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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
(Mark One)
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-14966
CNOOC LIMITED
(Exact name of Registrant as specified in its charter)
---------------------
Hong Kong
(Jurisdiction of incorporation or organization)
---------------------
65th Floor, Bank of China Tower
1 Garden Road, Central
Hong Kong
(Address of principal executive offices)
---------------------
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of Name of each exchange
Each class On which Registered
---------- ---------------------
American Depositary Shares, each representing 20 shares of
par value HK$0.10 per share......................................... New York Stock Exchange, Inc.
Shares of par value HK$0.10 per share.................................. New York Stock Exchange, Inc.*
Securities registered or to be registered pursuant to Section 12(g) of the Act. None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
(Title of Class)
Indicate the number of outstanding Shares of each of the issuer's classes of capital or common
stock as of the close of the period covered by the annual report.
Shares, par value HK$0.10 per share...............................................................8,214,165,655
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) or the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant as required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark which financial statement item the Registrant
has elected to follow.
Item 17 |_| Item 18 |X|
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* Not for trading, but only in connection with the registration of American
Depositary Shares.
Table of Contents
Page
----
Certain Terms and Conventions....................................................................................2
Currencies and Exchange Rates....................................................................................5
Forward-Looking Statements.......................................................................................7
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.................................................8
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE...............................................................8
ITEM 3. KEY INFORMATION.......................................................................................9
A. Selected Financial Data........................................................................9
B. Capitalization and Indebtedness...............................................................11
C. Reasons for the Offer and Use of Proceeds.....................................................11
D. Risk Factors..................................................................................11
ITEM 4. INFORMATION ON THE COMPANY...........................................................................20
A. History and Development.......................................................................20
B. Business Overview.............................................................................24
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.........................................................63
A. Operating Results.............................................................................63
B. Liquidity and Capital Resources...............................................................75
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES...........................................................86
A. Directors and Senior Management...............................................................86
B. Compensation of Directors and Officers........................................................88
C. Board Practice................................................................................89
D. Employees.....................................................................................90
E. Share Ownership...............................................................................90
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS....................................................93
A. Major Shareholders............................................................................93
B. Related Party Transactions....................................................................93
C. Interests of Experts and Counsel..............................................................98
ITEM 8. FINANCIAL INFORMATION................................................................................99
A. Consolidated Statements and Other Financial Information.......................................99
B. Significant Changes..........................................................................100
ITEM 9. THE OFFER AND LISTING...............................................................................101
ITEM 10. ADDITIONAL INFORMATION..............................................................................102
A. Share Capital................................................................................102
B. Memorandum and Articles of Association.......................................................102
C. Material Contracts...........................................................................102
D. Exchange Controls............................................................................102
E. Taxation.....................................................................................103
F. Dividends and Paying Agents..................................................................106
G. Statement by Experts.........................................................................106
H. Documents on Display.........................................................................106
I. Subsidiary Information.......................................................................106
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK..........................................107
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..............................................107
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.....................................................108
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS........................108
A. Material Modifications to the Rights to Securities Holders...................................108
B. Use of Proceeds..............................................................................108
ITEM 15. RESERVED............................................................................................108
ITEM 16. RESERVED............................................................................................108
PART III
ITEM 17. FINANCIAL STATEMENTS................................................................................109
ITEM 18. FINANCIAL STATEMENTS................................................................................109
ITEM 19. EXHIBITS............................................................................................109
CERTAIN TERMS AND CONVENTIONS
Definitions
Unless the context otherwise requires, references in this annual report
to:
o "CNOOC" are to our parent, China National Offshore Oil Corporation,
a PRC limited liability company, and its affiliates, excluding us
and our subsidiaries;
o "CNOOC Limited," "we," "our" and "us" are to CNOOC Limited, a Hong
Kong company, and its subsidiaries after giving effect to the
reorganization of CNOOC or CNOOC's oil and gas exploration,
development, production and sales business that was transferred to
CNOOC Limited in the reorganization as described under "Item
5--Operating and Financial Review and Prospects" as though the
reorganization had effect from the earliest relevant date, except
where the context otherwise requires;
o "China" or the "PRC" are to the People's Republic of China,
excluding for purposes of this annual report Hong Kong, Macau and
Taiwan;
o "the Hong Kong Stock Exchange" are to The Stock Exchange of Hong
Kong Limited;
o "HK$" are to Hong Kong dollars;
o "JPY" are to Japanese yen;
o "Rmb" are to Renminbi, the currency of the PRC; and
o "US$" are to US dollars, the currency of the United States of
America.
Conventions
We have translated amounts from Renminbi into U.S. dollars solely for the
convenience of the reader at the noon buying rate in New York for cable
transfers payable in foreign currencies as certified for customs purposes by
the Federal Reserve Bank of New York on December 31, 2001 of US$1.00=Rmb
8.2766. We make no representation that the Renminbi amounts could have been,
or could be, converted into U.S. dollars at that rate on December 31, 2001, or
at all.
Our average net realized price for oil and gas in each period is
calculated by adding our revenues from oil and gas sales to our 30% ownership
share of revenues from oil and gas sales of our associated company and
dividing this total by the sum of our total volume of oil and gas sales and
30% of the volume of oil and gas sales of our associated company.
Our net proved reserves consist of our percentage interest in proved
reserves, comprised of our 100% interest in our independent oil and gas
properties (excluding the Pinghu field), our participating interest in the
properties covered under our production sharing contracts, and 30% of the
proved reserves of our associated company that operates the Pinghu field in
the East China Sea, less:
o an adjustment for our share of royalties payable to the PRC
government and our participating interest in share oil payable to
the PRC government under our production sharing contracts, and
o an adjustment for production allocable to foreign partners under our
production sharing contracts as reimbursement for exploration
expenses attributable to our participating interest.
Net proved reserves do not include any deduction for production taxes
payable by us, which are included in our operating expenses. Net production is
calculated in the same way as net proved reserves. For information regarding
the historical amounts of royalties and share oil paid to the PRC government,
see note 5 to the consolidated financial statements. Unless otherwise noted,
all information in this annual report relating to oil and natural gas reserves
is based upon estimates prepared by us. In calculating BOE amounts, we have
assumed that 6,000 cubic feet of natural gas equals one BOE.
2
Glossary of Technical Terms
Unless otherwise indicated in the context, references to:
o "adjusted finding and development cost per BOE" means the sum of (a)
total finding costs incurred for the years ended December 31, 1999,
2000 and 2001 divided by the sum of discoveries, extensions, and
revisions of prior estimates of net proved reserves for the years
ended December 31, 1999, 2000 and 2001 and (b) the sum of (i) total
development costs for the years ended December 31, 1999, 2000 and
2001 and (ii) the amount of expected future development costs of
proved undeveloped reserves as of December 31, 2001 divided by the
sum of (iii) proved undeveloped reserves as of December 31, 2001 and
(iv) the sum of undeveloped reserves converted to developed reserves
for the years ended December 31, 1999, 2000 and 2001. This measure
is used to account for expected future development costs for
existing reserves in addition to finding and development costs
already incurred.
o "API gravity" means the American Petroleum Institute's scale for
specific gravity for liquid hydrocarbons, measured in degrees. The
lower the API gravity, the heavier the liquid and, generally, the
lower its commercial value. For example, asphalt has an API gravity
of 8 degrees, West Texas Intermediate, a benchmark crude oil, has an
API of 40 degrees, and gasoline has an API gravity of 50 degrees.
o "appraisal well" means an exploration well drilled after a
successful wildcat well to gain more information on a newly
discovered oil or gas reserve.
o "condensate" means light hydrocarbon liquids separated from natural
gas in the field through condensation when natural gas is exposed to
surface temperature and pressure. This group generally includes
slightly heavier hydrocarbons than natural gas liquids, such as
pentane. It is combined with crude oil production and reserve
figures.
o "crude oil" means crude oil, including condensate and natural gas
liquids.
o "development cost" means, for a given period, costs incurred to
obtain access to proved reserves and to provide facilities for
extracting, treating, gathering and storing the oil and gas.
o "dry hole" means an exploration well that is not commercial (i.e.,
economically feasible to develop). Dry hole costs include the full
costs for such drilling and are charged as an expense.
o "exploration well" means a wildcat or appraisal well.
o "finding and development cost per BOE" means the sum of total
finding and development cost incurred for the years ended December
31, 1999, 2000 and 2001, divided by the sum of discoveries,
extensions, and revisions of prior estimates of net proved reserves
for the years ended December 31, 1999, 2000 and 2001.
o "finding cost" means, for a given period, costs incurred in
identifying areas that may warrant examination and in examining
specific areas that are considered to have prospects of containing
oil and gas reserves, including costs of drilling exploratory wells.
o "lifting cost" means, for a given period, costs incurred to operate
and maintain wells and related equipment and facilities, including
applicable operating costs of support equipment and facilities and
other costs of operating and maintaining those wells and related
equipment and facilities, plus production taxes. Also known as
production cost.
o "natural gas liquids" means light hydrocarbons that can be extracted
in liquid form from natural gas through special separation plants.
This group includes typically lighter liquid hydrocarbons than
condensate, such as butane, propane and ethane. It is combined with
crude oil production but not with crude oil reserve figures.
o "net wells" means a party's working interest in wells under a
production sharing contract.
o "offshore" means areas under water with a depth of five meters or
greater.
o "onshore" means areas of land and areas under water with a depth of
less than five meters.
3
o "proved developed reserves" means proved reserves of oil and natural
gas that can be expected to be recovered through existing wells with
existing equipment and operating methods.
o "proved reserves" means estimated quantities of crude oil and
natural gas that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e.,
prices and costs as of the date the estimate is made.
o "proved undeveloped reserves" means proved reserves that are
expected to be recovered from new wells in undrilled areas, or from
existing wells where significant expenditure is required for
completion.
For a further definition of reserves:
o "reserve replacement ratio" means, for a given year, gross additions
to proved reserves divided by production during the year.
o "reserve-to-production ratio" means the ratio of proved reserves to
annual production of crude oil or, with respect to natural gas, to
wellhead production excluding flared gas.
o "seismic data" means data recorded in either two-dimensional (2D) or
three-dimensional (3D) form from sound wave reflections off of
subsurface geology. This is used to understand and map geological
structures for exploratory purposes to predict the location of
undiscovered reserves.
o "success" means a discovery of oil or gas by an exploration well.
Such an exploration well is a successful well and is also known as a
discovery. A successful well is not necessarily commercial, which
means there are enough hydrocarbon deposits discovered for
economical recovery.
o "success rate" means the total number of successful wells divided by
the total number of wells drilled in a given period. Success rate
can be applied to wildcat wells or exploration wells in general.
o "wildcat well" means an exploration well drilled in an area or rock
formation that has no known reserves or previous discoveries.
References to:
o bbls means barrels, which is equivalent to approximately 0.134
tonnes of oil (33 degrees API),
o mmbbls means million barrels,
o BOE means barrels-of-oil equivalent,
o BOE per day means barrels-of-oil equivalent per day,
o million BOE means million barrels-of-oil equivalent,
o mcf means thousand cubic feet,
o mmcf means million cubic feet,
o bcf means billion cubic feet, which is equivalent to approximately
283.2 million cubic meters,
o BTU means British Thermal Unit, a universal measurement of energy,
and
o km means kilometers, which is equivalent to approximately 0.62
miles.
4
CURRENCIES AND EXCHANGE RATES
We publish our financial statements in Renminbi. Unless otherwise
indicated, all translations from Renminbi to US dollars have been made at a
rate of Rmb 8.2766 to US$1.00, the noon buying rate as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 2001. We do
not represent that Renminbi or US dollar amounts could be converted into US
dollars or Renminbi, as the case may be, at any particular rate, the rate
below or at all.
The following table sets forth the noon buying rate for US dollars in New
York City for cable transfers in Renminbi as certified for customs purposes by
the Federal Reserve Bank of New York for the periods indicated:
Noon Buying Rate
----------------
Period End Average(1) High Low
------ --- ---------- ---- ---
(Rmb per US$1.00)
1997 8.3100 8.3193 8.3290 8.2911
1998 8.3008 8.2991 8.3100 8.2778
1999 8.2795 8.2785 8.2800 8.2770
2000 8.2774 8.2784 8.2799 8.2768
2001 8.2766 8.2772 8.2786 8.2676
November 2001 8.2772 -- 8.2774 8.2765
December 2001 8.2766 -- 8.2773 8.2676
January 2002 8.2765 -- 8.2768 8.2765
February 2002 8.2765 -- 8.2770 8.2765
March 2002 8.2774 -- 8.2800 8.2766
April 2002 8.2773 -- 8.2780 8.2769
2002 (through April 30, 2002) 8.2773 8.2769 8.2800 8.2765
----------
(1) Determined by averaging the rates on the last business day of each month
during the relevant period.
As of May 17, 2002, the noon buying rate for cable transfers in Renminbi
as certified for customs purposes by The Federal Reserve Bank of New York
was Rmb 8.2769 to US$1.00.
5
The Hong Kong dollar is freely convertible into the U.S. dollar. Since
1983, the Hong Kong dollar has been linked to the U.S. dollar at the rate of
HK$7.80 to US$1.00. The Hong Kong government has also stated that it has no
intention of imposing exchange controls in Hong Kong and that the Hong Kong
dollar will remain freely convertible into other currencies, including the
U.S. dollar. However, we cannot assure you that the Hong Kong government will
maintain the link at HK$7.80 to US$1.00 or at all.
The following table sets forth the noon buying rate for US dollars in New
York City for cable transfers in Hong Kong dollars as certified for customs
purposes by the Federal Reserve Bank of New York for the periods indicated.
Noon buying rate
----------------
Period End Average(1) High Low
------ --- --------- ---- ---
(HK$ per US$1.00)
1997 7.7495 7.7440 7.7550 7.7304
1998 7.7476 7.7465 7.7595 7.7355
1999 7.7740 7.7599 7.7814 7.7457
2000 7.7999 7.7936 7.8008 7.7765
2001 7.7980 7.7996 7.8004 7.7970
November 2001 7.7988 -- 7.8004 7.7985
December 2001 7.7980 -- 7.7999 7.7970
January 2002 7.7995 -- 7.8000 7.7970
February 2002 7.7995 -- 7.7999 7.7991
March 2002 7.8000 -- 7.8000 7.7993
April 2002 7.7992 -- 7.8095 7.7992
2002 (through April 30, 2002) 7.7992 7.7996 7.8095 7.7970
----------
(1) The average of the noon buying rates on the last day of each month during
the relevant period.
As of May 17, 2002, the noon buying rate for cable transfers in Hong Kong
dollars as certified for customs purposes by The Federal Reserve Bank of New
York was HK$7.7990 to US$1.00.
6
FORWARD-LOOKING STATEMENTS
This annual report includes "forward-looking statements." All statements,
other than statements of historical facts, included in this annual report that
address activities, events or developments which we expect or anticipate will
or may occur in the future are forward-looking statements. The words
"believe", "intend", "expect", "anticipate", "project", "estimate", "predict"
and similar expressions are also intended to identify forward-looking
statements.
These forward-looking statements address, among others, such issues as:
o the amount and nature of future exploration, development and other
capital expenditures,
o wells to be drilled or reworked,
o oil and gas prices and demand,
o future earnings and cash flow,
o development projects,
o exploration prospects,
o estimates of proved oil and gas reserves,
o potential reserves,
o development and drilling potential,
o drilling prospects,
o expansion and other development trends of the oil and gas industry,
o business strategy,
o production of oil and gas,
o development of undeveloped reserves,
o expansion and growth of our business and operations, and
o our estimated financial information.
These statements are based on assumptions and analyses made by us in
light of our experience and our perception of historical trends, current
conditions and expected future developments, as well as other factors we
believe are appropriate under the circumstances. However, whether actual
results and developments will meet our expectations and predictions depend on
a number of risks and uncertainties which could cause actual results to differ
materially from our expectation. See "Item 3-Key Information-Risk Factors."
Consequently, all of the forward-looking statements made in this annual
report are qualified by these cautionary statements. We cannot assure you that
the actual results or developments anticipated by us will be realized or, even
if substantially realized, that they will have the expected effect on us or
our business or operations.
7
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable, but see "Item 6--Directors, Senior Management and
Employees--Directors and Senior Management."
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
8
ITEM 3.
KEY INFORMATION
A. SELECTED FINANCIAL DATA
Historical Financial Information
You should read the selected historical financial data set forth below in
conjunction with our consolidated financial statements and their notes and
"Item 5--Operating and Financial Review and Prospects" included elsewhere in
this annual report.
We have prepared our consolidated financial statements in accordance with
Hong Kong GAAP. For a reconciliation of our net income, shareholders' equity
and cash flows to U.S. GAAP, see note 36 to the consolidated financial
statements.
Year Ended December 31,
-----------------------------------------------------
1997 1998 1999 2000 2001 2001
---- ---- ---- ---- ---- ----
Rmb Rmb Rmb Rmb Rmb US$
(in millions, except per share and per ADS data)
Income Statement Data:
Hong Kong GAAP
Operating revenues:
Oil and gas sales...................... 11,461 7,814 11,398 18,819 17,561 2,122
Marketing revenues..................... 881 1,488 3,805 5,126 2,537 307
Other income........................... 31 10 108 279 722 87
------ ------ ------ ------ ------ ------
Total operating revenues............... 12,373 9,312 15,311 24,224 20,820 2,516
------ ------ ------ ------ ------ -----
Expenses:
Operating expenses..................... (1,859) (1,954) (1,855) (2,124) (2,329) (281)
Production taxes....................... (589) (383) (579) (1,037) (884) (107)
Exploration costs...................... (458) (584) (247) (553) (1,039) (126)
Depreciation, depletion and
amortization......................... (2,062) (1,954) (2,373) (2,578) (2,567) (310)
Dismantlement and site restoration
allowance............................ (198) (188) (177) (104) (90) (11)
Crude oil and product purchases........ (867) (1,432) (3,737) (5,098) (2,453) (296)
Selling and administrative expenses.... (579) (650) (517) (456) (616) (74)
Interest, net.......................... (644) (491) (568) (238) 201 24
Exchange gain (loss), net.............. 226 (303) (432) 381 235 28
Other.................................. (107) (109) (5) (217) (618) (75)
Total expenses......................... (7,137) (8,048) (10,490) (12,024) (10,160) (1,228)
------- ------- -------- -------- -------- -------
Share of (loss) profit of an associated
company.................................. (10) -- 13 218 90 11
Investment income.......................... -- -- -- -- 221 27
Non-operating profit (loss), net........... 3 580 (1) (195) 35 4
------- ------- -------- -------- -------- -------
Income before tax.......................... 5,229 1,844 4,833 12,223 11,006 1,330
Provision for taxation..................... (329) (295) (722) (1,926) (3,048) (368)
------- ------- -------- -------- -------- -------
Net income................................. 4,900 1 ,549 4,111 10,297 7,958 962
======= ======= ======== ======== ======== =======
Net income per share (basic & diluted)(a).. 0.82 0.26 0.69 1.63 1.00 0.12
Net income per ADS(a)...................... 16.33 5.16 13.70 32.53 20.04 2.42
U.S. GAAP
Operating revenues:
Oil and gas sales...................... 11,461 7,814 11,398 18,819 17,561 2,122
Marketing revenues..................... 881 1,488 3,805 5,126 2,537 307
Other income........................... 31 10 108 279 722 87
------- ------ ------ ------ ------ ------
Total operating revenues............... 12,373 9,312 15,311 24,224 20,820 2,516
------- ------ ------ ------ ------ ------
Net Income................................. 4,900 1,549 4,113 10,302 7,920 957
Net income per share (basic & diluted)(a).. 0.82 0.26 0.69 1.63 1.00 0.12
Net income per ADS(a)...................... 16.33 5.16 13.71 32.55 19.95 2.41
9
Year Ended December 31,
-----------------------------------------------------
1997 1998 1999 2000 2001 2001
---- ---- ---- ---- ---- ----
Rmb Rmb Rmb Rmb Rmb US$
(in millions)
Balance Sheet Data:
Hong Kong GAAP
Cash and cash equivalents.................. 330 426 879 2,797 6,394 773
Time deposits with maturities of three
months or more........................... -- -- -- 3,425 2,050 248
Current assets............................. 2,820 2,102 4,987 9,472 20,030 2,420
Property, plant and equipment, net......... 17,334 18,963 20,908 22,654 23,828 2,879
Investment in associated company........... 260 260 274 471 462 56
Total assets............................... 20,414 21,325 26,169 32,597 44,320 5,355
Current liabilities........................ 3,821 2,813 9,177 8,768 4,392 531
Long-term bank loans, net of current
portion.................................. 8,359 8,333 6,033 4,749 3,256 393
Total long-term liabilities ............... 11,785 12,153 8,607 7,707 6,617 799
Total liabilities.......................... 15,606 14,966 17,785 16,475 11,009 1,330
Shareholders' equity....................... 4,808 6,359 8,384 16,122 33,311 4,025
U.S. GAAP
Total assets............................... 20,414 21,325 26,000 32,330 44,062 5,324
Total long-term obligations and shares
with repurchase commitment............... 11,785 12,153 7,562 7,707 6,617 799
Shareholders' equity....................... 4,808 6,359 9,261 15,855 33,053 3,994
Year Ended December 31,
-----------------------------------------------------
1997 1998 1999 2000 2001 2001
---- ---- ---- ---- ---- ----
Rmb Rmb Rmb Rmb Rmb US$
(in millions, except percentages)
Other Financial Data:
Hong Kong GAAP
Capital expenditures....................... 2,783 3,576 4,070 4,404 4,343 525
Cash provided by (used for):
Operating activities................... 8,467 4,593 8,172 14,436 14,025 1,695
Returns on investments and servicing
of finance........................... (781) (599) (651) (4,391) (3,923) (474)
Taxation paid.......................... (1) (52) (198) (880) (2,611) (315)
Investing activities................... (2,974) (2,952) (4,442) (7,861) (11,366) (1,373)
Financing activities................... (4,715) (895) (2,428) (620) (7,473) (903)
Cash dividends declared per share.......... -- -- 0.17 0.98 0.11 0.01
EBITDE(b).................................. 8,364 5,365 8,630 15,314 14,366 1,736
EBITDE margin(c)........................... 67.6% 57.6% 56.4% 63.2% 69.0% 69.0%
U.S. GAAP
Cash provided by (used for):
Operating activities....................... 7,685 3,942 7,323 13,239 11,759 1,421
Investing activities....................... (2,974) (2,952) (4,442) (7,861) (11,366) (1,373)
Financing activities....................... (4,715) (895) (2,428) (3,454) 3,204 387
Cash dividends declared per share.......... -- -- 0.17 0.98 0.11 0.01
EBITDE(b).................................. 8,364 5,365 8,630 15,314 14,319 1,730
EBITDE margin(c)........................... 67.6% 57.6% 56.4% 63.2% 68.8% 68.8%
----------
(a) Net income per share and net income per ADS for the years ended December
31, 1997, 1998 and 1999 have been computed by dividing net income by the
number of shares and the number of ADSs of 6,000,000,000 and 300,000,000,
respectively (based on a ratio of 20 shares to one ADS), outstanding
immediately after the reorganization. Net income per share and net income
per ADS for 2000 have been computed by dividing net income by the
weighted average number of shares and the weighted average number of ADSs
of 6,331,114,421 and 316,555,721 respectively (based on a ratio of 20
shares to one ADS) for the period. Similarly, net income per share and
net income per ADS for 2001 have been computed, after considering the
dilutive effect of potential ordinary shares under our share option
scheme, using 7,942,288,803 and 397,114,440 respectively.
(b) EBITDE refers to earnings before interest income, interest expense,
income taxes and depreciation, depletion and amortization, dismantlement
and site restoration allowance, impairment losses related to property,
plant and equipment, exploration costs and exchange gains or losses as
computed under Hong Kong GAAP and U.S. GAAP. EBITDE is not a standard
measure under Hong
10
Kong GAAP or U.S. GAAP. We have included EBITDE as we believe it is a
financial measure commonly used in the oil and gas industry. We believe
that EBITDE is a useful supplement to cash flow data because it enables
us to measure our operating performance and provides us with a general
indicator of our ability to service and incur debt as well as to
internally fund exploration and development activities. However, EBITDE
should not be considered in isolation or construed as an alternative to
operating income, operating cash flows or any other measure of
performance or as an indicator of our operating performance, liquidity,
profitability or cash flows generated by operating, investing and
financing activities. EBITDE fails to account for taxes, interest expense
and other non-operating cash expenses. EBITDE does not consider any
functional or legal requirements of the business that may require us to
conserve and allocate funds for purposes other than debt service or
funding of exploration and development activities. EBITDE measures
presented in this annual report may not be comparable to other similarly
titled measures of other companies.
(c) EBITDE margin represents EBITDE as a percentage of our total revenues, as
computed under both Hong Kong GAAP and U.S. GAAP.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
Risks Relating to CNOOC Limited
Our business, revenues and profits fluctuate with changes in oil and gas
prices. Even relatively modest declines in crude oil prices may adversely
affect our business, revenues and profits. Our profitability is determined in
large part by the difference between the prices received for crude oil we
produce and the costs of exploring for, developing, producing and selling
these products.
Prices for crude oil are subject to wide fluctuations in response to
relatively minor changes in the supply of and demand for oil, market
uncertainty and a variety of additional factors that are beyond our control,
including:
o political developments in petroleum producing regions,
o the ability of the Organization of Petroleum Exporting Countries and
other petroleum producing nations to set and maintain production
levels and prices,
o the price and availability of other energy sources, such as coal,
o domestic and foreign government regulation,
o weather conditions, and
o overall economic conditions.
Our revenues and net income have fluctuated significantly in the past
four years, principally due to the volatility of world oil prices. Oil prices
worldwide have fluctuated considerably over the past year, which have
adversely affected our results of operations. Any future declines in oil and
gas prices would adversely affect our revenues and net income.
The prices for the natural gas that we sell in the PRC market are
determined by negotiations between us and the buyers. Our typical contracts
with gas buyers include provisions for annual resets and adjustment formulas
that depend on a basket of crude oil prices, inflation and various other
factors. Such resets and adjustment formulas can result in fluctuation of
natural gas prices which may adversely affect our business, results of
operations and financial condition.
Lower oil and gas prices may also result in the write-off of higher cost
reserves and other assets and in decreased earnings or losses. Lower oil and
natural gas prices may also reduce the amount of oil and natural gas we
11
can produce economically, and existing contracts that we have entered into may
become uneconomical as a result of changing prices. For further details
regarding the effects of fluctuating oil and gas prices on our financial
condition results of operations, see "Item 5--Operating and Financial Review
and Prospects."
The oil and gas reserves data in this annual report are only estimates
and may require substantial revisions as a result of future drilling, testing
and production. The reliability of reserves estimates depends on a number of
factors, including:
o the quality and quantity of technical and economic data,
o the prevailing oil and gas prices applicable to our production,
o the production performance of the reservoirs,
o extensive engineering judgments, and
o consistency in the PRC government's royalty and share oil policies.
Many of the factors, assumptions and variables involved in estimating
reserves are beyond our control and may prove to be incorrect over time. As a
result, results of drilling, testing and production after the date of the
estimates may require substantial upward or downward revisions in our reserves
data. For more information on our oil and gas reserves data, see "Item
4--Information on the Company--Oil and Natural Gas Reserves." Our oil and gas
reserves estimates included in this annual report as of dates prior to
December 31, 1999 have not been evaluated by Ryder Scott Company, our
independent petroleum engineering consultants.
Our failure to gain access to additional reserves and to develop our
proved undeveloped reserves may adversely affect our ability to achieve our
growth objectives. Our ability to achieve our growth objectives depends upon
our success in finding and acquiring or gaining access to additional reserves.
Our future drilling, exploration and acquisition activities may not be
successful. If we do not conduct successful exploration and development
activities, or acquire properties containing proved reserves, our total proved
reserves will decline.
Approximately 60% of our proved reserves were undeveloped as of December
31, 2001. Our future success will depend on our ability to develop these
reserves in a timely and cost-effective manner. There are various risks in
developing reserves, including construction, operational, geophysical,
geological and regulatory risks.
Our development plans have significant capital expenditure requirements
and our capital expenditure plans are subject to various risks. The oil and
gas exploration and production business is a capital intensive business. We
currently plan to spend approximately US$2.1 billion for capital expenditures
relating to the development of our oil and gas properties offshore China and
approximately US$400 million per year for independent exploration from 2002
through 2003. In addition to these amounts, we may make additional capital
expenditures and investments in implementing our business strategy, including
our natural gas strategy.
Our ability to maintain and increase our revenues, net income and cash
flows depends upon continued capital spending. We adjust our capital
expenditure and investment budget on an annual basis. Our capital expenditure
plans are subject to a number of risks, contingencies and other factors, some
of which are beyond our control, including:
o our ability to generate sufficient cash flows from operations and
financings to finance our capital expenditures, investments and
other requirements,
o the availability and terms of external financing,
o changes in crude oil and natural gas prices, which may affect our
cash flows from operations and capital expenditure and investment
plans,
o our mix of exploration and development activities conducted on an
independent basis versus under production sharing contracts,
12
o new investment opportunities that may be presented to us such as
international investment opportunities, liquefied natural gas
projects and other natural gas projects,
o PRC government approvals required for some capital expenditures and
investments,
o our ability to obtain sufficient foreign currency to finance our
capital expenditures, and
o economic, political and other conditions in the PRC and Hong Kong.
Therefore, our actual future capital expenditures and investments will
likely be different from our current planned amounts. The differences may be
significant.
Our business development may require external financing and our ability
to obtain external financing is uncertain. From time to time, we need to
obtain external debt and equity financing to implement our development plans
and to fund our other business requirements.
Our ability to obtain external financing in the future is subject to a
variety of uncertainties including:
o our future results of operations, financial condition and cash
flows,
o the amount of capital that other PRC and Hong Kong entities may seek
to raise in foreign capital markets,
o economic, political and other conditions in the PRC and Hong Kong,
o the PRC government's policies relating to foreign currency
borrowings, and
o conditions in the PRC, Hong Kong and international capital markets.
Our inability to obtain sufficient funding for our operations or
development plans could adversely affect our business, revenues, net income
and cash flows. For additional information on our capital expenditure plans
and financing requirements, see "Item 5--Operating and Financial Review and
Prospects--Liquidity and Capital Resources."
Our failure to implement our natural gas business strategy may adversely
affect our business and financial position. As part of our business strategy,
we intend to expand our natural gas business to meet increasing market demand
in China and to promote the development and production of our natural gas
reserves. This strategy involves a number of risks and uncertainties including
the following:
o we have no experience in investing in liquefied natural gas
facilities, gas transmission and distribution systems, and overseas
upstream natural gas properties,
o significant additional capital expenditures, which are required to
implement our natural gas strategy, could divert resources from our
core oil and gas exploration and production business and require us
to seek additional financing,
o we may face additional competition in our new natural gas activities
from a number of international and PRC companies. In particular,
PetroChina is currently constructing several natural gas pipelines
and planning to construct more pipelines in an effort to link its
natural gas fields located in the western region to the eastern
coastal regions of China. The completion of these pipelines could
significantly increase the competition in these coastal regions,
o our new natural gas activities may subject us to additional
government regulations in China and overseas,
o we do not have the same preferential rights or access to natural gas
businesses or overseas natural gas investments that we enjoy with
respect to our upstream natural gas business offshore China, and
o we are evaluating our option to make an investment in CNOOC's
planned liquefied natural gas project in Guangdong Province.
However, we have not decided whether to exercise our option. There
are various conditions to our ability to exercise the option,
including required governmental approvals.
13
Due to the above factors or other reasons, we may fail to implement our
natural gas strategy successfully.
The development of the natural gas infrastructure and demand in the PRC
natural gas market may occur at a slower pace than our planned increase in
production, which could adversely affect our ability to increase natural gas
sales. Our proposed expansion of natural gas production in China is currently
constrained by a lack of natural gas transmission and supply infrastructure
and an underdeveloped natural gas market. Construction of transmission and
supply pipelines and other infrastructure can depend on many factors, such as
government funding, costs of land acquisition, national and local government
approvals, and timely completion of construction, some of which are beyond our
control. Development of the natural gas market depends on the establishment of
long-term natural gas supply contracts with natural gas utilities or large
end-users, such as power and chemical plants. The demand of these buyers for
natural gas could be impacted by a number of regulatory and market factors
beyond our control, such as regulation of coal prices, government power and
utility policies, chemical commodity cycles, electricity pricing and demand,
and environmental policies.
We are controlled by CNOOC. CNOOC indirectly owns, through CNOOC (BVI)
Limited, its wholly owned subsidiary, an aggregate of 70.61% of our shares. As
a result, CNOOC is effectively able to control the composition of our board of
directors, determine the timing and amount of dividend payments and otherwise
control us, including causing us to effect corporate transactions without the
approval of our minority shareholders, except where we are required to obtain
such approval in order to comply with the requirements of the rules of The
Stock Exchange of Hong Kong Limited with respect to connected transactions.
For further details regarding potential conflicts, see "Item 7--Major
Shareholders and Related Party Transactions."
Under current PRC law, CNOOC has the exclusive right to enter into
production sharing contracts with international oil and gas companies for
petroleum exploration and production offshore China. CNOOC has undertaken to
us that it will transfer to us all of its rights and obligations under any new
production sharing contracts, except those relating to its administrative
functions. However, we cannot contract directly with foreign enterprises for
these purposes without CNOOC. The interests of CNOOC in entering into
production sharing contracts with international oil and gas companies may
conflict with our interest because of the possible differences between CNOOC's
and our criteria in determining whether, and on what terms, to enter into
production sharing contracts. Our future business development may be adversely
affected if CNOOC does not enter into new production sharing contracts.
A substantial portion of our sales are to three customers, and
significantly reduced purchases from them could have a material adverse impact
on our operations. We sell a significant percentage of our crude oil
production in the PRC domestic market to refineries and petrochemical
companies that are affiliates of China Petroleum & Chemical Corporation or
Sinopec. For the years ended December 31, 1999, 2000 and 2001, our sales to
Sinopec comprised approximately 56.2%, 26.1% and 30.2%, respectively, of our
total operating revenues. PetroChina is our next largest customer. For the
years ended December 31, 1999, 2000 and 2001, our sales to PetroChina were
approximately 12.0%, 6.0%, and 6.3%, respectively, of our total operating
revenues. Both PetroChina and Sinopec are majority owned by the PRC
government. In addition, we sell a significant portion of our natural gas to
one customer, Castle Peak Power Company Limited in Hong Kong, under a long
term take-or-pay contract. For the years ended December 31, 1999, 2000 and
2001, our sales to this customer were approximately 7.6%, 5.6% and 5.8%,
respectively, of our total operating revenues.
Both PetroChina and Sinopec have their own oil and gas fields and have
the right to import crude oil directly from international markets. We do not
have any long-term sales contracts with PetroChina, Sinopec or their
respective affiliates. Our business, results of operations and financial
condition would be adversely affected if:
o either PetroChina or Sinopec significantly reduces its purchases of
crude oil from us, or
o they suffer significant financial difficulties and, in either case,
o we cannot find a ready buyer for our crude oil in the international
market.
We may lose market share to existing competitors, and new entrants into
the offshore petroleum industry in China would increase competition and could
adversely affect our business. The crude oil industry is highly competitive.
We compete in the PRC and international markets for both customers and capital
to finance our
14
exploration, development and production activities, as well as for the
acquisition of desirable oil and gas prospects. The prices of our crude oil
are determined by reference to the prices of crude oil of comparable quality
on the international market. Our principal competitors in the PRC market are
PetroChina and Sinopec. For further details, see "Item 4--Information on the
Company--Competition."
We are the dominant player in the oil and gas industry offshore China,
and we are the only company authorized to engage in oil and gas exploration
offshore China in cooperation with international oil and gas companies. If
there are any changes in current PRC laws or regulations permitting an
expansion of existing companies' activities or new entrants into the offshore
petroleum industry, we may face increased competition in obtaining new oil and
gas properties offshore China.
CNOOC has undertaken to us that so long as
o it retains a controlling interest in us and
o our securities are listed on the Hong Kong Stock Exchange, the New
York Stock Exchange or other securities trading systems in other
parts of the world,
we will have the exclusive right to exercise CNOOC's rights to engage in
offshore oil and gas exploration, development, production and sales in the PRC
and that it will not compete with us in such oil and gas business. However,
CNOOC may not continue to maintain a controlling interest in our company and
CNOOC's undertaking may be subject to interpretative challenges in the future.
See "Item 7--Major Shareholders and Related Party Transactions."
Our operations are affected by exploration, development and production
risks and natural disasters, and resulting losses may not be covered by
insurance. Our petroleum exploration, development and production operations
involve risks normally incidental to such activities, including pipeline
ruptures and spills, fires, explosions, encountering formations with abnormal
pressures, blowouts, cratering and natural disasters, any of which may result
in loss of hydrocarbons, environmental pollution and other damage to our
properties and the properties of operators under production sharing contracts.
Also, we run the risk that we will not find any economically productive
natural gas or oil reservoirs. In addition, the costs of drilling, completing
and operating wells are often uncertain and are subject to numerous factors
beyond our control, including:
o weather conditions,
o natural disasters,
o shortages of, or delays in obtaining, equipment, and
o inadequacy and unavailability of transportation facilities.
We maintain insurance coverage against only some, but not all, potential
losses. We do not maintain business interruption insurance for all of our oil
and gas fields. We may suffer material losses resulting from uninsurable or
uninsured risks or insufficient insurance coverage.
For further information on our insurance coverage, see "Item
4--Information on the Company--Operating Hazards and Uninsured Risks."
We may be exposed to certain risks of operations in Indonesia as a result
of our acquisition of certain oil and gas interests located onshore and
offshore Indonesia. We recently completed the acquisition of nine subsidiaries
of Repsol YPF, S.A. See "Item 5--Operating and Financial Review and
Prospects--The Repsol Acquisition" and "Item 4--Information on the
Company--Principal Oil and Gas Regions--Overseas Activity." The interests of
the acquired subsidiaries are located onshore and offshore Indonesia and are
subject to certain risks of operations in Indonesia, including Indonesian
economic and political risks. Although the subsidiaries have not historically
experienced problems from civil unrest or disputes with the Indonesian
government, Indonesia's current political and economic environment could
impact the financial position, results of operations and prospects of the
subsidiaries and we may not fully realize the intended benefits of the
acquisition.
15
The businesses of the subsidiaries are subject to the laws and
regulations of Indonesia, including those relating to the development,
production, marketing, pricing, transportation and storage of natural gas and
crude oil, taxation and environmental and safety matters. In addition, these
subsidiaries are subject to production sharing arrangements with Pertamina,
the Indonesian state owned oil and gas company, which is currently the sole
entity authorized to manage Indonesia's petroleum resources on behalf of the
Indonesian government. The subsidiaries may be adversely affected by changes
in governmental policies or social instability or other political, economic or
diplomatic developments in or affecting Indonesia which are not within our
control including, among other things, a change in crude oil or natural gas
pricing policy, the risks of war and terrorism, expropriation,
nationalization, renegotiation or nullification of existing concessions and
contracts, taxation policies, foreign exchange and repatriation restrictions,
changing political conditions, Rupiah/U.S. dollar exchange rate fluctuations
and currency controls. The Indonesian government has recently introduced laws
on revenue sharing and regional autonomy and a proposed oil and gas law. It is
unclear at the present time what impact, if any, the recent and proposed
legislation would have on the financial position, results of operations and
prospects of these subsidiaries.
We face risks in connection with the integration of our Indonesian
subsidiaries. As with any acquisition, success of the acquisition depends in
part on our ability to integrate the operations of the subsidiaries of Repsol
YPF, S.A. in Indonesia into our existing businesses. Although we do not expect
to encounter difficulties with such integration, there can be no assurance
that we will be able to integrate the businesses of the subsidiaries
successfully or that we will not encounter delays or incur unanticipated costs
in such integration. If we are not able successfully integrate the businesses
of the subsidiaries into our operations, we may not fully realize the intended
benefits of the acquisition.
Risks relating to the PRC petroleum industry
We operate in a regulated industry and our business may be affected by
unfavorable regulatory changes. The PRC government exercises control over the
PRC petroleum industry, including with respect to licensing, exploration,
production, distribution, pricing, exports and allocation of various
resources. As part of a PRC government reorganization, the State Economic and
Trade Commission has become the primary coordinator for the petroleum industry
and, together with other relevant governmental agencies, provides regulatory
supervision over the petroleum industry.
In the past, we have benefited from various favorable PRC government
policies, laws and regulations that were enacted to encourage the development
of the offshore petroleum industry. In the future, the PRC government may
change existing policies or adopt new policies, laws or regulations. Our
business may be adversely affected by such unfavorable regulatory changes.
In addition, existing PRC regulations require that we apply for and
obtain various PRC government licenses and other approvals, including in some
cases amendments and extensions of existing licenses and approvals in order to
conduct our exploration and development activities offshore China. If in the
future we are unable to obtain any such necessary approvals, our reserves and
production would be adversely affected.
Certain restrictions on foreign companies will be lifted as a result of
China's entry into the World Trade Organization and may adversely affect our
business. Effective December 11, 2001, the PRC became a member of the WTO. WTO
membership status will result in China eventually lifting its restrictions
which prohibit the direct sale of crude oil and processed oil by foreign
companies in China within five years from the date of China's accession to the
WTO. The sale of natural gas and liquefied petroleum gas is not specifically
dealt with under China's market-access commitments relating to distribution
services (as is the case with crude and processed oil). Accordingly, foreign
participation in the sale of such products may be permitted within one year of
accession in the form of minority-owned joint ventures and, within two years
of accession, through wholly owned subsidiaries without any equity
restrictions.
China's WTO membership status also impacts the participation of foreign
companies in offshore oil-field services. China's WTO commitments in this
regard provide for petroleum exploitation by foreign entities in cooperation
with Chinese partners. Liberalization in this sector formally took effect from
the date of China's accession. However, current PRC legislation regulating
offshore oil-field services remains unchanged since 1982. This situation is
expected to change to reflect China's apparently more liberal WTO commitments.
Further
16
liberalization in this sector or amendments to PRC legislation to reflect
China's agreed WTO commitments may result in our losing benefits from special
policies and measures and lead to additional competition in the future.
Failure to comply with existing or future environmental laws and
regulations could adversely affect us. Our business is subject to PRC
environmental protection laws and regulations which:
o impose fees for the discharge of waste substances,
o require the payment of fines and damages for serious environmental
pollution, and
o provide that the government may, at its discretion, close or suspend
any facility which fails to comply with orders requiring it to cease
or cure operations causing environmental damage.
We believe that all of our facilities and operations are in material
compliance with the requirements of the relevant environmental protection laws
and regulations. However, amendment of existing laws or regulations may impose
additional or more stringent requirements. In addition, our compliance with
such laws or regulations may require us to incur significant capital
expenditures or other obligations or liabilities, which could create a
substantial financial burden on us. For a further discussion of the
environmental regulations in the PRC, see "Item 4--Information on the
Company--Environmental Regulation."
Risks relating to the PRC
Our operations may be adversely affected by PRC economic and political
conditions. Most of our business, assets and operations are located in the PRC
and are owned and conducted by our wholly owned PRC subsidiary, CNOOC China
Limited. The economy of the PRC differs from the economies of most developed
countries in many respects, including:
o structure,
o government involvement,
o level of development,
o growth rate,
o capital reinvestment,
o allocation of resources,
o government control of foreign exchange, and
o balance of payments position.
The PRC economy has historically been a planned economy subject to
long-term plans adopted by the PRC government, which set out production and
development targets. The majority of productive assets in the PRC are still
owned by the PRC government at various levels. In recent years the PRC
government has implemented economic reform measures emphasizing
decentralization, utilization of market forces in the development of the PRC
economy and a high level of management autonomy. Such economic reform measures
may be inconsistent or ineffectual, and we may not be able to capitalize on
all such reforms. Further, these measures may be adjusted or modified,
possibly resulting in such economic liberalization measures being inconsistent
from industry to industry, or across different regions of the country.
Our operating results may be adversely affected by:
o changes in the PRC's political, economic and social conditions,
o changes in policies of the PRC government,
o changes in PRC laws and regulations or the interpretation of PRC
laws and regulations,
o measures which may be introduced to control inflation or deflation,
17
o changes in the rate or method of taxation,
o imposition of additional restrictions on currency conversion and
remittances abroad,
o reduction in tariff protection and other import restrictions,
o changes in the usage and costs of state controlled transportation
services, and
o state policies affecting the industries to which we sell our
products.
The PRC economy has experienced significant growth in the past 20 years,
but the growth has been uneven both geographically and among various sectors
of the economy. Economic growth has also been accompanied by periods of high
inflation. The PRC government has implemented various policies from time to
time to restrain the rate of such economic growth, control inflation and
otherwise regulate economic expansion. In addition, the PRC government has
attempted to control inflation by controlling the prices of basic commodities.
Severe measures or other actions by the PRC government, such as placing
additional controls on prices of petroleum and petroleum products, could
restrict our business operations and adversely affect our financial position.
Government control of currency conversion and future movements in
exchange rates may adversely affect our operations and financial condition. We
receive most of our revenues in Renminbi. A portion of such revenues will need
to be converted into other currencies to meet our foreign currency
obligations. We have substantial requirements for foreign currency, including:
o debt service on foreign currency denominated debt,
o purchases of imported equipment, and
o payment of any dividends declared in respect of shares held by
international investors.
CNOOC China Limited, our wholly owned principal operating subsidiary in
the PRC, may undertake current account foreign exchange transactions without
prior approval from the State Administration for Foreign Exchange. It has
access to current account foreign exchange so long as it can produce
commercial documents evidencing such transactions and provided that they are
processed through certain banks in China. Foreign exchange transactions under
the capital account, including principal payments with respect to foreign
currency denominated obligations, will be subject to limitations of the State
Administration for Foreign Exchange.
Since 1994, the conversion of Renminbi into Hong Kong and United States
dollars has been based on rates set by the People's Bank of China, which are
set daily based on the previous day's PRC interbank foreign exchange market
rate and current exchange rates on the world financial markets. The PRC
government has stated publicly that it intends to make Renminbi freely
convertible in the future. However, we cannot predict when the PRC government
will allow free conversion of Renminbi into foreign currencies. Renminbi
devaluation and fluctuations in exchange rates may adversely affect the value,
translated or converted into U.S. dollars or Hong Kong dollars, of our net
assets, earnings and any declared dividends. Renminbi devaluation and exchange
rate fluctuations may adversely affect our results of operations and financial
condition and may result in foreign exchange losses because of our substantial
U.S. dollar-and Japanese yen-denominated debts, expenses and other
requirements. In addition, we may not be able to increase the Renminbi prices
of our domestic sales to offset fully any depreciation of the Renminbi due to
political, competitive or social pressures.
We do not hedge exchange rate fluctuations between the Renminbi and
foreign currencies and currently have no plans to do so. For further
information on our foreign exchange risks, foreign exchange rates and our
hedging activities, see "Currencies and Exchange Rates" and "Item 5--Operating
and Financial Review and Prospects--Market Risks."
Our operations are subject to the uncertainty of the PRC legal system.
The PRC legal system is based on written statutes. Prior court decisions may
be noted for reference but do not have binding precedential effect. Since
1979, the PRC government has been developing a comprehensive system of
commercial laws, and considerable progress has been made in introducing laws
and regulations dealing with economic matters such as foreign investment,
corporate organization and governance, commerce, taxation and trade. However,
these laws and regulations are relatively new and because of the limited
volume of published cases and judicial interpretation and
18
their non-binding nature, enforcement and interpretation of these laws and
regulations involve significant uncertainty. In addition, as the PRC legal
system develops, changes in such laws and regulations, their interpretation or
their enforcement may lead to additional restrictions on our business.
Risks relating to the ADSs and shares
Shares or ADSs eligible for public sale could adversely affect the price
of our shares or ADSs. Sales, or the real or perceived possibility of sales,
of a significant number of shares in the public market could adversely affect
prevailing market prices for the ADSs and shares. As of April 30, 2002, CNOOC,
through CNOOC (BVI) Limited, holds approximately 70.61% of our shares and the
corporate investors own approximately 6.79% of our shares and Shell Eastern
Petroleum (Pte) Limited owns approximately 3.16% of our shares. CNOOC (BVI)
may sell the shares it owns, subject to the requirement of the Listing Rules
of the Hong Kong Stock Exchange that, during the six-month period immediately
following the expiration of the six-month lock-up period with respect to the
global offering in February 2001, CNOOC shall not sell the shares such that it
would cease to be our controlling shareholder or if such sale would create a
disorderly market. During the second six-month period following the
commencement of public trading of our shares, our corporate investors may
dispose of up to 50% of our shares owned by them without CNOOC (BVI)'s prior
written consent. Also during this second six-month period, Shell Eastern
Petroleum (Pte) Limited may dispose of up to 50% of our shares owned by it
without our and/or Merrill Lynch Far East Limited's prior consent. As of April
30, 2002, neither CNOOC (BVI) Limited nor Shell Eastern Petroleum (Pte)
Limited has sold its shares in us. We cannot predict the effect, if any, that
market sales of our shares, or the availability of our shares for future sale,
will have on the market price of our shares or ADSs.
Pursuant to the registration rights agreement we entered into with our
strategic investor, we have agreed to indemnify the strategic investor for
certain liabilities that it may have under the Securities Act. Resale of the
shares or ADSs in the United States by our strategic investor may only be done
pursuant to an effective registration statement or an exemption from the
registration requirements of the Securities Act. We and our strategic investor
have entered into a registration rights agreement whereby we have agreed to
register the securities of our strategic investor if it so requests. We have
agreed to pay for the cost of any such registration and to indemnify our
strategic investor for certain liabilities that it may have under the
Securities Act which relate to the registration statement that would have to
be filed and the annual report that would have to be delivered to purchasers,
in the event of a resale by our strategic investor. There is a risk that we
will be required to indemnify our strategic investor pursuant to the
registration rights agreement.
We have agreed to enter into registration rights agreements with our
corporate investors on the same terms as our registration rights agreement
with our strategic investor. There is a risk that we will be required to
indemnify our corporate investors pursuant to such registration rights
agreements.
19
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT
Our legal and commercial name is CNOOC Limited. Our head office is
located at 65th Floor, Bank of China Tower, One Garden Road, Central, Hong
Kong, and our telephone number is 852-2213-2500. We have appointed CT
Corporation System, 111 Eighth Avenue, New York, New York 10011, as our agent
for service of process.
The PRC government established CNOOC as the state-owned offshore
petroleum company of China in 1982 under the Regulation of the People's
Republic of China on Exploitation of Offshore Petroleum Resources in
Cooperation with Foreign Enterprises, whereby CNOOC assumed overall
responsibility for the administration and development of PRC offshore
petroleum operations with foreign oil and gas companies. CNOOC is regulated
and supervised by the State Economic and Trade Commission.
Prior to the reorganization, which became effective as of October 1,
1999, CNOOC and its various subsidiaries and affiliates performed commercial
and administrative functions, including:
o exercising the exclusive right to cooperate with foreign partners in
offshore petroleum exploration, development, production and sales
activities, and taking up to a 51% participating interest in
production sharing contracts,
o organizing international bidding for offshore petroleum
exploitation,
o conducting independent exploration, development, production and
sales activities in our independently operated oil and gas fields
offshore China,
o awarding projects to and signing bilateral contracts with foreign
partners for offshore petroleum exploitation,
o reviewing and confirming appraisal reports and overall development
plans required under production sharing contracts, and
o obtaining from the PRC government all approvals, permits, licenses,
consents and special policies necessary under production sharing
contracts.
Reorganization
Under the reorganization in 1999, CNOOC transferred all of its then
current operational and commercial interests in its offshore petroleum
business to us. As a result, we and our subsidiaries are the only vehicle
through which CNOOC engages in petroleum exploration, development, production
and sales activities both within and outside China. CNOOC continues to perform
administrative functions relating to our business.
The assets and liabilities primarily relating to the offshore petroleum
business that were transferred to us in the reorganization include:
o 37 production sharing contracts and one geophysical survey
agreement,
o eight independent development and production projects,
o a 30% interest in Shanghai Petroleum and Natural Gas Company
Limited,
o the land use rights to terminal facilities in Nanhai, Weizhou and
the western part of Bohai Bay, and
o loans from, and swap agreements with, various PRC and foreign banks.
In addition, CNOOC transferred approximately 917 employees to us to
facilitate the transfer of the oil and natural gas businesses previously
operated by CNOOC.
20
CNOOC has retained its commercial interests in operations and projects
not related to oil and gas exploration and production, including:
o a petrochemical project in Huizhou, Guangdong Province,
o a fertilizer plant in Hainan Province, and
o a liquefied natural gas project in Guangdong Province.
CNOOC also retained all of its administrative functions, which it
performed prior to the reorganization, including:
o organizing international bidding for offshore petroleum
exploitation,
o awarding projects to and signing bilateral contracts with foreign
partners for offshore petroleum exploitation,
o approving any extension of the period for the completion of the
appraisal work on petroleum discovery under the production sharing
contracts, and
o submitting the overall development plans, reports of the oil and gas
fields and the environmental impact statements related to the
production sharing contracts to the PRC governmental authorities.
