1 Contents Page Enterprise Culture 2 Corporate Profiles 3 Natural Gas Distribution Business in China 4 Oil and Gas Production Business in Canada 5 Cor

Transcription

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

2 1 Contents Page Enterprise Culture 2 Corporate Profiles 3 Natural Gas Distribution Business in China 4 Oil and Gas Production Business in Canada 5 Corporate Information 6 Chairman s Statement 9 Management Discussion and Analysis 17 Biographical Details of Directors 20 Report of the Directors 23 Corporate Governance Report 35 Independent Auditor s Report 50 Consolidated Statement of Comprehensive Income 52 Consolidated Statement of Financial Position 53 Statement of Financial Position 55 Consolidated Statement of Changes in Equity 56 Consolidated Statement of Cash Flows Five Year Financial Summary

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

4 3 Corporate Profiles China Oil And Gas Group Limited (the Company ) (stock code: 603) and its subsidiaries (together, the Group ) are principally engaged in investment in natural gas and energy related business. Operations of the Group include piped city gas business, pipeline design and construction; transportation, distribution and sale of compressed natural gas ( CNG ) and liquefied natural gas ( LNG ); and development, production and sale of crude oil and gas and other upstream energy resources. As a piped city natural gas service provider, the Group supplies city natural gas through long-distance transmission pipelines. With 64 concession rights, the Group has built up city pipeline networks which offer stable and sufficient natural gas resources to local household, industrial, commercial and other users. As a non-pipeline natural gas provider, the Group has established 2 LNG plants in Qinghai Province, the PRC. Meanwhile, the Group has also built certain CNG primary stations to ensure a smooth supply of natural gas all year round. These facilities support supplies of natural gas to cities not yet covered by pipeline networks and are treated as emergency backup gas sources for the Group. As a major national operator of natural gas stations for automobile natural gas filling, the Group has built 36 CNG stations, 9 LNG stations and 3 L/ CNG stations across the country. All kinds of automobiles, city buses and long-distance buses can be converted into natural gas operation system by paying an affordable fee. Some of the provinces will provide subsidy to automobile owners who are willing to convert their automobile into natural gas operating system. With support from the PRC government, the Group offers inexpensive, clean and environmental friendly natural gas to the transportation sector. 603 CNGLNG 64 LNG CNG CNG 36LNG 9 L/CNG 3 As an operator of natural gas branch line business, the Group has already completed 1,033 km branch lines in Qinghai, Hunan, Jiangsu, Jiangxi, Ningxia, Shandong, Guizhou, Anhui and Hubei Province. Apart from bringing in stable natural gas transmission revenue, the branch line constructions will also facilitate the development of projects along the down-stream. The Group has well established a large-scale developed natural gas transport and logistics operation in the PRC, including the set up of LNG and CNG fleets which have reinforced the mobility and coverage of our natural gas supplies. As an upstream energy resources producer, the Group engages in the development, production and sale of crude oil and gas and other resources in Alberta of Canada. Baccalieu Energy Inc. ( Baccalieu ), a wholly-owned subsidiary of the Group, has proven reserves of approximately 18.2 million barrels of oil equivalent and proven plus probable reserves of approximately 25.2 million barrels of oil equivalent. Its average daily production was 4,266 barrels of oil equivalent in Baccalieu possesses energy business in production, a very experienced management team with proven track record, stable production assets portfolio and strong profitability with considerable potential for growth. 1,033 LNG CNG Baccalieu Energy Inc.Baccalieu ,266 Baccalieu 2014

5 4 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 Province with natural gas sales volume between mn m 3 in Province with natural gas sales volume < 100mn m 3 in Province to enter in near term Heilongjiang Horgas (gas from Central Asia) Lun-nan oil & gas field Xinjiang Tibet Sebei oil & gas field Gas from Burma Inner Mongolia Beijing Tianjin Shanxi Hebei Liaoning Jilin Linfen Qingyun Ningxia Shandong Xining Yinchuan Huimin Binzhou Qinghai Zouping Lvliang Gonghe Gansu Shaanxi Xinyi Jiangsu Ping an Henan Taizhou Yangzhou Rugao Anhui Nanjing Lishui Hubei Chuanyu Ma-Anshan Sichuan gas field Xiantao Jiaxing Wuhan Zhejiang Anyi Jing-an Nanchang Hunan Jiangxi Yunnan Guizhou Liling Pingxiang Fujian Dayu Shaoguan Guangdong Guangxi Yingde Chaozhou Taiwan Hainan Note: For illustrative purpose only, actual scale and location might differ slightly CHINA OIL AND GAS GROUP LIMITED Annual Report 2014

