中國石化 (SNP) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. I'm Rene Bangerson of Christensens. Welcome to Sinopec's 2006 annual results presentation. With us today we have Mr. Chen Tonghai, Chairman; Mr. Wang Tianpu, Director and President; and Mr. Dai Houliang, Director, Senior Vice President and CFO. The presentation will be conducted in three parts.

First, Chairman Chen will take you through a review of the reforms and development achievements during the year. He will be followed by President Wang, who will take you through the operational results of the Company. And then finally, Mr. Dai will cover the outlook for 2007. So please join me now in welcoming Chairman Chen for his start of the --

[Interpreted]. Ladies and gentlemen, good afternoon. Welcome to Sinopec's 2006 annual results announcement. Our presentation today includes three parts. First, I will share with you the reform and development achievements in the past year. Then, President Wang Tianpu will present the operational results in 2006. Finally, Senior Vice President and CFO Dai Houliang will brief you on 2007 outlook.

In 2006 Sinopec continued to implement the principles of reform, adjustment, innovation and development, expand business scales, improve asset quality and enhance profitability. Good operational results were made. Crude production exceeded 40m tonnes in 2006. Refining capacity jumped to the third in the world; better than BP and narrowly followed Exxon Mobil and Shell.

Our ethylene capacity ranked the fourth worldwide. Marketing network for oil products have been further improved with over 280,000 self-operated service stations, ranking the third worldwide.

Turnover and other revenues for 2006 added 29.3% year on year; a record of more than CNY1,000b. Net profit attributable to shareholders of CNY53.9b. Earnings per share gained 30% year on year to CNY0.62. By end 2006 shareholders' equity was CNY262.8b; up by 17.2% year on year.

Net cash flow from operating activities for 2006 rose 22.6% to CNY95.9b. We also expedited [source] adjustments and rationally consolidated [subsidiaries]. Net cash flow for investment activities was CNY103b. We also properly increased short-term debt. Asset efficiency has [evidencely] improved. ROCE reached 13.3%; 1.3% higher than the year -- previous year. Debt to total capital ratio, 29.3%. EBITDA interest coverage ratio, 15.9.

The Board of Directors propose to distribute a year-end dividend of CNY0.11 per share, plus the interim dividend of CNY0.04 per share, the annual dividend added 15% year on year to CNY0.15 per share.

In 2006 the AGM elected a Third Board and Supervisory Committee. New senior management were appointed by the Board. In line with the requirements of [inaudible] the Company continued to implement and improve internal controls, which have ensured the authenticity and accuracy of information disclosure and lay the solid foundation for risk management and operation optimization.

In 2006 the Company completed the shareholder structure reform in line with the State's requirements. And then the share of the Company became a Hang Seng Index constituent. The Company seized the opportunity to consolidate certain subsidiaries, acquired low quality oil-producing assets from the parent company, and became a majority owner in Hainan Refinery. The continuous managerial system reform in Refining operations, Chemical sales, material procurement and international trade, giving full play to the integrated management to reduce costs and center market position.

The Company has continually streamlined workforce and enhanced efficiency. Headcount was reduced by 24,000 in 2006, so the total number of 340,000 by the year end. We have reduced our headcount from the 510,000 when the Company was established to the 340,000 by year-end 2006.

The Company made further efforts in structure adjustment in 2006. We increased capital expenditure to about CNY80b. We made significant breakthrough in marine [state exploration series] and technology and discovered Puguang gas field. Preparational work for East China Gas transportation was fully launched and achieved more discoveries in Sichuan and [Tianjin] areas.

We kept increasing investment in crude wharves and pipelines for crude and oil products and established a modern logistics system reached by pipeline transportation. At present 70% of the crude and 30% of the oil products are transported through pipelines.

Our market position is further enhanced through our well-established oil product marketing network. A network for Chemical products takes shape. Refining and Chemical production capacity keeps expanding, thanks to the self-developed technologies our refineries are capable to handle low-quality crude which helps to expand resource [base] and lower the cost.

