Important Notice This Offering Is Available Only

IMPORTANT NOTICE

THIS OFFERING IS AVAILABLE ONLY TO INVESTORS WHO ARE EITHER (1) QUALIFIED INSTITUTIONAL BUYERS (AS DEFINED BELOW) OR (2) ADDRESSEES OUTSIDE OF THE UNITED STATES

IMPORTANT: You must read the following disclaimer before continuing. The following disclaimer applies to the attached preliminary offering memorandum (the ‘‘Preliminary Offering Memorandum’’). You are therefore advised to read this disclaimer carefully before reading, accessing or making any other use of the attached. In accessing the attached, you agree to be bound by the following terms and conditions, including any modifications to them from time to time, each time you receive any information from us as a result of such access.

Confirmation of your Representation: You have accessed the attached document on the basis that you have confirmed your representation to the Initial Purchasers (as defined in the attached Preliminary Offering Memorandum) that (1) either (i) you are not resident in the United States and, to the extent you purchase the securities described in the attached Preliminary Offering Memorandum you will be doing so pursuant to Regulation S under the U.S. Securities Act of 1933, as amended (the ‘‘Securities Act’’) or (ii) you are acting on behalf of, or you are, a qualified institutional buyer (‘‘Qualified Institutional Buyer’’), as defined in Rule 144A under the Securities Act and (2) you consent to delivery of the attached Offering Memorandum and any amendments or supplements thereto by electronic transmission.

The attached document has been made available to you in electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of transmission and consequently none of the Initial Purchasers nor any of their respective employees, representatives or affiliates accepts any liability or responsibility whatsoever in respect of any discrepancies between the document distributed to you in electronic format and the hard copy version. We will provide a hard copy version to you upon request.

Restrictions: The attached Preliminary Offering Memorandum is being furnished in connection with an offering exempt from registration under the Securities Act solely for the purpose of enabling a prospective investor to consider the purchase of the securities described in the Preliminary Offering Memorandum.

THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE SECURITIES ACT, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION AND THE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT), EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS.

Except with respect to eligible investors in jurisdictions where such offer is permitted by law, nothing in this electronic transmission constitutes an offer or an invitation by or on behalf of either the issuer of the securities or the Initial Purchasers to subscribe for or purchase any of the securities described therein, and access has been limited so that it shall not constitute a general advertisement or general solicitation (as those terms are used in Regulation D under the Securities Act) or directed selling efforts (within the meaning of Regulation S under the Securities Act) in the United States or elsewhere.

You are reminded that you have accessed the attached Preliminary Offering Memorandum on the basis that you are a person into whose possession this Preliminary Offering Memorandum may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not nor are you authorized to deliver or forward this document, electronically or otherwise, to any other person. If you have gained access to this transmission contrary to the foregoing restrictions, you will be unable to purchase any of the securities described therein.

Actions that You May Not Take: You should not reply by e-mail to this communication, and you may not purchase any securities by doing so. Any reply e-mail communications, including those you generate by using the ‘‘Reply’’ function on your e-mail software, will be ignored or rejected.

THE ATTACHED PRELIMINARY OFFERING MEMORANDUM MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORIZED.

You are responsible for protecting against viruses and other destructive items. Your use of this e-mail is at your own risk and it is your responsibility to take precautions to ensure that it is free from viruses and other items of a destructive nature. SUBJECT TO COMPLETION STRICTLY CONFIDENTIAL

ll or a PRELIMINARY OFFERING MEMORANDUM DATED April 28, 2015

Kunlun Energy Company Limited 昆侖能源有限公司 (incorporated with limited liability in Bermuda)

US$@@ @@%SeniorNotesDue20@@

Kunlun Energy Company Limited (the ‘‘Company’’) is offering US$@@ @@% Senior Notes due @@ (the ‘‘Notes’’). The Notes will be the unsecured unsubordinated obligations of the Company. The Notes will rank pari passu with all of the Company’sother existing and future unsecured unsubordinated obligations (other than obligations preferred by applicable law) and will be effectively subordinated to its secured obligations.

The Notes will bear interest from @@, 2015 at the rate set forth above, payable semi-annually in arrears on @@ and @@ of each year, commencing @@, 2015. The Company may redeem the Notes at any time upon the occurrence of certain tax events. At any time, the Company may at its option redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the applicable premium as of, and accrued and unpaid interest, if any, to the redemption date. For a more detailed description of the Notes, see ‘‘Description of the Notes’’ herein.

The Notes are expected to be rated ‘‘A1’’ by Moody’s Investors Service (‘‘Moody’s’’), ‘‘A+’’ by S&P Ratings Services (‘‘S&P’’), and ‘‘A’’ by Fitch Ratings Services (‘‘Fitch’’). A rating is not a recommendation to buy, sell or hold the Notes and may be subject to suspension, reduction or withdrawal at any time by S&P, Moody’s or Fitch. A suspension, reduction or withdrawal of the rating assigned to the Notes may adversely affect the market price of the Notes.

Investing in the Notes involves risks. See ‘‘Risk Factors’’ beginning on page 10.

Offering Price: @@% of principal amount plus accrued interest, if any, from @@,2015

The Notes have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the ‘‘Securities Act’’), or any state securities laws. Accordingly, the Notes are being offered or sold in the United States only to qualified institutional buyers (‘‘Qualified Institutional Buyers’’ and each, a ‘‘Qualified Institutional Buyer’’), as defined in, and in reliance on, Rule 144A under the Securities Act (‘‘Rule 144A’’), or outside the United States in accordance with Regulation S under the Securities Act (‘‘Regulation S’’). Prospective investors that are Qualified Institutional Buyers are hereby notified that sellers of Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. The Notes are not transferable except in accordance with the restrictions described under ‘‘Transfer Restrictions.’’

Application has been made to The Stock Exchange of Hong Kong Limited (the ‘‘SEHK’’) for listing of, and permission to deal in, the Notes by way of debt issue to professional investors only and such permission is expected to become effective on or about

sdiction where such offer or sale@@ is not permitted. , 2015. Listing of the Notes on the SEHK is not to be taken as an indication of the merits of the Notes or the Company. Hong Kong Exchanges and Clearing Limited and the SEHK take no responsibility for the contents of this document, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document.

The Notes will be represented by one or more global notes registered in the name of the nominee of The Depository Trust Company (‘‘DTC’’), as depositary. Beneficial interests in the Notes will be shown on, and transfers thereof will be effected through, records maintained by DTC, Clearstream Banking, société anonyme (‘‘Clearstream’’) and Euroclear Bank SA/NV (‘‘Euroclear’’), and their respective participants. See ‘‘Transfer Restrictions.’’

It is expected that the Notes will be ready for delivery against payment in immediately available funds on or about @@, 2015 the expected closing date.

Joint Global Coordinators Citigroup Morgan Stanley Joint Lead Managers and Joint Bookrunners Citigroup Morgan Stanley Credit Suisse Goldman Sachs (Asia) L.L.C. HSBC Standard Chartered Bank

The date of this Offering Memorandum is @@, 2015. solicitation of an offer to buy the securities in any juri The information in this preliminary Offering Memorandum is not complete and may be changed. This preliminary Offering Memorandum is not an offer to se CONTENTS

Page

PRESENTATION OF INFORMATION ...... vii

FORWARD-LOOKING STATEMENTS ...... ix

ENFORCEABILITY OF FOREIGN JUDGMENTS AND CIVIL LIABILITIES ...... xi

SUMMARY ...... 1

SUMMARY FINANCIAL INFORMATION AND OTHER DATA ...... 4

THE OFFERING ...... 7

RISK FACTORS ...... 10

CAPITALIZATION AND INDEBTEDNESS ...... 30

USE OF PROCEEDS ...... 31

OUR HISTORY AND CORPORATE STRUCTURE ...... 32

SELECTED FINANCIAL INFORMATION ...... 33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...... 36

INDUSTRY OVERVIEW ...... 54

BUSINESS ...... 67

SUMMARY OF RELEVANT PRC LAWS AND REGULATIONS ...... 85

MANAGEMENT ...... 99

PRINCIPAL SHAREHOLDERS ...... 104

RELATED PARTY TRANSACTIONS ...... 105

DESCRIPTION OF THE NOTES ...... 107

TRANSFER RESTRICTIONS ...... 125

EXCHANGE RATES ...... 127

TAXATION ...... 129

PLAN OF DISTRIBUTION ...... 133

RATINGS ...... 139

GENERAL INFORMATION ...... 140

ANNEX A – GLOSSARY OF TECHNICAL TERMS ...... A-1

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ...... F-1

i NOTICE TO INVESTORS

This Offering Memorandum has been prepared by us solely for use in connection with the proposed offering of the Notes. Citigroup Global Markets Inc., Morgan Stanley & Co. International plc, Credit Suisse Securities (Europe) Limited, Goldman Sachs (Asia) L.L.C., The Hongkong and Shanghai Banking Corporation Limited and Standard Chartered Bank (collectively, the ‘‘Initial Purchasers’’), as well as we, reserve the right to withdraw the offering of the Notes at any time or to reject any offer to purchase, in whole or in part, for any reason, or to sell less than all of the Notes offered hereby.

This Offering Memorandum is personal to the prospective investor to whom it has been delivered by the Initial Purchasers and does not constitute an offer to any other person or to the public in general to subscribe for or otherwise acquire the Notes. Distribution of this Offering Memorandum to any person other than the prospective investor and those persons, if any, retained to advise that prospective investor with respect thereto is unauthorized, and any disclosure of its contents without our prior written consent is prohibited. The prospective investor, by accepting delivery of this Offering Memorandum, agrees to the foregoing and agrees not to make any photocopies of this Offering Memorandum.

This Offering Memorandum is intended solely for the purpose of soliciting indications of interest in the Notes from qualified investors and does not purport to summarize all of the terms, conditions, covenants and other provisions contained in the indenture governing the Notes (the ‘‘Indenture’’) and other transaction documents described herein. The information provided is not all-inclusive.

You should rely only on the information contained in this Offering Memorandum. We have not authorized anyone to provide you with information that is different. This Offering Memorandum may only be used where it is legal to sell the Notes. The information in this document may only be accurate at the date of this Offering Memorandum. Neither the delivery of this Offering Memorandum nor any sale made hereunder shall under any circumstances imply that there has been no change in our affairs and those of each of our subsidiaries or that the information set forth herein is correct in all material respects as of any date subsequent to the date hereof.

This Offering Memorandum includes particulars given in compliance with Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the ‘‘Listing Rules’’) for the purpose of giving information with regard to the Company. The directors of the Company collectively and individually accept full responsibility for the accuracy of the information contained in this document and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief there are no other facts the omission of which would make any statement herein misleading.

Prospective investors hereby acknowledge that (i) they have not relied on the Initial Purchasers, the Trustee, Paying Agent, Transfer Agent or Registrar (each as defined below) or any person affiliated with the Initial Purchasers, the Trustee, Paying Agent, Transfer Agent or Registrar in connection with any investigation of the accuracy of such information or their investment decision and (ii) no person has been authorized to give any information or to make any representation concerning us or the Notes, other than as contained herein and, if given or made, any such other information or representation should not be relied upon as having been authorized by us, the Initial Purchasers, the Trustee, Paying Agent, Transfer Agent or Registrar.

In making an investment decision, prospective investors must rely on their examination of us and the terms of this offering, including the merits and risks involved. The Notes have not been approved or recommended by any United States federal or state securities commission or any other regulatory authority. Furthermore, the foregoing authorities have not passed upon or endorsed the merits of the offering or confirmed the accuracy or determined the adequacy of this Offering Memorandum. Any representation to the contrary is a criminal offense in the United States. Prospective purchasers are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A.

ii The SEHK takes no responsibility for the contents of this document, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document.

This Offering Memorandum does not constitute an offer to sell, or a solicitation of an offer to buy, any Note offered hereby by any person in any jurisdiction in which it is unlawful for such person to make an offer or solicitation.

In connection with this issue, each of Citigroup Global Markets Inc. and Morgan Stanley & Co. International plc (the ‘‘Stabilizing Manager’’), or any of its affiliates (or any person acting on behalf of it) may, to the extent permitted by applicable laws and regulations, over-allot or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail for a limited period after the issue date of the Notes (the ‘‘Issue Date’’). However, there is no obligation on the Stabilizing Manager, or any of its affiliates (or any person acting on behalf of it), to do this. Such stabilization, if commenced, may be discontinued at any time, and must be brought to an end after a limited period.

Neither we, the Initial Purchasers, the Trustee, Paying Agent, Transfer Agent or Registrar or any of their respective affiliates or representatives are making any representation to any offeree or purchaser of the Notes offered hereby regarding the legality of any investment by such offeree or purchaser under applicable legal investment or similar laws. None of the Initial Purchasers, the Trustee, Paying Agent, Transfer Agent or Registrar makes any representation, warranty or undertaking, express or implied, or accepts any responsibility, with respect to the accuracy or completeness of any of the information in this Offering Memorandum. To the fullest extent permitted by law, none of the Initial Purchasers, the Trustee, Paying Agent, Transfer Agent or Registrar accepts any responsibility for the contents of this Offering Memorandum or for any other statement made or purported to be made by the Initial Purchasers, the Trustee, Paying Agent, Transfer Agent or Registrar or on their behalf in connection with us or the issue and offering of the Notes. Each of the Initial Purchasers, the Trustee, Paying Agent, Transfer Agent or Registrar accordingly disclaims all and any liability whether arising in tort or contract or otherwise which it might otherwise have in respect of this Offering Memorandum or any such statement. Each prospective investor should consult with its own advisors as to legal, tax, business, financial and related aspects of a purchase of the Notes.

The distribution of this Offering Memorandum and the offer and sale of the Notes may, in certain jurisdictions, be restricted by law. Each purchaser of the Notes must comply with all applicable laws and regulations in force in each jurisdiction in which it purchases, offers or sells the Notes or possesses or distributes this Offering Memorandum, and must obtain any consent, approval or permission required for the purchase, offer or sale by it of the Notes under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes purchases, offers or sales. See ‘‘Plan of Distribution’’ for a description of certain restrictions on the offer and sale of the Notes, and the circulation of documents relating thereto, in certain jurisdictions.

iii NOTICE TO NEW HAMPSHIRE RESIDENTS

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B (‘‘RSA 421-B’’) OF THE NEW HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

AVAILABLE INFORMATION

At any time when we are not subject to Sections 13 or 15(d) of the U.S. Securities Exchange Act of 1934, as amended, (the ‘‘Exchange Act’’), or exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, we will furnish, upon request, to any holder of the Notes, or any prospective purchaser designated by any such holder, information satisfying the requirements of Rule 144A(d)(4)(i) under the Securities Act to permit compliance with Rule 144A in connection with resales of the Notes forsolongasanyoftheNotesare‘‘restricted securities’’ within the meaning of Rule 144(a)(3) under the Securities Act. We will also furnish to each such holder all notices of shareholders’ meetings and other reports and communications that are made generally available to shareholders.

iv CERTAIN DEFINED TERMS AND CONVENTIONS

In this Offering Memorandum, references to:

•‘‘Beijing Pipelines’’ are to our certain natural gas transmission pipelines in the Beijing-Hebei- Tianjin region as set out under ‘‘Beijing Pipelines’’ in ‘‘Business – Natural Gas Distribution – Natural Gas Transmission – Beijing Pipelines’’;

•‘‘CAGR’’ are to the compound annual growth rate;

•‘‘CNPC’’ are to China National Petroleum Corporation;

•‘‘Company’’ are to Kunlun Energy Company Limited;

•‘‘Group’’ are to Kunlun Energy Company Limited and its subsidiaries;

•‘‘HK$’’ and ‘‘Hong Kong dollars’’ are to Hong Kong dollars, the official currency of the Hong Kong Special Administrative Region;

•‘‘HKFRS’’ are to Hong Kong Financial Reporting Standards, as issued by the Hong Kong Institute of Certified Public Accountants, which differ in certain respects from accounting principles generally accepted in certain other countries, including generally accepted accounting principles in the United States.;

•‘‘NDRC’’ are to the National Development and Reform Commission of the PRC;

•‘‘PetroChina’’ are to PetroChina Company Limited;

•‘‘PRC’’ or ‘‘China’’ are to the People’s Republic of China, excluding, for the purpose of this Offering Memorandum only, the Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan;

•‘‘provinces’’ are to provinces and to provincial-level autonomous regions and municipalities in the PRC which are directly under the supervision of the central PRC government;

•‘‘RMB’’ or ‘‘Renminbi’’ are to the Renminbi, the official currency of the PRC;

•‘‘SAFE’’ are to the State Administration of Foreign Exchange of the PRC;

•‘‘SASAC’’ are to the State-owned Assets Supervision and Administration Commission of the State Council of China;

•‘‘US$’’ and ‘‘U.S. dollars’’ are to United States dollars, the official currency of the United States of America.

Solely for your convenience, this Offering Memorandum contains translations of certain Renminbi amounts into U.S. dollar amounts at specified rates. Unless indicated otherwise, the translation of Renminbi amounts into U.S. dollar amounts has been made at the rate of RMB6.2046 to US$1.00 and the translation of Hong Kong dollar amounts into U.S. dollar amounts has been made at the rate HK$7.7531 to US$1.00, the exchange rate set forth in the H.10 weekly statistical release of the Board of Governors of the Federal Reserve System of the United States on December 31, 2014. Further information on exchange rates is set forth in ‘‘Exchange Rates.’’ You should not construe these translations as representations that the Renminbi amounts could actually be converted into any U.S. dollar amounts at the rates indicated or at all.

v Market data and certain industry forecasts and statistics in this Offering Memorandum have been obtained from both public and private sources, including market research, publicly available information and industry publications. In many cases, there is no readily available external information (whether from trade associations, government bodies or other organizations) to validate market-related analyses and estimates, requiring us to rely on our own internally developed estimates regarding our industry, our position in the industry, our market and segment share and the market and segment shares of various industry participants based on experience, our own investigation of market conditions and our review of industry publications, including information made available to the public by our competitors. Although this information is believed to be reliable, it has not been independently verified by us or the Initial Purchasers or their respective directors and advisors, and neither we nor the Initial Purchasers nor their respective directors and advisors make any representation as to the accuracy or completeness of that information. Such information may not be consistent with other information compiled within or outside the PRC. In addition, third-party information providers may have obtained information from market participants and such information may not have been independently verified. This Offering Memorandum summarizes certain documents and other information, and investors should refer to them for a more complete understanding of what is discussed in those documents. In making an investment decision, each investor must rely on its own examination of us and the terms of the offering and the Notes, including the merits and risks involved.

vi PRESENTATION OF INFORMATION

Financial Data Our consolidated statement of comprehensive income and consolidated statement of financial position data for the year ended and as of December 31, 2012 have been extracted from the consolidated financial statements audited by PricewaterhouseCoopers, Certified Public Accountants and included elsewhere in this Offering Memorandum. Our consolidated statement of comprehensive income and consolidated statement of financial position data for the years ended and as of December 31, 2013 and 2014 have been extracted from the consolidated financial statements audited by KPMG, Certified Public Accountants and included elsewhere in this Offering Memorandum.

Certain amounts and percentages included in this Offering Memorandum have been rounded. Accordingly, in certain instances, the sum of the numbers in a column may not exactly equal the total figure for that column.

Segmental Financial and Volume Data Unless otherwise specified, our segmental financial and sales/volume data are presented after intercompany adjustments. The inter-company adjustments to our segmental financial (but not volume) data are included in Note 37 to the audited consolidated financial statements for the respective years.

Oil and Gas Reserves Oil and gas reserves are key elements in our investment decision-making process in relation to its exploration and production business. The term ‘‘reserves’’ describes the recoverable quantity of oil and gas volumes that are commercially viable for development given the prevailing economic situation, in particular the prices of crude oil and natural gas. Reserves are estimated using either a deterministic method, in which a single best estimate is made based on known geological, engineering and economic data, or a probabilistic method, in which known geological, engineering and economic data are used to generate a range of estimates and their associated probabilities. All oil and gas reserves data are estimates, which are revised when additional information becomes available (for example, when additional wells are drilled or when actual production commences). ‘‘Proved reserves’’ refers to the estimated quantities of crude oil and natural gas that geological and engineering data demonstrate have reasonable certainty of being recovered in future years from known reservoirs under existing economic and operating conditions (that is, prices and costs at the date the estimate is made). To qualify as proved reserves, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the proved estimate.

Our crude oil reserves are located in the PRC, as well as overseas, while our natural gas reserves are located outside of the PRC. We manage our reserves estimation through an independent engineering consultancy company.

vii Our reserves estimation is guided by procedural manuals and technical guidance. Initial collection and compilation of reserves information is conducted internally. The reserve management offices then work with technical experts to perform peer reviews to ensure that the reserves estimation complies with relevant technical guidance qualitatively and quantitatively and is accurate and reasonable. The reserve management committee is primarily responsible for managing and coordinating the reserves estimation process, reviewing and approving annual changes to and results of reserves estimation and reporting proved reserves. Our reserves estimation process is further facilitated by a specialized reserves database, which is improved and updated periodically. We engage independent engineering consultants to assist us in our reserves estimation process. In addition, a substantial majority of our overseas oil and gas reserves estimation has been assessed by or with assistance from independent engineering consultants.

Our reserves data for 2012, 2013 and 2014 were prepared in accordance with the final rules of the United States Securities and Exchange Commission on ‘‘Modernization of Oil and Gas Reporting’’, which became effective on January 1, 2010.

Unless otherwise indicated, information regarding our oil and gas reserves and production in this Offering Memorandum refers to our share of reserves and production based on its percentage of equity interest in the relevant properties.

viii FORWARD-LOOKING STATEMENTS

Certain statements in this Offering Memorandum are not historical facts and are ‘‘forward-looking statements’’ within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. This Offering Memorandum may contain words such as ‘‘believe,’’ ‘‘could,’’ ‘‘may,’’ ‘‘will,’’ ‘‘target,’’ ‘‘estimate,’’ ‘‘project,’’ ‘‘predict,’’ ‘‘forecast,’’ ‘‘guideline,’’ ‘‘should,’’ ‘‘plan,’’ ‘‘expect’’ and ‘‘anticipate’’ and similar expressions that are intended to identify forward-looking statements, but are not the exclusive means of identifying these statements. Particularly, statements under the captions ‘‘Summary,’’ ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and ‘‘Business’’ relating to the following matters may include forward-looking statements:

• the anticipated demand for oil and gas products and related capital expenditures and investments,

• projections of capital expenditures in general and other financial items,

• generation of future receivables,

• expected sales to customers and price levels,

• the expected results of exploration, production activities and related capital expenditures and investments, and

• environmental compliance and remediation.

Such statements are subject to various risks and uncertainties, including, but not limited to:

• changes in global economic and social conditions,

• changes in the world political situation,

• changes in economic and political conditions and increases in regulatory burdens in the PRC and other countries in which we operate, transact business or have interests,

• accidents and natural disasters,

• changes in import controls or import duties, levies or taxes, either in international markets or in the PRC,

• changes in laws, regulations, taxation or accounting standards or practices,

• currency, interest rate, price and credit risks,

• changes in prices or demand for products or raw materials produced or used by us or our subsidiaries or affiliates, both in the PRC and in international markets, as a result of competitive actions or economic factors, such as inflation or exchange rate fluctuations,

• the risks of the increasing expenditures and investments,

• uncertainty of technological change,

• the technical limitations of our exploration and production of the oil and gas reserves,

• the ability of third parties to perform in accordance with contractual terms and specifications,

• acquisitions or divestitures,

ix • potential disputes with international and domestic joint venture partners, and

• other factors, including those discussed in ‘‘Risk Factors.’’

In addition, the expectations of management with respect to oil and gas exploration activities are subject to risks arising from the inherent difficulty of predicting the presence, yield or quality of oil and gas deposits, as well as unknown or unforeseen difficulties in extracting, transporting or processing any oil and gas found, or doing so on a commercial basis.

Forward-looking statements involve inherent risks and uncertainties. Should one or more of these or other uncertainties or risks materialize, actual results may vary materially from those estimated, anticipated or projected. Specifically, but without limitation, capital costs could increase, projects could be delayed and anticipated improvements in capacity, performance or profit levels might not be fully realized. Although we believe that the expectations of our management as reflected by such forward- looking statements are reasonable based on information currently available to it, no assurances can be given that such expectations will prove to have been correct. Accordingly, you are cautioned not to place undue reliance on the forward-looking statements and we do not undertake any obligation to update or revise any of them, whether as a result of new information, future developments or otherwise.

x ENFORCEABILITY OF FOREIGN JUDGMENTS AND CIVIL LIABILITIES

We are a PRC state-owned enterprise incorporated in Bermuda. Most of our assets are located in the PRC. In addition, a majority of our directors and senior management are residents of the PRC, where substantially all of their assets may be located. As a result, it may be difficult for investors to effect service of process upon us or such persons, or to enforce against us or such persons judgments obtained in courts or arbitral tribunals outside the PRC, including judgments predicated upon the civil liability provisions of U.S. federal or state securities laws.

Since 1979, the PRC government has promulgated laws and regulations in relation to general economic matters such as foreign investment, corporate organization and governance, commerce, taxation, foreign exchange and trade, with a view toward developing a comprehensive system of commercial law. In particular, legislation over the past 30 years has significantly enhanced the protections afforded to various forms of foreign investment in the PRC. Where adequate law exists in the PRC, the enforcement of existing laws or contracts based on existing law may be nevertheless uncertain or sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. In addition, the PRC legal system is based on written statutes and their interpretations, and prior court decisions may be referenced but carry limited weight as precedents.

We have been advised by our PRC legal counsel, Zhong Lun Law Firm, that there is uncertainty as to whether the courts of the PRC would:

(1) enforce judgments of the U.S. courts obtained against us or our directors and officers predicated upon the civil liability provisions of the federal securities laws of the United States, or upon any other basis, as the PRC does not have treaties for the reciprocal enforcement of judgments with the United States; or

(2) entertain original actions brought in the courts of the PRC, against us or our directors and officers predicated solely upon the federal securities laws of the United States or the securities laws of any state or territory within the United States.

Zhong Lun Law Firm has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between the PRC and the country where the judgment is made or on reciprocity between jurisdictions. The PRC does not have any treaties or other agreements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. Therefore, it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.

We have been advised by Conyers Dill & Pearman, our Bermuda legal advisors, that the courts of Bermuda would recognize as a valid judgment, a final and conclusive judgment in personam obtained in any New York State or United States Federal Court against us under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment, (b) such courts did not contravene the rules of natural justice of Bermuda, (c) such judgment was not obtained by fraud, (d) the enforcement of the judgment would not be contrary to the public policy of Bermuda, (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of Bermuda and (f) there is due compliance with the correct procedures under the laws of Bermuda.

xi SUMMARY

This summary may not contain all of the information that may be important to you. You should read this entire Offering Memorandum before making an investment decision to purchase the Notes.

Overview We are the flagship platform for PetroChina’s downstream natural gas business. CNPC, PetroChina’s parent, is the largest oil and gas producer and supplier based on production and sales volume in the PRC and one of the leading integrated international energy companies in the world. Through a number of asset injections by PetroChina and CNPC, we have gained key natural gas transmission and distribution assets and are well positioned to benefit from the fast growing PRC natural gas industry.

We believe we are one of the largest integrated natural gas companies in the PRC focusing on midstream and downstream natural gas operations in terms of total volume of natural gas transmission and distribution. We also have upstream oil operations domestically and internationally in six countries. We believe we are the largest LNG supplier to vehicles and ships end-users in the PRC, with 12 LNG processing plants in production with a total aggregate processing capacity of 7.18 MCM per day and an extensive nationwide natural gas sales network, including 752 LNG refueling stations and 321 CNG refueling stations as of December 31, 2014. We also own midstream natural gas pipelines, including Shaan-Jing Lines I, II, and III, which are the main natural gas supply sources for the Beijing-Tianjin- Hebei region and the only natural gas transmission pipelines supply in Beijing, and two LNG terminals with a total capacity of 6.5 million tonnes per year as of December 31, 2014.

We primarily conduct the following businesses:

• Natural Gas Transmission. Natural gas transmission is one of the key components of our natural gas business. We transmit natural gas through our transmission pipelines to a large number of locations near our pipelines. With our Shaan-Jing Lines I, II and III, we are the main natural gas supplier for the Beijing-Tianjin-Hebei region and are the only provider of natural gas transmission pipelines to Beijing. In addition, we commenced construction of Shaan-Jing Line IV in 2014. As of December 31, 2014, the aggregate length of our Shaan-Jing Lines I, II and III was 2,836 km and the total annual designed transmission capacity of them was 35 BCM. For the years ended December 31, 2012, 2013 and 2014, our volume of natural gas transmission amounted to 23,833 MCM, 24,979 MCM and 30,052 MCM, respectively.

• LNG Terminal. We own two LNG terminals located in Dalian, Liaoning and Rudong, Jiangsu. Our LNG terminals provide LNG loading, storage, unloading and regasification services for PetroChina and third-party customers. For the years ended December 31, 2012, 2013 and 2014, the regasification volume of our LNG terminals amounted to 5,079 MCM, 6,503 MCM and 4,835 MCM, respectively.

• Natural Gas Sales and LNG processing.

• The sale of natural gas is one of our principal businesses and we expect revenue from our natural gas sales to continue to constitute a significant and increasing percentage of our total revenue. We sell our natural gas in the form of LNG, CNG and piped natural gas through our nationwide sales network. Over the past few years we have benefited from the ‘‘Gas in Substitution of Oil’’ strategy in the PRC and grew our natural gas sales. For the years ended December 31, 2012, 2013 and 2014, our sales volume of natural gas amounted to 4,583 MCM, 6,114 MCM and 7,327 MCM, respectively.

1 production capacity of 7.18 MCM as of December 31, 2014, we believe we have developed into one of the largest integrated midstream and downstream natural gas companies in the PRC in terms of total volume of natural gas transmission and distribution. In addition, we have completed the construction of another five LNG processing plants with a total daily production capacity of 9.2 MCM which are yet to start commercial operation. The majority of the LNG produced at our LNG processing plants is provided to and sold at our own LNG refueling stations, therefore helping to secure LNG supply for our LNG sales business. For the years ended December 31, 2012, 2013 and 2014, the processing volume of our LNG processing businesses amounted to 236 MCM, 352 MCM and 470 MCM, respectively.

• Exploration and Production. We are engaged in the exploration and development of oil and gas fields. We have a domestic and international upstream oil and gas portfolio with eight projects in six countries, namely the PRC, Kazakhstan, Oman, Peru, Thailand and Azerbaijan. As of December 31, 2014, our estimated proved developed reserves of crude oil and natural gas amounted to 65.0 million barrels and 79,952.6 mcf, respectively, and our estimated proved reserves of crude oil and natural gas amounted to 84.8 million barrels and 127,834.5 mcf, respectively.

For the year ended December 31, 2012, 2013 and 2014, our revenue and profit attributable to owners of the Company amounted to HK$32,953 million, HK$43,430 million and HK$48,044 million (US$6,197 million) and HK$6,518 million, HK$6,851 million and HK$5,610 million (US$724 million), respectively.

Our shares are listed on The Stock Exchange of Hong Kong Limited (stock code: 00135.hk).

Competitive Strengths We believe that the following competitive strengths have contributed to our success, distinguished us from our competitors and positioned us favorably to take advantage of future growth opportunities:

• strong support from PetroChina and CNPC;

• strong market position as one of the largest integrated midstream and downstream natural gas companies in the PRC, underpinned by stable natural gas transmission operations and extensive downstream sales networks;

• pioneer of the ‘‘Gas in Substitution of Oil’’ strategy in the PRC, with integrated facilities for unloading, processing and sales of LNG across the industry chain;

• fast growth and prosperous market potentials of the PRC’s natural gas industry, and well- positioned to capitalize on favorable government policies supporting clean energy;

• prudent financial policy; and

• experienced management team.

2 Business Strategies We intend to grow and strengthen our business through the implementation of the following core business strategies:

• continue to leverage favorable PRC government policies to develop our clean energy business;

• focus on robust growth of our natural gas business in the PRC;

• capitalize on opportunities to achieve leading position in the downstream sale of natural gas business; and

• prudent pursuit of expansion while maintaining strict risk control.

3 SUMMARY FINANCIAL INFORMATION AND OTHER DATA

Our historical consolidated financial information and other data as of and for the years ended December 31, 2012, 2013 and 2014 as set forth below have been derived from our audited consolidated financial statements included elsewhere in this Offering Memorandum. Our consolidated financial statements as of and for the year ended December 31, 2012 were audited by PricewaterhouseCoopers, Certified Public Accountants, Hong Kong. Our consolidated financial statements as of and for the years ended December 31, 2013 and 2014 were audited by KPMG, Certified Public Accountants, Hong Kong.

You should read the summary financial information below in conjunction with our consolidated financial statements and related notes and the section entitled ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ included elsewhere in this Offering Memorandum. Our consolidated financial statements are prepared and presented in accordance with HKFRS. Our historical results do not necessarily indicate results expected for any future period.

Consolidated Statement of Comprehensive Income Data For the year ended December 31, 2012 2013 2014 2014 (HK$ million) (HK$ million) (HK$ million) (US$ million) (unaudited) Revenue...... 32,953 43,430 48,044 6,197 Othergains,net...... 361 768 837 108 Interestincome...... 172 228 217 28 Purchases, services and others ...... (12,912) (21,303) (26,354) (3,399) Employee compensation costs ...... (1,684) (2,046) (2,368) (305) Exploration expenses, including exploratory dry holes (42) (11) –– Depreciation, depletion and amortization...... (4,434) (4,528) (5,392) (695) Selling, general and administrative expenses ...... (2,165) (2,878) (2,777) (358) Taxesotherthanincometaxes...... (923) (746) (737) (95) Interestexpenses...... (661) (622) (486) (63) Share of profits less losses of: – – Associates...... 2,334 1,646 716 92 – Jointventures...... 307 415 256 33 Profit before income tax expense...... 13,306 14,353 11,956 1,542 Incometaxexpense...... (3,392) (3,845) (3,080) (397) Profit for the year ...... 9,914 10,508 8,876 1,145 Other comprehensive income Items that may be reclassified subsequently to profit and loss: – Currency translation differences ...... 663 1,392 (1,864) (240) – Fair value (loss)/gain on available-for-sale financialassets...... 1 (10) (29) (4) Other comprehensive income, net of nil tax ...... 664 1,382 (1,893) (244) Total comprehensive income for the year...... 10,578 11,890 6,983 901 Profit for the year attributable to: – OwnersoftheCompany...... 6,518 6,851 5,610 724 – Non-controlling interests ...... 3,396 3,657 3,266 421 9,914 10,508 8,876 1,145 Total comprehensive income for the year attributable to: – OwnersoftheCompany...... 7,017 7,842 4,307 556 – Non-controlling interests ...... 3,561 4,048 2,676 345 10,578 11,890 6,983 901 Dividend attributable to owners of the Company . . . . 1,855 1,857 –(1) –(1)

Note:

(1) On March 26, 2015, the Board of Directors proposed final dividend attributable to owners of the Company in respect of 2014 of HK$0.20 per share amounting to a total of approximately HK$1,614 million. The amount is based on approximately 8,072 million shares in issue as at March 26 2015. Our consolidated financial statements do not reflect this dividend payable as the final dividends were proposed after December 31, 2014 and will be accounted for in equity as an appropriation of retained earnings in the year ending December 31, 2015 when approved at the 2015 Annual General Meeting.

4 Consolidated Statement of Financial Position Data As of December 31, 2012 2013 2014 2014 (HK$ million) (HK$ million) (HK$ million) (US$ million) (unaudited) Assets Non-current assets Property, plant and equipment ...... 69,225 82,943 86,442 11,149 Advanced operating lease payments ...... 2,199 2,895 3,379 436 Investmentsinassociates...... 5,606 5,720 4,775 616 Investments in joint ventures...... 1,541 1,564 1,451 187 Available-for-sale financial assets ...... 173 120 83 11 Intangible and other non-current assets ...... 2,360 3,104 1,509 195 Deferredtaxassets...... 187 254 456 59 81,291 96,600 98,095 12,652 Current assets Inventories...... 717 1,173 1,157 149 Accountsreceivable...... 1,367 1,893 1,988 256 Prepaid expenses and other current assets ...... 5,575 4,899 5,741 740 Cash and cash equivalents ...... 19,592 14,897 10,729 1,384 27,251 22,862 19,615 2,530 Total assets ...... 108,542 119,462 117,710 15,182 Equity Capital and reserves attributable to owners of the Company Sharecapital...... 81 81 81 10 Retainedearnings...... 20,059 24,530 27,765 3,581 Reserves...... 24,282 25,795 25,042 3,230 44,422 50,406 52,888 6,821 Non-controlling interests...... 17,756 21,862 21,426 2,764 Total equity...... 62,178 72,268 74,314 9,585 Liabilities Current liabilities Accounts payable and accrued liabilities ...... 12,438 12,676 14,776 1,906 Incometaxpayable...... 461 510 805 104 Othertaxpayable...... 353 394 262 34 Short-term borrowings ...... 5,111 13,551 8,465 1,092 Obligationsunderfinanceleases...... ––194 25 18,363 27,131 24,502 3,160 Non-current liabilities Long-term borrowings ...... 26,562 17,799 16,224 2,093 Deferred tax liabilities ...... 1,278 1,715 1,414 182 Obligationsunderfinanceleases...... ––649 84 Other long-term obligations ...... 161 549 607 78 28,001 20,063 18,894 2,437 Total liabilities...... 46,364 47,194 43,396 5,597 Total equity and liabilities ...... 108,542 119,462 117,710 15,182 Net current assets ...... 8,888 (4,269) (4,887) (630) Total assets less current liabilities ...... 90,179 92,331 93,208 12,022

5 Consolidated Cash Flow Data For the year ended December 31, 2012 2013 2014 2014 (HK$ million) (HK$ million) (HK$ million) (US$ million) (unaudited) Net cash generated from operating activities ...... 10,063 13,486 13,698 1,767 Net cash used in investing activities...... (12,871) (12,732) (7,601) (980) Net cash generated from/(used in) financing activities ...... 10,425 (6,092) (10,149) (1,309) Increase/(decrease) in cash and cash equivalents . . . . 7,617 (5,338) (4,052) (523) Cash and cash equivalents at January 1 ...... 11,718 19,592 14,897 1,921 Effect of foreign exchange rate changes ...... 257 643 (116) (15) Cash and cash equivalents at December 31 ...... 19,592 14,897 10,729 1,384

Other Financial Data For the year ended December 31, 2012 2013 2014 2014 (HK$ million*) (HK$ million*) (HK$ million*) (US$ million*) (unaudited) (unaudited) (unaudited) (unaudited) EBITDA(1) ...... 18,229 19,275 17,617 2,272 Total Debt(2)...... 31,673 31,350 25,532 3,293 Total Debt(2)/EBITDA(1)...... 1.7x 1.6x 1.4x – Net Debt(3)/EBITDA(1) ...... 0.7x 0.9x 0.8x – EBITDA(1)/Interest(4) ...... 12.9x 10.4x 11.9x – Total Debt(2)/Total Capital(5) ...... 33.7% 30.3% 25.6% –

* Except for percentages and ratios

(1) EBITDA is defined as our profit before income tax expense, excluding interest income, interest expense, depreciation, depletion and amortization. We present EBITDA in certain tables and discussions in this prospectus in addition to other financial information because we consider EBITDA to be an important performance measure and we believe that EBITDA is used by many industries and investors as one measure of gross cash flow generation. EBITDA should not be considered by an investor as an alternative to cash flow from operating activities as determined in accordance with HKFRS or other generally accepted accounting principles, and is not a standard measure under HKFRS. Our calculation of EBITDA may differ from similarly titled computations by other companies.

(2) Total debt consists of all short-term borrowings, long-term borrowings and obligations under financial leases.

(3) Net debt equals total debt less cash and cash equivalents.

(4) Interest is interest paid as extracted from the consolidated statements of cash flows of our consolidated financial statements.

(5) Total capital equals total debt plus total equity (including non-controlling interests).

Set out below is a reconciliation of our revenue and EBITDA:

Reconciliation of revenue to EBITDA

For the year ended December 31, 2012 2013 2014 2014 (HK$ million) (HK$ million) (HK$ million) (US$ million) (unaudited) (unaudited) (unaudited) (unaudited) Profit before income tax expense ...... 13,306 14,353 11,956 1,542 Add/(Deduct): Depreciation, depletion and amortization. . . 4,434 4,528 5,392 695 Interestexpenses...... 661 622 486 63 Interestincome...... (172) (228) (217) (28) EBITDA...... 18,229 19,275 17,617 2,272

6 THE OFFERING

The following is a brief summary of the terms of this offering and is qualified in its entirety by the remainder of this Offering Memorandum. For a more complete description of the terms of the Notes, see ‘‘Description of the Notes’’ in this Offering Memorandum. Terms used in this summary and not otherwise defined shall have the meanings given to them in ‘‘Description of the Notes.’’ Issuer...... KunlunEnergyCompanyLimited(the‘‘Company’’).

NotesOffered...... US$@@ aggregate principal amount of senior notes due @@ (the ‘‘Notes’’)

IssuePrice...... @@% of principal amount, plus accrued interest, if any, from @@, 2015, to the issue date.

MaturityDate...... @@, @@.

InterestPaymentDates...... @@ and @@ of each year, commencing @@, 2015

Interest...... TheNoteswillbearinterestfrom@@, 2015 at a rate of @@% per annum, payable semi-annually in arrears.

FurtherIssues...... TheNoteswillbeissuedininitial aggregate principal amounts of US$@@. We may, however, from time to time, without the consent of the holders of the Notes, create and issue, pursuant to the indenture, additional notes, having the same terms and conditions under the indenture as the Notes in all respects, except for issue date, issue price, and amount of the first payment of interest thereon. Additional notes issued may be consolidated with and form a single series with the Notes; provided, however, that such additional notes will not be issued under the same CUSIP, ISIN or other identifying number as the Notes unless such additional notes are fungible with the Notes for U.S. federal income tax purposes.

Ranking...... The Notes will constitute our direct, unconditional and unsubordinated obligations ranking pari passu with all of our other unsecured and unsubordinated obligations (except obligations preferred by applicable law) and senior in priority of payment and in all other respects to all our other indebtedness that is designated as subordinate or junior in right of payment to the Notes.

CertainCovenants...... Wehavecovenantedintheindenture,withcertainexceptions, not to incur certain liens or consolidate, merge, sell or lease its assets substantially as an entirety unless certain conditions are satisfied. The Notes and the indenture do not otherwise restrict or limit our ability to incur additional indebtedness by itself or its subsidiaries or its ability to enter into transactions with, or to pay dividends or make other payments to, affiliates. See ‘‘Description of the Notes – Certain Covenants – Limitation on Liens’’ and ‘‘– Consolidation, Merger and Sale of Assets.’’

7 Additional Amounts...... IntheeventthatBermuda,HongKongorPRCtaxesare payable in respect of payments pursuant to the Notes, we will, subject to certain exceptions, pay such Additional Amounts under the Notes as will result, after deduction or withholding of such taxes, in the payment of the amounts that would have been payable in respect of the Notes had no deduction or withholding been required. See ‘‘Description of the Notes – Additional Amounts.’’

OptionalRedemption...... Atanytimeandfromtimetotime,wemayatouroption redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the applicable premium as of, and accrued and unpaid interest, if any, to the redemption date. See ‘‘Description of the Notes – Optional Redemption.’’

OptionalTaxRedemption...... TheNotesmayberedeemed,attheoptionofus,inwholebut not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued interest, in the event we become obligated to pay Additional Amounts in respect of the Notes as a result of certain changes in tax law. See ‘‘Description of the Notes – Optional Tax Redemption.’’

Repurchase Upon a Change of Control Triggering Event...... Upon the occurrence of a Change of Control Triggering Event, we will be required to make an offer to repurchase all of the Notes at a price in cash equal to 101% of the principal amount of the Notes repurchased, plus accrued and unpaid interest on the principal amount of Notes being repurchased to but excluding the date of repurchase. See ‘‘Description of the Notes – Repurchase Upon a Change of Control Triggering Event.’’

TransferRestrictions...... TheNoteshavenotbeenandwillnotberegisteredunderthe Securities Act, any state securities laws in the United States or the securities laws of any other jurisdiction. Unless they are registered, the Notes may not be sold except pursuant to an exemption from or in a transaction not subject to the registration requirements of the Securities Act, applicable state securities laws or the applicable securities laws of any other jurisdiction. See ‘‘Transfer Restrictions.’’

Use of Proceeds ...... The aggregate proceeds of this offering, after deducting underwriting commissions and certain estimated offering expenses, will be approximately US$@@.Weintendtouse the net proceeds of this offering for refinancing of certain indebtedness and general corporate purposes. See ‘‘Use of Proceeds.’’

GoverningLaw...... The Notes and the indenture will be governed by, and construed in accordance with, the laws of the State of New York.

8 Denomination, Form and Registration...... TheNoteswillbeissuedinminimumdenominationsof US$200,000 and integral multiples of US$1,000 in excess thereof.

Notes offered in the United States to Qualified Institutional Buyers in reliance on Rule 144A will be represented by one or more permanent global notes in fully registered form without interest coupons deposited with The Bank of New York Mellon as custodian for, and registered in the name of, Cede & Co., as nominee of The Depository Trust Company, or DTC. Notes offered outside the United States in reliance on Regulation S will be represented by one or more permanent global notes in fully registered form without interest coupons deposited with The Bank of New York Mellon as custodian for, and registered in the name of, Cede & Co., as nominee of DTC for the respective accounts of Euroclear Bank S.A./N.V. or Euroclear, and Clearstream Banking, société anonyme, or Clearstream, Luxembourg.

DTC will credit the account of each of its participants, including Euroclear and Clearstream, Luxembourg, with the principal amount of Notes being purchased by or through such participant. Beneficial interests in the global notes will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its direct and indirect participants, including Euroclear and Clearstream, Luxembourg.

Ratings...... TheNotesareexpectedtoberated‘‘A1’’ by Moody’s, ‘‘A+’’ by S&P and ‘‘A’’ by Fitch. Security ratings are not recommendations to buy, sell or hold the Notes. Ratings are subject to revision or withdrawal at any time by the rating agencies.

RiskFactors...... See‘‘Risk Factors’’ and the other information in this Offering Memorandum for a discussion of factors that should be carefully considered before deciding to invest in the Notes.

Listing...... ApplicationhasbeenmadetolisttheNotesontheSEHK.

Trustee...... TheBankofNewYorkMellon

Paying Agent and Transfer Agent . . . The Bank of New York Mellon

Registrar...... TheBankofNewYorkMellon

9 RISK FACTORS

An investment in the Notes is subject to significant risks. You should carefully consider all of the information in this Offering Memorandum and, in particular, the risks described below before deciding to invest in the Notes. The following describes some of the significant risks that could affect us and the value of the Notes. Some risks may be unknown to us and other risks, currently believed to be immaterial, could become material. All of these could materially and adversely affect our business, financial condition and results of operations. The market price of the Notes could decline due to any of these risks and you may lose all or part of your investment. This Offering Memorandum also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this Offering Memorandum.

Risks Relating to Our Business and Industries Our operations may be adversely affected by international and domestic economic conditions. The global financial crisis and economic downturn have adversely affected economies and businesses around the world, including in the PRC.

Our operations may be adversely affected by international and domestic economic conditions. The severe liquidity crisis that arose in the global credit markets in 2008 has resulted in reduced liquidity and historic volatility in global financial markets, and continues to affect the functioning of financial markets and the global economy. It is still uncertain whether the recovery from the financial crisis will be stable or sustainable. In particular, the governments and central banks in the European Union have implemented, and continue to implement, a number of measures to address the financial crisis, although the situation in the banking system is still not secure in some of the peripheral euro-zone countries. At the moment it is difficult to predict the effect of these measures on the global economy and the financial system, how long the crisis will persist, and whether or to what extent our business, results of operations and financial condition may be adversely affected.

As the oil and gas industry is sensitive to macro-economic trends, oil and gas prices tend to fluctuate along with changes in macro-economic conditions. We may experience pricing pressure on our products in recessionary periods, which would have an adverse effect on our profitability. Furthermore, the global financial crisis and economic downturn and the European sovereign debt crisis have adversely affected economies and businesses around the world, including in the PRC, and the PRC’s GDP growth has slowed in recent years. In 2014, the real GDP growth of the PRC moderated to 7.4%, which was lower than the government’s target of 7.5%. Any global recession or slowdown of the PRC’s economic growth may adversely affect our business, results of operations and financial condition.

Our business is affected by the volatility of prices for crude oil and natural gas.

Our operations are affected by the volatility of prices for crude oil and natural gas. International prices for crude oil and natural gas have fluctuated widely in recent years in response to changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control, including competition within the oil and natural gas industry and with other industries in supplying consumers with competing commodities, international economic trends, exchange rate and interest rate fluctuations, expectations of inflation, domestic and foreign governmental regulations, concerns regarding the security of oil and gas supply, political and other events in major oil and gas producing and consuming nations and actions taken by members of the Organization of the Petroleum Exporting Countries (‘‘OPEC’’) and other oil exporting countries. Natural gas prices in regions such as Asia have traditionally been positively correlated with crude oil prices, and in other regions such as the U.S., natural gas prices have appeared to be decoupled from West Texas Intermediate (‘‘WTI’’) crude oil prices. More recently, after Henry Hub prices spiked in the first quarter of 2014, there has been a global drop in both WTI and Henry Hub prices, with both reaching near

10 record lows. The PRC’s natural gas prices have historically been maintained artificially lower than global natural gas prices. Recently, domestic natural gas prices have been brought closer to international prices.

We do not have, and will not have, control over the factors affecting domestic and international prices for crude oil and natural gas. For example, the political turmoil in the Middle East and North Africa in 2011 led to an increase in international oil prices. Similarly, the nuclear power plant accidents caused by the Great East Japan Earthquake slowed the development of nuclear power globally in 2011. Since late 2013, the price of oil has fallen below the $100 mark, plummeting below the US$60 mark in 2014, as oil production increased with new technology and OPEC’s decision not to cut back production. A decline in crude oil prices will reduce our crude oil revenues. If crude oil prices remain low for a prolonged period, we will have to determine and estimate whether our oil and gas assets may suffer impairment losses and, if so, the amount of the impairment losses.

Furthermore, if crude oil prices or the differential of crude oil prices over natural gas prices remain low for a prolonged period, the attractiveness of alternative energy sources would be reduced, which will have a material and adverse effect on our business, financial condition and results of operations.

The economic benefits arising from the growth of our midstream and downstream natural gas business depend on the economic development of the areas in which our projects are located.

The success of many of our projects depends on the economic development of the areas in which the projects are based. We cannot assure you that an operational location will develop economically as we expect. In particular, given the substantial capital investment at the early stages of some projects, any adverse changes in the economic growth of an operational location or any substantial deviation from our expectations in terms of both the number of new customers and the volume of their future natural gas consumption, could lengthen the payback period of our investment and may adversely affect our business, financial condition and results of operations.

Our construction of new natural gas pipelines may be subject to regulatory, environmental, economic and other risks, which could adversely affect our cash flows, results of operations and financial condition.

The construction of new natural gas pipelines such as the Shaan-Jing Line IV involves numerous regulatory, environmental, economic and other uncertainties beyond our control and may require the expenditure of significant amounts of capital. Financing may not be available on economically acceptable terms or at all. If we undertake these projects, we may not be able to complete them on schedule, at the budgeted cost or at all. Moreover, our revenues may not increase after we complete the construction of a particular project. For example, future consumption growth in a region where we invest in new facilities may not materialize. As a result, new facilities may not be able to attract enough throughput to achieve our expected investment return, which could adversely affect our results of operations and financial condition.

Potential changes in the tariff or pricing mechanism for our natural gas transmission pipelines may adversely affect our growth and profitability.

Natural gas transmission is one of the key components of our natural gas business. Our pricing mechanism for natural gas transmission is determined by the NDRC and the provincial price control bureaus. Our transmission tariff is currently not subject to changes in the upstream gas cost. However, we cannot give any assurance with respect to potential changes in the tariff or pricing mechanism, or the effect such regulation could have on our businesses or results of operations. We cannot assure you that our business and results of operations would not be materially and adversely affected.

11 The operation and profitability of our natural gas business depends on the availability and cost of raw materials.

The continued operation and profitability of our LNG processing plants depends on the availability of raw materials at economically acceptable cost. Our LNG processing plants use certain raw materials such as natural gas or coke-oven gas to produce LNG. If the relevant raw material is not available at all or not available at an economically acceptable cost, we will need to reduce the utilization of our LNG processing plants, and prolonged failure to procure raw materials at acceptable prices may result in write downs of the value of our LNG processing plants. In particular, as PRC economic growth has slowed, the supply of coke-oven gas, which is a by-product in the conventional production of coke, has decreased, adversely affecting the utilization of our LNG processing plants that use coke-oven gas to produce LNG. We cannot assure you that we will be able to acquire coke-oven gas or other raw materials at attractive costs or at all. If we cannot, our business, results of operations and financial condition would be materially and adversely affected, and substantial write downs of our LNG processing plants may occur, in which case our net income would be materially and adversely affected.

Furthermore, because the majority of the LNG we produce is sold through our own natural gas distribution network, any reduction in utilization of our LNG processing plants may result in our procuring more LNG from the wholesale market. This may materially and adversely affect the profitability and growth of our natural gas distribution business.

Our growth depends in part on environmental regulations and program promoting the use of cleaner burning fuels and modification or repeal of these regulations may adversely impact our business.

Our business depends in part on environmental policies and programs in the PRC that promote the use of cleaner burning fuels, including natural gas, for vehicles and ships. In particular, China’s11thFive- Year Plan (2006-2010) encouraged the use of energy-efficient, environmentally-friendly and new-fuel vehicles and made the development of natural gas engines for heavy-load trucks a national key development project. In 2007, China’s NDRC officially included CNG and gasoline hybrid vehicles in the country’s ‘‘encouraged development’’ category. In addition, many local governments have enacted policies providing subsidies to taxis and buses which convert their gasoline vehicles to CNG and gasoline hybrid vehicles. Moreover, according to the PRC’s 12th Five-Year Plan of Natural Gas Development (2011-2015) (the ‘‘12th Five-Year Plan’’)and‘‘One Belt and One Road Policy’’,thePRC government intends to enhance the supply of natural gas, expand the development of the cross-border and domestic natural gas trunk pipeline network, and implement additional regulations and programs encouraging the use of natural gas, resulting in an expected increase in the percentage of natural gas consumption to the total primary energy consumption in the PRC from 4.5% in 2011 to 7.5% by 2015. Any delay in implementation of these policies or programs could have a detrimental effect on the continued development of the PRC natural gas industry, which, in turn, could adversely affect our business, financial condition and results of operations.

We function as the flagship platform for PetroChina’s downstream natural gas business; if the role we play in PetroChina changes, the operations and development of our business could be adversely affected.

We are the flagship platform for PetroChina’s downstream natural gas business, and we have received strong support from PetroChina in the form of, among others, asset injections, business cooperation, financial support and technology support. In addition, we source substantially all of our natural gas from PetroChina. We cannot assure you that our role with PetroChina will not be changed, or that such support will always continue or not be reduced. Should our role within PetroChina change or PetroChina reduce its support for us because of reorganization within PetroChina, in response to PRC governmental policy or otherwise, our business, financial condition and results of operations may be materially and adversely affected.

12 The profitability and growth of our natural gas business depends on the availability of sufficient supply of raw materials, primarily natural gas in the PRC.

Our natural gas business depends on the availability of sufficient supply of natural gas in the PRC. Global natural gas demand has grown steadily in past years. However, natural gas production in the PRC remains significantly below that of oil and coal. If the growth in demand for natural gas in the PRC cannot be met by growth in domestic production or importation from major producing countries such as Russia, the development of the natural gas industry in the PRC would be constrained, in which case our growth would be materially and adversely impacted.

The applications of natural gas as a vehicle and industrial fuel continue to be much less developed than those of coal for industrial use, and of gasoline and diesel for vehicle use.

Coal, gasoline and diesel fueling stations and service infrastructure are widely available in the PRC. In contrast, use of natural gas vehicles and industrial fuels is less developed. Future growth of gas applications requires substantial promotional and educational efforts and the development and supply of more natural gas vehicles and fueling stations. This will require significant continued efforts by us, our industry as a whole, as well as the PRC government, and we will continue to face competition from oil companies, coal companies and gasoline station operators. We cannot assure you that natural gas will ever achieve the level of acceptance as a vehicle and industrial fuel necessary for us to expand this portion of our business.

If there are advances in alternative vehicle and industrial fuels or technologies, or if there are improvements in gasoline, diesel or hybrid engines, demand for natural gas vehicle and industrial fuels may decline and our vehicle refueling station business may suffer.

Technological advances in the production, delivery and use of alternative fuels that are, or are perceived to be, cleaner, more cost-effective or more readily available than LNG or CNG have the potential to slow the adoption of natural gas vehicles and industrial facilities. In addition, advances in gasoline and diesel engine technology, especially hybrids, may offer a cleaner, more cost-effective option and make vehicle customers less likely to convert their vehicles to natural gas. Technological advances related to ethanol or biodiesel, which are increasingly used as an additive to, or substitute for, gasoline and diesel fuel, may slow the need to diversify fuels and affect the growth of the natural gas vehicle market. In addition, hydrogen and other alternative fuels in experimental or developmental stages may eventually offer a cleaner, more cost-effective alternative to gasoline and diesel than natural gas. Advances in technology that slow the growth of or conversion to natural gas vehicles or industrial facilities or which otherwise reduce demand for natural gas as a vehicle or industrial fuel may have an adverse effect on our business.

Our city gas distribution business is susceptible to any change in upstream natural gas supply price and gas connection fees.

We face risks in relation to passing through increased input costs. Costs to downstream natural gas distributors, or city-gate prices, consist of the exploration wellhead price and transportation and transmission charge, both regulated by the NDRC. Piped gas end-user tariffs are set by local pricing bureaus rather than the central government, and may vary widely between cities. In particular, when upstream exploration wellhead price increases, it takes time to pass the cost increase to residential users because approval from the local pricing bureau is required through a public hearing. Even if the adjustments sought by us are approved, such approval process and hearing can cause substantial delay and we may not be able to completely and quickly pass through future increases in natural gas procurement costs to end customers and may face margin pressure if the NDRC makes unfavorable adjustments to natural gas prices.

13 In addition, the level of connection fees that we charge for connecting our new customers to our city-gas distribution networks is also subject to approval by local pricing bureaus. We cannot assure you that we will continue to have the right to charge pipeline connection fees and end-user tariffs in our existing markets at the levels currently enjoyed by us, or that we will be able to charge similar connection fees and end-user tariffs in new markets.

Any reduction in connection fees or end-user tariffs will have an adverse impact on our results of operations and financial condition. In addition, we cannot assure you that we will be able to obtain the required approval from the relevant local pricing bureau for an increase in pipeline connection fees or end-user tariffs if our costs increase significantly. In the event that we are unable to obtain approval for, or experience delay in, passing through any increased input costs in pipeline connection fees or gas tariffs, or experience loss of market demand due to increased end-user tariffs, our business, financial condition and results of operations may be materially and adversely affected.

We may not be able to effectively manage our expansion and growth.

We plan to continue expanding our operations, including into areas in which we do not presently have operations, as well as the areas where our penetration rates are low. Our expansion is based on our forward-looking assessment of market prospects. We cannot assure you that our assessments will turn out to be accurate. Our expansion plans may be affected by a number of factors which may not be within our control. These factors include fluctuations in demand for natural gas and related commodity prices, increasing competition in the industry, environmental standards, government regulation and our ability to obtain sufficient financing for our expansion efforts.

To succeed in our business expansion, we will need to recruit and train new managers and other employees and build our operations and reputation in the applicable markets within a relatively short period of time. We may have limited knowledge of the conditions of these local markets and little or no experience in these regions. As we enter new markets, we may not have the same level of familiarity with local regulations as compared to the cities where we are relatively established. For example, the distribution of natural gas and operations of fueling stations are highly regulated industries requiring registration for the issuance of licenses required by various government authorities. Additionally, various standards must be met for LNG and CNG vehicle refueling stations, including handling and storage of natural gas, tanker handling and compressor operation. These regulations and the associated governmental procedures may vary significantly from region to region, and our past experience in other regions may therefore not be of great assistance in navigating new regional regulatory environments.

We may not have the same level of familiarity with business practices, as well as customer behavior and preferences in the regions where we expand. In addition, when we enter new geographical areas, we may face intense competition from natural gas operators with an established presence and market share in those areas. Therefore, we cannot assure you that we can execute successfully our contemplated expansion plan or that we will succeed in effectively integrating our expanded operations, or that our expanded operations will generate adequate returns on our investments or positive operating cash flows. Furthermore, our expansion and growth may place a substantial strain on our managerial and financial resources and may require continued development of our internal controls in order to deal with greater and qualitatively different risks associated with an expanded scale and scope of operations, as well as an increasing number of subsidiaries, associates and joint ventures at multiple levels. Any failure in effectively managing our expansion and growth may materially and adversely affect our business, financial condition and results of operations.

Natural gas operations entail inherent safety and environmental risks that may result in substantial liability to us.

Natural gas operations entail inherent risks, including equipment defects, malfunctions and failures, human error, accidents and natural disasters, which could result in uncontrolled flows of natural gas, fires, explosions, property damage, damage to the environment, injury and death. LNG and CNG fuel

14 tanks, if damaged or improperly maintained, may rupture and the contents of the tank may rapidly decompress and result in death or injury. Also, operation of LNG pumps requires special training and protective equipment because of the extremely low temperatures of LNG. Improper loading of LNG vehicles can result in venting of methane gas, leading to explosions.

The location of pipelines near populated areas, including residential areas, commercial business centers, industrial sites and other public gathering places, could increase the level of damage resulting from these risks, including the loss of human life, significant damage to property, environmental damage, impairment of our operations and substantial loss to us. We may incur substantial liability and cost if damages are not covered by insurance or are in excess of policy limits.

We may be penalized if we fail to comply with existing or future health, safety, environmental protection or other laws and regulations.

Our business is subject to health, safety and environmental protection laws and regulations in the PRC, as well as other jurisdictions where we operate. These laws and regulations to which we are subject may become increasingly strict and have an increasing impact on our operations. Our compliance with such laws or regulations may require us to incur significant capital expenditures or other obligations or liabilities, which could create a substantial financial burden on us. Furthermore, these jurisdictions may impose fees and fines for any breaches of such laws and regulations, such as the discharge of waste substances or serious environmental pollution, and authorize a government, at its discretion, to close or suspend any facility which fails to comply with orders requiring us to cease or cure operations causing such breaches. Substantial liabilities, reputational damages, and other adverse consequences could result if we do not adequately identify all process safety, personal safety and environmental risks or provide effective mitigation, if our operations do not conform with our management systems and controls at all times, or if we conduct business activities before obtaining the requisite approvals or licenses or otherwise fail to comply with health, safety, environmental protection or other laws and regulations.

Our gas distribution business is dependent on our ability to maintain our gas operation licenses, other certificates, approvals and permits. We conduct our pipeline gas distribution business in the PRC pursuant to gas operation licenses and other certificates, approvals and permits from the PRC government, which authorizes us to provide gas delivery services in various PRC locations. Some of our PRC subsidiaries are still in the process of obtaining or renewing their gas operation licenses and other certificates, approvals and permits. For our subsidiaries that have obtained such licenses, the PRC government may revoke the gas operation licenses in certain circumstances based on the recommendation of the governmental bodies charged with the regulation of the transportation, distribution, marketing and storage of gas. The reasons for which our gas operation licenses in the PRC may be revoked include:

• refusal to supply gas to any entity or individual that meets the relevant requirements within the coverage area of the city-gas network;

• reselling at a profit, mortgaging, leasing, lending, transferring or altering the gas operation license;

• suspending gas supply or adjusting gas supply levels without notification, or terminating or suspending its business operations without approval;

• providing gas used for operation to any entity or individual without a gas operation license;

• storing gas in a manner which does not meet the relevant requirements for work safety;

• failing to supply gas which meets the national quality standards to gas users in a continuous, stable and safe way, or failing to regularly conduct safety inspections of the gas facilities of gas users; and

15 • requiring gas users to purchase specified products or services it provides.

