cnpc annual report 2010

2010 Annual Report

China National Petroleum Corporation

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Contents

Management

Review of the Year

Environment and Society

Human Resources

Technology

Annual Business Review

Financial Report

Major Events

Glossary

Message from the President

Energize ∙ Harmonize ∙ Realize

2010 was the final year of China’s 11th Five-Year Plan. In the past five years,

we seized strategic opportunities to further increase resources, expand

markets and seek a greater international role. We responded effectively

to the global economic downturn and natural calamities, and achieved

all our objectives and targets. CNPC is well on the way to becoming an

integrated international energy company with increased corporate value

and international competitiveness.

Our operating performance exceeded expectations in 2010, with operating

income of RMB 1,721 billion, total profit of RMB 172.7 billion, and tax

payments of RMB 290.4 billion, up 41%, 34.5% and 19.7% respectively year-

on-year.

In 2010, our core business played a more important role, increasing our

ability to maintain reliable supplies of oil and gas. Through successful

explorations, we made significant strategic discoveries, contributing to

sustained high reserve growth. In 2010, our newly proven oil and gas in

place was 655.77 million tons and 570.1 billion cubic meters respectively,

exceeding 1 billion tons in terms of oil equivalent for the fourth

consecutive year. Our domestic oil production grew to 105.41 million

tons. The natural gas operation maintained its rapid growth, with annual

production reaching a new high of 72.5 billion cubic meters, accounting

for 35.4% of our domestic production in terms of oil equivalent. Utilization

rate of refining units remained high with improved technical and economic

indicators. We managed the proportion of crude production, crude runs,

and oil products sales, and sold more than 100 million tons of refined

products in domestic market for the first time, with our market shares and

profitability also improving.

Our overseas business continued to grow in scale along with expanding

strategic cooperation with host countries and international oil companies.

We made important progress in cooperation with Russia, Kazakhstan,

Turkmenistan, Venezuela, and Canada. We acquired Australia’s Arrow

Energy, a CBM company, and established a presence in Qatar’s hydrocarbon

exploration in partnership with Shell. In Iraq, our cooperation projects

with BP, Total, and Petronas were well underway. Our overseas oil and gas

production reached a new high. Our competence and competitiveness

in oilfield services, engineering & construction, and equipment

manufacturing continued to grow. In addition, our emerging financial

services sector provided capital support to our overseas operations. In

2010, our international trading business experienced fast growth, with a

volume of 195 million tons and a value of USD 110.5 billion, up 27.5% and

67.6% respectively year-on-year.

Message from the President

We continued to build a green and resource-efficient enterprise while

firmly put people, safety and the environment first. We are fully committed

to the values of honesty, trustworthiness and excellence and have zero

tolerance for accidents and defects. Our energy saving and water efficiency

measures saved 1.87 million tons of standard coal equivalent and 38.21

million cubic meters of water in 2010. During the 11th Five-Year Plan

period, we cumulatively saved 9.37 million tons of standard coal equivalent

and 302 million cubic meters of water, and met our target one year ahead

of schedule. In July 2010, CNPC was honored with “Outstanding Award for

Energy Conservation and Emission Reduction” by the State-owned Assets

Supervision and Administration Commission of the State Council.

CNPC unfailingly fulfills its corporate social responsibilities, giving back

to society and shareholders while pursuing business development. We

are committed to local economic development, public welfare, poverty

alleviation and outreach programs, disaster rescue and relief activities, and

providing educational donations. In international cooperation, we are fully

engaged in serving both the host countries’ economy and community

based on the principle of mutually beneficial development.

Looking ahead to 2011, the first year of the 12th Five-Year Plan (2011-2015),

we are certain of doing even better. To this end, guided by the Scientific

Outlook on Development, we will accelerate the transformation of our

development model to adapt to changes at home and abroad. While

focusing on oil and gas business, we will fully utilize our advantages in

comprehensive and integrated operations, optimize the business structure,

promote technological innovation, strengthen safety procedures and

environmental protection, and enhance energy efficiency. Our goal is to

be a green and sustainable player in the global market, and provide more

clean and premium energy to fuel socio-economic development.

Jiang Jiemin, President

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Management

Jiang JieminPresident

Liao YongyuanVice President

Zhou JipingVice President

Wang GuoliangChief Financial Officer

Wang YilinVice President

Chen MingChief of Discipline &

Inspection Group

Zeng YukangVice President

Wang DongjinVice President

Wang FuchengVice President

Yu BaocaiVice President

Li XinhuaVice President

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Review of the Year

2010 was a year of frequent changes in international situation. The global financial crisis wound down, world demand for oil gradually recovered, and the oil price hovered around USD 80 per barrel.

By optimizing the use of existing

refining units and starting new ones

in response to market demand,

we processed 135.29 million tons

of crude and produced 86.33

million tons of refined products

domestically in 2010, up 8.1% and


Our sales sector witnessed fast

growth in 2010 with strengthened

market supply capacity. By

proactively adjusting our sales

in response to fluctuation in oil

products market, we realized

growth in the sales volumes,

market shares, and profitability. We

sold more than 100 million tons of

refined products in China, up 15.5%

year-on-year. Faced with rapid

growth in natural gas demand, we

strengthened the supply chain,

optimized pipeline operations, and

effectively managed gas storage to

ensure stable supplies to all users.

In 2010, we sold 66.86 billion cubic

meters of natural gas, up 12.6% year-on-year.

Construction of major projects, key domestic pipelines, and storage

facilities proceeded smoothly in 2010. We completed the Central Asia-

China dual gas pipelines and the Russia-China crude pipeline, and

launched the Myanmar-China oil and gas pipelines, providing China with

diverse import routes for oil and gas.

Despite market changes

and natural calamities, CNPC

greatly improved its operating

performance. We balanced

production, transport, sales and

storage operations, accelerated

our major project construction,

enhanced market supplies, and

carried forward the transformation

of our development model. Our

performance greatly surpassed

expectations in 2010, with

operating income of RMB 1,721

billion, total profit of RMB 172.7

billion, and tax payments of RMB

290.4 billion, up 41%, 34.5% and


We maintained steady growth in

upstream oil and gas business.

Enhanced exploration and

development activities helped us

continue high reserve growth. In

2010, our newly proven oil and

gas in place was 655.77 million

tons and 570.1 billion cubic

meters respectively, exceeding 1 billion tons in terms of oil equivalent

for the fourth consecutive year. The reserve replacement ratio remained

greater than 100%, compared to the global average of 83%. Our domestic

oil production grew to 105.41 million tons. The natural gas operation

maintained rapid growth, with its annual production reaching a new

high of 72.5 billion cubic meters, accounting for 35.4% of our domestic

production in terms of oil equivalent.

2008 2009 20102008 2009 2010

2008 2009 2010

2008 2009 2010

2008 2009 2010

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Our international business continued to grow, as we made rapid progress in key oil and

gas cooperation projects. Major achievements were obtained in overseas hydrocarbon

exploration, and operations of existing projects proceeded smoothly. In 2010, we produced

75.82 million tons of oil, of which our equity share was 36.03 million tons, up 8.9% and 4.97%

respectively year-on-year. We produced 13.7 billion cubic meters of natural gas, of which our

equity share was 10.38 billion cubic meters, up 67.1% and 88.2% respectively year-on-year.

Taking advantage of the comprehensive and integrated operations, CNPC rolled out and

pushed forward large oil and gas cooperation projects in the Middle East. We reached our

initial target of a 10% increase in daily production in a joint project with BP at the Rumaila

Oilfield in Iraq. We cooperated with resource-rich countries and international oil companies,

signed a number of new agreements, such as partnerships with Shell in Australia and Qatar.

We expanded our international trading business through multiple import channels. In 2010,

our trading volume was 195 million tons and the trading value amounted to USD 110.5

billion, up 27.5% and 67.6% respectively year-on-year.

Our competence and competitiveness in oilfield services and engineering & construction

were further strengthened. In the high-end overseas market, CNPC has grown into

a renowned EPC contractor. In the equipment manufacturing sector, we focused on

innovation and new product R&D, and optimized our product portfolio. Our emerging

financial services sector, consisting of banking, trusts, insurance, and financial leasing, helped

meet the capital demands of our fast business growth.

Newly proven oil in place | mmt (domestic)

Newly proven gas in place | bcm (domestic)

Crude production | mmt (domestic) Natural gas production | bcm (domestic)

Crude runs | mmt (domestic)

2010 Annual ReportReview of the Year

CNPC's share Total

2008 2009 2010 2008 2009 2010

CNPC's share Total

Natural gas production | bcm (overseas)Crude production | mmt (overseas)

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CNPC always gives top priority to people, the environment and safety.

We highlight production management and quality control in order

to build a resource-efficient and environmentally friendly enterprise,

and strive for harmonious relationships between energy and the

environment, and corporate and community interests.

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2010 Annual ReportEnvironment and Society

In 2010, we further improved our HSE management system and published

the HSE Management System Improvement Plan. Through benchmarking

and consultation with ISO31000 risk management standards and

OHSAS18000 occupational health and safety standards, we issued the

Social Safety Management System Manual for International Business

Operations based on our international business experience, which reduced

the risks faced by employees and (sub-) contractors to an acceptable

level. Continuous improvement was also realized by means of monitoring,

verification and review to ensure effective social safety management

system in our international business operations.

Operational SafetyWe continued to strictly implement the Safety Prohibition, standardize

management processes, regulate operational behavior and specify the

entities accountable for operational safety, resulting in overall stability in

the company’ s safety situation.

In 2010, we launched a new round of potential risk control by checking and

rating hidden safety risks. We also promoted HAZOP assessment and the

mechanical cleaning of oil tanks. In particular, we conducted specialized

examination of the construction of long-distance pipelines, the operation

of refining facilities and offshore operations in order to manage safety risks

and prevent accidents.

Environmental Protection We standardized the construction of environmental monitoring stations to

strengthen environmental risk management, control the sources of pollution

and prevent environmental accidents. We also enhanced the evaluation of

pollution reduction effectiveness and paid special attention to auditing major

emission reduction projects.

In addition, the company actively restored the environment at retired well sites

and other abandoned production areas by monitoring the soil environment,

controlling soil erosion and remedying petroleum contaminated soil.

Quality Control CNPC has long attached great importance to quality control and actively

improves management and product quality. To this end, we established the

internal quality guidelines of honesty and excellence, and set the goal of zero

accidents and zero defects. In 2010, we established or revised 40 national

standards, 200 industrial standards and 350 corporate standards, and urged

our affiliates to achieve third-party quality certification. By the end of 2010, our

102 affiliated enterprises had set up quality control systems and 54 had passed

quality management system certification.

To ensure that our products and services meet high quality standards,

we further standardized the overall process of product manufacturing,

engineering construction and services. Throughout the year, we randomly

inspected 1,944 batches of products produced by our 98 subsidiaries, and

terminated the purchase of, rejected or claimed compensation for products

produced by suppliers that failed to meet the company’s standards. To

The Kela-2 gas field, the major gas source of the West-East

Gas Pipeline, is located in Baicheng County, Xinjiang Uygur

Autonomous Region. The production area is surrounded by the

Gobi Desert, with its harsh natural environment featuring chronic

drought. As a result, great importance is attached to safeguarding

the environment with measures such as reinjecting treated

industrial wastewater back into the ground and using domestic

sewage for irrigation.

In the Kela production area, domestic sewage is drained to a

treatment pool one kilometer from the employee apartments to

create an artificial wetland covering 16,250 square meters. Now

the green area at the site is over 120,000 square meters, with

3,000 square meters of reeds surrounding the wetland, fostering

a healthy ecosystem. Every summer, reeds, wild ducks and various

water birds, along with the gas production facilities, form a

beautiful landscape in the Gobi desert.

Creation of a New Gobi Wetland

ensure a high-quality service to our customers, we also increased the

frequency and scope of quality inspection and supervision of oil products.

Energy Efficiency We have achieved significant results in improving energy and water

efficiency through the optimization of our business structure and the

implementation of major energy-saving projects. In 2010, CNPC saved 1.87

million tons of coal equivalent and 38.21 million cubic meters of water,

meeting the energy-saving target of the 11th Five-Year Plan one year ahead

of schedule and winning the “Outstanding Award for Energy Conservation

and Emission Reduction” by the State-owned Assets Supervision and

Administration Commission of the State Council.

In 2010, CNPC continued to carry out 10 major energy-saving projects and

strengthened their supervision and overall effectiveness. We launched

a total of 103 energy-saving projects, these included the upgrading of a

heavy oil steam flood system, the optimization of a steam and condensate

water system, reducing the power consumption of a mechanical oil

recovery system, and upgrading a heating furnace. In addition, monitoring

and evaluation of major energy and/or water intensive equipments and

facilities continued to ensure rational energy and water consumption.

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Environment and Society 2010 Annual Report

Emergency Response We improved our emergency response plan and the coordinated

emergency response system for key enterprises and facilities. In addition,

we issued the Regulation of Material Reserve Used for Emergency

Response to enhance the company’s ability to cope with emergencies.

CNPC now has rescue centers dedicated to dealing with fire, hazardous

chemical, long-distance oil and gas pipeline, well control and offshore

emergencies. We also attach great importance to cooperation and

coordination with external rescue forces.

Occupational Health We have established a unified occupational health database and employee

healthcare archives to improve occupational hazard prevention. We also

investigated occupational health hazards and tested key indicators in

thousands of workplaces. Throughout the year, 93% of our employees

received occupational health examinations.

To safeguard the health of production and field operation staff, we continue

to improve their medical and treatment conditions and sent professionals

to provide on-site medical services. Our long-standing Overseas Employee

Assistance Program provides psychological counseling to our overseas staff

and their families to help them cope with stress and emotional problems.

Public Welfare UndertakingsWe have a long-standing commitment to poverty alleviation and targeted

assistance. To this end, as part of the fulfillment of our social responsibilities,

we are actively involved in disaster relief and donations to education. In

addition, we are active in facilitating the development of host countries

and local communities.

Poverty Alleviation Since 1994, when CNPC first launched its targeted poverty alleviation

program in line with the requirements of the central government, we

have donated more than RMB 500 million to local industries and 297

development projects. Fruitful results have been seen in the socio-

economic development of targeted prefectures and counties in Xinjiang,

Tibet, Henan and Chongqing. In 2010, CNPC was granted "Annual

Outstanding Enterprise Award for Poverty Alleviation" by China Association

of Poverty Alleviation and Development.

In 2010, we invested RMB 19.9 million in seven projects in Shuanghu

Special District of Nachu Prefecture, mainly to build or repair infrastructure

and improve the living conditions of local farmers and herdsmen. We also

donated RMB 500,000 and 1,500 books to local culture and education

departments. From August 31 to September 4, our medical teams provided

free diagnosis and treatment to more than 200 farmers and herdsmen in

Shuanghu. Two local doctors were selected to receive further professional

training at the CNPC Central Hospital.

Donations to Education In 2010, CNPC donated more than RMB 180 million to domestic education

by means of establishing scholarships, offering student subsidies, funding

Hope primary schools, and financing research projects.

Since its establishment in 2001, the CNPC scholarship has been granted

to 7,872 students and 572 teachers in seven petroleum universities and

institutes and 15 prestigious universities in China in the form of Excellent

Student Awards, Motivational Awards and Talent Recommendation Awards.

Moreover, 2,302 students from poverty-stricken families completed their

college education with the financial assistance from CNPC.

Free diagnosis and treatment to local people in Shuanghu

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2010 Annual ReportEnvironment and Society

CNPC established public welfare funds for Africa under China

Foundation for Poverty Alleviation to facilitate community and

social development in Africa. In November 2010, CNPC Nile

Company donated USD 600,000 to this NGO to fund the building

of the Sino-Sudan Abu Ushar Friendship Hospital, the first-phase of

the Demonstration Projects for the Sudanese Maternal and Child

Healthcare System. The Abu Ushar Friendship Hospital, a general

hospital which also specializes in maternal and pediatric healthcare,

is located in Jonglei State covering an area of 2,000 square meters.

Completion of this hospital will significantly reduce the local maternal

and infant mortality rates, and improve medical services in rural

communities in Jonglei State.

Overseas Community Development CNPC adheres to the concept of mutually beneficial development

in international cooperation, and is dedicated to building long-term

partnerships with host countries and local communities by creating job

opportunities, training local employees and improving people’s living

conditions to contribute to local socio-economic development.

In Sudan, the four-year project of the Public Welfare Fund Agreement

(signed with the Ministry of Social Development of Khartoum State in

January 2007) was officially launched, mainly targeting disadvantaged

groups such as orphans, deaf-mute children, sick women, blind people and

those lacking employment-related skills.

In Kazakhstan, we invested USD 350 million in three major natural gas

utilization projects — the oil transfer station of Hope Oilfield, No. 4 Oil and

Gas Processing Plant, and wet gas re-injection. The three projects were built

and became operational within only eight months. CNPC-AktobeMunayGas

was therefore granted the "Golden Award of Most Socially Responsible

Enterprise" by Nursultan Abishevich Nazarbayev, President of Kazakhstan.

We also spent RMB 23.73 million on the construction and maintenance of

infrastructure, hospitals, and cultural and religious venues in Aktobe and

Astana. We also provided support to five agricultural areas, and funded

the repair and maintenance of community kindergartens in Mangystau

Province.

In Iraq, we gave holiday gifts to children at Basra orphanage and provided

air-conditioners, stationery and recreational items in order to improve their

living and learning conditions.

In Venezuela, Raul Cuenca is a community dominated by farming and

animal husbandry. Before 2007, 80% of local residents were in poverty and

more than 70% were unemployed. To help local residents improve their

living conditions, the joint venture of Intercampo and Caracoles project

invested USD 1.39 million to support local development. In 2010, the

elementary school was reconstructed and expanded to accommodate

1,250 pupils, and it now has its own canteen and a baseball field. By the

end of 2010, poverty in the community had been reduced by 30.3% and

the employment rate increased to 39.6%.

In Peru, Block 1AB/8 project employed a low-pressure high-flow wastewater

recycling technology which was based on studies of the water injection

horizon, injected water quality, formation breakdown pressure, and

dynamic monitoring and analysis of re-injected flow. A total of USD 484

million was invested in the construction and operation of the wastewater

recycling system in the two blocks to ensure that all the produced water

was properly treated and re-injected underground to enhance oil recovery.

Cooperation with China Foundation for Poverty Alleviation

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Human Resources

CNPC is committed to building a HR development system compatible

with its goal of building an integrated international energy company.

We adhere to the concept of putting people first in employment,

comply with related laws and regulations, respect and protect all the

legitimate rights and interests of our employees, and provide a growth

platform for employees at various levels to promote the synchronous

development of both employees and the company.

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2010 Annual ReportHuman Resources

In 2010, we further improved the remuneration, welfare and insurance

system and implemented EVA and performance assessment throughout

the company. We standardized the processes of performance planning,

performance assessment and performance improvement to develop a

rule-based performance assessment system that covers senior and middle

management, technicians and operatives. Remuneration continued to be

weighted towards field operation and key posts. Subsidies were increased

steadily for posts that require high technical skills and working at night. A

unified enterprise annuity management system was established, with the

management of enterprise annuity and the transitional annuity of CNPC being

improved, so that employee pensions can gradually rise. We also strengthened

the implementation of supplementary medical insurance which covers all

employees in order to ease the burden of their healthcare costs.