In 2006 the Company focused on the development of key technologies to fuel the growth of our core businesses and achieve an area of good results. We applied for 842 domestic patents, with 703 granted in the past year. We run nine National Science and Technology Progress Awards, and National Technology Invention Awards, Formation Mechanism for Natural Gas Reservoir in Deep Marine [Space] Carbonate Strata, Exploration Technologies and the Discovery of Puguang Gas Field received the first prize of National Science and Technology Progress Awards. Exploration area has been increasing due to the research in marine space exploration series and technologies.

The Company upgraded technological capabilities to produce oil products to meet Euro IV emission standards. We mainly adopt proprietary technologies to deal with 10m tonne per year refineries and 1m tonne per year ethylene products. In addition, ERP and other information technologies have been widely applied to improve operation and management.

As a world-class integrated energy and chemical Company, Sinopec has [various] corporate social responsibilities. In recent years the Company has conscientiously followed the State's regulations on oil product prices, ensuring a stable supply to domestic market and contribute a lot to the steady CPI level.

The Company attaches great importance to operation safety, environmental protection and resource conservation, while caring for employees' health. We realize stable and safe operation of production units at high [inaudible] rates under complex conditions that supply premium and high [stack] products to the public. At the same time we make more efforts to save energy and reduce consumption emissions.

In 2006 the comprehensive energy consumption per 10,000 [new production] value dropped 1.2% year on year, given the growth of total production value. Industrial water consumption decreased 4.9% and COD emission down 6.3%.

We continue to take disaster-stricken areas [as part of the] public philanthropic activities including spring bus program to help female dropout students return to school and Health Express program to cure cataract patients in quite remote regions, thus promoting harmonious development of the Company, the public and the environment.

Now I'd like to announce the approval of Sichuan East China Gas Transportation project by the State Council yesterday. It is regarded as a key project in the eleventh five-year plan.

We entered this area for exploration from 2000 and found the first development well in 2003. And preparation started on July 6, 2006, evaluation on [inaudible] specific items required by the State completed on February 14, 2007. Approval by the [NDRC] on April 4, 2007 and approval by the State Council on April 9. The project is composed of two parts. One is gas exploration, development and treatment and the other part is pipeline construction from Puguang to Shanghai. Total investment is expected to be CNY63.2b. Based on current gas prices, IRR expected to be above 14%.

Now I'd like to present the detailed content for this project. First one is development of Puguang gas field. Puguang gas field is composed of large gas-containing formations including Puguang, Dawan, Maoba, Qingxi, [Shuangmiao], and this the Puguang area is [inaudible], [Maoba] and [Qingxi] [inaudible]. The exploitation area is more than 1,000 square kilometers. At the -- by end 2006 the aggregate proven gases have reached 353 -- 356b cubic meters; 105b cubic meters higher compared with the figure released at the year beginning.

A total [inaudible] quarter three categories has proved probable and possible results reached 700b cubic meters. And the proven reserve we refer to today is equivalent to the international standards [Q1]. And more than 300b cubic meters reserves belong to the [provable and possible] reserves, and we expect that we have recoverable proven reserve exceeding 560b cubic meters by end 2008.

We discovered a hydrogen sulphide-free gas reserve in [Qing Xi] [inaudible] formation. And we -- during the drilling of the well, we encountered a special gas reserve and the open flow potential of [Qing Xi] [Wuhan] is half a million cubic meters per day, representing another significant discovery besides Puguang formation.

And the discovery of this formation represents another significant discovery of a new type of formation besides Puguang. And it is largely distributed in a Central South area of Puguang region. The well was recognized by a well-known international consulting agency to be the second biggest well in terms of open flow potential [along] the same type of gas reserves in the world. And to return this reserve into production capacity, we can form -- we can have more than 4m tones -- 4m cubic meters per day. And it's equivalent to the daily consumption, daily gas consumption of Beijing during the summer. And a single well for production of gas from the single well meets the demand of Beijing one day during the summer.

At present we have discovered big, highly permeable and high-yielding gas reservoir in Permian] and Triassic formations in Changxing, [Feixianguan] and [Jianglingjiang] indicating a three-tier vertically distributed reservoir. And the Puguang well sits [inaudible] these three-tier structures with aggregate thickness of 445 meters, the three gas layers exceed 445 meters, exceeding the height of IFC2, which is of 420 meters in Hong Kong.

