SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------- FORM 6-K -------- REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934 For April 18, 2006 CNOOC Limited (Translation of registrant's name into English) --------------------------------------------------------- 65th Floor Bank of China Tower One Garden Road Central, Hong Kong (Address of principal executive offices) --------------------------------------------------------- (Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F) Form 20-F X Form 40-F --------- ---------- (Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.) Yes No X --------- ---------- (If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A.) 2005 Hong Kong Annual Report ---------------------------- Company Profile CNOOC Limited (the "Company", together with its subsidiaries, the "Group" or "we") - Incorporated in Hong Kong in August 1999, was listed on the New York Stock Exchange (code: CEO) and The Stock Exchange of Hong Kong Limited (code: 0883) on 27 and 28 February 2001, respectively. The Company was admitted as a constituent stock of the Hang Seng Index in July 2001. The Group is China's largest producer of offshore crude oil and natural gas and one of the largest independent oil and gas exploration and production companies in the world. The Group mainly engages in oil and natural gas exploration, development, production and sales. The Group has four major oil production areas offshore China, which are Bohai Bay, Western South China Sea, Eastern South China Sea and East China Sea. It is one of the largest offshore oil producer in Indonesia. The Group also has certain upstream assets in regions such as Africa and Australia. As at 31 December 2005, the Group owned net proved reserves of approximately 2.36 billion barrels-of-oil equivalent and its annual average net production was 424,108 barrels-of-oil equivalent per day. The Group had 2,696 employees and total assets of approximately RMB114.7 billion. 1 Content 002 Financial Summary 070 Report of the Auditors 003 Operating Summary 071 Consolidated Income Statement 004 Milestones 2005 073 Consolidated Balance Sheet 006 Chairman's Report 074 Consolidated Statement of Changes in Equity 012 Operations Review 076 Consolidated Cash Flow Statement 028 Corporate Governance Report 077 Balance Sheet 042 Health, Safety and Environment 078 Notes to Financial Statements 046 Corporate Citizen 146 Supplementary Information on Oil & Gas 048 Human Resources Production Activities (Unaudited) 052 Directors and Senior Management 151 Notice of Annual General Meeting 058 Report of the Directors 161 Glossary 064 Management Discussion and Analysis 163 Company Information 002 Financial Summary (Amounts expressed in millions of RMB) Consolidated Income Statement (Audited) Year ended 31 December 2001 2002 2003 2004 2005 (Restated) (Restated) (Restated) (Note 2) (Note 1) (Note 1) (Note 1) ---------------------------------------------------------------------- Total revenue 20,820 26,374 40,950 55,222 69,456 Total expenses (10,596) (13,652) (25,305) (32,882) (33,284) Interest income/(expenses), net 201 (147) (171) (235) (741) Exchange gains/(losses), net 235 (114) (7) 29 287 Share of profit of associates 90 165 220 344 307 Investment income 221 193 123 72 248 Non-operating income/(expenses), net 35 (71) 315 519 28 ---------------------------------------------------------------------- Profit before tax 11,006 12,748 16,125 23,070 36,301 Tax (3,048) (3,541) (4,628) (6,931) (10,978) ---------------------------------------------------------------------- Net profit 7,958 9,207 11,497 16,139 25,323 ---------------------------------------------------------------------- Consolidated Balance Sheet (Audited) As at 31 December 2001 2002 2003 2004 2005 (Restated) (Restated) (Restated) (Note 2) (Note 1) (Note 1) (Note 1) ---------------------------------------------------------------------- Current assets 20,030 24,486 29,263 35,293 44,421 Property, plant and equipment, net 23,828 35,797 42,849 57,182 66,625 Investment in associates 462 537 1,117 1,327 1,402 Intangible assets -- -- -- -- 1,300 Available-for-sale financial assets -- -- -- -- 1,017 ---------------------------------------------------------------------- Total assets 44,320 60,820 73,229 93,802 114,765 ---------------------------------------------------------------------- Current liabilities (4,392) (7,134) (9,307) (10,402) (13,616) Non-current liabilities (6,617) (13,393) (17,461) (26,957) (27,546) ---------------------------------------------------------------------- Total Liabilities (11,009) (20,527) (26,768) (37,359) (41,162) ---------------------------------------------------------------------- Shareholders' Equity 33,311 40,293 46,461 56,443 73,603 ---------------------------------------------------------------------- Note 1: Certain prior year amounts have been restated upon adoption of new/revised accounting policies, details of which are included in note 2 to the financial statements. Note 2: The 2001 selected consolidated income statement data and consolidated balance sheet data were audited by Arthur Anderson & Co., which voluntarily relinquished its license to practice public accounting in 2002. Our current auditors, Ernst & Young, have not reaudited the financial statements. As such, no restatement was made for 2001 as the impacts on the consolidated financial statements are considered not material. 003 Operating Summary Year ended 31 December 2001 2002 2003 2004 2005 ---------------------------------------------------------------------- Production Net production of crude and liquids (barrels/day) Bohai Bay 99,978 127,756 129,506 134,512 178,840 Western South China Sea 41,277 56,910 60,944 55,873 49,016 Eastern South China Sea 81,404 73,792 72,981 96,989 103,741 East China Sea 3,967 3,223 2,536 2,121 1,706 Overseas 2,247 36,944 40,497 29,941 23,565 ---------------------------------------------------------------------- Total 228,873 298,625 306,464 319,436 356,868 ---------------------------------------------------------------------- Net production of natural gas (mmcf/day) Bohai Bay 46.2 47.1 47.1 47.7 49.1 Western South China Sea 139.0 142.3 127.8 215.2 229.6 Eastern South China Sea 0.0 0.0 0.0 0.0 0.0 East China Sea 9.8 12.4 14.2 17.1 18.3 Overseas 0.0 70.8 101.9 84.1 92.7 ---------------------------------------------------------------------- Total 195.0 272.6 291.0 364.1 389.6 ---------------------------------------------------------------------- Total net production (BOE/day) 261,379 346,639 356,729 382,513 424,108 ---------------------------------------------------------------------- Reserves at year end Net proved crude and liquids reserves (mm barrels) Bohai Bay 961.3 992.5 990.4 974.6 920.2 Western South China Sea 131.6 160.4 173.7 189.7 205.7 Eastern South China Sea 132.2 120.3 154.7 168.0 211.2 East China Sea 12.4 12.5 13.9 21.5 21.2 Overseas 8.4 138.7 103.4 101.9 99.1 ---------------------------------------------------------------------- Total 1,245.9 1,424.4 1,436.1 1,455.6 1,457.4 ---------------------------------------------------------------------- Net proved natural gas reserves (bcf) Bohai Bay 629.1 598.6 566.6 706.2 740.7 Western South China Sea 2,421.5 2,511.2 2,564.0 2,484.8 2,604.0 Eastern South China Sea 0.0 42.8 548.2 730.8 784.2 East China Sea 197.0 179.4 275.3 403.4 402.2 Overseas 0.0 215.9 200.3 321.4 899.9 ---------------------------------------------------------------------- Total 3,247.6 3,547.9 4,154.4 4,646.6 5,430.9 ---------------------------------------------------------------------- Total net proved reserves (million BOE) Bohai Bay 1,066.2 1,092.3 1,084.8 1,092.3 1,043.7 Western South China Sea 535.1 578.9 601.0 603.8 639.7 Eastern South China Sea 132.2 127.5 246.1 289.8 341.9 East China Sea 45.2 42.4 59.8 88.7 88.2 Overseas 8.4 174.7 136.8 155.5 249.1 ---------------------------------------------------------------------- Total 1,787.1 2,015.8 2,128.5 2,230.0 2,362.6 ---------------------------------------------------------------------- Others Reserve life (years) 18.7 15.9 16.3 15.9 15.3 Reserve replacement ratio (%) 131 281 187 173 186 Average realised price Crude oil (US$/barrel) 23.34 24.35 28.11 35.41 47.31 Natural gas (US$/mcf) 3.08 2.98 2.87 2.75 2.82 ---------------------------------------------------------------------- 004 Milestones 2005 13 January o CNOOC signed an agreement with the Shanghai Municipal Government to construct a LNG terminal in Shanghai. ---------------------------------------------------------------------------------------------------------------- 4 February o CNOOC signed a petroleum contract with Kerr-McGee for the deepwater block 43/11 in the Eastern South China Sea. ---------------------------------------------------------------------------------------------------------------- March o Named the "Best Managed Company in China" by The Assets. ---------------------------------------------------------------------------------------------------------------- April o Ranked the top of the "Best Managed Companies in China" in a FinanceAsia poll. ---------------------------------------------------------------------------------------------------------------- 12 April o Announced the acquisition of a 16.69% stake in the Canada-based MEG Energy Corporation for C$150 million. ---------------------------------------------------------------------------------------------------------------- 21 April o Announced the production of Luda 10-1 in Bohai Bay, which outperformed the Company's expectation with a daily output of over 7,000 barrels in well A11. ---------------------------------------------------------------------------------------------------------------- 23 June o Made an offer for Unocal for a cash consideration of US$18.5 billion, but the offer was finally withdrawn on 2 August. ---------------------------------------------------------------------------------------------------------------- 005 September o Announced the commencement of production of Bozhong 25-1/25-1S (C/F Platforms) and Nanbao 35-2 oilfields. ---------------------------------------------------------------------------------------------------------------- 12 October o Announced the independent discovery of Luda 27-1 in Bohai Bay. ---------------------------------------------------------------------------------------------------------------- 15 November o Standard & Poor's upgraded the Company's credit rating from "BBB+" to "A-" (Outlook Stable). 21 November o Announced the commencement of production of Luda 5-2. 29 November o Announced the independent discovery of Jinxian 1-1 in the Northeastern part of Bohai. ---------------------------------------------------------------------------------------------------------------- 6 December o CNOOC signed a petroleum contract with Devon Energy Corporation for the deepwater block 42/05 in the Eastern South China Sea. 28 December o Chairman Mr. Fu Chengyu was honoured CCTV 2005 Chinese Business Figures of the Year. 006 Chairman's Report 007 We clearly know, for a high-quality public company, the opportunities are abundant when it comes to growth, innovation and the pursuit of excellence. Being mindful of these opportunities, we will exercise prudence and yet at the same time make aggressive efforts to take the company to news height. 008 Chairman's Report Dear Shareholders, During the year, our basic and diluted earnings per share were RMB0.62 and RMB0.61 respectively. To reward When you get this annual report, we, CNOOC Limited, a our shareholders for their support, the Board of company listed in New York and Hong Kong, have been in Directors (the "Board") proposed a final dividend of the capital market for five years. HK$0.10 per share. Together with the interim dividend of HK$0.05 per share and the special interim dividend We believe that we have achieved good financial and of HK$0.05 per share, we will distribute a total of operational performance over the past five years. HK$0.20 per share to our shareholders for the year Thanks to the satisfactory growth in our assets, 2005. revenues and net profits, we have been able to show continuing progress in creating value and delivering Looking back at the year 2005 as well as the previous good return to our shareholders. four years of listing, we have been committed to deliver, and have delivered, the best return to our First, let us look at the outstanding performance of shareholders. As a responsible company, we will CNOOC Limited in 2005. Our growth momentum was continue to strive to create and add value to our successfully maintained in 2005 as evidenced by our business to share the fruits of our success with our annual results. In addition to the detailed financial shareholders, to allow employees and the Company to statements and other information set out hereafter, I grow together and to be responsible to the society, am pleased to share with you a few highlights of our community and environment. We also believe that our performance in 2005: shareholders will continue to be able to reap satisfactory return from our business growth, our Our total revenue rose by 25.8% to RMB69,455.7 dividend payouts and the excellent performance of our million, while net profit reached yet another record stock price. high of RMB25,323.1 million, the highest ever since our listing in 2001. There was a steady growth in our oil and gas production. We produced a total of 130.3 million barrels of oil and 142.2 billion cubic feet of natural gas, achieving a total production of 154.8 million barrels of oil equivalent ("BOE"), representing a year-on-year increase of 10.6%. Our production growth mainly came from the development projects offshore China coming on stream during the year. Seven new projects commenced production, which have contributed significantly to production growth during the year. Additionally, sixteen projects were under way. The achievements of our exploration initiatives were just as remarkable. Altogether, we made fourteen new oil and gas discoveries and eight structures were successfully appraised offshore China. During the year, we realized a reserve replacement ratio of 186% and our net proved reserves increased by 288 million BOE. 009 In light of the above, we would like to show you our key initiatives. As a E&P corporation, our value depends on the scale of our reserve and production. Therefore we have always been seeking more areas for exploration, development and production and to extend our development potentials. Within China, we intend to further step up our efforts in exploration in offshore China in 2006. We will initiate more exploration activities, acquire more seismic data and drill more exploration wells in various exploration areas. We will also extend the reach of our exploration initiatives to the deep-water [GRAPHIC OMITTED] areas for more reserves to support the sustainable rapid growth of our business. As far as production is concerned, we plan to bring 10 oil and gas fields on stream this year. In respect of our overseas business efforts, we made a friendly offer to acquire the US-based Unocal Corporation in 2005. However, the desired outcome did not materialize due to a host of factors. During the process, from bidding to the final voluntary withdrawal, our overriding principles remain focused on the Company's future growth and our commitment to increasing shareholders' value. As ever, our priority was on shareholders' interests and the Company's future growth, whether at the time of making the C$150 million acquisition of a 16.69% stake in Canadian MEG Energy Corporation, or when we [GRAPHIC OMITTED] acquired a 45% stake in the license covering the OML 130 in Nigeria for a cash consideration of US$2.268 billion in January 2006. We are dedicated to develop a path to overseas expansion to sustain the long-term growth of the Company. Our management team has been working hard towards this objective. 010 Chairman's Report Of course, we never forget our social responsibilities in the course of value creation. We are a socially responsible company well aware of the importance of our staff, the environment and our society as a whole. We grow healthily together with our staff. At the same time, we also made determined efforts to undertake responsibilities for the community, the environment and the society. "Win-Win for All" has been one of our essential approaches. Indeed, in pursuit of our corporate development, we constantly seek win-win [GRAPHIC OMITTED] situation for our staff, the community and the environment. We believe that our long-term viability and success, and our ability to continue to create and deliver value for our shareholders and the communities we serve, very much depend on conducting our business in a socially responsible manner. In 2005, we continued to enhance our health, safety and environment (HSE) protection system by strengthening the implementation of safety management policies. The safety management standards were also improved further with the development of the HSE system, employees' safety education program and the establishment of its accountability system. Throughout the year, the Company was neither involved in any material spillage or pollution incident, nor subject to any liability claim for loss of over RMB1 million. Currently, all oil and gas fields of the Company are equipped with anti-pollution facilities and have achieved stable discharge standards. They all have in place environment monitoring system combining both [GRAPHIC OMITTED] manual and automatic monitors. Besides, contingency plan for safety protection have been established for every offshore oil and gas fields and safety drills are also conducted on regular basis. As far as staff welfare is concerned, we not only provide a safe and healthy working environment, but also offer our staff reasonable packages and ample training opportunities in order to provide them with sufficient room for career development and added incentives. The section headed "Human Resources" in the annual report will explain more about the initiatives undertaken in fulfilling our responsibilities towards our staff. 011 OUR TREASURE, YOUR ENERGY OF LIFE. We are happy to take up our social responsibility in different areas and contribute to the advancement of the community and the society. As a responsible corporate citizen, we actively participate in various charity events and have long been involved in poverty relief and education endowments. We also give our whole-hearted support and donations to victims of natural disasters. In 2005, the Company made donations to several Chinese regions affected by Typhoons Talim and Damrey. Besides, donations were also made to the regions wreaked by Hurricane Katrina in the US. These efforts clearly reflect our heightened awareness of our social responsibility as a corporate citizen. Last but not least, I would like to take this opportunity to welcome on board Mr. Tse Hau Yin, Aloysius and Mr. Lawrence J. Lau joining us as our independent non-executive directors; and Mr. Cao Xinghe, Mr. Wu Zhenfang and Mr. Wu Guangqi and Mr. Yang Hua joining us as our executive directors. Given their extensive experience and valuable insights, I strongly believe that they will make great contributions for the benefit of the Company. Our success today is the result of dedicated efforts and devotion of our management and staff. Therefore I would also like to express my sincere gratitude for their support and hard work. We clearly know, for a high-quality public company, the opportunities are abundant when it comes to growth, innovation and the pursuit of excellence. Being mindful of these opportunities, we will exercise prudence and yet at the same time make aggressive efforts to take the company to news height. Fu Chengyu Chairman and Chief Executive Officer Hong Kong, 24 March 2006 012 Operations Review The Company continued its stable and robust growth in 2005: Encouraging success was achieved in exploration; Development projects came on stream on schedule; Production and reserves continued to grow. All these progresses combined with our high degree of transparency in corporate governance and prudent financial policies, gave a further boost to the business development of the Company. 013 [GRAPHIC OMITTED] 014 Solid Foundation and Unlimited Potential In 2005, to create value for our shareholders, we continued to pursue active business expansion. Brilliant achievements were made on exploration, project development and overseas acquisitions. Our outstanding business performance is widely recognized by our shareholders and the market alike. During the year, the Company made a lot of progresses in its active exploration activities, with 14 new oil and gas discoveries and 8 hydrocarbon-bearing structures successfully appraised. Its reserve replacement ratio reached 186%, surpassing that of previous year and continued to stand at the forefront amongst peers. As a result, the Company successfully maintained the growth momentum of its reserves. Despite heavy workload, the Company's engineering constructions progressed with high efficiency . During the year, a record number of projects were put on stream, and these new projects contributed substantially to the Company's production. In addition, more than 10 projects were under way as scheduled. In order to fulfill its commitment to future growth and to its shareholders, the Company continued to seek overseas acquisition opportunities. In 2005, it acquired assets and signed co-operation agreements in, among others, Canada and Morocco. The successful implementation of its overseas development strategy helped greatly to improve the Company's reputation around the world. During the year, the Company continued to maintain its prudent financial policy and its credit rating was upgraded by Standard and Poor's. In respect of health, safety and environmental protection, no material safety nor pollution incident was recorded throughout the year. Meanwhile, the Company actively participated in community charity activities, further reinforcing its positive image as a corporate citizen. Results Figures In 2005, the Company followed its business strategies to achieve various targets of the year. As of 31 December 2005, the Company's oil and gas production reached 154.8 million BOE, representing a year-on-year (YOY) increase of 10.6%. Crude oil production amounted to 356,868 barrels per day, while natural gas production was 389.6 MMCF per day, representing a YOY increase of 11.7% and 7.0% respectively. Total oil and gas production offshore China was 140.6 million BOE, including 121.7 million barrels of crude oil and 108.4 bcf of gas. In Indonesia, oil and gas production was 14.2 million BOE, including 8.6 million barrels of crude oil and 33.8 bcf of gas. 015 In 2005, the realized oil price of the Company was US$47.31 per barrel, an increase of 33.6% over the previous year. Realized natural gas price was US$2.82 per thousand cubic feet, a YOY increase of 2.6%. Benefiting from high oil prices and the increase in its production, the Company's results were outstanding in terms of total revenue and net profits, etc. in 2005. The Company realized a total revenue of RMB69,455.7 million, a YOY increase of 25.8% , and a net profit of RMB25,323.1 million, a YOY increase of 56.9%, setting yet another record in its history. The earnings per share were RMB0.62 and the return on shareholders' equity reached 38.9%. Surging prices of raw materials, among other things, leading to higher production costs, represented a tough challenge for the whole industry. In 2005, the Company's production cost per BOE increased by 8.7% over 2004. Still, the figure fared better than those of international peers. Operation Updates In 2005, the Company realized a reserve replacement ratio of 186%, continuing its leading position among peers. During the year, 7 new projects commenced production, breaking the record set the previous year. At the same time, 16 projects were under way as scheduled. Below are the Company's activities on exploration, development and engineering constructions: Exploration In 2005, the Company was very active in exploration offshore China and made 14 new oil and gas discoveries, including 9 independent discoveries and 5 discoveries under Production Sharing Contracts (PSCs). Moreover, 8 structures were successfully appraised, of which 6 were independent and 2 were under PSCs. These appraisals helped cement a solid base for the subsequent development activities of the Company. Meanwhile, the Company's overseas exploration activities were also vigorous. In 2005, the Company completed 2 wildcats in Indonesia and acquired 324 kilometers of 2D seismic data in block M in Myanmar. During the year, the Company's reserves maintained its growth momentum. In 2005, the proved reserves increased by 288 million BOE, comprising 132 million barrels of crude oil and 926 bcf of natural gas. The Company realized a reserve replacement ratio of 186%. 016 Construction and Development In 2005, the Company undertook more engineering projects than in 2004. There were altogether 16 projects under construction. Among these projects, 7 have been completed and have commenced production, namely Luda 10-1, Luda 4-2, Luda 5-2, Nanbao 35-2, Bozhong 25-1/25-1S (C/F platforms), Lufeng 13-2 and Caofeidian 11-3/5. These oil and gas fields made remarkable contributions to the Company's production for the year. The remaining projects are under way as scheduled. During the year, the Company completed the construction and installation of 19 and 12 jackets respectively, and of 28 and 15 platform modules respectively. It also laid 540 kilometers of subsea pipelines and completed 2 terminals. It is expected that a number of construction projects will be launched in 2006. Hence the Company's construction schedule will continue to be busy. It is estimated that the number of oil and gas projects under way will maintain at above 16. Besides, Chunxiao, Dongfang 1-1 Phase II, Qikou 17-2 East, Pinghu-BJT, etc. will be completed and commence production in 2006. Natural Gas Business Apart from actively finding new reserves, the Company is also aggressively developing its natural gas business. In 2005, its production of natural gas offshore China reached 142 bcf. In 2005, the development project on Dongfang 1-1 Phase II was completed, and will commence production in the first half of 2006. Besides, in 2006, the North West Shelf Gas Project in Australia will also commence production to supply gas to the LNG Terminal in Guangdong province, marking the beginning of significant gas importing to China. In the future, the Company will strengthen its exploration efforts in the South China Sea and develop more natural gas fields, in order to consolidate its leading position in the natural gas market along coastal China. Overseas Development In 2005, in order to fulfill its commitment to future growth and to its shareholders, the Company continued to seek overseas acquisition opportunities. On 25 January 2005, a consortium led by the Company, the Singaporean Golden Aaron Pte Limited and the PRC-based HQCEC, signed PSCs with Myanma Oil and Gas Enterprise ("MOGE") on three blocks, C1, C2 and M2. In these blocks the Company is the Operator and owns 81.25% participation interests. On 21 February 2005, the Company signed a joint study agreement with Office National de Recherches et d'Exploitations Petrolieres ("ONAREP"), a Morocco National Oil Company, to assess the oil potential in the basins of Haha and Missour, Morocco. On 11 March 2005, the Company reached an agreement with the Canadian MEG Energy Corporation ("MEG") on the acquisition of a 18.5% (16.69% on a diluted basis) stake in MEG, for a consideration of C$150 million. The Company thereby obtained entry into potential oil sand projects in Canada. 017 On 23 June 2005, the Company made an offer to merge with Unocal for US$67 per share, or a total consideration of approximately US$18.5 billion. However, in light of considerable uncertainties and unbearable risks associated with the political environment in the US, the Company finally withdrew its offer on 2 August 2005. During the whole process, from bidding to the final voluntary withdrawal, our overriding principles remained unchanged, with the emphasis on the Company's future growth and our commitment to shareholders. On 8 January 2006, the Company signed a definitive agreement with South Atlantic Petroleum Limited ("SAPETPO") to acquire a 45% working interest in an offshore oil-mining license "OML 130" in Nigeria for a cash consideration of US$2.268 billion. Conditional upon, among other things, the approval of Nigerian National Petroleum Corporation ("NNPC") and the PRC government, the transaction is expected to be completed in the first half of 2006. On 27 Jannuary 2006, the Company also acquired a 35% working interest in the contract for OPL229 in Nigeria for a consideration of US$60 million. In addition, the Company signed a PSC for block S in Equatorial Guinea, marking another progress in the Company's overseas business. Research and Development The technology research and development are mainly conducted by our research center. Besides, the Company's branches in Tianjin, Zhanjiang, Shenzhen and Shanghai are also engaged in certain research and development programs. In 2005, we continued to actively pursue technology development in support of our core business of oil exploration and development. Encouraging progress was made in respect of those critical technology development projects on the exploration of offshore oil and gas resources, development of offshore marginal oil fields and enhancement of recovery of offshore heavy oil fields. Pioneer studies were also conducted on the exploration and development in deep water areas. Certain research and development outcomes are already being applied in the production process of the Company with remarkable benefits. For example, the technology "Maximizing Reservoir Exposure Drilling & Fit-For-Purpose Sand Management" is found to be very effective in increasing the single-well production of offshore oilfields. This technology has been applied to the well A11 in Luda 10-1 field, realizing a production rate of over 7,000 barrels per day. Health, Safety and Environmental Protection (HSE) Our first priorities are always health, safety and environmental protection to guarantee the health and safety of employees. Over the years, the Company's staff and management at different levels have realized that "safety is always the weak link in corporate management". As a result, production safety, staff care and environmental protection have become an important part of our corporate culture. In 2005, the Company made satisfactory progress in respect of safeguarding health, safety and environmental protection. During the year, it was neither involved in any material injury liability case, spillage and pollution incidents, nor subject to any safety-related liability claims for losses over RMB 1 million. Besides, the Company's OSHA Statistics results continued to be above average among its peers. 018 MAJOR PROPERTIES UNDER PRODUCTION AND DEVELOPMENT Net Reserves as of 31 December 2005 Total (BOE/day) Total (MM BOE) Oil (Bbls/day) Oil (MM Bbls) Name of Block Major Oil and Gas Field Gas (Mmcf/day) Gas (Bcf) --------------------------------------------------------------------------------------------------------------- Bohai Bay --------------------------------------------------------------------------------------------------------------- o Production --------------------------------------------------------------------------------------------------------------- Liaoxi Jinzhou20-2, Jinzhou9-3, Suizhong36-1, 104,680 323.0 Luda4-2, Luda 5-2, Luda 10-1 Oil 98,065 Oil 286.5 Gas 40 Gas 219.1 --------------------------------------------------------------------------------------------------------------- 09/18 Chengbei 4,229 5.5 --------------------------------------------------------------------------------------------------------------- Boxi QK18-1, QK18-2, QK17-2, QK17-3 10,008 18.5 Oil 8,951 Oil 15.9 Gas 6 Gas 15.4 --------------------------------------------------------------------------------------------------------------- 05/36 Nanbao35-2, Qinghuangdao32-6 21,914 121.3 --------------------------------------------------------------------------------------------------------------- 11/05 Penglai19-3 7,422 132.5 --------------------------------------------------------------------------------------------------------------- Bonan Bozhong34-2/4, Bozhong28-1, Bozhong26-2 21,797 184.4 Bozhong25-1, Bozhong25-1s Oil 21,289 Oil 165.2 Gas 3 Gas 115.2 --------------------------------------------------------------------------------------------------------------- 04/36 Caofeidian11-1, Caofeidian11-2, Caofeidian11-3, Caofeidian11-5 16,970 28.8 --------------------------------------------------------------------------------------------------------------- o Development --------------------------------------------------------------------------------------------------------------- Liaoxi Jinzhou21-1/25-1S 90.7 Oil 38.9 Gas 310.3 --------------------------------------------------------------------------------------------------------------- Bozhong Qinhuangdao33-1, Bozhong3-1, Bozhong3-2 9.8 --------------------------------------------------------------------------------------------------------------- Boxi Caofeidian18-1, Caofeidian18-2, QK18-9, Bozhong13-1 20.1 Oil 9.0 Gas 67.1 --------------------------------------------------------------------------------------------------------------- 11/05 Penglai25-6 10.5 --------------------------------------------------------------------------------------------------------------- 04/36&05/36 Caofeidian12-1, Caofeidian12-1S 13.8 --------------------------------------------------------------------------------------------------------------- Bonan Bozhong34-1, Bozhong34-1S, Bozhong34-3/5 28.3 --------------------------------------------------------------------------------------------------------------- Liaodong Luda27-2, Luda32-2 37.4 --------------------------------------------------------------------------------------------------------------- 11/19 Bozhong19-4, Bozhong26-2N 19.1 Oil 16.8 Gas 13.6 --------------------------------------------------------------------------------------------------------------- Bohai Subtotal 187,021 1,043.7 Oil 178,840 Oil 920.2 Gas 49 Gas 740.7 --------------------------------------------------------------------------------------------------------------- 019 MAJOR PROPERTIES UNDER PRODUCTION AND DEVELOPMENT (continued) Net Reserves as of 31 December, 2005 Total (BOE/day) Total (MM BOE) Oil (Bbls/day) Oil (MM Bbls) Name of Block Major Oil and Gas Field Gas (Mmcf/day) Gas (Bcf) --------------------------------------------------------------------------------------------------------------- Eastern South China Sea --------------------------------------------------------------------------------------------------------------- o Production --------------------------------------------------------------------------------------------------------------- Huizhou14 Huizhou Oil Fields 18,117 22.0 --------------------------------------------------------------------------------------------------------------- 16/19 Huizhou19-3, Huizhou19-2, Huizhou19-1 2,782 21.6 --------------------------------------------------------------------------------------------------------------- 15/12 Xijiang24-3 16,576 15.0 --------------------------------------------------------------------------------------------------------------- Xijiang24 Xijiang30-2 10,788 8.5 --------------------------------------------------------------------------------------------------------------- Huizhou31 Liuhua11-1 18,699 29.8 --------------------------------------------------------------------------------------------------------------- 16/05 Lufeng13-1, Lufeng13-2 3,513 20.6 --------------------------------------------------------------------------------------------------------------- Lufeng08 Lufeng22-1 2,382 2.4 --------------------------------------------------------------------------------------------------------------- 15/34 Panyu4-2, Panyu5-1 30,885 29.7 --------------------------------------------------------------------------------------------------------------- o Development --------------------------------------------------------------------------------------------------------------- Liuhua07 Panyu30-1, Liuhua19-5 96.7 Oil 3.0 Gas 562.0 --------------------------------------------------------------------------------------------------------------- Panyu33 Panyu34-1 30.7 Oil 0.6 Gas 180.8 --------------------------------------------------------------------------------------------------------------- Xijiang04 Xijiang23-1 47.2 --------------------------------------------------------------------------------------------------------------- 15/34 Panyu11-6 2.6 --------------------------------------------------------------------------------------------------------------- Huizhou 14 Huizhou21-1(G) 9.1 Oil 2.2 Gas 41.3 --------------------------------------------------------------------------------------------------------------- Huizhou 16 Huizhou25-1, Huizhou25-3 6.1 --------------------------------------------------------------------------------------------------------------- Eastern South China Sea Subtotal 103,741 341.9 Oil 103,741 Oil 211.2 Gas 0 Gas 784.2 --------------------------------------------------------------------------------------------------------------- 020 MAJOR PROPERTIES UNDER PRODUCTION AND DEVELOPMENT (continued) Net Reserves as of 31 December, 2005 Total (BOE/day) Total (MM BOE) Oil (Bbls/day) Oil (MM Bbls) Name of Block Major Oil and Gas Field Gas (Mmcf/day) Gas (Bcf) --------------------------------------------------------------------------------------------------------------- Western South China Sea --------------------------------------------------------------------------------------------------------------- o Production --------------------------------------------------------------------------------------------------------------- Yulin35 Weizhou Oil Fields 25,864 46.4 Oil 24,706 Oil 44.7 Gas 7 Gas 10.5 --------------------------------------------------------------------------------------------------------------- Yangjiang31 Wenchang13-1, Wenchang13-2 23,077 30.1 --------------------------------------------------------------------------------------------------------------- Ledong01 Yacheng13-1 25,020 76.2 Oil 1,027 Oil 4.5 Gas 130 Gas 430.1 --------------------------------------------------------------------------------------------------------------- Changjiang25 Dongfang1-1 15,622 223.1 Oil 208 Oil 3.0 Gas 92 Gas 1,320.4 --------------------------------------------------------------------------------------------------------------- o Development --------------------------------------------------------------------------------------------------------------- Yangjiang31/32 Wenchang8-3, Wenchang14-3, Wenchang15-1, Wenchang19-1, Wenchang9-2, Wenchang9-3, Wenchang10-3 123.6 Oil 83.6 Gas 239.7 --------------------------------------------------------------------------------------------------------------- Ledong01 Yacheng13-4, Ledong22-1, Ledong15-1 101.8 Oil 1.3 Gas 603.3 --------------------------------------------------------------------------------------------------------------- Yulin35 Weizhou6-1, Weizhou11-1, Weizhou11-1N, Weizhou11-4N, Weizhou6-10, Weizhou12-8 38.5 --------------------------------------------------------------------------------------------------------------- Western South China Sea Subtotal 89,583 639.7 --------------------------------------------------------------------------------------------------------------- Oil 49,016 Oil 205.7 Gas 230 Gas 2,604.0 021 MAJOR PROPERTIES UNDER PRODUCTION AND DEVELOPMENT (continued) Net Reserves as of 31 December, 2005 Total (BOE/day) Total (MM BOE) Oil (Bbls/day) Oil (MM Bbls) Name of Block Major Oil and Gas Field Gas (Mmcf/day) Gas (Bcf) --------------------------------------------------------------------------------------------------------------- East China Sea --------------------------------------------------------------------------------------------------------------- o Production --------------------------------------------------------------------------------------------------------------- Pinghu Pinghu Gas Field 4,751 9.1 Oil 1,706 Oil 3.0 Gas 18 Gas 36.5 --------------------------------------------------------------------------------------------------------------- o Development --------------------------------------------------------------------------------------------------------------- Xihu Trough --------------------------------------------------------------------------------------------------------------- Canxue 9.4 Oil 5.1 Gas 25.5 --------------------------------------------------------------------------------------------------------------- Duanqiao 7.8 Oil 2.3 Gas 33.4 --------------------------------------------------------------------------------------------------------------- Chunxiao 32.0 Oil 3.8 Gas 169.0 --------------------------------------------------------------------------------------------------------------- Tianwaitian 6.1 Oil 0.5 Gas 33.7 --------------------------------------------------------------------------------------------------------------- Baoyunting 19.2 Oil 4.6 Gas 87.5 --------------------------------------------------------------------------------------------------------------- Wuyunting 4.7 Oil 1.9 Gas 16.6 --------------------------------------------------------------------------------------------------------------- East China Sea Subtotal 4,751 88.3 Oil 1,706 Oil 21.2 Gas 18 Gas 402.2 022 MAJOR PROPERTIES UNDER PRODUCTION AND DEVELOPMENT (continued) Net Reserves as of 31 December, 2005 Total (BOE/day) Total (MM BOE) Oil (Bbls/day) Oil (MM Bbls) Name of Block Major Oil and Gas Field Gas (Mmcf/day) Gas (Bcf) --------------------------------------------------------------------------------------------------------------- Offshore China Subtotal 385,095 2,113.7 Oil 333,303 Oil 1,358.5 Gas 297 Gas 4,531.0 --------------------------------------------------------------------------------------------------------------- o Production --------------------------------------------------------------------------------------------------------------- Indonesia 39,013 123.2 Oil 23,565 Oil 73.7 Gas 93 Gas 296.9 --------------------------------------------------------------------------------------------------------------- o Development --------------------------------------------------------------------------------------------------------------- Australia --------------------------------------------------------------------------------------------------------------- NWS 125.9 Oil 25.4 Gas 603.0 --------------------------------------------------------------------------------------------------------------- Overseas Subtotal 39,013 249.1 Oil 23,565 Oil 99.1 Gas 93 Gas 899.9 --------------------------------------------------------------------------------------------------------------- Total 424,108 2,363 Oil 356,868 Oil 1,457 Gas 390 Gas 5,431 --------------------------------------------------------------------------------------------------------------- 023 REVIEW BY AREA In 2005, the Company made 14 oil and gas discoveries offshore China, including 9 independent discoveries and 5 discoveries under PSCs. The 9 independent discoveries were Bozhong 26-2N, Bozhong 34-1N, Luda 27-1, Jinxian 1-1, Jinxian 1-1E and Qikou 17-2S in the Bohai Bay area; Weizhou 6-10, Wenchang 9-3, and Wenchang 10-3 in the Western South China Sea area. The 5 PSC discoveries, included Bozhong 19-4N, Bozhong 19-4S, Wushi 17-1, Huizhou 25-4 and Qinhuangdao 32-6N. In offshore China, the Company successfully appraised 8 structures, including 6 independent appraisals, namely Bozhong 3-2, Luda 27-2, Weizhou 11-1N, Weizhou 11-4N, Wenchang 9-2 and Liuhua 19-5; and 2 PSC appraisals, including Bozhong 19-4N and Huizhou 25-3 (CACT 16/19 Block). These appraisals greatly accelerated the progress of development and construction of the Company's oil and gas fields. In 2005, the Company acquired a total of 29,122 kilometers 2D seismic data offshore China, including 14,947 kilometers acquired independently and 14,175 kilometers acquired by PSC partners. Besides, a total of 3,633 square kilometers of 3D seismic data were also acquired, including 3,612 square kilometers acquired independently and 21 square kilometers acquired by PSC partners. Meanwhile, the Company completed 47 exploration wells, including 31 independent wells and 16 wells under PSCs, with total footage of 133,594 meters, including 90,756 meters drilled independently and 42,838 meters by PSC partners. As for overseas operations, the Company acquired 324 kilometers of 2D seismic data, drilled 2 exploration with total footage of 6,778 meters. Bohai Bay Bohai Bay is the Company's most important and largest oil and gas production base offshore China. In 2005, the Company's production and reserves in Bohai Bay continued to grow, further strengthening its leadership position. As of 31 December 2005, the net proved reserves in this region amounted to 1,044 million BOE, accounting for 44% of the Company's total. The average daily production in this area amounted to 187,021 BOE, accounting for 44% of the Company's total. Currently, the Company has exploration licenses of 15 blocks in the region, with 6 PSC blocks in cooperation with foreign companies. In 2005, there were altogether 6 new oil and gas projects that commenced production in Bohai Bay, namely Luda 10-1, Luda 4-2, Luda 5-2, Nanbao 35-2, Caofeidian 11-3/5 and Bozhong 25-1/25-1S (C/F Platforms). The commencement of production of these projects further strengthened the position of Bohai Bay as the most important oil and gas operation base of the Company. They also contributed greatly to the Company's sustainable production growth. In 2005, the Company continued to invest substantially in seismic data acquisition and drilling. Encouraging results were obtained in exploration. In Bohai Bay, 22 wells were drilled during the year. 15 wells were drilled independently, including 11 wildcats and 4 appraisal wells. 2,770 kilometers of 2D seismic data and 775 square kilometers of 3D seismic data were acquired independently. 7 wells were drilled by PSC partners, including 4 wildcats and 3 appraisal wells. 21 square kilometers of 3D seismic data were acquired by PSC partners. There were 9 new oil and gas discoveries and 3 structures were successfully appraised in Bohai Bay. Bozhong Block In 2005, 3 wells were drilled, including 1 wildcats and 2 appraisal wells. 1 structure (Bozhong 3-2) was successfully appraised in the region. 57.5 square kilometers of 3D seismic data were acquired. Bonan Block In 2005, 2 wildcats and 1 appraisal well were drilled. Besides, there was 1 new discovery, namely Bozhong 34-1N. Liaodong Bay Block During the year, 1 wildcat was drilled and 407 square kilometers of 3D seismic data were acquired. Boxi Block In 2005, 2 wildcats were drilled and there was 1 new discovery, namely Qikou 17-2S. Block 06/17 In 2005, 1 wildcat was drilled in the area. 024 Block 02/31 During the year, 4 wells were drilled in the area, including 3 wildcats and 1 appraisal well. There were 3 new discoveries, including Jinxian 1-1, Jinxian 1-1E and Luda 27-1 and 1 hydrocarbon-bearing structure, namely Luda 27-2, was successfully appraised. Block 11/19 In 2005, 1 wildcat was drilled in the area. There was 1 new discovery, namely Bozhong 26-2N. 1,061 kilometers of 2D seismic data and 310 square kilometers of 3D seismic data were acquired. In 2005, 3 PSC wells were drilled in the area, including 2 wildcats and 1 appraisal well. There were 2 new discoveries, namely Bozhong 19-4N and Bozhong 19-4S. Besides, the structure of Bozhong 19-4N was successfully appraised. Qinhuangdao 32-6 Block In 2005, 1 PSC wildcat was drilled. There was 1 new discovery, namely Qinhuangdao 32-6N. Block 09/06 & 09/18 In 2005, Kerr-McGee Group drilled 2 appraisal wells on the Caofeidian 14-5 hydrocarbon-bearing structure. Block 04/36 In 2005, Kerr-McGee Group drilled 1 wildcat on Caofeidian 2-2 in block 04/36. Other Independent Blocks During the year, the Company acquired 1,710 kilometers of 2D seismic data in the Bodong Miaoxi Sag. Western South China Sea This is the Company's another important natural gas production and exploration base. Two largest natural gas fields, Yacheng 13-1 and Dongfang 1-1 are located in this region. The Company's Dongfang 1-1 Phase II engineering project was completed in 2005 and will commence production in the first half of 2006. By the end of 2005, a total of 640 million BOE of net proved reserves were confirmed in the region, accounting for 27% of the Company's total. The average daily net production amounted to 89,583 BOE, or 21% of the Company's total. The major exploration areas in the Western South China Sea include Beibu Gulf, Yinggehai Basin and Qiongdongnan Basin. Currently, the Company has exploration licenses of 34 blocks in the region and with 6 PSC blocks in cooperation with foreign companies. In 2005, the Company drilled 6 wildcats and 3 appraisal wells and made 3 new discoveries appraised. In addition, 5,664 kilometers of 2D seismic data and 787 square kilometers of 3D seismic data were acquired. Meanwhile, the Company's PSC partners drilled 4 wildcats and had 1 new discovery in the region. Yulin Block 35 of Beibu Gulf In 2005, 3 wildcats and 2 appraisal wells were drilled. There was 1 new discovery, namely Weizhou 6-10 and 2 hydrocarbon-bearing structures, Weizhou 11-1N and Weizhou 11-4N, were successfully appraised. Yangjiang Block 32 by the Western Estuary of the Pearl River During the year, 2 wildcats and 1 appraisal well were drilled in the area. There were 2 new discoveries, Wenchang 10-3 and Wenchang 9-3, and 1 structure, namely Wenchang 9-2, was successfully assessed. Songtao Block 22 in Qiongdongnan Basin In 2005, 1 wildcat was drilled. Other Independent Blocks In 2005, 787 square kilometers of 3D seismic data were collected from the Southwestern Weixi Region. Besides, 5,664 kilometers of 2D seismic data were also acquired from Beijiao in Qiongdongnan Basin. PSC Blocks In 2005, Husky Oil China Limited drilled 1 wildcat and had 1 oil and gas discovery, namely Wushi 17-1 in block 23/15 in Beibu Gulf. Besides, it drilled 1 wildcat in block 23/20 and 2 wildcats in Wenchang 13-1/2 in Qionghai. 025 Eastern South China Sea This is one of the important crude oil production bases of the Company. The crude oil produced in this region is mainly medium or light oil. By the end of 2005, the Company had a total of 342 million BOE of net proved reserves in the Eastern South China Sea, accounting for 14% of the Company's total. The average daily net production in the area amounted to 103,741 BOE, or 24% of the Company's total. Currently, the Company made aggressive exploration efforts in the region. The Company has exploration licenses of 38 blocks, with 9 PSC blocks in cooperation with foreign companies. In 2005, the Company drilled 5 wildcats and 2 appraisal well in the region independently. Besides, it acquired 6,512 kilometers of 2D seismic data and 1,111 square kilometers of 3D seismic data. Meanwhile, the Company's PSC partners drilled 4 wildcats and 1 appraisal well. A new discovery, namely Huizhou 25-4 was made and 3,153 kilometers of 2D seismic data were acquired. In the region, 2 structures, including Liuhua 19-5 and Huizhou 25-3, were successfully assessed in 2004. This further helped prove the promising natural gas exploration potential in Baiyun Trough. Block 27/10 In 2005, 2 wildcats were drilled. Liuhua Block 07 During the year, 1 wildcat was drilled and 1 appraisal well, namely Liuhau 19-5, was successfully appraised. Enping Block 15 In 2005, 1 wildcat was drilled. Huizhou Block 14 In 2005, 1 wildcat was drilled. Block 16/21 During the year, 1 wildcat was drilled. Other Independent Blocks In 2005, 6,512 kilometers of 2D seismic data were acquired from Panyu 28-1, Baiyun 16-1, Xijiang 35-1, Hanjiang and Zhu I Sag. 1,111 square kilometers of 3D seismic data were acquired from Liuhua 4-1 and Xijiang 23-1. PSC Blocks Block 17/22 In 2005, Statoil drilled 1 wildcat. Block 16/19 In 2005, Eni and Chevron drilled 1 wildcat and had 1 new discovery, namely Huizhou 25-4; it also drilled 1 appraisal well and successfully assessed one, namely Huizhou 25-3. Block 15/34 During the year, Devon drilled 2 wildcats. Block 43/11 In 2005, Kerr-McGee Group acquired 3,153 kilometers of 2D seismic data from the area. East China Sea This is an area with enormous exploration potential and extensive exploration acreage. By the end of 2005, a total of 88 million BOE of net proved reserves was certified in the East China Sea, accounting for 4% of the Company's total. The average daily net production in the area amounted to 4,751 BOE, or 1% of the Company's total. Currently, the Company has exploration licenses of 57 blocks, with 3 PSC blocks in cooperation with foreign companies. In joint efforts with Sinopec, the Company is carrying out exploration and development activities in the Xihu area of the East China Sea. In 2005, the Company acquired 940 square kilometers of 3D seismic data from Xihu Trough 27/05. Overseas As of 31 December 2005, the Company had net proved reserves of 249 million BOE in Indonesia and Australia, accounting for 11% of the Company's total. Our overseas average daily net production amounted to 39,013 BOE, or 9% of the Company's total. During the year, the Company continued to conduct exploration work overseas. 2 wildcats were drilled in Indonesia and 324 kilometers of 2D seismic data were acquired in Block M in Myanmar. 