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SNP China Petroleum & Chemical

Filed: 20 Apr 21, 6:53am

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT . . . . . . . . . . . . . . . . . . .

 

FOR THE TRANSACTION PERIOD FORM                       TO                        

 

COMMISSION FILE NUMBER 1-15138

 

中国石油化工股份有限公司
CHINA PETROLEUM & CHEMICAL CORPORATION

 

(Exact name of Registrant as specified in its charter)

 

The People’s Republic of China

 

(Jurisdiction of incorporation or organization)

 

22 Chaoyangmen North Street
Chaoyang District, Beijing, 100728

The People’s Republic of China

 

(Address of principal executive offices)

 

Mr. Huang Wensheng
22 Chaoyangmen North Street
Chaoyang District, Beijing, 100728
The People’s Republic of China
Tel: +86 (10) 5996 0028

 

 

Fax: +86 (10) 5996 0386

 

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of Each Class Trading Symbol(s) Name of Each Exchange On Which Registered
American Depositary Shares, each representing 100 H Shares of par value RMB 1.00 per share SNP New York Stock Exchange, Inc.
H Shares of par value RMB 1.00 per share   New York Stock Exchange, Inc.*

 

 

*Not for trading, but only in connection with the registration of American Depository Shares.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

None

 

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

None

 

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

H Shares, par value RMB 1.00 per share25,513,438,600
A Shares, par value RMB 1.00 per share95,557,771,046

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

☒ Yes   ☐ No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

☐ Yes   ☒ No

 

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes   ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒ Yes   ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Emerging growth company ☐

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ☐ International Financial Reporting Standards as issued
by the International Accounting Standards Board ☒
 Other ☐

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

☐ Item 17   ☐ Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes   ☒ No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. * 

☐ Yes   ☐ No

 

*This requirement does not apply to the registrant in respect of this filing.

 

 

Table of Contents

 

CERTAIN TERMS AND CONVENTIONS1
CURRENCIES AND EXCHANGE RATES2
FORWARD-LOOKING STATEMENTS2
ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS3
ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE3
ITEM 3.KEY INFORMATION3
ITEM 4.INFORMATION ON THE COMPANY17
ITEM 4A.UNRESOLVED STAFF COMMENTS38
ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS38
ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES60
ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS70
ITEM 8.FINANCIAL INFORMATION73
ITEM 9.THE OFFER AND LISTING74
ITEM 10.ADDITIONAL INFORMATION74
ITEM 11.QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK89
ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES93
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES95
ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS95
ITEM 15.CONTROLS AND PROCEDURES95
ITEM 16.RESERVED96
ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT96
ITEM 16B.CODE OF ETHICS96
ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES96
ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES97
ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS97
ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT97
ITEM 16G.COMPARISON OF NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE RULES AND CHINA CORPORATE GOVERNANCE RULES FOR LISTED COMPANIES98
ITEM 16H.MINE SAFETY DISCLOSURE102
ITEM 17.FINANCIAL STATEMENTS102
ITEM 18.FINANCIAL STATEMENTS102
ITEM 19.EXHIBITS103

 

1

CERTAIN TERMS AND CONVENTIONS

 

Definitions

 

Unless the context otherwise requires, references in this annual report to:

 

“Sinopec Corp.,” “Company,” “we,” “our” and “us” are to China Petroleum & Chemical Corporation, a PRC joint stock limited company, and its subsidiaries;

 

“Sinopec Group Company” are to our controlling shareholder, China Petrochemical Corporation, a PRC limited liability company;

 

“Sinopec Group” are to the Sinopec Group Company and its subsidiaries other than Sinopec Corp. and its subsidiaries;

 

“provinces” are to provinces and to provincial-level autonomous regions and municipalities in China which are directly under the supervision of the central PRC government;

 

“RMB” are to Renminbi, the currency of the PRC;

 

“HK$” are to Hong Kong dollar, the currency of the Hong Kong Special Administrative Region of the PRC; and

 

“US$” are to US dollars, the currency of the United States of America.

 

Conversion Conventions

 

Unless otherwise specified, conversion of crude oil from tonnes to barrels are made at a rate of one tonne to 7.10 barrels for crude oil we produced domestically and one tonne to 7.21, 7.21 and 7.20 barrels for the years ended December 31, 2018, 2019 and 2020, respectively, for crude oil we produced overseas. Conversions of natural gas from cubic meters to cubic feet are made at a rate of one cubic meter to 35.31 cubic feet; and 6,000 cubic feet of natural gas is converted to one BOE.

 

Glossary of Technical Terms

 

Unless otherwise indicated in the context, references to:

 

“BOE” are to barrels-of-oil equivalent.

 

“primary distillation capacity” are to the crude oil throughput capacity of a refinery’s crude oil distillation units, calculated by estimating the number of days in a year that such crude oil distillation units are expected to operate, excluding downtime for regular maintenance, and multiplying that number by the amount equal to the units’ optimal daily crude oil throughput.

 

“rated capacity” are to the output capacity of a given production unit or, where appropriate, the throughput capacity, calculated by estimating the number of days in a year that such production unit is expected to operate, excluding downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output or throughput, as the case may be.

1

CURRENCIES AND EXCHANGE RATES

 

We publish our financial statements in Renminbi. Unless otherwise indicated, all translations from Renminbi to US dollars in this annual report were made at RMB6.8976 to US$1.00, the average of mid-point exchange rates of Renminbi as published by the PRC State Administration of Foreign Exchange (SAFE) for the year of 2020. We do not suggest that the Renminbi or US dollar amount can be converted to US dollars or Renminbi, as appropriate, at this exchange rate or any specific exchange rate.

 

FORWARD-LOOKING STATEMENTS

 

This annual report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this annual report that address activities, events or developments which we expect or anticipate will or may occur in the future are hereby identified as forward-looking statements for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words such as believe, intend, expect, anticipate, project, estimate, predict, plan and similar expressions are also intended to identify forward-looking statements. These forward-looking statements address, among others, such issues as:

 

amount and nature of future exploration and development,

 

future prices of and demand for our products,

 

future earnings and cash flow,

 

development projects and drilling prospects,

 

future plans and capital expenditures,

 

estimates of proved oil and gas reserves,

 

exploration prospects and reserves potential,

 

expansion and other development trends of the petroleum and petrochemical industry,

 

production forecasts of oil and gas,

 

expected production or processing capacities, including expected rated capacities and primary distillation capacities, of units or facilities not yet in operation,

 

expansion and growth of our business and operations, and

 

our prospective operational and financial information.

2

These statements are based on assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. However, whether actual results and developments will meet our expectations and predictions depends on a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including the risks set forth in “Item 3. Key Information—D. Risk Factors” and the following:

 

fluctuations in crude oil and natural gas prices,

 

fluctuations in prices of our refined oil and chemical products,

 

failures or delays in achieving production from development projects,

 

failures to receive oil and gas storage and transportation services subject to terms we desire,

 

potential acquisitions and other business opportunities,

 

general economic, market and business conditions, and

 

other risks and factors beyond our control.

 

Consequently, all of the forward-looking statements made in this annual report are qualified by these cautionary statements and readers are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements should be considered in light of the various important factors set forth above and elsewhere in this Form 20-F. In addition, we cannot assure you that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected effect on us or our business or operations.

 

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

 

Not applicable.

 

ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.KEY INFORMATION

 

A.SELECTED FINANCIAL DATA

 

The selected consolidated statement of income data (except per ADS data) and consolidated cash flows data for the years ended December 31, 2018, 2019 and 2020, and the selected consolidated balance sheet data as of December 31, 2019 and 2020 are derived from, and should be read in conjunction with, the audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statement of income data (except per ADS data) and consolidated cash flows data for the years ended December 31, 2016 and 2017 and the selected consolidated balance sheet data as of December 31, 2016, 2017 and 2018 are derived from our consolidated financial statements as restated as indicated hereinafter which are not included elsewhere in this annual report.

3

Moreover, the selected financial data should be read in conjunction with our consolidated financial statements and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Our consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board.

 

  Year Ended December 31, 
  2016  2017  2018  2019  2020 
  (RMB in millions, except per share, per ADS data and number of shares) 
Consolidated Statement of Income Data(1)(4)(5):               
Operating revenues  1,923,273   2,348,932   2,882,077   2,959,799   2,105,984 
Operating expenses  (1,845,609)  (2,277,115)  (2,799,513)  (2,873,425)  (2,092,791)
Operating income  77,664   71,817   82,564   86,374   13,193 
Earnings before income tax  80,544   86,964   99,339   90,022   48,143 
Income tax expense  (20,715)  (16,291)  (20,278)  (17,939)  (6,219)
Net income attributable to owners of the Company  46,884   51,384   61,708   57,493   33,096 
Basic earnings per share(3)  0.387   0.424   0.510   0.475   0.273 
Basic earnings per ADS(3)  38.72   42.44   50.97   47.49   27.34 
Diluted earnings per share(3)  0.387   0.424   0.510   0.475   0.273 
Diluted earnings per ADS(3)  38.72   42.44   50.97   47.49   27.34 
Declared cash dividend per share  0.249   0.500   0.420   0.310   0.200 
Segment Operating Income/(Loss)                    
Exploration and production  (36,641)  (45,944)  (10,107)  9,284   (16,476)
Refining  56,265   65,007   54,827   30,632   (5,555)
Marketing and distribution  32,153   31,569   23,464   29,107   20,828 
Chemicals  21,094   27,324   27,307   17,327   10,372 
Corporate and others  3,212   (4,484)  (9,293)  64   (393)
Elimination of inter-segment sales  1,581   (1,655)  (3,634)  (40)  4,417 
Operating income  77,664   71,817   82,564   86,374   13,193 
Shares                    
Basic weighted average number of A and H shares  121,071,209,646   121,071,209,646   121,071,209,646   121,071,209,646   121,071,209,646 
Diluted weighted average number of A and H shares  121,071,209,646   121,071,209,646   121,071,209,646   121,071,209,646   121,071,209,646 

 

  As of December 31, 
  2016  2017  2018  2019  2020 
  (RMB in millions, except per share, per ADS data and number of shares) 
Consolidated Balance Sheet Data(1)(4):                    
Cash and cash equivalents  124,513   113,389   111,927   60,438   87,559 
Total current assets  413,322   530,610   505,471   447,310   455,395 
Total non-current assets  1,089,911   1,069,984   1,091,930   1,312,976   1,278,410 
Total assets  1,503,233   1,600,594   1,597,401   1,760,286   1,733,805 
Total current liabilities  (488,292)  (582,711)  (568,611)  (579,978)  (522,190)
Short-term debts and loans from Sinopec Group Company and fellow subsidiaries (including current portion of long-term debts)  (76,819)  (82,649)  (63,127)  (83,810)  (29,033)
Long-term debts and loans from Sinopec Group Company and fellow subsidiaries (excluding current portion of long-term debts)  (117,502)  (99,174)  (93,581)  (58,834)  (83,815)
Total equity attributable to owners of the Company  (711,954)  (727,000)  (718,077)  (738,946)  (741,494)
Total equity  (833,000)  (854,509)  (857,998)  (877,304)  (882,858)

 

  Year Ended December 31, 
  2016  2017  2018  2019  2020 
  (RMB in millions, except per share, per ADS data and number of shares) 
Statement of Cash Flow and Other Financial Data(1)(4):               
Net cash generated from operating activities  214,341   191,166   175,937   153,619   167,518 
Net cash used in financing activities  (92,880)  (56,562)  (111,269)  (84,204)  (36,955)
Net cash used in investing activities  (66,254)  (145,375)  (66,648)  (121,051)  (102,203)
Capital expenditure Exploration and production                    
    Exploration and production  32,187   31,344   42,155   61,739   56,416 
Refining  14,347   21,075   27,908   31,372   24,722 
Marketing and distribution  18,493   21,539   21,429   29,566   25,403 
Chemicals  8,849   23,028   19,578   22,438   26,202 
Corporate and others  2,580   2,398   6,906   1,979   2,312 
Total  76,456   99,384   117,976   147,094   135,055 

4

 

(1)The acquisition of 55% equity interest of Shanghai Gaoqiao Petrochemical Co., Ltd. (“Gaoqiao”) in 2016 from Sinopec Group Company were considered as “combination of entities under common control” and accounted in a manner of predecessor value accounting. Accordingly, the acquired assets and liabilities have been accounted for at historical cost and the consolidated financial statements for periods prior to the combinations have been restated to include the financial condition and results of operation of these acquired business on a combined basis.

 

(2)In 2020, the Company entered into an Agreement with Sinopec Assets Management Corporation (“SAMC”) in relation to the formation of Sinopec Baling Petrochemical Co. Ltd (“Baling Petrochemical”). After the capital injection, the Company remained to hold 55% of Baling Petrochemical’s voting rights and was still able to control Baling Petrochemical. As Sinopec Group Company controls both the Company and SAMC, the transaction described above between Sinopec and SAMC has been accounted as business combination under common control. Accordingly, the assets and liabilities of which SAMC subscribed have been accounted for at historical cost, and the consolidated financial statements of the Company prior to these acquisitions have been restated to include the results of operation and the assets and liabilities of Baling Branch of SAMC on a combined basis. Such acquisition shall be deemed as business reorganization.

 

(3)Basic earnings per share have been computed by dividing net income attributable to equity shareholders of our company by the weighted average number of shares in issue. Basic and diluted earnings per ADS have been computed as if all of our issued and authorized ordinary shares, including domestic shares and H shares, are represented by ADSs during each of the years presented. Each ADS represents 100 ordinary shares.

 

(4)We have adopted IFRS Standard 16 “Leases” from January 1, 2019, but has not restated comparative amounts for the 2018 reporting period, as permitted under the specific transition provision in the standard. The reclassifications and the adjustments arising from such standard were therefore recognized in the opening balance sheet on January 1, 2019.

 

(5)The Company and Sinomart KTS Development Limited, Sinopec Natural Gas Limited Company and Sinopec Marketing Company Limited (“Marketing Company”), the subsidiaries of the Company entered into the Agreement on Cash Payment to Purchase Equity in Sinopec Yu Ji Pipeline Company Limited, the Agreement on Additional Issuance of Equity and Cash Payment to Purchase Assets, the Agreement on Cash Payment to Purchase Assets and the Agreement on Additional Issuance of Equity to Purchase Assets with China Oil & Gas Pipeline Network Corporation (“PipeChina”), on July 21, 2020 and on July 23, 2020 respectively, pursuant to which the Company and its subsidiaries proposed to dispose target business, including equity interests in the relevant companies, oil and gas pipeline and ancillary facilities, to PipeChina. The above transactions were considered and approved by the 15th Session of 7th Directorate Meeting on July 23, 2020 and the second Extraordinary General Meeting on September 28, 2020. The transaction consideration was mainly additional issuance of equity and/or cash payment by PipeChina and the gain on above transactions was RMB 37,731 million.

 

B.CAPITALIZATION AND INDEBTEDNESS

 

Not applicable.

 

C.REASONS FOR THE OFFER AND USE OF PROCEEDS

 

Not applicable.

5

D.RISK FACTORS

 

Risks Relating to Our Business Operation

 

We are exposed to risks associated with price fluctuations of crude oil and refined oil products and petrochemical products.

 

We consume a large amount of crude oil to produce our refined oil products and petrochemical products. Increases in crude oil prices may result in cost inflation, and high prices may also reduce demand for our products which might adversely affect our profitability. Decreases in prices of crude oil, refined oil products and petrochemical products may cause us to incur impairment to our investment and assets. A prolonged period of low oil prices may impact our profit and ability to maintain our long-term investment projects. We use financial derivatives, including commodity futures, to hedge risks of the volatility in the crude oil price. The use of such financial derivatives may not successfully hedge all risks. The fair value of derivatives fluctuates due to the volatility of crude oil price, which in turn impacts our financial performance. In addition, while we try to adjust the sale prices of our products to reflect international crude oil price fluctuations, our ability to pass on the increased cost resulting from crude oil price increases to our customers may be limited, and is dependent on international and domestic market conditions as well as the PRC government’s price control policies over refined oil products. For instance, the PRC government could exercise price control over refined oil products when international crude oil prices experience a sustained rise or become significantly volatile. As a result, our results of operations and financial condition may be materially affected by the fluctuation of prices of crude oil, refined oil products and petrochemical products.

 

Our continued business success depends in part on our ability to replace reserves and develop newly discovered reserves.

 

Our ability to achieve our growth objectives is dependent in part on our level of success in discovering or acquiring additional oil and natural gas reserves. Our exploration and development activities for additional reserves also expose us to inherent risks associated with drilling, including the risk that no proved oil or natural gas reserves might be discovered. Exploring for, developing and acquiring reserves is highly risky and capital intensive. The fluctuation in the prices of crude oil and natural gas will impact the amount of our proved oil or natural gas reserves. In the low oil price environment, only large scale, high quality reserves meet our development criteria, and some exploration projects may not be viable and thus cannot be carried forward, potentially leading to failure in supplementing our oil and natural gas reserves with additional reserves through future exploration. Without reserve additions through further exploration and development or acquisition activities, or if the prices of crude oil and natural gas fall sharply, our reserves and production will decline over time, which may adversely affect our results of operations and financial condition.

 

We rely heavily on outside suppliers for crude oil and other raw materials, and we may even experience disruption of our ability to obtain crude oil and other raw materials.

 

We purchased a significant portion of crude oil and other feedstock from outside suppliers located in different countries and regions in the world, of which certain amount of the crude oil processed by our refinery business was sourced from countries or regions that were on the sanction list published and administered by the Office of Foreign Assets Control, or OFAC, of the U.S. Department of Treasury, including Iran and Sudan region. In addition, our business growth requires us to source an increasing amount of crude oil from outside suppliers. While we purposely source our crude oil from a diversified portfolio of outside suppliers to avoid any potential disruptions to our normal business operations, we are subject to the political, geographical and economic risks associated with these countries and areas. If our contractual relationships with one or more outside suppliers were terminated or disrupted due to any natural disasters or political events, it is possible that we would not be able to find sufficient alternative sources of supply in a timely manner or on commercially reasonable terms. As a result, our business and financial condition would be materially and adversely affected.

 

Starting from January 2016, the United States suspended most secondary sanctions (i.e., those covering non-U.S. persons) pursuant to the terms of the Joint Comprehensive Plan of Action (the “JCPOA”). In May 2018, the United States withdrew from the JCPOA. Effective on November 5, 2018, all U.S. sanctions on Iran including those on the crude oil and petrochemical sectors were re-imposed, with eight countries and regions including China granted temporary “significant reduction exceptions” as exemptions to such sanctions to allow the importation of crude oil from Iran, which expired on May 2, 2019. As U.S. sanctions on Iran have been resumed, we may be unable to source crude oil from Iran or be subject to secondary sanctions resulting from importing crude oil from Iran, which may have further adverse impact on us, including but not limited to being prohibited from conducting certain business and financing activities that relate to the United States, and in turn materially and adversely impact our ADS trading price, results of operations and financial condition.

6

We rely on our collaboration relationship with PipeChina for the use of certain oil and gas storage and pipeline facilities. Any adverse change to our collaboration with PipeChina may materially impact our business operation and financial status.

 

In September 2020, we closed the transaction with PipeChina, pursuant to which we sold certain oil and gas storage and pipeline facilities to PipeChina in exchange for approximately 14% of registered capital of, and cash paid by, PipeChina as consideration. We have entered into long-term service agreement with respect to the use of oil and gas storage and pipeline facilities with PipeChina, pursuant to which PipeChina shall provide us with oil and gas transportation and storage services on the agreed terms including, among others, that PipeChina shall meet our demand of service following the agreed service specifications and standards.

 

Due to the special nature of our business operations, especially our production, refining and distribution activities, the successful execution of our business operation plan will depend on our access to long-term and high-quality performance of oil and gas storage and transportation services that are satisfactory to us, through investing in self-operated storage and pipeline facilities as we did prior to the transaction with PipeChina, and/or through purchasing storage and transportation services from PipeChina and other third parties. Considering the difficulty of the construction of the oil and gas pipeline, storage and other ancillary facilities, which involves time-consuming construction of major capital expenditure projects that are subject to regulatory approvals, we expect that, in the foreseeable future, it would be hard for us to promptly construct, develop and commission oil and gas pipeline, storage and other ancillary facilities, and our main production sites will be connected with and supported by pipelines and storage facilities owned by PipeChina. As a result, the smooth operation of our business in the future will partially depend upon our harmonious collaboration relationship with PipeChina based on service agreement(s) between us and PipeChina. We do not have control over PipeChina, and all key terms of service agreements between us and PipeChina shall be determined based on the applicable laws and regulations as well as the result of arm’s-length commercial negotiations between us and PipeChina, as a result of which we cannot guarantee that we will continue to secure service from PipeChina on current or desirable terms. If we cannot continue to receive service from PipeChina at terms we desire, the operation of our business may be interrupted, and the results of our operations and our financial condition may be materially impacted.

 

Our business faces operation risks and natural disasters that may cause significant property damages, personal injuries and interruption of operations, and we may not have sufficient insurance coverage for all the financial losses incurred by us.

 

Exploring for, producing and transporting crude oil and natural gas and producing and transporting refined oil products and petrochemical products involve a number of operating hazards. Our operations are subject to significant hazards and risks inherent in refining operations and in transporting and storing crude oil, intermediate products, refined oil products and chemical products. These hazards and risks include, but are not limited to, natural disasters, fires, explosions, pipeline ruptures and spills, third-party interference and mechanical failure of equipment at our or third-party facilities, any of which could result in production and distribution difficulties and disruptions, environmental pollution, personal injury or wrongful death claims and other damage to our properties and the property of others. There is also risk of mechanical failure and equipment shutdowns both in general and subsequent unforeseen events. In certain situations, undamaged refinery processing units may be dependent on or interact with damaged process units and, accordingly, are also subject to being shut down. Even though we have a strong institutional focus on the safety of our operations and have implemented health, safety, security and environment (HSSE) management system within our company and developed an integral risk evaluation and management platform, “PHAMS,” to conduct dynamical and quantitative management and control of relevant risks with the view to preventing accidents, and reducing personal injuries, property losses and environment pollution, our preventative measures may not be effective. We also maintain insurance coverage on our property, plant, equipment, inventory and potential third party liability, but our insurance coverage may not be sufficient to cover all the financial losses caused by the operation risks and natural disasters. Significant operating hazards and natural disasters may cause interruption to our operations, property or environmental damages as well as personal injuries, and each of these incidents could have a material adverse effect on our financial condition and results of operations.

7

The oil and natural gas reserves data in this annual report are only estimates, and our actual production, revenues and expenditures with respect to our reserves may differ materially from these estimates.

 

There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves, and in the timing of development expenditures and the projection of future rates of production. Adverse changes in economic conditions, such as a prolonged period of low oil prices, may render it uneconomical to develop certain reserves and lead to downward revisions in our reserves. Our actual production, revenues, taxes and fees payable and development and operating expenditures with respect to our reserves may likely vary from these estimates.

 

The estimate of reserves is affected by, among other things:

 

the quality and quantity of technical and economic data;

 

the prevailing oil and gas prices applicable to our production;

 

the production performance of the reservoirs; and

 

the production plans.

 

In addition, new drilling, testing and production results achieved following completion of the estimates may cause substantial upward or downward revisions in the estimates.

 

Oilfield exploration and drilling involves numerous risks, including risks that no commercially productive crude oil or natural gas reserves can be discovered and risks of failure to acquire or retain reserves.

 

Our oil and gas business is currently involved in exploration activities in various regions, including in some areas where natural conditions may be challenging and where the costs of such exploration activities may be high. As a result, our oil and gas business may incur cost overruns or may be required to curtail, delay or cancel drilling operations because of many factors, including, but not limited to, the following:

 

disruption caused by unexpected stratigraphic factors;

 

irregularities in geological formations pressure;

 

equipment failures;

 

oil/gas well blowouts;

 

adverse weather conditions or natural disasters;

 

compliance with existing or enhanced environmental regulations;

 

governmental requirements and standards; or

 

delays in the availability of drilling rigs and delivery and maintenance of equipment.

8

The future production of our oil and gas business depends significantly upon our success in finding or acquiring additional reserves and retaining and developing such reserves. If our oil and gas business fails to conduct successful exploration activities or to acquire or retain assets holding proved reserves, it may not meet its production or growth targets, and its proved reserves will decline as it extracts crude oil and natural gas from the existing reservoirs, which could adversely affect our business, financial condition and results of operations.

 

We have been actively pursuing business opportunities outside China to supplement our domestic resources. However, there can be no assurance that we can successfully locate sufficient alternative sources of crude oil supply or at all due to the complexity of the international political, economic and other conditions. If we fail to obtain sufficient alternative sources of crude oil supply, our results of operations and financial condition may be adversely affected.

 

Our exploration, development and production activities and our refining and petrochemical business require substantial expenditure and investments and our plans for and ability to make such expenditures and investments are subject to various risks.

 

Exploring for, developing and producing crude oil and natural gas fields are capital-intensive activities involving a high degree of risk. Our ability to undertake exploration, development and production activities and make the necessary capital expenditures and investments is subject to many risks, contingencies and other uncertainties, which may prevent our oil and gas business from achieving the desired results, or which may significantly increase the expenditures and investments that our oil and gas business makes, including, but not limited to, the following:

 

ability to generate sufficient cash flows from operations to finance our expenditures, investments and other requirements, which are affected by changes in crude oil and natural gas prices and sales volumes, and other factors;

 

availability and terms of external financing;

 

mix of exploration and development activities conducted on an independent basis and those conducted jointly with other partners;

 

extent to which our ability to influence or adjust plans for exploration and development related expenditures is limited under joint operating agreements for those projects in which we have partners;

 

government approvals required for exploration and development-related expenditures and investments in jurisdictions in which we conduct business; and

 

economic, political and other conditions in jurisdictions in which we conduct business.

 

From time to time, we may construct new and/or revamp existing refining and petrochemical facilities, which require substantial capital expenditures and investments. There can be no assurance that the cash generated by our operations will be sufficient to fund these development plans or that our actual future capital expenditures and investments will not significantly exceed our current planned amounts. Our inability to obtain sufficient funding for development plans could adversely affect our business, financial condition and results of operations.

 

Our development projects and production activities involve many uncertainties and operating risks that can prevent us from realizing profits and cause substantial losses.

 

Our development projects and production activities may be curtailed, delayed or cancelled for many reasons, including equipment shortages or failures, natural hazards, unexpected drilling conditions, mechanical and technical difficulties caused by complex geological conditions and operating errors by our employees. These projects and activities, which include projects focused on non-conventional oil and gas exploration and development, will also often require the use of new and advanced technologies that may be expensive to develop, purchase and implement, and may not function as expected. There is a risk that any development project that we undertake may not yield expected returns. In addition, our development projects and production activities, particularly those in remote areas, could become less profitable, or unprofitable, if we experience a prolonged period of low oil or gas prices or cost overruns.

9

Our business may be adversely affected by actions and regulations prompted by global climate changes.

 

Many nations in the world have reached consensus on the importance and urgency of addressing climate change. The oil and gas industry in which we operate is drawing increasing concerns about global climate change in recent years. A number of international, national and regional measures to limit greenhouse gas emissions have been enacted. The Paris Agreement on climate change adopted in December 2015 has placed binding commitments on nations that have ratified it since November 2016, which may lead to more stringent national and regional measures in the near future. Compliance with these measures could result in substantial impact on capital expenditure, profit and strategic growth opportunities. In addition, China has undertaken to strive to peak the CO2 emissions by 2030 or earlier and strive hard to achieve carbon neutrality by 2060, if possible, and to increase the non-fossil fuel share of all energy to around 25%by 2030 while reducing the CO2 emissions by no less than 65% as compared with 2005. China has also implemented a national carbon emissions trading scheme in 2017, with power generation industry included initially, and will gradually expand the industry coverage after the market matures. As most of our domestic subsidiaries may be recognized as emission-control enterprises, such change could have certain effect on our business operations.

 

Our overseas businesses may be adversely affected by changes of overseas government policies and business environment.

 

We have operations and assets and may seek new opportunities in various countries and regions, including countries in Africa, South America, Central Asia , Russia and certain other regions, some of which are deemed to be subject to a high degree of political risk. The operations in these countries and regions may experience debt divergence, changes in taxation and foreign exchange controls, legal litigations, deterioration in compliance management environments or public security, market fluctuations and oil and gas price fluctuations, changes in political situations and sanctions rules and policies, investment decision risk, safety production and equipment integrity risk. Occurrence of any of these conditions could disrupt or curtail our operations or development activities. These events may also limit our ability to pursue new opportunities, affect the recoverability of our assets or cause us to incur additional costs, particularly due to the long-term nature of many of our projects and the significant capital expenditure required by those projects.

 

We may be classified as a passive foreign investment company for United States federal income tax purposes, which could result in adverse United States federal income tax consequences to United States investors in the H shares or ADSs.

 

A non-United States corporation, such as our company, will be a “passive foreign investment company” (PFIC), for United States federal income tax purposes for any taxable year, if either (a) 75% or more of its gross income for such year consists of certain types of “passive” income or (b) 50% or more of the value of our assets (generally based on the average quarterly value of our assets during the taxable year) produce or are held for the production of passive income. Depending upon the value of our assets, which may be determined based, in part, on the market price of our H shares or ADSs, and the nature of our assets and income over time, we could be classified as a PFIC for United States federal income tax purposes. Based on our income and assets and the market price of our H shares or ADSs, we do not believe that we were a PFIC for the taxable year ended December 31, 2020 and do not anticipate becoming a PFIC in the current taxable year or in the foreseeable future. Because PFIC status is a factual determination made annually after the close of each taxable year on the basis of the composition of our income and the value of our active versus passive assets for that year, there can be no assurance that we will not be a PFIC for any future taxable year. The overall level of our passive assets will be affected by how, and how quickly, we expend our liquid assets. Under circumstances where gross income from activities that produce passive income significantly increase relative to our gross income from activities that produce non-passive income or where we determine not to deploy significant amounts of cash for active purposes, our risk of becoming classified as a PFIC may substantially increase. If we were to be or become classified as a PFIC, a US Holder (as defined in “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations”) may incur significantly increased United States income tax on gains recognized on the sale or other disposition of the H shares or ADSs and on the receipt of distributions on the H shares or ADSs to the extent such gains or distributions are treated as an “excess distribution” under the United States federal income tax rules. For more information see “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations.”

10

Our operations may be adversely affected by cyber-attacks or similar disruptions.

 

We have established cybersecurity control schemes and operation and maintenance schemes for our information infrastructure and application system, built a cybersecurity risk management and control information platform, and devoted significant resources to protecting our digital infrastructure and information system against cyber-attacks. If our systems against cyber-security risk prove to be ineffective, we could be adversely affected by, among other things, disruptions to our business operations, and loss of proprietary information, including intellectual property, financial information and employer and customer data, injury to people, property, environment and reputation. As cyber-security attacks continue to evolve, we may be required to expend additional resources to enhance our protective measures against cyber-security breaches.

 

COVID-19 pandemic could materially and adversely affect our business.

 

In 2020, the global pandemic of COVID-19 and public prevention measures have had and may continue to have certain adverse impacts for a period of time on the demand for our end products and on our normal operating activities, including disruptions from the temporary closure of offices, suspension of business travel or other disruptions on our normal working schedules, which, in aggregate, may have significant impacts on our business, financial condition and results of operations. We have taken measures in response to the outbreak, including the adoption of more stringent workplace sanitation measure. At present, domestic COVID-19 is generally under control within China, and vaccines are being inoculated within China and abroad, However, unpredictable factors still exist in terms of COVID-19 global trend. The extent to which this outbreak impacts our results will depend on future developments of COVID-19, including new information which may emerge concerning the severity of the outbreak and the actions to contain the outbreak or treat its impact, among others.

 

Risks Relating to Our Industry

 

Our operations may be adversely affected by the global and domestic economic conditions.

 

Our results of operations are materially affected by economic conditions in China and elsewhere around the world. There are some uncertainty and instability in the current global economy. The Chinese economy has entered a new development stage and is moving forward with high quality development. Our operations may also be adversely affected by factors such as foreign countries’ trade protection policies and increase in imports activities facilitated by regional trade agreements.

 

Our operations may be adversely affected by the cyclical nature of the market.

 

Most of our revenues are attributable to sales of refined oil products and petrochemical products, and certain of these businesses and related products have historically been cyclical and sensitive to a number of factors that are beyond our control. These factors include the availability and prices of feedstock and macro-economic conditions, such as changes in industry capacity and output levels, cyclical changes in regional and global economic conditions, prices and availability of substitute products and fluctuation in prices and demands of natural gas, refined oil products and chemical products. Although we are an integrated company with upstream, midstream and downstream businesses, we have limited ability to mitigate the adverse influence of the cyclicality of global markets.

11

We face strong competition from domestic and foreign competitors.

 

Among our competitors, some are major integrated petroleum and petrochemical companies within and outside China, which have recently become more significant participants in the petroleum and petrochemical industry in China. The PRC government has speeded up the release of restrictions on the right to use imported crude oil. This development may lead to refining overcapacity in China and intensify competition among local refineries. The Chinese crude oil and refined oil product markets are becoming increasingly dynamic and internationalized with implementation of tariff concessions and relaxation of market. In the opened-up wholesale market of refined oil products previously dominated by PetroChina Company Limited and us, we are facing stronger competition from new players and imported products. Our market share of chemical products is also under stronger competitive pressure due to the increasingly active participation of diversified new market players including multinational petroleum and petrochemical companies and domestic private enterprises. In addition, we are also expected to face competition in both domestic and overseas refined oil products and petrochemical product market as a result of our domestic and international competitors’ increasing production capacity. Increased competition may have a material adverse effect on our financial condition and results of operations.

 

Risks Relating to Our Controlling Shareholder

 

We engage in related party transactions with Sinopec Group from time to time which may create potential conflict of interest.

 

We have engaged from time to time and will continue to engage in a variety of transactions with Sinopec Group, which provides us with a number of services, including, but not limited to, ancillary supply, engineering, maintenance, transport, lease of land use right, lease of buildings, as well as educational and ancillary services. The nature of our transactions with Sinopec Group is governed by a number of service and other contracts between Sinopec Group and us. We have established various schemes in those agreements so that these transactions, when entered into, are under terms that are at arm’s length. However, we cannot assure you that Sinopec Group Company or any of its members would not take actions that may favor its interests or its other subsidiaries’ interests over ours.

 

We are controlled by Sinopec Group Company, our ultimate controlling shareholder, whose interest in certain businesses are likely to compete with our business.

 

Sinopec Group Company has interests in certain businesses, such as petrochemical and overseas exploration and development, which compete or are likely to compete, either directly or indirectly, with our businesses. To avoid the adverse effects brought by the competition between us and Sinopec Group Company to the maximum extent possible, we and Sinopec Group Company have entered into a non-competition agreement. In 2012, we received from Sinopec Group Company an undertaking to avoid its competition with us. For details, please refer to the descriptions under “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.” Notwithstanding the foregoing contractual arrangements, because Sinopec Group Company is our controlling shareholder, Sinopec Group Company may take actions that may conflict with our own interests.

 

It is possible that the current or future activities of our ultimate controlling shareholder, Sinopec Group Company, or its affiliates in or with certain countries that are the subject of economic sanctions under relevant U.S. laws could result in negative media and investor attention to us and possible imposition of sanctions on Sinopec Group Company, which could materially and adversely affect our shareholders’ value and operations.

 

Sinopec Group Company undertakes, from time to time and without our involvement, overseas investments and operations in the oil and gas industry, including exploration and production of oil and gas, refining and Liquefied Natural Gas or LNG, oilfield services and refining engineering projects. Sinopec Group Company’s overseas asset portfolio includes a limited number of projects in countries that are subject to U.S. sanctions administrated by OFAC and by the U.S. Department of State, including Iran, Syria and Sudan. We currently do not believe that any existing investments of Sinopec Group Company will result in any direct sanctions imposed by OFAC. However, we cannot predict the interpretation or implementation of sanction policy at the U.S. federal, state or local levels with respect to any current or future activities by Sinopec Group Company or its affiliates in countries or with individuals or entities that are the subject of U.S. sanctions. Similarly, we cannot predict whether U.S. sanctions will be further tightened in the case of Iran, or whether sanction scope will be modified or updated, or if any other countries or regions will be incorporated into the sanction list, or the impact that such actions may have on Sinopec Group Company and us. If becoming the target of U.S. sanctions, Sinopec Group Company may be prohibited from conducting business activities in the United States or with individuals or entities in the United States, and the transactions involving our securities in the United States will also be significantly affected. In addition, certain U.S. state and local governments and colleges have restrictions on the investment of public funds or endowment funds, respectively, in companies that are members of corporate groups with activities in certain countries that are the subject of U.S. sanctions. These investors may not wish to invest, and may divest their investment, in us because of our relationship with Sinopec Group Company and its investments and activities in those OFAC sanctioned countries. It is possible that, as a result of activities by Sinopec Group Company or its affiliates in countries that are the subject of U.S. sanctions, we may be subject to negative media or investor attention, which may distract management, consume internal resources and affect investors’ perception of our Company.

12

Risks Relating to the PRC

 

Government regulations may limit our activities and affect our business operations.

 

The PRC government, though gradually liberalizing its regulations on entry into the petroleum and petrochemical industry, continues to exercise certain controls over the petroleum and petrochemical industry in China. These control mechanisms include granting the licenses to explore for and produce crude oil and natural gas, granting the licenses to market and distribute crude oil and refined oil products, regulating the upper limit of the retail prices for gasoline and diesel; collecting special oil income levies, deciding import and export quotas and procedures, setting safety, environmental and quality standards, and formulating policies to save energy and reduce emission; meanwhile, there could be potential changes to macroeconomic and industry policies such as reforming of the oil and gas industry, and further reforming and improvement of pricing mechanism of refined oil products and natural gas, which could impact the development of the domestic petroleum and petrochemical industry and the production and operations of the domestic enterprises operating in such industry. Such control mechanisms may have material effects on our operations and profitability.

 

The PRC governmental authorities, from time to time, audit or inspect our ultimate controlling shareholder. We cannot predict the impact, if any, of their outcome on our reputation, business and financial condition as well as the trading prices of our ADSs and H shares.

 

The PRC governmental authorities, from time to time, perform audits, inspections, inquiries or similar actions on state-owned companies, such as Sinopec Group Company, our ultimate controlling shareholder. Such inspections are not conducted on a regular basis with specific targets, and therefore we cannot predict the outcome of these governmental activities. If, as a result of such audits, inspections or inquiries, (i) material irregularities are found within Sinopec Group Company or us or our employees or (ii) Sinopec Group Company or we become the target of any negative publicity, our reputation, business and financial condition as well as the trading prices of our ADSs and H shares may be materially and negatively impacted.

 

Our business operations may be adversely affected by present or future environmental regulations.

