CHINA PETROLEUM & CHEMICAL CORPORATION ANNUAL REPORT AND ACCOUNTS 2000

Transcription

1 CHINA PETROLEUM & CHEMICAL CORPORATION ANNUAL REPORT AND ACCOUNTS 2000

2 COMPANY PROFILE CHINA PETROLEUM & CHEMICAL CORPORATION ( SINOPEC CORP. ) IS AN INTEGRATED ENERGY AND CHEMICAL COMPANY WITH UPSTREAM, MIDSTREAM AND DOWNSTREAM OPERATIONS. THE BUSINESSES OF SINOPEC CORP. AND ITS SUBSIDIARIES INCLUDE: exploring and developing, producing and trading crude oil and natural gas processing crude oil into refined products, producing refined products and trading, transporting, distributing and marketing refined products producing, distributing and trading petrochemical products Based on the sales revenues in 2000 Sinopec Corp. and its subsidiaries (collectively, the Company ) are: the largest petroleum and petrochemical company in China and one of the largest in Asia the largest refiner and distributor of gasoline, diesel, jet fuel and most other major refined products in China and in Asia the second largest producer of crude oil and natural gas in China The Company s competitive strengths are grounded on: its commanding market share in the production and sale of refined products its status as the largest petrochemical producer and supplier in China its strategic market position in China s highest growth areas its well established and extensive network of relatively cost-effective sales and distribution channels its integrated operation s ability to reduce the effects of industry cycles its long-standing brand name and reputation its management s extensive experience in managing petroleum and petrochemical companies its research institutes development of much of China s refining and petrochemical technology its status as a domestic partner of choice for many large international petroleum and petrochemical companies for projects in China Since the listings of Sinopec Corp s H shares on the Stock Exchange of Hong Kong, and its ADSs on the New York Stock Exchange and the London Stock Exchange in October 2000, the Company has been more focused than ever to improve its return on capital employed (ROCE) and increase shareholders value and return, and is determined to capture profitable growth and expansion opportunities, centralise and rationalise its capital allocation and investment activities, improve the use of resources, develop and effectively deploy technologies and human resources and improve its overall competitive position and strengths. In 2001, the Company aims to achieve new breakthroughs in expanding resources and markets, reducing cost and disciplining capital expenditures. In the new century, the Company will strive to become an integrated world class energy and chemical company with outstanding core businesses, quality assets, state of the art technologies, professional management, disciplined financial practice, and improved competitive strength in the global market Exploration and Production 2 Refining 3 Marketing and Distribution 4 Chemicals 3 4

3 FINANCIAL HIGHLIGHTS EXTRACTED FROM THE ACCOUNTS PREPARED IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS Year ended 31 December Turnover and other operating revenues 328, , , ,727 Operating expenses Purchased crude oil, products and operating supplies and expenses (226,137) (160,843) (134,406) (154,563) Selling, general and administrative expenses (19,282) (18,337) (16,795) (18,165) Depreciation, depletion and amortisation (20,050) (17,905) (15,631) (13,022) Exploration expenses, including dry holes (2,883) (2,387) (2,614) (2,215) Personnel expenses (13,007) (12,456) (11,377) (11,026) Taxes other than income tax (12,183) (9,508) (8,637) (8,444) Other operating expenses, net (555) (3,183) (3,205) (2,962) Total operating expenses (294,097) (224,619) (192,665) (210,397) Operating profit 34,804 15,380 6,002 14,330 Net finance costs (4,843) (10,224) (11,109) (8,171) Gains from issuance of shares by subsidiaries 607 2,114 1,627 Investment income Share of profit less losses from associates and jointly controlled entities Profit/(loss) from ordinary activities before taxation 30,196 6,506 (2,209) 8,494 Taxation (9,399) (277) 2,357 (1,708) Profit from ordinary activities after taxation 20,797 6, ,786 Minority interests (1,793) (1,557) (450) (825) Profit/(loss) attributable to shareholders 19,004 4,672 (302) 5,961 Basic and diluted earnings/(loss) per share (Note i) RMB 0.26 RMB 0.07 RMB (0.00) RMB 0.09 Earnings/(loss) per share (based on the issued shares as at year end) (Note ii) RMB 0.23 RMB 0.07 RMB (0.00) RMB 0.09 Note i: The calculation of basic and diluted earnings/(loss) per share is based on the profit/(loss) attributable to shareholders and the weighted average number of shares in issue during the year of 71,936,025,585 (1997 to 1999: 68,800,000,000) as if the 68,800,000,000 shares issued and outstanding upon the legal formation of the Company on 25 February 2000 had been outstanding for all years presented. The weighted average number of shares for the year ended 31 December 2000 also reflects the issuance of 15,102,439,000 shares in October 2000 in connection with Sinopec Corp.'s initial public offering. 2/3 Sinopec Corp. Annual Report and Accounts 2000 Note ii: The calculation of earnings/(loss) per share (based on the issued shares as at year end) is based on the profit/(loss) attributable to shareholders and the number of shares issued as at year end of 83,902,439,000 (1997 to 1999: 68,800,000,000).

4 +37.04% % % Turnover and other operating revenues for the year increased by 37.04% to RMB 328,901 million Profit attributable to shareholders increased by 306.8% to RMB 19,004 million Basic and diluted earnings per share for the year increased by 271.4% to RMB % 2% 4% 6% 8% 10% % % Returns on capital employed (After tax operating profit/capital employed) At 31 December RMB million RMB million RMB million Current assets 134,208 87, ,095 Non-current assets 213, , ,132 Total assets 347, , ,227 Current liabilities 123, , ,641 Non-current liabilities 70,883 43,172 87,304 Total liabilities 194, , ,945 Minority interests 22,982 21,873 15,930 Shareholders' funds 129,871 87,120 71,352 Total liabilities and shareholders' funds 347, , ,227

5 CHAIRMAN S STATEMENT To all shareholders: Year 2000 was of historic significance to both China Petroleum & Chemical Corporation ( Sinopec Corp. ) and the petroleum and petrochemical industry in China. On February 25, 2000, Sinopec Corp. was established with the core business assets injected by China Petrochemical Corporation. As a result, Sinopec Corp. became an integrated energy and chemical company with upstream and downstream operations that were particularly distinguished in the refining and chemical businesses. On October 18 and 19, 2000, Sinopec Corp. successfully simultaneously listed its H shares on the Hong Kong Stock Exchange and its ADRs on the New York Stock Exchange and the London Stock Exchange in an initial public offering, being the first Chinese company ever to do so. Since Sinopec Corp. s IPO, Sinopec Corp. has been more focused than ever on improving shareholders value and is determined to discipline its capital expenditure and pursue higher returns on capital employed ( ROCE, defined as after tax operating profit divided by the amount of capital employed). In particular, Sinopec Corp. and its subsidiaries (collectively, the Company ) introduced a modern management information system, improved operating efficiency and centralised investment decisions in order to establish a modern enterprise system. Thanks to the great efforts of all of the Company s employees, the Company achieved impressive growth in all its principal businesses in 2000, with significantly improved operating results that meet all the targets set by the Company to maximise shareholders value. 4/5 Sinopec Corp. Annual Report and Accounts 2000 In 2000, turnover and other operating revenues of the Company amounted to RMB billion, up by 37.04% from 1999; and the earnings of the Company reached RMB billion, up by 306.8% or RMB billion from The basic and diluted earnings per share were RMB 0.26 (based on the weighted average of 71,936,025,585 shares), and the earnings per share based on the number of issued shares as at the year end, being 83,902,439,000 shares, were RMB The return on capital employed Mr Li Yizhong, Chairman

6 (ROCE) rose from 5.12% in 1999 to 10.03% in The Board of Directors hereby proposes a final dividend of RMB 0.08 per share for the year 2000, totalling RMB 6,712 million. Year 2000 was full of challenges as well as opportunities for the Company. World crude oil and refined products prices fluctuated in an unprecedented wide range. Under the circumstances, the pricing system prior to June 2000 in China for refined products exerted immense pressure upon the Company s earnings. Partly as a result of the Company s lobbying efforts, the State Development and Planning Commission, having linked the domestic crude price to the international market in 1998, started in June 2000 to stipulate and publish on a monthly basis retail guidance prices for gasoline and diesel with reference to the FOB prices in the Singapore market. As a result, since then, refined product prices have more closely reflected current international market prices, relieving to a great extent the pressure upon the Company s earnings caused by the relatively low domestic product prices that had lagged behind the escalating international crude prices. In 2000, the Company processed a total of million tonnes of crude oil, up by 19.6% over The Company intensified its exploration initiatives in an effort to improve its reserve replacement and to balance reserves and production. At the same time, by sticking to its principle of purchasing multiple types of crude oil from various sources through diversified channels, the Company managed to mitigate the impact of crude price fluctuation upon its earnings. The Company focused on the fast growth of its ROCE as its primary goal in The Company seized the opportunities of market expansion by increasing capital expenditure in the marketing and distribution segment. The Company acquired a great number of well-positioned storage facilities and petrol stations to expand its retail volume, which further enhanced its market position. At the same time, to seize the opportunity presented by the high international crude oil price, the Company selectively expanded its exploration and production operations. The Company increased its sour crude processing capacities to reduce crude cost, and intensified its internal management to reduce cash operating expenses. In addition, the Company centralised the decision making process for its capital expenditure plans. Every project, including the timing of the project, was to be scrutinised before approval to maximise return on investment. As a result of the Company s efforts in products marketing, resources expansion, cost cutting, and its disciplined approach to investment, the Company achieved very satisfactory results in its businesses in With respect to exploration and production, the Company captured the opportunity presented by the high crude oil prices by increasing its capital expenditure to RMB 14,550 million (accounting for 34.2% of the total capital expenditure) to develop reserves that had been difficult to exploit but which offered good potential. As a result, oil production in 2000 reached million barrels, up by 0.78% over 1999; natural gas production reached 80.3 billion cubic feet, up by 2.16% over 1999; proved reserves of crude oil reached 2,952 million barrels, up by 2.5% over 1999; and proved reserves of nature gas reached 999 billion cubic feet, up by 28% over With respect to refining, the Company invested RMB 5,511 million (accounting for 12.94% of the Company s total capital expenditure) mainly to expand its sour crude processing capacity by 6 million tonnes per year. Both refinery throughput and refined product output reached record highs, and the refining capacity utilisation rate rose from 67.7% in 1999 to 81% in In order to better meet domestic market demand, the Company further increased its diesel to gasoline production ratio, and increased the production of cleaner burning gasoline. With respect to the marketing of refined products, the Company expanded its retail market share through increased acquisitions of petrol stations. Oil storage facilities and petrol stations with the Sinopec logo were present in all major cities and along important roads in the Company s principal market. In 2000, capital expenditure on the construction and acquisition of petrol stations and storage facilities reached RMB 16,080 million, accounting for 37.8% of the Company s total capital expenditures. With retail sales volume doubled, the percentage of

7 CHAIRMAN S STATEMENT (CONTINUED) 6/7 Sinopec Corp. Annual Report and Accounts 2000 retail sales in the Company s total sales volume of refined products increased from 19.4% in 1999 to 35.7% in At the end of 2000, the Company had approximately 25,493 petrol stations that sell under the Sinopec brand, among which approximately 20,259 stations were operated by the Company, representing an increase of 78.1% over 1999, and approximately 5,234 stations were franchised by the Company. With respect to chemicals, the Company invested RMB 6,205 million (14.6% of the total capital expenditure) in revamping and expanding a number of chemical facilities. Through increased utilisation of facilities, the Company increased its production of synthetic resins by 12%, monomers and polymers for synthetic fibers by 10% and synthetic fibers by 10%. In addition, the Company increased its production of higher value-added products. Compared to 1999, production of performance compounds for synthetic resins increased by 47%, and production of differential fiber increased by 46%. The production ratio for performance compounds for synthetic resins increased by 9.4 percentage points from 30.3% in 1999 to 39.7% in 2000, and the production ratio for differential fiber increased by 6.5 percentage points from 20% in 1999 to 26.5% in Sales to production ratio for petrochemical products was almost 100%. In 2000, the Company continued to strengthen and expand its foreign cooperation. The Company developed further strategic alliances and partnerships with multinational companies, including Royal Dutch Shell, Exxon Mobile, bp and ABB. The Company established a joint venture company with BASF in Nanjing (BASF Yangzi Petrochemical Company Limited) to build a world-class integrated ethylene facility. A number of other major joint venture projects are also in preparation. Such cooperation will help the Company bring in state of the art technologies and managerial expertise from foreign companies to further enhance the Company s competitive strength. In 2001, maximisation of ROCE will remain the Company s primary goal. The Company intends to make further breakthroughs in expanding resources and markets, reducing cost and disciplining capital spending. Expanding resources: The Company fully recognises the ever-growing importance of stable and reliable domestic and international crude oil supplies in a competitive market. The Company will, in accordance with the principle of pursuing well-coordinated production, economic results and reserves, apply enhanced recovery technologies in existing fields to stabilize and optimise production, increase its investment in oilfields in eastern China and selectively choose new exploration areas for replacement of reserves. The Company will also maintain long-term supply contracts with overseas crude oil producers in line with the principle of importing multiple types of crude oil from various regions through diversified channels. In addition, the Company intends to acquire Sinopec National Star Petroleum Company ( Sinopec Star Petroleum ), a whollyowned subsidiary of Sinopec Group, within this year to further reinforce its upstream strength. Expanding market: In respect of refined products marketing, the Company will accelerate its construction and improvement of storage facilities, pipelines and retail networks, increase the site throughput of its petrol stations; the Company will also further improve its marketing information management system and reinforce the analysis of market dynamics to improve economic results. In respect of the marketing of chemicals, the Company will set up more effective direct sale and distribution networks, raise the percentage of direct sales, and develop the market for higher-value added products such as performance compounds for synthetic resins and differential fibers. In addition, the Company will promote e-commerce and take advantage of the scale of its business and unique strengths to create business opportunities and further reduce transaction costs. Reducing cost: The Company will devise feasible cost-reduction plans. Apart from reducing the costs of its principal raw materials such as crude oil, the Company will focus on specific measures such as reducing material and energy consumption, increasing utilisation of its facilities, and cutting sales expenses, general and administrative expenses. Overall the Company expects to reduce costs by as much as RMB 2,190 million in Detailed plans have been defined for each business segment and