026 Table of major exploration blocks Exploration License (Commencement- Blocks Block Area (km2) Expiration) --------------------------------------------------------------------------------------------------------------- Middle of Bohai Bay 4,974 26.4.04~26.4.06 Southern Bohai Bay 3,679 8.6.04~8.6.06 Western Bohai Bay 1,895 8.6.04~8.6.06 Western Liaodong Bay 3,344 31.3.00~8.4.06 Eastern Liaodong Bay 2,829 2.7.01~2.7.06 Eastern Bozhong 1,861 30.5.04~30.5.06 Bohai Block 09/11 843 5.4.04~5.4.06 Bohai Block 06/17 2,586 20.2.03~20.2.07 Bohai Block 02/31 4,990 29.5.03~29.5.07 Bohai Block 11/19 3,068 8.6.04~8.6.06 Bohai Block 05/36 2,721 7.4.05~10.2.07 Eastern Bohai Block 11/05 3,601 10.2.04~10.2.06 Western Bohai Block 11/05 2,897 1.2.04~1.2.06 Bohai Block 09/18 2,234 4.2.05~4.2.07 Bohai Block 04/36 1,691 23.9.05~23.9.07 ---------------------------------------------------------------------------------------------------------------- Bohai Total 43,213 ---------------------------------------------------------------------------------------------------------------- North Yellow Sea 6,471 25.5.01~25.5.06 Northern Trough (Northen South Yellow Sea) 912 30.8.00~30.8.07 Xihu Hangzhou 26 (East China Sea) 3,642 31.3.03~31.3.07 Xihu Hangzhou 17 (East China Sea) 4,227 28.8.01~28.8.08 Xihu Huangyan 04 (East China Sea) 2,848 28.8.01~28.8.08 Xihu Zhenhai 01 (East China Sea) 1,536 28.8.01~28.8.08 Lishui 33 (East China Sea) 2,999 05.12.05~01.7.09 Wenzhou 21 (East China Sea) 1,437 05.12.05~01.7.07 East China Sea 25/34 7,017 05.12.05~05.12.07 Kunshan Block 02 (East China Sea) 2,628 11.5.01~11.5.06 Jinhua Block 12 (East China Sea) 6,931 11.5.01~11.5.06 Tiantai 32 (East China Sea) 5,400 17.7.01~17.7.06 Fuzhou Block 02 (East China Sea) 3,064 11.5.01~11.5.06 Taibei Block 27 (East China Sea) 7,379 9.7.01~9.7.06 Taoyuan 07 (East China Sea) 6,457 9.7.01~9.7.06 Jilong 25 (East China Sea) 5,692 9.7.01~9.7.06 ---------------------------------------------------------------------------------------------------------------- East China Sea Total 68,640 ---------------------------------------------------------------------------------------------------------------- Xijiang 04 (Pearl River Mouth Basin) 7,969 11.5.01~11.5.06 Xijiang 33 (Pearl River Mouth Basin) 4,983 12.5.05~12.5.07 Lufeng 06 (Pearl River Mouth Basin) 4,457 11.5.01~11.5.06 Huizhou 31 (Pearl River Mouth Basin) 3,074 11.5.01~11.5.06 Enping 15 (Pearl River Mouth Basin) 5,833 11.5.01~11.5.06 Enping 10 (Pearl River Mouth Basin) 6,547 11.5.01~11.5.06 Panyu 33 (Pearl River Mouth Basin) 4,830 11.5.01~11.5.06 Liuhua 07 (Pearl River Mouth Basin) 4,172 11.5.01~11.5.06 Dongsha 04 (Pearl River Mouth Basin) 5,295 11.5.01~11.5.06 Kaiping 14 (Pearl River Mouth Basin) 7,753 11.5.01~11.5.06 Kaiping 32 (Pearl River Mouth Basin) 8,104 11.5.01~11.5.06 Dongsha 32(Pearl River Mouth Basin) 7,350 5.11.03~5.11.10 027 Table of major exploration blocks (continued) Exploration License (Commencement- Blocks Block Area (km2) Expiration) -------------------------------------------------------------------------------------------------------------- Liwan 14 (Pearl River Mouth Basin) 7,752 11.5.01~11.5.06 Zijin 27 (Pearl River Mouth Basin) 5,396 11.5.01~11.5.06 15/20 (Pearl River Mouth Basin) 1,895 11.5.00~16.10.06 16/02 (Pearl River Mouth Basin) 3,495 3.31.01~31.3.07 Baiyun 15 (Pearl River Mouth Basin) 6,463 11.5.01~11.5.06 Huizhou 30 (Pearl River Mouth Basin) 5,862 11.5.01~11.5.06 Lufeng 08 (Pearl River Mouth Basin) 4,684 6.6.05~6.6.07 16/05 (Pearl River Mouth Basin) 3,007 31.3.00~31.3.07 -------------------------------------------------------------------------------------------------------------- Eastern South China Sea Total 108,921 -------------------------------------------------------------------------------------------------------------- Weizhou 12 (Beibu Gulf) 6,980 11.5.01~11.5.06 Yulin 35 (Beibu Gulf) 6,050 11.5.01~11.5.06 Weizhou 26 (Beibu Gulf) 4,358 5.11.03~11.5.06 Ledong 01 (Yinggehai) 6,543 3.12.03~3.12.05 Lingtou 20 (Yinggehai) 2,692 30.8.00~30.8.07 Lingao 11 (Yinggehai) 4,117 11.5.01~11.5.06 Songtao 22 (Qiongdongnan) 4,063 11.5.01~11.5.06 Songtao 31 (Qiongdongnan) 5,264 11.5.01~11.5.06 Lingshui 18 (Qiongdongnan) 7,738 6.8.02~6.8.07 Yangjiang 31 (Pearl River Mouth Basin) 6,003 3.12.03~3.12.05 Qionghai 28 (Pearl River Mouth Basin) 5,208 11.5.01~11.5.06 Wenchang 11 (Pearl River Mouth Basin) 4,901 11.5.01~11.5.06 North Wanan-21 A 6,801 30.9.05~30.9.07 North Wanan-21 B 6,118 30.9.05~30.9.07 North Wanan-21 C 6,372 30.9.05~30.9.07 North Wanan-21 D 6,126 30.9.05~30.9.07 -------------------------------------------------------------------------------------------------------------- Western South China Sea 89,334 -------------------------------------------------------------------------------------------------------------- Offshore China Subtotal 310,108 -------------------------------------------------------------------------------------------------------------- Indonesia MALACCA STRAIT 11,865 4.8.00~4.8.20 SES 8,276 1968~2018 ONWJ 13,582 1967~2010 WEST MADURA 1,615 1981~2011 POLENG TAC 41 1993~2013 BLORA 3,431 1996~2006 -------------------------------------------------------------------------------------------------------------- Myanmar M 7,786 19.10.05~18.4.07 C1 16,988 24.01.06~23.1.08 C2 26,506 24.01.06~23.1.08 A4 8,493 13.03.06~12.3.08 M2 9,653 25.01.05~23.4.06 M10 13,379 13.03.06~12.3.08 -------------------------------------------------------------------------------------------------------------- Morocco RAS TAFELNEY 14,000 20.4.05-20.1.07 -------------------------------------------------------------------------------------------------------------- Overseas Subtotal 135,615 -------------------------------------------------------------------------------------------------------------- Total 445,723 -------------------------------------------------------------------------------------------------------------- As at 31 December, 2005 028 Corporate Governance Report [GRAPHIC OMITTED] 029 GOVERNANCE STANDARDS The Company has always upheld and executed high standard of business ethics, for which its transparency and standard of governance have been recognized by the public and its shareholders. High and strict standard of corporate governance enables the Company to operate steadily and efficiently and is in the long-term interests of the Company and its shareholders. Since its listing, the Company has endeavoured to maximize its shareholders' value. In 2005, the Company executed its corporate governance policies strictly and sought to comply with relevant provisions of the Code on Corporate Governance Practices (the "CG Code") as set out in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules"), ensuring that all decisions were made on principles of trust and fairness and in an open and transparent manner, so as to protect the interests of all shareholders. KEY CORPORATE GOVERNANCE PRINCIPLES AND THE COMPANY'S PRACTICES A. DIRECTORS A.1 The Board Principle: "An issuer should be headed by an effective board which should assume responsibility for leadership and control of the issuer and be collectively responsible for promoting the success of the issuer by directing and supervising the issuer's affairs. Directors should take decisions objectively in the interests of the issuer." o The Board consists of twelve members. Five of them are Independent Non-executive Directors. o The list of Directors, their respective biographies, and their respective roles in the Board committees are set out on pages 52 to 56 and 163 respectively. The relevant information is also disclosed in the Company's website. o The Board and committee members of the Company are dedicated, professional and accountable. With internationally recognised figures serving on the international advisory board, the Company's corporate governance standards are further enhanced. o Board meetings have been held 17 times during last year. In addition to the Board meetings, the members of the Board have also actively participated in the discussion on the business and operation of the Company, either in person or through other electronic means of communication such as email, when necessary. o There exists an open atmosphere for Directors to contribute alternative views. All decisions of the Board are made on the principles of trust and fairness in an open and transparent manner, so as to protect the interests of all shareholders. Attendance at full Board meetings in 2005 No. of Meetings attended Executive Directors (17 meetings in total) ----------------------------------------------------- Fu Chengyu 17/17 Luo Han 14/17 Zhou Shouwei 17/17 Cao Xinghe (Note 3) 3/3 Wu Zhenfang (Note 3) 2/3 Wu Guangqi (Note 1) 14/15 Yang Hua (Note 3) 2/3 ----------------------------------------------------- Independent Non-executive Directors Chiu Sung Hong 17/17 Kenneth S. Courtis 14/17 Evert Henkes 16/17 Tse Hau Yin, Aloysius (Note 2) 14/14 Lawrence J. Lau (Note 4) 3/3 Note 1: Mr. Wu Guangqi was appointed as Executive Director with effect from 1 June 2005. Note 2: Mr. Tse Hau Yin, Aloysius was appointed as Independent Non-executive Director with effect from 8 June 2005. Note 3: Mr. Cao Xinghe, Mr. Wu Zhenfang and Mr. Yang Hua were appointed as Executive Directors with effect from 31 August 2005. Note 4: Professor Lawrence J. Lau was appointed as Independent Non-executive Director with effect from 31 August 2005. 030 o The Company Secretary consulted the Directors on matters to be included in the agenda for regular Board meetings. o Dates of regular Board meetings are scheduled at least 2 months ahead to provide sufficient notice to give all Directors an opportunity to attend. For non-regular Board meetings, reasonable notice will be given. o Directors have access to the advice and services of the Company Secretary to ensure that Board procedures as well as all applicable rules and regulations are followed. o Minutes of meetings of the Board and Board committees are kept by the Company Secretary and open for inspection at any reasonable time on reasonable notice by any Director. o Minutes of meetings of the Board and Board committees recorded sufficient details the matters considered by the Board and Board committees and decisions reached, including any concerns raised by Directors or dissenting views expressed. Draft and final versions of minutes of Board meetings and Board committee meetings are sent to all Directors and all committee members respectively for their comments and records respectively. o The committees of the Board are able, upon reasonable request, to seek independent professional advice in appropriate circumstances, at the Company's expense. o If a substantial shareholder or a Director has conflict of interest in a matter to be considered by the Board which the Board has determined to be material, the matter shall not be dealt with by way of circulation or by a committee (except an appropriate Board committee set up for that purpose pursuant to a resolution passed in a Board meeting) but a Board meeting shall be held. Independent Non-executive Directors who have no material interest in the transaction shall be present at such Board meeting. A.2 Chairman and Chief Executive Officer Principle: "There are two key aspects of the management of every issuer - the management of the board and the day-to-day management of the issuer's business. There should be a clear division of these responsibilities at the board level to ensure a balance of power and authority, so that power is not concentrated in any one individual." o The Board, as representatives of the shareholders of the Company, is committed to the achievement of business success and the enhancement of long-term shareholder value with the highest standards of integrity and ethics. The Board comprises five Independent Non-executive Directors who participate in the decision-making of the Board. Besides, the Audit Committee and the Remuneration Committee comprise solely Independent Non-executive Directors. The Company believes that the high involvement of the Independent Non-executive Directors in the management and decision making of the Board and its committees strengthens the objectivity and independence of the Board. o The role of the Board is to direct, guide and oversee the conduct of the Company's business and to ensure that the interests of the shareholders are being served. o On the other hand, the senior management, under the direction of the Chief Executive Officer, is responsible for conducting the Company's business and affairs consistent with the principles and directions established by the Board. The clear division of responsibilities between the Board and the senior management ensures a balance of power and authority, as well as efficient management and operation of the Company, which help to contribute to the success of the Company. 031 o The Company did not divide the roles of the Chairman and the Chief Executive Officer. The Board believes that this structure contributes to a strong and efficient leadership which is beneficial to the development of the Company. It also enables the Company to make and implement decisions promptly and efficiently. On the other hand, the balance of power and authority is ensured by the operations of the Board and the Board committees. Further explanation on the deviation from the Code Provision is set out on page 38. A.3 Board composition Principle: "The board should have a balance of skills and experience appropriate for the requirements of the business of the issuer. The board should ensure that changes to its composition can be managed without undue disruption. The board should include a balanced composition of executive and non-executive directors (including independent non-executive directors) so that there is a strong independent element on the board, which can effectively exercise independent judgement. Non-executive directors should be of sufficient calibre and number for their views to carry weight." o The Board consists of twelve members. Five of them are Independent Non-executive Directors. All Directors are expressly identified by categories of Executive Directors and Independent Non-executive Directors in all corporate communications that disclose the names of Directors of the Company. o The Executive Directors of the Company are all individuals with immense experience in the Company's respective fields of operation. They are all engineers who are familiar with the Company's business and have been exposed to dealing with leading global players in the oil and gas industry. Most of them have over 25 years of experience in petroleum exploration and operation. o The five Independent Non-executive Directors of the Company are all professionals or scholars with backgrounds in the legal, economics, financial and investment fields. They have extensive experience and knowledge of corporate management, making significant contributions to the Company's strategic decisions. o The appointment of Mr. Tse Hau Yin, Aloysius and Professor Lawrence J. Lau as Independent Non-executive Directors in 2005 strengthened the independence and broadened the expertise of the Board. o The diverse background of the Board members ensures that they can fully represent the interests of all shareholders of the Company. o The Company has received annual confirmations from all its Independent Non-executive Directors acknowledging full compliance with the relevant requirements in respect of their independence pursuant to Rule 3.13 of the Listing Rules. The Company therefore considers all Independent Non-executive Directors independent. A.4 Appointments, re-election and removal Principle: "There should be a formal, considered and transparent procedure for the appointment of new directors to the board. There should be plans in place for orderly succession for appointments to the board. All directors should be subject to re-election at regular intervals. An issuer must explain the reasons for the resignation or removal of any director." o The Company has established a Nomination Committee which consists of an Executive Director and three Independent Non-Executive Directors. A list of members of the Nomination Committee is set out under the section headed "Company Information" on page 163 of the annual report. 032 o The role of the Nomination Committee is to establish proper procedures for the selection of the Company's leadership positions, upgrade the quality of Board members and perfect the Company's corporate governance structure. o The main authorities and responsibilities of the Nomination Committee are to nominate candidates for approval by the Board, to review the structure and composition of the Board, and to evaluate the leadership abilities of Executive and Non-executive Directors, so as to ensure the competitive position of the Company. o When nominating a particular candidate, the Nomination Committee will consider (1) the breadth and depth of management and/or leadership experience of the candidate; (2) financial literacy or other professional or business experience of the candidate that are relevant to the Company and its business; and (3) the experience in or knowledge of international operations of the candidate. All candidates must be able to meet the standards set out in Rules 3.08 and 3.09 of the Listing Rules. o The Nomination Committee is also responsible for evaluating the contributions and independence of incumbent Directors so as to determine whether they should be recommended for re-election. Based on such evaluation, the Nomination Committee will recommend to the Board candidates for re-election at general meetings and appropriate replacements (as necessary). The Board, based on the recommendation of the Nomination Committee, will propose to the shareholders the candidates for re-election at the relevant general meetings. o A Director appointed by the Board to fill a casual vacancy or as an addition shall hold office until the next extraordinary general meeting and/or annual general meeting (as appropriate). o During the year ended 31 December 2005, the Nomination Committee recommended the following candidates as Directors: (a) the appointment of Mr. Wu Guangqi as Executive Director with effect from 1 June 2005 to replace Mr. Jiang Longsheng, who ceased to be an Executive Director with effect from 1 June 2005; (b) the appointment of Mr. Tse Hau Yin, Aloysius with effect from 8 June 2005 to replace Dr. Erwin Schurtenburger, who ceased to be an Independent Non-executive Director with effect from 1 April 2005; and (c) the appointment of Mr. Cao Xinghe, Mr. Wu Zhenfang and Mr. Yang Hua as Executive Directors, and Professor Lawrence J. Lau as Independent Non-executive Director with effect from 31 August 2005, to further strengthen the Board and cater for the needs of the expanding business of the Company. Attendance of individual members at Nomination Committee meetings in 2005 No. of Meetings attended Directors (5 meetings in total) ----------------------------------------------------- Luo Han (Chairman) 5/5 Chiu Sung Hong 5/5 Tse Hau Yin, Aloysius (Note 1) 1/1 Lawrence J. Lau (Note 2) 0/0 Note 1: Mr. Tse Hau Yin, Aloysius was appointed as a member of the Nomination Committee with effect from 31 August 2005. Note 2: Professor Lawrence J. Lau was appointed as a member of the Nomination Committee with effect from 20 December 2005. 033 A.5 Responsibilities of directors Principle: "Every director is required to keep abreast of his responsibilities as a director of an issuer and of the conduct, business activities and development of that issuer. Given the essential unitary nature of the board, non-executive directors have the same duties of care and skill and fiduciary duties as executive directors." o The Company regularly updates its Directors with changes in laws and regulations relevant to their role as Director of the Company. o All Directors newly appointed to the Board (whether as Executive or Non-executive Directors) receive appropriate briefing and training from the Company. The senior management and the Company Secretary will also conduct subsequent briefings as and when necessary, to ensure that the Directors are kept appraised of the latest developments relevant to the operations and business of the Company and are able to discharge their responsibilities properly. o Each Independent Non-executive Director attended all regularly scheduled meetings of the Board and committees on which such Independent Non-executive Director sat in, and reviewed the meeting materials distributed in advance for such meetings. A number of Executive Directors, together with several Independent Non-executive Directors, attended the annual general meeting and the extraordinary general meetings and answered questions raised by the shareholders. A.6 Supply of and access to information Principle: "Directors should be provided in a timely manner with appropriate information in such form and of such quality as will enable them to make an informed decision and to discharge their duties and responsibilities as directors of an issuer." o The Company's senior management regularly supplies the Board and its committees with adequate information in a timely manner to enable them to make informed decisions. Senior management also organised presentations to the Board by professional advisers on specific transactions as appropriate. o For regular Board meetings and Board committee meetings, the agenda and accompanying Board papers were sent in full to all Directors at least three days before the intended date of the Board meetings or Board committee meetings. o The Board and each Director have separate and independent access to the Company's senior management and also the Company Secretary. All Directors are entitled to have access to Board papers, minutes and related materials upon reasonable notice. B. REMUNERATION OF DIRECTORS AND SENIOR MANAGEMENT B.1 The level and make-up of remuneration and disclosure Principle: "An issuer should disclose information relating to its directors' remuneration policy and other remuneration related matters. There should be a formal and transparent procedure for setting policy on executive directors' remuneration and for fixing the remuneration packages for all directors. Levels of remuneration should be sufficient to attract and retain the directors needed to run the company successfully, but companies should avoid paying more than is necessary for this purpose. No director should be involved in deciding his own remuneration." o Comprising three Independent Non-executive Directors, the Remuneration Committee is responsible for reviewing and approving all Executive Directors' salaries, bonuses, share option packages, performance appraisal systems and retirement plans. A list of members of the Remuneration Committee is set out in "Company Information" on page 163. o Details of the remuneration, as well as the share option benefits of Directors for the year ended 31 December 2005, are set out on pages 105 to 106. 034 o The major responsibilities and authorities of the Remuneration Committee are to make recommendations to the Board on the Company's policy and structure for all remuneration of Directors and the senior management, determine the specific remuneration packages for all Executive Directors and senior management, such as benefits in kind, pension rights and compensation payments, including any compensation payable for loss or termination of their office or appointment, and make recommendations to the Board on the remuneration of Independent Non-executive Directors. o The Company's emolument policy is to maintain fair and competitive packages with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee was mindful that levels of remunerations sufficient to attract and retain the Directors and senior management were needed to run the Company successfully, but at the same time avoid paying more than is necessary for this purpose. The Directors' emolument package comprises Director's fee, basic salaries and allowances, bonuses, share options and others. The following factors are considered when determining the Directors' remuneration package: -- Business needs and company development; -- Responsibilities of the Directors and individual contribution; -- Changes in appropriate markets, e.g. supply/demand fluctuations and changes in competitive conditions; and -- The desirability of performance-based remuneration. No individual Director or senior management of the Company was permitted to determine his/her own remuneration. The Company sought to apply similar principles when determining the remuneration packages for senior management and other general staff, and employees are rewarded on a performance-rated basis as well as other fringe benefits such as social insurance, pension fund and medical cover. Please refer to note 12 and note 13 to the financial statements on page 105 to 107 for details of Directors' remuneration and the five highest paid individuals in the Company. o The remuneration of Independent Non-executive Directors recommended by the Remuneration Committee was determined by the Board where the vote of the Directors concerned will not be counted in relation to their remuneration. o The Remuneration Committee also administered the Company's share option schemes and all other employee equity-based compensation plans, with full authority to make all other determinations in the administration thereof, but subject to the limitations prescribed by laws and the rules of such plans and programs. o The Remuneration Committee would consult the Chairman and Chief Executive Officer about its proposal relating to the remuneration of other Executive Directors and have access to professional advice if necessary. Attendance of individual members at Remuneration Committee meetings in 2005 ----------------------------------------------------- Independent No. of Meetings attended Non-executive Directors (5 meetings in total) ----------------------------------------------------- Chiu Sung Hong (Chairman) 5/5 Evert Henkes 5/5 Tse Hau Yin, Aloysius (Note) 3/3 Note: Mr. Tse Hau Yin, Aloysius was appointed as a member of the Remuneration Committee with effect from 8 June 2005. 035 C. ACCOUNTABILITY AND AUDIT C.1 Financial reporting Principle: "The board should present a balanced, clear and comprehensible assessment of the company's performance, position and prospects." o The Company regularly updates investors with progress of development and performance of the Company through formal channels such as annual report, interim report and announcements made through HKEx's website and newspapers, as well as through press releases. The Company also issues quarterly operational statistics and announces its strategy at the beginning of the year to enhance transparency about its performance and to give details of the latest development of the Company in a timely manner. o The Company provides a comprehensive business review in its interim and annual reports to enable investors to appraise its development over time and its financial position. o The Company has also engaged an independent technical consultant firm to conduct a review of its oil and gas information and discloses details of its oil and gas properties in its annual report (as set out on pages 146 to 150). C.2 Internal controls Principle: "The board should ensure that the issuer maintains sound and effective internal controls to safeguard the shareholders' investment and the issuer's assets." o The Company has established internal control system and mechanism and will continue to improve such systems to comply with regulatory requirements and to enhance corporate governance of the Company. o The Audit Committee of the Board is responsible for overseeing the operation of the internal monitoring systems, so as to ensure that the Board is able to monitor the Company's overall financial position, to protect the Company's assets, and to prevent major errors resulting from financial reporting or loss. o The Audit Committee has reviewed, together with senior management and the external auditors, the accounting principles and practices adopted by the Group and discussed the internal control and financial reporting matters. C.3 Audit Committee Principle: "The board should establish formal and transparent arrangements for considering how it will apply the financial reporting and internal control principles and for maintaining an appropriate relationship with the company's auditors. The audit committee established by an issuer pursuant to the Exchange Listing Rules should have clear terms of reference." o The Audit Committee consists of three Independent Non-executive Directors, with Dr. Kenneth Courtis designated as the Audit Committee financial expert for the purposes of U.S. securities laws. A list of members of the Audit Committee is under the section headed "Company Information" on page 163 of the annual report. o The Audit Committee meets at least twice a year and is responsible for reviewing the completeness, accuracy and fairness of the Company's accounts, evaluating the Company's auditing scope and procedures as well as its internal control systems. o Full minutes of Audit Committee meetings are kept by the Company Secretary. Draft and final versions of minutes of the Audit Committee meetings are sent to all members of the Audit Committee for their comments and records respectively, in both cases within a reasonable time after the meetings. o The Audit Committee is also responsible for overseeing the operation of the internal monitoring systems so as to ensure that the Board is able to monitor the Company's overall financial position, to protect the Company's assets, and to prevent major errors resulting from financial reporting or loss. 036 o The following is a summary of the work performed by the Audit Committee under its charter during the year: -- Reviewed the Company's audited accounts and results announcement before it is tabled before the Board for approval, discussing with senior management and the external auditors; -- The Audit Committee held formal meetings with the external auditors and senior management of the Company at least twice a year to discuss the following matters: (i) the external auditor's engagement letter and general scope of their audit work, including planning and staffing of the audit; (ii) the Company's management discussion and analysis disclosures in the interim report and annual report of the Company; (iii)the applicable accounting standards relating to the audit of the Company's financial statements, including any recent changes; -- In addition to formal meetings arrangement by the Company, members of the Audit Committee were also given direct access to the external auditors and have frequent contacts with the external auditors to discuss issues from time to time; -- Conducted a review of the effectiveness of the system of internal controls of the Company and its subsidiaries, including financial, operational and compliance controls, as well as risk management aspects of internal controls, and made recommendation to the Board based on the review; -- Discussing with senior management of the Company ways of improving and strengthening the scope, adequacy and effectiveness of the Company's internal controls, including corporate accounting and financial controls, both under the Listing Rules as well as under relevant US requirements; -- Made recommendation to senior management and the Board on the scope and quality of management's ongoing monitoring of risks and issues relevant to internal controls; -- Reviewed the work performed by the Company's external auditors and their relationship with the Company's senior management, and recommended to the Board for the re-appointment of Ernst & Young as external auditors, as well as the proposed auditor's fees; -- Reviewed the Company's audit and non-audit services pre-approval policy to ensure auditor independence; -- Members of the Audit Committee received materials from the Company's external auditors from time to time in order to keep abreast of changes in financial reporting principles and practices, as well as issues relating to financial reporting and internal controls relevant to the Company. -- Considered and approved the non-audit services provided by the external auditors during the year; -- Reviewed the Company's business ethics and compliance policies, related reports and training programs and making recommendation for improvement; and -- Reported on its findings and suggestions to the Board following its review of different aspects of the Company's financial reporting and internal control systems, and made appropriate recommendations where necessary. o The Audit Committee is provided with sufficient resources, including independent access to and advice from external auditors. 037 Attendance of individual members at Audit Committee meetings in 2005 ----------------------------------------------------- Independent No. of Meeting attended Non-executive Directors (3 meetings in total) ----------------------------------------------------- Chiu Sung Hong (Chairman) 3/3 Kenneth S. Courtis 3/3 Tse Hau Yin, Aloysius (Note) 2/2 Note: Mr. Tse Hau Yin, Aloysius was appointed as a member of the Audit Committee with effect from 8 June 2005. D. DELEGATION BY THE BOARD D.1 Management functions Principle: "An issuer should have a formal schedule of matters specifically reserved to the board for its decision. The board should give clear directions to management as to the matters that must be approved by the board before decisions are made on behalf of the issuer." o The Board is the ultimate decision-making body of the Company, other than those matters reserved to shareholders of the Company. The Board oversees and provides strategic guidance to senior management in order to enhance the long-term value of the Company for its shareholders. o The day-to-day management is conducted by senior management and employees of the Company, under the direction of the Chief Executive Officer and the oversight of the Board. In addition to its general oversight of management, the Board also performs a number of specific functions. o The primary functions performed by the Board include: (i) reviewing and approving long-term strategic plans and annual operating plans, and monitoring the implementation and execution of those plans; (ii) reviewing and approving significant financial and business transactions and other major corporate actions; and (iii) reviewing and approving financial statements and reports, and overseeing the establishment and maintenance of controls, processes and procedures to ensure accuracy, integrity and clarity in financial and other disclosures. D.2 Board committees Principle: "Board committees should be formed with specific written terms of reference which deal clearly with the committees' authority and duties." o The Company has formed an Audit Committee, a Remuneration Committee and a Nomination Committee of the Board, each committee with its own specific charter. E. COMMUNICATION WITH SHAREHOLDERS E.1 Effective communication Principle: "The board should endeavour to maintain an on-going dialogue with shareholders and in particular, use annual general meetings or other general meetings to communicate with shareholders and encourage their participation." o The Board recognises the importance of good and effective communication with all shareholders. With a policy of being transparent, strengthening investor relations, and providing consistent and stable returns to shareholders, the Company seeks to ensure transparency through establishing and maintaining different communication channels with shareholders. o The Company has a professionally-run investor relations department to serve as an important communication channel between the Company and its shareholders and other investors. In 2005, the Company was selected by sell-side analysts as "the Best Investor Relations in Oil and Gas Industry" according to the Institutional Investor research group and was named No. 1 for Best Corporate Governance in China by FinanceAsia magazine. 038 o A key element of effective communication with shareholders and investors is prompt and timely dissemination of information in relation to the Company. In addition to announcing its interim and annual results to shareholders and investors, the Company also publicises its major business developments and activities through press releases, announcements and the Company's website in accordance with relevant rules and regulations. Press conferences and analyst briefings are held from time to time on financial performance and major transactions. o The annual general meeting also provides a useful forum for shareholders to exchange views with the Board. The Chairman of the Board, as well as chairmen of the Audit Committee, Nomination Committee and Remuneration Committee, or in their absence, members of the respective committees, are available to answer questions from shareholders at annual general meetings and extraordinary general meetings of the Company. E.2 Voting by Poll Principle: "The issuer should regularly inform shareholders of the procedure for voting by poll and ensure compliance with the requirements about voting by poll contained in the Exchange Listing Rules and the constitutional documents of the issuer." o Details of the poll voting procedures and the rights of shareholders to demand a poll are set out on page 63 of this annual report, and are included in circulars to shareholders despatched by the Company. o The results of the poll are published in newspapers as well as on the Stock Exchange and the Company's website. o The Company has also complied with the requirements concerning voting by poll under the Listing Rules. For example, voting was conducted by poll in respect of the connected transactions at the Company's recent extraordinary general meeting held on 31 December 2005. COMPLIANCE WITH THE CODE ON CORPORATE GOVERNANCE PRACTICES The Company has complied with the Code Provisions of the CG Code as set out in Appendix 14 of the Listing Rules throughout the year ended 31 December, 2005, except for deviations from Code Provisions A.2.1, A.4.1, A.4.2 and B.1.3 only. The following summaries the Company's deviations from the CG Code and the reasons for such deviations. Code Provision A.2.1 Under Code Provision A.2.1, the roles of the chairman and chief executive officer are required to be separated and not to be performed by the same individual. Mr. Fu Chengyu ("Mr. Fu") is the Chairman of the Board. In addition to the role of the Chairman, the role of Chief Executive Officer is also designated to Mr. Fu. This constitutes a deviation from Code Provision A.2.1. The reason for such deviation is set out below. The Company is engaged in the oil and gas exploration and production business which is different from integrated oil companies engaging in both upstream and downstream operations. In light of this, the Board considers that the interest of the Company's oil and gas exploration and production business is best served when strategic planning decisions are made and implemented by the same person. The Company's Nomination Committee also agreed that it is in the best interest of the Company that the roles of the Chairman of the Board and Chief Executive Officer be performed by the same individual. In light of the above, the Company does not currently propose to designate another person as the Chief Executive Officer of the Company. 039 Code Provision A.4.1 Under Code Provision A.4.1, non-executive directors should be appointed for a specific term and be subject to re-election. None of the existing Independent Non-executive Directors of the Company is appointed for a specific term. This constitutes a deviation from Code Provision A.4.1. However, all the Directors of the Company (executive and non-executive) are subject to the retirement provisions under article 97 of the articles of association of the Company ("Article 97"). According to Article 97, one-third of the Directors for the time being must retire from the office by rotation at each annual general meeting. The Company has observed the need for good corporate governance practices and all the existing Independent Non-executive Directors of the Company have been re-elected in past three years, except Mr. Lawrence J. Lau, who was appointed as an Independent Non-executive Director of the Company with effect from 31 August 2005. Therefore, the Company considers that sufficient measures have been taken to ensure that the Company's corporate governance practices are no less exacting than those in the CG Code. Code Provision A.4.2 Under Code Provision A.4.2, every Director, including those appointed for a specific term, should be subject to retirement by rotation at least once every three years. Mr. Fu, the Chairman of the Company, was re-elected as a Director on 6 June 2002. Although he did not retire by rotation at the annual general meeting held on 25 May 2005 as under Article 97 a Director who is also a chairman or chief executive officer of the Company is exempted from the requirement to retire by rotation, he was re-elected as a Director at the extraordinary general meeting held on 31 December 2005 to comply with Code Provision A.4.2. Code Provision B.1.3 Code Provision B.1.3 requires the terms of reference of the remuneration committee of the Company to include, as a minimum, certain specific duties set out in such Code Provision. Previously, the Company's Remuneration Committee charter did not mirror the exact wording of the terms of reference in Code Provision B.1.3. The Company has therefore revised its Remuneration Committee charter to comply with the provisions in Code Provision B.1.3. CHANGES IN DIRECTORSHIP On 1 April 2005, Mr. Erwin Schurtenberger resigned as an Independent Non-executive Director of the Company for personal reasons due to ill health. Mr. Tse Hau Yin, Aloysius ("Mr. Tse") was subsequently appointed as an Independent Non-executive Director of the Company in place of Mr. Erwin Schurtenberger on 8 June 2005. Mr. Tse was also appointed as a member of the Audit Committee, Remuneration Committee and Nomination Committee of the Company. Mr. Jiang Longsheng, an Executive Director of the Company, retired on 1 June 2005 and Mr. Wu Guangqi was appointed as an Executive Director of the Company in place of Mr. Jiang Longsheng with effect from the same day. Mr. Wu Guangqi was also appointed as the Compliance Officer of the Company. Based on the recommendation of the Nomination Committee, Mr. Cao Xinghe, Mr. Wu Zhenfang and Mr. Yang Hua were appointed as Executive Directors of the Company, and Mr. Lawrence J. Lau was appointed as an Independent Non-executive Director of the Company, all with effect from 31 August 2005, to further strengthen the Board and cater for the needs of the expanding business of the Company. During the period between Mr. Erwin Schurtenberger's resignation and Mr. Tse's appointment as an Independent Non-executive Director of the Company, the Audit Committee only comprised of two Independent Non-executive Directors and therefore the Company was not in strict compliance with Rule 3.21 of the Listing Rules, which requires an audit committee to comprise of at least three Independent Non-executive Directors. The Company had informed the Stock Exchange immediately and published an announcement in newspapers containing relevant details in compliance with Rule 3.23 of the Listing Rules. The Company had also, in accordance with Rule 3.23 of the Listing Rules, ensured that an appropriate member was appointed to the Audit Committee within three months of Mr. Erwin Schurtenberger's resignation. After Mr. Tse's appointment with effect from 8 June 2005 as an Independent Non-executive Director and a member of the Audit Committee of the Company, the Audit Committee comprised three Independent Non-executive Directors and the Company is in compliance with Rule 3.21 of the Listing Rules. 040 CODE OF ETHICS The Board adopted a code of ethics ("Code of Ethics") on 28 August 2003 to provide guidelines to the senior management and Directors in legal and ethical matters as well as the sensitivities involved in reporting illegal and unethical matters. The Code of Ethics covers such areas as supervisory rules, insider dealing, market malpractices, conflict of interests, company opportunities, protection and proper use of the Company's assets as well as reporting requirements. All the senior management members and Directors are required to familiarise themselves with and follow the Code of Ethics to ensure that the Company's operations are honest and legal. Violations of the rules will be penalized and serious offences will result in dismissals. The Company reviewed its Code of Ethics and adopted the revised code of ethics ("New Code of Ethics") in 2005, as part of its continued efforts to improve its corporate governance standards. The Company has provided all its Directors and senior officers with a copy of the New Code of Ethics and require them to comply with the New Code of Ethics, so as to ensure the Company's operation is proper and lawful. The Company will take disciplinary actions towards any act which is in breach of the New Code of Ethics. MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS OF LISTED ISSUERS The Company's Code of Ethics and New Code of Ethics both incorporated the Model Code for Securities Transactions by Directors of Listed Issuers (the "Model Code") as set out in Appendix 10 to the Listing Rules. All Directors have confirmed that they complied, during the year ended 31 December 2005, with the required standards set out in the Model Code. SERVICES AND REMUNERATION OF AUDITORS Ernst & Young was appointed and engaged as the Company's auditor ("Auditor") for the financial year ended 31 December 2005. Services provided by the Auditor and fees charged by the Auditor for the services are as follows: Audit Fees The aggregate fees billed for professional services rendered by the Auditor for the audit of the Company's annual financial statements or services that are normally provided by the Auditor in connection with statutory and regulatory filings or engagements were RMB6,750,000 (approximately US$815,562) for the financial year ended 31 December 2004 and RMB7,961,006 (approximately US$986,469) for the financial year ended 31 December 2005. Audit-Related Fees The aggregate fees billed for assurance and related services by the Auditor that are reasonably related to the performance of the audit or review of the Company's financial statements and are not reported under "Audit Fees" were RMB993,180 (approximately US$120,000) for the financial year ended 31 December 2004 and RMB2,098,252 (approximately US$260,000) for the financial year ended 31 December 2005. The audit-related services provided by the Auditor included assistance in the implementation of Section 404 of the Sarbanes-Oxley Act. Tax Fees The aggregate fees billed for professional service rendered by the Auditor for tax compliance, tax advice and tax planning were RMB99,318 (approximately US$12,000) for the financial year ended 31 December 2004 and nil for the financial year ended 31 December 2005. All other fees There are no other fees payable to the Auditor for products and/or services provided by the Auditor, other than the services reported above, for the financial year ended 31 December 2004 and for the financial year ended 31 December 2005. 041 STATEMENT ON CORPORATE GOVERNANCE AS REQUIRED BY SECTION 303A.11 OF THE NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL The Company is incorporated under the laws of Hong Kong and the principal trading market for the ordinary shares of the Company is the Stock Exchange of Hong Kong Limited. In addition, because the Company's ordinary shares are registered with the United Sates Securities and Exchange Commission and are listed on the New York Stock Exchange (the "NYSE"), the Company is subject to certain corporate governance requirements. However, many of the corporate governance rules in the NYSE Listed Company Manual (the "NYSE Standards") do not apply to the Company as a "foreign private issuer" and the Company is permitted to follow its home country corporate governance practices in lieu of most corporate governance standards contained in the NYSE Standards. Section 303A.11 of the NYSE Listed Company Manual requires NYSE-listed foreign private issuers to describe the significant differences between their corporate governance practices and the corporate governance standards applicable to U.S. companies listed on the NYSE. The Company has posted a brief summary of such significant differences on its website, which may be accessed through the following web page: http://www.cnoocltd.com/investor/channel/investor1851.asp 042 Health, Safety and Environment 043 The Company is committed to the promotion of the concept and culture of health, safety and environmental protection among all the staff. Employees are encouraged and urged to put these ideas into practice. Hence, we are making every effort to develop the HSE system and structure, and to organize the related training for all the management and staff members of the Company. At CNOOC Limited, health, safety and environmental protection (HSE) are always the priority in various operating activities. The culture of improving and reinforcing HSE has already become a consensus among our management and staff members at all levels. The emphasis on strict implementation has become part of the routine of HSE management. The priority on environmental protection and employees' health has also been acted on. In addition, there is an increasing awareness of social responsibility during the project implementation. In 2005, the Company made sustained progress in respect of HSE management. During the year, it was neither involved in any material injury liability case, spillage or pollution incidents, nor subject to any safety-related liability claims for losses of over RMB1 million. Besides, the Company's OSHA Statistics results continued to be above average when compared with international peers. Strict HSE Management As an environment-friendly company, the Company is committed to preserving health and safety of its staff, as well as maintaining the harmony with environment, when pursuing its development and profit growth. The oil and gas field development projects of the Company that were started during the year all underwent simultaneous reviews on health, safety and environmental protection in accordance with the laws of the PRC. These projects had been endorsed by the competent government departments. Relevant government approvals had been obtained. During the year, our focus in HSE management was also placed on contractors. Through organizing case study seminars and issuing the HSE management standards for contractors, the Company further strengthened our HSE management toward contractors. In 2005, we also placed considerable emphasis on safety in helicopter, diving and vehicle operations. Professional auditors were hired to conduct safety checks on 11 leased helicopters. In 2006, we plan to carry out special audits on diving operations. 044 The Company introduced the system of occupation health profiles to all branches in order to strengthen the health management of offshore operating staff. Besides, we continued to require offshore operating staff to submit health certificates. We also analyze their health data, so as to offer proactive and constructive advices to them on health improvement. In 2005, we enhanced our information exchange on HSE. As an OGP (International Association of Oil and Gas Producer) member, the Company assisted the Group in organizing the "Workshop on Safety Management of Offshore Accidents" in 2005. Improvement on HSE Crisis Management In 2005, the Company organized a large-scale offshore emergency drill. There were over 300 participants, including our offshore service contractors and transportation service contractors. This exercise was very successful in training the involved parties, including our offshore units, branches, contractors and the relevant public authorities, on working together to tackle emergency situations. The Company continued to work with other entities to set up Oil Spill Response Base in Tangguh, Longkou, Weizhou and Zhuhai. Such initiatives strengthened our capability in handling offshore oil spill emergencies. 045 Cultivation of HSE Culture To reinforce its work on health, safety and environmental protection, the Company kept on organizing various training sessions to further promote the HSE culture among its employees. In 2005, nearly all the staff from the management to the operational level participated in our HSE training sessions. The topics covered HSE regulations, corporate values and policies, risk management and control, offshore rescue and special operations. In addition, the scope of our HSE training has been extended to the employees of contractors. The training requirement have also been further embedded in performance appraisals in order to enhance HSE practices during operations. More than 10,000 employees of our contractors participated in our training sessions in 2005. CNOOC LTD'S osha Occupational Injury & Occupation Disease Statistics of 2005 Number of Number of Rate of days away days away Gross Recordable recordable Number of Rate of & working & working Scope man-hours cases cases cases away cases away shifts bounds Deaths ---------------------------------------------------------------------------------------------------------------- Company 7,196,936 5 0.139 1 0 3 0.028 0 staff Company staff 31,558,087 50 0.317 15 0.095 138 0.875 0 & direct contractors 046 Corporate Citizen 047 As a socially responsible corporate citizen, the Company not only devotes to good causes in the form of Tibet-aid, poverty relief and education subsidies, but also gives whole-hearted support and donations to help victims of natural disasters. Support the Community and Contribute to the Society The Company-considers social responsibility as one of the essential prerequisites for corporate development. While emphasizing the creation of economic value to satisfy the high expectations of our shareholders, we are also eager to take up our social responsibility as a corporate citizen to generate social benefit for the advancement of the community and the whole society. In 2005, the Company undertook a number of initiatives to give back to society. In respect of education and culture, the Company established various endowment funds and education funds to support the education and living of poverty-stricken children. Besides, the Company also set up several free-education primary schools and made substantial donations in Hainan and other places to the construction of school buildings and dormitories. In 2005, the Company made further contributions to the Western Australia Symphony Orchestra as part of a 3-year sponsorship campaign. Besides, together with its seven partners in the North West Shelf Gas Project in Australia, the Company jointly sponsored the visit of the Western Australia Symphony Orchestra to China to promote cultural exchange between the two countries. The Company also sustained its oil aid activities to help relieve poverty by providing community support to different places in the form of provisions and volunteer labour. Meanwhile, the Company and its branches and subsidiaries in various provinces and cities continued to actively participate in a charity project to support mothers in poverty, the donation of money and provisions to the Children's Village in Beijing, blood donations, charity tree planting and other charity events. Apart from the corporate level, the employees of the Company also actively took part in volunteer work, relief support and other charity activities. The Company, as an active supporter of humanitarian causes and a socially responsible corporate citizen, is eager to help the victims of natural disasters with forthcoming and speedy responses through donations of money and provisions. In September 2005, we donated US$100,000 to the areas in the US where Hurricane Katrina wreaked havoc. In the same month, we also made substantial donations of money and provisions to several Chinese regions which were affected by Typhoon Talim. In December 2005, we donated HK$1 million to support student exchange at the Chinese University of Hong Kong. In February 2006, the Company donated US$50,000 to Southern Leyte, Philippines in support of the relief work for a landslide disaster, which caused massive deaths and injuries. 