2010 CNPC Industry Report 20110124

8/2/2019 2010 CNPC Industry Report 20110124

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Report on Domestic and OverseasOil & Gas Industry

Development in 2010

CNPC Research Institute of Economics & Technology

January 2011


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2011, CNPC Research Institute of Economics & Technology. All rightsreserved. No part of this publication may be reproduced, scanned into anelectronic retrieval system, or transmitted in any form or by any means,including photocopying and recording, without the written permission of thepublishers.

Please note that here is only the summary of the report that was released onJanuary 20th, with data based upon estimations that might be quite differentfrom official annual data. For further information, please contact:[email protected]


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Overview of Domestic and Overseas Oil & GasIndustry Development in 2010

Given the bumpy recovery of the world economy in 2010, the global oil & gasindustry experienced recoverable growth, with oil demand rebounding rapidly,oil supply increasing generally and oil prices at a high level. China s oil & gasindustry continued its strong momentum, and created numerous historicallyhigh records. Chinese oil demand achieved double-digit growth. Both crude oildemand and crude throughput exceeded 400 million tons, while crude oilproduction exceeded 200 million tons for the first time. Natural gas demandexceeded 100 billion cubic meters (BCM); Chinese oil companies speeded uptheir overseas business layout with the total M&A transaction volumeexceeding $30 billion and the equity oil & gas production surpassing 60 milliontons of oil equivalent (toe). China is becoming a major driving force in thedevelopment of the global oil & gas industry.

1. Characteristics of the Global Oil & Gas Industry in 2010

1.1 The world economy has bottomed out, but the basis for recovery wasnot so firm. Emerging economies became the first to step out of thecrisis, and were the main drivers of world economic growth.

2010 was the third year since the onset of the global financial crisis. Despitevarious government stimulus policies, the world economy continued to recoverin a twisted way. Global GDP surpassed the level in 2008. According to theInternational Monetary Fund (IMF), the global economy growth rate in 2010 isestimated to hit 4.8%, with 2.7% for developed countries and 7.1% foremerging economies and developing countries. The US, the eurozone andJapan are expected to grow by 2.6%, 1.7% and 2.8% respectively, while China,India, Russia and Brazil, as leading forces of the world economic recovery, willexpand by 10.5%, 9.7%, 4% and 7.5% respectively.

Although the hardest time for the world economy had already passed, therewere still some imbalances and uncertainties. In America and Europe, theunemployment rate remains stubbornly high, which is affecting consumerconfidence and the economic recovery. For some big European countries,the debt ratio has been so far beyond the red line and sovereign debt crisesare frequent. Though the EU has taken positive rescue measures, the debtcrisis will seriously affect the progress of the European economic recovery.The quantitative easing II (QE2) monetary policy by the US Federal Reserve,releasing $600 billion, will create pressure for further dollar depreciation, andcause rising commodity prices. The international trade volume has rebounded,

but trade frictions intensified. New trade protectionism and imported inflationwill undermine the recovery momentum in the emerging economies.


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1.2 Global oil demand returned to the pre-financial crisis level, withemerging economies leading the demand growth. The international oilprice was back to fundamentals, with the annual average price at

$79.45/barrel in 2010, 28.4% higher than that in 2009. The price wasrelatively stable, resulting in a minimum fluctuation over the past 15years.

Global oil demand rebounded rapidly to 87.45 million barrel per day (mbd) in2010, more than the level of 86.70mb/d in 2007 before the financial crisis, andbegan to show an upward trend. Emerging economies were the main engine ofglobal oil demand growth. Non-OECD oil demand is estimated to be 41.50mbd in 2010, 5% higher or 1.97 mbd more than 2009. That is the highestgrowth since 2004. Oil demand in the Asia-Pacific amounted to 19.52 mbd in

2010, with the world s highest growth rate of 6.3%.Global oil supply is estimated to rise to 87.30 mbd in 2010, 2.5% higher or 2.1mbd more than that in 2009. Non-OPEC production (including global bio-fuels)amounted to 52.8 mbd, 1.10 mbd more than the previous year. The OPECproduction quota remained unchanged for two consecutive years, but theactual output (including natural gas liquids) increased by 1 mbd in 2010. Giventhat global oil supply was slightly lower than oil demand, the oil market balancewas achieved by releasing surplus oil inventories, which, to some extent,provided the foundations for a higher oil price.

The international oil price stayed at a high level throughout 2010, with theannual average WTI spot price at $79.45/b, 28.4% or $17.5/b higher than thatof 2009. Since the start of the new century, that is the second record high onlybehind 2008. The oil price dropped to its lowest point at $65.58/b on May 25and reached its highest point at $91.44/b on December 31, 2010. Thus, theprice fluctuated by 39.4%, lowest in the past 15 years. The oil price fluctuationswere mainly driven by economic recovery expectations and dollar valuechanges, rather than by speculation.

The price relationship between WTI and Brent reversed frequently in 2010.Typically, due to difference in crude quality, WTI was higher than Brent. Sincethe financial crisis, the US economy has deteriorated and the dollar hasdepreciated. Demand contractions and production growth resulted in a highcrude oil inventory at Cushing hub. At the same time, the Brent price wassupported due to crude supply reductions during oilfield maintenance in theNorth Sea. The price spread between the two crude grades was once as highas $10/b.

1.3 Global exploration & development activities revived after


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experiencing a brief contraction. Oil and gas production returned togrowth, at rates of 1.7% and 2.4% respectively.

According to the latest data released by Oil and Gas Journal (OGJ), global oilreserves increased by 8.9% to 201.39 billion tons and global natural gasreserves rose by 0.6% to 188 trillion cubic meters (TCM) in 2010. Most of thenewly added oil reserves came from South America and Africa. With heavy oilbeing calculated in statistics for the first time, oil reserves in Venezuela rosefrom 99.3 billion bbl (13.6 billion tons) to 211.2 billion bbl (28.9 billion tons).Brazils offshore oil and gas reserves increased consecutively, with 2.05 billiontons of oil reserves in the Libra pre-salt discovery. Oil reserves in Africaincreased by 3.4%. For the first time, OGJ put Uganda in East Africa into worldoil reserve statistics, with 170 million tons of proved oil and 14.1 BCM ofproven gas reserves added to the list.

Global oil production fell by 2.6% in 2009, the biggest drop since 1982, butincreased by 1.7% in 2010. Oil production in the Asia-Pacific increased by3.9%, while oil production in North America increased by 2.4% to 540 milliontons, most of which was due to unconventional oil. As the world s biggest oilproducer, Russia lifted its oil production by 2.7% to 500 million tons. Oilproduction in Africa increased by 3% to 445 million tons, with production inNigeria increasing dramatically by 13%.

In 2009, global natural gas production experienced the first drop since 1970.

With the pace of demand recovery, gas production resumed growth in 2010. Itis estimated to be 3060 BCM, 70 BCM more than 2009. The former SovietUnion, North America, the Asia-Pacific and the Middle East remained theworlds four major natural gas production regions, with their combinedproduction accounting for 78% of the worlds total. Unconventional gas supplyin North America kept rising, accounting for more than 50% of the total naturalgas output in the US.

Global exploration & development investment were re-activated in 2010 due tothe significant role played by national oil companies (NOCs). According to

estimates, the planned exploration & development expenses of the 24 NOCsamounted to $189.2 billion, 13.9% more than 2009. Among them, Petrobrasranked first with $20.5 billion, 24% more than 2009. Global exploration &development investment in 2011 will be restored to the pre-financial crisis level.The investment shall be mainly directed toward unconventional oil and gasprojects in North America, large oil and gas projects in the Middle East andAfrica, LNG projects in Asia-Pacific and deep-water pre-salt oil and gasprojects in Latin America.

