OFFSHORE OIL ENGINEERING CO.,LTD. ANNUAL REPORT Stock Name: CNOOC Engineering Stock Code:

Transcription

1 OFFSHORE OIL ENGINEERING CO.,LTD. ANNUAL REPORT 2006 Stock Name: CNOOC Engineering Stock Code:

2 Company Profile Offshore Oil Engineering Co., Ltd (CNOOC Engineering, stock Code: ), the largest offshore engineering enterprise in China, is mainly engaged in the development of offshore oil and natural gas fields, as well as the engineering design, construction and installation of supporting works. It is the only EPCI contractor for large offshore oil and natural gas exploration and production projects in China and provides integrated services through engineering design, construction, installation, commissioning and maintenance. CNOOC Engineering was listed on the Shanghai Stock Exchange on February 5, CNOOC Engineering is a first-class certified company in the domestic offshore engineering industry and has been well recognized by the industry for its outstanding performance over many years. Domestic and international authoritative agencies issued dozens of certificates to the company, including Grade-A Constructor Certificate, Class-A Engineering Design Certificate, ISO9001 QMS Certificate and SMS Certificate. CNOOC Engineering has developed an all-sided, multi-layered and broad structure of human resources that adapts to EPCI contract projects of offshore works. CNOOC Engineering has expanded its market presence to all sea areas of China and successfully radiated its influence on sea areas in Middle East, Southeast Asia and South Korea. The company provided in succession quality services to many well-known companies at home and abroad, including CNOOC, Shell, BP, CACT-OG, Amoco, Arco, ConocoPhilips, Texaco, Total, Mitsubishi Heavy Industries, and Hyundai Heavy Industry. CNOOC Engineering contracted for the overall design, construction, offshore installation and commissioning of over 40 oil and natural gas fields in China seas that vary in environment conditions and oil characteristics. In particular, all oil and natural gas fields in Bohai sea were constructed either under the arrangement of the company or with the participation of the company. Nearly 20 projects contracted by CNOOC Engineering were given the National Science and Technology Advance Award. Among them, Yacheng 13-1 Onshore Terminal Project won the Lu Ban Award, the highest honor for construction quality in China. CNOOC Engineering will continue to embrace the market-oriented and customercentered idea and practice the development concept of professionalism, specialization and internationalization. On the basis of strengthening and expanding its core business of oil and gas field construction and maintenance, the company will accelerate the movement to the downstream and deep water fields, in order to develop into an internationally competitive, specialized and international energy engineering power that can sustain development and maximize shareholder s interest Share Price Performance Volume per day of COOEC Rate of change of Shanghai Stock Index Rate of change of COOEC

3 January CNOOC Engineering topped listed companies in China, according to the business performance analysis and ranking results jointly issued by PKU Guanghua-Hyperion Business Performance Management Research Institute and China Center for Economic Research, Peking University. Fu Chengyu, CEO and Party Secretary of CNOOC, led a delegation to visit the Lanjiang barge of CNOOC Engineering and sent their greetings to the crew. Major Events of CNOOC Engineering February CNOOC Engineering held the largest investor exchange meeting ever since the company s listing. March Caofeidian 11-2 Oilfield Subsea Pipeline Laying Project was completed 6 days ahead of schedule. Binghai No.109 Ship created a new record in the Indonesia SES Project by laying 182 single-joint 10-inch pipes in a day. April The jacket for Pinghu Oil and Gas Field Phase II was installed offshore 6 days ahead of schedule. May CNOOC Engineering announced its stock and cash dividend distribution plan for 2005: 10 shares and RMB2 (including tax) for every 10 shares held. June CNOOC Engineering put its ERP system into operation. The company was awarded the title CCTV Most Valuable Listed Company in China for the third consecutive year. CNOOC Engineering was elected to the Top 50 in Investor Relations Management. Asia s largest offshore oil engineering fabrication yard - Qingdao Yard Project Phase I was completed and put into operation. July Mr. Wu Guanzheng visited the Qingdao Yard of CNOOC Engineering. Qikou 17-2E Oilfield was put into service 34 days ahead of schedule. August The Indonesia SES Project succeeded in installing BWA and ZPC jackets in water. September CNOOC Engineering was selected as a constituent of SGX FTSE Xinhua China A50 Index Futures. October Caofeidian Oilfield E Platform was put into service 41 days ahead of schedule. November The waterproof system for underwater pipeline maintenance - one of the Key Technologies for Exploration and Development of Large Oilfields in Bohai Sea under the National 863 Plan passed the underwater experience in the presence of state auditors. Seven achievements of CNOOC Engineering were evaluated as new records of Chinese enterprises. December CNOOC Engineering was selected as a constituent of CSI Southern Well-off Industry Index. CNOOC Engineering and Qingdao Economic and Technological Development Zone signed the cooperation agreement on the third phase project of Qingdao Fabrication Yard. CNOOC Engineering ranked No.10 in the Competitiveness Report of Chinese Enterprises 2006 issued by Global Competitive Organization.

4 Chairman Address FINANCIAL HIGHLIGHTS Income from main business billion Net profit 747 million Respected shareholders: 2006 marks the fifth year of CNOOC Engineering s listing on the Shanghai Stock Exchange. In the face of the developing global offshore oil industry and the continuously, rapidly and efficiently growing CNOOC, our company firmly held development as the center, fully capitalized on its own advantages, reasonably mobilized internal and external resources to overcome difficulties and maintained high production efficiency, and delivered satisfying operation results. CNOOC Engineering recorded sales revenue of RMB4.969 billion and net profit of RMB747 million for 2006, a yearon-year increase of 16.68% and 27.68% respectively. While CNOOC Engineering outperformed the previous year, it shared the fruit with its shareholders by carrying out the dividend plan of distributing 10 shares and RMB2 for every 10 shares held. Based on the year s recorded performance, CNOOC Engineering proposed the dividend plan of distributing 2 shares and RMB1 for every 10 shares held for Completed the nontradable shares reform to schedule. On January 24, 2006, CNOOC Engineering completed its nontradable shares reform backed by the consideration of 2.4 shares for 10 shares, thanks to the understanding and strong support of large shareholders and circulating shareholders. The completed reform, a key milestone in the history of CNOOC Engineering, has further aligned the interest and value of the company with those of its shareholders, and will promote corporate governance to push the company towards a better and stronger one. Obviously improved the competency of CNOOC Engineering as an EPCI contractor. In the face of continuously rising orders, CNOOC Engineering seized the opportunity, took scientific and refined management as the breakthrough point, and ensured the smooth 3 OFFSHORE OIL ENGINEERING CO.,LTD.

5 Chairman Address production of all projects through scientific decision-making, improved management and fine organization. It has been improving its operating capability and its position as an EPCI contractor. In particular, the company saw an obvious enhancement of the capability to manage international projects as an EPCI contractor. CNOOC Engineering has made breakthroughs in market development and expanded to broader areas in the industry chain: moving from a pure upstream engineering and construction company towards an energy engineering power. Continuously improved corporate governance and operated the company pursuant to law. The Board of Directors strictly carried out all decisions of the general shareholder s meeting during their term of office. All Directors adhered to the principle of integrity and credibility, performed their duties, scientifically made decisions and well played the role of the Board of Directors. CNOOC Engineering has been increasingly recognized by the capital market, with its stock price rising by % throughout The company was evaluated by CCTV as one of the Top 10 Most Valuable Listed Companies in China for the third consecutive year. In 2006, CNOOC Engineering continued to retain at SSE 180 Index and was selected as a constituent of SSE 50 Index. Achievements belong to the past, and the future is even brighter. The global offshore oil industry is growing, and the international offshore oil engineering industry is making structural adjustment. Domestically, CNOOC continues to grow fast and efficiently, speeds up its step towards internationalization and implements its deep water strategy step by step. All these offer CNOOC Engineering an unprecedented opportunity. Let us pull together, work hard with a down-to-earth attitude, and seize the opportunity to exploit, innovate and develop, in order to build CNOOC Engineering into an internationally competitive and specialized energy engineering company early and to bring benefits to our shareholders, customers, employees, the company and the society. I would like to take this occasion to express, on behalf of the Board of Directors, our gratitude to Directors Hu Changan, Wang Zhongan and Huang Daya, who are going to leave their positions. I would also like to express our appreciation to all the staff for their hard work and contribution. Chairman Zhou Shouwei ANNUAL REPORT

6 President Address Respected shareholders: 2006 stands out as a milestone year in the history of CNOOC Engineering. Today, I am pleased to tell our shareholders that thanks to the favorable external and internal environment and the sustained and rapid development of CNOOC, thanks to the joint efforts of all employees and thanks to the support and help of the company s shareholders and various stake holders, we not only achieved the best business results in the history and created value for shareholders, but also witnessed a comprehensive enhancement in strategic planning, business performance and capabilities in management, market development and project management. With our achievements made in 2006, CNOOC Engineering not only honored its commitment to shareholders but also secured a solid foundation and a broader prospect for long-term development. I would like to take this occasion to extend, on behalf of the company s management, our heartfelt gratitude and respect to our customers, employees, shareholders, partners and people from all walks of life who pay attention to, support, and contribute to the development of CNOOC Engineering is CNOOC Engineering s second infrastructure construction year. We will strengthen innovation in management, technologies and systems and keep improving the standards of project, safety and quality management; continue to enhance strategic planning, infrastructure construction, and scientific and refined management; implement the talent strategy in an all-round way and accelerate the training of specialist talents; strengthen plan and budget management, cost control and the management of major investment projects; speed up the research and development of deep water and downstream key technologies and equipment and the building of scientific research teams for various business sectors; achieve sound and rapid development of the company through integrating production management and capital operation. China s economy will continue to grow rapidly, and the development of CNOOC will be fast, highly efficient, coordinated and health. These are sure to provide unprecedented opportunities for CNOOC Engineering to develop. CNOOC Engineering will continue to focus on the market and customer demands, give prominence to the main

7 President Address business, develop deep water, downstream / new energies, expand overseas, and make efforts to improve the capabilities in strategic planning and management, EPCI contractor, design, research and development, offshore installation, project management, talent recruitment, resource integration and market development, in order to sustain development and maximize relevant parties interest. Building an internationally competitive, specialized and international energy engineering power is the reinvention of CNOOC Engineering ; constantly making new and greater contributions to the energy sector for the state is our bounden responsibility. The company s management will continue to live the principle of honesty, credibility, and diligence, insist on building quality with professionalism and refined management, win loyalty with quality products and services, and shape brands through scientific management and integrity, in order to develop the company into an internationally competitive, specialized and international energy engineering power. Looking forward to the future, we are fully confident. Let s make joint efforts to create a win-win situation. Director, President Jiang Xizhao

8 Section 1 Important Notices and Contents Important Notices The Board of Directors, Board of Supervisors, directors, and supervisors as well as the senior management of the Company hereby confirm that there are not any false representation, misleading statements or important omissions carried in this report, and shall take individual and/or joint responsibilities for the authenticity, accuracy and completeness of the contents herein. All directors of the Company are present at the meeting of the Board of Directors. Chairman Zhou Shouwei, President Jiang Xizhao, Chief Financial Officer Lin Rongqing and Finance Manager Xie Hongjun hereby confirm the authenticity and completeness of the financial report in the Annual Report. The Annual Report has been audited by ShineWing Certified Public Accountants, which has issued a standard and unqualified auditor s report. 1 OFFSHORE OIL ENGINEERING CO.,LTD.

9 Important Notices and Contents Contents Section 1 Important Notices and Contents 1 Section 2 Company Profile 5 Section 3 Financial and Operating Highlights 7 Section 4 Equities Change and Shareholders 10 Section 5 Directors, Supervisors, Senior Management and Employees of the Company 16 Section 6 Company Governance Structure 21 Section 7 Brief Introduction to the General Meeting of Shareholders 24 Section 8 Report of the Board of Directors 25 Section 9 Report of the Board of Supervisors 41 Section 10 Important Matters 43 Section 11 Financial Report 47 Section 12 Contents of Reference Documents 82 ANNUAL REPORT

10 Definition I. Definition of Projects No. Project Name Project Description Sea Area & Operating Water Depth 1 Bozhong 25-1 EPCI Project, Phase II 2 Indonesian SES Project 3 Bajiaoting Project, Pinghu Penglai 19-3 Project, Phase II EPCI Project for Penglai 19-3 Hook-up & Commissioning, Phase II EPCI Project for Penglai 19-3 Subsea Pipeline & Cable Laying, Phase II Caofeidian 11-6/12-1/12-1S EPCI Project Panyu 30-1 Gas Field Development Project Weizhou Oilfields Offshore Installation Project South China Sea EPC Project for FPSO s Modules Indonesian Project KODECO Liuhua Oilfield FPSO s Overhaul Project Qikou 17-2 East High Oilfield Development Project Engineering, procurement, construction, offshore installation/hook-up/commissioning of one module Detailed design, shop design, procurement, construction, offshore installation/hook-up/commissioning of two jackets, two modules and 134km-subsea pipeline Detailed design, shop design, procurement, construction, offshore installation/hook-up/commissioning of one jacket, one module and living quarter, 14km-subsesa pipelines, 7km-subsea cable, as well as relevant renovations Shop design, procurement, construction, and offshore installation of two jackets and one module Hook-up & commissioning of five modules, hook-up& commissioning of one modular and superstructure modules for FPSO, and offshore renovation/hook-up /commissioning of WHPA Detailed design, procurement and laying of two subsea pipelines as well as the detailed design and laying of one subsea cable. Detailed design, procurement, construction, offshore installation/hook-up/commissioning of two jackets, three modules, three subsea pipelines and three subsea cables Detailed design, procurement, construction, offshore installation/hook-up/commissioning of one jacket and one module Detailed design of subsea pipelines, shop design and offshore installation of four jackets, four modules, three subsea pipelines, and two subsea cables Detailed design, procurement, consturction/commissioning of FPSO superstructure modules in Wenchang and Xijiang Offshore installation of three jackets, three modules and three subsea pipelines Liuhua oilfield FPSO s complete overhaul Shop design, procurement, construction, and offshore installation/hook-up of one jacket and one module Bohai Sea 19 meters Java Sea 50 meters East China Sea 80 meters Bohai Sea 30 meters Bohai Sea 30 meters Bohai Sea 30 meters Bohai Sea 27 meters South China Sea 200 meters South China Sea 40 meters South China Sea 120 meters Java Sea 50 meters South China Sea 305 meters Bohai Sea 5.7 meters 3 OFFSHORE OIL ENGINEERING CO.,LTD.

11 Definition II. Definition of Terms 1. EPCI: an acronym for Engineering, Procurement, Construction and Installation. 2. WHP: stands for Wellhead Platform. 3. SES Project: the name of a project. SES is short for CNOOC SES Ltd. 4. KODECO Project: the name of a project. KODECO is short for Korea Development Company. 5. OSHA: an abbreviation of Occupational Safety and Health Administration. 6. Incident ratio of lost working days: a measuring method to define the number of accidents resulting in a failure of working in one day amid many days, which is standardized on the basis of 200,000 man hours. Formula: Incident ratio of lost working days = number of incidents 200,000 man hours actual total man hours (unit: 10,000 man hours) 7. Recordable incident ratio: a composite index including fatality, working day losses, working day restriction and medical incidents. Formula: Recordable incident ratio = number of recordable incidents 200,000 man hours actual total man hours (unit: 10,000 man hours) 8. QA: Quality Assurance. 9. SPAR: A vertical cylindrical hull supporting the platform structure. 10. FPSO: Float Production Storage and Offloading. 11. ERP: Enterprise Resource Planning. 12. LNG: Liquefied Natural Gas. 13. RUP: Riser Utility Platform. 14. QHSE: Quality, Health, Safety and Environment. 15. CEP: Central Platform. ANNUAL REPORT

12 Section 2 Company Profile 1. Legal name of the Company: Chinese: 海洋石油工程股份有限公司 Chinese for short: 海油工程 English: OFFSHORE OIL ENGINEERING CO., LTD. English for short: CNOOC Engineering 2. Legal representative of the Company: Zhou Shouwei 3. Secretary of the Board of Directors: Liu Lianju Correspondence address: P.O.Box 616, No.1078 Danjiang Road, Tanggu District, Tianjin City Tel: Fax: llj@mail.cooec.com.cn 4. Registered address: No Hebei Road, Tanggu District, Tianjin City Office address: No.1078 Danjiang Road, Tanggu District, Tianjin City Postal code: Website of the Company: of the Company: zqblx@mail.cooec.com.cn 5. Newspaper designated by the Company for information disclosure: China Securities Journal, Shanghai Securities News Website designated by China Securities Regulatory Commission for publication of annual report: Place where this annual report is deposited: Board Secretariat 6. Stock Exchange for the listing of the Company: Shanghai Stock Exchange Stock name: CNOOC Engineering Stock code: Other information: Date of initial registration: April 20, 2000 Registered address of the Company: No.248 Building A, Zhongji Science Park, Huayuan Industry Development Area, Tianjin Hi-Tech Industrial Park Date of registration alternation: January 31, 2007 Registered address after registration alternation: No Hebei Road, Tanggu District, Tianjin City Corporate business license number: Tax registration certificate number: Name of the appointed CPA firm: ShineWing Certified Public Accountants Office address of the CPA firm: Room 818, Beijing Capital Times Square, No.88 West Chang an Avenue, Xicheng District, Beijing 5 OFFSHORE OIL ENGINEERING CO.,LTD.

13 Company Profile ANNUAL REPORT

14 Section 3 Financial and Operating Highlights I. Financial and Operating Highlights in 2006 (consolidated statements) in RMB Item Amount Total profit 946,920, Net profit 747,338, Net profit after deducting nonrecurring gains/losses 749,584, Profit from main business 1,022,020, Profit from other business 42, Operating profit 950,091, Investment income -16, Subsidy income 109, Non-operating income/expense, net -3,263, Net cash inflows from operating activities 1,221,126, Net increase in cash and cash equivalents 53,749, II. Items after Deduction of Nonrecurring Gains/Losses in RMB Items of Nonrecurring Gais/Losses Amount Subsidies from the government 109, Non-operating income/expense after deducting the provision for asset impairment taken in accordance with the Accounting System for Business Enterprises -3,263, Effect of income tax 907, Nonrecurring gains/losses after deducting the effect of income tax -2,246, OFFSHORE OIL ENGINEERING CO.,LTD.

15 Financial and Operating Highlights III. Major Accounting Data and Financial Indicators in the Past Three Years (consolidated statements) Item Unit YoY +/- (%) 2004 Income from main business RMB 4,968,874, ,258,588, ,487,502, Total profit RMB 946,920, ,293, ,147, Net profit RMB 747,338, ,314, ,596, Net profit after deducting nonrecurring gains/losses RMB 749,584, ,320, ,784, Earnings per share (diluted) RMB/share Net cash inflows from operating activities RMB 1,221,126, ,841, ,294, Net cash flows per share from operating activities RMB/share Return on Equity (diluted) % percentgae points Return on Equity (diluted), based on the net profit after deducting nonrecurring gains/ losses % Weighted average return on Equity, based on the net profit after deducting nonrecurring gains/losses % percentgae points percentgae points Item Unit at the end of 2006 at the end of 2005 YOY +/-(%) at the end of 2004 Total assets RMB 5,023,421, ,484,235, ,659,217, Shareholders equity (excluding minority interests) RMB 3,012,450, ,346,647, ,794,333, Net asset per share RMB/share Adjusted net asset per share RMB/share in RMB *Note: The decreases of net asset per share and earnings per share from that of the end of the previous reporting period and the same period of the previous year respectively, are caused by the implementation of the 2005 Profit Distribution and Reserve-to-Capital Conversion Plan in May 2006, which raised the total shares to 792 million from 396 million Total assets Income from main business Net profit Return on Equity (diluted) RMB million 5000 RMB million 800 RMB million 25 % ANNUAL REPORT

16 Financial and Operating Highlights IV. Return on Net Assets and Earnings Per Share, based on the Rules for the Contents and Format of Information Disclosure by Companies That issue Securities to the Public No. 9 issued by CSRC Profit in the reporting period Return on Equity (%) Weighted Fully diluted average in RMB Earnings per share (RMB) Weighted Fully diluted average Profit from main business Operating profit Net profit Net profit after deducting nonrecurring gains/losses V. Changes of shareholders equity during reporting period in RMB Item Shares Capital reserve Surplus reserve Statutory public welfare fund Undistributed profit Shareholders equity, total Balance at period beginning 396,000, ,088, ,743, ,847, ,024,816, ,346,647, Increase in the period 396,000, ,339, ,338, ,310,525, Decrease in the period 0 121,136, ,847, ,739, ,723, Balance at period end 792,000, ,952, ,082, ,339,415, ,012,450, Causes for change 1. During the reporting period, the Company implemented the 2005 Profit Distribution Plan and the Plan of Increasing Share Capital with Capital Reserves in 2005, i.e. to distribute share dividends of 7 shares and cash bonus of RMB2 (including tax) for every 10 shares, and issue 3 additional shares with the capital reserve for every 10 shares, increasing the total shares to 792 million from 396 million. 2. Reasons for reduction in capital reserve:1 during the reporting period, the Company implemented the 2005 Profit Distribution Plan and the Plan of Increasing Share Capital with Capital Reserves in 2005, and issued 3 additional shares with the capital reserve for every 10 shares, which resulted in the reduction of RMB118.8 million in the capital reserve at the end of reporting period; 2 the payment of expenses relating to the non-tradable share reform reduced the capital reserve by RMB2,336, During the reporting period, the Company did not take public welfare fund from January 1, 2006 in accordance with with the Circular of the Ministry of Finance on Relevant Accounting Issues of Enterprises after the Enforcement of the Company Law (C.Q. [2006] No. 67). 4. Reasons for increase in undistributed profit: 1 During the reporting period, net profits realized by the Company increased the undistributed profit by RMB 747,338,148.94; 2the withdrawal of statutory surplus reserve reduced the undistributed profit by RMB 76,339,555.95; 3 share dividends of 7 shares and cash bonus of RMB2 (including tax) are distributed for every 10 shares according to the 2005 Profit Distribution Plan, reducing the undistributed profit by RMB 356,400,000. The above events increased the undistributed profit by RMB 314,598, in total. 5. During the reporting period, the Company reported an increase in the net profit, leading to the increase of shareholders equity. 9 OFFSHORE OIL ENGINEERING CO.,LTD.