6 5 Oil and Gas Production Business in Canada Proved Producing Probable Producing Proved Undeveloped 8,322 MBOE 3,063 MBOE TOTAL: MMBOE 9,907 MBOE Probable Undeveloped 3,934 MBOE 0 10,000 20,000 30,000 Reserves (MBOE) Alberta Canada USA Baccalieu Cardium Land Baccalieu Land Cardium Well Baccalieu Land Annual Production (boe/d) Proved Plus Probable Reserve (mmboe) 5, ,000 3,000 2,268 2,756 3,348 4, ,000 1,000 1,

7 6 Corporate Information BOARD OF DIRECTORS Executive Directors XU Tie-liang (Chairman and 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 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 CHINA OIL AND GAS GROUP LIMITED Annual Report 2014

8 7 Corporate Information (continued) 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 2014

9 8 Chairman s C hairman s S Statement tatement Chairman s 主席報告 主 席報告 Statement and Management Discussion and Analysis 主席報告及管理層討論及分析 An nnu nuaall R epo ep orrt Annual Report 2014 CHINA CH C HIN INA OIL OIIL AND O AN A ND GAS ND GA G AS GROUP GR G ROU ROU OUP L LI LIMITED IM MIITE TED A

10 9 Chairman s Statement Dear shareholders, I am pleased to present the business review and prospect of China Oil And Gas Group Limited ( China Oil & Gas or Company, together with its subsidiaries, Group ) for the year ended 31 December 2014 to all shareholders. FINAL DIVIDEND BY WAY OF BONUS ISSUE OF SHARES The Board resolved to recommend to the shareholders of the Company at the forthcoming annual general meeting of the Company to be held on Tuesday, 26 May 2015 ( 2015 AGM ) a final dividend by way of bonus issue of new share of HK$0.01 each (the Share ) on the basis of one bonus Share for every ten Shares (2013: cash dividend of HK cent 0.72 per Share) whose names appear on the register of members of the Company on Tuesday, 2 June 2015 ( Record Date ) (the Bonus Issue ). The final dividend in 2013 amounted to approximately HK$36,005, ,005,000 The Bonus Issue will be credited as fully paid by way of capitalisation of an amount of approximately HK$5,300,000 in the share premium account of the Company. 5,300,

11 10 Chairman s Statement RESULTS The Group has experienced an extraordinarily strenuous year in After the PRC National Development and Reform Commission ( NDRC ) increased the city gate natural gas price, the Xining Government in Qinghai Province has not instantly approved to adjust the downstream tariff. This has led the Group to suffer substantial margin squeeze of that area. However, that government has recently issued its approval to pass through the natural gas price adjustments to the designated users with effect from 15 March 2015 on the price hike in July Moreover, the oil price has been dropped significantly by the end of 2014, which led to a decrease of the price competitiveness on the natural gas sales. Despite the above difficulties, the Group has recorded a total revenue of HK$7,698 million in 2014, with an increase of 20% compared with HK$6,440 million in With the aforesaid difficulties, profit for the year attributable to the owners of the Group in 2014 was HK$309 million, with a 23% decrease as compared to As of 31 December 2014, total assets of the Group amounted to HK$15,467 million, or a growth of 27%; net asset value was HK$6,093 million, an increase of 5% % % % % CHINA OIL AND GAS GROUP LIMITED Annual Report 2014

12 11 Chairman s Statement BUSINESS REVIEW NATURAL GAS BUSINESS Under the natural gas business, the Group has established a total of 109 natural gas project companies in 15 provinces and autonomous regions in China with 64 concession rights as at 31 December Natural Gas Sales Volume (million m 3 ) 3,000 12% 2,506 2,500 2,000 2, % 422 1,500 1,366 9% 1,487 1, % Residential Users Industrial, Commercial and Other Users Gas Stations Guangdong 7% Hubei 3% Anhui Ningxia 3% 3% 2013 Jiangxi Guizhou 3% Shanxi 1% 0% Hubei 3% Guangdong 6% Jiangxi Anhui Ningxia 3% 2% 3% 2014 Guizhou Shanxi 1% Zhejiang 1% 0% Gansu 0% Shandong 8% Qinghai 49% Shandong 9% Qinghai 47% Hunan 12% Hunan 12% Jiangsu 11% Jiangsu 13% 2014

13 12 Chairman s Statement Sales and distribution of natural gas and other related products For the year ended 31 December 2014, the Group s total gas sales volume reached 2,506 million m 3, representing an increase of 12% as compared to 2013; gas transmission volume increased 51% from 377 million m 3 to 569 million m 3 in 2014; and transportation volume up 6% to 132 million m % % % 1.32 Gas sales volume to residential users was 598 million m 3 (2013: 487 million m 3 ); to industrial, commercial and other users was 1,487 million m 3 (2013: 1,366 million m 3 ); and to gas stations was 422 million m 3 (2013: 394 million m 3 ), representing an increase of 23%, 9% and 7% respectively % 9% 7% Concession Rights Existing New Project Companies Existing New CHINA OIL AND GAS GROUP LIMITED Annual Report 2014