1.4 The global refining industry gradually stepped out of the shadow ofthe financial crisis, with refining capacity resuming its growth, but also


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with regional imbalances. Global ethylene capacity increased by 10million tons. A new pattern of global ethylene production is under way.

The global refining industry gradually stepped out of the shadow of thefinancial crisis, and began to recover. Global refining capacity increased for 9years consecutively and reached 4.41 billion tons in 2010, 1.2% higher or50.30 million tons more than 2009. Global crude throughput was 74.08 mbd,2.6% more than 2009. The global refinery utilization rate stopped its downwardtrend and began to stabilize. Global refining margins began to climb, and thosein North America, Western Europe and the Asia-Pacific increased by 6.5%,23.6% and 39.5 % respectively. But there was uneven development in differentregions oil refining industries: refining industries in Europe, the Americas andother developed areas were in adjustment and restructuring with slow recovery;the refining capacity in emerging economies, led by China and India, continued

to show strong growth momentum; the Middle East accelerated its refiningdevelopment based upon resource advantages, and proposed more capacityconstruction projects; and Africa actively searched for more foreign investmentto boost refining capacity. Due to the rising oil price, alternative fueldevelopment became active again, and the bio-fuel investment boom returned.

Global ethylene capacity increased by 10 million tons in 2010, the peak year interms of newly added capacity. However, due to less growth in demand thanproduction, ethylene capacity utilization decreased to 80%. After overtakingNorth America in 2009, the Asia-Pacific witnessed a rapid growth in ethylenecapacity by 15.6% in 2010, and firmly secured its first place globally. Ethylenecapacity in the Middle East was put into operation intensively, and had anenormous impact on global petrochemical markets. The global ethyleneindustry pattern was reshaped with the Asia-Pacific ranking first, NorthAmerica second, followed by Western Europe and the Middle East. With anumber of large ethylene plants coming on stream, the average size of globalethylene plants continued to expand, rising to 525,000 tons. Due to the risingoil price and the development of natural gas industry, especiallyunconventional gas in America, the proportion of natural gas as a raw material

to ethylene increased substantially, while that of naphtha decreased. Ethyleneraw materials are becoming more diversified and lighter.

1.5 Global natural gas demand recovered, and natural gas trade volumemaintained rapid growth. The three natural gas markets had differentprice trends, with a slight increase in North America, a sharp rise inEurope and a moderate growth in the Asia-Pacific.Global natural gas consumption began to stabilize and rise, but failed to returnto the peak in 2008. Total consumption in 2010 amounted to 3 trillion cubicmeters, with 2% growth, lower than the average over the past decade. The


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growth rate for the Asia-Pacific and Europe (including Central Asia and Russia)was close to 3%. Power generation became a major driver of global naturalgas consumption, and the fastest growing sector for gas utilization. TheInternational Energy Agency (IEA) estimated that in OECD countries the share

of natural gas used in power generation reached 34.8% in 2010, 7.4percentage points higher than 2000. While in emerging countries such asChina, most of the consumption growth derived from the residential sector orcity gas.

The global natural gas trade continued to maintain fast growth. Between 2005and 2009, global natural gas trade volume grew by 20%, with annual averagegrowth of nearly 5%. The global natural gas trade volume reached 876.6 BCMin 2009, 72.3% for pipeline gas and 27.7% for LNG. The annual averagegrowth of LNG trade from 2005 to 2009 reached 6%, higher than that of

pipeline gas. Qatar is the largest LNG exporter, and its LNG productioncapacity reached 77.2 million tons per year as of September 2010, accountingfor 28.04% of the world s total. With increasing LNG trade and a growing gasspot market, the relevance of regional markets is enhancing, despite the factthat the world gas market is still not unified.

In 2010, global natural gas prices kept pace with those of oil prices, but theprice levels varied in different regions, with the lowest in the US and thehighest in Japan. The annual average natural gas prices at Henry Hub andNBP were $4.41/MMBtu and $6.55/MMBtu respectively, which were 11.8%and 37.5% higher than 2009. From January to October 2010, the average CIFprice in Japan was $10.75/MMBtu, 21.6% higher than that in the same periodof 2009. Pushed by European companies, Russia agreed that 15% of the gastransacted under long-term contract be priced in linkage with the spot gasmarket.

1.6 The operating performance of IOCs rebounded sharply, but did notfully recover to the pre-financial crisis level. IOCs emphasized

investment restructuring and focused on natural gas development,especially unconventional gas, and actively carried forward deep-waterprojects.

Driven by the global economy recovery and the rising oil price in 2010, theoperating performance of large international oil companies (IOCs) hassignificantly improved. Excluding BP, the net profit of Exxon Mobil, Shell,Chevron, Total and ConocoPhillips increased by an average of 60% in the firstthree quarters in 2010, exceeding that for the whole of 2009. For the six majorIOCs, natural gas production increased by 9.8%, higher than crude oil growth.

Natural gas not only resulted in the largest production growth rate in the past 5years, but also became the main force of production growth for IOCs. In the


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first three quarters, for the six IOCs, crude throughput varied individually butremained flat collectively; and oil product sales differed individually butincreased by 1% collectively.

In 2010, IOCs continued to focus their investment on upstream, the share ofwhich was more than 80% in total investment. In downstream business, IOCscontinued their emphasis on asset adjustment by disposing of inefficient andnon-core assets, and by expanding downstream businesses in emergingmarkets such as the Middle East and the Asia-Pacific. As a result, profitabilitywas improved. IOCs also developed alternative fuels and renewable energy inan active and steady manner.

To accelerate natural gas development, IOCs carried out shale gas businesson a large scale by way of asset acquisitions. Shell Group acquired EastResources for $4.7 billion, which realized a 7.5% increase in its natural gasoutput in North America. Exxon Mobil completed the acquisition of XTO for $41billion, which strengthened its position in unconventional gas. Chevronacquired Atlas Energy for $4.3 billion, starting its shale gas development inNorth America, and actively sought opportunities in Europe and theAsia-Pacific and other areas to further strengthen the strategic layout of itsunconventional resources development.

IOCs kept pushing forward deep-water exploration and development in 2010.They are committed to reinforcing their dominant presence in deep waters

through major projects in the Gulf of Mexico, offshore Brazil and West Africa.IOCs did not slow the pace of their deep-water development despite the BP oilspill incident. Chevron decided to invest in and develop the Jack/St.Malodeep-water project in the Gulf of Mexico, just few days after US FederalGovernment lifted a ban on deep-water drilling in the region on October 12.

1.7 National Oil Companies (NOCs) achieved better performance. Theyemphasized exploration & development investment, accelerated naturalgas development and expanded to midstream and downstream. Theypushed forward the process of integration between refining andpetrochemical plants, and paid more attention to the effectiveness ofinternational business.

With the oil price rising in 2010, operating results of NOCs were significantlyimproved. In the first half of the year, driven by substantial output growth,Rosneft and Petrobras realized revenue growth of 57.2% and 43.7%, and netprofit growth of 33.6% and 29.2% respectively. NOCs continued to expandtheir investment scale and witnessed a significant growth in capitalexpenditure (CAPEX), with Petrobras and Gazprom increasing by 35.8% and21.8% respectively. While strengthening upstream exploration & development,


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NOCs focused on downstream integration, and constantly improved industrychains. Petrobras further expanded its involvement in deep sea and pre-salt oiland gas resources development, and accelerated its oil refining business.Rosneft increased its downstream capital spending on refinery expansion and

upgrading projects. Saudi Aramco completed a number of large refineryprojects for the further expansion of its refining business.

