SNPMF 20-F DEF-14A Report April 30, 2010 | Alphaminr
CHINA PETROLEUM & CHEMICAL CORP
ALPHAMINR

SNPMF 20-F Report ended April 30, 2010

Balance Sheet
Cash Flow
Income Statement
Debt
20-F 1 china_20-f.htm china_20-f.htm cy
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 20-F
(Mark One)
£
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
S
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
OR
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO_______
OR
£
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT ……………….
FOR THE TRANSACTION PERIOD FORM ____________ TO __________
COMMISSION FILE NUMBER 1-15138
_______________________
中国石油化工股份有限公司
CHINA PETROLEUM & CHEMICAL CORPORATION
(Exact name of Registrant as specified in its charter)
_______________________
The People's Republic of China
(Jurisdiction of incorporation or organization)
_______________________
22 Chaoyangmen North Street
Chaoyang District, Beijing, 100728
The People's Republic of China
(Address of principal executive offices)
_______________________
Mr. Chen Ge
22 Chaoyangmen North Street
Chaoyang District, Beijing, 100728
The People's Republic of China
Tel: +86 (10) 5996 0028
Fax: +86 (10) 5996 0386
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
________________________
Securities registered or to be registered pursuant to Section 12 (b) of the Act.

Title of Each Class
Name of Each Exchange
On Which Registered
American Depositary Shares, each representing 100 H Shares of par value RMB 1.00 per share
New York Stock Exchange, Inc.
H Shares of par value RMB 1.00 per share
New York Stock Exchange, Inc.*
*   Not for trading, but only in connection with the registration of American Depository Shares.
Securities registered or to be registered pursuant to Section 12 (g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15 (d) of the Act.


None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
H Shares, par value RMB 1.00 per share
16,780,488,000
A Shares, par value RMB 1.00 per share
69,921,951,000
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes X
No__
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes __
No X
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X
No__
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer X
Accelerated filer __
Non-accelerated filer __
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ___
International Financial Reporting Standards X
Other ___
as issued by the International Accounting
Standards Board
If "Other" has been checked in  response to the previous question,  indicate by check mark which  financial statement item the registrant has elected to follow.
Item 17__
Item 18__
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes __
No X

Table of Contents
Page
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
6
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
6
ITEM 3.
KEY INFORMATION
6
A.
SELECTED FINANCIAL DATA
6
B.
CAPITALIZATION AND INDEBTEDNESS
8
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
8
D.
RISK FACTORS
8
ITEM 4.
INFORMATION ON THE COMPANY
13
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
13
B.
BUSINESS OVERVIEW
14
C.
ORGANIZATIONAL STRUCTURE
30
D.
PROPERTY, PLANT AND EQUIPMENT
30
ITEM 4A.
UNRESOLVED STAFF COMMENTS
31
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
31
A.
GENERAL
31
B.
CONSOLIDATED RESULTS OF OPERATIONS
34
C.
DISCUSSIONS ON RESULTS OF SEGMENT OPERATIONS
40
D.
LIQUIDITY AND CAPITAL RESOURCES
47
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
50
A.
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
50
B.
COMPENSATION
57
C.
BOARD PRACTICE
58
D.
EMPLOYEES
59
E.
SHARE OWNERSHIP
60
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
60
A.
MAJOR SHAREHOLDERS
60
B.
RELATED PARTY TRANSACTIONS
60
C.
INTERESTS OF EXPERTS AND COUNSEL
60
ITEM 8.
FINANCIAL INFORMATION
61
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
61
B.
SIGNIFICANT CHANGES
61
ITEM 9.
THE OFFER AND LISTING
61
A.
OFFER AND LISTING DETAILS
61
ITEM 10.
ADDITIONAL INFORMATION
62
A.
SHARE CAPITAL
62
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
63
C.
MATERIAL CONTRACTS
70
D.
EXCHANGE CONTROLS
70
E.
TAXATION
71
F.
DIVIDENDS AND PAYING AGENTS
74
G.
STATEMENT BY EXPERTS
74
H.
DOCUMENTS ON DISPLAY
74
I.
SUBSIDIARY INFORMATION
75
ITEM 11.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
75
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
81
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
81
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
81
A.
MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITIES HOLDERS
81
B.
USE OF PROCEEDS
81
ITEM 15. CONTROLS AND PROCEDURES 81

1
ITEM 16.
RESERVED
83
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
83
ITEM 16B.
CODE OF ETHICS
83
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
83
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
83
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
83
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
83
ITEM 16G.
COMPARISON OF NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE RULES AND CHINA CORPORATE GOVERNANCE RULES FOR LISTED COMPANIES
83
ITEM 17.
FINANCIAL STATEMENTS
86
ITEM 18.
FINANCIAL STATEMENTS
86
ITEM 19.
EXHIBITS
86

2
CERTAIN TERMS AND CONVENTIONS
Definitions
Unless the context otherwise requires, references in this annual report to:
·
"Sinopec Corp.", "we", "our" and "us" are to China Petroleum & Chemical Corporation, a PRC joint stock limited company, and its subsidiaries;
·
"Sinopec Group Company" are to our controlling shareholder, China Petrochemical Corporation, a PRC limited liability company;
·
"Sinopec Group" are to the Sinopec Group Company and its subsidiaries other than Sinopec Corp. and its subsidiaries;
·
"China" or the "PRC" are to the People's Republic of China, excluding for purposes of this annual report Hong Kong, Macau and Taiwan;
·
"provinces" are to provinces and to provincial-level autonomous regions and municipalities in China which are directly under the supervision of the central PRC government;
·
"RMB" are to Renminbi, the currency of the PRC;
·
"HK$" are to Hong Kong dollar, the currency of the Hong Kong Special Administrative Region of the PRC; and
·
"US$" are to US dollars, the currency of the United States of America.
Conversion Conventions
Conversions of crude oil from tonnes to barrels are made at a rate of one tonne to 7.35 barrels for crude oil we purchase from external sources and one tonne to 7.1 barrels for crude oil we produce, representing the American Petroleum Institute (“API”) gravity of the respective source of crude oil. Conversions of natural gas from cubic meters to cubic feet are made at a rate of one cubic meter to 35.31 cubic feet.
Glossary of Technical Terms
Unless otherwise indicated in the context, references to:
·
"billion" are to a thousand million.
·
"BOE" are to barrels-of-oil equivalent; natural gas is converted at a ratio of 6,000 cubic feet of natural gas to one BOE.
·
"primary distillation capacity" are to the crude oil throughput capacity of a refinery's crude oil distillation units, calculated by estimating the number of days in a year that such crude oil distillation units are expected to operate, excluding downtime for regular maintenance, and multiplying that number by the amount equal to the units' optimal daily crude oil throughput.
·
"rated capacity" are to the output capacity of a given production unit or, where appropriate, the throughput capacity, calculated by estimating the number of days in a year that such production unit is expected to operate, excluding downtime for regular maintenance, and multiplying that number by an amount equal to the unit's optimal daily output or throughput, as the case may be.

3
CURRENCIES AND EXCHANGE RATES
We publish our financial statements in Renminbi. Unless otherwise indicated, all translations from Renminbi to US dollars have been made at a rate of RMB 6.8259 to US$1.00, the noon buying rate on December 31, 2009 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We do not represent that Renminbi or US dollar amounts could be converted into US dollars or Renminbi, as the case may be, at any particular rate, the rates below or at all. On April 23, 2010, the noon buying rate was RMB 6.8270 to US$1.00.
The following table sets forth noon buying rate for US dollars in Renminbi for the periods indicated:
Noon Buying Rate (1)
Period
End
Average (2)
High
Low
(RMB per US$1.00)
2005
8.0702 8.1826 8.2765 8.0702
2006
7.8041 7.9723 8.0702 7.9723
2007
7.2946 7.5806 7.8127 7.2946
2008
6.8225 6.9193 7.2946 6.7800
2009
6.8259 6.8307 6.8470 6.8176
October 2009
6.8264 6.8267 6.8292 6.8248
November 2009
6.8265 6.8271 6.8300 6.8255
December 2009
6.8259 6.8276 6.8299 6.8260
January 2010
6.8268 6.8269 6.8295 6.8258
February 2010
6.8258 6.8285 6.8330 6.8258
March 2010
6.8258 6.8262 6.8270 6.8254
April 2010 (up to April 23, 2010)
6.8270 6.8256 6.2875 6.8229
__________
(1)
For the period prior to January 1, 2009, the exchange rates reflect the noon buying rates certified by the Federal Reserve Bank of New York. For the period after January 1, 2009, the exchange rates reflect those set forth in the H.10 statistical release of the U.S. Federal Reserve Board.
(2)
Annual averages are determined by averaging the rates on the last business day of each month during the relevant period. Monthly averages are calculated using the average of the daily rates during the relevant period.

4

FORWARD-LOOKING STATEMENTS
This annual report includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical facts, included in this annual report that address activities, events or developments which we expect or anticipate will or may occur in the future are hereby identified as forward-looking statements for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words such as believe, intend, expect, anticipate, project, estimate, predict, plan and similar expressions are also intended to identify forward-looking statements. These forward-looking statements address, among others, such issues as:
·
amount and nature of future exploration and development,
·
future prices of and demand for our products,
·
future earnings and cash flow,
·
development projects and drilling prospects,
·
future plans and capital expenditures,
·
estimates of proved oil and gas reserves,
·
exploration prospects and reserves potential,
·
expansion and other development trends of the petroleum and petrochemical industry,
·
production forecasts of oil and gas,
·
expected production or processing capacities, including expected rated capacities and primary distillation capacities, of units or facilities not yet in operation,
·
expansion and growth of our business and operations, and
·
our prospective operational and financial information.
These statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. However, whether actual results and developments will meet our expectations and predictions depends on a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including the risks set forth in "Item 3. Key Information ¾ Risk Factors" and the following:
·
fluctuations in crude oil prices,
·
fluctuations in prices of our products,
·
failures or delays in achieving production from development projects,
·
potential acquisitions and other business opportunities,
·
general economic, market and business conditions, and
·
other risks and factors beyond our control.
Consequently, all of the forward-looking statements made in this annual report are qualified by these cautionary statements and readers are cautioned not to place undue reliance on these forward-looking statements.  These forward-looking statements should be considered in light of the various important factors set forth above and elsewhere in this Form 20-F.  In addition, we cannot assure you that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected effect on us or our business or operations.

5
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.
KEY INFORMATION
A.
SELECTED FINANCIAL DATA
The selected consolidated income statement data (except per ADS data) and consolidated cash flow data for the years ended December 31, 2007, 2008 and 2009, and the selected consolidated balance sheet data as of December 31, 2008, and 2009 have been derived from, and should be read in conjunction with, the audited consolidated financial statements included elsewhere in this annual report. The selected consolidated income statement data and consolidated cash flow data for the years ended December 31, 2005 and 2006 and the selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007 are derived from our audited consolidated financial statements which are not included elsewhere in this annual report and the financial statements of the acquired businesses described below.
We acquired from Sinopec Group Company the equity interests of Sinopec Hainan Refining and Chemical Company Limited (Sinopec Hainan) and certain oil and gas production companies (Oil Production Plants) in 2006, the equity interests of Zhanjiang Dongxing Petroleum Company Limited, Sinopec Hangzhou Oil Refinery Plant, Yangzhou Petrochemical Plant, Jiangsu Taizhou Petrochemical Plant and Sinopec Qingjiang Petrochemical Company Limited (collectively, Refinery Plants) in 2007, and the entire equity interests of Sinopec Qingdao Petrochemical Company Limited and certain storage and distribution operations (collectively, the Acquired Group) in 2009.  As we and these companies are under the common control of Sinopec Group Company, our acquisitions are reflected in our consolidated financial statements as combination of entities under common control that is accounted for in a manner similar to a pooling-of-interests.  Accordingly, the acquired assets and related liabilities have been accounted for at historical cost and our consolidated financial statements for periods prior to the combinations have been restated to include the financial condition and the results of operation of these companies on a combined basis.
Moreover, the selected financial data should be read in conjunction with our consolidated financial statements and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Our consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards, or IFRS.

6

Years Ended December 31,
2005
2006
2007
2008
2009
RMB
RMB
RMB
RMB
RMB
(in millions, except per share and per ADS data)
Consolidated Income Statement Data (1) :
Operating revenues
814,093 1,056,363 1,200,997 1,444,291 1,345,052
Other income
9,912 5,225 4,863 50,857 -
Operating expenses
(752,488 ) (980,338 ) (1,120,364 ) (1,468,812 ) (1,260,621 )
Operating income
71,517 81,250 85,496 26,336 84,431
Earnings before income tax
68,090 79,073 82,847 22,116 80,568
Tax (expense)/benefit
(21,048 ) (23,865 ) (24,723 ) 2,840 (16,084 )
Net income attributable to equity shareholders of the Company
43,743 53,773 55,914 28,525 61,760
Basic earnings per share (2)
0.50 0.62 0.64 0.33 0.71
Basic earnings per ADS (2)
50.45 62.02 64.49 32.90 71.23
Diluted earnins per share (2) 0.50 0.62 0.64 0.29 0.71
Diluted earnings per ADS (2) 50.45 62.02 64.49 28.87 70.78
Cash dividends declared per share
0.12 0.13 0.16 0.145 0.16
Segment results
Exploration and production
49,307 63,498 48,766 66,569 19,644
Refining
(2,801 ) (26,001 ) (10,997 ) (63,635 ) 23,077
Marketing and distribution
10,583 30,361 35,904 38,519 30,300
Chemicals
15,626 14,924 13,306 (12,950 ) 13,615
Corporate and others
(1,198 ) (1,532 ) (1,483 ) (2,167 ) (2,205 )
Operating income
71,517 81,250 85,496 26,336 84,431
As of December 31,
2005 2006 2007 2008 2009
RMB
RMB
RMB
RMB
RMB
(in millions)
Consolidated Balance Sheet Data (1) :
Cash and cash equivalents
15,418 7,187 7,785 7,008 8,750
Total current assets
150,640 148,073 186,761 165,398 201,280
Total non-current assets
400,160 471,413 556,610 613,774 676,562
Total assets
550,800 619,486 743,371 779,172 877,842
Short-term debts and loans from Sinopec Group Company and its affiliates (including current portion of long-term debts)
50,734 70,952 69,462 108,926 72,541
Long-term debts and loans from Sinopec Group Company and its affiliates (excluding current portion of long-term debts)
103,408 100,637 120,314 127,144 145,828
Equity attributable to equity shareholders of the Company
226,506 264,911 307,897 327,889 375,661
Capital employed (3)
396,404 451,636 515,213 577,604 608,472
Years Ended December 31
2005 2006 2007 2008 2009
RMB
RMB
RMB
RMB
RMB
(in millions)
Other Financial Data (1) :
Net cash generated from operating activities
78,294 91,934 118,612 66,517 152,075
Net cash (used in)/generated from financing activities
(6,835 ) 6,202 (3,196 ) 42,820 (34,294 )
Net cash used in investing activities
(75,142 ) (106,342 ) (114,754 ) (110,035 ) (116,039 )
Capital expenditure
Exploration and production
25,479 35,198 54,498 57,646 51,550
Refining
20,932 22,815 22,964 12,793 15,468
Marketing and distribution
13,262 13,475 14,671 14,796 16,283
Chemicals
9,386 12,629 16,184 20,622 25,207
Corporate and others
1,164 2,170 3,289 2,393 1,505
Total
70,223 86,287 111,606 108,250 110,013

7
__________
(1)
The acquisitions of equity interests of Sinopec Hainan and Oil Production Plants in 2006, the acquisition of equity interests of the Refining Plants in 2007 and the acquisition of the Acquired Group from Sinopec Group Company in 2009 are treated as “combination of entities under common control” which are accounted in a manner similar to a pooling-of-interests.  Accordingly, the acquired assets and liabilities have been accounted for at historical cost and the consolidated financial statements for periods prior to the combinations have been restated to include the financial condition and results of operation of these acquired companies on a combined basis.  The considerations for these acquisitions were treated as equity transactions.
(2)
Basic earnings per share have been computed by dividing net income attributable to equity shareholders of our company by the weighted average number of shares in issue. For the years ended December 31, 2005, 2006 and 2007, diluted earnings per share and per ADS are calculated on the same basis as basic earnings per share and per ADS, respectively, since there were no dilutive potential ordinary shares or they were considered anti-dilutive. The calculation of diluted earnings per share for the years ended December 31, 2008 and 2009 is based on the diluted net income attributable to equity shareholders of our Company of RMB 25,348 million and RMB62,136 million and the diluted weighted average number of the shares of 87,790 million and 87,790 million, respectively. Basic and diluted earnings per ADS have been computed as if all of our issued or potential ordinary shares, including domestic shares and H shares, are represented by ADSs during each of the years presented. Each ADS represents 100 shares.
(3)
Capital employed is derived by the sum of short-term debts, long-term debts, loans from Sinopec Group Company and its affiliates and total equity less cash and cash equivalents.
B.
CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D.
RISK FACTORS
Risks Relating to Our Business Operation
Our business may be adversely affected by the fluctuation of crude oil and refined petroleum product prices.
We consume a large amount of crude oil to produce our refined petroleum products and petrochemical products. While we try to adjust the sale price of our products to track international crude oil price fluctuations, our ability to pass on the increased cost resulting from crude oil price increases to our customers is dependent on international and domestic market conditions as well as the PRC government’s price control over refined petroleum products. Although the current price-setting mechanism for refined petroleum products in China allows the PRC government to adjust price in the PRC market when the average international crude oil price fluctuates beyond certain levels within a certain time period, the PRC government still retains discretion as to whether or when to adjust the refined petroleum products price. The PRC government generally exercises certain price control over refined petroleum products once international crude oil price experiences sustained rises or becomes significantly volatile. As a result, our results of operations and financial condition may be materially and adversely affected by the fluctuation of crude oil and refined petroleum product prices.
Our continued business success depends in part on our ability to replace reserves and develop newly discovered reserves.
Our ability to achieve our growth objectives is dependent in part on our level of success in discovering or acquiring additional oil and natural gas reserves and further exploring our current reserve base. Our exploration and development activities for additional reserves also expose us to inherent risks associated with drilling, including the risk that no economically productive oil or natural gas reservoirs might be discovered. Exploring for, developing and acquiring reserves is highly risky and capital intensive. Without reserve additions through further exploration and development or acquisition activities, our reserves and production will decline over time, which may materially and adversely affect our results of operations and financial condition.

8

We rely heavily on outside suppliers for crude oil and other raw materials, and we may even experience disruption of our ability to obtain crude oil and other raw materials.
We purchase a significant portion of our crude oil and other feedstock requirements from outside suppliers located in different countries and areas in the world. In 2009, approximately 75% of the crude oil required for our refinery business was sourced from international suppliers, some of which are from countries or regions that are on the sanction list published and administered by the Office of Foreign Assets Control of the US Department of Treasury, including Iran and Sudan. In addition, our development requires us to source an increasing amount of crude oil from outside suppliers. We are subject to the political, geographical and economic risks associated with these countries and areas. If one or more of our material supply contracts were terminated or disrupted due to any natural disasters or political events, it is possible that we would not be able to find sufficient alternative sources of supply in a timely manner or on commercially reasonable terms. As a result, our business and financial condition would be materially and adversely affected.
Our business faces operation risks and natural disasters that may cause significant property damages, personal injuries and interruption of operations, and we may not have sufficient insurance coverage for all the financial losses incurred by us.
Exploring for, producing and transporting crude oil and natural gas and producing and transporting refined and petrochemical products involve a number of operating hazards.  Significant operating hazards and natural disasters may cause interruption to our operations, property or environmental damages as well as personal injuries, and each of these incidents could have a material adverse effect on our financial condition and results of operations.
We have been paying high attention to the safety of our operation and implemented health, safety and environment management system within our company with the view to preventing accident, and reducing personal injuries, property losses and environment pollution. We also maintain insurance coverage on our property, plant, equipment and inventory. However, our preventative measures may not be effective and our insurance coverage may not be sufficient to cover all the financial losses caused by the operation risks and natural disasters. Losses incurred or payments required to be made by us due to operating hazards or natural disasters, which are not fully insured, may have a material adverse effect on our financial condition and results of operations.
The oil and natural gas reserves data in this annual report are only estimates, and our actual production, revenues and expenditures with respect to our reserves may differ materially from these estimates.
There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves, and in the timing of development expenditures and the projection of future rates of production. The reserve data set forth in this annual report represent estimates only. Adverse changes in economic conditions may render it uneconomical to develop certain reserves. Our actual production, revenues, taxes and fees payable and development and operating expenditures with respect to our reserves may likely vary from these estimates.
The reliability of reserves estimates depends on:
·
the quality and quantity of technical and economic data;
·
the prevailing oil and gas prices applicable to our production;
·
the production performance of the reservoirs; and
·
extensive engineering judgments.
In addition, new drilling, testing and production results following the estimates may cause substantial upward or downward revisions in the estimates.
Our operations may be adversely affected by the global and domestic economic conditions.
Our results of operations are materially affected by economic conditions in China and elsewhere around the world. The global financial crisis that began in 2008 has adversely affected China and other world economies, including the United States. Although many countries have adopted various macroeconomic policies, including stimulus packages, aiming at

9

offsetting the slowdown brought about by the financial crisis, the global economy has been negatively impacted. The global financial crisis also resulted in a tightening in credit markets, a low level of liquidity in many financial markets and increased volatility in credit, equity and commodity markets. The timing and nature of any recovery in worldwide financial markets and the global economy remain uncertain, and there can be no assurance that market conditions will improve in the near future, or even if they do improve, will not deteriorate again. Our operations may also be adversely affected by factors such as volatility in international commodity prices, governmental policies and measures affecting international trade and the PRC government’s regulatory schemes and policies affecting domestic market. If the global and domestic markets experience significant or continuous slowdown or downturn, our business, financial condition, results of operations would be adversely affected.
Our operations may be adversely affected by the cyclical nature of the market.
Most of our revenues are attributable to sales of refined petroleum products and petrochemical products, and certain of these businesses and related products have historically been cyclical and sensitive to a number of factors that are beyond our control. These factors include the availability and prices of feedstock and general economic conditions, such as changes in industry capacity and output levels, cyclical changes in regional and global economic conditions, prices and availability of substitute products and changes in consumer demand. With the further reduction of tariffs and other import restrictions in the PRC on refined petroleum products and petrochemical products, many of our products have become increasingly subject to the cyclicality of global markets, and hence, our operations may be adversely affected by the cyclical nature of the market.
We face strong competition from domestic and foreign competitors.
Among our competitors, some are major integrated petroleum and petrochemical companies within and outside the PRC, which have recently become more significant participants in the petroleum and petrochemical industry in China. On December 4, 2006, Ministry of Commerce of the PRC promulgated the “Administrative Rules for Crude Oil Market” and “Administrative Rules for Refined Petroleum Products Market” to open the wholesale market of crude oil and refined petroleum products to new market entrants. As a result, we expect to face more competition in both crude oil and refined petroleum product markets. We also expect to face more competition in petrochemical product market as a result of our domestic and international competitors’ increasing production capacity. Increased competition may have a material adverse effect on our financial condition and results of operations.
Risks Relating to Our Controlling Shareholder
Related party transactions.
We have engaged from time to time and will continue to engage in a variety of transactions with Sinopec Group, which provides to us a number of services, including, but not limited to, ancillary supply, engineering, maintenance, transport, lease of land use right, lease of buildings, as well as educational and community services. The nature of our transactions with Sinopec Group is governed by a number of service and other contracts between Sinopec Group and us. We have established various schemes in those agreements so that these transactions would be entered into under terms at arm’s length. However, we cannot assure you that Sinopec Group Company or any of its members would not take actions that may favor its interests or its other subsidiaries' interests over ours.
Non-competition.
Sinopec Group Company has interests in certain businesses, such as oil refining, petrochemical producing, retail service stations and overseas exploration and development, which compete or are likely to compete, either directly or indirectly, with our businesses. To avoid the adverse effects brought by the competition between us and Sinopec Group Company to the maximum extent possible, we and Sinopec Group Company have entered into a non-competition agreement whereby Sinopec Group Company has agreed to: refrain from operating new businesses which compete or could compete with us in any of our domestic or international markets; grant us an option to purchase Sinopec Group Company's operations that compete or could compete with our businesses; operate its sales enterprises and service stations in a manner uniform to our sales and service operations; and appoint us as sales agent for certain of its products which compete or could compete with our products. Notwithstanding the foregoing contractual arrangements, because Sinopec Group Company is our controlling shareholder, Sinopec Group Company may take actions that may conflict with our own interests.

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Investments in OFAC sanctioned countries.
Sinopec Group Company undertakes, from time to time and without our involvement, overseas investments and operations in the oil and gas industry, including exploration and production of oil and gas, refining and LNG projects.  Sinopec Group Company’s overseas asset portfolio includes oil and gas development projects in Iran, Sudan and Syria, which countries are on the sanction list published and administrated by the Office of Foreign Assets Control, or OFAC, of the U.S. Department of Treasury. Certain U.S.-based investors, including state and municipal governments and universities, may not wish to invest, and have proposed or adopted divestment or similar initiatives regarding investments, in companies that do business with countries on OFAC’s sanction list. These investors may not wish to invest, and may divest their investment, in us because of our relationship with Sinopec Group Company and its investments and activities in those OFAC sanctioned countries. As a result, the trading prices of our ADSs may be materially and adversely affected.
Risks Relating to the PRC
Government regulations may limit our activities and affect our business operations.
The PRC government, though gradually liberalizing its regulations on entry into the petroleum and petrochemical industry, continues to exercise certain controls over the petroleum and petrochemical industry in China. These control mechanisms include granting the licenses to explore and produce crude oil and natural gas, granting the licenses to market and distribute crude oil and refined petroleum products, regulating the pricing of refined petroleum products, collecting special gain levies, assessing taxes and fees payable, deciding import and export quotas and procedures for the oil and gas industry, and setting safety, environmental and quality standards. As a result, we may face constraints on our flexibility and ability to expand our business operations.
Our business operations may be adversely affected by present or future environmental regulations.
As an integrated petroleum and petrochemical company, we are subject to extensive environmental protection laws and regulations in China. These laws and regulations permit:
·
the imposition of fees for the discharge of waste substances;
·
the levy of fines and payments for damages for serious environmental offenses; and
·
the government, at its discretion, to close any facility which fails to comply with orders and require it to correct or stop operations causing environmental damage.
Our production operations produce substantial amounts of waste water, gas and solid waste materials. In addition, our production facilities require operating permits that are subject to renewal, modification and revocation. We have established a system to treat waste materials to prevent and reduce pollution. However, the PRC government has moved, and may move further, toward more rigorous enforcement of applicable laws, and toward the adoption of more stringent environmental standards, which, in turn, would require us to incur additional expenditures on environmental matters.
Some of our development plans require compliance with state policies and regulatory confirmation and registration.
We are currently engaged in a number of construction, renovation and expansion projects. Some of our large construction, renovation and expansion projects are subject to governmental confirmation and registration. The timing and cost of completion of these projects will depend on numerous factors, including when we can receive the required confirmation and registration from relevant PRC government authorities and the general economic condition in China. If any of our important projects required for our future growth are not confirmed or registered, or not confirmed or registered in a timely manner, our results of operations and financial condition could be adversely impacted.
Foreign enterprise holders of H shares may be subject to PRC taxation.
In accordance with the new Enterprise Income Tax Law and its implementation rules that became effective on January 1, 2008, dividends derived from the revenues after January 1, 2008 and are paid by PRC

11

companies to record holders that are non-resident enterprises, which are established under the laws of non-PRC jurisdictions and have no establishment or place of business in China or whose dividends from China do not relate to their establishment or place of business in China, are generally subject to a PRC withholding tax levied at a rate of 10% unless exempted or reduced pursuant to an applicable tax treaty or other exemptions. Under the notice issued by the State Administration of Taxation of the PRC on November 6, 2008, we are required to withhold PRC income tax at the rate of 10% on dividends paid for 2008 and later years payable to our H Share record holders that are “non-resident enterprises”. Accordingly, the investors of our American Depositary Shares representing our H Shares will be subject to such withholding of the PRC income tax at the rate of 10%, as Citibank N.A., the record holder of the H Shares represented by our American Depositary Shares, is deemed as a "non-resident enterprise" under the relevant PRC laws and regulations.
Government control of currency conversion and exchange rate fluctuation may adversely affect our operations and financial results.
We receive a significant majority of our revenues in Renminbi. A portion of such revenues will need to be converted into other currencies to meet our foreign currency needs, which include, among other things:
·
import of crude oil and other materials;
·
debt service on foreign currency-denominated debt;
·
purchases of imported equipment;
·
payment of the principals and interests of bonds issued overseas; and
·
payment of any cash dividends declared in respect of the H shares (including ADS).
The existing foreign exchange regulations have significantly reduced government foreign exchange controls for transactions under the current account, including trade and service related foreign exchange transactions and payment of dividends.  Foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures.  The PRC government has stated publicly that it intends to make the Renminbi freely convertible in the future. However, we cannot predict whether the PRC government will continue its existing foreign exchange policy and when the PRC government will allow free conversion of Renminbi.
The exchange rate of the Renminbi against the U.S. dollar and other foreign currencies fluctuates and is affected by, among other things, the foreign exchange control policies of the PRC government and the changes in the PRC’s and international political and economic conditions.  On July 21, 2005, the PRC government introduced a floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of foreign currencies. From July 21, 2005 to December 31, 2009, the value of the Renminbi has appreciated by approximately 21.3% against the U.S. dollar, according to exchange rates as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We purchase a significant portion of the crude oil from international suppliers, and the purchase prices are benchmarked to US dollar-denominated international prices. Fluctuations in the exchange rate of the Renminbi against the U.S. dollars and certain other foreign currencies may materially and adversely affect our financial condition and results of operations.
Risks relating to enforcement of shareholder rights; Mandatory arbitration.
Currently, the primary sources of shareholder rights are our articles of association, the PRC Company Law and the Listing Rules of the Hong Kong Stock Exchange, which, among other things, impose certain standards of conduct, fairness and disclosure on us, our directors and our controlling shareholder. In general, their provisions for protection of shareholder's rights and access to information are different from those applicable to companies incorporated in the United States, the United Kingdom and other Western countries. In addition, the mechanism for enforcement of rights under the corporate framework to which we are subject may also be relatively undeveloped and untested. To our knowledge, there has not been any published report of judicial enforcement in the PRC by H share shareholders of their rights under constituent documents of joint stock limited companies or the PRC Company Law or in the application or interpretation of the PRC or Hong Kong regulatory provisions applicable to PRC joint stock limited companies. We cannot assure you that our shareholders will enjoy protections that they may be entitled in other jurisdictions.

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China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom or most other Western countries, and therefore recognition and enforcement in China of judgments of a court in any of these jurisdictions in relation to any matter not subject to a binding arbitration provision may not be assured. Our articles of association as well as the Listing Rules of the Hong Kong Stock Exchange provide that most disputes between holders of H shares and us, our directors, supervisors, officers or holders of domestic shares, arising out of the articles of association or the PRC Company Law concerning the affairs of our company, are to be resolved through arbitration by arbitration organizations in Hong Kong or China, rather than through a court of law. On June 18, 1999, an arrangement was made between Hong Kong and the PRC for the mutual enforcement of arbitral awards. This new arrangement was approved by the Supreme People's Court of the PRC and the Hong Kong Legislative Council, and became effective on February 1, 2000. We are uncertain as to the outcome of any action brought in China to enforce an arbitral award granted to shareholders.
ITEM 4.
INFORMATION ON THE COMPANY
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
Our legal and commercial name is China Petroleum & Chemical Corporation. Our head office is located at 22 Chaoyangmen North Street, Chaoyang District, Beijing 100728, the People's Republic of China, our telephone number is (8610) 5996-0028 and our fax number is (8610) 5996-0386. We have appointed our subsidiary in the United States, SINOPEC-USA Co., Ltd., 410 Park Avenue, 22nd Fl., New York, NY 10022, USA (telephone number: (212) 759-5085; fax number: (212) 759-6882) as our agent for service of processes for actions brought under the U.S. securities laws.
We were established as a joint stock limited company on February 25, 2000 under the Company Law of the PRC with Sinopec Group Company as the sole shareholder. Our principal businesses consist of petroleum and petrochemical businesses transferred to us by Sinopec Group Company pursuant to a reorganization agreement.  Such businesses include:
·
exploration for, development, production and marketing of crude oil and natural gas;
·
refining of crude oil and marketing and distribution of refined petroleum products, including transportation, storage, trading, import and export of petroleum products; and
·
production and sales of petrochemical products.
Sinopec Group Company's continuing activities consist, among other things, of:
·
exploring and developing oil and gas reserves overseas;
·
operating certain petrochemical facilities, small capacity refineries and retail service stations that it retained;
·
providing geophysical exploration, and well drilling, survey, logging and downhole operational services;
·
manufacturing production equipment and providing equipment maintenance services;
·
providing construction services;
·
providing utilities, such as electricity and water; and
·
providing other operational services including transportation services.
Sinopec Group Company transferred the businesses to us either by transferring its equity holdings in subsidiaries or by transferring their assets and liabilities. Sinopec Group Company also agreed in the reorganization agreement to transfer to us its exploration and production licenses and all rights and obligations under the agreements in connection with its core businesses transferred to us. The employees relating to these assets were also transferred to us.

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In order to expand our core businesses, prevent competition between us and members of Sinopec Group and reduce related party transactions, between 2001 and 2008 we have acquired from Sinopec Group Company Sinopec National Star Petroleum Company, Sinopec Group Maoming Petrochemical Company, Tahe Oilfield Petrochemical Factory and Xi'an Petrochemical Main Factory, certain Petrochemical and Catalyst Assets, certain Refinery Plants and certain service stations, certain Oil Production Plants, Sinopec Hainan and certain downhole operation assets. We have also sold and disposed of certain auxiliary assets to third parties. In addition, we completed the privatization of Beijing Yanhua Petrochemical Co., Ltd. and Sinopec Zhenhai Refinery and Chemicals Co., Ltd. and the tender offers for the acquisition of publicly-held A-shares of four subsidiaries formerly listed on stock exchanges in China, namely Sinopec Qilu Petrochemical Co., Ltd., Sinopec Yangzi Petrochemical Co., Ltd., Sinopec Zhongyuan Petroleum Co., Ltd., and Shengli Oil Field Dynamic Co., Ltd. In addition, in 2007, we acquired 20 service stations and fuel business in Hong Kong from China Resources Enterprise, Ltd.
On June 30, 2009, we completed the acquisition of 100% equity interest of Sinopec Qingdao Petrochemical Co., Ltd., 41.99% equity interest in Shijiazhuang Chemical Fiber Co. Ltd., property interests in eight oil product pipeline project divisions and certain other assets relating to our exploration and production, refining and marketing and distribution segments from Sinopec Group Company. On the same day, we also disposed certain assets in our chemicals segment to Sinopec Group Company. The total consideration for the acquisition was RMB 1,839 million and the total consideration for the disposal was RMB 157 million.  We funded the net acquisition consideration through our internal resources.
On August 31, 2009, we completed the acquisitions from Sinopec Group Company of (i) all the assets in Petroleum Exploration & Production Research Institute, Research Institute of Petroleum Processing, Beijing Chemical Research Institute, Shanghai Research Institute of Petrochemical Technology, Fushun Research Institute of Petroleum and Petrochemicals and Qingdao Safety Engineering Research Institute, and (ii) 100% equity interests in Beijing Xingpu Fine Chemical Technical Development Company, Beijing Petrochemical Design Institute of Beijing Chemical Institute, Qingdao Sinosun Management System Certification Center, Fushun Huanke Petrochemical Technical Development Co., Ltd. and Sinopec Material Equipment Company. The total consideration for the acquisitions is RMB 3,946 million, which we funded through our internal resources.
On March 26, 2010, Sinopec Corporation Hong Kong International Limited, a wholly-owned subsidiary of Sinopec Corp., and Sinopec Overseas Oil & Gas Limited, a wholly-owned subsidiary of Sinopec Group Company, entered into a purchase agreement and a deed of novation, pursuant to which Sinopec Corporation Hong Kong International Limited agreed to acquire (i) 55% of the total issued share capital of Sonangol Sinopec International Limited, or SSI, a company which is incorporated in the Cayman Islands and a joint venture between China Sonangol International Holding Limited and Sinopec Overseas Oil & Gas Limited, and (ii) the shareholder’s loan provided by Sinopec Overseas Oil & Gas Limited to SSI with a cap of US$ 2.465 billion (equivalent to approximately RMB 16.831 billion). As of November 30, 2009, in respect of the shareholder’s loan, SSI had utilized US$2.3 billion (equivalent to approximately RMB15.9 billion), and the outstanding balance (with accrued interest) of which amounted to US$779.1 million (equivalent to approximately RMB5.3 billion). The total consideration for the acquisition of shares and shareholder’s loan is US$ 2.5 billion (equivalent to approximately RMB 16.8 billion). Sinopec Corporation Hong Kong International Limited will pay the consideration through its own financial resources and bank loans. After the completion of the transaction, SSI will be controlled by Sinopec Corp.  The acquisition is subject to the approvals by relevant PRC governmental authorities and our independent shareholders.
B.
BUSINESS OVERVIEW
Exploration and Production
Overview
We currently explore for, develop and produce crude oil and natural gas in a number of areas across China. As of December 31, 2009, we held 193 production licenses with an aggregate acreage of 19,136 square kilometers and with terms ranging from 10 to 80 years. Our production licenses are renewable upon our application at least 30 days prior to expiration. During the term of our production license, we pay an annual production license fee of RMB 1,000 per square kilometers. Oilfields at our Shengli production bureau accounted for approximately 58% of our total crude oil and natural gas production in 2009.

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As of December 31, 2009, we held 318 exploration licenses for various blocks in which we engaged in exploration activities. The maximum term of our exploration licenses is 7 years and the authorized total acreage under such licenses are 964 thousand square kilometers. Our exploration licenses may be renewed upon our application at least 30 days prior to expiration of the original term with each renewal for a two-year term. We are obligated to make an annual minimum exploration investment in each of the exploration blocks which we obtained the exploration licenses. In addition, we are also obligated to pay an annual exploration license fee ranging from RMB 100 to RMB 500 per square kilometer.  However, we are entitled under PRC laws and regulations for reduction and exemption of exploration license fee for exploration in China’s western region, northeast region and offshore China.
Properties
We currently operate 16 oil and gas production bureaus, each of which consists of many oil and gas producing fields and blocks and all of which are located in China.
Shengli production bureau, our most important crude oil production bureau, consists of 70 producing blocks of various sizes extending over an area of 2,564 square kilometers in northern Shandong province. Most of Shengli’s blocks are located in the Jiyang trough with various oil producing levels. In 2009, Shengli production bureau produced 200 million barrels of crude oil and 24.7 billion cubic feet of natural gas, with an average daily production of 553 thousand BOE, accounting for approximately 58% of our total crude oil and natural gas production for the year.
As of December 31, 2009, the total acreage of our oil and gas producing fields and blocks was 8,349 square kilometers, including 5,684 square kilometers that are developed acreage and 2,665 square kilometers that are undeveloped acreage. All of our oil and gas producing fields and blocks with respect to which acreage information is given are wholly owned by us.
Oil and Natural Gas Reserves
Our estimated proved reserves of crude oil and natural gas as of December 31, 2009 were 3,943 million BOE (including 2,820 million barrels of crude oil and 6,739 billion cubic feet of natural gas), representing a decrease of 1.4% from 2008. Our estimated proved reserves do not include additional quantities recoverable beyond the term of the relevant production licenses, or that may result from extensions of currently proved areas, or from application of improved recovery processes not yet tested and determined to be economical.
The following tables set forth our proved developed and undeveloped crude oil and natural gas reserves by our major oil and gas production bureaus as of December 31, 2007, 2008 and 2009. Reserves information as of December 31, 2009 shown in the following tables was calculated using the average of first-day-of-the-month price for oil and gas during 2009. Reserves information as of December 31, 2007 and 2008 shown in the following tables was calculated using year-end oil and gas price.

As of December 31,
2007
2008
2009
Crude Oil
(in millions of barrels)
Proved Reserves
Developed
Shengli
2,167 1,964 2,009
Zhongyuan
154 116 124
Xibei
119 158 173
Henan
75 77 72
Jiangsu
84 88 89
Others
52 48 46
Total Developed
2,651 2,451 2,513
Undeveloped
Shengli
64 187 114
Zhongyuan
81 49 33
Xibei
161 117 132
Henan
21 4 1
Jiangsu
3 3 3
Others
43 30 24
Total Undeveloped
373 390 307
Total Proved Reserves
3,024 2,841 2,820

15
As of December 31,
2007
2008
2009
Natural Gas
(in billions of cubic feet)
Proved Reserves
Developed
Shengli
328 264 262
Zhongyuan
198 133 103
Xibei
196 242 296
Jiangsu
10 12 12
Xinan
417 420 446
Huabei
327 384 450
Puguang
0 0 0
Others
43 116 158
Total Developed
1,519 1,571 1,727
Undeveloped
Shengli
0 0 0
Zhongyuan
163 56 33
Xibei
2 210 122
Jiangsu
0 0 0
Xinan
340 262 241
Huabei
454 325 275
Puguang
3,509 4,001 3,926
Others
344 534 415
Total Undeveloped
4,812 5,388 5,012
Total Proved Reserves
6,331 6,959 6,739
As of December 31, 2009, approximately 307 million barrels of our crude oil proved reserves and 5,012 billion cubic feet of our natural gas proved reserves were classified as proved undeveloped reserves. This compares to 390 million barrels and 5,389 billion cubic feet of proved undeveloped reserves of crude oil and natural gas, respectively, as of December 31, 2008. During the year, 1,193 new wells were drilled, including 607, 185 and 155 new wells at our Shengli production bureau, Zhongyuan production bureau and Xibei production bureau, respectively. We converted 111 million barrels of proved undeveloped crude oil reserves and 203 billion cubic feet of proved undeveloped natural gas reserves into proved developed reserves in 2009. Total capital expenditure incurred in converting proved undeveloped reserves into proved developed reserves amounted to RMB 12.2 billion, including RMB 4.7 billion, RMB 4.2 million and RMB 1.2 million incurred in connection with our operations at Xibei production bureau, Shengli production bureau and Zhongyuan production bureau, respectively, in 2009.
We manage our reserves estimation through a two-tier management system. Our Oil and Natural Gas Reserves Management Committee, or the RMC, at our headquarters level oversees the overall reserves estimation process and reviews the reserves estimation of our Company. Each of our production bureaus has a reserves management committee that manages the reserves estimation process and reviews the reserves estimation report at production bureau level.
Our RMC is chaired by Mr. Wang Zhigang, one of our senior vice presidents, and is co-led by our deputy chief geologist and our director general of our exploration and production segment.  Mr. Wang holds a Ph.D. degree in geology from Geology and Geo-physics Research Institute of the China Academy of Science and has 28 years of experience in oil and gas industry. Our RMC also consists of 31 other members who are senior management members in charge of exploration and development activities at production bureau level. A majority of our RMC members hold doctor’s or master’s degrees and our RMC members have an average of 20 years of technical experience in relevant industry fields, such as geology, engineering and economics.

Our reserves estimation is guided by procedural manuals and technical guidance. Initial collection and compilation of reserves information are conducted by different working divisions, including exploration, development, financial and legal divisions, at production bureau level. Exploration and development divisions collectively prepare the initial report on reserves estimation. Together with technical experts, reserves management committees at production bureau level then holds peer review to ensure the qualitative and quantitative compliance with technical

16

guidance and accuracy and reasonableness of the reserves estimation. At headquarter level, the RMC is primarily responsible for the management and coordination of the reserves estimation process, review and approval of annual changes and results in reserves estimation and reporting of our proved reserves. We also engage outside consultants who assist us to be in compliance with the U.S. Securities and Exchange Commission rules and regulations. Our reserves estimation process is further facilitated by a specialized reserves database which is improved and updated periodically.
Oil and Natural Gas Production
In 2009, we produced an average of 962 thousand BOE per day, of which approximately 85.8% was crude oil and 14.2% was natural gas. The following tables set forth our average daily production by final product sold and by our major oil and gas production bureau for the last three years. The production of crude oil includes condensed oil.

For the Years Ended December 31,
2007
2008
2009
(in thousands of barrels daily)
Average Daily Crude Oil Production
Shengli
539 538 541
Zhongyuan
59 58 56
Xibei
104 116 128
Henan
35 35 36
Jiangsu
33 33 33
Others
29 31 31
Total Crude Oil Production
799 811 825

For the Years Ended December 31,
2007
2008
2009
(in thousands of barrels daily)
Average Daily Natural Gas Production
Shengli
76 74 68
Zhongyuan
143 102 90
Xibei
92 123 130
Henan
7 6 6
Jiangsu
5 6 6
Xinan
260 261 281
Huabei
140 185 190
Others
51 44 48
Total Natural Gas Production
774 801 819

Lifting Cost & Realized Prices
The following table sets forth our average lifting costs per BOE of crude oil and natural gas produced, average sales prices per barrel of crude oil and average sales prices per thousand cubic meters of natural gas for the years ended December 31, 2007, 2008 and 2009.
Total
Shengli
Others
(RMB)
For the year ended December 31, 2009
Average petroleum lifting cost per BOE
90.51 96.34 82.63
Average realized sales price
Per barrel of crude oil
339.36 337.12 343.70
Per thousand cubic meters of natural gas
959.04 1019.98 956.75
For the year ended December 31, 2008
Average petroleum lifting cost per BOE
88.80 92.24 83.99
Average realized sales price
Per barrel of crude oil
601.22 598.99 605.80
Per thousand cubic meters of natural gas
914.47 992.15 939.48
For the year ended December 31, 2007
Average petroleum lifting cost per BOE
84.62 87.23 80.78
Average realized sales price
Per barrel of crude oil
435.94 421.66 466.17
Per thousand cubic meters of natural gas
822.83 939.92 817.72

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Exploration and Development Activities
In 2009, we continued to increase our production capacity and scale of our reserve development. We made progress with our key exploration and development projects in Shengli and Tahe. Our Songnan gas field started production. In 2009, our crude oil production capacity increased by 5.7 million tonnes per annum and our natural gas production capacity increased by 1.205 billion cubic meters per annum. Our Sichuan-to-East China Gas Project commenced trial operation in 2009.

The following table sets forth the numbers of our exploratory and development wells, including a breakdown of productive wells and dry wells we drilled during the years ended December 31, 2007, 2008 and 2009.

Total
Shengli
Xibei
Others
For the year ended December 31, 2009
Exploratory
— Productive
259 109 15 135
— Dry
311 95 30 186
Development
— Productive
3,079 1,702 147 1,230
— Dry
22 8 8 6
For the year ended December 31, 2008
Exploratory
— Productive
248 128 26 94
— Dry
296 105 18 173
Development
— Productive
3,128 1,563 141 1,424
— Dry
24 4 12 8
For the year ended December 31, 2007
Exploratory
— Productive
251 118 16 117
— Dry
306 119 24 163
Development
— Productive
2,956 1,136 112 1,708
— Dry
20 2 8 10

The following table sets forth the number of wells being drilled by our major oil and gas production bureau as of December 31, 2009, as compared to December 31, 2008. We own 100% of the working interest in these wells:
As of December 31,
2008
2009
Wells Drilling
Shengli
47 54
Zhongyuan
21 33
Xibei
30 43
Jiangsu
6 22
Others
73 67
Total Wells Drilling
177 219

As of December 31, 2009, we were conducting waterdrive testing at the undeveloped reserves with extra-low permeability at production bureaus of Shengli, Xibei and Dongbei.

The following table sets forth our number of productive wells for crude oil and natural gas as of December 31, 2009, as compared to December 31, 2008:

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As of December 31,
2008
2009
Crude Oil
Natural Gas
Crude Oil
Natural Gas
Shengli
24,303 394 25,600 415
Zhongyuan
3,936 301 4,033 296
Xibei
840 80 995 88
Jiangsu
1,776 5 1,929 6
Others
6,038 2,095 (1) 6,427 2,275 (1)
Total Productive Wells
36,893 2,875 38,984 3,080
__________
(1)
Including (i) six (6) natural gas productive wells in which a third party owns 50% of the working interest; and (ii) twelve (12) natural gas productive wells in which a third party owns 70% of the working interest.
Refining
Overview
We processed approximately 182.0 million tonnes of crude oil in 2009, representing approximately 53.57% of China's total crude oil throughput.  We produce a full range of refined petroleum products. The following table sets forth our production of our principal refined petroleum products for the years ended December 31, 2007, 2008 and 2009.
For the Years Ended December 31,
2007
2008
2009
(in million tonnes)
Gasoline
26.6 29.6 34.4
Diesel
63.4 69.7 68.9
Kerosene including jet fuel
8.3 8.0 10.4
Light chemical feedstock
24.0 23.1 26.9
Lubricant
13.3 12.1 1.3
Liquefied petroleum gas
7.4 8.2 8.7
Fuel oil
5.6 5.1 4.1

Gasoline and diesel are our largest revenue producing products, and are sold mostly through our marketing and distribution segment through both wholesale and retail channels. We use most of our production of chemical feedstock as feedstock for our own chemical operations. Most of our refined petroleum products were sold domestically to a wide variety of industrial and agricultural customers, and a small amount are exported.
Refining Facilities
Currently we operate 34 refineries in China, all of which are located in our principal market. As of December 31, 2009, our total primary distillation capacity was 227.0 million tonnes per annum.
The following table sets forth our total primary distillation capacity per annum and crude oil throughputs as of and for the years ended December 31, 2007, 2008 and 2009.
As of and for the Years Ended December 31 ,
2007
2008
2009
Primary distillation capacity (million tonnes per annum)
191.9 208.0 227.0
Crude oil throughputs (million tonnes)
164.0 171.1 182.6

In 2009, measured by the total output from our refineries, our overall gasoline yield was 18.85%, overall diesel yield was 37.71%, overall kerosene yield was 5.69% and overall light chemical feedstock yield was 14.71%. Other products include lubricant, liquefied petroleum gas, solvent, asphalt, petroleum coke, paraffin and fuel oil. For the years ended December 31, 2007, 2008 and 2009, our overall yield for all refined petroleum products at our refineries was 93.95%, 94.05% and 94.53%, respectively.
The following table sets forth the primary distillation capacity per annum as of, and refinery throughput for the years ended, December 31, 2007, 2008 and 2009 of each of our refineries with the primary distillation capacity of  8 million tonnes or more per annum as of December 31, 2009.