Under PRC laws and regulations, we are also required to obtain certain approvals, licenses, registrations, certificates and permits from the relevant governmental authorities for our construction of gas stations, branch pipelines and city-gas distribution networks. If any of our gas operation licenses, other certificates, approvals, registrations or permits are revoked or fail to be renewed or obtained, we would be required to cease providing gas supply in the relevant PRC locations, pay certain monetary penalties, shut down the relevant facilities or cease the relevant construction. The loss of some or all of our gas operation licenses, other certificates, approvals or permits may materially and adversely affect our business, financial condition and results of operations.

Our city-gas pipeline networks rely on local PRC governments to grant concession rights, which will expire or may be terminated early or not be renewed upon expiration, and may contain restrictions on our transfer of interests in the associated projects.

We operate our piped natural gas distribution projects pursuant to the relevant concession rights we have obtained or are in the process of obtaining from local PRC governments. Some concession rights agreements for our projects contain restrictions on our ability to transfer our interests to third parties without prior consent from the relevant local government. Furthermore, concession rights are subject to regulatory controls. The relevant local PRC governments may terminate the concession agreement and cancel our concession right if we: (i) transfer or lease concession rights without prior authorization; (ii) dispose of or mortgage out relevant property without prior authorization; (iii) experience material quality or work safety accidents due to negligence or recklessness in management; (iv) cease business operations without prior consent, thereby materially and adversely affecting public interest and security; or (v) engage in other acts prohibited by laws and regulations. Cancellation or early termination of any concession, imposition of restrictive regulatory controls or failure to renew any concession upon its expiration may interrupt the operations of such projects, which may materially and adversely affect our business, financial condition and results of operations.

We are exposed to political, economic, regulatory and legal risks related to countries where we participate in exploration and production projects.

We are subject to various political, legal and regulatory environments in foreign countries where we operate, some of which are known to be unstable and differ in certain significant respects from those prevailing in developed countries.

Our results of operations may be adversely affected by a number of factors in the countries in which we operate or have interests in, including, but not limited to, the following:

• changes in international political and economic conditions, as well as social conditions;

• military hostilities, war, political unrest or acts of terrorism;

• challenges caused by distance, language, local business customs and cultural differences;

• difficulty in obtaining licenses, permits or other regulatory approvals from local authorities and in enforcing the oil and gas segment’s rights under contracts;

• with respect to those countries that are members of OPEC, the lowering of petroleum production volume pursuant to OPEC policy;

• changes in laws, regulations or government policies, or in the interpretation or enforcement of laws, regulations and government policies, including changes driven by resource nationalism, or uncertainties thereof;

16 • measures which may be introduced to control inflation or changes in the rate or method of taxation;

• imposition of additional restrictions on currency conversion and remittances abroad or reduction in tariff protection and other import restrictions;

• exchange rate volatility;

• natural disasters and epidemics, outbreaks or pollution; and

• changes in the usage and costs of state-controlled transportation services.

Oilfield exploration and drilling involves numerous risks, including the risk that no commercially productive crude oil or natural gas reserves will be discovered and the risk that we will fail 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, the 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:

• unexpected drilling conditions;

• pressure or irregularities in geological formations;

• equipment failures or accidents;

• oilwellblowouts;

• 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.

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, we may not meet our production or growth targets, and our proved reserves will decline as we extract crude oil and natural gas from the existing reservoirs, which could adversely affect our business, financial condition and results of operations.

Our crude oil and natural gas reserve estimates involve some degree of uncertainty and may prove to be incorrect over time or may not accurately reflect actual growth levels. Even if such estimates are accurate, technical limitations may prevent us from retrieving these reserves. In addition, the actual size of deposits may differ materially from such estimates.

Evaluation of oil and gas reserves involves multiple uncertainties and requires exploration and production companies to extensively judge as to future events based upon available information. Our crude oil and natural gas reserves as of December 31, 2012, 2013 and 2014 were assessed by

17 independent engineering consultants. Such estimates reflect our best judgment at the time of their preparation, based on geological and geophysical analyses and appraisal work, and may differ from estimates that may have been made by us in the past.

Crude oil and natural gas exploration and production activities are subject to various uncertainties, including in relation to the physical characteristics of crude oil and natural gas fields. These physical characteristics, including the proportion of reserves that can ultimately be produced, the rate of production and the costs of developing the fields, are difficult to estimate and, as a result, actual production may be materially different from current estimates of reserves. Factors affecting our reserve estimates include: new exploration, drilling or production activities, new acquisitions or licenses granted, assumptions regarding future performance of wells and surface facilities, field reviews, the addition of new reserves from discoveries or extensions of existing fields, the application of improved recovery techniques and changed economic conditions.

The reliability of reserve estimates depends on the quality and quantity of technical and economic data, the production performance of the fields and consistency in oil and gas policies of the local governments where we have operations. In addition, changes in the price of crude oil and natural gas may also adversely affect the estimates of our reserves, because the reserves are evaluated based on prices and costs as of the appraisal date. The quantities of crude oil and natural gas that are ultimately recovered could materially differ from our reserve estimates, and downward revisions of our estimates could affect our results of operations and business plans. Published reserve estimates may also be subject to correction due to the application of newly published rules and guidance.

We can give no assurance that the reserve estimates upon which we have made investment decisions accurately reflect actual reserve levels or, even if accurate, that technical limitations will not prevent us from retrieving these reserves. Accordingly, investors should not rely on such data as the primary basis for their decision whether to invest in the Notes.

Any interruptions in our operations due to suspension, damage, destruction or closure of key operational facilities could adversely affect our activities.

We own and operate a variety of key operational facilities in the PRC and around the world, such as drilling platforms, natural gas pipelines, LNG terminals, LNG processing plants and LNG vehicle refueling stations. Any interruption in, or prolonged suspension of any part of operations at, or any damage to or destruction of such key operational facilities, or the closure of the same, could significantly affect our activities. Our various facilities are subject to the risk of operational breakdowns or disruptions, which may result from external factors beyond our control, including natural disasters, such as earthquake and tsunamis, terrorist attacks, health epidemics and labor disputes.

Operational breakdowns or disruptions may also result from industrial accidents, such as due to faulty construction, technical failures and human error, which may lead to fire, explosions or the release of toxic or harmful substances, particularly in our oil and gas operations. Any interruptions in our operations may prevent us from serving our principal customers, which may, in turn, result in breach of contract, loss of revenues, or expose us to liability, lawsuits and damage to our reputation, any of which could have an adverse effect on our business, financial condition and results of operations.

The oil and gas industry is highly competitive.

The oil and gas industry is highly competitive. There is strong competition, both within the oil and gas industry and with other industries, in supplying the fuel needs of commercial, industrial and residential markets. In addition, the oil and gas industry is characterized by rapid and significant technological advancements. The implementation of our growth strategy requires continuous technological advances and innovation, including advances in exploration, production, transmission, distribution and advances in technology related to LNG. Competition puts pressure on product prices, affects marketing and requires continuous management focus on reducing unit costs and improving efficiency. We cannot

18 assure you that we will be able to respond to these competitive pressures on a timely basis or at all. If we are unable to respond to these competitions in a timely and effective manner, our ability to compete could be adversely affected.

We may encounter problems with our joint projects and disputes with our business partners may adversely affect our business, financial condition and results of operations.

In the course of our business, we have in the past formed, and may in the future continue to form, joint ventures or other cooperative relationships with other parties to jointly engage in certain business activities. We may bear joint and several liabilities to the project owners or other parties with our business partners under the relevant agreements, and as a result, we may incur damages and other liabilities for any defective work or other breaches by other business partners. In addition, if there are disagreements between us and our business partners regarding the business and operations of the joint projects, we cannot assure you that these disagreements can be resolved in a manner that will be in our best interests. Certain major decisions, such as selling or refinancing these projects, may require the consent of all other partners. These limitations could adversely affect our ability to sell, refinance or otherwise operate and profit from these projects.

Any of these and other factors may have an adverse effect on the performance of our joint projects and expose such projects to a number of risks, including the risk that these projects may not be able to fulfill their obligations under contracts with customers, resulting in disputes not only between us and our partners, but also between the joint ventures and their customers, or create unexpected complications. Such a material adverse effect on the performance of the joint projects may in turn adversely affect our business, financial condition and results of operations.

We rely heavily on dividend payments from, and repayments of intercompany loans by, our subsidiaries for funding.

We are a holding company established in Bermuda and conduct substantially all of our operations through our subsidiaries that operate in the PRC and other jurisdictions. Most of our assets are held by, and substantially all of our earnings and cash flows are attributable to, our subsidiaries. As such, the availability of funds from which we are able to service our indebtedness depends upon dividends received from these subsidiaries. In addition, from time to time, we provide intercompany loans to our subsidiaries and, as a result, our ability to repay our indebtedness, including the Notes, is dependent on the timely repayment of such intercompany loans by our subsidiaries.

PRC laws and regulations permit payment of dividends only out of net profits as determined in accordance with PRC accounting standards and regulations and such profits differ from profits determined in accordance with HKFRS in certain significant respects, including the use of different bases of recognition of turnover and expenses. Our PRC subsidiaries are required to set aside a portion of their after-tax profits according to PRC accounting standards and regulations to fund certain reserve funds that are not distributable as cash dividends. In addition, one of our subsidiaries is subject to a loan agreement which provides that dividends cannot be made if its pre-tax profits are not sufficient to meet repayment obligations under the relevant loan. Any limitation on the ability of our subsidiaries to pay dividends to us may materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, service our debts or otherwise fund and conduct our business.

We cannot assure you that our subsidiaries will generate sufficient earnings and cash flows to pay dividends or otherwise distribute sufficient funds to enable us to meet our financial obligations, including making interest payments on our indebtedness, including the Notes. If the distributable dividends or other distributions from our subsidiaries decline for any reason, our earnings and cash flows will be materially and adversely affected and our ability to service our indebtedness, including the Notes, would be materially and adversely affected.

19 Our activities are capital intensive and we have had net current liabilities in the past; if we are unable to fund our capital expenditure requirements or refinance our debt on terms we deem acceptable, our liquidity and results of operations may be adversely affected.

Our exploration and production activities, as well as construction activities, are capital-intensive activities involving a high degree of risk. Our ability to undertake our exploration, production and construction activities and make the necessary capital expenditures and investments is subject to many risks, contingencies and other uncertainties, which may prevent our business from achieving the desired results, or which may significantly increase the expenditures and investments that our business needs to make.

As of December 31, 2013 and 2014, we had net current liabilities of HK$4,269 million and HK$4,887 million (US$630 million), respectively. These net current liability positions primarily reflect capital investments to expand the scale of our operations and distribution capability, including acquisitions of projects and the construction of fixed assets. We may continue to have substantial net current liabilities in the future, and our business operations and our ability to raise funding may be materially and adversely affected by our substantial amount of net current liabilities. Moreover, our cash flow position depends not only on market conditions and customer demands, but also on a number of economic, legal and other factors, some of which are beyond our control. If we cannot maintain sufficient revenue or are not able to raise necessary funding to pay off our current liabilities when due and meet our capital commitments, our business, financial condition, results of operations and liquidity may be materially and adversely affected.

Failure to attract and retain qualified personnel and experienced senior management could disrupt our operations and adversely affect our business and competitiveness.

To a significant extent, our success is built upon the technical expertise and in-depth knowledge of the oil and gas industry possessed by the executive directors and certain other key technical and management personnel. Our future growth and success depend to a large extent on our ability to retain or recruit qualified individuals to strengthen our management, operational and research teams. However, there can be no assurance that they will continue their services at the expiration of their initial employment contracts or that we will be able to find satisfactory replacements if they leave. In addition, due to the intense market competition for highly skilled workers and experienced senior management, we may face difficulties locating experienced and skilled personnel in certain areas, such as engineering, marketing, product development, sales, finance and accounting. Accordingly, if any of our executive directors or key technical and management personnel cease to be involved in our operations, the implementation of our business strategies may be affected, which could lead to a material adverse impact on our operations. Furthermore, we cannot assure you that we would not be subject to adverse publicity or speculation from the press regarding management change.

We may not be able to detect or prevent employee misconduct, including misconduct by senior management, and such misconduct may damage our reputation, which could have an adverse effect on our business.

Certain of our former senior management are being investigated by the relevant PRC authorities. We have very limited knowledge of the status or scope of the ongoing investigations and it is difficult for us to assess their ultimate outcome or their impact on our business. We have re-examined our internal control and corporate governance policies and procedures in order to strengthen our ability to detect and prevent similar and other misconduct. We cannot assure you, however, that we are able to detect or prevent such misconduct in a timely fashion, or at all. If we fail to prevent employee misconduct, our reputation may be harmed, which could have an adverse effect on our business.

20 We may become involved in various legal proceedings or other disputes in the normal course of our operations.

In the normal course of our operations, we may become involved in, named as a party to, or be the subject of, various legal proceedings or other disputes, including regulatory proceedings, tax proceedings and legal actions, related to personal injuries, property damage, property tax, land rights, the environment and contract disputes. The outcome of outstanding, pending or future proceedings cannot be predicted with certainty and may be determined adversely to us and, as a result, could have a material adverse effect on our assets, liabilities, business, financial condition and results of operations.

We have limited insurance coverage and may incur losses due to business interruptions resulting from natural or man-made disasters, and our insurance may not be adequate to cover liabilities resulting from accidents or injuries that may occur.

Due to the nature of our business, we often handle highly flammable and explosive materials. There is a significant risk that industry-related accidents will occur in the course of our business. While we have implemented safety precautions and maintenance procedures, we cannot assure you that accidents will not occur. Any significant accident, whether or not we are found to be at fault, may adversely affect our business, financial condition and results of operations.

The insurance industry in the PRC is still at an early stage of development. We maintain property insurance covering a small portion of our property, plant and equipment (including certain pipelines ownedbyus)andvehicleinsuranceonourtransportation vehicles. Our insurance policies do not typically cover third-party liabilities, business interruptions or environmental damages arising from our operations or caused by natural disasters, such as earthquakes. We cannot assure you that our insurance policies will adequately compensate us for losses or damages under any and all potential adverse circumstances. Should any disasters such as earthquakes, floods, or acts of terrorism occur, we may suffer significant property damage and loss of revenue due to interruptions in our business operations. A material and successful claim made against us that is not covered by any of our insurance policies or is in excess of our insurance coverage could materially and adversely affect our business, financial condition and results of operations.

The activities of our affiliates in certain countries and with certain entities that are the subject of U.S. and E.U. sanctions could result in negative media and investor attention to us, subject us to U.S. sanctions and materially and adversely affect investors’ investment in the Notes.

Our parent company, CNPC, engages through various CNPC group entities in limited international oil and gas production related services, production sharing and other activities in countries that are the subject of various United States economic sanctions regimes and sanctions programs in Europe. However, we do not engage in such business. While these entities are not controlled by us, it is possible that, as a result of our affiliation with these entities, we may be subject to negative media or investor attention, which may distract management, consume internal resources and affect investors’ perception of us.

The activities of CNPC’s subsidiaries, other than us, in countries targeted by U.S. sanctions could also subject us to U.S. sanctions. Certain U.S. sanctions provisions, including those contained in the Iran Sanctions Act, the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (‘‘CISADA’’), the National Defense Authorization Act for Fiscal Year 2012 (‘‘NDAA’’), Executive Order 13622, the Iran Threat Reduction and Syria Human Rights Act of 2012 and the Iran Freedom and Counter-Proliferation Act of 2012, authorize the imposition of sanctions on non-U.S. companies that engage in certain activities in or related to sanctioned countries, and those sanctions can impact such companies’ subsidiaries. If it is determined that a CNPC subsidiary, although it is not a member of our Group, does engage in certain activities targeted by U.S. sanctions, that subsidiary and CNPC could be subject to sanctions ranging from restrictions on U.S. exports or bank financing to the outright blocking of CNPC’s and that subsidiary’s property within U.S. jurisdiction. If CNPC is sanctioned pursuant to a

21 U.S. sanctions regime, it could harm our reputation and materially and adversely affect the market price of the Notes. Further, if the U.S. Government were to block CNPC’s property, including that of its controlled subsidiaries, we could be prohibited from engaging in business activities in the United States or with U.S. individuals or entities, and U.S. transactions in our securities and distributions to U.S. individuals and entities with respect to our securities could also be prohibited. We can give you no assurances that CNPC or any of its subsidiaries or affiliates, including us, will not be the subject of U.S. sanctions in the future due to the activities of CNPC group entities.

In addition, certain U.S. state and local governments and universities have restrictions on the investment of public funds or endowment funds, respectively, in, and/or the entry by relevant state governments into certain procurement contracts with, companies that are members of corporate groups with activities in certain sanctioned countries. As a result, concern about potential legal or reputational risk associated with the operations in the sanctioned countries by CNPC and CNPC group entities other than us also may reduce the marketability of our Notes to particular investors, which could affect the price of our Notes and investors’ interest in us, despite lack of any activity by us in those countries. We are aware that CNPC, we, and other affiliates of ours have been included in certain state lists that prohibit investment in our securities by the relevant state pension funds or agencies, and/or prohibit us from entering into contracts to sell goods or services above certain dollar thresholds to such state governments.

In addition, we keep deposits with Bank of Kunlun Co., Ltd. (‘‘Kunlun Bank’’), a subsidiary of CNPC that is a target of certain U.S. sanctions under CISADA. Although the amount of our deposits with Kunlun Bank is insignificant, this may also subject us to negative media or investor attention. Any of the above may have an adverse effect on investors’ investment in the Notes.

RisksRelatingtoConductingBusinessinthePRC Changes in the PRC’s economic, political and social conditions as well as governmental policies could affect our financial condition and results of operations.

The PRC’s economy differs from the economies of most developed countries in many respects, including the structure of economy, level of government involvement, level of development, growth rate, control of capital investment, control of foreign currency and allocation of resources. The PRC’s economy has been transitioning from a planned economy to a more market-oriented economy. For the past three decades, the PRC government authorities have implemented economic reform measures to emphasize the utilization of market forces in economic development. The PRC government authorities from time to time implement various macro-economic and other policies and measures, including contractionary or expansionary policies and measures at times of or in anticipation of changes in the PRC’seconomic conditions. Economic reform measures, however, may be adjusted, modified or applied inconsistently from industry to industry or across different regions of the country. As a result, we may not continue to benefit from all, or any, of these measures. In addition, whether changes in the PRC’s political, economic and social conditions, laws, regulations and policies will have any adverse effect on our current or future business, financial condition and results of operations cannot be predicted.

PRC government regulations may limit our activities and adversely affect our business operations.

Our operations, like those of other PRC oil and gas companies, are subject to extensive regulation by the PRC government authorities. Relevant governmental authorities, such as the NDRC, the National Energy Administration, the Ministry of Finance, the SAFE, the Ministry of Land and Resources, the National Energy Administration, the Ministry of Commerce and the State Administration of Taxation and/or their local branches, exercise extensive control over various aspects of the PRC’s oil and gas industry. These controls affect the following material aspects of our operations:

• exploration and production licensing;

22 • construction and protection of petroleum and natural gas pipelines;

• pricing mechanisms for our main products;

• industry-specific taxes and fees;

• capital investments;

• import and export quotas and procedures;

• environmental and safety standards; and

• technology development.

On December 29, 2011, the PRC government issued the Circular on the Increase of the Threshold of the Crude Oil Special Levy, pursuant to which the threshold of the crude oil special levy was increased from US$40 to US$55 per barrel with effect from November 1, 2011. In accordance with Notice of the Ministry of Finance on Raising the Threshold for Levying the Special Oil Proceeds Surcharge with effective date of January 1, 2015, upon approval by the State Council, the Ministry of Finance has decided that with effect from January 1, 2015, the threshold for levying the special oil proceeds surcharge shall be raised to US$65 per barrel. After the threshold is raised, the special oil proceeds surcharge shall still be calculated and levied according to fixed ad valorem rates at five excess progressive levels, ranging from 20% to 40% as decided by the Ministry of Finance. Based on the Provisional Regulations of the PRC on Resource Tax, issued by the State Council on December 25, 1993, the resource tax payable by the resource tax payers in connection with the extraction of crude oil and natural gas is collected based on volume. However, on June 1, 2010, the Ministry of Finance and the State Administration of Taxation jointly issued the Regulations on Several Issues Concerning the Reform on Resource Taxation of Crude Oil and Natural Gas in Xinjiang Province for the extraction of crude oil and natural gas. Pursuant to this regulation, effective from June 1, 2010, the resource tax payable by the resource tax payers in connection with the extraction of crude oil and natural gas in Xinjiang is collected based on value instead of volume. On December 1, 2010, the application of the resource tax based on value was expanded to 12 provinces in the western region. On September 30, 2011, the State Council issued the amendment to the Provisional Regulations of the PRC on Resource Tax. Pursuant to this amendment, effective from November 1, 2011, the resource tax based on value of sales and deemed sales has been applied to all of the PRC. Our results of operations may be adversely affected by this amendment.

In addition, the PRC government must approve the construction and major renovation of significant refining and petrochemical facilities, as well as the construction of significant natural gas pipelines and storage facilities. We do not have control over the timing and outcome of the final approvals for any projects for which such approvals are needed.

As a result, we may face significant constraints on our ability to implement our business strategies, to develop or expand our business operations or to maximize our profitability. Our business may also be adversely affected by future changes in certain policies of the PRC government in respect of the oil and gas industry.

Uncertainties with respect to the PRC legal system could limit the protections available to us.

The PRC legal system is a civil law system based on written statutes. Unlike in common law systems, prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in the PRC. However, since many laws, rules and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which

23 may limit legal protections available to us. For example, we may have to resort to administrative and court proceedings to enforce the legal protections that we enjoy either by law or contract. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate and predict the outcome of PRC administrative and court proceedings and the level of legal protection we enjoy in the PRC as compared to more developed legal systems. These uncertainties may impede our ability to enforce our contracts with future partners, service providers and suppliers. The effect of future developments in the PRC legal system cannot be predicted, particularly with regard to the oil and gas industry in the PRC, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors. In addition, any litigation in the PRC may be protracted and result in substantial costs and diversion of our resources and management attention.

Fluctuations in exchange rates may affect our business, financial condition and results of operations.

We receive most of our revenues in Renminbi. A portion of our Renminbi revenues must be converted into other currencies to meet our foreign currency obligations. The existing foreign exchange limitations under the PRC laws and regulations could affect our ability to obtain foreign currency through debt financing, or to obtain foreign currency for capital expenditures. The value of Renminbi against U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s 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. Since July 21, 2005, the value of the Renminbi has appreciated significantly against the U.S. dollar. Effective April 16, 2012, this trading band has been widened from 0.5% to 1%, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar or other foreign currency. There remains significant international pressure on the PRC government to adopt a more flexible currency policy. See ‘‘Exchange Rates’’. Fluctuations in the exchange rate of the Renminbi against the U.S. dollars and certain other foreign currencies may adversely affect our business, financial condition and results of operations. For example, we experienced a decrease in our share of profits less losses of associates for the year ended December 31, 2014 partly due to devaluation of the currency of Republic of Kazakhstan. The PRC government may undertake reforms in relation to the exchange rate system, such as making the Renminbi freely convertible in the future. However, there is no assurance if or when such reforms will occur and we may not be able to anticipate the effects of any such reforms.

Under the Enterprise Income Tax Law, we may be classified as a ‘‘resident enterprise’’ of the PRC. Such classification could result in unfavorable tax consequences for us and our non-PRC note holders.

Under the Enterprise Income Tax Law (‘‘EIT Law’’), an enterprise established outside of the PRC with a ‘‘de facto management body’’ within the PRC is deemed a ‘‘resident enterprise,’’ meaningthatitcanbe treated as a PRC enterprise for enterprise income tax purposes, although dividends paid from one resident enterprise to another may qualify as ‘‘tax-exempt income.’’ The implementing rules of the EIT Law define ‘‘de facto management’’ as ‘‘substantial and overall management and control over the production and operations, personnel, accounting, and properties’’ of the enterprise. A circular issued by the State Administration of Taxation on April 22, 2009 (‘‘Circular 82’’) provides that a foreign enterprise controlled by a PRC company or a PRC company group will be treated as a ‘‘resident enterprise’’ with a ‘‘de facto management body’’ located within China if all of the following requirements are satisfied at the same time: (i) the senior management and core management departments in charge of daily operations are located mainly within the PRC; (ii) financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (iii) major assets, accounting books, company seals and minutes and files of board and shareholders’ meetings are located or kept within the PRC; and (iv) at least half of the enterprise’s directors with voting rights or senior management reside within the PRC. On July 27, 2011, the State Administration of Taxation

24 issued Provisional Administrative Regulations of Enterprise Income Taxation of a Foreign Enterprise Controlled by a PRC Enterprise or a PRC Enterprise Group (‘‘Circular 45’’), taking effect as of September 1, 2011, to further prescribe the rules concerning the recognition, administration and taxation of a foreign enterprise ‘‘controlled by a PRC enterprise or PRC enterprise group’’. Circular 45 provides two ways for a foreign enterprise ‘‘controlled by a PRC enterprise or a PRC enterprise group’’ to be treated as a resident enterprise. First, the foreign enterprise may decide on its own whether its de facto management body is located in the PRC based on the criteria set forth in Circular 82, and, if it makes such determination, it shall apply to the competent tax bureau to be treated as a resident enterprise. Second, the tax authority may determine that the foreign enterprise is a resident enterprise after its active investigation.

We believe that we are not currently a PRC resident enterprise. However, since a majority of our management is currently based in the PRC, we cannot assure you that we will not be deemed a ‘‘resident enterprise’’ under the EIT Law and, therefore, be subject to enterprise income tax at a rate of 25% on its global income in the future. If we are not considered to be a PRC resident enterprise for EIT Law purposes, the payment of interest on the Notes to the overseas holders of the Notes will not be subject to PRC withholding tax.

Under the EIT Law and the implementation regulations thereunder, PRC withholding tax at a rate of 10% is normally applicable to PRC-source income derived by nonresident enterprises, subject to adjustment by applicable treaty. The EIT Law’s implementation regulations further set forth that interest income is viewed as PRC-source income if the enterprise or the establishment that pays or bears the interest is situated in the PRC. If we are deemed a PRC resident enterprise for tax purposes, interest paid to overseas note holders may be regarded as PRC-sourced and therefore be subject to PRC withholding tax at a rate of 10% for enterprise note holders and 20% for individual note holders (or a lower treaty rate, if any). Any gains realized on the transfer of the Notes by such investors may also be subject to PRC income tax at a rate of 10% for enterprise note holders or 20% for individual note holders, if such gains are regarded as PRC-sourced.

The discontinuation of or reduction in any preferential tax treatments currently available to us in the PRC may have an adverse effect on our financial condition and results of operations.

Under the EIT Law, both foreign-invested and domestic enterprises generally are subject to a uniform income tax rate of 25%. However, certain of our subsidiaries currently enjoy tax incentives in the form of preferential income tax rates. Such preferential tax treatments are subject to reassessment and there is no assurance that we will continue to enjoy such preferential tax treatments. If any of those subsidiaries is not able to obtain any further preferential tax treatment when its existing preferential tax treatment expires, our financial conditions and results of operations may be materially and adversely affected.

The PRC national economy and economies in different regions of the PRC may be adversely affected by natural disasters, acts of God, and occurrence of epidemics.

Our business is subject to general economic and social conditions in the PRC, in particular in the regions where we operate. Natural disasters, epidemics and other acts of God which are beyond our control may adversely affect the economy, infrastructure and livelihood of the people in the PRC. Some regions in the PRC, including certain cities where we operate, are under the threat of flood, earthquake, sandstorm, snowstorm, fire, drought, or epidemics such as Severe Acute Respiratory Syndrome, or SARS, H5N1 avian flu or the human swine flu, also known as Influenza A (H1N1). For instance, a serious earthquake and its successive aftershocks hit Sichuan province in May 2008 and subsequently, resulting in tremendous loss of lives and injury and destruction of assets in the region. In addition, past occurrences of epidemics, depending on their scale, have caused different degrees of damage to the national and local economies in the PRC. A recurrence of SARS or an outbreak of any other epidemics in the PRC, such as the H5N1 avian flu or the human swine flu, especially in the cities where we have operations, may adversely affect our business, financial condition and results of operations.

25 RisksRelatingtotheNotes The Notes do not restrict the Company’s ability to incur additional debt, repurchase the Notes or repay other indebtedness or to take other actions that could negatively impact holders of the Notes.

The Company is not restricted under the terms of the Notes from incurring additional debt or from repurchasing the Notes or repaying other indebtedness. Future incurrence of indebtedness may increase the related risks of the Company as described in this Offering Memorandum. In addition, the covenants applicable to the Notes do not require the Company to achieve or maintain any minimum financial results relating to their respective financial positions or results of operations. The Company’s ability to recapitalize, incur additional debt and take other actions that are not limited by the terms of the Notes could have the effect of diminishing the Company’s ability to make payments on the Notes when due.

Payments on the Notes may be structurally subordinated to the indebtedness of our subsidiaries, and effectively subordinated to the Company’s secured debt to the extent of the value of the collateral securing such indebtedness.

The Notes are solely our obligation and are not obligations of, or guaranteed by, our subsidiaries. In general, in an insolvency scenario of a subsidiary or affiliated company claims of the creditors of the subsidiary or affiliated company, including trade creditors, secured creditors and unsecured creditors holding indebtedness and guarantees issued by such subsidiary, will have priority with respect to the assets and profit of that subsidiary or affiliated company over the claims of the creditors of their shareholders. Payments by our subsidiaries to their respective creditors will take precedence over dividend distributions to their shareholders, including us. Finally, the indenture governing the Notes does not contain any limitation on the amount of liabilities that can be incurred by our subsidiaries.

The Notes are the Company’s unsecured obligations and will (i) rank equally in right of payment with all the Company’s other present and future senior unsecured indebtedness; (ii) be effectively subordinated to all of the Company’s present and future secured indebtedness to the extent of the value of the collateral securing such obligations; and (iii) be senior to all of Company’s present and future subordinated obligations. As a result, claims of secured lenders, whether senior or junior, with respect to assets securing their loans will be prior with respect to those assets. In the event of the Company’s bankruptcy, insolvency, liquidation, reorganization, dissolution or other winding up, or upon any acceleration of the Notes, these assets will be available to pay obligations on the Notes only after all other debt secured by these assets has been repaid in full. Any remaining assets will be available to you ratably with all of the Company’s other unsecured and unsubordinated creditors, including trade creditors. If there are not sufficient assets remaining to pay all these creditors, then all or a portion of the Notes then outstanding would remain unpaid.

The Notes are subject to optional redemption by the Company and may have a lower market value than notes that cannot be redeemed.

The Company has the option to redeem the Notes, in whole or in part, at the price as described under ‘‘Description of the Notes – Redemption – Optional Redemption’’ at any time. Such an optional redemption feature is likely to limit the market value of the Notes, and the market value of those Notes generally will not rise substantially above the price at which they can be redeemed. The Company may be expected to redeem the Notes when its cost of borrowing (taking into account costs of exercising such optional redemption) is lower than its costs under the Notes. At those times, you may not be able to reinvest the redemption proceeds at an effective interest rate to achieve the returns you would have been able to achieve had there been no redemption. You should consider reinvestment risk in light of other investments available at that time.

26 The Notes are unsecured obligations.

As the Notes are unsecured obligations, the repayment of principal and the payment of interests may be compromised if:

• there is a default in payment under the Company’s future secured indebtedness or other unsecured indebtedness;

• there is an acceleration of any of the Company’s indebtedness; or

• the Company enters into bankruptcy, liquidation, reorganization or other winding-up proceedings.

If any of these events occur, the Company’s assets and any amounts received from the sale of such assets may not be sufficient to pay amounts due on the Notes.

The ratings of the Notes may be downgraded or withdrawn.

The Notes are expected to be rated ‘‘A1’’ by Moody’s, ‘‘A+’’ by S&P and ‘‘A’’ by Fitch. The ratings represent the opinions of the rating agencies and their assessment of the ability of the Company to perform its obligations under the Notes and credit risks in determining the likelihood that payments will be made when due under the Notes. A rating is not a recommendation to buy, sell or hold securities. The ratings can be lowered or withdrawn at any time. The Company is not obligated to inform holders of the Notes if the ratings are lowered or withdrawn. A reduction or withdrawal of the ratings may adversely affect the market price of the Notes and the Company’s ability to access the debt capital markets.

The Company may not have the ability to raise the funds necessary to finance an offer to repurchase the Notes upon the occurrence of certain events constituting a change of control or otherwise as required by the indenture governing the Notes.

Upon the occurrence of certain events constituting a change of control, the Company is required to offer to repurchase all outstanding Notes at a purchase price in cash equal to 101% of their principal amount plus accrued and unpaid interest to the date of purchase. If any such event triggering the Company’s repurchase obligations were to occur, the Company cannot assure you that the Company would have sufficient funds available at such time to pay the purchase price of the outstanding Notes. The change of control provision contained in the indenture may not necessarily afford you protection in the event of certain important corporate events, including a reorganization, restructuring, merger or other similar transaction involving us that may adversely affect you, because such corporate events may not involve a shift in voting power or beneficial ownership or, even if they do, may not constitute a ‘‘Change of Control Triggering Event’’ as defined in the indenture. Except as described under ‘‘Description of the Notes – Redemption for Change of Control Triggering Event,’’ the indenture does not contain provisions that require the Company to offer to repurchase or redeem the Notes in the event of a reorganization, restructuring, merger, recapitalization or similar transaction.

You may experience difficulties in effecting service of legal process and enforcing judgments against us or our senior management.

We are a company incorporated under the laws of Bermuda and most of our assets and subsidiaries are located in the PRC. A majority of our directors and senior management reside within the PRC. The assets of these senior management also may be located within the PRC. As a result, it may not be possible to effect service of process upon our senior management outside the PRC. Moreover, the PRC does not have treaties providing for reciprocal recognition and enforcement of court judgments in the United States, the United Kingdom, Japan or most other countries. As a result, in the PRC, recognition

27 and enforcement of court judgments from the jurisdictions mentioned above may be difficult or impossible in relation to any matter that is not subject to a binding arbitration provision. See ‘‘Enforceability of Foreign Judgments and Civil Liabilities.’’

The insolvency laws of Hong Kong and other local insolvency laws may differ from those of another jurisdiction with which the holders of the Notes are familiar.

Because the Company is incorporated under the laws of Bermuda, any insolvency proceeding relating to the Company would likely involve Bermuda insolvency laws, the procedural and substantive provisions of which may differ from comparable provisions of the local insolvency laws of jurisdictions with which the holders of the Notes are familiar.

A trading market for the Notes may not develop, and there are restrictions on resales of the Notes.

The Notes are a new issue of securities for which there is currently no trading market. Application has been made to the SEHK for listing of, and permission to deal in, the Notes by way of debt issue to professional investors only. The Company has been advised that the Initial Purchasers intend to make a market in the Notes, but the Initial Purchasers are not obligated to do so and may discontinue such market-making activity at any time without notice. In addition, the Notes are being offered pursuant to exemptions from registration under the Securities Act and, as a result, the holders of the Notes will only be able to resell the Notes in transactions that have been registered under the Securities Act or in transactions not subject to or exempt from registration under the Securities Act. The Notes and the Indenture under which the Notes are issued will contain provisions that will restrict the Notes from being offered, sold or otherwise transferred except pursuant to the exemptions available pursuant to Rule 144A or other exceptions under the Securities Act. It is your obligation to ensure that your offers and sales of the Notes within the United States and other counties comply with applicable securities laws. See ‘‘Transfer Restrictions.’’ The Company cannot predict whether an active trading market for the Notes will develop or be sustained.

Certain facts and statistics are derived from publications not independently verified by the Company, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers, the Initial Purchasers or their respective advisors.

Facts and statistics in this Offering Memorandum relating to the PRC’s economy and the industries in which the Company operates are derived from publicly available sources. While the Company has taken reasonable care to ensure that the facts and statistics presented are accurately reproduced from such sources, they have not been independently verified by the Company, the Joint Global Coordinators, the Initial Purchasers or their respective advisors and, therefore, the Company, the Joint Global Coordinators, the Initial Purchasers or their respective advisors make no representation as to the accuracy of such facts and statistics, which may not be consistent with other information compiled within or outside the PRC. Due to ineffective calculation and collection methods and other problems, the facts and statistics herein may be inaccurate or may not be comparable to facts and statistics produced for other economies and should not be unduly relied upon.

Investment in the Notes may subject investors to foreign exchange-related risks.

The Notes are denominated and payable in U.S. dollars. If an investor measures its investment returns by reference to a currency other than U.S. dollars, an investment in the Notes entails foreign exchange- related risks, including possible significant changes in the value of the U.S. dollar relative to the currency by reference to which an investor measures its investment returns, due to, among other things, economic, political and other factors over which the Company has no control. Depreciation of the U.S. dollar against such currency could cause a decrease in the effective yield of the Notes below their stated coupon rates and could result in a loss when the return on the Notes is translated into such currency. In addition, there may be tax consequences for investors as a result of any foreign currency gains resulting from any investment in the Notes.

28 Developments in other markets may adversely affect the market price of the Notes.

The market price of the Notes may be adversely affected by declines in the international financial markets and world economic conditions. The market for Chinese securities is, to varying degrees, influenced by economic and market conditions in other markets, especially those in Asia. Although economic conditions are different in each country, investors’ reactions to developments in one country can affect the securities markets and the securities of issuers in other countries, including the PRC. Since the sub-prime mortgage crisis in 2008, the international financial markets have experienced significant volatility. If similar developments occur in the international financial markets in the future, the market price of the Notes could be adversely affected.

The Company will follow the applicable corporate disclosure standards for debt securities listed on the SEHK, which standards may be different from those applicable to companies in certain other countries.

The Company will be subject to reporting obligations in respect of the Notes to be listed on the SEHK. The disclosure standards imposed by the SEHK may be different than those imposed by securities exchanges in other countries or regions such as the United States or Singapore. As a result, the level of information that is available may not correspond to what investors in the Notes are accustomed to.

Payments under the Notes may be subject to U.S. withholding tax under FATCA TheUnitedStateshasenactedrules,commonlyreferredtoas‘‘FATCA,’’ that generally impose a new reporting and withholding regime with respect to ‘‘withholdable payments’’ (generally U.S. source payments (including dividends and interest) and gross proceeds from the disposition of property that can produce U.S. source payments such as interest and dividends) and, in the future, may impose such withholding on ‘‘foreign passthru payments’’ made by a ‘‘foreign financial institution’’ (an ‘‘FFI’’). Under current guidance, the term ‘‘foreignpassthrupayment’’ is not defined and it is therefore not clear whether or to what extent payments on the Notes would be considered foreign passthru payments. Withholding on foreign passthru payments would not be required with respect to payments made before 1 January 2017 (at the earliest) and then, only if the Notes are materially modified, on or after the date that is six months after the date on which the final regulations applicable to ‘‘foreign passthru payments’’ are filed in the Federal Register. The United States has entered into an intergovernmental agreement (an ‘‘IGA’’) with Hong Kong and Bermuda, and has agreed in substance with the PRC to an IGA (the ‘‘IGAs’’), which potentially modifies the FATCA withholding regime described above. Under the FATCA rules and the IGAs, the Company does not expect that it will be subject to the diligence, reporting and withholding obligations under FATCA or the applicable IGA. It is not yet clear how the IGAs will address foreign passthru payments. Prospective investors in the Notes should consult their tax advisors regarding the potential impact of FATCA, the IGAs and any non-U.S. legislation implementing FATCA, on their investment in the Notes.

29 CAPITALIZATION AND INDEBTEDNESS

The following table sets forth our capitalization and indebtedness as of December 31, 2014 and as adjusted to give effect to this offering. You should read this table in conjunction with our audited consolidated financial statements as of December 31, 2014, and related notes included elsewhere in this Offering Memorandum.

As of December 31, 2014(1)(2) Actual As Adjusted HK$ US$ HK$ US$ (in millions) Long-term indebtedness Long-term borrowings ...... 16,224 2,093 16,224 2,093 Notes offered hereby(3)...... ––@@ @@ Total long-term indebtedness ...... 16,224 2,093 @@ @@ Equity Sharecapital...... 81 10 81 10 Retainedearnings...... 27,765 3,581 27,765 3,581 Reserves...... 25,042 3,230 25,042 3,230 Non-controlling interests ...... 21,426 2,764 21,426 2,764 Total equity...... 74,314 9,585 74,314 9,585 Total capitalization(4) ...... 90,538 11,678 @@ @@

Notes:

(1) Except as disclosed herein, there have been no material changes in our consolidated capitalization since December 31, 2014.

(2) The translation of Hong Kong dollar amounts into U.S. dollar amounts and vice versa has been made at the rate HK$7.7531 to US$1.00, the exchange rate set forth in the H.10 weekly statistical release of the Board of Governors of the Federal Reserve System of the United States on December 31, 2014.

(3) As adjusted as of December 31, 2014 to give effect to the issue of the Notes and the net proceeds we are expecting to receive from the issue of the Notes (after deducting underwriting commissions and certain estimated offering expenses).

(4) Total capitalization equals total long-term indebtedness plus total equity.

30 USE OF PROCEEDS

The net proceeds we expect to receive from this offering, after deducting underwriting commissions and certain estimated offering expenses, will be approximately US$@@ million. We intend to use the net proceeds of this offering for refinancing of certain indebtedness and general corporate purposes.

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering subject to the applicable PRC laws and regulations. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this Offering Memorandum subject to the applicable PRC laws and regulations.

31 OUR HISTORY AND CORPORATE STRUCTURE

Our History We were incorporated with limited liability on August 16, 1991. CNPC became our controlling shareholder in 1993 at which we began to serve as a platform for CNPC’s overseas business. In 1994, we were renamed as CNPC (Hong Kong) Limited. In December 2008, PetroChina became our controlling shareholder. Prior to 2009, we focused our business operations mainly on upstream oil and gas exploration and production.

In 2009, we began a strategic transformation to become the flagship platform for PetroChina’snatural gas business. Our focus shifted to the sale of natural gas and its general application and included the acquisition of downstream gas distribution assets.

In 2009, we began to implement our ‘‘Gas in Substitution of Oil’’ strategy to further expand our LNG business. In 2010, we acquired the Jiangsu and the Dalian LNG terminals to grow our natural gas business. We were also renamed to our current name, Kunlun Energy Company Limited. In 2011, we acquired the Beijing Pipelines, which significantly increased our revenues from our natural gas transmission business. We were admitted to the lists of Constituents of Hang Seng Index and Constituents of Hang Seng Mainland China 25 Index with effect from December 10, 2012.

According to the 2014 Platts Top 250 Global Energy Company Rankings, we were the fastest growing Asia energy company in terms of compound growth rate over a three-year period. According to each of the 2013 and 2012 Platts Top Global Energy Company Rankings, we were the second fastest growing Asia energy company in terms of compound growth rate over a three-year period.

Our Corporate Structure The following chart briefly illustrates our shareholding and group structure as of December 31, 2014.

State Council of China

SASAC

100%

CNPC

86.5%

PetroChina 3.4%

58.4%

Company

Overseas Exploration and Production

Natural Natural PRC LNG Gas Sales Gas Exploration and Terminal and LNG Transmission Production Processing

32 SELECTED FINANCIAL INFORMATION

Consolidated Statement of Comprehensive Income Data For the year ended December 31, 2012 2013 2014 2014 (HK$ million) (HK$ million) (HK$ million) (US$ million) (unaudited) Revenue...... 32,953 43,430 48,044 6,197 Othergains,net...... 361 768 837 108 Interestincome...... 172 228 217 28 Purchases, services and others ...... (12,912) (21,303) (26,354) (3,399) Employee compensation costs ...... (1,684) (2,046) (2,368) (305) Exploration expenses, including exploratory dryholes...... (42) (11) –– Depreciation, depletion and amortization...... (4,434) (4,528) (5,392) (695) Selling, general and administrative expenses ...... (2,165) (2,878) (2,777) (358) Taxesotherthanincometaxes...... (923) (746) (737) (95) Interestexpenses...... (661) (622) (486) (63) Share of profits less losses of: – – Associates...... 2,334 1,646 716 92 – Jointventures...... 307 415 256 33 Profit before income tax expense...... 13,306 14,353 11,956 1,542 Incometaxexpense...... (3,392) (3,845) (3,080) (397) Profit for the year ...... 9,914 10,508 8,876 1,145 Other comprehensive income Items that may be reclassified subsequently to profit and loss: – Currency translation differences ...... 663 1,392 (1,864) (240) – Fair value (loss)/gain on available-for-sale financialassets...... 1 (10) (29) (4) Other comprehensive income, net of nil tax ...... 664 1,382 (1,893) (244) Total comprehensive income for the year...... 10,578 11,890 6,983 901 Profit for the year attributable to: – OwnersoftheCompany...... 6,518 6,851 5,610 724 – Non-controlling interests ...... 3,396 3,657 3,266 421 9,914 10,508 8,876 1,145 Total comprehensive income for the year attributable to: – OwnersoftheCompany...... 7,017 7,842 4,307 556 – Non-controlling interests ...... 3,561 4,048 2,676 345 10,578 11,890 6,983 901 Dividend attributable to owners of the Company . . . . 1,855 1,857 –(1) –(1)

Note:

(1) On March 26, 2015, the Board of Directors proposed final dividend attributable to owners of the Company in respect of 2014 of HK$0.20 per share amounting to a total of approximately HK$1,614 million. The amount is based on approximately 8,072 million shares in issue as at March 26, 2015. Our consolidated financial statements do not reflect this dividend payable as the final dividends were proposed after December 31, 2014 and will be accounted for in equity as an appropriation of retained earnings in the year ending December 31, 2015 when approved at the 2015 Annual General Meeting.

33 Consolidated Statement of Financial Position Data As of December 31, 2012 2013 2014 2014 (HK$ million) (HK$ million) (HK$ million) (US$ million) (unaudited) Assets Non-current assets Property, plant and equipment ...... 69,225 82,943 86,442 11,149 Advanced operating lease payments ...... 2,199 2,895 3,379 436 Investmentsinassociates...... 5,606 5,720 4,775 616 Investments in joint ventures...... 1,541 1,564 1,451 187 Available-for-sale financial assets ...... 173 120 83 11 Intangible and other non-current assets ...... 2,360 3,104 1,509 195 Deferredtaxassets...... 187 254 456 59 81,291 96,600 98,095 12,652 Current assets Inventories...... 717 1,173 1,157 149 Accountsreceivable...... 1,367 1,893 1,988 256 Prepaid expenses and other current assets ...... 5,575 4,899 5,741 740 Cash and cash equivalents ...... 19,592 14,897 10,729 1,384 27,251 22,862 19,615 2,530 Total assets ...... 108,542 119,462 117,710 15,182 Equity Capital and reserves attributable to owners of the Company Sharecapital...... 81 81 81 10 Retainedearnings...... 20,059 24,530 27,765 3,581 Reserves...... 24,282 25,795 25,042 3,230 44,422 50,406 52,888 6,821 Non-controlling interests...... 17,756 21,862 21,426 2,764 Total equity...... 62,178 72,268 74,314 9,585 Liabilities Current liabilities Accounts payable and accrued liabilities ...... 12,438 12,676 14,776 1,906 Incometaxpayable...... 461 510 805 104 Othertaxpayable...... 353 394 262 34 Short-term borrowings ...... 5,111 13,551 8,465 1,092 Obligationsunderfinanceleases...... ––194 25 18,363 27,131 24,502 3,160 Non-current liabilities Long-term borrowings ...... 26,562 17,799 16,224 2,093 Deferred tax liabilities ...... 1,278 1,715 1,414 182 Obligationsunderfinanceleases...... ––649 84 Other long-term obligations ...... 161 549 607 78 28,001 20,063 18,894 2,437 Total liabilities...... 46,364 47,194 43,396 5,597 Total equity and liabilities ...... 108,542 119,462 117,710 15,182 Net current assets ...... 8,888 (4,269) (4,887) (630) Total assets less current liabilities ...... 90,179 92,331 93,208 12,022

34 Consolidated Cash Flow Data For the year ended December 31, 2012 2013 2014 2014 (HK$ million) (HK$ million) (HK$ million) (US$ million) (unaudited) Net cash generated from operating activities ...... 10,063 13,486 13,698 1,767 Net cash used in investing activities...... (12,871) (12,732) (7,601) (980) Net cash generated from/(used in) financing activities ...... 10,425 (6,092) (10,149) (1,309) Increase/(decrease) in cash and cash equivalents . . . . 7,617 (5,338) (4,052) (523) Cash and cash equivalents at January 1 ...... 11,718 19,592 14,897 1,921 Effect of foreign exchange rate changes ...... 257 643 (116) (15) Cash and cash equivalents at December 31 ...... 19,592 14,897 10,729 1,384

* Except for percentages and ratios

(2) Total debt consists of all short-term borrowings, long-term borrowings and obligations under financial leases.

(3) Net debt equals total debt less cash and cash equivalents.

(4) Interest is interest paid as extracted from the consolidated statements of cash flows of our consolidated financial statements.

(5) Total capital equals total debt plus total equity (including non-controlling interests).

Set out below is a reconciliation of our revenue and EBITDA:

Reconciliation of revenue to EBITDA

35 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations is based upon and should be read in conjunction with our audited consolidated financial statements together with the accompanying notes as of and for the years ended December 31, 2012, 2013 and 2014 included elsewhere in this Offering Memorandum. Our consolidated financial information has been prepared in accordance with HKFRS.

This discussion contains forward‑looking statements about our business and financial performance which are subject to risks and uncertainties. These statements are based on assumptions and analysis 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 under the circumstances. However, our actual results may differ significantly from those projected in the forward- looking statements. Factors that may cause our future results to differ significantly from those projected include, but are not limited to, those discussed elsewhere in this Offering Memorandum, particularly in ‘‘Risk Factors’’ and ‘‘Forward-Looking Statements.’’ Overview We are the flagship platform for PetroChina’s downstream natural gas business. CNPC, PetroChina’s parent, is the largest oil and gas producer and supplier based on production and sales volume in the PRC and one of the leading integrated international energy companies in the world. Through a number of asset injections by PetroChina and CNPC, we have gained key natural gas transmission and distribution assets and are well positioned to benefit from the fast growing PRC natural gas industry.

Key Factors Affecting Results of Operations Our results of operations are primarily affected by the following factors:

Natural gas For the years ended December 31, 2012, 2013 and 2014, natural gas sales accounted for approximately 38.6%, 50.8% and 54.7% of our total revenue, respectively. For the years ended December 31, 2012, 2013 and 2014, LNG and CNG sales contributed 41.7%, 50.7% and 54.6%, respectively, of our natural gas sales, while city gas sales contributed 29.9%, 24.7% and 25.1%, respectively, of our natural gas sales. Our revenue correlates directly with the price of natural gas we sell to our customers.

36 Sales price and demand of CNG and LNG Our revenue from CNG and LNG gas stations ultimately depends on the sale of LNG and CNG as a fuel for natural gas vehicles, as well as, to a lesser extent, industrial and commercial customers. To expand our business, we must continue to retain existing customers and develop new customers. Our ability to expand our customer base is dependent on a number of factors, including the level of acceptance and availability of natural gas vehicles, the level of acceptance of natural gas as a vehicle fuel and industrial energy source, the growth in our target markets of natural gas infrastructure that supports LNG and CNG sales and our ability to supply LNG and CNG at competitive prices. Converting a gasoline or diesel powered vehicle to use natural gas will incur one-off modification costs, although government subsidies often are available for such conversions and an increasing number of new CNG/LNG-powered vehicles are being built.

Moreover, if the prices of LNG and CNG do not remain sufficiently below the price of gasoline or that of diesel (compared on a per-unit heat value basis), vehicle owners may be unable to recover the additional costs of acquiring or converting to natural gas vehicles in a timely manner, and they may choose not to use natural gas vehicles. In addition, recent and extreme volatility in oil and gasoline prices demonstrates that it is difficult to predict future transportation fuel costs. Any decline in the price of oil, diesel fuel or gasoline will reduce the economic advantages that our existing or potential customers may realize by using LNG and CNG fuel as an alternative to gasoline or diesel. Reduced prices for gasoline and diesel fuel and continuing uncertainty about fuel prices, combined with higher gas costs for natural gas vehicles, may cause us to lose our existing customers, or cause potential customers to delay or decline to convert their vehicles to run on natural gas, which may limit our growth and cause our business to suffer.

Sales price of city gas Except for the gate price of natural gas directly supplied to non-residential users (excluding chemical fertilizer enterprises), which can be determined by negotiation, we are required to obtain approval from the relevant local pricing authorities for the retail price of the piped natural gas we sell in a particular region, as well as any adjustment to the retail price. As retail prices are set by local pricing bureaus, rather than the PRC central government, they can vary significantly among cities. Specifically, in some cities with established price linkage mechanisms, retail prices to downstream residential users of natural gas are allowed to be adjusted in line with adjustments in prices for upstream purchases of natural gas supply. In other cities, any adjustments in retail prices to residential users will be determined following hearings held by the local pricing bureaus. Indicative prices for commercial and industrial customers and CNG customers are set by the local governments. We confirm the final price with customers based on the indicative price set by the local government. As a result of these factors, the average selling prices at each of our operating locations could vary significantly depending on the location. In particular, industrial customers are relatively insensitive to price adjustments compared to commercial or residential customers.

Moreover, there is typically a time lag for us to pass through any increase in our city-gate prices to residential users because any adjustment in end-user prices is subject to approval by the local pricing bureau through a public hearing. The time lag to pass on any increase in our city-gate prices to our commercial and industrial customers is often shorter than that for residential users because our commercial and industrial customer prices are often based on contract terms. These contract terms are typically based on an indicative price set by local governments that is adjustable within a negotiated range so it can be renegotiated on a bilateral basis after any increase in city-gate prices.

We share certain sales information with the NDRC and local authorities to ensure they receive adequate feedback with respect to the sales prices of natural gas. Our ability to maintain or increase the sale price of natural gas remains a crucial factor in our revenue and margins.

37 Normally, we set our natural gas at prices that exceed our production and transportation costs. Our results of operations will be impacted to the extent that our prices do not vary to reflect increases or decreases in our costs. See ‘‘Summary of Relevant PRC Laws and Regulations – Pricing – Natural gas’’ for a further discussion of these pricing controls.

Natural gas pipeline transmission tariff For the years ended December 31, 2012, 2013 and 2014, revenue from our natural gas pipeline transmission business accounted for approximately 34.6%, 27.1% and 26.4% of our total revenue, respectively. Our pricing mechanism for natural gas transmission is determined by the NDRC and the provincial price control bureaus. The transportation tariff is based on factors such as the investment, construction and operating cost of the pipelines. For the years ended December 31, 2012, 2013 and 2014, in respect of the Beijing Pipelines, our weighted average natural gas transmission fee was RMB0.38 per cubic meter, RMB0.37 per cubic meter and RMB0.33 per cubic meter (US$0.053 per cubic meter), respectively. The decrease in natural gas pipeline transmission revenue in 2014 was due to a revision in transmission tariff which reflected a change in natural gas supply sources.

Purchase price of natural gas Natural gas constitutes the most important purchase for our business, and the purchase price of natural gas significantly affects our results of operations. Our results of operations for the years ended December 31, 2012, 2013 and 2014 have reflected the natural gas procurement cost at prices set by government authorities.

We buy natural gas at city-gate prices, which is the wellhead price plus transportation cost, and sell to end-users at prices set by the local governments or agreed in our supply contracts. The NDRC determines the benchmark wellhead price as well as the transportation cost for national long-distance transmission pipelines, but also permits natural gas purchasers and sellers to contractually agree on a wellhead price not exceeding 110% of the NDRC’s benchmark wellhead price. Provincial price control bureaus determine the transportation costs for provincial gas pipelines, including provincial long- distance transmission pipelines, based on the distance from the gas wellhead. We currently purchase substantially all of our natural gas from our parent company CNPC or its distributors, at city-gate prices which are typically fixed on an annual basis under our contracts.

Accordingly, the city-gate prices for our natural gas purchases are significantly affected by factors that are out of our control. As we expand our natural gas business into other locations, we expect our results of operations to continue to be affected significantly by the regulation of natural gas prices in the PRC.

Competition Currently, our major competitors are other large state-owned oil and gas companies, listed natural gas distribution companies and local natural gas distribution companies. With the gradual opening of the domestic natural gas, oil and petrochemical market, large foreign natural gas, oil and petrochemical companies have become our competitors in certain regions and segments. Increased competition may have an adverse effect on our financial condition and results of operations.

Macro-economic environment Changes in the macro-economic environment have affected and will continue to affect our business and operations. The global recession and the European sovereign debt crisis have adversely affected economies and businesses in the world, including the PRC. Any slowdown in the PRC’seconomic growth may lower natural gas and oil demand and adversely affect us. The financial and economic situation may also have a negative impact on third parties with whom we do, or may do, business. Any of these factors may affect our financial condition and results of operations.

38 Regulatory environment Our operating activities are subject to extensive regulations and controls by the PRC government, including the imposition of industry-specific taxes and levies, the issuance of exploration and production licenses and the implementation of environmental policies and safety standards. Our results of operations will be affected by any future changes of such regulatory environment.

In 2009, the PRC government decided to reduce carbon dioxide emissions and is now in the process of introducing various measures to achieve a 40% to 45% reduction of carbon dioxide emissions per unit of GDP by 2020. The PRC government’s 12th Five-Year Plan highlighted several areas of energy development, including: (i) optimizing the development of fossil fuels, controlling coal production capacity and enhancing the supply of natural gas; (ii) enhancing the development of the energy pipeline network; and (iii) enhancing energy saving programs and reducing overall emissions. Natural gas, a comparatively clean and efficient fossil fuel, is one of the major types of clean energy specifically promoted by the PRC government and has been explicitly prescribed as the main source of energy for urban gas utilization.

In order to promote the natural gas industry, the PRC government has made significant investments in developing natural gas infrastructure. The PRC government plans to complete and launch several natural gas pipeline projects, including our Shaan-Jing Line IV, over the course of the next several years. Concurrently, the PRC government plans to build more LNG terminals along the coast to further expand the overall natural gas infrastructure. The PRC government is also planning to construct several large natural gas storage facilities in order to accumulate supplies for peak usage during the winter season. These clean energy policies and investments have benefited and are likely to continue to benefit our results of operations by encouraging demand for our natural gas products and services. As we focus on increasing facilities utilization rates and gas penetration rates across all of our operational locations and on further integration of our midstream and downstream natural gas facilities, we anticipate that our results of operations will continue to be affected by government policies on encouraging the adoption of cleaner energy.

Driven by environmental and efficiency concerns, the PRC government has been increasingly encouraging toward industrial, commercial and residential use of natural gas to meet primary energy and environmental protection needs. The PRC government has adopted a preferential value-added tax rate of 13% for natural gas sales as compared to a 17% value-added tax rate for crude oil production. In addition, the NDRC launched pilot reforms on natural gas pricing in Guangdong Province and Guangxi Zhuang Autonomous Region in December 2011. Under the pilot reforms, the prices of natural gas will be pegged to the prices of alternative energies to better trace and reflect market demand and supplies, as well as guide reasonable distribution. In 2013, the PRC government extended the pilot program and moved from cost-plus to a city-gate and netback pricing mechanism. In 2014, the PRC government gave up explicit control on prices of imported LNG, shale gas and coal bed methane, mandating that market forces would determine prices from these sources. In early 2015, the PRC government further updated the natural gas tariff structure, converging the tariffs of existing and incremental gas supply tiers. We believe that these policies have had a positive effect on the development and consumption of natural gas in many municipalities, benefiting our natural gas business in the long term.

Critical Accounting Estimates and Judgments In preparing our consolidated financial statements, we make estimates and judgments that affect the application of policies and reported amounts of assets, liabilities, income and expenses, and related disclosure of contingent assets and liabilities. We base estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Our estimates and underlying assumptions are reviewed on an ongoing basis.

39 Our results of operations may differ if prepared under different assumptions or conditions. See notes 3 and 5 to our audited consolidated financial statements for the year ended December 31, 2014 for more details. We believe the following principal accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Estimation of oil and natural gas reserves Estimates of oil and natural gas reserves are key elements in our investment decision-making process. They are also an important element in testing for impairment. Changes in proved oil and natural gas reserves, particularly proved developed reserves, will affect unit-of-production depreciation, depletion and amortization recorded in our consolidated financial statements for property, plant and equipment related to oil and gas production activities. A reduction in proved developed reserves will increase depreciation, depletion and amortization charges. Proved reserve estimates are subject to revision, either upward or downward, based on new information, such as from development drilling and production activities or from changes in economic factors, including product prices, contract terms or development plans.

Estimation of impairment of non-financial assets We test at least annually whether goodwill has suffered any impairment. Property, plant and equipment, including oil and gas properties, are reviewed for possible impairments whenever there are events or changes in circumstances that indicate that the carrying amount may not be recoverable. Determination as to whether and how much an asset is impaired involves management estimates and judgments such as future prices of crude oil. However, the impairment reviews and calculations are based on assumptions that are consistent with our business plans. Favorable changes to some assumptions may allow us to avoid the need to impair any assets in these years, whereas unfavorable changes may cause the assets to become impaired.

Taxes and duties applicable to an associate operating in Kazakhstan The determination of the obligations for taxes and duties for each statement of financial position date of the associate operating in Kazakhstan requires the interpretation of tax and other legislations. While the directors believe that the associate’s judgments are appropriate, significant differences in actual experience may materially affect its future tax and duty obligations.

The associate operating in Kazakhstan is subject to uncertainties relating to the determination of its tax and other liabilities. The tax system and legislations in Kazakhstan have been in force for only a relatively short time compared to more developed jurisdictions and are subject to frequent changes and varying interpretations. The interpretations of such legislation by management of the associate operating in Kazakhstan in applying it to business transactions may be challenged by the relevant tax and other governmental authorities and, as a result, the associate may be assessed for additional tax and other payments including duties, fines and penalties, which could have a material adverse effect on our financial position and results of operations. Such uncertainties may relate to calculating the profitability of each subsoil contract for tax purposes and the applicability of excess profits tax to the operations of the associate operating in Kazakhstan.

Were the actual final outcome on the interpretations of tax and other legislations to differ from the associate’s judgments and estimates, our results of operations and financial position could be adversely affected.

Estimation of useful lives and residual values of property, plant and equipment Our management determines the estimated useful lives and residual values for our property, plant and equipment, other than oil and gas properties. This estimate is based on the historical experience of the actual useful lives and residual values of property, plant and equipment of similar nature and functions. It could change significantly as a result of technological advancement and innovations in the oil and gas industry. Our management will adjust the depreciation charge where residual values vary from previous

40 estimates, or we will write off or write down technically obsolete or non-strategic assets that have been abandoned or sold. Actual residual values may differ from estimated residual values. Periodic review could result in a change in residual values and therefore depreciation in the future periods.

