Sie sind auf Seite 1von 29

Report on Domestic and Overseas Oil & Gas Industry Development in 2010

CNPC Research Institute of Economics & Technology January 2011

2011, CNPC Research Institute of Economics & Technology. All rights reserved. No part of this publication may be reproduced, scanned into an electronic retrieval system, or transmitted in any form or by any means, including photocopying and recording, without the written permission of the publishers. Please note that here is only the summary of the report that was released on January 20th, with data based upon estimations that might be quite different from official annual data. For further information, please contact: shanwg@cnpc.com.cn

Overview of Domestic and Overseas Oil & Gas Industry Development in 2010
Given the bumpy recovery of the world economy in 2010, the global oil & gas industry experienced recoverable growth, with oil demand rebounding rapidly, oil supply increasing generally and oil prices at a high level. Chinas oil & gas industry continued its strong momentum, and created numerous historically high records. Chinese oil demand achieved double-digit growth. Both crude oil demand and crude throughput exceeded 400 million tons, while crude oil production exceeded 200 million tons for the first time. Natural gas demand exceeded 100 billion cubic meters (BCM); Chinese oil companies speeded up their overseas business layout with the total M&A transaction volume exceeding $30 billion and the equity oil & gas production surpassing 60 million tons of oil equivalent (toe). China is becoming a major driving force in the development of the global oil & gas industry.

1. Characteristics of the Global Oil & Gas Industry in 2010


1.1 The world economy has bottomed out, but the basis for recovery was not so firm. Emerging economies became the first to step out of the crisis, and were the main drivers of world economic growth. 2010 was the third year since the onset of the global financial crisis. Despite various government stimulus policies, the world economy continued to recover in a twisted way. Global GDP surpassed the level in 2008. According to the International Monetary Fund (IMF), the global economy growth rate in 2010 is estimated to hit 4.8%, with 2.7% for developed countries and 7.1% for emerging economies and developing countries. The US, the eurozone and Japan are expected to grow by 2.6%, 1.7% and 2.8% respectively, while China, India, Russia and Brazil, as leading forces of the world economic recovery, will expand by 10.5%, 9.7%, 4% and 7.5% respectively. Although the hardest time for the world economy had already passed, there were still some imbalances and uncertainties. In America and Europe, the unemployment rate remains stubbornly high, which is affecting consumer confidence and the economic recovery. For some big European countries, the debt ratio has been so far beyond the red line and sovereign debt crises are frequent. Though the EU has taken positive rescue measures, the debt crisis will seriously affect the progress of the European economic recovery. The quantitative easing II (QE2) monetary policy by the US Federal Reserve, releasing $600 billion, will create pressure for further dollar depreciation, and cause rising commodity prices. The international trade volume has rebounded, but trade frictions intensified. New trade protectionism and imported inflation will undermine the recovery momentum in the emerging economies.
3

1.2 Global oil demand returned to the pre-financial crisis level, with emerging economies leading the demand growth. The international oil price was back to fundamentals, with the annual average price at $79.45/barrel in 2010, 28.4% higher than that in 2009. The price was relatively stable, resulting in a minimum fluctuation over the past 15 years. Global oil demand rebounded rapidly to 87.45 million barrel per day (mbd) in 2010, more than the level of 86.70mb/d in 2007 before the financial crisis, and began to show an upward trend. Emerging economies were the main engine of global oil demand growth. Non-OECD oil demand is estimated to be 41.50 mbd in 2010, 5% higher or 1.97 mbd more than 2009. That is the highest growth since 2004. Oil demand in the Asia-Pacific amounted to 19.52 mbd in 2010, with the worlds highest growth rate of 6.3%. Global oil supply is estimated to rise to 87.30 mbd in 2010, 2.5% higher or 2.1 mbd more than that in 2009. Non-OPEC production (including global bio-fuels) amounted to 52.8 mbd, 1.10 mbd more than the previous year. The OPEC production quota remained unchanged for two consecutive years, but the actual output (including natural gas liquids) increased by 1 mbd in 2010. Given that global oil supply was slightly lower than oil demand, the oil market balance was achieved by releasing surplus oil inventories, which, to some extent, provided the foundations for a higher oil price. The international oil price stayed at a high level throughout 2010, with the annual average WTI spot price at $79.45/b, 28.4% or $17.5/b higher than that of 2009. Since the start of the new century, that is the second record high only behind 2008. The oil price dropped to its lowest point at $65.58/b on May 25 and reached its highest point at $91.44/b on December 31, 2010. Thus, the price fluctuated by 39.4%, lowest in the past 15 years. The oil price fluctuations were mainly driven by economic recovery expectations and dollar value changes, rather than by speculation. The price relationship between WTI and Brent reversed frequently in 2010. Typically, due to difference in crude quality, WTI was higher than Brent. Since the financial crisis, the US economy has deteriorated and the dollar has depreciated. Demand contractions and production growth resulted in a high crude oil inventory at Cushing hub. At the same time, the Brent price was supported due to crude supply reductions during oilfield maintenance in the North Sea. The price spread between the two crude grades was once as high as $10/b.

1.3

Global

exploration

&

development
4

activities

revived

after

experiencing a brief contraction. Oil and gas production returned to growth, at rates of 1.7% and 2.4% respectively. According to the latest data released by Oil and Gas Journal (OGJ), global oil reserves increased by 8.9% to 201.39 billion tons and global natural gas reserves rose by 0.6% to 188 trillion cubic meters (TCM) in 2010. Most of the newly added oil reserves came from South America and Africa. With heavy oil being calculated in statistics for the first time, oil reserves in Venezuela rose from 99.3 billion bbl (13.6 billion tons) to 211.2 billion bbl (28.9 billion tons). Brazils offshore oil and gas reserves increased consecutively, with 2.05 billion tons of oil reserves in the Libra pre-salt discovery. Oil reserves in Africa increased by 3.4%. For the first time, OGJ put Uganda in East Africa into world oil reserve statistics, with 170 million tons of proved oil and 14.1 BCM of proven gas reserves added to the list. Global oil production fell by 2.6% in 2009, the biggest drop since 1982, but increased by 1.7% in 2010. Oil production in the Asia-Pacific increased by 3.9%, while oil production in North America increased by 2.4% to 540 million tons, most of which was due to unconventional oil. As the worlds biggest oil producer, Russia lifted its oil production by 2.7% to 500 million tons. Oil production in Africa increased by 3% to 445 million tons, with production in Nigeria increasing dramatically by 13%. In 2009, global natural gas production experienced the first drop since 1970. With the pace of demand recovery, gas production resumed growth in 2010. It is estimated to be 3060 BCM, 70 BCM more than 2009. The former Soviet Union, North America, the Asia-Pacific and the Middle East remained the worlds four major natural gas production regions, with their combined production accounting for 78% of the worlds total. Unconventional gas supply in North America kept rising, accounting for more than 50% of the total natural gas output in the US. Global exploration & development investment were re-activated in 2010 due to the significant role played by national oil companies (NOCs). According to estimates, the planned exploration & development expenses of the 24 NOCs amounted to $189.2 billion, 13.9% more than 2009. Among them, Petrobras ranked first with $20.5 billion, 24% more than 2009. Global exploration & development investment in 2011 will be restored to the pre-financial crisis level. The investment shall be mainly directed toward unconventional oil and gas projects in North America, large oil and gas projects in the Middle East and Africa, LNG projects in Asia-Pacific and deep-water pre-salt oil and gas projects in Latin America. 1.4 The global refining industry gradually stepped out of the shadow of the financial crisis, with refining capacity resuming its growth, but also
5