14 13 Chairman s Statement thousands End Users 837 6,543 Residential Users , , , , ,096 5,447 Industrial, Commercial and Other Users Existing Residential Users New Residential Users Existing Industrial, Commercial and Other Users New Industrial, Commercial and Other Users Gas pipeline construction and connection income The Group has completed new connections to 161,780 residential users and 1,096 industrial, commercial and other users during the year. As at the end of the year, accumulated connections of the Group were approximately 836,800 residential users and 6,600 industrial, commercial and other users representing an increase of 24% and 20% respectively as compared to It is anticipated that the number of new users will maintain stable growth in the future. With the increased in the number of new users, the Group will continue to trigger more channels for the sales of natural gas and provide services to more natural gas end-users, which will lay a solid foundation for the sales of natural gas by the Group in the future. 161,7801, ,800 6,60024% 20% 2014

15 14 Chairman s Statement Development of natural gas distribution business During 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 has obtained 4 city gas concession rights in Yangxin county, Hubei Province, Wuxi-Xinyi Industrial Park in Xinyi City, Jiangsu Province, Anren County, Chenzhou City, Hunan Province and Shenlun Town, Taizhou City, Jiangsu Province. Developed more than 10 new gas stations projects, including Guangzhou Panyu and Nansha LNG refueling stations, Henan Sanmenxia CNG primary station, 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 east 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 2014, the Group extended approximately 103 km of new high pressure pipelines, forming a high pressure pipeline network of 1,033 km, which pushed the development of downstream projects effectively. The city and courtyard pipeline network extended by 932 km in 2014, reaching an aggregate length of 5,833 km. The Group will make persistent efforts to obtain new gas projects and promote the development of natural gas distribution business. LNG CNGL/CNG L/CNGL/ CNG LNG LNG LNG 103 1, ,833 Exploitation and production of crude oil and natural gas business The Company entered into an agreement with independent third parties on 20 June 2014 to acquire 100% equity interest of Baccalieu Energy Inc. ( Baccalieu ) at a consideration of Canadian Dollar ( CAD ) million, which became a wholly-owned subsidiary of the Group Baccalieu Energy Inc.Baccalieu 100% According to a reserve report prepared by GLJ Petroleum Consultants, Baccalieu has proven reserves of approximately 18.2 million barrels of oil equivalent (63% is light oil and NGLs, 37% is natural gas) and proven plus probable reserves of approximately 25.2 million barrels of oil equivalent (63% is light oil and NGLs, 37% is natural gas) as of 31 December GLJ Petroleum Consultants Baccalieu % 37% % 37% In 2014, the average daily production of Baccalieu was 4,266 barrels of oil equivalent (67% is light oil and NGLs, 33% is natural gas). The average operating netback was CAD43.97 per barrel of oil equivalent. Baccalieu 4,26667% 33% CHINA OIL AND GAS GROUP LIMITED Annual Report 2014

16 15 Chairman s Statement Baccalieu possesses energy business in production, a very experienced management team with proven track record and stable production assets portfolio with considerable potential for growth. The financial results of Baccalieu has been consolidated into the Group since the second half of Baccalieu Baccalieu SENIOR NOTES AND CREDIT RATINGS In November 2014, the Company issued US$300 million senior notes bearing an interest rate of 5.0% per annum payable semi-annually in arrear due 2020 at par. Moody s Investors Service maintained the Company a credit rating of Ba1, Standard & Poor s maintained the Company a credit rating of BB+, reflecting the Company s solid and stable financial position and operational prospects Ba1 BB+ BUSINESS PROSPECT The growth of the economy of China will continue towards a New Normal development mode which pays more attention to the environment and the sustainability of growth. As the central government carries out comprehensive reform deepening and promulgates the related energy development strategies and measures for improving the atmospheric environment, the results of the structural adjustment of energy of China will gradually be seen, clean energy has become the main force in the energy structural adjustment, more utilization of natural gas has become a realistic choice to achieve energy structural adjustment. In 2014, NDRC of China announced the National Plan for Tackling Climate Change ( ). According to this plan, by 2020 the proportion of natural gas consumption in primary energy consumption will rise from the current 5% to over 10%, the consumption volume will jump from the current level of approximately 180 billion m 3 to 360 billion m 3, the substantial increase in demand for natural gas will bring good opportunities for the long term development of the natural gas downstream distribution sector. 5% 10% 1,8003,600 On 28 February 2015, NDRC of China announced the adjustment of gas price of existing volume and incremental volume, so as to achieve the same price ceiling of natural gas for non-residential users of all provinces, this is favourable for creating an environment for fair market competition, and lay a good foundation for the adopting market mechanism for natural gas pricing, also this allows the price advantages of natural gas in relation to comparable types of energy to continue as the state s support of the development of the natural gas industry. Consequently, the Group keeps an optimistic attitude towards the prospect of the natural gas distribution sector in China in which the Group is engaged. 2014