CNPC adheres to the principle of democracy, openness, competition and

selection to shortlist outstanding talents from inside and outside the

company to support business growth. In 2010, we appraised and elected

192 more senior technical experts. At the same time, we also investigated

the needs of high-level overseas talents based on our business growth

and built an overseas talent introduction database, and 10 people were

included in the National One Thousand People Program.

We continued to foster talents in business management, technology,

operational skills and international operations. Following the principle

of graduated management, we promote key training projects and

standardized professional training projects to ensure all our staff receiving

adequate training. In 2010, the headquarters organized 133 training

programs in business management, HSE, oil and gas exploration and

development and engineering construction, involving 20,000 trainees

included senior and middle management, technological experts,

technicians and operatives. Occupational skill competitions were

held covering oil production, ethylene unit operation, metal structure

manufacturing, well drilling and well control, with the winners receiving

promotion. Many young operatives are enthusiastic for such competitions

and a number of long-serving staff displayed their impressive talents,

resulting in an increase in the overall quality of our operational staff.

To meet the growing demand for talent from our expanding international

business, we strengthened the HR management and development for

overseas projects. Meanwhile, we proactively promoted the local hiring of

employees and created a communicative, coordinated and harmonious

working environment. By the end of 2010, we had a total of 80,000 foreign

employees working at our overseas oil and gas cooperation projects. In

Sudan, Kazakhstan and Indonesia, more than 90% of the employees are

local hires.

With its multicultural background, we underlined the improving of overall

competence of our international talents, especially in foreign language

skills, cross-cultural communication and international market operations.

We held training courses in foreign languages such as Arabic, Spanish and

Persian, and sent 190 staff to the US, Russia and other foreign countries

to receive professional training. We also sent 94 participants in overseas

project manager training programs and overseas project managers and

technical experts to obtain practical experience in overseas projects.

Through training, technical exchanges and educational cooperation with

local schools, we provided foreign employees with related knowledge and

operational skills training. The hard work and contribution of our foreign

employees is encouraged and recognized. We have rewarded and honored

outstanding Sudanese employees for three consecutive years. In 2010, the

Kazakhstan project company spent RMB 5 million to help outstanding local

youth receive education in prestigious universities in China, Kazakhstan

and other countries.

The Turkmenistan project of CPECC has 1,470 local employees, 70% of

the total staff. The project company provided 2,209 person/times of

training course to its employees and cooperated with local schools to

train more than 600 local people. The company also held five training

sessions for its partner Turkmenneftegasstroy State Concern and

trained 120 welders, 39 of whom passed the operational skills test

organized by the project supervision company in accordance with

China’s national welding testing rules.

Local employees said, “It is a pleasure to be trained here, work here

and we have learnt a lot.” “I really value my work today and my biggest

hope is that I can work in CPECC for a long time, because working

here itself is a kind of wealth.”

Training Turkmen Technicians

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In 2010, three CNPC scientists, Li Desheng, Su Yinao and Kuang Jun, were granted the Chen Jiageng Geo-

science Award, Guanghua Engineering Award and Guanghua Youth Award respectively, the highest honors

of the Chinese Academy of Sciences and the Chinese Academy of Engineering.

An expert in oil and gas explorationA professor-level senior engineerPetroChina Xinjiang Oilfield Company

A petroleum geologistAn academician of the Chinese Academy of SciencesResearch Institute of Petroleum Exploration and Development

Mr. Kuang innovatively proposed the models of oil entrapment by palaeouplift,

oil entrapment by fault, and oil and gas accumulation and dissipation. He has

conducted in-depth research into oil and gas reservoirs in the Junggar Basin,

which guided the discovery of six different types of oil and gas fields, including

Shixi Oilfield, the first 100-million-ton uncompartmentalized oilfield in the

heart of the desert. He organized and completed a number of major research

and application projects, and won one second prize of National Science and

Technology Advancement. He is the winner of Guanghua Youth Award of

Chinese Academy of Engineering.

Mr. Li is engaged in oil and gas exploration and development and was one of

the discoverers of the Daqing Oilfield. He has made significant contributions to

the study of continental oil generation theory, tectonic types of petroliferous

basins, lacustrine origin source beds, buried hill reservoirs and characteristics

of fractured reservoirs. He is the winner of Chen Jiageng Geo-science Award of

Chinese Academy of Sciences.

Mr. Su specializes in the research and application of drilling engineering

technology and is highly recognized in the field of directional well, cluster well

and horizontal well drilling. He has masterminded a number of national and

ministerial research projects and won two first prizes and one second prize of

National Science and Technology Advancement. He is the winner of Guanghua

Engineering Award of Chinese Academy of Engineering.

An expert in oil and gas drilling engineeringAn academician of the Chinese Academy of EngineeringCNPC Drilling Research Institute

Li Desheng

Kuang Jun

Su Yinao

2010 Annual Report Human Resources

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2010 Annual ReportHuman Resources

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Technology

In 2010, we made technical breakthroughs in the exploration and

development of conventional and unconventional oil and gas resources,

petrochemical production, oilfield services, and petroleum equipment

manufacturing. These were due to our focus on the integration,

optimization and application of existing proven technologies, research

and field tests at major national and corporate S&T projects, and follow-

up work and research on cutting-edge technologies that lead and drive

the oil and gas industry. Our efforts were driven by the needs of our core

businesses and oriented toward achieving production objectives.

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2010 Annual ReportTechnology

In the field of oil and gas exploration, innovations and improvements

to our geological theory and exploration technologies enabled massive

exploration of lithostratigraphic reservoirs. A geologic theory focusing on

the genetic model of sandy debris flows in open lacustrine basins and

the large-area, low-permeability hydrocarbon accumulation mechanism

assisted our rapid exploration of large lithostratigraphic reservoirs at Huaqing

in Ordos, Xujiahe Formation in Sichuan, and carboniferous volcanic strata

in northern Xinjiang, supported by high-precision sequence stratigraphic

industrial mapping and the prestack seismic prediction of reservoirs.

In oil and gas field development, improvements to water cut control and

potential release technologies, as well as chemical flooding for tertiary

recovery, helped maintain a stable output from Daqing Oilfield. Our field

tests on fracturing along horizontal wells for effective development of

low permeability reservoirs saw smooth progress. A breakthrough was

made in technical research and field tests of the Steam Assisted Gravity

Drainage (SAGD) for ultra-heavy oil recovery and the ignition of the

combustion drive. Our research on CO2 flooding and storage delivered

significant results, and will become the next-generation technology for the

development of low-permeability oilfields.

In the exploration and development of unconventional oil and gas, we further

improved the CBM accumulation theory, and developed key technologies

such as 2D seismic-based AVO prediction, drilling and completion of

multilateral horizontal wells, massive sand jet fracturing, optimal selection of

high-yielding layers, and drainage and extraction techniques. These enabled

large-scale CBM development in the Qinshui Basin.

Major breakthroughs occurred in CNPC’s petrochemical technologies in the

processing of inferior heavy oil, production of clean oil products, and R&D

of large-scale ethylene units and high value-added chemical products. In

addition to world-leading cracking catalysts and technology packages, we

also made major progress in the ethylene cracking furnace and product

forecasting system.

Our R&D in engineering technologies and equipment manufacturing

gave birth to a RTM software system with our independent intellectual

rights and suitable for onshore and offshore applications, as well as a next-

generation integrated and networked software platform for well logging.

Another R&D success was an all-welded large-diameter and high-pressure

ball valve suitable for long-distance pipelines. In addition, we mastered

core technologies in the manufacturing of coiled tubing and built the third

coiled tubing line in the world.

To meet the needs of basic research, key technical R&D, and technical

application, we promoted the construction of key labs and test bases for the

development of low-permeability reservoirs, pipeline transport security, LNG,

and the conversion of heavy oil to light oil. 2010 saw the completion of the

EOR State Key Laboratory, preliminary completion of the State Engineering

& Technology Center for CBM Development and Utilization, and the formal

incorporation of the National Energy Administration’s Shale Gas R&D (Test)

Center and the R&D (Test) Center for Technologies and Equipment of

Long-Distance Gas Pipelines. To further improve our R&D and innovative

capabilities, we also set up a technical R&D center in Houston to engage more

international talents in the research of basic issues and key technologies.

In 2010, we were granted 1,701 patents (out of 2,178 applications),

including 300 invention patents (out of 841 applications). Ten of our

scientific and technological achievements were granted national awards

in 2010 — the “High-efficiency exploration and development technologies

for continuously steady production of more than 40Mt/a in the later high-

water-cut period of Daqing Oilfield” was awarded the Special National

Scientific and Technological Advancement Prize (NSTAP), the “Technologies

and their applications in the West-East Gas Pipeline Project” won a First-

class NSTAP, the “Origins and its identification of natural gas in China” won

a Second-class National Science Prize (NSP), and the “New technologies

of two-segment riser catalytic cracking to increase the yield of light oil

products”, among others, won seven second-class NSTAPs.

Our theoretical innovations and technical breakthroughs overcame key

technological bottlenecks that had constrained our business growth, and led to

remarkable application results. These included the exploration of conventional

and unconventional oil and gas such as exploration for metamorphic

basement rocks and high-coal-rank CBM; production stabilization and water

cut control in mature oilfields and the thermal recovery of ultra-heavy oil in

the field of development; and seismic data processing, horizontal drilling,

completion, and staged fracturing, and logging processing and interpretation

in oilfield services; as well as efficient and safe blending transportation of

multiple types of crude in long-distance pipelines and FCC gasoline hydro-

upgrading.

Reservoir-forming Theory and Key Technologies for Metamorphic Basement Rocks

Based on systematic studies on the formation of metamorphic buried hill

reservoirs in the Liaohe sag, we established the reservoir-forming theory

for metamorphic basement rocks, and the evaluation theory for basement

reservoirs in mature basins. We also innovated and developed six key

technologies for the prediction and evaluation of basement reservoirs.

The "source-reservoir integration" exploration concept has been drawn

up, identifying three major potential areas for the exploration of basement

reservoirs. Three belts with 100Mt reserves in each have been discovered

in the metamorphic basement in the Bohai Bay Basin, newly adding 400

million tons of reserves.

"2+3" Waterflood-based Potential Release and Polymer Flooding for Type-II Reservoirs

Three important technical innovations that mark major progress in

"2+3" waterflood-based potential release and polymer flooding in type-

II reservoirs have been made in Changyuan, the major block of Daqing

Oilfield: (1) Innovations have been made in technologies for the fine

description of internal building elements in different types of channel

sand reservoirs and for the quantitative characterization of remaining

oil. In fact, the effectiveness of water control and potential release has

been so improved in thick reservoirs with ultra-high water cut that the

waterflood recovery efficiency has increased by 1-2% in applied blocks.

(2) Polymer flooding technology for type-II reservoirs with a permeability

of 100-300 mD has been developed, enhancing the recovery efficiency by

more than 10% compared to waterflood, and by 3% compared to legacy

15

2010 Annual Report Technology

polymer flooding technology for type-II reservoirs. (3) We have created

a "2 + 3" development mode and "2 + 3" comprehensive adjustment for

water control and potential release to tackle the ultra-high water cut in

Changyuan. Secondary recovery is combined with tertiary recovery and

potential release from type-II reservoirs is combined with that from type-III

reservoirs. Waterflood is carried out before tertiary recovery for type-II and

type-III reservoirs with abundant remaining oil. Waterflood-based recovery

has been enhanced by 4-6%, and by an additional 1-2% compared to

conventional tertiary infilling. These innovations provide important

guidelines on enhancing the development of similar continental sandstone

oilfields in China in their high or ultra-high water cut period.

Breakthroughs in Basic Research and Development of New Technology for Thermal Recovery of Ultra-Heavy Oil

CNPC has independently developed new test technologies and methods

that are embodied in a large-scale 3D thermal recovery simulation device.

This has allowed indoor testing technologies to advance from 1D simulation

to high-temperature and high-pressure 2D and 3D simulation. Numerical

simulation technologies enable the physical simulation of a variety of

recovery technologies for heavy and ultra-heavy oil of different scale and

spatial dimensions in oilfields. Pilot test bases have been built for new heavy

oil development technologies in Liaohe Oilfield and Xinjiang region. Major

R&D breakthroughs have been made in new technologies for steam flooding,

THAI, SAGD, and the combustion drive for the recovery of ultra heavy oil. As

for the combustion drive, the distribution pattern of the fire front, as well as

the thermodynamic characteristics in different zones, has been discovered.

Our understanding of the SAGD recovery mechanism with dual horizontal

wells for ultra-heavy oil has been enhanced. The eight key bottlenecks that

have already been overcome include SAGD cyclic warm-up and adjustment

for even development of the steam chamber, ignition of the combustion

drive, and monitoring and control of the fire front. In Liaohe Oilfield, steam

flooding and SAGD have enabled one million tons of oil to be produced

annually, with recovery enhanced by more than 25%.

Theoretical and Technological Breakthroughs in High-coal-rank CBM Exploration and Development

Regarding high-coal-rank CBM exploration theory and technology,

we have developed a geological theory system covering the origins,

occurrence, and formation of CBM reservoirs in China, and unveiled

the rules of CBM enrichment. We have clarified the varying pattern of

permeability throughout the recovery process of high-coal-rank CBM.

We also have developed methods for the prediction of recoverable CBM

resources and the comprehensive geological evaluation of CBM-enriched

zones. In addition, we have developed a coal crack prediction technology

with integrated 3D-3C acquisition, processing and interpretation, and

AVO prediction technology for CBM-enriched zones. Regarding CBM

development, we have independently designed the wellbore configuration

and well-spacing pattern of multilateral horizontal wells, and developed a

secondary fracturing technology to remove blockages in order to improve

the gas productivity of individual wells. We have introduced a “Five-Phase

& Three-Pressure” management approach at gas wells, and mastered five

production techniques featuring sand and coal dust control.

At Qinshui Basin, we have proved and massively developed China’s first

100bcm CBM gas field. With a 800Mcm/a capacity already established, the

field has become commercially operational, with a maximum daily output

of 11,000 cubic meters per individual vertical well and 55,000 cubic meters

per individual horizontal one.

Breakthroughs in Reverse Time Migration (RTM)

We developed GeoEast-Lightning, which, with our independent intellectual

property rights, is a Reverse Time Migration (RTM) software system suitable

for depth migration imaging in onshore and offshore applications. The

system is based on full wave equations and does not have any limit on

inclination during the course of imaging. It can plot images from primary

wave, bow tie, prism wave, ghost wave, and other multiple waves.

Moreover, it can produce better images with a higher signal-noise ratio and

a sharper border of faults and steep dips than Kirchhoff migration and one-

way wave equation migration. Running at a high efficiency but requiring

relatively few resources, the system takes only one-eighth of the time

of any other commercial software to calculate the same single-shot data

under the same conditions. The system is more flexible in application and

more adaptive to hardware systems. GeoEast-Lightning has so far provided

excellent images by processing data from 2,255 square kilometers in Xinjiang

Uygur Autonomous Region, Bohai Bay Rim, and the pre-Caspian basin.

Breakthroughs in Horizontal Drilling, Completion, and Staged Fracturing Technologies

Technical improvements were made in the optimization of wellbore

configuration, well track and drilling fluid, customization of drill bits, and

elimination of pilot drilling, which has played a significant role in reducing

the drilling cycle of horizontal wells, for example, from 132 days on average

in 2008 to 63.4 days in 2010 in Sulige region, leading to major savings in

drilling costs.

For the purpose of production stimulation, we have mastered the optimal

design methods of well pattern and staged fracturing of horizontal wells.

Moreover, three major staged fracturing technologies have been created

with double-packer-single-sticking, sliding sleeve and sand jet along

horizontal wells. We have also improved three major matching process

technologies, including the monitoring and evaluation of hydraulically

created fractures; workover and staged fracturing with liquid plugs for the

16

2010 Annual ReportTechnology

stimulation of horizontal wells; and acidizing and fracturing with high-

efficiency self-diversion acid in carbonate rocks. Field tests have been

conducted in 508 horizontal wells. The fracturing has stabilized the average

daily output from each well at 6.5 tons, 3.9 times as much as from each

vertical well. The needs of staged fracturing along horizontal wells in

conventional low-permeability reservoirs in Daqing, Jilin, and Changqing

oilfields can generally be met.

Next-generation Integrated and Networked Logging Processing and Interpretation Software Platform

We developed CIFLog, an integrated and networked software platform

for well logging interpretation, using state-of-the-art programming

tools. CIFLog is world's first third-generation logging processing and

interpretation system based on Java-NetBeans, a cutting-edge concept in

computing technology. It can run in a true 64-bit Windows, Linux, or UNIX

environment and completely integrate all aspects of the interpretation and

evaluation of open hole logging and cased well logging.

Version 1.0 of CIFLog is now available, and consists of processing and

interpretation systems such as individual well interpretation, volcanic

rock interpretation, carbonate rock interpretation, water-flooded layer

interpretation, production logging interpretation, CBM interpretation,

management and utilities support. In addition to the full set of conventional

processing programs, the individual well interpretation system includes

processing and interpretation programs for logging data of micro-resistivity

scanning and imaging, array induction, acoustic imaging, dipole acoustics,

nuclear magnetic resonance (NMR), elemental capture spectroscopy (ECS),

through-casing resistivity, and wireline formation testing. Versions in Chinese,

English and other languages are available. More than 100 sets of the software

platform are already in use and can process up to 10,000 well/times a year.

Efficient and Safe Blending Transportation of Multiple Types of Crude in Long-distance Pipelines

CNPC has overcome the challenge of efficient and safe blending

transportation of multiple types of crude in long-distance pipelines through

joint research with China University of Petroleum. Among the many new

oil-transportation technologies that have been developed are "long-

distance sequential transportation of multiple types and batches of crude

oil modified with additives in normal temperature", "simulation of thermal

effect between a crude pipeline and a refined products pipeline installed in

the same channel", "sequentially alternative long-distance transportation of

hot and cold crude", "intermittent transportation of wax-containing crude

in long-distance pipelines", and the "theory and technology for quantitative

simulation of shear and thermal effect in the transportation of crude oil

modified with pour point depressant". These new technologies have been

integrated as a package and applied in our Western Crude Pipeline.

National IV Standard Compliant FCC Gasoline Hydro-upgrading Technology

Thanks to its independently developed techniques of highly selective FCC

gasoline upgrading (GARDES) and selective hydro-desulphurization of FCC

gasoline (DSO), CNPC can hydro-desulphurize gasoline without a significant

reduction in the octane rating and produce gasoline in compliance with

the National-IV Standard. With each of these technologies, full-cut FCC

gasoline or cut RFCC gasoline first flows through a reactor containing

selective desulphurization catalyst for selective desulphurization, and

then enters a reactor containing hydroisomerization and an aromatization

catalyst to restore the octane rating.