As you can imagine, the height of IFC2 and compare that with thickness of our gas layers, we have [inaudible] [Huanglong] formation where potentials remain for larger discovery once we make breakthrough in exploration and which may become the fourth tier in Puguang region. Therefore, we are fully confident about the prospects of Puguang gas field. And we may submit the development plans to the State authorities. The original design for Puguang gas fields includes 16 well sites and, subject to development wells based on the reverse underground, and three to four wells in one well site, the actual number is 52 development wells.

And due to the complex surface conditions in this area it is difficult for us to find the right location to drill the well. Based on the original average gas production for oil it is expected to reach 700,000 cubic meters per day. Gas production capacity will reach 9b cubic meters by end 2008 and [12b] cubic meters by end 2010 respectively. And the production capacity will be composed of [inaudible] [Maoba] gas production based on the Puguang, not including all the production capacity in this area.

However, according to the current progress gas production capacity is projected to exceed 10b cubic meters by end 2008. Gas supply will start by end 2008 or at the beginning of 2009. Gas production capacity by end 2009 will be 15b cubic meters, equivalent to over 10m tonnes of LNG and this is far better than the submitted plan.

According to the status quo of the market and resources, we plan to supply gas to Sichuan as well as Chongqing, Hubei, Jiangxi, Anhui, Jiangsu, [Zhejiang] and Shanghai, which are alongside the pipeline. The length of the front pipeline will be 1,702 kilometers with diameter of 1.016 meters. For [inaudible] stations will be built maximum transportation capacity will be over 15b cubic meters per year. A clean natural gas will meet the local energy demand and contribute to better environment in these regions. The project is unique in terms of large gas reserves, high single well production and [best] end users' affordability to gas prices.

Meanwhile, we can also supply gas at our refineries and chemical plants from Sichuan all the way down to Shanghai, so that our refineries and chemical plants allow the pipeline can replace feedstock and fuel oil with the natural gas. I think now also reduce cost, improve efficiency and protect the environment. Thus, the project will become a new economic growth point of the Company.

Thank you. Now Mr. Wang Tianpu will present the detailed operational results for 2006.

[Interpreted]. Thank you, Chairman Chen. Now the 2006 operational results. In 2006 the Chinese economy maintained a stable and rapid growth with GDP up by 10.7% boosting [inaudible] the massive demand for petrochemical products. According to our statistics, apparent consumption of refined oil products was up by 6.1% year on year and natural gas and equivalents was up by 4.3% year on year, along with the volatile and high international crude price and tight regulation on domestic refined product prices, Chemical prices remained strong with upwards trend.

Faced with the compact and changing market [fluctuation], the Company appeared to substantially [inaudible] development to increase resource and expand markets where managed Refining production is strengthened, internal management with focus on free production, energy conservation, reduction on raw material consumption and production costs. That is achieving new growth in both business volume and economic return with combined assets for [inaudible].

In 2006 the Company strengthened E&P operation with [maximized] E&P plans and [scored] sound operating results. In oil and gas production the Company intensified its progressive aspirations and oil reserve evaluation. Whilst efficiently developed its [proved reserves].

In the battle for strong crude price the Company reinforced the E&P operation in low-yield reserves, enhanced the quality and profitability of capacity using frontier blocs and increased our hydrocarbon output of crude production rate 2.85m barrels; up by 2.2% year on year. Natural gas was 256.5b cubic feet; up by 15.6% year on year. Lifting cost was CNY520 per tonne; up by 6.6% year on year. We have realized a favorable [replacement ratio] in crude oil and made major discoveries in natural gas.

In 2006 our realized crude price average CNY3,195 a tonne; up 19.9% year on year. Realized natural gas price averaged CNY794 per 1,000 cubic meters; up by 18% year on year. EBIT for E&P segment totaled CNY63.2b; up by [30.7%] year on year.

Refining segment. In 2006 the Company has reinforced operational management with refining facilities, actively worked on [full load] production, flow [free] factor trends on the international crude market in pursuit of identifying and by diversifying crude resources and reducing [inaudible] costs. Leveraging all the newly-built storage and transportation facilities including the [inaudible] and pipelines, the Company has reduced the storage and transportation costs.