NOCs adjusted their overseas development strategy, and paid more attentionto the effectiveness of overseas operations. ONGC, Gazprom, the three majorChinese oil companies and other NOCs further participated in overseascooperation and expanded their overseas businesses. But some other NOCsrestructured their strategic focuses according to their individual situation. Dueto an offshore pre-salt discovery, Petrobras shifted its investment to domesticprojects, and cut its international business investment by 26% in its capital

expenditure plan for 2010-2014. Petronas realized a rapid development inoverseas business over the past 10 years with its overseas oil and gasreserves increasing by 10% annually from 3.25 billion barrels in 2001 to 6.84billion barrels in 2009. According to its newly appointed president, Petronas isreadjusting its overseas strategy by reducing overseas investment, disposingof inefficient international assets, and improving the profitability of overseasoperations.

1.8 The explosion at a BP drilling platform in the Gulf of Mexico became amilestone for the international oil industry. The tragedy not only causedmassive direct losses, but also had a far-reaching impact on globaldeepwater exploration & development.

On April 20, 2010, when operating at the Mississippi Canyon Block 252Macondo in the Gulf of Mexico, the Deepwater Horizon Drilling Platform,leased by BP from a Swiss company, exploded and sank after burning for 36hours. The incident killed 11 and injured 17, and about 4.10 million barrels ofcrude oil spilled into the Gulf of Mexico, which caused pollution in five coastal

states, making it one of the most serious accidents in the history of the worldoil industry.

The accident had very serious direct consequences. First, the ecologicalenvironment in the Gulf of Mexico was severely damaged, resulting in a greatamount of oil deposited on the seabed that cannot be removed and acontaminated marine ecosystem that cannot be restored for hundreds of years.Second, the economies along the coastal states suffered great losses. Fishing,shipping and tourism in Louisiana, Mississippi and Alabama and other statessuffered huge damage, and the effects may last for many years. Thus, the

public image of the oil industry was seriously damaged. Third, BPs corporate health was seriously affected. The companys stock price, market capitalizat ion


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and credit rating suffered a substantial decline with market capitalization morethan halved. The company s longstanding green oil image was seriouslyundermined. In addition to the more than $10 billion cost of dealing with theaccident, BP may also have to pay compensation exceeding $30 billion.

Therefore, the company had to sell significant assets, and its CEO was forcedto resign.

The accident will have a profound impact on the oil industry itself.Governments will pay more attention to the safety of offshore oil and gasexploration & development. A series of new supervision policies are being putforward with higher entry barriers, greater insurance costs and stricter safetystandards, which will temporarily slow the pace of deepwater oil and gasexploration and development. The oil spill led companies, including oilcompanies and engineering and technical service companies, to re-examine

their safety policies, and further increase investment to improve safetytechnology and safety management systems. All these initiatives will assist thefuture development of offshore oil exploration and development.

2. Characteri stics of Chinas Oil and Gas Industry in 2010

2.1 Chinas economy was generally in good circumstances with a rapidgrowth rate, but there still existed some uneven and uncertain factorsduring the development. A remarkable effect was achieved in policyadjustment. In 2010, Chinas economy was in a generally sound situation with moreconsolidated achievements in fighting the global financial crisis. China becamethe No. 2 global economic powerhouse in front of Japan, and the No. 3 nationin terms of voting rights in the IMF. The macroeconomy went along the righttrack as pre-set. Thanks to policy adjustments, front-ended high growth wasunder control and economic operations were stable with an estimated annualgrowth rate of over 10%. Equilibrium was achieved in inter-regional economicgrowth. The phenomina in 2009 that economic growth in eastern regions wassignificantly lower than that in the central and western regions was changed.

The contribution of investment, consumption and net exports, the threeelements that promoted economic growth, was different. High investmentgrowth began to fall, and urban fixed asset investment increased by 24.9% inthe first 11 months, with the growth rate decreasing by 7.2 percentage points.Consumption achieved steady growth and became an important driving forceof economic growth. Total retail sales of socially consumed goods increased by18.4% in the first 11 months. Both imports and exports grew rapidly, the totalvolume of which was more than in the same period of 2008. Exports increasedby 33%, and imports increased by 40.3%, and the trade surplus declined by3.9%.At the same time, the general level of domestic commodity prices surpassed


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3%, the target identified at the governments working conference in early 2010.As a major risk to economic operation, the annual CPI is estimated to havebeen controlled within 3.5%. The People s Bank of China, the nation s centralbank, raised the deposit reserve ratio six times during the year, and finally the

deposit reserve ratio for banks reached a record of 18.5%. The central bankraised the benchmark interest rate twice, and the cumulative increase was 0.5percentage points. Thus, the intention to reduce inflation expectations andincrease the cost of funds was very clear.The reform of the RMB exchange rate formation mechanism deepened further,and exchange rate flexibility was enhanced. However, China still faced greaterpressure regarding the appreciation of the RMB. Hot money inflows wereaccelerated, with 55 billion yuan in August, 20 billion yuan in September, 287billion yuan in October and 100 billion yuan in November respectively.In addition, the rebound in heavy industry manufacturing brought heavypressure on energy saving; rapidly rising housing prices brought risks of assetprices fluctuations; and financing risks at local debt platforms increased. Allthose above problems hindered Chinas sound and rapid economicdevelopment. Thus, the mission of transforming China s economicdevelopment mode remains a major one.

2.2 Oil demand rebounded strongly, and resumed a double-digit growthrate again after 2004. Crude oil demand exceeded 400 million tons for thefirst time. Oil product demand grew rapidly with diesel in short supply.Foreign oil dependence was over 55%, and net crude oil importsexceeded 200 million tons for the first time.In 2010, a strong rebound occurred in C hina s oil demand. Annual apparent oilconsumption is estimated to be 455 million tons, 11.4% higher or 47 milliontons more than the previous year . China s oil imports rose sharply in 2010.Annual oil net imports are estimated to be 253 million tons, 15.6% higher or 34million tons more than the previous year. More than 55% of the total demandwas met by foreign oil.Impacted by significantly increasing volumes of crude oil processing,

decreasing net imports of oil products, rapid increases in oil inventories andpipeline bedding, crude oil demand growth was faster than oil, and apparentcrude oil consumption reached 439 million tons, 13.1% higher or 50 milliontons more than the previous year. Net crude oil imports were 237 million tons,exceeding 200 million tons for the first time, 19.3% higher or 38.4 million tonsmore than the previous year. Foreign crude oil dependence was 54%.Oil product demand resumed rapid growth. Apparent oil product consumptionis estimated to be 241 million tons, 9.4% higher than the previous year, whichcreated a new record high since 2005. Gasoline consumption grew steadily

throughout the year with an estimated annual apparent consumption of 70.4million tons, 5% higher than the previous year. Driven by accelerated industrial


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output, large-scale investment in infrastructure and a stable recovery in thelogistics industry, diesel consumption experienced rapid growth in 2010. Theannual apparent diesel consumption is estimated to be 154 million tons, 11.1%higher or 15.4 million tons more than 2009, which witnessed a 27 million ton

reduction.Since the start of the second half of 2010, a tightening took place in dieselsupply and demand. Facing a contraction in diesel demand in 2009 and theincreased building of stocks in early 2010, oil companies were forced to adjustproduction and increase exports, which led to stock-drawing since March. Inthe second half of the year, diesel demand increased rapidly in sectors,including transportation, agriculture, fisheries, and especially from the surgingdiesel power generation due to power cuts in some provinces and cities sinceSeptember. Diesel supply, however, was reduced due to increased refinerymaintenance in the third quarter compared to previous years. The tight dieselsupply situation was reversed in the fourth quarter. Meanwhile, the dieselsupply and demand situation was further exacerbated with the international oilprice rising and increased speculation caused by the expected domestic priceadjustment. As a response to the inadequate diesel supply, the Chinesegovernment strengthened regulation and control, and CNPC and Sinopecincreased their processing quantity and diesel imports. As a result, thetightening diesel supply situation started to ease in early December.