Principal Statement of Income Components Revenue We derive our revenue from two operating businesses: (i) natural gas distribution; and (ii) exploration and production. The natural gas distribution business is further broken down into three segments: (i) transmission of natural gas in the PRC; (ii) LNG terminal business; and (iii) natural gas sales (including LNG processing). Natural gas sales (including LNG processing) of our natural gas distribution business constituted our most significant source of revenue for the years ended December 31, 2012, 2013 and 2014, representing 41.1%, 54.0% and 58.5% of our total revenue, respectively. The natural gas pipeline business of our natural gas distribution business constituted our second most significant source of revenue for the years ended December 31, 2012, 2013 and 2014, representing 34.6%, 27.1% and 26.4% of our total revenue, respectively. We expect revenue from our natural gas sales to continue to constitute a significant and increasing percentage of our total revenue primarily due to the strong demand for natural gas of our LNG, industrial, commercial, residential and CNG customers in line with our growing customer base, as well as the recurring nature of such income. The exploration and production segment is engaged in the exploration, development, production and sale of crude oil and natural gas.

Other gains, net Other gains, net primarily comprise net exchange gains, rental income, net losses on disposals of property, plant and equipment and government grants.

Interest income Interest income primarily comprises amounts due from related parties, amounts due from third parties and bank deposits.

Purchases, services and others Purchases, services and others primarily comprise raw materials, finished goods, electricity, water supplies, fuel and transportation costs.

Employee compensation costs Employee compensation costs primarily comprise salaries and allowances, retirement benefits scheme contributions and share-based payment expenses.

Exploration expenses, including exploratory dry holes Exploration expenses, including exploratory dry holes, primarily comprise of drilling, geological and geophysical expenses, among others.

Depreciation, depletion and amortization Depreciation, depletion and amortization are expenses related to costs of acquiring petroleum rights, exploratory wells, natural gas pipelines, development and equipment, as well as operating costs of supporting equipment that have been capitalized.

Selling, general and administrative expenses Selling, general and administrative expenses primarily comprise of royalties, consignment fees, rental fees, safety expenses, transportation charges, material consumption costs, electricity, repair and maintenance, taxes, travel expenses, administrative expenses, entertainment expenses, audit fees, inventory loss, labor protection fees and inspection fees.

41 Taxes other than income taxes Taxes other than income taxes primarily comprise a special levy on domestic sales of crude oil, resource tax, urban construction tax, education surcharges and business tax. See ‘‘Summary of Relevant PRC Laws and Regulations – Special levy’’ for a more detailed description of current PRC taxation.

Interest expenses Interest expenses primarily comprise interest expenses on loans from China Petroleum Finance Company Limited (‘‘CP Finance’’) and fellow subsidiaries, loans from an intermediate holding company and bank loans.

Share of profits less losses of associates/joint ventures Share of profits less losses of associates/joint ventures primarily comprise an associate in Kazakhstan and a joint venture in Oman, both of which are related to our exploration and production business.

Income tax expense Our income tax expense consists of current and deferred tax. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the statement of financial position date in the countries where we operate and generate taxable income. See ‘‘Summary of Relevant PRC Laws and Regulations’’ for a more detailed description of current PRC taxation.

Results of Operations The following table sets forth, for the periods indicated, certain items extracted from our audited consolidated financial statements included elsewhere in this Offering Memorandum:

For the year ended December 31, 2012 2013 2014 2014 (HK$ millions) (HK$ millions) (HK$ millions) (US$ millions) (unaudited) Revenue...... 32,953 43,430 48,044 6,197 Othergains,net...... 361 768 837 108 Interestincome...... 172 228 217 28 Purchases, services and others ...... (12,912) (21,303) (26,354) (3,399) Employee compensation costs ...... (1,684) (2,046) (2,368) (305) Exploration expenses, including exploratory dry holes (42) (11) –– Depreciation, depletion and amortization...... (4,434) (4,528) (5,392) (695) Selling, general and administrative expenses ...... (2,165) (2,878) (2,777) (358) Taxesotherthanincometaxes...... (923) (746) (737) (95) Interestexpenses...... (661) (622) (486) (63) Share of profits less losses of: Associates...... 2,334 1,646 716 92 Jointventures...... 307 415 256 33 Profit before income tax expense...... 13,306 14,353 11,956 1,542 Incometaxexpense...... (3,392) (3,845) (3,080) (397) Profit for the year ...... 9,914 10,508 8,876 1,145 Profit for the year attributable to: Owners of the Company ...... 6,518 6,851 5,610 724 Non-controlling interests ...... 3,396 3,657 3,266 421 Dividend attributable to owners of the Company . . . . 1,855 1,857 –(1) –(1)

Note:

42 Year ended December 31, 2014 compared to the year ended December 31, 2013 Revenue Our revenue increased 10.6% to HK$48,044 million (US$6,197 million) for the year ended December 31, 2014, compared to HK$43,430 million for the year ended December 31, 2013, mainly due to the expansion of our natural gas distribution business.

Natural Gas Distribution – Natural gas pipeline Revenue from our natural gas pipeline increased 7.6% to HK$12,679 million (US$1,635 million) for the year ended December 31, 2014, compared to HK$11,787 million for the year ended December 31, 2013, primarily due to an increase in transmission volume as a result of increased utilization of existing pipe networks.

Natural Gas Distribution – LNG terminal Revenue from our LNG terminal decreased 22.5% to HK$1,946 million (US$251 million) for the year ended December 31, 2014, compared to HK$2,512 million for the year ended December 31, 2013, primarily due to a decrease in LNG import volume as a result of an adjustment in the LNG import plan of PetroChina.

Natural Gas Distribution – Natural gas sales (including LNG processing) Revenue from our natural gas sales (including LNG processing) increased 19.6% to HK$28,083 million (US$3,622 million) for the year ended December 31, 2014, compared to HK$23,471 million for the year ended December 31, 2013, primarily due to an increase in natural gas sales volume as a result of the increased natural gas sales at our existing projects, as well as an expansion of our distribution network.

Exploration and Production Revenue from our exploration and production segment decreased 5.7% to HK$5,336 million (US$688 million) for the year ended December 31, 2014, compared to HK$5,660 million for the year ended December 31, 2013, mainly due to a decrease in international oil prices and a decrease in sales volume of crude oil in the PRC.

Other gains, net Other gains, net increased 9.0% to HK$837 million (US$108 million) for the year ended December 31, 2014, compared to HK$768 million for the year ended December 31, 2013, mainly due to compensation from the PRC government for revenue reduction due to the implementation of Valued-Added-Tax (‘‘VAT’’) Reform, as well as VAT refunds under the transitional supportive financial policies.

Interest income Interest income decreased 4.8% to HK$217 million (US$28 million) for the year ended December 31, 2014, compared to HK$228 million for the year ended December 31, 2013, mainly due to a decrease in the average balance of cash and cash equivalents.

Purchases, services and others Purchases, services and others increased 23.7% to HK$26,354 million (US$3,399 million) for the year ended December 31, 2014, compared to HK$21,303 million for the year ended December 31, 2013, mainly due to the increase in purchase volume of natural gas, which was in line with the expansion of the natural gas distribution business.

43 Employee compensation costs Employee compensation costs increased 15.7% to HK$2,368 million (US$305 million) for the year ended December 31, 2014, compared to HK$2,046 million for the year ended December 31, 2013, mainly due to the expansion of the natural gas distribution business and an increase in the average salary level.

Exploration expenses No exploration expenses were recognized for the year ended December 31, 2014, compared to HK$11 million for the year ended December 31, 2013.

Depreciation, depletion and amortization Depreciation, depletion and amortization increased 19.1% to HK$5,392 million (US$695 million) for the year ended December 31, 2014, compared to HK$4,528 million for the year ended December 31, 2013, mainly due to addition of property, plant and equipment following the business expansion.

Selling, general and administrative expenses Selling, general and administrative expenses decreased 3.5% to HK$2,777 million (US$358 million) for the year ended December 31, 2014, compared to HK$2,878 million for the year ended December 31, 2013, mainly due to the decrease in transportation costs, royalties in the exploration and production business and entertainment expense, partially offset by an increase in safety expenses.

Taxes other than income taxes Taxes other than income taxes decreased 1.2% to HK$737 million (US$95 million) for the year ended December 31, 2014, compared to HK$746 million for the year ended December 31, 2013, mainly due to the decrease in levy on petroleum, which was in line with the decrease in realized crude oil selling price of our exploration and production business.

Interest expenses Interest expenses decreased 21.9% to HK$486 million (US$63 million) for the year ended December 31, 2014, compared to HK$622 million for the year ended December 31, 2013, mainly due to an increase in amounts capitalized in relation to our natural gas distribution business.

Share of profits less losses of associates Share of profits less losses of associates decreased 56.5% to HK$716 million (US$92 million) for the year ended December 31, 2014, compared to HK$1,646 million for the year ended December 31, 2013, mainly due to a decrease in sales volume and realized crude oil selling price in CNPC-Aktobemunaigas Joint Stock Company and exchange loss due to devaluation of the currency of Republic of Kazakhstan.

Share of profits less losses of joint ventures Share of profits less losses of joint ventures decreased 38.3% to HK$256 million (US$33 million) for the year ended December 31, 2014, compared to HK$415 million for the year ended December 31, 2013, mainly due to provision for impairment loss in relation to Huayou Steel Pipe Co., Ltd.

Profit before income tax expense As a result of the above, profit before income tax expense decreased 16.7% to HK$11,956 million (US$1,542 million) for the year ended December 31, 2014, compared to HK$14,353 million for the year ended December 31, 2013.

44 Income tax expense Income tax expense decreased 19.9% to HK$3,080 million (US$397 million) for the year ended December 31, 2014, compared to HK$3,845 million for the year ended December 31, 2013. The effective tax rate, which is calculated by dividing income tax expense by profit before income tax expense (excluding share of profits less losses of associates and joint ventures) for the years ended December 31, 2013 and 2014 was 31.3% and 28.0%, respectively.

Profit for the year As a result of the above, profit for the year decreased 15.5% to HK$8,876 million (US$1,145 million) for the year ended December 31, 2014, compared to HK$10,508 million for the year ended December 31, 2013. Profit for the year attributable to owners of the Company decreased 18.1% to HK$5,610 million (US$724 million) for the year ended December 31, 2014, compared to HK$6,851 million for the year ended December 31, 2013.

Year ended December 31, 2013 compared to the year ended December 31, 2012 Revenue Our revenue increased 31.8% to HK$43,430 million for the year ended December 31, 2013, compared to HK$32,953 million for the year ended December 31, 2012, mainly due to the expansion of the natural gas distribution business.

Natural Gas Distribution – Natural gas pipeline Revenue from our natural gas pipeline increased 3.3% to HK$11,787 million for the year ended December 31, 2013, compared to HK$11,410 million for the year ended December 31, 2012, primarily duetoanincreaseintransmissionvolume.

Natural Gas Distribution – LNG terminal Revenue from our LNG terminal increased 31.1% to HK$2,512 million for the year ended December 31, 2013, compared to HK$1,916 million for the year ended December 31, 2012, primarily due to an increase in regasification and unloading volume.

Natural Gas Distribution – Natural gas sales (including LNG processing) Revenue from our natural gas sales (including LNG processing) increased 73.2% to HK$23,471 million for the year ended December 31, 2013, compared to HK$13,551 million for the year ended December 31, 2012, primarily due to an increase in natural gas sales volume and an increase in average selling prices.

Exploration and Production Revenue from our exploration and production segment decreased 6.8% to HK$5,660 million for the year ended December 31, 2013, compared to HK$6,076 million for the year ended December 31, 2012, mainly due to a decrease in sales volume in the PRC.

Other gains, net Other gains, net, increased 112.7% to HK$768 million for the year ended December 31, 2013, compared to HK$361 million for the year ended December 31, 2012, mainly due to compensation from the PRC government for revenue reduction due to the implementation of VAT Reform, as well as VAT refunds under the transitional supportive financial policies.

45 Interest income Interest income increased 32.6% to HK$228 million for the year ended December 31, 2013, compared to HK$172 million for the year ended December 31, 2012, mainly due to an increase in the proportion of time deposits with higher interest rates.

Purchases, services and others Purchases, services and others increased 65.0% to HK$21,303 million for the year ended December 31, 2013, compared to HK$12,912 million for the year ended December 31, 2012, mainly due to the increase in purchase volume and procurement cost of natural gas, which was in line with the expansion of the natural gas distribution business.

Employee compensation costs Employee compensation costs increased 21.5% to HK$2,046 million for the year ended December 31, 2013, compared to HK$1,684 million for the year ended December 31, 2012, mainly due to the expansion of the natural gas distribution business.

Exploration expenses Exploration expenses decreased 73.8% to HK$11 million for the year ended December 31, 2013, compared to HK$42 million for the year ended December 31, 2012, mainly due to the decrease in exploration activities undertaken by our exploration and production projects as a result of our conservative strategy in upstream operations.

Depreciation, depletion and amortization Depreciation, depletion and amortization increased 2.1% to HK$4,528 million for the year ended December 31, 2013, compared to HK$4,434 million for the year ended December 31, 2012, mainly due to addition of property, plant and equipment following the business expansion, offset by the revision of the estimated useful lives of our pipelines with effect from July 1, 2012.

Selling, general and administrative expenses Selling, general and administrative expenses increased 32.9% to HK$2,878 million for the year ended December 31, 2013, compared to HK$2,165 million for the year ended December 31, 2012, mainly due to the increase of transportation charges, rental expenses and safety fees in relation to the expansion of the natural gas distribution business.

Taxes other than income taxes Taxes other than income taxes decreased 19.2% to HK$746 million for the year ended December 31, 2013, compared to HK$923 million for the year ended December 31, 2012, mainly due to the implementation of VAT Reform that eliminated business tax and the decrease of levy on petroleum sales volume in the PRC.

Interest expenses Interest expenses decreased 5.9% to HK$622 million for the year ended December 31, 2013, compared to HK$661 million for the year ended December 31, 2012, mainly due to an increase in amounts capitalized in relation to Shaanxi-Beijing Pipeline, China Natural Gas Co., Ltd., Xinjiang Xinjie Co., Limited and CNPC Shennan Oil Technology Development Co., Ltd. projects. The increase in amounts capitalized was in line with the increase in borrowings for the construction of facilities in the natural gas distribution business.

46 Share of profits less losses of associates Share of profits less losses of associates decreased 29.5% to HK$1,646 million for the year ended December 31, 2013, compared to HK$2,334 million for the year ended December 31, 2012, mainly due to the decrease in sales volume and crude oil realized selling price and increase in exploration cost in CNPC-Aktobemunaigas Joint Stock Company.

Share of profits less losses of joint ventures Share of profits less losses of joint ventures increased 35.2% to HK$415 million for the year ended December 31, 2013, compared to HK$307 million for the year ended December 31, 2012, mainly due to an increase in crude oil realized selling price and sales volume in the Oman project.

Profit before income tax expense As a result of the above, profit before income tax expense increased 7.9% to HK$14,353 million for the year ended December 31, 2013, compared to HK$13,306 million for the year ended December 31, 2012.

Income tax expense Income tax expense increased 13.4% to HK$3,845 million for the year ended December 31, 2013, compared to HK$3,392 million for the year ended December 31, 2012. The effective tax rate, which is calculated by dividing income tax expense by profit before income tax expense (excluding share of profits less losses of associates and joint ventures) for the years ended December 31, 2012 and 2013 was 31.8% and 31.3%, respectively.

Profit for the year As a result of the above, profit for the year increased 6.0% to HK$10,508 million for the year ended December 31, 2013, compared to HK$9,914 million for the year ended December 31, 2012. Profit for the year attributable to owners of the Company increased 5.1% to HK$6,851 million for the year ended December 31, 2013, compared to HK$6,518 million for the year ended December 31, 2012.

Segment Information The following table sets out the sales volume and revenue for our major segments.

Sales/Processing Volume Revenue For the year ended December 31, For the year ended December 31, 2012 2013 2014 2012 2013 2014 (’000 cubic (’000 cubic (’000 cubic (HK$ (HK$ (HK$ (US$ meters) meters) meters) millions) millions) millions) millions) (unaudited) Natural Gas Distribution business Natural gas pipeline(1) ...... 23,833,181 24,979,190 30,052,328 11,410 11,787 12,679 1,635 LNG terminal ...... 5,078,257 6,510,583 5,056,537 1,916 2,512 1,946 251 Natural gas sales and LNG processing Natural gas sales ...... 4,582,631 6,114,184 7,326,933 12,734 22,073 26,291 3,391 LNGprocessing...... 235,530 352,137 470,380 817 1,398 1,792 231 Sub-total ...... 4,818,161 6,466,321 7,797,313 13,551 23,471 28,083 3,622 Total of Natural Gas Distribution business.... 33,729,599 37,956,094 42,906,178 26,877 37,770 42,708 5,509

47 Note:

(1) Under the natural gas pipeline segment, it included the following sales:

Sales Volume Revenue For the year ended December 31, For the year ended December 31, 2012 2013 2014 2012 2013 2014 (’000 cubic (’000 cubic (’000 cubic (HK$ (HK$ (HK$ (US$ meters) meters) meters) millions) millions) millions) millions) (unaudited) Saleofnaturalgas...... 105,312 53,111 55,627 249 146 208 27

Sales Volume Revenue For the year ended December 31, For the year ended December 31, 2012 2013 2014 2012 2013 2014 (’000 (’000 (’000 (HK$ (HK$ (HK$ (US$ barrels) barrels) barrels) millions) millions) millions) millions) (unaudited) Exploration and Production business ThePRC...... 5,621 5,273 5,368 4,000 3,610 3,477 448 South America(1) ...... 606 632 653 1,048 1,065 1,004 129 CentralAsia...... 681 659 646 541 513 465 60 South East Asia(2) ...... 597 625 545 487 472 390 50 Sub-total...... 7,505 7,189 7,212 6,076 5,660 5,336 688 Share of an associate in Central Asia ...... 6,773 6,456 5,773 –––– Share of a joint venture in Middle East ...... 3,288 3,811 3,892 –––– Total of Exploration and Production business.. 17,566 17,456 16,877 6,076 5,660 5,336 688

Notes:

(1) Only our 50% share of sales volume from an oilfield in South America is stated while its revenue is shown as 100% per consolidation requirement.

(2) Only our 96.11% share of sales volume from an oilfield in South East Asia is stated while its revenue is shown as 100% per consolidation requirement.

Liquidity and Capital Resources For the years ended December 31, 2012, 2013 and 2014, our principal sources of liquidity have been cash generated from operations, borrowings and equity financing. We plan to fund the capital and related expenditures described in this Offering Memorandum through a combination of cash provided by operating activities and borrowings, as well as potential debts and equity financing. As of December 31, 2012, 2013 and 2014, we had cash and cash equivalents of HK$19,592 million, HK$14,897 million and HK$10,729 million (US$1,384 million). As of December 31, 2012, 2013 and 2014, we had short-term and long-term borrowings of HK$31,673 million, HK$31,350 million and HK$24,689 million (US$3,184 million).

48 The following table sets forth a summary of the consolidated cash flow data for the periods indicated, which are extracted from our audited consolidated financial statements included elsewhere in this Offering Memorandum.

For the year ended December 31, 2012 2013 2014 (HK$ millions) (HK$ millions) (HK$ millions) (US$ millions) (unaudited) Net cash generated from operating activities ...... 10,063 13,486 13,698 1,767 Net cash used in investing activities...... (12,871) (12,732) (7,601) (980) Net cash generated from/(used in) financing activities. 10,425 (6,092) (10,149) (1,309) Increase/(decrease) in cash and cash equivalents . . . . 7,617 (5,338) (4,052) (523) Cash and cash equivalents, beginning of year ...... 11,718 19,592 14,897 1,921 Effect of foreign exchange rate changes ...... 257 643 (116) (15) Cashandcashequivalents,endofyear...... 19,592 14,897 10,729 1,384

Cash flows from operating activities For the year ended December 31, 2014, we had net cash flows generated from operating activities of HK$13,698 million (US$1,767 million), primarily resulting from profit for the year of HK$8,876 million (US$1,145 million), depreciation, depletion and amortization of HK$5,392 million (US$695 million) and income tax expense of HK$3,080 million. These items were partially offset by various items, principally income tax paid of HK$3,180 million (US$410 million) and a share of profits less losses of associates of a loss of HK$716 million (US$92 million).

For the year ended December 31, 2013, we had net cash flows generated from operating activities of HK$13,486 million, primarily resulting from profit for the year of HK$10,508 million, depreciation, depletion and amortization of HK$4,528 million and income tax expense of HK$3,845 million. These items were partially offset by various items, principally income tax paid of HK$3,427 million and a share of profits less losses of associates of a loss of HK$1,646 million.

For the year ended December 31, 2012, we had net cash flows generated from operating activities of HK$10,063 million, primarily resulting from profit for the year of HK$9,914 million, depreciation, depletion and amortization of HK$4,434 million and income tax expense of HK$3,392 million. These items were partially offset by various items, principally income tax paid of HK$3,161 million, an increase in accounts receivable and prepaid expenses and other current assets of HK$2,718 million, mainly due to the increase in amount due from intermediary companies and the prepayment of construction costs, and a share of profits less losses of associates of a loss of HK$2,334 million.

Cash flows used in investing activities For the year ended December 31, 2014, we had net cash flows used in investing activities of HK$7,601 million (US$980 million), primarily resulting from capital expenditure of HK$9,553 million (US$1,232 million) due to the construction of Shaan-Jing Line III and our LNG processing plants, as well as the expansion of our natural gas sales network, partially offset by dividends received from associates of HK$1,041 million (US$134 million) due to profits recognized from our associate, CNPC- Aktobemunaigas Joint Stock Company.

For the year ended December 31, 2013, we had net cash flows used in investing activities of HK$12,732 million, primarily resulting from capital expenditure of HK$15,405 million due to the construction of Shaan-Jing Line III and our LNG processing plants, as well as the expansion of our natural gas sales network, partially offset by dividends received from associates of HK$1,826 million due to profits recognized from our associate, CNPC-Aktobemunaigas Joint Stock Company.

49 For the year ended December 31, 2012, we had net cash flows used in investing activities of HK$12,871 million, primarily resulting from capital expenditure of HK$15,391 million due to the construction of Shaan-Jing Line III and our LNG processing plant, as well as the expansion of our natural gas sales network, partially offset by dividends received from associates of HK$3,113 million due to profits recognized from our associate, CNPC-Aktobemunaigas Joint Stock Company.

Cash flows generated from/(used in) financing activities For the year ended December 31, 2014, we had net cash flows used in financing activities of HK$10,149 million (US$1,309 million), primarily resulting from dividends paid to non-controlling interests of HK$3,865 million (US$499 million), interest paid of HK$1,486 million (US$192 million), dividends paid to owners of the Company of HK$1,857 million (US$240 million) and a decrease in borrowings, net of repayments, of HK$6,209 million (US$801 million) due to repayment of borrowings which came to maturity, partially offset by capital contributions from non-controlling interest of HK$789 million (US$102 million) due to an increase in share capital in our subsidiaries.

For the year ended December 31, 2013, we had net cash flows used in financing activities of HK$6,092 million, primarily resulting from dividends paid to non-controlling interests of HK$1,944 million, interest paid of HK$1,856 million, dividends paid to owners of the Company of HK$1,855 million and a decrease in borrowings, net of repayments, of HK$1,409 million due to repayment of borrowings which came to maturity, partially offset by capital contributions from non-controlling interest of HK$1,078 million due to an increase in share capital in our subsidiaries.

For the year ended December 31, 2012, we had net cash generated from financing activities of HK$10,425 million, primarily resulting from issue of shares, net of share issue expenses, of HK$10,605 million and a net increase in borrowings, net of repayments, of HK$3,701 million mainly to fund the construction of facilities in our natural gas distribution business.

Borrowings and indebtedness Our total consolidated short-term and long-term loans and debentures as of December 31, 2012, 2013 and 2014 comprised:

As of December 31, 2012 2013 2014 (HK$ in (HK$ in (HK$ in (US$ in millions) millions) millions) millions) (unaudited) Short-term borrowings (repayable within one year) 4,187 929 5,341 689 Long-term borrowings: Repayable within one year ...... 924 12,622 3,124 403 Repayable more than one year, but not exceeding two years ...... 14,932 9,158 5,288 682 Repayable more than two years, but not exceeding five years ...... 11,629 8,640 10,936 1,411 Repayablemorethanfiveyears...... 1 1 –– Total long-term borrowings ...... 27,486 30,421 19,348 2,496 Total borrowings ...... 31,673 31,350 24,689 3,184

50 Our short-term borrowings and long-term borrowings repayable within one year increased from HK$5,111 million as of December 31, 2012 to HK$13,511 million as of December 31, 2013 due to some loans reaching their maturity period, and decreased to HK$8,465 million (US$1,092 million) as of December 31, 2014 due to the Beijing Pipeline project repaying 50% of its borrowings without any addition in 2014. Our long-term borrowings repayable over more than one year decreased from HK$26,562 million as of December 31, 2012 to HK$17,799 million as of December 31, 2013 due to some loans reaching their maturity period, and decreased to HK$16,224 million (US$2,093 million) as of December 31, 2014 due to the Beijing Pipeline project repaying 50% of its borrowings without any addition in 2014.

Capital Expenditure and Contractual Obligations Contractual obligations and commitments The following table sets forth out capital commitments as of December 31, 2014:

As of December 31, 2014 (HK$ millions) (US$ millions) (unaudited) Contracted by not provided for: Oilfielddevelopmentcosts...... 404 52 Acquisitionsof/capitalcontributionstoinvestments...... –– Otherproperty,plantandequipment...... 7,179 926 7,583 978

The following table sets forth as of December 31, 2014, our commitment for future minimum lease payments under non-cancellable operating leases. These operating leases are mainly for leasing of land and building and equipment:

Payments Due by Period After 1 year Not later but within More than Contractual obligations Total than 1 year 5 years 5 years (HK$ millions) Operatingleaseobligations...... 1,091 140 384 567

Capital expenditures Our capital expenditure for the years ended December 31, 2012, 2013 and 2014 was HK$15,391 million, HK$15,405 million and HK$9,553 million (US$1,232 million), respectively. Our capital expenditures in 2014 were primarily used for further expansion of our natural gas sales network by the construction of the Shaan-Jing Line IV, and expansion of both the China Natural Gas Co., Ltd. and Xinjiang Xinjie Co. project factories. We expect that we will continue to make investments to increase our capacity in the natural gas distribution business and, depending on market conditions, to explore opportunities in our exploration and production business.

Off-Balance Sheet Arrangements Except as disclosed above, as of the date of this Offering Memorandum, we did not have any material off-balance sheet arrangements as determined for the purposes of HKFRS. Save as otherwise disclosed in this Offering Memorandum, we are currently not involved in any material legal proceedings, nor are we aware of any pending or potential material legal proceedings involving us.

Quantitative and Qualitative Disclosure of Market Risk Our operations expose us to foreign exchange rate risk, credit risk, capital risk management and interest rate risk. We currently do not hedge against these financial risks (including market risks) through the use of either derivatives or forward delivery contracts.

51 Foreign exchange rate risk We are exposed to foreign exchange rate risk primarily through sales and purchases that give rise to receivables, payables and cash balances that are denominated in a foreign currency (i.e., a currency other than the functional currencies of the operations to which the transactions relate). The currency giving rise to this risk is primarily the United States dollar. We are also exposed to foreign exchange rate risk in respect of the borrowings and cash and cash equivalents, which are denominated in Hong Kong dollar and U.S. dollar.

Please see Note 4.1 to the audited consolidated financial statements for the year ended December 31, 2014 in regard to our exposure at the end of the reporting period to foreign exchange rate risk arising from recognized assets or liabilities denominated in a currency other than the functional currency.

We did not enter into any hedging contracts for the years ended December 31, 2012, 2013 and 2014 to hedge against our foreign exchange rate risk. However, our management monitors the related foreign currency exposure closely and will consider hedging significant foreign currency exposure should the need arise.

Credit risk Credit risk arises primarily from cash and cash equivalents, accounts receivable, other receivables, amounts due from related parties and loans to third parties. A substantial portion of our cash at bank and time deposits are placed with state-owned banks and financial institutions in the PRC and our management believes that the credit risk is low. We perform ongoing assessments of the credit quality of our customers. Please see the aging analysis of accounts receivable presented in Note 26 to the audited consolidated financial statements for the year ended December 31, 2012, Note 26 to the audited consolidated financial statements for the year ended December 31, 2013 and Note 25 to the audited consolidated financial statements for the year ended December 31, 2014.

The carrying amounts of cash and cash equivalents, accounts receivable, other receivables, amounts due from related parties and loans to third parties included in the consolidated statement of financial position represent the our maximum exposure to credit risk. No other financial assets carry a significant exposure to credit risk. We have no significant concentration of credit risk.

Interest rate risk We are exposed to interest rate risk from changes in interest rates that affect future cash flows and fair values of financial instruments. While the majority of our debt is subject to fixed interest rates, resulting in stable cash outflows, fixed interest rates would result in a higher interest expense if market interest rates decrease. To manage the risk from interest rates, our policy is to maintain a proper proportion between fixed interest rate debt and floating interest rate debt. Therefore, we may use financial instruments, such as interest rate swaps, to swap between fixed interest rates and floating rates in order to minimize interest rate risks, considering costs, market conditions and acceptable risks.

Price risk We are engaged in the natural gas and oil business and changes in prices of natural gas and oil products, which are beyond our control, will positively or negatively affect our results of operations. We are also exposed to equity price risk either through our long-term equity investments, available-for-sale investments or held-for-trading investments in respect of equity securities listed in the respective stock exchanges. Our management manages equity price risk arising from these investments by closely monitoring the performance of respective listed equity security and market conditions. Our management will consider diversifying the portfolio of these investments as appropriate.

52 Inflation According to the National Bureau of Statistics of China, the Consumer Price Index in the PRC increased by 2.6% in 2012 and increased by 2.5% again in 2013. We have not been materially affected by inflation since our inception. Our results of operations could benefit from moderate inflation, but will be adversely affected by higher inflation rates in the PRC.

53 INDUSTRY OVERVIEW

This section provides an overview of the natural gas and oil industries globally and in the PRC. The information presented in this section has been extracted from publicly available documents and reports prepared by third parties, which have not been independently verified by us, the Initial Purchasers or any of their affiliates or advisers.

Overview of the Global Natural Gas Market Natural gas advantages Natural gas is often referred to as the cleanest fossil fuel. Natural gas emits only a fraction of the pollutants emitted by most other energy sources, such as coal and crude oil. Many regard natural gas as a preferred energy source and an environmentally friendly alternative to other fossil fuels.

The desirable qualities of natural gas include the following:

• Clean: Combustion of natural gas results in virtually no atmospheric emissions of sulphur dioxide or small particulate matter, and far lower emissions of carbon dioxide and other harmful elements compared to combustion of other fossil fuels, such as coal and crude oil. For instance, compared to diesel, natural gas emits 10% less carbon dioxide, 90% less sulphur oxide and 20% less carbon monoxide.

• Safe: Natural gas does not contain carbon monoxide or other toxic gases. In addition, natural gas has a much lower density than air, which makes the use of natural gas relatively safer than LPG as the chance of explosion is reduced.

• Efficient: Natural gas has a higher heat content compared to other fossil fuels. Under the same pressure, combustion of an equal volume of natural gas generates higher heat content than most other forms of fossil fuel.

• Convenient: For industrial users, natural gas units tend to be less complex and easier to operate and maintain than equipment powered by coal and other fossil fuels. In addition, natural gas consumption does not result in solid waste or ash requiring disposal.

Global natural gas consumption Global natural gas demand has grown steadily in past years. According to the BP Statistical Review of WorldEnergyJune2014(the‘‘BP Review’’), global natural gas consumption grew from 2,596.6 BCM in 2003 to 3,347.6 BCM in 2013, representing a CAGR of 2.6%.

54 The recent growth in global natural gas consumption is driven by both developed and emerging countries. In 2013, the PRC had the world’s largest increase in consumption by absolute volume, rising by 10.8% from 2012 and achieving a record high of 161.6 BCM. The U.S. and Brazil registered the next two largest increases by absolute volume in 2013. As a percentage of global primary energy consumption, natural gas consumption has remained fairly stable since 2004, reaching 23.7% in 2013. The table below sets forth historical data on the top 10 countries in terms of natural gas consumption for the years indicated:

Exhibit 1: Top 10 Countries in terms of Natural Gas Consumption (BCM)

12-13 % 04-13 Countries 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 change CAGR United States ...... 634.4 623.4 614.4 654.2 659.1 648.7 682.1 693.1 723.0 737.2 2.4% 1.7% Russia...... 389.3 394.1 415.0 422.0 416.0 389.7 414.2 424.6 416.3 413.5 (0.4%) 0.7% Iran ...... 98.7 102.8 112.0 125.5 134.8 143.2 152.9 162.4 161.5 162.2 0.7% 5.7% China ...... 39.7 46.8 56.1 70.5 81.3 89.5 106.9 130.5 146.3 161.6 10.8% 16.9% Japan ...... 77.0 78.6 83.7 90.2 93.7 87.4 94.5 105.5 116.9 116.9 0.2% 4.7% Canada ...... 95.1 97.8 96.9 96.2 96.1 94.9 95.0 100.9 100.3 103.5 3.5% 0.9% Saudi Arabia ...... 65.7 71.2 73.5 74.4 80.4 78.5 87.7 92.3 99.3 103.0 4.0% 5.1% Germany ...... 85.9 86.2 87.2 82.9 81.2 78.0 83.3 74.5 78.4 83.6 7.0% (0.3%) Mexico...... 54.3 61.0 66.6 63.5 66.3 72.5 72.5 76.6 79.6 82.7 4.2% 4.8% United Kingdom ...... 97.4 94.9 90.0 91.0 93.4 87.0 94.2 78.1 73.7 73.1 (0.6%) (3.1%) Rest of world ...... 1,049.2 1,107.5 1,144.0 1,183.8 1,225.3 1,188.0 1,297.6 1,294.4 1,315.4 1,310.3 (0.4%) 2.5% Total world ...... 2,686.7 2,764.3 2,839.6 2,954.4 3,027.7 2,957.4 3,180.8 3,233.0 3,310.8 3,347.6 1.4% 2.5% Global natural gas consumption as % of global primary energy consumption...... 23.3% 23.3% 23.3% 23.6% 23.8% 23.6% 24.0% 23.8% 23.9% 23.7% N.A. N.A.

Source: BP Statistical Review of World Energy June 2014

The PRC was one of the primary contributors to the growth in natural gas consumption from 2004 to 2013. According to the BP Review, the PRC’s natural gas consumption has grown from 39.7 BCM in 2004 to 161.6 BCM in 2013, representing a CAGR of 16.9%. Over the same period, natural gas consumption in the U.S. and Brazil grew at a CAGR of 1.7% and 8.0%, respectively. According to the BP Energy Outlook 2035, the PRC will continue to be one of the world’snaturalgasconsumption growth drivers, accounting for 38% of the growth in global primary energy consumption from 2012 to 2035.

55 Global natural gas supply According to the BP Review, global natural gas production in 2013 increased by 1.1% to 3,369.9 BCM, while the U.S. and Russia, the two largest natural gas producers in the world, recorded increases in natural gas production of 1.3% to 687.6 BCM, and 2.4% to 604.8 BCM, respectively. These increases were largely attributed to the discovery of significant non-conventional natural gas resources, in particular shale gas, over the last decade, as well as technological advances and a pricing environment that has made the extraction and sale of such resources economically viable. Unconventional natural gas resources are expected to play an increasingly important role in future natural gas supply throughout the world. The table below sets forth historical data on the top 10 countries in terms of natural gas production for the years indicated:

Exhibit 2: Top 10 Countries in terms of Natural Gas Production (BCM)

12-13 % 04-13 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 change CAGR United States ...... 526.4 511.1 524.0 545.6 570.8 584.0 603.6 648.5 681.2 687.6 1.3% 3.0% Russia...... 573.3 580.1 595.2 592.1 601.8 527.7 588.9 607.0 592.3 604.8 2.4% 0.6% Iran ...... 96.4 102.3 111.5 125.0 132.4 144.2 152.4 159.9 165.6 166.6 0.8% 6.3% Qatar ...... 39.2 45.8 50.7 63.2 77.0 89.3 116.7 145.3 150.8 158.5 5.4% 16.8% Canada ...... 183.7 187.1 188.4 182.7 176.6 164.0 159.9 159.7 156.0 154.8 (0.5%) (1.9%) China ...... 41.5 49.3 58.6 69.2 80.3 85.3 94.8 102.7 107.2 117.1 9.5% 12.2% Norway ...... 79.2 85.8 88.7 90.3 100.1 104.4 107.3 101.3 114.7 108.7 (5.0%) 3.6% Saudi Arabia ...... 65.7 71.2 73.5 74.4 80.4 78.5 87.7 92.3 99.3 103.0 4.0% 5.1% Algeria ...... 82.0 88.2 84.5 84.8 85.8 79.6 80.4 82.7 81.5 78.6 (3.3%) (0.5%) Indonesia ...... 70.3 71.2 70.3 67.6 69.7 71.9 82.0 75.9 71.1 70.4 (0.7%) 0.0% Rest of world ...... 945.2 986.3 1,036.6 1,067.7 1,093.6 1,052.2 1,117.1 1,112.5 1,123.5 1,119.8 (0.3%) 1.9% Total world ...... 2,702.8 2,778.6 2,881.8 2,962.7 3,068.5 2,981.0 3,190.8 3,287.7 3,343.3 3,369.9 1.1% 2.5% Global natural gas proved reserves (BCM)...... 156,358.0 156,927.3 157,794.3 161,138.3 169,347.8 169,050.2 176,247.5 185,612.2 185,306.7 185,695.8 0.2% 1.9%

Source: BP Statistical Review of World Energy June 2014

Global natural gas prices Since the 2008 global financial crisis, there has been a structural change in oil and natural gas pricing dynamics in the international energy markets. While natural gas prices in regions such as Asia have traditionally been positively correlated with crude oil prices, in other regions, such as the U.S., natural gas prices have appeared to be decoupled from WTI crude oil prices. In July 2008, the peaking of Henry Hub natural gas prices (the pricing point for natural gas futures contracts traded on the NYME) at US$13.31 per mmbtu coincided with a peak in WTI crude oil prices of US$145.29 per barrel as traded on the NYME. Following the peak, both Henry Hub prices and WTI oil prices decreased sharply as the global economy slowed down. However, as crude oil prices rebounded in 2010 and continued to stay at relatively high levels, Henry Hub prices continued to decrease, falling to a trough of US$1.84 per mmbtu in April 2012. By comparison, WTI prices reached US$103.05 per barrel in the same month. The decoupling of crude oil and natural gas prices is largely due to the availability of natural gas from previously untapped non-conventional natural gas resources such as shale gas in North America and CBM in Australia.

More recently, after Henry Hub prices spiked in the first quarter of 2014 mainly due to an abnormally cold winter which engulfed most of North America, there has been a global drop in both WTI and Henry Hub prices, with both reaching near record lows. This is primarily due to a global surplus of natural gas supply coupled with falling oil prices as a result of expanding world oil supply and changes in expectations on future supply and demand.

56 The chart below shows the WTI and Henry Hub prices as of the respective date between January 2005 and March 2015:

Exhibit 3: Historical WTI and Henry Hub Spot Price

Historical WTI and Henry Hub Spot Price, 2015 - YTD

160 18

14 120

10 80 8

40 4

0 0

WTI Henry Hub

Source: Bloomberg as of March 24, 2015

Overview of LNG and its advantages Liquefied Natural Gas is a natural gas that has undergone the process of liquefaction. The process converts the gas into a clear, colorless and non-toxic liquid form when the natural gas is cooled to -162ºC (-260ºF). This shrinks the volume of the gas by approximately 600 times, making it easier to store and transport.

In addition to the advantages of natural gas, LNG, with its compacted volume, makes it technically and economically feasible to transport natural gas over long distances, so that gas reserves located far from major consumption regions can be tapped. At destination, LNG can be stored in liquid form, or further transported on ground by truck fleet, or converted back to gas at regasification facilities, and then piped to homes, businesses and industries in the gas form.

Overview of the PRC Natural Gas Market Overview of the PRC economy and energy market According to the World Development Indicators issued by the World Bank, the PRC’sGDPgrewby 7.7% from 2012 to 2013, making it one of the fastest growing economies in the world. The PRC maintained stable GDP growth in 2014, increasing 7.4% from 2013 according to preliminary accounting reports in the statistical communiqué of the PRC Natural Bureau of Statistics. The PRC is currently exceeding its own stated target of 7.0% growth per annum until 2015, as stated in the PRC’s12thFive- Year Plan. Despite recent slowdowns, which has reduced the PRC’s GDP growth to a more sustainable rate accompanying the PRC’s, transformation to a new normal, this growth has remained consistently strong in recent history, significantly outstripping the global average. From 2004 to 2013, the PRC’s GDP grew at a CAGR of 10.2%.

57 Strong economic growth in the PRC has contributed to an increase in energy consumption. According to the BP Review, primary energy consumption in the PRC grew at a CAGR of 7.7% from 2004 to 2013, and in 2013, the PRC was the world’s largest consumer of energy. The PRC’s overall energy consumption continued to rise by 2.2%, with natural gas consumption rising by 8.6% from 2013 to 2014 according to preliminary accounting reports in the statistical communiqué of the PRC Natural Bureau of Statistics. The table below sets forth GDP growthandprimaryenergyconsumptionbymmtoeinthe PRC for the years indicated:

Exhibit 4: GDP Growth and Primary Energy Consumption in the PRC 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 GDP growth (% year-over-year). . . . . 10.1% 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.7% 7.7% Primaryenergyconsumption (mmtoe)...... 1,466.8 1,601.1 1,767.9 1,880.1 1,971.4 2,104.3 2,339.6 2,544.8 2,731.1 2,852.4 Primary energy consumption growth (%year-over-year)...... 17.8% 9.2% 10.4% 6.3% 4.9% 6.7% 11.2% 8.8% 7.3% 4.4%

Source: BP Statistical Review of World Energy June 2014, World Bank

ThemainsourceofenergyinthePRChastraditionally been coal, which accounted for 67.5% of primary energy consumption in 2013, followed by crude oil, which accounted for 17.8%. The heavy reliance on coal, particularly for power generation and heating, has contributed to high pollution levels in the PRC. In 2013, the world average natural gas consumption as a percentage of total primary energy consumption was 23.7%, whereas in the PRC, the rate was 5.1%, according to the BP Review. The PRC government is therefore taking measures to increase the use of more environmentally friendly fuel sources such as natural gas and renewable energy to address pollution.

Under the 12th Five-Year Plan, the percentage of natural gas consumption to total primary energy consumption in the PRC is targeted to grow from 4.5% in 2011 to 7.5% by 2015. In absolute terms, natural gas consumption and production is expected to reach 230.0 BCM and 156.5 BCM, respectively, by 2015. Natural gas supply in 2015 is expected to be further augmented by approximately 93.5 BCM of imported natural gas, representing approximately 37.4% of the PRC’s total natural gas supply.

The PRC has issued a long list of targets for its future energy strategy as the country looks to modernize its energy structure. The State Council promised more efficient, self-sufficient, green and innovative energy production and consumption in the Energy Development Strategy Action Plan (2014-2020) published in November 2014. The targets are set to be achieved by capping the amount of coal and coal- equivalent consumption. The effect on the primary energy mix consumption will be to increase the share of non-fossil fuels in the total primary energy mix from 9.6% in 2013 to 15% by 2020. Additionally, the share of natural gas will be raised to above 10% of the mix, reducing the use of coal to less than 62%. The overarching target is to boost energy self-sufficiency to around 85%.

58 The chart below shows the consumption of natural gas as a percentage of total primary energy consumption in the PRC in 2013, as well as the expected consumption percentages in 2015 and 2020, as targeted under the 12th Five-Year Plan:

Exhibit 5: Breakdown of Total Primary Energy Consumption in the PRC (%)

Source: NDRC, BP Statistical Review of World Energy June 2014

Natural gas consumption and supply in the PRC As a result of depleting crude oil reserves and growing concerns about coal pollution, the PRC has been actively searching for alternative sources of energy with a specific target of increasing natural gas consumption as a percentage of total primary energy consumption in the PRC. In addition, the PRC’s medium-term plan to achieve a 40% to 45% reduction of carbon dioxide emissions per unit of GDP by 2020 compared to the 2005 level is driving energy consumption toward cleaner fuels such as natural gas. As a result, the PRC has seen a strong growth in its natural gas consumption in recent years from 39.7 BCM in 2004 to 178.6 BCM in 2014, representing a CAGR of 16.2%, with the number of residential natural gas users expected to increase from 180 million in 2010 to 250 million in 2015, according to the 12th Five-Year Plan.

Even so, natural gas production in the PRC remains significantly below that of oil and coal. According to the BP Review, the PRC had proved natural gas reserves of 3.3 trillion cubic meters at the end of 2013, accounting for 1.8% of the world’s total proved natural gas reserves. Although the country has a significant amount of unexplored non-conventional natural gas resources such as coalbed methane (‘‘CBM’’) and shale gas, the exploration and development of both CBM and shale gas resources is still in the early stages in the PRC as they are so capital and technology intensive. However, 12th Five-Year Plan sets forth a short-term target to reduce carbon dioxide emission per unit of GDP by 17% by 2015 from 2010 levels. Compared to coal and oil, natural gas has the lowest carbon intensity when combusted. Therefore, to realize its 2015 target, the PRC has been taking active steps to increase the supply, and hence, utilization of natural gas, by increasing domestic production of both conventional and unconventional gas, as well as developing infrastructures for gas import.

Natural gas production in the PRC grew at a slower pace than natural gas consumption, from 41.5 BCM in 2004 to 130.2 BCM in 2014, representing a CAGR of 12.1%. The PRC effectively transitioned from a net exporter of natural gas to a net importer of natural gas in 2007 when its consumption outstripped its production level.

59 The table below sets forth natural gas demand and supply in the PRC for the years indicated:

Exhibit 6: Natural Gas Demand and Production in the PRC (BCM/year) 04-13 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 CAGR Natural gas consumption . . 39.7 46.8 56.1 70.5 81.3 89.5 106.9 130.5 146.3 161.6 16.9% Naturalgasproduction.... 41.5 49.3 58.6 69.2 80.3 85.3 94.8 102.7 107.2 117.1 12.2% Netimport/(export)...... (1.8) (2.5) (2.5) 1.3 1.0 4.2 12.1 27.8 39.1 44.5 –

Source: BP Statistical Review of World Energy June 2014

To meet the shortfall in supply, the PRC has been importing natural gas from its gas-rich neighbors such as Myanmar, Russia and other countries in Central Asia via long-distance cross-border import pipelines. These include the West-to-East Gas Pipelines and the Central Asia-China Gas Pipeline, as well as new extensions of these cross-border pipelines, some of which have become operational in recent years. In May 2014, Gazprom Management Committee (‘‘Gazprom’’) and CNPC signed a Sale and Purchase Agreement for the Russian gas supply via the eastern route. The 30-year contract provides for gas supplies in the amount of 38 BCM/year. In November 2014, Gazprom and CNPC signed a Framework Agreement on gas supplies via the western route. The 30-year contract provides for gas supplies in the amount of 30 BCM/year.

Separately, major nationwide trunk pipelines are the principal method of transporting natural gas to major consumption regions in the PRC. Because the majority of natural gas reserves are located inland in western and northwestern parts of the PRC, infrastructure is required to connect natural gas supply to areas with high demand for natural gas, largely located in the eastern part of the PRC. Expanding the network of these trunk pipelines, such as the Shaan-Jing Gas Pipeline, Zhong-Wu Gas Pipeline and the Qing Zang Gas Pipeline, helps to reduce the geographical mismatch between the demand and supply of natural gas. In addition to its domestic supply of natural gas, the PRC is increasingly reliant on imports of LNG. To support its increasing LNG import volume, the PRC has rapidly increased its LNG receiving and regasification capacity in recent years.

In the PRC, natural gas consumption is primarily from four sectors: city-gas, industrial fuel, power generation and chemicals. Taking into account the social, economic and environmental benefits of natural gas, the PRC government classified natural gas users into four categories: prioritized, allowed, restricted and prohibited. The NDRC issued a new set of policies on natural gas utilization that came into effect in December 2012 which expanded the category of prioritized users. These changes are a result of the growth in natural gas supply and reflect the policy support for developing the natural gas industry. The prioritized category of natural gas uses include, but are not limited to: natural gas vehicles (particularly referring to dual-fuel and LNG vehicles) which include city buses, taxis, logistical vehicles, passenger cars, trucks and sanitation vehicles among others which use natural gas as fuel; gas used for cooking and household amenities; gas used for public service facilities, including airports, government offices, schools, kindergartens, hospitals, hotels, shopping malls, office buildings, restaurants, bus stations, train stations, ports and welfare centers; central heating users in the city center and central zone of the new district; and air conditioning users. Going forward, as the penetration rates increase and natural gas supply infrastructure improves in the PRC, city-gas is expected to remain a key contributing sector for the PRC’s natural gas demand.

Historically, the chemical sector has been a major consumer of natural gas in the PRC. However, the PRC government has reviewed its priority policy and has now restricted natural gas usage as feedstock for certain chemical production within the restricted and prohibited categories. Demand growth from this sector is therefore only expected to increase moderately in the future.

60 Natural gas consumption as a percentage of total primary energy consumption in the PRC is generally lower compared to that in other major developed and emerging countries in the world. The large size of the PRC energy market and low natural gas penetration rate provide ample room for natural gas demand in the PRC to grow. The following charts show the natural gas consumption as a percentage of total primary energy consumption and natural gas consumption per capita in the PRC compared to the G7 Countries in 2013:

Exhibit 8: Natural Gas Consumption as a Percentage of Exhibit 9: Natural Gas Consumption per Capita in the PRC Total Primary Energy Consumption in the PRC and the G7 and the G7 Countries in 2013 (cubic meters per capita per Countries in 2013 (%) annum)

2,943.0 36.4% 32.9% 29.6% 2,332.1 28.0%

23.7% 23.2% 22.2%

15.5% 1,140.6 1,073.5 1,037.6 917.8 648.7 5.1% 469.9 119.1 U.S. Italy PRC U.S. Italy PRC Japan Japan France Canada France Canada Germany Germany World average World World average World United Kingdom United Kingdom

Source: BP Statistical Review of World Energy June 2014 Source: BP Statistical Review of World Energy June 2014, World Bank

Natural gas value chain in the PRC The value chain of the natural gas industry can be divided into three segments: upstream, midstream and downstream.

The upstream segment includes the exploration for potential underground or underwater natural gas reserves and resources, drilling of exploratory wells, and subsequently operating the wells that recover and extract natural gas to the surface. The major market leaders of the upstream market in the PRC are the three key state-owned oil and gas companies: PetroChina, a subsidiary of CNPC, China Petroleum & Chemical Corporation (‘‘Sinopec’’) and China National Offshore Oil Corporation (‘‘CNOOC’’).

The midstream segment mainly includes the initial processing and storage of natural gas (such as regasification of imported LNG), as well as transmission of natural gas through means such as high- pressure pipelines, and other forms of transportation via trucking and tankering. The ownership of PRC high-pressure natural gas pipelines is dominated by PetroChina, and the intra-provincial high-pressure pipelines are mainly owned by state-owned enterprise operators.

The downstream segment includes natural gas distribution. Natural gas distribution companies purchase natural gas from upstream oil and gas companies as well as midstream operators and distribute it to residential, commercial, industrial, district heating and power generation users, as well as vehicle customers through various city-gas infrastructures (which comprise the distribution pipelines, as well as numerous vehicle refueling stations). For other end customers not connected to a piped city-gas network, they can receive natural gas via trucks as well. After being granted concession rights for a city or region, natural gas distributors in the downstream segment usually have exclusive rights to supply natural gas to end customers in the designated area for a period of about 20 to 50 years, during which they face little or no competition from other piped natural gas distributors in the designated area.

61 The downstream segment also includes natural gas refueling stations. The PRC’s 12th Five-Year Plan estimates that gas volume (including natural gas and LPG) consumed by vehicles is expected to increase to 30 BCM by the end of 2015, representing a CAGR of 38%. The China Road Transport Association estimates the number of natural gas vehicle refueling stations to reach 5,000 and the number of natural gas vehicles to reach 1.8 million by 2015.

Exhibit 10: Natural Gas Business Model

Upstream Midstream Downstream End users

City Gas Distribution Nationwide Trunk Pipelines Residential Pipelines Conventional Natural Gas

Commercial

Unconventional Sources of Natural Gas (e.g. CBM and High Pressure Pipelines Shale Gas) Industrial

Vehicle Refueling Stations District Heating and Coal to Natural Gas Power Generation

LNG Processing Plants

Vehicles

Transportation Users Currently Not Imported LNG LNG Regas Terminals Fleet Connected to Pipelines

Natural gas pricing policy in the PRC Natural gas prices in the PRC have not historically been aligned with those in the international markets. Rather, in order to promote the use of natural gas as a substitute for traditional fossil fuels, the PRC government has historically set the price of natural gas at relatively low levels to incentivize consumption.

Costs to downstream natural gas distributors, or city-gate prices, consist of the exploration wellhead price and transportation and transmission charge, both regulated by the NDRC.

Piped gas end-user tariffs are set by local pricing bureaus rather than the central government and may vary widely between cities.

The following chart shows a typical PRC natural gas tariff structure:

Exhibit 11: PRC Natural Gas Tariff Structure

Components of Piped City Gas End- User Tariff

Components of City- Gate Price Distribution Cost Exploration Transportation & + Margin Wellhead Price + Margin Transmission Charge + Mission

Central NDRC approval Central NDRC approval for national inter Tariff for Residential Users: Local pricing provincial pipelines bureau approval

Provincial NDRC approval for intra Tariff for Industrial and Commercial Users: provincial pipelines Negotiated based on indicative price set by local pricing bureaus

When upstream exploration wellhead price increases, it typically takes three to six months for the distributor to pass the cost increase to residential users because approval from the local pricing bureau is required through a public hearing. On the other hand, the tariff for industrial and commercial users is generally negotiated bilaterally between the distributor and the non-residential customers, based on an

62 indicative price set by local governments and adjustable within a negotiated range, and hence can be renegotiated more quickly after exploration wellhead price increases. Connection fees that can be charged for connecting new customers to city-gas distribution networks are also subject to approval by local pricing bureaus.

The PRC’s natural gas prices have historically been maintained artificially lower than global natural gas prices, resulting in inefficient use of natural gas. Recently, domestic natural gas prices have been brought closer to international prices. Effective on June 1, 2010, the NDRC raised the onshore exploration wellhead price of natural gas by RMB0.23 per cubic meter, which represented an approximately 25% increase from RMB0.925 per cubic meter.

In December 2011, a pilot pricing reform program was implemented under which the price of natural gas would be set by the market. The pilot plan started in Guangdong Province and Guangxi Zhuang Autonomous Region. Under the plan, prices of natural gas would be pegged to fuel oils and LPG, using the ‘‘net-back’’ calculation methods that include all the costs companies incur to bring products to the marketplace. This move was intended to better trace and reflect market demand and resource supplies, and guide reasonable distributions. The ultimate goal of the pilot reform was to promote a market-driven pricing mechanism.

The new set of policies on natural gas utilization issued by the NDRC in October 2012 (which came into effect in December 2012), compared to the version issued in 2007, provides more specifics and direction on how the natural gas pricing mechanics can be further improved. This includes (a) establishing a better link between prices of natural gas and alternative fuels; (b) improving the price linkage mechanisms between upstream price and downstream price; and (c) exploring and implementing a differential pricing mechanism such as seasonal pricing and interruptible pricing.

The move toward establishing a dynamic pricing mechanism that reflects gas-market fundamentals and resource scarcity was further modified in June 2013 by the NDRC in acknowledgement of the substantial annual growth of incremental gas demand and its fiscal impact. More importantly, tiered pricing for existing (2012) gas versus incremental gas (in excess of the 2012 volume) was introduced (excluding residential use).

Under the new pricing regime, each province would have two city-gate price ceilings: one that applies to new (incremental) gas for non-residential users and the other to existing gas. For existing gas for non- residential use, the increase was no more than RMB0.40 per cubic meter; and for gas used to produce fertilizers, the increase did not exceed RMB0.25 per cubic meter. For incremental gas, the price was set at 85% of the import cost of alternative fuels (weighted average based on 60% for fuel oil and 40% for LPG). The goal was to gradually increase the price of existing gas so that it would eventually equal that of incremental gas. The NDRC has emphasized that these prices are meant to converge by the end of 2015.

Provincial city-gate price ceilings in the majority of provinces are higher under this 2013 reform than under the 2011 pilot reform. The new tiered measures are recognized as transitory, and the intention is to introduce net-back pricing nationwide for both existing and incremental gas use and target sectors that are more able to pay. At the same time, tiered pricing for the residential sector has been implemented in various cities since 2012, and a deadline for nationwide implementation has been set by the NDRC for the end of 2015. If used on a larger scale, tiered residential pricing could potentially enhance efficiency, reduce cross-subsidies and improve distribution margins, thereby promoting a more sustainable downstream market.

On August 12, 2014, the NDRC announced a further increase in the existing city-gate gas price ceiling for non-residential use, effective from September 1, 2014. Except for Guangdong and Guangxi, where the increase was RMB0.12 per cubic meter, the increase for all other provinces was RMB0.40 per cubic meter. This increase was part of a continuing implementation of gas price reform in the PRC.

63 As of February 2015, the NDRC further updated the natural gas tariff structure. The overarching aim of the updated policy is to realize the convergence of the oil-linked existing gas and incremental gas price tiers by taking advantage of the then lower oil prices, which had led to lower incremental gas prices. The average differential between both tiers then was RMB0.48 per cubic meter. The plan for convergence of the price of existing and incremental gas supply tiers started on April 1, 2015 by raising city-gate prices for the existing supply by RMB0.04 per cubic meter and lowering prices for the incremental supply by RMB0.44 per cubic meter. Residential gas prices have not been adjusted at this time, but the net effect of the policy on non-residential users is projected to be an overall 5% reduction in natural gas prices to an average RMB2.51 per cubic meter at the city-gate level.

Overview of Global and PRC Oil Industry Global oil consumption Global oil demand grew rapidly until 2014, with consumption having nearly tripled over the past 50 years. According to the BP Review, global oil demand grew from 80.2 million bpd in 2003 to 91.3 million bpd in 2013, representing a CAGR of 1.3%. According to the BP Energy Outlook 2035 (the ‘‘BP Outlook’’), the consumption growth rate is expected to gradually slow down. Global oil demand is projected to increase to 109.0 million bpd by 2035, representing a CAGR of 0.8% over the period from 2012 to 2035.

The growth in global oil consumption is driven primarily by developing countries, among which the PRC has been the primary contributor. According to the BP Review, the PRC’s oil consumption has grown from 5.8 million bpd in 2003 to 10.8 million bpd in 2013, representing a CAGR of 6.4%. In contrast, oil consumption in the United StatesfellataCAGRof0.6%whileinRussiaitgrewata CAGR of 2.2% over the same period. In the future, oil demand is expected to steadily increase from non-Organisation for Economic Co-operation and Development (‘‘non-OEDC’’) countries. The PRC, India and the Middle East will account for almost half of the expected global net increase by 2035.

Global oil production According to the U.S. Energy Information administration, global oil production increased to 93.0 million bpd in 2014 from 90.9 million bpd in 2013, representing a growth of 2.3%. However, the low oil price environment witnessed since in the second half of 2014 will impact the projected global oil production. Moreover, despite the projected oil supply of non-OPEC countries being expected to increase, it was announced by OPEC, following a meeting of the members on November 27, 2014, that it would continue to maintain its oil production level of 30.0 million bpd, as was agreed by them in December 2011. This has caused more concerns for the outlook of near-term oil prices and recently has forced several oil and gas companies to cut capital expenditure for 2015 and 2016. The above-mentioned factors, combined with an already abundantly supplied global oil market, has made the global oil production in the next few years hard to predict.

Global oil prices Since the financial crisis in 2008, the downturn in the global economy and subsequent recovery have resulted in unprecedented volatility in the oil and gas industry. The average price of WTI crude oil increased from US$112/bbl in April 2008 to US$133/bbl in July 2008. Strong demand for energy combined with limited supply, limited spare production capacity in OPEC, and supply disruption in key regions like Russia, the Middle East and West Africa were the main reasons for the record high prices in 2008. This was followed by a sharp decrease in the price of crude oil to US$40/bbl in December 2008, with the collapse of major financial institutions and a general slowdown in activity spreading throughout the global economy in 2008. Since then, oil prices have gradually increased amid global economic recovery. However, due to unrest in North Africa and the Middle East, as well as uncertainties in the economic outlook, the market has experienced relatively high price volatility, as WTI oil price traded in the range of US$76/bbl to US$114/bbl during the three-year period from 2011 to 2013. Since the fourth

64 quarter of 2014, the WTI oil price plunged by more than US$30/bbl from the third quarter of 2014 to the current level of around US$50/bbl due to expanding world oil supply and changes in expectations for future supply and demand dynamics.

Oil prices are affected by a number of factors, including changes in supply and demand dynamics, OPEC regulations, weather conditions and regulation by domestic and foreign authorities, as well as political and economic conditions. Moreover, the price and development of oil substitutes, especially the various types of renewable energy and the commercial production of shale gas in the U.S., are having a growing impact on the oil prices. It should also be noted that the oil market is dynamic and that the demand for oil to some extent is inversely linked to the price. Extended periods of high oil prices can therefore lead to increased use of alternative energy sources at the cost of oil demand.

The PRC oil market overview Over the past 20 years, the PRC has transformed from a small, self-sufficient energy consumer to a net importer, the world’s second largest oil consumer and fastest growing user of oil.

According to the BP Review, oil consumption in the PRC increased from 5.8 million bpd in 2003 to 10.8 million bpd in 2013, representing a CAGR of 6.4%. The main driver of the increase in energy consumption is the strong GDP growth that the PRC has experienced over the last two decades. According to the statistical communiqué of the PRC Natural Bureau of Statistics, the PRC’sGDPhas grown from RMB9.6 trillion in 2001 to RMB63.6 trillion in 2014 (according to preliminary reports), representing a CAGR of 15.7% in nominal terms. As this growth is expected to continue, this economic development is also expected to drive further increases in energy demand in the PRC. According to the BP Review, the PRC’s oil demand is expected to surpass oil demand in the U.S. around 2030, making it the world’s largest oil consumer.

Alongside this growing demand for energy, and oil in particular, is stagnant Chinese domestic oil production. According to the BP Review, the PRC’s oil production only increased from 3.4 million bpd in 2003 to 4.2 million bpd in 2013, for a CAGR of 2.1%, and for the first time in nearly 30 years the PRC’s crude oil production declined in 2009 by 0.2% from 2008, followed by another decline in 2011.

The rising demand for oil in the PRC, together with the declining production capacity of oil, has resulted in a large and growing supply gap in its domestic oil market.

The PRC has three key state-owned oil and gas companies that dominate its domestic oil and gas operations: CNPC, Sinopec and CNOOC. As of December 31, 2014, CNPC was the largest among the three by proved reserves and production. Together with its listed subsidiary PetroChina, CNPC accounts for the bulk of the PRC’s domestic oil and gas production, supplying the largest amount of domestic oil and gas production. Sinopec is generally considered as owning the largest refining and petrochemical capacity in the PRC. CNOOC is designated as the operator for offshore oil and gas assets. Apart from the three major oil companies, Sinochem, CITIC Group and Yanchang Petroleum have also expanded their operations in the PRC’s oil sector, but these companies are smaller in terms of reserves and production compared to the other three state-owned oil and gas companies.

65 Oil demand versus domestic production in the PRC

Source: BP Statistical Review of World Energy, June 2014

66 BUSINESS

We primarily conduct the following businesses:

• Natural Gas Sales and LNG processing.

