中國石化 (SNP) 2013 Q4 法說會逐字稿

Ladies and gentlemen, may I have your attention, please? Thank you. Good afternoon, ladies and gentlemen. Welcome to Sinopec 2013 annual results announcement. I'm Huang Wensheng, the Secretary to the Board of this Company.

Let me introduce our management team, who will present to you with our results and address your questions. They are our Chairman, Mr. Fu Chengyu; our President, Mr. Li Chunguang; and our CFO, Mr. Wang Xinhua.

Mr. Li Chunguang will review our business performance and give you highlights of our performance in the last year; and followed by Mr. Wang Xinhua, will present to you the detail of our business operations. And, finally, we would like to invite Mr. Fu Chengyu to talk about our recent developments.

Now, without further ado, I would like to invite Mr. Li Chunguang to review our business.

(interpreted) Ladies and gentlemen, welcome to Sinopec 2013 results announcement. In 2013, the Company achieved sound performance in all aspects.

In upstream, we achieved a strategic breakthrough in Fuling marine [facilities] shale gas exploration, laying a solid foundation for shale gas development. We capped domestic oil reserve replacement ratio above 100%. In addition, we completed overseas upstream assets acquisition from the parent company.

In refining, we were the first to complete GB IV gasoline upgrading. With further improved oil products prioritizing magnetism, we played to our strength and turnaround refining segment results.

In marketing, we continue to optimize sales structure and sustained growth for non-fuel business. So far, we are evaluating opening the segment to non-state capital in order to release value.

In chemicals, the Company optimized feedstock structure and product mix; reduced costs; and increased high value-added products ratio.

In financing, we seized favorable market condition to issue new H-shares and US bonds, raising RMB19.4 billion.

Together with the US commercial paper issuance, weight of low cost dollar financing doubled. Therefore, financing cost was significantly lowered year on year.

In 2013, our revenue hit RMB2,880.3 billion; up 3.4% year on year.

Profit attributable to shareholders was RMB66.1 billion; up 3.5% year on year. Net profit growth rate was above the industry's global average.

By the end of the report period, equity attributable to shareholders was RMB568.8 billion; up 11.3% year on year.

In 2013, net cash from operating activities reached RMB151.9 billion; up 6.7% year on year.

Moreover, the Company flexibly arranged long- and short-term financing tools, optimized debt structure. The Company's debt-to-asset ratio was capped at a stable level; 55% at the end of 2013.

It is Company's principle to share growth with our shareholders. The Board proposed RMB0.15 per share final dividend, with the RMB0.09 per share of interim dividend, making the full-year dividend up to RMB0.24 per share.

In recent years, we increased dividend payout ratio, and it reached 42.1% in 2013. Total cash dividend is expected to be RMB28 billion.

Based on four-year average of H-share price, dividend yield was 4.82%.

In 2013, focusing more on investment quality and economics, we made a CapEx of RMB168.6 billion; 7% less than the plan at the beginning of the year.

E&P was RMB88.8 billion, mainly used for gas field E&P in [Thous], Hubie, Shengli, Tahe, Yuanba, Fuling, Daniudi, and Shangdong LNG project.

Refining was RMB26.1 billion, mainly used for revamping of refining facilities and oil products' quality upgrading.

Marketing was RMB29.5 billion, mainly used for development and revamping of service stations, construction of oil products' pipelines, and depots.

Chemicals was RMB19.2 billion, Wuhan ethylene project and Hainan aromatics project were operational; and the Maoming polypropylene project construction earned us the most progress.

Corporate and others was RMB5.1 billion, mainly used for R&D facilities, units, and IT.

In addition, the Company made [RMB18.529 billion] of investment to acquire equities of Taihu, MECL, and CIR projects from Sinopec Group.

In 2013, we actively implemented innovation-driven strategy, constantly strengthened technology research, and spent RMB6.34 billion on R&D.

In upstream, we made significant breakthrough on E&P technology for Fuling shale gas development.

In refining, we continued to reinforce development production technologies for clean products, such as the commissioning success of countercurrent moving bed continuous reforming facility; and the successful application of SRH technology on several facilities.

In chemicals, looping process for PP production and technology for rare-earth isoprene rubber were successfully commercialized. With the successful trial test of self-developed bio jet fuel on commercial flights, we got a Whitney's certificate.