048 Human Resources [Graphic omitted] 049 Bringing Together Talents to Create Win-win Situation In 2005, the Company successfully speeded up its progress in aligning the standards of its human resources management system and corporate management system with those of international energy groups. This effectively created a solid platform to secure the abundant supply of high quality talents to support the Company down the road to globalization by enhancing its competitiveness in the international market. During the year, the Company continued to offer reasonable salary packages and ample training opportunities to provide the staff with sufficient room for career development and added incentives. Innovating Ideas and Optimizing Management Model To further enhance its competitiveness in respect of human resources, the Company started to work out its corporate competence models in a systematic manner under the human-oriented management principle. Various competence models, including core strengths leadership, professional and technical personnel and front line competence models, were designed for different ranks. The establishment of these competence models served to provide guidance on our human resources management with a revolutionary mindset. It also helps to ensure that those who are recruited, selected and promoted are competent for the relevant positions in the Company. Besides, it facilitates the development of a more focused training system so as to nurture and develop our staff more strategically in a target-oriented manner. Moreover, we keep improving our performance review system so that the emphasis on positions will be gradually replaced by the emphasis on career development. 050 Management Transparency and Professional Ethics During the year, the Company continued to emphasize that all employees should be respected and treated equally and fairly. During the year under review, the Company issued a series of policy documents, including the "Management Authority Manual", "Disciplinary Action Policy and Associated Regulations", "Code of Business Conduct and Ethics" and "Conflict of Interest Policy". By doing so, we managed to further improve the standards and increase transparency of the relevant management systems and their information disclosures, and to raise the professional standards of our employees. Comprehensive System and Reasonable Rewards In the course of its pursuit of corporate growth, the Company keeps on improving its salary structure and incentive schemes to reward its staff in recognition of their performance. During the year, we completed the "Compensation Administration and Adjustment Plan" and concluded the reform on our staff remuneration structure. Besides, we also introduced various incentive schemes, such as, among others, the "Project Team Incentive Scheme" and the "New discovery Incentive Scheme". Such efforts help not only further regulate the existing system of staff remuneration and benefits, but also effectively motivate our employees at all levels to contribute more to the business development of the Company. With respect to overseas staff, we continued to improve our remuneration policy to make it competitive in the international market. Besides, we also started to build up international recruitment database to support our overseas business expansion. 051 Staff Training and Long-term Development The Company places great importance to the long-term personal growth of the employees. Therefore, we keep on designing versatile, practical and target-oriented training courses to develop the capabilities of the employees in a systematic and progressive manner. During the year, apart from being active in recruiting external talents, we continued to strengthen internal training and personnel development. We constantly improved our training management system to upgrade our standards in this area. Besides, we took steps to build and develop various online training channels, including the E-learning online platform and other initiatives. Various management and other training programs were provided to our employees for the benefit of their career development, as well as the business development of the Company in order to create a win-win situation. In 2005, the Company organized a number of professional and general management training programs in a strategic manner. During the year, 818 training classes were organized with 12,215 participants, amounting to a total of 95,295 training hours or 50 training hours per person. 052 Directors and Senior Management [Graphic omitted] 053 Executive Directors Fu Chengyu Born in 1951, Mr. Fu received a B.S. degree in geology from the Northeast Petroleum Institute in China and a Master's degree in petroleum engineering from the University of Southern California in the United States. He has over 30 years of experience in the oil industry in the PRC. He previously worked in China's Daqing, Liaohe and Huabei oil fields. He joined China National Offshore Oil Corporation ("CNOOC"), the controlling shareholder of the Company, in 1982 and has since been appointed as the Chairman of the Management Committee formed through a joint venture between CNOOC, BP Amoco, Chevron, Texaco, Phillips Petroleum, Shell and Agip. From 1994 to 1995, Mr. Fu was the Deputy General Manager of China Offshore Oil Eastern South China Sea Corporation, a subsidiary of CNOOC. In December 1995, he was appointed as the Vice President of Phillips China Inc. and the General Manager of the Xijiang Development Project. In 1999, Mr. Fu was appointed as the General Manager of China Offshore Oil Eastern South China Sea Corporation, a subsidiary of CNOOC. In 2000, Mr. Fu was appointed as the Vice President of CNOOC. Subsequently, he was appointed as the Executive Vice President, President and Chief Operating Officer of the Company in 2001. In August 2002 he became the Chairman and Chief Executive Officer of China Oilfield Services Limited ("COSL"), a company listed on The Stock Exchange of Hong Kong Limited and a subsidiary of CNOOC. In October 2003, Mr. Fu was appointed as the President of CNOOC. He was also appointed as the Chairman of the Board of Directors and Chief Executive Officer of the Company with effect from 16 October 2003. In November 2003, Mr. Fu resigned from his Chief Executive Officer position in COSL. He also serves as the Chairman of the Board of Directors of CNOOC Finance Corporation Limited, a subsidiary of CNOOC, as well as CNOOC China Limited and CNOOC International Limited, both being the subsidiaries of the Company. Mr. Fu was appointed as an Executive Director of the Company with effect from 23 August 1999. Luo Han Born in 1953, Mr. Luo received a doctorate degree from the Petroleum University in China. He has over 30 years of experience in the oil industry in the PRC. He joined CNOOC in 1982. From 1993 to 1999, Mr. Luo served as the Vice President of China Offshore Oil Eastern South China Sea Corporation and concurrently as the Chairman of the CACT (CNOOC-AGIP-Chevron-Texaco) operators group, and the Executive Vice President of China Offshore Oil East China Sea Corporation, a subsidiary of CNOOC. In 1999, he served as the General Manager of CNOOC China Limited's Shanghai Branch. Mr. Luo is a Vice President of CNOOC, a position he has held since 2000. He also serves as the Chairman of the Board of Directors of Zhonghai Trust & Investment Co., Ltd., a subsidiary of CNOOC, and the Director of CNOOC China Limited, a subsidiary of the Company. Mr. Luo was appointed as an Executive Director of the Company with effect from 20 December 2000. Zhou Shouwei Born in 1950, Mr. Zhou received a doctorate degree from the Southwest Petroleum Institute in China and is a senior engineer. He joined CNOOC in 1982. Mr. Zhou served as the Deputy General Manager of China Offshore Oil Bohai Corporation, a subsidiary of CNOOC and the General Manager of CNOOC China Limited Tianjin Branch. He was appointed as the Executive Vice President of the Company in September 1999 and the President of the Company in July 2002. Since 2000, Mr. Zhou has been the Vice President of CNOOC. Mr. Zhou serves as the Director and the President of CNOOC China Limited and the Director of CNOOC International Limited, both subsidiaries of the Company. He also serves as the Chairman of CNOOC Southeast Asia Limited, a wholly-owned subsidiary of the Company since April 2003. Mr. Zhou became the chairman of CNOOC Engineering Company Limited, a listed company in Shanghai Stock Exchange and a subsidiary of CNOOC, on 6 December 2003. Mr. Zhou was appointed as an Executive Director of the Company with effect from 23 August 1999. 054 Cao Xinghe Born in 1949, Mr. Cao graduated from Tianjin Politics and Law Management College majoring in Economic Laws and later studied for MBA in Capital University of Economics and Business. Mr. Cao has forty years of experience in the petroleum industry since he started work in 1965. He worked for Shengli oilfield and Dagang oilfield before he joined CNOOC in 1982. From 1985 to 1996, Mr. Cao worked as Manager of Bohai Oil Commercial Company and later as the Manager of Bohai Oil Transportation Company, both being the subsidiaries of CNOOC. From 1996 to 2003, he worked as Deputy General Manager and General Manager of CNOOC Bohai Corporation successively. From April 2003 to July 2004, Mr. Cao worked as Assistant President of CNOOC. He became Vice President of CNOOC in August 2004. Mr. Cao also serves as the Chairman of the Board of Directors of CNOOC Base Group Limited, a subsidiary of CNOOC. Mr. Cao was appointed as an Executive Director of the Company with effect from 31 August 2005. Wu Zhenfang Born in 1952, Mr. Wu is a senior engineer and graduated with a bachelor's degree from Dalian University of Technology, majoring in Offshore Petroleum Engineering and Construction. He later studied for EMBA in Shanghai Jiao Tong University. Mr. Wu joined the petroleum industry in 1971. He joined CNOOC in 1982. From 1993 to 1997, he was Deputy General Manager of CNOOC Nanhai West Corporation. He became the President of CNOOC Chemical Limited in 2000. He was also the Chairman of the Board of Directors of Fudao Fertilizer Limited and CNOOC Chemical Limited from 2001 to 2003 and 2003 to 2005 respectively. From 2003 to 2004, Mr. Wu was Assistant President of CNOOC. In August 2004, he became Vice President of CNOOC. Mr. Wu also serves as the Chairman of a number of subsidiaries of CNOOC (including Guangdong Dapeng LNG Company Limited, CNOOC Fujian Natural Gas Limited, CNOOC Oil & Petrochemicals Co., Ltd. and CNOOC Zhejiang Ningbo LNG Co., Ltd.), the Chairman and President of CNOOC Gas and Power Limited and the Vice Chairman of Shanghai Petroleum and Natural Gas Company Limited. Mr. Wu was appointed as an Executive Director of the Company with effect from 31 August 2005. Wu Guangqi Born in 1957, Mr. Wu is a geologist and graduated with a Bachelor of Science degree from the Ocean University of China, majoring in Marine Geology. He also holds a master's degree in Management from the China Petroleum University. Mr. Wu joined CNOOC in 1982. He became the Deputy General Manager of CNOOC Oil Technical Services Company, a subsidiary of CNOOC, in 1994. Mr. Wu was appointed as Director of the Administration Department of CNOOC in 1995 and became the Director of the Ideology Affairs Department of CNOOC in 2001. Mr. Wu was appointed Assistant President in 2003, and has been Vice President of CNOOC since 2004. Mr. Wu has also served as an Independent Non-executive Director of China Yangtze Power Limited, a company listed on the Shanghai Stock Exchange, since May 2003, and the Compliance Officer of the Company since 1 June 2005. Mr. Wu was appointed as an Executive Director of the Company with effect from 1 June 2005. Yang Hua Born in 1961, Mr. Yang is an engineer and graduated from Petroleum University with a B.S. degree in Petroleum Engineering. He also received a MBA degree from the Sloan School of Management at MIT as a Sloan Fellow. Mr. Yang joined CNOOC in 1982 and has over 23 years' experience in petroleum exploration and production. Mr. Yang spent the first-eleven year of his career with CNOOC Research Center to serve as a number of positions including the Director of Field Development Department, the Manager for Reservoir Engineering Department, the Project Manager and Team Leaders. Mr. Yang spent his second-twelve year with international business, corporate finance and capital market in the Company and its subsidiaries. From 1993 to 1999, he served as the Deputy Chief Geologist, the Deputy Director and the Acting Director for Overseas Development Department of the Company and the Vice President of CNOOC International Limited, a wholly-owned subsidiary of the Company. In 1999, he became a Senior Vice President of the Company and then became an Executive Vice President in December 2005. From 2002 to 2003, Mr. Yang was the Director and President of CNOOC Southeast Asia Limited, a wholly-owned subsidiary of the Company. He was appointed as the Chief Financial Officer of the Company with effect from 1 January 2005. He also serves as the Director of CNOOC International Limited. Mr. Yang was appointed as an Executive Director with effect from 31 August 2005. 055 Independent Non-executive Directors Chiu Sung Hong Born in 1947, Mr. Chiu received an LL.B. degree from the University of Sydney. He is admitted as a solicitor of the Supreme Court of New South Wales and the High Court of Australia. He has over 30 years' experience in legal practice and is a director of a listed company in Australia. Mr. Chiu is the founding member of the Board of Trustees of Australian Nursing Home Foundation and served as the General Secretary of the Australian Chinese Community Association of New South Wales. Mr. Chiu was appointed as an Independent Non-executive Director of the Company with effect from 7 September 1999. Kenneth S. Courtis Born in 1946, Dr. Courtis was the Managing Director of Goldman Sachs and Vice Chairman of Goldman Sachs Asia and retired in March 2006. He specializes in economics and strategy throughout the Asia-Pacific region as well as in Europe and North America. After graduating with honors from Glendon College in Toronto, Dr. Courtis received an M.A. in international economics from Sussex University, England, an M.B.A. in finance and strategy from the European Institute of Business Administration and a Ph.D. from the Institute of Economic and Political Studies in Paris. Prior to joining Goldman Sachs, he served as Chief Asia Economist and Strategist for Deutsche Bank. Dr. Courtis was appointed as an Independent Non-executive Director of the Company with effect from 11 November 2002. Evert Henkes Born in 1943, Mr. Henkes served as the CEO of Shell global chemical business from 1998 to 2003. Since joining Shell in 1973, he held various executive positions worldwide, including Managing Director of Shell Chemicals UK Ltd., Managing Director of Shell UK, President of Billiton Metals, Shell's Metals Coordinator, Shell's Chemical Coordinator, and Director of Strategy & Business Services of Shell International Chemicals Ltd. He also served as directors in regional and global industrial bodies, including CEFIC and ICCA. He is also a director of Tate & Lyle Plc, SembCorp Industries Ltd. and Outokumpu Oy. Mr. Henkes was appointed as an Independent Non-executive Director of the Company with effect from 16 September 2003. Tse Hau Yin, Aloysius Born in 1948, Mr. Tse is a fellow of The Institute of Chartered Accountants in England and Wales, and the Hong Kong Institute of Certified Public Accountants ("HKICPA"). Mr. Tse is a past president of the HKICPA. He joined KPMG in 1976 and became a partner in 1984 and retired in March 2003. Mr. Tse was a non-executive Chairman of KPMG's operations in the PRC and a member of the KPMG China advisory board from 1997 to 2000. Mr. Tse is currently an independent non-executive director of China Construction Bank Corporation, China Telecom Corporation Limited, Wing Hang Bank, Limited and Linmark Group Limited, companies listed on The Stock Exchange of Hong Kong Limited. Mr. Tse is also the chairman of the International Advisory Council of the People's Municipal Government of Wuhan. Mr. Tse was appointed as an Independent Non-executive Director of the Company with effect from 8 June 2005. 056 Lawrence J. Lau Born in 1944, Professor Lau is an economist and graduated with a B.S. degree (with Great Distinction) in Physics and Economics from Stanford University in 1964, and received his M.A. and Ph.D. degrees in Economics from the University of California at Berkeley in 1966 and 1969 respectively. Professor Lau joined the faculty of the Department of Economics at Stanford University in 1966, becoming Professor of Economics in 1976 and the first Kwoh-Ting Li Professor of Economic Development at Stanford University in 1992. From 1992 to 1996, he served as a Co-Director of the Asia-Pacific Research Center at Stanford University, and from 1997 to 1999, as the Director of the Stanford Institute for Economic Policy Research. He was also awarded the honorary degree of Doctor of Social Sciences by the Hong Kong University of Science and Technology in 1999. Professor Lau has authored or edited five books and published more than one hundred and sixty articles and notes in professional journals. Professor Lau is an Honorary Professor of a large number of universities and institutions in mainland China such as the Institute of Systems Science at the Chinese Academy of Sciences, Jilin University, Nanjing University, Renmin University of China, Shantou University, Southeast University and the School of Economics and Management, Tsinghua University. In July 2004, Professor Lau assumed office as Vice-Chancellor of The Chinese University of Hong Kong. He currently provides useful public service to the local community in his capacity as member of the Executive Committee of the HKSAR Government's Commission on Strategic Development, the Advisory Committee of the Independent Commission Against Corruption, and the Steering Committee on Innovation and Technology. He also serves on the Board of Directors of the Hong Kong Science and Technology Park Corporation as an independent non-executive director, as well as the Far EasTone Corporation as an independent director and the Shin Kong Financial Holdings Corporation as an independent supervisor, both listed companies in Taiwan. Professor Lau was appointed as an Independent Non-executive Director of the Company with effect from 31 August 2005. Company Secretary Cao Yunshi Born in 1945, Mr. Cao is the Company Secretary, General Counsel and a Senior Vice President of the Company. He received a B.S. degree from the Beijing Petroleum Institute and studied law at the Law School of Columbia University. He joined CNOOC in 1982. From 1992 to 1999, Mr. Cao was the General Manager of the Legal Department of CNOOC. He has been the General Counsel of CNOOC since 1999. Mr. Cao is a senior economist and licensed lawyer in the PRC. He has extensive experience in production sharing contracts. Other Members of Senior Management Liu Jian Born in 1958, Mr. Liu is the Executive Vice President of the Company. He graduated from Huazhong University of Science and Technology with a B.S. degree and received his MBA degree from Tianjin University in 2000. He is responsible for the management of oil/gas field development and production. Mr. Liu joined CNOOC in 1982. He served as the manager of CNOOC Bohai Corporation, the Deputy General Manager of the Tianjin Branch, the General Manager of the Zhanjiang Branch, the Senior Vice President and General Manager of the Department of Development and Production at CNOOC. Chen Wei Born in 1958, Mr. Chen is a Senior Vice President of the Company and General Director of the CNOOC China Limited Research Center. He received his B.S. degree from Petroleum University and holds an MBA degree from Tsinghua University. He has over 23 years of experience in petroleum exploration and production. Mr. Chen joined CNOOC in 1984 and previously served as the Deputy Manager for the Exploration and Development Department of CNOOC Research Center, the Deputy Manager of the Overseas Research Department, the Manager of the Information Department, the Deputy Director of CNOOC Research Center and the General Manager of the Human Resources Department of CNOOC, and the Senior Deputy General Manager & General Manager of our Administration Department of CNOOC Limited. 057 Zhang Guohua Born in 1960, Mr. Zhang is a Senior Vice President of the company and General Manager of CNOOC China limited-Shanghai. He graduated from Qingdao Oceanographic Institute with a B.S. degree. He studied in the Business Institute of University of Alberta in Canada in 2001. He joined CNOOC in 1982 and served as Manager of the Exploration Department of China Offshore Oil Naihai West Corporation, Chief Geologist of CNOOC Research Center, Assistant to General Manager of CNOOC China Limited and General Manager of CNOOC limited Exploration Department. Li Ning Born in 1963, Mr. Li is a Senior Vice President of the Company and General Manager of CNOOC Limited Shenzhen Branch. He received his B.S. degree from Petroleum University of China and holds a MBA degree from Tianjin University. Mr. Li joined CNOOC in 1983 and served as Vice President of Design & Engineering Corporation of CNOOC, Vice General Manager of Engineering Department of CNOOC, General manager of DongFang 1-1 project, Vice General Manager of CNOOC Limited Zhanjiang Branch and General Manager of Engineering Department. Mr. Li was appointed as Senior Vice President of CNOOC Limited in 2003. Chen Bi Born in 1961, Mr. Chen is a Vice President of CNOOC Limited and General Manager of CNOOC China Limited-Tianjin. He graduated from the Development Department of Southwest Petroleum Institute, and acquired the Bachelor of Engineering. He received a Master's degree in Petroleum Engineering Department of Edinburgh Heriot-Watt University in 1988. He has received a degree of Master of Business Administration from Tsinghua University in 2000. Mr. Chen joined CNOOC in 1982. He served as the Deputy Manager of CNOOC Nanhai West Corporation Oil Production Company, Director of Production Section of the Development and Production Department of CNOOC Limited Deputy Manager and then General Manager of Development and Production Department of CNOOC Limited. Zhu Weilin Born in 1956, Mr. Zhu is a Vice President and General Manager of Exploration Department. He graduated from Tongji University with a Ph.D degree. Mr. Zhu joined CNOOC in 1982. He served as the General Geologist of CNOOC Research Center, the Deputy Manager and Chief Manager of Exploration Department. of CNOOC Limited, and the General Manager of the Zhanjiang Branch. Zhu Mingcai Born in 1956, Mr. Zhu is a Vice President of CNOOC Limited and General Manager of CNOOC International Limited. He graduated from South West Petroleum Institute with B.S. degree and received a MBA degree from the Management School of Lancaster University in UK. Mr. Zhu joined CNOOC in 1985. He served as the Vice President of CNOOC Bohai Corporation, the General Manager of Tianjin Branch and the President of Shenzhen Branch. Fang Zhi Born in 1962, Mr. Fang is a Vice President of CNOOC Limited and the President of CNOOC Southeast Asia Ltd. and is responsible for the company's businesses in Indonesia. He graduated from Zhejiang University with a B.S. degree and was conferred a MBA degree by the University of Birmingham in 1995. Mr. Fang joined CNOOC in 1982. He served as Deputy Director of the Research Center and Manager of Exploration and Development Department in China National Offshore Oil Nanhai East Corporation, Deputy General Manager of CNOOC-AMOCO Liuhua Joint Operating Group, Deputy General Manager and General Manager of CNOOC China Limited Shenzhen Branch during his career in the domestic operations. Changes in Director and Senior Management of the Company In April 2005, Mr. Erwin Schurtenberger resigned from the post of Independent Non-executive Director due to health reason. In June 2005, Mr. Jiang Longsheng was no longer an Executive Director of the Company due to retirement. Mr. Wu Guangqi was appointed as Executive Director to replace Mr. Jiang Longsheng. He was also appointed as the compliance officer. Mr. Tse Hau Yin, Aloysius was appointed as Independent Non-executive Director. In August 2005, Mr. Cao Xinghe, Mr. Wu Zhenfang and Mr. Yang Hua was appointed as Executive Directors of the Company and Professor Lawerence J. Lau was appointed as Independent Non-executive Director. In December 2005, Mr. Yang Hua and Mr. Liu Jian was appointed as Executive Vice President of the Company. 058 Report of the Directors The directors (the "Directors") of the Company are pleased to present their report together with the audited financial statements of the Company for the year ended 31 December 2005. PRINCIPAL ACTIVITIES The principal activity of the Company is investment holding of its subsidiaries, (together with the Company collectively referred to as the "Group"). These subsidiaries are principally engaged in the exploration, development, production and sales of crude oil and natural gas and other petroleum products. SUMMARY OF FINANCIAL INFORMATION AND OPERATING RESULTS Please refer to the financial summary on page 2 for a summary of the assets and liabilities of the Group as at 31 December 2005 and the operating results for the year then ended. LOANS Please refer to note 27 to the financial statements on pages 118 to 119, for details of the long-term bank loans of the Group for the year ended 31 December 2005. PROPERTY, PLANT AND EQUIPMENT Please refer to note 18 to the financial statements on pages 112 to 113 for net movements in property, plant and equipment of the Group for the year ended 31 December 2005. RESERVES The distributable reserves of the Company as at 31 December 2005, as calculated under section 79B of the Companies Ordinance (Cap. 32 of the Laws of Hong Kong), amounted to RMB7,762,096,000. Please refer to the statement of changes in equity on pages 74 to 75 and note 33 to the financial statements on page 133 to 134 for movements in the reserves of the Group and the Company, respectively, for the year ended 31 December 2005. SUBSIDIARIES AND ASSOCIATED COMPANIES Particulars of the Company's subsidiaries and associated companies as at 31 December 2005 are set out in notes 20 and 21 to the financial statements on pages 113 to 116. DIVIDENDS An interim dividend of HK$0.05 per share and a special interim dividend of HK$0.05 per share was declared on 30 August 2005 and paid to the shareholders of the Company on 29 September 2005. The Directors recommend the payment of a final dividend of HK$0.10 per share for the year ended 31 December 2005 payable on 7 June 2006 to all shareholders on the register of members of the Company on 24 May 2006 subject to shareholders' approval. RETIREMENT BENEFITS Please refer to note 34 to the financial statements on page 135 for details of the retirement benefits of the Group for the year ended 31 December 2005. MAJOR SUPPLIERS AND CUSTOMERS Purchases from the largest supplier of the Group for the year ended 31 December 2005 represented approximately 17.4% of the Group's total purchases. The total purchases attributable to the five largest suppliers of the Group accounted for approximately 41.4% of the total purchases of the Group for the year then ended. Sales to the largest customer for the year ended 31 December 2005 represented approximately 11.3% of the Group's total revenue. The total sales attributable to the five largest customers of the Group accounted for approximately 35.8% of the total oil and gas sales of the Group for the year ended 31 December 2005. 059 For the year ended 31 December 2005, except for the continuing connected transactions with its indirect controlling shareholder China National Offshore Oil Corporation ("CNOOC") and its associates, as disclosed in the section headed "Connected Transactions" below, none of the Directors or their respective associates or any shareholder of the Company (which to the knowledge of the Directors owns more than 5% of the Company's share capital) had any interests in the five largest suppliers or customers of the Group. CONNECTED TRANSACTIONS The Independent Non-executive Directors have confirmed that the following connected transactions for the year ended 31 December 2005 to which any member of the Group was a party were entered into by the Group: 1. in the ordinary and usual course of its business; 2. either (a) on normal commercial terms, or (b) where there was no available comparison, on terms no less favourable to the Group than those available to or from independent third parties; and 3. in accordance with the relevant agreement governing them on terms that were fair and reasonable so far as the shareholders of the Company were concerned and in the interests of the shareholders of the Company as a whole. The Independent Non-executive Directors have further confirmed that for the year ended 31 December 2005: 1. the aggregate annual volume of transactions under the materials, utilities and ancillary services supply agreements did not exceed 10% of the audited consolidated total revenues of the Company for the year ended 31 December 2004; 2. the aggregate annual volume of transactions in relation to technical services did not exceed RMB 7,218 million (being the revised cap for the year ended 31 December 2005, as approved by the independent shareholders of the Company on 31 December 2005); 3. the aggregate annual volume of transactions in relation to research and development services for particular projects did not exceed RMB 153 million; 4. the aggregate annual volume of transactions in relation to sales of crude oil, condensate oil and liquefied petroleum gas did not exceed 82% of the audited consolidated total revenues of the Group in the year ended 31 December 2004; 5. the amount paid under the general research and development services agreement did not exceed RMB 110 million; 6. the aggregate amounts paid under the lease and management agreements did not exceed RMB 78 million; and 7. the maximum outstanding balance of deposits (including interest received in respect of these deposits) placed with CNOOC Finance Corporation Limited did not exceed RMB 6,800 million. The auditors of the Group have reviewed the connected transactions referred to in paragraphs 1 to 7 above and confirmed to the Directors that: 1. the transactions have received the approval of the Directors; 2. the transactions were in accordance with the pricing policies as stated in the Company's financial statements; 3. the transactions were entered into in accordance with the terms of the agreements governing the transactions; and 4. the amount of the transactions has not exceeded the cap for which waiver was granted. Please also refer to note 30 to the financial statements on pages 121 to 123 for a summary of the related party transactions which include the Group's connected transactions. 060 In order to present a more coherent, logical and understandable picture to shareholders, and also to enable the Company to monitor the status of connected transactions following each category more effectively going forward, the Company has adopted a new categorisation for continuing connected transactions. On 8 December 2005, the Company entered into three comprehensive framework agreements with each of CNOOC, China Oilfield Services Limited and Offshore Oil Engineering Co., Ltd respectively for the provision (1) by the Group to CNOOC and/or its associates and (2) by CNOOC and/or its associates to the Group, of a range of products and services which may be required and requested from time to time by either party and/or its associates in respect of the new categories of continuing connected transactions. The term of each of the comprehensive framework agreements is for a period of two years from 1 January 2006. The new categorisation and caps for each category of continuing connected transactions as approved by the independent shareholders of the Company on 31 December 2005 which will apply to the Company for the period from 1 January 2006 to 31 December 2007 are as follows: Categories of continuing connected transactions Annual caps Provision of exploration, oil and gas development, oil and gas production as well as marketing, management and ancillary services by CNOOC and/or its associates to the Group (a) Exploration and For the two years ending 31 RMB2,117 million support services and RMB2,293 million, respectively (b) Oil and gas field For the two years ending 31 December 2007, development and RMB7,628 million and RMB10,458 million, support services respectively (c) Oil and gas field For the two years ending 31 December 2007, production and RMB3,935 million and RMB4,132 million, support services respectively (d) Marketing, For the two years ending 31 and December 2007, management RMB478 million and RMB504 million, respectively ancillary services (e) FPSO vessel leases For the two years ending 31 December 2007, RMB453 million and RMB463 million, respectively Provision of management, technical, facilities and ancillary services, including the supply of materials from the Group to CNOOC and/or its associates Provision of management, For the two years ending 31 December 2007, technical, facilities and RMB50 million and RMB100 million, respectively ancillary services, including the supply of materials to CNOOC and/or its associates Sales of petroleum and natural gas products by the Group to CNOOC and/or its associates (a) Sales of petroleum For the two years ending 31 December and natural 2007, RMB33,469 million and RMB44,199 million, gas products respectively (b) Long term sales of For the two years ending 31 December natural gas and 2007, RMB1,960 million and RMB3,599 million, liquefied natural gas respectively SHARE CAPITAL Please refer to note 32 to the financial statements on pages 124 to 132 for details of movements in the Company's share capital for the year ended 31 December 2005. 061 SHARE OPTION SCHEMES The Company has adopted the following share option schemes for the grant of options to the Company's Directors, senior management and other eligible grantees: 1. Pre-Global Offering Share Option Scheme; 2. 2001 Share Option Scheme; 3. 2002 Share Option Scheme; and 4. 2005 Share Option Scheme. Under these share option schemes, the Remuneration Committee of the Company's Board of Directors will from time to time propose for the Board's approval for the recipient of and the number of shares underlying each option. The maximum aggregate number of shares (including those that could be substituted for under the Pre-Global Offering Share Option Scheme, the 2001 Share Option Scheme, the 2002 Share Option Scheme and the 2005 Share Option Scheme) which may be granted shall not exceed 10% of the total issued share capital of the Company as at 31 December 2005, being the date on which the shareholders of the Company approved a new share option scheme, excluding shares issued upon exercise of options granted under these schemes from time to time. Please refer to note 32 to the financial statements on pages 124 to 132 for details regarding each of the share option scheme of the Company and options granted by the Company pursuant to each of the Pre-Global Offering Share Option Scheme, the 2001 Share Option Scheme, the 2002 Share Option Scheme and the 2005 Share Option Scheme. During the year ended 31 December 2005, 2,300,100 options granted under the share option schemes of the Company had been exercised. Save as those disclosed in note 32 to the financial statements on pages 124 to 132, no right to subscribe for equity or debt securities of the Company has been granted by the Company to, nor have any such rights been exercised by, any other person during the year ended 31 December 2005. PURCHASE, SALE OR REDEMPTION OF SHARES There was no purchase, sale or redemption of the Company's shares by the Company, or any of its subsidiaries during the year ended 31 December 2005. SUBSTANTIAL SHAREHOLDERS' INTERESTS IN SHARE CAPITAL As at 31 December 2005, the following persons (other than the Directors and chief executives of the Company) had interests in the shares of the Company as recorded in the register required to be kept by the Company under section 336 of the Securities and Futures Ordinance ("SFO"): Ordinary Shares Percentage of Directly Indirectly Total Issued held held Shares ---------------------------------------------------------------------------------------------------------------- (i) CNOOC (BVI) Limited ("CNOOC (BVI)") 28,999,999,995 -- 70.64% (ii) Overseas Oil & Gas Corporation, Limited 5 28,999,999,995 70.64% ("OOGC") (iii) CNOOC -- 29,000,000,000 70.64% Note: CNOOC (BVI) is a wholly-owned subsidiary of OOGC, which is in turn a wholly-owned subsidiary of CNOOC. Accordingly, CNOOC (BVI)'s interests are recorded as the interests of OOGC and CNOOC. 062 All the interests stated above represent long positions. Save as disclosed above, as at 31 December 2005, the Company is not aware of any other person having interests or short positions (other than the Directors and chief executives of the Company) in the shares or underlying shares of the Company as recorded in the register required to be kept under section 336 of the SFO. DIRECTORS AND SENIOR MANAGEMENT OF THE COMPANY Please refer to pages 52 to 57 for information concerning the Directors and senior management of the Company. DIRECTORS' INTERESTS Apart from holding personal interests in options to subscribe for shares in the Company granted under the share option schemes of the Company (as set out in note 32 to the financial statements on pages 124 to 132), as at 31 December 2005, none of the Directors and chief executives of the Company had registered an interest or short position in the shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO), or as being recorded pursuant to section 352 of the SFO, or as otherwise notified to the Company and the HKSE pursuant to the Model Code. All the interests held by the Company's directors and chief executive represent long positions. DIRECTORS' SERVICE CONTRACTS AND INTERESTS IN CONTRACTS No re-electing Director has an unexpired service contract with the Company which is not determinable by the Company within one year without payment of compensation (other than normal statutory obligations). Save as disclosed in this annual report, as at 31 December 2005 or during the year, none of the Directors had a material interest, whether directly or indirectly, in any contract of significance to the business of the Group to which the Company or any of its subsidiaries was a party. EMOLUMENTS OF THE DIRECTORS AND THE FIVE HIGHEST PAID INDIVIDUALS Please refer to notes 12 and 13 to the financial statements on pages 105 to 107 for details of the emoluments of the Directors and the five highest paid individuals of the Company. MATERIAL LEGAL PROCEEDINGS As at 31 December 2005, the Company was not involved in any material litigation or arbitration and no material litigation or claims was pending or threatened or made against the Company so far as the Company is aware. COMPLIANCE WITH THE CODE ON CORPORATE GOVERNANCE PRACTICES The Company is committed to high standards of corporate governance through the establishment of an efficient framework of policies, procedures and systems. Except for deviations from the code provisions A.2.1, A.4.1, A.4.2 and B.1.3, the Company has complied with the code provisions of the Code on Corporate Governance Practices as set out in Appendix 14 of the Listing Rules throughout the year ended 31 December 2005. Please refer to the Corporate Governance Report on pages 28 to 41 for details. AUDITORS Ernst & Young was appointed as the auditors of the Company for the year ended 31 December 2005 and has audited the accompanying financial statements. A resolution to re-appoint Ernst & Young as auditors of the Company will be proposed at the forthcoming annual general meeting to be held on 24 May 2006. SUFFICIENCY OF PUBLIC FLOAT As at the date of this report, the Directors confirmed that based on information that is publicly available to the Company and within the knowledge of the Directors, the Company had maintained sufficient amount of public float as required under the Listing Rules. 063 PROCEDURES FOR DEMANDING A POLL Pursuant to Article 69(a) of the articles of association of the Company, a resolution put to the vote of a general meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded by: (i) the Chairman of such meeting; or (ii) at least three members present in person (or in the case of a member being a corporation, by its duly authorised representative) or by proxy and entitled to vote at the meeting; or (iii) any member or members present in person (or in the case of a member being a corporation, by its duly authorised representative) or by proxy and representing the aggregate not less than one-tenth of the total voting rights of all members having the right to attend and vote at the meeting; or (iv) any member or members present in person (or in the case of a member being a corporation, by its duly authorised representative) or by proxy and holding shares conferring a right to attend and vote at the meeting on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all shares conferring that right. By Order of the Board Fu Chengyu Chairman Hong Kong, 24 March 2006 064 Management Discussion and Analysis BUSINESS REVIEW AND PROSPECTS As at 31 December 2005, our total revenue amounted to RMB69,455.7 million (US$8,470.4 million), representing a year-on-year increase of 25.8%. Net profit amounted to RMB25,323.1 million (US$3,088.3 million), representing a year-on-year increase of 56.9%. The profit growth was attributable to the following reasons: due to the increased oil price and high market demand, we seized favorable opportunities from such optimism and strengthened our exploration and development to actively expand our production capacity of oil and gas. We continued to implement effective cost control measures and maintained our leadership position in production cost per barrel among our peers. As at 31 December 2005, the Company's basic and diluted earnings per share were RMB0.62 and RMB0.61 respectively. Looking ahead, it is expected that the global economy will maintain positive development and the demand for energy will continue to rise. It apparently appears that oil price will likely stay at high level. We will increase our capital expenditure and strengthen exploration activities. More work will be done on the acquisitions of seismic data as well as exploration drilling. The development projects will also be conducted in a continual and highly efficient manner. There will be sixteen new projects in progress in 2006, of which ten of them are expected to commence operation during the year. The large number of oil and gas fields put into development are also expected to contribute positively to achieve the Company's production target. In 2006, we will consistently maintain a healthy financial position and continue to expand our overseas development and pursuit of opportunities for acquisition. At the same time, our exploration work will be extended to deepwater area. The management remains confident in the development potential of the Company. CONSOLIDATED NET PROFIT Our consolidated net income after tax was RMB25,323.1 million (US$3,088.3 million) in 2005, an increase of RMB9,184.0 million (US$1,120.0 million), or 56.9% from RMB16,139.1 million in 2004. REVENUE Income from our oil and gas sales for 2005 was RMB53,417.7 million (US$6,514.5 million), respesenting an increase of RMB16,531.7 million (US$2,016.1 million), or 44.8% from RMB 36,886.0 million in 2004. The increase was attributable to the high oil price, whilst growth in production also attributed to higher profits in the Company. The average realised price for our crude oil was US$47.31 per barrel in 2005, respesenting an increase of US$11.9, or 33.6% from US$35.41 per barrel in 2004. Sale of crude oil amounted to 129.8 million barrels, respesenting an increase of 11.6% over 2004. The average realised price for our natural gas was US$2.82 per thousand cubic feet in 2005, respesenting an increase of US$0.07, or 2.6% from US$2.75 per thousand cubic feet in 2004. At the same time, sales volume of our natural gas increased by 6.8% from 21.9 million BOE in 2004 to 23.4 million BOE in 2005. In 2005, our net marketing profit, which was derived from marketing revenue less purchase cost of crude oil and oil products, was RMB197.2 million (US$24.1 million), respesenting a decrease of RMB30.7 million (US$3.7 million), or 13.5%, from RMB227.9 million in 2004. Marketing revenue from the Company's wholly-owned subsidiary, CNOOC China Limited, was RMB9,430.8 million (US$1,150.1 million), respesenting an increase of RMB1,688.2 million (US$205.9 million) from RMB 7,742.6 million in 2004. The net marketing profit was RMB85.0 million (US$10.4 million), however, 45.7% decreased from the same period last year due to the significant reduction in sales margin which was mainly influenced by market price in local market. Marketing revenue from the Company's wholly-owned subsidiary, China Offshore Oil (Singapore) International Pte Ltd., was RMB6,470.5 million (US$789.1 million). Netting off purchase cost of crude oil and oil production, the net marketing profit was RMB112.2 million (US$13.7 million), or 57.4% increased from the same period last year. Our other income, reported on a net basis, was derived from our other income less corresponding costs. In 2005, our other net income was RMB59.7 million (US$7.3 million), respesenting a decrease of RMB39.1 million (US$4.8 million) from RMB98.8 million in 2004. The decrease mainly came from the fluctuation of income from service fee relating to PSC projects. 065 EXPENSES Operating expenses Our operating expenses in 2005 were RMB5,934.6 million (US$723.7 million), respesenting an increase of RMB864.3 million (US$105.4 million), or 17.0% from RMB 5,070.3 million in 2004. The increase was mainly attributable to the commencement of production of seven new oil and gas fields in China in the year. Operating expenses in 2005 were RMB38.8 (US$4.73) per BOE, an increase of 5.7% from RMB36.7 (US$4.43) per BOE in 2004. Operating expenses offshore China in 2005 were RMB32.5 (US$3.96) per BOE, respesenting an increase of 8.7% from 2004. The increase was mainly attributable to the higher service fees, supply vessels, equipment lease, maintenance materials, chemicals and fuel, resulting from the higher international crude oil price. Operating expenses offshore Indonesia in 2005 were RMB100.2 (US$12.22) per BOE, respesenting an increase of 13.0% from 2004. The increase in operating expenses per barrel for our Indonesian oil fields was due to lower net production volume based on their production sharing models. Based on working interest production, operating expenses in offshore Indonesia in 2005 were RMB48.7 (US$5.94) per BOE. Production taxes Our production taxes for 2005 were RMB2,596.5 million (US$316.7 million), respesenting an increase of RMB870.8 million (US$106.2 million), or 50.5% from RMB1,725.7 million in 2004. The increase was mainly due to the increased income from oil and gas sales. Exploration costs Our exploration costs for 2005 were RMB1,293.7 million (US$157.8 million), a slight decrease of RMB22.5 million (US$2.7 million), or 1.7% from RMB1,316.2 million in 2004, as a result of increase in capitalisation of investment in exploration. Depreciation, depletion and amortisation Our depreciation, depletion and amortisation were RMB5,964.7 million (US$727.4 million) for 2005, respesenting an increase of RMB509.6 million (US$62.1 million), or 9.3% from RMB 5,455.1 million in 2004. Our average depreciation, depletion and amortisation per barrel were RMB39.0 (US$4.75) per BOE which were more or less the same as those in 2004. Dismantlement Our dismantling costs for 2005 were RMB252.9 million (US$30.8 million), an increase of RMB51.3 million (US$6.3 million) from RMB201.6 million in 2004. The increase was primarily due to the increased dismantling costs resulting from the commencement of production at new oil and gas fields and a revision of the dismantlement liabilities for certain existing oil and gas fields. Our average dismantling costs were RMB1.7 (US$0.20) per BOE, a corresponding increase from RMB1.5 (US$0.18) per BOE in 2004. Impairment losses related to property, plant and equipment Our impairment losses for 2005 were RMB90.2 million (US$11.0 million). The impairment was due to the downward revision of the reserve of BZ34-2/4 and HZ19-3 oil and gas fields. The average impairment costs were RMB0.6 (US$0.07) per BOE. Selling and administrative expenses Our selling and administrative expenses for 2005 were RMB1,370.4 million (US$167.1 million), respesenting an increase of RMB266.1 million (US$32.5 million), or 24.1% from RMB1,104.3 million in 2004. Of which, the selling and administrative expenses of companies in China were RMB6.3 (US$0.77) per BOE, respesenting an increase of 14.5% from the previous year. Compared with last year, the increase was mainly attributable to the increase in management fees related to more PSC projects in production, labor costs and general research expenditures occurred in 2005. Finance costs, net of interest income Our net finance costs for 2005 were RMB741.2 million (US$90.4 million), an increase of 215.5% from the net interest expenses of RMB235.0 million in 2004. On one hand, our interest income increased RMB152.4 million from RMB206.9 million in 2004 to RMB359.3 million in 2005. On the other hand, the finance costs increased significantly mainly due to the interest expenses on our US$1 billion bonds issued in December 2004, the losses on fair value changes of the embedded derivative component of the convertible bonds and the effect of increased amount of provision of dismantlement arising from the passage of time. The increases due to the factors mentioned above were RMB164.4 million (US$20.1 million), RMB373.1 million (US$45.5) and RMB79.2 million (US$9.7 million) respectively. 066 Exchange gains/losses, net Our net exchange gains incurred in 2005 were RMB287.0 million (US$35.0 million), an increase of RMB257.7 million (US$31.4 million) from net exchange gains of RMB29.3 million in 2004. Compared with 2004, the increased exchange gains mainly came from the Chinese government's efforts on the improvement of rate-forming mechanism and the following appreciation of RMB in the second half of the year. Investment income Our investment income for 2005 was RMB247.9 million (US$30.2 million), a significant increase of RMB175.5 million (US$21.4 million), or 242.4% from RMB72.4 million in 2004. For the purpose of improving performance of current assets portfolio, we increased the investment in financial instruments such as money market funds. Benefiting from the structural changes in the investment portfolio and the influence from the market, we obtained a favorable return in this year. Share of profits of associates In 2005, there were gains from our investments in Shanghai Petroleum and Natural Gas Company Limited and CNOOC Finance Corporation Limited. Of them, share of profit from Shanghai Petroleum and Natural Gas Company Limited was RMB261.8 million (US$31.9 million), respesenting a decrease of 12.1% from 2004, which was mainly due to the change in tax rate from favorable rate of 16.5% to normal rate of 33.0% and resulting from the increased income tax payment of 2005. Share of profit from CNOOC Finance Corporation Limited was RMB45.3 million (US$5.5 million) during the period, relatively comparable to that from 2004. Non-operating income/expenses, net Our net non-operating income for 2005 was RMB28.6 million (US$3.5 million), and our net non-operating income for 2004 was RMB 519.2 million. The non-operating income in 2004 represented the tax refund from re-investment in China. Income tax Our income tax for the year 2005 was RMB10,977.8 million (US$1,338.8 million), respesenting an increase of RMB4,047.0 million (US$493.5 million), or 58.4% from RMB6,930.8 million in 2004. The primary reason for the increase was the increase in profit before tax. The effective tax rate for 2005 was 30.2%, slightly higher than the effective rate of 30.0% in 2004. Cash generated from operating activities Net cash generated from operating activities in 2005 amounted to RMB32,153.8 million (US$3,921.3 million), respesenting an increase of RMB9,825.9 million (US$1,198.3 million), or 44.0% from RMB22,327.9 million in 2004. The increase in cash was mainly due to an increase in profit before tax of RMB13,231.0 million (US$1,613.6 million), an increase in depreciation, depletion and amortization expenses of RMB509.7 million (US$62.2 million), an increase in finance costs of RMB658.7 million (US$80.3 million), an increase in provision for inventory of RMB35.8 million (US$4.4 million), an increase in dismantlement costs of RMB51.2 million (US$6.2 million), a decrease in share of profits of associates of RMB37.4 million (US$4.6 million), an increase in amortisation of discount of long term guaranteed notes of RMB26.3 million (US$3.2 million), and an increase in impairment losses related to property, plant and equipment of RMB90.2 million (US$11.0 million). Increase of cash flow was also partially offset by an increase of income tax paid of RMB2,447.2 million (US$298.4 million), an increase in our finance exchange gain and loss of RMB257.8 million (US$31.4 million), an increase in investment income received of RMB175.5 million (US$21.4 million), a decrease in the loss on disposal and write off of property, plant and equipment of RMB14.3 million (US$1.7 million), an increase in interest income of RMB152.4 million (US$18.6 million) and a decrease in compensation cost for share based payment of RMB17.5 million (US$2.1 million). In another aspect, compared with 2004, the increase in operating cash flow was partially attributable to the increase in changes of working capital, mainly due to the increase in changes of current assets from operating activities excluding cash and bank balances of RMB2,103.9 million (US$256.6 million), and a simultaneous increase in changes of current liabilities from operating activities of RMB71.0 million (US$8.7 million). 067 Capital expenditures and investments Net cash outflow from investing activities in 2005 was RMB29,349.2 million (US$3,579.3 million), representing an increase of RMB4,742.0 million (US$578.3 million) from RMB24,607.2 million in 2004. In line with our use of "successful efforts" method of accounting, total capital expenditures and investments primarily include successful exploration and development expenditures and purchases of oil and gas properties. Total capital expenditures were RMB17,469.5 million (US$2,130.5 million) in 2005, representing a decrease of RMB1,152.5 million (US$140.6 million), or 6.2%, from RMB18,622.0 million in 2004. Capital expenditures in 2005 mainly comprised of RMB875.8 million (US$106.7 million) for capitalised exploration activities, RMB15,729.7 million (US$1,918.4 million) for development investments, and RMB1,017.0 million (US$124.0 million) for acquisition of 16.69% equity interest of MEG, netting off a tax refund of RMB153.0 million (US$18.7 million) from NWS Project. Our development expenditures in 2005 related principally to the development of PanYu 30-1, Bozhong 25-1/25-1S, PL19-3 phase II, NanPu 35-2 oil and gas fields. In addition, cash outflow was attributable to the increase in time deposits with maturities over three months of RMB3,597.0 million (US$438.7 million), and the net purchase of available-for-sale financial assets of RMB8,282.7 million (US$1,010.1 million). Financing activities The net cash flow arising from financing activities in 2005 was an outflow of RMB7,786.4 million (US$ 949.6 million) while that in 2004 was an inflow of RMB1,970.5 million. Compared with 2004, there was no issuance of debt financing instruments or bank loan increase in 2005. The distribution of dividends of RMB7,772.2 million (US$947.9 million) and the repayment of bank loans of RMB18.7 million (US$2.3 million) by the Company generated a total cash outflow of RMB 7,790.9 million (US$950.1 million). Some cash inflow was generated by the proceeds from the exercise of share options of RMB4.5 million (US$0.5 million) in 2005. Repayment arrangements of our total debts as at 31 December 2005 were as follows: Debt maturities principal only Original currency Total RMB Total US$ Due by 31 December US$ JPY RMB equivalent equivalent ---------------------------------------------------------------------------------------------------------------- (in millions, except percentages) 2006 100.0 271.5 -- 825.7 102.3 2007-2009 1,000.0 271.4 -- 8,088.9 1,002.3 2010-2011 -- -- -- -- -- 2011 and beyond 1,000.0 -- -- 8,070.2 1,000.0 Total 2,100.0 542.9 -- 16,984.8 2,104.6 Percentage of total debt 99.8% 0.2% -- 100.0% 100.0% The gearing ratio of the Company was 19.1%. Gearing ratio is (Total Debt)/(Total Debt + Equity). 