 

As an integrated petroleum and petrochemical company, we are subject to extensive environmental protection laws and regulations in China. These laws and regulations permit:

 

the government, in accordance with law, to impose fines, to order correction, limitation on production or discharge, and suspend production for pollution discharge exceeding standards;

 

the government to impose fines for late payment of environmental tax for the discharge of waste materials;

 

the government, in accordance with law, to order correction, suspend production and impose fines for unlicensed or uncertified pollution discharge;

13

the government, at its discretion, to seal up or close down any facility which has caused or may cause severe environmental damage and require it to correct or stop operations; and

 

litigations and liabilities arising from pollutions and damages to the environment and public interests.

 

Our production activities produce substantial amounts of liquid, gas and solid waste materials. We have established a system to treat waste materials to prevent and reduce pollution. We may have certain facilities built in regions newly reclassified as ecological preservation areas, and therefore need to be relocated. Also, the PRC government has moved, and may move further, toward more rigorous enforcement of applicable laws, and toward the adoption of more stringent environmental standards.

 

In recent years, we have commenced exploration and production of unconventional oil and gas resources, such as shale oil and gas and coal bed methane, through the application of relatively advanced technologies. As a result, our unconventional oil and gas operations rely on unproven technology which may expose us to higher environmental compliance standards and requirements, which, in turn, would require us to incur additional expenditures on environmental matters.

 

Some of our development plans require compliance with state policies and governmental regulation.

 

We are currently engaged in a number of construction, renovation and expansion projects. Some of our large construction, renovation and expansion projects are subject to governmental confirmation and registration. The timing and cost of completion of these projects will depend on numerous factors, including when we can receive the required confirmation and registration from relevant PRC government authorities and the general economic condition in China. If any of our key projects required for our future growth is not confirmed or registered, or not confirmed or registered in a timely manner, our results of operations and financial condition could be adversely impacted.

 

Government control of currency conversion and exchange rate fluctuation may adversely affect our operations and financial results.

 

We receive a significant majority of our revenues in Renminbi. A portion of such revenues will need to be converted into other currencies to meet our foreign currency needs, which include, among other things:

 

import of crude oil and other materials;

 

debt service on foreign currency-denominated debt;

 

purchases of imported equipment;

 

payment of the principals and interests of bonds issued overseas; and

 

payment of any cash dividends declared in respect of the H shares (including ADS).

 

The existing foreign exchange regulations have significantly reduced government foreign exchange controls for transactions under the current account, including trade and service related foreign exchange transactions and payment of dividends. Foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange. The PRC government has stated publicly that it intends to make the Renminbi freely convertible in the future. However, we cannot predict whether the PRC government will continue its existing foreign exchange policy and when the PRC government will allow free conversion of Renminbi.

14

The exchange rate of the Renminbi against the US dollar and other foreign currencies fluctuates with market and is affected by, among other things, the changes in the PRC’s and international political and economic conditions. On July 21, 2005, the PRC government introduced a floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of foreign currencies. On June 19, 2010 and August 11, 2015, respectively, the People’s Bank of China (PBOC) decided to further promote the reform of exchange rate regime and enhance the flexibility of Renminbi exchange rate. The changes in foreign exchange rate will impact our cost in purchasing crude oil given the majority of our crude oil purchases are settled in foreign currencies and priced in US dollar. Besides, prices of refined oil products are guided by the PRC government and are pegged to the exchange rate of the Renminbi against the US dollar. Therefore the impact of Renminbi exchange rate fluctuation on the purchase cost of crude oil could largely be offset by the corresponding fluctuation in the prices of domestic refined oil products and chemical products.

 

Risks relating to enforcement of shareholder rights; Mandatory arbitration.

 

Currently, the primary sources of shareholder rights are our articles of association, the PRC Company Law and the Listing Rules of the Hong Kong Stock Exchange, which, among other things, impose certain standards of conduct, fairness and disclosure on us, our directors and our controlling shareholder. In general, their provisions for protection of shareholder’s rights and access to information are different from those applicable to companies incorporated in the United States, the United Kingdom and other Western countries. In addition, the mechanism for enforcement of rights under the corporate framework to which we are subject may also be relatively undeveloped and untested. To our knowledge, there has not been any published report of judicial enforcement in the PRC by H share shareholders of their rights under constituent documents of joint stock limited companies or the PRC Company Law or in the application or interpretation of the PRC or Hong Kong regulatory provisions applicable to PRC joint stock limited companies. We cannot guarantee that our shareholders will enjoy protections that they may be entitled in other jurisdictions.

 

China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom or most other Western countries, and therefore recognition and enforcement in China of judgments of a court in any of these jurisdictions in relation to any matter not subject to a binding arbitration provision may not be assured. Our articles of association as well as the Listing Rules of the Hong Kong Stock Exchange provide that most disputes between holders of H shares and us, our directors, supervisors, officers or holders of domestic shares, arising out of the articles of association or the PRC Company Law concerning the affairs of our company, are to be resolved through arbitration, at the election of the claimant, by arbitration organizations in Hong Kong or the PRC, rather than through a court of law. On June 18, 1999, an arrangement was made between Hong Kong and the PRC for the mutual enforcement of arbitral awards. This new arrangement was approved by the Supreme People’s Court of the PRC and the Hong Kong Legislative Council, and became effective on February 1, 2000. We are uncertain as to the outcome of any action brought in China to enforce an arbitral award granted to shareholders.

 

Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection. Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting of our ADSs, or the threat of their being delisted, may materially affect the value of your investment.

 

The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market in the U.S.

 

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is currently not inspected by the PCAOB.

15

On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above.

 

The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President's Working Group on Financial Markets, or the PWG, issued a report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate, some of which were more stringent than the HFCA Act.

 

The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition to the requirements of the HFCA Act are uncertain. Such uncertainty could cause the market price of our ADSs to be affected, and our securities could be delisted or prohibited from being traded “over-the-counter,” which may substantially impair the investors’ ability to sell or purchase our ADSs.

 

The PCAOB’s inability to conduct inspections in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public accounting firm. As a result, investors may be deprived of the benefits of PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

 

In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB in the PRC or by the CSRC or the PRC Ministry of Finance in the United States. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

 

Additional remedial measures imposed on certain PRC-based accounting firms, including our independent registered public accounting firm, in proceedings brought by the SEC alleging the firms’ failure to meet specific criteria, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

 

In December 2012, the SEC brought administrative proceedings against the “Big Four” accounting firms in China, including our independent registered public accounting firm, alleging that these firms had refused to produce audit work papers and other documents related to certain other China-based companies whose securities are publicly traded in the United States. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and barring these firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until it is endorsed by the SEC. In February 2015, each of the four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement required the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the China Securities Regulatory Commission (CSRC) in response to future document requests by the SEC made through the CSRC. We cannot predict if the SEC will further challenge the four China-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions.

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In the event that the Chinese affiliates of the “Big Four” become subject to additional legal challenges by the SEC or PCAOB, listed companies in the United States with PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, and hence face delisting. Moreover, any negative news about the proceedings against these audit firms may give rise to a perception of uncertainty to investors regarding China-based, U.S.-listed companies and the market price of our ADSs may be adversely affected.

 

If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to delisting of our ADSs from the New York Stock Exchange (NYSE) or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

 

ITEM 4.INFORMATION ON THE COMPANY

 

A.HISTORY AND DEVELOPMENT OF THE COMPANY

 

Our legal and commercial name is China Petroleum & Chemical Corporation. Our head office is located at 22 Chaoyangmen North Street, Chaoyang District, Beijing 100728, the People’s Republic of China, our telephone number is (8610) 5996-0028 and our fax number is (8610) 5996-0386. We have appointed our representative office in the North America, located at 3050 Post Oak Blvd, Suite 800, Houston, 77056, with telephone number of +1 (713) 544 8888 and fax number of +1 (713) 544 8878, as our agent for service of processes for actions brought under the U.S. securities laws. The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding us that have been filed electronically with the SEC, which can be accessed at http://www.sec.gov. Information about the Company and documents the Company submitted to the SEC are available on our investor relations website: http://www.sinopec.com/listco/en/investor_centre/corporate_governance/.

 

We were established as a joint stock limited company on February 25, 2000 under the Company Law of the PRC with Sinopec Group Company as the sole shareholder at our inception. Our principal businesses consist of petroleum and petrochemical businesses transferred to us by Sinopec Group Company pursuant to a reorganization agreement. Such businesses include:

 

exploration for, development, production and marketing of crude oil and natural gas;

 

refining of crude oil and marketing and distribution of refined oil products, including transportation, storage, trading, import and export of petroleum products; and

 

production and sales of petrochemical products.

 

Sinopec Group’s continuing activities primarily consist, among other things, of:

 

exploring and developing oil and gas reserves overseas;

 

operating certain petrochemical facilities;

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providing geophysical exploration, and well drilling, survey, logging and downhole operational services;

 

manufacturing production equipment and providing equipment maintenance services;

 

providing construction services;

 

providing utilities, such as electricity and water; and

 

providing other operational services including transportation services.

 

Sinopec Group Company transferred the businesses to us either by transferring its equity holdings in subsidiaries or by transferring their assets and liabilities. Sinopec Group Company also agreed in the reorganization agreement to transfer to us its exploration and production licenses and all rights and obligations under the agreements in connection with its core businesses transferred to us. The employees relating to these assets were also transferred to us.

 

From July 8, 2015 to July 7, 2016, Sinopec Group Company increased its shareholding in the Company through acquisitions of our ordinary shares on the stock market in its own name or through other concerting parties, by way of acquiring 72,000,000 A shares. Immediately following the shareholding increase, Sinopec Group Company directly and indirectly held 86,345,821,101 shares of the Company.

 

On October 29, 2015, we entered into a joint venture agreement with Sinopec Assets Management Co., Ltd. (“SAMC”), a wholly-owned subsidiary of Sinopec Group Company, in relation to the formation of Sinopec Shanghai Gaoqiao Petrochemical Co., Ltd. (“Gaoqiao”). We and SAMC subscribed for 55% and 45% of the registered capital of Gaoqiao, respectively, and Gaoqiao became a subsidiary of the Company.

 

On August 2, 2016, our board of directors unanimously approved the proposal to introduce capitals from potential investors to invest in Sichuan-to-East China gas pipeline project, through our indirectly wholly-owned subsidiary Sinopec Sichuan-to-East China Natural Gas Pipeline Co., Ltd. (“Sichuan-to-East China Pipeline Co.”). On December 12, 2016, Sinopec Natural Gas Limited Company, our wholly-owned subsidiary (“Natural Gas Company”), China Life Insurance Co., Ltd. (“China Life”) and SDIC Communications Holding Co., Ltd. (“SDIC Communications”) entered into the Capital Injection Agreement in relation to Sichuan-to-East China Pipeline Co. and agreed to collectively subscribe for 50% equity interest in Sichuan-to-East China Pipeline Co. for an aggregate amount of RMB 22.8 billion in cash. Upon completion of the capital injection, China Life, SDIC Communications and the Natural Gas Company held 43.86%, 6.14% and 50% equity interest in Sichuan-to-East China Pipeline Co., respectively.

 

On April 27, 2017, our board of directors unanimously approved the proposal of the acquisition of equity interest in Shanghai SECCO Petrochemical Company Limited (“Shanghai SECCO”) by Gaoqiao. On October 26, 2017, Gaoqiao purchased 50% equity interest in Shanghai SECCO from BP Chemicals East China Investment Limited with a cash consideration of RMB 10,135 million. Before the acquisition, we and one of our subsidiaries held 30% and 20% equity interest in Shanghai SECCO, respectively. Upon completion of the acquisition, we, together with our subsidiaries, hold 100% equity interest of Shanghai SECCO, which became a subsidiary of us.

 

Following the instruction by the State-owned Assets Supervision and Administration Commission of the State Council, on August 9, 2018, Sinopec Group Company gratuitously transferred 1,241,721,854 A shares of the Company to Beijing Chengtong Financial Control Investment Co., Ltd., and 1,241,721,854 A shares to Guoxin Investment Co., Ltd. Upon the completion of such transfers, Sinopec Group Company directly and indirectly held 83,862,377,393 shares of the Company.

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In July 2020, we and certain of our subsidiaries entered into transactions with PipeChina to sell the ownership of certain oil and gas pipeline assets and other facilities to PipeChina in exchange for approximately 14% of registered capital of, and cash paid by, PipeChina as consideration (the “Pipeline Transactions”). The Pipeline Transactions closed on September 30, 2020. In accordance with the arrangements of the Pipeline Transactions, we and PipeChina have entered into agreements for the continuous use of relevant oil and gas pipelines and other facilities in the future on the terms and subject to conditions set forth therein.

 

B.BUSINESS OVERVIEW

 

Exploration and Production

 

Overview

 

We currently explore for, develop and produce crude oil and natural gas in a number of areas in China and overseas. As of December 31, 2020, we held 238 production licenses in China, with an aggregate acreage of 33,965 square kilometers and with terms ranging from 10 to 80 years. Our production licenses may be renewed upon our application at least 30 days prior to the expiration date, which are renewable for unlimited times. During the term of our production license, we pay an annual production license fee of RMB 1,000 per square kilometer.

 

As of December 31, 2020, we held 190 exploration licenses in China for various blocks in which we engaged in exploration activities, with an aggregate acreage of approximately 437 thousand square kilometers.

 

As of December 31, 2020, our overseas subsidiary held one production licenses, with an acreage of 322.57 square kilometers. It currently does not have exploration licenses. Our overseas equity-accounted investments held 74 production licenses, with an aggregate acreage of 4,907.4 square kilometers, and no exploration license.

 

Properties

 

We currently operate 248 oil and gas producing fields and blocks.

 

Shengli production field is our most important crude oil production field. It consists of 75 producing blocks of various sizes extending over an area of 2,523 square kilometers in northern Shandong province, all of which are our net developed acreage. Most of Shengli’s blocks are located in the Jiyang trough with various oil producing layers. In 2020, Shengli production field produced approximately 166 million barrels of crude oil and 20.047 billion cubic feet of natural gas, with an average daily production of 463.1 thousand BOE.

 

As of December 31, 2020, the total acreage of our oil and gas producing fields and blocks in China was 16,770 square kilometers, including 10,230 square kilometers of developed acreage, all of which were net developed acreage; and 6,540 square kilometers of gross undeveloped acreage, all of which were net undeveloped acreage.

 

As of December 31, 2020, the total acreage of our oil and gas producing fields and blocks of our overseas subsidiary was 322.57 square kilometers, including 169.21 square kilometers of developed acreage, of which 110 square kilometers were net developed acreage; and 153.36 square kilometers of gross undeveloped acreage, of which 31.8 square kilometers were net undeveloped acreage.

 

As of December 31, 2020, the total acreage of our oil and gas producing fields and blocks of our overseas equity-accounted investments was 1,893.4 square kilometers, including 1,818.4 square kilometers of developed acreage, of which 1,818.4 square kilometers were net developed acreage; and 75.1 square kilometers of gross undeveloped acreage, of which 45.1 square kilometers were net undeveloped acreage.

 

Oil and Natural Gas Reserves

 

As of December 31, 2020, our estimated proved reserves of crude oil and natural gas in China were 2,595 million BOE (including 1,232 million barrels of crude oil and 8,181 billion cubic feet of natural gas), and our estimated proved reserves of crude oil and natural gas outside of China, which included a share of the estimated proved reserves of our equity-accounted investments, were 312.6 million BOE. Our estimated proved reserves do not include additional quantities recoverable beyond the term of the relevant production licenses, or that may result from extensions of currently proved areas, or from application of improved recovery processes not yet tested and determined to be economical.

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The following tables set forth our proved developed and undeveloped crude oil and natural gas reserves by region as of December 31, 2020.

 

Crude Oil Proved Reserves As of December 31, 2020 
  (in millions of barrels) 
Developed Subsidiaries    
China  1,130 
Shengli  821 
Others  309 
Overseas  15.03 
Subtotal  1,145.03 
Equity-accounted investments    
China  - 
Overseas  244.44 
Subtotal  244.44 
Total Proved Developed  1,389.47 
Undeveloped Subsidiaries    
China  102 
Shengli  16 
Others  86 
Overseas  5.49 
Subtotal  107.49 
Equity-accounted investments    
China  - 
Overseas  45.79 
Subtotal  45.79 
Total Proved Undeveloped  153.28 
Total Crude Oil Proved Reserves  1,542.75 

 

Natural Gas Proved Reserves As of December 31, 2020 
  (in billions of cubic feet) 
Developed Subsidiaries    
China  6,357 
Puguang  1,675 
Fuling  1,491 
Others  3,191 
Overseas  - 
Subtotal  6,357 
Equity-accounted investments    
China  - 
Overseas  8.34 
Subtotal  8.34 
Total Proved Developed  6,365.34 
Undeveloped Subsidiaries    
China  1,824 
Puguang  71 
Fuling  119 
Others  1,634 
Overseas  - 
Subtotal  1,824 
Equity-accounted investments    
China  - 
Overseas  1.33 
Subtotal  1.33 
Total Proved Undeveloped  1,825.33 
Total Natural Gas Proved Reserves  8,190.67 

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As of December 31, 2020, approximately 101.94 million barrels of our crude oil proved reserves and 1,823.7 billion cubic feet of our natural gas proved reserves were classified as proved undeveloped reserves in China and overseas. 2.23 million barrels of crude oil and 648.04 billion cubic feet natural gas proved reserves in China have been classified as proved undeveloped for more than five years, mainly under Sinopec Shanghai Offshore Petroleum Company, one of our subsidiaries.

 

During 2020, a total of 374 wells were drilled by us in China and 100 wells were drilled overseas. We converted 48.87 million barrels of proved undeveloped crude oil reserves and 139.14 billion cubic feet of proved undeveloped natural gas reserves into proved developed reserves in 2020. Total capital expenditure incurred in converting proved undeveloped reserves into proved developed reserves amounted to RMB8,205 million, including RMB7,096 million and RMB1,109 million incurred in connection with our operations in China and overseas, respectively, in 2020.

 

Our reserves estimation is managed by a two-tier management system. The Oil and Natural Gas Reserves Management Committee, or the RMC, at our headquarters level, organizes, coordinates and oversees the overall reserves estimation, and is in charge of the major issues in reserves estimation and approving the reserves estimation report of our company. Each of our Branches has a reserves management committee that manages and coordinates the reserves estimation process, organizes the evaluators to do reserves estimation, reviews and inspects the evaluation materials and results at the branches level, and reports to the RMC of the Company.

 

Our RMC consists of our senior managements, the senior management of related divisions at our headquarters level, our exploration and production institution and our Branches in each oil field. The current Chairman of our RMC, Mr. Liu Hongbin, Senior Vice President of the company, has over 30 years of experience in the oil and gas industry. A majority of our RMC members hold doctor’s or master’s degrees and our RMC members have an average of 20 years of technical experience in relevant industry fields, such as geology, development and economics.

 

Our reserves estimation is guided by procedural manuals and technical guidance. Initial collection and compilation of reserves information are conducted by different working divisions, including exploration, development and financial divisions, at production bureau level. Technical experts in exploration, development and economics divisions of our Branches in each oil field collectively prepare the initial report on reserves estimation. The reserves management committees at production bureau level then review to ensure the qualitative and quantitative compliance with technical guidance and accuracy and reasonableness of the reserves estimation. We also engage outside consultants who assist us to be in compliance with the U.S. Securities and Exchange Commission rules and regulations. Our reserves estimation process is further facilitated by a specialized reserves database which is reviewed and updated periodically.

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Oil and Natural Gas Production

 

In 2020, we produced an average of 1,168.6 thousand BOE per day in China, of which approximately 58.3% was crude oil and 41.7% was natural gas. We produced an average of 85.8 thousand BOE per day overseas, of which 98.05% was crude oil and 1.95% was natural gas.

 

The following tables set forth our average daily production of crude oil and natural gas for the years ended December 31, 2018, 2019 and 2020. The production of crude oil includes condensate.

 

  Year Ended December 31, 
  2018  2019  2020 
  (in thousands of barrels) 
Average Daily Crude Oil Production            
China  682   683   682 
Subsidiaries  682   683   682 
Shengli  455   455   454 
Others  227   228   228 
Overseas  107   95.3   84.1 
Subsidiary  30   19.2   17.4 
Equity-accounted investments  77   76.1   66.7 
Total Crude Oil Production  789   778.3   766.1 

 

  Year Ended December 31, 
  2018  2019  2020 
  (in millions of cubic feet) 
Average Daily Natural Gas Production            
China  2,668   2,862   2,921 
Subsidiaries  2,668   2,862   2,921 
Puguang  615   664   598 
Fuling  582   613   647 
Others  1,471   1,585   1,676 
Overseas  8   8.5   8.8 
Equity-accounted investments  8   8.5   8.8 
Total Natural Gas Production  2,676   2,870.5   2,929.8 

 

Lifting Cost & Realized Prices

 

The following table sets forth our average lifting costs per BOE of crude oil produced, average sales prices per barrel of crude oil and average sales prices per thousand cubic meters of natural gas for the years ended December 31, 2018, 2019 and 2020.

 

  Weighted Average  China  Overseas(1) 
  (RMB) 
For the year ended December 31, 2020         
Average petroleum lifting cost per BOE  105.28   101.67   154.41 
Average realized sales price            
Per barrel of crude oil  269.85   266.86   294.12 
Per thousand cubic meters of natural gas  1,318.1   1,318.1    
For the year ended December 31, 2019            
Average petroleum lifting cost per BOE  117.0   110.32   164.49 
Average realized sales price            
Per barrel of crude oil  406.0   400.37   445.96 
Per thousand cubic meters of natural gas  1,326.09   1,326.09    
For the year ended December 31, 2018            
Average petroleum lifting cost per BOE  112.45   111.75   116.90 
Average realized sales price            
Per barrel of crude oil  432.32   426.81   467.11 
Per thousand cubic meters of natural gas  1,263.41   1,263.41    

 

 

(1)The exchange rates we used for overseas data in this table were exchange rates for each year ended December 31, 2018, 2019 and 2020, which were RMB 6.6204 to US$ 1.00, RMB 6.8985 to US$ 1.00, and RMB 6.8976 to US$ 1.00, respectively.

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Exploration and Development Activities

 

In 2020, under the environment of low oil prices, we pressed ahead with high quality exploration and profit-oriented development, accelerated the systematic integration of natural gas production, supply, storage and marketing, and achieved tangible results in maintaining oil production, increasing gas output and cutting cost. In exploration, we continued to strengthen risk exploration in strategic areas, oil and gas rich zones and shale resources, which led to new discoveries in Tarim Basin, Sichuan Basin and Bohai Bay Basin. In crude oil development, we efficiently proceeded with the capacity building of Shunbei and other oilfields, strengthened fine development in mature fields, intensified EOR technology breakthrough and application, and consolidated the basis for steady production. In natural gas development, we constantly pushed forward capacity building in Weirong and West Sichuan gas fields, expanded the market and sales, and continuously improved the sales volume with a record high domestic market share. The Company’s production of oil and gas reached 459.02 million barrels of oil equivalent, with domestic crude production reaching 249.52 million barrels and natural gas production totalled 1,072.3 billion cubic feet, up by 2.3% year on year.

 

The following table sets forth the numbers of our exploratory and development wells, including a breakdown of productive wells and dry wells we drilled during the years ended December 31, 2018, 2019 and 2020.

 

  As of December 31, 
  2018  2019  2020 
Number of Exploratory  Development  Exploratory  Development  Exploratory  Development 
Drilled Wells Productive  Dry  Productive  Dry  Productive  Dry  Productive  Dry  Productive  Dry  Productive  Dry 
China 286  131  1,941  6  350  174  2,098  5  383  136  2,015  3 
Subsidiaries 286  131  1,941  6  350  174  2,098  5  383  136  2,015  3 
Shengli 149  71  1,201  5  195  81  1,168  4  204  64  1,080  2 
Others 137  60  740  1  155  93  930  1  179  72  935  1 
Overseas     70    3  1  99    2    100   
Subsidiaries                     4   
Equity- accounted investments     70    3  1  99    2    96   
Total 286  131  2,011  6  353  175  2,197  5  385  136  2,115  3 

 

The following table sets forth the number of wells being drilled by us as of December 31, 2018, 2019 and 2020:

 

  As of December 31, 
  2018  2019  2020 
Number of Drilling Gross  Net  Gross  Net  Gross  Net 
Welling Exploratory  Development  Exploratory  Development  Exploratory  Development  Exploratory  Development  Exploratory  Development  Exploratory  Development 
China 69  277  69  277  117  177  117  176  92  212  92  212 
Subsidiaries 69  277  69  277  117  177  117  176  92  212  92  212 
Shengli 25  72  25  72  60  20  60  20  29  52  29  52 
Others 44  205  44  205  57  157  57  156  63  160  63  160 
Overseas   10    10          2    2   
Subsidiaries                        
Equity-accounted investments   10    10          2    2   
Total 69  287  69  287  117  177  117  176  94  212  94  212 

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The following tables set forth our number of productive wells for crude oil and natural gas as of December 31, 2020, as compared to December 31, 2019 and 2018:

 

  As of December 31, 
  2018  2019  2020 
Productive Wells for Crude Oil Gross  Net  Gross  Net  Gross  Net 
China 51,030  51,030  52,112  52,112  53,240  53,240 
Subsidiaries 51,030  51,030  52,112  52,112  53,240  53,240 
Shengli 32,805  32,805  33,819  33,819  34,572  34,572 
Others 18,225  18,225  18,293  18,293  18,668  18,668 
Overseas 7,293  3,939  7,248  2,855  7,055  2,752 
Subsidiaries 28  14  28  14  28  10 
Equity-accounted investments 7,265  3,925  7,220  2,841  7,027  2,742 
Total 58,323  54,969  59,360  54,967  60,295  55,992 

 

  As of December 31, 
  2018  2019  2020 
Productive Wells for Natural Gas Gross  Net  Gross  Net  Gross  Net 
China 5,068  5,028  6,420  6,378  6,976  6,928 
Subsidiaries 5,068  5,028  6,420  6,378  6,976  6,928 
Puguang 58  58  61  61  67  67 
Fuling 368  368  482  482  632  632 
Others 4,642  4,602  5,877  5,835  6,277  6,229 
Total 5,068  5,028  6,420  6,378  6,976  6,928 

 

Refining

 

Overview

 

In 2020, our refinery throughputs were approximately 236.91 million tonnes. We produce a full range of refined oil products. The following table sets forth our production of our principal refined oil products for the years ended December 31, 2018, 2019 and 2020.

 

  Year Ended December 31, 
  2018  2019  2020 
  (in million tonnes) 
Gasoline  61.16   62.77   57.91 
Diesel  64.72   66.06   63.21 
Kerosene  28.91   31.16   20.38 
Light chemical feedstock  38.52   39.78   40.22 
Liquefied petroleum gas  13.17   12.57   11.61 
Fuel oil  1.68   1.95   7.71 

 

Gasoline and diesel are our largest revenue-generating products, and are sold mostly through Sinopec Marketing Co., Ltd., our subsidiary, through both wholesale and retail channels. We use most of our production of chemical feedstock as feedstock for our own chemical operations. Most of our other refined oil products were sold in China to a wide variety of industrial and agricultural customers, and a small amount is exported.

 

Refining Facilities

 

Currently we operate 30 refineries in China. As of December 31, 2020, our total primary distillation capacity of crude oil was 296.9 million tonnes per annum.

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The following table sets forth our total primary distillation capacity per annum of crude oil and refinery throughputs as of and for the years ended December 31, 2018, 2019 and 2020.

 

  As of and for the Year Ended December 31, 
  2018  2019  2020 
Primary distillation capacity of crude oil (million tonnes per annum)(1)  293.5   295.5   296.90 
Refinery throughputs (million tonnes)(2)  244.0   248.5   236.91 

 

 

(1)The primary distillation capacity and refinery throughputs of joint ventures are fully included in our statistics.

 

(2)When calculating refinery throughputs, conversion from tonnes to barrels are made at a rate of one tonne to 7.35 barrels.

 

In 2020, our gasoline yield was 24.44%, diesel yield was 26.68%, kerosene yield was 8.6%, and light chemical feedstock yield was 16.98%. For the years ended December 31, 2018, 2019 and 2020, our overall yield for all refined oil products at our refineries was 94.93%, 94.98% and 94.77%, respectively.

 

The following table sets forth the primary distillation capacity per annum as of December 31, 2020 of each of our refineries with the primary distillation capacity of 8 million tonnes or more per annum.

 

Refinery Primary Distillation Capacity as of
December 31, 2020
 
  (in million tonnes per annum) 
Maoming  18.0 
Zhenhai  23.0 
Jinling  19.0 
Zhongke  15.0 
Shanghai  14.0 
Qilu  12.5 
Yangzi  13.5 
Fujian  14.0 
Tianjin  13.8 
Guangzhou  12.8 
Gaoqiao  13.0 
Qingdao Refining & Chemical  12.0 
Changling  11.5 
Yanshan  11.0 
Shijiazhuang  10.0 
Jiujiang  10.0 
Hainan  9.2 
Anqing  9.0 
Wuhan  8.5 

 

In 2020, the newly-built 10 million-ton oil refining project of Zhongke was put into production, and we adjusted the statistical caliber of the primary processing capacity. Newly added hydrogenation refining capacity totaled 14 million tons/year (with new heavy oil hydrogenation projects such as Zhongke, Tianjin, Maoming, etc., totaling 9.6 million tons/year put into production, and Zhongke S Zorb, diesel hydrogenation, etc., totaling 4.4 million tons/year were put into production). Some of the equipment upgrading projects to improve oil quality were completed and put into production.

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Source of crude oil

 

In 2020, approximately 88.6% of the crude oil required for our refinery business was imported.

 

Marketing and Sales of Refined Oil Products

 

Overview

 

We operate the largest sales and distribution network for refined oil products in China. In 2020, we distributed and sold approximately 167.99 million tonnes of gasoline, diesel and kerosene domestically. Most of the refined oil products sold by us are produced internally. In 2020, approximately 67.3% of our gasoline sales volume and approximately 79.5% of our diesel sales volumes were produced internally.

 

The table below sets forth a summary of key data in the marketing and sales of refined oil products in the years of 2018, 2019 and 2020.

 

  As of December 31, 
  2018  2019  2020 
Total sales volume of refined oil products (in million tonnes)*  237.69   254.95   217.91 
Domestic sales volume of refined oil products (in million tonnes)  180.24   184.45   167.99 
Retail  121.64   122.54   113.19 
Wholesale and Distribution  58.61   61.91   54.80 
Average annual throughput of service stations (in tonnes per station)  3,979   3,992   3,686 

 

 

* The total sales volume of refined oil products includes the amount of refined oil marketing and trading sales volume.

 

  As of December 31, 
  2018  2019  2020 
Total number of service stations under Sinopec brand  30,661   30,702   30,713 
Self-operated service stations  30,655   30,696   30,707 

 

Retail

 

All of our retail sales are made through a network of service stations and petroleum shops operated under the Sinopec brand. Through this unified network we are able to implement consistent pricing policies, maintain both product and service quality standards and more efficiently deploy our retail network.

 

In 2020, we sold approximately 113.19 million tonnes of gasoline, diesel and kerosene through our retail network, representing approximately 67.4% of our total domestic gasoline, diesel, jet fuel and kerosene sales volume. Our retail network mainly consists of service stations that are wholly-owned and operated by us, and jointly-owned and generally operated or leased by us, all of which are operated under the Sinopec brand. We also franchised the Sinopec brand to third parties services stations. As of December 31, 2020, we had 6 franchised service stations that are owned and operated by third parties.

 

Wholesale and Distribution

 

In 2020, we sold approximately 54.8 million tonnes of refined oil products, including 13.15 million tonnes of gasoline, 26.83 million tonnes of diesel and 14.82 million tonnes of kerosene, through wholesale and distribution to independent distributors such as domestic industrial enterprises, hotels, restaurants and agricultural producers and long-term large-scale end users such as railways, airlines, shipping and public utilities.

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We operate 330 storage facilities with a total capacity of approximately 18.0 million cubic meters, substantially all of which are wholly-owned by us. These storage facilities and our wholesale centers are connected to our refineries by railway, waterway and pipelines. We also own some dedicated railways, oil wharfs and oil barges, as well as a number of rail tankers and oil trucks.

 

Chemicals

 

Overview

 

We are the largest petrochemicals producer and distributor in China, with our petrochemical production plants located in economically developed regions such as central, eastern and southern China. We produce and distribute a full range of chemical products including intermediate petrochemicals, synthetic resins, synthetic fiber monomer and polymers, synthetic fibers and synthetic rubber. Synthetic resins, synthetic fibers, and synthetic rubber comprise a significant majority of our external sales. Synthetic fiber monomer and polymers and intermediate petrochemicals, on the other hand, are mostly internally consumed as feedstock for the production of other chemical products. Our chemical operations are integrated upstream and downstream with our refining businesses, which supply a significant portion of our naphtha and light hydrocarbons feedstock. Due to the high demand in China, we sell most of our chemical products in China.

 

Products

 

Intermediate Petrochemicals

 

We are the largest ethylene producer in China. Our rated ethylene capacity as of December 31, 2020 was 12.548 million tonnes per annum. In 2020, we produced 12.06 million tonnes of ethylene. Nearly all of our olefins production is used as feedstock for our petrochemical operations.

 

We produce aromatics mainly in the forms of benzene and para-xylene, which are used primarily as feedstock for purified terephthalic acid, or PTA, the preferred raw material for polyester.

 

Chemicals extracted from olefins and aromatics are mainly used to produce synthetic resins, synthetic rubber and synthetic fibers, as well as intermediate petrochemicals.

 

The following table sets forth our rated capacity per annum, production volume and major plants of production as of or for the year ended December 31, 2020 for our principal intermediate chemical products.

 

  Our Rated
Capacity
  Our
Production
  Major Plants of Production
  (thousand tonnes
per annum)
  (thousand
tonnes)
   
Ethylene  12,548   12,060  Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, Shanghai SECCO, BASF-YPC*, Fujian*, Sinopec Sabic (Tianjin)*, Zhongke, Zhenhai, Sino-Korean (Wuhan) and Great Wall EC
Propylene  11,066   10,536  Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, Shanghai SECCO, Zhongke, BASF-YPC*, Jinling, Anqing, Qingdao, Hainan, Fujian*, Sinopec Sabic (Tianjin)*, Zhenhai, Sino-Korean (Wuhan) and Great Wall EC
Benzene  5,762   4,324  Yanshan, Shanghai, Yangzi, Qilu, Guangzhou, Zhenhai, Tianjin, Luoyang, Shanghai SECCO, Zhongke, BASF-YPC*, Fujian*, Maoming, Hainan and Sino-Korean (Wuhan), Jinling
Styrene  2,530   2,287  Zhenhai, Yanshan, Qilu, Guangzhou, Maoming, Shanghai SECCO, Anqing, Hainan and BASF-YPC*
Para-xylene  5,834   4,940  Shanghai, Yangzi, Qilu, Tianjin, Luoyang, Zhenhai, Jinling, Fujian* and Hainan
Phenol  757   723  Yanshan, Gaoqiao and Sinopec Sabic (Tianjin)*

 

*Joint ventures, of which the production capacities and outputs are fully included in our statistics.

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Synthetic Resins

 

We are the largest producer of polyethylene, polypropylene and polystyrene and supplier of major synthetic resins products in China.

 

The following table sets forth our rated capacity per annum, production volumes and major plants of production for each of our principal synthetic resins as of or for the year ended December 31, 2020.

 

  Our Rated
Capacity
  Our
Production
  Major Plants of Production
  (thousand tonnes
per annum)
  (thousand
tonnes)
   
Polyethylene  8,439   8,013  Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, Shanghai SECCO, Zhongke, BASF-YPC*, Fujian*, Sinopec Sabic (Tianjin)*, Zhenhai, Sino-Korean (Wuhan) and Great Wall EC
Polypropylene  8,304   7,925  Yanshan, Shanghai, Yangzi, Qilu, Guangzhou, Maoming, Tianjin, Zhongyuan, Shanghai SECCO, Zhongke, Jingmen Branch, Fujian*, Sinopec Sabic (Tianjin)*, Zhenhai, Sino-Korean (Wuhan), Great Wall EC, Luoyang, Jiujiang, Jingmen, Hainan, Beihai and Shijiazhuang
Polyvinyl chloride  600   331  Qilu
Polystyrene  583   620  Maoming, Guangzhou, Shanghai SECCO and BASF-YPC*
Acrylonitrile butadiene styrene  200   181  Gaoqiao

 

*Joint ventures, of which the production capacities and outputs are fully included in our statistics.

  

Synthetic Fiber Monomers and Polymers

 

Our principal synthetic fiber monomers and polymers are purified terephthalic acid, ethylene glycol, acrylonitrile, caprolactam, polyester, polyethylene glycol and polyamide fiber.

 

The following table sets forth our rated capacity per annum, our production volume and major plants of production as of or for the year ended December 31, 2020 for each type of our principal synthetic fiber monomers and polymers.

 

  Our Rated
Capacity
  Our
Production
  Major Plants of Production
  (thousand tonnes
per annum)
  (thousand
tonnes)
   
Purified terephthalic acid  2,819   2,382  Shanghai, Yangzi, Yizheng, Tianjin and Luoyang
Ethylene glycol  3,699   2,029  Yanshan, Shanghai, Yangzi, Tianjin, Maoming, Zhongke, Fujian*, BASF-YPC*, Sinopec Sabic (Tianjin)*, Zhenhai
Acrylonitrile  1,070   861  Anqing, Qilu Koruhr* and Shanghai SECCO
Caprolactam  909   809  Baling
Polyester  3,378   2,772  Shanghai, Yizheng, Tianjin and Luoyang

 

*Joint ventures, of which the production capacities and outputs are fully included in our statistics.

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Synthetic Fibers

 

Our principal synthetic fiber products are polyester fiber and acrylic fiber.

 

The following table sets forth our rated capacity per annum, production volume and major plants of production for each type of our principal synthetic fibers as of or for the year ended December 31, 2020.

 

  Our Rated
Capacity
  Our Production  Major Plants of Production
  (thousand tonnes
per annum)
  (thousand
tonnes)
   
Polyester fiber  1,206   1,120  Yizheng, Shanghai, Tianjin and Luoyang
Acrylic fiber  265   184  Shanghai, Anqing and Qilu

 

Synthetic Rubbers

 

Our principal synthetic rubbers are cis-polybutadiene rubber, styrene butadiene rubber, or SBR, styreneic block copolymers (SBCs) thermoplastic elastomer, isobutadiene isoprene rubber, or IIR, and ethylene propylene rubber. Based on our 2020 production, we are the largest producer of SBR, cis-polybutadiene rubber and SBCs thermoplastic elastomer in China.

 

The following table sets forth our rated capacity per annum, production volume and major plants of production as of or for the year ended December 31, 2020 for each of our principal synthetic rubbers.