In 2013, we applied for 4,442 patents, home and abroad, among which 2,388 were granted.

We ranked second among all Chinese companies in approved patents.

The Qingdao incident on November 22, 2013, was a painful and unforgettable lesson to the Company. November 22, has been designated as the Safety Awareness Day by the Company. This incident made us deeply understand that safety is a top priority of all works. The Company responded with immediate comprehensive safety inspection; improved emergency plan; and reinforced total value chain risk management.

In 2013, the Company strengthened implementation of green and low carbon strategy; advocated and signed proposal to address climate change with 60 companies.

We initiated Clean Water and Blue Sky, a special program of environmental protection; participated in the poly carbon trading; and promoted energy performance contracting. Major indicators of energy consumption and emission continue to go down.

Now, I would like to invite CFO, Mr. Xinhua Wang, to present our results by each segment.

(interpreted) Thank you, President Li. Now I will present the operational results by each segment in 2013.

In 2013, with more efforts in exploration, we achieved a strategic breakthrough in Fuling shale gas exploration, laying a solid foundation for shale gas development.

We kept domestic oil reserve replacement ratio above 100%; acquired some overseas upstream assets from the parent Company, significantly growing our overseas oil and gas assets.

In oil production, with better reserve development and enhanced recovery rate in mature fields our oil and gas production was 443 boe, up 3.48%; among which crude was 333 million barrels, up 1.3%.

And natural gas was 660.2 bcf; up 10.4%.

Lifting cost was $18.18 per barrel; up 3.8%.

In 2013, realized crude price averaged $95.4 per barrel; down 4.78%.

Realized gas price was $6.22 per 1,000 cubic feet; up 10.5%.

Operating profit for E&P was RMB54.8 billion; down 27.9% year on year.

In refining, we optimized the product mix and produced more high grade gasoline in jet fuel. We paced up quality upgrade of oil products, becoming the first to complete the gasoline upgrade, through GB IV standard.

We optimized crude allocation and reduced crude procurement costs. We processed 232 million tonnes of crude, up by 4.81%; and produced 140 million tonnes of oil products, up by 5.59%. Sales of lubricant, [LPG], and asphalt grew fast.

In 2013, seizing the opportunity of improved oil products pricing mechanism, we played to our strength and restructured our portfolio; turned around our refining business from lost profit.

Refining margin increased by 70.3%, and operating profit RMB8.6 billion, representing increase of RMB20 billion over last year.

In 2013, in light of structural changes in oil products demand, we focused on high grade gasoline and jet fuel marketing, and put premium products into the market ahead of other suppliers.

While increasing total sales volume, we leveraged our advantage in network and brand to expand retail volume. Through optimized products and location and logistics, transportation cost was lowered.

In 2013, oil product sales volume reached 180 million tonnes, among which domestic sales was 165 million tonnes, up 4%; and retail volume up 5.5%.

In 2013, responding to supply and demand changes, we endeavored to expand total sales volume and end-user sales. We actively provide one-stop services and signature products for customers.

Non-fuel product sales grew fast and realized sales volume of RMB13.35 billion; up 21.4%.

Operating profit of marketing segment reached RMB35.1 billion.

In chemicals, in 2013, faced with challenging market situation, we adjusted utilization rate and product [slate], focusing on feedstock, product mix, and regional optimization to lower costs.

Production, marketing, and R&D was further integrated. Production of new [specs] polyethylene performance compound ratio, high added value rubber, and a synthetic differentiated fiber ratio all hit new high.

Market-driven strategy and a differential marketing yielded good results. Ethylene production was 9.98 million tonnes; up 5.6%. Total marketing volume of chemicals was 58.23 million tonnes; up 7.1%.

To further optimized feedstock structure, we increased large feedstock, lowered cost, and continued products-led adjustment. Against a fierce competition, operating profit of chemicals was RMB870 million, better than domestic peers.

And now, I will present 2014 operational plan. In 2014, we expect global economy sustained recovery.

Along with China's deepened reform, Chinese economy will continue to grow steadily. We expect to see stable increase in domestic fuels consumption, yet change in consumption structure, and fuels quality upgrading. Chemicals demand will grow as well.

In 2014, international crude oil supply and demand fundamentals will be loose. And with US QE tapering, crude price will stay high and fluctuate in a narrow band.

In 2014, responding to market changes, we will focus on growth quality, and underline the following work.

