IEEJ: October 2005

The Northeast Asia Petroleum Industry: Challenges and Countermeasures
Wang Tianpu, President, China Petroleum & Chemical Corporation

Your honourable Chairman, ladies and gentlemen,

I am privileged to take part in this Northeast Asia Petroleum Forum and discuss about
the challenges for the NE Asia petroleum industry and the countermeasures.

1. Challenges for the NE Asia Petroleum Industry

The NE Asian economies are undergoing stable and fast growth. Over the past few
years, China has maintained 9% GDP growth while Japan and Korea have also gained
3%-5% in GDP growth. While presenting valuable opportunities, the rapid economic
growth in the region also poses a series of challenges to the petroleum industry.

A．Widening Supply to Demand Gap in Oil and Gas, Increasing Reliance on Import

NE Asia is one of the world’ most dynamic region in terms of economic development,with fast and sustained energy consumption. Statistics show that China’s oil
consumption in 2004 reached 318.7 million tonnes, import being 143.7 million tonnes,
45% reliance on import. Japan consumed 241.5 million tonnes and imported 208.9
million tonnes. Korea’s oil consumption was 104.8 million tonnes. Reliance on importfor Japan and Korea respectively approximate 100%. The aggregate consumption forChina, Japan and Korea reached 665 million tonnes, accounting 17.4% of the world’s
total consumption and their overall reliance on import was as high as 73.7%.

In 2004, natural gas consumption for China, Japan and Korea was 39 billion cubicmeters, 72.2 billion cubic meters and 31.6 billion cubic meters, respectively
representing 1.5%, 2.7% and 1.2% of the world’s total. China’s natural gas1

IEEJ: October 2005consumption was mainly fed by domestic production, whereas Japan and Korea turnto LNG import for their gas needs.

Along with the economic development and improving living standard, consumption
and import of oil and gas for the three countries are expected to grow, hence further
increase in import reliance. Just take China for instance, its oil consumption is
forecasted to hit 450 million tonnes by 2020, with reliance on imported oil reaching60%.

B. High Oil Price, Negative Impact on Regional Economy and Refining Sector

Global economy entered a new upturn cycle since 2002, with major developed anddeveloping countries being able to accelerate their growth. Year 2004 witnessed thestrongest growth for the past 25 years. Greater oil consumption comes together withfaster economic development. In addition, due to geopolitical tension, speculation,
natural disasters and other factors, international oil price kept climbing, current pricebeing 130% higher than that in 2002. WTI even hit $70/bbl at the end of August 2005.

Asia is the most suffering victim of the soaring oil price. Continuous rising oil priceshall have a serious impact on Asian economies, among which China, Japan and
Korea shall suffer most. According to the recent forecast by Asia Development Bank,
Asia is slowing down in growing economy because of the rising oil prices and East
Asia’s economic growth this year will drop to 6.8% from last year’s 7.6%. China’s
bill for crude import in the first half of this year was increased by more than US$ 7
billion due to price increase.

In the meantime, the strongly fluctuated oil price translates increasing operationalrisks and difficulties for petrochemical enterprises. It is estimated that due to rising
crude price and delay in price revision for refined oil products, Chinese refining
enterprises incurred severe loss in the first half of this year. Net loss for the entire
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sector reached RMB 4.19 billion, while same-period profit for last year was RMB
16.38 billion.

C. Stricter Environmental Rules, Higher Requirement for E&P and Production of OilProducts.

Energy-related environmental issues in NE Asia will become more prominent thanother regions due to the significant increase in energy consumption, especially in coalconsumption, thus more CO2 emission than North America and Europe. These issues
not only restrain the region’s social and economic development, but also invite
environmental protection pressure from the international community and increasing
green barriers in international trade. Meanwhile, there are still serious problems ofwastes emission and environmental damages in oil and gas exploration anddevelopment, storage and transportation of oil and gas, refining and petrochemicalproduction. The disposal of drilling mud, emission of waste water and oil for oil
extraction, disposal of wastes out of downhole operation, restoration of depleted wells,
flare waste and disposal of refinery wastes all need further improving.

In particular, like Japan, EU, and the U.S., China is to implement stricter rules on
clean fuels for automobiles. Starting from 1st July 2005, China adopted Euro II
emission standard, limiting sulfur content in gasoline to no greater than 500ppm. The
city of Beijing has adopted Euro III standard ahead of schedule. According to State
Environmental Protection Administration of China, the third phase emission standard(equivalent to Euro III standard) is to be implemented nationwide in 2007, with sulfur
content in gasoline no greater than 150ppm and that in diesel no greater than 350ppm.
The Euro IV-equivalent fourth phase standard is to be practiced in China in 2010. To
achieve the above targets, huge investment is needed for refineries revamping projects
to reduce sulfur content.