with regional imbalances. Global ethylene capacity increased by 10 million tons. A new pattern of global ethylene production is under way. The global refining industry gradually stepped out of the shadow of the financial crisis, and began to recover. Global refining capacity increased for 9 years consecutively and reached 4.41 billion tons in 2010, 1.2% higher or 50.30 million tons more than 2009. Global crude throughput was 74.08 mbd, 2.6% more than 2009. The global refinery utilization rate stopped its downward trend and began to stabilize. Global refining margins began to climb, and those in North America, Western Europe and the Asia-Pacific increased by 6.5%, 23.6% and 39.5 % respectively. But there was uneven development in different regions oil refining industries: refining industries in Europe, the Americas and other developed areas were in adjustment and restructuring with slow recovery; the refining capacity in emerging economies, led by China and India, continued to show strong growth momentum; the Middle East accelerated its refining development based upon resource advantages, and proposed more capacity construction projects; and Africa actively searched for more foreign investment to boost refining capacity. Due to the rising oil price, alternative fuel development became active again, and the bio-fuel investment boom returned. Global ethylene capacity increased by 10 million tons in 2010, the peak year in terms of newly added capacity. However, due to less growth in demand than production, ethylene capacity utilization decreased to 80%. After overtaking North America in 2009, the Asia-Pacific witnessed a rapid growth in ethylene capacity by 15.6% in 2010, and firmly secured its first place globally. Ethylene capacity in the Middle East was put into operation intensively, and had an enormous impact on global petrochemical markets. The global ethylene industry pattern was reshaped with the Asia-Pacific ranking first, North America second, followed by Western Europe and the Middle East. With a number of large ethylene plants coming on stream, the average size of global ethylene plants continued to expand, rising to 525,000 tons. Due to the rising oil price and the development of natural gas industry, especially unconventional gas in America, the proportion of natural gas as a raw material to ethylene increased substantially, while that of naphtha decreased. Ethylene raw materials are becoming more diversified and lighter.

1.5 Global natural gas demand recovered, and natural gas trade volume maintained rapid growth. The three natural gas markets had different price trends, with a slight increase in North America, a sharp rise in Europe and a moderate growth in the Asia-Pacific. Global natural gas consumption began to stabilize and rise, but failed to return to the peak in 2008. Total consumption in 2010 amounted to 3 trillion cubic meters, with 2% growth, lower than the average over the past decade. The
6

growth rate for the Asia-Pacific and Europe (including Central Asia and Russia) was close to 3%. Power generation became a major driver of global natural gas consumption, and the fastest growing sector for gas utilization. The International Energy Agency (IEA) estimated that in OECD countries the share of natural gas used in power generation reached 34.8% in 2010, 7.4 percentage points higher than 2000. While in emerging countries such as China, most of the consumption growth derived from the residential sector or city gas. The global natural gas trade continued to maintain fast growth. Between 2005 and 2009, global natural gas trade volume grew by 20%, with annual average growth of nearly 5%. The global natural gas trade volume reached 876.6 BCM in 2009, 72.3% for pipeline gas and 27.7% for LNG. The annual average growth of LNG trade from 2005 to 2009 reached 6%, higher than that of pipeline gas. Qatar is the largest LNG exporter, and its LNG production capacity reached 77.2 million tons per year as of September 2010, accounting for 28.04% of the worlds total. With increasing LNG trade and a growing gas spot market, the relevance of regional markets is enhancing, despite the fact that the world gas market is still not unified. In 2010, global natural gas prices kept pace with those of oil prices, but the price levels varied in different regions, with the lowest in the US and the highest in Japan. The annual average natural gas prices at Henry Hub and NBP were $4.41/MMBtu and $6.55/MMBtu respectively, which were 11.8% and 37.5% higher than 2009. From January to October 2010, the average CIF price in Japan was $10.75/MMBtu, 21.6% higher than that in the same period of 2009. Pushed by European companies, Russia agreed that 15% of the gas transacted under long-term contract be priced in linkage with the spot gas market.

1.6 The operating performance of IOCs rebounded sharply, but did not fully recover to the pre-financial crisis level. IOCs emphasized investment restructuring and focused on natural gas development, especially unconventional gas, and actively carried forward deep-water projects. Driven by the global economy recovery and the rising oil price in 2010, the operating performance of large international oil companies (IOCs) has significantly improved. Excluding BP, the net profit of Exxon Mobil, Shell, Chevron, Total and ConocoPhillips increased by an average of 60% in the first three quarters in 2010, exceeding that for the whole of 2009. For the six major IOCs, natural gas production increased by 9.8%, higher than crude oil growth. Natural gas not only resulted in the largest production growth rate in the past 5 years, but also became the main force of production growth for IOCs. In the
7

first three quarters, for the six IOCs, crude throughput varied individually but remained flat collectively; and oil product sales differed individually but increased by 1% collectively. In 2010, IOCs continued to focus their investment on upstream, the share of which was more than 80% in total investment. In downstream business, IOCs continued their emphasis on asset adjustment by disposing of inefficient and non-core assets, and by expanding downstream businesses in emerging markets such as the Middle East and the Asia-Pacific. As a result, profitability was improved. IOCs also developed alternative fuels and renewable energy in an active and steady manner. To accelerate natural gas development, IOCs carried out shale gas business on a large scale by way of asset acquisitions. Shell Group acquired East Resources for $4.7 billion, which realized a 7.5% increase in its natural gas output in North America. Exxon Mobil completed the acquisition of XTO for $41 billion, which strengthened its position in unconventional gas. Chevron acquired Atlas Energy for $4.3 billion, starting its shale gas development in North America, and actively sought opportunities in Europe and the Asia-Pacific and other areas to further strengthen the strategic layout of its unconventional resources development. IOCs kept pushing forward deep-water exploration and development in 2010. They are committed to reinforcing their dominant presence in deep waters through major projects in the Gulf of Mexico, offshore Brazil and West Africa. IOCs did not slow the pace of their deep-water development despite the BP oil spill incident. Chevron decided to invest in and develop the Jack/St.Malo deep-water project in the Gulf of Mexico, just few days after US Federal Government lifted a ban on deep-water drilling in the region on October 12.

1.7 National Oil Companies (NOCs) achieved better performance. They emphasized exploration & development investment, accelerated natural gas development and expanded to midstream and downstream. They pushed forward the process of integration between refining and petrochemical plants, and paid more attention to the effectiveness of international business. With the oil price rising in 2010, operating results of NOCs were significantly improved. In the first half of the year, driven by substantial output growth, Rosneft and Petrobras realized revenue growth of 57.2% and 43.7%, and net profit growth of 33.6% and 29.2% respectively. NOCs continued to expand their investment scale and witnessed a significant growth in capital expenditure (CAPEX), with Petrobras and Gazprom increasing by 35.8% and 21.8% respectively. While strengthening upstream exploration & development,
8

NOCs focused on downstream integration, and constantly improved industry chains. Petrobras further expanded its involvement in deep sea and pre-salt oil and gas resources development, and accelerated its oil refining business. Rosneft increased its downstream capital spending on refinery expansion and upgrading projects. Saudi Aramco completed a number of large refinery projects for the further expansion of its refining business. NOCs adjusted their overseas development strategy, and paid more attention to the effectiveness of overseas operations. ONGC, Gazprom, the three major Chinese oil companies and other NOCs further participated in overseas cooperation and expanded their overseas businesses. But some other NOCs restructured their strategic focuses according to their individual situation. Due to an offshore pre-salt discovery, Petrobras shifted its investment to domestic projects, and cut its international business investment by 26% in its capital expenditure plan for 2010-2014. Petronas realized a rapid development in overseas business over the past 10 years with its overseas oil and gas reserves increasing by 10% annually from 3.25 billion barrels in 2001 to 6.84 billion barrels in 2009. According to its newly appointed president, Petronas is readjusting its overseas strategy by reducing overseas investment, disposing of inefficient international assets, and improving the profitability of overseas operations.