Undertakings
CNOOC has undertaken to us that:
o we will enjoy the exclusive right to exercise all of CNOOC's
commercial and operational rights under the PRC laws and regulations
relating to the exploration, development, production and sales of
the PRC offshore oil and natural gas,
o it will transfer to us all of its rights and obligations under any
new production sharing contracts and geophysical exploration
operations, except those relating to its administrative functions,
o neither it nor any of its affiliates will engage or be interested,
directly or indirectly, in oil and natural gas exploration,
development, production and sales in or outside the PRC,
o we will be able to participate jointly with CNOOC in negotiating new
production sharing contracts and to set out our views to CNOOC on
the proposed terms of new production sharing contracts,
o we will have unlimited and unrestricted access to all data, records,
samples and other original data owned by CNOOC relating to oil and
natural gas resources,
o we will have an option, for which no consideration will be payable
by us to CNOOC, to make any investment in liquefied natural gas
projects that CNOOC has invested or proposes to invest, and CNOOC
will at its own expense help us to procure all necessary government
approvals needed for our participation in these projects, and
o we will have an option, for which no consideration will be payable
by us to CNOOC, to participate in other businesses related to
natural gas in which CNOOC has invested or proposes to invest, and
CNOOC will at its own expense procure all necessary government
approvals needed for our participation in such business.
If we do not exercise the option to participate in a liquefied natural
gas project, such decision will be subject to the review of our independent
non-executive directors. We will make an announcement of our decision and the
views of our independent non-executive directors, and include in our annual
report the decision and the views of our independent non-executive directors.
The terms of this option require us, if we exercise the option, to reimburse
CNOOC for any contribution CNOOC has made with respect to the facility,
together with interest thereon calculated at the prevailing market interest
rate.
The undertakings from CNOOC will cease to have any effect:
21
o if we become a wholly owned subsidiary of CNOOC,
o if our securities cease to be listed on any stock exchange or
automated trading system, or
o 12 months after CNOOC or any other PRC government controlled entity
ceases to be our controlling shareholder.
Corporate Structure
As of April 30, 2002, CNOOC indirectly owns or controls an aggregate of
70.61% of our shares. Accordingly, it continues to be able to exercise all the
rights of a controlling shareholder, including electing our directors and
voting to amend our articles of association. Although CNOOC has retained a
controlling interest in our company, the management of our business will be
our directors' responsibility.
The chart on the following page sets forth our controlling entities and
our principal subsidiaries as of April 30, 2002.
22
CNOOC Limited Corporate Structure
----------------------------------
| China National Offshore Oil |
| Corporation |
| (PRC) |
----------------------------------
|
|
| 100%
|
|
----------------------------------
| Overseas Oil & Gas |
| Corporation Ltd. |
| (Bermuda) |
----------------------------------
|
|
| 100%
|
|
----------------------------------
| CNOOC (BVI)Limited |
| (British Virgin Islands) |
| |
----------------------------- ----------------------------------
| Public Shareholders and | |
| Corporate Investors |\ |
| | \ 29.39% | 70.61%
| | \ |
----------------------------- \ |
\ ----------------------------------
\ | CNOOC Limited |
\ | (Hong Kong) |
\| |
| |
----------------------------------
|
|
|
------------------------------------------------------------------------------------------
| | | |
| 100% | 100% | 100% | 100%
| | | |
---------------------------- ------------------------- ----------------------------- -------------------------
| CNOOC | | CNOOC China | | China Offshore Oil | | CNOOC Finance |
| International | | Limited(1) | | (Singapore) | | (2002) Limited |
| Limited)1) | | (PRC) | | International Pte Ltd.(3) | | (British Virgin |
| (British Virgin Islands) | | | | (Singapore) | | Islands) |
---------------------------- ------------------------- ----------------------------- -------------------------
-----------------
(1) The owner of our interests in our overseas petroleum exploration and
production business and operations.
(2) The owner of substantially all of our petroleum exploration and production
businesses, operations and properties in the PRC.
(3) The business vehicle through which we engage in sales and marketing
activities in the international market.
23
B. BUSINESS OVERVIEW
Overview
We are an oil and gas company engaged primarily in the exploration,
development and production of crude oil and natural gas offshore China. We are
the dominant producer of crude oil and natural gas offshore China and the only
company permitted to conduct exploration and production activities with
international oil and gas companies offshore China. As of December 31, 2001,
we had estimated net proved reserves of 1,787.1 million BOE, comprised of
1,245.9 million barrels of crude oil and condensate and 3,247.6 billion cubic
feet of natural gas. For the year 2001, our net production averaged 228,874
barrels per day of crude oil, condensate and natural gas liquids and 195.0
million cubic feet per day of natural gas, which together totaled 261,379 BOE
per day and represented a 9.2% increase over the annual average daily
production in year 2000.
We increased our net proved reserves from 668 million BOE as of December
31, 1995 to 1,787.1 million BOE as of December 31, 2001, which represents a
compound annual growth rate of 17.8%. Based on net proved reserves, we are one
of the largest independent oil and gas exploration and production companies in
the world. In the petroleum industry, an "independent" company owns oil and
gas reserves independently of other downstream assets, such as refining and
marketing assets, as opposed to an integrated company that owns downstream
assets in addition to oil and gas reserves. As of December 31, 2001,
approximately 60% of our net proved reserves were classified as net proved
undeveloped. We plan to spend approximately US$2.1 billion developing our
reserves offshore China and approximately US$400 million for independent
exploration offshore China from 2002 through 2003.
We conduct our exploration, development and production activities through
both independent operations and production sharing contracts with foreign
partners. We have added to our reserves in recent years primarily through our
independent operations. As of December 31, 2001, independent properties
accounted for approximately 59.5% of our total net proved reserves. We are the
operator of all of our independent producing properties. For the year ended
December 31, 2001, production from our independent properties accounted for
57.9% of total net production. Because independent properties account for
approximately 59% of our current net proved undeveloped reserves, we expect
our production from independent properties to continue to increase.
Through our parent company, CNOOC, we have the exclusive right to enter
into production sharing contracts with international oil and gas companies to
conduct exploration and production activities offshore China. See
"--Production Sharing Contracts." As of December 31, 2001, we were a party to
a total of 30 production sharing contracts and one joint study agreement. In
2001, we entered into three of these production sharing contracts and into one
joint study agreement with our foreign partners. The following table sets
forth details of these transactions.
Nature of Contract Area
Basin Block Agreement Foreign Partner Interest(%) Date of Signature (km2)
----- ---------- --------- -------------- ----------- ----------------- -------------
Pearl River Mouth 27/10 PSC Santa Fe 100 May 10, 2001 6,546
Pearl River Mouth 39/05 PSC Husky 100 July 26, 2001 5,700
Bohai Bay BZ26-2/28-1 Joint Study Shell 100 August 31, 2001 143
Bohai Bay 11/26 PSC Shell 100 December 11, 2001 3,190
Total 15,579
We currently are the operator or joint operator of most of the properties
developed under our production sharing contracts. In the early years of our
existence, we conducted most of our activities through production sharing
contracts. Production sharing contracts have enabled us to develop our
technical and management expertise and provided us with the cash flows
necessary to increase the scope of our independent exploration and production
activities.
24
Natural gas is becoming an increasingly important part of our business
strategy as we exploit our natural gas reserves to meet rapidly growing
domestic demand. We are continuing to explore for natural gas and develop
natural gas properties. In view of the domestic natural gas supply shortfall
forecasted by the Chinese government, we may invest in liquefied natural gas
projects. We may also make strategic investments in other assets to facilitate
the development of markets for natural gas production.
CNOOC, our parent company, was formed in 1982 when the Regulation of the
People's Republic of China on Exploitation of Offshore Petroleum Resources in
Cooperation with Foreign Enterprises gave CNOOC the exclusive right to enter
into production sharing contracts with foreign partners to conduct exploration
and production activities offshore China. As a result of CNOOC's October 1999
reorganization, we became the only entity through which CNOOC engages in the
upstream petroleum business. CNOOC continues to perform administrative
functions relating to our upstream petroleum business. For further details
regarding this reorganization, see "Item 7--Major Shareholders and Related
Party Transactions."
Competitive Strengths
We believe that our historical success and future prospects are directly
related to a combination of strengths, including the following:
o large proved reserve base with significant exploitation
opportunities;
o sizable operating area with demonstrated exploration potential;
o successful independent exploration and development record;
o competitive cost structure;
o reduced risks and access to capital and technology through
production sharing contracts;
o strategic position in China's growing natural gas markets; and
o experienced management team.
Large proved reserve base with significant exploitation opportunities.
Based on net proved reserves as of December 31, 2001 and average net daily
production for the year ended December 31, 2001, we had a
reserve-to-production ratio of approximately 18.7 years. As of December 31,
2001, approximately 60% of our net proved reserves were classified as net
proved undeveloped. We expect our production to grow significantly as these
undeveloped properties begin producing.
Sizable operating area with demonstrated exploration potential. The
offshore China exploration area is approximately 1.3 million square kilometers
in size, about twice as large as the U.S. Gulf of Mexico exploration area. As
of December 31, 2001, a total of 738 exploration wells had been drilled
offshore China. Only limited exploration has been conducted in the natural gas
prone regions of the Western South China Sea and the East China Sea. Since
CNOOC's inception in 1982, a total of 615 exploration wells have been drilled
offshore China including 394 wildcat wells with a success rate of
approximately 36%. 17 discoveries have been made offshore China between the
beginning of 1999 and December 31, 2001, including major discoveries made by
Phillips, Kerr-McGee, Devon Energy and the CACT operating group, as well as
four discoveries made by us.
Successful independent exploration and development record. From the
formation of CNOOC in 1982 to December 31, 2001, we achieved a success rate of
approximately 51% on our 146 independent wildcat wells while our foreign
partners achieved a success rate of approximately 28% on their 248 wildcat
wells. Between late 1995 and the end of 2001, we completed six of our major
independent development projects on time and under budget. Our average finding
and development cost for our independent operations for the three years ended
December 31, 2001 was US$4.92 per BOE, or US$4.15 per BOE as adjusted for the
estimated future costs of developing proved undeveloped reserves.
Competitive cost structure. For the year ended December 31, 2001, our
total lifting costs were US$4.16 per BOE. Lifting costs consist of operating
expenses and production taxes. Total lifting costs for independent operations
25
were US$3.88 per BOE during the same period. We have kept our lifting costs
low through various measures including more efficient use of offshore
infrastructure, the linking of employee bonuses to cost reduction and the
adoption of new technology in our operations. We believe that our cost
structure allows us to compete effectively even in a low crude oil price
environment.
Reduced risks and access to capital and technology through production
sharing contracts. Production sharing contracts help to minimize finding
costs, exploration risks and capital requirements because foreign partners are
responsible for all costs associated with exploration. Under a production
sharing contract, our foreign partners can recover their exploration costs
only if a commercially viable discovery is made. Through production sharing
contracts, we have ready access to modern technology and are able to gain
expertise, which we are then able to utilize in our independent exploration
and production activities. We also enter into production sharing contracts
with respect to our independent discoveries in instances where we believe we
need the expertise and capital of a foreign partner to reduce our risk and
develop the discovery successfully.
Strategic position in China's growing natural gas markets. The proximity
of our natural gas reserves to the major demand areas in the coastal regions
of China provides us with a competitive advantage over other natural gas
suppliers in China, whose natural gas reserves are located primarily in
northwest and southwest China. We have natural gas fields near many of China's
rapidly growing coastal areas, including Hong Kong, Shanghai and Tianjin. In
addition, CNOOC has granted us an option to acquire its interest in a
liquefied natural gas import facility located in Guangdong Province.
Construction of the facility is expected to begin in 2002. The terms of this
option require us, if we exercise the option, to reimburse CNOOC for any
contribution CNOOC has made with respect to the facility, together with
interest thereon calculated at the prevailing market interest rate. CNOOC has
also granted us an option to make any other investment in liquefied natural
gas projects or other natural gas related businesses in which CNOOC has
invested or proposes to invest. If we exercise our option to participate in
the Guangdong Province project, we believe our participation in this project
will position us well for participation in future liquefied natural gas
projects. For further information, see "--Natural Gas Business."
Experienced management team. Our senior management team has extensive
experience in the oil and gas industry, and most of our executives have been
with us or CNOOC since CNOOC's inception in 1982. We have evolved from a
company heavily reliant on production sharing contracts with foreign partners
to a company with a balance of independent operations and production sharing
contract operations. Our management team and staff have had the opportunity to
work closely with foreign partners both within and outside China. We have
implemented international management practices including incentive
compensation schemes for our employees. In addition, we have adopted a share
option scheme for our senior management. See "Item 6--Directors, Senior
Management and Employees--Share Ownership."
Business Strategy
We intend to continue to expand our oil and gas exploration and
production activities and, where appropriate, to make strategic investments in
related natural gas businesses in order to help develop the markets for
natural gas production. While our expansion strategy will continue to focus
primarily on offshore China, we may also consider selective acquisition
opportunities overseas. The principal components of our strategy are as
follows:
o increase production primarily through the development of our net
proved undeveloped reserves;
o add to our reserves through independent exploration and production
sharing contracts;
o capitalize on the growing demand for natural gas in China;
o maintain operational efficiency and low production costs; and
o maintain conservative financial practices to maximize financial
flexibility.
Increase production primarily through the development of our net proved
undeveloped reserves. As of December 31, 2001, approximately 60% of proved
reserves were classified as proved undeveloped, which gives us the opportunity
to achieve substantial production growth even without further discovery of new
reserves, assuming that we will be able to develop these reserves more quickly
than we deplete our currently producing reserves. We are currently undertaking
a number of large development projects located primarily in the Bohai Bay and
the
26
Western South China Sea, which will substantially increase production as these
projects begin producing. We plan to spend approximately US$2.1 billion
through the year 2003 to develop our net proved undeveloped reserves offshore
China. Approximately US$970 million will be spent on independent projects and
approximately US$1.2 billion will be spent on projects under production
sharing contracts.
Add to our reserves through independent exploration and production
sharing contracts. We plan to concentrate our independent exploration efforts
in existing operating areas with a particular emphasis on natural gas. We plan
to spend approximately US$400 million through 2003 on independent exploration
activities. We plan to augment independent exploration efforts and reduce
capital commitments and exploration risks by continuing to enter into
production sharing contracts with foreign partners. We currently have
identified 40 prospects ready for drilling. In 2002, we plan to drill
approximately 42 exploration wells, acquire approximately 18,200 kilometers of
2D seismic data and approximately 1,900 square kilometers of 3D seismic data
independently. Our foreign partners, under existing production sharing
contracts, plan to drill approximately 21 to 41 exploration wells, acquire
approximately 1,800 kilometers of 2D seismic data and acquire approximately
600 to 2,650 square kilometers of 3D seismic data in 2002.
Capitalize on the growing demand for natural gas in China. The Chinese
government is forecasting significant growth in domestic natural gas demand
and has made efforts to promote the use of natural gas as a clean and more
efficient fuel. We plan to capitalize on this growth potential through the
following initiatives:
o continue to develop natural gas fields and focus independent
exploration efforts on natural gas;
o evaluate whether to exercise the option to invest in the planned
Guangdong liquefied natural gas project;
o evaluate investment opportunities in related natural gas businesses
that will help develop markets for our natural gas production; and
o selectively pursue interests in producing natural gas properties
outside China, where appropriate, to secure upstream natural gas
supply for any liquefied natural gas projects in which we may
participate.
To the extent we invest in businesses and geographic areas where we have
limited experience and expertise, we plan to structure our investments as
alliances or partnerships with parties possessing the relevant experience and
expertise.
Maintain operational efficiency and low production costs. We currently
use advanced technologies including:
o drilling technologies including rapid drilling, drilling in
high-temperature and high-pressure areas, long range extension
wells, multilateral wells, advanced formation testing and advanced
seismic profiling;
o production technologies including hydrocyclone and extended reach
pipelines, multi-phase transmission, monolayer pipeline and subsea
production technologies; and
o offshore engineering technologies including minimal structure
techniques and suction foundation technology.
The application of these technologies to operations in offshore China has
enabled us to expand the scope of our exploration activities, increase
exploration and development efficiencies and reduce costs. We plan to continue
to invest in technology.
Maintain conservative financial practices to maximize financial
flexibility. We will continue to emphasize conservative financial management
practices. Currently, we have a strong financial profile with a moderate
leverage ratio. We intend to maintain our financial strength through
management of key measures such as capital expenditures, cash flows and fixed
charge coverage. We intend to aggressively manage our accounts receivable and
inventory positions to enhance liquidity and improve profitability. We will
continue to monitor our foreign currency denominated debt and to minimize our
exposure to foreign exchange rate fluctuations.
27
Exploration and Production
Summary
We currently conduct exploration, development and production activities
primarily in four areas offshore China:
o the Bohai Bay;
o the Western South China Sea;
o the Eastern South China Sea; and
o the East China Sea.
In addition, we have a 39.5% interest in a production sharing contract in
Indonesia and expect to complete an acquisition for interests in four
additional production sharing contracts and a technical assistance contract
onshore and offshore Indonesia in September 2002. See "--Overseas Activity"
and "Item 5--Operating and Financial Review and Prospects--The Repsol
Acquisition."
As of December 31, 2001, we had estimated net proved reserves of 1,787.1
million BOE, comprised of 1,245.9 million barrels of crude oil and condensate
and 3,247.6 billion cubic feet of natural gas. As of December 31, 2001, we had
interests in 27 producing properties and 18 properties under development and
appraisal. In 2001, two properties commenced production. We are the operator
or joint operator of 22 oil and gas properties under production. For the year
2001, net production averaged 228,874 barrels per day of crude oil, condensate
and natural gas liquids and 195.0 million cubic feet per day of natural gas,
which together totaled 261,379 BOE per day.
We conduct our exploration, development and production activities through
independent exploration and production activities and production sharing
contracts and geophysical survey agreements with foreign partners. A
production sharing contract contains provisions regarding the exploration,
development, production and operation of an oil and gas field and the formula
through which foreign partners may recover exploration, development and
production costs and share in the production after the successful development
of petroleum reserves. See "--Production Sharing Contracts" for a detailed
discussion of these arrangements. As of December 31, 2001, we were a party to
30 production sharing contracts.
We can also conduct exploration efforts through geophysical survey
agreements with foreign companies. Geophysical survey agreements are designed
for international oil and gas companies to conduct certain geophysical studies
before they decide whether to enter into production sharing contract
negotiations with CNOOC. If a foreign partner decides to enter into a
production sharing contract with CNOOC, the costs and expenses that the
foreign partner incurs in conducting geophysical exploration may be recovered
in the production period by the foreign partner, subject to our confirmation.
See "--Geophysical Survey Agreements" for a detailed discussion of these
arrangements. As of December 31, 2001, we were no longer a party to any
geophysical survey agreements. We decide to conduct independent exploration,
development and production primarily on the basis of the commercial viability
of a discovery and the resources and technical expertise required to explore
and develop a particular property.
The offshore China exploration area is approximately 1.3 million square
kilometers in size. We currently have the exclusive right to operate
independently or in conjunction with international oil and gas companies in
approximately 601,700 square kilometers of the total offshore China
exploration area. We currently have licenses for 81 exploration blocks
covering approximately 387,810 square kilometers. Our production sharing
contract partners currently have licenses for 27 exploration blocks covering
approximately 87,310 square kilometers. We have access to approximately
789,870 kilometers of 2D seismic data and approximately 27,710 square
kilometers of 3D seismic data. From the beginning of CNOOC's operations in
1982 to December 31, 2001, a total of 615 exploration wells have been drilled
offshore China, including 394 wildcat wells with a success rate of
approximately 36%. During this period we achieved a success rate of
approximately 51% on our 146 independent wildcat wells while our foreign
partners achieved a success rate of approximately 28% on their 248 wildcat
wells.
28
Oil and Natural Gas Reserves
We have a large base of net proved undeveloped reserves as a result of
our exploration successes. As of December 31, 2001, approximately 60% of net
proved reserves were classified as net proved undeveloped. We are currently
undertaking a number of large development projects located primarily in the
Bohai Bay and the Western South China Sea which we expect will substantially
increase our production as they begin producing.
In this annual report, we report net proved reserves. Our net proved
reserves consist of our percentage interest in total reserves, comprised of
our 100% interest in our independent oil and gas properties (excluding the
Pinghu field in the East China Sea), our participating interest in the
properties covered under our production sharing contracts and 30% of the
proved reserves of our associated company that operates the Pinghu field, less
(a) an adjustment for our share of royalties payable to the PRC government and
our participating interest in share oil payable to the PRC government under
our production sharing contracts, and less (b) an adjustment for production
allocable to foreign partners under our production sharing contracts as
reimbursement for exploration expenses attributable to our participating
interest. Net proved reserves do not include an adjustment for production
taxes payable by us, which are included in our operating expenses. Net
production is calculated in the same way as net proved reserves.
We explore for, and develop, our reserves under exploration licenses and
production licenses, each granted by the PRC government. Exploration licenses
generally are granted on a block by block basis, while production licenses
generally are granted on a field by field basis. We have production licenses
that cover all of our proved reserves.
At our request, Ryder Scott Company, independent petroleum engineering
consultants, carried out an independent evaluation of our selected properties
as at December 31, 2001. The results obtained by Ryder Scott Company with
respect to net proved reserves as at December 31, 2001 do not show significant
differences from those reported by us.
29
The following tables set forth net proved crude oil reserves, net proved
natural gas reserves and total net proved reserves, as of December 31, 1999,
2000 and 2001, by independent and production sharing contract operations in
each of our operating areas.
Total Net Proved Crude Oil Reserves
(mmbbls)
As of December 31, As of December 31, 2001
-------------------------- ------------------------------------------
1999 2000 Developed Undeveloped Total
-------- --------- ----------- ------------- ---------
Independent
Bohai Bay.................................. 687.9 675.7 339.8 250.1 589.9
Western South China Sea.................... 185.1 76.4 56.1 15.7 71.7
Eastern South China Sea.................... -- -- -- -- --
East China Sea............................. 8.2 4.5 -- -- --
Overseas................................... -- -- -- -- --
-------- ------- ------ ----- ----
Total................................. 881.2 756.6 395.8 265.8 661.6
Production Sharing Contracts
Bohai Bay.................................. 227.6 248.2 98.2 273.2 371.4
Western South China Sea.................... 5.3 64.7 3.6 56.2 59.9
Eastern South China Sea.................... 117.4 136.8 74.6 57.6 132.2
East China Sea............................. -- -- 1.9 10.5 12.4
Overseas................................... 10.1 9.5 8.4 -- 8.4
-------- ------- ------ ---- ------
Total................................. 360.4 459.2 186.7 397.6 584.2
Total
Bohai Bay.................................. 915.5 923.9 437.9 523.4 961.3
Western South China Sea.................... 190.4 141.1 59.7 71.9 131.6
Eastern South China Sea.................... 117.4 136.8 74.6 57.6 132.2
East China Sea............................. 8.2 4.5 1.9 10.5 12.4
Overseas................................... 10.1 9.5 8.4 -- 8.4
-------- -------- ------- ------ --------
Total................................. 1,241.6 1,215.8 582.5 663.4 1,245.9
======== ======== ======= ====== ========
30
Total Net Proved Natural Gas Reserves
(bcf)
As of December 31, As of December 31, 2001
-------------------------- --------------------------------------------
1999 2000 Developed Undeveloped Total
-------- --------- ---------- ------------- ----------
Independent
Bohai Bay.................................. 605.7 591.4 196.1 402.8 598.9
Western South China Sea.................... 1,773.5 1,773.6 -- 1,809.2 1,809.2
Eastern South China Sea.................... -- -- -- -- --
East China Sea............................. 67.2 65.3 -- -- --
Overseas................................... -- -- -- -- --
-------- --------- ------- ------- -------
Total................................. 2,446.4 2430.3 196.1 2,211.9 2,408.0
Production Sharing Contracts
Bohai Bay.................................. -- -- -- 30.2 30.2
Western South China Sea.................... 874.3 819.4 538.0 74.3 612.3
Eastern South China Sea.................... -- -- -- -- --
East China Sea............................. -- -- 31.0 166.0 197.0
Overseas................................... -- -- -- -- --
-------- --------- ------- ------- -------
Total................................. 874.3 819.4 569.1 270.5 839.5
Total
Bohai Bay.................................. 605.7 591.4 196.1 433.0 629.1
Western South China Sea.................... 2,647.8 2,593.0 538.0 1,883.4 2,421.5
Eastern South China Sea.................... -- -- -- -- --
East China Sea............................. 67.2 65.3 31.0 166.0 197.0
Overseas................................... -- -- -- -- --
-------- --------- ------- ------- -------
Total................................. 3,320.7 3,249.7 765.2 2,482.4 3,247.6
======== ========= ======= ======= =======
Total Net Proved Reserves
(million BOE)
As of December 31, As of December 31, 2001
-------------------------- ----------------------------------------------
1999 2000 Developed Undeveloped Total
-------- --------- ---------- ------------- ------------
Independent
Bohai Bay............................. 788.9 774.2 372.4 317.3 689.7
Western South China Sea............... 480.7 372.0 56.1 317.2 373.3
Eastern South China Sea............... -- -- -- -- --
East China Sea........................ 19.4 15.4 -- -- --
Overseas.............................. -- -- -- -- --
-------- --------- ------- ------- -------
Total.............................. 1,289.0 1,161.6 428.5 634.4 1,063.0
Production Sharing Contracts
Bohai Bay............................. 227.6 248.2 98.2 278.3 376.5
Western South China Sea............... 151.0 201.3 93.2 68.6 161.8
Eastern South China Sea............... 117.4 136.8 74.6 57.6 132.2
East China Sea........................ -- -- 7.1 38.1 45.2
Overseas.............................. 10.1 9.5 8.4 -- 8.4
-------- --------- ------- ------- -------
Total.............................. 506.1 595.8 281.5 442.6 724.2
Total
Bohai Bay............................. 1,016.5 1,022.4 470.6 595.5 1,066.2
Western South China Sea............... 631.7 573.3 149.4 385.8 535.1
Eastern South China Sea............... 117.4 136.8 74.6 57.6 132.2
East China Sea........................ 19.4 15.4 7.1 38.1 45.2
Overseas.............................. 10.1 9.5 8.4 -- 8.4
-------- --------- ------- ------- -------
Total.............................. 1,795.1 1,757.4 710.0 1,077.1 1,787.1
======== ========= ======= ======= =======
31
Oil and Natural Gas Production
The following tables show average daily net oil production, net natural
gas production, and average net total production for the three years ended
December 31, 1999, 2000 and 2001. Oil production comprises crude oil,
condensate and natural gas liquids.
Average Daily Net Crude Oil Production
(bbls per day)
Year ended December 31,
------------------------------------------------
1999 2000 2001
---------- --------- ----------
Independent
Bohai Bay........................................... 42,297 63,797 97,613
Western South China Sea............................. 34,522 45,828 40,377
Eastern South China Sea............................. -- -- --
East China Sea...................................... 3,249 3,557 3,967
Overseas............................................ -- -- --
-------- -------- --------
Total............................................. 80,068 113,182 141,957
Production Sharing Contracts
Bohai Bay........................................... 2,907 -- 2,366
Western South China Sea............................. 641 606 900
Eastern South China Sea............................. 88,052 90,097 81,404
East China Sea...................................... -- -- --
Overseas............................................ 3,077 2,462 2,247
-------- -------- --------
Total............................................. 94,677 93,165 86,917
Total
Bohai Bay........................................... 45,204 63,797 99,979
Western South China Sea............................. 35,163 46,434 41,277
Eastern South China Sea............................. 88,052 90,097 81,404
East China Sea...................................... 3,249 3,557 3,967
Overseas............................................ 3,077 2,462 2,247
-------- -------- --------
Total............................................. 174,745 206,347 228,874
======== ======== =======
32
Average Daily Net Natural Gas Production
(mmcf per day)
Year ended December 31,
------------------------------------------------
1999 2000 2001
---------- --------- ----------
Independent
Bohai Bay.......................................... 43.1 45.8 46.2
Western South China Sea............................ -- -- --
Eastern South China Sea............................ -- -- --
East China Sea..................................... 4.5 7.8 9.8
Overseas........................................... -- -- --
------ ------ ------
Total............................................ 47.6 53.6 56.0
Production Sharing Contracts
Bohai Bay........................................... -- -- --
Western South China Sea............................. 156.8 144.3 139.0
Eastern South China Sea............................. -- -- --
East China Sea...................................... -- -- --
Overseas............................................ -- -- --
------ ------ ------
Total............................................. 156.8 144.3 139.0
Total
Bohai Bay........................................... 43.1 45.8 46.2
Western South China Sea............................. 156.8 144.3 139.0
Eastern South China Sea............................. -- -- --
East China Sea...................................... 4.5 7.8 9.8
Overseas............................................ -- -- --
------ ------ ------
Total............................................. 204.4 197.9 195.0
====== ====== ======
Average Daily Net Production
(BOE per day)
Year ended December 31,
------------------------------------------------
1999 2000 2001
---------- --------- ----------
Independent
Bohai Bay........................................... 49,481 71,437 105,322
Western South China Sea............................. 34,522 45,828 40,377
Eastern South China Sea............................. -- -- --
East China Sea...................................... 4,000 4,853 5,599
Overseas............................................ -- -- --
------- ------- -------
Total............................................. 88,003 122,118 151,298
Production Sharing Contracts
Bohai Bay........................................... 2,907 -- 2,366
Western South China Sea............................. 26,776 24,658 24,063
Eastern South China Sea............................. 88,052 90,097 81,404
East China Sea...................................... -- -- --
Overseas............................................ 3,077 2,462 2,247
------- ------- -------
Total............................................. 120,812 117,217 110,080
Total
Bohai Bay........................................... 52,388 71,437 107,688
Western South China Sea............................. 61,298 70,486 64,440
Eastern South China Sea............................. 88,052 90,097 81,404
East China Sea...................................... 4,000 4,853 5,599
Overseas............................................ 3,077 2,462 2,247
------- ------- -------
Total............................................. 208,815 239,335 261,379
======= ======= ========
33
Principal Oil and Gas Regions
Bohai Bay
The Bohai Bay area holds our largest net proved reserves and, for the
year ended December 31, 2001, was our largest producing area for crude oil and
natural gas. The Bohai Bay exploration area is located in the northeastern
part of China, approximately 200 kilometers east of Beijing and is
approximately 58,100 square kilometers in size. We currently have the
exclusive right to operate independently or in conjunction with international
oil and gas companies in approximately 56,000 square kilometers of the total
Bohai Bay exploration area. Our operating area contains numerous oil and gas
fields in shallow waters with typical depths ranging from 10 to 30 meters. The
crude oil is generally of heavy gravity ranging from 15 to 20 degrees API. As
of December 31, 2001, net proved reserves in this region were 961.3 million
barrels of crude oil and condensate and 629.1 billion cubic feet of natural
gas, totaling 1,066.2 million BOE and representing approximately 59.7% of our
total net proved reserves.
The Bohai Bay has been a prolific area with significant oil discoveries
in recent years and will continue to be one of our principal areas for
exploration in the near future. Two discoveries were made by foreign partners
during 2001 . We currently have exploration licenses for five blocks covering
approximately 17,030 square kilometers. Our production sharing contract
partners currently have exploration licenses for nine blocks covering
approximately 25,430 square kilometers.
A key area of recent successful exploration in the Bohai Bay has been the
Caofeidian oil fields. In 2001, Kerr-McGee and its partners drilled three
wildcat wells and discovered the CFD 11-2 (04/36 block) and CFD 12-1S (05/36
block) oil fields, adjacent to the CFD 11-1 and CFD 12-1 oil fields.
In addition to the discoveries, seven appraisal wells were successfully
drilled at CFD 11-1 and CFD 11-2, which are planned to be developed jointly
with production start-up targeted for 2004. Four appraisal wells were also
drilled at the CFD 12-1 field. Three to 14 exploration wells are planned for
the blocks, with half consisting of wildcats wells.
Chevron/Texaco has also found success in 2001 with its exploration
efforts in the11/19 block. Following the successful appraisal of Bozhong 25-1S
in 2000, with three out of four appraisal wells drilled successfully, another
wildcat well drilled in this block also successfully encountered oil. In 2002,
Chevron/Texaco plans to drill two to four follow-on exploration wells in this
block. We also found exploration success in 2001, drilling two successful
appraisal wells out of three in the Nanbao 35-2 oil field. Such results
demonstrate the production potential and the reservoir nature of the field,
which will allow for the field's development plan to be finalized in 2002.
34
The following table sets forth the principal exploration blocks under
exploration license to us and principal exploration blocks under exploration
license to the production sharing contract partners in the Bohai Bay.
Independent
Exploration License exploration
Approximate ------------------------------ 2001 drilling
contract area Commencement Expiration exploration planned
Block (km2) Partner(s) date date drilling for 2002
------------------------------------- -------------- ---------------- ------------ ---------- ----------- -----------
Independent
Middle of Bohai Bay.............. 5,181 -- 10/08/00 10/08/02 4 3
Southern Bohai Bay............... 3,763 -- 10/08/00 10/08/02 -- 4
Western Bohai Bay................ 1,913 -- 03/29/01 03/29/03 -- --
Liaodong Bay..................... 3,344 -- 03/31/00 04/08/06 -- 4
Eastern Liaodong Bay............. 2,829 -- 07/02/01 07/02/06 -- --
Production Sharing Contracts
09/11(1)......................... 844 Agip 01/11/99 01/11/02 --
05/36(1)......................... 1,251 Kerr-McGee, 10/08/00 02/01/02 5
Newfield, SAOEC
06/17............................ 2,587 Chevron/Texaco, 02/01/01 02/01/03 --
Carigali
Eastern 11/05(1)................. 5,452 Phillips 02/01/00 02/01/02 1
Western 11/05(1)................. 4,079 Phillips 02/01/00 02/01/02 --
11/19............................ 3,186 Chevron/Texaco 03/28/01 03/28/03 5
09/18............................ 2,266 Kerr-McGee 04/04/01 04/04/04 --
02/31............................ 3,936 Chevron, Carigali 04/06/01 04/06/03 --
04/36(1)......................... 1,829 Kerr-McGee, 03/28/01 12/31/01 9
SAOEC
-----------
(1) Application submitted for extension of exploration license.
During the year ended December 31, 2001, we acquired approximately 118
square kilometers of 3D seismic data and our foreign partners acquired
approximately 1,733 square kilometers of 3D seismic data in the Bohai Bay
area. We have independently acquired an aggregate of approximately 170,000
kilometers and 5,550 square kilometers of 2D and 3D seismic data,
respectively, in the Bohai Bay area. We also have access, through our
production sharing contract partners, to approximately another 65,900
kilometers and 7,320 square kilometers, respectively, of 2D and 3D seismic
data in this area. In 2002, we plan to drill 11 exploration wells and our
partners plan to drill from 13 to 32 exploration wells in the Bohai Bay area.
Exploration capital expenditures for this area for 2001 were US$15.2 million.
Our budgeted exploration capital expenditures for the Bohai Bay for 2002 are
approximately US$44 million and its budgeted exploration capital expenditures
for the Bohai Bay for 2003 are approximately US$20 million.
For 2001, net production in this region averaged 99,978 barrels per day
of crude oil, condensate and natural gas liquids and 46.3 million cubic feet
per day of natural gas, representing approximately 41.2% of our total daily
net production. We are currently undertaking 10 development projects in the
Bohai Bay area. Development capital expenditures for the Bohai Bay area for
2001 were US$314.4 million. Our budgeted development capital expenditures for
the area for 2002 are approximately US$373 million and our total budgeted
development capital expenditures for the area for 2003 are approximately
US$913 million.
Our largest independent oil field, Suizhong 36-1, more than doubled its
production capacity in 2001 through the completion of its second development
phase (Phase II). Phase II consisted of platforms E, F and D coming on-stream
at the end of 2000 and with platforms C, G and H entering production on August
26, September 12 and November 9, 2001, respectively, each ahead of schedule.
All six platforms of Phase II have a daily production capacity of over 60,000
barrels. We plan to drill four wildcats adjacent to Suizhong 36-1 and Jingzhou
20-2 in 2002.
35
Qinhuangdao 32-6 was brought on-line in 2001 and was jointly developed by
us (51%), Texaco China (24.5%) and BP China Ltd. (24.5%). The field's A and B
platforms and its floating production storage and offloading (FPSO) unit, the
Bohai Century, were successfully launched into production ahead of schedule on
October 8, 2001, with daily production reaching approximately 25,000 barrels.
Phase II of this project is expected to come on stream in 2002 with platforms
C, D, E and F.
We expect partial completion of Penglai 19-3 in 2002. Penglai 19-3 is
being developed in two phases jointly with Phillips Petroleum (49%). The first
phase of the project is expected to come on stream in 2002 and will include
one well-head platform, a FPSO unit, 1.6 kilometers of sub-sea
pipeline/sub-sea wire and a single mooring system. The maximum production
capacity by design is 40,000 barrels per day. In the same block, Phillips
Petroleum completed a successful appraisal well in Penglai 25-6 at the
beginning of 2001 (cross-year well) which is expected to accelerate the
development of this nearby field.
The following table sets forth our principal oil and gas properties in
the Bohai Bay that were under production or development as of December 31,
2001.
Net proved
Average reserves
net Actual or as of
production Number of expected December
CNOOC for year net production 31, 2001
Limited 2001 (BOE productive commencement (million
Block/Field Operator Partner(s) interest per day) wells year BOE)
---------------------------- ---------- ---------- --------- ------------ ----------- ------------ ----------
Production
Liaoxi
Suizhong 36-1(I)...... Company -- 100% 25,231 62.0 1993 72.88
Suizhong 36-1(II)(1).. Company -- 100% 33,735 180.0 2000 188.39
Jinzhou 9-3........... Company -- 100% 15,949 43.0 1999 43.42
Jinzhou 20-2.......... Company -- 100% 8,402 11.0 1992 49.79
Boxi
Qikou 18-1............ Company -- 100% 2,984 6.0 1997 5.49
Qikou 17-3............ Company -- 100% 2,530 9.0 1997 0.82
Qikou 17-2............ Company -- 100% 10,073 29.0 2000 20.54
Chengbei oil field.... Company -- 100% 4,329 52.0 1985 9.40
Qinhuangdao 32-6
Qinhuangdao 32-6(2)... Company Texaco, BP 51% 2,366 23.5 2001 98.18
Bonan
Bozhong 34-2/4........ Company -- 100% 2,091 25.0 1990 4.91
Development
Liaoxi
Jinzhou 21-1.......... Company -- 100% -- -- 2005 13.04
Boxi
Qikou 18-9............ Company -- 100% -- -- 2008 3.54
Qikou 18-2............ Company -- 100% -- -- 2005 6.10
Bozhong
Nanbao 35-2........... Company -- 100% -- -- 2004 75.76
Bonan
Bonan oil fields...... Company -- 100% -- -- 2004 68.33
Bozhong 25-1.......... Company -- 100% -- -- 2005 127.29
Bozhong 25-1s......... Texaco -- 51% -- -- 2005 110.45
11/05
Penglai 19-3.......... Phillips Phillips Bohai 51% -- -- 2002 117.38
Penglai 25-6.......... Phillips Phillips Bohai 51% -- -- 2006 10.63
04/36
CFD 11-1.............. Kerr-McGee Energy 51% -- -- 2004 32.74
CFD 11-2.............. Kerr-McGee Newfield, Energy 51% -- -- 2004 7.09
-----------
(1) Phase II of the Suizhong 36-1 development was completed in November 2001.
(2) Qinhuangdao 32-6 phase I was successfully brought on stream in October
2001.
36
Western South China Sea
The Western South China Sea has been our most important natural gas
producing area, and was our third largest producing area for the year ended
December 31, 2001. The operating area in the Western South China Sea is
located in the southern part of China southwest of Hong Kong and is
approximately 712,480 square kilometers in size. The most important
exploration areas in the Western South China Sea are the Beibu Gulf, the
Yinggehai Basin, and the Qiongdongnan Basin. We currently have the exclusive
right to operate independently or in conjunction with international oil and
gas companies in a total of 206,480 square kilometers of the Western South
China Sea exploration area. Typical water depths in this region range from 40
meters to 120 meters. The crude oil produced is of medium to light gravity,
ranging from 27 to 41 degrees API. As of December 31, 2001, we had net proved
reserves of 131.6 million barrels of crude oil and condensate and 2,421.4
billion cubic feet of natural gas in this region, totaling 535.1 million BOE
and representing approximately 29.8% of our total net proved reserves.
The Western South China Sea is one of our least explored areas, but will
become increasingly important as the markets for natural gas in south China
develop. During the year ended December 31, 2001, we drilled five wildcat
wells and one appraisal well, and our production sharing contract partners
drilled one wildcat well in this area. We currently have exploration licenses
for 20 blocks covering approximately 97,030 square kilometers. Our production
sharing contract partners currently have licenses for five exploration blocks
covering approximately 26,950 square kilometers.
Our 2001 drill bit success in the region has both expanded an existing
field, and opened an entirely new geological play. We successfully drilled an
appraisal well in the northern part of the existing Weizhou 12-1 oil field,
and plan to follow with one wildcat in 2002. Our successful wildcat well at
Wenchang 15-1 yielded the first discovery in the Shenhu uplift structure in
the last 20 years, and thus opened a new area for exploration and development
in the Wenchang block. We plan to drill one wildcat and one appraisal well in
this block in 2002.
The following table sets forth our principal exploration blocks under
exploration license to us and principal exploration blocks under exploration
license to our production sharing contract partners in the Western South China
Sea.
Independent
Exploration License exploration
Approximate ------------------------------ 2001 drilling
contract area Commencement Expiration exploration planned
Block (km2) Partner(s) date date drilling for 2002
------------------------------------ ------------- --------------- --------------- ---------- ----------- -----------
Independent
Yangjiang 6,072 -- 12/03/01 12/03/03 -- --
31........................
Ledong 6,543 -- 12/03/01 12/03/03 -- 6
01...........................
Changjiang 5,811 -- 12/03/01 12/03/03 -- 12
25.......................
Weizhou 6,980 -- 05/11/01 05/11/06 1 --
12..........................
Yulin 35........................... 6,050 -- 05/11/01 05/11/06 -- 1
Xuwen 05........................... 3,846 -- 05/11/01 05/11/06 -- 1
Ledong 17.......................... 3,971 -- 05/11/01 05/11/06 -- --
Qionghai 28........................ 5,208 -- 05/11/01 05/11/06 1 --
Qiongdongnan Songtao 22............ 4,063 -- 05/11/01 05/11/06 1 1
Qiongdongnan Songtao 31............ 5,264 -- 05/11/01 05/11/06 1 --
Wenchang 11........................ 4,901 -- 05/11/01 05/11/06 -- --
Wenchang 20........................ 4,979 -- 05/11/01 05/11/06 1 2
Weizhou 26......................... 4,100 -- 05/11/01 05/11/06 -- --
Production Sharing Contracts
Wanganbei 25,418 Crestone 10/01/01 10/01/03 --
(A,B,C,D).................
1,529 Devon 03/31/00 03/31/07 1
26/35(1)............................
37/05(2)........................... 5,700 Husky 12/03/01 12/03/03 --
22/12(2)........................... 608 Blair 05/11/01 05/11/06 --
-----------
(1) Application submitted for extension of exploration license.
(2) Contract completed in 2001, independent exploration license under
application.
37
During the year ended December 31, 2001, we acquired approximately 412
square kilometers of 3D seismic data and our foreign partners acquired
approximately 550 square kilometers of 3D seismic data in the Western South
China Sea area. We have independently acquired an aggregate of approximately
152,450 kilometers and 6,300 square kilometers of independent 2D and 3D
seismic data, respectively, in the Western South China Sea area. We also have
access, through our production sharing contract partners, to approximately
another 106,910 kilometers and 3,220 square kilometers of 2D and 3D seismic
data, respectively, in this area. In 2002, we plan to drill 23 exploration
wells and our partners plan to drill two wildcat wells in the Western South
China Sea area. Exploration capital expenditures for the Western South China
Sea for 2001 were US$76.2 million. Our budgeted exploration capital
expenditures for the Western South China Sea for 2002 are approximately US$112
million and our budgeted exploration capital expenditures for the area for
2003 are approximately US$96 million.
For 2001, net production averaged 41,277 barrels per day of crude oil,
condensate and natural gas liquids and 139.0 million cubic feet per day of
natural gas, representing approximately 24.7% of total daily net production.
Development capital expenditures for the Western South China Sea for 2001 were
US$123.9 million. Our budgeted development capital expenditures for 2002 are
approximately US$218 million and our budgeted development capital expenditures
for the area for 2003 are approximately US$193 million.
Production development in this region is based on near-term oil and
longer-term gas projects. The Wenchang 13-1/13-2 oil fields are being
developed on schedule and are expected to be put into production in 2002.
Dongfang 1-1, our largest natural gas field consisting of 1,309 billion net
cubic feet, is currently under development with the first phase to come online
in 2003, targeting the gas market of Hainan island. Longer-term development
plans include Dongfang 1-1 Phase II and the Ledong gas fields.
The following table sets forth the principal oil and gas properties in
the Western South China Sea area that were under production or development as
of December 31, 2001.
Net proved
Average reserves
net Actual or as of
production Number of expected December
for 2001 net production 31, 2001
Company (BOE per productive commencement (million
Block/Field Operator Partner(s) interest day) wells year BOE)
---------------------------- ---------- ---------- ---------- ------------ ---------- ------------ ----------
Production
Yinggehai
Yacheng 13-1.......... BP Kufpec 51% 24,063 5.1 1995 106.56
Yulin 35
Weizhou 10-3.......... Company -- 100% 1,694 12.0 1986 --
Weizhou 11-4.......... Company -- 100% 18,440 33.0 1993 23.04
Weizhou 12-1.......... Company -- 100% 20,243 17.0 1999 37.12
Development
Changjiang 25
Dongfang 1-1........... Company -- 100% -- -- 2003 218.27
Yangjiang 31 and 32
Wenchang 13-1/13-2..... Company Husky 60% -- -- 2002 55.36
Wenchang 8-3........... Company -- 100% -- -- 2004 11.58
Ledong 01
Ledong 15-1/22-1....... Company -- 100% -- -- 2009 83.26
38
Eastern South China Sea
The Eastern South China Sea is currently one of our most important oil
producing areas in terms of its contribution to our total production and
sales. The Eastern South China Sea exploration area is located in the southern
part of China, directly southeast of Hong Kong, and is approximately 174,420
square kilometers in size. We currently have the exclusive right to operate
independently or in conjunction with international oil and gas companies in
the entire Eastern South China Sea exploration area. This area includes the
important Pearl River Mouth Basin. Typical water depths in this region range
from 100 meters to 120 meters. The crude oil produced is of medium to light
gravity, ranging from 30 to 40 degrees API. As of December 31, 2001, we had
net proved reserves of 132.2 million barrels of crude oil in this area,
totaling 132.2 million BOE and representing approximately 7.4% of our total
net proved reserves.
During the year ended December 31, 2001, we drilled one successful
wildcat well and our production sharing contract partners drilled six wildcat
wells and one appraisal well in this area, of which three wildcats were
successful and three were unsuccessful. We currently have exclusive
exploration rights covering an aggregate of approximately 138,420 square
kilometers in size. We are also in the process of applying for a license for
one block covering 15,430 square kilometers. Our production sharing contract
partners have exploration licenses for nine blocks covering approximately
18,350 square kilometers.
We successfully drilled one wildcat well in the Liuhua19-3 structure,
encountering a gas-bearing structure for the first time in the Liuhua 07
block. We plan to follow with two wildcat wells and one appraisal well in
2002. The joint operating group consisting of us, Agip, and Chevron/Texaco
(CACT) successfully drilled two wildcats and one appraisal well in the 16/19
block, yielding two discoveries near the existing Huizhou 19-3 oil fields. All
three fields will be developed jointly to benefit from economies of scales.
In the 15/34 block, the Panyu oil fields, including Panyu 4-2 and Panyu
5-1, are being developed jointly with Devon and Baker Hughes and are expected
to come on stream in 2003.
39
The following table sets forth our principal exploration blocks under
exploration license or pending exploration license and principal exploration
blocks under exploration license to our production sharing contract partners
in the Eastern South China Sea.
Independent
Exploration License exploration
Approximate ------------------------------ 2001 drilling
contract area Commencement Expiration exploration planned
Block (km2) Partner(s) date date drilling for 2002
------------------------------------ ------------- ------------------- --------------- ---------- ----------- ----------
Independent
Huizhou 31...................... 3,074 -- 05/11/01 05/11/06 -- 1
Enping 15....................... 5,833 -- 05/11/01 05/11/06 -- --
Enping 10....................... 6,547 -- 05/11/01 05/11/06 -- --
Panyu 33........................ 4,830 -- 05/11/01 05/11/06 -- 1
Liuhua 07....................... 4,172 -- 05/11/01 05/11/06 1 3
Liuhua 21....................... 4,496 -- 05/11/01 05/11/06 -- --
Liuhua 32....................... 5,796 -- 05/11/01 05/11/06 -- --
Chaotai(1)(2)................... 15,430 -- -- -- -- 1
Production Sharing Contracts
16/19(3)........................ 471 Agip, Chevron/ Texaco 10/08/00 03/31/02 3
16/08........................... 541 Agip, Chevron/ Texaco 04/29/01 04/29/03 --
15/34........................... 5,124 Sante Fe 08/30/00 02/28/04 --
16/02........................... 3,498 Sante Fe 03/31/00 03/31/07 1
16/05........................... 3,009 Sante Fe 03/31/00 03/31/07 1
15/12........................... 1,895 Shell 10/16/00 10/16/06 --
16/21(4)........................ 2,241 Burlington 10/16/00 10/16/07 1
15/24(4)........................ 133 Phillips, Shell 05/12/01 05/12/03 1
15/35........................... 1,439 Sante Fe 08/10/01 01/31/03 --
27/10(5)........................ 6,546 Sante Fe 10/09/01 10/09/03 --
-----------
(1) Application submitted for exploration license.
(2) Joint exploration block with other oil company, planned work load equals
joint operation work load.
(3) Application submitted for extension of exploration license.
(4) Contract completed in 2001, independent exploration license under
application.
(5) This contract area is located in an independent block, the valid period
of which is dependent on that of the exploration license for the
independent block. The PSC contract area has been excluded from the total
area of the independent block.
40
For the year ended December 31, 2001, we did not acquire any 3D seismic
data, while our foreign partners acquired approximately 700 square kilometers
of 3D seismic data in the Eastern South China Sea area. We have an aggregate
of approximately 49,200 kilometers of independent 2D seismic data in the
Eastern South China Sea area. We also have access, through our production
sharing contract partners, to approximately another 106,730 kilometers and
5,300 square kilometers of 2D and 3D seismic data, respectively, in this area.
We plan to drill five exploration wells in the Eastern South China Sea in
2002. Exploration capital expenditures for the Eastern South China Sea for
2001 were US$8.8 million. Our budgeted exploration capital expenditures for
the Eastern South China Sea for 2002 are approximately US$36 million and its
budgeted exploration capital expenditures for the area for 2003 are
approximately US$24 million.
For 2001, daily net production averaged 81,404 barrels per day of crude
oil, condensate and natural gas liquids, representing approximately 31.1% of
total daily net production. Development capital expenditures for this region
for 2001 were US$36.6 million. Our budgeted development capital expenditures
for this area for 2002 are approximately US$133 million and our budgeted
development capital expenditures for this area for 2003 are approximately
US$146 million.
The following table sets forth our principal oil and gas properties in
the Eastern South China Sea that were under production or development as of
December 31, 2001.
Net proved
reserves
Average net Actual or as of
production Number of expected December
for 2001 net production 31, 2001
Company (BOE per productive commencement (million
Block/Field Operator Partner(s) interest day) wells year BOE)
--------------------------- ---------------- ---------- ---------- ------------ ------------ ------------- -----------
Production
16/08
Huizhou 21-1........... CACT 51% 3,795 7.7 1990 2.73
Huizhou 26-1........... CACT 51% 14,381 10.2 1991 14.40
Huizhou 32-2........... CACT 51% 3,809 4.6 1995 3.61
Huizhou 32-3........... CACT 51% 8,943 5.6 1995 8.24
Huizhou 32-5........... CACT 51% 7.075 1.5 1999 2.38
15/11
Xijiang 24-3........... Company/Phillips Shell 51% 14,974 10.7 1994 9.40
Xijiang 30-2........... Company/Phillips Shell 40% 14,590 8.8 1995 16.19
29/04
Liuhua 11-1............ Company/BP Kerr-McGee 51% 8,293 12.8 1996 6.00
16/06
Lufeng 13-1............ JHN 25% 3,451 4.8 1993 5.00
17/22
Lufeng 22-1............ Company/Statoil 25% 2,093 1.3 1997 0.53
Development
16/08
Huizhou 27-1........... CACT 51% -- -- 2005 0.51
Huizhou 33-1........... CACT 51% -- -- 5.58
16/19
Huizhou 19-2........... CACT 51% -- -- 12.84
Huizhou 19-3........... CACT 51% -- -- 2004 11.35
Huizhou 25-1........... CACT 51% -- -- 0.60
15/34
Panyu 4-2.............. Devon Burlington 51% -- -- 2003 16.11
Panyu 5-1.............. Devon Burlington 51% -- -- 2003 16.72
41
East China Sea
The East China Sea area is the least explored area of our four principal
areas, and an area that we expect to become an important natural gas
production base in the future. The East China Sea area is approximately
339,580 square kilometers in size and is located east of Shanghai, an area
that has experienced rapid economic growth in recent years. We currently have
the exclusive right to operate independently or in conjunction with
international oil and gas companies in 164,800 square kilometers of the total
East China Sea area. In August 2001, our subsidiary CNOOC China Limited
entered into an acquisition agreement with CNOOC, our controlling shareholder,
to purchase CNOOC's interest in a joint venture with China Petrochemical
Corporation with respect to certain oil and gas fields in the Xihu Trough
within the East China Sea area. Typical water depths in this region are
approximately 90 meters and crude oil and condensate produced are of light
gravity. As of December 31, 2001, our net proved reserves in this region were
12.4 million barrels of crude oil and condensate and 197.0 billion cubic feet
of natural gas, totaling 45.2 million BOE and representing less than 3% of our
total net proved reserves.