D. Multi-risks in Oil Supply Diversity, Starting Stage for Regional Dialogue
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Mechanism

The undiversified source for oil import leads to a fragile market for NE Asia. The NE
Asian nations heavily rely on the Middle East for oil. About three quarters of the totaloil import for China, Japan and Korea comes from the Middle East. Oil transport
security is one of the challenges that face the three nations. Imported oil for the threecountries mainly comes in via the Malacca Straight. The frequent terrorist attacks andsea bandits’ activities pose enormous risks to the transportation.

Secondly, the NE Asian countries have to pay the unfair ‘premium’ in purchasing
Middle East crude. Since 1992, Middle East crude sole to Asia has been US$
1-1.5/bbl higher than that to Europe or North America. Now this ‘premium’ has evenextended to LNG, LPG and other products, meaning an extra bill of US$ 5-10 billion
for the Asian oil consuming countries.

Furthermore, energy collaboration in NE Asia is far less developed than Europe orNorth America. Up to now, even though the conditions for collaboration arefavourable, there has been limited cooperation among China, Japan and Korea in oil
and gas exploration and development, refining, petrochemical and marketing. A
regional collaboration mechanism is yet to set up. Currently, the major oil
consumption regions (North America, Western Europe and East Asia) all face thechallenges in expanding sources, competing for oil purchase and safeguardingtransport. Therefore, regional collaboration is an urgent must to avert risks and seek
benefit. The NE Asian countries have a shared fate. In time of energy crisis, no single
country could stand alone. Only by combining strengths would the NE Asian
countries be able to build weighty bargaining power as well as purchasing power, thus
greater influence on oil price. In this way, the nations will be able to make up for thefragile market, reduce transportation risks and jointly secure the oil supply.

2. China, Japan and Korea: Countermeasures and Development Strategy for the4

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Petroleum Industry

A. Establishing Mechanism for Dialogue and Emergency Response for Security

Along with the quickening of economic integration in the region, the Asia Pacificpetroleum and petrochemical market further emerges into a unified market. As major
players in the market, the NE Asian oil enterprises should join hands to promotestability and prosperity in the greater Asia Pacific market. As a result, a regional
dialogue mechanism and security emergency response system should be established.
An organization for NE Asia energy collaboration consultation should be establishedand mechanism for regular dialogue be formed to enhance the openness andtransparency for energy policies.

A NE Asia petroleum information network should

be set up to strengthen exchange of energy information and cooperation. A unified
emergency response mechanism should be set up and the further target should be thepetroleum reserve system for the region. The exchange of emergency response
experiences should be further enhanced to better the response system.

B. Enhancing Collaboration in Exploration & Development, Refining &Petrochemical, Import, Storage and Transportation

Collaboration in hydrocarbon resources, refining & petrochemical, storage andtransportation facilities construction should be upgraded for mutual benefit andwin-win situation, in order to increase regional competence and reduce geological andgeopolitical risks.

Technology cooperation in exploration & development, refining and petrochemical
production should be enhanced. China, Japan and Korea enjoy wide scope and huge
potential for energy cooperation and are complementing among each other. Japan has
unique advantages in capital and technology, a well developed strategic petroleum
reserves system and huge refining capacity. Japan enjoys a comprehensive legal
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framework, state-of-the-art technologies and rich experiences in energy conservation,environmental protection and new energy deployment. China is rich in workforce andnatural resources. It is also a big energy producer, being still a major coal supplier toJapan and Korea. China’s oil and gas exploration and development technologies interrestrial genesis of hydrocarbon, progressive exploration and development andlarge-scale non-homogeneous oil shale field development have reached leading leveland China needs advanced technologies for new energy and conservation. Korea also
has a lot to offer in energy conservation, market operation and strategic reserves.

Oil import cooperation should be strengthened and an Asian petroleum and energy
market should be set up. ‘Group purchase’ should be carried out as a new measure toeliminate the ‘Asia premium’ to reduce crude cost. The feasibility of establishinghigh-efficiency regional oil and gas pipelines should be explored. The oil
consumption volume for NE Asia is similar to Europe and North America. However,there is only a transit market of Singapore for this region. We should start to set up aninternational oil market centered around China, Japan and Korea to influence oil priceand erase the ‘Asia premium’.

Cooperation in facilities construction and utilization for oil and gas storage andtransportation should be elevated. The three countries should jointly safeguard thetransport channels, promote stability in related areas, fight sea bandits and terrorism,
improve the fragile facilities and network, and ensure the security of major ports andcritical points. A joint shipping fleet could also be discussed about to constantly
improve the capacity in handling sudden and unexpected occurrences in the changingmarket.

C. Emphasizing Development and Application Energy Alternatives

With the rising oil prices, the world is fastening steps to develop oil substitutes. China,
Japan and Korea could collaborate in the following aspects.
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Joint development of non-conventional resources such as oil sand, oil shale andnatural gas hydrate should be conducted to complement the conventional oil and gas
resources. China has rich oil shale resources, the majority of which is yet to prove.

Cooperation in coal to liquids should be developed. China has rich coal reserves,
hence a unique advantage in coal to liquids practice. When oil price is at a high level,coal to liquids becomes economically viable. Under a coal to gasoline and diesel
programme, China Shenhua Group’s coal to liquids facility of 5 million tonnes
capacity has started up in Ordos in August 2004.