068 Market risks Our market risk exposures primarily consist of fluctuations in oil and gas prices, exchange rates and interest rates. Oil and gas price risk As our oil and gas prices are mainly determined by reference to the oil and gas prices in international markets, changes in international oil and gas prices have a large impact on us. International oil and gas prices are volatile, and this volatility has a significant effect on our net sales and net profits. Currency risk Substantially all of the Group's oil and gas sales are denominated in Renminbi and US dollars. In the past decade, the PRC government's policies of maintaining a stable exchange rate and China's ample foreign reserves have contributed to the stability of the Renminbi. Starting from 21 July 2005, China reformed the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Renminbi would no longer be pegged to US dollar. From that day to 31 December 2005, Renminbi has appreciated by approximately 2.5% against US dollars. The appreciation of Renminbi against US dollars may have certain impact on the Group. On one hand, since the benchmark oil and gas prices are usually in US dollars, the Group's oil and gas sales may decrease due to the depreciation of US dollars against Renminbi. On the other hand, the depreciation of US dollars against Remminbi will also decrease the Group's costs for imported equipment and materials. In addition, the debt repayment by the Group will decrease since more than 99% of the Group's debts are also denominated in U.S. dollars. As of the end of 2005, the balance of our yen-denominated loans was only RMB37.3 million. Since the Group has hedged our yen loans against foreign currency swaps, the Group does not expect any exchange risk relating to Japanese yen in the future. Interest rate risk As of the end of 2005, the interest rates for all balance of our debts were fixed. The term of the weighted average balance was approximately 8 years. The average interest rate payable by the Group is favorable under the environment of interest rate hike. Significant investments and material acquisitions i) On 11 March 2005, CNOOC reached agreement with Canadian MEG Energy Corporation, on the acquisition of 18.5% (16.69% on a diluted basis) of the issued shares of MEG Energy Corp., for a consideration of C$150 million. The Company thereby acquired an interest in the oil sand project in Canada, which has a huge development potential. ii) On 23 June 2005, the Company made a merger proposal to Unocal Corporation to acquire all the shares of Unocal Corporation at US$67 per share, or a total consideration of approximately US$18.5 billion. However, in light of huge uncertainties and unbearable risks associated with the political environment in the US, the Company finally withdrew its offer on 2 August 2005. iii) On 8 January 2006, the Company signed a definitive agreement with South Atlantic Petroleum Limited ("SAPETRO") to acquire a 45% working interest in an offshore oil mining license 130 "OML 130" in Nigeria for a cash consideration of US$2.268 billion. Conditional on, among other things, the approval of the Nigerian National Petroleum Corporation ("NNPC") and the PRC government, the transaction is expected to be completed in the first half of 2006. iv) On 27 January 2006, the Company acquired a 35% working interest in the Nigeria OPL229 for a consideration of US$60 million. 069 EMPLOYEES We had 2,696 employees as at 31 December 2005. We have adopted share option schemes for directors, senior management officers and other eligible grantees of the Company since 4 February 2001. The Board has granted options to eligible grantees pursuant to the terms of the relevant schemes in effect from time to time. In 2005, we further improved the implementation and utilization of performance-based assessment system and continued implementing the "target management" and "Balance Score Card" effectively. We also upgraded our remuneration systems and various incentive systems and formulated "Proposal for employees' remuneration and its adjustments". At the same time, we accomplished the task of standardising our internal remuneration and awarded a number of prizes and awards. We effectively awarded employees who made contribution to our development while further standardised the existing remuneration and benefits system. We put great emphasis on the cultivation and development of our staff and increased our efforts and strength on training. By continuously improving the training and management system of the Company, formulating the standard for training as well as establishing and amending on-line training, we provide our staff with all kinds of management and business training, which is beneficial to both our staff and the development of the enterprise.We strive to create a win-win situation for our staff and the enterprise. Furthermore, we continue implementing and refining our competitive remuneration and benefits packages for overseas employees. We have also started establishing a pool of talented staff which will guarantee the provision of the necessary resources to cater for our strategic opportunities for continuous fast growth. CHARGES ON ASSETS Except for the change on the interest of the Group in the NWS Project as discussed in note 4 to the financial statements, the Group had no charge on assets as at 31 December 2005. CONTINGENT LIABILITIES The Group had no contingent liabilities as at 31 December 2005. 070 Report of the Auditors [GRAPHIC OMITTED] Ernst & Young To the shareholders of CNOOC Limited (Incorporated in Hong Kong with limited liability) We have audited the financial statements of CNOOC Limited (the "Company") and its subsidiaries (the "Group") on pages 71 to 145 which have been prepared in accordance with accounting principles generally accepted in Hong Kong. Respective responsibilities of directors and auditors The Companies Ordinance requires the directors to prepare financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion solely to you, as a body, in accordance with Section 141 of the Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Basis of opinion We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. An audit includes an examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company's and the Group's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2005 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Ordinance. Ernst & Young Certified Public Accountants Hong Kong 24 March 2006 071 Consolidated Income Statement Year ended 31 December 2005 (All amounts expressed in thousands of Renminbi, except per share data) Notes 2005 2004 (Restated) -------------------------------------------------------------- REVENUE Oil and gas sales 7, 30 53,417,669 36,886,019 Marketing revenues 8 15,901,325 18,191,353 Other income 136,749 144,691 -------------------------------------------------------------- 69,455,743 55,222,063 -------------------------------------------------------------- EXPENSES Operating expenses (5,934,598) (5,070,344) Production taxes (2,596,543) (1,725,674) Exploration expenses (1,293,687) (1,316,160) Depreciation, depletion and amortisation (5,964,740) (5,455,062) Dismantlement 31 (252,857) (201,637) Impairment losses related to property, plant and equipment (90,190) -- Crude oil and product purchases 8 (15,704,100) (17,963,461) Selling and administrative expenses 10 (1,370,368) (1,104,348) Others (77,062) (45,844) -------------------------------------------------------------- (33,284,145) (32,882,530) -------------------------------------------------------------- PROFIT FROM OPERATING ACTIVITIES 36,171,598 22,339,533 Interest income 359,294 206,872 Finance costs 11 (1,100,532) (441,825) Exchange gains, net 287,027 29,269 Investment income 9 247,893 72,438 Share of profits of associates 307,075 344,469 Non-operating income/(expenses), net 28,579 519,206 -------------------------------------------------------------- PROFIT BEFORE TAX 9 36,300,934 23,069,962 Tax 14 (10,977,812) (6,930,826) -------------------------------------------------------------- NET PROFIT 15 25,323,122 16,139,136 ============================================================== 072 Notes 2005 2004 (Restated) -------------------------------------------------------------- DIVIDENDS Special interim dividend declared in place of 2003 final dividend 16 -- 2,617,526 Interim dividend 16 2,138,128 1,306,451 Special interim dividend 16 2,138,128 2,177,418 Proposed final dividend 16 4,250,391 1,310,022 Proposed special final dividend 16 -- 2,183,371 -------------------------------------------------------------- 8,526,647 9,594,788 -------------------------------------------------------------- EARNINGS PER SHARE Basic 17 RMB 0.62 RMB 0.39 Diluted 17 RMB 0.61 RMB 0.39 DIVIDEND PER SHARE Special interim dividend declared in place of 2003 final dividend 16 RMB -- RMB 0.06 Interim dividend 16 RMB 0.05 RMB 0.03 Special interim dividend 16 RMB 0.05 RMB 0.05 Proposed final dividend 16 RMB 0.10 RMB 0.03 Proposed special final dividend 16 RMB -- RMB 0.05 ============================================================== 073 Consolidated Balance Sheet 31 December 2005 (All amounts expressed in thousands of Renminbi) Group Notes 2005 2004 (Restated) -------------------------------------------------------------- NON-CURRENT ASSETS Property, plant and equipment, net 18 66,625,167 57,182,026 Intangible assets 19 1,299,643 -- Investments in associates 21 1,401,839 1,327,109 Available-for-sale financial assets 1,017,000 -- -------------------------------------------------------------- Total non-current assets 70,343,649 58,509,135 -------------------------------------------------------------- CURRENT ASSETS Accounts receivable, net 22 5,277,784 4,276,489 Inventories and supplies 23 1,199,626 1,147,294 Due from related companies 30 2,099,197 1,173,374 Other current assets 806,115 556,931 Available-for-sale financial assets/short term investments 24 13,846,935 5,444,113 Time deposits with maturities over three months 12,200,000 8,603,000 Cash and cash equivalents 30 8,991,758 14,091,524 -------------------------------------------------------------- Total current assets 44,421,415 35,292,725 -------------------------------------------------------------- CURRENT LIABILITIES Accounts payable 25 2,867,678 3,102,024 Other payables and accrued liabilities 26 5,206,943 4,191,024 Current portion of long term bank loans 27 825,674 24,364 Due to the parent company 29, 30 488,482 370,060 Due to related companies 30 759,934 211,425 Tax payable 14 3,467,505 2,503,466 -------------------------------------------------------------- Total current liabilities 13,616,216 10,402,363 -------------------------------------------------------------- NET CURRENT ASSETS 30,805,199 24,890,362 -------------------------------------------------------------- TOTAL ASSETS LESS CURRENT LIABILITIES 101,148,848 83,399,497 -------------------------------------------------------------- NON-CURRENT LIABILITIES Long term bank loans 27 24,392 865,211 Long term guaranteed notes 28 16,531,780 16,313,550 Provision for dismantlement 31 4,161,663 3,089,448 Deferred tax liabilities 14 6,827,916 6,688,498 -------------------------------------------------------------- Total non-current liabilities 27,545,751 26,956,707 -------------------------------------------------------------- Net assets 73,603,097 56,442,790 ============================================================== CAPITAL AND RESERVES Issued capital 32 876,635 876,586 Reserves 33 72,726,462 55,566,204 -------------------------------------------------------------- Total equity 73,603,097 56,442,790 ============================================================== Zhou Shouwei Yang Hua Director Director 074 Consolidated Statement of Changes in Equity Year ended 31 December 2005 (All amounts expressed in thousands of Renminbi) Share premium and capital Asset Cumulative Statutory and Issued redemption revaluation translation non-distributive Other Retained share capital reserve reserve reserve reserve reserves earnings Total --------------------------------------------------------------------------------------------------------------- Balances at 1 January 2004 as previously reported 876,978 20,761,205 274,671 22,647 8,050,489 -- 16,750,542 46,736,532 Cumulative adjustment for the adoption of HKFRS 2 (note 2.2) -- -- -- -- -- 63,502 (63,502) -- Cumulative adjustment for the adoption of HKAS 16 (note 2.2) -- -- (274,671) -- -- -- -- (274,671) --------------------------------------------------------------------------------------------------------------- Balances at 1 January 2004 as restated 876,978 20,761,205 -- 22,647 8,050,489 63,502 16,687,040 46,461,861 --------------------------------------------------------------------------------------------------------------- Exchange realignment -- -- -- (42,301) -- -- -- (42,301) --------------------------------------------------------------------------------------------------------------- Total income and expenses for the year recognised directly in equity -- -- -- (42,301) -- -- -- (42,301) Net profit for the year (as restated) -- -- -- -- -- -- 16,139,136 16,139,136 --------------------------------------------------------------------------------------------------------------- Total income and expenses for the year -- -- -- (42,301) -- -- 16,139,136 16,096,835 Repurchases of shares (392) -- -- -- -- -- (60,761) (61,153) Transfer of reserve upon share repurchases -- 392 -- -- -- -- (392) -- 2004 special interim dividend declared in place of 2003 final dividends -- -- -- -- -- -- (2,617,526) (2,617,526) 2004 interim dividends -- -- -- -- -- -- (1,306,451) (1,306,451) 2004 special interim dividends -- -- -- -- -- -- (2,177,418) (2,177,418) Appropriation to statutory reserve -- -- -- -- 1,363,121 -- (1,363,121) -- Equity-settled share option expenses -- -- -- -- -- 46,642 -- 46,642 --------------------------------------------------------------------------------------------------------------- Balances at 31 December 2004 as restated 876,586 20,761,597 -- (19,654) 9,413,610 110,144 25,300,507 56,442,790 =============================================================================================================== Balances at 1 January 2005 as previously reported 876,586 20,761,597 274,671 (19,654) 9,413,610 -- 25,410,651 56,717,461 Cumulative adjustment for the adoption of HKFRS 2 (note 2.2) -- -- -- -- -- 110,144 (110,144) -- Cumulative adjustment for the adoption of HKAS 16 (note 2.2) -- -- (274,671) -- -- -- -- (274,671) --------------------------------------------------------------------------------------------------------------- Balances at 1 January 2005 as restated 876,586 20,761,597 -- (19,654) 9,413,610 10,144 25,300,507 56,442,790 --------------------------------------------------------------------------------------------------------------- 075 Share premium and capital Asset Cumulative Statutory and Issued redemption revaluation translation non-distributive Other Retained share capital reserve reserve reserve reserve reserves earnings Total --------------------------------------------------------------------------------------------------------------- Changes in fair value of available-for- sale investments -- -- -- -- -- 69,069 -- 69,069 Exchange realignment -- -- -- (493,289) -- -- -- (493,289) --------------------------------------------------------------------------------------------------------------- Total income and expenses for the year recognised directly in equity -- -- -- (493,289) -- 69,069 -- (424,220) Net profit for the year -- -- -- -- -- -- 25,323,122 25,323,122 --------------------------------------------------------------------------------------------------------------- Total income and expenses for the year -- -- -- (4 93,289) -- 69,069 25,323,122 24,898,902 2004 final dividends -- -- -- -- -- -- (3,495,962) (3,495,962) 2005 interim dividends -- -- -- -- -- -- (4,276,256) (4,276,256) Exercise of share options 49 4,451 -- -- -- -- -- 4,500 Appropriation to statutory reserve -- -- -- -- 2,268,364 -- (2,268,364) -- Equity-settled share option expenses -- -- -- -- -- 29,123 -- 29,123 --------------------------------------------------------------------------------------------------------------- Balances at 31 December 2005 876,635 20,766,048 -- (512,943) 11,681,974 208,336 40,583,047 73,603,097 =============================================================================================================== *These reserve accounts comprise the consolidated reserves of RMB72,726,462,000 (2004: RMB55,566,204,000 (restated)) in the consolidated balance sheet. 076 Consolidated Cash Flow Statement Year ended 31 December 2005 (All amounts expressed in thousands of Renminbi) Notes 2005 2004 -------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations 35(a) 41,695,648 29,705,761 Income taxes paid (9,849,454) (7,402,280) Interest received 359,294 206,871 Dividends received 232,346 135,000 Short term investment income received 45,785 4,626 Interest paid (329,797) (322,118) -------------------------------------------------------------- Net cash inflow from operating activities 32,153,822 22,327,860 -------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of and prepayment for oil and gas properties 35(b) (864,007) (5,779,140) Additions of property, plant and equipment (16,605,548) (12,842,905) Increase in time deposits with maturities over three months (3,597,000) (6,280,000) Purchase of available-for-sale financial assets/ short term investments (21,487,478) (5,735,093) Disposals of available-for-sale financial assets/ short term investments 13,204,817 6,029,946 -------------------------------------------------------------- Net cash outflow from investing activities (29,349,216) (24,607,192) -------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long term guaranteed notes -- 8,154,085 Repayment of bank loans (18,654) (21,075) Dividends paid (7,772,218) (6,101,395) Share repurchases -- (61,153) Proceeds from exercise of share options 4,500 -- -------------------------------------------------------------- Net cash (outflow)/inflow from financing activities (7,786,372) 1,970,462 -------------------------------------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (4,981,766) (308,870) Cash and cash equivalents at beginning of year 14,091,524 14,400,394 Effect of foreign exchange rate changes, net (118,000) -- -------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR 8,991,758 14,091,524 ============================================================== ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and cash equivalents balances 8,991,758 14,091,524 ============================================================== 077 Balance Sheet 31 December 2005 (All amounts expressed in thousands of Renminbi) Company Notes 2005 2004 -------------------------------------------------------------- NON-CURRENT ASSETS Property, plant and equipment, net 18 1,074 164 Investment in subsidiaries 20 7,766,971 7,766,971 Loans to a subsidiary 20 4,138,290 4,138,290 -------------------------------------------------------------- Total non-current assets 11,906,335 11,905,425 -------------------------------------------------------------- CURRENT ASSETS Other current assets 1,848 5,416 Due from the parent company 29 34 5 Due from subsidiaries 20 22,213,478 13,206,016 Available-for-sale financial assets 24 9,086,576 4,439,554 Cash and cash equivalents 572,792 9,240,575 -------------------------------------------------------------- Total current assets 31,874,728 26,891,566 -------------------------------------------------------------- CURRENT LIABILITIES Other payables and accrued liabilities 52,532 50,244 Due to subsidiaries 20 14,468,726 15,256,082 -------------------------------------------------------------- Total current liabilities 14,521,258 15,306,326 -------------------------------------------------------------- NET CURRENT ASSETS 17,353,470 11,585,240 -------------------------------------------------------------- NET ASSETS 29,259,805 23,490,665 -------------------------------------------------------------- CAPITAL AND RESERVES Issued capital 32 876,635 876,586 Reserves 33 28,383,170 22,614,079 ============================================================== Total equity 29,259,805 23,490,665 ============================================================== Zhou Shouwei Yang Hua Director Director 078 Notes to Financial Statements 31 December 2005 (All amounts expressed in Renminbi unless otherwise stated) 1. CORPORATE INFORMATION CNOOC Limited (the "Company") was incorporated in the Hong Kong Special Administrative Region ("Hong Kong"), the People's Republic of China (the "PRC") on 20 August 1999 to hold the interests in certain entities whereby creating a group comprising the Company and its subsidiaries. During the year, the Company and its subsidiaries (hereinafter collectively referred to as the "Group") were principally engaged in the exploration, development, production and sale of crude oil, natural gas and other petroleum products. The registered office address is 65/F, Bank of China Tower, 1 Garden Road, Hong Kong. In the opinion of the directors, the parent and the ultimate holding company is China National Offshore Oil Corporation ("CNOOC"), a company established in the PRC. 2.1 BASIS OF PREPARATION These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards ("HKFRSs") (which also include Hong Kong Accounting Standards ("HKASs") and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA"), accounting principles generally accepted in Hong Kong ("Hong Kong GAAP") and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention except for available-for-sale investments and derivative financial instruments which have been measured at fair value. These financial statements are presented in Renminbi ("RMB") and all values are rounded to the nearest thousand (RMB'000) except when otherwise indicated. Basis of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December 2005. The results of subsidiaries are consolidated from the date of acquisition being the date on which the Group obtains control and continue to be consolidated until the date that such control ceases. All significant intercompany transactions and balances within the Group are eliminated on consolidation. The acquisition of subsidiaries or an interest in a joint venture or associate during the year has been accounted for using the purchase method of accounting. This method involves allocating the cost of the business combinations to the fair value of the assets acquired, and liabilities and contingent liabilities assumed at the date of acquisition. The cost of the acquisition is measured at the aggregate of the fair value of the assets given, equity instruments issued (if any) and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. 079 2.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS ("HKFRSs") The Hong Kong Institute of Certified Public Accountants has issued a number of new Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and interpretations, herein collectively referred to as the new HKFRSs, which are generally effective for accounting periods beginning on or after 1 January 2005. The following new and revised HKFRSs affect the Group and are adopted for the first time for the current year's financial statements: HKAS 1 Presentation of Financial Statements HKAS 2 Inventories HKAS 7 Cash Flow Statements HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors HKAS 10 Events after the Balance Sheet Date HKAS 12 Income Taxes HKAS 14 Segment Reporting HKAS 16 Property, Plant and Equipment HKAS 17 Leases HKAS 18 Revenue HKAS 19 Employee Benefits HKAS 21 The Effects of Changes in Foreign Exchange Rates HKAS 23 Borrowing Costs HKAS 24 Related Party Disclosures HKAS 27 Consolidated and Separate Financial Statements HKAS 28 Investments in Associates HKAS 31 Interests in Joint Ventures HKAS 32 Financial Instruments: Disclosure and Presentation HKAS 33 Earnings per Share HKAS 36 Impairment of Assets HKAS 37 Provisions, Contingent Liabilities and Contingent Assets HKAS 38 Intangible Assets HKAS 39 Financial Instruments: Recognition and Measurement HKAS 39 Amendment Transition and Initial Recognition of Financial Assets and Financial Liabilities HKFRS 2 Share-based Payment HKFRS 3 Business Combinations 080 2.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS ("HKFRSs") (continued) The adoption of HKASs 1, 2, 7, 8, 10, 12, 14, 17, 18, 19, 21, 23, 24, 27, 28, 31, 33, 36, 37, 38 and HKFRS 3 has no material impact on the accounting policies of the Group and the methods of computation in the Group's financial statements. The impacts of adopting other HKFRSs are detailed as follows: (a) HKAS 16 - Property, Plant and Equipment In prior years, the Group's property, plant and equipment were classified into three categories: oil and gas properties, land and buildings (representing the onshore terminals for oil and gas processing), and vehicles and office equipment. Land and buildings were stated at valuation less accumulated depreciation. Depreciation for land and buildings is calculated on the straight-line basis at an annual rate estimated to write off the valuation of each asset over its expected useful life, ranging from 30 to 50 years. According to HKAS 16, property, plant and equipment are required to be categorised by major component and different useful lives, if any, should be applied in calculating the depreciation. Upon the adoption of HKAS 16, the Group has classified its property, plant and equipment into two categories: oil and gas properties and vehicles and office equipment. The Group has reclassified the onshore terminals previously classified as land and buildings to oil and gas properties as they will be used in similar operations and are expected to have similar economic useful lives. The Group has also decided to change its accounting policy to state the onshore terminals at cost instead of valuation and to amortise those terminals by the unit-of-production method on a property-by-property basis computed based on the total estimated units of proved developed reserves instead of the straight line method. Management believes the new policy will provide more relevant information and consistent accounting approach for oil and gas related assets. The effect of this change in accounting policy is to decrease both property, plant and equipment and the revaluation reserve as at 1 January 2005 and 2004 by RMB 274,671,000. No adjustment was made to the prior years' amounts as the impact on the prior years' consolidated income statements was not material. The effects of the above changes are summarized in note 2.4 to the financial statements. (b) HKASs 32 and 39 - Financial Instruments (i) Investments in equity and debt securities In prior periods, the Group classified its investments in short term debt and equity securities as short term investments which were not intended to be held on a continuing basis and those investments were stated at fair value at the balance sheet date, on an individual investment basis. The gains or losses arising from changes in the fair value of such securities were credited or charged to the income statement in the period in which they arose. Upon the adoption of HKAS 39, these securities held by the Group at 1 January 2005 in the amount of RMB 5,444,113,000 were designated as available-for-sale investments under the transitional provisions of HKAS 39 and accordingly are stated at fair value with gains or losses being recognised as a separate component of equity until subsequent derecognition or impairment. (ii) Convertible bonds In prior periods, convertible bonds were stated at amortised cost. Upon the adoption of HKAS 32 and HKAS 39, the Group's convertible bonds issued with a cash settlement option and other derivative features are split into liability and derivative components based on their fair values for measurement purposes. The effects of the above changes are summarised in note 2.4 to the financial statements. In accordance with HKAS 32, comparative amounts have been restated. 081 2.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS ("HKFRSs") (continued) (c) HKFRS 2 - Share-based Payment In prior periods, no recognition and measurement of share-based transactions in which employees (including directors) were granted share options over shares in the Company were required until such options were exercised by employees, at which time the share capital and share premium were credited with the proceeds received. Upon the adoption of HKFRS 2, when employees (including directors) render services as consideration for equity instruments ("equity-settled transactions"), the cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which the instruments are granted. The main impact of HKFRS 2 on the Group is the recognition of the cost of these transactions and a corresponding entry to equity for employee share options. The revised accounting policy for share-based payment transactions is described in more detail in note 3 "Summary of significant Accounting Policies" below. The Group has adopted the provisions of HKFRS 2 retrospectively to all stock options granted from the date of its incorporation. The effects of adopting HKFRS 2 are summarized in note 2.4 to the financial statements. 2.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS The HKICPA has issued a number of new and revised HKFRSs that are not mandatory for these financial statements. The Group has not early applied these HKFRSs in these financial statements. The following new and revised HKFRSs, although not early adopted by the Group, will have impact on the Group's financial statements in the period of initial application. Unless otherwise stated, the following HKFRSs are effective for accounting periods beginning on or after 1 January 2006: HKAS 1 Amendment Capital Disclosures HKAS 21 Amendment The effects of Changes in Foreign Exchange Rate - Net Investment in a Foreign Operation HKAS 39 Amendment Cash Flow Hedge Accounting of Forecast Intragroup Transactions HKAS 39 Amendment The Fair Value Option HKFRSs 1 & 6 Amendments First-time Adoption of Hong Kong Financial Reporting Standards and Exploration for and Evaluation of Mineral Resources HKFRS 6 Exploration for and Evaluation of Mineral Resources HKFRS 7 Financial Instruments: Disclosures HK(IFRIC)-Int 4 Determining whether an Arrangement contains a Lease HK(IFRIC)-Int 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds 082 2.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS (continued) The HKAS 1 Amendment shall be applied for accounting periods beginning on or after 1 January 2007. The revised standard will affect the disclosures about qualitative information about the Group's objective, policies and processes for managing capital; quantitative data about what the Company regards as capital; and compliance with any capital requirements and the consequences of any non-compliance. HKFRS 6 deals with the accounting for exploration for and evaluation of mineral resources, including oil and gas. This HKFRS should be applied for accounting periods beginning on or after 1 January 2006. The Group expects that the adoption of HKFRS 6 will not have any significant impact on its results of operations and financial position. HKFRS 7 will replace HKAS 32 and has modified the disclosure requirements of HKAS 32 relating to financial instruments. This HKFRS shall be applied for accounting periods beginning on or after 1 January 2007. Except as stated above, the Group expects that the adoption of the other pronouncements listed above will not have any significant impact on the Group's financial statements in the period of initial application. 2.4 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES (a) Effect on the consolidated balance sheet Effect of adopting --------------------------------------------- At 1 January 2005 HKAS 16# HKFRS 2# Effect of new policies Property, plant Recognition of Increase/(decrease) and equipment share-based payment Total RMB'000 RMB'000 RMB'000 Assets Property, plant and equipment, net (274,671) -- (274,671) -------------- Liabilities/equity Asset revaluation reserve (274,671) -- (274,671) Other reserves -- 110,144 110,144 Retained earnings -- (110,144) (110,144) -------------- (274,671) ============== 083 2.4 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES (continued) (a) Effect on the consolidated balance sheet (continued) Effect of adopting ------------------------------------------------------------------- HKAS 16# HKASs 32 HKAS 39* HKFRS 2# At 31 December 2005 and 39* Change in Recognition of Effect of new policies Property, plant Convertible classification of share-based Increase/(decrease) and equipment bonds equity investments payment Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Assets Property, plant and equipment, net (274,671) -- -- -- (274,671) --------------- Liabilities/equity Long term guaranteed notes -- 373,060 -- -- 373,060 Asset revaluation reserve (274,671) -- -- -- (274,671) Other reserves -- -- 69,069 139,267 208,336 Retained earnings -- (373,060) (69,069) (139,267) (581,396) --------------- (274,671) =============== (b) Effects on the balances of equity at 1 January 2004 and at 1 January 2005 Effect of adopting --------------------------------------------- HKAS 16# HKFRS 2# Effect of new policies Property, plant Recognition of Increase/(decrease) and equipment share-based payment Total RMB'000 RMB'000 RMB'000 1 January 2004 Asset revaluation reserve (274,671) -- (274,671) Other reserves -- 63,502 63,502 Retained earnings -- (63,502) (63,502) -------------- (274,671) ============== 1 January 2005 Asset revaluation reserve (274,671) -- (274,671) Other reserves -- 110,144 110,144 Retained earnings -- (110,144) (110,144) -------------- (274,671) ============== * Adjustments taken effect prospectively from 1 January 2005. # Adjustments taken effect retrospectively. 084 2.4 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES (continued) (c) Effect on the consolidated income statement for the years ended 31 December 2005 and 2004 Effect of adopting ----------------------------------------------------- HKAS 16 HKAS 39 HKFRS 2 Recognition of Property, plant Convertible share-based Effect of new policies and equipment bonds payment Total RMB'000 RMB'000 RMB'000 RMB'000 Year ended 31 December 2005 Increase in depreciation, depletion and amortisation 19,269 -- -- 19,269 Increase in a loss on embedded derivatives in convertible bonds -- 373,060 -- 373,060 Increase in selling and administrative expenses -- -- 29,123 29,123 ------------------------------------------------------------------------ Total decrease in profit 19,269 373,060 29,123 421,452 ======================================================================== Year ended 31 December 2004 Increase in selling and administrative expenses -- -- 46,642 46,642 ------------------------------------------------------------------------ Total decrease in profit -- -- 46,642 46,642 ======================================================================== There was no material impact on basic earnings per share and diluted earnings per share for the years ended 31 December 2005 and 2004 for the adoption of the above new policies. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Subsidiaries A subsidiary is a company in which the Company, directly or indirectly, controls more than half of its voting power or issued share capital or controls the composition of its Board of Directors. The results of subsidiaries are included in the Company's income statement to the extent of dividends received and receivable. The Company's interests in subsidiaries are stated at cost less any impairment losses. 085 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Associates An associate is an entity, not being a subsidiary or a jointly-controlled entity, in which the Group has a long term interest of generally not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence. The Group's share of the post-acquisition results and reserves of the associates are included in the consolidated income statement and consolidated reserves, respectively. The Group's proportionate interests in the associates are stated in the consolidated balance sheet at the Group's share of net assets under the equity method of accounting, less any impairment losses. Joint Ventures Certain of the group's activities are conducted through joint arrangements, including the production sharing arrangements detailed in note 5 below. These arrangements are a form of joint venture whereby a contractual arrangment exists between two or more parties to undertake an economic activity that is subject to joint control. These joint arrangements are included in the consolidated financial statements in proportion to the group's interests in the income, expenses, assets and liabilities of these arrangements. Related parties A party is considered to be related to the Group if: (a) the party directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Group ; (ii) has an interest in the Group that gives it significant influence over the Group; or (iii) has joint control over the Group; (b) the party is an associate; (c) the party is a jointly controlled entity; (d) the party is a member of the key management personnel of the Group or its parent; (e) the party is a close member of the family of any individual referred to in (a) or (d); or (f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e). 086 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Impairment of assets Where an indication of impairment exists, or when annual impairment testing for an asset (other than inventories and financial assets) is required, the asset's recoverable amount is estimated. An asset's recoverable amount is calculated as the higher of the asset's or cash-generating unit's value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the income statement in the period in which it arises. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation), had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is credited to the income statement in the period in which it arises, unless the asset is carried at a revalued amount, in which case the reversal of the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset. Property, plant and equipment Property, plant and equipment comprise oil and gas properties, and vehicles and office equipment. (i) Oil and gas properties For oil and gas properties, the successful efforts method of accounting is adopted. The Group capitalises initial acquisition costs of oil and gas properties. Impairment of initial acquisition costs is recognised based on exploratory experience and management judgement. Upon discovery of commercial reserves, acquisition costs are transferred to proved properties. The costs of drilling and equipping successful exploratory wells, all development expenditures on construction, installation or completion of infrastructure facilities such as platforms, pipelines, processing plants and the drilling of development wells, including those renewals and betterments which extend the economic lives of the assets, and the borrowing costs arising from borrowings used to finance the development of oil and gas properties before they are substantially ready for production are capitalised. The costs of unsuccessful exploratory wells and all other exploration costs are expensed as incurred. Exploratory wells are evaluated for economic viability within one year of completion. Exploratory wells that discover potentially economic reserves in areas where major capital expenditure will be required before production would begin and when the major capital expenditure depends upon successful completion of further exploratory work remain capitalised and are reviewed periodically for impairment. 087 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Property, plant and equipment (continued) (i) Oil and gas properties (continued) Productive oil and gas properties and other tangible and intangible costs of producing properties are amortised using the unit-of-production method on a property-by-property basis under which the ratio of produced oil and gas to the estimated remaining proved developed reserves is used to determine the depreciation, depletion and amortisation provision. Costs associated with significant development projects are not depleted until commercial production commences and the reserves related to those costs are excluded from the calculation of depletion. Capitalised acquisition costs of proved properties are amortised by the unit-of-production method on a property-by-property basis computed according to the total estimated units of proved reserves. The Group estimates future dismantlement costs for oil and gas properties with reference to the estimates provided from either internal or external engineers after taking into consideration the anticipated method of dismantlement required in accordance with current legislation and industry practices. The associated cost is capitalised and the liability is discounted and an accretion expense is recognised using the credit-adjusted risk-free interest rate in effect when the liability is initially recognised. (ii) Vehicles and office equipment Vehicles and office equipment are stated at cost less accumulated depreciation and impairment losses. The straight-line method is adopted to depreciate the cost less any estimated residual value of these assets over their expected useful lives. The Group estimates the useful lives of vehicles and office equipment to be five years. Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a recoverable basis among the parts and each part is depreciated separately. Residual values, useful lives and the depreciation method are reviewed and, adjusted if appropriate, at each balance sheet date. An item of property, plant and equipment is derecognised upon disposal or where no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the income statement in the year that the asset is derecognised is the difference between the net sales proceeds and the carrying value of the relevant asset. Intangible assets The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed as least at each balance sheet date. 088 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Research and development costs All research costs are charged to the income statement as incurred. Expenditure (other than relating to oil and gas properties discussed above) incurred on projects to develop new products is capitalised and deferred only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the project and the ability to measure reliably the expenditure during the development. Product development expenditure which does not meet these criteria is expensed when incurred. No development costs were capitalised during the year. Investments and other financial assets Applicable to the year ended 31 December 2004: Short term investment Short term investments are investments in debt and equity securities not intended to be held on a continuing basis and are stated at their fair values on the basis of their quoted market prices at the balance sheet date, on an individual investment basis. The gains or losses arising from changes in the fair value of a security are credited or charged to the income statement in the period in which they arise. Applicable to the year ended 31 December 2005: Financial assets in the scope of HKAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at the balance sheet date. All regular way purchases and sales of financial assets are recognised on the trade date i.e., the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. (a) Financial assets at fair value through profit or loss Financial assets classified as held for trading are included in the category "financial assets at fair value through profit or loss". Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated and effective hedging instruments. Gains or losses on investments held for trading are recognised in the income statement. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date, which are included in non-current assets. Loans and receivables are included in trade and other receivables in the balance sheet. 089 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investments and other financial assets (continued) (c) Held-to-maturity investments During this year, the Group did not hold any investments assets in this category. (d) Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets in listed and unlisted equity securities that are designated as available-for-sale or are not classified in any of the other categories. After initial recognition available-for-sale financial assets are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the income statement. When the fair value of unlisted equity securities can not be reliably measured because (a) the variability in the range of reasonable fair value estimates is significant or that investment or (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value, such securities are stated at cost less any impairment losses. Fair Value The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid price at the close of business at the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm's length market transactions; reference to the current market value of another instrument which is substantially the same; a discounted cash flow analysis; and option pricing models. Impairment of financial assets (Applicable to the year ended 31 December 2005) The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets is impaired. Assets carried at amortised cost If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced either directly or through the use of an allowance account. The amount of the impairment loss is recognised in profit or loss. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. 090 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Impairment of financial assets (Applicable to the year ended 31 December 2005) (continued) If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. Available-for-sale financial assets If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in profit or loss, is transferred from equity to the income statement. Impairment losses on equity instruments classified as available-for-sale are not reversed through profit or loss. Derecognition of financial assets (applicable to the year ended 31 December 2005) A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: o the rights to receive cash flows from the asset have expired; o the Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay in full without material delay to a third party under a "pass-through" arrangement; or o the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group's continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Where continuing involvement takes the form of a written and/or purchased option (including a cash settled option or similar provision) on the transferred asset, the extent of the Group's continuing involvement is the amount of the transferred asset that the Group may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, where the extent of the Group's continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. 091 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Interest-bearing loans and borrowings All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in net profit or loss when the liabilities are derecognised as well as through the amortisation process. Convertible bonds The Group's convertible bonds issued with a cash settlement option and other embedded derivative features are split into liability and derivative components according to their fair values for measurement purposes. The fair value of the liability component is determined using the market rate for an equivalent non-convertible bond on the issuance of convertible bonds and this amount is carried as a long term liability on the amortised cost basis until extinguished on conversion or redemption. The derivative component is remeasured at each balance sheet date and any gains or losses arising from change in the fair value are recognised in the income statement. Both the liability and the related embedded derivative components are presented together for financial statements reporting purposes. Derecognition of financial liabilities (applicable to the year ended 31 December 2005) A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in profit or loss. Derivative financial instruments (applicable to the year ended 31 December 2005) The Group uses currency swaps to hedge its risks associated with currency exchange fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to net profit or loss for the year. The fair value of currency swap contracts is determined by reference to market values for similar instruments. 092 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Inventories and supplies Inventories consist primarily of oil and supplies consist mainly of items for repairs and maintenance of oil and gas properties. Inventories are stated at the lower of cost and net realisable value. Costs of inventories and supplies represent purchase or production cost of goods and are determined on a weighted average basis. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal. Supplies are capitalised to property, plant and equipment when used for renewals and betterments of oil and gas properties and have resulted in an increase in the future economic values of oil and gas properties or are recognised as expenses when used. Cash and cash equivalents For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are payable on demand and form an integral part of the Group's cash management. For the purpose of the balance sheet, cash and cash equivalents comprise cash on hand and at banks, and term deposits with maturities of three months or less which are not restricted to use. Provisions A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation. When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the income statement. Provisions for dismantlement are made based on the present value of the future costs expected to be incurred, on a property-by-property basis, in respect of the Group's expected dismantlement and abandonment costs at the end of the related oil exploration and recovery activities. 093 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Income tax Income tax comprises current and deferred tax. Income tax is recognised in the income statement or in equity if it relates to items that are recognised in the same or a different period directly in equity. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences: o Except where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and o in respect of taxable temporary differences associated with investments in subsidiaries and associates, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. o Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and o in respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Conversely, previously unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantially enacted at the balance sheet date. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. 094 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue recognition Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases: (i) Oil and gas sales Oil and gas sales represent the invoiced value of sales of oil and gas attributable to the interests of the Group, net of royalties and PRC government share oil that are lifted and sold on behalf of the PRC government. Sales are recognised when the significant risks and rewards of ownership of oil and gas have been transferred to customers. Oil and gas lifted and sold by the Group above or below the Group's participating interests in the production sharing contracts result in overlifts and underlifts. The Group records these transactions in accordance with the entitlement method under which overlifts are recorded as liabilities and underlifts are recorded as assets at year end oil prices. Settlement will be in kind when the liftings are equalised or in cash when production ceases. The Group has entered into gas sales contracts with customers which contain take-or-pay clauses. The clauses require those customers to take a specified minimum volume of gas each year. If the minimum volume of gas is not taken, those customers must pay for the deficiency gas, even though the gas is not taken. Those customers can offset the deficiency payment against any future purchases in excess of the specified volume. The Group records any deficiency payments as deferred revenue which is included in other payables until any make-up gas is taken by those customers or the expiry of the contracts. (ii) Marketing revenues Marketing revenues represent sales of oil purchased from the foreign partner under the production sharing contracts and revenues from the trading of oil through the Company's subsidiary in Singapore. The title, together with the risks and rewards of the ownership of such oil purchased from the foreign partners, is transferred to the Group from the foreign partners and other unrelated oil and gas companies before the Group sells such oil to its customers. The cost of the oil sold is included in crude oil and product purchases. (iii) Other income Other income mainly represents project management fees charged to the foreign partners and handling fees charged to customers and is recognised when the services are rendered. (iv) Dividend income Dividend income is recognised when the shareholders' right to receive payment has been established. (v) Interest income Interest income from deposits placed with banks and other financial instruments is recognised on a time proportion basis taking into account the effective yield on the assets. 095 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Employee benefits Share-based payment transactions The Company has adopted share option schemes for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group's operations. Employees (including directors) of the Group will from time to time receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments ("equity-settled transactions"). The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined by using a Black-Scholes model, further details of which are given in note 32. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company, if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the "vesting date"). The cumulative expenses recognised for equity-settled transactions at each balance sheet date until the vesting date reflects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the income statement for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. Where the terms of an equity-settled award are modified, as a minimum, an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expenses not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and is designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph. The Group has adopted the provisions of HKFRS 2 retrospectively to all stock options granted from the date of its incorporation. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share. Retirement and termination benefits The Group participates in defined contribution plans in accordance with local laws and regulations for full-time employees in the PRC and other countries in which it operates. The plans provide for contributions ranging from 5% to 22% of the employees' basic salaries. The Group's contributions to these defined contribution plans are charged to expense in the year to which they relate. 096 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Dividends Final and special final dividends proposed by the directors are classified as a separate allocation of retained earnings within the equity section of the balance sheet, until they have been approved by the shareholders in a general meeting. When these dividends have been approved by the shareholders and declared, they are recognised as a liability. Interim and special interim dividends are simultaneously proposed and declared, because the Company's memorandum and articles of association grant the directors the authority to declare interim dividends. Consequently, interim dividends are recognised immediately as a liability when they are proposed and declared. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e. assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset is determined as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation is determined by applying a capitalisation rate to the expenditures on that asset. The capitalisation rate is the weighted average of the borrowing costs applicable to the borrowings of the group that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalised incurred during a period should not exceed the amount of borrowing cost incurred during that period. Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds, including amortisation of discounts or premiums relating to the borrowing, and amortisation of ancillary costs incurred in connection with arranging the borrowing. Foreign currencies These financial statements are presented in RMB. Each entity in the Group maintains its books and records in its own functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the balance sheet date. Exchange differences are dealt with in the income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. On consolidation, the balance sheet of the Company and the overseas subsidiaries, other than the subsidiaries in the PRC, are translated into RMB at the exchange rates ruling at the balance sheet date and, their income statements are translated into RMB at the weighted average exchange rates for the year. The resulting translation differences are included in the cumulative translation reserve. 097 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Foreign currencies (continued) For the purpose of the consolidated cash flow statement, the cash flows of overseas subsidiaries are translated into RMB at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries which arise throughout the year are translated into RMB at the weighted average exchange rates for the year. Repairs, maintenance and overhaul costs Repairs, maintenance and overhaul costs are normally charged to the income statement as operating expenses in the period in which they are incurred. Operating leases Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where the Company is the lessee, rentals payable under the operating leases are charged to the income statement on the straight-line basis over the lease terms. Contingencies Contingent liabilities are not recognised in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the financial statements, but are disclosed when an inflow of economic benefits is probable. Subsequent events Post-year-end events that provide additional information about the Company's position at the balance sheet date or those that indicate the going concern assumption is not appropriate (adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material. Use of estimates The preparation of financial statements in conformity with Hong Kong GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil and gas reserve volumes and the future development, purchase price allocation, provision for dismantlement and impairment as well as estimates relating to certain oil and gas revenues and expenses. Actual amounts could differ from those estimates and assumptions. More details are given in notes 3, 18 and 31. 098 4. ACQUISITIONS During the year, the Group completed the acquisition of the North West Shelf Project ("NWS Project"), including an interest of approximately 5.3% in the NWS Project and a 25% interest in the China LNG Joint Venture, a new joint venture established within the NWS Project. The Group acquired the NWS Project to expand its upstream oil and gas reserves and production. The Group's participation in the NWS Project has not started commercial operations. Details of the net assets acquired are as follows: Purchase consideration: RMB'000 -------------------- Consideration paid 4,341,783 Direct costs relating to the acquisition 87,522 -------------------- Total purchase consideration 4,429,305 ==================== The assets and liabilities arising from the acquisition are as follows: RMB'000 -------------------- Oil and gas properties 3,129,662 Intangible assets - gas processing rights 1,299,643 -------------------- Net assets acquired 4,429,305 ==================== Purchase consideration settled in cash 4,429,305 ==================== The purchase price allocation set out above is still preliminary, pending the confirmation of the tax basis of the underlying assets. The interest of the Group in the NWS Project has been charged to the other partners of the Project as security for certain of the Group's liabilities relating to the Project. In addition, the Company, through its wholly-owned subsidiary, has signed an agreement with a Canadian based company, MEG Energy Corporation ("MEG"), to acquire a 16.69% equity interest in MEG. The Company completed the transaction and paid C$150 million (equivalent of RMB1,017 million) for the acquisition of 13,636,364 common shares of MEG in March 2005. MEG is principally engaged in the exploitation and production of oil sands. The investment in the unlisted shares of this company is accounted for as a non-current available-for-sales asset and is stated at cost less any impairment. 5. PRODUCTION SHARING CONTRACTS PRC For production sharing contracts in the PRC, the foreign parties to the contracts ("foreign partners") are normally required to bear all exploration costs during the exploration period and such exploration costs can be recovered according to the production sharing formula after commercial discoveries are made and production begins. After the initial exploration stage, the development and operating costs are funded by the Group and the foreign partners according to their respective participating interests. 099 5. PRODUCTION SHARING CONTRACTS (continued) PRC (continued) In general, the Group has the option to take up to 51% participating interest in a production sharing contract and may exercise such option after the foreign partners have independently undertaken all the exploration risks and costs and made viable commercial discoveries. After the Group exercises its option to take a participating interest in a production sharing contract, the Group accounts for the oil and gas properties using the proportional method under which the Group recognises its share of development costs, revenues and expenses from such operations according to its participating interest in the production sharing contract. The Group does not account for either the exploration costs incurred by its foreign partners or the foreign partners' share of development costs and revenues and expenses from such operations. Part of the annual gross production of oil and gas in the PRC is distributed to the PRC government as settlement of royalties which are payable pursuant to a sliding scale. The Group and the foreign partners also pay the value-added tax to the tax bureau at a pre-determined rate. In addition, there is a pre-agreed portion of oil and gas designated to recover all exploration costs, development costs, operating costs incurred and related interest according to the participating interests between the Group and the foreign partners. Any remaining oil after the foregoing priority allocations is first distributed to the PRC government as government share oil on a pre-determined ratio pursuant to a sliding scale, and then distributed to the Group and the foreign partners according to their respective participating interests. As the government share is not included in the Group's interest in the annual production, the net sales of the Group do not include the sales revenue of the government share oil. The foreign partners have the right either to take possession of their allocable remainder oil for sale in the international market, or to negotiate with the Group to sell their allocable remainder oil to the Group for sale in the PRC market. Overseas The Group and the other partners to the overseas production sharing contracts are required to bear all exploration, development and operating costs according to their respective participating interests. Exploration, development and operating costs which qualify for recovery can be recovered according to the production sharing formula after commercial discoveries are made and production begins. The Group's net interest in the production sharing contracts in overseas consists of its participating interest in the properties covered under the relevant production sharing contracts, less oil and gas distributed to the local government and the domestic market obligation. 6. SEGMENT INFORMATION Segment information is presented by way of two segment formats: (i) on a primary segment reporting basis, by business segment; and (ii) on a secondary segment reporting basis, by geographical segment. Intersegment transactions: segment revenue, segment expenses and segment performance include transfers between business segments and between geographical segments. Such transfers are accounted for at cost. Those transfers are eliminated on consolidation. 100 6. SEGMENT INFORMATION (continued) (a) Business segments The Group is organised on a worldwide basis into three major operating segments. The Group is involved in the upstream operating activities of the petroleum industry that comprise independent operations, production sharing contracts with foreign partners and trading business. These segments are determined primarily because the senior management makes key operating decisions and assesses performance of the segments separately. The Group evaluates the performance of each segment based on profit or loss from operations before income taxes. The following table presents revenue, profit and certain assets, liabilities and expenditures information for the Group's business segments for the years ended 31 December 2005 and 2004. Independent Production Trading operations sharing contracts business Segment revenue 2005 2004 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 (Restated) (Restated) (Restated) ---------------------------------------------------------------------------------------------- Sales to external customers: Oil and gas sales 22,808,733 15,177,621 30,608,936 21,708,398 -- -- Marketing revenues -- -- -- -- 15,901,325 18,191,353 Intersegment revenues 1,598,171 920,669 7,467,429 2,551,181 -- -- Other income 13,093 6,139 103,047 136,942 -- -- ---------------------------------------------------------------------------------------------- Total 24,419,997 16,104,429 38,179,412 24,396,521 15,901,325 18,191,353 ---------------------------------------------------------------------------------------------- Segment results Operating expenses (2,095,273) (1,828,614) (3,839,325) (3,241,730) -- -- Production taxes (1,154,771) (775,210) (1,441,772) (950,464) -- -- Exploration costs (1,025,993) (1,136,055) (267,694) (180,105) -- -- Depreciation, depletion and amortisation (2,554,896) (2,235,064) (3,409,844) (3,219,998) -- -- Dismantlement (152,796) (117,310) (100,061) (84,327) -- -- Impairment loss related to property, plant and equipment (39,494) -- (50,696) -- -- -- Crude oil and product purchases(1,598,171) (920,669) (7,467,429) (2,551,181) (15,704,100) (17,963,461) Selling and administrative expenses (39,486) (50,721) (676,062) (557,521) -- -- Others -- -- (77,062) (45,844) -- -- Interest income -- -- 7,328 2,077 -- -- Finance costs (183,325) (135,119) (94,885) (64,956) -- -- Exchange gains/(losses), net -- -- (5,119) (15,308) -- -- Investment income -- -- -- -- -- -- Share of profits of associates -- -- -- -- -- -- Non-operating income/ (expenses), net -- -- -- -- -- -- Tax -- -- -- -- -- -- ---------------------------------------------------------------------------------------------- Net profit 15,575,792 8,905,667 20,756,791 13,487,164 197,225 227,892 ---------------------------------------------------------------------------------------------- Other segment information Segment assets 25,054,275 21,120,584 51,125,491 37,851,716 2,413,195 1,712,212 Investments in associates -- -- -- -- -- -- ---------------------------------------------------------------------------------------------- Total assets 25,054,275 21,120,584 51,125,491 37,851,716 2,413,195 1,712,212 Segment liabilities (5,187,124) (3,913,905) (12,876,516) (11,453,307) (667,336) (809,663) Capital expenditure 7,806,927 6,309,397 8,914,306 13,145,839 -- -- ---------------------------------------------------------------------------------------------- Unallocated Eliminations Consolidated Segment revenue 2005 2004 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 (Restated) (Restated) (Restated) --------------------------------------------------------------------------------------------- Sales to external customers: Oil and gas sales -- -- -- -- 53,417,669 36,886,019 Marketing revenues -- -- -- -- 15,901,325 18,191,353 Intersegment revenues -- -- (9,065,600) (3,471,850) -- -- Other income 20,609 1,610 -- -- 136,749 144,691 --------------------------------------------------------------------------------------------- Total 20,609 1,610 (9,065,600) (3,471,850) 69,455,743 55,222,063 --------------------------------------------------------------------------------------------- Segment results Operating expenses -- -- -- -- (5,934,598) (5,070,344) Production taxes -- -- -- -- (2,596,543) (1,725,674) Exploration costs -- -- -- -- (1,293,687) (1,316,160) Depreciation, depletion and amortisation -- -- -- -- (5,964,740) (5,455,062) Dismantlement -- -- -- -- (252,857) (201,637) Impairment loss related to property, plant and equipment -- -- -- -- t (90,190) -- Crude oil and product purchases -- -- 9,065,600 3,471,850 s (15,704,100) (17,963,461) Selling and administrative expenses (654,820) (496,106) -- -- (1,370,368) (1,104,348) Others -- -- -- -- (77,062) (45,844) Interest income 351,966 204,795 -- -- 359,294 206,872 Finance costs (822,322) (241,750) -- -- (1,100,532) (441,825) Exchange gains/(losses), net 292,146 44,577 -- -- 287,027 29,269 Investment income 247,893 72,438 -- -- 247,893 72,438 Share of profits of associates 307,075 344,469 -- -- 307,075 344,469 Non-operating income/ (expenses), net 28,579 519,206 -- -- 28,579 519,206 Tax (10,977,812) (6,930,826) -- -- (10,977,812) (6,930,826) --------------------------------------------------------------------------------------------- Net profit (11,206,686) (6,481,587) -- -- 25,323,122 16,139,136 --------------------------------------------------------------------------------------------- Other segment information Segment assets 34,770,264 31,790,239 -- -- 113,363,225 92,474,751 Investments in associates 1,401,839 1,327,109 -- -- 1,401,839 1,327,109 --------------------------------------------------------------------------------------------- Total assets 36,172,103 33,117,348 -- -- 114,765,064 93,801,860 Segment liabilities (22,430,991) (21,182,195) -- -- (41,161,967) (37,359,070) Capital expenditure 144,442 164,775 -- -- 16,865,675 19,620,011 --------------------------------------------------------------------------------------------- 101 6. SEGMENT INFORMATION (continued) (b) Geographical segments In determining the Group's geographical segments, revenues and results are attributed to the segments based on the location of the Group's customers, and assets are attributed to the segments based on the location of the Group's assets. The Group mainly engaged in the exploration, development and production of crude oil and natural gas in offshore China. Any activities outside the PRC are mainly conducted in Indonesia, Australia, Canada and Singapore. The following table presents revenue and certain asset and expenditure information for the Group's geographical segments for the years ended 31 December 2005 and 2004. PRC Outside PRC Total 2005 2004 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 (Restated) (Restated) ------------------------------------------------------------------------------------ Total revenue 38,992,740 30,453,453 30,463,003 24,768,610 69,455,743 55,222,063 Segment assets 92,845,974 75,023,500 21,919,090 18,778,360 114,765,064 93,801,860 Capital expenditure 14,496,690 12,014,894 2,368,985 7,605,117 16,865,675 19,620,011 ------------------------------------------------------------------------------------------------------ (c) An analysis of sales to major customers by business segment is as follows: 2005 2004 RMB'000 RMB'000 ------------------------------------- Production sharing contracts China Petroleum & Chemical Corporation 9,996,768 6,932,008 PetroChina Company Limited 1,410,369 1,944,709 Castle Peak Power Company Limited 1,107,314 1,070,436 ------------------------------------- 12,514,451 9,947,153 ------------------------------------- Independent operations China Petroleum & Chemical Corporation 5,628,968 3,702,058 PetroChina Company Limited 365,830 -- ------------------------------------- 5,994,798 3,702,058 ------------------------------------- 18,509,249 13,649,211 ------------------------------------- 102 7. OIL AND GAS SALES 2005 2004 RMB'000 RMB'000 ------------------------------------- Gross sales 57,988,465 39,955,702 Royalties (708,537) (610,055) PRC government share oil (3,862,259) (2,459,628) ------------------------------------- 53,417,669 36,886,019 ------------------------------------- 8. MARKETING PROFIT 2005 2004 RMB'000 RMB'000 ------------------------------------- Marketing revenues 15,901,325 18,191,353 Crude oil and product purchases (15,704,100) (17,963,461) ------------------------------------- 197,225 227,892 ------------------------------------- 103 9. PROFIT BEFORE TAX The Group's profit before tax is arrived at after charging/(crediting): 2005 2004 RMB'000 RMB'000 (Restated) ------------------------------------- Crediting: Interest income on bank deposits (359,294) (206,872) Exchange gains, net (287,027) (29,269) Interest income on available-for-sale financial assets (9,757) (1,654) Dividend income on available-for-sale financial assets (175,416) (93,040) Realised gains on available-for-sale financial assets (62,720) (2,972) Unrealised losses on investments -- 25,228 ------------------------------------- Investment income (247,893) (72,438) ------------------------------------- Charging: Auditors' remuneration - Audit fee 7,961 6,750 - Other fees 2,098 1,093 ------------------------------------- 10,059 7,843 ------------------------------------- Employee benefit expense (including directors' remuneration (note 12)): - Wages, salaries and allowances 363,668 265,007 - Labour costs paid to contractors 750,651 666,599 - Equity-settled share option expense 29,123 46,642 ------------------------------------- 1,143,442 978,248 ------------------------------------- Depreciation, depletion and amortisation 5,941,755 5,410,413 Add: Oil-in tank adjustments 22,985 44,649 ------------------------------------- 5,964,740 5,455,062 ------------------------------------- Operating lease rentals -Office buildings 87,440 107,803 -Equipment 641,846 494,264 ------------------------------------- 729,286 602,067 ------------------------------------- Loss on disposal of property, plant and equipment 9,629 173 Repairs and maintenance 1,047,979 1,193,700 Research and development costs 401,640 268,477 Provision for/(reversal of) inventory obsolescence 33,088 (2,710) 104 10. SELLING AND ADMINISTRATIVE EXPENSES 2005 2004 RMB'000 RMB'000 (Restated) ------------------------------------- Salary and staff benefits 392,791 311,649 Utility and office expenses 143,204 115,817 Travel and entertainment 94,590 75,675 Rentals and maintenance 111,426 128,579 Management fees 243,730 218,087 Selling expenses 32,983 36,015 Provision for/(reversal of) for inventory obsolescence 33,088 (2,710) Other 318,556 221,236 ------------------------------------- 1,370,368 1,104,348 ------------------------------------- 11. FINANCE COSTS 2005 2004 RMB'000 RMB'000 ------------------------------------- Interest on bank loans which are - wholly repayable within five years 98,892 80,829 Interest on other loans (including convertible bonds) 671,849 485,812 Other borrowing costs 3,773 163 ------------------------------------- Total interest 774,514 566,804 Less: Amount capitalised in property, plant and equipment (note 18) (245,987) (244,686) ------------------------------------- 528,527 322,118 Other finance costs: Increase in discounted amount of provisions arising from the passage of time (note 31) 198,945 119,707 Loss on embedded derivative component in convertible bonds 373,060 -- ------------------------------------- 1,100,532 441,825 ------------------------------------- The interest rates used for interest capitalisation represented the cost of capital from raising the related borrowings and varied from 4.1% to 9.2% per annum for the year ended 31 December 2005. 105 12. DIRECTORS' REMUNERATION AND SHARE OPTION BENEFITS Directors' remuneration and share option benefits for the year, disclosed pursuant to the Listing Rules and Section 161 of the Companies Ordinance, are as follows: 2005 2004 RMB'000 RMB'000 (Restated) ------------------------------------- Fees for executive directors -- -- Fees for non-executive directors** 2,360 851 Other emoluments for executive and independent non-executive directors - Basic salaries, allowances and benefits in kind** 12,988 7,756 - Bonuses -- -- - Pension scheme contributions 104 62 ------------------------------------- Amount paid/payable during the year 15,452 8,669 Share option benefits* 8,561 9,208 ------------------------------------- 24,013 17,877 ------------------------------------- (a) Independent non-executive directors The fees paid/payable to independent non-executive directors during the year were as follows: 2005 2004 RMB'000 RMB'000 ------------------------------------- Chiu Sung Hong 619 213 Evert Henks 619 213 Kenneth S Courtis 619 213 Erwin Schurtenberger 350 213 Tse Hau Yin, Aloysius 153 -- Lawrence J. Lau -- -- ------------------------------------- Professor Lawrence J. Lau, appointed as the independent non-executive director of the Company on 31 August 2005, waived his remuneration in 2005. 106 12. DIRECTORS' REMUNERATION AND SHARE OPTION BENEFITS (continued) (b) Executive directors and independent non-executive directors Salaries, Amount allowances Performance Pension paid/payable and benefits related scheme during Share option Fees** In kind** bonuses contributions the year benefits* Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 ------------------------------------------------------------------------------------------------- 2005 Executive directors: Fu Chengyu -- 4,411 -- -- 4,411 2,236 6,647 Zhou Shouwei -- 3,519 -- 82 3,601 1,653 5,254 Luo Han -- 1,291 -- -- 1,291 1,086 2,377 Cao Xinghe -- 430 -- -- 430 269 699 Wu Zhenfang -- 430 -- -- 430 269 699 Wu Guangqi -- 1,377 -- -- 1,377 542 1,919 Yang Hua -- 967 -- 22 989 1,086 2,075 Jiang Longsheng -- 563 -- -- 563 55 618 ------------------------------------------------------------------------------------------------- Independent non-executive director: Chiu Sunghong 619 -- -- -- 619 437 1,056 Evert Henks 619 -- -- -- 619 437 1,056 Kenneth S Courtis 619 -- -- -- 619 437 1,056 Tse Hau Yin, Aloysius 350 -- -- -- 350 -- 350 Erwin Schurtenberger*** 153 -- -- -- 153 54 207 Lawrence J. Lau -- -- -- -- -- -- -- ------------------------------------------------------------------------------------------------- 2004 Executive directors: Fu Chengyu -- 3,934 -- -- 3,934 2,077 6,011 Luo Han -- 561 -- -- 561 1,107 1,668 Zhou Shouwei -- 2,710 -- 62 2,772 1,685 4,457 Jiang Longsheng -- 551 -- -- 551 1,107 1,658 ------------------------------------------------------------------------------------------------- Independent non-executive director: Chiu Sunghong 213 -- -- -- 213 808 1,021 Evert Henks 213 -- -- -- 213 808 1,021 Kenneth S Courtis 213 -- -- -- 213 808 1,021 Erwin Schurtenberger 213 -- -- -- 213 808 1,021 --------------------------------------------------------------------------------------------------------------------------- * During the year, certain directors were granted share options in respect of their services to the Group under the applicable share option schemes of the Company, further details of which are set out in note 32 to the financial statements. Share option benefits represent the fair value at grant date of share options issued under the share option schemes of the Company amortised to the income statement during the year disregarding whether the options have been exercised or not, and have been disclosed in accordance with HKFRS 2. No share options were exercised by the directors during the year. ** Fees and salaries, allowances and benefits in kind represent the gross amount (before Hong Kong individual salary tax) paid/ payable to individual directors. *** On 1 April 2005, Mr. Erwin Schurtenberger surrendered 1,150,000 share options following his resignation as an independent non-executive director of the Company. Save as disclosed above, there was no arrangement under which a director waived or agreed to waive any remuneration during the year. 107 13. FIVE HIGHEST PAID EMPLOYEES The five highest paid employees during the year included three (2004: Nil) directors and two (2004: five) non-directors are as follows: 2005 2004 RMB'000 RMB'000 (Restated) ------------------------------------- Basic salaries, allowances and benefits in kind* 15,843 20,509 Bonuses 471 4,589 Pension scheme contributions 542 1,509 ------------------------------------- Amount paid/payable during the year 16,856 26,607 Share option benefits** 4,975 1,107 ------------------------------------- 21,831 27,714 ------------------------------------- Number of directors 3 -- Number of employees 2 5 * Salaries, allowances and benefits in kind represent the gross amount (before Hong Kong individual salary tax) paid/payable to individual employees. ** Share option benefits represent fair value at grant date of share options issued under the share option schemes of the Company amortised to the income statement during the year disregarding whether the options have been exercised or not, and have been disclosed in accordance with HKFRS2. No share options were exercised by the relevant employees during the year. The number of the five highest paid employees whose remuneration fell within the following bands is as follows: Number of employees 2005 2004 ------------------------------------- Nil to HK$3,000,000 1 -- HK$3,000,001- HK$3,500,000 1 1 HK$3,500,001- HK$4,000,000 -- 1 HK$4,000,001- HK$4,500,000 1 1 HK$4,500,001- HK$5,000,000 -- -- HK$5,000,001- HK$5,500,000 1 -- HK$5,500,001- HK$6,000,000 -- 1 HK$6,000,001- HK$8,000,000 1 -- HK$8,000,001- HK$8,500,000 -- 1 ------------------------------------- 5 5 ------------------------------------- During the year, share options were granted to certain of the five highest paid employees in respect of their services to the Group, further details of which are included in the disclosures in note 32 to the financial statements. 108 14. TAX (i) Income tax The Company and its subsidiaries are subject to income taxes on an entity basis on profit arising in or derived from the tax jurisdictions in which they are domiciled and operated. The Company is not liable for profits tax in Hong Kong as it does not have any assessable income currently sourced from Hong Kong. The Company's subsidiary in the PRC, CNOOC China Limited, is a wholly foreign-owned enterprise. It is exempt from the 3% local surcharge and is subject to an enterprise income tax of 30% under the prevailing tax rules and regulations. The Company's subsidiary in Singapore, China Offshore Oil (Singapore) International Pte Ltd., is subject to income tax at rates of 10% and 20%, for its oil trading activities and other income generating activities, respectively. The Company's subsidiaries owning interests in oil and gas properties in Indonesia along the Malacca Strait are subject to corporate and dividend tax at the rate of 44%. The Company's subsidiaries owning interests in oil and gas properties in Indonesia acquired from Repsol YPF, S.A. are subject to corporate and dividend tax at the rate of 43.125% to 51.875%. All of the Company's other subsidiaries are not subject to any income taxes in their respective jurisdictions for the year presented. An analysis of the provision for tax in the consolidated income statement was as follows: 2005 2004 RMB'000 RMB'000 ------------------------------------- Overseas income taxes - Current 845,390 755,568 - Deferred 14,907 (170,118) PRC enterprise income tax - Current 9,912,426 6,411,417 - Deferred 205,089 (66,041) ------------------------------------- Total tax charge for the year 10,977,812 6,930,826 ------------------------------------- A reconciliation of the statutory PRC enterprise income tax rate to the effective income tax rate of the Group is as follows: 2005 2004 % % (Restated) ------------------------------------- Statutory PRC enterprise income tax rate 33.0 33.0 Effect of tax exemption granted (3.0) (3.0) Effect of different tax rates for the Company and overseas subsidiaries 0.5 0.3 Tax credit from the government (0.3) (0.6) Tax effect on other permanent differences (0.0) 0.3 ------------------------------------- Tax charge at the Group's effective rate 30.2 30.0 ------------------------------------- 109 14. TAX (continued) (i) Income tax (continued) The tax effect of significant temporary differences of the Group was as follows: (Credited)/ Recognised charged to in income foreign 2004 statements exchange 2005 RMB'000 RMB'000 RMB'000 RMB'000 ------------------------------------------------------------------------- Deferred tax assets Provision for retirement and termination benefits 112,150 (10,659) (2,795) 98,696 Provision for dismantlement 926,834 321,664 -- 1,248,498 Provision for impairment of property, plant and equipment and write-off of unsuccessful exploratory drillings 869,286 17,116 -- 886,402 ------------------------------------------------------------------------- 1,908,270 328,121 (2,795) 2,233,596 ------------------------------------------------------------------------- Deferred tax liabilities Accelerated amortization allowance for oil and gas properties (8,596,768) (548,117) 83,373 (9,061,512) ------------------------------------------------------------------------- Net deferred tax liabilities (6,688,498) (219,996) 80,578 (6,827,916) ------------------------------------------------------------------------- As at 31 December 2005, there was no significant unrecognised deferred tax liability (2004: Nil) for taxes that would be payable on the unremitted earnings of certain of the Group's subsidiaries and associates as the Group had no liability to additional tax should such amounts be remitted. There are no income tax consequences attaching to the payment of dividends by the Company to its shareholders. 110 14. TAX (continued) (ii) Other taxes The Company's PRC subsidiary pays the following other taxes: -- Production taxes equal to 5% of independent production and production under production sharing contracts; and -- Business tax of 3% to 5% on other income. 15. NET PROFIT AFTER TAX The net profit after tax for the year ended 31 December 2005 dealt with in the financial statements of the Company, was approximately RMB13,791,976,000 (2004: RMB5,395,306,000 (restated)) (see note 33). 16. DIVIDENDS On 30 August 2005, the Board of Directors declared an interim dividend of HK$0.05 per share (2004: HK$0.03 per share), totalling HK$2,052,733,769 (equivalent to approximately RMB2,138,128,000) (2004: RMB1,306,451,000); and a special interim dividend of HK$0.05 per share (2004: HK$0.05 per share), totalling HK$2,052,733,769 (equivalent to approximately RMB2,138,128,000) (2004: RMB2,177,418,000). In addition, the Company paid a special interim dividend in 2004 of HK$0.06 per share, totalling HK$2,464,249,697 (equivalent to approximately RMB2,617,526,000) in place of its 2003 final dividend. The Board of Directors have recommended a final dividend of HK$0.10 per ordinary share, totaling HK$4,105,467,538 (approximately equivalent to RMB4,250,391,000) for the year ended 31 December 2005. The payment of future dividends will be determined by the Company's Board of Directors. The payment of dividends will depend upon, among other things, future earnings, capital requirements, financial conditions and general business conditions of the Company. The Company's ability to pay dividends will also depend on the cash flows determined by the dividends, if any, received by the Company from its subsidiaries and associates. As the controlling shareholder, CNOOC will be able to influence the Company's dividend policy. Cash dividends to the shareholders in Hong Kong will be paid in Hong Kong dollars. Cash dividends to the American Depositary Receipts ("ADR") holders will be paid to the depositary in Hong Kong dollars and will be converted by the depositary into United States dollars and paid to the holders of ADRs. 111 17. EARNINGS PER SHARE 2005 2004 (Restated) ------------------------------------------------------- Earnings: Net profit from ordinary activities attributable to shareholders for the year for the purpose of basic earnings per share RMB 25,323,122,000 RMB16,139,136,000 Interest expense and losses recognised on the derivative component of convertible bonds RMB 537,468,873 -- ------------------------------------------------------- Net profit from ordinary activities attributable to shareholders for the year for the purpose of diluted earnings per share RMB 25,860,590,873 RMB16,139,136,000 ------------------------------------------------------- Number of shares: Weighted average number of ordinary shares for the purpose of basic earnings per share before effects of shares repurchased and share options exercised 41,052,375,275 41,070,828,275 Effect of shares repurchased -- (10,587,616) Effect of share options exercised 2,124,707 -- ------------------------------------------------------- Weighted average number of ordinary shares for the purpose of basic earnings per share 41,054,499,982 41,060,240,659 ------------------------------------------------------- Effect of dilutive potential ordinary shares under the share option schemes 38,861,432 66,720,503 Effect of dilutive potential ordinary shares for convertible bonds 1,292,694,352 52,552,274 ------------------------------------------------------- Weighted average number of ordinary shares for the purpose of diluted earnings per share 42,386,055,766 41,179,513,436 ------------------------------------------------------- Earnings per share - Basic RMB0.62 RMB0.39 - Diluted RMB0.61 RMB0.39 The calculation of basic earnings per share amounts is based on the net profit for the year and the weighted average number of ordinary shares in issue during the year. The calculation of diluted earnings per share amounts is based on the net profit for the year, adjusted to reflect the interest expense and losses recognised on the derivative component of the convertible bonds. The weighted average number of ordinary shares used in the calculation is the ordinary shares in issue during the year, as used in the basic earnings per share calculation, and the weighted average number of ordinary shares assumed to have been issued at no consideration on the deemed exercise or conversion of all the dilutive potential ordinary shares into ordinary shares. 112 18. PROPERTY, PLANT AND EQUIPMENT, NET Movements in the property, plant and equipment of the Group are as follows: Group 2005 2004 Vehicles Oil and gas Land and and office properties buildings equipment Total Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 (Restated) ------------------------------------------------------------------------------ Cost: At beginning of the year as previously reported 89,917,894 941,578 187,705 91,047,177 71,102,511 Cumulative adjustment for the adoption of HKAS 16 666,907 (941,578) -- (274,671) (274,671) At beginning of the year as restated 90,584,801 -- 187,705 90,772,506 70,827,840 Additions 17,500,195 -- 146,226 17,646,421 13,010,141 Acquisitions (including prepayments) -- -- -- -- 6,934,951 Transfer from prepayment to intangible assets upon completion of acquisition (1,299,643) -- -- (1,299,643) -- Purchase price adjustment (152,993) -- -- (152,993) -- Disposals and write-offs -- -- (14,511) (14,511) (177) Exchange realignment (504,132) -- (6) (504,138) (249) ------------------------------------------------------------------------------ End of year 106,128,228 -- 319,414 106,447,642 90,772,506 ============================================================================== Accumulated depreciation, depletion and amortisation and amortisation: At beginning of the year as previously reported (33,414,136) (132,455) (43,889) (33,590,480) (27,978,710) Cumulative adjustment for the adoption of HKAS 16 (132,455) 132,455 -- -- -- ============================================================================== At beginning of the year as restated (33,546,591) -- (43,889) (33,590,480) (27,978,710) Depreciation provided during the year (6,176,784) -- ( 57,248) (6,234,032) (5,612,050) Impairment recognised in the income statement during the year (90,190) -- -- (90,190) -- Disposals -- -- 4,881 4,881 5 Exchange realignment 87,346 -- -- 87,346 275 ------------------------------------------------------------------------------ End of year (39,726,219) -- (96,256) (39,822,475) (33,590,480) ============================================================================== Net book value: Beginning of year as previously reported 56,503,758 809,123 143,816 57,456,697 43,123,801 ============================================================================== Beginning of the year as restated 57,038,210 -- 143,816 57,182,026 42,849,130 ============================================================================== End of year 66,402,009 -- 223,158 66,625,167 57,182,026 ============================================================================== Included in the current year additions was an amount of approximately RMB245,987,000 (2004: RMB244,686,000) in respect of interest capitalised in property, plant and equipment. 113 18. PROPERTY, PLANT AND EQUIPMENT, NET (continued) The property, plant and equipment of the Company mainly comprised office equipment and were stated at cost less accumulated depreciation. The movements in property, plant and equipment of the Company are as follows: Company 2005 2004 RMB'000 RMB'000 ------------------------------------- Cost: Beginning of the year 5,833 5,833 Additions 2,128 -- ------------------------------------- End of year 7,961 5,833 ------------------------------------- Accumulated depreciation: Beginning of the year (5,669) (5,562) Charge for the year (1,218) (107) ------------------------------------- End of year (6,887) (5,669) ------------------------------------- Net book value: Beginning of year 164 271 ------------------------------------- End of year 1,074 164 ------------------------------------- 19. INTANGIBLE ASSETS During the year, the Company completed the acquisition of the NWS Project. Accordingly, the consideration allocated to the gas processing rights is recorded as an intangible asset and will be amortised upon the commercial production of the liquefied natural gas using the unit of production method. 20. INVESTMENT IN SUBSIDIARIES/LOANS TO AND DUE FROM/TO SUBSIDIARIES Company 2005 2004 RMB'000 RMB'000 ------------------------------------- Unlisted shares, at cost 7,766,971 7,766,971 Loans to a subsidiary 4,138,290 4,138,290 Due from subsidiaries 22,213,478 13,206,016 Due to subsidiaries (14,468,726) (15,256,082) ------------------------------------- 19,650,013 9,855,195 ------------------------------------- 114 20. INVESTMENT IN SUBSIDIARIES/LOANS TO AND DUE FROM/TO SUBSIDIARIES (continued) The loans to a subsidiary are unsecured and bear interest at a rate of 7.084% per annum. The carrying value of the loans approximated to fair value. The maturities of the balance are as follows: 2005 2004 RMB'000 RMB'000 ------------------------------------- Balances due: Within five years -- -- More than five years 4,138,290 4,138,290 ------------------------------------- 4,138,290 4,138,290 ------------------------------------- The amounts due from/to subsidiaries are unsecured, interest-free and are repayable on demand. Particulars of the principal subsidiaries are as follows: Nominal value Percentage Place and date of of issued and paid/ of equity incorporation/ registered ordinary attributable to Name of entity establishment share capital the Group Principal activities -------------------------------------------------------------------------------------------------------------- Directly held subsidiaries: CNOOC China Limited Tianjin, PRC RMB15 billion 100% Offshore petroleum 15 September 1999 exploration, development, production and sale in the PRC CNOOC International British Virgin Islands US$2 100% Investment holding Limited 23 August 1999 China Offshore Oil Singapore S$3 million 100% Sale and marketing (Singapore) 14 May 1993 of petroleum International Pte., Ltd. Outside the PRC CNOOC Finance (2002) British Virgin Islands US$1,000 100% Bond issuance Limited 24 January 2002 CNOOC Finance (2003) British Virgin Islands US$1,000 100% Bond issuance Limited 2 April 2003 CNOOC Finance (2004) British Virgin Islands US$1,000 100% Bond issuance Limited 9 December 2004 115 20. INVESTMENT IN SUBSIDIARIES/LOANS TO AND DUE FROM/TO SUBSIDIARIES (continued) Nominal value Percentage Place and date of of issued and paid/ of equity incorporation/ registered ordinary attributable to Name of entity establishment share capital the Group Principal activities -------------------------------------------------------------------------------------------------------------- Indirectly held subsidiaries*: Malacca Petroleum Bermuda US$12,000 100% Offshore petroleum Limited 2 November 1995 exploration, development and production in Indonesia OOGC America, Inc. State of Delaware, US$1,000 100% Investment holding United States of America 2 September 1997 OOGC Malacca Limited Bermuda US$12,000 100% Offshore petroleum 2 November 1995 exploration, development and production in Indonesia CNOOC Southeast Asia Bermuda US$12,000 100% Investment holding Limited 16 May 1997 CNOOC ONWJ Ltd. Labuan, F.T., US$1 100% Offshore petroleum Malaysia exploration, 27 March 2002 development and production in Indonesia CNOOC SES Ltd. Labuan, F.T., US$1 100% Offshore petroleum Malaysia exploration, 27 March 2002 development and production in Indonesia CNOOC Poleng Ltd. Labuan, F.T., US$1 100% Offshore petroleum Malaysia exploration, 27 March 2002 development and production in Indonesia CNOOC Madura Ltd. Labuan, F.T., US$1 100% Offshore petroleum Malaysia exploration, 27 March 2002 development and production in Indonesia CNOOC Blora Ltd. Labuan, F.T., US$1 100% Onshore petroleum Malaysia exploration, 27 March 2002 development and production in Indonesia 116 20. INVESTMENT IN SUBSIDIARIES/LOANS TO AND DUE FROM/TO SUBSIDIARIES (continued) Nominal value Percentage Place and date of of issued and paid/ of equity incorporation/ registered ordinary attributable to Name of entity establishment share capital the Group Principal activities -------------------------------------------------------------------------------------------------------------- CNOOC NWS Private Limited Singapore S$1 100% Offshore petroleum 8 October 2002 exploration, development and production in Australia CNOOC Wiriagar Overseas British Virgin Islands US$1 100% Offshore petroleum Ltd. 15 January 2003 exploration, development and production in Indonesia CNOOC Muturi Ltd. The Isle of Man US$7,780,700 100% Offshore petroleum 8 February 1996 exploration, development and production in Indonesia * Indirectly held through CNOOC International Limited. The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length. 21. INVESTMENTS IN ASSOCIATES The Group's investments in associates represent (1) a 30% equity interest of CNOOC China Limited in Shanghai Petroleum and Natural Gas Company Limited ("SPC"). SPC was incorporated on 7 September 1992 in the PRC with limited liability and is principally engaged in offshore petroleum exploration, development, production and sale in the South Yellow Sea and East China Sea areas. The issued and paid-up capital of SPC is RMB900 million; and (2) a 31.8% equity interest of CNOOC China Limited in CNOOC Finance Corporation Limited. CNOOC Finance Corporation Limited was incorporated on 14 June 2002 in the PRC with limited liability and is principally engaged in deposit-taking, transfer, settlement, loan, discounting and other financing services to CNOOC and its member entities. The issued and paid-up capital of CNOOC Finance Corporation Limited is RMB1,415 million. Group 2005 2004 RMB'000 RMB'000 ------------------------------------- Share of net assets 1,401,839 1,327,109 ------------------------------------- 117 22. ACCOUNTS RECEIVABLE, NET The Group's trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The customers are required to make payment within 30 days after the delivery of oil and gas. Trade receivables are non-interest-bearing. As at 31 December 2005 and 2004, substantially all the accounts receivable were aged within six months. 23. INVENTORIES AND SUPPLIES Group 2005 2004 RMB'000 RMB'000 ------------------------------------- Materials and supplies 969,915 879,300 Oil in tanks 268,834 274,029 Less: Provision for inventory obsolescence ( 39,123) (6,035) ------------------------------------- 1,199,626 1,147,294 ------------------------------------- 24. AVAILABLE-FOR-SALE FINANCIAL ASSETS (CURRENT) / SHORT TERM INVESTMENT As at 31 December 2005, available-for-sale financial assets mainly represented investments in liquidity funds and were stated at fair value at the balance sheet date. Details of the available-for-sale financial assets were as follows: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 -------------------------------------------------------------------------- Unlisted investments, at fair value: Liquidity funds 13,185,139 3,763,959 8,424,780 2,759,400 Corporate bonds 199,877 1,639,956 199,877 1,639,956 Common stock -- 40,198 -- 40,198 Listed investments, at fair value: Common stock 461,919 -- 461,919 -- -------------------------------------------------------------------------- 13,846,935 5,444,113 9,086,576 4,439,554 -------------------------------------------------------------------------- The fair values of listed investments are based on quoted market prices. The fair values of unlisted investments are based on the prices quoted by fund managers. The directors believe that the estimated fair values quoted by fund managers, which are recorded in the consolidated balance sheet, and the related changes in fair values, which are recorded in the consolidated balance sheet or income statement, are reasonable, and that they are the most appropriate values at the balance sheet date. During the year, the gross gain of the Group's and the Company's available-for-sale investments recognised directly in equity amounted to RMB69,069,142 and RMB64,900,590. 118 25. ACCOUNTS PAYABLE As at 31 December 2005 and 2004, substantially all the accounts payable were aged within six months. The accounts payable are non-interest-bearing and are normally settled within six months. 26. OTHER PAYABLES AND ACCRUED LIABILITIES Group 2005 2004 RMB'000 RMB'000 ------------------------------------- Accrued payroll and welfare payable 178,872 156,706 Provision for retirement and termination benefits 239,591 292,128 Accrued expenses 3,411,784 2,818,785 Advances from customers 22,238 12,588 Royalties payable 297,139 142,638 Other payables 1,057,319 768,179 ------------------------------------- 5,206,943 4,191,024 ------------------------------------- Other payables are non-interest-bearing and have an average term within six months. The fair value of the currency swaps of RMB4,725,000 (2004: RMB2,581,000) are included in the other payables of the Group. 27. LONG TERM BANK LOANS As at 31 December 2005, the long term bank loans of the Group were used primarily to finance the development of oil and gas properties and to meet working capital requirements. Group 2005 2004 RMB'000 RMB'000 ------------------------------------- Effective interest rate and final maturity US$ denominated Effective interest rate of 9.2% per annum with bank loans maturities through to 2006 812,759 827,650 Japanese Yen denominated bank Effective interest rate of 4.1% per annum loans with maturities through to 2007 37,307 61,925 ------------------------------------- 850,066 889,575 Less: Current portion of long term bank loans (825,674) (24,364) ------------------------------------- 24,392 865,211 ------------------------------------- As at 31 December 2005, all the bank loans of the Group were unsecured and none of the outstanding borrowings were guaranteed by CNOOC. 119 27. LONG TERM BANK LOANS (continued) The maturities of the long term bank loans are as follows: Group 2005 2004 RMB'000 RMB'000 ------------------------------------- Balances due: Within one year 825,674 24,364 After one year but within two years 24,392 846,471 After two years but within three years -- 18,740 After three years but within four years -- -- After four years but within five years -- -- ------------------------------------- 850,066 889,575 Amount due within one year shown under current liabilities (825,674) (24,364) ------------------------------------- 24,392 865,211 ------------------------------------- Supplemental information with respect to long term bank loans: Maximum Average Weighted Weighted amount amount average average outstanding outstanding interest rate Balance interestrate during the during the during the For the year ended at year end at year end year year* year** 31 December RMB'000 RMB'000 RMB'000 --------------------------------------------------------------------------- 2005 850,066 8.98% 889,575 869,821 8.89% 2004 889,575 8.81% 910,193 899,884 8.37% --------------------------------------------------------------------------- * The average amount outstanding is computed by dividing the total outstanding principal balances as at 1 January and 31 December by two. ** The weighted average interest rate is computed by dividing the total weighted average interest rates as at 1 January and 31 December by two. 120 28. LONG TERM GUARANTEED NOTES Long term guaranteed notes comprised the following: (i) The principal amount of US$500 million of 6.375% guaranteed notes due in 2012 issued by CNOOC Finance (2002) Limited, a wholly-owned subsidiary of the Company. The obligations of CNOOC Finance (2002) Limited in respect of the notes are unconditionally and irrevocably guaranteed by the Company. (ii) The principal amount of US$200 million of 4.125% guaranteed notes due in 2013 and the principal amount of US$300 million of 5.500% guaranteed notes due in 2033 issued by CNOOC Finance (2003) Limited, a wholly-owned subsidiary of the Company. The obligations of CNOOC Finance (2003) Limited in respect of the notes are unconditionally and irrevocably guaranteed by the Company. (iii) The principal amount of US$1 billion zero coupon guaranteed convertible bonds due in 2009, unconditionally and irrevocably guaranteed by, and convertible into shares of the Company issued by CNOOC Finance (2004) Limited, a wholly-owned subsidiary of the Company, on 15 December 2004. The bonds are convertible from 15 January 2005 onwards at a price of HK$6.075 per share, subject to adjustment for, among other things, the subdivision or consolidation of shares, bond issues, rights issues, capital distribution and other dilutive events. The conversion price was adjusted to HK$5.97 per share on 7 June 2005 as a result of the declaration of the final and special final dividends for 2004 by the Company. Unless previously redeemed, converted or purchased and cancelled, the bonds will be redeemed on the maturity date at 105.114% of the principal amount. CNOOC Finance (2004) Limited has an early redemption option at any time after 15 December 2007 (subject to certain criteria) and a cash settlement option when the holders exercise their conversion right. The bondholders also have an early redemption option to require CNOOC Finance (2004) to redeem all or part of the bonds on 15 December 2007 at an early redemption amount of 103.038% of the principal amount. 29. BALANCES WITH THE PARENT COMPANY As at 31 December 2005 and 2004, the balances with CNOOC were unsecured, interest-free and were repayable on demand. 