------------------------------------------------------------------------------------------------------------
Purchase deposits 4,841 2,496
--------------------------------------------------------------------------------------------------------------------------
Prepayments in connection with construction work and equipment purchases 5,373 5,583
--------------------------------------------------------------------------------------------------------------------------
Prepaid value-added tax and customs duty 4,630 4,288
--------------------------------------------------------------------------------------------------------------------------
Amounts due from associates 522 539
--------------------------------------------------------------------------------------------------------------------------
23,225 19,395
==========================================================================================================================
94
24 DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets and deferred tax liabilities are attributable to the
items detailed in the table below:
Assets Liabilities Net balance
AT 30 At 31 AT 30 At 31 AT 30 At 31
JUNE December JUNE December JUNE December
2006 2005 2006 2005 2006 2005
RMB MILLIONS RMB millions RMB MILLIONS RMB millions RMB MILLIONS RMB millions
Current
--------------------------------------------------------------------------------------------------------------------------
Receivables and inventories 4,122 3,904 -- -- 4,122 3,904
--------------------------------------------------------------------------------------------------------------------------
Non-current
--------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment 1,557 1,642 (1,656) (1,619) (99) 23
--------------------------------------------------------------------------------------------------------------------------
Accelerated depreciation -- -- (4,392) (4,217) (4,392) (4,217)
--------------------------------------------------------------------------------------------------------------------------
Tax value of losses carried forward,
net of valuation allowances 97 128 -- -- 97 128
--------------------------------------------------------------------------------------------------------------------------
Lease prepayments 355 359 -- -- 355 359
--------------------------------------------------------------------------------------------------------------------------
Others 36 39 -- (66) 36 (27)
--------------------------------------------------------------------------------------------------------------------------
Deferred tax assets/(liabilities) 6,167 6,072 (6,048) (5,902) 119 170
==========================================================================================================================
As at 30 June 2006, certain subsidiaries of the Company had tax value of
losses carried forward for PRC income tax purpose of RMB 5,890 million which
were available to offset future PRC taxable income of respective
subsidiaries, if any. RMB 503 million, RMB 425 million, RMB 751 million, RMB
1,239 million, RMB 1,154 million and RMB 1,818 million expire in 2006, 2007,
2008, 2009, 2010 and 2011, respectively. As at 30 June 2006, the Group
recognised deferred tax assets, net of valuation allowances, of RMB 97
million (2005: RMB 128 million) with respect to these tax value of losses
carried forward.
A valuation allowance on deferred tax assets is recorded if it is probable
that some portion or all of the deferred tax assets will not be realised
through the recovery of taxes previously paid and/or future taxable income.
The allowance is subject to ongoing adjustments based on changes in
circumstances that affect the Group's assessment on the realisability of the
deferred tax assets. The Group has reviewed its deferred tax assets at the
balance sheet date. Based on this review, valuation allowances of RMB 600
million (2005: RMB 15 million) were provided for the six-month period ended
30 June 2006. The Group determined the valuation allowance based on
management's assessment of the probability that taxable profit will be
available over the period which the deferred tax assets can be realised or
utilised. In assessing the probability, both positive and negative evidence
was considered, including whether it is probable that the operations will
have future taxable profits over the periods which the deferred tax assets
are deductible or utilised and whether the tax losses result from
identifiable causes which are unlikely to recur. Based on this assessment, a
valuation allowance was provided to reduce the deferred tax asset to the
amount that is probable to be realised.
25 SHORT-TERM AND LONG-TERM DEBTS AND LOANS FROM SINOPEC GROUP COMPANY AND
FELLOW SUBSIDIARIES
Short-term debts represent:
AT 30 JUNE At 31 December
2006 2005
RMB MILLIONS RMB millions
THIRD PARTIES' DEBTS
-----------------------------------------------------------------------------------------------------------------
Short-term bank loans 39,664 15,392
-----------------------------------------------------------------------------------------------------------------
Current portion of long-term bank loans 14,363 14,879
-----------------------------------------------------------------------------------------------------------------
Current portion of long-term other loans 28 26
-----------------------------------------------------------------------------------------------------------------
Current portion of long-term bank loans of jointly controlled entities 253 193
-----------------------------------------------------------------------------------------------------------------
14,644 15,098
-----------------------------------------------------------------------------------------------------------------
Corporate bonds (a) 10,891 9,921
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
65,199 40,411
-----------------------------------------------------------------------------------------------------------------
LOANS FROM SINOPEC GROUP COMPANY AND FELLOW SUBSIDIARIES
-----------------------------------------------------------------------------------------------------------------
Short-term loans 7,121 732
-----------------------------------------------------------------------------------------------------------------
Current portion of long-term loans 174 100
-----------------------------------------------------------------------------------------------------------------
7,295 832
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
72,494 41,243
=================================================================================================================
The Group's weighted average interest rate on short-term loans was 4.1% at
30 June 2006 (2005: 4.0%).
95
25 SHORT-TERM AND LONG-TERM DEBTS AND LOANS FROM SINOPEC GROUP COMPANY AND
FELLOW SUBSIDIARIES (Continued)
Long-term debts comprise:
AT 30 JUNE At 31 December
Interest rate and final maturity 2006 2005
RMB MILLIONS RMB millions
THIRD PARTIES' DEBTS
-------------------------------------------------------------------------------------------------------------------------
LONG-TERM BANK LOANS
-------------------------------------------------------------------------------------------------------------------------
Renminbi denominated Interest rates ranging from interest free to 6.3% per annum
at 30 June 2006 with maturities through 2013 63,409 59,769
-------------------------------------------------------------------------------------------------------------------------
Japanese Yen denominated Interest rates ranging from 2.6% to 5.8% per annum
at 30 June 2006 with maturities through 2024 3,096 3,394
-------------------------------------------------------------------------------------------------------------------------
US Dollar denominated Interest rates ranging from interest free to 7.4% per annum
at 30 June 2006 with maturities through 2031 2,816 5,056
-------------------------------------------------------------------------------------------------------------------------
Euro denominated Fixed interest rate at 6.7% per annum
at 30 June 2006 with maturities through 2010 104 117
-------------------------------------------------------------------------------------------------------------------------
Hong Kong Dollar denominated Floating rate at Hong Kong Prime Rate plus 0.8% to 1.1%
per annum at 30 June 2006 with maturities through 2007 48 94
-------------------------------------------------------------------------------------------------------------------------
69,473 68,430
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
LONG-TERM OTHER LOANS
-------------------------------------------------------------------------------------------------------------------------
Renminbi denominated Interest rates ranging from interest free to 5.0% per annum
at 30 June 2006 with maturities through 2008 124 170
-------------------------------------------------------------------------------------------------------------------------
US Dollar denominated Interest rates ranging from interest free to 2.0% per annum
at 30 June 2006 with maturities through 2015 48 51
-------------------------------------------------------------------------------------------------------------------------
172 221
-------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS
-------------------------------------------------------------------------------------------------------------------------
Renminbi denominated Fixed interest rate at 4.61% per annum
at 30 June 2006 with maturity in February 2014 (b) 3,500 3,500
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
73,145 72,151
-------------------------------------------------------------------------------------------------------------------------
LONG-TERM BANK LOANS OF JOINTLY CONTROLLED ENTITIES
-------------------------------------------------------------------------------------------------------------------------
Renminbi denominated Floating rate at 90% of PBOC's base lending rate per annum
at 30 June 2006 with maturities through 2021 5,580 5,710
-------------------------------------------------------------------------------------------------------------------------
US Dollar denominated Floating rate at London Interbank Offer Rate plus 0.4% to 0.7%
per annum at 30 June 2006 with maturities through 2021 4,198 4,296
-------------------------------------------------------------------------------------------------------------------------
9,778 10,006
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
TOTAL THIRD PARTIES' LONG-TERM DEBTS 82,923 82,157
-------------------------------------------------------------------------------------------------------------------------
Less: Current portion (14,644) (15,098)
-------------------------------------------------------------------------------------------------------------------------
68,279 67,059
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
LONG-TERM LOANS FROM SINOPEC GROUP COMPANY AND FELLOW SUBSIDIARIES
-------------------------------------------------------------------------------------------------------------------------
Renminbi denominated Interest rates ranging from interest free to 5.4% per annum
at 30 June 2006 with maturities through 2020 39,554 39,962
-------------------------------------------------------------------------------------------------------------------------
LONG-TERM LOANS OF JOINTLY CONTROLLED ENTITIES FROM SINOPEC GROUP
COMPANY AND FELLOW SUBSIDIARIES
-------------------------------------------------------------------------------------------------------------------------
Renminbi denominated Floating rate at 90% of PBOC's base lending rate
applicable to three-year tenor loan per annum
at 30 June 2006 with maturities through 2021 73 71
-------------------------------------------------------------------------------------------------------------------------
Less: Current portion (174) (100)
-------------------------------------------------------------------------------------------------------------------------
39,453 39,933
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
107,732 106,992
-------------------------------------------------------------------------------------------------------------------------
(a) The Company issued six-month corporate bonds with a face value at RMB
10 billion to corporate investors in PRC debenture market on 24 October
2005, at a discounted value of RMB 98.75 per RMB 100 par value. The
effective yield of the bonds was 2.54% per annum. Upon the maturity of
the bonds, the Company redeemed the bonds at face value in April 2006.
A subsidiary of the Company issued 270-day corporate bonds with a face
value at RMB 1 billion to corporate investors in PRC debenture market
on 23 February 2006, at a discounted value of RMB 97.78 per RMB 100 par
value. The bonds have an effective yield of 3.07% per annum and mature
in November 2006.
The Company issued 183-day corporate bonds with a face value at RMB 10
billion to corporate investors in PRC debenture market on 16 May 2006,
at a discounted value of RMB 98.68 per RMB 100 par value. The bonds
have an effective yield of 2.67% per annum and mature in November 2006.
(b) The Company issued ten-year corporate bonds of RMB 3.5 billion to PRC
citizens as well as PRC legal and non-legal persons on 24 February 2004
with a fixed interest rate at 4.61% per annum.
Third parties' loans of RMB 62 million of the Group at 30 June 2006
(2005: RMB 35 million) were secured by certain of the Group's property,
plant and equipment. The net book value of property, plant and
equipment of the Group pledged as security amounted to RMB 109 million
at 30 June 2006 (2005: RMB 83 million).