 

  Our Rated
Capacity
  Our
Production
  Major Plants of Operation
  (thousand tonnes
per annum)
  (thousand
tonnes)
   
Cis-polybutadiene rubber  420   445  Yanshan, Qilu, Maoming, Yangzi and Gaoqiao
Styrene butadiene rubber  430   412  Qilu, Yangzi, Gaoqiao and Yanshan
Styrene-butadiene-styrene thermoplastic elastomers  140   124  Yanshan and Maoming
Isobutylene isoprene rubber  125   26  Yanshan
Ethylene propylene rubber  75   60  Gaoqiao*

 

*Joint ventures, of which the production capacities and outputs are fully included in our statistics.

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Marketing and Sales of Petrochemicals

 

The central, eastern and southern regions in China, where most of our petrochemical plants are located, constitute the major petrochemical market in China. Our proximity to the major petrochemical market gives us a geographic advantage over our competitors.

 

The prices of petrochemical products in China have become market-oriented. Our principal sales channels consist of (i) direct sales to domestic and foreign large- and medium-sized manufacturing enterprises, which account for more than 76% of our direct sales, (ii) sales to distributors, who are responsible for sales and distribution to a portion of our smaller and scattered customers or specific customers, and (iii) sales of chemical products through our e-commerce platform “Chem E-Mall,” which effectively launched an e-commerce channel of petrochemical products and improved customer experience.

 

Competition

 

According to the Measures for the Administration of Overseas Investment of Enterprises (Decree No. 11 of 2017 of the National Development and Reform Commission), when an investment entity conducts overseas investment, it shall undergo the formalities for the confirmation or recordation of overseas investment projects, report relevant information, and cooperate in supervision and inspection. The scope of implementation of confirmation management is sensitive projects conducted by investors directly or through overseas enterprises controlled by them, including projects involving sensitive countries and regions, and projects involving sensitive industries. The scope of the implementation of recordation management is non-sensitive projects that are directly conducted by investors, namely, non-sensitive projects that involve investors’ direct contribution of assets or rights and interests or provision of financing or security. The confirmation or recordation authority is the National Development and Reform Commission (NDRC).

 

Pursuant to the Anti-Monopoly Law of the PRC which became effective on August 1, 2008, when market concentration by business carriers through merger, acquisition of control through shares or assets acquisition, or acquisition of control or the ability to exercise decisive influence over other business carriers by contract or by other means reaches a threshold of declaration level prescribed by the State Council, the business carriers shall declare in advance to the Anti-monopoly Law enforcement agency, otherwise, the business carriers shall not implement such market concentration.

 

Refining and Marketing of Refined Oil Products

 

Market participants compete primarily on the basis of wide-established sales network and logistics system, quality of products and service, efficiency of operations including proximity to customers, awareness of brand name and price. While we constantly face competition from other market participants, we believe that we have a competitive advantage in our principal market against our competitors.

 

Chemicals

 

We compete with domestic and foreign chemicals producers and distributors in the chemicals market. We adopt the strategy of “one product one policy, one customer one case” to meet customers’ needs, coordinate production, sales, research and application, produce targeted solutions based on client’s needs, provide customized services, and strive to create value for customers. Our petrochemical production facilities’ proximity to customers has given us significant regional advantages over our competitors, resulting in lower transportation costs and better competitiveness of our products.

 

Patents and Trademarks

 

In 2020, we were granted 4,254 patents in China and overseas. As of December 31, 2020, we owned a total of 38,695 patents in China and overseas.

 

In 2020, we had 391 material trademarks approved internally.

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Business Operations Relating to Iran Threat Reduction and Syria Human Rights Act of 2012

 

In 2020, we did not source any of our refinery throughputs of crude oil from Iran. Based on our internal reports and statistics, no revenue or net profit was recorded from trading activity with Iranian companies.

 

Based on feedback to our inquiries to Sinopec Group Company, our controlling shareholder, Sinopec Group Company engaged in a small amount of business activities in Iran such as providing engineering services and designs. Sales revenue from these business activities accounted for 0.014% of its total unaudited sales revenue, with a minor net loss incurred from these business.

 

Regulatory Matters

 

Overview

 

China’s petroleum and petrochemical industry has seen significant deregulation in the past ten years. However, the exploration, production, marketing and distribution of crude oil and natural gas, as well as the production, marketing and distribution of certain refined oil products are still subject to regulation of many government agencies including:

 

National Development and Reform Commission (NDRC)

 

NDRC is responsible for formulating and implementing key policies in respect of petroleum and petrochemical industry, including:

 

Formulating guidance plan for annual production, import and export amount of crude oil, natural gas and petroleum products nationwide based on its forecast on macro-economic conditions in China;

 

Setting the pricing policy for refined oil products;

 

Approving certain domestic and overseas resource investment projects which are subject to NDRC’s approval as required by the Catalogue of Investment Projects Approved by the Government in effect; and

 

National Energy Administration (NEA)

 

NEA is primarily responsible for the formulation of energy development plans and annual directive plans, approving major energy-related projects and facilitating the implementation of sustainable development of energy strategies, coordinating the development and utilization of renewable energies and new energies, and organizing matters relating to energy conservation and comprehensive utilization as well as environmental protection for the energy industry.

 

The Ministry of Commerce (MOFCOM)

 

MOFCOM is responsible for the record-filing of Sino-foreign equity joint venture contracts and Sino-foreign cooperation joint venture contracts, and monitoring the foreign investors’ oil and gas exploration projects in the PRC. It is responsible for approving or filing of the overseas investment by PRC enterprises and issuing the enterprise overseas investment certificate and quotas and licenses for import and export of crude oil and refined oil products. According to the law, MOFCOM is also responsible for supervising, approving and record-filing of foreign investment (excluding financial investment) of domestic enterprises.

 

Ministry of Natural Resources (MNR)

 

The MNR (formerly known as the Ministry of Land and Resources, or MLR) is responsible for issuing the licenses that are required to explore and produce crude oil and natural gas in China. In March 2018, according to the Institutional Reform Plan of the State Council, the responsibilities of the Ministry of Land and Resources were integrated to form the Ministry of Natural Resources of the People’s Republic of China.

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Regulation of Exploration and Production

 

Exploration and Production Rights

 

The PRC Constitution provides that all mineral and oil resources belong to the state. In 1986, the Standing Committee of the National People’s Congress passed the Mineral Resources Law which authorizes MNR, to exercise administrative authority over the exploration and production of the mineral and oil resources within the PRC, including its territorial waters. The Mineral Resources Law and its supplementary regulations provide the basic legal framework under which exploration licenses and production licenses are granted. The MNR has the authority to grant exploration licenses and production licenses on a competitive bidding or other basis it considers appropriate. Applicants for these licenses must be companies approved by the State Council to engage in oil and gas exploration and production activities. Currently, we are one of the few companies that have received such exploration licenses and production licenses in oil and gas industry.

 

Applicants for exploration licenses must first submit applications to the MNR with respect to blocks in which they intend to engage in exploration activities. The holder of an exploration license is obligated to make an annual minimum exploration investment and pay annual exploration license fees, ranging from RMB 100 to RMB 500 per square kilometer, relating to the exploration blocks in respect of which the license is issued. The maximum term of an oil and gas exploration license is 7 years. Such exploration license may be renewed upon application by the holder at least 30 days prior to expiration date, with each renewal for a maximum two-year term. Under the PRC laws and regulations, we are entitled for reductions and exemptions of exploration license fees for exploration in the western, offshore and northeastern regions of China.

 

At the exploration stage, an applicant can also apply for a progressive exploration and production license that allows the holder to test and develop reserves not yet fully proved. The progressive oil and gas exploration and production license has a maximum term of 15 years. When the reserves become proved for a block, the holder must apply for a full production license in order to undertake production.

 

The MNR issues full production licenses to applicants on the basis of the reserve reports approved by relevant authorities. The maximum term of a full production license is 30 years unless a special dispensation is given by the State Council. Due to a special dispensation granted to us by the State Council, the maximum term of our full production licenses is 80 years. The full production license is renewable upon application by the holder at least 30 days prior to expiration of the original term. A holder of the full production license has to pay an annual full production right usage fee of RMB 1,000 per square kilometer.

 

Exploration and production licenses do not grant the holders the right to enter upon any land for the purpose of exploration and production. Holders of exploration and production licenses must separately obtain the right to use the land covered by the licenses, and if permissible under applicable laws, current owners of the rights to use such land may transfer or lease the land to the license holder.

 

Incentives for Shale Gas Development

 

In order to incentivize the exploration, discovery and development of China’s shale gas reserves, to increase the supply of natural gas and to relieve the imbalance between supply and demand of natural gas, the Ministry of Finance of China and China National Energy Administration issued the Notice on Subsidy for Shale Gas Development and Utilization (Ministry of Finance No. 847 [2012]), pursuant to which the central government will subsidize shale gas production companies at a rate of RMB 0.4 per cubic meter of shale gas produced from 2012 to 2015.

32

China National Energy Administration issued the Shale Gas Industry Policy (NEA No. 5 [2013]) in October 2013, which classifies shale gas as a “national strategic new industry” and calls for more fiscal support for exploration and development of shale gas. In particular, subsidies should be given directly to a shale gas production company according to the amount of its shale gas development and utilization. Local governments are also encouraged to provide subsidies to shale gas production companies, with the subsidy amount to be determined by local fiscal authorities. The Policy also reduces or waives compensatory fee for mineral resources, license and royalty fees for shale gas production companies. For encouraged projects like shale gas exploration and discovery, the policy also waives customs duty for imported equipment and machineries that cannot be manufactured domestically in accordance with relevant regulations.

 

In April 2015, to facilitate the development of the shale gas industry, the Ministry of Finance of China and China National Energy Administration issued the Notice on Fiscal Subsidies for Shale Gas Development and Utilization (Ministry of Finance No. 112 [2015]) to further implement the policy of fiscally subsidizing the shale gas industry during the period of the thirteenth “five-year” plan, and the subsidy will be RMB 0.3 per cubic meter of shale gas produced and RMB 0.2 per cubic meter of shale gas produced from 2016 to 2018 and from 2019 to 2020, respectively.

 

In March 2018, in order to promote the development and utilization of shale gas, the Ministry of Finance and the State Administration of Taxation jointly issued the Notice on the Reduction of Resource Tax on Shale Gas (Ministry of Finance No. 26 [2018]) which provides that from April 1, 2018 to March 31, 2021, a 30% reduction shall be applied to the 6% tax rate applicable to shale gas.

 

In June 2019, the Ministry of Finance issued the Supplemental Notice on Interim Measures for the Management of Special Funds for Renewable Energy Development (Ministry of Finance No. 298 [2019]), which cancels the fixed-rate subsidy on shale gas industry, and provides that the increased gradient subsidy shall be granted to enterprises if their production of shale gas increases over the last year, while only reduced subsidy shall be granted if the production decreases over the last year. The Notice also provides increased subsidy for the incremental production of unconventional natural gas in winter.

 

Price Controls on Crude Oil

 

According to Measures for Administration of Petroleum Products Price issued by NDRC on January 13, 2016, the crude oil price shall be determined by reference to the international market price.

 

Price Controls on Natural Gas

 

In recent years, the pace of market-oriented natural gas price reforms has accelerated significantly. In April 2015, according to the change in the price of alternative energy, NDRC unified the stock natural gas and incremental natural gas prices. In November 2015, NDRC to further liberalized the pricing of natural gas by replacing the reference ceiling price for city-gate prices of non-residential natural gas with a reference base rate. In October 2016, NDRC has relaxed the control over service prices for gas prices used for fertilizer production, determined that the relevant prices of gas storage facilities were market-oriented, and launched a trial reform of the marketization of city-gate prices in Fujian Province.

 

In August 2017, based on the results of the supervision and review of the pricing of natural gas pipelines, NDRC adjusted the pipeline transportation prices, in conjunction with the adjustment of the natural gas value-added tax rate. The non-residential natural gas reference city-gate prices have been reduced by RMB 0.1 per cubic meter. NDRC encouraged the natural gas production and operation enterprises and users to actively enter the natural gas trading platform, and the prices of natural gas that have been openly traded on trading platforms such as the Shanghai Oil and Gas Exchange Center and Chongqing Oil and Gas Exchange Center are formed by the market. In May 2018, NDRC adjusted the price of natural gas for civil use, improved price mechanism, replaced the reference ceiling price for city-gate prices of residential natural gas with a reference base rate, and thus brought the price of residential gas in line with the price of non-resident gas.

 

In March 2019, NDRC issued the Notice on Adjusting the City-Gate Price (NDRC Pricing Circular No, 562 [2019]) to adjust the city-gate price based on adjustments on value-added tax applicable to natural gas with effective date on April 1, 2019. We have adjusted the sales price of natural gas to grant the benefits of the lower value-added tax rate to our customers.

33

Regulation of Pipelines Networks

 

In October 2016, NDRC issued the Interim Provisions for Management Measures of Natural Gas Pipeline Transmission Prices and the Interim Provisions for Supervision and Review of Natural Gas Pipeline Transmission Cost (for Trial Implementation) (NDRC Pricing Circular 2142[2016]) (the “Interim Provisions”).

 

In August 2017, according to the Interim Provisions, after the supervision and review of the pricing of natural gas interprovincial pipelines, NDRC adjusted the prices of 13 natural gas interprovincial pipelines. Since September 1, 2017, based on the pipeline transmission prices (traffic price rate) of the Sichuan-East Gas Pipeline and Yulin-Jinan Pipeline published by the NDRC, along the transportation distance of the natural gas inlet and export, we have calculated and determined the prices of the gas transmission points for Sichuan-East Gas Pipeline and the Yulin-Jinan Pipeline and published the list of prices on our official website. We have updated the information disclosure on our website regarding the cost of operation and the maintenance expense on annual basis.

 

In March 2019, the NDRC issued the Notice on Adjusting the Prices of Trans-provincial Pipeline Transportation of Natural Gas (NDRC Pricing Circular No.561 [2019]) to adjust the trans-provincial pipeline transportation price of natural gas based on adjustments on the value-added tax rate applicable to natural gas with effective date on April 1, 2019. We have adjusted our trans-provincial pipeline transportation price.

 

In 2020, we sold certain pipeline assets to PipeChina. Pursuant to the oil and gas pipeline transportation service price policy specified by the NDRC, (i) if there exists government-specified price, such price shall be applied, and (ii) if there exists no government-specified price, the supply and demand parties shall negotiate and determine a price, or refer to the existing similar pipeline transportation rates. We negotiated with PipeChina to determine the pipeline transportation service price, among which, the natural gas and crude oil pipeline transportation service fee and LNG receiving terminal usage fee shall be priced pursuant to government policy, and refined oil pipeline transportation service fee shall be negotiated by both Parties with reference to the pricing principle applicable to natural gas pipeline transportation service fee.

 

Regulation of Refining and Marketing of Refined Oil Products

 

Gasoline and Diesel Prices

 

Gasoline and diesel prices are government-guided.

 

In March 2013, NDRC released Circular on Establishment of Sound Price Formation Mechanism of Refined Oil Products (NDRC Pricing Circular 624[2013]), which specified that a reformed refined oil product price formation mechanism shall include shortening of the refined oil product price adjustment period to 10 working days. To save social resources, if the assessed adjustment in domestic refined oil product prices is less than RMB 50 per tonne, the adjustment will be postponed to next period. In cases of special conditions such as significant increase in domestic CPI, significant emergencies or significant fluctuations of crude oil price on international market which may trigger adjustment of domestic refined oil price, NDRC may implement ad hoc suspension, delay or narrowing of price adjustment upon the approval by the State Council. Upon elimination of the special conditions, the price formation mechanism may resume operation after NDRC obtains the State Council’s for approval.

 

On January 13, 2016, NDRC made further adjustments to the pricing mechanism for refined oil products, effective immediately. When benchmark crude oil price falls below US$ 40/bbl, NDRC will not further adjust oil product prices, the unadjusted portion would be transferred into a risk fund, which can be used for energy conservation and emission reduction, refined oil product quality upgrading and security of crude oil and gas supply upon approval by relevant departments.

 

Jet Fuels Price

 

The ex-factory price of the jet fuels will be determined by the buyers and the sellers, with reference to the price in the Singapore market.

34

Regulation of Crude Oil and Refined Oil Products Market

 

On December 4, 2006, Ministry of Commerce of the PRC promulgated the “Administrative Rules for Crude Oil Market” and “Administrative Rules for Refined Oil Products Market.”

 

Starting in 2015, qualified refineries has been allowed to use, and conduct business in connection with, imported crude oil. On December 4, 2019, Ministry of Commerce issued the Notice of Reform of “Release-Management-Service” on Crude Oil and Refined Oil Products to further open up the domestic oil and refined oil products market. Ministry of Commerce formally abolished the “Administrative Rules for Crude Oil Market” and “Administrative Rules for Refined Oil Products Market” on July 1, 2020, and promogulated the “Guidelines for the Administration of Petroleum Refined Oil Circulation Industry” on December 31, 2020. In September 2020, the State Council issued the “Decision on the Cancellation and Decentralization of a Batch of Administrative Licensing Items”, clarifying that “the approval of the wholesale and warehousing operation qualifications for petroleum refined oil will be cancelled, and the approval for the retail operation qualification of refined oil products will be delegated to the formulation department of the municipal people’s government with local governments to implement territorial supervision responsibilities.” The domestic crude oil and refined oil product markets are increasingly open.

 

Investment

 

Overseas investments by Chinese enterprises involving sensitive countries or regions or sensitive industries shall be submitted to NDRC and MOFCOM for approval, and other overseas investments by Chinese enterprises will only need to submit a filing with NDRC and MOFCOM or its regional branches.

 

According to Measures for the Administration of Overseas Investment of Enterprises (NDRC No.11 [2017]), promulgated on December 26, 2017, investments made directly, or indirectly through offshore entities controlled by the investor, involving sensitive countries or regions or sensitive industries shall be approved by the NDRC. For non-sensitive direct investments, namely investments for which the investor provide financing or guarantee, or make asset or interest investment directly, filings with NDRC or its local branches shall be made.

 

According to the Measures for Supervision and Administration of Overseas Investment by Central Enterprises (SASAC Decree No. 35[2017]) promulgated by the State-owned Assets Supervision and Administration Commission of the State Council, central enterprises shall establish a negative list for overseas investment under which prohibited investments and specially supervised investments shall be administered separately. Central enterprises shall not make any investments categorized as prohibited ones. The foreign investment projects listed in the special supervision category of the negative list shall be submitted to the SASAC for approval.

 

In accordance with the Administrative Measures for Overseas Investments (MOFCOM Order No. 3 [2014]) issued by MOFCOM, overseas investment shall be subject to approval or filing requirements of MOFCOM or its provincial counterparts based on its investment category.  Overseas investments involving sensitive countries (regions) or sensitive industries shall be approved by MOFCOM. All other investments will require only a filing with MOFCOM.

 

Taxation, Fees and Royalty

 

Companies which operate petroleum and petrochemical businesses in China are subject to a variety of taxes, fees and royalties.

 

Effective from December 1, 2014, the rate of mineral resource compensation charges on crude oil and natural gas is reduced to zero, and the applicable resource tax rate is correspondingly increased from 5% to 6%.

 

Effective from January 1, 2015, the threshold of the special oil income levy is increased from US$55 to 65 per barrel, and a five-level progressive rate is applied to special oil income levy collection based on the sale prices.

35

From November 29, 2014 to January 12, 2015, the unit tax amount of consumption tax on gasoline, naphtha, solvent and lubricant have been adjusted three times and the current applicable consumption tax rates are set forth in the table below. For further information about consumption tax rates, see Note 7 to our consolidated financial statements.

 

Effective from May 1, 2016, business tax has been completed replaced by value-added tax to cover all the business sectors that used to fall under the business tax regime.

 

In April 2017, the State Council issued a notice to implement the reform of the existing mineral resources income levy system, in which the existing license fees of exploration rights and production rights will be integrated into mining rights occupancy fees, and will be dynamically adjusted based on the changes in mineral product prices and economic development needs. Collection methods and standards have not yet been released.

 

Starting on January 1, 2018, environmental tax has been levied, with the original sewage charges being cancelled.

 

Starting in April 2019, the value-added tax rate has been further lowered.

 

Applicable tax, fees and royalties on refined oil products and other refined oil products generally payable by us or by other companies in similar industries are shown below.

 

Tax Item Tax Base Tax Rate/Fee Rate
Enterprise income tax Taxable income 25% effective from January 1, 2008.
Value-added tax Revenue 9% for liquefied petroleum gas, natural gas, low-density polyethylene for production of agricultural film and fertilizers, 13% for other commodities and 6% for the taxable service. On behalf of the tax authorities, we collect value-added tax from users other than the selling price of the products when settling payments with users. The value-added tax paid by us when purchasing raw materials for production, and the payment of drilling and other engineering service fees may be deducted from the value-added tax collected by us from users.
Consumption tax Aggregate volume sold or self-consumed Effective from January 13, 2015, RMB 1.52 per liter for gasoline, naphtha, solvent oil and lubricant, and RMB 1.2 per liter for diesel, fuel oil and jet kerosene.
Import tariff CIF China price 5% for gasoline, 6% for diesel, 9% for jet kerosene and 6% for fuel oil. In 2017, the applicable tax rate for motor gasoline and aviation gasoline, No. 5-7 fuel oil and diesel is 1%, and 0% for jet kerosene and naphtha.
Resource tax Aggregate Sales Revenue Effective from December 1, 2014, for domestic production of crude oil and natural gas, the applicable tax rate is increased from 5% to 6% of the sales revenue, exemption or deduction may apply if qualified.
Resource compensation tax Sales revenue of crude oil and natural gas Effective from December 1, 2014, the applicable tax rate is reduced from 1% to zero.
Exploration license fee Area RMB 100 to RMB 500 per square kilometer per annum.
Production license fee Area RMB 1,000 per square kilometer per annum.
Royalty fee(1) Production volume Progressive rate of 0-12.5% for crude oil and 0-3% for natural gas.
City construction tax Total payment of value-added tax and consumption tax 1%, 5% and 7%.
Education surcharge and local education surcharge Total payment of value-added tax and consumption tax 3% for education surcharge and 2% for local education surcharge.
Special Oil Income Levy Any revenue derived from sale of domestically produced crude oil when the realized crude oil price exceeds US$65 per barrel. Progressive rate of 20% to 40% for revenues derived from crude oil with realized price in excess of US$65 per barrel.

 

 
(1)Sino-foreign oil and gas exploration and development cooperative projects whose contracts were signed prior to November 1, 2011 and have not yet expired are still subject to royalty fee, and the project companies of those cooperative projects are not subject to any other resource taxes or fees. Sino-foreign oil and gas exploration cooperative projects whose contracts are signed after November 1, 2011 are not subject to royalty fee, but are subject to resource taxes.

36

C.ORGANIZATIONAL STRUCTURE

 

For a description of our relationship with Sinopec Group Company, see “Item 4. Information on the Company—A. History and Development of the Company” and “Item 7. Major Shareholders and Related Party Transactions.” For a description of our significant subsidiaries, see Note 39 to our consolidated financial statements.

 

D.PROPERTY, PLANT AND EQUIPMENT

 

We own substantially all of our properties, plants and equipment relating to our business activities. See “Item 4. Information on the Company—B. Business Overview” for description of our property, plant and equipment.

 

Environmental Matters

 

We are subject to various national environmental laws and regulations and also environmental regulations promulgated by the local governments in those jurisdictions we have operations, and we must pay the environmental tax for pollutant emissions. Usually the environmental tax increases for each incremental amount of discharge up to a certain level. Above a certain level prescribed by the pollutant discharge permits or other standards, the PRC regulations permit the local government to order any of our facilities to cure certain behavior causing environmental damage and subject to the central government’s approval, the local government may also issue orders to close any of our facilities that fail to comply with the existing regulations. In addition, we have incurred capital expenditure specifically in compliance with the various environmental protection objectives set by the PRC government for the petroleum and chemical industry, to promote energy saving and environmental protection.

 

Our Energy Management and Environmental Protection Department is responsible for environmental management functions such as energy saving, emission reduction, environmental protection, water saving, comprehensive utilization of resources and clean production. Each of our production subsidiaries has implemented policies to control its pollutant emissions and discharge and to oversee compliance with the PRC environmental regulations.

 

Most of our production facilities have their own environmental protection facilities, and the rest of our production facilities utilize available social resources, to guarantee the effective treatment of waste water, solid waste and waste gases, to ensure the compliance with applicable emission standard for our emission of waste water and waste gas, and to follow applicable disposal procedures for our disposal of solid waste.

37

Environmental regulations also require companies to file an environmental impact evaluation report to the Ministry of Ecology and Environment or local ecology and environment department for approval before undertaking any project with negative impact on the environment. When carrying out such projects, companies shall construct and implement environmental protection facilities and measures as required by the environmental bureau. After the completion of the construction, the projects shall be assessed according to the relevant requirements of environmental assessment, and the projects will only be permitted to operate after the assessment of its discharge treatment facilities, measures and pollutant discharge satisfactory environmental assessment and approval requirements and reporting on the national information platform for completion-based environmental protection check and acceptance of construction projects.

 

We believe our environmental protection systems and facilities are adequate for us to comply with current applicable national and local environmental protection regulations. The PRC government, however, may impose stricter regulations which may require additional expenditure on compliance with environmental regulations. In addition, to actively undertake our social responsibility, we may adopt and implement stricter internal policies with respect to environmental protections.

 

Our environmental protection expenditures were approximately RMB 7.9 billion in 2018, RMB 9.3 billion in 2019 and RMB 11.4 billion in 2020.

 

Insurance

 

In respect of our refining, petrochemical production, and marketing and sales operations, we currently maintain with Sinopec Group Company, under the terms of its Safety Production Insurance Fund (SPI Fund), approximately RMB 954.3 billion of coverage on our property and plants and approximately RMB 123.5 billion of coverage on our inventory. In 2020, we paid an insurance premium of approximately RMB 2.282 billion to Sinopec Group Company for such coverage.

 

Transportation vehicles and products in transit are not covered by Sinopec Group Company and we maintain insurance policies for those assets with insurance companies in the PRC.

 

The insurance coverage under SPI Fund applies to all domestic enterprises controlled by Sinopec Group Company under regulations published by the Ministry of Finance. We believe that, in the event of a major accident, we will be able to recover most of our losses from insurance proceeds paid under the SPI Fund or by insurance companies.

 

Pursuant to an approval of the Ministry of Finance, Sinopec Group Company entered into an agreement with PICC Property and Casualty Company Limited on January 29, 2002 to purchase a property and casualty policy which would also cover our assets. The policy provides for an annual maximum cumulative claim amount of RMB 4 billion and a maximum of RMB 2.36 billion per occurrence.

 

ITEM 4A.UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A.GENERAL

 

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements. Our consolidated financial statements have been prepared in accordance with IFRS. Certain financial information presented in this section is derived from our audited consolidated financial statements. Unless otherwise indicated, all financial data presented on a consolidated basis or by segment, are presented net of inter-segment transactions (i.e., inter-segment and other intercompany transactions have been eliminated).

38

Critical Accounting Policies

 

Our reported consolidated financial condition and consolidated results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements. We base our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. On an on-going basis, our management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.

 

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. Our principal accounting policies are set forth in Note 2 to the consolidated financial statements. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

 

Oil and gas properties and reserves

 

The accounting for the exploration and production activities of oil and gas is subject to accounting rules that are unique to the oil and gas industry. There are two methods to account for oil and gas business activities, the successful efforts method and the full cost method. We have elected to use the successful efforts method. The successful efforts method reflects the volatility that is inherent in exploring for mineral resources in that costs of unsuccessful exploratory efforts are charged to expense as they are incurred. These costs primarily include dry hole costs, seismic costs and other exploratory costs. Under the full cost method, these costs are capitalized and written-off or depreciated over time.

 

Engineering estimates of our oil and gas reserves are inherently imprecise and represent only approximate amounts because of the subjective judgements involved in developing such information. There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and gas reserves can be designated as “proved.” Proved and proved developed reserves estimates are updated at least annually and take into account recent production and technical information about each field. In addition, as prices and cost levels change from year to year, the estimate of proved and proved developed reserves also changes. This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in relation to depreciation rates. Oil and gas reserves have a direct impact on the assessment of the recoverability of the carrying amounts of oil and gas properties reported in the financial statements. If proved reserves estimates are revised downwards, earnings could be affected by changes in depreciation expense or an immediate write-down of the property’s carrying amount.

 

Future dismantlement costs for oil and gas properties are estimated with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with industry practices in similar geographic area, including estimation of economic life of oil and gas properties, technology and price level. The present values of these estimated future dismantlement costs are capitalized as oil and gas properties with equivalent amounts recognized as provisions for dismantlement costs.

 

Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depreciation expense, impairment loss and future dismantlement costs. Capitalized costs of proved oil and gas properties are amortized on a unit-of-production method based on volumes produced and reserves.

 

Impairment for long-lived assets

 

If circumstances indicate that the net book value of a long-lived asset may not be recoverable, the asset may be considered “impaired,” and an impairment loss may be recognized in accordance with IAS 36 “Impairment of Assets.” The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. For goodwill, the recoverable amount is estimated annually. The recoverable amount is the greater of the net selling price and the value in use. It is difficult to precisely estimate selling price because quoted market prices for our assets or cash-generating units are not readily available. In determining the value in use, expected cash flows generated by the asset or the cash-generating unit are discounted to their present value, which requires significant judgement relating to level of sale volume, selling price, amount of operating costs and discount rate. Management uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sale volume, selling price, amount of operating costs and discount rate.

39

Impairment losses recognized for each of the three years ended December 31, 2018, 2019 and 2020 in our statement of income on long-lived assets are summarized as follows:

 

  Year ended December 31, 
  2018  2019  2020 
  (RMB in millions) 
Exploration and production  4,274   3   8,495 
Refining  353   245   1,923 
Marketing and distribution  264   80   536 
Chemicals  1,379   17   3,606 
Corporate and others  16   -   - 
Total*  6,286   345   14,560 

 

 
*Information relating to the detailed analysis of the change in impairment losses is presented in Note 8 to the consolidated financial statements.

 

Depreciation

 

Property, plant and equipment, other than oil and gas properties, are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. Management reviews the estimated useful lives of the assets at least annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on our historical experience with similar assets and take into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

 

Measurement of expected credit losses

 

We measure and recognize expected credit losses, considering reasonable and supportable information about the relevant past events, current conditions and forecasts of future economic conditions. We regularly monitor and review the assumptions used for estimating expected credit losses. The changes in the impairment losses for bad and doubtful accounts of bills receivable and accounts receivable are as follows:

 

  Year ended December 31, 
  2018  2019  2020 
  (RMB in millions) 
Balance as of January 1  612   606   1,848 
Impairment losses recognized for the year  83   1,566   2,173 
Reversal of impairment losses  (77)  (283)  (68)
Written off  (19)  (41)  (23)
Others  7   -   (70)
Balance as of December 31  606   1,848   3,860 

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Allowance for diminution in value of inventories

 

If the costs of inventories become higher than their net realizable values, an allowance for diminution in value of inventories is recognized. Net realizable value represents the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Management bases the estimates on all available information, including the current market prices of the finished goods and raw materials, and historical operating costs. If the actual selling prices were to be lower or the costs of completion were to be higher than estimated, the actual allowance for diminution in value of inventories could be higher than estimated. Allowance for diminution in value of inventories is analyzed as follows:

 

  Year ended December 31, 
  2018  2019  2020 
  (RMB in millions) 
Balance as of January 1  1,165   6,389   2,585 
Allowance for the year  5,538   1,616   11,689 
Reversal of allowance on disposal  (114)  (199)  (328)
Written off  (217)  (5,233)  (10,795)
Others  17   12   (51)
Balance as of December 31  6,389   2,585   3,100 

 

Recently Pronounced International Financial Reporting Standards

 

Information relating to the recently pronounced IFRS is presented in Note 1 to the consolidated financial statements.

 

Overview of Our Operations

 

We are the largest integrated petroleum and petrochemical company in China and one of the largest in Asia in terms of operating revenues. We engage in exploring for, developing and producing crude oil and natural gas, operating refineries and petrochemical facilities and marketing crude oil, natural gas, refined oil products and petrochemical products. We have reported our consolidated financial results according to the following four principal business segments and the corporate and others segment.

 

Exploration and Production Segment, which consists of our activities related to exploring for and developing, producing and selling crude oil and natural gas;

 

Refining Segment, which consists of purchasing crude oil from our exploration and production segment and from third parties, processing of crude oil into refined oil products, selling refined oil products principally to our marketing and distribution segment;

 

Marketing and Distribution Segment, which consists of purchasing refined oil products from our refining segment and third parties, and marketing, selling and distributing refined oil products by wholesale to large customers and independent distributors and retail through our retail network;

 

Chemicals Segment, which consists of purchasing chemical feedstock principally from the refining segment and producing, marketing, selling and distributing chemical products; and

 

Corporate and Others Segment, which consists principally of trading activities of the import and export subsidiaries and our research and development activities.

41

B.CONSOLIDATED RESULTS OF OPERATIONS

 

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

 

In 2020, our total operating revenues were RMB 2,106.0 billion, representing a decrease of 28.8% over 2019. Our operating income was RMB 13.2 billion, representing a decrease of 84.7% over 2019.

 

The following table sets forth major revenue and expense items in the consolidated statement of income for the years ended December 31, 2019 and 2020.

 

  Year Ended December 31, 
  2019(1) 2020(2) Change from
2019 to 2020
 
  (RMB in millions)  (%) 
Operating revenues  2,959,799   2,105,984   (28.8)
Sales of goods  2,899,682   2,049,456   (29.3)
Other operating revenues  60,117   56,528   (6.0)
Operating expenses  (2,873,425)  (2,092,791)  (27.2)
Purchased crude oil, products and operating supplies and expenses  (2,370,699)  (1,594,130)  (32.8)
Selling, general and administrative expenses  (55,438)  (55,315)  (0.2)
Depreciation, depletion and amortization  (109,172)  (106,965)  (2.0)
Exploration expenses, including dry holes  (10,510)  (9,716)  (7.6)
Personnel expenses  (82,743)  (86,006)  3.9 
Taxes other than income tax  (244,517)  (234,947)  (3.9)
Other operating expenses, net  (346)  (5,712)  1,550.9 
Operating income  86,374   13,193   (84.7)
Net finance costs  (10,048)  (9,506)  (5.4)
Investment income and share of profits less losses from associates and joint ventures  13,696   44,456   224.6 
Earnings before income tax  90,022   48,143   (46.5)
Income tax expense  (17,939)  (6,219)  (65.3)
Net income  72,083   41,924   (41.8)
Attributable to:            
Owners of the Company  57,493   33,096   (42.4)
Non-controlling interests  14,590   8,828   (39.5)

 

 
(1)We have adopted IFRS Standard 16 “Leases” from January 1, 2019, but has not restated comparative amounts for the 2018 reporting period, as permitted under the specific transition provision in the standard. The reclassifications and the adjustments arising from such standard were therefore recognized in the opening balance sheet on January 1, 2019.
(2)Information relating to the detailed information of gain on sale is presented in Note 10 to the consolidated financial statements.

 

Operating revenues

 

In 2020, our sales of goods were RMB 2,049.5 billion, representing a decrease of 29.3% over 2019. This was mainly due to decreased price and sales volume of refined oil products, decreased price of chemical products, and shrank international trading scale of crude oil and refined oil products, which was impacted by the COVID-19 outbreak and the slump in international crude oil price.

42

The following table sets forth our external sales volume, average realized prices and the respective rates of change from 2019 to 2020 for our major products:

 

  Sales Volume  Change from  Average Realized Price  Change from 
  2019  2020  2019 to 2020  2019  2020  2019 to 2020 
  (thousand tonnes)  (%)  (RMB per tonne)  (%) 
Crude oil  6,034   7,422   23.0   3,000   2,029   (32.4)
Natural gas  27,073(1)   26,280(1)    (2.9)  1,562(2)   1,352(2)   (13.4)
Gasoline  92,233   86,193   (6.5)  7,387   6,298   (14.7)
Diesel  87,083   77,280   (11.3)  5,811   4,792   (17.5)
Kerosene  27,041   20,828   (23.0)  4,298   2,635   (38.7)
Basic chemical feedstock  41,022   36,683   (10.6)  4,599   3,635   (21.0)
Monomer and polymer for synthetic fiber  14,019   9,691   (30.9)  5,714   4,297   (24.8)
Synthetic resins  16,103   17,112   6.3   7,804   7,148   (8.4)
Synthetic fiber  1,370   1,402   2.3   8,438   6,381   (24.4)
Synthetic rubber  1,280   1,361   6.3   9,583   7,982   (16.7)
Chemical fertilizer  924   1,177   27.4   2,110   1,955   (7.3)

 

 
(1)million cubic meters

 

(2)RMB per thousand cubic meters

 

Sales of crude oil and natural gas

 

Most of crude oil and a small portion of natural gas we produced were used internally for refining and chemical production and the remaining were sold to external customers. In 2020, the total revenue from crude oil, natural gas and other upstream products that were sold externally amounted to RMB 104.5 billion, representing a decrease of 5.9% over 2019. The change was mainly due to decreases in crude oil and natural gas prices.

 

Sales of refined petroleum products

 

In 2020, our refining segment and marketing and distribution segment sell petroleum products (mainly consisting of gasoline, diesel and kerosene which are referred to as the refined oil products and other refined petroleum products) to external parties. The external sales revenue realized by these two segments were RMB 1,164.7 billion, accounting for 55.3% of our operating revenues and representing a decrease of 24.1% over 2019. The change was mainly due to the decrease in prices and volume of major products, such as gasoline, diesel and kerosene, resulting from the impact of COVID-19 and slump of international crude oil price. The sales revenue of gasoline, diesel and kerosene was RMB 968.0 billion, accounting for 83.1% of the total revenue of other refined petroleum products and representing a decrease of 25.7% over 2019. The sales revenue of other refined petroleum products was RMB 196.6 billion, accounting for 16.9% of the total revenue of petroleum products and representing a decrease of 15.1% over 2019.

 

Sales of chemical products

 

Our external sales revenue of chemical products was RMB 322.1 billion, accounting for 15.3% of our operating revenues and representing a decrease of 24.9% over 2019. This was mainly attributable to the decrease in price of chemical products.

 

Revenue from corporate and others

 

In 2020, our corporate and others realized operating revenue of RMB 890.3 billion (including an operating revenue of RMB 886.4 billion in import and export trade business), representing a decrease of 39.9% over 2019. This was mainly because sales volume and prices of crude oil and refined oil products plunged as a result of COVID-19 impact.

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Operating expenses

 

In 2020, our operating expenses were RMB 2,092.8 billion, representing a decrease of 27.2% over 2019. Among the operating expenses:

 

Purchased crude oil, products and operating supplies and expenses were RMB 1,594.1 billion, representing a decrease of 32.8% over 2019, accounting for 76.2% of the total operating expenses, of which:

 

crude oil purchase expenses were RMB 479.1 billion, representing a decrease of 29.7% over 2019. In 2019, the total throughput of crude oil that was purchased externally was 222.79 million tonnes (excluding the volume processed for third parties), representing a decrease of 2.6% over 2019; the average unit processing cost for crude oil purchased externally was RMB 2,380 per tonne, representing a decrease of 28.4% over 2019;

 

refined oil purchase expenses were RMB 257.6 billion, representing a decrease of 29.4% over 2019;

 

trade purchase expenses were RMB 421.2 billion, representing a decrease of 42.6% over 2019; and

 

other purchasing expenses were RMB 436.3 billion, representing a decrease of 26.1% over 2019.

