UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                            ----------------------

                                   FORM 20-F
(Mark One)
|_|   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
      SECURITIES EXCHANGE ACT OF 1934
                                      OR
|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
      For the fiscal year ended December 31, 2005
                                      OR
|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      For the transition period from _________________ to _______________
                                      OR
|_|   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      Date of event requiring this shell company report ________________


                        Commission File Number 1-14966

                                 CNOOC LIMITED
                          [CHINESE LANGUAGE OMITTED]
            (Exact name of Registrant as specified in its charter)

                          -------------------------

                                   Hong Kong
                (Jurisdiction of incorporation or organization)

                          -------------------------

                        65th Floor, Bank of China Tower
                           One Garden Road, Central
                                   Hong Kong
                   (Address of principal executive offices)

                          -------------------------

      Securities registered or to be registered pursuant to Section 12(b) of
the Act.

<TABLE>
<CAPTION>

                             Title of each class                                     Name of each exchange on which registered
<S>                                                                                   <C>
American depositary shares, each representing 100 shares of
   par value HK$0.02 per share.....................................................   New York Stock Exchange, Inc.*
Shares of par value HK$0.02 per share..............................................   New York Stock Exchange, Inc.**

      Securities registered or to be registered pursuant to Section 12(g) of
the Act. None (Title of Class)

      Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act. None (Title of Class)

      Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by
the annual report.

Shares, par value HK$0.02 per share................................................   41,054,675,375*
</TABLE>

      Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.

                                Yes |X| No |_|

      If this report is an annual or transition report, indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.

                                Yes |X| No |_|


<PAGE>


      Note - Checking the box above will not relieve any registrant required
to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 from their obligations under those Sections.

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant is required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                Yes |X| No |_|

      Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, nor a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):

  Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|

      Indicate by check mark which financial statement item the Registrant has
elected to follow.

                            Item 17 |_| Item 18 |X|

      If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

                                Yes |_| No |X|

      (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PAST FIVE YEARS)

      Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                                Yes |_| No |_|

---------
* As of December 31, 2005, the number of shares outstanding was
41,054,675,375. As a result of placing existing shares and subscription of new
shares as announced by CNOOC (BVI) Limited on April 27, 2006, we allotted
2,272,727,273 new shares on May 11, 2006. The number of shares outstanding
immediately after the placing and allotment was 43,327,402,648.

** Not for trading, but only in connection with the registration of American
depositary shares.


<PAGE>


                                                          Table of Contents

<TABLE>
<CAPTION>

                                                                                                                                Page
TERMS AND CONVENTIONS..............................................................................................................1
FORWARD-LOOKING STATEMENTS.........................................................................................................5

                                                               PART I

<S>           <C>                                                                                                                <C>
ITEM 1.       IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS................................................................6
ITEM 2.       OFFER STATISTICS AND EXPECTED TIMETABLE..............................................................................6
ITEM 3.       KEY INFORMATION......................................................................................................6
   A.         Selected Financial Data..............................................................................................6
   B.         Capitalization and Indebtedness.....................................................................................10
   C.         Reasons for the Offer and Use of Proceeds...........................................................................10
   D.         Risk Factors........................................................................................................10
ITEM 4.       INFORMATION ON THE COMPANY..........................................................................................20
   A.         History and Development.............................................................................................20
   B.         Business Overview...................................................................................................23
ITEM 4A.      UNRESOLVED STAFF COMMENTS...........................................................................................68
ITEM 5.       OPERATING AND FINANCIAL REVIEW AND PROSPECTS........................................................................68
   A.         Operating Results...................................................................................................68
   B.         Liquidity and Capital Resources.....................................................................................81
   C.         Research and Development, Patents and Licenses, etc.................................................................88
   D.         Trend Information...................................................................................................88
   E.         Off-Balance Sheet Arrangements......................................................................................88
   F.         Tabular Disclosure of Contractual Obligations.......................................................................88
ITEM 6.       DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..........................................................................89
   A.         Directors and Senior Management.....................................................................................89
   B.         Compensation of Directors and Officers..............................................................................96
   C.         Board Practice......................................................................................................96
   D.         Employees..........................................................................................................100
   E.         Share Ownership....................................................................................................100
ITEM 7.       MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..................................................................105
   A.         Major Shareholders.................................................................................................105
   B.         Related Party Transactions.........................................................................................105
   C.         Interests of Experts and Counsel...................................................................................114
ITEM 8.       FINANCIAL INFORMATION..............................................................................................114
   A.         Consolidated Statements and Other Financial Information............................................................115
   B.         Significant Changes................................................................................................116
ITEM 9.       THE OFFER AND LISTING..............................................................................................117
ITEM 10.      ADDITIONAL INFORMATION.............................................................................................118
   A.         Share Capital......................................................................................................118
   B.         Memorandum and Articles of Association.............................................................................118
   C.         Material Contracts.................................................................................................121
   D.         Exchange Controls..................................................................................................121
   E.         Taxation...........................................................................................................122
   F.         Dividends and Paying Agents........................................................................................125
   G.         Statement by Experts...............................................................................................125
   H.         Documents on Display...............................................................................................125
   I.         Subsidiary Information.............................................................................................126
ITEM 11.      QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.........................................................126
ITEM 12.      DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.............................................................127


                                                                  i
<PAGE>


                                                               PART II

ITEM 13.      DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES....................................................................128
ITEM 14.      MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.......................................128
   A.         Material Modifications to the Instruments Defining the Rights of Security Holders..................................128
   B.         Material Modifications to the Rights of Registered Securities by Issuing or Modifying any other Class of
              Securities.........................................................................................................128
   C.         Withdrawal or Substitution of a Material Amount of the Assets Securing any Registered Securities...................128
   D.         Change of Trustees or Paying Agents for any Registered Securities..................................................128
   E.         Use of Proceeds....................................................................................................128
ITEM 15.      CONTROLS AND PROCEDURES............................................................................................128
ITEM 16A.     AUDIT COMMITTEE FINANCIAL EXPERT...................................................................................128
ITEM 16B.     CODE OF ETHICS.....................................................................................................128
ITEM 16C.     PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................................................................129
ITEM 16D.     EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.........................................................130
ITEM 16E.     PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.............................................130

                                                              PART III

ITEM 17.      FINANCIAL STATEMENTS...............................................................................................131
ITEM 18.      FINANCIAL STATEMENTS...............................................................................................131
ITEM 19.      EXHIBITS...........................................................................................................131
</TABLE>


                                                                 ii
<PAGE>


                             TERMS AND CONVENTIONS

Definitions

      Unless the context otherwise requires, references in this annual report
to:

o     "CNOOC" are to our controlling shareholder, China National Offshore Oil
      Corporation, a PRC state-owned enterprise, and its affiliates, excluding
      us and our subsidiaries;

o     "CNOOC Limited," are to CNOOC Limited, a Hong Kong limited liability
      company and the registrant of this annual report;

o     "Our company," "we," "our" or "us" are to CNOOC Limited and its
      subsidiaries;

o     "China" or "PRC" are to the People's Republic of China, excluding for
      purposes of geographical reference in this annual report, the Hong Kong
      Special Administrative Region, the Macau Special Administrative Region
      and Taiwan;

o     "Hong Kong Stock Exchange" or "HKSE" are to The Stock Exchange of Hong
      Kong Limited;

o     "Hong Kong Stock Exchange Listing Rules" are to the Rules Governing the
      Listing of Securities on The Stock Exchange of Hong Kong Limited;

o     "HK$" are to Hong Kong dollar, the legal currency of the Hong Kong
      Special Administrative Region;

o     "JPY" are to Japanese yen, the legal currency of Japan;

o     "Rmb" are to Renminbi, the legal currency of the PRC;

o     "Rupiah" are to Indonesian Rupiah, the legal currency of the Republic of
      Indonesia; and

o     "US$" are to U.S. dollar, the legal currency of the United States of
      America.

Conventions

      We have translated amounts from Renminbi into U.S. dollars solely for
the convenience of the reader at the noon buying rate in New York for cable
transfers payable in foreign currencies as certified for customs purposes by
the Federal Reserve Bank of New York on December 30, 2005 of US$1.00=Rmb
8.0702. We have also translated amounts in Hong Kong dollars solely for the
convenience of the reader at the rate of HK$7.80 to US$1.00, the linked
exchange rate between such currencies under policies of the Hong Kong
government in effect on December 31, 2005. We make no representation that the
Renminbi amounts or Hong Kong dollar amounts could have been, or could be,
converted into U.S. dollars at those rates on December 31, 2005, or at all.
For further information on exchange rates, see Item 3 "Key
Information--Selected Financial Data."

      Totals presented in this annual report may not total correctly due to
rounding of numbers.

      Our "average net realized price" for oil and gas in each period is
derived from a numerator divided by a denominator, where:

o     the numerator is equal to the sum of (i) revenues from our oil and gas
      sales offshore China for the applicable period; (ii) the 30% ownership
      share of revenues from gas sales for the applicable period from our
      associated company, Shanghai Petroleum and Natural Gas Company Limited;
      and (iii) the revenues from oil and gas sales for the applicable period
      from our overseas interests; while:

o     the denominator is equal to the sum of (i) the volume of oil and gas
      sales offshore China for the applicable period; (ii) 30% of the volume
      of gas sales for the applicable period from our associated company,
      Shanghai Petroleum and Natural Gas Company Limited; and (iii) the volume
      of oil and gas sales for the applicable period from our overseas
      interests.


                                      1
<PAGE>


      Our "net proved reserves" consist of our percentage interest in
reserves, including our 100% interest in the independent oil and gas
properties and our participating interest in the properties covered under the
production sharing contracts in the PRC, less: (a) an adjustment for our share
of royalties payable by us to the PRC government and our participating
interest in share oil payable to the PRC government under the production
sharing contracts, and (b) an adjustment for production allocable to foreign
partners under the PRC production sharing contracts as reimbursement for
exploration expenses attributable to our participating interest; and plus (i)
our 5.3% participating interest in North West Shelf Project in Australia, and
(ii) our participating interest in the properties covered under the production
sharing contracts in Indonesia less an adjustment for share oil attributable
to the Indonesian government and the domestic market obligation. In this
annual report, we use "share oil" to refer to the portion of production that
must be allocated to the relevant government entity or company under our
production sharing contracts.

      Net proved reserves do not include any deduction for production taxes
payable by us, which are included in our operating expenses. Net production is
calculated in the same way as net proved reserves. Unless otherwise noted, all
information in this annual report relating to oil and natural gas reserves is
based upon estimates prepared by us. In calculating barrels-of-oil equivalent,
or BOE, amounts, we have assumed that 6,000 cubic feet of natural gas equals
one BOE, with the exception of natural gas from certain fields which is
converted using the actual heating value of the natural gas.

Glossary of Technical Terms

      Unless otherwise indicated in the context, references to:

      o     "API gravity" means the American Petroleum Institute's scale for
            specific gravity for liquid hydrocarbons, measured in degrees. The
            lower the API gravity, the heavier the liquid and, generally, the
            lower its commercial value. For example, asphalt has an API
            gravity of eight degrees, West Texas Intermediate, a benchmark
            crude oil, has an API of 40 degrees, and gasoline has an API
            gravity of 50 degrees.

      o     "appraisal well" means an exploration well drilled after a
            successful wildcat well to gain more information on a newly
            discovered oil or gas reserve.

      o     "condensate" means light hydrocarbon liquids separated from
            natural gas in the field through condensation when natural gas is
            exposed to surface temperature and pressure. This group generally
            includes slightly heavier hydrocarbons than natural gas liquids,
            such as pentane. It is combined with crude oil production and
            reserve figures.

      o     "crude oil" means crude oil and liquids, including condensate,
            natural gas liquids and liquefied petroleum gas.

      o     "development cost" means, for a given period, costs incurred to
            obtain access to proved reserves and to provide facilities for
            extracting, treating, gathering and storing the oil and gas.

      o     "dry hole" means an exploration well that is not commercial (i.e.,
            economically feasible to develop). Dry hole costs include the full
            costs for such drilling and are charged as an expense.

      o     "exploration well" means a wildcat or appraisal well.

      o     "lifting cost" means, for a given period, costs incurred to
            operate and maintain wells and related equipment and facilities,
            including applicable operating costs of support equipment and
            facilities and other costs of operating and maintaining those
            wells and related equipment and facilities, plus production taxes.
            Also known as production cost. The U.S. dollar amount of the
            lifting cost in this annual report may be different from what we
            disclosed in Hong Kong annual report due to the usage of different
            conversion rates.


                                      2
<PAGE>


      o     "natural gas liquids" means light hydrocarbons that can be
            extracted in liquid form from natural gas through special
            separation plants. This group includes typically lighter liquid
            hydrocarbons than condensate, such as butane, propane and ethane.
            It is combined with crude oil production but not with crude oil
            reserve figures.

      o     "net wells" means a party's working interest in wells.

      o     "proved developed reserves" means proved reserves of oil and
            natural gas that can be expected to be recovered through existing
            wells with existing equipment and operating methods.

      o     "proved reserves" means estimated quantities of crude oil and
            natural gas that geological and engineering data demonstrate with
            reasonable certainty to be recoverable in future years from known
            reservoirs under existing economic and operating conditions, i.e.,
            prices and costs as of the date the estimate is made.

      o     "proved undeveloped reserves" means proved reserves that are
            expected to be recovered from new wells in undrilled areas, or
            from existing wells where significant expenditure is required for
            completion.

For further definitions relating to reserves:

      o     "reserve replacement ratio" means, for a given year, total
            additions to proved reserves divided by production during the
            year.

      o     "reserve-to-production ratio" means the ratio of proved reserves
            to annual production of crude oil or, with respect to natural gas,
            to wellhead production excluding flared gas.

      o     "seismic data" means data recorded in either two-dimensional (2D)
            or three-dimensional (3D) form from sound wave reflections off of
            subsurface geology. This is used to understand and map geological
            structures for exploratory purposes to predict the location of
            undiscovered reserves.

      o     "success" means a discovery of oil or gas by an exploration well.
            Such an exploration well is a successful well and is also known as
            a discovery. A successful well is commercial, which means there
            are enough hydrocarbon deposits discovered for economical
            recovery.

      o     "success rate" means the total number of successful exploration
            wells divided by the total number of exploration wells drilled in
            a given period. Success rate can be applied to wildcat wells or
            appraisal wells in general.

      o     "wildcat well" means an exploration well drilled in an area or
            rock formation that has no known reserves or previous discoveries.

References to:

      o     bbls means barrels, which is equivalent to approximately 0.134
            tons of oil (33 degrees API);

      o     mmbbls means million barrels;

      o     BOE means barrels-of-oil equivalent;

      o     BOE per day means barrels-of-oil equivalent per day;

      o     million BOE means million barrels-of-oil equivalent;

      o     mcf means thousand cubic feet;


                                      3
<PAGE>


      o     mmcf means million cubic feet;

      o     bcf means billion cubic feet, which is equivalent to approximately
            283.2 million cubic meters;

      o     BTU means British Thermal Unit, a universal measurement of energy;
            and

      o     km means kilometers, which is equivalent to approximately 0.62
            miles.


                                      4
<PAGE>


                          FORWARD-LOOKING STATEMENTS

      This annual report includes "forward-looking statements" within the
meaning of the United States Private Securities Litigation Reform Act of 1995.
All statements, other than statements of historical facts, included in this
annual report that address activities, events or developments which we expect
or anticipate will or may occur in the future are forward-looking statements.
The words "believe," "intend," "expect," "anticipate," "project," "estimate,"
"predict" and similar expressions are also intended to identify such
forward-looking statements.

      These forward-looking statements address, among others, such issues as:

      o     the amount and nature of future exploration, development and other
            capital expenditures,

      o     wells to be drilled or reworked,

      o     oil and gas prices and demand,

      o     future earnings and cash flow,

      o     development projects,

      o     exploration prospects,

      o     estimates of proved oil and gas reserves,

      o     potential reserves,

      o     development and drilling potential,

      o     drilling prospects,

      o     expansion and other development trends of the oil and gas
            industry,

      o     business strategy,

      o     production of oil and gas,

      o     development of undeveloped reserves,

      o     expansion and growth of our business and operations, and

      o     our estimated financial information.

      These statements are based on assumptions and analyses made by us in
light of our experience and our perception of historical trends, current
conditions and expected future developments, as well as other factors we
believe are appropriate under the circumstances. However, whether actual
results and developments will meet our expectations and predictions depend on
a number of risks and uncertainties which could cause our actual results,
performance and financial condition to differ materially from our expectation.
For a description of such risks and uncertainties, see "Item 3-Key
Information-Risk Factors."

      Consequently, all of the forward-looking statements made in this annual
report are qualified by these cautionary statements. We cannot assure that the
actual results or developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected effect on us or our
business or operations.


                                      5
<PAGE>


                                    PART I

         ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

      Not applicable, but see "Item 6--Directors, Senior Management and
Employees--Directors and Senior Management."

                ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

      Not applicable.

                            ITEM 3. KEY INFORMATION

A.    SELECTED FINANCIAL DATA

      You should read our selected historical consolidated financial data set
forth below in conjunction with our consolidated financial statements and
their notes under "Item 18--Financial Statements" and "Item 5--Operating and
Financial Review and Prospects" in this annual report.

      On June 6, 2002, Ernst & Young replaced Arthur Andersen & Co as our
independent public accountants. For a discussion on such change of
accountants, see "Item 3--Key Information--Risk Factors--Risks relating to our
business--You may not be able to assert claims against Arthur Andersen, our
independent public accountants for periods prior to 2002, nor may you be able
to assert claims against our current independent public accountants for
financial statements previously audited by Arthur Andersen" and "Item
5--Operating and Financial Review and Prospects--Change of Accountants."

      The Hong Kong Institute of Certified Public Accountants issued a number
of new standards and interpretations, effective January 1, 2005, which are
applicable to our financial statements for the fiscal year ended on December
31, 2005. Certain prior year amounts have been restated upon adoption of such
new policies, details of which are included in note 2.4 to our consolidated
financial statements under "Item 18--Financial Statements" in this annual
report.

      We have prepared and presented our consolidated financial statements in
accordance with Hong Kong generally accepted accounting principles ("Hong Kong
GAAP"). For an explanation of the reconciliation of our net income and
shareholders' equity to U.S. generally accepted accounting principles ("US
GAAP"), see note 37 to our consolidated financial statements under "Item
18--Financial Statements" in this annual report.


                                      6
<PAGE>


<TABLE>
<CAPTION>

                                                                             Year ended December 31,
                                                   --------------------------------------------------------------------------------
                                                    2001(g)           2002          2003          2004           2005          2005
                                                   --------       --------      --------      --------       --------       -------
                                                        Rmb            Rmb           Rmb           Rmb            Rmb           US$
                                                   --------       --------      --------      --------       --------       -------

                                                                 (in millions, except per share and per ADS data)
Income Statement Data:
Hong Kong GAAP                                                  (Restated)    (Restated)    (Restated)
Operating revenues:
<S>                                                  <C>            <C>           <C>           <C>            <C>            <C>
   Oil and gas sales............................     17,561         23,779        28,117        36,886         53,418         6,619
   Marketing revenues...........................      2,537          2,377        12,399        18,191         15,901         1,970
   Other income.................................        722            217           434           145            137            17
                                                   --------       --------      --------      --------       --------       -------
   Total operating revenues.....................     20,820         26,374        40,950        55,222         69,456         8,606
                                                   --------       --------      --------      --------       --------       -------

Expenses:
   Operating expenses...........................    (2,329)        (3,775)       (4,513)       (5,070)        (5,935)         (735)
   Production taxes.............................      (884)        (1,023)       (1,239)       (1,726)        (2,597)         (322)
   Exploration expenses.........................    (1,039)        (1,318)         (848)       (1,316)        (1,294)         (160)
   Depreciation, depletion and amortization.....    (2,567)        (4,020)       (4,643)       (5,455)        (5,965)         (739)
   Dismantlement................................       (90)          (126)         (167)         (202)          (253)          (31)
   Impairment losses related to property,
   plant and equipment..........................         --             --            --            --           (90)          (11)
   Crude oil and product purchases..............    (2,453)        (2,326)      (12,295)      (17,963)       (15,704)       (1,946)
   Selling and administrative expenses..........      (616)    (1,033) (e)   (1,250) (e)   (1,104) (e)        (1,370)         (170)
   Others.......................................      (618)           (31)         (350)          (46)           (76)          (10)
                                                   --------       --------      --------      --------       --------       -------
                                                   (10,596)       (13,652)      (25,305)      (32,882)       (33,284)       (4,124)
                                                   --------       --------      --------      --------       --------       -------

Interest income.................................        318            148           184           207            359            44
Finance costs...................................      (117)          (295)         (355)         (442)        (1,100)         (136)
Exchange gains (losses), net....................        235          (114)           (7)            29            287            36

Short term investment income....................        221            193           124            72            248            31
Share of  profits of associates.................         90            165           220           344            307            38
Non-operating income (expenses), net............         35           (71)           315           519             28             4
                                                   --------       --------      --------      --------       --------       -------

Income before tax...............................     11,006         12,748        16,125        23,070         36,301         4,498
Tax.............................................    (3,048)        (3,541)       (4,628)       (6,931)       (10,978)       (1,360)
                                                   --------       --------      --------      --------       --------       -------
Net income......................................      7,958          9,207        11,497        16,139         25,323         3,138
                                                   ========       ========      ========      ========       ========       =======

Net income per share (basic)(a)(b)..............       0.20           0.22          0.28          0.39           0.62          0.08
Net income per share (diluted)(a)(c)............       0.20           0.22          0.28          0.39           0.61          0.08
Net income per ADS (basic)(a)(b)................      20.04          22.42         27.99         39.31          61.68          7.64
Net income per ADS (diluted)(a)(c)..............      20.04          22.40         27.97         39.19          61.01          7.56

Dividend per share(a)
   Special interim dividend declared in
   place of  2003 final dividend(d).............         --             --            --         0.060             --            --
   Interim......................................      0.022          0.024         0.030         0.030          0.052         0.006
   Interim (in US$).............................      0.003          0.003         0.004         0.004             --            --
   Special interim..............................         --             --         0.038         0.050          0.052         0.006
   Special interim (in US$).....................         --             --         0.005         0.006             --            --
   Proposed final(d)............................      0.032          0.032         0.026         0.030          0.103         0.013
   Proposed final (in US$)(d)...................      0.004          0.004         0.003         0.004             --            --
   Proposed special final(d)....................         --          0.032         0.038         0.050             --            --
   Proposed special final (in US$)(d)...........         --          0.004         0.005         0.006             --            --

U.S. GAAP Operating revenues:
Oil and gas sales...............................     17,561         23,779        28,117        36,886         53,418         6,619
Marketing revenues..............................      2,537          2,377        12,399        18,191         15,901         1,970
Other income....................................        722            217           434           145            137            17
                                                   --------       --------      --------      --------       --------       -------
Total operating revenues........................     20,820         26,374        40,950        55,222         69,456         8,606
                                                   --------       --------      --------      --------       --------       -------
Net Income......................................      7,920          9,086        11,980        16,176         25,343         3,140

Net income per share (basic)(a)(b)..............       0.20           0.22          0.29          0.39           0.62          0.08
Net income per share (diluted)(a)(c)............       0.20           0.22          0.29          0.39           0.61          0.08


                                                                  7
<PAGE>

                                                                             Year ended December 31,
                                                   --------------------------------------------------------------------------------
                                                    2001(g)           2002          2003          2004           2005          2005
                                                   --------       --------      --------      --------       --------       -------
                                                        Rmb            Rmb           Rmb           Rmb            Rmb           US$
                                                   --------       --------      --------      --------       --------       -------

                                                                 (in millions, except per share and per ADS data)

Net income per ADS (basic)(a)(b)................      19.95          22.12         29.17         39.40          61.73          7.65
Net income per ADS (diluted)(a)(c)..............      19.95          22.13         29.14         39.28          61.06          7.57


                                                                             As of December 31,
                                                   --------------------------------------------------------------------------------
                                                    2001(g)            2002            2003            2004         2005       2005
                                                   --------        --------        --------        --------     --------    -------
                                                        Rmb             Rmb             Rmb             Rmb          Rmb        US$
                                                   --------        --------        --------        --------     --------    -------
                                                                      (in millions)
Balance Sheet Data:
Hong Kong GAAP                                                   (Restated)      (Restated)      (Restated)
Cash and cash equivalents.......................      6,394           7,839          14,400          14,092        8,992      1,114
Time deposits with maturities over three months.      2,050           4,690           2,323           8,603       12,200      1,512
Short term investments..........................      8,896           6,531           5,684           5,444       13,847      1,716
Current assets..................................     20,030          24,486          29,263          35,293       44,421      5,504
Property, plant and equipment, net..............     23,828      35,797 (f)      42,849 (f)      57,182 (f)       66,625      8,256
Investment in associates........................        462             537           1,118           1,327        1,402        174
Intangible assets...............................         --              --              --              --        1,300        161
Long term available-for-sale financial assets...         --              --              --              --        1,017        126
Total assets....................................     44,320      60,820 (f)      73,229 (f)      93,802 (f)      114,765     14,221
Current liabilities.............................      4,392           7,134           9,307          10,402       13,616      1,687
Long term bank loans, net of current portion....      3,256             941             890             865           24          3
Long term guaranteed notes .....................         --           4,071           8,142          16,313       16,532      2,049
Total long term liabilities.....................      6,617          13,393          17,461          26,957       27,546      3,413
Total liabilities...............................     11,009          20,527          26,768          37,359       41,162      5,100
Shareholders' equity............................     33,311  40,293 (e),(f)  46,461 (e),(f)  56,443 (e),(f)       73,603      9,120

U.S. GAAP
Total assets....................................     44,062          60,444          73,234          93,846      114,809     14,226
Total long term liabilities.....................      6,617          13,393          17,461          26,957       27,546      3,413
Shareholders' equity............................     33,053          40,344          46,496          56,487       73,647      9,126
</TABLE>

---------
(a)   On March 17, 2004, our shareholders approved a five-for-one stock split
      of our shares. The stock split was effected by dividing each of our
      issued and unissued shares of HK$0.10 each into five shares of HK$0.02
      each, and to increase the board lot size for trading on the Hong Kong
      Stock Exchange from 500 shares of HK$0.10 each to 1,000 subdivided
      shares of HK$0.02 each. The ratio of our ADSs listed on the New York
      Stock Exchange also changed such that each ADS now represents 100
      subdivided shares of HK$0.02 each, as opposed to 20 shares of HK$0.10
      each prior to the stock split. As such, per share amounts of our shares
      have been adjusted retroactively for the stock split.

(b)   Net income per share (basic) and net income per ADS (basic) for 2001
      have been computed, without considering the dilutive effect of the
      shares underlying our share option scheme, by dividing net income by the
      weighted average number of shares and the weighted average number of
      ADSs of 39,706,916,525 and 397,069,165 respectively (based on a ratio of
      100 shares to one ADS) for the period. Net income per share (basic) and
      net income per ADS (basic) for 2002 have been computed, without
      considering the dilutive effect of the shares underlying our share
      option scheme, by dividing net income by the weighted average number of
      shares and the weighted average number of ADSs of 41,070,828,275 and
      410,708,283 respectively (based on a ratio of 100 shares to one ADS) for
      the period. Net income per share (basic) and net income per ADS (basic)
      for 2003 have been computed, without considering the dilutive effect of
      the shares underlying our share option scheme, by dividing net income by
      the weighted average number of shares and the weighted average number of
      ADSs of 41,070,828,275 and 410,708,283 respectively (based on a ratio of
      100 shares to one ADS) for the period. Net income per share (basic) and
      net income per ADS (basic) for 2004 have been computed, without
      considering the dilutive effect of the shares underlying our share
      option scheme and convertible bonds, by dividing net income by the
      weighted average number of shares and the weighted average number of
      ADSs of 41,060,240,659 and 410,602,407 respectively (based on a ratio of
      100 shares to one ADS) for the period. Net income per share (basic) and
      net income per ADS (basic) for 2005 have been computed, without
      considering the dilutive effect of the shares underlying our share
      option scheme and convertible bonds, by dividing net income by the
      weighted average number of shares and the weighted average number of
      ADSs of 41,054,499,982 and 410,545,000 respectively (based on a ratio of
      100 shares to one ADS) for the period.

(c)   Net income per share (diluted) and net income per ADS (diluted) for 2001
      have been computed, after considering the dilutive effect of the shares
      underlying our share option scheme, using 39,711,444,015 and 397,114,440
      respectively. Net income per share (diluted) and net income per ADS
      (diluted) for 2002 have been computed, after considering the dilutive
      effect of the shares underlying our share option scheme, using
      41,096,426,920 and 410,964,269 respectively. Net income per share
      (diluted) and net income per ADS (diluted) for 2003 have been computed,
      after considering the dilutive effect of the shares underlying our share
      option scheme, by using 41,110,339,095 and 411,103,391 respectively. Net
      income per share (diluted) and net income per ADS (diluted) for 2004
      have been computed, after considering the dilutive effect of the shares
      underlying our share option scheme and convertible bonds, by using
      41,179,513,436 and 411,795,134 respectively. Net income per share
      (diluted) and net income per ADS (diluted) for 2005 have been computed,
      after considering the dilutive effect of the shares underlying our share
      option scheme and convertible bonds, by using 42,386,055,766 and
      423,860,558 respectively.

(d)   The proposed final dividend and special final dividend for 2003 were
      cancelled and replaced by the special interim dividend of HK0.06 per
      share declared and paid in 2004.

(e)   In periods prior to 2005, no recognition and measurement of share-based
      transactions in which employees (including directors) were granted share
      options in our company were required until such options were exercised
      by the employees, at which time the share capital and share premium were
      credited with the proceeds received. In 2005, we have adopted the
      provisions of Hong Kong Financial Reporting Standard ("HKFRS")
      retrospectively to all stock options granted from the date of our
      incorporation. Under HKFRS 2, when employees (including directors)
      render services as consideration for equity transactions
      ("equity-settled transaction"), the cost of equity-settled transaction
      is measured by reference to the fair value on the date on which the
      instrument is granted.


                                      8
<PAGE>


(f)   Certain prior year amounts have been restated upon adoption of new Hong
      Kong accounting policies, details of which are included in note 2.2 to
      our financial statements (under HK GAAP). In prior periods, we
      classified the on-shore processing plants as land and buildings and
      depreciated over 30-50 years on a straight-line basis. Upon the adoption
      of HKAS 16, we have retrospectively reclassified our property, plant and
      equipment into two categories: oil and gas properties, and vehicles and
      office equipment. We have reclassified the onshore terminals previously
      classified as land and buildings to oil and gas properties as they will
      be used in similar operations and are expected to have similar economic
      useful lives. We have also changed our accounting policy retrospectively
      for 2002, 2003 and 2004 to state the onshore terminals at cost instead
      of valuation and to amortize those terminals by the unit-of-production
      method on a property-by-property basis.

(g)   The 2001 selected consolidated income statement data and consolidated
      balance sheet data were audited by Arthur Anderson & Co., which
      voluntarily relinquished its license to practice public accounting in
      2002. Our current auditors, Ernst & Young, have not reaudited the
      financial statements of 2001. As such, no restatement was made for 2001
      as the impacts on the consolidated financial statements are considered
      not material.

<TABLE>
<CAPTION>

                                                                             Year ended December 31,
                                                   --------------------------------------------------------------------------------
                                                    2001(g)           2002          2003          2004           2005          2005
                                                   --------       --------      --------      --------       --------       -------
                                                        Rmb            Rmb           Rmb           Rmb            Rmb           US$
                                                   --------       --------      --------      --------       --------       -------
Other Financial Data:
Hong Kong GAAP
<S>                                                <C>             <C>           <C>          <C>            <C>            <C>
Capital expenditures paid........................     4,343           6,833        8,272        12,843         16,606         2,058
Cash provided by (used for):
      Operating activities.......................    11,759          14,742       17,819        22,328         32,154         3,984
      Investing activities.......................  (11,366)        (11,724)      (9,513)      (24,607)       (29,349)       (3,637)
      Financing activities.......................     3,204         (1,573)      (1,745)         1,970        (7,786)         (965)
Ratio of total debt to total
  capitalization(1)..............................     12.3%           11.6%        16.2%         23.3%          19.1%        19.1 %

U.S. GAAP
Cash provided by (used for):
      Operating activities.......................    11,759          14,742       17,819        22,328         32,154         3,984
      Investing activities.......................  (11,366)        (11,724)      (9,513)      (24,607)       (29,349)       (3,637)
      Financing activities.......................     3,204         (1,573)      (1,745)         1,970        (7,786)         (965)
Ratio of cash provided by operating
   activities  to gross interest expense(2)......     37.2x           36.4x        35.1x         39.4x          41.5x         41.5x

Ratio of total debt to cash provided by
operating activities.............................      0.4x            0.4x         0.5x          0.8x           0.5x          0.5x
Net income.......................................     7,920           9,086       11,980        16,176         25,343         3,140
Net income margin(3).............................     38.0%           34.5%        29.3%         29.3%          36.5%         36.5%
Ratio of net income to gross interest expense(2).     25.1x           22.4x        23.6x         28.5x          32.7x         32.7x
Ratio of total debt to net income................      0.6x            0.6x         0.8x          1.1x           0.7x          0.7x
Ratio of total debt to total capitalization(1)...     12.4%           11.8%        16.3%         23.4%          19.1%         19.1%
</TABLE>
--------------
(1)   Total capitalization excludes current portion of long-term debt.

(2)   Gross interest expense includes capitalized interest.

(3)   Net income margin represents net income as a percentage of our total
      operating revenues, as computed under U.S. GAAP.

      We publish our financial statements in Renminbi. Unless otherwise
indicated, all translations from Renminbi to U.S. dollars have been made at a
rate of Rmb 8.0702 to US$1.00, the noon buying rate as certified for customs
purposes by the Federal Reserve Bank of New York on December 30, 2005. We do
not represent that Renminbi or U.S. dollar amounts could be converted into
U.S. dollars or Renminbi, as the case may be, at any particular rate, the rate
below or at all.

      The following table sets forth the noon buying rates for U.S. dollars in
New York City for cable transfers in Renminbi as certified for customs
purposes by the Federal Reserve Bank of New York for the periods indicated:

                                             Noon Buying Rate
                                ------------------------------------------------
Period                             End    Average(1)          High           Low
                                ------        ------        ------        ------
                                            (Rmb per US$1.00)
2001........................    8.2766        8.2772        8.2786        8.2676
2002........................    8.2800        8.2772        8.2800        8.2669
2003........................    8.2767        8.2771        8.2800        8.2765
2004........................    8.2765        8.2768        8.2774        8.2764
2005........................    8.0702        8.1998        8.2765        8.0702
December 2005...............    8.0702            --        8.0808        8.0702
January 2006................    8.0608            --        8.0702        8.0596
February 2006...............    8.0415            --        8.0616        8.0415


                                      9
<PAGE>


March 2006..................    8.0167            --        8.0505        8.0167
April 2006..................    8.0165            --        8.0248        8.0040
May 2006....................    8.0215            --        8.0300        8.0005

---------
(1)   Determined by averaging the noon buying rates on the last business day
      of each month during the relevant period.

      As of June 6, 2006, the noon buying rate for cable transfers in Renminbi
as certified for customs purposes by the Federal Reserve Bank of New York was
Rmb 8.0120 to US$1.00.

      The Hong Kong dollar is freely convertible into the U.S. dollar. Since
1983, the Hong Kong dollar has been linked to the U.S. dollar. The Hong Kong
government has also stated that it has no intention of imposing exchange
controls in Hong Kong and that the Hong Kong dollar will remain freely
convertible into other currencies, including the U.S. dollar. However, we
cannot assure that the Hong Kong government will maintain the link at HK$7.80
to US$1.00 or at all.

      The following table sets forth the noon buying rates for U.S. dollars in
New York City for cable transfers in Hong Kong dollars as certified for
customs purposes by the Federal Reserve Bank of New York for the periods
indicated.

                                             Noon Buying Rate
                                ------------------------------------------------
Period                             End    Average(1)          High           Low
                                ------        ------        ------        ------
                                                 (HK$ per US$1.00)
2001........................    7.7980        7.7996        7.8004        7.7970
2002........................    7.7988        7.7996        7.8095        7.7970
2003........................    7.7640        7.7864        7.8001        7.7285
2004........................    7.7723        7.7891        7.8010        7.7632
2005........................    7.7533        7.7755        7.7999        7.7514
December 2005...............    7.7533            --        7.7548        7.7514
January 2006................    7.7561            --        7.7571        7.7506
February 2006...............    7.7584            --        7.7618        7.7564
March 2006..................    7.7597            --        7.7620        7.7570
April 2006..................    7.7529            --        7.7598        7.7529
May 2006....................    7.7567            --        7.7575        7.7510

---------
(1)   Determined by averaging the noon buying rates on the last business day
      of each month during the relevant period.

      As of June 6, 2006, the noon buying rate for cable transfers in Hong
Kong dollars as certified for customs purposes by the Federal Reserve Bank of
New York was HK$7.7596 to US$1.00.

B.    CAPITALIZATION AND INDEBTEDNESS

      Not applicable.

C.    REASONS FOR THE OFFER AND USE OF PROCEEDS

      Not applicable.

D.    RISK FACTORS

Risks relating to our business

      Our business, revenues and profits fluctuate with changes in oil and gas
prices

      Even relatively modest declines in crude oil prices may adversely affect
our business, revenues and profits. Our profitability is determined in large
part by the difference between the prices received for the crude oil we
produce and the costs of exploring for, developing, producing and selling
these products.


                                      10
<PAGE>


      Prices for crude oil fluctuate widely in response to relatively minor
changes in the supply and demand for oil, market uncertainty and various other
factors that are beyond our control, including:

      o     political developments in petroleum producing regions;

      o     the ability of the Organization of Petroleum Exporting Countries
            and other petroleum producing nations to set and maintain
            production levels and prices;

      o     the price and availability of other energy sources, such as coal;

      o     domestic and foreign government regulations;

      o     weather conditions; and

      o     overall economic conditions.

      Our revenues and net income have increased significantly in the past
five years, mainly due to increasing oil prices. However, we can not assure
that oil price will remain high in the future. In 2005, oil prices for West
Texas Intermediate, the international benchmark for crude oil, rose 44.9% from
US$42.13 per barrel on January 3, 2005 to US$61.04 per barrel on December 30,
2005. The conflict and turmoil in the Middle East in the past three years
raised concerns about the security and availability of ample supplies to meet
growing global demand. West Texas Intermediate reached a high in 2005 of
US$69.82 per barrel on August 30, 2005 and was US$72.50 per barrel on June 6,
2006. For a description of oil prices in recent years, see "Item
4--Information on the Company--Business Overview--Sales and Marketing--Sales
of Offshore Crude Oil--Pricing" in this annual report. Any future declines in
oil and gas prices would adversely affect our revenues and net income.

      The prices for the natural gas we sell are determined by negotiations
between us and the prospective buyers. Our typical contracts with gas buyers
include provisions for periodic resets and adjustment formulas that depend on
a basket of crude oil prices and inflation as well as various other factors.
These resets and adjustment formulas can result in natural gas price
fluctuations which may adversely affect our business, results of operations
and financial condition.

      Lower oil and gas prices may result in the write-off of higher cost
reserves and other assets and may lower our earnings or cause losses. Lower
oil and natural gas prices may also reduce the amount of oil and natural gas
we can produce economically and render existing contracts that we have entered
into uneconomical. For further details regarding the effects of oil and gas
price fluctuations on our financial condition and results of operations, see
"Item 5--Operating and Financial Review and Prospects."

      The oil and gas reserve estimates in this annual report may require
substantial revision as a result of future drilling, testing and production

      The reliability of reserves estimates depends on a number of factors,
including:

      o     the quality and quantity of technical and economic data;

      o     the prevailing oil and gas prices for our production;

      o     the production performance of reservoirs;

      o     extensive engineering judgments; and

      o     royalty and share oil policies in the PRC and foreign countries
            and regions where we have operations or assets.

      Many of the factors, assumptions and variables involved in estimating
reserves are beyond our control and may prove to be incorrect over time.
Consequently, the results of drilling, testing and


                                      11
<PAGE>


production may require substantial upward or downward revisions in our initial
reserves data. For more information on our oil and gas reserves data, see
"Item 4--Information on the Company--Business Overview--Oil and Natural Gas
Reserves."

      Any failure to develop our proved undeveloped reserves and gain access
to additional reserves could impair our ability to achieve certain growth
objectives

      Our ability to achieve certain growth objectives depends upon our
success in finding and acquiring or gaining access to additional reserves.
Future drilling, exploration and acquisition activities may not be successful.
If our exploration and development activities or acquisition of properties
containing proved reserves are unsuccessful, our total proved reserves will
decline.

      Approximately 50.9% of our proved reserves were undeveloped as of
December 31, 2005. Our future success will depend on our ability to develop
these reserves in a timely and cost-effective manner. There are various risks
in developing reserves, including construction, operational, geophysical,
geological and regulatory risks.

      Our future prospects largely depend on our capital expenditure plans,
which are subject to various risks

      The oil and gas exploration and production business is capital
intensive. We currently plan to spend US$2,233.2 million to develop our oil
and gas properties and US$457.8 million for exploration in 2006. In addition
to these amounts, we may make additional capital expenditures and investments
to implement our business strategy.

      The ability to maintain and increase our revenues, net income and cash
flows depends upon continued capital spending. We adjust our capital
expenditure and investment budget each year. Our capital expenditure plans are
subject to a number of contingencies, some of which are beyond our control.
These variables include:

      o     our ability to generate sufficient cash flows from operations to
            finance our capital expenditures, investments and other
            requirements;

      o     the availability and terms of external financing;

      o     changes in crude oil and natural gas prices, which may affect cash
            flows from operations and capital expenditure and investment
            plans;

      o     the mix of exploration and development activities conducted on an
            independent basis and under production sharing contracts;

      o     new investment opportunities that may be presented to us,
            including international investment opportunities and liquefied and
            other natural gas projects;

      o     approvals required from foreign governments for certain capital
            expenditures and investments outside the PRC;

      o     our ability to obtain sufficient foreign currency to finance our
            capital expenditures; and

      o     economic, political and other conditions in the PRC and in foreign
            countries and regions where we have operations.

      Therefore, our actual capital expenditures and investments in the future
may differ significantly from our current planned amounts. There can be no
assurance that we will be able to execute our capital expenditure program on
schedule or as planned.


                                      12
<PAGE>


      Any failure to implement our natural gas business strategy may adversely
affect our business and financial position

      As part of our business strategy and to meet increasing market demand in
China, we continue to expand our natural gas business. This strategy involves
a number of risks and uncertainties including the following:

      o     we have limited experience in investing in liquefied natural gas
            facilities, gas transmission and distribution systems, and
            overseas upstream natural gas properties;

      o     any additional capital expenditures that are necessary to
            implement our natural gas strategy could divert resources from our
            core oil and gas exploration and production business and require
            us to seek additional financing;

      o     our new natural gas operations may face additional competition
            from a number of international and PRC companies. In particular,
            PetroChina Company Limited, or PetroChina, has constructed natural
            gas pipelines to link its natural gas fields located in the
            western part of China to the eastern coastal regions;

      o     our new natural gas activities may subject us to additional
            government regulation in China and foreign countries and regions;

      o     our overseas natural gas businesses are subject to economic and
            political risks in the relevant countries and regions. See "--We
            are exposed to operating risks in some foreign countries and
            regions as a result of our acquisition of oil and gas interests
            located in these regions;"

      o     we do not have the same preferential rights or access to natural
            gas businesses or overseas natural gas investments that we enjoy
            with respect to our upstream natural gas business offshore China;
            and

      o     we are evaluating the options to invest in CNOOC's liquefied
            natural gas projects in China. However, we have not decided
            whether to exercise these options. The options are subject to
            various conditions, including the receipt of certain governmental
            approvals.

      Due to the above factors or other reasons, we may fail to implement our
natural gas strategy successfully.

      The infrastructure and demand for natural gas in the PRC may proceed at
a slower pace than our planned increase in production

      Our proposed expansion of natural gas production in China is currently
constrained by a lack of natural gas transmission and supply infrastructure
and an underdeveloped natural gas market. Construction of transmission and
supply pipelines and other infrastructure depends on many factors, many of
which are beyond our control, such as funding, costs of land acquisition,
national and local government approvals, and timely completion of
construction. Development of the natural gas market depends on the
establishment of long-term natural gas supply contracts with natural gas
utilities or large end-users, such as power and chemical plants. The demand of
these buyers for natural gas could be affected by a number of regulatory and
market factors, such as regulation of coal prices, government power and
utility policies, chemical commodity cycles, electricity pricing and demand,
and environmental policies.

      CNOOC largely controls us and we regularly enter into related party
transactions with CNOOC and its affiliates

      CNOOC indirectly owned 66.41% of our shares as of June 6, 2006. As a
result, CNOOC is able to control the composition of our board of directors,
determine the timing and amount of our dividend payments and otherwise control
us. Although CNOOC is required to comply with provisions in the Hong


                                      13
<PAGE>


Kong Stock Exchange Listing Rules relating to protection for minority
shareholders, there can be no assurance that CNOOC will act in a manner that
benefits all of our shareholders. If CNOOC takes actions that favor its
interests over ours, our results of operations and financial position may be
adversely affected. We regularly enter into transactions with CNOOC and its
affiliates, including China Oilfield Services Limited and Offshore Oil
Engineering Company Limited. For the year ended December 31, 2005, sales to
CNOOC and its affiliates accounted for 38.3% of our total revenues. For
further details, see "Item 7--Major Shareholders and Related Party
Transactions." Our transactions with CNOOC and its affiliates constitute
connected transactions under the Hong Kong Stock Exchange Listing Rules.
However, We must obtain the prior approval of the Hong Kong Stock Exchange to
engage in some of these transactions and may also be required to obtain the
prior approval of our independent directors and our independent shareholders.
If we do not obtain these approvals, we may not be allowed to execute these
transactions and our business operations and financial condition could be
adversely affected.

      Under current PRC law, CNOOC has the exclusive right to enter into
production sharing contracts with foreign oil and gas companies for petroleum
exploration and production offshore China. CNOOC has undertaken to us that it
will transfer all of its rights and obligations under any new production
sharing contracts to us, except those relating to its administrative
functions. PRC law restricts us from contracting directly with foreign
enterprises for these purposes without CNOOC. The interests of CNOOC in
entering into production sharing contracts with international oil and gas
companies may differ from our interests, especially with respect to the
criteria for determining whether, and on what terms, to enter into production
sharing contracts. Our future business development may be adversely affected
if CNOOC does not enter into new production sharing contracts on terms that
are acceptable to us.

      Our business performance relies heavily on our sales to several major
customers and a substantial drop in sales to any of these customers could have
a material adverse effect on our results of operations

      We sell a significant proportion of our production to CNOOC and its
affiliates and China Petroleum & Chemical Corporation, or Sinopec. For the
years ended December 31, 2003, 2004 and 2005, sales to CNOOC and its
affiliates accounted for 20.3%, 25.3% and 38.3%, respectively, of our total
operating revenues, while sales to Sinopec accounted for 17.0%, 19.3% and
22.5%, respectively, of our total operating revenues. CNOOC has a controlling
interest in us. However, our transactions with CNOOC and its affiliates are on
commercial terms and CNOOC does not guarantee our sales volume or profit
margin. Sinopec has its own oil and gas fields and has the right to import
crude oil directly from the international market. We do not have any long-term
sales contracts with CNOOC and its affiliates or Sinopec. Our business,
results of operations and financial condition would be adversely affected if
either CNOOC and its affiliates or Sinopec significantly reduces their crude
oil purchases from us and we cannot find another ready buyer in the
international market to purchase our crude oil at comparable prices.

      The PRC petroleum and natural gas industries are highly competitive and
our success depends on several factors

      We compete in the PRC and international markets for customers, capital
financing and business opportunities, including desirable oil and gas
prospects. The performance of our competitors may also affect the
international market price for comparable crude oil, which in turn would
likely affect the price of our crude oil. Our principal competitors in the PRC
market are PetroChina and Sinopec. For further details, see "Item
4--Information on the Company--Business Overview--Competition."

      We are the dominant player in the oil and gas industry offshore China.
Currently, we are the only company permitted to engage in oil and gas
exploration offshore China in cooperation with foreign oil and gas companies.
Any change to PRC law that allows new entrants to conduct oil and gas
exploration activities offshore China in cooperation with international oil
and gas companies could increase the competition for new oil and gas
properties offshore China.

      CNOOC has undertaken to us that so long as it retains a controlling
interest in us and our securities are listed on the Hong Kong Stock Exchange,
the New York Stock Exchange or other securities


                                      14
<PAGE>


trading systems in other parts of the world, we will have the exclusive right
to exercise CNOOC's rights to engage in offshore oil and gas exploration,
development, production and sales in the PRC and that it will not compete with
us in such business. However, CNOOC's controlling interest in us may not
continue in the future and CNOOC's undertaking may be subject to
interpretative challenges. See "Item 4--Information on the Company--History
and Development--Corporate Structure" and "Item 7--Major Shareholders and
Related Party Transactions."

      Exploration, development and production risks and natural disasters
affect our operations and could result in losses that are not covered by
insurance

      Our petroleum exploration, development and production operations are
subject to various risks, including pipeline ruptures and spills, fires,
explosions, encountering formations with abnormal pressures, blowouts,
cratering and natural disasters. Any of these risks could result in loss of
hydrocarbons, environmental pollution and other damage to our properties and
the properties of operators under production sharing contracts. In addition,
we face the risk that we may not discover any economically productive natural
gas or oil reservoirs. The costs of drilling, completing and operating wells
also are uncertain and are subject to numerous factors beyond our control,
including:

      o     weather conditions;

      o     natural disasters;

      o     availability of equipment and services;

      o     equipment shortages and delays; and

      o     lack of adequate transportation facilities.

      We maintain insurance coverage against some, but not all, potential
losses. We do not maintain business interruption insurance for all of our oil
and gas fields. We may suffer material losses resulting from uninsurable or
uninsured risks or insufficient insurance coverage.

      For further information on insurance coverage, see "Item 4--Information
on the Company--Business Overview--Operating Hazards and Uninsured Risks."

      Some foreign countries and regions in which we have operations or may
have operations in the future may not have diplomatic or trade relations with
other countries and may be subject to trade or economic sanctions imposed by
such other countries

      We currently have operations and assets in various foreign countries and
regions, including Indonesia, Australia, Canada, Morocco, Nigeria and Myanmar.
We may expand our operations into other countries to further enhance our
reserve base and diversify our geographic risk profile. While these countries
in which we have operations or may have operations in the future may maintain
an amicable relationship with China, some of them may not have diplomatic or
trade relations with other countries and may be subject to trade or economic
sanctions imposed from time to time by such other countries. We will endeavor
to limit our investment and scale of operations in these foreign jurisdictions
to minimize our exposure, but we cannot assure that the operations and assets
that we currently have or in the future may have in foreign countries and
regions will not be affected by trade or economic sanctions that may be
imposed by other countries due to their deteriorated relations with each
other. Our business and results of operations may be adversely affected if
such sanctions are imposed and result in interruption of our overseas
operations or non-accessibility of our overseas assets for a significant
period of time.

      We are exposed to operating risks in some foreign countries and regions
as a result of our acquisition of oil and gas interests located in these
regions

      We have acquired interests in oil and gas properties located in various
foreign countries and regions, including Indonesia, Australia, Canada,
Morocco, Nigeria and Myanmar. See "Item 4--


                                      15
<PAGE>


Information on the Company--Business Overview--Principal Oil and Gas
Regions--Overseas Activity," "--Natural Gas Business--Overseas Activity" and
"Item 5--Operating and Financial Review and Prospects--Operating
Results--Acquisitions and Overseas Activities." These interests are subject to
operating risks in their respective regions, including economic and political
risks.

      Our non-PRC interests are subject to the laws and regulations of these
non-PRC jurisdictions respectively, including those relating to the
development, production, marketing, pricing, transportation and storage of
crude oil and natural gas, taxation and environmental and safety matters. In
addition, our overseas operations generally are subject to production sharing
arrangements with production sharing partners. As we expand to different
countries, we may become exposed to various operating risks in each of these
jurisdictions. Our non-PRC interests may be adversely affected by changes in
governmental policies or social instability or other political, economic or
diplomatic developments in or affecting these foreign nations which are not
within our control including, among other things, a change in crude oil or
natural gas pricing policy, the risks of war and terrorism, expropriation,
nationalization, renegotiation or nullification of existing concessions and
contracts, taxation policies, foreign exchange and repatriation restrictions,
changing political conditions, foreign exchange rate fluctuations and currency
controls.

      We may not be able to obtain external financing that is acceptable to us
for business development purposes

      From time to time, we may need to procure external debt and equity
financing to implement our development plans and fund our other business
requirements.

      Our ability to obtain external financing is subject to various
uncertainties, including:

      o     our results of operations, financial condition and cash flows;

      o     the amount of capital that other PRC and Hong Kong entities may
            seek to raise in the international capital markets;

      o     economic, political and other conditions in the PRC and Hong Kong;

      o     the PRC government's policies relating to foreign currency
            borrowings; and

      o     conditions in the PRC, Hong Kong and international capital
            markets.

      If we are unable to obtain sufficient funding for our operations or
development plans, our business, revenues, net income and cash flows could be
adversely affected. For additional information on our capital expenditure
plans and financing requirements, see "Item 5--Operating and Financial Review
and Prospects--Liquidity and Capital Resources."

      Once we issue debt securities or otherwise incur indebtedness, we become
subject to risks that impact the underlying principal of such indebtedness.
While all our current debt securities are rated investment grade by rating
agencies, we cannot assure that such ratings will not change due to internal
or external factors. These factors may be beyond our control. Even if there is
no default or event of default on our part, a market perception of an
increased likelihood of a default may have a material adverse effect on our
outstanding indebtedness as well as on our business operations.

      You may not be able to assert claims against Arthur Andersen, our
independent public accountants for periods prior to 2002, nor may you be able
to assert claims against our current independent public accountants for
financial statements previously audited by Arthur Andersen

      On June 6, 2002, we terminated the engagement of Arthur Andersen & Co as
our independent public accountants. Prior to that date, Arthur Andersen had
audited our financial statements. Our selected historical financial data for
the year ended, and as of, December 31, 2001 set forth in "Item 3--Key
Information--Selected Financial Data" were based on our financial statements
audited by Arthur Andersen. On June 15, 2002, Arthur Andersen was convicted of
federal obstruction of justice charges in


                                      16
<PAGE>


connection with the U.S. government's investigation of Enron Corporation. On
August 31, 2002, Arthur Andersen voluntarily relinquished its licenses to
practice public accountancy in all states of the United States, thereby
effectively ceasing to exist as a global accounting firm. Accordingly, it may
be difficult or impossible for you to assert any claims against, or recover
any damages from, Arthur Andersen, in respect of this annual report, including
in respect of the financial statements previously audited by Arthur Andersen.
Moreover, our current independent public accountants, Ernst & Young, have not
reaudited the financial statements previously audited by Arthur Andersen.
Therefore, it is highly unlikely that you will be able to assert claims
against, or recover any damages from, Ernst & Young, in respect of the
financial statements that were previously audited by Arthur Andersen.

Risks relating to the PRC petroleum industry

      A change in PRC petroleum industry regulations could have an adverse
effect on our operations

      The PRC government exercises control over the PRC petroleum industry,
including with respect to licensing, exploration, production, distribution,
pricing, taxation, imports and exports and allocation of various resources. In
the past, we have benefited from various favorable PRC government policies,
laws and regulations that have been enacted to encourage the development of
the offshore petroleum industry. See "Item 4--Information on the
Company--Regulatory Framework--Special Policies Applicable to the Offshore
Petroleum Industry in China." We cannot assure that the legal regime affecting
our businesses will remain substantially unchanged or that we will continue to
benefit from favorable PRC government policies.

      In addition, existing PRC regulations require us to apply for and obtain
various PRC government licenses and other approvals, including in some cases
approvals for amendments and extensions of existing licenses and approvals, to
conduct exploration and development activities offshore China. If we are
unable to obtain any necessary approvals, our reserves and production would be
adversely affected. See "Item 4--Information on the Company--Regulatory
Framework."

      Increasing competition from foreign companies as a result of China's
entry into the World Trade Organization may adversely affect our business

      Effective December 11, 2001, the PRC became a member of the World Trade
Organization, or WTO. China's WTO commitments require it, within five years
from the date of China's accession to the WTO, to lift restrictions that
prohibit foreign companies from directly selling crude and processed oil in
China. The sale of natural and liquefied petroleum gas is not specifically
dealt with under China's market-access commitments relating to distribution
services (as is the case with crude and processed oil). On April 6, 2004, the
PRC Ministry of Commerce promulgated the Measures for the Administration on
Foreign Investment in Commercial Fields, which generally allow foreign
companies, through foreign-invested enterprises, to engage in retail and
wholesale businesses other than those subject to special administration by the
PRC government such as direct sale of crude and processed oil in China. The
lifting of the restrictions on distribution of natural liquefied petroleum gas
and the subsequent lifting of the restrictions on distribution of crude and
processed oil in accordance with China's WTO commitments may increase
competition and may adversely affect our business.

      We may be penalized if we fail to comply with existing or future
environmental laws and regulations

      Our business is subject to environmental protection laws and regulations
in the PRC, as well as other jurisdictions, which, among other things:

      o     impose fees for the discharge of waste substances;

      o     require the payment of fines and damages for serious environmental
            pollution; and


                                      17
<PAGE>


      o     provide that the government may, at its discretion, close or
            suspend any facility which fails to comply with orders requiring
            it to cease or cure operations causing environmental damage.

      We believe that all of our facilities and operations are in material
compliance with the requirements of the relevant environmental protection laws
and regulations. However, amendment of existing laws or regulations may impose
additional or more stringent requirements. In addition, our compliance with
such laws or regulations may require us to incur significant capital
expenditures or other obligations or liabilities, which could create a
substantial financial burden on us. For a further discussion of the
environmental regulations, particularly those in the PRC, see "Item
4--Information on the Company--Business Overview--Environmental Regulation."

Risks relating to the PRC

      PRC economic and political conditions may adversely affect our
operations

      Most of our businesses, assets and operations are located in the PRC.
The economic system of the PRC differs from the economies of most developed
countries in many respects, including:

      o     government investment;

      o     level of development;

      o     control of capital investment;

      o     control of foreign exchange; and

      o     allocation of resources.

      The economy of the PRC has been undergoing a transformation from a
planned economy to a market-oriented economy. In recent years the PRC
government has implemented economic reform measures emphasizing
decentralization, utilization of market forces in the development of the PRC
economy and a higher level of management autonomy. These economic reform
measures have and will continue to subject our businesses to some uncertainty.
In the future, our operating results could be adversely affected by changes to
the laws and regulations that govern our industry and changes in the PRC
political and economic systems.

      The PRC economy has experienced significant growth since 1978, but the
growth has been uneven both geographically and among various sectors of the
economy. The PRC government has implemented various policies from time to time
to restrain the rate of such economic growth, control inflation and otherwise
regulate economic expansion. In addition, the PRC government has attempted to
control inflation by controlling the prices of basic commodities. Severe
measures or other actions by the PRC government, such as placing additional
controls on prices of petroleum and petroleum products, could restrict our
business operations and adversely affect our financial position.

      Government control of currency conversion and future movements in
exchange rates may adversely affect our operations and financial condition

      A portion of our Renminbi revenue may need to be converted into other
currencies by our wholly owned principal operating subsidiary in the PRC to
meet our foreign currency obligations. We have substantial requirements for
foreign currency, including:

      o     debt service on foreign currency denominated debt;

      o     overseas acquisitions of oil and gas properties;

      o     purchases of imported equipment; and


                                      18
<PAGE>


      o     payment of dividends declared in respect of shares held by
            international investors.

      Our wholly owned subsidiary in the PRC may undertake current account
foreign exchange transactions without prior approval from the State
Administration for Foreign Exchange. It has access to current account foreign
exchange so long as it can produce commercial documents evidencing such
transactions and provided that they are processed through certain banks in
China. Foreign exchange transactions under the capital account, including
principal payments with respect to foreign currency denominated obligations,
will be subject to the registration requirements of the State Administration
for Foreign Exchange.

      The value of the Renminbi against Hong Kong dollar, U.S. dollar and
other currencies fluctuates and is affected by, among other things, changes in
China's political and economic conditions. Since 1994, the conversion of
Renminbi into foreign currencies, including Hong Kong and U.S. dollars, has
been based on rates set by the People's Bank of China. The official exchange
rate for the conversion of Renminbi into U.S. dollar has generally been stable
during the past 10 years. On July 21, 2005, China reformed its foreign
exchange regime by moving into a managed floating exchange rate system based
on market supply and demand with reference to a basket of currencies. Renminbi
would no longer be pegged to the U.S. dollar. From that day to December 31,
2005, Renminbi appreciated about 2.5% against the U.S. dollar. Changes in the
PRC government's currency policies may lead to further fluctuations in the
exchange rates for the conversion of Renminbi into foreign currencies which
could have an uncertain effect on our business and operating results.

      For further information on foreign exchange risks, foreign exchange
rates and hedging activities, see "Item 3--Key Information--Selected Financial
Data" and "Item 11--Qualitative and Quantitative Disclosure about Market
Risk." However, we may be unable to hedge our exposure to foreign currencies
fully and future Renminbi exchange rate movements could adversely affect our
results of operations and financial condition. Since we receive substantially
all of our revenues and express our profits in Renminbi, any devaluation of
the Renminbi may also materially and adversely affect the value of, and any
dividends payable on our shares and American depositary shares in foreign
currency terms.

      Certain legal restrictions on dividend distribution may have a material
adverse effect on our cash flows

      We are a holding company. Our exploration, development, production and
sales businesses are owned and conducted through various wholly owned
subsidiaries, including CNOOC China Limited, our wholly foreign-owned
enterprise in the PRC. Accordingly, our future cash flows will consist
principally of dividends from our subsidiaries. The subsidiaries' ability to
pay dividends to us is subject to PRC regulations, including restriction that
companies may pay dividends only out of net income determined in accordance
with PRC accounting standards and regulations. In addition, under PRC laws,
CNOOC China Limited is required to allocate at least 10% of its net profit to
a reserve fund until the balance of the fund has reached 50% of its registered
capital. Such reserve is not distributable as cash dividends. Therefore, there
is a risk that we could not maintain sufficient cash flows due to these
restrictions on dividend distribution.

      The interpretation and enforcement of PRC laws and regulations is
subject to some uncertainty

      The PRC legal system is based on statutory law. Under this system, prior
court decisions may be referred to but are not binding. Since 1979, the PRC
government has been developing a comprehensive system of commercial laws and
considerable progress has been made in the promulgation of laws and
regulations dealing with economic matters, such as corporate organization and
governance, foreign investments, commerce, taxation and trade. Because these
laws, regulations and legal requirements are relatively new, and because of
the limited volume of published cases and judicial interpretations and the
non-binding nature of prior court decisions, the interpretation and
enforcement of these laws, regulations and legal requirements involve some
uncertainty.

      The PRC government underwent substantial reforms after the National
People's Congress meeting in March 2003. The PRC government has reiterated its
policy of furthering reforms in the


                                      19
<PAGE>


socialist market economy. No assurance can be given that these changes will
not have an adverse effect on business conditions in China generally or on our
business in particular.

Risks relating to our ADSs and shares

      Additional shares or ADSs eligible for public sale could adversely
affect the price of our shares or ADSs

      Sales, or the real or perceived possibility of sales, of a significant
number of additional shares in the public market could adversely affect
prevailing market prices for our shares and ADSs. As of June 6, 2006, CNOOC,
through its wholly owned subsidiaries, CNOOC (BVI) Limited and Overseas Oil &
Gas Corporation Ltd., held approximately 66.41% of our shares and the rest of
our shares were held by public investors, including institutional and
corporate investors. We cannot predict the effect, if any, that sales of our
shares, including sales of large positions held by institutional and corporate
investors, or the availability of our shares for future sale, will have on the
market price of our shares or ADSs.