96
25 SHORT-TERM AND LONG-TERM DEBTS AND LOANS FROM SINOPEC GROUP COMPANY AND
FELLOW SUBSIDIARIES (Continued) The aggregate maturities of long-term debts
and loans from Sinopec Group Company and fellow subsidiaries are as follows:
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Within one year 14,818 15,198
---------------------------------------------------------------------------
Between one and two years 24,619 18,787
Between two and five years 32,746 39,142
After five years 50,367 49,063
---------------------------------------------------------------------------
122,550 122,190
===========================================================================
Included in short-term and long-term debts and loans from Sinopec Group
Company and fellow subsidiaries of the Group are the following amounts
denominated in a currency other than the functional currency of the entity
to which they relate:
At 30 June At 31 December
2006 2005
RMB millions RMB millions
US Dollars USD 1,204 USD 2,158
---------------------------------------------------------------------------
Japanese Yen JPY 45,816 JPY 50,507
---------------------------------------------------------------------------
Euro EUR 11 EUR 12
---------------------------------------------------------------------------
Hong Kong Dollars HKD 7,802 HKD 128
===========================================================================
26 TRADE ACCOUNTS AND BILLS PAYABLES
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Amounts due to third parties 47,728 49,962
---------------------------------------------------------------------------
Amounts due to Sinopec Group Compan
and fellow subsidiaries 2,175 2,304
---------------------------------------------------------------------------
Amounts due to jointly controlled entities 725 650
---------------------------------------------------------------------------
Amounts due to associates 8 51
---------------------------------------------------------------------------
50,636 52,967
---------------------------------------------------------------------------
Bills payable 27,198 23,243
---------------------------------------------------------------------------
77,834 76,210
===========================================================================
Amounts due to Sinopec Group Company and fellow subsidiaries are repayable
in accordance with normal commercial terms.
The maturities of trade accounts and bills payables are as follows:
AT 30 JUNE At 31 December
2006 2005
RMB MILLIONS RMB millions
Due within 1 month or on demand 48,219 44,194
---------------------------------------------------------------------------
Due after 1 month but within 6 months 29,381 31,704
---------------------------------------------------------------------------
Due after 6 months 234 312
---------------------------------------------------------------------------
77,834 76,210
===========================================================================
27 ACCRUED EXPENSES AND OTHER PAYABLES
AT 30 JUNE At 31 December
2006 2005
RMB MILLIONS RMB millions
Amounts due to Sinopec Group
Company and fellow subsidiaries 12,128 7,144
---------------------------------------------------------------------------
Accrued expenditures 20,245 19,566
---------------------------------------------------------------------------
Taxes other than income tax 7,222 3,090
---------------------------------------------------------------------------
Receipts in advance 13,156 12,368
---------------------------------------------------------------------------
Advances from third parties 1,243 1,226
---------------------------------------------------------------------------
Others 6,909 4,773
---------------------------------------------------------------------------
60,903 48,167
===========================================================================
97
28 SHARE CAPITAL
AT 30 JUNE At 31 December
2006 2005
RMB MILLIONS RMB millions
REGISTERED, ISSUED AND FULLY PAID
---------------------------------------------------------------------------------------------------
67,121,951,000 domestic state-owned A shares of RMB 1.00 each 67,122 67,122
---------------------------------------------------------------------------------------------------
16,780,488,000 overseas listed H shares of RMB 1.00 each 16,780 16,780
---------------------------------------------------------------------------------------------------
2,800,000,000 domestic listed A shares of RMB 1.00 each 2,800 2,800
---------------------------------------------------------------------------------------------------
86,702 86,702
The Company was established on 25 February 2000 with a registered capital of
68.8 billion domestic state-owned shares with a par value of RMB 1.00 each.
Such shares were issued to Sinopec Group Company in consideration for the
assets and liabilities of the Predecessor Operations transferred to the
Company (Note 1).
Pursuant to the resolutions passed at an Extraordinary General Meeting held
on 25 July 2000 and approvals from relevant government authorities, the
Company is authorised to increase its share capital to a maximum of 88.3
billion shares with a par value of RMB 1.00 each and offer not more than
19.5 billion shares with a par value of RMB 1.00 each to investors outside
the PRC. Sinopec Group Company is authorised to offer not more than 3.5
billion shares of its shareholdings in the Company to investors outside the
PRC. The shares sold by Sinopec Group Company to investors outside the PRC
would be converted into H shares.
In October 2000, the Company issued 15,102,439,000 H shares with a par value
of RMB 1.00 each, representing 12,521,864,000 H shares and 25,805,750
American Depositary Shares (OADSsO, each representing 100 H shares), at
prices of HK$ 1.59 per H share and US$ 20.645 per ADS, respectively, by way
of a global initial public offering to Hong Kong and overseas investors. As
part of the global initial public offering, 1,678,049,000 domestic
state-owned ordinary shares of RMB 1.00 each owned by Sinopec Group Company
were converted into H shares and sold to Hong Kong and overseas investors.
In July 2001, the Company issued 2.8 billion domestic listed A shares with a
par value of RMB 1.00 each at RMB 4.22 by way of a public offering to
natural persons and institutional investors in the PRC.
All A shares and H shares rank pari passu in all material aspects.
29 COMMITMENTS AND CONTINGENT LIABILITIES
Operating lease commitments
The Group leases service stations and other equipment through
non-cancellable operating leases. These operating leases do not contain
provisions for contingent lease rentals. None of the rental agreements
contain escalation provisions that may require higher future rental
payments.
At 30 June 2006 and 31 December 2005, the future minimum lease payments
under operating leases are as follows:
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Within one year 3,665 3,593
---------------------------------------------------------------------------
Between one and two years 3,480 3,442
---------------------------------------------------------------------------
Between two and three years 3,417 3,388
---------------------------------------------------------------------------
Between three and four years 3,383 3,357
---------------------------------------------------------------------------
Between four and five years 3,318 3,353
---------------------------------------------------------------------------
Thereafter 93,831 95,176
---------------------------------------------------------------------------
111,094 112,309
============================================================================
Capital commitments
At 30 June 2006 and 31 December 2005, capital commitments are as follows:
At 30 June At 31 December
2006 2005
RMB millions RMB millions
The Group
---------------------------------------------------------------------------
Authorised and contracted for 61,682 71,666
---------------------------------------------------------------------------
Authorised but not contracted for 64,617 84,213
---------------------------------------------------------------------------
126,299 155,879
---------------------------------------------------------------------------
Jointly controlled entities
---------------------------------------------------------------------------
Authorised and contracted for 2,018 2,160
---------------------------------------------------------------------------
Authorised but not contracted for 4 60
2,022 2,220
============================================================================
These capital commitments relate to oil and gas exploration and development,
refining and petrochemical production capacity expansion projects, the
construction of service stations and oil depots, and capital contributions
to the Group's investments and interest in associates.
98
29 COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Exploration and production licenses
Exploration licenses for exploration activities are registered with the
Ministry of Land and Resources. The maximum term of the Group's exploration
licenses is 7 years, and may be renewed twice within 30 days prior to
expiration of the original term with each renewal being for a two-year term.
The Group is obligated to make progressive annual minimum exploration
investment relating to the exploration blocks in respect of which the
license is issued. The Ministry of Land and Resources also issues production
licenses to the Group on the basis of the reserve reports approved by
relevant authorities. The maximum term of a full production license is 30
years unless a special dispensation is given by the State Council. The
maximum term of production licenses issued to the Group is 55 years as a
special dispensation was given to the Group by the State Council. The
Group's production license is renewable upon application by the Group 30
days prior to expiration.
The Group is required to make payments of exploration license fees and
production right usage fees to the Ministry of Land and Resources annually
which are expensed as incurred. Payments incurred were approximately RMB 12
million for the six-month period ended 30 June 2006 (2005: RMB 25 million).
Estimated future annual payments are as follows:
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Within one year 158 107
----------------------------------------------------------------------------
Between one and two years 101 112
----------------------------------------------------------------------------
Between two and three years 64 59
----------------------------------------------------------------------------
Between three and four years 63 67
----------------------------------------------------------------------------
Between four and five years 31 56
----------------------------------------------------------------------------
Thereafter 236 239
----------------------------------------------------------------------------
653 640
============================================================================
Contingent liabilities
(a) The Company has been advised by its PRC lawyers that, except for
liabilities constituting or arising out of or relating to the business
assumed by the Company in the Reorganisation, no other liabilities were
assumed by the Company, and the Company is not jointly and severally
liable for other debts and obligations incurred by Sinopec Group
Company prior to the Reorganisation.
(b) At 30 June 2006 and 31 December 2005, guarantees given to banks in
respect of banking facilities granted to the parties below were as
follows:
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Associates 95 79
---------------------------------------------------------------------
The Group monitors the conditions that are subject to the guarantees to
identify whether it is probable that a loss has occurred, and recognise any
such losses under guarantees when those losses are estimable. At 30 June
2006 and 31 December 2005, it is not probable that the Group will be
required to make payments under the guarantees. Thus no liability has been
accrued for a loss related to the Group's obligation under these guarantee
arrangements.
Environmental contingencies
To date, the Group has not incurred any significant expenditures for
environmental remediation, is currently not involved in any environmental
remediation, and has not accrued any amounts for environmental remediation
relating to its operations. Under existing legislation, management believes
that there are no probable liabilities that will have a material adverse
effect on the financial position or operating results of the Group. The PRC
government, however, has moved, and may move further towards more rigorous
enforcement of applicable laws, and towards the adoption of more stringent
environmental standards. Environmental liabilities are subject to
considerable uncertainties which affect the Group's ability to estimate the
ultimate cost of remediation efforts. These uncertainties include i) the
exact nature and extent of the contamination at various sites including, but
not limited to refineries, oil fields, service stations, terminals and land
development areas, whether operating, closed or sold, ii) the extent of
required cleanup efforts, iii) varying costs of alternative remediation
strategies, iv) changes in environmental remediation requirements, and v)
the identification of new remediation sites. The amount of such future cost
is indeterminable due to such factors as the unknown magnitude of possible
contamination and the unknown timing and extent of the corrective actions
that may be required. Accordingly, the outcome of environmental liabilities
under proposed or future environmental legislation cannot reasonably be
estimated at present, and could be material. The Group paid normal routine
pollutant discharge fees of approximately RMB 667 million for the six-month
period ended 30 June 2006 (2005: RMB 107 million).
Legal contingencies
The Group is a defendant in certain lawsuits as well as the named party in
other proceedings arising in the ordinary course of business. While the
outcomes of such contingencies, lawsuits or other proceedings cannot be
determined at present, management believes that any resulting liabilities
will not have a material adverse effect on the financial position or
operating results of the Group.