2.3 Domestic crude oil production exceeded 2 million tons for the firsttime. The crude oil production pattern was formed as the West replacedthe East and offshore supplemented onshore. Domestic natural gasoffered encouraging prospects with significant exploration results andoutput reaching a new historic high.By seizing the favorable opportunities of the domestic economy recovery andconsumption growth in 2010, oil companies organized production in a positivemanner, which led to domestic crude oil production exceeding 2 million tons forthe first time, 5% more than the previous year. An oil-producing pattern inwhich the East is being replaced by the West and offshore China was basically

formed. For West China, the remaining proven oil reserves increased rapidlyand reached 558 million tons in 2009, 55.9% more than 2000. Its share ofnational total oil reserves reached 26%, the first time they surpassed a quarterof the total. For offshore China, its share of domestic total oil reservesincreased to 9.6% in 2009 from 7.9% in 2000, while its share of national totaloil production increased steadily to 12% in 2009 from 6.7% in 2000. Thanks toefforts to stabilize production in old eastern oil fields and increased productionin the west and offshore China, sustained and stable growth in crude oilproduction was achieved.

Remaining proven reserves of domestic natural gas maintained their steadygrowth, with an annual average growth rate of 8.2% from 2000 to 2009. In


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2009, the remaining gas reserves reached 2.1 TCM (trillion cubic meters),double that in 2000. Natural gas production increased threefold to 83 BCM in2009 from 27 BCM in 2000. In 2010, the three major Chinese oil companiesachieved double-digit growth in gas production, due to gas production growth

in the Changqing gas producing region, the start-up of the Puguang gas fieldand production growth in other onshore gas fields. Total national gasproduction reached 95 BCM, 11.5% higher than 2009, once again a newrecord high. The Sichuan, Changqing and Tarim gas areas remained the majornatural gas producing provinces.

2.4 China's oil refining capacity increased steadily with total capacityexceeding 500 million tons and the crude oil processing volumesurpassing 4 million tons in 2010. Chinese refineries witnessed a highutilization rate and realized further expansion of their average size.National III Standard gasoline was brought into use across the country.Both ethylene capacity and production increased rapidly, with theaverage unit size reaching 0.6 million tons, slightly higher than the globalaverage.Driven by the rapid growth of domestic oil product consumption and start-upsof large refineries, China's oil refining industry continued to develop rapidly in2010. With 32 million tons of distillation capacity newly added, the totalcapacity reached 504 million tons. Crude oil processing volume was about 421million tons, 12.3% higher than 2009. The national average refinery utilizationrate rose to 86.5%. Oil product output reached 251 million tons, 10.6% higherthan the previous year. The average size of refineries in the two major oilgroups increased to 6.3 million tons per year, already higher than the world saverage level. With the completion and start-up of Qinzhou Refinery, thenumber of 10-million-ton refineries increased to 20. Refining capacity in SouthChina increased and the national oil refining layout was further adjusted andoptimized. With the National III Stadard gasoline being promoted nationwide,oil product specification and quality in China improved consecutively.Ethylene capacity and production increased rapidly in 2010. The newly added

ethylene capacity was 2.45 million tons, and the total capacity reached 14.17million tons. Ethylene production was about 13.71 million tons, 29.9% higherthan 2009. The annual average utilization rate was 97.9%, far higher than theworld average of 80%. The average annual capacity of Chinas ethylene unitswas 590,000 tons, slightly higher than the world's average of 545,000 tons peryear.

2.5 Chinese natural gas consumption also increased rapidly, exceeding100 BCM for the first time. Natural gas production experienced steady

growth while gas imports rose sharply. For the first time, natural gasbecame the No.1 source for city gas. The government adjusted the


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ex-factory price of domestic onshore natural gas, which laid thefoundations for a price mechanism reform.With rapid economic recovery and pipeline projects progressing smoothly,China's natural gas market expanded rapidly. In 2010, the annual gas

consumption was expected to exceed 100 BCM for the first time, with apparentconsumption reaching 106 BCM, 19.5% higher than 2009. Gas consumption inthe residential sector (city gas) and industries increased substantially, but gasconsumption for power generation still increased slowly, and the proportion ofgas for chemicals continued to fall. In the residential sector, the share ofnatural gas increased further and exceeded that of LPG by thermal value forthe first time. Natural gas became the primary source for the urban gassystem.In 2010, China natural gas imports were about 17 BCM, accounting for 16% ofdomestic gas consumption. Pipeline gas imports started and amounted to 4.4BCM while LNG imports rose sharply to 9.1 million tons, 64.6% higher than2009. A multi-source gas supply pattern is initially being formed in China.To rationalize price relations between natural gas and other alternativeenergies, and to guide rational resource allocation and promote energy saving,the government adjusted the gas transmission rate and the ex-factory gasprice in April 2010 and June 2010. With this adjustment, the price gapsbetween domestic gas and gas from abroad, and between gas and alternativeenergies, were reduced considerably, which laid a good foundation for thereform of the natural gas pricing mechanism.

2.6 Oil and gas pipeline construction witnessed rapid development. Thetotal length of pipelines reached 78,000 km. A trunk pipeline network isbeing formed. Oil storage facility construction experienced rapidprogress, with a 36-day storage capacity completed. The total capacity ofunderground gas storage reached 1.87 BCM, which strengthenedpeak-shaving capability.In 2010, China s oil and gas transpartation and storage facilities continued togrow rapidly. By the end of 2010, China had built 19,900 km of crude oil

pipelines and 18,100 km of oil product pipelines, which basically formed abackbone pipeline network. Outstanding achievements were made in naturalgas storage and transportation facilities. The Myanmar-China Gas Pipelineconstruction was started, while five long-distance gas pipelines were put intooperation, including the east section of the second West-East Gas Pipeline,the third Shanxi-Beijing Gas Pipeline, and the Sichuan-East Gas Pipeline. Bythe end of 2010, the total length of domestic natural gas pipelines reached40,000 km.The second stage of the national strategic oil reserve project proceeded

smoothly. When fully completed in 2012, the total capacity shall be up to 2.74billion barrels. State, private and foreign capital all actively participated in the


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construction of commercial oil reserves. By the end of 2010, the capacity ofstrategic oil reserves reached 1.78 billion barrels and that of commercial oilreserves reached 1.68 billion barrels. Thus, the total oil storage capacity isequivalent to 36 days of domestic oil consumption. Significant progress was

made in steel pipe manufacturing technology used in gas transmission. TheWest-East Gas Pipeline Project was the first in the world to use the X80-levelspiral SAW pipe.By the end of 2010, three LNG receiving terminals were completed, andanother eight LNG terminals were under construction. As planned, they will begradually put into operation by 2013, when the total receiving capacity will bemore than 40 million tons. Underground gas storage construction is facing apeak period. Twenty gas storages had been completed with 1.87 BCM of peakshaving capacity. Throughout the year, more than 20 small-scale LNG plantswere under construction, which provided access to natural gas to people insome remote areas away from pipeline network.