1.8 The explosion at a BP drilling platform in the Gulf of Mexico became a milestone for the international oil industry. The tragedy not only caused massive direct losses, but also had a far-reaching impact on global deepwater exploration & development. On April 20, 2010, when operating at the Mississippi Canyon Block 252 Macondo in the Gulf of Mexico, the Deepwater Horizon Drilling Platform, leased by BP from a Swiss company, exploded and sank after burning for 36 hours. The incident killed 11 and injured 17, and about 4.10 million barrels of crude oil spilled into the Gulf of Mexico, which caused pollution in five coastal states, making it one of the most serious accidents in the history of the world oil industry. The accident had very serious direct consequences. First, the ecological environment in the Gulf of Mexico was severely damaged, resulting in a great amount of oil deposited on the seabed that cannot be removed and a contaminated marine ecosystem that cannot be restored for hundreds of years. Second, the economies along the coastal states suffered great losses. Fishing, shipping and tourism in Louisiana, Mississippi and Alabama and other states suffered huge damage, and the effects may last for many years. Thus, the public image of the oil industry was seriously damaged. Third, BPs corporate health was seriously affected. The companys stock price, market capitalization
9

and credit rating suffered a substantial decline with market capitalization more than halved. The companys longstanding green oil image was seriously undermined. In addition to the more than $10 billion cost of dealing with the accident, BP may also have to pay compensation exceeding $30 billion. Therefore, the company had to sell significant assets, and its CEO was forced to resign. The accident will have a profound impact on the oil industry itself. Governments will pay more attention to the safety of offshore oil and gas exploration & development. A series of new supervision policies are being put forward with higher entry barriers, greater insurance costs and stricter safety standards, which will temporarily slow the pace of deepwater oil and gas exploration and development. The oil spill led companies, including oil companies and engineering and technical service companies, to re-examine their safety policies, and further increase investment to improve safety technology and safety management systems. All these initiatives will assist the future development of offshore oil exploration and development.

2. Characteristics of Chinas Oil and Gas Industry in 2010


2.1 Chinas economy was generally in good circumstances with a rapid growth rate, but there still existed some uneven and uncertain factors during the development. A remarkable effect was achieved in policy adjustment. In 2010, Chinas economy was in a generally sound situation with more consolidated achievements in fighting the global financial crisis. China became the No. 2 global economic powerhouse in front of Japan, and the No. 3 nation in terms of voting rights in the IMF. The macroeconomy went along the right track as pre-set. Thanks to policy adjustments, front-ended high growth was under control and economic operations were stable with an estimated annual growth rate of over 10%. Equilibrium was achieved in inter-regional economic growth. The phenomina in 2009 that economic growth in eastern regions was significantly lower than that in the central and western regions was changed. The contribution of investment, consumption and net exports, the three elements that promoted economic growth, was different. High investment growth began to fall, and urban fixed asset investment increased by 24.9% in the first 11 months, with the growth rate decreasing by 7.2 percentage points. Consumption achieved steady growth and became an important driving force of economic growth. Total retail sales of socially consumed goods increased by 18.4% in the first 11 months. Both imports and exports grew rapidly, the total volume of which was more than in the same period of 2008. Exports increased by 33%, and imports increased by 40.3%, and the trade surplus declined by 3.9%. At the same time, the general level of domestic commodity prices surpassed
10

3%, the target identified at the governments working conference in early 2010. As a major risk to economic operation, the annual CPI is estimated to have been controlled within 3.5%. The Peoples Bank of China, the nations central bank, raised the deposit reserve ratio six times during the year, and finally the deposit reserve ratio for banks reached a record of 18.5%. The central bank raised the benchmark interest rate twice, and the cumulative increase was 0.5 percentage points. Thus, the intention to reduce inflation expectations and increase the cost of funds was very clear. The reform of the RMB exchange rate formation mechanism deepened further, and exchange rate flexibility was enhanced. However, China still faced greater pressure regarding the appreciation of the RMB. Hot money inflows were accelerated, with 55 billion yuan in August, 20 billion yuan in September, 287 billion yuan in October and 100 billion yuan in November respectively. In addition, the rebound in heavy industry manufacturing brought heavy pressure on energy saving; rapidly rising housing prices brought risks of asset prices fluctuations; and financing risks at local debt platforms increased. All those above problems hindered Chinas sound and rapid economic development. Thus, the mission of transforming Chinas economic development mode remains a major one. 2.2 Oil demand rebounded strongly, and resumed a double-digit growth rate again after 2004. Crude oil demand exceeded 400 million tons for the first time. Oil product demand grew rapidly with diesel in short supply. Foreign oil dependence was over 55%, and net crude oil imports exceeded 200 million tons for the first time. In 2010, a strong rebound occurred in Chinas oil demand. Annual apparent oil consumption is estimated to be 455 million tons, 11.4% higher or 47 million tons more than the previous year. Chinas oil imports rose sharply in 2010. Annual oil net imports are estimated to be 253 million tons, 15.6% higher or 34 million tons more than the previous year. More than 55% of the total demand was met by foreign oil. Impacted by significantly increasing volumes of crude oil processing, decreasing net imports of oil products, rapid increases in oil inventories and pipeline bedding, crude oil demand growth was faster than oil, and apparent crude oil consumption reached 439 million tons, 13.1% higher or 50 million tons more than the previous year. Net crude oil imports were 237 million tons, exceeding 200 million tons for the first time, 19.3% higher or 38.4 million tons more than the previous year. Foreign crude oil dependence was 54%. Oil product demand resumed rapid growth. Apparent oil product consumption is estimated to be 241 million tons, 9.4% higher than the previous year, which created a new record high since 2005. Gasoline consumption grew steadily throughout the year with an estimated annual apparent consumption of 70.4 million tons, 5% higher than the previous year. Driven by accelerated industrial
11

output, large-scale investment in infrastructure and a stable recovery in the logistics industry, diesel consumption experienced rapid growth in 2010. The annual apparent diesel consumption is estimated to be 154 million tons, 11.1% higher or 15.4 million tons more than 2009, which witnessed a 27 million ton reduction. Since the start of the second half of 2010, a tightening took place in diesel supply and demand. Facing a contraction in diesel demand in 2009 and the increased building of stocks in early 2010, oil companies were forced to adjust production and increase exports, which led to stock-drawing since March. In the second half of the year, diesel demand increased rapidly in sectors, including transportation, agriculture, fisheries, and especially from the surging diesel power generation due to power cuts in some provinces and cities since September. Diesel supply, however, was reduced due to increased refinery maintenance in the third quarter compared to previous years. The tight diesel supply situation was reversed in the fourth quarter. Meanwhile, the diesel supply and demand situation was further exacerbated with the international oil price rising and increased speculation caused by the expected domestic price adjustment. As a response to the inadequate diesel supply, the Chinese government strengthened regulation and control, and CNPC and Sinopec increased their processing quantity and diesel imports. As a result, the tightening diesel supply situation started to ease in early December. 2.3 Domestic crude oil production exceeded 2 million tons for the first time. The crude oil production pattern was formed as the West replaced the East and offshore supplemented onshore. Domestic natural gas offered encouraging prospects with significant exploration results and output reaching a new historic high. By seizing the favorable opportunities of the domestic economy recovery and consumption growth in 2010, oil companies organized production in a positive manner, which led to domestic crude oil production exceeding 2 million tons for the first time, 5% more than the previous year. An oil-producing pattern in which the East is being replaced by the West and offshore China was basically formed. For West China, the remaining proven oil reserves increased rapidly and reached 558 million tons in 2009, 55.9% more than 2000. Its share of national total oil reserves reached 26%, the first time they surpassed a quarter of the total. For offshore China, its share of domestic total oil reserves increased to 9.6% in 2009 from 7.9% in 2000, while its share of national total oil production increased steadily to 12% in 2009 from 6.7% in 2000. Thanks to efforts to stabilize production in old eastern oil fields and increased production in the west and offshore China, sustained and stable growth in crude oil production was achieved. Remaining proven reserves of domestic natural gas maintained their steady growth, with an annual average growth rate of 8.2% from 2000 to 2009. In
12