                      ITEM 4. INFORMATION ON THE COMPANY

A.    HISTORY AND DEVELOPMENT

      Our legal and commercial name is CNOOC Limited. We were incorporated
with limited liability on August 20, 1999 in Hong Kong under the Companies
Ordinance of Hong Kong. Our business registration number in Hong Kong is
685974. Under the third section of our Memorandum of Association, we may do
anything which we are permitted to do by any enactment or rule of law. Our
head office is located at 65th Floor, Bank of China Tower, One Garden Road,
Central, Hong Kong, and our telephone number is 852-2213-2500. We have
appointed CT Corporation System, 111 Eighth Avenue, New York, New York 10011,
as our agent for service of process.

      The PRC government established CNOOC, our controlling shareholder, as
the state-owned offshore petroleum company of China in 1982 under the
Regulation of the People's Republic of China on Exploitation of Offshore
Petroleum Resources in Cooperation with Foreign Enterprises, whereby CNOOC
assumed overall responsibility for the administration and development of PRC
offshore petroleum operations with foreign oil and gas companies. Prior to
March 2003, CNOOC was regulated and supervised by the State Economic and Trade
Commission. Since March 2003, the PRC government has undergone substantial
reform. The National Development and Reform Commission has succeeded the State
Economic and Trade Commission as the primary coordinator for the petroleum
industry.

      Prior to CNOOC's internal business reorganization in 1999, CNOOC and its
various affiliates performed both commercial and administrative functions
relating to petroleum exploration and development offshore China, including:

      o     exercising the exclusive right to cooperate with foreign partners
            in offshore petroleum exploration, development, production and
            sales activities, and taking participating interests in production
            sharing contracts;

      o     organizing international bidding for offshore petroleum
            exploitation;

      o     conducting independent exploration, development, production and
            sales activities in independently operated oil and gas fields
            offshore China;

      o     awarding projects to and signing bilateral contracts with foreign
            partners for offshore petroleum exploitation;

      o     reviewing and confirming appraisal reports and overall development
            plans required under production sharing contracts; and


                                      20
<PAGE>


      o     obtaining from the PRC government all approvals, permits,
            licenses, consents and special policies necessary under production
            sharing contracts.

Reorganization

      Pursuant to CNOOC's internal business reorganization in 1999, CNOOC
transferred all of its then and current operational and commercial interests
in its offshore petroleum business to us. As a result, we and our subsidiaries
are the only vehicle through which CNOOC engages in petroleum exploration,
development, production and sales activities both within and outside China.

      The assets and liabilities primarily relating to the offshore petroleum
business that were transferred to us in the reorganization included:

      o     37 production sharing contracts and one geophysical survey
            agreement;

      o     8 independent development and production projects;

      o     a 30% interest in Shanghai Petroleum and Natural Gas Company
            Limited;

      o     the land use rights to terminal facilities in Nanhai, Weizhou and
            the western part of the Bohai Bay; and

      o     loans from, and swap agreements with, various PRC and foreign
            banks.

      In addition, CNOOC transferred 917 employees to us to facilitate the
transfer of the oil and natural gas businesses previously operated by CNOOC.

      CNOOC retained its commercial interests in operations and projects not
related to oil and gas exploration and production, including:

      o     a petrochemical project in Huizhou, Guangdong Province;

      o     a fertilizer plant in Hainan Province; and

      o     a liquefied natural gas project in Guangdong Province.

      CNOOC also retained all of its administrative functions, which it
performed prior to the reorganization, including:

      o     organizing international bidding for offshore petroleum
            exploitation;

      o     awarding projects to and signing bilateral contracts with foreign
            partners for offshore petroleum exploitation;

      o     approving any extension of the period for the completion of the
            appraisal work on petroleum discovery under the production sharing
            contracts; and

      o     submitting the overall development plans, reports of the oil and
            gas fields and the environmental impact statements related to the
            production sharing contracts to the PRC governmental authorities.

Undertakings

      CNOOC has undertaken to us that:


                                      21
<PAGE>


      o     we will enjoy the exclusive right to exercise all of CNOOC's
            commercial and operational rights under the PRC laws and
            regulations relating to the exploration, development, production
            and sales of oil and natural gas offshore China;

      o     it will transfer to us all of CNOOC's rights and obligations under
            any new production sharing contracts and geophysical exploration
            operations, except those relating to CNOOC's administrative
            functions;

      o     it will not engage or be interested, directly or indirectly, in
            oil and natural gas exploration, development, production and sales
            in or outside the PRC;

      o     we will be able to participate jointly with CNOOC in negotiating
            new production sharing contracts and to set out our views to CNOOC
            on the proposed terms of new production sharing contracts;

      o     we will have unlimited and unrestricted access to all data,
            records, samples and other original data owned by CNOOC relating
            to oil and natural gas resources;

      o     we will have an option to make investment in liquefied natural gas
            projects that CNOOC invested or proposed to invest, and CNOOC will
            at its own expense help us to procure all necessary government
            approvals needed for our participation in these projects; and

      o     we will have an option to participate in other businesses related
            to natural gas in which CNOOC invested or proposed to invest, and
            CNOOC will procure all necessary government approvals needed for
            our participation in such business.

The undertakings from CNOOC will cease to have any effect:

      o     if we become a wholly owned subsidiary of CNOOC;

      o     if our securities cease to be listed on any stock exchange or
            automated trading system; or

      o     12 months after CNOOC or any other PRC government-controlled
            entity ceases to be our controlling shareholder.

Organizational Structure

      CNOOC indirectly owned or controlled an aggregate of approximately
66.41% of our shares as of June 6, 2006. There have been no changes to our
corporate structure since such date. Accordingly, CNOOC continues to be able
to exercise all the rights of a controlling shareholder, including electing
our directors and voting to amend our articles of association. Although CNOOC
has retained a controlling interest in us, the management of our business will
be our directors' responsibility.

      The following chart sets forth our controlling entities and our
principal subsidiaries as of June 6, 2006.


                                      22
<PAGE>


<TABLE>
<CAPTION>

  <S>       <C>                <C>                <C>             <C>                           <C>

                                                  --------------------------
                                                    China National Offshore
                                                        Oil Corporation
                                                             (PRC)
                                                  --------------------------
                                                              |
                                                              |  100%
                                                              |
                                                  --------------------------
                                                      Overseas Oil & Gas
                                                      Corporation, Ltd(1)
                                                           (Bermuda)
                                                  --------------------------
                                                              |
                                                              |  100%
                                                              |
                                                  --------------------------
                                                      CNOOC (BVI) Limited
                                                    (British Virgin Islands)

                                                  --------------------------
            --------------------------                       |
             Public Shareholders and                         |
               Corporate Investors    \                      |    66.41%
                                        \  33.59%            |
            --------------------------    \                  |
                                            \     --------------------------
                                              \         CNOOC Limited
                                                \        (Hong Kong)

                                                  --------------------------
                                                             |
                                                             |
                                                             |
              ----------------------------------------------------------------------------------------------
              |                            |                                  |                             |
              |   100%                     |   100%                           |   100%                      |   100%
              |                            |                                  |                             |
  --------------------------   --------------------------         --------------------------    --------------------------
            CNOOC                                                    China Offshore Oil                  Finance
        International                 CNOOC China                        (Singapore)                  Subsidiaries(5)
          Limited(2)                   Limited(3)                 International Pte. Ltd.(4)     (British Virgin Islands)
   (British Virgin Islands)              (PRC)                           (Singapore)
  --------------------------   --------------------------         --------------------------    --------------------------

</TABLE>


(1)   Overseas Oil & Gas Corporation, Ltd also directly owns five shares of
      our company.

(2)   Owner of our overseas interests in petroleum exploration and production
      businesses and operations.

(3)   Owner of substantially all of our PRC petroleum exploration and
      production businesses, operations and properties.

(4)   Business vehicle through which we engage in sales and marketing
      activities in the international markets.

(5)   Include CNOOC Finance (2002) Limited, the financing vehicle through
      which we issued our US$500 million 6.375% guaranteed notes due 2012,
      CNOOC Finance (2003) Limited, the financing vehicle through which we
      issued our US$200 million 4.125% guaranteed notes due 2013 and US$300
      million 5.5% guaranteed notes due 2033, and CNOOC Finance (2004)
      Limited, the financing vehicle through which we issued our US$1 billion
      zero coupon guaranteed convertible bonds due 2009. These finance
      companies are our wholly owned subsidiaries with our company as their
      sole corporate director.

Capital Expenditures

      Our capital expenditures in 2003, 2004 and 2005 amounted to Rmb 12,372.5
million, Rmb 18,622.0 million and Rmb 17,469.5 million (US$2,164.7 million) ,
respectively. For 2006, we have budgeted approximately US$3.08 billion for
capital expenditures, approximately US$316.3 million of which is budgeted for
general exploration activities offshore China and approximately US$1,860.1
million is budgeted for development activities offshore China. We expect to
fund our capital expenditures with our cash flows from operations and our
borrowings. For further details about our capital expenditures, see "Item
5--Operating and Financial Review and Prospects--Liquidity and Capital
Resources--Capital Expenditures and Investments."

B.    BUSINESS OVERVIEW

Overview

      We are an oil and gas company engaged in the exploration, development
and production of crude oil and natural gas primarily offshore China. We are
the dominant producer of crude oil and natural gas offshore China and the only
company permitted to conduct exploration and production activities with
foreign oil and gas companies offshore China. As of December 31, 2005, we had
estimated net proved reserves of 2,362.6 million BOE, comprised of 1,457.4
million barrels of crude oil and condensate and 5,430.9 billion cubic feet of
natural gas. For 2005, our net production averaged 356,868 barrels per day of


                                      23
<PAGE>


crude oil, condensate and natural gas liquids and 389.6 million cubic feet per
day of natural gas, which together totaled 424,108 BOE per day.

      Our net proved reserves increased from 1,787.1 million BOE as of
December 31, 2001 to 2,362.6 million BOE as of December 31, 2005 which
represents a compound annual growth rate of 7.2%. Based on net proved
reserves, we are one of the largest independent oil and gas exploration and
production companies in the world. In the petroleum industry, an "independent"
company owns oil and gas reserves independently of other downstream assets,
such as refining and marketing assets, whereas an integrated company owns
downstream assets in addition to oil and gas reserves. As of December 31,
2005, approximately 50.9% of our net proved reserves were classified as net
proved undeveloped. We plan to spend US$1,860.1 million developing our
reserves primarily offshore China and US$316.3 million for exploration
primarily offshore China in 2006.

      We conduct exploration, development, production and sale activities
through both independent operations and production sharing contracts with
foreign partners. We have added to our reserves in recent years primarily
through our independent operations. As of December 31, 2005, independent
properties accounted for 61.9% of our total net proved reserves and
independent net proved undeveloped reserves accounted for 67.2% of our total
net proved undeveloped reserves. We are the operator of all of our independent
producing properties. For the year ended December 31, 2005, production from
our independent properties accounted for 45.5% of our total net production.

      Our controlling shareholder, CNOOC, has the exclusive right to enter
into contracts with international oil and gas companies to conduct exploration
and production activities offshore China. Under these production sharing
contracts, we have the sole right to acquire, at no cost, participating
interests in any successful discovery offshore China made by our foreign
partners. Our foreign partners can recover their exploration costs under the
production sharing contracts only if a commercially viable discovery is made.
As of December 31, 2005, we had approximately 28 foreign partners under our
existing production sharing contracts offshore China, all of which are
international oil and gas companies, including Agip, BP, Burlington Resources,
Chevron, ConocoPhillips, Devon Energy, Husky, Kerr-McGee, Newfield Exploration
and Royal Dutch Shell. As of December 31, 2005, we were a party to 34
production sharing contracts offshore China. We are currently the operator or
joint operator of most of the properties developed under our production
sharing contracts.

      Natural gas is becoming an increasingly important part of our business
strategy because of rapidly growing domestic demand. In view of increasing
demand for natural gas, we have continued to develop our natural gas reserves
and invested in liquefied natural gas related upstream projects outside the
PRC. We continue to explore for natural gas and develop natural gas
properties. We have acquired interests in gas reserves located in Tangguh,
Indonesia and the North West Shelf of Australia. In addition, CNOOC, our
controlling shareholder, has granted us an option to invest in liquefied
natural gas projects or other natural gas related business in which CNOOC
invested or proposed to invest. The terms of this option require us, if we
exercise the option, to reimburse CNOOC for any contribution CNOOC has made
with respect to the facility together with interest calculated at the
prevailing market rate.

Competitive Strengths

      We believe that our historical success and future prospects are directly
related to a combination of our strengths, including the following:

      o     large proved reserve base with significant exploitation
            opportunities;

      o     sizable operating areas with demonstrated exploration potential;

      o     successful independent exploration and development record;

      o     competitive cost structure;

      o     reduced risks and access to capital and technology through
            production sharing contracts;


                                      24
<PAGE>


      o     strategic position in China's growing natural gas markets; and

      o     experienced management team.

      Large proved reserve base with significant exploitation opportunities

      Based on net proved reserves as of December 31, 2005 and average net
daily production for the year ended December 31, 2005, we had a
reserve-to-production ratio of 15.3 years. As of December 31, 2005,
approximately 50.9% of our net proved reserves were classified as net proved
undeveloped. We expect our production to grow significantly as these
undeveloped properties begin production.

      Sizable operating area with demonstrated exploration potential

      The offshore China exploration area is approximately 1.3 million square
kilometers in size, about twice as large as the U.S. Gulf of Mexico
exploration area. Only limited exploration has been conducted in Western South
China Sea and East China Sea. Since CNOOC's inception in 1982 to the end of
2005, a total of 820 exploration wells have been drilled offshore China,
including 526 wildcat wells with a success rate of approximately 35%. During
the past five years ended December 31, 2005, we made 31 discoveries and
foreign partners announced 17 discoveries offshore China.

      Successful independent exploration and development record.

      From the inception of CNOOC in 1982 to December 31, 2005, we achieved a
success rate of approximately 44% on our 237 offshore China independent
wildcat wells, while our foreign partners achieved a success rate of
approximately 28% on their 289 offshore China wildcat wells. As of December
31, 2005, independent properties accounted for 61.9% of our total net proved
reserves and independent net proved undeveloped reserves accounted for 67.2%
of our total net proved undeveloped reserves. In 2005, we completed four of
our major independent development projects on time and under budget.

      Competitive cost structure

      For the year ended December 31, 2005, our total offshore China lifting
costs were US$6.34 per BOE. Total lifting costs for independent operations
offshore China were US$5.86 per BOE during the same period. Lifting costs
consist of operating expenses and production taxes. We have kept our offshore
China lifting costs low through various measures including more efficient use
of existing offshore facilities, the linking of employee bonuses to cost
reduction and the adoption of new technology in our operations. We believe
that such cost structure allows us to compete effectively even in a low crude
oil price environment.

      Reduced risks and access to capital and technology through production
sharing contracts

      Production sharing contracts help us minimize our offshore China finding
costs, exploration risks and capital requirements because our foreign partners
are responsible for all costs associated with exploration. Our foreign
partners recover their exploration costs only if a commercially viable
discovery is made.

      Strategic position in China's growing natural gas markets

      The proximity of our natural gas reserves to the major demand areas in
the coastal regions of China provides us with a competitive advantage over
other natural gas suppliers in China, whose natural gas reserves are located
primarily in northwest and southwest China. We have natural gas fields near
many of China's rapidly growing coastal areas, including Hong Kong, Shanghai
and Guangzhou. We have also acquired interests in gas reserves located in
Tangguh, Indonesia and the North West Shelf of Australia. In addition, CNOOC
has granted us an option to invest in liquefied natural gas projects or other
natural gas related businesses in the PRC in which CNOOC invested or proposed
to invest. For further information, see "--Natural Gas Business."


                                      25
<PAGE>


      Experienced management team

      Our senior management team has extensive experience in the oil and gas
industry, and most of our executives have been with the CNOOC group since its
inception in 1982. We evolved from a company heavily reliant on production
sharing contracts with foreign partners to a company with a balance of both
independent and production sharing contract operations. Our management team
and staff have had the opportunity to work closely with foreign partners both
within and outside China. We have implemented international management
practices including incentive compensation schemes for our employees. In
addition, we have adopted share option schemes for our employees. See "Item
6--Directors, Senior Management and Employees--Share Ownership."

      Business Strategy

      We intend to continue expanding our oil and gas exploration and
production activities and, where appropriate, to continue making strategic
investments in natural gas businesses. While our expansion strategy will
continue to focus primarily on offshore China, we may also consider overseas
acquisition opportunities that may be presented to us. The principal
components of our strategy are as follows:

      o     increase production primarily through the development of our net
            proved undeveloped reserves;

      o     add to our reserves through independent exploration and production
            sharing contracts;

      o     capitalize on the growing demand for natural gas in China;

      o     selectively pursue acquisitions to ensure long-term production
            growth, geographical reserves risk diversification, and to further
            our natural gas strategy;

      o     maintain operational efficiency and low production costs; and

      o     maintain financial flexibility through prudent financial
            practices.

            Increase production primarily through the development of our net
proved undeveloped reserves

      As of December 31, 2005, approximately 50.9 % of our proved reserves
were classified as net proved undeveloped, which gives us the opportunity to
achieve substantial production growth even without additional reserve
discoveries, assuming that we will be able to develop these reserves more
quickly than we deplete our currently producing reserves. We are currently
undertaking a number of large development projects located primarily in the
Bohai Bay and the Western South China Sea, which we expect to substantially
increase production. We plan to spend approximately US$1,860.1 million in 2006
to develop our net proved undeveloped reserves offshore China. We also plan to
spend approximately US$373.1 million to develop our overseas reserves in 2006.

      Add to our reserves through independent exploration and production
sharing contracts

      We plan to concentrate our independent exploration efforts in existing
operating areas. We plan to spend approximately US$457.8 million in 2006 on
exploration activities. We plan to increase independent exploration efforts
while continuing to enter into production sharing contracts with foreign
partners to lower capital requirements and exploration risks. In 2006, we plan
to drill approximately 67 exploration wells, and acquire independently
approximately 25,300 kilometers and 4,050 square kilometers of 2D seismic data
and 3D seismic data, respectively. Our foreign partners under existing
production sharing contracts plan to drill approximately 22 exploration wells,
and acquire approximately 13,200 kilometers and 5,320 square kilometers of 2D
seismic data and 3D seismic data, respectively, in 2006.

      Capitalize on the growing demand for natural gas in China


                                      26
<PAGE>


      We plan to capitalize on the growth potential of the PRC natural gas
market through the following initiatives:

      o     continue to develop natural gas fields and focus independent
            exploration efforts on natural gas;

      o     evaluate whether to exercise the options to invest in CNOOC's
            liquefied natural gas projects in China; and

      o     evaluate investment opportunities in related natural gas
            businesses that will help develop markets for our natural gas
            production.

      To the extent we invest in businesses and geographic areas where we have
limited experience and expertise, we plan to structure our investments as
alliances or partnerships with parties possessing the relevant experience and
expertise.

      Selectively pursue acquisitions to ensure long-term production growth,
geographical reserves risk diversification, and to further our natural gas
strategy

      We plan to make selective acquisitions that will meet one or more of our
strategic objectives of enhancing our production profile, diversifying our
reserve base and geographic risk profile and furthering our natural gas
strategy. In addition, we evaluate acquisition opportunities based on our
expected economic return criteria. In 2004 and 2005, we, Golden Aaron Pte.
Ltd. and China Global Construction Limited. formed a joint venture and entered
into six production sharing contracts with Myanmar Oil and Gas Enterprise. We
act as the operator under these production sharing contracts. In early 2005,
through our wholly owned subsidiary CNOOC Canada Limited, we acquired a 16.69%
interest in MEG Energy Corp. at a consideration of 150 million Canadian
dollars. In April 2006, we completed the acquisition of a 45% working interest
in an offshore oil-mining license "OML 130" in Nigeria for a cash
consideration of US$2.268 billion. On April 28, 2006, through our wholly-owned
subsidiary CNOOC Africa Limited, we signed production sharing contracts for
six blocks with a total area of 115,343 square kilometers in Kenya.

      We are continuously implementing our natural gas strategy. In April,
2006, we signed Farm-in Agreements with BHP Billiton Limited and Kerr-McGee
Australia Exploration and Production Pty Ltd through our subsidiary, CNOOC
Australia E&P Pty Ltd, and obtained a 25% interest in four Exploration Permits
in the Outer Browse Basin of Australia. We believe these upstream
participation will enhance our natural gas strategy as well as provide us with
access to other gas-rich basins for further growth opportunities.

      Maintain operational efficiency and low production costs

      We will continue to maintain our low cost structure and operational
efficiency through the following initiatives:

      o     Apply up-to-date drilling, production and offshore engineering
            technology to our operations through our oilfield service
            providers. This technology includes long-range extension wells,
            multilateral wells, advanced formation testing, multi-phase
            transmission, monolayer pipeline and subsea technology, minimal
            structure techniques and suction foundation technology;

      o     Proactively manage service contracts and cooperate with our
            oilfield service providers to improve exploration efficiency and
            reduce exploration costs. This measure includes using operational
            techniques such as cluster drilling, which reduces drilling time
            by one-third and lowers the related costs by up to 40%; and

      o     Maintain high production volume levels on an individual well basis
            and increase the productivity of producing wells.


                                      27
<PAGE>


      Maintain financial flexibility through prudent financial practices

      Currently, we have a strong financial profile with a low leverage ratio.
We intend to maintain our financial strength by managing key measures such as
capital expenditures, cash flows and fixed charge coverage. We intend to
actively manage our accounts receivable and inventory positions to enhance
liquidity and improve profitability. We will continue to monitor our foreign
currency denominated debt and to minimize our exposure to foreign exchange
rate fluctuations.

Selected Operating and Reserves Data

      The following table sets forth our operating data and our net proved
reserves as of the time and for the periods indicated.

                                                      Year ended December 31,
                                                  ------------------------------
                                                      2003       2004       2005
                                                  --------   --------   --------
Net Production:
Oil (daily average bbls/day)..................     306,464    319,436    356,868
Gas (daily average mmcf/day)..................       291.0      364.1      389.6
Oil equivalent (BOE/day)......................     356,729    382,513    424,108
Average net realized prices:
      Oil (per bbl)...........................    US$28.11   US$35.41   US$47.31
      Gas (per mcf)...........................        2.87       2.75       2.82
Offshore China lifting costs (per BOE)........        4.66       5.31       6.34
Overseas lifting costs (per BOE)(1)...........        9.27      10.72      12.41

Net Proved Reserves (end of period):
Oil (mmbbls)..................................     1,436.1    1,455.6    1,457.4
Gas (bcf).....................................     4,154.4    4,646.6    5,430.9
Total (million BOE)...........................     2,128.5    2,230.0    2,362.6
Proved developed reserves (million BOE).......       914.6    1,080.7    1,159.8
Annual reserves replacement ratio.............        187%       173%       186%
Estimated reserves life (years)...............        16.3       15.9       15.3
Standardized measure of discounted future
  net cash flow (million Rmb).................     109,800    125,387    199,427

---------
(1)   Overseas lifting costs reflect lifting costs associated with our
      operations in Indonesia and are calculated using the net entitlement
      method.

      Our finding and development costs per BOE reported in prior years was
calculated by dividing the net reserve change for each reporting period
(excluding production and sales) into the costs incurred for the period, as
reported in the "Costs Incurred" disclosure required by Statement of Financial
accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities." Due to the timing of the related costs incurred to find and
develop such proved reserves, this often includes quantities of proved
reserves for which a majority of the costs of development have not yet been
incurred. Conversely, it also often includes costs to develop proved reserves
that had been added in earlier years. Because it may not necessarily represent
total finding and development costs for projects under way or may not be
indicative of expected future finding and development costs, we discontinued
reporting such information.

      At our request, Ryder Scott Company, an independent petroleum
engineering consulting company, carried out an independent evaluation of the
reserves of selected properties as of December 31, 2003, 2004 and 2005. For
further information regarding our reserves, see "Item 3--Key Information--Risk
Factors--Risks relating to our business--The oil and gas reserve estimates in
this annual report may require substantial revision as a result of future
drilling, testing and production" and "--Oil and Natural Gas Reserves."


                                      28
<PAGE>


      The following table sets forth summary information with respect to our
estimated net proved reserves of crude oil and natural gas as of the dates
indicated.

<TABLE>
<CAPTION>

                                                       Net proved reserves         Net proved reserves
                                                         at December 31,           at December 31, 2005
                                                        -------  -------          -------         -----   -------
                                                           2003     2004        Developed   Undeveloped     Total
                                                        -------  -------        ---------   -----------   -------
Bohai Bay:
<S>                                                       <C>      <C>              <C>           <C>       <C>
Crude oil (mmbbls).................................       990.4    974.6            452.0         468.2     920.2
Natural gas (bcf)..................................       566.6    706.2            304.4         436.3     740.7
                                                        -------  -------        ---------   -----------   -------
   Total (million BOE):............................     1,084.8  1,092.3            502.7         541.0   1,043.7
                                                        =======  =======        =========   ===========   =======
      Independent (million BOE)....................       556.3    605.5            336.0         286.4     622.4
      Production sharing contracts (million BOE)...       528.5    486.8            166.7         254.6     421.3

Western South China Sea:
Crude oil (mmbbls).................................       173.7    189.7             77.6         128.1     205.7
Natural gas (bcf)..................................     2,564.0  2,484.8          1,733.5         870.4   2,604.0
                                                        -------  -------        ---------   -----------   -------
   Total (million BOE):............................       601.0    603.8            366.5         273.2     639.7
                                                        =======  =======        =========   ===========   =======
      Independent (million BOE)....................       476.7    482.6            264.7         266.5     531.2
      Production sharing contracts (million BOE)...       124.3    121.2            101.8           6.7     108.5

Eastern South China Sea:
Crude oil (mmbbls).................................       154.8    168.0            112.0          99.2     211.2
Natural gas (bcf)..................................       548.2    730.8               --         784.2     784.2
                                                        -------  -------        ---------   -----------   -------
   Total (million BOE):............................       246.1    289.8            112.0         229.9     341.9
                                                        =======  =======        =========   ===========   =======
      Independent (million BOE)....................       141.1    183.8             39.6         180.7     220.3
      Production sharing contracts (million BOE)...       105.0    106.0             72.4          49.2     121.6

East China Sea:
Crude oil (mmbbls).................................        13.9     21.5              2.8          18.4      21.2
Natural gas (bcf)..................................       275.3    403.4             60.0         342.2     402.2
                                                        -------  -------        ---------   -----------   -------
   Total (million BOE):............................        59.8     88.7             12.8          75.4      88.2
                                                        =======  =======        =========   ===========   =======
      Independent (million BOE)....................        12.7     88.7             12.8          75.4      88.2
      Production sharing contracts (million BOE)...        47.1       --               --            --        --

Overseas:
Crude oil (mmbbls).................................       103.4    101.9             77.1          22.0      99.1
Natural gas (bcf)..................................       200.3    321.4            532.4         367.5     899.9
                                                        -------  -------        ---------   -----------   -------
   Total (million BOE):............................       136.8    155.5            165.8          83.3     249.1
                                                        =======  =======        =========   ===========   =======
      Independent (million BOE)....................          --       --               --            --        --
      Production sharing contracts (million BOE)...       136.8    155.5            165.8          83.3     249.1

Total:
Total crude oil (mmbbls)...........................     1,436.1  1,455.6            721.5         735.9   1,457.4
Total natural gas (bcf)............................     4,154.3  4,646.6          2,630.3       2,800.6   5,430.9
                                                        -------  -------        ---------   -----------   -------
   Total (million BOE):............................     2,128.5  2,230.0          1,159.9       1,202.7   2,362.6
                                                        =======  =======        =========   ===========   =======
      Independent (million BOE)....................     1,186.9  1,360.5            653.2         809.0   1,462.2
      Production sharing contracts (million BOE)...       941.6    869.5            506.7         393.7     900.4
</TABLE>


                                                        29
<PAGE>


New Contracts Signed in 2005

           In 2005, our controlling shareholder, CNOOC, signed seven petroleum
contracts offshore China as follows:

<TABLE>
<CAPTION>
                                                                                      Interest of
                                                                                 Partner(s) in the
                                                                                 Exploration Phase        Date of
No.     Basin                     Block                    Partner                      (%)              Agreement       Area (km(2)
------------------------------------------------------------------------------------------------------------------------------------

<S>     <C>                 <C>                <C>                                         <C>            <C>                <C>
1       Pearl River Mouth                      Kerr-McGee China Petroleum Ltd.             100%           02/04/2005          9,729
        Basin               43/11

2       East China Sea      25/34              Primeline Energy China Limited/             100%           03/24/2005          7,006
                                               Primeline Petroleum Corporation


3       Pearl River Mouth   28/20              Texas American Resources-Asia,              100%           10/18/2005          7,625
        Basin                                  Inc.

4       Pearl River Mouth   03/27              Texas American Resources-Asia,              100%           10/18/2005         10,569
        Basin                                  Inc.

5       Pearl River Mouth   42/05              Devon Energy China, Ltd.                    100%           12/06/2005          6,939
        Basin

6       Pearl River Mouth   16/05              New Field China, LDC                        100%           12/12/2005          2,064
        Basin

7       Pearl River Mouth   17/08              New Field China, LDC                        100%           12/12/2005          7,106
        Basin

</TABLE>


      In 2005 and the first four months of 2006, we signed 11 overseas
petroleum contracts or agreements as follows:

<TABLE>
<CAPTION>

                                                                                   Our Participating       Date of
No.     Country                   Block                    Partners                 Interest (%)        Agreement       Area (km(2))
------------------------------------------------------------------------------------------------------------------------------------

<S>     <C>                   <C>               <C>                                       <C>               <C>              <C>
1       Myanmar                    C1           Golden Aaron Pte Limited HQCEC            81.25             01/25/05         16,988

2       Myanmar                    C2           Golden Aaron Pte Limited HQCEC            81.25             01/25/05         26,506

3       Myanmar                    M2           Golden Aaron Pte Limited HQCEC            81.25             01/25/05          9,653

4       Equatorial Guinea           S                      GEPetrol                          75             02/17/06          2,287

5       Morocco               RAS TAFELNEY                  Vanco                         11.25             04/21/05         14,000

6       Nigeria                  OML130                     Total                            45             01/09/06          1,295
                                                          Petrobras
                                                           SAPETRO


                                                                 30
<PAGE>


7       Nigeria                  OPL229                      EERL                            35             01/27/06          1,376
                                                             AMNI
                                                             AERD
                                                             BOGI

8       Philippines               SC57                     PNOC-EC                           51             04/02/06        2,881.5

9       Australia               WA-301-P                     BHPB                            25             04/03/06          7,430

10      Australia               WA-303-P                     BHPB                            25             04/03/06         13,570
                                WA-304-P                  Kerr McGee
                                WA-305-P

11      Kenya                Block 1, Block                                                 100             04/28/06        115,342
                              9, Block 10A,
                                 L2, L3, L4
</TABLE>


Exploration and Production

Summary

      We currently conduct exploration, development and production activities
primarily in four areas offshore China:

      o     the Bohai Bay;

      o     the Western South China Sea;

      o     the Eastern South China Sea; and

      o     the East China Sea.


                                      31
<PAGE>


                               [GRAPHIC OMITTED]

      In addition, we hold several equity interests in oil and gas properties
in foreign countries and regions including Indonesia, Australia, Canada,
Morocco, Nigeria and Myanmar. See "--Overseas Activity," "--Natural Gas
Business--Overseas Activity" and "Item 5--Operating and Financial Review and
Prospects--Operating Results--Acquisitions and Overseas Activities."

      As of December 31, 2005, we had estimated net proved reserves of 2,362.6
million BOE, comprised of 1,457.4 million barrels of crude oil and condensate
and 5,430.9 billion cubic feet of natural gas. As of December 31, 2005, we had
interests in 41 producing properties and 49 properties under development and
appraisal offshore China. In 2005, seven properties offshore China commenced
production. For 2005, net production averaged 356,868 barrels per day of crude
oil, condensate and natural gas liquids and 389.6 million cubic feet per day
of natural gas, which together totaled 424,108 BOE per day, representing a
10.9% increase over the annual average daily production for 2004.

      We conduct our exploration, development and production activities
independently as well as through production sharing contracts with foreign
partners. A production sharing contract contains provisions regarding the
exploration, development, production and operation of an oil and gas field and
the formula through which foreign partners may recover exploration,
development and production costs and share in the production after the
successful development of petroleum reserves. See "--Production Sharing
Contracts--Offshore China" for a detailed discussion of these arrangements.


                                      32
<PAGE>


      We also conduct exploration efforts through geophysical survey
agreements with foreign companies. These geophysical survey agreements allow
international oil and gas companies to conduct geophysical studies before
deciding whether to negotiate a production sharing contract with CNOOC. If a
foreign partner decides to enter into a production sharing contract with
CNOOC, the costs and expenses that the foreign partner incurs in conducting
geophysical exploration may be recovered during the production period by the
foreign partner, subject to our confirmation. See "--Geophysical Survey
Agreements" for a detailed discussion of these arrangements. As of December
31, 2005, we were not a party to any geophysical survey agreements, although
we may enter into such agreements in the future.

      The offshore China exploration area is approximately 1.3 million square
kilometers in size. We currently have rights to operate independently or in
conjunction with international oil and gas companies in 134 exploration blocks
covering approximately 627,271 square kilometers. We have access to 902,476
kilometers of 2D seismic data and 45,217 square kilometers of 3D seismic data.
From the beginning of CNOOC's operations in 1982 to December 31, 2005, a total
of 820 exploration wells have been drilled, including 526 wildcat wells, with
a success rate of approximately 35%. During this period we achieved a success
rate of approximately 44% on 237 independent exploration wildcat wells, while
our foreign partners achieved a success rate of approximately 28% on their 289
exploration wildcat wells.

Oil and Natural Gas Reserves

      We have a large base of net proved undeveloped reserves as a result of
our exploration successes. As of December 31, 2005, approximately 50.9% of our
net proved reserves were classified as net proved undeveloped. We are
undertaking a number of large development projects located primarily in the
Bohai Bay and the Western South China Sea and expect these projects to
substantially increase our production.

      Our "net proved reserves" consist of our percentage interest in
reserves, including our 100% interest in the independent oil and gas
properties and our participating interest in the properties covered under the
production sharing contracts in PRC, less: (a) an adjustment for our share of
royalties payable by us to the PRC government and our participating interest
in share oil payable to the PRC government under the production sharing
contracts, and (b) an adjustment for production allocable to foreign partners
under the PRC production sharing contracts as reimbursement for exploration
expenses attributable to our participating interest; and plus (i) our 5.3%
participating interest in North West Shelf Project in Australia, and (ii) our
participating interest in the properties covered under the production sharing
contracts in Indonesia less an adjustment for share oil attributable to the
Indonesian government and the domestic market obligation. Net proved reserves
do not include any deduction for production taxes, which are included in our
operating expenses. Net production is calculated in the same way as net proved
reserves.

      We explore and develop our reserves offshore China under exploration and
production licenses granted by the PRC government. The PRC government
generally grants exploration licenses for individual blocks while production
licenses generally are granted for individual fields. All of our proved
reserves are under production licenses granted by the PRC government.

      At our request, Ryder Scott Company, an independent petroleum
engineering consulting company, evaluated our selected properties as of
December 31, 2003, 2004 and 2005. For further information regarding our
reserves, see "Item 3--Key Information--Risk Factors--Risks relating to our
business--The oil and gas reserves data in this annual report may require
substantial revisions as a result of future drilling, testing and production."

      The following tables set forth net proved crude oil reserves, net proved
natural gas reserves and total net proved reserves, as of the dates indicated,
for our independent and production sharing contract operations in each of our
operating areas.


                                      33
<PAGE>


                      Total Net Proved Crude Oil Reserves
                                   (mmbbls)

<TABLE>
<CAPTION>

                                                 As of December 31,                   As of December 31, 2005
                                                --------------------       ----------------------------------------------
                                                   2003         2004       Developed         Undeveloped            Total
                                                -------      -------       ---------         -----------          -------
Offshore China
Independent
<S>                                               <C>          <C>             <C>                 <C>              <C>
      Bohai Bay..........................         474.3        487.8           285.3               213.6            498.9
      Western South China Sea............         135.2        147.6            43.2               125.8            169.0
      Eastern South China Sea............          56.6         69.1            39.6                56.9             96.5
      East China Sea.....................           4.6         21.5             2.8                18.4             21.2
                                                -------      -------       ---------         -----------          -------
           Total.........................         670.8        726.0           370.9               414.7            785.6
Production Sharing Contracts
      Bohai Bay..........................         516.1        486.8           166.7               254.6            421.3
      Western South China Sea............          38.5         42.0            34.5                 2.3             36.8
      Eastern South China Sea............          98.1         98.8            72.4                42.3            114.7
      East China Sea.....................           9.3           --              --                  --               --
                                                -------      -------       ---------         -----------          -------
           Total.........................         662.0        627.6           273.6               299.2            572.8
Combined
      Bohai Bay..........................         990.4        974.6           452.0               468.2            920.2
      Western South China Sea............         173.7        189.7            77.6               128.1            205.7
      Eastern South China Sea............         154.8        168.0           112.0                99.2            211.2
      East China Sea.....................          13.9         21.5             2.8                18.4             21.2
                                                -------      -------       ---------         -----------          -------
           Total.........................       1,332.7      1,353.8           644.4               713.9          1,358.3
Overseas(1)
      Indonesia..........................         103.4        101.9            62.7                11.0             73.7
      North West Shelf, Australia........            --           --            14.4                11.0             25.4
                                                -------      -------       ---------         -----------          -------
      Total..............................         103.4        101.9            77.1                22.0             99.1
Total....................................       1,436.1      1,455.6           721.5               735.9          1,457.4
                                                =======      =======       =========         ===========          =======

---------
(1)   As of December 31, 2005, our net proved reserves attributable to
      overseas operations were derived mainly from Indonesia and Australia. We
      conduct our operations in Indonesia through production sharing contracts
      and technical assistance contracts. In Australia, we hold interests in
      the North West Shelf project.


                     Total Net Proved Natural Gas Reserves
                                     (bcf)

                                                 As of December 31,                   As of December 31, 2005
                                                --------------------       ----------------------------------------------
                                                   2003         2004       Developed         Undeveloped            Total
                                                -------      -------       ---------         -----------          -------
Offshore China
Independent
      Bohai Bay.........................          491.9        706.2           304.4               436.3             740.7
      Western South China Sea...........        2,049.3      2,009.7         1,329.4               844.4           2,173.8
      Eastern South China Sea...........          506.9        687.7              --               742.8             742.8
      East China Sea....................           48.7        403.4            60.0               342.2             402.2
                                                -------      -------       ---------         -----------          -------
           Total........................        3,096.8      3,807.0         1,693.8             2,365.8           4,059.6
Production Sharing Contracts
      Bohai Bay.........................           74.7           --              --                  --                --
      Western South China Sea...........          514.7        475.1           404.1                26.0             430.1
      Eastern South China Sea...........           41.2         43.0              --                41.3              41.3
      East China Sea....................          226.7           --              --                  --                --
                                                -------      -------       ---------         -----------          -------
           Total........................          857.3        518.1           404.1                67.3             471.4
Combined
      Bohai Bay  .......................          566.6        706.2           304.4               436.3             740.7
      Western South China Sea...........        2,564.0      2,484.8         1,733.5               870.4           2,603.9
      Eastern South China Sea...........          548.2        730.8              --               784.2             784.2
      East China Sea....................          275.3        403.4            60.0               342.2             402.2
                                                -------      -------       ---------         -----------          -------
           Total........................        3,954.1      4,325.2         2,097.9             2,433.1           4,531.0


                                                             34
<PAGE>



                                                 As of December 31,                   As of December 31, 2005
                                                --------------------       ----------------------------------------------
                                                   2003         2004       Developed         Undeveloped             Total
                                                -------      -------       ---------         -----------          --------
Overseas(1)
      Indonesia.........................          200.3        321.4           154.6               142.2             296.9
      North West Shelf, Australia.......             --           --           377.7               225.3             603.0
                                                -------      -------       ---------         -----------          --------
           Total........................          200.3        321.4           532.3               367.5             899.9
Total...................................        4,154.4      4,646.6         2,630.3             2,800.6           5,430.9
                                                =======      =======       =========         ===========          ========

---------
(1)   As of December 31, 2005, our net proved reserves attributable to
      overseas operations were derived mainly from Indonesia and Australia. We
      conduct our operations in Indonesia through production sharing contracts
      and technical assistance contracts. In Australia, we hold interests in
      the North West Shelf project.

                           Total Net Proved Reserves
                                 (million BOE)

                                                 As of December 31,                   As of December 31, 2005
                                                --------------------       ----------------------------------------------
                                                   2003         2004       Developed         Undeveloped             Total
                                                -------      -------       ---------         -----------          --------
Offshore China
Independent
      Bohai Bay.........................          556.3        605.5           336.0               286.4             622.4
      Western South China Sea...........          476.7        482.6           264.7               266.5             531.2
      Eastern South China Sea...........          141.1        183.7            39.6               180.7             220.3
      East China Sea....................           12.7         88.7            12.8                75.4              88.2
                                                -------      -------       ---------         -----------          --------
           Total........................        1,186.9      1,360.5           653.1               809.0           1,462.1
Production Sharing Contracts
      Bohai Bay.........................          528.5        486.8           166.7               254.6             421.3
      Western South China Sea...........          124.3        121.2           101.8                 6.7             108.5
      Eastern South China Sea...........          105.0        106.0            72.4                49.2             121.6
      East China Sea....................           47.1           --              --                  --                --
                                                -------      -------       ---------         -----------          --------
           Total........................          804.9        714.0           340.9               310.5             651.4
Combined
      Bohai Bay.........................        1,084.8      1,092.3           502.7               541.0           1,043.7
      Western South China Sea...........          601.0        603.8           366.5               273.2             639.7
      Eastern South China Sea...........          246.1        289.8           112.0               229.9             341.9
      East China Sea....................           59.8         88.7            12.8                75.4              88.2
                                                -------      -------       ---------         -----------          --------
           Total........................        1,991.7      2,074.6           994.0             1,119.5           2,113.5
Overseas(1)
      Indonesia.........................          136.7        155.5            88.5                34.7             123.2
      North West Shelf, Australia.......             --           --            77.3                48.6             125.9
                                                -------      -------       ---------         -----------          --------
           Total........................          136.7        155.5           165.8                83.3             249.1
Total...................................        2,128.5      2,230.0         1,159.8             1,202.7           2,362.6
                                                =======      =======       =========         ===========          ========
</TABLE>

---------
(1)   As of December 31, 2005, our net proved reserves attributable to
      overseas operations were derived mainly from Indonesia and Australia. We
      conduct our operations in Indonesia through production sharing contracts
      and technical assistance contracts. In Australia, we hold interests in
      the North West Shelf project.

Oil and Natural Gas Production

      The following tables show average daily net oil production, net natural
gas production, and average net total production for the periods indicated.
Oil production comprises crude oil, condensate and natural gas liquids.


                                      35
<PAGE>


                   Average Daily Net Production of Crude Oil
                                (bbls per day)

                                                     Year ended December 31,
                                               ---------------------------------
                                                  2003         2004         2005
                                               -------      -------      -------
Offshore China
Independent
      Bohai Bay.........................        98,790       94,769      118,605
      Western South China Sea...........        27,547       26,737       24,913
      Eastern South China Sea...........        13,708       19,497       20,047
      East China Sea....................         2,536        2,121        1,706
                                               -------      -------      -------
           Total........................       142,581      143,123      165,271
Production Sharing Contracts
      Bohai Bay.........................        30,716       39,744       60,235
      Western South China Sea...........        33,397       29,136       24,103
      Eastern South China Sea...........        59,273       77,492       83,694
      East China Sea....................             -            -            -
                                               -------      -------      -------
           Total........................       123,386      146,372      168,032
Combined
      Bohai Bay.........................       129,506      134,512      178,840
      Western South China Sea...........        60,944       55,873       49,016
      Eastern South China Sea...........        72,981       96,989      103,741
      East China Sea....................         2,536        2,121        1,706
                                               -------      -------      -------
           Total........................       265,967      289,495      333,303
Overseas(1)
      Indonesia.........................        40,497       29,941       23,565
                                               -------      -------      -------
           Total........................        40,497       29,941       23,565
Total...................................       306,464      319,436      356,868
                                               =======      =======      =======

-----------
(1)   As of December 31, 2005, our net production attributable to overseas
      operations were derived entirely from our operations in Indonesia. We
      conduct our operations in Indonesia through production sharing contracts
      and technical assistance contracts.

                  Average Daily Net Production of Natural Gas
                                (mmcf per day)

                                                       Year ended December 31,
                                                  2003         2004         2005
Offshore China
Independent
      Bohai Bay.........................          47.1         47.7         49.1
      Western South China Sea...........          29.1         83.7         99.4
      Eastern South China Sea...........             -            -            -
      East China Sea....................          14.2         17.1         18.3
                                               -------      -------      -------
           Total........................          90.4        148.5        166.8
Production Sharing Contracts
      Bohai Bay.........................             -            -            -
      Western South China Sea...........          98.7        131.6        130.1
      Eastern South China Sea...........             -            -            -
      East China Sea....................             -            -            -
                                               -------      -------      -------
           Total........................          98.7        131.6        130.1
Combined
      Bohai Bay.........................          47.1         47.7         49.1
      Western South China Sea...........         127.8        215.2        229.6
      Eastern South China Sea...........             -            -            -
      East China Sea....................          14.2         17.1         18.3
                                               -------      -------      -------
           Total........................         189.1        280.0        296.9
Overseas(1)
      Indonesia.........................         101.9         84.1         92.7
                                               -------      -------      -------
           Total........................         101.9         84.1         92.7
Total...................................         291.0        364.1        389.6
                                               =======      =======      =======
-----------
(1)   As of December 31, 2005, our net production attributable to overseas
      operations were derived entirely from our operations in Indonesia. We
      conduct our operations in Indonesia through production sharing contracts
      and technical assistance contracts.


                                      36
<PAGE>


                         Average Daily Net Production
                                 (BOE per day)

                                                      Year ended December 31,
                                               ---------------------------------
                                                  2003         2004         2005
                                               -------      -------      -------
Offshore China
Independent
      Bohai Bay.........................       106,637      102,725      126,786
      Western South China Sea...........        32,391       40,683       41,486
      Eastern South China Sea...........        13,708       19,497       20,047
      East China Sea....................         4,908        4,963        4,751
                                               -------      -------      -------
           Total........................       157,644      167,868      193,069
Production Sharing Contracts
      Bohai Bay.........................        30,716       39,744       60,235
      Western South China Sea...........        51,619       53,454       48,097
      Eastern South China Sea...........        59,274       77,492       83,694
      East China Sea....................             -            -            -
                                               -------      -------      -------
           Total........................       141,609      170,690      192,026
Combined
      Bohai Bay.........................       137,353      142,469      187,020
      Western South China Sea...........        84,010       94,137       89,583
      Eastern South China Sea...........        72,981       96,989      103,741
      East China Sea....................         4,908        4,963        4,751
                                               -------      -------      -------
           Total........................       299,252      338,558      385,095
Overseas(1)
      Indonesia.........................        57,477       43,955       39,013
                                               -------      -------      -------
           Total........................        57,477       43,955       39,013
                                               -------      -------      -------
Total...................................       356,729      382,513      424,108
                                               =======      =======      =======

-----------
(1)   As of December 31, 2005, our net production attributable to overseas
      operations were derived entirely from our operations in Indonesia. We
      conduct our operations in Indonesia through production sharing contracts
      and technical assistance contracts.

Principal Oil and Gas Regions

Bohai Bay

      The Bohai Bay holds our largest net proved reserves and, for the year
ended December 31, 2005, was our largest producing area for crude oil and
natural gas. The Bohai Bay exploration area is located in the northeastern
part of China, approximately 200 kilometers east of Beijing and is
approximately 58,100 square kilometers in size. As of December 31, 2005, we
had rights to operate, independently or in conjunction with international oil
and gas companies, in 15 blocks covering approximately 43,244 square
kilometers of the total Bohai Bay exploration area. Our operating area
contains oil and gas fields in shallow waters with typical depths ranging from
10 to 30 meters. The crude oil is generally of heavy gravity ranging from 15
to 20 degrees API. As of December 31, 2005, net proved reserves in this region
were 920.2 million barrels of crude oil and condensate and 740.7 billion cubic
feet of natural gas, totaling 1,043.7 million BOE and representing
approximately 44.2% of our total net proved reserves.

      The Bohai Bay has been a prolific area with significant oil discoveries
in recent years and will continue to be one of our principal areas for
exploration in the near future. In 2005, we independently drilled in this area
11 wildcat wells, six of which were successful, and four appraisal wells, two
of which were successful. In 2005, our foreign partners drilled in this area
four wildcat wells, three of which were successful, and three appraisal wells,
one of which was successful. We and our foreign partners made six and three
discoveries, respectively, in this area in 2005.


                                      37
<PAGE>


      The following table sets forth principal exploration blocks under
exploration licenses for both our independent operations and our production
sharing contracts in the Bohai Bay as of December 31, 2005. All exploration
licenses expiring on or before June 6, 2006 are being renewed.

                                                            Exploration License
                                                                 (Commencement-
Blocks                           Block Area (km(2))                 Expiration)
--------------------------------------------------------------------------------
Middle of Bohai Bay                           4,974           04/26/04~04/26/06
Southern Bohai Bay                            3,679           06/08/04~06/08/06
Western Bohai Bay                             1,895           06/08/04~06/08/06
Western Liaodong Bay                          3,344           03/31/00~04/08/06
Eastern Liaodong Bay                          2,829           07/02/01~07/02/06
Eastern Bozhong                               1,861           05/30/04~05/30/06
Bohai Block 09/11                               843           04/05/04~04/05/06
Bohai Block 06/17                             2,586           02/20/03~02/20/07
Bohai Block 02/31                             4,990           05/29/03~05/29/07
Bohai Block 11/19                             3,068           06/08/04~06/08/06
Bohai Block 05/36                             2,721           04/07/05~02/10/07
Eastern Bohai Block 11/05                     3,601           02/10/04~02/10/06
Western Bohai Block 11/05                     2,897           02/01/04~02/01/06
Bohai Block 09/18                             2,234           02/04/05~02/04/07
Bohai Block 04/36                             1,691           09/23/05~09/23/07

--------------------------------------------------------------------------------
Total                                        43,213

      During the year ended December 31, 2005, we independently acquired 2,770
kilometers of 2D seismic data and 775 square kilometers of 3D seismic data and
our foreign partners acquired 21 square kilometers of 3D seismic data in the
Bohai Bay. We have an aggregate of approximately 181,663 kilometers and 10,530
square kilometers of independent 2D and 3D seismic data, respectively, in the
Bohai Bay. We also have access through our production sharing contract
partners to approximately 66,903 kilometers and 9,177 square kilometers of
additional 2D and 3D seismic data, respectively, in this area. Our exploration
capital expenditures for 2005 were US$84.3 million. In 2006, we plan to drill
24 exploration wells in the Bohai Bay.

      For 2005, net production in this region averaged 178,840 barrels per day
of crude oil, condensate and natural gas liquids and 49.1 million cubic feet
per day of natural gas, representing approximately 44.1% of our total daily
net production. Our development capital expenditures for the Bohai Bay for
2005 were US$856.4 million.

      The following table sets forth our principal oil and gas properties
under production in the Bohai Bay as of December 31, 2005.

<TABLE>
<CAPTION>

                                                                                             Average Net                       Net
                                                                                              Production           Reserves as  of
                                                                                           for year 2005         December 31, 2005
Name of Block     Major Oil and Gas Field                          Our Interest            (BOE per day)             (million BOE)
----------------------------------------------------------------------------------------------------------------------------------
<S>               <C>                                                      <C>                   <C>                         <C>
Liaoxi            Jinzhou20-2, Jinzhou9-3, Suizhong36-1,                   100%                  104,680                     323.0
                  Luda4-2, Luda5-2, Luda10-1
----------------------------------------------------------------------------------------------------------------------------------
09/18             Chengbei                                                 100%                    4,229                       5.5
----------------------------------------------------------------------------------------------------------------------------------
Boxi              Qikou18-1, Qikou18-2, Qikou17-2, Qikou17-3               100%                   10,008                      18.5
----------------------------------------------------------------------------------------------------------------------------------
05/36             Nanbao35-2                                               100%                   21,914                     121.3
                  ------------------------------------------
                  Qinghuangdao32-6                                        75.5%
----------------------------------------------------------------------------------------------------------------------------------
11/05             Penglai19-3                                               51%                    7,422                     132.5
----------------------------------------------------------------------------------------------------------------------------------
Bonan             Bozhong34-2, Bozhong34-4, Bozhong28-1,                   100%                   21,797                     184.4
                  Bozhong26-2,
                  ------------------------------------------


                                                                 38
<PAGE>


                                                                                             Average Net                       Net
                                                                                              Production           Reserves as  of
                                                                                           for year 2005         December 31, 2005
Name of Block     Major Oil and Gas Field                          Our Interest            (BOE per day)             (million BOE)
----------------------------------------------------------------------------------------------------------------------------------
                  Bozhong25-1/25-1S                                       83.8%
----------------------------------------------------------------------------------------------------------------------------------
04/36             Caofeidian11-1, Caofeidian11-2,                           51%                   16,970                      28.8
                  Caofeidian11-3, Caofeidian11-5
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The following table sets forth our principal oil and gas properties under
development in the Bohai Bay as of December 31, 2005.

<TABLE>
<CAPTION>

                                                                                                     Net
                                                                                         Reserves as  of
                                                                                       December 31, 2005
Name of Block     Major Oil and Gas Field                          Our Interest            (million BOE)
--------------------------------------------------------------------------------------------------------
<S>               <C>                                                      <C>                     <C>
Liaoxi            Jinzhou21-1, Jinzhou25-1S                                100%                    90.6
--------------------------------------------------------------------------------------------------------
Bozhong           Qinhuangdao33-1, Bozhong3-1, Bozhong3-2                  100%                     9.8
--------------------------------------------------------------------------------------------------------
Boxi              Caofeidian18-1, Caofeidian18-2, Qikou18-9,               100%                    20.1
                  Bozhong13-1
--------------------------------------------------------------------------------------------------------
11/05             Penglai25-6                                               51%                    10.5
--------------------------------------------------------------------------------------------------------
04/36&05/36       Caofeidian12-1, Caofeidian12-1S                           51%                    13.8
--------------------------------------------------------------------------------------------------------
Bonan             Bozhong34-1, Bozhong34-1S, Bozhong34-3,                  100%                    28.3
                  Bozhong34-5
--------------------------------------------------------------------------------------------------------
Liaodong          Luda27-2, Luda32-2                                       100%                    37.4
--------------------------------------------------------------------------------------------------------
11/19             Bozhong19-4, Bozhong26-2N                                100%                    19.1
--------------------------------------------------------------------------------------------------------
</TABLE>


Western South China Sea

      The Western South China Sea has been our most important natural gas
producing area. The Western South China Sea is located in the southern part of
China southwest of Hong Kong and is approximately 712,480 square kilometers in
size. As of December 31, 2005, we had rights to operate, independently or in
conjunction with international oil and gas companies, in 34 blocks covering
approximately 180,507 square kilometers of the Western South China Sea
exploration area. Typical water depths in this region range from 40 meters to
120 meters. The crude oil produced is of medium to light gravity, ranging from
27 to 41 degrees API. As of December 31, 2005, we had net proved reserves of
205.7 million barrels of crude oil and condensate and 2,603.9 billion cubic
feet of natural gas in this region, totaling 639.7 million BOE and
representing 27.1% of our total net proved reserves.

      The Western South China Sea is one of our least explored areas but will
become increasingly important as the markets for natural gas in the southern
part of China develop. In 2005, we independently drilled in this area six
wildcat wells, three of which were successful, and three appraisal wells,
three of which were successful. In 2005, our foreign partners drilled in this
area four wildcat wells, one of which was successful. We and our foreign
partners made three discoveries and one discovery, respectively, in this area
in 2005.

      The following table sets forth the principal exploration blocks under
exploration licenses for both our independent operations and our production
sharing contracts in the Western South China Sea as of December 31, 2005.
Licenses expire on or before June 6, 2006 are being renewed.

                                                            Exploration License
                                               Block Area        (Commencement-
  Blocks                                            (km2)           Expiration)
  ------------------------------------------------------------------------------
  Weizhou 12 (Beibu Gulf)                          6,980      05/11/01~05/11/06
  Yulin 35 (Beibu Gulf)                            6,050      05/11/01~05/11/06
  Weizhou 26 (Beibu Gulf)                          4,358      11/05/03~05/11/06


                                      39
<PAGE>


  Ledong 01 (Yinggehai)                            6,543      12/03/03~12/03/05
  Lingtou 20 (Yinggehai)                           2,692      08/30/00~08/30/07
  Lingao 11 (Yinggehai)                            4,117      05/11/01~05/11/06
  Songtao 22 (Qiongdongnan)                        4,063      05/11/01~05/11/06
  Songtao 31 (Qiongdongnan)                        5,264      05/11/01~05/11/06
  Lingshui 18 (Qiongdongnan)                       7,738      08/06/02~08/06/07
  Yangjiang 31 (Pearl River Mouth Basin)           6,003      12/03/03~12/03/05
  Qionghai 28 (Pearl River Mouth Basin)            5,208      05/11/01~05/11/06
  Wenchang 11 (Pearl River Mouth Basin)            4,901      05/11/01~05/11/06
  North Wanan-21 A                                 6,801      09/30/05~09/30/07
  North Wanan-21 B                                 6,118      09/30/05~09/30/07
  North Wanan-21 C                                 6,372      09/30/05~09/30/07
  North Wanan-21 D                                 6,126      09/30/05~09/30/07

  ------------------------------------------------------------------------------
  Total                                           89,334

      During the year ended December 31, 2005, we independently acquired 5,664
kilometers of 2D seismic data and 787 square kilometers of 3D seismic data and
our foreign partners acquired 186,504 kilometers of 2D seismic data and 8,844
square kilometers of 3D seismic data in the Western South China Sea. We have
an aggregate of approximately 186,504 kilometers and 8,844 square kilometers
of independent 2D and 3D seismic data, respectively, in the Western South
China Sea. We also have access through our production sharing contract
partners to approximately 106,907 kilometers and 4,656 square kilometers of
additional 2D and 3D seismic data, respectively, in this area. Our exploration
capital expenditures for the Western South China Sea for 2005 were US$76.0
million. In 2006, we plan to drill 18 exploration wells in the Western South
China Sea area.

      For 2005, net production in this region averaged 49,016 barrels per day
of crude oil, condensate and natural gas liquids and 229.6 million cubic feet
per day of natural gas, representing approximately 21.1% of our total daily
net production. Our development capital expenditures for the Western South
China Sea for 2005 were US$161.3 million.

      The following table sets forth our principal oil and gas properties
under production in the Western South China Sea area as of December 31, 2005.

<TABLE>
<CAPTION>

                                                                                              Average net                       Net
                                                                                               Production            Reserves as of
                                                                                            for year 2005         December 31, 2005
Name of Block             Major Oil and Gas Field                  Our Interest             (BOE per day)             (million BOE)
------------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>                                              <C>                     <C>                         <C>
Yulin35                   Weizhou Oil Field                                100%                    25,864                      46.4
------------------------------------------------------------------------------------------------------------------------------------
Yangjiang31               Wenchang13-1, Wenchang13-2                        60%                    23,077                      30.1
------------------------------------------------------------------------------------------------------------------------------------
Ledong01                  Yacheng13-1                                       51%                    25,020                      76.2
------------------------------------------------------------------------------------------------------------------------------------
Changjiang25              Dongfang1-1                                      100%                    15,622                     223.1
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

      The following table sets forth our principal oil and gas properties
under development in the Western South China Sea area as of December 31, 2005.

<TABLE>
<CAPTION>

                                                                                                                 Net
                                                                                                      Reserves as of
                                                                                                   December 31, 2005
Name of Block             Major Oil and Gas Field                               Our Interest           (million BOE)
---------------------------------------------------------------------------------------------------------------------
<S>                       <C>                                                           <C>                    <C>
Yangjiang31/32            Wenchang8-3, Wenchang14-3, Wenchang15-1,                      100%                   123.6
                          Wenchang19-1, Wenchang9-2, Wenchang9-3,
                          Wenchang10-3
---------------------------------------------------------------------------------------------------------------------
Ledong01                  Yacheng13-4, Ledong22-1, Ledong15-1                           100%                   101.8
---------------------------------------------------------------------------------------------------------------------
Yulin35                   Weizhou6-1, Weizhou11-1, Weizhou11-1N,                        100%                    38.5
                          Weizhou11-4N, Weizhou6-10,
                        -----------------------------------------------------------------------
                          Weizhou12-8                                                    51%
---------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                          40
<PAGE>


Eastern South China Sea

      The Eastern South China Sea is currently one of our most important oil
producing areas in terms of its contribution to our total production and
sales. The Eastern South China Sea exploration area is located in the southern
part of China, directly southeast of Hong Kong, and is approximately 174,420
square kilometers in size. As of December 31, 2005, we had rights to operate,
independently or in conjunction with international oil and gas companies, in
38 blocks covering approximately 193,704 square kilometers in the Eastern
South China Sea exploration area. This area includes the important Pearl River
Mouth Basin. Typical water depths in this region range from 100 meters to 120
meters. The crude oil produced is of medium to light gravity, ranging from 30
to 40 degrees API. As of December 31, 2005, we had net proved reserves of
211.2 million barrels of crude oil and condensate and 784.2 billion cubic feet
of natural gas in this region, totaling 341.9 million BOE and representing
approximately 14.5% of our total net proved reserves.

      In 2005, we independently drilled in this area six wildcat wells, all of
which were unsuccessful, and one appraisal well, which was successful. In
2005, our foreign partners drilled in this area four wildcat wells, one of
which was successful, and one appraisal wells, which was successful. Our
foreign partners made one discovery in this area in 2005.

      The following table sets forth the principal exploration blocks under
exploration licenses for both our independent operations and our production
sharing contracts in the Eastern South China Sea as of December 31, 2005. All
exploration licenses expiring on or before June 6, 2006 are being renewed.

                                                             Exploration License
                                               Block Area         (Commencement-
Blocks                                             (km(2)            Expiration)
--------------------------------------------------------------------------------

Xijiang 04 (Pearl River Mouth Basin)                7,969      05/11/01~05/11/06
Xijiang 33 (Pearl River Mouth Basin)                4,983      05/12/05~05/12/07
Lufeng 06 (Pearl River Mouth Basin)                 4,457      05/11/01~05/11/06
Huizhou 31 (Pearl River Mouth Basin)                3,074      05/11/01~05/11/06
Enping 15 (Pearl River Mouth Basin)                 5,833      05/11/01~05/11/06
Enping 10 (Pearl River Mouth Basin)                 6,547      05/11/01~05/11/06
Panyu 33 (Pearl River Mouth Basin)                  4,830      05/11/01~05/11/06
Liuhua 07 (Pearl River Mouth Basin)                 4,172      05/11/01~05/11/06
Dongsha 04 (Pearl River Mouth Basin)                5,295      05/11/01~05/11/06
Kaiping 14 (Pearl River Mouth Basin)                7,753      05/11/01~05/11/06
Kaiping 32 (Pearl River Mouth Basin)                8,104      05/11/01~05/11/06
Dongsha 32(Pearl River Mouth Basin)                 7,350      11/05/03~11/05/10
Liwan 14 (Pearl River Mouth Basin)                  7,752      05/11/01~05/11/06
Zijin 27 (Pearl River Mouth Basin)                  5,396      05/11/01~05/11/06
15/20 (Pearl River Mouth Basin)                     1,895      05/11/00~10/16/06
16/02 (Pearl River Mouth Basin)                     3,495      03/31/01~03/31/07
Baiyun 15 (Pearl River Mouth Basin)                 6,463      05/11/01~05/11/06
Huizhou 30 (Pearl River Mouth Basin)                5,862      05/11/01~05/11/06
Lufeng 08 (Pearl River Mouth Basin)                 4,684      06/06/05~06/06/07
16/05 (Pearl River Mouth Basin)                     3,007      03/31/00~03/31/07
--------------------------------------------------------------------------------
 Total                                            108,921

      During the year ended December 31, 2005, we independently acquired 6,512
kilometers of 2D seismic data and 1,111 square kilometers of 3D seismic data
and our foreign partners acquired 3,153 kilometers of 2D seismic data in the
Eastern South China Sea area. We have an aggregate of approximately 72,817
kilometers and 3,769 square kilometers of independent 2D seismic data and 3D
seismic data, respectively, in the Eastern South China Sea. We also have
access through our production sharing contract partners to approximately
112,415 kilometers and 6,431 square kilometers of additional


                                      41
<PAGE>


2D and 3D seismic data, respectively, in this area. Our exploration capital
expenditures for the Eastern South China Sea for 2005 were US$52.9 million. We
plan to drill 3 exploration wells in the Eastern South China Sea in 2006.