GARDES enables the production of blending component for clean gasoline

in compliance with the National-IV standard, with sulfur content of no

more than 50PPM, directly from FCC gasoline with sulfur content of no

more than 500PPM and alkene content of no more than 50% (volume

fraction). It was applied in a 200kt/a gasoline hydro-upgrading unit at

Dalian Petrochemical on January 9, 2010. Its industrial application showed

that the technology allows hydro-upgrading without separating the heavy

from the light cut. It can reduce the content of sulfur and alkene in FCC

gasoline by 70-80% and 25-33%, respectively, with an octane rating loss no

more than 1 unit and a gasoline yield of more than 99%. It is so adaptive to

high alkene cut FCC gasoline that the content of sulfur and alkene in the

upgraded gasoline can satisfy the requirements for blending gasoline in

compliance with the National-IV standard.

DSO features a flexible process flow, mild reaction conditions, and

high desulphurization rates. Good results have been obtained from its

application in FCC gasoline hydrogenation units at Yumen Refinery and

Dalian Petrochemical in 2008 and 2009. In 2011, DSO will undergo an

industrial test on a 600kt/a FCC gasoline hydrogenation unit at Urumqi

Petrochemical to produce blending component for clean gasoline in

compliance with the National-IV standard, with sulfur content of no more

than 50PPM, directly from FCC gasoline with sulfur content of 300-500PPM.

The liquid yield is expected to be higher than 99%.

Industrial Test of Hexene-1 and 10kt/a Tech-package

A technology package for the production of hexane-1 through tri-

polymerization of ethylene independently developed by CNPC has led to

four innovations: (1) a highly selective catalyst for hexene-1; (2) an ethylene

pre-mix process; (3) a heterogeneous tank reactor of high mass transfer;

and (4) online desorption of oligomers without adhesion on the tank.

Industrial operation indicates that the catalytic efficiency is 1.3 times more

than that of the pilot run, per-pass conversion of ethylene has increased by

14.6%, and the purity of the hexene-1 product exceeds 99%.

17

In 2010, guided by the principles of stability, balance, efficiency, control

and coordination, CNPC continued to optimize its investment portfolio,

accelerate the construction of major projects, and improve capital

returns. We consolidated our upstream oil and gas business strengths,

improved technical and economic indicators in refining operations,

maintained stable market supply, and expanded international

operations. In addition, we fully utilized our advantages in oilfield

services, engineering and construction, and equipment manufacturing

to support oil and gas operations.

Annual Business Review

18

2010 Annual ReportAnnual Business Review

2008 2009 2010

2008 2009 2010

2008 2009 2010

Newly proven oil in place (mmt) 643.22 627.50 655.77

Newly proven gas in place (bcm) 416.82 461.60 570.10

2D seismic (kilometers) 37,340 26,816 31,023

3D seismic (square kilometers) 11,891 11,427 13,463

Exploration wells 1,648 1,901 1,640

Preliminary prospecting wells 891 1,071 949

Appraisal wells 757 830 691

Exploration and Production

CNPC focused on its core upstream operations, and continued to invest heavily in exploration

and development, achieving a number of breakthroughs and rapid growth in oil and gas

production. Our oil and gas production in terms of oil equivalent accounted for about 60% of

China’s total.

Exploration

In 2010, our oil and gas exploration was mainly focused on key basins and target areas. Great

efforts had been made in preliminary prospecting, risk exploration, fine exploration and the

integration of exploration and development. We adopted a series of technical measures such

as vertical multi-stage fracturing, horizontal drilling and staged fracturing in the exploration

of low-permeability, carbonate and volcanic reservoirs, resulting in a number of strategic

discoveries and breakthroughs in reserve growth.

Throughout the year, we completed 31,023 kilometers of 2D lines, 13,463 square kilometers

of 3D profiles, and 1,640 exploration wells with a total footage of 4.63 million meters.

Domestically, we newly proved 655.77 million metric tons of oil in place and 570.1 billion cubic

meters of gas in place. Proven oil and gas reserves reached more than one billion metric tons

of oil equivalent for four consecutive years. The oil reserve replacement ratio remained above

100%, and natural gas above 200%, projecting a more reasonable reserve sequence and more

solid resource bases.

Major Discoveries A number of significant oil and gas discoveries were made in southwest Tarim Basin, lower-

paleozoic in the Ordos Basin, southwest Qaidam Basin, west of Longgang in the Sichuan Basin,

north Tuha Basin, northwestern flank of the Junggar Basin and Damintun Sag in the Bohai

Bay Basin. Well Kedong-1 drilled in southwest Tarim Basin yielded commercial oil and gas

flows, resulting in major breakthroughs in the risk exploration of piedmont high and steep

structures. High yield gas flows were obtained from four wells, including well Su-203, in lower-

paleozoic strata in the Ordos Basin. Thick oil and gas reservoirs were encountered in well Sha-

37 in southwest Qaidam Basin. The fine exploration in mature fields resulted in the discovery of

100-million-ton uncompartmentalized reserves.

In addition, we proved 16 blocks with sizeable reserves, including nine oil blocks and seven

natural gas blocks, in the Ordos, Qaidam, Bohai Bay, Tarim, and Sichuan basins.

Reserves and Operating Data

Newly proven oil in place | mmt (domestic)

Newly proven gas in place | bcm (domestic)

19

2010 Annual Report Annual Business Review

2008 2009 2010

2008 2009 2010

Development and ProductionIn 2010, CNPC carefully managed its operations in mature oilfields and promoted the integral

development of new oilfields. To build up production capacity of both new and mature fields, we

gave priority to hydrocarbon-rich blocks, optimized well pattern, employed new technologies such

as cluster well drilling, horizontal drilling, unbalanced drilling, fracturing, and high-efficiency lifting

to enhance the protection of reservoirs and maximize single well output. The redevelopment of

our mature oilfields proceeded smoothly, achieving substantial progress in eight pilot projects in

Daqing, Liaohe and Xinjiang. Our target of increasing single well output and significantly enhancing

oil recovery was basically reached.

In 2010, we completed the development drilling of 16,564 oil wells and 989 gas wells, of which 709

were horizontal wells and 305 were unbalanced wells. We newly built an oil production capacity of

14.15 million metric tons and a gas production capacity of 12.43 billion cubic meters.

Crude Oil By continuing the Year of Waterflood Development campaign, the natural decline rate of mature

wells decreased to 12.5% and the water cut growth rate was controlled within 0.5%. We effectively

curbed the falling trend of single well output through comprehensive measures such as focusing

on fine water flooding, subdividing development layer series, reorganizing injection and production

system, implementing massive fracturing and acidizing, and controlling flooding front and profile.

Thanks to these efforts, we were able to stabilize the daily output per individual well and produced

105.41 million metric tons of crude in 2010.

In Daqing Oilfield, we further implemented water flooding to release the potential of mature

fields. Daqing’s annual crude production has been stabilized at 40 million metric tons for eight

consecutive years. The annual yield by means of tertiary recovery was maintained above 10 million

metric tons. Changqing Oilfield proactively promoted large-scale pilot tests and boosted the

production capacity of low-permeability reservoirs, resulting in a crude output increment of 2.53

million metric tons. In 2010, Changqing’s oil and gas production exceeded 35 million metric tons of

oil equivalent, of which 4 million metric tons were contributed by ultra low-permeability reservoirs.

Redevelopment of Mature Oilfields

Our eight oilfield companies — Liaohe, Xinjiang, Jilin, Daqing, Dagang, Jidong, Tuha and Yumen

— achieved substantial progress and significant results in terms of their pilot projects for the

Crude production | mmt (domestic)

Natural gas production | bcm (domestic)

20


redevelopment of mature oilfields. Production per individual well was

increased and the oil recovery was dramatically enhanced. The pilot

projects, covering 835 million metric tons of geologic reserves, are

expected to newly add 65.38 million metric tons of recoverable reserves

and increase the oil recovery by 7.8%. The number of producing well grew

from 6,554 to 9,196, and annual oil output increased from 4.58 million

metric tons to 5.99 million metric tons. The average daily output per

newly opened single well was 3.9 metric tons, up 11% compared with

adjacent new wells. Meanwhile, we gained a better understanding of the

redevelopment of mature oilfields, and made new progress in well pattern

restructuring, flooding front control, layer sub-division in oil and water

wells, production control processes, reorganization of surface processes,

and economic evaluation.

Major Pilot Tests

In 2010, we strived to make technological breakthrough in the

development of specified reservoirs characterized by high water cut, low-

permeability, heavy oil and tidal zone, and launched a series of pilot tests.

The pilot test for the development of Changqing’s 0.3 mD reservoirs was

successful, which promoted the economical and efficient development of

ultra-low permeability reservoirs. The binary flooding test was expected

to enhance oil recovery by 15%. We also achieved preliminary results in

pilot fire flooding for heavy oil development. In Jilin Oilfield, we further

expanded the scale of CO2 flooding test, producing 1.53 million metric tons

of crude last year. CO2 flooding is expected to be a leading technology in

developing low-permeability reservoirs.

Natural GasIn natural gas development, we enhanced production management and

capacity building, which resulted in significant progress in developing

complicated reservoirs, such as low-permeability and highly acid ones, as

well as in integral and cost-efficient development. In 2010, we produced

72.5 billion cubic meters of natural gas domestically, up 6.2% year-on-year.

The four major natural gas producing areas, namely Changqing, Tarim,

Sichuan and Qinghai, witnessed stable operations and production growth.

Changqing produced 21.1 billion cubic meters of natural gas, the largest

portion of the company, of which more than 10 billion cubic meters were

output from Sulige gas field. Sulige, with its annual production capacity

reaching 13.5 billion cubic meters, becomes China’s largest gas field.

Large-scale and Efficient Development of Sulige Gas Field

Sulige gas field, characterized by low permeability, low pressure and low

abundance, is the major gas source for Shan-Jing Pipelines. Since its large-

scale development started in 2006, innovations have taken place there in

six key technologies — well location optimization, rapid drilling, separate

fracturing commingled production, downhole chocking, inter-well

concatenation, and remote control, as well as 12 support development

technologies. Meanwhile, we also achieved major breakthroughs in

development by cluster and horizontal well drilling, experimented with and

promoted mixed development modes such as vertical well + directional

well, and vertical well + directional well + horizontal well. By the end of

2010, 3,520 gas wells, 85 gas gathering stations and four gas processing

plants had been established at Sulige gas field. The annual gas production

capacity had reached 13.5 billion cubic meters, and the annual gathering,

transmission and processing capacity had reached 18 billion cubic meters.

The field produced 37 million cubic meters of natural gas per day, more

than 10 billion cubic meters throughout the year.

Trial Operation Began at Tazhong I Oil and Gas Field

Tazhong I oil and gas field is located in the hinterland of Taklimakan Desert,

featuring high sour ultra-deep buried carbonate reservoirs. In October

2010, the oil and gas processing plant, gathering and transportation

system and auxiliary facilities became operational at the pilot development

area of Tazhong I oil and gas field. It is capable of processing one billion

cubic meters of natural gas, and producing 180,000 metric tons of gas

condensate annually.

Changling Gas Field Became Operational

Changling gas field is characterized by deep buried volcanic reservoirs

associated with CO2. It is the first domestic project integrating CO2-

containing natural gas development and CO2 flooding. In December

2010, the second phase surface project of Changling gas field became

operational. This includes one decarburization unit, CO2 pressurization

facilities and auxiliary production facilities, giving it an annual gas

production and processing capacity of one billion cubic meters.

Exploration and Development of Unconventional Oil and Gas We attach great importance to the exploration and development of

unconventional oil and gas resources such as CBM, tight gas and shale

gas, and are accelerating the construction of CBM industrial base and

conducting resource evaluations of tight gas and shale gas.

CBMIn 2010, our newly proven CBM reserves — mainly in the Qinshui Basin

and the eastern edge of the Ordos Basin — exceeded 100 billion cubic

meters for this first time in history. By widely using fishbone horizontal

drilling and extracting gas by water drainage, we effectively solved the key

technological challenges to CBM development.

In Qinshui of Shanxi and Hancheng of Shaanxi, we established two

digitalized and sizeable CBM fields with an annual production capacity

of 1.3 billion cubic meters. In 2010, our annual CBM production was 280

million cubic meters. The Fanzhuang Block in Qinshui Basin started external

transmission of CBM with a daily rate of 1.3 million cubic meters.

Shale Gas CNPC launched shale gas pilot development at two blocks in Weiyuan-

Changning in Sichuan Province and Zhaotong in Yunnan Province in 2010.

The first shale gas appraisal well Wei-201 was completed in the south of

the Sichuan Basin. Commercial gas flows were obtained from two series of

shale strata of Cambrian and Silurian systems after fracturing.

21


Drilling operation in Changqing Oilfield

22


Joint Exploration and Development Authorized by the Chinese government, CNPC cooperated with other

international oil companies to develop domestic oil and gas resources.

These joint blocks and projects mainly involve low-permeability, heavy oil,

tidal zone and shallow water area, sour, high-temperature high-pressure

and CBM reservoirs.

By the end of 2010, 35 joint exploration and development projects were in

progress, including 15 conventional crude, 10 conventional natural gas, and

10 CBM ones. These projects covered 37,600 square kilometers, producing

3.76 million metric tons of crude and 3.68 billion cubic meters of natural

gas throughout the year, i.e. 6.69 million metric tons of oil equivalent, up

3.7% year-on-year.

In 2010, we signed a gas contract on Dajing Block in Junggar Basin,

two agreements on joint evaluation and research of Daning CBM block

and Daqing tight oil project. The joint shale gas assessment for Fushun-

Yongchuan Block proceeded smoothly. CNPC was approved by the state as

a pilot enterprise for international cooperation in CBM development.

Newly Inked Projects

Dajing Block in Junggar Basin

On November 3, 2010, CNPC and Australia’s Dart Energy signed a 30 year

Production Sharing Contract (PSC) in relation to exploring the Dajing block

for natural gas. The block is located in the east of Junggar Basin covering an

area of 3,969 square kilometers.

Executive Summary of Major Projects

Chuandongbei Project

The project block is located in the Sichuan Basin, covering an area of 1,969

square kilometers. With Chevron as our partner, the proven gas fields will

be developed in three stages. The first stage is the overall development of

Luojiazhai gas field, including the construction of Xuanhan gas processing

plant. The second stage involves the overall development of Tieshanpo gas

field and the construction of a gas processing plant. The third stage refers

to the overall development of Dukouhe and Qilibei gas fields. On August 5,

2010, the overall development of Luojiazhai gas field was launched.

Changbei Project

Changbei Block is located in the Ordos Basin, covering an area of 1,691

square kilometers. Shell is our partner at this project, and also the operator.

In August 2010, the overall development plan for Chengbei project was

approved by NDRC, and the target commercial gas delivery was increased

from 3 to 3.3 billion cubic meters per annum. Since its commercial

production in March 2007, Chengbei project had cumulatively produced

more than 11 billion cubic meters of natural gas, completed and tested 26

bilateral horizontal wells. By the end of 2010, the average daily output per

individual well was 500,000 cubic meter. 15 of these wells produced more

than 1 million cubic meters each per day at the initial stage. In particular,

well CB12-1 output 2.2 million cubic meters per day at the initial stage ,

and 1.5 million cubic meters at the end of 2010. It had cumulatively yielded

1.1 billion cubic meters since being put into production in March 2008.

Zhaodong Project

Zhaodong project, located in the shallow waters of the Bohai Bay Basin,

includes two cooperative blocks: C/D and C4, covering an area of 35.85

square kilometers. We develop this project in cooperation with Australia’s

RocOil, with RocOil Bohai Company acts as the project operator.

In 2010, Zhaodong Project overcame the impact of the worst build-up of

sea ice in the Bohai Bay for 30 years and ensured the safety of personnel

and production facilities, producing 1.01 million metric tons of crude

throughout the year. The natural gas pipeline became operational on a trial

basis, delivering associated gas through an undersea pipeline to Chenghai

1-1 artificial island in the tidal area of Dagang Oilfield for processing. Once

being fully operational, the pipeline is expected to transport 60-70 million

cubic meters annually, which will provide an important new source of gas

for Beijing and Tianjin.

Yuedong Project

The project block is located at the southern tip of the Hainan-Yuedong

structural belt in the Bohai Bay Basin. Tianshi Energy Company from Hong

Kong is our partner in this project, and is also its operator.

One artificial island and two auxiliary production platforms were completed

at Hainan Yuedong Project in 2010. The project has been put into trial

production, with eight wells producing approximately 100 metric tons of

crude a day.

23


69%

80%

Natural Gas and Pipeline

Natural gas and pipeline is one of our most promising sectors and has the greatest growth

potential. Natural gas currently accounts for less than 4% of China’s primary energy

consumption, much lower than the global average of 24%. Accelerating the development

of natural gas business is in line with a more balanced energy mix and also offers a practical

approach for our sustainable development.

In 2010, we leveraged our competitive edge in natural gas resources in China, while also

accelerated gas imports. In addition, we achieved a better balance in production, sales and

resources. Natural gas outputs grew in the four major producing areas of Tarim, Changqing,

Sichuan and Qinghai. A nationwide natural gas trunk pipeline network linking the four major

producing areas with major consumption markets has taken shape. Two major crude pipeline

networks were formed in the northeast and northwest. The “two-vertical and four-horizontal”

oil products pipeline networks proceeded smoothly. A nationwide, cross-border oil and gas

supply system, characterized by diverse sources and centralized distribution, has taken shape.

By the end of 2010, the total pipeline mileage in operation had reached 56,865 kilometers, of

which 14,807 kilometers were crude pipelines, 32,801 kilometers were gas pipelines, and 9,257

kilometers were refined products pipelines, accounting for 69.2%, 80.5 % and 49.1 % of the

nation’s total respectively. Throughout the year, the pipelines transmitted 158.46 million metric

tons of crude, 5.1% more than last year, and 23.74 million metric tons of refined products, up

33.3% year-on-year.

Operation and Control We strengthened oil and gas supplying capacity in 2010 through centralized control and

regional management to ensure the stable and efficient operation of our oil and gas pipelines.

Our 38 long-distance oil and gas pipelines in operation all came under centralized control. We

also established a pipeline integrity management system that connects specialized companies

and regional companies so that the pipelines, natural and geological disasters as well as third-

party damage risks could be continuously identified, evaluated and controlled. These would

ensure the safe, reliable and controllable construction and operation of pipelines. CNPC

consecutively conducted international rating of asset integrity management for the third year,

reviewing 11 processes and more than 1,000 business factors related to integrity management,

with integrity management continuously and steadily improved.

Underground Gas Storage

With the nationwide natural gas pipeline network taking shape, underground gas storage

has become the “control valve” for peak shaving, and an important gas source that can ensure

stable natural gas supplies. The gas storages at Jintan, Dagang and Huabei have played a vital

role in improving the ability of our natural gas network to respond to seasonal peak regulation

and emergency supply.