2009, the remaining gas reserves reached 2.1 TCM (trillion cubic meters), double that in 2000. Natural gas production increased threefold to 83 BCM in 2009 from 27 BCM in 2000. In 2010, the three major Chinese oil companies achieved double-digit growth in gas production, due to gas production growth in the Changqing gas producing region, the start-up of the Puguang gas field and production growth in other onshore gas fields. Total national gas production reached 95 BCM, 11.5% higher than 2009, once again a new record high. The Sichuan, Changqing and Tarim gas areas remained the major natural gas producing provinces. 2.4 China's oil refining capacity increased steadily with total capacity exceeding 500 million tons and the crude oil processing volume surpassing 4 million tons in 2010. Chinese refineries witnessed a high utilization rate and realized further expansion of their average size. National III Standard gasoline was brought into use across the country. Both ethylene capacity and production increased rapidly, with the average unit size reaching 0.6 million tons, slightly higher than the global average. Driven by the rapid growth of domestic oil product consumption and start-ups of large refineries, China's oil refining industry continued to develop rapidly in 2010. With 32 million tons of distillation capacity newly added, the total capacity reached 504 million tons. Crude oil processing volume was about 421 million tons, 12.3% higher than 2009. The national average refinery utilization rate rose to 86.5%. Oil product output reached 251 million tons, 10.6% higher than the previous year. The average size of refineries in the two major oil groups increased to 6.3 million tons per year, already higher than the worlds average level. With the completion and start-up of Qinzhou Refinery, the number of 10-million-ton refineries increased to 20. Refining capacity in South China increased and the national oil refining layout was further adjusted and optimized. With the National III Stadard gasoline being promoted nationwide, oil product specification and quality in China improved consecutively. Ethylene capacity and production increased rapidly in 2010. The newly added ethylene capacity was 2.45 million tons, and the total capacity reached 14.17 million tons. Ethylene production was about 13.71 million tons, 29.9% higher than 2009. The annual average utilization rate was 97.9%, far higher than the world average of 80%. The average annual capacity of Chinas ethylene units was 590,000 tons, slightly higher than the world's average of 545,000 tons per year. 2.5 Chinese natural gas consumption also increased rapidly, exceeding 100 BCM for the first time. Natural gas production experienced steady growth while gas imports rose sharply. For the first time, natural gas became the No.1 source for city gas. The government adjusted the
13

ex-factory price of domestic onshore natural gas, which laid the foundations for a price mechanism reform. With rapid economic recovery and pipeline projects progressing smoothly, China's natural gas market expanded rapidly. In 2010, the annual gas consumption was expected to exceed 100 BCM for the first time, with apparent consumption reaching 106 BCM, 19.5% higher than 2009. Gas consumption in the residential sector (city gas) and industries increased substantially, but gas consumption for power generation still increased slowly, and the proportion of gas for chemicals continued to fall. In the residential sector, the share of natural gas increased further and exceeded that of LPG by thermal value for the first time. Natural gas became the primary source for the urban gas system. In 2010, China natural gas imports were about 17 BCM, accounting for 16% of domestic gas consumption. Pipeline gas imports started and amounted to 4.4 BCM while LNG imports rose sharply to 9.1 million tons, 64.6% higher than 2009. A multi-source gas supply pattern is initially being formed in China. To rationalize price relations between natural gas and other alternative energies, and to guide rational resource allocation and promote energy saving, the government adjusted the gas transmission rate and the ex-factory gas price in April 2010 and June 2010. With this adjustment, the price gaps between domestic gas and gas from abroad, and between gas and alternative energies, were reduced considerably, which laid a good foundation for the reform of the natural gas pricing mechanism. 2.6 Oil and gas pipeline construction witnessed rapid development. The total length of pipelines reached 78,000 km. A trunk pipeline network is being formed. Oil storage facility construction experienced rapid progress, with a 36-day storage capacity completed. The total capacity of underground gas storage reached 1.87 BCM, which strengthened peak-shaving capability. In 2010, Chinas oil and gas transpartation and storage facilities continued to grow rapidly. By the end of 2010, China had built 19,900 km of crude oil pipelines and 18,100 km of oil product pipelines, which basically formed a backbone pipeline network. Outstanding achievements were made in natural gas storage and transportation facilities. The Myanmar-China Gas Pipeline construction was started, while five long-distance gas pipelines were put into operation, including the east section of the second West-East Gas Pipeline, the third Shanxi-Beijing Gas Pipeline, and the Sichuan-East Gas Pipeline. By the end of 2010, the total length of domestic natural gas pipelines reached 40,000 km. The second stage of the national strategic oil reserve project proceeded smoothly. When fully completed in 2012, the total capacity shall be up to 2.74 billion barrels. State, private and foreign capital all actively participated in the
14

construction of commercial oil reserves. By the end of 2010, the capacity of strategic oil reserves reached 1.78 billion barrels and that of commercial oil reserves reached 1.68 billion barrels. Thus, the total oil storage capacity is equivalent to 36 days of domestic oil consumption. Significant progress was made in steel pipe manufacturing technology used in gas transmission. The West-East Gas Pipeline Project was the first in the world to use the X80-level spiral SAW pipe. By the end of 2010, three LNG receiving terminals were completed, and another eight LNG terminals were under construction. As planned, they will be gradually put into operation by 2013, when the total receiving capacity will be more than 40 million tons. Underground gas storage construction is facing a peak period. Twenty gas storages had been completed with 1.87 BCM of peak shaving capacity. Throughout the year, more than 20 small-scale LNG plants were under construction, which provided access to natural gas to people in some remote areas away from pipeline network. 2.7 Chinese oil companies made great achievements in overseas oil and gas cooperation with equity production surpassing 60 million toe for the first time and M&A activity exceeding $30 billion. Steady progress was made in inter-governmental energy cooperation and a breakthrough was also made in strategic channel building. In 2010, the overseas oil and gas production of Chinese oil companies maintained steady growth. Equity production is estimated to exceed 60 million tons for the first time, 15% more than 2009. In 2010, all the three major Chinese oil companies made large-scale acquisitions, worth a total of over $30 billion, creating a new record, and accounting for 20% of global upstream M&As. CNPC continued to expand its overseas operation scale, while Sinopec and CNOOC speeded up their overseas business distribution. Sinopec acquired 9.03% of ConocoPhillips stake in the Canadian Syncrude oil sands project for $4.65 billion and gained a 40% stake in Repsols business in Brazil for $7.1 billion. In two transactions, CNOOC acquired oil and gas assets in Argentina worth $7 billion. In partnership with Shell, CNPC paid $3.265 billion and took over 100% of the stake in ARROW, a CBM company in Australia. Breakthroughs were made in strategic energy channel construction. The Sino-Russia ESPO crude oil pipeline officially became operational. In late September, both the Chinese and Russian presidents attended the completion ceremony of the pipeline. On December 28, ESPO was connected to the Northeast China pipeline network, formally launching 15 million tons of annual Russia crude oil exports to China over the next 20 years. New onshore access to Russian oil has been made available to China. The two NOCs from China and Kazakhstan formally signed the Principle Agreement on Designing, Financing, Construction and Operation for Second Phase of the Sino-Kazakhstan Natural Gas Pipeline". Construction of the project formally
15