17 16 Chairman s Statement 2014 is a crucial year for the Group to realise its development strategy of vertical integration of upstream and downstream operations. Since the conventional oil and gas resources in the PRC are relatively deficient, for a long time the Group has been actively seeking for overseas valuable oil and gas resources, in order to form the strategic objective of vertical integration of upstream and downstream operations. In June 2014, the Group successfully acquired Baccalieu, which was a key step in the implementation of that strategy. Faced with the market environment of falling international oil prices and the prices sustaining at a low range, the Group will maintain a modest drilling program, focusing on the production of light oil which has high economic benefits. At the same time, it will seize the good development opportunities presented by the undervalued oil prices, and actively seek valuable oil and gas interests and reserves. Baccalieu Looking ahead, faced with new opportunities and challenges, the Group will continue to strengthen the management and operation level of the Company, further optimise the management models, enhance management efficiency; continue to devote more efforts to expand the market, actively expand into new projects on the basis of the current investment portfolio and business model; use the advantages of the coordinated development of the upstream and downstream operations of the Group to make it to become a comprehensive energy group which will be trusted by its clients, respected by the society and with good management and which will continue to create value for shareholders. On behalf of the Board China Oil And Gas Group Limited Xu Tie-liang Chairman Hong Kong, 30 March 2015 CHINA OIL AND GAS GROUP LIMITED Annual Report 2014

18 17 Management Discussion and Analysis The following discussions should be read in conjunction with the audited consolidated financial statements of the Group and its notes and other sections in the annual report for the year ended FINANCIAL REVIEW For the year ended 31 December 2014, the Group recorded revenue of HK$7,698 million, a growth of 20% over The Group s cost of sales was HK$6,545 million (2013: HK$4,986 million), representing an increase of 31%. Due to the government of Qinghai Province has not instantly approved to adjust the downstream tariff as instructed by NDRC, the Group s revenue growth is less than the growth of cost of sales. However, the Xining government has issued its approval to pass through the natural gas price adjustments to the designated users with effect from 15 March Revenue for the year combining by three segments, namely (1) sales and distribution of natural gas and other related products (2) gas pipeline construction and connection and (3) exploitation and production of crude oil and natural gas, amounted to HK$6,296 million, HK$1,077 million and HK$325 million respectively and representing a year-to-year increase of 17%, 3% and exploitation and production of crude oil and natural gas was from the newly acquired Baccalieu since the acquisition date of 20 June Sales and distribution of natural gas continued to be the Group s main source of income and constituted 82% of the total revenue (2013: 84%) % % (1) (2) (3) % 3% Baccalieu 82%84% The Group s selling and distribution costs increased by 7% to approximately HK$62 million from HK$58 million in The increase was in line with the Group s new project companies set up during the year 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: 0.9%) of the total revenue. Administrative expenses has been increased by 52% to HK$333 million due to acquisition of Baccalieu during the year and the related transaction costs. Finance costs net of capitaisation has been increased from last year s HK$115 million to current year s HK$136 million, which was mainly constituted by coupon interest on our senior notes issued on 25 April 2013 and 11 November The Group s weighted average cost of all indebtedness (including bank borrowings, other borrowings and senior notes) as at 31 December 2014 was 5.2% (2013: 4.9%). 5,800 7%6, %0.9% 52% 3.33 Baccalieu % 4.9% 2014