8 subsidiary, requiring each level of business operation unit to be accountable for earnings improvement. In addition, the Company will implement an employee reduction plan. The Company intends to cut 100,000 employees from its payroll between 2001 and 2005, including 27,000 employees in Disciplining capital spending: Targeting to increase return on investment, the Company will centralise its decision making processes, optimise investments, and adjust its capital structure to improve overall competitive strength. The current capital expenditure plan for 2001 is RMB billion. The corporate headquarter will devise the overall development program, and will work out a corporate five-year plan during The Company will further standardise its investment decision processes, avoid redundant constructions and investments that are not carefully planned, and invest in business segments and projects that will generate high growth and high returns for the Company. Since Sinopec Corp. s IPO, in an effort to adhere to the best practice of an internationally listed company, the Company has been promoting a completely new corporate culture which can be highlighted as follows: a management philosophy of competition and openness, where competition is the driver of and openness is the fuel to the Company s growth; a business strategy of expanding markets and resources, reducing costs to maximise profitability, where the Company shall work for the market, wisely locate the resources and constantly pursue cost-saving and better profitability; an operating principle of standardisation, discipline and integrity, which calls for both the employees professional ethics and the Company s credibility; an incentive system of encouraging self-motivation through proper reward, where the Company intends to create equal opportunities for its employees in an employee friendly environment. In 2001, the Company is confident that, with the continuing efforts from its employees, the Company will be able to meet its operating targets. Well-positioned in a market with fast growth potential, the Company strives to become a world-class integrated energy and chemical company with prominent core business, quality assets, state of the art technologies, professional management and disciplined financial practice, and bring stable and sustained growth in returns to its shareholders. Finally, on behalf of the Board of Directors, I extend my sincere appreciation to all of the employees of the Company, and to all of the shareholders, for their support to the Company. Li Yizhong Chairman Beijing, the PRC 12th April, 2001 an operating goal of maximising return on investment (ROI) and shareholders return where maximising ROI is the Company s target, and maximising shareholders return is the shareholders hope and the Company s intention; an operating mechanism of market-oriented external operation, and synergetic internal operation ;

9 8/9 Sinopec Corp. Annual Report and Accounts 2000

10 BUSINESS REVIEW AND PROSPECTS I. BUSINESS REVIEW In 2000, China s economy maintained a healthy and stable development, with a GDP growth rate of 8%. Correspondingly, domestic demand for oil and petrochemical products continued to grow. Being the largest integrated energy and chemical company in China, the Company captured the opportunities presented by these favorable market conditions. Thanks to its meticulous efforts, the Company s 2000 business results outshone the 1999 performance significantly, with an operating profit of RMB billion an increase of 126.3% over Product Market Review Refined oil products: In 2000, domestic demand for oil products maintained its growth momentum, with total national consumption of gasoline, diesel and kerosene reaching million tonnes, up by 4.8% over The Chinese government continued its suspension of gasoline and diesel imports, and started in June 2000 to stipulate and promulgate retail-guidance prices for gasoline and diesel on a monthly basis with reference to FOB prices in the Singapore market. As a result, refined products prices in China have since more closely reflected price changes in the international market. Chemicals: Domestic demand for chemicals was also relatively strong in China had to import a significant amount of chemicals to make up the shortage in domestic supply. Consumption of synthetic resin, synthetic fiber, monomers and polymers for synthetic fiber and synthetic rubber reached million tonnes, 7.87 million tonnes, million tonnes, and 1.52 million tonnes, Mr. Wang Jiming, Director and President showing increases of 17.52%, 16.25%, 20.98% and 11.76% over 1999 respectively. The domestic market for chemicals has long been opened for foreign participation. Free from government control, prices of chemicals fluctuate concurrently with the international market. 2. Crude Market Review: In 2000, the international market saw the crude oil price fluctuate over a wide range. Daily Brent once climbed to a ten-year high, and the year ended with a Platt s Singapore average spot quote of US$ 28.54/bbl, representing a sharp increase of 58.26% over Because the domestic crude price was linked to the international market, crude oil prices also fluctuated widely in the home market in In 2000, China produced million tonnes and imported, net of exports, million tons of crude oil, representing growth of 1.0% and 102.8% over 1999, respectively.

11 10/11 Sinopec Corp. Annual Report and Accounts 2000 EXPLORATION & PRODUCTION THE COMPANY EXPLORES FOR, DEVELOPS AND PRODUCES CRUDE OIL AND NATURAL GAS IN 13 PROVINCES, CITIES AND AUTONOMOUS REGIONS IN CHINA. IN 2000, APPROXIMATELY 26% OF THE COMPANY S REFINING AND CHEMICAL OPERATIONS CRUDE OIL REQUIREMENTS WERE PROVIDED BY THE COMPANY S OWN CRUDE OIL EXPLORATION AND PRODUCTION OPERATIONS.

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13 12/13 Sinopec Corp. Annual Report and Accounts 2000

14 BUSINESS REVIEW AND PROSPECTS (CONTINUED) 3. Performance Review by Business Segments: In 2000, with its market orientation, the Company aggressively expanded its market share, optimised its allocation of resources, actively reduced cost of production, adjusted products structure, and achieved satisfactory results in all segments of its businesses. Exploration and Production Segment In 2000, the Company increased its exploration activities to discover new reserves. To take advantage of the high crude price prevailing in 2000, the Company exploited reserves which would have been unprofitable or marginally profitable at a lower crude price. Oil and gas production was relatively stable in 2000, reversing the slightly declining trend experienced in the past few years. For the fourth consecutive year, the Company had a greater than one annual reserves replacement ratio. Refining Segment In 2000, the refining segment adjusted its business strategy in accordance with the market situation, optimised its crude sourcing structure and increased refinery throughput, especially with respect to less expensive sour crude, to improve profitability. In 2000, the Company s refining throughput accounted for 52.1% of the national total, with various operational performance ratios improved significantly. Operation Summary of Exploration and Production Segment Change, % Oil production (mmbbls) Natural gas production (bcf) Added proven oil reserves (mmbbls) Added proven gas reserves (bcf) Year end proved reserves of crude oil (mmbbls) 2,952 2, Year end proved reserves of natural gas (bcf) Year end proved reserves of oil and gas (mmboe) 3,118 3, Crude Sourcing Structure (1,000 t.) Change, % Self-supply 27,390 27, Sinopec Group 160 NA NA PetroChina 16,560 20, CNOOC 5,170 7, Import 58,920 34, Total 108,200 89, Operation Summary of Refining Segment Change, % Crude throughput, mm bbl/day Sour crude throughput, mm bbl/day Refinery utilisation, % pct. points Gasoline, diesel and kerosene production, mm t Light product yield, % pct. points Composite commercial yield, % pct. points

15 14/15 Sinopec Corp. Annual Report and Accounts 2000 REFINING THE COMPANY IS THE LARGEST REFINER OF CRUDE OIL IN CHINA PRODUCING GASOLINE, DIESEL, JET FUEL, LUBRICANTS, FUEL OIL, VARIOUS PETROCHEMICAL FEEDSTOCK AND OTHER REFINED PRODUCTS. IN 2000, THE COMPANY OPERATED 25 REFINERIES AND PROCESSED MILLION TONNES OF CRUDE OIL ACCOUNTING FOR 52.1% OF CHINA S REFINING THROUGHPUT.

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17 BUSINESS REVIEW AND PROSPECTS (CONTINUED) Marketing and Distribution Segment In 2000, the Company further strengthened its efforts in acquiring, building and renovating service stations and in acquiring strategically located storage facilities in order to expand its market share. These efforts significantly improved the Company s market position and competitive edge. In 2000, sales volume of refined products accounted for 62% of the national total and 86% in the Company s principal market. In 2000, with a fully-fledged marketing network in position, the average annual pumped volume per station increased by 29.3% over 1999, and the Company s retail sales volume doubled in 2000 compared with The Company s share of gasoline and diesel retail market in the nation and in its principal market reached 46.6% and 61%, respectively. As a result, the Company s retail strength was further consolidated and reinforced. Chemicals Segment In 2000, the Company s major chemical and chemical fiber facilities were all running at high load. The production of all chemicals substantially increased compared to 1999 with the exception of synthetic rubber and urea. In response to the market demand, the Company increased its production of highvalue added products, and temporarily shut down a few of fertiliser facilities. The Company also improved the operating performance ratio of most of its chemical facilities. Compared with 1999, the ethylene yield rate increased by 0.19 percentage points. Through optimisation of ethylene feedstock, the Company replaced 600,000 tonnes of light diesel that was short of supply in domestic market. Energy consumption for ethylene and other chemical facilities was reduced to various extents. In 2000, the Company unified its marketing strategy for chemicals and exerted great efforts to develop its markets. The sales to production ratios for chemicals and chemical fibers were almost 100%. For major chemicals, the direct sales to total sales ratio also increased to over 60% from 55% in In addition, the petrochemicals e-commerce platform commenced operation during the year, which laid a foundation for the Company to further strengthen its market share and establish a direct-sale network for petrochemicals. Operation Summary of Marketing and Distribution Segment 16/17 Sinopec Corp. Annual Report and Accounts Change, % Sales volume of refined oil products (gasoline, diesel and kerosene), mm t Retail volume, mm t Average annual pumped volume per station, t./site 1,402 1, Retail to total sales volume, % pct. points Number of service stations operated at year-end 20,259 11, Number of franchised service stations at year-end 5,234 NA NA Number of total service stations under SINOPEC brand at year-end 25,493 11, Capacity of oil storages, mm m

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19 18/19 Sinopec Corp. Annual Report and Accounts 2000 MARKETING & DISTRIBUTION THE COMPANY HAS THE LARGEST DISTRIBUTION NETWORK FOR REFINED PRODUCTS IN CHINA. AS AT 31 DECEMBER 2000, THE COMPANY HAD 1,118 STORAGE FACILITIES AND 25,493 SERVICE STATIONS UNDER THE SINOPEC BRAND, WHERE THE COMPANY OPERATED 20,259 STATIONS AND FRANCHISED 5,234 STATIONS. IN 2000, THE COMPANY S SALES VOLUME OF REFINED PRODUCTS ACCOUNTED FOR 62% OF THE NATIONAL CONSUMPTION IN CHINA.

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21 20/21 Sinopec Corp. Annual Report and Accounts 2000

22 BUSINESS REVIEW AND PROSPECTS (CONTINUED) Production of Major Chemicals (1,000 t.) Change, % Ethylene 2,170 2, Synthetic resin 3,183 2, Incl: Performance compounds resins 1, Synthetic rubber Monomers and polymers for synthetic fiber 3, , Synthetic fiber 1, Incl: Differential fiber Urea 2, , Research & Development Major R&D achievements in 2000 include the following: Exploration & Production: applied enhanced oil recovery technologies in oilfields with high water content, developed technologies for subtle reservoirs, and developed engineering technologies for shallow-water areas. Refining: developed GOR series catalysts and LAP co-catalyst that reduce the olefin content in FCC gasoline for the production of cleaner burning fuels; developed technology to maximize diesel yield for FCC units. Chemicals: developed 100,000 tpa ethylene cracking furnace; developed and applied new generation catalysts for polyethylene, polypropylene, acrylonitrile, and ethyloxide production, which reduced production cost and capital expenditure. Information technology: completed and operated the marketing management network, the financial management network, and the two e-commerce platforms for material procurement and the sales of petrochemicals. Safety and Environment The Company sets up an HSE management system, promotes cleaner production, and takes great care of the health of its employees, and diligently performs its social responsibilities. Safety: The Company started in 2000 to set up the HSE management system by carrying out experiments in selected enterprises and devised plans to extend the system in the entire Company in 2001; The Company also set up a safety monitoring system with IT technology and a standardised safety and environment performance evaluation system to improve the overall level of safety management. Environmental protection: The Company implemented cleaner production in the entire Company, decreased total contaminants discharged (equivalent to COD) by 3.1% compared to 1999, and started supplying new standard cleaner burning gasoline to Beijing, Shanghai and Guangzhou since 1 July In 2000, the Company was qualified as the first large industrial enterprise in China to meet the national emission standards.