In 2010, construction of the new underground gas storage in Dagang began. The total capacity

will be as much as 2 billion cubic meters, with 1 billion cubic meters of effective working gas

and daily delivery of 8 million cubic meters. Completion of Dagang gas storage will further

improve gas supply to Beijing and Tianjin. Part of Jintan gas storage for the West-East Gas

Pipeline has become operational, and the gas delivery for peak shaving has so far reached 55

million cubic meters, while delivery for emergency response has reached more than 75 million

cubic meters. Natural gas pipeline mileage in China's total

Crude pipeline mileage in China's total

24


Gas gathering station in Sebei, Qinghai

25


Storage and Transportation Facilities In 2010, construction of the four major oil and gas pipelines — the

northeast, northwest, southwest and offshore — all started and key

projects proceeded as scheduled. The Second West-East Gas Pipeline

(western section), the Third Shaan-Jing Pipeline, Russia -China Crude

Pipeline, Shikong-Lanzhou Crude Pipeline, Lanzhou-Zhengzhou-Changsha

Products Pipeline (Lanzhou-Wuhan section) all became operational,

opening the channels for oil and gas resources from east and west China

and foreign countries to enter domestic inland markets. The Zhongwei-

Huangpi section of the Second West-East Gas Pipeline (eastern section)

was completed and became operational, introducing natural gas from

Central Asia into central China for the first time, effectively alleviating the

gas shortage in this region. The Russian oil import and expansion project

was also fully underway. The Russia-China Crude Pipeline was linked to the

Northeast oil pipeline network. The Parallel Sebei-Xining-Lanzhou Pipeline

was also fully operational, connecting the three major gas fields of Qinghai,

Changqing and Tarim with the pipeline network.

Second West-East Gas Pipeline

The Second West-East Gas Pipeline consists of the Horgos-Zhongwei-

Guangzhou trunk and eight branches — Jingbian, Lunnan, Shiyan, Tai’an,

Xiangtan, Shanghai, Nanning and Shenzhen. It has a total length of 8,704

kilometers, including 4,978 kilometers of trunk lines and 3,726 kilometers of

branches. The pipe diameter is 1,219 mm and the designed pressure is 10

MPa with the annual gas transmission capacity of 30 billion cubic meters.

Construction of the pipeline is divided into western and eastern sections at

Zhongwei in Ningxia.

The 2,461-km long Horgos-Zhongwei trunk line became operational at the

end of 2009. By the end of 2010, it had transmitted a total of 4.38 billion

cubic meters of natural gas imported from Central Asia. Construction of the

Zhongwei-Guangzhou trunk line, 2,517 kilometers long, started in February

2009. On November 18, 2010, Zhongwei-Huangpi section became

operational. On December 8, the Zaoyang-Xiangfan section became

operational and was connected with the Zhongxian-Wuhan pipeline. By

then, the coverage of the Second West-East Gas Pipeline had stretched to

Hunan and Hubei.

Third Shaan-Jing Gas Pipeline

The 1,011-km long Third Shaan-Jing Gas Pipeline starts at Yulin in Shaanxi

and ends at Xishatun in Beijing. It has a pipe diameter of 1,016 mm,

designed pressure of 10 MPa and designed annual gas delivery capacity of

15 billion cubic meters. More than 400 kilometers of the pipeline runs in

parallel with the Second Shaan-Jing Pipeline, offering another important

channel to supply natural gas to the Bohai Rim region. On December

31, 2010, the Yulin-Liangxiang section became operational, and the

Liangxiang-Xishatun section is expected to be operational in June 2012.

Shandong Gas Pipeline Network

Shandong gas pipeline network consists of one trunk line and the Zibo,

Laigang, Rizhao, Rushan and Zhaoyuan branches. It has a total length of

1,017 kilometers. The 584-km long trunk has a pipe diameter of 1,016 mm,

designed pressure of 10 MPa, and designed annual transmission capacity

of 8.6 billion cubic meters. The branches are 433 kilometers long.

Construction of the Tai’an-Qingdao-Weihai trunk line and its branches

started in September 2009. The Tai’an-Qingdao section and Qingdao-

Weihai section were expected to be completed in April and October 2011

respectively.

Dalian-Shenyang Gas Pipeline

The Dalian-Shenyang gas pipeline includes the Dalian Xingang-Songlan-

Yingkou-Shenyang trunk line and Dalian and Fushun branches. The trunk

line is 431 kilometers long, with the pipe diameter of 711mm, designed

pressure of 10 MPa, and designed annual delivery capacity of 8.4 billion

cubic meters.

In March 2010, construction of the Dalian Xingang-Songlan section and

Shenyang-Yingkou section of the trunk line, as well as the branches started.

The Dalian Xingang-Songlan-Yingkou-Shenyang trunk line was scheduled

to be operational in June 2012. Once the Dalian-Shenyang gas pipeline

becomes fully operational, it will be linked to the Qinhuangdao-Shenyang

gas pipeline to integrate the natural gas pipeline networks of northeast

and north China.

Natural Gas Utilization and MarketingFaced with continuously growing market demand, CNPC fully utilized its

resources and advantage in the pipeline network, coordinated domestic

resources and imported resources, and optimized its natural gas sale

structure, selling 66.86 billion cubic meters of natural gas throughout

the year, up 12.6% over previous year, and ensuring stable supplies to

individual customers, public utilities, and key industrial users.

26


Dalian LNG Project

CNPC’s natural gas supply covers 26 provinces, municipalities and

autonomous regions of China, and the number of supplied cities and users

continued to grow at a rapid pace. In 2010, we developed the downstream

market for newly constructed pipelines and signed gas supply agreements

for the Second West-East Gas Pipeline with 99 users from Xinjiang, Gansu,

Henan, Hubei, Hunan and Shenzhen.

We also quickly developed downstream businesses such as civilian gas,

CNG, LNG and natural gas power generation. By keeping pace with market

developments and focusing on profitability, we promoted professional

and integrated management of our natural gas downstream businesses,

realizing the extension and enhanced secondary value of the natural gas

industrial chain. In 2010, CNPC affiliated Kunlun Gas Utilization Company

established a joint venture, Jiangxi Provincial Natural Gas Investment

Company, with Jiangxi Provincial Investment Group Corporation. This joint

venture will invest in the construction of the second phase project of the

natural gas pipeline network in Jiangxi Province.

Liquefied Natural Gas We actively developed import channels for natural gas resources such as

LNG. The main work of the Dalian and Jiangsu LNG projects was completed

and preparations were made for their operation. The Tangshan LNG

project was approved by the state and equipped with all conditions for

construction.

Dalian LNG Project

The Dalian LNG project includes an LNG dock and receiving terminals.

The project is divided into two phases, with the capacity of the first phase

being 3 million metric tons per annum, and 6 million metric tons per

annum for the second phase.

Construction of the receiving terminals and dock was completed in

December 2010. The project is to due to be completed and become

operational in July 2011.

Jiangsu LNG Project

The Jiangsu LNG project also includes a LNG dock and receiving terminals.

Construction is in three phases, with annual capacity of the first phase

being 3.5 million metric tons, the second at 6.5 million metric tons, and a

final goal of 10 million metric tons.

In December 2010, construction of the receiving terminals and dock was

completed and the project is to be completed and become operational in

June 2011.

Tangshan LNG Project

The Tangshan LNG project includes the construction of a dock, trestle and

receiving terminals. The annual capacity of the first phase is 3.5 million

metric tons, and second phase is 6.5 million metric tons. The final capacity

will reach 10 million metric tons a year.

Feasibility studies for the project and preliminary design have been

completed. In 2010, work was conducted on the project’s foundation and

preparations were made for construction. The project is due for completion

in July 2013.

27


2008 2009 2010

2008 2009 2010

2008 2009 2010

2008 2009 2010

Crude runs (mmt) 125.30 125.12 135.29

Utilization rate of refining units (%) 95.60 90.60 93.20

Refined products output (mmt) 79.22 80.45 86.33

Gasoline 25.46 25.82 26.76

Kerosene 3.60 3.64 3.66

Diesel oil 50.16 50.99 55.91

Lubricating oil output (mmt) 1.77 1.40 1.61

Ethylene output (mmt) 2.68 2.99 3.62

Synthetic resin output (mmt) 4.40 4.76 5.65

Synthetic fiber output (mmt) 0.14 0.14 0.12

Synthetic rubber output (mmt) 0.41 0.48 0.62

Urea output (mmt) 3.82 3.97 3.76

Synthetic ammonia output (mmt) 2.60 2.71 2.61

Ethylene output | mmt (domestic)

Refining and Chemicals

To improve its competitiveness, CNPC also focused on the refining and chemicals sector. Our refining capacity

ranked 9th globally, accounting for 34% of the domestic total. Our ethylene production capacity ranked 11th

globally, accounting for 29% of the domestic total.

Confronted with market changes in 2010, we adjusted the refining load, optimized resource allocation, and efficiently

managed the operation of newly built and existing units. Twenty-three major technical and economic indicators

recorded a new high, with light oil and ethylene yields leading in China. Throughout 2010, we processed 135.29

million metric tons of crude and produced 86.33 million metric tons of oil products in China, up 8.1% and 7.3%

respectively year-on-year. With Guangxi and Qingyang petrochemical complexes becoming operational, our daily

crude runs exceeded 400,000 metric tons, hitting a record high. The chemical production facilities were all operating

at full capacity, producing 3.62 million metric tons of ethylene, up 21% year-on-year.

Construction of Large Refining Bases In 2010, substantial progress was made in the strategic restructuring of our refining business and the

deployment of refining facilities. 15 major projects and 60 sets of refining units were newly completed, resulting

in a 14.6 million metric tons increment in our one-step refining capacity of crude oil. Seven 10 Mt/a refining

bases at Dalian Petrochemical, Dalian West Pacific Petrochemical, Fushun Petrochemical, Jilin Petrochemical,

Dushanzi Petrochemical and Guangxi Petrochemical, eleven 5 Mt/a refineries as well as four large ethylene

production bases were basically completed.

Guangxi Petrochemical’s 10 Mt/a refining project, Qingyang Petrochemical’s relocation and transformation project,

Tarim fertilizer project, Urumqi Petrochemical’s aromatic hydrocarbon complex were all completed and became

operational. Liaoyang Petrochemical’s Russian crude processing project was also completed basically. Ningxia

Petrochemical’s 5 Mt/a refining project and Hohhot Petrochemical’s 5 Mt/a refining capacity expansion project had

both commenced. A number of major projects in Sichuan, Fushun and Daqing proceeded smoothly as according to

plan. Ground breaking took place for the products quality upgrade project at Huabei Petrochemical and for the Sino-

Russian 13 Mt/a refining project in Tianjin.

Crude runs | mmt (domestic)

Refined products output | mmt (domestic)

Refining & Chemicals operating data

28


Operation of the 10 Mt/a Refining Project at Guangxi Petrochemical

Guangxi Petrochemical is the first large-scale refining base built by CNPC in

southern China, mainly including more than 10 sets of production facilities

including a 10 Mt/a atmospheric-vacuum distillation unit, a 3.5 Mt/a heavy

catalytic cracking unit, a 2.2 Mt/a continuous reforming unit, a 2.2 Mt/a wax

oil hydrogenation cracking unit, and auxiliary projects such as utilities, tank

farms, dock and railway.

In November 2007, Guangxi Petrochemical’s 10 Mt/a refining project was

launched in Qinzhou. JEC, IPMT, ICMT and SPOM models were adopted in

project design, engineering construction, operation commencement and

production process respectively, which dramatically improved engineering

quality and management efficiency.

On September 6, 2010, the 10 Mt/a refining project became operational at

Guangxi Petrochemical. It is capable of supplying 8.3 million metric tons

of gasoline, diesel, aviation kerosene and LNG, as well as 900,000 tons of

petrochemical products such as polypropylene, aromatic hydrocarbon,

benzene, toluene and mixed xylene. The project adopted a sophisticated

environmentally friendly wholly hydrogenated process, with all of its products

meeting the Euro III standard and 70% consistent with the Euro IV standard. At

the same time, the company also set up a 3-tier control system to prevent and

manage environmental risks, with more than 70% of wastewater recycled.

Relocation and Transformation of Refining Plant at Qingyang Petrochemical

Qingyang Petrochemical is located in Qingyang City, the main oil

production area of the Changqing Oilfield. The 3 Mt/a refining plant

relocation and transformation project includes a 3 Mt/a atmospheric

distillation unit, a 1.6 Mt/a catalytic cracking unit, a 600 Kt/a catalytic

reforming unit, and a 100 Kt/a benzene extraction unit. The project was

launched on March 15, 2009 and became operational on October 27, 2010.

Tarim Fertilizer Project

The Tarim fertilizer project is one of China’s biggest land-based modern fertilizer

plants in terms of production capacity per single unit. It is designed to produce

450,000 tons of synthetic ammonia and 800,000 tons of urea. Construction of

the project started on September 20, 2007 and it was completed and became

operational on July 14, 2010. Under full load, the project could produce 2,640

tons of urea per day, meeting demand for SGU in southern Xinjiang.

Aromatic Hydrocarbon Complex at Urumqi Petrochemical

The aromatic hydrocarbon complex at Urumqi Petrochemical is composed of a

800 Kt/a naphtha hydrogenation unit, a 1 Mt/a continuous reforming unit, a 700

Kt/a aromatic hydrocarbon extraction unit, a 1.8 Mt/a disproportionate unit, a 4.3

Mt/a adsorptive separation unit, a 3.3 Mt/a isomerization unit, a 4.9 Mt/a xylene

distillation unit, and a 70,000 cum/hr hydrogen purification unit. The 1 Mt/a PX unit

is among the world’s largest ones. This project started construction on May 1, 2008

and became operational on July 19, 2010. It has an annual production capacity of

one million tons of PX, 376,500 tons of benzene and 1.35 million tons of fertilizer.

Upgrading of Refined Products and Development of New ProductsWe made continuous efforts to upgrade the quality of refined products and

optimize the product structure in order to turn our technological advantage

into market and economic benefits. On January 1, 2010, all gasoline produced

by CNPC for vehicle use met the national III standard, and 60% of diesel

reached the national III standard. We also produced high-grade gasoline and

diesel compatible with local requirements. Throughout the year, 74.5% of

CNPC produced gasoline was of high-grade, an increase of 12.4%, meeting

the demand of the Shanghai World Expo and Guangzhou Asian Games. On

December 30, 2010, Lanzhou Petrochemical’s 1.8 Mt/a catalytic gasoline

hydrogenation unit was successfully put into operation at the first try.

Also, we leveraged our advantage in the integration of production, sales

and R&D to highlight the differentiated production of chemical products.

Throughout the year, we developed 55 types of new products, whose

output amounted to 1.2 million tons. The new products developed by

Dushanzi Petrochemical, such as tubular goods PE100, doublet membrane

material J5008, HDPE 8920, high flowability impact polypropylene K9928

and special BOPP material F1002B, secured a foothold in the market. What

is particularly noteworthy is that K9928 won the recognition of many

customers. Our Kunlun SBR and LAB products were honored as China Well-

known Petroleum and Chemical Product Brands.

10 Mt/a Refining Project at Guangxi Petrochemical

29


2008 2009 2010

Marketing and Sales

We continued to strengthen our domestic distribution network, project our brand image, and

enhance services to ensure stable supply of oil products.

Refined Products In 2010, we consolidated our position in the developed markets, made active efforts to expand

high-end market and increased terminal sales, achieving simultaneous growth in sales, market

share and profitability. Sales of refined products exceeded 100 million metric tons, up 15.5%

year-on-year. Retail sales exceeded 70 million metric tons, an increase of 19.6% compared

with previous year. The proportion of retail sales was increased by 2.1%, and our share in the

domestic refined products market was increased by 1.8% year-on-year.

Marketing Network Network development was accelerated. In 2010, we issued new design and construction

standards for service stations and oil tanks. 1,050 service stations became operational, including

570 newly developed skid-mounted service stations, bringing a retail sales increment of 6.39

million metric tons. By the end of 2010, we operated 17,996 service stations domestically.

In 2010, CNPC issued more than 5 million Kunlun fuel cards, which can now be used in our

16,050 service stations nationwide, giving the card owners quick and convenient access to

refueling services.

Non-oil ServicesIn 2010, our non-oil services witnessed rapid development in terms of both size and

profitability. The number of uSmile convenience stores grew 10.9% over the previous year, with

their operating profit increased 60.7%.

Lube Oil CNPC produces various kinds of lube which can meet different needs of end users. Our Kunlun

base oil, engine oil, additives, and auto gear oil have a leading position in the domestic market.

We sold 1.84 million tons of lube oil in 2010, and achieved sales growth of 7.5% for top grade

lube oil and 14.3% for packaged lube over the previous year. Exports of auto lube oil and

grease increased rapidly. The sales of Kunlun ship lube oil ranked first in the domestic market.

Miscellaneous Refined ProductsIn 2010, sales of miscellaneous refined products grew 20.9% over the previous year, while

asphalt sales increased 21% over the previous year and maintained the biggest market share in

China. We established six regional sales companies in northeast, north, northwest, east, central

and south China to create a network that support the rapid growth of our asphalt business.

Refined prouducts sales | mmt (domestic)

30


Production line of Kunlun lube oil

31


CNPC's share Total

2008 2009 2010

2008 2009 2010

CNPC's share Total

Overseas Oil and Gas Operations

In 2010, CNPC successfully fulfilled all of the objectives of its overseas oil and gas operations. We managed this

by optimizing the business layout and investment structure and improving the operating quality and profit of

projects abroad.

Exploration and Development 2010 saw important achievements in our overseas exploration and development. We obtained major

breakthroughs in risk exploration in our joint blocks in Niger, Chad, Uzbekistan and Turkmenistan, and made

progress in progressive exploration in joint oil and gas projects in Indonesia, Sudan and Kazakhstan.

High-yield flow was obtained from three exploration wells under formation test in the Dibeilla area,

located east of Agadem, Niger.

Formation test yielded a 1,000 tons per day oil flow from risk exploration well Cassia N-1 in Naramay area

of Block H in Chad.

High-yield gas flow of 1.44 Mcm/d was obtained from preliminary prospecting well Oja-21 in Block B on

the Right Bank of Amu-Darya River in Turkmenistan.

Oil and Gas ProductionDespite challenging changes in the external environment, production at our joint oil and gas projects was

smooth. This was attributable to the comprehensive administration and precise tapping of potential at mature

oilfields, accelerated capacity building in new oilfields, and the application of advanced technologies such as

horizontal drilling. In 2010, 75.82 million tons of oil were produced, 8.9% more than in 2009, of which CNPC's

share was 36.03 million tons, 4.97% more than in 2009. Natural gas operations yielded 13.7 billion cubic meters,

of which CNPC's share was 10.38 billion cubic meters, up 67.1% and 88.2% year-on-year, respectively.

Natural gas production | bcm

Crude production | mmt

32


Refining and ChemicalsOur overseas refining and chemical projects maintained stable operation

and total crude runs within the year reached 10.55 million tons, up 4.9%

over 2009. Khartoum Refinery in Sudan, PetroKazakhstan's Shymkent

Refinery in Kazakhstan, and Adrar Refinery in Algeria optimized process and

production plans and realized efficient production. Construction of both

N'Djamena JV Refinery in Chad and Zinder JV Refinery in Niger smoothly

advanced into the equipment installation stage.

