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1 (Incorporated in Bermuda with Limited Liability) Stock Code: 603 Interim Report 2014

2 1 Contents Page Enterprise Culture 2 Natural Gas Distribution Business in China 3 Oil and Gas Production Business in Canada 4 Corporate Information 5 Condensed Consolidated Statement of Comprehensive Income 7 Condensed Consolidated Statement of Financial Position 8 Condensed Consolidated Statement of Changes in Equity 10 Condensed Consolidated Statement of Cash Flows 12 Notes to Condensed Consolidated Financial Statements 13 Report of the Board

3 2 Enterprise Culture OUR OBJECTIVES: OUR MISSION: OUR VISION: OUR CULTURE: CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

4 3 Natural Gas Distribution Business in China Main trunk pipelines West-to-East line 1 West-to-East line 2 West-to-East line 3 (under construction) Se-Ning-Lan line Shaan-Jing line 4 Shaan-Jing line 3 Cang-Zi Line Zhong-Wu Line Myanmar-China Line Company operating assets/data Branch pipeline City gas project with concession right LNG processing plant CNG/LNG station Province with natural gas sales volume > 500mn m 3 in 1H Province with natural gas sales volume between mn m 3 in 1H Province with natural gas sales volume < 100mn m 3 in 1H Province to enter in near term Heilongjiang Horgas (gas from Central Asia) Jilin Lun-nan oil & gas field Tibet Xinjiang Sebei oil & gas field Gas from Burma Qinghai Gonghe Ping an Liaoning Inner Mongolia Beijing Tianjin Shanxi Hebei Qingyun Ningxia Linfen Shandong Xining Yinchuan Binzhou Huimin Lvliang Zouping Gansu Shaanxi Xinyi Jiangsu Henan Yangzhou Taizhou Rugao Hubei Anhui Nanjing Lishui Chuanyu Ma-Anshan Xiantao Sichuan gas field Wuhan Zhejiang Jing-an Yunnan Hunan Anyi Nanchang Jiangxi Guizhou Pingxiang Fujian Liling Dayu Shaoguan Guangdong Taiwan Guangxi Yingde Chaozhou Note: For illustrative purpose only, actual scale and location might differ slightly Hainan 2014

5 4 Oil and Gas Production Business in Canada Proved Producing Probable Producing 6,424 MBOE 6,424 2,437 MBOE 2,437 TOTAL: 22.0 MMBOE P: 51.0% 2P: 50.6% 1H2014 Pr.: 1,842boe/d Proved Undeveloped 9,748 MBOE 9,748 Probable Undeveloped 0 5,000 10,000 15,000 20,000 25,000 Reserves (MBOE) 3,353 MBOE 3,353 1P: 30.4% 2P: 30.6% 1H2014 Pr.: 1,306boe/d 1P: 5.0% 2P: 5.3% 1H2014 Pr.: 271boe/d 1P: 13.6% 2P: 13.4% 1H2014 Pr.: 725boe/d Canada Alberta USA PRODUCTION 1H 2014 production 4,154 boe/d (67% liquids) Liquids: 2,792bbl/d Gas : 8,171mcf/d (boe/d) 5,000 4,000 3,000 2,000 1,000 1, CAGR: % 2,268 2,756 3,348 4, H2014 CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

6 5 Corporate Information BOARD OF DIRECTORS Executive Directors XU Tie-liang (Chairman & Chief Executive Officer) ZHU Yuan GUAN Yijun CHEUNG Shing Independent Non-Executive Directors LI Yunlong SHI Xun-zhi WANG Guangtian COMPANY SECRETARY CHAN Yuen Ying Stella, FCIS, FCS, MHKIoD AUTHORISED REPRESENTATIVES XU Tie-liang CHAN Yuen Ying Stella AUDIT COMMITTEE LI Yunlong (chairman) SHI Xun-zhi WANG Guangtian REMUNERATION COMMITTEE LI Yunlong (chairman) WANG Guangtian CHEUNG Shing NOMINATION COMMITTEE WANG Guangtian (chairman) LI Yunlong CHEUNG Shing CORPORATE GOVERNANCE COMMITTEE XU Tie-liang (chairman) ZHU Yuan GUAN Yijun CHEUNG Shing LAW Yin Shan Jenny CHAN Yuen Ying Stella AUDITOR PricewaterhouseCoopers FCIS, FCS, MHKIoD 2014

7 6 Corporate Information LEGAL ADVISERS (As to Hong Kong Law) LI & Partners (As to PRC Law) Beijing Huaao Law & Partners PRINCIPAL REGISTRARS MUFG Fund Services (Bermuda) Limited The Belvedere Building 69 Pitts Bay Road Pembroke HM08 Bermuda HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE Computershare Hong Kong Investor Services Limited Shops , 17th Floor Hopewell Centre 183 Queen s Road East Wanchai Hong Kong REGISTERED OFFICE Clarendon House 2 Church Street Hamilton HM 11 Bermuda HEAD OFFICE AND PRINCIPAL PLACE OF BUSINESS IN HONG KONG Suite 2805, 28th Floor Sino Plaza Gloucester Road Causeway Bay Hong Kong PRINCIPAL BANKER The Hongkong and Shanghai Banking Corporation Limited STOCK CODE 603 WEBSITE AND ADDRESS Website: info@hk603.com MUFG Fund Services (Bermuda) Limited The Belvedere Building 69 Pitts Bay Road Pembroke HM08 Bermuda Clarendon House 2 Church Street Hamilton HM 11 Bermuda info@hk603.com CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