In response to the market change the Company actively optimized reserves portfolio and product mix, enhanced low quality crude throughput ratio and increased [phase walling] of high value-added products. As a result the throughput reached 146m tones; up by 4.6% year on year and with sour crude increased by 3.3%. Major economic indicators [inaudible] light stream yields and overrode Refining yields were certainly improved.

In 2006 with the international crude price fluctuating at high levels and tight control over domestic product prices, the Company continued to settle material [loss] in Refining segment. Operational loss registered CNY25.3b as a Refining margin and minus CNY20 per tonne.

Marketing and Distribution segment. In 2006 the Company tried to expand and use the market of refined products and optimized operational structure. Sales of refined oil products topped 112m tones; up by 6.8% year on year of which retail volume was 72.16m tonnes, up by 13.6%. By end 2006 service stations [with China pipeline] totaled 28,801 in which 28,001 are self-operated. Average annual throughput per self-operated station hit 2,577 tonnes; up by 11% year on year.

[Inaudible] have been actively promoted with aggregate [inaudible] of over 30m. In 2006 EBIT for Marketing Distribution [segment] reached CNY13.2b; up by 190% year on year. With ROCE of retail volume cash operating cost per tonne of product sold was CNY167; a price increase over the year before.

Chemical segment. In 2006 the Company fully leveraged on the strength of an integrated marketing channels through [uniformed] market operation, Chemical sales reached 29.56m tonnes of which 19.58m tonnes were under integrated marketing channel; up by 8.5% year on year.

With the efforts to tap the potential chemical facilities we organized production to ensure full-load operation of major chemical facilities hitting a record in production volume. Ethylene output reached 6.163m tones; up by 15.9% year on year.

In 2006 EBIT for Chemical segment reached CNY17.3b; up by 20.6% year on year. Cash operating cost for ethylene was CNY1,282 per tonne; a slight increase over the year before.

Cost reduction. In 2006 the Company adopted varying measures to reduce costs with total reduction CNY2.78b across the four segments. CapEx for 2006 was CNY79.8b in which E&P was CNY31.73b, with newly-added crude production capacity of 6.465m tonnes per annum and natural gas production capacity of 1.9bcf per year.

Refining was 21.97b, with newly-added Refining capacity of 14.7m tonnes per annum, mainly due to expansion projects in Hainan, Guangzhou. [Yizheng] started production while Cezidao Wharf and Yizheng crude oil pipeline was completed and put into operation. Qingdao Refining project is on track.

Marketing and Distribution segment was CNY11.32b. Marketing natural gas has further improved distributing [takeover] and operating service stations, adding 811 self-operated stations for the whole year. Chemicals segment was CNY12.63b, newly-added ethylene production capacity reached 750,000 tonnes per annum.

Maoming ethylene expansion project was completed in [inaudible] chemical fertilizer expansion projects including Anqing, was completed and started production. The Fujian Integrated Project, Tianjin Ethylene and Zhenhai Ethylene Projects are now under construction and add value.

Corporate and others totaled CNY2.17b which was planned for information system and R&D infrastructures.

That is the 2006 operational results. Next, Mr. Dai Houliang, Senior Vice President, CFO, will present the business outlook for 2007. Thank you very much.

[Interpreted]. Thank you, President Wang. Now I will brief you on 2007 outlook. Looking to 2007, China's economy will maintain a rapid growth and the demands of petroleum and petrochemical products will continue to grow steadily. Prices of crude oil and major petroleum petrochemical products are expected to remain high.

In addition, market competition will be increasingly intensified after domestic market of refined oil products is fully opened. Under such conditions the Company will continue to take flexible operational strategies, enhancing internal management and [prudency] arrange production while focusing on operational safety, energy conservation and reduction of raw material consumption.

In the E&P segment [the Company will] expedite East China Gas project and make more effort in North Eastern and North Western Sichuan for more discoveries. We will stabilize production in the eastern mature blocs, increase production in western frontier areas and promote natural gas development to raise oil and gas production and build up production capacity in key areas. Given the high crude prices we will further rationally develop marginal reserves.

We plan to produce 291.1m barrels of crude oil and 282.5b cubic fee of natural gas in 2007. In the Refining segment the Company will keep high load operations by diversified crude oil sources, apply proprietary technologies to process more low-quality crude to reduce procurement costs. We will further reduce energy and raw material consumption for better efficiency and further optimize product portfolio to produce more high value-added products. We plan to process 156m tonnes of crude in 2007.