Oil and Gas Pipelines2010 saw smooth progress of our oil and gas pipelines being built, and

steady operation of existing ones, which transported 40.31 million tons of

crude, 2.7% more than in 2009, in addition to 6.06 billion cubic meters of

natural gas.

Central Asia-China Gas Pipeline

The Central Asia-China Gas Pipeline is the first long-distance gas pipeline

that we built and operate that traverses several foreign countries. This

3,666km-long pipeline consists of Line A and B installed in parallel to each

other, starting at Turkmen-Uzbek border city Gedaim, running through

Uzbekistan and Kazakhstan, and reaching Horgos in China's Xinjiang Uygur

Autonomous region. Line A was completed and became operational on

December 14, 2009.

After Line B and Compressor Station 4 in Kazakhstan were completed on

October 26 and December 14, 2010, respectively, the delivery capacity of

the pipeline was upgraded to 15 bcm/a. In 2010, it transported 4.38 billion

cubic meters of natural gas from Turkmenistan to China.

The Second Phase of the Kazakhstan-China Gas Pipeline

The Kazakhstan-China Gas Pipeline, an important part of the Central Asia-

China Gas Pipeline, will be built in two phases. The 1,300km-long Phase 1

is the section of the Central Asia-China Gas Pipeline through Kazakhstan,

and was completed and put into service in December, 2009. The second

phase starts from Beyneu of Mangystau Province in Kazakhstan, and will

be connected to the Central Asia-China Gas Pipeline at Shymkent of South

Kazakhstan Province. This 1,475km-long section is designed to transport

10 billion cubic meters of natural gas a year, and has a potential of up to 15

bcm/a, thus meeting the gas demand in southern Kazakhstan.

Construction of the second phase began on December 21, 2010. A

1,164km-long section from Bozoy of Aktobe Province to Shymkent will be

built to have a capacity of 6 bcm/a, and is planned to be put into service at

the end of 2012. At the second stage, a 311km-long section from Beyneu

to Bozoy will be installed, upgrading the capacity to 10-15 bcm/a.

The No.1 Natural Gas Processing Plant on the Right Bank of Amu-Darya River in Turkmenistan

33


Europe

Tunisia

Algeria

Libya

Nigeria

Niger

Equatorial Guinea

Chad

Sudan

Africa

Mongolia

Japan

Myanmar

Thailand

Singapore

Indonesia

AustraliaAsia-Paci�c

Russia

Kazakhstan

Uzbekistan

Turkmenistan

Azerbaijan

United Kingdom

France

Central Asia-Russia

Syria

Iraq

Iran

Oman

Qatar

Middle East

Canada

Costa Rica

Ecuador

Colombia

Peru

Venezuela

America

Overseas Oil and Gas Operations

34


Europe

Tunisia

Algeria

Libya

Nigeria

Niger

Equatorial Guinea

Chad

Sudan

Africa

Mongolia

Japan

Myanmar

Thailand

Singapore

Indonesia

AustraliaAsia-Paci�c

Russia

Kazakhstan

Uzbekistan

Turkmenistan

Azerbaijan

United Kingdom

France

Central Asia-Russia

Syria

Iraq

Iran

Oman

Qatar

Middle East

Canada

Costa Rica

Ecuador

Colombia

Peru

Venezuela

America

35


Central Asia-RussiaIn 2010, CNPC made oil and gas investments in Kazakhstan, Turkmenistan,

Uzbekistan, Azerbaijan and Russia, and pushed forward the construction of

Central Asia Demonstration Area of oil and gas cooperation.

KazakhstanNew geologic discoveries in the Pre-Caspian central block consolidated

and expanded the resource foundation of the Hope Oilfield, our joint

project in Aktobe. We made important breakthroughs in progressive

exploration of two blocks and two mature oilfields in South Turgai Basin as

part of our PK project, with oil and gas discovered above the caprock of the

region for the first time. These demonstrated new room for exploration to

tap into unstructured reservoirs.

With respect to the development of oil and gas fields, we actively

developed fine reservoir description and effectively mitigated the

production decline of mature fields through optimization of drilling

position, application of sidetrack horizontal drilling and fracturing

techniques. We also accelerated the drilling of new wells and the

construction of associated surface facilities in new blocks. These helped us

stabilize and increase production in 2010. In response to the government

of Kazakhstan’s call for complete gas utilization, AktobeMunaiGas initiated

the combined processing station, the No.4 Oil and Gas Processing Plant,

and rich gas re-injection project in the Hope Oilfield, completing them in

the same year.

Turkmenistan2010 saw the start of natural gas production together with initiation of the

second phase construction in our natural gas exploration and development

project on the Right Bank of Amu-Darya River in Turkmenistan. Efficient

and orderly seismic acquisition and drilling in contract blocks led to

significant increases in reserves in Samandepe gas field of Block A, as well

as important discoveries that opened up new directions for exploration

in the southern, eastern, and central parts of Block B. Through renovating

mature wells and developing new ones, both the production of individual

wells and total capacity were much increased at the Samandepe gas field.

Total production of natural gas in 2010 exceeded 4 billion cubic meters.

New acidizing techniques and optimal re-perforation measures increased

the daily average capacity per mature well from 300,000 cubic meters to

650,000 cubic meters. The daily average output per newly started well

reached 1-2 million cubic meters, thanks to horizontal and high-angle well

drilling. The First Natural Gas Processing Plant processed 16 million cubic

meters of natural gas and supplied 14.5 million cubic meters of commercial

gas to the Central Asia-China Gas Pipeline per day.

UzbekistanOur cooperation with Uzbekistan in the field of natural gas was

further deepened in 2010. We signed a framework agreement with

Uzbekneftegaz to receive 10 billion cubic meters of natural gas a year from

Uzbekistan. Smooth progress was made in our joint Aral Sea project with

Uzbekneftegaz, Russia's LUKoil, Petronas, and KNOC, marked by high-yield

gas flow resulting from a test at well WAEX-1, the first exploration well

completed in the Aral sea.

RussiaThe Russia-China Crude Pipeline became operational in 2010, symbolizing

a new era of our energy cooperation with Russia. We inked a general

agreement with Transneft over the operation of the Russia-China Crude

Pipeline that stretches from Russia's Skovorodino station to China's Mohe

station, a framework agreement with Gazprom to import natural gas to

China, an agreement with Rosneft on extending oil supply to the Russia-

China Crude Pipeline, and an agreement with LUKoil on expanding

strategic cooperation.

Cooperation in the oil and gas business deepened in 2010. Vostok Energy

Ltd, our joint venture with Rosneft, made progress in two exploration

projects at Verkhneichersky and West Chonsky in north Irkutsk Oblast.

We completed drilling and encountered oil and gas shows in exploration

well West Chonsky-1. Our 13 Mt/a joint veture refinery with Rosneft was

inaugurated in Binhai New District of Tianjin.

MS metering station in Uzbekistan

36


Russia-China Crude Pipeline Being Operational

A ceremony celebrating the completion of the Russia-China Crude

Pipeline was held on September 27, 2010, with Russian President

Dmitry Medvedev and Chinese President Hu Jintao in attendance.

At the ceremony President Hu said, “The completion of Russia-China

Crude Pipeline is a model of mutual benefit and win-win, as well as a

new milestone of energy cooperation between Russia and China.”

In the 1990s, CNPC began negotiating with Russia on building the Russia-

China Crude Pipeline. On April 21, 2009, the governments of Russia

and China formally signed the “Agreement between The Government

of the People's Republic of China and The Government of the Russian

Federation on Cooperation in the Field of Petroleum”, which approved the

construction of the Russia-China Crude Pipeline and authorized CNPC and

Transneft to jointly carry out the construction. Accordingly, CNPC signed

“The Contract on Construction and Operation of the Crude Oil Pipeline

from Skovorodino to the Russia-China Border” with Transneft, as well as

agreements with Rosneft and Transneft respectively for long-term crude

trade. Under the agreements, Russia will supply 15 million tons of crude to

China each of the 20 years of the contract term.

The pipeline starts at Skovorodino off-take station in Russia and ends at

Daqing terminal station in China. With a designed annual capacity of 15

million tons, the pipeline is about 1,000 kilometers long, including 63.4

kilometers in Russia and 933 kilometers in China. Construction of the

Russian section and Chinese section (Mohe-Daqing) began in April and

May, 2009, respectively. The Mohe-Daqing section was built in such a

complex environment that constructors were technically challenged by

the permanently frozen soil in extremely cold zones, and a 1,150m-long

crossing over Heilongjiang River, the boundary river between Russia

and China. To install the pipeline, CNPC's pipeline constructors mastered

and implemented innovative new construction techniques such as

“pipeline construction in multi-year frozen soil areas”, “construction on

forest wetlands”, “construction in swamps of permanently frozen soil”, and

conscientiously minimized the operation zones to maximally protect the

nature in the protection zone while keeping to the construction schedule.

Most notably, we used fibertec protection technology for the Heilongjiang

River crossing, which kept the anticorrosion layer on the pipeline from

being damaged by the gravel layer, and ensured a more than 50-year

service life for the pipeline used in the crossing.

On January 1, 2011, the pipeline was completely put into service. This

new channel for China's import of Russian oil will play an important

role in deepening the energy cooperation between Russia and China.

37


AfricaIn 2010, CNPC made oil and gas investments in Sudan, Algeria, Niger, Chad,

Nigeria, Tunis, Equatorial Guinea, and Libya.

Sudan2010 saw smooth operation of our joint projects in Sudan. In addition

to discoveries from progressive exploration in Block 1/2/4 and 3/7, we

completed drilling of two offshore exploration wells in Block 15, providing

us with experience in offshore risk exploration. For the purpose of oil and

gas field development, we enhanced comprehensive control of mature

oilfields and accelerated capacity building in new ones. The Phase-2 of

Block 3/7 and Phase-3 of Block 6 were put into operation. The acidulous

water stripping work for environmental protection of Phase-2 expansion

of Khartoum Refinery was successfully started and achieved remarkable

results in comprehensive wastewater treatment.

NigerThe Agadem upstream downstream integrated project in Niger made

orderly progress. High yield from three exploration wells in formation

test marked a major breakthrough in upstream risk exploration. Most of

the welding work was completed along the crude pipeline designed to

transport one million tons of oil per year. Construction of the Zinder JV

Refinery advanced to the installation stage.

ChadOur Chad project in Bongor Basin made key exploration discoveries, and

achieved successful formation test in risk exploration well Cassia N-1

deployed in the Naramy region. N'Djamena Refinery, our joint venture with

the Chadian Ministry of Petroleum, smoothly advanced to the installation

stage. We completed the main part of a 311km-long crude pipeline

designed to transport one million tons of oil a year at the first stage.

AmericaIn 2010, CNPC had joint oil and gas investments in Venezuela, Ecuador,

Peru, Columbia, Canada, and Costa Rica.

VenezuelaWe formally signed a joint venture operation agreement with PDVSA on

Block Junin 4 in the Orinoco heavy oil belt. Our existing joint projects ran

smoothly. With respect to the MPE3 project, we accelerated construction

of well sites, the drilling of new wells, and the speed at which new wells

were put into production. These achievements, together with enhanced

oilfield management and optimized parameters of oil producing wells,

contributed to growth in output.

EcuadorOur projects in Ecuador converted their PSC into service contracts. The

Andes projects saw the successive birth of high-yield wells in the Tarapoa

block, aided by the study of the patterns of reservoir-formation, fine reservoir

description, and the distribution of remaining oil. When these new wells were

put into production, the preliminary stage test results showed a remarkable

average output of more than 900 barrels per day. We also introduced dual well

completion and other state-of-the-art and proven oilfield production processes

and technologies, and fulfilled the objective of stabilizing oil production.

PeruDespite the high composite water-cut and the weakening capacity of

water-injection wells, all wastewater was treated and re-injected in Block

1AB/8 . This was made possible by excellent maintenance of water-

injection systems, and smooth operation of wastewater recycling systems.

The project also witnessed organic growth of oil production through

enhanced management and stimulation of existing light oil wells and

ensuring production of heavy oil in Block 1AB.

38


秘鲁塔拉拉油田6/7区块海边油井

Drilling operation in Ecuador

39


Drilling operation in Ahdab Oilfield in Iraq

Middle EastIn 2010, we invested in oil and gas projects in Iraq, Iran, Oman and Syria,

and entered Qatar's oil and gas exploration in partnership with Shell.

Iraq2010 saw the advancement of our joint projects in Ahdab, Rumaila, and

Halfaya oilfields.

We commenced capacity building and surface work at Ahdab Oilfield.

Massive well drilling resulted in the spud-in of 27 wells and the

completion of 24 wells throughout the year. A total length of 201km of

three export pipelines was welded in 2010. The operating area, living

camp, and logistics and service area took shape. 1,703 jobs, or 58% of

the total, were locally staffed.

The Rumaila Oilfield reached its target productivity. The Rumaila Field

Operating Organization (ROO), a consortium by CNPC, BP and Iraq's

South Oil Company, took over operation management and commenced

operation in the oilfield. Over the course of the year, a total of 41 wells were

drilled, 103 workovers completed, and 122km of flowlines laid. The initially

targeted 10% increase of daily oil production was met in December, 2010,

thanks to the commencement of production at new wells and optimization

of production parameters.

In January 2010, the service contract was formally signed for the Halfaya

Oilfield, which is operated by CNPC in consortium with Total, Petronas,

and Iraq's Missan Oil. The terms of the contract require the consortium to

increase daily output to 535,000 barrels per day. In December 2010, 3D

seismic acquisition was formally commenced and the first batch of three

horizontal appraisal wells with the designed depth of more than 4,000m

were spud in.

SyriaIn 2010 we expanded our oil and gas business in Syria. We concluded an

agreement with Shell to acquire shares in Al Furat Petroleum Company.

Under the agreement, we acquired a 35% interest in Syria Shell Petroleum

Development (SSPD), which had been 100% owned by Shell.

40


Asia-PacificIn 2010, CNPC made joint oil and gas investments in Indonesia, Myanmar,

Thailand, Mongolia, Singapore, and Japan, and entered the Australian CBM

industry for the first time.

IndonesiaOur continued progressive exploration made new discoveries in 2010. Oil

and gas fields maintained stable production by rejuvenating old wells,

optimizing production parameters, and recovering shut-in wells.

AustraliaBy acquiring 100% shares of Australia’s Arrow Energy in partnership with

Shell, at a cost of AUD 3.5 billion, we gained entrance into the Australian

CBM industry. On August 23, the settlement was approved at Arrow's

general shareholders meeting and accepted by the Chinese and Australian

governments. PetroChina International Investment Co., a subsidiary of

CNPC, and Shell Energy Holdings Australia, established a 50-50 joint

venture to develop CBM resources in Queensland and Shell's proposed

LNG plants on Curtis Island at Gladstone.

MyanmarIn 2010, construction of the Myanmar-China Oil and Gas Pipeline officially

commenced. CNPC and Myanmar Oil and Gas Enterprise (MOGE) signed

the Shareholder Agreement on Southeast Asia Oil Pipeline Co., Rights

and Obligations Agreement on Southeast Asia Gas Pipeline Co. and the

Shareholder Agreement on Southeast Asia Gas Pipeline Co. According

to these agreements, CNPC Southeast Asia Natural Gas Pipeline Co., Ltd.

would be responsible for the design, construction, operation, expansion,

and maintenance of the oil and gas pipelines.

Both pipelines will start from Myanmar's Kyaukryu and enter China at Ruili

in Yunnan Province. The gas pipeline will extend across Yunnan, Guizhou,

Chongqing, and Guangxi. The oil pipeline is designed to transport 22

million tons of oil per year, and the gas pipeline is designed to transport

10-13 billion cubic meters of gas per year. An oil terminal will be built on

the west coast of Myanmar's Kyaukryu.

41


International Trade

By leveraging its integrated business advantages and adapting to market

trends, CNPC expanded international trade in 2010. We use various means

such as long-term contracts, hedging, processing on order, warehousing,

financing, and prepayment trade to strengthen the control of resources.

Throughout the year, we realized trade volume of 195 million tons of crude,

refined products, chemicals, and natural gas, worth USD 110.5 billion, up

27.5% and 67.6% over 2009, respectively.

We increased our influence in the crude oil market by focusing on market

development in major geographical regions and major oil types, and

growth of new energy resource types. In 2010, the volume of our physical

oil trade increased by 27% over 2009.

We extended our trade value chain by carrying out processing on order

of refined products and fully utilizing storage facilities. Our entry to the

refined products market of South Asia and Africa marked further expansion

of our offshore vessel refueling business. In the fourth quarter, we helped

stabilize domestic supply by importing diesel to meet market demand.

Our export of petroleum coke, paraffin, fertilizer, and other chemicals

reached a new high. New breakthroughs were made in the export of

synthetic resin and rubber. In addition to consolidating and expanding

our resources in northeast Asia and the Middle East, we enhanced market

development in South Asia and South America.

We continued to purchase natural gas from Central Asia. In addition to

concluding a gas purchasing framework agreement with Uzbekistan, we

made preparations to import LNG from Australia and Qatar.

The shipping business also increased in scale, with traffic up 23% year-on-

year. We expanded the size of our fleet by means of “shipbuilding + time

charter”. Ships were built in joint ventures with international petroleum

shipping companies from Venezuela and Russia.

Our three major overseas oil and gas operation centers in Asia, Europe, and

America all saw improvements, with the Asia center enhancing trading,

processing, storage, and transport capabilities. We also initiated a refined

products storage project in the Middle East.

42


Domestic Overseas

2008 2009 2010

2008 2009 2010

Domestic Overseas

2008 2009 2010

Seismic crews in operation

Domestic

Overseas

177

131

46

175

112

63

170

105

65

2D seismic data acquired (kilometers)

Domestic

Overseas

114,548

45,535

69,013

74,392

31,897

42,495

81,130

32,959

48,171

3D seismic data acquired (square kilometers)

Domestic

Overseas

58,648

15,834

42,814

53,525

15,383

38,142

54,338

15,671

38,667

Oilfield Services

As one of the world's major oilfield service providers, CNPC has 597 crews providing

geophysical prospecting, well drilling, well logging, mud logging, and downhole operations in

55 countries and regions.

In 2010, our geophysical prospecting saw improved acquisition speed, with the daily efficiency

of 3D seismic acquisition increasing by 5%. We promoted large-scale application of new

technologies such as horizontal drilling, underbalanced drilling, gas drilling, and operations

under pressure. Throughout the year, we domestically completed 709 horizontal wells, 305

underbalanced wells, and under-pressure operations for 1,621 well-times, up 40.4%, 27.1%,

and 54.2% over last year, respectively. With much increased efficiency of construction and

operation, our oilfield services were more capable of providing services and support and more

competitive within the market. In the high-end overseas market, we made progress by newly

inking contracts worth USD 3.66 billion and grew into a renowned EPC contractor.

Geophysical ProspectingIn 2010, CNPC deployed 241 seismic crew-times (99 2D and 107 3D crew-times) at home

and abroad. We also have 14 VSP crews, and 21 non-seismic (gravity and magnetic survey,

electric survey, and geochemical exploration) crews in operation. In 2010, we acquired 81,130

kilometers of 2D lines, up 9.1% year-on-year, and 54,338 square kilometers of 3D profiles,

roughly the same as in 2009.