Cooperation in renewable energy should also be enhanced. China passed a renewableenergy act in February 2005, aiming to promote development and utilization ofrenewable energy, increase energy supply, improve energy structure, ensure energy
security, protect the environment and achieve sustained development. Under this act,
preferential policies would be given to the development and utilization of wind energy,
solar energy, water energy, bio-energy, thermal energy, ocean energy and other non
fossil fuels. The ethanol gasoline project has been rolled out in 5 provinces in China
with annual consumption reached 1 million tonnes. This project is expected to operate
in 9 provinces at the end of 2005.

The three countries should also collaborate in the research and development on newenergy, aiming for breakthrough in new energy utilization.

D. Elevating Collaboration in Energy Efficiency and Circular Economy

Utilizing the Japan’ and Korea’s strengths in energy efficiency to promote regional
collaboration in conservation and integrate energy utilization with environmental
protection. To compare with Japan and other developed countries, China’s energy
utilization efficiency is much lower. China’s motor fuel consumption is high at an7

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annual average of 2.28 tonnes per vehicle while that in Japan is 1.07 tonnes, meaning
China’s motor fuel consumption per vehicle is 115% higher than that of Japan.
Internal oil consumption for Chinese oil fields accounts for 2% of the total production.
Fuel oil consumption at China’s petrochemical enterprises approximates 5.6 million
tonnes. The refineries also have a high loss rate of 1.08% whereas the leading level isjust 0.5%. Average comprehensive energy consumption at refineries is 1.3-1.5 timesof foreign refineries and that for ethylene facilities is 1.6 times.

In the meantime, clean development mechanism (CDM) should be advocated for theregion’s sustainable development. Along with the intensified environment regulationand development of circular economy in China, more manufacturing enterprises haveestablished clean production mechanism and a circular resources utilization model. A
resources co-generation chain is formed among enterprises. During such practice, thegreen house gases such as CO2 and methane have become important resources forcircular use, reducing emission and achieving sustainability. Through the CDM
projects, China would benefit in acquiring technologies and experiences in emission
reduction.

3. Overview of Sinopec and Prospect for Collaboration.

A. Overview of Sinopec

Sinopec is an integrated energy and chemical company with oil and gas explorationand development, refining, chemical production and products marketing businesses.
The company’s principal market is in the most dynamic regions in eastern andsouthern China.

Sinopec is China’s second largest oil and gas producer, China’s largest refiner,producer and marketer of petrochemicals and refined oil products. Sinopec has themost extensive marketing network for oil products in China, with a total of 30,063
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stations in 2004, among which 26,581 stations are self-owned. Annual throughput per
station averaged 2,000 tonnes, up by 18.8% over 2003. Also in 2004, Sinopec
produced 274.15 million barrels of crude and 207 billion cubic feet of natural gas,
1.18% and 10.29% increase over the previous year. Total refining throughput for 2004
was 132.95 million tonnes, up by 14.36% from 116.26 million tonnes in 2003.
Ethylene production for the company in 2004 was increased from 3.982 million
tonnes in 2003 to 4.074 million tonnes, up by 2.31%. Sinopec ranked 31st in Fortune
500 according to its sales revenue in 2004.

Over the years, Sinopec has been intensifying international cooperation andestablished sound partnerships with international peers in exploration & development,
petrochemical production and oil products marketing. In exploration & development
for oil and gas, Sinopec has made preliminary progress by entering into a number ofjoint development agreements with oil companies in Saudi Arabia, Algeria,Azerbaijan, Kazakhstan, Yemen, Iran, Indonesia, Angola, Nigeria, Cuba, etc. In
petrochemical business, Sinopec has an integrated refining and ethylene joint venture
in Fujian with ExxonMobil and Saudi Aramco, a 900 kta ethylene joint venture inShanghai with BP, and a 600 kta ethylene joint venture in Nanjing with BASF. In
refined oil products, Sinopec has marketing joint ventures respectively withExxonMobil, Shell and BP.

B. Prospect for Collaboration

Looking ahead, based on its achievement in the past two decades and relying on
domestic and overseas resources, Sinopec will further its reform, develop corebusiness and improve overall competitive power.

Sinopec is more than pleased to enhance communications and exchanges with ourindustry peers in the region, promote mutual understanding and cooperation. The NE
Asian countries should increase dialogues and cooperation with major oil producing
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countries, further exchange of information and improve response capacity in sudden
market changes. On the other hand, the region should actively seek means for
multi-collaboration among enterprises, combining respective strengths at different
chain of the petroleum industry and complementing each other.

We firmly believe that along with the increasing integration of the Asia Pacificeconomy and NE Asia trade relations, the petroleum enterprises in NE Asia will
experience broader and deeper cooperation. Sinopec is committed to the healthy andrapid growth of regional economy as well as the development of the society.

In the end, I wish this forum a round success. Thank you for your attention.

Contact: report@tky.ieej.or.jp

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