In E&P, promote efficiency and success rate in exploration, with stress on cost management and profit; improve oil and gas development, while organize [fuel and] capacity building. We plan to produce 333.76 barrels of oil, and 706.2 bcf of natural gas.

In refining, we will optimize crude procurement and allocation; reduce sourcing costs; pace up oil products upgrading; and restructure facilities and products mix. Refining throughput is expected to be 224 million (sic - see slide 25, "244 million") tonnes.

In marketing, we will increase retail scale; improve network; introduce specialized management experience; and produce market-driven development of non-fuel business. Domestic marketing volume of oil products is expected to be 169 million tonnes.

In chemicals, we will continue to optimize structure of feedstock, products mix, and portfolio, increasing our profitability. Ethylene production is expected to be 10.58 million tonnes.

In 2014, we will fine tune our operational plan, according to market changes.

Our 2014 CapEx is RMB161.6 billion. RMB87.9 billion is for E&P, mainly for Fuling shale gas and [shale] capacity building, LNG, and natural gas pipeline construction.

RMB25.5 billion for refining, mainly for oil products upgrading and revamping [Zhejiang] refineries, etc.

RMB24.1 billion for marketing, mainly for upgrading existing service stations and logistics, natural gas and non-fuel business facilities.

RMB17.6 billion for chemicals, mainly for start up of East Ningxia coal to chemical integrated project, and construction of Jinling PO, and Qilu acrylonitrile projects.

RMB6.5 billion for corporate and others, mainly for R&D and IT.

RMB9.1 billion for Clean Water and Blue Sky program, and this is already included in the segment CapEx.

And now, Chairman Fu will discuss fuling shale gas development progress, and the restructuring of marketing segment. Thank you.

(interpreted) As you know, the upstream segment is always a shortcoming for Sinopec, because of the historical reasons.

Sinopec started as a downstream Company. Since 1998, the Chinese Government restructured its oil and gas industry, and Sinopec's business started to expand its business to the upstream segment. So, therefore, Sinopec has an obvious shortcoming for Sinopec. So our upstream blocks are of very hard conditions, so it is quite an achievement for Sinopec to achieve a 100% reserve replacement in recent years.

But thanks to the breakthrough of shale gas development, especially in US, the fast growth of the shale gas development, and such technology converted our disadvantages to our advantages, because, as you know, shale gas is unconventional resources.

So though we may have not have those conventional underground structures, we still can find shale gas resources in our blocks. So, therefore, we have more areas to explore for the unconventional resources. Especially, in recent years, Sinopec put shale gas development as our upstream segment priority.

I'll now go through recent years of exploratory and production technology innovation. We made a significant breakthrough for the shale gas development technologies, which achieved a significant breakthrough in Chongqing Fuling region; now make us enter into a new era for China's shale gas development.

We've been involved in the shale gas development for many years. We have the gas resource, but we are not quite sure whether it is commercial or not. Our target is to build a large commercial shale gas field; and now we did it, and that [symbolizes] a milestone for the new era for the Chinese shale gas development.

According to the current information in our hand, we required an area with reservoir depths of less than 4,500 meters total, with 4,000 square kilometers.

It is not a case that the shale gas cannot be developed beneath the depth of 4,500 meters, but it is not economical. So we mainly targeted at depths from 3,500 meters to 4,500 meters. And such area amounted 4,000 square kilometers for Sinopec's shale gas resources, so reserve in place reached 2.1 trillion cubic meters.

Its high quality, wide distribution rich pay zone, and moderate depths make this promising area a quality marine [facing] shale gas reservoir base. So if we compare this area with US, the past shale gas development zone, we are not -- we are as good as that in USA.

In this case, we set up a fully national shale gas pilot area. 21 test wells has been drilled, and 600 million cubic meters per year of capacity has been built. Actually, that is the target for our 2012 five-year plan. Now we have already exceeded the target and reached 600 million cubic meters.

Average single well test production is 337,000 cubic meters per day.

If we targeted at, for example, our test well stabled at 60,000 cubic meters per day for 480 days, another test well, Jiaoye 6-2 HF, stabled its production at 320,000 cubic meters per day for 170 days. So this area make us believe that we're entering into a grand development for Chinese shale gas resources.

With previous experiences, we have developed resource evaluation, technology, and fracking equipment manufacturing strength. So, as you know, that the US is quite strong in those shale gas fracking equipments, but because there is difference between the US and China's underground situation so we have to modify those equipments and technologies.