19 18 Management Discussion and Analysis 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. On 25 April 2013, the Company issued US$350 million senior notes bearing an interest rate of 5.25% per annum payable semi-annually in arrear due 2018 at par and on 11 November 2014, the Company issued another US$300 million senior notes bearing an interest rate of 5% per annum payable semi-annually in arrear due 2020 at par. The Company repaid a HK$700 million other borrowing during the year. As at 31 December 2014, the Group s total indebtedness (including bank borrowings, other borrowings and senior notes) amounted to HK$5,787 million (2013: HK$4,335 million). As at 31 December 2014, the Group had cash and cash equivalents and time deposits with maturity over three months of approximately HK$3,665 million (2013: HK$4,173 million). Total assets of HK$15,467 million (2013: HK$12,157 million), and among which current assets were HK$5,421 million (2013: HK$5,426 million). Total liabilities of the Group were HK$9,375 million (2013: HK$6,331 million), and among which current liabilities were HK$3,856 million (2013: HK$2,680 million). The Group s debt-to-asset ratio, measured on the basis of total indebtedness divided by total assets was 37% (2013: 36%). The current ratio (current assets divided by current liabilities) of the Group was 1.41 times (2013: 2.02 times). The financial and liquidity of the Group has remained at a healthy and stable position. Employees and Remuneration Policy At the end of 2014, the Group employed a total of 3,828 (2013: 3,643) fulltime employees, where mostly were stationed in the PRC. Total staff cost for the year amounted to HK$327 million (2013: HK$248 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 At the end of the year, the Group has pledged part of its equity interest (actual capital investment at the time of drawdown) in China City Natural Gas Co., Ltd. ( CCNG ) as security for an other borrowing of HK$700 million. After the statement of financial position date, the pledged part of CCNG equity interest has been released as the Company has repaid the other borrowing in full during the year %36% ,828 3, CHINA OIL AND GAS GROUP LIMITED Annual Report 2014

20 19 Management Discussion and Analysis As at 31 December 2014, certain financial assets at fair value through profit or loss and available-for-sale financial assets of the Group are pledged as securities for certain banking facilities of the Group. Contingent Liabilities The Group has no material contingent liability as at 31 December Financial Management and Treasury Policy 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, United States dollars and Canadian 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. Litigation As at 31 December 2014, the Group has no litigation. Capital Structure During the year, a total of 48,860,000 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 Shares had been issued under the share award scheme ,860,000250,000,000 As at 31 December 2014, the issued share capital of the Company was HK$52,995,762 divided into 5,299,576,213 Shares with a nominal value of HK$0.01 each. 52,995,7625,299,576,

21 20 Biographical Details of Directors CHAIRMAN, CHIEF EXECUTIVE OFFICER AND EXECUTIVE DIRECTOR Mr. Xu Tie-liang, aged 51, was appointed as an executive Director and the Chairman of the Board of the Company on 30 August He was also appointed as the Chief Executive Officer of the Company on 4 November Mr. Xu is the chairman of the Corporate Governance Committee of the Company (the CG Committee ) and a director of certain subsidiaries of the Company. Mr. Xu graduated from Xi an Shiyou University ( ) and University of International Business and Economics ( ), he is a certified public accountant and lawyer. Mr. Xu has 26 years experience in management, investments, legal and finance. EXECUTIVE DIRECTORS Mr. Zhu Yuan, aged 62, was appointed as an executive Director of the Company on 10 September He was appointed as the senior vice president of the Company on 4 November Mr. Zhu is a member of the CG Committee and a director of certain subsidiaries of the Company. He graduated from China University of Mining And Technology and is a certified senior accountant. He is engaged in oil and gas industries for over 40 years, and has deep research and extensive experience in investment and operation of the usage of natural gas, city gas and liquefied natural gas projects. Ms. Guan Yijun, aged 50, was appointed as an executive Director of the Company on 10 September She was appointed as the vice president of the Company on 1 September Ms. Guan is a member of the CG Committee and a director of certain subsidiaries of the Company. She graduated from Changchun Normal University and has extensive business operation management experiences for almost 20 years. CHINA OIL AND GAS GROUP LIMITED Annual Report 2014

22 21 Biographical Details of Directors Mr. Cheung Shing, aged 62, was appointed as an executive Director of the Company on 13 January He is a director of certain subsidiaries of the Company. Mr. Cheung is a member of each of the CG Committee, the Remuneration Committee (the Remuneration Committee ) and the Nomination Committee of the Company (the Nomination Committee ). He worked in China Petroleum Qilu Petrochemical Refinery ( ), China Petroleum Shengli Oilfield ( ), China Petroleum Zhongyuan Oilfield ( ) and has ever been a management economist of China National Petroleum Corporation ( ) ( CNPC ) during the period between 1969 and He was the chairman of each of Wah Chung (HK) Limited ( ), Henan Shenghua Petrochemical Co., Ltd. ( ) and Liaoning Xinmin Petroleum Company Limited during the period between 1993 and Mr. Cheung was the deputy chairman and an executive director of Yanchang Petroleum International Limited (stock code: 346), a company listed on the Stock Exchange, from January 2007 to September 2010 and from February 2005 to October 2010 respectively. He was the chairman and an executive director of Birmingham International Holdings Limited (stock code: 2309), a company listed on the Stock Exchange, from February 2014 to March 2015 and May 2013 to March 2015 respectively. He is also currently a visiting lecturer of Jiangxi University of Finance and Economics, the vice president of Hong Kong General Association of International Investment () and the vice president of China Petroleum Business Council () INDEPENDENT NON-EXECUTIVE DIRECTORS Mr. Li Yunlong, aged 63, was appointed as an independent non-executive Director of the Company on 18 April He is the chairman of each of the Audit Committee of the Company (the Audit Committee ) and the Remuneration Committee, and a member of the Nomination Committee. Mr. Li graduated from the Accounting School of Zhongnan University of Economics and Law () with a Bachelor Degree in Economics. Mr. Li is a registered certified public accountant in the PRC and possesses the qualification of PRC senior auditor. Mr. Li had been working at the National Audit Office of the PRC for over 16 years in various audit departments, and he is currently a partner of Hua Wen CPA Ltd ( ) in the PRC. He is the financial consultant of various companies in the PRC, and an independent director of Sichuan Xichang Electric Power Co., Ltd. () and Sichuan Tuopai Shede Wine Co., Ltd. (), both companies listed on the Shanghai Stock Exchange. He is being a national financial expert of The Ministry of Science and Technology of the PRC. He has extensive experience in legal, accounting, auditing and finance aspects. 2014