99
30 RELATED PARTY TRANSACTIONS
Parties are considered to be related to the Group if the Group has the
ability, directly or indirectly, to control or jointly control the party or
exercise significant influence over the party in making financial and
operating decisions, or vice versa, or where the Group and the party are
subject to common control or common significant influence. Related parties
may be individuals (being members of key management personnel, significant
shareholders and/or their close family members) or other entities and
include entities which are under the significant influence of related
parties of the Group where those parties are individuals, and
post-employment benefit plans which are for the benefit of employees of the
Group or of any entity that is a related party of the Group.
(a) Transactions with Sinopec Group Company and fellow subsidiaries,
associates and jointly controlled entities
The Group is part of a larger group of companies under Sinopec Group
Company, which is owned by the PRC government, and has significant
transactions and relationships with Sinopec Group Company and fellow
subsidiaries. Because of these relationships, it is possible that the
terms of these transactions are not the same as those that would result
from transactions among wholly unrelated parties.
The principal related party transactions with Sinopec Group Company and
fellow subsidiaries, associates and jointly controlled entities, which
were carried out in the ordinary course of business, are as follows:
Six-month periods
ended 30 June
Note 2006 2005
RMB millions RMB millions
Sales of goods (i) 54,716 36,976
----------------------------------------------------------------------------------------------------------
Purchases (ii) 30,243 20,134
----------------------------------------------------------------------------------------------------------
Transportation and storage (iii) 777 893
----------------------------------------------------------------------------------------------------------
Exploration and development services (iv) 9,490 7,692
----------------------------------------------------------------------------------------------------------
Production related services (v) 4,795 3,757
----------------------------------------------------------------------------------------------------------
Ancillary and social services (vi) 842 912
----------------------------------------------------------------------------------------------------------
Operating lease charges (vii) 1,715 1,565
----------------------------------------------------------------------------------------------------------
Agency commission income (viii) 33 29
----------------------------------------------------------------------------------------------------------
Intellectual property license fee paid (ix) -- 9
----------------------------------------------------------------------------------------------------------
Interest received (x) 21 21
----------------------------------------------------------------------------------------------------------
Interest paid (xi) 487 507
----------------------------------------------------------------------------------------------------------
Net deposits withdrawn from related parties (xii) 3,483 2,874
----------------------------------------------------------------------------------------------------------
Net loans obtained from/(repaid to) related parties (xiii) 5,983 (3,325)
----------------------------------------------------------------------------------------------------------
The amounts set out in the table above in respect of the six-month
periods ended 30 June 2006 and 2005 represent the relevant costs to the
Group as determined by the corresponding contracts with the related
parties.
At 30 June 2006 and 31 December 2005, there were no guarantees given to
banks by the Group in respect of banking facilities to Sinopec Group
Company and fellow subsidiaries. Guarantees given to banks by the Group
in respect of banking facilities to associates are disclosed in Note 29.
The directors of the Company are of the opinion that the above
transactions with related parties were conducted in the ordinary course
of business and on normal commercial terms or in accordance with the
agreements governing such transactions.
Notes:
(i) Sales of goods represent the sale of crude oil, intermediate
petrochemical products, petroleum products and ancillary
materials.
(ii) Purchases represent the purchase of materials and utility
supplies directly related to the Group's operations such as the
procurement of raw and ancillary materials and related services,
supply of water, electricity and gas.
(iii) Transportation and storage represent the cost for the use of
railway, road and marine transportation services, pipelines,
loading, unloading and storage facilities.
(iv) Exploration and development services comprise direct costs
incurred in the exploration and development such as geophysical,
drilling, well testing and well measurement services.
(v) Production related services represent ancillary services rendered
in relation to the Group's operations such as equipment repair
and general maintenance, insurance premium, technical research,
communications, fire fighting, security, product quality testing
and analysis, information technology, design and engineering,
construction which includes the construction of oilfield ground
facilities, refineries and chemical plants, manufacture of
replacement parts and machinery, installation, project management
and environmental protection.
(vi) Ancillary and social services represent expenditures for social
welfare and support services such as educational facilities,
media communication services, sanitation, accommodation,
canteens, property maintenance and management services.
(vii) Operating lease charges represent the rental paid to Sinopec
Group Company for operating leases in respect of land, buildings
and equipment.
(viii) Agency commission income represents commission earned for acting
as an agent in respect of sales of products and purchase of
materials for certain entities owned by Sinopec Group Company.
(ix) Intellectual property license fee represents reimbursement paid
to Sinopec Group Company for fees required to maintain the
validity of certain licenses for trademarks, patents, technology
and computer software.
(x) Interest received represents interest received from deposits
placed with Sinopec Finance Company Limited, a finance company
controlled by Sinopec Group Company. The applicable interest rate
is determined in accordance with the prevailing saving deposit
rate. The balance of deposits at 30 June 2006 was RMB 1,106
million (2005: RMB 4,589 million).
100
30 RELATED PARTY TRANSACTIONS (Continued)
(a) Transactions with Sinopec Group Company and fellow subsidiaries,
associates and jointly controlled entities (Continued)
(xi) Interest paid represents interest charges on the loans and
advances obtained from Sinopec Group Company and Sinopec
Finance Company Limited.
(xii) Deposits withdrawn from related parties represent net deposits
withdrawn form Sinopec Finance Company Limited.
(xiii) The Group obtained loans from/repaid loans to Sinopec Group
Company and Sinopec Finance Company Limited.
In connection with the Reorganisation, the Company and Sinopec Group
Company entered into a number of agreements under which 1) Sinopec
Group Company will provide goods and products and a range of
ancillary, social and supporting services to the Group and 2) the
Group will sell certain goods to Sinopec Group Company. The terms of
these agreements are summarised as follows:
(a) The Company has entered into a non-exclusive Agreement for Mutual
Provision of Products and Ancillary Services (OMutual Provision
AgreementO) with Sinopec Group Company effective from 1 January 2000 in
which Sinopec Group Company has agreed to provide the Group with
certain ancillary production services, construction services,
information advisory services, supply services and other services and
products. While each of Sinopec Group Company and the Company is
permitted to terminate the Mutual Provision Agreement upon at least six
months notice, Sinopec Group Company has agreed not to terminate the
agreement if the Group is unable to obtain comparable services from a
third party. The pricing policy for these services and products
provided by Sinopec Group Company to the Group is as follows:
o the government-prescribed price;
o where there is no government-prescribed price, the
government-guidance price;
o where there is neither a government-prescribed price nor a
government-guidance price, the market price; or
o where none of the above is applicable, the price to be agreed
between the parties, which shall be based on a reasonable cost
incurred in providing such services plus a profit margin not
exceeding 6%.
(b) The Company has entered into a non-exclusive Agreement for Provision of
Cultural and Educational, Health Care and Community Services with
Sinopec Group Company effective from 1 January 2000 in which Sinopec
Group Company has agreed to provide the Group with certain cultural,
educational, health care and community services on the same pricing
terms and termination conditions as agreed to in the above Mutual
Provision Agreement.
(c) The Company has entered into a series of lease agreements with Sinopec
Group Company to lease certain land and buildings at a rental of
approximately RMB 2,557 million and RMB 568 million, respectively, per
annum. The Company and Sinopec Group Company can renegotiate the rental
amount every three years for land and every year for buildings, however
such amount cannot exceed the market price as determined by an
independent third party. The Group has the option to terminate these
leases upon six months notice to Sinopec Group Company.
(d) The Company has entered into agreements with Sinopec Group Company
effective from 1 January 2000 under which the Group has been granted
the right to use certain trademarks, patents, technology and computer
software developed by Sinopec Group Company. The Group will reimburse
Sinopec Group Company for fees required to maintain the validity of
these licenses.
(e) The Company has entered into a service stations franchise agreement
with Sinopec Group Company effective from 1 January 2000 under which
its service stations and retail stores would exclusively sell the
refined products supplied by the Group.
Amounts due from/to Sinopec Group Company and fellow subsidiaries,
associates and jointly controlled entities included in the following
accounts captions are summarised as follows:
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Trade accounts receivable 3,038 4,126
------------------------------------------------------------------------------------------------------------
Prepaid expenses and other current assets 3,829 3,493
------------------------------------------------------------------------------------------------------------
Total amounts due from Sinopec Group Company and
fellow subsidiaries, associates and jointly controlled entities 6,867 7,619
------------------------------------------------------------------------------------------------------------
Trade accounts payable 2,908 3,005
------------------------------------------------------------------------------------------------------------
Accrued expenses and other payables 12,128 7,144
------------------------------------------------------------------------------------------------------------
Short-term loans and current portion of long-term loans from
Sinopec Group Company and fellow subsidiaries 7,295 832
------------------------------------------------------------------------------------------------------------
Long-term loans excluding current portion from Sinopec
Group Company and fellow subsidiaries 39,453 39,933
------------------------------------------------------------------------------------------------------------
Total amounts due to Sinopec Group Company and fellow subsidiaries,
associates and jointly controlled entities 61,784 50,914
------------------------------------------------------------------------------------------------------------
Amounts due from/to Sinopec Group Company and fellow subsidiaries,
associates and jointly controlled entities, other than short-term loans
and long-term loans, bear no interest, are unsecured and are repayable in
accordance with normal commercial terms. The terms and conditions
associated with short-term loans and long-term loans payable to Sinopec
Group Company and fellow subsidiaries are set out in Note 25.
As at and for the six-month period ended 30 June 2006, and as at and for
the year ended 31 December 2005, no impairment losses for bad and
doubtful debts were recorded in respect of amounts due from Sinopec Group
Company and fellow subsidiaries, associates and jointly controlled
entities.
101
30 RELATED PARTY TRANSACTIONS (Continued)
(b) Key management personnel emoluments
Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the activities
of the Group, directly or indirectly, including directors and
supervisors of the Group. The key management personnel compensations
are as follows:
Six-month periods
ended 30 June
2006 2005
RMB'000 RMB'000
Short-term employee benefits 1,977 1,209
-------------------------------------------------------------------------
Retirement scheme contributions 68 54
-------------------------------------------------------------------------
2,045 1,263
=========================================================================
Total emoluments are included in Opersonnel expensesO as disclosed in
Note 6.