In recent years, we make breakthroughs in self-developments, and set of shale gas proprietary shale gas development technologies. All these boost our confidence in developing the Fuling shale gas field. We are well prepared to develop these large commercial field in terms of resource and technology base.

With overall planning and phased execution principle, we already reported to the State Energy Agency. We set up a master development tally that is by the end of 2017 we will build 10 billion cubic meters of capacity; and by the end of 2015, we will reach the target of 5 billion cubic meters of capacity. And we will only use 229 square kilometers of area, which is a very small part of the 4,000 square kilometers area.

And the reserve we use is 341.3 billion cubic meters of proved reserve, and is only a very small part of the 2.1 trillion cubic meters of reserve in place.

According to the actual progress, we will modify and work out the new plan for the shale gas development plan by the end of 2017.

And second, about the restructuring of our marketing segment, and to introduce non-State capital. I think you are quite aware of the general situation, and I would like to discuss this, furthermore, and about to the potentials of our marketing segment.

As you now, Sinopec owns over 30,000 service stations, which is the biggest network in China; and also owns over 23,000 c-stores; more than 80 million fuel card holders. We already printed over 180 million fuel cards. And every day we serve over 20 million customers in our service stations. That's the best assets of our Company.

But those potentials have not been tapped on a current magnetism, so the Board decide open to non-state capitals, and to implement the mixed ownership. The reason why those potentials are not -- have not been tapped, because many restrictions upon the state-owned assets.

Our systems are not flexible enough, therefore, cannot be able to release those hidden values of the assets, so we really appreciate that the Central Government decided to implement the mixed ownership for the state-owned companies in 18th National Congress. And to make our national assets more market oriented and take out the potential of those assets, that's what we decided to do.

The first step, to restructure those assets internally by March 31. We will form a specialized company and operate as a wholly owned subsidiary, and also conducting auditing and evaluation, and by end of June we will start to invite non-state capitals and the strategic investors.

By the end of June, when we finished the evaluation, we will announce the roles for the mixed ownership, how we choose our partners. And by that time we will detail announce such roles at the -- and fair principles with equal footings for all the companies; and we will also following all the regulation rules.

So each year, with the same obligations and rights for every partners. Of course, we have some certain conditions when we invited those strategic investors. And every procedure will be open to the public.

All those magnetisms is to prevent the loss of state-owned assets; and also to ensure that those capitals should have some voice, strong voice, for those equities that hold by the other capitals.

For next step, which kind of investors we will invite. They are mainly two types. The one is the strategic investors which will bring technologies and management expertise and values to Sinopec. These companies will be the priorities.

And next is the other investors. Nowadays, the following investors are quite active, and many companies already ask to meet with me. But things we still work out the [regulationary] rules for the mixed ownership; we still have to wait. And we will offer more opportunities for the domestic non-state capitals.

It is a huge gold mine, but is still waiting to be [digged]. And for this precious assets, we're not able to tap all those potentials so we need the investors from our side.

We are, in the Company, feel all very excited for this new development in -- this shale gas development. And it's going to be the first, largest ever shale gas development in China. And we are also looking forward for develop those great potentials in our marketing business.

Thanks. I'm now very happy to take your questions from the floor.

Scott Darling, JPMorgan. What do you intend to do with some of the proceeds from this mixed partnership, on opening up your marketing business? And then, do you think in the longer term you may actually IPO this business? Thank you.

(interpreted) Responding to your first question, how we would use the proceeds, as you know, since the 18th CPC National Congress, China has entered into a new moderate economic growth stage, or in the Government was a change of gear; that is to slow down the development growth rate.

And secondly, this also concerns the transformation from the previous capital-led expansion to quality and efficiency-focused growth. And this actually aligned with the Company's strategy. This has been the Company's focus since the past two years.

In the long past, Sinopec has been expanding very fast in terms of scale, but not yielded very good results over quality and efficiency. Ever since the recent two years, we've been transforming our structure from the investment-driven to quality or organic growth.

At the same time, the mixed ownership proceeds will also be invested in those high return business. And we see there will be mainly three areas. The first one would be used for the upstream, particularly the shale gas development, which will require CapEx in the future.

And the second one, the proceeds will also be used to help optimize our debt structure, so that we can increase return to shareholders.