17 Section 4 Equities Change and Shareholders I. Change in Equities i. Change in Share Capital The Company has completed the reform of non-tradable shares by 24 January 2006, and disclosed the change in share capital as follows in accordance with the Rules on the Contents and Format for the Information Disclosure of Companies That Make Public issuance of Securities, No.5 Contents and Format of Companies Report on Change in Share Capital (Revised in 2005): Unit: Share Before the change Increase/decrease as a result of the change (+,-) After the change Shares Percentage (%) Newly issued shares Bonus shares Transferred shares from the surplus reserve Others Subtotal Shares Percentage (%) I. Shares subject to restrictions on sales 1. State-owned shares 203,399, ,379, ,019, ,600, ,799, ,199, Shares held by stateowned entities 35,467, ,827, ,640, ,429,594-6,962,030 28,505, Shares held by other domestic investors Incl.: Shares held by domestic legal persons Shares held by domestic natural persons 4. Shares held by foreign investors Incl.: Shares held by foreign legal persons Shares held by foreign natural persons Total shares subject to restrictions on sales 238,867, ,207, ,660,160-82,029, ,837, ,704, II. Shares not subject to restrictions on sales 1. RMB ordinary shares 157,132, ,992, ,139, ,029, ,162, ,295, Domestically listed foreign shares 3. Overseas listed foreign shares 4. Others Total shares not subject to restrictions on sales 157,132, ,992, ,139, ,029, ,162, ,295, III. Total share 396,000, ,200, ,800, ,000, ,000, ANNUAL REPORT

18 Equities Change and Shareholders Trading Schedule of Shares Subject to Restrictions on Sales Date Shares tradable at the expiry of lock-up period Outstanding shares subject to restrictions on sales Outstanding shares not subject to restrictions on sales 24 January ,029, ,704, ,295, January ,105, ,599, ,400, January ,599, ,000,000 Unit: Share Remarks Refer to the Company s non-tradable shares ReformStatement (Revised) for the detailed restrictions on sales Note: 1. The Company has no fund placement shares, employee shares, shares placed to strategic investors or shares placed to general legal persons. 2. On 24 January 2006, the Company implemented the plan of reforming non-tradable shares, which provides allotting 2.4 shares for per 10 shares as dividends with some supplementary undertaking clauses, in accordance with the G.Z.C.Q. [2006] No.2 document issued by State-owned Assets Supervision and Administration Commission of the State Council and the SH.ZH.SH.Z. [2006] No.31 document issued by the Shanghai Exchange Stock. Although the share capital remained unchanged, the Company s stock structure altered. The plan of reforming non-tradable shares is specified in the China Securities Journal and Shanghai Securities News dated 19 January 2006, as well as the announcement released on the website of Shanghai Stock Exchange (SSE), 3. On 24 April 2006, the 2005 annual general meeting of shareholders passed the 2005 Profit Distribution Plan and the Plan of Converting Capital Reserve to Share Capital for 2005, deciding to allot 7 shares and RMB2 (including tax) per 10 shares respectively as the stock dividend and cash dividend based on the total 396,000,000 shares, and to convert every 10 shares of capital reserve to 3 shares. The aforesaid plans have been completed by 19 May According to legal commitments made by original holders of non-tradable shares during the non-tradable shares reform, they can sell their non-tradable shares which account for no more than 5% of the Company s total share capital within one year after the completion of the non-tradable shares reform. The 82,029,594 shares subject to restrictions on sales can be tradable from 24 January To have more details, please refer to the Listing Announcement of Tradable Shares Subject to Restrictions on Sales of Offshore Oil Engineering Co., Ltd. published on the China Securities Journal and Shanghai Securities News as well as the website of Shanghai Stock Exchange on 19 January ii. Issuance and listing of Shares 1. The Company has issued shares for only one time by the end of the reporting period and the particulars are as follows: Type of shares issued: RMB ordinary share (A share) Issue date: January 21, 2002 Issue price: RMB9.6 per share Number of shares issued: 80,000,000 P/E Ratio: 19.6 Listing date: February 5, 2002 Approved tradable shares: 80,000,000 Enlarged total share capital: 250,000, Total shares of the Company and changes in share structure 1 On 23 September 2003, the first provisional general meeting of shareholders in 2003 passed the 2002 Profit Distribution Plan and the Plan of Converting Capital Reserve to Share Capital for 2002, deciding to allot RMB1 (including tax) per 10 shares as the cash dividend based on the total 250,000,000 shares, and convert every 10 shares of capital reserve to 1 share. See the following table for details: 11 OFFSHORE OIL ENGINEERING CO.,LTD.

19 Equities Change and Shareholders Share right register date: 14 October 2003 Listing date of newly-added tradable shares: 16 October 2003 Date of payment of cash dividends: 21 October 2003 Total shares after distribution: 275,000,000 Non-tradable shares after distribution: 187,000,000 Tradable shares after distribution: 88,000,000 2 On April 19, 2004, the 2003 annual general meeting of shareholders passed the 2003 Profit Distribution Plan and the Plan of Converting Capital Reserve to Share Capital for 2003, deciding to allot 1 share and RMB1 (including tax) per 10 shares respectively as the stock dividend and cash dividend based on the total 275,000,000 shares, and to convert every 10 shares of capital reserve to 1 share. See the following table for details: Share right register date: 14 May 2004 Listing date of newly-added tradable shares: 18 May 2004 Date of payment of cash dividends: 21 May 2004 Total shares after distribution: 330,000,000 Non-tradable shares after distribution: 224,400,000 Tradable shares after distribution: 105,600,000 3On April 18, 2005, the 2004 annual general meeting of shareholders passed the 2004 Profit Distribution Plan and the Plan of Converting Capital Reserve to Share Capital for 2004, deciding to allot 1 share and RMB1 (including tax) per 10 shares respectively as the stock dividend and cash dividend based on the total 330,000,000 shares, and to convert every 10 shares of capital reserve to 1 share. See the following table for details: Share right register date: 11 May 2005 Listing date of newly-added tradable shares: 13 May 2005 Date of payment of cash dividends: 18 May 2005 Total shares after distribution: 396,000,000 Non-tradable shares after distribution: 269,280,000 Tradable shares after distribution: 126,720,000 4 The shareholders meeting held on 16 January 2006 concerning the reform of non-tradable shares adopted the plan for reform of non-tradable shares, deciding that all holders of non-tradable shares shall pay 30,412,800 shares to holders of tradable shares, and the latter shall be allotted 2.4 shares for every 10 tradable shares held. Share right register date: 20 January 2006 Total shares after the reform: 396,000,000 Shares not subject to the restrictions on sales after the reform: 157,132,800 Trading date of consideration share: 24 January 2006 Shares subject to the restrictions on sales after the reform: 238,867,200 5 On 24 April 2006, the 2005 annual general meeting of shareholders passed the 2005 Profit Distribution Plan and the Plan of Converting Capital Reserve to Share Capital for 2005: deciding to allot 7 shares and RMB2 (including tax) per 10 shares respectively as the stock dividend and cash dividend based on the total 396,000,000 shares, and to convert every 10 shares of capital reserve to 3 shares. See the following table for details: Share right register date: 12 May 2006 Listing date of newly-added tradable shares: 16 May 2006 Date of payment of cash dividends: 19 May 2006 Total shares after distribution: 792,000,000 Shares subject to the restrictions on sales after distribution: 477,734,400 Shares not subject to the restrictions on sales after distribution: 314,265,600 ANNUAL REPORT

20 Equities Change and Shareholders 6 According to the Company s legal commitments made during the reform of non-tradable share, from 24 January 2007, the shares held by the original holders of non-tradable shares, which account for no more than 5% of the total share capital, can be tradable. The basic information is as follows: Listing date: 24 January 2007 Tradable shares: 82,029,594 Shares subject to restrictions on sales after the change: Shares not subject to restrictions on sales after the 395,704,806 change: 396,295, Particulars about the existing employee shares The Company did not have any employee shares as at the end of the reporting period. II. Particulars about Shareholders i. As at the end of the reporting period, the Company had a total of 11,425 shareholders. ii. Particulars about Shareholding of Top 10 Shareholders (as of 31 December 2006) S/N Name of shareholder Increase/ decrease of shares within the year Total shares by the yearend Percentage (%) Shares subject to restrictions on sales Unit: Share Nature of shareholder 1 China National Offshore Oil Corporation State-owned (CNOOC) 177,502, ,799, ,199,272 shareholder 2 CNOOC Nanhai West Corporation 29,717,136 68,105, ,505,534 State-owned shareholder 3 FORTIS BANK SA/NV 7,416,565 11,125, Foreign shareholder 4 Southern Open-end Securities Investment Fund for Stocks with High Growth 11,022,700 11,022, Other 5 Jinghong Securities Investment Fund 5,178,364 10,211, Other 6 Guangfa Strategic Selective Securities Investment Mixed Fund 10,054,982 10,054, Other 7 INVESCO Great Wall Emerging Growth Stock Securities Investment Fund 10,000,000 10,000, Other Southern Securities Investment Fund for 8 Stocks with Good Performance and Growth 9,406,482 9,406, Other Bank of Communications Schroders 9 Growth Stock Securities Investment Fund 9,175,696 9,175, Other Bank of Communications Schroders 10 Mixed Securities Investment Fund with Prudent Portfolio 6,999,958 6,999, Other 13 OFFSHORE OIL ENGINEERING CO.,LTD.

21 Equities Change and Shareholders Note: 1. Shares held by the shareholders with 5% or above of total shares have not been pledged or locked-up during the reporting period. 2. Of all the top 10 shareholders, CNOOC Nanhai West Corporation is the wholly-owned subsidiary of China National Offshore Oil Corporation, which holds state-owned shares; both the Southern Open-end Securities Investment Fund for Stocks with High Growth and Southern Securities Investment Fund for Stocks with Good Performance and Growth are the securities investment funds governed by China Southern Fund Management Co., Ltd.; both the Bank of Communications Schroders Growth Stock Securities Investment Fund and Bank of Communications Schroders Mixed Securities Investment Fund with Prudent Portfolio are the securities investment funds governed by Bank of Communications Schroder Fund Management Co., Ltd. The Company is not aware of any connected relations and concerted action among the abovementioned shareholders. 3. Of the shareholders with more than 5% of total shares and all the top 10 shareholders not subject to restrictions on sales, no strategic investor or general legal person participated in the placement of new shares. iii. Shares Held by Top 10 Shareholders Subject to Restrictions on Sales and the Restrictions Unit: Share S/N Name of shareholders subject to restrictions on sales Shares held subject to restrictions on sales Floating date Newly- added tradable shares Restrictions 1 2 China National Offshore Oil Corporation CNOOC Nanhai West Corporation 406,799,272 January 24, ,600, ,199,272 January 24, ,600, ,599,272 January 24, ,599,272 68,105,534 January 24, ,600,000 28,505,534 January 24, ,505,534 Note 1 3 CNOOC Bohai Corporation 2,829,594 January 24, ,829,594 Note 1: Since the first trading date (i.e. January 24, 2006) after the implementation of the reform plan for non-tradable shares, shares shall not be traded or transferred within 12 months. Upon the expiry of 12 months, the original non-tradable shares shall become tradable in the stock exchange by listing with the proportion of not more than 5% of total shares within 12 months and 10% within 24 months. iv. Brief Introduction to the Controlling Shareholder and Actual Controller of the Company 1. Particulars about the controlling shareholder and actual controller (1) Company name: China National Offshore Oil Corporation (CNOOC) (2) Legal representative: Fu Chengyu (3) Establishment date: February 15, 1982 (4) Registered capital: RMB50 billion (5) Major business and management activities: enjoy the exclusive right to exploit offshore petroleum and natural gas resources at the sea areas of China in cooperation with foreign enterprises according to the Regulations of the People s Republic of China on the Exploitation of Offshore Petroleum Resources in Cooperation with Foreign Enterprises issued by the State Council. The Company s major business activities cover the organization of exploitation, development and production of offshore petroleum and natural gas, and oil refining, petroleum chemistry as well as the processing and application of natural gas; marketing and distribution of petroleum products, natural gas products, petroleum- and gasprocessed products, petrochemicals, as well as the products produced or processed by the subsidiaries of the Company; provision of the services of the exploration, development, production and distribution of petroleum and natural gas; import and export of three kinds of commodities; commissioned import & export and technical export for subsidiaries; ANNUAL REPORT

22 Equities Change and Shareholders Sino-foreign joint ventures, cooperative production, processing with offered materials and samples and assembling with customers parts for foreign companies, compensation trade, and entrepot trade; contracting overseas projects and domestic foreign-funded projects, as well as the import & export of required equipments, materials and parts and accessories; sending the engineering, production and service personnel familiar with the industry overseas. (6) Property right and controlling relations between the Company and its actual controller (after the reform of nontradable shares) State-owned Assets Supervision and Administration Commission of the State Council 100% 100% CNOOC 100% CNOOC Nanhai West Corp. CNOOC Bohai Corp. 8.60% 51.36% 0.36% Offshore Oil Engineering Co., Ltd. 2. Changes in the controlling shareholder and actual controller No changes happened to the controlling shareholder and actual controller during the reporting period. v. Particulars about Top 10 Holders of Tradable Shares (as of December 31, 2006) S/N Name of shareholder Shares held as at the end of the year Type of share 1 FORTIS BANK SA/NV Southern Open-end Securities Investment Fund for Stocks 11,125,506 A Share 2 with High Growth 11,022,700 A Share 3 Jinghong Securities Investment Fund 10,211,836 A Share 4 Guangfa Strategic Selective Securities Investment Mixed Fund 10,054,982 A Share 5 INVESCO Great Wall Emerging Growth Stock Securities Investment Fund 10,000,000 A Share 6 Southern Securities Investment Fund for Stocks with Good Performance and Growth 9,406,482 A Share 7 Bank of Communications Schroders Growth Stock Securities Investment Fund 9,175,696 A Share 8 Bank of Communications Schroders Mixed Securities Investment Fund with Prudent Portfolio 6,999,958 A Share 9 National Social Security Fund 105 Combination 6,200,000 A Share 10 ICBC Credit Suisse Selective Composite Securities Investment Fund Unit: Share 5,099,414 A Share Note: Of all the top10 shareholders not subject to restrictions on sales, both the Southern Open-end Securities Investment Fund for Stocks with High Growth and Southern Securities Investment Fund for Stocks with Good Performance and Growth are the securities investment funds governed by China Southern Fund Management Co., Ltd.; both the Bank of Communications Schroders Growth Stock Securities Investment Fund and Bank of Communications Schroders Mixed Securities Investment Fund with Prudent Portfolio are the securities investment funds governed by Bank of Communications Schroder Fund Management Co., Ltd. The Company is not aware of any connected relations and concerted action among the above-mentioned shareholders. 15 OFFSHORE OIL ENGINEERING CO.,LTD.

23 Section 5 Directors, Supervisors, Senior Management and Employees I. Directors, Supervisors and Senior Management Name Gender Age Post Zhou Shouwei Male 56 Board Chairman N.A. N.A. Jiang Xizhao Male 50 Director, President N.A 41.2 Hu Chang an Male 59 Director, Secretary of Party Committee N.A Wang Zhong an Male 43 Director N.A. N.A. Xu Yongchang Male 38 Director N.A. N.A. Huang Daya Male 46 Director N.A. N.A. Li Wei an Male 49 Independent director N.A. N.A. Yang Jun Male 48 Independent director N.A. N.A. Han Chuanmo Male 56 Independent director N.A. N.A. Yin Jihong Male 57 Chairman of the Board of Supervisors N.A. N.A. Xiao Jianwen Male 57 Supervisor N.A. N.A. Wang Chaozhu Male 53 Posts Held at the Shareholder Entity Supervisor, Vice Secretary of Party Committee, Secretary of the Discipline Inspection Commission, Chairman of Labor Union Term of office Shares held at the beginning of the year Shares held at the end of the year Reason s of change N.A. Total pre-tax remuneration received from the Company during the reporting period (RMB10,000) (March- December) Zhang Songfu Male 53 Vice President N.A Chen Wenjin Male 42 Vice President N.A Wang Tao Male 40 Vice President N.A Fang Xiaoming Male 51 Chief Engineer N.A Lin Rongqing Male 43 Chief Financial Officer N.A Liu Lianju Male 41 Secretary to the Board of Directors 0 0 N.A Name Name of the shareholder entity Post Starting date of term of office Ending date of term of office Whether or not the remuneration paid by the shareholder entity Zhou Shouwei CNOOC Vice General Manager Yes Xu Yongchang CNOOC Yin Jihong Xiao Jianwen CNOOC CNOOC General Manager of Assets Management Dept Yes High Commissioner of Assets Management Dept. Commissioner of Assets Management Dept. Currency: Renminbi (RMB) Yes Yes ANNUAL REPORT

24 Directors, Supervisors, Senior Management and Employees Posts Held at Other Entities Name Name of the entity Post Wang Zhong an China Offshore Oil Co., Ltd. Starting date of term of office Ending date of term of office Whether or not the remuneration paid by the other entity General Manager of Planning Dept Yes Huang Daya CNOOC Oil Base Group Ltd. General Manager of HR Dept Yes Li Wei an Nankai University Dean of Business School, Director of MBA Center, chair professor of "Cheung Kong Scholars Programme", doctoral advisor Yes Yang Jun Ping An Insurance Company Advisor Yes Han Chuanmo Tianjin University of Finance & Economics Vice dean of Business College, professor and doctoral advisor Yes II. Main Working Experiences of the Present Directors, Supervisors and Senior Management Members Name Zhou Shouwei Jiang Xizhao Hu Chang an Wang Zhong an Post Board Chairman Director, President Director, Secretary of Party Committee Director Educational background/a cademic Doctor of Engineering EMBA MBA Master's degree Professional title Senior Engineer Senior Economist Senior Political Worker Senior Engineer Main working experiences September 1999-October 2000: Executive Director and Executive Vice President of China Offshore Oil Co., Ltd., and General Manager and Secretary of Party Committee of China National Offshore Oil (China) Co., Ltd. Tianjin Branch; October 2000-August 2002: Vice General Manger of CNOOC, and Executive Director and Executive Vice President of China Offshore Oil Co., Ltd.; August 2002-present: Vice General Manger of CNOOC, and Executive Director and President of China Offshore Oil Co., Ltd. and Board Chairman of the Company and Offshore Oil Engineering (Qingdao) Co., Ltd. at present. August 2001-December 2002: President of Development and Design Institute of China Offshore Oil Research Center; January 2003-March 2004: studied at University of Texas at Arlington and obtained a degree of EMBA; March 2004-October 2005: Manager of management post of down stream project of Engineering Construction Dept., CNOOC; October 2005-present: President of Offshore Oil Engineering Co., Ltd.; and director of the Company, director, General Manager and Secretary of Party Committee of Offshore Oil Engineering (Qingdao) Co., Ltd., and director of China Offshore Ocean Oilfields Services (Hong Kong) Limited and CNOOC Finance Corp. August 1999-April 2001: Manager and Secretary of Party Committee of Oil Extraction Company, CNOOC Bohai Corporation; April 2001-December 2001: Manager and Secretary of Party Committee of Oil Extraction Company, CNOOC Bohai Corporation, Manager of Oil Extraction Engineering Company, and Manager of Technical Service Company; December 2001-December 2003: Vice Secretary of Party Committee of CNOOC Bohai Corporation; December 2003-present: Secretary of Party Committee of Offshore Oil Engineering Co., Ltd.; and director of the Company and Chairman of Board of Supervisors of Offshore Oil Engineering (Qingdao) Co., Ltd. at present. January 2000-February 2001: Deputy Director of Basic Industry Dept., State Planning Commission; February 2001-August 2001: Vice General Manager of Strategic Planning Dept. of China Offshore Oil Co., Ltd.; August 2001-July 2005: General Manager of Planning Dept. of CNOOC.; August 2005-present: General Manager of Planning Dept. of China Offshore Oil Co., Ltd.; and director of the Company. 17 OFFSHORE OIL ENGINEERING CO.,LTD.