(c) Contributions to defined contribution retirement plans The Group
participates in various defined contribution retirement plans organised
by municipal and provincial governments for its staff. The details of
the Group's employee benefits plan are disclosed in Note 31. As at 30
June 2006 and 31 December 2005, there was no material outstanding
contribution to post-employment benefit plans.
(d) Transactions with other state-controlled entities in the PRC The Group
is a state-controlled energy and chemical enterprise and operates in an
economic regime currently dominated by entities directly or indirectly
controlled by the PRC government through its government authorities,
agencies, affiliations and other organisations (collectively referred
as Ostate-controlled entitiesO).
Apart from transactions with Sinopec Group Company and fellow
subsidiaries, the Group has transactions with other state-controlled
entities include but not limited to the following:
o sales and purchase of goods and ancillary materials;
o rendering and receiving services;
o lease of assets;
o depositing and borrowing money; and
o use of public utilities.
These transactions are conducted in the ordinary course of the Group's
business on terms comparable to those with other entities that are not
state-controlled. The Group has established its procurement policies,
pricing strategy and approval process for purchases and sales of
products and services which do not depend on whether the counterparties
are state-controlled entities or not.
Having considered the transactions potentially affected by related
party relationships, the entity's pricing strategy, procurement
policies and approval processes, and the information that would be
necessary for an understanding of the potential effect of the related
party relationship on the financial statements, the directors are of
the opinion that the following related party transactions require
disclosure of numeric details:
(i) Transactions with other state-controlled energy and chemical
companies
The Group's major domestic suppliers of crude oil and refined
petroleum products are China National Petroleum Corporation and
its subsidiaries (OCNPC GroupO) and China National Offshore Oil
Corporation and its subsidiaries (OCNOOC GroupO), which are
state-controlled entities.
During the six-month period ended 30 June 2006, the aggregate
amount of crude oil purchased by Refining Segment and refined
petroleum purchased by Marketing and Distribution Segment from
CNPC Group and the amount of crude oil purchased by Refining
Segment from CNOOC Group was RMB 31,112 million (2005: RMB 25,205
million).
The aggregate amounts due from/to CNPC Group and CNOOC Group are
summarised as follows:
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Trade accounts receivable 603 213
-----------------------------------------------------------------------------------------
Prepaid expenses and other current assets 237 120
-----------------------------------------------------------------------------------------
Total amounts due from CNPC Group and CNOOC Group 840 333
-----------------------------------------------------------------------------------------
Trade accounts payable 1,244 1,237
-----------------------------------------------------------------------------------------
Accrued expenses and other payables 162 127
-----------------------------------------------------------------------------------------
Total amounts due to CNPC Group and CNOOC Group 1,406 1,364
102
30 RELATED PARTY TRANSACTIONS (Continued)
(d) Transactions with other state-controlled entities in the PRC (Continued)
(ii) Transactions with state-controlled banks
The Group deposits its cash with several state-controlled banks in
the PRC. The Group also obtains short-term and long-term loans
from these banks in the ordinary course of business. The interest
rates of the bank deposits and loans are regulated by the PBOC.
The Group's interest income from and interest expenses to these
state-controlled banks in the PRC are as follows:
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Interest income 205 107
--------------------------------------------------------------------------------------------------------------------
Interest expenses 2,771 2,234
--------------------------------------------------------------------------------------------------------------------
The amounts of cash deposited at and loans from state-controlled banks
in the PRC are summarised as follows:
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Cash and cash equivalents 8,165 8,360
--------------------------------------------------------------------------------------------------------------------
Time deposits with financial institutions 663 889
--------------------------------------------------------------------------------------------------------------------
Total deposits at state-controlled banks in the PRC 8,828 9,249
--------------------------------------------------------------------------------------------------------------------
Short-term loans and current portion of long-term loans 49,363 27,891
--------------------------------------------------------------------------------------------------------------------
Long-term loans excluding current portion of long-term loans 63,663 62,341
--------------------------------------------------------------------------------------------------------------------
Total loans from state-controlled banks in the PRC 113,026 90,232
--------------------------------------------------------------------------------------------------------------------
31 EMPLOYEE BENEFITS PLAN
As stipulated by the regulations of the PRC, the Group participates in
various defined contribution retirement plans organised by municipal and
provincial governments for its staff. The Group is required to make
contributions to the retirement plans at rates ranging from 17.0% to 30.0%
of the salaries, bonuses and certain allowances of its staff. A member of
the plan is entitled to a pension equal to a fixed proportion of the salary
prevailing at his or her retirement date. The Group has no other material
obligation for the payment of pension benefits associated with these plans
beyond the annual contributions described above. The Group's contributions
for the six-month period ended 30 June 2006 were RMB 959 million (2005: RMB
930 million).
32 SEGMENTAL REPORTING
The Group has five operating segments as follows:
(i) Exploration and production, which explores and develops oil fields,
produces crude oil and natural gas and sells such products to the
Refining Segment of the Group and external customers.
(ii) Refining, which processes and purifies crude oil, which is sourced
from the Exploration and Production Segment of the Group and
external suppliers, and manufactures and sells petroleum products to
the chemicals and Marketing and Distribution Segments of the Group
and external customers.
(iii) Marketing and distribution, which owns and operates oil depots and
service stations in the PRC, and distributes and sells refined
petroleum products (mainly gasoline and diesel) in the PRC through
wholesale and retail sales networks.
(iv) Chemicals, which manufactures and sells petrochemical products,
derivative petrochemical products and other chemical products mainly
to external customers.
(v) Corporate and others, which largely comprise the trading activities
of the import and export companies of the Group and research and
development undertaken by other subsidiaries.
The segments were determined primarily because the Group manages its
exploration and production, refining, marketing and distribution, chemicals,
and corporate and others businesses separately. The reportable segments are
each managed separately because they manufacture and/or distribute distinct
products with different production processes and due to their distinct
operating and gross margin characteristics. In view of the fact that the
Company and its subsidiaries operate mainly in the PRC, no geographical
segment information is presented.
The Group evaluates the performance and allocates resources to its operating
segments on an operating income basis, without considering the effects of
finance costs or investment income. The accounting policies of the Group's
segments are the same as those described in the principal accounting
policies (see Note 2). Corporate administrative costs and assets are not
allocated to the operating segments; instead, operating segments are billed
for direct corporate services. Inter-segment transfer pricing is based on
cost plus an appropriate margin, as specified by the Group's policy.
103
32 SEGMENTAL REPORTING (Continued)
Reportable information on the Group's business segments is as follows:
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Turnover
---------------------------------------------------------------------------------------------------------------------------
Exploration and production
---------------------------------------------------------------------------------------------------------------------------
External sales 12,135 8,651
---------------------------------------------------------------------------------------------------------------------------
Inter-segment sales 53,362 35,745
---------------------------------------------------------------------------------------------------------------------------
65,497 44,396
---------------------------------------------------------------------------------------------------------------------------
Refining
---------------------------------------------------------------------------------------------------------------------------
External sales 48,681 37,083
---------------------------------------------------------------------------------------------------------------------------
Inter-segment sales 220,301 172,035
---------------------------------------------------------------------------------------------------------------------------
268,982 209,118
---------------------------------------------------------------------------------------------------------------------------
Marketing and distribution
---------------------------------------------------------------------------------------------------------------------------
External sales 273,153 206,763
---------------------------------------------------------------------------------------------------------------------------
Inter-segment sales 1,962 1,320
---------------------------------------------------------------------------------------------------------------------------
275,115 208,083
---------------------------------------------------------------------------------------------------------------------------
Chemicals
---------------------------------------------------------------------------------------------------------------------------
External sales 92,673 74,731
---------------------------------------------------------------------------------------------------------------------------
Inter-segment sales 5,271 8,335
---------------------------------------------------------------------------------------------------------------------------
97,944 83,066
---------------------------------------------------------------------------------------------------------------------------
Corporate and others
---------------------------------------------------------------------------------------------------------------------------
External sales 55,346 32,020
---------------------------------------------------------------------------------------------------------------------------
Inter-segment sales 38,335 21,228
---------------------------------------------------------------------------------------------------------------------------
93,681 53,248
---------------------------------------------------------------------------------------------------------------------------
Elimination of inter-segment sales (319,231) (238,663)
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Turnover 481,988 359,248
---------------------------------------------------------------------------------------------------------------------------
Other operating revenues
---------------------------------------------------------------------------------------------------------------------------
Exploration and production 4,720 3,627
---------------------------------------------------------------------------------------------------------------------------
Refining 2,331 1,851
---------------------------------------------------------------------------------------------------------------------------
Marketing and distribution 282 533
---------------------------------------------------------------------------------------------------------------------------
Chemicals 3,575 2,950
---------------------------------------------------------------------------------------------------------------------------
Corporate and others 232 245
---------------------------------------------------------------------------------------------------------------------------
Other operating revenues 11,140 9,206
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Turnover and other operating revenues 493,128 368,454
===========================================================================================================================
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Result
---------------------------------------------------------------------------------------------------------------------------
Operating profit
---------------------------------------------------------------------------------------------------------------------------
By segment
---------------------------------------------------------------------------------------------------------------------------
- Exploration and production 33,344 17,795
---------------------------------------------------------------------------------------------------------------------------
- Refining (16,610) (1,296)
---------------------------------------------------------------------------------------------------------------------------
- Marketing and distribution 10,761 6,643
---------------------------------------------------------------------------------------------------------------------------
- Chemicals 7,198 10,815
---------------------------------------------------------------------------------------------------------------------------
- Corporate and others (455) (275)
---------------------------------------------------------------------------------------------------------------------------
Total operating profit 34,238 33,682
---------------------------------------------------------------------------------------------------------------------------
Share of profits less losses from associates
---------------------------------------------------------------------------------------------------------------------------
- Exploration and production 122 238
---------------------------------------------------------------------------------------------------------------------------
- Refining 40 8
---------------------------------------------------------------------------------------------------------------------------
- Marketing and distribution 158 168
---------------------------------------------------------------------------------------------------------------------------
- Chemicals 2 15
---------------------------------------------------------------------------------------------------------------------------
- Corporate and others 125 107
---------------------------------------------------------------------------------------------------------------------------
Aggregate share of profits less losses from associates 447 536
---------------------------------------------------------------------------------------------------------------------------
Finance costs
---------------------------------------------------------------------------------------------------------------------------
Interest expense (3,542) (2,845)
---------------------------------------------------------------------------------------------------------------------------
Interest income 250 168
---------------------------------------------------------------------------------------------------------------------------
Foreign exchange losses (52) (40)
---------------------------------------------------------------------------------------------------------------------------
Foreign exchange gains 202 151
---------------------------------------------------------------------------------------------------------------------------
Net finance costs (3,142) (2,566)
---------------------------------------------------------------------------------------------------------------------------
Investment income 131 62
---------------------------------------------------------------------------------------------------------------------------
Profit before taxation 31,674 31,714
---------------------------------------------------------------------------------------------------------------------------
Taxation (10,110) (9,945)
---------------------------------------------------------------------------------------------------------------------------
Profit for the period 21,564 21,769
---------------------------------------------------------------------------------------------------------------------------
104
32 SEGMENTAL REPORTING (Continued)
Assets and liabilities dedicated to a particular segment's operations are
included in that segment's total assets and liabilities. Assets which
benefit more than one segment or are considered to be corporate assets are
not allocated. OUnallocated assetsO consists primarily of cash and cash
equivalents, time deposits with financial institutions, investments and
deferred tax assets. OUnallocated liabilitiesO consists primarily of
short-term and long-term debts, loans from Sinopec Group Company and fellow
subsidiaries, income tax payable, deferred tax liabilities and other
liabilities.