 

Selling, general and administrative expenses totaled RMB 55.3 billion, representing a decrease of 0.2% over 2019.

 

Depreciation, depletion and amortization was RMB 107.0 billion, representing a decrease of 2.0% over 2019. This was mainly due to the depletion ratio of oil and gas assets decreased.

 

Exploration expenses, including dry holes were RMB 9.7 billion, representing a decrease of 7.6% over 2019. That was mainly due to optimization of investment scale and structure in upstream and improvement of success rate in exploration.

 

Personnel expenses were RMB 86.0 billion, representing an increase of 3.9% over 2019.

 

Taxes other than income tax were RMB 234.9 billion, representing a decrease of 3.9% over 2019. That was mainly due to the decrease of consumption tax resulting from the decrease of production volume in gasoline and diesel.

 

Other operating expenses, net were RMB 5.7 billion, representing an increase of RMB 5.4 billion over the same period of 2019. That was mainly due to the increased impairment in fixed and long-term assets.

 

Operating income

 

In 2020, our operating income was RMB 13.2 billion, representing a decrease of 84.7% over 2019, mainly due to the decrease of processing volume, sales volume, and products margin affected by the COVID-19 outbreak, slump of crude oil prices, and drop of market demand.

 

Net finance costs

 

In 2020, our net finance costs were RMB 9.5 billion, representing a decrease of RMB 0.5 billion over 2019.

 

Earnings before income tax

 

In 2020, our earnings before income tax were RMB 48.1 billion, representing a decrease of 46.5% over 2019.

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Income tax expense

 

In 2020, we recognized income tax expense of RMB 6.2 billion, representing a decrease of 65.3% over 2019. That was mainly due to decrease of profit before taxation, resulting in a decrease of RMB 10.5 billion in income tax.

 

Net income attributable to non-controlling interests

 

In 2020, our net income attributable to non-controlling interests was RMB 8.8 billion, representing a decrease of RMB 5.8 billion over 2019.

 

Net income attributable to owners of the Company

 

In 2020, our net income attributable to our owners was RMB 33.1 billion, representing a decrease of 42.4% over 2019.

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

In 2019, our total operating revenues were RMB 2,959.8 billion, representing an increase of 2.7% over 2018. Our operating income was RMB 86.4 billion, representing an increase of 4.6% over 2018.

 

The following table sets forth major revenue and expense items in the consolidated statement of income for the years ended December 31, 2018 and 2019.

 

  Year Ended December 31, 
  2018  2019(1) Change from
2018 to 2019
 
  (RMB in millions)  (%) 
Operating revenues  2,882,077   2,959,799   2.7 
Sales of goods  2,822,375   2,899,682   2.7 
Other operating revenues  59,702   60,117   0.7 
Operating expenses  (2,799,513)  (2,873,425)  2.6 
Purchased crude oil, products and operating supplies and expenses  (2,279,844)  (2,370,699)  4.0 
Selling, general and administrative expenses  (65,770)  (55,438)  (15.7)
Depreciation, depletion and amortization  (110,344)  (109,172)  (1.1)
Exploration expenses, including dry holes  (10,744)  (10,510)  (2.2)
Personnel expenses  (78,967)  (82,743)  4.8 
Taxes other than income tax  (248,587)  (244,517)  (1.6)
Other operating expenses, net  (5,257)  (346)  (93.4)
Operating income  82,564   86,374   4.6 
Net finance costs  930   (10,048)   
Investment income and share of profits less losses from associates and joint ventures  15,845   13,696   (13.6)
Earnings before income tax  99,339   90,022   (9.4)
Income tax expense  (20,278)  (17,939)  (11.5)
Net income  79,061   72,083   (8.8)
Attributable to:            
Owners of the Company  61,708   57,493   (6.8)
Non-controlling interests  17,353   14,590   (15.9)

 

 
(1)We have adopted IFRS Standard 16 “Leases” from January 1, 2019, but has not restated comparative amounts for the 2018 reporting period, as permitted under the specific transition provision in the standard. The reclassifications and the adjustments arising from such standard were therefore recognized in the opening balance sheet on January 1, 2019.

45

Operating revenues

 

In 2019, our sales of goods were RMB 2,899.7 billion, representing an increase of 2.7% over 2018. This was mainly attributable to the expansion of business scale and trading volume.

 

The following table sets forth our external sales volume, average realized prices and the respective rates of change from 2018 to 2019 for our major products:

 

  Sales Volume  Change from  Average Realized Price  Change from 
  2018  2019  2018 to 2019  2018  2019  2018 to 2019 
  (thousand tonnes)  (%)  (RMB per tonne)  (%) 
Crude oil  6,595   6,034   (8.5)  3,100   3,000   (3.2)
Natural gas  24,197(1)   27,073(1)   11.9   1,400(2)   1,562(2)   11.6 
Gasoline  88,057   92,233   4.7   7,870   7,387   (6.1)
Diesel  84,630   87,083   2.9   5,996   5,811   (3.1)
Kerosene  25,787   27,041   4.9   4,562   4,298   (5.8)
Basic chemical feedstock  40,520   41,022   1.2   5,488   4,599   (16.2)
Monomer and polymer for synthetic fiber  11,127   14,019   26.0   6,971   5,714   (18.0)
Synthetic resins  14,433   16,103   11.6   8,634   7,804   (9.6)
Synthetic fiber  1,314   1,370   4.3   9,712   8,438   (13.1)
Synthetic rubber  1,114   1,280   14.9   10,619   9,583   (9.8)
Chemical fertilizer  794   924   16.4   2,096   2,110   0.7 

 

 
(1)million cubic meters

 

(2)RMB per thousand cubic meters

 

Sales of crude oil and natural gas

 

Most of crude oil and a small portion of natural gas we produced were used internally for refining and chemical production and the remaining were sold to external customers. In 2019, the total revenue from crude oil, natural gas and other upstream products that were sold externally amounted to RMB 111.1 billion, representing an increase of 18.8% over 2018. The change was mainly due to increases in natural gas sales volume and prices as the result of promoting natural gas production-supply-storage-sale system, and actively expanding market share.

 

Sales of refined petroleum products

 

In 2019, our refining segment and marketing and distribution segment sell petroleum products (mainly consisting of gasoline, diesel and kerosene which are referred to as the refined oil products and other refined petroleum products) to external parties. The external sales revenue realized by these two segments were RMB 1,535.2 billion, accounting for 51.8% of our operating revenues and representing a decrease of 1.5% over 2018. The change was mainly due to the decrease in petroleum products’ prices. The sales revenue of gasoline, diesel and kerosene was RMB 1,303.6 billion, accounting for 85% of the total revenue of other refined petroleum products and representing a decrease of 1.1% over 2018. The sales revenue of other refined petroleum products was RMB 231.6 billion, accounting for 15% of the total revenue of petroleum products and representing a decrease of 3.4% over 2018.

 

Sales of chemical products

 

Our external sales revenue of chemical products was RMB 428.8 billion, accounting for 14.5% of our operating revenues and representing a decrease of 7% over 2018. This was mainly attributable to the decrease in price of chemical products, which resulted from the increase of supply in chemical market.

46

Revenue from corporate and others

 

In 2019, our corporate and others realized operating revenue of RMB 1,480.7 billion (including an operating revenue of RMB1,478.4 billion in import and export trade business), representing an increase of 8.7% over 2018. This was mainly attributable to the increase in trading volumes of crude oil and refined oil products outside China, as well as the rapid development of our Epec platform, especially on facilities and chemical products segments.

 

Operating expenses

 

In 2019, our operating expenses were RMB 2,873.4 billion, representing an increase of 2.6 % over 2018. Among the operating expenses:

 

Purchased crude oil, products and operating supplies and expenses were RMB 2,370.7 billion, representing an increase of 4.0 % over 2018, accounting for 82.5% of the total operating expenses, of which:

 

crude oil purchase expenses were RMB 681.2 billion, representing a decrease of 2.9% over 2018. In 2019, the total throughput of crude oil that was purchased externally was 228.74 million tonnes (excluding the volume processed for third parties), representing an increase of 0.7% over 2018; the average unit processing cost for crude oil purchased externally was RMB 3,326 per tonne, representing a decrease of 3.6% over 2018;

 

refined oil purchase expenses were RMB 364.9 billion, representing an increase of 2.6% over 2018;

 

trade purchase expenses were RMB 738.3 billion, representing an increase of 12.6% over 2018; and

 

other purchasing expenses were RMB 586.2 billion, representing an increase of 2.7% over 2018.

 

Selling, general and administrative expenses totaled RMB 55.4 billion, representing a decrease of 15.7% over 2018, mainly because the company significantly reduced non-operating costs, and adjusted accounting of some of the service station, land and other rental expenses to depreciation and interests expense as required by the New Lease Standard.

 

Depreciation, depletion and amortization was RMB 109.2 billion, representing a 1.1% decrease over 2018. This was mainly due to the depletion of oil and gas assets decreased as a result of the Company’s proved reserves of crude oil and natural gas increased.

 

Exploration expenses, including dry holes were RMB 10.5 billion, representing a decrease of 2.2% over 2018.

 

Personnel expenses were RMB 82.7 billion, representing an increase of 4.8% over 2018.

 

Taxes other than income tax were RMB 244.5 billion, representing a decrease of 1.6% over 2018. That was mainly due to the decrease of RMB 3.2 billion in urban maintenance and construction tax and education surcharges resulting from the decrease of value added tax rate.

 

Other operating expenses, net were RMB 0.35 billion.

 

Operating income

 

In 2019, our operating income was RMB 86.4 billion, representing an increase of 4.6% over 2018, mainly due to a significant increase of profit in upstream business.

47

Net finance costs

 

In 2019, our net finance costs were RMB 10 billion, representing an increase of RMB 11 billion over 2018. This decrease in finance costs was mainly attributable to the adoption of the New Lease Standard.

 

Earnings before income tax

 

In 2019, our earnings before income tax were RMB 90.0 billion, representing a decrease of 9.4% over 2018, mainly due to the narrower margin of our refining segment.

 

Income tax expense

 

In 2019, we recognized income tax expense of RMB 17.9 billion, representing a decrease of 11.5% over 2018.

 

Net income attributable to non-controlling interests

 

In 2019, our net income attributable to non-controlling interests was RMB 14.6 billion, representing a decrease of RMB 2.8 billion over 2018.

 

Net income attributable to owners of the Company

 

In 2019, our net income attributable to our owners was RMB 57.5 billion, representing an decrease of 6.8% over 2018.

 

C.DISCUSSIONS ON RESULTS OF SEGMENT OPERATIONS

 

We divide our operations into four business segments (exploration and production segment, refining segment, marketing and distribution segment and chemicals segment, and corporate and others). Unless otherwise specified, the inter-segment transactions have not been eliminated in the financial data discussed in this section. In addition, the operating revenue data of each segment have included the “other operating revenues” of this segment.

 

The following table sets forth the operating revenues by each segment, the contribution of external sales and inter-segment sales as a percentage of operating revenues before elimination of inter-segment sales, and the contribution of external sales as a percentage of consolidated operating revenues (i.e. after elimination of inter-segment sales) for the periods indicated.

 

  Year Ended December 31,  As a Percentage of
Consolidated
Operating Revenues
Before Elimination of
Inter-segment Sales
  As a Percentage of
Consolidated
Operating Revenues
After Elimination of
Inter-segment Sales
 
  2018  2019  2020  2019  2020  2019  2020 
  (RMB in billions)  (%)  (%)  (%)  (%) 
Exploration and production                            
External sales(1)  104   122   110   2.5   3.2   4.1   5.2 
Inter-segment sales  96   89   58   1.8   1.7         
Total operating revenue  200   211   168   4.3   4.9         
Refining                            
External sales(1)  154   147   119   3.0   3.4   5.0   5.6 
Inter-segment sales  1,109   1,077   826   22.2   23.7         
Total operating revenue  1,263   1,224   945   25.2   27.1         
Marketing and distribution                            
External sales(1)  1,441   1,427   1,097   29.3   31.6   48.2   51.9 
Inter-segment sales  5   4   5   0.1   0.1         
Total operating revenue  1,447   1,431   1,102   29.4   31.7         
Chemicals                            
External sales(1)  471   438   331   9.0   9.5   14.8   15.4 
Inter-segment sales  101   78   41   1.6   1.2         
Total operating revenue  572   516   372   10.6   10.7         
Corporate and others                            
External sales(1)  711   827   460   17.0   13.2   27.9   21.9 
Inter-segment sales  651   654   430   13.5   12.4         
Total operating revenue  1,362   1,481   890   30.5   25.6         
Total operating revenue before inter-segment eliminations  4,844   4,863   3,477   100.0   100.0         
Elimination of inter-segment sales  (1,962)  (1,903)  (1,371)                
Consolidated operating revenues  2,882   2,960   2,106           100.0   100.0 

 

 
(1)include other operating revenues.

48

The following table sets forth the operating revenues, operating expenses and operating income/(loss) by each segment before elimination of the inter-segment transactions for the periods indicated, and the changes from 2019 to 2020.

 

  Year Ended December 31,  Change from 
  2018  2019  2020  2019 to 2020 
  (RMB in billions)   (%) 
Exploration and production                
Total operating revenues  200   211   168   (20.4)
Total operating expenses  (210)  (201)  (184)  (8.5)
Total operating (loss)/income  (10)  9   (16)  - 
Refining                
Total operating revenues  1,263   1,224   945   (22.8)
Total operating expenses  (1,209)  (1,194)  (950)  (20.4)
Total operating income  54   31   (6)    
Marketing and distribution                
Total operating revenues  1,446   1,431   1,102   (23.0)
Total operating expenses  (1,423)  (1,402)  (1,081)  (22.9)
Total operating income  23   29   21   (27.6)
Chemicals                
Total operating revenues  572   516   372   (28.0)
Total operating expenses  (544)  (499)  (361)  (27.6)
Total operating income  27   17   10   (40.2)
Corporate and others                
Total operating revenues  1,362   1,481   890   (39.9)
Total operating expenses  (1,371)  (1,481)  (891)  (39.8)
Total operating (loss)/income  (9)  0.1   (0.39)  - 
Elimination of inter-segment income  (4)  (0.04)  4.42   - 

49

Exploration and Production Segment

 

Most of the crude oil and a small portion of the natural gas produced by the exploration and production segment were used for our refining and chemicals operations. Most of our natural gas and a small portion of crude oil were sold to other customers.

 

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

 

In 2020, the operating revenues of this segment were RMB 167.8 billion, representing a decrease of 20.4% over 2019. This was mainly attributed to the decrease of realized price in crude oil, natural gas and LNG.

 

This segment sold 34.52 million tonnes of crude oil and 27.8 billion cubic meters of natural gas in 2020, representing an increase of 0.5% and a decrease of 3.6% over 2019, respectively; 15.7 billion cubic meters of gasified LNG, representing an increase of 40.3% over 2019; and 6.17 million tonnes of LNG, representing an increase of 30.2% over 2019. The average realized price of crude oil and natural gas was RMB 1,902 per tonne and RMB 1,360 per thousand cubic meters, respectively, representing a decrease of 33.6% and a decrease of 13.2%, respectively, over 2019, and the average realized price of gasified LNG and LNG was RMB 1,774 per thousand cubic meters and RMB 2,543 per tonne, respectively, representing a decrease of 13.0% and a decrease of 23.1%, respectively.

 

In 2020, the operating expenses of this segment were RMB 184.2 billion, representing a decrease of 8.5% over 2019. This was mainly due to:

 

Procurement cost decreased by RMB 12.0 billion year on year, as a result of decrease of LNG price;

 

Depreciation, depletion and amortization decreased by RMB 4.5 billion year on year;

 

Cost of power fuel and purchased materials decreased by RMB 2.1 billion year on year;

 

Resource Tax and special oil income levy decreased by RMB 2.0 billion year on year; and

 

Impairment losses on long-lived assets increased by RMB 7.9 billion year on year.

 

The lifting cost for oil and gas was RMB 729.59 per tonne in 2020, representing a decrease of 6.7% over 2019, mainly attributable to the decrease in the cost of purchased material, fuels, and power since the upstream segment proactively reinforced the cost control to cope with the low oil price environment.

 

In 2020, the operating loss of the exploration and production segment was RMB 16.5 billion, representing a decrease of RMB 25.8 billion compared with 2019, mainly attributable to decrease of international oil price.

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

In 2019, the operating revenues of this segment were RMB 210.7 billion, representing an increase of 5.3% over 2018. This was mainly attributed to the rise of realized price of, and sales volume in, natural gas as a result of the expansion of natural gas business.

 

This segment sold 34.35 million tonnes of crude oil and 28.78 billion cubic meters of natural gas in 2019, representing a decrease of 1.3% and an increase of 9.7% over 2018, respectively; 11.16 billion cubic meters of gasified LNG, representing an increase of 33.9% over 2018; and 4.74 million tonnes of LNG, representing an increase of 65.9% over 2018. The average realized price of crude oil and natural gas was RMB 2,862 per tonne and RMB 1,566 per thousand cubic meters, respectively, representing a decrease of 6.0% and an increase of 11.1%, respectively, over 2018, and the average realized price of gasified LNG and LNG was RMB 2,040 per thousand cubic meters and RMB 3,305 per tonne, respectively, representing an increase of 5.5% and a decrease of 12.6%, respectively.

50

In 2019, the operating expenses of this segment were RMB 201.4 billion, representing a decrease of 4.2% over 2018. This was mainly due to:

 

Depreciation, depletion and amortization decreased by RMB 9.6 billion;

 

Payment of land use right and community services expenses decreased by RMB 5.7 billion year on year;

 

Impairment losses on long-lived assets decreased by RMB 4.3 billion year on year;

 

Resource tax and special oil income levy decreased by RMB 2.0 billion year on year;

 

Procurement cost increased by RMB 10.6 billion year on year, as a result of expansion of LNG business scale; and

 

Personnel expenses increased by RMB 1.7 billion year on year.

 

The lifting cost for oil and gas was RMB 782 per tonne in 2019, representing a decrease of 1.8% over 2018.

 

In 2019, the operating profit of the exploration and production segment was RMB 9.3 billion, representing an increase of RMB 19.4 billion compared with 2018. The segment reinforced efficient exploration and profit-oriented development, enhanced stable production of crude oil, accelerated construction of natural gas production-supply-storage-sale system and actively expanded market and promoted sales, strengthened cost control, and effectively improved profitability.

 

Refining Segment

 

Business activities of the refining segment consist of purchasing crude oil from third parties and from our exploration and production segment, processing crude oil into refined oil products, selling gasoline, diesel and kerosene to the marketing and distribution segment, selling a portion of chemical feedstock to our chemicals segment, and selling other refined oil products to the domestic and overseas customers.

 

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

 

In 2020, the operating revenues of this segment was RMB 944.5 billion, representing a decrease of 22.8% over 2019. This was mainly attributed to the decrease in products prices and crude oil throughput compared with the same period of last year as a result of recession in market demand which was impacted by the COVID-19 pandemic.

 

The table below sets forth sales volume and average realized prices by product for 2020 and 2019, as well as the percentage changes in sales volume and average realized prices for the periods shown.

 

  Sales volume  Change from  Average realized prices  Change from 
  2019  2020  2019 to 2020  2019  2020  2019 to 2020 
  (thousand tonnes)  (%)  (RMB per tonne)  (%) 
Gasoline  60,750   56,259   (7.4)  7,057   5,813   (17.6)
Diesel  63,509   61,167   (3.7)  5,477   4,354   (20.5)
Kerosene  23,890   17,309   (27.6)  4,252   2,673   (37.2)
Chemical feedstock  39,720   39,872   0.4   3,531   2,596   (26.5)
Other refined oil products  61,890   65,353   5.6   3,237   3,011   (7.0)

 

In 2020, our sales revenues of gasoline were RMB 327.0 billion, representing a decrease of 23.7% over 2019; the sales revenues of diesel were RMB 266.3 billion, representing a decrease of 23.4% over 2019; the sales revenues of kerosene were RMB 46.3 billion, representing a decrease of 54.5% over 2019; the sales revenues of chemical feedstock were RMB 103.5 billion, representing a decrease of 26.2% over 2019; and the sales revenues of other refined oil products other than gasoline, diesel, kerosene and chemical feedstock were RMB 196.8 billion, representing a decrease of 1.8% over 2019.

51

This segment’s operating expenses were RMB 950.1 billion in 2020, representing a decrease of 20.4% over 2019, which is mainly attributable to the decrease in procurement cost of crude oil resulted from the slump of international crude oil price.

 

In 2020, the average processing cost of crude oil was RMB 2,456 per tonne, representing a decrease of 27.8% over 2019. Refining throughput were 245.92 million tonnes (excluding the volume processed for third parties), representing a decrease of 2.6% over 2019. In 2020, the total costs of crude oil processed were RMB 603.9 billion, representing a decrease of 29.7% over 2019, which was accounted for 63.6% of the segment’s operating expenses, a decrease of 8.4 percentage points year on year.

 

The refining margin was RMB 240 per tonne in 2020, representing a decrease of RMB 126 per tonne compared with 2019. This is mainly due to the significant shrink of margin in kerosene and other refined petroleum products which was impacted by the COVID-19 outbreak and market demand recession as well as inventory losses of crude oil and refined products due to crude oil price slump.

 

In 2020, the refining cash operating cost (defined as operating expenses less the processing cost of crude oil and refining feedstock, depreciation and amortization, taxes other than income tax and other operating expenses, then divided by the throughput of crude oil and refining feedstock) was RMB 181.48 per tonne, an increase of 2.1% over 2019, which was mainly because the unit cost increased as a result of the throughput decreased compared with last year.

 

In 2020, the operating loss of the segment totaled RMB 5.6 billion, representing a decline of RMB 36.2 billion compared with 2019.

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

In 2019, the operating revenues of this segment were RMB 1,224.2 billion, representing a decrease of 3.1% over 2018. This was mainly attributable to the decrease in products prices compared with the same period of last year.

 

The table below sets forth sales volume and average realized prices by product for 2019 and 2018, as well as the percentage changes in sales volume and average realized prices for the periods shown.

 

  Sales volume  Change from  Average realized prices  Change from 
  2018  2019  2018 to 2019  2018  2019  2018 to 2019 
  (thousand tonnes)  (%)  (RMB per tonne)  (%) 
Gasoline  59,746   60,750   1.7   7,386   7,057   (4.5)
Diesel  62,676   63,509   1.3   5,766   5,477   (5.0)
Kerosene  22,418   23,890   6.6   4,515   4,252   (5.8)
Chemical feedstock  38,524   39,720   3.1   3,910   3,531   (9.7)
Other refined oil products  61,439   61,890   0.7   3,312   3,237   (2.3)

 

In 2019, our sales revenues of gasoline were RMB 428.7 billion, representing a decrease of 2.9% over 2018; the sales revenues of diesel were RMB 347.8 billion, representing a decrease of 3.7% over 2018; the sales revenues of kerosene were RMB 101.6 billion, representing an increase of 0.4% over 2018; the sales revenues of chemical feedstock were RMB 140.2 billion, representing a decrease of 6.9% over 2018; and the sales revenues of other refined oil products other than gasoline, diesel, kerosene and chemical feedstock were RMB 200.3 billion, representing a decrease of 1.6% over 2018.

 

This segment’s operating expenses were RMB 1,193.5 billion in 2019, representing a decrease of 1.2% over 2018, which is mainly attributable to the decrease in procurement cost of crude oil.

52

In 2019, the average processing cost of crude oil was RMB 3,403 per tonne, representing a decrease of 4.1% over 2018. Refining throughput were 252.5 million tonnes (excluding the volume processed for third parties), representing an increase of 1.7 % over 2018. In 2019, the total costs of crude oil processed were RMB 859.3 billion, representing a decrease of 2.4% over 2018.

 

The refining margin was RMB 366 per tonne in 2019, representing a decrease of RMB 96 per tonne, or 20.8%, compared with 2018. This is mainly due to the fluctuation of price spread between heavy and light crude oil, increase of freight and insurance costs for overseas shipments, as well as the narrowed gross margin of refined petroleum products other than gasoline, diesel and kerosene.

 

In 2019, the unit refining cash operating cost (defined as operating expenses less the processing cost of crude oil and refining feedstock, depreciation and amortization, taxes other than income tax and other operating expenses, then divided by the throughput of crude oil and refining feedstock) was RMB 178 per tonne, a decrease of RMB 2 per tonne, or 1.1%, over 2018.

 

This segment’s operating profit of the segment was RMB 30.6 billion in 2019, representing a decrease of RMB 24.2 billion as compared with 2018.

 

Marketing and Distribution Segment

 

The business activities of the marketing and distribution segment include purchasing refined oil products from our refining segment and third parties, making wholesale and distribution to domestic customers, and retail of the refined oil products through this segment’s retail distribution network, as well as providing related services.

 

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

 

In 2020, the operating revenues of this segment was RMB 1,102.2 billion, down by 23.0% year-on-year. This was mainly because demand and sales volume of refined oil products decreased as a result of COVID-19 impact and reduced oil prices. The sales revenues of gasoline totaled RMB 549.2 billion, down by 19.4% year-on-year; the sales revenues of diesel were RMB 377.0 billion, down by 25.7% year-on-year; and the sales revenues of kerosene was RMB 54.9 billion, down by 52.8% year-on-year.

 

The following table sets forth the sales volumes, average realized prices and the respective rates of changes of the four major product categories in 2020 and 2019, including breakdown in retail, wholesale and distribution of gasoline and diesel.

 

  Sales Volume  Change from  Average Realized Prices  Change from 
  2019  2020  2019 to 2020  2019  2020  2019 to 2020 
  (thousand tonnes)  (%)  (RMB per tonne)  (%) 
Gasoline  92,261   86,216   (6.6)  7,387   6,370   (13.8)
Retail sale  66,440   61,446   (7.5)  7,968   6,940   (12.9)
Wholesale and distribution  25,820   24,770   (4.1)  5,892   4,955   (15.9)
Diesel  87,335   77,507   (11.3)  5,812   4,865   (16.3)
Retail sale  43,503   36,757   (15.5)  6,227   5,351   (14.1)
Wholesale and distribution  43,832   40,750   (7.0)  5,399   4,426   (18.0)
Kerosene  27,068   20,828   (23.1)  4,297   2,634   (38.7)
Fuel oil  21,772   23,331   7.2   3,072   2,536   (17.4)

 

In 2020, the operating expenses of the segment were RMB 1,081.4 billion, representing a decrease of RMB 320.5 billion year-on-year, down by 22.9%. This was mainly due to the decrease of sales volumes and procurement costs.

 

In 2020, the operating revenues of nonfuel business was RMB 33.9 billion, up by RMB 1.8 billion year-on-year and the profit of non-fuel business was RMB 3.7 billion, up by RMB 0.5 billion. This was mainly because the Company vigorously promoted company-owned brands and innovated marketing model to boost the increase of volume and profit of non-fuel business. 

53

In 2020, the segment’s marketing operating cash cost (defined as the operating expenses less the purchase costs, taxes other than income tax, depreciation and amortization, divided by sales volume) was RMB 189.86 per tonne, up by 4.0% year-on-year, which was mainly because the unit cost increased as a result of the decreased sales volume.

 

In 2020, the segment’s operating profit was RMB 20.8 billion, down by 28.4% year-on-year. This was mainly because sales volume decreased as a result of shrinking demand of refined oil product.

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

In 2019, the operating revenues of this segment were RMB 1,431.0 billion, representing a decrease of 1.1% compared with 2018.

 

In 2019, the sales revenues of gasoline, diesel and kerosene were RMB 681.5 billion, RMB 507.5 billion and RMB 116.3 billion, representing a decrease of 1.7%, 0.3% and 1.1%, respectively, over 2018.

 

The following table sets forth the sales volumes, average realized prices and the respective rates of changes of the four major product categories in 2019 and 2018, including breakdown in retail, wholesale and distribution of gasoline and diesel.

 

  Sales Volume  Change from  Average Realized Prices  Change from 
  2018  2019  2018 to 2019  2018  2019  2018 to 2019 
  (thousand tonnes)  (%)  (RMB per tonne)  (%) 
Gasoline  88,076   92,261   4.8   7,870   7,387   (6.1)
Retail sale  66,855   66,440   (0.6)  8,296   7,968   (4.0)
Wholesale and distribution  21,221   25,820   21.7   6,524   5,892   (9.7)
Diesel  84,865   87,335   2.9   5,998   5,812   (3.1)
Retail sale  43,327   43,503   0.4   6,435   6,227   (3.2)
Wholesale and distribution  41,537   43,832   5.5   5,541   5,399   (2.6)
Kerosene  25,787   27,068   5.0   4,562   4,297   (5.8)
Fuel oil  23,372   21,772   (6.8)  2,974   3,072   3.3 

 

In 2019, the operating expenses of the segment were RMB 1,401.9 billion, representing a decrease of RMB 21.3 billion or 1.5% as compared with that of 2018. This was mainly due to the decrease in refined oil products procured price which resulting in the decrease of procurement cost for RMB 22 billion.

 

In 2019, the segment’s non-petroleum business income was RMB 32.2 billion with the profit of RMB 3.2 billion.

 

In 2019, the segment’s marketing cash operating cost (defined as the operating expenses less purchase costs, taxes other than income tax, depreciation and amortization, and then divided by the sales volume) was RMB 183 per tonne, representing a decrease of 11.6% compared with that of 2018, due to the adjusted accounting of some of the service stations, land and other right of use assets as required by the New Lease Standard.

 

In 2019, the segment exerted advantages of integrated business and distribution network into full play, reinforced the coordination of internal and external resources, promoted targeted marketing and differentiated marketing to improve service quality, and constantly increased profits and sales volume. Meanwhile, we enhanced the development and sales of company-owned brand and put efforts to expand non-fuel business scale and profitability. The operating income of this segment in 2019 was RMB 29.1 billion, representing an increase of 24% compared with 2018.

54

Chemicals Segment

 

The business activities of the chemicals segment include purchasing chemical feedstock from the refining segment and third parties, producing, marketing and distributing petrochemical and inorganic chemical products.

 

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

 

In 2020, the operating revenues of this segment was RMB 371.9 billion, down by 28.0% year-on-year. This was mainly due to the decrease in chemical products prices and sales volume of some products because of COVID-19 impact.

 

In 2020, the sales revenue generated by the segment’s six major categories of chemical products (namely basic organic chemicals, synthetic resin, synthetic fiber monomer and polymer, synthetic fiber, synthetic rubber, and chemical fertilizer) was RMB 354.4 billion, down by 24.3%, accounting for 95.3% of the operating revenues of the segment. 

 

The following table sets forth the sales volume, average realized price and the respective rates of changes for each of these six categories of chemical products of this segment from 2019 to 2020.

 

  Sales Volume  Change from  Average Realized Prices  Change from 
  2019  2020  2019 to 2020  2019  2020  2019 to 2020 
  (thousand tonnes)  (%)  (RMB per tonne)  (%) 
Basic organic chemicals  52,007   47,109   (9.4)  4,534   3,564   (21.4)
Synthetic fiber monomers and polymers  14,089   9,743   (30.8)  5,722   4,302   (24.8)
Synthetic resins  16,131   17,124   6.2   7,804   7,150   (8.4)
Synthetic fiber  1,370   1,403   2.4   8,438   6,407   (24.1)
Synthetic rubber  1,284   1,364   6.3   9,595   7,986   (16.8)
Chemical fertilizer  925   1,181   27.8   2,109   1,950   (7.5)

 

In 2020, the operating expenses of the segment was RMB 361.5 billion, down by 27.6% year-on-year.

 

In 2020, the segment’s operating profit was RMB 10.4 billion, down by RMB 7 billion year-on-year. This was mainly due to the decrease in chemical product prices and narrowed gross margin as a result of COVID-19 impact.

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

The operating revenues of the chemicals segment in 2019 were RMB 516.3 billion, representing a decrease of 9.8% over 2018, which was mainly attributable to sharp decrease in prices of chemical products as a result of the concentrated release of new capacity, as well as the change of supply-demand structure.

 

The sales revenues generated by the segment’s six major categories of chemical products (namely basic organic chemicals, synthetic resins, synthetic fiber monomer and polymer, synthetic fiber, synthetic rubber, and chemical fertilizer) totaled RMB 468.1 billion, representing a decrease of 9.7% as compared with 2018, and accounted for 90.7% of the operating revenues of the segment.

 

The following table sets forth the sales volume, average realized price and the respective rates of changes for each of these six categories of chemical products of this segment from 2018 to 2019.

 

  Sales Volume  Change from  Average Realized Prices  Change from 
  2018  2019  2018 to 2019  2018  2019  2018 to 2019 
  (thousand tonnes)  (%)  (RMB per tonne)  (%) 
Basic organic chemicals  52,450   52,007   (0.8)  5,281   4,534   (14.1)
Synthetic fiber monomers and polymers  11,252   14,089   25.2   6,978   5,722   (18.0)
Synthetic resins  15,325   16,131   5.3   8,646   7,804   (9.7)
Synthetic fiber  1,314   1,370   4.3   9,712   8,438   (13.1)
Synthetic rubber  1,278   1,284   0.5   10,750   9,595   (10.7)
Chemical fertilizer  796   925   16.2   2,093   2,109   0.8 

55

In 2019, the operating expenses of the chemicals segment were RMB 498.9 billion, representing a decrease of 8.4% over 2018, mainly because of the decrease in the price of externally procured raw materials as compared with the same period in 2018.

 

In 2019, confronted with the business cycle correction and decreased chemical margin, the Company strengthened the coordination among research, development, production and marketing, continuously reinforced the profit prediction based on the market, optimized the structures of feedstock, product and facilities, intensified allocation of resources, pushed ahead with targeted marketing and precise service strategy, and achieved steadily growing sales volume of petrochemicals. The operating income of this segment was RMB 17.3 billion.

 

Corporate and Others

 

The business activities of corporate and others mainly consist of the import and export business activities of our subsidiaries, research and development activities of us and managerial activities of our headquarters.

 

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

 

In 2020, the operating revenues generated from corporate and others was RMB 890.3 billion (of which the operating revenues of trading companies was RMB 886.4 billion), down by 39.9% year-on-year. This was mainly because sales volume and prices of crude oil and refined oil products plunged as a result of COVID-19 impact.

 

In 2020, the operating expenses for corporate and others was RMB 890.7 billion (of which the operating expenses of trading companies was RMB 882.2 billion), down by 39.8% year-on-year.

 

In 2020, the segment’s operating loss was RMB 0.4 billion, of which trading companies realized an operating profit of RMB 4.1 billion. 

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

In 2019, the operating revenue generated from corporate and others was RMB 1,480.7 billion, representing an increase of 8.7% over 2018, which was mainly attributable to the increase in value of trade from crude oil and overseas refined oil products, as well as the rapid growth of the equipment and petrochemicals business transaction scale through Epec platform.

 

In 2019, the operating expenses of this segment was RMB 1,480.6 billion, representing an increase of 8.0% over 2018.

 

In 2019, the operating income of this segment was RMB 0.1 billion.

 

D.            LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of funding have been cash provided by our operating activities, along with short-term and long-term loans. Our primary uses of cash have been for working capital, capital expenditures and repayment of short-term and long-term loans. We arrange and negotiate financing with financial institutions to finance our capital resource requirement, and maintain a certain level of standby credit facilities to reduce liquidity risk. We believe that our current cash on hand, expected cash flows from operations and available standby credit facilities from financial institutions will be sufficient to meet our working capital requirements and repay our short-term debts and obligations when they become due.

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The following table sets forth a summary of our consolidated statements of cash flow data for the years ended December 31, 2018, 2019 and 2020.

 

  Year Ended December 31, 
Statement of cash flow data 2018  2019(1) 2020 
  (RMB in millions) 
Net cash generated from operating activities  175,937   153,619   167,518 
Net cash used in investing activities  (66,648)  (121,051)  (102,203)
Net cash used in financing activities  (111,269)  (84,204)  (36,955)
Net decrease in cash and cash equivalents  (1,980)  (51,636)  28,360 

 

 

(1)We have adopted IFRS Standard 16 “Leases” from January 1, 2019, but has not restated comparative amounts for the 2018 reporting period, as permitted under the specific transition provision in the standard. The reclassifications and the adjustments arising from such standard were therefore recognized in the opening balance sheet on January 1, 2019.

 

In 2020, the net cash generated from operating activities of the Company was RMB 167.5 billion, representing an increase in cash of RMB 13.9 billion year on year. This was mainly due to the strengthened management of inventories and receivables and payables and sharp decrease of occupation of funds.

 

In 2019, the net cash generated from operating activities of the company was RMB 153.6 billion, representing a decrease of RMB 22.3 billion as compared with 2018, of which: profit before taxation decreased by RMB 9.3 billion, loss from assets impairment decreased by RMB 9.8 billion, interest expenses increased by RMB 9.7 billion, exchange rate and derivatives financial instruments loss/(gain) increased by 5.5 billion, net change of accounts receivable and other current assets decreased by RMB 10.9 billion, net change of inventory decreased by RMB 7.1 billion, net change of accounts payable and other current liabilities decreased by RMB 15.7 billion, and the paid income tax decreased by RMB 13.6 billion as compared with 2018.

 

The net cash generated from our operating activities in 2018 was RMB 175.9 billion, representing a decrease of RMB 15.2 billion over 2017, among which, profit before taxation increased by RMB 12.4 billion, depreciation, depletion and amortization and assets impairment loss decreased by RMB 15.5 billion, accounts receivable and net change for other current assets decreased by RMB 30.1 billion, net change for inventory decreased by RMB 27.0 billion, accounts payable and net change for other current liabilities decreased by RMB 58.7 billion, and the paid income tax increased by RMB 13.0 billion as compared with 2017.

 

In 2020, the net cash used in investing activities was RMB 102.2 billion, representing a year on year decrease of RMB 18.8 billion, mainly because capital expenditures decreased by RMB 12.2 billion.

 

In 2019, the net cash used in investing activities was RMB 121.1billion, representing an increase of cash outflow of RMB 54.4 billion over 2018, of which: capital expenditure and wildcat expenditure increased by RMB 38.4 billion, purchasing investment and associates and joint ventures investments decreased by RMB 6.6 billion, cash inflow from changes of financial assets at fair value through profit or loss decreased by RMB 3.0 billion, outcome from time deposit with maturities over three months increased by RMB 9.2 billion.

 

The net cash used in our investing activities in 2018 was RMB 66.6 billion, representing a decrease of RMB 78.7 billion over 2017, which was mainly due to an increase in capital expenditure of RMB 31.2 billion, an increase of RMB 76.6 billion in proceeds from matured financial assets at fair value through profit or loss, and an increase of RMB 30.5 billion in gains from the time deposits with maturities over three months.