25 Directors, Supervisors, Senior Management and Employees Xu Yongchang Huang Daya Li Wei an Yang Jun Han Chuanmo Yin Jihong Xiao Jianwen Wang Chaozhu Zhang Songfu Chen Wenjin Wang Tao Fang Xiaoming Chief Engineer Lin Rongqing Liu Lianju Director Director Independent director Independent director Independent director Chairman of Board of Supervisors Supervisor Supervisor, Vice Secretary of Party Committee, Secretary of the Discipline Inspection Vice President Vice President Vice President Chief Financial Officer Secretary to the Board of Directors Master of Economics Master of Management Science Doctor of Management Science Doctor of Laws Master of Accounting Bachelor degree Bachelor degree Bachelor degree Bachelor degree MBA EMBA Bachelor degree Master of Economics Master of Economics Accountant, Auditor Senior Engineer Chair Professor of "Cheung Kong Scholars Programme", doctoral Lawyer Professor, doctoral advisor Senior Economist Senior Economist - Senior Engineer Senior Engineer Senior Engineer Senior Engineer Senior Accountant August 2000-July 2002: Full-time supervisor of Work Committee for Enterprises, the Central Committee of the Communist Party of China; August 2002-April 2003: Management Manager of Board of Supervisors of Inspection Dept., CNOOC; April 2003-present: General Manager of Asset Managements Dept., CNOOC; and director of the Company. September 2000-June 2001: Manager of Tepu Company of CNOOC Nanhai West Corporation; June 2001-September 2001: Manager of Enterprise Management Dept. of CNOOC Nanhai West Corporation; September 2001-December 2004: Vice General Manager of CNOOC Nanhai West Corporation; December 2004-present: General Manager of HR Dept. of CNOOC Oil Base Group; and director of the Company. October 1997-present: Dean of Business School, Director of MBA Center and Director of Corporate Governance Study Center, Nankai University; In 2005, he was chosen as the Chair Professor of "Cheung Kong Scholars Programme" by the Ministry of Education, and the doctoral advisor; and independent director of the Company at present : Managing Director of BOC International Holdings Ltd.; 2001-present: Advisor of Ping An Insurance Company; and independent director of the Company at present. September : Professor and doctoral advisor of Tianjin University of Finance & Economics; 2004-present: Vice Dean of Business School of Tianjin University of Finance & Economics; and independent director of the Company at present. September 2001-April 2003: Wages and Insurance Manager of HR Dept., CNOOC; April 2003-present: High Commissioner of Assets Management Dept. of CNOOC; and Chairman of Board of Supervisors of the Company at present. March 2001-December 2002: Commissioner of Board of Supervisors of State-owned Enterprises dispatched by the State Council; January 2003-present: Commissioner of Assets Management Dept., CNOOC; and supervisor of the Company at present. September 2001-March 2003: Personnel and Labor and Capital Manager of HR Dept., CNOOC; March 2003-March 2006: Secretary of the Discipline Inspection Commission of CNOOC Industrial Company; March 2006-present: Secretary of Party Committee and Secretary of the Discipline Inspection Commission of Offshore Oil Engineering Co., Ltd.; May 2006-present: Chairman of Labor Union of Offshore Oil Engineering Co., Ltd.; and supervisor of the Company and supervisor of Offshore Oil Engineering (Qingdao) Co., Ltd. April 2000-present: Vice President of Offshore Oil Engineering Co., Ltd.; and Chief Security Officer of the Company and director of Offshore Oil Engineering (Qingdao) Co., Ltd. April 2000-present: Vice President of Offshore Oil Engineering Co., Ltd.; and director of Offshore Oil Engineering (Qingdao) Co., Ltd. April 2000-March 2002: Vice President of Production Management Dept. of Offshore Oil Engineering Co., Ltd.; January 2005-December 2005: studied at University of Texas at Arlington and obtained a degree of EMBA; March 2002-present: Vice President of Offshore Oil Engineering Co., Ltd.; and director of Offshore Oil Engineering (Qingdao) Co., Ltd. at present. April : Manager of Production Management Dept. of Offshore Oil Engineering Co., Ltd.; 2002-present: Chief Engineer of Offshore Oil Engineering Co., Ltd.; and representative of quality control personnel of the Company and director of Offshore Oil Engineering (Qingdao) Co., Ltd. at present. Certified April 2000-February 2001: Manager of Financial Dept. of Offshore Oil Engineering Co., Ltd.; Senior Enterprise Risk February 2001-present: Chief Financial Officer of Offshore Oil Engineering Co., Ltd.; Manager, Senior and director of Offshore Oil Engineering (Qingdao) Co., Ltd. at present. April 2000-February 2001: supervisor of Offshore Oil Engineering Co., Ltd.; February 2001-present: Secretary to the Board of Directors of Offshore Oil Engineering Co., Ltd. at present. ANNUAL REPORT

26 Directors, Supervisors, Senior Management and Employees III. Annual Remuneration of the Present Directors, Supervisors and Senior Management i. Process and basis of decision-making for remuneration of directors, supervisors and senior management are as follows: 1. To refer to the remuneration of senior management of the trade. 2. To establish the remuneration standards according to the responsibility and complexity of the post as well as the work performance and achievement, and by sticking to the principle of stabilizing personnel and combining the incentive and restriction. ii. Subsidy for independent directors The subsidy for each of the three independent directors of the Company is RMB 62,000 (before tax) per year. Travel expenses for participating in the general meeting of shareholders and the Board meeting and other expenses required for exercising their powers in accordance with the Articles of Association can be reimbursed by the Company. iii. Directors and supervisors who do not receive their remunerations and subsidies from the Company include Mr. Zhou Shouwei, Mr. Yin Jihong, Mr. Wang Zhong an, Mr. Xu Yongchang, Mr. Huang Daya and Mr. Xiao Jianwen, among which Mr. Zhou Shouwei, Mr. Yin Jihong, Mr. Xu Yongchang and Mr. Xiao Jianwen receive their remunerations and subsidies from CNOOC, the first largest shareholder entity, Mr. Wang Zhong'an receives his remuneration and subsidy from China Offshore Oil Co., Ltd., and Mr. Huang Daya from CNOOC Oil Base Group. IV. Appointment and Removal of Directors, Supervisors and Senior Management during the Reporting Period Mr. Wang Chaozhu was elected as employee supervisor of the 2nd Board of Supervisors at the labor union members representative meeting of the Company on 25 May V. Employees As of 31 December 2006, the Company had 4,270 in-service employees. Personnel constituents of the Company are as follows: 1. Classification by educational background: 2. Classification by specialties: Category of educational background Number of persons involved Category of specialty Number of persons involved Bachelor degree and above 1204 Management personnel 746 Junior college 793 Technical personnel 790 Technical secondary school 835 Financial personnel 39 Technical school 612 Production personnel 2631 Senior high school and below 826 Sales personnel 64 Bachelor degree and above 28% Junior college 19% Senior high school and below 19% Technical school 14% Technical secondary school 20% Financial personnel 1% Technical personnel 19% Production personnel 62% Management personnel 17% Sales personnel 1% 19 OFFSHORE OIL ENGINEERING CO.,LTD.

27 Directors, Supervisors, Senior Management and Employees ANNUAL REPORT

28 Section 6 Corporate Governance Structure I. Company Governance The Company has established and perfected the corporate governance structure and modern enterprise system by strictly following the Company Law, Securities Law and requirements in relevant laws and regulations of China Securities Regulatory Commission (CSRC), and also formulated a series of systems such as Rules of Procedure for the General Meeting of Shareholders, Rules of Procedure for the Board of Directors, Rules of Procedure for the Board of Supervisors, Detailed Working Instructions for President etc. by following the requirements in such regulating documents as Code of Corporate Governance for Listed Companies in China issued by CSRC and State Economic and Trade Commission so as to standardize the operation of the Company. In accordance with the Company Law and Securities Law revised in 2005, the Guidelines on Articles of Association of Listed Companies and Rules for the General Meetings of Shareholders of Listed Companies revised by the CSRC, the Model Rules of Procedure for the Board of Directors/Board of Supervisors newly issued by Shanghai Stock Exchange (SSE), the Company has had it s Articles of Association and relevant rules of procedure revised in all aspects, further standardizing the methods of procedure and the decision-making procedure for General Meeting of Shareholders, the Board of Directors and the Board of Supervisors, which lays a system foundation for perfecting the corporate governance structure. Currently, the governance structure of the Company goes like the following: i. About the Shareholders and General Meeting of Shareholders In accordance with the requirements of Opinions on Regulating the General Meeting of Shareholders of Listed Company and the other laws and regulations, the Company has formulated and implemented the Rules of Procedure for General Meeting of Shareholders, and strictly standardized the convening and voting procedures of general meeting of shareholders. Under such kind of system, on the one hand, all shareholders can fulfill their obligations respectively; on the other hand, the Company can ensure that all shareholders, minority shareholders in particular, are endowed with equal status and can fully exercise 21 OFFSHORE OIL ENGINEERING CO.,LTD.

29 Corporate Governance Structure their own rights respectively. During the reporting period, in accordance with the Rules of the General Meeting of Shareholders for Listed Company newly revised by the CSRC, the Company has had the Rules of Procedures for General Meeting of Shareholders revised comprehensively, and further standardized procedures for convening, voting and vote-counting and management of meeting minutes and archives, which helped broadening the access of interim proposing, shortening the informing time for the general meeting of shareholders, endowing the independent shareholders with the right to propose to convene the general meeting of shareholders. Please visit the website of SSE ( for the revised Rules of Procedure for General Meeting of Shareholders. ii. About the Relationship between The Largest Shareholder and The listed Company The largest shareholder of the Company did not interfere the General Meeting of Shareholders to intervene in the decision-making or operation activities in a direct or indirect manner. Five Separations has been realized in terms of personnel, assets, finance, departments and businesses between the largest shareholder and the Company who operates independently. The Board of Shareholders, Board of Supervisors and internal departments can operate independently and bring their own roles into play respectively. By formulating series of rules and regulations management like financial management, the Company has established and improved the financial and accounting systems and realized independent accounting, that is, the largest shareholder put no fingers in the financial or accounting activities of the Company. iii. About the Directors and the Board of Directors The Company, strictly following the selecting and engaging procedures stipulated in the Articles of Association, selected and engaged directors with the quorum and legal constitution. The Company has formulated and implemented the Rules of Procedures for the Board of Directors. Each director attended the Board meeting with a serious and responsible attitude, performed his/her responsibilities in an honest and diligent manner, made decisions with a prudential attitude so as to ensure the policy made is efficient, scientific, reasonable and legal. During the reporting period, the Company, in accordance with the Model Rules of Procedure for the Board of Directors/Board of Supervisors newly issued by the SSE, has revised its Rules of Procedure for the Board of Directors in a comprehensive manner. In which, not only the limits of examination and approval authority have been revised for various transactions (excluding offering guarantee and donated cash assets), but also the procedures are further defined for reviewing related party transactions and external guarantee etc. Please visit the website of SSE ( for the revised Rules of Procedure for the Board of Directors. iv. About the Supervisors and the Board of Supervisors The Company has formulated and implemented the Rules of Procedures for the Board of Supervisors. With the spirit of being serious and responsible to shareholders, each supervisor seriously performed his/her responsibilities; carried out the supervision on the Company s financial position and the legitimacy and compliance of the director, president and other senior management members in terms of their responsibilities. In a word, the supervisors fully brought their supervision functions into play and hence protected the legal rights and interests of the Company and its shareholders. During the reporting period, in accordance with the Model Rules of Procedure for the Board of Directors/Board of Supervisors newly issued by SSE, the Company has had the Rules of Procedure for the Board of Supervisors revised in a comprehensive manner, with a focus on the revision and standardization of informing, convening, presiding and attending of the meeting of Board of Supervisors, bringing forward of the proposal and its reviewing, voting method, decisionmaking procedures, and archives management etc. Please visit the website of SSE ( for the revised Rules of Procedure for the Board of Supervisors. v. About the Stakeholders The Company can, with the spirit of fully respecting the legal rights of such stakeholders as the bank and other creditors, employees, employers and suppliers etc, actively carry out cooperation so as to jointly drive the Company moving forward in a sustainable and healthy direction. vi. About the Information Disclosure and Transparency The Company has formulated and implemented the Management Method for Information Disclosure. Under the unified instruction and management of the Board of Directors, the secretary to the Board of Directors is responsible for the organization and coordination of relevant information disclosure proceedings. The Company can, by strictly following the provisions in relevant laws and regulations and the Articles of Association, disclose relevant information in an authentic, accurate, complete, timely and legal manner so as to ensure an equal access to the information for all shareholders and other people and departments concerned and to protect the legal rights and interests of shareholders, especially the minority shareholders. Besides, the Company can also, in line with relevant regulations, timely disclose the particulars about the majority shareholders or actual controller of the Company as well as any change in shares. During the reporting period, the Company has conducted the information disclosure by strictly following the requirements of relevant laws and regulations promulgated by such regulatory authorities as CSRC and SSE etc. Upon learning that local deformation of underwater structure occurred to the jacket part of Panyu 30-1 Project, the Company disclosed relevant information and revealed the investment risk to investors in a timely manner, and held special investors exchange for answering consultation, embodying the responsible attitude the Company holds to shareholders and its honest operation philosophy, and presenting the standardized management and transparent governance of the Company. ANNUAL REPORT

30 Corporate Governance Structure II. Responsibilities Fulfillment of Independent Directors Since being in office, three independent directors of the Company, with an industrious and responsible attitude, have spent sufficient time and energy in effectively performing their responsibilities, including putting forward professional opinions in such aspects as corporate governance, law, finance, incentive mechanism and the establishment of internal control system etc. During the reporting period, the three independent directors attended all the Board meetings, on which they seriously reviewed each proposal and had a detailed understanding about reference information for relevant decision-making. They presented their own points of view and commented some professional opinions for such issues as related party transactions and the change of CPA firm etc. They brought their professional advantages and working experience into play so as to protect the interests of all shareholders especially the minority shareholders in real earnest. In terms of the implementation of talents strategy, they also raised pertinent suggestions, which help greatly in the scientific decision-making of the Board of Directors and the healthy development of the Company. 1. Attendance of independent directors to the Board meeting Name of independent director Number of Board meeting requiring attendance this year Number of attendances in person Number of attendances by entrustment Absent (times) Li Wei an Yang Jun Han Chuanmo Objection against relevant issues of the Company put forward by independent directors In 2006, the independent directors held no objection against the resolutions made by the Board of Directors and other relevant issues of the Company. III. Separation between the Company and the Largest Shareholder in Terms of Business, Personnel, Assets, Departments and Finance i. Business: the Company engages itself in the engineering, construction, installation and maintenance of development project of oil & gas onshore and offshore and their supporting works, independent of the largest shareholder. The Company owns independent systems of manufacturing, supplying and selling and enjoys the ability of conducting business on its own, i.e. the purchase of main raw materials and the manufacturing and selling of products performed independent of the controlling shareholders. ii. Personnel: the Company employs all directors and senior management members through legal proceedings, and the latter (including president, Vice president, Chief Financial Officer, secretary to the Board of Directors etc) are full-time employees of the Company, draw their salaries from the Company, and hold no concurrent posts in shareholders entities, that is, the Company implements a completely independent management in terms of labor, salary and personnel. iii. Assets: owning independent manufacturing system, tangible and intangible assets such as supporting facilities and non-patented technology, the Company has the independent and integrated assets and a clearly-defined property ownership with its shareholders. The Company owns construction site and manufacturing equipment and facilities for fourteen engineering vessels like Lanjiang. iv. Departments: with its own working departments and places for manufacturing and operation, the Company is fully independent of the largest shareholder, without mixed operation and working at the same place. The General Meeting of Shareholders, Board of Directors, Board of Supervisors and the Management can operate independently and legally, and bring their own roles into play respectively. v. Finance: with its independent financial department and personnel, accounting system and financial management system, the Company makes its financial decisions, opens account in the bank, pays taxes according to relevant laws, and signs contracts on its own. It is not necessary for the Company to provide guarantee for related parties, and the largest shareholder has never intervened in the funds utilization of the Company. A conclusion can be made from all of the above mentioned that the Company owns independent and integrated businesses, self-operating and developing capabilities, and is fully independent of the largest shareholder in terms of businesses, personnel, assets, departments and finance etc. IV. Establishment and Implementation of Assessment and Incentive Mechanism for the Senior Management during the Reporting Period During the reporting period, the Company shall carry out the assessment towards the Senior Management in accordance with their working performance and the completion of annual objectives and plans. In the plan of reforming non-tradable shares of the Company, the largest shareholder, CNOOC, promised that it will propose and actively promote the incentive plan for the Management of CNOOC Engineering right after the official promulgation and implementation of relevant regulations concerning incenting the management of listed companies. During the reporting period, a special working team responsible for issues concerning stock award has been established and it is in process as scheduled. 23 OFFSHORE OIL ENGINEERING CO.,LTD.

31 Section 7 Brief Introduction to the General Meeting of Shareholders I. Annual General Meeting of Shareholders for Year of 2005 On April 24, 2006, the Company held the 2005 annual general meeting of shareholders, and an announcement of resolutions passed at the meeting was published on China Securities Journal and Shanghai Securities News dated April 25, II. The 1 st Provisional General Meeting of Shareholders for Year of 2006 On December 25, 2006, the Company held the 1 st provisional general meeting of shareholders for year of 2006, and an announcement of resolutions passed at the meeting was published on China Securities Journal and Shanghai Securities News dated December 26, ANNUAL REPORT

32 Section 8 Report of the Board of Directors I. Operation of the Company in the Reporting period i. Overall State of Operation in the Reporting Periodzz The year 2006 is the first year of fundamental building set by the Company. Aiming at building an internationalized and specialized energy engineering company with international competitiveness, with sciencific and refined management as the breakthrough point, the Company has made great progress in improving operating capacity, level of management and operating achievements by focusing on strengthening infrastructure building and improving the overall quality of the team, adhering to the people-oriented and good faith concept and reinforcing corporate culture building. Through these efforts, the Company not only fulfilled its commitment to the shareholders, but also gained greater space for development and laid material and mechanism foundations for rapid and stable development. During the reporting period, the Company was granted the honor of Global Challenger by Standard & Poor s, was selected as CCTV Top 10 Most Valuable Listed Companies in China for consecutive three years, and was in succession selected as a constituent of Sample Stock of SSE 50 and CSI Southern Well-off Industry Index. The Company ranked 10th in the Report on Competitiveness of Chinese Enterprises in 2006 made by the Global Competitive Organization. 1. Great concern and importance attached to the Company by substantial shareholders In the reporting period, Fu Chengyu, General Manager of China National Offshore Oil Corp., and Zhou Shouwei, Vice General Manager of China National Offshore Oil Corp. and Board Chairman of the Company conducted investigations at the Company, handled business on site, participated in communication conferences for investors and visited the employees for 25 OFFSHORE OIL ENGINEERING CO.,LTD.

33 Report of the Board of Directors several times, showing the great concern of substantial shareholders for the development of the Company and promoting the establishment of strategic planning and healthy and harmonious development of the Company. The Management of the Company represented great capacities in handling crisis and performing its duties, the dedication and the awareness of learning and innovation in its response to Panyu 30-1 Project crisis and the problems encountered by the Company in its development, which was well accepted. 2. Operational performance In the reporting period, the Company kept developing rapidly and efficiently. Total assets and net assets of the Company amounted to RMB5,023 million and RMB3,012 million, representing a year-on-year increase of 44.18% and 28.37% respectively. In the whole year, sales revenue and net profit reached RMB4,969 million and RMB million, a year-on-year increase of 16.68% and 27.68% respectively, making a new record in the history of the Company. 3. Establishment and improvement of strategic planning for development In the reporting period, the Company brought forth the overall objective of building an internationalized and specialized energy engineering company with international competitiveness, and established the strategy of relying on the main operations and setting foot in two wings, i.e. the down stream market as well as deep water, primarily forming a systematic development planning involving five major types of businesses and laying a foundation for long-term development of the Company. 4. Fundamental management and construction CCTV2005 In the reporting period, the Company established performance assessment system, strengthened planning, budgeting, quota 中国最具价值 and statistical management, intensified training for the employees, and reinforced system building and team building, gaining significant achievements. The Company formulated 上市公司奖杯 and implemented annual work plan for the first time and carried out budget control in the whole company. From a strategic point of view, the Company strengthened training; and built and improved systems for ensuring safe operation of investment decision-making, finance, capital and procurement. In the period, the expected objective of energy-conservation was achieved. A working group for corporate culture building was set up and functioned well. Investigations for organizational framework optimization were carried out. The main leaders of the Company such as president and Secretary of Party Committee publicized corporate philosophy and values and gave reports on situations and tasks for thousands of employees, improving aggregation force of the team and inspiring morale. 5. Operation of engineering projects Tasks of project engineering of the Company continued to increase in 2006 compared to middle and large engineering projects were under construction, and 10 projects were completed in the year, of which, 6 projects including Bozhong 25-1, Qikou 17-2 East High Oilfield Development Project, Caofeidian Phase II, Cross Pipeline Relocation Project of Jinzhou 20-2, Penglai 19-3A Platform Renovation Project and Bajiaoting Project were completed ahead of schedule. In the reporting period, the Company enhanced its project management capability and its status as a EPCI contractor. In addition, the Company improved its capability of contingency management and integration and management of external resources, and reinforced its awareness of services. ANNUAL REPORT

34 Report of the Board of Directors Comparison between the Work Completed in 2006 and in 2005 Item Jacket fabrication (set) Jacket installation (set) Modular fabrication (set) Modular installation (set) FPSO module (piece) Subsea pipeline laying (km) Subsea cable laying (km) Quantity of steel processed (structural members in 10,000t) Year of Year of Jacket installation Modular installation Subsea cable laying Incident Ratio of Lost Working Days in Jacket fabrication Modular fabrication 250 Subsea pipeline laying 1.5 Man hour (10,000m 3 ) Incident ratio of lost working days Unit:(set) Unit:(km) 6. Management of health and safety and environmental protection (HSE) Accoring to statistics prepared under OSHA standards, although the total work load of the Company increased by 40% in 2006 over 2005, the incident ratio of lost working days decreased from 0.43 in 2005 to 0.2 and the recordable incident ratio decreased from 0.6 to 0.29, and the overall quality of construction and installation were of general excellence. In the reporting period, the Company made great efforts to strengthen awareness of safety of the employees, to promote the building of full-time safety management team, to advocate corporate culture of good faith and to encourage all units to report accidents and accident potentials, thus achieving in-time transmission and sharing of safety information. In 2006, the Company applied QA for the first time to supervise and manage the process of forming intermediate products and final products. 7. Exploration of overseas and down stream markets In the reporting period, the Company executed SES project and KODECO project in Indonesia. The Company did not suffer any loss in overseas projects and hit a new record of the Company in terms of income from overseas projects. During the period, the first overseas subsidiary of the Company was established in Indonesia, and subsidiaries in Nigeria, Houston and Iran are under preparation. The Company strenghthened the exploration of down stream market, and dedicated to a great number of down stream projects such as Zhuhai Liquified Natural Gas Project, Lisha Wharf Project and Huizhou Oil Refinery Project. In the reporting period, the Company entered the Cooperation Agreement on Complete Set of Natural Gas Compressor and Overseas Project Services with H.S Company from Singapore. Cooperation between the two parties on complete set of compressors and supply of FPSO superstructure process facility module and process equipment module has entered into a substantial stage. 27 OFFSHORE OIL ENGINEERING CO.,LTD.