2.7 Chinese oil companies made great achievements in overseas oil andgas cooperation with equity production surpassing 60 million toe for thefirst time and M&A activity exceeding $30 billion. Steady progress wasmade in inter-governmental energy cooperation and a breakthrough wasalso made in strategic channel building.In 2010, the overseas oil and gas production of Chinese oil companiesmaintained steady growth. Equity production is estimated to exceed 60 milliontons for the first time, 15% more than 2009. In 2010, all the three majorChinese oil companies made large-scale acquisitions, worth a total of over $30billion, creating a new record, and accounting for 20% of global upstreamM&As. CNPC continued to expand its overseas operation scale, while Sinopecand CNOOC speeded up their overseas business distribution. Sinopecacquired 9.03% of ConocoPhillips stake in the Canadian Syncrude oil sandsproject for $4.65 billion and gained a 40% stake in Repsols business in Brazilfor $7.1 billion. In two transactions, CNOOC acquired oil and gas assets inArgentina worth $7 billion. In partnership with Shell, CNPC paid $3.265 billion

and took over 100% of the stake in ARROW, a CBM company in Australia.Breakthroughs were made in strategic energy channel construction. TheSino-Russia ESPO crude oil pipeline officially became operational. In lateSeptember, both the Chinese and Russian presidents attended the completionceremony of the pipeline. On December 28, ESPO was connected to theNortheast China pipeline network, formally launching 15 million tons of annualRussia crude oil exports to China over the next 20 years. New onshore accessto Russian oil has been made available to China. The two NOCs from Chinaand Kazakhstan formally signed the Principle Agreement on Designing,

Financing, Construction and Operation for Second Phase of the Sino-Kazakhstan Natural Gas Pipeline" . Construction of the project formally


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started at the end of December 2010, and it is expected to be completed andcommissioned in 2012. The construction of the second phase of theSino-Kazakhstan natural gas pipeline will further stabilize and guarantee a gassupply source for the West-East Gas project. The long-awaited Sino-Myanmar

Gas pipeline formally began construction, which will open up an important newenergy channel for China, and will be helpful in improving the effectiveness ofoil transportation from the North to the South and resolving the problem of oiland gas shortages in Southwest China.

2.8 The three major oil companies significantly improved theirperformance. Oil production further increased while natural gasproduction achieved double-digit growth. CNOOC realized 50 million toeof oil and gas production for the first time. Sinopec expanded its crudeoil capacity to 2 million tons for the first time. Both CNPC and Sinopecbecame top 10 global companies in the Fortune 500.In 2010, the three major companies operated smoothly and orderly with oilproduction increasing and natural gas production achieving double-digitgrowth. CNPC continued implementing its project of oil reserve growth at thepeak phase and made important achievements. Its crude oil production startedto grow again and increased by 1.3% in the first three quarters. Daqing Oilfieldmaintained crude oil production of 40 million tons. Changqing Oilfieldincreased its production by 500 million toe, and exceeded 35 million toe for thefirst time. Qinzhou Refinery was completed and put into operation, whichimproved the companys downstream distribution . With the Sino-Russia crudeoil pipeline put into operation, and phase II of the Sino-Kazakhstan project andSino-Myanmar pipeline starting their construction, strategic channels hadgained remarkable results. Meanwhile, Sinopec was dedicated to building anupstream "long board", and realized oil production growth of 1.9%. Sinopecfurther expanded its downstream refining and petrochemical business scale,strengthened its marketing efforts, and developed non-oil sales operations. Itscrude oil processing capacity exceeded 2 million tons for the first time. Sinopecspeeded up its overseas distribution and acquired several large-scale assets,

including Canadian oil sands and Repsol s business in Brazil. Its overseasequity production achieved rapid growth.CNOOCs development was striking in 2010, with an over 40% growth rate inits domestic oil and gas production. Total production reached the landmark of50 million toe for the first time, decl aring the establishment of a Daqing in theSea." CNOOC also proposed an ambitious goal of build "a Daqing in the DeepSea . In addition, the company continued the extension of its industrial chainwith its refining capacity exceeding 30 million tons. The company speeded upits overseas business layout, and completed two acquisitions of onshore oil

assets in Argentina for $7 billion.In 2010, all three major oil companies have resumed their growth in sales


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income and net profit. Exploration and production became the major source oftheir operating revenue. CNPC and Sinopec accomplished the goal of energysaving and emission reduction as defined in the 11th Five-Year Plan, one andtwo years ahead of schedule respectively. In 2010, for the first time, both

CNPC and Sinopec were ranked in the top 10 of the Fortune Global 500, whichreveals that the position and image of Chinese oil companies has beenheightened significantly among the world s large enterprises.

2.9 As energy system and mechanism reforms are deepening, newprogress was made in energy-related laws and regulations. Therelationship between energy production and energy consumption, andbetween the interests of the central government and various localstakeholders were further adjusted and became more balanced, whichpromotes social harmony.In January 2010, the National Energy Commission was established, headedby Premier Wen Jiabao. The Commission aims to furtherstrengthen governmental functions in energy industry management. In order toreinforce coordination and leadership on major energy issues, national policies,such as The 12 th Five-Year Plan on Energy Development , The 12 th - Five- Year Plan on Renewable Energy Development and other major energydevelopment plans have been compiled.New progress was made in legal system construction. The Oil and Gas Pipelines Protection Act was officially promulgated on October 1, which aimsto better safeguard national energy transportation security and public safety.The National Development and Reform Commission and three other ministries

jointly issued Suggestions on Promoting Energy-Saving Service Industry Development by Implementation of Energy Contract Management, in whichmeasures by way of subsidies, taxes, accounting and finances will be taken topromote energy contract management, and ultimately to promote theconstruction of an energy-saving service system and the development of theservice industry. The Commission also adopted the Decision on Promoting Development of Newly Emerging Strategic Industries , in which the new energy

vehicle sector is defined as one of the seven emerging strategic industries,and subsidies will be offered for private purchases of plug-in hybrid vehiclesand electric vehicles. In addition, the Renewable Energy Act (Amendment), aswell as the other related new laws and regulations were enforced, whichfurther improved the energy system s legal framework.Fiscal and taxation policies have been further refined. The resource tax waschanged from a specific duty into an ad valorem duty, and was piloted inXinjiang first and then expanded to 12 Western provinces and autonomousregions. The reform adjusted the benefit distribution between energy

producers and consumers, and that between the central government andvarious local stakeholders in resource producing areas, and effectively


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promoted local economic and social development and improved theinvestment environment in western China.Some adjustments were made in the fuel oil consumption tax, not onlyreducing tax burdens to teapot refineries, but also positively guiding related

companies to deeply process fuel oils and produce high value-added products.Market-orientation was further promoted. The so-called R egulation of New 3 6 issued by the State Council is supporting private capital in oil and gasexploration. Private companies are encouraged to do business in oil and gasexploration in cooperation with state-owned oil companies, and to takeinterests in infrastructure constructions, such as crude oil, natural gas, oilproduct storages and pipeline transportation facilities. It can be expected thatprivate enterprises and private capital will play a greater role in the oil and gasindustry in the future.According to the new oil pricing mechanism, four adjustments were made inthe domestic oil product prices in 2010, with price hikes three times and a priceslump once. In the first half of 2010, the gas transmission rate and theex-factory gas price were also adjusted. A new natural gas pricing mechanismreform program is already being devised.