8 7 Interim Results The board (the Board ) of directors (the Directors ) of China Oil And Gas Group Limited (the Company ) is pleased to announce the unaudited condensed consolidated interim results of the Company and its subsidiaries (collectively the Group ) for the six months ended 30 June 2014 (the Period ). Condensed Consolidated Statement of Comprehensive Income For the six months ended 30 June 2014 Six months ended 30 June Notes HK$ 000 HK$ 000 (unaudited) (unaudited) Revenue 4 3,447,287 2,879,691 Cost of sales (2,846,419) (2,203,707) Gross profit 600, ,984 Other income 5 17,973 12,714 Other gains/(losses) 6 40,320 (38,595) Selling and distribution costs (26,824) (23,403) Administrative expenses (110,640) (111,438) Operating profit 521, ,262 Interest income 7 66,153 41,768 Finance costs 7 (71,792) (44,497) Share of result of a jointly-controlled entity 6, Share of result of an associate (778) (535) Profit before taxation 522, ,211 Taxation 8 (111,948) (105,066) Profit for the period 410, ,145 Other comprehensive income/(loss): Items that may be subsequently reclassified to profit or loss: Fair value changes from available- for-sale financial assets (5,082) (18,011) Total comprehensive income for the period 405, ,134 Profit for the period attributable to: Owners of the Company 209, ,692 Non-controlling interests 200, , , ,145 Total comprehensive income attributable to: Owners of the Company 204, ,681 Non-controlling interests 200, , , ,134 HK cents HK cents Earnings per share 9 Basic Diluted

9 8 Interim Results Condensed Consolidated Statement of Financial Position As at 30 June Notes HK$ 000 HK$ 000 (unaudited) (audited) Non-current assets Property, plant and equipment 11 3,977,386 3,712,892 Exploration and evaluation assets 14 2,384,719 Land use rights 219, ,365 Intangible assets 1,072,124 1,072,227 Interest in an associate 5,385 6,162 Interest in a jointly-controlled entity 47,989 41,231 Available-for-sale financial assets 293, ,011 Other non-current assets 980, ,710 8,982,097 6,730,598 Current assets Inventories 206, ,926 Deposits, trade and other receivables 12 1,363, ,344 Financial assets at fair value through profit or loss 62, ,812 Time deposits with maturity over three months 781, ,427 Cash and cash equivalents 3,606,769 3,377,551 6,020,394 5,426,060 Current liabilities Trade and other payables 13 1,128, ,804 Consideration payable 1,708,600 Receipt in advance 934,565 1,006,593 Short-term borrowings 938, ,500 Current tax payable 112, ,572 4,822,919 2,680,469 Net current assets 1,197,475 2,745,591 Total assets less current liabilities 10,179,572 9,476,189 CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

10 9 Interim Results Condensed Consolidated Statement of Financial Position (Continued) As at 30 June Notes HK$ 000 HK$ 000 (unaudited) (audited) Non-current liabilities Long-term borrowings 954, ,000 Senior notes 2,676,260 2,672,082 Deferred tax liabilities 277,299 23,960 Other non-current liabilities 168,778 Total non-current liabilities 4,076,337 3,650,042 Net assets 6,103,235 5,826,147 Equity Equity attributable to owners of the Company Share capital 15 52,797 50,007 Reserves 3,659,538 3,497,373 3,712,335 3,547,380 Non-controlling interests 2,390,900 2,278,767 Total equity 6,103,235 5,826,

11 10 Interim Results Condensed Consolidated Statement of Changes In Equity For the six months ended 30 June 2014 Attributable to owners of the Company Shares held for share Exchange Share-based Non- Share Share award Other fluctuation compensation Retained controlling Total capital premium scheme reserves reserve reserve profits Total interests equity HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January ,007 1,594,280 (65,260) 103, ,571 11,163 1,559,328 3,547,380 2,278,767 5,826,147 Change in equity for 2014 Fair value changes from available-for-sale financial assets (5,082) (5,082) (5,082) Profit for the period 209, , , ,090 Total comprehensive income for the period (5,082) 209, , , ,008 Issue of shares upon exercise of share options ,419 (7,248) 12,461 12,461 Equity settled share based payments 2, ,066 3,066 Shares purchased or issued under share award scheme 2,500 (19,645) (17,145) (17,145) Capital injection by non controlling interests 99,060 99,060 Dividend paid to non controlling interests of subsidiaries (184,205) (184,205) Final dividend for the year ended 31 December 2013 (38,014) (38,014) (38,014) Reduction of share premium account (1,594,280) 1,472, ,127 Changes in the ownership interests in subsidiaries that do not result in a loss of control (285) (285) (2,858) (3,143) At 30 June ,797 19,419 (82,477) 1,532, ,571 4,553 1,891,409 3,712,335 2,390,900 6,103,235 CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

12 11 Interim Results Condensed Consolidated Statement of Changes in Equity (Continued) For the six months ended 30 June 2014 Attributable to owners of the Company Shares held for share Exchange Share-based Non- Share Share award Other fluctuation compensation Retained controlling Total capital premium scheme reserves reserve reserve profits Total interests equity HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January ,654 1,572,081 (10,993) 167, ,360 15,461 1,157,834 3,179,791 1,847,039 5,026,830 Change in equity for 2013 Fair value changes from available-for-sale financial assets (18,011) (18,011) Profit for the period 156, , , ,145 Total comprehensive income for the period (18,011) 156, , , ,134 Issue of shares upon exercise of share options 127 8,078 (2,748) 5,457 5,457 Equity-settled share-based payments 543 1,570 2,113 2,113 Shares purchased under share award scheme (9,507) (9,507) (9,507) Capital injection by non-controlling interests 6,672 6,672 Dividend paid to non-controlling interests of subsidiaries (66,577) (66,577) Dividend paid to shareholders of the Company (32,275) (32,275) (32,275) Others (514) 6,698 6,184 6,184 At 30 June ,781 1,580,159 (19,957) 116, ,058 14,283 1,314,526 3,290,444 2,037,587 5,328,