During the year ended December 31, 2001, we drilled two wildcat wells in
our independent blocks and funded the costs of one appraisal well in a
production sharing contract block. The foreign partners did not drill any
exploration wells in this area in 2001. We currently have exploration licenses
for 40 blocks covering approximately 181,430 square kilometers in the East
China Sea. Our production sharing contract partners have licenses for four
blocks covering approximately 16,590 square kilometers.
The following table sets forth our principal exploration blocks under
exploration license or pending exploration license and principal exploration
blocks under exploration license to our production sharing contract partners
in the East China Sea.
Independent
Exploration License exploration
Approximate ------------------------------ 2001 drilling
contract area Commencement Expiration exploration planned
Block (km2) Partner(s) date date drilling for 2002
------------------------------------- -------------- ------------------- --------------- ---------- ----------- -----------
Independent
Pinghu(1)...................... N/A Sinopec National N/A N/A -- --
Star,
Shanghai Municipal
Government
Xihu Huangyan 04(2)............ 2,848 -- 08/28/01 08/28/08 -- 5
Xihu Hangzhou 17............... 4,227 -- 08/28/01 08/28/08 -- --
Xihu Zhenghai 01............... 1,536 -- 08/28/01 08/28/08 -- --
Xihu Fuyang 27................. 2,526 -- 08/28/01 08/28/08 -- --
Lishui-Jiaojiang Trough........ 6,767 -- 03/31/00 11/28/05 -- --
Western Wunansha............... 242 -- 03/31/00 12/16/05 1 --
South 2 Trough................. 508 -- 08/30/00 08/30/05 -- --
South 5 Trough................. 481 -- 08/30/00 08/30/05 1 1
North Trough................... 912 -- 08/30/00 08/30/05 -- --
West Trough.................... 2,179 -- 08/30/00 08/30/05 -- 1
Dalian 16...................... 6,471 -- 05/11/01 05/11/06 -- --
Yantai 04...................... 6,109 -- 05/11/01 05/11/06 -- --
Rushang 32..................... 4,413 -- 05/11/01 05/11/06 -- 1
Production Sharing Contracts
32/32.......................... 4,593 Primeline 07/06/00 07/06/02 1
Western 04/20(3)............... 3,530 Primeline 04/06/01 04/06/03 --
Southern 04/20(3).............. 5,309 Primeline 12/31/00 12/31/02 --
Northern 04/20(3).............. 3,155 Primeline 05/25/01 05/25/04 --
-----------
(1) Covered by a production license to the Shanghai Petroleum and Natural Gas
Company in which the company has a 30% interest. The production license
will expire on December 1, 2020.
(2) Joint exploration block with other oil company, planned work load equals
joint operation work load.
(3) Contract completed in 2001, independent exploration license under
application.
42
During the year ended December 31, 2001, neither we nor our foreign
partners acquired any 3D seismic data in this area. We have independently
acquired an aggregate of approximately 99,400 kilometers and 380 square
kilometers, respectively, of 2D and 3D seismic data in the East China Sea
area. We also have access, through our production sharing contract partners,
to approximately another 47,500 kilometers and 475 square kilometers,
respectively, of 2D and 3D seismic data in this area. In 2002, we plan to
drill eight exploration wells, five of which will be conducted with other
parties, and our foreign partners currently have no plans to drill any
exploration wells in the East China Sea. Exploration capital expenditures for
the East China Sea for 2001 were US$20.0 million. Our budgeted exploration
capital expenditures for the East China Sea for 2002 are approximately US$27
million and our budgeted exploration capital expenditures for the East China
Sea for 2003 are approximately US$60 million.
For 2001, net production averaged 3,967 barrels per day of crude oil,
condensate and natural gas liquids and 9.8 million cubic feet per day of
natural gas, representing approximately 2.1% of total daily net production.
Development capital expenditures for the East China Sea for 2001 were US$45.0
million and were attributable to our prepayment costs for the acquistion of
the Xihu Trough. Our budgeted development capital expenditures for the East
China Sea for 2002 are approximately US$25 million and our budgeted
development capital expenditures for the East China Sea for 2003 are
approximately US$123 million.
As the operator of the Pinghu gas field, we pioneered the development of
the first oil and gas field in the East China Sea. While first production came
on stream in 1998, the next phase of the project expansion is planned for
completion in 2003. An additional platform and parallel crude and gas
pipelines are planned to be built and installed for production by January
2006.
In 2001, we acquired a working interest in the Xihu Trough and its
undeveloped Chunxiao gas field, which will be jointly owned with Sinopec and
operated by us. The fields include Chunxiao, Tianwaitian, Duanqiao and Canxue
gas fields, with the Tianwaitian gas field located 60 kilometers away from
Pinghu. We prepaid US$45.0 million for the acquisition.
The following table sets forth the principal oil and gas property in the
East China Sea that was under production as of December 31, 2001.
Net proved
reserves
Average net Actual or as of
production Number of expected December
for 2001 net production 31, 2001
Company (BOE per productive commencement (million
Block/Field Operator Partner(s) interest day) wells year BOE)
--------------------------- ------------- ----------------- ---------- ------------- ---------- ------------ ---------
Production
Pinghu
Pinghu(1).............. Company Sinopec National 30% 5,599 4.5 1998 15.42
Star,
Shanghai Municipal
Government
Development
Xihu
Canxue................. Company 50% -- -- 11.28
Duanqiao............... Company 50% -- -- 18.50
---------
(1) This field is under license to the Shanghai Petroleum and Natural Gas
Company in which the company has a 30% interest.
43
Overseas Activity
On January 18, 2002, we, through a wholly owned subsidiary, entered into
a share purchase agreement to acquire the Repsol subsidiaries. The nine
subsidiaries together hold a portfolio of operated and non-operated interests
in oil and gas production sharing and technical assistance contracts in
contract areas located offshore and onshore Indonesia. The acquisition of the
Repsol subsidiaries is consistent with our plan to expand our production and
reserves. Furthermore, we believe the acquisition represents a unique
opportunity to acquire producing assets that fit with our offshore expertise
and experience.
The main businesses of the Repsol subsidiaries are the exploration,
development and production of oil and gas offshore and onshore Indonesia.
Their main assets comprise a portfolio of operated and non-operated interests
in an aggregate of five production sharing and technical assistance contracts
in that region. We estimate the net working interest proved reserves of the
assets as at January 1, 2002 at approximately 360 million BOE, or
approximately 185 million BOE in terms of its net entitlement.
The interests owned by the Repsol subsidiaries comprise the following
assets:
o South East Sumatra Production Sharing Contract. The Repsol
subsidiaries own a 65.3% interest in the South East Sumatra
production sharing contract. This contract area covers approximately
8,100 square kilometers located offshore Sumatra and is the largest
of the assets held by the Repsol subsidiaries. It will be operated
and majority owned by the company. It is one of the largest offshore
oil developments in Indonesia and has produced more than one billion
barrels of oil in over 20 years of production. The concession
expires in 2018.
o Offshore Northwest Java Production Sharing Contract. The Repsol
subsidiaries own a 36.7% interest in the Offshore Northwest Java
production sharing contract. This contract area covers approximately
13,800 square kilometers in the Southern Java Sea, offshore Jakarta
and has produced more than one billion BOE in over 20 years of
production. It is operated by a member of the BP p.l.c. group and
currently produces crude oil and natural gas. Its natural gas is
sold to the Indonesia State Electric Company and the Indonesia State
Gas Utility Company. The concession expires in 2017.
o West Madura Production Sharing Contract and Poleng Technical
Assistance Contract. The Repsol subsidiaries own a 25.0% interest in
the West Madura production sharing contract and a 50.0% interest in
the Poleng technical assistance contract. These contract areas are
located offshore Java, near the island of Madura and the Java city
of Surabaya and cover approximately 1,600 square kilometers
combined. Kodeco Energy Company is the operator for the West Madura
production sharing contract and Korea Development Co. Ltd. is the
operator for the Poleng technical assistance contract, each assisted
by certain Repsol subsidiaries. These contract areas currently
produce crude oil and natural gas. Their natural gas is sold to the
Indonesia State Electric Company. The West Madura production sharing
contract expires in May 2011. The Poleng technical assistance
contract expires in December 2013.
o Blora Production Sharing Contract. The Repsol subsidiaries own a
16.7% interest in the Blora production sharing contract. This
contract area lies entirely onshore Java and covers an area of
approximately 4,800 square kilometers. There has been no production
of crude oil or natural gas from this concession. The current
operator is Coparex Blora B.V. The concession expires in 2026.
Remaining interests in the above assets are owned by independent third
parties.
On April 19, 2002, we announced the completion of the acquisition. Upon
completion, we entered into a co-operation agreement with Repsol Exploration
Services Limited, pursuant to which Repsol Exploration Services Limited will
provide consulting assistance to the Repsol subsidiaries on terms determined
on an arm's length basis for a period of up to six months, in order to achieve
a smooth transition of the businesses of the Repsol subsidiaries. For further
information on the acquisition, see "Item 5--Operating and Financial Review
and Prospects--The Repsol Acquisition."
44
In addition to the pending acquisition of the Repsol subsidiaries, we
currently have a 39.5% participating interest in a production sharing contract
in the Malacca Strait in Indonesia. As of December 31, 2001, our net proved
reserves in this property were 8.4 million barrels of crude oil. For 2001, net
production from this property averaged 2,683 barrels per day of crude oil,
condensate and natural gas liquids, representing approximately 1.0% of total
daily net production. Production has been declining in recent periods due to
water cut increases and natural production declines. Our interests in the
production sharing contract are held by our wholly owned subsidiaries.
Our budgeted capital expenditures for overseas activity, including the
pending acquisition in Indonesia, is approximately US$650 million from 2002
through the end of 2003.
We currently conduct all of our international oil sales through China
Offshore Oil (Singapore) International Pte. Ltd., our wholly owned Singapore
subsidiary. In addition to selling oil in the international market, this
subsidiary also trades oil produced by international oil and gas companies.
45
Other Oil and Gas Data
Production Cost Data
The following table sets forth average sales prices per barrel of crude
oil, condensate and natural gas liquids sold, average sales prices per
thousand cubic feet of natural gas sold and production costs per BOE produced
for our independent, production sharing contract and combined operations for
the three years ended December 31, 1999, 2000 and 2001.
Year ended December 31,
-----------------------------------------------
1999 2000 2001
---------- ----------- -----------
Average Sales Prices of Petroleum Produced
Per Barrel of Crude Oil, Condensate and Natural
Gas Liquid Sold................................... US$18.91 US$28.21 US$23.34
Per Thousand Cubic Feet of Natural Gas Sold......... 2.88 3.09 3.08
Average Lifting Costs Per BOE Produced
Independent......................................... US$3.14 US$4.00 US$3.88
Production Sharing Contracts........................ 4.49 4.86 4.51
Combined Operations................................. 3.93 4.45 4.16
Drilling and Productive Wells
The following table sets forth our exploratory and productive wells
drilled as of December 31, 2001 by independent and production sharing contract
operations in each of our operating areas.
As of December 31, 2001
--------------------------------------------------------------------------
Western Eastern
South South East
Bohai China China China
Total Bay Sea Sea Sea Overseas
------- --------- ---------- ---------- --------- ----------
Independent
Net Exploratory Wells..................... 1,387.0 1,247.0 128.0 2.0 10.0 --
Net Productive Wells...................... 479.0 417.0 62.0 -- -- --
Crude Oil............................... 468.0 406.0 62.0 -- -- --
Natural Gas............................. 11.0 11.0 -- -- -- --
Production Sharing Contracts
Net Exploratory Wells..................... 2.8 -- -- -- 2.0 0.8
Net Productive Wells...................... 107.1 23.5 5.1 68.0 4.5 6.0
Crude Oil............................... 99.6 23.5 -- 68.0 2.1 6.0
Natural Gas............................. 7.5 -- 5.1 -- 2.4 --
Total
Net Exploratory Wells..................... 379.8 247.0 128.0 2.0 2.0 0.8
Net Productive Wells...................... 586.1 440.5 67.1 68.0 4.5 6.0
Crude Oil............................... 567.6 429.5 62.0 68.0 2.1 6.0
Natural Gas............................. 18.5 11.0 5.1 -- 2.4 --
46
Drilling Activity
The following tables set forth our net exploratory and development wells
for the three years ended December 31, 1999, 2000 and 2001 broken down by
independent and production sharing contract operations in each of our
operating areas.
Western Eastern
South South East
Bohai China China China
Total Bay Sea Sea Sea Overseas
------ --------- ---------- ---------- --------- ---------
For the Year Ended December 31, 2001
Independent
Net Exploratory Wells Drilled............. 13.0 4.0 6.0 1.0 2.0 --
Successful.............................. 5.0 2.0 2.0 1.0 -- --
Dry..................................... 8.0 2.0 4.0 -- 2.0 --
Net Development Wells Drilled............. 76.0 76.0 -- -- -- --
Successful.............................. 76.0 76.0 -- -- -- --
Dry..................................... -- -- -- -- -- --
-- -- -- -- -- --
Production Sharing Contracts
Net Exploratory Wells Drilled............. 1.0 -- -- -- 1.0 --
Successful.............................. -- -- -- -- -- --
Dry..................................... 1.0 -- -- -- 1.0 --
Net Development Wells Drilled............. 41.7 34.7 4.8 -- 0.6 1.6
Successful.............................. 40.7 34.7 3.8 -- 0.6 1.6
Dry..................................... 1.0 -- 1.0 -- -- --
Western Eastern
South South East
Bohai China China China
Total Bay Sea Sea Sea Overseas
------ --------- ---------- ---------- --------- ---------
For the Year Ended December 31, 2000
Independent
Net Exploratory Wells Drilled............. 12.0 5.0 4.0 1.0 2.0 --
Successful.............................. 6.0 5.0 1.0 -- -- --
Dry..................................... 6.0 -- 3.0 1.0 2.0 --
Net Development Wells Drilled............. 65.2 61.0 3.0 -- 1.2 --
Successful.............................. 65.2 61.0 3.0 -- 1.2 --
Dry..................................... -- -- -- -- -- --
Production Sharing Contracts
Net Exploratory Wells Drilled............. 1.8 -- -- -- 1.0 0.8
Successful.............................. 1.0 -- -- -- 1.0 --
Dry..................................... 0.8 -- -- -- -- 0.8
Net Development Wells Drilled............. 25.2 22.4 -- -- -- 2.8
Successful.............................. 25.2 22.4 -- -- -- 2.8
Dry..................................... -- -- -- -- -- --
47
Western Eastern
South South East
Bohai China China China
Total Bay Sea Sea Sea Overseas
------- -------- ---------- ---------- -------- ----------
For the Year Ended December 31, 1999
Independent
Net Exploratory Wells Drilled............. 6.0 3.0 3.0 -- -- --
Successful.............................. 3.0 2.0 1.0 -- -- --
Dry..................................... 3.0 1.0 2.0 -- -- --
Net Development Wells Drilled............. 123.5 118.0 4.0 -- 1.5 --
Successful.............................. 123.5 118.0 4.0 -- 1.5 --
Dry..................................... -- -- -- -- -- --
Production Sharing Contracts
Net Exploratory Wells Drilled............. -- -- -- -- -- --
Successful.............................. -- -- -- -- -- --
Dry..................................... -- -- -- -- -- --
Net Development Wells Drilled............. 4.7 2.6 -- 0.5 -- 1.6
Successful.............................. 4.7 2.6 -- 0.5 -- 1.6
Dry..................................... -- -- -- -- -- --
Natural Gas Business
Natural gas is becoming an increasingly important part of our business
strategy as we exploit our natural gas reserves to meet rapidly growing
domestic demand for natural gas. In view of the domestic natural gas supply
shortfall forecasted by the Chinese government, we also plan to participate in
liquefied natural gas projects.
CNOOC, our controlling shareholder, is currently engaged in a project to
build China's first proposed liquefied natural gas import facility in
Guangdong Province in southern China. CNOOC has granted us the option to
acquire CNOOC's interest in the project. The terms of this option require us,
if we exercise the option, to reimburse CNOOC for any contribution CNOOC has
made with respect to the facility together with interest thereon calculated at
the prevailing market interest rate. We have not entered into any negotiations
with CNOOC on the detailed terms under which we may acquire CNOOC's interest
in this liquefied natural gas facility. CNOOC has committed to take a 33%
ownership interest in the project. Other partners include Hongkong Electric
and Hong Kong and China Gas, each committed to 3% ownership interests, and
five customers of the proposed facility who have collectively committed to a
31% ownership interest. Through a competitive selection process, BP Global
Investment Limited was selected as the foreign partner to take the remaining
30% interest in the project.
The project involves the construction of a receiving terminal with
capacity of three million metric tons per year, a 215-kilometer trunkline and
two branch trunklines with a total length of 111 kilometers. Solicitation
tendering for liquefied natural gas suppliers was launched on November 8,
2001. Project construction is expected to begin in the fourth quarter of 2002.
The facility is scheduled to commence operations in 2005. The total cost of
the facility is estimated to be approximately US$600 million. As described
above, CNOOC has granted us the option at no consideration to acquire its 33%
interest in this project. We will, however, be required to reimburse CNOOC for
any equity contribution it has made to the venture and will be required to
fund 33% of any future equity contributions to the venture. CNOOC will help us
procure all necessary government approvals for our participation in this
project should we exercise this option. We are currently evaluating the
exercise of this option and may exercise it at any time. CNOOC has not entered
into any definitive agreements with respect to the Guangdong liquefied natural
gas facility.
48
We may make other strategic investments in liquefied natural gas
projects. We may also make strategic investments in other natural gas
businesses in China's coastal provinces to facilitate the development of the
market for natural gas production. CNOOC has granted us the option to make any
other investments in natural gas-related businesses that CNOOC has made or
proposes to make. In addition, we plan to selectively pursue interests in
producing natural gas properties outside of China, where appropriate, to
secure upstream natural gas supply for any liquefied natural gas projects in
which we may participate. To the extent we invest in businesses and geographic
areas where we have limited experience and expertise, we plan to structure our
investments as alliances and partnerships with parties possessing the relevant
experience and expertise.
In August 2001, we signed a Memorandum of Understanding with Chevron
Australia Pty Ltd. to explore the feasibility of acquiring an equity interest
in oil and gas assets in Gorgon field, a large natural gas field in the Gorgon
area offshore Western Australia, and to develop the natural gas market in
coastal China.
In September 2001, CNOOC signed an agreement with Zhejiang Provincial
Energy Group Company Limited and Zhejiang Southeast Electric Power Company
Limited to invest in a joint venture to develop an intra-provincial natural
gas distribution network. CNOOC will hold a 37% equity interest in the joint
venture company. We have an option to take CNOOC's share in the joint venture
company in an arrangement similar to our option in the Guangdong liquefied
natural gas project. The business scope of the joint venture includes the
construction, operation and management of natural gas pipelines, the
intra-provincial wholesale and distribution of natural gas, and the
development of gas-fired power plants and other natural gas related
infrastructures and projects.
In September 2001, CNOOC signed an agreement with Shandong Province
Development Planning Commission and Shandong International Trust & Investment
Corporation in connection with the construction of a gas pipeline and the
importation of liquefied natural gas in Shandong Province. A steering
committee was established by the parties to study the prospect of gas
utilization in Shandong Province, including the feasibility of constructing a
main gas pipeline in Shandong and importing liquefied natural gas to Shandong
through Qingdao. CNOOC is also exploiting gas sources in Bohai Bay. CNOOC
expects that natural gas from Bohai Bay will land in Longkou of Shandong
Province in 2003, which can be further transported to Qingdao and Yantai in
Shandong Province by pipeline. The pipeline between Longkou and Yantai will be
95 kilometers; the pipeline between Longkou and Qingdao will be 2,101
kilometers.
In October 2001, CNOOC signed an agreement with the Fujian provincial
government on natural gas market development in Fujian Province. The agreement
provides for a joint investment commitment of increasing natural gas supply
and gas market development in Fujian by both parties. Both parties are
committed to sourcing gas, including liquefied natural gas, from all viable
sources, including from offshore production and overseas. The parties also
agreed to invest in gas-fired power plants and related infrastructure. We have
the option to take CNOOC's working interest in the project.
In November 2001, we entered into a Heads of Agreement with BHP Petroleum
(Northwest Shelf) Pty Ltd., BP Developments Australia Pty Ltd., Chevron
Australia Pty Ltd., Japan Australia LNG (MIMI) Pty Ltd., Shell Development
(Australia) Pty Ltd., and Woodside Energy Ltd. on a joint venture to develop
Northwest Shelf gas in Australia. We agreed to co-invest in the development of
Australia's Northwest Shelf gas project and to produce and process liquefied
natural gas to sell to the China markets, subject to the joint venture
successfully bidding for the contract to supply liquefied natural gas to an
import facility in Guangdong Province, in which CNOOC has an equity interest.
Sales and Marketing
Sales of Offshore Crude Oil
We sell crude oil and natural gas to the PRC market exclusively through
our wholly owned PRC subsidiary, CNOOC China Limited, and sales to
international markets are carried out by our wholly owned subsidiary, China
Offshore Oil (Singapore) International Pte. Ltd., located in Singapore.
49
We report production and sales plans to the State Economic and Trade
Commission annually. Based on information provided by China's three crude oil
producers, us, PetroChina and Sinopec, the State Development and Planning
Commission compiles an overall national plan for coordination of sales. We
have been allowed to freely determine where we sell our production both
domestically and internationally. Our sales of crude oil to international
markets also require us to obtain export licenses issued by the Ministry of
Foreign Trade and Economic Cooperation. Historically we have always been able
to obtain such export licenses.
Pricing
We determine our crude oil prices with reference to prices for crude oil
of comparable quality in international markets, including a premium or
discount mutually agreed upon with our customers according to market
conditions at the time of the sale. Prices are quoted in U.S. dollars only,
but domestic sales are billed and paid in Renminbi.
We currently produce three types of crude oil - Nanhai Light, Medium
Grade and Heavy Crude. The table below sets forth the sales and marketing
volumes, pricing benchmarks and average realized prices of each of these three
types of crude oil for the three years ended December 31, 1999, 2000 and 2001.
Year ended December 31,
-----------------------------------------
1999 2000 2001
----------- ---------- ---------
Sales and Marketing Volumes (benchmark)
(mmbbls)(1)
Nanhai Light (APPI(2) Tapis(3)).................... 36.9 39.1 32.2
Medium Grade (Daqing OSP(4))....................... 51.6 58.3 57.1
Heavy Crude (APPI(2) Duri(5))...................... 22.3 25.4 37.4
Average Realized Prices (US$/bbl)(6)
Nanhai Light....................................... US$19.11 US$29.49 US$24.96
Medium Grade....................................... 18.18 28.98 24.16
Heavy Crude........................................ 15.90 26.53 21.01
Benchmark Prices (US$/bbl)
APPI(2) Tapis(3)................................... US$18.61 US$29.53 US$24.99
Daqing OSP(4)...................................... 17.70 28.53 23.92
APPI(2) Duri(5).................................... 15.71 26.39 21.26
West Texas Intermediate (US$/bbl).................. US$19.25 US$30.35 US$25.89
--------------
(1) Includes the sales volumes of the company and the foreign partners under
production sharing contracts.
(2) Asia petroleum price index.
(3) Tapis is a light crude oil produced in Malaysia.
(4) Daqing official selling price. Daqing is a medium crude produced in
northeast China.
(5) Duri is a heavy crude oil produced in Indonesia.
(6) Includes the average realized prices of the company and the foreign
partners under production sharing contracts.
The international benchmark crude oil price, West Texas Intermediate, was
at US$19.84 per barrel as of December 31, 2001 and US$27.28 per barrel as of
April 30, 2002.
Markets and Customers
We sell most of our crude oil production in the PRC domestic market. We
also sell to customers in Korea, Japan, the United States and Australia, as
well as to crude oil traders in the spot market. For the years ended December
31, 1999, 2000 and 2001, we sold approximately 83.7%, 67.0% and 79.9%,
respectively, of crude oil in the PRC, and exported approximately 16.3%, 33.0%
and 20.1%, respectively.
Most of our crude oil production sales in the PRC domestic market are to
refineries and petrochemical companies that are affiliates of Sinopec and
PetroChina. Sales volume to Sinopec has been high historically because
50
most of the PRC refineries and petrochemical companies were affiliates of
Sinopec. After the restructuring of the PRC petroleum industry in July 1998,
some refineries and petrochemical companies were transferred to PetroChina
from Sinopec. As a result, sales to Sinopec decreased and sales to PetroChina
increased. For the years ended December 31, 1999, 2000 and 2001, sales to
Sinopec were approximately 68.6%, 52.8% and 52.7%, respectively, and sales to
PetroChina were approximately 11.8%, 12.6% and 13.8%, respectively, of total
oil and gas sales in the PRC domestic market. These customers represented in
aggregate approximately 80.4%, 65.4% and 66.5%, respectively, of total oil and
gas sales in the PRC domestic market. In recent years we have diversified our
domestic client base by targeting companies not affiliated with Sinopec or
PetroChina. These targeted companies typically are involved in bitumen
processing, fuel blending and mixing, power generation and production of
fertilizer feed stocks. We plan to continue our efforts to diversify our
client base.
The following table presents, for the periods indicated, our revenues
sourced in the PRC and outside the PRC:
Year ended December 31,
-----------------------------------------
1999 2000 2001
---------- ---------- ----------
(US$ in millions, except percentages)
Revenues sourced in the PRC........................... 11,140 17,559 18,105
Revenues sourced outside the PRC...................... 4,170 6,665 2,715
-------- ------ ------
Total revenues........................................ 15,310 24,224 20,820
% of revenues sourced outside the PRC................. 27.2% 27.5% 13.0%
======== ====== ======
Sales Contracts
We sign sales contracts with customers for each cargo. Sales contracts
are standard form contracts containing ordinary commercial terms such as
quality, quantity, price, delivery and payment. All sales are made on
free-on-board terms. PRC customers are required to make payments within 30
days after the shipper takes possession of the crude oil cargo at our delivery
points. During the years ended December 31, 1999, 2000 and 2001, the accounts
receivable turnover was approximately 51.6 days, 39.5 days and 32.3 days,
respectively. Doubtful accounts provision during the years ended December 31,
1999, 2000 and 2001 was Rmb 65.3 million, Rmb 15.7 million and Rmb 10.7
million, respectively.
We have a credit control policy, including credit investigation of
customers and periodic assessment of credit terms. Sales clerks are directly
responsible for liaising with the customers on the collection of receivables
within the credit terms.
We price our crude oil in U.S. dollars only. PRC customers are billed and
make actual payments in Renminbi based on the exchange rate prevailing at the
bill of lading date, while overseas customers are billed and are required to
make payments in U.S. dollars within 30 days of the bill of lading date.
Sales of Offshore Natural Gas
Driven by environmental and efficiency concerns, the PRC government is
increasingly encouraging residential and industrial use of natural gas to meet
primary energy needs. In 1989, in order to encourage natural gas production,
the PRC government adopted a favorable royalty treatment, which provides a
royalty exemption for natural gas production up to two billion cubic meters
(70.6 billion cubic feet or 11.8 million BOE) per year as compared to a
royalty exemption available for crude oil production of up to one million tons
or approximately seven million BOE per year. The favorable treatment also
includes lower royalty rates on incremental increases in natural gas
production as compared with the royalty rates for crude oil production.
51
Since 1989, the PRC government has adopted the following sliding scale of
royalty payments of up to 3% of the annual gross production of natural gas:
Annual gross production Royalty rate
----------------------- ------------
Less than 2 billion cubic meters................................................. 0.0%
2-3.5 billion cubic meters....................................................... 1.0%
3.5-5 billion cubic meters....................................................... 2.0%
Above 5 billion cubic meters..................................................... 3.0%
We sell a large portion of our natural gas production in Hong Kong. The
remaining natural gas production is sold to customers in mainland China. Of
the 71.2 billion cubic feet of natural gas that we produced offshore China in
the year ended December 31, 2001, 50.7 billion cubic feet, or approximately
71.2%, was produced from the Yacheng 13-1 gas field. This field is governed by
a production sharing contract we entered into with BP and Kufpec. We hold a
51% participating interest in this field. In December 1992, Castle Peak Power
in Hong Kong signed a long-term gas supply contract under which it agreed to
buy from the partners approximately 102.4 billion cubic feet of natural gas
per year on a take-or-pay basis until 2015. Gas prices are quoted and paid in
U.S. dollars. The payments are made in U.S. dollars monthly and are reconciled
annually. Castle Peak Power purchased approximately 61.7% of our total natural
gas production for the year ended December 31, 2001. Castle Peak Power is a
60/40 joint venture between Exxon Mobil and CLP Power Hong Kong Limited, a
public utility company in Hong Kong. The remaining 38.3% of the company's
total natural gas production in the year ended December 31, 2001 was sold to
PRC customers including Hainan Fertilizer, Hainan Power, Shanghai Gas, Jingxi
Chemical, Xinao Gas, Tianjin Binhai Power and Tianjin Binhai Gas.
The price of gas sold to the PRC market is determined by negotiations
between us and the buyers based on market conditions. Contracts typically
consist of a base price with provisions for annual resets and adjustment
formulas which depend on a basket of crude prices, inflation and various other
factors.
Procurement of Services
We usually outsource work in connection with the acquisition and
processing of seismic data, reservoir studies, well drilling services, wire
logging and perforating services and well control and completion service to
independent third parties or CNOOC's affiliates.
In the development stage, we normally employ independent third parties
for mooring and oil tanker transportation services and both independent third
parties and affiliates of CNOOC for other services by entering into contracts
with them. We conduct a bidding process to determine who we employ to
construct platforms, terminals and pipelines, to drill production wells and to
transport offshore production facilities. Both independent third parties and
affiliates of CNOOC participate in the bidding process. We are closely
involved in the design and management of services by contractors and exercise
extensive control over their performance, including their costs, schedule and
quality.
Competition
Domestic Competition
The petroleum industry is highly competitive. We compete in the PRC and
international markets for both customers and capital to finance its
exploration, development and production activities. Our principal competitors
in the PRC market are PetroChina and Sinopec.
We price our crude oil on the basis of comparable crude oil prices in the
international market. The majority of our customers for crude oil are
refineries affiliated with Sinopec and PetroChina to which we have been
selling crude oil, from time to time, since 1982. Based on its dealings with
these refineries, we believe that we have established a stable business
relationship with them. In 1998, the PRC government restructured PetroChina
and Sinopec into vertically integrated companies, with each having both
upstream and downstream petroleum businesses and operations.
52
We are the dominant player in the oil and gas industry offshore China and
are the only company authorized to engage in oil and gas exploration and
production offshore China in cooperation with foreign parties. We may face
increased competition in the future from other petroleum companies in
obtaining new PRC offshore oil and gas properties, or, as a result of changes
in current PRC laws or regulations permitting an expansion of existing
companies' activities or new entrants into the industry.
As part of our business strategy, we intend to expand our natural gas
business to meet rapidly increasing domestic demand. Our competitors in the
PRC natural gas market are PetroChina and, to a lesser extent, Sinopec. Our
principal competitor, PetroChina, is the largest supplier of natural gas in
China in terms of volume of natural gas supplied. PetroChina's natural gas
business benefits from strong market positions in Beijing, Tianjin, Hebei
Province and northern China. We intend to invest in related natural gas
businesses in China's eastern coastal provinces, where we may face competition
from PetroChina and, to a lesser extent, Sinopec. We believe that our
extensive natural gas resources base, the proximity of these resources to the
markets in China, our relatively advanced technologies and our experienced
management team will enable us to compete effectively in the domestic natural
gas market.
Foreign Competition and the World Trade Organization
Imports of crude oil are subject to tariffs, import quotas, handling fees
and other restrictions. The PRC government also restricts the availability of
foreign exchange with which the imports must be purchased. The combination of
tariffs, quotas and restrictions on foreign exchange has, to some extent,
limited the competition from imported crude oil.
In line with the general progress of its economic reform programs, the
PRC government has agreed to reduce import barriers as part of its WTO
commitments. As a result of China joining the World Trade Organization as a
full member on December 11, 2001, it is required to further reduce its import
tariffs and other trade barriers over time, including with respect to certain
categories of petroleum and crude oil. All import quotas and licenses for
processed oil are expected to be eliminated by 2004. Notwithstanding China's
WTO related concessions, crude and processed oil remain, for the time being,
subject to restrictions on import rights and only certain designated state
owned enterprises may import crude and processed oil. Sinopec and PetroChina
have received permission to import crude oil on their own. Currently, there is
no set schedule for the liberalization of trading rights that would allow
foreign owned or foreign invested entities to participate in the import of
crude or processed oil.
PRC Fiscal Regimes for Offshore Crude Oil and Natural Gas Activities
We conduct exploration and production operations either independently or
jointly with foreign partners under our production sharing contracts. The PRC
government has established different fiscal regimes for crude oil and natural
gas production from our independent operations and from our production sharing
contracts.
Royalties paid to the PRC government are based on our gross production
with respect to each of our independent oil and gas fields and with respect to
each of our oil and gas fields covered by production sharing contracts. The
amount of the royalties is a varying percentage up to 12.5% based on the
annual production of the relevant property. The PRC government has provided
the company with a royalty exemption for up to one million tons, or seven
million BOE per year, for our crude oil production and for up to 70.6 billion
cubic feet, or 11.8 million BOE per year, for our natural gas production. The
limits in these exemptions apply to our total production from both independent
properties and properties subject to production sharing contracts. In
addition, we pay production taxes to the PRC government equal to 5% of our
crude oil and gas produced independently and 5% of our crude oil and gas
produced under production sharing contracts.
Under our production sharing contracts, production of crude oil and gas
is allocated among us, the foreign partners and the PRC government according
to a formula contained in the contracts. Under this formula, a percentage of
production under our production sharing contracts is allocated to the PRC
government as its share oil. For more information about the allocation of
production under the production sharing contracts, see "--Production Sharing
Contracts--Production Sharing Formula."
53
Production Sharing Contracts
When exploration and production operations are conducted through a
production sharing contract, the operator of the oil or gas field must submit
a detailed evaluation report and an overall development plan to CNOOC upon
discovery of petroleum reserves. The overall development plan must also be
submitted to a joint management committee established under the production
sharing contract. After CNOOC confirms the overall development plan, CNOOC
submits it to the State Development and Planning Commission for approval.
After receiving the governmental approval, the parties to the production
sharing contract may begin the commercial development of the petroleum field.
As part of the reorganization, CNOOC transferred all of its economic
interests and obligations under its existing production sharing contracts to
us and our subsidiary, CNOOC (China) Limited. As of December 31, 2001, we had
10 production sharing contracts in the production and development stages, and
20 in the exploration stage.
Under PRC law, the negotiation of a production sharing contract is a
function that only a national company, such as CNOOC, can perform. This
function cannot be transferred to us because we are a pure commercial entity.
Since the reorganization, under the terms of its undertaking with us, CNOOC,
after entering into production sharing contracts with international oil and
gas companies, is required to assign immediately to us all of its economic
interests and obligations under the production sharing contracts. For further
details, see "Item 7--Major Shareholders and Related Party Transactions."
New production sharing contracts are entered into between CNOOC and
foreign partners primarily through bidding organized by CNOOC and, to a lesser
extent, through direct negotiation.
Bidding Process
The typical bidding process involves the following major steps:
o CNOOC determines which blocks, with the approvals of the PRC
government, are open for bid and prepare geological information
packages and bidding documentation for these blocks;
o CNOOC invites foreign enterprises to bid;
o potential bidders are required to provide information, including
estimates of minimum work commitment, exploration costs and
percentage of share oil payable to the PRC government; and
o CNOOC evaluates each bid and negotiates a production sharing
contract with the successful bidder.
Under CNOOC's undertaking with us, we may participate with CNOOC in all
negotiations of new production sharing contracts.
A typical production sharing contract has a term not exceeding 30 years
with three distinct phases:
Exploration. The exploration period generally lasts for seven consecutive
years depending on the size of the contract area, and may be extended with the
consent of CNOOC. During this period, exploratory and appraisal work on the
exploration block is conducted in order to discover petroleum and to enable
the parties to determine the commercial viability of any petroleum discovery.
Development. The development period begins on the date that the overall
development plan, which outlines, among other things, the recoverable reserves
and schedule for the development of the discovered petroleum reserves, is
approved by the relevant PRC regulatory authorities. Once the design,
construction, installation, drilling and related research work for the
realization of petroleum production have been completed, the development
period comes to an end.
Production. The production period begins on the date of the commencement
of commercial operations and usually lasts for 15 years. The production period
may be extended upon approval of the PRC government.
54
Minimum Work Commitment
Under production sharing contracts that include exploration, foreign
partners must complete a minimum amount of work during the exploration period,
generally including:
o a minimum number of exploration wells to be drilled;
o a fixed amount of seismic data to be produced; and
o a minimum amount of exploration expenditures to be incurred.
Foreign partners are required to bear all exploration costs during the
exploration period. However, such exploration costs can be recovered according
to the production sharing formula after commercial discoveries are made and
production begins. During the exploration period, foreign partners are
required to return 25% of the contract areas, excluding the development and
production areas, to CNOOC at the end of each of the third year and fifth year
of the exploration period. At the end of the exploration period, all areas,
excluding the development areas, production areas and areas under evaluation,
must be returned to CNOOC.
Participating Interests
Under production sharing contracts, CNOOC has the right to take up to a
51% participating interest in any oil or gas field discovered in the contract
area and may exercise the right after the foreign partners have made
commercially viable discoveries. The foreign partners retain the remaining
participating interests.
Production Sharing Formula
A chart illustrating the production sharing formula under our production
sharing contracts is shown below.
-------------------------------------------------------------------------------------------------------------------------------
Percentage of total production Allocation
-------------------------------------------------------------------------------------------------------------------------------
5.0% Production Taxes to PRC government
------------------------------------------------------------------------------------------
62.5% 12.5%(a) Royalty oil to PRC Government
------------------------------------------------------------------------------------------
(Royalty and cost recovery oil) 50.0%(a) Cost recovery oil allocated with following priority:
(1) Recovery of current year operating costs by us and foreign
partner(s).
(2) Recovery of earlier exploration costs of foreign
partner(s).
(3) Recovery of development costs by us and foreign partner(s)
based on respective participating interests.(c)
(4) Any excess, distributed proportionately to each partner's
respective participating interest.(c)
-------------------------------------------------------------------------------------------------------------------------------
(1-X) Share oil to PRC Government
32.5%(b) multiplied by
(Remainder oil) 32.5%
------------------------------------------------------------------------------------------
X multiplied by Allocable remainder oil distributed proportionate to each
32.5% partner's respective participating interest.(c)
-------------------------------------------------------------------------------------------------------------------------------
----------
(a) Assumes annual gross production of more than four million metric tons, approximately 30 million barrels of oil. For
lower amounts of production, the royalty rate will be lower and the cost recovery will be greater than 50.0% by the
amount that the royalty rate is less than 12.5%.
(b) The ratio "X" is agreed in each production sharing contract based on commercial considerations and ranges from 8%
to 100%.
(c) See "--Principal Oil and Gas Regions" for our participating interest percentage in each production sharing
contract.
55
Annual gross production of petroleum is shared in the following order:
1. The first 5% of the annual gross production is deducted as
production taxes paid to the PRC government.
2. The next 62.5% of the annual gross production, which is referred to
as "royalty and cost recovery oil," is allocated in the following
order:
First, since 1989, the PRC government has adopted the following
sliding scale of royalty payment of up to 12.5% of the annual gross
production:
Annual gross production of oil(1) Royalty rate
--------------------------------- ------------
Less than 1 million tons............................... 0.0%
1-1.5 million tons..................................... 4.0%
1.5-2.0 million tons................................... 6.0%
2.0-3.0 million tons................................... 8.0%
3.0-4.0 million tons................................... 10.0%
Above 4 million tons................................... 12.5%
------------------
(1) The sliding scale royalty for natural gas reaches a maximum at 3%.
Second, the balance of the royalty and cost recovery oil is
allocated in the following order:
o to recover actual operating costs required for the production
operations incurred by both parties in the current year;
o to recover exploration costs, excluding interest accrued
thereon, incurred but not yet recovered by foreign partners
during the exploration period; and
o to recover development investments incurred but not yet
recovered, and interest accrued in the current year, according
to the participating interest split between us and foreign
partners.
3. The last 32.5% of the annual gross production, which is referred to
as "remainder oil," is distributed to the PRC government, us and
foreign partners according to a pre-determined "ratio X" that is
based on a percentage agreed to by CNOOC and the foreign partners in
each production sharing contract. Remainder oil is distributed in
the following order:
o First, an amount of oil and gas equal to the product of
"remainder oil" and one minus the "ratio X" is distributed to
the PRC government. This portion is referred to as "share oil;"
and
o Second, the balance of the remainder oil, which is referred to
as "allocable remainder oil," is distributed to us and foreign
partners. Each party will receive an amount of oil or gas equal
to the product of "allocable remainder oil" multiplied by its
respective percentage of participating interests.
We pay the estimated production taxes and royalties at the time of each
shipment for crude oil production, and monthly for natural gas production. At
the end of each year, we calculate the production taxes and royalties on an
annual basis and file the information with the PRC tax bureau. Any overpayment
or underpayment of production taxes and royalties during the year will be
adjusted at year-end.
The foreign partners have the right either to take possession of their
crude oil for sale in the international market, or to sell such crude oil to
us for resale in the PRC market.
Management and Operator
Under each production sharing contract, a party will be designated as an
operator to undertake the execution of the production sharing contract which
includes:
56
o preparing work programs and budgets;
o procuring equipment and materials relating to operations;
o establishing insurance programs; and
o issuing cash-call notices to the parties to the production sharing
contract to raise funds.
A joint management committee, which usually consists of six or eight
persons, is set up under each production sharing contract to perform
supervisory functions, and each of our company and the foreign partners as a
group has the right to appoint an equal number of representatives to form the
joint management committee. The chairman of the joint management committee is
the chief representative designated by us and the vice chairman is the chief
representative designated by the foreign partners as a group. The joint
management committee has the authority to make decisions on matters including:
o reviewing and approving operational and budgetary plans;
o determining the commercial viability of each petroleum discovery;
o reviewing and adopting the overall development plan; and
o approving significant procurements and expenditures, and insurance
coverages.
Daily operations of a property subject to the respective production
sharing contract are carried out by the designated operator. The operator is
typically responsible for determining and executing operational and budgetary
plans and all routine operational matters. Upon discovery of petroleum
reserves, the operator is required to submit a detailed overall development
plan to the joint management committee.
After the foreign partner has fully recovered its exploration and
development costs under production sharing contracts in which the foreign
partner is the operator, we have the exclusive right to take over the
operation of the particular oil or gas field. With the consent of the foreign
partner, we may also take over the operation before the foreign partner has
fully recovered its exploration and development costs.
Ownership of Data and Assets
All data, records, samples, vouchers and other original information
obtained by foreign partners in the process of exploring, developing and
producing offshore petroleum become the property of CNOOC as a state-owned
national oil company under PRC law. Through CNOOC, we have unlimited and
unrestricted access to the data.
We and our foreign partners have joint ownership in all of the assets
purchased, installed or constructed under the production sharing contract
until either:
o the foreign partners have fully recovered their development costs,
or
o upon the expiration of the production sharing contract.
After that, as a state-owned national oil company under PRC law, CNOOC
will assume ownership of all of the assets under the production sharing
contracts, but we and the foreign partners retain the exclusive right to use
the assets during the production period.
Abandonment Costs
Any party to our production sharing contracts must give prior written
notice to the other party or parties if it plans to abandon production of the
oil or gas field within the contracted area. If the other party or parties
agrees to abandon production from the oil or gas field, all parties pay
abandonment costs in proportion to their respective percentage of
participating interests in the field. If we decide not to abandon production
upon notice from a foreign partner, all of such foreign partner's rights and
obligations under the production sharing contract in respect of the oil or gas
field, including the responsibilities for payment of abandonment costs,
terminate automatically. We will bear the abandonment costs if we decide to
abandon production after an initial decision to proceed with production. We
57
have not incurred any abandonment costs to date but expect that we may incur
such costs beginning in 2002 when some of our fields are shut down after their
production period expires.
Production Tax
The PRC production tax rate on the oil and natural gas produced under
production sharing contracts is currently 5%.
Geophysical Survey Agreements
We conduct our exploration operations through geophysical survey
agreements with leading international oil and gas companies as well as
independently and through production sharing contracts. As of December 31,
2001, we were no longer a party to any geophysical survey agreements, but may
enter such agreements in the future.
Geophysical survey agreements are designed for foreign petroleum
companies to conduct certain geophysical exploration before they decide
whether to enter into production sharing contract negotiations with CNOOC.
Geophysical survey agreements usually have a term of less than two years.
International oil and gas companies must complete all of the work confirmed by
both parties in the agreements and bear all the costs and expenses. If a
foreign partner decides to enter into a production sharing contract with
CNOOC, the costs and expenses that the foreign partner incurs in conducting
geophysical survey may be recovered by the foreign partner in the production
period subject to our confirmation. CNOOC has the sole ownership of all data
and information obtained by the foreign partner during the geophysical survey,
and, through CNOOC, we have access to all such data.
Under PRC law, the negotiation of a geophysical survey agreement is a
function that only a national company, such as CNOOC, can perform. As part of
the reorganization, CNOOC transferred to us all its commercial rights under an
existing geophysical survey agreement. In the future, CNOOC has agreed to
assign to us all of its commercial rights under any geophysical survey
agreements it enters into with international oil and gas companies.
Operating Hazards and Uninsured Risks
Our operations are subject to hazards and risks inherent in the drilling,
production and transportation of crude oil and natural gas, including pipeline
ruptures and spills, fires, explosions, encountering formations with abnormal
pressures, blowouts, cratering and natural disasters, any of which can result
in loss of hydrocarbons, environmental pollution and other damage to our
properties and the properties of operators under production sharing contracts.
In addition, certain of our crude oil and natural gas operations are located
in areas that are subject to tropical weather disturbances, some of which can
be severe enough to cause substantial damages to facilities and interrupt
production.
As protection against operating hazards, we maintain insurance coverage
against some, but not all, potential losses, including the loss of wells,
blowouts, pipeline leakage or other damage, certain costs of pollution control
and physical damages on certain assets. Our insurance coverage includes oil
and gas fields property and construction insurance, marine hull insurance,
protection and indemnity insurance, drilling equipment insurance, marine cargo
insurance and third party and comprehensive general liability insurance. It
also carries business interruption insurance for Pinghu field. We currently
maintain in total approximately Rmb 34.4 billion in insurance coverage and pay
an annual insurance premium of approximately Rmb 180 million to maintain that
coverage. We believe that our level of insurance is adequate and customary for
the PRC petroleum industry. However, we may not have sufficient coverage for
some of these risks, either because insurance is not available or because of
high premium costs. See "Item 3--Key Information--Risk Factors." For the years
ended December 31, 1999, 2000 and 2001, we experienced total losses of
approximately Rmb 390 million.
58
Research and Development
During the three years ended December 31, 1999, 2000 and 2001, we used
research and development services provided by CNOOC's affiliates as well as
other international entities. We are trying to develop more efficient and
effective approaches to explore for new reserves. Our research efforts have
been focusing on:
o advanced resolution enhancement technology;
o building up exploration and development data bases to improve the
efficiency of our research efforts; and
o consolidating multi-discipline data to optimize the selection of
exploration sites.
We are also studying various ways of better utilizing our existing
reserves including:
o building more accurate reservoir models;
o re-processing existing seismic and log data to locate potential
areas near existing fields to be integrated into existing production
facilities; and
o researching ways to reduce development risks for marginal fields and
to group fields for joint developments sharing common facilities.
We will continue to use research and development services provided by
CNOOC's affiliate, China Offshore Oil Research Center.
During the three years ended December 31, 1999, 2000 and 2001, we spent
approximately Rmb 115 million, Rmb 104 million and Rmb 109 million,
respectively, on general research and development activities.
For further information regarding our agreement with the China Offshore
Oil Research Center, see "Item 7--Major Shareholders and Related Party
Transactions--Related Party Transactions."
Environmental Regulation
Our operations in China are required to comply with various PRC
environmental laws and regulations administered by the central and local
government environmental protection bureaus. We are also subject to the
environmental rules introduced by the local PRC governments in whose
jurisdictions the various onshore logistical support facilities are located.
The State Environmental Protection Bureau sets national environmental
protection standards and local environmental protection bureaus may set
stricter local standards.
The relevant environment protection bureau must approve or review each
stage of a project. We must file an environmental impact statement or, in some
cases, an environmental impact assessment outline before an approval can be
issued. The filing must demonstrate that the project conforms to applicable
environmental standards. The relevant environmental protection bureau
generally issues approvals and permits for projects using modern pollution
control measurement technology.
The PRC national and local environmental laws and regulations impose fees
for the discharge of waste substances above prescribed levels, require the
payment of fines for serious violations and provide that the PRC national and
local governments may at their own discretion close or suspend any facility
which fails to comply with orders requiring it to cease or cure operations
causing environmental damage.
For the three years ended December 31, 1999, 2000 and 2001, we
experienced a total of 2 incidents of crude oil discharge with a total volume
of approximately 240 barrels being wrongfully discharged and spilled offshore,
for which fines in an aggregate amount of Rmb 31,900 (US$3,854) were imposed.
None of the incidents nor the aggregate amount of such fines had a material
adverse effect on our business or results of operations.
The PRC environmental laws do not currently require offshore petroleum
developers to pay abandonment costs. Our financial statements include
provisions for costs associated with the dismantling and abandonment of
59
abandoned fields during the years ended December 31, 1999, 2000 and 2001 of
approximately Rmb 177 million, Rmb 104 million and Rmb 90.4 million,
respectively.
Environmental protection and prevention costs and expenses in connection
with the operation of offshore petroleum exploitation are covered under each
individual production sharing contract. Environmental protection and
prevention costs and expenses represented approximately 4% of our average
operating costs relating to projects constructed during the three years ended
December 31, 2001. Each platform has its own environmental protection and
safety staff responsible for monitoring and operating the environmental
protection equipment. However, no assurance can be given that the PRC
government will not impose new or stricter regulations which would require
additional environmental protection expenditures.
We are not currently involved in any environmental claims and believes
that our environmental protection systems and facilities are adequate for us
to comply with applicable national and local environmental protection
regulations.
Legal Proceedings
We are not a defendant in any material litigation, claim or arbitration,
and we know of no pending or threatened proceeding which would have a material
adverse effect on our financial condition.
Patents and Trademarks
We own or have licenses to use two trademarks which are of value in the
conduct of our business. CNOOC is the owner of the "CNOOC" trademark. Under
two non-exclusive license agreements between CNOOC and us, we have obtained
the right to use this trademark for a nominal consideration.
Real Properties
Our corporate headquarters is located in Hong Kong. We also lease several
other properties from CNOOC in China and Singapore. The rental payments under
these lease agreements are determined with reference to market rates. For
further details regarding the terms of these leases, see "Item 7--Major
Shareholders and Related Party Transactions."
We own the following property interests in the PRC:
o land, various buildings and structures at Xingcheng JZ 20-2 Natural
Gas Separating Plant, Dongyao Village, Shuangsu Township, Xingcheng
City, Liaoning Province;
o land, various buildings and structures located at Boxi Processing
Plant, South of Jintang Subway, Tanggu District, Tianjin City;
o land, various buildings and structures at Weizhou Terminal
Processing Plant, Weizhou Island, Weizhou Town, Beihai City, Guangxi
Zhuang Autonomous Region; and
o a parcel of land at Suizhong 36-1 Base, Xiaolihuang Village, Gaoling
Town, Suizhong County, Liaoning Province.
Employees and Employee Benefits
During the three years ended December 31, 1999, 2000 and 2001, we
employed approximately 920, 1,007 and 1,081 persons, respectively. Of these
1,081 persons employed as of December 31, 2001, approximately 38% are
management staff and the remainder are professional personnel. Of these 1,081
employees, approximately 80% were involved in petroleum exploration,
development and production activities, approximately 11% were involved in
accounts and finance work and the remainder were senior management,
coordinators of production sharing contracts and safety and environmental
supervisors. Workers for the operation of our oil and gas fields, maintenance
personnel and ancillary service workers are hired on a contract basis.
60
We have a trade union that:
o protects employees' rights,
o organizes educational programs,
o assists in the fulfillment of economic objectives,
o encourages employee participation in management decisions, and
o assists in mediating disputes between us and individual employees.
We have not been subjected to any strikes or other labor disturbances and
we believe that our relations with our employees are good.
The total remuneration of our employees includes salary, bonuses and
allowances. Bonus for any given period is based primarily on individual and
company performance. Employees also receive subsidized housing, health
benefits and other miscellaneous subsidies.
We have implemented an occupational health and safety program similar to
that employed by other international oil and gas companies. Under this
program, we closely monitor and record health and safety incidents and
promptly report them to government agencies and organizations. On March 15,
2000, we finalized and implemented our occupational health and safety program.