23 22/23 Sinopec Corp. Annual Report and Accounts 2000 PETROCHEMICALS THE COMPANY PRODUCES AND SELLS MORE PETROCHEMICAL PRODUCTS THAN ANY OTHER PRODUCERS IN CHINA. OUR RANGE OF PRODUCTS INCLUDES INTERMEDIATE PETROCHEMICALS, SYNTHETIC RESINS,MONOMERS AND POLYMERS FOR SYNTHETIC FIBER, SYNTHETIC FIBER, SYNTHETIC RUBBER AND CHEMICAL FERTILISERS.

24 BUSINESS REVIEW AND PROSPECTS (CONTINUED)

25 BUSINESS REVIEW AND PROSPECTS (CONTINUED) 24/25 Sinopec Corp. Annual Report and Accounts 2000 II. BUSINESS PROSPECTS 1. Market Prospects The Company expects to encounter a macro-economic environment with the following marketing conditions: Steady growth of the PRC economy is likely to keep the domestic demand for refined and petrochemical products relatively strong. It is expected that in 2001 the PRC economy will continue to grow at a GDP growth rate of 7%. Taking into considenation the likely technologies advancement, lower energy consumption, and a consumption elasticity of 0.65 for refined products, it is estimated that in 2001 China s consumption of refined products is likely to grow at a rate of approximately 4.5%, and the consumption of major petrochemicals, represented by ethylene, is likely to grow at a rate of 7%, both providing an opportunity for the Company s sustained growth. International oil prices are expected to continue fluctuating at a relatively high level. As the latest information from OPEC indicates, the international oil price is expected to continue to fluctuate between US$ 22/bbl. and US$ 28/bbl. Regulatory environment will be further improved. The PRC government is working on measures in preparation for China s WTO entry with specific policies including the expansion of exports and foreign cooperation, effective utilisation of foreign capital, and greater efforts in customs control and curbing smuggling. The State Economic and Trade Commission has made it clear that in 2001 the suspension of gasoline and diesel imports will continue, and the import of fuel oil will be further standardised. The regulatory environment is expected to further improve the market order to endow fair competition. The Company expects that it would be able to benefit from such a favorable regulatory environment and achieve better financial results. 2. Operation Prospects In light of the opportunities and challenges presented in 2001, the Company will focus its operations on the following aspects. Stabilise oil and gas production: The Company will reinforce exploration in new acreages for The Company will reserve replacement, and improve the recovery rate of producing fields to stabilize production. In 2001, the Company plans to produce as much as 261 million BOE of crude oil and natural gas. Optimise resources allocation: The Company gives preference to low-cost, advanced, bigger size refineries in crude allocation; optimise the crude transport process to reduce transport cost; sharply increase the volume of imported sour crude to reduce crude cost; and, further optimise the feedstock of chemical plants, and by further increasing the percentage of naphtha, eventually shift to lighter and better quality ethylene feeds. Stabilise overall operation and adjust product mix: The Company intends to: continue to optimise the crude supply chain, production processes and exploration acreages; achieve overall balance between total refinery throughput and crude resources, import and export, and sales and inventory; properly arrange the refinery throughput for sour crude, improve the quality of refined oil products, and increase the production of cleaner burning fuels and high-grade road asphalt; ensure full-load and long-cycle operations of ethylene, synthetic resin, synthetic fiber and synthetic rubber plants, and increase the percentage of performance compound resins and differential fibers to replace imports. In 2001, the Company plans to process million tonnes (daily production of 2.2 million barrels) of crude oil and produce 2.2 million tonnes of ethylene. Consolidate and expand market: The Company intends to: continue to control wholesale and expand retail, reform the marketing system, and reinforce management; acquire and build 4,000 new petrol stations as planned, and further improve the refined products marketing information system; build the brand image and expand markets. In 2001, the Company plans to sell 72.3 million tonnes of gasoline and diesel, and increase the percentage of retail to total sales volume to 51%. Reduce costs: Apart from reducing purchase cost of bulk materials such as crude oil, the Company will focus on specific cost reduction measures, such as lowering material and energy consumptions, improving plant utilization rate and cutting selling, general and administrative costs. Overall the Company expects to reduce costs as much as RMB 2.19 billion in 2001, calling for cost-saving of RMB 450 million in exploration and production segment, RMB 640 million in refining segment, RMB 490 million in chemicals segment, and RMB 610 million in marketing and distribution segment. 3. Capital Expenditures In accordance with the principle of maximising its return on investment, the Company currently plans to spend RMB billion for capital expenditures in RMB 12.5 billion for exploration and production, mainly to be used in matured reserves in the east part of China and in new acreages for discoveries to replace reserves. RMB 6.8 billion to increase the sour crude processing capacities along the coastal area to reduce costs. RMB 10.6 billion to acquire more service stations and storage facilities to further expand the refined oil product market. RMB 10.5 billion for revamping and expansion of a few major ethylene plants to increase the production of petrochemicals, especially high-value added products. RMB 360 million for the ERP system and the construction and upgrading of other systems. In addition, the Company plans to make an A share offering in 2001 to fund the acquisition of Sinopec National Star and the investment in the Ningbo-Shanghai- Nanjing Crude Oil Import Pipeline project and Maoming-Guizhou-Kunming Product Oil Pipeline project. In 2001, the Company will continue its efforts to deepen internal reform, and vigorously promote business restructuring, slimed-down organisational structure and specialized management. The Company will set up a cost control mechanism, standardize investment behaviors, reinforce budget and cash flow controls, and try to achieve a sustained growth in operation and business results throughout the year.

26 MANAGEMENT S DISCUSSION AND ANALYSIS UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES MADE TO THE COMPANY ARE TO CHINA PETROLEUM & CHEMICAL CORPORATION ( SINOPEC CORP. ) AND ITS SUBSIDIARIES. CERTAIN REVENUES AND COSTS INCLUDED IN THE RESULTS OF OPERATIONS OF THE COMPANY FOR 1999 WERE ASSOCIATED WITH CERTAIN PRODUCTION ASSETS RELATING TO PETROLEUM AND PETROCHEMICAL PRODUCTS WHICH WERE RETAINED BY SINOPEC GROUP COMPANY FOLLOWING THE REORGANISATION OF SINOPEC GROUP COMPANY. THESE OPERATIONS, ASSETS AND LIABILITIES WERE NOT AVAILABLE TO GENERATE REVENUES FOR THE COMPANY IN 2000 (AND WILL NOT BE AVAILABLE TO GENERATE REVENUES FOR THE COMPANY IN CURRENT OR FUTURE PERIODS). THEREFORE, THE RESULTS OF OPERATIONS OF THE COMPANY FOR 2000, PARTICULARLY WITH RESPECT TO PETROCHEMICALS, ARE NOT NECESSARILY COMPARABLE WITH THE RESULTS FOR CONSOLIDATED RESULTS OF OPERATIONS The following table sets forth certain income and expense items from the consolidated profit and loss account of the Company for the years indicated. Turnover Overview. The Company had significant growth in the sales of refined products in Turnover and other operating revenues increased by RMB 88.9 billion, or 37%, from RMB billion in 1999 to RMB billion in Sales of refined products from the refining and the marketing and distribution segments contributed RMB 73.6 billion, or approximately 83%, of the increase in the turnover and other operating revenues of the Company. This increase in sales of refined products was due primarily to increases in the averaged realised sales prices of gasoline and diesel, which have been set with reference to FOB Singapore prices since June 2000, and the increased portion of the sales volume of gasoline and diesel made through retail sales which tend to have the highest unit prices among all sales channels. Turnover and other operating revenues from the corporate and others segment contributed RMB 13.8 billion, or 15%, of the increase in turnover and other operating revenues. This increase was primarily due to the increased external sales of Sinopec Hong Kong Co. and the consolidation of the financial results of China International United Petroleum and Chemicals Co., Ltd., or Unipec, of which the Company s equity interest increased to 70% at the end of 1999 resulting in the Company s accounting for it as a subsidiary for the whole year in Sales of crude oil and natural gas. Sales of crude oil and natural gas contributed 3% of the turnover and other operating revenues of the Company, compared with 2.6% in The Company produces crude oil principally to supply its refining and chemical operations. The Company sold approximately 4.9 million tonnes crude oil representing approximately 15% of their total crude oil sales volume in 2000, compared with approximately 4.5 million tonnes external crude oil sales volume representing approximately 14% of the total crude oil sales volume in The increase in external sales volume is primarily due to the segregation and distribution on 31 December 1999 of certain refineries to Sinopec Group Company which during previous periods had been accounted for as the intersegment sales Year Ended 31 December RMB RMB (in billions) Turnover and other operating revenues Turnover Other operating revenues Total turnover and other operating revenues Operating expenses Purchased crude oil, products and operating supplies and expenses (226.1) (160.8) Selling, general and administrative expenses (19.3) (18.3) Depreciation, depletion and amortisation (20.1) (17.9) Exploration expenses, including dry holes (2.9) (2.4) Personnel expenses (13.0) (12.5) Taxes other than income tax (12.2) (9.5) Other operating expenses, net (0.5) (3.2) Total operating expenses (294.1) (224.6) Operating profit Net finance costs (4.8) (10.2) Gains from issuance of shares by subsidiaries 0.6 Other income and gains Profit from ordinary activities before taxation Taxation (9.4) (0.3) Profit from ordinary activities after taxation Minority interests (1.8) (1.5) Profit attributable to shareholders of the Company but were actually retained by Sinopec Group Company in the reorganisation. Turnover of crude oil and natural gas increased by approximately RMB 3.7 billion, or 60%, to RMB 9.8 billion in The increase in sales of crude oil and natural gas was principally due to: an increase of approximately 89.1% in the average realised sales price of crude oil from approximately RMB 880 per tonne in 1999 to approximately RMB 1,664 per tonne in 2000, as the international crude oil prices against which the crude oil prices of the Company are principally benchmarked rose steeply in 2000 as compared with 1999; and an increase of approximately 8.9% in the external sales volume of crude oil from approximately 4.5 million tonnes in 1999 to approximately 4.9 million tonnes in Sales of refined products. Both the refining and the marketing and distribution segments make external sales of refined products. External sales from the refining and the marketing and distribution segments in 2000 were RMB 67.9 billion and RMB billion, respectively, representing increases of 34.6% and 45.2%, respectively, from Consolidated revenues from external sales of refined products in the two segments represented approximately 73.7% of the turnover and other operating revenues in 2000.