13 12 Interim Results Condensed Consolidated Statement of Cash Flows For the six months ended 30 June 2014 Unaudited Unaudited (6 months) (6 months) HK$ 000 HK$ 000 Net cash generated from operating activities 494, ,530 Net cash used in investing activities (180,826) (385,294) Net cash (used in)/generated from financing activities (80,118) 1,826,129 Net increase in cash and cash equivalents 233,502 1,757,365 Cash and cash equivalents at beginning of the Period 3,377,551 2,416,911 Effect of foreign exchange rate changes (4,284) 6,184 Cash and cash equivalents at end of the period 3,606,769 4,180,460 CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

14 13 Interim Results Notes to Condensed Consolidated Financial Statements For the six months ended 30 June 2014 (1) General information (1) China Oil And Gas Group Limited (the Company ) was incorporated in Bermuda as an exempted company with limited liability and its shares are listed on The Stock Exchange of Hong Kong Limited (the Stock Exchange ). The address of its registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The address of its principal place of business of the Company is at Suite 2805, 28th Floor, Sino Plaza, Gloucester Road, Causeway Bay, Hong Kong. The Company is an investment holding company, and its subsidiaries are principally engaged in investment in energy related businesses, including 1) piped city gas operation, pipeline design and construction; 2) transportation, distribution and sales of compressed natural gas ( CNG ) and liquefied natural gas ( LNG ); and 3) exploration and development, production and sales of oil and gas and other upstream energy resources. (2) Basis of preparation Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda ) 2) CNG LNG 3) (2) The unaudited condensed consolidated interim financial statements of the Group have been prepared in accordance with Hong Kong Accounting Standards ( HKAS ) 34 Interim Financial Reporting issued by the Hong Kong Institute of Certified Public Accountants ( HKICPA ) and Appendix 16 to the Rules Governing the Listing of Securities on the Stock Exchange. These interim financial statements should be read in conjunction with the Group s audited financial statements for the year ended 31 December (3) Application of new and revised Hong Kong Financial Reporting Standards ( HKFRS(s) ) In the current interim period, the Group has applied, for the first time, the following new interpretation and amendments to HKFRSs issued by the HKICPA: (3) HKAS 32 (Amendments) HKAS 36 (Amendments) HKAS 39 (Amendments) Offsetting financial assets and financial liabilities Recoverable amount disclosures for non-financial assets Novation of derivatives and continuation of hedging accounting

15 14 Interim Results (3) Application of new and revised Hong Kong Financial Reporting Standards ( HKFRS(s) ) (Continued) (3) HKFRS 10, HKFRS 12 and HKAS 27 (2011) (Amendments) Investment Entities HK (IFRIC) Int 21 Levies 21 The application of the above new, revised or amended standards and interpretations have no material impact on the results and the financial position of the Group. (4) Revenue and segment information (4) The Group s executive directors are the chief operating decision makers as they collectively make strategic decisions on resources allocation and performance assessment. The Group is principally engaged in sales of natural gas and gas pipeline construction and connection in the PRC. Nearly all identifiable assets of the Group are located in PRC. Information reported to the Group s executive directors for the purpose of resources allocation and assessment of performance focuses on the type of products or services. Each type of product or service is managed by a unique business unit within the Group whose performance is assessed independently. The Group s operating segments under HKFRS 8 are therefore as follows: 8 sales and distribution of natural gas and other related products gas pipelines construction and connection Information regarding the Group s reportable segments as provided to the Board for the purpose of resources allocation and assessment of segment performance for the six months ended 30 June 2014 and 2013 is set out below: CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

16 15 Interim Results (continued) (4) Revenue and segment information (Continued) (4) Business Segments For the six months ended 30 June 2014: Sales and distribution of natural Gas pipeline gas and construction other related and products connection Group HK$ 000 HK$ 000 HK$ 000 Segment revenue and results Sales to external customers 2,996, ,462 3,447,287 Segment results 317, , ,317 Interest income 66,153 Other gains/(losses) 40,320 Finance cost (71,792) Share of result of a jointly- controlled entity 6,758 Share of result of an associate (778) Unallocated corporate expenses (43,940) Profit before taxation 522,038 Taxation (111,948) Profit for the period 410,

17 16 Interim Results (continued) (4) Revenue and segment information (Continued) (4) For the six months ended 30 June 2013: Sales and distribution of natural Gas pipeline gas and construction other related and products connection Group HK$ 000 HK$ 000 HK$ 000 Segment revenue and results Sales to external customers 2,437, ,061 2,879,691 Segment results 354, , ,156 Interest income 41,768 Other gains/(losses) (38,595) Finance cost (44,497) Share of result of a jointly-controlled entity 213 Share of result of an associate (535) Unallocated corporate expenses (4,299) Profit before taxation 512,211 Taxation (105,066) Profit for the period 407,145 CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

18 17 Interim Results (continued) (5) Other income (5) Unaudited Unaudited (6 months) (6 months) HK$ 000 HK$ 000 Dividend income from list securities 573 3,984 Government subsidies 11, Rental income 2,746 4,082 Service income 1,584 2,076 Others 1,625 1,853 17,973 12,714 (6) Other gains/(losses) (6) During the six months ended 30 June 2014 and 2013, the balances represent the fair value gains/(losses) on financial assets at fair value through profit or loss, and gain on a bargain purchase in 2014 (Note 14)