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As of and for the Years Ended December 31,
2007
2008
2009
Refinery
Primary
Distillation
Capacity
Refinery
Throughput
Primary
Distillation
Capacity
Refinery
Throughput
Primary
Distillation
Capacity
Refinery
Throughput
(in million tonnes)
Zhenhai
20.0 18.6 20.0 19.4 23.0 19.2
Shanghai
14.0 8.9 14.0 9.2 14.0 8.8
Maoming
13.5 13.1 13.5 13.0 13.5 13.0
Guangzhou
13.2 10.4 13.2 11.6 13.2 11.2
Jinling
13.0 11.5 13.0 11.2 13.0 12.4
Yanshan
13.0 8.6 13.0 10.7 13.0 10.8
Gaoqiao
11.0 8.1 11.0 10.2 11.0 10.5
Qilu
10.5 10.6 10.5 10.0 10.5 10.1
Qingdao (1)
- - 10.0 5.1 10.0 9.5
Yangzi
8.0 8.2 8.0 7.5 8.0 8.0
Hainan
8.0 8.0 8.0 7.8 8.0 8.2
Luoyang
6.5 5.2 8.0 4.8 8.0 6.4
Wuhan
5.0 4.3 8.0 4.0 8.0 4.5
Fujian
4.0 3.5 4.0 3.1 12.0 7.0
Tianjin
5.5 5.3 5.5 3.6 12.5 4.3
__________
(1)
Qingdao Refinery was completed and commenced operation in May 2008.

In 2009, our primary distillation capacity of crude oil increased by 22.0 million tonnes per annum, representing a net increase of 19.0 million tonnes per annum from 2008 after adjusting for the facility shut-downs, which includes an increase of 21.0 million tonnes per annum in the distillation capacity of high-sulfur crude oil. In addition, in 2009, our hydro-refining capacity and coking capacity increased by 16.8 million tonnes per annum and 3.3 million tonnes per annum, respectively. The revamping projects for a number of refining facilities to improve refined petroleum product quality were also progressing as planned.
Sources of Crude Oil
Crude oil is our most important raw material.  The following table sets forth the sources of our crude oil supply for the years ended December 31, 2007, 2008 and 2009.
For the Years ended December 31,
2007
2008
2009
Source of Supply
(in million tonnes)
Self-supply
30.83 30.88 31.90
PetroChina Company Ltd.
6.89 6.13 7.05
CNOOC Ltd.
7.42 7.55 6.49
Import
116.87 127.98 138.07
Total
162.01 172.54 183.51

Marketing and Sales of Refined Petroleum Products
Overview
We operate the largest sales and distribution network for refined petroleum products in China. In 2009, we distributed and sold in China approximately 124.02 million tonnes of gasoline, diesel and kerosene including jet fuel, representing a market share of approximately 60% in China.  Most of the refined petroleum products sold by us are produced internally. In 2009, approximately 84% of our gasoline sales volume and approximately 87% of our diesel sales volumes were produced internally.
The table below sets forth a summary of key data in the marketing and sales of refined petroleum products for the year ended December 31, 2007, 2008 and 2009.

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For the Years Ended December 31,
2007
2008
2009
Sales volume of refined petroleum products
(in million tonnes)
119.39 122.98 124.02
Of which: Retail
76.62 84.10 78.90
Direct Sales
20.17 19.63 25.61
Wholesale
22.60 19.25 19.52
Average annual throughput of service stations (tonnes per station)
2,697 2,935 2,715
Total number of service stations under Sinopec brand as of December 31 of the respective year
29,062 29,279 29,698
Of which:  Self-operated service stations
28,405 28,647 29,055
Franchised service stations
657 632 643
Retail
All of our retail sales are made through a network of service stations and petroleum shops operated under the Sinopec brand. Through this unified network we are more able to implement consistent pricing policies, maintain both product and service quality standards and more efficiently deploy our retail network.
In 2009, we sold approximately 78.9 million tonnes of refined petroleum products through our retail network, representing approximately 63.6% of our total refined petroleum products sales volume. Our retail market share in 2009 was approximately 76.7% in our principal market. Our retail network mainly consists of service stations that are wholly-owned and operated by us or jointly-owned and operated or leased by us and franchised service stations that are owned and operated by third parties.
In 2009, we continued to improve our refined petroleum products retail networks through acquisition, construction and renovation of service stations, and added 408 new service stations wholly-owned and operated by us into our retail network. We believe we have further strengthened our leading position in our principal market, and further improved our brand awareness and customer loyalty.
Direct Sales

In 2009, we sold approximately 25.61 million tonnes of refined petroleum products, including 2.42 million tonnes of gasoline, 23.06 million tonnes of diesel and 0.13 million tonnes of kerosene, through direct sales to commercial customers such as industrial enterprises, hotels, restaurants and agricultural producers.
Wholesale
In 2009, we sold approximately 19.52 million tonnes of refined petroleum products through wholesale channels, representing approximately 15.7% of our total sales volume of refined petroleum products. Our wholesale sales include sales to large commercial or industrial customers and independent distributors as well as sales to certain long-term customers such as railway, airlines, shipping and public utilities.
Through our wholesale centers, we operate 410 storage facilities with a total capacity of approximately 14.0 million cubic meters, substantially all of which are wholly-owned by us. Our wholesale centers are connected to our refineries by railway, waterway and, in some cases, by pipelines. We also own some dedicated railways, oil wharfs and oil barges, as well as a number of rail tankers and oil trucks.
Chemicals
Overview
We are the largest petrochemicals producer in China.  We produce a full range of petrochemical products including intermediate petrochemicals, synthetic resins, synthetic fiber monomers and polymers, synthetic fibers, synthetic rubber and chemical fertilizers. Synthetic resins, synthetic fibers, synthetic rubber, chemical fertilizers and some intermediate petrochemicals comprise a significant majority of our external sales. Synthetic fiber monomers and polymers and intermediate petrochemicals, on the other hand, are mostly internally consumed as feedstock for the production of other chemical products. Our chemical operations are integrated with our refining businesses, which

21

supply a significant portion of our chemical feedstock such as naphtha. Because of strong domestic demand, most of our petrochemical products are sold in China’s domestic market.
In 2009, our Fujian ethylene project commenced operation and construction of our Tianjin ethylene project achieved mechanical completion.
Products
Intermediate Petrochemicals
We are the largest ethylene producer in China.  Our rated ethylene capacity was 7.13 million tonnes per annum, which represented 59.6% of China’s total domestic ethylene capacity, as of December 31, 2009. In 2009, we produced 6.71 million tonnes of ethylene, representing approximately 62.8% of the total domestic output. Nearly all of our olefins production is used as feedstock for our petrochemical operations.
We produce aromatics mainly in the forms of benzene and para-xylene, which are used primarily as feedstock for purified terephthalic acid, or PTA, the preferred raw material for polyester. We are the largest aromatics producer in China.
Organic chemicals extracted mainly from olefins and aromatics are intermediate petrochemicals and are essential raw materials for synthetic resins, synthetic rubber and synthetic fibers. We are the largest producer of butanol, styrene, paraxylene, vinyl acetate, phenol and acetone in China.
The following table sets forth our rated capacity per annum, production volume and major plants of production as of or for the year ended December 31, 2009 for our principal intermediate petrochemical products. These operational data include 100% of the rated capacity and production of our joint ventures, SECCO, BASF-YPC, and Fujian Refining and Petrochemical Company Limited., which we own 50%, 40% and 50%, respectively.
Our Rated
Capacity
Our
Production
Major Plants of Production
(thousand tonnes
per annum)
(thousand
tonnes)
Ethylene
7,135
6,713
Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, SECCO, BASF-YPC and Fujian
Propylene
6,343
6,169
Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, SECCO, BASF-YPC, Gaoqiao, Anqing, Jinan, Jingmen, Wuhan and Fujian
Benzene
3,701
2,488
Yanshan, Shanghai, Yangzi, Qilu, Guangzhou, Zhenhai, Tianjin, Luoyang, SECCO and BASF-YPC
Styrene
1,241
996
Yanshan, Qilu, Guangzhou, Maoming and SECCO
Para-xylene
4,068
2,997
Shanghai, Yangzi, Qilu, Tianjin and Luoyang
Phenol
350
322
Yanshan and Gaoqiao

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

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The following table sets forth our rated capacity per annum, production volumes and major plants of production for each of our principal synthetic resins as of or for the year ended December 31, 2009. These operational data include 100% of the rated capacity and production of our joint ventures, SECCO, BASF-YPC, and Fujian Refining and Petrochemical Company Limited., which we own 50%, 40% and 50%, respectively.
Our Rated
Capacity
Our
Production
Major Plants of Production
(thousand tonnes
per annum)
(thousand
tonnes)
Polyethylene
5,081
4,747
Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, SECCO, BASF-YPC and Fujian
Polypropylene
4,287
4,297
Yanshan, Shanghai, Yangzi, Qilu, Guangzhou, Maoming, Tianjin, Zhongyuan, SECCO, Wuhan Fenghuang, Jingmen and Fujian
Polyvinyl chloride
600
514
Qilu
Polystyrene
536
412
Yanshan, Qilu, Maoming, Guangzhou and SECCO
Acrylonitrile butadiene styrene
200
142
Gaoqiao

Synthetic Fiber Monomers and Polymers
Our principal synthetic fiber monomers and polymers are purified teraphthalic acid, ethylene glycol, acrylonitrile, caprolactam, polyester, polyethylene glycol and polyamide fiber. Based on our 2009 production, we are the largest producer of purified teraphthalic acid, ethylene glycol, caprolactam and polyester in China.  Most of our production of synthetic fiber monomers and polymers are used as feedstock for synthetic fibers.
The following table sets forth our rated capacity per annum, our production volume and major plants of production as of or for the year ended December 31, 2009 for each type of our principal synthetic fiber monomers and polymers. These operational data include 100% of the rated capacity and production of our joint ventures, SECCO, BASF-YPC, and Fujian Refining and Petrochemical Company Limited., which we own 50%, 40% and 50%, respectively.
Our Rated
Capacity
Our
Production
Major Plants of Production
(thousand tonnes
per annum)
(thousand
tonnes)
Purified teraphthalic acid
3,078
3,289
Shanghai, Yangzi, Yizheng, Tianjin and Luoyang
Ethylene glycol
1,413
1,013
Yanshan, Shanghai, Yangzi, Tianjin, Maoming, BASF-YPC and Fujian
Acrylonitrile
510
496
Shanghai, Anqing, Qilu and SECCO
Caprolactam
210
184
Shijiazhuang and Baling
Polyester
2,812
2,701
Shanghai, Yizheng, Tianjin and Luoyang

Synthetic Fibers
We are the largest producer of polyester and acrylic fibers in China. Our principal synthetic fiber products are polyester fiber and acrylic fiber.
The following table sets forth our rated capacity per annum, production volume and major plants of production for each type of our principal synthetic fibers as of or for the year ended December 31, 2009.

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Our Rated
Capacity
Our
Production
Major Plants of Production
(thousand tonnes
per annum)
(thousand
tonnes)
Polyester fiber
1,200
991
Yizheng, Shanghai, Tianjin and Luoyang
Acrylic fiber
315
305
Shanghai, Anqing and Qilu
Synthetic Rubbers
Our principal synthetic rubbers are cis-polybutadiene rubber, styrene butadiene rubber, or SBR, styrene butadiene-styrene thermoplastic elastomer and isobutadiene isoprene rubber, or IIR. Based on our 2009 production, we are the largest producer of SBR and cis-polybutadiene rubber and the only producer of IIR in China.
The following table sets forth our rated capacity per annum, production volume and major plants of production as of or for the year ended December 31, 2009 for each of our principal synthetic rubbers.
Our Rated
Capacity
Our
Production
Major Plants of Operation
(thousand tonnes
per annum)
(thousand
tonnes)
Cis-polybutadiene rubber
285
296
Yanshan, Qilu, Maoming and Gaoqiao
Styrene butadiene rubber
430
354
Yanshan, Qilu, Maoming and Gaoqiao and Yangzi
Styrene-butadiene-styrene thermoplastic elastomers
170
194
Yanshan and Maoming
Isobulylene isoprene rubber
45
40
Yanshan

Chemical Fertilizers
We produce synthetic ammonia and urea. Our synthetic ammonia is used to manufacture urea, caprolactam and acrylic nitrile.
The following table sets forth our rated capacity per annum, our production volume and major plants of production for ammonia and urea as of or for the year ended December 31, 2009.
Our Rated
Capacity
Our Production
Major Plants of Production
(thousand tonnes
per annum)
(thousand
tonnes)
Ammonia
2,227
1,123
Zhenhai, Jinling, Anqing, Jiujiang, Qilu, Hubei and Baling
Urea
3,634
1,752
Zhenhai, Jinling, Anqing, Jiujiang, Qilu, Hubei and Baling
Marketing and Sales of Petrochemicals
Price and volume of petrochemical sales are primarily market driven. The southern and eastern regions in China, where most of our petrochemical plants are located, constitute the major petrochemical market in China. Our proximity to the major petrochemical market gives us a geographic advantage over our competitors.
Our principal sales and distribution channels consist of direct sales to end-users, most of which are large- and medium-sized manufacturing enterprises, and sales to distributors in our national sales network. We also provided after-sale services to our customers, including technical support. We continuously strive to improve our product mix and enhance our product quality to meet market needs.

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Competition
Exploration and Production
Because our production of crude oil can only meet approximately 17.4% of our crude oil requirements, we generally do not compete for crude oil customers. However, we compete with other market participants for the acquisition of desirable crude oil and natural gas prospects.
Refining and Marketing of Refined Petroleum Products
Market participants compete primarily on the basis of quality of products and service, efficiency of operations including proximity to customers, awareness of brand name and price. While we constantly face competition from other market participants, we believe that we have a competitive advantage in our principal market over our competitors in most of these aspects.
Chemicals
We compete with domestic and foreign chemicals producers in the chemicals market.  We believe our proximity to customers has given us significant geographical advantages. Most of our petrochemical production facilities are located in the eastern and southern regions in China, an area which has experienced higher economic growth rates in China in the past two decades. Proximity of our production facilities to our markets has given us an advantage over our competitors in terms of easy access to our customers, resulting in lower transportation costs, more reliable delivery of products and better service to customers.
Patents and Trademarks
In 2009, we were granted 605 patents in China and 37 patents overseas. As of December 31, 2009, we owned a total of 5,082 patents in China. We are also entitled to use certain patents, trademarks and computer software owned by Sinopec Group Company under a royalty-free basis, provided that we bear all such annual expenses of maintaining the validity of such trademarks, patents and computer software. Certain patents expire from time to time and cover various products, processes and product uses.  Our royalty-free trademark licenses from Sinopec Group Company also include the right to use the “Sinopec” brand for our products and services. Pursuant to a supplemental agreement we entered into with Sinopec Group Company on October 21, 2009, our intellectual property licenses from Sinopec Group Company were extended to December 31, 2019.
Regulatory Matters
Overview
China's petroleum and petrochemical industry has seen significant liberalization in the past ten years. However, the exploration, production, marketing and distribution of crude oil and natural gas, as well as the production, marketing and distribution of certain refined petroleum products are still subject to regulation of many government agencies including:
National Development and Reform Commission ("NDRC")
The NDRC is responsible for formulating and implementing key policies in respect of petroleum and petrochemical industry, including:
·
Formulating guidance plan for annual production, import and export amount of crude oil, natural gas and gasoline nationwide based on its forecast on macro economic conditions in China;
·
Setting the pricing policy for refined petroleum products;
·
Approving certain domestic and overseas resource investment projects which are subject to NDRC’s approval as required by the Catalogue of Investment Projects Approved by the Government (2004); and
·
Approving foreign investment projects that are in excess of certain investment limits.

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The Ministry of Commerce ("MOFCOM")

MOFCOM is responsible for examining and approving production sharing contracts, Sino-foreign equity joint venture contracts and Sino-foreign cooperation joint venture contracts for oil and gas development within the PRC. It is also responsible to issue quotas and licenses for import and export of crude oil and refined oil.

Ministry of Land and Resources ("MLR")

The MLR is responsible for issuing the licenses that are required to explore and produce crude oil and natural gas in China.

Regulation of Exploration and Production
Exploration and Production Rights
The PRC Constitution provides that all mineral and oil resources belong to the state. In 1986, the Standing Committee of the National People's Congress passed the Mineral Resources Law which authorizes the Ministry of Land and Resources, or the MLR, to exercise administrative authority over the exploration and production of the mineral and oil resources within the PRC, including its territorial waters. The Mineral Resources Law and its supplementary regulations provide the basic legal framework under which exploration licenses and production licenses are granted. The MLR has the authority to grant exploration licenses and production licenses on a competitive bidding or other basis it considers appropriate. Applicants for these licenses must be companies approved by the State Council to engage in oil and gas exploration and production activities.  Currently, only we, PetroChina, CNOOC and Yanchang Petroleum Group Ltd. have received such exploration licenses and production licenses in oil and gas industry. In addition, pursuant to the Regulation on the Administration of Geological Survey Qualifications promulgated by the State Council, which became effective from July 1, 2008, any entity engaging in geological survey activities shall obtain a geological survey qualification certificate. Oil and natural gas survey qualifications, among others, shall be examined, approved and granted by the MLR.
Applicants for exploration licenses must first register with the MLR blocks in which they intend to engage in exploration activities. The holder of an exploration license is obligated to make an annual minimum exploration investment relating to the exploration blocks in respect of which the license is issued. Investment ranges from RMB 2,000 per square kilometer for the initial year to RMB 5,000 for the second year and to RMB 10,000 for the third and subsequent years. Additionally, the holder has to pay an annual exploration license fee of RMB 100 per square kilometer for each of the first three years. Afterwards, the annual fee increases by an additional RMB 100 per square kilometer per year up to a maximum of RMB 500 per square kilometer. The maximum term of an exploration license is 7 years. The exploration license may be renewed upon application by the holder at least 30 days prior to expiration of the original term with each renewal for a two-year term.
At the exploration stage, an applicant can also apply for a progressive exploration and production license that allows the holder to test and develop reserves not yet fully proved. The progressive exploration and production license has a maximum term of 15 years. When the reserves become proved for a block, the holder must apply for a full production license in order to undertake production.
The MLR issues full production licenses to applicants on the basis of the reserve reports approved by relevant authorities. The maximum term of a full production license is 30 years unless a special dispensation is given by the State Council. Due to a special dispensation granted to us by the State Council, the maximum term of our full production licenses is 80 years. The full production license is renewable upon application by the holder at least 30 days prior to expiration of the original term. A holder of the full production license has to pay an annual full production right usage fee of RMB 1,000 per square kilometer.
All companies approved by the State Council to engage in oil and gas exploration and production activities may apply for exploration and production licenses for onshore and offshore oil and natural gas resources without geographical restrictions. We have exploration and production licenses for the exploration and production of both onshore and offshore crude oil and natural gas resources in China.
Exploration and production licenses do not grant the holders the right to enter upon any land for the purpose of exploration and production. Holders of exploration and production licenses must separately obtain the right to use the land covered by the licenses, and if permissible under applicable laws, current owners of the rights to use such land may transfer or lease the land to the license holder.

26

Volume and Price of Natural Gas
The NDRC formulates the annual natural gas supply guidelines which require natural gas producers to distribute specified amount of natural gas to specified fertilizer producers. The actual production level of natural gas (excluding the amount supplied to the fertilizer producers) is determined by the natural gas producers themselves.
The price of natural gas has two components:
·
ex-factory price; and
·
pipeline transportation fee
Since December 2005, the NDRC simplified the ex-factory price-setting mechanism by dividing natural gas prices into two tiers and setting a median guidance ex-factory price for each tier.  The price for the first tier may be set within ± 10% of the guidance price through negotiation between the producers and their customers, while the price for the second tier may fluctuate up to 10% of the guidance price with no limitation on the minimum price.  In addition, the NDRC would adjust the guidance prices once per year by up to 8% annually to reflect the price trends of crude oil and other alternative energies. On November 8, 2007, the NDRC adopted an adjusted pricing policy for natural gas, by increasing the guidance ex-factory price of the natural gas for industrial applications other than chemical fertilizers and independent heating enterprises by RMB 400.0 per thousand cubic meters, deregulating the ex-factory price of the natural gas for LNG producers, fixing the minimum ratio between the base retail price of natural gas for automobiles and the base retail price of #90 gasoline at 0.75:1.
Natural gas producers submit to the NDRC for examination and approval of any proposed transportation fee for the natural gas transported by pipelines, which was based on the capital investment made in the pipeline, the depreciation period for the pipeline and the ability of end users to pay.
Regulation of Refining and Marketing of Refined Petroleum Products
Volume and Price Controls on Gasoline, Diesel and Jet Fuel
The PRC government continues to exercise control over gasoline, diesel and jet fuel prices.
According to the Notice on Implementing Reforms on Prices of Refined Products and Tax promulgated by the State Council on December 18, 2008 and the Measures for Administration of Petroleum Products Price (Trial) issued by the NDRC on May 7, 2009, the sale price for refined petroleum products in the PRC market shall be adjusted with reference to international crude oil price fluctuations, subject to governmental control. The NDRC will set maximum retail price and the provincial price bureaus have the authority to set maximum whole sale prices for gasoline and diesel . As a principle, maximum retail price for gasoline and diesel in the Chinese market shall be decided with reference to the international crude oil price plus the average domestic processing costs, tax levies, reasonable sales and marketing expenses and appropriate profit. The refined petroleum products price in the PRC market may be adjusted when the moving average price of international crude oil price fluctuates beyond 4% within a period of 22 consecutive business days. If the international crude oil prices experience sustained increase or radical fluctuation, the price of refined petroleum products, including gasoline and diesel products, will be controlled by the government to reduce the oil price fluctuation impact upon the PRC market.
Regulation of Crude Oil and Refined Petroleum Products Market
On December 4, 2006, Ministry of Commerce of the PRC promulgated the “Administrative Rules for Crude Oil Market” and “Administrative Rules for Refined Petroleum Products  Market” to open the wholesale market of crude oil and refined petroleum products to new market entrants, respectively. We will face more competition in both crude oil and refined petroleum products markets. Such increased competition may have a material adverse effect on our financial conditions and results of operations.
Investment
Under the State Council's Decision on Investment System Reform, investments without the use of government funds are only subject to a licensing system or a registration system, as the case may be. Under the current

27

system, only significant projects and the projects of restrictive nature are subject to approval so as to maintain social and public interests, and all other projects of any investment scale are only subject to a registration system.
Overseas investment project falling within the category of resources development involving investment by any Chinese party of above US$ 200 million (inclusive) shall be verified and approved by the State Council, and those involving investment of above US$ 30 million (inclusive) shall be verified and approved by the NDRC. Other overseas investment project shall be verified and approved by State Council if it involves investment by any Chinese party of above US$ 50 million (inclusive), or by the NDRC if it involves investment by any Chinese party of above US$ 10 million (inclusive). Any overseas investment projects other than the foregoing shall be filed with the NDRC and/or the MOFCOM if the investor is an enterprise managed by the central government, or approved by its local government according to applicable laws and regulations. Overseas investment projects involving domestic enterprise's establishment or acquisition of overseas enterprise to acquire ownership, control or management rights of overseas enterprise (with the exception of financial enterprises) shall be approved by the MOFCOM or relevant provincial-level commerce authorities according to applicable laws and regulations.
Pursuant to the Anti-Monopoly Law of the PRC which became effective on August 1, 2008, when market concentration by business carriers through merger, acquisition of control through shares or assets acquisition, or acquisition of control or the ability to exercise decisive influence over other business carriers by contract or by other means reaches a threshold of declaration level prescribed by the State Council, the business carriers shall declare in advance to the Anti-monopoly Law Enforcement Agency, otherwise, the business carriers shall not implement such market concentration.
Taxation, Fees and Royalty
Companies which operate petroleum and petrochemical businesses in China are subject to a variety of taxes, fees and royalties.
Effective from January 1, 2008, the general enterprise income tax rate imposed on entities, other than certain enterprises defined in the new Enterprise Income Tax Law of the PRC, is 25%.
According to the Notice on Implementing Reforms on Prices of Refined Products and Tax, starting from January 1, 2009, consumption tax on refined petroleum products were adjusted. Applicable tax, fees and royalties on refined petroleum products and other refined products generally payable by us or by other companies in similar industries are shown below.
Tax Item
Tax Base
Tax Rate
Enterprise income tax
Taxable income
25% effective from January 1, 2008.
Value-added tax
Revenue
13% for liquefied petroleum gas, natural gas, and low density polyethylene for production of agricultural film and fertilizers and 17% for other items. We generally charge value-added tax to our customers at the time of settlement on top of the selling prices of our products on behalf of the taxation authority. We may directly claim refund from the value-added tax collected from our customers of any value-added tax that we paid for (i) purchasing materials consumed during the production process; (ii) charges paid for drilling and other engineering services; and (iii) labor consumed during the production process.
Business tax
Revenue from pipeline transportation services
3%.
Consumption tax
Aggregate volume sold or self-consumed
RMB 1 per liter for gasoline, naphtha, solvent oil and lubricant; RMB 0.8 per liter for diesel, jet fuel and fuel oil. Prior to December 31, 2010, the consumption tax paid for imported naphtha for the

28
production of ethylene and aromatic hydrocarbon will be refunded, and naphtha procured from domestic sources for the production of ethylene and aromatic hydrocarbon will remain tax-free. Consumption tax on jet fuel is currently exempted.
Import tariff
CIF China price
5% for gasoline, 6% for light diesel, 9% for jet kerosene and 6% for No. 5-7 fuel oil. The current applicable tax rates in 2010 for jet kerosene and No. 5-7 fuel oil are 6% and 3%, respectively.
Resource tax
Aggregate volume sold or self-consumed
RMB 14 to RMB 30 per tonne for crude oil. RMB 7 to RMB 15 per thousand cubic meters for natural gas.
Compensatory fee for mineral resources
Revenue of crude oil and natural gas
1%
Exploration license fee
Area
RMB 100 to 500 per square kilometer per annum.
Production license fee
Area
RMB 1,000 per square kilometer per annum.
Royalty fee (1)
Production volume
Progressive rate of 0-12.5% for crude oil and 0-3% for natural gas.
City construction tax
Total amount of value-added tax, consumption tax and business tax
1%, 5% and 7%.
Education Surcharge
Total amount of value-added tax, consumption tax and business tax
3%.
Special Oil Income Levy
Any revenue derived from sale of domestically produced crude oil when the realized crude oil price exceeds US$ 40 per barrel.
Progressive rate of 20% to 40% for revenue derived from crude oil with realized price in excess of US$ 40 per barrel, i.e. 20% for the portion in excess of US$ 40 per barrel up to US$ 45 per barrel (inclusive); 25% for the portion in excess of US$ 45 per barrel up to US$ 50 per barrel (inclusive); 30% for the portion  in excess of US$ 50 per barrel to US$ 55 per barrel (inclusive); 35% for the portion in excess of US$ 55 per barrel to US$ 60 per barrel (inclusive); and 40% for the portion in excess of US$ 60 per barrel.
__________
(1)
Payable only by Sino-foreign oil and gas exploration and development cooperative projects, and the project companies of those cooperative projects are not subject to any other resource taxes or fees.

C.
ORGANIZATIONAL STRUCTURE
For a description of our relationship with Sinopec Group Company, see "Item 4. Information on the Company ¾ A. History and Development of the Company" and "Item 7. Major Shareholders and Related Party Transactions." For a description of our significant subsidiaries, see Note 34 to our consolidated financial statements.
D.
PROPERTY, PLANT AND EQUIPMENT
We own substantially all of our properties, plants and equipment relating to our business activities.  We hold production licenses covering all of our interests in our developed and undeveloped crude oil and natural gas fields and productive wells.  See "Item 4. Information on the Company ¾ B. Business Overview" for description of our property, plant and equipment.

29

Environmental Matters
We are subject to various national environmental laws and regulations and also environmental regulations promulgated by the local governments in whose jurisdictions we have operations. For example, national regulations promulgated by the central government set discharge standards for emissions into air and water. They also set forth schedules of discharge fees for various waste substances. These schedules usually provide for discharge fee increases for each incremental increase of the amount of discharge up to a certain level. Above a certain level, the central regulations permit the local government to order any of our facilities to cure certain behavior causing environmental damage and subject to the central government's approval, the local government may also issue orders to close any of our facilities that fail to comply with the existing regulations. In addition, the PRC government has set certain environmental protection objective for the petroleum and chemical industry to reduce energy intensity, chemical oxygen demand, industrial water consumption and sulfur dioxide emission by certain level by 2009 compared to 2005. In light of such objective, we have incurred capital expenditure specifically to promote energy saving and environmental protection in China.
Each of our production subsidiaries has implemented a system to control its pollutant emissions and to oversee compliance with the PRC environmental regulations. We have a central safety and environmental compliance department to set our internal environmental requirements and procedures, and to manage and supervise the environmental protection programs at the various production facilities. Each production subsidiary has an environmental compliance department which is responsible for supervising environmental matters at the subsidiary and implementing our environmental requirements and procedures. These departments report both to the management of the subsidiary and to the central environmental compliance department.
Our production facilities have their own facilities to treat waste water, solid waste and waste gases on site. Waste water first goes through preliminary treatment at our own waste water treatment facilities. Thereafter, the water is sent to nearby waste water treatment centers operated either by us or by Sinopec Group for further treatment. All solid waste materials generated by our production facilities are buried at disposal sites or burned in furnaces either operated by us or by Sinopec Group. Waste gases are generally treated and burned in furnaces before dissipation and the ash is disposed in accordance with our solid waste disposal procedures.
Environmental regulations also require companies to file an environmental impact report to the environmental bureau for approval before undertaking any construction of a new production facility or any major expansion or renovation of an existing production facility. Such an undertaking will not be permitted to operate until the environmental bureau has performed an inspection and is satisfied that environmentally sound equipment has been installed for the facility.
We believe our environmental protection systems and facilities are adequate for us to comply with current applicable national and local environmental protection regulations. The PRC government, however, may impose stricter regulations which require additional expenditure on compliance with environmental regulations.
We paid pollutant discharge fees of approximately RMB 2.1 billion in 2007, RMB 2.3 billion in 2008 and RMB 3.2 billion in 2009.
Insurance
In respect of our refining, petrochemical production, and marketing and sales operations, we currently maintain with Sinopec Group Company, under the terms of its Safety Production Insurance Fund ("SPI Fund"), approximately RMB 456.3 billion of coverage on our property and plants and approximately RMB 71.2 billion of coverage on our inventory. In 2009, we paid an insurance premium of approximately RMB 1.87 billion to Sinopec Group Company for such coverage.  Transportation vehicles and products in transit are not covered by Sinopec Group Company and we maintain insurance policies for those assets with insurance companies in the PRC.
The insurance coverage under SPI Fund applies to all enterprises controlled by Sinopec Group Company under regulations published by the Ministry of Finance. We believe that, in the event of a major accident, we will be able to recover most of our losses from insurance proceeds paid under the SPI Fund or by insurance companies.
Pursuant to an approval of the Ministry of Finance, Sinopec Group Company entered into an agreement with China People's Insurance Company on January 29, 2002 to purchase a property and casualty policy which would also cover our assets. The policy provides for an annual maximum cumulative claim amount of RMB 4.0 billion and a maximum of RMB 2.36 billion per occurrence.

30

Consistent with what we believe to be customary practice among PRC enterprises, we do not currently carry any third party liability insurance to cover claims in respect of personal injury, environmental damage arising from accidents on our property or relating to our operations other than on our transportation vehicles. We have not had a third party liability claim filed against us during the past three years. We do not carry business interruption insurance, as such coverage is not customary in the PRC.
ITEM 4A.
UNRESOLVED STAFF COMMENTS
None.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A.
GENERAL
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements. Our consolidated financial statements have been prepared in accordance with IFRS. Certain financial information presented in this section is derived from our audited consolidated financial statements. Unless otherwise indicated, all financial data presented on a consolidated basis or by segment, are presented net of inter-segment transactions (i.e., inter-segment and other intercompany transactions have been eliminated).
Critical Accounting Policies
Our reported consolidated financial condition and consolidated results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements.  We base our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources.  On an on-going basis, our management evaluates its estimates.  Actual results may differ from those estimates as facts, circumstances and conditions change.
The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements.  Our principal accounting policies are set forth in Note 2 to the consolidated financial statements.  We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
Oil and gas properties and reserves
The accounting for our upstream oil and gas activities is subject to special accounting rules that are unique to the oil and gas business.  There are two methods to account for oil and gas business activities, the successful efforts method and the full cost method.  We have elected to use the successful efforts method.
The successful efforts method reflects the volatility that is inherent in exploring for mineral resources in that costs of unsuccessful exploratory efforts are charged to expense as they are incurred.  These costs primarily include dry hole costs, seismic costs and other exploratory costs.  Under the full cost method, these costs are capitalized and written-off (depreciation) over time.
Engineering estimates of our oil and gas reserves are inherently imprecise and represent only approximate amounts because of the subjective judgments involved in developing such information.  There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and gas reserves can be designated as “proved”.  Proved and proved developed reserves estimates are updated at least annually and take into account recent production and technical information about each field.  In addition, as prices and cost levels change from year to year, the estimate of proved and proved developed reserves also changes.  This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in related depreciation rates.
Future dismantlement costs for oil and gas properties are estimated with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with industry practices in similar geographic area, including estimation of economic life of oil and gas properties, technology and price level.  The present values of these estimated future dismantlement costs are capitalized as oil and gas properties with equivalent amounts recognized as provision for dismantlement costs.

31

Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depreciation expense, impairment expense and future dismantlement costs, and in disclosing the supplemental standardized measure of discounted future net cash flows relating to proved oil and gas properties.  Depreciation rates are determined based on estimated proved developed reserve quantities (the denominator) and capitalized costs of producing properties (the numerator).  Producing properties’ capitalized costs are amortized based on the units of oil or gas produced.  Therefore, assuming all other variables are held constant, an increase in estimated proved developed reserves decreases our depreciation, depletion and amortization expense.  Also, estimated reserves are often used to calculate future cash flows from our oil and gas operations, which serve as an indicator of fair value in determining whether a property is impaired or not. The larger the estimated reserves, the less likely the property is impaired.  There have been no significant changes to the original reserve estimates during any of the three years ended December 31, 2007, 2008 and 2009.
Impairment for long-lived assets
If circumstances indicate that the net book value of a long-lived asset, including oil and gas properties, may not be recoverable, the asset may be “impaired”, and an impairment loss may be recognized.  The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. For goodwill, the recoverable amount is estimated annually. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. The recoverable amount is the greater of the net selling price and the value in use.  It is difficult to precisely estimate selling price because quoted market prices for our assets or cash-generating units are not readily available. In determining the value in use, expected cash flows generated by the asset or the cash-generating unit are discounted to their present value, which requires significant judgment relating to level of sales volume, selling price and amount of operating costs. We use all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of reserve quantities, sales volume, selling price and amount of operating costs.
Impairment losses recognized for each of the three years ended December 31, 2007, 2008 and 2009 in our statement of income on long-lived assets are summarized as follows:
Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
(in millions)
Exploration and production
481 5,991 1,595
Refining
1,070 270 396
Marketing and distribution
1,237 709 1,479
Chemicals
318 1,511 3,807
Corporate and others
— 19 8
Total
3,106 8,500 7,285

Depreciation
Property, plant and equipment (other than oil and gas properties) are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. We review the estimated useful lives of the assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on our historical experience with similar assets and take into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.  There have been no changes to the estimated useful lives and residual values during each of the three years ended December 31, 2007, 2008 and 2009.
Impairment of accounts receivable for bad and doubtful debts
We estimate impairment of accounts receivable for bad and doubtful debts resulting from the inability of our customers to make the required payments. We base our estimates on the aging of our accounts receivable balance, customer credit-worthiness, and historical write-off experience. If the financial condition of our customers were to deteriorate, actual write-offs would be higher than estimated.  The changes in the impairment losses for bad and doubtful accounts are as follows:

32
Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
(in millions)
Balance as of January 1 .
3,373 2,909 2,406
Impairment losses recognized for the year .
295 143 70
Reversal of impairment losses
(204 ) (254 ) (245 )
Written off
(555 ) (392 ) (310 )
Balance as of December 31
2,909 2,406 1,921
Allowance for diminution in value of inventories
If the costs of inventories fall below their net realizable values, an allowance for diminution in value of inventories is recognized.  Net realizable value represents the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.  We base the estimates on all available information, including the current market prices of the finished goods and raw materials, and historical operating costs.  If the actual selling prices were to be lower or the costs of completion were to be higher than estimated, the actual allowance for diminution in value of inventories could be higher than estimated.  Allowance for diminution in value of inventories is analyzed as follows:
Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
(in millions)
Balance as of January 1
871 4,572 9,189
Allowance for the year
3,962 8,777 401
Reversal of allowance on disposal
(131 ) (64 ) (185 )
Written off
(130 ) (4,096 ) (8,367 )
Balance as of December 31
4,572 9,189 1,038

Recently Pronounced International Financial Reporting Standards
Information relating to the recently pronounced IFRS is presented in Note 37 to the consolidated financial statements.
Overview of Our Operations
We are the largest integrated petroleum and petrochemical company in China and one of the largest in Asia in terms of operating revenues. We engage in exploring for, developing and producing crude oil and natural gas, operating refineries and petrochemical facilities and marketing crude oil, natural gas, refined petroleum products and petrochemicals. We have reported our consolidated financial results according to the following four principal business segments and the corporate and others segment.
·
Exploration and Production Segment , which consists of our activities related to exploring for and developing, producing and selling crude oil and natural gas;
·
Refining Segment , which consists of purchasing crude oil from our exploration and production segment and from third parties, processing of crude oil into refined petroleum products, selling refined petroleum products principally to our marketing and distribution segment;
·
Marketing and Distribution Segment , which consists of purchasing refined petroleum products from our refining segment and third parties, and marketing, selling and distributing refined petroleum products by wholesale to large customers and independent distributors and retail through our retail network;
·
Chemicals Segment , which consists of purchasing chemical feedstock principally from the refining segment and producing, marketing, selling and distributing chemical products; and
·
Corporate and Others Segment , which consists principally of trading activities of the import and export subsidiaries and our research and development activities.

33
B.
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth certain income and expense items from our consolidated statements of income for the periods indicated.
Years Ended December 31,
2007
2008
2009
RMB
RMB
RMB
(in billions)
Operating revenues
Sales of goods
1,170.0 1,413.2 1,315.9
Other operating revenues
31.0 31.1 29.1
Total operating revenues
1,201.0 1,444.3 1,345.0
Other income
4.9 50.9 -
Operating expenses
Purchased crude oil, products and operating supplies and expenses
(971.7 ) (1,286.1 ) (990.5 )
Selling, general and administrative expenses
(32.8 ) (39.4 ) (40.5 )
Depreciation, depletion and amortization
(43.6 ) (46.4 ) (50.5 )
Exploration expenses, including dry holes
(11.1 ) (8.3 ) (10.5 )
Personnel expenses
(22.9 ) (23.4 ) (28.8 )
Taxes other than income tax
(34.7 ) (57.2 ) (132.9 )
Other operating expenses, net
(3.6 ) (8.1 ) (6.9 )
Total operating expenses
(1,120.4 ) (1,468.9 ) (1,260.6 )
Operating income
85.5 26.3 84.4
Net finance costs
(8.4 ) (5.2 ) (7.2 )
Income from investments
5.7 1.0 3.4
Earnings before income tax
82.8 22.1 80.6
Tax (expense)/benefit
(24.7 ) 2.9 (16.1 )
Net income
58.1 25.0 64.5
Attributable to:
Equity shareholders of the Company
55.9 28.5 61.8
Minority interests
2.2 (3.5 ) 2.7
58.1 25.0 64.5
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
In 2009, our total operating revenues were RMB 1,345.0 billion, representing a decrease of 6.9% over the year of 2008. Our operating income was RMB 84.4 billion, representing an increase of 220.9% over the year of 2008. The increase in our operating income was primarily due to our efforts to respond to the international financial crisis, including our development in the markets we compete, enhancement in marketing and services quality, improvement of our raw material structure and further leveraging on our strength in business scale and integration. These efforts were coupled with the reform on pricing mechanism and taxation and fee policies for refined oil products by the PRC government and the increase in demand for chemical products in domestic market.
Operating Revenues
In 2009, our operating revenues from sales of goods were RMB 1,315.9 billion, representing a decrease of 6.9% over 2008. This was mainly due to the decrease in the price of crude oil, refined oil and petrochemical products over 2008. In addition, in 2008, we received RMB 50.9 billion of government subsidy as a result of the PRC government’s tight control over refined petroleum products prices in 2008 (categorized as other income), and we did not receive any such subsidy as a result of the reform on pricing mechanism and taxation and fee policies for refined oil products by the PRC government in 2009.
The following table sets forth our external sales volume, average realized prices and the respective rates of change from 2008 to 2009 for our major products:

34


Average Realized Price
Rate of Change from
Sales Volume
Rate of Change from
2008
2009
2008 to 2009
2008
2009
2008 to 2009
(RMB)
(RMB)
(%)
(%)
Crude Oil
4,190 (1) 2,303 (1) (45.0 ) 4.39 (2) 4.92 (2) 12.1
Natural Gas
911 (3) 933 (3) 2.4 6.28 (4) 6.49 (4) 3.3
Gasoline
6,409 (1) 6,367 (1) (0.7 ) 37.73 (2) 39.04 (2) 3.5
Diesel
5,629 (1) 5,092 (1) (9.5 ) 80.24 (2) 82.34 (2) 2.6
Kerosene
6,063 (1) 3,918 (1) (35.4 ) 9.22 (2) 11.35 (2) 23.1
Basic chemical feedstock
6,238 (1) 4,359 (1) (30.1 ) 10.67 (2) 13.27 (2) 24.4
Synthetic Resin
10,094 (1) 8,072 (1) (20.0 ) 7.83 (2) 8.67 (2) 10.7
Synthetic Fiber
10,488 (1) 9,140 (1) (12.9 ) 1.35 (2) 1.42 (2) 5.2
Synthetic Rubber
16,160 (1) 11,448 (1) (29.2 ) 0.98 (2) 1.12 (2) 14.3
Synthetic Fiber Monomer and Polymer
8,054 (1) 6,530 (1) (18.9 ) 3.99 (2) 4.65 (2) 16.5
Chemical fertilizer
1,729 (1) 1,657 (1) (4.2 ) 1.66 (2) 1.77 (2) 6.6
____________
(1)
per tonne
(2)
million tonnes
(3)
per thousand cubic meters
(4)
billion cubic meters
Sales of crude oil and natural gas
Most of crude oil and a small portion of natural gas we produced were internally used for refining and chemical production and the remaining were sold to other customers. In 2009, the total revenue from crude oil, natural gas and other upstream products that were sold externally amounted to RMB 19.3 billion, representing a decrease of 26.7% over 2008. The change was mainly due to the decrease in the price of crude oil.
Sales of refined petroleum products
In 2009, our refining segment and marketing and distribution segment sell petroleum products (mainly consisting of gasoline, diesel and kerosene which are referred to as the refined oil products and other refined petroleum products) to external parties. The external sales revenue realized by these two segments were RMB 874.2 billion, accounting for 65.0% of our operating revenues and representing a decrease of 6.5% over 2008. The decrease was mainly due to the decrease in price of refined oil products. The sales revenue of gasoline, diesel and kerosene was RMB 712.3 billion, accounting for 81.5% of the total revenue of petroleum products and representing a decrease of 5.0% over 2008. Sales revenue of other refined petroleum products was RMB 161.9 billion, accounting for 18.5% of the total turnover of petroleum products and representing a decrease of 12.8% over 2008.
Sales of chemical products
Our external sales revenue of chemical products was RMB 192.7 billion, accounting for 14.3% of our operating revenues and representing a decrease of 12.3% over 2008. This was mainly due to the decrease in the price of chemical products.
Other income
In 2008, we received RMB 50.9 billion of government subsidy as a result of the PRC government’s tight control over refined petroleum products prices in 2008. We did not receive any such subsidy as a result of the reform on pricing mechanism and taxation and fee policies for refined oil products by the PRC government in 2009.

35

Operating expenses
In 2009, our operating expenses were RMB 1,260.6 billion, representing a decrease of 14.2% over 2008, among which:
Purchased crude oil, products and operating supplies and expenses were RMB 990.5 billion, representing a decrease of 23.0% over 2008, accounting for 78.6% of the total operating expenses, of which:
Crude oil purchase expenses were RMB 405.4 billion, representing a decrease of 41.3% over 2008. In 2009, the total throughput of crude oil that was purchased externally was 135.14 million tonnes (excluding the amount processed for third parties), representing an increase of 0.2% over 2008; the average unit processing cost for crude oil purchased externally was RMB 3,000 per tonne, representing a decrease of 41.5% over 2008.
In 2009, our other purchasing expenses were RMB 585.1 billion, representing a decrease of 1.7% over 2008. This was mainly due to the decrease in the cost of gasoline, diesel, kerosene and other feedstock purchased externally.
Selling, general and administrative expenses totaled RMB 40.5 billion, representing an increase of 2.8% over 2008. This was mainly due to the increase in the expenses of community services and culture, education and healthcare and the increase in rental charges of some gas stations.
Depreciation, depletion and amortization was RMB 50.5 billion, representing an increase of 8.8% over 2008. This was mainly due to the depreciation resulting from the our continuous capital expenditure on property, plant and equipment.
Exploration expenses were RMB 10.5 billion, representing an increase of 26.5% over 2008, reflecting our enhanced exploration activities in northeastern Sichuan, west Sichuan and Erdos regions.
Personnel expenses were RMB 28.8 billion, representing an increase of 23.1% compared with 2008, reflecting our accrual of staff annuity and housing subsidy.
Taxes other than income tax were RMB 132.9 billion, representing an increase of 132.3% compared with 2008. This was mainly due to the reform on pricing mechanism and taxation and fee policies for refined oil products by the PRC government, which led to the increase in the consumption tax, urban construction tax and educational surcharge by RMB 101.4 billion over 2008. In addition, the special oil income levy decreased by RMB 25.7 billion compared to 2008 as a result of the decrease in the price of crude oil in 2009.
Other operating expenses were RMB 6.9 billion, representing a decrease of 14.8% over 2008.
Operating income
In 2009, our operating income was RMB 84.4 billion, representing an increase of 220.9% over 2008.
Net finance costs
In 2009, our net finance costs were RMB 7.2 billion, representing an increase of 38.5% over 2008. Our interest expenses in 2009 were RMB 7.4 billion, representing a decrease of RMB 4.5 billion over 2008; our foreign currency exchange gains were RMB 0.4 billion, representing a decrease of RMB 2.9 billion over 2008. We also incurred a loss of RMB 0.2 billion with respect to the fair value change of embedded financial derivative instruments in convertible bonds as a result of the change in our H share’s trading price, compared with a gain of RMB 3.9 billion with respect to the fair value change of embedded financial derivative instruments in convertible bonds in 2008.
Earnings before income tax
In 2009, our earnings before income tax were RMB 80.6 billion, representing an increase of 264.7% over 2008.