27 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) 26/27 Sinopec Corp. Annual Report and Accounts 2000 The Company derived approximately 72% of their sales of refined products from sales of gasoline and diesel in Gasoline sales went up by 35% to RMB 65.2 billion and diesel sales went up by 41% to RMB billion in 2000 from The increase in gasoline and diesel sales was primarily the result of the significant increase in the realised sales prices for both gasoline and diesel. Sales of principal refined products other than gasoline and diesel also experienced significant growth due to both the increased realised sales prices and the increased sales volume, except for sales volume of lubricants which decreased slightly, from 1999 to The average realised sales prices of gasoline and diesel in 2000 went up by approximately 40% and 38%, respectively, from 1999, to approximately RMB 2,846 and RMB 2,634 per tonne, respectively. This increase in prices was principally the result of: the PRC government s reform on the state control over gasoline and diesel prices, which allowed the domestic prices to more closely reflect the rising gasoline and diesel prices on the international markets after May 2000; and the higher percentage of retail sales in the sales volume of gasoline and diesel of the Company in 2000 compared with Combined sales volumes of gasoline and diesel in 2000 amounted to 64.2 million tonnes, which slightly increased from The retail sales volume of gasoline as a percentage of total sales volume of gasoline was up from 23.8% in 1999 to 34.6% in 2000, and the retail sales volume of diesel as a percentage of total sales volume of diesel was up from 13.7% in 1999 to 27.9% in The increases in retail sales volume and the decreases in wholesale sales volume are primarily due to the acquisition by the Company of more than 8,200 service stations which during previous periods had been wholesale customers and the construction by the Company of more than 600 new service stations. The Company also plans to acquire, including leasing, or build more service stations in As a result, the Company expects both their retail sales volume and the percentage of retail sales volume in the total sales volume of gasoline and diesel will further increase. Sales of chemicals. Turnover of chemicals was RMB 56.2 billion in 2000, down 6% from The decline in chemicals sales was a result of lower sales volumes of some principal chemical products in 2000 as compared to 1999, which was primarily due to the segregation and distribution of certain petrochemical operations that were retained by Sinopec Group Company in the reorganisation but were included in the historical financial statements of the Company prior to 31 December If these operations were excluded as at 1 January 1999, sales volumes for most chemicals other than chemical fertilisers would have increased in 2000 as compared to 1999, and turnover of chemicals in 2000 would have increased by 24% from Average realised sales prices of most chemicals other than chemical fertilisers increased significantly due to: the PRC s domestic demand for chemicals continued to grow at a fairly strong rate which the Company believes is correlated with China s 8% GDP growth rate; higher crude oil price drove up petrochemical feedstock cost which is partly passed on to the chemical product prices; the Company s efforts to improve its product mix with more higher value added products such as differential fibers and performance compounds for synthetic resin; and the Company s efforts to increase the amount of direct sales as a percentage of its total sales of major chemical products. Operating Expenses Overview. Total operating expenses of the Company in 2000 were RMB billion, representing an increase of RMB 69.5 billion, or 31%, from The increase in total operating expenses was primarily attributable to the increase in the expense item of purchased crude oil, products and operating supplies and expenses. Purchased crude oil, products and operating supplies and expenses. Purchased crude oil, products and operating supplies and expenses increased by RMB 65.3 billion, or 40.6%, to RMB billion in 2000 from Purchased crude oil expenses accounted for approximately RMB billion, or 62%, of this expense item, and constituted approximately 48% of the total operating expenses in Purchased crude oil expenses increased by approximately RMB 73.5 billion in 2000 from 1999, due to: an increase of approximately 27% in the volume of crude oil purchased from approximately 61 million tonnes in 1999 to approximately 77.4 million tonnes in 2000; and an increase of approximately 64% in the average realised prices for crude oil expensed by the Company from approximately RMB 1,113 per tonne in 1999 to approximately RMB 1,825 per tonne in The increase in the average realised price expensed for crude oil reflected the upward trend in 2000 of crude oil prices in the international markets. Approximately 74% of the crude oil requirements of the Company by volume in 2000 were sourced from imports, PetroChina, CNOOC and Sinopec National Star, with the remaining 26% supplied by the Company s own exploration and production operations. While the volume of crude oil supplied by the exploration and production segment increased slightly by approximately 1%, such volume as a percentage of the total crude oil requirements of the Company declined from 31% in 1999 to 26% in 2000 because the crude oil distillation throughput of the Company in 2000 was 19.6% higher than The Company purchased diesel and gasoline from other domestic refineries to supplement its own production. Purchased diesel and gasoline expenses decreased by approximately RMB 8.3 billion, or 27%, from approximately RMB 30.8 billion in 1999 to approximately RMB 22.5 billion in The decrease was entirely due to a decrease in the volume purchased from external sources, partially offset by increased prices in Externally purchased volumes of gasoline and diesel were down by approximately 52% and 43%, respectively, to approximately 3.6 million tonnes and 5.6 million tonnes, respectively, in The Company improved its crude oil distillation capacity utilisation rate from 67.7% in 1999 to 81% in The Company produced more gasoline and diesel and its sales of diesel and gasoline included a larger percentage of internally produced products in 2000 compared to The increase in purchased crude oil, products and operating supplies and expenses in 2000 as compared to 1999 was also attributable to the increased purchases and expenses of the Company s trading subsidiaries, Unipec, and Sinopec Hong Kong Co., both of which were accounted in the corporate and others segment. Selling, general and administrative expenses. Selling, general and administrative expenses

28 increased by RMB 1.0 billion, or 5%, to RMB 19.3 billion in 2000 as compared to The increase was primarily attributable to the increase in operating lease charges, which was up by RMB 2.5 billion from RMB 0.4 billion in 1999 to RMB 2.9 billion in The Company entered into a land use rights lease contract and a property lease contract with Sinopec Group Company effective as at 1 January Under the two contracts, the Company paid approximately RMB 2.4 billion as rental payment to Sinopec Group Company in Although sales of the Company increased significantly, the Company managed to control the selling, general and administrative expenses other than operating lease charges in part due to: efforts made by the Company to better control its customers credits to reduce provisions for bad and doubtful debts; and efforts made by the Company to implement cost reduction programs to better control its logistics to reduce transportation and storage costs. Depreciation expenses. Depreciation, depletion and amortisation expenses increased by approximately 12% from RMB 17.9 billion in 1999 to RMB 20.1 billion in 2000 due primarily to: an increase in the depreciable value of property, plant and equipment as a result of a revaluation effected on 30 September 1999, offset in part by a decrease in depreciation expenses resulting from the distribution of certain assets to Sinopec Group Company on 31 December 1999 as part of the reorganisation; and commencement of operations of newly constructed or acquired facilities including a significant number of service stations and the resulting commencement of depreciation of such facilities. Personnel and other expenses. Personnel expenses slightly increased by approximately 4% from RMB 12.5 billion in 1999 to RMB 13.0 billion in The increase was primarily due to the payment of year-end performance bonuses to employees in 2000 in connection with the better operating results of the Company. Taxes other than income tax, which primarily consisted of consumption tax, increased by approximately 28% from RMB 9.5 billion in 1999 to RMB 12.2 billion in 2000 primarily as a result of increased sales volume, including both external and intersegment sales volume, of gasoline and diesel from the Company s refineries which were subject to consumption tax. Net other operating expenses decreased from RMB 3.2 billion in 1999 to RMB 0.5 billion in 2000 due primarily to the decrease in impairment loss on long-lived assets and the cessation of allocation of staff quarters under the housing reform policy after 31 December Operating Profit; Finance Cost and Other; Profit attributable to Shareholders Operating profit of the Company increased by RMB 19.4 billion, or 126%, from RMB 15.4 billion in 1999 to RMB 34.8 billion in Operating profit increased because turnover and other operating revenues of the Company grew faster than their operating expenses. The increase in turnover and other operating revenues outpaced the increase in operating expenses as a result of a number of factors including the increases in the average realised sales prices of most of the products other than in some petrochemicals where the Company was unable to pass along the increases in the costs of raw materials, and the implementation of many cost reduction programs by the Company. However, the most important factor that contributes to the increase in profit attributable to shareholders is that the higher refined product prices more than offset the higher crude oil cost. Net finance costs decreased by RMB 5.4 billion, or approximately 53%, from RMB 10.2 billion in 1999 to RMB 4.8 billion in 2000 largely as a result of a decrease in interest expenses of RMB 3.5 billion, and to a lesser extent, an increase of foreign exchange gains less losses of RMB 2.3 billion which primarily resulted from the depreciation of Japanese yen against renminbi in Interest expenses decreased principally due to: a distribution of certain assets and associated liabilities which were retained by Sinopec Group Company but were included in the historical financial statements of the Company consolidated prior to 1 January 2000, to Sinopec Group Company on 31 December 1999; Sinopec Group Company s assumption of RMB 13.1 billion of bank loans of the Company on 31 December 1999; Sinopec Group Company s assumption of RMB 5.8 billion of bank loans in April 2000 in consideration of the Company transferring to it an equivalent amount of receivables; and a conversion of short- and long-term debt of RMB 35.6 billion into an interest free 20-year subordinated loan from Sinopec Group Company as at 30 April Profit from ordinary activities before taxation of RMB 30.2 billion in 2000 was significantly higher than the RMB 6.5 billion amount for 1999 principally because of increased operating profit and reduced interest expense of the Company. Taxation of the Company went up significantly to RMB 9.4 billion in 2000 because of increased profit from ordinary activities before taxation and increased effective profit tax rate of the Company. The latter was mainly attributable to the absence of profit tax refunds and cessation of special allowance relating to exploration and production activities of the Company in Profit from ordinary activities after taxation and minority interests were RMB 20.8 billion and RMB 1.8 billion, respectively, in 2000 compared to RMB 6.2 billion and RMB 1.5 billion, respectively, in Minority interests increased by 20% due to increased contribution from the Company s non-wholly owned subsidiaries to the profit from ordinary activities after taxation reflecting stronger financial performance of these subsidiaries in 2000 compared with Profit attributable to shareholders increased from RMB 4.7 billion in 1999 to RMB 19 billion in Earnings per share calculated with the weighted average number of shares in issue during 2000 was RMB 0.26.

29 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) The Company improved the return on capital employed, or ROCE, from 5.1% in 1999 to 10.0% in The ROCE is defined as the ratio of after tax operating profit to the amount of capital employed. After tax operating profit is defined as the product of operating profit and one minus the effective income tax rate. The amount of capital employed is defined as the total capital less the amount of excess cash, where total capital is the sum of debt (including shareholders loans), minority interests and shareholders equity, and excess cash is the sum of cash and cash equivalents and time deposits. Discussion of Segment Operations The Company began reorganising its operations into four principal business segments and a corporate and others segment in early Although in 1999 the Company had not divided its operations into these segments, for the purposes of the following discussion, the 1999 financial results have been reconstructed on a segment basis. Unless otherwise indicated, intersegment transactions have not been eliminated from the financial data discussed in this section and the operating revenue data for each of the business segments discussed in this section include, in addition to turnover, other operating revenues for each such segment. For other operating revenues of each of the Company s operating segments, see note 34 on the accounts. The following table lists operating revenues by segment, the contribution of external sales and intersegment sales as a percentage of consolidated operating revenues before elimination of intersegment sales, and the contribution of external sales as a percentage of consolidated operating revenues (i.e., after elimination of intersegment sales) for the years indicated. 28/29 Sinopec Corp. Annual Report and Accounts 2000 Consolidated As a Percentage Operating of Consolidated As a Percentage Operating of Revenues Before Revenues After Elimination of Elimination of Year Ended 31 December Intersegment Sales Intersegment Sales RMB RMB (in billions) Percent Percent Operating Revenues Exploration and production External sales (1) Intersegment sales Total operating revenue Refining External sales (1) Intersegment sales Total operating revenue Marketing and distribution External sales (1) Intersegment sales Total operating revenue Chemicals External sales (1) Intersegment sales Total operating revenue Corporate and others External sales (1) Intersegment sales Total operating revenue Total operating revenue before intersegment eliminations Elimination of intersegment sales (224.0) (114.4) Consolidated operating revenues (1) Includes other operating revenues. See note 34 on the accounts for other operating revenues of each of the Company s operating segments.

30 The following table lists operating revenues, operating expenses and operating profit by segment before elimination of intersegment transactions for the years indicated. Year Ended 31 December RMB RMB (in billions) Exploration and production Total operating revenues Total operating expenses (32.5) (27.3) Total operating profit Refining Total operating revenues Total operating expenses (231.7) (132.5) Total operating profit Marketing and distribution Total operating revenues Total operating expenses (169.3) (118.2) Total operating profit Chemicals Total operating revenues Total operating expenses (58.5) (59.0) Total operating profit Corporate and others Total operating revenues Total operating expenses (26.1) (1.9) Total operating loss (0.1) (0.8) Exploration and Production Segment Exploration and production segment consists of the activities of the Company related to exploring for and developing, producing and selling of crude oil and natural gas. Operating revenues from the exploration and production segment increased by 83.3% from RMB 31.2 billion in 1999 to RMB 57.2 billion in The increase in operating revenues was primarily due to: an increase of approximately 89% in average realised prices of crude oil for external sales to approximately RMB 1,664 per tonne in 2000; and an increase of approximately 65% in average realised prices of crude oil for intersegment sales to RMB 1,640 per tonne in These price increases reflected steeply rising international crude oil prices in 2000 and, to a lesser extent for intersegment sales, the change in the intersegment transfer pricing policy of the Company effective 1 January This crude oil transfer pricing policy provides that sales of similar grades of crude oil are to be made at substantially the same prices as those for external sales of the same products. As a result of this new policy, substantially all of the external and intersegment sales of this segment are based on market prices. Total sales volume of crude oil increased slightly in 2000 compared to Overall operating expenses increased by 19% in 2000 compared with 1999 for the exploration and production segment, primarily due to the higher depreciation, depletion and amortisation expenses in 2000 as a result of the increased capital expenditure that the Company spent on exploration and production to take advantage of the high international crude oil price. As a result of the increased exploration and production activities, exploration expenses, including dry holes expenses, was up by RMB 0.5 billion, or 20.8%, to RMB2.9 billion in The Company managed to reduce the purchased crude oil, products and operating supplies and expenses by approximately 18% in 2000 compared with 1999 primarily through the reduction of power and fuel expenses and, to a lesser extent, through reduction of raw materials expenses. Production costs increased slightly in 2000 to RMB per barrel from RMB 54.4 per barrel in Production costs increased in 2000 as compared with 1999 principally because, to take advantage of the high crude oil price prevailing in 2000, some of the crude oil production in 2000 was obtained from oil wells that were unprofitable or marginally profitable at the lower crude oil prices prevailing during The Company expects to reduce production from and expenses related to these less profitable wells if crude oil prices decline significantly from the current levels. Finding and developing costs increased by 81% in 2000 to RMB per BOE from RMB per BOE in Operating profit in 2000 increased significantly compared to 1999 primarily as a result of high crude oil prices prevailing in Refining Segment Refining segment consists of the operations of the Company related to purchasing crude oil from the Company s exploration and production segment and from third parties, processing of crude oil into refined products, selling refined products principally to selected large bulk customers and internally principally to the Company s marketing and distribution segment. Operating revenues from the refining segment increased by approximately 68% from RMB billion in 1999 to RMB billion in The increase in operating revenue was principally due to increases in sales revenues from the sale of diesel, gasoline and chemical feedstock. Sales of diesel, which constitutes approximately 39% of the refining segment s operating revenue, went up in 2000 by 75% to approximately RMB 90.7 billion. The increase in sales revenues for diesel was due to: an increase of approximately 43% and 33% in the average realised price for intersegment sales and external sales, respectively, to approximately RMB 2,439 and RMB 2,238 per tonne; and an increase of approximately 23% in the combined sales volume for external and intersegment sales to approximately 37.4 million tonnes.