 

In 2020, the net cash used in financing activities were RMB 37.0 billion, representing a year on year decrease of RMB 47.2 billion, mainly because proceeds from bank and other loans decreased by RMB 43.8 billion, repayments of bank and other loans decreased by RMB 74.1 billion, dividends paid by the Company decreased by RMB 14.5 billion, distributions by subsidiaries to non-controlling shareholders decreased by RMB 3.2 billion.

57

In 2019, the net cash used in financing activities was RMB 84.2 billion, representing a decrease of cash outflow by RMB 27.1 billion over 2018. This was mainly due to the cash outflow from the changes of loans increased to RMB 13.8 billion, cash paid for dividends decrease by RMB 21.8 billion, subsidiary companies allocated to non-controlling shareholders reduced by RMB 6.3 billion, investments from non-controlling shareholders increased by RMB 1.9 billion, and repayment for lease liabilities increased by RMB 16.8 billion.

 

The net cash used in the Company’s financing activities in 2018 was RMB 111.3 billion, representing an increase of cash out flow by RMB 54.7 billion over 2017, among which, the dividend payment increased by RMB 35.1 billion, the net repayments of bank and other loans increased by RMB 13.9 billion and the distributions by subsidiaries to non-controlling shareholders increased by RMB 6.2 billion.

 

In respect of our cash flow situation of 2020, we further strengthened the centralized management of funds, strictly controlled the scale of monetary funds and interest-bearing debts, reduced capital precipitation, accelerated capital turnover, and maintained stable operating cash flow throughout the year.

 

In respect of our debts and borrowings in 2020, due to our stable cash flow, we decreased our debts to RMB 112.8 billion at the end of 2020 from RMB 142.6 billion from the beginning of 2020. Among which, our short-term debts decreased by RMB 54.8 billion as compared to the beginning of 2020, representing a decrease from 59% at the beginning of 2020 to 26% at the end of 2020 of the debts, primarily because of repayment of matured debts. Our long-term debts increased by RMB 25.0 billion from the beginning of 2020, representing an increase from 41% at the beginning of 2020 to 74% at the end of 2020 of the debts, which was mainly due to increase in imported crude oil loans and project loans from companies such as Sino-SK. Our short-term debts consist of revolving loans borrowed according to our business plan and operation needs and overdrawing agreements entered into on the corporate bank account with our strategic-alliance banks to meet our intra-day payment requirements.

 

Contractual Obligations and Commercial Commitments

 

The following table sets forth our obligations and commitments to make future payments under contracts and commercial commitments as of December 31, 2020.

 

  As of December 31, 2020 
  Total  less than 1
year
  1-3 years  4-5 years  After 5 years 
  (RMB in millions) 
Contractual obligations(1)               
Short-term debt  45,912   45,912   -   -   - 
Long-term debt  93,865   2,176   62,080   21,125   8,484 
Total contractual obligations  139,777   48,088   62,080   21,125   8,484 
                     
Other commercial commitments                    
Capital commitments  205,277   165,700   38,443   1,134   - 
Exploration and production licenses  1,498   390   165   119   824 
Guarantees(2)  14,840   14,840   -   -   - 
Total commercial commitments  221,615   180,930   38,608   1,253   824 

 

 

(1)Contractual obligations include the contractual obligations relating to interest payments.

 

(2)Guarantee is not limited by time, therefore specific payment due period is not applicable. As of December 31, 2020, with respect to guarantees in relation to banking facilities granted to certain parties, we have not entered into any off-balance sheet arrangements. As of December 31, 2020, the maximum amount of potential future payments under the guarantees was RMB 14.8 billion. As of December 31, 2019, the maximum amount of potential future payments under the guarantees was RMB 17.2 billion. See Note 34 to the consolidated financial statements for further information of the guarantees.

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Historical and Planned Capital Expenditure

 

The following table sets forth our capital expenditure by segment for the years of 2018, 2019 and 2020 and the capital expenditure in each segment as a percentage of our total capital expenditure for such year.

 

  2018  2019  2020  Total 
  RMB  Percent  RMB  Percent  RMB  Percent  RMB  Percent 
  (in billions, except percentage data) 
Exploration and production  42.16   35.73%  61.74   41.97%  56.42   42%  160.32   38%
Refining  27.91   23.66%  31.37   21.33%  24.72   18%  84.00   20%
Marketing and distribution  21.43   18.16%  29.57   20.10%  25.40   19%  76.40   18%
Chemicals  19.58   16.59%  22.44   15.26%  26.20   19%  68.22   16%
Corporate and others  6.90   5.86%  1.97   1.34%  2.31   2%  11.18   7%
Capital Expenditure  117.98   100.00%  147.09   100.00%  135.05   100%  400.12   100%

 

In 2020, focusing on quality and profitability of investment, the Company optimized its investment management system, with total capital expenditures of RMB 135.1 billion, among which:

 

Exploration and production. RMB 56.4 billion, mainly for Shengli and Northwest crude oil capacity building projects, Fuling and Weirong shale gas projects, phase II of Tianjin LNG project, and phase II of Shandong LNG project.

 

Refining. RMB 24.7 billion, mainly for Zhongke Refining and Petrochemical project, Zhenhai, Tianjin, Maoming, Luoyang and Sinopec-SK refining upgrading projects.

 

Marketing and distribution. RMB 25.4 billion, mainly for construction of service stations, oil products depots and nonfuel business.

 

Chemicals. RMB 26.2 billion, mainly for Zhongke, Zhenhai and Gulei projects, Amur gas chemical complex project, Sinopec-SK ethylene revamping projects, Jiujiang aromatics project and meltblown fabric capacity building.

 

Corporate and others. RMB 2.3 billion, mainly for R&D facilities and information technology projects.

 

Capital expenditures for the year 2021 are budgeted at RMB 167.2 billion, among which,

 

Exploration and production. The planned capital expenditure in 2021 for this segment is approximately RMB 66.8 billion, with focuses on the production capacity building of Fuling and Weirong shale gas fields, Shengli and Northwest crude oil development projects, and the Phase II LNG project in Tianjin and Phase II LNG project in Shandong.

 

Refining. The planned capital expenditure in 2021 for this segment is RMB 20.1 billion, mainly on the structural adjustment projects of Yangzi and Anqing, as well as the expansion of Zhenhai.

 

Marketing and distribution. The planned capital expenditure in 2021 for this segment is RMB 26.5 billion with emphasis on service stations, gas stations, hydrogen stations, depots and non-fuel business.

59

Chemicals. The planned capital expenditure in 2021 for this segment is RMB 48.6 billion, mainly on projects such as Zhenhai, Gulei, Hainan and Tianjin Nangang, Sinopec-SK and the Amur ethylene projects, Jiujiang aromatics, Baling caprolactam project, Shanghai large-tow carbon fiber, Yizheng PTA and other projects.

 

Corporate and others. The planned capital expenditure in 2021 for this segment is RMB 5.2 billion, mainly for R&D facilities and information technology projects.

 

Research and Development

 

Our expenditures for research and development were RMB 12.9 billion in 2018, RMB 15.5 billion in 2019 and RMB 15.2 billion in 2020, among which, the research expenses were RMB 8.0 billion, RMB 9.5 billion and RMB 10.1 billion for each of the three years, respectively.

 

Consumer Price Index

 

According to the data provided by the National Bureau of Statistics, the consumer price index (CPI) in the PRC increased by 2.5% in 2020 over 2019 (CPI increased by 2.9% in 2019) and increased by 5.4% over 2018.

 

ITEM 6.                DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.            DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

 

Directors

 

The table and discussion below set forth certain information concerning our directors. The current term for all of our directors of the seventh session of the Board of Directors will expire in May 2021.

 

Name Age Position with the Company
Zhang Yuzhuo 59 Chairman
Ma Yongsheng 59 Director, President
Yu Baocai 56 Director, Senior Vice President
Liu Hongbin 58 Director, Senior Vice President
Ling Yiqun 58 Director, Senior Vice President
Zhang Shaofeng 49 Director
Tang Min 67 Independent Director
Cai Hongbin 53 Independent Director
Ng, Kar Ling Johnny 60 Independent Director

 

Zhang Yuzhuo, aged 59, Chairman of the Board of Directors of Sinopec Corp. Mr. Zhang is a Research Fellow, Ph.D. in engineering and Academician of the Chinese Academy of Engineering. Mr. Zhang is an alternate member of the 19th Central Committee of the Communist Party of China (“CPC”). In January 1997, he was appointed as Vice President of China Coal Research Institute; in February 1998, he temporarily served as Deputy General Manager of Yankuang Group Co. Ltd.; in July 1998, he was appointed as Vice President of China Coal Research Institute, Director and Deputy General Manager of China Coal Technology Corporation; in March 1999, he served as President of China Coal Research Institute and Chairman of China Coal Technology Corporation; in June 1999, he was appointed as President and Deputy Secretary of CPC Committee of China Coal Research Institute, and Chairman and Deputy Secretary of CPC Committee of China Coal Technology Corporation; in January 2002, he was appointed as Deputy General Manager of Shenhua Group Corporation Limited, and served concurrently as Chairman and General Manager of China Shenhua Coal Liquefaction Company Limited; in August 2003, he was appointed as Deputy General Manager and Member of the Leading Party Member Group of Shenhua Group Corporation Limited, and served concurrently as Chairman of China Shenhua Coal Liquefaction Company Limited; in December 2008, he was appointed as Director, General Manager and Member of the Leading Party Member Group of Shenhua Group Corporation Limited; in July 2009, he served concurrently as Vice Chairman of All-China Federation of Returned Overseas Chinese; in May 2014, he was appointed as Chairman and Secretary of the Leading Party Member Group of Shenhua Group Corporation Limited, and served concurrently as Chairman of China Shenhua Energy Company Limited; in March 2017, he served as a member of the Standing Committee of the CPC Tianjin Municipal Committee and Secretary of the CPC Binhai New Area Committee; in July 2017, he served concurrently as Chairman of Sino-Singapore Tianjin Eco-City Investment & Development Co., Ltd.; in May 2018, he served concurrently as Director of China (Tianjin) Pilot Free Trade Zone Administration; in January 2020, he was appointed as Chairman and Secretary of the Leading Party Member Group of China Petrochemical Corporation. In March 2020, he was elected as Chairman of the Board of Directors of Sinopec Corp.

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Ma Yongsheng, aged 59, Director and President of Sinopec Corp. Mr. Ma is a professor level senior engineer with a Ph.D. degree and an academician of the Chinese Academy of Engineering. Mr. Ma is a member of the 13th National Committee of Chinese People’s Political Consultative Conference (“CPPCC”). In April 2002, he was appointed as Chief Geologist of Sinopec Southern Exploration and Production Company; in April 2006, he was appointed as Executive Deputy Manager (in charge of overall management), Chief Geologist of Sinopec Southern Exploration and Production Company; in January 2007, he was appointed as General Manager and Party Secretary of CPC Committee of Sinopec Southern Exploration and Production Company; in March 2007, he served as General Manager and Deputy Party Secretary of CPC Committee of Sinopec Exploration Company; in May 2007, he was appointed as Deputy Commander of Sichuan-East China Gas Pipeline Project Headquarter of Sinopec Corp., General Manager and Deputy Secretary of CPC Committee of Sinopec Exploration Company; in May 2008, he was appointed as Deputy Director General of Exploration and Production Department of Sinopec Corp. (Director General Level) and Deputy Commander of Sichuan-East China Gas Pipeline Project Headquarter; in July 2010, he served as Deputy Chief Geologist of Sinopec Corp.; in August 2013, he was appointed as Chief Geologist of Sinopec Corp.; in December 2015, he served as Vice President of China Petrochemical Corporation and was appointed as Senior Vice President of Sinopec Corp.; in January 2017, he was appointed as Member of the Leading Party Member Group of China Petrochemical Corporation; in April 2019, he was appointed as Director, President and Vice Secretary of the Leading Party Member Group of China Petrochemical Corporation. In February 2016, he was elected as Director of Sinopec Corp.; in October 2018, he was appointed as President of Sinopec Corp.

 

Yu Baocai, aged 56, Director and Senior Vice President of Sinopec Corp. Mr. Yu is a senior engineer with a master’s degree in economics. In September 1999, Mr. Yu was appointed as Deputy General Manager of Daqing Petrochemical Company; in December 2001, he was appointed as General Manager and Deputy Secretary of CPC Committee of Daqing Petrochemical Company; in September 2003, he was appointed as General Manager and Secretary of CPC Committee of Lanzhou Petrochemical Company; in June 2007, he was appointed as General Manager and Deputy Secretary of CPC Committee of Lanzhou Petrochemical Company and General Manager of Lanzhou Petroleum & Chemical Company; in September 2008, he was appointed as a member of the Leading Party Member Group and Deputy General Manager of China National Petroleum Corporation (“CNPC”) and since May 2011, he acted concurrently as Director of PetroChina Company Limited; in June 2018, he was appointed as a Member of the Leading Party Member Group and Vice President of China Petrochemical Corporation. In October 2018, Mr. Yu was elected as Director of Sinopec Corp.; in September 2020, he was appointed as Senior Vice President of Sinopec Corp.

 

Liu Hongbin, aged 58. Director and Senior Vice President of Sinopec Corp. Mr. Liu is a senior engineer with a bachelor’s degree. In June 1995, he was appointed as Chief Engineer of Tuha Petroleum Exploration & Development Headquarters; in July 1999, he was appointed as Deputy General Manager of PetroChina Tuha Oilfield Company; in July 2000, he was appointed as Commander and Deputy Secretary of CPC Committee of Tuha Petroleum Exploration & Development Headquarters; in March 2002, he served as General Manager of the Planning Department of PetroChina Company Limited; in September 2005, he served as Director of the Planning Department of CNPC; in June 2007, he was appointed as Vice President of PetroChina Company Limited, and in November 2007, he served concurrently as General Manager and Secretary of CPC Committee of the Marketing Branch of PetroChina Company Limited; in June 2009, he served concurrently as General Manager and Deputy Secretary of CPC Committee of the Marketing Branch of PetroChina Company Limited; in July 2013, he was appointed as Member of the Leading Party Member Group and Deputy General Manager of CNPC and in August 2013, he served concurrently as an Executive Director and General Manager of Daqing Oilfield Company Limited, Director of Daqing Petroleum Administration Bureau and Deputy Secretary of CPC Committee of Daqing Oilfield; in May 2014, he served concurrently as Director of PetroChina Company Limited; in November 2019, he was appointed as a member of the Leading Party Member Group of China Petrochemical Corporation; in December 2019, he was appointed as Vice President of China Petrochemical Corporation. In March 2020, he was appointed as Senior Vice President of Sinopec Corp.; in May 2020, he was elected as Director of Sinopec Corp.

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Ling Yiqun, aged 58, Director and Senior Vice President of Sinopec Corp. Mr. Ling is a professor level senior engineer with a Ph.D. degree. From 1983, he worked in the refinery of Beijing Yanshan Petrochemical Company and the Refining Department of Beijing Yanshan Petrochemical Company Ltd.; in February 2000, he was appointed as Deputy Director General of Refining Department of Sinopec Corp.; in June 2003, he was appointed as Director General of Refining Department of Sinopec Corp.; in July 2010, he was appointed as Vice President of Sinopec Corp.; in May 2012, he was appointed concurrently as Executive Director, President and Secretary of CPC Committee of Sinopec Refinery Product Sales Company Limited; in August 2013, he was appointed concurrently as President and Secretary of CPC Committee of Sinopec Qilu Petrochemical Company, and President of Sinopec Qilu Company; in March 2017, he was appointed as Vice President of China Petrochemical Corporation; since April 2019, he has been a member of the Leading Party Member Group of China Petrochemical Corporation. In February 2018, he was appointed as Senior Vice President of Sinopec Corp.; in May 2018, he was elected as Director of Sinopec Corp.

 

Zhang Shaofeng, aged 49, Director of Sinopec Corp., Mr. Zhang is a professor level senior accountant with a master’s degree in business administration. In December 2008, he was appointed as Chief Accountant and Member of the CPC Committee of Trans-Asia Gas Pipeline Company Limited of CNPC; in July 2017, he was appointed as General Manager of Finance Department of CNPC and served concurrently as General Manager of Finance Department of PetroChina Company Limited; in December 2017, he was appointed as General Manager of Finance Department of CNPC and served concurrently as General Manager of Finance Department of PetroChina Company Limited; in July 2020, he was appointed as Member of the Leading Party Member Group and Chief Accountant of China Petrochemical Corporation. In September 2020, he was elected as Director of Sinopec Corp.

 

Tang Min, aged 67, Independent Director of Sinopec Corp. Mr. Tang has a Ph.D. degree in economics. He presently acts as Counsellor of the State Council of the PRC and Executive Vice Chairman of YouChange China Social Entrepreneur Foundation. He was an economist and senior economist at the Economic Research Centre of the Asian Development Bank between 1989 and 2000; chief economist at the Representative office of the Asian Development Bank in China between 2000 and 2004; Deputy Representative at the Representative Office of the Asian Development Bank in China between 2004 and 2007 and Deputy Secretary-General of the China Development Research Foundation between 2007 and 2010. In May 2015, he was appointed as Independent Director of Sinopec Corp.

 

Cai Hongbin, aged 53, Independent Director of Sinopec Corp. Mr. Cai is Dean of Faculty of Business and Economics and Professor of Economics of the University of Hong Kong. Mr. Cai has a Ph.D. degree in Economics. From 1997 to 2005, Mr. Cai taught at the University of California, Los Angeles. Since 2005, he served as a professor and Ph.D. supervisor in Applied Economics Department at Guanghua School of Management at Peking University, and he once served as Director, Assistant to the Dean and Vice Dean of the Applied Economics Department. From December 2010 to January 2017, he served as Dean of Guanghua School of Management at Peking University. In June 2017, he joined the Faculty of Business and Economics of the University of Hong Kong. Mr. Cai once served as a member of the 12th National People’s Congress, a member of Beijing Municipal Committee of CPPCC, a member of the 11th Central Committee of China Democratic League, Deputy Chairman of Beijing Municipal Committee of China Democratic League and a Special Auditor of the National Audit Office. He currently serves as an Independent Director of CCB International (Holdings) Limited and Ping An Bank Co., Ltd. In May 2018, he was elected as Independent Director of Sinopec Corp.

 

Ng, Kar Ling Johnny, aged 60, Independent Director of Sinopec Corp. Mr. Ng currently is a practicing Certified Public Accountant in Hong Kong, a practicing auditor and Certified Public Accountant in Macau, a Fellow of the Hong Kong Institute of Certified Public Accountants (FCPA), a Fellow of the Association of Chartered Certified Accountant (FCCA), and a Fellow of the Institute of Chartered Accountants in England and Wales (FCA). Mr. Ng obtained a bachelor’s degree and a master’s degree in business administration from the Chinese University of Hong Kong in 1984 and 1999, respectively. Mr. Ng joined KPMG (Hong Kong) in 1984 and became a Partner in 1996. He acted as a Managing Partner from June 2000 to September 2015 and Vice Chairman of KPMG China from October 2015 to March 2016. Mr. Ng currently serves as Independent Non-executive Director of China Vanke Co., Ltd., Fangdd Network Group Ltd. and Metallurgical Corporation of China Ltd. In May 2018, he was elected as Independent Director of Sinopec Corp.

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Supervisors

 

The table and discussion below set forth certain information concerning our supervisors. The current term for all of our supervisors of the seventh session of the Board of Supervisors will expire in May 2021.

 

Name Age Position with the Company
Zhao Dong 50 Chairman of Board of Supervisors
Jiang Zhenying 56 Supervisor
Li Defang 59 Employee Representative Supervisor
Lv Dapeng 59 Employee Representative Supervisor
Chen Yaohuan 57 Employee Representative Supervisor

 

Zhao Dong, aged 50, Chairman of Board of Supervisors of Sinopec Corp. Mr. Zhao is a professor level senior accountant with a Ph.D. degree. In July 2002, he was appointed as Chief Accountant and General Manager of Financial Assets Department of CNPC International (Nile) Ltd.; in January 2005, he was appointed as Deputy Chief Accountant and Executive Deputy Director of Financial and Capital Operation Department of China National Oil and Gas Exploration and Development Corporation; in April 2005, he was appointed as Deputy Chief Accountant and General Manager of Financial and Capital Operation Department of China National Oil and Gas Exploration and Development Corporation; in June 2008, he was appointed as Chief Accountant of China National Oil and Gas Exploration and Development Corporation; in October 2009, he was appointed as Chief Accountant of China National Oil and Gas Exploration and Development Corporation and Chief Financial Officer of PetroChina International Investment Company Limited; in September 2012, he was appointed as Deputy General Manager of CNPC Nile Company; in August 2013, he was appointed as General Manager of CNPC Nile Company; in November 2015, he was appointed as Chief Financial Officer of PetroChina Company Limited. In November 2016, he was appointed as a Member of the Leading Party Member Group and Chief Accountant of China Petrochemical Corporation; in May 2020, he was appointed as Director and Deputy Secretary of the Leading Party Member Group of China Petrochemical Corporation. In June 2017, he was elected as Chairman of Board of Supervisors of Sinopec Corp.

 

Jiang Zhenying, aged 56, Supervisor of Sinopec Corp. Mr. Jiang is a professor level senior economist with a Ph.D. degree in management. In December 1998, he was appointed as Vice President of China Petrochemical Supplies & Equipment Co., Ltd.; in February 2000, he was appointed as Deputy Director General of Sinopec Procurement Management Department; in December 2001, he was appointed as Director General of Sinopec Procurement Management Department; in November 2005, he concurrently held the positions of Chairman of Board of Directors, President and Secretary of CPC Committee of China Petrochemical International Co., Ltd.; in March 2006, he was appointed as Director General (General Manager), Executive Director and Secretary of the CPC Committee of Sinopec Procurement Management Department (Sinopec International Co. Ltd.); in April 2010, he was appointed as Director General (General Manager), Executive Director and Deputy Secretary of the CPC Committee of Sinopec Procurement Management Department (Sinopec International Co. Ltd); in November 2014, he was appointed as Director of Safety Supervisory Bureau of China Petrochemical Corporation and Director General of Safety Supervisory Department of Sinopec Corp.; in May 2017, he was appointed as Deputy Director General (Director General level) of the Office of Leading Party Member Group Inspection Work of China Petrochemical Corporation; in December 2018, he was appointed as Director of Audit Bureau of China Petrochemical Corporation, and Director of Audit Department of Sinopec Corp.; in December 2019, he was appointed as President of Audit Bureau of Sinopec Corp. and Director of the Office of Audit Committee of Leading Party Member Group of China Petrochemical Corporation. In December 2010, he was elected as Employee’s Representative Supervisor of Sinopec Corp.; in May 2018, he was elected as Supervisor of Sinopec Corp.

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Li Defang, aged 59, Employee’s Representative Supervisor of Sinopec Corp. Mr. Li is a professor level senior engineer with a Ph.D. degree. In May 2001, he was appointed as Deputy Secretary of CPC Committee and Trade Union Chairman of Sinopec Engineering Incorporation; in December 2001, he was appointed as Director General of Information System Management Department of Sinopec Corp.; in September 2013, he was appointed as Director General of Informatization Management Department of Sinopec Corp.; in October 2014, he was appointed as Chairman of Petro-CyberWorks Information Technology Co., Ltd.; in January 2018, he was elected as Employee Supervisor of China Petrochemical Corporation; in March 2019, he was appointed as Secretary of CPC Committee of Sinopec Management Institute (Sinopec Communist Party School); in November 2020, he was appointed as the Secretary of CPC Committee of Sinopec Management Institute and Executive Vice Principal of Sinopec Communist Party School. In May 2020, he was elected as Employee’s Representative Supervisor of Sinopec Corp.

 

Lv Dapeng, aged 59, Employee’s Representative Supervisor of Sinopec Corp. Mr. Lv is a professor level senior administration engineer with a Master’s degree of business administration. In December 2001, he was appointed as Deputy Director General of China Petrochemical News; in March 2003, he was appointed as Deputy Director General and Chief Editor of China Petrochemical News; in June 2004, he was appointed as Director General and Chief Editor of China Petrochemical News; in December 2004, he was appointed as Director General, Secretary of CPC Committee and Chief Editor of China Petrochemical News; in March 2011, he was appointed as Director General of Corporate Culture Department of Sinopec Corp., and Director General of the Political Work Department of and Deputy Secretary of the CPC Committee directly under China Petrochemical Corporation; in June 2012, he was appointed concurrently as Deputy Director General of Working Committee of Trade Union and Deputy Director of the Youth Working Committee of China Petrochemical Corporation; in March 2015, he was appointed as Director General of Corporate Culture Department of Sinopec Corp. and Director General of Communications Department (Press Office) of China Petrochemical Corporation; in December 2019, he was appointed as Director General of Corporate Culture Department of Sinopec Corp., Director General of Communication Department and Director General of Press Office of China Petrochemical Corporation. In January 2021, he was elected as Employee’s Representative Supervisor of Sinopec Corp.

 

Chen Yaohuan, aged 57, Employee’s Representative Supervisor of Sinopec Corp. Mr. Chen is a professor level senior engineer with a Master’s degree awarded by Central Party School of the CPC. In October 2008, he was appointed as Deputy Director General of Refining Department of Sinopec Corp.; in March 2015, he was appointed as Executive Director, General Manager and Deputy Secretary of the CPC Committee of Sinopec Beihai Refining and Chemical Limited Liability Company; in May 2015, he was appointed as a member of the Standing Committee of the CPC Beihai Municipal Committee; in June 2018, he was appointed as General Manager and Deputy Secretary of the CPC Committee of Guanzhou Branch of Sinopec Corp. and General Manager of Guangzhou Branch of Sinopec Assets Management Corporation; in July 2019, he was appointed as Deputy Director General (Director General Level) and Chief Engineer of Refining Department of Sinopec Corp.; in October 2019, he was appointed concurrently as Chairman of Sinopec Kantons International Limited and Sinopec Kantons Holdings Limited; in December 2019, he was appointed as General Manager and Chief Engineer of Refining Department of Sinopec Corp.; in December 2019, he was appointed concurrently as Vice Chairman and Chairman of Audit Committee of Yanbu Aramco Sinopec Refining Company Ltd.; in August 2020, he was appointed concurrently as Executive Director and Secretary of CPC Committee of Sinopec Petroleum Marketing Company Limited and Chairman of Sinopec Petroleum Storage and Reserve Limited. In January 2021, he was elected as Employee’s Representative Supervisor of Sinopec Corp.

 

Other Executive Officers

 

Name Age Positions with Sinopec Corp.
Chen Ge 58 Senior Vice President
Yu Xizhi 58 Vice President
Shou Donghua 51 CFO
Zhao Rifeng 58 Vice President
Huang Wensheng 54 Vice President/Secretary to the Board of Directors

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Chen Ge, aged 58, Senior Vice President of Sinopec Corp. Mr. Chen is a senior economist with a Master’s degree. In February 2000, he was appointed as Deputy Director General of the Board Secretariat of Sinopec Corp.; in December 2001, he was appointed as Director General of the Board Secretariat of Sinopec Corp.; in April 2003, he was appointed as Secretary to the Board of Directors of Sinopec Corp.; from April 2005 to August 2013, he was appointed concurrently as Director General of Corporate Reform & Management Dept. of Sinopec Corp.; in July 2010, he was appointed as Assistant to President of China Petrochemical Corporation; from December 2013 to December 2015, he was appointed temporarily as Deputy Secretary-General of Guizhou Provincial People’s Government and a member of the Leading Party Member Group of Guizhou Provincial General Office; in November 2015, he was appointed as Employee’s Representative Director of China Petrochemical Corporation; in December 2017, he was appointed concurrently as Director General of Corporate Reform & Management Dept. of Sinopec Corp.; in October 2018, he was appointed as Senior Vice President of Sinopec Corp.

 

Yu Xizhi, aged 58, Vice President of Sinopec Corp. Mr Yu is a professor-level senior engineer with a Ph.D. degree in engineering. In August 1997, he was appointed as Deputy General Manager of Anqing Petrochemical General Plant and concurrently as General Manager of Fertilizer Plant; in September 1999, he became a member of the CPC Standing Committee of Anqing Petrochemical General Plant; in February 2000, he was appointed as Deputy General Manager of Sinopec Anqing Company and in September 2000, he was appointed as General Manager of Sinopec Anqing Company; in January 2005, he was appointed as General Manager of Anqing Petrochemical General Plant and from May 2009 to July 2010, he temporarily served as a member of the Standing Committee of the CPC Anqing Municipal Committee; in July 2010, he became General Manager and Deputy Secretary of the CPC Committee of Maoming Petrochemical Company and General Manager of Sinopec Maoming Company; in July 2016, Mr. Yu was appointed as head of Maoming-Zhanjiang Integration Leading Group; in December 2016, he became Executive Director, General Manager and Deputy Secretary of the CPC Committee of Zhongke (Guangdong) Refining and Petrochemical Co., Ltd.; in April 2017, Mr. Yu was appointed as Director General of Human Resources Department of Sinopec Corp.; in June 2017, he was elected as Employee’s Representative Supervisor of Sinopec Corp.; in December 2019, he was appointed as President of Human Resource Department of Sinopec Corp. and the Director General of Organization Department of China Petrochemical Corporation; in January 2020, he was elected as Director of China Petrochemical Corporation. In July 2020, he was appointed as Vice President of Sinopec Corp.

 

Shou Donghua, aged 51, Chief Financial Officer of Sinopec Corp. Ms. Shou is a professor level senior accountant with a Master’s degree of business administration. In July 2010, she was appointed as the Chief Financial Officer of Sinopec Zhenhai Refining & Chemical Company; in October 2014, she was appointed as Deputy Director General of Human Resource Department of Sinopec Corp.; in August 2017, she was appointed as the Secretary of CPC Committee of Sinopec Zhenhai Refining & Chemical Company and Deputy General Manager of Sinopec Zhenhai Refining & Chemical Company; in August 2018, she was appointed as the Director General of Finance Department of China Petrochemical Corporation and concurrently served as the Chairman of Sinopec Century Bright Capital Investment Limited; in December 2019, she was appointed as General Manager of Finance Department of Sinopec Corp. and concurrently served as the Chairman of Sinopec Century Bright Capital Investment Limited; in January 2020, she was appointed as Chief Financial Officer of Sinopec Corp.

 

Zhao Rifeng, aged 58, Vice President of Sinopec Corp. Mr. Zhao is a professor level Senior Engineer with a Master’s degree. In July 2000, he was appointed as Deputy General Manager of Sinopec Jinling Petrochemical Co., Ltd. and Deputy Manager of Sinopec Jinling Company; in October 2004, he was appointed as General Manager of Sinopec Jinling Company; in October 2006, he was appointed as Vice Chairman and General Manager of Sinopec Jinling Petrochemical Co., Ltd.; in November 2010, he was appointed as Chairman, General Manger, Deputy Secretary of CPC Committee of Sinopec Jinling Petrochemical Co., Ltd.; in August 2013, he was appointed as Director General of Refining Department of Sinopec Corp.; in December 2017, he was appointed as the Director General of the Marketing Department of Sinopec Corp. and Chairman and Secretary of CPC Committee of Sinopec Marketing Company Limited; in December 2019, he was appointed as the President of the Marketing Department of Sinopec Corp. and Chairman and Secretary of CPC Committee of Sinopec Marketing Company Limited. In February 2018, he was appointed as Vice President of Sinopec Corp.

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Huang Wensheng, aged 54, Vice President of Sinopec Corp., Secretary to the Board of Directors. Mr. Huang is a professor level senior economist with a university diploma. In March 2003, he was appointed as Deputy Director General of the Board Secretariat of Sinopec Corp.; in May 2006, he was appointed as Representative on Securities Matters of Sinopec Corp.; in August 2009, he was appointed as the Deputy Director General of President’s office of Sinopec Corp.; in September 2009, he was appointed as Director General of the Board Secretariat of Sinopec Corp.; in May 2012, he was appointed as Secretary to the Board of Directors of Sinopec Corp.; in June 2018, he was appointed concurrently as Director General of Department of Capital Management and Financial Services of China Petrochemical Corporation; in July 2018, he was appointed concurrently as Chairman, and Secretary of CPC Committee of Sinopec Capital Co., Ltd.; in December 2019, he was appointed as President of Department of Capital Management and Financial Services of China Petrochemical Corporation. In May 2014, he was appointed as Vice President of Sinopec Corp. 

 

B.COMPENSATION

 

Salaries of Directors, Supervisors and Members of the Senior Management

 

Our directors and supervisors who hold working posts with us and other senior management members receive all their compensation from us in cash. Our compensation committee, with assistances from relevant administrative departments, determines the appropriate level of annual compensation for each of our directors and supervisors who hold working posts with us and other senior management members in two components: a base salary component and a performance rewards component. The base salary component is a fixed amount that will be paid on monthly basis. The performance rewards component is paid in one lump sum at about year end and the exact amounts of the performance rewards to be paid will be based on the completion by the Company of certain performance targets (key performance indicators, or KPIs) which are set at the beginning of the year and reviewed at year end. The KPIs cover areas such as profitability, workplace safety and environmental protection. Based on the annual review by our compensation committee, with the assistances from relevant administrative departments, of the Company’s completion of various KPIs, our directors and supervisors who hold working posts with us and other senior management members will receive full or partial payments as their performance rewards.

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The following table sets forth the compensation on individual basis for our directors, supervisors and executive officers who received compensation from us in 2020.

 

Name Position with the Company Remuneration paid by the
Company in 2020
    (RMB in ten thousands before tax)
Directors    
Zhang Yuzhuo Chairman 
Ma Yongsheng Director, President 101.31
Yu Baocai Director, Senior Vice President 
Liu Hongbin(1) Director, Senior Vice President 
Ling Yiqun Director, Senior Vice President 
Zhang Shaofeng(2) Director 
Tang Min Independent Director 35.00
Cai Hongbin Independent Director 35.00
Ng, Kar Ling Johnny Independent Director 35.00
Fan Gang(3) Former Independent Director N/A
Li Yong(4) Former Director N/A
     
Supervisors    
Zhao Dong Chairman of the Board of Supervisors 
Jiang Zhenying Supervisor 115.94
Li Defang(5) Employee Representative Supervisor 
Lv Dapeng(6) Employee Representative Supervisor 
Chen Yaohuan(7) Employee Representative Supervisor 
Yang Changjiang(8) Former Supervisor 
Zhang Baolong(9) Former Supervisor 
Zou Huiping(10) Former Supervisor 88.51
Yu Xizhi(11) Former Employee Representative Supervisor 76.19
Zhou Hengyou(12) Former Employee Representative Supervisor 76.00
Yu Renming(13) Former Employee Representative Supervisor 
Sun Huanquan(14) Former Employee Representative Supervisor 46.63
     
Other Executive officers    
Chen Ge Senior Vice President 151.06
Yu Xizhi (15) Vice President 31.73
Shou Donghua CFO 80.54
Zhao Rifeng Vice President 162.21
Huang Wensheng Vice President/Secretary to the Board of Directors 125.24
Lei Dianwu(16) Former Senior Vice President N/A

 

 

Note:      (1) Mr. Liu Hongbin was elected on May 19, 2020.

(2) Mr. Zhang Shaofeng was elected on September 28, 2020.

(3) Mr. Fan Gang resigned on August 28, 2020.

(4) Mr. Li Yong resigned on September 22, 2020.

(5) Mr. Li Defang was appointed on May 18, 2020.

(6) Mr. Lv Dapeng was appointed on January 11, 2021.

(7) Mr. Chen Yaohuan was appointed on January 11, 2021.

(8) Mr. Yang Changjiang resigned on September 9, 2020.

(9) Mr. Zhang Baolong resigned on September 9, 2020.

(10) Mr. Zou Huiping resigned on January 28, 2021.

(11) Mr. Yu Xizhi resigned on May 18, 2020.

(12) Mr. Zhou Hengyou resigned on May 18, 2020.

(13) Mr. Yu Renmin resigned on January 11, 2021.

(14) Mr. Sun Huanquan was appointed on May 18, 2020, and resigned on January 11, 2021.

(15) Mr. Yu Xizhi was appointed on July 23, 2020.

(16) Mr. Lei Dianwu resigned on August 12, 2020.

 

C.BOARD PRACTICE

 

We have nine directors. We have five special board committees, namely the strategic committee, the audit committee, the remuneration and evaluation committee, the nominating committee and social responsibility management committee. All members of the audit committee and the majority of the members of the remuneration and evaluation committee and the nominating committee are independent directors. In addition, there is at least one independent director who is a financial expert in the audit committee.

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The main responsibilities of the strategy committee are to conduct research and put forward proposals on the long-term development strategy and significant investments.

 

The members of our strategy committee are Zhang Yuzhuo, Ma Yongsheng, Ling Yiqun, and Cai Hongbin.

 

The main responsibilities of the audit committee include:

 

to propose the appointment or replacement of the independent auditor;

 

to oversee the internal auditing system and its implementation;

 

to coordinate the communication between the internal auditing department and the independent auditor;

 

to examine and approve financial information and it disclosure; and

 

to examine the financial policies, internal auditing, internal control and risk management system.

 

The members of our audit committee are Ng, Kar Ling Johnny, Tang Min and Cai Hongbin, all of whom are our Independent Non-executive Directors. Our Board has determined that Ng, Kar Ling Johnny qualifies as an audit committee financial expert.

 

The main responsibilities of the remuneration and appraisal committee (remuneration committee) include:

 

to review evaluation standards on the performance of directors and senior management, to conduct their evaluations and make suggestions to the Board; and

 

to review compensation policies and scheme in respect of the remuneration of directors, supervisors and executive officers, and make suggestions to the Board.

 

The members of our remuneration committee are Tang Min, Ma Yongsheng and Ng, Kar Ling Johnny.

 

The main responsibilities of the nominating committee include:

 

to advise the Board on the size and composition of the Board based on the company’s business activities, asset size and shareholding structure;

 

to review the selection criteria and procedures for directors and senior management, and to make suggestions to the Board; and

 

to search in the domestic and overseas talent market and within the Company for qualified candidates, review the director and president candidates, senior vice president candidates, chief financial officer and vice president candidates as suggested by the president, and secretary to the Board as proposed by the chairman, and make recommendations to the Board.

 

The members of nominating committee are Zhang Yuzhuo, Tang Min and Ng, Kar Ling Johnny.

 

The main responsibilities of the social responsibility management committee are to research on the policy, governance, strategy and planning for the Company’s social responsibility and put forward proposals to the Board.

 

The members of social responsibility management committee are Zhang Yuzhuo, Tang Min and Cai Hongbin.

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Our directors have entered into directors service contracts with us and under such contracts, there is no severance pay arrangements for our directors.

 

As a joint stock company incorporated in the PRC, we are required by the PRC law to have in place a board of supervisors. The board of supervisors shall consist of no less than three supervisors, and at least one third of the board of supervisors shall be employee representative supervisors. Employee representative supervisors shall be elected by our employees at a meeting of employee representatives, a general meeting of employees or through other means.