And the third one, the proceeds will also be used for the CapEx requirements in the future as we embrace a new industrial restructuring, and we need to focus more on saving energy; reduce emission; improve environmental protection; as well as green development.

As for your second question, whether we have a plan to IPO this business, I would say the shareholders, or the new shareholders, have the final say. They will give their comments or recommendations, and we'll listen to their comments.

Thank you.

(interpreted) A question from Morgan Stanley. There are two questions. The first one is Morgan Stanley is very pleased to see this reform, restructure to introduce a mixed ownership for the marketing business. The question is does the Company have plan for similar practices over its other business segments, such as refining, chemicals, pipelines, transmission? And so whether is there any plan for the asset restructuring and mixed ownership introduction?

The second question regards the Company's coal-to-chemicals. During the previous results announcement, the Chairman has shared with us the progress for the East Ningxia coal-to-chemical progress, and the question is what's the further plan for the Company's coal business for the year 2014 and 2015?

(interpreted) I will take the first question, and second one will be addressed by President Li. I'd like to say, ever since the late 70s and early 80s, when China embarked on the reform and opening up, China has started a journey; there is no u-turn.

And particularly since the third planned recession of the 18th CPC congress, the central government has decided to deepen the reform, and comprehensively; not just in the economic sector, but in all social sectors. So I would say this mixed ownership will be carried out in a wider and deeper sense. And this is not the only thing that will be done. There will be many things to come.

And let's come back to Sinopec. If you were following Sinopec's practices, in fact, we've been restructuring and restructuring over the past years. However, Sinopec has a very large asset base, and concerns a very diverse business value chain.

Due to past institutional and mechanisms reasons, all the assets were put in one umbrella. I very often describe, we are putting all the vegetables and fruit in one basket, and we can only sell this basket of goods at one universal price. So, in the future, we'll also look at the assets that could be released by more value if by such similar practices.

I was also asked this same question during the two sessions of the CPC and CPCCC conferences, and my answer was we are now, at Sinopec, having breakfast. We cannot have brunch, or even breakfast plus lunch and dinner. We need to take one step after another. And as for what detailed plan will be conducted, we'll evaluate this according to the progress that take place. Thank you.

(interpreted) I will take the second question regarding coal-to-chemicals. As you know, coal-to-chemical has been put as Sinopec's choice of strategy, and we've done a lot of work in this regard.

Currently, we've planned six coal-to-chemical projects throughout China; in, respectively, Ningxia; Anhui; Inner Mongolia; Guizhou; Hunan; and [Zhejiang], where the East Ningxia coal-to-chemical project we mentioned is located.

For the coal-to-chemical business, we have a strategy, and we have planned steps to develop this coal-to-chemical business. For the first step, we'll use coal to produce syngas; and for the second process, we'll develop the MTO of coal to olefins. And because the coal-to-syngas and coal-to-olefin, Sinopec has developed the in-house preparatory technologies. And for the third phase, we'll also produce other chemicals using coal, and even coal-to-liquids.

Specifically on the progress of East Nigxia coal-to-chemical project, we have got the approval from NDRC, and we are also progressing our preliminary or preparatory work. According to our plan, the capacity will be 8 billion cubic meters per year, and the gas will be transmitted using the Xinjiang to Guangdong and Zhejiang pipeline. Total investment is RMB59.5 billion, and return on investment is well above our investment threshold.

Okay, thank you. For the next question, please.

Neil Beveridge, Sanford Bernstein. Thank you for the presentation, and the excellent lunch, as always. Two questions. First of all, just on the marketing sale, you talked about this being a gold mine and full of untapped potential, and I guess non-fuel retail sales are very underdeveloped within that segment and have tremendous growth potential.

When you look at similar businesses in other parts of the world they trade on multiples to book value of 2 times to 3 times. You're in a 1 times price-to-book multiple. What kind of valuation uplift do you think you can realize from the sale, or the partial sale, of the marketing business? That's the first question.

The second question is really around the Fuling shale block. Clearly, this is a tremendous resource of enormous scale. But I guess the big question is really around the economics, the costs of this development. What kind of operating margins do you think you'll be able to realize on gas production from this asset? Will this be similar to the existing portfolio, lower, or could you even achieve higher margins? Thank you.