3. Domestic and Overseas Oil and Gas Industry Outlook for2011

3.1 The world economy is expected to resume growth, and its GDPgrowth rate will be 4.2%; China will implement positive, prudent andflexible policies, although the economic growth rate will decline it willremain more than 9%

The IMF forecast that global GDP will grow by 4.2% in 2011, and the economicgrowth of developed countries will be 2.2%, while that for emerging economiesand developing countries is expected to be 6.4%. However, many uncertainand unstable factors remain. Although there are obvious signs of US economicrecovery, its economic outlook remains uncertain due to the huge fiscal deficitand the high unemployment rate; the risk of the European debt crisisspreading remains, which increases the overall uncertainty of its economicrecovery; Japan s economic growth is weak, and may stall again. Variousforms of trade protectionism and trade frictions are on the rise all over theworld. The US quantitative easing monetary policy and European rescue planswill increase capital mobility and export inflation to developing countries, whichmay affect the good momentum of emerging countries economic recovery.2011 is the first year of China s 12 th Five-Year-Plan. Its macro-economy willmaintain steady growth, while still facing a complex situation: the pressure ofeconomic restructuring will increase; resource and environmental constraints

will strengthen; inflation and RMB appreciation pressures will also rise;external demand will decrease and foreign trade frictions will grow. China will


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Impacted by a slowdown in economic growth, the government s economicstructural adjustment policy, energy saving and sustainable energydevelopment, as well as rise in the growth base, the growth rates of China s oildemand will decrease in 2011. Apparent oil demand is expected to be 483

million tons or 6.2% higher in 2011, and crude oil demand is expected to be471 million tons or 7.2% higher.China s oil product demand will be increase by 6.3% to 257 million tons in 2011.With the expected decline in car sales growth, the increased development ofalternative fuel, more stringent traffic restrictions and a higher international oilprice, gasoline demand growth will be limited but steady. Apparent gasolineconsumption is expected to be 74.6 million tons in 2011, 5.9% higher than theprevious year. After the rebound in 2010, China s diesel demand growth willslow, and is expected to be 164 million tons in 2011, an increase of 6.2% onthe previous year.Since large refineries from CNPC, Sinopec and other enterprises are nearpeak capacity, newly added capacity in the year will be limited, local teapotrefineries are facing compressed margins and the adoption of National III oilproduct specification and thus their utilization rate and production incrementare full of uncertainties, it is expected that the increase in diesel production willbe less than that of demand, and the overall diesel supply situation will tighten.With the fast development of civil aviation, China s jet kerosene demand willgrow at a high rate of 8.8%, and annual kerosene demand will be 18.5 milliontons.

3.4 In China, refining capacity will keep expanding, oil specification willkeep upgrading, newly added crude oil processing capacity is expectedto be 24.5 million tons and the refining structure will be further adjustedand optimized. Newly added ethylene production capacity will be 0.41million tons, and a number of large refinery projects will be speeded up.

In 2011, the newly added distillation capacity in China is expected to be 24.5million tons, because many refinery upgrading and expansion projects shall becompleted in Beihai, Anqing, Ningxia, Liaoyang and Fushun. The total refiningcapacity will be 529 million tons, while the share in South China will rise, andthe average refinery size of CNPC and Sinopec will increase. The volume ofcrude oil processed is expected to be 434-444 million tons in 2011, and thecombined production of gasoline, diesel and kerosene is expected to be259-265 million tons.National III Standard diesel will be spread across the country in 2011 after thenationwide adoption of National III Standard gasoline in 2010. Newly addedethylene capacity will be 0.41 million tons in 2011. The size and strength ofChina s refining and petrochemical capacity will be further upgraded after the

completion of large projects, including Maoming Petrochemical, theChina-Kuwait Refinery, Tianjin Orient Refinery, Sichuan Refinery and


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Shijiazhuang Refinery, Fushun Ethylene, Huizhou Ethylene II, Wuhan Ethyleneand Daqing Petrochemical, which are under construction.

3.5 China s natural gas consumption is expected to be 130 BCM in 2011,

while domestic natural gas production will be 105 BCM and importedpipeline gas and LNG will exceed 30 BCM.

In 2011, China s natural gas production will keep fast growth. With a constantlyexpanding market scale, an improved pipeline network and newly constructedcapacity will come into operation, it is expected that domestic natural gasproduction will be 105 BCM, 10.5% more than the previous year. According tothe government s overall development plan for distributed natural gas, 1,000distributed natural gas projects will be built in 2011.China s natural gas imports will also maintain fast growth in 2011. The total

imports will exceed 30 BCM, 76.5% more than 2010. Imports via the CentralAsian pipeline will increase substantially to 15 BCM, three times more than2010. With the completion of LNG terminals at Dalian and Jiangsu, China sLNG receiving capacity will exceed 12 million tons.With the pace of supply growth, China s domestic natural gas consumption willalso rise rapidly and is expected to be 130 BCM in 2011. Fast consumptiongrowth will be witnessed in the sector of city gas or residential gas, and asignificant growth will be made in power generation and industry. But the sharefor chemical input will decline. Following the completion of long-distance and

branch pipelines, natural gas consumption areas will be expanded further.Developed eastern areas, natural gas producing and surrounding areas will bethe main natural gas consumption regions.

3.6 In accordance with the requirements of the changing developmentmode, China will keep on promoting energy conservation and emissionreduction, accelerating fiscal and tax reforms, and going for marketorientation.

The 12 th Five-Year Energy Development Plan will be promulgated in 2011 to

guide the development of energy industries. New development opportunitieswill be available in natural gas, alternative energies and new energies. Thegovernment will continue to promote energy contract management, so as tohelp meet energy saving and emission reduction targets, to introduce carbonemission reduction standards, to improve the market mechanism of energysaving, and introduce incentive and restraint mechanisms for enterprises.Tax reform will be further deepened. The resource tax will be extended to moreregions and an environmental tax will be studied. The Regulation of Town Gas Management , which aims to standardize residential gas markets, will beimplemented on March 1, 2011. The capital gains charge for centrallystate-owned enterprises will be increased with the charge rate for the three


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major oil companies raised from 10% to 15%. The problem of a relatively lowstarting point for the crude oil special levy may be resolved. In order topromote natural gas development, the government may offer more policyincentives, such as supporting unconventional gas and waiving gas import

related taxes.The energy pricing mechanism reform will be deepened. A new oil productpricing mechanism is expected to decentralize pricing powers and shorten thepricing cycle; and the natural gas pricing mechanism to be introduced will bebased upon both supply and demand while considering the affordability of gasusers, and the price relationship between domestic gas and alternativeenergies and gas from abroad.

4 Development Tendencies of China s Oil and Gas Industry

during the 12th Five-Year Plan4.1 The period of the 12th Five-Year Plan is still the time for China tospeed up its economic development and also the crucial stage toaccelerate the adjustment of economic construction and thetransformation of the development mode. There will be greatopportunities for China s oil and gas industry development during thisperiod.

China s economy has been developing fast since the 11th Five-Year Plan.

GDP had doubled during the five years, reaching RMB 37 trillion in 2010compared to RMB 18 trillion in 2005, realizing an annual growth rate of above10%, and ranking second in the world. The per capita income was $3,800,reaching the level of middle-income nations. The urbanization rate increasedfrom 43% in 2005 to 47% in 2009. Central China and Western China achievedfaster development, so inter-regional economic development is getting morebalanced. The scale or strength of enterprises is strengthening rapidly. Thenumber of Chinese enterprises ranked in the Fortune 500, was 54 in 2010, upfrom 18 in 2005. China s economic development is moving to a new stage.

The period of the 12th Five-Year Plan is the key time to build a well-off societyin an all-round way. China s petroleum and petrochemical industry is also in animportant development period. Generally speaking, opportunities co-exist withchallenges, but there are more opportunities than challenges.

In terms of opportunities, the global environment is getting better and providinga chance of peaceful development. Vigorous global oil demand and the rapiddevelopment of gas industry are the advantages to expand internationalcooperation and to make full use of domestic and overseas resources. TheChinese economy will keep growing fast at an estimated annual rate of above

7%. The steadily increasing national income will bring more oil and gasdemand, and the market will be expanded rapidly and on a large scale. The


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deepening organizational and mechanism system reform and the improvingprice-forming mechanism will benefit oil and gas industry development.