35 Report of the Board of Directors ANNUAL REPORT

36 Report of the Board of Directors 8. Building of hardware and software Project of Qingdao Fabrication Yard Phase I, the largest yard facility construction project in the history of the Company, was successfully put into use on 29 June, creating CNOOC speed. The ERP system of CNOOC was put into operation on June 12, 2006, and it has passed the testing for project execution. At the same time, the Company signed cooperating agreement with Qingdao Economic and Technical Development Zone for Phase III Project of Qingdao fabrication yard. Design and building of deepwater pipeline laying and crane barge and shallow water pipeline laying barge were in preparation and the 30,000t launching barge project has started. In the reporting period, 12 persons from the Company obtained the qualification of Project Management Professional (PMP) from Project Management Institute. The 11 riveters selected from the Company won 3 golden medals, 7 silver medals and 1 copper medal in the final of the skill competition of the profession. At present, the Company has 48 Technican Experts of CNOOC. 9. Building of independent innovation ability 1The Company worked out objectives and tasks of scientific and technological work, systematically formulated plan for technological development, and improved technological R&D system, which set up a platform for transformation of research achievements into productivity. 2 The Company carried out discussion and communication with international companies on such issues as deepwater technology, watercraft resources for offshore construction, welding techniques, corrosion prevention techniques, which laid a foundation for entering the deepwater field. 3Project 863 of the 10th Five-Year Plan - underwater dry-type pipeline maintenance system passed the state review and was successfully applied in the transformation of oil fields such as Jinzhou 20-1 and Caofeidian 11. 4The Company undertook the task of techniques for laying deepwater subsea pipeline for Project 863 of the 11th Five-Year Plan. 5In the reporting period, 45 patents of the Company were accepted by the Patent Office of the People s Republic of China, 15 patent achievements were approved, and 7 were listed in the new record of Chinese enterprises. 10. Information disclosure and investors relation In the reporting period, the Company for the first time formulated and implemented the Work Plan for Information

37 Report of the Board of Directors Disclosure and Investors Relation, to promote communication with investors and publicity for its stocks. It also organized the investors to visit the major engineering ship Lanjiang barge and Qingdao fabrication yard, deepening knowledge of the investors of the Company. Upon occurrence of Panyu 30-1 Event, the Company immediately and fairly disclosed information and risks to all shareholders, and disclose the follow-up information as well, fulfilling the obligations of a listed company. In 2006, the Company for the first time was listed in the Top 50 in Investors Relation Management among domestic listed companies. 11. Participation in public welfare undertaking and performacne of social responsibilities and obligations The company provided financial aid for Hope Primary School and actively participated in youth volunteers actions and actions for supporting and aiding the poor, well fulfilling its social responsibilities as an enterprise. In the reporting period, the Company rescued an injured grand swan (under grade 2 protection of the State) that fell on the barge Lanjiang in the offshore construction. The swan was carefully protected and sent to Wildlife Conservation Station in Tanggu of Tianjin for check-up and treatment. The act implies the pursuit of employees for harmonious development of people, the enterprise, society and the nature. 12. Progress of Panyu 30-1 Project Since the release of the Announcement on Deformation of Partial Submarine Structures of the Jacket in Panyu 30-1 Project on June 26, 2006, the Company, upon the entrustment of Party A, has taken effective remedial measures to secure the platform and minimize property loss, successfully removed the superstructure modules of the project, and maintained the modules in an appropriate manner. The Company also worked with Party A in making a plan for putting the gas field into production. In order to put the gas field into operation as soon as possible, Party A decided to make an advanced payment to build the jacket of Panyu 30-1 Project. Entrusted by Party A, the Company started building jacket for Panyu 30-1 gas field at Qingdao fabrication yard. Up to the reporting date, investigation organized by Party A was still underway, and settlement of insurance claim was in process under efforts of related parties. ANNUAL REPORT

38 Report of the Board of Directors ii. Influence of macro-economy and external environment on production and operation of the Company According to the statistics of National Bureau of Statistics of China, Chinese economy maintained a steady growth in 2006: GDP exceeded RMB20 trillion, representing a year-on-year increase of 10.7% and an increase of 0.3 percentage points in growth rate; crude oil ouptput was million tons, a year-on-year increase of 1.7%; and net imported oil reached million tons, a year-on-year increase of 19.6%. Increasing demand for energy raised by robust growth of Chinese economy, wide utilization of new energy sources, acceleration of CNOOC development and the overall advance of overseas and domestic energy sources strategy layout provides the Company with sound external environment for development. iii. Main business and operation of the Company The Company is a EPCI contractor for large projects, providing service package of offshore petroleum engineering design, construction, installation, commissioning and maintenance. The main businesses of the Company include design, construction, installation, hook-up and commissioning of offshore and onshore oil gas development project and supporting works; subsea pipeline laying; inspection and maintenance of facilities in offshore oil gas field; manufacturing and installation of various steel structures and net racks; manufacturing of pressure vessels, etc. In the reporting period, the Company continued to concentrate on offshore oil projects, its prime business; and to engage in down stream and deepwater operations on the basis of the main operation. Meanwhile, the Company deepened reform, strengthened infraustructure, and actively explored overseas market and down stream markets. All production and operation activities went steadily and smoothly, and the profit reached a new height. 1. Distribution of main business by industry By industry/ product Revenue from main business Gross margin Cost of main (RMB) business (RMB) (%) +/- in revenue from main business over previous year (%) +/- in cost of main business over previous year (%) +/- in gross margin over previous year (%) Offshore engineering industry 4,968,874, ,861,352, An increase of 2.59 percentage points 2. Distribution of main business by region Revenue from main Cost of main Profit from main +/- in revenue from main Region business (RMB) business (RMB) business (RMB) business over previous year (%) Tanggu Area 4,920,583, ,825,956, ,012,387, Shenzhen Area 102,530, ,799, ,005, Hainan Area 1,700,000 1,600, , Huizhou Area 9,165, ,244, , Qingdao Area 63,202, ,137, ,415, Main suppliers and customers The Company paid to the top 5 suppliers a total of RMB million for its procurement, accounting for 58.99% of the total amount for procurement. The sales amount of the Company from the top 5 customers totaled RMB4, million, accounting for 84.90% of the total sales. 31 OFFSHORE OIL ENGINEERING CO.,LTD.

39 Report of the Board of Directors iv. Analysis on financial status and operating results of the Company in the reporting period Items At December 31, 2006 At December 31, / - (%) Accounts receivable 291,688, ,277, Accounts in advance 81,768, ,775, Inventories 980,727, ,008, Construction in progress 727,197, ,171, Accounts payable 1,082,344, ,056, Accounts receivable in advance 504,339, ,164, Total assets 5,023,421, ,484,235, Shareholders equity 3,012,450, ,346,647, Items / - (%) Income from main business 4,968,874, ,258,588, Cost of main buisness 3,861,352, ,419,759, Profit from main business 1,022,020, ,284, Financial expenses 5,266, , Net profits 747,338, ,314, Net cash flows from operating activities 1,221,126, ,841, Net increase in cash and cash equivalents 53,749, ,584, Reasons for change: Unit: RMB 1. The decrease in accounts receivable as at the end of the reporting period is mainly due to smooth reimbursement for the project completed in this period. 2. The increase in accounts in advance at the end of the period is due to the increase of the procurement advances paid for the prepared materials of the engineering project. 3. As for increase in inventories, after local deformation of the Partial Submarine structure occurred to the jacket part of Panyu 30-1 EPCI contract project on June 22, 2006, the enginnering costs relating to the Panyu 30-1 EPCI contract project, and the disassembling, transportation and storage of project modules incurred after the month are not recognized as income, and the accrued project cost of about RMB389 million, was recorded in the item of project construction. 4. The increase in construction in progress is mainly due to the increase of the fabrication yard of CNOOC Engineering (Qingdao) Co., Ltd; and the completed structure have been transferred into fixed assets in succession. 5. The increase in accounts payable is mainly due to the rise of interim payment payables for enginnering projects of subcontractors. 6. After local deformation of the Partial Submarine structure occurred to the jacket part of Panyu 30-1 EPCI contract project on June 22, 2006, about RMB409 million of progress payment for EPCI contracting received is presented temporarily under the item of accounts receivable in advance. Thus, accounts receivable in advance represents great changes in the period. 7. Main reasons for increase in income from main business include: 1The project tasks of in the reporting period continued to increase over 2005, and 28 medium and large projects were operated, the quantities of projects maintaing sustained growth. 2Ten projects were completed in the year, of which, Bozhong 25-1, Qikou 17-2 East High Oilfield Development Project, Caofeidian Phase II, Jinzhou 20-2 Cross Pipeline Relocation Project, Penglai 19-3A Platform Renovation Project and Bajiaoting Project were completed ahead of schedule, ensuring increase in income from main business. 8. Net loss in exchange increased from RMB million in 2005 to RMB million in 2006 as a result of RMB appreciation in the reporting period, which resulted in the increase in financial cost. 9. Main reasons for increase in net profits: 1In the reporting period, the Company effectively reduced cost of main business. The gross margin increased by 2.59% to 22.29% from 19.7% in 2005, contributing to the increase of 32.85% in profit from main business. 2The total profits increased by 34.45%, in step with the increase in profits from main business. The net profits increased by 27.68%, 6.77% lower than the growth in total profits, mainly due to the increase of 68.12% in income tax over previous year as a result of increase in total profits. ANNUAL REPORT

40 Report of the Board of Directors v. Operations and performance of the holding subsidaries and share-participating enterprises 1. Basic information of the holding subsidiaries which are included into the consolidated statements in the reporting period: Registered capital Company name (RMB 10,000) Shenzhen China Ocean Petroleum Platform Maintance & Installation Co., Ltd 1,365 Hainan China Ocean Petroleum Platform Manufacturing Co., Ltd 2,000 CNOOC Engineering (Qingdao) Co., Ltd 50,000 Main operations and products Total assets (RMB 10,000) Net profits (RMB 10,000) Fabrication, installation and maintenance of offshore oil platform 9, , % Fabrication, installation and 70% direct maintenance of offshore and holding, and 30% land platforms 2, indirect holding Fabrication, installation and maintenance of offshore oil and gas enginnering 146, , Shareholding 99% direct holding, and 1% indirect holding The physical assets invested in the holding subsidiary Offshore Oil Engineering (Qingdao) Co., Ltd. by the Company, including hydraulic pile-driving hammer and two barges (Offshore Oil No. 222 and Offshore Oil No. 223), have been accomplished procedures for ownership transfer in the reporting period. 2. Basic information of the participating enterprises in the reporting period: Investee Registered Capital Registration Time Business Scope Shareholding Ratio Actual contribution CNOOC Finance Co., Ltd RMB1,415 million June 2002 Deposits, loans and financing leases for the member organizations 1.77% RMB25 million II. Prospect of the Future Development of the Company i. Trend of industrial development 1. The development strategy of CNOOC brings opportunities for development of the Company At present, the output of offshore crude oil in China exceeds 30 milion tons, and the output of offshore natural gas exceeds 6.2 billion m³. Utilizing ocean and developing offshore economy are playing an increasingly important strategic role in the overall development of economy and society. The total output of oil and gas by CNOOC exceeds million tons of oil equivalent in 2006, representing an increase of more than 440 folds over the 90,000t of annual output at its establishment. The implementation of the great strategic objective of CNOOC to realize 100 million tons of oil equivalent of energy supply in 2010 brings forth opportunity for development of the Company. 1Findings of CNOOC in deepwater field creates conditions for development of the Company. Exploration and development of deepwater oil storage have become an investment highlight for multinational oil compa- 33 OFFSHORE OIL ENGINEERING CO.,LTD.

41 Report of the Board of Directors nies. In recent years, the large oil and gas fields discovered in the world concentrated in the deepwaters of over 300m. Deepwater oil and gas development has become an inevitable trend. The breakthrough of CNOOC in deepwater prospecting will provide a market basis for the Company to enter deepwater field. 2Steady implementation of Going-global strategy of CNOOC will effectively promote the Company s entry into international market. A series of overseas mergers and acquisitions conducted by CNOOC in 2006 provided the Company with a market basis for internationalized development. 3Development of downstream industries of CNOOC brings new opportunities for development of the Company. In recent years, CNOOC has being under its way in transforming from a company engaging upstream businesses to a comprehensive energy sources company integrating upstream and downstream businesses. Development of refinery and chemicals and LNG business will provide the Company with new opportunities for business extension. 2.Gradual transfer of world manufacturing center to China It is generally believed in international communities that China will become the world manufacturing center in the 21 st century. At present, the total output of manufacturing industry of China ranks 4th in the world. Of the exported merchandises, manufactured products have replaced primary products, accounting for over 80% of the total products. China is experiencing its transformation from a multinational processing and assembling base to a manufacturing base. In some fields, the manufacturing industry of China has the strength to compete with the fellow traders of the world. (Source: ii. Continuity and stability of profitability and operation of the Company Through years of development, the Company has established regulations, standards and process systems that conform to the management requirements of foreign oil companies. It has accumulated talents and technical resources in design, manufacturing and installation in the offshore oil and gas filed, and has relatively low cost for equipment manufacturing and upgrading compared with foreign competitors. The Company has attached great importance to strategic planning and market exploration. Its manageria ability and level has been greatly improved in international bidding competition. All above factors strengthen the competitive advantages of the Company, ensuring continuity and stability of its operation and profitability. iii. Investment plan, fund demand and capital sources In order to achieve the established strategic development planning, the Company shall manage to seize every opportunity and get stronger and larger as soon as possible for further exploration of deepwater field and international market. In 2007, the Company will accelerate input into equipment and facilities building, and will take the advantages of various financing channels and select steady financing products at moderate costs based on in-depth study on various market approaches. ANNUAL REPORT

42 Report of the Board of Directors iv. Possible changes in accounting policy and accounting estimate after implementation of the new accounting standards for business enterprises and the influence on the financial status and operating results of the Company 1. The equity investment balance (consolidated difference) of the Company listed in the financial statements and formed in consolidation of enterprises under the same control should be amortized and retrospectively adjusted in accordance with the new accounting standards for business enterprises. Such adjustment will result in a decrease of RMB53, in long-term equity investment balance and a decrease of RMB53, in owners equity. 2. The Company has early retirees to whom it should pay wages and benefits. According to the data provided by the Human Resources Departtment, the retrospective adjustment will cause a decreases of RMB6,187,308 in owners equity. 3. The temporary differences in income tax calculation at present are maily due to the depreciable life used by the Company and the depreciable life stipulated in tax law, assets impairement taken by the Company that cannot be deducted before tax, payable wage balances after the tax adjustment and formed income tax assets or liabilities. The retrospective adjustment will cause a decrease of RMB19,838, in owners equity. 35 OFFSHORE OIL ENGINEERING CO.,LTD. 4. After the adjustment of owners equity, the Company should list minority interests under owners equity according to the new standards, which will cause an increase of RMB2,082, in owners equity. v. Plan for the main work and operations in 2007 The Company set 2007 as the second year of fundamental building. The Company will strengthen the fundamental work to accumulate strength for entry into international market in a large scale. It will speed up the development while ensuring development quality, and promote the improvement of technological and managerial capabilities through execution of international projects and EPCI contracting projects of high technological and managerial contents while ensuring the smooth implementation of current projects. In 2007, the Company plans to operate 18 engineering projects, including 6 projects to be completed or to be put into operation within this year. 12 potential projects may be initiated. The total work load will increase by more than 15% over It is estimated that sales revenue and total profits in 2007 will increase by more than 15% over strategic planning for the next 20 years or even longer to enhance capability of grasping opportunities. 2. To implement the talent strategy, establish effective incentive mechanism, and create sound environment for promoting talents and encouraging innovations; and to take continuous training and the cultivation of a loyal, competitive and professional employee team as the strategic priority of the Company. 3. To improve capability in EPCI contracting for projects and managing international projects, highlight the development of design capacity, and enhance the QHSE management. 4. To continue to strengthen fundamental building, and enhance the IT application in management and operational efficiency. 5. To strengthen the exploration of overseas market and enlarge share in overseas market. 6. To strengthen the capability in independent innovation and resource integration, concentrate on key technologies that plays vital role in industrial competition, and develop core technologies of independent intellectual rights. Centering on the above objectives, the Company will attach emphasis to the following issues: 7. To reinforce corporate culture building, and further define vision, philosophy and core values of the Company. 1. To formulate and implement the 10-year Strategic Planning for the Development of Offshore Oil Engineering, and start to make 8. To make full use of the capital market and speed up the development of the Company through capital operation.

43 Report of the Board of Directors ANNUAL REPORT

44 Report of the Board of Directors III. Investments in the Reporting Period 1. Investment projects by raised fund 1Use of raised fund The Company issued 80,000,000 shares of RMB common stock and raised RMB million of net proceeds in January As of the end of 2006, RMB million of the raised fund had been used and the RMB30.70 million of unused fund was deposited in banks and was safely protected. Deepwater ditching machine Projects committed 75,038 Proposed amount Total amount of raised funds used this year 0 Acumulative amount of raised 71,968 fund having been Whether or not change the project Actual amount invested Whether or not conform to the scheduled progress and estimated earnings Lanjiang, large crane and pipelaying barge 62,738 No 62,738 Yes 800KNM hydraulic pile-driving hammer 2,700 No 2,667 Yes 350t caterpillar crane 2,000 No 1,963 Yes 10,000t launching barge 4,600 No 9,010 Yes Deepwater ditching machine 3,000 No 0 No Total 75,038-76,378-2 Project progress (1) Lanjiang, a large crane and pipelaying barge Lanjiang was put into use in February 2002 after the commissioning, and functioned well in the reporting period. Lanjiang is be used for pipelaying in 6-150m deepwater. Its full-swivel elevating capacity is up to 2,500t and maximum fixed elevating capacity is 3,800t. Lanjiang has been granted certificates of classification by China Classification Society and American Bureau of Shipping. The using of Lanjiang greatly improved the strength of the Company in equipment and the capability in deep ocean operation and EPCI contracting of projects, and provided hardware support for the Company to participate in international competition. In 2006, Lanjiang was used for offshore installation in such projects as Weizhou, Yacheng, Pinghu Bajiaoting, Penglai 19-3 Phase II, and for removal of the superstructure modules of Panyu 30-1 Project. It still plays an important role as a main operating vessel. 37 OFFSHORE OIL ENGINEERING CO.,LTD.

45 Report of the Board of Directors (2) 800KNM hydraulic pile-driving hammer The 800KNM hydraulic pile-driving hammer was put into use in 2002 after the alignment, and functioned well in the reporting period. It is specially used for offshore piling in deepwater. With the maximum operating depth up to 1,000m, such harmmer is widely used by offshore oil engineering companies worldwide. By using the hammer, offshore operating capacity and efficiency of the Company was greatly improved. (3) 350t caterpillar crane The 350t caterpillar crane was put into use in 2002 after the commissioning, and functioned well in the reporting period. The using of 350t caterpillar crane enables the Company to further optimize its hoisting technology in offshore oil engineering and to transform its operational model from two-crane joint operation to single-crane operation and from multimachine operation to fewer-crane operation, thus enhancing operating efficiency and comprehensive operating capacity. The crane has played an important role in the construction of Tanggu manufacturing site in recent years. The crane operates well at present. (4) 10,000t launching barge The 10,000t launching barge Offshore Oil 221 was fabricated in 2004, with a total investment of RMB9.01 million, including RMB4.6 million of raised fund and RMB4.41 million of self-raised fund. On June 22, 2006, the brage assisted Lanjiang complete launching and installation of the 6,500t CEP deepwater jacket of Chunxiao Project. Bying using Offshore Oil 221, the company transformed the method of jacket installation from hoisting to combination of hoisting and launching, and enhanced its jacket installation capacity from 3,800t to 8,000t, which is conducive to improving its offshore operating capacity and comprehensive competitiveness. (5) Deepwater ditching machine The Company plans to purchase the equipment in The investment is estimated to be RMB54.40 million, and the Company will self-raise funds through other channels when all the funds raised in share issuing are used. ANNUAL REPORT

46 Report of the Board of Directors 2. Major projects of the Company invested by non-raised funds in the reporting period 1 Project of Qingdao fabrication yard Phase I of Qingdao fabrication yard project has been put into use on June 30, 2006 and Phase II is under construction. Preparation for Phase III of Qingdao fabrication yard project is underway. 2 Project of shallow and deep water pipelaying barge and 30,000t barge The Company planned to build large deepwater and shallow pipelaying barge and 30,000t barge. At present, detailed designs for the three watercrafts are in progress. After the watercrafts are putting into use, watercraft composition of the Company will be further optimized, which will ensure the Company s entry into deepwater market in terms of equipment. 3 Project of Offshore Engineering and Technological Research Center In order to improve office environment and efficiency and to attract talents, the Company invested RMB79.43 million in the building of Offshore Engineering and Technological Research Center in Tianjin Tanggu offshore Hi-Tech Industrial Park. At the end of 2006, the office building of the research center was completed. The Company has moved to the new office building on January 31, OFFSHORE OIL ENGINEERING CO.,LTD.