We maintained our position as the global leader in onshore prospecting and aggressively

pushed forward the development of the integrated onshore and offshore market. In 2010,

utilization rates for our deep sea operation vessels increased to 83% (from 30% in 2009). BGP

Pioneer performed the first dual-vessel operation on a site in the sea of Ghana.

In China, we performed high-density 3D seismic exploration for carbonate fracture-cave

reservoirs at well block Ha-7 in Tarim Basin, Phase-2 3D seismic acquisition at Kunbei fault-

terrace belt-Qiexi slope in Qaidam Basin, 2D seismic acquisition for the pilot zone of shale gas

industrialization at Zhaotong in Zhejiang Basin and 3D seismic acquisition as part of Shenhua

Group's 100kt/a CCS project in Ordos. Overseas, we achieved our first success in linking

Geophysical prospecting operations

2D seismic data acquired | kilometers

3D seismic data acquired | square kilometers

43


among nodes, OBC, and onshore data

acquisition with the S64 project in Saudi

Arabia. In Oman, our PDO acquisition

project set a record with a per day

average of 20,000 shots using Distance

Simultaneous Separated Sweep (DSSS)

technology. In Myanmar, our 2D seismic

acquisition in offshore block BLOCK-M1

saw smooth progress. We also

moved into the onshore geophysical

prospecting market in Egypt, Cameroon,

and Papua New Guinea.

In 2010, GeoMoutain, a software system

with our independent intellectual property that integrates mountainous

seismic acquisition, processing, and interpretation, was launched and

successfully applied in 2D seismic exploration for shale gas reservoir at

Changning structure in Sichuan Basin. Our KLSeis software maintained

its leading position in the world. GeoEast software was equipped with

more sophisticated routine functions. Our GeoEast-Lightning, a software

system for depth-migration before stack (DMBS) and tomographic velocity

modeling, achieved world-class status. We continued to advance large-

scale application of GeoEast V2.0. The onsite processing version of the

software enjoyed an installation rate of 100% in China.

The Bureau of Geophysical Prospecting (BGP), our wholly owned

subsidiary, and American ION established a joint venture — INOVA (Tianjin)

Geophysical Prospecting Equipment Co., Ltd. — to further the research and

development of new seismic apparatuses, high-performance vibroseis and

other onshore exploration apparatuses and equipment. Seismic apparatus

ES109, which embodies our independent intellectual property rights,

saw smooth progress towards scaled-up production and sales. INOVA's

Scorpion, with its 12,080 reception channels for seismic acquisition, made

3D seismic acquisition much more efficient in well block Kedong-1 of Tarim

Basin by enabling up to 426 shots per day.

Well Drilling In 2010, our 1,000 drilling rigs spudded 13,121 wells, with total footage

of 25.20 million meters, 1.65% more than in 2009. The domestic footage

increased by 4.1% to 22.97 million meters. Our overall drilling speed saw

a 5% increase, with up to a 10% increase in deep wells, thanks to the

promotion of proven technologies such as optimal selection of bits and

parameters and quality drilling fluid. Drilling efficiency was further improved,

with the average construction cycle shortened by 5.08% to 17.92 days.

In 2010, we completed 867 horizontal wells, including 709 at home and

158 abroad, much more than in 2009. Horizontal wells completed in

Sulige saw the average along-hole depth increased by 113 meters to

4,493 meters, average horizontal interval increased by 136 meters to 943

meters, and average drilling period shortened by 7 days to 71 days, as

compared to those in 2009. Our Great Wall Drilling Company successfully

finished 12 lateral horizontal wells in Xinglongtai buried hill region and

block Sheng-601. The company had an average drilling period of only

7 days longer, while seeing an average production per single well 50%

more than those of conventional horizontal wells in the same blocks. Our

Bohai Drilling Engineering Company also saw the smooth completion of

two CBM multilateral horizontal wells at well block Zhengping-02-1 and

Zhengping-05-1 in Shanxi Province, where the coal seam was prone to

collapse and leakage and the control of well track difficult to maintain.

Horizontal well Halahatang-901H in Tarim Basin was completed at a depth

of 7,069.56 meters, with a maximum slant of 90 degrees, horizontal interval

of 310 meters, and maximum borehole temperature of 158 degrees

Centigrade. Thanks to the precise pressure control adopted in the course of

drilling, the well was completed 13 days ahead of schedule, setting a new

drilling record of CNPC's ultra-deep horizontal drilling.

A number of high-yield wells were drilled by using underbalanced/gas

drilling technologies, which effectively protect the reservoirs and increase

individual-well producing rate. In 2010, we drilled 305 underbalanced wells,

27.1% more than in 2009. CNPC's Western Drilling Engineering Company

obtained high-yield industrial gas flow from well Ke-21-2 by drilling

with negative pressure all along the reservoir section in Tuha Oilfield.

44


2008 2009 2010

Domestic Overseas

2008 2009 2010

Domestic Overseas

2008 2009 2010

Drilling rigs in operation

Domestic

Overseas

1,054

868

186

1,009

814

195

1,000

835

165

Wells drilled

Domestic

Overseas

15,161

14,125

1,036

12,900

11,570

1,330

13,043

11,919

1,124

Footage drilled (million meters)

Domestic

Overseas

28.28

26.02

2.26

24.79

22.07

2.72

25.20

22.97

2.23

Drilling operations

Underbalanced nitrogen drilling increased the penetration rate by three times and output by

3-4 times at well Ma-491 as compared to adjacent ones in Tuha Oilfield. CNPC's Chuanqing

Drilling Engineering Company registered a maximum depth record of 5,012 meters in the

311.2mm-borehole mist-drilled well Dabei-6 in Tarim Basin.

We aggressively expanded our presence in the international drilling market in 2010. We

entered the Iraqi drilling market by winning a drilling and directional drilling service contract

for Halfaya Oilfield. We also won contracts for drilling or integrated oilfield services of drilling,

mud, well logging, cementing, and mud logging for national oil companies of Uzbekistan,

Kazakhstan, Korea, and Norway. Moreover, we were awarded drilling and workover contracts

by Chevron and other international oil companies. Meanwhile, we brought our mature

technologies such as compound drilling, optimal selection of PDC bits, and pulse drilling to

overseas fields. Well Nangong-1 drilled by Western Drilling Engineering Company in Uzbekistan

was completed at a depth of 5,717 meters, 21 days ahead of schedule. This well registered a

record in terms of drilling depth, as well as the one-pass success of electrical logging, casing,

and cementing, along a 311mm wellbore using a 70 Rig.

Geothermal Power Generation in Kenya

The government of Kenya developed a new power development plan to help hydroelectric

plants meet domestic electricity demand in the dry season. It expects to convert the rich

geothermal resource available in the country into electricity, thereby enabling the state grid

to serve 90% of the country’s population by 2030 and increasing the percentage of electric

consumption in rural and mountainous regions.

In 2006, CNPC Great Wall Drilling Company (GWDC) won a drilling contract for the geothermal

power generation in Kenya, which would add 70MW generating capacity to the country. In

2007-2008, GWDC concluded a contract for the drilling of additional 25 geothermal wells

in Kenya. The average daily output of steam per single well is 5 MW. Especially, well OW909

achieved a daily testing rate of 12MW, which is now the No.1 high-yield geothermal well in

Africa. In 2010, GWDC worked with China Import and Export Bank to financially and technically

help Kenya promote the exploitation and utilization of geothermal resources under a

framework agreement in the field of energy cooperation between the governments of China

and Kenya. The company will provide comprehensive drilling services for 26 geothermal wells

in the OLKaria 4 Block, 140 kilometers west of the capital city Nairobi.

Wells drilled

Footage | million meters

45


46


2008 2009 2010

Logging crews

Domestic

Overseas

598

523

75

644

556

88

675

556

119

Well logging operations (well-time)

Domestic

Overseas

83,966

77,835

6,131

69,776

64,277

5,499

80,319

74,826

5,493

2008 2009 2010

Downhole operation crews

Domestic

Overseas

1,696

1,641

55

1,892

1,739

153

1,877

1,698

179

Downhole operations (well-time)

Domestic

Overseas

165,116

163,931

1,185

131,321

128,397

2,924

136,382

134,201

2,181

Well Logging and Mud LoggingIn 2010, CNPC had 675 logging crews operating 121 imaging logging units

and 311 high-precision logging units. Throughout the year, these crews

completed 80,319 instances of well logging and perforation and 10,133

instances of mud logging, up 15.11% and 3.94% from 2009, respectively.

As horizontal well logging technologies improve, we can provide open-

hole logging, cementing quality logging, and perforation for these wells.

2010 saw our first successful nuclear magnetic resonance (NMR) logging in

a well with a bore as thick as 12.25 inches — the well Midong-1 in Xinjiang

Oilfield. Our overseas projects saw smooth progress. In addition to entering

the offshore logging market of Iran, our logging projects in Uzbekistan and

Mongolia were endorsed by our partners.

CNPC is a global top-4 developer and manufacturer of imaging logging

systems. As such, we continuously strive to improve the logging outfit

EILog of our intellectual property. We domestically make imaging logging

units of six types (i.e., array induction, array lateral, micro-resistivity

scanning imaging, ultrasonic imaging, array sonic wave, and nuclear

magnetic resonance logging) in three categories (“3 of the electric, 2 of the

sonic, and 1 of the nuclear magnetic category). These units provide new

technical approaches for tackling the challenges of well logging evaluation

in complex reservoirs. In 2010, we developed, domestically made and

deployed 200 imaging logging units of five types (3 of the electric and 2 of

the sonic category), and 26 logging-while-drilling (LWD) units for formation

evaluation. In addition, we signed a sales and technical service contract of

MCI5570 micro-resistivity scanning instrument with Russia’s TNG. This was

the first export of Chinese-made equipment of this kind into the Russian

well logging market.

We independently developed the well logging system LEAP800, which

embodies world-leading technologies. LEAD3.0, our next-generation

integrated platform for well logging, was put into service in 2010, and has

efficiently and accurately processed the completion data of more than

440 wells in Changqing Oilfield. Field tests indicated that the average

processing and interpretation time per well is shortened by 2-3 hours

as compared to other existing products in China. Comprehensive mud

logging unit Snow Wolf and Dema (which contain our independent

intellectual property) have been used in 12 domestic oilfields and 7 foreign

countries.

Well logging operations

Downhole operations

Downhole OperationsIn 2010, CNPC had 1,877 downhole operation crews providing operations and

services including fracturing and acidizing, well intervention, overhaul and

sidetrack drilling. We completed 136,382 downhole operations throughout the

year, 3.86% more than in 2009; and conducted formation test in 6,852 layers, a

little less than in 2009.

In 2010, we fully deployed operations under pressure and domestically applied

them for 1,621 well-times, 54.2% more than in 2009 and exceeding our annual

objective. These operations significantly protected reservoirs, maintained

formation pressure, stabilized and increased individual-well producing rate, and

reduced discharge and energy consumption. In Jilin Oilfield, we applied the

operations for 514 well-times throughout the year, reducing the discharge of

wastewater by 757,000 cubic meters and the transportation by 100,000 tanker-

times. By the end of 2010, we had 84 under-pressure operation crews and 87

under-pressure operation units.

In 2010, we successfully developed an open-hole staged fracturing tool and

its matching technologies for the stimulation of horizontal wells. This tool

enables fracturing of up to 11 stages in a single string run, with a success rate

of 100%. We carried out ten-stage sand fracturing in well Su-5-2-15H in block

Su-5 of Sulige Oilfield. The fracturing resulted in an industrial open gas flow of

553,600 cubic meters per day from the well, which, completed at a depth of

5,235 meters with the average reservoir permeability of less than 0.213 mD and

the horizontal interval of 1,512 meters. We set a number of domestic records at

horizontal well Su-75-70-6H in block Su-75: the longest horizontal interval, the

most fracturing stages with one run at an along-hole-depth of more than 3,000

meters, most sand consumption, longest duration of continuous pumping,

and the first use of carboxymethyl fracturing fluid with low gel residual and

damage in horizontal well operations.

47


Engineering and Construction

In 2010, our engineering and construction business improved its ability

to provide services and support. We improved workforce coordination,

better allocated resources, optimized management flow, and enhanced

construction safety and quality supervision in the capacity building of

oil and gas fields, large-scaled refining and chemical projects, and major

pipeline works. We undertook 73 major engineering and construction

projects, including 27 delivered or made operational, 8 newly commenced,

and 19 carried out overseas.

In 2010, we continuously pushed forward high-end business of EPC, PMC,

and construction management. By focusing on large regional markets and

optimizing market layout, we improved our EPC and PMC functions. We

won construction contracts in the Middle East and saw the contribution of

high-end markets increase as a proportion of our total business.

Oil and Gas Field Surface EngineeringWe are the domestic leader in building capacity of onshore oil and gas

fields. We have the capacity to build surface works to accommodate

facilities with 20 Mt/a oil production capacity and 10 bcm/a gas production

capacity. In addition, we have established technology packages of surface

engineering in conventional oil and gas fields, in high water cut, low

permeability, ultra heavy and high condensate content oil fields, and in

high pressure, high sulfur content, and high yield gas fields.

In 2010, we standardized surface engineering design in oil and gas fields

in the domestic market by rolling out standardized and modular design,

and enhancing the engineering design, construction quality, material

procurement, engineering supervision, and matching construction. The

year saw our addition of 15 Mt/a oil capacity and 10 bcm/a gas capacity.

The surface work for pilot production of Dabei block in Kelasu gas field,

EPC-contracted by CPE and constructed by CPECC and other companies,

was completed and put into operation. The No.4 Sulige Natural Gas

Processing Plant, designed to process 5 billion cubic meters of natural gas

per year, was completed and became operational. Construction of the No.5

Sulige Natural Gas Processing Plant, expected to process 23 billion cubic

meters of natural gas per year, was commenced.

Overseas, we saw smooth progress in surface engineering of oil and gas

fields. The JAKE FPF project (the capacity building Phase 3 in Block 6 of

Sudan) was mechanically completed as scheduled in the contract. The

reconstructed and upgraded Algeria LPG processing unit was put into

operation. We won contracts for the Phase-2 Power Plant Project of Palouge

Oilfield in Block 3/7 of Sudan, EPC of Private Station of Bagtyiarlyk Contract

Block in Turkmenistan. Construction of the No.4 Oil and Gas Processing

Plant in Kazakhstan was completed in the same year that the contract was

awarded.

Pipeline and Storage Tank Construction As the domestic leader in design and world leader in construction of

onshore long-distance oil and gas pipelines, we have the annual capacity

to build 6,700-9,700 kilometers of oil and gas pipelines with a diameter

of more than 711mm. In addition, we have the technological capacity to

design and construct 150,000 cubic meters of crude tank and 10,000 cubic

meters of gas tank, and are capable of designing and building 26 million

cubic meters of crude tanks and 16 million cubic meters of refined product

tanks per year.

In 2010, we installed 5,200 kilometers of long-distance pipelines. As the EPC

contractor, China Petroleum Pipeline Bureau (CPPB) smoothly advanced the

construction of the eastern segment of the Second West-East Gas Pipeline,

and completed construction of and began operation at the Zhongwei-

Huangpi trunk. To install the trunk of the eastern segment, we successfully

applied semi-automatic downward welding with RMD + thin thread,

and made new breakthrough in the welding technique of long-distance

pipelines and small-diameter pipes on oilfield stations and yards. The

Parallel Sebei-Ningxia-Lanzhou Pipeline and the Lanzhou-Wuhan section

of Lanzhou-Zhengzhou-Changsha Products Pipeline were completed

and became operational. The Yulin-Liangxiang section of the Third Shaan-

Jing Pipeline was completely brought on stream. Rizhao-Dongming and

Taizhou-Qingdao pipelines were pushed forward as scheduled.

48


We made smooth progress in our pipeline construction overseas. The

Russia-China Crude Pipeline was completed. In the crossing of the

Heilongjiang River, Transneft and CNPC simultaneously drilled in opposite

directions from both banks of the river, and adopted the innovative fibertec

protection for pipe pullback to ensure a service life of more than 50 years

of the crossing pipe. Line B of the Central Asia-China Gas Pipeline generally

contracted by CPPB went on stream successfully in one trial. Both lines of

the pipeline went on stream two months ahead of the original schedule.

We also set a new record of 9.3 million labor-hours in an international

project without any accident. We began construction of the Myanmar-

China Oil and Gas Pipelines, smoothly built the crude pipelines in Chad and

Niger, and completed 90% of the Abu Dhabi Crude Pipeline. Our efforts

earned the praise of both our partner in Kenya and India's supervisor. We

built and burnished our reputation within the eastern Africa market by

upgrading the Eastern Line 1 in Kenya, which has smoothly run for one year

since being put into service. In May 2010, we commenced construction on

the western pipe upgrade of Line 4 in Kenya.

In 2010, we erected 3.2 million cubic meters of crude tanks and 520,000

cubic meters of refined products tanks. Huanqiu saw smooth progress

in its LNG EPC projects in Jiangsu, Dalian, and Tangshan. Four 100,000-

cubic-meter tanks were built in Lanzhou commercial crude storage base,

which was EPC-contracted by CPPB, and the another four were built in

Lanzhou crude storage base for production and operation, which was EPC-

contracted by Huanqiu. As the EPC contractor, CPECC largely completed

the Zhuhai refined products storage.

Offshore EngineeringWe have the capacity to provide integrated and comprehensive support for

offshore production. Our services include well drilling, well completion, and

production test in tidal and shallow water regions, design and construction

of marine engineering, and vessel service. We have created advanced and

highly functional technologies in support of offshore operations. All these

have helped us develop oil and gas fields in the Bohai Bay.

In 2010, we spudded 58 wells and delivered 63 wells, with a total footage

of 146,000 meters. We also provided well-completion service for 114 well-

times. We saw a 433m-increase in the average along-the-hole depth, an

0.88% increase in time efficiency, and 100% compliance of cementing and

wellbore quality. These results were made possible by the application of

PDC bits, high-pressure jet drilling, leakage prevention, and quick-setting

cement paste system, in light of the formation characteristics in Dagang,

Liaohe, and Jidong oilfields. In well Binhai-10X1, our CPOE 6 rig completed

drilling at a depth of 4,891 meters. The penetration rate was 23.5% higher

than that of adjacent wells, and the drilling period set a record of 44.3 days,

thanks to pressure-controlled drilling. Well Binhai-6 in Dagang Oilfield

(completed at a depth of 4,742 meters) was fractured at a depth of 4,474.4

to 4,535.3 meters, a temperature of 170 degrees Centigrade, and a span of

60.9 meters. The fracturing allowed daily production to reach 103.6 tons of

oil and 29,000 cubic meters of natural gas.

Our Tangshan production support base has been equipped with a

coastline of 1,270 meters in the wharf. The first phase of construction

enables the berthing of vessels and platforms and the loading and

restocking of materials, and provides winter berthing, inspection, and

maintenance for 12 platforms, more than 20 vessels, and ships of CNPC's

Offshore Emergency Response Center. Construction of the Qingdao

offshore engineering construction base saw smooth progress, enabling the

processing of 3,400 tons of steel in 2010.