      For 2005, net production in this region averaged approximately 103,741
barrels per day of crude oil, condensate and natural gas liquids, representing
approximately 24.5% of our total daily net production. Our development capital
expenditures for this region for 2005 were US$554.1 million.

      The following table sets forth our principal oil and gas properties
under production in the Eastern South China Sea as of December 31, 2005.

<TABLE>
<CAPTION>

                                                                                              Average Net                       Net
                                                                                               Production            Reserves as of
                                                                                            for year 2005         December 31, 2005
Name of Block     Major Oil and Gas Field                          Our Interest             (BOE per day)             (million BOE)
------------------------------------------------------------------------------------------------------------------------------------
<S>               <C>                                                       <C>                    <C>                         <C>
Huizhou14         Huizhou Oil Fields                                        51%                    18,117                      22.0
------------------------------------------------------------------------------------------------------------------------------------
16/19             Huzhou19-3, Huizhou19-2, Huizhou19-1                      51%                     2,782                      21.6
------------------------------------------------------------------------------------------------------------------------------------
15/12             Xijiang24-3                                               51%                    16,576                      15.0
------------------------------------------------------------------------------------------------------------------------------------
Xijiang24         Xijiang30-2                                               40%                    10,788                       8.5
------------------------------------------------------------------------------------------------------------------------------------
Huizhou31         Liuhua11-1                                               100%                    18,699                      29.8
------------------------------------------------------------------------------------------------------------------------------------
16/05             Lufeng13-1                                                25%                     3,513                      20.6
                ------------------------------------------------------------------
                  Lufeng13-2                                               100%
------------------------------------------------------------------------------------------------------------------------------------
Lufeng08          Lufeng22-1                                                25%                     2,382                       2.4
------------------------------------------------------------------------------------------------------------------------------------
15/34             Panyu4-2, Panyu5-1                                        51%                    30,885                      29.7
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

      The following table sets forth our principal oil and gas properties
under development in the Eastern South China Sea as of December 31, 2005.

                                                                            Net
                                                                 Reserves as of
                                                      Our     December 31, 2005
Name of Block     Major Oil and Gas Field        Interest         (million BOE)
--------------------------------------------------------------------------------
Liuhua07          Panyu30-1, Liuhua19-5              100%                  96.7
--------------------------------------------------------------------------------
Panyu33           Panyu34-1                          100%                  30.7
--------------------------------------------------------------------------------
Xijiang04         Xijiang23-1                        100%                  47.2
--------------------------------------------------------------------------------
15/34             Panyu11-6                           51%                   2.6
--------------------------------------------------------------------------------
Huizhou14         Huizhou21-1(G)                      51%                   9.1
--------------------------------------------------------------------------------
Huizhou16         Huizhou25-1, Huizhou25-3            51%                   6.1
--------------------------------------------------------------------------------

East China Sea

      The East China Sea is the least explored area of our four principal
regions offshore China, and an area that we expect to become an important
natural gas production base in the future. The East China Sea is approximately
339,580 square kilometers in size and is located east of Shanghai. As of
December 31, 2005, we had rights to operate, independently or in conjunction
with international oil and gas companies, in 47 blocks (excluding the Pinghu
block) covering approximately 209,816 square kilometers of the total East
China Sea. On August 19, 2003, CNOOC, Sinopec, Pecten Orient Company of the
United States (a subsidiary company of Shell) and Unocal reached an agreement
to explore, develop and market natural gas, oil and condensate in Xihu Trough,
East China Sea. Under the agreement CNOOC owned 30% of the project and
accordingly, we acquired a 30% working interest in the project from CNOOC. In
September 2004, Pecten Orient and Unocal exited the project and as a result,
our working interest in the Xihu Trough project was increased to 50%. The
project comprises three exploration and two development contract areas of the
Xihu Trough covering approximately 22,000 square kilometers. The first
development under the contracts will be in the Chunxiao development area,
which is expected to


                                      42
<PAGE>


come on stream in the first half of 2006. The total block area of the Xihu
Trough is approximately 59,565 square kilometers. Typical water depths in this
region are approximately 90 meters and the crude oil and condensate are of
light gravity. As of December 31, 2005, our net proved reserves in the Xihu
Trough were 18.1 million barrels of crude oil and condensate and 365.7 billion
cubic feet of natural gas, totaling 79.1 million BOE and representing 3.7% of
our total net proved reserves. We are the operator of the project.

      In 2005, we and our foreign partners drilled no wells in this area.

      The following table sets forth the principal exploration blocks under
existing exploration licenses or pending exploration licenses for both our
independent operations and our production sharing contracts in the East China
Sea as of December 31, 2005. All exploration licenses expiring on or before
June 6, 2006 are being renewed.

                                                             Exploration License
                                               Block Area         (Commencement-
Blocks                                               (km2)           Expiration)
--------------------------------------------------------------------------------
North Yellow Sea                                     6,471     05/25/01~05/25/06
Northern Trough (Northern South Yellow Sea)            912     08/30/00~08/30/07
Xihu Hangzhou 26 (East China Sea)                    3,642     03/31/03~03/31/07
Xihu Hangzhou 17 (East China Sea)                    4,227     08/28/01~08/28/08
Xihu Huangyan 04 (East China Sea)                    2,848     08/28/01~08/28/08
Xihu Zhenhai 01 (East China Sea)                     1,536     08/28/01~08/28/08
Lishui 33 (East China Sea)                           2,999     12/05/05~07/01/09
Wenzhou 21 (East China Sea)                          1,437     12/05/05~07/01/07
East China Sea 25/34                                 7,017     12/05/05~12/05/07
Kunshan Block 02 (East China Sea)                    2,628     05/11/01~05/11/06
Jinhua Block 12 (East China Sea)                     6,931     05/11/01~05/11/06
Tiantai 32 (East China Sea)                          5,400     07/17/01~07/17/06
Fuzhou Block 02 (East China Sea)                     3,064     05/11/01~05/11/06
Taibei Block 27 (East China Sea)                     7,379     07/09/01~07/09/06
Taoyuan 07 (East China Sea)                          6,457     07/09/01~07/09/06
Jilong 25 (East China Sea)                           5,692     07/09/01~07/09/06
--------------------------------------------------------------------------------
Total                                               68,640

      During the year ended December 31, 2005, we independently acquired 940
square kilometers of 3D seismic data. We have an aggregate of approximately
115,990 kilometers and 1,317 square kilometers of independent 2D and 3D
seismic data, respectively, in the East China Sea area. We also have access
through our production sharing contract partners to approximately 48,255
kilometers and 475 square kilometers, respectively, of additional 2D and 3D
seismic data in this area. Our exploration capital expenditures for the East
China Sea for 2005 were US$6.3 million. We plan to drill one exploration well
in this area in 2006.

      For 2005, our net production in this region averaged 1,706 barrels per
day of crude oil, condensate and natural gas liquids and 18.3 million cubic
feet per day of natural gas, representing 1.1% of our total daily net
production. Our development capital expenditures for the East China Sea for
2005 were US$105.0 million.

      The following table sets forth the principal oil and gas properties
under production or development in the East China Sea as of December 31, 2005.


                                      43
<PAGE>


<TABLE>
<CAPTION>

                                                                           Average net                    Net
                                                                            production         Reserves as of
                                                                         for year 2005      December 31, 2005
Name of Block             Major Oil and Gas Field      Our Interest      (BOE per day)          (million BOE)
-------------------------------------------------------------------------------------------------------------
Under Production
-------------------------------------------------------------------------------------------------------------
<S>                       <C>                                   <C>              <C>                      <C>
Pinghu                    Pinghu Gas Field                      30%              4,751                    9.1
-------------------------------------------------------------------------------------------------------------
Under Development
-------------------------------------------------------------------------------------------------------------
Xihu Trough               Canxue, Duanqiao,                     50%                  -                   79.2
                          Chunxiao, Tianwaitian,
                          Baoyunting, Wuyunting
-------------------------------------------------------------------------------------------------------------
</TABLE>

Overseas Activity

      In early 2003 and 2004, we acquired interests in the Tangguh LNG project
located in Indonesia. The Tangguh LNG partners have signed contracts to
provide liquefied natural gas to South Korea and North America. For further
details of these interests, see "--Natural Gas Business--Overseas Activity."

      In December 2004, we completed the North West Shelf Project acquisition.
We acquired a 25% stake in the China LNG Joint Venture, a new joint venture
established within the NWS Gas Project. Under the terms of the transaction, We
also acquired approximately a 5.3% interest in certain production licences,
retention leases and an exploration permit of the NWS Gas Project, and a right
to participate in future exploration undertaken over and above the proven
reserves. See "--Natural Gas Business--Overseas Activity."

      In April 2002, our wholly owned subsidiary, CNOOC Southeast Asia
Limited, acquired subsidiaries in Indonesia formerly owned by Repsol YPF, S.A.
These Indonesian subsidiaries together hold a portfolio of interests in oil
and gas production sharing and technical assistance contracts in areas located
offshore and onshore Indonesia. The main businesses of the Indonesian
subsidiaries are the exploration, development and production of oil and gas
offshore and onshore Indonesia. Their main assets comprise a portfolio of
interests in four production sharing contracts and a technical assistance
contract in that region. We estimate that our net proved reserves of the
assets in Indonesia as of December 31, 2005 were approximately 123.2 million
BOE.

      The interests owned by the Indonesian subsidiaries comprise the
following assets:

      o     South East Sumatra Production Sharing Contract. The Indonesian
            subsidiaries own a 65.5409% interest in the South East Sumatra
            production sharing contract. This contract area covers
            approximately 8,100 square kilometers located offshore Sumatra and
            is the largest of the assets held by the Indonesian subsidiaries.
            It is operated and majority-owned by us. It is also one of the
            largest offshore oil developments in Indonesia and has produced
            more than one billion barrels of oil in over 20 years of
            production. The concession expires in 2018.

      o     Offshore North West Java Production Sharing Contract. The
            Indonesian subsidiaries own a 36.7205% interest in the Offshore
            North West Java production sharing contract. This contract area
            covers approximately 13,800 square kilometers in the Southern Java
            Sea, offshore Jakarta and has produced more than one billion BOE
            in over 20 years of production. It is operated by a member of the
            BP group and currently produces crude oil and natural gas. Its
            natural gas is sold to the Indonesia State Electric Company and
            the Indonesia State Gas Utility Company. The concession expires in
            2017.

      o     West Madura Production Sharing Contract and Poleng Technical
            Assistance Contract. These subsidiaries own a 25.0% interest in
            the West Madura production sharing contract and a 50.0% interest
            in the Poleng technical assistance contract. These contract areas
            are located offshore Java, near the island of Madura and the Java
            city of Surabaya and cover approximately 1,600 square kilometers
            combined. Kodeco Energy Company is the operator for the West
            Madura production sharing contract and Korea Development Company
            is the


                                      44
<PAGE>


            operator for the Poleng technical assistance contract, each
            assisted by certain of the Indonesian subsidiaries. These contract
            areas currently produce crude oil and natural gas. Their natural
            gas is sold to the Indonesia State Electric Company. The West
            Madura production sharing contract expires in May 2011. The Poleng
            technical assistance contract expires in December 2013. Three new
            oil and gas discoveries were made in this area in 2003.

      o     Blora Production Sharing Contract. The Indonesian subsidiaries own
            a 16.7% interest in the Blora production sharing contract. This
            contract area lies entirely onshore Java and covers an area of
            approximately 4,800 square kilometers. There has been no
            production of crude oil or natural gas from this concession. The
            current operator is Coparex Blora. The concession expires in 2026.

      The remaining interests in the above assets at the time of our
acquisition were owned by independent third parties, including Lundin
Petroleum, BP, Kodeco, Kalila Energy, BG Group, Pertamina, INPEX, Kanematsu,
Nissho Iwai, Nisseki Mitsubishi, Paladin Resources, C. Itoh and Co. and
Amerada Hess.

      In addition to our Indonesian subsidiaries and the acquisition of
interests in the Tangguh LNG project, we have a 39.51% participating interest
in a production sharing contract in the Malacca Strait in Indonesia.

      On May 3, 2004, we, through our wholly owned subsidiary CNOOC Morocco
Limited, acquired from Vanco Energy Corporation an 11.25% interest in a
petroleum agreement for Ras Tafelney offshore Morocco.

      In 2004 and 2005, we, Golden Aaron Pte. Ltd. and China Global
Construction Limited. formed a joint venture and entered into six production
sharing contracts with Myanmar Oil and Gas Enterprise. We act as the operator
under these production sharing contracts. In early 2005, through our wholly
owned subsidiary CNOOC Canada Limited, we acquired a 16.69% interest in MEG
Energy Corp. for a consideration of 150 million Canadian dollars.

      In June 2005, we made an offer to merge with Unocal for US$67 per share,
or a total consideration of approximately US$18.5 billion. However, in light
of considerable uncertainties and risks associated with the political climate
in the United States, we withdrew the offer on August 2, 2005.

      In January 2006, we signed an agreement with South Atlantic Petroleum
Limited to acquire a 45% working interest in an offshore oil-mining license
"OML 130" in Nigeria for a cash consideration of US$2.268 billion. The
acquisition was completed in April 2006. On January 27, 2006, CNOOC Africa
Limited, a wholly-owned subsidiary of CNOOC International Ltd., signed an
agreement of share sale and purchase deed with ARED Projects Nigeria Limited
to acquired a 35% working interest in an offshore oil prospecting license "OPL
229" in Nigeria. CNOOC Africa Limited will pay US$ 60 million for the
acquisition. In addition, we signed a production sharing contract for block S
in Equatorial Guinea. Block S is an exploration block and covers a total area
of approximately 2,287 square kilometers in the south offshore Equatorial
Guinea.

      On April 28, 2006, through our wholly-owned subsidiary CNOOC Africa
Limited, we signed production sharing contracts (PSCs) for six blocks in
Kenya. These six blocks, namely Block 1, Block 9, Block 10A, L2, L3, and L4
are located in the three basins of LAMU, ANZA and MANDERA. The total area is
115,343 square kilometers.

      As of December 31, 2005, our net proved reserves in our overseas
properties were 99.1 million barrels of crude oil and 899.9 billion cubic feet
of natural gas. For 2005, net production from our overseas properties averaged
23,565 barrels per day of crude oil, condensate and natural gas liquids and
92.7 million cubic feet of natural gas, representing approximately 6.6% and
23.8%, respectively, of our total daily net production of crude oil and total
daily net production of natural gas. Our interests in the production sharing
contracts are held by our wholly owned subsidiaries.


                                      45
<PAGE>


      We currently conduct all of our international oil sales through China
Offshore Oil (Singapore) International Pte. Ltd., our wholly owned Singapore
subsidiary. In the past, this subsidiary also engaged in oil trading
activities.

      The following table sets forth our principal overseas oil and gas
properties under production or development as of December 31, 2005.

<TABLE>
<CAPTION>

                                                                               Average net                   Net
                                                                                production        Reserves as of
                                                                             for year 2005     December 31, 2005
Name of Block             Major Oil and Gas Field                            (BOE per day)         (million BOE)
----------------------------------------------------------------------------------------------------------------
Under Production
----------------------------------------------------------------------------------------------------------------
<S>                       <C>                                                       <C>                    <C>
Indonesia                 South East Sumatra, Offshore North West Java,             39,013                 123.2
                          West Madura, Poleng, and Malacca Strait
----------------------------------------------------------------------------------------------------------------
Under Development
----------------------------------------------------------------------------------------------------------------
Australia                 North West Shelf                                               -                 125.9
----------------------------------------------------------------------------------------------------------------
Indonesia                 Tangguh                                                        -                     -
----------------------------------------------------------------------------------------------------------------
</TABLE>

Other Oil and Gas Data

Production Cost Data

      The following table sets forth average sales prices per barrel of crude
oil, condensate and natural gas liquids sold, average sales prices per
thousand cubic feet of natural gas sold and production costs per BOE produced
for each of our independent, production sharing contract and combined
operations for the periods indicated.

<TABLE>
<CAPTION>

                                                                                               Year ended December 31,
                                                                                               ---------------------------------
                                                                                               2003           2004          2005
                                                                                               -----         -----         -----
                                                                                               (US$)         (US$)         (US$)
Average Sales Prices of Petroleum Produced
<S>                                                                                            <C>           <C>           <C>
Per Barrel of Crude Oil, Condensate and Natural Gas Liquids Sold........................       28.11         35.41         47.31
Per Thousand Cubic Feet of Natural Gas Sold.............................................        2.87          2.75          2.82

Offshore China Average Lifting Costs per BOE Produced
Independent.............................................................................        4.78          5.28          5.86
Production Sharing Contracts............................................................        4.53          5.35          6.81
Offshore China Average..................................................................        4.66          5.31          6.34

Overseas Average Lifting Costs per BOE Produced
Net Entitlement.........................................................................        9.27         10.72         12.41
</TABLE>

Drilling and Productive Wells

      The following table sets forth our exploratory and productive wells
drilled offshore China as of December 31, 2005 by independent and production
sharing contract operations in each of our operating areas. It includes
exploratory and productive wells drilled offshore China prior to our inception
in 1982.

<TABLE>
<CAPTION>

                                                                            As of December 31, 2005
                                                   -------------------------------------------------------------------------------
                                                                               Western        Eastern
                                                                                 South          South           East
                                                    Total     Bohai Bay      China Sea      China Sea      China Sea      Overseas
                                                   ------     ---------    -----------      ---------      ---------      --------
Independent
<S>                                                   <C>           <C>            <C>             <C>            <C>          <C>
Net Exploratory Wells.........................        525           312            170             27             16             -
Net Productive Wells..........................      574.4           453             88             28            5.4             -
Crude Oil.....................................      541.7           437             74             28            2.7             -
Natural Gas...................................       32.7            16             14              -            2.7             -


                                                                 46
<PAGE>


Production Sharing Contracts
Net Exploratory Wells.........................       20.3           3.8            1.2            0.5            2.6          12.2
Net Productive Wells*.........................      965.4         229.9             20           78.7              -         636.8
Crude Oil.....................................      918.5         229.9           14.4           78.2              -         596.0
Natural Gas...................................       46.9             -            5.6            0.5              -          40.8

Totals
Net Exploratory Wells.........................      545.3         315.8          171.2           27.5           18.6          12.2
Net Productive Wells..........................     1539.8         682.9            108          106.7            5.4         636.8
Crude Oil.....................................     1460.2         666.9           88.4          106.2            2.7         596.0
Natural Gas...................................       79.6            16           19.6            0.5            2.7          40.8
</TABLE>

---------
*Excluding abandoned wells.

Drilling Activity

      The following tables set forth our net exploratory and development wells
broken down by independent and production sharing contract operations in each
of our operating areas for the years ended December 31, 2005, 2004 and 2003.

<TABLE>
<CAPTION>

                                                                     Year ended December 31, 2005
                                                   ------------------------------------------------------------------------
                                                                            Western      Eastern
                                                                              South        South          East
                                                                Bohai         China        China         China
                                                   Total          Bay           Sea          Sea           Sea     Overseas
                                                   -----        -----       -------      -------         -----     --------
Independent
<S>                                                  <C>          <C>           <C>          <C>           <C>          <C>
Net Exploratory Wells Drilled.................        31           15             9            7             -            -
   Successful.................................        15            8             6            1             -            -
   Dry........................................        16            7             3            6             -            -
Net Development Wells Drilled.................        84           68            14            2             -            -
   Successful.................................        84           68            14            2             -            -
   Dry........................................         -            -             -            -             -            -

Production Sharing Contracts
Net Exploratory Wells Drilled.................       6.3          3.8           1.2            -             -          1.3
   Successful.................................       3.8          3.8             -            -             -            -
   Dry........................................       2.5            -           1.2            -             -          1.3
Net Development Wells Drilled.................        54           42             -            4             2            6
   Successful.................................        54           42             -            4             2            6
   Dry........................................         -            -             -            -             -            -


                                                                     Year ended December 31, 2004
                                                   ------------------------------------------------------------------------
                                                                            Western      Eastern
                                                                              South        South          East
                                                                Bohai         China        China         China
                                                   Total          Bay           Sea          Sea           Sea     Overseas
                                                   -----        -----       -------      -------         -----     --------
Independent
Net Exploratory Wells Drilled.................        36           19             8            6             3            -
   Successful.................................        21           14             3            4             -            -
   Dry........................................        15            5             5            2             3            -
Net Development Wells Drilled.................        42           34             4            2             2            -
   Successful.................................        42           34             4            2             2            -
   Dry........................................         -            -             -            -             -            -

Production Sharing Contracts
Net Exploratory Wells Drilled.................       4.6            -             -            -           0.6            4
   Successful.................................       3.3            -             -            -           0.3            3
   Dry........................................       1.3            -             -            -           0.3            1
Net Development Wells Drilled.................        73           62             -           11             -            -
   Successful.................................        73           62             -           11             -            -
   Dry........................................         -            -             -            -             -            -


                                                             47
<PAGE>


                                                                      Year ended December 31, 2003
                                                   ------------------------------------------------------------------------
                                                                            Western      Eastern
                                                                              South        South          East
                                                                Bohai         China        China         China
                                                    Total         Bay           Sea          Sea           Sea     Overseas
                                                   -----        -----       -------      -------         -----     --------
Independent
Net Exploratory Wells Drilled.................       28.0        16.0           5.0          7.0             -            -
   Successful.................................       14.0         6.0           3.0          5.0             -            -
   Dry........................................       14.0        10.0           2.0          2.0             -            -
Net Development Wells Drilled.................       20.1        11.1           9.0            -             -            -
   Successful.................................       20.1        11.1           9.0            -             -            -
   Dry........................................          -           -             -            -             -            -

Production Sharing Contracts
Net Exploratory Wells Drilled.................        3.5           -             -          0.5             -          3.0
   Successful.................................          -           -             -            -             -            -
   Dry........................................        3.5           -             -          0.5             -          3.0
Net Development Wells Drilled.................       78.0        42.9             -          3.1             -         32.0
   Successful.................................       72.0        42.9             -          3.1             -         26.0
   Dry........................................        6.0           -             -            -             -          6.0
</TABLE>

Natural Gas Business

      Natural gas is becoming an increasingly important part of our business
strategy. We intend to exploit our natural gas reserves to meet rapidly
growing demand in the PRC for natural gas. In light of increasing demand for
natural gas in the PRC, we have made strategic investments in liquefied
natural gas projects outside the PRC and may continue to do so in the future.

PRC Activity

      CNOOC, our controlling shareholder, has granted us an option to invest
in liquefied natural gas projects or other natural gas related businesses in
which CNOOC has invested or proposed to invest. The terms of this option
require us, if we exercise the option, to reimburse CNOOC for any contribution
CNOOC has made with respect to the facility together with interest calculated
at the prevailing market rate. CNOOC's major liquefied natural gas projects in
the PRC include:

      Guangdong LNG Facility. CNOOC is currently engaged in a project to build
China's first proposed liquefied natural gas import facility in Guangdong
Province in southern China. We have not entered into any negotiations with
CNOOC on the detailed terms under which we may exercise our option to acquire
CNOOC's interest in this facility. CNOOC has committed to take a 33% ownership
interest in the project. Other partners include Hong Kong Electric Holding
Company and Hong Kong & China Gas Company Limited, each committed to 3%
ownership interests, and five customers of the proposed facility who have
collectively committed to a 31% ownership interest. Through a competitive
selection process, BP Global Investment Limited was selected as the foreign
partner to take the remaining 30% interest in the project.

      The project involves the construction of a receiving terminal with
capacity of 3.7 million tonnes per year and a 380-kilometer trunk line.
Project construction began in the third quarter of 2003. The facility is
scheduled to commence operations in 2006.

      Fujian Development. In October 2001, CNOOC signed an agreement with the
Fujian provincial government on natural gas market development in Fujian
Province. The agreement provides for a joint investment commitment to increase
natural gas supply and gas market development in Fujian Province. Both parties
are committed to sourcing gas, including liquefied natural gas, from all
viable sources, including from offshore production and overseas. The parties
also agreed to invest in gas-fired power plants and related infrastructure.
The parties contemplate that the Tangguh LNG project in Indonesia will supply
liquefied natural gas to this project. In August 2002, CNOOC announced that
China's second LNG terminal would be built in Fujian by CNOOC and its
partners. CNOOC owns a 60% interest in the


                                      48
<PAGE>


project. Construction for the project began in the third quarter of 2003. The
project is scheduled to commence operations in 2008.

      Zhejiang Development. In March 2004, CNOOC signed an agreement with
Zhejiang provincial government to jointly develop China's third LNG terminal
in Zhejiang. The joint development will include construction of an LNG
re-gasification terminal, a gas trunk line and a gas-fired power plant. CNOOC
will take a 51% interest in the project, with a Zhejiang government affiliate
and a Ningbo city government affiliate taking a 29% interest and a 20%
interest, respectively, in the project. Based on current plan and estimate,
phase one construction of the project will be completed in 2008.

      Shanghai LNG Project. In September 2004, CNOOC signed an agreement with
a Shanghai municipal government affiliate to build a liquefied natural gas
import facility in Shanghai. This project involves the construction of a
receiving terminal and a submarine trunk line. Based on current arrangements,
CNOOC will take a 45% equity interest in the project, with the Shanghai
partner taking the remaining 55% interest. Based on current plan and estimate,
phase one construction of the project will be completed in 2008.

Overseas Activity

      On January 1, 2003, we acquired BP Muturi Limited, which owned a 44.0%
interest in the Muturi production sharing contract offshore Indonesia, and BP
Wiriagar Limited's 42.4% interest in the Wiriagar production sharing contract
offshore Indonesia for a consideration of approximately US$275 million. The
Muturi production sharing contract and Wiriagar production sharing contract,
together with the Berau production sharing contract, make up the Tangguh LNG
project. The Tangguh LNG project is a greenfield project located offshore
Indonesia and is one of the largest natural gas projects in Asia. On May 12,
2004, we completed our acquisition of an additional 20.767% interest in the
Muturi production sharing contract from British Gas International Limited for
a consideration of US$105.1 million. As a result, our interest in the Muturi
production sharing contract increased to 64.767%.

      Our interests in these production sharing contracts represent 16.96% of
the total reserves and upstream production of the Tangguh LNG project. The
remaining interests in the Tangguh LNG project are held by BP Berau, BP
Muturi, BP Wiriagar, MI Berau, Nippon, KG Berau, KG Wiriagar and Indonesia
Natural Gas Resources Muturi. The partners in the Tangguh LNG project have
applied to the Indonesia government to consolidate the three production
sharing contracts and expect that BP will serve as the operator for the
project.

      In connection with our acquisition of interests in the Tangguh LNG
project, the partners in the Tangguh LNG project entered into a conditional
25-year supply contract to provide up to 2.6 million tonnes of liquefied
natural gas per year to a liquefied natural gas terminal project in Fujian
Province, China. Supply of liquefied natural gas under this supply contract is
expected to begin in 2009. In July 2004, the Tangguh PSC partners signed the
LNG sales and purchases agreement("SPA") with POHANG Steel Co to provide up to
0.55 million tonnes per annum ("mtpa") LNG for 20 years. In August 2004,
the Tangguh PSC partners signed the LNG SPA with K-Power. Co. Ltd. to provide
up to 0.6 mtpa LNG for 20 years. In October 2004, the Tangguh PSC partners
signed the LNG SPA with Sempra Energy LNG Marketing Corp. to provide up to
3.615 mtpa LNG for 20 years.

      Given the proximity of the Tangguh LNG project to many major industrial
and commercial areas, we expect the project to secure additional LNG supply
contracts in the near future.

      In May 2003, we signed an agreement with the original North West Shelf
project partners to acquire an aggregate interest of 5.3% in the reserves and
upstream production of Australia's North West Shelf project for a
consideration of US$348 million. We completed this acquisition in December
2004. We booked 125.9 million BOE of gas reserves from this project in 2005.
Woodside Petroleum is the operator for the project.

      Pursuant to the agreement, we also acquired a 25% interest in the China
LNG Joint Venture established by the six original partners to supply liquefied
natural gas from the North West Shelf project


                                      49
<PAGE>


to a liquefied natural gas terminal currently being developed by CNOOC, our
controlling shareholder, and various partners in Guangdong Province, China.
The terms of this transaction require us to pay the other partners in the
North West Shelf project for gas production and processing services provided
over the term of the China LNG Joint Venture. We are also required to make an
upfront tariff payment of approximately US$180 million in relation to
liquefied natural gas processing facilities. The partners of the project
signed a 25-year LNG supply agreement in December 2004 to provide liquefied
natural gas to the Guangdong liquefied natural gas terminal starting 2006.

      On October 24, 2003, we entered into an agreement with the joint venture
participants of the Gorgon natural gas project in Australia based on a
memorandum of understanding, under which we agreed to acquire certain interest
in the upstream production and reserves of the Gorgon natural gas project. The
memorandum of understanding expired in March 2005.

      In April, 2006, we signed Farm-in Agreements with BHP Billiton Limited
and Kerr-McGee Australia Exploration and Production Pty Ltd through our
subsidiary, CNOOC Australia E&P Pty Ltd, and obtained a 25% interest in four
Exploration Permits in the Outer Browse Basin of Australia.

      To the extent we invest in businesses and geographic areas where we have
limited experience and expertise, we plan to structure our investments as
alliances and partnerships with parties possessing the relevant experience and
expertise.

Segment Information

      The following table shows the breakdown of our total consolidated
operating revenues for each of the periods indicated and the percentage
contribution of each revenue component to our total operating revenues:

<TABLE>
<CAPTION>

                                                                         Year ended December 31,
                                              ------------------------------------------------------------------------------
                                                    2003                            2004                          2005
                                              -------------------        ---------------------        ----------------------
                                                 Rmb'000        %           Rmb'000          %           Rmb'000           %
                                              ----------    -----        ----------      -----        ----------       -----
<S>                                           <C>            <C>         <C>              <C>         <C>               <C>
Independent operations...................     12,049,054     29.4        16,104,429       29.2        24,419,997        35.2
Production sharing contracts.............     20,231,534     49.4        24,396,521       44.2        38,179,412        55.0
Trading businesses.......................     12,398,661     30.3        18,191,353       32.9        15,901,325        22.9
Unallocated and elimination..............    (3,728,976)    (9.1)       (3,470,240)      (6.3)       (9,044,991)      (13.1)
                                              ----------    -----        ----------      -----        ----------       -----
Total operating revenues.................     40,950,273    100.0        55,222,063      100.0        69,455,743       100.0
                                              ----------    -----        ----------      -----        ----------       -----
</TABLE>

      We are mainly engaged in the exploration, development and production of
crude oil and natural gas primarily offshore China. For the year ended
December 31, 2005, approximately 56.1% of our total revenue was contributed by
PRC customers. Our overseas activities are mainly conducted in Indonesia,
Australia, Myanmar and Nigeria.

Sales and Marketing

Sales of Offshore Crude Oil

      We sell crude oil and natural gas to the PRC market through our wholly
owned PRC subsidiary, CNOOC China Limited, and sell to the international
market through our wholly owned subsidiary, China Offshore Oil (Singapore)
International Pte. Ltd., located in Singapore.

      We submit production and sales plans to the National Development and
Reform Commission each year. Based on information provided by China's three
crude oil producers, PetroChina, Sinopec and us, the National Development and
Reform Commission compiles an overall national plan to coordinate sales. Our
sales of crude oil to the international market also require us to obtain
export licenses issued by the PRC Ministry of Commerce. Historically, we have
been able to obtain all required export licenses.


                                      50
<PAGE>


      Pricing

      We price our crude oil with reference to prices for crude oil of
comparable quality in the international market, including a premium or
discount mutually agreed upon by us and our customers according to market
conditions at the time of the sale. Prices are quoted in U.S. dollars, but
domestic sales are billed and paid in Renminbi. We currently produce three
types of crude oil: Nanhai Light, Medium Grade and Heavy Crude. The table
below sets forth the sales and marketing volumes, pricing benchmarks and
average realized prices for each of these three types of crude oil for the
periods indicated.

                                                        Year ended December 31,
                                                  ------------------------------
                                                      2003       2004       2005
                                                  --------   --------   --------
Sales and Marketing Volumes (benchmark)
    (mmbbls)(1)
Nanhai Light (APPI(2) Tapis(3))...............        20.4       13.1       18.4
Medium Grade (Daqing OSP(4))..................        69.6       91.8       85.3
Heavy Crude (APPI(2) Duri(5)).................        60.2       63.9       86.7

Average Realized Prices (US$/bbl)(6)
Nanhai Light..................................    US$30.27   US$41.24   US$54.52
Medium Grade..................................       29.45      37.57      51.88
Heavy Crude...................................       26.56      31.78      42.81

Benchmark Prices (US$/bbl)
APPI(2) Tapis(3) .............................    US$29.59   US$40.68   US$57.05
Daqing OSP(4) ................................       28.94      36.55      52.56
APPI(2) Duri(5) ..............................       25.46      31.92      42.48
ICP Duri......................................       27.11      32.09      46.01
ICP(7) Cinta..................................       28.04      35.62      51.14
ICP Widuri....................................       28.05      35.65      51.19

West Texas Intermediate (US$/bbl).............    US$31.07   US$41.44   US$61.04

---------
(1)   Includes the sales volumes of us and our foreign partners under
      production sharing contracts.
(2)   Asia petroleum price index.
(3)   Tapis is a light crude oil produced in Malaysia.
(4)   Daqing official selling price. Daqing is a medium crude oil produced in
      northeast China.
(5)   Duri is a heavy crude oil produced in Indonesia.
(6)   Includes the average realized prices of us and our foreign partners
      under production sharing contracts.
(7)   Indonesian crude price.

      The international benchmark crude oil price, West Texas Intermediate,
was US$61.13 per barrel as of December 30, 2005 and US$72.50 per barrel as of
June 6, 2006.

      Markets and Customers

      We sell most of our crude oil production in the PRC domestic market. We
also sell to customers in South Korea, Japan, the United States and Australia,
as well as to crude oil traders in the spot market. For the years ended
December 31, 2003, 2004 and 2005, we sold approximately 73.5%, 81.2% and
70.9%, respectively, of our crude oil in the PRC, and exported approximately
26.5%, 18.8% and 29.1%, respectively.

      Most of our crude oil production sales in the PRC domestic market are to
refineries and petrochemical companies that are affiliates of Sinopec,
PetroChina and CNOOC, our controlling shareholder. Sales volume to Sinopec has
been high historically because most of the PRC refineries and petrochemical
companies were affiliates of Sinopec. After the restructuring of the PRC
petroleum industry in July 1998, some refineries and petrochemical companies
were transferred to PetroChina from Sinopec. For the years ended December 31,
2003, 2004 and 2005, sales to Sinopec were approximately


                                      51
<PAGE>


36.8%, 38.4% and 41.9%, respectively, and sales to PetroChina were
approximately 7.7%, 7.0% and 5.0%, respectively, of our total crude oil sales
in the PRC domestic market. Together these two customers accounted for
approximately 44.5%, 45.4% and 46.9%, respectively, of our total crude oil
sales in the PRC domestic market. For the same periods, sales to affiliates of
CNOOC were approximately 43.9%, 41.2% and 48.0%, respectively, of our total
crude oil sales in the PRC domestic market. For further information about our
sales to CNOOC-affiliated companies, please see note 27 to our consolidated
financial statements attached to this annual report.

      The following table presents, for the periods indicated, our revenues
sourced in the PRC and outside the PRC:

                                                       Year ended December 31,
                                                   ----------------------------
                                                     2003       2004       2005
                                                   ------     ------     ------
                                                        (Rmb in millions,
                                                        except percentages)
Revenues sourced in the PRC...................     25,416     30,453     38,993
Revenues sourced outside the PRC..............     15,534     24,769     30,463
                                                   ------     ------     ------
Total revenues................................     40,950     55,222     69,456
                                                   ======     ======     ======
% of revenues sourced outside the PRC.........      37.9%      44.9%      43.9%

      Sales Contracts

      We sign sales contracts with our oil customers for each shipment. Sales
contracts are standard form contracts containing ordinary commercial terms
such as quality, quantity, price, delivery and payment. All sales are made on
free-on-board terms. Some of our customers are required to make payments
within 30 days after the shipper takes possession of the crude oil cargo at
our delivery points. Some of them are required to make prepayment or provide
guarantee letters or letter of credit. As of December 31, 2003, 2004 and 2005,
most of our account receivables were aged within six months. During the years
ended December 31, 2003, 2004 and 2005, the accounts receivable turnover were
approximately 47.5 days, 42.3 days and 32.6 days, respectively. Doubtful
accounts provision during the years ended December 31, 2003, 2004 and 2005
were Rmb 1.5 million, nil and nil, respectively.

      We have a credit control policy, including credit investigation of
customers and periodic assessment of credit terms. Sales clerks are directly
responsible for liaising with customers on the collection of receivables
within the credit terms.

      We price our crude oil in U.S. dollars. PRC customers are billed and
make actual payments in Renminbi based on the exchange rate prevailing at the
bill of lading date, while overseas customers are billed and are required to
make payments in U.S. dollars within 30 days of the bill of lading date.

Sales of Natural Gas from Offshore China

      Driven by environmental and efficiency concerns, the PRC government is
increasingly encouraging residential and industrial use of natural gas to meet
primary energy needs. In 1989, in order to encourage natural gas production,
the PRC government adopted a favorable royalty treatment, which provides a
royalty exemption for natural gas production up to two billion cubic meters
(70.6 billion cubic feet or 11.8 million BOE) per year as compared to a
royalty exemption available for crude oil production of up to one million tons
or approximately seven million BOE per year. The favorable treatment also
includes lower royalty rates on incremental increases in natural gas
production as compared with the royalty rates for crude oil production.

      Since 1989, the PRC government has adopted the following sliding scale
of royalty payments of up to 3% of the annual gross production of natural gas:


                                      52
<PAGE>


Annual gross production                                            Royalty rate
Less than 2 billion cubic meters.................................             -
2-3.5 billion cubic meters.......................................          1.0%
3.5-5 billion cubic meters.......................................          2.0%
Above 5 billion cubic meters.....................................          3.0%

      We sell a large portion of our offshore China natural gas production to
Hong Kong and Hainan Province. In December 1992, Castle Peak Power in Hong
Kong signed a long-term gas supply contract under which it agreed to buy from
the partners approximately 102.4 billion cubic feet of natural gas per year on
a take-or-pay basis until 2015. Gas prices are quoted and paid in U.S.
dollars. The payments are made in U.S. dollars on a monthly basis and are
reconciled annually. Castle Peak Power purchased approximately 38.4% of our
total offshore China natural gas production for the year ended December 31,
2005. We sold the remaining of our total offshore China natural gas production
to mainland China customers, including Hainan Fertilizer, Hainan Yangpu Power,
Shandong Yantai Zhongshi Gas and Hainan Refinery.

      The price of gas sold to the PRC market is determined by negotiations
between us and the buyers based on market conditions. Contracts typically
consist of a base price with provisions for annual or seasonal resets and
adjustment formulas which depend on a basket of crude oil prices, inflation
and various other factors.

Procurement of Services

      We usually outsource work in connection with the acquisition and
processing of seismic data, reservoir studies, well drilling services, wire
logging and perforating services and well control and completion service to
independent third parties or our connected parties.

      In the development stage, we normally employ independent third parties
for single point mooring and floaring production storage and offloading, or
FPSO, services and both independent third parties and CNOOC affiliates for
other services by entering into contracts with them. We conduct a bidding
process to determine who we employ to construct platforms, terminals and
pipelines, to drill production wells and to install offshore production
facilities. Both independent third parties and CNOOC affiliates participate in
the bidding process. We are closely involved in the design and management of
services by contractors and exercise extensive control over their performance,
including their costs, schedule, quality and HSE (health, safety, and
environment) measures.

Competition

Domestic Competition

      The petroleum industry is highly competitive. We compete in the PRC and
in international markets for customers as well as capital to finance our
exploration, development and production activities. Our principal competitors
in the PRC market are PetroChina and Sinopec.

      We price our crude oil on the basis of comparable crude oil prices in
the international market. The majority of our customers for crude oil are
refineries affiliated with Sinopec and PetroChina to which we have been
selling crude oil, from time to time, since 1982. Based on our dealings with
these refineries, we believe that we have established a stable business
relationship with them.

      We are the dominant player in the oil and gas industry offshore China
and are the only company permitted to engage in oil and gas exploration and
production offshore China in cooperation with foreign parties. We may face
increasing competition in the future from other petroleum companies in
obtaining new PRC offshore oil and gas properties, or, as a result of changes
in current PRC laws or regulations permitting an expansion of existing
companies' activities or new entrants into the industry.

      As part of our business strategy, we intend to expand our natural gas
business to meet rapidly increasing domestic demand. Our competitors in the
PRC natural gas market are PetroChina and, to a lesser extent, Sinopec. Our
principal competitor, PetroChina, is the largest supplier of natural gas in
China in terms of volume of natural gas supplied. PetroChina's natural gas
business benefits from strong


                                      53
<PAGE>


market positions in Beijing, Tianjin, Hebei Province and northern China. We
intend to develop related natural gas businesses in China's coastal provinces,
where we may face competition from PetroChina and, to a lesser extent,
Sinopec. We believe that our extensive natural gas resources base, the
proximity of these resources to the markets in China, our relatively advanced
technologies and our experienced management team will enable us to compete
effectively in the domestic natural gas market.

Foreign Competition and the World Trade Organization

      Imports of crude oil are subject to tariffs, import quotas, handling
fees and other restrictions. The PRC government also restricts the
availability of foreign exchange with which the imports must be purchased. The
combination of tariffs, quotas and restrictions on foreign exchange has, to
some extent, limited the competition from imported crude oil.

      In line with the general progress of its economic reform programs, the
PRC government has agreed to reduce import barriers as part of its WTO
commitments. As a result of China joining the World Trade Organization as a
full member on December 11, 2001, it is required to further reduce its import
tariffs and other trade barriers over time, including with respect to certain
categories of petroleum and crude oil. Notwithstanding China's WTO related
concessions, crude and processed oil remain, for the time being, subject to
restrictions on import rights and only certain designated state-owned
enterprises may import crude and processed oil. Sinopec, PetroChina and
several other domestic companies have received permission to import crude oil
on their own. At present, foreign owned or foreign invested entities and other
none-state-owned enterprises are subject to certain import quotas.

PRC Fiscal Regimes for Offshore Crude Oil and Natural Gas Activities

      We conduct exploration and production operations either independently or
jointly with foreign partners under our production sharing contracts. The PRC
government has established different fiscal regimes for crude oil and natural
gas production from our independent operations and from our production sharing
contracts.

      Royalties paid to the PRC government are based on our gross production
from both independent operations and oil and gas fields under production
sharing contracts. The amount of the royalties varies up to 12.5% based on the
annual production of the relevant property. The PRC government has provided
companies such as ours with a royalty exemption for up to approximately one
million tons, or seven million BOE, per year for our crude oil production and
for up to 70.6 billion cubic feet, or approximately 11.8 million BOE, per year
for our natural gas production. The limits in these exemptions apply to our
total production from both independent properties and properties under
production sharing contracts. In addition, we pay production taxes to the PRC
government equal to 5% of our crude oil and gas produced independently and 5%
of our crude oil and gas produced under production sharing contracts.

      Under our production sharing contracts, production of crude oil and gas
is allocated among us, the foreign partners and the PRC government according
to a formula contained in the contracts. Under this formula, a percentage of
production under our production sharing contracts is allocated to the PRC
government as its share oil. For more information about the allocation of
production under the production sharing contracts, see "--Production Sharing
Contracts--Offshore China--Production Sharing Formula."

      We cannot give any assurance that the fiscal regime outlined above will
not change significantly in the future.

Production Sharing Contracts

Offshore China

      When exploration and production operations offshore China are conducted
through a production sharing contract, the operator of the oil or gas field
must submit a detailed evaluation report upon discovery of petroleum reserves.
If such a discovery is determined commercially viable pursuant to the
procedures set forth in the production sharing contract, an overall
development plan must be submitted to


                                      54
<PAGE>


a joint management committee established under the production sharing contract
for its review and adoption. After that, the overall development plan must
also be submitted to CNOOC. After CNOOC confirms the overall development plan,
CNOOC submits it to the National Development and Reform Commission for
approval. After receiving the governmental approval, the parties to the
production sharing contract may begin the commercial development of the oil
and gas field.

      As part of the reorganization in 1999, CNOOC transferred all of its
economic interests and obligations under its then existing production sharing
contracts to us and our subsidiaries. It also undertook to transfer its future
production sharing contracts to us and our subsidiaries. As of December 31,
2005, we had 34 production sharing contracts.

      Under PRC law, the negotiation of a production sharing contract is a
function that only a state-owned national company, such as CNOOC, may perform.
This function cannot be transferred to us because we are a pure commercial
entity. Since the reorganization, under the terms of its undertaking with us,
CNOOC, after entering into production sharing contracts with international oil
and gas companies, is required to assign immediately to us all of its economic
interests and obligations under the production sharing contracts. For further
details, see "Item 4--Information on the Company--History and Development" and
"Item 7--Major Shareholders and Related Party Transactions--Related Party
Transactions."

      New production sharing contracts are entered into between CNOOC and
foreign partners primarily through bidding organized by CNOOC and direct
negotiation.

      Bidding Process

      The bidding process typically involves the following steps:

      o     CNOOC, with the approvals of the PRC government, determines which
            blocks are open for bidding and prepares geological information
            packages and bidding documentation for these blocks;

      o     CNOOC invites foreign enterprises to bid;

      o     potential bidders are required to provide information, including
            estimates of minimum work commitments, exploration costs and
            percentage of share oil payable to the PRC government; and

      o     CNOOC evaluates each bid and negotiates a production sharing
            contract with the successful bidder.

      Under CNOOC's undertaking with us, we may participate with CNOOC in all
negotiations of new production sharing contracts.

      The term of a production sharing contract typically lasts for 30 years
and has three distinct phases:

      o     Exploration. The exploration period shall be divided into three
            phases with three, two and two years for each phase, and may be
            extended with the consent of CNOOC and the approval of relevant
            PRC regulatory authorities. During this period, exploratory and
            appraisal work on the exploration block is conducted in order to
            discover petroleum and to enable the parties to determine the
            commercial viability of any petroleum discovery.

      o     Development. The development period begins on the date on which
            the relevant PRC regulatory authorities approve the overall
            development plan, which outlines the recoverable reserves and
            schedule for developing the discovered petroleum reserves. The
            development phase ends when the design, construction,
            installation, drilling and related research work for the
            realization of petroleum production as provided in the overall
            development plan have been completed.


                                      55
<PAGE>


      o     Production. The production period begins when commercial
            production commences and usually lasts for 15 years. The
            production period may be extended upon approval of the PRC
            government.

      Minimum Work Commitment

      Under production sharing contracts that involve exploration activities,
the foreign partners must complete a minimum amount of work during the
exploration period, generally including:

      o     drilling a minimum number of exploration wells;

      o     producing a fixed amount of seismic data; and

      o     incurring a minimum amount of exploration expenditures.

      Foreign partners are required to bear all exploration costs during the
exploration period. However, such exploration costs can be recovered according
to the production sharing formula after commercial discoveries are made and
production begins. During the exploration period, foreign partners are
required to return 25% of the contract area, excluding the development and
production areas, to CNOOC at the end of each phase of the exploration period.
At the end of the exploration period, all areas, excluding the development
areas, production areas and areas under evaluation, must be returned to CNOOC.

      Participating Interests

      Pursuant to production sharing contracts, we have the right to take
participating interests in any oil or gas field discovered in the contract
area and may exercise this right after the foreign partners have made
commercially viable discoveries. The foreign partners retain the remaining
participating interests.

      Production Sharing Formula

      A chart illustrating the production sharing formula under our production
sharing contracts is shown below.

Percentage of annual gross
production                     Allocation
--------------------------------------------------------------------------------
5.0%                           Production tax payable to the PRC government, or
                               VAT(1)

0.0% -- 12.5%(2)               Royalty oil payable to the PRC government

50.0% -- 62.5%(2)              Cost recovery oil allocated according to the
                               following priority:
                                    1. recovery of current year operating costs
                                    by us and foreign partner(s);
                                    2. recovery of earlier exploration costs by
                                    foreign partner(s);
                                    3. recovery of development costs by us and
                                    foreign partner(s) based on participating
                                    interests;(3) and
                                    4. any excess, allocated to the remainder
                                    oil.

32.5%(3)                       Remainder oil allocated according to the
                               following formula:
                                    1. (1-X) multiplied by 32.5% represents
                                    share oil payable to the PRC government;
                                    and
                                    2. X multiplied by 32.5% represents
                                    remainder oil distributed according to
                                    each partner's participating interest.(4)

---------
(1)   The production tax is also referred to as "value-added tax" (VAT) in PRC
      production sharing contracts.
(2)   Assumes annual gross production of more than four million metric tons,
      approximately 30 million barrels of oil. For lower amounts of
      production, the royalty rate will be lower and the cost recovery will be
      greater than 50.0% by the amount that the royalty rate is less than
      12.5%.


                                      56
<PAGE>


(3)   The ratio "X" is agreed in each production sharing contract based on
      commercial considerations and ranges from 8% to 100%.
(4)   See "--Principal Oil and Gas Regions" for our participating interest
      percentage in our production sharing contracts.

      The first 5.0% of the annual gross production is paid to the PRC
government as production tax. The PRC government is also entitled to a royalty
payment equal to the next 0% to 12.5% of the annual gross production based on
the following sliding scale:

                                                                        Royalty
Annual gross production of oil(1)                                          rate
-------------------------------------------------------------------------------
Less than 1 million tons.............................................      0.0%
1-1.5 million tons...................................................      4.0%
1.5-2.0 million tons.................................................      6.0%
2.0-3.0 million tons.................................................      8.0%
3.0-4.0 million tons.................................................     10.0%
Above 4 million tons.................................................     12.5%

---------
(1)   The sliding scale royalty for natural gas reaches a maximum at 3.0%.

      Depending on the percentage of the PRC government's royalty payment, an
amount equal to the next 50.0% to 62.5% of the annual gross production is
allocated to the partners for cost recovery purposes. This amount is allocated
according to the following priority schedule:

      o     recovery of operating costs incurred by the partners during the
            year;

      o     recovery of exploration costs, excluding interest accrued thereon,
            incurred but not yet recovered by foreign partners during the
            exploration period; and

      o     recovery of development investments incurred but not yet
            recovered, and interest accrued in the current year, according to
            each partner's participating interest.

      The remaining 32.5% of the annual gross production, which is referred to
as the remainder oil, is distributed to each of the PRC government, us and the
foreign partners according to a "ratio X" agreed to by CNOOC and the foreign
partners in the production sharing contracts. An amount of oil and gas equal
to the product of the remainder oil and one minus the "ratio X" is first
distributed to the PRC government as share oil. The balance of the remainder
oil, which is referred to as the allocable remainder oil, is then distributed
to us and the foreign partners based on each party's participating interest.

      We pay production tax and royalty to the PRC government on a monthly
basis for oil and natural gas production. At the end of each month, we
calculate the production tax and royalty payable and file this information
with the PRC tax bureau for current month payment. We make adjustments for any
overpayment or underpayment of production tax and royalty at the end of the
year.

      The foreign partners have the right to either take possession of their
allocable remainder oil for sale in the international market, or sell such
crude oil to us for resale in the PRC market.

      Management and Operator

      Under each production sharing contract, a party will be designated as an
operator to undertake the execution of the production sharing contract which
includes:

      o     preparing work programs and budgets;

      o     procuring equipment and materials relating to operations;

      o     establishing insurance programs; and

      o     issuing cash-call notices to the parties to the production sharing
            contract to raise funds.


                                      57
<PAGE>


      A joint management committee, which usually consists of six or eight
persons, is set up under each production sharing contract to perform
supervisory functions, and each of us and the foreign partners as a group has
the right to appoint an equal number of representatives to form the joint
management committee. The chairman of the joint management committee is the
chief representative designated by us and the vice chairman is the chief
representative designated by the foreign partners as a group. The joint
management committee has the authority to make decisions on matters including:

      o     reviewing and approving operational and budgetary plans;

      o     determining the commercial viability of each petroleum discovery;

      o     reviewing and adopting the overall development plan; and

      o     approving significant procurements and expenditures, and insurance
            coverage.

      Daily operations of a property subject to a production sharing contract
are carried out by the designated operator. The operator is typically
responsible for determining and executing operational and budgetary plans and
all routine operational matters. Upon discovery of petroleum reserves, the
operator is required to submit a detailed overall development plan to the
joint management committee.

      After the foreign partner has fully recovered its exploration and
development costs under production sharing contracts in which the foreign
partner is the operator, we have the exclusive right to take over the
operation of the particular oil or gas field. With the consent of the foreign
partner, we may also take over the operation before the foreign partner has
fully recovered its exploration and development costs.

      Ownership of Data and Assets

      All data, records, samples, vouchers and other original information
obtained by foreign partners in the process of exploring, developing and
producing offshore petroleum become the property of CNOOC as a state-owned
national oil company under PRC law. Through CNOOC, we have unlimited and
unrestricted access to the data.

      Our foreign partners and we have joint ownership in all of the assets
purchased, installed or constructed under the production sharing contract
until either:

      o     the foreign partners have fully recovered their development costs,
            or

      o     upon the expiration of the production sharing contract.

      After that, as a state-owned national oil company under PRC law, CNOOC
will assume ownership of all of the assets under the production sharing
contracts; our foreign partners and we retain the exclusive right to use the
assets during the production period.

      Abandonment Costs

      Any party to our production sharing contracts must give prior written
notice to the other party or parties if it plans to abandon production of the
oil or gas field within the contracted area. If the other party or parties
agree to abandon production from the oil or gas field, all parties pay
abandonment costs in proportion to their respective percentage of
participating interests in the field. If we decide not to abandon production
upon notice from a foreign partner, all of such foreign partner's rights and
obligations under the production sharing contract in respect of the oil or gas
field, including the responsibilities for payment of abandonment costs,
terminate automatically. We bear the abandonment costs if we decide to abandon
production after an initial decision to proceed with production. In 2005, we
accrued for dismantlement costs of approximately Rmb 100 million for oil and
gas fields governed by production sharing contracts.

      Production Tax


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<PAGE>


      The PRC production tax rate on the oil and natural gas produced under
production sharing contracts is currently 5%.

Overseas

      In addition to our production sharing arrangements in the PRC, we have
made production sharing arrangements in several foreign countries and regions,
including Indonesia, Australia, Morocco, Nigeria and Myanmar etc.

      We have interests in production sharing contracts and a technical
assistance contract in Indonesia. Indonesian oil and gas activities are
currently supervised and controlled by BP MIGAS, the executive agency for
upstream oil and gas activities in Indonesia. Under current Indonesian law, BP
MIGAS is the sole entity authorized to manage Indonesia's oil and gas
resources on behalf of the Indonesian government and to enter into agreements
with foreign and domestic companies, functions previously conducted by
Pertamina.

      BP MIGAS enters into production sharing arrangements with private energy
companies. The arrangements allow such private companies to explore and
develop oil and gas in specified areas in exchange for a percentage interest
in the production from such areas. These production sharing arrangements are
mainly governed by production sharing contracts, as well as by technical
assistance contracts, each of which is described further below. Upon entering
into a production sharing arrangement, the operator commits to spending a
specified sum of capital to implement an agreed work program.

      Production sharing arrangements in Indonesia are based on the following
principles:

      o     contractors are responsible for all investments (exploration,
            development and production);

      o     a contractor's investment and production costs are recovered from
            production;

      o     the profit split between the Indonesian government and contractors
            is based on production after the cost recovery, domestic market
            oil, etc;

      o     ownership of tangible assets remains with the Indonesian
            government; and

      o     overall control lies with BP MIGAS on behalf of the Indonesian
            government.

      An original production sharing contract is awarded to explore for and to
establish commercial hydrocarbon reserves in a specified area prior to
commercial production. The contract is generally awarded for a number of years
depending on the contract terms, subject to discovery of commercial quantities
of oil and gas within a certain period. The term of the exploration period can
generally be extended by agreement between the contractor and BP MIGAS. The
contractor is generally required to relinquish specified percentages of the
contract area by specified dates unless such designated areas correspond to
the surface area of any field in which oil and gas has been discovered.

      BP MIGAS is typically responsible for managing all production sharing
contract operations, assuming and discharging the contractor from all taxes
(other than Indonesian corporate taxes, taxes on interest, dividends and
royalties and others as set forth in the production sharing contract),
obtaining approvals and permits needed by the project and approving the
contractor's work program and budget. The responsibilities of a contractor
under a production sharing contract generally include advancing necessary
funds, furnishing technical aid and preparing and executing the work program
and budget. In return, the contractor may freely lift, dispose of and export
its share of crude oil and retain the proceeds obtained from its share.

      The contractor generally has the right to recover all finding and
developing costs, as well as operating costs, in each production sharing
contract against available revenues generated after deduction of first tranche
production of oil and gas, or FTP. Under FTP terms, the parties are entitled
to take and receive an annually agreed percentage of production from each
production zone or formation each year,


                                      59
<PAGE>


prior to any deduction for recovery of operating costs, investment credits and
handling of production. FTP for each year is generally shared between the
Indonesian government and the contractor in accordance with the standard
sharing splits. The balance is available for cost recovery. Post-cost
recovery, the Indonesian government is entitled to a specified profit share of
crude oil production and of natural gas production. Under each production
sharing arrangement, the contractor is obligated to pay Indonesian corporate
taxes on its specified profit share at the Indonesian corporate tax rate in
effect at the time the agreement is executed.

      Production sharing contracts in Indonesia have long included a provision
known as the domestic market obligation, or DMO, under which a contractor must
sell a specified percentage of its crude oil to the local market at a reduced
price. After the first five years of a field's production, the contractor is
required to supply, the lesser of (i) 25% of the contractor's before-tax share
of total crude oil production or (ii) the contractor's share of profit oil.
This reduced price varies from contract to contract and is calculated at the
point of export.

      The new Indonesian Oil and Gas Law, which came into force on November
23, 2001, stipulates a gas DMO, under which the contractor must sell up to 25%
of its gas entitlement to the domestic market, although it is not clear at
what price this gas must be sold. Production sharing contract parties have
stated that they would prefer that this price be determined on the open
market, and that it be recognized that if there are pre-existing gas sale
agreements, or if the project produces LNG for export, the obligation to sell
gas into the local market may not be feasible.

      Technical assistance contracts are awarded when a field has prior or
existing production. The oil or gas production is divided into non-shareable
and shareable portions. The non-shareable portion represents the expected
production from the field at the time the technical assistance contract is
signed and is retained by Pertamina. The shareable portion represents the
additional production resulting from the operator's investment in the field
and is split in the same way as for an original production sharing contract as
described above.

      We also have interests in production sharing contracts in various
countries, including Morocco, Nigeria and Myanmar. On May 3, 2004, we, through
our wholly owned subsidiary CNOOC Morocco Limited, acquired from Vanco Energy
Corporation an 11.25% interest in a petroleum agreement for Ras Tafelney
offshore Morocco. In 2004 and 2005, we, Golden Aaron Pte. Ltd. and China
Global Construction Limited formed a joint venture in Myanmar and had entered
into six production sharing contracts as of June 8, 2005. In January 2006, we
acquired a 35% working interest in the contract for OPL 229 in Nigeria. In
April 2006, we acquired a 45% interest in offshore Nigerian oil mining license
"OML 130".

      On February 17, 2006, we signed a production sharing contract for block
S in Equatorial Guinea. On April 28, 2006, through our wholly-owned subsidiary
CNOOC Africa Limited, we signed production sharing contracts for six blocks in
Kenya. We will act as the operator under these production sharing contracts.

Geophysical Survey Agreements

      Historically, we conducted our exploration operations through
geophysical survey agreements with leading international oil and gas companies
through production sharing contracts. For the year ended December 31, 2005, we
did not enter into any geophysical survey agreements with third parties, but
may enter such agreements in the future.

      Geophysical survey agreements are designed for foreign petroleum
companies to conduct certain geophysical exploration before they decide
whether to enter into production sharing contract negotiations with CNOOC.
Geophysical survey agreements usually have a term of less than two years.
International oil and gas companies must complete all of the work confirmed by
both parties in the agreements and bear all the costs and expenses. If a
foreign partner decides to enter into a production sharing contract with
CNOOC, the costs and expenses that the foreign partner incurs in conducting
geophysical survey may be recovered by the foreign partner in the production
period subject to our confirmation. CNOOC


                                      60
<PAGE>


has the sole ownership of all data and information obtained by the foreign
partner during the geophysical survey, and, through CNOOC, we have access to
all such data.

      Under PRC law, the negotiation of a geophysical survey agreement is a
function that only a state-owned national company, such as CNOOC, can perform.
As part of its reorganization in 1999, CNOOC transferred to us all its
commercial rights under a geophysical survey agreement, which has since been
completed. In the future, CNOOC has agreed to assign to us all of its
commercial rights under any geophysical survey agreements it enters into with
international oil and gas companies.

Operating Hazards and Uninsured Risks

      Our operations are subject to hazards and risks inherent in the
drilling, production and transportation of crude oil and natural gas,
including pipeline ruptures and spills, fires, explosions, encountering
formations with abnormal pressures, blowouts, cratering and natural disasters,
any of which can result in loss of hydrocarbons, environmental pollution and
other damage to our properties and the properties of operators under
production sharing contracts. In addition, certain of our crude oil and
natural gas operations are located in areas that are subject to tropical
weather disturbances, some of which can be severe enough to cause substantial
damage to facilities and interrupt production.

      As protection against operating hazards, we maintain insurance coverage
against some, but not all, potential losses, including the loss of wells,
blowouts, pipeline leakage or other damage, certain costs of pollution control
and physical damages on certain assets. Our insurance coverage includes oil
and gas field properties and construction insurance, marine hull insurance,
protection and indemnity insurance, drilling equipment insurance, marine cargo
insurance and third party and comprehensive general liability insurance. We
also carry business interruption insurance for Pinghu Field. In Indonesia, the
operators of the production sharing contracts in which we participate are
required by local law to purchase insurance policies customarily taken out by
international petroleum companies. As of December 31, 2005, we paid an annual
insurance premium of approximately Rmb 163.1 million to maintain our insurance
coverage. We believe that our level of insurance is adequate and customary for
the PRC petroleum industry and international practices. However, we may not
have sufficient coverage for some of the risks we face, either because
insurance is not available or because of high premium costs. See "Item 3--Key
Information--Risk Factors--Risks relating to our business--Exploration,
development and production risks and natural disasters affect our operations
and could result in losses that are not covered by insurance."

      For the year ended December 31, 2005, we did not have any uninsured
losses.

Research and Development

      Historically, we used research and development services provided by
CNOOC's affiliates, including CNOOC Research Center, as well as other
international research entities. In July 2003, we established our own research
center, CNOOC (China) Limited Research Center, to undertake most of our
research and development activities. During the years ended December 31, 2003,
2004 and 2005, our research and development costs were approximately Rmb 165.8
million, Rmb 268.5 million and Rmb 401.6 million, respectively.

      Our research efforts have focused on:

      o     enhancing oil recovery in offshore China heavy oil fields;

      o     engineering and developing deepwater fields;

      o     engineering and developing marginal fields; and

      o     developing new offshore exploration technology and new exploration
            areas.