started at the end of December 2010, and it is expected to be completed and commissioned in 2012. The construction of the second phase of the Sino-Kazakhstan natural gas pipeline will further stabilize and guarantee a gas supply source for the West-East Gas project. The long-awaited Sino-Myanmar Gas pipeline formally began construction, which will open up an important new energy channel for China, and will be helpful in improving the effectiveness of oil transportation from the North to the South and resolving the problem of oil and gas shortages in Southwest China. 2.8 The three major oil companies significantly improved their performance. Oil production further increased while natural gas production achieved double-digit growth. CNOOC realized 50 million toe of oil and gas production for the first time. Sinopec expanded its crude oil capacity to 2 million tons for the first time. Both CNPC and Sinopec became top 10 global companies in the Fortune 500. In 2010, the three major companies operated smoothly and orderly with oil production increasing and natural gas production achieving double-digit growth. CNPC continued implementing its project of oil reserve growth at the peak phase and made important achievements. Its crude oil production started to grow again and increased by 1.3% in the first three quarters. Daqing Oilfield maintained crude oil production of 40 million tons. Changqing Oilfield increased its production by 500 million toe, and exceeded 35 million toe for the first time. Qinzhou Refinery was completed and put into operation, which improved the companys downstream distribution. With the Sino-Russia crude oil pipeline put into operation, and phase II of the Sino-Kazakhstan project and Sino-Myanmar pipeline starting their construction, strategic channels had gained remarkable results. Meanwhile, Sinopec was dedicated to building an upstream "long board", and realized oil production growth of 1.9%. Sinopec further expanded its downstream refining and petrochemical business scale, strengthened its marketing efforts, and developed non-oil sales operations. Its crude oil processing capacity exceeded 2 million tons for the first time. Sinopec speeded up its overseas distribution and acquired several large-scale assets, including Canadian oil sands and Repsols business in Brazil. Its overseas equity production achieved rapid growth. CNOOCs development was striking in 2010, with an over 40% growth rate in its domestic oil and gas production. Total production reached the landmark of 50 million toe for the first time, declaring the establishment of a Daqing in the Sea." CNOOC also proposed an ambitious goal of build "a Daqing in the Deep Sea. In addition, the company continued the extension of its industrial chain with its refining capacity exceeding 30 million tons. The company speeded up its overseas business layout, and completed two acquisitions of onshore oil assets in Argentina for $7 billion. In 2010, all three major oil companies have resumed their growth in sales
16

income and net profit. Exploration and production became the major source of their operating revenue. CNPC and Sinopec accomplished the goal of energy saving and emission reduction as defined in the 11th Five-Year Plan, one and two years ahead of schedule respectively. In 2010, for the first time, both CNPC and Sinopec were ranked in the top 10 of the Fortune Global 500, which reveals that the position and image of Chinese oil companies has been heightened significantly among the worlds large enterprises. 2.9 As energy system and mechanism reforms are deepening, new progress was made in energy-related laws and regulations. The relationship between energy production and energy consumption, and between the interests of the central government and various local stakeholders were further adjusted and became more balanced, which promotes social harmony. In January 2010, the National Energy Commission was established, headed by Premier Wen Jiabao. The Commission aims to further strengthen governmental functions in energy industry management. In order to reinforce coordination and leadership on major energy issues, national policies, such as The 12th Five-Year Plan on Energy Development, The 12th- Five- Year Plan on Renewable Energy Development and other major energy development plans have been compiled. New progress was made in legal system construction. The Oil and Gas Pipelines Protection Act was officially promulgated on October 1, which aims to better safeguard national energy transportation security and public safety. The National Development and Reform Commission and three other ministries jointly issued Suggestions on Promoting Energy-Saving Service Industry Development by Implementation of Energy Contract Management, in which measures by way of subsidies, taxes, accounting and finances will be taken to promote energy contract management, and ultimately to promote the construction of an energy-saving service system and the development of the service industry. The Commission also adopted the Decision on Promoting Development of Newly Emerging Strategic Industries, in which the new energy vehicle sector is defined as one of the seven emerging strategic industries, and subsidies will be offered for private purchases of plug-in hybrid vehicles and electric vehicles. In addition, the Renewable Energy Act (Amendment), as well as the other related new laws and regulations were enforced, which further improved the energy systems legal framework. Fiscal and taxation policies have been further refined. The resource tax was changed from a specific duty into an ad valorem duty, and was piloted in Xinjiang first and then expanded to 12 Western provinces and autonomous regions. The reform adjusted the benefit distribution between energy producers and consumers, and that between the central government and various local stakeholders in resource producing areas, and effectively
17

promoted local economic and social development and improved the investment environment in western China. Some adjustments were made in the fuel oil consumption tax, not only reducing tax burdens to teapot refineries, but also positively guiding related companies to deeply process fuel oils and produce high value-added products. Market-orientation was further promoted. The so-called Regulation of New 36 issued by the State Council is supporting private capital in oil and gas exploration. Private companies are encouraged to do business in oil and gas exploration in cooperation with state-owned oil companies, and to take interests in infrastructure constructions, such as crude oil, natural gas, oil product storages and pipeline transportation facilities. It can be expected that private enterprises and private capital will play a greater role in the oil and gas industry in the future. According to the new oil pricing mechanism, four adjustments were made in the domestic oil product prices in 2010, with price hikes three times and a price slump once. In the first half of 2010, the gas transmission rate and the ex-factory gas price were also adjusted. A new natural gas pricing mechanism reform program is already being devised.

3. Domestic and Overseas Oil and Gas Industry Outlook for 2011
3.1 The world economy is expected to resume growth, and its GDP growth rate will be 4.2%; China will implement positive, prudent and flexible policies, although the economic growth rate will decline it will remain more than 9% The IMF forecast that global GDP will grow by 4.2% in 2011, and the economic growth of developed countries will be 2.2%, while that for emerging economies and developing countries is expected to be 6.4%. However, many uncertain and unstable factors remain. Although there are obvious signs of US economic recovery, its economic outlook remains uncertain due to the huge fiscal deficit and the high unemployment rate; the risk of the European debt crisis spreading remains, which increases the overall uncertainty of its economic recovery; Japans economic growth is weak, and may stall again. Various forms of trade protectionism and trade frictions are on the rise all over the world. The US quantitative easing monetary policy and European rescue plans will increase capital mobility and export inflation to developing countries, which may affect the good momentum of emerging countries economic recovery. 2011 is the first year of Chinas 12th Five-Year-Plan. Its macro-economy will maintain steady growth, while still facing a complex situation: the pressure of economic restructuring will increase; resource and environmental constraints will strengthen; inflation and RMB appreciation pressures will also rise; external demand will decrease and foreign trade frictions will grow. China will
18