CNPC has 42 large-scaled offshore equipment units, including nine mobile

drilling platforms, one modular drilling rig, five production test platforms,

and a variety of 27 vessels. In 2010, our vessels operated 9,383 steaming

days for transportation and our platforms were engaged in 82 towing and

shifting voyages. High-precision towing and positioning with zero errors

was conducted by CPOE 7 platform in Anadarko Petroleum Corporation's

well block Caofeidian, and by CPOE 3 platform in ROC's well block C4.

49


Construction of Refining and Chemicals FacilitiesWe have the capacity to simultaneously construct two or three 10Mt/a refining

plants, in addition to one or two 1 Mt/a ethylene plans.

In 2010, we undertook more than 40 major construction projects. Working through

CPECC and China Huanqiu Contracting & Engineering Corp., we completed

and put into operation Guangxi Petrochemical's 10 Mt/a refinery and Qingyang

Petrochemical's relocation and reconstruction. CPECC undertook construction

of Urumchi Petrochemical's 1 Mt/a aromatic plant, the largest project of this

type in the world, and Tarim Fertilizer Plant's 450 kt/a synthetic ammonia unit

and 800 kt/a urea plant, the largest capacity of each unit in the world. All these

plants successfully went on stream in a single trial. As the EPC contractor, Huanqiu

fully pushed forward Sichuan Petrochemical's 800 kt/a, Fushun Petrochemical's

800 kt/a, and Daqing Petrochemical's 600 kt/a ethylene plants, and saw major

progress in Hohhot Petrochemical's 5 Mt/a refinery upgrading project. As the

plant EPC contractor, CPECC made progress in Ningxia Petrochemical's 5 Mt/a

refinery reconstruction project and Karamay Petrochemical's 600 kt/a continuous

reforming unit.

We made new breakthroughs in developing our presence in the overseas refining

and chemical construction market. Huanqiu signed contracts for the refinery

foundation design and FEED contract in Cuba, feasibility study of a refinery in

Costa Rica, and maintenance in Ecuador. The environmental protection project

of Khartoum Refinery in Sudan undertaken by CPECC was completed ahead of

schedule.

50


Tarim Fertilizer Plant

51


Petroleum Equipment Manufacturing

In 2010, our equipment manufacturing business succeeded in optimizing

and adjusting the product portfolio, increasing industry concentration,

and improving market competiveness. This enabled us to build a modern

manufacturing industry that focuses on marketing, R&D and services.

2010 saw smooth progress in the integration of equipment manufacturing

business and the construction of large equipment manufacturing bases. As

part of the effort, the Machinery Plant of Lanzhou Petrochemical Company

was reorganized into Bohai Petroleum Equipment Manufacturing Company

Limited. We have preliminarily set up a new configuration of business

development, which consists of six manufacturers and technical developers

including Baoji Oilfield Machinery Company Limited (BOMCO), Baoji Petroleum

Steel Pipe Company Limited, Bohai Equipment Manufacturing Co., Ltd, CNPC

Jichai Power Complex, Daqing Oilfield Equipment Manufacturing Company

Ltd, and Liaohe Petroleum Equipment Manufacturing Corporation, in addition

to one professional international trading firm, China Petroleum Technology

& Development Corporation (CPTDC). Five large equipment manufacturing

bases integrating R&D, design, manufacturing, sales, and services have taken

shape in Shaanxi, Tianjin, Daqing, Liaohe, and Shandong. We have successfully

developed 53 new products, such as a 5000m trailer-mounted drilling rig,

coiled tubing, and a high-reliability diesel engine.

Our drilling equipment is evolving towards intelligent, highly reliable, and

highly mobile processes and technologies that are suitable to complex

environments. We have built our capacity to make a full series of 1,000-12,000m

rigs, and established systematic manufacturing capacity of seven models of

top drive drilling system. In 2010, our domestically made, second generation

slant well drilling rig ZJ20DBX passed a 50km road mobility test, with all test

data in compliance with the design requirements. We also succeeded in the

trial production of a large "36-inch button bit" with full drilling capacity and

China's first marine riser device for offshore drilling.

Our oil and gas production outfits are more intelligent, energy efficient, and

automatic. We can produce high-performance products such as electric

submersed oil pumps, screw pumps, insulated tubing, and gas wellhead at

scale. Our manufacturing capacity of energy-efficient motors has increased

from 2,500 units to 10,000 units a year. 2010 saw the smooth progress in the

R&D of new technologies for high steel grade HFW tubing. Technical upgrade

of the sucker rod production line was commenced at Bohai Petroleum

Equipment Manufacturing Company, where upgrade and reconstruction

projects of drill pipe production line were completed and became operational.

We have developed a wide range of multiple series of power units, including

natural gas, multi-fuel-gas, and dual-fuel engines. We have expanded the

application range of our heavy-duty compressors from well drilling to oil

and gas gathering and transportation. In 2010, construction began on a

manufacturing facility expected to produce 5,000 JC15 engines on light-duty

drilling rigs and 100 26/32 high-speed, heavy-duty engines per year.

Our manufacturing capacity of high-grade steel pipes saw marked

improvement. We develop high-steel-grade, thick-wall and large-diameter oil

and gas transport pipes, which have played an important role in support of the

construction of major pipelines. 2010 witnessed our successful trial production

of a submerged arc welded steel pipe, which is made from steel of grade X100

and has a diameter of 1,219mm and a wall thickness of 15.3mm. The finished

product of the pipe was accepted in an inspection. In addition, its matching

welding rod also passed production tests, with all performance indicators

meeting the design standard.

We can also produce high value added and state-of-the-art petroleum pipes

at scale. In 2010, an oil pipe project was launched in Xi’an, as part of a 300kt/a

production base of high-grade oil pipes to be built in Shaanxi Province.

In addition to a domestic marketing network covering all upstream, midstream,

and downstream sectors, we have international marketing sites at major oil and

gas producing regions around the world. We have established 12 large markets

valued at USD 50 million each, including those of Central Asia, the Middle

East, North Africa, South America, and North America. In 2010, our petroleum

equipment and materials were exported to 88 countries and regions, at a

total value of USD 1.6 billion. ESPs made by our Daqing Oilfield Equipment

Manufacturing Company Ltd. were introduced to the Iraq market, and the

China Geosteering Drilling System (CGDS) made by our Beijing Petroleum

Machinery Factory was introduced to North America. Baoji Petroleum Steel

Pipe Company Limited won a contract to supply pipes to the Russian East

Siberia – Pacific Pipeline. Baoji Oilfield Machinery Company Limited signed a

contract to export the drilling system for submersible offshore rig to Daewoo

Shipbuilding & Marine Engineering Co., Ltd (DSME). This was our first export of

new products such as offshore drilling rig modules, material supplies for water

injection, and well logging packages.

52


53

2010 Annual Report Financial Report

Financial Report

2008 2009 2010

Current assets

Cash and cash equivalent 185,818.39 257,975.98 235,670.40

Tradable financial assets 92.76 564.20 1,431.72

Net bills and accounts receivable 36,743.67 63,389.14 88,233.81

Prepayments 36,537.24 38,412.29 37,657.95

Other accounts receivables 30,244.97 18,109.40 43,564.44

Inventories 157,672.00 188,526.43 227,676.04

Other current assets 26,055.15 47,505.64 40,683.49

Total current assets 473,164.18 614,483.08 674,917.85

Fixed assets　

Available-for-sale financial assets 30,619.86 38,508.08 45,553.44

Held-to-maturity investments 76,040.89 125,210.98 160,513.86

Long-term equity investments 37,665.31 39,155.85 66,070.31

Fixed assets-net value 404,152.78 470,011.78 555,665.29

Construction in progress 191,653.20 258,150.89 284,671.93

Oil and gas assets 501,473.22 551,207.55 636,605.70

Intangible assets 33,807.86 40,954.66 47,721.77

Other fixed assets (other long-term assets) 55,163.87 83,922.14 158,236.11

Total fixed assets 1,330,576.99 1,607,121.93 1,955,038.41

Total Assets 1,803,741.17 2,221,605.01 2,629,956.26

Current liabilities

Short-term loans 35,515.21 31,931.15 60,943.52

Bills and accounts payable 167,095.92 219,829.48 286,325.64

Prepayments 30,458.72 40,545.11 57,032.51

Employee pay payable 32,733.43 26,264.18 23,130.42

Taxes payable 20,138.05 25,117.64 53,071.31

Other payables 61,865.52 70,108.08 82,787.95

Other current liabilities 21,436.74 125,326.03 157,519.55

Total current liabilities 369,243.59 539,121.67 720,810.90

Non-current liabilities 　　

Long-term loans 23,548.37 43,069.83 34,393.32

Estimated liabilities 39,344.92 48,003.47 65,440.66

Deferred income tax liabilities 13,866.76 23,883.07 23,752.57

Other non-current liabilities 47,469.30 146,365.52 217,448.21

Total non-current liabilities 124,229.35 261,321.89 341,034.76

Total liabilities 493,472.94 800,443.56 1,061,845.66

Consolidated Balance Sheet million RMB yuan

54

2010 Annual ReportFinancial Report

Consolidated Balance Sheet (continued)

2008 2009 2010Operating income 1,272,400.03 1,220,488.13 1,720,885.19

Income from core businesses 1,271,569.62 1,219,788.48 1,720,183.72

Income from other businesses 830.41 699.65 701.47

Less: Operating cost 837,133.11 778,764.31 1,154,873.26

Cost of core businesses 836,776.40 778,563.37 1,154,654.56

Cost of other businesses 356.71 200.94 218.70

Business tax and supertax 124,732.27 139,160.76 188,782.79

Sales expenses 51,943.76 53,848.23 63,531.85

Management expenses 86,447.74 90,724.85 101,427.99

Financial expenses 4,040.95 4,702.95 8,406.80

Loss on depreciation of assets 37,557.66 2,440.19 7,248.65

Others 24,835.45 22,791.93 27,140.64

Plus: Income from change in fair value (Loss is presented with "-") 4.42 101.15 -44.98

Income from investments 15,665.04 7,441.11 12,844.91

Operating profit 121,378.55 135,597.17 182,273.14

Plus: Non-operating income 23,788.11 7,566.70 7,594.28

Less: Non-operating expense 10,965.06 14,743.57 17,210.44

Total profit 134,201.60 128,420.30 172,656.98

Less: Income tax expense 43,151.12 41,196.09 48,473.02

Net profit 91,050.48 87,224.21 124,183.96

Less: Loss and gain from minority 20,271.66 17,652.96 26,931.64

Net profit attributable to owners' equity of the parent company 70,778.82 69,571.26 97,252.32

2008 2009 2010

Owners equity 　　

Paid-in capital 297,870.99 320,429.89 348,953.24

Capital reserves 269,068.18 270,562.90 267,207.03

Special reserves 18,098.18 23,230.89 26,645.64

Surplus reserves 108,572.90 115,838.40 749,117.88

Retained profits 491,315.61 552,514.46 13,129.06

Converted difference in Foreign Currency Statements -8,647.55 -11,319.15 -10,517.80

General risk preparation 635.88 1,117.06

Total owners' equity attributable to parent company 1,176,278.31 1,271,893.27 1,395,652.11

Minority interests 133,989.92 149,268.18 172,458.49

Total owners' equity 1,310,268.23 1,421,161.45 1,568,110.60

Total liabilities and owners' equity 1,803,741.17 2,221,605.01 2,629,956.26

Consolidated Profit Statement

Note: Data in 2009 have been adjusted in accordance with Accounting Standard for Business Enterprises.

million RMB yuan

million RMB yuan

55


A. Description of Principal Accounting Policies and Accounting Estimates

1. Accounting standard and accounting system

Since January 1, 2007, CNPC (hereinafter referred to as the Company)

started to follow the Accounting Standard for Business Enterprises issued

by the Ministry of Finance in 2006.

2. Fiscal year

The fiscal year starts on January 1 and ends on December 31 each

calendar year.

3. Standard accounting currency

The Company adopts RMB yuan as currency used in bookkeeping.

4. Accounting basis and valuation

Accounting is based on the accrual system. All assets are measured at

historical cost, except for tradable financial assets and available-for-sale

financial assets which are initially measured at fair value.

5. Foreign currency accounting and conversion

(1) Foreign currency transaction

Our foreign currency transactions are converted into RMB yuan at the

spot exchange rate on the days the transactions occurred; the monetary

foreign currency assets and liabilities on the balance sheet date are

converted into RMB yuan at the spot exchange rate on the balance

sheet date. The exchange gains and losses arising from these translations

that occurred in construction preparation, production and operation

are taken into financial expenses; those related to the acquisition and

construction of fixed asset, oil and gas asset and other assets in line with

the capitalization condition are handled according to relevant provisions

about borrowing costs; and those occurred in the period of liquidation

are taken into liquidation gain or loss.

A non-monetary foreign currency asset measured at historical cost is

converted into RMB yuan at the spot exchange rate on the trading day, with

its amount in RMB yuan unchanged. The closing fair value of a non-monetary

asset measured at fair value is converted into RMB yuan at the closing spot

exchange rate, with the difference between the converted value and the

original amount in RMB yuan taken into the current profits and losses.

(2) Conversion of financial statement in foreign currency

All asset and liability items presented in Foreign Currency Balance Sheet are

converted into RMB yuan at spot exchange rate on the balance sheet date;

the owner’s equity other than “undistributed profit” is converted at spot

exchange rate when occurred. Foreign incomes and expenses presented in

the Income Statement are converted at the exchange rate approximating

the spot exchange rate on the date of transaction. The exchange difference

of Foreign Currency Balance Sheet arising from the conversions mentioned

above is presented separately in “Converted Difference in Foreign Currency

Statement” under owner’s equity. The exchange difference arising from

monetary foreign currency items materially invested in foreign business

due to the change in exchange rate is also presented separately in owner’s

equity when preparing consolidated financial statements. When disposing

foreign business, the related exchange difference is carried to the gains/

losses of the period the business is disposed.

The opening balances of cash and cash equivalents in the Foreign Currency

Cash Flow Statement are converted at statement’s initial exchange rate;

and the closing balances are converted at the spot exchange rate on the

balance sheet date. And other items are converted at the exchange rate

approximating the spot exchange rate on the date of transaction. The

converted difference of cash flow statement arising from the conversions

mentioned above is presented separately in Effect of the Change of

Exchange Rate on Cash.

6. Recognition of cash and cash equivalents

The cash presented in the Cash Flow Statement comprises cash in hand

and the deposits available for payment from time to time. Cash equivalents

presented in the Cash Flow Statement are short-term (mature within three

months), highly liquid investments that are readily convertible into cash

and almost have no risk of change in value.

7. Financial assets

(1) Financial assets are classified into following specified categories: financial

assets at fair values through profit or loss, held-to-maturity investments,

loans, receivables, and available-for-sale financial assets. The classification

depends on the purposes of investments and economic substance.

a. Financial assets at fair value through profit or loss are financial assets that

are acquired for the purpose of selling in the near term, and are recorded

as tradable financial assets in the Balance Sheet.

b. Held-to-maturity investments are non-derivative financial assets with fixed

or determinable payments and fixed maturity dates that the management of

the Company has the positive intent and ability to hold to maturity.

c. Loans and receivables are non-derivative financial assets including bills

receivable, accounts receivable, interests receivable, dividends receivable

Notes to the Financial Statements

56


and other receivables with fixed or determinable payments that are not

quoted in active market.

d. Available-for-sale financial assets include all non- derivative financial

assets that are designated initially as available-for-sale or the financial

assets that are not classified in any of the other three categories.

(2) Recognition and measurement of financial assets

Financial assets are initially recognized at fair value. For financial assets at

fair value through profit or loss, the costs of acquisition are directly stated

in profit and loss accounts. Transaction costs of other financial assets are

initially recognized at fair value. A financial asset is derecognized when the

rights to receive cash flow from the assets are expired, or the Company

has transferred substantially all the risks and rewards of ownership of the

financial assets to a third party.

Financial assets at fair value through profit or loss and available-for-sale

financial assets are subsequently measured at fair value; the investments in

equity instruments that are not quoted in active market and its fair value

can not be measured reliably are measured at costs; loans, receivables and

held-to-maturity investments are measured at amortized cost using the

effective interest method.

Changes in fair value of financial assets at fair value through profit or

loss are recorded in profit/loss on changes in fair value; interests or cash

dividends from the assets held are recognized as income from investment;

when disposed, the difference between its fair value and initially

recognized amount is recognized as gain/loss on investment, and its gain/

loss on changes in fair value are adjusted accordingly.

The held-to-maturity investments during the period of holding shall be

determined using the effective interest method and shall be recognized

as income from investment. The effective interest rate shall be determined

upon obtaining such investment and remain unchanged in the following

period. When disposing of the held-to-maturity investment, the difference

between the price of obtaining such investment and its book value shall

be determined as income from investment.

When recovering the loans and receivables or disposing of the loans, the

difference between the price of obtaining such investment and loan book

value shall be determined as the income statement.

Changes in fair value of available-for-sale financial assets are recorded in

owner's equity; interests are recorded in gain on investment using the

effective interest method; cash dividends of available-for-sale investment

in equity instruments are recorded in gains on investment when invested

enterprises announce to distribute dividends; when disposed, the

deference between acquisition cost and the carrying value is recorded

in, and the accumulative amount of the changes in fair value originally

recorded in the owner’s equity is carried to profit/loss on investment.

(3) Impairment of financial assets

An assessment of carrying value of financial assets, except for financial assets

at fair value through profit or loss, is made at each term end to determine

whether there is objective evidence of impairment. If there is an objective

evidence of impairment of a financial asset, a provision for impairment

is recognized. Where there is a substantial or non-temporary decrease in

fair value of available-for-sale financial assets, the accumulated losses on

decrease of fair value that are directly recorded in owner’s equity before

are recorded in losses on impairment. For available-for-sale investment

in debt instruments with recognized loss on impairment, if its fair value is

increased in a subsequent period and the increase can be related objectively

to an event occurring after the impairment was recognized, the previously

recognized loss on impairment is reversed and recognized in the income

statement. For available-for-sale investment in equity instruments with

recognized loss on impairment, if its fair value is increased in a subsequent

period and the increase can be related objectively to an event occurring

after the impairment was recognized, the previously recognized loss on

impairment is reversed and recognized in the owner’s equity. The losses on

impairment of the investment in equity instruments that are not quoted in

active market and its fair value can not be measured reliably are irreversible.

8. Inventories

(1) Inventories comprise purchase, raw materials, packing materials, low-

value consumption goods, work in progress and semi-finished goods etc.

(2) Inventories are carried at the actual cost when acquired, using perpetual

inventory method; actual cost of delivered or sold inventories are carried at

weighted average.

(3) Low-value consumption goods and packing materials are amortized

using one-off amortization method when they are put into use.