19 18 Interim Results (continued) (7) Interest income and finance costs (7) Unaudited Unaudited (6 months) (6 months) HK$ 000 HK$ 000 Interest income from: Bank deposits 36,153 24,809 Advances to leasee 29,492 16,463 Loan to a third party ,153 41,768 Finance costs on: Bank borrowings (20,498) (27,123) Other borrowings (51,294) (17,374) (71,792) (44,497) Finance costs, net (5,639) (2,729) CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

20 19 Interim Results (continued) (8) Taxation (8) No provision for Hong Kong profits tax has been made as the Group did not have any assessable profits subject to Hong Kong profits tax for the Period (2013: Nil). In accordance with the relevant PRC corporate income tax laws, regulations and implementation guidance note, subsidiaries in Mainland China are subject to the PRC corporate income tax rate at 25% (2013: 25%). 25% 25% Certain of the Company s PRC subsidiaries which are operating in the Western China have been granted tax concessions by the local tax bureau and are taxed at a preferential income tax of 15% (2013: 15%). Certain subsidiaries are entitled to exemption from PRC enterprise income tax for the first two years commencing from their first profit-making year of operation and thereafter, these subsidiaries will be entitled to a 50% relief from PRC enterprise income tax for the following three years. PRC enterprise income tax has been provided for after taking these tax incentives into account. 15% 15% Unaudited Unaudited (6 months) (6 months) HK$ 000 HK$ 000 Current tax: PRC corporate income tax 107,908 87,652 Deferred tax 4,040 17,414 Taxation 111, ,

21 20 Interim Results (continued) (9) Earnings per share (9) (a) The calculation of basic earnings per share is based on the Group s profit attributable to owners of the Company of approximately HK$209,954,000 (six months ended 30 June 2013: HK$156,692,000) and weighted average number of ordinary shares in issue less shares held under share award scheme during the Period of approximately 4,940,485,000 shares (six months ended 30 June 2013: 4,965,988,000 shares). (a) 209,954, ,692,000 4,940,485,000 4,965,988,000 (b) Diluted earnings per share is calculated based on the profit attributable to owners of the Company of approximately HK$209,954,000 (six months ended 30 June 2013: HK$156,692,000), and the weighted average number of ordinary shares of approximately 4,969,073,000 shares (six months ended 30 June 2013: 5,024,225,000 shares) which is the weighted average number of ordinary shares in issue less shares held under share award scheme during the Period plus the weighted average number of dilutive potential ordinary shares in respect of share options of approximately 27,686,000 shares (six months ended 30 June 2013: 57,317,000 shares) and the effect of awarded shares of approximately 902,000 shares (six months ended 30 June 2013: 920,000 shares) deemed to be issued at no consideration if all outstanding share options granted had been exercised. (b) 209,954, ,692,000 4,969,073,000 5,024,225,000 27,686,000 57,317, , ,000 (10) Dividend (10) The Board did not declare the payment of an interim dividend for the six months ended 30 June 2014 (2013: Nil). During the Period, a dividend of HK cent 0.72 per share (2013: HK cent 0.65) amounting to HK$38,014,000 (2013: HK$32,275,000) was paid to the shareholders as the final dividend for ,014,000 32,275,000 CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

22 21 Interim Results (continued) (11) Property, plant and equipment (11) During the six months ended 30 June 2014, the Group acquired property, plant and equipment amounting to HK$369,933,000 (six months ended 30 June 2013: HK$321,311,000) and disposed of property, plant and equipment with net book value of HK$114,000 (six months ended 30 June 2013: HK$2,407, ,933, ,311, ,000 2,407,000 (12) Deposits, trade and other receivables (12) Unaudited Audited At At HK$ 000 HK$ 000 Trade receivables 679, ,414 Other receivables, deposits and prepayments 683, ,930 1,363, ,344 The ageing analysis of trade receivables is as follows: Current to 90 days , , days ,283 18,716 Over 180 days ,635 10, , ,

23 22 Interim Results (continued) (13) Trade and other payables (13) Unaudited Audited At At HK$ 000 HK$ 000 Trade payables 571, ,462 Other payables and accruals 557, ,342 1,128, ,804 The ageing analysis of trade payables is as follows: Current to 90 days , , days ,867 24,012 Over 180 days ,716 28, , ,462 CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

24 23 Interim Results (continued) (14) Business combination (14) Effective from 20 June 2014, the Group acquired 100% equity interest in Baccalieu Energy Inc. from independent third parties to the Group. The total consideration for the acquisition is CAD 235,500,000 (equivalent to approximately HK$1,708,600,000). The acquired business contributed no revenue or loss to the Group for the six months ended 30 June Baccalieu Energy Inc. 235,500,0001,708,600,000 During the Period, the above acquisition was completed and the Group commenced to account for the business combination from the effective date when the Group gained control over the company. As at the date of this interim report, the initial accounting for the acquisition is determined on a provisional basis as the allocation of fair value to the identifiable assets and liabilities of the acquisition is still progressing. Adjustments to those provisional values of identifiable assets and liabilities, including any additional depreciation, amortisation, and other profit or loss effect, if any, will be recognised on completion of the initial accounting. Details of net assets acquired and gain on a bargain purchase arising are as follows: Acquiree s provisional fair value at acquisition date HK$ 000 Exploration and evaluation assets 2,384,719 Deposits, trade and other receivables 103,648 Trade and other payables (108,472) Short-term borrowings (201,361) Current tax payable (15,896) Deferred tax liabilities (249,298) Others (168,778) Net identifiable assets acquired 1,744,562 Consideration payable (1,708,600) Gain on a bargain purchase 35,

