FINANCIAL INSTITUTIONS

CREDIT OPINION26 May 2017

Update

RATINGS

CNPC Captive Insurance CompanyLimitedDomicile China

Long Term Rating A2

Type Insurance FinancialStrength - Fgn Curr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Stella Ng 852-3758-1506AVP-Analyststella.ng@moodys.com

Qian Zhu + 86 21 2057 4014VP-Senior Analystqian.zhu@moodys.com

Kelvin Kwok 852-3758-1516Associate Analystkelvin.kwok@moodys.com

Sally Yim 852-3758-1450Senior Vice Presidentyatmansally.yim@moodys.com

CNPC Captive Insurance Company LimitedUpdate Following Downgrade Due to Sovereign Rating Action

Summary Rating RationaleCNPC Captive Insurance Company Limited’s A2 insurance financial strength rating (IFSR)reflects the fact that its credit profile is highly correlated with the issuer rating of its ultimateparent company, China National Petroleum Corporation (CNPC, A1 stable). CNPC CaptiveInsurance is the sole captive insurance subsidiary of CNPC, which insures only internal grouprisks.

The insurer has a solid level of capital and a very liquid investment portfolio. However,partially offsetting these positive factors is a lack of a track record of underwritingprofitability. In addition, the insurer has limited external reinsurance protection. It also hasconcentration in insuring property damage and engineering risks in the oil and gas sector,which is intrinsically volatile.

In September 2016, CNPC Captive Insurance received the China Insurance RegulatoryCommission's (CIRC) approval to change its shareholder structure. PetroChina CompanyLimited (unrated) -- 86%-owned by CNPC -- is the largest shareholder of CNPC CaptiveInsurance, with a 49% stake. The remaining stakes are held by the new shareholder, CNPCCapital Company Limited (40%, unrated), which is ultimately 100%-owned by CNPC, andCNPC (11%).

The one-notch difference between the ratings of CNPC and CNPC Captive Insurance reflectsthe modest standalone credit profile of the insurer and the lack of explicit guarantee fromthe parent. We do not expect either operational or financial support from CNPC will changefollowing the ownership change, given that CNPC Captive Insurance is still majority-ownedby CNPC.

Our assessment of support also incorporates the regulator CIRC's expectations that a parentcompany should always ensure that its captive insurance subsidiary maintains adequatelevels of capital. Parent companies are required to inject capital into their captive insurancesubsidiary whenever its subsidiary fails to meet the regulatory solvency requirement.

On 24 May 2017, we have downgraded CNPC Captive Insurance's IFSR to A2 from A1,following our rating action to downgrade CNPC's rating to A1 from Aa3 with outlookchanged to stable from negative. The IFSR of the insurer reflects our expectation of a weakercredit profile of its ultimate parent.

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Exhibit 1

Net Income and Return on Capital (1 yr. avg.)[1]

[1] CNPC Captive Insurance was established in December 2013. Hence, there is no data for 2012-13.Sources: Moody's Investors Service, Company Data

Credit Strengths

» Expected high levels of operational and financial support from CNPC, and integration with the group's resources and riskmanagement

» Solid capital relative to risk taken

» Very liquid investment portfolio, comprising mainly cash and deposits

Credit Challenges

» A lack of a track record of underwriting profitability, with a short operating history of three years

» Limited use of external reinsurance, with a concentration in insuring property damage and energy risk for the oil and gas sector,which could lead to intrinsic volatility in earnings

» High credit correlation with the business growth of CNPC and affiliates within the group

Rating OutlookThe rating outlook is stable, in line with the stable outlook of CNPC's rating

What to watch for:

» Level of continued strong support from CNPC

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 26 May 2017 CNPC Captive Insurance Company Limited: Update Following Downgrade Due to Sovereign Rating Action

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» Ability to make a stable and profitable underwriting profitability, as the company's business grows

Factors that Could Lead to an UpgradeGiven that CNPC Captive Insurance's credit profile is highly correlated with that of its parent, we would consider upgrading its ratingonly if CNPC's rating is upgraded.