36

Income tax
In 2009, we recognized an income tax expense of RMB 16.1 billion, increased by RMB 19.0 billion. The increase was mainly due to substantial growth of earnings before income taxes over 2008.
Net income attributable to minority interests
In 2009, our net income attributable to minority interests was RMB 2.7 billion, representing an increase of RMB 6.2 billion compared with 2008.
Net income attributable to equity shareholders of the Company
In 2009, our net income attributable to our equity shareholders was RMB 61.8 billion, representing an increase of 116.8% over 2008.
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
In 2008, our sales of goods, other operating revenues and other income were RMB 1,495.2 billion, representing an increase of 24.0% over 2007. Our operating income in 2008 was RMB 26.3 billion, representing a decrease of 69.2% over 2007. This was primarily due to the losses suffered by our refining segment due to the distortion of the correlation of domestic refined petroleum product prices and the international crude oil prices.
Operating Revenues
In 2008, our sales of goods and other operating revenues were RMB 1,444.3 billion, of which sales of goods were RMB 1,413.2 billion, representing an increase of 20.8% over 2007. The increase was primarily due to the increase in our sales of goods, which was the result of our increased average realized price and sales volume of refined oil products and the increase in volume of our trading business. In 2008, our other operating revenues were RMB 31.1 billion, representing an increase of 0.3% over 2007.
The following table sets forth our external sales volume, average realized prices and the respective rates of change from 2007 to 2008 for our major products:
Average Realized Price
Rate of Change from
Sales Volume
Rate of Change from
2007
2008
2007 to 2008
2007
2008
2007 to 2008
(RMB)
(RMB)
(%)
(%)
Crude Oil
3,110 (1) 4,190 (1) 34.7 4.43 (2) 4.39 (2) (0.9 )
Natural Gas
811 (3) 911 (3) 12.3 5.82 (4) 6.28 (4) 7.9
Gasoline
5,408 (1) 6,409 (1) 18.5 35.18 (2) 37.73 (2) 7.2
Diesel
4,724 (1) 5,629 (1) 19.2 76.92 (2) 80.24 (2) 4.3
Kerosene
4,728 (1) 6,063 (1) 28.2 7.05 (2) 9.22 (2) 30.8
Basic chemical feedstock
6,182 (1) 6,238 (1) 0.9 10.57 (2) 10.67 (2) 0.9
Synthetic Resin
10,204 (1) 10,094 (1) (1.1 ) 7.88 (2) 7.83 (2) (0.6 )
Synthetic Fiber
11,605 (1) 10,488 (1) (9.6 ) 1.50 (2) 1.35 (2) (10.0 )
Synthetic Rubber
13,763 (1) 16,160 (1) 17.4 0.96 (2) 0.98 (2) 2.1
Synthetic Fiber Monomer and Polymer
9,112 (1) 8,054 (1) (11.6 ) 4.07 (2) 3.99 (2) (2.0 )
Chemical fertilizer
1,659 (1) 1,729 (1) 4.2 1.58 (2) 1.66 (2) 5.1
____________
(1)
per tonne
(2)
million tonnes
(3)
per thousand cubic meters
(4)
billion cubic meters

37
Sales of crude oil and natural gas
Most of the crude oil and a small portion of natural gas produced by us were internally used for refining and chemicals production and the remaining were sold to other customers. In 2008, the total revenue of crude oil, natural gas and other upstream products that were sold externally amounted to RMB 26.4 billion, representing an increase of 29.2% over 2007 and accounting for 1.8% of the sales of goods and other operating revenues. The increase was mainly due to the increase in the price of crude oil and the expansion of our natural gas business.
Sales of refined petroleum products
Our refining segment and marketing and distribution segment sell petroleum products (mainly consisting of gasoline, diesel and kerosene which are referred to as the refined oil products and other refined petroleum products) to external parties. In 2008, the external sales revenue of petroleum products by these two segments were RMB 935.0 billion, accounting for 64.7% of our sales of goods and other operating revenues, and representing an increase of 19.9% over 2007. This was primarily the result of the increased selling price of refined petroleum products, expansion of the sales volume of our petroleum products, and the optimizing of our sales structure. The sales revenue of gasoline, diesel and kerosene was RMB 749.3 billion, accounting for 80.1% of the total turnover of refined petroleum products, and representing an increase of 27.7% over 2007. The turnover of other refined petroleum products was RMB 185.7 billion, representing a decrease of 3.7% compared with 2007, and accounting for 19.9% of the total turnover of the refined petroleum products .
Sales of chemical products
Our external sales revenue of chemical products was RMB 219.7 billion, accounting for 14.7% of our sales of goods and other operating revenues, and representing a decrease of 0.2% over 2007. This was primarily due to the general decrease in the selling prices and sales volume of our chemical products (other than synthetic rubber and chemical fertilizer).
Other income
In 2008, we recognized grant income of RMB 50.9 billion compared to RMB 4.9 billion in 2007 for compensation of losses incurred due to the distortion of the correlation of domestic refined petroleum product prices and the international crude oil prices, and the measures we took to stabilize the supply in the PRC refined petroleum product market during the year.  There are no unfulfilled conditions and other contingencies attached to the receipts of the grant. There is no assurance that we will continue to receive such grant in the future.
Operating expenses
In 2008, our operating expenses were RMB 1,468.9 billion, representing an increase of 31.1% over 2007, among which:
Purchased crude oil, products and operating supplies and expenses were RMB 1,286.1 billion, representing an increase of 32.4% over 2007, accounting for 87.6% of the total operating expenses, of which:
Crude oil purchase expense was RMB 691.1 billion, representing an increase of 40.1% over 2007. This expense accounted for 47.1% of the total operating expense, representing an increase of 3.1 percentage points. With the rapid economic development in China and the expanded market demand, we increased the amount of crude oil that was purchased externally. In 2008, the total throughput of crude oil purchased externally reached 134.8 million tonnes (excluding the amounts processed for third parties), representing an increase of 6.6%. The average unit processing cost for crude oil purchased externally was RMB 5,126 per tonne, representing an increase of 31.4% over 2007.
In 2008, our other purchasing expenses reached RMB 595.0 billion, accounting for 40.5% of the total operating expenses, representing an increase of 24.3%. The increase was mainly due to the increased volume in our trading business and the increased cost for other outsourcing materials.
Selling, general and administrative expenses totaled RMB 39.4 billion, representing an increase of 20.1% over 2007. This was primarily due to the RMB 2.6 billion increase in products delivering costs and other

38

miscellaneous charges caused by the increased sales volume of our refined petroleum products as well as the increased unit transportation costs.
Depreciation, depletion and amortization was RMB 46.4 billion, representing an increase of 6.4% over 2007, mainly due to the increased depreciation resulted from our continuous capital expenditures on property, plant and equipment in recent years.
Exploration expenses reached RMB 8.3 billion, representing a decrease of 25.2%. This was mainly due to the decrease in upstream exploration activities over last year.
Personnel expenses were RMB 23.4 billion, representing an increase of 2.2% over 2007.
Taxes other than income tax were RMB 57.2 billion, representing an increase of 64.8% over 2007. The increase was mainly due to the increase of the special oil income levy in the amount of RMB 21.6 billion as a result of the high crude oil price in 2008 .
Other operating expenses were RMB 8.1 billion in 2008 compared to RMB 3.6 billion in 2007, that are primarily due to impairment losses on long-lived assets, which were  RMB 8.5 billion in 2008 compared with RMB 3.1 billion in 2007. The impairment losses were caused by the lower price of crude oil which led to the decrease in reserves estimated and higher production and development cost in certain field blocks.
Operating income
In 2008, our operating income was RMB 26.3 billion, representing a decrease of 69.2% over 2007.
Net finance costs
In 2008, our net finance costs were RMB 5.2 billion, representing a decrease of 38.1% over 2007. The decrease was mainly attributable to the increase in unrealized gain on embedded derivative component of convertible bonds by RMB 7.1 billion, partially offset by the increase in interest expense by RMB 4.2 billion.
Earnings before income tax
In 2008, our earnings before income tax were RMB 22.1 billion, representing a decrease of 73.3% over 2007.
Income tax
In 2008, we recognized an income tax benefit of RMB 2.9 billion compared to income tax expense of RMB 24.7 billion in 2007. See Note 10 to our consolidated financial statements for a reconciliation between the actual income tax benefit and the expected income tax expense at the applicable statutory tax rate.
Net income attributable to minority interests
In 2008, loss for the year attributable to the minority interests of our Company was RMB 3.5 billion. This was primarily due to the losses incurred by our subsidiaries shared by the minority shareholders.
Net income attributable to equity shareholders of the Company
In 2008, net income attributable to our equity shareholders was RMB 28.5 billion, representing a decrease of 49.0% compared with 2007.
C.
DISCUSSIONS ON RESULTS OF SEGMENT OPERATIONS
We divide our operations into four business segments (exploration and production segment, refining segment, marketing and distribution segment and chemicals segment) and corporate and others. Unless otherwise specified, the inter-segment transactions have not been eliminated in the financial data discussed in this section. In addition, the operating revenue d­ata of each segment have included the “other operating revenues” of the segment.

39

The following table sets forth the operating revenues by each segment, the contribution of external sales and inter-segment sales as a percentage of operating revenues before elimination of inter-segment sales, and the contribution of external sales as a percentage of consolidated operating revenues (i.e. after elimination of inter-segment sales) for the periods indicated.
Years Ended December 31,
As a Percentage of
Consolidated Operating
Revenues Before
Elimination
of Inter-segment Sales
As a Percentage of
Consolidated
Operating Revenues
After Elimination of
Inter-segment Sales
2007
2008
2009
2008
2009
2008
2009
RMB
RMB
RMB
(%)
(%)
(%)
(%)
(in billions)
Exploration and Production
External sales (1)
38.2 45.1 36.8 1.6 1.6 3.0 2.7
Inter-segment sales
107.5 151.4 87.0 5.3 3.7
Total operating revenue
145.7 196.5 123.8 6.9 5.3
Refining
External sales (1)
127.2 178.2 99.7 6.2 4.2 11.9 7.4
Inter-segment sales
541.6 692.5 603.9 24.3 25.7
Total operating revenue
668.8 870.7 703.6 30.5 29.9
Marketing and distribution
External sales (1)
663.0 813.6 780.7 28.5 33.2 54.4 58.0
Inter-segment sales
2.8 3.2 2.4 0.1 0.1
Total operating revenue
665.8 816.8 783.1 28.6 33.3
Chemicals
External sales (1)
227.5 226.2 197.3 7.9 8.4 15.1 14.7
Inter-segment sales
16.5 27.3 21.1 1.0 0.9
Total operating revenue
244.0 253.5 218.4 8.9 9.3
Corporate and others
External sales (1)
150.0 232.1 230.5 8.1 9.8 15.6 17.2
Inter-segment sales
303.6 484.3 291.4 17.0 12.4
Total operating revenue
453.6 716.4 521.9 25.1 22.2
Total operating revenue
before inter-segment
eliminations
2,177.9 2,853.9 2,350.8 100.0 100.0
Elimination of inter-segment
sales
(972.0 ) (1,358.7 ) (1,005.8 )
Consolidated operating
revenues
1,205.9 1,495.2 1,345.0 100.0 100.0
__________
(1)
include other operating revenues.  See Note 33 to the consolidated financial statements for other operating revenues of each of our operating segments.
The following table sets forth the operating revenues, operating expenses and operating income/(loss) by each segment before elimination of the inter-segment transactions for the periods indicated, and the rate of changes from 2007 to 2009.

40


Years Ended December 31,
Rate of Change from 2008 to 2009
2007
2008
2009
(RMB in billions)
(%)
Exploration and Production
Total operating revenues
145.7 196.5 123.8 (37.0 )
Total operating expenses
(96.9 ) (129.9 ) (104.2 ) (19.8 )
Total operating income
48.8 66.6 19.6 (70.6 )
Refining
Total operating revenues
666.9 829.7 703.6 (15.2 )
Other income
1.9 41.0 — (100.0 )
Total operating expenses
(679.8 ) (934.3 ) (680.5 ) (27.2 )
Total operating income/(loss)
(11.0 ) (63.6 ) 23.1 —
Marketing and distribution
Total operating revenues
662.8 806.9 783.1 (2.9 )
Other income
3.0 9.9 — (100.0 )
Total operating expenses
(629.9 ) (778.3 ) (752.8 ) (3.3 )
Total operating income
35.9 38.5 30.3 (21.3 )
Chemicals
Total operating revenues
244.0 253.4 218.4 (13.8 )
Total operating expenses
(230.7 ) (266.4 ) (204.8 ) (23.1 )
Total operating income/(loss)
13.3 (13.0 ) 13.6 —
Corporate and others
Total operating revenues
453.6 716.5 521.9 (27.2 )
Total operating expenses
(455.1 ) (718.7 ) (524.1 ) (27.1 )
Total operating loss
(1.5 ) (2.2 ) (2.2 ) 0.0

Exploration and Production Segment
Most of the crude oil and a small portion of the natural gas produced by the exploration and production segment were used for our refining and chemicals operations. Most of our natural gas and a small portion of crude oil were sold to other customers.
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
In 2009, the operating revenues of this segment were RMB 123.8 billion, representing a decrease of 37.0% over 2008.This is mainly attributable to the decrease in the selling price of crude oil.
The segment sold 40.24 million tonnes of crude oil and 7.03 billion cubic meters of natural gas in 2009, representing an increase of 2.1% and 2.2% respectively over 2008. The average realized price of crude oil and natural gas were RMB 2,409 per tonne and RMB 959 per thousand cubic meters respectively, representing a decrease of 43.6% and an increase of 1.9% respectively over 2008.
In 2009, the operating expenses of this segment were RMB 104.2 billion, representing a decrease of 19.8% over 2008. The was mainly due to the decrease of special oil income levy by RMB 25.7 billion over 2008, which reflected the decrease in crude oil price.
The lifting cost for oil and gas was RMB 90.51 per BOE in 2009, representing an increase of 1.9% over 2008.
The segment’s operating income was RMB 19.6 billion in 2009, representing a decrease of 70.6% over 2008, which was mainly caused by substantial decline in prices of crude oil in 2009.
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
In 2008, the operating revenues of this segment were RMB 196.5 billion, representing an increase of 34.9% over 2007. The increase was mainly attributable to the increase in the sales volume and sales price of crude oil and natural gas.
In 2008, this segment sold 39.41 million tonnes of crude oil and 6.9 billion cubic meters of natural gas, representing an increase of 1.4% and 9.5% respectively over 2007. The average realized price of crude oil was RMB 4,269 per tonne, representing an increase of 37.9%. The average realized price of natural gas was RMB 941 per thousand cubic meters, representing an increase of 14.4% over 2007.
In 2008, the operating expenses of this segment were RMB 129.9 billion, representing an increase of 34.1% over 2007. The increase was mainly due to the following reasons:

41
·
The purchased raw materials, products and operating supplies and expenses increased by RMB 2 billion, which was primarily caused by the increased price of raw materials and fuels.
·
The impairment losses increased by RMB 5.5 billion over 2007, attributable to the lower in price of crude oil which led to the decrease in reserves estimated and higher production and development cost in certain field blocks.
·
The increase in depreciation, depletion and amortization amounted to RMB 3.9 billion was primarily due to the continuous investment in oil and gas assets.
·
Special oil income levy increased by RMB 21.6 billion, primarily due to the high crude oil price in 2008.
In light of the high crude oil price in 2008, we developed more marginal oil reserves to increase oil and gas production. Water and electricity charges associated with oil and gas production increased from RMB 601 per tonne in 2007 to RMB 630 per tonne in 2008, or an increase of 4.8%, due to our development of marginal oil reserves.
In 2008, the operating income of the segment was RMB 66.6 billion, representing an increase of 36.5% over 2007.
Refining Segment
Business activities of the refining segment consist of purchasing crude oil from third parties or from our exploration and production segment, processing crude oil into refined petroleum products, selling gasoline, diesel and kerosene to the marketing and distribution segment, selling a portion of chemical feedstock to our chemicals segment, and selling other refined petroleum products to the domestic and overseas customers.
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
In 2009, the operating revenues of this segment were RMB 703.6 billion, representing a decrease of 15.2% over 2008. This was mainly attributable to the decrease in prices of the refined petroleum products.
The table below sets forth sales volume and average realized prices by product for 2008 and 2009, as well as the percentage changes in sales volume and average realized prices for the periods shown.
Sales volume
Rate of change from
Average realized prices
Rate of change from
2008
2009
2008 to 2009
2008
2009
2008 to 2009
(million tonnes)
(%)
(RMB per tonne)
(%)
Gasoline
28.73 31.34 9.1 5,586 5,591 0.1
Diesel
68.73 63.10 (8.2 ) 4,934 4,646 (5.8 )
Chemical feedstock
23.60 26.98 14.3 5,983 3,333 (44.3 )
Kerosene and other refined petroleum products
41.90 44.08 5.2 4,391 3,208 (26.9 )
In 2009, the segment’s sales revenues of gasoline were RMB 175.2 billion, representing an increase of 9.2% over 2008; the sales revenues of diesel were RMB 293.2 billion, representing a decrease of 13.6% against 2008; the sales revenues of chemical feedstock were RMB 89.9 billion, representing a decrease of 36.3% against 2008; and the sales revenues of other refined petroleum products were RMB 141.4 billion, representing a decrease of 23.1% against 2008.
The segment’s operating expenses were RMB 680.5 billion in 2009, representing a decrease of 27.2% against 2008, which is mainly attributable to the decrease of crude oil processing cost caused by decrease of crude oil sales price.
In 2009, the average unit cost of crude oil processed was RMB 2,911 per tonne, representing a decrease of 41.9% against 2008. Refining throughput were 167.08 million tonnes (excluding the volume processed for third

42

parties), representing an increase of 0.9% over 2008. In 2009, the total costs of crude oil processed were RMB 486.3 billion, representing a decrease of 41.4% against 2008.
The refining margin was RMB 309 per tonne in 2009, an increase of RMB 722 per tonne over 2008, primarily reflecting the reform on pricing mechanism and taxation and fee policies for refined oil products by the PRC government, and our optimization of production scheme, adjustment in product mix as well as our higher load operations.
In 2009, the unit refining cash operating cost (defined as operating expenses less the purchase cost of crude oil and refining feedstock, depreciation and amortization, taxes other than income tax and other operating expenses, and divided by the throughput of crude oil and refining feedstock) was RMB 136 per tonne, representing an increase of RMB 6.4 per tonne, i.e. 4.9% compared with 2008. This was mainly due to lower quality of crude oil and the higher cost in upgrading oil products quality.
The segment’s operating income was RMB 23.1 billion in 2009, an increase of RMB 86.7 billion compared with 2008.
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
In 2008, the operating revenues of this segment were RMB 829.7 billion, representing an increase of 24.4% over 2007. The increase was mainly attributable to the increase in the price and sales volume of each refined petroleum products.
The table below sets forth sales volume and average realized prices by product for 2007 and 2008, as well as the percentage changes in sales volume and average realized prices for the periods shown.
Sales volume
Rate of change from
Average realized prices
Rate of change from
2007
2008
2007 to 2008
2007
2008
2007 to 2008
(million tonnes)
(%)
(RMB per tonne)
(%)
Gasoline
24.54 28.73 17.1 4,640 5,586 20.4
Diesel
62.48 68.73 10.0 4,057 4,934 21.6
Chemical feedstock
25.67 23.60 (8.1 ) 4,986 5,983 20.0
Kerosene and other refined petroleum products
42.62 41.90 (1.7 ) 3,903 4,391 12.5
In 2008, the sales revenues of gasoline by the segment were RMB 160.5 billion, representing an increase of 40.9% over 2007 and accounting for 19.3% of this segment’s operating revenues. The sales revenues of diesel by the segment were RMB 339.1 billion, representing an increase of 33.8% over 2007 and accounting for 40.9% of this segment’s operating revenues. In 2008, the sales revenues of chemical feedstock by the segment were RMB 141.2 billion, representing an increase of 10.3% over 2007 and accounting for 17.0% of this segment’s operating revenues. The sales revenues of refined petroleum products other than gasoline, diesel and chemical feedstock were RMB 184.0 billion, representing an increase of 10.6% over 2007 and accounting for 22.2% of this segment’s operating revenues.
In 2008, this segment’s operating expenses were RMB 934.3 billion, representing an increase of 37.4% over 2007. The increase was mainly attributable to the increase of raw materials prices.
The average cost of crude oil processed was RMB 5,008 per tonne, representing an increase of 33.1% over 2007. Refining throughput were 165.6 million tonnes (excluding the volume processed for third parties), representing an increase of 5.0% over 2007. In 2008, the total costs of crude oil processed were RMB 829.3 billion, representing an increase of 39.7%, and accounting for 88.8% of the segment’s operating expenses, up by 1.5 percentage points over 2007.
In 2008, due to the high international crude oil price and the PRC government’s tight control over refined petroleum products prices, our refining segment incurred significant losses. The refining margin was negative RMB 414 per tonne in 2008, a decrease of RMB 519 per tonne over RMB 105 per tonne in 2007.

43

In 2008, the unit refining cash operating cost was RMB 129 per tonne, representing a decrease of RMB 3 per tonne, i.e. 3% compared with 2007. This reflects the segment’s effort to reduce the costs and expenses coupled with the increase in production volume.
After recognizing the subsidy of RMB 41.0 billion received by this segment, the operating losses for the segment was RMB 63.6 billion, representing an increase in loss of RMB 52.6 billion over 2007.
Marketing and Distribution Segment
The business activities of the marketing and distribution segment include purchasing refined oil products from our refining segment and third parties, making wholesale and direct sales to domestic customers, and retail of the refined oil products through the segment’s retail distribution network, as well as providing related services.
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
In 2009, the operating revenues of this segment were RMB 783.1 billion, representing a decrease of 2.9% compared with 2008.
In 2009, the sales revenues of gasoline, diesel and kerosene were RMB 248.7 billion, RMB 421.0 billion and RMB 44.4 billion, representing an increase of 2.9% and a decrease of 7.3% and 20.3% respectively compared with 2008.
The following table sets forth the sales volumes, average realized prices and the respective rates of changes of the four major product categories in 2008 and 2009 in different forms of sales channels.
Sales Volume
Rate of Change from
Average Realized Prices
Rate of Change from
2008
2009
2008 to 2009
2008
2009
2008 to 2009
(million tonnes)
(%)
(RMB per tonne)
(%)
Gasoline
37.71 39.07 3.6 6,410 6,366 (0.7 )
Retail sale
29.83 31.47 5.5 6,524 6,540 0.2
Direct sale
2.61 2.38 (8.8 ) 6,013 5,554 (7.6 )
Wholesale
5.27 5.22 (0.9 ) 5,964 5,687 (4.6 )
Diesel
80.65 82.70 2.5 5,629 5,091 (9.6 )
Retail sale
48.90 41.94 (14.2 ) 5,704 5,374 (5.8 )
Direct sale
22.31 28.14 26.1 5,561 4,844 (12.9 )
Wholesale
9.44 12.62 33.7 5,402 4,697 (13.1 )
Kerosene including jet fuel
9.19 11.33 23.3 6,065 3,919 (35.4 )
Fuel Oil
11.46 17.89 56.1 3,692 2,952 (20.0 )

The operating expenses of the segment in 2009 was RMB 752.8 billion, representing a decrease of 3.3% over 2008, which was mainly attributable to the decrease in purchasing costs of gasoline and diesel.
In 2009, the segment’s unit cash selling expenses of refined oil products per tonne (defined as the operating expenses less the purchasing costs, taxes other than income tax, depreciation and amortization and divided by the sales volume) was RMB 163.6 per tonne, representing an increase of 6.8% over 2008. This was primarily attributable to the repair and maintenance expenses for gas station and increase of rental and storage charges.
The operating income of the segment in 2009 was RMB 30.3 billion, a decrease of 21.3% over 2008, which was primarily attributable to the smaller price gap resulting from the reform on pricing mechanism and taxation and fee policies for refined oil products by the PRC government as well as high level of supply and severe competition in the refined oil products market.
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
In 2008, the operating revenues of this segment were RMB 806.9 billion, up by 21.7% over 2007. The increase was mainly attributable our adjustment of sales policy and expansion in sales volume.
In 2008, the operating revenues from sales of gasoline and diesel were RMB 695.7 billion, accounting for 86.2% of the operating revenues of this segment. The percentage of retail in the total sales volume of gasoline and

44

diesel increased to 68.1% from 65.9% in 2007. The percentage of direct sales in the total sales volume increased to 20.1% from 16.9% in 2007. The percentage of wholesale volume in the total sales volume of gasoline and diesel decreased from 17.2% in 2007 to 11.8% in 2008.
The following table sets forth the sales volumes, average realized prices and the respective rates of changes of the four major product categories in 2007 and 2008 in different forms of sales channels.
Sales Volume
Rate of Change from
Average Realized Prices
Rate of Change from
2007
2008
2007 to 2008
2007
2008
2007 to 2008
(million tonnes)
(%)
(RMB per tonne)
(%)
Gasoline
35.12 37.71 7.4 5,410 6,410 18.5
Retail sale
26.73 29.83 11.6 5,542 6,524 17.7
Direct sale
2.61 2.61 0.0 5,036 6,013 19.4
Wholesale
5.79 5.27 (9.0 ) 4,967 5,964 20.1
Diesel
77.29 80.65 4.3 4,723 5,629 19.2
Retail sale
44.99 48.90 8.7 4,832 5,704 18.0
Direct sale
17.03 22.31 31.0 4,742 5,561 17.3
Wholesale
15.26 9.44 (38.1 ) 4,381 5,402 23.3
Kerosene including jet fuel
7.01 9.19 31.1 4,729 6,065 28.3
Fuel Oil
13.16 11.46 (12.9 ) 2,923 3,692 26.3

In 2008, the subsidy income recognized by the segment was RMB 9.9 billion.
In 2008, the operating expenses of the segment were RMB 778.3 billion, representing an increase of 23.6% compared with 2007. The increase was mainly due to the increase in the purchasing cost of refined oil products.
In 2008, the segment’s unit cash selling expenses of refined oil products per tonne was RMB 153.0 per tonne, representing an increase of 10.2% over 2007. This was primarily attributable to the increase in repairing expenses and rental and employment expenses resulting from the increase in consumer price.
In 2008, the operating income of the segment was RMB 38.5 billion, representing an increase of 7.2% over 2007.
Chemicals Segment
The business activities of the chemicals segment include purchasing chemical feedstock from our refining segment and third parties, producing, marketing and distributing petrochemical and inorganic chemical products.
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
The operating revenues of the chemicals segment in 2009 were RMB 218.4 billion, representing a decrease of 13.8% against 2008, which was mainly attributable to the dramatic drop in chemical product sales prices.
The sales revenues of our six major categories of chemical products (namely basic organic chemicals, synthetic fiber monomers and polymers for synthetic fiber, synthetic fiber, synthetic rubber and chemical fertilizer) of the segment in 2009 were approximately RMB 201.0 billion, representing a decrease of 12.8% compared with 2008, accounting for 92.0% of the operating revenues of the segment.
The following table sets forth the sales volume, average realized price and the respective rates of changes for each of these six categories of chemical products of this segment from 2008 to 2009.
Sales Volume
Rate of Change from
Average Realized Prices
Rate of Change from
2008
2009
2008 to 2009
2008
2009
2008 to 2009
(million tonnes)
(%)
(RMB per tonne)
(%)
Basic organic chemicals
13.39 16.66 24.4 6,392 4,296 (32.8 )
Synthetic resins
7.85 8.68 10.6 10,097 8,073 (20.0 )
Synthetic fiber monomers and polymers
4.02 4.69 16.7 8,052 6,519 (19.0 )
Synthetic rubber
0.99 1.12 13.1 16,180 11,448 (29.2 )
Synthetic fiber
1.35 1.42 5.2 10,488 9,140 (12.9 )
Chemical fertilizer
1.66 1.77 6.6 1,729 1,657 (4.2 )

45

The operating expenses of the segment in 2009 were RMB 204.8 billion, representing a decrease of 23.1% over 2008, which was mainly attributable to the decrease of the unit cost of raw materials, resulting in the decrease of raw material costs by RMB 60.1 billion.
The segment proactively expanded the market in 2009, strengthened the integration of manufacturing, sales and research operations, improved customer services and strengthened strategic alliance with key customers and hence achieved operating income of RMB 13.6 billion, an increase of RMB 26.6 billion over 2008.
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
In 2008, operating revenues of this segment were RMB 253.4 billion, representing an increase of 3.9% over the year of 2007.
In 2008, the sales revenues of our six major categories of chemical products (namely basic organic chemicals, monomers and polymers for synthetic fiber, synthetic resin, synthetic fiber, synthetic rubber and chemical fertilizer) totaled approximately RMB 230.4 billion and accounting for 90.9% of the operating revenues of this segment.
The following table sets forth the sales volume, average realized price and the respective rates of changes for each of these six categories of chemical products of this segment from 2007 to 2008.
Sales Volume
Rate of Change from
Average
Realized Prices
Rate of Change from
2007
2008
2007 to 2008
2007
2008
2007 to 2008
(million tonnes)
(%)
(RMB per tonne)
(%)
Basic organic chemicals
12.95 13.39 3.4 5,999 6,392 6.6
Synthetic resins
7.90 7.85 (0.6 ) 10,205 10,097 (1.1 )
Synthetic fiber monomers and polymers
4.21 4.02 (4.5 ) 9,130 8,052 (11.8 )
Synthetic rubber
0.97 0.99 2.1 13,760 16,180 17.6
Synthetic fiber
1.50 1.35 (10.0 ) 11,605 10,488 (9.6 )
Chemical fertilizer
1.59 1.66 4.4 1,659 1,729 4.2
In 2008, operating expenses of the chemicals segment were RMB 266.4 billion, representing an increase of 15.5% over 2007. This was primarily due to the increase in the prices of feedstock and ancillary materials, which, together, contributed to an increase of RMB 33.4 billion in operating expenses over 2007.
In 2008, operating loss of the chemicals segment was RMB 13.0 billion, compared to the operating income of RMB 13.3 billion in 2007.
Corporate and others
The business activities of corporate and others mainly consist of the import and export operations, international trading, research and development activities of us and managerial activities of our headquarters.
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
In 2009, the operating revenue generated from corporate and others was RMB 521.9 billion, representing a decrease of 27.2% over 2008, which was mainly attributable to the decrease in petroleum and petrochemical product prices, leading to the decrease of revenues from crude oil and refined oil trading business of the trading  subsidiaries. The operating revenue from trading companies was RMB 520.5 billion.
In 2009, the operating expenses of this segment was RMB 524.1 billion, representing a decrease of 27.1% over 2008, which was mainly attributable to the decrease in its trading companies’ purchasing costs. The operating expense from the trading companies was RMB 519.3 billion.

46

In 2009, the operating loss of this segment were RMB 2.2 billion, flat with that of 2008. This includes operating income from trading companies which amounted to RMB 1.2 billion and the operating loss from research affiliates, headquarters and donation activities which amounted to RMB 3.4 billion.
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
In 2008, the operating revenues generated from corporate and others were RMB 716.5 billion, representing an increase of 58.0% over 2007. The increase was mainly due to the increase in the trading volume of crude oil and refined oil products.
In 2008, the operating expenses of this segment were RMB 718.7 billion, representing an increase of 57.9% over 2007. This increase was mainly due to the increase in the purchasing costs of the trading business in line the increase in its operating revenue.
In 2008, the operating loss of this segment was RMB 2.2 billion, compared to the operating loss of RMB 1.5 billion in 2007.
D.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funding have been cash provided by our operating activities, short-term and long-term loans. Our primary uses of cash have been for working capital, capital expenditures and repayment of short-term and long-term loans. We arrange and negotiate financing with financial institutions to finance our capital resource requirement, and maintain a certain level of standby credit facilities to reduce liquidity risk. We believe that our current cash on hand, expected cash flows from operations and available standby credit facilities from financial institutions will be sufficient to meet our working capital requirements and repay our short term debts and obligations when they become due.
The following table sets forth a summary of our consolidated cash flows for the years ended December 31, 2008 and 2009.
For the Years Ended December 31,
Cash flow data
2008
2009
(in RMB billions)
Net cash generated from operating activities
66.5 152.1
Net cash used in investing activities
(110.0 ) (116.1 )
Net cash generated from / (used in) financing activities
42.8 (34.3 )
Net (decrease) / increase in cash and cash equivalents
(0.7 ) 1.7

The net cash generated from our operating activities in 2009 was RMB 152.1 billion, an increase of RMB 85.6 billion compared with the end of the previous year, which reflected: (i) our earnings before taxation of RMB 80.6 billion, representing an increase of RMB 58.5 billion over 2008, (ii) our depreciation, depletion and amortization of RMB 50.5 billion, representing an increase of RMB 4.1 billion over 2008; and (iii) a decrease of our income tax payment by RMB 17 billion from 2008.
The net cash used in our investing activities was RMB 116.1 billion, an increase of RMB 6.1 billion over 2008. This was mainly attributable to the year-on-year increase of the capital expenditures pursuant to our annual investment plan.
The net cash outflow from our financing activities was RMB 34.3 billion, an increase of RMB 77.1 billion over 2008. This reflected our enhancement in capital management and liquidity in resources and reduction in level of indebtedness.
Contractual Obligations and Commercial Commitments
The following table sets forth our obligations and commitments to make future payments under contracts and commercial commitments as of December 31, 2009.

47
As of December 31, 2009
Payment due by period
Total
less than 1 year
1-3 years
4-5 years
After 5 years
(RMB millions)
Contractual obligations (1)
Short-term debt
66,866 66,866 - - -
Long-term debt
174,642 10,077 53,175 55,433 55,957
Total contractual obligations
241,508 76,943 53,175 55,433 55,957
Other commercial commitments
Operating lease commitments
174,487 6,084 11,739 11,326 145,338
Capital commitments
183,362 100,256 83,106 - -
Exploration and production licenses
1,004 136 139 40 689
Guarantees (2)
14,996 14,996 - - -
Total commercial commitments
373,849 121,472 94,984 11,366 146,027
_________
(1)
Contractual obligations include the contractual obligations relating to interest payments.
(2)
Guarantee is not limited by time, therefore specific payment due period is not applicable. As of December 31, 2009, we have not entered into any off-balance sheet arrangements other than guarantees given to banks in respect of banking facilities granted to certain parties. As of December 31, 2009, the maximum amount of potential future payments under the guarantees was RMB 15 billion.  See Note 30 to the consolidated financial statements for further information of the guarantees.
Historical and Planned Capital Expenditure
The following table sets forth our capital expenditure by segment for the years ended December 31, 2007, 2008 and 2009 and the capital expenditure in each segment as a percentage of our total capital expenditure for such year.
2007
2008
2009
Total
RMB
Percent
RMB
Percent
RMB
Percent
RMB
Percent
(in billions, except percentage data)
Exploration and production
54.5 49 57.7 53 51.5 47 163.7 49
Refining
23.0 21 12.8 12 15.5 14 51.3 16
Marketing and distribution
14.6 13 14.8 14 16.3 15 45.7 14
Chemicals
16.2 14 20.6 19 25.2 23 62.0 19
Corporate
3.3 3 2.4 2 1.5 1 7.2 2
Total
111.6 100 108.3 100 110.0 100 329.9 100
In 2009, our total capital expenditure amounted to RMB 110.0 billion, among which:
·
Exploration and production . RMB 51.5 billion was used in exploration and development segment to enhance our oil and gas exploration, expand our production capacity and increase the scale of our producing reserve. The newly-built crude oil production capacity was 5.7 million tonnes per year, and newly-built natural gas capacity was 1.205 billion cubic meters per year in 2009.
·
Refining . RMB 15.5 billion was used in our refining segment for quality upgrade of our refined oil product and crude oil adaptability restructuring project in some refineries, as well as construction of new storage facilities and pipeline.
·
Marketing and distribution . RMB 16.3 billion was used in this segment to add 1,229 petrol and gas stations in key areas including highways, major cities and newly planned regions, and accelerate the construction of oil products storage facilities and pipeline.
·
Chemicals . RMB 25.2 billion was spent in this segment, including investments on Fujian, Tianjin and Zhenhai ethylene projects. Our SBR unit of Sinopec Qilu Company and ethylbenzene/styrene complex unit of Sinopec Anqing Company were completed and put into production in 2009.
·
Corporate and Others . RMB 1.5 billion was used for scientific research, construction of ancillary projects and further application of information systems focused on ERP.

48
In 2010, we will continue to focus on investments into our most profitable and core projects. We will strictly manage our investment procedures and project construction process. The total planned capital expenditure in 2010 amounts to RMB 112 billion, including:
·
Exploration and production . The planned capital expenditure in 2010 for this segment is RMB 53.3 billion. We expect to commence commissioning of Puguang Gas Field and manage the operation of the Sichuan-to-East China Gas Project, as well as to continue the exploration and capacity buildup of Tahe and Shengli oil fields and Puguang and Erdos gas fields.
·
Refining . The planned capital expenditure in 2010 for this segment is RMB 22.3 billion. We will continue to focus on building-up our refining capacity at strategic locations. We also expect to continue our revamping projects to use lower quality crude oil as feedstock, to enhance oil products with high quality and low cost, and to improve the construction of crude oil dock and transportation and delivery system.
·
Marketing and distribution . The planned capital expenditure in 2010 for this segment is RMB 14 billion. W expect to focus on the construction and acquisition of petrol and gas stations in key areas including highways, major cities and newly planned zones. We will continue to accelerate our pipeline construction and to improve our sales network of oil products.
·
Chemicals . The planned capital expenditure in 2010 for this segment is RMB 20 billion. The construction of Zhenhai ethylene project is expected to be completed in 2010. We will continue to make investment for the construction of Wuhan ethylene, Yanshan butyl rubber and other projects.
·
Corporate and Others . The planned capital expenditure in 2010 for this segment is RMB 2.4 billion.
Consumer Price Index
According to the data provided by the National Bureau of Statistics, the consumer price index in the PRC decreased by 0.7% in 2009, compared with increases of 5.9% in 2008 and 4.8% in 2007.  According to China's official analysis, the deflation in the PRC during 2009 was due to the impact of global financial crisis, decreases in export and lower level of demand in domestic market. Deflation has not had a significant impact on our results of operations in the previous year.
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Directors
The table and discussion below set forth certain information concerning our directors. The current term for all our directors is three years, which will expire in May 2012.
Name
Age
Positions with Sinopec Corp.
Su Shulin
47
Chairman
Wang Tianpu
47
Vice Chairman, President
Zhang Yaocang
56
Vice Chairman
Zhang Jianhua
45
Director, Senior Vice President
Wang Zhigang
52
Director, Senior Vice President
Cai Xiyou
48
Director, Senior Vice President
Cao Yaofeng
56
Director
Li Chunguang
54
Director
Dai Houliang
46
Director, Senior Vice President
Liu Yun
53
Director
Liu Zhongli
75
Independent Non-executive Director
Ye Qing
76
Independent Non-executive Director
Li Deshui
65
Independent Non-executive Director
Xie Zhongyu
66
Independent Non-executive Director
Chen Xiaojin
65
Independent Non-executive Director


49
Su Shulin , 47, Chairman of the Board of Directors of Sinopec Corp. and President of Sinopec Group Company. He received his Bachelor Degree from Daqing Petroleum Institute in July 1983, and obtained a Master Degree from Harbin Engineering University in March 1999. He is a professor level senior engineer. From March 1996 to January 1997, Mr. Su acted as Assistant to the Director of CNPC Daqing Petroleum Administration Bureau.  From January to November 1997, Mr. Su served as Head of the No. 1 Oil and Gas Development Department and Assistant to the Director of CNPC Daqing Petroleum Administration Bureau from November 1997 to January 1999, Mr. Su was Deputy Director and member of the Party Committee of CNPC Daqing Petroleum Administration Bureau. From January to September 1999, Mr. Su was Director and Vice Secretary to the Party Committee of CNPC Daqing Petroleum Administration Bureau. From September 1999 to August 2000, Mr. Su Shulin was served as Vice President of PetroChina Company Limited and Chairman, General Manager and Secretary to the Party Committee of Daqing Oilfield Company Limited and Vice Secretary to Party Committee of CNPC Daqing Petroleum Administration Bureau. From August 2000 to March 2001, Mr. Su acted as Deputy General Manager and member of the Party Committee of China National Petroleum Corporation, Vice President of PetroChina Company Limited, Chairman, General Manager and Secretary to the Party Committee of Daqing Oilfield Company Limited as well as Vice Secretary to the Party Committee of CNPC Daqing Petroleum Administration Bureau. From March 2001 to December 2002, Mr. Su served as Deputy General Manager and member of the Party Committee of China National Petroleum Corporation, Vice President of PetroChina Company Limited and Chairman and General Manager of Daqing Oilfield Company Limited. From December 2002 to December 2003, Mr. Su acted as Deputy General Manager and member of the Party Committee of China National Petroleum Corporation, Director and Senior Vice President of PetroChina Company Limited as well as Chairman and General Manager of Daqing Oilfield Company Limited. From December 2003 to September 2006, Mr. Su acted as Deputy General Manager and member of the Party Committee of China National Petroleum Corporation, Director and Senior Vice President of PetroChina Company Limited. From September 2006 to October 2006, Mr. Su was elected as a member of the Standing Committee of the provincial Party Committee of Liaoning Province. In October 2006, Mr. Su was appointed as a member of the Standing Committee and Head of the Organization Department of Liaoning Provincial Committee. In June 2007 he was appointed as President and Secretary of the Party Leadership Group of Sinopec Group Company. Mr. Su was elected as Director and Chairman on Third Session of the Board of Directors of Sinopec Corp. in August 2007.

Wang Tianpu , 47, Vice Chairman of the Board of Directors and President of Sinopec Corp. Mr. Wang graduated from Qingdao Chemical Institute in July 1985 majoring in basic organic chemistry. He obtained his MBA degree in Dalian University of Science & Technology in July 1996 and Ph.D. degree in Zhejiang University in August 2003 majoring in chemical engineering. He is a professor level senior engineer and well-experienced in the production and management in petrochemical industry. From March 1999 to February 2000, Mr. Wang was Vice President of Qilu Petrochemical Company of Sinopec Group. From February 2000 to September 2000, he was Vice President of Sinopec Corp Qilu Company. From September 2000 to August 2001, he was President of Sinopec Corp Qilu Company. Mr. Wang was Vice President of Sinopec Corp from August 2001 to April 2003 and was Senior Vice President of Sinopec Corp from April 2003 to March 2005. Mr. Wang has been President of Sinopec Corp since March 2005. Mr. Wang was elected as Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006 and has been President of Sinopec Corp. In May 2009, Mr. Wang was elected as Vice Chairman of Board of Directors.

Zhang Yaocang , 56, Vice Chairman of the Board of Directors and Vice President of Sinopec Group Company. Mr. Zhang is a professor level senior engineer and obtained a graduate degree of Graduate School. In November 1990, he was appointed as Deputy Director General of Bureau of Petroleum Geology and Marine Geology, Ministry of Geology and Mineral Resources (MGMR); in February 1994, he was appointed as Secretary of CPC Committee and Deputy Director General of Bureau of Petroleum Geology and Marine Geology, Ministry of Geology and Mineral Resources (MGMR); in June 1997, he was appointed as Deputy Secretary of CPC Leading Group and Executive Vice President of Sinopec Star Petroleum Co. Ltd; in April 2000, he was appointed as Assistant to President of Sinopec Group Company and concurrently as President of Sinopec Star Petroleum Co., Ltd.; in August 2000, he was appointed concurrently as Secretary of CPC Committee of Sinopec Star Petroleum Co. Ltd; in July 2001, he was appointed as Vice President of Sinopec Group Company; in May 2009, he was elected as Vice Chairman of the Board of Directors of Sinopec Corp.

Zhang Jianhua , 45, Director of the Board of Directors and Senior Vice President of Sinopec Corp. Mr. Zhang graduated from East China Chemical Institute in July 1986 majoring in petroleum refining, and obtained a master’s

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degree from East China University of Science and Technology in December 2000 majoring in chemical engineering. He is a professor level senior engineer. From April 1999 to February 2000, Mr. Zhang was Vice President of Shanghai Gaoqiao Petrochemical Company of Sinopec Group. From February 2000 to September 2000, he was Vice President of Sinopec Corp. Shanghai Gaoqiao Company. He was President of Sinopec Corp. Shanghai Gaoqiao Company from September 2000 to June 2003. Mr. Zhang served as Vice President of Sinopec Corp. from April 2003 to March 2005. He was also the Director General of Sinopec Production & Operation Management Dept. from November 2003 to November 2005. He has been Senior Vice President of Sinopec Corp. since March 2005; Mr. Zhang was elected as Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006 and has been Senior Vice President of Sinopec Corp.
Wang Zhigang , 52, Director of the Board of Directors of Sinopec Corp. and Senior Vice President of Sinopec Corp. Mr. Wang graduated from East China Petroleum Institute in January 1982, majoring in oil production, and then obtained a master’s degree from University of Petroleum in June 2000, majoring in oil and gas development engineering. He obtained a Ph.D. degree from Geology and Geo-physics Research Institute of the China Academy of Sciences in September 2003 majoring in geology. He is a professor level senior engineer. From February 2000 to June 2000, he was Vice President of Sinopec Shengli Oilfield Company Limited. From June 2000 to December 2001, Mr. Wang served as Director and President of Sinopec Shengli Oilfield Company Limited. He was appointed as honorary Deputy Director-General of the Economic and Trade Committee of Ningxia Hui Autonomous Region from November 2001 to May 2003. He was Vice President of Sinopec Corp. from April 2003 to March 2005. He was also the Director General of Sinopec Exploration and Production Dept. since June 2003 to November 2005. He has been Senior Vice President of Sinopec Corp. since March 2005. Mr. Wang was elected as Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006 and has been Senior Vice President of Sinopec Corp.

Cai Xiyou , 48, Director of the Board of Directors of Sinopec Corp. and Senior Vice President of Sinopec Corp. Mr. Cai graduated from Fushun Petroleum Institute in August 1982 majoring in petroleum refining automation, and obtained a MBA degree from China Industry and Science Dalian Training Center in October 1990. He is a senior economist. From June 1995 to May 1996, he was Deputy General Manager of Jinzhou Petrochemical Company of the former Sinopec Group Company. From May 1996 to December 1998, he was Deputy General Manager of Dalian Western Pacific Petrochemical Co., Ltd (WEPEC). From December 1998 to June 2001, he was Deputy General Manager of Sinopec Sales Co., Ltd, and from June 2001 to December 2001, he was Executive Deputy Manager of Sinopec Sales Co., Ltd. He has been Director and General Manager of China International United Petrochemical Company Limited (UNIPEC) from December 2001 to December 2005. He was Vice President of Sinopec Corp. from April 2003 to November 2005. Mr. Cai has been Senior Vice President of Sinopec Corp. since November 2005. He was elected as Director of the Fourth Session of the Board of Directors of Sinopec Corp. in May 2009.

Cao Yaofeng , 56, Director of the Board of Directors of Sinopec Corp. and Vice President of Sinopec Group Company. Mr. Cao is a professor level senior engineer and obtained a master degree. In April 1997, he was appointed as Deputy Director General of Shengli Petroleum Administration Bureau; in May 2000, he served as concurrently as Vice Chairman of Board of Directors of Sinopec Shengli Oilfield Co., Ltd.; in December 2001, he served as Board Director and President of Sinopec Shengli Oilfield Co., Ltd.; in December 2002, he served as Director Genaral of Shengli Petroleum Administration Bureau of Sinopec Group Company and Chairman of Board of Directors of Shengli Oilfield Company Limited; from April 2003 to May 2006, he served as Employee Representative Board Director of Sinopec Corp.; in October 2004, he was appointed as Assistant to President of Sinopec Group Company; in November 2005, he was appointed as Vice President of Sinopec Group Company; in May 2009, he was elected as Board Director of Sinopec Corp.

Li Chunguang , 54, Director of the Board of Directors of Sinopec Corp. and Vice President of Sinopec Group Company. Mr. Li is a professor level senior engineer and obtained a university diploma. In August 1991, he was appointed as Deputy General Manager of Sinopec Sales Company North China Branch; in October 1995, he was appointed as Deputy General Manager of Sinopec Sales Company; in June 2001, he was appointed as General Manager of Sinopec Sales Co., Ltd.; in December 2001, he was appointed as Director General of Oil Product Sales Department of Sinopec Corp.; in April 2002 he was elected as Chairman of Board of Directors and General Manager of Sinopec Sales Co., Ltd.; in April 2003, he was appointed as Vice President of Sinopec Corp.; in November 2005, he was appointed as Vice President of Sinopec Group Company; in May 2009, he was elected as Board Director of Sinopec Corp.

Dai Houliang , 46, Director of the Board of Directors of Sinopec Corp. and Senior Vice President of Sinopec Corp. Mr. Dai graduated from Jiangsu Chemical Institute in July 1985, specializing in organic chemical engineering. From September 1997 to July 1999, he participated in the MBA training program in Nanjing University. He is a professor level senior engineer. He was Deputy Manager of Sinopec Yangzi Petrochemical Company from December

51

1997 to April 1998. He served as Director and Deputy General Manager of Sinopec Yangzi Petrochemical Co., Ltd. from April 1998 to July 2002. He was Vice Chairman and General Manager of Sinopec Yangzi Petrochemical Co., Ltd. and Director of Sinopec Yangzi Petrochemical Company from July 2002 to December 2003. He was Chairman and President of Sinopec Yangzi Petrochemical Co., Ltd. and Chairman of Sinopec Yangzi Petrochemical Company from December 2003 to September 2005. He also served as Chairman of BASF-YPC Company Limited from December 2004 to October 2006. He has been the Deputy CFO of Sinopec Corp. from September 2005 to May 2006. Mr. Dai has been Vice President of Sinopec Corp. from November 2005 to May 2006. In May 2006, he was elected as Director of the Third Session of the Board of Directors, Senior Vice President and CFO of Sinopec Corp. Mr. Dai was elected as Director of the Fourth Session of the Board of Directors and appointed as Senior Vice President of Sinopec Corp. in May 2009.
Liu Yun , 53, Director of the Board of Directors of Sinopec Corp. and Chief Accountant of Sinopec Group Company. Mr. Liu is a senior accountant and obtained a master degree. In December 1998, he was appointed as Deputy Director General of Financial Department of Sinopec Group Company; in February 2000, he was appointed as Deputy Director General of Financial Department of Sinopec Corp.; in January 2001, he was appointed as Director General of Financial Department of Sinopec Corp.; in June 2006, he was appointed as Deputy CFO of Sinopec Corp.; in February 2009, he was appointed as Chief Accountant of Sinopec Group Company; and in May 2009, he was elected as Board Director of Sinopec Corp.