25 24 Interim Results (continued) (15) Share capital (15) Number of shares Amount 000 HK$ 000 Authorised: Ordinary shares of HK$0.01 each at 30 June 2013, 31 December 2013 and 30 June ,000,000 1,250,000 Issued and fully paid: Ordinary shares of HK$0.01 each at 30 June ,978,096 49,781 Issue of shares upon exercise of share options 22, Ordinary shares of HK$0.01 each at 31 December ,000,716 50,007 Issue of shares upon exercise of share options 28, Issue of shares under share award scheme 250,000 2,500 Ordinary shares of HK$0.01 each at 30 June ,279,696 52,797 (16) Pledge of assets The Group has pledged its equity interest (actual capital investment at the time of drawdown) in China City Natural Gas Co., Ltd., a subsidiary owned as to 51% by the Group as security for an other borrowing of HK$700,000,000. Apart from the above, no other material assets of the Group have been pledged as at 30 June (17) Contingent liability As at 30 June 2014, the Group has no material contingent liability (2013: Nil). (18) Approval of the interim financial statements The condensed consolidated interim financial statements were approved and authorised for issue by the Board on 28 August (16) 51% 7 (17) (18) CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

26 25 Report of the Board FINANCIAL AND OPERATING INFORMATION HIGHLIGHTS The board (the Board ) of directors (the Directors ) of China Oil And Gas Group Limited (the Company ) and its subsidiaries (collectively the Group ) is pleased to announce the unaudited condensed consolidated interim results for the six months ended 30 June 2014 (the Period ). The Group is principally engaged in investment in natural gas, oil and energy related business. The natural gas business includes piped city gas business, pipeline design and construction, as well as transportation, distribution and sales of compressed natural gas ( CNG ) and liquefied natural gas ( LNG ). The oil business mainly includes the sales of upstream light oil. MANAGEMENT DISCUSSION AND ANALYSIS Business Review In the first half of 2014, the Group s natural gas business successfully sustained healthy growth under the concerted effort of our staff. As at 30 June 2014, the Group has established a total of 109 natural gas project companies in 48 cities of 14 provinces and autonomous regions in China. Gas pipeline construction and connection income During the Period, the Group attained revenue of HK$3,447 million, representing an increase of 20% from HK$2,880 million as compared with the same period last year. Income from gas pipeline construction and connection was HK$450 million. New connections to residential users and industrial and commercial users were 77,000 and 349 respectively, representing an increase of 11% and 6% respectively as compared to the end of last year. It is anticipated that the number of new users will maintain stable growth in the future. With the increases in the connection income, the Group would continue to open more channels for the sale of natural gas and provide services to more natural gas end-users, which would in turn lay a solid foundation for the sale of natural gas by the Group in the future. CNG LNG % % 6% 2014

27 26 Report of the Board 1,400 Natural Gas Sales Volume (million m 3 ) 15% 1,200 1,000 1, , H H 2014 Residential Users Industrial, Commercial and Other Users Gas Stations 1H2013 1H2014 Jiangsu 10.1% Hunan 11.7% Qinghai 50.0% Shangdong 8.5% Guangdong 6.9% Jiangxi 2.8% Hubei 3.3% Ningxia 3.0% Anhui 2.8% Shanxi 0.2% Guizhou 0.7% Jiangsu 13.1% Hunan 11.3% Qinghai 48.5% Shangdong 9.0% Guangdong 4.9% Jiangxi 3.6% Hubei 2.9% Ningxia 2.6% Anhui 2.4% Guizhou 1.3% Shanxi 0.4% CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

28 27 Report of the Board Residential Users thousands , , End Users 5, , , ,447 7,000 6,000 5,000 4,000 3,000 2,000 Industrial, Commercial and Other Users 100 1, H H H H H H 2014 Existing Residential Users New Residential Users Existing Industrial, Commercial and Other Users New Industrial, Commercial and Other Users Sales and distribution of natural gas and other related products Revenue from the sales and distribution of natural gas and other related products amounted to HK$2,997 million, representing a year-on-year increase of 23% which accounted for 87% of the total revenue. During the Period, total gas sales volume was 1,219 million m 3, representing a year-onyear increase of 15%. Amongst the total gas sales volume, gas consumption by residential users was 320 million m 3 (2013: 271 million m 3 ); consumption by industrial and commercial users was 709 million m 3 (2013: 600 million m 3 ); consumption by gas stations was 190 million m 3 (2013: 186 million m 3 ), representing a year-on-year increase of 18%, 18% and 2% respectively. Benefited from the development of the Group s high pressure natural gas branch pipelines, gas transmission volume for the Period reached 243 million m 3 (2013: 188 million m 3 ), representing a year-on-year increase of 29% %87% % % 18% 2% % 2014