31 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) 30/31 Sinopec Corp. Annual Report and Accounts 2000 Sales of gasoline, which constitutes approximately 22% of the refining segment s operating revenue, went up in 2000 by 76% to approximately RMB 51.0 billion. The increase in sales revenues for gasoline was due to: an increase of approximately 39% and 38% in the average realised price for intersegment sales and external sales, respectively, to approximately RMB 2,611 and RMB 2,237 per tonne; and an increase of approximately 25% in the combined sales volume for external and intersegment sales to approximately 20 million tonnes. All intersegment sales of gasoline and diesel from the refining segment to the marketing and distribution segment are made at the ex-factory prices which are set with reference to FOB Singapore prices and certain other factors. The ex-factory prices have been set on a monthly basis to more closely reflect the prevailing FOB Singapore prices of gasoline and diesel. Sales of chemical feedstock, which constitutes approximately 19% of the refining segment s operating revenue, went up in 2000 by 87% to approximately RMB 43.6 billion. The increase in sales revenues for chemical feedstock was due to significant increases in both the volume and the average realised prices in 2000 compared with Intersegment sales accounted for approximately 70% of the refining segment s operating revenue in 2000, compared with approximately 63% in Among the intersegment sales, sales of gasoline and diesel to the marketing and distribution segment accounted for approximately 55% of the refining segment s operating revenue. To operate more efficiently as an integrated company with distinct refining and marketing and distribution segments, the Company intends to gradually redirect substantially all the refining segment s sales of gasoline and diesel to the marketing and distribution segment. In 2000, the Company has significantly redirected most of the gasoline and diesel sales, other than to certain special customers and exports, to the marketing and distribution segment. External sales volumes of gasoline in 2000, other than export sales, were down approximately 38% from 1999 to approximately 1.36 million tonnes, while intersegment sales volumes were up by approximately 34% to approximately 16.4 million tonnes in External sales volume of diesel in 2000, other than export sales, was down by approximately 54% to approximately 2.4 million tonnes while intersegment sales volumes increased by approximately 40% to approximately 34.9 million tonnes. Operating expenses increased by RMB 99.2 billion, or 74.9%, to RMB billion in 2000 from The increase was principally due to an increase in the purchased crude oil expenses, which accounted for approximately 81% of the total operating expenses for the refining segment in The average realised price which the Company paid for crude oil in 2000 increased significantly compared to 1999 reflecting the higher international crude oil prices prevailing in 2000 and the new transfer pricing policy between the exploration and production segment and the refining segment. Crude oil transfer pricing policy, effective 1 January 2000, provides that all sales of similar grades of crude oil are to be made at substantially the same prices as those for external sales of the same products. As a result of this new policy, substantially all of the external and intersegment purchases of crude oil of the refining segment are now made at substantially market prices. As a consequence, the crude oil expenses for the refining segment increased in 2000 because this new pricing policy had the effect of increasing the cost of intersegment sales of crude oil to the refining segment. The purchased crude oil expenses also increased because the Company purchased and expensed approximately 16.8 million tonnes more crude oil in 2000 than 1999, primarily sourced from the international crude oil market. In 2000, the Company significantly improved its crude oil distillation capacity utilisation rate and distilled a record amount of crude oil. Gross refining margin (defined as the difference between sales revenues and crude oil expenses, divided by the volume of crude oil distilled) declined in 2000 compared with This decline was largely due to increases in the crude oil expenses partially offset by increases in the Company s average realised sales prices of gasoline and diesel. Cash operating cost (defined as the segment s operating expense less the sum of purchased crude oil expenses, depreciation and amortisation, taxes other than income tax, other operating expenses and adjustments, and divided by the volume of crude oil distilled) was RMB per tonne of crude oil distilled in 2000, compared to RMB per tonne in Operating profit was down by 77% to RMB 1.4 billion in This decline was largely due to the faster growth rate in the segment s costs of crude oil than in the segment s product prices for its major products such as gasoline, diesel and jet fuel, especially in the first four months in The price of crude oil in China has been reflecting movements of prices in the international market since June These prices have generally been rising since late However, gasoline and diesel prices were infrequently adjusted prior to 1 June 2000, and thus did not fully and timely reflect the increased crude cost. Beginning June 2000, gasoline and diesel prices have been adjusted monthly with reference to FOB Singapore prices. As a result, the segment s operating profit improved significantly in the second half of 2000 compared with the first half of Marketing and Distribution Segment Marketing and distribution segment consists of the operations related to purchasing refined products from the refining segment and third parties, and marketing, selling and distributing refined products, wholesale to large bulk customers and retail through the Company s retail distribution network. Operating revenues of the marketing and distribution segment increased by approximately 45.4% to RMB billion in 2000 from More than 90% of such operating revenues were from sales of gasoline and diesel in 2000 and substantially all of the operating revenues were from external sales. The increase in operating revenues was principally due to increased sales revenues from sales of diesel and, to a lesser extent, gasoline and fuel oil.

32 Sales revenue for diesel increased by approximately 55% to approximately RMB billion in 2000, due to: an increase of approximately 35% in the average realised wholesale prices, including prices for direct sales made to special customers, to approximately RMB 2,587 per tonne; an increase of approximately 32% in the average realised retail price to approximately RMB 2,830 per tonne; and an increase of approximately 109% in retail sales volume to approximately 11.5 million tonnes. Sales revenue for gasoline increased by approximately 39% to approximately RMB 57.8 billion in 2000, due to: an increase of approximately 43% in the average realised wholesale prices, including prices for direct sales made to special customers, to approximately RMB 2,867 per tonne; an increase of approximately 28% in the average realised retail prices to approximately RMB 3,073 per tonne; and an increase of approximately 41% in retail sales volume to approximately 7.9 million tonnes. Sales revenue for fuel oil increased by approximately 239% to approximately RMB 2.1 billion in 2000, due to: an increase of approximately 144% in total sales volume to approximately 1.4 million tonnes; an increase of approximately 39% in the average realised prices to approximately RMB 1,559 per tonne. Compared to 1999, wholesale sales volume of gasoline and diesel, including direct sales made to special customers, declined by approximately 17% and 5%, respectively, to approximately 11.7 million tonnes and approximately 27.5 million tonnes, respectively, in Wholesale sales of gasoline and diesel accounted for approximately 59% of the operating revenues of the marketing and distribution segment in 2000, compared to 69% for Retail sales of gasoline and diesel accounted for approximately 32% of operating revenues of the marketing and distribution segment in 2000, compared to 21% in Retail sales volume and revenues as a percentage of total sales volume and revenues of gasoline and diesel increased primarily as a result of the addition to the distribution network of over 8,800 service stations in Average realised sales prices of gasoline and diesel increased with the rising international gasoline and diesel prices in 2000 compared with 1999, primarily as a result of the overall upward movement of the retail guidance prices which were published by the State Development Planning Commission in November 1999, February and each month after May 2000 with reference to the Singapore market prices. Operating expenses of the marketing and distribution segment increased by approximately 43.2% to RMB billion, in 2000 from Purchased gasoline and diesel expenses constituted approximately 85% of the marketing and distribution segment s operating expenses in The average realised prices expensed by the Company for gasoline and diesel in 2000 increased by 42% and 38%, respectively, to approximately RMB 2,600 per tonne and approximately RMB 2,396 per tonne, respectively, compared with Gross marketing margin (defined as the difference between sales revenues and total gasoline and diesel expenses for the marketing and distribution segment divided by the volume of gasoline and diesel sold by the marketing and distribution segment) increased in 2000 compared with This increase was largely due to the fact that increases in the average realised sales prices for gasoline and diesel outpaced the increases in gasoline and diesel expenses, partly attributable to the increased proportion of the refined products sold through retail sales channels. Operating profit for the marketing and distribution segment increased by RMB 3.8 billion to RMB 6.4 billion in 2000 from 1999, reflecting the foregoing factors. Cash operating cost (defined as the segment s operating expenses less the sum of the purchased gasoline, diesel, jet fuel and kerosene expense, taxes other than income tax and depreciation and amortisation, and divided by the sales volume of gasoline, diesel, jet fuel and kerosene) was RMB 181 per tonne of gasoline, diesel, jet fuel and kerosene in 2000, compared with RMB 177 in 1999, primarily due to the increased transportation expenses associated with the Company s expanded retail distribution network. Chemicals Segment Chemicals segment consists of producing, marketing, selling and distributing petrochemical and inorganic chemical products. Operating revenues decreased in 2000 by RMB 1.8 billion, or 3%, to RMB 60.9 billion from The decline was a result of lower sales volumes of some of principal chemical products in 2000 compared to 1999, partially offset by higher realised sales prices for most of the chemical products other than chemical fertilisers. The decline in sales volumes was primarily due to the segregation and distribution of certain petrochemical operations, which were retained by Sinopec Group Company in the reorganisation but were included in the historical financial statements of the Company prior to 31 December 1999, to Sinopec Group Company on 31 December If these operations were excluded as at 1 January 1999, the segment s operating revenues would have increased by 25% in 2000 as compared to 1999, due to: an increase in external sales volumes for most of the principal petrochemical products other than synthetic rubber and chemical fertilisers; and an increase in average realised prices for most of the principal petrochemical products other than chemical fertilisers. Operating expenses slightly decreased by RMB 0.5 billion to RMB 58.5 billion in 2000 from Purchased petrochemical feedstock expenses including naphtha expenses accounted for RMB 33.2 billion, or 57%, of the operating expenses. If those operations retained by Sinopec Group Company were excluded as at 1 January 1999, the segment s operating expenses would have gone up by 36% primarily due to the increased purchased petrochemical feedstock expenses and increased selling, general and administrative expenses. Despite that the Company improved its ethylene yield by 0.19 percentage point. Operating profit decreased by RMB 1.3 billion to RMB 2.4 billion in 2000 from 1999 as the decline in operating revenues outpaced the decline in operating expenses. Operating profit decreased significantly in the last six months in 2000 compared with the first six months in 2000, primarily because the Company was unable to pass on all the increases in its petrochemical feedstock costs to the realised sales prices of