23 22 Biographical Details of Directors Mr. Shi Xun-zhi, aged 80, was appointed as an independent non-executive Director of the Company on 30 August He is a member of the Audit Committee. He is a deputy minister and a professor senior engineer. He has been awarded the Youth and Mature Scientist with outstanding contributions by the State Council. He graduated from Petroleum Institute of Beijing ( ) (renamed as China University of Petroleum, Beijing) () in 1956 in the profession of petroleum geology. He worked as geology engineer, associate director of the technology division, director of human resources division, supervisor in the Ministry of Petroleum Industry, CNPC president s special assistant and also a member of the Ninth Chinese People s Political Consultative Conference. He had been the chairman of CNPC Sino-Russian Oil & Gas Corporation Committee and the chairman of China National Oil & Gas Exploration and Development Corporation () and the chairman of CNPA Alberta Petroleum Center ( ), and the president of Northeast Asian Gas And Pipeline Forum and the president of Asia Gas & Pipeline Cooperation Research Center of China, responsible for the oil and gas works between China and Russia, and worked on the overseas petroleum exploration and development as well as international cooperation work. Mr. Wang Guangtian, aged 51, was appointed as an independent non-executive Director of the Company on 4 November He is the chairman of the Nomination Committee, and a member of each of the Audit Committee and the Remuneration Committee. He holds a master s degree in world economics from the Hebei University and has over 30 years of experience in financial and administrative management. He is currently the managing director of Guofu Group and a director and the general manager of Guofu (Hong Kong) Holdings Limited. He is also currently an independent non-executive director of ENN Energy Holdings Limited, a company listed on the Stock Exchange. CHINA OIL AND GAS GROUP LIMITED Annual Report 2014

24 23 Report of the Directors The Board is pleased to submit their report together with the audited consolidated financial statements of the Company and its subsidiaries (the Group ) for the year ended 31 December PRINCIPAL ACTIVITIES The principal activity of the Company is investment holding. The Group is principally engaged in investments in natural gas and energy related businesses. RESULTS AND APPROPRIATIONS The Group s profit for the year ended 31 December 2014 and the state of affairs of the Group as at that date are set out in the consolidated financial statements on pages 52 to FINAL DIVIDEND BY WAY OF BONUS ISSUE OF SHARES The Board resolved to recommend to the shareholders of the Company at the forthcoming annual general meeting of the Company to be held on Tuesday, 26 May 2015 ( 2015 AGM ) a final dividend by way of bonus issue of new share of HK$0.01 each (the Share ) on the basis of one bonus Share for every ten Shares (2013: cash dividend of HK cent 0.72 per Share) to those shareholders whose names appear on the register of members of the Company on Tuesday, 2 June 2015 (the Bonus Issue ). The final dividend in 2013 amounted to approximately HK$36,005, ,005,000 The Bonus Issue will be credited as fully paid by way of capitalisation of an amount of approximately HK$5,300,000 in the share premium account of the Company. 5,300,