• Our LNG processing plants are used for processing natural gas and converting it into LNG. We have established an onshore LNG processing layout and are increasing the utilization rate of our processing plants. With 12 LNG processing plants in operation with a total daily production capacity of 7.18 MCM as of December 31, 2014, we believe we have developed into one of the largest integrated midstream and downstream natural gas companies in the PRC in terms of total volume of natural gas transmission and distribution. In addition, we

67 have completed the construction of another five LNG processing plants with a total daily production capacity of 9.2 MCM which are yet to start commercial operation. The majority of the LNG produced at our LNG processing plants is provided to and sold at our own LNG refueling stations, therefore helping to secure LNG supply for our LNG sales business. For the years ended December 31, 2012, 2013 and 2014, the processing volume of our LNG processing businesses amounted to 236 MCM, 352 MCM and 470 MCM, respectively.

Our shares are listed on The Stock Exchange of Hong Kong Limited (stock code: 00135.hk).

Strong Support from PetroChina and CNPC CNPC, PetroChina’s parent, is the largest PRC oil and gas producer and supplier based on production and sales volume and one of the leading integrated international energy companies in the world. As the flagship platform for PetroChina’s downstream natural gas business, we share with PetroChina and CNPC highly-fitted long-term strategies and have received strong support from them. In particular:

- Business support and partnership. Since our strategic transformation in 2009, we have quickly built up a new natural gas development platform through asset injections by PetroChina. According to the 2014 Platts Top 250 Global Energy Company Rankings, we were the fastest growing Asia energy company in terms of compound growth rate from 2012 to 2014. PetroChina is also our most important business partner and the primary supplier of natural gas to our midstream and downstream natural gas business. In addition, PetroChina, through its subsidiaries, is also the operator of certain key natural gas facilities of ours, including, but not limited to, the Shaan-Jing Lines and our two LNG terminals.

- Financial support. We receive strong funding support from PetroChina and CNPC with preferential terms. As of December 31, 2014, our total loans other than bank loans, which comprised borrowings from PetroChina and other subsidiaries of CNPC, amounted to HK$21,860 million (US$2,820 million) as of December 31, 2014, representing 89% of our total borrowings as of the same date.

- Highly-aligned management and corporate governance. Most of the members of our board of directors and senior management are from or appointed by PetroChina, and have substantial management experience in PetroChina or its affiliates. We also draw upon PetroChina’s existing framework in risk management and corporate governance to improve our own. In addition, PetroChina also provides our employees with a number of management and technical training opportunities.

68 Strong Market Position as One of the Largest Integrated Midstream and Downstream Natural Gas Companies in the PRC, Underpinned by Stable Natural Gas Transmission Operations and Extensive Downstream Sales Networks We are the flagship platform for PetroChina’s downstream natural gas business. CNPC, PetroChina’s parent, is the largest PRC oil and gas producer and supplier based on production and sales volume and one of the leading integrated international energy companies in the world. Through multiple asset injections by PetroChina and CNPC as well as our organic growth, we have gained key natural gas transmission and distribution assets, and we believe we have developed into one of the largest integrated midstream and downstream natural gas companies in the PRC in terms of total volume of natural gas transmission and distribution, well positioned to benefit from the fast growing PRC natural gas industry.

In particular, we own key mid-stream natural gas transmission assets that we believe offer stable growth potential and return. We are the only provider of natural gas transmission pipelines to Beijing, and our Shaan-Jing Lines form an important part of the nationalarterypipelinenetworkandplayakeyrolein the Beijing-Tianjin-Hebei region. Our mid-stream pipelines offer advantages of stable cash flow and high profit margins, because we receive a transmission charge based on the gas volume transmitted in our pipelines that is not subject to the volatility of upstream gas cost while benefiting from fast growth in natural gas consumption in Beijing and other regions in the PRC that our pipelines supply to. For the years ended December 31, 2012, 2013 and 2014, our revenue from the natural gas pipelines amounted to HK$11,410 million, HK$11,787 million and HK$12,679 million (US$1,635 million), respectively. During the same period, in respect of the Beijing Pipelines, our average gas transmission fee remained relatively stable at RMB0.38 per cubic meter, RMB0.37 per cubic meter and RMB0.33 per cubic meter (US$0.053 per cubic meter), respectively. We expect Shaan-Jing Line IV to further increase our transmission capacity, and to solidify and strengthen our leadership in the Beijing-Tianjin-Hebei region.

Our position in the fast growing PRC natural gas industry is strengthened by our extensive and fast- growing downstream natural gas business, spanning LNG refueling stations, CNG refueling stations and piped gas distribution to residential, commercial and industrial users. For the years ended December 31, 2012, 2013 and 2014, our revenue from the sales of natural gas amounted to HK$12,734 million, HK$22,073 million and HK$26,291 million (US$3,391 million), respectively. During the same period, our sales volume of natural gas was 4,583 MCM, 6,114 MCM and 7,327 MCM, respectively.

With a presence throughout the natural gas industry across 30 provinces, cities and autonomous regions in the PRC, and benefiting from key mid-stream operations supplying the Beijing-Tianjin-Hebei region, we believe we are well-positioned to take advantage of the fast growing demand for natural gas in the PRC.

Pioneer of the ‘‘Gas in Substitution of Oil’’ Strategy in the PRC, with Integrated Facilities for Unloading, Processing and Sales of LNG across the Industry Chain To take advantage of the PRC government’s promotion of clean energy policies, we have pioneered and implemented a ‘‘Gas in Substitution of Oil’’ strategy, which focused on the promotion of the use of LNG and CNG as fuel in public transport, power equipment and shipping. The PRC government has provided strong support for the development of the LNG industry. For example, in October 2012, the NDRC issued the ‘‘Policies on the Utilization of Natural Gas,’’ which classified natural gas vehicles (dual-fuel and LNG vehicles in particular) and natural gas-fueled transportation vessels into a ‘‘preferred category’’.

As a pioneer of the implementation of the ‘‘Gas in Substitution of Oil’’ strategy in the PRC, we have established an integrated midstream and downstream LNG value chain with strong positions in processing, warehousing, distribution, terminals and refueling stations. We believe that we are one of the largest suppliers of LNG to end-user vehicles and ships in the PRC. For example,

• LNG terminals. As of December 31, 2014, we owned two LNG terminals with aggregate receiving capacities of 6.5 million tonnes per year.

69 • LNG processing plants. As of December 31, 2014, we owned 12 LNG processing plants in operation with aggregate daily processing capacity of 7.18 MCM. In addition, we have completed the construction of another five LNG processing plants with a total daily production capacity of 9.2 MCM which are yet to start commercial operation.

• LNG refueling stations. As of December 31, 2014, we owned 752 LNG refueling stations and served 105,089 LNG vehicle users.

Fast Growth and Prosperous Market Potentials of the PRC’s Natural Gas Industry, and Well- Positioned to Capitalize on Favorable Government Policies Supporting Clean Energy In order to reduce reliance on polluting energy sources such as coal and crude oil, the PRC government has, in recent years, taken many steps to promote the development and utilization of natural gas (including LNG) as a comparatively cleaner energy, and has laid out policies encouraging optimization of energy structure and the use of natural gas and LNG. In particular, the Energy Development Strategy Action Plan (2014-2020) supports domestic energy structure reform and an increase in the percentage of natural gas consumption. It targets to increase the share of non-fossil fuels in the total primary energy mix from 9.6% in 2013 to 15% by 2020, with the share of natural gas increasing to above 10%. In absolute terms, natural gas consumption and production is expected to reach 230.0 BCM and 156.5 BCM respectively, by 2015, according to the 12th Five-Year Plan. The targets and favourable policies are expected to continue driving the fast growth of the natural gas industry in the PRC, creating prosperous market potentials.

We believe that, as one of the largest integrated midstream and downstream natural gas companies in the PRC, we are well positioned to benefit from continued growth in the PRC natural gas industry, with our significant presence in the natural gas and LNG value chain covering LNG terminals, natural gas transmission pipelines and downstream distribution network.

Prudent Financial Policy We have established a prudent and integrated risk management system to effectively understand, measure, monitor and mitigate the various risks arising from our operations. Policies and guidelines have been developed to identify, analyze, appraise and monitor the changing risks that we face. We are also able to leverage the risk management expertise and policies of PetroChina and CNPC.

We have devised a series of financial policies and objectives to achieve prudent and effective management of financial resources to meet our production and operation needs. We are dedicated to developing diversified financing channels in order to maintain stable debt ratios and cash flow levels as well as an appropriate debt structure. We have a comprehensive analytical framework and set of approval procedures for all investment projects.

Experienced Management Team Our management team has extensive experience in the PRC oil and gas industry. We have built an experienced management team with an innovative and international spirit. Most of our management personnel have more than 25 years of experience in the PRC oil and gas industry with proven track records in one or more of our business segments. In particular, our Chairman, Mr. WU Enlai, has over 30 years of experience in the PRC’s oil and natural gas industry and was awarded ‘‘National Model Worker’’ by the State Council in 2010. Furthermore, Mr. ZHAO Yongqi, currently our Chief Executive Officer and Executive Director, has over 30 years of experience in the PRC oil and gas industry. He was elected a representative to the 11th National People’s Congress of the People’s Republic of China in January 2008.

70 Business Strategies We intend to grow and strengthen our business through the implementation of the following core business strategies:

Continue to Leverage Favorable PRC government Policies to Develop Our Clean Energy Business In order to reduce reliance on polluting energy sources, the PRC government has developed a series of principles and policies for promoting comparatively clean energy, including natural gas and LNG. We aim to continue taking advantage of favourable PRC government policies in respect of clean energy and develop our business in a way that responds to and benefits from existing policies and evolving changes. In particular, we aim to solidify our leadership in the ‘‘Gas in Substitution of Oil’’ strategy in the PRC. We aim to further strengthen a full value chain from importing, and processing to end-user sales and related services to drive the development of the PRC’s LNG vehicle and vessel-market, to improve the efficiency of our existing LNG plants and terminals, and to expand our market share in downstream distribution, driven by ‘‘Gas in Substitution of Oil’’ demonstration projects for vehicles and vessels.

Focus on Robust Growth of our Natural Gas Business in the PRC We are the flagship platform for PetroChina’s downstream natural gas business. Since our transformation in 2009, natural gas has become the focus of our business. Going forward, we plan to:

• Upstream business.

– Exploration and Production. Further increase oil recovery rate by technological innovation and reduce operation costs by improved management.

• Midstream business.

– Natural gas transmission. Continue focusing on trunk pipelines such as the Shaan-Jing Lines, improve natural gas transmission capacity and solidify our strengths in key regional markets such as the Beijing-Tianjin-Hebei region.

– LNG terminal. Expand our customer base by opening up to third parties while ensuring sufficient internal supply, strengthening cost control, and improving operational efficiency.

• Downstream business.

– Natural Gas Sales and LNG processing. Proactively improve our current business structure and explore opportunities to expand our business. For additional details, See ‘‘– Capitalize on Opportunities to Achieve Leading Position in the Downstream Sale of Natural Gas Business.’’ Continue lowering the production cost of our LNG processing plants through the improvement of operational efficiency and increase the utilization of our LNG processing capability by further integrating our LNG processing operations with our natural gas sales.

Capitalize on Opportunities to Achieve Leading Position in the Downstream Sale of Natural Gas Business We aim to become the largest downstream distributor of natural gas in the PRC by leveraging our position as the flagship platform for PetroChina’s downstream natural gas business, complemented by PetroChina’sandCNPC’s strength in the upstream natural gas business. Specifically, we plan to:

• emphasize low-carbon economy and green development and develop integrated natural gas utilization business;

• continue to leverage favorable PRC government policies (see also ‘‘– Continue to Leverage Favorable PRC Government Policies to Develop Our Clean Energy Business’’);

71 • deepen cooperation and pursue strategic synergies with PetroChina and its affiliates; and

• emphasize steady and tactical progress to balance growth with stability.

Prudent Pursuit of Expansion While Maintaining Strict Risk Control With the volatility in international economic conditions and energy prices, we aim to maintain a prudent expansion strategy, and explore opportunities in three major areas:

• expansion of natural gas pipeline business, including construction of the Shaan-Jing Lines IV and acquisition or construction of branch pipeline projects which are less capital intensive with more immediate economic returns than main trunk pipelines;

• optimization of LNG and CNG refueling stations by cautiously exploring investment opportunities in premium geographical locations such as highway junctions; and

• development and expansion of our natural gas business.

For all expansion opportunities, we plan to carefully conduct diligence, evaluate the feasibility, strategic value and the financial impact, and balance economic returns and benefits with risks and uncertainties.

Our Business The following table sets out the sales or processing volume and revenue for our major business segments.

Note:

(1) Under the natural gas pipeline segment, it included the following sales:

72 Sales Volume Revenue For the year ended December 31, For the year ended December 31, 2012 2013 2014 2012 2013 2014 (’000 (’000 (’000 (HK$ (HK$ (HK$ (US$ barrels) barrels) barrels) millions) millions) millions) millions) (unaudited) Exploration and Production business ThePRC...... 5,621 5,273 5,368 4,000 3,610 3,477 448 South America(1) ...... 606 632 653 1,048 1,065 1,004 129 CentralAsia...... 681 659 646 541 513 465 60 South East Asia(2) ...... 597 625 545 487 472 390 50 Sub-total...... 7,505 7,189 7,212 6,076 5,660 5,336 688 Share of an associate in Central Asia ...... 6,773 6,456 5,773 –––– Share of a joint venture in Middle East . . . . . 3,288 3,811 3,892 –––– Total of Exploration and Production business ...... 17,566 17,456 16,877 6,076 5,660 5,336 688

Notes:

(1) Only our 50% share of sales volume from an oilfield in South America is stated while its revenue is shown as 100% per consolidation requirement.

(2) Only our 96.11% share of sales volume from an oilfield in South East Asia is stated while its revenue is shown as 100% per consolidation requirement.

Natural Gas Distribution In 2009, we began a strategic transformation to become the flagship platform for PetroChina’s downstream natural gas business. Our focus shifted to the sale of natural gas and its general application. Our midstream and downstream natural gas business comprises natural gas transmission, sale of natural gas and LNG processing, and LNG terminals.

Natural Gas Transmission Natural gas transmission is one of the key components of our natural gas business. Through our transmission pipelines, we transmit natural gas under high pressure. For the years ended December 31, 2012, 2013 and 2014, our volume of natural gas transmission amounted to 23,833 MCM, 24,979 MCM and 30,052 MCM, respectively. Revenue from natural gas pipeline businesses amounted to HK$11,410 million, HK$11,787 million and HK$12,679 million (US$1,635 million), respectively.

73 The following map illustrates the geographic coverage of certain of our pipelines:

Chengde Hohhot Zhangjiakou

Shaan-jing Line IV Yanqing

Shunyi

Ying County Liuli River Beijing

Shaan-jing Line I Sulige Plant II Yongqing

Shijiazhuang Dazhangtuo Shaan-jing Line II Repository Sulige Yulin Anping Plant IV Taiyuan Jingbian Shaan-jing Line III

Beijing Pipelines We are the only provider of natural gas transmission pipelines in Beijing, and our Shaan-Jing Lines form an important part of the national artery pipeline network and play an indispensable role in the Beijing-Tianjin-Hebei region. We own the Beijing Pipelines through PetroChina Beijing Gas Pipeline Co., Ltd (‘‘PetroChina Beijing Pipeline’’), our 60% owned subsidiary. As of December 31, 2014, the aggregate length of our Shaan-Jing Lines I, II and III was 2,836 km and the total annual design transmission capacity of them was 35 BCM.

The following table sets forth details about our transmission pipelines in the Beijing-Hebei-Tianjin region as of December 31, 2014.

Annual Design Year Length capacity pressure Operations Pipeline Line Type (km) (100 MCM) (MPa) Began Beijing Pipelines: Shaan-Jing Line I ...... Trunk 910 30 6 1997 Shaan-Jing Line II ...... Trunk 934 170 10 2005 Shaan-Jing Line III ...... Trunk 992 150 10 2010 Yong-Tang-Qin Line ...... Branch 312 90 10 2009 Gangqing Line III ...... Branch 166 67.5 10 2015 Tangshan Line ...... Branch 127 90 10 2013 Datang SNG Line Beijing Section...... Branch 109 40 10 2013 Subtotal ...... 3,550 TianjinPipeline...... Branch 20 20 4 2011 Total...... 3,570

We are expanding our infrastructure. In 2014, we began the construction of the Shaan-Jing Line IV.

Sales The following table sets forth the annual transmission volumes of our pipelines during the periods indicated:

Year Ended December 31, 2012 2013 2014 (in BCM) AnnualVolumeoftheBeijingPipelines...... 23.3 24.8 29.9 AnnualVolumeoftheTianjinPipeline...... 0.5 0.2 0.1

74 The utilization rate of our Beijing Pipelines has been steadily increasing from 67% in 2012 to 71% in 2013 and to 78% in 2014.

Pricing Our pricing mechanism is determined by the NDRC and the provincial price control bureaus. The NDRC determines the ceiling price of city gate price and transportation tariff for national long distance transmissions and the provincial price control bureaus regulate the transportation tariff for provincial pipelines. The NDRC has freed up the control of the city gate price of the natural gas supply for direct use (excluding chemical fertilizer enterprises), and the price may be reached by negotiation between suppliers and customers.

The Beijing Pipeline’s average annual transmission price amounted to RMB0.38 per cubic meter, RMB0.37 per cubic meter and RMB0.33 per cubic meter (US$0.053 per cubic meter) for the years ended December 31, 2012, 2013 and 2014, respectively.

LNG Terminal We own two LNG terminals located in Dalian, Liaoning and Rudong, Jiangsu. Our LNG terminals provide LNG loading, storage, unloading and regasification services for PetroChina and third-party customers. For the years ended December 31, 2012, 2013 and 2014, the regasification volume of our LNG terminals amounted to 5,079 MCM, 6,503 MCM and 4,835 MCM, respectively. Revenue from our LNG terminal business amounted to HK$1,916 million, HK$2,512 million and HK$1,946 million (US$251 million), respectively.

Services We use our LNG terminals for the following:

• Receiving LNG tankers and unloading their cargo;

• Storing LNG;

• Regasifying LNG (turning LNG back into a gaseous state);

• Feeding gas into the national transmission network; and

• Transporting gas to retail gas stations.

Our LNG terminals regasify a majority of the imported LNG for pipeline transmission, while the rest is directly trucked to LNG refueling stations.

Facilities The following table sets forth certain details for the periods indicated in relation to our two LNG terminals:

Capacity (mm tonnes Regasification Volume (BCM) Shipment Volume (Cargos) LNG Terminal p.a.) 2012 2013 2014 2012 2013 2014 Dalian, Liaoning LNG Terminals . . 3 2 2.6 2.1 15 18 14 Rudong, Jiangsu LNG Terminal . . . 3.5 3.1 3.9 2.7 24 30 22 Total ...... 6.5 5.1 6.5 4.8 39 48 36

Natural Gas Sales and LNG Processing The sale of natural gas is one of our principal business and we expect revenue from our natural gas sales to continue to constitute a significant and increasing percentage of our total revenue. Over the past few years we have benefited from the ‘‘Gas in Substitution of Oil’’ strategy in the PRC and realized a high

75 growth of natural gas sales. For the years ended December 31, 2012, 2013 and 2014, our sales volume of natural gas amounted to 4,583 MCM, 6,114 MCM and 7,327 MCM, respectively. Revenue from natural gas sales amounted to HK$12,734 million, HK$22,073 million and HK$26,291 million (US$3,391 million), respectively.

Our LNG processing plants are used for processing natural gas and turning it into LNG. We have established our onshore LNG processing layout and are increasing the utilization rate of our processing plants. The majority of the LNG produced at our LNG processing plants are provided to and sold at our own LNG refueling stations, thereby helping to secure the LNG supply for our LNG sales business. For the years ended December 31, 2012, 2013 and 2014, the processing volume of our LNG processing plants amounted to 236 MCM, 352 MCM and 470 MCM, respectively. Revenue from our LNG processing businesses amounted to HK$817 million, HK$1,398 million and HK$1,792 million (US$231 million), respectively. With 12 LNG processing plants in production with a daily production capacity of 7.18 MCM as of December 31, 2014, we believe we have developed into one of the largest suppliers of LNG to end-user vehicles and ships in the PRC.

Services We sell natural gas through, among others, our LNG refueling stations, CNG refueling stations and piped gas distributions.

• LNG refueling stations. We primarily sell natural gas in the form of LNG to LNG vehicle and vessel users for heavy duty and long distance travel. For further details of our LNG customers, see subsection headed ‘‘– Sales and Customers’’. As of December 31, 2014, we owned 752 LNG refueling stations throughout the PRC.

• CNG refueling stations. Natural gas in the form of CNG is primarily offered to CNG vehicle users for short distance travel. CNG is a compressed form of natural gas and can be used in engines designed or modified for use with natural gas as fuel. For further details of our CNG customers, see subsection headed ‘‘– Sales and Customers’’.

• Piped natural gas distribution. We distribute gas to end-users, comprising residential, commercial and industrial customers, through our distribution network in our city gas concessions.

Our LNG processing plants purify raw natural gas which contains impurities before turning it into LNG. Our LNG processing system consists of the following steps:

• Raw natural gas is transported to our LNG processing plants;

• The raw natural gas is purified and impurities, such as carbon dioxide and water, are removed; and

• The purified natural gas goes through successive stages of refrigeration and cooling to turn into LNG.

76 Facilities LNG and CNG refueling stations The following table sets forth the numbers of our LNG and CNG refueling stations as of the dates indicated:

As of December 31, 2012 2013 2014 LNGrefuelingstations...... 291 391 752 CNGrefuelingstations...... 210 231 321 Total...... 501 622 1,073

The following table sets forth the location of our LNG and CNG refueling stations as of December 31, 2014.

Number of Number of LNG CNG Refueling Refueling Province Stations Stations Total Xinjiang...... 38 142 180 Hebei...... 122 41 163 Shandong...... 98 30 128 Henan...... 71 4 75 Shanxi...... 66 2 68 InnerMongolia...... 29 11 40 Jiangsu...... 50 3 53 Sichuan...... 27 19 46 Shaanxi...... 28 6 34 Guangdong...... 29 2 31 Hubei...... 26 2 28 Hainan...... 13 26 39 Liaoning...... 22 – 22 Zhejiang...... 25 – 25 Guizhou...... 14 – 14 Tianjin...... 23 – 23 Qinghai...... 6 14 20 Ningxia...... 15 8 23 Fujian...... 11 – 11 Yunnan...... 5 1 6 Shanghai...... 6 3 9 Beijing...... 7 1 8 Hunan...... 1 1 2 Jilin...... 6 – 6 Anhui...... 4 1 5 Gansu...... 2 3 5 Guangxi...... 3 1 4 Tibet...... 3 – 3 Heilongjiang...... 2 – 2 752 321 1,073

77 LNG Processing We had 12 operating LNG plants and five completed LNG plants pending for operations as of December 31, 2014. The aggregate daily production capacity of the 12 LNG processing plants in operation was 7.18 MCM as of December 31, 2014. The following table sets forth certain details of these LNG processing plants as of December 31, 2014:

Location/Name As of December 31, 2014 (daily production capacity) (’000 cubic meters) Fushan,Hainan...... 430 Bayan nuur, Inner Mongolia ...... 300 Lunnan,Xinjiang...... 300 Golmud,Qinghai...... 350 Guangan,Sichuan...... 1,000 Ansai,Shaanxi...... 2,000 Tai’anShenran,Shangdong...... 150 Bazhou,Hebei...... 1,000 Hotan,Xinjiang...... 250 Panjin,Liaoning...... 100 WuhaiXilaifeng,InnerMongolia...... 1,000 Dagang,Tianjin...... 300

In addition, we had completed the construction of another five LNG processing plants with a total daily production capacity of 9.2 MCM which were yet to start commercial operation as of December 31, 2014. The following table sets forth certain details of these LNG processing plants as of December 31, 2014:

Location As of December 31, 2014 (daily production capacity) (’000 cubic meters) Huanggang,Hubei...... 5,000 Tai’an,Shandong...... 2,600 Guangyuan,Sichuan...... 1,000 Karamay,Xinjiang...... 500 Hami,Xinjiang...... 100

Below highlights certain details of our LNG plants:

• Hubei Huanggang LNG Plant – We believe this LNG plant has the largest single unit production capacity in the PRC; and

• Shandong Tai’an LNG Plant – This LNG plant has been designated by the PRC National Energy Administration as a foundational project for developing domestic capabilities for LNG technology and key equipment.

Sales and Customers LNG refueling stations We provide natural gas in the form of LNG to customers at our LNG refueling stations. Key customers of our LNG refueling stations are owners or users of ships and large vehicles, comprising buses, coaches, heavy trucks and other specials vehicles.

The following table sets forth the number of ships and vehicles fueled by our LNG refueling stations during the periods indicated:

Year ended December 31 2012 2013 2014 Vehicles...... 31,170 81,586 105,089 Ships...... 21 25 30

78 CNG refueling stations Natural gas in the form of CNG is provided to CNG customers at our CNG refueling stations. Key customers of our CNG refueling stations are small vehicles, such as taxies, private cars and small buses.

Piped Natural Gas Distribution We have a broad and diversified customer base in industrial, residential and commercial sectors. Natural gas is primarily used by commercial customers for air conditioning, heating and cooking purposes. These customers include, among others, owners of hotels, restaurants, office buildings, shopping malls, hospitals, educational establishments, sports and leisure facilities and exhibition halls. For industrial customers, natural gas has a wide variety of applications such as fueling industrial boilers, furnaces, ovens, incinerators, foundries and steamers, as well as water and space heating in staff canteens and dormitories within the industrial customers’ premises. Natural gas is primarily used by residential households for cooking and heating.

Pricing LNG Refueling Stations We charge customers based on the price determined by market mechanisms and the equilibrium of supply and demand.

CNG Refueling Stations Prices for CNG refueling station customers are generally set by the local governments.

Piped Natural Gas Distribution Our revenue from piped natural gas distribution consists of recurring revenue from gas sales and one-off connection fees charged to the residential, commercial and industrial customers.

End-user gas prices for residential users and any adjustments to such fees may only be approved by local pricing bureaus following a public hearing. In cities with established price linkage mechanisms, retail prices to downstream residential users of natural gas will be adjusted in line with adjustments in prices for upstream purchases of natural gas supply, and the detailed price adjustment scheme shall be implemented following a public hearing if required pursuant to PRC laws and regulations governing such hearings. Pursuant to PRC laws and regulations governing pricing of natural gas, when considering applications for an increase in end-user gas price, the local state price bureau may consider factors such as increases in the wholesale price of gas or operating expenses, inflation, additional capital expenditures, social and economical influence, and whether the profit margin remains fair and reasonable. Indicative prices for non-residential customers are set by the local governments and we charge customers based on such indicative prices.

Connection fees are charged for residential households on a ‘‘per connection’’ basis and for commercial and industrial customers on a ‘‘daily maximum capacity’’ basis. Gas connection fees are determined based upon a number of factors such as estimated capital expenditure, number of users, growth in penetration rates, income levels and affordability of local residents. The level of connection fees and any increase in connection fees are subject to the approval of the local pricing bureau.

Exploration and Production We are engaged in the exploration and development of oil and gas fields. We have a domestic and international upstream portfolio with eight projects in six countries, namely the PRC, Kazakhstan, Oman, Peru, Thailand, and Azerbaijan. These projects have provided us with a stable source of income in the past, and we expect them to remain valuable revenue and cash flow contributors in the future.

79 Reserves The following table sets forth our estimated proved developed reserves of crude oil and natural gas as of the dates indicated:

Crude Oil Natural Gas Combined (million barrels) (mmcf) (million boe) Proved developed reserves As of December 31, 2012 PRC...... 22.0 – 22.0 Overseas...... 43.5 37,701.8 49.8 Total...... 65.5 37,701.8 71.8 As of December 31, 2013 PRC...... 29.4 – 29.4 Overseas...... 50.0 78,733.3 63.1 Total...... 79.4 78,733.3 92.5 As of December 31, 2014 PRC...... 26.8 – 26.8 Overseas...... 38.2 79,952.6 51.5 Total...... 65.0 79,952.6 78.3

The following table sets forth our estimated proved reserves of crude oil and natural gas as of the dates indicated:

Crude Oil Natural Gas Combined (million barrels) (mmcf) (million boe) Proved reserves As of December 31, 2012 PRC...... 28.8 – 28.8 Overseas...... 66.7 138,461.4 89.8 Total...... 95.5 138,461.4 118.6 As of December 31, 2013 PRC...... 29.4 – 29.4 Overseas...... 83.2 142,086.0 106.9 Total...... 112.6 142,086.0 136.3 As of December 31, 2014 PRC...... 26.8 – 26.8 Overseas...... 58.0 127,834.5 79.3 Total...... 84.8 127,834.5 106.1

Projects The following table sets forth certain details regarding our projects and their contractual models.

Projects Contractual Model Xinjiang91/95Project...... Productionsharingagreement(‘‘PSA’’) LiaoheLengJiapuProject...... PSA OmanArea5Project...... PSA AzerbaijanK&KProject...... PSA AktobeProject...... Royalties PeruArea6/7Project...... Royalties ThailandSukhothaiProject...... Royalties ThailandL21/43Project...... Royalties

80 Xinjiang 91/95 Project Pursuant to an oil production sharing agreement in relation to the development and production of crude oil in the Karamay Oilfield in Xinjiang, we undertook to fund an enhanced oil recovery program to improve oil recovery in the Karamay Oilfield in return for a 54% share of the oilfield’s production. The oil production sharing agreement runs from July 1, 1996 to June 30, 2021, with an initial approved production period of 12 years commencing from the date of production, which expired in August 2008. On April 15, 2008, we extended the production period for eight years to expire on August 31, 2016.

Liaohe Leng Jiapu Project Pursuant to an oil production sharing agreement in relation to the development and production of crude oil in the Leng Jiapu Oilfield in Liaoning, we undertook to fund 70% of the costs of developing the oilfield in return for a 70% share of the oilfield’s production. The oil production sharing agreement provides for 20 consecutive years of production sharing beginning on March 1, 1998.

In connection with the agreement, we also entered into an entrustment contract with an operational service providing company owned and operated by CNPC, which is entrusted to act as the operator. Under that entrustment contract, a joint development management organization was established for the performance of the contractual responsibilities under the operatorship.

OmanArea5Project In 2002, a 50% joint venture of ours acquired a 50% interest in a production sharing agreement with the Government of the Sultanate of Oman (the ‘‘Oman PSA’’). The production sharing agreement provided for a share of up to 13.5% of the net production of crude oil, and provided for 30 years from the date of the initial discovery date of resources, which occurred in 1989. The term of agreement can be extended for a further ten years if oil is still produced at the end of the 30 years.

Azerbaijan K&K Project In 2002, we acquired a total of 25% production sharing interest in an oil production sharing agreement in relation to the development and production of crude oil in the Kursangi and Karabagli oilfields. The oil production sharing agreement provides for 25 consecutive years of production sharing which may be extended by an additional period of five years subject to the approval of The State Oil Company of the Azerbaijan Republic.

Aktobe Project Pursuant to agreements with the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan through an associate of ours, we engaged our exploration and production activities in petroleum in Kazakhstan.

Peru Area 6/7 Project Through a 50% owned joint venture of ours, we engaged in the exploration and production of petroleum in Peru. The production period of petroleum in Peru will expire in July 2015 and we intend to seek its renewal upon expiration.

Thailand Sukhothai Project Pursuant to a petroleum concession and certain supplemental concessions in relation to the exploration and production of petroleum in an exploration block situated in Thailand, we undertook to pay the government of Thailand royalties at specified rates based on the value and volume of petroleum sold or disposed of. Under the latest supplemental concessions, the production period was renewed until 2021.

81 Thailand L21/43 Project Pursuant to a petroleum concession in relation to the exploration and production of petroleum in an exploration block situated in Thailand, we undertook to pay the government of Thailand royalties at specified rates based on the value and volume of petroleum sold or disposed of. The petroleum exploration period was extended in 2012 for ten years. The petroleum production period will be twenty years following the petroleum exploration period.

Production The following table sets forth our total production of crude oil and natural gas for the periods indicated:

Year Ended December 31, 2012 2013 2014 Crude oil production Daily production(2) (thousandbarrels)...... 48.4 48.8 47.4 Total production (million barrels) ...... 17.7 17.8 17.3 Averagesalesprice(US$perbarrel)...... 98.8 97.3 84.5 Natural gas production(1) Daily production(2) (mmcf)...... 52.7 54.2 56.4 Totalproduction(bcf)...... 19.3 19.8 20.6 Averagesalesprice(US$permmcf)...... 927 904 817 Crude oil and natural gas production Daily production(2) (thousandboe)...... 57.2 57.8 56.7 Total production (million boe)...... 20.9 21.1 20.7

(1) Represents production of natural gas for sale.

(2) Calculation of daily production is based on the number of days in the relevant calendar year

Property We own buildings, land use rights, service stations and other properties across the PRC. The address of our principal office is 39/F, 118 Connaught Road West, Hong Kong, and the address of our registered office is Clarendon House, 2 Church Street Hamilton, HM11, Bermuda.

Employees As of December 31, 2014, we had approximately 21,751 employees (excluding staff under entrustment contract). Our employees participate in various basic social insurance plans organized by municipal and provincial governments whereby we are required to make contributions to these plans at certain rates of the employees’ salary as stipulated by relevant local regulations. Expenses incurred in connection with the retirement benefit plans amounted to approximately HK$137 million, HK$182 million and HK$227 million (US$29 million), for the years ended December 31, 2012, 2013 and 2014, respectively.

Since 2012, we have not experienced any strikes, work stoppages, labor disputes or actions that have had a material adverse effect on the operation of any of our respective businesses. We believe that we maintain good relationships with our employees.

Risk Management We are exposed to a variety of risks associated with oil and gas and other business operations and financing activities. It is the responsibility of our board of directors to ensure that we maintain sound and effective internal controls to safeguard our shareholders investment and our assets. Our internal control system comprises a well-established organizational structure and comprehensive policies and standards. Our board of directors, through our Audit Committee, assesses annually the effectiveness of our internal control system which covers all material controls, including financial, operational and compliance controls as well as risk management, the adequacy of resources, qualification and experiences of our staff’s accounting and financial functions, and our training programs and budget.

82 In addition, we have developed a Health, Safety and Environmental (‘‘HSE’’) management system to achieve our environmental and safety targets, strengthen accountability and adopt measures to target root causes rather than symptoms. In accordance with our HSE guideline and strategic goals, we provide HSE training throughout the entire organization, which covers the whole production process and everyone from top management to grassroots operators. We have also issued the Principles of HSE Management, outlining the basic requirements and behavior codes for all managers and organized annual HSE examination and ad hoc inspection to review HSE performance of key subsidiaries. The HSE system of certain of our subsidiaries have been assessed and found to be in conformity with the requirements of certain CNPC HSE management systems, according to the China Petroleum Health Safety Environment Audit Center of Beijing. Since incorporation, we have not experienced any HSE accident that had a material adverse effect on the operation of our business and operation.

Insurance Consistent with what we believe to be the customary industry practice in the PRC, we currently maintain property insurance covering a small portion of our property, plant and equipment (including certain pipelines owned by us) and vehicle insurance on our transportation vehicles. Our insurance policies do not typically cover third-party liabilities, business interruptions or environmental damages arising from our operations or caused by natural disasters, such as earthquakes. This practice is consistent with what we believe to be the industry practice in the PRC. Accordingly, there may be circumstances in which we will not be covered or compensated for certain losses, damages and liabilities, which may in turn adversely affect our financial position and results of operations.

Intellectual Property We rely on a variety of patents, copyrights, trade secrets, trademarks and proprietary information to maintain and enhance our competitive position. We are authorized by CNPC to use certain of its logos that are registered in the PRC. We work closely with PetroChina and CNPC with respect to patents and other intellectual property rights.

Legal Proceedings We are involved in legal proceedings concerning matters arising in the ordinary course of our business. We believe, based on currently available information, that these proceedings, individually or in the aggregate, do not and will not have a material adverse effect on our results of operations or financial condition.

Regulatory Our businesses are subject to numerous international, national, regional and local governmental regulations. See ‘‘Summary of Relevant PRC Laws and Regulations.’’

Environmental Matters We are subject to various PRC national environmental laws and regulations and also environmental regulations promulgated by the local governments in whose jurisdictions we have operations. The PRC has adopted extensive environmental laws and regulations that affect the operation of the oil and gas industry. There are national and local standards applicable to emissions control, discharges to surface and subsurface water and disposal, and the generation, handling, storage, transportation, treatment and disposal of solid waste materials.

The environmental regulations require us to register or file an environmental impact report with the relevant environmental bureau for approval before we undertake any construction of a new production facility or any major expansion or renovation of an existing production facility. The new facility or the expanded or renovated facility will not be permitted to operate unless the relevant environmental bureau has inspected to its satisfaction that environmental equipment that satisfies the environmental protection requirements has been installed for the facility. Any company that wishes to discharge pollutants,

83 whether it is in the form of emissions, water or materials, must submit a pollutant discharge declaration statement detailing the amount, type, location and method of treatment. After reviewing the pollutant discharge declaration, the relevant environmental bureau will determine the amount of discharge allowable under the relevant laws and regulations and will issue a pollutant discharge permit for that amount of discharge subject to the payment of discharge fees. If a company discharges more than what is permitted in the pollutant discharge permit, the relevant environmental bureau can fine the company up to several times the discharge fees payable by the offending company for its allowable discharge, or require the offending company to close its operation to remedy the problem.

We believe that our businesses are in compliance with currently applicable national, local and foreign environmental laws and regulations in all material aspects. During the past three years, we did not encounter any material issues in environmental pollution and were not subject to any material administrative penalties owing to any activities that may cause pollution to the environment.

84 SUMMARY OF RELEVANT PRC LAWS AND REGULATIONS

Overview The Chinese government has enacted legislation and implemented policies to support continued foreign participation in the domestic oil and gas industry. The Regulations of the People’s Republic of China on Sino-Foreign Cooperative Exploitation of Onshore Petroleum Resources (the ‘‘Petroleum Regulations’’), are the primary regulations that govern the exploration, development, production and sale of foreign oil companies operating onshore in the PRC.

The PRC’s oil and gas industry is subject to extensive regulations by the PRC government with respect to a number of aspects of exploration, production, transmission and marketing of crude oil and natural gas, as well as the production, transportation and marketing of refined products and chemical products. The following central government authorities exercise control over various aspects of the PRC’soiland gas industry:

• The Ministry of Land and Resources has the authority for granting, examining and approving oil and gas exploration and mining licenses, as well as the administration of registration and transfer of exploration and mining licenses;

• The Ministry of Commerce:

• sets the import and export volume quota for crude oil and refined products according to the overall supply and demand for crude oil and refined products in the PRC, as well as the World Trade Organization (WTO) requirements for the PRC;

• issues import and export licenses for crude oil and refined products to oil and gas companies that have obtained import and export quota; and

• The NDRC:

• has the industry administration and policy coordination authority over the PRC’soilandgas industry;

• determines mandatory minimum volumes and applicable prices of natural gas to be supplied to certain fertilizer producers;

• publishes retail median guidance prices for certain refined products, including gasoline and diesel;

• approves significant petroleum, natural gas, oil refinery and chemical projects set forth under the Catalogues of Investment Projects Approved by the Central Government; and

• approves Sino-foreign equity and cooperative projects.

Regulatory Framework for Sino-Foreign Cooperation in the Exploitation of Onshore Petroleum Resources Under the Catalogue of Industries for Guiding Foreign Investment (2015 revision) that divides industries into those that are prohibited, restricted, and encouraged, the exploration and development of oil and gas is classified as an encouraged industry where foreign participation is welcomed.

The PRC Constitution and the Mineral Resources Law provide that all mineral and oil resources in the territory of the PRC belong to the state. Therefore, the PRC’s oil and gas industry is subject to extensive government regulation. In 1993, the State Council promulgated the Regulations of the People’s Republic

85 of China on Sino-Foreign Cooperative Exploitation of Onshore Petroleum Resources (amended in 2001, 2007, 2011 and 2013) (the ‘‘Petroleum Regulations’’), to regulate onshore crude oil and natural gas exploration and production in the PRC by foreign entities.

Under the Petroleum Regulations, foreign companies may conduct onshore oil and gas exploration, development and production only in areas approved by the State Council. Foreign enterprises must enter Sino- foreign cooperation projects with either CNPC or Sinopec in order to conduct onshore exploitation of petroleum resources in the areas approved by the State Council. CNPC and Sinopec have the exclusive right to negotiate, sign and execute production sharing contracts with foreign enterprises.

Production sharing contracts provide foreign enterprises with exclusive rights, subject to supervision by CNPC or Sinopec, to explore oil in a defined cooperative block approved by the State Council. These contracts also regulate the exploration, development, and production processes of the cooperative exploitation. Before May 15, 2013, all production sharing contracts were subject to the approval of the MOFCOM. CNPC or Sinopec might also enter into other cooperative contracts relating to the exploitation of onshore oil resources in the approved cooperative blocks, and such contracts must be filed with the MOFCOM. On May 15, 2013, the State Council issued the Decision of the State Council on Matters Concerning Administrative Approval Items to Be Cancelled and Delegated to Lower Levels, which canceled the approval of MOFCOM over production sharing contracts.

The Petroleum Regulations in conjunction with the Plan on Reform of State Council Organs, approved by the National People’s Congress in 2008 and 2013, provide that the National Energy Administration (the ‘‘NEA’’), established under the administration of the NDRC, is responsible for dividing and assigning cooperative blocks for Sino-foreign cooperation projects based on the areas approved by the State Council, determining the forms of cooperation, organizing the formulation of relevant plans and policies, and reviewing and approving the overall development plans for the oil or gas fields submitted by the foreign contractors.

Investment Protection for Foreign Contractors The Petroleum Regulations protect the cooperative exploitation activities, investments, profits and lawful interests of foreign contractors in order to promote Sino-foreign cooperation projects for the exploitation of onshore petroleum resources. Under PRC laws, the state cannot expropriate the investments and incomes of foreign contractors except when required by public policy. Under these special circumstances, the state may expropriate a part or all of the oil receivable by foreign contractors from the cooperative exploitation for adequate compensation and in accordance with legal procedures.

Production Sharing Contracts Foreign enterprises must cooperate with CNPC or Sinopec in order to conduct exploitation of onshore oil and gas resources in China. Foreign enterprises generally enter into these cooperative relationships by means of a bidding process or bilateral negotiations with CNPC or Sinopec. The foreign entity and its cooperative Chinese petroleum company must set out the terms of their cooperation and the cooperative project in a production sharing contract. Under the production sharing contract, CNPC or Sinopec, on behalf of the state, grants the foreign enterprise exclusive rights, subject to supervision by CNPC or Sinopec, to explore oil in a defined cooperative block within the areas approved by the State Council. The NDRC, or a department designated by the State Council, may periodically adjust the pre- defined cooperative block, subject to the conditions of the production sharing contract.

Development Plans and Operatorship of Petroleum Fields Under the Petroleum Regulations, the operator is responsible for formulating the overall development plans for the oil and gas fields assigned under the production sharing contract. The overall development plans should discuss the economic, environmental, geological, geophysical, legal and technological aspects of the proposed development. All overall development plans are subject to NDRC or NEA’s approval.

86 Unless otherwise provided in PRC law or the production sharing contract, the foreign contractor is solely responsible for implementing the overall development plans until the cooperative Chinese petroleum company takes over the operation. The foreign contractor must provide the full investment for prospecting the cooperative block and is solely responsible for the prospecting operations and all related risks. If the foreign contractor discovers an oil or gas field of commercial exploitation value, the cooperative Chinese petroleum company shall then jointly invest in the cooperative development of the field with the foreign contractor.

Sale of Petroleum Production and Compensation of Foreign Contractors In accordance with the production sharing contract, the foreign contractors may deliver the petroleum due to them and purchased by them abroad according to the relevant provisions of the State and the provisions stipulated in the contract, and they may also remit the investment recovered by them, their profits and their other lawful gains abroad in accordance with the law. If a foreign contractor sells the petroleum due to it within the territory of the PRC, in general, such petroleum shall be purchased by CNPC or Sinopec. A foreign contractor may also sell such petroleum in other forms agreed upon by the parties to the contract. However, it shall not violate the provisions of the State on sale of petroleum products in the territory of the PRC.

Ownership of Data and Assets In accordance with the Petroleum Regulations, in the course of performing the contracts, foreign contractors shall promptly and accurately report on the petroleum operations to CNPC or Sinopec, obtain complete and accurate data, records, samples, vouchers and other original information in respect of all petroleum operations, and submit information, samples and various reports in respect of technical, economic, financial, accounting and administrative aspects to CNPC or Sinopec in accordance with the provisions. CNPC or Sinopec shall have the ownership of all the above-mentioned data, records, samples, vouchers, and other original information concerning the petroleum operations. The use, transfer, donation, exchange, sale and publication of the data, records, samples, vouchers and other original materials aforesaid and their transportation and transmission out of the PRC shall be subject to the relevant provisions of the State.

After a foreign contractor has been compensated for its investment in accordance with the contract or after the production period of oil (gas) field in question has expired, title to all assets purchased and manufactured by the foreign contractor according to the plan and the budget for performance of the contracts, except for equipment leased from third parties, shall be vested in CNPC or Sinopec. During the term of the contract, the foreign contractor may use such assets as stipulated in the contract.

Where foreign contractors open foreign exchange accounts and handle other matters related to foreign exchanges, they shall abide by the Regulations on Foreign Exchange Control of the People’s Republic of China and other provisions of the State on foreign exchange control. The investments of foreign contractors shall be in U.S. dollars or other freely convertible currencies.

Import and Export Since January 1, 2002, state-owned trading companies have been allowed to import crude oil under an automatic licensing system. Non-state-owned trading companies have been allowed to import crude oil and refine products subject to quota controls. The export of crude oil and refined oil products by both state-owned trading companies and non-state-owned trading companies is subject to quota control. The Ministry of Commerce has granted PetroChina the right to conduct crude oil and refined product import and export business.

87 Pricing Crude Oil CNPC/PetroChina and Sinopec set their crude oil prices each month based on the international market prices for crude oil of different grades in the previous month. In addition, CNPC/PetroChina and Sinopec negotiate a premium or discount to reflect transportation costs, the differences in oil quality and market supply and demand. The NDRC will mediate if CNPC/PetroChina and Sinopec cannot agree on the amount of premium or discount.

Gasoline and Diesel The government set the government guidance price for gasoline and diesel. NDRC would publish and adjust the retail guidance prices of gasoline and diesel (standard products) for different provinces making reference to the international market prices, and CNPC/PetroChina and Sinopec can set the detailed retail prices within the retail median guidance prices. The governments at the provincial level set the maximum gasoline and diesel wholesale and retail price based on the standard product price and quality ratio table issued by the relevant authority.

Natural Gas Costs to downstream natural gas distributors, or city-gate prices, consist of the exploration wellhead price and transportation and transmission charge, both regulated by the NDRC.

Piped gas end-user tariffs (distribution gas fee) are set by local pricing bureaus rather than the central government, and may vary widely between cities.

On 28 June 2013, the National Development and Reform Commission (NDRC) launched a new pricing mechanism through the Notice on Natural Gas Price Adjustment（《國家發展改革委關於調整天然氣價格的通知》）for non-residential natural gas consumption. The administration of natural gas prices shall be adjusted from the ex-factory stage to the city-gate stage. City-gate prices are government-guided prices and are subject to the price ceiling. The supplier and the user may, within the scope of the price ceiling as prescribed by the state, determine a specific price through negotiation.

• Policies on the Utilization of Natural Gas In full consideration of the various factors such as social benefits, environmental benefits and economic benefits arising from the utilization of natural gas as well as the characteristics of different natural gas consumption, the users of natural gas are classified into the preferred category, permitted category, restricted category and prohibited category. Policies on the Utilization of Natural Gas has classified the users of natural gas in detail. According to the characteristics of different features of natural gas consumption, the users of natural gas are classified into users of city gas, industrial fuel, natural gas power generation, natural gas chemical industry and other users.

All new gas utilization projects (including preferred category) must guarantee the gas source when applying for approval, and sign contracts for purchasing gas. For the projects that have used the gas, the contracts shall be executed by the supplying party and the purchasing party to ensure the responsibilities and rights.

• NDRC Notice of Disentangling Prices of Natural Gas for Non-Resident Use In accordance with NDRC Notice of Disentangling Prices of Natural Gas for Non-Resident Use, to implement the price unification and disentangle prices of natural gas for non-resident use, the highest gate price of incremental gas shall be decreased by RMB440 per thousand cubic meters and the highest gate price of existing gas shall be increased by RMB40 per thousand cubic meters （Guangdong, Guangxi, Hainan, Chongqing, Sichuan province shall make arrangement in accordance with national standard）.

88 The government frees up the control of the gate price of the natural gas directly-supplying user (excluding chemical fertilizer enterprises), and the price may be reached by negotiation between the supplying and demanding parties. The government also plans to launch the pilot of marketization reform.

The gate price of the natural gas (not including gas for the central heating) for life of residents, school teaching and student life, senior welfare institutions shall not be adjusted temporarily. The gate price of newly-added gas for urban residents after the implement of above-mentioned scheme follows the price policy of the local province (area, city) after unifying the price.

The scheme above shall be implemented since April 1, 2015.

Exploration Licenses and Mining Licenses in Relation to Oil and Gas The Mineral Resources Law of the People’s Republic of China (‘‘Mineral Resources Law’’) authorizes the Ministry of Land and Resources to exercise administrative authority over the exploration and production of mineral resources, including oil and gas, within the PRC. The Mineral Resources Law and its supplementary regulations provide for the basic legal framework under which exploration licenses and mining licenses for oil and gas are granted. The Ministry of Land and Resources has the authority to issue exploration licenses and mining licenses. Applicants must be the companies approved by the competent authorities to engage in oil and gas exploration and production activities.

• Mineral Resources Law In accordance with the Mineral Resources Law, The State practices a unified regional registration system for exploration of mineral resources. The department in charge of geology and mineral resources under the State Council shall be responsible for the registration of exploration of mineral resources. The State Council may authorize other relevant competent departments to handle the registration of exploration of specified minerals (oil, natural gas, etc.).

Anyone who wishes to establish a mining enterprise must meet the qualifications in accordance with law and relevant regulations, and the competent department shall examine the enterprise’s mining area, its mining design or mining plan, production and technological conditions and safety and environmental protection measures. Only those that pass the examination shall be granted such approval.

The competent departments authorized by the State Council may conduct examination of and grant approval to mining of such specified minerals as oil, natural gas, and issue mining licenses.

• Rules for the Implementation of the Mineral Resources Law of the People’s Republic of China In accordance with Rules for the Implementation of the Mineral Resources Law of the People’s Republic of China (‘‘Implementation of the Mineral Resources Law’’), The State shall adopt a license system for the exploration and exploitation of the mineral resources. Anyone who intends to explore/exploit mineral resources shall apply for registration in accordance with the law, draw an exploration/mining license, and obtain the exploration/mining right.

The State allows foreign companies, enterprises and other economic organizations as well as individuals to invest for exploration and exploitation of mineral resources within the territory of the PRC and other sea areas under its jurisdiction.

For conducting the exploration/mining of any specified minerals (oil, natural gas, etc.), the formalities concerning the application, examination, approval and the exploration/mining registration shall be fulfilled according to the relevant provisions of the State Council.

89 • Measures for Registration Administration of Exploration Blocks of Mineral Resources The State shall effectuate a unified system for administering the registration of exploration blocks of mineral resources. The largest scope of each exploration project permitted to be registered shall be 2,500 basic unitary blocks for minerals of petroleum and natural gas.

The exploration of minerals of petroleum or natural gas shall, upon examination and consent by the agency designated by the State Council, be registered by the competent department of geology and mineral resources of the State Council, which shall issue an exploration license.

The longest period of validity of an exploration license for petroleum or natural gas shall be seven years, and the extension period each time shall not exceed 2 years. The longest period of validity of a mining license for an on-going exploration and exploitation of petroleum or natural gas shall be 15 years.

The holder of an exploration license is obligated to make a progressively increasing annual minimum exploration investment relating to the exploration blocks for which the license is issued. The minimum investments are RMB2,000 per square kilometer for the initial year and RMB5,000 per square kilometer for the second year. Starting from the third year, the minimum investment is RMB10,000 per square kilometer. In addition, the holder of an exploration license is obligated to pay an annual exploration license fee that is RMB100 per square kilometer for the first three years of explorations. Starting from the fourth year of exploration, the exploration fee shall increase by an additional RMB100 per square kilometer each year for subsequent years up to a maximum of RMB500 per square kilometer.

• Measures for Registration Administration of Mineral Resources Exploitation The exploitation of minerals of petroleum or natural gas shall, upon examination and consent by the agency designated by the State Council, be registered by the competent department of geology and mineral resources of the State Council, which shall issue a mining license.

The State shall effectuate a system in which the mining right shall be obtained for compensation. The mining fee shall be paid year by year according to the acreage of the scope of the mining zone at a rate of 1,000 yuan per square kilometer per year.

The period of validity for a mining license shall be determined according to the construction scale of the mine: for a large-scale mine or above, the longest period of validity of the mining license shall be 30 years; for a medium-scale mine, the longest period of validity of the mining license shall be 20 years; for a small-scale mine, the longest period of validity of the mining license shall be ten years. The mining concessionaires can apply for extension of registration with the registration agency.

• Notice of the Ministry of Land and Resources on Relevant Issues Concerning the Regulation of the Powers to Issue the Exploration License and the Mining Licence Exploration/Mining licenses for petroleum, hydrocarbon natural gas and coalbed methane shall be issued by the Ministry of Land and Resources.

• Regulations of the People’s Republic of China on Sino-Foreign Cooperative Exploitation of Onshore Petroleum Resources For any Sino-foreign cooperative exploitation of onshore petroleum resources within the territory, the use of land in petroleum operations shall be handled according to the Land Administration Law of the People’s Republic of China and other relevant provisions of the State.

90 Protection of Petroleum and Natural Gas Pipelines • Law of the People’s Republic of China on the Protection of Petroleum and Natural Gas Pipelines The planning and construction of pipelines shall satisfy the requirements of pipeline protection and comply with the principles of safety, environmental protection, conservative use of land, and economical reasonableness.

A pipeline enterprise shall formulate a pipeline construction planning in accordance with the national pipeline development planning, and submit the pipeline construction route selection plan determined in its pipeline construction planning to the urban and rural planning department under the local people’s government at or above the county level where the pipelines are to be constructed. Land used for pipeline construction that has been included into the urban and rural planning shall not be used for other purposes arbitrarily. Pipeline construction projects shall be subject to environmental impact review in accordance with the law.

The use of land for pipeline construction shall satisfy the provisions of the Land Administration Law of the People’s Republic of China and other related laws and administrative regulations. Where a legally-constructed pipeline passes through a land owned by the collective or State-owned land to which others hold the use right, thereby affecting the land use, the pipeline enterprise shall make compensations in accordance with the land use purpose at the time the pipeline was constructed.

Pipeline enterprises shall select correspondingly eligible exploration, design, construction, and engineering supervision entities to engage in pipeline construction. The safety protection installations for pipelines shall be designed, constructed, and put into use at the same time with the main structure of the pipelines.

After completion of the pipelines, checks and acceptance shall be conducted in accordance with the relevant provisions of the State. The pipelines can then be delivered for use after being verified qualified through the checks and acceptance.

Pipeline enterprises shall establish and improve a pipeline inspection and protection system, be staffed with designated persons to conduct daily inspection and protection for the pipeline routes. Pipeline enterprises shall conduct testing and maintenance to the pipelines at fixed intervals to ensure that they function well. If a pipeline enterprise discovers any potential safety hazard in a pipeline, it shall eliminate such hazard in a timely manner or report it to the competent department at or above the county level if it is difficult for itself to eliminate such a hazard.

Pipeline enterprises shall formulate their own pipeline emergency response plans and submit the same to the competent departments at the county level where the pipelines are located for record filing.

Where a pipeline is disused, sealed, or scrapped, the pipeline enterprise shall take necessary safety protection measures and report the same to the competent department at or above the county level for record filing.

Environmental Protection The PRC has adopted extensive environmental laws and regulations that affect the operation of the oil and gas industry. There are national and local standards applicable to emissions control, discharges to surface and subsurface water, and the generation, handling, storage, transportation, treatment and disposal of solid waste materials.

91 • Environmental Protection Law of the People’s Republic of China The State implements the pollutant emission license administration system in accordance with the provisions of the law. The enterprises and other producers and business operators shall discharge pollutants according to pollutant emission license and shall not discharge pollutants without obtaining the pollutant emission license.

Enterprises, public institutions and other producers and business operators that discharge pollutants shall pay pollutant discharge fees in accordance with relevant State provisions. If environmental protection taxes are collected in accordance with the law, pollutant discharge fees shall not be collected.

A key pollutant-discharging entity shall make public the names of its major pollutants, the ways of emission, the emission concentration and total volume, whether the emission exceeds relevant limits, as well as the construction and operation of pollution prevention and control facilities and accept social supervision.

Enterprises and public institutions that discharge pollutants shall establish an environmental protection responsibility system and specify the responsibilities of the persons-in-charge of the entities and the relevant personnel.

The preparation of relevant development and utilization plans and the construction of the projects having impact on environment shall be subject to environmental impact assessment in accordance with the law. For any development and utilization plan, in absence of the environmental impact assessment in accordance with the law, the plan shall not be implemented; for any construction project, in absence of the environmental impact assessment in accordance with the law, the construction of the project shall not be commenced.

The period of limitation of the action regarding compensation for environment damage shall be three years commencing from the time when the party concerned is or should be aware of the damage it has incurred.

If any of the enterprises and other producers and business operators discharges pollutants causing or likely to cause serious pollution, the relevant competent department may seize or detain the facilities and equipment causing the discharge of pollutants.

• Law of the People’s Republic of China on Evaluation of Environmental Effects On the basis of the extent of the effects exerted on the environment by construction projects, the State exercises, in a classified manner, control over the evaluation of the effects of construction projects on the environment. A construction unit shall make arrangements for preparing a written report on the environmental effects or a statement on such effects or filling out a registration form of environmental effects.

• Law of the People’s Republic of China on the Protection of Petroleum and Natural Gas Pipelines Where the petroleum leaked from pipelines or the petroleum discharged due to repair of pipelines has caused environmental pollution, the pipeline enterprise shall dispose the petroleum in a timely manner. With regard to the liability for compensation caused by environmental pollution, the relevant provisions of the Tort Liability Law of the People’s Republic of China and laws on environmental pollution prevention shall apply.

92 Supervision and Administration over the Use of Land All land in the PRC is either state-owned or collectively owned by local residents, depending on the location of the land. All land in the urban areas of a city or town is state-owned, all land in the rural and suburban areas, unless otherwise specified by law, collectively owned by local residents, and house sites and private plots of cropland and hilly land are collectively owned by local residents.

• Land Administration Law of the People’s Republic of China In April 1988, the PRC Constitution was amended by the National People’s Congress to allow for the transfer of land use rights for value. In December 1988, the Land Administration Law of the People’s Republic of China (‘‘Land Administration Law’’) was amended to permit the transfer of land use rights for value. In accordance with the Land Administration Law amended in 2004, a construction unit may obtain state-owned land use rights through grant or by other means with consideration. But the following land may be obtained through governmental allocation with the approval of the people’s government at and above the county level according to law: (i) land for use by government organs and for military use; (ii) land for building urban infrastructure and for public welfare undertakings; (iii) land for building energy, communications and water conservancy and other infrastructure projects supported by the state; and (iv) other land as provided for by the law and administrative decrees.

If the land is needed for public interests or the use of the land needs to be readjusted for renovating the old urban area according to city planning or under other provided circumstances, the land administration department may, with the approval of the competent government, take back the right to the use of the State-owned land and provide compensation for the user granted with the land use right.

• Interim Regulations of the People’s Republic of China Concerning the Assignment and Transfer of the Right to the Use of the State-owned Land in the Urban Areas There are different maximum periods of grant for different uses of land: 70 years for residential purposes; 40 years for commercial, tourism and entertainment purposes; 50 years for industrial, education, science, culture, public health and physical education, comprehensive or other purposes.

• Property Law of the People’s Republic of China On March 16, 2007, the National People’s Congress promulgated the Property Law of the PRC effective from October 1, 2007, which stipulates that the construction land use rights may be created through grant or allocation. For land used for industrial, business, entertainment or commercial residential purposes, as there are two or more intended users of such land, the construction land use rights must be granted by means of public tender, auction or listing-for-sale. In addition, all infrastructures such as railways, highways, power facilities, telecommunications facilities and oil and gas pipelines that belong to the State are owned by the State.

• The Reply regarding Construction Land Used for Drilling and Auxiliary Facilities for Petroleum and Natural Gas Industry According to the Reply regarding Construction Land Used for Drilling and Auxiliary Facilities for Petroleum and Natural Gas Industry, lands used for drilling and auxiliary facilities may be approved by land administration authorities at the county level for temporary uses firstly according to features of the land use. By the end of each quarter, a petroleum enterprise may submit application for use of land in accordance with relevant land administration laws and regulations to the land administration authorities at the county level, who will submit the application to competent land administrative authorities for approval. Pursuant to the Land Administration Law of the PRC, a petroleum enterprise applying for land temporarily used for drilling and auxiliary

93 facilities shall execute contracts for the use of the land with the proper land administrative departments or rural collective organizations or villagers committees, depending on the ownership of the land, and pay land compensation fees for the use of the land.

Land Remediation The Mineral Resources Law and its supplementary regulations govern the exploring and mining of mineral resources within the PRC. These laws also regulate the process of closing down mines to promote land recovery and environmental protection.

• Mineral Resources Law of the People’s Republic of China Ifamineistobecloseddown,areportmustbe prepared with information about the mining operations, hidden dangers, land reclamation and utilization, and environmental protection, and an application for examination and approval must be filed in accordance with relevant State regulations.

• Rules for the Implementation of the Mineral Resources Law of the People’s Republic of China In order to close down a mine, the mine operator must submit the application on closing down of the mine and the geological report on closing down of pits to the relevant competent departments. And, the geological report on closing down of pits and report on closing down of mines shall be examined and permitted by the competent departments for approval.

After the report on closing down of pits being approved, The mining enterprises shall finalize the work regarding labor safety, water and soil conservancy, land recovery and environmental protection or paying in full the cost for the land recovery and environmental protection. The mining enterprises shall apply to the original licensing authorities for the revocation of the mining license.

Production Safety • Law of the People’s Republic of China on Work Safety TheLawofthePeople’s Republic of China on Work Safety and its implementation rules provide stringent production safety requirements for mining operations, including: (i) mining entities shall establish an administrative organ for production safety or have full-time personnel for the administration of production safety; (ii) these persons in charge of production safety must have passed production safety examinations; (iii) safety appraisals shall be made for mining construction projects according to the relevant regulations; (iv) the safety facility designs of the mining construction projects shall be subject to the examination and approval of the relevant departments according to the relevant regulations; (v) safety facilities shall be constructed according to the approved safety facility designs and the mining entities shall be responsible for the quality of these constructions; (vi) after a mining construction project is completed, but before it is put into production or use, the safety facilities constructed for the project shall be subject to acceptance check; and (vii) mining entities shall establish emergency rescue organizations. If a production or business operation is small in scale, it may designate part-time emergency rescue persons instead of establishing an emergency rescue organization. The mining entities shall always be equipped with regularly serviced and maintained rescue and emergency equipment.

• Regulations on Safe Work Permits The State adopts a licensing system for work safety in mining enterprises, no enterprise that has not obtained a safe work permit shall conduct mining activities.

94 The validity period of a safe work permit is three years. If an extension to the validity period is required upon expiration of a safe work permit, the enterprise shall, three months prior to the expiration, go through the extension formalities with the department that issues and administers such safe work permit.