(4) Year-end inventories are carried at the lower of cost and net realizable

value. Based on wall-to-wall inventory at the end of the period, provision

for inventory write-down is retained for the estimated loss on contracted

works and the part of the cost exceeded net realizable value of the

inventories that are replaced, in part or in whole outdated, or their selling

price is lower than cost. Provision for inventory write-down is retained for

the difference between cost and net realizable value of inventories on the

individual item basis. The net realizable value is expected selling price less

estimated complete cost, selling cost and related tax.

9. Long-term equity investment

(1) Measurement of long-term equity investment

57


For the combination of business under the same control, the carrying

amount of the owner's equity of the combined business on the day of

combination is recognized as the initial cost of the long-term equity

investment. For the long-term equity investment obtained from

combination of business under different control, the assets paid, liabilities

occurred or assumed and the fair value of the equity securities issued on

the combination or purchase day for acquiring the control of the combined

or purchased business are recognized as cost on combination. And the cost

on combination is recognized as initial cost of investment in the long-term

equity investment.

Except for the long-term equity investment obtained from combination of

business mentioned above, if a long-term equity investment is obtained

through payment of cash, payment of non-monetary assets or issue of

equity securities, its fair value is recognized as initial cost of long-term

equity investment; if a long-term equity investment is obtained from debt

reorganization, the fair value of the shares converted from financial claim

is recognized as the initial cost of investment to the debtor; if a long-term

equity investment is invested directly, the value agreed in investment

contract is recognized as initial cost of the investment, in the event that

the value agreed is unfair, the fair value of the equity invested is recognized

as initial cost of investment. If an initial cost of a long-term equity

investment is higher than the share of the fair value of the net assets that

can be identified in the invested business, the initial cost of the long-term

investment is not adjusted; the difference between the initial cost and the

share of the fair value is recorded in the income statement, and the cost of

the long-term investment is adjusted accordingly.

(2) Measurement of long-term equity investment

Investment in subsidiary is the equity investment in a business practically

controlled by the Company. The investment in subsidiary is recognized

using cost method, and is adjusted using equity method for the purpose of

consolidated financial statements.

Investment in joint venture is the equity investment in a mutual control on

a contracted commercial activity in which the sharing party agrees to share

the control on the significant financial, production and operating decision

with the Company. The investment in joint venture is recognized using

equity method.

Investment in subsidiary is the equity investment in a business on which

the Company does significant influence. The investment in associate is

recognized using equity method.

Long-term equity investment that is not quoted in active market and with

undeterminable fair value and insignificant influence are recognized using

cost method. For the long-term equity investment quoted in active market

and with determinable fair value, if it is not quite influential, its fair value is

reported in available-for-sale financial assets, and the change in fair value is

taken into owner’s equity.

(3) Provision for depreciation of long-term equity investment: At the end of

the year, if the recoverable amount of a long-term investment is lower than

its carrying value because that its market price is lower then its carrying

value in the latest two years, the investment is suspended of trading for

more than one year, the invested business suffered serious loss in the

year, the amount of loss is more than 1/3 of net assets at the beginning

of the year, the invested business run at a deficit in the latest two year, or

the invested business is in liquidation, reorganization or other business

discontinuance, the provision for the depreciation of the long-term equity

investment is retained against the difference between the recoverable

amount and the carrying value. Recoverable amount of marketable long-

term equity investment is the market price of the investment less disposal

expenses; if a long-term equity investment is not marketable, but its fair

value can be measured reliably, the recoverable amount of the investment

is determined against the lower of its fair value less disposal expenses and

the expected current value of cash flows from holding and exposal of the

investment in the future. If a long-term equity investment is not marketable

and its fair value can not be measured reliably, its recoverable amount

is determined against the discount of its future cash flow at the market

earnings ratio for the similar financial assets.

10. Deferred income

Deferred income comprises the governmental subsidy which shall be taken

into the income statements in the subsequent period and the unrealized

revenue of sale/leaseback transactions. The unrealized revenue of sale/

leaseback transactions is amortized using actual interest method.

Asset-related governmental subsidy is recognized as asset and deferred

income when received, and is contributed averagely to gains/losses of the

period against the useful life of the asset. Income-related governmental

subsidy used to recover related expenses or losses in the subsequent

period is recognized as deferred income, and is taken into the income

statement of the period in which the related expenses is recognized; those

used to recover related expenses and losses occurred in this period are

recognized directly as the gains/losses of the current period.

11. Income tax

Income tax expenses are recognized using balance sheet debt method.

Where there is a difference between carrying value of asset and liability

and their tax base, asset and liability of the deferred income tax occurred in

accordance related regulations.

58


B. Main Taxes

1. Income tax

The applicable tax rate for business income taxes of the Company is 25%.

2. Value added tax

Value added tax is set at 17% for petroleum and petrochemical products

and 13% for natural gas and LPG.

3. Operating tax

Operating tax is set at 3% for transportation and construction, and at 5%

for finance and insurance, service operations, transfer of intangible assets

and real estate sales.

4. Supertax

Urban tax is calculated and paid at 1% of turnover tax. Maintenance tax is

calculated and paid at 5% of turnover tax. Construction tax is calculated

and paid at 7% of turnover tax. Educational surtax is calculated and paid

at 3% of turnover tax.

5. Excise tax

Tax payable is calculated at the rate of 1.0 yuan per liter for lead-free

gasoline, 0.8 yuan per liter for diesel, 1.0 yuan per liter for naphtha,

solvent, and lubricant, and 0.8 yuan per liter for fuel oil.

6. Personal income tax

The employees are responsible for their own income tax, which is

withheld and remitted by the Company.

7. Royalties

Royalties for crude oil and natural gas production are calculated

according to the amount sold, at the rate of 14-30 yuan per ton for crude

oil and 7-15 yuan per 1,000 cubic meters for gas, or according to the

price, at the rate of 5%.

59

2010 Annual Report Major Events

January Jan. 8 CNPC officially released the GeoMountain software system with complete proprietary

intellectual property rights. The software system is composed of three sets of software

respectively used for aquisition, processing and interpretation, which can provide users with

an integrated solution in seismic data acquisition, processing and interpretation, and reservoir

description for mountainous areas.

Jan. 27 PetroChina, a holding company of CNPC, formed a consortium with Total, Petronas

and Iraq South Oil Company in signing a 20-year development and production service

contract with Iraq’s Missan Oil for Halfaya Oilfield. PetroChina owns 37.5% of the equity

and acts as the operator.

February Feb. 10 CNPC signed documents with Canada’s Athabasca Oil Sands Corporation to complete

the handover of the MacKay River and Dover oil sands projects.

MarchMar. 12 CNPC signed a strategic cooperation framework agreement on CBM development and

utilization with Yunnan Provincial Government.

Mar. 18 CNPC signed a MOU on Sino-Bangladesh oil and gas cooperation.

Mar. 27 BGP, a wholly owned subsidiary of CNPC, signed an agreement with the US ION

Company to set up the INOVA Geophysical Equipment Limited joint venture, 51% of whose

equity is owned by BGP. The company will use this venture as a platform to strengthern the R&D

of high-performance onshore prospecting equipment.

April Apr. 14 A 30-year contract on natural gas development and production in Jinqiu Block of

Sichuan Basin reached by CNPC and Shell E&P China was approved by the Ministry of Commerce

of China. The contract block covers an area of 4,067 square kilometers.

MayMay 16 PetroChina, a holding company of CNPC, signed an Exploration and Production Sharing

Agreement with Shell and Qatar Petroleum (QP) for Qatar Block D. Under the agreement, the

partners will jointly explore for natural gas in Block D within the agreement term of 30 years.

May 19 CNPC reached an agreement with Shell to acquire a 35% interest in Syria Shell

Petroleum Development (SSPD), a wholly owned subsidiary of Shell. SSPD has 31.25% equity in

three production licenses — Deir-Ez-Zor, Fourth Annex and Ash Sham.

Major Events

Jan. 8

Mar. 18

Mar. 27

60

2010 Annual ReportMajor Events

June Jun. 3 CNPC signed the shareholder agreement of Southeast Asia Crude Pipeline Limited,

rights and obligations agreement of Southeast Natural Gas Pipeline Limited, and shareholder

agreement of Southeast Asia Natural Gas Pipeline Limited with Myanmar Oil and Gas Enterprise.

Jun. 9 CNPC signed a framework agreement on purchase and sale of natural gas with

Uzbekneftegaz, whereby Uzbekistan will supply 10 billion cubic meters of natural gas to

China annually.

Jun. 12 CNPC signed an agreement on the principles of design, financing, construction and

operation of the second phase of the Kazakhstan-China Natural Gas Pipeline with KazMunayGas.

The two companies will cooperate to construct the second phase of the pipeline to meet

natural gas demand in southern Kazakhstan.

Jun. 15 CNPC signed a cooperation memorandum of understanding with the CPC Corporation

of Taiwan.

Jun. 28 CNPC signed a strategic cooperation agreement with China Resources under which

the two companies will conduct wide-ranging cooperation in civilian gas, refined products

marketing, natural gas power generation, engineering construction and overseas investment.

JulyJul. 1 The operation management rights of Rumaila project was officially handed over to ROO,

which is jointly established by BP, CNPC and Iraq South Oil Company.

Jul. 14 The Tarim fertilizer project, with annual output of 450,000 tons of synthetic ammonia and

800,000 tons of urea, became operational. With a total annual fertilizer production capacity of 1.3

million tons, it is an important fertilizer production base in China.

Jul. 19 Urumqi Petrochemical Company’s 1 Mt/a PX and aromatic hydrocarbon project

became operational.

Jul. 28 CNPC and Chongqing Machinery & Electric Group launched the Kunlun Financing

and Leasing Company Limited joint venture in Chongqing, with its business scope covering

financing for petroleum equipment purchases, the purchase of marine transport shipping and

the development of fixed assets.

Jul. 28 CNPC signed a cooperation framework agreement with Shandong Provincial

Government, whereby the two sides will conduct cooperation in oil and gas pipelines, refining,

refined product sales network, civilian gas, and oil and gas transport and storage projects,

including ports and docks.

Jun. 3

Jun. 12

Jul. 14

61

2010 Annual Report Major Events

AugustAug. 20 The National Shale Gas Development Center was launched at Langfang branch of

CNPC Research Institute of Petroleum Exploration and Development, which will conduct

theoretical research, technological and equipment development in the field of shale gas.

Aug. 23 CNPC, in partnership with Shell, acquired a 100% interest in Australia’s Arrow Energy

for AUD 3.5 billion. The transaction was approved by the general meeting of shareholders of

Arrow Energy and all the licensing procedures of both the Chinese and Australian governments,

resulting in a smooth takeover.

Aug. 26 CNPC signed a strategic cooperation agreement with the Henan Provincial Government

whereby the company will continue to increase its supply of natural gas and refined products

in Henan and cooperate with related enterprises in the province to jointly develop CBM.

SeptemberSep. 2 Huabei Petrochemical launched its 10 Mt/a refining quality upgrade and safety and

environmental protection technological transformation project. It is due to be operational in

August 2013.

Sep. 6 Guangxi Petrochemical’s 10 Mt/a refining project became operational. It is capable

of supplying 8.3 million metric tons of gasoline, diesel and aviation kerosene, as well as LPG,

and 900,000 tons of petrochemical products including polypropylene, aromatic hydrocarbon,

benzene, toluene and mixed xylene annually.

Sep. 9 CNPC signed a strategic agreement with the Yunnan Provincial Government on the

cooperation in oil and gas pipeline construction, refining and chemicals and the sale of civilian

gas and refined products.

Sep. 10 Construction of the Chinese section of the Myanmar-China Oil and Gas Pipelines

started in Anning City, Yunnan Province, and ground breaking for the auxiliary refining project

took place in Kunming. The designed annual delivery capacity of the crude pipeline is 20 million

metric tons and the designed capacity of the gas pipeline is 10-13 billion cubic meters. The

project is due to be completed and became operational in 2013.

Sep. 15 CNPC signed a memorandum of understanding with Chevron on the on the

Maishi Project.

Sep. 26 The Parallel Sebei-Xining-Lanzhou Pipeline was completed and became operational. In

combination with the Sebei-Xining-Lanzhou Pipeline, it is capable of delivering 18.94 million

cubic meters of gas per day.

Sep. 27 Chinese President Hu Jintao and Russian President Dmitry Medvedev took part in

the ceremony to mark the completion of the Russia-China Crude Pipeline. On the same day,

CNPC inked a general agreement with Transneft over the operation of the Russia-China Crude

Pipeline that stretches from Russia's Skovorodino station to China's Mohe station, a framework

agreement with Gazprom to import natural gas to China, an agreement with Rosneft on

extending oil supply to the Russia-China Crude Pipeline, and an agreement with LUKoil on

expanding strategic cooperation.

Sep. 10

Sep. 27

62

2010 Annual ReportMajor Events

October Oct. 26 Natural gas was input into Line B of the Central Asia-China Gas Pipeline, marking the

operation of the dual line.

November Nov. 3 Our daily crude runs exceeded 400,000 metric tons for the first time, further improving our

market supply capability.

Nov. 3 CNPC and Australia’s Dart Energy signed a 30 year Production Sharing Contract (PSC) in

relation to exploring natural gas in Dajing block in the Junggar Basin.

Nov. 9 PetroChina, a holding company of CNPC, signed a memorandum on an integrated oil and

gas project in Canada and an agreement on the joint assessment of the CBM project in Daning

block in the Ordos Basin with Shell.

Nov. 18 The Zhongwei-Huangpi trunk line of the eastern section of the West-East Gas Pipeline

became operational and started supplying gas to Hunan and Hubei. The 1,393-kilometer

Zhongwei-Huangpi trunk line starts in Zhongwei, Ningxia, and passes through Gansu, Shaanxi and

Henan provinces before reaching the distribution station at Huangpi in Wuhan, Hubei Province.

Nov. 24 CNPC signed a strategic cooperation framework agreement with the Hubei Provincial

Government on the construction of refined product depots, sales network development, natural

gas supply, natural gas pipelines, and gas storage depot projects, as well as in civilian gas and

CNG projects.

DecemberDec. 1 CNPC signed an agreement on the joint-venture operation of the Junin 4 project with the

Venezuelan Ministry of Energy and Petroleum.

Dec. 15 Changling Gas Field in Jilin was completed and became operational, meaning that the

natural gas output of Jilin Oilfield will increase to 1.6 billion cubic meters. Changling Gas Field is

the domestic first gas field with high carbon content.

Dec. 21 The second phase of the Kazakhstan-China Gas Pipeline started construction. In the first

stage, a 1,164-kilometer gas pipeline from Bozoy in Aktobe to Shymkent in southern Kazakhstan

with an annual capacity of 6 billion cubic meters will be constructed. The pipeline is due to

become operational in 2012.

Dec. 31 The Yulin-Liangxiang section of the Third Shaan-Jing Gas Pipeline became operational.

With a total length of 1,011 kilometers, the Third Shaan-Jing Gas Pipeline starts at Yulin in Shaanxi

and ends at Xishatun in Beijing. The pipeline has a designed annual delivery capacity of 15

billion cubic meters and will become another important channel to supply natural gas to the

Bohai Rim region.

Nov. 9

Dec. 1

Dec. 15

63

Glossary

SAGD

Steam Assisted Gravity Drainage (SAGD) is an EOR technique suitable for

producing super heavy oil or natural asphalt with extremely high viscosity.

It combines heat conduction and thermal convection of fluid and employs

steam as the heat source. The heated heavy oil or gas condensate drains to

a lower well bore by gravity, and is then extracted to the ground.

Redevelopment

A process to enhance the ultimate recovery of a mature field which should

have reached its limit or should have been abandoned with the use of

conventional primary-development techniques. The development system

of the oilfield is reconstructed by consolidating brand new concepts, and

using and developing new secondary recovery technologies.

LNG

Liquid Natural Gas is produced by dewatering, deacidifying, dehydrating

and fractionating the natural gas produced from a gas field and then

turning it into liquid under low temperatures and high pressure.

Processing loss rate

The percentage of the crude oil that is lost when it is processed. It

immediately determines the profitability of a refinery.

Horizontal well

A class of nonvertical wells where the wellbore axis is near horizontal

(within approximately ten degrees of the horizontal), or fluctuating above

and below 90 degrees deviation. A horizontal well may produce at rates

several times greater than a vertical well, enhance recovery efficiency and

prolong the production cycle, due to the increased wellbore surface area

within the producing interval. Meanwhile, the environmental costs or land

use problems that may pertain in some situations, such as the aggregate

surface "footprint" of an oil or gas recovery operation, can be reduced by

the use of horizontal wells.

Underbalanced drilling

Underbalanced drilling is a well drilling technique in which the hydrostatic

pressure of drilling fluid column is lower than the pore pressure in the

stratum. Formation fluid is allowed to flow into the well bore, circulate out,

and be controlled on the surface. It plays an important role in discovering

and protecting reservoirs.

Occupational diseases

A disease or ailment caused due to excessive exposure to noxious fumes

or substances in a working environment.

Proven reserves

According to China National Standards, proven reserves are estimated

quantities of mineral deposits possibly to be recovered from reservoirs

proved by appraisal drilling during the period of reservoir evaluation, with

a reasonable certainty or a relative difference of no more than 20%.

Remaining recoverable reserves

Remaining recoverable reserves are the remaining portion of recoverable

reserves in an oil (gas) field (reservoir) which have been developed to a

certain stage. They are the recoverable reserves minus the volume of oil

(gas) that has been cumulatively extracted until that stage.

Reserve replacement ratio

The reserve replacement ratio refers to the value of the amount of oil

and gas reserves added in a year divided by the amount of oil and gas

produced during that same year.

Oil equivalent

Oil equivalent is the conversion coefficient with which the output of

natural gas is converted to that of crude oil by calorific value. In this report,

the coefficient is 1,255, i.e. 1,255 cubic meters of natural gas is equivalent

to one metric ton of crude oil.

Recovery factor

The percentage of oil/gas in place that is recoverable from underground.

Tertiary recovery

Tertiary recovery is also called enhanced oil recovery and it is abbreviated

as EOR. It is a method to increase the recovery of crude oil by injecting fluid

or heat to physically or chemically alter the oil viscosity or the interfacial

tension between the oil and another medium in the formation, in order

to displace any discontinuous or had-to-tap oil in reservoirs. EOR methods

mainly include thermal recovery, chemical flooding and miscible flooding.

Polymer flooding

This is an EOR method by which a polymer solution is used as the agent to

displace oil. Polymer is injected to increase the viscosity of formation water,

changing the oil/water viscosity ratio and reducing the difference between

water flowability and oil flowability in the formation. This will increase the

swept volume of water flooding and thereby the oil displacement efficiency.

ASP flooding

A flooding system prepared with alkali, surfactant and polymer. It not only

has a high viscosity but can also create an ultra-low water-oil interfacial

tension to improve the oil-washing capability.

2010 Annual Report Glossary

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About this Report

In this report, the expressions "CNPC", "the corporation", and "the company" are used for convenience where references are made to China National Petroleum Corporation in general. Likewise, the words "we", "us" and "our" are also used to refer to China National Petroleum Corporation in general or to those who work for it.

This report is presented in Chinese, English, Russian, Spanish, and French. In case there is any divergence of interpretation, the Chinese text shall prevail.

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