121 30. RELATED PARTY TRANSACTIONS The Group has entered into several agreements with CNOOC and its affiliates, which govern the provision of materials, utilities and ancillary services, the provision of technical services, the provision of research and development services, and various other commercial arrangements. In addition to the transactions and balances detailed elsewhere in these financial statements, the Group had the following material transactions with related parties during the year: Notes 2005 2004 RMB'000 RMB'000 ------------------------------------------------------- Materials, utilities and ancillary services (i) 2,995,772 1,295,598 Technical services (ii) 6,651,240 6,362,206 Research and development services (iii) 8,110 7,800 Lease and property management services (iv) 77,273 76,721 Included in: Exploration expenses 753,534 960,031 Operating expenses 1,972,431 1,405,877 Selling and administrative expenses 337,816 326,004 Capitalised under property, plant and equipment 6,668,614 5,050,413 (i) Materials, utilities and ancillary services CNOOC China Limited has entered into materials, utilities and ancillary services supply agreements with the affiliates of CNOOC. Under these agreements, the affiliates of CNOOC provide to CNOOC China Limited various materials, utilities and ancillary services. The materials, utilities and ancillary services are provided at: -- state-prescribed prices; -- where there is no state-prescribed price, at market prices, including the local or national market prices or the prices at which CNOOC's affiliates previously provided the relevant materials, utilities and ancillary services to independent third parties; or -- where neither of the prices mentioned above is applicable, at the cost to CNOOC's affiliates of providing the relevant materials, utilities and services, including the cost of sourcing or purchasing from third parties, plus a margin of not more than 5% before any applicable taxes. 122 30. RELATED PARTY TRANSACTIONS (continued) (ii) Technical services Various affiliates of CNOOC, including China Oilfield Services Limited and Offshore Oil Engineering Company Limited, provide the Group with technical services for the Group's offshore oil and gas production activities, including: -- offshore drilling; -- ship tugging, oil tanker transportation and security services; -- well survey, well logging, well cementation and other related technical services; -- collection of geophysical data, ocean geological prospecting, and data processing; -- platform fabrication service and maintenance; and -- design, construction, installation and test of offshore and onshore production facilities. The price for technical services was determined based on local market prices. (iii) Research and development services The Group has revised the original research and development services agreement with China Offshore Oil Research Centre (the "Centre"), CNOOC's subsidiary, due to the restructuring of operations in 2003, and only pays the Centre for particular research and development services. These research and development services were determined at local market prices. (iv) Lease and property management services The Group has entered into lease and property management services agreements with the affiliates of CNOOC for the leasing of various office, warehouse and residential premises. Lease charges reflect the fair and reasonable commercial market rent and management fees. (v) Sale of crude oil, condensated oil and liquefied petroleum gas The Group sells crude oil, condensated oil and liquefied petroleum gas to CNOOC's affiliates which engage in the downstream petroleum business at the international market price. For the year ended 31 December 2005, the total sales amounted to approximately RMB26,576,247,000 (2004: RMB13,945,565,000). In the prior year, the Company, through its wholly-owned subsidiary, China Offshore Oil (Singapore) International Pte., Ltd., imported oil into the PRC for trading, using CNOOC's import license. The total sales to its customers through such arrangements amounted to approximately RMB447 million while the commission paid by the third party customers to CNOOC amounted to approximately RMB2.7 million for the year ended 31 December 2004. No such trading by using CNOOC's import license occurred during the year. 123 30. RELATED PARTY TRANSACTIONS (continued) (vi) Transactions with CNOOC Finance Corporation Limited The Company entered into a framework agreement ("Framework Agreement") with CNOOC Finance Corporation Limited ("CNOOC Finance") on 8 April 2004. Under the Framework Agreement, the Group utilises the financial services provided by CNOOC Finance, a 31.8% owned associate company of the Company which is also a subsidiary of CNOOC. Such services include placing of the Group's cash deposits with CNOOC Finance, and settlement services for transactions between the Group and other entities including CNOOC and its subsidiaries. Pursuant to the Framework Agreement, the financial services provided by CNOOC Finance also include provision of loan. The charges by CNOOC Finance for its financial services to the Group are based on the pricing policies of CNOOC Finance. Such pricing policies are subject to People's Bank of China guidelines, including the interest rates and foreign exchange rates, as well as guidelines published by PRC self-regulatory bodies, such as associations of finance companies. Based on these guidelines, CNOOC Finance has limited discretion in setting its prices. For the year ended 31 December 2005, the maximum outstanding balance for deposits (including interest received in respect of these deposits) placed with CNOOC Finance amounted to approximately RMB3,922,468,000 (2004: RMB5,300,381,000). 31. PROVISION FOR DISMANTLEMENT Provision for dismantlement represents the estimated costs of dismantling offshore oil platforms and abandoning oil and gas properties. The provision for dismantlement has been classified under long term liabilities. The associated cost is capitalised and the liability is discounted and an accretion expense is recognised using the credit-adjusted risk-free interest rate in effect when the liability is initially recognised. The current year's income statement charge represents the amortisation charge on the dismantlement liabilities capitalised in accordance with HKAS 37 and is included in the accumulated depreciation, depletion and amortisation in note 18. The details of the provision for dismantlement are as follows: Group 2005 2004 RMB'000 RMB'000 ------------------------------------- At the beginning of year 3,089,448 2,646,800 Additions during the year and capitalised in oil and gas properties 873,270 322,941 Increase in a discounted amount of provisions arising from the passage of time 198,945 119,707 ------------------------------------- At the end of year 4,161,663 3,089,448 ------------------------------------- 124 32. SHARE CAPITAL Issued share capital Number of shares Share capital equivalent of Shares (after subdivision of shares*) HK$'000 RMB'000 ----------------------------------------------------------- Authorised: Ordinary shares of HK$0.02 each As at 31 December 2005 and 31 December 2004 75,000,000,000 1,500,000 ======================================== Issued and fully paid: Ordinary shares of HK$0.02 each As at 1 January 2004 41,070,828,275 821,417 876,978 Repurchased and cancelled (18,453,000) (369) (392) ----------------------------------------------------------- As at 31 December 2004 41,052,375,275 821,048 876,586 Exercise of options 2,300,100 46 49 ----------------------------------------------------------- As at 31 December 2005 41,054,675,375 821,094 876,635 =========================================================== * Adjustment has been made to take account of the subdivision of issued and unissued shares of HK$0.10 each into five shares of HK$0.02 each effective 17 March 2004. The repurchase of the Company's shares during the prior year was effected by the directors, pursuant to the mandate from shareholders received at the last annual general meeting. Share option schemes The Company has adopted the following share option schemes for the grant of options to the Company's Directors, senior management and other eligible grantees: 1. Pre-Global Offering Share Option Scheme (as defined below); 2. 2001 Share Option Scheme (as defined below); 3. 2002 Share Option Scheme (as defined below); and 4. 2005 Share Option Scheme (as defined below). Under these share option schemes, the Remuneration Committee of the Company's Board of Directors will from time to time propose for the Board's approval for the recipient of and the number of shares underlying each option. The maximum aggregate number of shares (including those that could be substituted for under the Pre-Global Offering Share Option Scheme, the 2001 Share Option Scheme, the 2002 Share Option Scheme and the 2005 Share Option Scheme) which may be granted shall not exceed 10% of the total issued share capital of the Company as at 31 December 2005, being the date on which the shareholders of the Company approved a new share option scheme, excluding shares issued upon exercise of options granted under these schemes from time to time. 125 32. SHARE CAPITAL (continued) Share option schemes (continued) Pre-Global Offering Share Option Scheme On 4 February 2001, the Company adopted a pre-global offering share option scheme (the "Pre-Global Offering Share Option Scheme"). Pursuant to the Pre-Global Offering Share Option Scheme: 1. options for an aggregate of 23,100,000 shares have been granted; 2. the subscription price per share is HK$1.19; and 3. the period during which an option may be exercised is as follows: (a) 50% of the rights to exercise the options shall vest 18 months after the date of the grant; and (b) 50% of the rights to exercise the options shall vest 30 months after the date of the grant. The exercise periods for options granted under the Pre-Global Offering Share Option Scheme shall end not later than 10 years from 12 March 2001. No further options may be granted under the Pre-Global Offering Share Option Scheme. 2001 Share Option Scheme On 4 February 2001, the Company adopted a share option scheme (the "2001 Share Option Scheme") for the purposes of recognising the contribution that certain individuals had made to the Company and attracting and retaining the best available personnel to the Company. Pursuant to the 2001 Share Option Scheme: 1. options for an aggregate of 44,100,000 shares have been granted; 2. the subscription price per share is HK$1.232; and 3. the period during which an option may be exercised is as follows: (a) one-third of the rights to exercise the options shall vest on the first anniversary of the date of the grant; (b) one-third of the rights to exercise the options shall vest on the second anniversary of the date of the grant; and (c) one-third of the rights to exercise the options shall vest on the third anniversary of the date of the grant. The exercise periods for options granted under the 2001 Share Option Scheme shall end not later than 10 years from 27 August 2001. In view of the amendments to the relevant provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules") regarding the requirements of share option schemes of a Hong Kong listed company effective on 1 September 2001, no further options will be granted under the 2001 Share Option Scheme. 126 32. SHARE CAPITAL (continued) Share option schemes (continued) 2002 Share Option Scheme In June 2002, the Company adopted a new share option scheme (the "2002 Share Option Scheme"). Under the 2002 Share Option Scheme, the Directors may, at their discretion, invite employees, including Executive Directors, of the Company or any of its subsidiaries, to take up options to subscribe for shares in the Company. The maximum number of shares which may be granted under the 2002 Share Option Scheme to any individual in any 12-month period up to the next grant shall not exceed 1% of the total issued share capital of the Company from time to time. According to the 2002 Share Option Scheme, the consideration payable by a participant for the grant of an option will be HK$1.00. The subscription price of a share payable by a participant upon the exercise of an option is determined by the Directors at their discretion at the date of grant, except that such price may not be set below a minimum price which is the highest of: 1. the nominal value of the share of the Company on the date of the grant of the option; 2. the average closing price of the shares on The Stock Exchange of Hong Kong Limited ("HKSE") as stated in the HKSE's quotations sheets for the five trading days immediately preceding the date of grant of the option; and 3. the closing price of the shares on the HKSE as stated in the HKSE's quotations sheets on the date of grant of the option. On 24 February 2003, the Board of Directors approved to grant options in respect of 42,050,000 shares to the Company's Directors and senior management under the 2002 Share Option Scheme. The exercise price for such options is HK$2.108 per share. The closing market price immediately before the date on which such options were granted was HK$2.11 per share. Such options granted under the 2002 Share Option Scheme may be exercised, in whole or in part, in accordance with the following vesting schedule: 1. one-third of the rights to exercise the options shall vest on the first anniversary of the date of the grant; 2. one-third of the rights to exercise the options shall vest on the second anniversary of the date of the grant; and 3. one-third of the rights to exercise the options shall vest on the third anniversary of the date of the grant. The exercise period for the above options granted under the 2002 Share Option Scheme shall end not later than 10 years from 24 February 2003. 127 32. SHARE CAPITAL (continued) Share option schemes (continued) 2002 Share Option Scheme (continued) On 5 February 2004, the Board of Directors approved a grant of options in respect of 50,700,000 shares to the Company's Directors and senior management under the 2002 Share Option Scheme. The exercise price for such options is HK$3.152 per share. The closing market price immediately before the date on which such options were granted was HK$3.146 per share. Such options granted under the 2002 Share Option Scheme may be exercised, in whole or in part, in accordance with the following vesting schedule: 1. one-third of the rights to exercise the options shall vest on the first anniversary of the date of the grant; 2. one-third of the rights to exercise the options shall vest on the second anniversary of the date of the grant; and 3. one-third of the rights to exercise the options shall vest on the third anniversary of the date of the grant. The exercise period for the above options granted under the 2002 Share Option Scheme shall end not later than 10 years from 5 February 2004. On 31 August 2005, the Board of Directors approved a grant of options in respect of 65,870,000 shares to the Company's Directors and senior management under the 2002 Share Option Scheme. The exercise price of such options is HK$5.62 per share. The closing market price immediately before the date on which such options were granted was HK$5.75 per share. Such options granted under the 2002 Share Option Scheme may be exercised, in whole or in part, in accordance with the following vesting schedule: 1. one-third of the rights to exercise the options shall vest on the first anniversary of the date of the grant; 2. one-third of the rights to exercise the options shall vest on the second anniversary of the date of the grant; and 3. one-third of the rights to exercise the options shall vest on the third anniversary of the date of the grant. The exercise period for the above options granted under the 2002 Share Option Scheme shall end not later than 10 years from 31 August 2005. 2005 Share Option Scheme The Company had undertaken a review of the 2002 Share Option Scheme in 2005 and noted that certain provisions could be clarified and improved. Accordingly, the Board had proposed, and on 31 December 2005, the Company adopted a new share option scheme ("2005 Share Option Scheme") and terminated the 2002 Share Option Scheme. Upon termination of the 2002 Share Option Scheme, no further options may be granted under the 2002 Share Option Scheme, but in all other respects the provisions of the 2002 Share Option Scheme shall remain in force. The outstanding options under the 2002 Share Option Scheme shall continue to be subject to the provisions of the 2002 Share Option Scheme, and the adoption of the 2005 Share Option Scheme will not in any way affect the terms of the exercise of such outstanding options. 128 32. SHARE CAPITAL (continued) Share option schemes (continued) 2005 Share Option Scheme (continued) Under the 2005 Share Option Scheme, the Board of the Company will have the authority to grant options to subscribe for shares to the Directors, officers and employees of the Company and its subsidiaries, and any other persons who in sole discretion of the Board have contributed or will contribute to the Group. Unless approved by the shareholders, the total number of shares issued and to be issued upon exercise of the options granted to each individual (including exercised and unexercised options) under the 2005 Share Option Scheme or any other share option scheme adopted by the Company, in any 12 months period, must not exceed 1% of the shares in issue. According to the 2005 Share Option Scheme, the consideration payable by a participant for the grant of an option will be HK$1.00. The subscription price of a share payable by a participant upon the exercise of an option will be determined by the Directors at their discretion at the date of the grant, except that such price may not be set below a minimum price which is the highest of: 1. the nominal value of the share of the Company on the date of the grant of the option; 2. the average closing price of the shares on the HKSE as stated in the HKSE's quotations sheets for the five trading days immediately preceding the date of the grant of the option; and 3. the closing price of the shares on the HKSE as stated in the HKSE's quotations sheet on the date of the grant of the option. The period within which the options must be exercised, as well as any minimum holding period or performance targets which apply to the options, will be specified by the Board of the Company at the time of grant. The exercise period for options granted under the 2005 Share Option Scheme shall end not later than 10 years from the date of the grant of the option. During the year, no options have been granted or exercised under the 2005 Share Option Scheme. 129 32. SHARE CAPITAL (continued) Share option schemes (continued) During the year ended 31 December 2005, the movements in the options granted under all of the above share option schemes were as follows: Number of share options ----------------------------------------------------------------------------- Granted Exercised Forfeited Expired At 31 Name of category At 1 January during during during during December Date of grant of of participant 2005 the year the year the year the year 2005 share options ----------------------------------------------------------------------------------------------------------------------------------- Executive Directors Fu Chengyu 1,750,000 -- -- -- -- 1,750,000 12 March 2001 1,750,000 -- -- -- -- 1,750,000 27 August 2001 1,150,000 -- -- -- -- 1,150,000 24 February 2003 2,500,000 -- -- -- -- 2,500,000 5 February 2004 -- 3,500,000 -- -- -- 3,500,000 31 August 2005 Luo Han 1,400,000 -- -- -- -- 1,400,000 12 March 2001 1,150,000 -- -- -- -- 1,150,000 27 August 2001 1,150,000 -- -- -- -- 1,150,000 24 February 2003 1,150,000 -- -- -- -- 1,150,000 5 February 2004 -- 1,610,000 -- -- -- 1,610,000 31 August 2005 Zhou Shouwei 1,400,000 -- -- -- -- 1,400,000 12 March 2001 1,750,000 -- -- -- -- 1,750,000 27 August 2001 1,750,000 -- -- -- -- 1,750,000 24 February 2003 1,750,000 -- -- -- -- 1,750,000 5 February 2004 -- 2,450,000 -- -- -- 2,450,000 31 August 2005 ----------------------------------------------------------------------------------------------------------------------------------- Price of Weighted average Company's price of the shares Company's shares ------------ ------------------------------ Exercise Immediately Immediately price before the before the Name of category Exercise period of of share grant date exercise At exercise of participant share options** options of options date date HK$ HK$ HK$ HK$ ------------------------------------------------------------------------------------------------------------------------ Executive Directors Fu Chengyu 12 March 2001 to 12 March 2011 1.19 1.23 -- -- 27 August 2001 to 27 August 2011 1.232 1.46 -- -- 24 February 2003 to 24 February 2013 2.108 2.09 -- -- 5 February 2004 to 5 February 2014 3.152 3.13 -- -- 31 August 2005 to 31 August 2015 5.62 5.75 -- -- Luo Han 12 March 2001 to 12 March 2011 1.19 1.23 -- -- 27 August 2001 to 27 August 2011 1.232 1.46 -- -- 24 February 2003 to 24 February 2013 2.108 2.09 -- -- 5 February 2004 to 5 February 2014 3.152 3.13 -- -- 31 August 2005 to 31 August 2015 5.62 5.75 -- -- Zhou Shouwei 12 March 2001 to 12 March 2011 1.19 1.23 -- -- 27 August 2001 to 27 August 2011 1.232 1.46 -- -- 24 February 2003 to 24 February 2013 2.108 2.09 -- -- 5 February 2004 to 5 February 2014 3.152 3.13 -- -- 31 August 2005 to 31 August 2015 5.62 5.75 -- -- ------------------------------------------------------------------------------------------------------------------------ 130 32. SHARE CAPITAL (continued) Share option schemes (continued) Number of share options ----------------------------------------------------------------------------- Granted Exercised Forfeited Expired At 31 Name of category At 1 January during during during during December Date of grant of of participant 2005 the year the year the year the year 2005 share options ------------------------------------------------------------------------------------------------------------------------------------ Jiang Longsheng* 1,400,000 -- -- -- -- 1,400,000 12 March 2001 1,150,000 -- -- -- -- 1,150,000 27 August 2001 1,150,000 -- -- 383,300 -- 766,700 24 February 2003 1,150,000 -- -- 766,700 -- 383,300 5 February 2004 -- 1,610,000 -- 1,610,000 -- -- 31 August 2005 Cao Xinghe -- 800,000 -- -- -- 800,000 31 August 2005 Wu Zhenfang -- 800,000 -- -- -- 800,000 31 August 2005 Wu Guangqi -- 1,610,000 -- -- -- 1,610,000 31 August 2005 Yang Hua 1,150,000 -- -- -- -- 1,150,000 12 March 2001 1,150,000 -- -- -- -- 1,150,000 27 August 2001 1,150,000 -- -- -- -- 1,150,000 24 February 2003 1,150,000 -- -- -- -- 1,150,000 5 February 2004 -- 1,610,000 -- -- -- 1,610,000 31 August 2005 ------------------------------------------------------------------------------------------------------------------------------------ Price of Weighted average Company's price of the shares Company's shares --------- ----------------------------- Exercise Immediately Immediately price before the before the At exercise Name of category Exercise period of of share grant date exercise date of of participant share options** options of options date options HK$ HK$ HK$ HK$ ------------------------------------------------------------------------------------------------------------------ Jiang Longsheng* 12 March 2001 to 12 March 2011 1.19 1.23 -- -- 27 August 2001 to 27 August 2011 1.232 1.46 -- -- 24 February 2003 to 24 February 2013 2.108 2.09 -- -- 5 February 2004 to 5 February 2014 3.152 3.13 -- -- 31 August 2005 to 31 August 2015 5.62 5.75 -- -- Cao Xinghe 31 August 2005 to 31 August 2015 5.62 5.75 -- -- Wu Zhenfang 31 August 2005 to 31 August 2015 5.62 5.75 -- -- Wu Guangqi 31 August 2005 to 31 August 2015 5.62 5.75 -- -- Yang Hua 12 March 2001 to 12 March 2011 1.19 1.23 -- -- 27 August 2001 to 27 August 2011 1.232 1.46 -- -- 24 February 2003 to 24 February 2013 2.108 2.09 -- -- 5 February 2004 to 5 February 2014 3.152 3.13 -- -- 31 August 2005 to 31 August 2015 5.62 5.75 -- -- ------------------------------------------------------------------------------------------------------------------ 131 32. SHARE CAPITAL (continued) Share option schemes (continued) Number of share options ----------------------------------------------------------------------------- Granted Exercised Forfeited Expired At 31 Name of category At 1 January during during during during December of participant 2005 the year the year the year the year 2005 ------------------------------------------------------------------------------------------------------------------------ Non-executive Directors Chiu Sung Hong 1,150,000 -- -- -- -- 1,150,000 Evert Henkes 1,150,000 -- -- -- -- 1,150,000 Kenneth S Courtis 1,150,000 -- -- -- -- 1,150,000 Erwin Schurtenberger* 1,150,000 -- -- 1,150,000 -- -- Other Employees In aggregate 6,550,000 -- -- 1,700,000 -- 4,850,000 22,650,000 -- 1,150,000 2,350,000 -- 19,150,000 26,500,000 -- 766,700 3,733,400 -- 21,999,900 35,850,000 -- 383,400 4,683,200 -- 30,783,400 -- 51,880,000 -- 2,380,000 -- 49,500,000 ------------------------------------------------------------------------------------------------------------------------ Total 124,250,000 65,870,000 2,300,100 18,756,600 -- 169,063,300 ======================================================================================================================== Price of Company's shares ------------ Exercise Immediately price before the Name of category Date of grant of Exercise period of of share grant date of participant share options share options** options of options HK$ HK$ ------------------------------------------------------------------------------------------------------------------------------------ Non-executive Directors Chiu Sung Hong 5 February 2004 5 February 2004 to 5 February 2014 3.152 3.13 Evert Henkes 5 February 2004 5 February 2004 to 5 February 2014 3.152 3.13 Kenneth S Courtis 5 February 2004 5 February 2004 to 5 February 2014 3.152 3.13 Erwin Schurtenberger* 5 February 2004 5 February 2004 to 5 February 2014 3.152 3.13 Other Employees In aggregate 12 March 2001 12 March 2001 to 12 March 2011 1.19 1.23 27 August 2001 27 August 2001 to 27 August 2011 1.232 1.46 24 February 2003 24 February 2003 to 24 February 2013 2.108 2.09 5 February 2004 5 February 2004 to 5 February 2014 3.152 3.13 31 August 2005 31 August 2005 to 31 August 2015 5.62 5.75 ------------------------------------------------------------------------------------------------------------------------------------ Total ==================================================================================================================================== Weighted average price of the Company's shares ------------------------------ Immediately before the At exercise Name of category exercise date of of participant date options HK$ HK$ -------------------------------------------------------------------- Non-executive Directors Chiu Sung Hong -- -- Evert Henkes -- -- Kenneth S Courtis -- -- Erwin Schurtenberger* -- -- Other Employees In aggregate -- -- 4.03 4.05 4.16 4.19 3.85 3.93 -- -- -------------------------------------------------------------------- Total ==================================================================== * Mr. Erwin Schurtenberger resigned as an Independent Non-executive Director of the Company on 1 April 2005 and Mr. Jiang Longsheng retired as an Executive Director of the Company on 1 June 2005. ** The share options are only exercisable by the relevant grantees upon the vesting of such share options. The vesting of the Company's share options is by stage and the details are disclosed above. 132 32. SHARE CAPITAL (continued) Share option schemes (continued) The fair value of the share options granted during the year was HK$103,811,616. The fair value of equity-settled share options granted during the year was estimated as at the date of grant, using the Black-Scholes model, taking into account the terms and conditions upon which the options were granted. The following table lists the assumptions to the model used for the year ended 31 December 2005: Dividend yield 2% Expected volatility 31% Risk-free interest rate 4.57% Expected life of option 5 years Weighted average share price HK$5.62 The expected life of the options is based on the historical data and is not necessarily indicative of the exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. No other feature of the options granted was incorporated into the measurement of fair value. Any changes to the above assumptions may affect the estimation of the fair value of the option. 2,300,100 share options granted under the 2002 Share Option Scheme and the 2001 Share Option Scheme have been exercised since the respective dates of grant and up to the date when the Board of Directors approved the financial statements. On 1 April 2005, Mr. Erwin Schurtengberger surrendered 1,150,000 share options following his resignation as an independent non-executive director of the Company. The weighted average closing price of the shares immediately on the day before the exercise of the options was HK$4.04. The share options exercised during the year resulted in the issue of 2,300,100 ordinary shares of the Company and new share capital of RMB49,000 and share premium of RMB4,451,000. The total number of options exercisable as of 31 December 2005 was 70,416,522. No share options had been cancelled during the year ended 31 December 2005. At the balance sheet date, the Company had 169,063,300 share options outstanding under these share options schemes which represented approximately 0.4% of the Company's shares in issues as at that date. The exercise in full of the remaining share options would, under the present capital structure of the Company, result in the issue of 169,063,300 additional ordinary shares of the Company and additional share capital of RMB3,517,531 and share premium of RMB602,823,748. 133 33. RESERVES According to the laws and regulations of the PRC and the articles of association of CNOOC China Limited, CNOOC China Limited is required to provide for certain statutory funds, namely, the general reserve fund and staff and workers' bonus and welfare fund, which are appropriated from net profit (after making good losses from previous years), but before dividend distribution. CNOOC China Limited is required to allocate at least 10% of its net profit as reported in accordance with the generally accepted accounting principles in the PRC ("PRC GAAP") to the general reserve fund until the balance of such fund has reached 50% of its registered capital. The general reserve fund can only be used, upon approval by the relevant authority, to offset against accumulated losses or to increase capital. Appropriation to the staff and workers' bonus and welfare fund, which is determined at the discretion of CNOOC China Limited's directors, is expensed as incurred under Hong Kong GAAP. The staff and workers' bonus and welfare fund can only be used for special bonuses or collective welfare of employees, and assets acquired through this fund shall not be taken as assets of CNOOC China Limited. As at 31 December 2005, the general reserve fund amounted to RMB6,681,974,000 (2004: RMB4,413,610,000), representing approximately 44.5% (2004: 29.4%) of the total registered capital of CNOOC China Limited. Included in retained earnings is an amount of RMB1,146,530,000 (2004: RMB877,109,000), being the retained earnings attributable to associates. The Company's ability to distribute dividends will largely depend on the dividends it receives from its subsidiaries. The dividends distributable by the Company's subsidiaries to the Company are determined in accordance with the relevant accounting principle required by the local authorities. As of 31 December 2005, the aggregate amount of the subsidiaries' retained earnings available for distribution to the Company amounted to approximately RMB30,275,453,000 (2004: RMB16,652,414,000). 134 33. RESERVES (continued) Company Share premium account Issued and capital Cumulative share redemption translation Other Retained capital reserve reserve reserves earnings Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 ---------------------------------------------------------------------------------- Balances at 1 January 2004 as previously reported 876,978 20,761,205 -- -- 2,573,082 24,211,265 Cumulative adjustment for the adoption of HKFRS 2 (note 2.2) -- -- -- 63,502 (63,502) -- ---------------------------------------------------------------------------------- Balances at 1 January 2004 as restated 876,978 20,761,205 -- 63,502 2,509,580 24,211,265 Exchange realignment -- -- -- -- -- -- ---------------------------------------------------------------------------------- Total income and expenses for the year recognised in equity -- -- -- -- -- -- Net profit for the year (as restated) -- -- -- -- 5,395,306 5,395,306 ---------------------------------------------------------------------------------- Total income and expenses for the year -- -- -- -- 5,395,306 5,395,306 Repurchases of shares (392) -- -- -- (60,761) (61,153) Transfer of reserve upon share repurchase -- 392 -- -- (392) -- 2004 special interim dividend declared in place of 2003 final dividends -- -- -- -- (2,617,526) (2,617,526) 2004 interim dividends -- -- -- -- (1,306,451) (1,306,451) 2004 special interim dividends -- -- -- -- (2,177,418) (2,177,418) Equity-settled share option arrangements -- -- -- 46,642 -- 46,642 ---------------------------------------------------------------------------------- Balances at 31 December 2004 as restated 876,586 20,761,597 -- 110,144 1,742,338 23,490,665 ================================================================================== Balances at 1 January 2005 as previously reported 876,586 20,761,597 -- -- 1,852,482 23,490,665 Cumulative adjustment for the adoption of HKFRS 2 (note 2.2) -- -- -- 110,144 (110,144) -- ---------------------------------------------------------------------------------- Balances at 1 January 2005 as restated 876,586 20,761,597 -- 110,144 1,742,338 23,490,665 Changes in fair value of available-for-sale investments -- -- -- 64,900 -- 64,900 Exchange realignment -- -- (349,141) -- -- (349,141) ---------------------------------------------------------------------------------- Total income and expenses for the year recognised in equity -- -- (349,141) 64,900 -- (284,241) Net profit for the year -- -- -- -- 13,791,976 13,791,976 ---------------------------------------------------------------------------------- Total income and expenses for the year -- -- (349,141) 64,900 13,791,976 13,507,735 2004 final dividends -- -- -- -- (3,495,962) (3,495,962) 2005 interim dividends -- -- -- -- (4,276,256) (4,276,256) Exercise of share options 49 4,451 -- -- -- 4,500 Equity-settled share option arrangements -- -- -- 29,123 -- 29,123 ---------------------------------------------------------------------------------- Balances at 31 December 2005 876,635 20,766,048 (349,141) 204,167 7,762,096 29,259,805 ================================================================================== As at 31 December 2005, the distributable profits of the Company amounted to approximately RMB7,762,096,000 (2004: RMB1,742,338,000 (restated)). 135 34. RETIREMENT AND TERMINATION BENEFITS All the Group's full-time employees in the PRC are covered by a government regulated pension, and are entitled to an annual pension. The PRC government is responsible for the pension liabilities to these retired employees. The Group is required to make annual contributions to the government-regulated pension at rates ranging from 9% to 22% of the employees' basic salaries. The Company is required to make contributions to a defined contribution mandatory provident fund at a rate of 5% of the basic salaries of all full-time employees in Hong Kong. The related pension costs are expensed as incurred. The Group provides retirement and termination benefits for all local employees in Indonesia in accordance with Indonesian labour law, and provides employee benefits to expatriate staff in accordance with the relevant employment contracts. The Group has adopted an accounting policy to record liabilities for the retirement and termination benefits. 136 35. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (a) Reconciliation of profit before tax to cash generated from operations 2005 2004 RMB'000 RMB'000 (Restated) ------------------------------------- Profit before tax 36,300,934 23,069,962 Adjustments for: Interest income (359,294) (206,872) Finance costs 1,100,532 441,825 Exchange (gains)/losses, net (287,027) (29,269) Share of profits of associates (307,075) (344,469) Investment income (247,893) (72,438) Provision for/(reversal) of inventory obsolescence 33,088 (2,710) Depreciation, depletion and amortisation 5,964,740 5,455,062 Loss on disposal and write-off of property, plant and equipment 141,574 155,876 Dismantlement 252,857 201,637 Amortisation of discount of long term guaranteed notes 41,959 15,634 Impairment losses related to property, plant and euipment 90,190 -- Equity-settled share option expenses 29,123 46,642 ------------------------------------- Operating cash flows before movements in working capital 42,753,708 28,730,880 Increase in accounts receivable (1,001,296) (27,466) Increase in inventories and supplies (108,405) (96,307) (Increase)/decrease in other current assets (342,087) 267,168 Increase in amounts due from related companies (925,824) (417,091) Increase in an amount due to the parent company 118,422 205,407 Increase in accounts payable, other payables and accrued liabilities 677,522 1,318,415 Decrease in other taxes payable (24,900) (12,447) Increase/(decrease) in amounts due to related companies 548,508 (262,798) ------------------------------------- Cash generated from operations 41,695,648 29,705,761 ------------------------------------- 137 35. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued) (b) Acquisitions 2005 2004 RMB'000 RMB'000 ------------------------------------- Acquisitions Net assets acquired: Property, plant and equipment, net 3,129,662 4,686,857 Intangible assets 1,299,643 -- Accounts receivable -- 453 Other current assets -- 66,744 Accounts payable -- (81,547) Deferred tax liabilities -- (1,141,461) ------------------------------------- 4,429,305 3,531,046 Prepayment for the NWS Project -- 4,693,809 Acquisition of interests of MEG 1,017,000 -- ------------------------------------- 5,446,305 8,224,855 ------------------------------------- Satisfied by: Prepayments made in 2004 4,582,298 2,445,715 Cash paid for the NWS project (including cash call for the Tangguh Project) -- 5,779,140 Cash paid for the interests of MEG 1,017,000 -- Tax refund from the NWS Project (152,993) -- ------------------------------------- 5,446,305 8,224,855 ------------------------------------- An analysis of the net outflow of cash and cash equivalents in respect of the acquisitions is as follows: 2005 2004 RMB'000 RMB'000 ------------------------------------- Cash consideration 1,017,000 5,779,140 Cash received for tax refund of the NWS project (152,993) -- ------------------------------------- Net outflow of cash and cash equivalents 864,007 5,779,140 ------------------------------------- Further details of the acquisitions of the NWS Project and MEG are included in note 4 to the financial statements. The purchase price allocations for the NWS Project are still preliminary pending the confirmation of the tax basis of the underlying assets. The interest in MEG has been included under long term available-for-sale financial assets. 138 36. COMMITMENTS (i) Capital commitments As at 31 December 2005, the Group and the Company had the following capital commitments, principally for the construction and purchase of property, plant and equipment: 2005 2004 RMB'000 RMB'000 ------------------------------------- Contracted for 7,511,100 9,568,971 Authorised, but not contracted for 23,736,582 20,331,504 ------------------------------------- As at 31 December 2005, the Group had unutilised banking facilities amounting to approximately RMB33,450,791,000 (2004: RMB20,662,120,000). (ii) Operating lease commitments (a) Office properties The Group leases certain of its office properties under operating lease arrangements. Leases for properties are negotiated for terms ranging from 10 months to 3 years. As at 31 December 2005, the Group had total minimum lease payments under non-cancelable operating leases falling due as follows: 2005 2004 RMB'000 RMB'000 ------------------------------------- Commitments due: Within one year 157,181 24,824 In the first to second years, inclusive 22,351 549 After the second but before the fifth years, inclusive 23,972 -- ------------------------------------- 203,504 25,373 ------------------------------------- 139 36. COMMITMENTS (continued) (ii) Operating lease commitments (continued) (b) Plant and equipment The Group leases certain of its plant and equipment under operating lease arrangements for a term of 10 years. As at 31 December 2005, the Group had total minimum lease payments under non-cancelable operating lease falling due as follows: 2005 2004 RMB'000 RMB'000 ------------------------------------- Commitments due: Within one year 183,137 149,360 In the first to second years, inclusive 183,137 597,442 After the second but before the fifth years, inclusive 1,006,289 1,834,023 ------------------------------------- 1,372,563 2,580,825 ------------------------------------- 37. Financial instruments (a) Currency swap contracts As at 31 December 2005, the Group had a currency swap contract with a financial institution to sell United States dollars in exchange for Japanese Yen in order to hedge against future repayments of certain Japanese Yen denominated loans. The hedged Japanese Yen loans bore interest at a fixed rate of 4.5% per annum. The interest rate stipulated in the swap contract for the United States dollars was the floating LIBOR rate. The details are as follows: 2005 2004 Weighted Weighted Notional average Notional average contract contractual contract contractual amount exchange rate amount exchange rate (JPY'000) (JPY/US$) (JPY'000) (JPY/US$) ------------------------------------------------------------------------- Year 2005 -- -- 271,470 95.00 2006 271,470 95.00 271,470 95.00 2007 271,470 95.00 271,470 95.00 ------------------------------------------------------------------------- 140 37. Financial instruments (continued) (b) Fair value of financial instruments The carrying value of cash and cash equivalents, time deposits, available-for-sale investments, accounts receivables, other current assets, accounts payable and other payables approximated to fair value due to the short maturity of these instruments. The estimated fair value of long term bank loans based on current market interest rates was approximately RMB868,886,000 as at 31 December 2005 (2004: RMB 967,770,000). The estimated fair value of long term guaranteed notes based on current market interest rates was approximately RMB16,592,412,000 as at 31 December 2005 (2004: RMB16,428,934,000). 38. CONCENTRATION OF CUSTOMERS A substantial portion of the oil and gas sales of the Group is made to a small number of customers on an open account basis. Details of the sales to these customers are as follows: 2005 2004 RMB'000 RMB'000 ------------------------------------- China Petroleum & Chemical Corporation 15,625,736 10,634,066 PetroChina Company Limited 1,776,199 1,944,709 Castle Peak Power Company Limited 1,107,314 1,070,436 ------------------------------------- 39. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group's principal financial instruments, other than derivatives, comprise bank loans, convertible bonds, guaranteed notes, and cash and short term deposits. The main purpose of these financial instruments is to raise finance for the Group's operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The Group also enters into a currency swap contract. The purpose is to manage the currency risks arising from the Group's operations and its sources of finance. (i) Credit risk The carrying amount of cash and cash equivalents, time deposits, liquidity funds and bond investments, accounts receivable and other receivables, and due from related parties and other current assets except for prepayments represents our maximum exposure to credit risk in relation to financial assets. The majority of the Group's accounts receivable is related to sales of oil and natural gas to third party customers. The Group performs ongoing credit evaluations of the customers' financial condition and generally do not require collateral on accounts receivable. The Group maintains a provision for doubtful accounts and actual losses have been within management's expectation. No other financial assets carry a significant exposure to credit risk. 141 39. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) (ii) Currency risk Substantially all of the Group's oil and gas sales are denominated in Renminbi and US dollars. In the past decade, the PRC government's policies of maintaining a stable exchange rate and China's ample foreign reserves have contributed to the stability of the Renminbi. Starting from 21 July 2005, China reformed the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Renminbi would no longer be pegged to the US dollar. From that day to 31 December 2005, Renminbi has appreciated by approximately 2.5% against US dollars. The appreciation of Renminbi against US dollars may have the following impact on the Group. On one hand, since the benchmark oil and gas prices are usually in US dollars, the Group's oil and gas sales may decrease due to the depreciation of US dollars against Renminbi. On the other hand, the depreciation of US dollars against Remminbi will also decrease the Group's costs for imported equipment and materials, most of which are denominated in US dollars. In addition, the debt repayment by the Group will decrease since more than 99% of the Group's debts are also denominated in U.S. dollars. As of the end of 2005, the balance of the yen-denominated loans was only RMB37,307,000. Since the Group has hedged the yen loans against foreign currency swaps, the Group does not expect any exchange risk relating to Japanese yen in the future. (iii) Interest rate risk As of the end of 2005, the interest rates for all debts were fixed. The term of the weighted average balance was approximately 8 years. The average interest rate payable by the Group is favorable under the environment of interest rate hike. (iv) Business risk The major operations are conducted in the PRC, Indonesia and Australia and accordingly are subject to special considerations and significant risks not typically associated with investments in equity securities of the United States of America and Western European companies. These include risks associated with, among others, the oil and gas industry, the political, economic and legal environments, influence of the national authorities over price setting and competition in the industry. 142 40. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES OF AMERICA ("US GAAP ") Net profit and net equity (a) Impairment of long-lived assets Under Hong Kong GAAP, impairment charges are recognised when a long-lived asset's carrying amount exceeds the higher of an asset's fair value less costs to sell and value in use, which incorporates discounting the asset's estimated future cash flows. Under US GAAP, long-lived assets are assessed for possible impairment in accordance with SFAS No.144, "Accounting for the impairment or disposal of long-lived assets". SFAS No. 144 requires the Group to (a) recognise an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset. SFAS No. 144 requires that a long-lived asset to be abandoned, exchanged for a similar productive asset, or distributed to owners in a spin-off be considered as held and used until it is disposed of. SFAS No. 144 also requires the Group to assess the need for an impairment of capitalised costs of proved oil and gas properties and the costs of wells and related equipment and facilities on a property-by-property basis. If an impairment is indicated based on undiscounted expected future cash flows, then an impairment is recognised to the extent that net capitalised costs exceed the estimated fair value of the property. Fair value of the property is estimated by the Group using the present value of future cash flows. The impairment was determined based on the difference between the carrying value of the assets and the present value of future cash flows. It is reasonably possible that a change in reserve or price estimates could occur in the near term and adversely impact management's estimate of future cash flows and consequently the carrying value of properties. In addition, under Hong Kong GAAP, a subsequent increase in the recoverable amount of an asset (other than goodwill and available-for-sale equity investments) is reversed to the income statement to the extent that an impairment loss on the same asset was previously recognised as an expense when the circumstances and events that led to the write-down or write-off cease to exist. The reversal is reduced by the amount that would have been recognised as depreciation had the write-down or write-off not occurred. Under US GAAP, an impairment loss establishes a new cost basis for the impaired asset and the new cost basis should not be adjusted subsequently other than for further impairment losses. For the year ended 31 December 2005, an impairment of approximately RMB90,190,000 was recognised under Hong Kong GAAP and US GAAP. 143 40. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES OF AMERICA ("US GAAP ") (continued) Net profit and net equity (continued) (b) Accounting for convertible bonds With effect from 1 January 2005, under HKAS 32 Financial Instruments: Disclosure and Presentation, financial instruments with cash settlement options and other derivative components will need to be bifurcated into a debt component and a derivative component. The derivative component is marked to market at each balance sheet date and the differences will be charged/credited to the income statement. The debt component is stated at amortised cost. The requirements of HKAS 32 have been applied retrospectively with comparative amounts restated. Under US GAAP, convertible bonds are subject to different rules on the bifurcation of the debt and derivative components. However, there is no significant difference on the accounting treatment adopted under HK GAAP and US GAAP for the Group's convertible bonds. (c) Comprehensive income According to SFAS No. 130, "Reporting comprehensive income", the Group is required to include a statement of other comprehensive income for revenues and expenses, gains and losses which under US GAAP are included in comprehensive income and excluded from net income. 2005 2004 RMB'000 RMB'000 ------------------------------------- Net income under US GAAP 25,343,158 16,176,492 Other comprehensive income: Foreign currency translation adjustments (493,289) (42,301) Unrealised gains /(losses) on available-for-sale investments/Short term investments 69,069 (25,228) Less: Reclassification adjustment for gains included in net income (20,036) (2,972) ------------------------------------- Comprehensive income under US GAAP 24,898,902 16,105,991 ------------------------------------- 144 40. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES OF AMERICA ("US GAAP ") (continued) Net profit and net equity (continued) (c) Comprehensive income (continued) Roll forward of accumulated other comprehensive income components are as follows: Unrealised Foreign gains on Accumulated currency available other translation -for-sale comprehensive adjustments investments income RMB'000 RMB'000 RMB'000 -------------------------------------------------------- Balance at 1 January 2004 22,647 48,236 70,883 Reversal of current year's realised gains -- (2,972) (2,972) Current year's change (42,301) (25,228) (67,529) -------------------------------------------------------- Balance at 31 December 2004 (19,654) 20,036 382 Reversal of current year realised gains -- (20,036) (20,036) Current year's change (493,289) 69,069 (424,220) -------------------------------------------------------- Balance at 31 December 2005 (512,943) 69,069 (443,874) -------------------------------------------------------- (d) Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil and gas reserve volumes and the future development, provision for dismantlement as well as estimates relating to certain oil and gas revenues and expenses. Actual amounts could differ from those estimates and assumptions. (e) Segment reporting The Group's segment information is based on the segmental operating results regularly reviewed by the Group's chief operating decision maker. The accounting policies used are the same as those used in the preparation of the Group's consolidated Hong Kong GAAP financial statements. There are no significant differences between Hong Kong GAAP and US GAAPs on the consolidated balance shees as at 31 December 2005 and 2004 and the consolidated income statements for the years ended 31 December 2005 and 2004. As such, no reconciliation tables have been presented. 145 41. SUBSEQUENT EVENT On 8 January 2006, the Company signed a definitive agreement with South Atlantic Petroleum Limited ("SAPETRO") to acquire a 45% working interest in an offshore oil mining license 130 "OML 130" in Nigeria for a cash consideration of US$2.268 billion, subject to adjustment. Conditional on, among other things, the approval of the Nigerian National Petroleum Corporation ("NNPC") and the PRC government, the transaction is expected to be completed in the first half of 2006. On 27 January 2006, CNOOC Africa Limited, a wholly-owned subsidiary of the Company, signed an agreement to acquire from AERD Projects Nigeria Limited a 35% of right to Oil Prospecting Licence 229 "OPL229" in Nigeria for US$ 60 million in cash, subject to adjustments. 42. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved and authorised for issue by the Board of Directors on 24 March 2006. 146 Supplementary Information on Oil and Gas Producing Activities (Unaudited) (All amounts expressed in Renminbi unless otherwise stated) The following disclosures are included in accordance with the United States Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing Activities". The disclosures are categorized by the geographical areas in which the Group conducts oil and gas activities. Except for PRC and Indonesia, the information on the other geographical areas, such as Australia, Myanmar and Morocco, etc., are combined in the following disclosures as "Others", among which all the other projects are still in exploration or joint study stage except that the North West Shelf Project in Australia is in development stage. (a) Reserve quantity information Crude oil and natural gas reserve estimates are determined through analysis of geological and engineering data which appear, with reasonable certainty, to be recoverable at commercial rates in the future from known oil and natural gas reservoirs under existing economic and operating conditions. Estimates of crude oil and natural gas reserves have been made by independent engineers. The Group's net proved reserves consist of its percentage interest in reserves, comprised of a 100% interest in its independent oil and gas properties and its participating interest in the properties covered under the production sharing contracts in PRC, less (a) an adjustment for the Group's share of royalties payable by the Group to the PRC government and the Group's participating interest in share oil payable to the PRC government under the production sharing contracts, and less (b) an adjustment for production allocable to foreign partners under the PRC production sharing contracts as reimbursement for exploration expenses attributable to the Group's participating interest, and plus (a) its participating interest in the properties in Australia, and (b) the participating interest in the properties covered under the production sharing contracts in Indonesia less an adjustment of share oil attributable to the Indonesian government and the domestic market obligation. 