47 Report of the Board of Directors IV. Reasons and effects of changes in accounting policy and accounting estimates or correction of significant accounting errors According to the resolutions adopted at the 20 th meeting of the 2 nd Session of Board of Directors, in order to unify the inventory measurement methods (ERP) with the parent company, the Company replace the LIFO method with the weighted average method on June 1, 2006 to measure the raw materials (excluding the materials prepared for the special purpose of an engineering project). As the cumulative effect from the change of accounting policy is unable to reasonably determined, the Company adopts the future application method. The adoption of such a method did not result in great effect on profits and losses of the Company in the period. V. Routine work of Board of Directors i. Meetings convened by the Board of Directors contents of the resolutions in the reporting period In the reporting period, the Board of Directors convened 5 meetings. 1. The 15 th meeting of the 2 nd Board of Directors was held on March 17, The announcement of resolutions was published in the China Securities Journal and Shanghai Securities News dated March 21, The 16 th meeting of the 2 nd Board of Directors was held on April 21, The st Quarter Report of the Company was reviewed and adopted at the meeting. 3. The 17 th meeting of the 2 nd Board of Directors was held on August 15, The 2006 Interim Report of the Company was reviewed and adopted at the meeting. 4. The 18 th meeting of the 2 nd Board of Directors was held on October 24, The rd Quarter Report of the Company was reviewed and adopted at the meeting. 5. The 19 th meeting of the 2 nd Board of Directors was held on December 5, The announcement of resolutions was published in the China Securities Journal and Shanghai Securities News dated December 7, ii. Implementation of resolutions of the General Meeting of Shareholders by the the Board of Directors The Board of Directors of the Company strictly implemented all resolutions of the General Meeting of Shareholders. According to the resolutions of the 2005 annual general meeting of shareholders, the Board timely implemented the Plan for Profit Distribution & Conversion of Capital Reserve to Share Capital. Specifically, the Company distributed share dividends of 7 shares and cash bonus of RMB2 (including tax) for each 10 shares based on the total of 396 million shares, involving million dividend shares and cash bonus of RMB79.2 million in total; and issued additional 3 shares for each 10 shares with the capital reserve, involving million shares in total. After profit distribution and conversion of capital reserve, the Company has a total of 792,000,000 shares. (Please refer to the China Securities Journal and Shanghai Securities News dated May 8, 2006 for detailed announcement.) VI. Plans for profit distribution and transfer from capital surplus to stock Upon the audit by ShineWing Certified Public Accountants, the Company gained a net profit of RMB747,338,148.94; on which adding the undistributed profit at the beginning of the year of RMB1,024,816, and less RMB76,339, of statutory surplus reserve, the profit attribuitable to shareholders was RMB1,695,815, The Company distributed RMB277,200,000 of share dividends and RMB79,200,000 of cash bonus to shareholders in May As of the end of 2006, the Company had an undistributed profit of RMB1,339,415, The Company plans to distribute share dividend of 2 shares and cash bonus of RMB1 (including tax) for each 10 shares based on the total of 792 million shares, which will increase the Company s total share capital to million shares upon the completion. The cash dividend distributed will amount to RMB79.2 million in total, and undistributed profit of RMB1,101,815, will be retained for future distribution. The distribution plan shall be presented to the 2006 annual general meeting of shareholders for review. VII. Special statements and independent opinions of independent directors on acumulative and current guarantees According to the Notice on Regulating Capital Flow between Listed Company and Connected Parties and Guarantees by Listed Company (Z.J.F. [2003] No. 56) and the Articles of Association of the Company as well as other relevant documents, we conducted examination on the guarantees provided by the Company in 2006 and found that the acumulative and current amount of guarantees was zero. Capital flows between the Company and the controlling shareholders or other connected parties were ordinary transactions and there was no appropriation of capital. Independent directors: Li Wei an, Yang Jun, Han Chuanmo ANNUAL REPORT

48 Section 9 Report of the Board of Supervisors In the year of 2006, holding the attitude of being honest, active, practical and prudent and of being highly responsible to all shareholders and to the long-term development of the Company, the Board of Supervisors has been seriously fulfilling its responsibilities in accordance with requirements in the Company Law, the Articles of Association and Rules of Procedures for the Board of Supervisors of the Company. The Board of Supervisors supervised and checked such aspects as decision-making procedures, compliant operation, financial status and internal management, protecting the legal rights and interests of the Company and shareholders and providing necessary guarantee for compliant operation and sound development of the Company. I. Work of the Board of Supervisors 1. The 5th meeting of the 2 nd Board of Supervisors was held on March 17, The meeting reiewed and adopted the 2005 Work Report of the Board of Supervisors, and put forth written reviewing opinions on the 2005 Annual Report prepared by the Board of Directors. The announcement of resolution for this meeting was published on the China Securities Journal and Shanghai Securities News dated March 21, The 6th meeting of the 2 nd Board of Supervisors was held in Tianjin on December 5, The meeting reiewed and adopted the Proposal for Rivision to the Rules of Procedures for the Board of Supervisors of Offshore Oil Engineering Co., Ltd. The announcement of resolution for this meeting was published on the China Securities Journal and Shanghai Securities News dated December 7, During the reporting period, supervisors of the Company attended without voting rights all the general meetings of shareholders and meetings of Board of Directors to carry out supervision over the convening and voting procedures of the meetings, and participated in the work meetings of the Senior Management and the monthly production meeting to keep track on the production and operation of the Company. They also had an understanding of the quarterly, interim and anual reports and accountants reports, and communicated with CFO and manager of the Financial Department so as to be well informed of the basic financial status of the Company. II. Independent opinions of the Board of Supervisors on relevant matters of the Company i. Compliant operation of the Company 1. In 2006, with the support of shareholders and the hard working of employees, the Company operated in compliance with the Company Law, the Securities Law and Articles of Association of the Company. The procedures for production and operation decision-making were legal. 2. In the reporting period, with responsible and company-oriented attitude, each director and senior manager observed the laws, regulations and Articles of Association of the Company, carried out various resolutions of the General Meeting Shareholders and the Board of Directors, regulated procedures for production, operation and management, and protected the rights and interests of shareholders and the Company. 41 OFFSHORE OIL ENGINEERING CO.,LTD.

49 Report of the Board of Supervisors ii. Check on financial status of the Company After the careful check on the financial system and status of the Company in the reporting period, the Board of Supervisors concludes that the 2006 Annual Financial Report faithfully reflects the financial status and operating results of the Company in the previous year, and the auditor s report issued by ShineWing Certified Public Accountants is truthful, objective and fair. iii. Use of raised fund The Company raised fund of RMB750 million, and undertook to invest in 5 projects. Currently, the project of deep-water ditching machine has not been carried out yet, and is planned to start the purchase in The actual use of raised fund is consistent with the undertaking. In the process of construction, there were neither illegal and regulations-violating activities nor incidents of illegal occupation or project fund appropriation. iv. Acquisition and selling of assets No acquisition or selling of assets occurred to the Company in the year of v. Major connected transactions There are comparatively many connected transactions between the Company and its connected parties, which are determined by the exclusive operating system of CNOOC for cooperation-based offshore exploitation and by its development history. The principle of equity, fairness, and openness was applied to connected transactions, and the transaction price was determined by bidding. Additionally, the Company entered long-term service agreements with its connected parties so as to ensure the fairness of transaction price. Concerned directors or shareholders avoided when the meeting of the Board of Directors or the general meeting of shareholders was voting for connected transactions. Thus, no act that infringed upon interests of the Company was found. ANNUAL REPORT

50 Section 10 Significant Matters I. No significant litigation or arbitration occurred to the company in the reporting period. II. The Company had no acquisition, selling of assets or merging in the reporting period. III. Significant connected transactions in the reporting period i. Connected transactions arising from purchases/sales of goods and the offering/receiving of labor services 1. The Company provides connected parties with professional production services such as design, construction and installation, and determines contract prices through bidding in accordance with the market principle. The settlement is conducted according to milestone points or project progress. Connected party Transaction amount (RMB) Proportion to the total amount of connected transactions (%) CNOOC China Limited 3,343,465, CNOOC-Shell Petrochemicals Co., Ltd 26,288, CNOOC Oil Base Group Limited 167,413, CNOOC Refining & Chemical Engineering Co., Ltd. 4,644, CNOOC Gas & Power Limited 9,775, ACT OPERATOR S GROUP 36,279, The subcontract projects completed by connected parties as the subcontractors of the Company are as follows: Connected party Transaction amount (RMB) Proportion to the total amount of connected transactions (%) CNOOC Bohai Corporation 1,977, China Oilfield Services Limited 50,925, CNOOC Oil Base Group Limited 98,097, Shenzhen China Ocean Petroleum Platform Maintance & Installation Co., Ltd 54,239, CNOOC Engineering (Qingdao) Co., Ltd. 63,202, In accordance with the connected transaction contracts entered into between the Company and the connected companies, the CNOOC Oil Base Group Limited and China Oilfield Services Limited of China National Offshore Oil Corporation provide such service as transportation, vessel, fuel, water and electricity in the period. See the following for details: 43 OFFSHORE OIL ENGINEERING CO.,LTD.

51 Significant Matters Connected party Content of transaction Transaction amount (RMB) Proportion to the total amount of connected transactions (%) CNOOC Bohai Corporation Service fee 14,461, Transportation service 9,820, China Oilfield Services Limited Vessel service 66,797, Engineering construction 900, CNOOC Enterprises Corporation Service fee 121, Engineering construction 3,037, CNOOC China Limited Service fee 60, Service fee 70,817, Engineering construction 629,366, CNOOC Oil Base Group Limited Transportation service 17,189, Fuel expense 50,502, Water & electricity expense 20,898, CNOOC Donghai Corporation Service fee 28,654, Explanation for influence from connected transactions on profit of the Company and the necessity and continuity of connected transactions There are comparatively many related transactions existing between the Company and related parties like CNOOC China Limited, a phenomenon which is decided by the monopoly system of external cooperation offshore exploitation of CNOOC and by its development history, and conforms to the industrial policy of China. These related transactions make up the main resources of business income and hence play an important role in the development of the Company. That these related transactions serve as an integrated part of the Company s development. Such principles as equity, fairness, and openness have been reflected since the contract price for related transactions were decided by open bidding, which helps develop main business of the Company and maximize the interests of shareholders. It is proved by facts that these related transactions are necessary and will be carried out continuously. ii. Connected transactions arising from asset and equity transfer No connected transactions arising from asset and equity transfer occurred to the Company in the reporting period. iii. Related transactions arising from jointly investment by the Company and its connected parties There was no connected transaction arising from jointly investment by the Company and its connected parties in the reporting period. iv. Guarantees No major guarantee matters occurred between the Company and its connected parties as at the end of the reporting period. v. Other major connected transactions 1. Deposits with connected parties Company At the end of the period At the beginning of the period CNOOC Finance Co., Ltd. 293,637, ,086, ANNUAL REPORT

52 Significant Matters Company CNOOC Finance Co., Ltd. 2,939, ,929, The interest rate for deposits the Company puts in the connected parties adopts relevant provisions of the People s Bank of China. 3. Investment in connected parties and relevant investment income Company Investment at the end of the period (RMB) Investment income in 2006 (RMB) CNOOC Finance Co., Ltd. 25,000, IV. Significant Contracts and Performance i. In the reporting period, there was no such siginificant matters as trusting, contracting and leasing assets from other companies by the Company, or having its assets being trusted, contracting or leased. ii. There was no significant guarantee of the Company in the reporting period. iii. The Company did not entrust others to manage its cash assets in the reporting period. iv. Other significant contracts Significant Contracts and Performance Unit: RMB10,000 Payer Content of contract Amount of the contract Accumulative amount paid CNOOC China Limited ConocoPhillips China Inc. CNOOC Oil Base Group Limited Kerr-McGee China Petroleum Ltd. All of the above mentioned transactions are daily manufacturing and operating business of the Company. V. Undertaking Contract of offshore oil engineering 705, , Contract of offshore oil engineering 162, , Contract of offshore oil engineering 34,000 18, Contract of offshore oil engineering 42, , After the non-tradable share reform of the Company on January 24, 2006, no transaction or transfer of the non-tradable shares held by China National Offshore Oil Corporation, CNOOC Bohai Corporation and CNOOC Nanhai West Corporation should be conducted within the first 12 months since the above mentioned date. After the expiry of the above mentioned undertaking, shares for trading on the stock exchange should accout for no more than 5% of the total shares within 12 months, and no more than 10% within 24 months. Special undertakings made by the Company in the non-tradable share reform and the fulfillment: Name of shareholders Special commitment Performance of the commitment China National Offshore Oil Corporation It will put forward and actively promote the incentive plan for the Management of CNOOC Engineering when the regulations concerning management incentives for listed companies are officially formulated and implemented. A special organ has been established and is making studies on the scheme. 45 OFFSHORE OIL ENGINEERING CO.,LTD.

53 Significant Matters VI. Engagement of Accounting Firms It was reviewed and approved on the first Provisional General Meeting of Shareholders held on December 25, 2006 that the Company would engage ShineWing Certified Public Accountants as its auditor of 2006 instead of Zhongxingyu Certified Public Accountants. The Company paid ShineWing Certified Public as followings: 1. The General Meeting of Shareholders is responsible for deciding on the engagement of accounting firm, corresponding payment or the term of payment. Such decision-making procedures are accepted by the Board of Directors and independent directors of the Company. 2. As for 2006, the Company should pay financial audit fee of RMB650,000, including fees of 2006 annual audit and of transition and adjustment for new accounting standards, but excluding business travel expense. VII. Punishment and rectification occurred to the Company, Board of Directors and Directors In the reporting period, there was no inspection, administrative punishment or criticism from CSRC, or denouncement from SSE occurred to the Company, the Board of Directors or directors. VIII. Other significant matters 1. Change in registered capital: According to the Profit Distribution Plan and the Plan of Increasing Capital with Undistributed Profit in 2005 passed at 2005 annual general meeting of shareholders, the Company distributed share dividends of 7 shares and cash bonus of RMB2 (including tax) for each 10 shares based on the total of 396 million shares, and the total shares increased to 792 million shares after the completion of profit distribution and conversion. Relevant industrial and commercial procedures for changes have been handled on January 31, In the reporting period, no significant matters listed in Article 67 of the Securities Law and in Article 17 of the Implementing Rules for Information Disclosure by Companies Issuing Stocks to the Public (Trial) occurred to the company. IX. Building of internal control system of the Company 1. Establishment of internal control system by the Company The Company has been attaching great importance to the establishment of internal control system. In 2006, the Company paid much more attention to this aspect. Specifically speaking, the Company established or revised nearly 50 regulations at the company level; and preliminary established an institutional system for the safe operation of investment decision-making, finance, fund and procurement, which offered a guarantee for the sound operation of various business activities of the Company, as well as for the implementation of laws and regulations of the state and internal rules of the Company. These regulations have become an important component of core competitiveness of the Company, and all of them have been implemented effectively. 2. Internal control for risks 1The Company has established a control frame and the internal reporting system for major matters of holding subsidiaries. 2In October 2005, the Company formulated and distributed the Contingency Plan for Crisis Management at the company level, set up emergency institutions for units at various levels, and made various emergency plans so as to guarantee the orderly processing under emergency and minimize the loss caused by risks. In order to enhance the ability of dealing with sudden incidents concerning securities and to handle emergencies timely and properly, the Company, in 2006, compiled the Emergency Management Procedures for Securities Affairs which will be included into the Contingency Plan for Crisis Management at a proper time. 3. Inspection and supervision for internal control system In order to carry out supervision and inspection over the internal control system, to establish and improve the long-acting mechanism for honest working system, the Company, in the reporting period, set up the Audit and Supervision Department which consisted of professional audit personnel, and strengthened the implementation of internal control, ensuring the sound, stable and sustainable development of the Company. The next step for the Board of Directors is to establish Audit Committee at a right time. ANNUAL REPORT

54 Section 11 Financial Statements Auditors Report Shareholders of Offshore Oil Engineering Co., Ltd: We have audited the accompanying financial statements of Offshore Oil Engineering Co., Ltd. ( Offshore Oil Engineering ), including the Balance Sheet as at December 31, 2006 and the Profit Statement, Cash Flow Statement, Statement of Changes in Equity and Notes to Financial Statements for the year I. The Management s Responsibility on the Financial Statements In accordance with the provisions in relevant accounting standards and the Accounting System for Business Enterprises, the Management of Offshore Oil Engineering bears the responsibility of preparating financial statements. The Management shall be responsible for: (1) designing, implementing and maintaining the internal control measures relating to the preparation of financial statements, so as to guarantee that the financial statements contains no significant misstatement caused by malpractices or negligence; (2) selecting and adopting proper accounting policies; (3) making rational accounting estimate. II. Responsibility of Certified Public Accountants We are responsible for expressing audit opinions on the financial statements based on our audits. We performed 占同类交易 our audit in accordance with the Independent Auditing Standards for the Chinese Certified Public Accountants. According to the Auditing Standards, we shall plan and implement the audits in full compliance with the professional ethics, so as to obtain reasonable assurance about whether the financial statements are free of material misstatement. The audit involved the implementation of audit procedures, which is aming at obtaining audit evidences relevant to the amount and disclosure in the financial statements. The audit procedures are selected based on the judgment of certified public accountants, and include the evaluation on the risk of significant misstatement in the financial statement caused by malpractice or negligence. During the risk evaluation, we took the internal control relating to the preparation of financial statements into consideration, so as to work out appropriate audit procedures. An audit also includes an assessment of the accounting policies adopted and significant accounting estimates made by the management, as well as an evaluation on the overall presentation of the financial statements. We believe that the sufficient and proper audit evidence obtained by us provides a reasonable basis for our opinion. III. Audit Opinions We believe that the financial statements of Offshore Oil Engineering have been prepared in accordance with the accounting standards of enterprises and the Accounting System for Business Enterprises, and present fairly, in all material aspects, the financial position of Offshore Oil Engineering as of December 31, 2006, and the operating results and cash flow for the year then ended. ShineWing Certified Public Accountants 47 OFFSHORE OIL ENGINEERING CO.,LTD.

55 Financial Statements Balance Sheet (Creditors) Prepared by: Offshore Oil Engineering Co., Ltd in RMB Assets Consolidated Notes Consolidated Parent Company Parent Company at period end at period beginning at period end at period beginning Current assets: Currency capital 1 690,446, ,697, ,387, ,284, Short-term investment Notes receivable Dividends receivable Interests receivable Accounts receivable ,688, ,277, ,857, ,795, Other accounts receivable 3 10,077, ,136, ,829, ,449, Accounts in advance 4 81,768, ,775, ,779, ,715, Allowance receivable 5 7,342, ,316, ,342, ,316, Inventories 6 980,727, ,008, ,425, ,973, Deferred expenses Long-term debt investment expiring within one year Other current assets Total current assets 2,062,052, ,570,211, ,892,621, ,464,535, Long-term investment: Long-term equity investment ,053, ,069, ,187, ,250, Long-term debt investment Total of long-tem investment 25,053, ,069, ,187, ,250, Incl.: consolidated difference 53, , Fixed assets: Original value of fixed assets 8 3 3,293,305, ,410,765, ,546,021, ,300,965, Less: accumulated depreciation 8 3 1,114,143, ,915, ,089,083, ,558, Net value of fixed assets 2,179,161, ,463,849, ,456,938, ,364,407, Less: devalue provision of fixed assets Net value of fixed assets 2,179,161, ,463,849, ,456,938, ,364,407, Enginnering materials Construction in progress 9 727,197, ,171, ,465, ,461, Disposal of fixed assets Total fixed assets 2,906,359, ,869,020, ,513,403, ,429,868, Intangible and other assets: Intangible assets 10 29,956, ,698, ,619, ,698, Long-term deferred expense 1,235, Other long-term assets Total intangible and other assets 29,956, ,934, ,619, ,698, Deferred tax: Deferred tax, debit Total assets 5,023,421, ,484,235, ,996,832, ,476,352, Person in charge of the Company: Zhou Shouwei Person in charge of accounting affairs: Lin Rongqing Person in charge of the accounting department: Xie Hongjun ANNUAL REPORT

56 Financial Statements Balance Sheet (Assets) Prepared by: Offshore Oil Engineering Co., Ltd Liabilities & Shareholders Equity Consolidated Notes Consolidated Parent Company Parent Company at period end at period beginning at period end at period beginning Current liabilities: Short-term loan Notes payable ,334, ,562, ,334, ,562, Accounts Payable 12 1,082,344, ,056, ,062,369, ,810, Accounts received in advance ,339, ,164, ,339, ,846, Wages payable 43,484, ,015, ,944, ,015, Welfare expense payable 1,910, ,875, ,733, ,699, Dividends payable Tax payable ,549, ,291, ,816, ,723, Other payable 15 3,953, ,827, ,341, ,803, Other payable 16 45,163, ,448, ,693, ,317, Withdraw expenses in advance Liabilities in advance Long-term liabilities expiring within one year Other current liabilities Total current liabilities 1,974,079, ,110,242, ,949,572, ,103,778, Long-term liabilities: Long-term loan Bond payable Long-term payable Special accounts payable 17 32,740, ,740, ,740, ,740, Other long-term liabilities Total long-term liabilities 32,740, ,740, ,740, ,740, Deferred tax: Deferred tax, credit 18 2,069, ,186, ,069, ,186, Total liabilities 2,008,889, ,136,168, ,984,382, ,129,704, Minority shareholders equity 2,082, ,419, Shareholders equity: Share capital ,000, ,000, ,000, ,000, Less: investment returned Share capital, net 792,000, ,000, ,000, ,000, Capital surplus ,952, ,088, ,952, ,088, Surplus ,082, ,743, ,797, ,063, Incl.: public welfare fund 90,847, ,347, Undistributed profit 22 1,339,415, ,024,816, ,344,700, ,028,495, Incl.: cash dividend to be distributed 79,200, ,200, ,200, ,200, Total shareholders equity 3,012,450, ,346,647, ,012,450, ,346,647, Total liabilities & shareholders equity 5,023,421, ,484,235, ,996,832, ,476,352, Person in charge of the Company: Zhou Shouwei Person in charge of accounting affairs: Lin Rongqing Person in charge of the accounting department: Xie Hongjun in RMB 49 OFFSHORE OIL ENGINEERING CO.,LTD.