Interests in and share of profits from associates are included in the
segments in which the associates operate. Information on associates is
included in Note 18. Additions to long-lived assets by operating segment are
included in Notes 14 and 15.
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Assets
---------------------------------------------------------------------------------------------------------------------------
Segment assets
---------------------------------------------------------------------------------------------------------------------------
- Exploration and production 136,429 123,631
---------------------------------------------------------------------------------------------------------------------------
- Refining 150,175 135,731
---------------------------------------------------------------------------------------------------------------------------
- Marketing and distribution 109,857 102,935
---------------------------------------------------------------------------------------------------------------------------
- Chemicals 122,362 115,942
---------------------------------------------------------------------------------------------------------------------------
- Corporate and others 31,167 20,570
---------------------------------------------------------------------------------------------------------------------------
Total segment assets 549,990 498,809
---------------------------------------------------------------------------------------------------------------------------
Interest in associates
---------------------------------------------------------------------------------------------------------------------------
- Exploration and production 1,050 1,494
---------------------------------------------------------------------------------------------------------------------------
- Refining 682 521
---------------------------------------------------------------------------------------------------------------------------
- Marketing and distribution 4,272 4,298
---------------------------------------------------------------------------------------------------------------------------
- Chemicals 1,219 1,092
---------------------------------------------------------------------------------------------------------------------------
- Corporate and others 3,470 1,812
---------------------------------------------------------------------------------------------------------------------------
Aggregate interest in associates 10,693 9,217
---------------------------------------------------------------------------------------------------------------------------
Unallocated assets 26,232 29,295
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Total assets 586,915 537,321
---------------------------------------------------------------------------------------------------------------------------
Liabilities
---------------------------------------------------------------------------------------------------------------------------
Segment liabilities
---------------------------------------------------------------------------------------------------------------------------
- Exploration and production 18,704 18,882
---------------------------------------------------------------------------------------------------------------------------
- Refining 32,176 26,486
---------------------------------------------------------------------------------------------------------------------------
- Marketing and distribution 25,339 23,713
---------------------------------------------------------------------------------------------------------------------------
- Chemicals 17,134 19,442
---------------------------------------------------------------------------------------------------------------------------
- Corporate and others 45,370 35,855
---------------------------------------------------------------------------------------------------------------------------
Total segment liabilities 138,723 124,378
---------------------------------------------------------------------------------------------------------------------------
Unallocated liabilities 191,006 159,947
---------------------------------------------------------------------------------------------------------------------------
Total liabilities 329,729 284,325
===========================================================================================================================
Segment capital expenditure is the total cost incurred during the period to
acquire segment assets that are expected to be used for more than one year.
Six-month periods
ended 30 June
2006 2005
RMB millions RMB millions
Capital expenditure
---------------------------------------------------------------------------------------------------------------------------
Exploration and production 11,676 10,077
---------------------------------------------------------------------------------------------------------------------------
Refining 5,121 3,451
---------------------------------------------------------------------------------------------------------------------------
Marketing and distribution 6,685 6,384
---------------------------------------------------------------------------------------------------------------------------
Chemicals 5,930 2,242
---------------------------------------------------------------------------------------------------------------------------
Corporate and others 1,040 396
---------------------------------------------------------------------------------------------------------------------------
30,452 22,550
===========================================================================================================================
Capital expenditure of jointly controlled entities
---------------------------------------------------------------------------------------------------------------------------
Exploration and production 73 354
---------------------------------------------------------------------------------------------------------------------------
Chemicals 106 1,500
---------------------------------------------------------------------------------------------------------------------------
179 1,854
===========================================================================================================================
Depreciation, depletion and amortisation
---------------------------------------------------------------------------------------------------------------------------
Exploration and production 6,209 5,247
---------------------------------------------------------------------------------------------------------------------------
Refining 3,489 3,320
---------------------------------------------------------------------------------------------------------------------------
Marketing and distribution 1,655 1,382
---------------------------------------------------------------------------------------------------------------------------
Chemicals 4,946 5,026
---------------------------------------------------------------------------------------------------------------------------
Corporate and others 205 180
---------------------------------------------------------------------------------------------------------------------------
16,504 15,155
---------------------------------------------------------------------------------------------------------------------------
Impairment losses on long-lived assets
---------------------------------------------------------------------------------------------------------------------------
Marketing and distribution 5 5
---------------------------------------------------------------------------------------------------------------------------
Chemicals 29 392
---------------------------------------------------------------------------------------------------------------------------
34 397
===========================================================================================================================
105
33 PRINCIPAL SUBSIDIARIES
At 30 June 2006, the following list contains the particulars of subsidiaries
which principally affected the results or assets of the Group.
Percentage of equity
Particulars held by the
of issued Type of held by the Company's
Name of company capital legal entity Company subsidiary Principal activities
(millions) % %
China Petrochemical International RMB 1,704 Limited 100.00 - Trading of crude oil and
Company Limited company petrochemical products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Sales Company Limited RMB 1,700 Limited 100.00 - Marketing and
company distribution of refined
petroleum products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Zhenhai Refining and Chemical RMB 2,524 Limited 100.00 - Manufacturing of
Company Limited (Note 16) company intermediate
petrochemical products
and petroleum products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Qilu Petrochemical RMB 1,950 Limited 99.76 - Manufacturing of
Company Limited (Note 16) company intermediate
petrochemical products
and petroleum products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Yangzi Petrochemical RMB 2,330 Limited 99.81 - Manufacturing of
Company Limited (Note 16) company intermediate
petrochemical products
and petroleum products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Zhongyuan Petroleum RMB 875 Limited 99.35 - Exploration and
Company Limited (Note 16) company production of crude oil
and natural gas
------------------------------------------------------------------------------------------------------------------------------------
Shengli Oil Field Dynamic RMB 364 Limited 97.71 - Exploration and
Company Limited (Note 16) company production of crude oil
and distribution of
petrochemical products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Fujian Petrochemical RMB 2,253 Limited 50.00 - Manufacturing of
Company Limited (i) company plastics, intermediate
petrochemical products
and petroleum products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Shanghai Petrochemical RMB 7,200 Limited 55.56 - Manufacturing of
Company Limited company synthetic fibres, resin
and plastics,
intermediate
petrochemical products
and petroleum products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Shijiazhuang Refining-Chemical RMB 1,154 Limited 79.73 - Manufacturing of
Company Limited company intermediate
petrochemical products
and petroleum products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Kantons Holdings Limited HK$ 104 Limited - 72.40 Trading of crude oil and
company petroleum products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Wuhan Petroleum Group RMB 147 Limited 46.25 - Marketing and
Company Limited (i) company distribution of refined
petroleum products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Wuhan Phoenix Company Limited (i) RMB 519 Limited 40.72 - Manufacturing of
company petrochemical products
and petroleum products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Yizheng Chemical Fibre RMB 4,000 Limited 42.00 - Production and sale of
Company Limited (i) company polyester chips and
polyester fibres
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Zhongyuan Petrochemical RMB 2,400 Limited 93.51 - Manufacturing of
Company Limited company chemical products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Shell (Jiangsu) Petroleum Marketing RMB 830 Limited 60.00 - Marketing and
Company Limited company distribution of refined
petroleum products
------------------------------------------------------------------------------------------------------------------------------------
BP Sinopec (Zhejiang) Petroleum RMB 800 Limited 60.00 - Marketing and
Company Limited company distribution of refined
petroleum products
------------------------------------------------------------------------------------------------------------------------------------
Sinopec Qingdao Refining and Chemical RMB 800 Limited 85.00 - Manufacturing of
Company Limited company intermediate
petrochemical products
and petroleum products
------------------------------------------------------------------------------------------------------------------------------------
Except for Sinopec Kantons Holdings Limited, which is incorporated in
Bermuda, all of the above principal subsidiaries are incorporated in
the PRC.
(i) The Group consolidated the results of the entity because the Group
controlled the board of this entity and had the power to govern its
financial and operating policies.
106
34 FINANCIAL INSTRUMENTS
Financial assets of the Group include cash and cash equivalents, time
deposits with financial institutions, investments, trade accounts
receivable, bills receivable, amounts due from Sinopec Group Company and
fellow subsidiaries, advances to third parties, amounts due from associates,
and other receivables. Financial liabilities of the Group include bank and
other loans, loans from Sinopec Group Company and fellow subsidiaries, trade
accounts payable, bills payable, amounts due to Sinopec Group Company and
fellow subsidiaries, receipts in advance, and advances from third parties.
The Group has no derivative instruments that are designated and qualified as
hedging instruments at 30 June 2006 and 31 December 2005.
Credit risk
The carrying amounts of cash and cash equivalents, time deposits with
financial institutions, trade accounts and bills receivables, and other
current assets, except for prepayments and deposits, represent the Group's
maximum exposure to credit risk in relation to financial assets.
The majority of the Group's trade accounts receivable relate to sales of
petroleum and chemical products to related parties and third parties
operating in the petroleum and chemical industries. The Group performs
ongoing credit evaluations of its customers' financial condition and
generally does not require collateral on trade accounts receivable. The
Group maintains an allowance for doubtful accounts and actual losses have
been within management's expectations. No single customer accounted for
greater than 10% of total revenues.
No other financial assets carry a significant exposure to credit risk.