25 24 Report of the Directors (continued) CLOSURE OF REGISTER OF MEMBERS For determining the identity of the shareholders to attend and vote at the 2015 AGM, the register of members of the Company will be closed from Friday, 22 May 2015 to Tuesday, 26 May 2015 (both days inclusive) during which period no transfer of shares will be registered. In order to be eligible to attend and vote at the 2015 AGM, all transfers of shares accompanied by the relevant share certificates must be lodged with the Company s branch share registrar and transfer office in Hong Kong, Computershare Hong Kong Investor Services Limited at Shops , 17th Floor, Hopewell Centre, 183 Queen s Road East, Wanchai, Hong Kong for registration not later than 4:30 p.m. on Thursday, 21 May For determining the entitlement of the shareholders to the proposed final dividend by way of Bonus Issue, the register of members of the Company will be closed from Monday, 1 June 2015 to Tuesday, 2 June 2015 (both days inclusive) during which period no transfer of shares will be registered. In order to qualify for the proposed Bonus Issue, all transfers of shares accompanied by the relevant share certificates must be lodged with the Company s branch share registrar and transfer office in Hong Kong, Computershare Hong Kong Investor Services Limited for registration not later than 4:30 p.m. on Friday, 29 May SUMMARY OF FINANCIAL INFORMATION A summary of the results and of assets and liabilities of the Group for the last five financial years, as extracted from the audited consolidated financial statements and reclassified as appropriate, is set out on page 188. This summary does not form part of the consolidated financial statements. 188 SEGMENT INFORMATION An analysis of the Group s revenue and results by operating segments for the year ended 31 December 2014 is set out in note 6 to the consolidated financial statements. 6 PROPERTY, PLANT AND EQUIPMENT Details of movements in the property, plant and equipment of the Group during the year are set out in note 16 to the consolidated financial statements. 16 CHINA OIL AND GAS GROUP LIMITED Annual Report 2014

26 25 Report of the Directors (continued) SHARE CAPITAL Details of movement in the Company s share capital during the year are set out in note 33(a) to the consolidated financial statements. 33(a) SHARE OPTION SCHEMES 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 ( SGM ), details of the Old Share Option Scheme are set out in note 33(b) to the consolidated financial statements. 33(b) The Company adopted a new share option scheme (the Share Option Scheme ) on 23 November 2011 at the SGM, details of the Share Option Scheme are set out in note 33(b) to the consolidated financial statements. 33(b) RESTRICTED SHARE AWARD SCHEME On 4 November 2011, the Board adopted a restricted share award scheme (the Restricted Share Award Scheme ) as an incentive to recognise the contributions by employees and to give incentives in order to retain them for their continuing operation and development and to attract suitable personnel for further development of the Group, details of the Restricted Share Award Scheme are set out in note 33(c) to the consolidated financial statements. 33(c) PRE-EMPTIVE RIGHTS There are no provisions for pre-emptive rights under the Bye-laws of the Company (the Bye-Laws ) or the laws of Bermuda, being the jurisdiction in which the Company was incorporated, which would oblige the Company to offer new shares on a pro rata basis to existing shareholders. 2014

27 26 Report of the Directors (continued) PURCHASE, REDEMPTION OR SALE OF LISTED SECURITIES OF THE COMPANY Neither the Company nor any of its subsidiaries purchased, redeemed or sold any of the Company s listed securities during the year ended 31 December 2014, other than those purchased by the trustee for the Restricted Share Award Scheme. DISTRIBUTABLE RESERVES As at 31 December 2014, the amount standing to the credit of the Company s share premium account in the amount of HK$32,960,000 may also be distributed in the form of fully paid bonus shares, and the Company s contributed surplus account in the amount of HK$1,520,328,000 may be distributed under certain circumstances. 32,960,000 1,520,328,000 MAJOR CUSTOMERS AND SUPPLIERS The percentage of purchases and sales attributable to the Group s major suppliers and customers are as follows: % % Purchases the largest supplier five largest suppliers combined Turnover the largest customer five largest customers combined None of the Directors or any of their associates (as defined in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the Stock Exchange ) (the Listing Rules )) or any shareholders (who, to the knowledge of the Directors, own more than 5% of the Company s share capital) had any beneficial interests in the Group s five largest customers or five largest suppliers. 5% CHINA OIL AND GAS GROUP LIMITED Annual Report 2014

28 27 Report of the Directors (continued) DIRECTORS The Directors of the Company during the year and up to the date of this report are as follows: Executive Directors XU Tie-liang (Chairman and Chief Executive Officer) ZHU Yuan GUAN Yijun CHEUNG Shing Independent Non-Executive Directors LI Yunlong SHI Xun-zhi WANG Guangtian In accordance with Bye-law 87(1) of the Bye-Laws, Ms. Guan Yijun, Mr. Shi Xun-zhi and Mr. Wang Guangtian shall retire from office as Directors by rotation at the 2015 AGM and, being eligible, offer themselves for reelection. 87(1) INDEPENDENCE CONFIRMATION The Company has received from each of the independent non-executive Directors an annual confirmation of independence pursuant to Rule 3.13 of the Listing Rules. The Company considers all of the independent nonexecutive Directors are independent DIRECTORS RIGHTS TO ACQUIRE SHARES OR DEBENTURES Save as disclosed under the sections headed SHARE OPTION SCHEMES and RESTRICTED SHARE AWARD SCHEME above and in notes 33(b) and (c) to the consolidated financial statements, at no time during the year was the Company or any of its subsidiaries a party to any arrangement to enable the Directors to acquire such rights in any other body corporate. 33(b) (c) 2014