On September 18, 2013, the State Administration of Work Safety published the Ten Provisions on Maintaining the Work Safety of Chemical (Hazardous Chemicals) Enterprises（《化工（危險化學品）企業保障生產安全十條規定》）, which stipulates a chemical enterprise must acquire complete and effective licenses and implement work safety responsibility system and other safety management rules and regulations. The employees must meet recruitment qualifications and receive adequate training.

• Administrative Measures for the Accrual and Utilization of Work Safety Funds of Enterprises ‘‘Work safety funds’’ refers to the funds that are listed under and disbursed from their costs by enterprises in accordance with specified standards, and are earmarked for improving and enhancing the work safety conditions of the enterprises or their projects.

Enterprises engaged in the exploration and production of oil must accrue work safety funds that are equal to RMB17 per ton of crude oil produced monthly. Enterprises engaged in the exploration and production of natural gas and coal bed methane (surface exploitation) must accrue work safety funds that are equal to RMB 5 per 1,000 cubic meters of raw gas monthly. When the balance of the preceding year’s work safety funds of a small, medium-sized or micro enterprise and a large enterprise accounts for 5% and 1.5%, respectively, of their business revenue of the preceding year, enterprises may defer or reduce the accrual of the work safety funds for the current year with the consent of the relevant departments.

Supervision and Administration over Foreign Exchange The principal regulations governing foreign currency exchange in the PRC are the Regulations of the People’s Republic of China on Foreign Exchange Control( promulgated and lately amended on August 5, 2008) and Regulations on the Administration of Settlement, Sale and Payment of Foreign Exchange. The PBOC authorizes the CFETS to publish the Renminbi exchange rate against other major currencies.

• Regulations of the People’s Republic of China on Foreign Exchange Control Foreign exchange receipts for current account transactions may be retained or sold to financial institutions engaged in settlement or sale of foreign exchange according to relevant provisions of the State. Foreign exchange payments for current account transactions shall be made by presenting valid documents, with their own foreign exchange or through purchasing foreign exchange from financial institutions engaged in settlement or sale of foreign exchange.

Overseas institutions or individuals that propose to make direct investment in the PRC shall go through the formalities for registration with the foreign exchange control organs after the relevant competent departments approve the proposals. Domestic institutions or individuals that make direct investment abroad or are engaged in distribution or deal of overseas valuable securities or derivative products shall go through the formalities for registration. The said institutions or individuals shall go through the formalities for examination and approval or record-filing prior to foreign exchange registrationasrequiredbyPRClaw.

The exchange rate for Renminbi follows a managed floating exchange rate system based on market demand and supply.

95 • Notice of the State Administration of Foreign Exchange on the Administration of Foreign Exchange Involved in Overseas Investment, Financing and Return on Investment Conducted by Residents in China via Special-Purpose Companies Prior to making contribution to a SPC with legitimate holdings of domestic or overseas assets or interests, a Mainland resident shall apply to the relevant Foreign Exchange Bureau for foreign exchange registration of overseas investment.

After a SPC has completed overseas financing, if the funds raised are repatriated to the Mainland for use, relevant Chinese provisions on foreign investment and external debt management shall be complied with. The Foreign-invested Enterprise established as a result of round-trip investment shall go through relevant foreign exchange registration, and truthfully disclose the actual controllers of its shareholders and other relevant information.

A Mainland resident may, on the basis of real and reasonable needs, purchase foreign exchanges to remit funds overseas for the establishment, share repurchase, delisting, etc. of a SPC.

• Provisions on Foreign Exchange Administration for Overseas Direct Investment of Domestic Institutions The domestic institutions may use their own foreign exchange funds, domestic loans in foreign currencies in compliance with relevant provisions, foreign exchange purchased with Renminbi, material objects, intangible assets and other foreign exchange funds approved by the Foreign Exchange Bureaus for overseas direct investment. The profits gained from overseas direct investment of domestic institutions may be deposited in overseas banks and used for overseas direct investment.

The SAFE and its local branches shall implement the foreign exchange registration and filing system for overseas direct investment of domestic institutions as well as the assets and relevant rights and interests gained from overseas direct investment.

The domestic institution shall go through the formalities for outward remittance of funds for overseas direct investment at a designated foreign exchange bank by presenting the approval document issued by the department in charge of overseas direct investment and the foreign exchange registration certificate for overseas direct investment.

• Provisions on Foreign Investors’ Merger with and Acquisition of Domestic Enterprises A Domestic Company’s establishment of a SPC outside the PRC shall be subject to application for approval with the Ministry and Commerce. After obtaining the approval certificate, the founder or controller shall apply for foreign exchange registration for outbound investment.

• Provisions on Foreign Exchange Administration over Direct Investment Made by Foreign Investors in China Institutions and individuals involved in direct investment in the PRC shall go through registration with the SAFE and its branches. Banks shall process business relating to the Direct Investment in China based on the registration information provided by the Foreign Exchange Bureaus.

• Notice of the State Administration of Foreign Exchange on Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment （Published on February 13,2015 and effective on June 1, 2015） Two administrative examination and approval items, i.e. verification and approval of foreign exchange registration under domestic direct investment, and verification and approval of foreign exchange registration under overseas direct investment, shall be abolished. Instead, banks shall, in accordance with this Notice and the Operating Guidelines for Foreign Exchange Services directly

96 examine and handle foreign exchange registration under domestic/overseas direct investment. The SAFE and its branches shall conduct indirect regulation of foreign exchange registration of direct investment via banks.

Taxes and Levies in the Petroleum Industry Royalty AccordingtotheInterimRegulationonthePayment of Mining Royalty for the Sino-Foreign Cooperative Exploitation of Onshore Petroleum, Sino-foreign enterprises that are involved in the exploitation of onshore petroleum resources are required to pay a royalty that is calculated and charged based on the total crude oil or natural gas output of each petroleum field for each calendar year and the mining area usage fee rate. However, the aforesaid Interim Regulation was repealed by Regulations of the People’s Republic of China on Sino-Foreign Cooperative Exploitation of Onshore Petroleum Resources as amended on September 30, 2011 and effective on November 1, 2011, except that the payment of mining royalties shall continue within the contractual period of contracts on Sino-foreign cooperative exploitation of onshore petroleum resources lawfully executed prior to November 1, 2011.

Resource Tax The Regulations of the People’s Republic of China on Sino-Foreign Cooperative Exploitation of Onshore Petroleum Resources as amended and effective in 2011 provides that, as of the date when the amended Petroleum Regulations came into effect, enterprises involved in the Sino-foreign cooperative exploitation of onshore petroleum resources shall pay resource taxes rather than the mining royalty, except that the parties to contracts on Sino-foreign cooperative exploitation of onshore petroleum resources lawfully executed prior to the effective date of the amended Petroleum Regulations shall continue to pay mining royalties until the expiration of the contracts when the resource tax then applies.

Pursuant to the Provisional Regulation of the People’s Republic of China on Resource Tax, promulgated in 1993 and amended in 2011, and its implementation rules, enterprises and individuals engaging in mining exploitation shall pay the resource tax, the rates of which to be applied to crude oil and natural gas are 5%-10% of revenues from the sale.

Mineral Resource Compensation Fee Pursuant to the Notice of the General Office of the Ministry of Land and Resources on Properly Carrying out the Collection of Compensations for Sino-foreign Cooperative Exploitation of Petroleum Resources published on March 31, 2012 with a valid period of eight years, Chinese and foreign enterprise engaged in Sino-foreign cooperative exploitation of onshore or offshore petroleum resources within the territory of the PRC and the sea waters under PRC’s jurisdiction shall pay mineral resource compensation fees to be calculated pursuant to the Provisions on Administration of Collection of Mineral Resources Compensation Fees promulgated in 1994 and amended in 1997, except for contracts on such cooperative exploitation lawfully executed prior to November 1, 2011, the payment of mining royalties shall continue within the contractual period.

Special Levy According to the State Council’s Decision to Levy Special Profit Charge of Petroleum, Measures for the Administration of the Collection of Special Oil Proceeds and the Supplementary Notice of the Ministry of Finance on Issues Concerning the Collection of the Special Oil Proceeds Charge, the special oil proceeds charge shall be collected from oil extracted within the territory of and waters under the jurisdiction of the PRC, regardless of whether such oil is sold within the territory of PRC. The oil value- added tax, mining royalties, and oil retained by the State that are handed over to the State by Sino- foreign cooperative oil fields as required shall not be subject to the special oil proceeds charge. The collection rate of special oil proceeds shall be determined according to the monthly weighted average price of the crude oil sold by an oil exploitation enterprise.

97 In accordance with Notice of the Ministry of Finance on Raising the Threshold for Levying the Special Oil Proceeds Surcharge with effective date of January 1, 2015, upon approval by the State Council, the Ministry of Finance has decided that with effect from January 1, 2015, the threshold for levying the special oil proceeds surcharge shall be raised to USD 65 per barrel. After the threshold is raised, the special oil proceeds surcharge shall still be calculated and levied according to fixed ad valorem rates at five excess progressive levels, ranging from 20% to 40%,as decided by the Ministry of Finance. Special oil proceeds shall be calculated monthly and paid quarterly.

A joint venture or cooperative enterprise shall have the special oil proceeds payable thereby withheld by the Chinese party of such joint venture or cooperative enterprise. The financial authority may not reduce or exempt the special oil proceeds payable by an oil exploitation enterprise without permission.

Value Added Tax Under the Interim Regulation of the People’s Republic of China on Value Added Tax, a value added tax is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC. Furthermore, pursuant to the Notice of the State Council on Relevant Problems Concerning the Application of the Provisional Regulations on Value Added Tax, Consumption Tax, Business Tax to Enterprises With Foreign Investment and Foreign Enterprises and the Notice of State Administration of Taxation on the Relevant Issues Concerning Payment of Value Added Tax in Connection with Sino Foreign Cooperative Exploitation of Petroleum Resources, value added tax shall be levied in kind at rate of 5.0% on all crude oil and natural gas exploited from Sino-foreign cooperation oil and gas fields.

98 MANAGEMENT

General Our board of directors (the ‘‘Board’’) is responsible and has general powers for the management and conduct of our business. The rights and obligations of each member of the board of directors are regulated by our articles of association and by our shareholders during our general meetings. Our board of directors is responsible for the approval and monitoring of all policy matters, overall strategies and budgets, internal control and risk management systems, material transactions (in particular those that may involve conflict of interests), financial information, appointment of directors and other significant financial and operational matters.

Directors and Senior Management The following table sets forth information regarding our directors and senior management.

Name Age Position Mr.WUEnlai...... 55 ChairmanandExecutiveDirector Mr. ZHAO Yongqi ...... 54 Chief Executive Officer and Executive Director Mr. ZHANG Bowen ...... 48 President and Executive Director Mr.CHENGCheng...... 47 SeniorVicePresidentandExecutiveDirector Dr.LAUWahSum...... 87 IndependentNon-ExecutiveDirector Mr. LI Kwok Sing Aubrey ...... 65 Independent Non-Executive Director Dr.LIUXiaoFeng...... 52 IndependentNon-ExecutiveDirector Mr.FAYuxiao...... 50 SeniorVicePresident Mr. ZHONG Wenxu ...... 50 Senior Vice President Mr.XIAYu...... 51 AssistantChiefExecutiveOfficer Mr. LAU Hak Woon ...... 62 Chief Financial Officer & Company Secretary

Mr. WU Enlai, aged 55, is currently our Chairman and Executive Director. He is also the secretary to the board of PetroChina. As a professorate senior engineer, he has over 30 years of work experience in the oil industry in the PRC. He obtained a bachelor’s degree from China University of Petroleum (Huadong) with a major in refining and petrochemical in August 1982, and obtained a master’sdegreein Management Science & Engineering from China University of Petroleum in June 1999. He also obtained an MBA degree in June 2002 from University of Calgary. He served as the deputy director general of Tarim Petrochemical Engineering Construction Headquarters from August 1997 to July 2002, the deputy director general of M&A department of China National Petroleum Corporation from August 2002 to December 2003 and the deputy general manager of China National Oil and Gas Exploration and Development Corporation from January 2004 to April 2005. He was appointed as the head of the Preparatory Work Team for PetroChina Guangxi Petrochemical Company in May 2005, and has been its general manager since October 2005 and the head of Enterprise Coordination Team of PetroChina in Guangxi since September 2010.

Mr. ZHAO Yongqi, aged 54, is currently our Chief Executive Officer and Executive Director. He is also the general manager and an executive director of PetroChina Kunlun Gas Co., Ltd. (‘‘PetroChina Kunlun Gas’’). Furthermore, he serves as the general manager and an executive director of PetroChina Kunlun Natural Gas Utilisation Co., Ltd. (‘‘PetroChina Kunlun Natural Gas Utilisation’’). He is a Professor-level Senior Economist and has over 30 years of experience in the Chinese oil and gas industry. He became the deputy general manager of PetroChina Dagang Oil Fields Sales Company in May 1997, the deputy general manager of PetroChina North China Sales Company in December 1999, the general manager of PetroChina Inner Mongolia Sales Company in October 2004. He was elected a representative to the 11th National People’s Congress of the People’s Republic of China in January 2008. He became the general manager of China Marine Bunker Co., Ltd. in November 2009, the general manager of PetroChina Kunlun Gas in August 2011, and began to concurrently serve as an executive director of the same company in October 2011. In April 2012, he further began to concurrently serve as the general manager and an executive director of PetroChina Kunlun Natural Gas Utilization.

99 Mr. ZHANG Bowen, aged 48, is currently our President and Executive Director. He joined us in January 2007. He holds a Bachelor degree from Xidian University in computer science and a Master degree in petroleum geology from Daqing Petroleum Institute. After graduation, he joined China National Oil and Gas Exploration and Development Corporation, a subsidiary of CNPC. He has over 26 years of working experience in the oil and gas industry. Before joining us, he was the executive vice president of CNPC America Limited.

Mr. CHENG Cheng, aged 47, is currently one of our Senior Vice Presidents and Executive Director. He was appointed as our Executive Director in June 2004. Before joining us, he had over 25 years industry experience working at various departments and sections of CNPC including three years in Canada as Vice President of CNPC International (Canada) Limited. He has a Master of Business Administration from the University of Calgary, Canada, a Master in Energy and Environment Economy from Scuola Superiore Enrico Mattei, Milan, Italy and a Diploma in Petroleum Technical Economy from Jianghan Institute of Petroleum, the PRC.

Dr. LAU Wah Sum, aged 87, joined us as an Independent Non-Executive Director in August 1994. He is a Fellow of the Chartered Institute of Management Accountants. He was the Chairman of the Urban Renewal Authority. He is currently the President of W S Lau & Associates Limited and Chairman of Equity Holdings Limited. He serves the community as Honorary Court Member of the University of Science and Technology of Hong Kong.

Mr. LI Kwok Sing Aubrey, aged 65, joined us as an Independent Non-Executive Director in 1998. He is chairman of IAM Holdings (Hong Kong) Limited, a Hong Kong based investment firm, and has over 35 years experience in merchant banking and commercial banking. He is a non-executive director of The Bank of East Asia, Limited, and an independent non-executive director of Cafe de Coral Holdings Limited, China Everbright International Limited, Kowloon Development Company Limited, Pokfulam Development Company Limited and Tai Ping Carpets International Limited. He is also a non-executive director of Affin Bank Berhad. He has a Master of Business Administration from Columbia University and a Bachelor of Science in Civil Engineering from Brown University.

Dr. LIU Xiao Feng, aged 52, joined us as an Independent Non-Executive Director in 2004. He is currently a Managing Director at China Resources Capital Holdings Company Limited. He has worked in various international financial institutions since 1993, including N.M. Rothschild & Sons, JP Morgan, and DBS. He has many years of experience in corporate finance. He has a PhD and a Masters degree from the Faculty of Economics, University of Cambridge and a Bachelor of Economics from Sichuan Institute of Finance and Economics, China. He is currently also an independent non-Executive director of Honghua Group Limited, which is a publicly listed company on the SEHK.

Mr. FA Yuxiao, aged 50, is currently one of our Senior Vice Presidents. He is a senior engineer having 27 years experience in the oil and gas field. He studied earth physics and exploration technology in the Southwest Petroleum University and was awarded a bachelor’s degree in engineering in 1984. After his graduation, he worked for the Research Institute of Petroleum Exploration and Development, the Tarim Petroleum Exploration and Development Headquarters, CNPC and PetroChina. He was once the Deputy Chief Economist under the Human Resources Department of the CNPC and PetroChina.

Mr. ZHONG Wenxu, aged 50, is currently one of our Senior Vice Presidents. He is a senior engineer having 25 years experience in the oil and gas field. He majored in oil drilling engineering in the Southwest Petroleum Institute and was awarded a bachelor’sdegreeinengineeringin1986.Afterhis graduation, he worked for various entities including CNPC Xinjiang Petroleum Administration, CNPC Tarim Oilfield Company and Shenzhen Petroleum Industrial Co., Ltd. In 2005, he graduated from the Oil and Gas Field Development Engineering Specialty of the China University of Petroleum in Beijing, obtaining a master’s degree in engineering. After that, he worked as the Deputy General Manager of PetroChina Kunlun Natural Gas Utilisation as well as the General Manager of China Natural Gas Co., Ltd.（華油天然氣股份有限公司）.

100 Mr. XIA Yu, aged 51, is currently our Assistant Chief Executive Officer. He is a senior engineer with 28 years experience in the oil and gas field. He majored in irrigation for agricultural land in the Shandong Water Polytechnic. After graduating with a bachelor’s degree in engineering in 1983, he joined Hubei Petroleum Administration. In 1998, he was awarded a masters degree in business administration by Tianjin University. After that, he worked for a number of companies including China International (Kazakhstan) Company, CNPC Shennan Oil Technology Development Co., Ltd. and Shenzhen Petroleum Industrial Co., Ltd. He was also the Deputy General Manager of PetroChina Kunlun Natural Gas Utilisation.

Mr. LAU Hak Woon, aged 62, is currently our Chief Financial Officer and Company Secretary. He is a member of the Hong Kong Institute of Certified Public Accountants, a fellow member of The Chartered Association of Certified Accountants in the UK and a Certified Management Accountant of the Society of Management Accountants of Ontario in Canada. He has a Master of Business Administration from Newport University and more than 30 years’ experience in accounting and financial management. He joined us in 1997. Before joining us, he was the Chief Financial Officer of several large companies in Hong Kong and overseas.

Our Company Secretary is Mr. LAU Hak Woon.DetailsofMr.Lau’s biography are set out above.

Board Committees The Board has established three committees, namely, the Audit Committee, the Remuneration Committee and the Nomination Committee for overseeing particular aspects of our affairs. All of the Board committees are established with defined written terms of reference. The terms of reference of the BoardcommitteesarepostedontheSEHK’s website and on our website and are available to shareholders upon request.

The three Independent Non-executive Directors of the Company are the members of each of the Audit Committee, the Remuneration Committee and the Nomination Committee of the Company.

The Board committees are provided with sufficient resources to discharge their duties and, upon reasonable request, are able to seek independent professional advice in appropriate circumstances, at our expense.

Audit Committee We established the Audit Committee on December 8, 1998, and have adopted the set of terms of reference for the Audit Committee by a resolution passed on March 29, 2012.

The Audit Committee comprises three Independent Non-executive Directors (including one Independent Non-executive Director who possesses the appropriate professional qualifications or accounting or related financial management expertise). None of the members of the Audit Committee is a former partner of our existing independent auditor.

The main duties of the Audit Committee include the following:

1. To review the financial statements and reports and consider any significant or unusual items raised by the independent auditor before submission to the Board.

2. To review the relationship with the independent auditor by reference to the work performed by the independent auditor, their fees and terms of engagement, and make recommendation to the Board on the appointment, re- appointment and removal of the independent auditor.

3. To review the adequacy and effectiveness of our financial reporting system, internal control system and risk management system and associated procedures.

101 Remuneration Committee We established the Remuneration Committee on September 3, 2003, and have adopted the set of terms of reference for the Remuneration Committee by a resolution passed on March 29, 2012.

Our Remuneration Committee comprises three Independent Non-executive Directors. The primary objectives of our Remuneration Committee include reviewing the management’s remuneration proposals with reference to the board’s corporate goals and objectives, making recommendations to the Board for approval of the remuneration policy and structure, and making recommendations or determining the remuneration packages of the Directors and the senior management. Our Remuneration Committee is also responsible for establishing transparent procedures for developing such remuneration policy and structure to ensure that no director or any of his associates will participate in deciding his own remuneration, which remuneration will be determined by reference to the performance of the individual and the Company as well as market practice and conditions.

The Remuneration Committee normally meets annually for reviewing the remuneration policy and structure and determination of the annual remuneration packages of the Executive Directors and the senior management and other related matters. Our Company Secretary is responsible for collection and administration of the human resources data and making recommendations to the Remuneration Committee for consideration. Our Remuneration Committee shall consult our Chairman and/or Chief Executive Officer about these recommendations on remuneration policy and structure and remuneration packages.

Nomination Committee We established the Nomination Committee on January 16, 2012, and have adopted the set of terms of reference for our Nomination Committee by a resolution passed on March 29, 2012.

The Nomination Committee comprises four members including three Independent Non-executive Directors and our Chairman. The Chairman of the Company is the Chairman of the Nomination Committee.

The main duties of our Nomination Committee include the following:

1. to review the structure, size and composition (including the skills, knowledge and experience) of the Board at least annually and make recommendations on any proposed changes to the Board to complement our corporate strategy;

2. to identify individuals suitably qualified to become Board members and select or make recommendations to the Board on the selection of individuals nominated for directorships;

3. to assess the independence of Independent Non-executive Directors;

4. to make recommendations to the Board on the appointment or re-appointment of Directors and succession planning for Directors, in particular the Chairman and the Chief Executives;

5. to regularly review the time required from a Director to perform his responsibilities; and

6. to do such other things to enable the Committee to discharge its powers and functions conferred to it by the Board.

In performing its duties, due regards would be given to the Listing Rules and the associated guidance.

102 Compensation of Key Management The remuneration of directors and other members of key management for the periods indicated:

For the years ended December 31 2012 2013 2014 2014 (HK$ million) (HK$ million) (HK$ million) (US$ million) (unaudited) Salariesandallowances...... 34 42 36 5 Retirement benefits – defined contribution scheme . . . 2 2 2 0.3 Share-basedpayments...... 72 ––– Total...... 108 44 38 5

103 PRINCIPAL SHAREHOLDERS

As of December 31, 2014, the register of substantial shareholders maintained under section 336 of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (‘‘SFO’’), showed that we have been notified of the following interests, being 5% or more of our issued share capital.

Number of shares Percentage of Direct Indirect the total number Name Interest Interest of shares in issue Sun World Limited (‘‘Sun World’’) (1) ...... 4,708,302,133(L) – 58.33% PetroChina Hong Kong (BVI) Ltd. (‘‘PetroChina (BVI)’’) (1) ...... – 4,708,302,133 (L) 58.33% PetroChina Hong Kong Ltd. (‘‘PetroChina Hong Kong’’) (1) ...... – 4,708,302,133 (L) 58.33% PetroChina (1) ...... – 4,708,302,133 (L) 58.33% China National Oil and Gas Exploration and Development Corporation (‘‘CNODC’’) (2) . – 277,432,000 (L) 3.43% CNPC International Ltd.(‘‘CNPCI’’) (2) ...... – 277,432,000 (L) 3.43% Fairy King Investments Ltd. (2) ...... 277,432,000(L) – 3.43% CNPC (1) (2) ...... – 4,985,734,133 (L) 61.76%

Notes:

(1) Sun World is a wholly owned subsidiary of PetroChina (BVI), which in turn is wholly owned by PetroChina Hong Kong. PetroChina Hong Kong is wholly owned by PetroChina, which is in turn owned as to 86.47% by CNPC. Accordingly, CNPC is deemed to have interest in the 4,708,302,133 (L) shares held by Sun World. Mr Wu Enlai, our Chairman and Mr Zhang Bowen, our President are also the directors of Sun World, which is our substantial shareholder (within the meaning of Part XV of the SFO).

(2) Fairy King Investments Ltd. is a wholly owned subsidiary of CNPCI, which in turn is wholly owned by CNODC, which is in turn owned as to 100.00% by CNPC. Accordingly, CNPC is deemed to have interest in the 277,432,000 (L) shares held by Fairy King Investments Ltd.

Save as disclosed above, as of December 31, 2014, no person (other than our director or chief executive) had any interest or short position in our shares or underlying shares which would fall to be disclosedtousunderDivisions2and3ofPartXVoftheSFO.

As of December 31, 2014, no person (other than our director or chief executive) was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group, or any options in respect of such capital.

104 RELATED PARTY TRANSACTIONS

PetroChina, our controlling shareholder, and its parent, CNPC, are state-controlled enterprises directly controlled by SASAC. The SASAC is the ultimate controlling party of us. Related parties include CNPC and its subsidiaries (together, the ‘‘CNPC Group’’), other state-owned enterprises and their subsidiaries for which the SASAC has control, joint control or significant influence over the enterprises which we are able to control, jointly control or exercise significant influence over, key management personnel of us and CNPC and their close family members.

The following is a summary of significant related party transactions between us and our related parties during the years and balances arising from related party transactions at the end of the years indicated below:

Transactions with CNPC Group, associates and joint ventures Xinjiang Contract and Leng Jiapu Contract We entered into (i) the contract for the Xinjiang 91/95 Project (the ‘‘Xinjiang Contract’’)andthe contract for the Liaohe Leng Jiapu Project (the ‘‘Leng Jiapu Contract’’, and collectively, the ‘‘PSAs’’) with the CNPC Group in 1996 and 1997 respectively and (ii) a master agreement in 2003, which was subsequently amended and supplemented pursuant to the first supplemental agreement in 2006, the second supplemental agreement in 2009, the third supplemental agreement in 2010 and the fourth supplemental agreement in 2011. For details of the exploration projects, see ‘‘Business – Exploration and Production – Projects.’’

Under the PSAs, we procure from the CNPC Group on a continuing basis certain services and assistance. Whereas, the master agreement provides a framework for a range of products and services to be procured from the CNPC Group to us and vice versa including oil and gas products, general products and services, financial services and rental services. The master agreement expired on December 31, 2014. On November 6, 2014, we and CNPC entered into the fifth supplemental agreement for the purpose of renewing the term of the master agreement for the three years ending on December 31, 2017.

• Provision of general products and services by the CNPC Group to us amounted to approximately HK$5,683 million, HK$6,783 million and HK$8,218 million (US$1,060 million) for the years ended December 31, 2012, 2013 and 2014, respectively, which includes interest charged on the loans and advances obtained from CNPC, PetroChina, Sun World Limited and fellow subsidiaries of approximately HK$1,411 million, HK$1,865 million and HK$1,459 million (US$188 million), respectively.

• Purchase of our share of crude oil production by the CNPC Group amounted to approximately HK$4,000 million, HK$3,610 million and HK$3,477 million (US$448 million) for the years ended December 31, 2012, 2013 and 2014, respectively.

• Rental payments by us for leasing of certain offices and warehouses in Hong Kong and the PRC from the CNPC Group amounted to approximately HK$11 million, HK$19 million and HK$15 million (US$2 million) for the years ended December 31, 2012, 2013 and 2014, respectively.

• Purchase of crude oil, natural gas, refined oil products, chemical products and other ancillary or similar products by us from the CNPC Group amounted to approximately HK$6,927 million, HK$12,514 million and HK$12,687 million (US$1,636 million) for the years ended December 31, 2012, 2013 and 2014, respectively.

• Provision of general products and services by us to the CNPC Group amounted to approximately HK$5,849 million, HK$6,205 million and HK$10,809 million (US$1,394 million) for the years ended December 31, 2012, 2013 and 2014, respectively.

105 Agreement for sales of natural gas to certain associates of ours We have entered into agreement for the sale of natural gas to certain associates of ours which amounted to approximately HK$222 million, HK$156 million and HK$145 million (US$19 million) for the years ended December 31, 2012, 2013 and 2014, respectively.

Amounts due from and to CNPC Group, associates and joint ventures of ours As of December 31, 2012, 2013 and 2014, our amounts due from and to CNPC Group, associates and joint ventures, which are unsecured and interest free, are included in the following accounts captions and summarized as follows:

As of December 31, 2012 2013 2014 2014 (HK$ million) (HK$ million) (HK$ million) (US$ million) (unaudited) Intangible and other non-current assets ...... 77 150 239 31 Accountsreceivable...... 342 434 435 56 Accounts payable and accrued liabilities ...... 1,044 2,565 2,769 357 Borrowings...... 31,518 31,011 21,860 2,820 Prepaid expenses and other current assets ...... – 950 1,312 169 Obligationsunderfinanceleases...... ––504 65

Transactions with Beijing Enterprises Holdings Limited (‘‘Beijing Enterprises Holdings’’)andits subsidiaries (together, the ‘‘Beijing Enterprises Group’’) PetroChina Beijing Pipeline, a subsidiary of the Group, has entered into an agreement with PetroChina (the ‘‘Natural Gas Transmission Agreement’’), pursuant to which PetroChina has commissioned PetroChina Beijing Pipeline for the transmission of natural gas to its designated natural gas buyers and PetroChina Beijing Pipeline has commissioned PetroChina to collect from such natural gas buyers payments relating to the natural gas transmission. Under the terms of the Natural Gas Transmission Agreement, the pipeline transmission fee shall be payable on such basis as set out in the agreement entered into between PetroChina and the relevant natural gas buyers. A subsidiary of Beijing Enterprises Holdings, a non-controlling interest in PetroChina Beijing Pipeline, is one of such natural gas buyers designated by PetroChina. Revenue from transmission of natural gas received and receivable from the Beijing Enterprises Group amounted to approximately HK$4,509 million, HK$4,807 million and HK$4,690 million (US$605 million) for the years ended December 31, 2012, 2013 and 2014, respectively. This transaction constituted connected transactions in accordance with Chapter 14A of the Listing Rules and was accounted for in a manner similar to a uniting of interests basis.

Transactions with other state-controlled entities in the PRC Apart from transactions with CNPC Group, associates and joint ventures, we have transactions with other state-controlled entities include but not limited to (i) sales and purchases of goods and services; (ii) purchases of assets; (iii) lease of assets; and (iv) bank deposits and borrowings.

106 DESCRIPTION OF THE NOTES

Kunlun Energy Company Limited (the ‘‘Company’’) will issue the Notes pursuant to the indenture (the ‘‘Indenture’’) to be dated as of @@, 2015 between itself and The Bank of New York Mellon as trustee (the ‘‘Trustee’’). A copy of the Notes and the Indenture will be available for inspection at the corporate trust office of the Trustee. The holders of the Notes will be bound by, and be deemed to have notice of, all the provisions of the Indenture. The following summaries of certain provisions of the Notes and the Indenture are subject to, and are qualified in their entirety by reference to, the detailed provisions of the Notes and the Indenture. Terms and expressions used in this section and not otherwise defined shall have the meanings given to such terms in the Notes and the Indenture. This section does not restate those agreements in their entirety. Whenever particular sections or defined terms of the Indenture not otherwise defined herein are referred to, such sections or defined terms are incorporated herein by reference.

General The Notes will be issued in an initial aggregate principal amount of US$@@ and will mature on @@, 20@@, unless the Notes are redeemed earlier pursuant to the terms thereof and of the Indenture.

The Notes will bear interest at the rate of @@% per annum. Interest on the Notes will accrue from @@, 2015 or from and including the most recent Interest Payment Date (as defined below) to which interest has been paid or provided for, to and excluding the next Interest Payment Date or the maturity date, payable semi-annually in arrears on @@ and @@ in each year (each, an ‘‘Interest Payment Date’’), commencing on @@, 2015, to the persons in whose names the Notes are registered at the close of business (whether or not a Business Day) on @@ and @@, respectively immediately preceding an Interest Payment Date. Interest on the Notes shall be calculated on the basis of a 360-day year consisting of twelve 30-day months.

In any case where the date of maturity of the principal of or interest on the Notes or the date fixed for redemption of the Notes is not a Business Day, then payment of principal or interest shall be made on the next succeeding Business Day, with the same force and effect as if made on the date of maturity or the date fixed for redemption, as the case may be, and no interest shall accrue for the period after such date. ‘‘Business Day’’ means any day in The City of New York or Hong Kong or the applicable place of payment, other than a Saturday, Sunday or a day on which banking institutions are authorized or obligated by law or executive order to remain closed.

The Notes will not be entitled to the benefit of any sinking fund. The Notes shall be denominated in minimum principal amounts of US$200,000 and in integral multiples of US$1,000 in excess thereof.

The Notes will be the direct, unconditional and unsubordinated obligations of the Company, and rank pari passu with all other unsecured and unsubordinated obligations of the Company (other than obligations preferred by applicable law) and senior in priority of payment and in all other respects to all other Indebtedness (as defined below) of the Company that is designated as subordinate or junior in right of payment to the Notes.

The principal of, interest on, and all other amounts payable under, the Notes will be payable to the persons in whose names the Notes are registered, and the Notes may be exchanged or transferred, at the office or agency of the Company in maintained for that purpose (which initially will be the specified office of The Bank of New York Mellon as Paying Agent, located at 101 Barclay Street, New York, NY 10286, United States of America). The principal of and interest on the Notes will be made by wire transfer or otherwise in immediately available funds and payable in U.S. dollars. Payments of interest and principal with respect to interests in the global notes will be credited to the respective accounts of the holders of such interests with DTC or its participants, including Euroclear and Clearstream, Luxembourg. See ‘‘– Notes; Delivery and Form.’’

107 Further Issues The Notes will be issued in an initial aggregate principal amount of US$@@.TheCompanymay, however, from time to time, without the consent of the holders of the Notes, create and issue pursuant to the Indenture, additional notes of a series having the same terms and conditions under the Indenture as the previously outstanding Notes in all respects, except for issue date, issue price, and amount of the first payment of interest thereon (such additional notes, the ‘‘Additional Notes’’). Additional Notes issued may be consolidated with and form a single series with the previously outstanding Notes; provided, however, that such Additional Notes will not be issued under the same CUSIP, ISIN, Common Code or other identifying number as the outstanding Notes unless such Additional Notes are fungible with such Notes for U.S. federal income tax purposes.

Redemption Unless earlier redeemed in the limited circumstances set forth below under ‘‘– Optional Redemption’’ and ‘‘– Optional Tax Redemption,’’ the Notes will mature on @@,20@@, at a price equal to 100% of the principal amount thereof and the Notes will not be otherwise redeemable at the option of the Company.

Optional Redemption The Company may at any time and from time to time redeem any of the Notes, in whole or in part, on not less than 30 nor more than 60 days’ prior notice mailed to the holders of such Notes, with a copy provided to the Trustee. The applicable Notes will be redeemable at a redemption price equal to the greater of (1) 100% of the principal amount of the applicable Notes to be redeemed and (2) the sum of the present values of the remaining scheduled payments of principal and interest on the applicable Notes to be redeemed (not including interest accrued to the date of redemption), discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus @@ basis points, plus accrued and unpaid interest on the applicable Notes to be redeemed, if any, to the date of redemption. None of the Trustee or the Agents shall be responsible for calculating or verifying the redemption price of the applicable Notes.

‘‘Comparable Treasury Issue’’ means the United States Treasury security selected by an Independent Investment Banker that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes to be redeemed. ‘‘Independent Investment Banker’’ means one of the Reference Treasury Dealers appointed by the Company.

‘‘Comparable Treasury Price’’ means, with respect to any redemption date, (1) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (2) if the Company obtains fewer than three such Reference Treasury Dealer Quotations, the average of all quotations obtained.

‘‘Reference Treasury Dealer’’ means each of any three investment banks of recognized standing that is a primary U.S. government securities dealer in the United States, selected by the Company in good faith.

‘‘Reference Treasury Dealer Quotations’’ means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Company, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by such Reference Treasury Dealer as of 5:00 p.m., New York City time, on the third Business Day preceding such date of redemption.

108 ‘‘Treasury Rate’’ means, with respect to any date of redemption, the rate per annum equal to the semi- annual equivalent yield to maturity (computed as of the third Business Day immediately preceding such redemption date) of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such date of redemption.

Additional Amounts All payments of principal and interest in respect of the Notes will be made free and clear of, and without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature (‘‘Taxes’’) imposed, levied, collected, withheld or assessed by or on behalf of Bermuda, Hong Kong, the PRC or any other jurisdiction in which the Company is organized or resident for tax purposes, in each case including any political subdivision, territory or possession thereof, and any authority therein having power to tax (each, as applicable, a ‘‘Relevant Taxing Jurisdiction’’) or any jurisdiction through which payments are made including any political subdivision, territory or possession thereof, and authority therein having power to tax (together with the Relevant Taxing Jurisdiction, ‘‘Relevant Jurisdictions’’) unless such Taxes are required by law to be withheld or deducted. If any deduction or withholding for any present or future Taxes of the applicable Relevant Jurisdiction shall at any time be so required, the Company shall pay such additional amounts (‘‘Additional Amounts’’) as will result (after deduction of such Taxes and any additional Taxes payable in respect of such Additional Amounts) in receipt by each holder of any Note of such amounts as would have been received by such holder with respect to such Note had no such withholding or deduction been required; provided, however, that no Additional Amounts shall be payable in respect of any Note:

(i) to a holder (or to a third party on behalf of a holder) who is liable to such Taxes in respect of such Note by reason of his having some connection with the Relevant Jurisdiction other than the mere holding of the Note; or

(ii) which is presented (where presentation is required) more than 30 days after the Relevant Date, except to the extent that the holder of it would have been entitled to such Additional Amounts on surrender of such Note for payment on the last day of such period of 30 days. ‘‘Relevant Date’’ means whichever is the later of (a) the date on which such payment first becomes due and (b) if the full amount payable has not been received by the Trustee on or prior to such due date, the date on which, the full amount having been so received and notice to that effect shall have been given to the holders of the Notes; or

(iii) to a holder (or to a third party on behalf of a holder) who would have been able to avoid such withholding or deduction by duly presenting the Note (where presentation is required) to another paying agent; or

(iv) with respect to any Taxes that would not have been imposed but for the failure of the holder or beneficial owner to comply with a timely request of the Company addressed to the holder to provide certification or information concerning the nationality, residence or identity of the holder or beneficial owner of the Note, if compliance is required as a precondition to relief or exemption from the Taxes; or

(v) with respect to any withholding or deduction that is imposed or levied on a payment pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of November 26-27, 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or

(vi) with respect to any estate, inheritance, gift, sale, transfer, personal property or similar tax, assessment or other similar governmental charge; or

109 (vii) with respect to any such Taxes payable otherwise than by deduction or withholding from payments under or with respect to any Note; or

(viii) any combination of the preceding items (i) through (vii) above.

Notwithstanding anything to the contrary in these terms and conditions, none of the Company, any paying agent or any other person shall be required to pay any additional amounts with respect to any withholding or deduction imposed on or with respect to any Note pursuant to Section 1471 to 1474 of the U.S. Internal Revenue Code of 1986 (‘‘FATCA’’), any treaty, law, regulation or other official guidance implementing FATCA, or any agreement (or related guidance) between the Company, a paying agent or any other person and the United States, any other jurisdiction, or any authority of any of the foregoing implementing FATCA.

Additional Amounts will not be paid with respect to any payment of the principal of or any interest on any Note to any holder of a Note who is a fiduciary or partnership or other than the sole beneficial owner of such payment to the extent that payment would be required by the laws of the Relevant Jurisdiction to be included in the income of a beneficiary or settlor with respect to the fiduciary, a member of that partnership or a beneficial owner who would not have been entitled to the Additional Amounts had that beneficiary, settlor, member or beneficial owner been the holder.

Whenever there is mentioned, in any context, the payment of principal or interest in respect of any Note, such mention shall be deemed to include the payment of Additional Amounts provided for in the Indenture to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to the Indenture.

Optional Tax Redemption The Notes may be redeemed, at the option of the Company, in whole but not in part, upon notice as described below, at a redemption price equal to 100% of the principal amount thereof, together with accrued interest to the date fixed for redemption and Additional Amounts, if any, if, as a result of any change in or amendment to the laws of a Relevant Taxing Jurisdiction or any regulations or rulings promulgated thereunder, or any change in the official interpretation or official application of such laws, regulations or rulings, which change or amendment (i) in the case the Company is organised or is tax resident in a jurisdiction that is a Relevant Taxing Jurisdiction as of the date hereof, becomes effective on or after the date of this offering memorandum and (ii) in the case the Company becomes organized or tax resident in or any successor to the Company is organized or tax resident in a jurisdiction that is not a Relevant Taxing Jurisdiction as of the original issue date of the Notes, on or after the date the Company becomes organized or tax resident in such jurisdiction or that such successor assumes the Company’s obligations, as applicable, under the Notes andIndenture,theCompanyorsuchsuccessoris or would be required on the next succeeding due date for a payment with respect to the Notes to pay Additional Amounts with respect to the Notes as described above under ‘‘– Additional Amounts’’ and such obligation cannot be avoided by the use of reasonable measures available to the Company or any successor person, as the case may be.

Notice of redemption of the Notes as provided above shall be given not less than 30 nor more than 60 days prior to the date fixed for redemption. Notice having been given, the Notes of such series shall become due and payable on the date fixed for redemption and will be paid at the redemption price, together with accrued interest to the date fixed for redemption and any Additional Amounts, at the place or places of payment and in the manner specified in the notice. From and after the date fixed for redemption, if moneys for the redemption of such Notes shall have been made available as provided in the Indenture for redemption on the date fixed for redemption, the Notes shall cease to bear interest, and the only right of the holders of the Notes shall be to receive payment of the redemption price and interest accrued (including any Additional Amounts) to the date fixed for redemption.

110 Repurchase Upon a Change of Control Triggering Event Unless previously redeemed under ‘‘– Redemption’’ above, upon a Change of Control Triggering Event, the Company will be required to make an offer to repurchase all of the Notes at a price in cash equal to 101% of the principal amount of the Notes repurchased, plus accrued and unpaid interest on the principal amount of Notes being repurchased to but excluding the date of repurchase (a ‘‘Change of Control Offer’’).

Within 30 days following any Change of Control Triggering Event, the Company will be required to give written notice to holders describing the transaction or transactions that constitute the Change of Control Triggering Event and offering to repurchase all of the Notes on the date specified in the notice, which date will be no earlier than 30 days and no later than 60 days from the date such notice is given (the ‘‘Change of Control Purchase Date’’).

The Company will not be required to make a Change of Control Offer upon a Change of Control Triggering Event if a third party makes such an offer substantially in the manner, at the times and in compliance with the requirements for a Change of Control Offer (and for at least the same purchase price payable in cash) and such third party purchases all Notes properly tendered and not withdrawn under its offer.

A holder will have no right to require the Company to repurchase portions of Notes if it would result in the issuance of new Notes, representing the portion not repurchased, in an amount of less than US$200,000.

The Company will comply, to the extent applicable, with the requirements of applicable securities laws or regulations in connection with the repurchase of Notes pursuant to this covenant.

None of the Trustee or the Agents shall be required to take any steps to ascertain whether a Change of Control has occurred or may occur, and each of the Trustee and the Agents shall be entitled to assume that no such event has occurred unless the Trustee or such Agent has received written notice of the occurrence of such event. None of the Trustee or the Agents shall be responsible for determining or verifying whether a Note is to be accepted for purchase under a Change of Control Offer or be responsible to the holders for any loss arising from any failure by it to do so. Neither the Trustee nor any Agent shall be under any duty to determine, calculate or verify the amount payable under a Change of Control Offer or be responsible to the holders for any loss arising from any failure by it to do so.

Modification and Waiver The Indenture contain provisions permitting the Company and the Trustee, without the consent of the holders of Notes, to execute supplemental indentures for certain enumerated purposes, including any amendment solely to conform the Indenture to this Offering Memorandum (as amended and supplemented) or to secure the Notes and create or register Liens on any collateral and, with the consent of the holders of not less than a majority in aggregate principal amount of the Notes then outstanding under the Indenture, to change or modify in any manner the rights of the holders of the Notes, provided that no such modification or amendment may, without the consent of the holder of each such Note affected thereby, among other things:

(i) change the stated maturity of the Notes;

(ii) reduce the principal amount of or payments of interest on any such Note;

(iii) change any obligation of the Company to pay Additional Amounts;

(iv) change the currency or place of payment of the principal of or interest on such Note;

111 (v) impair the right to institute suit for the enforcement of any payment due on or with respect to any such Note;

(vi) reduce the above stated percentage of outstanding Notes necessary to modify or amend the Indenture;

(vii) reduce the percentage of the aggregate principal amount of outstanding Notes necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults;

(viii) reduce the premium payable upon the redemption or repurchase of any Note or change the time at which any Note may be redeemed or required to be repurchased as described above under ‘‘– Optional Redemption’’ or ‘‘– Repurchase Upon a Change of Control Triggering Event’’;or

(ix) modify such provisions with respect to modification and waiver as provided in the Indenture.

The holders of not less than a majority in aggregate principal amount of the Notes then outstanding may, on behalf of holders of all the Notes, waive compliance by the Company with certain restrictive provisions of the Indenture. The holders of not less than a majority in aggregate principal amount of the Notes may on behalf of all holders of Notes waive any existing or past default under the Indenture, except a continuing default in the payment of principal of, or interest on, any Note then outstanding or in respect of a covenant or provision which under the Indenture cannot be modified or amended without the consent of the holder of each Note then outstanding affected thereby. Any such waivers will be conclusive and binding on all holders of the Notes, whether or not they have given consent to such waivers, and on all future holders of such Notes, whether or not notation of such waivers is made upon such Notes. Any instrument given by or on behalf of any holder of a Note in connection with any consent to any such waiver will be irrevocable once given and will be conclusive and binding on all subsequent holders of such Note.

Certain Covenants Limitation on Liens The Indenture provides that the Company will not, and will not permit any Principal Subsidiary to, create, incur, assume or permit to exist any Lien upon any of its property or assets, now owned or hereafter acquired, to secure any Relevant Indebtedness of the Company or such Principal Subsidiary (or any guarantees or indemnity in respect thereof) without, in any such case, making effective provision whereby the Notes will be secured either at least equally and ratably with such Relevant Indebtedness or by such other Lien as shall have been approved by the holders of the Notes as provided in the Indenture, for so long as such Relevant Indebtedness will be so secured, unless, after giving effect thereto, the aggregate outstanding principal amount of all such secured Relevant Indebtedness entered into after the date of the Indenture does not exceed 10% of the Company’s Adjusted Consolidated Net Worth.

The foregoing restriction will not apply to:

(i) any Lien existing on or prior to the date of issue of the Notes;

(ii) any Lien existing on any property or asset prior to the acquisition thereof by the Company or arising after such acquisition pursuant to contractual commitments entered into prior to and not in contemplation of such acquisition;

(iii) any Lien on any property or asset securing Relevant Indebtedness incurred or assumed for the purpose of financing the purchase price thereof or the cost of construction, improvement or repair of all or any part thereof; provided that such Lien attaches to such property concurrently with or within 12 months after the acquisition thereof or completion of construction, improvement or repair thereof;

112 (iv) any Lien created or outstanding in favor of the Company or any of the Company’s Subsidiaries;

(v) any Lien arising or already arisen automatically by operation of law which is promptly discharged or disputed in good faith by appropriate proceedings;

(vi) any Lien on money paid to or money or securities deposited with a fiscal agent, trustee or depository to pay or discharge in full the obligations of the Company in respect of Relevant Indebtedness (provided that such money or securities so paid or deposited, and the proceeds therefrom, will be sufficient to pay or discharge such obligations in full); or

(vii) any Lien arising out of the refinancing, extension, renewal or refunding of any Relevant Indebtedness secured by any Lien permitted by any of the foregoing clauses; provided that such Relevant Indebtedness is not increased and is not secured by any additional property or assets.

Consolidation, Merger and Sale of Assets The Indenture provides that the Company will not consolidate with or merge into any other Person in a transaction in which the Company is not the surviving entity, or convey, transfer or lease its properties and assets substantially as an entirety to any Person unless:

(i) any Person formed by such consolidation or into which the Company is merged or to whom the Company has conveyed, transferred or leased its properties and assets substantially as an entirety is a corporation, partnership, trust or other entity validly existing under the laws of the jurisdiction of its organization and such Person expressly assumes by an indenture supplemental to the Indenture all the obligations of the Company under the Indenture or the Notes, as the case may be;

(ii) immediately after giving effect to the transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing;

(iii) any such Person not organized and tax resident only under the laws of Bermuda, Hong Kong or the PRC shall expressly agree in a supplemental indenture that its jurisdiction of organization and/or tax residency (or any political subdivision, territory or possession thereof, any taxing authority therein or any area subject to its jurisdiction) will be added to the list of Relevant Taxing Jurisdictions; and

(iv) if, as a result of the transaction, any property or asset of the Company or any of the Company’s Subsidiaries would become subject to a Lien that would not be permitted under ‘‘– Certain Covenants – Limitation on Liens’’ above, the Company or such successor Person takes such steps as shall be necessary to secure the Notes at least equally and ratably with the Relevant IndebtednesssecuredbysuchLienorbysuchotherLienasshallhavebeenapprovedbyholders of the Notes pursuant to the Indenture.

Reports So long as any of the Notes remain outstanding, the Company will file with the Trustee:

(i) as soon as they are available, but in any event within 180 calendar days after the end of the fiscal year of the Company, copies of its financial statements (on a consolidated basis and in the English language, which may be an English translation of the original financial statements) in respect of such financial year (including a statement of income, balance sheet and cash flow statement) audited by a member firm of independent accountants; and

(ii) as soon as they are available, but in any event within 120 calendar days after the end of the first semi-annual fiscal period of the Company, copies of its unaudited financial statement (on a consolidated basis and in the English language, which may be an English translation of the original

113 financial statements) in respect of such semi-annual period (including a statement of income, balance sheet and cash flow statement) prepared on a basis consistent with the audited financial statements of the Company, together with a certificate signed by the person then authorized to sign financial statements on behalf of the Company, to the effect that such financial statements are true in all material respects and present fairly the financial position of the Company, as at the end of, and the results of its operations for, the relevant semi-annual period; provided that if at any time the capital stock of the Company is listed for trading on a recognized stock exchange, the Company will file with the Trustee, as soon as they are available but in any event not more than 10 calendar days after any financial or other reports (in the English language, which may be an English translation of such reports) of the Company are filed with any recognized exchange on which the Company’s capital stock is at any time listed for trading, true and correct copies of any financial or other report filed with such exchange in lieu of the reports identified in clauses (i) and (ii) above.

So long as any of the Notes remain outstanding, the Company will file with the Trustee, as soon as possible and in any event within 10 days after the Company becomes aware of the occurrence thereof, written notice of the occurrence of any event or condition which constitutes, or which, after notice or lapse of time or both, would become, an Event of Default and an officer’s certificate of the Company setting forth the details thereof and the action the Company is taking or proposes to take with respect thereto.

Further, the Company will agree in the Indenture that, so long as the Notes remain outstanding and are ‘‘restricted securities’’ within the meaning of Rule 144(a)(3) under the Securities Act, the Company, during any period in which it is not subject to and in compliance with Section 13 or 15(d) of the U.S. Exchange Act or it is not exempt from such reporting requirements pursuant to and in compliance with Rule 12g3-2(b) under the U.S. Exchange Act, will furnish, upon the request of any holder of a Note or of a beneficial interest in a Note, such information as is specified in paragraph (d)(4) of Rule 144A, to such holder or beneficial owner or to a prospective purchaser of a Note or a beneficial interest in a Note who is a qualified institutional buyer within the meaning of Rule 144A, in order to permit compliance by the holder or beneficial owner with Rule 144A in connection with the resale of the Note or beneficial interest in the Note in reliance on Rule 144A.

Events of Default Each of the following shall constitute an ‘‘Event of Default’’ under the Indenture:

(i) failure to pay principal of, or premium on, if any, any Note on the date such amount is due and payable, upon optional redemption, required repurchase, acceleration or otherwise;

(ii) failure to pay interest on any Note within 30 days after the due date for such payment;

(iii) failure by the Company to comply with its obligations under the covenants described under ‘‘– Certain Covenants – Consolidation, Merger and Sale of Assets’’;

(iv) failure by the Company to comply, for 45 days after written notice by the holders of 25% or more of the aggregate principal amount of the outstanding Notes, with any of its obligations under the covenants described under ‘‘– Repurchase Upon a Change of Control Triggering Event’’ or the covenants described under ‘‘– Certain Covenants’’ (in each case, other than a failure to purchase Notes which will constitute an Event of Default under clause (i) above and other than a failure which will constitute an Event of Default under clause (iii) above);

(v) failure to perform any other covenant or agreement of the Company in the Indenture, and such failure continues for 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or by the holders of at least 25% in aggregate principal amount of the

114 Notes then outstanding (with a copy to the Trustee) a written notice specifying such failure and requiring it to be remedied and stating that such notice is a ‘‘Notice of Default’’ under the Indenture;

(vi) (a) failure to pay upon final maturity (after giving effect to the expiration of any applicable grace period therefor) the principal of any Indebtedness of the Company or any Principal Subsidiary, (b) acceleration of the maturity of any Indebtedness of the Company or any Principal Subsidiary following a default by the Company or such Principal Subsidiary, if such Indebtedness is not discharged, or such acceleration is not annulled, within 10 days after receipt by the Trustee of the written notice from the Company as provided in the Indenture, or (c) failure to pay any amount payable by the Company or any Principal Subsidiary under any guarantee or indemnity in respect of any Indebtedness of any other Person if such obligation is not discharged or otherwise satisfied within 10 days after receipt by the Trustee of written notice from the Company as provided in the Indenture; provided, however, that no such event set forth in clause (a), (b) or (c) shall constitute an Event of Default unless the aggregate outstanding Indebtedness to which all such events relate exceeds US$100,000,000 (or its equivalent in any other currency);

(vii) failure by the Company or any Principal Subsidiary to pay one or more final judgments from a court of competent jurisdiction aggregating in excess of US$100,000,000 (or its equivalent in other currencies), which judgments are not paid, discharged or stayed for a period of 60 days; or

(viii) certain events in bankruptcy, insolvency or reorganization in respect of the Company or any Principal Subsidiary as provided in the Indenture.

If an Event of Default (other than an Event of Default described in clause (viii) above) with respect to the Notes shall occur and be continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the Notes then outstanding by notice as provided in the Indenture may declare the principal amount of the Notes and any accrued and unpaid interest thereon to be due and payable immediately. If an Event of Default in clause (viii) above with respect to the Notes shall occur, the unpaid principal amount of all the Notes and any accrued and unpaid interest thereon will automatically, and without any action by the Trustee or any holder of Notes, become immediately due and payable. After any such acceleration but before a judgment or decree based on acceleration has been obtained, the holders of at least a majority in aggregate principal amount of the Notes then outstanding may, under certain circumstances, rescind and annul such acceleration if all Events of Default, other than the nonpayment of accelerated principal, have been cured or waived as provided in the Indenture. For information as to waiver of defaults, see ‘‘– Modification and Waiver.’’ See also ‘‘– Notices’’ below.

Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default shall occur and be continuing, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the holders of Notes unless such holders shall have offered to the Trustee security and/or indemnity satisfactory to the Trustee. Subject to certain provisions, including those requiring security and/or indemnification to the Trustee’s satisfaction, the holders of a majority in aggregate principal amount of the Notes then outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust orpowerconferredontheTrusteewithrespecttothe Notes. However, the Trustee may refuse to follow any direction that conflicts with applicable law or the Indenture, that may involve the Trustee in personal liability or cause it to expend or risk its own funds or otherwise incur any financial liability in following such direction and may take any other action it deems proper that is not inconsistent with any such direction received from holders. No holder of any Notes will have any right to institute any proceeding, judicial or otherwise, with respect to the Indenture, or for the appointment of a receiver or a trustee, or for any other remedy thereunder unless (i) such holder has previously given to the Trustee written notice of a continuing Event of Default with respect to the Notes, (ii) the holders of at least 25% in aggregate principal amount of the Notes then outstanding have made written request, and such holder or holders have offered to the Trustee indemnity

115 and/or security satisfactory to the Trustee, to institute such proceeding as trustee and (iii) the Trustee has failed to institute such proceeding, and has not received from the holders of a majority in aggregate principal amount of the Notes then outstanding a direction inconsistent with such request, within 60 days after such notice, request and offer. However, such limitations do not apply to a suit instituted by a holder of a Note for the enforcement of the right to receive payment of the principal of or interest on such Note on or after the applicable due date specified in such Note.

Neither the Company nor any of its Subsidiaries will, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes unless such consideration is (1) offered to be paid or agreed to be paid to all holders of the Notes and (2) paid to all holders of the Notes that consent, waive or agree to amend on the terms and within the time frame set forth in the solicitation documents relating to such consent, waiver or agreement.

Certain Definitions Set forth below are definitions of certain of the terms used herein. Additional terms are defined elsewhere above or in the Indenture.

‘‘Adjusted Consolidated Net Worth’’ means the sum of the Company’s (a) shareholders’ equity as determined under HKFRS and (b) Subordinated Indebtedness.

‘‘Capital Stock’’ means any and all shares, interests (including joint venture interests), participations or other equivalents (however designated) of capital stock of a corporation or any and all equivalent ownership interests in a Person (other than a corporation).

‘‘Change of Control’’ means the occurrence, at any time, of any of the following:

(i) the government of the PRC or Persons controlled by the government of the PRC ceasing to own and control directly or indirectly or in combination (through controlled Subsidiaries) at least 50.1% of the Voting Shares of CNPC;

(ii) the Company ceasing to be a consolidated subsidiary of CNPC under PRC generally accepted accounting principles; or

(iii) any ‘‘person’’ or ‘‘group’’ (as such terms are used in Sections 13(d) and 14(d) of the U.S. Exchange Act) is or becomes the ‘‘beneficial owner’’ (as such term is used in Rule 13d-3 of the U.S. Exchange Act), directly or indirectly, of total voting power of the Voting Shares of the Company greater than such total voting power held beneficially by the government of the PRC, CNPC or Persons controlled by the government of the PRC or CNPC; or

‘‘Change of Control Triggering Event’’ means a Change of Control, provided that, in the event that the Notes are, on the Rating Date, rated Investment Grade by two or more Rating Agencies, a Change of Control Triggering Event shall mean the occurrence of both a Change of Control and a Rating Decline. No Change of Control Triggering Event will be deemed to have occurred in connection with any particular Change of Control unless and until such Change of Control has actually been consummated.

‘‘CNPC’’ means China National Petroleum Corporation.

‘‘Indebtedness’’ of any Person means, at any date, without duplication, (i) any outstanding indebtedness for or in respect of money borrowed (including bonds, debentures, notes or other similar instruments, whether or not listed) that is evidenced by any agreement or instrument, excluding trade payables, (ii)

116 all non-contingent obligations of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, and (iii) all Indebtedness of others guaranteed by such Person.

‘‘Investment Grade’’ means a rating of ‘‘AAA,’’ ‘‘AA,’’ ‘‘A’’ or ‘‘BBB,’’ as modified by a ‘‘+’’ or ‘‘-’’ indication, or an equivalent rating representing one of the four highest rating categories, by S&P or any of its successors or assigns; a rating of ‘‘Aaa,’’ ‘‘Aa,’’ ‘‘A’’ or ‘‘Baa,’’ as modified by a ‘‘1,’’ ‘‘2’’ or ‘‘3’’ indication, or an equivalent rating representing one of the four highest rating categories, by Moody’sor any of its successors or assigns; a rating of ‘‘BBB-’’ or better by Fitch or any of its successors or assigns; or the equivalent ratings of any internationally recognized rating agency or agencies, as the case may be, which shall have been designated by the Company as having been substituted for S&P, Moody’s, or Fitch or any combination thereof, as the case may be.

‘‘Lien’’ means any mortgage, charge, pledge, lien, encumbrance, hypothecation, title retention, security interest or security arrangement of any kind.

‘‘Person’’ means any state-owned enterprise, individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, limited liability company, government or any agency or political subdivision thereof or any other entity.

‘‘PetroChina’’ means PetroChina Company Limited.

‘‘Principal Subsidiary’’ at any time shall mean one of the Company’sSubsidiaries

(i) as to which one or more of the following conditions is/are satisfied:

(a) its net profit or (in the case of one of the Company’sSubsidiarieswhichhasSubsidiaries) consolidated net profit attributable to the Company (in each case before taxation and exceptional items) is at least 10% of the Company’s consolidated net profit (before taxation and exceptional items); or

(b) its net assets or (in the case of one of the Company’s Subsidiaries which has Subsidiaries) consolidated net assets attributable to the Company (in each case after deducting minority interests in Subsidiaries) are at least 10% of the Company’s consolidated net assets (after deducting minority interests in Subsidiaries);

all as calculated by reference to the then latest audited financial statements (consolidated or, as the case may be, unconsolidated) of the Company’s Subsidiary and the Company’s then latest consolidated financial statements, provided that: (1) in the case of a Subsidiary of the Company acquired after the end of the financial period to which the then latest relevant audited accounts relate, the reference to the then latest audited accounts for the purposes of the calculation above shall, until audited accounts for the financial period in which the acquisition is made are published, be deemed to be a reference to the accounts adjusted to consolidate the latest audited accounts of the Subsidiary in the accounts; (2) if, in the case of a Subsidiary of the Company which itself has one or more Subsidiaries, no consolidated accounts are prepared and audited, its consolidated net assets and consolidated net profits shall be determined on the basis of pro forma consolidated accounts of the relevant Subsidiary and its Subsidiaries prepared for this purpose and opined on by its auditors; or (3) if the accounts of a Subsidiary of the Company (not being a Subsidiary referred to in (1) above) are not consolidated with those of the Company then the determination of whether or not the Subsidiary is a Principal Subsidiary shall, if the Company requires, be based on a pro forma consolidation of its accounts (consolidated, if appropriate) with the consolidated accounts of the Company and its Subsidiaries; or

117 (ii) to which is transferred all or substantially all of the assets of the Company’s Subsidiary which immediately prior to the transfer was a Principal Subsidiary, provided that, with effect from such transfer, the Subsidiary which so transfers its assets and undertakings shall cease to be a Principal Subsidiary (but without prejudice to paragraph (i) above) and the Company’s Subsidiary to which the assets are so transferred shall become a Principal Subsidiary.

A certificate of the Company’s auditors as to whether or not the Company’s Subsidiary is a Principal Subsidiary shall be conclusive and binding on all parties in the absence of manifest error.

‘‘Rating Agencies’’ means (i) Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., and its successors (‘‘S&P’’); (ii) Moody’s Investors Service, Inc., a subsidiary of Moody’s Corporation, and its successors (‘‘Moody’s’’); (iii) Fitch Inc., a subsidiary of Fimalac, S.A., and its successors (‘‘Fitch’’); and (iv) if one or more of S&P, Moody’s or Fitch shall not make a rating of the Notes publicly available, a United States nationally recognized securities rating agency or agencies, as the case may be, selected by the Company, which shall be substituted for S&P, Moody’sor Fitch or any combination thereof, as the case may be.

‘‘Rating Date’’ means, in connection with a Change of Control Triggering Event, that date which is 90 days prior to the earlier of (i) a Change of Control and (ii) a public notice of the occurrence of a Change of Control or of the intention by the Company or any other Person or Persons to effect a Change of Control.