further change its mode of economic development, with steady growth, structural adjustment, and fighting inflation being the main objectives, while implementing a proactive fiscal policy and a prudent monetary policy. It is expected that Chinas economy will grow steadily; the growth rate will decrease but still be more than 9%. Domestic consumption will maintain steady growth, and its contribution to economic growth will increase. Investment growth will slow while exports and imports will decrease substantially. As an important index of government adjustment and regulation, CPI is expected to be within 4% due to appropriate measures. 3.2 World oil supply & demand will be basically balanced and gradually tighten, while the overall level of oil prices will be pushed up by dollar depreciation and limited production from OPEC countries. However, impacted by the high level of oil stocks and spare capacity, the international oil price will not be too high but is expected to average at $85-$90 /b within the band of $70-$100 /b, which is higher than the level in 2010 In 2011, world oil demand will keep growing and will be 1.2 mbd higher than the previous year, 0.4 mbd of which will be from non-OPEC countries. In order to meet the demand, OPEC needs to increase its crude supply by at least 0.5 mbd apart from the growth of its NGL production, which is excluded from the scope of production quotas. However, OPEC is more likely to rollover its current production policy under current oil price levels. Therefore, world oil supply and demand will be basically balanced and gradually tighten, and the fundamentals support a rise in the oil price. It is expected that OECD oil stocks will decrease from 60 to 58 days in 2011, which is still higher than the normal level of 52-53 days. OPECs spare capacity will increase to 5.3 mbd and its ability to regulate the market will be significantly enhanced. High oil stocks and high spare capacity will inhibit Price rises. The oil price will be higher, supported by the further depreciation of the dollar and increasing comprehensive costs of global exploration & development. Since strengthened financial regulation will inhibit excessive speculation in the market, the international oil price is unlikely to fluctuate substantially in 2011. It is expected that the overall oil price will keep rising and fluctuate between $70$100/b. The annual average price will be $85-$90/b. It cannot be ruled out that the oil price will possibly fall below $70/b due to the worsening European debt crisis or surpass $100/b within a short period because of escalating problems related to Iran. 3.3 Chinas oil demand will keep rising, but the growth rate will slow. Oil product demand will also increase rapidly with diesel in short supply but gasoline remaining in oversupply

19

Impacted by a slowdown in economic growth, the governments economic structural adjustment policy, energy saving and sustainable energy development, as well as rise in the growth base, the growth rates of Chinas oil demand will decrease in 2011. Apparent oil demand is expected to be 483 million tons or 6.2% higher in 2011, and crude oil demand is expected to be 471 million tons or 7.2% higher. Chinas oil product demand will be increase by 6.3% to 257 million tons in 2011. With the expected decline in car sales growth, the increased development of alternative fuel, more stringent traffic restrictions and a higher international oil price, gasoline demand growth will be limited but steady. Apparent gasoline consumption is expected to be 74.6 million tons in 2011, 5.9% higher than the previous year. After the rebound in 2010, Chinas diesel demand growth will slow, and is expected to be 164 million tons in 2011, an increase of 6.2% on the previous year. Since large refineries from CNPC, Sinopec and other enterprises are near peak capacity, newly added capacity in the year will be limited, local teapot refineries are facing compressed margins and the adoption of National III oil product specification and thus their utilization rate and production increment are full of uncertainties, it is expected that the increase in diesel production will be less than that of demand, and the overall diesel supply situation will tighten. With the fast development of civil aviation, Chinas jet kerosene demand will grow at a high rate of 8.8%, and annual kerosene demand will be 18.5 million tons. 3.4 In China, refining capacity will keep expanding, oil specification will keep upgrading, newly added crude oil processing capacity is expected to be 24.5 million tons and the refining structure will be further adjusted and optimized. Newly added ethylene production capacity will be 0.41 million tons, and a number of large refinery projects will be speeded up. In 2011, the newly added distillation capacity in China is expected to be 24.5 million tons, because many refinery upgrading and expansion projects shall be completed in Beihai, Anqing, Ningxia, Liaoyang and Fushun. The total refining capacity will be 529 million tons, while the share in South China will rise, and the average refinery size of CNPC and Sinopec will increase. The volume of crude oil processed is expected to be 434-444 million tons in 2011, and the combined production of gasoline, diesel and kerosene is expected to be 259-265 million tons. National III Standard diesel will be spread across the country in 2011 after the nationwide adoption of National III Standard gasoline in 2010. Newly added ethylene capacity will be 0.41 million tons in 2011. The size and strength of Chinas refining and petrochemical capacity will be further upgraded after the completion of large projects, including Maoming Petrochemical, the China-Kuwait Refinery, Tianjin Orient Refinery, Sichuan Refinery and
20

Shijiazhuang Refinery, Fushun Ethylene, Huizhou Ethylene II, Wuhan Ethylene and Daqing Petrochemical, which are under construction. 3.5 Chinas natural gas consumption is expected to be 130 BCM in 2011, while domestic natural gas production will be 105 BCM and imported pipeline gas and LNG will exceed 30 BCM. In 2011, Chinas natural gas production will keep fast growth. With a constantly expanding market scale, an improved pipeline network and newly constructed capacity will come into operation, it is expected that domestic natural gas production will be 105 BCM, 10.5% more than the previous year. According to the governments overall development plan for distributed natural gas, 1,000 distributed natural gas projects will be built in 2011. Chinas natural gas imports will also maintain fast growth in 2011. The total imports will exceed 30 BCM, 76.5% more than 2010. Imports via the Central Asian pipeline will increase substantially to 15 BCM, three times more than 2010. With the completion of LNG terminals at Dalian and Jiangsu, Chinas LNG receiving capacity will exceed 12 million tons. With the pace of supply growth, Chinas domestic natural gas consumption will also rise rapidly and is expected to be 130 BCM in 2011. Fast consumption growth will be witnessed in the sector of city gas or residential gas, and a significant growth will be made in power generation and industry. But the share for chemical input will decline. Following the completion of long-distance and branch pipelines, natural gas consumption areas will be expanded further. Developed eastern areas, natural gas producing and surrounding areas will be the main natural gas consumption regions. 3.6 In accordance with the requirements of the changing development mode, China will keep on promoting energy conservation and emission reduction, accelerating fiscal and tax reforms, and going for market orientation. The 12th Five-Year Energy Development Plan will be promulgated in 2011 to guide the development of energy industries. New development opportunities will be available in natural gas, alternative energies and new energies. The government will continue to promote energy contract management, so as to help meet energy saving and emission reduction targets, to introduce carbon emission reduction standards, to improve the market mechanism of energy saving, and introduce incentive and restraint mechanisms for enterprises. Tax reform will be further deepened. The resource tax will be extended to more regions and an environmental tax will be studied. The Regulation of Town Gas Management, which aims to standardize residential gas markets, will be implemented on March 1, 2011. The capital gains charge for centrally state-owned enterprises will be increased with the charge rate for the three
21

major oil companies raised from 10% to 15%. The problem of a relatively low starting point for the crude oil special levy may be resolved. In order to promote natural gas development, the government may offer more policy incentives, such as supporting unconventional gas and waiving gas import related taxes. The energy pricing mechanism reform will be deepened. A new oil product pricing mechanism is expected to decentralize pricing powers and shorten the pricing cycle; and the natural gas pricing mechanism to be introduced will be based upon both supply and demand while considering the affordability of gas users, and the price relationship between domestic gas and alternative energies and gas from abroad.

4 Development Tendencies of Chinas Oil and Gas Industry during the 12th Five-Year Plan
4.1 The period of the 12th Five-Year Plan is still the time for China to speed up its economic development and also the crucial stage to accelerate the adjustment of economic construction and the transformation of the development mode. There will be great opportunities for Chinas oil and gas industry development during this period. Chinas economy has been developing fast since the 11th Five-Year Plan. GDP had doubled during the five years, reaching RMB 37 trillion in 2010 compared to RMB 18 trillion in 2005, realizing an annual growth rate of above 10%, and ranking second in the world. The per capita income was $3,800, reaching the level of middle-income nations. The urbanization rate increased from 43% in 2005 to 47% in 2009. Central China and Western China achieved faster development, so inter-regional economic development is getting more balanced. The scale or strength of enterprises is strengthening rapidly. The number of Chinese enterprises ranked in the Fortune 500, was 54 in 2010, up from 18 in 2005. Chinas economic development is moving to a new stage. The period of the 12th Five-Year Plan is the key time to build a well-off society in an all-round way. Chinas petroleum and petrochemical industry is also in an important development period. Generally speaking, opportunities co-exist with challenges, but there are more opportunities than challenges. In terms of opportunities, the global environment is getting better and providing a chance of peaceful development. Vigorous global oil demand and the rapid development of gas industry are the advantages to expand international cooperation and to make full use of domestic and overseas resources. The Chinese economy will keep growing fast at an estimated annual rate of above 7%. The steadily increasing national income will bring more oil and gas demand, and the market will be expanded rapidly and on a large scale. The
22