57 Financial Statements Profit and Profit Distribution Statement Prepared by: Offshore Oil Engineering Co., Ltd Item Consolidated Parent company I. Income from main business 1 4 Less: Cost from main business Tax and additional on main business 2 II. Profit from main business Plus: Profit from other business Less: Operating expense Administrative expense 3 Financial expense 4 III. Operating profit Plus: Investment income 5 5 Allowance income Non-operating income Less: Non-operating expense IV. Total profit Less: Income tax 6 6 Less: Profit and loss of Minority shareholders V. Net profit Plus: Undistributed profit at year beginning Other accounts transferred in VI. Profit available for distribution Less: Statutory surplus reserve Statutory public welfare fund Fund for employee bonus and welfare Reserve fund Eenterprise development fund Profit capitalized on return of investment VII. Profit available for distribution to shareholders Less: Dividends payable on preferred shares Other surplus reserve Dividends payable on common shares Common share dividends converted into shares Notes Consolidated Parent Company at period end at period beginning at period end in RMB at period beginning 4,968,874, ,258,588, ,920,583, ,225,659, ,861,352, ,419,759, ,825,956, ,404,840, ,500, ,544, ,239, ,804, ,022,020, ,284, ,012,387, ,013, , ,704, ,757, ,723, ,757, ,266, , ,462, , ,091, ,238, ,201, ,922, , ,062, ,062, ,561, , , , , , , , , ,544, , ,489, , ,920, ,293, ,028, ,516, ,920, ,321, ,690, ,201, , , ,338, ,314, ,338, ,314, ,024,816, ,175, ,028,495, ,978, ,772,154, ,180,490, ,775,834, ,182,293, ,339, ,782, ,733, ,531, ,891, ,265, ,695,815, ,090,816, ,701,100, ,094,495, ,200, ,000, ,200, ,000, ,200, ,000, ,200, ,000, VIII. Undistributed profit 1,339,415, ,024,816, ,344,700, ,028,495, Person in charge of the Company: Zhou Shouwei Person in charge of accounting affairs: Lin Rongqing Person in charge of the accounting department: Xie Hongjun ANNUAL REPORT

58 Financial Statements Cash Flow Statement Year of 2006 Prepared by: Offshore Oil Engineering Co., Ltd Item Consoli dated in RMB Parent Company Consolidated Parent Company I. Cash flows from operating activities Cash received from sale of goods or provisions of services 5,106,394, ,076,907, Refund of tax 160,516, ,516, Other cash received relating to operating activities 1 51,935, ,845, Sub-total of cash inflows 5,318,846, ,286,268, Cash paid for goods and services 3,465,749, ,465,058, Cash paid to and on behalf of employee 216,046, ,474, Payments of various taxes 370,170, ,976, Other cash paid relating to operating activities 2 45,753, ,184, Sub-total of cash outnflows 4,097,720, ,081,694, Net cash inflows from operating activities 1,221,126, ,204,574, II. Cash flows from investment activities Cash received from disposal of investments Cash received from returns on investments Net cash received from disposal of fixed assets, intangible assets & other long-term assets 64, , Other cash received relating to investment activities Sub-total of cash inflows 64, , Cash paid to acquire fixed assets, intangible assets and other long-term assets 1,079,015, ,023, Cash paid to acquire investments 28,053, Other cash payment relating to investing activities 7 800,097, Sub-total of cash outflows 1,079,015, ,008,174, Net cash inflows from investing activities -1,078,951, ,008,110, III. Cash flows from financing activities Cash received from absorbing investment Cash received from borrowings Other cash received relating to financing activities Sub-total of cash inflows Cash paid on repayment of debts Cash paid for distribution of dividends, profits and repayment of interests 79,200, ,200, Other cash paid relating to financing activities 2,336, ,336, Sub-total of cash outflows 81,536, ,536, Net cash payment relating to financing activities -81,536, ,536, IV. Effect of exchange rate changes on cash -6,889, ,825, V. Net increase in cash and cash equivalents 53,749, ,102, Notes Person in charge of the Company: Zhou Shouwei Person in charge of accounting affairs: Lin Rongqing Person in charge of the accounting department: Xie Hongjun Amount 51 OFFSHORE OIL ENGINEERING CO.,LTD.

59 Financial Statements Annotation to Cash Flow Statement Year of 2006 Prepared by: Offshore Oil Engineering Co., Ltd Item Consoli dated in RMB Parent Company Consolidated Parent Company 1. Regulation net profit as the cash flows from operating activities Net profit 747,338, ,338, Plus: Loss and gains of minority shareholders 662, Retained provision for asset devaluation -8,460, ,451, Depreciation of fixed assets 170,558, ,551, Amortization of intangible assets 3,681, ,675, Amortization of long-term deferred expense 1,235, Decrease in deferred expense (less: increase) Increase of expense retained in advance (less: decrease) Losses on disposal of fixed assets, intangible assets and other long-term assets (less: gains) -64, , Losses on scrapping of fixed assets 2,407, ,373, Financial expense 2,517, ,644, Investments losses (less: gains) 16, ,062, Deferred tax, credit (less: debit) Decrease in inventories (less: increase) -628,215, ,948, Decrease in operating receivables (less: increase) 150,370, ,362, Increase in operating payables (less: decrease) 779,079, ,029, Others Net cash inflows from operating activities 1,221,126, ,204,574, Investment and financing activities that do not involve cash receipts and payments Debt-for-capital conversion Convertible corporate bonds expiring within one year Fixed assets acquired under finance leases 3. Net increase in cash and cash equivalents Cash at period end 690,446, ,387, Less: Cash at period beginning 636,697, ,284, Plus: Cash equivalents at period end Less: Cash equivalents at period beginning Net increase in cash and cash equivalents 53,749, ,102, Person in charge of the Company: Zhou Shouwei Person in charge of accounting affairs: Lin Rongqing Person in charge of the accounting department: Xie Hongjun Notes Amount ANNUAL REPORT

60 Annotations of Financial Statements of Offshore Oil Engineering Co., Ltd I. Company Profile 1. Establishment: Offshore Oil Engineering Co., Ltd. (the Company ) is a joint stock company with limited liabilities jointly promoted by CNOOC Design Company (the Design Company ), CNOOC Platform Manufacturing Company (the Platform Company ), CNOOC Maritime Engineering Company (the Maritime Engineering Company ), CNOOC Bohai Corporation (the Bohai Corporation ) and CNOOC Nanhai West Corporation (the West Corporation ). The Design Company, the Platform Company and the Maritime Engineering Company, as the major initiators, converted all of their operating assets relating to offshore engineering design, construction, offshore installation and offshore pipeline laying into the state-owned corporate shares based on the appraisal value; Bohai Company contributed the land use right of 3, square meters based on the appraisal value; and West Company contributed 4,000 tons slideway and the land use right of 3,864 square meters based on the appraisal value. The Company was formally registered with Tianjin Administration for Industry & Commerce on April 20, 2000 with a registered capital of RMB170 million, and obtained the Business License for Legal Person. 2. Business scope: EPCI contract of engineering; design of oil and gas (offshore oil engineering, manufacturing and maintenance of oil machinery, pipeline transportation engineering, oil and gas processing engineering, chemical engineering and comprehensive utilization of oil and gas) and construction engineering; construction of various offshore oil construction engineering and other offshore engineering; fabrication and installation of various steel structures and grid-structure engineering; manufacturing of pressure vessels; export of the self-made products and technologies; import of raw and auxiliary materials, instruments, meters, mechanical equipment, parts, accessories and technologies necessary to the production of the Company; processing with imported materials, processing with supplied materials, processing with supplied samples, assesmbling of supplied componenets and compensation trade; contracting of the overseas offshore oil projects and domestic international bidding; contracting of the survey, consultation, design and supervision of the above overseas projects; export of equipment and materials necessary to the above overseas projects; labor service for above overseas projects and domestic coastal transportation of conventional freight vessels (Special provisions shall prevail provided the state has promulgated special provisions on operation of the above items). 3. Iinital public offering: upon the approval (Zh.J.F.X.Z. (2002) No. 2) of China Securities Regulatory Commission (CSRC), the Company offered 80 million shares to the public on January 21, 2002; and listed the shares on Shanghai Stock Exchange on February 5, 2002 after relevant funds were paid (code: ). The Company completed the procedures of alteration registration on July 9, 2002, with the number of the Business License for Legal Person being after alteration and the registered capital being RMB250 million. 4. Capital Increases after Initial Public Offering (1)The Company approved the Plan of Inreasing Share Capital with Capital Reserves at the first interim general meeting of shareholders in 2003, deciding to issue additional 1 share for each 10 shares with the capital reserves based on the total of 250 million shares. Upon the completion of the above plan, total shares of the Company reached 275 million, including 88 million tradable shares. The Company finished the procedures of industry & commerce alteration registration on January 1, 2004, with registered capital of RMB275 million after the alteration; (2)The Company approved the Plan of Increasing Share Capital with Capital Reserves and Undistributed Profits at the general meeting of shareholders in 2003, deciding to issue 1 additional share for each 10 shares (27.5 million shares in total) to the shareholders with the capital reserves and distribute 1 dividend share for each 10 shares (27.5 million shares in total) to the shareholders based on the total of 275 million shares, which increased the share capital by 55 million shares aggregatedly. The Company finished the procedures of industry & commerce alteration registration on October 27, 2004, with registered capital of RMB330 million after the alteration; (3)The Company approved the 2004 Profit Distribution Plan and Plan of Increasing Capital with Capital Reserves in 2004 at the general meeting of shareholders in 2004, deciding to distribute share dividend of 1 share for each 10 shares to the shareholders with the undistributed profit (33 million shares in total) and issue 1 additional share for each 10 shares to the shareholders with the capital reserve (33 million shares in total) based on the total of 330 million shares, which increased the share capital by 66 million shares aggregatedly. The Company finished the procedures of industry & commerce alteration registration on July 15, 2005, with registered capital of RMB396 million after the alteration. 53 OFFSHORE OIL ENGINEERING CO.,LTD.

61 Notes to Financial Statements (4)The Company approved the 2005 Profit Distribution Plan and Plan of Increasing Capital with Capital Reserves in 2005 at the general meeting of shareholders in 2005, deciding to distribute share dividends of 7 shares for each 10 shares to the shareholders with the undistributed profit (277.2 million shares in total) and issue 3 additional share for each 10 shares to the shareholders with the capital reserve (118.8 million shares in total) based on the total of 396 million shares, which increased the share capital by 396 million shares aggregatedly. The Company finished the procedures of industry & commerce alteration registration on January 31, 2005, with registered capital of RMB792 million after the alteration. The Company s legal representative is Zhou Shouwei. 5. Equity Change to the Initiators (1)China National Offshore Oil Corporation (CNOOC), the actual controller of the Company, without payment of consideration, accepted a total of 159,233,800 shares held by the initiators of CNOOC Platform Manufacturing Company, CNOOC Maritime Engineering Company and CNOOC Design Company, representing 67.91% of the total shares at that time. Upon the transfer, CNOOC completed the procedures of share transfer on February 13, 2004, and became the largest shareholder of the Company. The CNOOC Platform Manufacturing Company, CNOOC Martitime Engineering Company and CNOOC Design Company no longer held the Company s shares. (2)According to the non-tradable share reform plan approved by the Official Replies to Relevant Issues of nontradable Share Reform of Offshore Oil Engineering Co., Ltd (G.Z.Ch.Q. (2006) No. 2) issued by the State-owned Assets Supervision and Administration Commission of the State Council and approved at the shareholders meeting on non-tradable share reform held on January 16, 2006, holders of non-tradable shares of the Company should pay a consideration of 2.4 shares for each 10 shares to the holders of tradable shares registered with Shanghai Branch of China Securities Depository and Clearing Corporation Limited as of January 20, 2006, involving total payment of 30,412,800 shares by the holders of non-tradable shares. After the consideration was paid, China National Offshore Oil Corporation, CNOOC Bohai Corporation and CNOOC Nanhai West Corporation, holders of non-tradable shares of the company, hold 203,399,600 shares, 1,414,800 shares and 34,052,800 shares respectively in the company, representing a ratio of 51.36%, 0.36% and 8.60% respectively. On the first trading day after the non-tradable share reform is executed, all non-tradable shares held by the holders of the Company obtained the rights of circulation. II. Significant Accounting Policies and Estimates, Preparation Methods of Consolidated Statement 1. Accounting Regulations The Company implements the Accounting Standards for Business Enterprises, the Accounting System for Business Enterprises and the supplementary regulations thereto, and the Regulations on Accounting of Construction Enterprises prepared by the Ministry of Finance. 2. Accounting Year The accounting year of the Company is from January 1 to December 31 of each calendar year. 3. Accounting Principles and Measurement Basis The financial statements adopt the method of debit-credit bookkeeping, and are prepared on an accrual basis; the measurement basis employed is historical cost. Provided devaluation occurs to an asset item at the end of the accounting period, the devaluation provision is taken in accordance with with relevant provisions of the Ministry of Finance. 4. Accounting of Foreign Currency Transactions Renminbi is adopted as the functional currency. Foreign currency transactions occurred in the reporting year are translated into RMB at the applicable exchange rates quoted by People s Bank of China on the last workday of the previous month in which these transactions occurred. At the end of the year, it is translated into RMB according to the benchmark exchange rate. The difference between the translated RMB balance and the original book balance shall be recognized as the exchange gains/losses of the current period. The exchange gains/losses directly relating to the purchase and establishment of fixed asset etc before the asset reaches the expected usable condition are recognized as the cost of the corresponding asset. 5. Recognition Criteria for Cash Equivalents Cash equivalents refer to short-term highly liquid investments, which are readily convertible into known amounts of cash, subject to an insignificant risk of conversion in value. 6. Measurement of Short-term Investments and Provision for Shot-tem Investment depreciation The short-term investments are recognized at cost of initial investment. At the end of the period, the short-term investments are measured and recognized at the cost or the market price, whichever is lower; and the provision for short-term investment depreciation is taken based on the difference between the cost and the market value. 7. Mreasurement of Bad Debts (1)The bad debts are identified provided: 1 the debtors concerned have passed away or gone bankrupt, the receivables can not be recovered after the execution of the heritage or the existing property; 2 the accounts receivebale have been expired due to unfulfillment of obligations by the debtor and there is strong evidence showing it is not recoverable. ANNUAL REPORT

62 Notes to Financial Statements (2)The measurement of loss on bad debts adopts the allowance method. The provisions for bad debts are taken on accounts receivable and other accounts receivable, where unexpired accounts receivable, various guaranty funds, cash deposits and reserve funds do not take provisions. The provision for bad debts is taken based on the aging analysis and the actual situation, with the ratios as follows: Ageing Percentage (%) < 1 year years years years 50 > 5 years Mreasurement of Inventories Inventories include engineering prepared material and the completed yet unsettled engineering construction. The inventories shall be recognized at the actual cost upon acquisition. The inventories claimed or distributed are calculated according to the weighted average method; and the delivery of raw materials purchased for special use of certain engineering project is calculated according to the individual identification method. Consumable materials, turn-over materials and low-value consumables adopt the method of one-off amortization. At the end of the year, the provisions for inventory depreciation are taken based on the difference of net realizable value of an inventory from its cost on an item by item basis. The enginnering construction reflects the accumulated incurred costs under an enginnering contract and the debit balance between the accumulated identified gross profit and the accumulated amount settled (the credit difference shall be represented under the money received in advance, reflecting the amounts settled yet the correspondending progress in the construction contract has not be fulfilled). 9. Mreasurement of Provision for Predicted Loss on Contract In accordance with the standards for construction contract, provided the expected total cost on a contract exceeds the expected total income from it, the provision for predicted loss on contract shall be taken based on the amount of predicted loss, and listed into the management expense of the current period. The provision for predicted loss on contract shall be listed under the item of provision for inventory depreciation. 10. Mreasurement of Long-term Investments The measurement of long-term bond investments and method of income identification: The long-term bond investments are initially recognized at the total price paid upon acquisition (including tax, commissions and other relevant expenses) after deducting the interests of bonds due but not yet received. The interests are taken by periods on the accrual basis and listed into investment income. The measurement of long-term equity investments and method of income identification: The long-term equity investments are initially recognized at the actual cost upon acquisition. In general, the cost method shall be adopted provided that the investment to other entities accounts for less than 20% of the total voting capital of the entity invested, and the equity method shall be adopted provided the investment to other entities accounts for 20% or above of the total voting capital of the entity invested. The subsidiaries in which the Company accounts for more than 50% in terms of investment or has the actual control rights despite a proportion of less than 50% shall be included into the the consolidated statement. Provided the equity method is applied to the long-term external equity investment, the difference, provided the acquisition cost is less than the owners equity invested attributable to the Company in the company, is recognized as the long-term equity investment difference, and amortized in the investment period if the period is specialized in the contract or 10 years if the period is unspecified. The difference, provided the acquisition cost is larger than the owners equity attributable to the Company in the company invested, is recognized as capital surplus at the time of investment; and no retroactive adjustment is done on the external investments that has been accounted according to the original provisions before relevant regulations of the Ministry of Finance are issued. The provisions for long-term investment devaluation are taken on an item by item basis. Provided the recoverable value of an investment is lower than its book value due to changes in the operating position of the entity invested, and the difference is unable to be recovered within the predicted future period, the provision for long-term investment devaluation is taken according to the difference between the recoverable value and the book value of long-term investment. The expected impariment to the long-term investments is recorded as a loss/gain item of the current year. 11. Mreasurement of Fixed Assets and Depreciation Policy The fixed assets mean housings, structures, machinery, transportation tools and other equipments, devices and tools relating to operation, with useful lives of more than 1 year. The fixed assets also include the items with useful lives of more than 2 years and unit value of more than RMB2,000, despite that they may not fall within the scope of key operation facilities. The fixed assets are recognized at the actual acquisition cost; and depreciated based on the average service life method. All fixed assets involving 55 OFFSHORE OIL ENGINEERING CO.,LTD.

63 Notes to Financial Statements insufficient withdrawal of depreciation are depreciated. The residual value ratio of fixed assets is set at 5-10%, which is set out as follows according to the type and service life of fixed assets: Type Useful life (in years) Annual depreciation rate (%) Housings and structures Generally used equipments Specially used equipments Provided the fixed assets depreciate due to the outdated technology, damage or long-term idleness, the provisions for depreciation are taken in accordance with relevant provisions of the Ministry of Finance. 12. Mreasurement of Construction in Progress The construction in progress is recognized at the actual cost, and is transferred to fixed assets in the month it reaches the expected usable condition. For enginnerings constructed with loans, the loan interests incurred before it reaches the expected usable condition are capitalized and recognized as the cost of the construction in progress; while the loan interests incurred after the construction in process is delivered and used are recognized in the income statement of the current period. Provided the construction in progress depreciates and has been suspended for a long time and will not be commenced in the next 3 years, the provision for devaluation shall be taken based on the item of engineering. 13. Measurement of Intangible Assets and Amortization Policy The intangible assets are recognized at the actual cost upon acquisition, and are amortized evenly within the predicted useful lives starting from the month of acquisition. Provided that intangible assets are replaced by other new technologies, or the market prices drop significantly, or the legal protection periods expire, the provision for devaluation shall be taken based on the tem of assets. 14. Policy for Long-term Deferred Expense Amortization Long-term deferred expenses are amortized evenly according to their actual beneficiary periods or legal period of validity, whichever is shorter. Initial set up cost incurred during the construction period is recognized in the income statement in the month when the Company commenced its operation. 15. Measurement of Borrowing Expense Except that the exepenses incurred on borrowings for the special purpose of purchasing and constructing fixed assets and before the construction in progress reaches the expected usable condition are capitalized and recognized as cost of the construction in progress, other borrowing expenses are recognized as expenses and directly listed into the financial expense of the current period. 16. Measurement of Bonds Payable The issued bonds are recognized as liabilities at the total funds actually financed. The difference between the total amount financed and the par value of bonds is recognized as premium or discount. It is amortized, according to the existing period of bond, at the the time when the interest is crrued based on a straight-line menthod, and adopt the accounting method of borrowing expense. 17. Measurement of Special accounts Payable The special accounts payable represent the special appropriation obtained by the Company. After the completion of project for which the appropriation is made, the part that shall be written off is used to reverse the special accounts payable, and the rest is transferred into capital reserve. 18. Recognition of Revenue In light of the features of main business, the Company, according to the Standards for Construction Contract, uses the completion percentage method to recognize the revenue and cost of a contract. The revenue on a contract includes the initial revenue stipulated in contract and the revenue arisen from contract alteration, claims and bonus. (1) The recognition of revenue from a fixed-cost contract meets the following conditions: 1Total revenue from a contract can be measured reliably; 2The economic profits relating to the contract can flow into the Company; 3As at the Balance Sheet date, the completion percentage of contract and the cost needed for the uncompleted part can be measured reliably; 4The incurred cost for the uncompleted part of contract can be explicitly distinguished and liably measured. Operating income is recognized provided the four conditions are met. (2) The recognition of revenue arisen from contract alteration, claims and bonus meets the following conditions: 1The revenue can be measured reliably; 2The client has reached a consensus with the Company on the matters of contract alteration, claim and bonus, and has entered into a contract or an agreement; ANNUAL REPORT

64 Notes to Financial Statements The Company determines the completion percentage according to the percentage of accumulative contract cost actually iccured in the predicted total contract cost. The Company, according to the implementation of budget, adjusts the predicted total contract cost when the contract alters or the actual expense is obviously different from the budget. 19. Measurement of Income Tax The Company uses the tax payable method to measure the income tax. 20. Preparation for Consolidated Financial Statements According to the Provisional Regulations on Consolidaed Accounting Statements and relevant provisions promulgated by the Ministry of Finance, the Company consolidates, with the holding company, the financial statements of holding subsidiaries in which the Company holds more than 50% total shares of the investment accounts or have the actual control rights despite with a shareholding ratio of less than 50%. 21. Changes to Accounting Policies and Estimates According to the resolutions adopted at the 20 th meeting of the 2 nd Session of Board of Directors, in order to unify the inventory measurement methods (ERP) with the parent company, the Company replace the LIFO method with the weighted average method on June 1, 2006 to measure the raw materials (excluding the materials prepared for the special purpose of an engineering project). As the cumulative effect from the change of accounting policy is unable to reasonably determined, the Company adopts the future application method. III. Taxation 1. Turnover tax: turnover tax of the Company consists of value added tax and business tax. (1)According to the Circular of the Ministry of Finance and the State Administration of Taxation on Value-added Tax Refund for offshore Engineering Structure (C.SH.[2003]No.46) and the Supplementary Circular of the Ministry of Finance and the State Administration of Taxation on Value Added Tax Refund for Offshore Engineering Structure (C.SH.[2003]No.249), the ocean enginnering structure goods involving in the procurement contracts signed by the Company and domestic offshore oil and gas exploitation enterprise applied the method of tax exemption, offset and reimbursement during the sales. (2)According to the Replies of the State Administration of Taxation on Relevant Matters Concerning Charging Value Added Tax and Implementing Tax Exemption, Offset and Reimbursement on Offshore Oil Engineering Co., Ltd. (G.SH.[2004]No.1043), the revenue earned from providing of self-produced products and rendering of value added tax service shall be exempted from the value added tax, and the revenue earned from costruction service shall be charged business tax provided the Company has specified, in the EPCI contract or subcontract, the price for construction service and that for providing of self-produced products and rendering of value added tax service. The Company implements the Replies from January 1, (3)The construction business of offshore oil engineering and other offshore enginnering pays business tax at 3% of the operating income; and the design business of offshore engineering pays business tax at 5% of the operating income. 2. Urban maintenance and construction tax and educational additional fee: the urban maintenance and construction tax and educational additional fee are paid at 7% and 3% of the turnover tax payables and the exempted and offsetted value added tax reviewed and approved by State Administration of Taxation, respectively. Shenzhen China Ocean Petroleum Platform Maintance & Installation Co., Ltd, a controlling subsidiary of the Company pays urban construction and maintenance tax and educational surcharge at 1% and 3% of the turn-over tax payables. CNOOC Engineering (Qingdao) Co., Ltd, a controlling subsidiary of the Company, pays urban construction and maintenance tax, educational additional fee and local educational additional fee at 7%, 3% and 1% of the turn-over tax payable respectively. 3. Income tax: according to the Replies on Offshore Oil Engineering Co., Ltd s Application of Preferential Tax Policy for High-Tech Enterprises and Relevant Matters (J.G.SH. (2000) No.43) issued by the Tianjin Office of State Administration of Taxation and the Certificate of High-Tech Enterprise issued by the Science & Technology Committee of Tianjin Hi-Tech Industry Park, the Company enjoys the preferential income tax rate of 15%. According to document (J.G.SH.S. [2004] No. 112) issued by Tianjin Office of State Administration of Taxation, hi-tech enterprises shall go through procedures of annual inspection on a yearly basis, and complete the annual inspection by the middle of the next year; therefore, the Company calculates income tax at the rate of 33%; provided the Company passes the annual inspection of hi-tech enterprise, it is allowed to pay the income tax at a preferential rate of 15%. The income tax rate of Huizhou branch of the Company is 33%, and that of Shenzhen China Ocean Petroleum Platform Maintance & Installation Co., Ltd and Hianan China Ocean Petroleum Platform Manufacturing Co., Ltd is 15%. 4. Other taxes are calculated and paid in accordance with relevant tax provisions of the state. 57 OFFSHORE OIL ENGINEERING CO.,LTD.