We believe this program is broadly in line with the United States government
Occupational Safety & Health Administration guidelines.
All our full-time employees in the PRC are covered by a government
regulated pension. The PRC government is responsible for the pension
liabilities to these retired employees. We are required to contribute monthly
an average of approximately 9% to 22.5% of our employees' basic salaries, with
each employee contributing 4% to 7% of his or her base salary for retirement.
The contributions vary from region to region.
For further details regarding our retirement benefits, see note 26 to the
consolidated financial statements.
Health, Safety and Environmental Policies
Employees' health and safety are crucial for our success and development
and everyone plays a part in creating healthy, safe and environmentally
friendly results. In order to monitor our production activities and to provide
proper guidelines for employees, we have established a set of comprehensive
health, safety and environmental ("HSE") policies which constitutes an
important part of our corporate culture and which we believe represents one of
our core competitive strengths.
With the goal of further improving levels of health, safety and
environmental protection, we continued during 2001 to implement established
HSE systems and key programs and realized our HSE targets set at the beginning
of the year. During the year, we experienced no fatalities, no incidents of
oil spillage of material quantities, and no single incident resulting in an
economic loss exceeding US$120,000. The OHSA statistics on occupational injury
and occupational disease showed a significant improvement compared to previous
years with both incident and the days-away rates. As a result, our HSE
performance was above the average standards for international oil companies.
61
CNOOC Limited occupational injury & occupational disease statistics of 2001
Number of days away
Incident rate rate
(Times/200,000 Man Hour) (Day/200,000 Man Hour)
------------------------------------------------ ---------------------
Number of
days away Death & Number
Average Recordable & working number of of days Number of days away &
Scope person Man-hour cases bounds days away away working bounds
----- ------- ---------- ---------- --------- --------- ------- ---------------------
Permanent worker 1,402 2,228,512 0.00 0.00 0.00 0.00 0.00
Permanent worker, & 5,847 12,187,935 0.20 0.15 0.16 0.15 1.77
other worker &
direct contractor
Community Contributions
Besides constantly trying to increase efficiency and create value for our
shareholders, we have also been taking an active part in community activities.
During the year, as part of our efforts to make additional significant
contributions to society, we participated in "Project Hope", greening
activities, educational sponsorships, and other social charitable events.
In conjunction with foreign cooperative partners, we participated in the
"Century Forest Green Action - Bid for 2008 Olympics", and planted 220
"Olympic Bid" trees in Bijiashan Garden, Shenzhen engraved with our logo.
Human Resources Development
We believe quality, creativity and dedication of our employees represent
our most precious assets and are the major driving forces for our continued
growth. As such, we have committed ourselves to formulating and implementing a
series of long-term and short-term human resources strategies that are in line
with the development objectives of our company and our employees.
In 2001, we have been regularly enhancing the employee evaluation systems
and strengthening the management and mobility of human resources. We have also
established a recruitment system on the Internet to attract talent worldwide.
To reward outstanding achievers, we launched a share option scheme for
the senior management on February 4, 2001 based on the long-term profit and
risk sharing relationship between our senior management and us. Under this
scheme, our compensation committee will, from time to time, make its proposal
for board approval on the number of options to be granted to the eligible
participants. See "Item 6 - Directors, Senior Management and Employees - Share
Ownership" for further details on our share option schemes.
In 1999, we established a "Chairman's Special Award" to reward business
units and individuals who have made outstanding contributions in the areas of
production, management and research. In 2001, a total of four business units
and 44 employees received the award.
During 2001, based on the human resources development strategy for the
future and the results from the employee evaluation system, we established a
series of target training initiatives and organized a variety of training
programs. During the year, a total of 325 training workshops were held with
over 7,000 participants attending these workshops.
62
ITEM 5.
Operating and Financial Review and Prospects
A. OPERATING RESULTS
The following discussion and analysis should be read in conjunction with
our consolidated financial statements, selected historical consolidated
financial data and operating and reserves data, in each case together with the
accompanying notes, included elsewhere in this annual report. The consolidated
financial statements have been prepared in accordance with Hong Kong GAAP,
which differ in certain material respects from U.S. GAAP. Note 36 to the
consolidated financial statements provides a reconciliation to U.S. GAAP of
net income, shareholders' equity and cash flows.
Overview of Our Operations
We are an oil and gas company that engages primarily in the exploration,
development and production of crude oil and natural gas offshore China. We are
the dominant producer of crude oil and natural gas offshore China and the only
company permitted to conduct exploration and production activities with
international oil and gas companies offshore China. As of December 31, 2001,
we had estimated net proved reserves of 1,787.1 million BOE, comprised of
1,245.9 million barrels of crude oil and condensate and 3,247.6 billion cubic
feet of natural gas. For the year 2001, our net production averaged 228,874
barrels per day of crude oil, condensate and natural gas liquids and 195.0
million cubic feet per day of natural gas, which together totaled
approximately 261,379 BOE per day.
Our revenues and profitability are largely determined by the difference
between prices received for crude oil and natural gas produced by us and our
costs of finding, developing and producing these hydrocarbons. A substantial
decline in crude oil prices began in 1997 and continued in 1998, with crude
oil prices falling to a 12-year low of US$10.76 per barrel in December 1998.
The lower crude oil prices had a significant negative impact on the company's
net sales and net income in 1998, although the company still recorded positive
income of Rmb 1,549.5 million in that year. As crude oil prices began to
recover in April 1999, reaching a peak of US$37.21 per barrel on September 20,
2000, the company recorded significantly higher net income of Rmb 4,111.4
million in 1999 and Rmb 10,296.6 million in 2000. Crude oil prices have
declined since then. The decline in crude oil prices, particularly in the
second half of 2001, has adversely impacted the company's operating results.
The international benchmark crude oil, West Texas Intermediate, was at
US$19.84 per barrel as of December 31, 2001 and US$27.28 per barrel as of
April 30, 2002.
Most of our crude oil production is sold in the PRC domestic market to
customers affiliated with Sinopec or PetroChina. Most of our natural gas
production is sold to Castle Peak Power Company Limited under a long-term
take-or-pay contract. Our financial performance also is affected by a number
of other variables external to us and the petroleum industry, including
political, economic and social conditions in China and foreign currency
exchange fluctuations.
For a further description of these factors and certain other factors
affecting our financial performance, see "Item 3--Key Information--Risk
Factors."
The Reorganization
Overview.
Prior to the October 1999 reorganization of CNOOC, we did not exist as a
separate legal entity and our business and operations were conducted by CNOOC
and its various affiliates. In connection with the reorganization, CNOOC's oil
and gas exploration, development, production and sales business and operations
conducted both inside and outside China were transferred to us and our
subsidiaries. As CNOOC controlled the business and operations transferred to
us before the reorganization and continues to control us after the
reorganization, the accompanying consolidated financial statements have been
prepared on the basis of a reorganization under common control. Accordingly,
the transfer of the business and operations has been accounted for in a manner
similar to a pooling of interests. The accompanying consolidated balance
sheets have been prepared to present our assets and liabilities as if the
reorganization had been completed as of the beginning of the periods
presented. The assets acquired by us and
63
the liabilities assumed by us have been stated at historical amounts. The
accompanying consolidated statements of income and cash flows include our
results of operations and cash flows as if the business and operations had
been transferred to us at the beginning of the periods presented. In preparing
the consolidated financial statements, those assets, liabilities, revenues and
expenses that are clearly applicable to the businesses and operations
transferred to us are included in the consolidated financial statements. For
those expenses for which the specific identification method was not practical,
we allocated the relevant expenses on the basis described in note 2 to the
consolidated financial statements. See "Item 7--Major Shareholders and Related
Party Transactions" and notes 1 and 2 to the consolidated financial
statements.
Implementation of New Agreements.
Before the reorganization, certain PRC subsidiaries of CNOOC provided
various materials, utilities and ancillary services for CNOOC's exploration
and production of crude oil and natural gas. In September of 1999, in
connection with our reorganization:
o we entered into a new materials, utilities and ancillary services
supply agreement under which the PRC subsidiaries of CNOOC that had
previously provided such services agreed to continue to provide us
with various materials, utilities and ancillary services. For the
year ended December 31, 2001, our total cost for these materials,
utilities and ancillary services was Rmb 1,103.6 million, compared
to Rmb 618.1 million and Rmb 1,147.0 million for the years ended
December 31, 1999 and 2000, respectively.
o we and our subsidiaries entered into various lease agreements with
other affiliates of CNOOC for various office and residential
premises used in our business. Prior to the reorganization, the
premises covered under the new lease agreements were owned by CNOOC
and depreciated over their respective useful lives. Prior to the
reorganization, China Offshore Oil Research Center, a subsidiary of
CNOOC, provided general research and development services to CNOOC
in connection with CNOOC's oil and gas business.
o we entered into a new general research and development services
agreement with China Offshore Oil Research Center for the provision
of general geophysical exploration services, comprehensive
exploration research services, information technology services and
seismic study. Under this contract, we pay an annual amount of Rmb
110 million to China Offshore Oil Research Center. For the year
ended December 31, 2001, our cost for these research and development
services was Rmb 109 million, compared to Rmb 115 million and Rmb
104 million for the years ended December 31, 1999 and 2000,
respectively. Prior to the reorganization, China Offshore Oil
Research Center, a subsidiary of CNOOC, provided general research
and development services to CNOOC in connection with CNOOC's oil and
gas business.
Our consolidated financial statements reflect the historical costs of
these services prior to the effectiveness of the new agreements described
above and the costs governed by these agreements for the periods after our
October 1999 reorganization. For a description of these agreements, see "Item
7--Major Shareholders and Related Party Transactions."
Revaluation of Assets.
Under our reorganization, our real properties were revalued by an
independent appraiser to reflect their fair market value. The revalued assets
consist of certain land and properties but do not include our oil and gas
properties. The revaluation would not be recorded under U.S. GAAP because real
properties are generally required to be stated at their historical cost under
U.S. GAAP. Furthermore, the effect on future depreciation expense under Hong
Kong GAAP will be excluded from the determination of U.S. GAAP net income.
64
The Repsol Acquisition
On January 18, 2002, we, through a wholly owned subsidiary, entered into
a share purchase agreement to acquire nine subsidiaries of Repsol YPF, S.A.,
or the Repsol subsidiaries. The Repsol subsidiaries together hold a portfolio
of operated and non-operated interests in oil and gas production sharing and
technical assistance contracts in contract areas located offshore and onshore
Indonesia. The assets to be acquired include a 65.3% interest in the South
East Sumatra production sharing contract, a 36.7% interest in the Offshore
Northwest Java production sharing contract, a 25.0% interest in the West
Madura production sharing contract, a 50.0% interest in the Poleng technical
assistance contract and a 16.7% interest in the Blora production sharing
contract.
On April 19, 2002, we announced the completion of the acquisition. The
acquisition has effect from January 1, 2002. We expect to pay US$585.0 million
and a US$6.86 million final oil price adjustment.
Production Sharing Contracts
We perform a significant amount of our oil and gas activities through
production sharing contracts with international oil and gas companies. Under
these production sharing contracts, our foreign partners are required to bear
all exploration costs during the exploration period and such exploration costs
can be recovered according to a production sharing formula after commercial
discoveries are made and production begins. Our production sharing contracts
provide us with the option to take a participating interest of up to 51% in
properties covered by the production sharing contracts which we may exercise
after the foreign partners have made viable commercial discoveries. The
foreign partners retain the remaining participating interests. The development
and operating costs are funded by us and the foreign partners according to our
respective participating interests. Specified amounts of the annual gross
production of petroleum from our producing fields subject to production
sharing contracts are distributed in the following order:
o to the PRC government for the payment of production taxes,
o to the PRC government for the payment of royalties,
o to the parties to recover operating costs incurred,
o to the foreign partner to recover exploration costs,
o to the parties to recover development costs plus interest according
to the parties' respective participating interests, and
o any remaining oil and gas, which is termed as "remainder oil," is
first distributed to the PRC government at a pre-determined ratio,
referred to as the government's "share oil," and then distributed to
us and the foreign partners based on the respective participating
interests.
Before we exercise our option to take a participating interest of up to
51% in a production sharing contract, we do not account for the exploration
costs incurred as these costs were incurred by our foreign partners. After we
exercise the option to take a participating interest in a production sharing
contract, we account for the oil and gas properties using the "proportional
method" under which we recognize our share of development costs, revenues and
expenses from such operations based on our participating interest in the
production sharing contracts. We do not account for the exploration costs
incurred by our foreign partners and their share of development costs and
revenues and expenses from such operations. See note 4 to the consolidated
financial statements.
The foreign partners have the right either to take possession of their
petroleum for sale in the international market or to sell their petroleum to
us for resale in the PRC market. See "Item 4--Information on the
Company--Production Sharing Contracts." For the years ended December 31, 1999,
2000 and 2001, certain of these foreign partners elected to sell approximately
78%, 53% and 57%, respectively, of their oil to us for resale in the PRC
market. Their remaining portions were sold by them in international markets.
Our foreign partners have complete discretion over whether they choose to
sell their share of oil in China or in other international markets and the
amount of their share of oil sold in China. Our decision to purchase our
65
foreign partners' share of oil is based on price negotiations with the
applicable foreign partners and is not regulated in any way by the PRC
government. The PRC government also does not restrict our foreign partners'
ability to sell their share of oil to us. We do not know the specific reasons
for the variations in the percentage of our foreign partners' oil sold to us
for resale in the PRC as such selling decisions are business decisions made
solely by our foreign partners.
As described above, under our production sharing contracts, production of
crude oil and natural gas is allocated among us, our foreign partners and the
PRC government according to a formula contained in the contracts. Under this
formula, a percentage of production under our production sharing contracts is
allocated to the PRC government as its share oil. Share oil is not paid to the
government in respect of our independent oil and gas production. Historically,
the PRC government allowed CNOOC to retain the share oil as government
contributions to its capital. Since our October 1999 reorganization, we have
paid the share oil to CNOOC. In the future we may be required by the PRC
government to make the share oil payments directly to the government.
Accordingly, we have excluded the government's share oil from our net sales in
our historical consolidated financial statements. Because our historical
consolidated financial statements already exclude the government's share oil
from our net sales, we do not expect any future share oil payments to affect
our results of operations or operating cash flows differently than the effects
reflected in our historical consolidated financial statements. For information
regarding the historical amounts of government share oil payable to the
government, see note 5 to the consolidated financial statements.
We have participating interests of less than 100% in our oil and gas
properties subject to production sharing contracts. We account for these
properties using the "proportional method," in which our proportions, based on
our participating interests, of the revenues and expenses from such operations
are included in our consolidated statements of income. We have one associated
company, Shanghai Petroleum and Natural Gas Company Limited, which owns the
Pinghu field, and in which we own a 30% equity interest. Our equity interest
in Shanghai Petroleum and Natural Gas Company Limited is accounted for using
the equity method, under which our proportionate share of Shanghai Petroleum
and Natural Gas Company Limited's net income or loss is included in our
consolidated statements of income as share of income or loss of associated
company.
Our cost structures for production sharing contracts and for independent
operations are different. The total expenses per unit of production under
production sharing contracts are generally higher due to the use of expatriate
staff of the foreign partners, administrative and overhead costs that may be
allocated by the operators and a higher percentage of capital expenditures and
equipment that are imported.
Production from Independent Operations versus Production from Production
Sharing Contracts
Our net production arising from independent operations has increased
steadily as compared to our net production arising from production sharing
contracts since the beginning of 1997. The percentage of our total net
production arising from independent operations was 42.1%, 50.6% and 56.7% for
the years ended December 31, 1999, 2000 and 2001, respectively. This trend
resulted primarily from our cooperation with foreign partners under production
sharing contracts, which provides us with the expertise to exploit our
independent operations more efficiently. As we become familiar with our
foreign partners' technology and expertise, we are able to conduct independent
operations that, in earlier periods, would have required a foreign partner
under a production sharing contract to exploit fully. In future periods, we
anticipate that this trend will continue. In addition, approximately US$970
million of our US$2.1 billion offshore China development budget through 2003
is planned for the development of independent properties. During the year
ended December 31, 2001, 58.8% of our production came from properties operated
by us. During the same period, only 41.2% of our production, or an estimated
37.3% of our revenues, came from properties operated by our foreign partners
under production sharing contracts. Although we will continue to focus on
independent operations, we plan to continue seeking appropriate opportunities
to cooperate with foreign partners under production sharing contracts.
Before we exercise our option to take a participating interest of up to
51% in a production sharing contract, we do not account for the exploration
costs incurred as such costs were incurred by our foreign partners. After we
exercise the option to take a participating interest in a production sharing
contract, we account for the oil and gas properties using the "proportional
method" under which we recognize our share of development costs, revenues and
expenses from such operations based on our participating interest in the
production sharing contracts. We do not
66
account for the exploration costs incurred by our foreign partners and their
share of development costs and revenues and expenses from such operations.
Impairment of Property, Plant and Equipment
We incur charges for impairment of property, plant and equipment when
recorded asset values are not expected to be recoverable through future cash
flows. The charges are included in our consolidated statements of income under
"Other" expenses.
When assessing impairment of our oil and gas properties, we make the
following assumptions and take into account the following factors to arrive at
our estimated total cash flows:
o We assume that production rates will remain constant for our
producing wells unless and until we anticipate a decline in
production ability. For this purpose, we consider only proved
reserves.
o We use test data and other related information to estimate the
anticipated initial production rates for fields that are not
currently producing. We then assume that these initial production
rates will remain constant in the future. For proved reserves not
yet on production, sales are estimated to commence at an anticipated
date.
o When we anticipate a decline in production ability for a field, we
apply an estimated rate of decline for the depletion of the reserves
at that field. We then apply this estimated rate of decline as the
basis for estimating future production rates.
o We assume that our prices for our oil and gas at December 31, 2001
will remain constant, except for known and determinable escalations,
for purposes of our discounted cash flow calculation. For our year
end data in our historical financial statements, we used the
prevailing prices at December 31 of the applicable year.
During the years ended December 31, 1999, 2000 and 2001, we did not have
any forward sales. During the years ended December 31, 1999 and 2000, we did
not incur any impairment charges. See note 3(s) to the consolidated financial
statements. During the year 2001, we incurred an impairment charge of Rmb 99.7
million.
Dismantlement and Site Restoration Allowance
We estimate future dismantlement and site restoration costs for our oil
and gas properties and accrue the costs over the economic lives of the assets
using the unit-of-production method. The dismantlement and site restoration
allowance for the years ended December 31, 1999, 2000 and 2001 was Rmb 177.1
million, Rmb 103.6 million and Rmb 90.4 million, respectively. The accrued
liability is reflected in the company's consolidated balance sheet under
"dismantlement and site restoration allowance." See note 22 to the
consolidated financial statements.
Production Imbalance
We account for oil overlifts and underlifts using the entitlement method,
under which overlifts are recorded as liabilities and underlifts are recorded
as assets. An overlift occurs when we sell more than our percentage interest
of oil from a property subject to a production sharing contract. An underlift
occurs when we sell less than our participating interest of oil from a
property under a production sharing contract.
During the historical periods presented in our consolidated financial
statements, we had no gas imbalances. We believe the production imbalance has
no significant effects on our operations, liquidity or capital resources.
Allowances for Doubtful Accounts
67
We evaluate our accounts receivable by considering the financial
condition of our customers, their past payment history and credit standing and
other specific factors, including whether the accounts receivable in question
are under dispute. We make provisions for accounts receivable when they are
overdue for six months and we are concerned about their collectibility,
following an assessment using the above criteria. For the years ended December
31, 1999, 2000 and 2001, allowances for doubtful accounts were not material as
compared to total operating expenses and did not have a material effect on our
results of operations or financial condition.
Results of Operations
Overview
The following table summarizes the components of our revenues and net
production as percentages of our total revenues and total net production for
the periods indicated:
Year Ended December 31,
-----------------------
1999 2000 2001
---- ---- ----
Revenues:
(Rmb in millions, except percentages and production data)
Oil and gas sales:
Crude oil............................... 9,883 64.5% 17,189 71.0% 15,916 76.4%
Natural gas............................. 1,515 9.9% 1,630 6.7% 1,645 7.9%
------ ------ ------ ------ ------ ------
Total oil and gas sales............. 11,398 74.4% 18,819 77.7% 17,561 84.3%
Marketing revenues.......................... 3,805 24.9% 5,126 21.2% 2,537 12.2%
Other income................................ 108 0.7% 279 1.1% 722 3.5%
------ ------ ------ ------ ------ ------
Total revenues...................... 15,311 100.0% 24,224 100.0% 20,820 100.0%
====== ======= ======= ====== ====== ======
Net production (million BOE):
Crude oil............................... 63.8 83.7% 75.5 86.2% 83.5 87.5%
Natural gas............................. 12.4 16.3% 12.1 13.8% 11.9 12.5%
------ ------ ------ ------ ------ ------
Total net production................ 76.2 100.0% 87.6 100.0% 95.4 100.0%
====== ====== ====== ====== ====== ======
The following table summarizes our oil and gas sales and net production
by production sharing contracts and independent operations for the periods
indicated:
Year ended December 31,
-----------------------
1999 2000 2001
---- ---- ----
(Rmb in millions, except percentages and production data)
Oil and gas sales:
Production sharing contracts................ 6,809 59.7% 9,536 50.7% 7,716 43.9%
Independent operations...................... 4,589 40.3% 9,283 49.3% 9.845 56.1%
------ ------ ------ ------ ------ ------
Total oil and gas sales................. 11,398 100.0% 18,819 100.0% 17,561 100.0%
====== ====== ====== ====== ====== ======
Net production (million BOE):
Production sharing contracts................ 44.1 57.9% 43.3 49.4% 40.2 42.1%
Independent operations...................... 32.1 42.1% 44.3 50.6% 55.2 57.9%
------ ------ ------ ------ ------ ------
Total net production.................... 76.2 100.0% 87.6 100.0% 95.4 100.0%
====== ====== ====== ====== ====== ======
For further information regarding the amounts of our revenues, assets and
certain other financial items that are allocable to our production sharing
contracts versus our independent operations, see note 32 to the consolidated
financial statements.
68
The following table sets forth, for the periods indicated, certain income
and expense items in our consolidated income statements as percentages of
total revenues:
Year ended December 31,
1999 2000 2001
---- ---- ----
Revenues:
Oil and gas sales.................................................. 74.4% 77.7% 84.3%
Marketing revenues................................................. 24.9 21.2 12.2
Other income....................................................... 0.7 1.1 3.5
------ ------ ------
Total revenues................................................ 100.0% 100.0% 100.0%
====== ====== ======
Expenses:
Operating expenses................................................. (12.1)% (8.8)% (11.2%)
Production taxes................................................... (3.8) (4.3) (4.2)
Exploration costs.................................................. (1.6) (2.3) (5.0)
Depreciation, depletion and amortization........................... (15.5) (10.6) (12.3)
Dismantlement and site restoration allowance....................... (1.2) (0.4) (0.4)
Impairment losses related to property, plant and equipment......... -- -- (0.5)
Crude oil and product purchases.................................... (24.4) (21.0) (11.8)
Selling and administrative expenses................................ (3.4) (1.9) (3.0)
Interest, net...................................................... (3.7) (1.0) 1.0
Exchange (loss) gain, net.......................................... (2.8) 1.6 1.1
Other. -- (0.9) (2.5)
------ ------ ------
Total expenses................................................ (68.5)% (49.6)% (48.8%)
------ ------ ------
Share of profit of an associated company................................ 0.1 0.9 0.4
------ ------ ------
Investment income....................................................... -- -- 1.1
------ ------ ------
Non-operating (loss) profit, net........................................ -- (0.8) 0.2
Income before tax....................................................... 31.6 50.5 52.9
Provision for taxation.................................................. (4.7) (8.0) (14.6)
------ ------ ------
Net income ........................................................... 26.9% 42.5% 38.3%
====== ====== ======
Calculation of Revenues
In our consolidated financial statements, we report total revenues, which
consist of oil and gas sales, marketing revenues and other income. Oil and gas
sales represent gross oil and gas sales less royalties and share oil payable
to the PRC government. Marketing revenues represent our sales of oil and gas
that were produced under our production sharing contracts and purchased by us
from the foreign partners under such contracts as well as revenues from the
trading activities of our wholly owned Singapore subsidiary. These amounts are
calculated as follows:
o gross oil and gas sales consist of our percentage interest in total
oil and gas sales, comprised of a 100% interest in our independent
oil and gas properties and of our participating interest in the
properties covered under our production sharing contracts, less an
adjustment for production allocable to foreign partners under our
production sharing contracts as reimbursement for exploration
expenses attributable to our participating interest,
o royalties represent royalties we pay to the PRC government on
production with respect to each of our oil and gas fields. The
amount of the royalties is a varying percentage from 0% up to 12.5%
based on the annual production of the relevant property. We pay
royalties on oil and gas we produce independently and under
production sharing contracts,
o government share oil, which is only paid on oil and gas produced
under production sharing contracts, is calculated as described under
"--Overview--Production Sharing Contracts,"
o marketing revenues represent our sales of our foreign partners' oil
and gas produced under our production sharing contracts and
purchased by us from our foreign partners under such contracts as
well as revenues from the trading of oil and gas purchased from
international oil and gas companies through our wholly owned
Singapore subsidiary. Our cost of purchasing oil and gas from our
foreign
69
partners and from international oil and gas companies is included as
an expense in the income statement in our consolidated financial
statements. Our foreign partners have the right to either take
possession of their oil and gas for sale in the international market
or to sell their oil and gas to us for resale in the PRC market,
o our share of the oil and gas sales of our associated company is not
included in our revenues, but our share of the profit or loss of our
associated company is included in our consolidated statements of
income under "share of (loss) income of associated company,"
o we pay production taxes to the PRC government that are equal to 5%
of oil and gas produced independently and under production sharing
contracts. Until May 1, 2001, we paid an additional 0.5% local
surcharge on the oil and gas produced independently. This surcharge
no longer exists. Our oil and gas sales are not reduced by
production taxes. Production taxes are included in our expenses
under "production taxes;" and
o other income mainly represents project management fees charged to
our foreign partners and handling fees charged to end customers,
which are recognized when the services are rendered.
The following table sets forth, for the periods indicated, oil and gas
sales, royalties and government share oil in our consolidated financial
statements as percentages of gross sales. See note 5 to the consolidated
financial statements.
Year ended December 31,
1999 2000 2001
---- ---- ----
Oil and gas sales................. 89.9% 86.5% 89.3%
Royalties......................... 0.8 1.0 1.4
Government share.................. 9.3 12.5 9.3
------ ----- ------
Gross sales....................... 100.0% 100.0% 100.0%
2001 versus 2000
We had consolidated net income of Rmb 7,957.6 million (US$961.5 million)
in 2001, a decrease of Rmb 2,339.0 million (US$282.6 million), or 22.7 %, from
Rmb 10,296.6 million in 2000. The decrease primarily reflected drops in global
crude oil prices and the change in the enterprise income tax rate. The
preferential enterprise income tax rate enjoyed by our PRC subsidiary ceased
to apply after 2000 and the applicable enterprise income tax rate was adjusted
from the 15% preferential rate to the normal rate of 30% with effect from the
year 2001.
Oil and gas sales for the year 2001 were Rmb 17,560.8 million (US$2,121.7
million), a decrease of Rmb 1,258.5 million (US$152.1 million), or 6.7%, from
Rmb 18,819.3 million in 2000. Due to lower oil prices, our oil and gas sales
from properties already operating prior to 2001 decreased approximately Rmb
3,351.0 million (US$ 404.9 million), which was partially offset by
approximately Rmb 2,093.0 million (US$ 252.9 million) in additional sales
brought on by the commencement of operations at new oil and gas properties in
2001. Our average net realized crude oil price was US$23.34 per barrel in
2001, a decrease of US$4.87, or 17.3%, from US$28.21 per barrel in 2000, due
to decreases in international oil prices. Our average net realized natural gas
price was US$3.08 per thousand cubic feet in 2001, essentially unchanged from
US$3.09 per thousand cubic feet in 2000. Our natural gas prices are determined
by negotiations between us and the buyers based on market conditions,
typically with provisions for annual resets and adjustments which depend on a
basket of crude oil prices, inflation and various other factors. Our net crude
oil and condensate production in 2001 averaged approximately 228,874 barrels
per day, an increase of 22,572 barrels, or 10.9% compared to 206,347 barrels
per day in 2000. The increase in production primarily resulted from the
commencement of production at new oil properties during 2001, including
Suizhong 36-1 (phase II), Qikou 17-2 and Qinghuangdao 32-6. Our net natural
gas production in 2001 averaged 195.0 million cubic feet per day, a decrease
of approximately 2.9 million cubic feet, or 1.5%, from 197.9 million cubic
feet per day in 2000. This decrease was primarily due to the increased thermal
capacity of natural gas produced at Yacheng 13-1, which caused lower
consumption of such natural gas by the contract user of Yacheng 13-1.
70
Other income, consisting primarily of project management fees and
handling fees, was Rmb 721.7 million (US$87.2 million) in 2001, an increase of
Rmb 443.1 million, or 159.0%, compared to Rmb 278.6 million in 2000. The
increase in other income primarily resulted from increases in project
management fees and handling fees for production sharing contract blocks.
Operating expenses for the year 2001 were Rmb 2,329.1 million (US$281.4
million), an increase of Rmb 205.0 million (US$24.8 million), or 9.7%, from
Rmb 2,124.1 million in 2000, primarily due to increased costs associated with
the commencement of productions at new oil and gas properties. On a unit of
production basis, our operating expenses in the year 2001 was Rmb 24.9
(US$3.01) per BOE, compared to Rmb 24.8 (US$2.99) per BOE in 2000.
Production taxes for the year 2001 were Rmb 883.8 million (US$106.8
million), a decrease of Rmb 152.9 million (US$18.5 million), or 14.7%, from
Rmb 1,036.7 million in 2000, The decrease was primarily due to lower sales
revenue caused by significant drops in oil prices.
Exploration costs for the year 2001 were Rmb 1,039.3 million (US$125.6
million), an increase of Rmb 486.4 million (US$58.8 million), or 88.0%, from
Rmb 552.9 million in 2000 primarily due to the higher investment in
significantly increasing exploration work in 2001 and the writing-off of
expenses associated with exploration work on wells for uncertain reserves in
earlier years. Our exploration costs relate principally to our independent
exploration activities, as exploration costs under our production sharing
contracts are funded by our foreign partners. Because we use the successful
efforts method of accounting, our exploration costs do not include the costs
of drilling and equipping successful wells. These amounts are capitalized and
amortized on a unit of production basis. See note 3(f)(i) to the consolidated
financial statements.
Depreciation, depletion and amortization expense for the year 2001 was
Rmb 2,566.9 million (US$310.1 million), a decrease of Rmb 11.0 million (US$1.4
million), or 0.4%, from Rmb 2,577.9 million in 2000. On a unit of production
basis, depreciation, depletion and amortization expense for the year 2001 was
Rmb 27.5 (US$3.32) per BOE, a decrease of Rmb 2.5 (US$0.30), or 8.3%, compared
to Rmb 30.0 (US$3.63) per BOE in 2000. The primary reason for the decrease was
that the increase in proven reserves in certain high-production oil & gas
fields resulted in a decrease in the unit depreciation, depletion and
amortization cost of those fields, thereby leading to the decrease in our
total depreciation, depletion and amortization cost.
Dismantlement and site restoration allowance for the year 2001 was Rmb
90.4 million (US$10.9 million), a decrease of Rmb 13.2 million (US$1.6
million), or 12.7%, from Rmb 103.6 million in 2000. The decrease was due to
full provision of the allowance for certain mature fields in earlier years.
Impairment losses related to oil and gas assets were Rmb 99.7 million
(US$12.0 million), which reflected the estimated impairment resulting from two
oil fields not being expected to fully recover their net book values through
future cash flows.
Marketing revenues for the year 2001 were Rmb 2,537.0 million (US$306.5
million), a decrease of Rmb 2,589.0 million (US$312.8 million), or 50.5%, from
Rmb 5,126.0 million (US$619.3 million) in 2000.
Crude oil and product purchases for the year 2001 were Rmb 2,453.3
million (US$296.4 million), a decrease of Rmb 2,644.5 million (US$319.5
million), or 51.9%, from Rmb 5,097.8 million in 2000. We handle crude oil
sales in China for our foreign partners. Upon their request, we purchase their
share of crude oil for resale in China, since we are one of the only three
companies authorized to market and sell crude oil in the PRC. We do not have
control over our foreign partners' decisions regarding the sale of their share
of production, and therefore have no control over the volume that we may be
asked to handle in any particular period.
Selling and administrative expenses for the year 2001 were Rmb 615.4
million (US$74.4 million), an increase of Rmb 159.4 million (US$19.3 million),
or 35.0%, from Rmb 456.0 million (US$55.1 million) in 2000. On a unit of
production basis, selling and administrative expenses were Rmb 6.6 (US$0.80)
per BOE in 2001, an increase of Rmb 1.3 (US$0.16), or 25% from Rmb 5.3
(US$0.64) per BOE in 2000. The relative increase resulted from a combination
of the following factors: in 2000, selling and administrative expenses were
lower in part due to the recovery of Rmb 57.7 million (US$7.0 million) in
doubtful accounts; in 2001, we made a Rmb 40.0 million
71
provision for staff and workers bonus and welfare funds in accordance with a
resolution of our board of directors, there was an increase of salary and
staff benefits as a result of employee compensation reform; and there was also
an increase of public facilities, office administrative, telecommunication and
travelling expenses as a result of greater business volumes and higher office
rents.
We realized a net interest income of Rmb 201.1 million (US$24.3 million)
for the year 2001, an increase of Rmb 439.5 million (US$53.1 million), or
184.4%, from a net interest expense of Rmb 238.4 million (US$28.8 million) in
2000. This increase was due to an increase in interest income resulting from
significantly higher cash balances after our initial public offering in 2001
and lower interest expenses resulting from lower outstanding balances in
respect of long-term indebtedness.
We experienced an exchange gain of Rmb 235.4 million (US$28.4 million)
for the year 2001, a decrease of Rmb 145.9 million (US$17.6 million) compared
to Rmb 381.3 million (US$46.1 million) in 2000. The exchange gain or loss in
each period mainly represents foreign exchange gains or losses on our Japanese
yen denominated debt resulting from the depreciation or appreciation of
Japanese yen against Renminbi.
Other expenses for the year 2001 were Rmb 517.9 million (US$62.6
million), an increase of Rmb 300.3 million (US$36.3 million) from Rmb 217.6
million (US$26.3 million) in 2000, primarily due to the increase in expenses
related to project management for production sharing contracts and the
provision of services for areas covered by production sharing contracts.
Investment income for 2001 was Rmb 220.7 million (US$26.7 million), which
represented the income generated from investing the unused net proceeds from
our initial public offering in low risk short term money market funds.
Share of profit of associated company for the year 2001 was Rmb 90.0
million (US$10.9 million), a decrease of Rmb 128.3 million (US$15.5 million),
or 58.8%, compared to a gain of Rmb 218.3 million (US$26.4 million) in 2000.
This item reflected our share of profit generated by Shanghai Petroleum and
Natural Gas Company Limited. This company experienced a decrease in profit in
2001 as compared to 2000 primarily due to an increase in its exploration costs
and an increase in its amortization cost resulting from lower exploitable
reserves, as well as a decline in 2001 in the realized price of its
condensate.
Non-operating profit for the year 2001 was Rmb 34.9 million (US$4.2
million), an increase of Rmb 230.9 million (US$27.9 million) from a
non-operating loss of Rmb 196.0 million in 2000, primarily due to the losses
incurred in the disposal of certain assets in 2000.
Provision for taxation for the year 2001 was Rmb 3,048.2 million
(US$368.3 million), an increase of Rmb 1,122.1 million (US$135.6 million), or
58.3%, from Rmb 1,926.1 million (US$232.7 million) in 2000. The primary reason
for the increase was that the period for which our PRC subsidiary enjoyed
preferential enterprise income tax treatment expired after 2000 and the
applicable enterprise income tax rate for our PRC subsidiary was adjusted from
15% to the normal rate of 30% with effect from 2001.
2000 versus 1999
We had consolidated net income of Rmb 10,296.6 million (US$1,243.6
million) in 2000, an increase of Rmb 6,185.2million (US$747.1million), or
150.4 %, from Rmb 4,111.4 million in 1999. The increase primarily reflected
increased oil prices, increased oil production volumes, continuing cost
control measures and exchange gains on foreign currency denominated loans.
Oil and gas sales for the year 2000 were Rmb 18,819.3 million
(US$2,272.9million), an increase of Rmb 7,421.4 million (US$896.3 million), or
65.1%, from Rmb 11,397.9 million in 1999, primarily due to increased oil
prices and increased oil production volumes. Our average net realized crude
oil price was US$28.21 per barrel in 2000, an increase of US$9.3, or 49.2%,
from US$18.91 per barrel in 1999, due to the increase in international oil
prices. Our average net realized natural gas price was US$3.09 per thousand
cubic feet in 2000, an increase of US$0.21, or 7.3%, from US$2.88 per thousand
cubic feet in 1999. Our natural gas prices are determined by negotiations
between us and the buyers based on market conditions, typically with
provisions for annual resets and
72
adjustments which depend on a basket of crude oil prices, inflation and
various other factors. This increase in gas prices resulted primarily from
increased production at fields servicing customers buying our gas under higher
priced contracts. Our net crude oil production in 2000 averaged 206,347barrels
per day, an increase of 31,597 barrels, or 18%, compared to 174,750 barrels
per day in 1999. Our net natural gas production in 2000 averaged 198 million
cubic feet, per day, a decrease of approximately 6.4 million cubic feet, or
3%, from 204.4 million cubic feet per day in 1999. Our net crude oil
production increase primarily resulted from new production including from
fields Weizhou 12-1, Jinzhou 9-3, Qikou 17-2 and Huizhou 26-1N, and a
reduction in production under production sharing contracts allocated to
reimbursement of exploration expenses of foreign partners in the Huizhou and
Xijiang oil fields, the effects of which were partially offset by declines in
production in some mature fields, including Lufeng 13-1, and shutdowns for
repair and maintenance at Lufeng 22-1. Our net production from independently
owned and operated fields in 2000 averaged 122,120 BOE per day, an increase of
34,120 BOE, or 39%, compared to 88,000 BOE per day in 1999. Our net production
from fields covered by production sharing contracts in 2000 averaged 117,218
BOE per day, an decrease of 3,592 BOE, or 3 %, compared to 120,810 BOE per day
in 1999.
Other income, consisting primarily of project management fees and
handling fees, was Rmb 278.6 million (US$33.6 million) in 2000, an increase of
Rmb 170.3 million, or 157.2%, compared to Rmb 108.3 million in 1999. The
increase in other income primarily resulted from income we received from
contracts with our foreign partners under which we facilitate the provision of
construction services for the foreign partners' facilities offshore China.
Operating expenses for the year 2000 were Rmb 2,124.1 million
(US$256.5million), an increase of Rmb 268.8 million (US$32.5 million), or
14.5%, from Rmb 1,855.3 million in 1999, primarily due to increase of new oil
and gas properties commenced production in 2000 and prices of fuel, rental and
services as well as increased well operating costs attributable to older crude
oil producing properties. On a unit of production basis, our operating
expenses increased in the year 2000 was Rmb 24.8 (US$2.99) per BOE maintaining
the same level as of 1999. On a unit of production basis, operating expenses
arising from independently owned and operated fields for the year 2000 were
Rmb 21.3 (US$2.6) per BOE, an increase of Rmb 3.7 (US$0.45) per BOE, or 21%,
compared to Rmb 17.6 in 1999. On a unit of production basis, operating
expenses arising from fields covered by production sharing contracts for the
year 2000 were Rmb 28.1 (US$3.4) per BOE, a decrease of Rmb 1.7(US$0.21) per
BOE, or 5.7% compared to Rmb 29.9 in 1999
Production taxes for the year 2000 were Rmb 1,036.7 million (US$125.2
million), an increase of Rmb 457.8 million (US$55.3 million), or 79.1%, from
Rmb 578.9 million in 1999, due to the increase in crude oil prices and crude
oil production.
Exploration costs for the year 2000 were Rmb 552.9 million (US$66.8
million), an increase of Rmb 306.5 million (US$37.0 million), or 124.4%, from
Rmb 246.4 million in 1999. Our exploration costs relate principally to our
independent exploration activities, as exploration costs under our production
sharing contracts are funded by our foreign partners. These costs in year 2000
consisted principally of dry hole costs and also geology and geophysical
costs, which increased compared to the year 1999 due to a lower drilling
success rate and higher exploration budget. Because we use the successful
efforts method of accounting, our exploration costs do not include the costs
of drilling and equipping successful wells. These amounts are capitalized and
amortized on a unit of production basis.
Depreciation, depletion and amortization expense for the year 2000 was
Rmb 2577.9 million (US$311.3 million), an increase of Rmb 204.5 million
(US$24.7 million), or 8.6%, from Rmb 2,373.4 million in 1999, primarily due to
the growth in crude oil production. Depreciation, depletion and amortization
expense per BOE was Rmb 30.0(US$3.63) a decrease of 3.5% from Rmb 31.8 per BOE
in 1999. On a unit of production basis, depreciation, depletion and
amortization expense arising from independently owned and operated fields for
the year 2000 was Rmb 33.7(US$4.07), an increase of Rmb 7.3 (US$0.88), or 28%,
compared to Rmb 26.4 in 1999. On a unit of production basis, depreciation,
depletion and amortization expense arising from fields covered by production
sharing contracts for the year 2000 was Rmb 26.4 (US$3.18), a decrease of Rmb
9.6 (US$1.16), or 27.0%, compared to Rmb 35.5 in 1999.
Dismantlement and site restoration allowance for the year 2000 was Rmb
103.6 million (US$12.5 million), a decrease of Rmb 73.5 million (US$8.9
million), or 41.5%, from Rmb 177.1 million in 1999, due to full provision of a
number of old fields in early years.
73
Crude oil and product purchases for the year 2000 were Rmb 5,097.8
million (US$615.7 million), an increase of Rmb 1,361.1 million (US$164.4
million), or 36.4%, from Rmb 3,736.7 million in 1999. We handle crude oil
sales in China for our foreign partners. Upon their request, we purchase their
share of crude oil for resale in China, since we are the only company
authorized to market and resell our foreign partners' crude oil in the PRC. We
do not have control over our foreign partners' decisions regarding the sale of
their share of production, and therefore have no control over the volume that
we may be asked to handle in any particular period.
Selling and administrative expenses for the year 2000 were Rmb
456.0million (US$55.1million), a decrease of Rmb 60.5 million (US$7.3
million), or 11.7%, from Rmb 516.5 million in 1999. On a unit of production
basis, selling and administrative expenses were Rmb 5.3 (US$0.64) per BOE, a
decrease of 23.2% from Rmb 6.9 (US$0.83) per BOE in 1999. This decrease
resulted primarily from increase of write-back of doubtful accounts. For
additional information regarding our selling and administrative expenses, see
note 8 to the consolidated financial statements.
Net interest expense for the year 2000 was Rmb 238.4 million (US$28.8
million), a decrease of Rmb 329.6 million, or 58.0%, from Rmb 568.0 million in
1999. This decrease primarily resulted from the increase in interest income
due to higher cash balances and lower interest expenses resulting from lower
outstanding debts. See note 9 to the consolidated financial statements.
We experienced an exchange gain of Rmb 381.3 million (US$46.1 million)
for the year 2000, compared to a loss of Rmb 432.0 million in 1999. The
foreign exchange gain in 2000 primarily represented exchange gains on our
Japanese yen-denominated loans. The foreign exchange loss in 1999 primarily
represented exchange losses on our Japanese yen-denominated loans.
Other expenses for the year 2000 were Rmb 217.6 million (US$26.3
million), an increase of Rmb 212.2 million from Rmb 5.4 million in 1999, due
to the increase of expenses related to project management and construction
services for the foreign partner's activities in offshore China, and disposal
of useless materials.
Share of income of associated company for the year 2000 was Rmb 218.3
million (US$26.4 million), an increase of Rmb 204.7 million (US$24.7 million),
or 1,539%, compared to a gain of Rmb 13.3 million in 1999. The increase
resulted from our 30% share of increased earnings generated by Shanghai
Petroleum and Natural Gas Company Limited, which increase resulted from the
commencement of commercial natural gas production at the Pinghu field in May
1999. We have a 30% equity interest in Shanghai Petroleum and Natural Gas
Company Limited.
Non-operating loss for the year 2000 was Rmb 196.0 million (US$23.7
million), an increase of Rmb 195.1 million (US$23.7million) from non-operating
profit of Rmb 0.9 million in 1999, primarily due to losses from our disposal
of unnecessary equipment.
Provision for taxation for the year 2000 was Rmb 1,926 million (US$232.6
million), an increase of Rmb 1204.2 million (US$145.4 million), or 116.8%,
from Rmb 721.9 million in 1999, primarily due to an increase in taxable
income. In both periods, our provision for taxation reflected a 50% reduction
in PRC enterprise income taxes, which reduction expired on December 31, 2000.
Accordingly, our future PRC enterprise income tax rate will be higher than the
rate reflected in our historical financial statements included in this annual
report.
74
B. LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes cash flows for the periods presented:
Year ended December 31,
-----------------------
1999 2000 2001
---- ----- ----
(Rmb in millions)
Cash provided by (used for):
Operating activities............................................... 8,171.8 14,429.7 14,025.0
Returns on investments and servicing
of finance...................................................... (651.1) (4,391.4) (3,922.6)
Taxation........................................................... (197.5) (880.1) (2,611.5)
Investing activities............................................... (4,442.1) (7,860.6) (11,366.4)
Financing activities............................................... (2,428.1) 620.1 7,472.6
--------- --------- ----------
Net increase in cash and cash equivalents............................... 453.0 1,917.7 3,597.1
Cash Provided by Operations
Cash provided by operations in 2001 decreased Rmb 404.7 million
(US$48.9 million), or 2.8%, to Rmb 14,025.0 million (US$1,694.5 million), from
Rmb 14,429.7 million (US$1,743.4 million) in 2000. The decrease resulted from
a decrease in profit before tax of Rmb 1,216.8 million (US$147.0 million), a
decrease in net interest expenses of Rmb 439.5 million (US$53.1 million) and
an increase in short-term investment gains of Rmb 220.7 million (US$26.7
million). The decrease in cash flow was partly offset by a non-cash write off
of exploration dry hole expenses and disposal of fixed assets of Rmb 456.8
(US$55.2 million), non-cash impairment losses related to oil and gas assets of
Rmb 99.7 million (US$12.0 million), a decrease in share of profit of an
associated company of Rmb 128.3 million (US$15.5 million) and a decrease in
unrealized foreign exchange gain of Rmb 62.9 million (US$7.6 million).
In addition, our operating cash flow was favorably affected by a net
decrease in working capital. The decrease in working capital resulted from an
increase of Rmb 267.7 million (US$32.3 million) in accounts payable and
accrued liabilities and a decrease of Rmb 314.9 million (US$38.0 million) in
accounts receivable and other current assets.
We had a working capital surplus of Rmb 15,638.5 million (US$1,889.5
million) in 2001, an increase of Rmb 14,934.3 million (US$1,804.4 million),
compared to Rmb 704.2 million (US$85.1 million) in 2000 and a working capital
deficit of Rmb 4,189.7 million in 1999. The increase mainly resulted from
proceeds of Rmb 10,101.6 million (US$1,220.5 million) received from our
initial public offering in February 2001, a decrease of Rmb 3,397.3 million
(US$410.5 million) in dividends payable and a decrease of Rmb 1,657.0 million
(US$200.2 million) in retirement funds payable to our parent company. This
increase was partially offset by an increase of Rmb 404.8 million (US$48.9
million) in accounts payable and accrued liabilities, an increase of Rmb 234.3
million (US$28.3 million) in current portion of long term bank loans and a
decrease of Rmb 274.5 million (US$33.2 million) in accounts receivable and
other receivable amounts.
Cash provided by operations in 2000 increased Rmb 6,257.9 million
(US$756.1 million), or 76.6%, to Rmb 14,429.7 million (US$1,743.4 million),
from Rmb 8,171.8 million (US$987.3 million) in 1999. The increase resulted
primarily from an increase in income before tax of Rmb 7,389.3 million
(US$892.8 million), an increase of unrealized exchange gain of Rmb 726.7
million (US$87.8 million), and an increase of depreciation, depletion and
amortization of expense of Rmb 204.5 million (US$24.7 million) which was
offset by a decrease in dismantlement and site restoration allowance of Rmb
73.5 million, and an increase in unreceived share of income of associated
company of Rmb 205.0 million.
75
In addition, operating cash flow in 2000 was adversely affected by a net
increase in working capital of Rmb 326.4 million (US$39.4 million). The
increase in working capital resulted from a decrease in accounts payable and
accrued liabilities of Rmb 1,433.9 million, and an increase in other current
assets of Rmb 39.4 million, which was partially offset by a decrease in
accounts receivable of Rmb 1,146.6 million.
The increase of Rmb 4,893.9 million in net working capital from December
31, 1999 to December 31, 2000 mainly resulted from Rmb 3,769.7 million
received from the issuance of new shares in 2000 through private placements
and a decrease in short-term bank loans and current portion of long term bank
loans of Rmb 2,071.8 million, as well as a decrease of accounts payable and
accrued liabilities of Rmb 1,460.3 million. This was partially offset by a
decrease in accounts receivable of Rmb 1,089.0 million and an increase in
dividends payable of Rmb 2,532.0 million and taxes payable of Rmb 767.1
million.
Cash provided by operations in 1999 increased Rmb 3,578.9 million
(US$432.4 million), or 77.9%, to Rmb 8,171.8 million (US$987.3 million), from
Rmb 4,592.9 million in 1998. The increase resulted primarily from an increase
in income before tax of Rmb 2,989.5 million and an increase in depreciation,
depletion and amortization expense of Rmb 419.0 million which was offset in
part by a decrease in net foreign exchange loss of Rmb 59.9 million, and a
decrease in dismantlement and site restoration allowance of Rmb 10.3 million.
In addition, operating cash flow in 1999 was adversely affected by a net
increase in working capital of Rmb 163.9 million. The increase in working
capital resulted from an increase in current assets, including increases in
accounts receivable of Rmb 1,928.5 million, increases in inventories and
supplies of Rmb 124.7 million and increases in other current assets of Rmb 1.8
million, which were offset in part by an increase in accounts payable and
accruals of Rmb 1,583.7 million and increases in other taxes payable of Rmb
307.3 million.
Capital Expenditures and Investments
In line with our use of the successful efforts method of accounting,
total capital expenditures and investments exclude expenditures associated
with unsuccessful exploration and expenditures for disposed oil fields. Our
total capital expenditures were Rmb 4,342.6 million (US$524.7 million) in
2001, a decrease of Rmb 61.4 million (US$7.4 million), or 1.4%, from Rmb 4,404
million (US$532.1 million) in 2000. The capital expenditures in 2001 included
Rmb 311.5 million (US$37.6 million) for capitalized exploration activities and
Rmb 4,013.1 million (US$484.9 million) for development activities. Our
development expenditures in 2001 related principally to the development of
Suizhong 36-1 (Phase II) and Qinhuangdao 32-6 in Bohai Bay and Wenchang 13-1,
Wenchang 13-2 and Dongfang 1-1 in Western South China Sea.
Our total capital expenditures were Rmb 4,404 million (US$532.1 million)
in 2000, an increase of Rmb 334.3 million (US$40.4 million), or 8.2%, from Rmb
4,069.7 million (US$491.5 million) in 1999. Our capital expenditures in 2000
included Rmb 57.0 million for capitalized exploration activities and Rmb
4,176.3 million for development activities. Our 2000 development expenditures
related principally to the development of fields including Suizhong 36-1
(Phase II), Qinhuangdao 32-6, Wenchang 13-1/13-2 and Qikou 17-2.
Our total capital expenditures and investments were Rmb 4,069.7 million
(US$491.5 million) in 1999, an increase of Rmb 493.8 million (US$59.6
million), or 13.8%, from Rmb 3,575.9 million in 1998. Our capital expenditures
in 1999 consisted of Rmb 205.2 million for exploration activities and Rmb
3,822.0 million for development activities. Our 1999 development expenditures
related principally to the development of the second phase of the Suizhong
36-1 field, as well as the development of the Jinzhou 9-3, Weizhou 12-1,
Weizhou 11-4 East and Qinhuangdao 32-6 fields.
Our budgeted total capital expenditures for general exploration and
development activities for the two-year period from 2002 through 2003,
including expenditures for the Repsol acquisition (See "--The Repsol
Acquisition"), is approximately US$3.2 billion, of which approximately US$400
million is budgeted for general exploration activities offshore China,
approximately US$2.1 billion is budgeted for development activities offshore
China, approximately US$50 million is budgeted for development activities
overseas and approximately US$600 million is budgeted for the Repsol
acquisition.