With the Marketing segment, we will further leverage the advantage of our brand image and marketing network to expand total sales and ratio volume. We will closely follow the market trend, optimize resource allocation, improve pipeline efficiency and reduce transportation costs. And more effort will be done to promote the sales of high-grade gasoline. Domestic sales volume of oil product is expected to reach 117m tons in 2007, including 75m tons retail volume.

In the Chemical segment, [the Company will give full sway] to the centralized sales to steadily expand market share and sales volume. We will tailor our market -- our products to the market need, enhanced by management and improve operational facilities for safe and [fuller] production, further optimize [regional] allocation of resources for chemical feedstock supplies.

In 2007, we plan to produce 6.45m tons of ethylene and 19.13 -- 19.13m tons of synthetic resins, synthetic rubbers, synthetic fibers [and its] monomers and polymers.

In 2007, in line with the market demand and corporate development's target, the Company sees several [options] to increase upstream investment and fully launch gas transportation projects from Sichuan to East China. We will accelerate the construction of key refining chemical projects and further improve modern logistics to back the rapid growth of refining oil and chemical product sales.

CapEx for 2007 will reach CNY110.6b, among which, 53.1 -- CNY53.1b is for the E&P segment, CNY22.7b for the Refining segment, CNY12b for the Marketing segment, CNY19.46b for the Chemical segment and CNY2.8b for Corporate and others.

Looking into 2007, the Company will be confronted with both opportunities and challenges. We will stick to the principles of reform adjustment, management, innovation and development set up by the Board, actively respond to market variation, focus on HSE, reduce cost, accelerate structure adjustment, reinforce corporate management for a more technical innovation, and strive to realize sustainable, effective and harmonious development of the Company. We are fully confident about the growth of our Company.

Now my colleagues and I are happy to take your questions. Thank you very much.

Question time. May I ask, first of all, that when you ask a question you mention your name as well as the name of your company? Thank you in advance. The first question all the way in the back.

[Inaudible]. [I was wondering] [that] you were to take a look at the process transforming coal into gasoline like [chamber one]. And, to what extent do you think [all that] [inaudible] interesting for China energy-wise? Because the international energy [ATV and] it seems, this is one of the most interesting cards to play.

And the second question was on because of that price difference between gasoline in China and the investment companies, to what extent is it interesting for Sinopec for start marketing [inaudible] refined, or some of your refined products, in higher price to the rest of market?

[Spoken in Chinese].

[Interpreted]. Thank you very much for your question. In response to your first question, please allow me to say that my Company has already started the research and development for alternative energies, or new process to produce liquid [fuel]. As you mentioned, something like coal to liquid and gas liquids. Take gas to liquid as an example. We have already developed our own gas to liquid technology and are now under commercialization test.

As far as cost is [mentioned], as you just said, that we are not only focused on the study of production cost for processes like [TTL or TTO], but we should also take into consideration the cost of the environment. Because, you may probably understand, [technical difficulty] that during the gasification process of coal, it will give out large volume of CO2 blocs and sulphides. For such kind of processes, our experts from Sinopec are making careful evaluations on those emission [potentials].

Through such kind of process you may get high-grade or super-grade diesel or gasoline products free of sulfur. But, however, please bear in mind that during the production process we still have to take into consideration the emission problem. In some far and remoter areas where [high flying] construction is not economical or viable, what we can -- what can we do if we find some natural gas resources? Our solution is to use gas to liquid technology and to transport the liquid product, or refined oil product, through pipeline to the market.

And the product from gas to liquid process, I believe, is competitive in cost. The most important thing is the availability of technology and its commercialization level.

In response to the second question, in fact, the specification or quality specification for refined oil products is actually issued by Chinese Central Government and for companies which have implemented this specification. In our R&D [and] efforts I would like to state that our research and development, our hybrid refined oil products production process, as well as [inaudible], are ready to meet European Standard IV in terms of emission.