deepening organizational and mechanism system reform and the improving price-forming mechanism will benefit oil and gas industry development. In terms of challenges, there coexist deflation in developed economies and inflation in emerging markets. The debt crisis might become a long lasting hidden trouble for global economic growth. Global problems like climate change are more outstanding and trade protectionism and disputes are rising again. The developed countries headed by the US are requiring China to bear more responsibilities, especially when China became the No. 2 economic powerhouse in the world. There are more visible or invisible barricades and pressures in the international arena. Domestically, economic growth is more restricted by limited resources and environmental problems. Due to problems in structure and mechanism, and problems of equilibrium and unsustainability, the pressure for economic restructuring is even larger. On the whole, China is facing more complex domestic and overseas economic development environments. The principal task in this period is to accelerate the transformation of the economic development mode. The period of the 12th Five-Year Plan is also the crucial stage to transform the energy industry development mode, and the important phase to construct a safe, stable, economical clean and modern energy industry system. Energy reforms will be deepened, aiming to improve the industry management and to promote legalization and market orientation. In order to optimize the energy consumption structure, energy saving will be prioritized, the total energy consumption will controlled rationally, highly energy intensive industries will be prevented from developing too fast, and traditional energies will be used in a more clear and efficient way. Natural gas development will be accelerated while the development of unconventional gas, such as shale gas and coal bed methane (CBM) will be speeded up. Alternative energy and new energy will be reinforced so as to increase the share of non-fossil energies. To improve supply security, oil & gas transmission pipeline networks and oil & gas strategic reserves shall be expanded. Price relationship among energies such as coal, electricity, oil and gas will be rationalized, and the factor pricing mechanism will be improved. As steps to optimize the taxation system, a resource tax will be promoted and extended nationally; and an environmental protection tax will be introduced. The government will vigorously promote energy diplomacies and participate more deeply in international energy cooperation for mutual benefit.

4.2 China will witness a booming oil market with the increasing oil price, and the accelerated development of alternative fuels. During the 11th Five-Year Plan period, driven by fast domestic economic
23

development, quick urbanization and booming automobile ownership, Chinese oil consumption increased sharply with higher degree of foreign oil dependence. During the 11th Five-Year Plan period, apparent oil consumption increased from 323 million tons to 455 million tons with 7% of annual average growth; apparent crude oil consumption increased from 305 million tons to 439 million tons with 7.6% of annual average growth; the net oil import increased from 143 million tons to 253 million tons with 12.1% of annual average growth. Domestic oil market management system had been improved with the launching Measures for Oil Product Market Administration and Measures for Crude Oil Market Administration; which opened the wholesale qualifications for domestic crude oil and oil products. A large number of state-owned enterprises, foreign enterprises and private enterprises swarmed into the market and diversified the market. Great progress was also made in oil product pricing reforms. During the 12th Five-Year Plan, China is still in the stage of quick urbanization and industrialization. Chinese oil demand will grow further with a 4% annual average growth rate but higher at the start and lower afterwards. The total oil demand in 2015 is expected to be 540 million tons and foreign oil dependence will be lifted to more than 60% from 55% in 2010. Domestic supplies will dominate the oil product market, with gasoline in surplus and diesel in balance. But short supplies due to regional, seasonal, emergent or structural reasons cannot be dispelled, thus imports and exports will play an important role in market adjustment. A persistently high international oil price will drive the domestic oil price higher. Domestic oil product market reform will be further deepened, with the aim of regularizing market supervision and to bring a more flexible pricing mechanism. As a result, the market will be more open but more fiercely competitive with more diversified market participants. Fuel for vehicles, including electricity, ethanol, methanol and bio-diesel will be developed in an accelerated manner, which indicates the coming of a new development period of oil being replaced in a large scale. 4.3 Major Chinese oil companies will devote great efforts to implementing their resource strategies. Petroleum exploration and development will follow the way of stabilizing the East, accelerating the West, developing offshore and expanding overseas. It is possible that domestic crude oil production shall be increased steadily to more than 200 million tons and overseas equity crude oil production will exceed 100 million tons. During the 11th Five-Year Plan period, focusing on the resource strategy, CNPC achieved a new peak period of oil and gas reserves growth by way of attaching potentials to mature oilfields and promoting preparatory seismic
24

surveys and risk exploration. In the 12th Five-Year Plan period, in accordance with the principles of scale exploration, effective exploration and scientific exploration and based on the eight great basins, CNPC will continue pushing forward projects of reserve growth at peak periods, reinforcing exploration and development integration, so as to effectively increase oil and gas production capacity, and secure domestic crude oil production above 100 million tons. Daqing Oilfield is expected to stabilize its production at 40 million tons and Changqing Oilfield is expected to realize a breakthrough of 50 million toe. Sinopec made its resource strategy a priority during the period of the 11th Five-Year Plan. The company insisted on casting its upstream long board, which resulted in 42.56 million tons of crude oil production and a new round of steady production growth. In the 12th Five-Year Plan period, Sinopec will keep on stabilizing production at mature fields in the East and reinforcing exploration and production in new areas. The company will make more efforts to develop natural gas, enhance innovation in theories, technologies and managements, optimize investment structure and strengthen cost control, so as to increase both reserves and production. Guided by the principle of searching for big and medium-sized oilfields, CNOOC made series of breakthroughs in key spheres and realized rapid growth in oil and gas production during the 11th Five-Year Plan. In 2010, the companys production reached 50 million toe. During the 12th Five-Year Plan period, CNOOC will further intensify its exploration and development while extending from the shallow waters to deep seas, so as to make resource foundation the preparation for building a Daqing in the Deep Sea, In general, in the 12th Five-Year Plan, Chinas oil and gas exploration and development will focus on the West and the offshore with targets shifting from conventional resources to both conventional and unconventional resources. As the geological and geographical environment will be more complex, the worsening conditions and rising difficulty will lead to higher exploration and development costs. Breakthroughs will mainly rely on technological progress and advancements in equipment. Guided by the national principle of going out, Chinese oil companies will further accelerate their internationalization process and strengthen international win-win cooperation by acquisitions and mergers, bidding and tendering. Their overseas business will be expanded on a large scale and more attention will be paid to effectiveness of their overseas investment and its development quality. It is expected that the three major oil companies total overseas equity oil output will be more than 100 million tons by 2015.