76
The following table sets forth, for our key operating areas in the years
indicated, our budgeted capital expenditures for 2002 and 2003:
Year ended
-----------
December 31,
------------
2002 2003
---- ----
(US$ millions)
Operating Area:
Bohai Bay
Development....................................................... 373 913
Exploration....................................................... 44 20
Western South China Sea:
Development....................................................... 218 193
Exploration....................................................... 112 96
East China Sea:
Development....................................................... 25 123
Exploration....................................................... 27 60
East South China Sea:
Development....................................................... 133 146
Exploration....................................................... 36 24
Overseas:
Development....................................................... 50 --
Acquisition....................................................... 600 --
Total....................................................................... 1,618 1,575
In addition to the budgeted development and exploration expenditures
relating to the oil and gas properties described above, we may make additional
capital expenditures and investments in these periods consistent with our
business strategy, including our natural gas strategy. For example, the above
budgeted amounts do not include any investments we may make in the liquefied
natural gas project located in Guangdong Province, other natural gas projects
and overseas natural gas properties. See "Item 4--Information on the
Company--Business Overview--Business Strategy."
Our ability to maintain and grow our revenues, net income and cash flows
depends upon continued capital spending. We adjust our capital expenditure and
investment budget on an annual basis. Our capital expenditure plans are
subject to a number of risks, contingencies and other factors, some of which
are beyond our control. Therefore actual future capital expenditures and
investments will likely be different from our current planned amounts, and
such differences may be significant. See "Item 3--Key Information--Risk
Factors."
Financing Activities
We had net cash inflows from financing activities of Rmb 7,472.6 million
(US$902.9 million) in 2001. Net cash flows from financing activities in 2001
resulted primarily from Rmb 10,101.6 million (US$1,220.5 million) in proceeds
from our initial public offering, including the exercise of the related
over-allotment option, in early 2001 and short-term bank loans of Rmb 2,500
million (US$302.1 million), offset in part by cash outflows of Rmb 3,497.5
million (US$422.6 million) for repayment of bank loans and Rmb 1,657.0 million
(US$200.2 million) for retirement fund payments to our parent company.
We had net cash inflows from financing activities of Rmb 620.1 million
(US$74.9 million) in 2000. Net cash inflows in 2000 primarily resulted from
net proceeds of Rmb 3,769.7 million (US$455.5 million) from the issuance of
new shares to corporate investors in 2000, offset in part by cash outflows of
Rmb 3,371.7 million (US$407.4 million) for repayment of bank loans.
We had net cash outflows from financing activities of Rmb 2,428.1 million
(US$293.4 million) in 1999. Net cash outflows in 1999 consisted of Rmb 2,143.9
million (US$259.0 million) for the repayment of bank loans, Rmb 471.6 million
(US$57.0 million) for a withdrawal of capital investment by CNOOC and a Rmb
786.4 million (US$95.0 million) decrease in the amount payable to CNOOC. The
return on capital investment to CNOOC in 1999
77
was due to the spin-off of certain assets unrelated to our petroleum
exploration, development and production activities. Cash inflows from
financing activities consisted of a Rmb 159.8 million (US$19.3 million)
increase in the amount due to related companies and Rmb 814.0 million (US$98.3
million) in proceeds from bank loans.
In addition to our capital expenditures and investments, we also have
debt service obligations consisting of principal and interest payments on our
outstanding indebtedness. The following table summarizes the maturities of our
long-term debt outstanding as of December 31, 2001. Other than our guaranteed
bond offering on March 8, 2002, there has been no material long-term debt
incurred after December 31, 2001.
Debt maturities principal only
---------------------------------------------------
Original currency Total Rmb Total US$
---------------------- ----------- -----------
Due within December 31, US$ JPY Rmb equivalents equivalents
---------------------- ------ ------ ---- ----------- -----------
(in millions)
2002 ......................................................... 103.4 5,190.7 49.0 1,231.8 148.8
2003-2005..................................................... 38.9 13,511.5 567.3 1,740.6 210.3
2006-2007..................................................... 100.0 9,007.5 120.0 1,515.1 183.1
Total.................................................... 242.3 27,709.7 736.3 4,487.5 542.2
After our initial public offering on February 22, 2001, we paid Rmb
1,660.0 million (US$200.6 million) to CNOOC in respect of employee retirement
benefits due to retired CNOOC employees with proceeds from the initial public
offering. See "--Employee Benefits."
Prior to the October 1999 reorganization, the businesses transferred to
us by CNOOC were funded by CNOOC. In connection with the reorganization, all
of CNOOC's loans relating to the businesses were transferred to CNOOC China
Limited, our wholly owned PRC subsidiary, and this debt is reflected in our
financial statements included in this annual report. As of December 31, 2001,
our total consolidated debt was Rmb 4,487.5 million (US$542.2 million), of
which Rmb 1,231.8 million (US$148.8 million) was short-term debt, and Rmb
3,255.7 million (US$393.2 million) was long-term debt, excluding the current
portion.
Following the reorganization in October 1999, we paid dividends of Rmb
1,045.4 million (US$126.7 million) in March 2000 and declared a dividend of
Rmb 6,426.4 million (US$776.5 million) on December 20, 2000, which was paid in
full prior to February 1, 2001. On August 27, 2001, we declared a dividend of
Rmb 871.8 million (US$105.3 million), which was paid in full prior to October
31, 2001. On March 27, 2002, our board of directors proposed a final dividend
for 2001 of HK$1,232.1 (US$158.0 million). The proposed final dividend
distribution is subject to our shareholders' approval in the next shareholders
meeting. We intend to declare and pay dividends in the future. The payment and
the amount of any dividends will depend on our results of operations, cash
flows, financial condition, the payment by our subsidiaries of cash dividends
to us, future prospects and other factors which our directors may consider
relevant.
Our distributions to CNOOC for the years ended December 31, 1999 and 2000
accounted for 43.4% and 62.4% of our net income for those years, respectively.
Our distributions to CNOOC for the year ended December 31, 2001, including the
year end dividend announced on March 27, 2002 that remains subject to approval
by our shareholders, accounted for 19.3% of our net income. The amount of
dividends we paid historically prior to becoming a public company in February
2001 is not indicative of the dividends we will pay in the future.
We believe our future cash flows from operations, borrowing capacity and
the proceeds from our initial public offering and guaranteed bond offering
will be sufficient to fund planned capital expenditures and investments, debt
maturities and working capital requirements through at least 2003. We have
built good relationships and credibility with various international and PRC
financial institutions. Several large financial institutions have expressed
interest in supporting our business development, although we have not entered
into any agreements for additional financing with them. However, our ability
to obtain adequate financing to satisfy our capital expenditure and debt
service requirements may be limited by our financial condition and results of
operations and the liquidity of international and domestic financial markets
including the following factors:
78
o Any failure by us to achieve timely rollover, extension or
refinancing of its short-term debt may result in our inability
to meet our obligations in connection with debt service,
accounts payable and/or other liabilities when they become due
and payable.
o Our primary operating subsidiary is a PRC incorporated company.
Therefore, prior to accessing international capital markets, we
will be subject to limitations of various PRC government
authorities, including the State Administration for Foreign
Exchange and the People's Bank of China, depending on the type
of international financing raised. We may also need to obtain
PRC government support for any project involving significant
capital investment in the operations of our PRC subsidiary.
o In addition, financing sources often look to similarly situated
entities when determining whether, and at what rates, to provide
financing. Successful or unsuccessful financings by Hong Kong
and PRC entities similarly situated to us could have an impact
on our ability to obtain external financing.
See "Item 3--Key Information--Risk Factors."
Employee Benefits
All of our full-time employees in the PRC are covered by a
government-regulated pension plan and are entitled to an annual pension at
their retirement dates. The PRC government is responsible for the pension
liabilities to these retired employees under this government pension plan. The
actual pension payable to each retiree is subject to a formula based on the
status of the individual pension account, general salary and inflation
movements. We are required to make annual contributions to the government
pension plan at rates ranging from 9% to 22% of its employees' base salaries.
The related pension costs are expensed as incurred.
In addition to the government pension fund described above, CNOOC also
provided a supplementary pension plan for its retirees, which was terminated
on September 20, 1999 as a result of a general restructuring of our
compensation scheme. The average annual supplementary pension payment was
about Rmb 16,000 per retiree as of June 30, 1999. CNOOC retained all
liabilities for retirement benefits for its employees, both former and
current, who were not transferred to us under the reorganization. As
compensation for CNOOC's retention of liabilities for retirement benefits
payable under the terminated supplementary pension plan to approximately 7,000
retired CNOOC employees who were previously engaged in the oil and gas
business that was transferred to us in the reorganization, we made a one-time
payment to CNOOC of Rmb 1,660.0 million (US$200.6 million) in 2001.
Our retirement expenses attributed to the current government plan in the
respective historical periods are as follows:
Year ended December 31,
-------------------------
1999 2000 2001
---- ---- ----
Rmb Rmb Rmb
(in millions)
Expenses attributable to current government pension plan............................ 12.2 12.8 6.4
Costs related to the terminated supplementary pension were amortized over
the service periods of the retirees. Approximately 1,600 employees retired in
1998 and no employees retired in 1999 prior to our October 1999
reorganization. As there were no retirees during 1999 prior to the
reorganization, and as the supplementary pension plan was terminated prior to
the reorganization, we did not attribute any expenses for the future payment
of benefits under the supplementary pension during the year ended December 31,
1999. There were no expenses attributable to the terminated supplemental
pension plan in 2000 and 2001.
The expenses attributable to mandatory contributions under the current
government pension plan are included in our historical consolidated statements
of income under either operating expenses for our production staff or selling
and administrative expenses for our administrative staff. The expenses
attributable to employee retirement benefits reflected in our historical
financial statements for periods prior to September 1999 were based on the
current government pension plan as well as the supplementary pension plan that
was terminated in September 1999. We expect that, under the current PRC rules
and regulations regarding employee retirement benefits, the future costs
79
of the current government plan will be comparable to our historical costs
subject to customary increases largely in line with salary increases of our
employees.
Holding Company Structure
We are a holding company. Our entire petroleum exploration, development,
production and sales business in the PRC is owned and conducted by CNOOC China
Limited, our wholly foreign owned enterprise in the PRC. Our entire petroleum
exploration, development and production business outside of the PRC is owned
and conducted by CNOOC International Limited, our wholly owned subsidiary
incorporated in the British Virgin Islands. International sales of crude oil
are conducted by China Offshore Oil (Singapore) International Pte. Ltd., our
wholly owned subsidiary incorporated in Singapore. Accordingly, our future
cash flow will consist principally of dividends from our subsidiaries. The
subsidiaries' ability to pay dividends to us is subject to various
restrictions, including legal restrictions in the jurisdictions of
incorporation of our subsidiaries. For example, legal restrictions in the PRC
permit payment of dividends only out of net income determined in accordance
with PRC accounting standards and regulations. In addition, under PRC law,
CNOOC China Limited is required to set aside a portion of its net income each
year to fund certain reserve funds. These reserves are not distributable as
cash dividends.
Deflation
According to the China Statistical Bureau, China experienced an overall
national deflation rate in 1999, 2000 and 2001, as represented by the general
consumer price index, of 1.4%, 0.4% and 0.7%, respectively. The deflation has
not had a significant impact on our results of operations in recent years.
U.S. GAAP Reconciliation
Our consolidated financial statements are prepared in accordance with HK
GAAP, which differ in certain material respects from U.S. GAAP. These
differences relate primarily to the treatment of the dividend of Rmb 1,045.4
million (US$126.3 million) that was paid to CNOOC in March 2000, revaluation
of properties and land use rights performed in connection with the
reorganization, the treatment of impairment of long-lived assets, the
treatment of stock compensation plans and the treatment of unrealized holding
gains from available-for-sale investments in marketable securities. Except for
the accounting treatment of the property revaluation and the recognition of
stock compensation costs and the unrealized holding gains from
available-for-sale investments in marketable securities, there are no material
differences between HK GAAP and U.S. GAAP that affect our net income or
shareholders' equity. The difference in accounting treatment of dividend has
been removed since January 1, 2001 with HK SSAP 9 coming into effect on that
day. See note 36 to the consolidated financial statements.
Taxation
We are subject to income taxes on an entity basis on income arising in or
derived from the tax jurisdiction in which we and each of our subsidiaries are
domiciled and operate. We are not liable for income taxes in Hong Kong as we
currently do not have any assessable income from Hong Kong sources. Pursuant
to a notice issued by the State Administration of Taxation in March 2001, we
will be entitled to all tax benefits conferred by Chinese law to foreign
invested enterprises.
Our PRC subsidiary, absent exemptions, is subject to enterprise income
tax at the rate of 33%. Following the October 1999 reorganization, our PRC
subsidiary became a wholly foreign owned enterprise and accordingly was
exempted from 3% local surcharges, reducing our enterprise income tax rate to
the current rate of 30%. Moreover, entities now comprising our PRC subsidiary
were exempted from enterprise income taxes for two years starting from the
first year of profitable operation in 1996 and were entitled to a 50%
reduction of enterprise income taxes for three years beginning in 1998 and
ending on December 31, 2000. This tax exemption increased the company's
earnings by Rmb 536.4 million and Rmb 1,920.7 million during the years ended
December 31, 1999 and 2000, respectively. Starting from January 1, 2001, the
PRC subsidiary is no longer entitled to the 50% reduction of PRC enterprise
income tax and is currently subject to the 30% enterprise income tax rate. The
PRC enterprise
80
income tax was levied based on taxable income including income from
operations as well as other components of earnings, as determined in
accordance with the generally accepted accounting principles in the PRC, or
PRC GAAP. PRC GAAP differs from HK GAAP in certain aspects, including timing
differences. Deferred taxation was calculated to account for the tax
attributes of the timing differences between PRC GAAP and HK GAAP. Major
timing differences include accelerated amortization allowances for oil and gas
properties, which are offset in part by a dismantlement and site restoration
allowance and a provision for impairment of property, plant and equipment and
write-off of unsuccessful exploratory drillings. As of December 31, 2001, we
had Rmb 1,763.6 million (US$213.1 million) in net deferred tax liabilities
primarily due to these timing differences. See note 10 to the consolidated
financial statements.
Besides income taxes, our PRC subsidiary also pays certain other taxes,
including:
o production taxes equal to 5% of independent production and
production under production sharing contracts and
o business tax of 3% to 5% on other income.
Market Risks
Our primary market risk exposures are to fluctuations in oil and gas
prices, exchange rates and interest rates.
Commodity Price Risks
We are exposed to fluctuations in prices of crude oil and natural gas,
which are commodities whose prices are determined by reference to
international market prices. International oil and gas prices are volatile and
this volatility has a significant effect on our net sales and net income. We
do not hedge market risk resulting from fluctuations in oil and gas prices.
See "--Overview" and "Item 3--Key Information--Risk Factors." Foreign Exchange
Risk
Our foreign exchange exposure gives rise to market risk associated with
exchange rate movements.
We maintain our accounts in Renminbi and most of our revenues and
expenses are denominated in Renminbi. We also have some U.S. dollar revenues
from exports of oil and gas.
In addition, although our domestic sales are denominated in Renminbi, our
domestic oil and gas prices are quoted in U.S. dollars based on international
U.S. dollar oil prices and are billed and paid in Renminbi based on the
Rmb--U.S. dollar exchange rates prevailing at the time of billing.
Accordingly, substantially all of our domestic sales are U.S. dollar "linked."
We are exposed to foreign exchange risk related to our debt because a
substantial portion of our loans are denominated in foreign currencies,
principally U.S. dollars and Japanese yen. Our U.S. dollar denominated loans
totaled the equivalent of Rmb 4,638.1 million (US$560.4 million), Rmb 2,613.4
million (US$315.8 million) and Rmb 2,005.4 million (US$242.3 million) at
December 31, 1999, 2000 and 2001, respectively, representing 51.0%, 45.5% and
44.7%, respectively, of our total loans at those dates. In addition, our
wholly owned subsidiary, CNOOC Finance (2002) Limited, recently completed an
offering of an aggregate principal amount of US$500 million in notes due in
2012. These notes are unconditionally and irrevocably guaranteed by us. Our
yen-denominated loans were JPY 40,739 million, JPY 32,900 million and JPY
27,709.7 million as of December 31, 1999, 2000 and 2001, respectively,
representing 36.3%, 41.5% and 38.9% of the total outstanding loans,
respectively.
Due to the current stable Rmb exchange rate policy and the adequate
foreign exchange reserve held by the PRC government, we think there will be no
substantial risk of Rmb depreciation. On the other hand, our oil and gas
prices are quoted in US Dollars based on international oil and gas prices,
which can help us offset the foreign exchange risk of US Dollar capital
expenditures. So there is actually no exchange risk of conversion Rmb to US
Dollar for our company. As a result, the foreign exchange risk faced by our
company is the yen-denominated loan risk primarily.
81
The company is consistently managing the yen liability dynamically under
the principle of "just hedge, no speculations". Since April of 2000, 94% of
the yen liability is under the exposure. We have entered into two U.S.
dollar-Japanese yen currency swaps relating to a portion of our
yen-denominated debt, one of which was unwound on March 31, 2000. The only
existing cross currency swap occurred at the end of 1995, involving a
yen-denominated loan drawn at the beginning of 1995. The swap price was 95
JPY/US$, while the drawing cost of the loan was 83.6 JPY/US$. As the yen
depreciated by 15% in 2001 and we maintained 94% of our yen liability under
the exposure, we realized a foreign exchange gain of US$28.4 million from this
currency swap which, we believe, indicates successful management of our
yen-denominated debt.
In addition, we are exposed to foreign exchange risk related to our
capital expenditures because a portion of our capital expenditures represent
imported equipment that is purchased in foreign currencies, principally U.S.
dollars. During the years ended December 31, 1999, 2000 and 2001,
approximately 35%, 27% and 16%, respectively, of the company's capital
expenditures were denominated in foreign currencies, principally in U.S.
dollars.
We believe that our U.S. dollar-denominated and U.S. dollar-linked
revenues partially limit our foreign exchange risk. However, any depreciation
in the value of the Renminbi versus the U.S. dollar or Japanese yen could
adversely affect the results of operations and financial condition. This could
include potential increases in the Renminbi cost to us of servicing our
foreign currency debt and the amount of our foreign currency debt as expressed
in Renminbi on our balance sheet. Any increase would result in a foreign
exchange loss that would be reflected as a noncash expense on our income
statement in the year it occurs, an increase in the interest expense on our
foreign currency debt as expressed in Renminbi on our income statement, and an
increase in the Renminbi cost to us of our foreign currency capital
expenditures and other foreign currency expenditures.
Interest Rate Risk
We are also exposed to interest rate risk arising from our short-term and
long-term loans. Upward fluctuations in interest rates increase the cost of
new debt and the interest cost of outstanding floating rate borrowings. A
substantial portion of our borrowings have floating interest rates which are
determined by reference to the London Interbank Offered Rate ("LIBOR") or
floating interest rates quoted by PRC banks.
At the beginning of 2001, the total amounts of foreign currency
denominated floating interest rate and fixed interest rate debt of our company
were US$215.7 million and US$387.9 million respectively. These figures
declined to US$142.3 million and US$310.9 million by the end of 2001
respectively, accounting for 31.4% and 68.6% of the total foreign currency
denominated debt respectively. Of the foreign currency fixed interest rate
debt, 67.8% is denominated in yen and 32.2% is denominated in US Dollars
Our interest expense decreased Rmb 358.4 million (US$43.3 million), or
75.4%, to Rmb 116.6 million (US$14.1 million) in 2001, from Rmb 475.0 million
(US$57.4 million) in 2000. Our interest expense due to floating interest rate
debt decreased by approximately 60% during the same period as a result of the
11 interest rate cuts by the US Federal Reserve in 2001. We believe that we
will not be subject to risks of interest rate hike, since our floating
interest rate debt will be paid off in the next 1.5 years in line with the
payment schedule. We have not swapped any fixed rate debt for floating rate
debt because the interest on such debt has been capitalized and has an average
weighted fixed interest rate of 5.66%, which we believe can be entirely
supported by our oil and gas operations.
We use interest rate swap transactions, from time to time, to adjust our
interest rate exposure when considered appropriate, based on existing and
anticipated market conditions. Our policy is to match the interest payments
under the interest rate swap agreements to the interest rate obligations due
under underlying loan agreements so that the interest rate swaps qualify for
hedge accounting. Interest rate differentials are reflected as an adjustment
to interest expense over the life of the swap agreement.
Our interest rate swaps are entered into with major financial
institutions, thereby minimizing the risk of credit loss.
82
For additional discussions of our market risks, see "Item 3--Key
Information--Risk Factors."
Recent Accounting Pronouncements
United States
SFAS No. 141 "Business Combinations"
In June 2001, Statement of Financial Accounting Standards ("SFAS") No.
141 "Business Combinations" was released. This statement addresses financial
accounting and reporting for business combinations and requires that the
purchase method of accounting to be used for all business combinations
initiated or with the acquisition date after June 30, 2001. The adoption of
this statement is not expected to have a significant effect on our financial
statements.
SFAS No. 143 "Accounting for Asset Retirement Obligations"
On August 15, 2001, SFAS No. 143 "Accounting for Asset Retirement
Obligations" was released and will be effective for the fiscal years beginning
after June 15, 2002. This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived assets. Further, under this statement, the liability
is discounted and accretion expense is recognized using the credit-adjusted
risk-free interest rate in effect when the liability was initially recognized.
According to the existing accounting policies adopted to prepare the
financial statements, we estimate future dismantlement and site restoration
costs for oil and gas properties with reference to the estimates provided from
either internal or external engineers after taking into consideration the
anticipated method of dismantlement and the extent of site restoration
required in accordance with current legislation and industry practice. We
provide for the future dismantlement and site restoration allowance using the
unit of production method over the useful life of the related asset.
Adoption of the statement will likely result in increase in both costs of
assets and total liabilities. We are currently assessing these matters and
have not yet determined whether or the extent to which they will affect the
financial statements.
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets"
In August 2001, SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-lived Assets" was released and will be effective for the fiscal years
beginning after December 15, 2001. This statement retains the requirements of
SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount
of a long-lived asset is not recoverable from its undiscounted cash flows and
(b) measure an impairment loss as the difference between the carrying amount
and fair value of the asset. This statement requires that a long-lived asset
to be abandoned, exchanged for a similar productive asset, or distributed to
owners in a spinoff be considered held and used until it is disposed of. The
accounting model for long-lived assets to be disposed of by sale is used for
all long-lived assets, whether previously held and used or newly acquired.
That accounting model retains the requirement of SFAS No. 121 to measure a
long-lived asset classified as held for sale at the lower of its carrying
amount or fair value less cost to sell and to cease depreciation. Therefore,
discontinued operations are no longer measured on a net realizable value
basis, and future operating losses are no longer recognized before they occur.
The changes in this statement improve financial reporting by requiring that
one accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and by broadening the
presentation of discontinued operations to include more disposal transactions.
The adoption of this statement is not expected to have a significant effect on
our financial statements.
83
Hong Kong
In February 2000, the Hong Kong Society of Accountants (HKSA) issued
Statement of Standard Accounting Practice 14 "Leases" revised (SSAP 14
(revised)). SSAP 14 (revised) is effective for accounting periods beginning on
or after July 1, 2000 and is therefore required to be adopted by us for the
year ending December 31, 2001. SSAP 14 (revised) introduces changes to the way
in which finance leases and operating leases are distinguished, the basis for
recognizing finance income for lessors under finance leases and disclosure
requirements for both lessors and lessees. SSAP 14 (revised) is not expected
to have a significant effect on our financial statements.
In February 2000, the HKSA also issued SSAP 26 "Segmental Reporting"
(SSAP 26). SSAP 26 is effective for accounting periods beginning on or after
January 1, 2001 and is therefore required to be adopted by us for the year
ending December 31, 2001. SSAP 26 requires certain disclosures regarding a
company's business and geographical segments. As SSAP 26 is applicable to
companies whose equity or debt securities are listed or are in the process of
being listed, the issue of guaranteed notes by our subsidiary will require us
to adopt SSAP 26. In August 2001, the HKSA issued Statement of Accounting
Practice 26 "Segment reporting" revised (SSAP 26 (revised)). SSAP 26 (revised)
introduces changes to the components of financial statements. The adoption of
SSAP 26 is not expected to have a significant effect on our financial
statements.
In January 2001, the HKSA issued the following Statements of Standard
Accounting Practice (SSAPs):
o SSAP 9 (Events after the balance sheet date) (revised);
o SSAP 28 (Provisions, contingent liabilities and contingent assets);
o SSAP 29 (Intangible assets);
o SSAP 30 (Business combinations);
o SSAP 31 (Impairment of assets); and
o SSAP 32 (Consolidated financial statements and accounting for
investments in subsidiaries).
The above SSAPs are effective for accounting periods beginning on or
after January 1, 2001 and are therefore required to be adopted by us for the
year ending December 31, 2001.
SSAP 9 (revised) introduces significant changes to when dividends are
recognized in the financial statements. Dividends proposed, approved or
declared after the balance sheet date are required to be recorded in the
period in which they are proposed, approved or declared under SSAP 9
(revised). Previously dividends proposed, approved or declared after the
balance sheet date are recorded in the period to which they relate. The
adoption of SSAP 9 (revised) may have an impact on our financial statements
depending on when dividends are proposed, approved or declared.
SSAP 28 clarifies the rules on when and how to recognize provisions,
contingent liabilities and contingent assets and requires far greater
disclosure than previously required. The adoption of SSAP 28 is not expected
to have a significant effect on our financial statements.
SSAP 29 prescribes accounting principles for the recognition of
intangible assets not dealt with under other SSAPs. SSAP 29 required
intangible assets to be recognized and amortized in financial statements to
the extent that they are identifiable, controllable and future economic
benefits can be foreseen. The adoption of SSAP 29 is not expected to have a
significant effect on our financial statements.
SSAP 30 introduces certain fundamental changes relating to accounting for
the acquisition of net assets and operations of another enterprise and
eliminates the previously allowed practice of charging goodwill directly to
reserves. SSAP 30 is not expected to have a significant effect on our
financial statements.
SSAP 31 prescribes the accounting and disclosure for the impairment of
assets and applies to property, plant and equipment other than investment
properties, goodwill, intangible assets, and investments in subsidiaries,
84
associates and joint ventures. Although the principle of reducing carrying
values if assets were impaired was generally accepted, SSAP 31 sets out a new
methodology to be adopted consistently across the balance sheet for the
non-current assets set out above for identifying if an asset is impaired and
if so, by how much its carrying value should be reduced. The adoption of SSAP
31 is not expected to have a significant effect on our financial statements.
SSAP 32 replaces the existing SSAP 7 (Group accounts) and introduces
certain changes including the requirement for enterprises to use a wider
control-based definition of a subsidiary, as compared to the Hong Kong
Companies Ordinance in determining whether a parent-subsidiary relationship
exists. The adoption of SSAP 32 is not expected to have a significant effect
on our financial statements.
In October 2001, the HKSA issued Statement of Standard Accounting
Practice 33 "Discontinuing operations" (SSAP 33). SSAP 33 is effective for
accounting periods beginning on or after January 1, 2002. Early adoption is
encouraged but not required. SSAP 33 establishes principles for reporting
information about discontinuing operations, thereby enhancing the ability of
users of financial statements to make projections of an enterprise's cash
flows, earnings-generating capacity, and financial position by segregating
information about discontinuing operations from information about continuing
operations. The adoption of SSAP 33 is not expected to have a significant
effect on our financial statements.
In December 2001, the HKSA issued Statements of Standard Accounting
Practice 34 "Employee benefits" (SSAP 34). SSAP 34 is effective for accounting
periods beginning on or after January 1, 2002. Earlier adoption is encouraged
but not required. The objective of SSAP 34 is to prescribe the accounting and
disclosure for employee benefits. SSAP 34 requires an enterprise to recognize
a liability when an employee has provided service in exchange for employee
benefits to be paid in the future, and an expense when the enterprise consumes
the economic benefit arising from service provided by an employee in exchange
for employee benefits. The adoption of SSAP 34 is not expected to have a
significant effect on our financial statements.
85
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
In accordance with Hong Kong law and our articles of association, CNOOC
Limited's affairs are managed by our board of directors. The board of
directors has nine members, including two independent non-executive directors.
The current directors and officers of CNOOC Limited are:
Age as of
----------
Name December 31, 2001 Positions
----- ----------------- ---------
Liucheng Wei 55 Chairman of the Board of Directors and Chief Executive
Officer
Chengyu Fu 50 President, Director and Chief Operating Officer
Longsheng Jiang 56 Director
Shouwei Zhou 50 Director and Executive Vice President
Han Luo 48 Director
Kai Sum Tso 69 Non-executive Director
Will Honeybourne 50 Non-executive Director
Chak Kwong So 56 Independent Non-executive Director
Sung Hong Chiu 55 Independent Non-executive Director
Ke Ru 58 Executive Vice President
Yunshi Cao 56 Senior Vice President, Company Secretary and General Counsel
Mark Qiu 38 Senior Vice President and Chief Financial Officer
Mengfei Wu 46 Senior Vice President
Hua Yang 40 Senior Vice President
Mr. Kai Sum Tso and Mr. Will Honeybourne, our non-executive directors
were appointed in July 2000 and December 2001, respectively. Mr. Longsheng
Jiang and Mr. Han Luo were appointed in December 2000. All other executive
directors and independent non-executive directors were appointed in September
1999.
We have a management team with extensive experience in the oil and gas
industry. As a result of our cooperation with international oil and gas
companies, our management team and staff have had the opportunity to work
closely with our foreign partners both within and outside China. Such
opportunities, in conjunction with our management exchange programs with
foreign partners, have provided valuable training to our personnel in
international management practices. A description of the business experience
and present position of each director and executive officer is provided below.
Executive Directors
Liucheng Wei received a B.S. degree from China Petroleum Institute and a
graduate degree in Business Administration from the Chinese Academy of Social
Sciences. He is a senior economist and has over 30 years' experience in the
oil industry in the PRC. He was appointed as Chairman of the Board of
Directors and Chief Executive Officer of our company in September 1999. Mr.
Wei is also the President of CNOOC, a position he has held since November
1998. From 1993 to 1998, he served as Vice President of CNOOC. He joined CNOOC
in 1982.
Chengyu Fu received a B.S. degree from Northeast Petroleum Institute in
China and a master's degree in petroleum engineering from the University of
Southern California in the United States. He has over 26 years' experience in
the petroleum industry in the PRC. He was appointed as director and Chief
Operating Officer of our company in September 1999 and as President in
December 2000. He is in charge of day-to-day management and administrative
matters. Mr. Fu is also a vice president of CNOOC. In 1999, Mr. Fu was the
General Manager of
86
China Offshore Oil Eastern South China Sea Corporation, a subsidiary of
CNOOC. From 1995 to 1999, he served as Vice President and General Manager of
Xijiang Operations of Phillips China Inc. From 1994 to 1995, he served as
Deputy General Manager of China Offshore Oil Eastern South China Sea
Corporation. He joined CNOOC in 1982.
Longsheng Jiang received a B.S. degree from Beijing Petroleum Institute
in China. He has over 31 years' experience in the oil and gas industry in the
PRC. He was appointed as director of our company in December 2000. From 1982
to 1994, Mr. Jiang served as chief engineer of China Offshore Oil Western
South China Sea Corporation. From 1995 to 1998, he was the general manager of
China Offshore Oil Southern Drilling Company. Mr. Jiang is a Vice President of
CNOOC, a position he has held since 1998. He joined CNOOC in 1982.
Shouwei Zhou received a B.S. degree from Southwest China Petroleum
Institute and is a senior engineer. He was appointed as director and Executive
Vice President of our company in September 1999 in charge of the management
and operation of CNOOC China. Mr. Zhou is also a vice president of CNOOC. From
1994 to 1999, Mr. Zhou was the Deputy Manager of China Offshore Oil Bohai
Production Company, a subsidiary of CNOOC, and has been the President of China
Offshore Oil Bohai Corporation since 1999. He joined CNOOC in 1982.
Han Luo received a doctor's degree from China Petroleum University. He
has over 26 years' experience in the oil industry in the PRC. He was appointed
as director of our company in December 2000. From 1993 to 1999, Mr. Luo served
as Vice President of China Offshore Oil Eastern South China Sea Corporation
and concurrently the chief representative of CNOOC in the CACT operating
group, and Executive Vice President of China Offshore Oil East China Sea
Corporation. In April 1999, he was the general manager of CNOOC
China--Shanghai Branch. Mr. Luo is a vice president of CNOOC, a position he
has held since 2000. He joined CNOOC in 1982.
Non-executive Directors
Kai Sum Tso is the Group Managing Director of Hongkong Electric Co., Ltd.
He was appointed to the board of Hongkong Electric in 1985 and assumed the
current office in 1997. Mr. Tso worked with the Hongkong Electric Group from
1966 to 1981, holding positions of a Chief Project Engineer of the Hongkong
Electric Company Limited and of an Executive Director of Associated Technical
Services Limited. He is also an executive director of Cheung Kong
Infrastructure. He has extensive experience in property development and
business in power generation. He holds a B.S. degree in Engineering from the
University of Hong Kong and is also a Chartered Engineer.
Will Honeybourne is currently Managing Director of First Reserve
Corporation. He joined First Reserve in 1999 and is responsible for deal
origination and investment structuring and monitoring, with a primary focus on
service technology and international markets. He serves on the board of
directors of various First Reserve portfolio companies, currently including
Dresser Inc., CiDRA Corporation, Canadian Crude Separators, Inc., and Destiny
Resource Services Corporation. Prior to joining First Reserve, Mr. Honeybourne
served as Senior Vice President of Western Atlas International, an oilfield
services company. Prior to Western Atlas, he served as President and Chief
Executive Officer of Alberta-based Computalog and in various capacities with
Baker Hughes, including Vice President and General Manager at INTEQ and
President of EXLOG. Born in Great Britain and currently a citizen of the
United States, Mr. Honeybourne holds a BSc. in Oil Technology from Imperial
College, London University.
Independent Non-executive Directors
Chak Kwong So is the Chairman of the board of directors and chief
executive of the MTR Corporation Limited. He has been a Non-Executive Director
of The Hongkong and Shanghai Banking Corporation Limited since January 2000.
Mr. So began his career with the Hong Kong government. He joined the private
sector in 1978, serving in various posts in the securities, finance and
property industries. Mr. So also served as Executive Director of the Hong Kong
Trade Development Council from 1985 to 1992. Mr. So is the President of the
Chartered Institute of Logistics and Transport. He is also a vice president of
the International Association of Public Transport and is the chairman of its
Asia-Pacific Division. He also serves on a number of other committees and
organizations, including the Hong Kong/European Union Business Cooperation
Committee, Independent Commission Against Corruption--Operations Review
Committee, the Employers' Federation of Hong Kong, the Hong Kong Management
Association and the Community Chest of Hong Kong.
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Sung Hong Chiu received an LL.B. degree from the University of Sydney. He
is admitted as a solicitor of the Supreme Court of New South Wales and the
High Court of Australia. He has over 27 years' experience in legal practice
and is a director of a listed company in Australia. Mr. Chiu is the founding
member of the Board of Trustees of the Australian Nursing Home Foundation and
served as the General Secretary of Australian Chinese Community Association of
New South Wales.
Company Secretary
Yunshi Cao is the Company Secretary, the General Counsel and a Senior
Vice President of the Company. He is also the General Counsel and the Director
of the Legal Department of CNOOC, a position he has held since 1999. He joined
CNOOC in 1982. Mr. Cao is a senior economist and licensed lawyer in the PRC.
He has extensive experience in production sharing contracts and over 30 years
experience in the oil industry. He received a B.S. degree from the China
Petroleum Institute and studied law at the Law School of Columbia University.
Senior Management
Ke Ru is the Executive Vice President of our company and is responsible
for our offshore petroleum exploration. Mr. Ru is a geologist, graduated from
China Petroleum Institute and was a Visiting Scholar at the University of
Oklahoma. He has over 30 years' experience in exploration, geophysical and
geological research in China. He joined CNOOC in 1982 and was President of the
Research Institute of China Offshore Oil Western South China Sea Corporation
and Chief Geologist of CNOOC.
Yunshi Cao, Senior Vice President (please refer to Company Secretary).
Mark Qiu is a Senior Vice President and Chief Financial Officer of our
company. Prior to joining our company, Mr. Qiu worked at Salomon Smith Barney
and last served as the Head of Oil and Gas Investment Banking Group Asia.
Prior to that, Mr. Qiu served as a Vice President at ARCO China Inc., a
subsidiary of Atlantic Richfield Corporation (ARCO) and later as a Corporate
Federal Government Relations Director of ARCO in Washington D.C. He was a
Sloan Fellow and received an MBA degree from Massachusetts Institute of
Technology and a doctoral and master degree in Decision Sciences from
University of Texas. Mr. Qiu joined CNOOC in 2001.
Mengfei Wu is a Senior Vice President of our company. He is a senior
economist and holds a master's degree of industrial economics from the
Graduate Institute of China Petroleum Institute. He has over 10 years'
experience in corporate finance. Mr. Wu joined CNOOC in 1988 and was Director
of the Department of Planning and Treasury of CNOOC.
Hua Yang is a Senior Vice President of our company and President of CNOOC
International Limited. He is a senior engineer and is responsible for our
overseas operations. He received his B.S. degree from China Petroleum
Institute. He has over 10 years' experience in petroleum exploration and
production. Mr. Yang joined CNOOC in 1982 and was Acting Director of the
Overseas Department of CNOOC.
B. COMPENSATION OF DIRECTORS AND OFFICERS
Each of the executive directors entered into a service contract with us
for a term of three years made effective as of February 28, 2001, the date on
which our shares commenced trading on The Stock Exchange of Hong Kong Limited,
subject to termination by either party by written notice given not less than
three months prior to the expiration of the end of the initial term or any
subsequent calendar month. Particulars of these contracts are in all material
respects identical except as indicated below:
o the annual salary for Mr. Liucheng Wei (the Chairman of the Board
and Chief Executive Officer), Mr. Chengyu Fu (President and Chief
Operating Officer) and Mr. Shouwei Zhou (Executive Vice President)
during the initial three years shall be HK$2,480,000, HK$1,880,000
and HK$1,680,000, respectively, subject to an annual increase as
determined by the board of directors not exceeding 15% of his then
current salary;
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o the Chairman of the Board and the other executive directors shall be
entitled to a maximum annual paid leave of 30 days and 25 days,
respectively;
o each of the executive directors is entitled to the use of an
apartment as his residence and the use of a car provided free by us
together with certain other benefits and reimbursements;
o the annual salary for each of the other executive directors during
the initial three years shall be HK$388,000, subject to an annual
increase as determined by the board of directors not exceeding 15%
of his then current salary; and
o we may, at our sole discretion, pay an executive director a bonus in
such amount as the board of directors may determine in respect of
each complete financial year during which his appointment subsists.
The aggregate amount of salaries, housing allowances, other allowances
and benefits in kind paid to our executive directors during the years ended
December 31, 1999, 2000 and 2001 was approximately Rmb 1.7 million (US$0.21
million), Rmb 2.5 million (US$0.30 million) and Rmb 8.3 million (US$1.00
million) respectively, while the amount paid to our executive officers for the
same periods was approximately Rmb 670,808 (US$81,049), Rmb 1,251,305
(US$151,186) and Rmb 5.2 million (US$0.63 million) respectively. Under our
pension contribution plan for 2001, we set aside an aggregate amount of Rmb
0.21 million (US$0.025 million) and Rmb 0.36 million (US$0.043 million) for
pension and similar benefits in kind for the executive directors and executive
officers respectively. The executive directors and the executive officers
contributed additional Rmb 51,400 (US$6,210) and Rmb 70,500 (US$8,518)
respectively, to the pension contribution plan for 2001. For further details
regarding employee compensation, see "Item 4--Information on the
Company--Business Overview--Employees and Employee Benefits." For further
details regarding share options granted to our directors, officers and other
employees, see "--Share Ownership" below.
C. BOARD PRACTICE
Audit and other Committees
The audit committee consists of two independent non-executive directors.
Its primary duties are to review and supervise the financial reporting process
and our internal control system.
The compensation committee consists of two independent non-executive
directors and one non-executive director. Its primary duties are to manage our
share option schemes and to formulate our remuneration policy.
International Advisory Board
On October 29, 2001, we announced the establishment of an International
Advisory Board with globally well-respected political figures and corporate
leaders as members. The purpose of the International Advisory Board is to
provide the management with strategic advice on world events and macro issues
that may impact our development. Set forth below is information on the members
of the International Advisory Board.
Name Biographical Information
---- ------------------------
Henry A. Kissinger 56th Secretary of State of the United States and
former Assistant to the President for National
Security Affairs. Born in Germany in May, 1923, he
received his Ph.D. degree from Harvard University in 1954.
Simon Murray Former Executive Chairman of Asia
Pacific for the Deutsche Bank Group. He was
the founder of Davenham Investments, a project
advisory company. He became the Group Managing
Director of Hutchison Whampoa in 1984. He is
currently a Director of a number of companies
that include Hutchison Whampoa, Cheung Kong
Holdings, Tommy Hilfiger in the USA and
Vivendi Universal in France.
89
Edward S. Steinfeld Assistant professor at the MIT Sloan School of
Management. He received both his undergraduate and
doctoral training at Harvard University. A China
specialist, he has conducted extensive firm-level
research in China.
Erwin Schurtenberger Former Ambassador of Switzerland to China, the
Democratic People's Republic of Korea and the
Republic of Mongolia. He has been an independent
business advisor to various European multinationals,
American groups and humanitarian aid organizations
such as Credit Suisse Financial Services, Novartis
and Bunge. He received a Ph.D. degree in Economics
and was trained in political science and philosophy.
Kenneth S. Courtis Managing Director of Goldman Sachs and Vice Chairman of
Goldman Sachs Asia. Professor Courtis has won numerous
prizes and distinctions for his research and is a valued
advisor on international economic, financial and investment
matters. He has published on major international economic,
public policy, investment, and strategy issues and frequently
appears as a commentator on television news programs. Prior to
joining Goldman Sachs, he served as Chief Asia Economist and
Strategy for Deutsche Bank.
D. EMPLOYEES
See "Item 4--Information on the Company--Business Overview--Employees and
Employee Benefits."
E. SHARE OWNERSHIP
On February 4, 2001, we adopted a share option scheme for our senior
management. Under this share option scheme, the compensation committee of our
board of directors will from time to time propose for board approval the
recipient of and number of shares underlying each option grant. Options
granted under this scheme will be exercisable, in whole or in part, in
accordance with the following vesting schedule:
o one-third of the shares underlying the option shall vest on the
first anniversary of the date of the grant;
o one-third of the shares underlying the option shall vest on the
second anniversary of the date of the grant; and
o one-third of the shares underlying the option shall vest on the
third anniversary of the date of the grant.
The scheme provides for issuance of options exercisable for shares
granted under the share option scheme and the pre-global offering share option
scheme not exceeding 10% of the total number of the outstanding shares of the
company, excluding shares issued upon exercise of options granted under the
scheme.
The price for a share payable by a participant upon the exercise of an
option will be determined by our board of directors in its discretion at the
grant date, as long as the price will not be less than a specified minimum.
The minimum price will be the higher of:
o the nominal value of a share;
o the average closing price of the shares on the HKSE as stated in the
HKSE's quotation sheets for the five trading days immediately
preceding the date of grant of the option; and
o the closing price of the shares on the HKSE as stated in the HKSE's
quotation sheets on the date of grant of the option.
On September 1, 2001, the amendments to the relevant provisions of the
Listing Rules of The Stock Exchange of Hong Kong Limited regarding the
requirements of share option schemes of a Hong Kong listed company came
90
into effect. A Hong Kong listed company must comply with the new
provisions of the Listing Rules if it wishes to grant any options after
September 1, 2001.
We have proposed to amend our share option scheme to comply with the new
Listing Rules requirements. A circular setting out the changes to the share
option scheme will be sent to our shareholders. An extraordinary general
meeting will be held in Hong Kong on June 6, 2002 immediately after the
conclusion of our annual general meeting on the same date to consider and, if
thought fit, approve the amendments to the share option scheme.
Options granted prior to September 1, 2001 will be governed by the rules
of the share option scheme adopted on February 4, 2001. The amendments to the
share option scheme will not operate to affect adversely the terms of issue of
the options which have been granted prior to September 1, 2001. No further
options will be granted under the share option scheme adopted on February 4,
2001.
Under the proposed amended share option scheme, our board of directors
may, at their discretion, invite employees, including executive directors of
us or any of our subsidiaries, to take up options to subscribe for shares. The
maximum aggregate number of shares (including those that could be subscribed
for under the pre-global offering share option scheme as described below)
which may be granted shall not exceed 10% of our total issued share capital.
The maximum number of shares which may be granted under the share option
scheme to any individual in any 12 month period up to the next grant will not
exceed 1% of our total issued share capital from time to time.
As at December 31, 2001, options for ordinary shares which have been
granted under the share option scheme were as follows:
Closing Price
of Shares on
August 24, 2001 Exercise Price No. of
Name of Grantee Position Date of Grant (HK$) (HK$) Options
Wei Liucheng Chairman & CEO August 27, 2001 7.30 6.16 500,000
Fu Chengyu Executive Director, August 27, 2001 7.30 6.16 350,000
President & COO
Jiang Longsheng Executive Director August 27, 2001 7.30 6.16 230,000
Zhou Shouwei Executive Director & August 27, 2001 7.30 6.16 350,000
Executive Vice President
Luo Han Executive Director August 27, 2001 7.30 6.16 230,000
Other Employees August 27, 2001 7.30 6.16 7,160,000
We have also adopted a pre-global offering share option scheme. Its
principal terms are the same as the share option scheme in all material
respects except that:
o options for an aggregate of 4,620,000 shares have been granted
to our senior management under the pre-global offering share
option scheme;
o the subscription price of a share in respect of any particular
option granted under the pre-global offering share option scheme
is HK$5.95; and
o options granted under the pre-global offering scheme will be
exercisable, in whole or in part, in accordance with the
following vesting schedule:
o 50% of the shares underlying the option shall vest 18 months
after the date of the grant; and
o 50% of the shares underlying the option shall vest 30 months
after the date of the grant.
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As at December 31, 2001, options for ordinary shares which have been
granted under the pre-global offering share option scheme were as follows:
Exercise Price
Name of Grantee Position Date of Grant (HK$) No. of Options
Wei Liucheng Chairman & CEO March 12, 2001 5.95 500,000
Fu Chengyu Executive Director, March 12, 2001 5.95 350,000
President & COO
Jiang Longsheng Executive Director March 12, 2001 5.95 280,000
Zhou Shouwei Executive Director & March 12, 2001 5.95 280,000
Executive Vice President
Luo Han Executive Director March 12, 2001 5.95 280,000
Other Employees March 12, 2001 5.95 2,930,000
As of December 31, 2001, none of our officers and directors owned 1% or
more of our shares including the shares underlying the stock options granted
as of that date.
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ITEM 7. Major Shareholders and Related Party Transactions
A. MAJOR SHAREHOLDERS
The following table sets forth information regarding the ownership of our
outstanding shares as of April 30, 2002.
Number of
Shares Owned
Shareholder (in millions) Percentage
----------- -------------- -----------
CNOOC 5,800 70.61%
B. RELATED PARTY TRANSACTIONS
Overview
CNOOC indirectly owns or controls an aggregate of 70.61% of our shares as
of April 30, 2002. Accordingly, it is able to exercise all the rights of a
controlling shareholder, including electing our directors and voting to amend
our articles of association. Although CNOOC retains a controlling interest in
our company, the management of our business is our directors' responsibility.
Prior to the reorganization, which became effective as of October 1,
1999, CNOOC and its various subsidiaries and affiliates performed commercial
and administrative functions.
In connection with the reorganization, we have entered into or will enter
into the following agreements with CNOOC:
(a) Reorganization
In September 1999, we entered into a reorganization agreement with CNOOC
which includes mutual indemnities given by CNOOC and us under which CNOOC
indemnifies us in relation to the period before the completion of the
reorganization and we indemnify CNOOC in relation to the period after the
completion of the reorganization against, among other things, any claims
incurred in connection with or arising from the transfer of the assets in the
reorganization and from breach of any provision of the reorganization
agreement. Our indemnity, however, is limited to the total liabilities of
approximately Rmb 14,926 million shown on the balance sheet as of the date
immediately before the completion of the reorganization.
(b) Contracts with foreign petroleum companies
Immediately prior to the reorganization, CNOOC had 37 production sharing
contracts and one geophysical exploration agreement with various international
oil and gas companies. As part of the reorganization, and in preparation for
the global offering, CNOOC has transferred or will transfer to us all of its
rights and obligations under these contracts and future contracts, except
those rights and obligations relating to CNOOC's administrative functions.
However, CNOOC remains and will remain a party to the production sharing
contracts, as required by existing laws and regulations. Following the global
offering, we continue to deal with CNOOC with respect to the performance of
the rights and obligations retained by CNOOC under the production sharing
contracts.
(c) Undertaking
CNOOC provided various undertakings to us. For further details on these
and other undertakings given to us by CNOOC, see "--Undertakings."
(d) Trademark license agreement
CNOOC and CNOOC's affiliate are the respective registered owners of two
"CNOOC" trademarks. Under two non-exclusive license agreements entered into on
September 9, 1999, we have obtained the right to use
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the trademarks for a nominal consideration of Rmb 1,000 for each of the
trademarks. The registration of the trademarks will expire on December 6, 2008
and April 20, 2009, respectively. Each of CNOOC and CNOOC's affiliate
undertakes that so long as CNOOC is our controlling shareholder (as defined in
the listing rules of the Hong Kong Stock Exchange), it will renew the
registration of the trademarks to enable us to continue to use the trademarks
without any additional payment.
(e) Lease agreement in respect of Nanshan Terminal
Under an agreement dated September 9, 1999, among CNOOC, CNOOC's
affiliate and us, CNOOC and CNOOC's affiliate have granted us a right to use
the land and buildings comprising the Nanshan Terminal, Yacheng 13-1 without
any consideration payable to CNOOC or its affiliate by us for a term of 20
years.
(f) Contribution towards pension benefits
As of June 30, 1999, CNOOC had approximately 7,000 retired employees who
previously were engaged in the oil and gas business that was transferred to
us. Under the reorganization, CNOOC agreed to take up the ultimate pension
liabilities of such employees in consideration of the payment of Rmb 1,660.0
million. Following the closing of the global offering, we made a one-time
payment to CNOOC of approximately Rmb 1,660.0 million (US$200.0 million) in
respect of retirement benefits payable to such employees. This liability was
reflected in our consolidated balance sheet as of September 30, 2000. CNOOC
retains all liabilities for retirement benefits to its former and current
employees who were not transferred to us under the reorganization.
(g) Provision of materials, utilities and ancillary services
After the establishment of CNOOC, four PRC subsidiaries were formed to
undertake the exploration and production of oil and natural gas businesses. In
addition, their scope of business included the provision of various facilities
and ancillary services such as the supply of materials for offshore oil and
gas production, medical and employee welfare services, major equipment
maintenance and repair work and the supply of water, electricity and heat.
After the reorganization, these PRC subsidiaries of CNOOC no longer
undertake the exploration and production of oil and natural gas businesses but
continue to hold interests in various properties, including office buildings
and warehouses, and provide facilities and ancillary services to our
subsidiary, CNOOC China Limited, some of which may not be available from
independent third parties or available on comparable terms. Currently, these
PRC subsidiaries of CNOOC only provide facilities and ancillary services to
us. CNOOC China Limited has entered into a materials, utilities and ancillary
services supply agreement with each of the four PRC subsidiaries of CNOOC.
Under this agreement, each of these four PRC subsidiaries will, for a term of
three years from September 9, 1999, provide to CNOOC China Limited various
materials, utilities and ancillary services, including:
o materials for offshore oil and gas production (including cement,
diesel oil, mud, fuels, barite and paint);
o oil and gas production labor services;
o warehousing and storage;
o road transportation services;
o telecommunication and network services;
o wharf services;
o construction services, including the construction of roads, piers,
buildings, plants and embankment;
o major equipment maintenance and repair works;
o medical, child care and social welfare services;
o water, electricity and heat supply;
94
o security and fire services;
o technical training;
o accommodation;
o repair and maintenance of buildings; and
o catering services.
The materials, utilities and ancillary services will be provided at:
o state-prescribed prices, or
o where there is no state-prescribed price, market prices, including
the local or national market prices or the prices at which CNOOC's
affiliates previously provided the relevant materials, utilities and
ancillary services to independent third parties, or
o where neither of the prices mentioned above is applicable, the cost
to CNOOC of providing the relevant materials, utilities and
services, including the cost of sourcing or purchasing from third
parties, plus a margin of not more than 5%, before any applicable
taxes.
The prices, volumes and other terms for the supply of materials,
utilities and ancillary services will be reviewed by the parties annually. If
any of the terms are to be amended, the parties will enter into a supplemental
agreement no later than 60 days prior to the end of the financial year
preceding the financial year in which such amendments are to take effect. If
the parties fail to reach agreement by then, the existing terms of the supply
agreement will continue to apply until the parties agree on the terms of the
supplemental agreement.
The historical costs of the materials, utilities and ancillary services
provided to us during the financial years ended December 31, 1999, 2000 and
2001 were Rmb 618.1 million, Rmb 1,147 million and Rmb 1,103.6 million,
respectively.
(h) Technical services
Since the establishment of CNOOC, a number of specialized companies have
been formed by CNOOC to provide sub-contracting services for CNOOC's offshore
oil and gas production activities. These specialized companies also provided
services to the operators of oil and gas fields under the production sharing
contracts through an open bidding process.
In connection with the reorganization, CNOOC transferred to us the
existing technical services agreement with the specialized companies. After
the transfer, we may terminate any of these agreements by giving 30 days'
written notice to the relevant company. We will continue to use the technical
services provided by CNOOC, including:
o offshore drilling,
o ship tugging, oil tanker transportation and security services,
o well survey, well logging, well cementation and other related
technical services,
o collection of geophysical data, ocean geological prospecting, and
data processing,
o platform fabrication service and maintenance, and
o design, construction, installation and test of offshore and onshore
production facilities.