29 28 Report of the Directors (continued) DIRECTORS SERVICE CONTRACTS Mr. Xu Tie-liang entered into a service contract with the Company on 10 April 2014 for a term of three years commencing from 10 April The appointment of Mr. Xu can be terminated by six months advance notice in writing by either party. None of the Directors who are proposed for re-election at the 2015 AGM has a service contract with the Company which is not determinable within one year without payment of compensation, other than statutory compensation. DIRECTORS INTERESTS IN CONTRACTS No Director had a significant beneficial interest, either directly or indirectly, in any contract of significance to the business of the Group to which the Group or any of its subsidiaries was a party during the year. DIRECTORS AND CHIEF EXECUTIVES INTERESTS IN SHARES, UNDERLYING SHARES AND DEBENTURES At 31 December 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 as set out in Appendix 10 to the Listing Rules (the Model Code ), are set out below: XV XV CHINA OIL AND GAS GROUP LIMITED Annual Report 2014

30 29 Report of the Directors (continued) Interests in shares, underlying shares and debentures of the Company Approximate percentage of the Company s issued Number of share capital 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 1,152,078, US$3,000,000 3,000,000 Zhu Yuan Beneficial owner Long position 3 2,500, Cheung Shing Beneficial owner Long position 1,380, Notes: ,018,300 ordinary shares and 831,060,000 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$3,000,000 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. 1. Sino Advance Holdings LimitedSino Advance Sino Vantage Management LimitedSino Vantage 321,018,300831,060, Sino Vantage 350,000, % 3,000, ,500,000(1) 2,100,000 (2) 400,

31 30 Report of the Directors (continued) SUBSTANTIAL SHAREHOLDERS At 31 December 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: 336 Interests in the shares and underlying shares of the Company Approximate percentage of the Company s issued Number of share capital Name of Long position/ ordinary shareholder Capacity short position Notes shares held Sino Advance Beneficial owner Long position 1 321,018, Sino Vantage Beneficial owner Long position 1 831,060, Sino Best Interest in controlled corporations Long position 1 1,152,078, Artisan Partners Investment manager Long position 2 488,140, Limited (Partnership) Artisan Partners Investment manager Long position 2 488,140, Holdings LP Artisan Investment manager Long position 2 488,140, Partners Asset Management Inc. CHINA OIL AND GAS GROUP LIMITED Annual Report 2014

32 31 Report of the Directors (continued) 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 831,060,000 ordinary shares of the Company held through Sino Advance and Sino Vantage ,140,000 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. 1. Sino Advance Sino Vantage Sino Advance Sino Vantage321,018,300831,060, ,140,000Artisan Partners Limited (partnership) Artisan Partners Limited (partnership) Artisan Partners Holdings LP Artisan Partners Holdings LP 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 31 December MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules as the code of conduct regarding securities transactions by the Directors. Having made specific enquiry of all Directors, the Company confirmed that all Directors have complied with the required standard set out in the Model Code throughout the year. CONNECTED TRANSACTIONS The Group has entered into several transactions with entities which are connected persons (as defined in Chapter 14A of the Listing Rules) of the Company, and such transactions constitute connected transaction and continuing connected transaction of the Company under Chapter 14A of the Listing Rules. 14A 14A 2014

33 32 Report of the Directors (continued) Connected transaction On 5 January 2011, the Company as borrower entered into a loan agreement with the Lender (Note 1) and Zhongda Industrial Group Inc. and Alta Financial Holdings Limited (wholly-owned subsidiaries of the Company) as guarantors (the Guarantors ) in relation to the granting of a loan secured by an equity pledge in the amount of HK$700,000,000 (the Loan ) to the Company by the Lender for five years at an annual interest rate of 3.7% payable half yearly ,000, % The Loan (together with accrued interests) was fully repaid in November Exempt continuing connected transaction The following continuing connected transaction constitutes an exempt continuing connected transaction for the Company under Chapter 14A of the Listing Rules: 14A Appointment of Trustee for Restricted Share Award Scheme The Trustee (Note 2) was appointed by the Company as trustee for the administration of the Restricted Share Award Scheme adopted by the Board on 4 November Service fee will be payable by the Company to the Trustee according to the share award trust deed entered into between the Company and the Trustee on 4 November The payment of the service fees to the Trustee by the Company constitutes a continuing connected transaction of the Company, but is exempt from reporting, annual review, announcement and independent shareholders approval requirements under Rule 14A.76(1) of the Listing Rules. 2 14A.76(1) HK$200,000 was paid/payable to the Trustee for the financial year ended 31 December ,000 CHINA OIL AND GAS GROUP LIMITED Annual Report 2014