      We are also studying various ways of utilizing our existing reserves
including:


                                      61
<PAGE>


      o     building more accurate reservoir models;

      o     re-processing existing seismic and log data to locate potential
            areas near existing fields to be integrated into existing
            production facilities; and

      o     researching ways to reduce development risks for marginal fields
            and to group fields into joint developments to share common
            facilities.

      For further information regarding our agreement with CNOOC Research
Center, see "Item 7--Major Shareholders and Related Party
Transactions--Related Party Transactions--Categories of Connected
Transactions--Research and development services."

Regulatory Framework

Government Control

      The PRC government owns all of China's petroleum resources and exercises
regulatory control over petroleum exploration and production activities in
China. We are required to obtain various governmental approvals, including
those from the Ministry of Land and Resources, the State Administration for
Environmental Protection, the National Development and Reform Commission and
the Ministry of Commerce before we are permitted to conduct production
activities. Our sales are coordinated by the National Development and Reform
Commission. For joint exploration and production with foreign enterprises, we
are required to obtain various governmental approvals, through CNOOC,
including those from:

      o     the Ministry of Land and Resources, for a permit for exploration
            blocks, an approval of a geological reserve report submitted
            through CNOOC;

      o     the Ministry of Land and Resources or the National Development and
            Reform Commission to designate such blocks as an area for foreign
            cooperation;

      o     the Ministry of Commerce for the production sharing contracts
            between CNOOC and the foreign enterprises;

      o     the State Administration for Environmental Protection for an
            environmental impact report submitted through CNOOC;

      o     the National Development and Reform Commission for an overall
            development plan submitted through CNOOC; and

      o     the Ministry of Land and Resources, for an extraction permit.

      Since the conclusion of the meeting of the National People's Congress in
March 2003, the PRC government has undergone substantial reform. It is
believed that market-oriented reforms will continue.

Special Policies Applicable to the Offshore Petroleum Industry in China

      Since the early 1980s, the PRC government has adopted policies and
measures to encourage the development of the offshore petroleum industry.
These policies and measures, which were applicable to CNOOC's operations prior
to the reorganization, became applicable to our operations in accordance with
an undertaking agreement between us and CNOOC. As approved by the relevant PRC
government authorities, including the Ministry of Land and Resources and the
Ministry of Commerce, these policies and measures have provided us with the
following benefits:


                                      62
<PAGE>


      o     the exclusive right to explore for, develop and produce petroleum
            offshore China in cooperation with international oil and gas
            companies and to sell this petroleum in China;

      o     the flexibility to set our prices in accordance with international
            market prices and determine where to sell our crude oil, with only
            minimal supervision from the PRC government;

      o     a favorable 5% production tax on the crude oil and natural gas we
            produce both independently and under production sharing contracts,
            rather than the 17% rate generally applicable to the independent
            production of domestic petroleum companies in China; and

      o     production from one of our major gas fields, Yacheng 13-1, is
            exempt from the PRC royalties under an approval by the State Tax
            Bureau in May 1989 and the 5% production tax applicable to the oil
            and gas produced under other production sharing contracts in
            accordance with an approval by the Ministry of Finance in August
            1985. Our natural gas revenues from Yacheng 13-1 for each of the
            five years ended December 31, 2001, 2002, 2003, 2004 and 2005
            represented approximately 7.3%, 5.6%, 3.6%, 3.2% and 2.3%,
            respectively, of our total oil and natural gas sales in those
            years.

      Although we historically have benefited from the foregoing special
policies, we cannot assure that such policies will continue in the future. We
are also regulated by the PRC government in various other aspects of our
business and operations, including required government approvals for new
independent development and production projects and new production sharing
contracts. For a further discussion of ways in which we are regulated by the
PRC government, see "--Government Control."

Policies Applicable to International Oil and Gas Companies Operating Offshore
China

      The PRC government encourages foreign participation in offshore
petroleum exploration and production through exclusive cooperation with CNOOC.
In 1982, the State Council promulgated the Regulation of the People's Republic
of China on Exploitation of Offshore Petroleum Resources in Cooperation with
Foreign Enterprises, which grants to CNOOC the exclusive right to enter into
joint cooperation arrangements with foreign enterprises for offshore petroleum
exploration and production. From 1982 to 2000, CNOOC successfully completed
several rounds of bidding for offshore petroleum exploration and production
projects, and many international oil and gas companies have been involved and
awarded exploration blocks for joint exploration, development and production
with CNOOC.

      In October 2001, the State Council amended the regulation referred to
above as a part of the comprehensive review of all business laws and
regulations by the Chinese government to ensure their compliance with its WTO
commitments. The amendment revised such terms in the law governing offshore
exploration as restrictive provisions on technology transfers and domestic
components requirements in procurement. The removal of these restrictions will
provide a level playing field for all oilfield service contractors, domestic
or international. These amendments are expected to benefit CNOOC's businesses
as well as our exploration and production business and further increase
production sharing contract activities offshore China. CNOOC will continue to
enjoy the exclusive right to conduct production sharing contract activities
with foreign contractors and is entitled to all rights and privileges under
the previous regulation. The regulation also states that CNOOC, as a
state-owned enterprise, is to be in charge of all efforts to exploit petroleum
resources with contractors in Chinese waters. Currently, international oil and
gas companies can only undertake offshore petroleum exploration and production
activities in China after they have entered into a production sharing contract
with CNOOC.

      In March 2006, the State Council issued the Decision to Impose a Levy on
Special Oil Income and the Ministry of Finance promulgated the Management
Rules on the Administration of Special Oil Income Levy, effective March 26,
2006. According to the rules, the Ministry of Finance will impose a special
oil income levy on any income derived from the sales by an oil exploration and
production company of locally produced crude oil at a price which exceeds
US$40 per barrel. The special oil income levy will be collected on a quarterly
basis. As the international oil prices, exchange rate of Renminbi and our
crude oil production fluctuate, the full impact on us as a result of the
implementation of the Special oil income levy cannot be ascertained at this
time.


                                      63
<PAGE>


Environmental Regulation

      Our operations are required to comply with various applicable
environmental laws and regulations, including PRC laws and regulations
administered by the central and local government environmental protection
bureaus for our operations in China. We are also subject to the environmental
rules introduced by governments in whose jurisdictions our onshore logistical
support facilities are located. The State Administration for Environmental
Protection sets national environmental protection standards and local
environmental protection bureaus may set stricter local standards.

      The relevant environment protection bureau must approve or review each
stage of a project. We must file an environmental impact statement or, in some
cases, an environmental impact assessment outline before an approval can be
issued. The filing must demonstrate that the project conforms to applicable
environmental standards. The relevant environmental protection bureau
generally issues approvals and permits for projects using modern pollution
control measurement technology.

      The PRC national and local environmental laws and regulations impose
fees for the discharge of waste substances above prescribed levels, require
the payment of fines for serious violations and provide that the PRC national
and local governments may at their own discretion close or suspend any
facility which fails to comply with orders requiring it to cease or cure
operations causing environmental damage.

      For the year ended December 31, 2005, we did not experience any major
incident of oil spillage.

      The PRC environmental laws require offshore petroleum developers to pay
abandonment costs. Our financial statements include provisions for costs
associated with the dismantlement of oil and gas fields during the years ended
December 31, 2003, 2004 and 2005 of approximately Rmb 167.3 million, Rmb 201.6
million and Rmb 252.9 million, respectively.

      Environmental protection and prevention costs and expenses in connection
with the operation of offshore petroleum exploitation are covered under each
individual production sharing contract. Environmental protection and
prevention costs and expenses represented on average approximately 4% of our
annual operating costs relating to projects constructed offshore China during
the three years ended December 31, 2005. Each platform has its own
environmental protection and safety staff responsible for monitoring and
operating the environmental protection equipment. However, no assurance can be
given that the PRC government will not impose new or stricter regulations
which would require additional environmental protection expenditures.

      We are not currently involved in any environmental claims and believe
that our environmental protection systems and facilities are adequate for us
to comply with applicable national and local environmental protection
regulations.

Legal Proceedings

      We are not a defendant in any material litigation, claim or arbitration,
and know of no pending or threatened proceeding which would have a material
adverse effect on our financial condition.

Patents and Trademarks

      We own or have licenses to use two trademarks which are of value in the
conduct of our business. CNOOC is the owner of the "CNOOC" trademark. Under
two non-exclusive license agreements between CNOOC and us, we have obtained
the right to use this trademark for a nominal consideration.

Real Properties

      Our corporate headquarters is located in Hong Kong. We also lease
several other properties from CNOOC in China and Singapore. The rental
payments under these lease agreements are determined with


                                      64
<PAGE>


reference to market rates. For further details regarding the terms of these
leases, see "Item 7--Major Shareholders and Related Party
Transactions--Related Party Transactions--Categories of Connected
Transactions--Lease agreement in respect of the Nanshan Terminal," and
"--Lease and property management services."

      We own the following main property interests in the PRC:

      o     land, various buildings and structures at Xingcheng JZ 20-2
            Natural Gas Separating Plant, Dongyao Village, Shuangsu Township,
            Xingcheng City, Liaoning Province;

      o     land, various buildings and structures located at Boxi Processing
            Plant, South of Jintang Subway, Tanggu District, Tianjin City;

      o     land, various buildings and structures at Weizhou Terminal
            Processing Plant, Weizhou Island, Weizhou Town, Beihai City,
            Guangxi Zhuang Autonomous Region;

      o     a parcel of land at Suizhong 36-1 Base, Xiaolihuang Village,
            Gaoling Town, Suizhong County, Liaoning Province;

      o     land, various buildings and structures located at Bonan Processing
            Plant, Jimu Island, Longgang Development Zone, Longkou City,
            Shandong Province;

      o     land, various buildings and structures located at Dongfang 1-1
            Processing Plant, Shugang Road, Dongfang City, Hainan Province;

      o     50% interest in land, various buildings and structures located at
            Panyu-Huizhou Gas Processing Plant, Huandao North Road, Hengqin
            Town, Zhuhai City, Guangdong Province; and

      o     land, various buildings and structures located at Chunxiao Gas
            Processing Plant, Chunxiao Road, Chunxiao Town, Beilun District,
            Ningbo City, Zhejiang Province.

Employees and Employee Benefits

      During the years ended December 31, 2003, 2004 and 2005, we employed
2,447 persons, 2,524 persons and 2,696 persons, respectively. Of the 2,696
employees we employed as of December 31, 2005, approximately 72.4% were
involved in petroleum exploration, development and production activities,
approximately 7.1% were involved in accounts and finance work and the
remainder were senior management, coordinators of production sharing contracts
and safety and environmental supervisors. Workers for the operation of the oil
and gas fields, maintenance personnel and ancillary service workers are hired
on a contract basis.

      We have a trade union that:

      o     protects employees' rights;

      o     organizes educational programs;

      o     assists in the fulfillment of economic objectives;

      o     encourages employee participation in management decisions; and

      o     assists in mediating disputes between us and individual employees.

      We have not been subjected to any strikes or other labor disturbances
and believe that relations with our employees are good.


                                      65
<PAGE>


      The total remuneration of employees includes salary, bonuses and
allowances. Bonus for any given period is based primarily on individual and
our performance. Employees also receive subsidized housing, health benefits
and other miscellaneous subsidies.

      We have implemented an occupational health and safety program similar to
that employed by other international oil and gas companies. Under this
program, we closely monitor and record health and safety incidents and
promptly report them to government agencies and organizations. On March 15,
2000, we finalized and implemented our occupational health and safety program.
We believe this program is broadly in line with the United States government's
Occupational Safety & Health Administration guidelines.

      All full-time employees in the PRC are covered by a government-regulated
pension. The PRC government is responsible for the pension of these retired
employees. We are required to contribute monthly approximately 9% to 22% of
our employees' salaries, with each employee contributing 4% to 8% of his or
her salary for retirement. The contributions vary from region to region.

      Our Indonesian subsidiaries employ approximately 900 employees,
including approximately 50 expatriates. We provide benefits to expatriates
that we believe to be in line with customary international practices. Our
local staff in Indonesia enjoy welfare benefits mandated by Indonesian labor
laws.

      For further details regarding retirement benefits, see note 31 to our
consolidated financial statements attached to this annual report.

Health, Safety and Environmental Policy

      We are committed to the promotion of the concept and culture of health,
safety and environmental ("HSE") protection among all the staff. The oil and
gas field development projects that were started during the year all underwent
simultaneous reviews on HSE protection in accordance with the laws of the PRC.
In 2005, nearly all the staff from the management to the operational level
participated in our HSE training sessions. In addition, the scope of our HSE
training has been extended to the employees of contractors. More than 10,000
person-time from our contractors participated in our training sessions in
2005.

      In 2005, we also placed considerable emphasis on safety in helicopter,
diving and vehicle operations. Professional auditors were hired to conduct
annual safety audit and safety checks on 11 leased helicopters. In 2006, we
plan to carry out special audits on diving operations.

      We introduced the system of occupation health profiles to all branches
in order to strengthen the health management of offshore operating staff in
addition to requiring them to submit health certificates. The submitted health
data is to be analyzed so as to offer the staff proactive and constructive
advices on health improvement.

      As an International Association of Oil and Gas Producer (OGP) member, we
assisted OGP in organizing the "Workshop on Safety Management of Offshore
Accidents" in 2005.

      In 2005, we organized a large-scale offshore emergency drill. There were
over 300 participants, including our offshore service contractors and
transportation service contractors. We continued to work with other entities
to set up Oil Spill Response Base in Tangguh, Longkou, Weizhou and Zhuhai. We
believe such initiatives strengthened our capability in handling offshore oil
spill emergencies.

      In 2005, we made sustained progress in respect of HSE management. During
the year, we were neither involved in any material injury liability case,
spillage or pollution incidents, nor subject to any safety-related liability
claims for losses of over US$120,000. Our OSHA Statistics results continued to
be above average when compared with international peers.

      We seek to align our operations with international standards and have
been applying for the ISO14000 environmental management qualification for our
oilfields. By the end of 2005, our


                                      66
<PAGE>


Qinhuangdao  32-6  oilfield  and Wenchang  oilfields  were  certified  under the
ISO14000 environmental management system.

      We are a member of the "National Offshore Oil Spillage Response Plan"
organized by the State Oceanic Administration. In 2005, we continued to conduct
researches and participated in discussions on issues relating to resources
sharing and risk assessment in the event of oil spillage offshore China. We also
continued to cooperate with the Bohai Bay Oil Spillage Awareness Center and
facilitated the establishment of the oil spillage response organizations in the
South China Sea.

      In accordance with changes to the statistical requirements of the U.S.
Occupational Safety and Health Administration, or OSHA, we revised our internal
documentation procedures to keep abreast with OSHA's standard, which uses OGP
reporting methods to record the differences and standards of particular
incidents. We have also adopted new OSHA and incident reporting forms in order
to better meet the requirements of international associations such as OGP and
API. We deliver working hour statistics and incident reports to investors and
API on a quarterly basis.

Human Resources Development

      As an oil and gas exploration and production company operating in highly
competitive markets, we depend in large part on our employees for effective and
efficient operations. We devote significant resources to train our technical
employees. During 2005, we held 818 training workshops, which were attended by
12,215 participants. To ensure smooth implementation of our overseas strategy,
we have established an international human resources system to attract and
retain talents in the international market. During the year, we completed the
"Compensation Administration and Adjustment Plan". We also introduced various
incentive schemes, including the "Project Team Incentive Scheme" and the "New
discovery Incentive Scheme". With respect to overseas staff, we continued to
improve our remuneration policy to make it competitive in the international
market. We also started to build up an international recruitment database to
support our overseas business expansion.

      We have adopted four stock option schemes for our senior management since
February 4, 2001, and granted options under three of the schemes.

                       ITEM 4A. UNRESOLVED STAFF COMMENTS

      None.

             ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.    OPERATING RESULTS

      You should read the following discussion and analysis in conjunction with
our consolidated financial statements, selected historical consolidated
financial data and operating and reserves data, in each case together with the
accompanying notes, contained in this annual report. Our consolidated financial
statements have been prepared in accordance with Hong Kong GAAP, which differ in
certain material respects from U.S. GAAP. Note 38 to our consolidated financial
statements attached to this annual report provides an explanation of our
reconciliation to U.S. GAAP of net income and shareholders' equity. Certain
statements set forth below constitute "forward-looking statements" within the
meaning of the United States Private Securities Litigation Reform Act of 1995.
See "Forward-Looking Statements."

Overview

      We are an oil and gas company engaged in the exploration, development and
production of crude oil and natural gas primarily offshore China. We are the
dominant producer of crude oil and natural gas offshore China and the only
company permitted to conduct exploration and production activities with
international oil and gas companies offshore China. As of December 31, 2005, we
had estimated net proved reserves of 2,362.6 million BOE, comprised of 1,457.4
million barrels of crude oil and condensate


                                       67
<PAGE>

and 5,430.9 billion cubic feet of natural gas. In 2005, our net production
averaged 356,868 barrels per day of crude oil, condensate and natural gas
liquids and 389.6 million cubic feet per day of natural gas, which together
totaled 424,108 BOE per day.

      Our revenues and profitability are largely determined by our production
volume and the prices we realize for our crude oil and natural gas, as well as
the costs of our exploration and development activities. Although crude oil
prices depend on various market factors and have been volatile historically, our
production volume has increased steadily over the past few years.

      The following table sets forth our net production of crude oil, condensate
and natural gas liquids and net income for the periods indicated.

<TABLE>
<CAPTION>
                                                     Year ended December 31,
                                   -----------------------------------------------------------
                                    2001         2002         2003         2004          2005
                                   -------      -------      -------      -------      -------
<S>                                <C>          <C>          <C>          <C>          <C>
Net production of crude oil,
condensate and natural gas
liquids (BOE/day) ...........      228,874      298,625      306,464      319,436      356,868
Net production of natural gas
(mmcf/day) ..................        195.0        272.6        291.0        364.1        389.6
Net income (Rmb in millions)
(Restated) ..................      7,957.6      9,207.0     11,497.0     16,139.0     25,323.1
</TABLE>

      We sold 46.9% of our crude oil production in 2005 to customers affiliated
with Sinopec or PetroChina in the PRC domestic market. We sold 38.4% of our
natural gas production offshore China in 2005 to Castle Peak Power Company
Limited in Hong Kong under a long-term take-or-pay contract.

      For a further description of these factors and certain other factors
affecting our financial performance, see "Item 3--Key Information--Risk
Factors."

Relationship with CNOOC

      Prior to the October 1999 reorganization of CNOOC, we did not exist as a
separate legal entity and our business and operations were conducted by CNOOC
and its various affiliates. In connection with the reorganization, CNOOC's oil
and gas exploration, development, production and sales business and operations
conducted both inside and outside China were transferred to us. See "Item
4--Information on the Company--History and Development--Corporate Structure,"
"Item 7--Major Shareholders and Related Party Transactions" and note 27 to our
consolidated financial statements attached to this annual report.

      Before the reorganization, certain PRC affiliates of CNOOC provided
various materials, utilities and ancillary services for CNOOC's exploration and
production activities. In connection with the reorganization, we entered into
various agreements under which we continued to use various services and
properties provided by these CNOOC affiliates. These agreements include: (i) a
materials, utilities and ancillary services supply agreement; (ii) technical
service agreements; (iii) agreements for the sale of crude oil, condensate oil
and liquefied petroleum gas; (iv) various lease agreements with other affiliates
of CNOOC for office and residential premises used by us; and (v) a research and
development services agreement with China Offshore Oil Research Center for the
provision of general geophysical exploration services, comprehensive exploration
research services, information technology services and seismic study. We have
renewed these agreements on substantially the same terms. In 2002, CNOOC
consolidated most of its oilfield services operations and established China
Oilfield Services Limited. This CNOOC affiliate now provides most of the
technical services to us.

      For a description of the services provided under these agreements, see
"Item 7--Major Shareholders and Related Party Transactions."

Acquisitions and Overseas Activities

      On January 1, 2003, we acquired BP Muturi Limited, which owned a 44.0%
interest in the Muturi production sharing contract offshore Indonesia, and BP
Wiriagar Limited's 42.4% interest in the Wiriagar


                                       68
<PAGE>

production sharing contract offshore Indonesia for a total consideration of
approximately US$275 million. The Muturi production sharing contract and
Wiriagar production sharing contract, together with the Berau production sharing
contract, make up the Tangguh LNG project. Our interests in these production
sharing contracts represented approximately 12.5% of the total reserves and
upstream production of the Tangguh LNG project. On May 12, 2004, we completed
our acquisition of an additional 20.767% interest in the Muturi production
sharing contract from the BG Group. As a result, our interests in these
production sharing contracts now represent 16.96% of the total reserves and
upstream production of the Tangguh LNG project. The remaining interests are held
by BP Berau, BP Muturi, BP Wiriagar, MI Berau, Nippon, BG, KG Berau, KG Wiriagar
and Indonesia Natural Gas Resources Muturi. The Tangguh LNG project is a
greenfield project located offshore Indonesia and represents one of the largest
natural gas projects in Asia.

      In connection with our acquisition of interests in the Tangguh LNG
project, the partners in the Tangguh LNG project entered into a conditional
25-year supply contract to provide up to 2.6 million tonnes of liquefied natural
gas per year to a liquefied natural gas terminal project in Fujian Province,
China. Supply of liquefied natural gas under this supply contract is expected to
begin in 2008.

      In May 2003, we signed an agreement with the original North West Shelf
project partners to acquire an aggregate interest of 5.3% in the upstream
production and reserves of the North West Shelf project for a consideration of
US$348 million, plus an upfront tariff payment relating to certain LNG
processing facilities amounting to US$180 million. We also agreed to acquire a
25% interest in the China LNG joint venture established by the North West Shelf
project partners to supply liquefied natural gas from the North West Shelf
project to a liquefied natural gas terminal currently being developed by CNOOC,
our controlling shareholder, and various partners in Guangdong Province, China.
We completed the acquisition in December 2004. Our share of reserves from this
project is expected to be approximately 1.2 trillion cubic feet of natural gas.
Our share of natural gas together with associated liquids is expected to be
approximately 210 million BOE. The partners of the project signed a 25-year LNG
supply agreement in December 2004 to provide liquefied natural gas to the
Guangdong liquefied natural gas terminal starting 2006. Woodside Petroleum is
the operator for the project. See "Item 4--Information on the Company--Business
Overview--Natural Gas Business--Overseas Activity."

      On October 24, 2003, we entered into an agreement with the joint venture
participants of the Gorgon natural gas project in Australia based on a
memorandum of understanding previously entered into with them, under which we
agreed to acquire certain interest in the upstream production and reserves of
the Gorgon natural gas project. The memorandum of understanding expired in March
2005.

      At the end of 2004, we and Golden Aaron Pte. Ltd. and China Global
Construction Limited formed a joint venture in Myanmar and entered into six
production sharing contracts as of June 8, 2005. We will act as the operator
under these production sharing contracts.

      In early 2005, through our wholly owned subsidiary CNOOC Belgium BVBA, we
acquired a 16.69% interest in MEG Energy Corp., a Canada based oil sand company,
at a consideration of 150 million Canadian dollars.

      On January 8, 2006, we signed an agreement with South Atlantic Petroleum
Limited to acquire a 45% working interest in an offshore oil-mining license 130
"OML 130" in Nigeria for a cash consideration of US$2.268 billion. The
acquisition was completed in April 2006. We also acquired a 35% working interest
in the contract for OPL 229 in Nigeria for a consideration of US$60 million. On
February 17, 2006, we signed a production sharing contract for block S in
Equatorial Guinea.

      On April 28, 2006, through our wholly-owned subsidiary CNOOC Africa
Limited, we signed production sharing contracts for six blocks with a total area
of 115,343 square kilometers in Kenya.

Production Sharing Contracts Offshore China

      We conduct a significant amount of our offshore China oil and gas
activities through production sharing contracts with international oil and gas
companies. Under these production sharing contracts, our


                                       69
<PAGE>

foreign partners are required to bear all exploration costs during the
exploration period. The parties to the contracts may recover exploration costs
after commercial discoveries are made and production begins. The amount of
exploration costs recoverable is derived from a production sharing formula set
forth in each contract. Our production sharing contracts provide us with the
option to take participating interests in properties covered by the production
sharing contracts which we may exercise after the foreign partners have made
viable commercial discoveries. The foreign partners retain the remaining
participating interests. We and the foreign partners fund our development and
operating costs according to our respective participating interests. Based on a
formula contained in the applicable contract, we are entitled to allocate
specified amounts of the annual gross production of petroleum from those
producing fields. See "Item 4--Information on the Company--Business
Overview--Production Sharing Contracts--Offshore China--Production Sharing
Formula."

      Before we exercise our option to take a participating interest in a
production sharing contract, we do not account for the exploration costs
incurred, as these costs were incurred by our foreign partners. After we
exercise the option to take a participating interest in a production sharing
contract, we account for the oil and gas properties using the "proportional
method" under which we recognize our share of development costs, revenues and
expenses from such operations based on our participating interest in the
production sharing contracts. See note 5 to our consolidated financial
statements attached to this annual report.

      The foreign partners have the right to either take possession of their
petroleum for sale in the international market or sell their petroleum to us for
resale in the PRC market. See "Item 4--Information on the Company--Business
Overview--Production Sharing Contracts--Offshore China."

      As described above, production of crude oil and natural gas is allocated
among us, our foreign partners and the PRC government according to a formula
contained in the production sharing contracts. We have excluded the government's
share oil from net sales in our historical consolidated financial statements.
Since our historical consolidated financial statements already exclude the
government's share oil from our net sales figure, we do not expect any future
share oil payments to affect our results of operations or operating cash flows
differently than the effects reflected in our historical consolidated financial
statement. For information regarding the historical amounts of government share
oil payable to the government, see note 5 to our consolidated financial
statements attached to this annual report. For information regarding treatment
of the PRC government's share oil, see "Item 4--Information on the
Company--Business Overview--Production Sharing Contracts--Offshore
China--Production Sharing Formula."

      Shanghai Petroleum and Natural Gas Company Limited, which owns the Pinghu
field, is our associated company. Our 30% equity interest in this company is
accounted for using the equity method, under which our proportionate share of
the net income or loss of Shanghai Petroleum and Natural Gas Company Limited is
included in our consolidated statements of income as a share of income or loss
of the associated company.

      Our cost structures for production sharing contracts and for independent
operations are different. The total expenses per unit of production under
production sharing contracts are generally higher due to our foreign partners'
use of expatriate staff, who generally command higher wages, as well as
administrative and overhead costs that may be allocated by the operators, a
higher percentage of capital expenditures and larger proportion of imported
equipment.

Production from Independent Operations offshore China versus Production from
Production Sharing Contracts offshore China

      Historically we have cooperated with foreign partners under production
sharing contracts, which have provided us with the expertise to undertake our
independent operations more effectively. The percentage of our net production
arising from independent operations offshore China was 52.7%, 49.6% and 50.2%,
respectively, for the years ended December 31, 2003, 2004 and 2005,
respectively. Although


                                       70
<PAGE>

we will continue to focus on independent operations, we plan to continue seeking
appropriate opportunities to cooperate with foreign partners under production
sharing contracts.

Provision for dismantlement

      Prior to 2002, we estimated future dismantlement costs for our oil and gas
properties and accrued the costs over the economic lives of the assets using the
unit-of-production method. We estimated future dismantlement costs for oil and
gas properties with reference to the estimates provided from either internal and
external engineers after taking into consideration the anticipated method of
dismantlement required in accordance with then current legislation and industry
practice. In 2002, we changed the method of accounting for the provision for
dismantlement in compliance with Hong Kong Statement of Standard Accounting
Practice or HK SSAP 28 (HKAS 37 replaced HK SSAP 28 in 2005), "Provisions,
contingent liabilities and contingent assets." HK SSAP 28 requires the provision
to be recorded for a present obligation whether that obligation is legal or
constructive. The associated cost is capitalized and the liability is discounted
and accretion expense is recognized using the credit adjusted risk-free rate in
effect when the liability is initially recognized. The dismantlement costs for
the years ended December 31, 2003, 2004 and 2005 were Rmb 167.3 million, Rmb
201.6 million and Rmb 252.9 million, respectively. The accrued liability is
reflected in our consolidated balance sheet under "provision for dismantlement."
See note 28 to our consolidated financial statements attached to this annual
report.

Production Imbalance

      We account for oil overlifts and underlifts using the entitlement method,
under which we record overlifts as liabilities and underlifts as assets. An
overlift occurs when we sell more than our percentage interest of oil from a
property subject to a production sharing contract. An underlift occurs when we
sell less than our participating interest of oil from a property under a
production sharing contract. During the historical periods presented in our
consolidated financial statements attached to this annual report, we had no gas
imbalances. We believe that production imbalance has not had a significant
effect on our operations, liquidity or capital resources.

Allowances for Doubtful Accounts

      We evaluate our accounts receivable by considering the financial condition
of our customers, their past payment history and credit standing and other
specific factors, including whether the accounts receivable in question are
under dispute. We make provisions for accounts receivable when they are overdue
for six months and we are concerned about our ability to collect them. For the
year ended December 31, 2003, 2004 and 2005, allowances for doubtful accounts
were not material in the context of total operating expenses and did not have a
material effect on our results of operations or financial condition.

Critical Accounting Policies

      We prepare our consolidated financial statements in accordance with Hong
Kong GAAP. The preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of our assets and
liabilities, the disclosure of our contingent assets and liabilities as of the
date of our financial statements and the reported amounts of our revenues and
expenses during the periods reported. Management makes these estimates and
judgments based on historical experience and other factors that are believed to
be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. We believe that the
following significant accounting policies may involve a higher degree of
judgment in the preparation of our consolidated financial statements. For
additional discussion of our significant accounting policies, see note 3 to our
consolidated financial statements attached to this annual report.

Oil and Gas Properties

      For oil and gas properties, we have adopted the successful efforts method
of accounting. As a result, we capitalize initial acquisition costs of oil and
gas properties and recognize impairment of initial


                                       71
<PAGE>

acquisition costs based on exploratory experience and management judgment. Upon
discovery of commercial reserves, we transfer acquisition costs to proved
properties and capitalize the costs of drilling and equipping successful
exploratory wells, all development costs, and the borrowing costs arising from
borrowings used to finance the development of oil and gas properties before they
are substantially ready for production. We treat the costs of unsuccessful
exploratory wells and all other related exploration costs as expenses when
incurred. We amortize capitalized acquisition costs of proved properties by the
unit-of-production method on a property-by-property basis based on the total
estimated units of proved reserves. We estimate future dismantlement costs for
oil and gas properties with reference to the estimates provided from either
internal or external engineers after taking into consideration the anticipated
method of dismantlement required in accordance with current legislation and
industry practices. The associated cost is capitalized and the liability is
discounted and an accretion expense is recognized using the credit-adjusted
risk-free interest rate in effect when the liability is initially recognized.

Impairment of Assets

      We make an assessment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, or when there is
any indication that an impairment loss previously recognized for an asset in
prior years may no longer exist or may have decreased. In any event, we would
make an estimate of the asset's recoverable amount, which is calculated as the
higher of the asset's value in use or its net selling price. We recognize an
impairment loss only if the carrying amount of an asset exceeds its recoverable
amount. We charge an impairment loss to the income statement in the period in
which it arises unless the asset is carried at a revalued amount. For a revalued
asset, we account for the impairment loss in accordance with the relevant
accounting policy for such revalued asset. A previously recognized impairment
loss is reversed only if there has been a change in our estimates used to
determine the recoverable amount of an asset. However, no reversal may put the
value of the asset higher than the carrying amount that we would have determined
(net of any depreciation/amortization) had no impairment loss been recognized
for the asset in prior years.

      A reversal of an impairment loss is credited to the income statement in
the period in which it arises, unless the asset is carried at a revalued amount,
when the reversal of the impairment loss is accounted for in accordance with the
relevant accounting policy for that revalued asset.

Provisions

      We recognize a provision when a present obligation (legal or constructive)
has arisen as a result of a past event and it is probable that a future outflow
of resources will be required to settle the obligation so long as a reliable
estimate can be made of the amount of the obligation. When the effect of
discounting is material, the amount recognized for a provision is the present
value at the balance sheet date of the future expenditures expected to be
required to settle the obligation. The increase in the discounted present value
amount arising from the passage of time is included in finance costs in the
income statement. We make provisions for dismantlement based on the present
value of our future costs expected to be incurred, on a property-by-property
basis, in respect of our expected dismantlement and abandonment costs at the end
of the related oil exploration and recovery activities.

Deferred Tax

      Deferred tax is provided, using the liability method, on all temporary
differences at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.

Recognition of Revenue from Oil and Gas Sales and Marketing

      We recognize revenue when it is probable that the economic benefits will
flow to us and when the revenue can be measured reliably. For oil and gas sales,
our revenues represent the invoiced value of sales of oil and gas attributable
to our interests, net of royalties and any government share oil that is lifted
and sold on behalf of the PRC government. Sales are recognized when the
significant risks and rewards


                                       72
<PAGE>

of ownership of oil and gas have been transferred to customers. Oil and gas
lifted and sold by us above or below our participating interests in any
production sharing contract result in overlifts and underlifts. We record these
transactions in accordance with the entitlement method under which overlifts are
recorded as liabilities and underlifts are recorded as assets at year-end oil
prices. Settlement will be in kind when the liftings are equalized or in cash
when production ceases. We enter into gas sales contracts with customers which
typically contain take-or-pay clauses. These clauses require our customers to
take a specified minimum volume of gas each year. If a customer fails to take
the minimum volume of gas, the customer must pay for the gas even though it did
not take the gas. The customer can offset the deficiency payment against any
future purchases in excess of the specified volume. We record any deficiency
payment as deferred revenue which is included in other payables until any
make-up gas is taken by the customer or the expiry of the contract. Our
marketing revenues represent sales of oil purchased from the foreign partners
under our production sharing contracts and revenues from the trading of oil
through our subsidiary in Singapore. The title, together with the risks and
rewards of the ownership of such oil purchased from the foreign partners, are
transferred to us from the foreign partners and other unrelated oil and gas
companies before we sell such oil to our customers. The cost of the oil sold is
included in crude oil and product purchases.

Results of Operations

Overview

      The following table summarizes the components of our revenues and net
production as percentages of our total revenues and total net production for the
periods indicated:

<TABLE>
<CAPTION>
                                                           Year ended December 31,
                                ------------------------------------------------------------------------------
                                           2003                       2004                      2005
                                ------------------------   ------------------------   ------------------------
                                       (Rmb in millions, except percentages, production data and prices)
<S>                                 <C>            <C>         <C>            <C>         <C>            <C>
Revenues:
Oil and gas sales: (1)
  Crude oil .................       25,792         63.0%       34,081         61.7%       50,361         72.5%
  Natural gas ...............        2,325          5.7%        2,805          5.1%        3,057          4.4%
                                ----------   ----------    ----------   ----------    ----------   ----------
  Total oil and gas sales ...       28,117         68.7%       36,886         66.8%       53,418         76.9%

Marketing revenues ..........       12,398         30.3%       18,191         32.9%       15,901         22.9%
Other income ................          435          1.1%          145          0.3%          137          0.2%
                                ----------   ----------    ----------   ----------    ----------   ----------
  Total revenues ............       40,950        100.0%       55,222        100.0%       69,456        100.0%
                                ==========   ==========    ==========   ==========    ==========   ==========

Net production (million BOE):
Crude oil ...................        111.9         85.9%        116.9         83.5%        130.3         84.2%
Natural gas .................         18.3         14.1%         23.1         16.5%         24.5         15.8%
                                ----------   ----------    ----------   ----------    ----------   ----------

  Total net production ......        130.2        100.0%        140.0        100.0%        154.8        100.0%
                                ==========   ==========    ==========   ==========    ==========   ==========
Average net realized prices:
  Crude oil (per bbl)......       US$28.11                   US$35.41                   US$47.31
  Natural Gas (per mcf)....           2.87                       2.75                       2.82
</TABLE>

-------------------------
(1)   These figures do not include our revenues from the Pinghu gas field.

      The following table sets forth, for the periods indicated, certain income
and expense items in our consolidated income statements as a percentage of total
revenues:

<TABLE>
<CAPTION>
                                                                           Year ended December 31,
                                                                  ----------------------------------------
                                                                     2003           2004           2005
                                                                  ----------     ----------     ----------
Operating Revenues:                                               (based on restated amounts)
<S>                                                                     <C>            <C>            <C>
     Oil and gas sales ........................................         68.7%          66.8%          76.9%
     Marketing revenues .......................................         30.2           32.9           22.9
     Other income .............................................          1.1            0.3            0.2
                                                                  ----------     ----------     ----------
         Total revenues .......................................        100.0%         100.0%         100.0%
                                                                  ==========     ==========     ==========
Expenses:
     Operating expenses .......................................        (11.0)%         (9.2)%         (8.5)%


                                                      73
<PAGE>

     Production taxes .........................................         (3.0)          (3.1)          (3.7)
     Exploration costs ........................................         (2.1)          (2.4)          (1.9)
     Depreciation, depletion and amortization .................        (11.3)          (9.9)          (8.6)
     Dismantlement ............................................         (0.4)          (0.4)          (0.4)
     Impairment losses related to property, plant and equipment         (0.0)          (0.0)          (0.1)
     Crude oil and product purchases ..........................        (29.9)         (32.5)         (22.6)
     Selling and administrative expenses ......................         (3.1)          (1.9)          (2.0)
     Other ....................................................         (0.9)          (0.1)          (0.1)
                                                                  ----------     ----------     ----------
                                                                       (61.7)%        (59.5)%        (47.9)%
                                                                  ----------     ----------     ----------

Interest income ...............................................          0.4%           0.4%           0.5%
Finance costs .................................................         (0.9)          (0.8)          (1.6)
Exchange gain (loss), net .....................................         (0.0)           0.1            0.4
Short term investment income ..................................          0.3            0.1            0.4
Share of profit of an associate ...............................          0.5            0.6            0.4
Non-operating profit (loss), net ..............................          0.8            0.9            0.0
                                                                  ----------     ----------     ----------
Income before tax .............................................         39.4           41.8           52.3
Tax ...........................................................        (11.3)         (12.6)         (15.8)
                                                                  ----------     ----------     ----------
Net income ....................................................         28.1%          29.2%          36.5%
                                                                  ==========     ==========     ==========
</TABLE>

Calculation of Revenues

      China

      We report total revenues, which consist of oil and gas sales, marketing
revenues and other income, in our consolidated financial statements attached to
this annual report. With respect to revenues derived from our offshore China
operations, oil and gas sales represent gross oil and gas sales less royalties
and share oil payable to the PRC government. These amounts are calculated as
follows:

      o     gross oil and gas sales consist of our percentage interest in
            total oil and gas sales, comprised of (i) a 100% interest in our
            independent oil and gas properties and (ii) our participating
            interest in the properties covered under our production sharing
            contracts, less an adjustment for production allocable to foreign
            partners under our production sharing contracts as reimbursement
            for exploration expenses attributable to our participating
            interest;

      o     royalties represent royalties we pay to the PRC government on
            production with respect to each of our oil and gas fields. The
            amount of royalties varies from 0% up to 12.5% based on the annual
            production of the relevant property. We pay royalties on oil and
            gas we produce independently and under production sharing
            contracts;

      o     government share oil, which is only paid on oil and gas produced
            under production sharing contracts, is calculated as described
            under "--Overview--Production Sharing Contracts Offshore China;"

      o     other income mainly represents project management fees charged to
            our foreign partners and handling fees charged to end
            customers--both fees are recognized when the services are
            rendered; and

      o     we pay production taxes to the PRC government that are equal to 5%
            of the oil and gas we produce independently and under production
            sharing contracts. Our oil and gas sales are not reduced by
            production taxes. Production taxes are included in our expenses
            under "production taxes."

      Marketing revenues represent our sales of our foreign partners' oil and
gas produced under our production sharing contract and purchased by us from our
foreign partners under such contracts as well as from international oil and gas
companies through our wholly owned subsidiary in Singapore. Net marketing
revenues represent the marketing revenues net of the cost of purchasing oil and
gas from foreign partners and from international oil and gas companies. Our
foreign partners have the right to


                                       74
<PAGE>

either take possession of their oil and gas for sale in the international market
or to sell their oil and gas to us for resale in the PRC market.

      Our share of the oil and gas sales of our associated company is not
included in our revenues, but our share of the profit or loss of our associated
company is included in our consolidated statements of income under "share of
profit of associates."

      Indonesia

      The oil and gas sales from our subsidiaries in Indonesia consist of our
participating interest in the properties covered under the relevant production
sharing contracts, less adjustments for share oil payable under our Indonesian
production sharing contracts and for a domestic market obligation under which
the contractor must sell a specified percentage of its crude oil to the local
Indonesian market at a reduced price.

2005 versus 2004

      The discussions under "--2005 versus 2004" are based on the restated
amounts, where applicable, as a result of the adoption of new HKFRSs. See note
2.4 to our consolidated financial statements under "Item 18-Financial Statement"
in this annual report.

      Consolidated Net Profit

      Our consolidated net income after tax was Rmb 25,323.1 million (US$3,137.9
million) in 2005, an increase of Rmb 9,184.0 million (US$1,138.0 million), or
56.9%, from Rmb 16,139.1 million in 2004.

      Revenue

      Our oil and gas sales for 2005 were Rmb 53,417.7 million (US$6,619.1
million), an increase of Rmb 16,531.7 million (US$2,048.5 million), or 44.8%,
from Rmb 36,886.0 million in 2004. The increase primarily reflects the rise in
global crude oil prices and production grants. Our sales volume of crude oil and
natural gas in 2005 increased by 11.6% and 6.8%, respectively, as compared to
2004. The average realized price for our crude oil was US$47.31 per barrel in
2005, an increase of US$11.9, or 33.6% from US$35.41 per barrel in 2004. The
average realized price of natural gas was US$2.82 per thousand cubic feet in
2005, an increase of US$0.07, or 2.6%, from US$2.75 per thousand cubic feet in
2004.

      In 2005, our net marketing profit, which were derived from marketing
revenue less purchase cost of crude oil and oil products, were Rmb 197.2 million
(US$24.4 million), a decrease of Rmb 30.7 million (US$3.8 million), or 13.5%,
from Rmb 227.9 million in 2004. Since we are one of the three companies that
have the right to sell crude oil in China, upon request by our production
sharing contract partners, we may purchase the oil of these partners for sale in
China. However, the amount of oil we may purchase and sell in China depends on
our foreign partners and, therefore, we cannot control the amount of crude oil
that we are able to sell for any specific period. In 2005, marketing revenue
from our wholly-owned subsidiary, CNOOC China Limited, was Rmb 9,430.8 million
(US$1,168.6 million), representing an increase of Rmb 1,688.2 million (US$209.2
million) from Rmb 7,742.6 million in 2004. The net marketing profit, however,
decreased Rmb 71.6 million, or 45.7%, from Rmb 156.6 million in 2004. The
decrease was primarily due to the significant reduction in sales margin which
was mainly influenced by market prices in the local markets. The net marketing
profit from our wholly-owned subsidiary, China Offshore Oil (Singapore)
International Pte Ltd., was Rmb 112.2 million (US$13.9 million), an increase of
Rmb 40.9 million, or 57.4%, from Rmb 71.3 million in 2004.

      Our other income, reported on a net basis, was derived from our other
income less corresponding costs. In 2005, the total other income was Rmb 59.7
million (US$7.4 million), a decrease of Rmb 39.1 million (US$4.8 million) from
Rmb 98.8 million in 2004. The decrease was primarily due to the lower service
fees received from our production sharing contract projects.


                                       75
<PAGE>

      Expenses

      Operating expenses. Our operating expenses were Rmb 5,934.6 million
(US$735.4 million) in 2005, an increase of Rmb 864.3 million (US$107.1 million),
or 17.0%, from Rmb 5,070.3 million in 2004. The increase was mainly attributable
to the commencement of production of seven new oil and gas fields in China in
2005. Operating expenses in 2005 were Rmb 38.8 (US$4.8) per BOE, an increase of
5.7% from Rmb 36.7 per BOE in 2004. Operating expenses for our offshore China
operations in 2005 were Rmb 32.5 (US$4.0) per BOE, representing an increase of
8.7% from 2004. The increase was mainly attributable to the higher service fees,
supply vessels, equipment lease, maintenance materials, chemicals and fuel,
resulting from the higher international crude oil price. Operating expenses for
our offshore Indonesia operations were Rmb 100.2 (US$12.4) per BOE, an increase
of 13.0% over 2004. The increase in operating expenses per barrel for our
Indonesian oil fields was due to lower net production volume based on their
profit sharing models. Based on working interest production, operating expenses
for our offshore Indonesia operations in 2005 were Rmb 48.7 (US$6.0) per BOE.

      Production taxes. Our production taxes for 2005 were Rmb 2,596.5 million
(US$321.7 million), an increase of Rmb 870.8 million (US$107.9 million), or
50.5% from Rmb 1,725.7 million in 2004. The increase was primarily due to the
increased income from oil and gas sales.

      Exploration costs. Our exploration costs for 2005 were Rmb 1,293.7 million
(US$160.3 million), a slight decrease of Rmb 22.5 million (US$2.8 million), or
1.7%, from Rmb 1,316.2 million in 2004, as a result of an increase in
capitalization of investment in exploration activities.

      Depreciation, depletion and amortization expenses. Our depreciation,
depletion and amortization expenses for 2005 were Rmb 5,964.7 million (US$739.1
million), an increase of Rmb 509.6 million (US$63.1 million), or 9.3%, from Rmb
5,455.1 million in 2004. On a unit of production basis, depreciation, depletion
and amortization expenses for 2005 were Rmb 39.0 (US$4.8) per BOE, as compared
to Rmb 39.5 per BOE in 2004.

      Dismantlement costs. Our dismantlement costs for 2005 were Rmb 252.9
million (US$31.3 million), an increase of Rmb 51.3 million (US$6.4 million),
from Rmb 201.6 million in 2004. The increase was primarily due to the increased
dismantling costs resulting from the commencement of production at new oil and
gas fields and a revision of the dismantlement liabilities for certain existing
oil and gas fields. Our dismantlement costs were Rmb 1.7 (US$0.2) per BOE, a
corresponding increase from Rmb 1.5 per BOE in 2004.

      Impairment losses related to property, plant and equipment. Our impairment
losses for 2005 were Rmb 90.2 million (US$11.2 million). The impairment was due
to the downward revision of the reserve of BZ34-2/4 and HZ19-3 oil and gas
fields. The average impairment costs were Rmb 0.6 (US$0.07) per BOE.

      Selling and administrative expenses. Our selling and administrative
expenses for 2005 were Rmb 1,370.4 million (US$169.8 million), an increase of
Rmb 266.1 million (US$33.0 million), or 24.1%, from Rmb 1,104.3 million in 2004.
Of which, our selling and administrative expenses of companies in China in 2005
were Rmb 6.3 (US$0.8) per BOE, an increase of 14.5% over 2004.
 Compared with 2004, the increase was mainly attributable to an increase in
management fees related to the increased number of production sharing contract
projects under production, and increases in labor costs and general research
expenditure in 2005.

      Finance costs, net of interest income

      Our net finance costs for 2005 was Rmb 741.2 million (US$91.8 million), an
increase of 215.5%, from the net interest expenses of Rmb 235.0 million in 2004.
On the one hand, our interest income increased by Rmb 152.4 million from Rmb
206.9 million in 2004 to Rmb 359.3 million in 2005. On the other hand, the
finance costs increased significantly mainly due to the interest expenses on our
US$1 billion bonds issued in December 2004, the losses on fair value changes of
the embedded derivative component of the convertible bonds and the effect of
increased amount of provision of dismantlement arising from the passage of time.
The increases due to the factors mentioned above were Rmb 164.4


                                       76
<PAGE>

million (US$20.4 million), Rmb 373.1 million (US$46.2) and Rmb 79.2 million
(US$9.8 million), respectively.

      Exchange Gain/Loss, net

      Our net exchange gain for 2005 was Rmb 287.0 million (US$35.6 million), an
increase of Rmb 257.7 million (US$31.9 million), from net exchange gains of Rmb
29.3 million in 2004. Compared with 2004, the increased exchange gains mainly
came from the Chinese government's efforts on the improvement of rate-forming
mechanism and the following appreciation of Renminbi in the second half of the
year.

      Investment Income

      Our short term investment income for 2005 was Rmb 247.9 million (US$30.7
million), a significant increase of Rmb 175.5 million (US$21.7 million), or
242.4%, from Rmb 72.4 million in 2004. For the purpose of improving performance
of current assets portfolio, we increased the investment in financial
instruments such as money market funds. Benefiting from the structural changes
in the investment portfolio and the influence from the market, we obtained a
favorable return in this year.

      Share of Profits of Associates

      In 2005, there were gains from our investments in Shanghai Petroleum and
Natural Gas Company Limited and CNOOC Finance Corporation Limited. Of them,
share of profit from Shanghai Petroleum and Natural Gas Company Limited was Rmb
261.8 million (US$32.4 million), representing a decrease of 12.1% from 2004,
which was mainly due to the change in tax rate from favorable rate of 16.5% to
normal rate of 33.0% and resulting from the increased income tax payment of
2005. Share of profit from CNOOC Finance Corporation Limited was Rmb 45.3
million (US$5.6 million) during the period, relatively comparable to that from
2004.

      Non-operating Income/Expenses, Net

      Our net non-operating income for 2005 was Rmb 28.6 million (US$3.5
million), as compared to non-operating income of Rmb 519.2 million for 2004. In
2004, the net non-operating income represented the tax refund from re-investment
in China.

      Income tax

      Our income tax for 2005 was Rmb 10,977.8 million (US$1,360.3 million), an
increase of Rmb 4,047.0 million (US$501.5 million), or 58.4%, from Rmb 6,930.8
million in 2004. The primary reason for the increase was the increase in profit
before tax. The effective tax rate for 2005 was 30.2%, slightly higher than the
effective rate of 30.0% in 2004.



2004 versus 2003

      The discussions under "--2004 versus 2003" are based on the restated
amounts, where applicable, as a result of the adoption of new HKFRSs. See note
2.4 to our consolidated financial statements under "Item 18 - Financial
Statements" in this annual report.

      Consolidated Net Profit

      Our consolidated net income after tax was Rmb 16,139.1 million in 2004, an
increase of Rmb 4,641.4 million, or 40.4%, from Rmb 11,497.7 million in 2003.

      Revenue


                                       77
<PAGE>

      Our oil and gas sales for 2004 were Rmb 36,886.0 million, an increase of
Rmb 8,769.2 million or 31.2%, from Rmb 28,116.8 million in 2003. The increase
primarily reflects the rise in global crude oil prices and our higher production
level. Our sales of crude oil and natural gas in 2004 increased by 5% and 26%,
respectively, as compared to 2003. The average realized price for our crude oil
was US$35.41 per barrel in 2004, an increase of US$7.3, or 26.0% from US$28.11
per barrel in 2003. The average realized price of natural gas was US$2.75 per
thousand cubic feet in 2004, a decrease of US$0.12, or 4.2%, from US$2.87 per
thousand cubic feet in 2003. The decrease was due to the increased weighting of
production of low-priced gas fields.

      In 2004, our net marketing profit, which were derived from marketing
revenue less purchase cost of crude oil and oil products, were Rmb 227.9
million, an increase of Rmb 124.5 million, or 120.3%, from Rmb 103.4 million in
2003. Since we are one of the three companies that have the right to sell crude
oil in China, upon request by our production sharing contract partners, we may
purchase the oil of these partners for sale in China. However, the amount of oil
we may purchase and sell in China depends on our foreign partners and,
therefore, we cannot control the amount of crude oil that we are able to sell
for any specific period. In 2004, our marketing profit from our wholly owned
subsidiary, China Offshore Oil (Singapore) International Pte Ltd., was Rmb 71.3
million, an increase of 36.1% from Rmb 52.4 million in 2003.

      Our other income, reported on a net basis, was derived from our other
income less corresponding costs. In 2004, the total other income was Rmb 98.8
million, an increase of Rmb 14.3 million (US$1.7 million) from Rmb 84.5 million
in 2003.

      Expenses

      Operating expenses. Our operating expenses were Rmb 5,070.3 million in
2004, an increase of Rmb 557.5 million, or 12.4%, from Rmb 4,512.8 million in
2003. The increase primarily resulted from the increased operating expenses in
connection with the commencement of operations in new properties. Operating
expenses were Rmb 36.7 per BOE in 2004, an increase of 4.2% from Rmb 35.2 per
BOE in 2003. Operating expenses offshore China in 2004 were Rmb 29.9 per BOE, an
increase of 10.7% from Rmb 27.0 per BOE in 2003. Operating expenses offshore
Indonesia were Rmb 88.7 per BOE, an increase of 15.6% from Rmb 76.7 per BOE in
2003. The increases were primarily due to the high international crude oil
prices and an increase in operating expenses per barrel for our Indonesian
oilfields due to their lower production volume based on their profit sharing
model. Based on working interest production, operating expenses for our offshore
Indonesia operations in 2004 were Rmb 42.0 per BOE, which were in line with the
operating expenses for our offshore Indonesia operations in the previous year.

      Production taxes. Our production taxes for 2004 were Rmb 1,725.7 million,
an increase of Rmb 487.1 million, or 39.3%, from Rmb 1,238.6 million in 2003.
The increase was primarily due to increase in oil and gas sales in 2004.

      Exploration costs. Our exploration costs for 2004 were Rmb 1,316.2
million, an increase of Rmb 468.1 million, or 55.2%, from Rmb 848.1 million in
2003. The increase was primarily due to a significant increase in exploration
activities. In 2004, some successful exploration wells were written off because
we did not expect to develop these wells within the next couple years. The
write-off amount was Rmb 155.8 million.

      Depreciation, depletion and amortization expenses. Our depreciation,
depletion and amortization expenses for 2004 were Rmb 5,455.1 million, an
increase of Rmb 812.3 million, or 17.5%, from Rmb 4,642.8 million in 2003. On a
unit of production basis, depreciation, depletion and amortization expenses for
2004 were Rmb 39.5 per BOE, an increase of 9.2% compared to Rmb 36.2 per BOE in
2003. The primary reason for the increase was the higher amortization costs for
the oilfields that commenced operations in 2004 and the lower production level
of the Indonesian oilfields. Based on our profit sharing model, our production
level of our Indonesian oilfields is directly affected by oil price fluctuation.


                                       78
<PAGE>

      Dismantlement costs. Our dismantlement costs for 2004 were Rmb 201.6
million, an increase of Rmb 34.3 million, or 20.5%, from Rmb 167.3 million in
2003. The increase was primarily due to the increased dismantlement costs
resulting from the commencement of production at new oil and gas properties. On
a unit production basis, our dismantlement costs were Rmb 1.5 per BOE, an
increase of 15.3% compared to Rmb 1.3 per BOE in 2003.

      Selling and administrative expenses. Our selling and administrative
expenses for 2004 were Rmb 1, 104.3 million, a decrease of Rmb 145.9 million, or
11.7%, from Rmb 1,250.3 million in 2003. The primary reason for the decrease was
a decrease in labor costs resulting from the direct charge of some labor costs
to specific projects and the replacement of some foreign employees that received
higher salaries with local employees. On a unit of production basis, selling and
administrative expenses were Rmb 8.0 per BOE in 2004, a decrease of 19.1% from
Rmb 9.7 per BOE in 2003. Our selling and administrative expenses in China in
2004 were Rmb 5.5 per BOE, a decrease of 17.9% from 2003.

      Net interest expenses/income

      Our net interest expense for 2004 was Rmb 235.0 million, an increase of
Rmb 63.6 million, or 37.1%, from Rmb 171.4 million in 2003. The increase was
primarily due to the interest expenses on our US$500 million bonds issued in
2003. Rmb 94.8 million of the increase in interest expense was attributable to
our long term guaranteed notes.

      Exchange Gain/Loss, net

      Our net exchange gain for 2004 was Rmb 29.3 million, compared with a net
exchange loss of Rmb 6.7 million in 2003. The exchange gain in 2004 was mainly
attributable to our foreign currency swaps for our yen-denominated loans.

      Short Term Investment Income

      Our short term investment income for 2004 was Rmb 72.4 million, a decrease
of Rmb 51.1 million, or 41.4%, from Rmb 123.5 million in 2003. The decrease was
primarily due to the structural change to our investment portfolio, where we
disposed of some of our investment in corporate bonds and reinvested the
proceeds in market funds.

      Share of Profit of Associates

      Our share of profit of associates for 2004 was Rmb 344.5 million, an
increase of Rmb 124.2 million, or 56.4%, from Rmb 220.3 million in 2003. This
item reflected our share of profit generated by Shanghai Petroleum and Natural
Gas Company Limited resulting primarily from increases in production and oil
prices and our share of profit generated by CNOOC Finance Corporation Limited.

      Non-operating Income/Expenses, Net

      Our net non-operating income for 2004 was Rmb 519.2 million, compared to
non-operating income of Rmb 315 million for 2003. In 2004, the net non-operating
income was mainly due to the tax refund from re-investment in China.

      Income tax

      Our income tax for 2004 was Rmb 6,930.8 million, an increase of Rmb
2,303.0 million, or 49.8%, from Rmb 4,627.8 million in 2003. The primary reason
for the increase was the increase in profit before tax. In 2003, we received Rmb
252.0 million tax rebate for using domestic equipment. The effective tax rate
for 2004 was 30.0%, as compared with the effective rate of 28.7% in 2003.


                                       79
<PAGE>

B.    LIQUIDITY AND CAPITAL RESOURCES

      The following table summarizes our cash flows for the periods presented:

                                                  Year ended December 31,
                                           -----------------------------------
                                              2003        2004          2005
                                           ---------    ---------    ---------
                                                     (Rmb in millions)
Cash provided by (used for):
   Operating activities ................      17,819       22,328       32,154
   Investing activities ................      (9,513)     (24,607)     (29,349)
   Financing activities ................      (1,745)       1,970       (7,787)
                                           ---------    ---------    ---------
Net increase/(decrease) in cash and cash
      equivalents ......................       6,561         (309)      (4,982)
                                           =========    =========    =========

Cash Provided by Operations

      Net cash generated from operating activities in 2005 amounted to Rmb
32,153.8 million (US$3,984.3 million), representing an increase of Rmb 9,825.9
million (US$1,217.6 million), or 44.0% from Rmb 22,327.9 million in 2004. The
increase was primarily due to an increase in profit before tax of Rmb 13,231.0
million (US$1,639.5 million), an increase in depreciation, depletion and
amortization expenses of Rmb 509.7 million (US$63.2 million), an increase in
finance costs of Rmb 658.7 million (US$81.6 million), an increase in provision
for inventory of Rmb 35.8 million (US$4.4 million), an increase in dismantlement
costs of Rmb 51.2 million (US$6.3 million), a decrease in share of profits of
associates of Rmb 37.4 million (US$4.6 million), an increase in amortization of
discount of long term guaranteed notes of Rmb 26.3 million (US$3.3 million), and
an increase in impairment losses related to property, plant and equipment of Rmb
90.2 million (US$11.2 million).

      Increase of cash flow was also partially offset by an increase of income
tax paid of Rmb 2,447.2 million (US$303.2 million), an increase in our finance
exchange gain and loss of Rmb 257.8 million (US$31.9 million), an increase in
investment income received of Rmb 175.5 million (US$21.7 million), a decrease in
the loss on disposal and write off of property, plant and equipment of Rmb 14.3
million (US$1.8 million), an increase in interest income of Rmb 152.4 million
(US$18.9 million) and a decrease in compensation cost for share based payment of
Rmb 17.5 million (US$2.2 million).

      In another aspect, compared with 2004, the increase in operating cash flow
was partially attributable to the increase in changes of working capital, mainly
due to the increase in changes of current assets from operating activities
excluding cash and bank balances of Rmb 2,103.9 million (US$260.7 million), and
a simultaneous increase in changes of current liabilities from operating
activities of Rmb 71.0 million (US$8.8 million).

Capital Expenditures and Investments

      Net cash outflow from investing activities in 2005 was Rmb 29,349.2
million (US$3,636.7 million), representing an increase of Rmb 4,742.0 million
(US$587.6 million), from Rmb 24,607.2 million in 2004. In line with our use of
"successful efforts" method of accounting, total capital expenditures and
investments primarily include successful exploration and development
expenditures and purchasing costs of oil and gas properties. Total capital
expenditures were Rmb 17,469.5 million (US$2,164.7 million) in 2005,
representing a decrease of Rmb 1,152.5 million (US$142.8 million), or 6.2%, from
Rmb 18,622.0 million in 2004.

      The capital expenditures in 2005 mainly comprised of Rmb 875.8 million
(US$108.5 million) for capitalized exploration activities, Rmb 15,729.7 million
(US$1,949.1 million) for development activities, and Rmb 1,017.0 million
(US$126.0 million) for acquiring 16.69% equity interest in MEG, netting off a
tax refund of Rmb 153.0 million (US$ 19.0 million) for the North West Shelf
project in Australia. Our development expenditures in 2005 related principally
to the development of PanYu 30-1, Bozhong 25-1/25-1S, PL19-3 phase II and NanPu
35-2 oil and gas fields.


                                       80
<PAGE>

      In addition, cash outflow was attributable to the increase in time
deposits with maturities over three months of Rmb 3,597 million (US$445.7
million), and the net purchase of available-for-sale financial assets of Rmb
8,282.7 million (US$1,026.3 million).

      Total capital expenditures were Rmb 18,622.0 million in 2004, an increase
of Rmb 6,249.5 million, or 50.5%, from Rmb 12,372.5 million in 2003. The capital
expenditures in 2004 included Rmb 783.5 million for capitalized exploration
activities, Rmb 12,059.4 million for development activities, and Rmb 5,779.1
million for acquiring the Tangguh LNG project, the North West Shelf project and
other oil and gas properties. Our development expenditures in 2004 related
principally to the development of Bozhong 25-1/25-1S, Luda, Bonan and Caofeidian
oil and gas fields. In addition, cash outflow in 2004 was in part attributable
to an increase in time deposits with maturities over three months of Rmb 6,280
million, which was partially offset by cash inflow from net disposal of
short-term investment of Rmb 294.8 million.

      For 2006, we have budgeted approximately US$3.08 billion for capital
expenditures, approximately US$316.3 million of which is budgeted for general
exploration activities offshore China, approximately US$1,860.1 million of which
is budgeted for development activities offshore China and approximately US$514.5
million of which is budgeted for our exploration and development activities
overseas.

      The following table sets forth actual or budgeted capital expenditures on
an accrual basis for our key operating areas for the periods indicated.

                                                        Year ended December 31,
                                                       -------------------------
                                                         2005(1)        2006(2)
                                                       ----------     ----------
Operating Area:                                          (US$ in millions)
Bohai Bay
   Development ...................................          856.4        1,099.5
   Exploration ...................................           84.3          136.5
Western South China Sea
   Development ...................................          161.3          441.3
   Exploration ...................................           76.0          113.4
East China Sea
   Development ...................................          105.0           30.3
   Exploration ...................................            6.3           12.1
East South China Sea
   Development ...................................          554.1          271.5
   Exploration ...................................           52.9           32.9
Other Offshore China
   Development ...................................             --           17.4
   Exploration ...................................           13.4           21.4
Overseas
   Development ...................................          288.5          373.1
   Exploration ...................................           19.6          141.4
                                                       ----------     ----------
      Total ......................................        2,217.7        2,690.8
                                                       ==========     ==========

-----------------------
(1)   Figures for 2005 represent our actual spending for capital expenditure
      purposes.
(2)   Figures for 2006 represent our budgeted capital expenditures.

      In addition to the budgeted development and exploration expenditures
relating to the oil and gas properties described above, we may make additional
capital expenditures and investments in these periods consistent with our
business strategy. See "Item 4--Information on the Company--Business
Overview--Business Strategy."

      Our ability to maintain and grow our revenues, net income and cash flows
depends upon continued capital spending. We adjust our capital expenditure and
investment budget on an annual basis. Our capital expenditure plans are subject
to a number of risks, contingencies and other factors, some of


                                       81
<PAGE>

which are beyond our control. Therefore, our actual future capital expenditures
and investments will likely be different from our current planned amounts, and
such differences may be significant. See "Item 3--Key Information--Risk
Factors--Risks relating to our business--Our future prospects largely depend on
our capital expenditure plans, which are subject to various risks."