Liu Zhongli , 75, Independent Non-Executive Director of Sinopec Corp. He graduated from the training course of the Training Department of Central Communist Party School (undergraduate course) in July 1982. He is a senior economist engaging in treasury finance administration and government work for a long time, and has extensive experience in macro-economics, financial and treasury administration. He was working in Commerce Bureau of Heilongjiang Province in 1952 and in Planning Commission of Heilongjiang Provincial Government in 1963. He had served as Deputy Division Director of the General Affairs Office of Planning Commission of Heilongjiang Provincial Government and Deputy Secretary General of Planning Commission of Heilongjiang Provincial Government since September 1973. He was Deputy Director General of Planning Commission of Heilongjiang Provincial Government and a member of Party Committee of Planning Commission of Heilongjiang Provincial Government from July 1982 to May 1983. From May 1983 to May 1985, he was Director General of Planning Commission (Planning & Economics Department) of Heilongjiang Provincial Government and Secretary of Party Committee of Planning Commission (Planning & Economics Department) of Heilongjiang Provincial Government. He served as Deputy Governor of Heilongjiang Province from May 1985 to January 1988. He was Vice Minister of the Ministry of Finance and Deputy Secretary of Party Committee of the Ministry of Finance from February 1988 to July 1990. He served as Deputy Secretary General of the State Council and Deputy Secretary of Party Committee of the State Council from July 1990 to September 1992. From September 1992 to March 1998, he was Minister of the Ministry of Finance and Secretary of Party Committee of the Ministry of Finance and, from February 1994, concurrently Director-General of State Administration of Taxation. From March 1998 to November 2000, he was Head of Economic System Reform Office of the State Council and Secretary of Party Committee of the Economic System Reform Office of the State Council. From August 2000 to March 2003, he was Chairman of National Council for Social Security Fund and Secretary of Party Committee of the National Council for Social Security Fund. He has been a member of the Standing Committee of the Tenth Session of the Chinese People’s Political Consultative Conference (CPPCC) and Director-General of the Economics Committee of CPPCC since March 2003. Since October 2004, he has concurrently been Chairman of the Chinese Institute of Certified Public Accountants. Mr. Liu was elected as Independent Non-Executive Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006.

Ye Qing , 76, Independent Non-executive Director of Sinopec Corp. Mr. Ye is a senior engineer and obtained a college diploma. Mr. Ye is a senior engineer and obtained a college diploma. In January 1976, he was appointed as Deputy Director of Revolutionary Committee and Chief Engineer of Jixi Mining Bureau; in March 1982, he was appointed as Vice Minister, Member of CPC Leading Group, Chief Engineer and Secretary of CPC Leading Group of Ministry of Coal Industry; in August 1986, he was appointed as Deputy Director General and Member of CPC Leading Group of National Economy Commission; in May 1988, he was successively appointed as Deputy Director General, Member of CPC Leading Group and Deputy Secretary of CPC Leading Group of State Planning Commission, as well as Director General of State Council Production Commission; in July 1991, he was appointed as Deputy Director and Member of CPC Leading Group of State Planning Commission; from April 1998 to July 2003, he served as Chairman of Board of Directors and Secretary of CPC Leading Group of Shenhua Group Company Limited; from February 1999 to December 2000, he served concurrently as President of Shenhua Group Company Limited; in May 2009, he was elected as Independent Non-executive Director of Sinopec Corp. Mr. Ye was elected as Alternate Member of 14th Session of CPC Central Committee and Standing Committee Member of 9th and 10th Session of CPPCC.

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Li Deshui , 65, Independent Non-Executive Director of Sinopec Corp. Mr. Li graduated from university in 1967. He is a senior engineer, researcher, part-time professor of the Economics School of Peking University and the Economics School of Renmin University of China. After graduating from university, he was assigned to work at Maanshan Steel Company and has acted as Workshop Section Head and Dispatch Head. In 1977 he worked at the Planning Institute of the Metallurgy Department. In 1984 he worked at the Raw Materials Bureau of the State Planning Commission. In 1988 he acted as Deputy Division Director of the First Industrial Planning Division of the Long-term Planning Department of the State Planning Commission. In 1989 he was Division Director of the First Industrial Planning Division of the Long-term Planning Department and Division Director of the First Industrial Planning Division of the Long-term Planning and Industrial Policy Department. In 1992 he acted as Deputy Director of the National Economy Comprehensive Department of the State Planning Commission. In May 1996 he was Director of the National Economy Comprehensive Department of the State Planning Commission. In November 1996, he acted as Vice Mayor of Chongqing in Sichuan Province. In March 1997 he acted as Vice Mayor of Chongqing Municipality. In November 1999 he worked as Deputy Director of the Research Office of the State Council and a member of the Party Committee. In April 2002, he served as Secretary of the Party Committee and Deputy General Manager of China International Engineering Consultancy Company. In March 2003 he served as Secretary of the Party Committee and Head of the State Statistics Bureau, a member of the Monetary Policy Committee of the People’s Bank of China and Chairman of China Statistics Institute. In March 2005, he was elected as Vice Chairman of the Thirty-sixth Statistics Commission of the United Nations. In March 2005 he served as a member of the Tenth Session of the Chinese People’s Political Consultative Conference. In April 2006 he acted as a member of the Economic Commission. In March 2006, he was the consultant of the State Statistics Bureau. Mr. Li was elected as Independent Non-Executive Director of the Fourth Session of the Board of Directors of Sinopec Corp. in May 2009.

Xie Zhongyu , 66, Independent Non-executive Director of Sinopec Corp. Mr. Xie is a senior engineer and obtained a university diploma. In May 1986, he was appointed as Deputy Director General for both Investigation and Research Office and Policy Research Office in Ministry of Chemical Industry; in November 1988, he was appointed as Director General of Department of Policy, Laws & Regulations of Ministry of Chemical Industry; in December 1991, he was appointed as Director General of Department of Policy, Laws & Regulations of Ministry of Chemical Industry; in September 1993, he was appointed as Director General of General Office of Ministry of Chemical Industry; in June 1998, he was appointed as Deputy Director General, Member of CPC Leading Group of State Petroleum and Chemical Industry Bureau; from June 2000 to December 2006, he served as Chairman of the Board of Supervisors for Key Large-scaled State Owned Enterprises; in October 2007, he was elected as Board Director of Nuclear Power Technology Corporation; and in May 2009, he was elected as Independent Non-executive Director of Sinopec Corp.

Chen Xiaojin , 65, Independent Non-executive Director of Sinopec Corp. Mr. Chen is a senior engineer (research fellow level) and obtained a university diploma. In December 1982, he was appointed as President of Tianjin Ship Industry Corporation; in January 1985, he was appointed successively as Vice President and President of CNOOC Platform Corporation; in February 1987, he was appointed successively as Director General of Operation Department, Director General of Foreign Affairs Bureau, Director General of International Affairs Department in China State Shipbuilding Corporation and Deputy President of China State Shipbuilding Trading Company; in December 1988, he was appointed as Vice President of China State Shipbuilding Corporation; in January 1989, he was appointed concurrently as President of China State Shipbuilding Trading Company; in October 1996, he was elected as concurrently as Chairman of Board of Directors of China State Shipbuilding Trading Company; from June 1996 to July 2008, he served as President and Secretary of CPC Leading Group of China State Shipbuilding Corporation; in May 2009, he was elected as Independent Non-executive Director of Sinopec Corp.
Supervisors
The table and discussion below set forth certain information concerning our supervisors. The current term of our supervisors is three years, which will expire in May 2012.
Name
Age
Position with the Company
Wang Zuoran
59
Chairman of the Board of Supervisors
Zhang Youcai
68
Vice Chairman, Independent Supervisor
Geng Limin
55
Supervisor
Zou Huiping
49
Supervisor
Li Yonggui
69
Independent Supervisor
Liu Xiaohong
55
Employee Representative Supervisor
Zhou Shiliang
52
Employee Representative Supervisor
Chen Mingzheng
52
Employee Representative Supervisor
Su Wensheng
53
Employee Representative Supervisor

53
Wang Zuoran , 59, Chairman of the Supervisory Board of Sinopec Corp. Mr. Wang graduated from Shandong Economic Administration Institute in September 1994 specializing in economic administration. Mr. Wang is a professor level senior economist and has extensive experience in the management of petroleum industry. From October 1994 to February 2000, Mr. Wang served as Deputy Director and Party Secretary of Shengli Petroleum Administration Bureau. From February 2000 to July 2001, Mr. Wang was the Assistant to the President of Sinopec Group Company. Mr. Wang has been Director of Disciplinary Supervision Committee of Sinopec Group Company since July 2001. Mr. Wang served as Supervisor of the First Session of the Supervisory Board of Sinopec Corp. from February 2000 to April 2003. From April 2003 to May 2006, Mr. Wang served as Supervisor and Chairman of the Second Session of the Supervisory Board of Sinopec Corp.; he was elected as Supervisor and Chairman of the Third Session of the Supervisory Board of Sinopec Corp. in May 2006.

Zhang Youcai , 68, Independent Supervisor and Vice Chairman of the Supervisory Board of Sinopec Corp. Mr. Zhang graduated from Nanjing Industrial University in August 1965 majoring in inorganic chemistry. He is a professor and has long been engaged in business administration, financial management and government affairs, and has extensive experience in industrial, economic, financial and accounting management. From January 1968 to August 1980, he served as a technician, Vice-President, Deputy Secretary of the Party Committee and President of Nantong Chemical Fertilizer Plant. From August 1980 to January 1982, he was Deputy Director-General and member of the Party Committee of the Industrial Bureau of Nantong Region. From January 1982 to February 1983, he served as Deputy Director - General of Planning Commission of Nantong Region. From February 1983 to November 1989, he served as Deputy Mayor, Deputy Secretary of the Party Committee and Mayor of Nantong City. He was Vice Minister and member of the Party Committee of Ministry of Finance from December 1989 to July 2002 (from May 1994 to March 1998, he served concurrently as Director-General of State-owned Assets Administration Bureau). He has been Chairman of the Chinese Institute of Chief Accountants since November 2002. He has been a member of the Standing Committee of the Tenth National People’s Congress (NPC) and Deputy Director of its Financial and Economic Committee of NPC from March 2003. Mr. Zhang served as an Independent Non-Executive Director of the Second Session of Board of Directors of Sinopec Corp. from April 2003 to May 2006; he was elected as Independent Supervisor and Vice Chairman of the Third Session of the Supervisory Board of Sinopec Corp. in May 2006.

Geng Limin , 55, Supervisor of Sinopec Corp., Director General of Supervision Department of Sinopec Corp., Vice Leader of Discipline Inspection Group for CPC Leading Group of Sinopec Group Company, Director General of Supervision Bureau of Sinopec Group Company. Mr. Geng is a senior administration engineer and obtained a college diploma. In February 2000, he was appointed as Deputy Director General of Supervision Department of Sinopec Corp. and Deputy Director General of Supervision Bureau of Sinopec Group Company; in January 2007, he was appointed as Deputy Secretary of CPC Committee, Secretary of Discipline Inspection Committee as well as Trade Union Chairman of Sinopec Chemical Products Sales Company; in August 2008, he was appointed as Director General of Supervision Department of Sinopec Corp. and Vice Leader of Discipline Inspection Group for CPC Leading Group of Sinopec Group Company and Director General of Supervision Bureau of Sinopec Group Company; and in May 2009, he was elected as Supervisor of Sinopec Corp.

Zou Huiping , 48, Supervisor of Sinopec Corp. Mr. Zou graduated from Jiangxi Institute of Finance and Economics in July 1986 specializing in trade economics. He is a professor level senior accountant. From November 1998 to February 2000, he served as Chief Accountant of Sinopec Group Guangzhou Petrochemical Company. From February 2000 to December 2001, he was Deputy Director General of Financial Assets Department of Sinopec Group Company. From December 2001 to March 2006, he was Deputy Director General of Finance Planning Department of Sinopec Group Company. In March 2006, he was Director General of Financial Assets Department of Sinopec Assets Management Co., Ltd. Since March 2006, he has been Director General of Audit Department of Sinopec Corp. Mr. Zou was elected as Supervisor of the Third Session of the Supervisory Board of Sinopec Corp. in May 2006.

Li Yonggui , 68, Independent Supervisor of Sinopec Corp. Mr. Li graduated from Shandong Institute of Finance and Economics in July 1965, majoring in treasury finance. He is a senior economist and CPA, and has long been engaged in tax management with extensive management experience in taxation. From February 1985 to December 1988, he was Deputy Director-General of Taxation Bureau of Ministry of Finance. He served as Chief Economist of State Administration of Taxation from December 1988 to April 1991. From April 1991 to February 1995, he served as Deputy Director-General of State Administration of Taxation. He was Chief Economist of State Administration of Taxation from February 1995 to September 2001. Mr. Li has been Chairman of Chinese Association of Certified Public Taxation Experts since April 2000. He has served as Vice Chairman of Chinese Association of Certified Accountants since November 2004. In July 2008, he was appointed as consultant of Chinese Association of Certified Public Taxation Experts. Mr. Li served as Independent Supervisor of the Second Session of Supervisory Board of Sinopec Corp. from April 2003 to May 2006; he was elected as Independent Supervisor of the Third Session of Supervisory Board of Sinopec Corp. in May 2006.

54
Liu Xiaohong , 55, Employee Representative Supervisor of Sinopec Corp. and Sinopec General Representative of Sinopec Corp. based in Hong Kong. Mr. Liu is a senior administration engineer and obtained a graduate degree from Graduate School. In February 1992, he was appointed as Deputy Director General of General Office of the former Sinopec Group Company; in December 1998, he was appointed as Deputy Director General of General Office of Sinopec Group Company; in December 2001, he was appointed as Director General of President’s Office of Sinopec Corp.; in February 2005, he was appointed as Director General of General Office of Sinopec Group Company; in September 2005, he was appointed again as Director General of President’s Office of Sinopec Corp.; in September 2009, he was appointed as General Representative of Sinopec Corp. based in Hong Kong; in May 2009, he was elected as Employee Representative Supervisor of Sinopec Corp.

Zhou Shiliang , 52, Employee Representative Supervisor of Sinopec Corp. and Director General of Personnel Departments of both Sinopec Corp. and Sinopec Group Company. Mr. Zhou is a professor level senior engineer and obtained a master degree. In February 2000, he was appointed as Deputy Director General of Yunnan-Guizhou-Guangxi Petroleum Exploration Bureau; in September 2000, he was appointed as President of Sinopec Yunnan-Guizhou-Guangxi Oilfield Company;in April 2002, he was appointed as Secretary of CPC Committee and Vice President in Sinopec South Exploration & Development Company; in April 2006, he was appointed as Secretary of CPC Committee and Deputy Director General in Sinopec Henan Petroleum Exploration Bureau; in November 2007, he was appointed as Director General of Sinopec Personnel Department of both Sinopec Corp. and Sinopec Group Company; and in May 2009, he was elected as Employee Representative Supervisor of Sinopec Corp.

Chen Mingzheng , 52, Employee Representative Supervisor of Sinopec Corp., Vice President of Sinopec Northwest Oilfield Company and Secretary of CPC Committee of Northwest Petroleum Bureau of Sinopec Group Company. Mr. Chen is a senior engineer and obtained a graduate degree from Graduate School. In November 2000, he was appointed as Deputy Director General of North China Petroleum Bureau under Sinopec Star Petroleum Co. Ltd.; in June 2003, he was appointed as Deputy Director General of North China Petroleum Bureau under Sinopec Group Company; in October 2004, he was appointed as Secretary of CPC Committee in North China Petroleum Bureau under Sinopec Group Company; in March 2008, he was appointed as Secretary of CPC Committee in Southwest Petroleum Bureau of Sinopec Group Company and Vice President of Sinopec Northwest Oilfield Company; in May 2009, he was elected as Employee Representative Supervisor of Sinopec Corp.

Su Wensheng , 53, Employee Representative Supervisor of Sinopec Corp. Mr. Su is a senior engineer and obtained a master degree. In September 1986, he was appointed as Deputy Secretary of CPC Committee and Secretary of Discipline Inspection Commission of Beijing Design Institute of former Sinopec Group Company; in November 1996, he was appointed as Secretary of CPC Committee of Beijing Design Institute of former Sinopec Group Company; in December 1998, he was appointed as Director General of Political and Ideological Department, and Deputy Secretary of CPC Committee directly affiliated to Sinopec Group Company; in December 2001, he was appointed concurrently as Executive Deputy Secretary of CPC Work Committee in Sinopec West New Region Exploration Headquarters; in October 2007, he serverd as Secretary of CPC Committee and Vice Chairman of Directors of Beijing Yanshan Petrochemical Company; and in April 2003, he was elected as Employee Representative Supervisor of Sinopec Corp.

Other Executive Officers

Name
Age
Positions with Sinopec Corp.
Wang Xinhua
54
CFO
Zhang Kehua
56
Vice President
Zhang Haichao
52
Vice President
Jiao Fangzheng
47
Vice President
Lei Dianwu
47
Vice President
Chen Ge
47
Secretary of the Board of Directors

Wang Xinhua , 54, CFO of Sinopec Corp. and Director General of Financial Department of Sinopec Corp. Mr. Wang is a professor level Senior accountant and obtained a university diploma. In January 2001, he was appointed as Deputy Director General of Finance & Assets Department of Sinopec Group Company; in December 2001, he was appointed as Deputy Director General of Finance & Planning Department of Sinopec Group Company; in October

55

2004, he was appointed as Director General of Finance & Planning Department of Sinopec Group Company; in May 2008, he was appointed as Director General of Financial Department of Sinopec Group Company; in March 2009, he was appointed as Director General of Financial Department of Sinopec Corp.; in May 2009, he was appointed as CFO of Sinopec Corp.
Zhang Kehua , 56, Vice President of Sinopec Corp. Mr. Zhang graduated from Shanghai Chemical Engineering University in January 1980 majoring in chemical and mechanical engineering. He is a senior engineer and had his master’s degree from University of Petroleum majoring in management science and engineering in December 2000. He was Deputy Manager of No. 3 Construction Company of the former Sinopec Group Company from February 1994 to April 1996. From April 1996 to December 1998, he was Deputy Director General (Deputy Manager of Sinopec Engineering Incorporation) of the Engineering Department of the former Sinopec Group Company. He was Deputy Director General of the former Engineering Department of Sinopec Group Company from December 1998 to December 2001 and was Deputy Director General of Engineering Department of Sinopec Group Company from December 2001 to September 2002. Mr. Zhang was Director General of Engineering Department of Sinopec Group Company from September 2002 to October 2004. Mr. Zhang has served as the Assistant to the President of Sinopec Group Company and Director General of Engineering Department since October 2004. Mr. Zhang has been Vice President of Sinopec Corp. since May 2006. From June 2007 to Present, he has been Director General of Engineering Dept. of Sinopec Corp.

Zhang Haichao , 52, Vice President of Sinopec Corp. Mr. Zhang graduated from Zhoushan Commercial and Technical School in December 1979, specializing in oil storage and transportation. He also graduated from Jilin Petrochemical Institute in July 1985 specializing in recycling of lubricating oil. From January 2001 to June 2002, he participated in the business administration program at Macau Science & Technology University. He is an economist. He served as Deputy General Manager of Zhejiang Petroleum Company from March 1998 to September 1999. He served as General Manager of Zhejiang Petroleum Company from September 1999 to February 2000, and has served as Manager of Sinopec Zhejiang Petroleum Company from February 2000 to September 2005. He has been Chairman of Sinopec-BP Zhejiang Petroleum Sales Co., Ltd. since April 2004. He was Secretary of the  Party Committee, Vice Chairman and Deputy General Manager of Sinopec Sales Co., Ltd. from October 2004 to November 2005. He was Secretary of Party Committee, Chairman and General Manager of Sinopec Sales Co., Ltd. from November 2005 to June 2006. He has been Chairman and General Manager of Sinopec Sales Co., Ltd. since June 2006. From December 2008, he acted as Chairman and President of Sinopec Sales Co., Ltd. He served as Employee Representative Supervisor of the Second Session of the Supervisory Board of Sinopec Corp. from April 2003 to November 2005. Mr. Zhang has been Vice President of Sinopec Corp. since November 2005.

Jiao Fangzheng , 47, Vice President of Sinopec Corp. Mr. Jiao won his bachelor’s degree in petroleum exploration and won his doctoral degree in natural gas engineering from Southwest Petroleum Institute respectively in July 1983 and November 2000. Mr. Jiao is a professor level senior engineer. From January 1999 to February 2000, he was Chief Geologist of Zhongyuan Petroleum Exploration Bureau of Sinopec Group Company. He then served as Deputy Manager and Chief Geologist of Zhongyuan Oilfield Company of Sinopec Group Company from February 2000 to February 2001. He was Vice President of Sinopec Exploration and Production Research Institute from July 2000 to March 2001. He then served as Deputy Director General of Sinopec Oilfield E & P Department from March 2001 to June 2004. Since June 2004, he served as Manager of the Northwest Company of Sinopec Group Company. Mr. Jiao has served as Vice President of Sinopec Corp. since October 2006.

Lei Dianwu , 47, Vice President of Sinopec Corp, Director General of Development & Planning Department of Sinopec Corp. Mr. Lei is a senior engineer and obtained a university diploma. In October 1995, he was appointed as Vice President of Yangzi Petrochemical Corporation; in December 1997, he was appointed as Director of Planning & Development Department in China Donglian Petrochemical Co., Ltd.; in May 1998, he was appointed as Vice President of Yangzi Petrochemical Corporation; in August 1998 he was appointed as Vice President in Yangzi Petrochemical Co., Ltd.; in March 1999, he was appointed temporarily as Deputy Director General of Development & Planning Department of Sinopec Group Company; in February 2000, he was appointed as Deputy Director General of Development & Planning Department of Sinopec Corp.; in March 2001, he was appointed as Director General of Development & Planning Department of Sinopec Corp.; in May 2009, he was appointed as Vice President of Sinopec Corp.

Chen Ge , 47, Secretary to the Board of Directors of Sinopec Corp. Mr. Chen graduated from Daqing Petroleum Institute in July 1983 majoring in petroleum refining, and then obtained his MBA degree from Dalian University of Science and Technology in July 1996. He is a senior economist. From July 1983 to February 2000, he worked in Beijing Yanshan Petrochemical Company. From February 2000 to December 2001, he was Deputy Director General of the Board Secretariat of Sinopec Corp. Mr. Chen has been Director General of the Board Secretariat since December 2001. Mr. Chen has been the Secretary to the Board of Directors of Sinopec Corp. since April 2003.

56
B.
COMPENSATION
Salaries of Directors, Supervisors and Members of the Senior Management
Our directors and supervisors who hold working posts with us and other senior management members receive their remuneration in the form of basic salary and performance rewards.
The following table sets forth the compensation on individual basis for our directors, supervisors and executive officers who receive compensation from us in 2009.
Name
Position with the Company
Remuneration paid by the Company in 2009
(RMB in thousand)
Directors
Su Shulin
Chairman
─
Wang Tianpu
Vice Chairman, President
726
Zhang Yaocang
Vice Chairman
─
Zhang Jianhua
Director, Senior Vice President
721
Wang Zhigang
Director, Senior Vice President
721
Cai Xiyou
Director, Senior Vice President
721
Cao Yaofeng
Director
─
Li Chunguang
Director
─
Dai Houliang
Director, Senior Vice President
721
Liu Yun
Director
─
Liu Zhongli
Independent Non-executive Director
240
Ye Qing
Independent Non-executive Director
140
Li Deshui
Independent Non-executive Director
240
Xie Zhongyu
Independent Non-executive Director
140
Chen Xiaojin
Independent Non-executive Director
140
Supervisors
Wang Zuoran
Chairman of the Board of Supervisors
─
Zhang Youcai
Vice Chairman, Independent Supervisor
240
Geng Limin
Supervisor
─
Zou Huiping
Supervisor
447
Li Yonggui
Independent Supervisor
240
Liu Xiaohong
Employee Representative Supervisor
318
Zhou Shiliang
Employee Representative Supervisor
322
Chen Mingzheng
Employee Representative Supervisor
387
Su Wensheng
Employee Representative Supervisor
450
Other Executive officers
Wang Xinhua
CFO
355
Zhang Kehua
Vice President
539
Zhang Haichao
Vice President
525
Jiao Fangzheng
Vice President
525
Lei Dianwu
Vice President
362
Chen Ge
Secretary of the Board of Directors
440

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C.
BOARD PRACTICE
We have three special board committees, namely, the audit committee, the strategy committee and the remuneration and evaluation committee. The majority of the members of the strategy committee and the remuneration and evaluation committee, and all members of the audit committee, are independent directors.  In addition, the audit committee shall have at least one independent director who is a financial expert.
The main responsibilities of the audit committee include:
·
to propose the appointment or replacement of the independent auditor;
·
to oversee the internal auditing system and its implementation;
·
to coordinate the communication between the internal auditing department and the independent auditor;
·
to examine and approve financial information and it disclosure; and
·
to examine the internal control system.
The main responsibilities of the strategy committee are to conduct research and put forward proposals on the long-term development strategy and significant investments.
The main responsibilities of the remuneration and evaluation committee include:
·
to research on evaluation criteria for directors and the president, to conduct their evaluations and make necessary suggestions; and
·
to research on and review the policies and proposals in respect of the remuneration of directors, supervisors, president, vice-president, Chief Financial Officer and secretary of the board of directors.
The members of our audit committee are Liu Zhongli, Li Deshui and Xie Zhongyu, all of whom are our Independent Non-executive Directors. Our Board has determined that Liu Zhongli qualifies as an audit committee financial expert.  The members of our strategy committee are Wang Tianpu, Ye Qing, Zhang Yaocang, Zhang Jianhua, Wang Zhigang, Dai Houliang, Li Deshui and Xie Zhongyu.  The members of our remuneration and evaluation committee are Ye Qing, Li Deshui, Chen Xiaojin and Li Chunguang.
Our directors have entered into directors service contracts with us and under such contracts, there is no severance pay arrangements for our directors.
D.
EMPLOYEES
As of December 31, 2007, 2008 and 2009, we had approximately 334,377, 358,304 and 371,333 employees, respectively. The following table sets forth the number of our employees by our business segments, their scope of work and their education as of December 31, 2009.
By Segment
Number of Employees
Percentage of Total Number of Employees (%)
Exploration and Production
142,869
38.4
Refining
83,511
22.5
Marketing and Distribution
66,424
17.9
Chemicals
68,991
18.6
Corporate and Others
9,538
2.6
Total
371,333
100.0

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By Employee's Scope of Work
Number of Employees
Percentage of Total Number of Employees (%)
Production
192,752
51.9
Sales
58,269
15.7
Technical
49,181
13.2
Finance
9,847
2.7
Administration
29,706
8.0
Others
31,578
8.5
Total
371,333
100.0

By Education
Number of Employees
Percentage of Total Number of Employees (%)
Master's degree and above
7,718
2.1
University
73,176
19.7
Tertiary education
78,055
21.0
Technical/polytechnic school
33,002
8.9
Secondary, technical/polytechnic school or below
179,382
48.3
Total
371,333
100.0

We have trade unions that protect employee rights, organize educational programs, assist in the fulfillment of economic objectives, encourage employee participation in management decisions, and assist in mediating disputes between us and individual employees. We have not been subject to any strikes or other labor disturbances that have interfered with our operation, and we believe that our relations with our employees are good.
The total remuneration of our employees includes salary, performance bonuses and allowances. Employees also receive certain subsidies in housing, health services, education and other miscellaneous items.
Since 2001, we have implemented an employee reduction plan by means of retirement, voluntary resignation and/or redundancy to enhance our efficiency and operating income, and by December 31, 2009, a total of 167,817 employees have retired.
E.
SHARE OWNERSHIP
Our directors, supervisors and senior officers do not have share ownership in us.
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
MAJOR SHAREHOLDERS
The following table sets forth information regarding our 5% or more shareholders as of April 23, 2010.
Shareholder
Number of
Shares Owned
(in millions)
Percentage of Ownership (%)
Sinopec Group Company .
65,758.04
75.84

As of April 23, 2010, 1,015,144,800 H shares were registered in the name of a nominee of Citibank, N.A., the depositary under our ADS deposit agreement. Citibank, N.A. has advised us that, as of April 23, 2010, 10,151,488 ADSs, representing 1,015,144,800 H shares, were held of record by Cede & Co. and 49 other registered shareholders domiciled in and outside of the United States. We have no further information as to our shares held, or beneficially owned, by U.S. persons.
59
B.
RELATED PARTY TRANSACTIONS
Sinopec Group Company owns 75.84% of our outstanding equity as of April 23, 2010. Sinopec Group Company will be able to exercise all the rights of a controlling shareholder, including the election of directors and voting in respect of amendments to our articles of association. Sinopec Group Company, as our controlling shareholder, will be subject to certain minority shareholder protection provisions under our articles of association.
We have engaged from time to time and will continue to engage in a variety of transactions with Sinopec Group Company, which provide a number of services to us, including ancillary supply, transport, educational and community services. The nature of our transactions with Sinopec Group Company is governed by a number of service and other contracts between Sinopec Group Company and us.  A discussion of these agreements and arrangements is set forth under the heading “Item 7 - Major Shareholders and Related Party Transactions - Related Party Transactions” in our annual report on Form 20-F filed with the Securities and Exchange Commission on October 10, 2000, April 13, 2007 and May 20, 2009, respectively, and under the heading “Item 4 – Information on the Company – History and Development of the Company” of this annual report.
On August 21, 2009, we entered into certain agreements with Sinopec Group Company, pursuant to which certain related party transaction agreements between the parties were amended. Pursuant to the Continuing Connected Transactions Second Supplemental Agreement dated August 21, 2009 between Sinopec Group Company and us, the term of each of the Mutual Supply Agreement, the Community Services Agreement and the Intellectual Property License Agreements, dated June 3, 2000 and as amended and supplemented from time to time, was extended to December 31, 2012, December 31, 2012 and December 31, 2019, respectively. Pursuant to the Land Use Rights Leading Agreement Second Amendment Memo dated August 21, 2009 between Sinopec Group Company and us, , the members of Sinopec Group Company agreed to lease to us certain parcels of land with an area of approximately 416 million square meters.
Please also see Note 31 of our consolidated financial statements included elsewhere in this annual report for a detailed discussion of our related party transactions. The aggregate amount of connected transactions we actually incurred during 2009 was RMB 297.7 billion, of which, expenses amounted to RMB 135.0 billion, and revenues amounted to RMB 162.8 billion (including RMB 162.7 billion of sales of goods and services, RMB 38 million of interest income, RMB 45 million of agency commission receivable). In 2009, the products and services provided by Sinopec Group Company and its subsidiaries, including procurement, storage, exploration and production and other services to us amounted to RMB 96.2 billion, representing 7.63% of our operating expenses for 2009. The auxiliary and community services provided by Sinopec Group Company to us amounted to RMB 3.3 billion, representing 0.26% of our operating expenses for 2009. In 2009, our product sales to Sinopec Group Company amounted to RMB 49.6 billion, representing 3.69% of our operating revenues. We also paid rentals of RMB 419 million to Sinopec Group Company in 2009 pursuant to the Leasing Agreement for Properties.
C.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See F-pages following Item 19.
Legal Proceedings
We are involved in certain judicial and arbitral proceedings before Chinese courts or arbitral bodies concerning matters arising in connection with the conduct of our businesses. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition or results of operations.
Dividend Distribution Policy
Our board of directors will determine the payment of dividends, if any, with respect to our shares on a per share basis. Any final dividend for a financial year shall be subject to shareholders' approval. The board may declare interim and special dividends at any time under general authorization by a shareholders' ordinary resolution. A decision to declare or to pay any dividends in the future, and the amount of any dividends, will depend on our results

60

of operations, cash flows, financial condition, the payment by our subsidiaries of cash dividends to us, future prospects and other factors which our directors may determine are important.
For holders of our H shares, cash dividend payments, if any, shall be declared by our board of directors in Renminbi and paid in HK dollars. The depositary will convert the HK dollar dividend payments and distribute them to holders of ADSs in US dollars, less expenses of conversion.
In addition to cash, dividends may be distributed in the form of shares. Any distribution of shares, however, must be approved by special resolution of the shareholders. Dividends in the form of shares will be distributed to the depositary and, except as otherwise described in the Deposit Agreement, will be distributed by the depositary in the form of additional ADSs, to holders of ADSs.
Dividends may be paid only out of our distributable profits (less allocations to the statutory surplus reserve funds which are 10% of our net income determined in accordance with the PRC Accounting Standards for Business Enterprises ("ASBE") and the discretionary surplus reserve funds) and may be subject to PRC withholding tax. Our articles of association limit our distributable profits to the lower of the amount determined in accordance with the ASBE and IFRS. Subject to the above, we currently expect that we will distribute as dividends up to 40% of our distributable profits.
In accordance with the board resolution adopted on March 26, 2010, our board has proposed dividend of RMB 0.18 per ordinary share for the year ended December 31, 2009. After deducting the interim dividends distribution of RMB 0.07 per ordinary share, the year end dividend is RMB 0.11 per ordinary share. The total dividend to be paid amounted to approximately RMB 9.54 billion. The resolution is subject to the approval by the general shareholders’ meeting.
B.
SIGNIFICANT CHANGES
None.
ITEM 9.
THE OFFER AND LISTING
A.
OFFER AND LISTING DETAILS
Not applicable, except for Item 9A (4) and Item 9C.
Our H Shares have been listed on the Hong Kong Stock Exchange (Code: 0386), and our ADSs, each representing 100 H Shares, have been listed on the New York Stock Exchange and the London Stock Exchange under the symbol "SNP", since we completed our initial public offering on October 19, 2000. Prior to that time, there was no public market for our H Shares. The Hong Kong Stock Exchange is the principal non-U.S. trading market for our H Shares.  Our publicly traded domestic shares, or A shares, are listed on the Stock Exchange of Shanghai since August 8, 2001 (Code: 600028).
The following table sets forth, for the periods indicated, the high and low closing prices per H Share, as reported on the Stock Exchange of Hong Kong, per ADS, as reported on the New York Stock Exchange and per A share, as reported on the Stock Exchange of Shanghai.
The Stock Exchange of Hong Kong
The New York Stock Exchange
The Shanghai Stock Exchange
Period
High
Low
High
Low
High
Low
Past 6 months
(HK dollar per H share)
(US dollar per ADS)
(RMB per A share)
April (up to April 23)
6 .70
6.35
87.40
82.27
12.00
10.33
March
6.38
6.07
82.34
78.72
12.00
11.04
February 6.23 5.75 80.51 73.86 11.34 10.82
2010
January 6.82 6.08 88.20 77.69 13.90 11.42
December 6.91 6.40 88.30 82.95 14.14 12.10
November 6.89 6.35 90.80 83.68 12.76 11.73
2009
October 7.06 6.37 92.16 82.05 12.19 11.46


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Quarterly Data
2009
Fourth Quarter 7.06 6.35 92.16 82.05 14.14 11.46
Third Quarter 7.15 5.87 93.50 74.76 15.42 10.78
Second Quarter 6.50 5.15 85.82 67.45 10.84 8.78
First Quarter 5.26 3.65 67.70 47.08 9.27 7.06
2008
Fourth Quarter 6.24 3.76 78.35 50.57 10.19 6.67
Third Quarter 8.38 5.89 110.36 73.26 11.88 8.7
Second Quarter 8.71 6.78 112.56 86.65 13.81 9.91
First Quarter 11.66 6.14 146.28 81.43 24.38 11.38
2007
Fourth Quarter 12.96 9.18 178.83 118.19 28.49 19.23
Third Quarter 9.71 6.93 124.90 90.00 18.99 12.33
Second Quarter 9.18 6.63 117.44 85.78 15.20 10.04
First Quarter 7.32 5.67 92.23 72.92 11.20 8.37
Annual Data
2009
7.15 3.65 93.50 47.08 15.42 7.06
2008
11.66 3.76 146.28 50.57 24.38 6.67
2007
12.96 5.67 178.83 72.92 28.49 8.37
2006
7.20 3.775 92.64 47.40 9.15 4.58
2005
3.90 2.75 50.58 35.55 4.66 3.25
___________
Source: Bloomberg

ITEM 10.
ADDITIONAL INFORMATION
A.
SHARE CAPITAL
Not applicable.
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
The following is a summary of certain provisions of our articles of association and its appendices, as amended, the Company Law of the PRC (2006) and certain other applicable laws and regulations of the PRC. You and your advisors should refer to the text of our articles of association, as amended, and to the texts of applicable laws and regulations for further information.
Objects and Purposes
We are a joint stock limited company established in accordance with the Company Law and certain other laws and regulations of the PRC. We are registered with the PRC State Administration of Industry and Commerce with business license number 100000000032985. Article 12 of our articles of association provides that our scope of businesses includes, among other things, exploration, exploitation, storage, pipeline transportation, land transportation, water transportation, sales of oil and natural gas; oil refining; wholesaling and retailing of gasoline, kerosene and diesel oil(for subsidiaries only); sales of lubricant, liquid gas, fuel oil, solvent naphtha and asphalt; the production, sales, storage land transportation and water transportation of ethylene, propylene, butadiene, naphtha, heavy oil, ethylene glycol, PTA, beta-lactam, dacron, nitrilon, rubber and other chemical raw materials and products; production of chemical fertilizer; production of electricity; operation of 24-hour stores; shaped packing foods, retailing of cigarettes, automobile decorations (for subsidiaries only), automobile cleaning; production, supervision of manufacturing, installation of oil and petrochemical machinery and equipment; purchase and sales of oil and petrochemical raw and auxiliary materials, equipment and parts; technology and information, research, development,

62

application and consultation of alternative energy products; self-operation of and acting as agency for the import and export of various commodities and technologies other than those restricted or prohibited by the state from import and export; contractor of overseas mechanical, electronics, petrochemical projects and domestic international bid-inviting projects; export of equipments and materials required for the aforementioned overseas projects; dispatch of labor required for the aforementioned overseas projects.
Directors
Our directors shall be elected at our shareholders' general meeting. Cumulative voting shall be adopted for the election of directors if a controlling shareholder controls 30% or more of our shares. Details of the cumulative voting mechanism are set forth in Article 59 of the Rules and Procedures for the Shareholders' General Meetings that is an appendix to, and forms an integral part of, our articles of association. Our directors shall be elected for a term of three years and may serve consecutive terms upon re-election, except that independent directors may only serve a maximum of two terms. Our directors are not required to hold any shares in us, and there is no age limit requirement for the retirement or non-retirement of our directors.
Where a director is materially interested, directly or indirectly, in a contract, transaction or arrangement (including any proposed contract, transaction or arrangement) with us, he or she shall declare the nature and extent of his or her interests to the board of directors at the earliest opportunity, whether or not such contract, transaction or arrangement is otherwise subject to the approval of the board. A director shall not vote, and shall not be counted in the quorum of the meeting, on any resolution concerning any contract, transaction or arrangement where the director owns material rights or interests therein. A director is deemed to be interested in a contract, transaction or arrangement in which his associate (as defined by the Listing Rule of the Hong Kong Stock Exchange) is interested.
Unless the interested director discloses his interests to the board and the contract, transaction or arrangement in which the director is materially interested is approved by the board at a meeting in which the director neither votes nor is not counted in the quorum, such contract, transaction or arrangement shall be voidable by us except with respect to a bona fide party thereto who does not have notice of the director's interests.
We are prohibited from making loans or providing guarantees to our directors and their associates except where such loan or guarantee is to meet expenditure requirement incurred or to be incurred by the director for the purposes of the company or for the purpose of enabling the director to perform his or her duties properly in accordance with the terms of a service contract approved by the shareholders in a general meeting.
The board of directors shall examine and approve the amount of the long-term loans for the current year according to the annual investment plan as approved by the shareholders’ general meeting. The chairman of the board of directors is authorized to make adjustments of no more than 10% of the total amount of the long-term loans as approved by the board of directors for the current year. Within the total amount of the long-term loans as approved by the board of directors, the chairman of the board of directors is authorized to approve and execute individual long-term loan agreement with the loan amount exceeding RMB1 billion, and the president is authorized to approve and execute individual long-term loan agreement with the loan amount not exceeding RMB1 billion. Within the total amount of the working capital loans for the current year as approved by the board of directors, the chairman of the board of directors is authorized to execute the overall short-term loan facility agreement for raising working capitals as we need.
Matters relating to the remuneration of our directors shall be determined by the shareholders' general meeting.
Dividends
A distribution of final dividends for any financial year is subject to shareholders’ approval. Except as otherwise decided by Shareholders’ meeting, the board of directors may make decision on the distribution of interim dividends.  Except as otherwise provided by laws and regulations, the sum of interim dividends shall not exceed 50 percents of the net profit for the half year interim period. Dividends may be distributed in the form of cash or shares. A distribution of shares, however, must be approved by special resolution of the shareholders.
Dividends may only be distributed after allowance has been made for:
·
recovery of losses, if any;
·
allocations to the statutory surplus  reserve fund; and
·
allocations to a discretionary surplus reserve fund if approved by the shareholders.

63
The allocations to the statutory surplus reserve fund shall be 10% of our after-tax profits of the current year determined in accordance with ASBE.
The articles of association require us to appoint on behalf of the holders of H shares a receiving agent which is registered as a trust corporation under the Trustee Ordinance of Hong Kong to receive dividends declared by us in respect of the H shares on behalf of such shareholders. The articles of association require that cash dividends in respect of H shares be declared in Renminbi and paid by us in HK dollars. The depositary of our ADSs will convert such proceeds into U.S. dollars and will remit such converted proceeds to our holders of ADSs. If we record no profit for the year, we may not normally distribute dividends for the year.
Dividend payments may be subject to PRC withholding tax.
Voting Rights and Shareholders’ Meetings
Our board of directors shall convene a shareholders’ annual general meeting once every year and within six months from the end of the preceding financial year. Our board shall convene an extraordinary general meeting within two months of the occurrence of any one of the following events:
·
where the number of directors is less than the number stipulated in the PRC Company Law or two-thirds of the number specified in our articles of association;
·
where our unrecovered losses reach one-third of the total amount of our actually paid-in share capital;
·
where shareholder(s) holding 10% or more of our issued and outstanding voting shares request(s) in writing the convening of an extraordinary general meeting;
·
whenever our board deems necessary or our board of supervisors so requests; or
·
circumstances provided in the articles of association.
Meetings of a special class of shareholders must be called in certain enumerated situations when the rights of the holders of such class of shares may be modified or adversely affected as discussed below. Proposals made by the board of directors, the board of supervisors or shareholder(s) holding 3% or more of the total number of voting shares shall be included in the agenda for the relevant general meeting if they are matters which fall within the scope of the functions and powers of shareholders in general meeting. Shareholder(s) holding 3% or more of the total shares of the Company may put forward interim motions by written proposals to the convener 10 days before the shareholders’ general meeting. The convenor shall publish supplementary notice to announce the interim motion within two days upon receiving.
All shareholders’ meetings must be convened by our board of directors by written notice given to shareholders no less than 45 days before the meeting, by our board of supervisors or certain qualified shareholders in case a shareholders’ meeting is not convened by our board of directors and board of supervisors. Shareholder(s) holding 10% or more the total number of shares of the Company have the right to convene and chair the interim shareholders' general meeting or class shareholders' meeting in accordance with the provisions in laws, administrative rules and the articles of association, in the event that the board of directors and the board of supervisors fail to convene and chair such meeting upon demand made by such shareholders. Based on the written replies received by us 20 days before a shareholders’ meeting, we shall calculate the number of voting shares represented by shareholders who have indicated that they intend to attend the meeting. Where the number of voting shares represented by those shareholders amount to more than one-half of our total voting shares, we may convene the shareholders’ general meeting (regardless of the number of shareholders who actually attend). Otherwise, we shall, within five days, inform the shareholders again of the motions to be considered and the date and venue of the meeting by way of public announcement. After the announcement is made, the shareholders’ meeting may be convened. The accidental omission by us to give notice of a meeting to, or the non-receipt of notice of a meeting by, a shareholder will not invalidate the proceedings at that shareholders’ meeting.

64

Shareholders at meetings have the power, among other things, to approve or reject our profit distribution plans, annual budget, financial statements, increase or decrease in share capital, issuance of debentures, merger or liquidation and any amendment to our articles of association.  Shareholders of the shares which the Company issues to foreign investors for subscription in foreign currencies possess the same rights and undertake the same obligations as those of the shares which the Company issues to domestic investors for subscription in Renminbi.  In addition, the rights of a class of shareholders may not be modified or abrogated, unless approved by a special resolution of all shareholders at a general shareholders’ meeting and by a special resolution of shareholders of that class of shares at a separate meeting. Our articles of association enumerate, without limitation, certain amendments which would be deemed to be a modification or abrogation of the rights of a class of shareholders, including increasing or decreasing the number of shares of a class disproportionate to increases or decreases of other classes of shares, removing or reducing rights to receive dividends in a particular currency or creating shares with voting or equity rights superior to shares of such class.
Cumulative voting in accordance with the relevant laws and regulations in effect is adopted for the election of directors and supervisors. For all other matters, each share is entitled to one vote on all such matters submitted to a vote of our shareholders at all shareholders’ meetings, except for meetings of a special class of shareholders where only holders of shares of the affected class are entitled to vote on the basis of one vote per share of the affected class.
Shareholders are entitled to attend and vote at meetings either in person or by proxy. Proxies must be in writing and deposited at our legal address, or such other place as is specified in the meeting notice, no less than 24 hours before the time for holding the meeting at which the proxy proposes to vote or the time appointed for the passing of the relevant resolution(s). When the instrument appointing a proxy is executed by the shareholder’s attorney-in-fact, such proxy when deposited must be accompanied by a notary certified copy of the relevant power of attorney or other authority under which the proxy was executed.
Except for those actions discussed below which require supermajority votes (‘‘special resolutions’’), resolutions of the shareholders are passed by a simple majority of the voting shares held by shareholders who are present in person or by proxy. Special resolutions must be passed by or more than two-thirds of the voting rights represented held by shareholders who are present in person or by proxy.
The following decisions must be adopted by special resolution:
·
an increase or reduction of our share capital or the issue of shares, including stock distributions, of any class, warrants and other similar securities;
·
issuance of debentures;
·
our division, merger, dissolution and liquidation; (Shareholders who object to a proposed division or merger are entitled to demand that either we or the shareholders who approved the merger purchase their shares at a fair price.)
·
amendments to our articles of association and its appendices;
·
change of our company form;
·
acquisition or disposal of material assets or provision of material guarantee within one year, with the value exceeding 30% of our latest audited total assets;
·
any stock incentive plan;
·
any other matters required by laws and regulations or our articles of association and its appendices or considered by the shareholders in a general meeting and which they have resolved by way of an ordinary resolution to be of a nature which may have a material impact on us and should be adopted by special resolution.
All other actions taken by the shareholders, including the appointment and removal of our directors and supervisors and the declaration of cash dividend payments, will be decided by an ordinary resolution of the shareholders. The listing agreement between us and the Hong Kong Stock Exchange (the ‘‘Listing Agreement’’)

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provided that we may not permit amendments to certain sections of the articles of association which have been mandated by the Hong Kong Stock Exchange. These sections include provisions relating to:
·
varying the rights of existing classes of shares;
·
voting rights;
·
our power to purchase our own shares;
·
rights of minority shareholders; and
·
procedure on liquidation.
In addition, certain amendments to the articles of association require the approval and consent of the relevant PRC authorities.
Any shareholder resolution which is in violation of any laws or administrative regulations of the PRC will be null and void subject to statutory procedures.
Liquidation Rights
In the event of our liquidation, the H shares will rank pari passu with the domestic ordinary shares, and payment of debts out of our remaining assets shall be made in the order of priority prescribed by applicable laws and regulations or, if no such standards exist, in accordance with such procedure as the liquidation committee which has been appointed either by us or the People’s Court of the PRC may consider to be fair and reasonable. After payment of debts, we shall distribute the remaining property to shareholders according to the class and proportion of their shareholders.
Further Capital Call
Shareholders are not liable to make any further contribution to the share capital other than according to the terms, which were agreed by the subscriber of the relevant shares at the time of subscription.
Increases in Share Capital and Preemptive Rights
The articles of association require the approval by a special resolution of the shareholders and by special resolution of holders of domestic ordinary shares and oversea-listed foreign invested shares at separate shareholder class meetings be obtained prior to authorizing, allotting, issuing or granting shares, securities convertible into shares or options, warrants or similar rights to subscribe for any shares or such convertible securities. No such approval is required if, but only to the extent that:
·
we issue domestic ordinary shares and/or overseas-listed foreign-invested shares, either separately or concurrently, in numbers not exceeding 20% of the number of domestic ordinary shares and overseas-listed foreign-invested shares then in issue, respectively, in any 12-month period, as approved by a special resolution of the shareholders; or
·
if our plans for issuing domestic ordinary shares and overseas-listed foreign-invested sharesupon its establishment are implemented within fifteen months of the date of approval by the China Securities Regulatory Commission.
New issues of shares must also be approved by the relevant PRC authorities.
Reduction of Share Capital and Purchase by Us of Our Shares and General Mandate to Repurchase Shares
We may reduce our registered share capital only upon obtaining the approval of the shareholders by a special resolution and, in certain circumstances, of relevant PRC authorities. The number of H shares, which may be purchased is subject to the Hong Kong Takeovers and Share Repurchase Codes.