Factors that Could Lead to a Downgrade

» Downgrade of CNPC's rating

» Any indication of a decline in the degree of support from CNPC group, and it starts writing third-party businesses

» If CNPC Captive Insurance's capital base is not replenished, following a series of significant losses due to large industrial andcatastrophic events

Key Indicators

Exhibit 2

CNPC Captive Insurance Co., Ltd[1][2] 2016 2015 2014 2013 2012

As Reported (Chinese Renminbi Millions)

Total Assets 11,372 10,368 8,698 5,068 -

Total Shareholders' Equity 5,742 5,460 5,172 4,999 -

Net income (loss) attributable to common shareholders' 283 286 173 (1) -

Gross Premiums Written 507 556 156 - -

Net Premiums Written 312 276 129 - -

Moody's Adjusted Rat ios

High Risk Assets % Shareholders' Equity 0.0% 0.0% 0.0% 0.0% -

Reinsurance Recoverable % Shareholders' Equity 9.5% 7.8% 1.3% 0.0% -

Goodwill & Intangibles % Shareholders' Equity 0.0% 0.0% 0.0% 0.0% -

Gross Underwriting Leverage 0.2x 0.2x 0.1x NA -

Return on avg. Capital (1 yr. avg ROC) 5.0% 5.3% 3.3% NA -

Sharpe Ratio of ROC (5 yr. avg) NA NA NA NA -

Adv./(Fav.) Loss Dev. % Beg. Reserves (1 yr. avg) NA NA NA NA -

Financial Leverage 1.0% 0.2% 2.2% 3.3% -

Total Leverage 1.0% 0.2% 2.2% 3.3% -

Earnings Coverage (1 yr.) 153.1x 868.1x 138.9x 0.7x -

[1] Information based on Local GAAP and financial statements as of Fiscal YE December 31

[2] Certain items may have been relabeled and/or reclassified for global consistency

Sources: Moody's Investors Service, Company Data

Detailed Rating ConsiderationsINSURANCE FINANCIAL STRENGTH RATINGThe following are the key factors influencing the rating and outlook:

MARKET POSITION, BRAND AND DISTRIBUTION: LIMITED SIZE OF OPERATIONS DUE TO CAPTIVE STATUS

Domiciled in Beijing, CNPC Captive Insurance's market position, franchise and distribution network are very modest, given the insurer'sshort operating history of three years and its captive status, which solely underwrites risks for CNPC Group.

In our view, given CNPC Captive Insurance’s captive status, this factor is not as relevant to our overall rating assessment.

3 26 May 2017 CNPC Captive Insurance Company Limited: Update Following Downgrade Due to Sovereign Rating Action

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BUSINESS AND GEOGRAPHIC DIVERSIFICATION: INCREASED INSURANCE RISKS ASSOCIATED WITH CNPC'S OVERSEASEXPANSION

CNPC Captive Insurance’s business growth is heavily dependent on the group's oil and gas production in both China and overseasmarkets. The insurer reported a negative gross premium growth of 9% in 2016 from a year earlier. This was largely due to weak oilprices that led to lower premium rates for oil-related insurance business, and the value-added tax impact on its reported premiums.

The insurer covers both the group's domestic and overseas insurance risks, representing 76% (84% in 2015) and 24% (16%),respectively, of its total gross premiums in 2016. The fast pace of the group's overseas expansion drove CNPC Captive Insurance'soverseas premium growth in 2016.

CNPC Captive Insurance's portfolio comprises three main lines of business: commercial property (48% of gross premiums written in2016), liability (21%) and specialty risk (17%), which is mainly energy risk. Energy risk has high level of severity, which increases itsproduct risk.

ASSET QUALITY: VERY LIQUID AND LOW-RISK INVESTMENT PORTFOLIO

CNPC Captive Insurance's investment portfolio is highly liquid, and the insurer does not have exposure to high-risk assets such asequities and real estate.

At the end of 2016, 77% of its total invested assets were in cash and bank deposits, 19% in alternative investments, namely assetmanagement products and trust plans, and 4% in money market funds. While the insurer has increased its exposure to alternativeinvestments to enhance its yield, we consider the level of credit risk of its investment portfolio remains manageable.

CAPITAL ADEQUACY: SOLID CAPITALIZATION, EXPECTED HIGH LEVEL OF SUPPORT FROM CNPC WHEN NEEDED

CNPC Captive Insurance's capitalization is solid to support its business growth, as reflected by its comprehensive solvency ratio of498% in the first quarter ended March 2017 (543% in the last quarter ended December 2016) under China's Risk-Oriented SolvencySystem.

The insurer's gross underwriting leverage remained minimal at 0.2x in 2016. We expect its capital adequacy levels to remain solid for itsbusiness growth in the next 12-18 months.