29 28 Report of the Board Development of natural gas distribution business In the first half of 2014, focusing on coast and riverfront markets and centered on the existing scope of businesses, the Group conducted intensive research and development in respect of the periphery of key natural gas pipelines. The Group obtained the concession right of city gas projects in Yangxin county, Hubei Province, as well as five new projects, including Changbei L/CNG refueling station, Nantong Hongjiang L/CNG refueling station, Nantong vehicles hub L/CNG refueling station, Xining Mafang oil and gas station and Xining Eastern Exit oil and gas station. The Group continued to promote the application of LNG business of gas in substitution of oil by selecting key areas and closely monitoring the LNG projects in Jiangsu Province and along the Ganjiang River in Jiangxi Province, and progresses were made in gas used by modified vessels, gas used by modified vehicles and LNG point-to-point projects. In the first half of 2014, the Group extended approximately 57 km of new high pressure pipelines, forming a high pressure pipeline network of 987 km, which pushed the development of downstream projects effectively. The city and courtyard pipeline network extended by 577 km in the first half of 2014, reaching an aggregate length of 5,478 km. The Group will make persistent efforts to obtain new gas projects and promote the development of natural gas distribution business. L/CNG L/CNGL/ CNG LNG LNG LNG ,478 New oil and gas production business The Company entered into an agreement with the Canadian Baccalieu Energy Inc. ( Baccalieu ) on 20 June 2014 to acquire 100% equity interest of Baccalieu at a consideration of CAD235.5 million, which became a whollyowned subsidiary of the Group. According to a reserve report prepared by GLJ Petroleum Consultants, Baccalieu has proven reserves of approximately 16.2 million barrels of oil equivalent (60% is light oil and NGLs, 40% is natural gas) and proven plus probable reserves of approximately 22 million barrels of oil equivalent (60% is light oil and NGLs, 40% is natural gas) as of 31 December In the first half of 2014, the average daily production of Baccalieu was 4,154 barrels of oil equivalent (67% is light oil and NGLs, 33% is natural gas). The average operating net back value was CAD50.17 per barrel of oil equivalent. Baccalieu possesses energy business in production, a very experienced management team with proven track record, stable production assets portfolio, strong cash flow and profitability with considerable potential for growth. The financial results of Baccalieu will be consolidated into the Group in the second half of Baccalieu Energy Inc.Baccalieu Baccalieu 100% GLJ Petroleum Consultants Baccalieu % 40% 2260% 40% Baccalieu 4,15467% 33% Baccalieu Baccalieu CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

30 29 Report of the Board As at 30 June 2014, the aforesaid acquisition had been completed and the combination of businesses had been presented in the consolidated statement of financial position of the Group. Since the allocation of the fair value of identifiable assets and liabilities under the acquisition is still in process, the initial accounting for the acquisition was determined provisionally. The adjustments relating to the temporary value of identifiable assets and liabilities will be recognized upon the completion of initial accounting. Business Prospect In 2014, the Chinese economy was still underpinned by strong fundamentals. The improving external economic environment would lead to improvement of the market. Inflationary pressure continued to ease off. Consumer price index (CPI) was within the price control target of 3.5%. Economic growth was stimulated by the adoption of mixed ownership model and structural reformation. After the Third Plenary Session of the 18th Communist Party of China Central Committee, the PRC government introduced numerous reform measures such as simplifying and delegating administrative approval procedures, and the pace of structural reform accelerated. The economic development of the non-public sector geared up. The efficiency of resources deployment was effectively raised. The Group continued to maintain good co-operation with companies under the PRC central government and local governments and private enterprises. By utilizing its edge of market-oriented operation and rich industrial experience, the Group grasped the opportunity of synergy development of the industry and gained a broader room for development. CPI 3.5% Since the beginning of this year, the PRC government issued Several Opinions on Establishing Long-Term Mechanism to Guarantee Stable Natural Gas Supply and Energy Industry to Strengthen Air Pollution Control Work Program, clearly stating natural gas supply capacity of China should reach 250 billion m 3 in 2015 and over 400 billion m 3 in The introduction of these policies will provide favourable policy support for the rapid and healthy development of the natural gas industry in the long run. On 21 July, the operational data of the natural gas industry published by National Development and Reform Commission ( NDRC ) showed that the natural gas production for the first half of the year was 63.2 billion m 3, representing a year-on-year increase of 7.5%. The apparent consumption of natural gas for the first half of the year was 88.7 billion m 3, representing a year-on-year increase of 8.9%. The discrepancy between demand and supply was still substantial with reliance on external supply at 31.9%. Such national policies and industry development were favourable factors to the core business of the Group. 2,500 4, % % 31.9% 2014

31 30 Report of the Board As the gap for domestic natural gas supply widens, and demand for natural gas import grows. The price of natural gas supply will increase inevitably. During the year, NDRC issued the Guidance Opinions on Implementing Progressive Price Level Mechanism for Residential Gas Supply and Notice on the Adjustment of Non-Residential Gas Prices, planning to increase the city-gate gas prices in different provinces in September. Subsidiary enterprises of the Group will continue to closely communicate with the local governments, industrial associations and industrial and commercial clients to co-operate with the local governments commencement of natural gas price adjustments is a crucial year for the Group to realize its development strategy of vertical integration of upstream and downstream operations. Currently, conventional oil and gas resources in the PRC are relatively deficient, resulting in the degree of dependence on foreign oil and gas of the PRC reaching 58%. Actively searching for foreign oil and gas resources and realizing optimized resource allocation on a global scale have always been the energy strategy of the PRC. The Group s acquisition of Baccalieu in June 2014 is not only for the need of realizing its development strategy of vertical integration of upstream and downstream operations, but is also an efficient path to achieve continuous operation in the future and to improve operation results. 58% Baccalieu The Group has been constantly improving its corporate management and operational standard. On the basis of the good results from the management and regulatory work of the previous year, the Group will continue to improve its corporate governance and internal control standard. Effective and sustainable corporate governance measures can prevent risks and make sure that the Group can achieve its operational goals. Taking into account the various factors above, the Group will maintain its current investment portfolio and business development model in the second half of the year and in the future to achieve steady growth. While concentrating on the development of its existing domestic business, the Group will also create an upstream resources platform overseas for the Group to become an energy group which is trusted by clients, socially respected, well-managed and constantly creates value for shareholders. CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