In terms of challenges, there coexist deflation in developed economies andinflation in emerging markets. The debt crisis might become a long lastinghidden trouble for global economic growth. Global problems like climatechange are more outstanding and trade protectionism and disputes are risingagain. The developed countries headed by the US are requiring China to bearmore responsibilities, especially when China became the No. 2 economicpowerhouse in the world. There are more visible or invisible barricades andpressures in the international arena. Domestically, economic growth is morerestricted by limited resources and environmental problems. Due to problemsin structure and mechanism, and problems of equilibrium and unsustainability,the pressure for economic restructuring is even larger. On the whole, China is

facing more complex domestic and overseas economic developmentenvironments. The principal task in this period is to accelerate thetransformation of the economic development mode.

The period of the 12th Five-Year Plan is also the crucial stage to transform theenergy industry development mode, and the important phase to construct asafe, stable, economical clean and modern energy industry system. Energyreforms will be deepened, aiming to improve the industry management and topromote legalization and market orientation. In order to optimize the energyconsumption structure, energy saving will be prioritized, the total energyconsumption will controlled rationally, highly energy intensive industries will beprevented from developing too fast, and traditional energies will be used in amore clear and efficient way.

Natural gas development will be accelerated while the development ofunconventional gas, such as shale gas and coal bed methane (CBM) will bespeeded up. Alternative energy and new energy will be reinforced so as toincrease the share of non-fossil energies. To improve supply security, oil & gastransmission pipeline networks and oil & gas strategic reserves shall beexpanded. Price relationship among energies such as coal, electricity, oil andgas will be rationalized, and the factor pricing mechanism will be improved. Assteps to optimize the taxation system, a resource tax will be promoted andextended nationally; and an environmental protection tax will be introduced.The government will vigorously promote energy diplomacies and participatemore deeply in international energy cooperation for mutual benefit.

4.2 China will witness a booming oil market with the increasing oil price,and the accelerated development of alternative fuels.

During the 11th Five-Year Plan period, driven by fast domestic economic


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development, quick urbanization and booming automobile ownership, Chineseoil consumption increased sharply with higher degree of foreign oildependence. During the 11th Five-Year Plan period, apparent oil consumptionincreased from 323 million tons to 455 million tons with 7% of annual average

growth; apparent crude oil consumption increased from 305 million tons to 439million tons with 7.6% of annual average growth; the net oil import increasedfrom 143 million tons to 253 million tons with 12.1% of annual average growth.Domestic oil market management system had been improved with thelaunching Measures for Oil Product Market Administration and Measures for Crude Oil Market Administration ; which opened the wholesale qualifications fordomestic crude oil and oil products. A large number of state-owned enterprises,foreign enterprises and private enterprises swarmed into the market anddiversified the market. Great progress was also made in oil product pricingreforms.

During the 12th Five-Year Plan, China is still in the stage of quick urbanizationand industrialization. Chinese oil demand will grow further with a 4% annualaverage growth rate but higher at the start and lower afterwards. The total oildemand in 2015 is expected to be 540 million tons and foreign oil dependencewill be lifted to more than 60% from 55% in 2010. Domestic supplies willdominate the oil product market, with gasoline in surplus and diesel in balance.But short supplies due to regional, seasonal, emergent or structural reasonscannot be dispelled, thus imports and exports will play an important role in

market adjustment.A persistently high international oil price will drive the domestic oil price higher.Domestic oil product market reform will be further deepened, with the aim ofregularizing market supervision and to bring a more flexible pricing mechanism.As a result, the market will be more open but more fiercely competitive withmore diversified market participants. Fuel for vehicles, including electricity,ethanol, methanol and bio-diesel will be developed in an accelerated manner,which indicates the coming of a new development period of oil being replacedin a large scale.

4.3 Major Chinese oil companies will devote great efforts toimplementing their resource strategies. Petroleum exploration anddevelopment will follow the way of stabilizing the East, accelerating theWest, developing offshore and expanding overseas. It is possible thatdomestic crude oil production shall be increased steadily to more than200 million tons and overseas equity crude oil production will exceed 100million tons.

During the 11th Five-Year Plan period, focusing on the resource strategy,CNPC achieved a new peak period of oil and gas reserves growth by way ofattaching potentials to mature oilfields and promoting preparatory seismic


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surveys and risk exploration. In the 12th Five-Year Plan period, in accordancewith the principles of scale exploration, effective exploration and scientificexploration and based on the eight great basins, CNPC will continue pushingforward projects of reserve growth at peak periods, reinforcing exploration and

development integration, so as to effectively increase oil and gas productioncapacity, and secure domestic crude oil production above 100 million tons.Daqing Oilfield is expected to stabilize its production at 40 million tons andChangqing Oilfield is expected to realize a breakthrough of 50 million toe.

Sinopec made its resource strategy a priority during the period of the 11thFive-Year Plan. The company insisted on casting its upstream long board ,which resulted in 42.56 million tons of crude oil production and a new round ofsteady production growth. In the 12th Five-Year Plan period, Sinopec will keepon stabilizing production at mature fields in the East and reinforcing exploration

and production in new areas. The company will make more efforts to developnatural gas, enhance innovation in theories, technologies and managements,optimize investment structure and strengthen cost control, so as to increaseboth reserves and production.

Guided by the principle of searching for big and medium-sized oilfields ,CNOOC made series of breakthroughs in key spheres and realized rapidgrowth in oil and gas production during the 11th Five-Year Plan. In 2010, thecompany s production reached 50 million toe. During the 12th Five-Year Planperiod, CNOOC will further intensify its exploration and development whileextending from the shallow waters to deep seas, so as to make resourcefoundation the preparation for building a Daqing in the Deep Sea ,

In general, in the 12th Five-Year Plan, China s oil and gas exploration anddevelopment will focus on the West and the offshore with targets shifting fromconventional resources to both conventional and unconventional resources. Asthe geological and geographical environment will be more complex, theworsening conditions and rising difficulty will lead to higher exploration anddevelopment costs. Breakthroughs will mainly rely on technological progressand advancements in equipment.

Guided by the national principle of going out , Chinese oil companies willfurther accelerate their internationalization process and strengtheninternational win-win cooperation by acquisitions and mergers, bidding andtendering. Their overseas business will be expanded on a large scale andmore attention will be paid to effectiveness of their overseas investment and itsdevelopment quality. It is expected that the three major oil companies totaloverseas equity oil output will be more than 100 million tons by 2015.

4.4 The Chinese refining and petrochemical industry will continue its


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expansion with its structure being more adjusted and optimized. It isexpected that new additions in refining capacity and ethylene productioncapacity will be 190 million tons and 7.4 million tons respectively. Thecrude oil processing volume and the oil product output will keep on

growing. The number of large refining bases will increase. The productyield structure will be further adjusted and the product quality will keepon updating.

During the 11th Five-Year Plan, the Chinese refining and petrochemicalindustry developed rapidly with large-scale expansion. It has established 2010-million-ton refining bases, including 14 large refining and petrochemicalbases. The refining capacity was increased by 55.1% from 325 million tons to504 million tons. Ethylene production capacity was increased by 43.4% from9.88 million tons to 14.169 million tons. China has become the second biggest

refining and ethylene producing country after the US. The industry layout andthe unit structure were further adjusted and optimized. The processingcapacity for handling high-sulfur crude oil reached 70 million tons. Theethylene unit size was averaged at 590 thousand tons, higher than the worldaverage. Two refineries with a size more than 20 million tons were ranked asworld-class refineries. Crude oil processing capacity increased by 37.4% from307 million tons to 421 million tons. Ethylene production increased by 43.6%from 9.55 million tons to 13.71 million tons. In recent years, the unitnationalization rate for Chinese new ethylene plants has reached 70%-80%.

There has formed a pattern of domestic refining and ethylene industry withcompetition between diversified participants, led by CNPC and Sinopec, andparticipated in by other state-owned enterprises and foreign enterprises.