For the years ended December 31, 1999, 2000 and 2001, the charges for
such technical services payable to these specialized companies were
approximately Rmb 1,068 million, Rmb 1,607 million and Rmb 2,012 million,
respectively. These costs were calculated in accordance with the local market
prices.
95
We expect that our award of any future contract to CNOOC's affiliates for
technical services will be made if, following an open bidding process, the
terms and prices provided by CNOOC's affiliates are more competitive than
those of the other suppliers. In view of the fact that we and CNOOC's
affiliates became separate independent entities after our global offering in
February 2001, the prices for the provision of the technical services may be
higher than the charges paid to CNOOC's affiliates prior to our global
offering.
(i) Research and development services
Under the terms of a general research and development services agreement
dated September 9, 1999, with CNOOC's affiliate, China Offshore Oil Research
Center, we will pay the Center for a term of three years from September 9,
1999, an annual amount of Rmb 110 million, which is calculated on the basis of
the operating expenses of the relevant CNOOC affiliates during the two years
ended December 31, 1998, for the provision of the services, including:
o geophysical exploration services,
o seismic data processing,
o comprehensive exploration research services, and
o information technology services.
We may terminate the agreement by giving three months' written notice to
China Offshore Oil Research Center. The Center undertakes that the number of
working hours by its senior, middle rank and junior staff on services provided
to us under the agreement will not be less than 187,000, 215,000 and 150,000
hours per year, respectively, which is in line with the number of working
hours spent by such staff during the two years ended December 31, 1998. After
the first year, we may request downward adjustment in the light of our
requirements.
For the three years ended December 31, 1999, 2000 and 2001, the costs of
these general research and development services were approximately Rmb 115
million, Rmb 104 million and Rmb 109 million, respectively, representing
approximately 0.7%, 0.4% and 0.5%, respectively, of our total revenues. The
costs in respect of the periods prior to September 9, 1999 were calculated in
accordance with the internal pricing policies of CNOOC and formulated
primarily on the basis of their costs for the periods presented.
We may also use the research and development services provided by the
China Offshore Oil Research Center for the provision of research and
development services for particular projects through an open bidding process.
For the three years ended December 31, 1999, 2000 and 2001, the costs of these
research and development services were approximately Rmb 125 million, Rmb 130
million and Rmb 118 million, respectively, representing approximately 0.8%,
0.5% and 0.6%, respectively, of our total revenues.
(j) Lease and property management agreements
We have entered into lease agreements with CNOOC for various office and
residential premises in China and Singapore with annual aggregate payment
totaling approximately Rmb 55 million.
(k) Sales of crude oil, condensate oil, and liquefied petroleum gas
We may sell crude oil, condensate oil, and liquefied petroleum gas to
CNOOC's affiliates which engage in the downstream petroleum business at the
international market price on normal commercial terms. For the year ended
December 31, 1999, the total amount, based on the market price, which we would
have received from CNOOC's affiliates if this arrangement had been in place
since January 1, 1999 would have been approximately Rmb 117 million (US$14.1
million), representing approximately 0.8% of our total revenues for such
period. For the years ended December 31, 2000 and 2001, the total amounts were
approximately Rmb 548 million (US$66.2 million) and Rmb 1,814 million
(US$216.2 million), respectively, representing approximately 2.9% and 9% of
total revenues for the respective periods.
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The above transactions constitute our connected transactions under the
listing rules of the Hong Kong Stock Exchange for so long as CNOOC remains our
substantial shareholder. Under the listing rules of the Hong Kong Stock
Exchange, we are required, subject to the nature and the value of the
transactions, to disclose and to obtain prior approval of independent
shareholders for each connected party transaction. In the opinion of the
directors, including the independent non-executive directors, the above
connected transactions referred to in paragraphs (g), (h), (i), (j), and (k)
have been or will be entered into in our ordinary course of business and on
normal commercial terms or on terms that are fair and reasonable so far as our
shareholders are concerned and the connected transactions referred to in
paragraphs (a), (b), (c), (d), (e) and (f) have been and will be entered into
on terms that are fair and reasonable so far as our shareholders are
concerned. Because we believe that full disclosure and prior approval of all
of such connected transactions in full compliance with the listing rules would
be impracticable and add additional administrative costs to us, we have
applied to the Hong Kong Stock Exchange for waivers from certain requirements
of the listing rules.
The Hong Kong Stock Exchange has indicated that it will grant a waiver if:
(A) in relation to the connected transactions referred to in paragraphs
(a) to (f), the transactions, and the respective agreements (if any) governing
such transactions, are on terms that are fair and reasonable so far as our
shareholders are concerned, and in relation to the connected transactions
referred to in paragraphs (g) to (k), the transactions, and the respective
agreements (if any) governing such transactions, are:
(i) entered into by us in our ordinary and usual course of
business;
(ii) either on normal commercial terms or, where there is no
available comparison, on terms no less favorable than those
available to independent third parties; and
(iii) on terms that are fair and reasonable so far as our shareholders
are concerned;
(B) brief details of the transactions in each year including the date or
period of the transaction, the parties thereto and a description of their
connected relationship, a brief description of the transaction and the purpose
of the transaction, the total consideration and the terms, and the nature and
extent of the interest of the connected person in the transaction, are
disclosed in our annual report and accounts for the relevant year;
(C) our independent non-executive directors annually review the
transactions and confirm, in our annual report and accounts for the year in
question, that such transactions have been conducted in the manner stated in
condition (A) above and, where applicable, within the limit stated in
condition (E) below;
(D) our auditors carry out review procedures annually on the transactions
and confirm to our directors in writing that the transactions:
(i) received the approval of our directors;
(ii) have been entered into in accordance with the pricing policies
set forth in our financial statements; and
(iii) have been entered into in accordance with the terms of the
agreement governing the transactions or, where there is no
agreement, on terms that are not less favorable than terms
available to independent third parties.
For the purpose of the above review by our auditors, CNOOC has undertaken
to us that it will provide the auditors with access to its accounting records;
(E) the aggregate annual volume of transactions do not exceed the limits
set out below:
The transactions Annual cap on aggregate value of transactions
---------------- ---------------------------------------------
Materials, utilities and ancillary services 10% of our audited consolidated total revenues
supply agreements in the immediate preceding financial year
Technical services in respect of each of the years ending
December 31, 2000, 2001 and 2002, Rmb 2,200
million, Rmb 3,800 million and Rmb 5,300 million,
respectively
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Research and development services for particular in respect of each of the years ending December
projects 31, 2000, 2001 and 2002, Rmb 140 million, Rmb 150
million and Rmb 160 million, respectively
Sales of crude oil, condensate oil and liquefied in respect of each of the years ending December
petroleum gas 31, 2000, 2001 and 2002, 4%, 25% and 38%, respectively,
of our audited consolidated total revenues in the
immediate preceding financial year
The transactions Amounts set out in the relevant agreement
---------------- ------------------------------------------
General research and development services Rmb 110 million
agreement
Lease and management agreements Rmb 55 million
and;
(F) we undertake that if any of the terms of the agreements or
transactions referred to above are altered, or if we enter into any new
agreements with any connected persons (within the meaning of the listing
rules) in the future, or if the limits stated in (E) above are exceeded, we
will comply with the provisions of the listing rules dealing with connected
transactions unless a separate waiver from the Hong Kong Stock Exchange has
been obtained.
(i) Other Transactions
On August 27, 2001, CNOOC China Limited, entered into an agreement with
CNOOC to acquire CNOOC's interest in a joint venture with China Petrochemical
Corporation with respect to certain oil and gas fields in Xihu Trough for a
total consideration of US$45.0 million in cash. Xihu Trough is located in the
East China Sea, 400 kilometers east of Shanghai. We will be the operator of
the property. The acquisition was negotiated on an arm's length basis and
reflected normal commercial terms.
Directors' Interests
Our directors have no interest in any business which competes or might
compete with our businesses.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
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ITEM 8. Financial Information
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See pages F-1 to F-53 following Item 19.
Legal Proceedings
The Company is not a defendant in any material litigation, claim or
arbitration, and we know of no pending or threatened proceeding which would
have a material adverse effect on our financial condition.
Dividend Distribution Policy
We intend to declare and pay dividends in the future. The payment and the
amount of any dividends will depend on our results of operations, cash flows,
financial condition, the payment by our subsidiaries of cash dividends to us,
future prospects and other factors which our directors may consider relevant.
In addition, as our controlling shareholder, CNOOC will be able to influence
our dividend policy. Holders of our shares will be entitled to receive such
dividends declared by our board of directors pro rata according to the amounts
paid up or credited as paid up on the shares. Subject to the factors described
above, we currently intend to pursue a dividend policy consistent with other
international oil and gas exploration and production companies. Based on
current share prices and dividends of international oil and gas exploration
and production companies, we currently intend to target an initial dividend
yield of approximately 1%.
Dividends may be paid only out of our distributable profits as permitted
under Hong Kong law, which does not restrict the payment of dividends to
nonresident holders of our securities. To the extent profits are distributed
as dividends, such portion of profits will not be available to be reinvested
in our operations.
Holders of our ADSs will be entitled to receive dividends, subject to the
terms of the deposit agreement, to the same extent as holders of our shares,
less the fees and expenses payable under the deposit agreement. Cash dividends
will be paid to the depositary in Hong Kong dollars and, will be converted by
the depositary into U.S. dollars and paid to holders of ADSs. Stock dividends,
if any, will be distributed to the depositary and will be distributed by the
depositary, in the form of additional ADSs, to holders of the ADSs.
Following the reorganization of CNOOC and our establishment as a separate
legal entity in October 1999, we paid dividends of Rmb 1,045.4 million
(US$126.3 million) in March 2000 and declared a dividend of Rmb 6,426.4
million (US$776.4 million) on December 20, 2000, which was paid in full prior
to February 1, 2001. On August 27, 2001, we declared a dividend of Rmb 871.8
million (US$105.3 million), which was paid in full prior to October 31, 2001.
On March 27, 2002, our board of directors proposed a final dividend for 2001
of HK$0.15 per share, totaling HK$1,232.1 million (US$158.0 million). The
proposed final dividend distribution is subject to our shareholders' approval
in the next shareholders meeting. We have not declared or paid any other
dividends. The amount of dividends we paid historically prior to our initial
public offering is not indicative of the dividends that we will pay in the
future.
Substantially all our dividend payments result from dividends paid to us
by CNOOC China Limited. CNOOC China Limited must follow the laws and
regulations of the PRC and its articles of association in determining its
dividends. As a wholly foreign owned enterprise in China, CNOOC China has to
provide for a reserve fund and staff and workers' bonus and welfare fund, each
of which is appropriated from net profit after taxation but before dividend
distribution according to the prevailing accounting rules and regulations in
the PRC. CNOOC China is required to allocate at least 10% of its net profit to
the reserve fund until the balance of this fund has reached 50% of its
registered capital. Appropriations to the staff and workers' bonus and welfare
fund, which are determined at the discretion of CNOOC China's directors, are
charged to expense as incurred in the consolidated financial statements, which
were prepared under HK GAAP. None of CNOOC China's contributions to these
statutory funds may be used for dividend purposes.
For the years ended December 31, 1999, 2000 and 2001, CNOOC China Limited
made the following appropriations to the statutory reserves:
99
For the year ended For the year ended For the year ended
------------------- ------------------- ------------------
December 31, 1999 December 31, 2000 December 31, 2001
------------------- ------------------- ------------------
Percentage Rmb Percentage Rmb Percentage Rmb
---------- --- ---------- ----- ---------- ----
of Net Profits (in millions) of Net (in millions) of Net (in millions)
-------------- ------------- ---------- -------------- ---------- -----------
Profits Profits
------- -------
Reserve fund 10% 100.9 10% 847.5 10% 587.0
Staff and workers' bonus and 5% 50.4 -- -- 0.7% 40.0
welfare fund
Prior to our reorganization, CNOOC China was not required to make
contributions to these reserve funds. Because the appropriations for these
funds are determined annually by CNOOC China's board of directors based on
year-end financial statements, there were no appropriations to these funds for
the year ended December 31, 2000.
B. SIGNIFICANT CHANGES
On March 8, 2002, CNOOC Finance (2002) Limited, our wholly-owned
subsidiary successfully issued 10-year global bonds in the aggregate principal
amount of US$500 million with a coupon of 6.375%. The notes, fully guaranteed
by us, were priced at 163 basis points over the benchmark 10-year U.S.
Treasury (with a yield of 4.913%). The notes are rated Baa2 with positive
outlook by Moody's Investors Service and BBB by Standard & Poor's Ratings
Services.
In the first quarter of 2002, we repaid Rmb 1,081.7 million (US$130.7
million) of our long-term debt, which included repayment of Rmb 771.7 million
(US$93.2 million) in principal amount due and prepayment of Rmb 310 million
(US$37.5 million). After consolidation of the bond offering and the repayment
and prepayment, our long-term debt outstanding as of March 31, 2002 was Rmb
7,532.7 million (US$910.1 million).
On April 19, 2002, we announced the completion of the acquisition of nine
subsidiaries of Repsol YPF, S.A. for an aggregate consideration of US$591.86
million. The acquisition has effect from January 1, 2002. See "Item 4 -
Information on the Company - Principal Oil and Gas Regions - Overseas Activity"
and "Item 5 - Operating and Financial Review and Prospects - Operating Results -
The Repsol Acquisition."
100
ITEM 9. THE OFFER AND LISTING
Not applicable, except for Item 9.A.4 and Item 9.C.
The following table sets forth, for the periods indicated, the high and
low closing prices per H Share, as reported on the Stock Exchange of Hong
Kong, and per ADS, as reported on the New York Stock Exchange.
The Stock Exchange of Hong Kong The New York Stock Exchange
------------------------------- ---------------------------
Period High Low High Low
(HK$) (US$)
2001* 8.70 6.00 22.00 15.70
2001 Financial Quarters
1st Quarter*............ 7.30 6.80 18.48 15.70
2nd Quarter............. 8.70 6.20 22.00 16.00
3rd Quarter............. 8.50 7.00 21.75 18.10
4th Quarter............. 8.15 6.90 20.70 17.35
Last six months
November 2001........... 7.80 6.90 20.00 17.67
December 2001........... 7.65 6.90 19.69 17.35
January 2002............ 8.25 7.25 20.75 19.00
February 2002........... 9.00 7.85 22.70 20.05
March 2002.............. 9.95 8.20 25.10 21.39
April 2002.............. 10.70 9.20 26.99 23.60
* We listed our ordinary shares on the Hong Kong Stock Exchange and our ADSs
on the New York Stock Exchange in February 2001.
101
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Incorporated by reference to our registration statement on Form F-1
(Registration No. 333-10862), to which our articles of association was filed
as an exhibit.
C. MATERIAL CONTRACTS
Incorporated by reference to our registration statement on Form F-1
(Registration No. 333-10862), to which our material contracts were filed
as exhibits. For information regarding certain material contracts, see
"Item 7.B - Major Shareholders and Related Party Transactions - Related
Party Transactions."
D. EXCHANGE CONTROLS
We receive substantially all of our revenues in Renminbi. A portion of
such revenues will need to be converted into other currencies to meet our
foreign currency obligations. The level of foreign currency requirements is
generally typical of our foreign currency needs and, based primarily on our
current contractual commitments, we do not expect our cash flow requirements
for foreign currency to increase materially in the near term. However, no
assurances can be given that our needs will not increase significantly as many
factors which determine our needs, such as exchange rates and imported crude
oil prices, are not within our control. We have substantial requirements for
foreign currency, including:
o import of crude oil and other materials;
o debt service on foreign currency denominated debt;
o purchases of imported equipment; and
o payment of any cash dividends declared in respect of the H shares.
The existing foreign exchange regulations have significantly reduced
government foreign exchange controls for transactions under the current
account, including trade and service related foreign exchange transactions and
payment of dividends. We may undertake current account foreign exchange
transactions without prior approval from the State Administration of Foreign
Exchange by producing commercial documents evidencing such transactions,
provided that they are processed through Chinese banks licensed to engage in
foreign exchange transactions. The PRC government has stated publicly that it
intends to make the Renminbi freely convertible in the
102
future. However, we cannot predict whether the PRC government will
continue its existing foreign exchange policy and when the PRC government will
allow free conversion of Renminbi to foreign currency.
Foreign exchange transactions under the capital account, including
principal payments in respect of foreign currency-denominated obligations,
continue to be subject to significant foreign exchange controls and require
the approval of the State Administration of Foreign Exchange. These
limitations could affect our ability to obtain foreign exchange through debt
or equity financing, or to obtain foreign exchange for capital expenditures.
Since 1994, the conversion of Renminbi into Hong Kong and United States
dollars has been based on rates set by the People's Bank of China, which are
set daily based on the previous day's PRC interbank foreign exchange market
rate and current exchange rates on the world financial markets. Although the
Renminbi to US dollar exchange rate has been relatively stable since 1994, we
cannot predict nor give any assurance of its future stability. Fluctuations in
exchange rates may adversely affect the value, translated or converted into US
dollars or Hong Kong dollars, of our net assets, earnings and any declared
dividends. We cannot give any assurance that any future movements in the
exchange rate of the Renminbi against the US dollar and other foreign
currencies will not adversely affect our results of operations and financial
condition. We do not currently hedge exchange rate fluctuations between the
Renminbi and the US dollar or other currencies and currently have no plans to
do so. For further information on our foreign exchange risks, foreign exchange
rates, our hedging activities and our historical foreign currency
requirements, see "Currencies and Exchange Rates" and "Item 5--Operating and
Financial Review and Prospects--Market Risks--Foreign Exchange Rate Risk."
E. TAXATION
The taxation of income and capital gains of holders of our shares or ADSs
is subject to the laws and practices of Hong Kong and of jurisdictions in
which holders of our shares or ADSs are resident or otherwise subject to tax.
The following is a summary of taxation provisions that are anticipated to be
material based on current law and practice, is subject to change and does not
constitute legal or tax advice. The discussion does not deal with all possible
tax consequences relating to an investment in our shares or ADSs. In
particular, the discussion does not address the tax consequences under state,
local and other laws, such as non-Hong Kong and non-U.S. federal laws.
Accordingly, we urge you to consult your tax adviser regarding the tax
consequences of an investment in our shares and ADSs. The discussion is based
upon laws and relevant interpretations in effect as of the date of this annual
report, all of which are subject to changes. There is no reciprocal tax treaty
in effect between Hong Kong and the United States.
Hong Kong
Tax on Dividends
Under the current practices of the Hong Kong Inland Revenue Department,
no tax is payable in Hong Kong in connection with dividends paid by us.
Profits Tax
No tax is imposed in Hong Kong in respect of capital gains from the sale
of property, such as the shares and ADSs. Trading gains from the sale of
property by persons carrying on a trade, profession or business in Hong Kong
where such gains are derived from or arise in Hong Kong from such trade,
profession or business will be chargeable to Hong Kong profits tax which is
currently imposed at the rate of 16% on corporations and at a maximum rate of
15% on individuals. Gains from sales of the shares effected on the Hong Kong
Stock Exchange will be considered to be derived from or arise in Hong Kong.
Liability for Hong Kong profits tax would thus arise in respect of trading
gains from sales of shares or ADSs realized by persons carrying on a business
of trading or dealing in securities in Hong Kong.
Stamp Duty
Hong Kong stamp duty, currently charged at the rate of HK$1.125 per
HK$1,000 or part thereof on the higher of the consideration for or the value
of the shares, will be payable by the purchaser on every purchase and by
103
the seller on every sale of shares. For example, a total of HK$2.25 per
HK$1,000 or part thereof is currently payable on a typical sale and purchase
transaction involving shares. In addition, a fixed duty of HK$5 is currently
payable on any instrument of transfer of shares. The withdrawal of shares upon
the surrender of ADRs, and the issuance of ADRs upon the deposit of shares,
will also attract stamp duty at the rate described above for sale and purchase
transactions unless the withdrawal or deposit does not result in a change in
the beneficial ownership of the shares under Hong Kong law. The issuance of
the ADRs upon the deposit of shares issued directly to the depositary or for
the account of the depositary does not attract stamp duty. No Hong Kong stamp
duty is payable upon the transfer of ADSs outside Hong Kong.
Estate Duty
The shares are Hong Kong property under Hong Kong law, and accordingly
such shares may be subject to estate duty on the death of the beneficial owner
of such shares, regardless of the place of the owner's residence, citizenship
or domicile. We cannot assure you that the Hong Kong Inland Revenue Department
will not treat the ADRs as Hong Kong property that may be subject to estate
duty on the death of the beneficial owner of the ADR even if the ADRs are
located outside Hong Kong at the date of such death. Hong Kong estate duty is
imposed on a progressive scale from 5% to 15%. The rate of and the threshold
for estate duty has, in the past, been adjusted on a fairly regular basis. No
estate duty is payable when the aggregate value of the dutiable estate does
not exceed HK$7.5 million, and the maximum rate of duty of 15% applies when
the aggregate value of the dutiable estate exceeds HK$10.5 million.
United States
Federal Income Tax Considerations
The following is a summary of United States federal income tax
considerations that are anticipated to be material for U.S. Holders, as
defined below. This summary is based upon existing United States federal
income tax law, which is subject to change, possibly with retroactive effect.
This summary does not discuss all aspects of United States federal income
taxation which may be important to particular investors in light of their
individual investment circumstances, such as investors subject to special tax
rules including: partnerships, financial institutions, insurance companies,
broker-dealers, tax-exempt organizations, and, except as described below,
non-U.S. Holders, or to persons that will hold our shares or ADSs as part of a
straddle, hedge, conversion, or constructive sale transaction for United
States federal income tax purposes or that have a functional currency other
than the United States dollar, all of whom may be subject to tax rules that
differ significantly from those summarized below. In addition, this summary
does not discuss any foreign, state, or local tax considerations. This summary
assumes that investors will hold our shares or ADSs as "capital assets"
(generally, property held for investment) under the United States Internal
Revenue Code. Each prospective investor is urged to consult its tax advisor
regarding the United States federal, state, local, and foreign income and
other tax considerations of the purchase, ownership, and disposition of our
shares or ADSs.
For purposes of this summary, an U.S. Holder is a beneficial owner of
shares or ADSs that is for United States federal income tax purposes:
o an individual who is a citizen or resident of the United States;
o a corporation, or other entity that is taxable as a corporation
created in or organized under the laws of the United States or any
State or political subdivision thereof;
o an estate the income of which is includible in gross income for
United States federal income tax purposes regardless of its source;
o a trust the administration of which is subject to the primary
supervision of a United States court and which has one or more
United States persons who have the authority to control all
substantial decisions of the trust; or
o a trust that was in existence on August 20, 1996, was treated as a
United States person, for United States federal income tax purposes,
on the previous day, and elected to continue to be so treated.
104
A beneficial owner of our shares or ADSs that is not a U.S. Holder is
referred to herein as a "Non-U.S. Holder."
A foreign corporation will be treated as a "passive foreign investment
company" (a "PFIC"), for United States federal income tax purposes, if 75% or
more of its gross income consists of certain types of "passive" income or 50%
or more of its assets are passive. Based on our current and projected income,
assets, and activities, we presently believe that we are not a PFIC and do not
anticipate becoming a PFIC. This is, however, a factual determination made on
an annual basis. Because the classification of certain of our interests for
United States federal income tax purposes is uncertain and the PFIC rules are
subject to administrative interpretation, however, no assurance can be given
that we are not or will not be treated as a PFIC. The discussion below under
"U.S. Holders Dividends" and "U.S. Holders Sale or Other Disposition of Shares
or ADSs", assumes that we will not be subject to treatment as a PFIC for
United States federal income tax purposes.
U.S. Holders
For United States federal income tax purposes, a U.S. Holder of an ADS
will be treated as the owner of the proportionate interest of the shares held
by the depositary that is represented by an ADS and evidenced by such ADS.
Accordingly, no gain or loss will be recognized upon the exchange of an ADS
for the holders' proportionate interest in the shares. A U.S. Holder's tax
basis in the withdrawn shares will be the same as the tax basis in the ADS
surrendered therefore, and the holding period in the withdrawn shares will
include the period during which the holder held the surrendered ADS.
Dividends. Any cash distributions paid by us out of our earnings and
profits, as determined under United States federal income tax principles, will
be subject to tax as ordinary dividend income and will be includible in the
gross income of a U.S. Holder upon receipt. Cash distributions paid by us in
excess of our earnings and profits will be treated as a tax-free return of
capital to the extent of the U.S. Holder's adjusted tax basis in our shares or
ADSs, and after that as gain from the sale or exchange of a capital asset.
Dividends paid in Hong Kong dollars will be includible in income in a United
States dollar amount based on the United States dollar to Hong Kong dollar
exchange rate prevailing at the time of receipt of such dividends by the
depositary, in the case of ADSs, or by the U.S. Holder, in the case of shares
held directly by such U.S. Holder. U.S. Holders should consult their tax
advisors regarding the United States federal income tax treatment of any
foreign currency gain or loss recognized on the subsequent conversion of Hong
Kong dollars received as dividends to United States dollars. Dividends
received on shares or ADSs will not be eligible for the dividends received
deduction allowed to corporations.
Dividends received on shares or ADSs will be treated, for United States
federal income tax purposes, as foreign source income. A U.S. Holder may be
eligible, subject to a number of complex limitations, to claim a foreign tax
credit in respect of any foreign withholding taxes imposed on dividends
received on shares or ADSs. U.S. Holders who do not elect to claim a foreign
tax credit for federal income tax withheld may instead claim a deduction, for
United States federal income tax purposes, in respect of such withholdings,
but only for a year in which the U.S. Holder elects to do so for all
creditable foreign income taxes.
In addition, the United States Treasury has expressed concerns that
parties to whom depositary shares are pre-released may be taking actions that
are inconsistent with the claiming of foreign tax credits by the holders of
ADSs. Accordingly, the analysis of the creditability of foreign withholding
taxes could be affected by future actions that may be taken by the United
States Treasury.
Sale or Other Disposition of Shares or ADSs. A U.S. Holder will recognize
capital gain or loss upon the sale or other disposition of shares or ADSs in
an amount equal to the difference between the amount realized upon the
disposition and the U.S. Holder's adjusted tax basis in such shares or ADSs,
as each is determined in U.S. dollars. Any such capital gain or loss will be
long-term if the shares or ADSs have been held for more than one year and will
generally be United States source gain or loss. The claim of a deduction in
respect of a capital loss, for United States federal income tax purposes, may
be subject to limitations. If a U.S. Holder receives Hong Kong dollars for any
such disposition, such U.S. Holder should consult its tax advisor regarding
the United States federal income tax treatment of any foreign currency gain or
loss recognized on the subsequent conversion of the Hong Kong dollars to
United States dollars.
105
PFIC Considerations
If we were to be classified as a PFIC in any taxable year, a U.S. Holder
would be subject to special rules generally intended to reduce or eliminate
any benefits from the deferral of United States federal income tax that a U.S.
Holder could derive from investing in a foreign company that does not
distribute all of its earnings on a current basis. In such event, a U.S.
Holder of the shares or ADSs may be subject to tax at ordinary income tax
rates on (i) any gain recognized on the sales of the shares or ADSs and (ii)
any "excess distribution" paid on the shares or ADSs (generally, a
distribution in excess of 125% of the average annual distributions paid by us
in the three preceding taxable years). In addition, a U.S. Holder may be
subject to an interest charge on such gain or excess distribution. Prospective
investors are urged to consult their tax advisors regarding the potential tax
consequences to them if we are or do become a PFIC, as well as certain
elections that may be available to them to mitigate such consequences.
Non-U.S. Holders
An investment in shares or ADSs by a Non-U.S. Holder will not give rise
to any United States federal income tax consequences unless:
o the dividends received or gain recognized on the sale of the shares
or ADSs by such person is treated as effectively connected with the
conduct of a trade or business by such person in the United States
as determined under United States federal income tax law, or
o in the case of gains recognized on a sale of shares or ADSs by an
individual, such individual is present in the United States for 183
days or more and certain other conditions are met.
In order to avoid back-up withholding on dividend payments made in the
United States, a Non-U.S. Holder of the shares or ADSs may be required to
complete, and provide the payer with, an Internal Revenue Service Form W-8BEN,
or other documentary evidence, certifying that such holder is an exempt
foreign person.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We filed with the Securities and Exchange Commission in Washington, D.C.
a Registration Statement on Form F-1 (Registration No. 333-10862) under the
Securities Act in connection with the ADSs offered in the global offering. The
Registration Statement contains exhibits and schedules. Any statement in this
annual report about any of our contracts or other documents is not necessarily
complete. If the contract or document is filed as an exhibit to the
Registration Statement, the contract or document is deemed to modify the
description contained in this annual report. You must review the exhibits
themselves for a complete description of the contract or documents.
You may inspect and copy our registration statements, including their
exhibits and schedules, and the reports and other information we file with the
Securities and Exchange Commission in accordance with the Exchange Act at the
public reference facilities maintained by the Securities and Exchange
Commission at Judiciary Plaza, 450 Fifth Street, Room 1024, N.W., Washington,
D.C. 20549. You may also inspect the registration statements, including their
exhibits and schedules, at the office of the New York Stock Exchange, Wall
Street, New York, New York 10005. Copies of such material may also be obtained
from the Public Reference Section of the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may
obtain information regarding the Washington D.C. Public Reference Room by
calling the Securities and Exchange Commission at 1-800-SEC-0330 or by
contacting the Securities and Exchange Commission over the internet at its
website at http://www.sec.gov.
I. SUBSIDIARY INFORMATION
Not applicable.
106
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 5--Operating and Financial Review and Prospects--Market Risks."
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
107
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
A. MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITIES HOLDERS
None.
B. USE OF PROCEEDS
As of March 31, 2002, we have used approximately Rmb 6,234.5 million
(US$753.3 million) from the net offering proceeds of our initial public
offering in February 2001 to fund our capital expenditures and investments and
approximately Rmb 1,657 million (US$200.2 million) from the net offering
proceeds to pay to CNOOC in respect of retirement benefits payable to retired
CNOOC employees. The remainder of the proceeds was held in bank deposits in a
separate account as of March 31, 2002, and will be applied to fund our capital
expenditures and investment. None of the payments were direct or indirect
payments to our directors, officers or affiliates.
ITEM 15. RESERVED
ITEM 16. RESERVED
108
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 to F-53 following Item 19.
ITEM 19. EXHIBITS
The following documents are filed as part of this annual report:
1.1 Articles of Association of the Registrant, incorporated by
reference to Exhibit 3.1 to our Registration Statement on Form
F-1 filed with the Securities and Exchange Commission (File
Number: 333-10862).
1.2 Memorandum of Association of the Registrant, incorporated by
reference to Exhibit 3.2 to our Registration Statement on Form
F-1 filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.1 The Asset Swap Agreement dated July 20, 1999 between CNOOC and
Offshore Oil Company Limited, incorporated by reference to
Exhibit 10.1 to our Registration Statement on Form F-1 filed with
the Securities and Exchange Commission (File Number: 333-10862).
4.2 The Asset Allocation Agreement dated July 20, 1999 between CNOOC
and Offshore Oil Company Limited, incorporated by reference to
Exhibit 10.2 to our Registration Statement on Form F-1 filed with
the Securities and Exchange Commission (File Number: 333-10862).
4.3 The Reorganisation Agreement dated September 13, 1999 between
CNOOC, Offshore Oil Company Limited and CNOOC Limited,
incorporated by reference to Exhibit 10.3 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.4 Form of the Equity Transfer Agreement between CNOOC and CNOOC
Limited, incorporated by reference to Exhibit 10.4 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.5 Form of the Transfer Agreement dated October 1, 1999 between
CNOOC and Offshore Oil Company Limited regarding the transfer of
the rights and obligations of CNOOC under the 37 production
sharing contracts and one geophysical exploration agreement,
incorporated by reference to Exhibit 10.5 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.6 Form of Equity Transfer Agreement between China Offshore Oil East
China Sea Corporation and Offshore Oil Company Limited regarding
the transfer of the rights and obligations under Joint Venture
Contract of Shanghai Petroleum and Natural Gas Company Limited
dated July 28, 1992 to Offshore Oil Company Limited, incorporated
by reference to Exhibit 10.6 to our Registration Statement on
Form F-1 filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.7 Transfer Agreement dated September 9, 1999 between CNOOC and
Offshore Oil Company Limited regarding the transfer of the rights
and obligations of CNOOC under the Natural Gas Sale and Purchase
Contract dated December 22, 1992 to Offshore Oil Company Limited,
incorporated by reference to Exhibit 10.7 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
109
4.8 Transfer Agreement dated September 9, 1999 between CNOOC and
Offshore Oil Company Limited regarding the transfer of the rights
and obligations of CNOOC under the Natural Gas Sale and Purchase
Contract dated November 7, 1992 to Offshore Oil Company Limited,
incorporated by reference to Exhibit 10.8 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.9 Transfer Agreement dated September 9, 1999 among CNOOC, Offshore
Oil Company Limited, the four PRC subsidiaries and CNOOC's
affiliates regarding the transfer of the rights and obligations
of the technical services agreements to Offshore Oil Company
Limited, incorporated by reference to Exhibit 10.9 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.10 Nanshan Terminal Leasing Agreement dated September 9, 1999
between CNOOC, Hainan China Oil and Offshore Natural Gas Company
and Offshore Oil Company Limited, incorporated by reference to
Exhibit 10.10 to our Registration Statement on Form F-1 filed
with the Securities and Exchange Commission (File Number:
333-10862).
4.11 Trademark Licence Agreement dated September 9, 1999 between
CNOOC, Offshore Oil Company Limited and CNOOC Limited,
incorporated by reference to Exhibit 10.11 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.12 Trademark Licence Agreement dated September 9, 1999 between China
Offshore Oil Marketing Company, CNOOC Limited and Offshore Oil
Company Limited and CNOOC Limited, incorporated by reference to
Exhibit 10.12 to our Registration Statement on Form F-1 filed
with the Securities and Exchange Commission (File Number:
333-10862).
4.13 Agreement for provision of materials, facilities and auxiliary
services dated September 9, 1999 between China Offshore Oil Bohai
Corporation and Offshore Oil Company Limited, incorporated by
reference to Exhibit 10.13 to our Registration Statement on Form
F-1 filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.14 Agreement for provision of materials, facilities and auxiliary
services dated September 9, 1999 between China Offshore Oil
Eastern South China Sea Corporation and Offshore Oil Company
Limited, incorporated by reference to Exhibit 10.14 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.15 Agreement for provision of materials, facilities and auxiliary
services dated September 9, 1999 between China Offshore Oil
Western South China Sea Corporation and Offshore Oil Company
Limited, incorporated by reference to Exhibit 10.15 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.16 Agreement for provision of materials, facilities and auxiliary
services dated September 9, 1999 between China Offshore Oil East
South China Sea Corporation and Offshore Oil Company Limited,
incorporated by reference to Exhibit 10.16 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.17 General Research and Development Agreement dated September 9,
1999 between China Ocean Oil Research Institute and Offshore Oil
Company Limited, incorporated by reference to Exhibit
10.17 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
110
4.18 Property Leasing Agreement dated September 9, 1999 between Wui
Hai Enterprise Company Limited and Offshore Oil Company Limited
in respect of the office premises at 6th, 7th and 8th Floors,
CNOOC Plaza, No. 6 Dong Zhi Men Wai Xiao Jie, Beijing,
incorporated by reference to Exhibit 10.18 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.19 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil Western South China Sea Corporation and Offshore Oil
Company Limited in respect of the office premises at 1st to 9th
Floors, Nantiao Road, Potou District Zhangjiang, Guangdong,
incorporated by reference to Exhibit 10.19 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.20 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil Bohai Corporation and Offshore Oil Company Limited
in respect of the office premises at 1st to 7th Floors and 9th
Floor, 2-37 He Kou Jie, Tanggu District, Tianjin, incorporated by
reference to Exhibit 10.20 to our Registration Statement on Form
F-1 filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.21 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil East China Sea Corporation and Offshore Oil Company
Limited in respect of the office premises at 20th, 22nd and 23rd
Floors, 583 Ling Ling Road, Shanghai, the PRC, incorporated by
reference to Exhibit 10.21 to our Registration Statement on Form
F-1 filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.22 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil Eastern South China Sea Corporation and Offshore Oil
Company Limited in respect of the office premises at 3rd Floor
and 6th to 11th Floors, 1 Second Industrial Road, Shekou,
Shenzhen, the PRC, incorporated by reference to Exhibit 10.22 to
our Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.23 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil Bohai Corporation and Offshore Oil Company Limited
in respect of the Chengbei Warehouse, Chengbei Road, Tanggu
District, Tianjin City, the PRC, incorporated by reference to
Exhibit 10.23 to our Registration Statement on Form F-1 filed
with the Securities and Exchange Commission (File Number:
333-10862).
4.24 Property Leasing Agreement dated September 9, 1999 between
Overseas Oil & Gas Corporation Ltd. and China Offshore Oil
(Singapore) International Pte. Ltd. in respect of the residential
premises at 10-01 and 17-002 Aquamarine Tower, 50 Bayshore Road,
13-05 Jade Tower, 60 Bayshore Road, Singapore, incorporated by
reference to Exhibit 10.24 to our Registration Statement on Form
F-1 filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.25 Suizhong Pier Agreement dated September 9, 1999 between Offshore
Oil Company Limited and China Offshore Bohai Corporation,
incorporated by reference to Exhibit 10.25 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.26 Form of Novation Agreement among CNOOC, CNOOC China Limited, the
Banks and other financial institution and the Fuji Bank Limited
Hong Kong Branch, as agent, in respect of the transfer of the
US$110 million syndicated loan, incorporated by reference to
Exhibit 10.26 to our Registration Statement on Form F-1 filed
with the Securities and Exchange Commission (File Number:
333-10862).
111
4.27 Form of the Undertaking Agreement between CNOOC and CNOOC
Limited, incorporated by reference to Exhibit 10.27 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.28 Employment Contract between CNOOC Limited and Liucheng Wei
(Service Agreement for Director, incorporated by reference to
Exhibit 10.28 to our Registration Statement on Form F-1 filed
with the Securities and Exchange Commission (File Number:
333-10862).
4.29 Employment Contract between CNOOC Limited and Chengyu Fu (Service
Agreement for Director, incorporated by reference to Exhibit
10.29 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.30 Employment Contract between CNOOC Limited and Shouwei Zhou
(Service Agreement for Director, incorporated by reference to
Exhibit 10.30 to our Registration Statement on Form F-1 filed
with the Securities and Exchange Commission (File Number:
333-10862).
4.31 Form of Pre-Global Offering Share Option Scheme for the Senior
Management of CNOOC Limited, incorporated by reference to Exhibit
10.31 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.32 Form of Share Option Scheme for the Senior Management of CNOOC
Limited, incorporated by reference to Exhibit 10.32 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.33 Subscription Agreement dated March 17, 2000 among CNOOC Limited,
CNOOC (BVI) Limited, Overseas Oil & Gas Corporation, Ltd., et
al., incorporated by reference to Exhibit 10.33 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.34 Subscription Agreement dated May 31, 2000 among CNOOC Limited,
CNOOC (BVI) Limited, Overseas Oil & Gas Corporation, Ltd. and
Hutchison International Limited, incorporated by reference to
Exhibit 10.34 to our Registration Statement on Form F-1 filed
with the Securities and Exchange Commission (File Number:
333-10862).
4.35 Subscription Agreement dated May 31, 2000 among CNOOC Limited,
CNOOC (BVI) Limited, Overseas Oil & Gas Corporation, Ltd. and
Hongkong Electric Holdings Limited, incorporated by reference to
Exhibit 10.35 to our Registration Statement on Form F-1 filed
with the Securities and Exchange Commission (File Number:
333-10862).
4.36 Subscription Agreement dated June 28, 2000 among CNOOC Limited,
CNOOC (BVI) Limited, Overseas Oil & Gas Corporation, Ltd., et
al., incorporated by reference to Exhibit 10.36 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.37 Corporation Placing Agreement dated February 6, 2001 among CNOOC
Limited, China National Offshore Oil Corporation, Shell Eastern
Petroleum (Pte) Limited and Merrill Lynch Far East Limited,
incorporated by reference to Exhibit 10.37 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
8 List of Subsidiaries.
10 Letter from CNOOC Limited dated May 23, 2002 regarding receipt of
certain representations from Arthur Andersen & Co. pursuant to the
requirements of the United States Securities and Exchange
Commission.
112
Signature
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report of its behalf.
CNOOC Limited
/s/ Cao Yunshi
-------------------------
Name: Cao Yunshi
Title: Company Secretary, General Counsel
and Senior Vice President
Date: May 23, 2002
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
INDEX TO FINANCIAL STATEMENTS
Page
CNOOC LIMITED AND ITS SUBSIDIARIES
Report of Independent Public Accountants F-2
Consolidated statements of income for the years ended December 31, 2001, 2000, and
1999 F-3
Consolidated balance sheets as of December 31, 2001 and 2000 F-4
Consolidated statements of recognized gains and losses for the years ended
December 31, 2001, 2000, and 1999 F-5
Consolidated statements of cash flows for the years ended December 31, 2001, 2000,
and 1999 F-6
Notes to the consolidated financial statements F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of CNOOC Limited:
We have audited the accompanying consolidated balance sheets of CNOOC Limited
(established in the Hong Kong Special Administrative Region, the People's
Republic of China) and its subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of income, recognized gains and losses and
cash flows for the years ended December 31, 2001, 2000 and 1999. These
financial statements are the responsibility of the management of CNOOC
Limited. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America and auditing standards established
by the Hong Kong Society of Accountants. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the accompanying consolidated financial statements referred to
above present fairly, in all material respects, the financial positions of
CNOOC Limited and its subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and cash flows for the years ended December 31,
2001, 2000 and 1999 in conformity with accounting principles generally
accepted in Hong Kong ("Hong Kong GAAP").
Hong Kong GAAP does not conform to generally accepted accounting principles in
the United States of America. A description of the significant differences
between those two generally accepted accounting principles and the effect of
those differences on net income and shareholders' equity is set forth in Note
36 to the consolidated financial statements.
ARTHUR ANDERSEN & CO
Certified Public Accountants
Hong Kong
March 27, 2002
F-2
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(All amounts expressed in thousands, except per share and per ADS data)
Notes 1999 2000 2001 2001
------- --------------- -------------- -------------- ---------------
RMB'000 RMB'000 RMB'000 US$'000
Turnover
Oil and gas sales 5, 27 11,397,873 18,819,323 17,560,788 2,121,739
Marketing revenues 6 3,804,367 5,126,015 2,537,032 306,531
Other income 108,347 278,580 721,737 87,202
--------------- -------------- -------------- ---------------
15,310,587 24,223,918 20,819,557 2,515,472
Total revenues --------------- -------------- -------------- ---------------
Expenses
Operating expenses 27 (1,855,309) (2,124,078) (2,329,130) (281,412)
Production taxes 10 (578,878) (1,036,729) (883,768) (106,779)
Exploration costs 27 (246,402) (552,869) (1,039,297) (125,571)
Depreciation, depletion and
amortization (2,373,380) (2,577,882) (2,566,920) (310,142)
Dismantlement and site restoration
allowance 22 (177,090) (103,569) (90,367) (10,918)
Impairment losses related to property,
plant and equipment - - (99,675) (12,043)
Crude oil and product purchases 6 (3,736,671) (5,097,765) (2,453,312) (296,415)
Selling and administrative expenses 8, 27 (516,485) (456,002) (615,389) (74,353)
Interest, net 9, 27 (567,995) (238,380) 201,072 24,294
Exchange (loss) gain, net (431,980) 381,336 235,409 28,443
Other (5,423) (217,599) (517,876) (62,571)
--------------- -------------- -------------- ---------------
(10,489,613) (12,023,537) (10,159,253) (1,227,467)
Total expenses --------------- -------------- -------------- ---------------
Investment income 17 - - 220,650 26,659
--------------- -------------- -------------- ---------------
Share of profit of an associated company 14 13,301 218,326 89,963 10,870
--------------- -------------- -------------- ---------------
Non-operating (loss) income, net (911) (196,031) 34,941 4,222
--------------- -------------- -------------- ---------------
Income before taxation 4,833,364 12,222,676 11,005,858 1,329,756
Provision for taxation 10 (721,925) (1,926,076) (3,048,227) (368,295)
--------------- -------------- -------------- ---------------
Net income 4,111,439 10,296,600 7,957,631 961,461
=============== ============== ============== ===============
Net income per share, basic and diluted 12 RMB 0.69 RMB 1.63 RMB 1.00 US$ 0.12
=============== ============== ============== ===============
Net income per ADS, basic and diluted 12 RMB 13.70 RMB 32.53 RMB 20.04 US$ 2.42
=============== ============== ============== ===============
The accompanying notes are an integral part of these financial statements.
F-3
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
(All amounts expressed in thousands, except for share number and per share data)
Notes 2000 2001 2001
---------- ----------------- --------------- -----------------
ASSETS RMB'000 RMB'000 US$'000
Non-current assets
Property, plant and equipment, net 13, 27 22,654,375 23,827,499 2,878,899
Investment in an associated company 14 471,027 461,990 55,819
----------------- --------------- -----------------
23,125,402 24,289,489 2,934,718
----------------- --------------- -----------------
Current assets
Cash and cash equivalents 2,796,627 6,393,724 772,506
Time deposits with maturities over three months 3,424,512 2,050,000 247,686
Short-term investments 17 300,000 8,895,804 1,074,814
Accounts receivable, net 15 1,916,190 1,194,180 144,284
Inventories and supplies 16 626,864 627,337 75,796
Due from related companies 21 162,688 176,519 21,327
Other current assets 245,122 692,595 83,682
----------------- --------------- -----------------
9,472,003 20,030,159 2,420,095
----------------- --------------- -----------------
Total assets 32,597,405 44,319,648 5,354,813
================= =============== =================
EQUITY AND LIABILITIES
Capital and reserves
Common stock, par value of HK$0.10 each,
15,000,000,000 shares authorized,
6,557,575,755 and 8,214,165,655 shares
issued respectively 23 701,181 876,978 105,959
Reserves 25 15,420,622 32,433,528 3,918,702
----------------- --------------- -----------------
16,121,803 33,310,506 4,024,661
---------------------------------- -----------------
Non-current liabilities
Long-term bank loans 18 4,748,844 3,255,699 393,362
Dismantlement and site restoration allowance 22 1,507,763 1,598,130 193,090
Deferred tax liabilities 10 1,451,220 1,763,637 213,087
---------------------------------- -----------------
7,707,827 6,617,466 799,539
---------------------------------- -----------------
Current liabilities
Current portion of long-term bank loans 18 997,533 1,231,840 148,834
Accounts payable 19 342,249 591,624 71,482
Other payables and accrued liabilities 20 657,656 813,146 98,245
Dividends payable 11 3,397,323 - -
Due to parent company 21 1,782,497 125,493 15,162
Due to related companies 21 132,259 157,823 19,069
Taxes payable 1,458,258 1,471,750 177,821
---------------------------------- -----------------
8,767,775 4,391,676 530,613
----------------- --------------- -----------------
Total liabilities 16,475,602 11,009,142 1,330,152
----------------- --------------- -----------------
Commitments and contingencies 28
Total equity and liabilities 32,597,405 44,319,648 5,354,813
================= ================ ================
The accompanying notes are an integral part of these financial statements.
F-4
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RECOGNIZED GAINS AND LOSSES
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(All amounts expressed in thousands)
1999 2000 2001 2001
----------------- ---------------- ----------------- -----------------
RMB'000 RMB'000 RMB'000 US$'000
Surplus on revaluation of properties 170,598 104,073 - -
Exchange differences on translation of
the financial statements of foreign
entities - (6,350) 702 85
----------------- ---------------- ----------------- -----------------
Net gains not recognized in the income
statement 170,598 97,723 702 85
Net income for the year 4,111,439 10,296,600 7,957,631 961,461
----------------- ---------------- ----------------- -----------------
Total recognized gains and losses 4,282,037 10,394,323 7,958,333 961,546
================= ================ ================= =================
The accompanying notes are an integral part of these financial statements.
F-5
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(All amounts expressed in thousands)
Notes 1999 2000 2001 2001
-------- --------------- ---------------- ---------------- ----------------
RMB'000 RMB'000 RMB'000 US$'000
Net cash inflow from operating activities 31(a) 8,171,846 14,429,703 14,024,982 1,694,534
--------------- ---------------- ----------------- ----------------
Returns on investments and servicing of
finance
Interest received 53,709 163,461 317,706 38,386
Interest paid (704,826) (501,383) (124,422) (15,033)
Short-term investment income received - - 53,641 6,481
Dividends received - 21,000 99,000 11,961
Dividends paid - (4,074,466) (4,268,517) (515,733)
--------------- ---------------- ----------------- ----------------
(651,117) (4,391,388) (3,922,592) (473,938)
--------------- ---------------- ----------------- ----------------
Taxation
PRC income tax paid (182,056) (851,230) (2,584,451) (312,260)
Overseas tax paid (15,454) (28,850) (26,999) (3,262)
--------------- ---------------- ----------------- ----------------
(197,510) (880,080) (2,611,450) (315,522)
--------------- ---------------- ----------------- ----------------
Investing activities
Purchases of property, plant and
equipment (4,069,690) (4,403,968) (4,342,622) (524,687)
Proceeds from disposal of property,
plant and equipment - 27,148 6,313 763
(Increase) Decrease in time deposits
with maturities over three months - (3,424,512) 1,374,512 166,072
Additions of short-term investments - (300,000) (8,699,312) (1,051,073)
Disposals of short-term investments - - 308,506 37,274
(Increase) Decrease in due from
related companies (372,368) 240,726 (13,831) (1,671)
--------------- ---------------- ----------------- ----------------
(4,442,058) (7,860,606) (11,366,434) (1,373,322)
--------------- ---------------- ----------------- ----------------
Net cash inflow (outflow) before financing 2,881,161 1,297,629 (3,875,494) (468,248)
--------------- ---------------- ----------------- ----------------
Financing 31(b)
Proceeds from short-term bank loans 813,965 339,423 2,500,000 302,057
Repayment of bank loans (2,143,892) (3,371,657) (3,497,533) (422,581)
Net proceeds from Private Placements - 3,769,664 - -
Net proceeds from issue of ordinary
shares - - 10,101,564 1,220,497
(Decrease) Increase in due to parent
company (786,412) 47,256 (1,657,004) (200,203)
Increase (Decrease) in due to related
companies 159,844 (164,570) 25,564 3,088
Return of capital to CNOOC (471,560) - - -
--------------- ---------------- ----------------- ----------------
(2,428,055) 620,116 7,472,591 902,858
--------------- ---------------- ----------------- ----------------
Net increase in cash and cash equivalents 453,106 1,917,745 3,597,097 434,610
Cash and cash equivalents, beginning of
year 425,776 878,882 2,796,627 337,896
--------------- ---------------- ----------------- ----------------
Cash and cash equivalents, end of year 878,882 2,796,627 6,393,724 772,506
=============== ================ ================ =================
The accompanying notes are an integral part of these financial statements.
F-6
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in Renminbi unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
CNOOC Limited ("We") was incorporated in the Hong Kong Special Administrative
Region ("Hong Kong"), the People's Republic of China (the "PRC") on August 20,
1999 to hold the interests in the entities now comprising our subsidiaries. We
and our subsidiaries are principally engaged in exploration, development,
production and sales of crude oil, natural gas and other Petroleum.
Prior to our formation, the businesses and operations were carried on by China
National Offshore Oil Corporation ("CNOOC"). All such businesses and
operations were transferred to us pursuant to a reorganization effective on
October 1, 1999, in preparation for the public offering of our shares (the
"Reorganization"). As a result of the Reorganization, CNOOC's interests in
offshore oil and gas exploration, development, production and sales businesses
in and outside of the PRC were transferred to us. CNOOC's assets and
liabilities relating to such businesses in the PRC were transferred to our
wholly owned subsidiary, CNOOC China Limited, a wholly foreign owned
enterprise established in the PRC. CNOOC's interests in offshore oil and gas
businesses outside of the PRC were transferred to our wholly owned
subsidiaries, CNOOC International Limited, a company incorporated in the
British Virgin Islands, and China Offshore Oil (Singapore) International Pte.
Ltd., a company incorporated in Singapore.
F-7
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
As of December 31, 2001, we had direct or indirect interests in the following
principal subsidiaries. All of these entities are private limited companies
and were owned by CNOOC upon their incorporation/establishment except for
CNOOC International Limited which was owned by us upon its incorporation:
Percentage of
Place and date of equity interest
incorporation / attributable Issued and
Name of entity establishment to us paid up capital Principal activities
--------------------- ---------------------- ------------------- ----------------- ----------------------------
Directly held subsidiaries:
CNOOC China Tianjin, the PRC 100% RMB10 billion Offshore petroleum
Limited September 15, exploration, development,
1999 production and sales in
the PRC
CNOOC International British Virgin Islands 100% US$2 Investment holding
Limited August 23, 1999
China Offshore Oil Singapore 100% S$3 million Sales and marketing of
(Singapore) May 14, 1993 petroleum outside of the
International PRC
Pte. Ltd.