147 (a) Reserve quantity information (continued) Proved developed and undeveloped reserves (net of royalties and PRC government share oil): PRC Indonesia Others Total Oil Natural gas Oil Natural gas Oil Natural gas Oil Natural gas (mmbls) (bcf) (mmbls) (bcf) (mmbls) (bcf) (mmbls) (bcf) ------------------------------------------------------------------------------ 31 December 2002 1,287 3,333 138 215 -- -- 1,425 3,548 Purchase of reserves 53 142 -- -- -- -- 53 142 Discoveries and extensions 114 506 1 2 -- -- 115 508 Production (97) (69) (15) (37) -- -- (112) (106) Revisions of prior estimates (24) 42 (21) 20 -- -- (45) 62 ------------------------------------------------------------------------------ 31 December 2003 1,333 3,954 103 200 -- -- 1,436 4,154 Purchase of reserves 6 161 -- -- -- -- 6 161 Discoveries and extensions 129 414 4 157 -- -- 133 571 Production (106) (103) (11) (31) -- -- (117) (134) Revisions of prior estimates (8) (101) 5 (5) -- -- (3) (106) ------------------------------------------------------------------------------ 31 December 2004 1,354 4,325 101 321 -- -- 1,455 4,646 Purchase of reserves -- -- -- -- 25 603 25 603 Discoveries and extensions 133 314 -- 17 -- -- 133 331 Production (122) (108) (9) (34) -- -- (131) (142) Revisions of prior estimates (7) -- (19) (7) -- -- (26) (7) ------------------------------------------------------------------------------ 31 December 2005 1,358 4,531 73 297 25 603 1,456 5 ,431 ============================================================================== Proved developed reserves: PRC Indonesia Others Total Oil Natural gas Oil Natural gas Oil Natural gas Oil Natural gas (mmbls) (bcf) (mmbls) (bcf) (mmbls) (bcf) (mmbls) (bcf) ------------------------------------------------------------------------------ 31 December 2003 459 2,054 91 135 -- -- 550 2,189 31 December 2004 617 2,134 85 138 -- -- 702 2,272 31 December 2005 644 2,098 63 155 14 378 721 2,631 ============================================================================== 148 (b) Results of operations 2003 2004 PRC Indonesia Others Total PRC Indonesia Others Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 ---------------------------------------------------------------------------------------------------- Net sales to customers 23,644,659 4,472,172 -- 28,116,831 32,723,277 4,162,742 -- 36,886,019 Operating expenses (2,903,094) (1,609,715) -- (4,512,809) (3,643,182) (1,427,162) -- (5,070,344) Production taxes (1,238,598) -- -- (1,238,598) (1,725,674) -- -- (1,725,674) Exploration (764,165) (83,907) -- (848,072) (1,202,203) (113,957) -- (1,316,160) Accretion expense (93,246) -- -- (93,246) (119,707) -- -- (119,707) Depreciation, depletion and amortisation (including dismantlement) (3,700,349) (1,109,730) -- (4,810,079) (4,670,988) (985,711) -- (5,656,699) ---------------------------------------------------------------------------------------------------- 14,945,207 1,668,820 -- 16,614,027 21,361,523 1,635,912 -- 22,997,435 Income tax expenses (4,483,562) (719,695) -- (5,203,257) (6,408,457) (705,487) -- (7,113,944) ---------------------------------------------------------------------------------------------------- Result of operations 10,461,645 949,125 -- 11,410,770 14,953,066 930,425 -- 15,883,491 ==================================================================================================== 2005 PRC Indonesia Others Total RMB'000 RMB'000 RMB'000 RMB'000 ------------------------------------------------- Net sales to customers 48,778,934 4,638,735 -- 53,417,669 Operating expenses (4,507,915) (1,426,683) -- (5,934,598) Production taxes (2,596,543) -- -- (2,596,543) Exploration (1,169,067) (77,842) (46,779) (1,293,688) Accretion expense (198,945) -- -- (198,945) Depreciation, depletion and amortisation (including dismantlement) (5,360,745) (856,775) -- (6,217,520) ------------------------------------------------- 34,945,719 2,277,435 (46,779) 37,176,375 Income tax expenses (10,483,716) (995,885) -- (11,479,601) ------------------------------------------------- Result of operations 24,462,003 1,281,550 (46,779) 25,696,774 ================================================= (c) Capitalised costs 2003 2004 PRC Indonesia Others Total PRC Indonesia Others Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 ----------------------------------------------------------------------------------------------------- Proved oil and gas Properties 57,537,676 9,440,843 -- 66,978,519 70,931,798 10,100,116 -- 81,031,914 Unproved oil and gas Properties 713,594 -- -- 713,594 437,513 4,696,237 -- 5,133,750 Accumulated depreciation, depletion and amortization (25,740,836) (2,098,269) -- (27,839,105) (30,462,658) (3,083,933) -- (33,546,591) ----------------------------------------------------------------------------------------------------- Net capitalised costs 32,510,434 7,342,574 -- 39,853,008 40,906,653 11,712,420 -- 52,619,073 ===================================================================================================== 2005 PRC Indonesia Others Total RMB'000 RMB'000 RMB'000 RMB'000 ------------------------------------------------ Proved oil and gas Properties 85,960,339 11,241,345 3,129,662 100,331,346 Unproved oil and gas Properties 267,432 5,529,450 -- 5,796,882 Accumulated depreciation, depletion and amortization (35,875,926) (3,850,293) -- (39,726,219) ------------------------------------------------ Net capitalised costs 50,351,845 12,920,502 3,129,662 66,402,009 ================================================ (d) Costs incurred 2003 2004 PRC Indonesia Others Total PRC Indonesia Others Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 ----------------------------------------------------------------------------------------------------- Acquisition costs 1,579,726 -- -- 1,579,726 -- 3,531,046 -- 3,531,046 Exploration costs 1,225,926 102,067 -- 1,327,993 1,806,556 137,361 -- 1,943,917 Development costs* 7,489,472 512,064 -- 8,001,536 11,693,183 645,501 -- 12,338,684 ----------------------------------------------------------------------------------------------------- Total costs incurred 10,295,124 614,131 -- 10,909,255 13,499,739 4,313,908 -- 17,813,647 ===================================================================================================== 2005 PRC Indonesia Others** Total RMB'000 RMB'000 RMB'000 RMB'000 ------------------------------------------------ Acquisition costs -- -- 4,546,285 4,546,285 Exploration costs 1,878,931 111,219 46,779 2,036,929 Development costs* 14,423,266 2,328,200 -- 16,751,466 ------------------------------------------------ Total costs incurred 16,302,197 2,439,419 4,593,064 23,334,680 ================================================ * The development costs include estimated future dismantlement costs of dismantling offshore oil platforms and gas properties. ** The amounts include prepayments made in 2004 for the NWS Project of RMB 4,693,809,000 and a tax refund of RMB152,993,000 related to the acquisition of the NWS Project received in 2005. 149 (e) Standardised measure of discounted future net cash flows and changes therein In calculating the standardised measure of discounted future net cash flows, year-end constant price and cost assumptions were applied to the Group's estimated annual future production from proven reserves to determine future cash inflows. Year end average realised oil prices used in the estimation of proved reserves and calculation of the standardised measure were US$48 as at 31 December 2005 (2004: US$32; 2003; US$30). Future development costs are estimated based upon constant price assumptions and assume the continuation of existing economic, operating and regulatory conditions. Future income taxes are calculated by applying the year-end statutory rate to estimate future pre-tax cash flows after provision for the tax cost of the oil and natural gas properties based upon existing laws and regulations. The discount was computed by application of a 10% discount factor to the estimated future net cash flows. Management believes that this information does not represent the fair market value of the oil and natural gas reserves or the present value of estimated cash flows since no economic value is attributed to potential reserves, the use of a 10% discount rate is arbitrary, and prices change constantly from year-end levels. Present value of estimated future net cash flows: 2003 2004 Notes PRC Indonesia Others Total PRC Indonesia Others RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 ---------------------------------------------------------------------------------------------- Future cash inflows (1) 422,329,692 30,135,721 -- 452,465,413 467,336,822 37,198,784 -- Future production Costs (106,854,167) (17,532,095) -- (124,386,262) (115,267,250) (20,472,914) -- Future development Costs (2) (52,917,280) (4,114,091) -- (57,031,371) (60,319,348) (6,709,341) -- Future income taxes (72,124,755) (3,346,547) -- (75,471,302) (78,717,296) (4,001,019) -- ---------------------------------------------------------------------------------------------- Future net cash flows (3) 190,433,490 5,142,988 -- 195,576,478 213,032,928 6,015,510 -- 10% discount factor (84,550,531) (1,226,300) -- (85,776,831) (91,755,987) (1,905,679) -- ---------------------------------------------------------------------------------------------- Standardised measure 105,882,959 3,916,688 -- 109,799,647 121,276,941 4,109,831 -- ---------------------------------------------------------------------------------------------- 2005 Total PRC Indonesia Others Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 ---------------------------------------------------------------------------- Future cash inflows 504,535,606 661,693,176 40,919,470 21,855,452 724,468,098 Future production Costs (135,740,164) (156,122,249) (19,370,535) (3,742,250) (179,235,034) Future development Costs (67,028,689) (69,918,424) (7,481,211) (4,497,517) (81,897,152) Future income taxes (82,718,315) (119,326,469) (5,678,110) (2,759,755) (127,764,334) ---------------------------------------------------------------------------- Future net cash flows 219,048,438 316,326,034 8,389,614 10,855,930 335,571,578 10% discount factor (93,661,666) (128,177,514) (2,494,083) (5,472,748) (136,144,345) ---------------------------------------------------------------------------- Standardised measure 125,386,772 188,148,520 5,895,531 5,383,182 199,427,233 ---------------------------------------------------------------------------- (1) Future cash flows consist of the Group's 100% interest in the independent oil and gas properties and the Group's participating interest in the properties under production sharing contracts in PRC less (a) an adjustment for the royalties payable to the PRC government and share oil payable to the PRC government under production sharing contracts and (b) an adjustment for production allocable to foreign partners under the PRC production sharing contracts for exploration costs attributable to the Group's participating interest, plus (a) its participating interest in the properties in Australia, and (b) the participating interest in the properties covered under the production sharing contracts in Indonesia, less an adjustment of share oil attributable to Indonesian government and the domestic market obligation. (2) Future development costs include the estimated costs of drilling future development wells and building the production platforms. (3) Future net cash flows have been prepared taking into consideration estimated future dismantlement costs of dismantling offshore oil platforms and gas properties. 150 (e) Standardised measure of discounted future net cash flows and changes therein (continued) Changes in the standardised measure of discounted future net cash flows: 2003 2004 2005 RMB'000 RMB'000 RMB'000 -------------------------------------------------------- Standardised measure, beginning of year 100,141,049 109,799,647 125,386,772 Sales of production, net of royalties and production costs (22,345,781) (30,090,001) (44,886,528) Net change in prices, net of royalties and production costs 22,321,949 17,826,421 99,412,030 Extensions discoveries and improved recovery, net of related future costs 13,790,936 20,772,271 26,693,961 Change in estimated future development costs (14,673,054) (21,766,234) (18,500,061) Development costs incurred during the year 7,718,863 11,768,916 15,592,789 Revisions in quantity estimates (2,942,902) (1,954,130) (3,087,240) Accretion of discount 13,428,654 14,202,072 17,132,630 Net change in income taxes (6,290,099) (5,515,547) (29,228,637) Purchase of properties 5,363,142 2,352,004 8,981,882 Changes in timing and other (6,713,110) 7,991,353 1,929,635 -------------------------------------------------------- Standardised measure, end of year 109,799,647 125,386,772 199,427,233 -------------------------------------------------------- 151 Notice of Annual General Meeting NOTICE IS HEREBY GIVEN THAT the Annual General Meeting of the shareholders of CNOOC Limited (the "Company") will be held on 24 May 2006, at 2:30 p.m. at Island Shangri-la Hong Kong, Two Pacific Place, Supreme Court Road, Hong Kong, for the following purposes: A. As ordinary business, to consider and, if thought fit, pass with or without amendments, the following ordinary resolutions: 1. To receive and consider the audited Statement of Accounts together with the Reports of the Directors and Auditors thereon for the year ended 31 December 2005. 2. To declare a final dividend for the year ended 31 December 2005. 3. To re-elect retiring Directors, to elect Dr. Edgar W. K. Cheng as a new Independent Non-executive Director, and to authorise the Board of Directors to fix the remuneration of each of the Directors. The Directors to be re-elected and elected are as follows: Zhou Shouwei Born in 1950, Mr. Zhou received a doctorate degree from the Southwest Petroleum Institute in China and is a senior engineer. He joined China National Offshore Oil Corporation ("CNOOC") in 1982. Mr. Zhou served as the Deputy General Manager of China Offshore Oil Bohai Corporation, a subsidiary of CNOOC and the General Manager of CNOOC China Limited Tianjin Branch. He was appointed as the Executive Vice President of the Company in September 1999 and the President of the Company in July 2002. Since 2000, Mr. Zhou has been the Vice President of CNOOC. Mr. Zhou serves as the Director and the President of CNOOC China Limited and the Director of CNOOC International Limited, both subsidiaries of the Company. He also serves as the Chairman of CNOOC Southeast Asia Limited, a wholly-owned subsidiary of the Company since April 2003. Mr. Zhou became the chairman of CNOOC Engineering Company Limited, a listed company in Shanghai Stock Exchange and a subsidiary of CNOOC, on 6 December 2003. Mr. Zhou was appointed as an Executive Director of the Company with effect from 23 August 1999. Save as aforesaid, Mr. Zhou does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 9,100,000 share options in the Company, Mr. Zhou has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. Under the service contract between the Company and Mr. Zhou, Mr. Zhou's emoluments comprise an annual remuneration of HK$ 2,600,000 (after Hong Kong tax), plus performance-based bonuses. The emoluments of Mr. Zhou were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make adjustments if necessary. Mr. Zhou is subject to the provisions of his service contract and the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. 152 Evert Henkes Born in 1943, Mr. Henkes served as the CEO of Shell global chemical business from 1998 to 2003. Since joining Shell in 1973, he held various executive positions worldwide, including Managing Director of Shell Chemicals UK Ltd., Managing Director of Shell UK, President of Billiton Metals, Shell's Metals Coordinator, Shell's Chemical Coordinator, and Director of Strategy & Business Services of Shell International Chemicals Ltd. He also served as directors in regional and global industrial bodies, including CEFIC and ICCA. He is also a director of Tate & Lyle Plc, SembCorp Industries Ltd. and Outokumpu Oy. Mr. Henkes was appointed as an Independent Non-executive Director of the Company with effect from 16 September 2003. Mr. Henkes does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 1,150,000 share options in the Company, Mr. Henkes has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. There is no service contract between the Company and Mr. Henkes. Mr. Henkes' emoluments comprise an annual remuneration of HK$500,000 (after Hong Kong tax). The Remuneration Committee will review the level of directors' remuneration from time to time and make recommendation to the Board for adjustments if necessary. The emoluments of Mr. Henkes were determined with reference to perception of industry standards and prevailing market conditions. Mr. Henkes is subject to the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. Cao Xinghe Born in 1949, Mr. Cao graduated from Tianjin Politics and Law Management College majoring in Economic Laws and later studied for MBA in Capital University of Economics and Business. Mr. Cao has forty years of experience in the petroleum industry since he started work in 1965. He worked for Shengli oilfield and Dagang oilfield before he joined CNOOC in 1982. From 1985 to 1996, Mr. Cao worked as Manager of Bohai Oil Commercial Company and later as the Manager of Bohai Oil Transportation Company, both subsidiaries of CNOOC. From 1996 to 2003, he worked as Deputy General Manager and General Manager of CNOOC Bohai Corporation successively. From April 2003 to July 2004, Mr. Cao worked as Assistant President of CNOOC. He became Vice President of CNOOC in August 2004. Mr. Cao also serves as the Chairman of the Board of Directors of CNOOC Base Group Limited, a subsidiary of CNOOC. Mr. Cao was appointed as an Executive Director of the Company with effect from 31 August 2005. Save as aforesaid, Mr. Cao does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 800,000 share options in the Company, Mr. Cao has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. 153 Under the service contract between the Company and Mr. Cao, Mr. Cao's emoluments comprise an annual remuneration of HK$ 800,000 (after Hong Kong tax), plus performance-based bonuses. The emoluments of Mr. Cao were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make adjustments if necessary. Mr. Cao is subject to the provisions of his service contract and the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. Wu Zhenfang Born in 1952, Mr. Wu is a senior engineer and graduated with a bachelor's degree from Dalian University of Technology, majoring in Offshore Petroleum Engineering and Construction. He later studied for EMBA in Shanghai Jiao Tong University. Mr. Wu joined the petroleum industry in 1971. He joined CNOOC in 1982. From 1993 to 1997, he was Deputy General Manager of CNOOC Nanhai West Corporation. He became the President of CNOOC Chemical Limited in 2000. He was also the Chairman of the Board of Directors of Fudao Fertilizer Limited and CNOOC Chemical Limited from 2001 to 2003 and 2003 to 2005 respectively. From 2003 to 2004, Mr. Wu was Assistant President of CNOOC. In August 2004, he became Vice President of CNOOC. Mr. Wu also serves as the Chairman of a number of subsidiaries of CNOOC (including Guangdong Dapeng LNG Company Limited, CNOOC Fujian Natural Gas Limited, CNOOC Oil & Petrochemicals Co., Ltd. and CNOOC Zhejiang Ningbo LNG Co., Ltd.), the Chairman and President of CNOOC Gas and Power Limited and the Vice Chairman of Shanghai Petroleum and Natural Gas Company Limited. Mr. Wu was appointed as an Executive Director of the Company with effect from 31 August 2005. Save as aforesaid, Mr. Wu does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 800,000 share options in the Company, Mr. Wu has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. Under the service contract between the Company and Mr. Wu, Mr. Wu's emoluments comprise an annual remuneration of HK$ 800,000 (after Hong Kong tax), plus performance-based bonuses. The emoluments of Mr. Wu were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make adjustments if necessary. Mr. Wu is subject to the provisions of his service contract and the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. 154 Yang Hua Born in 1961, Mr. Yang is an engineer and graduated from Petroleum University with a B.S. degree in Petroleum Engineering. He also received a MBA degree from the Sloan School of Management at MIT as a Sloan Fellow. Mr. Yang joined CNOOC in 1982 and has over 23 years' experience in petroleum exploration and production. Mr. Yang spent the first-eleven year of his career with CNOOC Research Center to serve as a number of positions including the Director of Field Development Department, the Manager for Reservoir Engineering Department, the Project Manager and Team Leaders. Mr. Yang spent his second-twelve year with international business, corporate finance and capital market in the Company and its subsidiaries. From 1993 to 1999, he served as the Deputy Chief Geologist, the Deputy Director and the Acting Director for Overseas Development Department of the Company and the Vice President of CNOOC International Limited, a wholly-owned subsidiary of the Company. In 1999, he became a Senior Vice President of the Company and then became an Executive Vice President in December 2005. From 2002 to 2003, Mr. Yang was the Director and President of CNOOC Southeast Asia Limited, a wholly-owned subsidiary of the Company. He was appointed as the Chief Financial Officer of the Company with effect from 1 January 2005. He also serves as the Director of CNOOC International Limited. Mr. Yang was appointed as an Executive Director with effect from 31 August 2005. Save as aforesaid, Mr. Yang does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 6,210,000 share options in the Company, Mr. Yang has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. Under the service contract between the Company and Mr. Yang, Mr. Yang's emoluments comprise an annual remuneration of HK$ 2,100,000 (after Hong Kong tax), plus performance-based bonuses. The emoluments of Mr. Yang were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make adjustments if necessary. Mr. Yang is subject to the provisions of his service contract and the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. 155 Lawrence J. Lau Born in 1944, Professor Lau is an economist and graduated with a B.S. degree (with Great Distinction) in Physics and Economics from Stanford University in 1964, and received his M.A. and Ph.D. degrees in Economics from the University of California at Berkeley in 1966 and 1969 respectively. Professor Lau joined the faculty of the Department of Economics at Stanford University in 1966, becoming Professor of Economics in 1976 and the first Kwoh-Ting Li Professor of Economic Development at Stanford University in 1992. From 1992 to 1996, he served as a Co-Director of the Asia-Pacific Research Center at Stanford University, and from 1997 to 1999, as the Director of the Stanford Institute for Economic Policy Research. He was also awarded the honorary degree of Doctor of Social Sciences by the Hong Kong University of Science and Technology in 1999. Professor Lau has authored or edited five books and published more than one hundred and sixty articles and notes in professional journals. Professor Lau is an Honorary Professor of a large number of universities and institutions in mainland China such as the Institute of Systems Science at the Chinese Academy of Sciences, Jilin University, Nanjing University, Renmin University of China, Shantou University, Southeast University and the School of Economics and Management, Tsinghua University. In July 2004, Professor Lau assumed office as Vice-Chancellor of The Chinese University of Hong Kong. He currently provides useful public service to the local community in his capacity as member of the Executive Committee of the HKSAR Government's Commission on Strategic Development, the Advisory Committee of the Independent Commission Against Corruption, and the Steering Committee on Innovation and Technology. He also serves on the Board of Directors of the Hong Kong Science and Technology Park Corporation as an independent non-executive director, as well as the Far EasTone Corporation as an independent director and the Shin Kong Financial Holdings Corporation as an independent supervisor, both listed companies in Taiwan. Professor Lau was appointed as an Independent Non-executive Director of the Company with effect from 31 August 2005. Professor Lau does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Professor Lau has no interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. There is no service contract between the Company and Professor Lau. Professor Lau's emoluments comprise an annual remuneration of HK$500,000 (after Hong Kong tax). The emoluments of Professor Lau were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make recommendation to the Board for adjustments if necessary. Professor Lau is subject to the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. 156 Edgar W. K. Cheng Born in 1943, Dr. Cheng was a graduate from the University of Notre Dame and the Medical College of Wisconsin, USA. He was Clinical Associate Professor of Medicine at Cornell University Medical College and practiced medicine and conducted clinical research at the Memorial Sloan-Kettering Cancer Centre in New York. Dr. Cheng was a former Chairman of the University Grants Commission in Hong Kong, and a member of the Education Commission. Dr. Cheng has been in many other financial market positions such as Chairman of the Stock Exchange of Hong Kong, Vice-Chairman and non-executive director of the Hang Seng Bank Ltd., Vice President of the International Federation of Stock Exchange, Founding Chairman of the Hong Kong Securities Institute, Member of the Board of Directors of the Hong Kong Futures Exchange Ltd., and Member of the Conference Board's Global Advisory Council. He was appointed by the Chinese Government as a Hong Kong Affairs Advisor (1991 - 1997). He became a Member of the Preparatory Committee and also the Selection Committee for the Hong Kong Special Administrative Region of the National People's Congress (1996-1997). Dr. Cheng served as the Head of the Central Policy Unit of the Government of Hong Kong Special Administrative Region from 1999 - 2001. He is at present Chairman of the Council of the Chinese University of Hong Kong, the Chairman of the World-Wide Investment Co. Ltd. and a member of the Board of Directors of the Hong Kong Institute for Monetary Research, non-executive director of the Standard Chartered Bank (Hong Kong) Ltd, independent director of Goldman Sachs Gao Hua Securities Co. Ltd, a member of The Greater Pearl River Delta Business Council, a member of the Commission on Strategic Development as well as the Vice-Chairman of the Council for Sustainable Development. He is also a member of the 10th Chinese People's Political Consultative Conference National Committee. Dr. Cheng does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Dr. Cheng has no interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. There is no service contract between the Company and Dr. Cheng. Dr. Cheng's emoluments are expected to comprise an annual remuneration of HK$500,000 (after Hong Kong tax). The emoluments of Dr. Cheng will be determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make recommendation to the Board for adjustments if necessary. Dr. Cheng is subject to the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. 4. To re-appoint Auditors and to authorise the Board of Directors to fix their remuneration. 157 B. As special business, to consider and, if thought fit, pass with or without amendments, the following resolutions as ordinary resolutions: 1. "THAT: (a) subject to paragraph (b) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to repurchase shares in the capital of the Company on The Stock Exchange of Hong Kong Limited (the "Stock Exchange") or on any other exchange on which the shares of the Company may be listed and recognised by the Securities and Futures Commission of Hong Kong and the Stock Exchange for this purpose ("Recognised Stock Exchange"), subject to and in accordance with all applicable laws, rules and regulations and the requirements of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the "Listing Rules"), or of any other Recognised Stock Exchange and the Articles of Association (the "Articles") of the Company, be and is hereby generally and unconditionally approved; (b) the aggregate nominal amount of shares of the Company which the Company is authorised to repurchase pursuant to the approval in paragraph (a) above shall not exceed 10% of the aggregate nominal amount of the share capital of the Company in issue as at the date of the passing of this resolution; and (c) for the purposes of this resolution: "Relevant Period" means the period from the date of the passing of this resolution until whichever is the earliest of: (i) the conclusion of the next annual general meeting of the Company; (ii) the expiration of the period within which the next annual general meeting of the Company is required by any applicable laws or the Articles of the Company to be held; and (iii) the revocation or variation of the authority given under this resolution by an ordinary resolution of the shareholders of the Company in general meeting." 2. "THAT: (a) subject to the following provisions of this resolution, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue and deal with additional shares in the capital of the Company and to make or grant offers, agreements and options (including bonds, notes, warrants, debentures and securities convertible into shares of the Company) which would or might require the exercise of such powers be and is hereby generally and unconditionally approved; (b) the approval in paragraph (a) above shall authorise the Directors during the Relevant Period to make or grant offers, agreements and options (including bonds, notes, warrants, debentures and securities convertible into shares of the Company) which would or might require the exercise of such powers after the end of the Relevant Period; 158 (c) the aggregate nominal amount of share capital of the Company allotted or agreed conditionally or unconditionally to be allotted, issued or dealt with (whether pursuant to an option or otherwise) by the Directors pursuant to the approval in paragraph (a) above, otherwise than pursuant to: (i) a Rights Issue (as hereinafter defined); (ii) an issue of shares pursuant to any specific authority granted by shareholders of the Company in general meeting, including upon the exercise of rights of subscription or conversion under the terms of any warrants issued by the Company or any bonds, notes, debentures or securities convertible into shares of the Company; (iii) an issue of shares pursuant to the exercise of any option granted under any share option scheme or similar arrangement for the time being adopted by the Company and/or any of its subsidiaries; (iv) any scrip dividend or similar arrangement providing for the allotment of shares in lieu of the whole or part of a dividend on shares of the Company in accordance with the Articles of the Company; or (v) any adjustment, after the date of grant or issue of any options, rights to subscribe or other securities referred to above, in the price at which shares in the Company shall be subscribed, and/or in the number of shares in the Company which shall be subscribed, on exercise of relevant rights under such options, warrants or other securities, such adjustment being made in accordance with, or as contemplated by, the terms of such options, rights to subscribe or other securities, shall not exceed 20% of the aggregate nominal amount of the share capital of the Company in issue as at the date of the passing of this resolution; and (d) for the purposes of this resolution: "Relevant Period" means the period from the date of passing of this resolution until whichever is the earliest of: (i) the conclusion of the next annual general meeting of the Company; (ii) the expiration of the period within which the next annual general meeting of the Company is required by any applicable laws or the Articles of the Company to be held; and (iii) the revocation or variation of the authority given under this resolution by an ordinary resolution of the shareholders of the Company in general meeting. "Rights Issue" means an offer of shares open for a period fixed by the Directors made to holders of shares whose names appear on the register of members of the Company on a fixed record date in proportion to their then holdings of such shares (subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of, or the requirements of, any recognised regulatory body or any stock exchange in or in any territory outside Hong Kong). 159 3. "THAT subject to the passing of the resolutions numbered B1 and B2 as set out in the notice convening this meeting, the general mandate granted to the Directors to allot, issue and deal with additional shares of the Company pursuant to resolution numbered B2 set out in this notice be and is hereby extended by the addition to it of an amount representing the aggregate nominal amount of the shares in the capital of the Company which are repurchased by the Company pursuant to and since the granting to the Company of the general mandate to repurchase shares in accordance with resolution numbered B1 set out in this notice, provided that such extended amount shall not exceed l0% of the aggregate nominal amount of the share capital of the Company in issue as at the date of the passing of this resolution." By Order of the Board CNOOC Limited Cao Yunshi Company Secretary Hong Kong, 12 April 2006 Registered office: 65th Floor, Bank of China Tower, 1 Garden Road, Hong Kong. 160 Notes: 1. Every member entitled to attend and vote at the above meeting (or at any adjournment thereof) is entitled to appoint one or more proxies to attend and vote on his behalf. A proxy need not be a shareholder of the Company. 2. In order to be valid, the form of proxy duly completed and signed in accordance with the instructions printed thereon, together with the power of attorney or other authority (if any) under which it is signed, or a copy of such authority notarially certified, must be completed and returned to the Company's registered office at 65th Floor, Bank of China Tower, 1 Garden Road, Hong Kong not less than 48 hours before the time appointed for the holding of the meeting or any adjournment thereof (as the case may be). 3. Completion and return of the form of proxy will not preclude a shareholder from attending and voting at the meeting or any adjournment thereof if the shareholder so desires and, in such event, the relevant form of proxy shall be deemed to be revoked. 4. Where there are joint registered holders of any share of the Company, any one of such persons may vote at the meeting, either personally or by proxy, in respect of such share as if he were solely entitled thereto; but if more than one of such joint registered holders be present at the meeting personally or by proxy, then the registered holder so present whose name stands first on the register of members of the Company in respect of such share will alone be entitled to vote in respect thereof. 5. With respect to resolution numbered B1, approval is being sought from shareholders for a general mandate to repurchase shares to be given to the Directors. The Directors wish to state that they have no immediate plans to repurchase any existing shares. The Explanatory Statement containing the information necessary to enable the shareholders to make an informed decision on whether to vote for or against the resolution to approve the repurchase by the Company of its own shares, as required by the Listing Rules, is set out in a separate letter from the Company. 6. With respect to resolution numbered B2, approval is being sought from shareholders for a general mandate to allot, issue and deal with shares to be given to the Directors. The Directors wish to state that they have no immediate plans to allot or issue any new shares of the Company. Approval is being sought from the shareholders as a general mandate for the purpose of Section 57B of the Companies Ordinance (Cap. 32 of the Laws of Hong Kong) and the Listing Rules. 7. With respect to resolution numbered B3, approval is being sought from shareholders for an extension of the general mandate granted to the Directors to allot and issue shares by adding to it the number of shares purchased under the authority granted pursuant to resolution numbered B1. 8. For the sake of good corporate governance practice, the Chairman intends to demand voting by poll for all the resolutions set out in the notice of the annual general meeting. 9. The register of members of the Company will be closed from 17 May 2006 to 24 May 2006 (both days inclusive), during which no transfer of shares in the Company will be registered. In order to qualify for the proposed final dividends and voting at the meeting, members are reminded to ensure that all instrument of transfer of shares accompanied by the relevant share certificate(s) must be lodged with the Company's registrar, Hong Kong Registrars Limited, at Shops 1712-1716, 17/F, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong for registration not later than 4:00 p m on 16 May 2006. 161 Glossary API gravity The America Petroleum Institute's scale for specific gravity for liquid hydrocarbons, measured in degrees. Appraisal well An exploratory well drilled for the purpose of evaluating the commerciality of a geological trap in which petroleum has been discovered. Bbls Barrels Bcf Billion cubic feet BOE Barrels-of-oil-equivalent DD&A Depreciation, depletion and amortization Dismantlement Post closure and other environmental exit Lifting costs per barrel (Operating expenditures + production taxes)/total net production Downstream business Refinery and petrochemical processing Finding costs For a given period, costs incurred in identifying areas that may warrant examination and in examining specific areas that are considered to have prospects of containing oil and gas reserves, including costs of drilling exploratory wells. FPSO Floating, Production, Storage and Offloading LNG Liquefied Natural Gas Mbbls Thousand barrels MBOE Thousand barrels of equivalent Mcf Thousand cubic feet Mmboe Million barrels-of-oil equivalent Mmbbls Million barrels Mmcf Million cubic feet Net Production Net production is calculated in the same way as net proved reserves. Net reserve additions Total additions of reserves plus or minus reserves revisions OGP International Association of Oil & Gas Producers Net Proved Reserves The Group's net proved reserves consist of its percentage interest in reserves, comprised of a 100% interest in its independent oil and gas properties and its participating interest in the properties covered under the production sharing contracts in PRC, less (a) an adjustment for the Group's share of royalties payable by the Group to the PRC government and the Group's participating interest in share oil payable to the PRC government under the production sharing contracts, and less (b) an adjustment for production allocable to foreign partners under the PRC attributable to the Group's participating interest, and plus (a) its participating interest in the properties in Australia, and (b) the participating interest in the properties covered under the production sharing contracts in Indonesia less an adjustment of share oil attributable to the Indonesian government and the domestic market obligation. 162 PSC Production sharing contract Reserve replacement ratio For a given year, total additions to proved reserves divided by production during the year Total production costs per barrel (operating expenditures + production taxes + dismantlement + DD&A + SG&A)/total net production Upstream business Oil and gas exploration, development, production and sales Wildcats A well drilled on any geological trap for the purpose of searching for petroleum accumulations in an area or rock formation that has no known reserves or previous discoveries Note: In calculating barrels-of-oil equivalent, or BOE, we have assumed that 6,000 cubic feet of natural gas equals one BOE, with the exception of natural gas from certain fields which is converted using the actual heating value of the natural gas. 163 Company Information Board of Directors: Fu Chengyu Executive Director, Chairman & CEO Luo Han Executive Director Zhou Shouwei Executive Director & President Cao Xinghe Executive Director Wu Zhenfang Executive Director Wu Guangqi Executive Director & Compliance Officer Yang Hua Executive Director, Executive Vice President & CFO Chiu Sung Hong Independent Non-executive Director Kenneth S. Courtis Independent Non-executive Director Evert Henkes Independent Non-executive Director Tse Hau Yin, Aloysius Independent Non-executive Director Lawrence J. Lau Independent Non-executive Director Company Secretary Cao Yunshi Audit Committee Chiu Sung Hong (Chairman) Dr. Kenneth S. Courtis (Financial Expert) Tse Hau Yin, Aloysius Remuneration Committee Chiu Sung Hong (Chairman) Evert Henkes Tse Hau Yin, Aloysius Nomination Committee Luo Han (Chairman) Chiu Sung Hong Tse Hau Yin, Aloysius Lawrence J. Lau Other Members of the Senior Management Liu Jian Executive Vice President Chen Wei Senior Vice President Zhang Guohua Senior Vice President Li Ning Senior Vice President Chen Bi Vice President Zhu Weilin Vice President Zhu Mingcai Vice President Fang Zhi Vice President Department Management Zhu Weilin General Manager, Exploration Department Li Fanrong General Manager, Development & Production Department Yang Shubo General Manager, Engineering & Project Department Li Feilong Qualified Accountant & Financial Controller, Finance Department Zhao Liguo General Manager, Legal Department Song Lisong General Manager, Health, Safety & Environmental Department Wang Zhong'an General Manager, Strategic Development & Planning Department Chen Hezhi Human Resources Manager, Human Resources Department Zheng Baoguo General Manager, Marketing Department Huang Xiaofeng General Manager, Treasury Department Xiao Zongwei General Manager, Investor Relations Department Zhu Mingcai General Manager, International Affairs Dong Weiliang General Manager, Science and Technology Development Department Zhang Benchun General Manager, Audit and Supervision Department 164 Branch Offices & Subsidiaries Management Chen Bi General Manager, CNOOC China Limited - Tianjin Branch Xie Yuhong General Manager, CNOOC China Limited - Zhanjiang Branch Li Ning General Manager, CNOOC China Limited - Shenzhen Branch Zhang Guohua General Manager, CNOOC China Limited - Shanghai Branch Chen Wei Director, CNOOC China Limited Research Center Zhu Mingcai President, CNOOC International Limited Fang Zhi Director & President, CNOOC Southeast Asia Limited Sun Dalu General Manager, China Offshore Oil (Singapore) International Pte. Ltd. Principal bankers: Bank of China (Hong Kong) Limited Hang Seng Bank Limited Bank of China Industrial and Commercial Bank of China China CITIC Bank China Construction Bank Hong Kong Share Registrar: Hong Kong Registrars Limited 17th Floor, Room 1712-6 Hopewell Center 183 Queen's Road East Wan Chai Hong Kong ADS Depositary: JPMorgan Chase Bank, N.A. 4 New York Plaza, 13th Floor New York, NY 10004 United States of America Symbol and stock code: NYSE: CEO HKSE: 0883 Investor / Public Relations: Hong Kong Tel: (852) 2213 2500 Fax: (852) 2525 9322 Beijing Tel: (8610) 8452 1646 Fax: (8610) 8452 1441 E-mail: xiaozw@cnooc.com.cn Registered office: 65/F, Bank of China Tower, 1 Garden Road, Hong Kong Tel: (852) 2213 2500 Fax: (852) 2525 9322 Beijing office: CNOOC Tower, No.6 Dong Zhi Men Wai Xiao Jie, Beijing, 100027, China Zip Code: 100027 Tel: (8610) 8452 1604 Fax: (8610) 6460 2503 Website: www.cnoocltd.com Company Announcement -------------------- CNOOC LIMITED [GRAPHIC OMITTED] (Incorporated in Hong Kong with limited liability under the Companies Ordinance) (Stock Code: 883) Notice of Annual General Meeting NOTICE IS HEREBY GIVEN THAT the Annual General Meeting of the shareholders of CNOOC Limited (the "Company") will be held on 24 May 2006, at 2:30 p.m. at Island Shangri-la, Hong Kong, Two Pacific Place, Supreme Court Road, Hong Kong, for the following purposes: A. As ordinary business, to consider and, if thought fit, pass with or without amendments, the following ordinary resolutions: 1. To receive and consider the audited Statement of Accounts together with the Reports of the Directors and Auditors thereon for the year ended 31 December 2005. 2. To declare a final dividend for the year ended 31 December 2005. 3. To re-elect retiring Directors, to elect Dr. Edgar W. K. Cheng as a new Independent Non-executive Director, and to authorise the Board of Directors to fix the remuneration of each of the Directors. The Directors to be re-elected and elected are as follows: Zhou Shouwei Born in 1950, Mr. Zhou received a doctorate degree from the Southwest Petroleum Institute in China and is a senior engineer. He joined China National Offshore Oil Corporation ("CNOOC") in 1982. Mr. Zhou served as the Deputy General Manager of China Offshore Oil Bohai Corporation, a subsidiary of CNOOC and the General Manager of CNOOC China Limited Tianjin Branch. He was appointed as the Executive Vice President of the Company in September 1999 and the President of the Company in July 2002. Since 2000, Mr. Zhou has been the Vice President of CNOOC. Mr. Zhou serves as the Director and the President of CNOOC China Limited and the Director of CNOOC International Limited, both subsidiaries of the Company. He also serves as the Chairman of CNOOC Southeast Asia Limited, a wholly-owned subsidiary of the Company since April 2003. Mr. Zhou became the chairman of CNOOC Engineering Company Limited, a listed company in Shanghai Stock Exchange and a subsidiary of CNOOC, on 6 December 2003. Mr. Zhou was appointed as an Executive Director of the Company with effect from 23 August 1999. Save as aforesaid, Mr. Zhou does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 9,100,000 share options in the Company, Mr. Zhou has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. Under the service contract between the Company and Mr. Zhou, Mr. Zhou's emoluments comprise an annual remuneration of HK$2,600,000 (after Hong Kong tax), plus performance-based bonuses. The emoluments of Mr. Zhou were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make adjustments if necessary. Mr. Zhou is subject to the provisions of his service contract and the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. Evert Henkes Born in 1943, Mr. Henkes served as the CEO of Shell global chemical business from 1998 to 2003. Since joining Shell in 1973, he held various executive positions worldwide, including Managing Director of Shell Chemicals UK Ltd., Managing Director of Shell UK, President of Billiton Metals, Shell's Metals Coordinator, Shell's Chemical Coordinator, and Director of Strategy & Business Services of Shell International Chemicals Ltd. He also served as directors in regional and global industrial bodies, including CEFIC and ICCA. He is also a director of Tate & Lyle Plc, SembCorp Industries Ltd. and Outokumpu Oy. Mr. Henkes was appointed as an Independent Non-executive Director of the Company with effect from 16 September 2003. Mr. Henkes does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 1,150,000 share options in the Company, Mr. Henkes has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. There is no service contract between the Company and Mr. Henkes. Mr. Henkes' emoluments comprise an annual remuneration of HK$500,000 (after Hong Kong tax). The Remuneration Committee will review the level of directors' remuneration from time to time and make recommendation to the Board for adjustments if necessary. The emoluments of Mr. Henkes were determined with reference to perception of industry standards and prevailing market conditions. Mr. Henkes is subject to the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. Cao Xinghe Born in 1949, Mr. Cao graduated from Tianjin Politics and Law Management College majoring in 2 Economic Laws and later studied for MBA in Capital University of Economics and Business. Mr. Cao has forty years of experience in the petroleum industry since he started work in 1965. He worked for Shengli oilfield and Dagang oilfield before he joined CNOOC in 1982. From 1985 to 1996, Mr. Cao worked as Manager of Bohai Oil Commercial Company and later as the Manager of Bohai Oil Transportation Company, both subsidiaries of CNOOC. From 1996 to 2003, he worked as Deputy General Manager and General Manager of CNOOC Bohai Corporation successively. From April 2003 to July 2004, Mr. Cao worked as Assistant President of CNOOC. He became Vice President of CNOOC in August 2004. Mr. Cao also serves as the Chairman of the Board of Directors of CNOOC Base Group Limited, a subsidiary of CNOOC. Mr. Cao was appointed as an Executive Director of the Company with effect from 31 August 2005. Save as aforesaid, Mr. Cao does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 800,000 share options in the Company, Mr. Cao has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. Under the service contract between the Company and Mr. Cao, Mr. Cao's emoluments comprise an annual remuneration of HK$800,000 (after Hong Kong tax), plus performance-based bonuses. The emoluments of Mr. Cao were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make adjustments if necessary. Mr. Cao is subject to the provisions of his service contract and the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. Wu Zhenfang Born in 1952, Mr. Wu is a senior engineer and graduated with a bachelor's degree from Dalian University of Technology, majoring in Offshore Petroleum Engineering and Construction. He later studied for EMBA in Shanghai Jiao Tong University. Mr. Wu joined the petroleum industry in 1971. He joined CNOOC in 1982. From 1993 to 1997, he was Deputy General Manager of CNOOC Nanhai West Corporation. He became the President of CNOOC Chemical Limited in 2000. He was also the Chairman of the Board of Directors of Fudao Fertilizer Limited and CNOOC Chemical Limited from 2001 to 2003 and 2003 to 2005 respectively. From 2003 to 2004, Mr. Wu was Assistant President of CNOOC. In August 2004, he became Vice President of CNOOC. Mr. Wu also serves as the Chairman of a number of subsidiaries of CNOOC (including Guangdong Dapeng LNG Company Limited, CNOOC Fujian Natural Gas Limited, CNOOC Oil & Petrochemicals Co., Ltd. and CNOOC Zhejiang Ningbo LNG Co., Ltd.), the Chairman and President of CNOOC Gas and Power Limited and the Vice Chairman of Shanghai Petroleum and Natural Gas Company Limited. Mr. Wu was appointed as an Executive Director of the Company with effect from 31 August 2005. Save as aforesaid, Mr. Wu does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 800,000 share options in the Company, Mr. Wu has no other interest in the 3 Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. Under the service contract between the Company and Mr. Wu, Mr. Wu's emoluments comprise an annual remuneration of HK$800,000 (after Hong Kong tax), plus performance-based bonuses. The emoluments of Mr. Wu were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make adjustments if necessary. Mr. Wu is subject to the provisions of his service contract and the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. Yang Hua Born in 1961, Mr. Yang is an engineer and graduated from Petroleum University with a B.S. degree in Petroleum Engineering. He also received a MBA degree from the Sloan School of Management at MIT as a Sloan Fellow. Mr. Yang joined CNOOC in 1982 and has over 23 years' experience in petroleum exploration and production. Mr. Yang spent the first-eleven year of his career with CNOOC Research Center to serve as a number of positions including the Director of Field Development Department, the Manager for Reservoir Engineering Department, the Project Manager and Team Leaders. Mr. Yang spent his second-twelve year with international business, corporate finance and capital market in the Company and its subsidiaries. From 1993 to 1999, he served as the Deputy Chief Geologist, the Deputy Director and the Acting Director for Overseas Development Department of the Company and the Vice President of CNOOC International Limited, a wholly-owned subsidiary of the Company. In 1999, he became a Senior Vice President of the Company and then became an Executive Vice President in December 2005. From 2002 to 2003, Mr. Yang was the Director and President of CNOOC Southeast Asia Limited, a wholly-owned subsidiary of the Company. He was appointed as the Chief Financial Officer of the Company with effect from 1 January 2005. He also serves as the Director of CNOOC International Limited. Mr. Yang was appointed as an Executive Director with effect from 31 August 2005. Save as aforesaid, Mr. Yang does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 6,210,000 share options in the Company, Mr. Yang has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. Under the service contract between the Company and Mr. Yang, Mr. Yang's emoluments comprise an annual remuneration of HK$2,100,000 (after Hong Kong tax), plus performance-based bonuses. The emoluments of Mr. Yang were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make adjustments if necessary. Mr. Yang is subject to the provisions of his service contract and the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. 