According to the Chinese national regulations, starting from December 31, 2009, Euro III energy standards will be widely applied to all the [Chinese cities]. My requirements to my R&D team is to develop technologies and the catalyst which is two tiers higher than available Chinese national standards. That is to say, for the time being, my team will be able to develop process technology plus catalysts that can meet European emission Standard V.

It is true that Euro III Standards will be started from the very beginning of 2010. However, during Olympic time period, in large cities like Beijing and Sichuan, we are required to supply to the market products that comply to European Standard IV emissions. Thank you very much.

Can I have the next question please? No. Yes.

[Interpreted]. Mr. Chairman, I have two questions [inaudible]. The first question is that, according to your agenda or schedule for construction of Sichuan to Shanghai natural gas pipeline, can you give us an idea how much gas will be available through pipeline from Sichuan to Shanghai by the end of 2008 or 2009?

Second question, based on the international crude price in the first three months of this year, are you expecting another one-off subsidy from the Chinese Central Government to [listed companies] this year?

[Interpreted]. According to original plan, by the time, I mean end 2008 or early 2009, our gas production capacity will be around 9b cubic meters per year. Therefore, through the pipeline, the gas will be available to Shanghai, [inaudible] and [inaudible] destination. However, along this pipeline we are also going to supply some gas to Anhui, [Jiangsu], Hubei, and this [continue].

The gas [by that will] be available to Shanghai. [Cherjin and Chenzil] will be around 6b cubic meters. For initial availability to Shanghai specifically, there will be 2b cubic meters of gas available to Shanghai markets. However, we expect this volume will increase gradually to a number around 4 to 5b cubic meters for Shanghai in particular.

According to our current progress in the Sichuan gas development areas, the initial production could be more than 9b cubic meters, which is as we explained, 10b cubic meters. And [inaudible] [was under 10 the] gas availability will be 15b cubic meters.

For the next step, we will intensify our efforts for the gas developments and production. At the same time, we are going to turn those letters of intention [signed with] [the responsive] customers into real gas supply contracts.

In response to your second question, for [inaudible] [at the impact] our Refining segment started to make a profit from the fourth quarter 2006 last year. And in the last year's full year Annual Report we also had some income forecasts for the first quarter 2007. So, under such circumstances, I do not expect that the Central Government will, once again, give us a subsidy in the year 2007, unless there are some big changes in the market which might result to a -- result in a potential Government's one-off subsidy again to Sinopec Corp.

My principle is that I want to make money by my Company itself, but not waiting for somebody's subsidy. Thank you very much.

Next question please. Yes. Go ahead, please.

[Interpreted]. I have two questions. We understand that the Company has made discoveries in the Puguang natural gas field. So, compared -- can you give us an idea, compared to PetroChina and the CNOC, what is your volume of natural gas reserve? Are your natural gas reserves higher or lower than PetroChina or CNOC?

The second question is that have you ever considered to use natural gas as the feedstock to produce, for example, chemical fertilizer?

[Interpreted]. Puguang natural gas field is definitely a large-sized gas field, but we do not believe it will be our largest gas field. We are trying our best and making every effort to find something much bigger than Puguang.

Please allow me to say that a discovery of natural gas fields, like the one we have in Puguang, will not necessarily change the scenario in terms of oil and gas reserves among CNPC, Sinopec and the CNOC. So, for the time being, CNPC is still the number one Company with large reserves in China and we are ranked the second, and CNOC is the third.

Regarding the natural gas to chemical fertilizer production, it can only be practiced in some -- under some specific conditions because, in our minds, natural gas, as a clean energy, [does] it have more use than just producing chemical fertilizers. And, at the same time, the Chinese Central Government has guidance on the limitation of production of large volume of chemical fertilizers.

Thank you. Next question please.

Hello. This is Vivien from Macquarie. I want to ask about the product price. What, in your opinion, [will] Government -- [when the] Government will control, release the control of the price in [tennyson]? And how the China price in London can [inaudible] [an upright]?

And the other question is what is your view on the upstream trend in the next five years? Thank you.

[Interpreted]. Actually, regarding this refined oil products price question, I touched upon discussion several times last year actually. I believe the linkage of domestic price with the international levels and its relationship with China's domestic macroeconomic situation is actually the foundations for the Chinese Central Government to make their final decision. I would like to define this decision as a gradual one.