33 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) 32/33 Sinopec Corp. Annual Report and Accounts 2000 certain chemical products including chemical fertilisers. Corporate and Others Corporate and others segment principally involves trading activities of the import and export subsidiaries and the Company s research and development activities. Operating revenues from the corporate and others segment increased significantly from RMB 1.1 billion in 1999 to RMB 26.0 billion in Operating expenses also increased significantly from RMB 1.9 billion in 1999 to RMB 26.1 billion in The significant increases in both operating revenues and operating expense primarily resulted from the increased sales and the associated increases in purchased crude oil, products and operating supplies and expenses of the Company s trading subsidiaries including Sinopec Hong Kong Co. and Unipec. The Company increased its equity interest in Unipec to 70% at the end of 1999 which resulted in the Company s accounting for it as a consolidated subsidiary for a full year in The Company reduced the operating loss of RMB 0.8 billion in 1999 to an operating loss of RMB 0.1 billion in LIQUIDITY AND CAPITAL RESOURCES Primary sources of funding for the Company have been cash provided by operating activities and short- and long-term borrowings and primary uses of funds by the Company have been for working capital, capital expenditures and repayment of short-term and long-term borrowings. As at 31 December 2000, the short-term debts (including short-term loans from Sinopec Group Company and fellow subsidiaries) of the Company amounted to RMB 58.7 billion (including the current portion of long-term debts, which was RMB 8.0 billion) and accounted for 46.1% of the total short-term and long-term debts (which longterm debts include interest free subordinated loan from Sinopec Group Company due in 2020) of the Company. Interest coverage ratio of the Company, calculated by dividing operating profit before depreciation, depletion and amortisation by interest expense, was 8.4 times for the year ended 31 December The Company has reduced through a variety of methods its short-term debts as a percentage of its outstanding debts as well as its overall debt levels in 2000, including: On 31 December 1999, RMB 13.1 billion of the bank loans of the Company were assumed by Sinopec Group Company and are included in the net contributions from Sinopec Group Company in the consolidated statements of shareholders equity of the Company. As at 30 April 2000, the Company had further reduced its total outstanding short- and long- term debts through a combination of using cash and cash equivalents and transferring receivables and equivalent amounts of outstanding debts to Sinopec Group Company. Approximately RMB 5.8 billion of the short- and long-term debts owed by the Company to nonaffiliated third parties were assumed by Sinopec Group Company in April 2000 in consideration The following table sets forth a condensed summary of the statements of cash flows for the years indicated. Year Ended 31 December RMB RMB (in billions) Net cash generated from operating activities: Net cash provided by operations (1) Net cash used in working capital and other assets and liabilities (2) (15.7) (1.1) Net interest and tax paid (3) (13.7) (10.3) Total Cash flows from investing activities: Capital expenditure (43.5) (33.1) Purchase of investments net of proceeds from disposal of investments (1.4) (1.3) Net increase in time deposits (17.3) Net changes in other activities (4) Total (61.9) (34.2) Cash flows from financing activities: Proceeds from initial public offering, net of issuing expenses 24.3 Cash provided by bank and other loans, net of repayments Cash provided by issuance of shares of subsidiaries, net of distributions to minority interests (0.6) 1.2 Cash from issuance of convertible bonds and debentures, net of maturities (0.7) 1.5 Cash contributions from/(distributions to) Sinopec Group Company (0.6) 0.5 Cash and cash equivalents distributed to Sinopec Group Company in connection with reorganisation (11.8) Total Net decrease in cash and cash equivalents (2.0) (5.6) Selected consolidated balance sheet items (as of year-end) Cash and cash equivalents Time Deposits with financial institutions (1) Represents profit from ordinary activities before taxation as adjusted for depreciation, depletion and amortisation, dry hole cost, provision for doubtful accounts, income from associates and jointly controlled entities, investment income, interest income, interest expense, unrealised foreign exchange (gains)/losses, loss on allocation of staff quarters, loss on disposal of property, plant and equipment, impairment losses on long-lived assets, reversal of impairment losses on long-lived assets net of depreciation effect and gains from issuance of shares by subsidiaries. (2) Represents decreases/(increases) in current assets, increases/(decreases) in current liabilities and increases in other assets, net of other liabilities. (3) Represents interest received, interest paid, investment income received, income tax paid, and tax refunds received. (4) Represents proceeds from disposal of staff quarters and property, plant and equipment, repayments from associates and jointly controlled entities, net of advances to associates and jointly controlled entities.

34 of the Company transferring an equivalent amount of receivables to Sinopec Group Company. In April 2000, RMB 35.6 billion of the shortand long-term debts of the Company were exchanged for an interest-free 20-year subordinated loan from Sinopec Group Company. This loan cannot be repaid prior to 31 December After 31 December 2006 and prior to its maturity date, this loan can only be repaid with the approval of the Company s independent shareholders. Upon maturity of the loan in 2020, the Company may choose to repay by one repayment in 2020 or two equal installments in 2020 and Net Cash Generated from Operating Activities Primarily as a result of increases in average realised sales prices of refined products, petrochemical products and crude oil, net cash provided by operations increased from 1999 to The net cash provided by operations increased significantly from RMB 36.7 billion in 1999 to RMB 57.3 billion in 2000 and was partially offset by cash used for working capital and other assets of RMB 15.7 billion and net interest and tax paid of RMB 13.7 billion. The increase in cash used in working capital and other assets and liabilities in 2000 is primarily due to increase in inventory of crude and refined products, to support higher level of sales and throughout in Net interest and tax paid for the year 2000, consisted primarily of interest payment of RMB 8.1 billion and RMB 6.8 billion of income tax paid, offset by RMB 1.1 billion of cash interest received. Cash Flows from Investing Activities Cash outflows of the Company for capital expenditure projects amounted to RMB 33.1 billion and RMB 43.5 billion in 1999 and 2000, respectively. The Company made investments of RMB 1.5 billion each in 1999 and 2000, respectively, in a variety of joint ventures, including service stations. The Company also realised RMB 0.4 billion and RMB 0.2 billion in 1999 and 2000, respectively, from the disposal of investments and staff quarters, property, plant and equipment. Cash flow from investing activities also includes a RMB 17.3 billion net increase in time deposits in 2000 of the net proceeds from the Company s initial public offering in October Cash Flows from Financing Activities Cash flows from financing activities increased significantly from RMB 3.3 billion in 1999 to RMB 32.0 billion in 2000 largely due to the net proceeds the Company received from its initial public offering in October Proceeds from bank and other loans were the largest source of financing, which were offset by debt repayments and maturity of debentures of four subsidiaries totalling RMB 683 million as well as RMB 642 million of dividends paid by the Company s listed subsidiaries to their minority shareholders and RMB 579 million of dividend paid by the Company in February Cash and cash equivalents as at 31 December 2000 was RMB 19.3 billion as compared to RMB 21.3 billion as at 31 December Time deposits with financial institutions as at 31 December 2000 increased to RMB 21.8 billion as compared to RMB 4.5 billion as at 31 December The aggregate maturities of long-term bank and other loans, and loans from Sinopec Group Company as at 31 December 2000 were as follows: Principal as at Maturity date 31 December 2000 RMB (in billions) Thereafter (1) (1) Includes an interest free loan from Sinopec Group Company of RMB 35.6 billion due 2020.

35 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Net borrowings by the Company for the years ended 31 December 1999 and 2000 were as follows: Year Ended 31 December RMB RMB (in billions) Proceeds from bank and other loans Repayments of bank and other loans (120.4) (86.7) (1) Net borrowings (1) In connection with the reorganisation, RMB 46.0 billion of short- and long-term debt was retained by Sinopec Group Company and RMB 13.1 billion of bank loans was assumed by Sinopec Group Company and reflected as an equity contribution from Sinopec Group Company on 31 December Total short- and long-term debts and loans from Sinopec Group Company and fellow subsidiaries outstanding and cash and cash equivalents as well as time deposits with financial institutions as at 31 December 1999 and 2000 were as follows: As of 31 December RMB RMB (in billions) Short-term debts Long-term debts Loans from Sinopec Group Company and fellow subsidiaries Total debts Cash and cash equivalents Time-deposits with financial institutions Total debts less cash and cash equivalents and time deposits with financial institutions In addition, the Company had, as at 31 December 2000, lease commitments of RMB 99.9 billion, contracted capital commitments of RMB 15.5 billion and contingent liabilities of RMB 0.9 billion, of which RMB 55 million were guarantees on bank loans to Sinopec Group Company and fellow subsidiaries. 34/35 Sinopec Corp. Annual Report and Accounts 2000 Historical and Planned Capital Expenditures The following table sets forth the capital expenditures of the Company by segment for 1999 and 2000 and the capital expenditures in each segment as a percentage of the Company total capital expenditures for such year RMB Percent RMB Percent (in billions, except percentage data) Exploration and production Refining Marketing and distribution Chemicals Corporate and others Total

36 In 2000, the Company spent: RMB 14.5 billion on the exploration and production segment. The Company added 367 million BOE, including 318 million BOE of crude oil and 49 million BOE of natural gas, to the proved reserves in 2000, and to take advantage of the high crude oil price prevailing in 2000, the Company also increased crude oil production by two million barrels from 1999; RMB 5.5 billion on the refining segment. The Company upgraded two major refining facilities and increased its rated capability to process imported crude oil with higher sulphur contents by 6 million tonnes per annum. The Company put 20 facilities into production in 2000, including hydro-cracking and coking facilities with rated capacity of 2.8 million tonnes per annum for severe process, reforming facilities with rated capacity of 600,000 tonnes per annum and diesel hydro refining facility with rated capacity of 3.7 million tonnes per annum to improve diesel quality, and to meet market demand for high-class highway asphalt, asphalt facilities with rated capacity of 300,000 tonnes per annum. RMB 16.1 billion on the marketing and distribution segment. The Company acquired and built over 8,800 service stations in 2000, and its retail market share for gasoline and diesel is estimated to have increased to 40% nationally and 61% in the Company s principal market at the end of RMB 6.2 billion on the chemical segment. The Company increased its chemical and fiber production capacity to produce more higher value added products, among which, the Company increased its polyester capacity by 100,000 tonnes per annum, PVC capacity by 44,000 tonnes per annum, and caprolactam capacity by 20,000 tonnes per annum. RMB 0.3 billion on the corporate and others segment to build an ERP system and other miscellaneous projects including petrochemical e-commerce platforms, refined products sales information system and financial and accounting information system. In 2001, the Company plans to spend: RMB 12.5 billion on crude oil and natural gas exploration and development to discover new reserves and to keep its crude oil and natural gas production relatively stable. The Company will continue to conduct exploration and production activities in oil fields in eastern China, and will begin to explore and develop the newly registered exploration areas in Tarim Basin, Sungar Basin and Hexi Zhoulang area in western China. RMB 6.8 billion on the refining segment to renovate its coastal refineries, particularly to increase their processing capacity of crude oil with higher sulphur content. In addition, the Company plans to construct more crude oil pipelines to reduce crude oil transportation cost. RMB 10.6 billion on the marketing and distribution segment to acquire, construct and renovate more service stations and oil storage facilities to further expand its market share of refined products. RMB 10.5 billion on the chemical segment to expand and renovate a few major ethylene facilities to increase ethylene production capacity and to produce more higher valueadded products. The Company also plans to implement energy saving and other cost reduction measures in such expansion or renovation projects. RMB 360 million on the corporate and others segment to continue construction of the ERP system and to implement or upgrade other miscellaneous projects. The Company plans to fund the capital and related expenditures principally through cash provided by operating activities, short- and longterm debts, cash and cash equivalents and a portion of the net proceeds received from the the Company s initial public offering in October The Company is in negotiation with Sinopec Group Company regarding a possible acquisition of its wholly-owned subsidiary Sinopec National Star. Sinopec National Star engages in both onshore and offshore exploration and production of crude oil and natural gas. In conjunction with these negotiations, the Company is also in the process of preparing an offering of its domestic shares, the proceeds of which will be primarily used for the purpose of financing the acquisition of Sinopec National Star, if the Company and Sinopec Group Company successfully conclude the negotiations, and construction of a crude oil pipeline from Ningbo via Shanghai to Nanjing and a refined product pipeline from Maoming via Guizhou to Kunming.

37 DISCLOSURE OF SIGNIFICANT EVENTS 36/37 Sinopec Corp. Annual Report and Accounts PROPOSED ISSUE OF A SHARES Sinopec Corp. intends to apply to China Securities Regulatory Commission for the issue of A Shares to natural persons and institutional investors in the PRC and to the Shanghai Stock Exchange for the listing of such A Shares on the Shanghai Stock Exchange. It is proposed that the number of A Shares to be issued will not be more than 3 billion A Shares. The net proceeds of the issue of A Shares are presently intended to be used for funding the acquisition of Sinopec National Star and other projects and the remaining balance as additional general working capital of Sinopec Corp.. The annual general meeting of Sinopec Corp. has been convened to be held at 9:00 a.m. on Tuesday, 5th June, 2001 at which a resolution will be put forward for the shareholders to approve the proposed issue of A Shares. Details of the proposed issue of A Shares are set out in Sinopec Corp. s notice of AGM published and despatched on Tuesday, 17th April A circular containing information regarding, inter alia, the A Share Issue and brief information regarding the Proposed Acquisition will be despatched to shareholders as soon as practicable. 2. PROPOSED ACQUISITION OF SINOPEC NATIONAL STAR Sinopec Corp. is considering to exercise the option granted to it by Sinopec Group Company, under a non-competition agreement of effective date 1st January 2000, to acquire certain assets owned by Sinopec National Star and/or interests in Sinopec National Star owned by Sinopec Group Company (the Proposed Acquisition ). If it proceeds, the consideration for the Proposed Acquisition will be funded by the proceeds or a portion of the proceeds arising from the A Share Issue or by internal resources of Sinopec Corp.. In accordance with the request of the relevant PRC authorities, the Board proposes to put forward at the Annual General Meeting resolutions relating to the proposed A Share Issue, the use of the proceeds from the A Share Issue mainly for the Proposed Acquisition, authorising the Directors: (i) to negotiate the terms of the Proposed Acquisition with Sinopec Group Company and to sign the acquisition agreement thereafter; (ii) to determine the preliminary purchase price for the Proposed Acquisition which shall not be lower than the appraised value of Sinopec National Star as confirmed by the PRC government and determined in accordance with PRC laws, the requirements under the Articles of Association, the requirements of foreign regulatory authorities and market practice. The final acquisition method, purchase price and acquisition agreement will be presented for approval at an extraordinary general meeting of Sinopec Corp., which will be convened at such time when appropriate having regard to the progress of the Proposed Acquisition. At the request of the PRC government, the purchase price shall not be lower than the appraised value of Sinopec National Star as confirmed by the PRC government. The Proposed Acquisition may or may not proceed. If the Proposed Acquisition proceeds, it will constitute a connected transaction for Sinopec Corp. under the Listing Rules. Sinopec National Star is a wholly-owned subsidiary of Sinopec Group Company which is the controlling shareholder of Sinopec Corp.. A formal announcement and a circular containing detailed information regarding the Proposed Acquisition, the necessary information as required under the Listing Rules (including the advice from the independent financial adviser and the recommendation of an independent board committee of Sinopec Corp. regarding the Proposed Acquisition) will be published as soon as possible. The final acquisition agreement will be put forward at a separate extraordinary general meeting of Sinopec Corp. to be convened for formal approval by the Shareholders and Sinopec Group Company and its associates shall abstain from voting at the extraordinary general meeting. 3. EMPLOYEE REDUCTION PLAN In order to improve its efficiency and profitability, Sinopec Corp. preliminarily plans to reduce the number of employees by 100,000 by way of retirement, voluntary resignation and/or redundancy under Sinopec Corp. s employee reduction plan in the years 2001 to 2005 (the Plan ). Sinopec Corp. plans to reduce the number of its employees by 27,000 in the year 2001 by way of retirement, voluntary resignation and redundancy. The Board estimated that the cost of compensation in the year 2001 will be RMB1.02 billion. The Board believes that, after the reduction in staff numbers in 2001, Sinopec Corp. will save labour costs of approximately RMB350 million annually. If the Plan is put into full effect as preliminarily planned in the following four years ( ), the total cost of