The 12th Five-Year Plan period is still an important development stage for theChinese refining industry to further expand its capacity, adjust its structure andoptimize its layout. If all the refining projects of all the companies that are underconstruction, proposed or under planning can be completed on schedule, it isexpected that by 2015, the national total refining capacity will be increased by190 million tons, the number of 10-million-ton class refineries will be 29, and

3-4 large refining bases with 20-million-ton capacity will be established. With7.4 million tons of newly added capacity, the total ethylene capacity will reach21.98 million tons. And 3-4 ethylene production bases with 2-million-toncapacity will be built. With the establishment of the four petrochemicalindustrial zones, including Hangzhou Bay (Yangtze River Delta), Pearl RiverDelta, Bohai Bay Rim and the Northwestern region, an oil refining and ethyleneproducing pattern with more diversified producers but matching regionaleconomic development will be basically formed.

Meanwhile, oil product specification will be upgraded from National III to

National IV, with National V possibly being adopted in some areas. Alternativeauto fuel related industries, including natural gas, alcohol, bio-fuel, CTL and


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electric cells will be developed more quickly. The growing Chinese market willattract more foreign investment in domestic refining and marketing. A trend ofinternationalized domestic competition will be more visible. Driven by variousfactors, the overseas downstream business will be accelerated.

With the rapid expansion of domestic refining and petrochemical capacity, thegovernment will pay more attention to macro-adjustment and planningguidance, so as to achieve the coordinated development of capacity growthmatching demand growth and to avoid periodical excessive supplies. In orderto improve the enterprises international competitiveness and to turn Chinafrom a large refining country to a powerful refining country, the government willbe inclined to guide enterprises to further improve the technological contentand nationalization rate of their units, and to eliminate backward productioncapacities and increase value-added and differentiated products.

4.5 Both Chinese natural gas demand and supply are growing rapidlyand vigorously. It is expected that domestic gas production will be morethan 150 BCM while gas consumption will be around 230 BCM by 2015.The consumption structure will be more rational. The government willintroduce and optimize a new gas pricing mechanism so that the naturalgas market can be developed in a healthy manner.

Great breakthroughs were made in the Chinese natural gas industry during the

11th Five-Year Plan. Natural gas reserves grew rapidly with average annualgrowth of more than 300 BCM. Natural gas production increased by 13.4%annually from 58.6 BCM to 95 BCM. Natural gas consumption increased by10.1% annually from 56.1 BCM to 106 BCM. The consumption region wasextended from zones neighboring gas fields to economically developed areas.Urban gas has become the fastest growing sector. The share of powergeneration increased while that of industry and chemicals dropped.Breakthroughs were made in foreign gas resource utilization with LNG importsincreased further and pipeline gas imports starting. The ex-factory price and

pipeline transportation rate were adjusted several times and thus a solidfoundation was laid for the introduction of the new natural gas pricingmechanism.

The 12th Five-Year Plan period is a strategic development period for theChinese natural gas industry. With the developing economy, increasingpopulation and ongoing industrialization and urbanization, and encouraged bythe clean energy policy, natural gas demand will grow rapidly. It is expectedthat the total gas consumption will be doubled by 2015 to around 230 BCM,with an average annual growth rate of 16.8%. Calculated by supposing

domestic energy consumption remains at 4 billion tons of coal equivalent, theshare of natural gas in the primary energy mix will also be doubled.


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Driven by strong demand, the next five years shall be the quickest period forgas reserve growth, during which gas production will be increased by anunprecedented volume. It is expected that the annual average growth ofproved gas reserves will be more than 500 BCM, and that of gas production

may be above 11 BCM. Thus it is possible to reach 150 BCM in 2015.Unconventional natural gas exploration and development will enter into acrucial period. Coal bed methane production will be increased noticeably to 10BCM in 2015. Shale gas will also enter into commercial production.

Natural gas imports will be expanded rapidly. It is expected that the totalimports both pipeline gas and LNG will reach 70 BCM, with a 30% share intotal domestic consumption. Distributable energy projects related to naturalgas will be gradually promoted among large cities above designated sizeacross the country.

Obvious changes will take place in the gas sector and regional consumptionstructures. Gas demand will be distributed in a regional ladder-shaped pattern.Fast growth will be achieved in developed regions with great environmental-protection pressures, like Bohai Rim, Yangtze River Delta and the Southeastcoastal areas. Demand growth will be extended from large cities to smallertowns and from the developed eastern areas to the central and westernregions. Urban residential gas will grow fast, gas used for industry and powergeneration will expand but gas for chemicals will decline. The government willaccelerate reforms of the pricing mechanism for resource-related products. Anew natural gas pricing mechanism will be introduced and improvedconsistently. Price relations between domestic gas and imported gas andbetween gas and alternative energies will be optimized.

4.6 Chinese oil and gas storage and transportation infrastructure will stillbe in the era of rapid development with its system becoming morecomplete.

China s oil and gas storage and transportation infrastructure developed rapidlyduring the 11th Five-Year Plan. Domestic long-distance trunk lines, like theWest-East Gas Pipeline and the Sichuan-East Gas Pipeline and oil and gasimporting pipelines from Russia, Kazakhstan, Central Asia and Myanmarbegan construction or operation, representing a milestone in world pipelinehistory. The crude oil backbone pipeline networks have been basicallyestablished. The construction of oil product pipelines has been accelerated.The great leap forward in natural gas pipeline construction resulted in theformation of a trunk line network. The proportion of oil and gas transmitted bypipeline has been increased significantly.

In the 11th Five-Year Plan, 7,352 kilometers of crude oil pipeline was


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completed, contributing to the establishment of 180 million tons of actualannual transmission capacity. With regard to oil product pipelines, 10,763kilometers were completed or under construction, which is more than the totallength in the past 56 years. For natural gas pipelines, the total length was

longer than 10,000 kilometers and the transmission capacity was doubled. Inthe 11th Five-Year Plan period, national strategic oil reserves were developedquickly from nothing to a considerable scale. The total storage capacity ofnational strategic reserves and commercial oil reserves reached 346 millionbarrels.

During 12th Five-Year Plan period, the Chinese oil and gas pipeline will still bein the era of rapid expansion with its system becoming more complete.Pipeline construction will be shifted from trunk lines to pipeline networks withhigher density. Pipeline transmission capacity will be strengthened with a

greater proportion of oil and gas transmitted. It is expected that the averageannual growth rate of pipeline length will be 13.9%, higher than that in the past10 years. Regarding the length of pipeline construction, natural gas pipelineswill be faster than oil pipelines, and oil product pipelines faster than crude oilpipelines. It is expected that the total length of long-distance oil and gaspipelines will be more than 100,000 kilometers by the end of the 12thFive-Year Plan.

Phase II and Phase III of national strategic reserves will be completed and putinto operation. The total capacity of strategic reserves will be 350 millionbarrels by the end of the 12th Five-Year Plan. Underground gas storageconstruction is facing a climax with total investment of more than RMB 30billion. LNG receiving terminals will be built and put into operation on aconcentrated during this period. The eight receiving terminals now underconstruction will be put into operation before 2013, which will expand China sLNG receiving capacity.

During 2011 and the whole period of the 12th Five-Year Plan, China s oil andgas industry will have great opportunities for further development and it will bea key period for structural adjustment. Opportunities coexist with challengeswhile development coexists with adjustment. Development will be the maintheme for the oil and gas industry and adjustments will be carried outthroughout this period. As a result of this adjustment, industry structure,product structure and regional layout will be optimized; industry managementabilities will be reinforced and the level of legalization, market-orientation andinternationalization will be lifted. This will lead to highly efficient, cleaner andmore sustainable development.

Documents

2010 CNPC Industry Report 20110124