Nonetheless, CNPC Captive Insurance is exposed to natural catastrophic perils, which could undermine its balance sheet strength.Because the insurer is an integral part of CNPC Group's risk management process, we expect the parent company to continue to ensurethat it maintains adequate capital levels as its business grows.

While CNPC Captive Insurance has no explicit guarantee or a keepwell agreement from CNPC, the insurer's articles of association stateexplicitly that the parent company should support the captive insurer in improving its solvency ratios whenever the insurer fails to meetregulatory requirements.

Our assessment of support also incorporates CIRC's expectation that a parent company should always ensure that its captive insurancesubsidiary maintains adequate levels of capital. Parent companies are required to inject capital into their captive insurance subsidiarywhenever such a subsidiary fails to meet the regulatory solvency requirement.

PROFITABILITY: UNDERWRITING LOSSES IN 2016; PROFITABILITY SUSCEPTIBLE TO VOLATILITY GIVEN POTENTIALLARGE RISK EXPOSURE

CNPC Captive Insurance continued to report underwriting losses in 2016, with a combined ratio of 109.4% (107.3% in 2015). Whilethe loss ratio dropped to 79.8% in 2016 from 87.3% in 2015, mainly driven by improved loss experience in commercial property andspecialty risk businesses, its expense ratio increased to 29.6% from 20.0% during the same period as a result of higher business andoperating costs, partly due to an increase in rental expense.

CNPC Captive Insurance's underwriting profitability is potentially volatile because of its exposure to high-severity losses, which aredifficult to estimate, particularly given its lack of loss experience and limited use of reinsurance.

4 26 May 2017 CNPC Captive Insurance Company Limited: Update Following Downgrade Due to Sovereign Rating Action

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A stable level of investment income from the company's large holdings of cash and deposits remains the key contributor to its bottomline. The insurer reported a good level of net income of RMB324 million in 2016 compared with RMB308 million in 2015.

RESERVE ADEQUACY: VERY LIMITED CLAIMS EXPERIENCE

With an operating history of three years, CNPC Captive Insurance has limited claims experience. The insurer regularly reviews itsreserve adequacy through a globally recognized audit firm.

In addition, the insurer's increasing exposure to specialty risk, mainly energy risk, with a high level of severity could make its lossexperience more volatile. Therefore, its reserve adequacy and stability remain to be tested.

FINANCIAL FLEXIBILITY: CLOSELY TIED TO PARENT'S CREDIT QUALITY AND ACCESS TO CAPITAL

CNPC Captive Insurance’s financial flexibility depends on CNPC to a great extent. The insurer does not have any debt on its balancesheet. However, as a captive insurer, it does not have direct access to capital markets or other external financing. We believe the insurerwill continue to benefit from the support and financial resources of CNPC.

While retained earnings will likely be the primary source of the insurer's future capital, we expect the insurer's parent to provide capitalsupport, when needed.

CNPC Captive Insurance's rating benefits extensively from the ownership and implicit support received from CNPC. For example, anintegration of its risk management into that of the group and a significant initial capital provided by the parent. This has enabled CNPCCaptive Insurance to maintain a solid capital base to support its operations and risk exposures.

Operating environment: China: BaaIn addition to the insurer's own business and financial fundamentals, we consider China's operating environment in arriving at ourstandalone credit profile (or final rating) for CNPC Captive Insurance. Our overall Baa rating assigned for the insurance operatingenvironment, which carries a 20% weight in the Scorecard, is based on our assessment of China's very high economic strength.This strength is counterbalanced by China's moderate institutional strength, moderate level of susceptibility to event risk, limitedpenetration of the insurance market in the national economy, and the per capita utilization of insurance when compared with othercountries worldwide. Overall, the Baa insurance operating environment rating for China exerts a mildly negative influence on CNPCCaptive Insurance's rating.

Ratings

Exhibit 3Category Moody's RatingCNPC CAPTIVE INSURANCE COMPANY LIMITED

Rating Outlook STAInsurance Financial Strength A2

CHINA NATIONAL PETROLEUM CORPORATION

Rating Outlook STALT Issuer Rating A1

Source: Moody's Investors Service

5 26 May 2017 CNPC Captive Insurance Company Limited: Update Following Downgrade Due to Sovereign Rating Action

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6 26 May 2017 CNPC Captive Insurance Company Limited: Update Following Downgrade Due to Sovereign Rating Action