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Restrictions on Large or Controlling Shareholders
Our articles of association provide that, in addition to any obligation imposed by laws and administration regulations or required by the listing rules of the stock exchanges on which our H shares are listed, a controlling shareholder shall not exercise his voting rights in a manner prejudicial to the interests of the shareholders generally or of some part of the shareholders:
·
to relieve a director or supervisor from his or her duty to act honestly in our best interests;
·
to approve the expropriation by a director or supervisor (for his or her own benefit or for the benefit of another person) of our assets in any way, including, without limitation, opportunities which may benefit us; or
·
to approve the expropriation by a director or supervisor (for his or her own benefit or for the benefit of another person) of the individual rights of other shareholders, including, without limitation, rights to distributions and voting rights (save according to a restructuring of our company which has been submitted for approval by the shareholders in a general meeting in accordance with our articles of association and its appendices).
A controlling shareholder, however, will not be precluded by our articles of association or any laws and administrative regulations or the listing rules of the stock exchanges on which our H shares are listed from voting on these matters.
A controlling shareholder is defined by our articles of association as any person who acting alone or in concert with others:
·
is in a position to elect half or more of the board of directors;
·
has the power to exercise, or to control the exercise of, 30% or more of our voting rights;
·
acting separately or in concert with others, holds 30% or more of our issued and outstanding shares,; or
·
acting separately or in concert with others, has de facto control of us in any other way.
As of the date of this annual report, Sinopec Group Company is and will be our only controlling shareholder.
Disclosure
The Listing Agreement imposes a requirement on us to keep the Hong Kong Stock Exchange, our shareholders and other holders of our listed securities informed as soon as reasonably practicable of any information relating to us and our subsidiaries, including information on any major new developments which are not public knowledge, which:
·
is necessary to enable them and the public to appraise the position of us and our subsidiaries;
·
is necessary to avoid the establishment of a false market in its securities; and
·
might be reasonably expected materially to affect market activity in and the price of its securities.
There are also requirements under the Listing Rules for us to obtain prior shareholders’ approval and/or to disclose to shareholders details of certain acquisitions or disposals of assets and other transactions (including transactions with controlling shareholders).
Sources of Shareholders’ Rights
The PRC’s legal system is based on written statutes and is a system in which decided legal cases have little precedent value. The PRC’s legal system is similar to civil law systems in this regard. In 1979, the PRC began the process of developing its legal system by undertaking to promulgate a comprehensive system of laws. In December 1993, the Standing Committee of the 8th National People’s Congress adopted the PRC Company Law. On October 27,

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2005, the PRC Company law was amended by the Standing Committee of the 10 th National People’s Congress, and came into force on January 1, 2006. The amended PRC Company Law enhanced the protection of shareholders’ rights primarily in the following regards:
·
Shareholders holding 10 percent or more of the shares of the company are entitled to petition the court to dissolve the company if (i) the company is in serious operational difficulties; (ii) its continuing existence will seriously prejudice the interests of the shareholders; and (iii) such difficulties cannot be resolved through any other means;
·
Shareholders holding 1 percent or more of the shares of the company for more than 180 consecutive days are entitled to request the board of supervisors (in terms of directors and senior management) or the board of directors (in terms of supervisors) to bring legal proceedings, or bring legal proceedings in their own name on behalf of the company where it is in emergency and the company will be subject to irreparable loss if not to do so, against directors, supervisors or senior management who fail to comply with the laws and regulations or the company’s articles of association in the course of performing their duties and cause loss to the company;
·
Shareholders who oppose the company’s decision on merger or separation are entitled to request the company to repurchase their shares; and
·
Shareholders holding 10 percent or more of the voting rights of the company are entitled to convene a shareholders’ meeting.
Currently, the primary sources of shareholder rights are our articles of association, as amended, the PRC Company Law and the Listing Rules of the Hong Kong Stock Exchange, which, among other things, impose certain standards of conduct, fairness and disclosure on us, our directors and our controlling shareholder, i.e., Sinopec Group Company. To facilitate the offering and listing of shares of PRC companies overseas, and to regulate the behavior of companies whose shares are listed overseas, the State Council Securities Committee and the State Commission for Restructuring the Economic System issued on August 27, 1994 the Mandatory Provisions for articles of association of Company Listing Overseas (the ‘‘Mandatory Provisions’’). These Mandatory Provisions become entrenched in that, once they are incorporated into the articles of association of a PRC company, any amendment to those provisions will only become effective after approval by the State-owned Assets Supervision and Administration Commission of the State Council. The Listing Rules require a number of additional provisions to the Mandatory Provisions to be included in the articles of association of PRC companies listing H shares on the Hong Kong Stock Exchange (the ‘‘Additional Provisions’’). The Mandatory Provisions and the Additional Provisions have been incorporated into our articles of association.
In addition, upon the listing of and for so long as the H shares are listed on the Hong Kong Stock Exchange, we will be subject to those relevant ordinances, rules and regulations applicable to companies listed on the Hong Kong Stock Exchange, including the Listing Rules of the Hong Kong Stock Exchange, the Securities (Disclosure of Interests) Ordinance (the ‘‘SDI Ordinance’’), the Securities (Insider Dealing) Ordinance and the Hong Kong Codes on Takeovers and Mergers and Share Repurchases (the ‘‘Hong Kong Takeovers and Repurchase Codes’’).
Unless otherwise specified, all rights, obligations and protections discussed below derive from our articles of association and/or the PRC Company Law.
Enforceability of Shareholders’ Rights
There has not been any public disclosure in relation to the enforcement by holders of H shares of their rights under constitutive documents of joint stock limited companies or the PRC Company Law or in the application or interpretation of the PRC or Hong Kong regulatory provisions applicable to PRC joint stock limited companies.
In most states of the United States, shareholders may sue a corporation ‘‘derivatively’’. A derivative suit involves the commencement by a shareholder of a corporate cause of action against persons (including corporate officers, directors or controlling shareholders) who have allegedly wronged the corporation, where the corporation itself has failed to enforce such claim against such persons directly. Such action is brought based upon a primary right of the corporation, but is asserted by a shareholder on behalf of the corporation. The PRC company law as amended in October 2005 and effective in January 2006 has also granted shareholders with the rights to bring such derivative suits.

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Our articles of association provide that all differences or claims, arising from any provision of our articles of association, any right or obligation conferred or imposed by the PRC Company Law or any other relevant law or administrative regulation which concerns our affairs:
·
between a holder of overseas-listed foreign-invested shares and us;
·
between a holder of overseas-listed foreign-invested shares and any of our directors, supervisors, general managers, deputy general managers or other senior officers; or
·
between a holder of overseas-listed foreign-invested shares and a holder of domestic ordinary shares
must be referred to arbitration at either the China International Economic and Trade Arbitration Commission in the PRC or the Hong Kong International Arbitration Center, and the laws of the PRC shall apply, save as otherwise provided in the laws and administrative regulations. Our articles of association provide that such arbitration will be final and conclusive. In June 1999, an arrangement was made between the People’s Courts of the PRC and the courts of Hong Kong to mutually enforce arbitration rewards rendered in the PRC and Hong Kong according to their respective laws. This new arrangement was approved by the Supreme Court of the PRC and the Hong Kong Legislative Council and became effective on February 1, 2000. We have provided an undertaking to the United States Securities and Exchange Commission that, at such time, if any, as all applicable laws and regulations of the PRC and (unless our H shares are no longer listed on the Hong Kong Stock Exchange) all applicable regulations of the Stock Exchange of Hong Kong Ltd. shall not prohibit, and to the extent Section 14 under the United States Securities Act of 1933, as amended, so requires, our board of directors shall propose an amendment to the articles of association which would permit shareholders to adjudicate disputes arising between our shareholders and us, our directors, supervisors or officers by means of judicial proceedings.
The holders of H shares will not be able to bring actions on the basis of violations of the Listing Rules and must rely on the Hong Kong Stock Exchange to enforce its rules. The SDI Ordinance establishes certain obligations in relation to disclosure of shareholder interests in Hong Kong listed companies, the violation of which is subject to prosecution by the Securities and Futures Commission of Hong Kong. The Hong Kong Takeovers and Repurchase Codes do not have the force of law and are only standards of commercial conduct considered acceptable for takeover and merger transactions and share repurchases in Hong Kong as established by the Securities and Futures Commission and the securities and futures industry in Hong Kong.
We have appointed our subsidiary in the U.S., SINOPEC-USA Co., Ltd., 410 Park Avenue, 22nd Fl., New York, NY 10022, USA, as our agent to receive service of process with respect to any action brought against us in certain courts in New York under the United States federal and New York State’s securities laws. However, as the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts within the United States, the United Kingdom, Japan or most other the Organization for Economic Cooperation and Development countries, administrative actions brought by regulatory authorities, such as the Commission, and other actions which result in foreign court judgments, could (assuming such actions are not required by PRC law and the articles of association to be arbitrated) only be enforced in the PRC on a reciprocal basis or according to relevant international treaty to which China is a party if such judgments or rulings do not violate the basic principles of the law of the PRC or the sovereignty, security and public interest of the society of the PRC, as determined by a People’s Court of the PRC which has the jurisdiction for recognition and enforcement of judgments. We have been advised by our PRC counsel, Haiwen & Partners, that there is certain doubt as to the enforceability in the PRC of actions to enforce judgments of United States courts arising out of or based on the ownership of H shares or ADSs, including judgments arising out of or based on the civil liability provisions of United States federal or state securities laws.
Restrictions on Transferability and the Share Register
Our H shares shall only be traded among investors who are not PRC persons and may not be sold to PRC investors. There are no restrictions on the ability of investors who are not PRC residents to hold our H shares.
As provided in the articles of associations we may refuse to register a transfer of H shares unless:
·
any relevant transfer fee is paid;
·
the instrument of transfer is only related to H shares listed in Hong Kong;

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·
the instrument of transfer is accompanied by the share certificates to which it relates, or such other evidence is given as may be reasonably necessary to show the right of the transferor to make the transfer;
·
the stamp duty which is chargeable on the instrument of transfer has already been paid;
·
if it is intended that the shares be transferred to joint owners, the maximum number of joint owners shall not be more than four (4); and
·
the Company does not have any lien on the relevant shares.
We are required to keep a register of our shareholders which shall be comprised of various parts, including one part which is to be maintained in Hong Kong in relation to H shares to be listed on the Hong Kong Stock Exchange. Shareholders have the right to inspect and, for a nominal charge, to copy the share register. No transfers of ordinary shares shall be recorded in our share register within 30 days prior to the date of a shareholders’ general meeting or within 5 days prior to the record date established for the purpose of distributing a dividend.
We have appointed HKSCC Registrars Limited to act as the registrar of our H shares. This registrar maintains our register of holders of H shares at our offices in Hong Kong and enters transfers of shares in such register upon the presentation of the documents described above.
C.
MATERIAL CONTRACTS
We have not entered into any material contracts other than in the ordinary course of business and other than those described under Item 4.  Information on the Company, Item 7 - Major Shareholders and Related Party Transactions or elsewhere in this Form 20-F.
D.
EXCHANGE CONTROLS
The existing foreign exchange regulations have significantly reduced government foreign exchange controls for transactions under the current account, including trade and service related foreign exchange transactions and payment of dividends. We may undertake current account foreign exchange transactions without prior approval from the State Administration of Foreign Exchange by producing commercial documents evidencing such transactions, provided that they are processed through Chinese banks licensed to engage in foreign exchange transactions. The PRC government has stated publicly that it intends to make the Renminbi freely convertible in the future. However, we cannot predict whether the PRC government will continue its existing foreign exchange policy and when the PRC government will allow free conversion of Renminbi to foreign currency.
Foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures.
On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar.  Under the new policy, the Renminbi is permitted to fluctuate within a band against a basket of certain foreign currencies.  This change in policy resulted initially in an approximately 2.0% appreciation in the value of the Renminbi against the U.S. dollar.  Since the adoption of this new policy, the value of Renminbi against the U.S. dollar has fluctuated on a daily basis within narrow ranges, but overall has further strengthened against the U.S. dollar.  On January 4, 2006, the PBOC authorized the China Foreign Exchange Trade System to publish the exchange rate of the RMB against the US dollar, the euro, the Japanese yen, and the HK dollar at 9:15 am of each business day, which would be the medium exchange rate of RMB for transactions on the interbank spot foreign exchange market (over-the-counter transactions and automatic price-matching transactions) as well as transactions over bank counters. We cannot assure that such exchange rate would not fluctuate greatly. In addition, any significant revaluation of the Renminbi may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on, our ADSs in foreign currency terms. We do not currently and will not plan to hedge against the risk of exchange rate fluctuation. Information relating to the exchange risk, exchange rate and hedging activities is presented in “Item 11. Qualitative and Quantitative Disclosures about Market risk ¾ Foreign Exchange Rate Risk”.

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E.
TAXATION
PRC Taxation
The following discussion addresses the principal PRC tax consequences of investing in the H shares or ADSs.
Taxation of Dividends
Individual Investors
According to the PRC Individual Income Tax Law, as amended, dividends paid by Chinese companies are ordinarily subject to a Chinese withholding tax levied at a flat rate of 20%. For a foreign individual who has no domicile and does not stay in the territory of China or who has no domicile but has stayed in the territory of China for less than one year, the receipt of dividends from a company in China is normally subject to a withholding tax of 20% unless reduced or exempted by an applicable tax treaty. However, the Chinese State Administration of Taxation, or the SAT, the Chinese central government tax authority which succeeded the State Tax Bureau, issued, on July 21, 1993, the Notice of the Chinese State Administration of Taxation Concerning the Taxation of Gains on Transfer and Dividends from Share (Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and Foreign Individuals, or the Tax Notice, which states that dividends paid by a Chinese company to individuals with respect to overseas-listed shares, such as H shares, are temporarily not subject to Chinese withholding tax.
In a letter dated July 26, 1994 to the former State Commission for Restructuring the Economic System, the former State Council Securities Commission and the China Securities Regulatory Commission, the SAT reiterated the temporary tax exemption stated in the Tax Notice for dividends received from a Chinese company listed overseas. In the event that the exemption is withdrawn, a 20% tax may be withheld on dividends in accordance with the PRC Individual Income Tax Law and its implementation rules, as amended. The withholding tax may be reduced or exempted under an applicable double taxation treaty. To date, the relevant tax authorities have not collected withholding tax from dividend payments on the shares exempted under the Tax Notice.
Foreign Enterprises
In accordance with the new Enterprise Income Tax Law and its implementation rules that became effective on January 1, 2008, dividends derived from the revenues accumulated from January 1, 2008 and are paid by PRC companies to non-resident enterprises, which are established under the laws of non-PRC jurisdictions and have no establishment or place of business in China or whose dividends from China do not relate to their establishment or place of business in China, are generally subject to a PRC withholding tax levied at a rate of 10% unless exempted or reduced pursuant to an applicable double-taxation treaty or other exemptions. Dividends paid by PRC companies to resident enterprises, including enterprises established under the laws of non-PRC jurisdictions but whose “de facto management body” is located in the PRC, are not subject to any PRC withholding tax, unless the dividends are derived from the publicly traded shares which have been held continuously by the resident enterprises for less than twelve months. Dividends, bonuses and other return based on equity investment that a non-resident enterprise with establishment or place of business in China receives from a resident enterprise and that have actual connection with such establishment or place of business are also exempted from any PRC withholding tax, except of those derived from the publicly traded shares which have been held continuously by the non-resident enterprises for less than 12 months. Chinese resident enterprises are required to withhold PRC enterprise income tax at the rate of 10% on dividends paid for 2008 and later years’ earnings payable to their respective H Shares holders that are “non-resident enterprises,” except for those holders whose dividend income is not subject to PRC enterprise income tax pursuant to PRC governmental approval.
Tax Treaties
Holders resident in countries which have entered into avoidance of double taxation treaties or arrangements with the PRC may be entitled to a reduction or exemption of the withholding tax imposed on the payment of dividends. The PRC currently has avoidance of double taxation treaties or arrangements with a number of other countries/jurisdictions, which include Australia, Canada, France, Germany, Hong Kong, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States.
Under a tax treaty between United States and China, China may tax dividends paid by Sinopec Corp. to eligible US Holders up to a maximum of 10% of the gross amount of such dividend. Under the tax treaty, an eligible US Holder is a person who, by reason of domicile, residence, place of head office, place of incorporation or any other criterion of similar nature is liable to tax in the United States, subject to a detailed "treaty shopping" provision.

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Taxation of Capital Gains
According to the Tax Notice, gains realized upon the sale of overseas-listed shares issued by PRC companies by foreign individual investors are not subject to tax on capital gains.
In accordance with the new Enterprise Income Tax Law and its implementation rules, capital gains realized by foreign enterprises which are non-resident enterprises in China upon the sale of overseas-listed shares are generally subject to a PRC withholding tax levied at a rate of 10%, unless exempted or reduced pursuant to an applicable double-taxation treaty or other exemptions. The capital gains realized by resident enterprises, including enterprises established under the laws of non-PRC jurisdictions but whose “de facto management body” is located in the PRC, upon the sales of overseas-listed shares are subject to the PRC enterprise income tax. Before the effectiveness of the new Enterprise Income Tax Law, gains realized by foreign enterprises that are holders of overseas-listed shares of a PRC company excluding the shares held through their PRC domestic establishment or place of business were exempted from the withholding tax according to the Tax Notice. However, the effectiveness of such exemption granted by the Tax Notice becomes uncertain in light of the provisions under the new Enterprise Income Tax Law and its implementation rules.
PRC Stamp Tax Considerations
Under the Provisional Regulations of The People's Republic of China Concerning Stamp Tax, which became effective in October, 1988, PRC stamp tax should not be imposed on the transfer of shares of H Shares or ADSs of PRC publicly traded companies..
United States Federal Income Tax Considerations
The following is a summary of United States federal income tax considerations that are anticipated to be material for US Holders (as defined below) who hold H shares or ADSs. This summary is based upon existing United States federal income tax law, which is subject to change, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income taxation which may be important to particular investors in light of their individual investment circumstances, such as investors subject to special tax rules including: financial institutions, insurance companies, broker-dealers, tax-exempt organizations, non-US Holders, investors who own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that will hold H shares or ADSs as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, or US Holders that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any foreign, state, local or alternative minimum tax considerations. This summary only addresses investors that will hold their H shares or ADSs as "capital assets" (generally, property held for investment) under the United States Internal Revenue Code (the "Code"). Each holder is urged to consult its tax advisor regarding the United States federal, state, local, and foreign income and other tax considerations of an in vestment in H shares or ADSs.
For purposes of this summary, a US Holder is a beneficial owner of H shares or ADSs that is for United States federal income tax purposes:
·
an individual who is a citizen or resident of the United States;
·
a corporation created in or organized under the laws of, the United States or any State or political subdivision thereof;
·
an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source;
·
a trust the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust; or
·
a trust that has elected to be treated as a United States person under the Code.
If a partnership (including any entity treated as a partnership for United States federal income tax purposes) holds H shares or ADSs, the tax treatment of a partner in such partnership will depend upon the status of the partner

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and the activities of the partnership.  Partners in a partnership holding our H shares or ADSs are urged to consult their tax advisors as to the particular United States federal income tax consequences applicable to them.
A foreign corporation will be treated as a "passive foreign investment company" (a "PFIC"), for United States federal income tax purposes, if 75% or more of its gross income consists of certain types of "passive" income or 50% or more of its assets are passive. Sinopec Corp. presently does not believe that it is a PFIC and does not anticipate becoming a PFIC. This is, however, a factual determination made on an annual basis and is subject to change. The following discussion is based on the belief that Sinopec Corp. will not be classified as a PFIC for United States federal income tax purposes.  See the discussion below under the heading “PFIC Considerations” for a brief summary of the PFIC rules.
General
For United States federal income tax purposes, a US Holder of an ADS will be treated as the owner of the proportionate interest of the H shares held by the depositary that is represented by an ADS and evidenced by such ADS. Accordingly, no gain or loss will be recognized upon the exchange of an ADS for the holder's proportionate interest in the H shares. A US Holder's tax basis in the withdrawn H shares will be the same as the tax basis in the ADS surrendered therefor, and the holding period in the withdrawn H shares will include the period during which the holder held the surrendered ADS.
Dividends
Any cash distributions paid by Sinopec Corp. out of earnings and profits, as determined under United States federal income tax principles, will be subject to tax as dividend income and will be includible in the gross income of a US Holder upon receipt.  Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distribution paid will generally be treated as a "dividend" for United States federal income tax purposes.  A non-corporate recipient of dividend income will generally be subject to tax on dividend income from a "qualified foreign corporation" at a maximum U.S. federal tax rate of 15% rather than the marginal tax rates generally applicable to ordinary income so long as certain holding period requirements are met.  A non-U.S. corporation (other than a passive foreign investment company) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States.  There is currently a tax treaty in effect between the United States and the People's Republic of China which the Secretary of Treasury of the United States determined is satisfactory for these purposes and Sinopec Group, presently believes that it is eligible for the benefits of such treaty.  Additionally, our ADSs trade on the New York Stock Exchange, an established securities market in the United States.  Dividends paid in Hong Kong dollars will be includible in income in a United States dollar amount based on the United States dollar - Hong Kong dollar exchange rate prevailing at the time of receipt of such dividends by the depositary, in the case of ADSs, or by the US Holder, in the case of H shares held directly by such US Holder.  Gain or loss, if any, recognized on a subsequent sale, conversion or other disposition of Hong Kong dollars generally will be U.S. source income or loss.  Dividends received on H shares or ADSs will not be eligible for the dividends received deduction allowed to corporations.
Dividends received on H shares or ADSs will be treated, for United States federal income tax purposes, as foreign source income. A US Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on H shares or ADSs. US Holders who do not elect to claim a foreign tax credit for foreign income tax withheld may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which the US Holder elects to do so for all creditable foreign income taxes.
A distribution of additional shares of Sinopec Corp.'s stock to US Holders with respect to their H shares or ADSs that is pro rata to all Sinopec Corp.'s shareholders may not be subject to United States federal income tax. The tax basis of such additional shares will be determined by allocating the US Holders' adjusted tax basis in the H shares or ADSs between the H shares or ADSs and the additional shares, based on their relative fair market values on the date of distribution.

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Sale or Other Disposition of H shares or ADSs
A US Holder will recognize capital gain or loss upon the sale or other disposition of H shares or ADSs in an amount equal to the difference between the amount realized upon the disposition and the US Holder's adjusted tax basis in such H shares or ADSs, as each is determined in US dollars. Any capital gain or loss will be long-term if the H shares or ADSs have been held for more than one year and may be, under the income tax treaty between the People's Republic of China and the United States, foreign source gain or loss. The claim of a deduction in respect of a capital loss, for United States federal income tax purposes, may be subject to limitations.
PFIC Considerations
If Sinopec Corp. were to be classified as a PFIC in any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a foreign company that does not distribute all of its earnings on a current basis. In such event, a U.S. Holder of the H shares or ADSs may be subject to tax at ordinary income tax rates on (i) any gain recognized on the sale of the H shares or ADSs and (ii) any "excess distribution" paid on the H shares or ADSs (generally, a distribution in excess of 125% of the average annual distributions paid by Sinopec Corp. in the three preceding taxable years). In addition, a U.S. Holder may be subject to an interest charge on such gain or excess distribution.
The above results may be eliminated if a “mark-to-market” election is available and a US Holder validly makes such an election. If the election is made, such holder generally will be required to take into account the difference, if any, between the fair market value and its adjusted tax basis in H shares or ADSs at the end of each taxable year as ordinary income or ordinary loss (to the extent of any net mark-to-market gain previously included in income). In addition, any gain from a sale or other disposition of H shares or ADSs will be treated as ordinary income, and any loss will be treated as ordinary loss (to the extent of any net mark-to-market gain previously included in income).
Withholding Tax, Backup Withholding, and Information Reporting
Pursuant to recently enacted legislation, U.S. Holders may be required to submit to the Internal Revenue Service certain information with respect to an investment in the H shares or ADSs not held through an account with a "financial institution."  This new legislation also imposes penalties if a U.S. Holder is required to submit such information to the Internal Revenue Service and fails to do so.  In addition, U.S. Holders may be subject to information reporting to the Internal Revenue Service with respect to dividends on and proceeds from the sale or other disposition of our H shares or ADSs.  Dividend payments with respect to our H shares or ADSs and proceeds from the sale or other disposition of our H shares or ADSs are not generally subject to U.S. withholding tax or backup withholding (provided that certain certification requirements are satisfied).  U.S. Holders should consult their tax advisors regarding the application of the United States information reporting and backup rules.
F.
DIVIDENDS AND PAYING AGENTS
Not applicable.
G.
STATEMENT BY EXPERTS
Not applicable.
H.
DOCUMENTS ON DISPLAY
We filed with the Securities and Exchange Commission in Washington, D.C. a Registration Statement on Form F-1 (Registration No. 333-12502) under the Securities Act in connection with the ADSs offered in the global offering. The Registration Statement contains exhibits and schedules. Any statement in this annual report about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the Registration Statement, the contract or document is deemed to modify the description contained in this annual report. You must review the exhibits themselves for a complete description of the contract or documents.
You may inspect and copy our registration statements, including their exhibits and schedules, and the reports and other information we file with the Securities and Exchange Commission in accordance with the Exchange Act at the public reference facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth

74

Street, Room 1024, N.W., Washington, D.C. 20549 and at the regional offices of the Securities and Exchange Commission located at 233 Broadway, New York, NY 10279 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also inspect the registration statements, including their exhibits and schedules, at the office of the New York Stock Exchange, Wall Street, New York, New York 10005. Copies of such material may also be obtained from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain information regarding the Washington D.C. Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by contacting the Securities and Exchange Commission over the internet at its website at http://www.sec.gov.
I.
SUBSIDIARY INFORMATION
Not applicable.
ITEM 11.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are to fluctuations in oil and gas prices, exchange rates and interest rates.
Commodity Price Risk
We engage in oil and gas operations and is exposed to commodity price risk related to price volatility of crude oil and refined oil products. The fluctuations in prices of crude oil and refined oil products could have significant impact on us. We use derivative financial instruments, including commodity futures and swaps, to manage a portion of this risk. As of December 31, 2009, we had certain commodity contracts of crude oil and refined oil products designated as qualified cash flow hedges and economic hedges. As of December 31, 2009, the fair value assets and fair value liabilities of these derivative financial instruments were RMB 321 and RMB 587, respectively. We did not enter into any derivative financial instruments for trading purposes.
As of December 31, 2009, it is estimated that a general increase/decrease of USD 10 per barrel in crude oil and refined oil products, with all other variables held constant, would decrease/increase our net income and retained earnings by approximately RMB 215, and increase/decrease our other reserves by approximately RMB 1,991. This sensitivity analysis has been determined assuming that the change in prices had occurred at the balance sheet date and the change was applied to our derivative financial instruments at that date with exposure to commodity price risk.
Foreign Exchange Rate Risk
The Renminbi is not a freely convertible currency. With the authorization from the PRC government, the PBOC announced that the PRC government reformed the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies on July 21, 2005. Actions taken by the PRC government could cause future exchange rates to vary significantly from current or historical exchange rates. Fluctuations in exchange rates may adversely affect the value, translated or converted into US dollars or Hong Kong dollars, of our net assets, earnings and any declared dividends. We cannot give any assurance that any future movements in the exchange rate of the Renminbi against the US dollar and other foreign currencies will not adversely affect our results of operations and financial condition.
The following presents various market risk information regarding market-sensitive financial instruments that we held or issued as of December 31, 2009 and 2008. We conduct our business primarily in Renminbi, which is also our functional and reporting currency.
The following tables provide information regarding instruments that are sensitive to foreign exchange rates as of December 31, 2009 and 2008. For debt obligations, the table presents cash flows and related weighted average rates by expected maturity dates.

75

As of December 31, 2009:

Expected maturity
2010
2011
2012
2013
2014
thereafter
Total
Fair value
(RMB equivalent in millions, except interest rates)
Assets
Cash and cash equivalents
In United States dollar
2,155 - - - - - 2,155 2,155
In Hong Kong dollar
146 - - - - - 146 146
In Japanese yen
14 - - - - - 14 14
In Euro
129 - - - - - 129 129
Time deposits with financial institutions
In United States dollar
4 - - - - - 4 4
Liabilities
Debts in United States dollar
Fixed rate
1,108 71 57 57 57 279 1,629 1,644
Average interest rate
1.0 % 1.5 % 1.4 % 1.4 % 1.4 % 1.4 %
Variable rate
15,541 3 4 3 4 2 15,557 15,557
Average interest rate (1)
0.9 % 4.9 % 4.9 % 4.9 % 4.9 % 4.9 %
Debts in Japanese yen
Fixed rate
104 74 74 74 74 654 1,054 1,172
Average interest rate
2.6 % 2.6 % 2.6 % 2.6 % 2.6 % 2.6 %
Variable rate
202 202 202 - - - 606 606
Average interest rate (1)
2.9 % 2.9 % 2.9 % - - -
Debts in Hong Kong dollar
Fixed rate
- - - - 10,371 - 10,371 10,371
Average interest rate
- - - - 4.2 % -
Variable rate
- - - - - - - -
Average interest rate (1)
- - - - - -
Debts in Euro
Fixed rate
85 31 - - - - 116 120
Average interest rate
6.6 % 6.6 % - - - -
___________
(1)
The average interest rates for variable rate loans are calculated based on the rates reported as of December 31, 2009.
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As of December 31, 2008:
Expected maturity
2009
2010
2011
2012
2013
thereafter
Total
Fair value
(RMB equivalent in millions, except interest rates)
Assets
Cash and cash equivalents
In United States dollar
1,259 - - - - - 1,259 1,259
In Hong Kong dollar
109 - - - - - 109 109
In Japanese yen
5 - - - - - 5 5
In Euro
43 - - - - - 43 43
Time deposits with financial institutions
In United States dollar
91 - - - - - 91 91
Liabilities
Debts in United States dollar
Fixed rate
3,074 114 71 57 57 336 3,709 3,702
Average interest rate
4.0 % 2.0 % 1.5 % 1.4 % 1.4 % 1.4 %
Variable rate
4,948 3 3 4 4 7 4,969 4,969
Average interest rate (1)
4.5 % 4.9 % 4.9 % 4.9 % 4.9 % 4.9 %
Debts in Japanese yen
Fixed rate
110 110 79 79 79 734 1,191 1,233
Average interest rate
2.6 % 2.6 % 2.6 % 2.6 % 2.6 % 2.6 %
Variable rate
309 207 207 207 - - 930 930
Average interest rate (1)
2.8 % 2.9 % 2.9 % 2.9 % - -
Debts in Hong Kong dollar
Fixed rate
- - - - - 9,870 9,870 9,870
Average interest rate
- - - - - 4.2 %
Variable rate
265 - - - - - 265 265
Average interest rate (1)
0.9 % - - - - -
Debts in Euro
Fixed rate
84 84 29 - - - 197 206
Average interest rate
6.6 % 6.6 % 6.6 % - - -
___________
(1)
The average interest rates for variable rate loans are calculated based on the rates reported as of December 31, 2008.
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Interest Rate Risk
We are exposed to interest rate risk resulting from fluctuations in interest rates on our short- and long-term debts. Upward fluctuations in interest rates increase the cost of new debt and the interest cost of outstanding floating rate borrowings.
Our debts consist of fixed and variable rate debt obligations with original maturities ranging from 1 to 25 years. Fluctuations in interest rates can lead to significant fluctuations in the fair values of our debt obligations.
The following tables present principal cash flows and related weighted average interest rates by expected maturity dates of our interest rate sensitive financial instruments as of December 31, 2009 and 2008.

78

As of December 31, 2009:
Expected maturity
2010
2011
2012
2013
2014
thereafter
Total
Fair value
(RMB equivalent in millions, except interest rates)
Assets
Cash and cash equivalents
In Renminbi
6,306 - - - - - 6,306 6,306
In United States dollar
2,155 - - - - - 2,155 2,155
In Hong Kong dollar
146 - - - - - 146 146
In Japanese yen
14 - - - - - 14 14
In Euro
129 - - - - - 129 129
Time deposits with financial institutions
In Renminbi
1,232 - - - - - 1,232 1,232
In United States dollar
4 - - - - - 4 4
Liabilities
Debts in Renminbi
Fixed rate
50,947 192 38,580 60 28,392 52,364 170,535 169,730 (1)
Average interest rate
2.8 % 2.8 % 2.8 % 2.5 % 2.5 % 1.6 %
Variable rate
4,554 3,513 4,108 5,200 1,126 - 18,501 18,501
Average interest rate (2)
5.4 % 5.2 % 5.2 % 5.3 % 5.2 % -
Debts in United States dollar
Fixed rate
1,108 71 57 57 57 279 1,629 1,644
Average interest rate
1.0 % 1.5 % 1.4 % 1.4 % 1.4 % 1.4 %
Variable rate
15,541 3 4 3 4 2 15,557 15,557
Average interest rate (2)
0.9 % 4.9 % 4.9 % 4.9 % 4.9 % 4.9 %
Debts in Japanese yen
Fixed rate
104 74 74 74 74 654 1,054 1,172
Average interest rate
2.6 % 2.6 % 2.6 % 2.6 % 2.6 % 2.6 %
Variable rate
202 202 202 - - - 606 606
Average interest rate (2)
2.9 % 2.9 % 2.9 % - - -
Debts in Hong Kong dollar
Fixed rate
- - - - 10,371 - 10,371 10,371
Average interest rate
- - - - 4.2 % -
Variable rate
- - - - - - - -
Average interest rate (2)
- - - - - -
Debts in Euro
Fixed rate
85 31 - - - - 116 120
Average interest rate
6.6 % 6.6 % - - - -
___________
(1)
Carrying amounts are used for loans from Sinopec Group Company and its affiliates as it is not practicable to estimate their fair values because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive.
(2)
The average interest rates for variable rate loans are calculated based on the rates reported as of December 31, 2009.
79
As of December 31, 2008:

Expected maturity
2009
2010
2011
2012
2013
thereafter
Total
Fair value
(RMB equivalent in millions, except interest rates)
Assets
Cash and cash equivalents
In Renminbi
5,592 - - - - - 5,592 5,592
In United States dollar
1,259 - - - - - 1,259 1,259
In Hong Kong dollar
109 - - - - - 109 109
In Japanese yen
5 - - - - - 5 5
In Euro
43 - - - - - 43 43
Time deposits with financial institutions
In Renminbi
661 - - - - - 661 661
In United States dollar
91 - - - - - 91 91
Liabilities
Debts in Renminbi
Fixed rate
78,395 1,550 382 8,580 60 79,705 168,672 172,273 (1)
Average interest rate
3.7 % 3.0 % 3.0 % 2.9 % 2.5 % 1.5 %
Variable rate
11,300 7,923 5,034 2,974 6,139 2,454 35,824 35,824
Average interest rate (2)
6.3 % 6.7 % 6.7 % 6.7 % 6.7 % 6.8 %
Debts in United States dollar
Fixed rate
3,074 114 71 57 57 336 3,709 3,702
Average interest rate
4.0 % 2.0 % 1.5 % 1.4 % 1.4 % 1.4 %
Variable rate
4,948 3 3 4 4 7 4,969 4,969
Average interest rate (2)
4.5 % 4.9 % 4.9 % 4.9 % 4.9 % 4.9 %
Debts in Japanese yen
Fixed rate
110 110 79 79 79 734 1,191 1,233
Average interest rate
2.6 % 2.6 % 2.6 % 2.6 % 2.6 % 2.6 %
Variable rate
309 207 207 207 - - 930 930
Average interest rate (2)
2.8 % 2.9 % 2.9 % 2.9 % - -
Debts in Hong Kong dollar
Fixed rate
- - - - - 9,870 9,870 9,870
Average interest rate
- - - - - 4.2 %
Variable rate
265 - - - - - 265 265
Average interest rate (2)
0.9 % - - - - -
Debts in Euro
Fixed rate
84 84 29 - - - 197 206
Average interest rate
6.6 % 6.6 % 6.6 % - - -
___________
(1)
Carrying amounts are used for loans from Sinopec Group Company and its affiliates as it is not practicable to estimate their fair values because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive.
(2)
The average interest rates for variable rate loans are calculated based on the rates reported as of December 31, 2008.
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ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
A.
MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITIES HOLDERS
None.
B.
USE OF PROCEEDS
Not applicable.
ITEM 15.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2009 (the "Evaluation Date"), the end of the fiscal year covered by this annual report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) of the Securities Exchange Act of 1934). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting based upon the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as of December 31, 2009. Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2009 based on these criteria.
KPMG, an independent registered public accounting firm, has audited the consolidated financial statements included in this annual report on Form 20-F and, as part of the audit, has issued a report, included herein, on the effectiveness of our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of China Petroleum & Chemical Corporation:

81

We have audited China Petroleum & Chemical Corporation's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. China Petroleum & Chemical Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, China Petroleum & Chemical Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of China Petroleum & Chemical Corporation and subsidiaries as of December 31, 2008 and 2009, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the years in the three-year period ended December 31, 2009, and our report dated March 26, 2010 expressed an unqualified opinion on those consolidated financial statements.
/S/ KPMG
Hong Kong, China
March 26, 2010

Changes in Internal Control over Financial Reporting
During the year ended December 31, 2009, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 16.
RESERVED
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors has determined that Mr. Liu Zhongli qualifies as an audit committee financial expert in accordance with the terms of Item 16.A of Form 20-F.  Mr. Liu was appointed as an independent non-executive director and a member of the audit committee of the fourth board of our company in May 2009. For Mr. Liu’s biographical information, see "Item 6 Directors, Senior Management and Employees – A. Directors, members of the supervisory committee and senior management."
ITEM 16B.
CODE OF ETHICS
As of the date of this annual report, we do not have, in form, a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer.  Our principal executive officers, Mr. Su Shulin (Chairman) and Mr. Wang Tianpu (Vice Chairman and President), currently also serve as our directors and are thus subject to the director service contracts that they have with us. Our principal financial officer, Mr. Wang Xinhua (CFO) is subject to the employment contract that he has with us. Under such contracts, each of them agrees that he owes a fiduciary and diligence obligation to our company and that he shall not engage in any activities in competition with our business or carry any activities detrimental to the interests of our company.  Each of them also agrees to perform his respective duties as a director and senior officer in accordance with the Company Law of the PRC, relevant rules and regulations promulgated by China Securities Regulatory Commission and the Mandatory Provisions of Articles of Association of Overseas Listed Companies.
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate audit fees, audit-related fees, tax fees of our principal accountants and all other fees billed for products and services provided by our principal accountants other than the audit fees, audit-related fees and tax fees for each of the fiscal years 2008 and 2009:
Audit Fees
Audit-Related Fees
Tax Fees
Other Fees
2008
RMB 81 million
— — —
2009
RMB 84 million
— — —

Before our principal accountants were engaged by our company or our subsidiaries to render audit or non-audit services, the engagement has been approved by our audit committee.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G.
COMPARISON OF NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE RULES AND CHINA CORPORATE GOVERNANCE RULES FOR LISTED COMPANIES
Under the amended Corporate Governance Rules of New York Stock Exchange (NYSE), foreign issuers (including the Company) listed on the NYSE are required to disclose a summary of the significant differences between their domestic corporate governance rules and NYSE corporate governance rules that would apply to a U.S. domestic issuer. A summary of such differences is listed below:

83
NYSE corporate governance rules
Corporate governance rules applicable to the
domestically listed companies in China and the
Company’s governance practices
Corporate governance guidelines
Listed companies must adopt and disclose corporate governance guidelines, involving director qualification standards, director compensation, director continuing education, annual performance evaluation of the board of directors, etc.
CSRC (China Securities Regulatory Commission) has issued the Corporate Governance Rules, prescribing detailed guidelines on directors of the listed companies, including director selection, the structure of the board of directors and director performance evaluation etc. The Company Law of PRC has specific regulations on the directors’ qualification. Furthermore, CSRC promulgates the guidelines on the senior management training and organizes the relevant training.
The Company has complied with the above mentioned laws or rules.
Director Independence
A listed company must have a majority of independent directors on its board of directors. No director qualifies as “independent’’ unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). In addition, a director must meet certain standards to be deemed independent. For example, a director is not independent if the director is, or has been within the last three years, an employee of the listed company, or if the director has received, during any twelve-month period within the last three years, more than US$120,000 in direct compensation from the listed company.
To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management.
It is required in China that any listed company must establish an independent director system and set forth specific requirements for the qualification of independent directors. For example, an independent director shall not hold any other position in the listed company other than being a director and shall not be influenced by the main shareholders or the controlling persons of the listed company, or by any other entities or persons with whom the listed company has a significant relationship.
The Company has complied with the relevant Chinese corporate governance rules and has implemented internal rules governing the independence and responsibilities of independent directors. The Company determines the independence of independent directors every year.
No similar requirements.
Nominating/Corporate Governance Committee
Listed companies must have a nominating/corporate governance committee composed entirely of independent directors.
It is stipulated in China that the board of directors of a listed company may, through the resolution of the shareholders’ meeting, establish a nominating committee composed entirely of directors, of which the independent directors shall be the majority and the convener. Up to now, the Company has not set up any nominating committee.
The nominating/corporate governance committee must have a written charter that addresses the committee’s purposes and responsibilities which, at minimum, must be to: search for eligible people for the board of directors, select and nominate directors for the next session of the shareholders’ annual meeting, study and propose corporate governance guidelines, supervise the evaluation of the board of directors and management, and evaluate the performance of the committee every year.
Relevant responsibilities of the nominating committee are similar to those stipulated by the NYSE rules, but the main responsibilities do not include the research and recommendation of corporate governance guidelines, the supervision of the evaluation of the board of directors and management, or the annual evaluation of the committee.

84
Compensation Committee
Listed companies must have a compensation committee composed entirely of independent directors.
It is stipulated in China that the board of directors of a listed company should, through the resolution of shareholders’ meeting, have a compensation and assessment committee composed entirely of directors, of whom the independent directors are the majority and act as the convener.
The written charter of the compensation committee must state, at least, the following purposes and responsibilities:
(1) review and approve the corporate goals associated with CEO’s compensation, evaluate the performance of the CEO in fulfilling these goals, and based on such evaluation determine and approve the CEO’s compensation level;
(2) make recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval;
(3) produce a committee report on executive compensation as required by the SEC to be included in the annual proxy statement or annual report filed with the SEC.
The charter must also include the requirement for an annual performance evaluation of the compensation committee.
It is stipulated in China that the responsibilities of the compensation committee are:
(1) to study evaluation standards on the performance of directors and the senior management and submit suggestion to the board of directors;
(2) to study and review the compensation policies on the directors and the senior management.
It is also stipulated that the committee shall produce a report about the committee’s performance in the annual report.
But the committee is not required to produce a report on the executive compensation or make an annual performance evaluation of the committee.
The board of directors of the Company has established a compensation and performance evaluation committee composed mainly of independent directors who act as the convener, and the committee has established a written charter complying with the domestic corporate governance rules.
Audit Committee
Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 of Securities Exchange Act of 1934 (the “Exchange Act”). It must have a minimum of three members, and all audit committee members must satisfy the requirements for independence set forth in Section 303A.02 of NYSE Corporate Governance Rules as well as the requirements of Rule 10A-3b (1) of the Exchange Act.
It is stipulated in China that the board of directors of a listed company should, through the resolution of the shareholders’ meeting, establish an audit committee composed entirely of directors, of which the independent directors are the majority and act as the convener, and, at minimum, one independent director is an accounting professional.
The written charter of the audit committee must specify that the purpose of the audit committee is to assist the board oversight of the integrity of financial statements, the company’s compliance with legal and regulatory requirements, qualifications and independence of independent auditors and the performance of the listed company’s internal audit function and independent auditors.
The written charter must also require the audit committee to prepare an audit committee report as required by the SEC to be included in the listed company’s annual proxy statement as well as an annual performance evaluation of the audit committee.
Each listed company must have an internal audit department.
Shareholders must be given the opportunity to vote on equity-compensation plans and material revisions thereto, except for employment incentive plans, certain awards and plans in the context of mergers and acquisitions.
The responsibilities of the audit committee are similar to those stipulated by the NYSE rules. It is also stipulated that the committee shall produce a report about the committee’s performance in the annual report.
But according to the domestic practices, the company is not required to make an annual performance evaluation of the audit committee, and the audit committee is not required to prepare an audit report to be included in the company’s annual proxy statement.
The Board of Directors of the Company has established an audit committee that satisfies relevant domestic and overseas requirements and the audit committee has a written charter.
China has a similar regulatory provision, and the Company has an internal audit department.
The relevant regulations of China require the board of directors propose plans on the amount and types of director compensation for the shareholders’ meeting to approve. The compensation plan of executive officers shall be approved by the board and disclosed to the public upon the approval of the board of directors.

85
Code of ethics for directors, officers and employees
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.
China does not have such requirement for a code for ethics. But, since the directors and officers of the Company have all signed the Director Service Agreement or employment agreement, as applicable, they are bound by their fiduciary duties to the Company. In addition, the directors and officers must perform their legal responsibilities in accordance with the Company Law of PRC, relative requirements of CSRS and Mandatory Provisions to the Charter of Companies Listed Overseas. Meanwhile, the Company establishes The Model Code of Securities Transactions by Corporate Employees and The Rules of The Company’s Shares Transactions by Corporate Directors, Superiors and Senior Managements to regulate the above mentioned people when transacting related securities. In 2008, the Company promulgated the Code for Employees of the Company as the standards of business conduct and ethics of the employees.
Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards and he or she must promptly notify the NYSE on writing of any material non-compliance with any applicable provisions of Section 303A.
No similar requirements.

ITEM 17.
FINANCIAL STATEMENTS
Not applicable.
ITEM 18.
FINANCIAL STATEMENTS
See F-pages following Item 19.
ITEM 19.
EXHIBITS

1 **
Articles of Association of the Registrant, amended and adopted by the shareholders' meeting on May 24, 2006 (English translation), incorporated by reference to Exhibit 1 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007 (File Number: 001-15138).
1.1 **
Amendment to the Articles of Association of China Petroleum & Chemical Corporation, adopted by the shareholders’ meeting on May 26, 2008 (English translation), incorporated by reference to Exhibit 1.1 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on May 20, 2009 (File Number: 001-15138).
1.2 *
Articles of Association of the Registrant, amended and adopted by the shareholders’ meeting on May 22, 2009 (English translation).

86
4.1**
Forms of Director Service Contracts dated May 24, 2006 (English translation), incorporated by reference to Exhibit 4.1 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007  (File Number: 001-15138).
4.2**
Forms of Supervisor Service Contracts dated May 24, 2006 (English translation), incorporated by reference to Exhibit 4.2 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007  (File Number: 001-15138).
4.3**
Reorganization Agreement between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.1 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.4**
Agreement for Mutual Provision of Products and Ancillary Services between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.3 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.5**
Agreement for Provision of Cultural, Educational, Hygiene and Community Services between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.4 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.6**
Trademark License Agreement between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.6 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.7**
Patents and Proprietary Technology License Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.7 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.8**
Computer Software License Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.8 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.9**
Assets Swap Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.9 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.10**
Land Use Rights Leasing Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.10 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.12**
Property Leasing Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.11 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.13**
Accounts Collectable Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 16, 2000 (including English translation), incorporated by reference to Exhibit 10.17 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).

87
4.14**
Loan Transfer and Adjustment Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 16, 2000 (including English translation), incorporated by reference to Exhibit 10.18 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.15**
Agreement on Adjustment to Related Party Transactions between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 11, 2001 (English translation), incorporated by reference to Exhibit 4.15 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007 (File Number: 001-15138).
4.16**
Land Use Right Leasing Agreement between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 22, 2003 (English translation), incorporated by reference to Exhibit 4.16 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007  (File Number: 001-15138).
4.17**
2004 Agreement on Adjustment to Related Party Transactions between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated October 31, 2004 (English translation) , incorporated by reference to Exhibit 4.17 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007  (File Number: 001-15138).
4.18**
Memorandum on Adjustment of Rent of Land Use Rights between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated March 31, 2006 (English translation) , incorporated by reference to Exhibit 4.18 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007  (File Number: 001-15138).
4.19**
Supplemental Agreement on  Related Party Transactions between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated March 31, 2006 (English translation) , incorporated by reference to Exhibit 4.19 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007  (File Number: 001-15138).
4.20**
Memorandum on Adjustment of Rent of Land Use Rights between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 22, 2008 (English Translation), incorporated by reference to Exhibit 4.20 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on May 20, 2009 (File Number: 001-15138).
4.21*
Continuing Connected Transactions Second Supplemental Agreement between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 21, 2009 (English translation).
4.22* Memorandum on Adjustment of Rent of Land Use Rights between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 21, 2009 (English translation).
8*
A list of the Registrant's subsidiaries.
12.1*
Certification of Chairman pursuant to Rule 13a-14(a).
12.2*
Certification of President pursuant to Rule 13a-14(a).
12.3*
Certification of CFO pursuant to Rule 13a-14(a).
13*
Certification of CEO and CFO pursuant to 18 U.S.C. §1350, and Rule 13a-14(b).
___________
*
Filed herewith.
**
Incorporated by reference.

88

CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Page
Report of independent registered public accounting firm
F-2
Consolidated statements of income for the years ended December 31, 2007, 2008 and 2009
F-3
Consolidated statements of comprehensive income for the years ended December 31, 2007, 2008 and 2009
F-4
Consolidated balance sheets as of December 31, 2008 and 2009
F-5
Consolidated statements of equity for the years ended December 31, 2007, 2008 and 2009
F-6
Consolidated statements of cash flows for the years ended December 31, 2007, 2008 and 2009
F-9
Notes to consolidated financial statements
F-11
Supplemental information on oil and gas producing activities (unaudited)
F-67


F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Shareholders of
China Petroleum & Chemical Corporation:

We have audited the accompanying consolidated balance sheets of China Petroleum & Chemical Corporation and subsidiaries as of December 31, 2008 and 2009, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Petroleum & Chemical Corporation and subsidiaries as of December 31, 2008 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), China Petroleum & Chemical Corporation's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 26, 2010 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/S/ KPMG
Hong Kong, China
March 26, 2010

F-2
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts in millions, except per share data)

Years ended December 31,
Note
2007
2008
2009
RMB
RMB
RMB
Operating revenues
Sales of goods
1,169,984 1,413,203 1,315,915
Other operating revenues
3 31,013 31,088 29,137
1,200,997 1,444,291 1,345,052
Other income
4 4,863 50,857 —
Operating expenses
Purchased crude oil, products and operating supplies and expenses
(971,670 ) (1,286,106 ) (990,459 )
Selling, general and administrative expenses
5 (32,811 ) (39,392 ) (40,500 )
Depreciation, depletion and amortization
(43,648 ) (46,321 ) (50,487 )
Exploration expenses, including dry holes
(11,105 ) (8,310 ) (10,545 )
Personnel expenses
6 (22,829 ) (23,381 ) (28,836 )
Taxes other than income tax
7 (34,665 ) (57,214 ) (132,884 )
Other operating expenses, net
8 (3,636 ) (8,088 ) (6,910 )
Total operating expenses
(1,120,364 ) (1,468,812 ) (1,260,621 )
Operating income
85,496 26,336 84,431
Finance costs
Interest expense
9 (7,690 ) (11,907 ) (7,382 )
Interest income
407 446 277
Unrealized (loss) / gain on embedded derivative component of the Convertible Bonds
24(c) (3,211 ) 3,947 (218 )
Foreign currency exchange losses
(311 ) (954 ) (327 )
Foreign currency exchange gains
2,442 3,278 416
Net finance costs
(8,363 ) (5,190 ) (7,234 )
Investment income
1,670 390 374
Income from associates and jointly controlled entities
4,044 580 2,997
Earnings before income tax
82,847 22,116 80,568
Tax (expense) / benefit
10 (24,723 ) 2,840 (16,084 )
Net income
58,124 24,956 64,484
Attributable to:
Equity shareholders of the Company
55,914 28,525 61,760
Non-controlling interests
2,210 (3,569 ) 2,724
Net income
58,124 24,956 64,484
Earnings per share:
Basic
12 0.64 0.33 0.71
Diluted
12 0.64 0.29 0.71
Weighted average number of shares
12 86,702 86,702 86,702
See accompanying notes to consolidated financial statements.