      Financing activities

      The net cash outflow arising from financing activities in 2005 was Rmb
7,786.4 million (US$964.8 million) as compared to a net cash inflow of Rmb
1,970.5 million from financing activities in 2004. There was no issuance of debt
financing instruments or bank loan increase in 2005. The net cash outflow in
2005 was primarily due to the distribution of dividends of Rmb 7,772.2 million
(US$963.1 million) and the repayment of bank loans of Rmb 18.7 million (US$2.3
million). Some cash inflow was generated by the proceeds from the exercise of
share options of Rmb 4.5 million (US$0.6 million) in 2005.

      We had net cash inflows from financing activities of Rmb 1,970.5 million
in 2004, primarily attributable to the convertible bond issuance which generated
cash inflow of approximately Rmb 8,154.1 million. The cash inflows were
partially offset by our repayment of Rmb 21.1 million in bank loans, dividend
distributions of Rmb 6,101.4 million and a cash outflow of Rmb 61.2 million
resulting from our share repurchases in 2004.

      We have debt service obligations consisting of principal and interest
payments on our outstanding indebtedness. The following table summarizes the
maturities of our long-term debt outstanding as of December 31, 2005. As of the
date this annual report is filed, we have not incurred any material long-term
debt since December 31, 2005.

<TABLE>
<CAPTION>
                                              Debt maturities (principal only)
                           ------------------------------------------------------------------
                                       Original currency
                           --------------------------------------   Total Rmb      Total US$
Due by December 31,            US$          JPY           Rmb      equivalents    equivalents
------------------------   ----------    ----------    ----------   ----------    ----------
                                                    (in millions, except percentages)
<S>                        <C>           <C>           <C>          <C>           <C>
2006 ...................        100.0         271.5            --        825.7         102.3
2007-2009 ..............      1,000.0         271.4            --      8,088.9       1,002.3
2010-2011 ..............           --            --            --           --            --
2011 and beyond ........      1,000.0            --            --      8,070.2       1,000.0
   Total ...............      2,100.0         542.9            --     16,984.8       2,104.6
Percentage of total debt         99.8%          0.2%           --        100.0%        100.0%
</TABLE>

      As of June 6, 2006, we had a total U.S. dollar debt of US$2,100.0 million
and a total foreign currency debt of US$2,104.6 million.

      After we became a separate entity in October 1999, we paid a dividend of
Rmb 1,045.4 million in 1999 and declared and paid a final dividend of Rmb
6,426.4 million in 2000. In 2002, 2003 and 2004, we paid dividends totaling Rmb
2,265.1 million, Rmb 5,403.7 million and Rmb 6,101.4 million, respectively. In
2005, we declared and paid dividends totaling Rmb 7,772.2 million (US$963.1
million). The payment and the amount of any dividends in the future will depend
on our results of operations, cash flows, financial condition, the payment by
our subsidiaries of cash dividends to us, future prospects and other factors
which our directors may consider relevant. The amount of dividends we paid
historically is not indicative of the dividends that we will pay in the future.

      We believe our future cash flows from operations, borrowing capacity and
funds raised from our debt offerings will be sufficient to fund planned capital
expenditures and investments, debt maturities and working capital requirements
through at least 2006. Several large financial institutions have expressed an
interest in supporting our business development, although we have not entered
into any agreements for additional financing with these institutions. However,
our ability to obtain adequate financing to satisfy our capital expenditure and
debt service requirements may be limited by our financial condition and results
of operations and the liquidity of international and domestic financial markets,
including the following factors:


                                       82
<PAGE>

      o     Any failure by us to achieve timely rollover, extension or
            refinancing of our short-term debt may result in our inability to
            meet our obligations in connection with debt service, accounts
            payable and/or other liabilities when they become due and payable.

      o     Our primary operating subsidiary is a PRC incorporated company.
            Therefore, prior to accessing the international capital markets we
            will be subject to limitations imposed by various PRC government
            authorities, including the State Administration for Foreign
            Exchange, depending on the type of international financing raised.
            We may also need to obtain PRC government support for any project
            involving significant capital investment in the operations of our
            PRC subsidiary.

      o     In addition, financing sources often look to similarly situated
            entities when determining whether, and at what rates, to provide
            financing. Successful or unsuccessful financing by Hong Kong and
            PRC entities similarly situated to us could have an impact on our
            ability to obtain external financing.

      See "Item 3--Key Information--Risk Factors--Risks relating to our
business--Our future prospects largely depend on our capital expenditure plans,
which are subject to various risks" and "--We may not be able to obtain external
financing that is acceptable to us for business development purposes."

Employee Benefits

      When we became a separate entity as a result of CNOOC's reorganization in
October 1999, CNOOC retained all liabilities for retirement benefits for its
employees, both former and current, who had not been transferred to us. As
compensation for CNOOC's retention of liabilities for retirement benefits
payable to approximately 7,000 retired CNOOC employees who were previously
engaged in the oil and gas business that was transferred to us in the
reorganization, we made a one-time payment to CNOOC of Rmb 1,660.0 million in
2001.

      All of our full-time employees in the PRC are covered by a
government-regulated pension plan and are entitled to an annual pension at their
retirement dates. The PRC government is responsible for the pension liabilities
to these retired employees under this government pension plan. The actual
pension payable to each retiree is subject to a formula based on the status of
the individual pension account, general salary and inflation movements. We are
required to make annual contributions to the government pension plan at rates
ranging from 9% to 22% of our employees' salaries. The related pension costs are
expensed as incurred.

      The expenses attributable to mandatory contributions under the current
government pension plan are included in our historical consolidated statements
of income under either operating expenses for our production staff or selling
and administrative expenses for our administrative staff. We expect that, under
the current PRC rules and regulations regarding employee retirement benefits,
the future costs of the current government plan will be comparable to our
historical costs, subject to customary increases largely in line with salary
increases of our employees.

      We are required to make contributions to a mandatory provident fund at a
rate of 5% of the base salaries for full-time employees in Hong Kong. The costs
are expensed as incurred.

      Our Indonesian subsidiaries employ approximately 900 employees, including
approximately 50 expatriates. We provide benefits to expatriates that we believe
to be in line with customary international practices. Our local staff in
Indonesia enjoy welfare benefits mandated by Indonesia labor laws.

Holding Company Structure

      We are a holding company. Our entire petroleum exploration, development,
production and sales business in the PRC is owned and conducted by CNOOC China
Limited, our wholly foreign-owned enterprise in the PRC. Our entire petroleum
exploration, development and production business outside the PRC is owned and
conducted by CNOOC International Limited, our wholly-owned subsidiary


                                       83
<PAGE>

incorporated in the British Virgin Islands. International sales of crude oil are
conducted by China Offshore Oil (Singapore) International Pte. Ltd., our
wholly-owned subsidiary incorporated in Singapore. Accordingly, our future cash
flows will consist principally of dividends from our subsidiaries. The
subsidiaries' ability to pay dividends to us is subject to various restrictions,
including legal restrictions in their jurisdictions of incorporation. For
example, legal restrictions in the PRC permit payment of dividends only out of
net income determined in accordance with PRC accounting standards and
regulations. In addition, under PRC law, CNOOC China Limited is required to set
aside a portion of its net income each year to fund certain reserve funds. These
reserves are not distributable as cash dividends.

Inflation/Deflation

      According to the China Statistical Bureau, China experienced an overall
national deflation rate, as represented by the general consumer price index, of
1.2% in 2003, an overall inflation rate of 3.9% in 2004 and an overall inflation
rate of 1.8% in 2005. Neither the deflation nor the inflation has had a
significant impact on our results of operations in the respective years.

U.S. GAAP Reconciliation

      Our consolidated financial statements are prepared in accordance with Hong
Kong GAAP, which differ in certain material respects from U.S. GAAP. These
differences relate primarily to the treatment of impairment of long-lived assets
and the treatment for convertible bonds. For differences between Hong Kong GAAP
and U.S. GAAP that affect our net income or shareholders' equity. Please refer
to note 38 to our consolidated financial statements attached to this annual
report.

Taxation

      We are subject to income taxes on an entity basis on income arising in or
derived from the tax jurisdictions in which we and each of our subsidiaries are
domiciled and operate. We are not liable for income taxes in Hong Kong as we
currently do not have any assessable income from Hong Kong sources. Pursuant to
a notice issued by the State Administration of Taxation in March 2001, we are
entitled to all tax benefits conferred by Chinese law on foreign invested
enterprises.

      Our PRC subsidiary, absent exemptions, is subject to enterprise income tax
at the rate of 33%. Following the October 1999 reorganization, our PRC
subsidiary became a wholly foreign owned enterprise and accordingly was exempted
from 3% local surcharges, reducing its enterprise income tax rate to the current
rate of 30%. The PRC enterprise income tax is levied based on taxable income
including income from operations as well as other components of earnings, as
determined in accordance with the generally accepted accounting principles in
the PRC, or PRC GAAP. Besides income taxes, our PRC subsidiary also pays certain
other taxes, including:

      o     production taxes equal to 5% of independent production and
            production under production sharing contracts; and

      o     business tax of 5% on other income.

      Our subsidiary in Singapore, China Offshore Oil (Singapore) International
Pte. Ltd., is subject to income tax at the rate of 10% and 20% for its oil
trading activities and other income-generating activities, respectively. Our
subsidiaries that own interests in oil properties in Indonesia along the Malacca
Strait are subject to corporate and branch profit tax of 44%. The nine
subsidiaries of Repsol-YPF, S.A. in Indonesia acquired by us during 2002 are all
subject to corporate and dividend tax at rates ranging from 43.125% to 51.875%.
None of our other subsidiaries were subject to any income taxes in their
respective jurisdictions for the years presented.

      We calculate deferred taxation to account for temporary differences
between our tax bases, which is used for income tax reporting and prepared in
accordance with applicable tax guidelines, and our accounting bases, which is
prepared in accordance with applicable financial reporting requirements. Major
temporary differences include accelerated amortization allowances for oil and
gas properties,


                                       84
<PAGE>

which are offset in part by provision for dismantlement and a provision for
impairment of property, plant and equipment and write-off of unsuccessful
exploratory drilling. As of December 31, 2003, 2004 and 2005, we had Rmb 5,783.2
million, Rmb 6,688.5 million and Rmb 6,827.9 million (US$846.1 million),
respectively, in net deferred tax liabilities. See note 13 to our consolidated
financial statements attached to this annual report.

Change of Accountants

      On June 6, 2002, we terminated the engagement of Arthur Andersen & Co as
our independent public accountants. Prior to such date, Arthur Andersen had
audited our consolidated financial statements, including financial statements as
of and for the year ended December 31, 2001 presented in "Item 3--Selected
Financial Data." On June 15, 2002, Arthur Andersen was convicted of federal
obstruction of justice charges in connection with the U.S. government's
investigation of Enron Corporation. On August 31, 2002, Arthur Andersen
voluntarily relinquished its licenses to practice public accountancy in all
states of the United States and, accordingly, cannot furnish any written consent
to the issue of this annual report with the inclusion of its reports in the form
and context in which they are included. For a discussion of risks related to
Arthur Andersen, see "Item 3--Key Information--Risk Factors--Risks relating to
our business--You may not be able to assert claims against Arthur Andersen, our
independent public accountants for periods prior to 2002, nor may you be able to
assert claims against our current independent public accountants for financial
statements previously audited by Arthur Andersen."

      On June 6, 2002, we appointed Ernst & Young as our independent
accountants. Ernst & Young audited our consolidated financial statements for the
year period ended December 31, 2003, 2004 and 2005 included in this annual
report.

Impact of Recently Issued Accounting Standards

U.S. GAAP

        In December 2004, the Financial Accounting standards Board ("FASB"),
issued SFAS No. 153, "Exchanges of Non-monetary Assets an amendment of APB
Opinion No. 29". This Statement, which addresses the measurement of exchanges of
non-monetary assets, is effective prospectively for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of this
Statement is not expected to impact our consolidated financial position or
results of operations.

        In December 2004, the FASB issued Statement No. 123 (revised 2004),
"Share-Based Payment" (FAS No.123R), which replaces FAS No. 123 and supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees." FAS No. 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values beginning with the first interim period after June 15, 2005, with early
adoption encouraged. Under the SEC's rules, FAS No. 123R is effective for us
beginning January 1, 2006. The pro forma disclosures previously permitted under
FAS No. 123 are no longer an alternative to financial statement recognition. We
believe the adoption of the FAS No. 123R will have no material impact on our
consolidated financial position or results of operations as we currently account
for the stock options under the fair value recognition provision of FAS No. 123.

        In 2005, the FASB has finalized an amendment to Statement No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies" (FAS No.
19) that change the way oil and gas producers account for deferred exploratory
drilling costs. The new standard would relax the one-year limitation, so long as
oil and gas reserves have been discovered and an enterprise "is making
sufficient progress assessing the reserves and the economic and operating
viability of the project." We believe the adoption of amendment to FAS No. 19
will have no material impact on our consolidated financial position or results
of operations. This amendment is effective for the first reporting period
beginning after April 4, 2005.

        In March 2005, the FASB issued FASB Interpretation Number 47 (FIN No.
47), "Accounting for Conditional Asset Retirement Obligations". The
interpretation clarifies the requirement to record


                                       85
<PAGE>

abandonment liabilities arising from legal obligations when the asset retirement
depends on a conditional future event. FIN No. 47 requires that the uncertainty
about the timing or method of settlement of a conditional asset retirement
obligation be factored into the measurement of the liability when sufficient
information available. FIN No. 47 is effective for fiscal years ending after
December 15, 2005 and application of the interpretation did not change our
calculation of abandonment obligations.

        In May 2005, the FASB issued SFAS No.154, iss.Accounting Changes and
Error Corrections,i<168>a replacement of APB Opinion No.20, iss.Accounting
Changesi<168> and SFAS No.3, iss.Reporting Accounting Changes in Interim
Financial Statementsi<168> (" SFAS No.154 "). SFAS No.154 changes the
requirements for the accounting for, and reporting of, a change in accounting
principle. Previously, voluntary changes in accounting principles were generally
required to be recognized by way of a cumulative effect adjustment within net
income during the period of the change. SFAS No.154 requires retrospective
application to prior periods' financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of the
change. SFAS No.154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005; however, the statement does not change the
transition provisions of any existing accounting pronouncements. We do not
believe adoption of SFAS No.155 will have a material effect on our financial
position, cash flows or results of operations.

        In February 2006, the FASB issued SFAS No.155 "Accounting for Certain
Hybrid Financial Instruments, an amendment of FASB Statements No.133 and 140"
("SFAS No.155"). SFAS No.155 clarifies certain issues relating to embedded
derivatives and beneficial interests in securitized financial assets, including
permitting fair value measurement for any hybrid financial instrument that
contains an embedded derivative, eliminating the prohibition on a qualifying
special-purpose entity from holding certain derivative instruments, and
providing clarification that concentrations of credit risk in the form of
subordination are not embedded derivatives. The provisions of SFAS No.155 are
effective for all financial instruments acquired or issued after fiscal years
beginning after September 15, 2006. We do not believe adoption of SFAS No.154
will have a material effect on our financial position, cash flows or results of
operations.

Hong Kong GAAP

      The Hong Kong Institute of Certified Public Accountants has issued a
number of new and revised HKFRSs, some of which are not mandatory for the
current year financial statements. The following new and revised HKFRSs,
although not early adopted by us, will have an impact on our financial
statements once applied. Unless otherwise stated, the following HKFRSs are
effective for accounting periods beginning on or after January 1, 2006:

    HKAS 1 Amendment         Capital Disclosures
    HKAS 21 Amendment        The effects of Changes in Foreign Exchange Rate -
                             Net Investment in a Foreign Operation
    HKAS 39 Amendment        Cash Flow Hedge Accounting of Forecast Intragroup
                             Transactions
    HKAS 39 Amendment        The Fair Value Option
    HKFRSs 1 & 6 Amendments  First-time Adoption of Hong Kong Financial
                             Reporting Standards and Exploration for and
                             Evaluation of Mineral Resources
    HKFRS 6                  Exploration for and Evaluation of Mineral Resources
    HKFRS 7                  Financial Instruments: Disclosures
    HK(IFRIC)-Int 4          Determining whether an Arrangement contains a Lease
    HK(IFRIC)-Int 5          Rights to Interests arising from Decommissioning,
                             Restoration and Environmental Rehabilitation Funds

    HKAS 1 Amendment shall be applied for accounting periods beginning on or
    after January 1, 2007. The revised standard will affect the disclosure of
    qualitative information about our objective, policies and processes for
    managing capital; quantitative data about what we regard as capital; and
    compliance with any capital requirements and the consequences of any
    non-compliance.


                                       86
<PAGE>

    HKFRS 6 deals with the accounting for exploration for and evaluation of
    mineral resources, including oil and gas. We do not expect the adoption of
    HKFRS 6 to have any significant impact on our results of operations and
    financial position.

    HKFRS 7 has modified the disclosure requirements of HKAS 32 relating to
    financial instruments, and will replace HKAS 32. This HKFRS shall be applied
    for accounting periods beginning on or after January 1, 2007.


      Except as stated above, we do not expect the adoption of the other
pronouncements listed above to have any significant impact on our financial
statements in the period of initial application.

C.    RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

      See "Item 4--Information on the Company--Business Overview--Research and
Development" and "Item 7--Major Shareholders and Related Party
Transactions--Related Party Transactions--Categories of Connected
Transactions--Research and Development Services."

D.    TREND INFORMATION

      Crude oil price is a major driver of our results of operation. We price
our crude oil with reference to the international crude oil prices, which have
fluctuated considerably over the years. On January 3, 2005 the international
benchmark crude oil, West Texas Intermediate, was US$42.13 per barrel. As of
June 6, 2006, it was US$72.50 per barrel. In addition, continued political and
economic uncertainties in Iraq and threat of terrorism worldwide raise concerns
about the security and availability of ample supplies to meet growing demand. It
is expected that crude oil price will remain relatively high in 2006. For more
information about crude oil prices, see "Item 3--Key Information--Risk
Factors--Risks Relating to Our Business--Our business, revenues and profits
fluctuate with changes in oil and gas prices," "Item 4--Information on the
Company--Business Overview--Sales and Marketing--Sales of Offshore Crude
Oil--Pricing," and "Item 5--Operating and Financial Review and
Prospects--Operating Results--Results of Operations--2005 versus 2004."

      In additional to crude oil, natural gas is becoming an increasingly
important part of our business. The Chinese government promotes the use of
natural gas as a clean and efficient fuel. Demand for natural gas in the PRC is
likely to increase significantly. We have expanded and will continue to expand
our natural gas business and intend to exploit our natural gas reserves to meet
growing demand for natural gas. For more information about our natural gas
business, see "Item 3--Key Information--Risk Factors--Risks Relating to Our
Business--Any failure to implement our natural gas business strategy may
adversely affect our business and financial position," "--The infrastructure and
demand for natural gas in the PRC may proceed at a slower pace than our planned
increase in production," "Item 4--Information on the Company--Business
Overview--Competitive Strengths--Strategic Position in China's Growing Natural
Gas Market" and "--Natural Gas Business."

E.    OFF-BALANCE SHEET ARRANGEMENTS

      None

F.    TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

      The following table sets forth information regarding our contractual
obligations for the periods indicated.

<TABLE>
<CAPTION>
                                                                            Payments due by period
                                                       --------------------------------------------------------------
                Contractual Obligations                             Less than                              More than
                                                         Total        1 year     1-3 years    3-5 years     5 years
                                                       ----------   ----------   ----------   ----------   ----------
                                                         Rmb'000      Rmb'000      Rmb'000      Rmb'000      Rmb'000

                                       87
<PAGE>

<S>                                                    <C>             <C>           <C>       <C>          <C>
Long-term debt obligations .........................   17,381,846      825,674       24,392    8,538,453    7,993,327
Operating lease obligations ........................    1,576,067      340,318      409,191      294,682      531,876
Other long-term liabilities reflected on our balance
    sheet under Hong Kong GAAP .....................    4,161,663           --           --           --    4,161,663
                                                       ----------   ----------   ----------   ----------   ----------
         Total .....................................   23,119,576    1,165,992      433,583    8,833,135   12,686,866
                                                       ==========   ==========   ==========   ==========   ==========
</TABLE>

      As of December 31, 2005, we had the following capital commitments,
principally for the construction and purchase of property, plant and equipment:

<TABLE>
<CAPTION>
Capital Commitments                                               2005        2004
-------------------                                         ----------  ----------
                                                               Rmb'000     Rmb'000
<S>                                                          <C>         <C>
Contracted for............................................   7,511,100   9,568,971
Authorized, but not contracted for........................  23,736,582  20,331,504
</TABLE>

      As of December 31, 2005, we had unutilized banking facilities amounting to
approximately Rmb 33,450.8 million (US$4,145.0 million) as compared to Rmb
20,662.1 million as of December 31, 2004.

              ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.    DIRECTORS AND SENIOR MANAGEMENT

      In accordance with Hong Kong law and our articles of association, our
affairs are managed by our board of directors. The board of directors has 12
members, including five independent non-executive directors.

      The table below sets forth information about our directors and senior
officers:

Name                  Year of Birth   Position
-------------------   -------------   -----------------------------------------
Chengyu Fu.........       1951        Chairman of Board of Directors and Chief
                                      Executive Officer

Han Luo............       1953        Director

Longsheng Jiang....       1945        Director (retired on June 1, 2005)

Shouwei Zhou.......       1950        Director and President

Xinghe Cao.........       1949        Director (since August 31, 2005)

Zhenfang Wu........       1952        Director (since August 31, 2005)

Guangqi Wu.........       1957        Director and Compliance Officer (since
                                      June 1, 2005)

Hua Yang...........       1961        Director (since August 31, 2005),
                                      Executive Vice President and Chief
                                      Financial Officer

Edgar W.K. Cheng...       1943        Independent Non-executive Director (since
                                      May 24, 2006)

Sung Hong Chiu.....       1947        Independent Non-executive Director

Kenneth S. Courtis.       1946        Independent Non-executive Director
                                      (retired on May 24, 2006)


                                       88
<PAGE>

Evert Henkes.......       1943        Independent Non-executive Director

Lawrence J. Lau....       1944        Independent Non-executive Director (since
                                      August 31, 2005)

Erwin                     1940        Independent Non-executive Director
Schurtenberger.....                   (resigned on April 1, 2005)

Aloysius Hau Yin          1948        Independent Non-executive Director (since
Tse................                   June 8, 2005)

Yunshi Cao.........       1945        Senior Vice President, General Counsel
                                      and Company Secretary (retired on April
                                      18, 2006)

Victor Zhikai Gao..       1962        Senior  Vice President, General Counsel
                                      and Company Secretary (since April 18,
                                      2006)

Jian Liu...........       1958        Executive Vice President

Wei Chen...........       1958        Senior Vice President and General
                                      Director of CNOOC China Limited Beijing
                                      Research Center

Guohua Zhang.......       1960        Senior Vice President and General Manager
                                      of  CNOOC China Limited Shanghai Branch

Ning Li............       1964        Senior Vice President and General Manager
                                      of  CNOOC China Limited Shenzhen Branch

Bi Chen............       1961        Vice President and General Manager of
                                      CNOOC China Limited Tianjin Branch

Weilin Zhu.........       1956        Vice President and General Manager of
                                      Exploration Department

Mingcai Zhu........       1956        Vice President and President of CNOOC
                                      International Limited

Zhi Fang...........       1962        Vice President and President of CNOOC
                                      Southeast Asia Ltd.

      We have a management team with extensive experience in the oil and gas
industry. As a result of our cooperation with international oil and gas
companies, the management team and staff have had the opportunity to work
closely with foreign partners both within and outside China. Such opportunities,
in conjunction with management exchange programs with foreign partners, have
provided valuable training to our personnel in international management
practices. A description of the business experience and present position of each
director and executive officer is provided below. Our principal executive
offices are located at 65th Floor, Bank of China Tower, One Garden Road,
Central, Hong Kong.

Directors

      Chengyu Fu received a B.S. degree in geology from the Northeast Petroleum
Institute in China and a Master's degree in petroleum engineering from the
University of Southern California in the United States. He has over 30 years of
experience in the oil industry in the PRC. He previously worked in China's
Daqing, Liaohe and Huabei oil fields. He joined CNOOC, our controlling
shareholder, in 1982 and has since been appointed as the Chairman of the
Management Committee formed through a joint venture between CNOOC, BP Amoco,
Chevron, Texaco, Phillips Petroleum, Shell and Agip. From 1994


                                       89
<PAGE>

to 1995, Mr. Fu was the Deputy General Manager of China Offshore Oil Eastern
South China Sea Corporation, a subsidiary of CNOOC. In December 1995, he was
appointed as the Vice President of Phillips China Inc. and the General Manager
of the Xijiang Development Project. In 1999, Mr. Fu was appointed as the General
Manager of China Offshore Oil Eastern South China Sea Corporation, a subsidiary
of CNOOC. In 2000, Mr. Fu was appointed as the Vice President of CNOOC.
Subsequently, he was appointed as our Executive Vice President, President and
Chief Operating Officer in 2001. In August 2002 he became the Chairman and Chief
Executive Officer of China Oilfield Services Limited ("COSL"), a company listed
on The Stock Exchange of Hong Kong Limited and a subsidiary of CNOOC. In October
2003, Mr. Fu was appointed as the President of CNOOC. He was also appointed as
our Chairman of the Board of Directors and Chief Executive Officer with effect
from October 16, 2003. In November 2003, Mr. Fu resigned from his Chief
Executive Officer position in COSL. He also serves as the Chairman of the Board
of Directors of CNOOC Finance Corporation Limited, a subsidiary of CNOOC, as
well as CNOOC China Limited and CNOOC International Limited, both being our
subsidiaries. Mr. Fu was appointed our Executive Director with effect from
August 23, 1999.

      Han Luo received a doctorate degree from the Petroleum University in
China. He has over 30 years of experience in the oil industry in the PRC. He
joined CNOOC in 1982. From 1993 to 1999, Mr. Luo served as the Vice President of
China Offshore Oil Eastern South China Sea Corporation and concurrently as the
Chairman of the CACT (CNOOC-AGIP-Chevron-Texaco) operators group, and the
Executive Vice President of China Offshore Oil East China Sea Corporation, a
subsidiary of CNOOC. In 1999, he served as the General Manager of CNOOC China
Limited's Shanghai Branch. Mr. Luo is a Vice President of CNOOC, a position he
has held since 2000. He also serves as the Chairman of the Board of Directors of
Zhonghai Trust & Investment Co., Ltd., a subsidiary of CNOOC, and the Director
of CNOOC China Limited, our subsidiary. Mr. Luo was appointed as our Executive
Director with effect from December 20, 2000.

      Longsheng Jiang received a B.S. degree from the Beijing Petroleum
Institute in China. He has over 35 years of experience in the oil industry in
the PRC. He was appointed as a Director of our company in December 2000 and has
been the Vice President of CNOOC since 1998. From 1994 to 1998, he was the
General Manager of China Offshore Oil Southern Drilling Company. From 1991 to
1994, Mr. Jiang served as the Deputy Chief Drilling Engineer and was later
appointed as the Chief Drilling Engineer of China Offshore Oil Western South
China Sea Corporation. He joined CNOOC in 1982. Mr. Jiang retired from our board
of director with effect from June 1, 2005.

      Shouwei Zhou received a doctorate degree from the Southwest Petroleum
Institute in China and is a senior engineer. He joined CNOOC in 1982. Mr. Zhou
served as the Deputy General Manager of China Offshore Oil Bohai Corporation, a
subsidiary of CNOOC and the General Manager of CNOOC China Limited Tianjin
Branch. He was appointed as our Executive Vice President in September 1999 and
our President in July 2002. Since 2000, Mr. Zhou has been the Vice President of
CNOOC. Mr. Zhou serves as the Director and the President of CNOOC China Limited
and the Director of CNOOC International Limited, both being our subsidiaries. He
also serves as the Chairman of CNOOC Southeast Asia Limited, our wholly-owned
subsidiary since April 2003. Mr. Zhou became the chairman of Offshore Oil
Engineering Company Limited, a listed company in Shanghai Stock Exchange and a
subsidiary of CNOOC, on December 6, 2003. Mr. Zhou was appointed as our
Executive Director with effect from August 23, 1999.

      Xinghe Cao graduated from Tianjin Politics and Law Management College
majoring in Economic Laws and later studied for MBA in Capital University of
Economics and Business. Mr. Cao has forty years of experience in the petroleum
industry since he started work in 1965. He worked for Shengli oilfield and
Dagang oilfield before he joined CNOOC in 1982. From 1985 to 1996, Mr. Cao
worked as Manager of Bohai Oil Commercial Company and later as the Manager of
Bohai Oil Transportation Company, both being the subsidiaries of CNOOC. From
1996 to 2003, he worked as Deputy General Manager and General Manager of CNOOC
Bohai Corporation successively. From April 2003 to July 2004, Mr. Cao worked as
the Assistant President of CNOOC. He became the Vice President of CNOOC in
August 2004. Mr. Cao also serves as the Chairman of the Board of Directors of
CNOOC


                                       90
<PAGE>

Base Group Limited, a subsidiary of CNOOC. Mr. Cao was appointed as our
Executive Director with effect from August 31, 2005.

      Zhenfang Wu is a senior engineer and graduated with a bachelor's degree
from Dalian University of Technology, majoring in Offshore Petroleum Engineering
and Construction. He later studied for EMBA in Shanghai Jiao Tong University.
Mr. Wu joined the petroleum industry in 1971. He joined CNOOC in 1982. From 1993
to 1997, he was Deputy General Manager of CNOOC Nanhai West Corporation. He
became the President of CNOOC Chemical Limited in 2000. He was also the Chairman
of the Board of Directors of Fudao Fertilizer Limited and CNOOC Chemical Limited
from 2001 to 2003 and 2003 to 2005 respectively. From 2003 to 2004, Mr. Wu was
Assistant President of CNOOC. In August 2004, he became the Vice President of
CNOOC. Mr. Wu also serves as the Chairman of a number of subsidiaries of CNOOC
(including Guangdong Dapeng LNG Company Limited, CNOOC Fujian Natural Gas
Limited, CNOOC Oil & Petrochemicals Co., Ltd. and CNOOC Zhejiang Ningbo LNG Co.,
Ltd.), the Chairman and President of CNOOC Gas and Power Limited and the Vice
Chairman of Shanghai Petroleum and Natural Gas Company Limited. Mr. Wu was
appointed as our Executive Director with effect from August 31, 2005.

      Guangqi Wu is a geologist and graduated with a Bachelor of Science degree
from the Ocean University of China, majoring in Marine Geology. He also holds a
master's degree in Management from the China Petroleum University. Mr. Wu joined
CNOOC in 1982. He became the Deputy General Manager of CNOOC Oil Technical
Services Company, a subsidiary of CNOOC, in 1994. Mr. Wu was appointed as
Director of the Administration Department of CNOOC in 1995 and became the
Director of the Ideology Affairs Department of CNOOC in 2001. Mr. Wu was
appointed Assistant President in 2003, and has been the Vice President of CNOOC
since 2004. Mr. Wu has also served as an Independent Non-executive Director of
China Yangtze Power Limited, a company listed on the Shanghai Stock Exchange,
since May 2003, and our Compliance Officer since June 1, 2005. Mr. Wu was
appointed as our Executive Director with effect from June 1, 2005.

      Hua Yang is an engineer and graduated from Petroleum University with a
B.S. degree in Petroleum Engineering. He also received a MBA degree from the
Sloan School of Management at MIT as a Sloan Fellow. Mr. Yang joined CNOOC in
1982 and has over 23 years' experience in petroleum exploration and production.
Mr. Yang spent the first-eleven year of his career with China Offshore Oil
Research Center to serve as a number of positions including the Director of
Field Development Department, the Manager for Reservoir Engineering Department,
the Project Manager and Team Leaders. Mr. Yang spent his second-twelve year with
international business, corporate finance and capital market in our Company and
its subsidiaries. From 1993 to 1999, he served as our Deputy Chief Geologist,
our Deputy Director and our Acting Director for Overseas Development Department
and the Vice President of CNOOC International Limited, our wholly-owned
subsidiary. In 1999, he became our Senior Vice President and then became our
Executive Vice President in December 2005. From 2002 to 2003, Mr. Yang was the
Director and President of CNOOC Southeast Asia Limited, our wholly-owned
subsidiary. He was appointed as our Chief Financial Officer with effect from
January 1, 2005. He also serves as the Director of CNOOC International Limited
and CNOOC Southeast Asia Limited. Mr. Yang was appointed as our Executive
Director with effect from August 31, 2005.

Independent Non-executive Directors

      Edgar W.K. Cheng was a graduate from the University of Notre Dame and the
Medical College of Wisconsin, USA. He was Clinical Associate Professor of
Medicine at Cornell University Medical College and practiced medicine and
conducted clinical research at the Memorial Sloan-Kettering Cancer Centre in New
York. Dr. Cheng was a former Chairman of the University Grants Commission in
Hong Kong, and a member of the Education Commission. Dr. Cheng has been in many
other financial market positions such as Chairman of the Stock Exchange of Hong
Kong, Vice-Chairman and non-executive director of the Hang Seng Bank Ltd., Vice
President of the International Federation of Stock Exchange, Founding Chairman
of the Hong Kong Securities Institute, Member of the Board of Directors of the
Hong Kong Futures Exchange Ltd., and Member of the Conference Board's Global
Advisory Council. He was appointed by the Chinese Government as a Hong Kong
Affairs Advisor (1991 - 1997). He became a


                                       91
<PAGE>

Member of the Preparatory Committee and also the Selection Committee for the
Hong Kong Special Administrative Region of the National People's Congress (1996
- 1997). Dr. Cheng served as the Head of the Central Policy Unit of the
Government of Hong Kong Special Administrative Region from 1999 - 2001. He is at
present Chairman of the Council of the Chinese University of Hong Kong, the
Chairman of the World-Wide Investment Co. Ltd. and a member of the Board of
Directors of the Hong Kong Institute for Monetary Research, non-executive
director of the Standard Chartered Bank (Hong Kong) Ltd, independent director of
Goldman Sachs Gao Hua Securities Co. Ltd, a member of The Greater Pearl River
Delta Business Council, a member of the Commission on Strategic Development as
well as the Vice-Chairman of the Council for Sustainable Development. He is also
a member of the 10th Chinese People's Political Consultative Conference National
Committee. Dr. Cheng was appointed as our Independent Non-executive Director
with effect from May 24, 2006.

      Sung Hong Chiu received an LL.B. degree from the University of Sydney. He
 is admitted as a solicitor of the Supreme Court of New South Wales and
the High Court of Australia.  He has over thirty years' experience in legal
practice and is a director of a listed company in Australia.  Mr. Chiu is
the founding member of the Board of Trustees of Australian Nursing Home
Foundation and served as the General Secretary of the Australian Chinese
Community Association of New South Wales.  Mr. Chiu was appointed as our
Independent Non-executive Director with effect from September 7, 1999.

      Erwin Schurtenberger is a senior advisor to the China Training Center for
Senior Personnel Management Officials. He received a Ph.D. Degree in Economics
and was trained in political science and philosophy at the University of Paris.
He was the Ambassador of Switzerland to the People's Republic of China, the
Democratic People's public of Korea and the Republic of Mongolia from 1988 to
1995. He joined the Swiss Foreign Services in 1969. Over the years, he held
various diplomatic positions in Bangkok, Hong Kong, Beijing and Tokyo. He also
served as the Ambassador of Switzerland to Iraq. He has been an independent
business advisor to various European multinationals, American groups and
humanitarian aid organizations. He was the President of the Swiss-Asia
Foundation. He serves on the boards of directors of ROBERT BOSCH RBint, BUHLER
GROUP Switzerland, FIRMENICH-China, TAIKANG Life Insurance and WINTERTHUR
Insurances (Asia). Dr. Schurtenberger resigned from our board of directors with
effect from April 1, 2005.

      Kenneth S. Courtis was the Managing Director of Goldman Sachs and Vice
Chairman of Goldman Sachs Asia and retired in March 2006. He specializes in
economics and strategy throughout the Asia-Pacific region as well as in Europe
and North America. After graduating with honors from Glendon College in Toronto,
Dr. Courtis received an M.A. in international economics from Sussex University,
England, an M.B.A. in finance and strategy from the European Institute of
Business Administration and a Ph.D. from the Institute of Economic and Political
Studies in Paris. Prior to joining Goldman Sachs, he served as Chief Asia
Economist and Strategist for Deutsche Bank. Dr. Courtis was appointed as our
Independent Non-executive Director with effect from November 11, 2002 and
retired from our board of directors with effect from May 24, 2006.

      Evert Henkes served as the CEO of Shell global chemical business from 1998
to 2003. Since joining Shell in 1973, he held various executive positions
worldwide, including Managing Director of Shell Chemicals UK Ltd., Managing
Director of Shell UK, President of Billiton Metals, Shell's Metals Coordinator,
Shell's Chemical Coordinator, and Director of Strategy & Business Services of
Shell International Chemicals Ltd. He also served as directors in regional and
global industrial bodies, including CEFIC and ICCA. He is also a director of
Tate & Lyle Plc, SembCorp Industries Ltd. and Outokumpu Oy. Mr. Henkes was
appointed as our Independent Non-executive Director with effect from September
16, 2003.

      Lawrence J. Lau is an economist and graduated with a B.S. degree (with
Great Distinction) in Physics and Economics from Stanford University in 1964,
and received his M.A. and Ph.D. degrees in Economics from the University of
California at Berkeley in 1966 and 1969 respectively. Professor Lau joined the
faculty of the Department of Economics at Stanford University in 1966, becoming
Professor of Economics in 1976 and the first Kwoh-Ting Li Professor of Economic
Development at Stanford University in 1992. From 1992 to 1996, he served as a
Co-Director of the Asia-Pacific Research Center


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at Stanford University, and from 1997 to 1999, as the Director of the Stanford
Institute for Economic Policy Research. He was also awarded the honorary degree
of Doctor of Social Sciences by the Hong Kong University of Science and
Technology in 1999. Professor Lau has authored or edited five books and
published more than one hundred and sixty articles and notes in professional
journals. Professor Lau is an Honorary Professor of a large number of
universities and institutions in mainland China such as the Institute of Systems
Science at the Chinese Academy of Sciences, Jilin University, Nanjing
University, Renmin University of China, Shantou University, Southeast University
and the School of Economics and Management, Tsinghua University. In July 2004,
Professor Lau assumed office as Vice-Chancellor of The Chinese University of
Hong Kong. He currently provides useful public service to the local community in
his capacity as member of the Executive Committee of the HKSAR Government's
Commission on Strategic Development, the Advisory Committee of the Independent
Commission Against Corruption, and the Steering Committee on Innovation and
Technology. He also serves on the Board of Directors of the Hong Kong Science
and Technology Park Corporation as an independent non-executive director, as
well as the Far EasTone Corporation as an independent director and the Shin Kong
Financial Holdings Corporation as an independent supervisor, both listed
companies in Taiwan. Professor Lau was appointed as our Independent
Non-executive Director with effect from August 31, 2005.

      Aloysius Hau Yin Tse is a fellow of The Institute of Chartered Accountants
in England and Wales, and the Hong Kong Institute of Certified Public
Accountants ("HKICPA"). Mr. Tse is a past president of the HKICPA. He joined
KPMG in 1976 and became a partner in 1984 and retired in March 2003. Mr. Tse was
a non-executive Chairman of KPMG's operations in the PRC and a member of the
KPMG China advisory board from 1997 to 2000. Mr. Tse is currently an independent
non-executive director of China Construction Bank Corporation, China Telecom
Corporation Limited, Wing Hang Bank, Limited and Linmark Group Limited,
companies listed on The Stock Exchange of Hong Kong Limited. Mr. Tse is also the
chairman of the International Advisory Council of the People's Municipal
Government of Wuhan. Mr. Tse was appointed as our Independent Non-executive
Director with effect from June 8, 2005.

Company Secretary

      Victor Zhikai Gao graduated from Suzhou University in 1981 with a B.A.
degree in English Literature and from Beijing University of Foreign Studies
in 1983 with a M.A. degree in English Literature.  Mr. Gao obtained a M.A.
degree in Political Science from Yale Graduate School in 1990 and a J.D.
degree from Yale Law School in 1993.  Mr. Gao is a licensed attorney-at-law
in the State of New York, and was a licensed financial advisor with the
Securities and Futures Commission of Hong Kong from 1994 to 1999.  Mr. Gao's
extensive previous working experiences included services with the Chinese
Ministry of Foreign Affairs in Beijing, the United Nations Secretariat in
New York City, Milbank Tweed Hadley & McCloy in New York City, Morgan
Stanley in Hong Kong, China International Capital Corporation in Beijing and
Hong Kong, PCCW and Henderson (China) Investment Co., Ltd.  Mr. Gao was the
China Policy Advisor with the Securities and Futures Commission of Hong Kong
between 1999 and 2000.  Mr. Gao was appointed as our Senior Vice President,
General Counsel and Company Secretary with effect from April 18, 2006.

Other Members of Senior Management

      Jian Liu Born in 1958, Mr. Liu is the Executive Vice President of the
Company. He graduated from Huazhong University of Science and Technology with a
B.S. degree and received his MBA degree from Tianjin University in 2000. He is
responsible for the management of oil/gas field development and production. Mr.
Liu joined CNOOC in 1982. He served as the manager of CNOOC Bohai Corporation,
the Deputy General Manager of the Tianjin Branch, the General Manager of the
Zhanjiang Branch, the Senior Vice President and General Manager of the
Department of Development and Production at CNOOC.

      Wei Chen Born in 1958, Mr. Chen is a Senior Vice President of the Company
and General Director of the CNOOC China Limited Research Center. He received his
B.S. degree from Petroleum


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<PAGE>

University and holds an MBA degree from Tsinghua University. He has over 23
years of experience in petroleum exploration and production. Mr. Chen joined
CNOOC in 1984 and previously served as the Deputy Manager for the Exploration
and Development Department of CNOOC Research Center, the Deputy Manager of the
Overseas Research Department, the Manager of the Information Department, the
Deputy Director of CNOOC Research Center and the General Manager of the Human
Resources Department of CNOOC, and the Senior Deputy General Manager & General
Manager of our Administration Department of CNOOC Limited.

      Guohua Zhang Born in 1960, Mr. Zhang is a Senior Vice President of the
company and General Manager of CNOOC China limited-Shanghai. He graduated from
Qingdao Oceanographic Institute with a B.S. degree. He studied in the Business
Institute of University of Alberta in Canada in 2001. He joined CNOOC in 1982
and served as Manager of the Exploration Department of China Offshore Oil Naihai
West Corporation, Chief Geologist of CNOOC Research Center, Assistant to General
Manager of CNOOC China Limited and General Manager of CNOOC limited Exploration
Department.

      Ning Li Born in 1963, Mr. Li is a Senior Vice President of the Company and
General Manager of CNOOC Limited Shenzhen Branch. He received his B.S. degree
from Petroleum University of China and holds a MBA degree from Tianjin
University. Mr. Li joined CNOOC in 1983 and served as Vice President of Design &
Engineering Corporation of CNOOC, Vice General Manager of Engineering Department
of CNOOC, General Manager of DongFang 1-1 project, Vice General Manager of CNOOC
Limited Zhanjiang Branch and General Manager of Engineering Department. Mr. Li
was appointed as Senior Vice President of CNOOC Limited in 2003.

        Bi Chen Born in 1961, Mr. Chen is a Vice President of CNOOC Limited and
General Manager of CNOOC China Limited-Tianjin. He graduated from the
Development Department of Southwest Petroleum Institute, and acquired the
Bachelor of Engineering. He received a Master's degree in Petroleum Engineering
Department of Edinburgh Heriot-Watt University in 1988. He has received a degree
of Master of Business Administration from Tsinghua University in 2000. Mr. Chen
joined CNOOC in 1982. He served as the Deputy Manager of CNOOC Nanhai West
Corporation Oil Production Company, Director of Production Section of the
Development and Production Department of CNOOC Limited Deputy Manager and then
General Manager of Development and Production Department of CNOOC Limited.

      Weilin Zhu Born in 1956, Mr. Zhu is a Vice President and General Manager
of Exploration Department. He graduated from Tongji University with a Ph.D
degree. Mr. Zhu joined CNOOC in 1982. He served as the General Geologist of
CNOOC Research Center, the Deputy Manager and Chief Manager of Exploration
Department of CNOOC Limited, and the General Manager of the Zhanjiang Branch.

      Mingcai Zhu Born in 1956, Mr. Zhu is a Vice President of CNOOC Limited and
General Manager of CNOOC International Limited. He graduated from South West
Petroleum Institute with B.S. degree and received a MBA degree from the
Management School of Lancaster University in UK. Mr. Zhu joined CNOOC in 1985.
He served as the Vice President of CNOOC Bohai Corporation, the General Manager
of Tianjin Branch and the President of Shenzhen Branch.

      Zhi Fang Born in 1962, Mr. Fang is a Vice President of CNOOC Limited and
the President of CNOOC Southeast Asia Ltd. and is responsible for the company's
businesses in Indonesia. He graduated from Zhejiang University with a B.S.
degree and was conferred a MBA degree by the University of Birmingham in 1995.
Mr. Fang joined CNOOC in 1982. He served as Deputy Director of the Research
Center and Manager of Exploration and Development Department in China National
Offshore Oil Nanhai East Corporation, Deputy General Manager of CNOOC-AMOCO
Liuhua Joint Operating Group, Deputy General Manager and General Manager of
CNOOC China Limited Shenzhen Branch during his career in the domestic
operations.


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B.    COMPENSATION OF DIRECTORS AND OFFICERS

      Each of the executive directors entered into a service contract with a 12
month term and on a 12 month rolling basis as determined by our board of
directors or our shareholders. Particulars of these contracts are in all
material respects identical except as indicated below:

      o     the annual salaries for Mr. Chengyu Fu and Mr. Shouwei Zhou during
            the initial three years are HK$1,880,000 and HK$1,680,000,
            respectively;

      o     the chairman of our board of director and each other director (other
            than independent non-executive directors) shall be entitled to a
            maximum annual paid leave of 30 working days and 25 working days,
            respectively;

      o     each of the directors (other than independent non-executive
            directors) is entitled to the use of an apartment as his residence
            and the use of a car provided free of charge by us together with
            certain other benefits and reimbursements;

      o     the annual salary for each of the other directors (other than
            independent non-executive directors) during the initial three years
            is HK$388,000; and

      o     we may, at our sole discretion, pay director (other than independent
            non-executive directors) a bonus in such amount as the board of
            directors may determine in respect of each completed financial year.

      The salaries for Mr. Chengyu Fu and Mr. Shouwei Zhou were HK$3,952,381 and
HK$3,095,238, respectively, for 2005. The aggregate amounts of salaries, housing
allowances, other allowances and benefits in kind paid to our directors (other
than independent non-executive directors) during the years ended December 31,
2003, 2004 and 2005 were approximately Rmb 10.7 million, Rmb 7.8 million and Rmb
20.3 million (US$2.5 million), respectively, while the amounts paid to our
executive officers for the same periods were approximately Rmb 11.0 million, Rmb
12.6 million and Rmb 14.0 million (US$1.7 million), respectively. Under our
pension plan for 2005, we set aside an aggregate amount of Rmb 104,000
(US$12,886.9) for pension and similar benefits in kind for our directors (other
than independent non-executive directors) and our executive officers. Our
directors (other than independent non-executive directors) and executive
officers contributed an additional Rmb 104,000 (US$12,886.9) to the pension plan
for 2005. Each director's annual compensation, including salary, allowances,
pension and benefits in kind, is disclosed in Note 11 to our consolidated
financial statements under Item 18 in this annual report. For further details
regarding employee compensation, see "Item 4--Information on the
Company--Business Overview--Employees and Employee Benefits." For further
details regarding share options granted to our directors, officers and
employees, see "--Share Ownership" below.

C.    BOARD PRACTICE

Audit and Other Committees

      We have established an audit committee, a remuneration committee and a
nomination committee. Our audit committee meets at least twice a year and is
responsible for reviewing the completeness, accuracy and fairness of our
accounts, evaluating our auditing scope and procedures, and evaluating internal
control systems. The committee is also responsible for setting up internal
monitoring systems so as to allow our board of directors to monitor our
financial position, protect our assets, and prevent major errors resulting from
financial reporting or loss. Our board of directors is responsible for these
systems and appropriate delegations and guidance have been made. The audit
committee regularly reports to the board of directors. Since May 25, 2006, our
audit committee consists of Mr. Aloysius Hau Yin Tse, Mr. Sung Hong Chiu and
Professor Lawrence J. Lau.

      The primary responsibilities of our remuneration committee are to review
information in respect of our executives' remuneration, share option schemes,
performance appraisal systems and retirement plans. Since May 25, 2006, our
remuneration committee consists of Mr. Sung Hong Chiu, Mr. Evert Henkes, Mr.
Aloysius Hau Yin Tse and Mr. Xinghe Cao.


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<PAGE>

      The primary responsibilities of our nomination committee include
nominating candidates for directors subject to our board of directors' approval,
conducting routine examination of the structure, scale and composition of our
board of directors, and review the leadership capabilities of our directors in
order to ensure that we remain competitive. Since May 25, 2006, our nomination
committee consists of Mr. Han Luo, Dr. Edgar W.K. Cheng and Professor Lawrence
J. Lau.

      For information on our audit committee finance expert and our code of
ethics, see "Item 16A--Audit Committee Finance Expert," and "Item 16B--Code of
Ethics."

International Advisory Board

      On October 29, 2001, we announced the establishment of an International
Advisory Board with globally well-respected political figures and corporate
leaders as members. The purpose of the International Advisory Board is to
provide the management with strategic advice on world events and macro issues
that may impact our development. Chengyu Fu, Chairman of our board of director,
is the Chairman of the International Advisory Board.


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<PAGE>

      Set forth below is information on the current members of our International
Advisory Board.

Name                                    Biographical Information
-------------------   ---------------------------------------------------------
Chengyu Fu            See "--A. Directors and Senior Management--Directors"

Erwin Schurtenberger  The Ambassador of Switzerland to the People's Republic of
                      China, the Democratic People's Republic of Korea and the
                      Republic of Mongolia from 1988 to 1995. He joined the
                      Swiss Foreign Services in 1969. Over the years, he held
                      various diplomatic positions in Bangkok, Hong Kong,
                      Beijing and Tokyo. He also served as the Ambassador of
                      Switzerland to Iraq. He has been an independent business
                      advisor to various European multinationals, American
                      groups and humanitarian aid organizations. He was the
                      President of the Swiss-Asia Foundation. He serves on the
                      Boards of ROBERT BOSCH RBint and its International
                      Advisory Board, BUHLER GROUP Switzerland, FIRMENICH-China,
                      TAIKANG Life Insurance, WINTERTHUR Insurances (Asia). Dr.
                      Schurtenberger is also a senior advisor to the China
                      Training Center for Senior Personnel Management Officials.
                      He is a graduate in both political science and philosophy
                      of the University of Paris and received a Ph.D. Degree in
                      Economics. Dr Schurtenberger was a director on our board
                      of directors from November 11, 2002 to April 1, 2005.

Simon Murray          Chairman of General Enterprise Management Services Limited
                      (GEMS), a private equity fund management company owned by
                      Simon Murray & Associates Limited. Formerly, the Executive
                      Chairman of Asia Pacific for the Deutsche Bank Group, and
                      the Group Managing Director of Hutchison Whampoa Ltd. He
                      is currently a Director of a number of companies that
                      include Hutchison Whampoa, Cheung Kong Holdings, Orient
                      Overseas (International) Limited, Compagnie Financiere
                      Richemont SA and Sino-Forest Corporation.

Edward S. Steinfeld   Assistant professor at the MIT Sloan School of Management.
                      He received both his undergraduate and doctoral training
                      at Harvard University. As a China specialist, he has
                      conducted extensive firm-level research in China.

Charles Freeman       Became Chairman of Projects International, Inc. in 1995,
                      after an extensive career in the U.S. Government spanning
                      three decades and numerous senior positions, including
                      U.S. Ambassador to Saudi Arabia and Assistant Secretary of
                      Defense for International Security Affairs. He is
                      currently president of the Middle East Policy Council,
                      co-chair of the U.S. China Policy Foundation, vice-chair
                      of the Atlantic Council, and a trustee of the Institute
                      for Defense Analyses, among other positions. Ambassador
                      Freeman attended the National Autonomous University of
                      Mexico and received his A.B. from Yale University as well
                      as a J.D. from the Harvard Law School. He is the author of
                      two widely circulated books on statecraft and diplomacy:
                      The Diplomat's Dictionary and Arts of Power.

Summary of Significant Differences in Corporate Governance Practices for
Purposes of Section 303A.11 of the New York Stock Exchange Listed Company
Manual

      We are incorporated under the laws of Hong Kong. The principal trading
market for our shares is the Hong Kong Stock Exchange. In addition, because our
ordinary shares are registered with the United States Securities and Exchange
Commission and are listed on the New York Stock Exchange (the "NYSE"), we are
subject to certain corporate governance requirements. However, many of the
corporate governance rules in the NYSE Listed Company Manual (the "NYSE
Standards") do not apply to us as a "foreign private issuer" and we are
permitted to follow the corporate governance practices in Hong Kong in lieu of
most corporate governance standards contained in the NYSE Standards. Section
303A.11 of the NYSE Standards requires NYSE-listed foreign private issuers to
describe the significant differences between their corporate governance
practices and the corporate governance standards applicable to U.S.


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<PAGE>

domestic companies listed on the NYSE ("U.S. domestic issuers"). We set forth
below a brief summary of such significant differences.

1. Board and Committee Independence

      While NYSE Standards require U.S. domestic issuers to have a majority of
independent directors, we are not subject to this requirement. Five of our
twelve directors are independent non-executive directors.

      NYSE Standards require U.S. domestic issuers to schedule an executive
session at least once a year to be attended by only independent directors. We
are not subject to such requirement and our independent directors attend all
board meetings where possible.

      NYSE Standards require U.S. domestic issuers to disclose a method for
interested parties to communicate directly with the presiding director or with
non-management directors as a group. We are not subject to such requirement and
we have not adopted such a method yet.

2. Audit Committee

      If an audit committee member simultaneously serves on the audit committees
of more than three public companies, and the listed company does not limit the
number of audit committees on which its audit committee members serve to three
or less, then in each case, the boards of directors of U.S. domestic issuers are
required to determine that such simultaneous service would not impair the
ability of such member to effectively serve on its audit committee and disclose
such determination in its annual proxy statement or annual report. We are not
subject to such requirement and we have not addressed this in our audit
committee charter.

      NYSE Standards require audit committees of U.S. domestic issuers to
discuss guidelines and policies that govern the process by which risk assessment
and risk management are handled and include such responsibilities in their audit
committee charters. We are not subject to such requirement and our audit
committee charter does not have such provision. Our audit committee charter only
provides that our audit committee shall review with our auditors and the
Director of Internal Audit the scope, adequacy and effectiveness of our
corporate accounting and financial controls, and any related significant
findings regarding risks or exposures and consider recommendations for
improvement of such controls according to the Hong Kong Stock Exchange Listing
Rules.

3. Remuneration Committee

      NYSE Standards require U.S. domestic issuers to have a compensation
committee composed entirely of independent directors. We are not subject to such
requirement and have a remuneration committee that consists of three independent
non-executive directors and one executive director.

      NYSE Standards require U.S. domestic issuers to address in their
remuneration committee charters matters regarding committee member removal and
committee structure and operations (including authority to delegate to
subcommittees). We are not subject to such requirement and we have not addressed
this in our remuneration committee charter.

      NYSE Standards require remuneration committees of U.S. domestic issuers to
produce a remuneration committee report annually and include such report in
their annual proxy statements or annual reports on Form 10-K. We are not subject
to such requirement and we have not addressed this in our remuneration committee
charter. We disclose the amounts of compensation of our directors on a named
basis and the five highest paid employees in our annual reports according to the
requirements of Hong Kong Stock Exchange Listing Rules.

4. Nomination Committee


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<PAGE>

      While NYSE Standards require U.S. domestic issuers to have only
independent directors on their nomination committee, we are not subject to such
requirement and our nomination committee consists of two independent
non-executive directors and one executive director.

      NYSE Standards require U.S. domestic issuers to address in their
nomination committee charters matters regarding committee member removal and
committee structure and operations (including authority to delegate to
subcommittees). We are not subject to such requirement and we have not addressed
this in our nomination committee charter.

      NYSE Standards require U.S. domestic issuers to adopt and disclose
corporate governance guidelines. They must state in their annual proxy
statements or annual reports that such corporate governance guidelines are
available on their website and in print form to any shareholder who requests it.
We are not subject to such requirement. We have adopted a set of corporate
governance guidelines in accordance with the Hong Kong Stock Exchange Listing
Rules, including a code of ethics, to govern various aspects of our corporate
governance. We have posted the code of ethics on our website.


D.    EMPLOYEES

      See "Item 4--Information on the Company--Business Overview--Employees and
Employee Benefits."

E.    SHARE OWNERSHIP

      We have adopted the following share option schemes for the grant of
options to our directors, senior management and other eligible grantees:

      1.    Pre-Global Offering Share Option Scheme (as defined below);
      2.    2001 Share Option Scheme (as defined below);
      3.    2002 Share Option Scheme (as defined below); and
      4.    2005 Share Option Scheme (as defined below).

      Under these share option schemes, the remuneration committee of our board
of directors had, and will, from time to time propose for our board's approval
for the recipient of and the number of shares underlying each option. The
maximum aggregate number of shares (including those that could be substituted
for under the Pre-Global Offering Share Option Scheme, the 2001 Share Option
Scheme, the 2002 Share Option Scheme and the 2005 Share Option Scheme) which may
be granted shall not exceed 10% of our total issued share capital as of December
31, 2005, being the date on which our shareholders approved the 2005 Share
Option Scheme, excluding shares issued upon exercise of options granted under
these schemes from time to time.

      Pre-Global Offering Share Option Scheme
      On February 4, 2001, we adopted a pre-global offering share option scheme
or the Pre-Global Offering Share Option Scheme. Pursuant to the Pre-Global
Offering Share Option Scheme:

      1.    options for an aggregate of 23,100,000 shares have been granted;

      2.    the subscription price per share is HK$1.19; and

      3.    the period during which an option may be exercised is as follows:

            (a)   50% of the rights to exercise the options shall vest 18 months
                  after the date of the grant; and

            (b)   50% of the rights to exercise the options shall vest 30 months
                  after the date of the grant.


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<PAGE>

      The exercise periods for options granted under the Pre-Global Offering
Share Option Scheme shall end not later than 10 years from March 12, 2001. No
further options may be granted under the Pre-Global Offering Share Option
Scheme.

      2001 Share Option Scheme

      On February 4, 2001, we adopted a share option scheme, or the 2001 Share
Option Scheme for the purposes of recognizing the contribution that certain
individuals had made to our company and attracting and retaining the best
available personnel to our company. Pursuant to the 2001 Share Option Scheme:

      1.    options for an aggregate of 44,100,000 shares have been granted;

      2.    the subscription price per share is HK$1.232; and

      3.    the period during which an option may be exercised is as follows:

            (a)   one-third of the rights to exercise the options shall vest on
                  the first anniversary of the date of the grant;

            (b)   one-third of the rights to exercise the options shall vest on
                  the second anniversary of the date of the grant; and

            (c)   one-third of the rights to exercise the options shall vest on
                  the third anniversary of the date of the grant.

      The exercise periods for options granted under the 2001 Share Option
Scheme shall end not later than 10 years from August 27, 2001.

      In view of the amendments to the relevant provisions of Hong Kong Stock
Exchange Listing Rules regarding the requirements of share option schemes of a
Hong Kong listed company effective on September 1, 2001, no further options will
be granted under the 2001 Share Option Scheme.

      2002 Share Option Scheme

      In June 2002, we adopted a new share option scheme, or the 2002 Share
Option Scheme. Under the 2002 Share Option Scheme, our directors may, at their
discretion, invite employees, including executive directors, of our company or
any of our subsidiaries, to take up options to subscribe for our shares. The
maximum number of shares which may be granted under the 2002 Share Option Scheme
to any individual in any 12-month period up to the next grant shall not exceed
1% of our total issued share capital from time to time.

      According to the 2002 Share Option Scheme, the consideration payable by a
grantee for the grant of an option will be HK$1.00. The subscription price of a
share payable by a grantee upon the exercise of an option is determined by our
directors at their discretion at the date of grant, except that such price may
not be set below a minimum price which is the highest of:

      1.    the nominal value of our share on the date of the grant of the
            option;

      2.    the average closing price of the shares on the HKSE as stated in the
            HKSE's quotation sheets for the five trading days immediately
            preceding the date of grant of the option; and

      3.    the closing price of the shares on the HKSE as stated in the HKSE's
            quotation sheets on the date of grant of the option.


                                      100
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       On February 24, 2003, our board of directors approved to grant options in
respect of 42,050,000 shares to our directors and senior management under the
2002 Share Option Scheme. The exercise price for such options is HK$2.108 per
share. The closing market price immediately before the date on which such
options were granted was HK$2.11 per share. Such options granted under the 2002
Share Option Scheme may be exercised, in whole or in part, in accordance with
the following vesting schedule:

      1.    one-third of the rights to exercise the options shall vest on the
            first anniversary of the date of the grant;

      2.    one-third of the rights to exercise the options shall vest on the
            second anniversary of the date of the grant; and

      3.    one-third of the rights to exercise the options shall vest on the
            third anniversary of the date of the grant.

       The exercise periods for the above options granted under the 2002 Share
Option Scheme shall end not later than 10 years from February 24, 2003.

       On February 5, 2004, our board of directors approved a grant of options
in respect of 50,700,000 shares to our directors and senior management under the
2002 Share Option Scheme. The exercise price for such options is HK$3.152 per
share. The closing market price immediately before the date on which such
options were granted was HK$3.146 per share. Such options granted under the 2002
Share Option Scheme may be exercised, in whole or in part, in accordance with
the following vesting schedule:

      1.    one-third of the rights to exercise the options shall vest on the
            first anniversary of the date of the grant;

      2.    one-third of the rights to exercise the options shall vest on the
            second anniversary of the date of the grant; and

      3.    one-third of the rights to exercise the options shall vest on the
            third anniversary of the date of the grant.

      The exercise periods for the above options granted under the 2002 Share
Option Scheme shall end not later than 10 years from February 5, 2004.

      On August 31, 2005, our board of directors approved a grant of options in
respect of 65,870,000 shares to our directors and senior management under the
2002 Share Option Scheme. The exercise price of such options is HK$5.62 per
share. The closing market price immediately before the date on which such
options were granted was HK$5.75 per share. Such options granted under the 2002
Share Option Scheme may be exercised, in whole or in part, in accordance with
the following vesting schedule:

      1.    one-third of the rights to exercise the options shall vest on the
            first anniversary of the date of the grant;

      2.    one-third of the rights to exercise the options shall vest on the
            second anniversary of the date of the grant; and

      3.    one-third of the rights to exercise the options shall vest on the
            third anniversary of the date of the grant.

      The exercise periods for the above options granted under the 2002 Share
Option Scheme shall end not later than 10 years from August 31, 2005.


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      2005 Share Option Scheme

      We had undertaken a review of the 2002 Share Option Scheme in 2005 and
noted that certain provisions could be clarified and improved. Accordingly, our
board had proposed, and on December 31, 2005, we adopted a new share option
scheme, or the 2005 Share Option Scheme and terminated the 2002 Share Option
Scheme. Upon termination of the 2002 Share Option Scheme, no further options may
be granted under the 2002 Share Option Scheme, but in all other respects the
provisions of the 2002 Share Option Scheme shall remain in force. The
outstanding options under the 2002 Share Option Scheme shall continue to be
subject to the provisions of the 2002 Share Option Scheme, and the adoption of
the 2005 Share Option Scheme will not in any way affect the terms of the
exercise of such outstanding options.

      Under the 2005 Share Option Scheme, our board will have the authority to
grant options to subscribe for shares to our directors, officers and employees
and or of our subsidiaries, and any other persons who in sole discretion of our
board have contributed or will contribute to our group. Unless approved by our
shareholders, the total number of shares issued and to be issued upon exercise
of the options granted to each individual (including exercised and unexercised
options) under the 2005 Share Option Scheme or any other share option scheme
adopted by us, in any 12 months period, must not exceed 1% of the shares in
issue.