 

Under our articles of association, the main responsibilities of our board of supervisors include:

 

to review the Company’s financial affairs;

 

to supervise directors and executive officers when they perform their duties, and to propose to our shareholders the dismissal of any director or executive officer who has violated our articles of association and relevant laws and regulation;

 

to demand directors or executive officers to rectify their conducts that conflict with our interests;

 

to propose the call of any extraordinary general meeting of shareholders to the Board, and to convene and preside over such shareholders’ meeting if the Board fails to do so; and

 

to initiate legal proceedings against directors and executive officers on behalf of the Company.

 

Our board of supervisors currently consists of five supervisors including three employee representative supervisors. In 2020, some of the supervisors attended the Company’s shareholders’ meetings and presented at the Company’s board meetings, and made assessment on the work of the Board. The supervisors went to the Company’s subsidiaries for research, made suggestions to improve management of the Company.

 

D.EMPLOYEES

 

As of December 31, 2018, 2019 and 2020, we had approximately 423,543, 402,206 and 384,065 employees, respectively. The following table sets forth the number of our employees by our business segments, their scope of work and their education as of December 31, 2020.

 

By Segment Number of Employees  Percentage of Total
Number of Employees
(%)
 
Exploration and production  130,920   34 
Refining  56,876   15 
Marketing and distribution  122,490   32 
Chemicals  62,668   16 
Research and Development  6,035   2 
Corporate and other  5,076   1 
Total  384,065   100 

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By Employee’s Scope of Work Number of Employees  Percentage of Total
Number of Employees
(%)
 
Production  140,004   37 
Technical  81,563   21 
Sales  110,631   29 
Finance  8,607   2 
Administration  30,725   8 
Others  12,535   3 
Total  384,065   100 

 

By Education Number of Employees  Percentage of Total
Number of Employees
(%)
 
Master’s degree and above  19,606   5 
University  105,705   28 
Junior college  86,083   22 
Technical secondary school  31,003   8 
Senior high school and technical school degree or below  141,668   37 
Total  384,065   100 

 

During this report period, there has been no significant change to our core technical team and key technicians.

 

We have a workers’ association that protects employee rights, organizes educational programs, assists in the fulfillment of economic objectives, encourages employee participation in management decisions, and assists in mediating disputes between us and individual employees. We regulate employee behavior through the “Employee Code of Conduct” and build a good working atmosphere. We have not been subject to any strikes or other labor disturbances that have interfered with our operation, and we believe that our relations with our employees are good.

 

The total remuneration of our employees includes salary, performance bonuses and allowances. Employees also receive certain subsidies in housing, health services, education and other miscellaneous items.

 

E.SHARE OWNERSHIP

 

As of December 31, 2020, except our director and senior vice president Ling Yiqun who holds 13,000 shares of our A shares, none of our directors, supervisors and executive officers beneficially own any of our shares.

 

ITEM 7.               MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A.MAJOR SHAREHOLDERS

 

The following table sets forth information regarding our 5% or more shareholders as of April 15, 2021.

 

Shareholder Number of Shares Owned
(in millions)
  Percentage of
Ownership (%)
 
Sinopec Group Company(1)  83,262  68.77 

 

 

(1)Inclusive of 553,150,000 H shares held by Sinopec Century Bright Capital Investment Ltd. (overseas wholly-owned subsidiary of Sinopec Group Company) under HKSCC Nominees Limited.

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As of April 15, 2021, 1,231,644,000 H shares were registered in the name of a nominee of Citibank, N.A., the depositary under our ADS deposit agreement. Citibank, N.A. has advised us that, as of April 15, 2021, 12,316,440 ADSs, representing 1,231,644,000 H shares, were held of record by Cede & Co. and 24 other registered shareholders domiciled in and outside of the United States. We have no further information as to our shares held, or beneficially owned, by U.S. persons.

 

To avoid the adverse effects brought by intra-industry competition to the maximum extent possible, we and Sinopec Group Company have entered into a non-competition agreement whereby Sinopec Group Company has agreed to: refrain from operating new businesses which compete or could compete with us in any of our domestic or international markets; grant us an option to purchase Sinopec Group Company’s operations that compete or could compete with our businesses; operate its sales enterprises in a manner uniform to our sales and service operations; and appoint us as sales agent for certain of its products which compete or could compete with our products.

 

In March 2017, Sinopec Group has earnestly fulfilled its undertaking in eliminating competitions in chemical business with us through: (1) subscribing capital contribution of joint ventures controlled by us, by way of injecting net assets of certain chemical business and cash; (2) authorizing us to be in charge of production plan, management and sales of the remaining chemical business. The competition in chemical business between Sinopec Group and us has been eliminated.

 

Given that Sinopec Group Company engages in the same or similar businesses as us with regard to the exploration and production of overseas petroleum and natural gas, Sinopec Group Company issued an undertaking on April 28, 2014, granting us an option, in ten years since the issue date of the undertaking, (1) after thorough analysis from political, economic and other perspectives, to require Sinopec Group Company to sell its overseas oil and gas assets owned at the time, to the extent remaining in its possession, to us, (2) to require Sinopec Group Company to sell its overseas oil and gas assets to us, provided that the aforementioned proposed acquisitions comply with the applicable laws and regulations, contractual obligations and other procedural requirements. By then, to the extent in compliance with the applicable law and the requirements of the contract and procedures, Sinopec Group Company will sell the oil and gas assets as mentioned in (1) and (2) to us as required.

 

B.RELATED PARTY TRANSACTIONS

 

Sinopec Group Company owned 68.77% of our outstanding equity as of April 15, 2020. Sinopec Group Company is able to exercise all the rights of a controlling shareholder, including the election of directors and voting in respect of amendments to our articles of association. Sinopec Group Company, as our controlling shareholder, is subject to certain non-controlling shareholder protection provisions under our articles of association.

 

We have engaged from time to time and will continue to engage in a variety of transactions with Sinopec Group Company, which provide a number of services to us, including ancillary supply, transport, educational and community services. The nature of our transactions with Sinopec Group Company is governed by a number of service and other contracts between Sinopec Group Company and us. A discussion of these agreements and arrangements is set forth under the heading “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions” in our annual report on Form 20-F filed with the Securities and Exchange Commission on October 10, 2000, April 13, 2007, May 20, 2009, April 30, 2010, April 11, 2013, April 16, 2014, April 10, 2015, April 20, 2016, April 24, 2017, April 27, 2018, April 29, 2019 and April 10, 2020, respectively.

 

On July 9, 2018, we entered into the Articles of Association of Sinopec Capital Co., Ltd., or Sinopec Capital, with Sinopec Group Company, pursuant to which, we will establish Sinopec Capital with Sinopec Group Company with a registered capital of RMB 10 billion, of which, we will subscribe capital contribution of RMB 4.9 billion by cash, representing 49% of the registered capital of Sinopec Capital, and Sinopec Group will subscribe capital contribution of RMB 5.1 billion by cash, representing 51% of the registered capital of Sinopec Capital. Upon the establishment of Sinopec Capital, its investments will focus on strategic emerging industries, including new energy, new material, energy conservation and environmental protection, and intelligence manufacturing in relation to the industry chain. In respect of the investment projects which are related to our principal business, we will have the right of first refusal to acquire such projects.

 

On August 24, 2018, we entered into the Continuing Connected Transaction Fifth Supplemental Agreement with Sinopec Group Company, pursuant to which the terms of Continuing Connected Transactions under the Mutual Supply Agreement and the Cultural, Educational, Hygiene and Auxiliary Agreement (formerly named Cultural, Educational, Hygiene and Community Services Agreement) were renewed as January 1, 2019 to December 31, 2021. On October 23, 2018 the First Extraordinary General Meeting of 2018 of the Company approved the Continuing Connected Transactions for the three years ending December 31, 2021. See Exhibit 4.15.4 herewith for details of the Continuing Connected Transactions.

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In 2020, our related connected transactions occurred in accordance with the abovementioned Continuing Connected Transaction agreements amounted to RMB 385.868 billion, among which, our purchase amounted to RMB 252.381 billion, accounting for 11.38% of the amount of similar transactions, including products and services (purchasing, storage and transportation, exploration and development services, and production-related services) of RMB 236.685 billion, auxiliary and community service of RMB 3.126 billion, house rental payment of RMB 565 million, land rental payment of RMB 11.086 billion, and the interest expense of RMB 0.919 billion. The amount of our sales was RMB 133.486 billion, accounting for 5.99% of the transaction amount of similar transactions, including sales of goods of RMB 132.643 billion, agency commission income of RMB 140 million and interest income of RMB 0.704 billion.

 

On April 29, 2020, Zhongke (Guangdong) Refining and Petrochemical Co., Ltd. (“Zhongke Refining”), a wholly-owned subsidiary of the Company, entered into a merger agreement with Sinopec Zhanjiang Dongxing Petrochemical Company Limited (“Zhanjiang Dongxing”), and the Company entered into a joint venture contract with Sinopec Century Bright Capital Investment Ltd. (“Century Bright Company”), pursuant to which, Zhongke Refining shall absorb and merge Zhanjiang Dongxing and, upon the completion of such transaction, Zhongke Refining will become the owner of all assets and liabilities of Zhanjiang Dongxing and will assume the existing businesses and personnel of Zhanjiang Dongxing with the Company and Century Bright Company holding 90.3% and 9.7% equity interest in Zhongke Refining, respectively.

 

On October 28, 2020, our board of directors approved the capital increase in Sinopec Baling Petrochemical Company Limited (“Baling Petrochemical”) by the Company with the Sinopec Group Asset Management Co., Ltd. (“Assets Company”) on a pro rata basis. The capital increase in Baling Petrochemical will be contributed by the Company and the Assets Company with an aggregate amount of approximately RMB 6.3 billion, of which, the Company will contribute approximately RMB 3.5 billion by injecting the relevant assets of the Company. Baling Branch and cash, and the Assets Company will contribute approximately RMB 2.8 billion by injecting the relevant assets of Assets Company Baling Branch. Pursuant to the capital increase agreement, the registered capital of Baling Petrochemical will be increased from RMB 100 million to RMB 3 billion. Upon completion of the capital increase, the shareholders of Baling Petrochemical and their respective shareholdings will remain unchanged, while the Company and the Assets Company will continue to hold 55% and 45% equity interest in Baling Petrochemical, respectively. Baling Petrochemical will remain a subsidiary of the Company.

 

On March 26, 2021, (i) Sinopec Overseas Investment Holding Limited (“Overseas Investment Company”), a subsidiary of the Company, and Century Bright Company entered into the Agreement on Purchasing Equity Interest in Sinopec Hainan Refining and Chemical Company Limited, pursuant to which Overseas Investment Company proposed to purchase the 25% equity interest in Sinopec Hainan Refining and Chemical Company Limited held by Century Bright Company at a consideration of RMB 5,769 million; (ii) the Company and Assets Company entered into the Agreement on Purchasing Equity Interest in Cangzhou Toray Fine Chemical Co., Ltd., pursuant to which the Company proposed to purchase the 40% equity interest in Cangzhou Toray held by Assets Company at a consideration of RMB 20 million; (iii) the Company and Assets Company entered into the Agreement on Purchasing the Polypropylene and Utility Business Assets, pursuant to which the Company proposed to purchase the non-equity assets held by Assets Company, including the polypropylene and utility business assets of Cangzhou branch of Assets Company, at a consideration of RMB 138 million; (iv) the Company and Beijing Orient Petrochemical Industry Co., Ltd. (“Orient Petrochemical”) entered into the Agreement on Purchasing Equipment and Relevant Assets, pursuant to which the Company proposed to purchase the non-equity assets held by Orient Petrochemical, including inventory and equipment, at a consideration of RMB 715 million; and (v) Sinopec Beihai Refining and Chemical Limited Liability Company (“Beihai Refining and Chemical”), a subsidiary of the Company, and Beihai Petrochemical Limited Liability Company of Sinopec Group (“Beihai Petrochemical”) entered into the Agreement on Purchasing Assets of Beihai Petrochemical related to Pier Business, pursuant to which Beihai Refining and Chemical proposed to purchase the non-equity assets held by Beihai Petrochemical, including the pier operation platform, at a consideration of RMB 149 million.

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The above-mentioned variety of transactions with Sinopec Group Company are in compliance with the upper limit of the amount of related party transactions approved by the shareholders and the Board.

 

C.INTERESTS OF EXPERTS AND COUNSEL

 

Not applicable.

 

ITEM 8.                FINANCIAL INFORMATION

 

A.CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

 

See consolidated financial statements included in this annual report following Item 19.

 

Legal Proceedings

 

We are involved in certain judicial and arbitral proceedings before Chinese courts or arbitral bodies concerning matters arising in connection with the conduct of our businesses. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition or results of operations.

 

Dividend Distribution Policy

 

In 2012, we amended our articles of association based on its original framework. Our dividend distribution policy was amended. According to our amended articles of association:

 

Our board of directors will determine the payment of dividends, if any, with respect to our shares on a per share basis. Any final dividend for a financial year shall be subject to shareholders’ approval. The board may declare interim and special dividends at any time under general authorization by a shareholders’ ordinary resolution. A decision to declare or to pay any dividends in the future, and the amount of any dividends, will depend on our results of operations, cash flows, financial condition, the payment by our subsidiaries of cash dividends to us, future prospects and other factors which our directors may determine are important.

 

For holders of our H shares, cash dividend payments, if any, shall be declared by our board of directors in Renminbi and paid in HK dollars. The depositary will convert the HK dollar dividend payments and distribute them to holders of ADSs in US dollars, less expenses of conversion.

 

The Company may distribute dividends in the following forms: cash, shares or other forms provided by laws, administrative rules, regulations of competent authorities and regulatory provisions in the place where the Company’s shares are listed. The Company shall give priority to the distribution of dividends in cash. The Company may make interim dividends distribution. The Company shall distribute cash dividends when the Company’s net profit and retained earnings, in separate financial statement, are positive and the Company has adequate cash inflows over the requirements of cash outflows of operation and sustainable development. The cash dividends per annum should not be less than thirty percent of the net profit of the Company in the current year. Dividends in the form of shares will be distributed to the depositary and, except as otherwise described in the Deposit Agreement, will be distributed by the depositary in the form of additional ADSs, to holders of ADSs.

 

At the annual general meeting held on May 19, 2020, our shareholders adopted the distribution of a final cash dividend of RMB 0.19 (including tax) per share, combining with an interim distributed dividend of RMB 0.12 (including tax) per share, the total dividend for 2019 is RMB 0.31 (including tax) per share.

 

At the extraordinary general meeting held on September 28, 2020, our shareholders adopted the distribution of a special dividend of RMB 0.07 (including tax) per share. At the 21st meeting of the seventh session of our board, our board approved the proposal to distribute a final cash dividend of RMB 0.13 (including tax) per share, combining with an interim distributed dividend of RMB 0.07 (including tax) per share, the total dividend for 2020 is RMB 0.20 (including tax) per share. The proposal is subject to the shareholder’s approval at the annual general meeting.

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B.SIGNIFICANT CHANGES

 

None.

 

ITEM 9.                THE OFFER AND LISTING

 

A.OFFER AND LISTING DETAILS

 

Not applicable, except for Item 9A (4) and Item 9C.

 

Our H Shares have been listed on the Hong Kong Stock Exchange (Code: 0386), and our ADSs, each representing 100 H Shares, have been listed on the New York Stock Exchange and the London Stock Exchange under the symbol “SNP,” since we completed our initial public offering on October 19, 2000. Prior to that time, there was no public market for our H Shares. The Hong Kong Stock Exchange is the principal non-U.S. trading market for our H Shares. Our publicly traded domestic shares, or A shares, are listed on the Stock Exchange of Shanghai since August 8, 2001 (Code: 600028).

 

On 14 February 2013, we issued 2,845,234,000 listed H shares with a par value of RMB 1.00 each at the price of HKD 8.45 per share. The aggregate gross proceeds from the placing amounted to approximately HKD 24.0 billion.

 

On January 26, 2015, the conditional redemption of the 2011 convertible bonds amounting to RMB 23 billion, was triggered. As of February 11, 2015 (the redemption registration date), the cumulative conversion of the 2011 convertible bonds to listed A shares is 4,623,769,047 shares, and the balance of registered 2011 convertible bonds is RMB 52,766,000. On February 17, 2015, we redeemed the balance plus interests payable at the aggregate amount of RMB 53,348,948.28. The 2011 convertible bonds were delisted from the Shanghai Stock Exchange.

 

ITEM 10.              ADDITIONAL INFORMATION

 

A.SHARE CAPITAL

 

Not applicable.

 

B.MEMORANDUM AND ARTICLES OF ASSOCIATION

 

In 2019, we amended the articles of association.

 

The following is a summary of certain provisions of our articles of association and its appendices, as amended, the Company Law of the PRC (2018) and certain other applicable laws and regulations of the PRC. You and your advisors should refer to the text of our articles of association, as amended, and to the texts of applicable laws and regulations for further information.

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Objects and Purposes

 

We are a joint stock limited company established in accordance with the Company Law and certain other laws and regulations of the PRC. We are registered with the PRC State Administration of Industry and Commerce with business license number 100000000032985. Article 13 of our articles of association provides that our scope of businesses includes, among other things, the production, storage, pipeline transportation, land transportation, water transportation and sale of non-coal mines (oil and natural gas etc.), dangerous chemicals (ethylene, propylene, butadiene and naphtha etc.), heavy oil, rubber and other chemical raw materials and products; oil refining; wholesaling and retailing (for subsidiaries only) of gasoline, kerosene and diesel oil; the production, storage, transportation and sale of natural gas chemicals and coal chemicals; sale of lubricant, fuel oil, solvent naphtha and asphalt; production of chemical fertilizer; operation of LPG station, sale of CNG, LNG, LPG and city gas; operation of electrical vehicle charging station; production, supervision of manufacturing, installation of oil and petrochemical machinery and equipment; manufacturing of equipment, tools, instruments and gauges in petroleum drilling and production; purchase and sale of oil and petrochemical raw and auxiliary materials, equipment and parts; technology and information, research, development, application and consultation of alternative energy products; production and sale of electricity, steam, water and industrial gases; wholesaling of farm, forestry and pasture products; operation of general merchandise convenience stores; wholesaling and retailing of knitted garments and housewares; wholesaling and retailing of cultural and sports goods and equipment; sale of food, beverages and tobacco products; wholesaling and retailing of pharmaceuticals and medical devices; retailing of automobiles, motorcycles and components; repair and maintenance of and technical training for automobiles and motorcycles; wholesaling and retailing of machineries, hardware products, electronic products and household appliances; retailing of furniture and materials for indoor decoration; stalls, no-store sale and other forms of retail business; general merchandise retail; accommodation and catering services; manufacturing of food and food additives; residents´ services; transportation agency services; warehousing; operation of self-owned properties; leasing of natural gas storage facility; leasing of houses, working places, vehicles and equipment; lease of machineries; media, advertising and acting as commission agent; insurance brokerage and agency services; financial trust and management services; E-commerce; self-operation of and acting as agency for the import and export of various commodities and technologies other than those restricted or prohibited by the state from import and export; contractor of overseas mechanical, electronics, petrochemical projects and domestic international bid-inviting projects; export of equipment and materials required for the aforementioned overseas projects; dispatch of labor required for the aforementioned overseas projects; railway transportation; coastal engineering auxiliary operations, port operations, oil spill response, safety guard, ship pollution removal operations; professional technical service industry quality inspection technical services, environmental and ecological monitoring and testing services; edible salt production, wholesale, retail; shale gas, coalbed methane, shale oil, combustible ice, uranium and other resources exploration, development, storage and transportation, pipeline transportation, sales; natural gas power generation, power supply; power installation and maintenance, power technology development and services.

 

Directors

 

Our directors shall be elected at our shareholders’ general meeting. Cumulative voting shall be adopted for the election of directors if a controlling shareholder controls 30% or more of our shares. Details of the cumulative voting mechanism are set forth in Article 59 of the Rules and Procedures for the Shareholders’ General Meetings that is an appendix to, and forms an integral part of, our articles of association. Our directors shall be elected for a term of three years and may serve consecutive terms upon re-election, except that independent directors may only serve a maximum of two terms. Our directors are not required to hold any shares in us, and there is no age limit requirement for the retirement or non-retirement of our directors.

 

Where a director is materially interested, directly or indirectly, in a contract, transaction or arrangement (including any proposed contract, transaction or arrangement) with us, he or she shall declare the nature and extent of his or her interests to the board of directors at the earliest opportunity, whether or not such contract, transaction or arrangement is otherwise subject to the approval of the board. A director shall not vote, and shall not be counted in the quorum of the meeting, on any resolution concerning any contract, transaction or arrangement where the director owns material rights or interests therein. A director is deemed to be interested in a contract, transaction or arrangement in which his associate (as defined by the Listing Rule of the Hong Kong Stock Exchange) is interested.

 

Unless the interested director discloses his interests to the board and the contract, transaction or arrangement in which the director is materially interested is approved by the board at a meeting in which the director neither votes nor is not counted in the quorum, such contract, transaction or arrangement shall be voidable by us except with respect to a bona fide party thereto who does not have notice of the director’s interests.

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We are prohibited from making loans or providing guarantees to our directors and their associates except where such loan or guarantee is to meet expenditure requirement incurred or to be incurred by the director for the purposes of the company or for the purpose of enabling the director to perform his or her duties properly in accordance with the terms of a service contract approved by the shareholders in a general meeting.

 

The board of directors shall examine and approve the amount of the long-term loans for the current year according to the annual investment plan as approved by the shareholders’ general meeting. The chairman of the board of directors is authorized to make adjustments of no more than 10% of the total amount of the long-term loans as approved by the board of directors for the current year. Within the total amount of the long-term loans as approved by the board of directors, the chairman of the board of directors is authorized to approve and execute individual long-term loan agreement with the loan amount exceeding RMB 1 billion, and the president is authorized to approve and execute individual long-term loan agreement with the loan amount not exceeding RMB 1 billion. Within the total amount of the working capital loans for the current year as approved by the board of directors, the chairman of the board of directors is authorized to execute the overall short-term loan facility agreement for raising working capitals as we need.

 

Matters relating to the remuneration of our directors shall be determined by the shareholders’ general meeting.

 

Dividends

 

A distribution of final dividends for any financial year is subject to shareholders’ approval. Except as otherwise decided by Shareholders’ meeting, the board of directors may make decision on the distribution of interim dividends. Except as otherwise provided by laws and regulations, the sum of interim dividends shall not exceed 50 percent of the net profit for the half year interim period. Dividends may be distributed in the forms of cash, shares or other forms provided by laws, administrative rules or regulations of competent authorities and regulatory provisions in the place where the Company’s shares are listed. The Company shall give priority to the distribution of dividends in cash. A distribution of shares, however, must be approved by special resolution of the shareholders.

 

Dividends may only be distributed after allowance has been made for:

 

recovery of losses, if any;

 

allocations to the statutory surplus reserve fund; and

 

allocations to a discretionary surplus reserve fund if approved by the shareholders.

 

The allocations to the statutory surplus reserve fund shall be 10% of our after-tax profits of the current year determined in accordance with ASBE. In the event that the statutory surplus reserve balance reaches fifty (50) percent of the registered capital of the Company, no allocation is needed.

 

The articles of association require us to appoint on behalf of the holders of H shares a receiving agent which is registered as a trust corporation under the Trustee Ordinance of Hong Kong to receive dividends declared by us in respect of the H shares on behalf of such shareholders. The articles of association require that cash dividends in respect of H shares be declared in Renminbi and paid by us in HK dollars. The depositary of our ADSs will convert such proceeds into US dollars and will remit such converted proceeds to our holders of ADSs. If we record no profit for the year, we may not normally distribute dividends for the year.

 

Dividend payments may be subject to PRC withholding tax.

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Voting Rights and Shareholders’ Meetings

 

Our board of directors shall convene a shareholders’ annual general meeting once every year and within six months from the end of the preceding financial year. Our board shall convene an extraordinary general meeting within two months of the occurrence of any one of the following events:

 

where the number of directors is less than the number stipulated in the PRC Company Law or two-thirds of the number specified in our articles of association;

 

where our unrecovered losses reach one-third of the total amount of our actually paid-in share capital;

 

where shareholder(s) holding 10% or more of our issued and outstanding voting shares request(s) in writing the convening of an extraordinary general meeting;

 

whenever our board deems necessary or our board of supervisors so requests; or

 

circumstances provided in the articles of association.

 

Meetings of a special class of shareholders must be called in certain enumerated situations when the rights of the holders of such class of shares may be modified or adversely affected as discussed below. Proposals made by the board of directors, the board of supervisors or shareholder(s) holding 3% or more of the total number of voting shares shall be included in the agenda for the relevant general meeting if they are matters which fall within the scope of the functions and powers of shareholders in general meeting. Shareholder(s) holding 3% or more of the total shares of the Company may put forward interim motions by written proposals to the convener 10 days before the shareholders’ general meeting. The convener shall publish supplementary notice to announce the interim motion within two days upon receiving.

 

All shareholders’ meetings must be convened by our board of directors by written notice given to shareholders no less than 45 days before the meeting, by our board of supervisors or certain qualified shareholders in case a shareholders’ meeting is not convened by our board of directors and board of supervisors. Shareholder(s) holding 10% or more the total number of shares of the Company have the right to convene and chair the interim shareholders’ general meeting or class shareholders’ meeting in accordance with the provisions in laws, administrative rules and the articles of association, in the event that the board of directors and the board of supervisors fail to convene and chair such meeting upon demand made by such shareholders. Based on the written replies received by us 20 days before a shareholders’ meeting, we shall calculate the number of voting shares represented by shareholders who have indicated that they intend to attend the meeting. Where the number of voting shares represented by those shareholders amount to more than one-half of our total voting shares, we may convene the shareholders’ general meeting (regardless of the number of shareholders who actually attend). Otherwise, we shall, within five days, inform the shareholders again of the motions to be considered and the date and venue of the meeting by way of public announcement. After the announcement is made, the shareholders’ meeting may be convened. The accidental omission by us to give notice of a meeting to, or the non-receipt of notice of a meeting by, a shareholder will not invalidate the proceedings at that shareholders’ meeting.

 

Shareholders at meetings have the power, among other things, to approve or reject our profit distribution plans, annual budget, financial statements, increase or decrease in share capital, issuance of debentures, merger or liquidation and any amendment to our articles of association. Shareholders of the shares which the Company issues to foreign investors for subscription in foreign currencies possess the same rights and undertake the same obligations as those of the shares which the Company issues to domestic investors for subscription in Renminbi. In addition, the rights of a class of shareholders may not be modified or abrogated, unless approved by a special resolution of all shareholders at a general shareholders’ meeting and by a special resolution of shareholders of that class of shares at a separate meeting. Our articles of association enumerate, without limitation, certain amendments which would be deemed to be a modification or abrogation of the rights of a class of shareholders, including increasing or decreasing the number of shares of a class disproportionate to increases or decreases of other classes of shares, removing or reducing rights to receive dividends in a particular currency or creating shares with voting or equity rights superior to shares of such class.

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Cumulative voting in accordance with the relevant laws and regulations in effect is adopted for the election of directors and supervisors. For all other matters, each share is entitled to one vote on all such matters submitted to a vote of our shareholders at all shareholders’ meetings, except for meetings of a special class of shareholders where only holders of shares of the affected class are entitled to vote on the basis of one vote per share of the affected class.

 

Shareholders are entitled to attend and vote at meetings either in person or by proxy. Proxies must be in writing and deposited at our legal address, or such other place as is specified in the meeting notice, no less than 24 hours before the time for holding the meeting at which the proxy proposes to vote or the time appointed for the passing of the relevant resolution(s). When the instrument appointing a proxy is executed by the shareholder’s attorney-in-fact, such proxy when deposited must be accompanied by a notary certified copy of the relevant power of attorney or other authority under which the proxy was executed.

 

Except for those actions discussed below which require supermajority votes (special resolutions), resolutions of the shareholders are passed by a simple majority of the voting shares held by shareholders who are present in person or by proxy. Special resolutions must be passed by or more than two-thirds of the voting rights represented held by shareholders who are present in person or by proxy.

 

The following decisions must be adopted by special resolution:

 

an increase or reduction of our share capital or the issue of shares, including stock distributions, of any class, warrants and other similar securities;

 

issuance of debentures;

 

our division, merger, dissolution and liquidation; (Shareholders who object to a proposed division or merger are entitled to demand that either we or the shareholders who approved the merger purchase their shares at a fair price.)

 

amendments to our articles of association and its appendices;

 

change of our company form;

 

acquisition or disposal of material assets or provision of material guarantee within one year, with the value exceeding 30% of our latest audited total assets;

 

any stock incentive plan;

 

any other matters required by laws and regulations or our articles of association and its appendices or considered by the shareholders in a general meeting and which they have resolved by way of an ordinary resolution to be of a nature which may have a material impact on us and should be adopted by special resolution.

 

All other actions taken by the shareholders, including the appointment and removal of our directors and supervisors and the declaration of cash dividend payments, will be decided by an ordinary resolution of the shareholders. The listing agreement between us and the Hong Kong Stock Exchange (Listing Agreement) provided that we may not permit amendments to certain sections of the articles of association which have been mandated by the Hong Kong Stock Exchange. These sections include provisions relating to:

 

varying the rights of existing classes of shares;

 

voting rights;

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our power to purchase our own shares;

 

rights of non-controlling shareholders; and

 

procedure on liquidation.

 

In addition, certain amendments to the articles of association require the approval and consent of the relevant PRC authorities.

 

Any shareholder resolution which is in violation of any laws or administrative regulations of the PRC will be null and void subject to statutory procedures.

 

Liquidation Rights

 

In the event of our liquidation, the H shares will rank pari passu with the domestic ordinary shares, and payment of debts out of our remaining assets shall be made in the order of priority prescribed by applicable laws and regulations or, if no such standards exist, in accordance with such procedure as the liquidation committee which has been appointed either by us or the People’s Court of the PRC may consider to be fair and reasonable. After payment of debts, we shall distribute the remaining property to shareholders according to the class and proportion of their shareholders.

 

Further Capital Call

 

Shareholders are not liable to make any further contribution to the share capital other than according to the terms, which were agreed by the subscriber of the relevant shares at the time of subscription.

 

Increases in Share Capital and Preemptive Rights

 

The articles of association require the approval by a special resolution of the shareholders and by special resolution of holders of domestic ordinary shares and overseas-listed foreign invested shares at separate shareholder class meetings be obtained prior to authorizing, allotting, issuing or granting shares, securities convertible into shares or options, warrants or similar rights to subscribe for any shares or such convertible securities. No such approval is required if, but only to the extent that:

 

we issue domestic ordinary shares and/or overseas-listed foreign-invested shares, either separately or concurrently, in numbers not exceeding 20% of the number of domestic ordinary shares and overseas-listed foreign-invested shares then in issue, respectively, in any 12-month period, as approved by a special resolution of the shareholders; or

 

if our plans for issuing domestic ordinary shares and overseas-listed foreign-invested shares upon our establishment are implemented within fifteen months of the date of approval by the China Securities Regulatory Commission.

 

New issues of shares must also be approved by the relevant PRC authorities.

 

Reduction of Share Capital and Purchase by Us of Our Shares and General Mandate to Repurchase Shares

 

We may reduce our registered share capital only upon obtaining the approval of the shareholders by a special resolution and, in certain circumstances, of relevant PRC authorities. The number of H shares, which may be purchased is subject to the Hong Kong Takeovers and Share Repurchase Codes.

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Restrictions on Large or Controlling Shareholders

 

Our articles of association provide that, in addition to any obligation imposed by laws and administration regulations or required by the listing rules of the stock exchanges on which our H shares are listed, a controlling shareholder shall not exercise his voting rights in a manner prejudicial to the interests of the shareholders generally or of some part of the shareholders:

 

to relieve a director or supervisor from his or her duty to act honestly in our best interests;

 

to approve the expropriation by a director or supervisor (for his or her own benefit or for the benefit of another person) of our assets in any way, including, without limitation, opportunities which may benefit us; or

 

to approve the expropriation by a director or supervisor (for his or her own benefit or for the benefit of another person) of the individual rights of other shareholders, including, without limitation, rights to distributions and voting rights (save according to a restructuring of our company which has been submitted for approval by the shareholders in a general meeting in accordance with our articles of association and its appendices).

 

A controlling shareholder, however, will not be precluded by our articles of association or any laws and administrative regulations or the listing rules of the stock exchanges on which our H shares are listed from voting on these matters.

 

A controlling shareholder is defined by our articles of association as any person who acting alone or in concert with others:

 

is in a position to elect half or more of the board of directors;

 

has the power to exercise, or to control the exercise of, 30% or more of our voting rights;

 

acting separately or in concert with others, holds 30% or more of our issued and outstanding shares; or

 

acting separately or in concert with others, has de facto control of us in any other way.

 

As of the date of this annual report, Sinopec Group Company is and will be our only controlling shareholder.

 

Disclosure

 

The Listing Agreement imposes a requirement on us to keep the Hong Kong Stock Exchange, our shareholders and other holders of our listed securities informed as soon as reasonably practicable of any information relating to us and our subsidiaries, including information on any major new developments which are not public knowledge, which:

 

is necessary to enable them and the public to appraise the position of us and our subsidiaries;

 

is necessary to avoid the establishment of a false market in its securities; and

 

might be reasonably expected materially to affect market activity in and the price of its securities.

 

There are also requirements under the Listing Rules for us to obtain prior shareholders’ approval and/or to disclose to shareholders details of certain acquisitions or disposals of assets and other transactions (including transactions with controlling shareholders).

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Sources of Shareholders’ Rights

 

The PRC’s legal system is based on written statutes and is a system in which decided legal cases have little precedent value. The PRC’s legal system is similar to civil law systems in this regard. In 1979, the PRC began the process of developing its legal system by undertaking to promulgate a comprehensive system of laws. In December 1993, the Standing Committee of the 8th National People’s Congress adopted the PRC Company Law. On October 27, 2005, the PRC Company law was amended by the Standing Committee of the 10th National People’s Congress, and came into force on January 1, 2006. The amended PRC Company Law enhanced the protection of shareholders’ rights primarily in the following regards:

 

Shareholders holding 10 percent or more of the shares of the Company are entitled to petition the court to dissolve the Company if (i) the Company is in serious operational difficulties; (ii) its continuing existence will seriously prejudice the interests of the shareholders; and (iii) such difficulties cannot be resolved through any other means;

 

Shareholders holding 1 percent or more of the shares of the Company for more than 180 consecutive days are entitled to request the board of supervisors (in terms of directors and senior management) or the board of directors (in terms of supervisors) to bring legal proceedings, or bring legal proceedings in their own name on behalf of the Company where it is in emergency and the Company will be subject to irreparable loss if not to do so, against directors, supervisors or senior management who fail to comply with the laws and regulations or the Company’s articles of association in the course of performing their duties and cause loss to the Company;

 

Shareholders who oppose the Company’s decision on merger or separation are entitled to request the Company to repurchase their shares; and

 

Shareholders holding 10 percent or more of the voting rights of the Company are entitled to convene a shareholders’ meeting.

 

Currently, the primary sources of shareholder rights are our articles of association, as amended, the PRC Company Law and the Listing Rules of the Hong Kong Stock Exchange, which, among other things, impose certain standards of conduct, fairness and disclosure on us, our directors and our controlling shareholder, i.e., Sinopec Group Company. To facilitate the offering and listing of shares of PRC companies overseas, and to regulate the behavior of companies whose shares are listed overseas, the State Council Securities Committee and the State Commission for Restructuring the Economic System issued on August 27, 1994 the Mandatory Provisions for articles of association of Company Listing Overseas (Mandatory Provisions). These Mandatory Provisions become entrenched in that, once they are incorporated into the articles of association of a PRC company, any amendment to those provisions will only become effective after approval by the SASAC. The Listing Rules require a number of additional provisions to the Mandatory Provisions to be included in the articles of association of PRC companies listing H shares on the Hong Kong Stock Exchange (Additional Provisions). The Mandatory Provisions and the Additional Provisions have been incorporated into our articles of association.

 

In addition, upon the listing of and for so long as the H shares are listed on the Hong Kong Stock Exchange, we will be subject to those relevant ordinances, rules and regulations applicable to companies listed on the Hong Kong Stock Exchange, including the Listing Rules of the Hong Kong Stock Exchange, the Securities (Disclosure of Interests) Ordinance (SDI Ordinance), the Securities (Insider Dealing) Ordinance and the Hong Kong Codes on Takeovers and Mergers and Share Repurchases (Hong Kong Takeovers and Repurchase Codes).

 

Unless otherwise specified, all rights, obligations and protections discussed below derive from our articles of association and/or the PRC Company Law.

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Enforceability of Shareholders’ Rights

 

There has not been any public disclosure in relation to the enforcement by holders of H shares of their rights under constitutive documents of joint stock limited companies or the PRC Company Law or in the application or interpretation of the PRC or Hong Kong regulatory provisions applicable to PRC joint stock limited companies.

 

In most states of the United States, shareholders may sue a corporation “derivatively.” A derivative suit involves the commencement by a shareholder of a corporate cause of action against persons (including corporate officers, directors or controlling shareholders) who have allegedly wronged the corporation, where the corporation itself has failed to enforce such claim against such persons directly. Such action is brought based upon a primary right of the corporation, but is asserted by a shareholder on behalf of the corporation. The PRC company law as amended in October 2005 and effective in January 2006 has also granted shareholders with the rights to bring such derivative suits.

 

Our articles of association provide that all differences or claims, arising from any provision of our articles of association, any right or obligation conferred or imposed by the PRC Company Law or any other relevant law or administrative regulation which concerns our affairs:

 

between a holder of overseas-listed foreign-invested shares and us;

 

between a holder of overseas-listed foreign-invested shares and any of our directors, supervisors, general managers, deputy general managers or other senior officers; or

 

between a holder of overseas-listed foreign-invested shares and a holder of domestic ordinary shares

 

must be referred to arbitration at either the China International Economic and Trade Arbitration Commission in the PRC or the Hong Kong International Arbitration Center, and the laws of the PRC shall apply, save as otherwise provided in the laws and administrative regulations. Our articles of association provide that such arbitration will be final and conclusive. In June 1999, an arrangement was made between the People’s Courts of the PRC and the courts of Hong Kong to mutually enforce arbitration rewards rendered in the PRC and Hong Kong according to their respective laws. This new arrangement was approved by the Supreme Court of the PRC and the Hong Kong Legislative Council and became effective on February 1, 2000. We have provided an undertaking to the United States Securities and Exchange Commission that, at such time, if any, as all applicable laws and regulations of the PRC and (unless our H shares are no longer listed on the Hong Kong Stock Exchange) all applicable regulations of the Stock Exchange of Hong Kong Ltd. shall not prohibit, and to the extent Section 14 under the United States Securities Act of 1933, as amended, so requires, our board of directors shall propose an amendment to the articles of association which would permit shareholders to adjudicate disputes arising between our shareholders and us, our directors, supervisors or officers by means of judicial proceedings.