F-3
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts in millions)

Years ended December 31,
Note
2007
2008
2009
RMB
RMB
RMB
Net income
58,124 24,956 64,484
Other comprehensive income for the year (after tax and reclassification adjustments)
11
Cash flow hedges
— — 54
Available-for-sale securities
326 (232 ) (175 )
Share of other comprehensive income of associates
2,711 (2,206 ) 806
Effect of change in tax rate
(37 ) — —
Total other comprehensive income
3,000 (2,438 ) 685
Total comprehensive income for the year
61,124 22,518 65,169
Attributable to:
Equity shareholders of the Company
58,752 26,205 62,482
Non-controlling interests
2,372 (3,687 ) 2,687
Total comprehensive income for the year
61,124 22,518 65,169


F-4
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND 2009
(Amounts in millions)
December 31,
Note
2008
2009
RMB
RMB
ASSETS
Current assets
Cash and cash equivalents
7,008 8,750
Time deposits with financial institutions
752 1,236
Trade accounts receivable, net
13 12,990 26,592
Bills receivable
3,660 2,110
Inventories
14 95,979 141,611
Prepaid expenses and other current assets
15 35,225 20,981
Income tax receivable
9,784 —
Total current assets
165,398 201,280
Non-current assets
Property, plant and equipment, net
16 411,939 465,182
Construction in progress
17 122,121 119,786
Goodwill
18 14,237 14,072
Interest in associates
19 15,595 18,162
Interest in jointly controlled entities
20 11,781 13,928
Investments
21 1,483 2,174
Deferred income tax assets
23 13,768 13,975
Lease prepayments
11,165 16,238
Long-term prepayments and other assets
22 11,685 13,045
Total non-current assets
613,774 676,562
Total asset
779,172 877,842
LIABILITIES AND EQUITY
Current liabilities
Short-term debts
24 75,516 58,898
Loans from Sinopec Group Company and its affiliates
24 33,410 13,643
Trade accounts payable
25 56,464 97,749
Bills payable
25 18,753 23,111
Accrued expenses and other payables
26 102,497 117,272
Income tax payable
16 2,746
Total current liabilities
286,656 313,419
Non-current liabilities
Long-term debts
24 90,254 108,828
Loans from Sinopec Group Company and its affiliates
24 36,890 37,000
Deferred income tax liabilities
23 5,235 4,979
Provisions
27 9,280 11,529
Other liabilities
2,315 3,234
Total non-current liabilities
143,974 165,570
Total liabilities
430,630 478,989
Equity
Share capital
28 86,702 86,702
Reserves
29 241,187 288,959
Total equity attributable to equity shareholders of the Company
327,889 375,661
Non-controlling interests
20,653 23,192
Total equity
348,542 398,853
Total liabilities and equity
779,172 877,842

See accompanying notes to consolidated financial statements.

F-5
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Amounts in millions)


Share
capital
Capital
reserve
Share
premium
Re-valuation
reserve
Statutory
surplus
reserve
Dis-
cretionary
surplus
reserve
Other
reserves
Retained
earnings
Total equity attributable
to equity shareholders of
the Company
Non-controlling interests
Total equity
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
Balance as of January 1, 2007, as previously reported
86,702 (21,590 ) 18,072 24,752 32,094 27,000 1,758 95,546 264,334 22,323 286,657
Adjustment for the Acquisition of the Acquired Group (Note 1)
— — — — — — 577 — 577 — 577
Change of accounting policy (Note 1)
— — — (24,752 ) — — — 24,752 — — —
Balance as of January 1, 2007, as adjusted
86,702 (21,590 ) 18,072 — 32,094 27,000 2,335 120,298 264,911 22,323 287,234
Net income
— — — — — — — 55,914 55,914 2,210 58,124
Other comprehensive income:
Available-for-sale securities
— — — — — — 181 — 181 145 326
Share of other comprehensive income of associates
— — — — — — 2,711 — 2,711 — 2,711
Effect of change in tax rate
— — — — — — (54 ) — (54 ) 17 (37 )
Total other comprehensive income
— — — — — — 2,838 — 2,838 162 3,000
Total comprehensive income for the year
— — — — — — 2,838 55,914 58,752 2,372 61,124
Transactions with owners, recorded directly in equity:
Contributions by and distributions to owners:
Final dividend for 2006
— — — — — — — (9,537 ) (9,537 ) — (9,537 )
Interim dividend for 2007
— — — — — — — (4,335 ) (4,335 ) — (4,335 )
Adjustment of statutory surplus reserve (Note 29 (d))
— — — — 235 — — (235 ) — — —
Appropriation (Note 29 (d))
— — — — 5,468 — — (5,468 ) — — —
Realization of deferred tax on lease prepayments
— — — — — — (7 ) 7 — — —
Transfer from retained earnings to other reserves
— — — — — — (770 ) 770 — — —
Transfer from other reserves to capital reserve
— (1,062 ) — — — — 1,062 — — — —
Contribution from Sinopec Group Company
— — — — — — 574 — 574 — 574
Consideration for the Acquisition of Refinery Plants (Note 1)
— — — — — — (2,468 ) — (2,468 ) — (2,468 )
Contributions to subsidiaries from non-controlling interests net of distributions
— — — — — — — — — 630 630
Total transactions with owners:
— (1,062 ) — — 5,703 — (1,609 ) (18,798 ) (15,766 ) 630 (15,136 )
Balance as of December 31, 2007
86,702 (22,652 ) 18,072 — 37,797 27,000 3,564 157,414 307,897 25,325 333,222
See accompanying notes to consolidated financial statements.

F-6
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)
(Amounts in millions)

Share capital
Capital reserve
Share premium
Statutory surplus reserve
Discretionary surplus reserve
Other reserves
Retained earnings
Total equity attributable to equity shareholders of the Company
Non-controlling interests
Total equity
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
Balance as of January 1, 2008
86,702 (22,652 ) 18,072 37,797 27,000 3,564 157,414 307,897 25,325 333,222
Net income
— — — — — — 28,525 28,525 (3,569 ) 24,956
Other comprehensive income:
Available-for-sale securities
— — — — — (114 ) — (114 ) (118 ) (232 )
Share of other comprehensive income of associates
— — — — — (2,206 ) — (2,206 ) — (2,206 )
Total other comprehensive income
— — — — — (2,320 ) — (2,320 ) (118 ) (2,438 )
Total comprehensive income for the year
— — — — — (2,320 ) 28,525 26,205 (3,687 ) 22,518
Transactions with owners, recorded directly in equity:
Contributions by and distributions to owners:
Issuance of the Bonds with Warrants (Note 24 (d))
— 6,879 — — — — — 6,879 — 6,879
Final dividend for 2007
— — — — — — (9,971 ) (9,971 ) — (9,971 )
Interim dividend for 2008
— — — — — — (2,601 ) (2,601 ) — (2,601 )
Adjustment of statutory surplus reserve (Note 29 (d))
— — — 1,189 — — (1,189 ) — — —
Appropriation (Note 29 (d) and (e))
— — — 4,092 20,000 — (24,092 ) — — —
Realization of deferred tax on lease prepayments
— — — — — (6 ) 6 — — —
Transfer from retained earnings to other reserves
— — — — — (1,244 ) 1,244 — — —
Distribution to Sinopec Group Company (Note 29 (b))
— (202 ) — — — — — (202 ) — (202 )
Distributions by subsidiaries to non-controlling interests net of contributions
— — — — — — — — (368 ) (368 )
Total contributions by and distributions to owners
— 6,677 — 5,281 20,000 (1,250 ) (36,603 ) (5,895 ) (368 ) (6,263 )
Changes in ownership interests in subsidiaries that do not result in a loss of control:
Acquisitions of non-controlling interests of subsidiaries
— (318 ) — — — — — (318 ) (617 ) (935 )
Total transactions with owners:
— 6,359 — 5,281 20,000 (1,250 ) (36,603 ) (6,213 ) (985 ) (7,198 )
Balance as of December 31, 2008
86,702 (16,293 ) 18,072 43,078 47,000 (6 ) 149,336 327,889 20,653 348,542

See accompanying notes to consolidated financial statements.

F-7
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)
(Amounts in millions)

Share
capital
Capital
reserve
Share
premium
Statutory
surplus
reserve
Dis-
cretionary
surplus
reserve
Other
reserves
Retained
earnings
Total equity attributable
to equity shareholders of
the Company
Non-controlling interests
Total equity
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
Balance as of January 1, 2009
86,702 (16,293 ) 18,072 43,078 47,000 (6 ) 149,336 327,889 20,653 348,542
Net income
— — — — — — 61,760 61,760 2,724 64,484
Other comprehensive income:
Cash flow hedges
— — — — — 54 — 54 — 54
Available-for-sale securities
— — — — — (138 ) — (138 ) (37 ) (175 )
Share of other comprehensive income of associates
— — — — — 806 — 806 — 806
Total other comprehensive income
— — — — — 722 — 722 (37 ) 685
Total comprehensive income for the year
— — — — — 722 61,760 62,482 2,687 65,169
Transactions with owners, recorded directly in equity:
Contributions by and distributions to owners:
Final dividend for 2008
— — — — — — (7,803 ) (7,803 ) — (7,803 )
Interim dividend for 2009
— — — — — — (6,069 ) (6,069 ) — (6,069 )
Appropriation (Note 29 (d) and (e))
— — — 4,953 20,000 — (24,953 ) — — —
Realization of deferred tax on lease prepayments
— — — — — (8 ) 8 — — —
Transfer from other reserves to capital reserve
— (1,551 ) — — — 1,551 — — — —
Consideration for the Acquisition of the Acquired Group (Note 1)
— — — — — (771 ) — (771 ) — (771 )
Distribution to Sinopec Group Company
— (49 ) — — — — — (49 ) — (49 )
Distributions by subsidiaries to non-controlling interests net of contributions
— — — — — — — — (144 ) (144 )
Total contributions by and distributions to owners
— (1,600 ) — 4,953 20,000 772 (38,817 ) (14,692 ) (144 ) (14,836 )
Changes in ownership interests in subsidiaries that do not result in a loss of control:
Acquisitions of non-controlling interests of subsidiaries
— (18 ) — — — — — (18 ) (4 ) (22 )
Total transactions with owners
— (1,618 ) — 4,953 20,000 772 (38,817 ) (14,710 ) (148 ) (14,858 )
Balance as of December 31, 2009
86,702 (17,911 ) 18,072 48,031 67,000 1,488 172,279 375,661 23,192 398,853
See accompanying notes to consolidated financial statements.

F-8
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts in millions)


Years ended December 31,
Note
2007
2008
2009
RMB
RMB
RMB
Net cash generated from operating activities
(a)
118,612 66,517 152,075
Investing activities
Capital expenditure
(101,113 ) (100,544 ) (104,761 )
Exploratory wells expenditure
(9,913 ) (8,380 ) (8,708 )
Purchase of investments, investments in associates and investments in jointly controlled entities
(1,581 ) (3,089 ) (3,240 )
Purchase of subsidiaries, net of cash acquired
(3,968 ) — —
Proceeds from disposal of investments and investments in associates
1,441 1,366 504
Proceeds from disposal of property, plant and equipment
413 265 594
Purchase of time deposits with financial institutions
(3,373 ) (1,442 ) (2,304 )
Proceeds from maturity of time deposits with financial institutions
3,340 1,358 1,820
Payments for derivative financial instruments
— (5,490 ) (3,197 )
Proceeds from derivative financial instruments
— 5,921 3,253
Net cash used in investing activities
(114,754 ) (110,035 ) (116,039 )
Financing activities
Proceeds of issuance of corporate bonds
35,000 15,000 61,000
Proceeds of issuance of convertible bonds, net of issuance costs
11,368 29,850 —
Proceeds from bank and other loans
779,252 1,182,908 779,987
Repayments of corporate bonds
(12,000 ) (10,000 ) (15,000 )
Repayments of bank and other loans
(798,398 ) (1,159,321 ) (845,103 )
Distributions by subsidiaries to non-controlling interests
(593 ) (1,404 ) (858 )
Contributions from non-controlling interests
1,223 1,137 714
Acquisitions of non-controlling interests of subsidiaries
— (598 ) (213 )
Dividend paid
(13,872 ) (12,572 ) (13,559 )
Distributions to Sinopec Group Company
(5,176 ) (2,180 ) (1,262 )
Net cash (used in) / generated from financing activities
(3,196 ) 42,820 (34,294 )
Net increase / (decrease) in cash and cash equivalents
662 (698 ) 1,742
Cash and cash equivalents as of January 1
7,187 7,785 7,008
Effect of foreign currency exchange rate changes
(64 ) (79 ) —
Cash and cash equivalents as of December 31
7,785 7,008 8,750
See accompanying notes to consolidated financial statements.

F-9
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts in millions)


(a)
Reconciliation of earnings before income tax to net cash generated from operating activities

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Operating activities
Earnings before income tax
82,847 22,116 80,568
Adjustment for:
Depreciation, depletion and amortization
43,648 46,321 50,487
Dry hole costs
6,060 4,236 4,761
Income from associates and jointly controlled entities
(4,044 ) (580 ) (2,997 )
Investment income
(1,670 ) (390 ) (374 )
Interest income
(407 ) (446 ) (277 )
Interest expense
7,690 11,907 7,382
Unrealized gain on foreign currency exchange rate changes and derivative financial instruments
(1,575 ) (2,394 ) (86 )
Loss / (gain) on disposal of property, plant and equipment, net
585 (231 ) (211 )
Impairment losses on long-lived assets
3,106 8,500 7,285
Gain on non-monetary contribution to a jointly controlled entity
(1,315 ) — —
Unrealized loss / (gain) on embedded derivative component of the Convertible Bonds
3,211 (3,947 ) 218
138,136 85,092 146,756
(Increase) / decrease in trade accounts receivable
(6,557 ) 10,818 (13,467 )
(Increase) / decrease in bills receivable
(4,191 ) 9,273 1,568
(Increase) / decrease in inventories
(20,387 ) 20,996 (45,508 )
(Increase) / decrease in prepaid expenses and other current assets
(2,724 ) (10,790 ) 13,963
Increase in lease prepayments
(4,220 ) (2,600 ) (5,073 )
Decrease in long-term prepayments and other assets
3,261 1,930 4,378
Increase / (decrease) in trade accounts payable
39,004 (37,400 ) 41,249
(Decrease) / increase in bills payable
(9,750 ) 6,323 4,353
Increase in accrued expenses and other payables
18,202 11,035 13,605
(Decrease) / increase in other liabilities
(215 ) 444 503
150,559 95,121 162,327
Interest received
406 447 277
Interest paid
(7,347 ) (11,660 ) (7,635 )
Investment and dividend income received
2,670 3,682 1,133
Income tax paid
(27,676 ) (21,073 ) (4,027 )
Net cash generated from operating activities
118,612 66,517 152,075
See accompanying notes to consolidated financial statements.
F-10
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data and except otherwise stated)
1 PRINCIPAL ACTIVITIES, ORGANIZATION AND BASIS OF PRESENTATION

Principal activities

China Petroleum & Chemical Corporation (the “Company”) is an energy and chemical company that, through its subsidiaries (hereinafter collectively referred to as the “Group”), engages in oil and gas and chemical operations in the People’s Republic of China (the “PRC”). Oil and gas operations consist of exploring for, developing and producing crude oil and natural gas; transporting crude oil and natural gas by pipelines; refining crude oil into finished petroleum products; and marketing crude oil, natural gas and refined petroleum products. Chemical operations include the manufacture and marketing of a wide range of chemicals for industrial uses.

Organization

The Company was established in the PRC on February 25, 2000 as a joint stock limited company as part of the reorganization (the “Reorganization”) of China Petrochemical Corporation (“Sinopec Group Company”), the ultimate holding company of the Group and a ministry-level enterprise under the direct supervision of the State Council of the PRC. Prior to the incorporation of the Company, the oil and gas and chemical operations of the Group were carried on by oil administration bureau, petrochemical and refining production enterprises and sales and marketing companies of Sinopec Group Company.

As part of the Reorganization, certain of Sinopec Group Company’s core oil and gas and chemical operations and businesses together with the related assets and liabilities were transferred to the Company. On February 25, 2000, in consideration for Sinopec Group Company transferring such oil and gas and chemical operations and businesses and the related assets and liabilities to the Company, the Company issued 68.8 billion domestic state-owned ordinary shares with a par value of RMB 1.00 each to Sinopec Group Company. The shares issued to Sinopec Group Company on February 25, 2000 represented the entire registered and issued share capital of the Company as of that date. The oil and gas and chemical operations and businesses transferred to the Company related to (i) the exploration, development and production of crude oil and natural gas, (ii) the refining, transportation, storage and marketing of crude oil and petroleum products, and (iii) the production and sale of chemicals.

Basis of preparation
Pursuant to the resolution passed at the Directors’ meeting on December 28, 2007, the Group acquired the controlling equity interests of Zhanjiang Dongxing Petrochemical Company Limited, Sinopec Hangzhou Oil Refinery Plant, Yangzhou Petrochemical Plant, Jiangsu Taizhou Petrochemical Plant and Sinopec Qingjiang Petrochemical Company Limited (collectively “Refinery Plants”) from Sinopec Group Company (hereinafter referred to as the “Acquisition of Refinery Plants”). In accordance with the acquisition agreement with Sinopec Group Company, the Group paid a cash consideration of RMB 2,468 to Sinopec Group Company during the year ended December 31, 2007, which is subject to further adjustment, if any, made by State-owned Assets Supervision and Administration Commission of the State Council (“SASAC”). During the year ended December 31, 2008, the consideration was adjusted by SASAC and the Group paid an additional cash consideration of RMB 96 to Sinopec Group Company.

Pursuant to the resolution passed at the Directors’ meeting on March 27, 2009, the Group acquired the entire equity interests of Sinopec Qingdao Petrochemical Company Limited and certain storage and distribution operations (collectively “the Acquired Group”) from Sinopec Group Company for total cash considerations of RMB 771 (hereinafter referred to as the “Acquisition of the Acquired Group”).

As the Group, Refinery Plants and the Acquired Group are under the common control of Sinopec Group Company, the Acquisition of Refinery Plants and the Acquisition of the Acquired Group have been reflected in the accompanying consolidated financial statements as combination of entities under common control in a manner similar to a pooling-of-interests. Accordingly, the assets and liabilities of Refinery Plants and the Acquired Group have been accounted for at historical cost and the consolidated financial statements of the Company prior to these acquisitions have been restated to include the results of operations and the assets and liabilities of Refinery Plants and the Acquired Group on a combined basis. The differences between the total considerations paid over the amounts of the net assets of Refinery Plants and the Acquired Group were accounted for as equity transactions.

The financial condition and the results of operation previously reported by the Group as of and for the years ended December 31, 2007 and 2008 have been restated to include the results of operations and the assets and liabilities of the Acquired Group on a combined basis as set out below.

F-11
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


The Group,
as previously reported
The
Acquired Group
Elimination*
The Group,
as restated
RMB
RMB
RMB
RMB
2007
Results of operation:
Operating revenues
1,204,843 10,304 (14,150 ) 1,200,997
Net income/(loss) attributable to the equity shareholders of the Company
56,533 (619 ) — 55,914
Basic and diluted earnings per share
0.65 — — 0.64
2008
Results of operation:
Operating revenues
1,452,101 11,781 (19,591 ) 1,444,291
Net income/(loss) attributable to the equity shareholders of the Company
29,769 (1,244 ) — 28,525
Basic earnings per share
0.34 — — 0.33
Diluted earnings per share
0.30 — — 0.29
Financial condition:
Current assets
164,311 1,549 (462 ) 165,398
Total assets
767,827 11,807 (462 ) 779,172
Current liabilities
274,537 12,581 (462 ) 286,656
Total liabilities
418,505 12,587 (462 ) 430,630
Total equity attributable to equity shareholders of the Company
328,669 (780 ) — 327,889

*
The Acquired Group sold its petroleum products primarily to the Group as well as purchasing crude oil primarily from the Group. These transactions between the Group and the Acquired Group have been eliminated on combination, resulting in a reduction in the operating revenue.  All other significant balances and transactions between the Group and the Acquired Group have been eliminated on combination.

The accompanying financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). IFRS includes International Accounting Standards (“IAS”) and related interpretations. A summary of the significant accounting policies adopted by the Group are set out in Note 2.
The IASB has issued certain new and revised IFRS that are first effective for the current accounting period of the Group. The new accounting policies and new disclosures resulting from the initial application of these standards or developments to the extent that they are relevant to the Group are summarized as follows:

(i)
As a result of the adoption of revised IAS 1 “Presentation of Financial Statements” (“revised IAS 1”), details of changes in equity during the year arising from transactions with equity shareholders in their capacity as such have been presented separately from all other income and expenses in a revised consolidated statement of equity. All other items of income and expense are presented in the consolidated statements of income, if they are recognized as part of profit or loss for the year, or otherwise in a new primary statement, the consolidated statements of comprehensive income. Corresponding amounts have been restated to conform to the new presentation.

F-12
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

(ii)
IFRS 8, Operating segments (“IFRS 8”), requires segment disclosure to be based on the way that the Group’s chief operating decision maker manages the Group, with the amounts reported for each reportable segment being the measures reported to the Group’s chief operating decision maker for the purposes of allocating resources to, and assessing the performance of the Group’s various lines of business. The adoption of IFRS 8 has not resulted in any significant changes to the presentation of segment information since the identification and presentation of reportable segments in prior periods were consistent with IFRS 8.
(iii)
As a result of the adoption of the amendments to IFRS 7, the financial statements include expanded disclosures in Note 35 about the fair value measurement of the Group’s financial instruments, categorizing these fair value measurements into a three-level fair value hierarchy according to the extent to which they are based on observable market data. The Group has taken advantage of the transitional provisions set out in the amendments to IFRS 7, under which comparative information for the newly required disclosures about the fair value measurements of financial instruments has not been provided.
The adoption of revised IAS 1, IFRS 8 and the amendments to IFRS 7 did not have any impact on the classification, recognition and measurement of the amounts recognized in the financial statements.
The Group has not adopted any other new standard or interpretation that is not yet effective for the current accounting period (Note 37).
In prior years, property, plant and equipment were carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses. In 2009, property, plant and equipment are accounted for using the cost model, being the cost less any accumulated depreciation and impairment losses. This change is to align the Group’s accounting policy with industry peers to provide more relevant financial information to the users of the Group’s financial statements. This change has been applied retrospectively.  Other than the elimination of the revaluation reserve by transferring the balance to retained earnings, this change in accounting policy has no effect on the financial condition as of December 31, 2007, 2008 and 2009, and the results of operation for the years then ended. Therefore, no comparative balance sheet as of January 1, 2008 was presented.
The accompanying financial statements are prepared on the historical cost basis except for the remeasurement of available-for-sale securities (Note 2(k)), derivative financial instruments (Note 2(l) and (m)) and derivative component of the convertible bonds (Note 2(q)) to their fair values.

The preparation of the financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and 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 year. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Key assumptions and estimation made by management in the application of IFRS that have significant effect on the financial statements and the major sources of estimation uncertainty are disclosed in Note 36.

F-13
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


2         SIGNIFICANT ACCOUNTING POLICIES

(a)      Basis of consolidation

The consolidated financial statements comprise the Company and its subsidiaries, and the Group’s interest in associates and jointly controlled entities.

(i)      Subsidiaries and non-controlling interests

Subsidiaries are those entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

The financial statements of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases.

Non-controlling interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheet and consolidated statements of equity within equity, separately from equity attributable to the equity shareholders of the Company. Non-controlling interests in the results of the Group are presented on the face of the consolidated statements of income and consolidated statements of comprehensive income as an allocation of the total net income or loss and total comprehensive income for the year between non-controlling interests and the equity shareholders of the Company.

The particulars of the Group’s principal subsidiaries are set out in Note 34.

(ii) Associates and jointly controlled entities

An associate is an entity, not being a subsidiary, in which the Group exercises significant influence over its management. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

A jointly controlled entity is an entity which operates under a contractual arrangement between the Group and other parties, where the contractual arrangement establishes that the Group and one or more of the other parties share joint control over the economic activity of the entity.

Investments in associates and jointly controlled entities are accounted for in the consolidated financial statements using the equity method from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. Under the equity method, the investment is initially recorded at cost and adjusted thereafter for the post acquisition change in the Group’s share of the investee’s net assets and any impairment loss relating to the investment (Note 2(j) and (n)).

The Group’s share of the post-acquisition, post-tax results of the investees and any impairment losses for the year are recognized in the consolidated statements of income, whereas the Group’s share of the post-acquisition post-tax items of the investees’ other comprehensive income is recognized in the consolidated statements of comprehensive income.

(iii)     Transactions eliminated on consolidation

Inter-company balances and transactions and any unrealized gains arising from inter-company transactions are eliminated on consolidation.  Unrealized gains arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group’s interest in the entity.  Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.


F-14
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


(b)       Translation of foreign currencies

The presentation currency of the Group is Renminbi. Foreign currency transactions during the year are translated into Renminbi at the applicable rates of exchange quoted by the People’s Bank of China (‘‘PBOC’’) prevailing on the transaction dates. Foreign currency monetary assets and liabilities are translated into Renminbi at the PBOC’s rates at the balance sheet date.

Exchange differences, other than those capitalized as construction in progress, are recognized as income or expenses in the “finance costs” section of the consolidated statements of income.

(c)       Cash and cash equivalents

Cash equivalents consist of time deposits with financial institutions with an initial term of less than three months when purchased. Cash equivalents are stated at cost, which approximates fair value.

(d)      Trade, bills and other receivables

Trade, bills and other receivables are initially recognized at fair value and thereafter stated at amortized cost less impairment losses for bad and doubtful debts (Note 2(n)). Trade, bills and other receivables are derecognized if the Group’s contractual rights to the cash flows from these financial assets expire or if the Group transfers these financial assets to another party without retaining control or substantially all risks and rewards of the assets.

(e)      Inventories

Inventories, other than spare parts and consumables, are stated at the lower of cost and net realizable value. Cost includes the cost of purchase computed using the weighted average method and, in the case of work in progress and finished goods, direct labor and an appropriate proportion of production overheads. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.

Spare parts and consumables are stated at cost less any provision for obsolescence.

(f)       Property, plant and equipment

An item of property, plant and equipment is recorded at cost, less accumulated depreciation and impairment losses (Note 2(n)). The cost of an asset comprises its purchase price, any directly attributable costs of bringing the asset to working condition and location for its intended use. The Group recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred, it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other expenditure is recognized as an expense in the consolidated statements of income in the year in which it is incurred.

Gains or losses arising from the retirement or disposal of an item of property, plant and equipment, other than oil and gas properties, are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognized as income or expense in the consolidated statements of income on the date of retirement or disposal.

Depreciation is provided to write off the cost amount of items of property, plant and equipment, other than oil and gas properties, over its estimated useful life on a straight-line basis, after taking into account its estimated residual value, as follows:

Buildings
15 to 45 years
Plant, machinery, equipment, and others
4 to 18 years
Oil depots, storage tanks and service stations
8 to 25 years

Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reassessed annually.


F-15
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


(g)      Oil and gas properties

The Group uses the successful efforts method of accounting for its oil and gas producing activities. Under this method, costs of development wells and the related support equipment are capitalized. The cost of exploratory wells is initially capitalized as construction in progress pending determination of whether the well has found proved reserves. The impairment of exploratory well costs occurs upon the determination that the well has not found proved reserves. Exploratory wells that find oil and gas reserves in any area requiring major capital expenditure are expensed unless the well has found a sufficient quantity of reserves to justify its completion as a producing well if the required capital expenditure is made, and drilling of the additional exploratory wells is under way or firmly planned for the near future. However, in the absence of a determination of the discovery of proved reserves, exploratory well costs are not carried as an asset for more than one year following completion of drilling. If, after one year has passed, a determination of the discovery of proved reserves cannot be made, the exploratory well costs are impaired and charged to expense. All other exploration costs, including geological and geophysical costs, other dry hole costs and annual lease rentals, are expensed as incurred. Capitalized costs relating to proved properties are amortized at the field level on a unit-of-production method. The amortization rates are determined based on oil and gas reserves estimated to be recoverable from existing facilities over the shorter of the economic lives of crude oil and natural gas reservoirs and the terms of the relevant production licenses.

Gains and losses on the disposal of proved oil and gas properties are not recognized unless the disposal encompasses an entire property. The proceeds on such disposals are credited to the carrying amounts of oil and gas properties.

Management estimates future dismantlement costs for oil and gas properties with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with the industry practices. These estimated future dismantlement costs are discounted at a credit-adjusted risk-free rate and are capitalized as oil and gas properties, which are subsequently amortized as part of the costs of the oil and gas properties.

(h) Lease prepayments

Lease prepayments represent land use rights paid to the relevant government authorities. Land use rights are carried at cost less the accumulated amount charged to expense and impairment losses (Note 2(n)). The cost of lease prepayments is charged to expense on a straight-line basis over the respective periods of the rights.

(i)
Construction in progress

Construction in progress represents buildings, oil and gas properties, various plant and equipment under construction and pending installation, and is stated at cost less impairment losses (Note 2(n)). Cost comprises direct costs of construction as well as interest charges, and foreign exchange differences on related borrowed funds to the extent that they are regarded as an adjustment to interest charges, during the periods of construction.

Construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use.

No depreciation is provided in respect of construction in progress.

(j)
Goodwill

Goodwill represents amounts arising on acquisition of subsidiaries, associates or jointly controlled entities.  Goodwill represents the difference between the cost of acquisition and the fair value of the net identifiable assets acquired.

Prior to January 1, 2008, the acquisition of the non-controlling interests of a consolidated subsidiary was accounted for using the acquisition method whereby the difference between the cost of acquisition and the fair value of the net identifiable assets acquired (on a proportionate share) was recognized as goodwill. From January 1, 2008, any difference between the amount by which the non-controlling interest is adjusted (such as through an acquisition of the non-controlling interests) and the cash or other considerations paid is recognized in equity.


F-16
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Goodwill is stated at cost less accumulated impairment losses. Goodwill arising on a business combination is allocated to cash-generating units, or groups of cash generating units, that is expected to benefit the synergies of the combination and is tested annually for impairment (Note 2(n)). In respect of associates and jointly controlled entities, the carrying amount of goodwill is included in the carrying amount of the interest in the associates or jointly controlled entities and the investment as a whole is tested for impairment whenever there is objective evidence of impairment (Note 2(n)).

(k)
Investments

Investments in available-for-sale securities are carried at fair value with any change in fair value recognized in other comprehensive income and accumulated separately in equity in other reserves.  When these investments are derecognized or impaired, the cumulative gain or loss is reclassified from equity to the consolidated statements of income. Investments in equity securities, other than investments in associates and jointly controlled entities, that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are recognized in the balance sheet at cost less impairment losses (Note 2(n)).

(l)       Derivative financial instruments

Derivative financial instruments are recognized initially at fair value.  At each balance sheet date the fair value is remeasured. The gain or loss on re-measurement to fair value is recognized immediately in the consolidated statements of income, except where the derivatives qualify for cash flow hedge accounting or the hedge of the net investment in a foreign operation, in which case recognition of any resultant gain or loss depends on the nature of the item being hedged (Note 2(m)).

(m)     Hedging

(i)       Cash flow hedges

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk of a committed future transaction, the effective portion of any gains or losses on re-measurement of the derivative financial instrument to fair value are recognized in other comprehensive income and accumulated separately in equity in other reserves. The ineffective portion of any gain or loss is recognized immediately in the consolidated statements of income.

If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated gain or loss is reclassified from equity to be included in the initial cost or other carrying amount of the non-financial asset or liability.

If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gain or loss is reclassified from equity to the consolidated statements of income in the same period or periods during which the asset acquired or liability assumed affects the consolidated statements of income (such as when interest income or expense is recognized).

For cash flow hedges, other than those covered by the preceding two policy statements, the associated gain or loss is reclassified from equity to the consolidated statements of income in the same period or periods during which the hedged forecast transaction affects the consolidated statements of income.

When a hedging instrument expires or is sold, terminated, exercised, or the entity revokes designation of the hedge relationship but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity until the transaction occurs and it is recognized in accordance with the above policy. If the hedged transaction is no longer expected to take place, the cumulative unrealized gain or loss is reclassified from equity to the consolidated statements of income immediately.


F-17
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


(ii)      Hedge of net investments in foreign operations

The portion of the gain or loss on re-measurement to fair value of an instrument used to hedge a net investment in a foreign operation that is determined to be an effective hedge is recognized in other comprehensive income and accumulated separately in equity in the exchange reserve until the disposal of the foreign operation, at which time the cumulative gain or loss is reclassified from equity to the consolidated statements of income. The ineffective portion is recognized immediately in the consolidated statements of income.

(n)
Impairment of assets

(i)       Trade accounts receivable, other receivables and investment in equity securities that do not have an quoted market price in an active market are reviewed at each balance sheet date to determine whether there is objective evidence of impairment.  If any such evidence exists, an impairment loss is determined and recognized.

The impairment loss is measured as the difference between the asset’s carrying amount and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material, and is recognized as an expense in the consolidated statements of income.  Impairment losses for trade and other receivables are reversed through the consolidated statements of income if in a subsequent period the amount of the impairment losses decreases. Impairment losses for equity securities carried at cost are not reversed.

For investments in associates and jointly controlled entities accounted under the equity method (Note 2(a)(ii)), the impairment loss is measured by comparing the recoverable amount of the investment as a whole with its carrying amount in accordance with the accounting policy set out in Note 2(n)(ii). The impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount in accordance with the accounting policy set out in Note 2(n)(ii).

(ii)      Impairment of other long-lived assets is accounted for as follows:

The carrying amounts of other long-lived assets, including property, plant and equipment, construction in progress, lease prepayments and investments in associates and jointly controlled entities, are reviewed at each balance sheet date to identify indicators that the assets may be impaired. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount.  For goodwill, the recoverable amount is estimated at each balance sheet date.

The recoverable amount is the greater of the fair value less costs to sell and the value in use. In determining the value in use, expected future cash flows generated by the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

The amount of the reduction is recognized as an expense in the consolidated statements of income. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then, to reduce the carrying amount of the other assets in the unit on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.

Management assesses at each balance sheet date whether there is any indication that an impairment loss recognized for a long-lived asset, except in the case of goodwill, in prior years may no longer exist. An impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount. A subsequent increase in the recoverable amount of an asset, when the circumstances and events that led to the write-down or write-off cease to exist, is recognized as an income. The reversal is reduced by the amount that would have been recognized as depreciation had the write-down or write-off not occurred.  An impairment loss in respect of goodwill is not reversed.


F-18
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


(o)       Trade, bills and other payables

Trade, bills and other payables are initially recognized at fair value and thereafter stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

(p)       Interest-bearing borrowings

Interest-bearing borrowings are recognized initially at fair value less attributable transaction costs.  Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the consolidated statements of income over the period of borrowings using the effective interest method.

(q)       Convertible bonds

(i)       Convertible bonds that contain an equity component

Convertible bonds that can be converted to equity share capital at the option of the holder, where the number of shares that would be issued on conversion and the value of the consideration that would be received at that time do not vary, are accounted for as compound financial instruments that contain both a liability component and an equity component.

At initial recognition, the liability component of the convertible bonds is measured as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option. Any excess of proceeds over the amount initially recognized as the liability component is recognized as the equity component. Transaction costs that relate to the issuance of the convertible bonds are allocated to the liability and equity components in proportion to the allocation of proceeds.

The liability component is subsequently carried at amortized cost. The interest expense on the liability component is calculated using the effective interest method. The equity component is recognized in the capital reserve until the bond is converted or redeemed.

If the bond is converted, the capital reserve, together with the carrying amount of the liability component at the time of conversion, is transferred to share capital and share premium as consideration for the shares issued. If the bond is redeemed, the capital reserve is transferred to retained earnings.

(ii)       Other convertible bonds

Convertible bonds issued with a cash settlement option and other embedded derivative features are accounted for as compound financial instruments that contain a liability component and a derivative component.

At initial recognition, the derivative component of the convertible bonds is measured at fair value.  Any excess of proceeds over the amount initially recognized as the derivative component is recognized as the liability component.  Transaction costs that relate to the issuance of the convertible bonds are allocated to the liability and derivative components in proportion to the allocation of proceeds.  The portion of the transaction costs relating to the liability component is recognized initially as part of the liability.  The portion relating to the derivative component is recognized immediately as an expense in the consolidated statements of income.

The derivative component is subsequently remeasured at each balance sheet date and any gains or losses arising from change in the fair value are recognized in the consolidated statements of income. The liability component is subsequently carried at amortized cost until extinguished on conversion or redemption.  The interest expense recognized in the consolidated statements of income on the liability component is calculated using the effective interest method.  Both the liability and the related derivative components are presented together for financial statements reporting purposes.

If the convertible bonds are converted, the carrying amounts of the derivative and liability components are transferred to share capital and share premium as consideration for the shares issued.  If the convertible bonds are redeemed, any difference between the amount paid and the carrying amounts of both components is recognized in the consolidated statements of income.


F-19
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


(r)       Provisions and contingent liability

A provision is recognized for liability of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made.

When it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote.  Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

Provisions for future dismantlement costs are initially recognized based on the present value of the future costs expected to be incurred in respect of the Group’s expected dismantlement and abandonment costs at the end of related oil and gas exploration and development activities. Any subsequent change in the present value of the estimated costs, other than the change due to passage of time which is regarded as interest cost, is reflected as an adjustment to the provision and oil and gas properties.

A provision for onerous contracts is recognized when the expected economic benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract.

(s)      Revenue recognition

Revenues associated with the sale of crude oil, natural gas, petroleum and chemical products and ancillary materials are recorded when the customer accepts the goods and the significant risks and rewards of ownership and title have been transferred to the buyer. Revenue from the rendering of services is recognized in the consolidated statements of income upon performance of the services. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due, the possible return of goods, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably.

Interest income is recognized on a time apportioned basis that takes into account the effective yield on the asset.

A government grant that becomes receivable as compensation for expenses or losses already incurred with no future related costs is recognized as income in the period in which it becomes receivable.

(t)       Borrowing costs

Borrowing costs are expensed in the consolidated statements of income in the period in which they are incurred, except to the extent that they are capitalized as being attributable to the construction of an asset which necessarily takes a period of time to get ready for its intended use.

(u)      Repairs and maintenance expenditure

Repairs and maintenance expenditure is expensed as incurred.

(v)       Environmental expenditures

Environmental expenditures that relate to current ongoing operations or to conditions caused by past operations are expensed as incurred.

Liabilities related to future remediation costs are recorded when environmental assessments and / or cleanups are probable and the costs can be reasonably estimated. As facts concerning environmental contingencies become known to the Group, the Group reassesses its position both with respect to accrued liabilities and other potential exposures.


F-20
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


(w)      Research and development expense

Research and development expenditures are expensed in the period in which they are incurred.  Research and development expense amounted to RMB 3,419, RMB 3,427 and RMB 3,816 for the years ended December 31, 2007, 2008 and 2009, respectively.

(x)      Operating leases

Operating lease payments are charged to the consolidated statements of income on a straight-line basis over the period of the respective leases.

(y)      Employee benefits

The contributions payable under the Group’s retirement plans are recognized as an expense in the consolidated statements of income as incurred and according to the contribution determined by the plans. Further information is set out in Note 32.

Termination benefits, such as employee reduction expenses, are recognized when, and only when, the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.

(z)      Income tax

Income tax comprises current and deferred tax. Current tax is calculated on taxable income by applying the applicable tax rates. Deferred tax is provided using the balance sheet liability method on all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes only to the extent that it is probable that future taxable income will be available against which the assets can be utilized. Deferred tax is calculated on the basis of the enacted tax rates or substantially enacted tax rates that are expected to apply in the period when the asset is realized or the liability is settled.  The effect on deferred tax of any changes in tax rates is charged or credited to the consolidated statements of income, except for the effect of a change in tax rate on the carrying amount of deferred tax assets and liabilities which were previously charged or credited to other comprehensive income or directly in equity.

The tax value of losses expected to be available for utilization against future taxable income is set off against the deferred tax liability within the same legal tax unit and jurisdiction to the extent appropriate, and is not available for set off against the taxable profit of another legal tax unit. The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that the related tax benefit will be realized.

(aa)     Dividends

Dividends are recognized as a liability in the period in which they are declared.

(bb)    Segment reporting

Operating segments, and the amounts of each segment item reported in the financial statements, are identified from the financial information provided regularly to the Group’s chief operating decision maker for the purposes of allocating resources to, and assessing the performance of the Group’s various lines of business.


F-21
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


3.       OTHER OPERATING REVENUES

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Sale of materials, service and others
30,643 30,597 28,749
Rental income
370 491 388
31,013 31,088 29,137

4.       OTHER INCOME

During the years ended December 31, 2007 and 2008, the Group recognized grant income of RMB 4,863 and RMB 50,857, respectively. These government grants were for compensation of losses incurred due to the distortion of the correlation of domestic refined petroleum product prices and the crude oil prices, and the measures taken by the Group to stabilize the supply in the PRC refined petroleum product market during the respective years. There were no unfulfilled conditions and other contingencies attached to the receipts of these grants. The Group did not receive such government grant during the year ended December 31, 2009.

5.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

The following items are included in selling, general and administrative expenses:

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Operating lease charges
5,897 6,986 7,555
Impairment losses
- trade accounts receivable
295 143 70
- other receivables
143 85 222

6.
PERSONNEL EXPENSES

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Wages and salaries
17,829 17,741 21,057
Staff welfare
886 1,277 1,345
Contributions to retirement schemes (Note 32)
2,817 2,873 4,647
Social security contributions
1,297 1,490 1,787
22,829 23,381 28,836

7.
TAXES OTHER THAN INCOME TAX

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Consumption tax (i)
16,636 17,868 110,206
Special oil income levy (ii)
11,208 32,823 7,145
City construction tax  (iii)
3,691 3,363 9,212
Education surcharge
1,931 1,838 5,043
Resources tax
882 857 857
Business tax
317 465 421
34,665 57,214 132,884

F-22
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Note:

(i)
Before January 1, 2009, consumption tax is levied on gasoline, diesel, naphtha, solvent oil, lubricant oil, fuel oil and jet fuel oil at a rate of RMB 277.6 per tonne, RMB 117.6 per tonne, RMB 277.0 per tonne, RMB 256.4 per tonne, RMB 225.2 per tonne, RMB 101.5 per tonne and RMB 124.6 per tonne, respectively. Effective from January 1, 2009, the consumption tax rates of on gasoline, diesel, naphtha, solvent oil, lubricant oil, fuel oil and jet fuel oil changed to RMB 1,388.0 per tonne, RMB 940.8 per tonne, RMB 1,385.0 per tonne, RMB 1,282.0 per tonne, RMB 1,126.0 per tonne, RMB 812.0 per tonne and RMB 996.8 per tonne, respectively.
(ii)
Special oil income levy is levied on oil exploration and production entities based on the progressive rates ranging from 20% to 40% on the portion of the monthly weighted average sales price of the crude oil produced in the PRC exceeding USD 40 per barrel.
(iii)
City construction tax is levied on an entity based on its total amount of value-added tax, consumption tax and business tax.
8.       OTHER OPERATING EXPENSES, NET

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Fines, penalties and compensations
73 106 159
Donations
158 104 174
Loss / (gain) on disposal of property, plant and equipment, net
585 (231 ) (211 )
Impairment losses on long-lived assets (i)
3,106 8,500 7,285
Gain on non-monetary contribution to a jointly controlled entity (ii)
(1,315 ) — —
Net realized and unrealized losses on derivative financial instruments not qualified as hedging
— (776 ) (82 )
Ineffective portion of change in fair value of cash flow hedges
— 54 16
Others
1,029 331 (431 )
3,636 8,088 6,910

Note:

(i)
The factor resulting in the exploration and production (“E&P”) segment impairment losses of RMB 481 and RMB 1,595 of property, plant and equipment for the years ended December 31, 2007 and 2009, respectively, was unsuccessful development drilling and high operating and development costs for certain small oil fields. The E&P segment impairment losses of RMB 5,991 for the year ended December 31, 2008 comprised of impairment losses on RMB 4,600 of property, plant and equipment in the E&P segment (Note 16) and RMB 1,391 of goodwill in respect of Sinopec Zhongyuan (Note 18) and was primarily due to downward reserves estimation for certain oil fields resulting from lower oil and gas pricing. The carrying values of these E&P properties and associated goodwill were written down to respective recoverable amounts which were determined based on the present values of the expected future cash flows of the assets. The oil and gas pricing was a factor used in the determination of the present values of the expected future cash flows of the assets and had an impact on the recognition of the asset impairment.

F-23
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

Impairment losses recognized for the chemicals segment were RMB 318, RMB 1,511 and RMB 3,807 for the years ended December 31, 2007, 2008 and 2009, respectively and comprised of impairment losses of RMB 318, RMB 1,511 and RMB 3,728 on property, plant and equipment for the years ended December 31, 2007, 2008 and 2009, respectively, and impairment losses of RMB 79 on other long-term assets for the year ended December 31, 2009. Impairment losses recognized for refining segment were RMB 1,070, RMB 270 and RMB 396 for the years ended December 31, 2007, 2008 and 2009, respectively, comprised of impairment losses of RMB 916, RMB 270 and RMB 377 on property, plant and equipment for the years ended December 31, 2007, 2008 and 2009, respectively, and impairment losses of RMB 154, RMB nil and RMB 19 on construction in progress for the years ended December 31, 2007, 2008 and 2009, respectively. These impairment losses relate to certain refining and chemicals production facilities that are held for use. The carrying values of these facilities were written down to their recoverable amounts that were primarily determined based on the asset held for use model using the present value of estimated future cash flows of the production facilities.  The primary factor resulting in the impairment losses on long-lived assets of the refining and chemicals segments was due to higher operating and production costs caused by the increase in the prices of raw materials that are not expected to be covered through an increase in selling price.
Impairment losses recognized on long-lived assets of the marketing and distribution segment of RMB 1,237, RMB 709 and RMB 1,479 for the years ended December 31, 2007, 2008 and 2009, respectively, and comprised of impairment losses of RMB 1,194, RMB 698 and RMB 1,425 of property, plant and equipment for the years ended December 31, 2007, 2008 and 2009, respectively, and impairment losses of RMB 43, RMB 11 and RMB 54 of construction in progress for the years ended December 31, 2007, 2008 and 2009, respectively, primarily relate to certain service stations and certain construction in progress that were closed or abandoned during respective years.  In measuring the amounts of impairment charges, the carrying amounts of these assets were compared to the present value of the expected future cash flows of the assets, as well as information about sales and purchases of similar properties in the same geographic area.
(ii)
During the year ended December 31, 2007, the Group contributed certain property, plant and equipment and construction in progress, respectively, in exchange for a 50% equity interest in a newly set up jointly controlled entity and recognized a gain of RMB 1,315, representing the portion of the difference between the carrying amount of these assets and their fair value attributable to the equity interests of the other venturer.  The other venturer contributed the other 50% equity interest in cash representing the fair values of the property, plant and equipment and construction in progress as determined by a valuation performed by an independent valuer.
9.       INTEREST EXPENSE

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Interest expense incurred
8,303 13,046 9,574
Less: Interest expense capitalized*
(966 ) (1,569 ) (2,621 )
7,337 11,477 6,953
Accretion expenses (Note 27)
353 430 429
Interest expense
7,690 11,907 7,382
* Interest rates per annum at which borrowing costs were Capitalized for construction in progress
3.6% to 7.1%
3.8% to 7.1%
3.0% to 6.8%


F-24
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


10.      INCOME TAX

Income tax in the consolidated statements of income represents:

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Current tax
- Provision for the year
28,630 610 17,042
- Under/(over)-provision in prior years
249 216 (512 )
Deferred taxation (Note 23)
(4,156 ) (3,666 ) (446 )
24,723 (2,840 ) 16,084

Reconciliation between actual income tax expense / (benefit) and the expected income tax at applicable statutory tax rates is as follows:

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Earnings before income tax
82,847 22,116 80,568
Expected PRC income tax expense at statutory tax rates of 33%, 25% and 25% in 2007, 2008 and 2009, respectively
27,340 5,529 20,142
Tax effect of differential tax rate (i)
(1,959 ) 1,212 (1,621 )
Tax effect of non-deductible expenses
1,413 865 326
Tax effect of non-taxable income (iii)
(3,767 ) (11,209 ) (1,686 )
Tax effect of utilization of previously unrecognized tax losses
— (401 ) (683 )
Tax effect of tax losses not recognized
295 948 118
Under/(over)-provision in prior years
249 216 (512 )
Tax credit for domestic equipment purchases
(500 ) — —
Effect of change in tax rate on deferred tax (ii)
1,652 — —
Actual income tax expense / (benefit).
24,723 (2,840 ) 16,084

Substantially all earnings before income tax and related tax expense / (benefit) are from PRC sources.