      According to the 2005 Share Option Scheme, the consideration payable by a
grantee for the grant of an option will be HK$1.00. The subscription price of a
share payable by a grantee upon the exercise of an option will be determined by
our directors at their discretion at the date of the grant, except that such
price may not be set below a minimum price which is the highest of:

      1.    the nominal value of our share on the date of the grant of the
            option;

      2.    the average closing price of the shares on the HKSE as stated in the
            HKSE's quotation sheets for the five trading days immediately
            preceding the date of the grant of the option; and

      3.    the closing price of the shares on the HKSE as stated in the HKSE's
            quotation sheet on the date of the grant of the option.

      The period within which the options must be exercised, as well as any
minimum holding period or performance targets which apply to the options, will
be specified by our board at the time of grant. The exercise periods for options
granted under the 2005 Share Option Scheme shall end not later than 10 years
from the date of the grant of the option. During the year, no options have been
granted or exercised under the 2005 Share Option Scheme.


      As of December 31, 2005, our directors and employees had the following
personal interests in options to subscribe for shares granted under our share
option schemes:

<TABLE>
<CAPTION>
                       Number of shares involved in
                       the options outstanding as of
                      -------------------------------                          -------------------------------------
                                                                                                          Closing
                                                                                                         price per
                                                                                                           share
                                                                                                        immediately
                                                                                                        before the      Exercise
                                        December 31,                                                      date of        Price
Name of Grantee       January 1, 2005       2005           Date of Grant       Date of Expiration***   grant (HK$)**     (HK$)
---------------       ---------------   ------------     -----------------     ---------------------   -------------    --------
<S>                   <C>               <C>              <C>                   <C>                     <C>              <C>
Directors:
Chengyu Fu                  1,750,000       1,750,000          March 12, 2001          March 12, 2011           1.23          1.19
                            1,750,000       1,750,000         August 27, 2001         August 27, 2011           1.46         1.232
                            1,150,000       1,150,000       February 24, 2003       February 24, 2013           2.09         2.108
                            2,500,000       2,500,000        February 5, 2004        February 5, 2014           3.13         3.152


                                      102
<PAGE>

                                    -       3,500,000         August 31, 2005         August 31, 2015           5.75          5.62
Han Luo                     1,400,000       1,400,000          March 12, 2001          March 12, 2011           1.23          1.19
                            1,150,000       1,150,000         August 27, 2001         August 27, 2011           1.46         1.232
                            1,150,000       1,150,000       February 24, 2003       February 24, 2013           2.09         2.108
                            1,150,000       1,150,000        February 5, 2004        February 5, 2014           3.13         3.152
                                    -       1,610,000         August 31, 2005         August 31, 2015           5.75          5.62
Longsheng Jiang*            1,400,000       1,400,000          March 12, 2001          March 12, 2011           1.23          1.19
                            1,150,000       1,150,000         August 27, 2001         August 27, 2011           1.46         1.232
                            1,150,000         766,700       February 24, 2003       February 24, 2013           2.09         2.108
                            1,150,000         383,300        February 5, 2004        February 5, 2014           3.13         3.152
Shouwei Zhou                1,400,000       1,400,000          March 12, 2001          March 12, 2011           1.23          1.19
                            1,750,000       1,750,000         August 27, 2001         August 27, 2011           1.46         1.232
                            1,750,000       1,750,000       February 24, 2003       February 24, 2013           2.09         2.108
                            1,750,000       1,750,000        February 5, 2004        February 5, 2014           3.13         3.152
                                    -       2,450,000         August 31, 2005         August 31, 2015           5.75          5.62
Xinghe Cao                          -         800,000         August 31, 2005         August 31, 2015           5.75          5.62
Zhenfang Wu                         -         800,000         August 31, 2005         August 31, 2015           5.75          5.62
Guangqi Wu                          -       1,610,000         August 31, 2005         August 31, 2015           5.75          5.62
Hua Yang                    1,150,000       1,150,000          March 12, 2001          March 12, 2011           1.23          1.19
                            1,150,000       1,150,000         August 27, 2001         August 27, 2011           1.46         1.232
                            1,150,000       1,150,000       February 24, 2003       February 24, 2013           2.09         2.108
                            1,150,000       1,150,000        February 5, 2004        February 5, 2014           3.13         3.152
                                    -       1,610,000         August 31, 2005         August 31, 2015           5.75          5.62
Sung Hong Chiu              1,150,000       1,150,000        February 5, 2004        February 5, 2014           3.13         3.152

Evert Henkes                1,150,000       1,150,000        February 5, 2004        February 5, 2014           3.13         3.152

Erwin                       1,150,000               0        February 5, 2004        February 5, 2014           3.13         3.152
Schurtenberger*
Kenneth S Courtis           1,150,000       1,150,000        February 5, 2004        February 5, 2014           3.13         3.152



Employees:
Other Employees             6,550,000       4,850,000          March 12, 2001          March 12, 2011           1.23          1.19
                           22,650,000      19,150,000         August 27, 2001         August 27, 2011           1.46         1.232
                           26,500,000      21,999,900       February 24, 2003       February 24, 2013           2.09         2.108
                           35,850,000      30,783,400        February 5, 2004        February 5, 2014           3.13         3.152
                                    -      49,500,000         August 31, 2005         August 31, 2015           5.75          5.62
</TABLE>

---------------------
*     Mr. Longsheng Jiang retired as our Executive Director with effect from
      June 1, 2005 and Dr. Erwin Schurtenberger resigned as our Independent
      Non-executive Director with effect from April 1, 2005.
**    Adjustment has been made to take account of the subdivision of issued and
      unissued shares of HK$0.10 each into five shares of HK$0.02 each effective
      on March 17, 2004.
***   The share options are only exercisable by the grantees upon the vesting of
      such share options.

      As of June 6, 2006, 2,300,100 options granted under our share option
schemes have been exercised. The weighted average closing price of our shares on
the day immediately preceding the exercise of the options was HK$4.04.

      On April 1, 2005, Dr. Erwin Schurtenberger resigned from our board. He
also surrendered the share options we granted to him upon resignation.

       The share options exercised during the year ended December 31, 2005
resulted in the issue of 2,300,100 ordinary shares and new share capital of Rmb
49,000 and share premium of Rmb 4,451,000. No share options had been cancelled
during the year ended December 31, 2005.

      As of December 31, 2005, we had 169,063,300 share options outstanding
under these share option schemes which represented approximately 0.4% of our
shares in issues as of that date.

      For further details about our share option schemes, see notes 11 and 29 to
our consolidated financial statements attached to this annual report.


                                      103
<PAGE>

      As of June 6, 2006, none of our directors and employees owned 1% or more
of our shares including the shares underlying the stock options granted as of
that date.

          ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.    MAJOR SHAREHOLDERS

      The following table sets forth information regarding the ownership of our
outstanding shares by major shareholders as of June 6, 2006.

 Shareholder                  Number of Shares Owned       Percentage
---------------------------  ------------------------     ------------
 CNOOC(1)..................       28,772,727,273             66.41%

------------------------
(1)   CNOOC owns our shares indirectly through its wholly owned subsidiaries,
      CNOOC (BVI) Limited and Overseas Oil & Gas Corporation, Ltd.


      As of June 6, 2006, CNOOC's interest in our company was reduced from
approximately 70.64% to approximately 66.41% as a result of placing
2,500,000,000 existing shares to independent investors and subscribing
2,272,727,273 new shares by CNOOC (BVI) Limited.

      Our major shareholder listed above does not have different voting rights.
Except as set forth in the above table, we are not aware of any holders of more
than 5% of our shares. Except as disclosed above, we are not aware of any
significant changes in the percentage ownership of our major shareholder over
the course of the past three years. To our knowledge, no arrangements are
currently in place that could lead to a change of control of our company.

      As of June 6, 2006, 8,661,634 American depositary shares were outstanding
in the United States, representing approximately 2% of our then outstanding
shares. At such date, the number of registered American depositary share holders
in the United States was 24.

B.    RELATED PARTY TRANSACTIONS

Overview

      We regularly enter into transactions with related parties, including
CNOOC, its subsidiaries and associates, as defined under the Hong Kong Stock
Exchange Listing Rules. Since CNOOC indirectly owns an aggregate of
approximately 66.41% of our issued share capital, some of these transactions
constitute connected transactions under the Rules Governing the Listing of
Securities on The Stock Exchange of Hong Kong Limited, or the Hong Kong Stock
Exchange Listing Rules, and are regulated by the Hong Kong Stock Exchange.

      Under the Hong Kong Stock Exchange Listing Rules, many of these connected
transactions normally would require full disclosure and the prior approval of
our independent shareholders. However, since the connected transactions are
carried out in the ordinary and usual course of business and occur on a regular
basis on normal commercial terms and on terms that are fair and reasonable as
far as our shareholders are concerned, the Hong Kong Stock Exchange has granted
us a waiver from strict compliance with requirements of the Hong Kong Stock
Exchange Listing Rules for the period from January 1, 2003 to December 31, 2005,
and we have also obtained independent shareholders' approval at our
extraordinary general meeting on December 31, 2005 for the continuing connected
transactions for the period from January 1, 2006 to December 31, 2007. The
continuing connected transactions are newly categorized into different
categories, and each category of connected transactions are subject to annual
caps and other conditions as specified below.

      We originally obtained a waiver from the Hong Kong Stock Exchange on April
3, 2001, shortly after our shares were listed on the Hong Kong Stock Exchange.
This waiver expired on December 31, 2002, and we renewed the waiver with the
Hong Kong Stock Exchange on January 7, 2003. The renewed


                                      104
<PAGE>

waiver covers the period from January 1, 2003 to December 31, 2005. Following
the amendments to the Hong Kong Stock Exchange Listing Rules in March 2004,
waivers for connected transactions from the Hong Kong Stock Exchange are no
longer required, and we are only required to obtain independent shareholders'
approval for continuing connected transactions. Accordingly, we obtained
independent shareholders' approval for our continuing connected transactions
with CNOOC, its subsidiaries and associates for the period from January 1, 2006
to December 31, 2007 using a new categorization.

Existing Categories of Connected Transactions

      Our ongoing connected transactions in respect of which we were granted a
waiver for the period from January 1, 2003 to December 31, 2005 consist of the
following eight categories:

      o     Contracts with foreign petroleum companies;

      o     Trademark license agreements;

      o     Lease agreement in respect of the Nanshan terminal;

      o     Provision of materials, utilities and ancillary services;

      o     Technical services;

      o     Research and development services;

      o     Lease and property management services; and

      o     Sales of crude oil, condensate oil and liquefied petroleum gas.

      Contracts with foreign petroleum companies. In preparation for our initial
public offering, CNOOC transferred to us all of its rights and obligations under
all existing and any future production sharing contracts with various
international oil and gas companies. As required by PRC law, CNOOC retained
certain administrative functions and will remain a party to the production
sharing contracts. PRC law requires CNOOC, which is a State-owned entity, to
negotiate and conclude an initial production sharing contract with a foreign
partner offshore China. New production sharing contracts continue to be entered
into between CNOOC and foreign partners, primarily through bidding organized by
CNOOC and, to a lesser extent, through direct negotiation.

      Trademark license agreements. CNOOC has licensed to us two "CNOOC"
trademarks under non-exclusive license agreements that will expire on September
8, 2008. We paid a nominal amount of Rmb 1,000 for each of the trademarks. The
registrations for the two trademarks will expire on December 6, 2008 and April
20, 2009, respectively. CNOOC has undertaken that so long as it is our
controlling shareholder, it will renew the trademark registrations to enable us
to continue using them without any additional consideration.

      Lease agreement in respect of the Nanshan Terminal. Under an agreement
dated September 9, 1999, CNOOC has granted us the right to use the Nanshan
Terminal, Yacheng 13-1, free-of-charge for a period of 20 years. We use the
property to process natural gas.

      Provision of materials, utilities and ancillary services. Various
affiliates of CNOOC provide us with the use of certain facilities and ancillary
services and products, including:

      o     materials for offshore oil and gas production (including cement,
            diesel oil, mud, fuels, barite and paint);

      o     oil and gas production labor services;

      o     warehousing and storage;


                                      105
<PAGE>

      o     road transportation services;

      o     telecommunication and network services;

      o     wharf services;

      o     construction services, including the construction of roads, piers,
            buildings, plants and embankment;

      o     major equipment maintenance and repair works;

      o     medical, child care and social welfare services;

      o     water, electricity and heat supply;

      o     security and fire services; technical training; accommodation;

      o     repair and maintenance of buildings; and

      o     catering services.

      Under agreements between these affiliates of CNOOC and us, the facilities
and ancillary products and services are to be provided at:

      (i)   state-prescribed prices; or

      (ii)  where there is no state-prescribed price, market prices, including
            the local or national market prices or the prices at which CNOOC's
            affiliates previously provided the relevant materials, utilities and
            ancillary services to independent third parties; or

      (iii) when neither (i) nor (ii) is applicable, the cost to CNOOC's
            associates of providing the relevant materials, utilities and
            ancillary services, including the cost of sourcing or purchasing
            from third parties, plus a margin of not more than 5%, before any
            applicable taxes.

      The prices, volumes and other terms of the agreements are reviewed by the
parties annually. If any of the terms are amended, the parties must enter into a
supplemental agreement no later than 60 days prior to the end of the financial
year preceding the financial year in which the amendment takes effect. If the
parties fail to reach an agreement by then, the existing terms of the supply
agreement will continue to apply until the parties agree on the terms of the
supplemental agreement. We have undertaken to the Hong Kong Stock Exchange that
we will comply with the provisions of the Hong Kong Stock Exchange Listing Rules
with respect to any supplemental agreements.

      For the years ended December 31, 2003, 2004 and 2005, the amounts we paid
to affiliates of CNOOC for these services were approximately Rmb 1,018 million,
Rmb 1,296 million and Rmb 2,996 million, respectively, representing 2.5%, 2.3%
and 4.3%, respectively, of our total revenues in that year.

      Technical services. Various affiliates of CNOOC, including China Oilfield
Services Limited and Offshore Oil Engineering Company Limited, provide us with
technical services for our offshore oil and gas production activities,
including:

      o     offshore drilling;

      o     ship tugging, oil tanker transportation and security services;

      o     well surveys, well logging, well cementing and other related
            technical services;


                                      106
<PAGE>

      o     collection of geophysical data, ocean geological prospecting, and
            data processing;

      o     platform fabrication service and maintenance; and

      o     design, construction, installation and test of offshore and
            onshore production facilities.

      For the years ended December 31, 2003, 2004 and 2005, the amounts we paid
to affiliates of CNOOC for these services totaled approximately Rmb 3,828
million, Rmb 6,362 million and Rmb 6,651 million, respectively, representing
9.3%, 11.5% and 9.6%, respectively, of our total revenue in that year. We
generally conduct an open bidding process to select these services providers and
the charges for these services are based on arm's-length negotiations between
the parties and reflect considerations such as volume of sales, length of
contracts, overall customer relationship and other market factors.

      Research and development services. Various affiliates of CNOOC, including
China Offshore Oil Research Center, have been providing us with research and
development services, including:

      o     geophysical exploration services;

      o     seismic data processing;

      o     comprehensive exploration research services; and

      o     information technology services.

      In July 2003, we established our own research center department, CNOOC
China Limited Research Center, to undertake most of our research and development
activities. In March 2006, we established CNOOC China Limited Beijing Research
Center as a branch.

      During the years ended December 31, 2003, 2004 and 2005, we paid
approximately Rmb 56 million, Rmb 8 million and Rmb 8 million, respectively, to
China Offshore Oil Research Center for its provision of general research and
development services. We occasionally also hired research institutes, including
China Offshore Oil Research Center, through an open bidding process for specific
research and development projects.

      Lease and property management services. We have entered into lease and
property management agreements with CNOOC and its affiliates for premises
located in Beijing, Tianjin, Zhanjiang, Shanghai and Shenzhen in the PRC and in
Singapore. Most of the premises are necessary for our operations, and the
agreements are based on normal commercial terms. For the years ended December
31, 2003, 2004 and 2005, the aggregate rentals and management fees payable by us
to CNOOC and its affiliates were approximately Rmb 57 million, Rmb 77 million
and Rmb 77 million, respectively.

      Sales of crude oil, condensate oil and liquefied petroleum gas. We sell
crude oil, condensate oil and liquefied petroleum gas to affiliates of CNOOC
that engage in the downstream petroleum business. The prices for these products
are based on prices in the international market. For the years ended December
31, 2003, 2004 and 2005, the affiliates of CNOOC paid us approximately Rmb 8,324
million, Rmb 13,946 million and Rmb 26,576 million, respectively, representing
approximately 20.3%, 25.3% and 38.3% of our total revenues for the respective
periods.

Waiver Conditions

      The waiver granted by the Hong Kong Stock Exchange to us in January 2003
in respect of ongoing connected transactions for the period from January 1, 2003
to December 31, 2005 contains the following typical conditions:

      i.    in relation to the ongoing connected transactions referred to in the
            paragraphs headed "Contracts with foreign petroleum companies,"
            "Trademark license agreements" and "Lease agreement in respect of
            the Nanshan Terminal" the transactions, and the respective


                                      107
<PAGE>

            agreements (if any) governing such transactions, must be on terms
            that are fair and reasonable so far as our shareholders are
            concerned and in relation to the ongoing connected transactions
            referred to in the paragraphs headed "Provision of materials,
            utilities and ancillary services," "Technical services," "Research
            and development services," "Lease and property management services"
            and "Sales of crude oil, condensate oil and liquefied petroleum gas"
            the transactions, and the respective agreements (if any) governing
            such transactions must be:

            a.    entered into by us in our ordinary and usual course of
                  business;

            b.    either on normal commercial terms or, where there is no
                  available comparison, on terms no less favorable than those
                  available to or from independent third parties; and

            c.    on terms that are fair and reasonable so far as our
                  shareholders are concerned;

      ii.   brief details of the continuing connected transactions in each year
            as required by Rule 14.25(1)(A) to (D) of the Hong Kong Stock
            Exchange Listing Rules then in force before March 31, 2004 (i.e.,
            the date or period of the transaction, the parties thereto and a
            description of their connected relationship, a brief description of
            the transaction and the purpose of the transaction, the total
            consideration and the terms, and the nature and the extent of the
            interest of the connected person in the transaction), must be
            disclosed in our annual report and accounts for the relevant year;

      iii.  our independent non-executive directors must review annually the
            transactions and confirm, in our annual report and accounts for the
            year in question, that such transactions have been conducted in the
            manner stated in (i) above and, where applicable, within the annual
            limit stated in (v) below;

      iv.   our auditors must carry out review procedures annually in relation
            to the connected transactions and must confirm in writing whether
            the transactions:

            a.    received the approval of our board of directors;

            b.    have been entered into in accordance with the pricing policies
                  as stated in our financial statements; and

            c.    have been entered into in accordance with the terms of the
                  agreement governing the transactions or, where there is no
                  agreement, on terms that are not less favorable than terms
                  available to or from independent third parties;

            For the purpose of the above review by our auditors, CNOOC has
      undertaken to us that it will provide the auditors with access to its
      relevant accounting records;

      v.    the aggregate annual volume of transactions shall not exceed the
            proposed annual limits set out in the following table:

         ------------------------------------------------------------
         Transaction                Annual Limit
         ------------------------------------------------------------
         Materials, utilities and   10% of our audited consolidated
         ancillary services supply  total revenues in the preceding
         agreements                 financial year
         ------------------------------------------------------------
         Technical services         In respect of the three financial
                                    years ending December 31, 2005,
                                    Rmb 5,853 million, Rmb 7,338
                                    million and Rmb 7,218* million,
                                    respectively
         ------------------------------------------------------------


                                 108
<PAGE>

            ------------------------------------------------------------
            Research and development   In respect of the three financial
            services for particular    years ending December 31, 2005,
            projects                   Rmb 141 million, Rmb 148 million
                                       and Rmb 153 million, respectively
            ------------------------------------------------------------
            Sales of crude oil,        In respect of the three financial
            condensate oil and         years ending December 31, 2005,
            liquefied petroleum gas    42%, 56% and 82%, respectively,
                                       of our audited consolidated total
                                       revenues in the preceding
                                       financial year
            ------------------------------------------------------------
            General research and       Rmb 110 million
            development services
            agreement
            ------------------------------------------------------------
            Lease and management       Rmb 78 million
            services
            ------------------------------------------------------------
            * On December 31, 2005, we proposed a revised cap for the category
            of technical services of continuing connected transactions at the
            extraordinary general meeting and obtained the approval of our
            independent shareholders.

      vi.   we undertook that if any of the terms of the agreements or
            arrangements referred to above are altered or if we enter into any
            new agreements with any connected persons (within the meaning of
            the Hong Kong Stock Exchange Listing Rules) in the future or if the
            limits stated in (v) above are exceeded, we will comply with the
            standard disclosure and shareholder approval provisions in the Hong
            Kong Stock Exchange Listing Rules unless we apply for and obtain a
            separate waiver from the Hong Kong Stock Exchange.

New Categories of Continuing Connected Transactions

      In order to present a more coherent, logical and understandable picture to
shareholders, and also to enable our company to monitor the status of connected
transactions following each category more effectively going forward, we adopted
a new categorization for continuing connected transactions, and obtained
independent shareholders' approval at our extraordinary general meeting on
December 31, 2005. The new categorization of continuing connected transactions,
which are discloseable under the Hong Kong Stock Exchange Listing Rules and
applicable to our company for the period from January 1, 2006 to December 31,
2007, are set out below:

      o     Provision of exploration, oil and gas development, oil and gas
            production as well as marketing, management and ancillary services
            by CNOOC and/or its associates to us;

      o     Provision of management, technical, facilities and ancillary
            services, including the supply of materials from us to CNOOC and/or
            its associates;

      o     Sales of petroleum and natural gas products by us to CNOOC and/or
            its associates.

     Since the establishment of CNOOC, certain associates of CNOOC specialized
in exploration, oil and gas development, oil and gas production, as well as
marketing, management and ancillary services provided these services to us
through bidding process. We will continue to use these services provided by
associates of CNOOC, including but not limited to China Oilfield Services
Limited, or COSL, Offshore Oil Engineering Co., Ltd., or CNOOC Engineering and
CNOOC Oil Base Group Limited, or COBGL. CNOOC also provides certain of these
services from time to time. The services provided by CNOOC and/or its associates
are set out below.


                                      109
<PAGE>

Provision of exploration, oil and gas development, oil and gas production as
well as marketing, management and ancillary services by CNOOC and/or its
associates to us

      (a) Provision of exploration and support services to us. The services
provided by CNOOC and/or its associates to us on exploration operations
include:

      o     well site survey;
      o     seismic data acquisition and processing;
      o     integrated exploration research services;
      o     exploration well operation;
      o     related technical services on exploration well;
      o     tow-boat, transportation and safety services; and
      o     other related technical and supporting services.

      (b) Provision of oil and gas development and support services to us. The
services provided by CNOOC and/or its associates to us on oil and gas
development operations include:

      o     platform survey;
      o     drilling and completion well operation;
      o     related technical services on drilling and completion;
      o     design, construction, installation and tuning of production
            facilities;
      o     shipping transportation;
      o     provision of materials;
      o     integrated research on development techniques; and
      o     other related technical and supporting services.

      (c) Provision of oil and gas production and support services to us. The
services provided by CNOOC and/or its associates to us on oil and gas
production operations are set out below. In addition, the scope of business of
these companies also include various facilities and ancillary services, such as
provision of different types of materials, medical and employee welfare
services, maintenance and repair of major equipments and supply of water,
electricity and heat to us, some of which may not be available from independent
third parties or available on comparable terms.

            o     integrated research on production techniques;
            o     well workover;
            o     shipping transportation;
            o     oil tanker transportation;
            o     provision of materials;
            o     maintenance of platform;
            o     repair of equipment and pipeline;
            o     production operations;
            o     oil and gas production labour services;
            o     warehousing and storage;
            o     lease of equipment and building;
            o     road transportation services;
            o     telecommunication and network services;
            o     wharf services;
            o     construction services, including roads, wharf, buildings,
                  factories and water barrier;
            o     maintenance and repair of major equipment;
            o     medical, childcare and social services;
            o     provision of water, electricity and heat;


                                      110
<PAGE>

            o     security and fire services;
            o     technical training;
            o     accommodation;
            o     maintenance and repair of buildings;
            o     catering services; and
            o     other related technical and supporting services.

      (d) Provision of marketing, management and ancillary services to us.
CNOOC and/or its associates provide marketing, administration and management,
management of oil and gas operations and integrated research services to us, as
well as other ancillary services relating to the exploration, development,
production and research activities of us. Details of these services are set out
below:

            o     marketing services;
            o     management;
            o     staff recruitment;
            o     publishing;
            o     telecommunications;
            o     leases of properties;
            o     property management;
            o     water, electricity and heat supply;
            o     car rental;
            o     integrated services such as record keeping, filing, repair
                  of computer, catering and photocopying; and
            o     integrated research.


    In addition, as part of providing administration and management services to
us, CNOOC and/or its associates leased certain premises. In addition to leasing
these properties, CNOOC and/or its associates also provided management services
in respect of certain properties leased to us.

     (e)FPSO vessel lease agreements. We lease floating production, storage and
offloading (FPSO) vessel from COBGL for use in oil and gas production operations
at market prices on normal commercial terms which are calculated on a daily
basis. FPSO vessels are usually located next to the offshore oil platforms and
are an integrated facility used by us during its offshore oil and gas production
for processing, storage and channelling of crude oil. The terms of FPSO vessel
leases are usually determined based on the expected term of oil and gas
exploration, development and production. We currently lease a FPSO vessel for a
term of 20 years from an associate of CNOOC, with such term being determined
based on the expected term of oil and gas exploration, development and
production.

Provision of management, technical, facilities and ancillary services,
including the supply of materials to CNOOC and/or its associates.

In addition to providing various services to us, CNOOC and/or its associates may
also utilise various types of management, facilities and ancillary services,
including the supply of materials provided by us from time to time. The services
that may be provided by us to CNOOC and/or its associates include:

        o   technical consulting;
        o   technology transfer;
        o   management;
        o   technical research services; and
        o   other supporting services.


                                      111
<PAGE>

Sales of petroleum and natural gas products by us to CNOOC and/or its
associates.

      (a) Sales of petroleum and natural gas products. We may sell petroleum
and natural gas products, including crude oil, condensate oil, liquefied
petroleum gas, natural gas and liquefied natural gas, to CNOOC and/or its
associates which engage in downstream petroleum business.

      (b)Long term sales of natural gas and liquefied natural gas. We sell
natural gas to CNOOC and/or its associates which engage in the downstream
petroleum business. We have also invested and acquired interests in liquefied
natural gas related upstream projects in Tangguh, Indonesia and the North West
Shelf of Australia. It is also envisaged that from time to time we may sell
liquefied natural gas explored from these gas reserves mentioned above and
other gas reserves in which we may invest in the future to CNOOC and/or its
associates.


Disclosure and/or Independent Shareholders' approval requirements

      Under the Hong Kong Stock Exchange Listing Rules, the following
categories amongst the new categories of continuing connected transactions are
exempted from the independent shareholders' approval requirement but are
subject to the reporting and announcement requirements set out in Rules 14A.45
to 14A.47 of the Hong Kong Stock Exchange Listing Rules:

      o     Marketing, management and ancillary services;
      o     FPSO vessel leases; and
      o     Provision of management, technical, facilities and ancillary
            services, including the supply of materials from us to CNOOC and/or
            its associates.

      Under the Hong Kong Stock Exchange Listing Rules, the following
categories amongst the new categories of continuing connected transactions, or
the Non-Exempt Continuing Connected Transactions, are subject to the reporting,
announcement and independent shareholders' approval requirements:

      o     Provision of exploration, oil and gas development, oil and gas
            production as well as marketing, management and ancillary services
            by CNOOC and/or its associates to us;
            (a)   Exploration and support services;
            (b)   Oil and gas field development and support services;
            (c)   Oil and gas field production and support services;
      o     Sales of petroleum and natural gas products by us to CNOOC and/or
            its associates
            (a)   Sales of petroleum and natural gas products;
            (b)   Long term Sales of natural gas and liquefied natural gas.

      We have obtained independent shareholders' approval at our extraordinary
general meeting on December 31, 2005 for the Non-Exempt Continuing Connected
Transactions on the condition that:

      i.    The annual amount of each category of the Non-Exempt Continuing
            Connected Transactions shall not exceed the applicable Proposed Cap
            set out in the following table:


      The continuing connected
      transactions                                 Caps

      Provision of exploration, oil and gas development, oil and gas production
      as well as marketing, management and ancillary services by CNOOC and/or
      its associates to us


                                      112
<PAGE>

<TABLE>
<CAPTION>
           <S>                                           <C>
           (a) Exploration and support services          For the two years ending 31
                                                         December 2007, Rmb 2,117 million
                                                         and Rmb 2,293 million, respectively

           (b) Oil and gas field development and         For the two years ending 31
           support services                              December 2007, Rmb 7,628 million
                                                         and Rmb 10,458 million,
                                                         respectively

           (c) Oil and gas field production and          For the two years ending 31
           support services                              December 2007, Rmb 3,935 million
                                                         and Rmb 4,132 million, respectively

           (d) Marketing, management and ancillary       For the two years ending 31
           services                                      December 2007, Rmb 478 million and
                                                         Rmb 504 million, respectively

           (e) FPSO vessel leases                        For the two years ending 31
                                                         December 2007, Rmb 453 million and
                                                         Rmb 463 million, respectively

           Provision of management, technical, facilities and ancillary services, including
           the supply of materials from us to CNOOC and/or its associates

           Provision of management, technical,           For the two years ending 31
           facilities and ancillary services,            December 2007, Rmb 50 million and
           including the supply of materials to CNOOC    Rmb 100 million, respectively
           and/or its associates

           Sales of petroleum and natural gas products by us to CNOOC and/or its associates

           (a) Sales of petroleum and natural gas        For the two years ending 31
           products                                      December 2007, Rmb 33,469 million
                                                         and Rmb 44,199 million,
                                                         respectively

           (b) Long term sales of natural gas and        For the two years ending 31
           liquefied natural gas                         December 2007, Rmb 1,960 million
                                                         and Rmb 3,599 million, respectively
</TABLE>

      ii.   (i)   The Non-Exempt Continuing Connected Transactions will be
                  entered into in our usual and ordinary course of businesses
                  and either (A) on normal commercial terms or (B) if there is
                  no available comparison, on terms no less favourable to us
                  than terms available from independent third parties; and

            (ii)  The Non-Exempt Continuing Connected Transactions will be
                  entered into in accordance with the relevant Comprehensive
                  Framework Agreements and on terms that are fair and
                  reasonable and in the interests of the Shareholders as a
                  whole.

    We will comply with other relevant provisions of the Hong Kong Stock
Exchange Listing Rules in relation to each category of the Non-Exempt Continuing
Connected Transactions.

    For further information regarding related party transactions, see note 27 to
our consolidated financial statements attached to this annual report.

C.    INTERESTS OF EXPERTS AND COUNSEL

      Not applicable.

                          ITEM 8. FINANCIAL INFORMATION


                                      113
<PAGE>

A.    CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

      See pages beginning on page F-1 following Item 19.

Legal Proceedings

      We are not a defendant in any material litigation, claim or arbitration,
and we know of no pending or threatened proceeding which would have a material
adverse effect on our financial condition.

Dividend Distribution Policy

      We intend to declare and pay dividends in the future. The payment and the
amount of any dividends will depend on our earnings, capital expenditure
requirements, financial conditions, future prospects and other factors which our
directors may consider relevant. In addition, CNOOC, as our controlling
shareholder, will be able to influence our dividend policy. Holders of our
shares will be entitled to receive such dividends declared by our board of
directors pro rata according to the amounts paid up or credited as paid up on
the shares. Subject to the factors described above, we currently intend to
pursue a dividend policy consistent with other international oil and gas
exploration and production companies. Based on current share prices and
dividends of international oil and gas exploration and production companies, we
currently intend to target an initial dividend yield of approximately 1% to 3%.

      Dividends may be paid only out of our distributable profits as permitted
under Hong Kong law, which does not restrict the payment of dividends to
nonresident holders of our securities. To the extent profits are distributed as
dividends, such portion of profits will not be available to be reinvested in our
operations.

      Holders of our ADSs will be entitled to receive dividends, subject to the
terms of the deposit agreement, to the same extent as holders of our shares,
less the fees and expenses payable under the deposit agreement. Cash dividends
will be paid to the depositary in Hong Kong dollars and, will be converted by
the depositary into U.S. dollars and paid to holders of ADSs. Stock dividends,
if any, will be distributed to the depositary and will be distributed by the
depositary, in the form of additional ADSs, to holders of the ADSs.

      Following the reorganization of CNOOC and our establishment as a separate
legal entity in October 1999, we paid a dividend of Rmb 1,045.4 million in 1999
and declared and paid a final dividend of Rmb 6,426.4 million in 2000. In 2001,
2002 and 2003, we declared and paid dividends totaling Rmb 871.1 million, Rmb
2,265.1 million and Rmb 5,403.7 million, respectively. In 2004, we declared
dividends totaling Rmb 6,101.4 million and paid dividends totaling Rmb 6,091.4
million. The difference between the amount of dividends declared and paid in
2004 was because that we repurchased and canceled some of our shares in 2004.
Out of the total dividends declared and paid in 2004, Rmb 2,617.5 million
(US$316.3 million) was attributable to a special interim dividend to replace the
2003 final dividend and final special dividend proposed by our board of
directors in 2003. In 2005, we declared and paid dividends totaling Rmb 7,772.2
million (US$963.1 million). The amount of dividends we paid historically is not
indicative of the dividends that we will pay in the future.

      Substantially all our dividend payments result from dividends paid to us
by CNOOC China Limited. CNOOC China Limited must follow the laws and regulations
of the PRC and its articles of association in determining its dividends. As a
wholly foreign owned enterprise in China, CNOOC China has to provide for a
reserve fund and staff and workers' bonus and welfare fund, each of which is
appropriated from net profit after taxation but before dividend distribution
according to the prevailing accounting rules and regulations in the PRC. CNOOC
China is required to allocate at least 10% of its net profit to the reserve fund
until the balance of this fund has reached 50% of its registered capital.
Appropriations to the staff and workers' bonus and welfare fund, which are
determined at the discretion of CNOOC China's directors, are charged to expense
as incurred in the consolidated financial statements, which were prepared under
Hong Kong GAAP. None of CNOOC China's contributions to these statutory funds may
be used for dividend purposes.


                                      114
<PAGE>

      For the years ended December 31, 2003, 2004 and 2005, CNOOC China Limited
made the following appropriations to the statutory reserves:

<TABLE>
<CAPTION>
                                      For the year ended          For the year ended                 For the year ended
                                       December 31, 2003           December 31, 2004                  December 31, 2005
                                       -----------------           -----------------                  -----------------
                                    Percentage        Rmb        Percentage       Rmb            Percentage            Rmb
                                  of Net Profits (in millions) of Net Profits (in millions)    of Net Profits     (in millions)
                                  -------------- ------------- -------------- -------------    --------------     -------------
<S>                               <C>            <C>           <C>            <C>              <C>                <C>
Reserve fund ...............            10%          818.1           10%         1,363.1             10%              2,268.4
Staff and workers' bonus and
   welfare fund ............            --              --            --              --              --                   --
</TABLE>

B.    SIGNIFICANT CHANGES

First Quarter 2006 Financial and Operating Results

      During the first quarter of 2006, our unaudited revenues from the sale of
oil and gas were Rmb 16.4 billion. Our daily average crude oil production was
383,519 barrels per day during this period, compared to 351,579 barrels per day
in 2005, while our daily average natural gas production was 390 million cubic
feet per day, compared to 348 million cubic feet per day in 2005. The average
net realized price of our crude oil was US$58.13 per barrel during the first
quarter of 2006, compared to US$41.73 per barrel in 2005, while the average net
realized price of our natural gas was US$3.10 per thousand cubic feet, compared
to US$2.92 per thousand cubic feet in 2005.

Change of Directors and Management

      On April 18, 2006, Mr. Yunshi Cao ceased to be our Senior Vice President,
General Counsel and Company Secretary. On the same day, Mr. Victor Zhikai Gao
was appointed as our Senior Vice President, General Counsel and Company
Secretary.

      On May 24, 2006, Dr. Kenneth S. Courtis retired as an Independent
Non-executive Director of our Company in accordance with the retirement
provisions in article 97 of our articles of association, following the
conclusion of our annual general meeting. On the same day, Dr. Edgar W. K.
Cheng was elected by our shareholders as an Independent Non-executive Director.

      Effective May 25, 2006, the composition of our board committees is set
forth in the table below.

<TABLE>
<CAPTION>
                             Audit Committee                     Nomination Committee                Remuneration Committee
                             ---------------                     --------------------                ----------------------
                       Before                From              Before             From              Before             From
                    May 25, 2006         25 May, 2006       May 25, 2006      25 May, 2006       May 25, 2006      25 May, 2006
                    ------------         ------------       ------------      ------------       ------------      ------------
<S>              <C>                  <C>                 <C>               <C>                 <C>              <C>
Chairman           Sung Hong Chiu     Aloysius Hau Yin,       Han Luo            Han Luo        Sung Hong Chiu    Sung Hong Chiu
                                              Tse
                                      (Financial Expert)
Members          Kenneth S. Courtis     Sung Hong Chiu     Sung Hong Chiu   Edgar W. K. Cheng    Evert Henkes      Evert Henkes
                 (Financial Expert)
                  Aloysius Hau Yin     Lawrence J. Lau    Lawrence J. Lau    Lawrence J. Lau     Aloysius Hau    Aloysius Hau Yin
                         Tse                                                                       Yin Tse              Tse
                                                            Aloysius Hau                                            Xinghe Cao
                                                              Yin Tse

Total                     3                   3                  4                  3                 3                  4
</TABLE>

Placing Existing Shares and Subscription of New Shares

      On April 27, 2006, we entered into a Placing Agreement and a Subscription
Agreement with CNOOC (BVI) Limited (the "Vendor"), a wholly-owned subsidiary of
CNOOC. At the time of the agreements, the Vendor held 28,999,999,995 of our
issued shares and pursuant to the Placing Agreement, the Vendor agreed to place
2,500,000,000 shares in our share capital to independent investors at HK$6.15
per share. Within 14 days of the Placing Agreement, the Vendor will, pursuant to
the Subscription Agreement, subscribe for 2,272,727,273 new shares at HK$6.15
per share (the "Subscription").


                                      115
<PAGE>

      The Placing Shares represent approximately 6.09% of our issued share
capital of 41,054,675,375 shares and approximately 5.77% of our issued share
capital as enlarged by the Subscription. The net proceeds from the Subscription
of approximately HK$13.78 billion will be used to finance our continuing capital
expenditure requirements in relation to the OML 130 in offshore Nigeria, as well
as our general working capital needs.

      As the Subscription was completed before the record date of May 16, 2006
for the 2005 final dividends of HK$0.10 per Share declared by our board of
directors on March 24, 2006, the Shares under the Subscription will be entitled
to the final dividends. We would therefore be required to pay an amount of
additional dividends of HK$227,272,727. As a result, our aggregate final
dividends payable for the year ended December 31, 2005 would be
HK$4,332,740,265.

                          ITEM 9. THE OFFER AND LISTING

      Not applicable, except for Item 9.A.4 and Item 9.C.

      We listed our shares on the Hong Kong Stock Exchange and our ADSs on the
New York Stock Exchange in February 2001. Our shares are listed on the Hong Kong
Stock Exchange under the stock code "883" and our ADSs are listed on the New
York Stock Exchange under the symbol "CEO." On March 17, 2004, our shareholders
approved a five-for-one stock split of our shares. The stock split was effected
by dividing each of our issued and unissued shares of HK$0.10 each into five
shares of HK$0.02 each. The ratio of our American depositary shares listed on
the New York Stock Exchange also changed such that each ADS now represents 100
subdivided shares of HK$0.02 each, as opposed to 20 shares of HK$0.10 each prior
to the stock split. The following table sets forth, for the periods indicated,
the high and low closing prices per share, as reported on the Hong Kong Stock
Exchange and adjusted retroactively to reflect the stock split, and per ADS, as
reported on the New York Stock Exchange.

                        Hong Kong Stock Exchange   New York Stock Exchange
                        ------------------------   -----------------------
Period                    High            Low       High             Low
                            (HK$ per share)             (US$ per ADS)
2001....................   1.74           1.20      21.85           15.70
2002....................   2.33           1.48      29.44           19.01
2003....................   3.54           1.96      42.78           23.83
2004....................   4.53           2.75      58.73           35.00
2005....................   6.05           3.80      76.73           48.16

2004 Financial Quarters
  1st Quarter...........   3.4            2.95      43.65           38.80
  2nd Quarter...........   3.45           2.65      44.23           35.00
  3rd Quarter...........   4.07           3.20      52.60           41.75
  4th Quarter...........   4.53           3.97      58.73           51.21
2005 Financial Quarters
  1st Quarter...........   4.525          3.800     56.34           48.16
  2nd Quarter...........   4.650          3.950     58.78           49.82
  3rd Quarter...........   6.05           4.600     76.73           59.13
  4th Quarter...........   5.60           4.825     71.95           61.70
2006 Financial Quarter
  1st Quarter...........   6.80           5.25      88.03           69.19

Last Six Months
  December 2005.........   5.60           5.25      71.95           67.40
  January 2006..........   6.55           5.25      86.31           69.19
  February 2006.........   6.80           6.30      88.03           81.99
  March 2006............   6.60           5.90      85.62           77.16
  April 2006............   6.85           6.00      87.90           78.00
  May 2006..............   6.55           5.85      83.50           73.90

--------------


                                      116
<PAGE>

                         ITEM 10. ADDITIONAL INFORMATION

A.    SHARE CAPITAL

      Not applicable.

B.    MEMORANDUM AND ARTICLES OF ASSOCIATION

      We were incorporated with limited liability on August 20, 1999 in Hong
Kong under the Companies Ordinance of Hong Kong. Our company registration number
in Hong Kong is 685974. Under section three of our memorandum of association, we
have the capacity and the rights, powers and privileges of a natural person and
in addition and without limit, we may do anything which we are permitted to do
by any enactment or rule of law. The following are summaries of provisions of
our memorandum of association and articles of association and the Companies
Ordinance (Chapter 32 of the Laws of Hong Kong). For further details, you should
read our memorandum of association which was filed as an exhibit to our
registration statement on Form F-1 (Registration No.333-10862) and our articles
of association, as amended, which is filed as an exhibit to this annual report.

Issue of Shares

      Under the Companies Ordinance of Hong Kong, our directors may, without
prior approval of the shareholders, offer to allot new shares in our company to
existing shareholders pro rata. Our directors may not allot new shares of our
company in any other manner without the prior approval of our shareholders in a
general meeting. Any approval given at a general meeting shall continue in force
from the date of the passing of the resolution until the earliest of:

      o     the conclusion of the next annual general meeting,

      o     the expiration of the period within which the next annual general
            meeting is required by any applicable laws or our articles of the
            association to be held, or

      o     the revocation or variation of the authority given under an
            ordinary resolution of the shareholders, in a general meeting of
            our company.

      If such approval is given, the unissued shares of our company shall be at
the disposal of the board of directors. Our directors may offer, allot, grant
options over or otherwise dispose of the unissued shares to persons at such
times and for such consideration and upon such terms and conditions as our
directors may determine, subject to the restrictions under the Hong Kong Stock
Exchange Listing Rules.

      In accordance with Hong Kong Stock Exchange Listing Rules, any such
approval of the shareholders must be limited to shares with an aggregate nominal
value not exceeding 20% of the aggregate value of our share capital in issue as
of the date of granting such approval plus the aggregate nominal amount of share
capital repurchased by us since the granting of such approval.

Dividends

      Subject to the Companies Ordinance of Hong Kong, the shareholders in a
general meeting may declare dividends to be paid to shareholders. However, under
our articles of association, dividends cannot be declared in excess of the
amount recommended by our board of directors.

      In addition to dividends declared in a general meeting, our board of
directors may declare and pay to the shareholders interim dividends as appear to
our board of directors to be justified by our financial position. Our board of
directors may also pay any fixed dividend on any shares of our company
semi-annually or at other suitable intervals, whenever our financial position,
in their opinion, justifies such payment.


                                      117
<PAGE>

Winding Up

      If we are wound up, the liquidator may, with the sanction of a special
resolution, divide among our shareholders in specie or in kind the whole or any
part of our assets or vest any part of our assets in trustees upon such trusts
for the benefit of our shareholders or any of them as the resolution shall
provide.

Voting Rights

      Under the Companies Ordinance of Hong Kong, any action to be taken by the
shareholders in a general meeting requires the affirmative vote of either an
ordinary or a special resolution passed at such meeting.

      o     An ordinary resolution is a resolution passed by the majority of
            shareholders that are entitled to, and do, vote in person or by
            proxy at a general meeting;

      o     A special resolution is a resolution passed by not less than 75% of
            shareholders that are entitled to, and do, vote in person or by
            proxy at a general meeting.

      Generally, resolutions of shareholders are passed by ordinary resolution.
However, the Companies Ordinance of Hong Kong provides that some matters may
only be passed as special resolutions. These matters include, for example:

      o     alteration of the object clause;

      o     alteration of the articles;

      o     change of a company's name;

      o     reduction of share capital; and

      o     voluntary winding up.

      Voting at any meeting of shareholders is by a show of hands unless a poll
is demanded. If voting is by a show of hands, every shareholder who is present
at the meeting in person or by proxy has one vote. On a poll, every shareholder
who is present in person or by proxy has one vote for every share held or
represented by him. A poll may be demanded by:

      o     the chairman of the meeting;

      o     at least three members present in person (or in the case of a
            member being a corporation, by its duly authorized representative)
            or by proxy and entitled to vote at the meeting;

      o     any member or members present in person (or in the case of a member
            being a corporation, by its duly authorized representative) or by
            proxy and representing in the aggregate not less than 10% of the
            total voting rights of all members having the right to attend and
            vote at the meeting; or

      o     any member or members present in person (or in the case of a member
            being a corporation, by its duly authorized representative) or by
            proxy and holding shares conferring a right to attend and vote at
            the meeting on which there have been paid up sums in the aggregate
            equal to not less than 10% of the total sum paid up on all shares
            conferring that right.

      Any action to be taken by the shareholders requires the affirmative vote
of the requisite majority of the shares at a meeting of shareholders. There are
no cumulative voting rights. Accordingly, the


                                      118
<PAGE>

holders of a majority of the shares voting for the election of directors can
elect all the directors if they choose to do so.

General Meetings

      We are required to hold an annual general meeting of shareholders each
year within 15 months from the date of our last annual general meeting. We may
also hold extraordinary general meetings of shareholders from time to time. Our
board of directors may convene an extraordinary general meeting at will, and
shall on requisition in accordance with the Companies Ordinance of Hong Kong,
proceed to convene an extraordinary general meeting. Our annual general meeting
and any extraordinary general meeting called for the purpose of passing a
special resolution requires at least 21 days' prior notice, and any other
general meeting requires at least 14 days' prior notice. The notice must specify
the place, day and time of the meeting and, in the case of special business, the
general nature of that business. The quorum for a general meeting is two
shareholders present in person or by proxy. If within thirty minutes from the
time appointed for the meeting a quorum is not present, the meeting, if convened
upon requisition in accordance with the Companies Ordinance of Hong Kong, must
be dissolved; but in any other case it must stand adjourned to the same day in
the next week at the same time and place, or to such other day, time and place
as the Chairman of the meeting may determine. If at such adjourned meeting a
quorum is not present within thirty minutes from the time appointed for the
meeting, the member or members present in person or by proxy shall be a quorum
and may transact the business for which the meeting is called.

Modification of Rights

      Subject to the Companies Ordinance of Hong Kong, any of the rights
attaching to any class of shares, unless otherwise provided for by the terms of
issue of the shares of that class, may be varied or abrogated with the written
consent of the holders of not less than 75% of the issued shares of that class
or with the sanction of a special resolution passed at a separate general
meeting of the holders of shares of that class.

Borrowing Powers

      Our board of directors may exercise all the powers of our company to
borrow money and to mortgage or charge all or any part of our undertaking,
property and assets, whether present or future, and uncalled capital. Our board
of directors may issue debentures, debenture stock, bonds or other securities of
our company, whether outright or as collateral security for any debt, liability
or obligation of our company or of any third party. These borrowing powers are
subject to variation by a special resolution of our company.

Interested Transactions

      Subject to the exceptions described below, none of our directors may vote
on any contract, arrangement or proposal in which the director or any of his or
her associates is materially interested. For this purpose, existence of material
interest is presumed if a company, in which the director and/or his or her
associates beneficially own 5% or more of any class of its shares or voting
rights, is materially interested in the transaction. Our directors may, however,
vote on the following matters:

      o     any contract or arrangement to give security or indemnity to the
            director or his or her associates for money lent or obligations
            undertaken by such director or his or her associates at the request
            of or for the benefit of our company or subsidiaries;

      o     any contract or arrangement to give security or indemnity to a
            third party for our debts or debts of our subsidiaries for which
            such director or his or her associates assumed responsibility by
            giving guarantee or security;


                                      119
<PAGE>

      o     any contract or arrangement concerning offering of securities by us
            (or any company which we may promote or be interested in
            purchasing) for which the director or his or her associates
            participate in the underwriting or sub-underwriting;

      o     any contract or arrangement in which the director or his or her
            associates are interested only by virtue of their interest in our
            securities;

      o     any contract or arrangement concerning any other company in which
            the director or his or her associates are interested as an officer
            or executive or a shareholder in which the director or his or her
            associates are beneficially interested in shares of that company
            other than a company in which they in aggregate beneficially own
            more than 5% of the issued shares of any class or voting rights;

      o     any proposal or arrangement concerning employee benefits that do
            not provide privileges to our directors or their associates,
            including employee share schemes and retirement, death or
            disability benefits schemes; and

      o     any proposal or arrangement concerning the adoption, modification
            or operation of any employees' share scheme involving the issue or
            grant of options over shares or other securities by us to, or for
            the benefit of, our employees or employees of our subsidiaries
            under which the director or his or her associates may benefit.

C.    MATERIAL CONTRACTS

      Incorporated by reference to our registration statement on Form F-1
(Registration No.333-10862) and annual reports on Form 20-F for fiscal years
2003, 2004 and 2005 (File No.1-14966), to which most of our current material
contracts were filed as exhibits. For additional information on our material
contracts, see "Item 7--Major Shareholders and Related Party
Transactions--Related Party Transactions" and "Item 19--Exhibits."

D.    EXCHANGE CONTROLS

      A portion of our Renminbi revenue may need to be converted into other
currencies by our wholly owned principal operating subsidiary in the PRC, CNOOC
China Limited, to meet our foreign currency obligations. We have substantial
requirements for foreign currency, including:

      o     debt service on foreign currency denominated debt;

      o     overseas acquisitions of oil and gas properties;

      o     purchases of imported equipment; and

      o     payment of dividends declared in respect of shares held by
            international investors.

      CNOOC China Limited may undertake current account foreign exchange
transactions without prior approval from the State Administration for Foreign
Exchange. It has access to current account foreign exchange so long as it can
produce commercial documents evidencing such transactions and provided that they
are processed through certain banks in China. Foreign exchange transactions
under the capital account, including principal payments with respect to foreign
currency denominated obligations, will be subject to the registration
requirements of the State Administration for Foreign Exchange.

      Since 1994, the conversion of Renminbi into Hong Kong and United States
dollars has been based on rates set by the People's Bank of China, which are set
daily based on the previous day's PRC interbank foreign exchange market rate and
current exchange rates on the world financial markets. The PRC government has
stated publicly that it intends to make Renminbi freely convertible in the
future. On July 21, 2005, China reformed its foreign exchange regime by moving
into a managed floating exchange rate system based on market supply and demand
with reference to a basket of currencies. Renminbi


                                      120
<PAGE>

would no longer be pegged to the U.S. dollar. From that day to December 31,
2005, Renminbi appreciated about 2.5% against the U.S. dollar. However, we
cannot predict when the PRC government will allow free conversion of Renminbi
into foreign currencies. Changes in the PRC government's currency policies may
lead to further fluctuations in the exchange rates for the conversion of
Renminbi into foreign currencies which could have an uncertain effect on our
business and operating results. Since the benchmark oil and gas prices are
usually in U.S. dollars, the appreciation of Renminbi against U.S. dollars will
decrease our revenues derived from oil and gas sales while such effects may be
partially offset by decreases in the costs of imported equipment denominated in
U.S. dollar and our debt servicing payments in U.S. dollar. Except for our
Yen-denominated debts, we do not hedge exchange rate fluctuations between the
Renminbi and foreign currencies and currently have no plans to do so. For
further information on foreign exchange risks, foreign exchange rates and
hedging activities, see "Item 3--Key Information--Selected Financial Data" and
"Item 11--Qualitative and Quantitative Disclosure about Market Risk."

E.    TAXATION

      The taxation of income and capital gains of holders of our shares or ADSs
is subject to the laws and practices of Hong Kong and of jurisdictions in which
holders of our shares or ADSs are resident or otherwise subject to tax. The
following is a summary of taxation provisions that are anticipated to be
material based on current law and practice, is subject to change and does not
constitute legal or tax advice. The discussion does not deal with all possible
tax consequences relating to an investment in our shares or ADSs. In particular,
the discussion does not address the tax consequences under state, local and
other laws, such as non-Hong Kong and non-U.S. federal laws. Accordingly, we
urge you to consult your tax adviser regarding the tax consequences of an
investment in our shares and ADSs. The discussion is based upon laws and
relevant interpretations in effect as of the date of this annual report, all of
which are subject to changes. There is no reciprocal tax treaty in effect
between Hong Kong and the United States.

Hong Kong

Tax on Dividends

      Under the current practices of the Hong Kong Inland Revenue Department, no
tax is payable in Hong Kong in connection with dividends paid by us.

Profits Tax

      No tax is imposed in Hong Kong in respect of capital gains from the sale
of property, such as the shares and ADSs. Trading gains from the sale of
property by persons carrying on a trade, profession or business in Hong Kong
where such gains are derived from or arise in Hong Kong from such trade,
profession or business will be chargeable to Hong Kong profits tax which is
currently imposed at the rate of 17.5% on corporations and at a maximum rate of
16% on individuals. Gains from sales of the shares effected on the Hong Kong
Stock Exchange will be considered to be derived from or arise in Hong Kong.
Liability for Hong Kong profits tax would thus arise in respect of trading gains
from sales of shares or ADSs realized by persons carrying on a business of
trading or dealing in securities in Hong Kong.

Stamp Duty

      Hong Kong stamp duty, currently charged at the rate of HK$1.00 per
HK$1,000 or part thereof on the higher of the consideration for or the value of
the shares, will be payable by the purchaser on every purchase and by the seller
on every sale of shares. For example, a total of HK$2.00 per HK$1,000 or part
thereof is currently payable on a typical sale and purchase transaction
involving shares. In addition, a fixed duty of HK$5 is currently payable on any
instrument of transfer of shares. The withdrawal of shares upon the surrender of
ADRs, and the issuance of ADRs upon the deposit of shares, will also attract
stamp duty at the rate described above for sale and purchase transactions unless
the withdrawal or deposit does not result in a change in the beneficial
ownership of the shares under Hong Kong law. The issuance of the ADRs upon the
deposit of shares issued directly to the depositary or for the account of the


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depositary does not attract stamp duty. No Hong Kong stamp duty is payable upon
the transfer of ADSs outside Hong Kong.

Estate Duty

      The shares are Hong Kong property under Hong Kong law, and accordingly
such shares may be subject to estate duty on the death of the beneficial owner
of such shares, regardless of the place of the owner's residence, citizenship or
domicile. We cannot assure that the Hong Kong Inland Revenue Department will not
treat the ADRs as Hong Kong property that may be subject to estate duty on the
death of the beneficial owner of the ADR even if the ADRs are located outside
Hong Kong at the date of such death. Hong Kong estate duty is imposed on a
progressive scale from 5% to 15%. The rate of and the threshold for estate duty
has, in the past, been adjusted on a fairly regular basis. No estate duty is
payable when the aggregate value of the dutiable estate does not exceed HK$7.5
million, and the maximum rate of duty of 15% applies when the aggregate value of
the dutiable estate exceeds HK$10.5 million. The Hong Kong Government is
considering abolishing estate duty in Hong Kong.

United States

Federal Income Tax Considerations

      The following is a summary of United States federal income tax
considerations that are anticipated to be material for U.S. Holders, as defined
below. This summary is based upon existing United States federal income tax law,
which is subject to change, possibly with retroactive effect. This summary does
not discuss all aspects of United States federal income taxation which may be
important to particular investors in light of their individual investment
circumstances, such as investors subject to special tax rules including:
partnerships, financial institutions, insurance companies, broker-dealers,
tax-exempt organizations, and, except as described below, non-U.S. Holders, or
to persons that will hold our shares or ADSs as part of a straddle, hedge,
conversion, or constructive sale transaction for United States federal income
tax purposes or that have a functional currency other than the United States
dollar, all of whom may be subject to tax rules that differ significantly from
those summarized below. In addition, this summary does not discuss any foreign,
state, or local tax considerations. This summary assumes that investors will
hold our shares or ADSs as "capital assets" (generally, property held for
investment) under the United States Internal Revenue Code. Each prospective
investor is urged to consult its tax advisor regarding the United States
federal, state, local, and foreign income and other tax considerations of the
purchase, ownership, and disposition of our shares or ADSs.

      For purposes of this summary, an U.S. Holder is a beneficial owner of
shares or ADSs that is for United States federal income tax purposes:

      o     an individual who is a citizen or resident of the United States;

      o     a corporation, partnership or other entity created in or organized
            under the laws of the United States or any State or political
            subdivision thereof;

      o     an estate the income of which is includible in gross income for
            United States federal income tax purposes regardless of its
            source;

      o     a trust the administration of which is subject to the primary
            supervision of a United States court and which has one or more
            United States persons who have the authority to control all
            substantial decisions of the trust; or

      o     a trust that was in existence on August 20, 1996, was treated as a
            United States person, for United States federal income tax
            purposes, on the previous day, and elected to continue to be so
            treated.

      A beneficial owner of our shares or ADSs that is not a U.S. Holder is
referred to herein as a "Non-U.S. Holder."


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<PAGE>

      A foreign corporation will be treated as a "passive foreign investment
company" or "PFIC", for United States federal income tax purposes, if 75% or
more of its gross income consists of certain types of "passive" income or 50% or
more of its assets produce or are held for the production of passive income.
Based on our current and projected income, assets, and activities, we presently
believe that we are not a PFIC and do not anticipate becoming a PFIC. This is,
however, a factual determination made on an annual basis. Because the
classification of certain of our interests for United States federal income tax
purposes is uncertain and the PFIC rules are subject to administrative
interpretation, however, no assurance can be given that we are not or will not
be treated as a PFIC. The discussion below under "U.S. Holders-Dividends" and
"U.S. Holders-Sale or Other Disposition of Shares or ADSs," assumes that we will
not be subject to treatment as a PFIC for United States federal income tax
purposes.

U.S. Holders

      For United States federal income tax purposes, a U.S. Holder of an ADS
will be treated as the owner of the proportionate interest of the shares held by
the depositary that is represented by an ADS and evidenced by such ADS.
Accordingly, no gain or loss will be recognized upon the exchange of an ADS for
the holders' proportionate interest in the shares. A U.S. Holder's tax basis in
the withdrawn shares will be the same as the tax basis in the ADS surrendered
therefore, and the holding period in the withdrawn shares will include the
period during which the holder held the surrendered ADS.

      Dividends. Any cash distributions paid by us out of our earnings and
profits, as determined under United States federal income tax principles, will
be subject to tax as ordinary dividend income and will be includible in the
gross income of a U.S. Holder upon receipt. Cash distributions paid by us in
excess of our earnings and profits will be treated as a tax-free return of
capital to the extent of the U.S. Holder's adjusted tax basis in our shares or
ADSs, and after that as gain from the sale or exchange of a capital asset.
Dividends paid in Hong Kong dollars will be includible in income in a United
States dollar amount based on the United States dollar to Hong Kong dollar
exchange rate prevailing at the time of receipt of such dividends by the
depositary, in the case of ADSs, or by the U.S. Holder, in the case of shares
held directly by such U.S. Holder. U.S. Holders should consult their tax
advisors regarding the United States federal income tax treatment of any foreign
currency gain or loss recognized on the subsequent conversion of Hong Kong
dollars received as dividends to United States dollars. Dividends received on
shares or ADSs will not be eligible for the dividends received deduction allowed
to corporations.

      Under current law, "qualified dividend income" received by an individual
for taxable years beginning after December 31, 2002 and for taxable years
beginning before January 1, 2009 is subject to United States federal income tax
rates lower than those applicable to ordinary income. The top federal income tax
rate on such qualified dividend income received by an individual is 15% or 5%
for those individuals whose incomes fall in the 10 or 15% brackets. Based upon
our existing and anticipated future operations and current assets, we believe
that we are a "qualified foreign corporation" and that our dividends paid to
U.S. Holders who are individuals will be eligible to be treated as "qualified
dividend income" provided that such U.S. Holders satisfy applicable holding
period requirements with respect to the ADSs and other applicable requirements.
Dividends paid by foreign corporations that are classified as PFICs are not
eligible to be treated as "qualified dividend income". See "PFIC Considerations"
below.

      Dividends received on shares or ADSs will be treated, for United States
federal income tax purposes, as foreign source income. A U.S. Holder may be
eligible, subject to a number of complex limitations, to claim a foreign tax
credit in respect of any foreign withholding taxes imposed on dividends received
on shares or ADSs. U.S. Holders who do not elect to claim a foreign tax credit
for federal income tax withheld may instead claim a deduction, for United States
federal income tax purposes, in respect of such withholdings, but only for a
year in which the U.S. Holder elects to do so for all creditable foreign income
taxes.

      In addition, the United States Treasury has expressed concerns that
parties to whom depositary shares are pre-released may be taking actions that
are inconsistent with the claiming of foreign tax credits by the holders of
ADSs. Accordingly, the analysis of the creditability of foreign withholding
taxes could be affected by future actions that may be taken by the United States
Treasury.


                                      123
<PAGE>

      Sale or Other Disposition of Shares or ADSs. A U.S. Holder will recognize
capital gain or loss upon the sale or other disposition of shares or ADSs in an
amount equal to the difference between the amount realized upon the disposition
and the U.S. Holder's adjusted tax basis in such shares or ADSs, as each is
determined in U.S. dollars. Any such capital gain or loss will be long-term if
the shares or ADSs have been held for more than one year and will generally be
United States source gain or loss. The claim of a deduction in respect of a
capital loss, for United States federal income tax purposes, may be subject to
limitations. If a U.S. Holder receives Hong Kong dollars for any such
disposition, such U.S. Holder should consult its tax advisor regarding the
United States federal income tax treatment of any foreign currency gain or loss
recognized on the subsequent conversion of the Hong Kong dollars to United
States dollars.

PFIC Considerations

      If we were to be classified as a PFIC in any taxable year, a U.S. Holder
would be subject to special rules generally intended to reduce or eliminate any
benefits from the deferral of United States federal income tax that a U.S.
Holder could derive from investing in a foreign company that does not distribute
all of its earnings on a current basis. In such event, a U.S. Holder of the
shares or ADSs may be subject to tax at ordinary income tax rates on (i) any
gain recognized on the sales of the shares or ADSs and (ii) any "excess
distribution" paid on the shares or ADSs (generally, a distribution in excess of
125% of the average annual distributions paid by us in the three preceding
taxable years). In addition, a U.S. Holder may be subject to an interest charge
on such gain or excess distribution. Prospective investors are urged to consult
their tax advisors regarding the potential tax consequences to them if we are or
do become a PFIC, as well as certain elections that may be available to them to
mitigate such consequences.