32 31 Report of the Board FINANCIAL RESULTS For the six months ended 30 June 2014, the Group recorded a total revenue of HK$3,447 million (2013: HK$2,880 million), representing an increase of approximately 20%. The Group s cost of sales was HK$2,846 million (2013: HK$2,204 million), representing an increase of approximately 29%. Gross profit amounted to HK$601 million (2013: HK$676 million) with a decrease of approximately 11%. Among the total revenue, the revenue of the sales and distribution of natural gas was HK$2,997 million (2013: HK$2,438 million) and the revenue of gas pipeline construction and connection was HK$450 million (2013: HK$442 million), representing a 23% and 2% growth. Sales and distribution of natural gas continued to be the Group s main source of income and constituted 87% of the Period s total revenue (2013: 85%). The Group s selling and distribution costs increased by 15% to approximately HK$26.8 million from approximately HK$23.4 million in The increase was in line with the Group s new project companies set up during the Period and new concession rights. The Group placed great emphasis on the effectiveness and appropriateness of sales strategies and successfully controlled its selling and distribution costs at 0.8% (2013: 0.8%) of the total revenue % % % % 2% 87% 85% 2,340 15% 2, % 0.8% 2013 was a year of enhancing the Group s management capability, during which a sound corporate system was established and the corporate governance structure was improved. In 2014, the Group continued to promote the construction of corporate governance and internal control standard, and the corporate governance level was efficiently raised. During the Period, the administrative expenses of the Group decreased by 0.7% to HK$111 million. With stringent cost control and improvement in efficiency, the Group successfully curbed its administrative expenses at 3% of total revenue, as compared to 4% during the first half of % % 4% 2014

33 32 Report of the Board Finance costs increased from HK$44.5 million of the corresponding period last year to current period s HK$71.8 million, which was mainly constituted by coupon interests on our senior notes issued on 25 April The Group s weighted average cost of all indebtedness (including bank borrowings, other borrowings and senior notes) as at 30 June 2014 was 5.1% (2013: 5.1). Profit attributable to owners of the Company was HK$210 million for the period ended 30 June 2014 (2013: HK$157 million), representing an increase of 34%. LIQUIDITY, FINANCIAL AND CAPITAL RESOURCES It is the Group s policy to use the cash flow generated from operations and appropriate level of borrowings as the principal source of fund to finance major expansion and acquisition. The Group s total indebtedness (including bank borrowings, other borrowings and senior notes) amounted to HK$4,569 million (31 December 2013: HK$4,335 million). As at 30 June 2014, the Group had cash and cash equivalents and time deposits with maturity over three months of approximately HK$4,388 million (31 December 2013: HK$4,173 million). Total assets of HK$15,003 million (31 December 2013: HK$12,157 million), and among which current assets were HK$6,020 million (31 December 2013: HK$5,426 million). Total liabilities of the Group were HK$8,899 (31 December 2013: HK$6,331 million), and among which current liabilities were HK$4,823 (31 December 2013: HK$2,680 million). The Group s debt-to-asset ratio, measured on the basis of total indebtedness divided by total assets was 30.5% (31 December 2013: 35.7%). The current ratio (current assets divided by current liabilities) of the Group was 1.25 times (31 December 2013: 2.02 times). EBITDA to interest cover ratio was at healthy level of times. The financial and liquidity of the Group is at a very healthy and stable position. 4,450 7, % 5.1% % %35.7% CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

34 33 Report of the Board EMPLOYEES AND REMUNERATION POLICY As at 30 June 2014, the Group employed a total of approximately 3,744 (31 December 2013: 3,643) full-time employees, where mostly were stationed in the PRC. Total staff cost for the Period amounted to HK$130 million (2013: HK$110 million). The Group remunerates its employees based on their performance, working experience and the prevailing market wage level. The total remuneration of the employees consisted of basic salary, cash bonus and share-based incentives. PLEDGE OF ASSETS The Group has pledged part of its equity interest (actual capital investment at the time of drawdown) in China City Natural Gas Co., Ltd., a subsidiary owned as to 51% by the Group, as security for an other borrowing of HK$700,000,000. CONTINGENT LIABILITIES The Group has no material contingent liability as at 30 June FINANCIAL MANAGEMENT AND TREASURY POLICY 3,744 3, % 7 The financial risk management of the Group is the responsibility of the Group s treasury function at the head office in Hong Kong. One of the major objectives of the Group s treasury policies is to manage its exposure to fluctuation in interest rates and foreign currency exchange rates. It is the Group s policy not to engage in speculative activities. The Group conducts its business primarily in Renminbi. The Group s certain bank deposits are denominated in Hong Kong dollars, Renminbi and United States dollars, and the Group s offshore bank loans and senior notes are denominated in Renminbi and United States dollars. Other than those disclosed, the Group does not have any material exposures to foreign exchange fluctuations. The Group does not have a foreign currency hedging policy. However, the Group monitors its foreign currency exposure closely and may, depending on the circumstances and trend of foreign currencies, consider adopting a significant foreign currency hedging policy in the future. 2014

35 34 Report of the Board LITIGATION As at 30 June 2014, the Group has no litigation. CAPITAL STRUCTURE During the Period, a total of 28,980,000 share options had been exercised by the employees and one Director of the Group at the exercise price of Hk$0.43 per share and 250,000,000 share had been issued under the share award scheme ,980, ,000,000 As at 30 June 2014, the issued share capital of the Company was HK$52,797,696, divided into 5,279,696,213 shares with a nominal value of HK$0.01. INTERIM DIVIDEND The Board resolved not to declare any interim dividend for the six months ended 30 June 2014 (30 June 2013: Nil). DIRECTORS AND CHIEF EXECUTIVES INTERESTS IN SHARES, UNDERLYING SHARES AND DEBENTURES At 30 June 2014, the interests or short positions of the Directors and chief executives of the Company in the shares, underlying shares and debentures of the Company or any associated corporation (within the meaning of Part XV of the Securities and Futures Ordinance ( SFO )), which were notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they are taken or deemed to have under such provision of the SFO), or which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers (the Model Code ), are set out below: 52,797,696 5,279,696, XV XV CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