(interpreted) The first question, the value of this marketing segment by mixed ownership introduction is you made a very correct comment, that if we look at the global level this marketing segment value could be very high. In fact, some of the business has 2 times, 3 times, or even 4 times of [P] versus our previous marketing segment. And even at 4 times, I would say that could not fully reflect Sinopec's hidden value that is to be released.

If you take into consideration the scale of our business and the potential of new business, particularly the non-fuel with our Ezjoy branding, and we have also over 20,000-plus Ezjoy c-stores; 80 million customers, which are very attractive targets for the retailers and other business entities, we can, in fact, release huge value offline and online. So I believe this is a sector that -- or segment has still a very attractive investor fondness, and I would say the value for this segment is limitless.

But we are not saying, though, how high the P should be. The focus -- or the priority should be at what level we can generate very good return for our shareholders. So I believe this practice for the mixed ownership will be prioritized on market-based open and fair transaction, as well as generating high return to the shareholders.

For the development cost of the shale gas, I would say generally this cost is higher than the conventional gas development. However, along with increased scale, by the economy of scale, the cost will also reduce. I can share with you some numbers.

Several years ago, when we drilled a well at about 40,000 -- 4,500 meters, the cost is about RMB100 million. Now, this number has reduced to RMB80 million; and we estimate in two to three years' time this number will further reduce to RMB50 million.

Even at RMB50 million per well, the cost is still higher than the US. Why? There are some reasons, geographically speaking. As you know, those shale reserve areas are in China's hilly areas and -- but the population is also highly -- has also high population density, and we have to build new roads. It is also very hard, costly, to find a flat piece of land to prepare for the development of the reserve.

So it's not only the drilling, or fracking, that adds up to the high development cost, but other factors. But we do believe as long -- along with the increased scale, that development costs will be reduced.

I can also share with you some numbers. At current drilling cost, RMB80 million per well, and at current gas price, breakeven for the shale gas development will be 40,000 cubic meters per day for single well production. If production is above that, it's economical. If not, it's not economical. And Sinopec has the good luck to produce -- or to drill high production wells in those areas.

I would also touch upon the fabrication and technology side. Along with the development in these areas, and along with the increased production, the cost will also be reduced.

Currently, the staged fracturing for horizontal section of 1,500 meters, staged fracturing sections is about 15 to 20, and at maximum is 26. But along with our drilling more wells and gaining more experiences and further technology advance, the costs will be reduced.

I would say even the current development costs is higher than the US. The return on this shale gas resources is not higher than our conventional upstream cost. Thank you.

Next question, David, please.

Your E&P division in 2013 seemed to have suffered a little bit. I know you mentioned, in your early statements, about focusing on some cost issues on the E&P side, and I know we've got the right person in place. But my question has more to do you're with your margins in the -- in 2013 on the E&P side were quite bad. We haven't seen them that low since 2008.

I realize there was an asset write-down. Even if you adjust for that, your margin was still a lot lower than it was any other time before, except 2008. I was wondering -- a lot of talk here about shale gas, so my question on the E&P side is were there other one-offs in the E&P segment during 2013 that will disappear in 2014? Or are we talking about higher costs because of shale and it will continue into 2014/2015, until we start seeing the production and returns on shale? Thank you.

(interpreted) Before our CFO will address specific in much details about why the E&P was not very good in 2013, I would share with you my observation.

The first one is that I would say E&P is a cyclic business. If you look at the business at a specific time of point, it could be good, it could be bad. And if we look at this from a relatively longer cycle, say, in three years or five years, we may draw a fairly comprehensive conclusion of the performance.

Second one, rising costs has been a global phenomenon. The E&P cost has been climbing up significantly throughout the world.

The third one, even this background, we still need to work very hard on some of the issues; that is to outperform our peers, and to generate good return for shareholders.

For the -- as you know, during -- for our legacy, Sinopec's conventional oil and gas were not competitive over our domestic peers. We were not very fast in increasing our reserve, as well as production, and during the recent years, we've been making significant progress in adding our reserve. That will translate significant -- or that will translate into production growth in the years to come.

So I would say by year 2015, in a relatively longer cycle, the production will also improve. But within this cycle there are a lot of things that management could do; that is to focus on the return on investment, and striving to make it increase year by year.

Just now, you mentioned your estimate is before 2018, this E&P margin will not improve. I would say we'll try our best to prevent it from becoming worse.