Indirectly held subsidiaries*:
Malacca Petroleum Bermuda 100% US$12,000 Investment holding
Limited November 2, 1995
OOGC America, Inc. State of Delaware, 100% US$1,000 Investment holding
United States of
America
September 2, 1997
OOGC Malacca Limited Bermuda 100% US$12,000 Investment holding
November 2, 1995
CNOOC Southeast Asia Bermuda 100% US$12,000 Investment holding
Limited** May 16, 1997
* Indirectly held through CNOOC International Limited.
** Formerly known as OOGC Myanmar Limited
F-8
2. BASIS OF PRESENTATION
Prior to the Reorganization, we and our subsidiaries did not exist as separate
legal entities and our business operations were conducted by CNOOC and its
various affiliates. In connection with the Reorganization, CNOOC's oil and gas
exploration, development, production and sales businesses and operations
conducted both inside and outside of the PRC were transferred to us.
As CNOOC controlled the businesses and operations transferred to us before the
Reorganization and continues to control us after the Reorganization,
accordingly, the transfer of the businesses and operations has been accounted
for as reorganization of companies under common control in a manner similar to
a pooling of interests.
On the basis described above, the financial statements have been prepared to
present our operating results for the year ended December 31, 1999 as if the
businesses and operations had been transferred to us at the beginning of the
year presented. Consequently, the assets, liabilities, revenues and expenses
that are clearly applicable to the businesses and operations transferred to us
are included in the financial statements. For those expenses for which
specific identification method was not practical, the following allocation
basis was adopted:
Basis
--------------------
Salaries Number of employees
Accounting and legal services Number of employees
Advertising expenses Revenues
Training Number of employees
Pension liabilities Number of employees
Rental and depreciation Floor area
Other selling and administrative expenses Number of employees
The employee count, floor area and revenue data used to allocate expenses
represent historical operating statistics that existed during the years that
they were being used to allocate costs. Management believes that the foregoing
is a reasonable basis of estimating what our expenses would have been on a
stand-alone basis prior to the Reorganization.
The financial statements have been prepared in accordance with accounting
principles generally accepted in Hong Kong ("Hong Kong GAAP"). This basis of
accounting differs from that used in the management accounts of CNOOC to
account for the businesses and operations transferred to us. The management
accounts of CNOOC were prepared in accordance with the accounting principles
and the financial regulations applicable to state-owned enterprises
established in the PRC.
As the accompanying consolidated financial statements are in conformity with
Hong Kong GAAP, the significant differences between Hong Kong GAAP and
generally accepted accounting principles in the United States of America ("US
GAAP") are set forth in Note 36.
F-9
3. PRINCIPAL ACCOUNTING POLICIES
(a) Adoption of Statements of Standard Accounting Practice
In the current year, we have adopted, for the first time, the following
Statements of Standard Accounting Practice issued by the Hong Kong Society of
Accountants ("Hong Kong SSAPs"):
Hong Kong SSAP9 (revised) Event after the balance sheet date
Hong Kong SSAP14 (revised) Leases
Hong Kong SSAP26 Segment reporting
Hong Kong SSAP28 Provisions, contingent liabilities and
contingent assets
Hong Kong SSAP29 Intangible assets
Hong Kong SSAP30 Business combinations
Hong Kong SSAP31 Impairment of assets
Hong Kong SSAP32 Consolidated financial statements and
accounting for investments in subsidiaries
In addition to the adoption of the above standards, we have adopted the
consequential changes made to Hong Kong SSAP 10 "Accounting for investments in
associates", Hong Kong SSAP 17 "Property, plant and equipment", Hong Kong SSAP
18 "Revenue" and Hong Kong SSAP 21 "Accounting for interests in joint
ventures".
The impact of adopting the above new Hong Kong SSAPs is not significant and,
accordingly, no prior period adjustment has been made on our financial
statements.
(b) Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
may differ from those estimates.
(c) Basis of consolidation
The consolidated financial statements include the financial statements of us
and our subsidiaries. This control is normally evidenced when we have the
power to govern the financial and operating policies of an enterprise so as to
benefit from its activities. In addition, if we hold, either directly or
indirectly, more than 50% of the issued share capital or controls more than
half of the voting power or the composition of the board of directors of the
subsidiaries, control is assumed.
Intragroup balances and transactions, and resulting unrealized profits are
eliminated in full. Unrealized losses resulting from intragroup transactions
are eliminated unless cost cannot be recovered. Consolidated financial
statements are prepared using uniform accounting policies for like
transactions and other events in similar circumstances.
F-10
4. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(d) Revenue recognition
Provided it is probable that the economic benefits associated with a
transaction will flow to us and the revenue and costs, if applicable, can be
measured reliably, revenue is recognized on the following basis:
(i) Oil and gas sales
Revenues represent the invoiced value of sales of oil and gas attributable to
our interests, net of royalties and government share of allocable share oil,
and are recognized when the significant risks and rewards of ownership of oil
and gas have been transferred to customers.
Oil and gas lifted and sold by us above or below our participating interests
in the production sharing contracts result in overlifts and underlifts. We
record these transactions in accordance with the entitlement method under
which overlifts are recorded as liabilities and underlifts are recorded as
assets. Settlement will be in kind when the liftings are equalized or in cash
when production ceases.
We entered into a gas sales contract with a customer which contain take-or-pay
clauses. The clause requires the customer to take a specified minimum volume
of gas each year. If the minimum volume of gas is not taken, the customer must
pay for the deficiency gas, even though the gas is not taken. The customer can
offset the deficiency payment against any future purchases in excess of the
specified volume. We recorded the deficiency payment as deferred revenue which
is included in other payables until make-up gas is taken by the customer. As
of December 31, 2001, deferred revenue amounted to approximately RMB5,581,000
(2000: RMB24,208,000).
(ii) Marketing revenues
Marketing revenues represent sales of oil purchased from the foreign partners
under the production sharing contracts and revenues from trading of oil
through our subsidiary in Singapore. The title, together with the risks and
rewards of the ownership of such oil, are transferred to us from the foreign
partners and other unrelated oil and gas companies before we sell such oil to
our customers. The cost of the oil sold is included in crude oil and product
purchases.
(iii) Other income
Other income mainly represents project management fees charged to the foreign
partners and handling fees charged to customers and is recognized when the
services are rendered.
(iv) Interest income
Interest income from deposits placed with banks and other financial
institutions is recognized on a time proportion basis that takes into account
the effective yield on the assets.
(v) Dividend income
Dividend income is recognized when the right to receive payment is
established.
(e) Research and development costs
Research and development costs are recognized as expenses in the period in
which they are incurred.
F-11
3. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(f) Property, plant and equipment
Property, plant and equipment comprise oil and gas properties, land and
buildings, and vehicles and office equipment.
(i) Oil and gas properties
For oil and gas properties, the successful efforts method of accounting is
adopted. We capitalize initial acquisition costs of oil and gas properties,
the costs of drilling and equipping successful exploratory wells, all
development costs, including those renewals and betterments which extend the
economic life of the assets, and the interest charges arising from borrowings
used to finance the development of oil and gas properties before they are
substantially ready for production. Costs of unsuccessful exploratory wells
and all other exploration costs are expensed as incurred.
In the absence of a determination as to whether the reserves that have been
found can be classified as proved, the costs of drilling such an exploratory
well will not be carried as an asset for more than one year following
completion of drilling. If, when that year has passed, a determination that
proved reserves have been found cannot be made, the well shall be assumed to
be impaired, and its costs shall be charged to the consolidated statements of
income.
Productive oil and gas properties and other tangible and intangible costs of
producing properties are amortized using the unit-of-production method on a
property-by-property basis under which the ratio of produced oil and gas to
the estimated remaining proved reserves is used to determine the depreciation,
depletion and amortization provision. Costs associated with significant
development projects are not depleted until commercial production commences
and the reserves related to those costs are excluded from the calculation of
depletion.
We estimate future dismantlement and site restoration costs for oil and gas
properties with reference to the estimates provided from either external or
internal engineers after taking into consideration the anticipated method of
dismantlement and the extent of site restoration required in accordance with
current legislation and industry practices. We provide for the future
dismantlement and site restoration allowance using the unit-of-production
method.
(ii) Land and buildings
Land and buildings are stated at valuation less accumulated depreciation and
accumulated impairment losses. Professional valuations are performed
periodically with the last valuation performed on December 31, 2000. In the
intervening years, our directors review the carrying value of land and
buildings and adjustment is made where in our directors' opinion there has
been a material change in value. Any increase in land and buildings valuation
is credited to the revaluation reserves; any decrease is first offset against
an increase in earlier valuation in respect of the same property and is
thereafter charged to statements of income. Depreciation is calculated on the
straight-line basis at annual rates estimated to write off valuation of each
asset over its expected useful life, ranging from 30 to 50 years.
(iii) Vehicles and office equipment
Vehicles and office equipment are stated at cost less accumulated depreciation
and accumulated impairment losses. The straight-line method is adopted to
depreciate the cost less salvage value of these assets over their expected
useful life. We estimate the useful lives of vehicles and office equipment to
be 5 years.
The useful lives of assets and method of depreciation, depletion and
amortization are reviewed periodically.
F-12
3. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(f) Property, plant and equipment (cont'd)
When assets are sold or retired, their costs or revalued amounts and
accumulated depreciation, depletion and amortization are eliminated from the
accounts and any gain or loss resulting from their disposal is included in the
statements of income.
(g) Subsidiaries
A subsidiary is an enterprise in which we directly or indirectly hold more
than 50% of its equity interest as a long-term investment and/or has the power
to cast the majority of votes at its meetings of the board of directors.
(h) Investment in an associated company
Investment in associate where significant influence is exercised by us are
accounted for using the equity method in the consolidated financial
statements, whereby the investment is initially recorded at cost and adjusted
thereafter to recognize our share of the post-acquisition profits or losses of
the associate, distributions received from the associate and other necessary
alterations in our proportionate interest in the associate arising from
changes in the equity of the associate that have not been included in the
statement of income and less any accumulated impairment losses. Our share of
post-acquisition results of the associate is included in the consolidated
statement of income.
(i) Short-term investments
Short-term investments are carried at fair value in the balance sheet. Any
unrealized holding gain or loss of the investments is recognized in the
statement of income in the period when it arises.
Upon disposal or transfer of the investments, any profit or loss thereon is
accounted for in the statement of income.
(j) Inventories and supplies
Inventories consist primarily of oil while supplies consist mainly of items
for repair and maintenance of oil and gas properties. Inventories are valued
at the lower of cost and net realizable value. Costs of inventories and
supplies represent purchase or production cost of goods and are determined on
a weighted average basis. Net realizable value is determined by reference to
the sales proceeds of items sold in the ordinary course of business after the
balance sheet date or to management's estimates based on prevailing market
conditions. Supplies are capitalized to property, plant and equipment when
used for renewals and betterments of oil and gas properties or recognized as
expenses when used for daily operations.
(k) Trade and other receivables
Trade and other receivables are stated at their cost, after provision for
doubtful accounts.
(l) Cash and cash equivalents
Cash represents cash on hand and deposits with banks and other financial
institutions which are repayable on demand.
Cash equivalents represent short-term, highly liquid investments which are
readily convertible into known amounts of cash with original maturities of
three months or less and that are subject to an insignificant risk of change
in value.
F-13
3. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(m) Operating leases
Lease of assets under which substantially all the risks and rewards of
ownership are retained by the lessor are classified as operating leases. Lease
payments under an operating lease are recognized as an expense on a
straight-line basis over the lease term.
(n) Provisions
A provision is recognized when an enterprise has a present obligation (legal
or constructive) as a result of a past event and it is probable (i.e. more
likely than not) that an outflow of resources embodying economic benefits will
be required to settle the obligation, and a reliable estimate can be made of
the amount of the obligation. Provisions are reviewed at each balance sheet
date and adjusted to reflect the current best estimate. Where the effect of
the time value of money is material, the amount of a provision is the present
value of the expenditures expected to be required to settle the obligation.
(o) Taxation
We provide for income taxes on the basis of our net income for financial
reporting purposes, adjusted for income and expense items that are not
assessable or deductible for income tax purposes.
Deferred taxation is provided under the liability method in respect of timing
differences between income as computed for taxation purposes and income as
stated in the financial statements to the extent that it is probable that a
liability or asset will crystallize.
(p) Foreign currency
The books and records are maintained in Renminbi ("RMB") except for our
subsidiaries incorporated overseas. The books and records of the overseas
subsidiaries are maintained either in Singapore dollars or United States
dollars. Transactions in currencies other than the book currency during the
year are translated into book currency at the exchange rates prevailing at the
time of the transactions. Monetary assets and liabilities denominated in other
currencies at the balance sheet date are translated into book currency at
rates of exchange in effect at the balance sheet date. Exchange differences
are dealt with in the consolidated statements of income in the period in which
they arise.
On consolidation, the financial statements of our overseas subsidiaries are
translated into RMB using the closing rate method, whereby assets and
liabilities are translated at the rates of exchange prevailing at the balance
sheet date and income and expenses are translated at the average rates of
exchange during the year. Share capital, share premium and retained earnings
are translated at historical rates. Translation differences arising therefrom
are dealt with as movements in reserves.
For the convenience of the readers, translation of amounts from RMB into
United States dollars ("US$") has been made at the rate of US$1.00=8.2766 on
December 31, 2001. No representation is made that RMB amounts could have been,
or could be, converted into US$ at that rate on December 31, 2001, or at any
other rate.
F-14
3. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(q) Borrowing costs
Borrowing costs include interest charges and other costs incurred in
connection with the borrowing of funds, including amortization of discounts or
premiums relating to borrowings, and amortization of ancillary costs incurred
in connection with arranging borrowings to the extent that they are regarded
as an adjustment to interest costs.
Borrowing costs are expensed as incurred, except when they are directly
attributable to the acquisition or construction of the property, plant and
equipment that necessarily takes a substantial period of time to prepare for
its intended use in which case they are capitalized as part of the costs of
that asset. Capitalization of borrowing costs commences when expenditures for
the asset and borrowing costs are being incurred and the activities to prepare
the asset for its intended use are in progress. To the extent that funds are
borrowed specifically for the purpose of obtaining a qualifying asset, the
amount of borrowing costs eligible for capitalisation on that asset is
determined as the actual borrowing costs incurred on that borrowing during the
period less any investment income on the temporary investment of those
borrowings.
To the extent that funds are borrowed generally and used for the purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for
capitalisation is determined by applying a capitalsation rate to the
expenditures on that asset. The capitalisation rate is the weighted average of
the borrowing costs applicable to the borrowings of the enterprise that are
outstanding during the period, other than borrowings made specifically for the
purpose of obtaining a qualifying asset. The amount of borrowing costs
capitalized incurred during a period should not exceed the amount of borrowing
cost incurred during that period.
(r) Retirement benefits and employee subsidies
We provide defined contribution plans based on local laws and regulations. The
plans cover full-time employees and provide for contributions ranging from 9%
to 22.5% of salary. Our contributions to defined contribution plans are
charged to expense in the year to which they relate.
The cost of employee subsidies is charged to the statements of income as
incurred.
(s) Impairment of assets
Property, plant and equipment and investment in an associated company and
subsidiaries are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Whenever the carrying amount of an asset exceeds its recoverable
amount, an impairment loss is recognized as an expense for items of property,
plant and equipment and investments in an associated company and subsidiaries
carried at cost, and treated as a revaluation decrease for buildings that are
carried at revalued amounts to the extent that the impairment loss does not
exceed the amount held in the revaluation surplus for that same building. The
recoverable amount is the higher of an asset's net selling price and value in
use. The net selling price is the amount obtainable from the sale of the asset
in an arm's length transaction while value in use is the present value of
estimated future cash flows expected to arise from the continuing use of the
asset and from its disposal at the end of its useful life. Recoverable amounts
are estimated for individual assets or, if it is not possible, for the
cash-generating unit.
Reversal of impairment losses recognized in prior years is recorded when the
impairment losses recognized for the asset no longer exist or have decreased.
The reversal is recorded in income or as a revaluation increase.
F-15
3. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(t) Repairs and maintenance
Repairs and maintenance and overhaul costs are normally charged to the
statement of income as operating expenses in the period in which it is
incurred.
(u) Financial instruments
We have currency swap contracts with financial institutions which are not
designated as hedging instruments and are carried at fair value, with changes
in fair value included in the statement of income.
(v) Segments
Business segments: for management purposes we are organized on a worldwide
basis into three major operating segments. The divisions are the basis upon
which we report our primary segment information. Financial information on
business and geographical segments is presented in Note 32.
Intersegment transactions: segment revenue, segment expenses and segment
performance include transfers between business segments and between
geographical segments. Such transfers are accounted for at cost. Those
transfers are eliminated in consolidation.
(w) Contingencies
Contingent liabilities are not recognized in the financial statements. They
are disclosed unless the possibility of an outflow of resources embodying
economic benefits is remote.
A contingent asset is not recognized in the financial statements but disclosed
when an inflow of economic benefits is probable.
(x) Subsequent events
Post-year-end events that provide additional information about a company's
position at the balance sheet date or those that indicate the going concern
assumption is not appropriate (adjusting events) are reflected in the
financial statements. Post-year-end events that are not adjusting events are
disclosed in the notes when material.
F-16
4. PRODUCTION SHARING CONTRACTS
We perform a significant amount of our oil and gas activities through
production sharing contracts with international oil companies ("foreign
partners").
For most production sharing contracts, foreign partners are required to bear
all exploration costs during the exploration period and such exploration costs
can be recovered according to the production sharing formula after commercial
discoveries are made and production begins.
The development and operating costs are funded by us and the foreign partners
according to the respective participating interests.
We have the option to take a participating interest of up to 51% in a
production sharing contract and may exercise such option after the foreign
partners have independently undertaken all the exploration risks and costs and
made viable commercial discoveries. The foreign partners retain the remaining
participating interests.
After we exercise the option to take a participating interest in a production
sharing contract, we account for the oil and gas properties using the
"proportional method" under which we recognize our share of development costs,
revenues and expenses from such operations based on our participating interest
in the production sharing contract. We do not account for the exploration
costs incurred by our foreign partners and their share of development costs
and revenues and expenses from such operations.
Part of the annual gross production of oil and gas is distributed to the PRC
government for the payment of royalties pursuant to a sliding scale. We and
the foreign partners also pay a production tax to the tax bureau at a
pre-determined rate (see Note 10). In addition, there is a pre-agreed portion
of oil and gas designated to recover all exploration costs, development costs,
operating costs incurred and related interests according to the participating
interests between us and the foreign partners. Any remaining oil after the
foregoing is first distributed to the PRC government as share oil on a
pre-determined ratio pursuant to a sliding scale and then distributed to us
and the foreign partners based on their respective participating interests. As
government share is not included in our interest in the annual production, our
net sales do not include the sales revenue of the government share oil.
The foreign partners have the right to take possession of their allocable
remainder oil for sale in the international market or to negotiate with us to
sell their allocable remainder oil to us for resale in the PRC market.
F-17
5. OIL AND GAS SALES
1999 2000 2001
------------------ ----------------- ------------------
RMB'000 RMB'000 RMB'000
Gross sales 12,681,879 21,747,888 19,663,251
Royalties (106,899) (208,885) (283,014)
Government share oil (1,177,107) (2,719,680) (1,819,449)
------------------ ----------------- ------------------
11,397,873 18,819,323 17,560,788
================== ================= ==================
6. MARKETING PROFIT
1999 2000 2001
------------------ ----------------- ------------------
RMB'000 RMB'000 RMB'000
Marketing revenues 3,804,367 5,126,015 2,537,032
Crude oil and product purchases (3,736,671) (5,097,765) (2,453,312)
------------------ ----------------- ------------------
67,696 28,250 83,720
================== ================= ==================
7. DIRECTORS' AND FIVE HIGHEST PAID INDIVIDUALS
(a) Details of directors' emoluments were as follows:
1999 2000 2001
------------------- ------------------ -------------------
RMB'000 RMB'000 RMB'000
Fees for executive directors 194 - -
Fees for non-executive directors - - 890
Other emoluments for executive directors
- basic salaries and allowances 1,847 400 6,106
- bonus 96 440 560
- pension scheme contribution 129 160 207
- other 1,136 1,500 1,500
The emoluments of the directors analyzed by the number of directors and
emolument ranges were as follows:
Number of Directors
---------------------------------------------------------
1999 2000 2001
------------------ ----------------- ------------------
Up to HK$1,000,000 7 7 6
HK$1,000,001 - HK$1,500,000 - - -
HK$1,500,001 - HK$2,000,000 - - 2
HK$2,000,001 - HK$2,500,000 - - -
HK$2,500,001 - HK$3,000,000 - - 1
------------------ ----------------- ------------------
7 7 9
================== ================= ==================
No directors had waived or agreed to waive any emoluments during the years
ended December 31, 2001, 2000, and 1999.
F-18
7. DIRECTORS' AND FIVE HIGHEST PAID INDIVIDUALS (CONT'D)
(b) Details of emoluments of the five highest paid individuals were as follows:
1999 2000 2001
------------------- ------------------ -------------------
RMB'000 RMB'000 RMB'000
Basic salaries and allowances 1,847 400 7,280
Bonus 96 440 1,280
Pension scheme contribution 129 160 416
Other 1,136 1,500 1,500
Number of directors 5 5 4
Number of employees - - 1
Their emoluments were within the following bands:
Number of Senior Executives
---------------------------------------------------------
1999 2000 2001
------------------ ----------------- ------------------
Up to HK$1,000,000 5 5 1
HK$1,000,001 - HK$1,500,000 - - -
HK$1,500,001 - HK$2,000,000 - - 2
HK$2,000,001 - HK$2,500,000 - - -
HK$2,500,001 - HK$3,000,000 - - 2
------------------ ----------------- ------------------
5 5 5
================== ================= ==================
During the years ended December 31, 2001, 2000 and 1999, no emoluments were
paid to the five highest paid individuals (including directors, members and
employees) as an inducement to join or upon joining us or as compensation for
loss of office.
8. SELLING AND ADMINISTRATIVE EXPENSES
1999 2000 2001
------------------ ----------------- ------------------
RMB'000 RMB'000 RMB'000
Salary and staff benefits 136,779 172,593 228,782
Utility and office expenses 61,674 70,069 89,462
Recovery of doubtful accounts (5,382) (57,658) (4,966)
Transportation and entertainment 40,879 60,682 64,923
Rentals and maintenance 78,583 89,184 121,483
Selling expenses 16,502 36,481 38,069
Other 187,450 84,651 77,636
------------------ ----------------- ------------------
516,485 456,002 615,389
================== ================= ==================
F-19
9. INTEREST, NET
1999 2000 2001
----------------- ------------------ ------------------
RMB'000 RMB'000 RMB'000
Interest expense on bank loans which are:
- wholly repayable within five years 355,876 241,749 219,045
- not wholly repayable within five years 337,629 191,755 81,634
Interest expense to CNOOC 6,225 41,500 8,415
Other borrowing costs - - 6,510
Less: Amounts capitalized in property, plant and
equipment (78,026) - (198,970)
----------------- ------------------ ------------------
621,704 475,004 116,634
Interest income (53,709) (236,624) (317,706)
----------------- ------------------ ------------------
567,995 238,380 (201,072)
================= ================== ==================
The capitalized interest rate represented the cost of capital from raising the
related borrowings and varied from 2.35% to 9.15% per annum for the year ended
December 31, 2001 (2000: -, 1999: 6% to 7%).
10. TAXATION
(a) Income tax
We and our subsidiaries are subject to income taxes on an entity basis on
income arising in or derived from the tax jurisdictions in which we are
domiciled and operate. We are not liable for profits tax in Hong Kong as we do
not have any assessable income currently sourced from Hong Kong.
Our subsidiary, CNOOC China Limited, is a wholly foreign owned enterprise
established in the PRC. It is exempt from 3% local surcharges and is subject
to an enterprise income tax of 30% under the prevailing tax rules and
regulations. Moreover, CNOOC China Limited was entitled to a 50% reduction of
enterprise income tax for three years until end of year 2000. Starting form
January 1, 2001, CNOOC China Limited is subject to enterprise income tax at
the normal rate of 30%. Further, CNOOC performed assets revaluation in 1995 on
its then oil properties and other plant and equipment which were transferred
to CNOOC China Limited in 1999 upon the Reorganization of CNOOC. According to
a notice from the tax bureau, the related revaluation surplus was deductible
for tax reporting purpose by CNOOC. Based on a confirmation received from the
local tax bureau in 2001, the related depreciation and amortization can still
be deductible for tax purpose by CNOOC China Limited. However, such treatment
may be subject to review by higher tax authorities. Should the depreciation
and amortization not be tax deductible, an additional enterprise income tax
liability of approximately RMB75,000,000 for the year ended December 31, 2001
may arise. We believe that the possibility of such a liability arising is
unlikely.
Our subsidiary in Singapore, China Offshore Oil (Singapore) International Pte.
Ltd., is subject to income tax at the rate of 10% and 26% respectively for its
oil trading activities and other income producing activities. Our subsidiaries
owning interests in oil properties in Indonesia are subject to corporate and
dividend tax of 56% before August 2000. Starting from August 2000 with the
renewal of production sharing contracts, the tax rate was reduced to 44%. All
of our other subsidiaries are not subject to income taxes in their respective
jurisdictions for the years presented.
F-20
10. TAXATION (CONT'D)
(a) Income tax (Cont'd)
An analysis of the provision for taxation in the consolidated statements of
income was as follows:
1999 2000 2001
------------------ ------------------ ------------------
RMB'000 RMB'000 RMB'000
Overseas income taxes
- Current 22,246 43,873 20,401
- Deferred 43 - -
PRC enterprise income tax
- Current 462,401 1,600,608 2,715,409
- Deferred 237,235 281,595 312,417
------------------ ------------------ ------------------
721,925 1,926,076 3,048,227
================== ================== ==================
With the tax holiday exemption, current income tax liabilities of our
subsidiary in the PRC were reduced by approximately RMB1,920,730,000 and
RMB536,385,000 respectively during the years ended December 31, 2000 and 1999.
The tax holiday exemption also increased the net income per share by RMB0.30
and RMB0.09 for the years ended December 31, 2000 and 1999.
The reconciliation of the statutory PRC enterprise income tax rate to our
effective income tax rate was as follows:
1999 2000 2001
------------------ ------------------ ------------------
RMB'000 RMB'000 RMB'000
Statutory PRC enterprise income tax rate 33.0% 33.0% 33.0%
Effect of tax holiday (15.0%) (15.0%) -
Effect of tax exemption granted (2.1%) (3.0%) (3.0%)
Effect of future tax rate changes on originating
timing differences 2.7% 1.2% -
Effect of different tax rates for overseas subsidiaries 0.2% 0.3% (1.2%)
Tax effect of additional depreciation on revaluation
and other permanent differences (3.9%) (0.7%) (1.1%)
------------------ ------------------ ------------------
Effective income tax rate 14.9% 15.8% 27.7%
================== ================== ==================
F-21
10. TAXATION (CONT'D)
(a) Income tax (Cont'd)
The tax effect of significant timing differences of us was as follows:
2000 2001
----------- ----------
RMB'000 RMB'000
Deferred tax assets
- Dismantlement and site restoration allowance 452,329 479,439
- Provision for impairment of property, plant and
equipment and write-off of unsuccessful
exploratory drillings 1,266,523 1,880,791
------------ ----------
1,718,852 2,360,230
Deferred tax liabilities
- Accelerated amortization allowance for oil
and gas properties (3,170,072) (4,123,867)
------------ -----------
Net deferred tax liabilities (1,451,220) (1,763,637)
============ ===========
There were no significant unprovided deferred income taxes during the years
presented.
(b) Other taxes
Our PRC subsidiary pays the following taxes:
- production taxes equal to 5% of independent production and production
under production sharing contracts;
- business tax of 3% to 5% on other income.
11. DIVIDENDS
The payment of future dividends will be determined by our board of directors.
The payment of dividends will depend upon, among other things, future
earnings, capital requirements and financial condition and general business
conditions of us. Our ability to pay dividends will also depend on the cash
flows determined by the dividends, if any, received by us from our
subsidiaries and associated company. As the controlling shareholder, CNOOC
will be able to influence our dividend policy.
Cash dividends to the shareholders in Hong Kong will be paid in Hong Kong
dollars and dividends to the ADS holders will be paid to the depositary in
Hong Kong dollars and will be converted by the depositary into United States
dollars and paid to the holders of ADSs.
On August 27, 2001, the board of directors declared a 2001 interim dividend of
HK$0.10 per share, totaling approximately RMB871,194,000 to its shareholders,
which was paid in October 2001.
On December 20, 2000, our board of directors proposed a dividend of RMB0.98
per share, totaling approximately RMB6,426,424,000, to our shareholders for
the year ended December 31, 2000. The dividend distribution was approved by
the shareholders in their annual general meeting held on February 4, 2001.
F-22
11. DIVIDENDS (CONT'D)
Immediately before the Reorganization effectively on October 1, 1999, the
retained earnings of CNOOC China Limited as of September 30, 1999 amounting to
RMB739,665,000 as reported in accordance with Accounting Regulation for
Enterprises with Foreign Investment of the PRC ("PRC GAAP") were distributed
to CNOOC.
In accordance with a board resolution dated March 10, 2000, we declared a
dividend amounting to RMB1,045,365,000 to CNOOC for the period from our
incorporation to December 31, 1999. The dividend was paid to CNOOC in March
2000 in cash immediately after the declaration.
12. NET INCOME PER SHARE AND PER ADS
The calculation of basic earnings per share for the years ended December 31,
2001 and 2000 is based on the net income attributable to ordinary
shareholders, divided by the weighted average number of ordinary shares
outstanding during the years of 7,941,383,305 shares and 6,331,114,421 shares
respectively. The calculation of basic earnings per share for the year ended
December 31, 1999 is based on the net income divided by the number of shares
outstanding immediately after the Reorganization of 6,000,000,000 shares.
Diluted earnings per share for the year ended December 31, 2001 is computed by
dividing net income for the year attributable to ordinary shareholders of
RMB7,957,631,000 by the weighted average number of ordinary shares outstanding
during the year adjusted for the effects of all dilutive potential ordinary
shares under the share option scheme (see Note 24). The weighted average
number of ordinary shares used to compute diluted earnings per share was
7,942,288,803 shares for the year ended December 31, 2001. There were no
potential dilutive ordinary shares outstanding for the years ended December
31, 2000 and 1999.
Reconciliation of the number of ordinary shares for calculation of basic and
diluted earnings per share for the year ended December 31, 2001:
2001
------------------
Weighted average number of ordinary shares used in
calculating basic earnings per share 7,941,383,305
Effect of all dilutive potential ordinary shares
under the share option scheme 905,498
-------------------
Weighted average number of ordinary shares used in
calculating diluted earnings per share 7,942,288,803
===================
Net income per ADS for the three years ended December 31, 2001 has been
computed by dividing net income by the number of ADS outstanding. Each ADS
represented 20 shares.
F-23
13. PROPERTY, PLANT AND EQUIPMENT, NET
Movements in our property, plant and equipment were:
2001
---------------------------------------------------------------------------
Oil and gas Land and Vehicles and Total
properties buildings office equipment
------------------- ------------------ ------------------ -----------------
RMB'000 RMB'000 RMB'000 RMB'000
Cost:
Beginning balance 37,319,924 824,781 39,837 38,184,542
Additions 4,320,675 - 18,063 4,338,738
Disposals and written off (463,140) - - (463,140)
------------------- ------------------- ------------------ -----------------
Ending balance 41,177,459 824,781 57,900 42,060,140
------------------- ------------------- ------------------ -----------------
Representing:
At cost 41,177,459 - 57,900 41,235,359
At revaluation - 824,781 - 824,781
------------------- ------------------- ------------------ -----------------
41,177,459 824,781 57,900 42,060,140
------------------- ------------------- ------------------ -----------------
Accumulated depreciation,
depletion and amortization:
Beginning balance (15,482,082) (30,280) (17,805) (15,530,167)
Charge for the year (2,572,896) (25,373) (4,530) (2,602,799)
Impairment (99,675) - - (99,675)
------------------- ------------------ ------------------- -----------------
Ending balance (18,154,653) (55,653) (22,335) (18,232,641)
------------------- ------------------ ------------------- -----------------
Net book value:
Beginning of year 21,837,842 794,501 22,032 22,654,375
=================== ================== =================== =================
End of year 23,022,806 769,128 35,565 23,827,499
=================== ================== =================== =================
Had the property, plant and
equipment been carried at
cost less accumulated
depreciation, depletion and
amortization, the carrying
amount of each class would
have been:
Cost 41,177,459 550,110 57,900 41,785,469
Accumulated depreciation,
depletion and amortization (18,154,653) (38,914) (22,335) (18,215,902)
-------------------- ------------------- ------------------ -----------------
23,022,806 511,196 35,565 23,569,567
==================== =================== ================== =================
F-24
13. PROPERTY, PLANT AND EQUIPMENT, NET (CONT'D)
2000
---------------------------------------------------------------------------
Oil and gas Land and Vehicles and Total
properties buildings office equipment
------------------- ------------------ ------------------ -----------------
RMB'000 RMB'000 RMB'000 RMB'000
Cost:
Beginning balance 33,756,460 374,862 35,185 34,166,507
Additions 4,233,845 345,846 4,652 4,584,343
Revaluation - 104,073 - 104,073
Disposals (670,381) - - (670,381)
------------------- ------------------ ------------------ -----------------
Ending balance 37,319,924 824,781 39,837 38,184,542
------------------- ------------------ ------------------ -----------------
Representing:
At cost 37,319,924 - 39,837 37,359,761
At revaluation - 824,781 - 824,781
------------------- ------------------ ------------------ -----------------
37,319,924 824,781 39,837 38,184,542
------------------- ------------------ ------------------ -----------------
Accumulated depreciation,
depletion and amortization:
Beginning balance (13,216,562) (20,598) (21,822) (13,258,982)
Charges for the year (2,629,323) (9,682) 4,017 (2,634,988)
Write back on disposals 363,803 - - 363,803
------------------- ------------------ ------------------ -----------------
Ending balance (15,482,082) (30,280) (17,805) (15,530,167)
------------------- ------------------ ------------------ -----------------
Net book value:
Beginning of year 20,539,898 354,264 13,363 20,907,525
=================== ================== ================== =================
End of year 21,837,842 794,501 22,032 22,654,375
=================== ================== ================== =================
Had the property, plant and
equipment been carried at
cost less accumulated
depreciation, the carrying
amount of each class would
have been:
Cost 37,319,924 550,110 39,837 37,909,871
Accumulated depreciation (15,482,082) (22,697) (17,805) (15,522,584)
------------------- ------------------ ------------------ -----------------
21,837,842 527,413 22,032 22,387,287
=================== ================== ================== =================
Impairment loss for the year ended December 31, 2001, represented the
estimated impairment resulting from downward revision of the reserves of
certain oil fields.
Our land and buildings are held outside Hong Kong with lease terms of 50
years.
Certain land use rights which were previously granted by the PRC government at
no cost. The land and buildings were revalued by Sallmanns (Far East) Limited,
Chartered Surveyors (the "Valuer") as of December 31, 2000 and August 31, 1999
using a depreciated replacement cost approach. The depreciated replacement
cost approach considers the cost to reproduce or replace in new condition the
property being appraised in accordance with current construction costs for
similar property in the locality with allowance for accrued depreciation as
evidenced by observed condition or obsolescence present, whether arising from
physical, functional or economic causes. The Valuer assumed that the assets
would be used for the purposes for which they are presently used and did not
consider alternative uses.
The revaluation surplus of approximately RMB104,073,000 in 2000 (1999: RMB170,
598,000) arising from the revaluation of the land and buildings has been
recorded by us.
F-25
14. INVESTMENT IN AN ASSOCIATED COMPANY
Investment in an associated company represents a 30% equity interest of CNOOC
China Limited in Shanghai Petroleum and Natural Gas Company Limited ("SPC").
SPC was incorporated on September 7, 1992 in the PRC with limited liability
and is principally engaged in offshore petroleum exploration, development,
production and sales in the South Yellow Sea and East China Sea areas. The
issued and paid up capital of SPC is RMB900,000,000.
2000 2001
--------------------- ---------------------
RMB'000 RMB'000
Investment at cost - unlisted 270,000 270,000
Accumulated share of profits 222,027 290,990
Dividends received (21,000) (99,000)
--------------------- ---------------------
471,027 461,990
===================== =====================
The directors are of the opinion that the underlying value of the investment
in the associated company was not less than the carrying amount of the
associated company as of December 31, 2001 and 2000.
15. ACCOUNTS RECEIVABLE, NET
2000 2001
--------------------- ---------------------
RMB'000 RMB'000
Trade receivables 1,931,883 1,204,907
Less: Allowance for doubtful accounts (15,693) (10,727)
--------------------- ---------------------
1,916,190 1,194,180
===================== =====================
The customers are required to make payment within 30 days after the delivery
of oil and gas. As of December 31, 2001 and 2000, substantially all the
accounts receivable were aged within six months.
16. INVENTORIES AND SUPPLIES
2000 2001
--------------------- ---------------------
RMB'000 RMB'000
Materials and supplies 448,536 428,991
Oil in tanks 178,328 198,346
--------------------- ---------------------
626,864 627,337
===================== =====================
F-26
17. SHORT-TERM INVESTMENTS
As of December 31, 2001 and 2000, short-term investments mainly represented
investments in liquidity funds and were stated at fair value at the balance
sheet dates. Details were as follows:
2000 2001
-------------------- --------------------
RMB'000 RMB'000
Liquidity funds - 7,675,622
Corporate bonds - 1,177,991
Common stock 300,000 42,191
-------------------- --------------------
300,000 8,895,804
==================== ====================
Investment income for the years is summarized as follows:
1999 2000 2001
---------------------- ------------------- -------------------
RMB'000 RMB'000 RMB'000
Interest - - 21,344
Dividends - - 123,213
Realized gains on investments - - 32,297
Unrealized gains on investments - - 43,796
---------------------- ------------------- -------------------
- - 220,650
====================== =================== ===================
18. LONG-TERM BANK LOANS
As of December 31, 2001 and 2000, our long-term bank loans were used primarily
to finance the development of oil and gas properties and to meet working
capital requirements.
Interest rate and final maturity 2000 2001
---------------------------------------- ------------------- -------------------
RMB'000 RMB'000
RMB denominated Floating prevailing market rate
bank loans adjusted annually with maturities
through 2006 675,000 670,000
Fixed interest rate at 5.94% per annum
through 2005 75,270 66,270
US$ denominated Floating LIBOR rate with maturities
bank loans through 2003 310,429 1,177,761
Floating prevailing rate for six
months foreign currency loans
quoted by domestic banks, with
maturities through 2003 1,475,157 -
Fixed interest rate of 9.15% per annum
with maturities through 2006 827,810 827,660
Japanese Yen denominated Fixed interest rate ranging from 2.35% to
bank loans 5.15% per annum, with maturities
through 2007 2,382,711 1,745,848
--------------------- -----------------
5,746,377 4,487,539
Less: current portion (997,533) (1,231,840)
--------------------- -----------------
4,748,844 3,255,699
===================== =================
F-27
18. LONG-TERM BANK LOANS (CONT'D)
As of December 31, 2001 and 2000, LIBOR was approximately 2.0% and 6.2%
respectively.
As of December 31, 2001 and 2000, all our bank loans were unsecured and
approximately RMB991,537,000 and RMB1,475,157,000 of the outstanding
borrowings were guaranteed by CNOOC.
The maturities of long-term bank loans are as follows:
2000 2001
--------------- -----------
RMB'000 RMB'000
Balances due:
- Within one year 997,533 1,231,840
- After one year but within two years 1,280,876 794,593
- After two years but within three years 837,064 462,564
- After three years but within four years 504,976 483,364
- After four years but within five years 525,776 1,231,423
- Beyond five years 1,600,152 283,755
---------------- -----------
5,746,377 4,487,539
Amount due within one year shown under current
liabilities (997,533) (1,231,840)
---------------- -----------
4,748,844 3,255,699
================ ===========
Supplemental information with respect to long-term bank loans:
Maximum Average Weighted
Weighted amount amount average
average outstanding outstanding interest rate
Balance at interest rate during the during the during the
year end at year end year year* year**
-------------- --------------- -------------- ---------------- ---------------
RMB'000 % RMB'000 RMB'000 %
For the year ended December 31,
1999 8,288,824 6.07 10,030,187 9,159,506 6.29
2000 5,746,377 6.28 8,908,583 7,017,601 6.18
2001 4,487,539 5.03 5,746,377 5,116,958 5.66
------------
* The average amount outstanding is computed by dividing the total of
outstanding principal balances as of January 1 and December 31 by 2.
** The weighted average interest rate is computed by dividing the total of
weighted average interest rates as of January 1 and December 31 by 2.
F-28
19. ACCOUNTS PAYABLE
As of December 31, 2001 and 2000, substantially all the accounts payable were
aged within six months.
20. OTHER PAYABLES AND ACCRUED LIABILITIES
2000 2001
----------------- ----------------
RMB'000 RMB'000
Accrued payroll and welfare payable 84,136 132,773
Accrued expenses 288,873 434,766
Advance from customers 30,640 86,301
Other payables 254,007 159,306
----------------- -----------------
657,656 813,146
================= =================
21. BALANCES WITH PARENT COMPANY AND RELATED COMPANIES
Except for RMB1,660,000,000 payable to CNOOC as of December 31, 2000 which
bore interest at 2.5% per annum, all other balances with CNOOC and related
companies were unsecured, non-interest bearing and repayable on demand.
2000 2001
----------------- ------------------
RMB'000 RMB'000
Due to parent company
- Advances from CNOOC 122,497 125,493
- Debt payable to CNOOC for pension liabilities 1,660,000 -
----------------- ------------------
1,782,497 125,493
================= ==================
22. DISMANTLEMENT AND SITE RESTORATION ALLOWANCE
Dismantlement and site restoration allowance represents the estimated costs of
dismantling offshore oil platforms and abandoning oil and gas properties.
Dismantlement and site restoration allowance has been classified under
long-term liabilities. The details of the dismantlement and site restoration
allowance were as follows:
2000 2001
----------------- ------------------
RMB'000 RMB'000
Total anticipated cost 2,757,902 2,962,004
Total cost accrued 1,507,763 1,598,130
F-29
23. SHARE CAPITAL
Number of shares Share capital
---------------------- ---------------------
Authorized: HK$'000
Ordinary shares of HK$0.10 each
At December 31, 2001 and 2000 15,000,000,000 1,500,000
====================== =====================
Number of shares Share capital Share capital
----------------- ----------------- -----------------
Issued and fully paid: HK$'000 Equivalent of
RMB'000
Ordinary shares of HK$0.10 each
At January 1, 2000 6,000,000,000 600,000 641,561
Issue of shares to corporate
investors (i) 557,575,755 55,758 59,620
----------------- ----------------- -----------------
At December 31, 2000 6,557,575,755 655,758 701,181
================= ================= =================
Ordinary shares of HK$0.10 each
At January 1, 2001 6,557,575,755 655,758 701,181
Issue of shares during the initial public offering
(ii) 1,656,589,900 165,659 175,797
----------------- ----------------- -----------------
At December 31, 2001 8,214,165,655 821,417 876,978
================= ================= =================
(i) According to the subscription agreements dated March 17, 2000, May 31,
2000 and June 28, 2000, we issued in total 557,575,755 new shares to
eight unaffiliated entities at US$0.825 per share ("Private Placements")
for aggregate net proceeds of approximately RMB3,769,664,000, after
deducting expenses of approximately RMB39,136,000.
(ii) We completed our initial public offering in 2001 and the details were as
follows:
- issued 1,442,426,000 shares of HK$0.10 each at HK$6.01 per share and
the shares and in the form of ADSs were listed on the Stock Exchange
of Hong Kong Limited ("Hong Kong Stock Exchange") and the New York
Stock Exchange on February 28, 2001 and February 27, 2001
respectively; and
- issued 214,163,900 shares of HK$0.10 each at HK$6.01 per share on
March 23, 2001 upon the exercise of an over-allotment option by the
underwriters of the global offering.
The net proceeds from the initial public offering (including the exercise of
the over-allotment option) amounted to approximately RMB10,101,564,000, after
deducting expenses of approximately RMB288,058,000.
F-30
24. SHARE OPTION SCHEME
We have a share option scheme which provides for the grant of options to our
senior management. Under this share option scheme, the remuneration committee
of our board of directors will from time to time propose for board approval
the recipient of and number of shares underlying each option. The scheme
provides for issuance of options exercisable for shares granted under this
scheme and the pre-global offering share option scheme as described below not
exceeding 10% of the total number of our outstanding shares, excluding shares
issued upon exercise of options granted under the scheme from time to time.
The exercise price of an option will be determined by our board of directors
at its discretion upon the grant date, as long as the price will not be less
than a specified minimum which is the higher of:
o the nominal value of the shares; and
o 80% of the average of the closing prices of shares on the Hong Kong
Stock Exchange for the five trading days immediately preceding the date
of grant of the option on which there were dealings in shares on the
Hong Kong Stock Exchange.
On August 27, 2001, our board of directors approved under the above stock
option scheme to grant options of 8,820,000 shares, and the exercise price is
HK$ 6.16 per share. Options granted under this scheme may be exercised, in
whole or in part, in accordance with the following vesting schedule:
o one-third of the shares subject to the option shall vest on the first
anniversary of the date of the grant;
o one-third of the shares subject to the option shall vest on the second
anniversary of the date of the grant; and
o one-third of the shares subject to the option shall vest on the third
anniversary of the date of the grant.
On February 4, 2001, we adopted a pre-global offering share option scheme.
Under this scheme, options of an aggregate of 4,620,000 shares were granted to
the senior management on March 12, 2001. The exercise price is HK$5.95 per
share. Options granted under this scheme will be exercisable, in whole or in
part, in accordance with the following vesting schedule:
o 50% of the shares underlying the option shall vest 18 months after the
date of the grant, and
o 50% of the shares underlying the option shall vest 30 months after the
date of the grant.
Outstanding options under the two option plans described above will remain in
force for a maximum of ten years from the grant date.
No options have been exercised since the date of grant and up to the date when
the board of directors approved the financial statements. 25.
F-31
25. MOVEMENT IN EQUITY
Movements in equity were as follows:
Cumulative
Paid-in Share Revaluation translation Statutory Retained
capital premium reserves reserve reserve earnings Total
------------ ----------- ----------- ------------ --------- ----------- ------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Balances at January 1, 1999 2,485,762 - - - - 3,872,932 6,358,694
Net income for the year - - - - - 4,111,439 4,111,439
Appropriation to statutory - -
reserve (i) - - 100,874 (100,874) -
Distribution to CNOOC (note 11) - - - - - (739,665) (739,665)
Dividends (Note 11) - - - - - (1,045,365) (1,045,365)
Return of capital to CNOOC - -
(ii) (471,461) - - - (471,461)
Share premium arising form
the Reorganization (1,372,301) 7,124,955 - - - (5,752,654) -
Surplus on revaluation of - 170,598
properties - - - - 170,598
------------ ----------- ----------- ------------ --------- ----------- ------------
Balances at January 1, 2000 642,000 7,124,955 170,598 - 100,874 345,813 8,384,240
Net income for the year - - - - - 10,296,600 10,296,600
Appropriation to statutory - -
reserve (i) - - 847,464 (847,464) -
Dividends (Note 11) - - - - - (6,426,424) (6,426,424)
Net proceeds from Private
Placements (Note 23(i)) 59,181 3,710,483 - - - - 3,769,664
Surplus on revaluation of
properties (Note 13) - - 104,073 - - - 104,073
Foreign currency translation
difference - - - (6,350) - - (6,350)
------------ ----------- ----------- ------------ --------- ----------- ------------
Balances at January 1, 2001 701,181 10,835,438 274,671 (6,350) 948,338 3,368,525 16,121,803
Foreign currency translation
difference - - 702 - - 702
Net income for the year - - - - 7,957,631 7,957,631
Appropriation to statutory
reserve (i) - - - 587,022 (587,022) -
Dividends (Note 11) - - - - (871,194) (871,194)
Net proceeds from issue of
ordinary shares (Note
23(ii)) 175,797 9,925,767 - - - - 10,101,564
------------ ----------- ----------- ------------ --------- ----------- ------------
Balances at December 31, 2001 876,978 20,761,205 274,671 (5,648) 1,535,360 9,867,940 33,310,506
============ =========== =========== ============ ========= =========== ============
As of December 31, 2001 and 2000, our distributable profits amounted to
approximately RMB220,127,000 and RMB17,420,000 respectively.
Included in retained earnings is an amount of RMB311,990,000 (2000:
222,027,000), being the retained earnings attributable to an associated
company.
The application of the share premium account is governed by Section 48B of the
Hong Kong Companies Ordinance.
The translation reserves and revaluation reserves have been established and
will be dealt with in accordance with the accounting policies adopted for
foreign currency translation and the revaluation of land and buildings.
F-32
25. MOVEMENT IN EQUITY (CONT'D)
(i) According to the laws and regulations of the PRC and articles of
association of CNOOC China Limited, CNOOC China Limited is required to
provide for certain statutory funds, namely, general reserve fund and
staff and workers' bonus and welfare fund, which are appropriated from
net income and after making good losses from previous years, but before
dividend distribution. CNOOC China Limited is required to allocate at
least 10% of its net income as reported in accordance with the generally
accepted accounting principles in the PRC ("PRC GAAP") to the general
reserve fund until the balance of such fund has reached 50% of its
registered capital. Appropriation to staff and workers' bonus and welfare
fund, which is determined at the discretion of the directors of CNOOC
China Limited, is charged to expense as incurred under Hong Kong GAAP.
The general reserve fund can only be used, upon approval by the relevant
authority, to offset against accumulated losses or increase capital.
Staff and workers' bonus and welfare fund can only be used for special
bonuses or collective welfare of employees, and assets acquired through
this fund shall not be taken as assets of CNOOC China Limited.
As of December 31, 2001 and 2000, the general reserve fund appropriated
amounted to RMB1,535,360,000 and RMB948,338,000, representing
approximately 15.4% and 9.5% of the total registered capital of CNOOC
China Limited.
(ii) This represents net assets distributed to CNOOC for no monetary
consideration. Such assets and liabilities were mainly in connection with
ancillary, social and supporting operations which were retained by CNOOC
under the Reorganization but were generated from earnings of the
exploration, development, production and sales businesses transferred to
us.
26. RETIREMENT BENEFITS
All our full-time employees in the PRC are covered by a government regulated
pension, and are entitled to an annual pension equal to their basic salaries
at their retirement dates. The PRC government is responsible for the pension
liabilities to these retired employees. We are required to make annual
contributions to the government-regulated pension at rates ranging from 9% to
22.5% of the employees' basic salaries.
The attribution to the PRC government pension plan for the year ended December
31, 2001 amounted to approximately RMB6,392,000 (2000: RMB12,842,000, 1999:
RMB12,207,000).
We are required to make contribution to mandatory provident fund at a rate of
5% of the basic salaries for all full-time employees in Hong Kong. The related
pension costs are expensed as incurred.
F-33
27. RELATED PARTY TRANSACTIONS
Companies are considered to be related if one company has the ability,
directly or indirectly, to control the other company or exercise significant
influence over the other company in making financial and operating decisions.
Companies are also considered to be related if they are subject to common
control or common significant influence.
We entered into several agreements with CNOOC and its affiliates, which govern
the provision of materials, utilities and ancillary services, the provision of
technical services, the provision of research and development services, the
provision of bank guarantees and various other commercial arrangements.
(a) Provision of materials, utilities and ancillary services
CNOOC China Limited has entered into a materials, utilities and ancillary
services supply agreements with the affiliates of CNOOC. Under these
agreements, the affiliates of CNOOC provide to CNOOC China Limited various
materials, utilities and ancillary service for the term of three years from
September 9, 1999.
The materials, utilities and ancillary services are provided at:
o state-prescribed prices,
o where there is no state-prescribed price, market prices, including the
local or national market prices or the prices at which CNOOC's affiliates
previously provided the relevant materials, utilities and ancillary
services to independent third parties, or
o where neither of the prices mentioned above is applicable, the cost to
CNOOC's affiliates of providing the relevant materials, utilities and
services, including the cost of sourcing or purchasing from third
parties, plus a margin of not more than 5% before any applicable taxes.
(b) Technical services
CNOOC China Limited has entered into technical service agreements with
specialized companies formed by CNOOC. According to these agreements, we used
the technical services provided by these specialized companies, including:
o offshore drilling;
o ship tugging, oil tanker transportation and security services;
o well survey, well logging, well cementation and other related technical
services;
o collection of geophysical data, ocean geological prospecting, and data
processing; and
o design, construction, installation and test of offshore and onshore
production facilities.
F-34
27. RELATED PARTY TRANSACTIONS (CONT'D)
(c) Research and development services
Under the terms of a general research and development services agreement with
CNOOC's subsidiary, China Offshore Oil Research Centre (the "Centre"), we will
pay the Centre for a term of three years from September 9, 1999, an annual
amount of RMB110,000,000, for the provision of the services, including:
o geophysical exploration services;
o seismic data processing;
o comprehensive exploration research services; and
o information technology services.
(d) Lease agreements
We have entered into lease agreements with affiliates of CNOOC for the leasing
of various office, warehouse and residential premises for a three-year term
commencing September 9, 1999. Lease charges are based on market rates.
(e) Sales of crude oil, condensate oil and liquefied petroleum gas
We sold crude oil, condensate oil and liquefied petroleum gas to CNOOC's
affiliates which engage in the downstream petroleum business at the
international market price. For the year ended December 31, 2001, the total
sales amounted to approximately RMB1,814,197,000 (2000: RMB507,677,000, 1999:
RMB117,000,000).