Note:

(i)
During the years ended December 31, 2007, 2008 and 2009, the provision for PRC current income tax is based on statutory income tax rates of 33%, 25% and 25%, respectively, of the assessable income of the Group as determined in accordance with the relevant income tax rules and regulations of the PRC, except for certain entities of the Group, which are taxed at preferential rates ranging from 15% to 20%.
(ii)
On March 16, 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the People’s Republic of China (“new tax law”), which took effect on January 1, 2008. According to the new tax law, a unified corporate income tax rate of 25% is applied to PRC entities; however certain entities previously taxed at a preferential rate are subject to a transition period during which their tax rate will gradually be increased to the unified rate of 25% over a five-year period starting from January 1, 2008.
Based on the new tax law, the income tax rate applicable to the Group, except for certain entities of the Group, is reduced from 33% to 25% from January 1, 2008. Based on a tax notice issued by the State Council on December 26, 2007, the applicable tax rates for entities operating in special economic zones, which were previously taxed at the preferential rate of 15%, are 18%, 20%, 22%, 24% and 25% in 2008, 2009, 2010, 2011 and 2012 onward, respectively. According to the same notice, the applicable tax rate for entities operating in the western region of the PRC which were granted a preferential tax rate of 15% from 2004 to 2010, remains at 15% in 2008, 2009 and 2010 and will be increased to 25% from January 1, 2011.
(iii)
The tax effect of non-taxable income for the year ended December 31, 2008 primarily related to the grant income.



F-25
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


11       OTHER COMPREHENSIVE INCOME

(a)      Tax effects relating to each component of other comprehensive income

Years ended December 31,
2007
2008
2009
Before-tax amount
Tax expense
Net-of-tax amount
Before-tax amount
Tax benefit
Net-of-tax amount
Before-tax amount
Tax (expense)/benefit
Net-of-tax amount
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
Cash flow hedges
— — — — — — 65 (11 ) 54
Available-for-sale securities
438 (112 ) 326 (296 ) 64 (232 ) (227 ) 52 (175 )
Share of other comprehensive income of associates
2,711 — 2,711 (2,206 ) — (2,206 ) 806 — 806
Effect of change in tax rate
— (37 ) (37 ) — — — — — —
Other comprehensive income
3,149 (149 ) 3,000 (2,502 ) 64 (2,438 ) 644 41 685

(b)      Reclassification adjustments relating to components of other comprehensive income

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Cash flow hedges:
Effective portion of changes in fair value of hedging instruments recognized during the year
— 662 (2,058 )
Amounts transferred to initial carrying amount of hedged items
— 257
Reclassification adjustments for amounts transferred to the cost of inventories for the year
— (662 ) 1,866
Net deferred tax expense recognized in other comprehensive income
— — (11 )
Net movement during the year recognized in other comprehensive income
— — 54
Available-for-sale securities:
Changes in fair value recognized during the year
1,209 (132 ) (1 )
Gain on disposal transferred to the consolidated statements of income
(771 ) (164 ) (226 )
Net deferred tax (expense)/benefit recognized in other comprehensive income
(112 ) 64 52
Net movement during the year recognized in other comprehensive income
326 (232 ) (175 )
Share of other comprehensive income of associates:
Net movement during the year recognized in other comprehensive income
2,711 (2,206 ) 806
Effect of change in tax rate:
Net movement during the year recognized in other comprehensive income (Note)
(37 ) — —

Note:
The amount recognized in other comprehensive income represents the effect of change in tax rate on deferred tax assets previously recognized directly in equity as a result of the new tax law.


F-26
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


12.      BASIC AND DILUTED EARNINGS PER SHARE

The calculation of basic and diluted earnings per share is based on the net income attributable to ordinary equity shareholders of the Company of RMB 55,914 and the weighted average number of shares of 86,702,439,000 for the year ended December 31, 2007. For the year ended December 31, 2007, diluted earnings per share was calculated on the same basis as basic earnings per share, since the effect of the Convertible Bonds (Note 24(c)) was anti-dilutive for that year.

The calculation of basic earnings per share is based on the net income attributable to ordinary equity shareholders of the Company of RMB 28,525 and RMB 61,760 for the years ended December 31, 2008 and 2009, respectively, and the weighted average number of the shares of 86,702,439,000 for each of the years ended December 31, 2008 and 2009. The calculation of diluted earnings per share for the years ended December 31, 2008 and 2009 is based on the net income attributable to ordinary equity shareholders of the Company of RMB 25,348 and RMB 62,136, respectively, and the weighted average number of the shares of 87,789,799,595 for each of the years ended December 31, 2008 and 2009 calculated as follows:

(i)        Net income attributable to ordinary equity shareholders of the Company (diluted)

2008
2009
RMB
RMB
Net income attributable to ordinary equity shareholders of the Company
28,525 61,760
After tax effect of interest expense (net of exchange gain) of the Convertible Bonds
(217 ) 212
After tax effect of unrealized (gain)/loss on embedded derivative component of the Convertible Bonds
(2,960 ) 164
Net income attributable to ordinary equity shareholders of the Company (diluted)
25,348 62,136

(ii)       Weighted average number of shares (diluted)

2008
2009
Number of
Number of
shares
shares
Weighted average number of shares as of December 31
86,702,439,000 86,702,439,000
Effect of conversion of the Convertible Bonds
1,087,360,595 1,087,360,595
Weighted average number of shares (diluted) as of December 31
87,789,799,595 87,789,799,595

The calculation of diluted earnings per share for the years ended December 31, 2008 and 2009 excludes the effect of the Warrants (Note 24(d)), since it did not have any dilutive effect.


F-27
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


13.      TRADE ACCOUNTS RECEIVABLE, NET

December 31,
2008
2009
RMB
RMB
Amounts due from third parties
11,318 27,481
Amounts due from Sinopec Group Company and its affiliates
2,670 697
Amounts due from associates and jointly controlled entities
1,408 335
15,396 28,513
Less: Impairment losses for bad and doubtful debts
(2,406 ) (1,921 )
Trade accounts receivable, net
12,990 26,592

Impairment losses for bad and doubtful debts are analyzed as follows:

2007
2008
2009
RMB
RMB
RMB
Balance as of January 1
3,373 2,909 2,406
Impairment losses recognized for the year
295 143 70
Reversal of impairment losses
(204 ) (254 ) (245 )
Written off
(555 ) (392 ) (310 )
Balance as of December 31
2,909 2,406 1,921

Sales are generally on a cash term. Credit is generally only available for major customers with well-established trading records. Amounts due from Sinopec Group Company and its affiliates are repayable under the same terms.

Trade accounts receivable (net of impairment losses for bad and doubtful debts) primarily represents receivable that is neither past due nor impaired. This receivable relates to a wide range of customers for whom there is no recent history of default.


F-28
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)



14.      INVENTORIES

December 31,
2008
2009
RMB
RMB
Crude oil and other raw materials
54,085 87,471
Work in progress
10,745 11,609
Finished goods
35,858 39,737
Spare parts and consumables
4,480 3,832
105,168 142,649
Less: Allowance for diminution in value of inventories
(9,189 ) (1,038 )
95,979 141,611

Allowance for diminution in value of inventories is analyzed as follows:

2007
2008
2009
RMB
RMB
RMB
Balance as of January 1
871 4,572 9,189
Allowance for the year
3,962 8,777 401
Reversal of allowance on disposal
(131 ) (64 ) (185 )
Written off
(130 ) (4,096 ) (8,367 )
Balance as of December 31
4,572 9,189 1,038
During the years ended December 31, 2007, 2008 and 2009, the cost of inventories recognized as an expense in the consolidated statements of income of RMB 1,009,489, RMB 1,329,637 and RMB 1,039,685, respectively, which includes the write-down of inventories, that primarily related to the refining and chemicals segment, of RMB 3,962, RMB 8,777 and RMB 401, respectively, and the reversal of write-down of inventories made in prior years of RMB 261, RMB 4,160 and RMB 8,552, respectively, that mainly was due to the sales of inventories.  The write-down of inventories and the reversal of write-down of inventories were recorded in purchased crude oil, products and operating supplies and expenses in the consolidated statements of income.

15      PREPAID EXPENSES AND OTHER CURRENT ASSETS

December 31,
2008
2009
RMB
RMB
Advances to third parties
1,257 1,214
Amounts due from Sinopec Group Company and its affiliates
3,889 787
Amounts due from associates and jointly controlled entities
654 23
Other receivables
3,538 1,130
Loans and receivables
9,338 3,154
Purchase deposits and other assets
4,104 2,320
Prepayments in connection with construction work and equipment purchases
3,176 1,906
Prepaid value-added tax and customs duty
17,740 12,577
Available-for-sale financial assets
— 700
Derivative financial instruments – hedging
224 142
Derivative financial instruments – non-hedging
643 182
35,225 20,981


F-29
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


16.      PROPERTY, PLANT AND EQUIPMENT

By segment:
Exploration
and
production
Refining
Marketing
and
distribution
Chemicals
Corporate
and
others
Total
RMB
RMB
RMB
RMB
RMB
RMB
Cost:
Balance as of January 1, 2008
284,183 159,959 97,704 181,124 6,198 729,168
Additions
1,598 536 592 688 162 3,576
Transferred from construction in progress
35,701 23,444 10,994 4,683 2,605 77,427
Acquisitions (ii)
17,943 — — — — 17,943
Reclassification
(105 ) (3,603 ) (250 ) 3,952 6 —
Reclassification to lease prepayments and other assets
— (247 ) (314 ) (41 ) (202 ) (804 )
Disposals
(198 ) (538 ) (1,069 ) (928 ) (28 ) (2,761 )
Balance as of December 31, 2008
339,122 179,551 107,657 189,478 8,741 824,549
Balance as of January 1, 2009
339,122 179,551 107,657 189,478 8,741 824,549
Additions
2,141 178 693 754 20 3,786
Transferred from construction in progress
61,111 18,291 9,690 15,146 1,170 105,408
Acquisitions (ii)
60 999 — — 1,722 2,781
Reclassification
— 6,008 214 (6,089 ) (133 ) —
Reclassification to lease prepayments and other assets
— — (663 ) — (20 ) (683 )
Disposals
(606 ) (1,812 ) (1,511 ) (4,333 ) (192 ) (8,454 )
Balance as of December 31, 2009
401,828 203,215 116,080 194,956 11,308 927,387
Accumulated depreciation:
Balance as of January 1, 2008
130,683 76,073 24,009 112,782 2,378 345,925
Depreciation charge for the year
22,040 9,576 4,934 8,234 716 45,500
Acquisitions (ii)
16,401 — — — — 16,401
Impairment losses for the year (Note 8 (i))
4,600 270 698 1,511 19 7,098
Reclassification
(194 ) (499 ) 13 686 (6 ) —
Reclassification to lease prepayments and other assets
— — (73 ) (1 ) (16 ) (90 )
Written back on disposals
(182 ) (444 ) (766 ) (809 ) (23 ) (2,224 )
Balance as of December 31, 2008
173,348 84,976 28,815 122,403 3,068 412,610
Balance as of January 1, 2009
173,348 84,976 28,815 122,403 3,068 412,610
Depreciation charge for the year
24,546 10,212 5,578 8,313 866 49,515
Acquisitions (ii)
— 591 — — 159 750
Impairment losses for the year (Note 8 (i))
1,595 377 1,425 3,728 8 7,133
Reclassification
— (44 ) 91 2 (49 ) —
Reclassification to lease prepayments and other assets
— — (83 ) — (2 ) (85 )
Written back on disposals
(590 ) (1,693 ) (1,346 ) (3,906 ) (183 ) (7,718 )
Balance as of December 31, 2009
198,899 94,419 34,480 130,540 3,867 462,205
Net book value:
Balance as of January 1, 2008
153,500 83,886 73,695 68,342 3,820 383,243
Balance as of December 31, 2008
165,774 94,575 78,842 67,075 5,673 411,939
Balance as of December 31, 2009
202,929 108,796 81,600 64,416 7,441 465,182

F-30
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


By asset class:
Buildings
Oil and
gas
properties
Oil depots,
storage tanks
and service
stations
Plant,
machinery,
equipment
and others
Total
RMB
RMB
RMB
RMB
RMB
Cost:
Balance as of January 1, 2008
46,641 259,373 103,845 319,309 729,168
Additions
206 1,482 329 1,559 3,576
Transferred from construction in progress
5,891 32,218 13,492 25,826 77,427
Acquisitions (ii)
548 — — 17,395 17,943
Reclassification
49 (176 ) 363 (236 ) —
Reclassification to lease prepayments and other assets
(543 ) — (27 ) (234 ) (804 )
Disposals
(231 ) — (1,236 ) (1,294 ) (2,761 )
Balance as of December 31, 2008
52,561 292,897 116,766 362,325 824,549
Balance as of January 1, 2009
52,561 292,897 116,766 362,325 824,549
Additions
372 2,022 413 979 3,786
Transferred from construction in progress
6,847 38,737 23,840 35,984 105,408
Acquisitions (ii)
1,912 — 342 527 2,781
Reclassification
(63 ) — (2,505 ) 2,568 —
Reclassification to lease prepayments and other assets
(98 ) — (585 ) — (683 )
Disposals
(389 ) — (1,565 ) (6,500 ) (8,454 )
Balance as of December 31, 2009
61,142 333,656 136,706 395,883 927,387
Accumulated depreciation:
Balance as of January 1, 2008
25,082 119,057 23,601 178,185 345,925
Depreciation charge for the year
2,037 20,254 5,380 17,829 45,500
Acquisitions (ii)
236 — — 16,165 16,401
Impairment losses for the year
522 4,530 632 1,414 7,098
Reclassification
(124 ) (231 ) 265 90 —
Reclassification to lease prepayments and other assets
(76 ) — (6 ) (8 ) (90 )
Written back on disposals
(170 ) — (992 ) (1,062 ) (2,224 )
Balance as of December 31, 2008
27,507 143,610 28,880 212,613 412,610
Balance as of January 1, 2009
27,507 143,610 28,880 212,613 412,610
Depreciation charge for the year
2,309 22,402 5,936 18,868 49,515
Acquisitions (ii)
213 — 292 245 750
Impairment losses for the year
579 1,553 1,076 3,925 7,133
Reclassification
(63 ) — (505 ) 568 —
Reclassification to lease prepayments and other assets
(13 ) — (72 ) — (85 )
Written back on disposals
(340 ) — (1,401 ) (5,977 ) (7,718 )
Balance as of December 31, 2009
30,192 167,565 34,206 230,242 462,205
Net book value:
Balance as of January 1, 2008
21,559 140,316 80,244 141,124 383,243
Balance as of December 31, 2008
25,054 149,287 87,886 149,712 411,939
Balance as of December 31, 2009
30,950 166,091 102,500 165,641 465,182

Notes:

(i)
The additions to the E&P segment and oil and gas properties of the Group for the years ended December 31, 2008 and 2009 included RMB 1,482 and RMB 2,013, respectively, of the estimated dismantlement costs for site restoration (Note 27).
(ii)
During the year ended December 31, 2008, the Group acquired certain assets and liabilities, including the oilfield downhole operation (the “Downhole Assets”) from Sinopec Group Company. During the year ended December 31, 2009, the Group acquired certain property, plant and equipment from Sinopec Group Company (Note 31).

F-31
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


17.     CONSTRUCTION IN PROGRESS

Exploration
and
production
Refining
Marketing
and
distribution
Chemicals
Corporate
and
others
Total
RMB
RMB
RMB
RMB
RMB
RMB
Balance as of January 1, 2008
34,441 25,992 13,504 16,752 5,236 95,925
Additions
61,750 12,897 13,435 20,536 2,073 110,691
Dry hole costs written off
(4,236 ) — — — — (4,236 )
Transferred to property, plant and equipment
(35,701 ) (23,444 ) (10,994 ) (4,683 ) (2,605 ) (77,427 )
Reclassification to lease prepayments and other assets
(154 ) (200 ) (1,340 ) (108 ) (1,019 ) (2,821 )
Reclassification
97 2,846 (292 ) (2,732 ) 81 —
Impairment losses for the year (Note 8 (i))
— — (11 ) — — (11 )
Balance as of December 31, 2008
56,197 18,091 14,302 29,765 3,766 122,121
Balance as of January 1, 2009
56,197 18,091 14,302 29,765 3,766 122,121
Additions
56,162 14,600 15,547 25,083 1,379 112,771
Dry hole costs written off
(4,761 ) — — — — (4,761 )
Transferred to property, plant and equipment
(61,111 ) (18,291 ) (9,690 ) (15,146 ) (1,170 ) (105,408 )
Reclassification to lease prepayments and other assets
(190 ) (744 ) (2,773 ) (1,113 ) (44 ) (4,864 )
Impairment losses for the year (Note 8 (i))
— (19 ) (54 ) — — (73 )
Balance as of December 31, 2009
46,297 13,637 17,332 38,589 3,931 119,786

Net changes in capitalized cost of exploratory wells included in the Group’s construction in progress in the E&P segment are analyzed as follows:

2007
2008
2009
RMB
RMB
RMB
At beginning of year.
4,771 6,294 7,833
Additions, net of amount that were capitalized and subsequently expensed in the same year, pending the determination of proved reserves.
4,874 4,613 5,008
Transferred to oil and gas properties based on the determination of proved reserves.
(568 ) (1,008 ) (1,072 )
Dry hole costs written off
(2,783 ) (2,066 ) (2,946 )
At end of year.
6,294 7,833 8,823

Aging of capitalized exploratory well costs based on the date the drilling was completed are analyzed as follows:

December 31,
2007
2008
2009
RMB
RMB
RMB
One year or less
5,701 7,113 7,625
Over one year
593 720 1,198
6,294 7,833 8,823

Capitalized exploratory wells costs aged over one year are related to wells for which the drilling results are being further evaluated or the development plans are being formulated.

The geological and geophysical costs paid during the years ended December 31, 2007, 2008 and 2009 amounted to RMB 4,640, RMB 3,789 and RMB 5,437, respectively.

On January 21, 2010, the Group contributed certain construction in progress of approximately RMB 17,459 of the chemicals segment into a new jointly controlled entity.

F-32
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


18.      GOODWILL

2008
2009
RMB
RMB
Cost:
Balance as of January 1
15,490 15,628
Additions
225 241
Disposals
(87 ) (406 )
Balance as of December 31
15,628 15,463
Accumulated impairment losses:
Balance as of January 1
— (1,391 )
Impairment losses for the year
(1,391 ) —
Balance as of December 31
(1,391 ) (1,391 )
Net book value
Balance as of December 31
14,237 14,072
Impairment tests for cash-generating units containing goodwill

Goodwill is allocated to the following Group’s cash-generating units:

December 31,
2008
2009
RMB
RMB
Sinopec Beijing Yanshan Branch (“Sinopec Yanshan”)
1,157 1,157
Sinopec Zhenhai Refining and Chemical Branch (“Sinopec Zhenhai”)
3,952 3,952
Sinopec Qilu Branch (“Sinopec Qilu”)
2,159 2,159
Sinopec Yangzi Petrochemical Company Limited (“Sinopec Yangzi”)
2,737 2,737
Sinopec Shengli Oil Field Dynamic Company Limited (“Dynamic”)
1,361 1,361
Hong Kong service stations
924 926
Multiple units without individually significant goodwill
1,947 1,780
14,237 14,072

Goodwill represents the excess of the cost of purchase over the fair value of the underlying assets and liabilities. The recoverable amounts of Sinopec Yanshan, Sinopec Zhenhai, Sinopec Qilu, Sinopec Yangzi, Dynamic and Hong Kong service stations are determined based on value in use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a one-year period and pre-tax discount rates primarily ranging from 10.0%  to 12.8% and 11.2% to 13.6% for the years ended December 31, 2008 and 2009, respectively. Cash flows beyond the one-year period are maintained constant. Management believes any reasonably possible change in the key assumptions on which these entities’ recoverable amounts are based would not cause these entities’ carrying amounts to exceed their recoverable amounts.

Key assumptions used for the value in use calculations for these entities are the gross margin and sales volume. Management determined the budgeted gross margin based on the gross margin achieved in the period immediately before the budget period and management’s expectation on the future trend of the prices of crude oil and petrochemical products. The sales volume was based on the production capacity and / or the sales volume in the period immediately before the budget period.


F-33
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


19.     INTEREST IN ASSOCIATES

December 31,
2008
2009
RMB
RMB
Share of net assets
15,595 18,162


The Group’s investments in associates are with companies primarily engaged in the oil and gas, petrochemical, and marketing and distribution operations in the PRC. These investments are individually and in aggregate not material to the Group’s financial condition or results of operations for all periods presented. The principal investments in associates, all of which are incorporated in the PRC, are as follows:

Name of company
Form of business structure
Particulars of issued
and paid up capital
Percentage of equity held by the Company
Percentage of equity held by the Company’s subsidiaries
Principal activities
%
%
Sinopec Finance Company Limited
Incorporated
Registered capital
RMB 8,000,000,000
49.00
—
Provision of non-banking financial services
China Aviation Oil Supply Company Limited
Incorporated
Registered capital
RMB 3,800,000,000
—
29.00
Marketing and distribution of refined petroleum products
Shanghai Petroleum Company Limited
Incorporated
Registered capital
RMB 900,000,000
30.00
—
Exploration and production of crude oil and natural gas
Shanghai Chemical Industry Park Development Company Limited
Incorporated
Registered capital
RMB 2,372,439,000
—
38.26
Planning, development and operation of the Chemical Industry Park in Shanghai, the PRC
China Shipping & Sinopec Suppliers Company Limited
Incorporated
Registered capital
RMB 876,660,000
—
50.00
Transportation of petroleum products

F-34
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


20.      INTEREST IN JOINTLY CONTROLLED ENTITIES

December 31,
2008
2009
RMB
RMB
Share of net assets
11,781 13,928

The Group’s principal interests in jointly controlled entities are primarily engaged in the refining and chemical operations in the PRC as follows:

Name of company
Form of business structure
Particulars of issued and paid up capital
Percentage of equity held by the Company
Percentage of equity held by the Company’s subsidiaries
Principal activities
%
%
Shanghai Secco Petrochemical Company Limited
Incorporated
Registered capital
USD 901,440,964
30.00
20.00
Manufacturing and distribution of petrochemical products
BASF-YPC Company Limited
Incorporated
Registered capital
RMB 8,793,000,000
30.00
10.00
Manufacturing and distribution of petrochemical products
Fujian Refining and Petrochemical  Company Limited
Incorporated
Registered capital
RMB 12,806,000,000
—
50.00
Manufacturing and distribution of petrochemical products
The Group’s effective interest share of the jointly controlled entities’ results of operation, financial condition and cash flows are as follows:

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Results of operation:
Operating revenue
23,085 27,417 25,141
Expenses
(20,378 ) (28,371 ) (23,901 )
Net income / (loss)
2,707 (954 ) 1,240

December 31,
2008
2009
RMB
RMB
Financial condition:
Current assets
6,691 9,857
Non-current assets
28,430 32,353
Current liabilities
(6,413 ) (9,038 )
Non-current liabilities
(16,927 ) (19,244 )
Net assets
11,781 13,928

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Cash flows:
Net cash generated from / (used in) operating activities
5,079 (2,046 ) 345
Net cash used in investing activities
(13,238 ) (5,872 ) (3,905 )
Net cash generated from financing activities
7,143 7,999 3,911
Net (decrease) / increase in cash and cash equivalents
(1,016 ) 81 351

F-35
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


21.      INVESTMENTS

December 31,
2008
2009
RMB
RMB
Available-for-sale financial assets
- Equity securities, listed and at quoted market price
154 61
- Investment in other available-for-sale security
— 700
Other investments in equity securities, unlisted and at cost
1,562 1,610
1,716 2,371
Less: Impairment losses for investments
(233 ) (197 )
1,483 2,174

Unlisted investments represent the Group’s interests in PRC privately owned enterprises which are mainly engaged in non-oil and gas activities and operations.

The impairment losses relating to investments for the years ended December 31, 2008 and 2009 amounted to RMB 9 and RMB 5, respectively.

22.      LONG-TERM PREPAYMENTS AND OTHER ASSETS

Long-term prepayments and other assets primarily represent prepaid rental expenses over one year, computer software, catalysts and operating rights of service stations.

23.      DEFERRED TAX ASSETS AND LIABILITIES

Deferred tax assets and deferred tax liabilities are attributable to the items detailed in the table below:

Assets
Liabilities
Net balance
December 31,
December 31,
December 31,
2008
2009
2008
2009
2008
2009
RMB
RMB
RMB
RMB
RMB
RMB
Current
Receivables and inventories
4,434 3,207 — — 4,434 3,207
Accruals
261 815 — — 261 815
Cash flow hedges
— 7 — (18 ) — (11 )
Non-current
Property, plant and equipment
3,891 5,601 (1,286 ) (1,178 ) 2,605 4,423
Accelerated depreciation
— — (3,716 ) (3,682 ) (3,716 ) (3,682 )
Tax value of losses carried forward
4,796 3,954 — — 4,796 3,954
Lease prepayments
300 292 — — 300 292
Available-for-sale securities
— — (52 ) — (52 ) —
Embedded derivative component of the Convertible Bonds
— — (151 ) (96 ) (151 ) (96 )
Others
86 99 (30 ) (5 ) 56 94
Deferred tax assets / (liabilities)
13,768 13,975 (5,235 ) (4,979 ) 8,533 8,996

As of December 31, 2008 and 2009, certain subsidiaries of the Company did not recognize the tax value of losses carried forward of RMB 7,975 and RMB 5,555, respectively, of which RMB 3,762 and RMB 472 were incurred for the years ended December 31, 2008 and 2009, respectively, because it was not probable that the related tax benefit will be realized. The tax value of these losses carried forward of RMB 928, RMB 1,231, RMB 392, RMB 2,532 and RMB 472 will expire in 2010, 2011, 2012, 2013 and 2014, respectively.

Periodically, management performed assessment on the probability that taxable profit will be available over the period which the deferred tax assets can be realized or utilized. In assessing the probability, both positive and negative evidence was considered, including whether it is probable that the operations will have future taxable profits over the periods which the deferred tax assets are deductible or utilized and whether the tax losses result from identifiable causes which are unlikely to recur.

F-36
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Movements in deferred tax assets and liabilities are as follows:
Balance as of
January 1,
2007
Recognized in
consolidated
statements of income
Acquisitions
of
subsidiaries
Recognized in
other comprehensive
income
Balance as of
December 31,
2007
RMB
RMB
RMB
RMB
RMB
Current
Receivables and inventories
3,532 309 — — 3,841
Accruals
865 1,748 — — 2,613
Non-current
Property, plant and equipment
601 711 (47 ) — 1,265
Accelerated depreciation
(4,657 ) 513 — — (4,144 )
Tax value of losses carried forward
105 71 — — 176
Lease prepayments
351 (8 ) — (37 ) 306
Available-for-sale securities
(4 ) — — (112 ) (116 )
Embedded derivative component of the Convertible Bonds
— 803 — — 803
Others
50 9 — — 59
Net deferred tax assets
843 4,156 (47 ) (149 ) 4,803


Balance as of
January 1,
2008
Recognized in
consolidated
statements of income
Recognized in
other comprehensive
income
Balance as of
December 31,
2008
RMB
RMB
RMB
RMB
Current
Receivables and inventories
3,841 593 — 4,434
Accruals
2,613 (2,352 ) — 261
Non-current
Property, plant and equipment
1,265 1,340 — 2,605
Accelerated depreciation
(4,144 ) 428 — (3,716 )
Tax value of losses carried forward
176 4,620 — 4,796
Lease prepayments
306 (6 ) — 300
Available-for-sale securities
(116 ) — 64 (52 )
Embedded derivative component of the Convertible Bonds
803 (954 ) — (151 )
Others
59 (3 ) — 56
Net deferred tax assets
4,803 3,666 64 8,533


F-37
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

Balance as of
January 1,
2009
Recognized in
consolidated
statements of income
Recognized in
other comprehensive
income
Acquisition
Balance as of
December 31,
2009
RMB
RMB
RMB
RMB
RMB
Current
Receivables and inventories
4,434 (1,227 ) — — 3,207
Accruals
261 554 — — 815
Cash flow hedges
— — (11 ) (11 )
Non-current
Property, plant and equipment
2,605 1,844 — (26 ) 4,423
Accelerated depreciation
(3,716 ) 34 — — (3,682 )
Tax value of losses carried forward
4,796 (842 ) — — 3,954
Lease prepayments
300 (8 ) — — 292
Available-for-sale securities
(52 ) — 52 — —
Embedded derivative component of the Convertible Bonds
(151 ) 55 — — (96 )
Others
56 36 — 2 94
Net deferred tax assets
8,533 446 41 (24 ) 8,996
24.
SHORT-TERM AND LONG-TERM DEBTS AND LOANS FROM SINOPEC GROUP COMPANY AND ITS AFFILIATES

Short-term debts represent:

December 31,
2008
2009
RMB
RMB
Third parties’ debts
Short-term bank loans
41,355 21,587
Current portion of long-term bank loans
17,109 6,234
Current portion of long-term other loans
2,052 77
19,161 6,311
Corporate bonds (Note (a))
15,000 31,000
75,516 58,898
Loans from Sinopec Group Company and its affiliates
Short-term loans
33,060 13,313
Current portion of long-term loans
350 330
33,410 13,643
108,926 72,541

The Group’s weighted average interest rates on short-term loans were 4.8% and 2.5% as of December 31, 2008 and 2009, respectively.


F-38
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Long-term debts comprise:

Interest rate and final maturity
December 31,
2008
2009
RMB
RMB
Third parties’ debts
Long-term bank loans
Renminbi denominated
Interest rates ranging from interest free to 7.6% per annum as of December 31, 2009 with maturities through 2013
42,036
18,869
Japanese Yen denominated
Interest rates ranging from 2.6% to 3.0% per annum as of December 31, 2009 with maturities through 2024
2,121
1,660
US Dollar denominated
Interest rates ranging from interest free to 7.9% per annum as of December 31, 2009 with maturities through 2031
746
629
Euro denominated
Interest rate ranging from 6.6% to 6.7% per annum as of December 31, 2009 with maturities through 2011
197
116
45,100
21,274
Long-term other loans
Renminbi denominated
Interest free as of December 31, 2009 with maturities through 2011
2,075
73
US Dollar denominated
Interest rates ranging from interest free to 4.9% per annum as of December 31, 2009 with maturities through 2015
33
29
2,108
102

Corporate bonds
Renminbi denominated
Fixed interest rate at 4.61% per annum as of December 31, 2009 with maturity in February 2014 (Note (b))
3,500
3,500
Fixed interest rate at 4.20% per annum as of December 31, 2009 with maturity in May 2017 (Note (b))
5,000
5,000
Fixed interest rate at 5.40% per annum as of December 31, 2009 with maturity in November 2012 (Note (b))
8,500
8,500
Fixed interest rate at 5.68% per annum as of December 31, 2009 with maturity in November 2017 (Note (b))
11,500
11,500
Fixed interest rate at 2.25% per annum as of December 31, 2009 with maturity in March 2012 (Note (b))
—
10,000
Fixed interest rate at 2.48% per annum as of December 31, 2009 with maturity in June 2012 (Note (b))
—
20,000
28,500
58,500


F-39
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

Interest rate and final maturity
December 31,
2008
2009
RMB
RMB
Convertible bonds
Hong Kong Dollar denominated
Zero coupon convertible bonds with maturity in April 2014 (Note (c))
9,870
10,371
Renminbi denominated
Bonds with Warrants with fixed interest rate at 0.8% per annum and maturity in February 2014 (Note (d))
23,837
24,892
33,707
35,263
Total third parties’ long-term debts
109,415
115,139
Less: Current portion
(19,161)
(6,311)
90,254
108,828
Long-term loans from Sinopec Group Company and its affiliates
Renminbi denominated
Interest rates ranging from interest free to 7.3% per annum as of December 31, 2009 with maturities through 2020
37,240
37,330
Less: Current portion
(350)
(330)
36,890
37,000
127,144
145,828

Short-term and long-term debts and loans from Sinopec Group Company and its affiliates, other than the Convertible Bonds, are primarily unsecured and carried at amortized cost.

Notes:

(a)
The Company issued six-month corporate bonds of face value RMB 15,000 to corporate investors in the PRC debenture market on December 22, 2008 at par value of RMB 100. The effective yield of the six-month corporate bonds is 2.30% per annum. The Company redeemed the corporate bonds in June 2009.
A subsidiary of the Company issued 330-day corporate bonds of face value RMB 1,000 to corporate investors in the PRC debenture market on April 3, 2009 at par value of RMB 100. The effective yield of the 330-day corporate bonds is 2.05% per annum. The corporate bonds mature in March 2010.
The Company issued one-year corporate bonds of face value RMB 15,000 to corporate investors in the PRC debenture market on July 16, 2009 at par value of RMB 100. The effective yield of the one-year corporate bonds is 1.88% per annum. The corporate bonds mature in July 2010.
The Company issued one-year corporate bonds of face value RMB 15,000 to corporate investors in the PRC debenture market on November 12, 2009 at par value of RMB 100. The effective yield of the one-year corporate bonds is 2.30% per annum. The corporate bonds mature in November 2010.
(b)
These corporate bonds are guaranteed by Sinopec Group Company.

F-40
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

(c)
On April 24, 2007, the Company issued zero coupon convertible bonds due 2014 with an aggregate principal amount of HK$11,700 (the “Convertible Bonds”).  The holders can convert the Convertible Bonds into shares of the Company from June 4, 2007 onwards at a price of HK$10.76 per share, subject to adjustment for, amongst other things, subdivision or consolidation of shares, bonus issues, rights issues, capital distribution, change of control and other events, which have a dilutive effect on the issued share capital of the Company (the “Conversion component”).  Unless previously redeemed, converted or purchased and cancelled, the Convertible Bonds will be redeemed on the maturity date at 121.069% of the principal amount.  The Company has an early redemption option at any time after April 24, 2011 (subject to certain criteria) (the “Early Redemption Option”) and a cash settlement option when the holders exercise their conversion right (the “Cash Settlement Option”).  The holders also have an early redemption option to require the Company to redeem all or some of the Convertible Bonds as of April 24, 2011 at an early redemption amount of 111.544% of the principal amount.
As of December 31, 2008, the carrying amount of the liability component and the derivative component, representing the Conversion component, the Early Redemption Option and the Cash Settlement Option, of the Convertible Bonds were RMB 9,870 and RMB nil, respectively. No conversion of the Convertible Bonds has occurred up to December 31, 2008.
As of December 31, 2009, the carrying amount of the liability component and the derivative component, representing the Conversion component, the Early Redemption Option and the Cash Settlement Option, of the Convertible Bonds were RMB 10,153 and RMB 218, respectively. No conversion of the Convertible Bonds has occurred up to December 31, 2009.
As of December 31, 2008 and 2009, the fair value of the derivative components of the Convertible Bonds was calculated using the Black-Scholes Model. The following are the major inputs used in the Black-Scholes Model:
2008
2009
Stock price of underlying shares
HKD 4.69
HKD 6.91
Conversion price
HKD 10.76
HKD 10.76
Option adjusted spread
450 basis points
150 basis points
Average risk free rate
1.64% 0.87%
Average expected life
3.8 years
2.8 years

Any change in the major inputs into the Black-Scholes Model will result in changes in the fair value of the derivative component. The change in the fair value of the conversion option from December 31, 2007 to December 31, 2008 and from December 31, 2008 to December 31, 2009 resulted in an unrealized gain of RMB 3,947 and an unrealized loss of RMB 218, respectively, which have been recorded in the “finance costs” section of the consolidated statements of income.
The initial carrying amount of the liability component of the Convertible Bonds is the residual amount, which is after deducting the allocated issuance cost of the Convertible Bonds relating to the liability component and the fair value of the derivative component as of April 24, 2007. Interest expense is calculated using the effective interest method by applying the effective interest rate of 4.19% to the adjusted liability component. Should the aforesaid derivative components not been separated out and the entire Convertible Bonds been considered as the liability component, the effective interest rate would have been 3.03%.
(d)
On February 26, 2008, the Company issued bonds with stock warrants due 2014 with an aggregate principal amount of RMB 30,000 in the PRC (the “Bonds with Warrants”). The Bonds with Warrants, which bear a fixed interest rate of 0.80% per annum payable annually, were issued at par value of RMB 100. The Bonds with Warrants are guaranteed by Sinopec Group Company. Every ten Bonds with Warrants are entitled to warrants to subscribe 50.5 A shares of the Company during the 5 trading days prior to March 3, 2010 at an initial exercise price of RMB 19.68 per share (the “Warrants”), subject to adjustment for, amongst other things, cash dividends, subdivision or consolidation of shares, bonus issues, rights issues, capital distribution, change of control and other events which have a dilutive effect on the issued share capital of the Company.

F-41
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)



On December 31, 2009, the exercise price of the Warrants was adjusted to RMB 19.15 per share as a result of the final dividend in respect of the year ended December 31, 2008 and the interim dividend in respect of the year ended December 31, 2009 declared and paid during the year ended December 31, 2009.
The initial recognition of the liability component of the Bond with Warrants is measured as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option (“market interest rate”). Interest expense is calculated using the effective interest method by applying the market interest rate of 5.40% to the liability component. The excess of proceeds from the issuance of the Bonds with Warrants, net of issuance costs, over the amount initially recognized as the liability component is recognized as the equity component in capital reserve until either the Warrants is exercised or expired. Should the equity component not have been separated out and the entire Bonds with Warrants been considered as the liability component, the effective interest rate would have been 0.80%. The initial carrying amounts of liability and equity components of the Bonds with Warrants were RMB 22,971 and RMB 6,879 upon issuance, respectively.
25       TRADE ACCOUNTS AND BILLS PAYABLES
December 31,
2008
2009
RMB
RMB
Amounts due to third parties
53,112 92,949
Amounts due to Sinopec Group Company and its affiliates
1,522 3,114
Amounts due to associates and jointly controlled entities
1,830 1,686
56,464 97,749
Bills payable
18,753 23,111
Trade accounts and bills payables measured at amortized cost
75,217 120,860


26.      ACCRUED EXPENSES AND OTHER PAYABLES

December 31,
2008
2009
RMB
RMB
Accrued expenditures
31,635 35,465
Advances from third parties
1,822 2,796
Amounts due to Sinopec Group Company and its affiliates
12,740 11,925
Others
6,365 5,834
Financial liabilities measured at amortized costs
52,562 56,020
Taxes other than income tax
21,560 24,178
Receipts in advance
27,829 36,316
Derivative financial instruments – hedging
122 319
Derivative financial instruments – non-hedging
424 439
102,497 117,272


F-42
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


27.     PROVISIONS

Provisions primarily represent provision for future dismantlement costs of oil and gas properties.  The Group has committed to the PRC government to establish certain standardized measures for the dismantlement of its oil and gas properties by making reference to the industry practices and is thereafter constructively obligated to take dismantlement measures of its oil and gas properties.

Movement of provision of the Group’s obligations for the dismantlement of its oil and gas properties is as follows:

2008
2009
RMB
RMB
Balance as of January 1
7,544 9,234
Provision for the year
1,482 2,013
Accretion expenses
430 429
Utilized
(222 ) (218 )
Balance as of December 31
9,234 11,458


F-43
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


28.      SHARE CAPITAL

December 31,
2008
2009
RMB
RMB
Registered, issued and fully paid
69,921,951,000 domestic listed A shares of RMB 1.00 each
69,922 69,922
16,780,488,000 overseas listed H shares of RMB 1.00 each
16,780 16,780
86,702 86,702

The Company was established on February 25, 2000 with a registered capital of 68.8 billion domestic state-owned shares with a par value of RMB 1.00 each. Such shares were issued to Sinopec Group Company in consideration for the assets and liabilities of the Predecessor Operations transferred to the Company (Note 1).

Pursuant to the resolutions passed at an Extraordinary General Meeting held on July 25, 2000 and approvals from relevant government authorities, the Company is authorized to increase its share capital to a maximum of 88.3 billion shares with a par value of RMB 1.00 each and offer not more than 19.5 billion shares with a par value of RMB 1.00 each to investors outside the PRC. Sinopec Group Company is authorized to offer not more than 3.5 billion shares of its shareholdings in the Company to investors outside the PRC. The shares sold by Sinopec Group Company to investors outside the PRC would be converted into H shares.

In October 2000, the Company issued 15,102,439,000 H shares with a par value of RMB 1.00 each, representing 12,521,864,000 H shares and 25,805,750 American Depositary Shares (“ADSs”, each representing 100 H shares), at prices of HK$ 1.59 per H share and US$ 20.645 per ADS, respectively, by way of a global initial public offering to Hong Kong and overseas investors. As part of the global initial public offering, 1,678,049,000 domestic state-owned ordinary shares of RMB 1.00 each owned by Sinopec Group Company were converted into H shares and sold to Hong Kong and overseas investors.

In July 2001, the Company issued 2.8 billion domestic listed A shares with a par value of RMB 1.00 each at RMB 4.22 by way of a public offering to natural persons and institutional investors in the PRC.

On September 25, 2006, the shareholders of listed A shares accepted the proposal offered by the shareholders of state-owned A shares whereby the shareholders of state-owned A shares agreed to transfer 2.8 state-owned A shares to shareholders of listed A shares for every 10 listed A shares they held, in exchange for the approval for the listing of all state-owned A shares. In October 2006, the 67,121,951,000 domestic state-owned A shares became listed A shares.

All A shares and H shares rank pari passu in all material aspects.

Capital management

Management optimizes the structure of the Group’s capital, which comprises of equity and loans. In order to maintain or adjust the capital structure of the Group, management may cause the Company to issue new shares, adjust the capital expenditure plan, sell assets to reduce debt, or adjust the proportion of short-term and long-term loans. Management monitors capital on the basis of debt-to-equity ratio, which is calculated by dividing long-term loans (excluding current portion), including long-term debts and loans from Sinopec Group Company and its affiliates, by the total of equity attributable to equity shareholders of the Company and long-term loans (excluding current portion), and liability-to-asset ratio, which is calculated by dividing total liabilities by total assets. Management’s strategy is to make appropriate adjustments according to the Group’s operating and investment needs and the changes of market conditions, and to maintain the debt-to-equity ratio and the liability-to-asset ratio of the Group at a range considered reasonable. The debt-to-equity ratio of the Group was 27.9% and 28.0% as of December 31, 2008 and 2009, respectively. The liability-to-asset ratio of the Group was 55.3% and 54.6% as of December 31, 2008 and 2009, respectively.

The schedule of the contractual maturities of loans and commitments are disclosed in Notes 24 and 30, respectively.

There were no changes in the management’s approach to capital management of the Group during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.

F-44
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


29.      RESERVES

2008
2009
RMB
RMB
Capital reserve (Note (a))
Balance as of January 1
(22,652 ) (16,293 )
Transfer from other reserves to capital reserve
— (1,551 )
Issuance of the Bonds with Warrants (Note 24(d))
6,879 —
Distributions to Sinopec Group Company (Note (b))
(202 ) (49 )
Acquisitions of non-controlling interests of subsidiaries
(318 ) (18 )
Balance as of December 31
(16,293 ) (17,911 )
Share premium (Note (c))
Balance as of January 1 / December 31
18,072 18,072
Statutory surplus reserve (Note (d))
Balance as of January 1
37,797 43,078
Adjustment of statutory surplus reserve
1,189 —
Appropriation
4,092 4,953
Balance as of December 31
43,078 48,031
Discretionary surplus reserve (Note (e))
Balance as of January 1
27,000 47,000
Appropriation
20,000 20,000
Balance as of December 31
47,000 67,000
Other reserves
Balance as of January 1
3,564 (6 )
Change in fair value of cash flow hedge, net of deferred tax
___
54
Change in fair value of available-for-sale financial assets, net of deferred tax
(114 ) (138 )
Share of other comprehensive income of associates
(2,206 ) 806
Realization of deferred tax on lease prepayments
(6 ) (8 )
Transfer from retained earnings to other reserves
(1,244 )
___
Transfer from other reserves to capital reserve
___
1,551
Consideration for the Acquisition of the Acquired Group (Note 1)
— (771 )
Balance as of December 31
(6 ) 1,488
Retained earnings (Note (f))
Balance as of January 1
157,414 149,336
Net income attributable to equity shareholders of the Company
28,525 61,760
Final dividend inspect of the previous year, approved and paid during the year (Note (g))
(9,971 ) (7,803 )
Interim dividend (Note (h))
(2,601 ) (6,069 )
Adjustment of statutory surplus reserve
(1,189 )
___
Appropriation
(24,092 ) (24,953 )
Realization of deferred tax on lease prepayments
6 8
Transfer from retained earnings to other reserves
1,244 —
Balance as of December 31
149,336 172,279
241,187 288,959


F-45
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Notes:

(a)
The capital reserve represents (i) the difference between the total amount of the par value of shares issued and the amount of the net assets transferred from Sinopec Group Company in connection with the Reorganization (ii) the difference between the considerations paid over the amount of the net assets of entities and related operations acquired from Sinopec Group Company and non-controlling interests and (iii) the equity component of the Bonds with Warrants.
(b)
During the year ended December 31, 2008, the Group paid additional consideration of RMB 96 for the Acquisition of Refinery Plants (Note 1) to Sinopec Group Company, which was accounted for as an equity transaction. In addition, the Group acquired Downhole Assets from Sinopec Group Company.  The difference between the consideration paid over the carrying value of these net assets acquired was RMB 106, which was accounted for as an equity transaction.
(c)
The application of the share premium account is governed by Sections 168 and 169 of the PRC Company Law.
(d)
According to the Company’s Articles of Association, the Company is required to transfer 10% of its net income in accordance with the PRC accounting policies adopted by the Group to statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of a dividend to shareholders.  Statutory surplus reserve can be used to make good previous years’ losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholdings or by increasing the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital.
On January 1, 2007, the Group adopted the accounting policies complying with the Accounting Standards for Business Enterprises (“ASBE”) issued by the Ministry of Finance of the PRC (“MOF”) on February 15, 2006, which resulted in certain PRC accounting policies being changed and applied retrospectively.  The statutory surplus reserve, amounting to RMB 235, has been adjusted accordingly.  The adjustment to the statutory surplus reserve was reflected as a movement for the year ended December 31, 2007.
Pursuant to the requirement in Cai Kuai [2008] No. 11 “Interpretation of ASBE No. 2” issued by the MOF on August 7, 2008, for statutory financial statement purposes, the Group adopted certain PRC accounting policies that were applied retrospectively.  The statutory surplus reserve, amounting to RMB 1,189, has been adjusted accordingly.  The adjustment to statutory surplus reserve was reflected as a movement for the year ended December 31, 2008.  During the years ended December 31, 2007, 2008 and 2009, the Company transferred RMB 5,468, RMB 4,092 and 4,953, respectively, being 10% of the net income determined in accordance with the PRC accounting policies, to this reserve.
(e)
For the year ended December 31, 2008, the directors authorized the transfer of RMB 20,000, which was approved by the shareholders at the Annual General Meeting on May 22, 2009, to discretionary surplus reserve. For the year ended December 31, 2009, the directors authorized the transfer of RMB 20,000, subject to the shareholders’ approval at the Annual General Meeting, to discretionary surplus reserve. The usage of the discretionary surplus reserve is similar to that of statutory surplus reserve.
(f)
According to the Company’s Articles of Association, the amount of retained earnings available for distribution to equity shareholders of the Company is the lower of the amount determined in accordance with the accounting policies complying with ASBE and the amount determined in accordance with the accounting policies complying with IFRS. As of December 31, 2008 and 2009, the amount of retained earnings available for distribution was RMB 82,147 and RMB 91,772, respectively, being the amount determined in accordance with the accounting policies complying with IFRS. Final dividend for the year ended December 31, 2009 of RMB 9,537 proposed after the balance sheet date has not been recognized as a liability at the balance sheet date.
(g)
Pursuant to the shareholders’ approval at the Annual General Meeting on May 26, 2008, a final dividend of RMB 0.115 per share totaling RMB 9,971 in respect of the year ended December 31, 2007 was declared and paid on June 30, 2008.

F-46
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

Pursuant to the shareholders’ approval at the Annual General Meeting on May 22, 2009, a final dividend of RMB 0.09 per share totaling RMB 7,803 in respect of the year ended December 31, 2008 was declared and paid on June 30, 2009.
(h)
Pursuant to the Company’s Articles of Association and a resolution passed at the Directors’ meeting on August 22, 2008, the directors authorized to declare an interim dividend for the year ended December 31, 2008 of RMB 0.03 per share totaling RMB 2,601, which was paid on September 19, 2008.
Pursuant to the Company’s Articles of Association and a resolution passed at the Director’s meeting on August 21, 2009, the directors authorized to declare an interim dividend for the year ended December 31, 2009 of RMB 0.07 per share totaling RMB 6,069, which was paid on October 15, 2009.
30. COMMITMENTS AND CONTINGENT LIABILITIES
Operating lease commitments

The Group leases land and buildings, service stations and other equipment through non-cancellable operating leases. These operating leases do not contain provisions for contingent lease rentals. None of the rental agreements contain escalation provisions that may require higher future rental payments.