‘‘Rating Decline’’ means, in connection with a Change of Control Triggering Event, the occurrence on, or within 180 days after, the date, or public notice of the occurrence of, a Change of Control or the intention by the Company or any other person or persons to effect a Change of Control (which period shall be extended (by no more than an additional 90 days after the consummation of the Change of Control) so long as the rating of the Notes is under publicly announced consideration for possible downgrade by any of the Rating Agencies) of any of the events listed below:

(i) in the event the Notes are (a) on the Rating Date (x) rated by three Ratings Agencies and (y) rated Investment Grade by each such Rating Agency, and (b) cease to be rated Investment Grade by at least two of such Rating Agencies; or

(ii) in the event the Notes are (a) on the Rating Date (x) rated by two but not more Ratings Agencies and (y) rated Investment Grade by each such Rating Agency, and (b) cease to be rated Investment GradebybothsuchRatingAgencies.

‘‘Relevant Indebtedness’’ of any Person means, at any date, Indebtedness, that (a) has a final maturity of one year or more from the date of incurrence or issuance of such Indebtedness and (b) is in the form of, is represented or embodied by, bonds, notes, debentures, debenture stock, loan stock or other securities which are, or intended to be, commonly quoted, listed or dealt in or traded on any stock exchange or securities market outside the PRC.

‘‘Subsidiary’’ means, as applied to any Person, any corporation or other entity of which a majority of the outstanding Voting Shares is, at the time, directly or indirectly, owned by such Person.

‘‘Subordinated Indebtedness’’ means the Company’s Indebtedness (including perpetual debt, which the Company is not required to repay) which (i) has a final maturity and a weighted average life to maturity longer than the remaining life to maturity of the Notes and (ii) is issued or assumed pursuant to, or evidenced by, an indenture or other instrument containing provisions for the subordination of such Indebtedness to the Notes including (x) a provision that in the event of the Company’s bankruptcy, insolvency or other similar proceeding, the holders of the Notes shall be entitled to receive payment in full in cash of all principal, Additional Amounts and interest on the Notes (including all interest arising after the commencement of such proceeding whether or not an allowed claim in such proceeding) before the holder or holders of any such Subordinated Indebtedness shall be entitled to receive any payment of

118 principal, interest or premium thereon, (y) a provision that, if an Event of Default has occurred and is continuing under the Indenture for the Notes, the holder or holders of any such Subordinated Indebtedness shall not be entitled to payment of any principal, interest or premium in respect thereof unless or until such Event of Default shall have been cured or waived or shall have ceased to exist, and (z) a provision that the holder or holders of such Subordinated Indebtedness may not accelerate the maturity thereof as a result of any default relating thereto so long as any Note is outstanding.

‘‘Voting Shares’’ means, with respect to any Person, the Capital Stock having the general voting power under ordinary circumstances to vote on the election of the members of the board of directors or other governing body of such Person (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency).

Defeasance and Discharge The Indenture provides that, upon the conditions set forth therein, the Company (i) may be discharged from all its obligations with respect to the Notes (except for certain obligations to exchange or register the transfer of Notes, to replace stolen, lost or mutilated Notes, to maintain paying agencies and to hold moneys for payment in trust and pay Additional Amounts), or (ii) need not comply with certain restrictive covenants of the Notes (including those described under ‘‘– Certain Covenants’’ and the events under paragraphs (vi) and (vii) under ‘‘– Events of Default’’ shall not constitute an Event of Default under the Indenture), in each case upon the deposit in trust for the benefit of the holders of the Notes of money in U.S. dollars or U.S. Government Obligations (as defined in the Indenture), or both, which, through the payment of principal and interest thereon in accordance with their terms, will provide money in an amount sufficient to pay the principal of and interest on the Notes (and any Additional Amounts known at such time and required to be paid in respect thereof) in accordance with the terms of the Indenture and the Notes. In the case of discharge pursuant to clause (i) above, the Company is required to deliver to the Trustee an opinion of independent legal counsel of recognized standing licensed to practice law in the United States to the effect that beneficial owners of the Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such deposit, defeasance or discharge and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit, defeasance or discharge had not occurred, which opinion of counsel must be based on a ruling received by the Company from the U.S. Internal Revenue Service or a published ruling of the U.S. Internal Revenue Service or other changes in applicable U.S. federal income tax law after the original issue date of the Notes.

Prescription Any moneys deposited with or paid to the Trustee or any paying agent of the Notes, or then held by the Company, in trust, for the payment of the principal of or interest on (or any Additional Amount payable in respect of) any Note and not applied but remaining unclaimed for two years after the date upon which such principal or interest shall have become due and payable, shall be repaid to the Company by the Trustee or such paying agent or (if then held by the Company) be discharged from such trust, unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, and the holder of such Note shall, unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property laws, thereafter look only to the Company for any payment which such holder may be entitled to collect, and all liability of the Trustee or any paying agent of the Notes with respect to such moneys shall thereupon cease.

Under New York law, any legal action upon the Notes must be commenced within six years after the payment thereof is due. Thereafter, the Notes will generally become unenforceable.

119 Concerning the Trustee The Bank of New York Mellon will be the Trustee under the Indenture. The Trustee’s office is currently located at 101 Barclay Street, New York, NY 10286, United States of America. The Company will appoint The Bank of New York Mellon as Paying Agent, Registrar and Transfer Agent (collectively, the ‘‘Agents’’, located at 101 Barclay Street, New York, NY 10286, United States of America.

The Indenture provides that the Trustee, except during the continuance of an Event of Default, undertakes to perform such duties and only such duties as are specifically set forth in the Indenture. If an Event of Default has occurred and is continuing, the Trustee will use the same degree of care and skill in its exercise of the rights and powers vested in it by the Indenture as a prudent person would exercise under the circumstances in the conduct of such person’s own affairs. The Indenture also provides that the Trustee and any paying or other agent of the Notes, in their individual or any other capacity, may become the owner or pledgee of Notes with the same rights it would have if it were not the trustee or such agent and may otherwise deal with the Company and receive, collect, hold and retain collections from the Company with the same rights it would have if it were not the trustee or such agent; provided, however, that all moneys received by the Trustee shall, until used or applied as provided in the Indenture, be held in trust thereunder for the purposes for which they were received and need not be segregated from other funds except to the extent required by law.

In order to comply with applicable tax laws, rules and regulations in effect from time to time, the Indenture will provide that each holder agrees by acquiring Notes to provide to the Company and the Trustee sufficient information about such holder and its transactions so the Trustee can determine whether it has tax related obligations under applicable law.

Indemnification for Judgment Currency Fluctuations To the fullest extent permitted by law, the obligations of the Company to any holder of Notes under the Indenture or the Notes, as the case may be, shall, notwithstanding any judgment in a currency (the ‘‘Judgment Currency’’) other than U.S. dollars (the ‘‘Agreement Currency’’), be discharged only to the extent that on the day following receipt by such holder or the Trustee, as the case may be, of any amount in the Judgment Currency, such holder or the Trustee, as the case may be, may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the amount originally to be paid to such holder or the Trustee, as the case may be, in the Agreement Currency, the Company agrees, as a separate obligation and notwithstanding such judgment, to pay the difference and if the amount of the Agreement Currency so purchased exceeds the amount originally to be paid to such holder, such holder or the Trustee, as the case may be, agrees to pay to or for the account of the Company such excess; provided that such holder or the Trustee, as the case may be, shall not have any obligation to pay any such excess as long as a default by the Company in its obligations under the Indenture or the Notes has occurred and is continuing, in which case such excess may be applied by such holder or the Trustee, as the case may be, to such obligations.

Governing Law and Consent to Jurisdiction The Notes and the Indenture are governed by and will be construed in accordance with the laws of the State of New York.

The Company will each irrevocably submit to the nonexclusive jurisdiction of any state or United States federal court located in the Borough of Manhattan, the City of New York, New York (each a ‘‘New York Court’’) in any suit, action or proceeding arising out of or relating to the Indenture, the Notes or any transaction contemplated thereby, and will irrevocably waive, to the fullest extent permitted by applicable law, any objection to the venue of any such suit, action or proceeding in any such New York Court and any claim of an inconvenient forum. The Company has appointed National Corporate Research, Ltd. as agent for service of process with respect of any such suit, action or proceeding.

120 Waiver of Immunity To the extent that the Company has or hereafter may acquire any immunity (sovereign or otherwise) from any legal action, suit or proceeding, from jurisdiction of any court or from set-off or any legal process (including any immunity from nonexclusive jurisdiction or from service of process or, except as provided below, from any execution to satisfy a final judgment or from attachment or in aid of such execution or otherwise) with respect to itself or any of its property, the Company irrevocably waives, to the fullest extent permitted under applicable law, any such right of immunity or claim thereto which may now or hereafter exist, and agrees not to assert any such right or claim in any action or proceeding against it arising out of or based on the Notes or the Indenture.

Notices Notices to holders of Notes will be mailed to them (or the first named of joint holders) by first class mail (or, if first class mail is unavailable, by airmail) at their respective addresses in the register and will be deemed to have been given on the fourth Business Day after the date of mailing. So long as and to the extent that the Notes are represented by global notes and such global notes are held by DTC, notices to owners of beneficial interests in the global notes may be given by delivery of the relevant notice to DTC for communication by it to entitled account holders.

Notes; Delivery and Form The statements set forth herein include summaries of certain rules and operating procedures of DTC, Euroclear and Clearstream, Luxembourg which will affect transfers of interests in the global notes.

The Notes sold in offshore transactions in reliance on Regulation S under the Securities Act will be initially in the form of one or more Regulation S global notes, fully registered without interest coupons, which will be deposited with The Bank of New York Mellon, as custodian for DTC (in such capacity, the ‘‘Custodian’’) and registered in the name of Cede & Co., as nominee of DTC, for the accounts of Euroclear and Clearstream, Luxembourg, as participants in DTC.

The Notes sold to QIBs in reliance on Rule 144A under the Securities Act will be issued initially in the form of one or more Rule 144A global notes, fully registered without interest coupons, which will be deposited with the Custodian for DTC and registered in the name of Cede & Co., as nominee of DTC.

The Notes will be issued in minimum denominations of US$200,000 and in integral multiples of US$1,000 in excess of that amount.

The Notes (including beneficial interests in the global notes) will be subject to certain restrictions on transfer set forth therein and in the Indenture and will bear a legend regarding such restrictions as set forth under ‘‘Transfer Restrictions.’’ Under certain circumstances, transfers may be made only upon receipt by the Trustee of a written certification (in the form(s) provided in the Indenture).

A beneficial interest in a Regulation S global note may be transferred within the United States to a person who takes delivery in the form of an interest in the related Rule 144A global note only if the transferor, and any person acting on its behalf, reasonably believes that the transferee is a QIB, and upon receipt by the Trustee of a written certification (in the form(s) provided in the Indenture) (a) from the transferee to the effect that such transferee (i) is a QIB purchasing for its own account (or for the account of one or more QIBs over which account it exercises sole investment discretion) and (ii) agrees to comply with the restrictions on transfer set forth under ‘‘Transfer Restrictions,’’ and (b) from the transferor to the effect that the transfer was made to a person whom the transferor reasonably believes is a QIB acquiring for its own account or the account of a QIB and that the transferor has informed the transferee that the transfer is being made in reliance on Rule 144A.

121 Beneficial interests in a Rule 144A global note may be transferred to a person who takes delivery in the form of an interest in a Rule 144A global note without any written certification from the transferor or the transferee. Beneficial interests in a Rule 144A global note may be transferred to a person who takes delivery in the form of an interest in a Regulation S global note only upon receipt by the Trustee of written certifications (in the form(s) provided in the Indenture) from the transferor to the effect that such transfer is being made pursuant to Rule 903 or Rule 904 of Regulation S or pursuant to Rule 144 under the Securities Act (if available).

Any individual Notes issued in exchange for an interest in a Rule 144A global note under the circumstances described under ‘‘– Individual Notes’’ below may be transferred only upon receipt by the Trustee of a written certification from the transferor (in the form(s) provided in the Indenture) to the effect that such transfer is being made in accordance with the restrictions on transfer set forth under ‘‘Transfer Restrictions.’’

Any beneficial interest in one of the global notes that is transferred to an entity who takes delivery in the form of an interest in the other global note will, upon transfer, cease to be an interest in such global note and become an interest in the other global note and, accordingly, will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to beneficial interests in such other global note for as long as it remains such an interest.

Investors may hold their interests in the global notes directly through DTC, Clearstream, Luxembourg or Euroclear, as the case may be, if they are participants in such systems, or indirectly through organizations which are participants in such systems. Clearstream, Luxembourg and Euroclear will hold interests in the Regulation S global notes on behalf of their participants through customers’ securities accounts in their respective names on the books of their respective depositaries, which are participants in DTC.

Transfers between participants in DTC (the ‘‘Participants’’) will be effected in the ordinary way in accordance with DTC rules. Transfers between participants in Clearstream, Luxembourg and Euroclear (‘‘Clearstream Participants’’ and ‘‘Euroclear Participants,’’ respectively) will be effected in the ordinary way in accordance with their respective rules and operating procedures.

Persons who are not Participants may beneficially own interests in the global notes held by DTC only through Participants or Indirect Participants (as defined below) (including Euroclear and Clearstream, Luxembourg). So long as Cede & Co., as the nominee of DTC, is the registered owner of the global notes, Cede & Co., for all purposes will be considered the sole holder of such Notes.

Payment of interest on and principal of the global notes will be made to Cede & Co., the nominee for DTC, as the registered owner of the global notes by wire transfer of immediately available funds. None of the Company, the Trustee or the Agents will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the global notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest.

The Company has been informed by DTC that, upon receipt of any payment of interest on or the redemption price of the global notes, DTC will credit Participants’ accounts with payments in amounts proportionate to their respective beneficial interests in the global notes as shown on the records of DTC. Payments of interest on and principal of the Notes held through Clearstream, Luxembourg or Euroclear will be credited to the cash accounts of Clearstream Participants or Euroclear Participants, as the case may be, in accordance with the relevant system’s rules and procedures. Payments by Participants to owners of beneficial interests in the global notes held through such Participants will be the responsibility of such Participants, as is the case with securities held by broker-dealers, either directly or through nominees, for the accounts of customers and registered in ‘‘street name.’’

122 Because DTC can only act on behalf of Participants, who in turn act on behalf of Indirect Participants and certain banks, the ability of a person having a beneficial interest in the global notes to pledge such interest to persons or entities that do not participate in the DTC system, or to otherwise take actions in respect of such interest, may be affected by the lack of a physical certificate.

So long as the Notes are represented by global notes and such global notes are held on behalf of DTC or any other clearing system, such clearing system or its nominee will be considered the sole holder of the Notes represented by the applicable global notes for all purposes under the Indenture, including, without limitation, obtaining consents and waivers thereunder, and neither the Company or the Trustee shall be affected by any notice to the contrary. None of the Company, the Trustee or the Agents shall have any responsibility or obligation with respect to the accuracy of any records maintained by any clearing system or any Participant of such clearing system. The clearing systems will take actions on behalf of their Participants (and any such Participants will take actions on behalf of any Indirect Participants) in accordance with their standard procedures. To the extent that any clearing system acts upon the direction of the holders of the beneficial interests in the applicable global note and such beneficial holders give conflicting instructions, the applicable clearing system may take conflicting actions in accordance with such instructions.

DTC has advised the Company that it will take any action permitted to be taken by a holder of Notes (including, without limitation, the presentation of Notes for exchange) only at the direction of one or more Participants and only in respect of the principal amount of the Notes represented by the global note as to which such Participant or Participants has or have given such direction.

Clearstream, Luxembourg or Euroclear, as the case may be, will take any action permitted to be taken by a holder of Notes (including, without limitation, the presentation of Notes for exchange) on behalf of a Clearstream Participant or a Euroclear Participant only in accordance with its relevant rules and procedures and subject to its ability to effect such actions through DTC.

DTC has advised the Company as follows:

DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a ‘‘clearing corporation’’ within the meaning of the Uniform Commercial Code and a ‘‘Clearing Agency’’ registered pursuant to the provisions of Section 17A of the U.S. Exchange Act. DTC was created to hold securities for its Participants and facilitate the clearance and settlement of securities transactions between Participants through electronic book-entry changes in accounts of its Participants, thereby eliminating the need for the physical movement of certificates.

Participants include securities brokers and dealers, banks, trust companies and clearing corporations and may include certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (‘‘Indirect Participants’’).

Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of interests in the global notes among participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of the Company, the Trustee or the Agents will have any responsibility for the performance by DTC, Clearstream, Luxembourg and Euroclear, or their respective Participants or Indirect Participants, of their respective obligations under the rules and procedures governing their operations.

Individual Notes If DTC is at any time unwilling or unable to continue as depositary and a successor depositary is not appointed by the Company within 90 days or if there shall have occurred and be continuing an Event of Default (as described above) with respect to the Notes, the Company will issue individual notes in certificated, fully registered form in exchange for the global notes.

123 Subject to the transfer restrictions set forth on the individual notes in certificated form, the holder of such individual notes in certificated form may transfer or exchange such Notes by surrendering them at the corporate trust office of the Trustee. Prior to any proposed transfer of individual notes in certificated form (other than pursuant to an effective registration statement), the holder may be required to provide certifications and other documentation relating to the manner of such transfer and submit such certifications and other documentation to the Trustee as described under ‘‘– Notes; Delivery and Form’’ above. Upon the transfer, exchange or replacement of individual notes in certificated form not bearing the legend referred to under ‘‘Transfer Restrictions,’’ the Trustee will deliver individual notes in certificated form that do not bear the legend. Upon the transfer, exchange or replacement of individual notes in certificated form bearing the legend, or upon specific request for removal of the legend on an individual note in certificated form, the Trustee will deliver only individual notes in certificated form that bear such legend or shall refuse to remove such legend, as the case may be, unless there is delivered to the Company such satisfactory evidence, which may include an opinion of counsel, as may reasonably be required by the Company that neither the legend nor the restrictions on transfer set forth therein are required to ensure compliance with the provisions of the Securities Act.

124 TRANSFER RESTRICTIONS

Because of the following restrictions, purchasers are advised to consult legal counsel prior to making any offer, sale, resale, pledge or other transfer of the Notes.

Each purchaser of the Notes will be deemed to have represented and agreed as follows (terms used in this paragraph that are defined in Rule 144A or in Regulation S under the Securities Act are used herein as defined therein):

(1) it is not an ‘‘affiliate’’ (as defined in Rule 144 under the Securities Act) of the Company or acting on behalf of the Company and (A)(i) is a Qualified Institutional Buyer, (ii) is aware that the sale of the Notes to it is being made in reliance on Rule 144A and (iii) is acquiring such Notes for its own account or the account of a Qualified Institutional Buyer, or (B) is outside the United States;

(2) it acknowledges that the Notes have not been and will not be registered under the Securities Act or with any securities regulatory authority of any jurisdiction and may not be offered or sold within the United States except as set forth below;

(3) it understands and agrees that if it decides to resell, pledge or otherwise transfer any Notes or any beneficial interests in any Notes other than a Regulation S global note within the time period referred to in Rule 144(d) under the Securities Act with respect to such resale, pledge or transfer, such Notes may be resold, pledged, or transferred only, (a) if such purchaser is an initial investor, (i) to the Company or any subsidiary thereof, (ii) to a person whom the seller reasonably believes is a Qualified Institutional Buyer that purchases for its own account or for the account of a Qualified Institutional Buyer in a transaction meeting the requirements of Rule 144A, (iii) in an offshore transaction meeting the requirements of Rule 903 or Rule 904 of Regulation S under the Securities Act or (iv) pursuant to an exemption from registration under the Securities Act provided by Rule 144 under the Securities Act (if available); (b) if such purchaser is a subsequent investor, as set forth in (a) above and, in addition, pursuant to any available exemption from the registration requirements under the Securities Act (provided that as a condition to the registration of transfer of any Notes otherwise than as described in a(i), (a)(ii) or (a)(iii) above or (c) below, the Company, the Trustee, the Paying Agent or the Registrar may, in circumstances that any of them deems appropriate, require evidence as to compliance with any such exemption); or (c) pursuant to an effective registration statement under the Securities Act, and in each of such cases, in accordance with any applicable securities laws of any state of the United States and any other jurisdiction;

(4) it agrees to, and each subsequent holder is required to, notify any purchaser of the Notes from it of the resale restrictions referred to in clause 3 above, if then applicable;

(5) it understands and agrees that (A) the Notes initially offered in the United States to Qualified Institutional Buyers will be represented by Rule 144A global notes and (B) the Notes offered outside the United States in reliance on Regulation S will be represented by Regulation S global notes;

(6) it understands that the Notes will bear a legend to the following effect, unless otherwise agreed to by the Company:

[IN THE CASE OF RULE 144A GLOBAL NOTES] THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE ‘‘SECURITIES ACT’’), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS A ‘‘QUALIFIED INSTITUTIONAL BUYER’’ (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT,

125 (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(d) UNDER THE SECURITIES ACT AS IN EFFECT WITH RESPECT TO SUCH TRANSFER, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE ISSUER OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 903 OR RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS ‘‘OFFSHORE TRANSACTION’’ AND ‘‘UNITED STATES’’ HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS.

[IN THE CASE OF REGULATION S GLOBAL NOTES] THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED, OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY JURISDICTION, AND MAY NOT BE TRANSFERRED IN THE UNITED STATES EXCEPT PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ALL APPLICABLE STATE SECURITIES LAWS.

(7) it acknowledges that the Company and the Initial Purchasers, the Trustee, the Paying Agent, the Transfer Agent, the Registrar and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements and agrees that, if any of such acknowledgments, representations or agreements deemed to have been made by virtue of its purchase of Notes are no longer accurate, it shall promptly notify the Company, and if it is acquiring any Notes as a fiduciary or agent for one or more accounts, it represents that it has sole investment discretion with respect to each such account and that it has full power to make the foregoing acknowledgments, representations and agreements on behalf of each such account.

For further discussion of the requirements (including the presentation of transfer certificates) under the Indentures to effect exchanges of transfer of interests in the global notes and of the Notes in certificated form, see ‘‘Description of the Notes – Notes; Delivery and Form.’’

126 EXCHANGE RATES

PRC

The PBOC sets and publishes daily a base exchange rate with reference primarily to the supply and demand of Renminbi against a basket of currencies in the market during the prior day. PBOC also takes into account other factors, such as the general conditions existing in the international foreign exchange markets. From 1994 to July 20, 2005, the conversion of Renminbi into foreign currencies, including Hong Kong dollars and U.S. dollars, was based on rates set daily by PBOC on the basis of the previous day’s inter-bank foreign exchange market rates and then current exchange rates in the world financial markets. During this period, the official exchange rate for the conversion of Renminbi to U.S. dollars remained generally stable. Although the PRC government introduced policies in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currencies for current account items, conversion of Renminbi into foreign currencies for capital items, such as foreign direct investment, loan principals and securities trading, still requires the approval of SAFE and other relevant authorities. On July 21, 2005, the PRC government introduced a managed 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 currencies. On the same day, the value of the Renminbi appreciated by approximately 2% against the U.S. dollar. On May 18, 2007, PBOC enlarged the floating band for the trading prices in the inter-bank foreign exchange market of the Renminbi against the U.S. dollar from 0.3% to 0.5% around the central parity rate, effective on May 21, 2007. This allows the Renminbi to fluctuate against the U.S. dollar by up to 0.5% above or below the central parity rate published by PBOC. The floating band was further widened to 1.0% on April 16, 2012 and to 2.0% on March 17, 2014. From July 21, 2005 to December 31, 2014, the value of the Renminbi appreciated by approximately 33% against the U.S. dollar. The PRC government has since made and in the future may make further adjustments to the exchange rate system. PBOC authorized the China Foreign Exchange Trading Center, effective since January 4, 2006, to announce the central parity exchange rate of certain foreign currencies against the Renminbi on each business day. This rate is set as the central parity for the trading against the Renminbi in the inter-bank foreign exchange spot market and the over-the- counter exchange rate for the business day.

The following table sets forth the exchange rate between Renminbi and the U.S. dollar set forth in the H.10 weekly statistical release of the Board of Governors of the Federal Reserve System of the United States for the periods indicated:

Period Period end Average(1) High Low (RMB per US$1.00) 2010 ...... 6.6000 6.7603 6.8330 6.6000 2011 ...... 6.2939 6.4475 6.6364 6.2939 2012 ...... 6.2303 6.3085 6.3879 6.2221 2013 ...... 6.0537 6.1412 6.2438 6.0537 2014 ...... 6.2046 6.1620 6.2591 6.0402 October ...... 6.1124 6.1251 6.1385 6.1107 November ...... 6.1429 6.1249 6.1429 6.1117 December...... 6.2046 6.1886 6.2256 6.1490 2015 January ...... 6.2495 6.2181 6.2535 6.1870 February ...... 6.2695 6.2518 6.2695 6.2399 March ...... 6.1990 6.2386 6.2741 6.1955 April (through April 17, 2015) ...... 6.1976 6.2010 6.2152 6.1930

Source: Federal Reserve H.10 Statistical Release

Note:

(1) Determined by averaging the rates on the last business day of each month during the relevant year, except for the monthly average rates, which are determined by averaging the daily rates during the month.

127 Hong Kong The Hong Kong dollar is freely convertible into other currencies, including the U.S. dollar. Since October 17, 1983, the Hong Kong dollar has been linked to the U.S. dollar at the rate of HK$7.80 to US$1.00. The Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China (the ‘‘Basic Law’’), which came into effect on July 1, 1997, provides that no foreign exchange control policies shall be applied in Hong Kong.

The market exchange rate of the Hong Kong dollar against the U.S. dollar continues to be determined by the forces of supply and demand in the foreign exchange market. However, against the background of the fixed rate system which applies to the issuance and withdrawal of Hong Kong currency in circulation, the market exchange rate has not deviated significantly from the level of HK$7.80 to US$1.00. In May 2005, the Hong Kong Monetary Authority broadened the 22-year-old trading band from the original rate of HK$7.80 per U.S. dollar to a rate range of HK$7.75 to HK$7.85 per U.S. dollar. The Hong Kong government has indicated its intention to maintain the link within that rate range. Under the Basic Law, the Hong Kong dollar will continue to circulate and remain freely convertible. The Hong Kong government has also stated that it has no intention of imposing exchange controls in Hong Kong and that the Hong Kong dollar will remain freely convertible into other currencies, including the U.S. dollar. However, no assurance can be given that the Hong Kong government will maintain the link within the current rate range or at all.

Thefollowingtablesetsforththeexchangeratebetween Hong Kong dollar and the U.S. dollar set forth in the H.10 weekly statistical release of the Board of Governors of the Federal Reserve System of the United States for the periods indicated:

Period Period end Average(1) High Low (HK$ per US$1.00) 2010 ...... 7.7810 7.7692 7.8040 7.7501 2011 ...... 7.7663 7.7793 7.8087 7.7634 2012 ...... 7.7507 7.7556 7.7699 7.7493 2013 ...... 7.7539 7.7565 7.7654 7.7503 2014 ...... 7.7531 7.7554 7.7669 7.7495 October ...... 7.7551 7.7572 7.7645 7.7541 November ...... 7.7548 7.7543 7.7572 7.7519 December...... 7.7531 7.7541 7.7616 7.7509 2015 January ...... 7.7529 7.7531 7.7563 7.7508 February ...... 7.7559 7.7551 7.7584 7.7517 March ...... 7.7540 7.7584 7.7686 7.7534 April (through April 17, 2015) ...... 7.7510 7.7512 7.7525 7.7499

Source: Federal Reserve H.10 Statistical Release

Note:

128 TAXATION

The following summary of certain tax consequences of the purchase, ownership and disposition of Notes is based upon applicable laws, rules and regulations in effect as of the date of this Offering Memorandum, all of which are subject to change (possibly with retroactive effect). This discussion does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase, own or dispose of the Notes and does not purport to deal with consequences applicable to all categories of investors, some of which may be subject to special rules. Persons considering the purchase of Notes should consult their own tax advisors concerning the tax consequences of the purchase, ownership and disposition of Notes, including any possible consequences under the laws of their country of citizenship, residence or domicile.

PRC

Taxation on Interest Pursuant to the EIT Law and its implementation regulations, enterprises that are established under laws of foreign countries and regions whose ‘‘de facto management bodies’’ are within the territory of the PRC are treated as PRC tax resident enterprises for the purpose of the EIT Law and must pay enterprise income tax at the rate of 25% in respect of their income sourced from both within and outside the PRC. If the relevant PRC tax authorities decide, in accordance with applicable tax rules and regulations, that the ‘‘de facto management body’’ of the Company is within the territory of the PRC, we may be treated as a PRC tax resident enterprise for the purpose of the EIT Law and be subject to enterprise income tax at the rate of 25% on its income from sources both within and outside the PRC.

The EIT Law, its implementation regulations impose withholding tax at the rate of 10%, or a lower rate if tax treaty benefits are available, on PRC-source income paid to a ‘‘non-resident enterprise’’ that does not have an establishment or place of business in the PRC or that has an establishment or place of business in the PRC but the relevant income is not effectively connected therewith. Pursuant to these provisions of the EIT Law, in the event that we are considered a PRC resident enterprise by the PRC tax authorities in the future, interest payable to non-resident enterprise holders of the Notes may be treated as income derived from sources within the PRC and be subject to such PRC withholding tax. Further, in accordance with the Individual Income Tax Law of the PRC which took effect on September 1, 2011 and its implementation regulations which took effect on September 1, 2011, if we are considered a PRC tax resident enterprise, interest payable to non-resident individual holders of the Notes may be treated as income derived from sources within the PRC and be subject to a 20% individual income tax; accordingly, if we are treated as a PRC tax resident enterprise, we would be obliged to withhold such individual income tax on payments of interests to non-resident individual holders of the Notes. To the extent that the PRC has entered into arrangements relating to the avoidance of double-taxation with any jurisdiction, such as Hong Kong, that allow a lower rate of withholding tax, such lower rate may apply to qualified holders of the Notes.

As confirmed by us, as of the date of this Offering Memorandum, we have not been given notice or informed by the PRC tax authorities that it is considered as a PRC tax resident enterprise for the purpose of the EIT Law. On that basis, non-resident enterprise holders of the Notes will not be subject to income tax imposed by any governmental authority in the PRC in respect of the holding of the Notes or any repayment of principal and payment of interest made thereon. However, there is no assurance that we will not be treated as a PRC tax resident enterprise under the EIT Law and related implementation regulations in the future.

Taxation on Capital Gains The EIT Law and its implementation regulations impose a tax at the rate of 10%, or a lower rate if tax treaty benefits are available, on income derived from sources within the PRC realized by a ‘‘non-resident enterprise’’ that does not have an establishment or place of business in the PRC or that has an establishment or place of business in the PRC but the relevant gain is not effectively connected

129 therewith. The Individual Income Tax Law and its implementation regulations impose a tax at the rate of 20% on income derived from sources within the PRC realized by non-resident individuals. If we are considered a PRC resident enterprise by the PRC tax authorities in the future, and if the capital gains realized by holders of the Notes are treated as income derived from sources within the PRC, such gains will be subject to PRC tax. To the extent that the PRC has entered into arrangements relating to the avoidance of double-taxation with any jurisdiction, such as Hong Kong, that allow a lower rate of tax, such lower rate may apply to qualified non-resident holders of the Notes, if both us and the investors qualify for benefits under the applicable tax treaty.

Stamp Duty No PRC stamp tax will be chargeable upon the issue or transfer of a Note to the extent that the register of holders of the Notes is maintained outside the PRC. We intend to maintain the register of holders of the Notes outside the PRC.

Bermuda At the present time, there is no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by us or by our shareholders in respect of our shares. We have obtained an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not, until March 31, 2035, be applicable to us or to any of our operations or to our shares, debentures or other obligations except insofar as such tax applies to persons ordinarily resident in Bermuda or is payable by us in respect of real property owned or leased by us in Bermuda.

Hong Kong Withholding Tax No withholding tax in Hong Kong is payable on payments of principal (including any premium payable on redemption of the Notes) or distributions in respect of the Notes.

Profits Tax Hong Kong profits tax is charged on every person carrying on a trade, profession or business in Hong Kong in respect of assessable profits arising in or derived from Hong Kong from such trade, profession or business.

Under the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong) (the ‘‘Inland Revenue Ordinance’’) as it is currently applied, Hong Kong profits tax may be charged on revenue profits arising on the sale, disposal or redemption of the Notes where such sale, disposition or redemption is or forms part of a trade, profession or business carried on in Hong Kong. Interest payments on the Notes will be subject to Hong Kong profits tax where such payments have a Hong Kong source, and are received by or accrue to:

• a financial institution (as defined in the Inland Revenue Ordinance) and arises through or from the carrying on by the financial institution of its business in Hong Kong; or

• a corporation carrying on a trade, profession or business in Hong Kong; or

• a person, other than a corporation, carrying on a trade, profession or business in Hong Kong and such distribution is in respect of the funds of the trade, profession or business.

Although no tax is imposed in Hong Kong in respect of capital gains, Hong Kong profits tax may be chargeable on trading gains arising on the sale or disposition of the Notes where such transactions are or form part of a trade, profession or business carried on in Hong Kong.

130 Stamp Duty No Hong Kong stamp duty will be chargeable upon the issue or transfer of a Note (for so long as the register of holders of the Notes is maintained outside Hong Kong).

United States Federal Income Tax Considerations The following is a summary of certain United States federal income tax considerations of the purchase, ownership and disposition of Notes by a ‘‘U.S. holder’’ (as defined below) who acquired our Notes upon original issuance at their initial offering price and who hold their Notes as ‘‘capital assets’’ (generally, property held for investment) for United States federal income tax purposes. 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 investors subject to special tax rules (e.g., financial institutions, insurance companies, broker-dealers, partnerships and their partners, tax-exempt organizations (including private foundations), investors who are not U.S. holders, investors who are traders in securities that have elected the mark-to-market method of accounting, investors who hold Notes as part of a hedge, straddle, conversion, or other integrated security transaction, investors holding the Notes in connection with a trade or business conducted outside the United States, or investors whose functional currency is not 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 address any state, local or non-United States tax considerations, the Medicare tax, or the Alternative Minimum Tax. You are urged to consult your tax advisors regarding the United States federal, state, local, and non-United States income and other tax considerations of an investment in our Notes.

For purposes of this summary, a ‘‘U.S. holder’’ is a beneficial owner of our Notes that is, for United States federal income tax purposes:

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

• a corporation created in, or organized under the law of, the United States, any state thereof or the District of Columbia;

• an estate the income of which is subject to United States federal income taxation regardless of its source; or

• a trust if it is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust.

If a partnership is a beneficial owner of our Notes, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partnership or a partner of a partnership holding our Notes, you are urged to consult your tax advisors regarding the United States federal income tax considerations of an investment in our Notes.

Payments of Interest Stated interest (including any PRC taxes withheld and without duplication, any Additional Amounts paid with respect thereto) on the Notes will generally be taxable to you as ordinary income at the time it is paid or accrued in accordance with your method of accounting for United States federal income tax purposes.

Sale, Exchange or Other Disposition of the Notes Your basis in a Note will, in general, be your cost for that Note. Upon the sale, exchange or other taxable disposition of a Note, you will recognize gain or loss equal to the difference between the amount realized upon the sale, exchange or other disposition (less an amount equal to any accrued but unpaid

131 interest, which will be taxable as ordinary interest income to the extent not previously included in income) and your adjusted tax basis in the Note. Such gain or loss will be capital gain or loss and, subject to the discussion below under ‘‘Foreign Tax Credit’’, will generally be treated as United States source gain or loss for foreign tax credit purposes. Certain non-corporate U.S. holders (including individuals) may qualify for preferential rates of United States federal income taxation in respect of long-term capital gains. The deductibility of capital losses is subject to certain limitations.

Foreign Tax Credit If any foreign taxes are paid on or withheld from any payments in respect of the Notes, a U.S. holder may be entitled to claim either a deduction or a foreign tax credit for United States federal income tax purposes for such foreign taxes withheld at a rate not exceeding any applicable treaty rate, subject to certain limitations (including that the election to deduct non-U.S. taxes in lieu of claiming foreign tax credits must apply to all of the holder’s non-U.S. taxes for a particular tax year). Interest income (including any Additional Amounts) on a Note generally will be considered foreign source income and, for purposes of the foreign tax credit, generally will be considered ‘‘passive income’’.

Because gain or loss on a sale or disposition of a Note generally will be U.S. source gain or loss, a U.S. holder may not be able to claim a credit for any foreign taxes imposed upon a disposition of a Note unless such credit can be applied (subject to certain limitations) against tax due on other income treated as derived from foreign source. If, however, any PRC tax is imposed upon a disposition of a Note and the U.S. holder is eligible for the benefits of theU.S.-Chinaincometaxtreaty,gainfromsuch disposition may be resourced as foreign source gain under the treaty. U.S. holders are urged to consult their tax advisors regarding the tax consequences if PRC tax is imposed on the disposition of a Note, including the application of the foreign tax credit rules to their particular circumstances.

A U.S. holder will generally be denied a foreign tax credit for foreign taxes imposed with respect to the Notes where the holder does not meet a minimum holding period requirement during which the holder is not protected from risk of loss. The rules governing the foreign tax credit are complex. U.S. holders are urged to consult their tax advisers regarding the availability and advisability of claiming a foreign tax credit or a deduction under their particular circumstances.

Information Reporting and Backup Withholding Information returns may be filed with the IRS in connection with payments with respect to the Notes unless the U.S. holder establishes that it is exempt under the information reporting rules. If information reports are required to be made, a U.S. holder may be subject to backup withholding on these payments if it fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, the backup withholding requirements. The amount of any backup withholding imposed on a payment will be allowed as a credit against any U.S. federal income tax liability of a U.S. holder and may entitle the U.S. holder to a refund, provided the required information is timely furnished to the Internal Revenue Service.

U.S. holders should consult their own tax advisers regarding any reporting or filing obligations they may have as a result of purchasing, owning or disposing of the Notes. Failure to comply with certain reporting obligations could result in the imposition of substantial penalties.

132 PLAN OF DISTRIBUTION

Subject to the terms and conditions set forth in a purchase agreement (the ‘‘Purchase Agreement’’) among us, and Citigroup Global Markets Inc. and Morgan Stanley & Co. International plc, as representatives for the initial purchasers named below (the ‘‘Initial Purchasers’’), we have agreed to sell to the Initial Purchasers, and each of the Initial Purchasers has agreed, severally and not jointly, to purchase from us, the principal amount of the Notes set forth opposite its name below.

Principal Amount of Initial Purchaser Notes CitigroupGlobalMarketsInc...... US$@@ MorganStanley&Co.Internationalplc...... US$@@ CreditSuisseSecurities(Europe)Limited...... US$@@ GoldmanSachs(Asia)L.L.C...... US$@@ The Hongkong and Shanghai Banking Corporation Limited ...... US$@@ StandardCharteredBank...... US$@@ Total...... US$@@

Subject to the terms and conditions set forth in the Purchase Agreement, the Initial Purchasers have agreed, severally and not jointly, to purchase the Notes sold under the Purchase Agreement. The Purchase Agreement provides that the obligations of the Initial Purchasers to purchase the Notes are subject to certain conditions, including, among others, the receipt by the Initial Purchasers of documentation related to the issuance and settlement of the Notes, officer’s certificates and legal opinions. The Purchase Agreement may be terminated by the Initial Purchasers in certain circumstances prior to the delivery of and payment for the Notes.

We have agreed to indemnify the Initial Purchasers against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Initial Purchasers may be required to make in respect of those liabilities.

The Initial Purchasers propose initially to offer the Notes at the offering price set forth on the cover page of this Offering Memorandum.

New Issue of Notes The Notes are a new issue of securities with no established trading market. Application has been made to the HKSE for listing of, and permission to deal in, the Notes by way of debt issue to professional investors only. We have been advised by the Initial Purchasers that they presently intend to make a market in the Notes after completion of the offering. However, they are under no obligation to do so and may discontinue any market-making activities at any time without any notice. We cannot assure the liquidity of the trading market for the Notes. If an active trading market for the Notes does not develop, the market price and liquidity of the Notes may be adversely affected. If the Notes are traded, they may trade at a discount from their initial offering price, depending on prevailing interest rates, the market for similar securities, our operating performance and financial condition, general economic conditions and other factors.

Settlement We expect that delivery of the Notes will be made to investors on or about the closing date specified on the cover page of this Offering Memorandum, which will be the fifth business day following the date of this Offering Memorandum (such settlement being referred to as ‘‘T+5’’). Under Rule 15c6-1 under the Exchange Act, trades in the secondary market are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Purchasers of the Notes who wish to trade the Notes prior to their date of delivery hereunder should consult their advisors.

133 Short Positions and Stabilizing Transactions In connection with the offering, each of Citigroup Global Markets Inc. and Morgan Stanley & Co. International plc as the Stabilizing Manager may purchase and sell the Notes in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing purchases. Short sales involve the sale by the Stabilizing Manager of a greater principal amount of the Notes than they are required to purchase in the offering. The Stabilizing Manager must close out any short position by purchasing the Notes in the open market. A short position is more likely to be created if the Initial Purchasers are concerned that there may be downward pressure on the price of the Notes in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions involve bids to purchase the Notes so long as the stabilizing bids do not exceed a specified maximum.

Similar to other purchase transactions, the Stabilizing Manager’s purchases to cover the syndicate short sales and stabilizing purchasers may have the effect of raising or maintaining the market price of the Notes or preventing or retarding a decline in the market price of the Notes. As a result, the price of the Notes may be higher than the price that might otherwise exist in the open market.

None of us or any of the Initial Purchasers makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Notes. In addition, none of us or any of the Initial Purchasers makes any representation that the Initial Purchasers will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice at any time. No assurance can be given as to the liquidity of, or the trading market for, the Notes.

If a jurisdiction requires that the offering be made by a licensed broker or dealer and the Initial Purchasers or any affiliate of the Initial Purchasers is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by that Initial Purchaser or its affiliate on behalf of the Company in such jurisdiction.

Selling Restrictions United States The Notes have not been and will not be registered under the Securities Act, and may not be offered or sold within the United States except in certain transactions exempt from the registration requirements of the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S.

The Notes are being offered and sold outside of the United States in reliance on Regulation S. The Purchase Agreement provides that the Initial Purchasers may directly or through their respective U.S. broker-dealer affiliates arrange for the offer and resale of the Notes within the United States only to Qualified Institutional Buyers in reliance on Rule 144A.

In addition, until 40 days after the commencement of the offering of the Notes, an offer or sale of the Notes within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A.

134 Each purchaser of the Notes will be deemed to have made acknowledgments, representations and agreements as described under ‘‘Transfer Restrictions.’’ Bermuda The Notes may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act 2003 of Bermuda. Additionally, non-Bermudian persons may not carry on or engage in any trade or business in Bermuda unless such persons are authorised to do so under applicable Bermuda legislation. Engaging in the activity of offering or marketing the notes in Bermuda to persons in Bermuda may be deemed to be carrying on business in Bermuda.

Hong Kong The Notes may not be offered or sold in Hong Kong by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to ‘‘professional investors’’ within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a ‘‘prospectus’’ within the meaning of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32, Laws of Hong Kong) and no advertisement, invitation or document relating to the Notes may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to ‘‘professional investors’’ within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

Italy The Notes have not been registered with the Italian Securities and Exchange Commission (Commissione Nazionale per le Società e la Borsa, the ‘‘CONSOB’’) pursuant to Italian securities legislation and, accordingly, the Notes may not be offered, sold or distributed, nor may copies of this Offering Memorandum or of any other document relating to the Notes be distributed in the Republic of Italy (‘‘Italy’’), except:

(i) to qualified investors (investitori qualificati), pursuant to Article 100 of Legislative Decree no. 58 of 24 February 1998 (the ‘‘Consolidated Financial Services Act’’) and Article 34-ter, paragraph 1, letter (b) of CONSOB regulation No. 11971 of 14 May 1999 (the ‘‘CONSOB Regulation’’), all as amended; or

(ii) in any other circumstances where an express exemption from compliance with the restrictions on offers to the public applies, as provided under Article 100 of the Consolidated Financial Services Act and Article 34-ter of the CONSOB Regulation.

Moreover, and subject to the foregoing, any offer, sale or delivery of the Notes or distribution of copies of this Offering Memorandum or any other document relating to the Notes in Italy under (i) or (ii) above must be:

(i) made by an investment firm, bank or financial intermediary permitted to conduct such activities in Italy in accordance with the Consolidated Financial Services Act, Legislative Decree No. 385 of 1 September 1993 (the ‘‘Banking Act’’), CONSOB Regulation No. 16190 of 29 October 2007, all as amended;

(ii) in compliance with Article 129 of the Banking Act and the implementing guidelines, pursuant to which the Bank of Italy may request information on the offering or issue of securities in Italy; and

135 (iii) in compliance with any securities, tax, exchange control and any other applicable laws and regulations, including any limitation or requirement which may be imposed from time to time, inter alia, by CONSOB or the Bank of Italy.

Any investor purchasing the Notes in the offering is solely responsible for ensuring that any offer or resale of the Notes it purchased in the offering occurs in compliance with applicable Italian laws and regulations.

Japan The Notes offered in this Offering Memorandum have not been registered under the Securities and Exchange Law of Japan. The Notes have not been offered or sold and will not be offered or sold, directly or indirectly, in Japan or to or for the account of any resident of Japan, except (i) pursuant to an exemption from the registration requirements of the Securities and Exchange Law and (ii) in compliance with any other applicable requirements of Japanese law.

PRC This Offering Memorandum does not constitute a public offer of the Notes, whether by way of sale or subscription, in the PRC. Other than to qualified domestic institutional investors in the PRC, the Notes are not being offered and may not be offered or sold, directly or indirectly, in the PRC to or for the benefit of, legal or natural persons of the PRC. According to the laws and regulatory requirements of the PRC, with the exception of qualified domestic institutional investors in the PRC, the Notes may, subject to the laws and regulations of the relevant jurisdictions, only be offered or sold to non-PRC natural or legal persons in any country other than the PRC.

Singapore This Offering Memorandum has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this Offering Memorandum and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Notes may not be circulated or distributed, nor may the Notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the ‘‘SFA’’), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to compliance with conditions set forth in the SFA.

Where the Notes are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

• a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

• a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the Notes pursuant to an offer made under Section 275 of the SFA except:

• to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

136 • where no consideration is or will be given for the transfer;

• where the transfer is by operation of law; or

• as specified in Section 276(7) of the SFA.

Switzerland This document is not intended to constitute an offer or solicitation to purchase or invest in the Notes described herein. The Notes may not be publicly offered, sold or advertised, directly or indirectly, in, into or from Switzerland and will not be listed on the SIX Swiss Exchange or on any other exchange or regulated trading facility in Switzerland. Neither this Offering Memorandum nor any other offering or marketing material relating to the Notes constitutes a prospectus as such term is understood pursuant to article 652a or article 1156 of the Swiss Code of Obligations, and neither this Offering Memorandum nor any other offering or marketing material relating to the Notes may be publicly distributed or otherwise made publicly available in Switzerland.

European Union In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a ‘‘Relevant Member State’’), each Initial Purchaser has represented and agreed with us that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the ‘‘Relevant Implementation Date’’)ithasnotmadeandwillnotmakean offer of the Notes to the public in that Relevant Member State other than:

• to any legal entity which is a ‘‘qualified investor’’ as defined in the Prospectus Directive;

• to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than ‘‘qualified investors’’ as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior written consent of the Initial Purchasers for any such offer; or

• in any other circumstances falling within Article 3(2) of the Prospectus Directive. provided that no such offer of the Notes shall require us or any Initial Purchaser to publish a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an ‘‘offer of Notes to the public’’ in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the Notes, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State; the expression ‘‘Prospectus Directive’’ means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State; and the expression ‘‘2010 PD Amending Directive’’ means Directive 2010/73/EU.

The sellers of the Notes have not authorized and do not authorize the making of any offer of Notes through any financial intermediary on their behalf, other than offers made by the Initial Purchasers with a view to the final placement of the Notes as contemplated in this Offering Memorandum. Accordingly, no purchaser of the Notes, other than the Initial Purchasers, is authorized to make any further offer of the Notes on behalf of the sellers or the Initial Purchasers.

United Kingdom Each Initial Purchaser has represented and agreed that:

137 (i) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (the ‘‘FSMA’’)) received by it in connection with the issue or sale of any Notes in circumstances in which Section 21(1) of the FSMA does not apply to us; and

(ii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.

Other Relationships The Initial Purchasers and their affiliates have in the past engaged, and may in the future engage, in transactions with and perform services, including financial advisory and investment banking services, for the and its affiliates in the ordinary course of business, for which they received or will receive customary fees and expenses.

The Initial Purchasers or certain of their affiliates may purchase the Notes and be allocated the Notes for asset management and/or proprietary purposes but not with a view to distribution. The Initial Purchasers or their respective affiliates may purchase the Notes for its or their own account or for the accounts of their customers and enter into transactions, including credit derivatives, such as asset swaps, repackaging and credit default swaps relating to the Notes and/or other securities of ours or our subsidiaries or associates at the same time as the offer and sale of the Notes or in secondary market transactions. Such transactions would be carried out as bilateral trades with selected counterparties and separately from any existing sale or resale of the Notes to which this Offering Memorandum relates (notwithstanding that such selected counterparties may also be purchasers of the Notes).

138 RATINGS

The Notes are expected to be assigned a rating of ‘‘A1’’ by Moody’s, ‘‘A+’’ by S&P and ‘‘A’’ by Fitch. The ratings reflect the rating agencies’ assessment of the likelihood of timely payment of the principal of and interest on the Notes. Ratings are limited in scope, and do not address all material risks relating to an investment in the Notes, but rather reflect only the view of each rating agency at the time the rating is issued. An explanation of the significance of a rating may be obtained from the relevant rating agency. Ratings are not recommendations to buy, sell or hold securities, and there can be no assurance that ratings will remain in effect for any given period of time or that ratings will not be lowered, suspended or withdrawn entirely by the rating agencies, if, in each rating agency’s judgment, circumstances so warrant. Each rating should be evaluated independently of any other rating on the Notes, on any other of our securities, or on us. See ‘‘Risk Factors – Risks Relating to the Notes – The ratings of the Notes may be downgraded or withdrawn.’’

LEGAL MATTERS

Certain legal matters in connection with this offering as to Hong Kong law and United States federal and New York law will be passed upon for us by Clifford Chance and for the Initial Purchasers as to United States federal and New York law by Davis Polk & Wardwell. Certain legal matters in connection with this offering as to PRC law will be passed upon for us by Zhong Lun Law Firm and for the Initial Purchasers by Jingtian & Gongcheng. Certain legal matters in connection with this offering as to Bermuda law will be passed upon for us by Conyers Dill & Pearman.

INDEPENDENT AUDITORS

Our consolidated financial statements as of and for the year ended December 31, 2012 included in this Offering Memorandum have been audited, by PricewaterhouseCoopers, Certified Public Accountants, as indicated in their report with respect thereto, included herein and our consolidated financial statements ended December 31, 2013 and 2014 included in this Offering Memorandum have been audited, by KPMG, Certified Public Accountants, our independent auditors, as indicated in their report with respect thereto, included herein.

139 GENERAL INFORMATION

1. Authorizations: We have obtained all necessary consents, approvals and authorizations in connection with the issue and performance of the Notes and the Indenture. The issue of the Notes was authorized by a meeting of the Board held on April 15, 2015.

2. Clearing Systems and Settlement: The Notes have been accepted for clearance through the facilities of Euroclear, Clearstream, Luxembourg and DTC. Certain trading information with respect to the Dollar Notes is set forth below:

ISIN CUSIP Common Code Rule144Aglobalnote...... @@ @@ @@ RegulationSglobalnote...... @@ @@ @@

3. Documents Available. For so long as any of the Notes are outstanding, copies of the Indenture governing the Notes may be inspected free of charge during normal business hours on any weekday (except public holidays) at the corporate trust office of the Trustee and the specified office of the Paying Agent.

For so long as any of the Notes are outstanding, copies of our audited financial statements for the past two fiscal years, if any, may be obtained during normal business hours on any weekday (except public holidays) at the corporate trust office of the Trustee.

4. Listing of the Notes. We have received the eligibility letter from the SEHK for the listing of the Notes by way of debt issues to professional investors only as described in this Offering Memorandum. Hong Kong Exchange and Clearing Limited and the SEHK take no responsibility for the correctness of any statements made on opinions or reports contained in this Offering Memorandum, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this Offering Memorandum. Admission of the Notes to the official list of the SEHK is not to be taken as an indication of the merits of the Notes or us.

5. No Material Adverse Change. Except as otherwise disclosed in this Offering Memorandum, there has been no adverse change, or any development reasonably likely to involve an adverse change, in the condition (financial or otherwise) of our general affairs since December 31, 2014 that is material in the context of the issue of the Notes.

140 ANNEX A – GLOSSARY OF TECHNICAL TERMS

‘‘barrel’’ or ‘‘bbl’’ barrel of oil. One metric ton is equivalent to approximately 7.33 barrels of oil

‘‘bcf’’ billion cubic feet, which is equivalent to approximately 28.3 million cubic meters

‘‘BCM’’ billion cubic meters

‘‘boe’’ barrels of oil equivalent and conversion of gas reserves to barrels of oil equivalent is at the ratio of 6 billion standard cubic feet of gas to 1 million barrels of crude oil

‘‘bpd’’ barrels per day

‘‘CNG’’ compressed natural gas

‘‘crude oil’’ oil including condensate and natural gas liquids. Condensate means light hydrocarbon substances produced with natural gas that condense into liquid at normal temperatures and pressures associated with surface production equipment. Natural gas liquids mean hydrocarbons that can be extracted in liquid form together with natural gas production. Ethane and pentanes are the predominant components of natural gas liquids, with other heavier hydrocarbons also present in limited quantities

‘‘km’’ kilometer

‘‘LNG’’ liquefied natural gas

‘‘mcf’’ thousand cubic feet

‘‘MCM’’ million cubic meters

‘‘mmbbl’’ million barrels of oil

‘‘mmboe’’ million barrels of oil equivalent

‘‘mmbtu’’ million metric british thermal unit

‘‘mmcf’’ million cubic feet

‘‘natural gas’’ a mixture of hydrocarbons that originally exist in gaseous phase in natural underground reservoirs and is classified as either associated gas or non- associated gas

‘‘oil’’ crude oil, condensate and natural gas liquids

‘‘tcf’’ trillion cubic feet

‘‘tonne’’ metric ton, representing 1,000 kilograms

A-1 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page Audited Consolidated Financial Statements(1) Independent Auditor’sReportfortheyearendedDecember31,2014 ...... F-2 Consolidated Statement of Comprehensive Income for the year ended December 31, 2014 . . . F-4 Consolidated Statement of Financial Position for the year ended December 31, 2014 ...... F-6 Statement of Financial Position for the year ended December 31, 2014 ...... F-8 ConsolidatedStatementofChangesinEquityfortheyearendedDecember31,2014...... F-9 ConsolidatedStatementofCashFlowsfortheyearendedDecember31,2014 ...... F-11 NotestotheConsolidatedFinancialStatementsfortheyearendedDecember31,2014 ...... F-13

Independent Auditor’sReportfortheyearendedDecember31,2013 ...... F-92 Consolidated Statement of Comprehensive Income for the year ended December 31, 2013 . . . F-94 Consolidated Statement of Financial Position for the year ended December 31, 2013 ...... F-96 Statement of Financial Position for the year ended December 31, 2013 ...... F-98 ConsolidatedStatementofChangesinEquityfortheyearendedDecember31,2013...... F-99 ConsolidatedStatementofCashFlowsfortheyearendedDecember31,2013 ...... F-101 NotestotheConsolidatedFinancialStatementsfortheyearendedDecember31,2013 ...... F-103

Independent Auditor’sReportfortheyearendedDecember31,2012 ...... F-184 Consolidated Statement of Comprehensive Income for the year ended December 31, 2012 . . . F-186 Consolidated Statement of Financial Position for the year ended December 31, 2012 ...... F-188 Statement of Financial Position for the year ended December 31, 2012 ...... F-190 ConsolidatedStatementofChangesinEquityfortheyearendedDecember31,2012...... F-191 ConsolidatedStatementofCashFlowsfortheyearendedDecember31,2012 ...... F-193 NotestotheConsolidatedFinancialStatementsfortheyearendedDecember31,2012 ...... F-195

Note:

1. Our consolidated financial statements as of and for the years ended December 31, 2012, 2013 and 2014 as set out herein have been reproduced from our annual reports for the years ended December 31, 2012, 2013 and 2014, respectively, including the page numbers and page references set forth in such reports. These audited consolidated financial statements have not been specifically prepared for the inclusion in this Offering Memorandum.

F-1 Independent Auditors Report

Independent auditor’s report to the shareholders of Kunlun Energy Company Limited (Incorporated in Bermuda with limited liability)

We have audited the consolidated financial statements of Kunlun Energy Company Limited (the “Company”) and its subsidiaries (together, the “Group”) set out on pages 41 to 128, which comprise the consolidated and company statements of financial position as at 31 December 2014, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended and a summary of significant accounting policies and other explanatory information.

DIRECTORS’ RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS

The directors of the Company are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the disclosure requirements of the Hong Kong Companies Ordinance and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

AUDITOR’S RESPONSIBILITY

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. This report is made solely to you, as a body, in accordance with Section 90 of the Bermuda Companies Act 1981, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of consolidated financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 39 F-2 Independent Auditors Report

OPINION

In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2014 and of the Group’s profit and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

KPMG Certified Public Accountants

8th Floor, Prince’s Building 10 Chater Road Central, Hong Kong

26 March 2015

40 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-3 Consolidated Statement of Comprehensive Income For the year ended 31 December 2014

2014 2013 Note HK$’million HK$’million

Revenue 6 48,044 43,430 Other gains, net 7 837 768 Interest income 8 217 228 Purchases, services and others (26,354) (21,303) Employee compensation costs 9 (2,368) (2,046) Exploration expenses – (11) Depreciation, depletion and amortisation (5,392) (4,528) Selling, general and administrative expenses (2,777) (2,878) Taxes other than income taxes 10 (737) (746) Interest expenses 11 (486) (622) Share of profits less losses of: – Associates 716 1,646 – Joint ventures 21 256 415

Profit before income tax expense 12 11,956 14,353 Income tax expense 14 (3,080) (3,845)

Profit for the year 8,876 10,508

Other comprehensive income Items that may be reclassified subsequently to profit or loss: – Currency translation differences – Subsidiaries (1,283) 1,439 – Associates (572) (46) – Joint ventures (9) (1) – Fair value loss on available-for-sale financial assets (29) (10)

Other comprehensive income, net of nil tax (1,893) 1,382

Total comprehensive income for the year 6,983 11,890

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 41 F-4 Consolidated Statement of Comprehensive Income For the year ended 31 December 2014

2014 2013 Note HK$’million HK$’million

Profit for the year attributable to: – Owners of the Company 5,610 6,851 – Non-controlling interests 3,266 3,657

8,876 10,508

Total comprehensive income for the year attributable to: – Owners of the Company 4,307 7,842 – Non-controlling interests 2,676 4,048

6,983 11,890

Earnings per share for profit attributable to owners of the Company 16 – Basic (HK cent) 69.52 85.01 – Diluted (HK cent) 69.49 84.83

The notes on pages 50 to 128 form part of these financial statements. Details of dividends payable to owners of the Company attributable to the profit for the year are set out in Note 17.

42 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-5 Consolidated Statement of Financial Position As at 31 December 2014

2014 2013 Note HK$’million HK$’million

Assets Non-current assets Property, plant and equipment 18 86,442 82,943 Advanced operating lease payments 19 3,379 2,895 Investments in associates 20 4,775 5,720 Investments in joint ventures 21 1,451 1,564 Available-for-sale financial assets 83 120 Intangible and other non-current assets 23 1,509 3,104 Deferred tax assets 32 456 254

98,095 96,600

Current assets Inventories 24 1,157 1,173 Accounts receivable 25 1,988 1,893 Prepaid expenses and other current assets 26 5,741 4,899 Cash and cash equivalents 27 10,729 14,897

19,615 22,862

Total assets 117,710 119,462

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 43 F-6 Consolidated Statement of Financial Position As at 31 December 2014

2014 2013 Note HK$’million HK$’million

Equity Capital and reserves attributable to owners of the Company Share capital 28 81 81 Retained earnings 29 27,765 24,530 Reserves 29 25,042 25,795

52,888 50,406 Non-controlling interests 21,426 21,862

Total equity 74,314 72,268

Liabilities Current liabilities Accounts payable and accrued liabilities 30 14,776 12,676 Income tax payable 32 805 510 Other tax payable 262 394 Short-term borrowings 31 8,465 13,551 Obligations under finance leases 33 194 –

24,502 27,131

Non-current liabilities Long-term borrowings 31 16,224 17,799 Deferred tax liabilities 32 1,414 1,715 Obligations under finance leases 33 649 – Other long-term obligations 607 549

18,894 20,063

Total liabilities 43,396 47,194

Total equity and liabilities 117,710 119,462

Net current liabilities (4,887) (4,269)

Total assets less current liabilities 93,208 92,331

Approved and authorised for issue by the board of directors on 26 March 2015.

Zhang Bowen Cheng Cheng President Senior Vice President

The notes on pages 50 to 128 form part of these financial statements. 44 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-7 Statement of Financial Position As at 31 December 2014

2014 2013 Note HK$’million HK$’million Assets Non-current assets Property, plant and equipment 18 3 4 Investments in associates 20 1,153 1,090 Investments in joint ventures 21 122 272 Investments in subsidiaries 22 44,298 43,337 Intangible and other non-current assets 23 1,264 1,290 46,840 45,993 Current assets Prepaid expenses and other current assets 26 15,130 9,605 Cash and cash equivalents 27 1,586 1,857 16,716 11,462

Total assets 63,556 57,455 Equity Capital and reserves attributable to owners of the Company Share capital 28 81 81 Retained earnings 29 16,984 11,905 Reserves 29 40,281 40,460 57,346 52,446 Liabilities Current liabilities Accounts payable and accrued liabilities 30 296 200 Income tax payable 5 – Short-term borrowings 31 – 4,263 301 4,463 Non-current liabilities Long-term borrowings 31 5,909 546 Total liabilities 6,210 5,009

Total equity and liabilities 63,556 57,455

Net current assets 16,415 6,999

Total assets less current liabilities 63,255 52,992

Approved and authorised for issue by the board of directors on 26 March 2015.