65 Notes to Financial Statements IV. Controlling Subsidiaries and Participating Enterprises 1. Basic information of the controlling subsidiaries which are included into the consolidated statements in the reporting period: Investee Registered Capital Registration Time Business Scope Shareholding Ratio Actual contribution Shenzhen China Ocean Petroleum Platform Maintance & Installation Co., Ltd RMB13.65 million July 1993 Hainan China Ocean Petroleum Platform Manufacturing Co., Ltd RMB20 million October 1995 CNOOC Engineering (Qingdao) Co., Ltd RMB500 million March 2005 Fabrication, installation and maintenance of offshore oil platform 95% RMB12,967,500 Fabrication, installation and maintenance of offshore and land platforms Fabrication, installation and maintenance of offshore oil and gas enginnering Direct invesment: 70%; indirect investment: 30%. Direct invesment: 99%; indirect invesment: 1%. RMB14 million RMB495 million 2. Basic information of the participating enterprises in the reporting period: Investee Registered Capital Registration Time Business Scope Shareholding Ratio Actual contribution CNOOC Finance Co., Ltd RMB1,415 million June 2002 Deposits, loans and financing leases for the member organizations 1.77% RMB25 million V. Notes to Major Items in the Consolidated Balance Sheet as at December 31, 2006 (in RMB) Note 1: Currency capital Item At the end of the period At the beginning of the period Cash 27, , Bank deposits 668,186, ,333, Other monetary fund 22,232, ,347, Total 690,446, ,697, Including: in foreign currency At the end of the period At the beginning of the period Currency in foreign currency Exchange rate in RMB in foreign currency Exchange rate in RMB USD 5,737, ,805, ,444, ,710, Rp 528,840, , ,484,954, ,298, ANNUAL REPORT

66 Notes to Financial Statements (1)Other currency capital is mainly the balance on the overseas bank account the Company opens in Indonesia, and fund on the account is for the use of the locale project team of SES EPCI contract in Indonesia. (2)Deposits of Connected Persons: Compnay Name At the end of the period At the beginning of the period CNOOC Finance Co., Ltd. 293,637, ,086, Note 2: Accounts receivable Ageing Bad debts % At the end of the period At the beginning of the period Amount Percentage Provision Amount Percentage Provision < 1 year 5% 292,598, % 2,322, ,929, % 3,606, years 10% 1,569, % 156, , % 80, years 3-5 years 30% 50% 454, % 227, > 5 years 100% 534, % 534, , % 80, Total 294,703, % 3,014, ,272, % 3,995, (1)The decrease in accounts receivable of the current period is mainly due to the timely recovery of funds on projects completed in the period; (2)The Company does not take provisions for bad debts on the unexpired accounts receivable; (3)Top five accounts receivable amount to RMB258,337, in total, accounting for 87.66% of the balance at the end of the period; (4)No accounts receivable is debts of shareholder entities which hold 5% or above shares of the Company. Note 3: Other accounts Receivable Ageing Bad debts % At the end of the period At the beginning of the period Amount Percentage Provision Amount Percentage Provision < 1 year 5% 5,005, % 6, ,490, % 36, years 10% 4,905, % 30, , % 28, years 30% 171, % 51, , % 8, years 50% 183, % 100, , % 91, Total 10,265, % 188, ,301, % 165, (1)The decrease in other accounts receivable of current period is mainly due to the decrease of caution money deposited with the customs; (2)Top five other accounts receivable amount to RMB6,088, in total, accounting for 59.31% of the balance at the end of the period; (3)The Company does not take provisions for bad debts on caution money and reserve funds. (4)No other accounts receivable is debts of shareholder entities which hold 5% or above shares of the Company. 59 OFFSHORE OIL ENGINEERING CO.,LTD.

67 Notes to Financial Statements Note 4: Accounts in advance Ageing At the end of the period At the beginning of the period Amount Percentage Amount Percentage < 1 year 80,490, % 49,015, % 1-2 years 1,278, % 5,760, % 2-3 years > 3 years Total 81,768, % 54,775, % (1)The increase in accounts in advance at the end of the period is due to the increase of the procurement advances paid for the prepared materials of the engineering project; (2)Top five accounts in advance amount to RMB59,897, in total, accounting for 73.25% of the balance at the end of the period; (3)No accounts in advance is prepaid to shareholder entities which hold 5% or above shares of the Company. Note 5: Allowance receivable Item At the end of the period At the beginning of the period Tax rebate receivable 7,342, ,316, (1)The Company implements the tax rebate policy of tax exemption, offset and reimbursement for value added tax since January 1, 2004 (refer to Note 3); (2)The decrease in export tax rebate receivable is mainly due to the timely rebate of taxes in current period Note 6: Inventories Item Amount At the end of the period Provision for devaluation Provision for predicted loss on contract At the beginning of the period Amount Provision for devaluation Provision for predicted loss on contract Engineering construction 839,561, ,083, ,557, Prepared material for enginnering 141,396, , ,658, ,176, Incl.: Common steels 51,307, ,141, , Imported materials 22,449, ,686, Electric engineering material 10,497, ,763, Other materials 57,142, ,066, ,558, Total 980,957, , ,742, ,176, ,557, (1)After local deformation of the underwater structure occurred to the jacket part of Panyu 30-1 EPCI contract project on ANNUAL REPORT

68 Notes to Financial Statements June 22, 2006, the engineering costs relating to the Panyu 30-1 EPCI contract project, and the disassembling, transportation and storage of project modules incurred after the month are reflected in the item of engineering construction, and amounts received are reflected in the item of advance payment. Refer to Note V /13(2) for details. (2)Excluding the Panyu 30-1 EPCI contract project mentioned above, the increase in outstanding inventories is due to the rise of the balance for the completed yet unsettled engineering in the current year as a result of the increase in construction projects. As of December 31, 2006, details of main unsettled construction in-process are as follows: Project Name Amount Wenchang 19-1/15-1/14-3/8-3 Oil Field Development Project 164,280, Penglai 19-3 Phase II RUP Platform, B Module, E Jacket EPCI Contract Project 97,788, Bozhong 34-1 EPCI Contract Project 65,303, Ledong 22-1/15-1 EPCI Contract Project 52,894, Liuhua Superstructure Facilities Maintenance Project 29,752, Total 410,018, (3)Changes to Provision for Inventory Depreciation in the current period: Item At the beginning of the period Increase in the period Decrease in the period At the end of the period Prepaid material for engineering 3,176, ,946, , Total 3,176, ,946, , Provision for depreciation is taken at the end of the period on the principle of the cost or net realizable value of an inventory, whichever is shorter; net realizable value of an inventory is determined according to the expected price less the costs, sales expense and relevant taxes expected to be incurred by the completion of inventory. (4)Change to Provisions for Predicted Loss on Contract in Current Period: Item At the beginning of the period Provision in the period Transfer-out of loss in At the end of the period the period Dongfang 1-1 Phase II Offshore Installation 4,557, ,557, Total 4,557, ,557, Dongfang 1-1 Phase II Offshore Installation has been completed and settled, and corresponding predictated loss on contract is reversed. Note 7: Long-term Investment (1)Other Equity Investments Investee Investment percentage Initial investment At the end of the period CNOOC Finance Co., Ltd. 1.77% 25,000, ,000, Total 25,000, ,000, OFFSHORE OIL ENGINEERING CO.,LTD.

69 Notes to Financial Statements (2)Equity Investment Difference Investee Initial difference Hainan China Ocean Petroleum Platform Manufacturing Co., Ltd -39, Shenzhen China Ocean Petroleum Platform Maintance & Installation Co., Ltd. 199, Amortizati Amortization Amortization method on period in the period Remaining value Comprehensive adjustment -3, , Comprehensive adjustment 19, , Total 160, , , Formation Evaluation depreciation Evaluation appreciation Note 8: Fixed Assets and Accumulated Depreciation Item At the end of the period At the beginning of the period Original value of fixed assets 3,293,305, ,410,765, Accumulated depreciation 1,114,143, ,915, Net value of fixed assets 2,179,161, ,463,849, (1)Original Value of Fixed Assets Item At the beginning of the period Increase in the period Decrease in the period At the end of the period Buildings and structures 204,686, ,278, ,965, Special-purpose equipment 1,624,826, ,909, , ,646,428, General equipment 581,252, ,213, ,554, ,911, Total 2,410,765, ,401, ,861, ,293,305, (2)Accumulated Depreciation Item At the beginning of the period Increase in the period Decrease in the period At the end of the period Buildings and structures 82,972, ,288, ,260, Special-purpose equipment 560,335, ,186, , ,515, General equipment 303,607, ,630, ,870, ,368, Total 946,915, ,104, ,876, ,114,143, (3) Net Value of fixed assets 1,463,849, ,179,161, (1)The increase in fixed assets of the period is mainly due to the site construction of Offshore Oil Enginnering (Qingdao) Co., Ltd; and the completion and transfer of new property and the procurement of equipments result in significant increase of fixed assets. (2)The original value of in-use fixed assets on which that the Company has taken sufficient depreciations is RMB494,250,634.20, with a net value of RMB49,866, They are mainly equipment of special purpose; ANNUAL REPORT

70 Notes to Financial Statements (3)The special-purpose equipments of the Company are mainly the work barges for the use of offshore engineering; (4)The Company has no replacement, mortgage or guarantee of fixed assets; (5)The Compant does not find any devaluation of fixed assets at the end of the period. Note 9: Construction in Progress Item Budget (RMB 10,000) At the Increase in the beginning of period the period Transfer to Fixed Assets in the period Other decrease At the end of the period China Offshore Oil Research Center ,704, ,725, ,430, Self-financed 100% ERP system 189, ,004, ,193, Self-financed 100% Underwater dry pipeline maintenance system of 863 plan ,138, ,114, ,252, Source of fund Completion Percentage Self-financed /appropriation 27% Deepwater pipelaying barge 44, ,869, ,914, Self-financed 2% Upgrade and improvem ent of shallow water ditch cutter 275 1,160, , ,831, Self-financed 67% 30000T barge 5,012, , ,044, Self-financed 2% Lanjiang auxiliary crane ,489, ,925, ,414, Self-financed 100% 60Bar grouter , , ,388, Self-financed 100% Reconstruction and expansion of module stockyard 791 4,615, ,615, Self-financed 100% 63 OFFSHORE OIL ENGINEERING CO.,LTD.

71 Notes to Financial Statements T crane for construction company ,904, ,904, Self-financed 100% S-500L hydraumatic pile-driving hammer ,909, ,909, Self-financed 100% Building for testing & examination center 670 3,233, ,233, Self-financed 48% Technical service building of CNOOC Engineering ,501, ,501, Self-financed 14.90% Shallow water pipelaying barge 2,493, ,493, Self-financed 0.21% Three-roller hydraulic plate bender ,591, ,591, Self-financed 100% 36"-60" hydraulic lifting machine , ,888, ,226, Self-financed 100% Site construction of Huizhou branch ,193, ,193, Self-financed 28% Qingdao fabrication yard ,709, ,334, ,392, ,651, Self-financed 83% Chiwan fabrication yard 81, , Self-financed Total 405,171, ,119,092, ,872, ,193, ,197, (1)The increase in construction in progress is mainly due to the increase of the site construction of CNOOC Engineering (Qingdao) Co., Ltd; and the completed structure have been transferred into fixed assets in succession. (2)Other decrease in construction in progress is mainly due to the completion of ERP system and the transfer to the intangible assets. ANNUAL REPORT

72 Notes to Financial Statements Note 10: Intangible Assets Item Acquisition method Original value At the beginning of the period Increase in the period Amortization in the period Accumulated amortization At the end of the period Residual amortization months Software Procurement 33,613, ,144, ,938, ,545, ,075, ,537, Land use right Investment 7,392, ,554, , , ,418, Total 41,005, ,698, ,938, ,681, ,049, ,956, (1)The software is stated at the actual cost of outsourcing; (2)The land use right is invested by the initiators, with the book-entry value being confirmed through the valuation of China Property Consultation & Evaluation Center; (3)The increase in intangible assets is mainly due to the transfer-in of ERP system and the procurement of design software in the period. Note 11: Notes Payable Type At the end of the period At the beginning of the period Bank acceptance note 156,071, Commercial acceptance note 4,263, ,562, Total 160,334, ,562, (1)In the period, the Company paid for the fabrication yard project of CNOOC Engineering (Qingdao) Co., Ltd with bank acceptance note. (2)As at the reporting date, RMB90 million is paid upon maturity on the bank acceptance notes issued by the Company; and RMB4,263, is paid on commercial acceptance notes. No note is ovedue yet unpaid. Note 12: Accounts Payable Ageing At the end of the period At the beginning of the period Amount Percentage Amount Percentage <1 year 993,136, % 550,566, % 1-2 years 76,835, % 29,183, % 2-3 years 12,065, % 306, % > 3 years 306, % Total 1,082,344, % 580,056, % (1)The increase in accounts payable is mainly due to the rise of interim payment accounts payable for engineering projects of subcontractors. (2)Top five accounts payable amount to RMB520,698, in total, accounting for 48.11% of the balance as the end of the period. See the following for details: Entity Amount Shenzhen Chiwan Sembawang Engineering Co. Ltd. 329,802, CNOOC Oil Base Group 136,122, China Oilfield Services Limited, Tianjin Branch 23,427, Tianjin Wugang Steel Sales Co., Ltd. 17,586, Yantai Salvage 13,760, OFFSHORE OIL ENGINEERING CO.,LTD.

73 Notes to Financial Statements (3)The Company has no accounts payable to the shareholder entities which hold 5% or above shares of the Company. Note 13: Accounts Received in Advance Ageing At the end of the period At the beginning of the period Amount Percentage Amount Percentage < 1 year 504,339, % 358,164, % Total 504,339, % 358,164, % (1)As the construction contract of the Company stipulates that Party A shall pay the engineering cost in strict accordance with the milestone payment point or the image completion point determined by Party A, the difference between the accumulated cost settled as at the Balance Sheet date and the engineering revenue calculated according to the completion percentage are recognized as settled costs for uncompleted part of engineering. (2)After local deformation of the underwater structure occurred to the jacket part of Panyu 30-1 EPCI contract project on June 22, 2006, the Company stops recognizing revenues on the Panyu 30-1 EPCI contract project, and the disassembling, transportation and storage of project modular; the interim payment of RMB408,870, received on the EPCI contract project is reflected in the item of money received in advance, and relevant incurred engineering costs are reflected in the item of inventory - construction engineering. Refer to Note V /6(1) for details. (3)No accounts received in advance is from the shareholder entities which hold 5% or above shares of the Company. (4)Excluding the Panyu 30-1 EPCI contract project, details of settled yet uncompleted engineerings as of December 31, 2006 are as follows: Project Amount Indonesian SES EPCI Contract Project 28,161, Xijiang 23-1 Oilfield Development EPCI Contract Project 24,542, South China Sea FPSO Superstructure Module EPCI Contract Project Contract Project 20,831, South China Sea EPSO Single Point Installation Project 15,988, Total 89,523, Note 14: Tax Payable Item At the end of the period Amount At the beginning of the period Business tax 17,114, ,765, Urban maintenance and construction tax 6,894, ,831, Enterprise income tax 129,527, ,999, Individual income tax 1,733, , Value added tax -22,744, ,442, Others 24, , Total 132,549, ,291, Statutory tax rate 3%, 5% 1%, 7% 33% 17% (1)The items do not include the business tax and urban maintenance and construction tax borne by the sub-contractors. (2)The increase in balances of the period is mainly due to the rise of enterprise income taxes payable resulted from the growth of profits. ANNUAL REPORT

74 Notes to Financial Statements Note 15: Other Payable Item At the end of the period Payment standards Educational surcharge 2,993, % of turnover tax Flood prevention expense 115, % of turnover tax Housing provident fund 83, Comprehensive social insurance 510, Local educational expense 249, % of turnover tax Total 3,953, The increase in balances of the period is mainly due to the rise of educational additional fee. Note 16: Other Payables Ageing Amount At the end of the period At the beginning of the period <1 year 29,373, ,874, years 12,672, , years 270, ,968, > 3 years 2,847, ,648, Total 45,163, ,448, (1)Other payable of the top five entities amount to RMB33,272,338.71, accounting for 73.67% of the balance as at the end of the period; (2)The payable to shareholder entities which hold 5% or above shares of the Company are as follows: Company At the end of the period At the beginning of the period Nature of account China National Offshore Oil Corporation 10,057, Account current Note 17: Special accounts Payable Entity At the end of the period At the beginning of the period Ministry of Science and Technology of the PRC 31,740, ,740, Shanghai Jiao Tong University 1,000, ,000, Total 32,740, ,740, The balance of special accounts payable is the appropriation for the research of projects such as underwater dry pipeline maintenance system of the 863 plan. 67 OFFSHORE OIL ENGINEERING CO.,LTD.

75 Notes to Financial Statements Note 18: Deferred Tax, Credit Item Original amount At the beginning of the period Increase in the Amortization in the period period At the end of the period Income tax payable 8,688, ,186, ,117, ,069, (1)The tax payables accrued from the evaluation appreciation are amortized evenly in a period of ten years starting from May 1, 2000 based on the comprehensive adjustment method. (2)The tax payables accrued from the interests of frozen subscription fund in 2002 are amortized evenly in a period of five years starting from January 1, (3)The income tax payables have included the effect from rise of the income tax rate in the period. Note 19: Share Capital Unit: 10,000 shares Item At the beginning of the period +/- in the period At the end of the period I. Non-tradable shares 1. Shares held by initiators 3, , , Including: State-owned shares Shares held by domestic legal persons 3, , , Shares held by foreign legal persons Others 2. Legal person shares 3. Inside employee shares 4. Preferred shares and others 22, , , Non-tradable shares, total 26, , , II. Tradable shares 1. Domestic listed RMB common shares 12, , , Domestic listed foreign shares 3. Overseas listed foreign shares 4. Others Tradable shares, total 12, , , Total 39, , , (1)The Company, upon approval, implements the non-tradable share reform in the year, refers to Note I/5(2) for details. The holders of non-tradable shares undertake: all holders of non-tradable shares of the Company will strictly abide by the provisions of China Securities Regulatory Commission, and will not trade or transfer the non-tradable shares held by them in 12 months starting from the day the non-tradable shares are allowed to trade; and after the expiration of the above undertaking period, they will, through the stock exchange, trade the above shares in the proporation of no more than 5% of the Company s total shares in 12 months, an no more than 10% in 24 months. (2)According to the Profit Distribution Plan and the Plan of Increasing Capital with Undistributed Profit in 2005 passed at 2005 annual general meeting of shareholders, the Company distributed share dividends of 7 shares and cash bonus of RMB2 (including tax) for each 10 shares based on the total of 396 million shares, involving million dividend shares and cash bonus of RMB79.2 million in total; and issued additional 3 shares for each 10 shares with the capital reserve, involving million shares in total. ANNUAL REPORT

76 Notes to Financial Statements Note 20: Capital Surplus Item As at December 31, 2006 As at December 31, 2005 At the beginning of the year 686,088, ,088, Increase in the period Incl.: Stock premium Provision for equity investment in investees Other capital surplus Decrease in the period 121,136, ,000, Incl.: Stock premium 118,800, ,000, Other capital surplus 2,336, At the end of the period 564,952, ,088, Incl.: Stock premium 550,412, ,212, Provision for equity investment in investees 332, , Other capital surplus 14,207, ,543, (1)Refer to Note V/19(2) for the reasons of decrease in stock premium; (2)The decrease in other capital surplus is resulted from the payment of expenses relating to the non-tradable share reform of the Company. Note 21: Surplus Item As at December 31, 2006 As at December 31, 2005 At the beginning of the year 239,743, ,069, Increase in the period 167,187, ,673, Incl.: Statutory surplus 76,339, ,782, Statutory public welfare fund 29,891, Other surplus 90,847, Tansfer-in from offset of income tax Decrease in the period 90,847, Incl.: Statutory surplus Statutory public welfare fund 90,847, Other surplus Transfer-in from offset of income tax At the end of the period 316,082, ,743, Incl.: Statutory surplus 225,235, ,895, Statutory public welfare fund 90,847, Other surplus 90,847, Transfer-in from offset of income tax 69 OFFSHORE OIL ENGINEERING CO.,LTD.