Currency risk
Substantially all of the revenue-generating operations of the Group are
transacted in Renminbi, which is not fully convertible into foreign
currencies. On 1 January 1994, the PRC government abolished the dual rate
system and introduced a single rate of exchange as quoted by the PBOC.
However, the unification of the exchange rate does not imply convertibility
of Renminbi into United States dollars or other foreign currencies. All
foreign exchange transactions continue to take place either through the PBOC
or other banks authorised to buy and sell foreign currencies at the exchange
rates quoted by the PBOC. Approval of foreign currency payments by the PBOC
or other institutions requires submitting a payment application form
together with suppliers' invoices, shipping documents and signed contracts.
With the authorisation from the PRC government, the PBOC announced that the
PRC government 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 on 21 July 2005. The exchange rate of US
dollars against RMB was adjusted to 8.11 yuan per US dollar with effect from
the time of 19:00 hours on 21 July 2005.
Other than the amounts as disclosed in Note 25, the amounts of other
financial assets and liabilities of the Group are substantially denominated
in the functional currency of respective entity of the Group.
Interest rate risk
The interest rates and terms of repayment of short-term and long-term debts
of the Group are disclosed in Note 25.
Fair values
The disclosures of the fair value estimates, methods and assumptions, set
forth below for the Group's financial instruments, are made to comply with
the requirements of IAS 32 and IAS 39 and should be read in conjunction with
the Group's consolidated financial statements and related notes. The
estimated fair value amounts have been determined by the Group using market
information and valuation methodologies considered appropriate. However,
considerable judgement is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Group could realise in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
The following table presents the carrying amount and fair value of the
Group's long-term indebtedness other than loans from Sinopec Group Company
and fellow subsidiaries at 30 June 2006 and 31 December 2005:
At 30 June At 31 December
2006 2005
RMB millions RMB millions
Carrying amount 82,923 82,157
----------------------------------------------------------------------------
Fair value 82,437 82,161
----------------------------------------------------------------------------
The fair value of long-term indebtedness is estimated by discounting future
cash flows thereon using current market interest rates offered to the Group
for debts with substantially the same characteristics and maturities.
Investments are unlisted equity securities, and are individually and in the
aggregate not material to the Group's financial condition or results of
operations. There are no listed market prices for such interests in the PRC
and, accordingly, a reasonable estimate of fair value could not be made
without incurring excessive costs.
The fair values of all other financial instruments approximate their
carrying amounts due to the nature or short-term maturity of these
instruments.
107
35 ACCOUNTING ESTIMATES AND JUDGEMENTS
The Group's financial condition and results of operations are sensitive to
accounting methods, assumptions and estimates that underlie the preparation
of the financial statements. The Group bases the assumptions and estimates
on historical experience and on various other assumptions that the Group
believes to be reasonable and which form the basis for making judgements
about matters that are not readily apparent from other sources. On an
on-going basis, management evaluates its estimates. Actual results may
differ from those estimates as facts, circumstances and conditions change.
The selection of critical accounting policies, the judgements and other
uncertainties affecting application of those policies and the sensitivity of
reported results to changes in conditions and assumptions are factors to be
considered when reviewing the financial statements. The principal accounting
policies are set forth in Note 2. The Group believes the following critical
accounting policies involve the most significant judgements and estimates
used in the preparation of the financial statements.
Oil and gas properties and reserves
The accounting for the exploration and production's oil and gas activities
is subject to accounting rules that are unique to the oil and gas business.
There are two methods to account for oil and gas business activities, the
successful efforts method and the full cost method. The Group has elected to
use the successful efforts method. The successful efforts method reflects
the volatility that is inherent in exploring for mineral resources in that
costs of unsuccessful exploratory efforts are charged to expense as they are
incurred. These costs primarily include dry hole costs, seismic costs and
other exploratory costs. Under the full cost method, these costs are
capitalised and written-off or depreciated over time.
Engineering estimates of the Group's oil and gas reserves are inherently
imprecise and represent only approximate amounts because of the subjective
judgements involved in developing such information. There are authoritative
guidelines regarding the engineering criteria that have to be met before
estimated oil and gas reserves can be designated as OprovedO. Proved and
proved developed reserves estimates are updated at least annually and take
into account recent production and technical information about each field.
In addition, as prices and cost levels change from year to year, the
estimate of proved and proved developed reserves also changes. This change
is considered a change in estimate for accounting purposes and is reflected
on a prospective basis in related depreciation rates.
Despite the inherent imprecision in these engineering estimates, these
estimates are used in determining depreciation expense and impairment
expense. Depreciation rates are determined based on estimated proved
developed reserve quantities (the denominator) and capitalised costs of
producing properties (the numerator). Producing properties' capitalised
costs are amortised based on the units of oil or gas produced.
Impairment for long lived assets
If circumstances indicate that the net book value of a long-lived asset may
not be recoverable, the asset may be considered OimpairedO, and an
impairment loss may be recognised in accordance with IAS 36 OImpairment of
AssetsO. The carrying amounts of long-lived assets are reviewed periodically
in order to assess whether the recoverable amounts have declined below the
carrying amounts. These assets are tested for impairment whenever events or
changes in circumstances indicate that their recorded carrying amounts may
not be recoverable. When such a decline has occurred, the carrying amount is
reduced to recoverable amount. For goodwill, the recoverable amount is
estimated annually. The recoverable amount is the greater of the net selling
price and the value in use. It is difficult to precisely estimate selling
price because quoted market prices for the Group's assets or cash-generating
units are not readily available. In determining the value in use, expected
cash flows generated by the asset or the cash-generating unit are discounted
to their present value, which requires significant judgement relating to
level of sale volume, selling price and amount of operating costs. The Group
uses all readily available information in determining an amount that is a
reasonable approximation of recoverable amount, including estimates based on
reasonable and supportable assumptions and projections of sale volume,
selling price and amount of operating costs.
Depreciation
Property, plant and equipment, other than oil and gas properties, are
depreciated on a straight-line basis over the estimated useful lives of the
assets, after taking into account the estimated residual value. The Group
reviews the estimated useful lives of the assets regularly in order to
determine the amount of depreciation expense to be recorded during any
reporting period. The useful lives are based on the Group's historical
experience with similar assets and taking into account anticipated
technological changes. The depreciation expense for future periods is
adjusted if there are significant changes from previous estimates.
Impairment for bad and doubtful debts
The Group estimates impairment losses for bad and doubtful debts resulting
from the inability of the customers to make the required payments. The Group
bases the estimates on the aging of the accounts receivable balance,
customer credit-worthiness, and historical write-off experience. If the
financial condition of the customers were to deteriorate, actual write-offs
would be higher than estimated.
108
36 POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND INTERPRETATIONS ISSUED BUT
NOT YET EFFECTIVE FOR THE ANNUAL ACCOUNTING PERIOD ENDING 31 DECEMBER 2006
Up to the date of issue of these interim financial statements, the IASB has
issued the following amendments, new standards and interpretations which are
not yet effective for the annual accounting period ending 31 December 2006
and which have not been adopted in these interim financial statements:
Effective for
accounting period
beginning on or after
IFRS 7, Financial instruments: disclosures 1 January 2007
------------------------------------------------------------------------------------------------------------
IFRIC 7, Applying the restatement approach under IAS 29,
Financial reporting in hyperinflationary economies 1 March 2006
------------------------------------------------------------------------------------------------------------
IFRIC 8, Scope of IFRS 2 1 May 2006
------------------------------------------------------------------------------------------------------------
IFRIC 9, Reassessment of Embedded Derivatives 1 June 2006
------------------------------------------------------------------------------------------------------------
IFRIC 10, Interim Financial Reporting and Impairment 1 November 2006
------------------------------------------------------------------------------------------------------------
Amendment to IAS 1, Presentation of financial statements: capital disclosures 1 January 2007
------------------------------------------------------------------------------------------------------------
The Group is in the process of making an assessment of what the impact of
these amendments, new standards and new interpretations is expected to be in
the period of initial application. Up to the date of issuance of these
interim financial statements, the Group believes that the adoption of IFRIC
7, IFRIC 8, IFRIC 9 and the amendment to IAS 1 are not applicable to any of
the Group's operations and that the adoption of the remainder of the above
new standards and new interpretations is unlikely to have a significant
impact on the Group's results of operations and financial position.
37 POST BALANCE SHEET EVENT
On 10 July 2006, one of the subsidiaries of the Group, Sinopec Kantons
Holdings Limited, entered into two equity acquisition agreements with
Guangzhou Petrochemical Plant (OGPCO), a wholly owned subsidiary of Sinopec
Group Company, and Guangzhou Zhong Guan An Tai Petrochemical Company Limited
(OGZGATO), a wholly-owned subsidiary of GPC. Pursuant to the agreements, the
Group will acquire 30% of the equity interests of Hua De Petrochemical
Company Limited (OHuadeO) from GPC at a cash consideration of RMB 594
million and the remaining 10% of the equity interests of Kantons Gas Station
Investment and Management Company Limited (OKGSIMO) from GZGAT at a cash
consideration of RMB 17 million. These transactions were approved by the
independent shareholders of Sinopec Kantons Holdings Limited on 18 August
2006 and are subject to the approval from the relevant PRC governmental and
regulatory bodies.
38 PARENT AND ULTIMATE HOLDING COMPANY
The directors consider the parent and ultimate holding company of the Group
as at 30 June 2006 is Sinopec Group Company, a state-owned enterprise
established in the PRC. This entity does not produce financial statements
available for public use.
109
(C) DIFFERENCES BETWEEN FINANCIAL STATEMENTS PREPARED UNDER THE PRC
ACCOUNTING RULES AND REGULATIONS AND IFRS
Other than the differences in the classifications of certain financial
statements captions and the accounting for the items described below, there are
no material differences between the Group's financial statements prepared under
the PRC Accounting Rules and Regulations and IFRS. The reconciliation presented
below is included as supplemental information, is not required as part of the
basic financial statements and does not include differences related to
classification, display or disclosures. Such information has not been subject to
independent audit or review. The major differences are:
(i) Equity investment differences
Under the PRC Accounting Rules and Regulations, equity investment
difference, being the excess of the initial investment cost over the
investor's share of equity of the investee enterprise, is amortised on a
straight-line basis. The amortisation period is determined according to
the investment period as stipulated in the relevant agreement, or less
than ten years if the investment period is not specified in the
agreement.
Under IFRS, goodwill, being the excess of the cost of the business
combination over the investor's interest in the net fair value of the
identifiable assets, liabilities and contingent liabilities, is not
amortised. Instead, goodwill is tested for impairment annually, or more
frequently if events or changes in circumstance indicate that it might
be impaired.