Zhang Bowen Cheng Cheng President Senior Vice President

The notes on pages 50 to 128 form part of these financial statements.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 45 F-8 Consolidated Statement of Changes In Equity For the year ended 31 December 2014

Attributable to owners of the Company Non- Share Retained controlling Total capital earnings Reserves Sub-total interests equity Note HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million

Balances at 1 January 2013 81 20,059 24,282 44,422 17,756 62,178

Changes in equity for 2013: Profit for the year – 6,851 – 6,851 3,657 10,508 Other comprehensive income – – 991 991 391 1,382

Total comprehensive income for the year – 6,851 991 7,842 4,048 11,890

Transfer between reserves – (563) 563 – – – Final dividend for 2012 – (1,855) – (1,855) – (1,855) Issue of shares upon exercise of share options 28(a) & (b) – – 86 86 – 86 Repurchase of shares 28(a) – – (57) (57) – (57) Lapsed share options – 38 (38) – – – Acquisition from non-controlling interests – – (32) (32) (103) (135) Dividend to non-controlling interests in subsidiaries – – – – (1,090) (1,090) Capital contributions from non-controlling interests – – – – 1,078 1,078 Acquisition of subsidiaries – – – – 173 173

Balances at 31 December 2013 81 24,530 25,795 50,406 21,862 72,268

46 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-9 Consolidated Statement of Changes In Equity For the year ended 31 December 2014

Balances at 1 January 2014 81 24,530 25,795 50,406 21,862 72,268

Changes in equity for 2014: Profit for the year – 5,610 – 5,610 3,266 8,876 Other comprehensive income – – (1,303) (1,303) (590) (1,893)

Total comprehensive income for the year – 5,610 (1,303) 4,307 2,676 6,983

Transfer between reserves – (518) 518 – – – Final dividend for 2013 17 – (1,857) – (1,857) – (1,857) Issue of shares upon exercise of share options 28(a) & (b) – – 32 32 – 32 Acquisition from non-controlling interests – – – – (13) (13) Dividend to non-controlling interests – – – – (3,888) (3,888) Capital contributions from non-controlling interests – – – – 789 789

Balances at 31 December 2014 81 27,765 25,042 52,888 21,426 74,314

The notes on pages 50 to 128 form part of these financial statements.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 47 F-10 Consolidated Statement of Cash Flows For the year ended 31 December 2014

2014 2013 Note HK$’million HK$’million

Cash flows from operating activities Profit for the year 8,876 10,508 Adjustments for: Income tax expense 3,080 3,845 Taxes other than income taxes 737 746 Depreciation, depletion and amortisation 5,392 4,528 Share of profits less losses of associates (716) (1,646) Share of profits less losses of joint ventures (256) (415) Impairment loss on property, plant and equipment 18 2 12 Impairment loss on available-for-sale financial assets 6 – Net losses on disposals of property, plant and equipment 7 16 70 Net exchange losses/(gains) 123 (45) Interest income (217) (228) Interest expense 486 622

Changes in working capital: Accounts receivable and prepaid expenses and other current assets (818) 115 Inventories (7) (457) Accounts payable and accrued liabilities and other tax payable 174 (742)

Cash generated from operations 16,878 16,913 Income tax paid (3,180) (3,427)

Net cash generated from operating activities 13,698 13,486

48 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-11 Consolidated Statement of Cash Flows For the year ended 31 December 2014

2014 2013 Note HK$’million HK$’million

Cash flows from investing activities Dividends received from associates 1,041 1,826 Dividends received from joint ventures 401 814 Acquisitions of subsidiaries – 37 Capital contributions to associates (84) (291) Capital contributions to joint ventures – (56) Proceeds from disposal of property, plant and equipment 158 353 Capital expenditure (9,553) (15,405) Interest received 210 228 Loans repaid by associates 13 – Loans to associates – (13) Loans to joint ventures (33) (38) Loans to third parties – (345) Loans repaid by third parties 246 158

Net cash used in investing activities (7,601) (12,732)

Cash flows from financing activities Capital contributions from non-controlling interests 789 1,078 Dividends paid to owners of the Company 29 (1,857) (1,855) Dividends paid to non-controlling interests (3,865) (1,944) Issue of shares, net of share issue expenses 32 86 Repurchase of shares – (57) Increase in borrowings 9,193 9,112 Repayments of borrowings (15,402) (10,521) Interest paid (1,486) (1,856) Proceeds from sale-and-leaseback arrangements 861 – Capital element of finance lease rentals paid (40) – Interest element of finance lease rentals paid (1) – Acquisition from non-controlling interests (13) (135) Increase in an amount due to ultimate holding company 631 – Increase in an amount due to non-controlling interests 1,009 –

Net cash used in financing activities (10,149) (6,092)

Decrease in cash and cash equivalents (4,052) (5,338) Cash and cash equivalents at 1 January 14,897 19,592 Effect of foreign exchange rate changes (116) 643

Cash and cash equivalents at 31 December 27 10,729 14,897

The notes on pages 50 to 128 form part of these financial statements.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 49 F-12 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

1 GENERAL INFORMATION

Kunlun Energy Company Limited (the “Company”) is incorporated in Bermuda as an exempted company with limited liability and its shares are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). Its ultimate holding company is China National Petroleum Corporation (“CNPC”) which is a company established in the People’s Republic of China (the “PRC”). The immediate holding company of the Company is Sun World Limited (“Sun World”), which is a company incorporated in the British Virgin Islands. On 18 December 2008, PetroChina Company Limited (“PetroChina”), a subsidiary of CNPC, acquired 100% equity interest in Sun World. Since then, PetroChina became an intermediate holding company of the Company. As at 31 December 2014, PetroChina indirectly owned 58.33% (2013: 58.40%) equity interest in the Company.

The address of the Company’s principal office and registered office are 39/F, 118 Connaught Road West, Hong Kong and Clarendon House, 2 Church Street Hamilton, HM11, Bermuda, respectively.

The Company acts as an investment holding company. The principal activities of its subsidiaries, associates and joint ventures are the exploration and production of crude oil and natural gas in the PRC, the Republic of Kazakhstan (“Kazakhstan”), the Sultanate of Oman (“Oman”), Peru, the Kingdom of Thailand (“Thailand”) and the Azerbaijan Republic (“Azerbaijan”), the sales of natural gas, liquefied natural gas (“LNG”) processing, LNG terminal business and transmission of natural gas in the PRC.

The Company and its subsidiaries (together, the “Group”) currently have three production sharing arrangements in the PRC and Azerbaijan. On 1 July 1996, the Group entered into an oil production sharing contract (the “Xinjiang Contract”) to develop and produce crude oil in Xinjiang Uygur Autonomous Region, the PRC. On 30 December 1997, the Group entered into another oil production sharing contract (the “Leng Jiapu Contract”) to develop and produce crude oil in Liaohe, Liaoning Province, the PRC. In 2002, the Group acquired the third production sharing arrangement (“K&K Contract”) to develop and produce crude oil in Azerbaijan. Further details in relation to these contracts and the Group’s share of results and net assets in these arrangements are shown in Note 35.

The oil operations in the PRC are conducted through production sharing arrangements with PetroChina, whereas the oil operations in Azerbaijan are conducted through production sharing arrangements with both PetroChina and a third party. The Group is entitled to a fixed percentage of assets, liabilities, income and expenses in accordance with the respective oil production sharing contracts entered into with PetroChina and the third party.

50 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-13 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

2 BASIS OF PREPARATION

(a) Statement of compliance

These financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual HKFRSs, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong. These financial statements also comply with the applicable disclosure requirements of the Hong Kong Companies Ordinance, which for this financial year and the comparative period continue to be those of the predecessor Companies Ordinance (Cap. 32), in accordance with transitional and saving arrangements for Part 9 of the new Hong Kong Companies Ordinance (Cap. 622), “Accounts and Audit”, which are set out in sections 76 to 87 of Schedule 11 to that Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on the Stock Exchange. A summary of the significant accounting policies adopted by the Group is set out below.

The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the current accounting period of the Group and the Company. Note 3(w) provides information on any changes in accounting policies resulting from initial application of these developments to the extent that they are relevant to the Group for the current and prior accounting periods reflected in these financial statements.

(b) Basis of preparation of the financial statements

The consolidated financial statements for the year ended 31 December 2014 comprise the Company and its subsidiaries (together referred to as the “Group”) and the Group’s interest in associates and joint ventures.

The measurement basis used in the preparation of the financial statements is the historical cost basis except for available-for-sale financial assets which are stated at their fair value as explained in the accounting policies set out in Note 3(h).

The preparation of financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by management in the application of HKFRSs that have significant effect on the financial statements and major sources of estimation uncertainty are discussed in Note 5.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 51 F-14 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

2 BASIS OF PREPARATION (CONTINUED)

(b) Basis of preparation of the financial statements (Continued)

As at 31 December 2014, the Group had net current liabilities of HK$4,887 million. Notwithstanding the net current liabilities of the Group at 31 December 2014, the Group’s consolidated financial statements have been prepared on a going concern basis because the directors are of the opinion that the Group would have adequate funds to meet its obligation, as and when they fall due, having regard to the following:

(i) the Group has certain undrawn facilities which include an undrawn facility provided by the Company’s immediate holding company amounting to HK$2,300 million;

(ii) the Group expects to generate positive operating cash flows in the future; and

(iii) the directors consider that the Group could obtain financing from various sources of funding.

Consequently, the consolidated financial statements have been prepared on a going concern basis.

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

(a) Subsidiaries and non-controlling interests

Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. When assessing whether the Group has power, only substantive rights (held by the Group and other parties) are considered.

An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group balances, transactions and cash flows and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly to the Company, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. For each business combination, the Group can elect to measure any non-controlling interests either at fair value or at the non-controlling interests’ proportionate share of the subsidiary’s net identifiable assets.

52 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-15 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(a) Subsidiaries and non-controlling interests (Continued)

Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from equity attributable to the equity shareholders of the Company. Non-controlling interests in the results of the Group are presented on the face of the consolidated statement of other comprehensive income as an allocation of the total profit or loss and total comprehensive income for the year between non-controlling interests and the equity shareholders of the Company. Loans from holders of non-controlling interests and other contractual obligations towards these holders are presented as financial liabilities in the consolidated statement of financial position in accordance with Notes 3(m) and 3(n) depending on the nature of the liability.

Changes in the Group’s interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and non-controlling interests within consolidated equity to reflect the change in relative interests, but no adjustments are made to goodwill and no gain or loss is recognised.

When the Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former subsidiary at the date when control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset (see Note 3(h)) or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture (see Note 3(b)).

A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. The assets and liabilities that the acquirer receives in the acquisition are accounted for at the acquiree’s carrying amount on the acquisition date. The difference between the carrying amount of the acquired net assets and the carrying amount of the consideration paid for the acquisition (or the total nominal value of shares issued) is recognised in merger reserve. Any costs directly attributable to the combination shall be recognised in profit or loss for the current period when occurred. The combination date is the date on which the acquirer effectively obtains control of the acquiree.

In the Company’s statement of financial position, an investment in subsidiary is stated at cost less impairment.

A listing of the Group’s principal subsidiaries is set out in Note 40.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 53 F-16 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(b) Associates and joint ventures

An associate is an entity in which the Group or Company has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions.

A joint venture is an arrangement whereby the Group or Company and other parties contractually agree to share control of the arrangement, and have rights to the net assets of the arrangement.

An investment in an associate or a joint venture is accounted for in the consolidated financial statements under the equity method. Under the equity method, the investment is initially recorded at cost, adjusted for any excess of the Group’s share of the acquisition-date fair values of the investee’s identifiable net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post acquisition change in the Group’s share of the investee’s net assets and any impairment loss relating to the investment.

Any acquisition-date excess over cost, the Group’s share of the post-acquisition, post-tax results of the investees and any impairment losses for the year are recognised in the consolidated statement of comprehensive income, whereas the Group’s share of the post-acquisition post-tax items of the investees’ other comprehensive income is recognised in the consolidated statement of comprehensive income.

When the Group’s share of losses exceeds its interest in the associate or the joint venture, the Group’s interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee. For this purpose, the Group’s interest is the carrying amount of the investment under the equity method together with the Group’s long-term interests that in substance form part of the Group’s net investment in the associate or the joint venture.

Unrealised profits and losses resulting from transactions between the Group and its associates and joint venture are eliminated to the extent of the Group’s interest in the investee, except where unrealised losses provide evidence of an impairment of the asset transferred, in which case they are recognised immediately in profit or loss.

If an investment in an associate becomes an investment in a joint venture or vice versa, retained interest is not remeasured. Instead, the investment continues to be accounted for under the equity method.

In all other cases, when the Group ceases to have significant influence over an associate or joint control over a joint venture, it is accounted for as a disposal of the entire interest in that investee, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former investee at the date when significant influence or joint control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset (see Note 3(h)).

54 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-17 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(b) Associates and joint ventures (Continued)

In the Company’s statement of financial position, investments in associates and investments in joint ventures are stated at cost less impairment.

Impairment loss is measured by comparing the recoverable amount of the investment with its carrying amount. The impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount.

Internal and external sources of information are reviewed at the end of each reporting period to identify indications that the investments in associates and joint ventures may be impaired or an impairment loss previously recognised no longer exists or may have decreased. If any such indication exists, the investment’s recoverable amount is estimated.

– Calculation of recoverable amount

The recoverable amount is the greater of its fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the investment. Where an investment does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of investments that generates cash inflows independently (i.e. a cash-generating unit).

– Recognition of impairment losses

An impairment loss is recognised in profit or loss if the carrying amount of an investment, or the cash- generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs of disposal (if measurable) or value in use (if determinable).

– Reversals of impairment losses

An impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised.

Listings of the Group’s principal associates and joint ventures are shown in Note 41 and Note 42, respectively.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 55 F-18 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

Production sharing contracts constitute joint operations. The Group shall recognise in relation to its interest in joint operations:

(i) its assets, including its share of any assets held jointly;

(ii) its liabilities, including its share of any liabilities incurred jointly;

(iii) its revenue from the sale of its share of the output arising from the joint operations;

(iv) its share of the revenue from the sale of the output by the joint operations; and

(v) its expenses, including its share of any expenses incurred jointly.

(d) Foreign currencies

(i) Functional and presentation currency

Items included in the financial statements of each entity in the Group are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Hong Kong dollar, which is the Group’s presentation currency. The Company’s functional currency is Renminbi.

(ii) Translation of foreign currencies

Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the end of the reporting period. Exchange gains and losses are recognised in profit or loss.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates ruling at the dates the fair value was measured.

56 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-19 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(d) Foreign currencies (Continued)

(ii) Translation of foreign currencies (Continued)

The results of foreign operations are translated into presentation currency at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Statement of financial position items, including goodwill arising on consolidation of foreign operations acquired on or after 1 January 2005, are translated into presentation currency at the closing foreign exchange rates at the end of the reporting period. The resulting exchange differences are recognised in other comprehensive income and accumulated separately in equity in the translation reserve. Goodwill arising on consolidation of a foreign operation acquired before 1 January 2005 is translated at the foreign exchange rate that applied at the date of acquisition of the foreign operation.

On disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation is reclassified from equity to profit or loss when the profit or loss on disposal is recognised.

(e) Property, plant and equipment

Property, plant and equipment, including oil and gas properties (Note 3(f)) and construction in progress, are initially recorded in the consolidated statement of financial position at cost where it is probable that they will generate future economic benefits. Cost represents the purchase price of the asset and other costs incurred to bring the asset into existing use. For construction in progress, cost comprises direct costs of construction as well as interest charges, and foreign exchange differences on related borrowed funds to the extent that they are regarded as an adjustment to interest charges, during the periods of construction. Construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use. Subsequent to their initial recognition, property, plant and equipment are carried at cost less accumulated depreciation, depletion and amortisation (including any impairment).

Depreciation to write off the cost of each asset, other than oil and gas properties (Note 3(f)), to their residual values over their estimated useful lives is calculated using the straight-line method.

The Group uses the following useful lives for depreciation purposes:

– Buildings 40 years or over the remaining period of respective leases whichever is the shorter – Natural gas pipelines 10-30 years – Equipment and machinery 4-30 years – Motor vehicles 4-14 years – Others 5-12 years

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 57 F-20 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(e) Property, plant and equipment (Continued)

No depreciation is provided for construction in progress until the assets are completed and ready for use.

The residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each statement of financial position date.

Property, plant and equipment, including oil and gas properties (Note 3(f)) and construction in progress, are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of a cash generating unit exceeds the higher of its fair value less costs to sell and its value in use, which is the estimated net present value of future cash flows to be derived from the cash generating unit.

Gains and losses on disposals of property, plant and equipment are determined by reference to their carrying amounts and are recorded in profit or loss.

Interest and other costs on borrowings to finance the construction of property, plant and equipment are capitalised during the period of time that is required to complete and prepare the asset for its intended use. Costs for repair and maintenance activities are expensed as incurred except for costs of components that result in improvements or betterments which are capitalised as part of property, plant and equipment and depreciated over their useful lives.

(f) Oil and gas properties

The successful efforts method of accounting is used for oil and gas exploration and production activities. Under this method, all costs for development wells, support equipment and facilities, and proved mineral interests in oil and gas properties are capitalised. Geological and geophysical costs are expensed when incurred. Costs of exploratory wells are capitalised as construction in progress pending determination of whether the wells find proved oil and gas reserves. Proved oil and gas reserves are the estimated quantities of crude oil and natural gas, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain regardless of whether the estimate is a deterministic estimate or probabilistic estimate. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12-month period before the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. The cost shall be that prevailing at the end of the period.

58 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-21 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(f) Oil and gas properties (Continued)

Exploratory wells in areas not requiring major capital expenditure are evaluated for economic viability within one year of completion of drilling. The related well costs are expensed as dry holes if it is determined that such economic viability is not attained. Otherwise, the related well costs are reclassified to oil and gas properties and are subject to impairment review (Note 3(e)). For exploratory wells that are found to have economically viable reserves in areas where major capital expenditure will be required before production can commence, the related well costs remain capitalised only if additional drilling is underway or firmly planned. Otherwise the related well costs are expensed as dry holes. The Group does not have any significant costs of unproved properties capitalised in oil and gas properties.

The Ministry of Land and Resources in China issues production licenses to applicants on the basis of the reserve reports approved by relevant authorities.

The cost of oil and gas properties is amortised at the field level based on the units of production method. Units of production rates are based on oil and gas reserves estimated to be recoverable from existing facilities based on the current terms of the Group’s production licenses. The Group’s oil and gas reserves estimates include only crude oil and condensate and natural gas which management believes can be reasonably produced within the current terms of these production licenses.

(g) Intangible assets

(i) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary, associate and joint ventures at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in “intangible assets” whereas goodwill on acquisitions of associates and joint ventures is included in the investments in associates and joint ventures respectively, and is tested for impairment as part of the overall balance. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units for the purpose of impairment test. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose identified according to operating segment.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 59 F-22 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(g) Intangible assets (Continued)

(ii) Other intangible assets

Expenditure on acquired patents, trademarks, technical know-how and licenses are capitalised at historical cost and amortised using straight line method over their estimated useful lives. Intangible assets are not subsequently revalued. The carrying amount of each intangible asset is reviewed annually and adjusted for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount and is recognised in profit or loss. The recoverable amount is measured as the higher of fair value less costs to sell and value in use which is the estimated net present value of future cash flows to be derived from the assets.

(h) Other investments in debt and equity securities

The Group’s and the Company’s policies for investments in debt and equity securities, other than investments in subsidiaries, associates and joint ventures, are as follows:

Investments in debt and equity securities are initially stated at fair value, which is their transaction price unless it is determined that the fair value at initial recognition differs from the transaction price and that fair value is evidenced by a quoted price in an active market for an identical asset or liability or based on a valuation technique that uses only data from observable markets. Cost includes attributable transaction costs, except where indicated otherwise below. These investments are subsequently accounted for as follows, depending on their classification:

Investments in securities held for trading are classified as current assets. Any attributable transaction costs are recognised in profit or loss as incurred. At the end of each reporting period the fair value is remeasured, with any resultant gain or loss being recognised in profit or loss. The net gain or loss recognised in profit or loss does not include any dividends or interest earned on these investments as these are recognised in accordance with the policies set out in Notes 3(p)(iii) and (iv).

Dated debt securities that the Group and/or the Company have the positive ability and intention to hold to maturity are classified as held-to-maturity securities. Held-to-maturity securities are stated at amortised cost less impairment losses.

Investments in securities which do not fall into any of the above categories are classified as available-for-sale securities. At the end of each reporting period the fair value is remeasured, with any resultant gain or loss being recognised in other comprehensive income and accumulated separately in equity in the fair value reserve. As an exception to this, investments in equity securities that do not have a quoted price in an active market for an identical instrument and whose fair value cannot otherwise be reliably measured are recognised in the statement of financial position at cost less impairment losses.

60 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-23 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(h) Other investments in debt and equity securities (Continued)

Dividend income from equity securities and interest income from debt securities calculated using the effective interest method are recognised in profit or loss in accordance with the policies set out in Notes 3(p)(iii) and (iv), respectively. Foreign exchange gains and losses resulting from changes in the amortised cost of debt securities are also recognised in profit or loss.

When the investments are derecognised or impaired, the cumulative gain or loss recognised in equity is reclassified to profit or loss. Investments are recognised/derecognised on the date the Group commits to purchase/sell the investments or they expire.

(i) Leased assets

An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.

(i) Assets acquired under finance leases

Where the Group acquires the use of assets under finance leases, the amounts representing the fair value of the leased asset, or, if lower, the present value of the minimum lease payments, of such assets are included in fixed assets and the corresponding liabilities, net of finance charges, are recorded as obligations under finance leases. Depreciation is provided at rates which write off the cost or valuation of the assets over the term of the relevant lease or, where it is likely the Group will obtain ownership of the asset, the life of the asset, as set out in Note 3(e). Impairment losses are accounted for in accordance with the accounting policy as set out in Note 3(e). Finance charges implicit in the lease payments are charged to profit or loss over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred.

(ii) Operating lease charges

Where the Group has the use of assets held under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 61 F-24 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(j) Inventories

Inventories include natural gas, materials for natural gas pipelines, crude oil and marina club debentures and wet berths held for sales which are stated at the lower of cost and net realisable value. Cost of inventories is primarily determined by the weighted average cost method, comprises raw materials, direct labour, other direct costs and related production overheads, but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses.

(k) Accounts receivable

Accounts receivable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision made for impairment of these receivables. Such provision for impairment is established if there is objective evidence that the Group will not be able to collect amounts due according to the original terms of the receivables. The factors the Group considers when assessing whether an account receivable is impaired include but not limited to significant financial difficulties of the customer, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.

(l) Cash and cash equivalents

Cash and cash equivalents comprise cash in hand, deposits held with banks and highly liquid investments with original maturities of three months or less from the time of purchase.

(m) Accounts payable

Accounts payable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

(n) Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. In subsequent periods, borrowings are stated at amortised cost using the effective yield method. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the consolidated profit or loss over the period of the borrowings.

General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

All other borrowing costs are recognised in the consolidated profit or loss in the period in which they are incurred.

62 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-25 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(n) Borrowings (Continued)

Borrowings are classified as current liabilities unless the Group has unconditional rights to defer settlements of the liabilities for at least 12 months after the reporting period.

(o) Taxation

The income tax expense for the period comprises current and deferred tax. Tax is recognised in the consolidated profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the statement of financial position date in the countries where the Group, associates and joint ventures operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from initial recognition of goodwill. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the statement of financial position date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

The Group also incurs various other taxes and levies that are not income taxes. “Taxes other than income taxes”, which form part of operating expenses, primarily comprise a special levy on domestic sales of crude oil (Note 10), resource tax, urban construction tax, education surcharges and business tax.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 63 F-26 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(p) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in the consolidated profit or loss as follows:

(i) Sales of goods

Sales are recognised upon delivery of products and customer acceptance, net of sales taxes and discounts. Revenue is recognised only when the Group has transferred to the buyers significant risks and rewards of ownership of the goods in the ordinary course of the Group’s activities, and when the amount of revenue and the costs incurred or to be incurred in respect of the transaction can be measured reliably and collectability of the related receivables is reasonably assured.

(ii) Rendering of services

Revenue from the rendering of services is recognised in the consolidated profit or loss upon performance of the services. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, the possible return of service being rendered, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably.

(iii) Dividends

– Dividend income from unlisted investments is recognised when the shareholder’s right to receive payment is established.

– Dividend income from listed investments is recognised when the share price of the investment goes ex-dividend.

(iv) Interest income

Interest income is recognised on a time apportioned basis that takes into account the effective yield on the assets.

(q) Government grants

Government grants are the gratuitous monetary assets or non-monetary assets that the Group receives from the government, excluding capital injection by the government as an investor. Special funds such as investment grants allocated by the government, if clearly defined in official documents as part of “capital reserve” are dealt with as capital contributions, and not regarded as government grants.

64 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-27 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(q) Government grants (Continued)

Government grants are recognised when there is reasonable assurance that the grants will be received and the Group is able to comply with the conditions attaching to them. Government grants in the form of monetary assets are recorded based on the amount received or receivable, whereas non-monetary assets are measured at fair value.

Government grants received in relation to assets are recorded as deferred income, and recognised evenly in profit or loss over the assets’ useful lives. Government grants received in relation to revenue are recorded as deferred income, and recognised as income in future periods as compensation when the associated future expenses or losses arise; or directly recognised as income in the current period as compensation for past expenses or losses.

(r) Provisions

Provisions for environmental restoration, restructuring costs and legal claims are recognised when: (i) the Group has a present legal or constructive obligation as a result of past events; (ii) it is probable that an outflow of resources will be required to settle the obligation; and (iii) reliable estimates of the amount can be made.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditure expected to be required to settle the obligation using a pre-tax that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.

(s) Retirement benefit plans

The Group contributes to various employee retirement benefit plans organised by PRC municipal and provincial governments under which it is required to make monthly contributions to these plans at prescribed rates for its employees in the PRC. The relevant PRC municipal and provincial governments undertake to assume the retirement benefit obligations of existing and future retired employees of the Group in the PRC. The Group has similar retirement benefit plans for its employees in its overseas operations. Contributions to these PRC and overseas plans are charged to expense as incurred. The Group currently has no additional material obligations outstanding for the payment of retirement and other post retirement benefits of employees in the PRC or overseas other than the monthly contributions described above.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 65 F-28 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(t) Share-based compensation

The Group operates an equity-settled, share-based compensation plan, under which the entity receives services from employees as consideration for equity instruments (options) of the Group. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted, including any market performance conditions (for example, an entity’s share price); excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period); and including the impact of any non-vesting conditions (for example, the requirement for employees to save). Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest. The total amount expensed is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of recognising the expense during the period between service commencement period and grant date. At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-marketing performance and service conditions. It recognises the impact of the revision to original estimates, if any, in the consolidated profit or loss, with a corresponding adjustment to equity.

When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital for the shares issued. When the options expire or are lapsed, the equity amount recognised in the employee share-based compensation reserve is released directly to retained earnings.

(u) Related parties

(a) A person, or a close member of that person’s family, is related to the Group if that person:

(i) has control or joint control over the Group;

(ii) has significant influence over the Group; or

(iii) is a member of the key management personnel of the Group or the Group’s parent.

(b) An entity is related to the Group if any of the following conditions applies:

(i) The entity and the Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

(iii) Both entities are joint ventures of the same third party.

66 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-29 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(u) Related parties (Continued)

(b) (Continued)

(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

(v) The entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group.

(vi) The entity is controlled or jointly controlled by a person identified in (a).

(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.

(v) Segment reporting

Operating segments, and the amounts of each segment item reported in the financial statements, are identified from the financial information provided regularly to the Group’s most senior executive management for the purposes of allocating resources to, and assessing the performance of, the Group’s various lines of business and geographical locations.

Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the nature of products and services, the nature of production processes, the type or class of customers, the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments which are not individually material may be aggregated if they share a majority of these criteria.

(w) Changes in accounting policies

The HKICPA has issued the following amendments to HKFRSs and one new Interpretation that are first effective for the current accounting period of the Group and the Company. Of these, The following developments are relevant to the Group’s financial statements:

− Amendments to HKFRS 10, HKFRS 12 and HKAS 27, Investment entities

− Amendments to HKAS 32, Offsetting financial assets and financial liabilities

− Amendments to HKAS 36, Recoverable amount disclosures for non-financial assets

− HK (IFRIC) 21, Levies

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 67 F-30 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(w) Changes in accounting policies (Continued)

The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period. Impacts of the adoption of new or amended HKFRSs are discussed below:

Amendments to HKFRS 10, HKFRS 12 and HKAS 27, Investment entities

The amendments provide consolidation relief to those parents which qualify to be an investment entity as defined in the amended HKFRS 10. Investment entities are required to measure their subsidiaries at fair value through profit or loss. These amendments do not have an impact on these financial statements as the Company does not qualify to be an investment entity.

Amendments to HKAS 32, Offsetting financial assets and financial liabilities

The amendments to HKAS 32 clarify the offsetting criteria in HKAS 32. The amendments do not have an impact on these financial statements as they are consistent with the policies already adopted by the Group.

Amendments to HKAS 36, Recoverable amount disclosures for non-financial assets

The amendments to HKAS 36 modify the disclosure requirements for impaired non-financial assets. Among them, the amendments expand the disclosures required for an impaired asset or cash generating unit whose recovered amount is based on fair value less costs of disposal. These amendments do not have an impact on these financial statements as the Group and the Company does not have any significant impaired non-financial assets.

HK (IFRIC) 21, Levies

The Interpretation provides guidance on when a liability to pay a levy imposed by a government should be recognised. The amendments do not have an impact on these financial statements as the guidance is consistent with the Group’s existing accounting policies.

68 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-31 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

4 FINANCIAL RISK MANAGEMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS

4.1 Financial risk factors

Exposure to foreign exchange rate risk, credit risk and liquidity risk arises in the normal course of the Group’s business. The Group’s exposure to these risks and the financial risk management policies and practices used by the Group to manage these risks are described below.

Risk management is carried out by the management of the Company under policies approved by the Board of Directors. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner. There has been no change to the Group’s exposure to the risks mentioned above or the manner in which it manages and measures the risks.

(a) Foreign exchange rate risk

The Group is exposed to foreign exchange rate risk primarily through sales and purchases which give rise to receivables, payables and cash balances that are denominated in a foreign currency, i.e. a currency other than the functional currencies of the operations to which the transactions relate. The currency giving rise to this risk is primarily United States dollar (“US dollar”). The Group and the Company are also exposed to foreign exchange rate risk in respect of the borrowings and cash and cash equivalents which are denominated in Hong Kong dollar and US dollar.

The following table details the Group’s and the Company’s exposure at the end of the reporting period to foreign exchange rate risk arising from recognised assets or liabilities denominated in a currency other than the functional currency of the entity to which they relate. For presentation purposes, the amounts of the exposure are shown in Hong Kong dollars, translated using the spot rate at the year end date. Differences resulting from the translation of the financial statements of foreign operations into the Group’s presentation currency are excluded.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 69 F-32 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

4 FINANCIAL RISK MANAGEMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

4.1 Financial risk factors (Continued)

(a) Foreign exchange rate risk (Continued)

Exposure to foreign currencies (expressed in Hong Kong dollars) 2014 2013 Hong Kong Hong Kong US dollar dollar US dollar dollar HK$’million HK$’million HK$’million HK$’million

Group Accounts receivable and other current assets 2 11 319 16 Cash and cash equivalents 994 406 1,024 510 Accounts payable and accrued liabilities (3) (42) (3) (43) Borrowings (4,265) (1,646) (4,371) (546)

Gross exposure arising from recognised assets and liabilities (3,272) (1,271) (3,031) (63)

70 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-33 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

4 FINANCIAL RISK MANAGEMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

4.1 Financial risk factors (Continued)

(a) Foreign exchange rate risk (Continued)

Exposure to foreign currencies (expressed in Hong Kong dollars) 2014 2013 Hong Kong Hong Kong US dollar dollar US dollar dollar HK$’million HK$’million HK$’million HK$’million

Company Accounts receivable and other current assets 2 11 318 16 Cash and cash equivalents 513 3 511 78 Accounts payable and accrued liabilities (3) (37) (3) (39) Borrowings (4,263) (1,646) (4,263) (546)

Gross exposure arising from recognised assets and liabilities (3,751) (1,669) (3,437) (491)

The Group did not enter into any hedge contracts during any of the years presented to hedge against its foreign exchange rate risk. However, management monitors the related foreign currency exposure closely and will consider hedging significant foreign currency exposure should the need arise.

The following table indicates the instantaneous change in the Group’s profit after tax (and retained earnings) that would arise if foreign exchange rates to which the Group has significant exposure at the end of the reporting period had changed at that date, assuming all other risk variables remained constant.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 71 F-34 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

4 FINANCIAL RISK MANAGEMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

4.1 Financial risk factors (Continued)

(a) Foreign exchange rate risk (Continued)

2014 2013 Effect on Effect on Increase/ profit after Increase/ profit after (decrease) tax and (decrease) tax and in foreign retained in foreign retained Group exchange earnings exchange earnings rates HK$’million rates HK$’million

US dollar 5% (123) 5% (114) (5%) 123 (5%) 114 Hong Kong dollar 5% (48) 5% (2) (5%) 48 (5%) 2

Results of the analysis as presented in the above table represent an aggregation of the instantaneous effects on each of the Group entities’ profit after tax (and retained earnings) measured in the respective functional currencies, translated into Hong Kong dollar at the exchange rate ruling at the end of the reporting period for presentation purposes.

The sensitivity analysis assumes that the change in foreign exchange rates had been applied to re-measure those financial instruments held by the Group which expose the Group to foreign currency risk at the end of the reporting period, including inter-company payables and receivables within the Group which are denominated in a currency other than the functional currencies of the lender or the borrower. The analysis excludes differences that would result from the translation of the financial statements of foreign operations into the Group’s presentation currency. The analysis is performed on the same basis for 2013.

72 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-35 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

4 FINANCIAL RISK MANAGEMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

4.1 Financial risk factors (Continued)

(b) Credit risk

Credit risk arises primarily from cash and cash equivalents, accounts receivable, other receivables, amounts due from related parties and loans to third parties.

A substantial portion of the Group’s cash at bank and time deposits are placed with state-owned banks and financial institutions in the PRC and management believes that the credit risk is low.

The Group performs ongoing assessment of the credit quality of its customers. The ageing analysis of accounts receivable is presented in Note 25.

The carrying amounts of cash and cash equivalents, accounts receivable, other receivables, amounts due from related parties and loans to third parties included in the consolidated statement of financial position represent the Group’s maximum exposure to credit risk. No other financial assets carry a significant exposure to credit risk.

The Group has no significant concentration of credit risk.

Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

The Group’s liquidity risk management involves maintaining sufficient cash and cash equivalents and availability of funding through an adequate amount of committed credit facilities. Management prepares monthly cash flow budget to ensure that the Group will always have sufficient liquidity to meet its financial obligations as they fall due. The Group arranges and negotiates financing with financial institutions and maintains a certain level of standby credit facilities to reduce the Group’s liquidity risk.

Given the low level of gearing and continued access to funding, the Group believes that its liquidity risk is not material.

Analysis of the Group’s financial liabilities based on the remaining period at the date of the consolidated statement of financial position to the contractual maturity dates are presented in Notes 30 and 31.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 73 F-36 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

4 FINANCIAL RISK MANAGEMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

4.2 Capital risk management

The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, optimise returns for owners and to minimise its cost of capital. In meeting its objectives of managing capital, the Group may issue new shares, adjust its debt levels or the mix between short-term and long-term borrowings.

The Group monitors capital on the basis of the gearing ratio which is calculated as the sum of interest-bearing borrowings and obligations under finance leases divided by the sum of total equity, interest-bearing borrowings and obligations under finance leases. The gearing ratio at 31 December 2014 is 25.6% (2013: 30.3%).

There were no changes in the management’s approach to capital management of the Group during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.

4.3 Fair value estimation

The carrying amounts of the Group’s financial instruments carried at cost or amortised cost as of 31 December 2014 and 2013 are short-term in nature and are not materially different from their fair values.

The fair values are based on discounted cash flow using applicable discount rates based upon the prevailing market rates of interest available to the Group for financial instruments with substantially the same terms and characteristics at the dates of the statement of financial position. Such discount rates ranged from 5.45% to 6.15% per annum as at 31 December 2014 depending on the type of the borrowings. An analysis of the carrying amounts of long-term borrowings is presented in Note 31.

74 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-37 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

5 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Estimates and judgements are regularly evaluated by the Group, based on historical experience and other factors which include expectations of future events that are believed to be reasonable under the circumstances.

Note 28(b) contains information about the assumptions and risks factors relating to fair value of share options granted. Other key sources of estimation uncertainty and judgement are described as follows:

(a) Estimation of oil and natural gas reserves

Estimates of oil and natural gas reserves are key elements in the Group’s investment decision-making process. They are also an important element in testing for impairment. Changes in proved oil and natural gas reserves, particularly proved developed reserves, will affect unit-of-production depreciation, depletion and amortisation recorded in the Group’s consolidated financial statements for property, plant and equipment related to oil and gas production activities. A reduction in proved developed reserves will increase depreciation, depletion and amortisation charges. Proved reserve estimates are subject to revision, either upward or downward, based on new information, such as from development drilling and production activities or from changes in economic factors, including product prices, contract terms or development plans.

(b) Estimation of impairment of non-financial assets

The Group tests at least annually whether goodwill was suffered any impairment. Property, plant and equipment, including oil and gas properties, are reviewed for possible impairments whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Determination as to whether and how much an asset is impaired involves management estimates and judgements such as future prices of crude oil. However, the impairment reviews and calculations are based on assumptions that are consistent with the Group’s business plans. Favourable changes to some assumptions may allow the Group to avoid the need to impair any assets in these years, whereas unfavourable changes may cause the assets to become impaired.

The Group’s management determines the estimated useful lives and residual values for the Group’s property, plant and equipment, other than oil and gas properties. This estimate is based on the historical experience of the actual useful lives and residual values of property, plant and equipment of similar nature and functions. It could change significantly as a result of technological advancement and innovations in the oil and gas industry. Management will adjust the depreciation charge where residual values vary with previously estimated, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold. Actual residual values may differ from estimated residual values. Periodic review could result in a change in residual values and therefore depreciation in the future periods.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 75 F-38 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

5 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (CONTINUED)

(d) Taxes and duties applicable to an associate operating in Kazakhstan

The determination of the obligations for taxes and duties for each statement of financial position date of the associate operating in Kazakhstan requires the interpretation of tax and other legislations. Whilst the directors believe that the associate’s judgements are appropriate, significant differences in actual experience may materially affect its future tax and duty obligations.

The associate operating in Kazakhstan is subject to uncertainties relating to the determination of its tax and other liabilities. The tax system and legislations in Kazakhstan have been in force for only a relatively short time compared to more developed jurisdictions and are subject to frequent changes and varying interpretations. The interpretations of such legislations by management of the associate operating in Kazakhstan in applying it to business transactions may be challenged by the relevant tax and other governmental authorities and, as a result, the associate may be assessed for additional tax and other payments including duties, fines and penalties, which could have a material adverse effect on the Group’s financial position and results of operations. Such uncertainties may relate to calculating the profitability of each subsoil contract for tax purposes, the applicability of excess profits tax to the operations of the associate operating in Kazahkstan.

Were the actual final outcome on the interpretations of tax and other legislations to differ from the associate’s judgements and estimates, the results of operation and financial position of the Group could have a significant adverse effect.

6 REVENUE AND TURNOVER

Turnover mainly represents revenue from the sales of crude oil, the sales of natural gas, LNG processing, LNG terminal business and transmission of natural gas. Analysis of revenue by segment is shown in Note 37.

7 OTHER GAINS, NET

2014 2013 HK$’million HK$’million

Net exchange (losses)/gains (123) 45 Rental income 87 63 Net losses on disposals of property, plant and equipment (16) (70) Government grants 778 656 Others 111 74

837 768

76 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-39 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

7 OTHER GAINS, NET (CONTINUED)

Government grants for the year ended 31 December 2014 mainly represented compensation of reduction in income due to the implementation of Value-Added-Tax Reform from the government. There were no unfulfilled conditions and other contingencies attached to the receipts of these grants. There is no assurance that the Group will continue to receive such grant in the future. During the year ended 31 December 2014, the Group have recognised and received related government grants of HK$665 million (2013: HK$538 million).

8 INTEREST INCOME

2014 2013 HK$’million HK$’million

Interest income on: – Amounts due from related parties 83 37 – Amounts due from third parties – 1 – Bank deposits 134 190

217 228

9 EMPLOYEE COMPENSATION COSTS

2014 2013 HK$’million HK$’million

Salaries, wages and allowances 2,141 1,864 Retirement benefits scheme contributions 227 182

2,368 2,046

As stipulated by the regulations of the PRC, the Group participates in various defined contribution retirement plans organised by municipal and provincial governments for its staff. The Group is required to make contributions to the retirement plans at rates ranging from 12% to 21% of the salaries, bonus and certain allowances of its staff. The Group has no other material obligation for the payment of pension benefits associated with these plans beyond the annual contributions described above. The Group’s contributions for the year ended 31 December 2014 were HK$227 million (2013: HK$182 million).

10 TAXES OTHER THAN INCOME TAXES

Taxes other than income taxes include special levies on PRC domestic sales of crude oil of approximately HK$331 million (2013: HK$388 million) for the year ended 31 December 2014.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 77 F-40 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

11 INTEREST EXPENSES

2014 2013 HK$’million HK$’million

Interest expenses on: Bank loans, wholly repayable within five years 55 17

Other loans, wholly repayable within five years, from: – An intermediate holding company 509 798 – An immediate holding company 35 13 – China Petroleum Finance Company Limited (“CP Finance”) 850 980 – Fellow subsidiaries 64 74

Finance charges on obligations under finance leases, from: – A fellow subsidiary 1 – – A third party 7 – Less: Amounts capitalised (1,035) (1,260)

486 622

Amounts capitalised are borrowing costs that are attributable to the construction of qualifying assets. The average interest rate used to capitalise such borrowing cost was 5.08% (2013: 5.80%) per annum for the year ended 31 December 2014.

12 PROFIT BEFORE INCOME TAX EXPENSE

Items charged in arriving at the profit before income tax expense include:

2014 2013 HK$’million HK$’million

Amortisation of advanced operating lease payments and intangible assets 81 60 Auditors’ remuneration 21 19 Cost of inventories recognised as expense 28,354 23,025 Depreciation and depletion of property, plant and equipment 5,311 4,468 Operating lease expenses 433 248 Impairment loss on property, plant and equipment 2 12 Impairment loss on available-for-sale financial assets 6 –

78 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-41 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

13 DIRECTORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS

Details of the emoluments of directors and the Chief Executive Officer for the years ended 31 December 2014 and 2013 are as follows:

2014 Retirement Salaries benefits and other scheme Fees benefits contributions Total HK$’000 HK$’000 HK$’000 HK$’000

Directors: Mr Wu Enlai – – – – Mr Zhao Yongqi (appointed on 12 June 2014) – – – – Mr Zhang Bowen – 6,375 375 6,750 Mr Cheng Cheng – 4,533 300 4,833 Dr Lau Wah Sum 450 – – 450 Mr Li Kwok Sing Aubrey 300 – – 300 Dr Liu Xiao Feng 250 – – 250

1,000 10,908 675 12,583

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 79 F-42 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

13 DIRECTORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS (CONTINUED)

2013 Retirement Salaries benefits and other scheme Fees benefits contributions Total HK$’000 HK$’000 HK$’000 HK$’000

Directors: Mr Zhang Bowen – 7,500 375 7,875 Mr Cheng Cheng – 5,333 300 5,633 Mr Wu Enlai (appointed on 30 December 2013) – – – –

Dr Lau Wah Sum 450 – – 450 Mr Li Kwok Sing Aubrey 300 – – 300 Dr Liu Xiao Feng 250 – – 250 Mr Li Hualin (resigned on 27 August 2013) – – – –

Mr Wen Qingshan (appointed on 27 August 2013 and resigned on 17 December 2013) – – – –

Chief Executive Officer: Mr Zhao Yongqi (appointed on 5 December 2013) – 42 – 42 Mr Jiang Changliang (resigned on 5 December 2013) – 468 – 468

1,000 13,343 675 15,018

80 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-43 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

13 DIRECTORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS (CONTINUED)

The five individuals whose emoluments were the highest in the Group for the year including two (2013: two) directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining three (2013: three) individuals during the year are as follows:

2014 2013 HK$’000 HK$’000

Salaries, wages and allowances 13,599 15,999 Retirement benefits scheme contributions 900 900

14,499 16,899

The emoluments fell within the following band:

HK$4,500,001 to HK$5,000,000 3 3

None of the directors has waived their remuneration during the year ended 31 December 2014 (2013: Nil).

During the year ended 31 December 2014, the Company did not incur any severance payment to any director for loss of office or any payment as inducement to any director to join the Company (2013: Nil).

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 81 F-44 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

14 INCOME TAX EXPENSE

2014 2013 HK$’million HK$’million

Current tax – PRC 3,101 2,847 – Overseas 481 629

3,582 3,476 Deferred tax (Note 32(b)) (502) 369

3,080 3,845

Hong Kong Profits Tax has not been provided for as the Group has no assessable profit for the year (2013: Nil).

In accordance with the relevant PRC income tax rules and regulations, the PRC corporate income tax rate applicable to the Group’s subsidiaries in the PRC is principally 25% (2013: 25%). The operations of the Group’s certain regions in the PRC have qualified for certain tax incentives in the form of a preferential income tax rates ranging from 15% to 20% (2013: 10% to 20%).

Income tax on overseas profits has been calculated on the estimated assessable profit for the year at the applicable rates of taxation prevailing in the jurisdictions in which the Group operates.

Included in overseas income tax expenses is withholding tax of approximately HK$217 million (2013: HK$320 million) in respect of dividend received from an associate, CNPC-Aktobemunaigas Joint Stock Company (“Aktobe”), which is charged at 20% (2013: 20%).

82 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-45 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

14 INCOME TAX EXPENSE (CONTINUED)

The tax on the Group’s profit before income tax expense differs from the theoretical amount that would arise using the corporate income tax rate in the PRC applicable to the Group as follows:

2014 2013 HK$’million HK$’million

Profit before income tax expense 11,956 14,353

Tax calculated at a tax rate of 25% (2013: 25%) 2,989 3,588 Under-provision in prior years 110 7 Effect of income taxes from international operations in different jurisdictions of taxes from the PRC statutory tax rate (63) (67) Effect of preferential tax rate (124) (103) Tax effect of income not subject to tax (45) (114) Tax effect of expenses not deductible for tax purposes 68 166 Tax effect of share of profits less losses of associates (119) (272) Tax effect of share of profits less losses of joint ventures (43) (68) Tax effect of unused tax losses not recognised 42 229 Tax effect of recognition of tax losses not recognised in prior years (73) (8) Withholding tax on dividends received and receivable 338 487

Income tax expense 3,080 3,845

The domestic income tax rate used in the calculation above is the PRC tax rate which is the jurisdiction where the operations of the Group are substantially based.

15 RESULTS ATTRIBUTABLE TO OWNERS OF THE COMPANY

Profit for the year in the Company’s financial statements amounted to HK$6,936 million (2013: HK$2,550 million), which included dividends from subsidiaries, joint ventures and associates amounting to HK$7,797 million (2013: HK$2,634 million).

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 83 F-46 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

16 BASIC AND DILUTED EARNINGS PER SHARE

(a) The calculation of basic earnings per share is based on the Group’s profit attributable to owners of the Company of approximately HK$5,610 million (2013: HK$6,851 million) and weighted average number of ordinary shares in issue during the year of approximately 8,070 million shares (2013: 8,059 million shares).

(b) Diluted earnings per share is calculated based on the Group’s profit attributable to owners of the Company of approximately HK$5,610 million (2013: HK$6,851 million), and the weighted average number of ordinary shares of approximately 8,073 million shares (2013: 8,076 million shares) which is the weighted average number of ordinary shares in issue during the year plus the weighted average number of dilutive potential ordinary shares in respect of share options of approximately 3 million shares (2013: 17 million shares) deemed to be issued at no consideration if all outstanding share option granted had been exercised.

17 DIVIDEND ATTRIBUTABLE TO OWNERS OF THE COMPANY

2014 2013 HK$’million HK$’million

Proposed final dividend attributable to owners of the Company for 2014 (note (a)) 1,614 – Final dividend attributable to owners of the Company for 2013 (note (b)) – 1,854

Notes:

(a) At the meeting on 26 March 2015, the Board of Directors proposed final dividend attributable to owners of the Company in respect of 2014 of HK20 cents per share amounting to a total of approximately HK$1,614 million. The amount is based on approximately 8,072 million shares in issue as at 26 March 2015. These consolidated financial statements do not reflect this dividend payable as the final dividends were proposed after the date of the statement of financial position and will be accounted for in equity as an appropriation of retained earnings in the year ending 31 December 2015 when approved at the 2015 Annual General Meeting.

(b) Final dividend attributable to owners of the Company in respect of 2013 of HK23 cents per share amounting to a total of approximately HK$1,854 million were approved by the shareholders in the Annual General Meeting on 12 June 2014. The amount is based on approximately 8,062 million shares in issue as at 20 March 2014. The actual final dividend for 2013 was approximately HK$1,857 million due to additional shares issued during the period from 21 March 2014 to 19 June 2014, the date of closure of the register of members, and was paid on 30 June 2014.

84 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-47 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

18 PROPERTY, PLANT AND EQUIPMENT

Group Company

Equipment Years ended 31 Oil and gas Natural gas and Motor Construction December 2014 and 2013 Buildings properties Pipelines machinery Vehicles Others in progress Total Others HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million

Cost: Balances at 1 January 2013 2,649 13,232 31,931 27,261 1,877 2,411 17,157 96,518 6 Currency translation differences 69 100 938 760 53 62 448 2,430 – Additions – 222 – 29 379 37 16,083 16,750 4 Additions through business combinations – – – – 34 3 – 37 – Disposals (2) (1) – (209) (23) (22) (221) (478) – Transfers 13 653 8,007 5,828 42 38 (14,581) – –

Balances at 31 December 2013 2,729 14,206 40,876 33,669 2,362 2,529 18,886 115,257 10

Balances at 1 January 2014 2,729 14,206 40,876 33,669 2,362 2,529 18,886 115,257 10 Currency translation differences (53) (234) (824) (719) (47) (127) (314) (2,318) – Additions 13 479 – 888 147 49 9,951 11,527 – Disposals (1) – – (1,005) (8) (2) (74) (1,090) (1) Transfers 124 444 1,004 4,613 – 45 (6,230) – – Reclassification (279) – (168) 1,702 8 (1,263) – – –

Balances at 31 December 2014 2,533 14,895 40,888 39,148 2,462 1,231 22,219 123,376 9

Accumulated depreciation and depletion: Balances at 1 January 2013 592 8,761 11,086 6,003 568 283 – 27,293 4 Currency translation differences 16 61 306 184 24 5 – 596 – Charge for the year 87 919 989 2,072 210 191 – 4,468 2 Disposals (1) – – (36) (16) (2) – (55) – Transfers (21) (8) (4) 110 (2) (75) – – – Impairment loss – – – 7 5 – – 12 –

Balances at 31 December 2013 673 9,733 12,377 8,340 789 402 – 32,314 6

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 85 F-48 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

18 PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

Group Company

Balances at 1 January 2014 673 9,733 12,377 8,340 789 402 – 32,314 6 Currency translation differences (14) (165) (260) (184) (12) (3) – (638) – Charge for the year 82 1,309 1,277 2,249 251 143 – 5,311 1 Disposals (1) – – (49) (4) (1) – (55) (1) Reclassification (19) – (46) 264 7 (206) – – – Impairment loss – – – 2 – – – 2 –

Balances at 31 December 2014 721 10,877 13,348 10,622 1,031 335 – 36,934 6

Net book value: Balances at 31 December 2014 1,812 4,018 27,540 28,526 1,431 896 22,219 86,442 3

Balances at 31 December 2013 2,056 4,473 28,499 25,329 1,573 2,127 18,886 82,943 4

The buildings of the Group are mainly located in the PRC.

The Group did not incur and does not anticipate to incur any material dismantlement, restoration or abandonment costs given the nature of its onshore producing activities and current regulations and contracts governing such activities.

Other assets mainly comprises of containers, roads, bridges and others.

As at 31 December 2014, the legal title registration of certain of the Group’s properties with carrying amount of approximately HK$831 million (2013: HK$837 million) is subject to certain administrative procedures to be completed by the relevant local government authorities. However, the Board of Directors of the Company is of the opinion that the risks and rewards of using these assets have been transferred to the Group.

In addition, certain of the Group’s property, plant and equipment are situated on leasehold land in the PRC which was granted for use by the relevant government authorities to the Group at nil consideration with no specific terms of usage.

During the year, the Group leases certain equipment and machinery under finance leases expiring from 5 to 6 years at an effective interest rate of 5.3%. At the end of the lease term the Group has the option to purchase the leased equipment and machinery at a price deemed to be a bargain purchase option. None of the leases includes contingent rentals. During the year, additions to equipment and machinery of the Group financed by new finance leases from a fellow subsidiary and a third party were HK$519 million (2013: HK$Nil) and HK$364 million (2013: HK$Nil) respectively. As at 31 December 2014, the net book value of equipment and machinery held under finance leases of the Group was HK$859 million (2013: HK$Nil). 86 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-49 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

19 ADVANCED OPERATING LEASE PAYMENTS

The Group’s advanced operating lease payments mainly represent land use rights and comprise:

Group 2014 2013 HK$’million HK$’million

Leasehold interest in land outside Hong Kong: Leases of between 10 to 50 years 3,369 2,885 Leases of over 50 years 10 10

3,379 2,895

Balance as at 1 January 2,895 2,199 Currency translation differences (78) 54 Acquisition of subsidiaries – 17 Additions 632 680 Amortisation for the year (70) (55)

Balance as at 31 December 3,379 2,895

These advanced operating lease payments are amortised over the related lease terms using the straight-line method.

20 INVESTMENTS IN ASSOCIATES

Group Company 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Unlisted shares, at cost – – 1,153 1,090 Share of net assets 4,332 5,255 – – Goodwill 443 452 – – Loans to associates – 13 – –

4,775 5,720 1,153 1,090

Details of the principal associates are set out in Note 41. Loans to associates are unsecured and interest-bearing at 8% per annum.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 87 F-50 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

20 INVESTMENTS IN ASSOCIATES (CONTINUED)

Summarised financial information of a material associate, adjusted for any differences in accounting policies, and reconciled to the carrying amounts in the consolidated financial statements, are disclosed below:

Aktobe 2014 2013 HK$’million HK$’million

Gross amounts of the associate’s Current assets 3,509 6,148 Non-current assets 33,062 35,260 Current liabilities (8,292) (13,498) Non-current liabilities (18,611) (14,491) Equity 9,668 13,419

Revenue 22,327 34,426 Profit from continuing operations 2,395 5,433 Post-tax profit or loss from discontinued operations – – Other comprehensive income – – Total comprehensive income 2,395 5,433 Dividend received from the associate 1,020 1,579

Reconciled to the Group’s interests in the associate Gross amounts of net assets of the associate 9,668 13,419 Group’s interest (note) 25.12% 25.12% Group’s share of net assets of the associate 2,428 3,371

Note:

The effective equity interest of Aktobe attributable to the Group is 15.07%, representing 25.12% equity interest in Aktobe held by a 60% owned subsidiary.

88 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-51 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

20 INVESTMENTS IN ASSOCIATES (CONTINUED)

Aggregate information of associates that are not individually material:

2014 2013 HK$’million HK$’million

Aggregate carrying amount of individually immaterial associates in the consolidated financial statements 2,347 2,336

Aggregate amounts of the Group’s share of those associates’ Profit from continuing operations 115 281 Post-tax profit or loss from discontinued operations – – Other comprehensive income – – Total comprehensive income 115 281

21 INVESTMENTS IN JOINT VENTURES

Group Company 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Unlisted shares, at cost – – 227 227 Share of net assets 1,336 1,481 – – Loans to joint ventures 115 83 45 45

1,451 1,564 272 272

Less: impairment loss – – (150) –

1,451 1,564 122 272

Details of the principal joint ventures are set out in Note 42.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 89 F-52 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

21 INVESTMENTS IN JOINT VENTURES (CONTINUED)

As at 31 December 2014, included in loans to joint ventures is an amount of HK$45 million (2013: HK$45 million) which is unsecured, interest-free and repayable on 31 December 2015. Except as disclosed above, loans to joint ventures are unsecured, interest-bearing at 8% per annum and repayable within one year.

As at 31 December 2014 and 2013, the loans to joint ventures are not past due and not impaired.

Dividends declared from joint ventures are approximately HK$393 million (2013: HK$336 million) for the year ended 31 December 2014.

During the year ended 31 December 2014, impairment loss of HK$150 million (2013: HK$ Nil) was made in respect of the Group’s interest in a joint venture. The recoverable amount of the relevant joint venture was estimated by reference to its business performance prepared by the investee’s management.

There is no individually material joint venture which significantly affects the results and/or net assets of the Group at 31 December 2014.

Aggregate information of joint ventures that are not individually material:

2014 2013 HK$’million HK$’million

Aggregate carrying amount of individually immaterial joint ventures in the consolidated financial statements 1,336 1,481

Aggregate amounts of the Group’s share of those joint ventures’ – Profit from continuing operations 256 415 – Post-tax profit or loss from discontinued operations – – – Other comprehensive income – – – Total comprehensive income 256 415

90 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-53 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

22 INVESTMENTS IN SUBSIDIARIES

Company 2014 2013 HK$’million HK$’million

Unlisted shares, at cost 44,298 43,337

Details of the principal subsidiaries are set out in Note 40.

The following tables list out the information related to PetroChina Beijing Gas Pipeline Co., Ltd (“Beijing Pipeline”) and CNPC International (Caspian) Limited (“Caspian”), the two subsidiaries of the Group which have material non-controlling interests (“NCI”). The summarised financial information presented below represents the amounts before any intercompany elimination.

Beijing Pipeline Caspian 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

NCI percentage 40% 40% 40% 40% Current assets 2,206 1,333 659 1,251 Non-current assets 38,026 39,190 2,428 3,371 Current liabilities (11,938) (6,968) (198) (204) Non-current liabilities (4,171) (9,414) (459) (718) Net assets 24,123 24,141 2,430 3,700 Carrying amount of NCI 9,656 9,662 972 1,480

Revenue 12,649 11,908 – – Profit for the year 5,965 5,850 366 1,012 Total comprehensive income 5,467 6,386 366 1,012 Profit allocated to NCI 2,388 2,341 146 405 Dividend paid to NCI 2,732 852 472 440

Cash flows from operating activities 9,583 8,685 – – Cash flows from investing activities (2,316) (5,967) 802 1,250 Cash flows from financing activities (6,969) (2,734) (1,394) (1,331)

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 91 F-54 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

23 INTANGIBLE AND OTHER NON-CURRENT ASSETS

Group Company 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Intangible assets (note (i)) 497 503 – – Prepaid construction costs 814 2,006 – – Loans to third parties 178 592 – – Loan to a subsidiary – – 1,263 1,289 Others 20 3 1 1

1,509 3,104 1,264 1,290

Notes:

(i) The intangible assets mainly comprise goodwill, franchised rights and computer software costs. The movements in intangible assets are as follows:

Group 2014 2013 Goodwill Others Total Goodwill Others Total HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million

At 1 January 375 128 503 280 63 343 Currency translation differences (8) (3) (11) 8 2 10 Additions – 16 16 – 68 68 Acquisitions of subsidiaries – – – 7 – 7 Adjustments to purchase consideration and net asset values (note (ii)) – – – 80 – 80 Amortisation for the year – (11) (11) – (5) (5)

At 31 December 367 130 497 375 128 503

(ii) These adjustments to purchase consideration and net asset values related to acquisitions of subsidiaries in the prior year, whose fair values of identifiable assets and liabilities were previously determined on a provisional basis. During the measurement period in 2013, the Group recognised adjustments amounting to HK$80 million to the provisional amounts.

92 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-55 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

24 INVENTORIES

Inventories in the consolidated statement of financial position comprise:

Group 2014 2013 HK$’million HK$’million

Natural gas 530 568 Materials for natural gas pipelines 549 527 Crude oil in tanks and others 78 78

1,157 1,173

25 ACCOUNTS RECEIVABLE

As of the end of the reporting period, the ageing analysis of accounts receivable, based on the invoice date (or date of revenue recognition, if earlier) is as follows:

Group 2014 2013 HK$’million HK$’million

Within 3 months 1,329 1,352 Between 3 to 6 months 254 397 Over 6 months 405 144

1,988 1,893

The Group’s revenue from sales of crude oil and rendering of terminal and pipeline services are generally collectable within a period ranging from 30 to 90 days from the invoice date while the sales of natural gas are made in cash or on credit terms no more than 90 days. As at 31 December 2014, accounts receivable of approximately HK$659 million (2013: HK$541 million) were past due but for which the Group has not provided for impairment loss. These accounts receivable relate to a number of independent customers that have a good track record with the Group. As of 31 December 2014 and 2013, there are no provision of impairment of accounts receivable. Accordingly, the ageing analysis of the accounts receivable which are past due but not impaired is disclosed in the above ageing analysis.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 93 F-56 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

26 PREPAID EXPENSES AND OTHER CURRENT ASSETS

Group Company 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Other receivables 1,058 1,170 2 2 Advances to suppliers 365 273 – – Amounts due from related parties – Intermediate holding company 1,207 697 – – – Subsidiaries – – 9,427 7,980 – Others 105 253 – –

2,735 2,393 9,429 7,982 Less: Provision for impairment (21) (21) (530) (244)

2,714 2,372 8,899 7,738

Loans to third parties 525 357 – – Dividends receivable from a joint venture – 8 – – Dividends receivable from associates 119 – 118 – Dividends receivable from subsidiaries – – 5,933 1,756 Value-added tax recoverable 992 873 – – Prepaid expenses 1,210 1,184 102 106 Other current assets 181 105 78 5

5,741 4,899 15,130 9,605

Except for the amounts due from intermediate holding company HK$1,207 million (2013: HK$697 million) which are unsecured and interest bearing at 3.3% per annum, the other amounts due from related parties are interest free and unsecured. All of the amounts due from related parties are expected to be settled within one year.

27 CASH AND CASH EQUIVALENTS

Group Company 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Cash at bank and on hand 6,381 11,347 30 517 Short-term bank deposits 4,348 3,550 1,556 1,340

Cash and cash equivalents 10,729 14,897 1,586 1,857

94 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-57 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

27 CASH AND CASH EQUIVALENTS (CONTINUED)

Cash at bank and bank deposits carry interest at prevailing market rate at 0.80% per annum (2013: 0.70% per annum).

Included in bank deposits, bank balances and cash are amounts of approximately HK$8,222 million or RMB6,510 million (2013: HK$11,740 million or RMB9,109 million) denominated in Renminbi which are deposited with banks in the PRC. The conversion of these Renminbi denominated balances into foreign currencies and the remittance of funds out of Mainland China is subject to the rules and regulations of foreign exchange control promulgated by the PRC Government.

28 SHARE CAPITAL AND SHARE OPTION SCHEMES

(a) Share capital

Number of Nominal value ordinary of ordinary shares shares million HK$’million

Authorised:

Ordinary shares of HK$0.01 each

At 1 January 2013, 31 December 2013 and 31 December 2014 16,000 160

Issue and fully paid:

Ordinary shares of HK$0.01 each

At 1 January 2013 8,051 81 Issue of shares upon exercise of share options (note (i)) 16 – Repurchase of shares (note (ii)) (5) –

At 31 December 2013 and 1 January 2014 8,062 81 Issue of shares upon exercise of share options (note (i)) 10 –

At 31 December 2014 8,072 81

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 95 F-58 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

28 SHARE CAPITAL AND SHARE OPTION SCHEMES (CONTINUED)

(a) Share capital (Continued)

Notes:

(i) During the year ended 31 December 2014, the Company allotted and issued approximately 9.9 million shares (2013: 15.6 million shares) of HK$0.01 each for cash at the average exercise price of HK$3.250 (2013: HK$5.527) per share as a result of the exercise of share options. The nominal value of ordinary shares has increased by HK$99,000 (2013: HK$156,000).

(ii) Purchase of own shares

During the year ended 31 December 2014, the Company did not repurchase its own shares on the Stock Exchange. The Company repurchased its own shares on the Stock Exchange for the year ended 31 December 2013 as follows:

Number of shares Highest price Lowest price Aggregate repurchased paid per share paid per share amount paid HK$ HK$ HK$’ million

June 2013 2,000,000 12.84 12.00 25 July 2013 2,518,000 12.84 12.40 32

The repurchased shares were lapsed and accordingly the issued share capital of the Company was reduced by the nominal value HK$45,000 of these shares. The premium paid on the repurchase of the shares of HK$57 million was charged to share premium for the year ended 31 December 2013.