Non-U.S. Holders

      An investment in shares or ADSs by a Non-U.S. Holder will not give rise to
any United States federal income tax consequences unless:

      o     the dividends received or gain recognized on the sale of the shares
            or ADSs by such person is treated as effectively connected with the
            conduct of a trade or business by such person in the United States
            as determined under United States federal income tax law, or

      o     in the case of gains recognized on a sale of shares or ADSs by an
            individual, such individual is present in the United States for 183
            days or more and certain other conditions are met.

      In order to avoid back-up withholding on dividend payments made in the
United States, a Non-U.S. Holder of the shares or ADSs may be required to
complete, and provide the payer with, an Internal Revenue Service Form W-8BEN,
or other documentary evidence, certifying that such holder is an exempt foreign
person.

F.    DIVIDENDS AND PAYING AGENTS

      Not applicable.

G.    STATEMENT BY EXPERTS

      Not applicable.

H.    DOCUMENTS ON DISPLAY

      We are also subject to the informational requirements of the Exchange Act
and accordingly file reports and other information with the Securities and
Exchange Commission. You may inspect and copy our reports and other information
we file with the Securities and Exchange Commission at the public reference
facilities maintained by the Securities and Exchange Commission at 100 F Street,
NE, Washington, D.C. 20549. You may also inspect such documents at the office of
the New York Stock Exchange, Wall Street, New York, New York 10005. Copies of
such material may also be obtained from the Public Reference Section of the
Securities and Exchange Commission at 100 F Street, NE,


                                      124
<PAGE>

Washington, D.C. 20549, at prescribed rates. You may obtain information
regarding the Washington D.C. Public Reference Room by calling the Securities
and Exchange Commission at 1-800-SEC-0330 or by contacting the Securities and
Exchange Commission over the internet at its website at http://www.sec.gov.

I.    SUBSIDIARY INFORMATION

      Not applicable.

     ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

      Our market risk exposures primarily consist of fluctuations in oil and gas
prices, exchange rates and interest rates.

Commodity Price Risks

      We are exposed to fluctuations in prices of crude oil and natural gas.
International oil and gas prices are volatile and this volatility has a
significant effect on our net sales and net income. We do not hedge market risk
resulting from fluctuations in oil and gas prices. See "--Overview" and "Item
3--Key Information--Risk Factors--Risks relating to our business--Our business,
revenues and profits fluctuate with changes in oil and gas prices."

Currency Risk

      Our foreign exchange exposure gives rise to market risk associated with
exchange rate movements.

      Substantially all of our oil and gas sales are denominated in Renminbi and
U.S. dollars. In the last ten years, the PRC government's policy of maintaining
a stable exchange rate and China's ample foreign reserves have contributed to
the stability of the Renminbi. On July 21, 2005, China reformed its foreign
exchange regime by moving into a managed floating exchange rate system based on
market supply and demand with reference to a basket of currencies. Renminbi
would no longer be pegged to the U.S. dollar. From that day to December 31,
2005, Renminbi appreciated about 2.5% against the U.S. dollar. However, the
Chinese government has not yet determined if or when the exchange rate will be
deregulated. Since the benchmark oil and gas prices are usually in U.S. dollars,
the appreciation of Renminbi against U.S. dollars will decrease our revenues
derived from oil and gas sales while such effects may be partially offset by
decreases in the costs of imported equipment denominated in U.S. dollar and our
debt servicing payments in U.S. dollar.

      As of December 31, 2005, the balance of our Yen-denominated loans was only
Rmb 37.3 million. Since we have hedged our Yen loans against foreign currency
swaps, we do not expect any exchange risk relating to Japanese Yen in the
future.

      For a discussion of our currency risk, see "Item 3--Key Information--Risk
Factors--Risks relating to the PRC-- Government control of currency conversion
and future movements in exchange rates may adversely affect our operations and
financial condition."

Interest Rate Risk

      We are exposed to interest rate risk arising from our loans. An upward
fluctuation in interest rates increases the cost of new debt. We may use
interest rate swap transactions, from time to time, to hedge our interest rate
exposure when considered appropriate, based on existing and anticipated market
conditions.

      As of December 31, 2005, the interest rates for our outstanding debts were
fixed. The term of the weighted average balance was approximately eight years.
The average interest rate payable by the Group is favorable under the
environment of interest rate hike. We do not currently engage in any interest
rate hedging activities.


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<PAGE>

      The following table sets forth additional information about the expected
maturity dates of our outstanding debt as of December 31, 2005.

<TABLE>
<CAPTION>
                                                                                                                      Fair value
                                                                                                                         as of
                                                                                                2011                   December
                                2006         2007         2008         2009         2010      and after      Total     31, 2005
                             ---------    ---------    ---------    ---------    ---------    ---------    ---------   ---------
                                                                     (Rmb in millions, except percentages)
Long-term debt, including current
  portion
<S>                          <C>          <C>          <C>          <C>          <C>          <C>          <C>         <C>
   Fixed rate ............       825.7         18.7           --           --           --           --        844.4         869
   Average interest rate .       8.956%         4.1%          --           --           --           --           --          --

Long-term guaranteed notes
   Fixed rate ............          --           --           --      8,070.2           --      8,070.2     16,140.4      16,592
   Average interest rate .       3.331%       3.331%       3.331%       3.381%       5.663%       5.663%          --          --
</TABLE>

      The above table takes into account our early repayment of certain loans in
2003. For additional discussions of our market risks, see "Item 3--Key
Information--Risk Factors."

       ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

      Not applicable.


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<PAGE>

                                     PART II


            ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

      None.

  ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
                                   OF PROCEEDS

A.    MATERIAL MODIFICATIONS TO THE INSTRUMENTS DEFINING THE RIGHTS OF
      SECURITY HOLDERS

      None.

B.    MATERIAL MODIFICATIONS TO THE RIGHTS OF REGISTERED SECURITIES BY
      ISSUING OR MODIFYING ANY OTHER CLASS OF SECURITIES

      None.

C.    WITHDRAWAL OR SUBSTITUTION OF A MATERIAL AMOUNT OF THE ASSETS SECURING ANY
      REGISTERED SECURITIES

      Not applicable.

D.    CHANGE OF TRUSTEES OR PAYING AGENTS FOR ANY REGISTERED SECURITIES

      Not applicable.

E.    USE OF PROCEEDS

      Not applicable.

                        ITEM 15. CONTROLS AND PROCEDURES

      (a) We have carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective and designed to ensure that material
information relating to us and our consolidated subsidiaries as required to be
disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported as and when required.

      (b) There were no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect these controls
subsequent to the date of their evaluation.

                  ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

      Our board of directors had determined that Dr. Kenneth S. Courtis, our
independent non-executive director, was an audit committee financial expert
serving on our audit committee. Dr. Courtis was independent as defined in the
listing standards of the New York Stock Exchange. Effective May 25, 2006, Mr.
Aloysius Hau Yin Tse has been designated by our board as an audit committee
financial expert upon Dr. Courtis' retirement. Mr. Tse is independent as
defined in the listing standards of the New York Stock Exchange.

                            ITEM 16B. CODE OF ETHICS


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<PAGE>

      Our board of directors adopted a code of ethics ("Code of Ethics") on
August 28, 2003 to provide guidelines to our senior management and directors in
legal and ethical matters as well as the sensitivities involved in reporting
illegal and unethical matters. The Code of Ethics covers such areas as
supervisory rules, insider dealing, market malpractices, conflict of interests,
company opportunities, protection and proper use of our assets as well as
reporting requirements.

      All our directors and senior management members are required to
familiarize themselves with and follow the Code of Ethics to ensure that our
operations are honest and legal. Violations of the rules will be disciplined
and serious offences will result in dismissals.

      We reviewed our Code of Ethics and adopted the revised code of ethics
(the "New Code of Ethics") in 2005, as part of our continuing efforts to
improve our corporate governance standards. The New Code of Ethics clarified
the scope of senior management, and expanded the applicability of prohibitions
against insider trading and other market misconduct to any "manager, secretary
of, or any other person involved in the management of, a corporation." Other
revisions made in the New Code of Ethics are technical or administrative in
nature. We have provided all our directors and senior officers with a copy of
the New Code of Ethics and require them to comply with the New Code of Ethics,
so as to ensure our operation is proper and lawful. We will take disciplinary
actions towards any act which is in breach of the New Code of Ethics. Any
change or waiver, explicit or implicit, with respect to our code of ethics,
must be disclosed to our shareholders either in our annual report or on our
internet website, www.cnoocltd.com.

               ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      Audit Fees

      The aggregate fees billed for professional services rendered by our
principal accountants for the audit of our annual financial statements or
services that are normally provided by the accountants in connection with
statutory and regulatory filings or engagements were Rmb 6.8 million for 2004
and Rmb 8.0 million (US$1.0 million) for 2005.

      Audit-Related Fees

      The aggregate fees billed for assurance and related services by our
principal accountants that are reasonably related to the performance of the
audit or review of our financial statements and are not reported under "Audit
Fees" were Rmb 993,180 for 2004 and Rmb 2,098,252 (US$260,000) for 2005. The
audit-related services provided included accounting advice, transaction support
services and advisory to our implementation of Section 404 of the
Sarbanes-Oxley Act.

      Tax Fees

      The aggregate fees billed for professional service rendered by the
principal accountant for tax compliance, tax advice and tax planning were Rmb
99,318 for 2004 and nil for 2005.

      All other fees

      The aggregate fees billed for products and services provided by our
principal accountant, other than the services reported above, were nil for
fiscal year 2004 and 2005.

      Audit Committee's pre-approval policies and procedures

      The audit committee under our board of directors is responsible for the
appointment, compensation and oversight of the work of our independent auditor.
In 2003, our audit committee adopted a policy calling for the audit committee's
pre-approval for the engagement of independent auditor for audit and permitted
non-audit services. Our board of directors has also ratified the policy and
procedures. Under this audit committee policy, proposed services may be
pre-approved by the audit committee either on an annual basis or on a
case-by-case basis. Appendices to the audit committee policy


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<PAGE>

sets forth (1) the audit, audit-related, tax and other services that may be
subject to the general annual pre-approval of the audit committee; (2)
non-audit services of a routine and recurring nature that may be subject to
specific pre-approval from the audit committee on a case-by-case basis; and (3)
a list of prohibited non-audit services. The audit committee will periodically
review and revise these attached lists based on its subsequent determinations.
The audit committee policy also provides for procedures to establish annual fee
levels or budgets for pre-approved services and ratios between different
categories of pre-approved services. In addition, the audit committee policy
contains provisions that deal with compliance, monitoring, reporting and other
related matters.

      During 2005, all of the audit-related services, and all of tax fees paid
to our principal accountant were approved by the audit committee. Our principal
accountant audited our financial statements for 2005 solely through its
full-time, permanent employees, without involvement of its part-time or
temporary employees.

      ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

            Not applicable.

      ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                                   PURCHASERS

      No purchases of equity securities by US or any affiliated purchaser
during the period covered by this annual report.


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<PAGE>

                                    PART III

                          ITEM 17. FINANCIAL STATEMENTS

      Not applicable.

                          ITEM 18. FINANCIAL STATEMENTS

      See pages beginning on page F-1 following Item 19.

                                ITEM 19. EXHIBITS

      The following documents are filed as part of this annual report:

Exhibit
Number    Document

1.1       Articles of Association of the Registrant, as amended in 2005.

1.2       Memorandum of Association of the Registrant, incorporated by
          reference to Exhibit 3.2 to our Registration Statement on Form
          F-1 filed with the Securities and Exchange Commission (File
          Number: 333-10862).

2.1       Form of Indenture, incorporated by reference to Exhibit 2.1 to
          our annual report on Form 20-F for fiscal year 2002 filed with
          the Securities and Exchange Commission (File Number: 1-14966).

2.2       Trust Deed dated December 15, 2004 among CNOOC Limited, CNOOC Finance
          (2004) Limited and J.P. Morgan Corporate Trustee Services Limited,
          incorporated by reference to Exhibit 2.2 to our annual report on Form
          20-F for fiscal year 2004 filed with the Securities and Exchange
          Commission (File Number: 1-14966).

4.1       The Asset Swap Agreement dated July 20, 1999 between CNOOC and
          Offshore Oil Company Limited, incorporated by reference to Exhibit
          10.1 to our Registration Statement on Form F-1 filed with the
          Securities and Exchange Commission (File Number: 333-10862).

4.2       The Asset Allocation Agreement dated July 20, 1999 between CNOOC and
          Offshore Oil Company Limited, incorporated by reference to Exhibit
          10.2 to our Registration Statement on Form F-1 filed with the
          Securities and Exchange Commission (File Number: 333-10862).

4.3       The Reorganization Agreement dated September 13, 1999 between CNOOC,
          Offshore Oil Company Limited and CNOOC Limited, incorporated by
          reference to Exhibit 10.3 to our Registration Statement on Form F-1
          filed with the Securities and Exchange Commission (File Number:
          333-10862).

4.4       Form of the Equity Transfer Agreement between CNOOC and CNOOC Limited,
          incorporated by reference to Exhibit 10.4 to our Registration
          Statement on Form F-1 filed with the Securities and Exchange
          Commission (File Number: 333-10862).

4.5       Form of the Transfer Agreement dated October 1, 1999 between
          CNOOC and Offshore Oil Company Limited regarding the transfer of
          the rights and obligations of CNOOC under the 37 production
          sharing contracts and one geophysical exploration agreement,
          incorporated by reference to Exhibit 10.5 to our Registration
          Statement on Form F-1 filed with the Securities and Exchange
          Commission (File Number: 333-10862).


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<PAGE>

4.6       Form of Equity Transfer Agreement between China Offshore Oil East
          China Sea Corporation and Offshore Oil Company Limited regarding the
          transfer of the rights and obligations under Joint Venture Contract of
          Shanghai Petroleum and Natural Gas Company Limited dated July 28, 1992
          to Offshore Oil Company Limited, incorporated by reference to Exhibit
          10.6 to our Registration Statement on Form F-1 filed with the
          Securities and Exchange Commission (File Number: 333-10862).

4.7       Transfer Agreement dated September 9, 1999 between CNOOC and Offshore
          Oil Company Limited regarding the transfer of the rights and
          obligations of CNOOC under the Natural Gas Sale and Purchase Contract
          dated December 22, 1992 to Offshore Oil Company Limited, incorporated
          by reference to Exhibit 10.7 to our Registration Statement on Form F-1
          filed with the Securities and Exchange Commission (File Number:
          333-10862).

4.8       Transfer Agreement dated September 9, 1999 between CNOOC and Offshore
          Oil Company Limited regarding the transfer of the rights and
          obligations of CNOOC under the Natural Gas Sale and Purchase Contract
          dated November 7, 1992 to Offshore Oil Company Limited, incorporated
          by reference to Exhibit 10.8 to our Registration Statement on Form F-1
          filed with the Securities and Exchange Commission (File Number:
          333-10862).

4.9       Transfer Agreement dated September 9, 1999 among CNOOC, Offshore Oil
          Company Limited, the four PRC subsidiaries and CNOOC's affiliates
          regarding the transfer of the rights and obligations of the technical
          services agreements to Offshore Oil Company Limited, incorporated by
          reference to Exhibit 10.9 to our Registration Statement on Form F-1
          filed with the Securities and Exchange Commission (File Number:
          333-10862).

4.10      Nanshan Terminal Leasing Agreement dated September 9, 1999 between
          CNOOC, Hainan China Oil and Offshore Natural Gas Company and Offshore
          Oil Company Limited, incorporated by reference to Exhibit 10.10 to our
          Registration Statement on Form F-1 filed with the Securities and
          Exchange Commission (File Number: 333-10862).

4.11      Trademark License Agreement dated September 9, 1999 between CNOOC,
          Offshore Oil Company Limited and CNOOC Limited, incorporated by
          reference to Exhibit 10.11 to our Registration Statement on Form F-1
          filed with the Securities and Exchange Commission (File Number:
          333-10862).

4.12      Trademark License Agreement dated September 9, 1999 between China
          Offshore Oil Marketing Company, CNOOC Limited and Offshore Oil Company
          Limited and CNOOC Limited, incorporated by reference to Exhibit 10.12
          to our Registration Statement on Form F-1 filed with the Securities
          and Exchange Commission (File Number: 333-10862).

4.18      Property Leasing Agreement dated September 9, 1999 between Wui Hai
          Enterprise Company Limited and Offshore Oil Company Limited in respect
          of the office premises at 6th, 7th and 8th Floors, CNOOC Plaza, No. 6
          Dong Zhi Men Wai Xiao Jie, Beijing, incorporated by reference to
          Exhibit 10.18 to our Registration Statement on Form F-1 filed with the
          Securities and Exchange Commission (File Number: 333-10862).

4.19      Property Leasing Agreement dated September 9, 1999 between China
          Offshore Oil Western South China Sea Corporation and Offshore Oil
          Company Limited in respect of the office premises at 1st to 9th
          Floors, Nantiao Road, Potou District Zhangjiang, Guangdong,
          incorporated by reference to Exhibit 10.19 to our Registration
          Statement on Form F-1 filed with the Securities and Exchange
          Commission (File Number: 333-10862).

4.20      Property Leasing Agreement dated September 9, 1999 between China
          Offshore Oil Bohai Corporation and Offshore Oil Company Limited in
          respect of the office premises at 1st to 7th Floors and 9th Floor,
          2-37 He Kou Jie, Tanggu District, Tianjin, incorporated by reference
          to Exhibit 10.20 to our Registration Statement on Form F-1 filed with
          the Securities and Exchange Commission (File Number: 333-10862).


                                      131
<PAGE>

4.21      Property Leasing Agreement dated September 9, 1999 between China
          Offshore Oil East China Sea Corporation and Offshore Oil Company
          Limited in respect of the office premises at 20th, 22nd and 23rd
          Floors, 583 Ling Ling Road, Shanghai, the PRC, incorporated by
          reference to Exhibit 10.21 to our Registration Statement on Form F-1
          filed with the Securities and Exchange Commission (File Number:
          333-10862).

4.22      Property Leasing Agreement dated September 9, 1999 between China
          Offshore Oil Eastern South China Sea Corporation and Offshore Oil
          Company Limited in respect of the office premises at 3rd Floor and 6th
          to 11th Floors, 1 Second Industrial Road, Shekou, Shenzhen, the PRC,
          incorporated by reference to Exhibit 10.22 to our Registration
          Statement on Form F-1 filed with the Securities and Exchange
          Commission (File Number: 333-10862).

4.23      Property Leasing Agreement dated September 9, 1999 between China
          Offshore Oil Bohai Corporation and Offshore Oil Company Limited
          in respect of the Chengbei Warehouse, Chengbei Road, Tanggu
          District, Tianjin City, the PRC, incorporated by reference to
          Exhibit 10.23 to our Registration Statement on Form F-1 filed
          with the Securities and Exchange Commission (File Number:
          333-10862).

4.24      Property Leasing Agreement dated September 9, 1999 between Overseas
          Oil & Gas Corporation Ltd. and China Offshore Oil (Singapore)
          International Pte. Ltd. in respect of the residential premises at
          10-01 and 17-002 Aquamarine Tower, 50 Bayshore Road, 13-05 Jade Tower,
          60 Bayshore Road, Singapore, incorporated by reference to Exhibit
          10.24 to our Registration Statement on Form F-1 filed with the
          Securities and Exchange Commission (File Number: 333-10862).

4.25      Suizhong Pier Agreement dated September 9, 1999 between Offshore Oil
          Company Limited and China Offshore Bohai Corporation, incorporated by
          reference to Exhibit 10.25 to our Registration Statement on Form F-1
          filed with the Securities and Exchange Commission (File Number:
          333-10862).

4.26      Form of Novation Agreement among CNOOC, CNOOC China Limited, the
          Banks and other financial institution and the Fuji Bank Limited
          Hong Kong Branch, as agent, in respect of the transfer of the
          US$110 million syndicated loan, incorporated by reference to
          Exhibit 10.26 to our Registration Statement on Form F-1 filed
          with the Securities and Exchange Commission (File Number:
          333-10862).

4.27      Form of the Undertaking Agreement between CNOOC and CNOOC Limited,
          incorporated by reference to Exhibit 10.27 to our Registration
          Statement on Form F-1 filed with the Securities and Exchange
          Commission (File Number: 333-10862).

4.28      Service Agreement between CNOOC Limited and Chengyu Fu.

4.29      Service Agreement between CNOOC Limited and Han Luo.

4.30      Service Agreement between CNOOC Limited and Shouwei Zhou.

4.31      Service Agreement between CNOOC Limited and Xinghe Cao.

4.32      Service Agreement between CNOOC Limited and Zhenfang Wu.

4.33      Service Agreement between CNOOC Limited and Guangqi Wu.

4.34      Service Agreement between CNOOC Limited and Hua Yang.

4.35      Form of Pre-Global Offering Share Option Scheme for the Senior
          Management of CNOOC Limited, incorporated by reference to Exhibit
          10.31 to our Registration Statement on Form F-1 filed with the
          Securities and Exchange Commission (File Number: 333-10862).

4.36      Form of Share Option Scheme for the Senior Management of CNOOC
          Limited, incorporated by reference to Exhibit 10.32 to our
          Registration Statement on Form F-1 filed with the Securities and
          Exchange Commission (File Number: 333-10862).

4.37      CNOOC Limited Share Option Scheme adopted on December 31, 2005


                                      132
<PAGE>

4.38      Subscription Agreement dated March 17, 2000 among CNOOC Limited,
          CNOOC (BVI) Limited, Overseas Oil & Gas Corporation, Ltd., et
          al., incorporated by reference to Exhibit 10.33 to our
          Registration Statement on Form F-1 filed with the Securities and
          Exchange Commission (File Number: 333-10862).

4.39      Subscription Agreement dated May 31, 2000 among CNOOC Limited,
          CNOOC (BVI) Limited, Overseas Oil & Gas Corporation, Ltd. and
          Hutchison International Limited, incorporated by reference to
          Exhibit 10.34 to our Registration Statement on Form F-1 filed
          with the Securities and Exchange Commission (File Number:
          333-10862).

4.40      Subscription Agreement dated May 31, 2000 among CNOOC Limited, CNOOC
          (BVI) Limited, Overseas Oil & Gas Corporation, Ltd. and Hong Kong
          Electric Holdings Limited, incorporated by reference to Exhibit 10.35
          to our Registration Statement on Form F-1 filed with the Securities
          and Exchange Commission (File Number: 333-10862).

4.41      Subscription Agreement dated June 28, 2000 among CNOOC Limited, CNOOC
          (BVI) Limited, Overseas Oil & Gas Corporation, Ltd., et al.,
          incorporated by reference to Exhibit 10.36 to our Registration
          Statement on Form F-1 filed with the Securities and Exchange
          Commission (File Number: 333-10862).

4.42      Corporation Placing Agreement dated February 6, 2001 among CNOOC
          Limited, China National Offshore Oil Corporation, Shell Eastern
          Petroleum (Pte) Limited and Merrill Lynch Far East Limited,
          incorporated by reference to Exhibit 10.37 to our Registration
          Statement on Form F-1 filed with the Securities and Exchange
          Commission (File Number: 333-10862).

4.43      Equity Transfer Agreement dated September 5, 2003 between CNOOC China
          Limited and CNOOC (Summary Translation), incorporated by reference to
          Exhibit 4.38 to our annual report on Form 20-F for fiscal year 2003
          filed with the Securities and Exchange Commission (File Number:
          1-14966).

4.44      Framework Agreement dated April 8, 2004 with CNOOC Finance Corporation
          Limited (Summary Translation), incorporated by reference to Exhibit
          4.39 to our annual report on Form 20-F for fiscal year 2003 filed with
          the Securities and Exchange Commission (File Number: 1-14966).

4.45      Framework Agreement dated December 8, 2005 with CNOOC (Summary
          Translation)

4.46      Framework Agreement dated December 8, 2005 with China Oilfield
          Services Limited (Summary Translation)

4.47      Framework Agreement dated December 8, 2005 with Offshore Oil
          Engineering Co., Ltd (Summary Translation)

4.48      Supplemental Agreement to the Undertaking agreement with CNOOC,
          dated December 8, 2005

4.49      Sale and Purchase Agreement, dated January 8, 2006 between CNOOC
          Exploration & Production Limited and South Atlantic Petroleum Limited
          (certain statements, marked with an asterisk in brackets [*], have
          been omitted from this agreement pursuant to a request for
          confidential treatment pursuant to Rule 24b-2 under the Securities
          Exchange Act of 1934, as amended, and the omitted materials have been
          filed separately in paper form with the Securities and Exchange
          Commission).

8.1       List of Subsidiaries

10.1      Letter from CNOOC Limited dated May 23, 2002 regarding receipt of
          certain representations from Arthur Andersen & Co pursuant to the
          requirements of the Securities and Exchange Commission, incorporated
          by reference to Exhibit 10 to our annual report on Form 20-F for
          fiscal year 2001 filed with the Securities and Exchange Commission
          (File Number: 1-14966).

11.1      Code of Ethics for Directors and Senior Officers, as amended in
          2005.

12.1      Certification by the Chief Executive Officer in accordance with
          Section 302 of the Sarbanes-Oxley Act of 2002.


                                      133
<PAGE>

12.2      Certification by the Chief Financial Officer in accordance with
          Section 302 of the Sarbanes-Oxley Act of 2002.

13.1      Sarbanes-Oxley Act of 2002 Section 906 Certification furnished to (not
          filed with) the Securities and Exchange Commission.


                                      134
<PAGE>

                                    SIGNATURE

      The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.


                                       CNOOC Limited



                                       By:      /s/Victor Zhikai Gao
                                          ---------------------------------
                                          Name:   Victor Zhikai Gao
                                          Title:  Senior Vice President,
                                          General Counsel and Company
                                          Secretary


Date: June 26, 2006





                                      135


<PAGE>



CNOOC LIMITED AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS






                                     F-1
<PAGE>


                         INDEX TO FINANCIAL STATEMENTS

                                                                           Page
CNOOC LIMITED AND ITS SUBSIDIARIES
 Report of Independent Public Accountants.............................     F-3
 Consolidated income statements for the years ended December 31, 2005,
   2004, and 2003.....................................................     F-4
 Consolidated balance sheets as of December 31, 2005 and 2004.........     F-6
 Consolidated statements of changes in equity for the years ended
   December 31, 2005, 2004, and 2003..................................     F-7
 Consolidated cash flow statements for the years ended December 31,
   2005, 2004, and 2003...............................................     F-9
 Notes to the consolidated financial statements.......................     F-10




                                     F-2
<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
CNOOC Limited
(Incorporated in Hong Kong with limited liability)

We have audited the accompanying consolidated balance sheets of CNOOC Limited
(the "Company") and its subsidiaries (the "Group") as of December 31, 2005 and
2004, and the related consolidated income statements, changes in
shareholders' equity and cash flows for each of the three years ended December
31, 2005, 2004 and 2003. These financial statements are the responsibility of
the management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and Hong Kong Standards on Auditing
issued by the Hong Kong Institute of Certified Public Accountants. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. We were not engaged to perform an audit of the
Company's internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Group as of
December 31, 2005 and 2004 and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2005, in conformity with accounting principles generally accepted in Hong
Kong ("Hong Kong GAAP").

Accounting principles generally accepted in Hong Kong vary in certain
significant respects from accounting principles generally accepted in the
United States of America. Information relating to the nature and effect of
such differences is presented in note 38 to the consolidated financial
statements.

As discussed in note 2.2 to the financial statements, in 2005 the company
changed its classification of property, plant and equipment, its method of
accounting for land and buildings, its method of accounting for investments in
equity and debts securities and convertible bonds, and its method of
accounting for share-based transactions, upon the adoption of recently issued
Hong Kong Financial Reporting Standards.





 /s/ Ernst & Young
-----------------------------------------
Ernst & Young
Certified Public Accountants


Hong Kong
March 24, 2005




                                     F-3
<PAGE>

<TABLE>
<CAPTION>


                                         CNOOC LIMITED AND ITS SUBSIDIARIES
                                           CONSOLIDATED INCOME STATEMENTS
                                FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

                                        Notes             2003                 2004                 2005                  2005
                                      ----------    -----------------    -----------------    ------------------    ---------------
                                                        RMB'000              RMB'000               RMB'000              US$'000
                                                       (Restated)           (Restated)
<S>                                     <C>           <C>                   <C>                     <C>                <C>
REVENUE
   Oil and gas sales                    7,27              28,116,831           36,886,019            53,417,669          6,619,126
   Marketing revenues                     8               12,398,661           18,191,353            15,901,325          1,970,376
   Other income                                              434,781              144,691               136,749             16,944
                                                    -----------------    -----------------    ------------------    ---------------

                                                          40,950,273           55,222,063            69,455,743          8,606,446
                                                    -----------------    -----------------    ------------------    ---------------
EXPENSES
   Operating expenses                                  (  4,512,809)         (  5,070,344)         (  5,934,598)       (   735,372)
   Production taxes                                    (  1,238,598)         (  1,725,674)         (  2,596,543)       (   321,745)
   Exploration expenses                                (    848,072)         (  1,316,160)         (  1,293,687)       (   160,304)
   Depreciation, depletion and
      amortisation                                     (  4,642,753)         (  5,455,062)         (  5,964,740)       (   739,107)
   Dismantlement                         28            (    167,326)         (    201,637)         (    252,857)       (    31,332)
   Impairment losses related to
     property, plant and equipment                                 -                     -              (90,190)           (11,176)
   Crude oil and product
     purchases                            8             (12,295,238)         ( 17,963,461)         ( 15,704,100)       ( 1,945,937)
   Selling and administrative
     expenses                             9            (  1,250,270)         (  1,104,348)         (  1,370,368)       (   169,806)
   Others                                              (    350,232)         (     45,844)         (     77,062)       (     9,548)
                                                    -----------------    -----------------    ------------------    ---------------

                                                       ( 25,305,298)         ( 32,882,530)         ( 33,284,145)       ( 4,124,327)
                                                    -----------------    -----------------    ------------------    ---------------

PROFIT FROM OPERATING ACTIVITIES                         15,644,975            22,339,533            36,171,598          4,482,119

Interest income                                              183,576              206,872               359,294             44,521
Financial costs                          10            (    354,940)         (    441,825)         (  1,100,532)       (   136,370)
Exchange gains/(losses), net                           (      6,746)               29,269               287,027             35,566
Investment income                                            123,483               72,438               247,893             30,717
Share of profit of associates                                220,263              344,469               307,075             38,050
Non-operating income/(expenses), net                         314,968              519,206                28,579              3,543
                                                    -----------------    -----------------    ------------------    ---------------

PROFIT BEFORE TAX                                         16,125,579           23,069,962            36,300,934          4,498,146

Tax                                      13            (   4,627,836)        (  6,930,826)         ( 10,977,812)       ( 1,360,290)
                                                    -----------------    -----------------    ------------------    ---------------

NET PROFIT                                                11,497,743           16,139,136            25,323,122          3,137,856
                                                    =================    =================    ==================    ===============

The accompanying notes are an integral part of these financial statements.


</TABLE>


                                                                 F-4
<PAGE>

<TABLE>
<CAPTION>


                                      CNOOC LIMITED AND ITS SUBSIDIARIES
                                    CONSOLIDATED INCOME STATEMENTS (CONT'D)
                             FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

                                       Notes            2003                2004                2005              2005
                                      ---------    ----------------    ---------------     ---------------    --------------
                                                       RMB'000            RMB'000             RMB'000            US$'000
                                                      (Restated)         (Restated)
<S>                                     <C>             <C>                <C>                 <C>            <C>
DIVIDENDS
Special interim dividend
  declared in place of 2003
  final dividend *                                             --          2,617,526                  --             --
Interim                                 14              1,220,132          1,306,451           2,138,128        264,941
Special interim                         14              1,568,741          2,177,418           2,138,128        264,941
Proposed final*                         14              1,050,460          1,310,022           4,250,391        526,678
Proposed special final*                 14              1,575,691          2,183,371                  --             --
                                                   ----------------    ---------------     ---------------    --------------
                                                        5,415,024          9,594,788           8,526,647      1,056,560
                                                   ================    ===============     ===============    ==============

DIVIDENDS PER SHARE
Special interim dividend                                       --           RMB0.060                  --             --
  declared in place of 2003
  final dividend*
Interim                                 14               RMB0.030           RMB0.030            RMB0.052      US$ 0.006
Special interim                         14               RMB0.038           RMB0.050            RMB0.052      US$ 0.006
Proposed final*                         14               RMB0.026           RMB0.030            RMB0.103      US$ 0.013
Proposed special final*                 14               RMB0.038           RMB0.050                  --             --

EARNINGS PER SHARE
    Basic                               15                RMB0.28            RMB0.39             RMB0.62       US$ 0.08
    Diluted                             15                RMB0.28            RMB0.39             RMB0.61       US$ 0.08

EARNINGS PER ADS
    Basic                               15               RMB27.99           RMB39.31            RMB61.68       US$ 7.64
    Diluted                             15               RMB27.97           RMB39.19            RMB61.01       US$ 7.56



* The proposed final dividend and special final dividend for 2003 were cancelled and replaced by the special interim
  dividend declared in 2004.


The accompanying notes are an integral part of these financial statements.


</TABLE>



                                                                F-5
<PAGE>

<TABLE>
<CAPTION>

                                      CNOOC LIMITED AND ITS SUBSIDIARIES
                                          CONSOLIDATED BALANCE SHEETS
                                FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

                                               Notes                2004                  2005                  2005
                                           --------------    --------------------   ------------------    -----------------
                                                                   RMB'000               RMB'000              US$'000
                                                                  (Restated)
<S>                                             <C>                    <C>                  <C>                 <C>
NON-CURRENT ASSETS
Property, plant and equipment, net              16                     57,182,026           66,625,167            8,255,702
Intangible assets                               17                             --            1,299,643              161,042
Investments in associates                       18                      1,327,109            1,401,839              173,706
Available-for-sale financial assets                                            --            1,017,000              126,019
                                                             --------------------   ------------------    -----------------
                                                                       58,509,135           70,343,649            8,716,469
                                                             --------------------   ------------------    -----------------

CURRENT ASSETS
Accounts receivable, net                        19                      4,276,489            5,277,784              653,984
Inventories and supplies                        20                      1,147,294            1,199,626              148,649
Due from related companies                      27                      1,173,374            2,099,197              260,117
Other current assets                                                      556,931              806,115               99,887
Available-for-sale financial assets
   /Short term investments                      21                      5,444,113           13,846,935            1,715,811
Time deposits with maturities over
   three months                                                         8,603,000           12,200,000            1,511,735
Cash and cash equivalents                       27                     14,091,524            8,991,758            1,114,193
                                                             --------------------   ------------------    -----------------
                                                                       35,292,725           44,421,415            5,504,376
                                                             --------------------   ------------------    -----------------

TOTAL ASSETS                                                           93,801,860          114,765,064           14,220,845
                                                             ====================   ==================    =================

CURRENT LIABILITIES
Accounts payable                                22                      3,102,024            2,867,678              355,342
Other payables and accrued liabilities          23                      4,191,024            5,206,943              645,206
Current portion of long term bank loans         24                         24,364              825,674              102,311
Due to the parent company                      26,27                      370,060              488,482               60,529
Due to related companies                        27                        211,425              759,934               94,166
Tax payable                                     13                      2,503,466            3,467,505              429,668
                                                             --------------------   ------------------    -----------------
                                                                       10,402,363           13,616,216            1,687,222
                                                             --------------------   ------------------    -----------------

NON-CURRENT LIABILITIES
Long term bank loans                            24                        865,211               24,392                3,022
Long term guaranteed notes                      25                     16,313,550           16,531,780            2,048,497
Provision for dismantlement                     28                      3,089,448            4,161,663              515,683
Deferred tax liabilities                        13                      6,688,498            6,827,916              846,065
                                                             --------------------   ------------------    -----------------
                                                                       26,956,707           27,545,751            3,413,267
                                                             --------------------   ------------------    -----------------

CAPITAL AND RESERVES
Issued capital                                  29                        876,586              876,635              108,626
Reserves                                        30                     55,566,204           72,726,462            9,011,730
                                                             --------------------   ------------------    -----------------
                                                                       56,442,790           73,603,097            9,120,356
                                                             --------------------   ------------------    -----------------

TOTAL EQUITY AND LIABILITIES                                           93,801,860          114,765,064           14,220,845
                                                             ====================   ==================    =================

The accompanying notes are an integral part of these financial statements.


</TABLE>


                                                                F-6
<PAGE>

<TABLE>
<CAPTION>


                                           CNOOC LIMITED AND ITS SUBSIDIARIES
                                                STATEMENTS OF CHANGES IN EQUITY
                                     FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003


                                                          Share
                                                        premium                                Statutory
                                           Issued   and capital         Asset    Cumulative     and non-
                                           share     redemption   revaluation   translation  distributive    Other      Retained
                                          capital       reserve       reserve       reserve      reserve   reserve      earnings
                                        ---------   -----------   ------------  -----------  ------------  -------      --------
                                          RMB'000       RMB'000       RMB'000       RMB'000      RMB'000   RMB'000       RMB'000
<S>                                       <C>        <C>           <C>           <C>           <C>         <C>        <C>
Balances at January 1, 2003 as
  previously reported                     876,978    20,761,205       274,671    (  13,596)    2,232,410         -    16,436,820
Cumulative adjustment for the
  adoption of HKFRS 2 (note 2.2)                -             -             -            -             -    25,755    (   25,755)


Cumulative adjustment for the
  adoption of HKAS 16 (note 2.2)                -             -     ( 274,671)          -              -         -             -
                                        ---------   -----------   ------------  -----------  ------------  -------      --------

Balances at January 1 2003
  as restated                             876,978    20,761,205             -      (13,596)    2,232,410    25,755    16,411,065

Exchange realignment                            -             -             -       36,243             -         -             -
                                        ---------   -----------   ------------  -----------  ------------  -------      --------

Total income and expenses for the
  year recognised directly in equity            -             -             -       36,243             -         -             -

Net profit for the year as restated             -             -             -            -             -         -    11,497,743
                                        ---------   -----------   ------------  -----------  ------------  -------      --------

Total income and expenses for the
  year                                          -             -             -       36,243             -         -    11,497,743
Appropriation to statutory reserve              -             -             -            -       818,079         -      (818,079)
2002 final dividends                            -             -             -            -             -         -    (1,307,408)
2002 special final dividends                    -             -             -            -             -         -    (1,307,408)
2003 interim dividends                          -             -             -            -             -         -    (1,220,132)
2003 special interim dividends                  -             -             -            -             -         -    (1,568,741)
Transfer to/(from) reserve                      -             -             -            -     5,000,000         -    (5,000,000)
Equity-settled share option expense             -             -             -            -             -    37,747             -
                                        ---------   -----------   ------------  -----------  ------------  -------      --------
Balances at December 31, 2003 as
  restated                                876,978    20,761,205             -       22,647     8,050,489    63,502    16,687,040
                                        =========   ===========   ============  ===========  ============  =======    ==========

Balances at January 1, 2004 as
  previously reported                     876,978    20,761,205       274,671       22,647     8,050,489         -    16,750,542

Cumulative adjustment for the
  adoption of HKFRS 2 (note 2.2)                -             -             -            -             -    63,502       (63,502)

Cumulative adjustment for the
    adoption of HKAS 16 (note 2.2)              -             -      (274,671)           -             -         -             -
                                        ---------   -----------   ------------  -----------  ------------  -------      --------
Balances at January 1, 2004
    as restated                           876,978    20,761,205             -       22,647     8,050,489    63,502    16,687,040

Exchange realignment                            -             -             -    (  42,301)            -         -             -
                                        ---------   -----------   ------------  -----------  ------------  -------      --------

Total income and expenses for the
  year recognised directly in equity            -             -             -    (  42,301)            -         -             -

Net profit for the year as restated             -             -             -            -             -         -    16,139,136
                                        ---------   -----------   ------------  -----------  ------------  -------      --------
Total income and expenses for the
  year                                          -             -             -      (42,301)            -         -    16,139,136

Repurchases of shares                        (392)            -             -            -             -         -       (60,761)

Transfer of reserve upon
  share repurchases                             -           392             -            -             -         -          (392)

2004 special interim dividend
  declared in place of 2003 final
  dividends                                     -             -             -            -             -         -    (2,617,526)

2004 interim dividends                          -             -             -            -             -         -    (1,306,451)

2004 special interim dividends                  -             -             -            -             -         -    (2,177,418)

Appropriation to statutory reserve              -             -             -            -     1,363,121         -    (1,363,121)

Equity-settled share option expenses            -             -             -            -             -    46,642             -
                                        ---------   -----------   ------------  -----------  ------------  -------      --------
Balances at 31 December 2004
     as restated                          876,586    20,761,597             -      (19,654)    9,413,610   110,144    25,300,507
                                        =========   ===========   ============  ===========  ============  =======    ==========

<CAPTION>

                                               Total
                                          -----------
                                             RMB'000
<S>                                       <C>
Balances at January 1, 2003 as
  previously reported                     40,568,488
Cumulative adjustment for the
  adoption of HKFRS 2 (note 2.2)                   -


Cumulative adjustment for the
  adoption of HKAS 16 (note 2.2)            (274,671)
                                          -----------

Balances at January 1 2003
  as restated                             40,293,817

Exchange realignment                          36,243
                                          -----------

Total income and expenses for the
  year recognised directly in equity          36,243

Net profit for the year as restated       11,497,743
                                          -----------
Total income and expenses for the year    11,533,986

Appropriation to statutory reserve                 -
2002 final dividends                      (1,307,408)
2002 special final dividends              (1,307,408)
2003 interim dividends                    (1,220,132)
2003 special interim dividends            (1,568,741)
Transfer to/(from) reserve                         -
Equity-settled share option expense           37,747
                                          -----------
Balances at December 31, 2003 as
  restated                                46,461,861
                                          ===========

Balances at January 1, 2004 as
  previously reported                     46,736,532

Cumulative adjustment for the
  adoption of HKFRS 2 (note 2.2)                   -

Cumulative adjustment for the
    adoption of HKAS 16 (note 2.2)          (274,671)
                                          -----------
Balances at January 1, 2004
    as restated                           46,461,861

Exchange realignment                      (   42,301)
                                          -----------

Total income and expenses for the
  year recognised directly in equity      (   42,301)

Net profit for the year as restated       16,139,136
                                          -----------
Total income and expenses for the
  year                                    16,096,835

Repurchases of shares                        (61,153)

Transfer of reserve upon
  share repurchases                                -

2004 special interim dividend
  declared in place of 2003 final
  dividends                               (2,617,526)

2004 interim dividends                    (1,306,451)

2004 special interim dividends            (2,177,418)

Appropriation to statutory reserve                 -

Equity-settled share option expenses          46,642
                                          -----------
Balances at 31 December 2004
     as restated                          56,442,790
                                          ===========


</TABLE>


                                                                F-7
<PAGE>

<TABLE>
<CAPTION>

                                              CNOOC LIMITED AND ITS SUBSIDIARIES
                                           STATEMENTS OF CHANGES IN EQUITY (CONT'D)
                                     FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

                                                        Share
                                                      premium                                Statutory
                                         Issued   and capital        Asset     Cumulative     and non-
                                          share    redemption  revaluation    translation distributive       Other    Retained
                                        capital       reserve      reserve        reserve      reserve     reserve    earnings
                                      ---------   -----------  -----------    -----------  -----------  ----------  ----------
                                        RMB'000       RMB'000      RMB'000        RMB'000      RMB'000   RMB'000       RMB'000
<S>                                    <C>         <C>         <C>              <C>          <C>         <C>        <C>
Balances at January 1 2005
   as previously reported               876,586    20,761,597      274,671       (19,654)    9,413,610        --    25,410,651

Cumulative adjustment for the
  adoption of HKFRS 2 (note 2.2)              -             -            -             -             -   110,144      (110,144)

Cumulative adjustment for the
    adoption of HKAS 16 (note 2.2)            -             -     (274,671)            -             -         -             -
                                      ---------   -----------  -----------    -----------  -----------  ----------  ----------

Balances at January 1 2005
    as restated                         876,586    20,761,597            -       (19,654)    9,413,610   110,144    25,300,507

Changes in fair value of
  available-for-sale investments              -             -            -             -             -    69,069             -

Exchange realignment                          -             -            -      (493,289)            -         -             -
                                      ---------   -----------  -----------    -----------  -----------  ----------  ----------

Total income and expenses for the
  year recognised directly in equity          -             -            -      (493,289)            -    69,069             -

Net profit for the year                       -             -            -             -             -         -    25,323,122
                                      ---------   -----------  -----------    -----------  -----------  ----------  ----------

Total income and expenses for the
  year                                        -             -            -      (493,289)            -    69,069    25,323,122

2004 final dividends                          -             -            -             -             -         -    (3,495,962)

2005 interim dividends                        -             -            -             -             -         -    (4,276,256)

Exercise of share options                    49         4,451            -             -             -         -             -

Appropriation to statutory reserve            -             -            -             -     2,268,364         -    (2,268,364)

Equity-settled share option expenses          -             -            -             -             -    29,123             -
                                      ---------   -----------  -----------    -----------  -----------  ----------  ----------

Balances at 31 December 2005            876,635    20,766,048            -      (512,943)   11,681,974   208,336    40,583,047
                                      =========   ===========  ===========    ===========  ===========  ==========  ==========


<CAPTION>


                                                       Total
                                                 -----------
                                                     RMB'000
<S>                                              <C>
Balances at January 1 2005
   as previously reported                         56,717,461

Cumulative adjustment for the
  adoption of HKFRS 2 (note 2.2)                           -

Cumulative adjustment for the
    adoption of HKAS 16 (note 2.2)                  (274,671)
                                                 -----------

Balances at January 1 2005
    as restated                                   56,442,790

Changes in fair value of
  available-for-sale investments                      69,069

Exchange realignment                                (493,289)
                                                 -----------

Total income and expenses for the
  year recognised directly in equity                (424,220)

Net profit for the year                           25,323,122
                                                 -----------

Total income and expenses for the
  year                                            24,898,902

2004 final dividends                              (3,495,962)

2005 interim dividends                            (4,276,256)

Exercise of share options                              4,500

Appropriation to statutory reserve                         -

Equity-settled share option expenses                  29,123
                                                 -----------

Balances at 31 December 2005                      73,603,097
                                                 ===========



  * These reserve accounts comprise the consolidated reserves of RMB72,726,462,000 (2004: RMB55,566,204,000
    (restated), 2003: RMB45,584,883,000 (restated)), in the consolidated balance sheet.

  The accompanying notes are an integral part of these financial statements.


</TABLE>



                                                                F-8
<PAGE>

<TABLE>
<CAPTION>

                                      CNOOC LIMITED AND ITS SUBSIDIARIES
                                       CONSOLIDATED CASH FLOW STATEMENTS
                             FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003


                                                  Notes        2003             2004             2005             2005
                                                 ------    -------------   --------------   -------------   ----------------
                                                              RMB'000         RMB'000          RMB'000          US$'000
OPERATING ACTIVITIES
<S>                                               <C>      <C>             <C>              <C>             <C>
Cash generated from operations                    32(a)      21,142,911       29,705,761      41,695,648        5,166,619
Income taxes paid                                          (  3,514,807)    (  7,402,280)   (  9,849,454)   (   1,220,472)
Income tax refund                                                     -                -               -                -
Interest received                                               183,576          206,871         359,294           44,521
Dividends received                                               90,000          135,000         232,346           28,791
Short term investments income received                           55,840            4,626          45,785            5,673
Interest paid                                              (    138,801)    (    322,118)   (    329,797)   (      40,866)
                                                           -------------    -------------   -------------   --------------

Net cash inflow from operating activities                    17,818,719       22,327,860      32,153,822        3,984,266
                                                           -------------    -------------   -------------   --------------

INVESTING ACTIVITIES
Acquisition of and prepayment for oil and gas
     properties                                   32(b)    (  4,100,900)    (  5,779,140)   (    864,007)   (     107,061)
Additions of property, plant and equipment                 (  8,271,564)    ( 12,842,905)   ( 16,605,548)   (   2,057,638)
Proceeds from disposals of property, plant and
    equipment                                                         -                -               -                -
Investment in an associate                                 (    450,000)               -               -                -
(Increase)/decrease in time deposits with
    maturities over three months                               2,367,000    (  6,280,000)   (  3,597,000)   (     445,714)
Purchase of available-for-sale financial
     assets/ short term investments                        (   8,144,702)   (  5,735,093)   ( 21,487,478)   (   2,662,571)
Disposals of available-for-sale financial
     assets/ short term investments                            9,087,581       6,029,946      13,204,817        1,636,244
                                                           -------------    -------------   -------------   --------------

Net cash outflow from investing activities                 (   9,512,585)   ( 24,607,192)   ( 29,349,216)   (   3,636,740)
                                                           --------------   -------------   -------------   --------------

FINANCING ACTIVITIES
Proceeds from issuance of long term guaranteed
     notes                                                     3,995,773       8,154,085               -                -
Repayment of bank loans                                    (     336,938)   (     21,075)   (     18,654)   (       2,312)
Dividends paid                                             (   5,403,689)   (  6,101,395)   (  7,772,218)   (     963,076)
Share repurchases                                                      -    (     61,153)              -                -
Proceeds from exercise of share options                                -               -           4,500              558
                                                           --------------   -------------   -------------   --------------

Net cash (outflow)/inflow from financing
     activities                                            (   1,744,854)      1,970,462    (  7,786,372)   (    964,830)
                                                           --------------   -------------   -------------   --------------

NET INCREASE/(DECREASE)IN CASH AND CASH EQUIVALENTS            6,561,280    (    308,870)   (  4,981,766)   (     617,304)

Cash and cash equivalents at beginning of year                 7,839,114      14,400,394      14,091,524        1,746,118

Effect of foreign exchange rate changes, net                           -               -    (    118,000)   (      14,621)
                                                           --------------   -------------   -------------   --------------


CASH AND CASH EQUIVALENTS AT END OF YEAR                      14,400,394      14,091,524        8,991,758       1,114,193
                                                           --------------   -------------    -------------   --------------

ANALYSIS OF BALANCES OF CASH AND CASH
    EQUIVALENTS

Cash and cash equivalents  balances                           14,400,394      14,091,524        8,991,758       1,114,193
                                                           ==============  ==============    =============   =============


  The accompanying notes are an integral part of these financial statements.

</TABLE>



                                                                F-9
<PAGE>

<TABLE>
<CAPTION>

                                              CNOOC LIMITED AND ITS SUBSIDIARIES
                                                 NOTES TO FINANCIAL STATEMENTS
                                  (All amounts expressed in Renminbi unless otherwise stated)



1.    CORPORATE INFORMATION

      CNOOC Limited (the "Company") was incorporated in the Hong Kong Special
      Administrative Region ("Hong Kong"), the People's Republic of China (the
      "PRC") on 20 August 1999 to hold the interests in certain entities
      whereby creating a group comprising the Company and its subsidiaries.
      During the year, the Company and its subsidiaries (hereinafter
      collectively referred to as the "Group") were principally engaged in the
      exploration, development, production and sale of crude oil, natural gas
      and other petroleum products.

      The registered office address is 65/F, Bank of China Tower, 1 Garden
      Road, Hong Kong.

      In the opinion of the directors, the parent and the ultimate holding
      company is China National Offshore Oil Corporation ("CNOOC"), a company
      established in the PRC.


      Particulars of the principal subsidiaries are as follows:

                                                                Nominal value of
                                                                 issued and paid    Percentage of
                                       Place and date of             /registered           equity
                                       incorporation/             ordinary share     attributable
       Name                            establishment                     capital     to the Group   Principal activities
       ---------------------------     ---------------------   -------------------  -------------   --------------------
       Directly held subsidiaries:

       <S>                             <C>                         <C>                       <C>    <C>
       CNOOC China Limited             Tianjin, the PRC            RMB15 billion             100%     Offshore petroleum
                                       September 15, 1999                                                   exploration,
                                                                                                            development,
                                                                                                     production and sale
                                                                                                              in the PRC

       CNOOC International Limited     British Virgin                       US$2             100%     Investment holding
                                       Islands
                                       August 23, 1999

       China Offshore Oil              Singapore                     S$3 million             100%     Sale and marketing
          (Singapore) International    May 14, 1993                                                 of petroleum outside
          Pte., Ltd.                                                                                          of the PRC

       CNOOC Finance (2002) Limited    British Virgin                   US$1,000             100%          Bond issuance
                                       Islands
                                       January 24, 2002

       CNOOC Finance (2003) Limited    British Virgin                   US$1,000             100%          Bond issuance
                                       Islands
                                       April 2, 2003

       CNOOC Finance (2004) Limited    British Virgin                   US$1,000             100%          Bond issuance
                                       Islands
                                       December 9, 2004


       Indirectly held subsidiaries*:

       Malacca Petroleum Limited       Bermuda                         US$12,000             100%     Offshore petroleum
                                       November 2, 1995                                                     exploration,
                                                                                                         development and
                                                                                                           production in
                                                                                                               Indonesia
</TABLE>

                                                                F-10
<PAGE>

<TABLE>
<CAPTION>


                                                 CNOOC LIMITED AND ITS SUBSIDIARIES
                                                    NOTES TO FINANCIAL STATEMENTS
                                     (All amounts expressed in Renminbi unless otherwise stated)


1.       CORPORATE INFORMATION (CONT'D)

                                                                Nominal value of
                                                                 issued and paid     Percentage of
                                       Place and date of             /registered            equity
                                       incorporation/             ordinary share   attributable to
         Name                          establishment                     capital         the Group    Principal activities
         ----------------------------- ---------------------   -----------------   ---------------    --------------------
         Indirectly held subsidiaries* (cont'd):

         <S>                           <C>                            <C>                     <C>       <C>
         OOGC America, Inc.            State of Delaware,               US$1,000              100%      Investment holding
                                       United States of
                                       America
                                       September 2, 1997

         OOGC Malacca Limited          Bermuda                         US$12,000              100%      Offshore petroleum
                                       November 2, 1995                                                       exploration,
                                                                                                           development and
                                                                                                             production in
                                                                                                                 Indonesia

         CNOOC Southeast Asia Limited  Bermuda                         US$12,000              100%      Investment holding
                                       May 16, 1997

         CNOOC ONWJ Ltd.               Labuan, F.T.,                        US$1              100%      Offshore petroleum
                                       Malaysia                                                               exploration,
                                       March 27, 2002                                                      development and
                                                                                                             production in
                                                                                                                 Indonesia

         CNOOC SES Ltd.                Labuan, F.T.,                        US$1              100%      Offshore petroleum
                                       Malaysia                                                               exploration,
                                       March 27, 2002                                                      development and
                                                                                                             production in
                                                                                                                 Indonesia

         CNOOC Poleng Ltd.             Labuan, F.T.,                        US$1              100%      Offshore petroleum
                                       Malaysia                                                               exploration,
                                       March 27, 2002                                                      development and
                                                                                                             production in
                                                                                                                 Indonesia

         CNOOC Madura Ltd.             Labuan, F.T.,                        US$1              100%      Offshore petroleum
                                       Malaysia                                                               exploration,
                                       March 27, 2002                                                      development and
                                                                                                             production in
                                                                                                                 Indonesia

         CNOOC Blora Ltd.              Labuan, F.T.,                        US$1              100%       Onshore petroleum
                                       Malaysia                                                               exploration,
                                       March 27, 2002                                                      development and
                                                                                                             production in
                                                                                                                 Indonesia

</TABLE>


                                                                F-11
<PAGE>

<TABLE>
<CAPTION>


                                                 CNOOC LIMITED AND ITS SUBSIDIARIES
                                                    NOTES TO FINANCIAL STATEMENTS
                                     (All amounts expressed in Renminbi unless otherwise stated)


1.       CORPORATE INFORMATION (CONT'D)

                                                               Nominal value of
                                                                issued and paid      Percentage of
                                         Place and date of          /registered             equity
                                         incorporation/          ordinary share    attributable to
         Name                            establishment                  capital          the Group   Principal activities
         -----------------------------  -------------------    ----------------    ---------------   --------------------
         Indirectly held subsidiaries* (cont'd):
         <S>                             <C>                      <C>                         <C>      <C>
         CNOOC NWS Private Ltd.          Singapore                          S$1               100%     Offshore petroleum
                                         October 8, 2002                                                     exploration,
                                                                                                          development and
                                                                                                            production in
                                                                                                                Australia
         CNOOC Wiriagar Overseas Ltd.    British Virgin                    US$1               100%     Offshore petroleum
                                         Islands                                                             exploration,
                                         January 15, 2003                                                 development and
                                                                                                            production in
                                                                                                                Indonesia
         CNOOC Muturi Ltd.               The Isle of Man           US$7,780,700               100%     Offshore petroleum
                                         February 8, 1996                                                    exploration,
                                                                                                          development and
                                                                                                            production in
                                                                                                                Indonesia
</TABLE>


         * Indirectly held through CNOOC International Limited.
         The above table lists the subsidiaries of the Company which, in the
         opinion of the directors, principally affected the results for the
         year or formed a substantial portion of the net assets of the Group.
         To give details of other subsidiaries would, in the opinion of the
         directors, result in particulars of excessive length.

2.1      BASIS OF PREPARATION

         These financial statements have been prepared in accordance with Hong
         Kong Financial Reporting Standards ("HKFRSs") (which also include
         Hong Kong Accounting Standards ("HKASs") and Interpretations) issued
         by the Hong Kong Institute of Certified Public Accountants
         ("HKICPA"), accounting principles generally accepted in Hong Kong
         ("Hong Kong GAAP") and the disclosure requirements of the Hong Kong
         Companies Ordinance. They have been prepared under the historical
         cost convention except for available-for-sale investments and
         derivative financial instruments which have been measured at fair
         value. These financial statements are presented in Renminbi ("RMB")
         and all values are rounded to the nearest thousand (RMB'000) except
         when otherwise indicated.

         Basis of consolidation

         The consolidated financial statements include the financial
         statements of the Company and its subsidiaries for the year ended
         December 31, 2005. The results of subsidiaries are consolidated from
         the date of acquisition being the date on which the Group obtains
         control and continue to be consolidated until the date that such
         control ceases. All significant intercompany transactions and
         balances within the Group are eliminated on consolidation.

         The acquisition of subsidiaries or an interest in a joint venture or
         associate during the year has been accounted for using the purchase
         method of accounting. This method involves allocating the cost of the
         business combinations to the fair value of the assets acquired, and
         liabilities and contingent liabilities assumed at the date of
         acquisition. The cost of the acquisition is measured at the aggregate
         of the fair value of the assets given, equity instruments issued (if
         any) and liabilities incurred or assumed at the date of exchange,
         plus costs directly attributable to the acquisition.


                                                                F-12
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


2.2   IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS
      ("HKFRSs")

      The Hong Kong Institute of Certified Public Accountants has issued a
      number of new Hong Kong Financial Reporting Standards, Hong Kong
      Accounting Standards and interpretations, herein collectively referred
      to as the new HKFRSs, which are generally effective for accounting
      periods beginning on or after January 1, 2005. The following new and
      revised HKFRSs affect the Group and are adopted for the first time for
      the current year's financial statements:
<TABLE>
<CAPTION>

      <S>                  <C>
      HKAS 1               Presentation of Financial Statements
      HKAS 2               Inventories
      HKAS 7               Cash Flow Statements
      HKAS 8               Accounting Policies, Changes in Accounting Estimates and Errors
      HKAS 10              Events after the Balance Sheet Date
      HKAS 12              Income Taxes
      HKAS 14              Segment Reporting
      HKAS 16              Property, Plant and Equipment
      HKAS 17              Leases
      HKAS 18              Revenue
      HKAS 19              Employee Benefits
      HKAS 21              The Effects of Changes in Foreign Exchange Rates
      HKAS 23              Borrowing Costs
      HKAS 24              Related Party Disclosures
      HKAS 27              Consolidated and Separate Financial Statements
      HKAS 28              Investments in Associates
      HKAS 31              Interests in Joint Ventures
      HKAS 32              Financial Instruments: Disclosure and Presentation
      HKAS 33              Earnings per Share
      HKAS 36              Impairment of Assets
      HKAS 37              Provisions, Contingent Liabilities and Contingent Assets
      HKAS 38              Intangible Assets
      HKAS 39              Financial Instruments: Recognition and Measurement
      HKAS 39 Amendment    Transition and Initial Recognition of Financial Assets and Financial Liabilities
      HKFRS 2              Share-based Payment
      HKFRS 3              Business Combinations

</TABLE>

      The adoption of HKASs 1, 2, 7, 8, 10, 12, 14, 17, 18, 19, 21, 23, 24,
      27, 28, 31, 33, 36, 37, 38 and HKFRS 3 has no material impact on the
      accounting policies of the Group and the methods of computation in the
      Group's financial statements. The impacts of adopting other HKFRSs are
      detailed as follows:

      (a)    HKAS 16 - Property, Plant and Equipment
             In prior years, the Group's property, plant and equipment were
             classified into three categories: oil and gas properties, land
             and buildings (representing the onshore terminals for oil and gas
             processing), and vehicles and office equipment. Land and
             buildings were stated at valuation less accumulated depreciation.
             Depreciation for land and buildings is calculated on the
             straight-line basis at an annual rate estimated to write off the
             valuation of each asset over its expected useful life, ranging
             from 30 to 50 years.

             According to HKAS 16, property, plant and equipment are required
             to be categorised by major component and different useful lives,
             if any, should be applied in calculating the depreciation.

                                     F-13
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


2.2    IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS
       ("HKFRSs")(CONT'D)

       (a)    HKAS 16 - Property, Plant and Equipment (continued)

              Upon the adoption of HKAS 16, the Group has classified its
              property, plant and equipment into two categories: oil and gas
              properties and vehicles and office equipment. The Group has
              reclassified the onshore terminals previously classified as land
              and buildings to oil and gas properties as they will be used in
              similar operations and are expected to have similar economic
              useful lives.

              The Group has also decided to change its accounting policy to
              state the onshore terminals at cost instead of valuation and to
              amortise those terminals by the unit-of-production method on a
              property-by-property basis computed based on the total estimated
              units of proved developed reserves instead of the straight line
              method. Management believes the new policy will provide more
              relevant information and consistent accounting approach for oil
              and gas related assets.

              The effect of this change in accounting policy is to decrease
              both property, plant and equipment and the revaluation reserve
              as at January 1, 2005 and 2004 by RMB 274,671,000. No adjustment
              was made to the prior years' amounts as the impact on the prior
              years' consolidated income statements was not material. The
              effects of the above changes are summarized in note 2.4 to the
              financial statements.

       (b)    HKASs 32 and 39 - Financial Instruments

              (i)   Investments in equity and debt securities

              In prior periods, the Group classified its investments in short
              term debt and equity securities as short term investments which
              were not intended to be held on a continuing basis and those
              investments were stated at fair value at the balance sheet date,
              on an individual investment basis. The gains or losses arising
              from changes in the fair value of such securities were credited
              or charged to the income statement in the period in which they
              arose.

              Upon the adoption of HKAS 39, these securities held by the Group
              at January 1, 2005 in the amount of RMB 5,444,113,000 were
              designated as available-for-sale investments under the
              transitional provisions of HKAS 39 and accordingly are stated at
              fair value with gains or losses being recognised as a separate
              component of equity until subsequent derecognition or
              impairment.

              (ii)  Convertible bonds

              In prior periods, convertible bonds were stated at amortised
              cost.

              Upon the adoption of HKAS 32 and HKAS 39, the Group's
              convertible bonds issued with a cash settlement option and other
              derivative features are split into liability and derivative
              components based on their fair values for measurement purposes.
              The effects of the above changes are summarised in note 2.4 to
              the financial statements. In accordance with HKAS 32,
              comparative amounts have been restated.


                                     F-14
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


2.2   IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS
      ("HKFRSs")(CONT'D)

      (c)    HKFRS 2 - Share-based Payment

             In prior periods, no recognition and measurement of share-based
             transactions in which employees (including directors) were
             granted share options over shares in the Company were required
             until such options were exercised by employees, at which time the
             share capital and share premium were credited with the proceeds
             received.

             Upon the adoption of HKFRS 2, when employees (including
             directors) render services as consideration for equity
             instruments ("equity-settled transactions"), the cost of
             equity-settled transactions with employees is measured by
             reference to the fair value at the date at which the instruments
             are granted.