 

The holders of H shares will not be able to bring actions on the basis of violations of the Listing Rules and must rely on the Hong Kong Stock Exchange to enforce its rules. The SDI Ordinance establishes certain obligations in relation to disclosure of shareholder interests in Hong Kong listed companies, the violation of which is subject to prosecution by the Securities and Futures Commission of Hong Kong. The Hong Kong Takeovers and Repurchase Codes do not have the force of law and are only standards of commercial conduct considered acceptable for takeover and merger transactions and share repurchases in Hong Kong as established by the Securities and Futures Commission and the securities and futures industry in Hong Kong.

 

We have appointed our representative office, located 3050 Post Oak Blvd, Suite 800, Houston, Texas, 77056, as our agent to receive service of process with respect to any action brought against us in certain courts in New York under the United States federal and New York State’s securities laws. However, as the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts within the United States, the United Kingdom, Japan or most other the Organization for Economic Cooperation and Development countries, administrative actions brought by regulatory authorities, such as the Commission, and other actions which result in foreign court judgments, could (assuming such actions are not required by PRC law and the articles of association to be arbitrated) only be enforced in the PRC on a reciprocal basis or according to relevant international treaty to which China is a party if such judgments or rulings do not violate the basic principles of the law of the PRC or the sovereignty, security and public interest of the society of the PRC, as determined by a People’s Court of the PRC which has the jurisdiction for recognition and enforcement of judgments. We have been advised by our PRC counsel, Haiwen & Partners, that there is certain doubt as to the enforceability in the PRC of actions to enforce judgments of United States courts arising out of or based on the ownership of H shares or ADSs, including judgments arising out of or based on the civil liability provisions of United States federal or state securities laws.

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Restrictions on Transferability and the Share Register

 

As provided in the articles of associations we may refuse to register a transfer of H shares unless:

 

any relevant transfer fee is paid;

 

the instrument of transfer is only related to H shares listed in Hong Kong;

 

the instrument of transfer is accompanied by the share certificates to which it relates, or such other evidence is given as may be reasonably necessary to show the right of the transferor to make the transfer;

 

the stamp duty which is chargeable on the instrument of transfer has already been paid;

 

if it is intended that the shares be transferred to joint owners, the maximum number of joint owners shall not be more than four (4); and

 

the Company does not have any lien on the relevant shares.

 

We are required to keep a register of our shareholders which shall be comprised of various parts, including one part which is to be maintained in Hong Kong in relation to H shares to be listed on the Hong Kong Stock Exchange. Shareholders have the right to inspect and, for a nominal charge, to copy the share register. No transfers of ordinary shares shall be recorded in our share register within 30 days prior to the date of a shareholders’ general meeting or within 5 days prior to the record date established for the purpose of distributing a dividend.

 

We have appointed HKSCC Registrars Limited to act as the registrar of our H shares. This registrar maintains our register of holders of H shares at our offices in Hong Kong and enters transfers of shares in such register upon the presentation of the documents described above.

 

C.MATERIAL CONTRACTS

 

We have not entered into any material contracts other than in the ordinary course of business and other than those described under “Item 4. Information on the Company,” “Item 7. Major Shareholders and Related Party Transactions” or elsewhere in this Form 20-F.

 

D.EXCHANGE CONTROLS

 

The existing foreign exchange regulations have significantly reduced government foreign exchange controls for transactions under the current account, including trade and service related foreign exchange transactions and payment of dividends. We may undertake current account foreign exchange transactions without prior approval from the State Administration of Foreign Exchange by producing commercial documents evidencing such transactions, provided that they are processed through Chinese banks licensed to engage in foreign exchange transactions. The PRC government has stated publicly that it intends to make the Renminbi freely convertible in the future. However, we cannot predict whether the PRC government will continue its existing foreign exchange policy and when the PRC government will allow free conversion of Renminbi to foreign currency.

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Foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures.

 

The exchange rate of the Renminbi against the US dollar and other foreign currencies fluctuates and is affected by, among other things, the changes in the PRC’s and international political and economic conditions. The PRC government has been gradually promoting the reform of exchange rate regime and enhance the flexibility of Renminbi exchange rate. On August 11, 2015, the PBOC decided to further improve the mechanism of RMB’s central parity rate against the US dollar. Any fluctuation of exchange rate of the Renminbi against US dollars and Hong Kong dollars may have an effect on our revenues and financial condition, and the value of, and any dividends payable on, our ADSs in foreign currency terms. We cannot assure you that the fluctuation of exchange rate of the Renminbi against US dollars or other foreign currencies would not have a material and adverse effect on our operation and financial condition in the future. Information relating to the exchange risk, exchange rate and hedging activities is presented in “Item 11. Qualitative and Quantitative Disclosures about Market risk—Foreign Exchange Rate Risk.”

 

E.TAXATION

 

PRC Taxation

 

The following discussion addresses the principal PRC tax consequences of investing in the H shares or ADSs.

 

Taxation of Dividends

 

Individual Investors

 

According to the PRC Individual Income Tax Law, as amended, dividends paid by Chinese companies are ordinarily subject to a Chinese withholding tax levied at a flat rate of 20%. For a foreign individual who has no domicile and does not stay in the territory of China or who has no domicile but has stayed in the territory of China for less than 183 days, the receipt of dividends from a company in China is normally subject to a withholding tax of 20% unless reduced or exempted by an applicable tax treaties.

 

Foreign Enterprises

 

In accordance with the new Enterprise Income Tax Law and its implementation rules that became effective on January 1, 2008 and amended on February 24, 2017 and December 29, 2018, dividends derived from the revenues accumulated from January 1, 2008 and are paid to non-resident enterprises, which are established under the laws of non-PRC jurisdictions and have no establishment or place of business in China or whose dividends from China do not relate to their establishment or place of business in China, are generally subject to a PRC withholding tax levied at a rate of 10% unless exempted or reduced pursuant to an applicable double-taxation treaty or other exemptions. Dividends paid by PRC companies to resident enterprises, including enterprises established under the laws of non-PRC jurisdictions but whose “de facto management body” is located in the PRC, are not subject to any PRC withholding tax, unless the investment income are derived from the publicly traded shares which have been held continuously by the resident enterprises for less than twelve months. Dividends, bonuses and other return based on equity investment that a non-resident enterprise with establishment or place of business in China receives from a resident enterprise and that have actual connection with such establishment or place of business are also exempted from any PRC withholding tax, except for investment income derived from the publicly traded shares which have been held continuously by the resident enterprises for less than 12 months. Chinese resident enterprises are required to withhold PRC enterprise income tax at the rate of 10% on dividends paid for 2009 and later years’ earnings payable to their respective H Shares holders that are “non-resident enterprises,” except for those holders whose dividend income is not subject to PRC enterprise income tax pursuant to PRC governmental approval.

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Tax Treaties

 

Holders resident in countries which have entered into avoidance of double taxation treaties or arrangements with the PRC may be entitled to a reduction or exemption of the withholding tax imposed on the payment of dividends.

 

Under a tax treaty between United States and China, China may tax dividends paid by Sinopec Corp. to eligible US Holders up to a maximum of 10% of the gross amount of such dividend. Under the tax treaty, an eligible US Holder is a person who, by reason of domicile, residence, place of head office, place of incorporation or any other criterion of similar nature is liable to tax in the United States, subject to a detailed “treaty shopping” provision.

 

Taxation of Capital Gains

 

In accordance with the new Enterprise Income Tax Law effective from January 1, 2008 and amended on January 8, 2011, February 24, 2017 and December 29, 2018, and its implementation rules, capital gains realized by foreign enterprises which are non-resident enterprises in China upon the sale of overseas-listed shares are generally subject to a PRC withholding tax levied at a rate of 10%, unless exempted or reduced pursuant to an applicable double-taxation treaty or other exemptions. The capital gains realized by resident enterprises, including enterprises established under the laws of non-PRC jurisdictions but whose “de facto management body” is located in the PRC, upon the sales of overseas-listed shares are subject to the PRC enterprise income tax.

 

PRC Stamp Tax Considerations

 

Under the Provisional Regulations of The People’s Republic of China Concerning Stamp Tax, which was effective on October 1, 1988 and amended in January 2011, PRC stamp tax should not be imposed on the transfer of shares of H Shares or ADSs of PRC publicly traded companies.

 

United States Federal Income Tax Considerations

 

The following is a summary of United States federal income tax considerations relating to the ownership and disposition of our H shares or ADSs by a US Holder (as defined below). This summary is based upon existing United States federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income taxation which may be important to particular investors in light of their individual investment circumstances, such as certain investors subject to special tax rules including: financial institutions, regulated investment companies, real estate investment trusts, broker-dealers, cooperatives, pension plans, insurance companies, traders in securities that elect mark-to-market treatment, partnerships and their partners, tax-exempt organizations (including private foundations), non-US Holders, holders who own (directly, indirectly, or constructively) 10% or more of our stock (by vote or value), investors that hold H shares or ADSs as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, holders who acquired their H shares or ADSs pursuant to any employee share option or otherwise as compensation, or US Holders that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any state, local, non-United States, alternative minimum tax, non-income tax (such as the U.S. federal estate and gift tax) or Medicare considerations. This summary assumes that our H shares or ADSs held by investors are “capital assets” (generally, property held for investment) under the United States Internal Revenue Code of 1986, as amended (Code). US Holders should consult their tax advisors regarding the United States federal, state, local, and non-United States income and other tax considerations relating to their ownership or disposition of our H shares or ADSs.

 

For purposes of this summary, a US Holder is a beneficial owner of H shares or ADSs that is, for United States federal income tax purposes:

 

an individual who is a citizen or resident of the United States;

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a corporation created in or organized under the laws of, the United States or any State thereof or the District of Columbia;

 

an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source; or

 

a trust (a) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (b) a trust that has otherwise elected to be treated as a United States person under the Code.

 

If a partnership (including any entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of H shares or ADSs, the tax treatment of a partner in such partnership will depend upon the status of the partner and the activities of the partnership. Partners in a partnership holding our H shares or ADSs should consult their tax advisors regarding the United States federal income tax considerations relating to the investment in our H shares or ADSs.

 

For United States federal income tax purposes, it is generally expected that US Holders of ADSs will be treated as the beneficial owners of the underlying H shares represented by the ADSs. The remainder of this discussion assumes that a holder of ADSs will be treated in this manner. Accordingly, deposits or withdrawals of H shares for ADSs will generally not be subject to United States federal income tax.

 

Passive Foreign Investment Company Considerations

 

A non-United States corporation, such as our company, will be a “passive foreign investment company” (PFIC), for United States federal income tax purposes for any taxable year, if either (a) 75% or more of its gross income for such year consists of certain types of “passive” income or (b) 50% or more of the value of our assets (generally based on the average quarterly value of our assets during the taxable year)  produce or are held for the production of passive income. For this purpose, cash and assets readily convertible into cash are categorized as passive assets and the Company’s goodwill and other unbooked intangibles associated with active business activities may generally be classified as active assets. We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in which we own, directly or indirectly, 25% or more (by value) of the stock.

 

We do not believe that we were classified as a PFIC for the taxable year ended December 31, 2020 and we do not expect to be classified as a PFIC for the current taxable year or for the foreseeable future. The determination of whether we will be or become a PFIC will depend, in part, upon the composition of our income and our assets (which are subject to change from year to year) and the market price of our H shares or ADSs (which we cannot control). Although we do not expect that our business plans will change in a manner that will affect our PFIC status, no assurance can be given in this regard. Because there are uncertainties in the application of the relevant rules and PFIC status is a fact-intensive determination made on an annual basis, no assurance can be given that we will not be classified as a PFIC for any taxable year.

 

The discussion below under “Dividends” and “Sale or Other Disposition” of H shares or ADSs assumes that we will not be classified as a PFIC for United States federal income tax purposes. See the discussion below under the heading “Passive Foreign Investment Company Rules” for a brief summary of the PFIC rules.

 

Dividends

 

The gross amount of any cash distributions (including the amount of any tax withheld) paid on our H shares or ADSs out of our current or accumulated earnings and profits, as determined under United States federal income tax principles, will be subject to tax as dividend income on the day actually or constructively received by a US Holder, in the case of H shares, or by the depositary bank, in the case of ADSs. Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distribution paid will generally be reported as a “dividend” for United States federal income tax purposes. A non-corporate recipient of dividend income will generally be subject to tax on dividend income from a “qualified foreign corporation” at a reduced capital gains rate rather than the marginal tax rates generally applicable to ordinary income provided that the holding period requirement is met.

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A non-U.S. corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. There is currently a tax treaty in effect between the United States and the People’s Republic of China (U.S.-PRC Treaty) which the Secretary of Treasury of the United States determined is satisfactory for these purposes and we believe that we are eligible for the benefits of such treaty. Additionally, our ADSs trade on the New York Stock Exchange, an established securities market in the United States. Although we presently believe that we are a qualified foreign corporation for purposes of the reduced tax rate, no assurance can be given that we will continue to be treated as a qualified foreign corporation in the future. US Holders should consult their tax advisors regarding the availability of the reduced tax rate on dividends under their particular circumstances. Dividends received on H shares or ADSs will not be eligible for the dividends received deduction allowed to corporations.

 

Dividends paid in non-United States currency will be includible in income in a United States dollar amount based on the exchange rate prevailing at the time of receipt of such dividends by the depositary, in the case of ADSs, or by the US Holder, in the case of H shares held directly by such US Holder, regardless of whether the non-United States currency is actually converted into United States dollars at that time. Gain or loss, if any, recognized on a subsequent sale, conversion or other disposition of the non-United States currency will generally be United States source income or loss.

 

Dividends received on H shares or ADSs will be treated, for United States foreign tax credit purposes, as foreign source income. A US Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any non-United States withholding taxes imposed on dividends received on H shares or ADSs. US Holders who do not elect to claim a foreign tax credit for foreign income tax withheld may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which the US Holder elects to do so for all creditable foreign income taxes. US Holders should consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.

 

Sale or Other Disposition of H shares or ADSs

 

A US Holder will recognize capital gain or loss upon the sale or other disposition of H shares or ADSs in an amount equal to the difference between the amount realized upon the disposition and the US Holder’s adjusted tax basis in such H shares or ADSs. Any capital gain or loss will be long-term if the H shares or ADSs have been held for more than one year and will generally be United States source gain or loss for United States foreign tax credit purposes. If any PRC tax were to be imposed on any gain from the disposition of H shares or ADSs, however, a US Holder that is eligible for the benefits of the U.S.- PRC Treaty may elect to treat the gain as non-United States source gain or loss. The deductibility of a capital loss may be subject to limitations. The rules governing the foreign tax credit are complex and their outcome depends in large part on the US Holder’s individual facts and circumstances. Accordingly, US Holders should consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.

 

US Holders that receive currency other than the United States dollar upon the sale or other disposition of H shares will realize an amount equal to the United States dollar value of the non-United States currency on the date of such sale or other disposition, or if the shares are traded on an established securities market, in the case of cash basis and electing accrual basis taxpayers, the settlement date. US Holders will recognize currency gain or loss if the United States dollar value of the currency received on the settlement date differs from the amount realized. US Holders will have a tax basis in the currency received equal to the United States dollar amount at the spot rate on the settlement date. Generally, any gain or loss realized by US Holders on a subsequent conversion or disposition of such currency will be United States source ordinary income or loss.

87

Passive Foreign Investment Company Rules

 

If we were to be classified as a PFIC in any taxable year, a special tax regime will apply to both (a) any “excess distribution” by us to a US Holder (generally, the US Holder’s ratable portion of distributions in any year which are greater than 125% of the average annual distribution received by such US Holder in the shorter of the three preceding years or the US Holder’s holding period for our H shares or ADSs) and (b) any gain realized on the sale or other disposition of the H shares or ADSs. Under this regime, any excess distribution and realized gain will be treated as ordinary income and will be subject to tax as if (a) the excess distribution or gain had been realized ratably over the US Holder’s holding period, (b) the amount deemed realized in each year had been subject to tax in each year of that holding period at the highest marginal rate for such year (other than income allocated to the current period or any taxable period before we became a PFIC, which would be subject to tax at the US Holder’s regular ordinary income rate for the current year and would not be subject to the interest charge discussed below), and (c) the interest charge generally applicable to underpayments of tax had been imposed on the taxes deemed to have been payable in those years. In addition, dividends made to a US Holder will not qualify for the lower rates of taxation applicable to long-term capital gains discussed above under “Dividends.”

 

If a “mark-to-market” election is available and a US Holder validly makes such an election, notwithstanding the foregoing, such a holder generally will be required to take into account the difference, if any, between the fair market value and its adjusted tax basis in H shares or ADSs at the end of each taxable year as ordinary income or ordinary loss (to the extent of any net mark-to-market gain previously included in income). In addition, any gain from a sale or other disposition of H shares or ADSs will be treated as ordinary income, and any loss will be treated as ordinary loss (to the extent of any net mark-to-market gain previously included in income).

 

Because a mark-to-market election technically cannot be made for any lower-tier PFICs that we may own, a US Holder may continue to be subject to the PFIC rules with respect to such US Holder’s indirect interest in any investments held by us that are treated as an equity interest in a PFIC for United States federal income tax purposes.

 

We do not intend to provide information necessary for US Holders to make qualified electing fund elections which, if available, would result in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs described above.

 

Each US Holder is urged to consult its tax advisor concerning the United States federal income tax consequences of holding and disposing H shares or ADSs if we are or become treated as a PFIC, including the possibility of making a mark-to-market election, the “deemed sale” and “deemed dividend” elections and the unavailability of the election to treat us as a qualified electing fund.

 

F.DIVIDENDS AND PAYING AGENTS

 

Not applicable.

 

G.STATEMENT BY EXPERTS

 

Not applicable.

 

H.DOCUMENTS ON DISPLAY

 

This annual report contains exhibits and schedules. Any statement in this annual report about any of our contracts or other documents is not necessarily complete. If the contract or document is filed or incorporated by reference as an exhibit to this annual report, the contract or document is deemed to modify the description contained in this annual report. You must review the exhibits themselves for a complete description of the contracts or documents.

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Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, Room 1024, NW, Washington, D.C. 20549; or at New York (address: 233 Broadway, New York, NY 10279) and Chicago (address: Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661). Copies of the above materials may also be obtained from the Public Information Department of SEC at 450 Fifth Street, NW, Washington DC 20549, charges as appropriate. You may also view the registration statement (including attachments and schedules) at the New York Stock Exchange at Wall Street, New York, NY 10005. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at www.sec.gov. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

 

I.SUBSIDIARY INFORMATION

 

Not applicable.

 

ITEM 11.QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our primary market risk exposures are to fluctuations in oil and gas prices, exchange rates and interest rates. Please also refer to Note 40 to the consolidated financial statements included elsewhere in this annual report for a detailed discussion of other market risks that we have exposure to.

 

Commodity Price Risk

 

We engage in oil and gas operations and is exposed to commodity price risk related to price volatility of crude oil, refined oil products and chemical products. The fluctuations in prices of crude oil, refined oil products and chemical products could have significant impact on us. We use derivative financial instruments, including commodity futures and swaps contracts, to manage a portion of such risk.

 

As of December 31, 2020, we had certain commodity contracts of crude oil, refined oil products and chemical products designated as qualified cash flow hedges and economic hedges. As of December 31, 2020, the fair value of such derivative hedging financial instruments is derivative financial assets of RMB 12,353 million (2019: RMB 788 million) and derivative financial liabilities of RMB 4,808 million (2019: RMB 2,728 million).

 

As of December 31, 2020, it is estimated that a general increase/decrease of USD 10 per barrel in basic price of derivative financial instruments, with all other variables held constant, would impact the fair value of derivative financial instruments, which would increase/decrease our net income for the year by approximately RMB 3,592 million (2019: increase/decrease RMB 3,134 million), and increase/decrease our other comprehensive income by approximately RMB 10,379 million (2019: decrease/increase RMB 4,289 million). This sensitivity analysis has been determined assuming that the change in prices had occurred at the balance sheet date and the change was applied to our derivative financial instruments at that date with exposure to commodity price risk. The analysis is performed on the same basis for 2019.

 

Foreign Exchange Rate Risk

 

The Renminbi is not a freely convertible currency. With the authorization from the PRC government, the PBOC announced that the PRC government reformed the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies on July 21, 2005. The PRC government has been gradually promoting the Renminbi exchange rate formation mechanism to enhance the flexibility of Renminbi exchange rate. On August 11, 2015, the PBOC decided to further improve the mechanism of RMB’s central parity rate against the US dollar. Actions taken by the PRC government could cause future exchange rates to vary significantly from current or historical exchange rates. Fluctuations in exchange rates may adversely affect the value, translated or converted into US dollars or Hong Kong dollars, of our net assets, earnings and any declared dividends. We cannot give any assurance that any future movements in the exchange rate of the Renminbi against the US dollar and other foreign currencies will not adversely affect our results of operations and financial condition.

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The following presents various market risk information regarding market-sensitive financial instruments that we held or issued as of December 31, 2019 and 2020. We conduct our business primarily in Renminbi, which is also our functional and reporting currency.

 

The following tables provide information regarding instruments that are sensitive to foreign exchange rates as of December 31, 2019 and 2020. For debt obligations, the table presents cash flows and related weighted average rates by expected maturity dates.

 

  As of December 31, 2020 
  Expected Maturity Date  Total
carrying
  Fair 
  2021  2022  2023  2024  2025  Thereafter  amount  Value 
  (RMB equivalent in millions, except interest rate) 
Assets                        
Cash and cash equivalent                                
In US Dollar  27,456   -   -   -   -   -   27,456   27,456 
In HK Dollar  1,410   -   -   -   -   -   1,410   1,410 
In Japanese Yen  38   -   -   -   -   -   38   38 
In Euro  402   -   -   -   -   -   402   402 
Others  2,406   -   -   -   -   -   2,406   2,406 
Time deposits with financial institutions                                
In US Dollar  8,413   -   -   -   -   -   8,413   8,413 
Liabilities                                
Debts in US Dollar                                
Fixed rate  643   13   1   8,140   1   3,247   12,045   12,742 
Average interest rate  1.56%  -   -   1.74%  -   1.42%        
Variable rate  2,679   5   5   5   5   1,412   4,111   4,111 
Average interest rate(1)  1.12%  -   -   -   -   1.56%        
Debts in HK Dollar                                
Fixed rate  -   -   -   -   -   -   -   - 
Average interest rate  -   -   -   -   -   -         
Variable rate  31   -   -   -   -   -   31   31 
Average interest rate(1)  4.35%  -   -   -   -   -         
Debts in Euro                                
Fixed rate  172   -   -   -   -   -   172   172 
Average interest rate  0.1%  -   -   -   -   -         
Variable rate  -   -   -   -   -   -   -   - 
Average interest rate(1)  -   -   -   -   -   -         

 

 
(1)The average interest rates for variable rate debts are calculated based on the rates reported as of December 31, 2020.

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  As of December 31, 2019 
  Expected Maturity Date  Total
carrying
  Fair 
  2020  2021  2022  2023  2024  Thereafter  amount  Value 
  (RMB equivalent in millions, except interest rate) 
Assets                        
Cash and cash equivalent                                
In US Dollar  15,962   -   -   -   -   -   15,962   15,962 
In HK Dollar  28   -   -   -   -   -   28   28 
In Japanese Yen  30   -   -   -   -   -   30   30 
In Euro  114   -   -   -   -   -   114   114 
Others  96   -   -   -   -   -   96   96 
Time deposits with financial institutions                                
In US Dollar  15,074   -   -   -   -   -   15,074   15,074 
Liabilities                                
Debts in US Dollar                                
Fixed rate  930   31   18   8,700   6   3,504   13,189   13,493 
Average interest rate  2.47%  1.39%  1.27%  2.69%  0.74%  1.40%        
Variable rate  1,421   -   -   -   -   -   1,421   1,421 
Average interest rate(1)  3.24%  -   -   -   -   -         
Debts in HK Dollar                                
Fixed rate  469   -   -   -   -   -   469   469 
Average interest rate  3.84%  -   -   -   -   -         
Variable rate  26   -   -   -   -   -   26   26 
Average interest rate(1)  4.35%  -   -   -   -   -         
Debts in Euro                                
Fixed rate  25   -   -   -   -   -   25   25 
Average interest rate  0.8%  -   -   -   -   -         
Variable rate  -   -   -   -   -   -   -   - 
Average interest rate(1)  -   -   -   -   -   -         

 

 
(1)The average interest rates for variable rate debts are calculated based on the rates reported as of December 31, 2019.

 

Interest Rate Risk

 

We are exposed to interest rate risk resulting from fluctuations in interest rates on our short-term and long-term debts. Upward fluctuations in interest rates increase the cost of new debt and the interest cost of outstanding floating rate borrowings.

 

Our debts consist of fixed and variable rate debt obligations with original maturities ranging from one to thirty years. Fluctuations in interest rates can lead to significant fluctuations in the fair values of our debt obligations.

91

The following tables present principal cash flows and related weighted average interest rates by expected maturity dates of our interest rate sensitive financial instruments as of December 31, 2019 and 2020.

 

  As of December 31, 2020 
  Expected Maturity Date  Total    
  2021  2022  2023  2024  2025  There-
after
  carrying
amount(2)
  Fair
value
 
  (RMB equivalent in millions, except interest rate) 
Assets                        
Cash and cash equivalent                                
In RMB  55,847   -   -   -   -   -   55,847   55,847 
In US Dollar  27,456   -   -   -   -   -   27,456   27,456 
In HK Dollar  1,410   -   -   -   -   -   1,410   1,410 
In Japanese Yen  38   -   -   -   -   -   38   38 
In Euro  402   -   -   -   -   -   402   402 
Others  2,406   -   -   -   -   -   2,406   2,406 
Time deposits with financial institutions                                
In RMB  92,085   -   -   -   -   -   92,085   92,085 
In US Dollar  8,413   -   -   -   -   -   8,413   8,413 
Liabilities                                
Debts in RMB  11,882   7,517   32,160   3,508   12,170   679   67,916   63,567 
Fixed rate  2.00%  2.10%  1.39%  1.08%  2.24%  0.59%        
Average interest rate  13,547   3,065   7,225   1,897   2,502   337   28,573   28,573 
Variable rate  2.94%  3.03%  2.81%  3.32%  4.32%  4.75%        
Average interest rate(1)                                
Debts in US Dollar  643   13   1   8,140   1   3,247   12,045   12,742 
Fixed rate  1.56%  -   -   1.74%  -   1.42%        
Average interest rate  2,679   5   5   5   5   1,412   4,111   4,111 
Variable rate  1.12%  -   -   -   -   1.56%        
Average interest rate(1)                                
Debts in HK Dollar  -   -   -   -   -   -   -   - 
Fixed rate  -   -   -   -   -   -         
Average interest rate  -   -   -   -   -   -   -   - 
Variable rate  31   -   -   -   -   -   31   31 
Average interest rate(1)  4.35%                            
Debts in Euro  172   -   -   -   -   -   172   172 
Fixed rate  0.1%  -   -   -   -   -         
Average interest rate  -   -   -   -   -   -   -   - 
Variable rate  -   -   -   -   -   -         

 

 
(1)The average interest rates for variable rate debts are calculated based on the rates reported as of December 31, 2020.

 

(2)Carrying amounts are used for loans from Sinopec Group Company and its affiliates as it is not practicable to estimate their fair values because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive.

92

  As of December 31, 2019 
  Expected Maturity Date  Total    
  2020  2021  2022  2023  2024  There-
after
  carrying
amount(2)
  Fair
value
 
  (RMB equivalent in millions, except interest rate) 
Assets                        
Cash and cash equivalent                                
In RMB  44,208   -   -   -   -   -   44,208   44,208 
In US Dollar  15,962   -   -   -   -   -   15,962   15,962 
In HK Dollar  28   -   -   -   -   -   28   28 
In Japanese Yen  30   -   -   -   -   -   30   30 
In Euro  114   -   -   -   -   -   114   114 
Others  96   -   -   -   -   -   96   96 
Time deposits with financial institutions                                
In RMB  52,540   -   -   -   -   -   52,540   52,540 
In US Dollar  15,074   -   -   -   -   -   15,074   15,074 
Liabilities                                
Debts in RMB                                
Fixed rate  59,462   715   7,714   2,587   3,544   7,998   82,020   81,037 
Average interest rate  1.64%  1.40%  2.02%  1.58%  1.50%  3.93%        
Variable rate  21,476   4,349   2,078   1,722   1,463   14,406   45,494   45,494 
Average interest rate(1)  3.05%  3.22%  3.71%  4.07%  3.96%  4.46%        
Debts in US Dollar                                
Fixed rate  930   31   18   8,700   6   3,504   13,189   13,493 
Average interest rate  2.47%  1.39%  1.27%  2.69%  0.74%  1.40%        
Variable rate  1,421   -   -   -   -   -   1,421   1,421 
Average interest rate(1)  3.24%  -   -   -   -   -         
Debts in HK Dollar                                
Fixed rate  469   -   -   -   -   -   469   469 
Average interest rate  3.84%  -   -   -   -   -         
Variable rate  26   -   -   -   -   -   26   26 
Average interest rate(1)  4.35%  -   -   -   -   -         
Debts in Euro                                
Fixed rate  25   -   -   -   -   -   25   25 
Average interest rate  0.8%  -   -   -   -   -         
Variable rate  -   -   -   -   -   -   -   - 
Average interest rate(1)  -   -   -   -   -   -         

 

 
(1)The average interest rates for variable rate debts are calculated based on the rates reported as of December 31, 2019.

 

(2)Carrying amounts are used for loans from Sinopec Group Company and its affiliates as it is not practicable to estimate their fair values because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive.

 

ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

A.DEBT SECURITIES

 

Not applicable.

 

B.WARRANTS AND RIGHTS

 

Not applicable.

 

C.OTHER SECURITIES

 

Not applicable.

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D.AMERICAN DEPOSITARY SHARES

 

Depositary Fees and Charges

 

Under the terms of the Deposit Agreement for China Petroleum & Chemical Corporation’s American Depositary Shares (ADSs), an ADS holder may have to pay the following services fees to the Depositary:

 

Services Fees
Issuance of ADSs US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) issued
Cancellation of ADSs US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) canceled
Distribution of cash dividends or other cash distributions US$2.00 (or less) per 100 ADSs (or portion of 100 ADSs) held
Distribution of ADSs pursuant to stock dividends, free stock distributions or exercises of rights US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) held
Distribution of securities other than ADSs or rights to purchase additional ADSs US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) held

 

An ADS holder will also be responsible to pay certain fees and expenses incurred by the Depositary and certain taxes and governmental charges such as:

 

Taxes (including relevant interests and fines) and other governmental charges;

 

such registration fees as may from time to time be in effect, for the registration of deposited securities in the register of members, or for the registration of transfers of deposited securities to the name of the Depositary or its nominee or the Custodian or its nominee on the making of deposits or withdrawals;

 

such cable, telex and facsimile transmission expenses as are expressly provided in the Deposit Agreement;

 

such expenses as are incurred by the Depositary in the conversion of foreign currency;

 

such expenses as are incurred with the compliance with the foreign currency control, ADSs and other deposited securities related laws, regulations and rules; and

 

any other charge payable by the Depositary, any of the Depositary’s agents, including the Custodian, Depositary, or the agents of the Custodian or Depositary, in connection with the servicing of deposited securities.

 

Depositary Payments for the Year 2020

 

In 2020, Citibank, N.A., the Depositary for our ADR program, provided reimbursement net of applicable withholding taxes for our expenses related to the listing and investor’ relations activities as follows:

 

reimbursement of application fees: US$ 91,472.7

 

reimbursement of data infrastructure fees: US$ 5,055.5

 

reimbursement of proxy procedure fees: US$ 116,768.6

 

reimbursement of investor relations expenses (including expenses related to non-deal road show, investor meeting and investor relations agency): US$ 209,605.6

 

the accounting committee and accounting standard committee of public company: US$ 48,765.3

 

Total: US$ 471,667.5

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ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

None.

 

ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

A.MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITIES HOLDERS

 

None.

 

B.USE OF PROCEEDS

 

Not applicable.

 

ITEM 15.CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure the information required to be disclosed in reports filed by us under the U.S. Securities Exchange Act of 1934 (Exchange Act), as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2020 (Evaluation Date), the end of the fiscal year covered by this annual report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) of the Securities Exchange Act of 1934). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting based upon the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission as of December 31, 2020. Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2020 based on these criteria.

95

PricewaterhouseCoopers Zhong Tian LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this annual report on Form 20-F and, as part of the audit, has issued a report, included herein, on the effectiveness of our internal control over financial reporting.

 

Changes in Internal Control over Financial Reporting

 

During the year ended December 31, 2020, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 16.RESERVED

 

[Reserved]

 

ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT

 

The board of directors has determined that Mr. Ng, Kar Ling Johnny qualifies as an audit committee financial expert in accordance with the terms of Item 16A. of Form 20-F. Mr. Ng was appointed as an independent non-executive director and a manager of the audit committee of the seventh board of our company in 2018. For Mr. Ng’s biographical information, see “Item 6 Directors, Senior Management and Employees—A. Directors, Supervisors and Senior Management.”

 

ITEM 16B.CODE OF ETHICS

 

Our controlling shareholder, Sinopec Group Company, has adopted a Staff Code to provide disciplines and requirements for its staff’s conducts, including legal and ethical matters as well as the sensitivities involved in reporting illegal and unethical matters. The Staff Code covers such areas as HSE, conflict of interests, anti-corruption, protection and proper use of our assets and properties as well as reporting requirements. The Staff Code also applies to all directors, officers and employees of each subsidiary of Sinopec Group Company, including us. We have provided all our directors and senior officers with a copy of the Staff Code and require them to comply with it in order to ensure our operations are proper and lawful. We have posted the Staff Code on our website, http://www.sinopec.com/listco/en/Resource/Pdf/ygsz2014b.pdf.

 

ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following table sets forth the aggregate audit fees, audit-related fees, tax fees of our principal accountants and all other fees billed for products and services provided by our principal accountants other than the audit fees, audit-related fees and tax fees for each of the fiscal years 2019 and 2020.

 

 Audit Fees Audit-Related Fees Tax Fees Other Fees
2019RMB 69.77 million   RMB 5.71 million
2020RMB 72.96 million   RMB 7.67 million

 

We are allowed to engage our principal accountants to render audit or non-audit services, only after the engagement is approved by our audit committee.

96

ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

Not applicable.

 

ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

None.

 

ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

On March 26, 2021, our board of directors resolved to propose change in our independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, after the completion of the audit of the December 31, 2020 consolidated financial statements and the audit of the effectiveness of internal control over financial reporting as of December 31, 2020. According to the relevant regulations issued by the Ministry of Finance of the People’s Republic of China and the State-owned Assets Supervision and Administration Commission of the State Council of the People’s Republic of China (the “SASAC”), there are restrictions in respect of the number of years of audit services that an accounting firm can continuously provide to the Company (the “SASAC Rotation Requirements”). PricewaterhouseCoopers Zhong Tian LLP will retire as the external auditor of the Company due to the SASAC Rotation Requirements. The decision is subject to the approval by the shareholders of the Company at the annual general meeting for the year 2020.

 

During the two most recent fiscal years and through April 20, 2021, there have been no disagreements (as defined in Item 16F(a)(1)(iv) of Form 20-F and related instructions to Item 16-F of Form 20-F) with PricewaterhouseCoopers Zhong Tian LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers Zhong Tian LLP would have caused it to make reference thereto in their report on the consolidated financial statements for such years.

 

During the two most recent fiscal years and through April 20, 2021, there have been no “reportable events” (hereinafter defined) requiring disclosure pursuant to Item 16F(a)(1)(v) of Form 20-F. As used herein, the term “reportable event” means any of the items listed in paragraphs (a)(1)(v)(A)-(D) of Item 16F of Form 20-F.

 

The audit reports of PricewaterhouseCoopers Zhong Tian LLP on the consolidated financial statements of China Petroleum & Chemical Corporation as of and for the years ended December 31, 2019 and 2020 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

 

We provided a copy of this disclosure to PricewaterhouseCoopers Zhong Tian LLP and requested that PricewaterhouseCoopers Zhong Tian LLP furnish a letter addressed to the SEC stating whether it agrees with the above statements, and if not, stating the respects in which it does not agree. A copy of the letter from PricewaterhouseCoopers Zhong Tian LLP addressed to the SEC, dated April 20, 2021, is filed as Exhibit 15.1.

 

On March 26, 2021, our board of directors resolved, as recommended by our audit committee, to propose to appoint KPMG Huazhen LLP as our independent registered public accounting firm, which subject to the approval by the shareholders of the Company at the annual general meeting for the year 2020. During the two most recent fiscal years and through April 20, 2021, neither we nor anyone on our behalf consulted KPMG Huazhen LLP regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the registrant’s financial statements, or (ii) any matter that was either the subject of a “disagreement” (as defined in Item 16F(a)(1)(iv) of Form 20-F and related instructions to Item 16-F of Form 20-F) or a “reportable event” (as described in Item 16F(a)(1)(v) of Form 20-F).  Also, during the two most recent fiscal years and through April 20, 2021, we have not obtained any written report or oral advice that KPMG Huazhen LLP concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue.

97

ITEM 16G.COMPARISON OF NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE RULES AND CHINA CORPORATE GOVERNANCE RULES FOR LISTED COMPANIES

 

Under the amended Corporate Governance Rules of the NYSE, foreign issuers (including us) listed on the NYSE are required to disclose a summary of the significant differences between their domestic corporate governance rules and NYSE corporate governance rules that would apply to a U.S. domestic issuer. A summary of such differences is listed below:

 

NYSE corporate governance rules Corporate governance rules applicable to the domestically listed
companies in China and the Company’s governance practices
Corporate governance guidelines  
   
Listed companies must adopt and disclose corporate governance guidelines, involving director responsibilities, director compensation, director continuing education, annual performance evaluation of the board of directors, etc. PRC corporate governance rules promulgated by China Securities Regulatory Commission and revised in September, 2018 prescribe detailed guidelines on directors of the listed companies, including director selection, duties and responsibilities of directors, director performance evaluation, the structure of the board of directors and rules of procedure for the board of directors, etc.
   
  The Company has complied with the above mentioned laws or rules.
   
Director Independence  
   
A listed company must have a majority of independent directors on its board of directors. No director qualifies as “independent” unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company). In addition, a director must meet certain standards to be deemed independent. For example, a director is not independent if the director is, or has been within the last three years, an employee of the listed company, or an immediate family member is, or has been within the last three years, an executive officer of the listed company, or if the director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than US$120,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service). 

It is required in China that any listed company must establish an independent director system and set forth specific requirements for the qualification of independent directors. For example, an independent director shall not hold any position other than board committee member of the listed company, shall not be related to the listed company and its key shareholders in a way which may hinder his/her independent and objective judgement, and shall not be influenced by the main shareholders or the controlling persons of the listed company, or by any other entities or persons with whom the listed company has a significant relationship.