The Chinese Government, on the one hand, would like to maintain a moderate economic growth rate and, at the same time, try their best to control the inflation. Nowadays, the international crude price is fluctuating severely, which makes big headache for the Chinese Government to make revelations on its network control measures.

However, or therefore, I would like to say that this whole process of price reform is -- will be gradual.

Well, I'd like to look at this refined oil product price [in a candid issue] from two aspects. First, I do believe that a much -- a little bit lower domestic product price is [definitely better] because if the domestic product price is a little bit lower than the international level, that will automatically form a variant in price.

The upstream business is -- remains to be a point of weakness for the Sinopec Corp. However, since the years of theoretical study and the practice, we have finally make -- managed to make breakthroughs in the marine-based theory for the exploration of hydrocarbon reserves. This breakthrough or achievement will enable Sinopec to face a more broader range of acreage or blocs that needs to be further explored. And we believe that we will make new achievements and new discoveries by making full use [of this] theory plus our practice. Thank you.

Does that answer your question? [I guess so.] We have the next question here please.

[Interpreted]. I'm from [CITC]. I have three questions. First of all, please allow me to congratulate the Company for its excellent performance in the past year. I have three questions, all directed to upstream operations.

For the cost of natural gas and crude oil, please give us an idea what will be the F&D cost and lifting cost for Puguang natural gas?

Second, last year Sinopec lifting cost was increased by 6.6%, a figure that is less than international peers. Can you explain why?

Question number three. [First time you mentioned this] by 2010, 15b cubic meters will be available from Puguang. So this 15b cubic meters, are you referring to production capacity by 2010 or actual contract volume that you can sell for 15b cubic meters?

[Interpreted]. I will answer question number one and number three. And I would like to invite Mr. Dai Houliang, my CFO, to answer the question number two.

The development costs and economic return for natural gas is very much different from that of crude oil.

The natural gas [refining] cost is very much related to the size of the gas reserve that you find. The larger the size, the lower the F&D cost. For major discoveries in Puguang, the thickness for a single well of the gas reserve is about 400 -- 440 meters, so the F&D cost for Puguang could be very much economical.

Secondly, the natural gas lifting costs in Puguang could be very low.

The lifting cost for natural gas production is not very high compared to crude oil. It's because you do have to inject -- do the water injection or do the fracturing to [put] the hydrocarbon, to [push] the gas production.

Secondly, the gas yields could be higher than the crude oil. According to the expectation of experts, the yield of Puguang [from] Puguang natural gas field will be equal or above 75%, which is two times that of crude oil yield in conventional oil fields.

The higher the yield of the gas the lower, for example, the lifting costs and also refining costs. For the time being, the natural gas price is comparatively lower than international crude price. And, on the other hand, the natural gas price is much stable compared to that of crude price.

Natural gas production in the future will bring Sinopec abundant cash flow and the only conflict [expense] is the [depression]. The only cost will be the depreciation -- depreciation, sorry.

Thank you very much.

[Interpreted]. In response to the second question, I take your comment as a compliment to Sinopec's [average below its] lifting costs or production costs. The reason behind the [inaudible] from two areas, two aspects. The first is the oil and gas structure inside of [that] is somewhat different from that of other international peers. In 2006, our crude production increased by some 2.3% and [we shall see] much higher increase in [grades] than other international companies.

Secondly, the major increase of the crude production is from our western frontier areas, where we have fast growth in production and a relatively low production cost in that area.

Natural [technical difficulty] gas production has increased by some 15.6%. As explained by my Chairman just now, the natural gas production costs, lifting costs are relatively low compared to that of crude oil.

Second aspect is that, over the years, Sinopec has been making every effort to further strengthen its internal management and actively adjust its asset structure and portfolio. We have made great success in reducing the labor costs. For example, we reduced the headcount from 510,000 several years ago to the current level of 30 -- 340,000 by the end of last year.

And, at the same time, we also strengthened our control on the overall budget in the [E&P oil] production and operation, which has provided to us a good foundation for our cost reduction efforts. Thank you very much.

Does it answer all your questions? Okay, very good. This concludes the presentation for today. Thank you for coming. And please join me in congratulating Chairman Chen and his team for a great performance.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.