You also mentioned about whether the shale gas development will lead to high costs of the E&P segment. My comment is, due to the shale gas advantage, the cost versus return is not inferior to the conventional oil and gas business. So I would say this shale gas will not lead to high E&P general cost.

As I mentioned, overall speaking, the global industry cost is increasing, but the management can focus on curbing that cost from increasing the return on investment and outperforming our domestic peers.

Now, I'd like to have Mr. Wang, our CFO, to share with you the details of 2013 E&P financials.

(interpreted) The E&P segment's profit was down by $15.3 billion. There are mainly two reasons; the first one is reduction in realized price, and the second one is increase in cost.

The first reason is the dominant reason for the reduced segment performance. The realized price was lowered by $5 per barrel, and if you calculate our 40 million tonnes of production that leads to a reduction of $13 billion profit out of the $15 billion. So this is the major factor.

The costs increase factor account for about $2 billion. However, we also focus on rigorously controlling our cost increase. The cost increase was 3.8%, which was well above the domestic peer.

I'd also like to discuss the fourth quarter performance, which was a significant reduction over the previous quarter. There are a number of reasons. The first one is the overseas assets maintenance affected production by 280,000 tonnes, and that translates into a reduction of $1 billion profit.

There are also increased costs due to the year-end settlement, including the write-down of reserve by $2.5 billion; a write-down on inventory by $500 million; and the increased depreciation by $1.6 billion. Many of those items are one-off items.

And I would also like to stress that during the whole year we worked very hard on curbing the increase in production cost. And for this year we'll also focus on the enhanced oil recovery in mature fields, so as to contain the overall upstream costs increase. Thank you.

Well, thank you. We are running out of time. We only have one last question.

Andrew, Mizuho. Just two quick questions. The first question is market's very concerned about Chairman Fu, your retirement. Do you plan to return any time soon?

And then the second question is on your shale gas over there. Is the Company just working on this shale project, or are they working on other projects as well? And do you have an estimate, like recovery percentage, of this 2.1 trillion cubic meters of gas in place? Thank you.

(interpreted) For the first question, this is the first time I've heard that that the market is concerned about my retirement.

I would say retirement is a very normal practice in China, and it's institutionalized. And everybody will retire one day, so I don't think we should worry about that. And, in addition, I don't have a say in on what day I will retire. There is a set of institution and system.

But I would like to stress that for any company that relies on a single person there will be a question mark on this company's sustainability. My capacity as a Chairman, my focus is that when I'm in office the Company will operate well; and when I'm not in office, the Company will operate better.

So the Board of Directors is focusing on putting the very institutional operations and management in place. And I would also like to say, even when they are retired, this set strategy, the institution or the management will not change, because those set of strategies were decided collectively, but not by a single person.

So if we look into the future, I would say that Sinopec will transform from a traditional legacy state-owned enterprise into a new modern Company with very advanced culture management, and eventually superior value creation to the shareholders.

For second question regarding the shale gas plan, we disclosed that we are now working within the 200 square kilometers out of the 4,000 square kilometers. We have drilled testing wells. And just now, we also mentioned that at the end of this year we'll announce the post 10 billion capacity building plan.

So, currently, we are focusing on further understanding the geology of this area, and we are thinking about whether the single well production will be effective if more numbers of testing wells would be drilled. Currently, the production is about 100,000 cubic meters per day.

I would say the 10 billion capacity is not the upper limit. We are planning on more projects, but I cannot say by how much, because we honor our announcement and we focus on delivering our commitment. So there are many projects to be conducted.

I would also like to touch upon the pricing environment. As you know, China is fastening the pricing reform, particularly for oil and gas. The incremental gas supply price has been lifted already, and will be continued to be lift. That will also lead to increase in existing gas supply price. And I believe this will present huge opportunities for natural gas development, including the tight gas and shale gas.

There is also favorite factors, including the public welcomeness for the clean energy to be supplied in the market. By the end of this year, I believe we'll be able to share with you a more detailed shale gas development plan. Thank you.

All right, thank you for kind interest in Sinopec. I would like also appreciate those friends sitting in the behind. We feel very apologize to keep you sitting in the behind, and next time we will find an even larger boardroom to accommodate more investors to join with us.

Should any further questions you may have, you could just contact our IR peoples at these numbers.

Okay, thank you for your continued support. I'm looking forward to see you very soon. Thank you very much. Until next time.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.