38 compensation payable to employees over these five years ( ) is estimated to be approximately RMB4.5 billion (subject to adjustment in accordance with any change in the economic condition of the PRC) and the saving of labour costs over that period is expected to be approximately RMB5.4 billion. The Board will continue to evaluate the Plan and the business operations and development of Sinopec Corp. and will, if it considers necessary and appropriate, improve or adjust the Plan. 4. HOUSING SUBSIDY PLAN In accordance with the relevant PRC regulations, the allocation of welfare staff quarters under housing reform policy already ceased. The PRC Ministry of Finance and certain provincial governmental authorities is gradually formulating cash-form housing subsidy plans. Sinopec Corp. is aware that the provision of housing subsidies is an important competitive factor in the labour market. In order to ensure that the level of employment benefits it provides can maintain its attractiveness, Sinopec Corp. is looking into the methods of providing housing subsidies, including wages increment and one-off compensation to eligible employees. In the following years, after the method of housing subsidies is clearly formulated, it will be reflected as appropriate in the accounts for the relevant year. In order to support Sinopec Corp., Sinopec Corp. s parent company, Sinopec Group Company, is willing to bear the costs of one-off housing subsidy plan in the future. 5. PROGRESS OF JOINT INVESTMENT SCHEMES WITH FOREIGN PARTICIPATION Sinopec Corp. s subsidiary Sinopec Yangzi Petrochemical Company Limited is partnered with BASF to develop a 600,000 tonnes per annum ethylene plant. The joint venture company was established in December The foreign investors of this project are BASF AG, BASF China Ltd and BASF Investments Company and the PRC investors are Sinopec Yangzi Petrochemical Corp., Sinopec Yangzi Petrochemical Co., Ltd. and Sinopec Corp.. The foreign investors and the PRC investors, respectively, hold 50% of the total investment. Of this, Sinopec Corp. holds 30% of the investment. It is expected that the joint venture company will complete construction and commence production in Sinopec Corp., Sinopec Shanghai Petrochemical Company Limited and bp Chemicals East China Investments Ltd. jointly invested in a 900,000 tonnes per annum ethylene plant in Shanghai. The foreign investors and the PRC investors, respectively, hold 50% of the total investment. Of this, Sinopec Corp. holds 30% of the investment. The feasibility study report for the project was approved by the respective board of Sinopec Corp. and the foreign investors in March 2001 and has been submitted to the PRC State Development and Planing Commission. It is expected that the joint venture company will complete construction and commence production in In the year 2000, Sinopec Corp. has established strategic alliance and co-operation relationship with international companies such as ExxonMobil, Shell, bp and ABB Lummus.

39 REPORT OF THE BOARD OF DIRECTORS 38/39 Sinopec Corp. Annual Report and Accounts 2000 The Board has pleasure in presenting their report and the audited accounts of Sinopec Corp. and its subsidiaries (the Company ) for the year ended 31st December PRINCIPAL ACTIVITIES The Company comprises integrated petroleum and petrochemical companies with upstream, midstream and downstream operations. The businesses of the Company include: exploring and developing, producing and trading crude oil and natural gas processing crude oil into refined products, producing refined products and trading, transporting, distributing and marketing refined products producing, distributing and trading petrochemical products The analysis of the principal activities of the Company during the financial year is set out in note 34 on the accounts. RESULTS AND PROFIT DISTRIBUTION The results of the Company for the year ended 31st December 2000 and its financial position as at that date are set out on pages 58 to 89 of the annual report. DIVIDENDS Upon the legal establishment of Sinopec Corp. in February 2000, dividends amounting to RMB579 million were paid. The Board recommends the payment of a final dividend of RMB0.08 per share totalling RMB6,712 million for the year ended 31st December The dividend has not been provided for in the accounts for the year ended 31st December The profit appropriation plan will be put forward for the shareholders to consider at the Annual General Meeting of Sinopec Corp. for the year 2000 to be held on Tuesday, 5th June Subject to shareholders approval at the Annual General Meeting of Sinopec Corp. to be held on Tuesday, 5th June 2001, the proposed final dividend will be paid on or before Friday, 27th July 2001 to those shareholders whose names appear on the register of members of Sinopec Corp. at the close of business on Sunday, 6th May In order to qualify for the final dividend for H Shares, all share certificates, accompanied by the completed transfer forms, must be lodged with Sinopec Corp. s share registrar, Hong Kong Registrars Limited, 2/F., Vicwood Plaza, 199 Des Voeux Road Central, Hong Kong, by 4:00 p.m. on Friday, 4th May Dividends will be denominated and declared in Renminbi. Dividends on domestic shares will be paid in Renminbi and dividends on foreign shares will be paid in Hong Kong dollars. The exchange rate for dividends to be paid in Hong Kong dollars is the mean of the average rate of Hong Kong dollars to Renminbi announced by the People s Bank of China during the week prior to the date of declaration of dividends. An individual H Shareholder or holder of ADSs who is resident and domiciled in the UK will, in general, be liable to UK income tax on dividends received from Sinopec Corp.. Where such an H Shareholder receives dividends from Sinopec Corp. without deduction of tax the amount included as income for the purposes of computing his or her UK tax liability is the gross amount of the dividend and this is taxed at the appropriate marginal rate (currently 10 per cent in the case of a basic rate of lower rate taxpayer and 32.5 per cent in the case of a higher rate taxpayer). Where tax is withheld from the dividend, credit will be given against UK income tax for any tax withheld from the dividend up to the amount of the UK income tax liability. Sinopec Corp. would assume responsibility for withholding tax at source within the PRC if such a withholding is required. The current UK-Chinese Double Taxation Agreement provides that the maximum withholding tax on dividends from Chinese resident companies paid to UK residents is 10 per cent of the gross dividend. UK resident H Shareholders or holder of ADSs who are individuals not domiciled within the UK will only be liable to income tax on a dividend from Sinopec Corp. to the extent that it is remitted to the UK. An H Shareholder or holder of ADSs which is a UK tax resident company will, in general, be liable to UK corporation tax on dividends received from Sinopec Corp., with double tax relief available for withholding tax suffered. In certain cases (not discussed here), an H Shareholder or holder of ADSs which is a UK tax resident company may be entitled to relief for underlying tax paid by Sinopec Corp. or its subsidiaries. FINANCIAL HIGHLIGHTS A summary of the results of the Company for each of the four years ended 31st December 2000 and of the assets, liabilities and shareholders funds of the Company as at 31st December 2000, 1999 and 1998 is set out on pages 2 to 3. BANK LOANS AND OTHER BORROWINGS The bank loans and other borrowings as at 31st December 2000 are detailed in note 26 on the accounts. FIXED ASSETS The movements of fixed assets during the year are summarised in note 17 on the accounts. PRINCIPAL SUBSIDIARIES As at 31st December 2000, details of the principal subsidiaries of Sinopec Corp. are set out in note 35 on the accounts. RESERVES Details of the movements in reserves are set out in note 30 on the accounts. DONATIONS During the year, donations for charitable purposes amounting to approximately RMB120 million were made. EMPLOYEES As at 31st December 2000, the Company had approximately 508,168 employees.

40 The breakdown of the employees by business divisions is set out below: Number of employees Percentage of the total number of employees Exploration and Production 164, % Refining 88, % Marketing and Distribution 113, % Chemicals 136, % Company and others 5, % Total 508, % The breakdown of the employees by job nature is set out below: Number of employees Percentage of the total number of employees Management staff 78, % Engineering and technology staff 60, % Manual workers 312, % Other staff 57, % Total 508, % The breakdown of employees by qualification is set out below: Number of employees Percentage of the total number of employees Master s Degree or above 2, % University 39, % Junior College 65, % Technical Secondary School 60, % Secondary, Technical School and below 340, % Total 508, % RETIREMENT PLAN Details of the Company s employee retirement plan are set out in note 33 on the accounts. PRE-EMPTIVE RIGHTS Pursuant to the Articles of Association of Sinopec Corp. and the laws of the PRC, Sinopec Corp. is not subject to any pre-emptive rights requiring it to offer new issue to its existing shareholders in proportion to their shareholdings. MAJOR SUPPLIERS AND CUSTOMERS For the year ended 31st December 2000, all of the five largest suppliers of the Company were crude oil suppliers. Among them, the largest supplier provided 15.3% of the total crude oil requirements of the Company and these five main suppliers provided 45.1% of the total crude oil requirements of the Company. The five main customers of the Company contributed less than 30% of the total annual sales of the Company. During the period covered by this report, none of the Directors, Supervisors or their associates or any person holding more than 5% of Sinopec Corp. s share capital has any interest in the above main suppliers and customers.

41 REPORT OF THE BOARD OF DIRECTORS (CONTINUED) SHARE CAPITAL STRUCTURE As of 31st December 2000, Sinopec Corp. s share capital consisted of: Number of Percentage of Type of share capital Shares share capital (%) State-owned Domestic Shares 67,121,951, % H Shares 16,780,488, % Total 83,902,439, % The changes in the share capital of Sinopec Corp. during the year are set out below: 1. Upon the establishment of Sinopec Corp., its registered share capital was RMB68.8 billion divided into 68.8 billion domestic shares of RMB1.00 shares; 2. After the global offering in October 2000, the registered share capital of Sinopec Corp. was increased from RMB68.8 billion to RMB83,902,439,000, consisting of 67,121,951,000 domestic shares and 16,780,488,000 H Shares. SUBSTANTIAL SHAREHOLDERS As of 31st December 2000, holders of Sinopec Corp. s domestic shares representing over 10% of Sinopec Corp. s total issued capital were as follows: Number of Shares Name of Shareholders (in millions) Percentage (%) China Petrochemical Corporation 47, China Development Bank 8, China Cinda Asset Management Corporation 8, As of 31st December 2000, the holder of H shares representing over 10% of Sinopec Corp. s total issued capital was as follows: Number of Shares Name of Shareholders (in millions) Percentage (%) HKSCC (Nominees) Limited 8, /41 Sinopec Corp. Annual Report and Accounts 2000 Other than the information stated above, Sinopec Corp. is not aware of any interests required to be recorded by Sinopec Corp. pursuant to Section 16(1) of the Securities (Disclosure of interests) Ordinance (Cap. 396 of the Laws of Hong Kong) ( SDI Ordinance ) as of 31st December INTERESTS OF DIRECTORS, SUPERVISORS AND OTHER SENIOR MANAGEMENT IN THE SHARE CAPITAL OF SINOPEC CORP. None of the directors or supervisors or senior management or any of their spouses or children under the age of 18 had, as at 31st December 2000, any interest in any shares or debentures of Sinopec Corp. or any associated corporation (within the meaning of the SDI Ordinance) which are required to be notified to Sinopec Corp. and the Hong Kong Stock Exchange pursuant to section 28 of the SDI Ordinance (including interests which they have taken or are deemed to have taken under Section 31 or Part 1 of the Schedule to the SDI Ordinance) or which are required pursuant to Section 29 of the SDI Ordinance to be entered in the register referred to therein, or any interests in warrants to subscribe for shares in Sinopec Corp. or any associated corporation (as so defined) which are required to be notified to Sinopec Corp. and the Hong Kong Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies or, in the case of supervisors, which would be required to be notified as described above if they had been directors.