(ii) Capitalisation of general borrowing costs
Under the PRC Accounting Rules and Regulations, only borrowing costs on
funds that are specifically borrowed for construction are capitalised as
part of the cost of property, plant and equipment. Under IFRS, to the
extent that funds are borrowed generally and used for the purpose of
obtaining a qualifying asset, the borrowing costs should be capitalised
as part of the cost of that asset.
(iii) Depreciation of oil and gas properties
Under the PRC Accounting Rules and Regulations, oil and gas properties
are depreciated on a straight-line basis. Under IFRS, oil and gas
properties are depreciated on the unit of production method.
(iv) Acquisitions of Sinopec National Star
Under the PRC Accounting Rules and Regulations, the acquisition of
Sinopec National Star (the OAcquisitionO) is accounted for by the
acquisition method. Under the acquisition method, the income of an
acquiring enterprise includes the operations of the acquired enterprise
subsequent to the acquisition. The difference between the cost of
acquiring Sinopec National Star and the fair value of the net assets
acquired is capitalised as an exploration and production right, which is
amortised over 27 years.
Under IFRS, as the Group and Sinopec National Star are under the common
control of Sinopec Group Company, the Acquisition is considered
Ocombination of entities under common controlO which is accounted in a
manner similar to a pooling-of-interests (Oas-if pooling-of-interests
accountingO). Accordingly, the assets and liabilities of Sinopec
National Star acquired have been accounted for at historical cost and
the financial statements of the Group for periods prior to the
Acquisition have been restated to include the financial condition and
results of operations of Sinopec National Star on a combined basis. The
consideration paid by the Group is treated as equity transactions.
(v) Revaluation of land use rights
Under the PRC Accounting Rules and Regulations, land use rights are
carried at revalued amount. Under IFRS, land use rights are carried at
historical cost less amortisation. Accordingly, the surplus on the
revaluation of land use rights, credited to revaluation reserve, was
eliminated.
(vi) Unrecognised losses of subsidiaries
Under the PRC Accounting Rules and Regulations, the results of
subsidiaries are included in the Group's consolidated income statement
to the extent that the subsidiaries' accumulated losses do not result in
their carrying amount being reduced below zero. Further losses are
debited to a separate reserve in the shareholders' funds. Any profits
earned by the subsidiaries subsequently are firstly credited to this
reserve before being included in the Group's consolidated income
statement to the extent that the aggregate amounts credited do not
exceed the accumulated losses debited to this reserve previously for
that same subsidiary.
Under IFRS, the results of subsidiaries are included in the Group's
consolidated income statement from the date that control effectively
commences until the date that control effectively ceases.
(vii) Government grants
Under the PRC Accounting Rules and Regulations, government grants
relating to the purchase of equipment used for technology improvements
should be credited to capital reserve. Under IFRS, government grants
relating to the purchase of equipment used for technology improvements
are initially recorded as long-term liabilities and are offset against
the cost of assets to which the grants related when construction
commences. Upon transfer to property, plant and equipment, the grants
are recognised as an income over the useful life of the property, plant
and equipment by way of reduced depreciation charge.
(viii) Pre-operating expenditures
Under the PRC Accounting Rules and Regulations, expenditures incurred
during the start-up period are aggregated in long-term deferred expenses
and charged to the income statement when operations commence. Under
IFRS, expenditures on start-up activities are recognised as an expense
when they are incurred.
(ix) Disposal of oil and gas properties
Under the PRC Accounting Rules and Regulations, gains and losses arising
from the retirement or disposal of an individual item of oil and gas
properties are recognised as an income or expense in the income
statement and are measured as the difference between the estimated net
disposal proceeds and the carrying amount of the asset.
Under IFRS, gains and losses on the retirement or disposal of an
individual item of proved oil and gas properties are not recognised
unless the retirement or disposal encompasses an entire property. The
costs of the asset abandoned or retired are charged to accumulated
depreciation with the proceeds received on disposals credited to the
carrying amounts of oil and gas properties.
110
(x) Minority interests
Under the PRC Accounting Rules and Regulations, minority interests at
the balance sheet date are presented in the consolidated balance sheet
separately from liabilities and as deduction from the shareholders'
funds. Minority interests in the results of the Group for the period are
also separately presented in the consolidated income statement as
deduction before arriving at the net profit.
Under IFRS, minority interests at the balance sheet date are presented
in the consolidated balance sheet within equity, separately from the
equity attributable to the equity shareholders of the Company, and
minority interests in the results of the Group for the period are
presented on the face of the consolidated income statement as an
allocation of the total profit or loss for the period between the
minority interests and the equity shareholders of the Company.
Effects of major differences between the net profit under the PRC
Accounting Rules and Regulations and the profit for the period under
IFRS are analysed as follows:
Six-month periods ended 30 June
Note 2006 2005
RMB millions RMB millions
Net profit under the PRC Accounting Rules and Regulations 20,679 18,044
----------------------------------------------------------------------------------------------------------------------------
Adjustments:
----------------------------------------------------------------------------------------------------------------------------
Equity investment differences (i) 394 1,169
----------------------------------------------------------------------------------------------------------------------------
Capitalisation of general borrowing costs, net of depreciation effect (ii) 294 216
----------------------------------------------------------------------------------------------------------------------------
Depreciation of oil and gas properties (iii) 290 417
----------------------------------------------------------------------------------------------------------------------------
Acquisition of Sinopec National Star (iv) 58 58
----------------------------------------------------------------------------------------------------------------------------
Reduced amortisation on revaluation of land use rights (v) 13 9
----------------------------------------------------------------------------------------------------------------------------
Unrecognised losses of subsidiaries (vi) 11 113
----------------------------------------------------------------------------------------------------------------------------
Reduced depreciation on government grants (vii) 6 1
----------------------------------------------------------------------------------------------------------------------------
Pre-operating expenditures (viii) (16) 442
----------------------------------------------------------------------------------------------------------------------------
Disposal of oil and gas properties, net of depreciation effect (ix) (177) (209)
----------------------------------------------------------------------------------------------------------------------------
Effects of the above adjustments on taxation (146) (607)
----------------------------------------------------------------------------------------------------------------------------
Minority interests (x) 158 2,116
----------------------------------------------------------------------------------------------------------------------------
Profit for the period under IFRS* 21,564 21,769
============================================================================================================================
Effects of major differences between the shareholders' funds under the PRC
Accounting Rules and Regulations and the total equity under IFRS are
analysed as follows:
At 30 June At 31 December
Note 2006 2005
RMB millions RMB millions
Shareholders' funds under the PRC Accounting Rules and Regulations 228,510 215,623
----------------------------------------------------------------------------------------------------------------------------
Adjustments:
----------------------------------------------------------------------------------------------------------------------------
Equity investment differences (i) 594 200
----------------------------------------------------------------------------------------------------------------------------
Capitalisation of general borrowing costs (ii) 2,406 2,112
----------------------------------------------------------------------------------------------------------------------------
Depreciation of oil and gas properties (iii) 12,523 12,233
----------------------------------------------------------------------------------------------------------------------------
Acquisition of Sinopec National Star (iv) (2,520) (2,578)
----------------------------------------------------------------------------------------------------------------------------
Revaluation of land use rights (v) (940) (953)
----------------------------------------------------------------------------------------------------------------------------
Government grants (vii) (582) (588)
----------------------------------------------------------------------------------------------------------------------------
Pre-operating expenditures (viii) (38) (22)
----------------------------------------------------------------------------------------------------------------------------
Disposal of oil and gas properties (ix) 2,883 3,060
----------------------------------------------------------------------------------------------------------------------------
Effects of the above adjustments on taxation (5,677) (5,531)
----------------------------------------------------------------------------------------------------------------------------
Minority interests (x) 20,027 29,440
----------------------------------------------------------------------------------------------------------------------------
Total equity under IFRS* 257,186 252,996
============================================================================================================================
* The above figure is extracted from the financial statements prepared in
accordance with IFRS which have been audited by KPMG.
111
(D) SUPPLEMENTAL INFORMATION FOR NORTH AMERICAN SHAREHOLDERS
The Group's accounting policies conform with IFRS which differ in certain
significant respects from accounting principles generally accepted in the United
States of America (OUS GAAPO). Information relating to the nature and effect of
such differences are set out below. The US GAAP reconciliation presented below
is included as supplemental information, is unaudited, is not required as part
of the basic financial statements and does not include differences related to
classification, display or disclosures. Such information has not been subject to
independent audit or review.
(a) Foreign exchange gains and losses
In accordance with IFRS, foreign exchange differences on funds borrowed for
construction are capitalised as property, plant and equipment to the extent
that they are regarded as an adjustment to interest costs during the
construction period. Under US GAAP, all foreign exchange gains and losses on
foreign currency debt are included in current earnings. For the periods
presented herein, the US GAAP adjustments represent the amortisation effect
of such originating adjustments described above. Accordingly, the carrying
amount of property, plant and equipment under IFRS was higher than the
amount under US GAAP by RMB 218 million (2005: RMB 241 million) as of 30
June 2006.
(b) Revaluation of property, plant and equipment
As required by the relevant PRC regulations with respect to the
Reorganisation, the property, plant and equipment of the Group were revalued
at 30 September 1999. In addition, the property, plant and equipment of
Sinopec National Star, Sinopec Maoming, Refining Assets, and Petrochemical
and Catalyst Assets were revalued at 31 December 2000, 30 June 2003, 31
October 2003 and 30 June 2004, respectively, in connection with the
acquisitions of Sinopec National Star, Sinopec Maoming, Refining Assets, and
Petrochemical and Catalyst Assets. Under IFRS, such revaluations result in
an increase in equity with respect to the increase in carrying amount of
certain property, plant and equipment above their historical cost bases and
a charge to income with respect to the reduction in carrying amount of
certain property, plant and equipment below their historical cost bases.
Under US GAAP, property, plant and equipment are stated at their historical
cost less accumulated depreciation. However, as a result of the tax
deductibility of the net revaluation surplus, a deferred tax asset related
to the reversal of the revaluation surplus is created under US GAAP with a
corresponding increase in equity.
In addition, under IFRS, on disposal of a revalued asset, the related
revaluation surplus is transferred from the revaluation reserve to retained
earnings. Under US GAAP, the gain and loss on disposal of an asset is
determined with reference to the asset's historical carrying amount and
included in current earnings.