As of December 31, 2008 and 2009, the future minimum lease payments under operating leases are as follows:

December 31,
2008
2009
RMB
RMB
Within one year
6,066 6,084
Between one and two years
5,750 5,905
Between two and three years
5,655 5,834
Between three and four years
5,595 5,722
Between four and five years
5,519 5,604
Thereafter
149,893 145,338
178,478 174,487


F-47
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Capital commitments

As of December 31, 2008 and 2009, capital commitments are as follows:

December 31,
2008
2009
RMB
RMB
Authorized and contracted for
120,773 124,403
Authorized but not contracted for
49,931 58,959
170,704 183,362

These capital commitments relate to oil and gas exploration and development, refining and petrochemical production capacity expansion projects and the construction of service stations and oil depots.

Exploration and production licenses

Exploration licenses for exploration activities are registered with the Ministry of Land and Resources. The maximum term of the Group’s exploration licenses is 7 years, and may be renewed twice within 30 days prior to expiration of the original term with each renewal being for a two-year term.  The Group is obligated to make progressive annual minimum exploration investment relating to the exploration blocks in respect of which the license is issued. The Ministry of Land and Resources also issues production licenses to the Group on the basis of the reserve reports approved by relevant authorities. The maximum term of a full production license is 30 years unless a special dispensation was given by the State Council. The maximum term of production licenses issued to the Group is 80 years as a special dispensation was given to the Group by the State Council. The Group’s production license is renewable upon application by the Group 30 days prior to expiration.

The Group is required to make payments of exploration license fees and production right usage fees to the Ministry of Land and Resources annually which are expensed as incurred. Payments incurred were approximately RMB 303, RMB 437 and RMB 395 for the years ended December 31, 2007, 2008 and 2009, respectively.

Estimated future annual payments are as follows:

December 31,
2008
2009
RMB
RMB
Within one year
123 136
Between one and two years
118 118
Between two and three years
20 21
Between three and four years
20 20
Between four and five years
19 20
Thereafter
651 689
951 1,004


F-48
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Contingent liabilities

As of December 31, 2008 and 2009, guarantees given to banks in respect of banking facilities granted to the parties below were as follows:

December 31,
2008
2009
RMB
RMB
Jointly controlled entities
11,223 14,815
Associates
181 181
11,404 14,996

As of December 31, 2009, the Company and a subsidiary have guaranteed to a jointly controlled entity in relation to the bank loans drawn down by the jointly controlled entity. The guarantees expire on December 31, 2015.

Management monitors the conditions that are subject to the guarantees to identify whether it is probable that a loss has occurred, and recognize any such losses under guarantees when those losses are estimable. As of December 31, 2008 and 2009, it is not probable that the Group will be required to make payments under the guarantees. Thus no liability has been accrued for the Group’s obligation under these guarantee arrangements.

Environmental contingencies

Under existing legislation, management believes that there are no probable liabilities that will have a material adverse effect on the financial position or operating results of the Group. The PRC government, however, has moved, and may move further towards more rigorous enforcement of applicable laws, and towards the adoption of more stringent environmental standards. Environmental liabilities are subject to considerable uncertainties which affect management’s ability to estimate the ultimate cost of remediation efforts. These uncertainties include i) the exact nature and extent of the contamination at various sites including, but not limited to refineries, oil fields, service stations, terminals and land development areas, whether operating, closed or sold, ii) the extent of required cleanup efforts, iii) varying costs of alternative remediation strategies, iv) changes in environmental remediation requirements, and v) the identification of new remediation sites. The amount of such future cost is indeterminable due to such factors as the unknown magnitude of possible contamination and the unknown timing and extent of the corrective actions that may be required. Accordingly, the outcome of environmental liabilities under proposed or future environmental legislation cannot reasonably be estimated at present, and could be material. The Group paid normal routine pollutant discharge fees of approximately RMB 2,085, RMB 2,284 and RMB 3,196 for the years ended December 31, 2007, 2008 and 2009, respectively.

Legal contingencies

The Group is a defendant in certain lawsuits as well as the named party in other proceedings arising in the ordinary course of business. Management has assessed the likelihood of an unfavourable outcome of such contingencies, lawsuits or other proceedings and believes that any resulting liabilities will not have a material adverse effect on the financial position, operating results or cash flows of the Group.


F-49
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


31.     RELATED PARTY TRANSACTIONS

Parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control or jointly control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control. Related parties may be individuals (being members of key management personnel, significant shareholders and / or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party of the Group.

(a)       Transactions with Sinopec Group Company and its affiliates, associates and jointly controlled entities

The Group is part of a larger group of companies under Sinopec Group Company, which is owned by the PRC government, and has significant transactions and relationships with Sinopec Group Company and its affiliates. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.

The principal related party transactions with Sinopec Group Company and its affiliates, associates and jointly controlled entities, which were carried out in the ordinary course of business, are as follows:

Years ended December 31,
Note
2007
2008
2009
RMB
RMB
RMB
Sales of goods
(i)
138,258 186,381 162,671
Purchases
(ii)
57,090 56,516 75,521
Transportation and storage
(iii)
1,151 1,206 1,251
Exploration and development services
(iv)
32,121 33,034 31,343
Production related services
(v)
19,892 14,133 17,603
Ancillary and social services
(vi)
1,621 1,611 3,329
Operating lease charges
(vii)
3,967 4,897 4,866
Agency commission income
(viii)
60 78 45
Interest received
(ix)
34 19 38
Interest paid
(x)
979 1,725 1,045
Net deposits withdrawn from /(placed with) related parties
(xi)
359 (353 ) (4,640 )
Net loans obtained from/(repaid to) related parties
(xii)
8,787 10,754 (19,657 )

The amounts set out in the table above in respect of each of the years in the three-year period ended December 31, 2009 represent the relevant costs to the Group and income from related parties as determined by the corresponding contracts with the related parties.

There were no guarantees given to banks by the Group in respect of banking facilities to Sinopec Group Company and its affiliates as of December 31, 2008 and 2009. Guarantees given to banks by the Group in respect of banking facilities to associates and jointly controlled entities are disclosed in Note 30.

The directors of the Company are of the opinion that the above transactions with related parties were conducted in the ordinary course of business and on normal commercial terms or in accordance with the agreements governing such transactions, and this has been confirmed by the independent non-executive directors.

Notes:

(i)
Sales of goods represent the sale of crude oil, intermediate petrochemical products, petroleum products and ancillary materials.
(ii)
Purchases represent the purchase of materials and utility supplies directly related to the Group’s operations such as the procurement of raw and ancillary materials and related services, supply of water, electricity and gas.
(iii)
Transportation and storage represent the cost for the use of railway, road and marine transportation services, pipelines, loading, unloading and storage facilities.

F-50
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

(iv)
Exploration and development services comprise direct costs incurred in the exploration and development such as geophysical, drilling, well testing and well measurement services.

(v)
Production related services represent ancillary services rendered in relation to the Group’s operations such as equipment repair and general maintenance, insurance premium, technical research, communications, fire fighting, security, product quality testing and analysis, information technology, design and engineering, construction which includes the construction of oilfield ground facilities, refineries and chemical plants, manufacture of replacement parts and machinery, installation, project management and environmental protection.
(vi)
Ancillary and social services represent expenditures for social welfare and support services such as educational facilities, media communication services, sanitation, accommodation, canteens, property maintenance and management services.
(vii)
Operating lease charges represent the rental paid to Sinopec Group Company for operating leases in respect of land, buildings and equipment.
(viii)
Agency commission income represents commission earned for acting as an agent in respect of sales of products and purchase of materials for certain entities owned by Sinopec Group Company.
(ix)
Interest received represents interest received from deposits placed with Sinopec Finance Company Limited and Sinopec Century Bright Capital Investment Limited, finance companies controlled by Sinopec Group Company. The applicable interest rate is determined in accordance with the prevailing saving deposit rate. The balance of deposits as of December 31, 2008 and 2009 were RMB 696 and RMB 5,336, respectively.
(x)
Interest paid represents interest charges on the loans and advances obtained from Sinopec Group Company and its affiliates.
(xi)
Deposits placed with / withdrawn from related parties represent net deposits placed with / withdrawn from Sinopec Finance Company Limited and Sinopec Century Bright Capital Investment Limited.
(xii)
The Group obtained or repaid loans from or to Sinopec Group Company and its affiliates.
In connection with the Reorganization, the Company and Sinopec Group Company entered into a number of agreements under which 1) Sinopec Group Company will provide goods and products and a range of ancillary, social and supporting services to the Group and 2) the Group will sell certain goods to Sinopec Group Company. The terms of these agreements are summarized as follows:

(a)
The Company has entered into a non-exclusive Agreement for Mutual Provision of Products and Ancillary Services (“Mutual Provision Agreement”) with Sinopec Group Company effective from January 1, 2000 in which Sinopec Group Company has agreed to provide the Group with certain ancillary production services, construction services, information advisory services, supply services and other services and products. While each of Sinopec Group Company and the Company is permitted to terminate the Mutual Provision Agreement upon giving at least six months notice, Sinopec Group Company has agreed not to terminate the agreement if the Group is unable to obtain comparable services from a third party. The pricing policy for these services and products provided by Sinopec Group Company to the Group is as follows:
●
the government-prescribed price;
●
where there is no government-prescribed price, the government-guidance price;
●
where there is neither a government-prescribed price nor a government-guidance price, the market price; or
●
where none of the above is applicable, the price to be agreed between the parties, which shall be based on a reasonable cost incurred in providing such services plus a profit margin not exceeding 6%.

F-51
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

(b)
The Company has entered into a non-exclusive Agreement for Provision of Cultural and Educational, Health Care and Community Services with Sinopec Group Company effective from January 1, 2000 in which Sinopec Group Company has agreed to provide the Group with certain cultural, educational, health care and community services on the same pricing terms and termination conditions as agreed to in the above Mutual Provision Agreement.
(c)
The Company has entered into a series of lease agreements with Sinopec Group Company to lease certain land at a rental of approximately RMB 4,234 and RMB 4,225  per annum for the years ended December 31, 2008 and 2009, respectively, and certain buildings at a rental of approximately RMB 568 and RMB 568 per annum for the years ended December 31, 2008 and 2009, respectively. The Company and Sinopec Group Company can renegotiate the rental amount every three years for land and every year for buildings, however such amount cannot exceed the market price as determined by an independent third party. The Group has the option to terminate these leases upon six months notice to Sinopec Group Company.
(d)
The Company has entered into agreements with Sinopec Group Company effective from January 1, 2000 under which the Group has been granted the right to use certain trademarks, patents, technology and computer software developed by Sinopec Group Company.
(e)
The Company has entered into a service stations franchise agreement with Sinopec Group Company effective from January 1, 2000 under which its service stations and retail stores would exclusively sell the refined products supplied by the Group.
Pursuant to the resolutions passed at the Directors’ meeting held on June 26, 2008, the Group acquired the Downhole Assets from Sinopec Group Company, primarily property, plant and equipment, for a cash consideration of RMB 1,624, which approximated the net carrying value of the assets and liabilities of the Downhole Assets.

Pursuant to the resolutions passed at the Directors’ meeting held on March 27, 2009, the Group acquired the entire equity interests of Sinopec Qingdao Petrochemical Company Limited and certain storage and distribution operations from Sinopec Group Company for total cash consideration of RMB 771 (Note 1). In addition, the Group acquired certain operating assets related to the E&P and refining segments from Sinopec Group Company, for total cash consideration of RMB 1,068.

Pursuant to the resolutions passed at the Directors’ meeting held on August 21, 2009, the Group acquired certain operating assets related to the corporate and others business segment from a subsidiary of Sinopec Group Company for total cash consideration of RMB 3,946.

Amounts due from / to Sinopec Group Company and its affiliates, associates and jointly controlled entities included in the following accounts captions are summarized as follows:

December 31,
2008
2009
RMB
RMB
Trade accounts receivable
4,078 1,032
Prepaid expenses and other current assets
4,543 810
Total amounts due from Sinopec Group Company and its affiliates, associates and jointly controlled entities
8,621 1,842
Trade accounts payable
3,352 4,800
Accrued expenses and other payables
12,740 11,925
Short-term loans and current portion of long-term loans from Sinopec Group Company and its affiliates
33,410 13,643
Long-term loans excluding current portion from Sinopec Group Company and its affiliates
36,890 37,000
Total amounts due to Sinopec Group Company and its affiliates, associates and jointly controlled entities
86,392 67,368


F-52
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Amounts due from / to Sinopec Group Company and its affiliates, associates and jointly controlled entities, other than short-term loans and long-term loans, bear no interest, are unsecured and are repayable in accordance with normal commercial terms.  The terms and conditions associated with short-term loans and long-term loans payable to Sinopec Group Company and its affiliates are set out in Note 24.

As of and for the years ended December 31, 2008 and 2009, no individually significant impairment losses for bad and doubtful debts were recognized in respect of amounts due from Sinopec Group Company and its affiliates, associates and jointly controlled entities.

(b)       Key management personnel emoluments

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including directors and supervisors of the Group.  The key management personnel compensations are as follows:

Years ended December 31,
2007
2008
2009
RMB’000
RMB’000
RMB’000
Short-term employee benefits
5,896 6,530 7,664
Retirement scheme contributions
184 198 287
6,080 6,728 7,951

Total emoluments are included in “personnel expenses” as disclosed in Note 6.

(c)       Contributions to defined contribution retirement plans

The Group participates in various defined contribution retirement plans organized by municipal and provincial governments for its staff.  The details of the Group’s employee benefits plan are disclosed in Note 32. As of December 31, 2008 and 2009, the accrual for the contribution to post-employment benefit plans was not material.

(d)       Transactions with other state-controlled entities in the PRC

The Group is a state-controlled energy and chemical enterprise and operates in an economic regime currently dominated by entities directly or indirectly controlled by the PRC government through its government authorities, agencies, affiliations and other organizations (collectively referred as “state-controlled entities”).

Apart from transactions with Sinopec Group Company and its affiliates, the Group has transactions with other state-controlled entities include but not limited to the following:

· sales and purchase of goods and ancillary materials;
· rendering and receiving services;
· lease of assets;
· depositing and borrowing money; and
· use of public utilities.

These transactions are conducted in the ordinary course of the Group’s business on terms comparable to those with other entities that are not state-controlled. The Group has established procurement policies, pricing strategy and approval process for purchases and sales of products and services which do not depend on whether the counterparties are state-controlled entities or not.

Having considered the transactions potentially affected by related party relationships, the Group’s pricing strategy, procurement policies and approval processes, and the information that would be necessary for an understanding of the potential effect of the related party relationship on the financial statements, the directors are of the opinion that the following related party transactions require disclosure of numeric details:

F-53
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

(i)
Transactions with other state-controlled energy and chemical companies

The Group’s major domestic suppliers of crude oil and refined petroleum products are China National Petroleum Corporation and its subsidiaries (“CNPC Group”) and China National Offshore Oil Corporation and its subsidiaries (“CNOOC Group”), which are state-controlled entities.

During the years ended December 31, 2007, 2008 and 2009, the aggregate amount of crude oil purchased by the Group’s refining segment from CNPC Group and CNOOC Group and refined petroleum purchased by the Group’s marketing and distribution segment from CNPC Group was RMB 70,341, RMB 113,612 and RMB 100,641, respectively.

The aggregate amounts due from / to CNPC Group and CNOOC Group included in the following accounts captions are summarized as follows:

December 31,
2008
2009
RMB
RMB
Trade accounts receivable
292 318
Prepaid expenses and other current assets
113 17
Total amounts due from CNPC Group and CNOOC Group
405 335
Trade accounts payable
2,045 3,628
Accrued expenses and other payables
433 361
Total amounts due to CNPC Group and CNOOC Group
2,478 3,989

(ii)
Transactions with state-controlled banks
The Group deposits its cash with several state-controlled banks in the PRC. The Group also obtains short-term and long-term loans from these banks in the ordinary course of business. The interest rates of the bank deposits and loans are regulated by the PBOC. The Group’s interest income from and interest expense to these state-controlled banks in the PRC are as follows:

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Interest income
227 413 238
Interest expense
5,450 7,262 2,770

The amounts of cash deposited at and loans from state-controlled banks in the PRC included in the following accounts captions are summarized as follows:

December 31,
2008
2009
RMB
RMB
Cash and cash equivalents
5,725 3,046
Time deposits with financial institutions
449 1,236
Total deposits at state-controlled banks in the PRC
6,174 4,282
Short-term loans and current portion of long-term loans
56,461 22,629
Long-term loans excluding current portion of long-term loans
27,844 14,893
Total loans from state-controlled banks in the PRC
84,305 37,522


F-54
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)
32.     EMPLOYEE BENEFITS PLAN

As stipulated by the regulations of the PRC, the Group participates in various defined contribution retirement plans organized by municipal and provincial governments for its staff. The Group is required to make contributions to the retirement plans at rates ranging from 18.0% to 23.0% of the salaries, bonuses and certain allowances of its staff. In addition, the Group provides a supplementary retirement plan benefit plan for its staff at rates not exceeding 5% of the salaries. A member of the above plans is entitled to a pension equal to a fixed proportion of the salary prevailing at his or her retirement date. The Group has no other material obligation for the payment of pension benefits associated with these plans beyond the annual contributions described above. The Group’s contributions for the years ended December 31, 2007, 2008 and 2009 were RMB 2,817, RMB 2,873 and RMB 4,647, respectively.

33.      SEGMENT REPORTING

Segment information is presented in respect of the Group’s business segments.  The format is based on the Group’s management and internal reporting structure.  In view of the fact that the Company and its subsidiaries operate mainly in the PRC, no geographical segment information is presented.

In a manner consistent with the way in which information is reported internally to the Group’s chief operating decision maker for the purposes of resource allocation and performance assessment, the Group has identified the following five reportable segments. No operating segments have been aggregated to form the following reportable segments.

(i)
Exploration and production, which explores and develops oil fields, produces crude oil and natural gas and sells such products to the refining segment of the Group and external customers.
(ii)
Refining, which processes and purifies crude oil, that is sourced from the exploration and production segment of the Group and external suppliers, and manufactures and sells petroleum products to the chemicals and marketing and distribution segments of the Group and external customers.
(iii)
Marketing and distribution, which owns and operates oil depots and service stations in the PRC, and distributes and sells refined petroleum products (mainly gasoline and diesel) in the PRC through wholesale and retail sales networks.
(iv)
Chemicals, which manufactures and sells petrochemical products, derivative petrochemical products and other chemical products mainly to external customers.
(v)
Corporate and others, which largely comprise the trading activities of the import and export companies of the Group and research and development undertaken by other subsidiaries.
The reportable segments are each managed separately because they manufacture and/or distribute distinct products with different production processes and due to their distinct operating and gross margin characteristics.

Group’s chief operating decision maker evaluates the performance and allocates resources to its operating segments on an operating income basis, without considering the effects of finance costs or investment income. Inter-segment transfer pricing is based on cost plus an appropriate margin, as specified by the Group’s policy.

Assets dedicated to a particular segment’s operations are included in that segment’s total assets, which include all tangible and intangible assets, except for cash and cash equivalents, time deposits with financial institutions, investments, deferred tax assets and other non-current assets.


F-55
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Information on the Group’s reportable segments is as follows:

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Sales of goods
Exploration and production
External sales
20,437 26,403 19,342
Inter-segment sales
107,473 151,393 87,008
127,910 177,796 106,350
Refining
External sales
120,171 132,209 95,792
Inter-segment sales
541,647 692,520 603,870
661,818 824,729 699,662
Marketing and distribution
External sales
659,552 802,817 778,417
Inter-segment sales
2,841 3,200 2,372
662,393 806,017 780,789
Chemicals
External sales
220,239 219,723 192,735
Inter-segment sales
16,529 27,303 21,125
236,768 247,026 213,860
Corporate and others
External sales
149,585 232,051 229,629
Inter-segment sales
303,571 484,343 291,396
453,156 716,394 521,025
Elimination of inter-segment sales
(972,061 ) (1,358,759 ) (1,005,771 )
Sales of goods
1,169,984 1,413,203 1,315,915
Other operating revenues
Exploration and production
17,757 18,705 17,485
Refining
5,035 4,957 3,909
Marketing and distribution
461 906 2,302
Chemicals
7,298 6,430 4,597
Corporate and others
462 90 844
Other operating revenues
31,013 31,088 29,137
Other income
Refining
1,926 41,017 —
Marketing and distribution
2,937 9,840 —
Total other income
4,863 50,857 —
Sales of goods, other operating revenues and other income
1,205,860 1,495,148 1,345,052

F-56
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

Years ended December 31,
2007
2008
2009
Result
RMB
RMB
RMB
Operating income / (loss)
By segment
- Exploration and production
48,766 66,569 19,644
- Refining
(10,997 ) (63,635 ) 23,077
- Marketing and distribution
35,904 38,519 30,300
- Chemicals
13,303 (12,950 ) 13,615
- Corporate and others
(1,480 ) (2,167 ) (2,205 )
Total segment operating income
85,496 26,336 84,431
Net finance costs
(8,363 ) (5,190 ) (7,234 )
Investment income
1,670 390 374
Income from associates and jointly controlled entities
4,044 580 2,997
Earning before income tax
82,847 22,116 80,568


December 31,
2007
2008
2009
RMB
RMB
RMB
Assets
Segment assets
- Exploration and production
198,998 235,866 263,041
- Refining
198,222 184,531 213,027
- Marketing and distribution
138,398 144,139 153,777
- Chemicals
121,716 121,964 128,322
- Corporate and others
34,282 31,120 60,433
Total segment assets
691,616 717,620 818,600
Interest in associates and jointly controlled entities
29,588 27,376 32,090
Investments
3,195 1,483 2,174
Deferred tax assets
10,439 13,768 13,975
Cash and cash equivalents and time deposits with financial institutions
8,453 7,760 9,986
Income tax receivable
— 9,784 —
Other unallocated assets
80 1,381 1,017
Total assets
743,371 779,172 877,842


F-57
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one year.

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Capital expenditure
Exploration and production
54,498 57,646 51,550
Refining
22,964 12,793 15,468
Marketing and distribution
14,671 14,796 16,283
Chemicals
16,184 20,622 25,207
Corporate and others
3,289 2,393 1,505
111,606 108,250 110,013
Depreciation, depletion and amortization
Exploration and production
18,216 22,115 24,648
Refining
9,177 9,658 10,330
Marketing and distribution
6,208 5,270 5,999
Chemicals
8,977 8,463 8,574
Corporate and others
1,070 815 936
43,648 46,321 50,487
Impairment losses on long-lived assets
Exploration and production
481 5,991 1,595
Refining
1,070 270 396
Marketing and distribution
1,237 709 1,479
Chemicals
318 1,511 3,807
Corporate and others
— 19 8
3,106 8,500 7,285

F-58
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


34.     PRINCIPAL SUBSIDIARIES

As of December 31, 2009, the following list contains the particulars of subsidiaries which principally affected the results, assets and liabilities of the Group.
Name of company
Particulars
of issued
capital
Type of
legal entity
Percentage of equity
Principal activities
China Petrochemical International Company Limited
RMB 1,400
Limited company
100.00
Trading of petrochemical products
Sinopec Sales Company Limited
RMB 1,700
Limited company
100.00
Marketing and distribution of refined petroleum products
Sinopec Yangzi Petrochemical Company Limited
RMB 16,337
Limited company
100.00
Manufacturing of intermediate petrochemical products and petroleum products
Fujian Petrochemical Company  Limited (i)
RMB 4,769
Limited company
50.00
Manufacturing of plastics, intermediate petrochemical products and petroleum products
Sinopec Shanghai Petrochemical Company Limited
RMB 7,200
Limited company
55.56
Manufacturing of synthetic fibres, resin and plastics, intermediate petrochemical products and petroleum products
Sinopec Kantons Holdings Limited
HKD 104
Limited company
72.34
Trading of crude oil and petroleum products
Sinopec Yizheng Chemical Fibre Company Limited (i)
RMB 4,000
Limited company
42.00
Production and sale of polyester chips and polyester fibres
Sinopec Zhongyuan Petrochemical Company Limited
RMB 2,400
Limited company
93.51
Manufacturing of chemical products
Sinopec Shell (Jiangsu) Petroleum Marketing Company Limited
RMB 830
Limited company
60.00
Marketing and distribution of refined petroleum products
BP Sinopec (Zhejiang) Petroleum Company Limited
RMB 800
Limited company
60.00
Marketing and distribution of refined petroleum products
Sinopec Qingdao Refining and Chemical Company Limited
RMB 5,000
Limited company
85.00
Manufacturing of intermediate petrochemical products and petroleum products
China International United Petroleum and Chemical Company Limited
RMB 3,040
Limited company
100.00
Trading of crude oil and petrochemical products
Sinopec Hainan Refining and Chemical Company Limited
RMB 3,986
Limited company
75.00
Manufacturing of intermediate petrochemical products and petroleum products
Sinopec (Hong Kong) Limited
HKD 5,477
Limited company
100.00
Trading of crude oil and petrochemical products
Sinopec Senmei (Fujian) Petroleum Ltd.
RMB 1,840
Limited company
55.00
Marketing and distribution of refined petroleum products
Sinopec Qingdao Petrochemical Company Limited
RMB 1,595
Limited company
100.00
Manufacturing of intermediate petrochemical products and petroleum products
Sinopec Chemical Sales Company Limited
RMB 1,000
Limited company
100.00
Trading of petrochemical products
Sinopec International Petroleum Exploration and Production Limited
RMB 4,500
Limited company
100.00
Investment in exploration, production and sales of petroleum and natural gas

Except for Sinopec Kantons Holdings Limited and Sinopec (Hong Kong) Limited, which are incorporated in Bermuda and Hong Kong respectively, all of the above principal subsidiaries are incorporated in the PRC.

(i)
The Company consolidated the financial statements of the entity because it controlled the board of this entity and had the power to govern its financial and operating policies.

F-59
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


35.      FINANCIAL RISK MANAGEMENT AND FAIR VALUES

Overview

Financial assets of the Group include cash and cash equivalents, time deposits with financial institutions, investments, trade accounts receivable, bills receivable, amounts due from Sinopec Group Company and its affiliates, advances to third parties, amounts due from associates and jointly controlled entities, derivative financial instruments and other receivables. Financial liabilities of the Group include short-term and long-term debts, loans from Sinopec Group Company and its affiliates, trade accounts payable, bills payable, amounts due to Sinopec Group Company and its affiliates, derivative financial instruments and advances from third parties.

The Group has exposure to the following risks from its use of financial instruments:

·
credit risk;
·
liquidity risk;
·
market risk; and
·
equity price risk.

The Board of Directors has overall responsibility for the establishment, oversight of the Group’s risk management framework, and developing and monitoring the Group’s risk management policies.

The Group’s risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management controls and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. Internal audit department undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Group’s audit committee.

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s deposits placed with financial institutions and receivables from customers. To limit exposure to credit risk relating to deposits, the Group primarily places cash deposits only with large financial institution in the PRC with acceptable credit ratings. The majority of the Group’s trade accounts receivable relate to sales of petroleum and chemical products to related parties and third parties operating in the petroleum and chemical industries. Management performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade accounts receivable. The Group maintains an impairment loss for doubtful accounts and actual losses have been within management’s expectations. No single customer accounted for greater than 10% of total trade accounts receivable.  The details of the Group’s credit policy and quantitative disclosures in respect of the Group’s exposure on credit risk for trade receivables are set out in Note 13.

The carrying amounts of cash and cash equivalents, time deposits with financial institutions, trade accounts and bills receivables, derivative financial instruments and other receivables, represent the Group’s maximum exposure to credit risk in relation to financial assets.

F-60
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach in managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. Management prepares monthly cash flow budget to ensure that the Group will always have sufficient liquidity to meet its financial obligation as they fall due.  The Group arranges and negotiates financing with financial institutions and maintains a certain level of standby credit facilities to reduce the Group’s liquidity risk.

As of December 31, 2008 and 2009, the Group has standby credit facilities with several PRC financial institutions which provide borrowings up to RMB 185,000 and RMB 159,500 on an unsecured basis, at a weighted average interest rate of 4.65% and 3.33% per annum, respectively. As of December 31, 2008 and 2009, the Group’s outstanding borrowings under these facilities were RMB 33,484 and RMB 9,361 and were included in short-term debts, respectively.

The following table sets out the remaining contractual maturities at the balance sheet date of the Group’s financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on prevailing rates current at the balance sheet date) and the earliest date the Group would be required to repay:

December 31, 2008
Carrying amount
Total contractual undiscounted cash flow
Within 1 year or on demand
More than 1 year but less than 2 years
More than 2 years but less than 5 years
More than 5 years
RMB
RMB
RMB
RMB
RMB
RMB
Short-term debts
75,516 77,303 77,303 — — —
Long-term debts
90,254 115,721 3,442 12,712 30,013 69,554
Loans from Sinopec Group Company and its affiliates
70,300 71,774 34,618 509 627 36,020
Trade accounts payable
56,464 56,464 56,464 — — —
Bills payable
18,753 18,768 18,768 — — —
Accrued expenses and other payables
53,108 53,108 53,108 — — —
364,395 393,138 243,703 13,221 30,640 105,574

Derivatives settled gross:
Forward exchange contracts
- outflow
(4,366 ) (4,415 ) (4,415 ) — — —
- inflow
4,480 4,531 4,531 — — —

December 31, 2009
Carrying amount
Total contractual undiscounted cash flow
Within 1 year or on demand
More than 1 year but less than 2 years
More than 2 years but less than 5 years
More than 5 years
RMB
RMB
RMB
RMB
RMB
RMB
Short-term debts
58,898 59,835 59,835 — — —
Long-term debts
108,828 130,424 3,081 7,004 99,942 20,397
Loans from Sinopec Group Company and its affiliates
50,643 51,249 14,027 222 1,440 35,560
Trade accounts payable
97,749 97,749 97,749 — — —
Bills payable
23,111 23,114 23,114 — — —
Accrued expenses and other payables
56,778 56,778 56,778 — — —
396,007 419,149 254,584 7,226 101,382 55,957

Management believes that the Group’s current cash on hand, expected cash flows from operations and available standby credit facilities from financial institutions will be sufficient to meet the Group’s working capital requirements and repay its short term debts and obligations when they become due.

F-61
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Currency risk

Currency risk arises on financial instruments that are denominated in a currency other than the functional currency in which they are measured.  The Group’s currency risk exposure primarily relates to short-term and long-term debts and loans from Sinopec Group Company and its affiliates denominated in US dollars, Japanese Yen and Hong Kong dollars. The Group enters into a number of foreign exchange contracts to manage such exposure.

The changes in the fair value of forward exchange contracts that economically hedge monetary assets and liabilities in foreign currencies are recognized as finance costs in the consolidated statements of income. As of December 31, 2008, the net fair value of forward exchange contracts used by the Group as economic hedges of monetary assets and liabilities in foreign currencies was RMB 114, and the notional amounts of these contracts held by the Group were USD 660. There was no forward exchange contract held by the Group as of December 31, 2009.

Included in short-term and long-term debts and loans from Sinopec Group Company and its affiliates of the Group are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:

December 31,
Gross exposure arising from loans and borrowings
2008
2009
US Dollars
USD    1,232 USD    1,341
Japanese Yen
JPY   28,037 JPY   22,500
Hong Kong Dollars.
HKD 11,192 HKD 11,779
A 5 percent strengthening of Renminbi against the following currencies as of December 31 would have increased net income and retained earnings of the Group by the amounts shown below. This analysis has been determined assuming that the change in foreign exchange rates had occurred at the balance sheet date and had been applied to the foreign currency balances to which the Group has significant exposure as stated above, and that all other variables, in particular interest rates, remain constant.  The analysis is performed on the same basis for 2008.

December 31,
2008
2009
US Dollars
147 343
Japanese Yen
80 62
Hong Kong Dollars
370 389

Other than the amounts as disclosed above, the amounts of other financial assets and liabilities of the Group are substantially denominated in the functional currency of respective entity of the Group.

Interest rate risk

The Group’s interest rate risk exposure arises primarily from its short-term and long-term debts.  Debts carrying interest at variable rates and at fixed rates expose the Group to cash flow interest rate risk and fair value interest rate risk respectively. The interest rates of short-term and long-term debts, and loans from Sinopec Group Company and its affiliates of the Group are disclosed in Note 24.

As of December 31, 2008 and 2009, it is estimated that a general increase / decrease of 100 basis points in variable interest rates, with all other variables held constant, would decrease / increase the Group’s net income and retained earnings by approximately RMB 263 and RMB 194, respectively. This sensitivity analysis has been determined assuming that the change in interest rates had occurred at the balance sheet date and the change was applied to the Group’s debts outstanding at that date with exposure to cash flow interest rate risk.  The analysis is performed on the same basis for 2008.


F-62
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Commodity price risk

The Group engages in oil and gas operations and is exposed to commodity price risk related to price volatility of crude oil and refined oil products. The fluctuations in prices of crude oil and refined oil products could have significant impact on the Group. The Group uses derivative financial instruments, including commodity futures and swaps, to manage a portion of this risk. As of December, 31 2009, the Group had certain commodity contracts of crude oil and refined oil products designated as qualified cash flow hedges and economic hedges. The fair values of these derivative financial instruments as of December 31, 2009 are set out in Notes 15 and 26.

As of December 31, 2008, it is estimated that a general increase/decrease of USD 10 per barrel in crude oil and refined oil products, with all other variables held constant, would have no effect to the Group’s net income and retained earnings, and decrease/increase the Group’s other reserves by approximately RMB 200. As of December 31, 2009, it is estimated that a general increase/decrease of USD 10 per barrel in crude oil and refined oil products, with all other variables held constant, would decrease/increase the Group’s net income and retained earnings by approximately RMB 215, and increase/decrease the Group’s other reserves by approximately RMB 1,991. This sensitivity analysis has been determined assuming that the change in prices had occurred at the balance sheet date and the change was applied to the Group’s derivative financial instruments at that date with exposure to commodity price risk. The analysis was performed on the same basis for 2008.

Equity price risk

The Group is exposed to equity price risk arising from changes in the Company’s own share price to the extent that the Company’s own equity instruments underlie the fair values of derivatives of the Group. As of December 31, 2009, the Group’s exposure to equity price risk is the derivative embedded in the Convertible Bonds issued by the Company as disclosed in Note 24(c).

As of December 31, 2008, it is estimated that an increase of 20% in the Company’s own share price would decrease the Group’s net income and retained earnings by approximately RMB 62 while a decrease of 20% in the Company’s own share price would have no effect to the Group’s net income and retained earnings. As of December 31, 2009, it is estimated that an increase of 20% in the Company’s own share price would decrease the Group’s net income and retained earnings by approximately RMB 306 while a decrease of 20% in the Company’s own share price would increase the Group’s net income and retained earnings by approximately RMB 156. The sensitivity analysis has been determined assuming that the changes in the Company’s own share price had occurred at the balance sheet date and that all other variables remain constant. The analysis was performed on the same basis for 2008.

Fair values

(i)        Financial instruments carried at fair value

The following table presents the carrying value of financial instruments measured at fair value at the balance sheet date across the three levels of the fair value hierarchy defined in IFRS 7, Financial Instruments: Disclosures , with the fair value of each financial instrument categorized in its entirety based on the lowest level of input that is significant to that fair value measurement. The levels are defined as follows:

·
Level 1 (highest level): fair values measured using quoted prices (unadjusted) in active markets for identical financial instruments.
·
Level 2: fair values measured using quoted prices in active markets for similar financial instruments, or using valuation techniques in which all significant inputs are directly or indirectly based on observable market data.
·
Level 3 (lowest level): fair values measured using valuation techniques in which any significant input is not based on observable market data.

F-63
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)



December 31, 2009
Level 1
Level 2
Level 3
Total
RMB
RMB
RMB
RMB
Assets
Available-for-sale financial assets:
- Listed
61 — — 61
- Unlisted
— 1,400 — 1,400
Derivative financial instruments:
- Derivative financial assets
17 307 — 324
78 1,707 — 1,785
Liabilities
Derivative financial instruments:
- Derivative components of the Convertible Bonds
— 218 — 218
- Other derivative financial liabilities
4 754 — 758
4 972 — 976

During the year there were no transfers between instruments in Level 1 and Level 2.

(ii)       Fair values of financial instruments carried at other than fair value

The disclosures of the fair value estimates, and their methods and assumptions of the Group’s financial instruments, are made to comply with the requirements of IFRS 7 and IAS 39 and should be read in conjunction with the Group’s consolidated financial statements and related notes. The estimated fair value amounts have been determined by the Group using market information and valuation methodologies considered appropriate. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Group could realize in a current market exchange. The use of different market assumptions and / or estimation methodologies may have a material effect on the estimated fair value amounts.

The fair values of the Group’s financial instruments (other than long-term indebtedness and investment in unquoted equity securities) approximate their carrying amounts due to the short-term maturity of these instruments.  The fair values of long-term indebtedness are estimated by discounting future cash flows using current market interest rates offered to the Group for debt with substantially the same characteristics and maturities ranging 3.58% to 5.94% and 4.18% to 5.94% for the years ended December 31, 2008 and 2009, respectively. The following table presents the carrying amount and fair value of the Group’s long-term indebtedness other than loans from Sinopec Group Company and its affiliates as of December 31, 2008 and 2009:

December 31,
2008
2009
RMB
RMB
Carrying amount
109,415 115,139
Fair value
113,060 114,471

The Group has not developed an internal valuation model necessary to make the estimate of the fair value of loans from Sinopec Group Company and its affiliates as it is not considered practicable to estimate their fair value because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive based on the Reorganization of the Group, its existing capital structure and the terms of the borrowings.

Investments in unquoted equity securities are individually and in aggregate not material to the Group’s financial condition or results of operations. There are no listed market prices for such interests in the PRC and, accordingly, a reasonable estimate of fair value could not be made without incurring excessive costs. The Group intends to hold these unquoted equity securities for long term purpose.


F-64
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


36.      ACCOUNTING ESTIMATES AND JUDGMENTS

The Group’s financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the financial statements.  Management bases the assumptions and estimates on historical experience and on various other assumptions that it believes to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources.  On an on-going basis, management evaluates its estimates.  Actual results may differ from those estimates as facts, circumstances and conditions change.

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

Oil and gas properties and reserves

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

Engineering estimates of the Group’s oil and gas reserves are inherently imprecise and represent only approximate amounts because of the subjective judgments involved in developing such information.  There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and gas reserves can be designated as “proved”.  Proved and proved developed reserves estimates are updated at least annually and take into account recent production and technical information about each field.  In addition, as prices and cost levels change from year to year, the estimate of proved and proved developed reserves also changes.  This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in related depreciation rates.

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

Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depreciation expense, impairment expense and future dismantlement costs.  Depreciation rates are determined based on estimated proved developed reserve quantities (the denominator) and capitalized costs of producing properties (the numerator).  Producing properties’ capitalized costs are amortized based on the units of oil or gas produced.

Impairment for long lived assets

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


F-65
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Depreciation

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

Impairment for bad and doubtful debts

Management estimates impairment losses for bad and doubtful debts resulting from the inability of the Group’s customers to make the required payments. Management bases the estimates on the aging of the accounts receivable balance, customer credit-worthiness, and historical write-off experience. If the financial condition of the customers were to deteriorate, actual write-offs would be higher than estimated.

Allowance for diminution in value of inventories

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

37. POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE ANNUAL ACCOUNTING PERIOD ENDED DECEMBER 31, 2009

Up to the date of issue of these financial statements, the IASB has issued a number of amendments, new standards and interpretations which are not yet effective for the annual accounting period ended December 31, 2009 and which have not been adopted in these financial statements.

Management is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application and has so far concluded that the adoption of these amendments, new standards and new interpretations is unlikely to have a significant impact on the Group’s results of operations and financial position.

38.       POST BALANCE SHEET EVENT

Pursuant to the resolution passed at the Directors’ meeting on March 26, 2010, the Group entered into an agreement with Sinopec Overseas Oil & Gas Limited (“SOOGL”), a subsidiary of Sinopec Group Company, to acquire 55% equity interests of Sonangol Sinopec International Limited (“SSI”) and to acquire the shareholder’s loans of USD 779 provided by SOOGL to SSI, at a total cash consideration of USD 2,457. SSI is engaged in the oil and gas operations in Angola. The transaction is subject to the approval from the shareholders’ meeting, the relevant governmental bodies or the relevant creditor.

39.      PARENT AND ULTIMATE HOLDING COMPANY

The directors consider the parent and ultimate holding company of the Group as of December 31, 2009 is Sinopec Group Company, a state-owned enterprise established in the PRC. This entity does not produce financial statements available for public use.

F-66
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)
(All currency amounts in millions)

In accordance with the Accounting Standards Update 2010-03, Extractive Activities - Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures , ("ASU 2010-03"), issued by the Financial Accounting Standards Board of the United States, this section provides supplemental information on oil and gas exploration and producing activities of the Group as of December 31, 2007, 2008 and 2009, and for the years then ended in the following six separate tables. Tables I through III provide historical cost information under IFRS pertaining to capitalized costs related to oil and gas producing activities; costs incurred in oil and gas exploration and development; and results of operations related to oil and gas producing activities. Tables IV through VI present information on the Group’s estimated net proved reserve quantities; standardized measure of discounted future net cash flows; and changes in the standardized measure of discounted future net cash flows.

Table I:        Capitalized costs related to oil and gas producing activities

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Property cost
___
___
___
Wells and related equipment and facilities
259,373 292,897 333,656
Supporting equipment and facilities
25,145 46,717 68,779
Uncompleted wells, equipment and facilities
34,441 56,197 46,297
Total capitalized costs
318,959 395,811 448,732
Accumulated depreciation, depletion, amortization and impairment losses
(130,837 ) (173,551 ) (199,182 )
Net capitalized costs
188,122 222,260 249,550

Table II:       Cost incurred in oil and gas exploration and development

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Exploration
15,774 12,947 14,572
Development
49,829 53,009 47,523
Total costs incurred
65,603 65,956 62,095

Table III:      Results of operations for oil and gas producing activities

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Revenues
Sales
20,092 26,192 19,114
Transfers
107,473 151,051 86,828
127,565 177,243 105,942
Production costs excluding taxes
(28,855 ) (30,837 ) (31,948 )
Exploration expenses
(11,105 ) (8,310 ) (10,545 )
Depreciation, depletion, amortization and impairment losses
(18,697 ) (26,715 ) (26,243 )
Taxes other than income tax
(13,604 ) (35,980 ) (9,188 )
Income before income tax
55,304 75,401 28,018
Income tax expense
(18,250 ) (18,850 ) (7,005 )
Results of operation from producing activities
37,054 56,551 21,013

F-67
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) – (Continued)
(All currency amounts in millions)

The results of operations for producing activities for the years ended December 31, 2007, 2008 and 2009 are shown above. Revenues include sales to unaffiliated parties and transfers (essentially at third-party sales prices) to other segments of the Group. All revenues reported in this table do not include royalties to others as there were none. Income taxes are based on statutory tax rates, reflecting allowable deductions and tax credits. General corporate overhead and interest income and expense are excluded from the results of operations.
Table IV:     Reserve quantities information

The Group’s estimated net proved underground oil and gas reserves and changes thereto for the years ended December 31, 2007, 2008 and 2009 are shown in the following table.

Proved oil and gas reserves are those quantities of oil and gas, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether the estimate is a deterministic estimate or probabilistic estimate. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change as additional information becomes available.

Proved developed oil and gas reserves are proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared with the cost of a new well.

“Net” reserves exclude royalties and interests owned by others and reflect contractual arrangements in effect at the time of the estimate.

Year-end reserves quantities for the year ended December 31, 2009 shown in the following tables were calculated using the average, first-day-of-the-month price for oil and gas during the twelve-month period before the ending date of the period covered by the report. Year-end reserves quantities for the years ended December 31, 2007 and 2008 shown in the following tables were calculated using year-end price. The estimated impact of changing to the average, first-day-of-the-month price for oil and gas during the twelve-month period before the ending date of the period was not significant on the Group’s proved reserves for the year ended December 31, 2009.

Years ended December 31,
2007
2008
2009
Proved developed and undeveloped reserves (oil) (million barrels)
Beginning of year
3,293 3,024 2,841
Revisions of previous estimates
(250 ) (94 ) 80
Improved recovery
125 98 131
Extensions and discoveries
148 110 69
Production
(292 ) (297 ) (301 )
End of year
3,024 2,841 2,820
Proved developed reserves
Beginning of year
2,903 2,651 2,451
End of year
2,651 2,451 2,513
Proved undeveloped reserves
Beginning of year
390 373 390
End of year
373 390 307
Proved developed and undeveloped reserves (gas) (billion cubic feet)
Beginning of year
2,856 6,331 6,959
Revisions of previous estimates
222 203 52
Extensions and discoveries
3,536 718 27
Production
(283 ) (293 ) (299 )
End of year
6,331 6,959 6,739

F-68
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) – (Continued)
(All currency amounts in millions)
Proved developed reserves
Beginning of year
1,472 1,518 1,571
End of year
1,518 1,571 1,727
Proved undeveloped reserves
Beginning of year
1,384 4,813 5,388
End of year
4,813 5,388 5,012
Table V:      Standardized measure of discounted future net cash flows

The standardized measure of discounted future net cash flows, related to the above proved oil and gas reserves, is calculated in accordance with the requirements of ASU 2010-03. Estimated future cash inflows from production are computed by applying the year-end prices for oil and gas for the years ended December 31, 2007 and 2008 and the average, first-day-of-the-month price for oil and gas during the twelve-month period before the ending date of the period covered by the report for the year ended December 31, 2009 to year-end quantities of estimated net proved reserves. Future price changes are limited to those provided by contractual arrangements in existence at the end of each reporting year. Future development and production costs are those estimated future expenditures necessary to develop and produce year-end estimated proved reserves based on year-end cost indices, assuming continuation of year-end economic conditions. Estimated future income taxes are calculated by applying appropriate year-end statutory tax rates to estimated future pre-tax net cash flows, less the tax basis of related assets. Discounted future net cash flows are calculated using 10% midperiod discount factors. This discounting requires a year-by-year estimate of when the future expenditure will be incurred and when the reserves will be produced.

The information provided does not represent management’s estimate of the Group’s expected future cash flows or value of proved oil and gas reserves. Estimates of proved reserve quantities are imprecise and change over time as new information becomes available. Moreover, probable and possible reserves, which may become proved in the future, are excluded from the calculations. The arbitrary valuation requires assumptions as to the timing and amount of future development and production costs. The calculations are made for the years ended December 31, 2007, 2008 and 2009 and should not be relied upon as an indication of the Group’s future cash flows or value of its oil and gas reserves.

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Future cash flows
1,835,471 977,904 1,207,127
Future production costs
(799,408 ) (536,442 ) (546,590 )
Future development costs
(68,970 ) (42,207 ) (32,895 )
Future income tax expenses
(196,103 ) (44,249 ) (94,523 )
Undiscounted future net cash flows
770,990 355,006 533,119
10% annual discount for estimated timing of cash flows
(349,987 ) (113,367 ) (228,932 )
Standardized measure of discounted future net cash flows
421,003 241,639 304,187


F-69
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) – (Continued)
(All currency amounts in millions)

Table VI:     Changes in the standardized measure of discounted future net cash flows

Years ended December 31,
2007
2008
2009
RMB
RMB
RMB
Sales and transfers of oil and gas produced, net of production costs.
(77,522 ) (112,424 ) (55,429 )
Net changes in prices and production costs.
165,191 (231,578 ) 62,417
Net change due to extensions, discoveries and improved recoveries
68,788 32,011 35,009
Revisions of previous quantity estimates
(46,980 ) (8,298 ) 9,897
Previously estimated development costs incurred during the year
8,783 27,578 13,531
Accretion of discount
23,726 36,031 20,627
Net change in income taxes
(4,716 ) 76,964 (23,814 )
Others
272 352 310
Net change for the year
137,542 (179,364 ) 62,548

F-70
SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
China Petroleum & Chemical Corporation
By
/s/ Chen Ge
Name:
Chen Ge
Title:
Secretary to the Board of Directors

Date: April 30, 2010
TABLE OF CONTENTS
Item 17__ Item 18__Item 1. Identity Of Directors, Senior Management and Advisors 6Item 2. Offer Statistics and Expected Timetable 6Item 3. Key Information 6Item 4. Information on The Company 13Item 4A. Unresolved Staff Comments 31Item 5. Operating and Financial Review and Prospects 31Item 6. Directors, Senior Management and Employees 50Item 7. Major Shareholders and Related Party Transactions 60Item 8. Financial Information 61Item 9. The Offer and Listing 61Item 10. Additional Information 62Item 11. Qualitative and Quantitative Disclosures About Market Risk 75Item 12. Description Of Securities Other Than Equity Securities 81Item 13. Defaults, Dividend Arrearages and Delinquencies 81Item 14. Material Modifications To The Rights Of Security Holders and Use Of Proceeds 81Item 15. Controls and Procedures 81Item 16. Reserved 83Item 16A. Audit Committee Financial Expert 83Item 16B. Code Of Ethics 83Item 16C. Principal Accountant Fees and Services 83Item 16D. Exemptions From The Listing Standards For Audit Committees 83Item 16E. Purchases Of Equity Securities By The Issuer and Affiliated Purchasers 83Item 16F. Change in Registrant S Certifying Accountant 83Item 17. Financial Statements 86Item 18. Financial Statements 86Item 19. Exhibits 86Item 1. Identity Of Directors, Senior Management and AdvisorsItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4. Information on The CompanyItem 4A. Unresolved Staff CommentsItem 5. Operating and Financial Review and ProspectsItem 6. Directors, Senior Management and EmployeesItem 7. Major Shareholders and Related Party TransactionsItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Qualitative and Quantitative Disclosures About Market RiskItem 12. Description Of Securities Other Than Equity SecuritiesItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 16. ReservedItem 16A. Audit Committee Financial ExpertItem 16B. Code Of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions From The Listing Standards For Audit CommitteesItem 16E. Purchases Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F. Change in Registrant S Certifying AccountantItem 17. Financial StatementsItem 18. Financial StatementsItem 19. Exhibits