4 Lawrence J. Lau Born in 1944, Professor Lau is an economist and graduated with a B.S. degree (with Great Distinction) in Physics and Economics from Stanford University in 1964, and received his M.A. and Ph.D. degrees in Economics from the University of California at Berkeley in 1966 and 1969 respectively. Professor Lau joined the faculty of the Department of Economics at Stanford University in 1966, becoming Professor of Economics in 1976 and the first Kwoh-Ting Li Professor of Economic Development at Stanford University in 1992. From 1992 to 1996, he served as a Co-Director of the Asia-Pacific Research Center at Stanford University, and from 1997 to 1999, as the Director of the Stanford Institute for Economic Policy Research. He was also awarded the honorary degree of Doctor of Social Sciences by the Hong Kong University of Science and Technology in 1999. Professor Lau has authored or edited five books and published more than one hundred and sixty articles and notes in professional journals. Professor Lau is an Honorary Professor of a large number of universities and institutions in mainland China such as the Institute of Systems Science at the Chinese Academy of Sciences, Jilin University, Nanjing University, Renmin University of China, Shantou University, Southeast University and the School of Economics and Management, Tsinghua University. In July 2004, Professor Lau assumed office as Vice-Chancellor of The Chinese University of Hong Kong. He currently provides useful public service to the local community in his capacity as member of the Executive Committee of the HKSAR Government's Commission on Strategic Development, the Advisory Committee of the Independent Commission Against Corruption, and the Steering Committee on Innovation and Technology. He also serves on the Board of Directors of the Hong Kong Science and Technology Park Corporation as an independent non-executive director, as well as the Far EasTone Corporation as an independent director and the Shin Kong Financial Holdings Corporation as an independent supervisor, both listed companies in Taiwan. Professor Lau was appointed as an Independent Non-executive Director of the Company with effect from 31 August 2005. Professor Lau does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Professor Lau has no interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. There is no service contract between the Company and Professor Lau. Professor Lau's emoluments comprise an annual remuneration of HK$500,000 (after Hong Kong tax). The emoluments of Professor Lau were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make recommendation to the Board for adjustments if necessary. Professor Lau is subject to the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. Edgar W. K. Cheng Born in 1943, Dr. Cheng was a graduate from the University of Notre Dame and the Medical College of Wisconsin, USA. He was Clinical Associate Professor of Medicine at Cornell University Medical 5 College and practiced medicine and conducted clinical research at the Memorial Sloan-Kettering Cancer Centre in New York. Dr. Cheng was a former Chairman of the University Grants Commission in Hong Kong, and a member of the Education Commission. Dr. Cheng has been in many other financial market positions such as Chairman of the Stock Exchange of Hong Kong, Vice-Chairman and non-executive director of the Hang Seng Bank Ltd., Vice President of the International Federation of Stock Exchange, Founding Chairman of the Hong Kong Securities Institute, Member of the Board of Directors of the Hong Kong Futures Exchange Ltd., and Member of the Conference Board's Global Advisory Council. He was appointed by the Chinese Government as a Hong Kong Affairs Advisor (1991 - 1997). He became a Member of the Preparatory Committee and also the Selection Committee for the Hong Kong Special Administrative Region of the National People's Congress (1996-1997). Dr. Cheng served as the Head of the Central Policy Unit of the Government of Hong Kong Special Administrative Region from 1999 - 2001. He is at present Chairman of the Council of the Chinese University of Hong Kong, the Chairman of the World-Wide Investment Co. Ltd. and a member of the Board of Directors of the Hong Kong Institute for Monetary Research, non-executive director of the Standard Chartered Bank (Hong Kong) Ltd, independent director of Goldman Sachs Gao Hua Securities Co. Ltd, a member of The Greater Pearl River Delta Business Council, a member of the Commission on Strategic Development as well as the Vice-Chairman of the Council for Sustainable Development. He is also a member of the 10th Chinese People's Political Consultative Conference National Committee. Dr. Cheng does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Dr. Cheng has no interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. There is no service contract between the Company and Dr. Cheng. Dr. Cheng's emoluments are expected to comprise an annual remuneration of HK$500,000 (after Hong Kong tax). The emoluments of Dr. Cheng will be determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make recommendation to the Board for adjustments if necessary. Dr. Cheng is subject to the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules. 4. To re-appoint Auditors and to authorise the Board of Directors to fix their remuneration. 6 B. As special business, to consider and, if thought fit, pass with or without amendments, the following resolutions as ordinary resolutions: 1. "THAT: (a) subject to paragraph (b) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to repurchase shares in the capital of the Company on The Stock Exchange of Hong Kong Limited (the "Stock Exchange") or on any other exchange on which the shares of the Company may be listed and recognised by the Securities and Futures Commission of Hong Kong and the Stock Exchange for this purpose ("Recognised Stock Exchange"), subject to and in accordance with all applicable laws, rules and regulations and the requirements of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the "Listing Rules"), or of any other Recognised Stock Exchange and the Articles of Association (the "Articles") of the Company, be and is hereby generally and unconditionally approved; (b) the aggregate nominal amount of shares of the Company which the Company is authorised to repurchase pursuant to the approval in paragraph (a) above shall not exceed 10% of the aggregate nominal amount of the share capital of the Company in issue as at the date of the passing of this resolution; and (c) for the purposes of this resolution: "Relevant Period" means the period from the date of the passing of this resolution until whichever is the earliest of: (i) the conclusion of the next annual general meeting of the Company; (ii) the expiration of the period within which the next annual general meeting of the Company is required by any applicable laws or the Articles of the Company to be held; and (iii) the revocation or variation of the authority given under this resolution by an ordinary resolution of the shareholders of the Company in general meeting." 2. "THAT: (a) subject to the following provisions of this resolution, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue and deal with additional shares in the capital of the Company and to make or grant offers, agreements and options (including bonds, notes, warrants, debentures and securities convertible into shares of the Company) which would or might require the exercise of such powers be and is hereby generally and unconditionally approved; (b) the approval in paragraph (a) above shall authorise the Directors during the Relevant Period to make or grant offers, agreements and options (including bonds, notes, warrants, debentures and securities convertible into shares of the Company) which would or might require the exercise of such powers after the end of the Relevant Period; 7 (c) the aggregate nominal amount of share capital of the Company allotted or agreed conditionally or unconditionally to be allotted, issued or dealt with (whether pursuant to an option or otherwise) by the Directors pursuant to the approval in paragraph (a) above, otherwise than pursuant to: (i) a Rights Issue (as hereinafter defined); (ii) an issue of shares pursuant to any specific authority granted by shareholders of the Company in general meeting, including upon the exercise of rights of subscription or conversion under the terms of any warrants issued by the Company or any bonds, notes, debentures or securities convertible into shares of the Company; (iii) an issue of shares pursuant to the exercise of any option granted under any share option scheme or similar arrangement for the time being adopted by the Company and/or any of its subsidiaries; (iv) any scrip dividend or similar arrangement providing for the allotment of shares in lieu of the whole or part of a dividend on shares of the Company in accordance with the Articles of the Company; or (v) any adjustment, after the date of grant or issue of any options, rights to subscribe or other securities referred to above, in the price at which shares in the Company shall be subscribed, and/or in the number of shares in the Company which shall be subscribed, on exercise of relevant rights under such options, warrants or other securities, such adjustment being made in accordance with, or as contemplated by, the terms of such options, rights to subscribe or other securities, shall not exceed 20% of the aggregate nominal amount of the share capital of the Company in issue as at the date of the passing of this resolution; and (d) for the purposes of this resolution: "Relevant Period" means the period from the date of passing of this resolution until whichever is the earliest of: (i) the conclusion of the next annual general meeting of the Company; (ii) the expiration of the period within which the next annual general meeting of the Company is required by any applicable laws or the Articles of the Company to be held; and (iii) the revocation or variation of the authority given under this resolution by an ordinary resolution of the shareholders of the Company in general meeting. "Rights Issue" means an offer of shares open for a period fixed by the Directors made to holders of shares whose names appear on the register of members of the Company on a fixed record date in proportion to their then holdings of such shares (subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of, or the requirements of, any recognised 8 regulatory body or any stock exchange in or in any territory outside Hong Kong). 3. "THAT subject to the passing of the resolutions numbered B1 and B2 as set out in the notice convening this meeting, the general mandate granted to the Directors to allot, issue and deal with additional shares of the Company pursuant to resolution numbered B2 set out in this notice be and is hereby extended by the addition to it of an amount representing the aggregate nominal amount of the shares in the capital of the Company which are repurchased by the Company pursuant to and since the granting to the Company of the general mandate to repurchase shares in accordance with resolution numbered B1 set out in this notice, provided that such extended amount shall not exceed l0% of the aggregate nominal amount of the share capital of the Company in issue as at the date of the passing of this resolution." By Order of the Board CNOOC Limited Cao Yunshi Company Secretary Hong Kong, 12 April 2006 Registered office: 65th Floor, Bank of China Tower, 1 Garden Road, Hong Kong. Notes: 1. Every member entitled to attend and vote at the above meeting (or at any adjournment thereof) is entitled to appoint one or more proxies to attend and vote on his behalf. A proxy need not be a shareholder of the Company. 2. In order to be valid, the form of proxy duly completed and signed in accordance with the instructions printed thereon, together with the power of attorney or other authority (if any) under which it is signed, or a copy of such authority notarially certified, must be completed and returned to the Company's registered office at 65th Floor, Bank of China Tower, 1 Garden Road, Hong Kong not less than 48 hours before the time appointed for the holding of the meeting or any adjournment thereof (as the case may be). 3. Completion and return of the form of proxy will not preclude a shareholder from attending and voting at the meeting or any adjournment thereof if the shareholder so desires and, in such event, the relevant form of proxy shall be deemed to be revoked. 4. Where there are joint registered holders of any share of the Company, any one of such persons may vote at the meeting, either personally or by proxy, in respect of such share as if he were solely entitled thereto; but if more than one of such joint registered holders be present at the meeting personally or by proxy, then the registered holder so present whose name stands first on the register of members of the Company in respect of such share will alone be entitled to vote in respect thereof. 5. With respect to resolution numbered B1, approval is being sought from shareholders for a general mandate to repurchase 9 shares to be given to the Directors. The Directors wish to state that they have no immediate plans to repurchase any existing shares. The Explanatory Statement containing the information necessary to enable the shareholders to make an informed decision on whether to vote for or against the resolution to approve the repurchase by the Company of its own shares, as required by the Listing Rules, is set out in a separate letter from the Company. 6. With respect to resolution numbered B2, approval is being sought from shareholders for a general mandate to allot, issue and deal with shares to be given to the Directors. The Directors wish to state that they have no immediate plans to allot or issue any new shares of the Company. Approval is being sought from the shareholders as a general mandate for the purpose of Section 57B of the Companies Ordinance (Cap. 32 of the Laws of Hong Kong) and the Listing Rules. 7. With respect to resolution numbered B3, approval is being sought from shareholders for an extension of the general mandate granted to the Directors to allot and issue shares by adding to it the number of shares purchased under the authority granted pursuant to resolution numbered B1. 8. For the sake of good corporate governance practice, the Chairman intends to demand voting by poll for all the resolutions set out in the notice of the annual general meeting. 9. The register of members of the Company will be closed from 17 May 2006 to 24 May 2006 (both days inclusive), during which no transfer of shares in the Company will be registered. In order to qualify for the proposed final dividends and voting at the meeting, members are reminded to ensure that all instrument of transfer of shares accompanied by the relevant share certificate(s) must be lodged with the Company's registrar, Hong Kong Registrars Limited, at Shops 1712-1716, 17/F, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong for registration not later than 4:00 p m on 16 May 2006. As at the date of this announcement, the Board comprises: Executive Directors: Fu Chengyu (Chairman) Luo Han Zhou Shouwei Cao Xinghe Wu Zhenfang Wu Guangqi Yang Hua Independent Non-Executive Directors: Chiu Sung Hong Kenneth S. Courtis Evert Henkes Hau Yin Tse, Aloysius Lawrence J. Lau 10 -------------------------------------------------------------------------------- IMPORTANT -------------------------------------------------------------------------------- If you are in any doubt as to any aspect of this document or as to the action to be taken, you should consult a stockbroker or other registered dealer in securities, a bank manager, solicitor, professional accountant or other professional adviser. If you have sold or transferred all your shares in CNOOC Limited you should at once pass this document to the purchaser or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser. The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this document, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document. -------------------------------------------------------------------------------- CNOOC LIMITED [GRAPHIC OMITTED] (Incorporated in Hong Kong with limited liability under the Companies Ordinance) (Stock Code: 883) EXPLANATORY STATEMENT RELATING TO GENERAL MANDATES TO ISSUE SECURITIES AND REPURCHASE SHARES AND RE-ELECTION AND ELECTION OF DIRECTORS -------------------------------------------------------------------------------- A notice convening an annual general meeting of CNOOC Limited to be held on 24 May 2006 at 2:30 p.m. at Island Shangri-la Hong Kong, Two Pacific Place, Supreme Court Road, Hong Kong is set out on pages 151 to 160 of the annual report of the Company for the year ended 31 December 2005. Whether or not you intend to attend such meeting, please complete and return the form of proxy in accordance with the instructions printed thereon as soon as possible, and in any event not less than 48 hours before the time appointed for holding such meeting. Completion and return of the form of proxy will not preclude shareholders from attending and voting at the meeting or any adjourned meeting if they so wish. 12 April 2006 1 CNOOC LIMITED [GRAPHIC OMITTED] (Incorporated in Hong Kong with limited liability under the Companies Ordinance) (Stock Code: 883) Board of Directors: Registered office: Fu Chengyu (Chairman) 65/F, Bank of China Tower Luo Han 1 Garden Road Zhou Shouwei Central Cao Xinghe Hong Kong Wu Zhenfang Wu Guangqi Yang Hua Sung Hong Chiu* Kenneth S. Courtis* Evert Henkes* Tse Hau Yin, Aloysius* Lawrence J. Lau* * Independent Non-executive Directors 12 April 2005 To the shareholders Dear Sir or Madam, EXPLANATORY STATEMENT RELATING TO GENERAL MANDATES TO ISSUE SECURITIES AND REPURCHASE SHARES AND RE-ELECTION AND ELECTION OF DIRECTORS INTRODUCTION The purpose of this document is to provide you with information in connection with the proposed ordinary resolution set out as items A3, B1, B2 and B3 of the notice of annual general meeting for the approval of renewal of the general mandates for issue of securities and repurchase Shares, and re-election of retiring directors and election of new independent non-executive director at the annual general meeting to be held at Island Shangri-la Hong Kong, Two Pacific Place, Supreme Court Road, Hong Kong on 24 May 2006 at 2:30 p.m. (the "Annual General Meeting"). References in this document to "Shares" are share(s) of all classes in the issued share capital of CNOOC Limited (the "Company"). GENERAL MANDATES TO ISSUE SECURITIES AND REPURCHASE SHARES At the annual general meeting of the Company held on 25 May 2005, ordinary resolutions were passed granting general mandates to the directors of the Company (the "Directors"), inter alia, (i) to repurchase Shares not exceeding 10 per cent. of the aggregate nominal amount of the issued share capital of the Company as at 25 May 2005; and (ii) to allot, issue and deal with additional Shares not exceeding 20 per cent. of the aggregate nominal amount of the issued share capital of the Company as at 25 May 2005 and those Shares not exceeding 10 per cent. of the aggregate nominal amount of the issued share capital of the Company as at 25 May 2005 which may be repurchased by the Company (collectively referred to as "Existing General Mandates"). 2 The Existing General Mandates will lapse at the conclusion of the Annual General Meeting. Accordingly, new general mandates to issue securities and to repurchase Shares, respectively, as set out as ordinary resolutions in the notice of the Annual General Meeting, are now proposed to be granted. The Directors, at the date hereof, have no immediate plans to repurchase any existing Shares or to issue any new securities pursuant to the relevant mandates. The explanatory statement, as required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules") to be sent to the shareholders of the Company (the "Shareholders") in connection with the proposed general mandate to issue securities and repurchase Shares, is set out in Appendix I to this document. The explanatory statement contains all information reasonably necessary to enable the Shareholders to make an informed decision on whether to vote for or against the relevant resolutions at the Annual General Meeting. RE-ELECTION AND ELECTION OF DIRECTORS Pursuant to Article 97 of the Articles of Association (the "Articles") of the Company, Messrs. Zhou Shouwei, Kenneth S. Courtis and Evert Henkes will retire from office at the Annual General Meeting and, being eligible for re-election, Messrs. Zhou Shouwei and Evert Henkes have been recommended by the Board and have offered themselves for re-election. Mr. Kenneth S. Courtis will retire at the Annual General Meeting. The Board has recommended Mr. Edgar W. K. Cheng for election at the Annual General Meeting as a new independent non-executive director of the Company. In addition, pursuant to Article 101 of the Articles of the Company, Messrs. Cao Xinghe, Wu Zhenfang, Yang Hua and Professor Lawrence J. Lau will also retire from office at the Annual General Meeting and, being eligible for re-election, have been recommended by the Board for re-election at the Annual General Meeting. Details of such Directors required to be disclosed under the Listing Rules are set out in Appendix II to this document. ANNUAL GENERAL MEETING A notice convening the Annual General Meeting is set out on pages 151 to 160 of the annual report of the Company for the year ended 31 December 2005. There is no Shareholder that is materially interested in the proposed resolutions regarding the general mandates to issue securities and repurchase Shares, and therefore none of the Shareholders is required to abstain from voting in respect of such resolutions. Pursuant to the Articles of the Company, at any general meeting of the Company, a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is demanded. Details of the procedures by which Shareholders may demand a poll are set out in Appendix III to this document. For the sake of good corporate governance practice, the Chairman intends to demand voting by poll for all the resolutions set out in the notice of the Annual General Meeting. A form of proxy for use at the Annual General Meeting is enclosed. Shareholders are requested to complete the form of proxy and return it to the registered office of the Company at 65th Floor, Bank of China Tower, 1 Garden Road, Central, Hong Kong in accordance with the instructions printed on it not less than 48 hours before the time appointed for the holding of the meeting or any adjournment thereof (as the case may be), if they do not intend to be present in person at the meeting. Completion and return of the form of proxy will not preclude Shareholders from attending and voting at the meeting or any adjournment thereof if they so wish and, in such event, the relevant form of proxy shall be deemed to be revoked. RECOMMENDATION The Directors believe that the granting of the general mandates to issue securities and repurchase Shares, and the re-election or election of the said Directors (as appropriate) are in the best interests of the Company and the Shareholders as a whole, and accordingly recommend the Shareholders to vote in favour of all the relevant resolutions to be proposed at the Annual General Meeting. Yours faithfully, For and on behalf of the Board CNOOC Limited Fu Chengyu Chairman 3 ------------------------------------------------------------------------------- APPENDIX I EXPLANATORY NOTES TO REPURCHASE MANDATE ------------------------------------------------------------------------------- The following is the explanatory notes required to be sent to the Shareholders under the Listing Rules in connection with the proposed general mandate for repurchase of securities and also constitutes the memorandum required under section 49BA of the Companies Ordinance. GENERAL MANDATE TO REPURCHASE SHARES At the Annual General Meeting, an ordinary resolution will be proposed to give the Directors a general and unconditional mandate (the "Repurchase Mandate") to exercise all the powers of the Company to repurchase on the Stock Exchange of Hong Kong Limited (the "Stock Exchange") the issued and fully paid Shares. Under the Repurchase Mandate, the number of Shares that the Company may repurchase shall not exceed 10 per cent. of the aggregate nominal amount of the issued share capital of the Company as at the date of passing the resolution. Shareholders should note that the Repurchase Mandate covers purchases made only during the period ending on the earliest of the date of the next annual general meeting of the Company, the date by which the next annual general meeting of the Company is required by any applicable laws or the Articles of the Company to be held and the date upon which such authority is revoked or varied. SHARE CAPITAL On 10 April 2006, being the latest practicable date before printing of this document for ascertaining certain information for the purpose of inclusion in this document (the "Latest Practicable Date"), 41,054,675,375 Shares were in issue and fully paid. Assuming that there are no changes from the Latest Practicable Date to the date of the Annual General Meeting in the Company's issued and fully paid share capital and subject to the passing of the ordinary resolution approving the Repurchase Mandate, the maximum number of Shares that may be repurchased by the Company pursuant to the Repurchase Mandate will be 4,105,467,537 Shares. DIRECTORS AND CONNECTED PERSONS None of the Directors nor, to the best of the knowledge and belief of the Directors having made all reasonable enquiries, any of their respective associates (as defined in the Listing Rules) has a present intention, in the event that the Repurchase Mandate is approved by the Shareholders, to sell Shares to the Company or its subsidiaries. No persons who are connected persons (as defined in the Listing Rules) have notified the Company that they have a present intention to sell Shares to the Company or have undertaken not to sell any of the Shares held by them to the Company, in the event that the Company is authorised to make purchases of Shares, on the Stock Exchange. DIRECTORS' UNDERTAKING The Directors have undertaken to the Stock Exchange to exercise the powers of the Company to make purchases pursuant to the Repurchase Mandate in accordance with the Listing Rules and all applicable laws of Hong Kong. EFFECT OF THE HONG KONG CODE ON TAKEOVERS AND MERGERS If as a result of a repurchase of Shares by the Company, a Shareholder's proportionate interest in the voting rights of the Company increases, such increase will be treated as an acquisition for the purpose of the Hong Kong Code on Takeovers and Mergers (the "Takeovers Code"). As a result, a Shareholder, or a group of Shareholders acting in concert, depending on the level of increase of its or their shareholding, could obtain or consolidate control of the Company and become obliged to make a mandatory offer in accordance with Rules 26 and 32 of the Takeovers Code. As at the Latest Practicable Date, the immediate controlling shareholder of the Company, CNOOC (BVI) Limited ("CNOOC BVI"), was recorded in the register required to be kept by the Company under section 336(1) of the Securities and Futures Ordinance as having an interest in 28,999,999,995 Shares, representing approximately 70.64 per cent. of the issued share capital of the Company as at that date. CNOOC BVI is a wholly-owned subsidiary of Overseas Oil & Gas Corporation, Limited ("OOGC"), which is in turn a wholly owned subsidiary of China National Offshore Oil Corporation ("CNOOC"). Accordingly, CNOOC (BVI)'s interests are recorded as the interests of OOGC and CNOOC. OOGC also has a direct interest in 5 Shares. If the Repurchase Mandate is exercised in full, CNOOC BVI, OOGC and CNOOC will be regarded as being interested in approximately 78.49 per cent. of the reduced issued share capital of the Company. Regardless of such increase in shareholding, neither CNOOC BVI, OOGC nor CNOOC would become obliged to make a mandatory offer for all securities not already owned by it or its concert parties under Rule 26 of the Takeovers Code. 4 PUBLIC FLOAT The Directors do not have a present intention to exercise the Repurchase Mandate to such extent, causing the public float of the securities of the Company to fall below 25 per cent.. LISTING RULES FOR REPURCHASE OF SHARES Reasons for Repurchase The Directors consider that the Repurchase Mandate will provide the Company with the flexibility to make such repurchases when appropriate and beneficial to the Company and its Shareholders. Such purchases may, depending on the market conditions and funding arrangements at the time, lead to an enhancement of the net asset value per Share and/or earnings per Share. Source of Funds Repurchases must be made from internal resources, borrowings and/or other funds legally available for the purpose in accordance with the Company's Memorandum and Articles of Association, the Listing Rules and applicable laws and regulations in Hong Kong. On the basis of the consolidated financial position of the Company as at 31st December 2005 (being the date to which the latest published audited financial statements of the Company have been made up) and in particular the working capital position and gearing ratio of the Company and the number of Shares in issue, the Directors consider that there will not be a material impact on the working capital or the gearing position of the Company in the event that the proposed repurchases were to be carried out in full at any time during the proposed repurchase period. No repurchase would be made in circumstances that would have a material adverse impact on the working capital of the Company (as compared with the position disclosed in the latest published audited financial statements) unless the Directors consider that such purchases were in the best interests of the Company and its Shareholders as a whole. SHARE REPURCHASE MADE BY THE COMPANY The Company has not repurchased any of its Shares (whether on the Stock Exchange or otherwise) in the six months preceding the Latest Practicable Date. GENERAL During each of the twelve months preceding the Latest Practicable Date, the highest and lowest traded prices for Shares on the Stock Exchange were as follows: Price Per Share Month Highest Lowest HK$ HK$ 2005 April 4.400 3.950 May 4.400 4.075 June 4.650 4.100 July 5.30 4.600 August 6.05 5.30 September 5.80 5.35 October 5.55 4.825 November 5.25 4.900 December 5.60 5.25 2006 January 6.55 5.25 February 6.80 6.30 March 6.60 5.90 April (up to the Latest Practicable Date) 6.20 6.05 5 ------------------------------------------------------------------------------- APPENDIX II DETAILS OF PROPOSED DIRECTORS FOR RE-ELECTION AND ELECTION AT THE AGM ------------------------------------------------------------------------------- The following are the particulars of the Directors who are proposed for re-election and election at the Annual General Meeting as required under Rule 13.51(2) of the Listing Rules: Zhou Shouwei Born in 1950, Mr. Zhou received a doctorate degree from the Southwest Petroleum Institute in China and is a senior engineer. He joined China National Offshore Oil Corporation ("CNOOC") in 1982. Mr. Zhou served as the Deputy General Manager of China Offshore Oil Bohai Corporation, a subsidiary of CNOOC and the General Manager of CNOOC China Limited Tianjin Branch. He was appointed as the Executive Vice President of the Company in September 1999 and the President of the Company in July 2002. Since 2000, Mr. Zhou has been the Vice President of CNOOC. Mr. Zhou serves as the Director and the President of CNOOC China Limited and the Director of CNOOC International Limited, both subsidiaries of the Company. He also serves as the Chairman of CNOOC Southeast Asia Limited, a wholly-owned subsidiary of the Company since April 2003. Mr. Zhou became the chairman of CNOOC Engineering Company Limited, a listed company in Shanghai Stock Exchange and a subsidiary of CNOOC, on 6 December 2003. Mr. Zhou was appointed as an Executive Director of the Company with effect from 23 August 1999. Save as aforesaid, Mr. Zhou does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 9,100,000 share options in the Company, Mr. Zhou has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. Under the service contract between the Company and Mr. Zhou, Mr. Zhou's emoluments comprise an annual remuneration of HK$2,600,000 (after Hong Kong tax), plus performance-based bonuses. The emoluments of Mr. Zhou were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make adjustments if necessary. There is no fixed term under the service contract and either party may terminate with 3 month's notice. Mr. Zhou is subject to the provisions of his service contract and the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rules 13.51(2)(h)-13.51(2)(v) of the Listing Rules, nor are there other matters that need to be brought to the attention of the Shareholders. Evert Henkes Born in 1943, Mr. Henkes served as the CEO of Shell global chemical business from 1998 to 2003. Since joining Shell in 1973, he held various executive positions worldwide, including Managing Director of Shell Chemicals UK Ltd., Managing Director of Shell UK, President of Billiton Metals, Shell's Metals Coordinator, Shell's Chemical Coordinator, and Director of Strategy & Business Services of Shell International Chemicals Ltd. He also served as directors in regional and global industrial bodies, including CEFIC and ICCA. He is also a director of Tate & Lyle Plc, SembCorp Industries Ltd. and Outokumpu Oy. Mr. Henkes was appointed as an Independent Non-executive Director of the Company with effect from 16 September 2003. Mr. Henkes does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 1,150,000 share options in the Company, Mr. Henkes has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. There is no service contract between the Company and Mr. Henkes. Mr. Henkes' emoluments comprise an annual remuneration of HK$500,000 (after Hong Kong tax). The Remuneration Committee will review the level of directors' remuneration from time to time and make recommendation to the Board for adjustments if necessary. The emoluments of Mr. Henkes were determined with reference to perception of industry standards and prevailing market conditions. Mr. Henkes is subject to the retirement provisions in the articles of association of the Company, and is expected to retire and stand for re-election before 2009. 6 ------------------------------------------------------------------------------- APPENDIX II DETAILS OF PROPOSED DIRECTORS FOR RE-ELECTION AND ELECTION AT THE AGM ------------------------------------------------------------------------------- There is no other information required to be disclosed pursuant to any of the requirements of Rules 13.51(2)(h)-13.51(2)(v) of the Listing Rules, nor are there other matters that need to be brought to the attention of the Shareholders. Cao Xinghe Born in 1949, Mr. Cao graduated from Tianjin Politics and Law Management College majoring in Economic Laws and later studied for MBA in Capital University of Economics and Business. Mr. Cao has forty years of experience in the petroleum industry since he started work in 1965. He worked for Shengli oilfield and Dagang oilfield before he joined CNOOC in 1982. From 1985 to 1996, Mr. Cao worked as Manager of Bohai Oil Commercial Company and later as the Manager of Bohai Oil Transportation Company, both subsidiaries of CNOOC. From 1996 to 2003, he worked as Deputy General Manager and General Manager of CNOOC Bohai Corporation successively. From April 2003 to July 2004, Mr. Cao worked as Assistant President of CNOOC. He became Vice President of CNOOC in August 2004. Mr. Cao also serves as the Chairman of the Board of Directors of CNOOC Base Group Limited, a subsidiary of CNOOC. Mr. Cao was appointed as an Executive Director of the Company with effect from 31 August 2005. Save as aforesaid, Mr. Cao does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 800,000 share options in the Company, Mr. Cao has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. Under the service contract between the Company and Mr. Cao, Mr. Cao's emoluments comprise an annual remuneration of HK$800,000 (after Hong Kong tax), plus performance-based bonuses. The emoluments of Mr. Cao were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make adjustments if necessary. There is no fixed term under the service contract and either party may terminate with 3 month's notice. Mr. Cao is subject to the provisions of his service contract and the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rules 13.51(2)(h)-13.51(2)(v) of the Listing Rules, nor are there other matters that need to be brought to the attention of the Shareholders. Wu Zhenfang Born in 1952, Mr. Wu is a senior engineer and graduated with a bachelor's degree from Dalian University of Technology, majoring in Offshore Petroleum Engineering and Construction. He later studied for EMBA in Shanghai Jiao Tong University. Mr. Wu joined the petroleum industry in 1971. He joined CNOOC in 1982. From 1993 to 1997, he was Deputy General Manager of CNOOC Nanhai West Corporation. He became the President of CNOOC Chemical Limited in 2000. He was also the Chairman of the Board of Directors of Fudao Fertilizer Limited and CNOOC Chemical Limited from 2001 to 2003 and 2003 to 2005 respectively. From 2003 to 2004, Mr. Wu was Assistant President of CNOOC. In August 2004, he became Vice President of CNOOC. Mr. Wu also serves as the Chairman of a number of subsidiaries of CNOOC (including Guangdong Dapeng LNG Company Limited, CNOOC Fujian Natural Gas Limited, CNOOC Oil & Petrochemicals Co., Ltd. and CNOOC Zhejiang Ningbo LNG Co., Ltd.), the Chairman and President of CNOOC Gas and Power Limited and the Vice Chairman of Shanghai Petroleum and Natural Gas Company Limited. Mr. Wu was appointed as an Executive Director of the Company with effect from 31 August 2005. Save as aforesaid, Mr. Wu does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 800,000 share options in the Company, Mr. Wu has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. Under the service contract between the Company and Mr. Wu, Mr. Wu's emoluments comprise an annual remuneration of HK$800,000 (after Hong Kong tax), plus performance-based bonuses. The emoluments of Mr. Wu were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make adjustments if necessary. There is no fixed term under the service contract and either party may terminate with 3 month's notice. Mr. Wu is subject to the provisions of his service contract and the retirement provisions in the articles of association of the 7 ------------------------------------------------------------------------------- APPENDIX II DETAILS OF PROPOSED DIRECTORS FOR RE-ELECTION AND ELECTION AT THE AGM ------------------------------------------------------------------------------- Company. There is no other information required to be disclosed pursuant to any of the requirements of Rules 13.51(2)(h)-13.51(2)(v) of the Listing Rules, nor are there other matters that need to be brought to the attention of the Shareholders. Yang Hua Born in 1961, Mr. Yang is an engineer and graduated from Petroleum University with a B.S. degree in Petroleum Engineering. He also received a MBA degree from the Sloan School of Management at MIT as a Sloan Fellow. Mr. Yang joined CNOOC in 1982 and has over 23 years' experience in petroleum exploration and production. Mr. Yang spent the first-eleven year of his career with CNOOC Research Center to serve as a number of positions including the Director of Field Development Department, the Manager for Reservoir Engineering Department, the Project Manager and Team Leaders. Mr. Yang spent his second-twelve year with international business, corporate finance and capital market in the Company and its subsidiaries. From 1993 to 1999, he served as the Deputy Chief Geologist, the Deputy Director and the Acting Director for Overseas Development Department of the Company and the Vice President of CNOOC International Limited, a wholly-owned subsidiary of the Company. In 1999, he became a Senior Vice President of the Company and then became an Executive Vice President in December 2005. From 2002 to 2003, Mr. Yang was the Director and President of CNOOC Southeast Asia Limited, a wholly-owned subsidiary of the Company. He was appointed as the Chief Financial Officer of the Company with effect from 1 January 2005. He also serves as the Director of CNOOC International Limited. Mr. Yang was appointed as an Executive Director with effect from 31 August 2005. Save as aforesaid, Mr. Yang does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Apart from holding 6,210,000 share options in the Company, Mr. Yang has no other interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. Under the service contract between the Company and Mr. Yang, Mr. Yang's emoluments comprise an annual remuneration of HK$2,100,000 (after Hong Kong tax), plus performance-based bonuses. The emoluments of Mr. Yang were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make adjustments if necessary. There is no fixed term under the service contract and either party may terminate with 3 month's notice. Mr. Yang is subject to the provisions of his service contract and the retirement provisions in the articles of association of the Company. There is no other information required to be disclosed pursuant to any of the requirements of Rules 13.51(2)(h)-13.51(2)(v) of the Listing Rules, nor are there other matters that need to be brought to the attention of the Shareholders. Lawrence J. Lau Born in 1944, Professor Lau is an economist and graduated with a B.S. degree (with Great Distinction) in Physics and Economics from Stanford University in 1964, and received his M.A. and Ph.D. degrees in Economics from the University of California at Berkeley in 1966 and 1969 respectively. Professor Lau joined the faculty of the Department of Economics at Stanford University in 1966, becoming Professor of Economics in 1976 and the first Kwoh-Ting Li Professor of Economic Development at Stanford University in 1992. From 1992 to 1996, he served as a Co-Director of the Asia-Pacific Research Center at Stanford University, and from 1997 to 1999, as the Director of the Stanford Institute for Economic Policy Research. He was also awarded the honorary degree of Doctor of Social Sciences by the Hong Kong University of Science and Technology in 1999. Professor Lau has authored or edited five books and published more than one hundred and sixty articles and notes in professional journals. Professor Lau is an Honorary Professor of a large number of universities and institutions in mainland China such as the Institute of Systems Science at the Chinese Academy of Sciences, Jilin University, Nanjing University, Renmin University of China, Shantou University, Southeast University and the School of Economics and Management, Tsinghua University. In July 2004, Professor Lau assumed office as Vice-Chancellor of The Chinese University of Hong Kong. He currently provides useful public service to the local community in his capacity as member of the Executive Committee of the HKSAR Government's Commission on Strategic Development, the Advisory Committee of the Independent Commission Against Corruption, and the Steering Committee on Innovation and Technology. He also serves on the Board of Directors of the Hong Kong Science and Technology Park Corporation as an independent non-executive director, as well as the Far EasTone Corporation as an independent director and the Shin Kong Financial Holdings Corporation as an independent supervisor, both listed 8 ------------------------------------------------------------------------------- APPENDIX II DETAILS OF PROPOSED DIRECTORS FOR RE-ELECTION AND ELECTION AT THE AGM ------------------------------------------------------------------------------- companies in Taiwan. Professor Lau was appointed as an Independent Non-executive Director of the Company with effect from 31 August 2005. Professor Lau does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Professor Lau has no interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. There is no service contract between the Company and Professor Lau. Professor Lau's emoluments comprise an annual remuneration of HK$500,000 (after Hong Kong tax). The emoluments of Professor Lau were determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make recommendation to the Board for adjustments if necessary. Professor Lau is subject to the retirement provisions in the articles of association of the Company, and is expected to retire and stand for re-election before 2009. There is no other information required to be disclosed pursuant to any of the requirements of Rules 13.51(2)(h)-13.51(2)(v) of the Listing Rules, nor are there other matters that need to be brought to the attention of the Shareholders. Edgar W. K. Cheng Born in 1943, Dr. Cheng was a graduate from the University of Notre Dame and the Medical College of Wisconsin, USA. He was Clinical Associate Professor of Medicine at Cornell University Medical College and practiced medicine and conducted clinical research at the Memorial Sloan-Kettering Cancer Centre in New York. Dr. Cheng was a former Chairman of the University Grants Commission in Hong Kong, and a member of the Education Commission. Dr. Cheng has been in many other financial market positions such as Chairman of the Stock Exchange of Hong Kong, Vice-Chairman and non-executive director of the Hang Seng Bank Ltd., Vice President of the International Federation of Stock Exchange, Founding Chairman of the Hong Kong Securities Institute, Member of the Board of Directors of the Hong Kong Futures Exchange Ltd., and Member of the Conference Board's Global Advisory Council. He was appointed by the Chinese Government as a Hong Kong Affairs Advisor (1991 - 1997). He became a Member of the Preparatory Committee and also the Selection Committee for the Hong Kong Special Administrative Region of the National People's Congress (1996-1997). Dr. Cheng served as the Head of the Central Policy Unit of the Government of Hong Kong Special Administrative Region from 1999 - 2001. He is at present Chairman of the Council of the Chinese University of Hong Kong, the Chairman of the World-Wide Investment Co. Ltd. and a member of the Board of Directors of the Hong Kong Institute for Monetary Research, non-executive director of the Standard Chartered Bank (Hong Kong) Ltd, independent director of Goldman Sachs Gao Hua Securities Co. Ltd, a member of The Greater Pearl River Delta Business Council, a member of the Commission on Strategic Development as well as the Vice-Chairman of the Council for Sustainable Development. He is also a member of the 10th Chinese People's Political Consultative Conference National Committee. Dr. Cheng does not have any relationship with any other Director, senior management, substantial shareholder or controlling shareholder of the Company. Dr. Cheng has no interest in the Company's securities within the meaning of Part XV of the Securities and Futures Ordinance. There is no service contract between the Company and Dr. Cheng. Dr. Cheng's emoluments are expected to comprise an annual remuneration of HK$500,000 (after Hong Kong tax). The emoluments of Dr. Cheng will be determined with reference to perception of industry standards and prevailing market conditions. The Remuneration Committee will review the level of directors' remuneration from time to time and make recommendation to the Board for adjustments if necessary. Dr. Cheng is subject to the retirement provisions in the articles of association of the Company, and is expected to retire and stand for re-election before 2009. There is no other information required to be disclosed pursuant to any of the requirements of Rules 13.51(2)(h)-13.51(2)(v) of the Listing Rules, nor are there other matters that need to be brought to the attention of the Shareholders. 9 APPENDIX III PROCEDURES FOR DEMANDING A POLL Pursuant to Article 69(a) of the Articles of the Company, a resolution put to the vote of a general meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded by: (i) the Chairman of such meeting; or (ii) at least three members present in person (or in the case of a member being a corporation, by its duly authorised representative) or by proxy and entitled to vote at the meeting; or (iii) any member or members present in person (or in the case of a member being a corporation, by its duly authorised representative) or by proxy and representing in aggregate not less than one-tenth of the total voting rights of all members having the right to attend and vote at the meeting; or (iv) any member or members present in person (or in the case of a member being a corporation, by its duly authorised representative) or by proxy and holding Shares conferring a right to attend and vote at the meeting on which there have been paid up sums in aggregate equal to not less than one-tenth of the total sum paid up on all Shares conferring that right. 10 CNOOC LIMITED [GRAPHIC OMITTED][GRAPHIC OMITTED] (Incorporated in Hong Kong with limited liability under the Companies Ordinance) (Stock Code: 883) Form of proxy for the Annual General Meeting to be held on 24 May 2006 I/We(Note 1) _________________________________________________________________ of ___________________________________________________________________________ being the registered holder(s) of ___________________ shares(Note 2) of HK$0.02 each in the share capital of the above-named Company HEREBY APPOINT THE CHAIRMAN OF THE MEETING(Note 3) or _______________________________________ ______________________________________________________________________________ of ___________________________________________________________________________ as my/our proxy to attend and act for me/us at the Annual General Meeting (and any adjournment thereof) of the said Company to be held at Island Shangri-la, Hong Kong, Two Pacific Place, Supreme Court Road, Hong Kong on 24 May 2006 at 2:30 p.m. for the purposes of considering and, if thought fit, passing the Resolutions as set out in the Notice of Annual General Meeting and at such Meeting (and at any adjournment thereof) to vote for me/us and in my/our name(s) in respect of the Resolutions as indicated below(Note 4). ---------------------------------------------------------------------------------------------------------------- ORDINARY RESOLUTIONS FOR(Note 4) AGAINST(Note 4) ---------------------------------------------------------------------------------------------------------------- A1. To receive and consider the Audited Statement of Accounts together with the Reports of the Directors and the Auditors thereon for the year ended 31 December 2005. ---------------------------------------------------------------------------------------------------------------- A2. To declare a final dividend for the year ended 31 December 2005. ---------------------------------------------------------------------------------------------------------------- A3. (i)___To re-elect Mr. Zhou Shouwei as Executive Director; (i) (i) ---------------------------------------------------------------------------------------------------------------- (ii) To re-elect Mr. Evert Henkes as Independent Non-executive (ii (ii) Director; ---------------------------------------------------------------------------------------------------------------- (iii) To re-elect Mr. Cao Xinghe as Executive Director; (iii) (iii) ---------------------------------------------------------------------------------------------------------------- (iv) To re-elect Mr. Wu Zhenfang as Executive Director; (iv) (iv) ---------------------------------------------------------------------------------------------------------------- (v) To re-elect Mr. Yang Hua as Executive Director; (v) (v) ---------------------------------------------------------------------------------------------------------------- (vi) To re-elect Professor Lawrence J. Lau as Independent (vi) (vi) Non-executive Director; ---------------------------------------------------------------------------------------------------------------- (vii) To elect Dr. Edgar W. K. Cheng as a new Independent (vii) (vii) Non-executive Director; and ---------------------------------------------------------------------------------------------------------------- (viii) To authorise the Board of Directors to fix the (viii) (viii) remuneration of each of the Directors. ---------------------------------------------------------------------------------------------------------------- A4. To re-appoint the Company's auditors and to authorise the Board of Directors to fix their remuneration. ---------------------------------------------------------------------------------------------------------------- B1. To grant a general mandate to the Directors to repurchase shares in the capital of the Company not exceeding 10% of the aggregate nominal amount of the share capital of the Company in issue as at the date of passing of this resolution. ---------------------------------------------------------------------------------------------------------------- B2. To grant a general mandate to the Directors to allot, issue and deal with additional shares in the capital of the Company not exceeding 20% of the aggregate nominal amount of the share capital of the Company in issue as at the date of passing of this resolution. ---------------------------------------------------------------------------------------------------------------- B3. To extend the general mandate granted to the Directors to allot, issue and deal with shares by the number of shares repurchased. ---------------------------------------------------------------------------------------------------------------- Dated this ________________day of _____________2006 Signed(Note 5) _______________________________ Notes: 1. Full name(s) and address(es) to be inserted in BLOCK CAPITALS. 2. Please insert the number of shares registered in your name(s) to which this proxy relates. If no number is inserted, this form of proxy will be deemed to relate to all the shares in the Company registered in your name(s). 3. If any proxy other than the Chairman is preferred, strike out the words "THE CHAIRMAN OF THE MEETING" and insert the name and address of the proxy desired in the space provided. A member may appoint one or more proxies to attend and vote in his stead. ANY ALTERATION MADE TO THIS FORM OF PROXY MUST BE INITIALLED BY THE PERSON WHO SIGNS IT. 4. IMPORTANT: IF YOU WISH TO VOTE FOR THE RESOLUTIONS, TICK THE APPROPRIATE BOXES MARKED "FOR". IF YOU WISH TO VOTE AGAINST THE RESOLUTIONS, TICK THE APPROPRIATE BOXES MARKED "AGAINST". Failure to complete any or all the boxes will entitle your proxy to cast his votes at his discretion. Your proxy will also be entitled to vote at his discretion on any resolution properly put to the Meeting other than those referred to in the Notice of Annual General Meeting. 5. This form of proxy must be signed by you or your attorney duly authorised in writing or, in the case of a corporation, must be either executed under its common seal or under the hand of an officer or attorney or other person duly authorised to sign the same. 6. In the case of joint holders of any share, any one of such joint holders may vote at the Meeting, either personally or by proxy, in respect of such shares as if he were solely entitled thereto. However, if more than one of such joint holders is present at the Meeting, personally or by proxy, the vote of the joint holder whose name stands first in the Register of Members and who tenders a vote, whether in person or by proxy, will be accepted to the exclusion of the votes of the other joint holder(s). 7. To be valid, this form of proxy together with the power of attorney (if any) or other authority under which it is signed (if any) or a notarially certified copy thereof, must be deposited at the Company's registered office at 65th Floor, Bank of China Tower, 1 Garden Road, Hong Kong not less than 48 hours before the time for holding the Meeting or any adjournment thereof (as the case may be). 8. The proxy need not be a member of the Company but must attend the Meeting in person to represent you. 9. Completion and delivery of the form of proxy will not preclude you from attending and voting at the Meeting if you so wish. In such event, the instrument appointing a proxy shall be deemed to be revoked. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report on Form 6-K to be signed on its behalf by the undersigned, thereunto duly authorized. CNOOC Limited By: /s/ Cao Yunshi ----------------------------- Name: Cao Yunshi Title: Company Secretary Dated: April 18, 2006