The following is a summary of our significant recurring transactions carried
out in the ordinary course of business with CNOOC and its affiliates.
1999 2000 2001
------------------ ----------------- -----------------
RMB'000 RMB'000 RMB'000
Included in exploration costs:
Provision for geological and geophysical services 127,290 55,295 139,659
Provision for research and development services 76,500 109,880 89,999
Provision for drilling services 35,046 106,150 389,847
Included in operating expenses:
Provision for technological services 211,326 254,276 44,044
Provision for research and development services 38,220 51,853 29,587
Provision for oil transportation services 263,061 171,490 68,399
Provision for production related services 570,219 597,579 579,207
Provision for materials, utilities and ancillary
services 90,177 163,828 148,149
Included in selling and administrative expenses:
Rental for office lease 12,459 49,089 45,524
Provision for research and development services - - 40,763
Provision for other ancillary services - 31,748 87,557
Included in interest income and expenses:
Interest income from a related company 117 25 -
Interest expense to CNOOC 6,225 41,500 8,415
Capitalized under property, plant and equipment:
Provision for oil and gas property construction services 679,000 865,549 1,341,545
Provision for drilling services 456,717 445,414 285,834
Provision for well measurement services 101,392 140,065 97,633
F-35
27. RELATED PARTY TRANSACTIONS (CONT'D)
In addition to the recurring transaction described above, pursuant to a
conditional agreement dated August 27, 2001, we will acquire interest in
certain oil and natural gas fields in the Xihu Trough in the East China Sea of
the PRC from CNOOC for a total consideration of US$45,000,000. As of December
31, 2001, the transaction has not been completed and the legal title of the
reserves has not been passed to us. The amount paid was recorded as
prepayments which is included in other current assets in the balance sheet.
28. COMMITMENTS AND CONTINGENCIES
(a) Capital commitments
As of December 31, 2001 and 2000, we have the following capital commitments,
principally for the construction and purchases of property, plant and
equipment:
2000 2001
------------------ -------------------
RMB'000 RMB'000
Contracted for 3,325,216 1,606,700
Authorized but not contracted for 7,729,113 5,183,690
As of December 31, 2001 and 2000, we had unutilized banking facilities
amounted to approximately RMB7,599,371,000 and RMB15,146,544,000 respectively
to finance development of oil and gas properties.
We had no significant contingent liabilities as of December 31, 2001 and 2000.
(b) Research and development commitment
According to the research and development services agreement with the Centre,
we agreed to pay the Centre for a term of three years from September 9, 1999,
an annual amount of RMB110,000,000 for provision of general geophysical
exploration services, comprehensive exploration research services, information
technology services and seismic data processing. As of December 31, 2001 and
2000, commitments for research and development services to be provided by the
Centre amounted to approximately RMB83,382,500 and RMB192,472,500
respectively.
(c) Operating lease commitments
Operating lease commitments as of December 31, 2001 and 2000 amounted to
approximately RMB94,079,000 and RMB143,922,000 and were as follows:
2000 2001
------------------ -------------------
RMB'000 RMB'000
Commitment due:
- Within one year 49,843 48,789
- After one year but within two years 48,789 45,290
- After two years but within three years 45,290 -
------------------ -------------------
143,922 94,079
================== ===================
F-36
28. COMMITMENTS AND CONTINGENCIES (CONT'D)
(d) Commitment to invest in the development of Australia's gas project
In August 2001, we signed a Memorandum of Understanding to explore the
feasibility of acquiring an equity interest in oil and gas assets in a large
natural gas field in Australia, and to develop the natural gas market in
coastal China. In November 2001, we entered into a Heads of Agreement on a
joint venture to develop Northwest Shelf gas in Australia. We agreed to
co-invest in the development of Australia's Northwest Shelf gas project and to
produce and process liquefied natural gas to sell to the China markets,
subject to the joint venture successfully bidding for the contract to supply
liquefied natural gas to an import facility in Guangdong Province, in which
CNOOC, the parent company, has an equity interest.
29. FINANCIAL INSTRUMENTS
(a) Currency swap contracts
As of December 31, 2001 and 2000, we had currency swap contracts with a
financial institution to sell United States dollars in exchange for Japanese
Yen in order to hedge against future repayments of certain Japanese Yen
denominated loans. The hedged Japanese Yen loans bore interest at fixed rate
of 4.5% per annum. The interest stipulated in the swap contract for the United
States dollars was floating LIBOR rate.
The details are as follows:
2000 2001
----------------------------------- ----------------------------------
Weighted Weighted
Notional average Notional average
contract contractual contract contractual
amount exchange rate amount exchange rate
--------------- ------------------ -------------- --------------------
(JPY'000) (JPY/US$) (JPY'000) (JPY/US$)
Year
2001 271,470 95.00 - -
2002 271,470 95.00 271,470 95.00
2003 271,470 95.00 271,470 95.00
2004 271,470 95.00 271,470 95.00
2005 271,470 95.00 271,470 95.00
2006 271,470 95.00 271,470 95.00
2007 271,470 95.00 271,470 95.00
(b) Fair value of financial instruments
The carrying amounts of cash and cash equivalents, time deposits and
short-term investments approximated fair value due to the short maturity of
these instruments.
The estimated fair value of long-term bank loans based on current market
interest rates for comparable instruments approximated their book value. 30.
F-37
CONCENTRATION OF RISKS
(a) Credit risk
The carrying amount of cash and cash equivalents, time deposits, accounts
receivable and other receivables, and due from related parties and other
current assets except for prepayments represents our maximum exposure to
credit risk in relation to financial assets.
The majority of our accounts receivable is related to sales of oil and natural
gas to third party customers. We perform ongoing credit evaluations of our
customers' financial condition and generally do not require collateral on
accounts receivable. We maintain a provision for doubtful accounts and actual
losses have been within management's expectation.
No other financial assets carry a significant exposure to credit risk.
(b) Interest rate risk
Our directors believe that the exposure to interest rate risk of financial
assets and liabilities as of December 31, 2001 was minimum since their
deviation from their respective fair values was not significant. The interest
rates and terms of repayment of our long-term bank loans are disclosed in Note
18.
(c) Currency risk
Substantially all of the revenue-generating operations of us are transacted in
RMB, which is not freely convertible into foreign currencies. On January 1,
1994, the Mainland China government abolished the dual rate system and
introduced single rate of exchange as quoted by the People's Bank of China.
However, the unification of the exchange rate does not imply free
convertibility of RMB into foreign currencies. As foreign exchange
transactions continue to take place either through the People's Bank of China
or other banks authorized to buy and sell foreign currencies at the exchange
rates quoted by the People's Bank of China, approval of foreign currency
payment by the People's Bank of China or other institution requires submitting
a payment application form together with suppliers' invoices, shipping
documents and signed contracts.
(d) Business risk
We conduct our major operations in the PRC and accordingly are subject to
special considerations and significant risks not typically associated with
investments in equity securities of the United States of America and Western
European companies. These include risks associated with, among others, the oil
and gas industry, the political, economic and legal environments, influence of
the national authorities over price setting and competition in the industry.
F-38
30. CONCENTRATION OF RISKS (CONT'D)
(e) Customer risk
A substantial portion of our oil and gas sales is made to a small number of
customers on an open account basis.
1999 2000 2001
----------------- ----------------- -----------------
RMB'000 RMB'000 RMB'000
China Petroleum & Chemical Corporation 8,597,541 6,325,061 6,282,532
PetroChina Company Limited 1,836,924 1,458,429 1,320,587
Castle Peak Power Company Limited 1,162,583 1,199,090 1,205,649
31. NOTES TO CASH FLOW STATEMENTS
(a) The reconciliation of income before taxation to net cash inflow from
operating activities is as follows:
1999 2000 2001
----------------- ----------------- -----------------
RMB'000 RMB'000 RMB'000
Income before taxation 4,833,364 12,222,676 11,005,858
Adjustments for:
Depreciation, depletion and amortization 2,373,380 2,577,882 2,566,920
Impairment losses related to property, plant and
equipment - - 99,675
Recovery of doubtful accounts (5,382) (57,658) (4,966)
Profit of an associated company (13,301) (218,326) (89,963)
Loss on disposal and written off of property, plant and
equipment - 220,146 456,827
Dismantlement and site restoration allowance 177,090 103,569 90,367
Short-term investment income - - (220,650)
Interest income (53,709) (236,624) (317,706)
Interest expense 621,704 475,004 116,634
Exchange loss (gain), net 402,529 (324,178) (261,305)
----------------- ----------------- -----------------
Operating profit before working capital changes 8,335,675 14,762,491 13,441,691
Decrease in accounts receivable (1,928,492) 1,146,613 726,976
(Increase) decrease in inventories and supplies (124,677) (2,438) 35,422
Increase in other current assets (1,791) (39,386) (447,473)
Increase (decrease) in accounts payable and accrued
liabilities 1,583,840 (1,440,278) 379,233
Increase (decrease) in other taxes payable 307,291 2,701 (110,867)
----------------- ----------------- -----------------
Net cash inflow from operating activities 8,171,846 14,429,703 14,024,982
================= ================= =================
F-39
31. NOTES TO CASH FLOW STATEMENTS (CONT'D)
(b) Analysis of changes in financing during the years:
Paid-in capital Due to
and share Due to parent related
premium Bank loans company companies
----------------- -------------- ---------------- -----------------
RMB'000 RMB'000 RMB'000 RMB'000
Proceeds from bank loans - 813,965 - -
Repayments of bank loans - (2,143,892) - -
Net repayments of loans - - (786,412) -
Net proceeds from loans - - - 159,844
Return of capital to CNOOC (471,560) - - -
Balances at January 1, 1999 2,485,762 10,030,187 877 136,985
Effect of changes in foreign exchange rates 99 402,529 - -
Transfer from reserves 5,752,654 - - -
Accrual for pension and distribution to CNOOC - - 2,399,665 -
----------------- -------------- ---------------- -----------------
Balances at January 1, 2000 7,766,955 9,102,789 1,614,130 296,829
Proceeds from short-term bank loans - 339,423 - -
Repayments of bank loans - (3,371,657) - -
Net proceeds from Private Placements 3,769,664 - - -
Net proceeds from loans - - 47,256 -
Net repayments of loans - - - (164,570)
Effect of changes in foreign exchange rates - (324,178) - -
Properties transferred from CNOOC - - 121,111 -
----------------- -------------- ---------------- -----------------
Balances at January 1, 2001 11,536,619 5,746,377 1,782,497 132,259
Proceeds from short-term bank loans - 2,500,000 - -
Repayments of bank loans - (3,497,533) - -
Net proceeds from issue of ordinary shares 10,101,564 - - -
Net prepayments of loans - - (1,657,004) -
Net proceeds from loans - - - 25,564
Effect of changes in foreign exchange rates - (261,305) - -
----------------- -------------- ---------------- -----------------
Balances at December 31, 2001 21,638,183 4,487,539 125,493 157,823
================= ============== ================ =================
32. SEGMENT INFORMATION
(a) Business segments
We are involved in the upstream operating activities of the petroleum industry
that comprise production sharing contracts with foreign partners, independent
operations and trading business. These segments are determined primarily
because the senior management makes key operating decisions and assesses
performance of the segments separately. The accounting policies of our
segments are the same as those described in the principal accounting policies
in Note 3. We evaluates performance based on profit or loss from operations
before income taxes.
F-40
32. SEGEMENT INFORMATION (CON'D)
An analysis by business segment is as follows:
Independent operations Production sharing contracts
------------------------------------------- ------------------------------------------
1999 2000 2001 1999 2000 2001
------------------------------------------- ------------------------------------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
TURNOVER Sales to external customers:
Oil and Gas sales 4,588,391 9,283,228 9,845,019 4,968,822 8,859,606 7,023,926
Marketing revenues - - - - - -
Intersegment revenues - - - 1,840,660 676,489 691,843
Other income 44,700 161,790 558,368 56,757 107,390 123,312
---------- ---------- ---------- ---------- ---------- ----------
4,633,091 9,445,018 10,403,387 6,866,239 9,643,485 7,839,081
========== ========== ========== ========== ========== ==========
RESULTS
Operating expenses (538,665) (894,813) (1,183,252) (1,316,644) (1,229,265) (1,145,878)
Production taxes (254,466) (526,491) (525,454) (324,412) (510,238) (355,544)
Exploration costs (244,378) (523,633) (955,475) (2,024) (29,236) (83,822)
Depreciation, depletion and
amortization (806,720) (1,443,045) (1,531,184) (1,566,660) (1,130,820) (1,035,736)
Dismantlement and site
restoration allowances (54,672) (49,145) (41,530) (122,418) (54,424) (48,837)
Impairment losses related to
property, plant and equipment - - (60,907) - - (38,768)
Crude oil and product purchases - - - - - -
Selling and
administrative
expenses (16,502) (33,146) (35,686) - (99) (100)
Other - (133,976) (514,655) - - -
Interest income - - - - - -
Interest expense (283,687) (262,274) (69,437) (295,798) (171,230) (13,871)
Exchange (loss) gain, net - - - - - -
Investment income - - - - - -
Share of profits of an
associated company - - - - - -
Non-operating (loss) income, net 2 (221,442) 18,267 - - -
Provision for taxation - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Net income 2,434,003 5,357,053 5,504,074 3,238,283 6,518,173 5,116,525
========== ========== ========== ========== ========== ==========
OTHER INFORMATION
Capital expenditures 3,626,737 3,326,893 1,922,074 691,577 1,244,159 2,398,601
========== ========== ========== ========== ========== ==========
Independent operation Production sharing contract
-------------------------------- --------------------------------
2000 2001 2000 2001
-------------------------------- --------------------------------
RMB'000 RMB'000 RMB'000 RMB'000
Segment assets 15,592,100 15,422,016 9,829,861 10,295,857
Investment in equity method
associate - - - -
TOTAL ASSETS 15,592,100 15,422,016 9,829,861 10,295,857
SEGMENT LIABILITIES 4,795,521 4,254,418 3,878,273 3,372,175
Trading business
-----------------------------------------------------
1999 2000 2001
-----------------------------------------------------
RMB'000 RMB'000 RMB'000
TURNOVER Sales to external customers:
Oil and Gas sales - - -
Marketing revenues 5,645,027 5,802,504 3,228,875
Intersegment revenues - - -
Other income - - -
---------- ---------- ----------
5,645,027 5,802,504 3,228,875
========== ========== ==========
RESULTS
Operating expenses - - -
Production taxes - - -
Exploration costs - - -
Depreciation, depletion and
amortization - - -
Dismantlement and site
restoration allowances - - -
Impairment losses related to
property, plant and equipment - - -
Crude oil and product purchases (5,577,331) (5,774,254) (3,145,155)
Selling and
administrative
expenses - - -
Other - - -
Interest income - - -
Interest expense - - -
Exchange (loss) gain, net - - -
Investment income - - -
Share of profits of an
associated company - - -
Non-operating (loss) income, net - - -
Provision for taxation - - -
---------- ---------- ----------
Net income 67,696 28,250 83,720
========== ========== ==========
OTHER INFORMATION
Capital expenditures - - -
========== ========== ==========
Trading business
-------------------------------
2000 2001
-------------------------------
RMB'000 RMB'000
Segment assets - 368,670
Investment in equity method
associate - -
TOTAL ASSETS - 368,670
SEGMENT LIABILITIES - 106,862
Unallocated Eliminations
--------------------------------------- ------------------------------------------
1999 2000 2001 1999 2000 2001
---------- ---------- --------- ----------- ---------- ---------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
TURNOVER Sales to external customers:
Oil and Gas sales - - - - - -
Marketing revenues - - - - - -
Intersegment revenues - - - (1,840,660) (676,489) (691,843)
Other income 6,890 9,400 40,057 - - -
--------- --------- --------- ---------- --------- ----------
6,890 9,400 40,057 (1,840,660) (676,489) (691,843)
--------- --------- --------- ---------- ---------- ----------
RESULTS
Operating expenses - - - - - -
Production taxes - - (2,770) - - -
Exploration costs - - - - - -
Depreciation, depletion and
amortization - (4,017) - - - -
Dismantlement and site - - - - - -
restoration allowances - - - - - -
Impairment losses related to - - - - - -
property, plant and equipment - - - - - -
Crude oil and product purchases - - - 1,840,660 676,489 691,843
Selling and administrative
exepenses (499,983) (422,757) (579,603) - - -
Other (5,423) (83,623) (3,221) - - -
Interest income 53,709 236,624 317,706 - - -
Interest expense (42,219) (41,500) (33,326) - - -
Exchange (loss) gain, net (431,980) 381,336 235,409 - - -
Investment income - 220,650 - - -
Share of profits of an - - - - - -
associated company 13,301 218,326 89,963 - - -
Non-operating (loss) income, net (913) 25,411 16,674 - - -
Provision for taxation (721,925) (1,926,076) (3,048,227 - - -
---------- --------- --------- ---------- --------- --------
Net income (1,628,543) (1,606,876 (2,746,688 - - -
========== ========= ========= ========== ========= ========
OTHER INFORMATION
Capital expenditures - 13,291 18,063 - - -
========== ========= ========= ========== ========= ========
Unallocated Eliminations
------------------------------ -------------------------------
2000 2001 2000 2001
------------------------------
RMB'000 RMB'000 RMB'000 RMB'000
Segment assets 6,704,417 17,771,115 - -
Investment in equity method
associate 471,027 461,990 - -
TOTAL ASSETS 7,175,444 18,233,105 - -
SEGMENT LIABILITIES 7,801,808 3,275,687 - -
Totals
--------------------------------------------------
1999 2000 2001
-------------- ------------ --------------
RMB'000 RMB'000 RMB'000
TURNOVER Sales to external customers:
Oil and Gas sales
Marketing revenues 9,557,213 18,142,834 16,868,945
Intersegment revenues 5,645,027 5,802,504 3,228,875
Other income - - -
108,347 278,580 721,737
---------- ---------- ----------
RESULTS 15,310,587 24,223,918 20,819,557
Operating expenses ---------- ---------- ----------
Production taxes
Exploration costs (1,855,309) (2,124,078 (2,329,130)
Depreciation, depletion and (578,878) (1,036,729) (883,768)
amortization (246,402) (552,869) (1,039,297)
Dismantlement and site (2,373,380) (2,577,882 (2,566,920)
restoration allowances (90,367)
Impairment losses related to (177,090) (103,569)
property, plant and equipment - - (99,675)
Crude oil and product purchases (3,736,671) (5,097,765) (2,453,312)
Selling and administrative
exepenses (516,485) (456,002) (615,389)
Other (5,423) (217,599) (517,876)
Interest income 53,709 236,624 317,706
Interest expense (621,704) (475,004) (116,634)
Exchange (loss) gain, net (431,980) 381,336 235,409
Investment income - - 220,650
Share of profits of an
associated company 13,301 218,326 89,963
Non-operating (loss) income, net (911) (196,031) 34,941
Provision for taxation (721,925) (1,926,076 (3,048,227)
---------- --------- ---------
Net income 4,111,439 10,296,600 7,957,631
========== ========== ==========
OTHER INFORMATION
Capital expenditures 4,318,314 4,584,343 4,338,738
========== ========== ===========
Total
--------------------------------
2000 2001
--------------------------------
RMB'000 RMB'000
32,126,378 43,857,658
471,027 461,990
32,597,405 44,319,648
16,475,602 11,009,142
F-41
32. SEGMENT INFORMATION (CONT'D)
(b) Geographical segments
We are an oil and gas company engaged in the exploration, development and
production of crude oil and natural gas offshore China. Approximately 87% of
our total revenue is contributed by PRC customers, therefore, our activities
are conducted predominantly in the PRC. An analysis by geographical segment is
as follows:
PRC Outside PRC Total
---------------------------------- ---------------------------------- ----------------------------------
1999 2000 2001 1999 2000 2001 1999 2000 2001
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
External sales 11,140,229 17,559,042 18,104,658 4,170,358 6,664,876 2,714,899 15,310,587 24,223,918 20,819,557
Capital expenditures 4,318,284 4,566,554 4,311,241 30 17,789 27,497 4,318,314 4,584,343 4,338,738
PRC Outside PRC Total
---------------------- ---------------------- ----------------------
2000 2001 2000 2001 2000 2001
---------- ---------- ---------- ---------- ---------- ----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Segment assets 32,432,338 43,783,409 165,067 536,239 32,597,405 44,319,648
(c) An analysis of sales to the major customers by segment is as follows:
1999 2000 2001
----------------- ------------------ ------------------
RMB'000 RMB'000 RMB'000
Production sharing contracts
China Petroleum & Chemical Corporation 5,733,935 1,850,239 2,861,847
PetroChina Company Limited 1,402,154 690,853 1,126,127
Castle Peak Power Company Limited 1,162,583 1,199,090 1,205,649
----------------- ------------------ ------------------
8,298,672 3,740,182 5,193,623
------------------ ------------------ -----------------
Independent operations
China Petroleum & Chemical Corporation 2,863,606 4,474,822 3,420,685
PetroChina Company Limited 434,770 767,576 194,460
------------------ ------------------ -----------------
3,298,376 5,242,398 3,615,145
------------------ ------------------ -----------------
11,597,048 8,982,580 8,808,768
================== ================== =================
F-42
33. SUBSEQUENT EVENTS
(i) On January 18, 2002, CNOOC Southeast Asia Limited entered into a share
purchase agreement to acquire shares and intercompany loans of nine
subsidiaries of Repsol-YPF, S.A. The nine subsidiaries together hold a
portfolio of operating and non-operating interests in oil and gas
production sharing and technical assistance contracts in contract areas
located offshore and onshore Indonesia. The aggregate consideration for
the shares and intercompany loans is US$585,000,000. The assets to be
acquired include a 65.3% interest in the Offshore Southeast Sumatra
Contract Area production sharing contract, a 36.7% interest in the
Offshore Northwest Java Contract Area production sharing contract, a 25%
interest in the West Madura Offshore Block production sharing contract,
a 50% interest in the Poleng Field technical assistance contract and a
16.7% interest in the Blora Block production sharing contract. The
acquisition is expected to be completed on or before September 30, 2002.
We would act as guarantor of CNOOC Southeast Asia Limited's obligations
under the acquisition.
(ii) Bond issue and establishment of CNOOC Finance (2002) Company
On March 1, 2002, CNOOC Finance (2002) Limited, a company incorporated
in the British Virgin Islands on January 24, 2002 and a wholly owned
subsidiary of us, issued US$500,000,000 principal amount of 6.375%
guaranteed notes due 2012. The obligations of CNOOC Finance (2002)
Limited in respect of the notes are unconditionally and irrevocably
guaranteed by us.
(iii) Dividends
On March 27, 2002, the board of directors proposed a final dividend of
HK$0.15 per share, totaling HK$1,232,124,848 (Equivalent to
RMB1,306,791,614) to our shareholders for the year ended December 31,
2001. The proposed dividend distribution is subject to shareholders
approval in their next meeting.
34. ULTIMATE HOLDING COMPANY
Our directors consider CNOOC, a company established in the PRC, as the
ultimate holding company.
35. ADDITIONAL FINANCIAL INFORMATION
As of December 31, 2001, our net current assets and total assets less current
liabilities amounted to approximately RMB15,638,483,000 (2000: RMB704,228,000)
and RMB39,927,972,000 (2000: RMB23,829,630,000), respectively.
F-43
36. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND U.S. GAAP
The accounting policies adopted by us conform to Hong Kong GAAP, which differ
in certain respects from generally accepted accounting principles in the
United States of America ("U.S. GAAP").
(a) Net income and net equity
(i) Revaluation of land and buildings
We revalued certain land and buildings on August 31, 1999 as part of the
Reorganization. We have recorded the revaluation surplus on that date. On
December 31, 2000, we revalued such properties and related revaluation surplus
of approximately RMB104,073,000 had been recorded on that date. Under Hong
Kong GAAP, revaluation of property, plant and equipment is permitted and
depreciation, depletion and amortization are based on the revalued amount.
Additional depreciation arising from the revaluation was approximately
RMB1,896,000 for the period from September 1, 1999 to December 31, 1999,
RMB5,687,000 for the year ended December 31, 2000 and RMB9,156,000 for the
year ended December 31, 2001. Under U.S. GAAP, property, plant and equipment
is required to be stated at cost. Hence, no additional depreciation, depletion
and amortization from the revaluation is recognized under U.S. GAAP.
(ii) Short-term investments
According to Hong Kong GAAP, available-for-sale investments in marketable
securities are measured at fair value and related unrealized holding gains and
loses are included in current period earnings. According to U.S. GAAP, such
investments are also measured at fair value and classified in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115. Under U.S. GAAP,
related unrealized gains and losses are excluded from current period earnings
reported.
(iii) Impairment of long-lived assets
Under Hong Kong GAAP, impairment charges are recognized when a long-lived
asset's carrying amount exceeds the higher of an asset's net selling price and
value in use, which incorporates discounting the asset's estimated future cash
flows.
Under U.S. GAAP, long-lived assets are assessed for possible impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived
assets and for Long-lived Assets to Be Disposed Of". SFAS No. 121 requires us
to assess the need for an impairment of capitalized costs of proved oil and
gas properties and the costs of wells and related equipment and facilities on
a property-by-property basis. If an impairment is indicated based on
undiscounted expected future cash flows, then an impairment is recognized to
the extent that net capitalized costs exceed the estimated fair value of the
property. We estimate the fair value of the property using the present value
of future cash flows discounted at 10%. The impairments were determined based
on the difference between the carrying value of the assets and the present
value of future cash flows discounted at 10%. It is reasonably possible that a
change in reserve or price estimates could occur in the near term and
adversely impact management's estimate of future cash flows and consequently
the carrying value of properties.
F-44
36. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND U.S. GAAP (CONT'D)
(a) Net income and net equity (Cont'd)
In addition, under Hong Kong GAAP, a subsequent increase in the recoverable
amount of an asset is reversed to the statement of income to the extent that
an impairment loss on the same asset was previously recognized 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
recognized as depreciation had the write-off not occurred. Under U.S. GAAP, an
impairment loss establishes a new cost basis for the impaired asset and the
new cost basis should not be adjusted subsequently other than for further
impairment losses.
For the year ended December 31, 2001, there were no difference on the amounts
of impairment loses recognized under Hong Kong GAAP and U.S. GAAP and no
reversal of the recovery of previous impairment charges recorded under Hong
Kong GAAP.
(iv) Stock compensation plans
As described in Note 24 to the financial statements, as of December 31, 2001,
we had two stock option plans. We apply Accounting Principles Board Opinion 25
and related Interpretations in accounting for these stock option plans.
Accordingly, compensation costs that have been recognized for the stock option
plans were RMB2,755,000 for the year ended December 31, 2001. Had compensation
costs for our stock option plans been determined based on the fair value at
the grant dates for awards under the plans consistent with the method of SFAS
No.123, our net income and earnings per share for the year ended December 31,
2001 would have been reduced to the pro forma amounts indicated below:
As reported Pro forma
----------------- -----------------
Net income (RMB'000) 7,920,236 7,912,150
Earnings per share
- Basic RMB1.00 RMB1.00
- Diluted RMB1.00 RMB1.00
Weighted average fair value of the options at the grant dates for awards under
the plans was RMB3.10 per share which was estimated using the Black-Scholes
model with the following assumptions: dividend yield of 2.0%, an expected life
of 5 years; expected volatility of 44%; and risk-free interest rates of 5.25%.
Weighted average exercise price of the stock options was HK$6.09 per share.
F-45
36. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND U.S. GAAP (CONT'D)
(a) Net income and net equity (Cont'd)
Effects on net income and net equity of above significant differences between
Hong Kong GAAP and U.S. GAAP are summarized below:
Net income
---------------------------------------------------------
1999 2000 2001
------------------- ------------------ ------------------
RMB'000 RMB'000 RMB'000
As reported under Hong Kong GAAP 4,111,439 10,296,600 7,957,631
Impact of U.S. GAAP adjustments:
- Reversal of additional depreciation, depletion
and amortization arising from the revaluation
surplus on land and buildings 1,896 5,687 9,156
- Unrealized holding gains from available-for-sale
investments in marketable securities - - (43,796)
- Recognition of stock compensation cost - - (2,755)
------------------- ------------------ ------------------
As restated under U.S. GAAP 4,113,335 10,302,287 7,920,236
=================== ================== ==================
Net income per share under U.S. GAAP
- Basic RMB 0.69 RMB 1.63 RMB 1.00
=================== ================== ==================
- Diluted RMB 0.69 RMB 1.63 RMB 1.00
=================== ================== ==================
Net equity
-------------------------------------------
2000 2001
-------------------- --------------------
RMB'000 RMB'000
As reported under Hong Kong GAAP 16,121,803 33,310,506
Impact of U.S. GAAP adjustments:
- Reversal of revaluation surplus on land and buildings (274,671) (274,671)
- Reversal of additional accumulated depreciation, depletion
and amortization charges arising from the revaluation
surplus on land and buildings 7,583 16,739
-------------------- --------------------
As restated under U.S. GAAP 15,854,715 33,052,574
==================== ====================
There are no significant GAAP differences that affect classifications within
the balance sheet or statement of income but do not affect net income or
shareholders' equity.
F-46
36. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(b) Statement of cash flows
We apply Hong Kong SSAP 15 "Cash Flow Statements". Its objectives and
principles are similar to those set out in SFAS No. 95, "Statement of Cash
Flows". The principal differences between the standards relate to
classification. Under Hong Kong SSAP 15, we present our cash flows for (a)
operating activities; (b) returns on investments and servicing of finance; (c)
taxation; (d) investing activities; and (e) financing. Cash flows from
taxation and returns on investments and servicing of finance would be included
as operating activities under SFAS No. 95, with the exception of
distributions, which under SFAS No. 95 would be classified as financing
activities. Summarized cash flow data by operating, investing and financing
activities in accordance with SFAS No. 95 are as follows:
1999 2000 2001
------------------ ------------------ -----------------
RMB'000 RMB'000 RMB'000
Net cash inflow (outflow) from:
- Operating activities 7,323,219 13,232,701 11,759,457
- Investing activities (4,442,058) (7,860,606) (11,366,434)
- Financing activities (2,428,055) (3,454,350) 3,204,074
------------------ ------------------ -----------------
Changes in cash and cash equivalents 453,106 1,917,745 3,597,097
Cash and cash equivalents at beginning of year 425,776 878,882 2,796,627
------------------ ------------------ -----------------
Cash and cash equivalents at end of year 878,882 2,796,627 6,393,724
================== ================== =================
(c) Comprehensive income
According to SFAS No. 130, it is required to include a statement of other
comprehensive income for revenues and expenses, gains and losses that under
U.S. GAAP are included in comprehensive income and excluded from net income.
1999 2000 2001
---------------- ----------------- -----------------
RMB'000 RMB'000 RMB'000
Net income under U.S. GAAP 4,113,335 10,302,287 7,920,236
Other comprehensive income:
Foreign currency translation adjustments 99 (6,350) 702
Unrealized gains on short-term investments - - 43,796
---------------- ----------------- -----------------
Comprehensive income under U.S. GAAP 4,113,434 10,295,937 7,964,734
================ ================= =================
Roll forward of accumulated other comprehensive income components are as
follows:
Foreign currency Unrealized gains Accumulated other
translation on short-term comprehensive
adjustments investments income
------------------- ------------------- -------------------
RMB'000 RMB'000 RMB'000
Balance at January 1, 2000 - - -
Current year change (6,350) - (6,350)
------------------- ------------------- -------------------
Balance at January 1, 2001 (6,350) - (6,350)
Current year change 702 43,796 44,498
------------------- ------------------- -------------------
Balance at December 31, 2001 (5,648) 43,796 38,148
=================== =================== ===================
F-47
36. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND U.S. GAAP (CONT'D)
(d) Derivative instruments
We had a currency swap contract with a financial institution to sell United
States dollars in exchange for Japanese Yen in order to hedge certain Japanese
Yen denominated loan repayments in the future. In accordance with SFAS No.133,
the derivative contract was recorded as "other current liabilities" in the
consolidated balance sheet at fair value. For the year ended December 31,
2001, we recognized related changes in fair value, a loss of RMB29,134,000,
and included the amount in "exchange gain, net" in the consolidated statement
of income. The adoption of SFAS No. 133 as of January 1, 2001 had no impact on
our financial statements.
(e) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. The most significant estimates
pertain to proved oil and gas reserve volumes and the future development,
dismantlement and abandonment costs as well as estimates relating to certain
oil and gas revenues and expenses. Actual amounts could differ from those
estimates and assumptions.
(f) Deferred income taxes
Under Hong Kong GAAP, we provide deferred taxes for timing differences only to
the extent that it is probable that a liability or asset will crystallize in
the foreseeable future. U.S. GAAP requires full provision for deferred taxes
under the asset and liability method on all temporary differences.
For Hong Kong GAAP purposes, deferred taxes are provided using the liability
method whereby it is calculated using tax rates estimated to be applicable
when timing differences reverse.
For U.S. GAAP purposes, deferred tax assets and liabilities are recognized for
the expected future tax consequences of existing differences between financial
reporting and tax reporting bases of assets and liabilities, and loss or tax
credit carryforwards using enacted tax rates expected to be in effect when
these differences are realized. Valuation allowances are recorded for deferred
tax assets for which it is more likely than not that such assets will be
realized.
For the year ended December 31, 2001, there was no difference on the amounts
of deferred income taxes recognized under Hong Kong GAAP and U.S. GAAP.
(g) Segment reporting
Our segment information is based on the segmental operating results regularly
reviewed by our chief operating decision maker. The accounting policies used
are the same as those used in the preparation of our consolidated Hong Kong
GAAP financial statements.
F-48
36. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND U.S. GAAP (CONT'D)
(h) Newly issued accounting standards
(i) SFAS No. 141 "Business Combinations"
In June 2001, SFAS No. 141 "Business Combinations" was released. This
statement addresses financial accounting and reporting for business
combinations and requires that the purchase method of accounting to be used
for all business combinations initiated or with the acquisition date after
June 30, 2001. The adoption of the statement is not expected to have a
significant effect on our financial statements.
(ii) SFAS No. 143 "Accounting for Asset Retirement Obligations"
On August 15, 2001, SFAS No. 143 "Accounting for Asset Retirement Obligations"
was released and will be effective for the fiscal years beginning after June
15, 2002. This statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived assets. Further, under this statement, the liability is discounted
and accretion expense is recognized using the credit-adjusted risk-free
interest rate in effect when the liability was initially recognized.
According to the existing accounting policies adopted to prepare the financial
statements, we estimate future dismantlement and site restoration costs for
oil and gas properties with reference to the estimates provided from either
internal or external engineers after taking into consideration the anticipated
method of dismantlement and the extent of site restoration required in
accordance with current legislation and industry practice. We provide for the
future dismantlement and site restoration allowance using the unit of
production method over the useful life of the related asset.
Adoption of the statement will likely result in increase in both costs of
assets and total liabilities. We are currently assessing these matters and
have not yet determined whether or the extent to which they will affect the
financial statements.
(iii) SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived
Assets"
In August 2001, SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-lived Assets" was released and will be effective for the fiscal years
beginning after December 15, 2001. This statement retains the requirements of
SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount
of a long-lived asset is not recoverable from its undiscounted cash flows and
(b) measure an impairment loss as the difference between the carrying amount
and fair value of the asset. This statement requires that a long-lived asset
to be abandoned, exchanged for a similar productive asset, or distributed to
owners in a spinoff be considered held and used until it is disposed of. The
accounting model for long-lived assets to be disposed of by sale is used for
all long-lived assets, whether previously held and used or newly acquired.
That accounting model retains the requirement of SFAS No. 121 to measure a
long-lived asset classified as held for sale at the lower of its carrying
amount or fair value less cost to sell and to cease depreciation. Therefore,
discontinued operations are no longer measured on a net realizable value
basis, and future operating losses are no longer recognized before they occur.
The changes in this statement improve financial reporting by requiring that
one accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and by broadening the
presentation of discontinued operations to include more disposal transactions.
The adoption of the statement is not expected to have a significant effect on
our financial statements.
F-49
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The following disclosures are included in accordance with the United States
Statements of Financial Accounting Standards No. 69, "Disclosures about Oil
and Gas Producing Activities".
(a) Reserve quantity information
Crude oil and natural gas reserve estimates are determined through analysis of
geological and engineering data which appear, with reasonable certainty, to be
recoverable at commercial rates in the future from known oil and natural gas
reservoirs under existing economic and operating conditions.
Estimates of crude oil and natural gas reserve have been made by independent
engineers and our internal engineers. Our net proved reserves consist of our
percentage interest in reserves, comprised of a 100% interest in our
independent oil and gas properties and our participating interest in the
properties covered under the production sharing contracts, less (a) an
adjustment for our share of royalties payable by us to the PRC government and
our participating interest in share oil payable to the PRC government under
the production sharing contracts, and less (b) an adjustment for production
allocable to foreign partners under the production sharing contracts as
reimbursement for exploration expenses attributable to our participating
interest.
Proved developed and undeveloped reserves (net of royalties and government
share oil):
Oil* Natural gas
------------------ ------------------
(mmbls) (bcf)
December 31, 1998 1,176 3,396
Discoveries and extensions 144 14
Production (64) (74)
Revisions of prior estimates (14) (4)
------------------ ------------------
December 31, 1999 1,242 3,332
Discoveries and extensions 76 5
Sales of reserves (41) -
Production (75) (72)
Revisions of prior estimates 14 (15)
------------------ ------------------
December 31, 2000 1,216 3,250
Discoveries and extensions 199 166
Production (84) (71)
Revisions of prior estimates (52) (97)
------------------ ------------------
December 31, 2001 1,279 3,248
================== ==================
--------------
* Crude oil and natural gas liquids, including 33mmbls reserve estimated by
our internal engineers.
Proved developed reserves:
Oil* Natural gas
------------------- -------------------
(mmbls) (bcf)
December 31, 1999 358 608
December 31, 2000 546 558
December 31, 2001 582 765
---------------
* Crude oil and natural gas liquids.
F-50
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(CONT'D)
(b) Results of operations
1999 2000 2001
----------------- ------------------ ------------------
RMB'000 RMB'000 RMB'000
Net sales to customers 11,397,873 18,819,323 17,560,788
Operating expenses (1,855,309) (2,124,078) (2,329,130)
Production taxes (578,878) (1,036,729) (883,768)
Exploration costs (246,402) (552,869) (1,039,297)
Depreciation, depletion and amortization (2,373,380) (2,577,882) (2,566,920)
----------------- ------------------ ------------------
Results of operations before tax 6,343,904 12,527,765 10,741,673
Income taxes (1,307,593) (2,265,847) (3,992,578)
----------------- ------------------ ------------------
Results of operations 5,036,311 10,261,918 6,749,095
================= ================== ==================
(c) Capitalized costs
1999 2000 2001
------------------- ------------------ ------------------
RMB'000 RMB'000 RMB'000
Proved oil and gas properties 33,045,347 36,323,472 40,748,848
Unproved oil and gas properties 711,113 996,452 428,611
Accumulated depreciation, depletion and amortization (13,216,562) (15,482,082) (18,154,653)
------------------- ------------------ ------------------
Net capitalized costs 20,539,898 21,837,842 23,022,806
=================== ================== ==================
(d) Costs incurred
1999 2000 2001
------------------ ------------------ -----------------
RMB'000 RMB'000 RMB'000
Acquisition costs - - -
Exploration costs 474,210 610,159 996,121
Development costs 3,877,367 4,176,555 3,958,357
------------------ ------------------ -----------------
Total costs incurred 4,351,577 4,786,714 4,954,478
================== ================== =================
F-51
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(CONT'D)
(e) Standardized measure of discounted future net cash flows and changes therein
In calculating the standardized measure of discounted future net cash flows,
year-end constant price and cost assumptions were applied to our estimated
annual future production from proven reserves to determine future cash
inflows. Year end average realized oil prices used in the estimation of proved
reserves and calculation of the standardized measure were US$17 as of December
31, 2001 (2000: US$22; 1999: US$22). Future development costs are estimated
based upon constant price assumptions and assume the continuation of existing
economic, operating and regulatory conditions. Future income taxes are
calculated by applying the year-end statutory rate to estimated future pre-tax
cash flows after provision for the tax cost of the oil and natural gas
properties based upon existing laws and regulations. The discount was computed
by application of a 10% discount factor to the estimated future net cash
flows.
Management believes that this information does not represent the fair market
value of the oil and natural gas reserves or the present value of estimated
cash flows since no economic value is attributed to potential reserves, the
use of a 10% discount rate is arbitrary, and prices change constantly from
year-end levels.
Present value of estimated future net cash flows:
Note 1999 2000 2001
-------- ----------------- ------------------ ------------------
RMB'000 RMB'000 RMB'000
Future cash inflows (i) 335,668,012 326,513,363 261,339,180
Future production costs (75,159,191) (73,402,341) (74,404,378)
Future development costs (ii) (34,712,865) (31,279,348) (38,640,756)
Future income taxes (34,632,334) (30,833,803) (39,097,483)
----------------- ------------------ ------------------
Future net cash flows (iii) 191,163,622 190,997,871 109,196,563
10% discount factor (103,441,165) (97,607,274) (58,114,105)
----------------- ------------------ ------------------
Standardized measure 87,722,457 93,390,597 51,082,458
================= ================== ==================
(i) Future cash flows consist of our 100% interest in the independent oil
and gas properties and our participating interest in the properties
under production sharing contracts less (a) an adjustment for the
royalties payable to the PRC government and share oil payable to the
PRC government under production sharing contracts and (b) an adjustment
for production allocable to foreign partners under the production
sharing contracts for exploration costs attributable to the our
participating interest.
(ii) Future development costs include the estimated costs of drilling future
development wells and building the production platforms.
(iii) Future net cash flows have been prepared taking into consideration
estimated future dismantlement and site restoration costs of
dismantling offshore oil platforms and oil and gas properties.
F-52
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(CONT'D)
(e) Standardized measure of discounted future net cash flows and changes
therein (CONT'D)
Changes in the standardized measure of discounted future net cash flows:
1999 2000 2001
------------------- ------------------ -----------------
RMB'000 RMB'000 RMB'000
Standardized measure, beginning of year: 38,446,846 87,722,457 93,390,597
Sales of production, net of royalties and production
costs (8,963,686) (15,658,516) (14,347,890)
Net change in prices, net of royalties and production
costs 53,656,976 578,121 (32,289,445)
Extensions, discoveries and improved recovery, net of
related future costs 9,742,935 5,417,977 9,985,707
Change in estimated future development costs (6,512,940) 3,433,517 (9,651,681)
Development costs incurred during the year 3,877,367 4,176,555 3,958,357
Revisions in quantity estimates (932,128) 830,236 (3,272,326)
Accretion of discount 4,469,855 10,361,478 10,846,714
Net change in income taxes (9,640,963) 815,779 (3,241,861)
Sales of property - (2,865,132) -
Changes in timing and other 3,578,195 (1,421,875) (4,295,714)
------------------- ------------------ -----------------
Standardized measure, end of year 87,722,457 93,390,597 51,082,458
=================== ================== =================
F-53
EXHIBIT INDEX
Exhibit
Number Document
------ --------
1.1 Articles of Association of the Registrant, incorporated by
reference to Exhibit 3.1 to our Registration Statement on
Form F-1 filed with the Securities and Exchange Commission
(File Number: 333-10862).
1.2 Memorandum of Association of the Registrant, incorporated by
reference to Exhibit 3.2 to our Registration Statement on
Form F-1 filed with the Securities and Exchange Commission
(File Number: 333-10862).
4.1 The Asset Swap Agreement dated July 20, 1999 between CNOOC
and Offshore Oil Company Limited, incorporated by reference
to Exhibit 10.1 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.2 The Asset Allocation Agreement dated July 20, 1999 between
CNOOC and Offshore Oil Company Limited, incorporated by
reference to Exhibit 10.2 to our Registration Statement on
Form F-1 filed with the Securities and Exchange Commission
(File Number: 333-10862).
4.3 The Reorganisation Agreement dated September 13, 1999
between CNOOC, Offshore Oil Company Limited and CNOOC
Limited, incorporated by reference to Exhibit 10.3 to our
Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.4 Form of the Equity Transfer Agreement between CNOOC and
CNOOC Limited, incorporated by reference to Exhibit 10.4 to
our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.5 Form of the Transfer Agreement dated October 1, 1999 between
CNOOC and Offshore Oil Company Limited regarding the
transfer of the rights and obligations of CNOOC under the 37
production sharing contracts and one geophysical exploration
agreement, incorporated by reference to Exhibit 10.5 to our
Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.6 Form of Equity Transfer Agreement between China Offshore Oil
East China Sea Corporation and Offshore Oil Company Limited
regarding the transfer of the rights and obligations under
Joint Venture Contract of Shanghai Petroleum and Natural Gas
Company Limited dated July 28, 1992 to Offshore Oil Company
Limited, incorporated by reference to Exhibit 10.6 to our
Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.7 Transfer Agreement dated September 9, 1999 between CNOOC and
Offshore Oil Company Limited regarding the transfer of the
rights and obligations of CNOOC under the Natural Gas Sale
and Purchase Contract dated December 22, 1992 to Offshore
Oil Company Limited, incorporated by reference to Exhibit
10.7 to our Registration Statement on Form F-1 filed with
the Securities and Exchange Commission (File Number:
333-10862).
4.8 Transfer Agreement dated September 9, 1999 between CNOOC and
Offshore Oil Company Limited regarding the transfer of the
rights and obligations of CNOOC under the Natural Gas Sale
and Purchase Contract dated November 7, 1992 to Offshore Oil
Company Limited, incorporated by reference to Exhibit 10.8
to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.9 Transfer Agreement dated September 9, 1999 among CNOOC,
Offshore Oil Company Limited, the four PRC subsidiaries and
CNOOC's affiliates regarding the transfer of the rights and
obligations of the technical services agreements to Offshore
Oil Company Limited, incorporated by reference to Exhibit
10.9 to our Registration Statement on Form F-1 filed with
the Securities and Exchange Commission (File Number:
333-10862).
4.10 Nanshan Terminal Leasing Agreement dated September 9, 1999
between CNOOC, Hainan China Oil and Offshore Natural Gas
Company and Offshore Oil Company Limited, incorporated by
reference to Exhibit 10.10 to our Registration Statement on
Form F-1 filed with the Securities and Exchange Commission
(File Number: 333-10862).
4.11 Trademark Licence Agreement dated September 9, 1999 between
CNOOC, Offshore Oil Company Limited and CNOOC Limited,
incorporated by reference to Exhibit 10.11 to our
Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.12 Trademark Licence Agreement dated September 9, 1999 between
China Offshore Oil Marketing Company, CNOOC Limited and
Offshore Oil Company Limited and CNOOC Limited, incorporated
by reference to Exhibit 10.12 to our Registration Statement
on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.13 Agreement for provision of materials, facilities and
auxiliary services dated September 9, 1999 between China
Offshore Oil Bohai Corporation and Offshore Oil Company
Limited, incorporated by reference to Exhibit 10.13 to our
Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.14 Agreement for provision of materials, facilities and
auxiliary services dated September 9, 1999 between China
Offshore Oil Eastern South China Sea Corporation and
Offshore Oil Company Limited, incorporated by reference to
Exhibit 10.14 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.15 Agreement for provision of materials, facilities and
auxiliary services dated September 9, 1999 between China
Offshore Oil Western South China Sea Corporation and
Offshore Oil Company Limited, incorporated by reference to
Exhibit 10.15 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.16 Agreement for provision of materials, facilities and
auxiliary services dated September 9, 1999 between China
Offshore Oil East South China Sea Corporation and Offshore
Oil Company Limited, incorporated by reference to Exhibit
10.16 to our Registration Statement on Form F-1 filed with
the Securities and Exchange Commission (File Number:
333-10862).
4.17 General Research and Development Agreement dated September
9, 1999 between China Ocean Oil Research Institute and
Offshore Oil Company Limited, incorporated by reference to
Exhibit 10.17 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.18 Property Leasing Agreement dated September 9, 1999 between
Wui Hai Enterprise Company Limited and Offshore Oil Company
Limited in respect of the office premises at 6th, 7th and
8th Floors, CNOOC Plaza, No. 6 Dong Zhi Men Wai Xiao Jie,
Beijing, incorporated by reference to Exhibit 10.18 to our
Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.19 Property Leasing Agreement dated September 9, 1999 between
China Offshore Oil Western South China Sea Corporation and
Offshore Oil Company Limited in respect of the office
premises at 1st to 9th Floors, Nantiao Road, Potou District
Zhangjiang, Guangdong, incorporated by reference to Exhibit
10.19 to our Registration Statement on Form F-1 filed with
the Securities and Exchange Commission (File Number:
333-10862).
4.20 Property Leasing Agreement dated September 9, 1999 between
China Offshore Oil Bohai Corporation and Offshore Oil
Company Limited in respect of the office premises at 1st to
7th Floors and 9th Floor, 2-37 He Kou Jie, Tanggu District,
Tianjin, incorporated by reference to Exhibit 10.20 to our
Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.21 Property Leasing Agreement dated September 9, 1999 between
China Offshore Oil East China Sea Corporation and Offshore
Oil Company Limited in respect of the office premises at
20th, 22nd and 23rd Floors, 583 Ling Ling Road, Shanghai,
the PRC, incorporated by reference to Exhibit 10.21 to our
Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.22 Property Leasing Agreement dated September 9, 1999 between
China Offshore Oil Eastern South China Sea Corporation and
Offshore Oil Company Limited in respect of the office
premises at 3rd Floor and 6th to 11th Floors, 1 Second
Industrial Road, Shekou, Shenzhen, the PRC, incorporated by
reference to Exhibit 10.22 to our Registration Statement on
Form F-1 filed with the Securities and Exchange Commission
(File Number: 333-10862).
4.23 Property Leasing Agreement dated September 9, 1999 between
China Offshore Oil Bohai Corporation and Offshore Oil
Company Limited in respect of the Chengbei Warehouse,
Chengbei Road, Tanggu District, Tianjin City, the PRC,
incorporated by reference to Exhibit 10.23 to our
Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.24 Property Leasing Agreement dated September 9, 1999 between
Overseas Oil & Gas Corporation Ltd. and China Offshore Oil
(Singapore) International Pte. Ltd. in respect of the
residential premises at 10-01 and 17-002 Aquamarine Tower,
50 Bayshore Road, 13-05 Jade Tower, 60 Bayshore Road,
Singapore, incorporated by reference to Exhibit 10.24 to our
Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.25 Suizhong Pier Agreement dated September 9, 1999 between
Offshore Oil Company Limited and China Offshore Bohai
Corporation, incorporated by reference to Exhibit 10.25 to
our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.26 Form of Novation Agreement among CNOOC, CNOOC China Limited,
the Banks and other financial institution and the Fuji Bank
Limited Hong Kong Branch, as agent, in respect of the
transfer of the US$110 million syndicated loan, incorporated
by reference to Exhibit 10.26 to our Registration Statement
on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.27 Form of the Undertaking Agreement between CNOOC and CNOOC
Limited, incorporated by reference to Exhibit 10.27 to our
Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.28 Employment Contract between CNOOC Limited and Liucheng Wei
(Service Agreement for Director, incorporated by reference
to Exhibit 10.28 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.29 Employment Contract between CNOOC Limited and Chengyu Fu
(Service Agreement for Director, incorporated by reference
to Exhibit 10.29 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.30 Employment Contract between CNOOC Limited and Shouwei Zhou
(Service Agreement for Director, incorporated by reference
to Exhibit 10.30 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.31 Form of Pre-Global Offering Share Option Scheme for the
Senior Management of CNOOC Limited, incorporated by
reference to Exhibit 10.31 to our Registration Statement on
Form F-1 filed with the Securities and Exchange Commission
(File Number: 333-10862).
4.32 Form of Share Option Scheme for the Senior Management of
CNOOC Limited, incorporated by reference to Exhibit 10.32 to
our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.33 Subscription Agreement dated March 17, 2000 among CNOOC
Limited, CNOOC (BVI) Limited, Overseas Oil & Gas
Corporation, Ltd., et al., incorporated by reference to
Exhibit 10.33 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.34 Subscription Agreement dated May 31, 2000 among CNOOC
Limited, CNOOC (BVI) Limited, Overseas Oil & Gas
Corporation, Ltd. and Hutchison International Limited,
incorporated by reference to Exhibit 10.34 to our
Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.35 Subscription Agreement dated May 31, 2000 among CNOOC
Limited, CNOOC (BVI) Limited, Overseas Oil & Gas
Corporation, Ltd. and Hongkong Electric Holdings Limited,
incorporated by reference to Exhibit 10.35 to our
Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.36 Subscription Agreement dated June 28, 2000 among CNOOC
Limited, CNOOC (BVI) Limited, Overseas Oil & Gas
Corporation, Ltd., et al., incorporated by reference to
Exhibit 10.36 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File
Number: 333-10862).
4.37 Corporation Placing Agreement dated February 6, 2001 among
CNOOC Limited, China National Offshore Oil Corporation,
Shell Eastern Petroleum (Pte) Limited and Merrill Lynch Far
East Limited, incorporated by reference to Exhibit 10.37 to
our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
8 List of Subsidiaries.
10 Letter from CNOOC Limited dated May 23, 2002 regarding
receipt of certain representations from Arthur Andersen &
Co. pursuant to the requirements of the United States
Securities and Exchange Commission.