42 DIRECTORS OR SUPERVISORS INTERESTS IN CONTRACTS None of the Directors nor the Supervisors of the Company had any beneficial interests in any material contracts to which Sinopec Corp., its holding company or any of its subsidiaries or fellow subsidiaries was a party subsisted at the end of the year or at any time during the year. No Director has entered into any service contracts with Sinopec Corp. which is not terminable by Sinopec Corp. within one year without payment other than statutory compensation. DETAILS OF THE CURRENT SESSION OF DIRECTORS AND SUPERVISORS OF SINOPEC CORP. Name Li Yizhong Chen Tonghai Wang Jiming Mou Shuling Zhang Jiaren Cao Xianghong Chen Qingtai Liu Guoguang Ho Tsu Kwok Charles Huang Min Yu Qingbo Wang Zuoran Zhang Chongqing Wang Peijun Wang Xianwen Hou Shaojian Jiang Baoxing Cui Jianmin Positions with Sinopec Corp. Chairman of the Board of Directors Vice Chairman of the Board of Directors Director; President Director; Vice President Director; Vice President and Chief Financial Officer Director; Vice President Independent Non-executive Director Independent Non-executive Director Independent Non-executive Director Employee Representative Director Chairman of the Supervisors Committee Supervisor Supervisor Supervisor Supervisor Supervisor Employee Representative Supervisor Independent Supervisor SENIOR MANAGEMENT COMPENSATION SYSTEM In order to better incentivise the senior management of the Company and improve shareholders value, upon the recommendation of its Board of Directors the shareholders adopted on 7th September 2000 a special compensation system for the senior management of the Company designed with the assistance of an independent compensation consulting firm. The system is designed to link its senior management s financial interests with its results of operations and the performance of its shares. Under this system, the senior management s compensation will consist of three components: basic salaries; performance bonuses; and share appreciation rights, (the SARs ). Basic salaries include wages, housing allowances, other allowances and retirement fund. Under the system, the senior management of the Company will sign performance evaluation agreements with the Company, which will set up some key performance indexes ( KPI ), to be used as basis for the senior management s performance bonuses. The performance evaluation system will rely on information provided by the management information system to ensure that the management s performance evaluation process is fair and transparent. In addition, the Company will grant SARs to approximately 480 employees, including members of the Board of Directors and the supervisory committee (excluding independent Directors and independent Supervisors), the president, vice presidents, the chief financial officer, heads of business segments and managers of departments, branches and subsidiaries. The exercise price of the initially granted SARs will be the initial public offering

43 REPORT OF THE BOARD OF DIRECTORS (CONTINUED) 42/43 Sinopec Corp. Annual Report and Accounts 2000 price. Upon exercise of the SARs, the exercising participant will receive payment, subject to any withholding tax, equal to the product of the number of SARs exercised and the difference of exercise price and market price of H Shares at the time of exercise. The senior management s compensation, such as the performance bonuses and the SARs, will account for approximately 75% of their total potential compensation. As the management level of the recipient rises, the SARs will constitute an increasingly larger proportion of the person s compensation package. DIRECTORS AND SUPERVISORS COMPENSATION The aggregate amount of salary and performance bonus paid by Sinopec Corp. to their Directors (other than the independent non-executive Directors) during the year ended 31st December 2000 was approximately RMB754,700. The aggregate amount of salaries and performance bonus paid by Sinopec Corp. to the Supervisors (not including the independent Supervisors) during the year ended 31st December 2000 was approximately RMB545,400. The aggregate amount of salaries and performance bonus paid by Sinopec Corp. to executive officers during the year ended 31st December 2000 and was approximately RMB72,300. No other emoluments have been paid or are payable, in respect of the year ended 31st December 2000, by Sinopec Corp. to the independent non-executive Directors and the independent supervisor. DIRECTORS MEETINGS All directors of Sinopec Corp. have complied with the Company Law of the PRC and regulations of Sinopec Corp. s Articles of Association, and have executed their responsibilities as set forth in Sinopec Corp. s Articles of Association and the resolutions of general meetings. The Board held four meetings and in addition passed two sets of written resolutions of the Board during the report period, details of which were as follows: 1. The first meeting of the first term of the Board was held at the head office of Sinopec Corp. on 22nd February 2000 at which the chairman, vice-chairman, president, vicepresident and the company secretary were elected. 2. Written resolutions of the Board in lieu of meeting were unanimously passed on 15th March 2000 to establish a strategic planning committee and an audit committee, appoint the financial controller and establish the Secretariat of the Board and appoint its person-in-charge. 3. The second meeting of the first term of the Board was held at the head office of Sinopec Corp. on 18th May 2000 at which resolutions were passed to approve the Rules and Regulations of the Board, the Investment Feasibility Report in 2000, the Report on Operations in 2000, and the accounting policies for the year 2000, to establish a compensation committee and certain amendments to the articles of association of Sinopec Corp.. 4. Written resolutions of the Board in lieu of meeting were unanimously passed on 13th July 2000 to approve the reorganisation proposal and the listing of H Shares, the appointment of international and domestic auditors and the appointment of a labour representative to the compensation committee. 5. The third meeting of the first term of the Board was held at the head office of Sinopec Corp. on 6th September 2000 at which resolutions were passed to approve the Report on the Operating Revenues from January to July 2000 and the work status for the five month period thereafter, the Progress Report on the listing and the relevant documents and matters relating to listing.

44 6. The fourth meeting of the first term of the Board was held at the head office of Sinopec Corp. on 15th December 2000 at which resolutions were passed to approve the Report on the Operations and Investment Plans in 2001, the Report on the financial status of the Company after issue of shares and the Regulations governing the representatives of shareholders, directors and supervisors of the wholly-owned subsidiaries, controlling shareholders and substantial shareholder of Sinopec Corp.. The Board will continue to act with integrity and diligence, and will faithfully work for the best interests of Sinopec Corp. and the shareholders of Sinopec Corp.. SHAREHOLDERS MEETINGS The following resolutions were passed by the shareholders of Sinopec Corp. in this year: 1. On 22nd February 2000, China Petrochemical Corporation, as the sole promoter of Sinopec Corp., convened an inaugural meeting of Sinopec Corp. at which the report on the establishment of Sinopec Corp. and the initial articles of association of Sinopec Corp. were adopted and the directors and supervisors of the first session were appointed. 2. An extraordinary general meeting of Sinopec Corp. was held on 30th April 2000 at which a resolution was passed to approve the appointment of Mr. Cui Jianmin as the independent supervisor of Sinopec Corp.. 3. An extraordinary general meeting of Sinopec Corp. was held on 9th June 2000 at which a resolution was passed to approve the appointment of Ho Tsu Kwok Charles as an independent non-executive Director of Sinopec Corp.. 4. An extraordinary general meeting of Sinopec Corp. was held on 25th July 2000 at which resolutions were passed to approve, among other things: (1) the conversion of Sinopec Corp. into a public subscription company, increase in registered capital, the issue of H shares and the listing and authorising the directors to act on related matters; (2) the adoption of its Articles of Association; (3) the appointment of domestic and international auditors; (4) the approval of the directors service contracts; (5) the approval of the supervisors service contracts. 5. A written resolution was passed by the shareholders of Sinopec Corp. on 7th September 2000 in respect of the following matters: (1) the Senior Management Compensation System of Sinopec Corp., the Share Appreciation Rights Scheme of Sinopec Corp. and its regulations; (2) authorising the directors to repurchase shares of Sinopec Corp. under the Repurchase Mandate; (3) the Capital Expenditure Plan of Sinopec Corp.. MAJOR LITIGATION The Company is involved in certain judicial and arbitration proceedings before Chinese courts or arbitration bodies concerning matters arising in connection with the conduct of its businesses. The board of directors believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on the financial condition or operations of the Company. CONNECTED TRANSACTIONS Details of the connected transactions of the Company carried out in the year are disclosed in note 32 on the accounts and pages 48 to 52 of the annual report. PURCHASE, SALE OR REDEMPTION OF SHARES For the year ended 31st December 2000, neither Sinopec Corp. nor any of its subsidiaries purchased, sold or redeemed any of the securities of Sinopec Corp.. COMPLIANCE WITH THE CODE OF BEST PRACTICE Sinopec Corp. has established an audit committee in accordance with its undertaking mentioned in its prospectus to comply with the Code of Best Practice as set out in Appendix 14 of the Listing Rules. The chairman of the transformed audit committee is Mr. Chen Qingtai, an independent non-executive Director. Other than this, the Directors believe that Sinopec Corp. complied with the Code of Best Practice throughout the period from the date of commencement of listing of the shares of the Company to 31st December AUDITORS KPMG Peat Marwick Huazhen and KPMG were Sinopec Corp. s domestic and international auditors respectively in A resolution for the reappointment of KPMG Peat Marwick Huazhen and KPMG as the domestic and international auditors of Sinopec Corp., respectively in 2001, is to be proposed at the forthcoming annual general meeting of Sinopec Corp.. On behalf of the Board Li Yizhong Chairman Beijing the PRC, 12th April 2001

45 REPORT OF THE SUPERVISORY COMMITTEE To all shareholders: During the report period under review, members of the Supervisory Committee, in compliance with the Company Law of the People s Republic of China and the Articles of Association of Sinopec Corp., and abiding by the principles of honesty and trustworthiness, have fulfilled diligently their supervising responsibilities to safeguard the interests of Sinopec Corp. and its shareholders. 44/45 Sinopec Corp. Annual Report and Accounts 2000 Since its inception the Supervisory Committee has convened six meetings. At the first meeting convened on 22nd February 2000, Mr. Yu Qingbo was elected as the Chairman of the Supervisory Committee for its first term. On 18th May of the same year at the second meeting convened, the Committee reviewed and adopted the Rules of Procedure of the Supervisory Committee of China Petroleum & Chemical Corporation. At the third meeting convened on 15th July of the same year the Committee reviewed and passed the Rules of Implementation of the Supervisory Committee of China Petroleum & Chemical Corporation for the Inspection of the Company s Financial Affairs. On 15th December of that year at the fourth meeting convened, the Committee verified and passed Sinopec Corp. s 2000 Interim Financial Statement and independent auditors report issued by international auditors. At the fifth meeting convened on 2nd March 2001, the Committee was briefed about site investigations and inspections that some of its members conducted at Sinopec Corp. s Shanghai Gaoqiao Branch and Jiangsu Oilfield Branch. On 12th April 2001, at the sixth meeting convened, the Committee heard a report by Sinopec Corp. s Finance Department on the 2000 final financial results and by KPMG on its auditors report, and discussed and passed the Report of the Supervisory Committee. At the same meeting, the Committee was briefed about site investigations and inspections that some of its members conducted at Sinopec Corp. s Jiangxi Petroleum Branch. In the opinion of the Supervisory Committee, in the year 2000, Sinopec Corp. s operations were in strict compliance with the Company Law of the People s Republic of China, other pertinent Chinese laws and regulations, provisions of Chinese and overseas securities regulatory institutions, and the Articles of Association of Sinopec Corp.; connected transactions were conducted in a standardized, open and Mr. Yu Qingbo, Chairman of Supervisory Committee transparent manner; management was exercised with centralized decision making, delegated authorities and specialized business operations. Members of the Board of Directors and senior members of the management consistently abided by the principles of diligence and integrity, sincerely targeted business operations at maximizing profit and shareholders returns, led the entire company in seizing opportunities arising from the monthly linkage of the refined product prices to the international market since June, and in reducing costs, expanding markets, effecting reforms and innovation and reinforcing management. Sinopec Corp. s net profit excluding minority interests was RMB billion. To the current knowledge of the Supervisory Committee, there was no instance of Directors or senior members of the management violating any laws, regulations, the Articles of Association of Sinopec Corp. or the interests of Sinopec Corp.. The Supervisory Committee reviewed the relevant information including the unqualified auditors reports issued by domestic and international auditors, and to be submitted to the Annual General Meeting by the Board of Directors. The Supervisory Committee believes that the Financial Statements for the year 2000 present a true, accurate and objective view of the state of the financial affairs and operating results of Sinopec Corp., that the operating results are true, all expenses and costs and the appropriations are in compliance with pertinent laws, regulations and the Articles of Association of Sinopec Corp., that the profit distribution plans balance the shareholders interests and the long-term interests of Sinopec Corp., that the financial structure is rational, and the accounting practice and financial management are in compliance with the relevant requirements of the Enterprise Accounting Standards and Enterprise Accounting System promulgated by the Ministry of Finance. In the year ahead the Supervisory Committee will live up to the trust of all shareholders, intensify supervision, and make renewed efforts in ensuring Sinopec Corp. s earnings growth in 2001 and in safeguarding the interests of investors. Yu Qingbo Chairman of the Supervisory Committee Beijing, the PRC 12th April, 2001

46 DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Ms. Huang Min, Director 2 Mr. Zhang Jiaren, Director, Vice President and CFO 3 Mr. Mou Shuling, Director and Vice President 4 Mr. Cao Xianghong, Director and Vice President 5 Mr. Ho Tsu Kwok Charles, Independent Non-Executive Director 6 Mr. Wang Jiming, Director and President 7 Mr. Chen Qingtai, Independent Non-Executive Director 8 Mr. Li Yizhong, Chairman 9 Mr. Liu Guoguang, Independent Non-Executive Director 10 Mr. Chen Tonghai, Vice Chairman