4.4 The Chinese refining and petrochemical industry will continue its
25

expansion with its structure being more adjusted and optimized. It is expected that new additions in refining capacity and ethylene production capacity will be 190 million tons and 7.4 million tons respectively. The crude oil processing volume and the oil product output will keep on growing. The number of large refining bases will increase. The product yield structure will be further adjusted and the product quality will keep on updating. During the 11th Five-Year Plan, the Chinese refining and petrochemical industry developed rapidly with large-scale expansion. It has established 20 10-million-ton refining bases, including 14 large refining and petrochemical bases. The refining capacity was increased by 55.1% from 325 million tons to 504 million tons. Ethylene production capacity was increased by 43.4% from 9.88 million tons to 14.169 million tons. China has become the second biggest refining and ethylene producing country after the US. The industry layout and the unit structure were further adjusted and optimized. The processing capacity for handling high-sulfur crude oil reached 70 million tons. The ethylene unit size was averaged at 590 thousand tons, higher than the world average. Two refineries with a size more than 20 million tons were ranked as world-class refineries. Crude oil processing capacity increased by 37.4% from 307 million tons to 421 million tons. Ethylene production increased by 43.6% from 9.55 million tons to 13.71 million tons. In recent years, the unit nationalization rate for Chinese new ethylene plants has reached 70%-80%. There has formed a pattern of domestic refining and ethylene industry with competition between diversified participants, led by CNPC and Sinopec, and participated in by other state-owned enterprises and foreign enterprises. The 12th Five-Year Plan period is still an important development stage for the Chinese refining industry to further expand its capacity, adjust its structure and optimize its layout. If all the refining projects of all the companies that are under construction, proposed or under planning can be completed on schedule, it is expected that by 2015, the national total refining capacity will be increased by 190 million tons, the number of 10-million-ton class refineries will be 29, and 3-4 large refining bases with 20-million-ton capacity will be established. With 7.4 million tons of newly added capacity, the total ethylene capacity will reach 21.98 million tons. And 3-4 ethylene production bases with 2-million-ton capacity will be built. With the establishment of the four petrochemical industrial zones, including Hangzhou Bay (Yangtze River Delta), Pearl River Delta, Bohai Bay Rim and the Northwestern region, an oil refining and ethylene producing pattern with more diversified producers but matching regional economic development will be basically formed. Meanwhile, oil product specification will be upgraded from National III to National IV, with National V possibly being adopted in some areas. Alternative auto fuel related industries, including natural gas, alcohol, bio-fuel, CTL and
26

electric cells will be developed more quickly. The growing Chinese market will attract more foreign investment in domestic refining and marketing. A trend of internationalized domestic competition will be more visible. Driven by various factors, the overseas downstream business will be accelerated. With the rapid expansion of domestic refining and petrochemical capacity, the government will pay more attention to macro-adjustment and planning guidance, so as to achieve the coordinated development of capacity growth matching demand growth and to avoid periodical excessive supplies. In order to improve the enterprises international competitiveness and to turn China from a large refining country to a powerful refining country, the government will be inclined to guide enterprises to further improve the technological content and nationalization rate of their units, and to eliminate backward production capacities and increase value-added and differentiated products.

4.5 Both Chinese natural gas demand and supply are growing rapidly and vigorously. It is expected that domestic gas production will be more than 150 BCM while gas consumption will be around 230 BCM by 2015. The consumption structure will be more rational. The government will introduce and optimize a new gas pricing mechanism so that the natural gas market can be developed in a healthy manner. Great breakthroughs were made in the Chinese natural gas industry during the 11th Five-Year Plan. Natural gas reserves grew rapidly with average annual growth of more than 300 BCM. Natural gas production increased by 13.4% annually from 58.6 BCM to 95 BCM. Natural gas consumption increased by 10.1% annually from 56.1 BCM to 106 BCM. The consumption region was extended from zones neighboring gas fields to economically developed areas. Urban gas has become the fastest growing sector. The share of power generation increased while that of industry and chemicals dropped. Breakthroughs were made in foreign gas resource utilization with LNG imports increased further and pipeline gas imports starting. The ex-factory price and pipeline transportation rate were adjusted several times and thus a solid foundation was laid for the introduction of the new natural gas pricing mechanism. The 12th Five-Year Plan period is a strategic development period for the Chinese natural gas industry. With the developing economy, increasing population and ongoing industrialization and urbanization, and encouraged by the clean energy policy, natural gas demand will grow rapidly. It is expected that the total gas consumption will be doubled by 2015 to around 230 BCM, with an average annual growth rate of 16.8%. Calculated by supposing domestic energy consumption remains at 4 billion tons of coal equivalent, the share of natural gas in the primary energy mix will also be doubled.
27

Driven by strong demand, the next five years shall be the quickest period for gas reserve growth, during which gas production will be increased by an unprecedented volume. It is expected that the annual average growth of proved gas reserves will be more than 500 BCM, and that of gas production may be above 11 BCM. Thus it is possible to reach 150 BCM in 2015. Unconventional natural gas exploration and development will enter into a crucial period. Coal bed methane production will be increased noticeably to 10 BCM in 2015. Shale gas will also enter into commercial production. Natural gas imports will be expanded rapidly. It is expected that the total imports both pipeline gas and LNG will reach 70 BCM, with a 30% share in total domestic consumption. Distributable energy projects related to natural gas will be gradually promoted among large cities above designated size across the country. Obvious changes will take place in the gas sector and regional consumption structures. Gas demand will be distributed in a regional ladder-shaped pattern. Fast growth will be achieved in developed regions with great environmental -protection pressures, like Bohai Rim, Yangtze River Delta and the Southeast coastal areas. Demand growth will be extended from large cities to smaller towns and from the developed eastern areas to the central and western regions. Urban residential gas will grow fast, gas used for industry and power generation will expand but gas for chemicals will decline. The government will accelerate reforms of the pricing mechanism for resource-related products. A new natural gas pricing mechanism will be introduced and improved consistently. Price relations between domestic gas and imported gas and between gas and alternative energies will be optimized.

4.6 Chinese oil and gas storage and transportation infrastructure will still be in the era of rapid development with its system becoming more complete. Chinas oil and gas storage and transportation infrastructure developed rapidly during the 11th Five-Year Plan. Domestic long-distance trunk lines, like the West-East Gas Pipeline and the Sichuan-East Gas Pipeline and oil and gas importing pipelines from Russia, Kazakhstan, Central Asia and Myanmar began construction or operation, representing a milestone in world pipeline history. The crude oil backbone pipeline networks have been basically established. The construction of oil product pipelines has been accelerated. The great leap forward in natural gas pipeline construction resulted in the formation of a trunk line network. The proportion of oil and gas transmitted by pipeline has been increased significantly. In the 11th Five-Year Plan, 7,352 kilometers of crude oil pipeline was
28

completed, contributing to the establishment of 180 million tons of actual annual transmission capacity. With regard to oil product pipelines, 10,763 kilometers were completed or under construction, which is more than the total length in the past 56 years. For natural gas pipelines, the total length was longer than 10,000 kilometers and the transmission capacity was doubled. In the 11th Five-Year Plan period, national strategic oil reserves were developed quickly from nothing to a considerable scale. The total storage capacity of national strategic reserves and commercial oil reserves reached 346 million barrels. During 12th Five-Year Plan period, the Chinese oil and gas pipeline will still be in the era of rapid expansion with its system becoming more complete. Pipeline construction will be shifted from trunk lines to pipeline networks with higher density. Pipeline transmission capacity will be strengthened with a greater proportion of oil and gas transmitted. It is expected that the average annual growth rate of pipeline length will be 13.9%, higher than that in the past 10 years. Regarding the length of pipeline construction, natural gas pipelines will be faster than oil pipelines, and oil product pipelines faster than crude oil pipelines. It is expected that the total length of long-distance oil and gas pipelines will be more than 100,000 kilometers by the end of the 12th Five-Year Plan. Phase II and Phase III of national strategic reserves will be completed and put into operation. The total capacity of strategic reserves will be 350 million barrels by the end of the 12th Five-Year Plan. Underground gas storage construction is facing a climax with total investment of more than RMB 30 billion. LNG receiving terminals will be built and put into operation on a concentrated during this period. The eight receiving terminals now under construction will be put into operation before 2013, which will expand Chinas LNG receiving capacity. During 2011 and the whole period of the 12th Five-Year Plan, Chinas oil and gas industry will have great opportunities for further development and it will be a key period for structural adjustment. Opportunities coexist with challenges while development coexists with adjustment. Development will be the main theme for the oil and gas industry and adjustments will be carried out throughout this period. As a result of this adjustment, industry structure, product structure and regional layout will be optimized; industry management abilities will be reinforced and the level of legalization, market-orientation and internationalization will be lifted. This will lead to highly efficient, cleaner and more sustainable development.

29