 

The Company has complied with the relevant Chinese corporate governance rules and has implemented internal rules governing the independence and responsibilities of independent directors. The Company determines the independence of independent directors every year.

 

   
To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management. No similar requirements.

98

Nominating/Corporate Governance Committee  
   
Listed companies must have a nominating/corporate governance committee composed entirely of independent directors. It is stipulated in China that the board of directors of a listed company may, based on actual needs, establish a nominating committee composed entirely of directors, of which the independent directors shall be the majority and the convener.

Up to now, the Company has set up a nominating committee, and made charters regarding its responsibilities and procedure.
   
The nominating/corporate governance committee must have a written charter that addresses the committee’s purposes and responsibilities which, at minimum, must be to: search for eligible people for the board of directors, select and nominate directors for the next session of the shareholders’ annual meeting, study and propose corporate governance guidelines, supervise the evaluation of the board of directors and management, and evaluate the performance of the committee every year. Relevant responsibilities of the nominating/corporate governance committee are similar to those stipulated by the NYSE rules, but the main responsibilities do not include the research and recommendation of corporate governance guidelines, the supervision of the evaluation of the board of directors and management, or the annual evaluation of the committee.
   
Compensation Committee  
   
Listed companies must have a compensation committee composed entirely of independent directors. It is stipulated in China that the board of directors of a listed company may, based on actual needs, have a compensation and assessment committee composed entirely of directors, of whom the independent directors are the majority and act as the convener.
   
The compensation committee must have a written charter that addresses, at least, the following purposes and responsibilities: It is stipulated in China that the responsibilities of the compensation and assessment committee are:
 (1) review and approve the corporate goals associated with CEO’s compensation, evaluate the performance of the CEO in fulfilling these goals, and, either as a committee or together with the other independent directors (as directed by the board), based on such evaluation, determine and approve the CEO’s compensation level;

(2) make recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval;

(3) produce a committee report on executive compensation as required by the SEC to be included in the annual proxy statement or annual report filed with the SEC.
 

 

(1) to review evaluation standards on the performance of directors and the senior management, make assessment and submit suggestion to the board of directors;

(2) to review compensation policies on the directors and the senior management.

But the committee is not required to produce a report on the executive compensation or make an annual performance evaluation of the committee.

The board of directors of the Company has established a compensation and performance evaluation committee composed mainly of independent directors who act as the convener, and the committee has established a written charter complying with the domestic corporate governance rules.

99

The charter must also include the requirement for an annual performance evaluation of the compensation committee.

The compensation committee may, in its sole discretion, retain or consult a compensation consultant, independent legal counsel or other advisor. The compensation committee shall be directly responsible for the appointment, compensation and oversight of the work of such advisor. A listed company must provide for appropriate funding for payment of reasonable compensation to such advisor. The compensation committee may select such advisor to the compensation committee only after taking into consideration all factors relevant to that person’s independence from management.
  
   
Audit Committee  
   
Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 of Securities Exchange Act of 1934 (Exchange Act). It must have a minimum of three members, and all audit committee members must satisfy the requirements for independence set forth in Section 303A.02 of NYSE Corporate Governance Rules as well as the requirements of Rule 10A-3(b)(1) of the Exchange Act. It is stipulated in China that the board of directors of a listed company shall establish an audit committee composed entirely of competent directors with expertise and business experience, of which the independent directors are the majority and act as the convener, and the convener of the audit committee shall be an accounting professional.
   
The audit committee must have a written charter that specifies the purpose of the audit committee is, at minimum, to assist the board oversight of the integrity of financial statements, the Company’s compliance with legal and regulatory requirements, qualifications and independence of independent auditors and the performance of the listed company’s internal audit function and independent auditors. The responsibilities of the audit committee are similar to those stipulated by the NYSE rules. The board of directors shall evaluate the independence and performance of members of the audit committee periodically, and may replace any member who is no longer suitable for the position. The Company shall disclose the performance of the audit committee in its annual report, including meetings convened by the audit committee.
In addition, the written charter must require the audit committee to prepare an audit committee report as required by the SEC to be included in the listed company’s annual proxy statement as well as an annual performance evaluation of the audit committee.

The written charter must also specify the duties and responsibilities of the audit committee, which, at a minimum, must include those set out in Rule 10A-3(b)(2), (3), (4) and (5) of the Exchange Act, as well as other duties and responsibilities such as to obtain and review a report by the independent auditor at least annually, meet to review and discuss the listed company’s annual audited financial statements and quarterly financial statements with management and independent auditor.
 The Board of Directors of the Company has established an audit committee that satisfies relevant domestic and overseas requirements and the audit committee has a written charter.

100

The audit committee must have a written charter that specifies the purpose of the audit committee is, at minimum, to assist the board oversight of the integrity of financial statements, the Company’s compliance with legal and regulatory requirements, qualifications and independence of independent auditors and the performance of the listed company’s internal audit function and independent auditors.

In addition, the written charter must require the audit committee to prepare an audit committee report as required by the SEC to be included in the listed company’s annual proxy statement as well as an annual performance evaluation of the audit committee.

The written charter must also specify the duties and responsibilities of the audit committee, which, at a minimum, must include those set out in Rule 10A-3(b)(2), (3), (4) and (5) of the Exchange Act, as well as other duties and responsibilities such as to obtain and review a report by the independent auditor at least annually, meet to review and discuss the listed company’s annual audited financial statements and quarterly financial statements with management and independent auditor.
 The responsibilities of the audit committee are similar to those stipulated by the NYSE rules. The board of directors shall evaluate the independence and performance of members of the audit committee periodically, and may replace any member who is no longer suitable for the position. The Company shall disclose the performance of the audit committee in its annual report, including meetings convened by the audit committee.

The Board of Directors of the Company has established an audit committee that satisfies relevant domestic and overseas requirements and the audit committee has a written charter.
   
Each listed company must have an internal audit department. China has a similar regulatory provision, and the Company has an internal audit department.
   
Shareholder approval of equity compensation plan  
   
Shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, except for, among others, plans that are made available to shareholders generally, such as typical dividend reinvestment plan and certain awards and plans in the context of mergers and acquisitions. It is stipulated in China that the compensation of the directors and supervisors shall be approved by the shareholders’ meeting. The compensation plan of executive officers shall be approved by the board of directors, illustrate to the shareholders’ meeting and fully disclosed to the public.

The Company has complied with the above mentioned laws or rules.
   
Code of ethics for directors, officers and employees  
   
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. Each code of business conduct and ethics must require that any waiver of the code for executive officers or directors may be made only by the board or a board committee. China does not have such requirement for a code for ethics. But our controlling shareholder, Sinopec Group Company, adopted a Staff Code in 2014 to provide disciplines and requirements for its staff’s conducts, including legal and ethical matters as well as the sensitivities involved in reporting illegal and unethical matters. The Staff Code covers such areas as HSE, conflict of interests, anti-corruption, protection and proper use of our assets and properties as well as reporting requirements. The Staff Code also applies to all directors, officers and employees of each subsidiary of Sinopec Group Company, including us. In addition, the directors and officers must perform their legal responsibilities in accordance with the Company Law of PRC, relative requirements of CSRS and Mandatory Provisions to the Charter of Companies Listed Overseas. Meanwhile, the Company establishes The Model Code of Securities Transactions by Corporate Employees and The Rules of The Company’s Shares Transactions by Corporate Directors, Superiors and Senior Managements to regulate the above mentioned people when transacting related securities.

101

Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the listed company of NYSE corporate governance listing standards and he or she must promptly notify the NYSE in writing of any non-compliance with any applicable provisions of Section 303A. No similar requirements.
   
Board of Supervisors  
   
Listed companies are not required to have a board of supervisors. PRC corporate governance rules promulgated by China Securities Regulatory Commission prescribe that the board of supervisors of listed companies is responsible for supervising the compliance of the Company’s financial affairs and the directors, executive officers of the Company, and safeguarding the legitimate rights and interests of the Company and the shareholders. The rules also provided detailed requirements in respect of the selection of supervisors of listed companies, the duties and composition of the board of supervisors and adoptions of its meeting procedures, etc.

The Company has complied with the above rules.

 

ITEM 16H.MINE SAFETY DISCLOSURE

 

Not applicable.

 

ITEM 17.FINANCIAL STATEMENTS

 

Not applicable.

 

ITEM 18.FINANCIAL STATEMENTS

 

See consolidated financial statements included in this annual report following Item 19.

102

 

ITEM 19.EXHIBITS

 

1Articles of Association of the Registrant, amended and adopted by the shareholders’ meeting on May 9, 2019, incorporated by reference to Exhibit 1 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 10, 2020 (File Number: 001-15138).
  
2.1Description of rights of each class of securities registered under Section 12 of the Securities Exchange Act of 1934, incorporated by reference to Exhibit 2.1 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 10, 2020 (File Number: 001-15138).
  
4.1Forms of Director Service Contracts adopted by the Company on May 11, 2012 (English translation), incorporated by reference to Exhibit 4.1 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 11, 2013 (File Number: 001-15138).
  
4.2Forms of Supervisor Service Contracts adopted by the Company on May 11, 2012 (English translation), incorporated by reference to Exhibit 4.2 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 11, 2013 (File Number: 001-15138).
  
4.3Agreement for Mutual Provision of Products and Ancillary Services between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.3 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
  
4.4Agreement for Provision of Cultural, Educational, Hygiene and Community Services between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.4 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
  
4.5Trademark License Agreement between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.6 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
  
4.6Patents and Proprietary Technology License Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.7 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
  
4.7Computer Software License Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.8 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
  
4.8Land Use Rights Leasing Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.10 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
  
4.9Property Leasing Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.11 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
  
4.10Loan Transfer and Adjustment Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 16, 2000 (including English translation), incorporated by reference to Exhibit 10.18 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).

103

4.11Agreement on Adjustment to Related Party Transactions between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 11, 2001 (English translation), incorporated by reference to Exhibit 4.15 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007 (File Number: 001-15138).
 
4.12Land Use Right Leasing Agreement between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 22, 2003 (English translation), incorporated by reference to Exhibit 4.16 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007 (File Number: 001-15138).
  
4.132004 Agreement on Adjustment to Related Party Transactions between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated October 31, 2004 (English translation), incorporated by reference to Exhibit 4.17 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007 (File Number: 001-15138).
  
4.14Memorandum on Adjustment of Rent of Land Use Rights between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated March 31, 2006 (English translation), incorporated by reference to Exhibit 4.18 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007 (File Number: 001-15138).
  
4.14.1Memorandum on Adjustment of Rent of Land Use Rights between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 22, 2008 (English Translation), incorporated by reference to Exhibit 4.20 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on May 20, 2009 (File Number: 001-15138).
  
4.14.2Land Use Rights Leasing Agreement Third Amendment Memo between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 24, 2012 (English Translation), incorporated by reference to Exhibit 4.20.1 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 11, 2013 (File Number: 001-15138).
  
4.15Supplemental Agreement on Related Party Transactions between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated March 31, 2006 (English translation), incorporated by reference to Exhibit 4.19 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007 (File Number: 001-15138).
  
4.15.1Continuing Connected Transactions Second Supplemental Agreement between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 21, 2009 (English translation), incorporated by reference to Exhibit 4.21 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 30, 2010 (File Number: 001-15138).
  
4.15.2Continuing Connected Transactions Third Supplemental Agreement between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 24, 2012 (English translation), incorporated by reference to Exhibit 4.19.2 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 11, 2013 (File Number: 001-15138).
  
4.15.3Continuing Connected Transactions Fourth Supplemental Agreement Between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 26, 2015 (English translation), incorporated by reference to Exhibit 4.22 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 20, 2016 (File Number: 001-15138).

104

4.15.4Continuing Connected Transactions Fifth Supplemental Agreement Between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 24, 2018 (English translation).
  
4.16Non-Compete Agreement Between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 and its related Undertakings (English translation), incorporated by reference to Exhibit 4.21 to our Annual Report on Form 20-F/A filed with the Securities and Exchange Commission on September 26, 2013 (File Number: 001-15138).
  
4.16.1Undertakings from China Petrochemical Corporation Regarding Further Avoiding Competition with China Petroleum & Chemical Corporation dated April 28, 2014 (English translation), incorporated by reference to Exhibit 4.21.1 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 10, 2015 (File Number: 001-15138).
  
4.17*Agreement on Additional Issuance of Equity to Purchase Relevant Oil and Gas Pipeline Assets, dated July 23, 2020, between China Oil & Gas Pipeline Network Corporation and China Petroleum & Chemical Corporation (English Translation)
  
4.17.1*Agreement on Additional Issuance of Equity and Cash Payment to Purchase Relevant Oil and Gas Pipeline Assets, dated July 23, 2020, between China Oil & Gas Pipeline Network Corporation and Sinopec Natural Gas Limited Company (English Translation)
  
4.17.2*Agreement on Cash Payment to Purchase Relevant Oil and Gas Pipeline Assets, dated July 23, 2020, between China Oil & Gas Pipeline Network Corporation and Sinopec Marketing Co., Limited (English Translation)
  
4.17.3*Agreement on Cash Payment to Purchase 100% Equity in Sinopec Yu Ji Company, dated July 21, 2020, between China Oil & Gas Pipeline Network Corporation and Sinomart KTS Development Limited (English Translation)
  
4.18*Framework Agreement regarding Production and Operation of Oil and Gas Pipeline Facilitates between China Petroleum & Chemical Corporation and China Oil & Gas Pipeline Network Corporation (English Translation)
  
8.1*A list of the Registrant’s subsidiaries.
  
12.1*Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
  
12.2*Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
  
12.3*Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
  
13**Certification of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended.
  
15.1*Letter from PricewaterhouseCoopers Zhong Tian LLP regarding Item 16F of this annual report.
  
101.INS*XBRL Instance Document
  
101.SCH*XBRL Taxonomy Extension Schema Document
  
101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
  
101.LAB*XBRL Taxonomy Extension Label Linkbase Document
  
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document

 

 
*Filed with this annual report on Form 20-F.

**Furnished with this annual report on Form 20-F.

105

SIGNATURE

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

 China Petroleum & Chemical Corporation
  
   
 By:/s/ Huang Wensheng
  Name:Huang Wensheng
  Title:Vice President and Secretary to the Board of Directors

Date:  April 20, 2021

 

106

 

CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 Page
Report of independent registered public accounting firmF-2
Consolidated statement of incomeF-5
Consolidated statement of comprehensive incomeF-6
Consolidated balance sheetF-7
Consolidated statement of changes in equityF-8
Consolidated statement of cash flowsF-11
Notes to consolidated financial statementsF-13

 

F-1

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of China Petroleum & Chemical Corporation

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of China Petroleum & Chemical Corporation and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

 

Change in Accounting Principle

 

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019. 

 

Basis for Opinions

 

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

F-2

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Critical Audit Matters

 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Recoverability of the carrying amount of property, plant and equipment relating to oil and gas producing activities

 

As described in Note 8, Notes 18 and 41 to the consolidated financial statements, the Company’s consolidated property, plant and equipment balance was RMB 589,247 million at December 31, 2020. Management identified possible indications of impairment from external and internal sources of information, and considered low crude oil prices gave rise to possible indication that the carrying amount of property, plant and equipment relating to oil and gas producing activities as at December 31, 2020 might be impaired. Management conducted impairment tests and adopted value in use as the respective recoverable amounts of property, plant and equipment relating to oil and gas producing activities, which involved key estimations or assumptions including future crude oil prices, future production profiles, future cost profiles and discount rates.

 

F-3

The principal considerations for our determination that performing procedures relating to recoverability of the carrying amount of property, plant and equipment relating to oil and gas producing activities is a critical audit matter are there were significant judgements by management in determining their respective recoverable amounts of property, plant and equipment using value in use. This in turn led to a high degree of auditor judgment, subjectivity and audit effort in evaluating management’s significant assumptions including future crude oil prices, future production profiles, future cost profiles and discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included evaluating and testing the effectiveness of key controls in respect of the preparation of the discounted cash flow projections of property, plant and equipment relating to oil and gas producing activities. These procedures also included, among others, testing management’s process for determining the recoverable amount of property, plant and equipment relating to oil and gas producing activities, evaluating the appropriateness of the methodology adopted in the discounted cash flow projections, testing the completeness, accuracy, and relevance of underlying data used in the discounted cash flow projections, evaluating the reasonableness of key estimates and significant assumptions used by management in developing the discounted cash flow projections including future crude oil prices, future production profiles, future cost profiles and discount rates, and testing the mathematical accuracy of the discounted cash flow projections. Evaluating the significant assumptions relating to the key estimates in discounted cash flow projections also involved (i) comparing the estimates of future crude oil prices adopted by the management against a range of published crude oil price forecasts; (ii) comparing the estimates of future production profiles against the oil and gas reserve estimation report approved by the management;; (iii) evaluating the competence, capability and objectivity of the management’s experts engaged in estimating the oil and gas reserves; (iv) evaluating key estimates or assumptions used in the reserve estimation against historical data, management plans and/or relevant external data in the market; (v) comparing the future cost profiles against historical costs and relevant budgets; (vi) using professionals with specialized skill and knowledge to assist in the evaluation of the appropriateness of discount rates; and (vii) evaluating the sensitivity analysis prepared by the management and assessing the potential impacts of a range of possible outcomes.

 

/s/ PricewaterhouseCoopers Zhong Tian LLP 

PricewaterhouseCoopers Zhong Tian LLP

Shanghai, the People’s Republic of China

March 26, 2021

 

We have served as the Company’s auditor since 2013.

 

F-4

CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF INCOME

 FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020

(Amounts in million, except per share data)

 

     Years ended December 31, 
  Notes  2018  2019  2020 
     RMB  RMB  RMB 
Operating revenues               
Sales of goods 3   2,822,375   2,899,682   2,049,456 
Other operating revenues 4   59,702   60,117   56,528 
      2,882,077   2,959,799   2,105,984 
                
Operating expenses               
Purchased crude oil, products and operating supplies and expenses     (2,279,844)  (2,370,699)  (1,594,130)
Selling, general and administrative expenses 5   (65,770)  (55,438)  (55,315)
Depreciation, depletion and amortization     (110,344)  (109,172)  (106,965)
Exploration expenses, including dry holes     (10,744)  (10,510)  (9,716)
Personnel expenses 6   (78,967)  (82,743)  (86,006)
Taxes other than income tax 7   (248,587)  (244,517)  (234,947)
Other operating expense, net 8   (5,257)  (346)  (5,712)
Total operating expenses     (2,799,513)  (2,873,425)  (2,092,791)
Operating income     82,564   86,374   13,193 
                
Finance costs               
Interest expense 9   (7,396)  (17,088)  (15,194)
Interest income     7,730   7,210   4,803 
Foreign currency exchange gains/(losses), net     596   (170)  885 
Net finance costs     930   (10,048)  (9,506)
Investment income 10   1,871   919   37,744 
Share of profits less losses from associates and joint ventures 22,23   13,974   12,777   6,712 
Earnings before income tax     99,339   90,022   48,143 
Income tax expense 11   (20,278)  (17,939)  (6,219)
Net income     79,061   72,083   41,924 
                
Attributable to:               
Owners of the Company     61,708   57,493   33,096 
Non-controlling interests     17,353   14,590   8,828 
Net income     79,061   72,083   41,924 
                
Earnings per share:               
 Basic 13   0.51   0.48   0.27 
Diluted 13   0.51   0.48   0.27 

 

See accompanying notes to consolidated financial statements.

 

F-5

CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020

 (Amounts in million)

 

     Years ended December 31,  
  Notes  

2018

  

2019

  

2020

 
     RMB  RMB  RMB 
Net income     79,061   72,083   41,924 
                
Other comprehensive (loss)/income: 12             
Items that may not be reclassified subsequently to profit or loss               
Equity investments at fair value through other comprehensive income     (53)  (31)  (22)
Total items that may not be reclassified subsequently to profit or loss     (53)  (31)  (22)
Items that may be reclassified subsequently to profit or loss               
Fair value hedges     -   -   162 
Share of other comprehensive loss of associates and joint ventures     (229)  (810)  (2,441)
Cash flow hedges     (9,741)  4,941   7,073 
Foreign currency translation differences     3,399   1,480   (4,457)
Total items that may be reclassified subsequently to profit or loss     (6,571)  5,611   337 
Total other comprehensive (loss)/income     (6,624)  5,580   315 
                
Total comprehensive income for the year     72,437   77,663   42,239 
                
Attributable to:               
Owners of the Company     54,090   62,908   34,490 
Non-controlling interests     18,347   14,755   7,749 
Total comprehensive income for the year     72,437   77,663   42,239 

 

See accompanying notes to consolidated financial statements.

 

F-6

CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEET

 AS OF DECEMBER 31, 2019 AND 2020

(Amounts in million)

 

     December 31, 
ASSETS Notes  2019  2020 
     RMB  RMB 
Current assets           
Cash and cash equivalents     60,438   87,559 
Time deposits with financial institutions     67,614   100,498 
Financial assets at fair value through profit or loss     3,319   1 
Derivative financial assets 14   837   12,528 
Trade accounts receivable 15   54,375   35,587 
Financial assets at fair value through other comprehensive income 24   8,661   8,735 
Inventories 16   194,142   151,895 
Prepaid expenses and other current assets 17   57,924   58,592 
Total current assets     447,310   455,395 
Non-current assets           
Property, plant and equipment, net 18   625,692   589,247 
Construction in progress 19   173,872   124,765 
Right-of-use assets 20   267,937   266,368 
Goodwill 21   8,697   8,620 
Interest in associates 22   95,737   136,163 
Interest in joint ventures 23   56,467   52,179 
Financial assets at fair value through other comprehensive income 24   1,521   1,525 
Deferred tax assets 25   17,616   25,054 
Long-term prepayments and other assets 26   65,437   74,489 
Total non-current assets     1,312,976   1,278,410 
Total assets     1,760,286   1,733,805 
LIABILITIES AND EQUITY           
Current liabilities           
Short-term debts 27   40,521   23,769 
Loans from Sinopec Group Company and fellow subsidiaries 27   43,289   5,264 
Lease liabilities 28   15,198   15,292 
Derivative financial liabilities 14   2,729   4,826 
Trade accounts payable and bills payable 29   200,023   161,656 
Contract liabilities 30   126,833   126,160 
Other payables 31   148,118   178,637 
Income tax payable     3,267   6,586 
Total current liabilities     579,978   522,190 
Non-current liabilities           
Long-term debts 27   49,208   72,037 
Loans from Sinopec Group Company and fellow subsidiaries 27   9,626   11,778 
Lease liabilities 28   177,674   172,306 
Deferred tax liabilities 25   6,809   8,124 
Provisions 32   43,163   45,552 
Other long-term liabilities     16,524   18,960 
Total non-current liabilities     303,004   328,757 
Total liabilities     882,982   850,947 
Equity           
Share capital 33   121,071   121,071 
Reserves 43   617,875   620,423 
Total equity attributable to owners of the Company     738,946   741,494 
Non-controlling interests     138,358   141,364 
Total equity     877,304   882,858 
Total liabilities and equity     1,760,286   1,733,805 

 

See accompanying notes to consolidated financial statements.

 

F-7

CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 

FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020 

(Amounts in million)

 

  Share
capital
  Capital
reserve
  Share
premium
  Statutory
surplus
reserve
  Discretionary
surplus
reserve
  Other
reserves
  Retained
earnings
  

Total equity
attributable
to owners of

the
Company

  

Non-
controlling

interests

  

Total

equity

 
  RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB 
Balance as of December 31, 2017 121,071  26,326  55,850  82,682  117,000  (2,934) 326,125  726,120  126,770  852,890 
Change in accounting policy -  -  -  -  -  (12) 12  -  -  - 
Contribution from SAMC in the Acquisition of Baling Branch of SAMC (Note 35) -  905  -  -  -  -  (25) 880  739  1,619 
Balance as of January 1, 2018 121,071  27,231  55,850  82,682  117,000  (2,946) 326,112  727,000  127,509  854,509 
Net income -  -  -  -  -  -  61,708  61,708  17,353  79,061 
Other comprehensive (loss)/income (Note 12) -  -  -  -  -  (7,618) -  (7,618) 994  (6,624)
Total comprehensive income for the year -  -  -  -  -  (7,618) 61,708  54,090  18,347  72,437 
Amounts transferred to initial carrying amount of hedged items -  -  -  -  -  5,269  -  5,269  -  5,269 
Transactions with owners, recorded directly in equity:                              
Contributions by and distributions to owners:                              
Final dividend for 2017 -  -  -  -  -  -  (48,428) (48,428) -  (48,428)
Interim dividend for 2018 -  -  -  -  -  -  (19,371) (19,371) -  (19,371)
Appropriation -  -  -  3,996  -  -  (3,996) -  -  - 
Distributions to non-controlling interests -  -  -  -  -  -  -  -  (7,476) (7,476)
Contributions to subsidiaries from non-controlling interests -  -  -  -  -  -  -  -  2,060  2,060 
Total contributions by and distributions to owners -  -  -  3,996  -  -  (71,795) (67,799) (5,416) (73,215)
Transaction with non-controlling interests -  (12) -  -  -  -  -  (12) (299) (311)
Total transactions with owners -  (12) -  3,996  -  -  (71,795) (67,811) (5,715) (73,526)
Others -  (431) -  -  -  818  (858) (471) (220) (691)
Balance as of December 31, 2018 121,071  26,788  55,850  86,678  117,000  (4,477) 315,167  718,077  139,921  857,998 

 

See accompanying notes to consolidated financial statements.

 

F-8

CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED) 

FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020 

(Amounts in million)

 

  Share
capital
  Capital
reserve
  Share
premium
  Statutory
surplus
reserve
  Discretionary
surplus
reserve
  Other
reserves
  Retained
earnings
  Total equity
attributable
to owners of

the
Company
  Non-
controlling
interests
  Total
equity
 
  RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB 
Balance as of January 1, 2019 121,071  26,788  55,850  86,678  117,000  (4,477) 315,167  718,077  139,921  857,998 
Net income -  -  -  -  -  -  57,493  57,493  14,590  72,083 
Other comprehensive income (Note 12) -  -  -  -  -  5,415  -  5,415  165  5,580 
Total comprehensive income for the year -  -  -  -  -  5,415  57,493  62,908  14,755  77,663 
Amounts transferred to initial carrying amount of hedged items -  -  -  -  -  1,038  -  1,038  55  1,093 
Transactions with owners, recorded directly in equity:   ��                          
Contributions by and distributions to owners:                              
Final dividend for 2018 -  -  -  -  -  -  (31,479) (31,479) -  (31,479)
Interim dividend for 2019 -  -  -  -  -  -  (14,529) (14,529) -  (14,529)
Appropriation (Note 43 (c)) -  -  -  3,745  -  -  (3,745) -  -  - 
Distributions to non-controlling interests -  -  -  -  -  -  -  -  (18,989) (18,989)
Contributions to subsidiaries from non-controlling interests -  -  -  -  -  -  -  -  5,495  5,495 
Total contributions by and distributions to owners -  -  -  3,745  -  -  (49,753) (46,008) (13,494) (59,502)
Transaction with non-controlling interests -  2,933  -  -  -  -  -  2,933  (2,933) - 
Total transactions with owners -  2,933  -  3,745  -  -  (49,753) (43,075) (16,427) (59,502)
Others -  9  -  -  -  (35) 24  (2) 54  52 
Balance as of December 31, 2019 121,071  29,730  55,850  90,423  117,000  1,941  322,931  738,946  138,358  877,304 

 

See accompanying notes to consolidated financial statements.

 

F-9

CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED) 

FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020 

(Amounts in million)

 

  Share
capital
  Capital
reserve
  Share
premium
  Statutory
surplus
reserve
  Discretionary
surplus
reserve
  Other
reserves
  Retained
earnings
  

Total equity
attributable
to owners of

the
Company

  

Non-
controlling

interests

  

Total

equity

 
  RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB 
Balance as of January 1, 2020 121,071  29,730  55,850  90,423  117,000  1,941  322,931  738,946  138,358  877,304 
Net income -  -  -  -  -  -  33,096  33,096  8,828  41,924 
Other comprehensive income (Note 12) -  -  -  -  -  1,406  (12) 1,394  (1,079) 315 
Total comprehensive income for the year -  -  -  -  -  1,406  33,084  34,490  7,749  42,239 
Amounts transferred to initial carrying amount of hedged items -  -  -  -  -  (47) -  (47) 48  1 
Transactions with owners, recorded directly in equity:                              
Contributions by and distributions to owners:                              
Final dividend for 2019 -  -  -  -  -  -  (23,004) (23,004) -  (23,004)
Interim dividend for 2020 -  -  -  -  -  -  (8,475) (8,475) -  (8,475)
Appropriation (Note 43 (c)) -  -  -  1,857  -  -  (1,857) -  -  - 
Distributions to non-controlling interests -  -  -  -  -  -  -  -  (6,726) (6,726)
Contributions to subsidiaries from non-controlling interests -  -  -  -  -  -  -  -  3,325  3,325 
Distribution to SAMC in the Acquisition of Baling Branch of SAMC (Note 35) -  (972) -  -  -  -  -  (972) 972  - 
Total contributions by and distributions to owners -  (972) -  1,857  -  -  (33,336) (32,451) (2,429) (34,880)
Transaction with non-controlling interests -  (138) -  -  -  -  -  (138) 13  (125)
Total transactions with owners -  (1,110) -  1,857  -  -  (33,336) (32,589) (2,416) (35,005)
Others -  812  -  -  -  200  (318) 694  (2,375) (1,681)
Balance as of December 31, 2020 121,071  29,432  55,850  92,280  117,000  3,500  322,361  741,494  141,364  882,858 

 

See accompanying notes to consolidated financial statements.

 

F-10

CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS  

FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020 

(Amounts in million)

 

     Years ended December 31, 
  Note  2018  2019  2020 
     RMB  RMB  RMB 
Net cash generated from operating activities (a)   175,937   153,619   167,518 
Investing activities               
Capital expenditure     (94,848)  (130,057)  (117,874)
Exploratory wells expenditure     (8,261)  (11,497)  (13,315)
Purchase of investments, investments in associates and investments in joint ventures     (10,116)  (3,483)  (6,040)
Payment for financial assets at fair value through profit or loss     (29,550)  (12,851)  (6,700)
Proceeds from sale of financial assets at fair value through profit or loss     55,000   35,292   10,000 
Payment for acquisition of subsidiary, net of cash acquired     (3,188)  (1,031)  (340)
Proceeds from disposal of investments and investments in associates     1,557   704   51,520 
Proceeds from disposal of property, plant, equipment and other non-current assets     9,671   709   2,656 
Increase in time deposits with maturities over three months     (81,708)  (103,231)  (84,689)
Decrease in time deposits with maturities over three months     78,401   90,710   54,950 
Interest received     5,810   7,094   2,305 
Investment and dividend income received     10,720   10,272   11,510 
Repayments of other investing activities     (136)  (3,682)  (6,186)
Net cash used in investing activities     (66,648)  (121,051)  (102,203)
Financing activities               
Proceeds from bank and other loans     749,155   602,467   558,680 
Repayments of bank and other loans     (774,572)  (614,108)  (540,015)
Contributions to subsidiaries from non-controlling interests     1,989   3,919   4,219 
Dividends paid by the Company     (67,799)  (46,008)  (31,479)
Distributions by subsidiaries to non-controlling interests     (13,702)  (7,357)  (4,157)
Interest paid     (6,064)  (6,250)  (7,508)
Payments made to acquire non-controlling interests     (160)  (8)  (1,121)
Repayments of lease liabilities (2018: Finance lease payment)     (86)  (16,859)  (15,327)
Proceeds from other financing activities     -   320   514 
Repayments of other financing activities     (30)  (320)  (761)
Net cash used in financing activities     (111,269)  (84,204)  (36,955)
Net (decrease)/increase in cash and cash equivalents     (1,980)  (51,636)  28,360 
Cash and cash equivalents as of January 1     113,389   111,927   60,438 
Effect of foreign currency exchange rate changes     518   147   (1,239)
Cash and cash equivalents as of December 31     111,927   60,438   87,559 

 

See accompanying notes to consolidated financial statements.

 

F-11

CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED STATEMENT OF CASH FLOWS  

FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020

(Amounts in million)

 

(a) Reconciliation of earnings before income tax to net cash generated from operating activities

 

  Years ended December 31, 
  2018  2019  2020 
  RMB  RMB  RMB 
Operating activities            
Earnings before income tax  99,339   90,022   48,143 
Adjustment for:            
Depreciation, depletion and amortization  110,344   109,172   106,965 
Dry hole costs written off  6,921   5,831   5,928 
Income from associates and joint ventures  (13,974)  (12,777)  (6,712)
Investment income  (1,871)  (919)  (37,744)
Interest income  (7,730)  (7,210)  (3,433)
Interest expense  7,396   17,088   14,449 
(Gain)/loss on foreign currency exchange rate changes and derivative financial instruments  (1,835)  3,624   2,003 
Loss/(gain) on disposal of property, plant, equipment and other non-current assets, net  1,501   1,829   (398)
Impairment losses on assets  11,613   1,779   26,018 
Credit impairment losses  140   1,264   2,066 
   211,844   209,703   157,285 
Net changes from:            
Accounts receivable and other current assets  (1,008)  (11,915)  (17,623)
Inventories  (2,670)  (9,748)  22,703 
Accounts payable and other current liabilities  844   (14,898)  14,175 
   209,010   173,142   176,540 
Income tax paid  (33,073)  (19,523)  (9,022)
Net cash generated from operating activities  175,937   153,619   167,518 

 

See accompanying notes to consolidated financial statements.

 

F-12

 

1PRINCIPAL ACTIVITIES, ORGANIZATION AND BASIS OF PREPARATION

 

Principal activities

 

China Petroleum & Chemical Corporation (the “Company”) is an energy and chemical company that, through its subsidiaries (hereinafter collectively referred to as the “Group”), engages in oil and gas and chemical operations in the People’s Republic of China (the “PRC”). Oil and gas operations consist of exploring for, developing and producing crude oil and natural gas; transporting crude oil and natural gas by pipelines; refining crude oil into finished petroleum products; and marketing crude oil, natural gas and refined petroleum products. Chemical operations include the manufacture and marketing of a wide range of chemicals for industrial uses.

 

Organization

 

The Company was established in the PRC on February 25, 2000 as a joint stock limited company as part of the reorganization (the “Reorganization”) of China Petrochemical Corporation (“Sinopec Group Company”), the ultimate holding company of the Group and a ministry-level enterprise under the direct supervision of the State Council of the PRC. Prior to the incorporation of the Company, the oil and gas and chemical operations of the Group were carried on by oil administration bureaux, petrochemical and refining production enterprises and sales and marketing companies of Sinopec Group Company.

 

As part of the Reorganization, certain of Sinopec Group Company’s core oil and gas and chemical operations and businesses together with the related assets and liabilities were transferred to the Company. On February 25, 2000, in consideration for Sinopec Group Company transferring such oil and gas and chemical operations and businesses and the related assets and liabilities to the Company, the Company issued 68.8 billion domestic state-owned ordinary shares with a par value of RMB 1.00 each to Sinopec Group Company. The shares issued to Sinopec Group Company on February 25, 2000 represented the entire registered and issued share capital of the Company as of that date. The oil and gas and chemical operations and businesses transferred to the Company were related to (i) the exploration, development and production of crude oil and natural gas, (ii) the refining, transportation, storage and marketing of crude oil and petroleum products, and (iii) the production and sales of chemicals.

 

Basis of preparation

 

The accompanying consolidated financial statements have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). IFRS includes International Accounting Standards (“IAS”) and related interpretations (“IFRIC”). A summary of the significant accounting policies adopted by the Group are set out in Note 2. The accompanying financial statements were authorized for issue by the Board of Directors on March 26, 2021.

 

The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of new and amended standards as set out below.

 

(a) New and amended standards and interpretations adopted by the Group

 

On 28 May 2020, the IASB published IFRS 16 COVID-19-Related Rent Concessions Amendment, which has no material impact on the Group for 31 December 2020 reporting periods.

 

A number of new or amended standards became applicable for the current reporting period. The Group did not have to change its accounting policies or make retrospective adjustments as a result of adopting these standards.

 

F-13

1PRINCIPAL ACTIVITIES, ORGANIZATION AND BASIS OF PREPARATION (Continued)

 

Basis of preparation (Continued)

 

(a) New and amended standards and interpretations adopted by the Group (Continued)

 

The Group had changed its accounting policies as a result of adopting IFRS 16 Leases in 2019.

 

IFRS 16 Leases - Impact of adoption

 

The Group has adopted IFRS 16 Leases from January 1, 2019, but has not restated comparative amounts for the 2018 reporting period, as permitted under the specific transition provision in the standard. The reclassifications and the adjustments arising from IFRS 16 Leases are therefore recognized in the opening balance sheet on January 1, 2019.

 

Lease accounting policy applied until December 31, 2018 is disclosed in Note 2(x)(iii).

 

On adoption of IFRS 16 Leases, the Group recognized lease liabilities in relation to leases which had previously been classified as ‘operating leases’. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of January 1, 2019. The lessee’s incremental borrowing rates applied to the lease liabilities on January 1, 2019 ranged from 4.35% to 4.90%.

 

 (i)Practical expedients applied

 

In applying IFRS 16 Leases for the first time, the Group has used the following practical expedients permitted by the standard:

 

 ·the use of a single discount rate to a portfolio of leases with reasonably similar characteristics,

 

 ·the accounting for operating leases with a remaining lease term of less than 12 months as of January 1, 2019 as short-term leases.

 

The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application.

 

 (ii)Measurement of lease liabilities

 

  RMB 
Operating lease commitments disclosed as of December 31, 2018  352,794 
Discounted using the lessee’s incremental borrowing rate of at the date of initial application  200,867 
(Less): short-term leases and low-value leases recognized on a straight-line basis as expense  (2,303)
Lease liabilities recognized as of January 1, 2019  198,564 
Of which are:    
Current lease liabilities  13,894 
Non-current lease liabilities  184,670 
   198,564 

F-14

1PRINCIPAL ACTIVITIES, ORGANIZATION AND BASIS OF PREPARATION (Continued)

 

Basis of preparation (Continued)

 

(a) New and amended standards and interpretations adopted by the Group (Continued)

 

 (iii)Measurement of right-of-use assets

 

Right-of-use assets were measured at the amount equal to the lease liabilities, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the balance sheet as of December 31, 2018.

 

The recognized right-of-use assets relate to the following types of assets:

 

  January 1,
2019
  December 31,
2019
 
  RMB  RMB 
Land  244,588   239,374 
Others  27,381   28,486 
Total right-of-use assets  271,969   267,860 

 

 (iv)Adjustments recognized in the balance sheet on January 1, 2019

 

The change in accounting policy affected the following items in the balance sheet on January 1, 2019:

 

 ·right-of-use assets – increase by RMB 271,969

 

 ·lease prepayments – decrease by RMB 64,514

 

 ·prepaid expenses and other current assets – decrease by RMB 766