Accordingly, the carrying amount of property, plant and equipment under IFRS
was higher than the amount under US GAAP by RMB 148 million (2005: RMB 1,838
million) as of 30 June 2006.
(c) Exchange of assets
During 2002, the Company and Sinopec Group Company entered into an asset
swap transaction. Under IFRS, the cost of property, plant and equipment
acquired in an exchange for a dissimilar item of property, plant and
equipment is measured at fair value. Under US GAAP, as the exchange of
assets was between entities under common control, the assets received from
Sinopec Group Company are measured at historical cost. The difference
between the historical cost of the net assets transferred and the net assets
received is accounted for as an equity transaction. For the periods
presented herein, the US GAAP adjustments represent the amortisation effect
of such originating adjustments described above. Accordingly, the carrying
amount of property, plant and equipment under IFRS was higher than the
amount under US GAAP by RMB 497 million (2005: RMB 509 million) as of 30
June 2006.
(d) Reversal of impairment of long-lived assets
Under IFRS, 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, determination of the recoverability of a long-lived asset
held for use is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. If the sum
of the expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognised. Measurement of an impairment loss
for a long-lived asset is based on the difference between the asset's
carrying value and the fair value of the asset.
In addition, under IFRS, a subsequent increase in the recoverable amount of
an asset is reversed to the consolidated 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-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 periods presented herein, the US GAAP adjustment represents the
effect of reversing the recovery of previous impairment charges recorded
under IFRS. Accordingly, the carrying amount of property, plant and
equipment under IFRS was higher than the amount under US GAAP by RMB 429
million (2005: RMB 456 million) as of 30 June 2006.
112
(e) Capitalised interest on investment in associates
Under IFRS, an investment accounted for by the equity method is not
considered a qualifying asset for which interest is capitalised. Under US
GAAP, an investment accounted for by the equity method while the investee
has activities in progress necessary to commence its planned principal
operations, provided that the investee's activities include the use of funds
to acquire qualifying assets for its operations, is a qualifying asset for
which interest is initially capitalised and subsequently amortised when the
operation of the qualifying assets begin. Accordingly, the carrying amount
of the interest in associates under IFRS was lower than the amount under US
GAAP by RMB 466 million (2005: RMB 486 million) as of 30 June 2006.
(f) Goodwill
Under IFRS, with reference to IFRS 3, OBusiness CombinationO, goodwill
arising from a business combination for which the purchase agreement date is
on or after 31 March 2004 is not amortised, or goodwill arising from a
business combination for which the purchase agreement date was before 31
March 2004 is no longer amortised from the first annual reporting period
beginning on or after 31 March 2004. Instead, goodwill is tested for
impairment annually.
Under US GAAP, with reference to Statement of Financial Accounting Standards
No.142, OGoodwill and Other Intangible AssetsO (OSFAS No.142O), goodwill is
no longer amortised beginning 1 January 2002. Instead, goodwill is reviewed
for impairment at least annually.
As a result, there is no difference in respect of goodwill amortisation
effective 1 January 2005. Accordingly, the carrying amount of the goodwill
under IFRS was lower than the amount under US GAAP by RMB 43 million (2005:
RMB 43 million) as of 30 June 2006 due to the continued amortisation of
goodwill under IFRS until the end of 2004.
(g) Presentation of minority interests
Under IFRS, minority interests at the balance sheet date are presented in
the consolidated balance sheet within equity, separately from the equity
attributable to the equity shareholders of the Company, and minority
interests in the results of the Group for the period are presented on the
face of the consolidated income statement as an allocation of the profit for
the period between the minority interests and the equity shareholders of the
Company. Under US GAAP, minority interests at the balance sheet date are
presented in the consolidated balance sheet either as liabilities or
separately from liabilities and equity. Minority interests in the results of
the Group for the period are also separately presented in the consolidated
income statement as a component of net income.
The effect on profit attributable to equity shareholders of the Company of
significant differences between IFRS and US GAAP is as follows:
Reference
in note Six-month periods ended 30 June
above 2006 2006 2005
US$ millions RMB millions RMB millions
Profit attributable to equity shareholders of the
Company under IFRS 2,678 21,406 19,653
-----------------------------------------------------------------------------------------------------------------------------
US GAAP adjustments:
-----------------------------------------------------------------------------------------------------------------------------
Foreign exchange gains and losses (a) 3 23 27
-----------------------------------------------------------------------------------------------------------------------------
Depreciation on revalued property, plant and equipment (b) 204 1,633 2,008
-----------------------------------------------------------------------------------------------------------------------------
Disposal of property, plant and equipment (b) 7 57 67
-----------------------------------------------------------------------------------------------------------------------------
Exchange of assets (c) 2 12 12
-----------------------------------------------------------------------------------------------------------------------------
Depreciation effect of reversal of
impairment of long-lived assets (d) 3 27 43
-----------------------------------------------------------------------------------------------------------------------------
Capitalised interest on investments in associates,
net of amortisation effect (e) (3) (20) (20)
-----------------------------------------------------------------------------------------------------------------------------
Deferred tax effect of US GAAP adjustments (67) (536) (660)
Minority interests (g) (23) (184) (181)
-----------------------------------------------------------------------------------------------------------------------------
Profit attributable to equity shareholders of the
Company under US GAAP 2,804 22,418 20,949
=============================================================================================================================
Basic and diluted earnings per share under US GAAP US$0.03 RMB0.26 RMB0.24
=============================================================================================================================
Basic and diluted earnings per ADS under US GAAP* US$3.23 RMB25.86 RMB24.16
=============================================================================================================================
* Basic and diluted earnings per ADS is calculated on the basis that one
ADS is equivalent to 100 H shares.
113
The effect on the total equity attributable to equity shareholders of the
Company of significant differences between IFRS and US GAAP is as follows:
Reference
in note At 30 June At 31 December
above 2006 2006 2005
US$ millions RMB millions RMB millions
Total equity attributable to equity shareholders
of the Company under IFRS 29,667 237,159 223,556
-----------------------------------------------------------------------------------------------------------------------------
US GAAP adjustments:
-----------------------------------------------------------------------------------------------------------------------------
Foreign exchange gains and losses (a) (27) (218) (241)
-----------------------------------------------------------------------------------------------------------------------------
Revaluation of property, plant and equipment (b) (19) (148) (1,838)
-----------------------------------------------------------------------------------------------------------------------------
Exchange of assets (c) (62) (497) (509)
-----------------------------------------------------------------------------------------------------------------------------
Reversal of impairment of long-lived assets (d) (54) (429) (456)
-----------------------------------------------------------------------------------------------------------------------------
Capitalised interest on investments in associates (e) 58 466 486
-----------------------------------------------------------------------------------------------------------------------------
Goodwill (f) 5 43 43
-----------------------------------------------------------------------------------------------------------------------------
Effect of US GAAP adjustments on deferred tax assets 47 378 921
-----------------------------------------------------------------------------------------------------------------------------
Effect of US GAAP adjustments on deferred
tax liabilities (16) (127) (134)
-----------------------------------------------------------------------------------------------------------------------------
Minority interests (g) 6 46 230
-----------------------------------------------------------------------------------------------------------------------------
Total equity attributable to equity
shareholders of the Company under US GAAP 29,605 236,673 222,058
=============================================================================================================================
Note: United States dollar equivalents
For the convenience of readers, amounts in Renminbi have been
translated into United States dollars at the rate of US$1.00 = RMB
7.9943 being the noon buying rate in New York City on 30 June 2006
for cable transfers in Renminbi as certified for customs purposes by
the Federal Reserve Bank of New York. No representation is made that
the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate.
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DOCUMENTS FOR INSPECTION
The following documents will be available for inspection during normal business
hours at the legal address of Sinopec Corp. from Friday, 25 August 2006 by the
relevant regulatory authorities and shareholders in accordance with the Articles
of Association of Sinopec Corp. and the laws and regulations of the PRC:
1 The original interim report for the first half of 2006 signed by the
Chairman of Sinopec Corp.;
2 The original audited financial statements and audited consolidated
financial statements of Sinopec Corp. prepared in accordance with IFRS and
the PRC Accounting Rules and Regulations for the six-month period ended 30
June 2006 signed by Mr. Chen Tonghai (Chairman of Sinopec Corp.), Mr. Wang
Tianpu (Director, President of Sinopec Corp.), Mr. Dai Houliang (Director,
Senior Vice President and Chief Financial Officer of Sinopec Corp.) and Mr.
Liu Yun (Head of the Accounting Department of Sinopec Corp.);
3 The original auditors' reports on the above financial statements signed by
the auditors; and
4 All original documents and announcements published by Sinopec Corp. in the
newspapers specified by the China Securities Regulatory Commission during
the reporting period.
By Order of the Board
CHEN TONGHAI
Chairman
115
Beijing, PRC, 25 August 2006
CONFIRMATION FROM THE DIRECTORS AND SENIOR MANAGEMENT
As the Board Directors and Senior Management of Sinopec Corp., we have carefully
reviewed the 2006 interim report and accounts of Sinopec Corp. and concluded
that this interim report truly and objectively represents the Company's business
performance in the first half 2006, contains no false representations,
misleading statements or material omissions and complies with the requirements
of the China Securities Regulatory Commission and other relevant regulatory
bodies.
Signatures of the Directors and Senior Management
/s/ Chen Tonghai /s/ Zhou Yuan /s/ Wang Tianpu
---------------- -------------- ----------------
Chen Tonghai Zhou Yuan Wang Tianpu
/s/ Zhang Jianhua /s/ Wang Zhigang /s/ Dai Houliang
----------------- ---------------- ----------------
Zhang Jianhua Wang Zhigang Dai Houliang
/s/ Liu Zhongli /s/ Shi Wanpeng /s/ Li Deshui
--------------- --------------- -------------
Liu Zhongli Shi Wanpeng Li Deshui
/s/ Yao Zhongmin /s/ Fan Yifei /s/ Cai Xiyou
---------------- ------------- -------------
Yao Zhongmin Fan Yifei Cai Xiyou
/s/ Zhang Kehua /s/ Zhang Haichao /s/ Chen Ge
---------------- -------------- ----------------
Zhang Kehua Zhang Haichao Chen Ge
25 August 2006
THIS INTERIM REPORT IS PUBLISHED IN BOTH ENGLISH AND CHINESE. SHOULD ANY
CONFLICT REGARDING MEANING ARISES, THE CHINESE VERSION SHALL PREVAIL.
116