77 Notes to Financial Statements Note 22: Undistributed Profit Item As at December 31, 2006 As at December 31, 2005 Undistributed profit at the beginning of the year 1,024,816, ,175, Plus: net profit of the period 747,338, ,314, Less: Statutory surplus 76,339, ,782, Less: Statutory public welfare fund 29,891, Less: Cash dividend 79,200, ,000, Less: Common stock dividend 277,200, ,000, Undistributed profit at the end of the year 1,339,415, ,024,816, Incl.: cash dividend to be distributed 97,200, ,200, According to the 2005 Profit Distribution Plan and the Plan of Increasing Capital with Undistributed Profit in 2005 passed at 2005 annual general meeting of shareholders, the Company distributed share dividends of 7 shares and cash bonus of RMB2 (including tax) for each 10 shares based on the total of 396 million shares, involving million dividend shares and cash bonus of RMB79.2 million in total; and issued additional 3 shares for each 10 shares with the capital reserve, involving million shares in total. VI. Notes to Major Items of the Consolidated Income Statement (in RMB) Note 1: Revenue from Main Business Item Revenue from offshore engineering EPCI contract project 4,650,229, ,702,057, Revenue from offshore engineering non-epci contract project 318,644, ,531, Including: Revenue from onshore fabrication of offshore engineering project 6,173, ,380, Revenue from offshore installation and offshore pipeline laying of offshore engineering project 140,981, ,577, Revenue from design of offshore engineering project 28,519, ,648, Revenue from maintenance of offshore engineering project 142,969, ,924, Total 4,968,874, ,258,588, Note 2: Tax and Additional on Main Business Item Business tax 66,413, ,337, Urban maintenance and construction tax 13,304, ,473, Educational additional 5,783, ,734, Total 85,500, ,544, The item does not include business tax and additional on subcontract project borne by the subcontractors. ANNUAL REPORT

78 Notes to Financial Statements Note 3: Financial Expense Item Commission expense 3,535, ,957, Exchange gains/losses 9,406, ,675, Less: interest income 7,675, ,343, Total 5,266, , The increase in financial expense is mainly due to the rise of exchange losses due to Renminbi appreciation. Note 4: Investment Income Item Equity investment income -16, ,062, Incl.: dividend received 2,078, Amortization of equitinvestment difference -16, , Debt investment income Total -16, ,062, There is no material restriction on the realization of investment and remittance of invement income. Note 5: Income Tax Item Income tax 198,920, ,321, The increase in income tax of the period is mainly due to the rise of profit before tax VII. Notes to the Consolidated Cash Flow Statement (in RMB) Note 1: Other Cash Received Relating to Operating Activities: RMB51,935, Where, major items are as follows: Item Amount Caution money deposited with customs 9,299, Insurance indemnity 18,567, Interest income 7,675, Special outlay 10,000, Current account 6,236, Note 2: Other Cash Paid Relating to Operating Activities: RMB45,753, Where, major items are as follows: Item Amount Current account 7,166, Training expense 4,691, Vehicle lease expense 3,822, Bank charges 3,535, Communication expense 6,128, Reception expense 2,501, Administrative allowance 13,435, Initial set up expense 1,018, OFFSHORE OIL ENGINEERING CO.,LTD.

79 Notes to Financial Statements VIII. Notes to Major Items of the Financial Statements of the Parent Company (in RMB) Note 1: Accounts Receivable Ageing Bad debts % At the end of the period At the beginning of the period Amount Percentage Provision Amount Percentage Provision < 1 year 5% 266,464, % 1,012, ,136, % 3,267, years 10% 1,561, % 156, , % 77, years 30% 3-5 years 50% 454, % 227, > 5 years 100% 534, % 534, , % 80, Total 268,561, % 1,704, ,448, % 3,652, (1)The Company does not take provisions for bad debts on the unexpired receivables; (2)Top five accounts receivable amount to RMB258,337, in total, accounting for 96.19% of the balance at the end of the period; (3)No accounts receivable are debts of shareholder entities which hold 5% or above shares of the Company. Note 2: Long-term Investment Type At the end of the period Amount At the beginning of the period Other equity investment 561,187, ,250, Total 561,187, ,250, (1) Details of other equity investment: Investee Percentage in registered Investment period capital of the investee Investment amount Hainan China Ocean Petroleum Platform Manufacturing Co., Ltd % 14,000, Shenzhen China Ocean Petroleum Platform Maintance & Installation Co., Ltd % 12,967, CNOOC Engineering (Qingdao) Co., Ltd % 495,000, CNOOC Finance Co., Ltd. 1.77% 25,000, Total 546,967, (2) Other equity investments measured according to equity method: Investee Initial investment At the beginning of the period Change to equity in the investee Accumulated ehange At the end of the period Hainan China Ocean Petroleum Platform Manufacturing Co., Ltd. 14,000, ,205, , ,178, ,178, Shenzhen China Ocean Petroleum Platform Maintance & Installation Co., Ltd 12,967, ,975, ,057, ,065, ,032, CNOOC Engineering (Qingdao) Co., Ltd. 495,000, ,000, ,076, ,076, ,923, Total 521,967, ,181, ,046, ,166, ,134, ANNUAL REPORT

80 Notes to Financial Statements (3)Equity Investment Difference Investee Initial amount Amortization period Amortization method Amortization in the period Accumulated Remaining amortization value Cause Hainan China Ocean Comprehensi Petroleum Platform ve Manufacturing Co., Ltd -39, adjustment -3, , , Evaluation Shenzhen China Ocean Petroleum Platform Comprehensi Maintance & Installation ve Co., Ltd 199, adjustment 19, , , Total 160, , , , Evaluation Note 3: Fixed Assets and Accumulated Depreciation Item At the end of the period At the beginning of the period Original value of fixed assets 2,546,021, ,300,965, Accumulated depreciation 1,089,083, ,558, Net value 1,456,938, ,364,407, (1)Original value of fixed assets Item At the beginning of the period Increase in the period Decrease in the period At the end of the period Buildings and structures 201,299, ,233, ,532, Special-purpose equipment 1,557,284, ,609, ,568,894, General equipment 542,381, ,430, ,217, ,594, Total 2,300,965, ,273, ,217, ,546,021, (2)Accumulated depreciation Item At the beginning of the period Increase in the period Decrease in the period At the end of the period Buildings and structures 82,023, ,391, ,414, Special-purpose equipment 559,509, ,849, ,359, General equipment 295,025, ,851, ,566, ,309, Total 936,558, ,091, ,566, ,089,083, (3) Net value of fixed assets 1,364,407, ,456,938, OFFSHORE OIL ENGINEERING CO.,LTD.

81 Notes to Financial Statements Note 4: Income of Main Business Item Revenue from offshore engineering EPCI contract project 4,650,229, ,702,057, Revenue from offshore engineering non-epci contract project 270,353, ,601, Including: Revenue from onshore fabrication of offshore engineering project 6,173, ,380, Revenue from offshore installation and offshore pipeline laying of offshore engineering project 140,981, ,577, Revenue from design of offshore engineering project 28,519, ,648, Revenue from maintenance of offshore engineering project 94,678, ,994, Total 4,920,583, ,225,659, Note 5: Investment Income Item Equity investment income -2,062, ,561, Incl.: dividends received 2,078, Change to equity in the investee during the adjustment at the end of the year -2,046, ,498, Amortization of equity investment difference -16, , Debt investment income Total -2,062, ,561, There is no material restriction on the realization of investment and remittance of invement income Note 6: Income Tax Item Income tax 195,690, ,201, Note 7: Other Cash Paid Relating to Investment Activities: RMB800,097, Other cash paid relating to investment activities is paid by the Company for the project costs of construction in progress on behalf of the CNOOC Engineering (Qingdao) Co., Ltd during its new construction period. IX.Connected Persons and Connected Transactions 1. Basic Information of Connected Persons ANNUAL REPORT

82 Notes to Financial Statements (1) Connected Persons Subject to Control Relationship Company Registered address / capital Main business Relationship with Legal Economic nature the Company representative China National Offshore Oil Corporation Exploration, development, production Beijing, China / and processing of offshore RMB50 billion oil and natural gas Parent company State-owned enterprise Fu Chengyu (2) Connected Persons Not Subject to Control Relationship Company CNOOC Nanhai West Corporation CNOOC Bohai Corporation CNOOC Donghai Corporation CNOOC China Limited China Oilfield Services Limited CNOOC-Shell Petrochemicals Co., Ltd ACT OPERATOR S GROUP CNOOC Finance Co., Ltd. CNOOC Oil Base Group Ltd CNOOC Refining & Chemical Engineering Co., Ltd CNOOC Gas & Power Limited CNOOC Enterprises Corporation Shenzhen China Ocean Petroleum Platform Maintance & Installation Co., Ltd Hainan China Ocean Petroleum Platform Manufacturing Co., Ltd. CNOOC Engineering (Qingdao) Co., Ltd. Relationship with the Company Holding 8.60% shares of the Company Holding 0.36% shares of the Company The same parent company The same parent company The same parent company The same parent company The same parent company The same parent company The same parent company The same parent company The same parent company The same parent company Subsidiary Subsidiary Subsidiary 2. Connected Transactions (1)The Company provides connected persons with professional production services such as design, installation and construction etc., and determines contract prices through public bidding or negotiation in accordance with the market principle. Relevant professional services provided in the reporting period are as follows: Connected Company CNOOC China Limited 3,343,465, ,195,855, CNOOC Nanhai West Corporation CNOOC Bohai Corporation 60,438, CNOOC-Shell Petrochemicals Co., Ltd 26,288, ,907, CNOOC Oil Base Group Limited 167,413, ,824, China Oilfield Services Limited 3,648, CNOOC Refining & Chemical Engineering Co., Ltd. 4,644, , CNOOC Gas & Power Limited 9,775, ,625, ACT OPERATOR S GROUP 36,279, ,672, OFFSHORE OIL ENGINEERING CO.,LTD.

83 Notes to Financial Statements (2)The subcontract projects completed by connected companies as the subcontractors of the Company are as follows: Company CNOOC Bohai Corporation 1,977, ,947, CNOOC Nanhai West Corporation 12,924, China Oilfield Services Limited 50,925, CNOOC Oil Base Group Limited 98,097, ,287, Shenzhen China Ocean Petroleum Platform Maintance & Installation Co., Ltd 54,239, ,981, CNOOC Engineering (Qingdao) Co., Ltd. 63,202, (3)In accordance with the connected transaction contracts entered into between the Company and the connected companies, the CNOOC Oil Base Group Limited and China Oilfield Services Limited of China National Offshore Oil Corporation provide such service as transportation, vessel, fuel, water and electricity in the period. See the following for details: Connected company Content of transaction CNOOC Bohai Corporation Service fee 14,461, ,796, Transportation service 9,820, ,300, Sub-total 24,282, ,096, China Oilfield Services Limited Vessel service 66,797, ,056, Engineering construction 900, Sub-total 67,697, CNOOC Enterprises Corporation Service fee 121, Engineering construction 3,037, Sub-total 3,159, CNOOC China Limited Service fee 60, , CNOOC Oil Base Group Limited Service fee 70,817, ,302, Engineering construction 629,366, ,358, Transportation service 17,189, ,683, Fuel expense 50,502, ,842, Water & electricity expense 20,898, ,839, Sub-total 788,774, ,024, CNOOC Donghai Corporation Service fee 28,654, (4)Deposits with Connected Companies As at the end of the reporting period, the deposits the Company puts in connected company is as follows: Company At the end of the period At the beginning of the period CNOOC Finance Co., Ltd. 293,637, ,086, ANNUAL REPORT

84 Notes to Financial Statements (5)Interest from Deposits with Connected Companies The interest eanred on deposits with connected companies in the reporting period is as follows: Company CNOOC Finance Co., Ltd. 2,939, ,929, The interest rate for deposits the Company puts in the connected companies adopts relevant provisions of the People s Bank of China (6)Investment in Connected Companies and Relevant Investment Income Company Investment at the end of the period Investment income in 2006 CNOOC Finance Co., Ltd. 25,000, Accounts Payable: Company At the end of the period At the beginning of the period CNOOC Bohai Corporation 9,051, ,790, China Oilfield Services Limited 23,427, ,628, CNOOC Oil Base Group Limited 136,122, ,505, Shenzhen China Ocean Petroleum Platform Maintance & Installation Co., Ltd 43,863, ,233, CNOOC Engineering (Qingdao) Co., Ltd. 23,202, CNOOC China Limited 828, CNOOC Enterprises Corporation 1,439, Account Current with Connected Persons Accounts Receivable : Company At the end of the period At the beginning of the period CNOOC China Limited 169,981, ,342, CNOOC Bohai Corporation 666, China Oilfield Services Limited 8,793, ,647, ACT OPERATOR S GROUP 12,009, ,662, CNOOC-Shell Petrochemicals Co., Ltd 50,256, CNOOC Oil Base Group Limited 12,433, ,908, CNOOC Gas & Power Limited. 2,870, Notes payable: Company At the end of the period CNOOC Oil Base Group Limited 156,071, Other receivable: Company At the end of the period At the beginning of the period At the beginning of the period Shenzhen China Ocean Petroleum Platform Maintance & Installation Co., Ltd 4,267, ,243, CNOOC Engineering (Qingdao) Co., Ltd. 916,137, OFFSHORE OIL ENGINEERING CO.,LTD.

85 Notes to Financial Statements Other payable: Company At the end of the period At the beginning of the period China National Offshore Oil Corporation 10,057, Shenzhen China Ocean Petroleum Platform Maintance & Installation Co., Ltd 17, Hainan China Ocean Petroleum Platform Manufacturing Co., Ltd 5,882, ,012, X. Contingencies After local deformation of the underwater structure occurred to the jacket part of Panyu 30-1 EPCI contract project on June 22, 2006, the Company launched emergency plan immediately and took active and effective measures. Later on, to ensure the safety of the platform and minimize property losses, the Company, upon entrustment of Party A, took effective remedial measures, removed the superstructure module of the project and appropriately kept and maintained the modules. The Company also made efforts together with Party A and other parties to carry out investigation and subsequent matters. At present, the investigation is in progress. Meanwhile, in order to put the gas field into operation successfully, Party A decided to make advance payment to build the jacket of Panyu 30-1 EPCI Contract Project. Entrusted by Party A, the Company has started preparing for the building of the jacket for Panyu 30-1 gas field, the manufacturing of jacket is arranged at Qingdao fabrication yard. XI. Undertakings On December 20, 2006, CNOOC Engineering (Qingdao) Co., Ltd, subdiary of the Company, signed an agreement on Phase III of the CNOOC Engineering (Qingdao) fabrication yard project with the Management Committee of Qingdao Economic and Technical Development Zone. The project is expected to be completed in Phase III mainly involves fabrication and maintenance of deepwater & shallow water fixed platform and float system facilities, with a total investment of RMB1.34 billion. To implement the project mentioned above, CNOOC Engineering (Qingdao) Co., Ltd will increase the registered capital by RMB500 million. XII. Events after the Balance Sheet Date According to the 2006 Profit Distribution Plan adopted at the 20th meeting of the 2nd Session of Board of Directors, the Company plans to distribute share dividend of 2 shares and cash bonus of RMB1 (including tax) for each 10 shares based on the total of 792 million shares, which will increase the Compnay s total share capital to million shares upon the completion. The cash dividend distributed will amount to RMB79.2 million in total. Before the execution, the distribution plan shall be presented to the 2006 general meeting of shareholders for review. XIII. Other Significant Events As of December 31, 2006, the Company has no other significant matters to be disclosed. ANNUAL REPORT

86 Notes to Financial Statements XIV. Supplementary Information 1. Non-recurring Gains/Losses Item Net profit 747,338, ,314, Less: Non-operating income 281, , Subsidy income 109, , Plus: Non-operating expense 3,544, , Plus: effect of income tax -907, , Net profit after deduction of non-recurring gains/losses 749,584, ,320, In accordance with the Circular on Issues Concerning Disclosure of Financial and Accounting Information Relating to the New Accounting Standards (ZH.J.F. [2006] No.136), due to the initial implementation of the new enterprise accounting standards, the shareholders equity is adjusted as follows: Item Amount Shareholders equity as of December 31, 2006 (under present accounting standards) 3,012,450, Long-term equity investment difference Incl.: Long-term equity investment difference due to merger of enterprises subject to control of the same person Other long-term equity investment credit difference measured according to the equity method -53, Investment real estate to be calculated at fair value Predicted expense on assets discard The dismissal welfare which meets the recognition doncidtions for predicted liabilities -6,187, Payment of shares for which the exercise date is set on the initial execution date or afterwards Debt restructuring liability which meets the recognition conditions for predicted liabilities Merger of enterprises Incl.: original book value of the goodwill due to merger of enterprises subject to control of the same person The contingent merger cost which can be measured reliably on the initial execution date The provisions for devaluation of goodwill taken on the initial execution date in accordance with new accounting standards Financial assets measured at fair value and the change of whose fair value is recognized in the incomes statement for the period Financial liabilities measured at fair value and the change of whose fair value is recognized in the incomes statement for the period Financial derivatives Income tax -19,838, Minority interests 2,082, Incl.: shareholders equity increased due to split of compound financial instrument Shareholders equity as at December 31, 2006 ( under the new accounting standards) 2,988,452, Offshore Oil Engineering Co., Ltd March 12, OFFSHORE OIL ENGINEERING CO.,LTD.

87 Notes to Financial Statements Supplementary Information to Financial Statements Details of Provisions for Devaluation of Consolidated Assets January - December, 2006 Assets Reversal in the year Decrease due to other reasons I. Provision for bad debts, total 4,160, , , ,203, Including: receivables 3,995, , ,014, Other receivables 165, , , II. Provision for depreciation of short-term investments, total Including: Stock investment Bond investment III. Provision for inventory depreciation, total 7,733, ,557, ,946, , Including: raw materials 3,176, ,946, , Packaging materials Low-value consumables Predicted loss on contract 4,557, ,557, Ⅳ. Provision for devaluation of long-term investments, total Including: Long-term equity investment Long-term debt investment Ⅴ. Provision for fixed asset devaluation, total Including: Buildings and structures Machinery equipment Transportation equipment Other equipment Ⅵ. Provision for devaluation of intangible assets Including: use right Trade marks Ⅶ. Provision for devaluation of construction in progress Ⅷ. Provision for devaluation of entrusted loans Including: long-term loans Short-term loans At the beginning of the year Increase in the year Decrease in the year At the end of the year Total impairment provisions 11,894, , ,537, ,946, ,433, Person in charge of the Company: Zhou Shouwei Person in charge of accounting affairs: Lin Rongqing Person in charge of the accounting department: Xie Hongjun ANNUAL REPORT

88 Notes to Financial Statements Details of Provisions for Asset Devaluation of the Parent Company January - December, 2006 Assets Reversal in the year I. Provision for bad debts, total 3,749, ,948, ,801, Including: receivables 3,652, ,948, ,704, Other receivables 96, , II. Provision for depreciation of short-term investments, total Including: Stock investment Bond investment III. Provision for inventory depreciation, total 7,733, ,557, ,946, , Including: raw materials 3,176, ,946, , Packaging materials Low-value consumables Predicted loss on contract 4,557, ,557, Ⅳ. Provision for devaluation of long-term investments, total Including: Long-term equity investment Long-term debt investment Ⅴ. Provision for fixed asset devaluation, total Including: Buildings and structures Machinery equipment Transportation equipment Other equipment Ⅵ. Provision for devaluation of intangible assets Including: use right Trade marks Ⅶ. Provision for devaluation of construction in progress At the beginning of the year Increase in the year Decrease in the year At the end of the year Ⅷ. Provision for devaluation of entrusted loans Including: long-term loans Short-term loans Total devaluation provisions 11,483, ,505, ,946, ,031, Person in charge of the Company: Zhou Shouwei Person in charge of accounting affairs: Lin Rongqing Person in charge of the accounting department: Xie Hongjun 81 OFFSHORE OIL ENGINEERING CO.,LTD.

89 Section 12 Contents of Reference Documents I.Accounting statements bearing the signatures and seals of the legal representative, person in charge of the accounting fairs and person in charge of the accounting department II.Original of the auditors report bearing the seal of the accounting firm, the signature and seal of certified public accountants III.Reserved copies of all corporate documents and originals of all announcements publically disclosed on the newspapers designated by CSRC in the reporting period. Board of Directors of Offshore Oil Engineering Co., Ltd Chairman of the Board of Directors: March 12, 2007 ANNUAL REPORT

90 Written Confirmation on 2006 Annual Report from Directors and Senior Management of Offshore Oil Engineering Co., Ltd In accordance with Article 68 of the Securities Law and relevant provisions in the Standards for the Content and Form for Information Disclosure by Companies Issuing Securities to the Public No 2: Content and Form of Annual Report (revised in 2005), as directors and senior management members of the Company, we fully understood and reviewed the 2006 annual report, and believed that, the Company has strictly abided by the Accounting System for Business Enterprises and the Accounting Standards for Business Enterprises of the people s Republic of China; the 2006 Annual Report of Offshore Oil Enginnering Co., Ltd audited by ShineWing Certified Public Accountants truly and objectively reresents the Company s business performance in We warrant the information disclosed in the 2006 Annual Report is authentic, accurate and complete, without any false records, misleading statements or major omissions. We assume individual and joint and several responsibilities for the truthfulness, accuracy and completeness of the contents in the report. Signature: Chairman of the Board of Directors: Zhou Shouwei Director, President: Jiang Xizhao Director: Hu Chang an Director:Wang Zhong an Director: Xu Yongchang Director: Huang Daya Independent Director: Li Wei an Independent Director: Yang Jun Independent Director : Han Chuanmo Vice President: Zhang Songfu Vice President: Chen Wenjin Chief Engineer: Fang Xiaoming Vice President: Wang Tao Chief Financial Officer: Lin Rongqing Secretary of the Board of Directors:Liu Lianju March 12, OFFSHORE OIL ENGINEERING CO.,LTD.