36 35 Report of the Board Interests in shares, underlying shares and debentures of the Company Approximate Approximate percentage of the percentage of Company s issued the Company s Number of share capital debenture Long position/ ordinary Amount of Name of Director Capacity short position Notes shares held debentures held Xu Tie-liang Interest in controlled corporations Long position 1, 2 1,151,278, % US$4,000, % 4,000,000 Zhu Yuan Beneficial owner Long position 3 2,500, % Notes: ,018,300 ordinary shares and 830,260,000 ordinary shares of the Company are held through Sino Advance Holdings Limited ( Sino Advance ) and Sino Vantage Management Limited ( Sino Vantage ) respectively, both of which were incorporated in the British Virgin Islands with limited liability and are wholly-owned by Sino Best International Group Limited ( Sino Best ) (a company incorporated in the British Virgin Islands with limited liability) which in turn is wholly and beneficially owned by Mr. Xu Tie-liang. 2. An amount of US$4,000,000 of the US$350,000, % senior notes of the Company due 2018 are held through Sino Vantage. 3. These 2,500,000 shares include (1) 2,100,000 ordinary shares of the Company held by Mr. Zhu Yuan; and (2) 400,000 restricted shares granted to Mr. Zhu Yuan pursuant to the Restricted Share Award Scheme adopted by the Board on 4 November Save as disclosed above, none of the Directors or chief executives of the Company had any interests or short positions in the shares, underlying shares or debentures of the Company which were recorded on the register required to be kept under section 352 of the SFO or notified to the Company and the Stock Exchange pursuant to the Model Code as at 30 June SUBSTANTIAL SHAREHOLDERS At 30 June 2014, the register of substantial shareholders maintained by the Company pursuant to section 336 of the SFO showed that other than the interests disclosed above in respect of certain Directors and chief executives, the following shareholders had notified the Company of relevant interests in the issued share capital of the Company: ,018, ,260,000 Sino Advance Holdings Limited Sino Advance Sino Vantage Management Limited Sino Vantage Sino Advance Sino Vantage 2. Sino Vantage 350,000, ,000, ,500,000 (1) 2,100,000(2) 400,

37 36 Report of the Board Interests in the shares and underlying shares of the Company Approximate Number of percentage of ordinary the Company s Name of Long position/ shares held issued share capital shareholder Capacity short position Notes Sino Advance Holdings Limited Beneficial owner Long position 1 321,018, % Sino Advance Holdings Limited Sino Vantage Management Limited Beneficial owner Long position 1 830,260, % Sino Vantage Management Limited Sino Best International Group Limited Interest in controlled corporations Long position 1 1,151,278, % Artisan Partners Limited (Partnership) Investment manager Long position 2 438,120, % Artisan Partners Limited (Partnership) Artisan Partners Holdings LP Investment manager Long position 2 438,120, % Artisan Partners Holdings LP Artisan Partners Asset Management Inc. Investment manager Long position 2 438,120, % Artisan Partners Asset Management Inc. Notes: 1. Sino Advance and Sino Vantage are wholly-owned by Sino Best which in turn is wholly and beneficially owned by Mr. Xu Tie-liang. Hence, Mr. Xu is deemed to be interested in 321,018,300 ordinary shares and 830,260,000 ordinary shares of the Company held through Sino Advance and Sino Vantage ,120,000 ordinary shares of the Company are held by Artisan Partners Limited (Partnership) as investment manager which is wholly-owned by Artisan Partners Holdings LP which in turn is wholly-owned by Artisan Partners Asset Management Inc. Save as disclosed above, no other parties were recorded in the register of the Company required to be kept under section 336 of the SFO as having interests or short positions in the shares or underlying shares of the Company as at 30 June Sino Advance Sino Vantage Sino Advance Sino Vantage 321,018, ,260, ,120,000 Artisan Partners Limited (Partnership) Artisan Partners Limited (Partnership) Artisan Partners Holdings LPArtisan Partners Holdings LP Artisan Partners Asset Management Inc. 336 CHINA OIL AND GAS GROUP LIMITED Interim Report 2014

38 37 Report of the Board SHARE OPTION SCHEME Old Share Option Scheme The Company adopted a share option scheme (the Old Share Option Scheme ) on 31 January 2002 and terminated the same at the special general meeting of the Company held on 23 November 2011 (the SGM ). The following table sets forth the details of the share options under the Old Share Option Scheme outstanding during the six months ended 30 June 2014: Number of share options Name or Balance Granted Exercised Lapsed Outstanding category of Exercise Date of Exercisable as at 1 during the during the during the as at 30 participants price grant period January 2014 period period period June 2014 (HK$) Director Mr. Zhu Yuan July July 2013 to 600,000 (600,000) 30 July Sub-total 600,000 (600,000) Employees July July 2011 to 570,000 (570,000) 30 July July July 2012 to 9,090,000 (9,090,000) 30 July July July 2013 to 38,600,000 (18,720,000) 19,880, July Sub-total 48,260,000 (28,380,000) 19,880,000 Total 48,860,000 (28,980,000) 19,880,