(b) Share option schemes

Pursuant to executive share option scheme (the “2002 Share Option Scheme”) of the Company dated 3 June 2002, the directors of the Company are authorised, at any time within ten years after the adoption of the 2002 Share Option Scheme, to grant options to any directors or employees of the Company or any of its subsidiaries to subscribe for the Company’s shares at a price not less than the average of the closing prices of the Company’s shares on the five trading days immediately preceding the offer date of the options, the closing price of the Company’s shares on the offer day or the nominal value of the Company’s shares, whichever is the highest. Unless otherwise lapsed or amended, the 2002 Share Option Scheme will be valid and effective for a period of ten years from the date of adoption. The maximum number of shares in respect of which options may be granted under the 2002 Share Option Scheme cannot exceed 10% of the issued share capital of the Company. Notwithstanding aforesaid in this paragraph, the maximum number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the 2002 Share Option Scheme (and under any other shares of the Company) shall not exceed 30% of the shares in issue from time to time.

Options granted under the 2002 Share Option Scheme must be taken up within the period as specified in the offer of the options and no amount shall be payable by the grantee to the exercising of the right to accept an offer of an option. Options granted are exercisable at any time, but not less than 3 months and not more than 10 years from the date on which the option is granted and accepted by the grantee. All of the options are vested to the option holders after 3 months from the date on which the options are granted. The exercise period of the option is 5 years from the grant date.

96 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-59 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

28 SHARE CAPITAL AND SHARE OPTION SCHEMES (CONTINUED)

(b) Share option schemes (Continued)

The 2002 share option scheme expired on 2 June 2012.

No new share option scheme was adopted after the expiration of 2002 Share Option Scheme on 2 June 2012. No new option was granted for the year ended 31 December 2014.

The number of shares in respect of which options had been granted and outstanding at 31 December 2014 under the 2002 Share Option Scheme was approximately 36.7 million shares (2013: 46.6 million shares), representing 0.45% (2013: 0.58%) of the issued share capital of the Company at 31 December 2014.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 97 F-60 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

28 SHARE CAPITAL AND SHARE OPTION SCHEMES (CONTINUED)

(b) Share option schemes (Continued)

The movements in the share options granted under the 2002 Share Option Scheme during the year ended 31 December 2013 and 2014 are shown in the following table:

Number of share options Outstanding at Outstanding 31 December Outstanding at Exercised Lapsed 2013 and Exercised at Name of category 1 January during during 1 January during 31 December of participants Option type 2013 the year the year 2014 the year 2014 ‘000 ‘000 ‘000 ‘000 ‘000 ‘000

Directors Mr Zhang Bowen 2008 (note (i)) 2,400 (2,400) – – – – 2009 (note (ii)) 2,400 – – 2,400 (2,400) – 2010 (note (iii)) 2,400 – – 2,400 – 2,400 2011 (note (iv)) 2,400 – – 2,400 – 2,400 2012 (note (v)) 2,200 – – 2,200 – 2,200

Mr Cheng Cheng 2008 (note (i)) 1,500 (1,500) – – – – 2009 (note (ii)) 1,500 – – 1,500 (1,500) – 2010 (note (iii)) 1,500 – – 1,500 – 1,500 2011 (note (iv)) 1,500 – – 1,500 – 1,500 2012 (note (v)) 2,000 – – 2,000 – 2,000

Dr Lau Wah Sum 2010 (note (iii)) 400 – – 400 – 400

Mr Li Kwok Sing Aubrey 2010 (note (iii)) 400 – – 400 – 400

Dr Liu Xiao Feng 2010 (note (iii)) 400 – – 400 – 400

Mr Li Hualin (resigned on 2008 (note (i)) 3,200 (3,200) – – – – 27 August 2013) 2009 (note (ii)) 3,200 – (3,200) – – – 2010 (note (iii)) 3,200 – (3,200) – – – 2011 (note (iv)) 3,200 – (3,200) – – – 2012 (note (v)) 3,200 – (3,200) – – –

Subtotal 37,000 (7,100) (12,800) 17,100 (3,900) 13,200

Chief Executive Officer Jiang Changliang (resigned 2012 (note (v)) 2,400 – (2,400) – – – on 5 December 2013)

Other employees 2008 (note (i)) 6,000 (6,000) – – – – 2009 (note (ii)) 6,000 – – 6,000 (6,000) – 2010 (note (iii)) 6,000 – – 6,000 – 6,000 2011 (note (iv)) 7,000 (1,000) – 6,000 – 6,000 2012 (note (v)) 13,000 (1,500) – 11,500 – 11,500

Subtotal 38,000 (8,500) – 29,500 (6,000) 23,500

Total 77,400 (15,600) (15,200) 46,600 (9,900) 36,700

98 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-61 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

28 SHARE CAPITAL AND SHARE OPTION SCHEMES (CONTINUED)

(b) Share option schemes (Continued)

Notes:

(i) These options were granted on 26 May 2008 with exercise price of HK$4.240 and exercisable from 26 August 2008 to 25 May 2013.

(ii) These options were granted on 26 March 2009 with exercise price of HK$3.250 and exercisable from 26 June 2009 to 25 March 2014.

(iii) These options were granted on 26 March 2010 with exercise price of HK$10.320 and exercisable from 26 June 2010 to 25 March 2015.

(iv) These options were granted on 18 March 2011 with exercise price of HK$11.730 and exercisable from 18 June 2011 to 17 March 2016.

(v) These options were granted on 17 May 2012 with exercise price of HK$12.632 and exercisable from 17 August 2012 to 16 May 2017.

(vi) The closing prices of the Company’s shares at the date on which the share options were exercised for the year ended 31 December 2014 ranged from HK$12.900 (2013: HK$14.460) to HK$12.900 (2013: HK$15.460).

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 99 F-62 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

29 RESERVES

(a) Movements in components of reserves

Group

Employee Available- share-based for-sale Share Contributed compensation Merger financial Translation Other Retained premium surplus reserve reserve assets reserve reserve Reserve earnings Total HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million note (i) note (ii) note (iii) note (iv) note (v) note (vi)

Balances at 31 December 2012 and 1 January 2013 39,830 134 186 (20,442) 53 2,710 1,811 20,059 44,341

Total comprehensive income for the year – – – – (10) 1,001 – 6,851 7,842 Transfer between reserves – – – – – – 563 (563) – Lapsed share options – – (38) – – – – 38 – Final dividend for 2012 – – – – – – – (1,855) (1,855) Repurchase of shares (57) – – – – – – – (57) Acquisition from non-controlling interests – – – (27) – – (5) – (32) Issue of shares upon exercise of share options 109 – (23) – – – – – 86

Balances at 31 December 2013 39,882 134 125 (20,469) 43 3,711 2,369 24,530 50,325

Balances at 31 December 2013 and 1 January 2014 39,882 134 125 (20,469) 43 3,711 2,369 24,530 50,325

Total comprehensive income for the year – – – – (29) (1,274) – 5,610 4,307 Transfer between reserves – – – – – – 518 (518) – Final dividend for 2013 – – – – – – – (1,857) (1,857) Issue of shares upon exercise of share options 42 – (10) – – – – – 32

Balances at 31 December 2014 39,924 134 115 (20,469) 14 2,437 2,887 27,765 52,807

100 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-63 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

29 RESERVES (CONTINUED)

(a) Movements in components of reserves (Continued)

Company

Employee share-based Share Contributed compensation Retained Translation premium surplus reserve earnings reserve Total HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million note (i) note (ii) note (v)

Balances at 1 January 2013 39,830 134 186 11,172 131 51,453

Total comprehensive income for the year – – – 2,550 188 2,738 Repurchase of shares (57) – – – – (57) Issue of shares upon exercise of share options 109 – (23) – – 86 Lapsed share options – – (38) 38 – – Final dividend for 2012 – – – (1,855) – (1,855)

Balances at 31 December 2013 39,882 134 125 11,905 319 52,365

Balances at 31 December 2013 and 1 January 2014 39,882 134 125 11,905 319 52,365

Total comprehensive income for the year – – – 6,936 (211) 6,725 Issue of shares upon exercise of share options 42 – (10) – – 32 Final dividend for 2013 – – – (1,857) – (1,857)

Balances at 31 December 2014 39,924 134 115 16,984 108 57,265

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 101 F-64 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

29 RESERVES (CONTINUED)

(b) Nature and purpose of reserves

Notes:

(i) Under the Bermuda Companies Act 1981, the share premium account may be applied by the Company in paying up unissued shares of the Company to be issued to members of the Company as fully paid bonus shares. During the year ended 31 December 2013, the Company repurchased its own shares on the Stock Exchange. The premium paid on the repurchase of the shares of HK$57 million was charged to share premium.

(ii) The contributed surplus represents the difference between the consolidated shareholders’ funds of the subsidiaries at the date on which they were acquired by the Group and the nominal amount of the Company’s shares issued for the acquisition.

(iii) The merger reserve represents the difference between the considerations and the aggregate share capital of subsidiaries acquired under business combinations under common control.

(iv) Available-for-sale financial assets reserve comprises the cumulative net change in the fair value of available-for-sale securities held at the end of the reporting period and is dealt with in accordance with the accounting policies in Notes 3(h).

(v) The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. The reserve is dealt with in accordance with the accounting policies set out in Note 3(d)(ii).

(vi) Other reserves mainly represents the statutory surplus reserves. Pursuant to the Company Law of the PRC, the Articles of Association and the resolution of Board of Directors of the Group’s subsidiaries established in the PRC are required to transfer 10% of its net profit to statutory surplus reserves. Appropriation to the statutory surplus reserves may be ceased when the fund aggregates to 50% of those subsidiaries’ registered capital. The statutory surplus reserves may be used to make good previous years’ losses or to increase the capital of those subsidiaries upon approval.

At 31 December 2014, the aggregate amount of reserves available for distribution to equity shareholders of the Company, as calculated under the Company’s Act 1981 of Bermuda (as amended) was HK$17,118 million (2013: HK$12,039 million). After the end of the reporting period the directors proposed a final dividend of HK20 cents per ordinary share (2013: HK23 cents per share), amounting to HK$1,614 million (2013: HK$1,854 million) (Note 17). This dividend has not been recognised as a liability at the end of the reporting period.

102 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-65 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

30 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Group Company 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Accounts payable 1,871 1,542 – – Advances from customers 1,785 1,518 – – Salaries and welfare payable 374 294 18 22 Accrued expenses 40 26 15 15 Dividend payable to non-controlling interests 95 72 – – Interest payable 94 68 5 3 Construction fee and equipment cost payables 6,809 7,248 – – Amounts due to related parties – Ultimate holding company 631 – – – – Subsidiaries – – 255 159 – Non-controlling interests 1,991 982 – – – Others 2 2 – – Other payables 1,084 924 3 1

14,776 12,676 296 200

As of the end of the reporting period, the ageing analysis of accounts payable, based on the invoice date, is as follows:

Group 2014 2013 HK$’million HK$’million

Within 3 months 1,278 923 Between 3 to 6 months 194 254 Over 6 months 399 365

1,871 1,542

The average credit period on purchase of goods is 90 days. The Group has financial risk management policies in place to ensure that all payables fall within the credit time frame. The contractual maturity date of accounts payable and accrued liabilities are within one year.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 103 F-66 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

31 BORROWINGS

Group Company 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Short-term borrowings – unsecured 5,341 929 – – Current portion of long-term borrowings 3,124 12,622 – 4,263

8,465 13,551 – 4,263

Long-term borrowings – unsecured 19,348 30,421 5,909 4,809 Less: Current portion of long-term borrowings (3,124) (12,622) – (4,263)

16,224 17,799 5,909 546

24,689 31,350 5,909 4,809

The carrying amounts of the borrowings are denominated in the following currencies:

Group Company 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Renminbi 18,587 26,051 – – US dollar 4,456 4,753 4,263 4,263 Hong Kong dollar 1,646 546 1,646 546

24,689 31,350 5,909 4,809

104 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-67 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

31 BORROWINGS (CONTINUED)

Group Company 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Total borrowings: – At fixed rates 18,407 25,610 1,100 – – At floating rates 6,282 5,740 4,809 4,809

24,689 31,350 5,909 4,809

Weighted average effective interest rates: – Bank loans 5.03% 4.59% – – – Loans from an immediate holding company 3.19% 2.34% 3.19% 2.34% – Loans from an intermediate holding company 6.29% 6.40% – – – Loans from CP Finance 4.30% 4.67% 2.32% 2.41% – Loans from fellow subsidiaries 4.62% 4.97% – –

The borrowings are analysed as follows:

Group Short-term borrowings Long-term borrowings 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Bank loans, wholly repayable within five years 820 – 2,009 339

Loans other than bank loans – Wholly repayable within five years 4,521 929 17,339 30,081 – Not wholly repayable within five years – – – 1

5,341 929 19,348 30,421

As at 31 December 2014, debentures amounting to HK$1,005 million (2013: HK$Nil) issued by 華油天然氣股份有限公司, a subsidiary of the Group, were included as borrowings of the Group. The debentures are unsecured, interest- bearing at 5.20% to 5.63% per annum and repayable within two years.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 105 F-68 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

31 BORROWINGS (CONTINUED)

Company Short-term borrowings Long-term borrowings 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Loans other than bank loans – Wholly repayable within five years – – 5,909 4,809

Loans other than bank loans are borrowings from PetroChina, Sun World and CP Finance (a finance company controlled by CNPC), other fellow subsidiaries and non-controlling interests.

As at 31 December 2014 and 2013, the long-term borrowings of the Group and the Company were repayable within one year and the long-term borrowings of the Group and the Company were repayable as follows:

Group Bank loans Loans other than bank loans 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Within one year 29 17 3,095 12,605 Between one to two years 868 26 4,420 9,132 Between two to five years 1,112 296 9,824 8,344 After five years – – – 1

2,009 339 17,339 30,082

Company Bank loans Loans other than bank loans 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Within one year – – – 4,263 Between one to two years – – – – Between two to five years – – 5,909 546

– – 5,909 4,809

106 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-69 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

31 BORROWINGS (CONTINUED)

The following table details the Group’s and the Company’s remaining contractual maturity for its non-derivative financial liabilities. The information presented is based on the earliest date on which the Group and the Company can be required to pay and represents the undiscounted cash flow including principal and interest:

Group Bank loans Loans other than bank loans 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Within one year 141 29 3,820 14,050 Between one to two years 954 94 4,924 7,209 Between two to five years 1,152 248 10,250 13,147

2,247 371 18,994 34,406

Company Bank loans Loans other than bank loans 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Within one year – – 151 4,326 Between one to two years – – 151 13 Between two to five years – – 5,979 564

– – 6,281 4,903

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 107 F-70 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

32 INCOME TAX IN THE STATEMENT OF FINANCIAL POSITION

(a) Current tax in the statement of financial position represents:

Group 2014 2013 HK$’million HK$’million

Tax payables in respect of subsidiaries in: – PRC 450 366 – Overseas 42 51

492 417

Withholding tax on dividend distributed by the subsidiaries 313 93

805 510

(b) Deferred tax assets and liabilities recognised:

Deferred tax is calculated in full on temporary differences under the liability method using the applicable tax rates which is expected to apply at the time of reversal of the temporary difference.

The movements in net deferred tax assets/(liabilities) are as follows:

Group 2014 2013 HK$’million HK$’million

At 1 January (1,461) (1,091) Acquisition of subsidiaries – 2 Currency translation differences 1 (3) Credit/(charged) to the consolidated profit or loss (Note 14) 502 (369)

At 31 December (958) (1,461)

Representing:

Deferred tax assets 456 254 Deferred tax liabilities (1,414) (1,715)

(958) (1,461)

108 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-71 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

32 INCOME TAX IN THE STATEMENT OF FINANCIAL POSITION (CONTINUED)

(b) Deferred tax assets and liabilities recognised (Continued):

The movements in deferred tax assets/(liabilities) during the year without taking into consideration of the offsetting of balances within the same tax jurisdiction, are as follows:

Group Undistributed profits of PRC and overseas Accelerated subsidiaries, tax associate and depreciation joint ventures Others Total HK$’million HK$’million HK$’million HK$’million

At 1 January 2013 (443) (742) 94 (1,091) Additions through business combination 2 – – 2 Currency translation differences (4) – 1 (3) (Charged)/credited to the consolidated profit or loss (260) (126) 17 (369)

At 31 December 2013 (705) (868) 112 (1,461)

At 1 January 2014 (705) (868) 112 (1,461) Currency translation differences 4 – (3) 1 Credited to the consolidated profit or loss 280 122 100 502

At 31 December 2014 (421) (746) 209 (958)

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 109 F-72 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

33 OBLIGATIONS UNDER FINANCE LEASE

At 31 December 2014, the Group had obligations under finance leases repayable as follows:

2014 2013 Present Present value of value of the Total the Total minimum minimum minimum minimum lease lease lease lease payments payments payments payments HK$’million HK$’million HK$’million HK$’million

Within 1 year 194 199 – –

After 1 year but within 2 years 176 190 – – After 2 years but within 5 years 431 518 – – After 5 years 42 57 – –

649 765 – –

843 964 – –

Less: total future interest expenses (121) –

Present value of lease obligations 843 –

34 COMMITMENTS

(a) Operating lease commitments

Operating lease commitments of the Group are mainly for leasing of land and buildings and equipment. Leases range from one to thirty years and usually do not contain renewal options. Future minimum lease payments as of 31 December 2014 and 2013 under non-cancellable operating leases are as follows:

Group Company 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Not later than one year 140 108 2 2 Later than one year and not later than five years 384 275 6 8 More than five years 567 274 – –

1,091 657 8 10

110 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-73 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

34 COMMITMENTS (CONTINUED)

(b) Capital commitments

Group Company 2014 2013 2014 2013 HK$’million HK$’million HK$’million HK$’million

Contracted but not provided for:

Oil field development costs 404 547 – – Acquisitions of/capital contributions to investments – – – – Other property, plant and equipment 7,179 5,045 – –

7,583 5,592 – –

Authorised but not contracted for:

Oil field development costs 623 601 – – Acquisitions of/capital contributions to investments 5,841 4,350 – – Other property, plant and equipment – 15,514 – –

6,464 20,465 – –

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 111 F-74 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

35 OIL PRODUCTION SHARING CONTRACTS

(a) Xinjiang Contract

Pursuant to the Xinjiang Contract, the Group agreed to fund an enhanced oil recovery programme (the “Infill Development Programme”) thereby reducing the inter-well spacing and improving oil recovery in the area as defined in the Xinjiang Contract (the “Contract Area”), at an estimated cost of US$66 million (approximately HK$510 million), in exchange for a 54% share in the oil production from the Contract Area.

Pursuant to the Xinjiang Contract, the Group would bear all the costs required for the Infill Development Programme and share the production from the Contract Area which shall be allocated (after deduction of local taxes and enterprise income tax) firstly towards operating costs recovery and thereafter in the proportion of 54% to the Group and 46% to PetroChina towards investment recovery and profit.

The Xinjiang Contract provides twelve consecutive years of production sharing commencing from the completion of the Infill Development Programme or such earlier date as may be determined by the Joint Management Committee (the “JMC”). The JMC is set up by the Group and PetroChina pursuant to the Xinjiang Contract to oversee oil operations in the Contract Area. The JMC resolved that the Group is entitled to oil production sharing as from 1 September 1996. The first phase of the Xinjiang Contract ended on 31 August 2008. In April 2008, the Group and PetroChina, having obtained the approval of the State Council of the PRC, extended the production period for further eight years to expire on 31 August 2016. The second phase of the Xinjiang Contract commenced on 1 September 2008.

112 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-75 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

35 OIL PRODUCTION SHARING CONTRACTS (CONTINUED)

(a) Xinjiang Contract (Continued)

In connection with the Xinjiang Contract, the Group has also entered into an Entrustment Contract with an operational entity wholly-owned and operated by CNPC, whereby the latter was entrusted to take up the responsibility as an operator. Set out below is the summary of assets, liabilities and results for the year recognised in the consolidated financial statements in relation to the Group’s interest in the Xinjiang Contract:

2014 2013 HK$’million HK$’million

(i) Results for the year Income 1,769 1,875 Expenses (1,140) (1,302)

(ii) Assets and liabilities Oil and gas properties 508 385 Other non-current assets 47 60 Current assets 318 294 Current liabilities (135) (142)

Net assets 738 597

(iii) Capital commitments Contracted but not provided for 182 177

(b) Leng Jiapu Contract

Pursuant to the Leng Jiapu Contract signed in 1997, the Group agreed to acquire 70% of the production sharing interest for RMB1,008 million (approximately HK$942 million) and to fund its share of cost of the development carried out for the realisation of oil production (the “Development Operations”) in the area as defined in the Leng Jiapu Contract (the “LJP Contract Area”), at an estimated cost of US$65.5 million (approximately HK$506 million) in the first two years of the development period and be further responsible for 70% of the development cost after the first two years, in exchange for a 70% share in the oil production from the LJP Contract Area.

Pursuant to the Leng Jiapu Contract, the Group shall bear 70% of the costs required for the Development Operations in the LJP Contract Area which shall be allocated (after deduction of local taxes and enterprise income tax) firstly towards operating costs recovery and thereafter in the proportion of 70% to the Group and 30% to PetroChina towards investment recovery and profit.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 113 F-76 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

35 OIL PRODUCTION SHARING CONTRACTS (CONTINUED)

(b) Leng Jiapu Contract (Continued)

The Leng Jiapu Contract provides twenty consecutive years of production sharing commencing from the completion of the Development Operations. The production sharing period commenced on 1 March 1998.

In connection with the Leng Jiapu Contract, the Group has also entered into an Entrustment Contract with an operational entity owned and operated by CNPC, whereby the latter is entrusted to take up the responsibility as an operator. Under the Entrustment Contract, a Joint Development Management Organisation was established for the performance of the contractual responsibilities under the operatorship.

The summary of assets, liabilities and results for the year recognised in the consolidated financial statements in relation to the Group’s interest in the Leng Jiapu Contract is as follows:

2014 2013 HK$’million HK$’million

(i) Results for the year Income 1,723 1,756 Expenses (1,850) (1,502)

(ii) Assets and liabilities Oil and gas properties 2,643 2,876 Current assets 664 804 Current liabilities (484) (446) Non-current liabilities (160) (210)

Net assets 2,663 3,024

(iii) Capital commitments Contracted but not provided for 222 370

114 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-77 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

35 OIL PRODUCTION SHARING CONTRACTS (CONTINUED)

K&K Contract provides twenty-five consecutive years of production sharing which commences on 5 November 1999 and may be extended by additional five years subject to the approval of The State Oil Company of the Azerbaijan Republic.

In 2002, the Group acquired 25% of the production sharing interest in Kursangi and Karabagli oil fields in the Azerbaijan (“K&K Contract Area”) for HK$0.3 billion from independent third parties.

Pursuant to the K&K Contract, the Group shall bear 25% of the costs in connection with the oil production in the K&K Contract Area.

The summary of assets, liabilities and results for the year recognised in the consolidated financial statements in relation to the Group’s interest in the K&K Contract is as follows:

2014 2013 HK$’million HK$’million

(i) Results for the year Income 464 514 Expenses (450) (502)

(ii) Assets and liabilities Oil and gas properties 73 106 Current assets 61 19 Current liabilities (7) (7)

Net assets 127 118

(iii) Capital commitments Authorised but not contracted for 7 4

36 RELATED PARTY TRANSACTIONS

CNPC, the controlling shareholder of the Company, is a state-controlled enterprise directly controlled by the PRC government. The PRC government is the ultimate controlling party of the Company. Related parties include CPNC and its subsidiaries (together, the “CNPC Group”), other state-owned enterprises and their subsidiaries which the PRC government has control, joint control or significant influence over the enterprises which the Group is able to control, jointly control or exercise significant influence over, key management personnel of the Company and CNPC and their close family members.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 115 F-78 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

36 RELATED PARTY TRANSACTIONS (CONTINUED)

In addition to the related party information shown elsewhere in the consolidated financial statements, the following is a summary of significant related party transactions entered into in the ordinary course of business between the Group and its related parties during the years and balances arising from related party transactions at the end of the years indicated below:

(a) Transactions with CNPC Group, associates and joint ventures

The Group has extensive transactions with other companies in the CNPC Group. Due to these relationships, it is possible that the terms of the transactions between the Group and other members of the CNPC Group are not the same as those that would result from transactions with other related parties or wholly unrelated parties.

The principal related party transactions with the CNPC Group and associates and joint ventures of the Group which were carried out in the ordinary course of business, are as follows:

(i) The Group entered into (i) the Xinjiang Contract and the Leng Jiapu Contract (together, the “PSAs”) with the CNPC Group in 1996 and 1997 respectively and (ii) a master agreement in 2003, which was subsequently amended and supplemented pursuant to the first supplement agreement in 2006, the second supplemental agreement in 2009, the third supplemental agreement in 2010 and the fourth supplemental agreement in 2011.

Under the PSAs, the Group procures from the CNPC Group on a continuing basis certain services and assistance. Whereas, the master agreement provides a framework for a range of products and services to be procured from the CNPC Group to the Group and vice versa including oil and gas products, general products and services, financial services and rental services. The master agreement expired on 31 December 2014. On 6 November 2014, the Group and CNPC entered into the fifth supplemental agreement for the purpose of renewing the term of the master agreement for three years ending on 31 December 2017.

• Provision of general products and services by the CNPC Group to the Group amounted to approximately HK$8,218 million (2013: HK$6,783 million) for the year ended 31 December 2014 which includes interest charged on the loans and advances obtained from CNPC, PetroChina, Sun World and fellow subsidiaries of approximately HK$1,459 million (2013: HK$1,865 million).

• Purchase of the Group’s share of crude oil production by the CNPC Group amounted to approximately HK$3,477 million (2013: HK$3,610 million) for the year ended 31 December 2014.

• Rental payments by the Group for leasing of certain offices and warehouses in Hong Kong and the PRC from the CNPC Group amounted to approximately HK$15 million (2013: HK$19 million) for the year ended 31 December 2014.

• Purchase of crude oil, natural gas, refined oil products, chemical products and other ancillary or similar products by the Group from the CNPC Group amounted to approximately HK$12,687 million (2013: HK$12,514 million) for the year ended 31 December 2014.

116 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-79 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

36 RELATED PARTY TRANSACTIONS (CONTINUED)

(a) Transactions with CNPC Group, associates and joint ventures (Continued)

• Provision of general products and services by the Group to the CNPC Group amounted to approximately HK$10,809 million (2013: HK$6,205 million) for the year ended 31 December 2014.

The above transactions constituted connected transactions in accordance with Chapter 14A of the Rules Governing the Listing of Securities on the Stock Exchange.

(ii) The Group has entered into agreement for the sales of natural gas to certain associates of the Group amounted to approximately HK$145 million (2013: HK$156 million) for the year ended 31 December 2014.

(iii) As at 31 December 2014 and 2013, amounts due from and to CNPC Group, associates and joint ventures of the Group, which are unsecured and interest free, are included in the following accounts captions and summarised as follows:

2014 2013 HK$’million HK$’million

Intangible and other non-current assets 239 150 Accounts receivable 435 434 Accounts payable and accrued liabilities 2,769 2,565 Borrowings 21,860 31,011 Prepaid expenses and other current assets 1,312 950 Obligations under finance leases 504 –

(b) Transactions with Beijing Enterprises Holdings Limited (“Beijing Enterprises Holdings”) and its subsidiaries (together, the “Beijing Enterprises Group”)

Beijing Pipeline has entered into an agreement with PetroChina (the “Natural Gas Transmission Agreement”), pursuant to which PetroChina has commissioned Beijing Pipeline for the transmission of natural gas to its designated natural gas buyers and Beijing Pipeline has commissioned PetroChina to collect from such natural gas buyers payments relating to the natural gas transmission. Under the terms of the Natural Gas Transmission Agreement, the pipeline transmission fee shall be payable on such basis as set out in the agreement entered into between PetroChina and the relevant natural gas buyers. A subsidiary of Beijing Enterprises Holdings, a non- controlling interests in Beijing Pipeline, is one of such natural gas buyers designated by PetroChina. Revenue from transmission of natural gas received and receivable from the Beijing Enterprises Group amounted to approximately HK$4,690 million (2013: HK$4,807 million) for the year ended 31 December 2014. This transaction constituted connected transactions in accordance with Chapter 14A of the Rules Governing the Listing of Securities on the Stock Exchange and was accounted for in a manner similar to a uniting of interests basis.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 117 F-80 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

36 RELATED PARTY TRANSACTIONS (CONTINUED)

2014 2013 HK$’million HK$’million

Salaries and allowances 36 42 Retirement benefits – defined contribution scheme 2 2

38 44

(d) Transactions with other state-controlled entities in the PRC

Apart from transactions with CNPC Group, associates and joint ventures, the Group has transactions with other state-controlled entities include but not limited to (i) sales and purchases of goods and services; (ii) purchases of assets; (iii) lease of assets; and (iv) bank deposits and borrowings.

These transactions are conducted in the ordinary course of the Group’s business on terms comparable to those with other entities that are not state-controlled.

118 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-81 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

37 SEGMENT INFORMATION

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker which is determined as the Executive Directors of the Company.

The Group organises its business around products and services. From the products and services perspective, the Group is engaged in a broad range of petroleum related activities and derives its revenue from its two operating segments: Exploration and Production and Natural Gas Distribution.

The Exploration and Production segment is engaged in the exploration, development, production and sale of crude oil and natural gas. It is further evaluated on a geographic basis (the PRC and other territories).

The Natural Gas Distribution segment is engaged in the sales of natural gas, LNG processing, LNG terminal business and transmission of natural gas in the PRC. It is evaluated on a business basis, Natural Gas Distribution segment includes Natural Gas Sales, LNG Processing, LNG Terminal and Natural Gas Pipeline.

No sales between operating segments are undertaken. The Executive Directors assesses the performance of the operating segments based on each segment’s profit/(loss) before income tax expense, share of profits less losses of associates and joint ventures (“segment results”).

Total assets exclude deferred and current taxes, available-for-sale financial assets, investments in associates and joint ventures, all of which are managed on a central basis (“segment assets”).

Corporate income and expenses, net, mainly refers to interest income earned from cash and cash equivalents, and general and administration expenses incurred at corporate level.

Corporate assets mainly comprise cash and cash equivalents held at corporate level.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 119 F-82 Notes to the Consolidated Financial Statements For the year ended 31 December 2014 3 6 5 Inter- company

Corporate adjustment

LNG Natural LNG Sales Natural Gas Distribution

Natural LNG Processing LNG Gas LNG Processing LNG Natural (3,080) 8,876 8 4 8 117,710 Natural Gas and – – – – (1,654) (1,654) (48) (12) (1,714) – – (1,714) – (1,714) (12) (48) (1,654) (1,654) – 256 – (270) 3 3 – 3 – 523 – 601 114 523 – 114 – 1 – 115 – – 716 – (17) (17) (212) (142) (354) (85) (203) (642) (158) 331 (486) – 2,428 2,341 1,136 179 1,136 – 179 – – 2,341 – – 179 136 6 1,451 – – 2,347 – – 4,775 837 341 1,178 1,303 (338) 965 805 8,141 9,911 (105) 10,984 – 837 1,465 2,302 1,420 1,082 10,029 (338) (375) 806 8,141 11,956 217 – (331) 245 155 61 92 2 86 6 148 140 8 Exploration and Production PRC Others Sub-total Gas Sales Processing Sub-total Terminal Sales Pipeline Sub-total PRC Others Sub-total Gas Total (672) (596) (1,268) (1,109) (211) (1,320) (702) (2,100) (4,122) (2) – (5,392) 3,477 1,859 5,336 26,291 3,446 29,737 1,994 12,691 44,422 – 3,477 1,859 5,336 26,291 1,792 28,083 1,946 12,679 42,708 – 49,758 – – 48,044 3,152 10,716 792 13,667 3,679 1,028 1,233 2,261 9,475 1,241 3,944 21,726 14,934 36,660 11,032 38,529 86,221 475 2,476 1,165 19,607 – – 91,330 4,180 2,025 6,205 31,201 16,175 47,376 11,507 41,005 99,888 4,844 110,937 – 4,180 5,589 102,414 9,769 33,721 16,175 49,896 11,513 41,005 4,980 117,163 – HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million For the year ended 31 December 2014 Gross revenue Less: Inter-company adjustment Revenue from external customers Segment results Share of profits less losses of: – Associates – Joint ventures Profit before income tax expense Income tax expense Profit for the year Segment results included: – Interest income – Depreciation, depletion and amortisation – Interest expenses As at 31 December 2014 Non-current assets Current assets Segment assets Investments in associates Investments in joint ventures Sub-total Available-for-sale financial assets Deferred tax assets Others Total assets

The segment information provided to the Executive Directors for the reportable segments for the years ended 31 December 2014 and 2013 are as follows: The segment information provided to the Executive Directors for reportable segments years ended 31 December 2014 and 37 SEGMENT INFORMATION (CONTINUED)

120 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-83 Notes to the Consolidated Financial Statements For the year ended 31 December 2014 Inter- company

Corporate adjustment

LNG Natural LNG Sales Natural Gas Distribution

Natural LNG Processing LNG Gas LNG Processing LNG Natural (3,845) 10,508 254 43 119,462 and Natural Gas – 1,365 1,365 281 – 281 – – 281 – – 1,646 281 – 281 – 281 – 1,365 415 1,365 – (18) 433 – – 433 – – (38) (38) (127) (129) (256) (186) (175) (617) (120) 153 (622) – 3,371 2,343 – 2,343 6 – 2,349 – – 5,720 Exploration and Production 173 6 179 93 5 98 3 33 134 68 (153) 228 (153) 173 179 93 6 5 98 134 68 3 33 PRC Others Sub-total Gas Sales Processing Sub-total Terminal Sales Pipeline Sub-total PRC Others Sub-total Gas Total 3,610 2,050 5,660 22,073 3,498 25,571 2,635 11,932 40,138 – – 45,798 1,148 701 1,849 1,473 10,540 158 1,631 1,135 7,774 (97) 12,292 – 3,261 1,153 14,074 4,414 20,807 11,456 32,263 11,733 39,429 83,425 16,364 3,242 11,804 2,270 1,103 598 1,692 1,413 1,800 3,213 22,819 – – 88,942 4,674 2,953 7,627 32,611 13,726 46,337 12,331 41,121 99,789 4,345 111,761 – 4,674 102,285 7,329 12,003 35,101 13,726 48,827 12,337 41,121 4,757 119,045 – HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million HK$’million amortisation (613) (249) (862) (834) (186) (1,020) (881) (1,762) (3,663) (1,762) (3) (1,020) (881) (4,528) (613) (249) (862) (834) (186) – amortisation assets 120 of: and expense 1,148 2,499 3,647 1,754 10,821 (115) 158 1,912 1,135 7,774 14,353 – tax adjustment – – – – (2,100) (2,100) (123) (145) (2,368) – – (2,368) – (2,368) (145) (123) (2,100) adjustment (2,100) – ventures 1,005 147 1,005 – 147 – – – 147 412 1,564 – losses financial less depletion associates joint year income assets in in expense income expenses results tax the profits assets tax ventures of before for assets Inter-company Associates Joint Interest Depreciation, Interest customers 3,610 2,050 5,660 22,073 1,398 23,471 revenue 2,512 11,787 37,770 external For the year ended 31 December 2013 – Gross – 43,430 from Less: Revenue Segment Share – – Profit Income Profit Segment results included: – – – assets As at 31 December 2013 Non-current assets Current Segment Investments Investments Sub-total Available-for-sale Deferred Others Total

37 SEGMENT INFORMATION (CONTINUED)

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 121 F-84 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

37 SEGMENT INFORMATION (CONTINUED)

Neither the Group’s revenue is derived from nor the Group’s non-current assets are located in the place of domicile of the Company.

For the year ended 31 December 2014, revenue of approximately HK$14,431 (2013: HK$16,800 million) are derived from one (2013: two) single customer with whom transactions have exceeded 10% of the Group’s revenues. The revenue is attributable to the Exploration and Production and Natural Gas Distribution segments.

38 ACQUISITIONS

Completion of acquisition of subsidiaries in the year ended 31 December 2013

For the year ended 31 December 2013, the Group acquired controlling interests in 5 subsidiaries, which are principally engaging in natural gas distribution business in the PRC for an aggregate consideration of RMB133 million (approximately HK$171 million). The acquired businesses contributed revenue of approximately HK$620 million and profit for the year of approximately HK$4 million to the Group for the period from the respective dates of acquisitions to 31 December 2013. If the acquisition had occurred on 1 January 2013, revenue would have been approximately HK$620 million, and profit for the year would have been approximately HK$1 million. These amounts have been calculated using the Group’s accounting policies and by adjusting the results of the subsidiary to reflect the additional depreciation and amortisation that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from 1 January 2013, together with the consequential tax effect.

Details of net assets acquired are as follows:

Fair value HK$’million Property, plant and equipment 38 Intangible and other non-current assets 159 Cash and cash equivalents 36 Accounts receivable 5 Prepaid expenses and other current assets 114 Accounts payable and accrued liabilities (188)

Identifiable net assets 164

Aggregate purchase consideration – Cash paid (29) – Deemed consideration (note) (142)

Goodwill (7)

Net cash outflow arising from the acquisition Aggregate purchase consideration – Cash paid (29) Less: Cash at bank and on hand acquired 66

Net cash outflow in respect of the acquisitions 37

Note:

The deemed consideration represents the Group’s share of the fair value of the identifiable assets and liabilities of its previously held interest in a joint venture prior to obtaining control of the entity.

122 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-85 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

39 APPROVAL OF CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements were approved by the Board of Directors on 26 March 2015 and will be submitted to the shareholders for approval at the 2015 Annual General Meeting to be held on 3 June 2015 (Wednesday).

40 PRINCIPAL SUBSIDIARIES

Details of the Company’s principal subsidiaries, all of which are limited liability companies at 31 December 2014, are as follows:

Nominal value of issued and Percentage of Place of fully paid equity interest incorporation/ ordinary shares/ Type of attributable to Name of subsidiary establishment registered capital legal entity the Group

Exploration, production and sales of crude oil in the PRC

Hafnium Limited British Virgin Islands (“BVI”) US$1 Limited liability company 100.00% (note (i))

Beckbury International Limited BVI US$1 Limited liability company 100.00% (note (i))

Exploration, production and sales of crude oil in Peru

SAPET Development Corporation (“SAPET”) United States of America 100 ordinary shares Limited liability company 50.00% (note (ii)) no par value

SAPET Development Peru Inc United States of America 100 ordinary shares Limited liability company 50.00% (note (ii)) no par value

Exploration, production and sales of crude oil in Thailand

Central Place Company Limited Hong Kong 160 ordinary shares Limited liability company 100.00%

Sino-U.S. Petroleum Inc United States of America US$1,000 Limited liability company 100.00%

CNPCHK (Thailand) Limited Thailand Baht100 million Limited liability company 100.00%

Exploration, production and sales of crude oil in Azerbaijan

Fortunemate Assets Limited BVI US$1 Limited liability company 100.00% (note (i))

Exploration, production and sales of crude oil in Kazakhstan

CNPC International (Caspian) Limited BVI US$100 Limited liability company 60.00%

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 123 F-86 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

40 PRINCIPAL SUBSIDIARIES (CONTINUED)

Natural gas distribution in the PRC

PetroChina Beijing Gas Pipeline Co., Ltd PRC RMB11,282 million Limited liability company 60.00% (note (i))

CNPC Shennan Oil Technology Development PRC RMB1,102 million Limited liability company 100.00% (note (i)) Co., Ltd.

華油天然氣股份有限公司 PRC RMB2,082 million Limited liability company 77. 88% (note (i))

Xinjiang Xinjie Co., Ltd. PRC RMB3,270 million Limited liability company 97.99% (note (i))

Huagang Gas Group Company Limited PRC RMB1,500 million Limited liability company 51.00% (note (i))

Xi’an Qinggang Clean Energy Technology PRC RMB330 million Limited liability company 51.00% (note (i)) Company Limited

新疆博瑞能源有限公司 PRC RMB500 million Limited liability company 94.00% (note (i))

四川川港燃氣有限責任公司 PRC RMB310 million Limited liability company 51.00% (note (i))

Kunlun Energy Investment Shandong PRC RMB1,500 million Limited liability company 100.00% (note (i)) Company Limited

Petrochina Tianjin Gas Pipeline Co., Ltd. PRC RMB500 million Limited liability company 51.00% (note (i))

昆侖能源青海有限公司 PRC RMB195 million Limited liability company 100.00% (note (i))

Cangzhou Gas Limited Company Petrochina PRC RMB200 million Limited liability company 51.00% (note (i))

PetroChina Jiangsu LNG Co., Ltd. PRC RMB2,651 million Limited liability company 55.00% (note (i))

124 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-87 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

40 PRINCIPAL SUBSIDIARIES (CONTINUED)

Natural gas distribution in the PRC (Continued)

PetroChina Dalian LNG Co., Ltd. PRC RMB2,600 million Limited liability company 75.00% (note (i))

KunLun Energy (LiaoNing) Company Limited PRC RMB192 million Limited liability company 100.00% (note (i))

昆侖能源西藏有限公司 PRC RMB48 million Limited liability company 100.00% (note (i))

Binhai New Energy Co., Ltd PRC RMB224 million Limited liability company 51.00% (note (i))

昆侖能源（甘肅）有限公司 PRC RMB105 million Limited liability company 100.00% (note (i))

Jilin Jigang Clean Energy Company Limited PRC RMB657 million Limited liability company 51.00% (note (i))

Notes:

(i) Shares held directly by the Company.

(ii) In accordance with the share purchase agreement dated 8 September 2001, the Group has the rights to variable returns from its involvement with SAPET and has the ability to affect those returns through its power over SAPET. As a result, SAPET is accounted for as a subsidiary of the Company.

Since SAPET Development Peru Inc. is wholly-owned by SAPET, it is also accounted for as the subsidiary of the Company.

(iii) Apart from the debentures of 華油天然氣股份有限公司 disclosed in Note 31, no other subsidiaries had any debt securities at 31 December 2014 or at any time during the year.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 125 F-88 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

41 PRINCIPAL ASSOCIATES

At 31 December 2014 and 2013, the Group had interest in the following principal associates:

Nominal value of issued and Percentage of Place of fully paid equity interest incorporation/ ordinary shares/ Type of attributable to Name of associates establishment registered capital legal entity the Group

Exploration, production and sales of crude oil in Kazakhstan

CNPC – Aktobemunaigas Kazakhstan 8,946,470 Joint-stock 15.07% (note (ii)) Joint Stock Company common shares company of 1,500 tenge each (note (i))

Natural gas distribution in the PRC

China City Natural PRC RMB1,000 million Equity joint venture 49.00% (note (iii)) Gas Investment Group Co., Ltd.

Notes:

(i) Issued and paid up share capital of Aktobe consists of 8,946,470 ordinary shares and 943,955 preference shares. The preference shares give their holders the right to participate in general shareholders’ meetings without voting rights generally.

(ii) The effective equity interest of Aktobe attributable to the Group is 15.07% as the 25.12% equity interest in Aktobe is held by a non-wholly owned subsidiary in which the Group holds a 60% equity interest.

(iii) Shares held directly by the Company.

126 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-89 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

42 PRINCIPAL JOINT VENTURES

As at 31 December 2014 and 2013, the Group had interest in the following principal joint ventures:

Nominal value of issued and Percentage of Place of fully paid equity interest incorporation/ ordinary shares/ Type of attributable to Name of joint ventures establishment registered capital legal entity the Group

Exploration, production and sales of crude oil in Oman

Mazoon Petrogas (BVI) Limited British Virgin Islands 50,000 ordinary Limited liability 50.00% (note (i)) shares of US$1 each company

Manufacturing of steel pipe in the PRC

華油鋼管有限公司 PRC RMB468 million Equity joint venture 39.56% (note (i) and (ii))

Production of petro-chemical products in the PRC

青島慶昕塑料有限公司 PRC RMB223 million Equity joint venture 25.00% (note (i))

Notes:

(i) The shares of the above principal joint ventures are held directly by the Company; and

(ii) In accordance with the joint venture agreement, the Group and the other investor agreed to share control of the entity and have rights to the net assets of the arrangement.

43 IMMEDIATE AND ULTIMATE CONTROLLING PARTY

At 31 December 2014, the directors consider the immediate parent and ultimate controlling party of the Group to be Sun World and CNPC which are incorporated in the BVI and the PRC respectively. PetroChina, an intermediate holding company, produces financial statements available for public use.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 127 F-90 Notes to the Consolidated Financial Statements For the year ended 31 December 2014

44 POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE YEAR ENDED 31 DECEMBER 2014

Up to the date of issue of these financial statements, the HKICPA has issued a few amendments and a new standard which are not yet effective For the year ended 31 December 2014 and which have not been adopted in these financial statements. These include the following which may be relevant to the Group.

Effective for accounting periods beginning on or after

Amendments to HKAS 19, Defined benefit plans: Employee contributions 1 July 2014

Annual improvements to HKFRSs 2010-2012 cycle 1 July 2014

Annual improvements to HKFRSs 2011-2013 cycle 1 July 2014

Amendments to HKFRS 11, Accounting for acquisitions of interests in joint operations 1 January 2016

Amendments to HKAS 16 and HKAS 38, Clarification of acceptable methods 1 January 2016 of depreciation and amortisation

HKFRS 15, Revenue from contracts with customers 1 January 2017

HKFRS 9, Financial instruments 1 January 2018

The Group is in the process of making an assessment of what the impact of these amendments is expected to be in the period of initial application. So far it has concluded that the adoption of them is unlikely to have a significant impact on the consolidated financial statements.

128 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2014 F-91 Independent Auditors Report

Independent auditor’s report to the shareholders of Kunlun Energy Company Limited (Incorporated in Bermuda with limited liability)

We have audited the consolidated financial statements of Kunlun Energy Company Limited (the “Company”) and its subsidiaries (together, the “Group”) set out on pages 39 to 128, which comprise the consolidated and company statements of financial position as at 31 December 2013, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended and a summary of significant accounting policies and other explanatory information.

DIRECTORS’ RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS

AUDITOR’S RESPONSIBILITY

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 37 F-92 Independent Auditors Report

OPINION

In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2013 and of the Group’s profit and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

KPMG Certified Public Accountants

8th Floor, Prince’s Building 10 Chater Road Central, Hong Kong

20 March 2014

38 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 F-93 Consolidated Statement of Comprehensive Income For the year ended 31 December 2013

2013 2012 Note HK$’million HK$’million

Revenue 6 43,430 32,953 Other gains, net 7 768 361 Interest income 8 228 172 Purchases, services and others (21,303) (12,912) Employee compensation costs 9 (2,046) (1,684) Exploration expenses, including exploratory dry holes (11) (42) Depreciation, depletion and amortisation (4,528) (4,434) Selling, general and administrative expenses (2,878) (2,165) Taxes other than income taxes 10 (746) (923) Interest expenses 11 (622) (661) Share of profits less losses of: – Associates 1,646 2,334 – Joint ventures 21 415 307

Profit before income tax expense 12 14,353 13,306 Income tax expense 14 (3,845) (3,392)

Profit for the year 10,508 9,914

Other comprehensive income Items that may be reclassified subsequently to profit and loss: – Currency translation differences 1,392 663 – Fair value (loss)/gain on available-for-sale financial assets (10) 1

Other comprehensive income, net of nil tax 1,382 664

Total comprehensive income for the year 11,890 10,578

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 39 F-94 Consolidated Statement of Comprehensive Income For the year ended 31 December 2013

2013 2012 Note HK$’million HK$’million

Profit for the year attributable to: – Owners of the Company 6,851 6,518 – Non-controlling interests 3,657 3,396

10,508 9,914

Total comprehensive income for the year attributable to: – Owners of the Company 7,842 7,017 – Non-controlling interests 4,048 3,561

11,890 10,578

Earnings per share for profit attributable to owners of the Company 16 – Basic (HK cent) 85.01 83.54 – Diluted (HK cent) 84.83 83.13

The notes on pages 48 to 128 form part of these financial statements. Details of dividends payable to owners of the Company attributable to the profit for the year are set out in Note 17.

40 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 F-95 Consolidated Statement of Financial Position As at 31 December 2013

2013 2012 Note HK$’million HK$’million

Assets Non-current assets Property, plant and equipment 18 82,943 69,225 Advanced operating lease payments 19 2,895 2,199 Investments in associates 20 5,720 5,606 Investments in joint ventures 21 1,564 1,541 Available-for-sale financial assets 22 120 173 Intangible and other non-current assets 24 3,104 2,360 Deferred tax assets 33 254 187

96,600 81,291

Current assets Inventories 25 1,173 717 Accounts receivable 26 1,893 1,367 Prepaid expenses and other current assets 27 4,899 5,575 Cash and cash equivalents 28 14,897 19,592

22,862 27,251

Total assets 119,462 108,542

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 41 F-96 Consolidated Statement of Financial Position As at 31 December 2013

2013 2012 Note HK$’million HK$’million

Equity Capital and reserves attributable to owners of the Company Share capital 29 81 81 Retained earnings 30 24,530 20,059 Reserves 30 25,795 24,282

50,406 44,422 Non-controlling interests 21,862 17,756

Total equity 72,268 62,178

Liabilities Current liabilities Accounts payable and accrued liabilities 31 12,676 12,438 Income tax payable 33 510 461 Other tax payable 394 353 Short-term borrowings 32 13,551 5,111

27,131 18,363

Non-current liabilities Long-term borrowings 32 17,799 26,562 Deferred tax liabilities 33 1,715 1,278 Other long-term obligations 549 161

20,063 28,001

Total liabilities 47,194 46,364

Total equity and liabilities 119,462 108,542

Net current (liabilities)/assets (4,269) 8,888

Total assets less current liabilities 92,331 90,179

Approved and authorised for issue by the board of directors on 20 March 2014.

Zhang Bowen Cheng Cheng President Senior Vice President (preforming the duties of the Chairman)

The notes on pages 48 to 128 form part of these financial statements.

42 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 F-97 Statement of Financial Position As at 31 December 2013

2013 2012 Note HK$’million HK$’million Assets Non-current assets Property, plant and equipment 18 4 2 Investments in associates 20 1,090 966 Investments in joint ventures 21 272 272 Investments in subsidiaries 23 43,337 40,389 Intangible and other non-current assets 24 1,290 1 45,993 41,630 Current assets Prepaid expenses and other current assets 27 9,605 8,597 Cash and cash equivalents 28 1,857 6,627 11,462 15,224

Total assets 57,455 56,854 Equity Capital and reserves attributable to owners of the Company Share capital 29 81 81 Retained earnings 30 11,905 11,172 Reserves 30 40,460 40,281 52,446 51,534 Liabilities Current liabilities Accounts payable and accrued liabilities 31 200 198 Income tax payable 33 – 88 Short-term borrowings 32 4,263 225 4,463 511 Non-current liabilities Long-term borrowings 32 546 4,809 Total liabilities 5,009 5,320

Total equity and liabilities 57,455 56,854

Net current assets 6,999 14,713

Total assets less current liabilities 52,992 56,343

Approved and authorised for issue by the board of directors on 20 March 2014.

Zhang Bowen Cheng Cheng President Senior Vice President (preforming the duties of the Chairman)

The notes on pages 48 to 128 form part of these financial statements.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 43 F-98 Consolidated Statement of Changes In Equity For the year ended 31 December 2013

Balances at 1 January 2012 72 17,545 12,766 30,383 15,275 45,658

Changes in equity for 2012: Profit for the year – 6,518 – 6,518 3,396 9,914 Other comprehensive income – – 499 499 165 664

Total comprehensive income for the year – 6,518 499 7,017 3,561 10,578

Transfer between reserves – (469) 469 – – – Final dividend for 2011 – (1,766) – (1,766) – (1,766) Issue of shares, net of share issue expenses upon placement 29(a) 8 – 10,251 10,259 – 10,259 Recognition of equity settled share-based payments 29(b) – – 72 72 – 72 Issue of shares upon exercise of share options 29(b) 1 – 345 346 – 346 Utilisation of reserves – – (120) (120) (35) (155) Dividend paid to former owners of acquired subsidiary – (1,769) – (1,769) – (1,769) Acquisition from non-controlling interests – – – – (123) (123) Dividend to non-controlling interests – – – – (3,217) (3,217) Capital contributions from non-controlling interests – – – – 2,295 2,295

Balances at 31 December 2012 81 20,059 24,282 44,422 17,756 62,178

44 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 F-99 Consolidated Statement of Changes In Equity For the year ended 31 December 2013

Balances at 1 January 2013 81 20,059 24,282 44,422 17,756 62,178

Changes in equity for 2013: Profit for the year – 6,851 – 6,851 3,657 10,508 Other comprehensive income – – 991 991 391 1,382

Total comprehensive income for the year – 6,851 991 7,842 4,048 11,890

Transfer between reserves – (563) 563 – – – Final dividend for 2012 17 – (1,855) – (1,855) – (1,855) Issue of shares upon exercise of share options 29(a) & (b) – – 86 86 – 86 Repurchase of shares 29(a) – – (57) (57) – (57) Lapsed share options – 38 (38) – – – Acquisition from non-controlling interests – – (32) (32) (103) (135) Dividend to non-controlling interests in subsidiaries – – – – (1,090) (1,090) Capital contributions from non-controlling interests – – – – 1,078 1,078 Acquisition of subsidiaries – – – – 173 173

Balances at 31 December 2013 81 24,530 25,795 50,406 21,862 72,268

The notes on pages 48 to 128 form part of these financial statements.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 45 F-100 Consolidated Statement of Cash Flows For the year ended 31 December 2013

2013 2012 Note HK$’million HK$’million

Cash flows from operating activities Profit for the year 10,508 9,914 Adjustments for: Income tax expense 3,845 3,392 Taxes other than income taxes 746 923 Depreciation, depletion and amortisation 4,528 4,434 Share of profits less losses of associates (1,646) (2,334) Share of profits less losses of joint ventures (415) (307) Employee share-based payment expense – 72 Impairment loss on property, plant and equipment 12 – Net losses on disposals of property, plant and equipment 70 4 Gains on disposals of joint ventures – (2) Net exchange gains (45) (96) Interest income (228) (172) Interest expense 622 661

Changes in working capital: Accounts receivable and prepaid expenses and other current assets 115 (2,718) Inventories (457) (154) Accounts payable and accrued liabilities and other tax payable (742) (393)

Cash generated from operations 16,913 13,224 Income tax paid (3,427) (3,161)

Net cash generated from operating activities 13,486 10,063

46 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 F-101 Consolidated Statement of Cash Flows For the year ended 31 December 2013

2013 2012 Note HK$’million HK$’million

Cash flows from investing activities Dividends received from associates 1,826 3,113 Dividends received from joint ventures 814 – Acquisitions of subsidiaries 38(b) 37 (579) Capital contributions to associates (291) (354) Capital contributions to joint ventures (56) (7) Acquisitions of available-for-sale financial assets – (36) Proceeds from disposal of joint ventures – 32 Proceeds from disposal of property, plant and equipment 353 178 Capital expenditure (15,405) (15,391) Interest received 228 172 Repayment of loan to non-controlling interests – 564 Loans to associates (13) – Loans to joint ventures (38) – Loan to third parties (187) (440)

Net cash used in investing activities (12,732) (12,748)

Cash flows from financing activities Capital contributions from non-controlling interests 1,078 2,295 Dividends paid to owners of the Company 30 (1,855) (1,766) Dividends paid to non-controlling interests (1,944) (2,310) Dividends paid to former owners of acquired subsidiary – (1,769) Amount received from non-controlling interests – 954 Increase in other long-term obligations – 133 Issue of shares, net of share issue expenses 86 10,605 Repurchase of shares (57) – Increase in borrowings 9,112 8,213 Repayments of borrowings (10,521) (4,512) Interest paid (1,856) (1,418) Acquisition from non-controlling interests (135) (123)

Net cash (used) in/generated from financing activities (6,092) 10,302

(Decrease)/increase in cash and cash equivalents (5,338) 7,617 Cash and cash equivalents at 1 January 19,592 11,718 Effect of foreign exchange rate changes 643 257

Cash and cash equivalents at 31 December 28 14,897 19,592

The notes on pages 48 to 128 form part of these financial statements.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 47 F-102 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

1 GENERAL INFORMATION

Kunlun Energy Company Limited (the “Company”) is incorporated in Bermuda as an exempted company with limited liability and its shares are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). Its ultimate holding company is China National Petroleum Corporation (“CNPC”) which is a company established in the People’s Republic of China (the “PRC”). The immediate holding company of the Company is Sun World Limited (“Sun World”), which is a company incorporated in the British Virgin Islands. On 18 December 2008, PetroChina Company Limited (“PetroChina”), a subsidiary of CNPC, acquired 100% equity interest in Sun World. Since then, PetroChina became an intermediate holding company of the Company. As at 31 December 2013, PetroChina indirectly owned 58.40% (2012: 58.48%) equity interest in the Company.

The address of the Company’s principal office and registered office are 39/F, 118 Connaught Road West, Hong Kong and Clarendon House, 2 Church Street Hamilton, HM11, Bermuda, respectively.

The Company and its subsidiaries (together, the “Group”) currently have three production sharing arrangements in the PRC and Azerbaijan. On 1 July 1996, the Group entered into an oil production sharing contract (the “Xinjiang Contract”) to develop and produce crude oil in Xinjiang Uygur Autonomous Region, the PRC. On 30 December 1997, the Group entered into another oil production sharing contract (the “Leng Jiapu Contract”) to develop and produce crude oil in Liaohe, Lioaning Province, the PRC. In 2002, the Group acquired the third production sharing arrangement (“K&K Contract”) to develop and produce crude oil in Azerbaijan. Further details in relation to these contracts and the Group’s share of results and net assets in these arrangements are shown in Note 35.

The oil operations in the PRC and Azerbaijan are both conducted through production sharing arrangements with PetroChina and a third party, whereby the Group is entitled to a fixed percentage of assets, liabilities, income and expenses in accordance with the respective oil production sharing contracts entered into with PetroChina and the third party.

48 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 F-103 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

2 BASIS OF PREPARATION

(a) Statement of compliance

(b) Basis of preparation of the financial statements

The consolidated financial statements for the year ended 31 December 2013 comprise the Company and its subsidiaries (together referred to as the “Group”) and the Group’s interest in associates and joint ventures.

The measurement basis used in the preparation of the financial statements is the historical cost basis except for available-for-sales financial assets which are stated at their fair value as explained in the accounting policies set out in Note 3(h).

Judgements made by management in the application of HKFRSs that have significant effect on the financial statements and major sources of estimation uncertainty are discussed in Note 5.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 49 F-104 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

2 BASIS OF PREPARATION (CONTINUED)

(b) Basis of preparation of the financial statements (Continued)

As at 31 December 2013, the Group had net current liabilities of HK$4,269 million. Notwithstanding the net current liabilities of the Group at 31 December 2013, these financial statements have been prepared on a going concern basis because the directors are of the opinion that the Group would have adequate funds to meet its obligation, as and when they fall due, having regard to the following:

(i) Subsequent to the end of the reporting period, China Petroleum Finance Company Limited (“CP Finance”) has confirmed to the Group that loans totalling US$550 million (equivalent to HK$4,263 million) that were due to be repaid in 2014 would be extended by three years upon maturities, subject to revision of borrowing interest rate. In addition, the Group has extended a loan of RMB1,700 million (equivalent to HK$2,191 million) that were due to be repaid in 2014 by one year upon maturities; and

(ii) the Group expects to generate positive operating cash flows for the year ending 31 December 2014.

Consequently, the consolidated financial statements have been prepared on a going concern basis.

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

(a) Subsidiaries and non-controlling interests

50 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 F-105 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(a) Subsidiaries and non-controlling interests (Continued)

When the Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former subsidiary at the date when control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture (see Note 3(b)).

In the Company’s statement of financial position, an investment in subsidiary is stated at cost less impairment.

A listing of the Group’s principal subsidiaries is set out in Note 40.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 51 F-106 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(b) Associates and joint ventures

A joint venture is an arrangement whereby the Group or Company and other parties contractually agree to share control of the arrangement, and have rights to the net assets of the arrangement.

52 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 F-107 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(b) Associates and joint ventures (Continued)

In the Company’s statement of financial position, investments in associates and investments in joint ventures are stated at cost less impairment.

– Calculation of recoverable amount

– Recognition of impairment losses

– Reversals of impairment losses

Listings of the Group’s principal associates and joint ventures are shown in Note 41 and Note 42, respectively.

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 53 F-108 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

Production sharing contracts constitute joint operations. The Group shall recognise in relation to its interest in joint operations:

(i) its assets, including its share of any assets held jointly;

(ii) its liabilities, including its share of any liabilities incurred jointly;

(iii) its revenue from the sale of its share of the output arising from the joint operations;

(iv) its share of the revenue from the sale of the output by the joint operations; and

(v) its expenses, including its share of any expenses incurred jointly.

(d) Foreign currencies

(i) Functional and presentation currency

(ii) Translation of foreign currencies

54 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 F-109 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(d) Foreign currencies (Continued)

(ii) Translation of foreign currencies (Continued)

(e) Property, plant and equipment

The Group uses the following useful lives for depreciation purposes:

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 55 F-110 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(e) Property, plant and equipment (Continued)

No depreciation is provided for construction in progress until the assets are completed and ready for use.

The residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each statement of financial position date.

Gains and losses on disposals of property, plant and equipment are determined by reference to their carrying amounts and are recorded in profit or loss.

(f) Oil and gas properties

56 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 F-111 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(f) Oil and gas properties (Continued)

The Ministry of Land and Resources in China issues production licenses to applicants on the basis of the reserve reports approved by relevant authorities.

(g) Intangible assets

(i) Goodwill

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 57 F-112 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(g) Intangible assets (Continued)

(ii) Other intangible assets

(h) Other investments in debt and equity securities

The Group’s and the Company’s policies for investments in debt and equity securities, other than investments in subsidiaries, associates and joint ventures, are as follows:

58 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 F-113 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(h) Other investments in debt and equity securities (Continued)

(i) Leases

Leases of property, plant and equipment where the Group assumes substantially all the benefits and risks of ownership are classified as finance leases. The Group has no significant finance leases.

Leases of assets under which a significant portion of the risks and benefits of ownership are effectively retained by the lessors are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessors) are expensed on a straight-line basis over the lease terms. Costs of land use rights paid to the relevant government authorities are treated as operating leases and are carried at lost less accumulate amounts charged to expenses and impairment losses. Land use rights are generally obtained through advance lump-sum payments and the terms of use of which the costs of these lease prepayments are charged to expenses on a straight-line basis over the respective periods of the rights.

(j) Inventories

(k) Accounts receivable

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 59 F-114 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(l) Cash and cash equivalents

Cash and cash equivalents comprise cash in hand, deposits held with banks and highly liquid investments with original maturities of three months or less from the time of purchase.

(m) Accounts payable

Accounts payable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

(n) Borrowings

All other borrowing costs are recognised in the consolidated profit or loss in the period in which they are incurred.

Borrowings are classified as current liabilities unless the Group has unconditional rights to defer settlements of the liabilities for at least 12 months after the reporting period.

(o) Taxation

60 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 F-115 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(o) Taxation (Continued)

Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

(p) Revenue recognition

(i) Sales of goods

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 61 F-116 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(p) Revenue recognition (Continued)

(ii) Rendering of services

(iii) Dividends

– Dividend income from unlisted investments is recognised when the shareholder’s right to receive payment is established.

– Dividend income from listed investments is recognised when the share price of the investment goes ex-dividend.

(iv) Interest income

Interest income is recognised on a time apportioned basis that takes into account the effective yield on the assets.

(q) Government grants

62 KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 F-117 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(r) Provisions

(s) Retirement benefit plans

(t) Share-based compensation

KUNLUN ENERGY COMPANY LIMITED ANNUAL REPORT 2013 63 F-118 Notes to the Consolidated Financial Statements For the year ended 31 December 2013

3 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(t) Share-based compensation (Continued)

When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. When the options expire or are lapsed, the equity amount recognised in the employee share-based compensation reserve is released directly to retained earnings.