             The main impact of HKFRS 2 on the Group is the recognition of the
             cost of these transactions and a corresponding entry to equity
             for employee share options. The revised accounting policy for
             share-based payment transactions is described in more detail in
             note 3 "Summary of significant Accounting Policies" below.

             The Group has adopted the provisions of HKFRS 2 retrospectively
             to all stock options granted from the date of its incorporation.
             The effects of adopting HKFRS 2 are summarized in note 2.4 to the
             financial statements.

2.3   IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING
      STANDARDS

      The HKICPA has issued a number of new and revised HKFRSs that are not
      mandatory for these financial statements. The Group has not early
      applied these HKFRSs in these financial statements. The following new
      and revised HKFRSs, although not early adopted by the Group, will have
      impact on the Group's financial statements in the period of initial
      application. Unless otherwise stated, the following HKFRSs are effective
      for accounting periods beginning on or after January 1, 2006:

      HKAS 1 Amendment                Capital Disclosures
      HKAS 21 Amendment               The effects of Changes in Foreign
                                      Exchange Rate - Net Investment in a
                                      Foreign Operation
      HKAS 39 Amendment               Cash Flow Hedge Accounting of Forecast
                                      Intragroup Transactions
      HKAS 39 Amendment               The Fair Value Option
      HKFRSs 1 & 6 Amendments         First-time Adoption of Hong Kong
                                      Financial Reporting Standards and
                                      Exploration for and Evaluation of Mineral
                                      Resources
      HKFRS 6                         Exploration for and Evaluation of Mineral
                                      Resources
      HKFRS 7                         Financial Instruments: Disclosures
      HK(IFRIC)-Int 4                 Determining whether an Arrangement
                                      contains a Lease
      HK(IFRIC)-Int 5                 Rights to Interests arising from
                                      Decommissioning, Restoration and
                                      Environmental Rehabilitation Funds

      The HKAS 1 Amendment shall be applied for accounting periods beginning
      on or after January 1, 2007. The revised standard will affect the
      disclosures about qualitative information about the Group's objective,
      policies and processes for managing capital; quantitative data about
      what the Company regards as capital; and compliance with any capital
      requirements and the consequences of any non-compliance.


                                     F-15
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)



2.3    IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING
       STANDARDS (CONT'D)

       HKFRS 6 deals with the accounting for exploration for and evaluation of
       mineral resources, including oil and gas. This HKFRS should be applied
       for accounting periods beginning on or after January 1, 2006. The Group
       expects that the adoption of HKFRS 6 will not have any significant
       impact on its results of operations and financial position.

       HKFRS 7 will replace HKAS 32 and has modified the disclosure
       requirements of HKAS 32 relating to financial instruments. This HKFRS
       shall be applied for accounting periods beginning on or after January
       1, 2007.

       Except as stated above, the Group expects that the adoption of the
       other pronouncements listed above will not have any significant impact
       on the Group's financial statements in the period of initial
       application.

<TABLE>
<CAPTION>

2.4    SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES

       (a)  Effect on the consolidated balance sheet

                                                          Effect of adopting
                                            ---------------------------------------------
            <S>                                       <C>              <C>                              <C>
            At  January 1, 2005                              HKAS 16#             HKFRS 2#
            Effect of new policies                    Property, plant       Recognition of
            Increase/(decrease)                         and equipment  share-based payment                 Total
                                                              RMB'000              RMB'000               RMB'000

            Assets
            Property, plant and equipment, net               (274,671)                 --               (274,671)
                                                                                                        -----------

            Liabilities/equity
            Asset revaluation reserve                        (274,671)                 --               (274,671)
            Other reserves                                          --              110,144              110,144
            Retained earnings                                       --             (110,144)            (110,144)
                                                                                                        -----------

                                                                                                        (274,671)
                                                                                                        -----------
</TABLE>


<TABLE>
<CAPTION>

                                                                Effect of adopting
                                            -------------------------------------------------------------------
            <S>                           <C>                 <C>           <C>                 <C>                     <C>

                                                 HKAS 16#        HKASs 32             HKAS 39*            HKFRS 2#
            At  December 31,  2005                             and 39*            Change in      Recognition of
            Effect of new policies        Property, plant     Convertible    classification of         share-based
            Increase/(decrease)             and equipment           bonds   equity investments             payment          Total
                                                  RMB'000         RMB'000              RMB'000             RMB'000        RMB'000

            Assets
            Property, plant and equipment, net   (274,671)             --                   --                  --       (274,671)
                                                                                                                       ------------

            Liabilities/equity
            Long term guaranteed notes                 --         373,060                   --                 --        373,060
            Asset revaluation reserve            (274,671)             --                   --                 --       (274,671)
            Other reserves                             --              --               69,069            139,267        208,336
            Retained earnings                          --        (373,060)             (69,069)          (139,267)      (581,396)
                                                                                                                       ------------

                                                                                                                        (274,671)
                                                                                                                       ------------
</TABLE>


                                                                 F-16
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)

<TABLE>
<CAPTION>

2.4  SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES (CONT'D)
     (b) Effects on the balances of equity at January 1, 2003, 2004 and 2005

                                              Effect of adopting
                                  ---------------------------------------------
                                                           HKAS 16#                    HKFRS 2#
          Effect of new policies                    Property, plant              Recognition of
          Increase/(decrease)                         and equipment         share-based payment          Total
                                                            RMB'000                     RMB'000        RMB'000
          <S>                                             <C>                           <C>           <C>
          January 1, 2003
          Asset revaluation reserve                        (274,671)                         --        (274,671)
          Other reserves                                         --                      25,755          25,755
          Retained earnings                                      --                     (25,755)        (25,755)
                                                                                                    ------------
                                                                                                       (274,671)
                                                                                                    ------------

          January 1, 2004
          Asset revaluation reserve                        (274,671)                         --        (274,671)
          Other reserves                                          --                     63,502          63,502
          Retained earnings                                       --                    (63,502)        (63,502)


                                                                                                       (274,671)
                                                                                                    ------------
          January 1, 2005

          Asset revaluation reserve                        (274,671)                         --        (274,671)
          Other reserves                                          --                    110,144         110,144
          Retained earnings                                       --                   (110,144)       (110,144)
                                                                                                    ------------

                                                                                                       (274,671)
                                                                                                    ------------

             * Adjustments taken effect prospectively from January 1, 2005.
             # Adjustments taken effect retrospectively.

     (c) Effect on the consolidated income statement for the years ended
         December 31, 2005, 2004 and 2003

                                                     Effect of adopting
                                            ---------------------------------------------------
                                                 HKAS 16           HKAS 39           HKFRS 2
                                                                              Recognition of
                                         Property, plant       Convertible       share-based
          Effect of new policies           and equipment             bonds           payment             Total
                                                 RMB'000           RMB'000           RMB'000           RMB'000

          Year ended  December 31, 2005
          Increase in depreciation,
            depletion and amortisation            19,269                --                --            19,269
          Increase in a loss on embedded
            derivatives in convertible bonds          --           373,060                --           373,060
          Increase in selling and
            administrative expenses                   --                --            29,123            29,123

                                        ------------------------------------------------------------------------

          Total decrease in profit                19,269           373,060            29,123           421,452
                                        ------------------------------------------------------------------------

          Year ended  December 31, 2004
          Increase in selling and
            administrative expenses                   --                --            46,642            46,642
                                        ------------------------------------------------------------------------

          Total decrease in profit                    --                --            46,642            46,642
                                        ------------------------------------------------------------------------

          Year ended  December 31, 2003
          Increase in selling and
            administrative expenses                   --                --            37,747            37,747
                                        ------------------------------------------------------------------------

          Total decrease in profit                    --                --            37,747            37,747
                                        ------------------------------------------------------------------------

          There was no material impact on basic earnings per share and diluted earnings per share for the years ended December
          31, 2005, 2004 and 2003 for the adoption of the above new policies.


</TABLE>


                                     F-17

<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Subsidiaries

      A subsidiary is a company in which the Company, directly or indirectly,
      controls more than half of its voting power or issued share capital or
      controls the composition of its Board of Directors.

      The results of subsidiaries are included in the Company's income
      statement to the extent of dividends received and receivable. The
      Company's interests in subsidiaries are stated at cost less any
      impairment losses.

      Associates

      An associate is an entity, not being a subsidiary or a
      jointly-controlled entity, in which the Group has a long term interest
      of generally not less than 20% of the equity voting rights and over
      which it is in a position to exercise significant influence.

      The Group's share of the post-acquisition results and reserves of the
      associates are included in the consolidated income statement and
      consolidated reserves, respectively. The Group's proportionate interests
      in the associates are stated in the consolidated balance sheet at the
      Group's share of net assets under the equity method of accounting, less
      any impairment losses.

      Joint Ventures

      Certain of the group's activities are conducted through joint
      arrangements, including the production sharing arrangements detailed in
      note 5 below. These arrangements are a form of joint venture whereby a
      contractual arrangement exists between two or more parties to undertake
      an economic activity that is subject to joint control. These joint
      arrangements are included in the consolidated financial statements in
      proportion to the group's interests in the income, expenses, assets and
      liabilities of these arrangements.

      Related parties

      A party is considered to be related to the Group if:

     (a)  the party directly or indirectly through one or more intermediaries,
          (i) controls, is controlled by, or is under common control with, the
          Group ; (ii) has an interest in the Group that gives it significant
          influence over the Group; or (iii) has joint control over the Group;

     (b)  the party is an associate;

     (c)  the party is a jointly controlled entity;

     (d)  the party is a member of the key management personnel of the Group
          or its parent;

     (e)  the party is a close member of the family of any individual referred
          to in (a) or (d); or

     (f)  the party is an entity that is controlled, jointly controlled or
          significantly influenced by or for which significant voting power in
          such entity resides with, directly or indirectly, any individual
          referred to in (d) or (e).


                                     F-18
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      Impairment of assets

      Where an indication of impairment exists, or when annual impairment
      testing for an asset (other than inventories and financial assets) is
      required, the asset's recoverable amount is estimated. An asset's
      recoverable amount is calculated as the higher of the asset's or
      cash-generating unit's value in use and its fair value less costs to
      sell, and is determined for an individual asset, unless the asset does
      not generate cash inflows that are largely independent of those from
      other assets or groups of assets, in which case, the recoverable amount
      is determined for the cash-generating unit to which the asset belongs.

      An impairment loss is recognised only if the carrying amount of an asset
      exceeds its recoverable amount. In assessing value in use, the estimated
      future cash flows are discounted to their present value using a pre-tax
      discount rate that reflects current market assessments of the time value
      of money and the risks specific to the asset. An impairment loss is
      charged to the income statement in the period in which it arises.

      An assessment is made at each reporting date as to whether there is any
      indication that previously recognised impairment losses may no longer
      exist or may have decreased. If such indication exists, the recoverable
      amount is estimated.

      A previously recognised impairment loss is reversed only if there has
      been a change in the estimates used to determine the recoverable amount
      of an asset, however not to an amount higher than the carrying amount
      that would have been determined (net of any depreciation/amortisation),
      had no impairment loss been recognised for the asset in prior years.

      A reversal of an impairment loss is credited to the income statement in
      the period in which it arises, unless the asset is carried at a revalued
      amount, in which case the reversal of the impairment loss is accounted
      for in accordance with the relevant accounting policy for that revalued
      asset.



                                     F-19
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      Property, plant and equipment

      Property, plant and equipment comprise oil and gas properties, and
      vehicles and office equipment.

     (i)  Oil and gas properties
            For oil and gas properties, the successful efforts method of
            accounting is adopted. The Group capitalises initial acquisition
            costs of oil and gas properties. Impairment of initial acquisition
            costs is recognised based on exploratory experience and management
            judgment. Upon discovery of commercial reserves, acquisition costs
            are transferred to proved properties. The costs of drilling and
            equipping successful exploratory wells, all development
            expenditures on construction, installation or completion of
            infrastructure facilities such as platforms, pipelines, processing
            plants and the drilling of development wells, including those
            renewals and betterments which extend the economic lives of the
            assets, and the borrowing costs arising from borrowings used to
            finance the development of oil and gas properties before they are
            substantially ready for production are capitalised. The costs of
            unsuccessful exploratory wells and all other exploration costs are
            expensed as incurred.

            Exploratory wells are evaluated for economic viability within one
            year of completion. Exploratory wells that discover potentially
            economic reserves in areas where major capital expenditure will be
            required before production would begin and when the major capital
            expenditure depends upon successful completion of further
            exploratory work remain capitalised and are reviewed periodically
            for impairment.

            Productive oil and gas properties and other tangible and
            intangible costs of producing properties are amortised using the
            unit-of-production method on a property-by-property basis under
            which the ratio of produced oil and gas to the estimated remaining
            proved developed reserves is used to determine the depreciation,
            depletion and amortisation provision. Costs associated with
            significant development projects are not depleted until commercial
            production commences and the reserves related to those costs are
            excluded from the calculation of depletion.

            Capitalised acquisition costs of proved properties are amortised
            by the unit-of-production method on a property-by-property basis
            computed according to the total estimated units of proved
            reserves.

            The Group estimates future dismantlement costs for oil and gas
            properties with reference to the estimates provided from either
            internal or external engineers after taking into consideration the
            anticipated method of dismantlement required in accordance with
            current legislation and industry practices. The associated cost is
            capitalised and the liability is discounted and an accretion
            expense is recognised using the credit-adjusted risk-free interest
            rate in effect when the liability is initially recognised. No
            market-risk premium has been included in the Company's calculation
            of asset retirement obligations balances since no reliable
            estimate can be made by the Company.


                                     F-20
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      Property, plant and equipment (cont'd)

      (ii)  Vehicles and office equipment

            Vehicles and office equipment are stated at cost less accumulated
            depreciation and impairment losses. The straight-line method is
            adopted to depreciate the cost less any estimated residual value
            of these assets over their expected useful lives. The Group
            estimates the useful lives of vehicles and office equipment to be
            five years.

      Where parts of an item of property, plant and equipment have different
      useful lives, the cost of that item is allocated on a recoverable basis
      among the parts and each part is depreciated separately.

      Residual values, useful lives and the depreciation method are reviewed
      and, adjusted if appropriate, at each balance sheet date.

      An item of property, plant and equipment is derecognised upon disposal
      or where no future economic benefits are expected from its use or
      disposal. Any gain or loss on disposal or retirement recognised in the
      income statement in the year that the asset is derecognised is the
      difference between the net sales proceeds and the carrying value of the
      relevant asset.


      Intangible assets

      The useful lives of intangible assets are assessed to be either finite
      or indefinite. Intangible assets with finite lives are amortised over
      the useful economic life and assessed for impairment whenever there is
      an indication that the intangible asset may be impaired.

      The amortisation period and the amortisation method for an intangible
      asset with a finite useful life are reviewed as least at each balance
      sheet date.


      Research and development costs

      All research costs are charged to the income statement as incurred.

      Expenditure (other than relating to oil and gas properties discussed
      above) incurred on projects to develop new products is capitalised and
      deferred only when the Group can demonstrate the technical feasibility
      of completing the intangible asset so that it will be available for use
      or sale, its intention to complete and its ability to use or sell the
      asset, how the asset will generate future economic benefits, the
      availability of resources to complete the project and the ability to
      measure reliably the expenditure during the development. Product
      development expenditure which does not meet these criteria is expensed
      when incurred. No development costs were capitalised during the year.



                                     F-21
<PAGE>

                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      Investments and other financial assets

      Applicable to the year ended December 31, 2004:

      Short term investment
      Short term investments are investments in debt and equity securities not
      intended to be held on a continuing basis and are stated at their fair
      values on the basis of their quoted market prices at the balance sheet
      date, on an individual investment basis. The gains or losses arising
      from changes in the fair value of a security are credited or charged to
      the income statement in the period in which they arise.

      Applicable to the year ended December 31, 2005:

      Financial assets in the scope of HKAS 39 are classified as financial
      assets at fair value through profit or loss, loans and receivables,
      held-to-maturity investments, and available-for-sale financial assets,
      as appropriate. When financial assets are recognised initially, they are
      measured at fair value, plus, in the case of investments not at fair
      value through profit or loss, directly attributable transaction costs.
      The Group determines the classification of its financial assets after
      initial recognition and, where allowed and appropriate, re-evaluates
      this designation at the balance sheet date.

      All regular way purchases and sales of financial assets are recognised
      on the trade date i.e., the date that the Group commits to purchase the
      asset. Regular way purchases or sales are purchases or sales of
      financial assets that require delivery of assets within the period
      generally established by regulation or convention in the marketplace.

     (a)  Financial assets at fair value through profit or loss
          Financial assets classified as held for trading are included in the
          category "financial assets at fair value through profit or loss".
          Financial assets are classified as held for trading if they are
          acquired for the purpose of selling in the near term. Derivatives
          are also classified as held for trading unless they are designated
          and effective hedging instruments. Gains or losses on investments
          held for trading are recognised in the income statement.

     (b)  Loans and receivables
          Loans and receivables are non-derivative financial assets with fixed
          or determinable payments that are not quoted in an active market.
          They arise when the Group provides money, goods or services directly
          to a debtor with no intention of trading the receivable. They are
          included in current assets, except for those with maturities greater
          than 12 months after the balance sheet date, which are included in
          non-current assets. Loans and receivables are included in trade and
          other receivables in the balance sheet.

     (c)  Held-to-maturity investments
          During this year, the Group did not hold any investments assets in
          this category.


                                     F-22
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      Investments and other financial assets (continued)

     (d)  Available-for-sale financial assets
          Available-for-sale financial assets are those non-derivative
          financial assets in listed and unlisted equity securities that are
          designated as available-for-sale or are not classified in any of the
          other categories. After initial recognition available-for-sale
          financial assets are measured at fair value with gains or losses
          being recognised as a separate component of equity until the
          investment is derecognised or until the investment is determined to
          be impaired at which time the cumulative gain or loss previously
          reported in equity is included in the income statement.

          When the fair value of unlisted equity securities can not be
          reliably measured because (a) the variability in the range of
          reasonable fair value estimates is significant or that investment or
          (b) the probabilities of the various estimates within the range
          cannot be reasonably assessed and used in estimating fair value,
          such securities are stated at cost less any impairment losses.

      Fair Value
      The fair value of investments that are actively traded in organised
      financial markets is determined by reference to quoted market bid price
      at the close of business at the balance sheet date. For investments
      where there is no active market, fair value is determined using
      valuation techniques. Such techniques include using recent arm's length
      market transactions; reference to the current market value of another
      instrument which is substantially the same; a discounted cash flow
      analysis; and option pricing models.

      Impairment of financial assets (Applicable to the year ended
      December 31, 2005)

      The Group assesses at each balance sheet date whether there is any
      objective evidence that a financial asset or group of financial assets
      is impaired.

      Assets carried at amortised cost
      If there is objective evidence that an impairment loss on loans and
      receivables carried at amortised cost has been incurred, the amount of
      the loss is measured as the difference between the asset's carrying
      amount and the present value of estimated future cash flows (excluding
      future credit losses that have not been incurred) discounted at the
      financial asset's original effective interest rate (i.e., the effective
      interest rate computed at initial recognition). The carrying amount of
      the asset is reduced either directly or through the use of an allowance
      account. The amount of the impairment loss is recognised in profit or
      loss.

      The Group first assesses whether objective evidence of impairment exists
      individually for financial assets that are individually significant, and
      individually or collectively for financial assets that are not
      individually significant. If it is determined that no objective evidence
      of impairment exists for an individually assessed financial asset,
      whether significant or not, the asset is included in a group of
      financial assets with similar credit risk characteristics and that group
      is collectively assessed for impairment. Assets that are individually
      assessed for impairment and for which an impairment loss is or continues
      to be recognised are not included in a collective assessment of
      impairment.


                                     F-23
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      Impairment of financial assets (Applicable to the year ended December
      31, 2005) (continued)

      If, in a subsequent period, the amount of the impairment loss decreases
      and the decrease can be related objectively to an event occurring after
      the impairment was recognised, the previously recognised impairment loss
      is reversed. Any subsequent reversal of an impairment loss is recognised
      in the income statement, to the extent that the carrying value of the
      asset does not exceed its amortised cost at the reversal date.

      Available-for-sale financial assets If an available-for-sale asset is
      impaired, an amount comprising the difference between its cost (net of
      any principal payment and amortisation) and its current fair value, less
      any impairment loss previously recognised in profit or loss, is
      transferred from equity to the income statement. Impairment losses on
      equity instruments classified as available-for-sale are not reversed
      through profit or loss.

      Derecognition of financial assets (applicable to the year ended December
      31, 2005) A financial asset (or, where applicable, a part of a financial
      asset or part of a group of similar financial assets) is derecognised
      where:

      o     the rights to receive cash flows from the asset have expired;

      o     the Group retains the rights to receive cash flows from the asset,
            but has assumed an obligation to pay in full without material
            delay to a third party under a "pass-through" arrangement; or

      o     the Group has transferred its rights to receive cash flows from
            the asset and either (a) has transferred substantially all the
            risks and rewards of the asset, or (b) has neither transferred nor
            retained substantially all the risks and rewards of the asset, but
            has transferred control of the asset.

      Where the Group has transferred its rights to receive cash flows from an
      asset and has neither transferred nor retained substantially all the
      risks and rewards of the asset nor transferred control of the asset, the
      asset is recognised to the extent of the Group's continuing involvement
      in the asset. Continuing involvement that takes the form of a guarantee
      over the transferred asset is measured at the lower of the original
      carrying amount of the asset and the maximum amount of consideration
      that the Group could be required to repay.

      Where continuing involvement takes the form of a written and/or
      purchased option (including a cash settled option or similar provision)
      on the transferred asset, the extent of the Group's continuing
      involvement is the amount of the transferred asset that the Group may
      repurchase, except that in the case of a written put option (including a
      cash-settled option or similar provision) on an asset measured at fair
      value, where the extent of the Group's continuing involvement is limited
      to the lower of the fair value of the transferred asset and the option
      exercise price.


                                     F-24
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      Interest-bearing loans and borrowings

      All loans and borrowings are initially recognised at the fair value of
      the consideration received less directly attributable transaction costs.

      After initial recognition, interest-bearing loans and borrowings are
      subsequently measured at amortised cost using the effective interest
      method.

      Gains and losses are recognised in net profit or loss when the
      liabilities are derecognised as well as through the amortisation
      process.

      Convertible bonds

      The Group's convertible bonds issued with a cash settlement option and
      other embedded derivative features are split into liability and
      derivative components according to their fair values for measurement
      purposes.

      The fair value of the liability component is determined using the market
      rate for an equivalent non-convertible bond on the issuance of
      convertible bonds and this amount is carried as a long term liability on
      the amortised cost basis until extinguished on conversion or redemption.
      The derivative component is remeasured at each balance sheet date and
      any gains or losses arising from change in the fair value are recognised
      in the income statement. Both the liability and the related embedded
      derivative components are presented together for financial statements
      reporting purposes.

      Derecognition of financial liabilities (applicable to the year ended
      December 31, 2005)

      A financial liability is derecognised when the obligation under the
      liability is discharged or cancelled or expires.

      When an existing financial liability is replaced by another from the
      same lender on substantially different terms, or the terms of an
      existing liability are substantially modified, such an exchange or
      modification is treated as a derecognition of the original liability and
      a recognition of a new liability, and the difference between the
      respective carrying amounts is recognised in profit or loss.

      Derivative financial instruments (applicable to the year ended
      December 31, 2005)

      The Group uses currency swaps to hedge its risks associated with
      currency exchange fluctuations. Such derivative financial instruments
      are initially recognised at fair value on the date on which a derivative
      contract is entered into and are subsequently remeasured at fair value.
      Derivatives are carried as assets when the fair value is positive and as
      liabilities when the fair value is negative.

      Any gains or losses arising from changes in fair value on derivatives
      that do not qualify for hedge accounting are taken directly to net
      profit or loss for the year.

      The fair value of currency swap contracts is determined by reference to
      market values for similar instruments.


                                     F-25
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      Inventories and supplies

      Inventories consist primarily of oil and supplies consist mainly of
      items for repairs and maintenance of oil and gas properties. Inventories
      are stated at the lower of cost and net realisable value. Costs of
      inventories and supplies represent purchase or production cost of goods
      and are determined on a weighted average basis. Net realisable value is
      based on estimated selling prices less any estimated costs to be
      incurred to completion and disposal. Supplies are capitalised to
      property, plant and equipment when used for renewals and betterments of
      oil and gas properties and have resulted in an increase in the future
      economic values of oil and gas properties or are recognised as expenses
      when used.


      Cash and cash equivalents

      For the purpose of the consolidated cash flow statement, cash and cash
      equivalents comprise cash on hand and demand deposits, and short term
      highly liquid investments which are readily convertible into known
      amounts of cash and which are subject to an insignificant risk of
      changes in value, and have a short maturity of generally within three
      months when acquired, less bank overdrafts which are payable on demand
      and form an integral part of the Group's cash management.

      For the purpose of the balance sheet, cash and cash equivalents comprise
      cash on hand and at banks, and term deposits with maturities of three
      months or less which are not restricted to use.


      Provisions

      A provision is recognised when a present obligation (legal or
      constructive) has arisen as a result of a past event and it is probable
      that a future outflow of resources will be required to settle the
      obligation, provided that a reliable estimate can be made of the amount
      of the obligation.

      When the effect of discounting is material, the amount recognised for a
      provision is the present value at the balance sheet date of the future
      expenditures expected to be required to settle the obligation. The
      increase in the discounted present value amount arising from the passage
      of time is included in finance costs in the income statement.

      Provisions for dismantlement are made based on the present value of the
      future costs expected to be incurred, on a property-by-property basis,
      in respect of the Group's expected dismantlement and abandonment costs
      at the end of the related oil exploration and recovery activities.


                                     F-26
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      Income tax

      Income tax comprises current and deferred tax. Income tax is recognised
      in the income statement or in equity if it relates to items that are
      recognised in the same or a different period directly in equity.

      Current tax assets and liabilities for the current and prior periods are
      measured at the amount expected to be recovered from or paid to the
      taxation authorities.

      Deferred tax is provided, using the liability method, on all temporary
      differences at the balance sheet date between the tax bases of assets
      and liabilities and their carrying amounts for financial reporting
      purposes.

      Deferred tax liabilities are recognised for all taxable temporary
      differences:

      o     Except where the deferred tax liability arises from the initial
            recognition of an asset or liability in a transaction that is not
            a business combination and, at the time of the transaction,
            affects neither the accounting profit nor taxable profit or loss;
            and

      o     in respect of taxable temporary differences associated with
            investments in subsidiaries and associates, except where the
            timing of the reversal of the temporary differences can be
            controlled and it is probable that the temporary differences will
            not reverse in the foreseeable future.

      o     Deferred tax assets are recognised for all deductible temporary
            differences, carry forward of unused tax credits and unused tax
            losses, to the extent that it is probable that taxable profit will
            be available against which the deductible temporary differences,
            and the carry forward of unused tax credits and unused tax losses
            can be utilised, except where the deferred tax asset relating to
            the deductible temporary differences arises from the initial
            recognition of an asset or liability in a transaction that is not
            a business combination and, at the time of the transaction,
            affects neither the accounting profit nor taxable profit or loss;
            and

      o     in respect of deductible temporary differences associated with
            investments in subsidiaries and associates, deferred tax assets
            are only recognised to the extent that it is probable that the
            temporary differences will reverse in the foreseeable future and
            taxable profit will be available against which the temporary
            differences can be utilised.

      The carrying amount of deferred tax assets is reviewed at each balance
      sheet date and reduced to the extent that it is no longer probable that
      sufficient taxable profit will be available to allow all or part of the
      deferred tax asset to be utilised. Conversely, previously unrecognised
      deferred tax assets are reassessed at each balance sheet date and are
      recognised to the extent that it is probable that sufficient taxable
      profit will be available to allow all or part of the deferred tax asset
      to be utilised.

      Deferred tax assets and liabilities are measured at the tax rates that
      are expected to apply to the period when the asset is realised or the
      liability is settled, based on tax rates (and tax laws) that have been
      enacted or substantially enacted at the balance sheet date.

      Deferred tax assets and deferred tax liabilities are offset, if a
      legally enforceable right exists to set off current tax assets against
      current tax liabilities and the deferred taxes relate to the same
      taxable entity and the same taxation authority.


                                     F-27
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      Revenue recognition

      Revenue is recognised when it is probable that the economic benefits
      will flow to the Group and when the revenue can be measured reliably, on
      the following bases:

     (i)  Oil and gas sales
          Oil and gas sales represent the invoiced value of sales of oil and
          gas attributable to the interests of the Group, net of royalties and
          PRC government share oil that are lifted and sold on behalf of the
          PRC government. Sales are recognised when the significant risks and
          rewards of ownership of oil and gas have been transferred to
          customers.

          Oil and gas lifted and sold by the Group above or below the Group's
          participating interests in the production sharing contracts result
          in overlifts and underlifts. The Group records these transactions in
          accordance with the entitlement method under which overlifts are
          recorded as liabilities and underlifts are recorded as assets at
          year end oil prices. Settlement will be in kind when the liftings
          are equalised or in cash when production ceases.

          The Group has entered into gas sales contracts with customers which
          contain take-or-pay clauses. The clauses require those customers to
          take a specified minimum volume of gas each year. If the minimum
          volume of gas is not taken, those customers must pay for the
          deficiency gas, even though the gas is not taken. Those customers
          can offset the deficiency payment against any future purchases in
          excess of the specified volume. The Group records any deficiency
          payments as deferred revenue which is included in other payables
          until any make-up gas is taken by those customers or the expiry of
          the contracts.

     (ii) Marketing revenues
          Marketing revenues represent sales of oil purchased from the foreign
          partner under the production sharing contracts and revenues from the
          trading of oil through the Company's subsidiary in Singapore. The
          title, together with the risks and rewards of the ownership of such
          oil purchased from the foreign partners, is transferred to the Group
          from the foreign partners and other unrelated oil and gas companies
          before the Group sells such oil to its customers. The cost of the
          oil sold is included in crude oil and product purchases.

    (iii) Other income
          Other income mainly represents project management fees charged to
          the foreign partners and handling fees charged to customers and is
          recognised when the services are rendered.

     (iv) Dividend income
          Dividend income is recognised when the shareholders' right to
          receive payment has been established.

     (v)  Interest income
          Interest income from deposits placed with banks and other financial
          instruments is recognised on a time proportion basis taking into
          account the effective yield on the assets.


                                     F-28
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

     Employee benefits

     Share-based payment transactions
     The Company has adopted share option schemes for the purpose of providing
     incentives and rewards to eligible participants who contribute to the
     success of the Group's operations. Employees (including directors) of the
     Group will from time to time receive remuneration in the form of
     share-based payment transactions, whereby employees render services as
     consideration for equity instruments ("equity-settled transactions").

     The cost of equity-settled transactions with employees is measured by
     reference to the fair value at the date at which they are granted. The
     fair value is determined by using a Black-Scholes model, further details
     of which are given in note 31. In valuing equity-settled transactions, no
     account is taken of any performance conditions, other than conditions
     linked to the price of the shares of the Company, if applicable.

     The cost of equity-settled transactions is recognised, together with a
     corresponding increase in equity, over the period in which the
     performance and/or service conditions are fulfilled, ending on the date
     on which the relevant employees become fully entitled to the award (the
     "vesting date"). The cumulative expenses recognised for equity-settled
     transactions at each balance sheet date until the vesting date reflects
     the extent to which the vesting period has expired and the Group's best
     estimate of the number of equity instruments that will ultimately vest.
     The charge or credit to the income statement for a period represents the
     movement in cumulative expense recognised as at the beginning and end of
     that period.

     No expense is recognised for awards that do not ultimately vest, except
     for awards where vesting is conditional upon a market condition, which
     are treated as vesting irrespective of whether or not the market
     condition is satisfied, provided that all other performance conditions
     are satisfied.

     Where the terms of an equity-settled award are modified, as a minimum, an
     expense is recognised as if the terms had not been modified. In addition,
     an expense is recognised for any modification, which increases the total
     fair value of the share-based payment arrangement, or is otherwise
     beneficial to the employee as measured at the date of modification.

     Where an equity-settled award is cancelled, it is treated as if it had
     vested on the date of cancellation, and any expenses not yet recognised
     for the award is recognised immediately. However, if a new award is
     substituted for the cancelled award, and is designated as a replacement
     award on the date that it is granted, the cancelled and new awards are
     treated as if they were a modification of the original award, as
     described in the previous paragraph. The Group has adopted the provisions
     of HKFRS 2 retrospectively to all stock options granted from the date of
     its incorporation.

     The dilutive effect of outstanding options is reflected as additional
     share dilution in the computation of earnings per share.



                                     F-29
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

     Retirement and termination benefits

     The Group participates in defined contribution plans in accordance with
     local laws and regulations for full-time employees in the PRC and other
     countries in which it operates. The plans provide for contributions
     ranging from 5% to 22% of the employees' basic salaries. The Group's
     contributions to these defined contribution plans are charged to expense
     in the year to which they relate.


     Dividends

     Final and special final dividends proposed by the directors are
     classified as a separate allocation of retained earnings within the
     equity section of the balance sheet, until they have been approved by the
     shareholders in a general meeting. When these dividends have been
     approved by the shareholders and declared, they are recognised as a
     liability.

     Interim and special interim dividends are simultaneously proposed and
     declared, because the Company's memorandum and articles of association
     grant the directors the authority to declare interim dividends.
     Consequently, interim dividends are recognised immediately as a liability
     when they are proposed and declared.


     Borrowing costs

     Borrowing costs directly attributable to the acquisition, construction or
     production of qualifying assets, i.e. assets that necessarily take a
     substantial period of time to get ready for their intended use or sale,
     are capitalised as part of the cost of those assets. The capitalisation
     of such borrowing costs ceases when the assets are substantially ready
     for their intended use or sale.

     To the extent that funds are borrowed specifically for the purpose of
     obtaining a qualifying asset, the amount of borrowing costs eligible for
     capitalisation on that asset is determined as the actual borrowing costs
     incurred on that borrowing during the period less any investment income
     on the temporary investment of those borrowings.

     To the extent that funds are borrowed generally and used for the purpose
     of obtaining a qualifying asset, the amount of borrowing costs eligible
     for capitalisation is determined by applying a capitalisation rate to the
     expenditures on that asset. The capitalisation rate is the weighted
     average of the borrowing costs applicable to the borrowings of the group
     that are outstanding during the period, other than borrowings made
     specifically for the purpose of obtaining a qualifying asset. The amount
     of borrowing costs capitalised incurred during a period should not exceed
     the amount of borrowing cost incurred during that period.

     Borrowing costs include interest charges and other costs incurred in
     connection with the borrowing of funds, including amortisation of
     discounts or premiums relating to the borrowing, and amortisation of
     ancillary costs incurred in connection with arranging the borrowing.




                                     F-30
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

     Foreign currencies

     These financial statements are presented in RMB. Each entity in the Group
     maintains its books and records in its own functional currency. Foreign
     currency transactions are initially recorded using the functional
     currency rates ruling at the date of transaction. Monetary assets and
     liabilities denominated in foreign currencies are retranslated at the
     functional currency rates of exchange ruling at the balance sheet date.
     Exchange differences are dealt with in the income statement. Non-monetary
     items that are measured in terms of historical cost in a foreign currency
     are translated using the exchange rates at the dates of the initial
     transactions. Non-monetary items measured at fair value in a foreign
     currency are translated using the exchange rates at the date when the
     fair value was determined.

     On consolidation, the balance sheet of the Company and the overseas
     subsidiaries, other than the subsidiaries in the PRC, are translated into
     RMB at the exchange rates ruling at the balance sheet date and, their
     income statements are translated into RMB at the weighted average
     exchange rates for the year. The resulting translation differences are
     included in the cumulative translation reserve.

     For the purpose of the consolidated cash flow statement, the cash flows
     of overseas subsidiaries are translated into RMB at the exchange rates
     ruling at the dates of the cash flows. Frequently recurring cash flows of
     overseas subsidiaries which arise throughout the year are translated into
     RMB at the weighted average exchange rates for the year.


     Repairs, maintenance and overhaul costs

     Repairs, maintenance and overhaul costs are normally charged to the
     income statement as operating expenses in the period in which they are
     incurred.


     Operating leases

     Leases where substantially all the rewards and risks of ownership of
     assets remain with the lessor are accounted for as operating leases.
     Where the Company is the lessee, rentals payable under the operating
     leases are charged to the income statement on the straight-line basis
     over the lease terms.


     Contingencies

     Contingent liabilities are not recognised in the financial statements.
     They are disclosed unless the possibility of an outflow of resources
     embodying economic benefits is remote.

     A contingent asset is not recognised in the financial statements, but are
     disclosed when an inflow of economic benefits is probable.


                                     F-31
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

     Subsequent events

     Post-year-end events that provide additional information about the
     Company's position at the balance sheet date or those that indicate the
     going concern assumption is not appropriate (adjusting events) are
     reflected in the financial statements. Post-year-end events that are not
     adjusting events are disclosed in the notes when material.


     Use of estimates

     The preparation of financial statements in conformity with Hong Kong GAAP
     requires management to make estimates and assumptions that affect the
     reported amounts of assets and liabilities and disclosure of contingent
     assets and liabilities at the date of the financial statements, and the
     reported amounts of revenues and expenses during the reporting period.
     The most significant estimates pertain to proved oil and gas reserve
     volumes and the future development, purchase price allocation, provision
     for dismantlement and impairment as well as estimates relating to certain
     oil and gas revenues and expenses. Actual amounts could differ from those
     estimates and assumptions. More details are given in notes 3, 16 and 28.



                                     F-32
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


4.   ACQUISITIONS

     During the year, the Group completed the acquisition of the North West
     Shelf Project ("NWS Project"), including an interest of approximately
     5.3% in the NWS Project and a 25% interest in the China LNG Joint
     Venture, a new joint venture established within the NWS Project. The
     Group acquired the NWS Project to expand its upstream oil and gas
     reserves and production. The Group's participation in the NWS Project has
     not started commercial operations.

     Details of the net assets acquired are as follows:

     Purchase consideration:                                           RMB'000
                                                                 -------------

     Consideration paid                                              4,341,783
     Direct costs relating to the acquisition                           87,522
                                                                 --------------

     Total purchase consideration                                    4,429,305
                                                                 --------------

     The assets and liabilities arising from the acquisition are as follows:

                                                                       RMB'000
                                                                 --------------

     Oil and gas properties                                          3,129,662
     Intangible assets - gas processing rights                       1,299,643
                                                                 --------------

     Net assets acquired                                             4,429,305
                                                                 --------------

     Purchase consideration settled in cash                          4,429,305
                                                                 --------------

     The purchase price allocation set out above is still preliminary, pending
     the confirmation of the tax basis of the underlying assets.

     The interest of the Group in the NWS Project has been charged to the
     other partners of the Project as security for certain of the Group's
     liabilities relating to the Project.

     In addition, the Company, through its wholly-owned subsidiary, has signed
     an agreement with a Canadian based company, MEG Energy Corporation
     ("MEG"), to acquire a 16.69% equity interest in MEG. The Company
     completed the transaction and paid C$150 million (equivalent of RMB1,017
     million) for the acquisition of 13,636,364 common shares of MEG in March
     2005. MEG is principally engaged in the exploitation and production of
     oil sands. The investment in the unlisted shares of this company is
     accounted for as a non-current available-for-sales asset and is stated at
     cost less any impairment.


                                     F-33
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


5.   PRODUCTION SHARING CONTRACTS

     PRC

     For production sharing contracts in the PRC, the foreign parties to the
     contracts ("foreign partners") are normally required to bear all
     exploration costs during the exploration period and such exploration
     costs can be recovered according to the production sharing formula after
     commercial discoveries are made and production begins.

     After the initial exploration stage, the development and operating costs
     are funded by the Group and the foreign partners according to their
     respective participating interests.


     In general, the Group has the option to take up to 51% participating
     interest in a production sharing contract and may exercise such option
     after the foreign partners have independently undertaken all the
     exploration risks and costs and made viable commercial discoveries.

     After the Group exercises its option to take a participating interest in
     a production sharing contract, the Group accounts for the oil and gas
     properties using the proportional method under which the Group recognises
     its share of development costs, revenues and expenses from such
     operations according to its participating interest in the production
     sharing contract. The Group does not account for either the exploration
     costs incurred by its foreign partners or the foreign partners' share of
     development costs and revenues and expenses from such operations.

     Part of the annual gross production of oil and gas in the PRC is
     distributed to the PRC government as settlement of royalties which are
     payable pursuant to a sliding scale. The Group and the foreign partners
     also pay the value-added tax to the tax bureau at a pre-determined rate.
     In addition, there is a pre-agreed portion of oil and gas designated to
     recover all exploration costs, development costs, operating costs
     incurred and related interest according to the participating interests
     between the Group and the foreign partners. Any remaining oil after the
     foregoing priority allocations is first distributed to the PRC government
     as government share oil on a pre-determined ratio pursuant to a sliding
     scale, and then distributed to the Group and the foreign partners
     according to their respective participating interests. As the government
     share is not included in the Group's interest in the annual production,
     the net sales of the Group do not include the sales revenue of the
     government share oil.

     The foreign partners have the right either to take possession of their
     allocable remainder oil for sale in the international market, or to
     negotiate with the Group to sell their allocable remainder oil to the
     Group for sale in the PRC market.


     Overseas

     The Group and the other partners to the overseas production sharing
     contracts are required to bear all exploration, development and operating
     costs according to their respective participating interests. Exploration,
     development and operating costs which qualify for recovery can be
     recovered according to the production sharing formula after commercial
     discoveries are made and production begins.

     The Group's net interest in the production sharing contracts in overseas
     consists of its participating interest in the properties covered under
     the relevant production sharing contracts, less oil and gas distributed
     to the local government and the domestic market obligation.


                                     F-34
<PAGE>


                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)

6.   SEGMENT INFORMATION

     Segment information is presented by way of two segment formats: (i) on a
     primary segment reporting basis, by business segment; and (ii) on a
     secondary segment reporting basis, by geographical segment.

     Intersegment transactions: segment revenue, segment expenses and segment
     performance include transfers between business segments and between
     geographical segments. Such transfers are accounted for at cost. Those
     transfers are eliminated on consolidation.

     (a)    Business segments

            The Group is organised on a worldwide basis into three major
            operating segments. The Group is involved in the upstream
            operating activities of the petroleum industry that comprise
            independent operations, production sharing contracts with foreign
            partners and trading business. These segments are determined
            primarily because the senior management makes key operating
            decisions and assesses performance of the segments separately. The
            Group evaluates the performance of each segment based on profit or
            loss from operations before income taxes.



                                     F-35
<PAGE>

                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)



6.    SEGMENT INFORMATION (CONT'D)

(a)   Business segments (cont'd)

      The following table presents revenue, profit and certain assets,
      liabilities and expenditures information for the Group's business
      segments for the years ended December 31, 2005 and 2004.


<TABLE>
<CAPTION>
                                                Independent operations                   Production sharing contracts
                                         ------------------------------------------------------------------------------------------
Segment revenue                                  2003            2004            2005            2003            2004         2005
---------------                          ------------    ------------    ------------    ------------    ------------   -----------
                                              RMB'000         RMB'000       RMB'000           RMB'000         RMB'000       RMB'000

                                           (Restated)     (Restated)                       (Restated)      (Restated)
<S>                                             <C>             <C>            <C>             <C>             <C>
Sales to external customers:
    Oil and gas sales                      12,040,587      15,177,621      22,808,733      16,076,244      21,708,398    30,608,936
    Marketing revenues                             --              --              --              --              --            --
Intersegment revenues                              --         920,669       1,598,171       3,730,797       2,551,181     7,467,429
Other income                                    8,468           6,139          13,093         424,493         136,942       103,047
                                         ------------    ------------    ------------    ------------    ------------  ------------
Total                                      12,049,055      16,104,429      24,419,997      20,231,534      24,396,521    38,179,412
                                         ------------    ------------    ------------    ------------    ------------  ------------
Segment results
---------------

Operating expenses                         (1,579,004)     (1,828,614)     (2,095,273)     (2,933,805)     (3,241,730)   (3,839,325)
Production taxes                             (626,897)       (775,210)     (1,154,771)       (611,701)       (950,464)   (1,441,772)
Exploration costs                            (590,541)     (1,136,055)     (1,025,993)       (257,531)       (180,105)     (267,694)
Depreciation, depletion and amortisation   (1,855,983)     (2,235,064)     (2,554,896)     (2,786,770)     (3,219,998)   (3,409,844)
Dismantlement                                 (96,206)       (117,310)       (152,796)        (71,120)        (84,327)     (100,061)
Impairment loss related to  property,
      plant and equipment                          --              --         (39,494)             --              --       (50,696)
Crude oil and product purchases                    --        (920,669)     (1,598,171)     (3,730,797)     (2,551,181)   (7,467,429)
Selling and administrative expenses           (62,247)        (50,721)        (39,486)       (666,369)       (557,521)     (676,062)
Others                                        (36,406)             --              --        (313,826)        (45,844)      (77,062)
Interest income                                    --              --              --          14,302           2,077         7,328
Finance costs                                 (60,358)       (135,119)       (183,325)        (20,817)        (64,956)      (94,885)
Exchange gains/(losses), net                       --              --              --             124         (15,308)       (5,119)
Investments income                                 --              --              --              --              --            --
Share of profit of associates                      --              --              --              --              --            --
Non-operating income/(expenses), net               --              --              --              --              --            --
Tax                                                --              --              --              --              --            --
                                         ------------    ------------    ------------    ------------    ------------   ------------
Net profit                                  7,141,413       8,905,667      15,575,792       8,853,224      13,487,164    20,756,791
                                         ------------    ------------    ------------    ------------    ------------   ------------
Other segment information
-------------------------

Segment assets                             36,087,581      21,120,584      25,054,275      26,821,223      37,851,716     51,125,491
Investment in associates                           --              --              --              --              --            --
                                         ------------    ------------    ------------    ------------    ------------     ----------
Total assets                               36,087,581      21,120,584      25,054,275      26,821,223      37,851,716     51,125,491
Segment liabilities                        (3,554,720)     (3,913,905)     (5,187,124)    (12,620,113)    (11,453,307)  (12,876,516)
Capital expenditure                         5,960,071       6,309,397       7,806,927       2,264,625      13,145,839      8,914,306
                                         ============    ============    ============    ============    ============   ============

</TABLE>

<TABLE>
<CAPTION>
                                                                    Trading business
                                                 --------------------------------------------
Segment revenue                                          2003            2004            2005
---------------                                  ------------    ------------    ------------
                                                      RMB'000         RMB'000         RMB'000

                                                  (Restated)      (Restated)
<S>                                              <C>             <C>              <C>
Sales to external customers:
    Oil and gas sales                                      --              --              --
    Marketing revenues                             12,398,661      18,191,353      15,901,325
Intersegment revenues                                      --              --              --
Other income                                               --              --              --
                                                 ------------    ------------    ------------
Total                                              12,398,661      18,191,353      15,901,325
                                                 ------------    ------------    ------------
Segment results
---------------

Operating expenses                                         --              --              --
Production taxes                                           --              --              --
Exploration costs                                          --              --              --
Depreciation, depletion and amortisation                   --              --              --
Dismantlement                                              --              --              --
Impairment loss related to  property, plant
and equipment                                              --              --              --

Crude oil and product purchases                   (12,295,238)    (17,963,461)    (15,704,100)
Selling and administrative expenses                        --              --              --
Others                                                     --              --              --
Interest income                                            --              --              --
Finance costs                                              --              --              --
Exchange gains/(losses), net                               --              --              --
Investments income                                         --              --              --
Share of profit of associates                              --              --              --
Non-operating income/(expenses), net                       --              --              --
Tax                                                        --              --              --
                                                 ------------    ------------    ------------
Net profit                                            103,423         227,892         197,225
                                                 ------------    ------------    ------------
Other segment information
-------------------------

Segment assets                                      2,629,009       1,712,212       2,413,195
Investment in associates                                   --              --              --
                                                 ------------    ------------    ------------
Total assets                                        2,629,009       1,712,212       2,413,195
Segment liabilities                                (2,173,828)       (809,663)       (667,336)
Capital expenditure                                        --              --              --
                                                 ============    ============    ============
</TABLE>

<TABLE>
<CAPTION>
                                                     Unallocated                                     Eliminations
                                              ----------------------------------------------------------------------------
Segment revenue                                       2003            2004            2005            2003            2004
---------------                               ------------    ------------    ------------    ------------    ------------
                                                   RMB'000         RMB'000         RMB'000         RMB'000         RMB'000

                                               (Restated)     (Restated)                        (Restated)       (Restated)
<S>                                           <C>             <C>             <C>             <C>             <C>
Sales to external customers:
    Oil and gas sales                                   --              --              --              --              --
    Marketing revenues                                  --              --              --              --              --
Intersegment revenues                                   --              --              --      (3,730,797)     (3,471,850)
Other income                                         1,820           1,610          20,609              --              --
                                              ------------    ------------    ------------    ------------    ------------
Total                                                1,820           1,610          20,609      (3,730,797)     (3,471,850)
                                              ------------    ------------    ------------    ------------    ------------
Segment results
---------------

Operating expenses                                      --              --              --              --              --
Production taxes                                        --              --              --              --              --
Exploration costs                                       --              --              --              --              --
Depreciation, depletion and amortisation                --              --              --              --              --
Dismantlement                                           --              --              --              --              --
Impairment loss related to  property, plant
      and equipment                                     --              --              --              --              --
Crude oil and product purchases                         --              --              --       3,730,797       3,471,850
Selling and administrative expenses               (521,654)       (496,106)       (654,820)             --              --
Others                                                  --              --              --              --              --
Interest income                                    169,274         204,795         351,966              --              --
Finance costs                                     (273,765)       (241,750)       (822,322)             --              --
Exchange gains/(losses), net                        (6,870)         44,577         292,146              --              --
Investments income                                 123,483          72,438         247,893              --              --
Share of profit of associates                      220,263         344,469         307,075              --              --
Non-operating income/(expenses), net               314,968         519,206          28,579              --              --
Tax                                             (4,627,836)     (6,930,826)    (10,977,812)             --              --
                                              ------------    ------------    ------------    ------------    ------------
Net profit                                      (4,600,317)     (6,481,587)    (11,206,686)             --              --
                                              ------------    ------------    ------------    ------------    ------------
Other segment information
-------------------------

Segment assets                                   6,848,849      31,790,239      34,770,264              --              --
Investment in associates                         1,117,640       1,327,109       1,401,839              --              --
                                              ------------    ------------    ------------    ------------    ------------
Total assets                                     7,966,489      33,117,348      36,172,103              --              --
Segment liabilities                             (8,419,109)    (21,182,195)    (22,430,991)             --              --
Capital expenditure                                 46,868         164,775         144,442              --              --
                                              ============    ============    ============    ============    ============
</TABLE>

<TABLE>
<CAPTION>
                                                                    Consolidated
                                              ------------------------------------------------------------
Segment revenue                                       2005            2003            2004            2005
---------------                               ------------    ------------    ------------    ------------
                                                   RMB'000         RMB'000         RMB'000         RMB'000

                                                                (Restated)      (Restated)
<S>                                           <C>             <C>             <C>             <C>
Sales to external customers:
    Oil and gas sales                                   --      28,116,831      36,886,019      53,417,669
    Marketing revenues                                  --      12,398,661      18,191,353      15,901,325
Intersegment revenues                           (9,065,600)             --              --              --
Other income                                            --         434,781         144,691         136,749
                                              ------------    ------------    ------------    ------------
Total                                           (9,065,600)     40,950,273      55,222,063      69,455,743
                                              ------------    ------------    ------------    ------------
Segment results
---------------

Operating expenses                                      --      (4,512,809)     (5,070,344)     (5,934,598)
Production taxes                                        --      (1,238,598)     (1,725,674)     (2,596,543)
Exploration costs                                       --        (848,072)     (1,316,160)     (1,293,687)
Depreciation, depletion and amortisation                --      (4,642,753)     (5,455,062)     (5,964,740)
Dismantlement                                           --        (167,326)       (201,637)       (252,857)
Impairment loss related to  property, plant
      and equipment                                     --              --              --         (90,190)
Crude oil and product purchases                  9,065,600     (12,295,238)    (17,963,461)    (15,704,100)
Selling and administrative expenses                     --      (1,250,270)     (1,104,348)     (1,370,368)
Others                                                  --        (350,232)        (45,844)        (77,062)
Interest income                                         --         183,576         206,872         359,294
Finance costs                                           --        (354,940)       (441,825)     (1,100,532)
Exchange gains/(losses), net                            --          (6,746)         29,269         287,027
Investments income                                      --         123,483          72,438         247,893
Share of profit of associates                           --         220,263         344,469         307,075
Non-operating income/(expenses), net                    --         314,968         519,206          28,579
Tax                                                     --      (4,627,836)     (6,930,826)    (10,977,812)
                                              ------------    ------------    ------------    ------------
Net profit                                              --      11,497,743      16,139,136      25,323,122
                                              ------------    ------------    ------------    ------------
Other segment information
-------------------------

Segment assets                                          --      72,386,662      92,474,751     113,363,225
Investment in associates                                --       1,117,640       1,327,109       1,401,839
                                              ------------    ------------    ------------    ------------
Total assets                                            --      73,504,302      93,801,860     114,765,064
Segment liabilities                                     --     (26,767,770)    (37,359,070)    (41,161,967)
Capital expenditure                                     --       8,271,564      19,620,011      16,865,675
                                              ============    ============    ============    ============
</TABLE>


                                     F-36
<PAGE>

                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)

6.    SEGMENT INFORMATION (CONT'D)

      (b)   Geographical segments

            In determining the Group's geographical segments, revenues and
            results are attributed to the segments based on the location of
            the Group's customers, and assets are attributed to the segments
            based on the location of the Group's assets.

            The Group mainly engaged in the exploration, development and
            production of crude oil and natural gas in offshore China. Any
            activities outside the PRC are mainly conducted in Indonesia,
            Australia, Canada and Singapore. The following table presents
            revenue and certain asset and expenditure information for the
            Group's geographical segments for the years ended December 31,
            2005 and 2004.

<TABLE>
<CAPTION>
                                     PRC                             Outside PRC                            Total
                      ----------------------------------  ----------------------------------  -----------------------------------
                         2003        2004        2005        2003        2004        2005        2003        2004        2005
                      ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  -----------
                         RMB'000     RMB'000     RMB'000     RMB'000     RMB'000     RMB'000     RMB'000     RMB'000      RMB'000

                      (Restated)  (Restated)                                                  (Restated)  (Restated)
<S>                   <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>          <C>
External sales        25,416,466  30,453,453  38,992,740  15,533,807  24,768,610  30,463,003  40,950,273  55,222,063   69,455,743

Segment assets        61,357,931  75,023,500  92,845,974  12,146,371  18,778,360  21,919,090  73,504,302  93,801,860  114,765,064

Capital expenditures   7,727,171  12,014,894  14,496,690     544,393   7,605,117   2,368,985   8,271,564  19,620,011   16,865,675
</TABLE>

(c)   An analysis of sales to major customers by business segment is as
      follows:

<TABLE>
<CAPTION>
                                                     2003          2004          2005
                                              -----------   -----------   -----------
<S>                                             <C>           <C>           <C>
                                                  RMB'000       RMB'000       RMB'000
      Production sharing contracts
      China Petroleum & Chemical Corporation    3,848,361     6,932,008     9,996,768
      PetroChina Company Limited                1,446,169     1,944,709     1,410,369
      Castle Peak Power Company Limited           841,285     1,070,436     1,107,314
                                              -----------   -----------   -----------
                                                6,135,815     9,947,153    12,514,451
                                              -----------   -----------   -----------

      Independent operations
      China Petroleum & Chemical Corporation    3,126,708     3,702,058     5,628,968
      PetroChina Company Limited                       --            --       365,830
                                              -----------   -----------   -----------
                                                3,126,708     3,702,058     5,994,798
                                              -----------   -----------   -----------
                                                9,262,523    13,649,211    18,509,249
                                              ===========   ===========   ===========

7.    OIL AND GAS SALES

                                                     2003          2004          2005
                                              -----------   -----------   -----------
                                                  RMB'000       RMB'000       RMB'000

      Gross sales                              30,556,967    39,955,702    57,988,465
      Royalties                                  (478,454)     (610,055)     (708,537)
      PRC government share oil                 (1,961,682)   (2,459,628)   (3,862,259)
                                              -----------   -----------   -----------

                                               28,116,831    36,886,019    53,417,669
                                              ===========   ===========   ===========
</TABLE>


                                     F-37
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


8.    MARKETING PROFIT

<TABLE>
<CAPTION>
                                                                               2003          2004          2005
                                                                        -----------   -----------   -----------
                                                                            RMB'000       RMB'000       RMB'000

<S>                                                                      <C>           <C>           <C>
      Marketing revenues                                                 12,398,661    18,191,353    15,901,325
      Crude oil and product purchases                                   (12,295,238)  (17,963,461)  (15,704,100)
                                                                        -----------   -----------   -----------
                                                                            103,423       227,892       197,225
                                                                        ===========   ===========   ===========

9.    SELLING AND ADMINISTRATIVE EXPENSES

                                                                               2003          2004          2005
                                                                        -----------   -----------   -----------
                                                                            RMB'000       RMB'000       RMB'000
                                                                         (Restated)    (Restated)
      Salary and staff benefits                                             393,165       311,649       392,791
      Utility and office expenses                                            90,801       115,817       143,204
      Transportation and entertainment                                       74,218        75,675        94,590
      Rentals and maintenance                                               107,310       128,579       111,426
      Management fee                                                        219,771       218,087       243,730
      Selling expenses                                                       30,686        36,015        32,983
      (Reversal) of/Provision for inventory obsolescence                      8,745        (2,710)       33,088
      Other                                                                 325,574       221,236       318,556
                                                                        -----------   -----------   -----------

                                                                          1,250,270     1,104,348     1,370,368
                                                                        ===========   ===========   ===========

10.   FINANCE COSTS

                                                                               2003          2004          2005
                                                                        -----------   -----------   -----------
                                                                            RMB'000       RMB'000       RMB'000
      Interest on bank loans which are:
         - wholly repayable within five years                                81,539        80,829        98,892
      Interest on long term guaranteed notes                                391,005       485,812       671,849
      Other borrowing costs                                                  34,933           163         3,773
                                                                        -----------   -----------   -----------
      Total interest                                                        507,477       566,804       774,514

      Less: Amount capitalised in property, plant
                  and equipment (note 16)                                  (245,783)     (244,686)     (245,987)
                                                                        -----------   -----------   -----------
                                                                            261,694       322,118       528,527
      Other finance costs:
      Increase in discounted amount of provisions arising from
        the passage of time (note 28)                                        93,246       119,707       198,945
      Loss on embedded derivative component in convertible bonds                 --            --       373,060
                                                                        -----------   -----------   -----------
                                                                            354,940       441,825     1,100,532
                                                                        ===========   ===========   ===========
</TABLE>

      The interest rates used for interest capitalisation represented the
      cost of capital from raising the related borrowings and varied from
      4.1% to 9.2% per annum for the year ended December 31, 2005(2004:4.1%
      to 9.2%, 2003:4.1% to 9.15%).


                                     F-38
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)

11.   DIRECTORS' REMUNERATION AND SHARE OPTION BENEFITS

      Directors' remuneration and share option benefits for the year,
      disclosed pursuant to the Listing Rules and Section 161 of the Companies
      Ordinance, are as follows:


<TABLE>
<CAPTION>
                                                                           2003          2004          2005
                                                                        RMB'000       RMB'000       RMB'000
                                                                   ------------  ------------  ------------
                                                                     (Restated)    (Restated)
<S>                                                                       <C>             <C>         <C>
       Fees for executive directors                                          --            --            --
       Fees for non-executive directors**                                 1,000           851         2,360

       Other emoluments for executive directors
            - Basic salaries and allowances and benefit in kind**         7,752         7,756        12,988
            - Bonus                                                       2,100            --            --
            - Pension scheme contribution                                   207            62           104
                                                                   ------------  ------------  ------------

      Amount paid/payable during the year                                11,059         8,669        15,452

       Share option benefits*                                             7,295         9,208         8,561
                                                                   ------------  ------------  ------------

                                                                         18,354        17,877        24,013
                                                                   ============  ============  ============
</TABLE>


                                     F-39
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


11.   DIRECTORS' REMUNERATION AND SHARE OPTION BENEFITS (CONT'D)

      (a)   Independent non-executive directors

            The fees paid/payable to independent non-executive directors
            during the year were as follows:

                                                   2004          2005
                                                RMB'000       RMB'000
                                                ---------------------

      So Chak Kwong                                  --            --
      Chiu Sung Hong                                213           619
      Evert Henks                                   213           619
      Kenneth S Courtis                             213           619
      Erwin Schurtenberger                          213           350
      Tse Hau Yin, Aloysius                          --           153
      Lawrence J. Lau                                --            --
                                                =====================


      Professor Lawrence J. Lau, appointed as the independent non-executive
      director of the Company on August 31, 2005, waived his remuneration in
      2005.

      (b)   Executive directors and independent non-executive directors

<TABLE>
<CAPTION>
                                                  Salaries,                                    Amount
                                                 allowances   Performance       Pension  paid/payable
                                               and benefits       related        scheme        during  Share option
                                       Fees**     In kind**       bonuses contributions      the year     benefits*         Total
                                      RMB'000       RMB'000       RMB'000       RMB'000       RMB'000       RMB'000       RMB'000
                                   ----------------------------------------------------------------------------------------------
      <S>                          <C>         <C>            <C>         <C>            <C>           <C>                <C>
      2005
      Executive directors:
      Chengyu Fu                           --         4,411            --            --         4,411         2,236         6,647
      Shouwei Zhou                         --         3,519            --            82         3,601         1,653         5,254
      Han Luo                              --         1,291            --            --         1,291         1,086         2,377
      Xinghe Cao                           --           430            --            --           430           269           699
      Zhenfang Wu                          --           430            --            --           430           269           699
      Guangqi Wu                           --         1,377            --            --         1,377           542         1,919
      Hua Yang                             --           967            --            22           989         1,086         2,075
      Longsheng Jiang                      --           563            --            --           563            55           618
                                   ----------------------------------------------------------------------------------------------

      Independent non-executive
        directors:
      Chiu Sunghong                       619            --            --            --           619           437         1,056
      Evert Henks                         619            --            --            --           619           437         1,056
      Kenneth S Courtis                   619            --            --            --           619           437         1,056
      Tse Hau Yin, Aloysius               350            --            --            --           350            --           350
      Erwin Schurtenberger***             153            --            --            --           153            54           207
      Lawrence J. Lau                      --            --            --            --            --            --            --
                                   ----------------------------------------------------------------------------------------------
</TABLE>


                                     F-40
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


11.   DIRECTORS' REMUNERATION AND SHARE OPTION BENEFITS (CONT'D)

      (b)   Executive directors and independent non-executive directors
            (cont'd)

<TABLE>
<CAPTION>
                                                  Salaries,                                    Amount
                                                 allowances   Performance       Pension  paid/payable
                                               and benefits       related        scheme        during  Share option
                                       Fees**     In kind**       bonuses contributions      the year     benefits*         Total
                                      RMB'000       RMB'000       RMB'000       RMB'000       RMB'000       RMB'000       RMB'000
                                    ---------------------------------------------------------------------------------------------
      <S>                           <C>        <C>            <C>         <C>            <C>           <C>                <C>
      2004
      Executive directors:
      Chengyu Fu                           --         3,934            --            --         3,934         2,077         6,011
      Han Luo                              --           561            --            --           561         1,107         1,668
      Shouwei Zhou                         --         2,710            --            62         2,772         1,685         4,457
      Longsheng Jiang                      --           551            --            --           551         1,107         1,658
                                    ---------------------------------------------------------------------------------------------

      Independent non-executive
        directors:
      Chiu Sunghong                       213            --            --            --           213           808         1,021
      Evert Henks                         213            --            --            --           213           808         1,021
      Kenneth S Courtis                   213            --            --            --           213           808         1,021
      Erwin Schurtenberger                213            --            --            --           213           808         1,021
                                    ---------------------------------------------------------------------------------------------
</TABLE>

      *     During the year, certain directors were granted share options in
            respect of their services to the Group under the applicable share
            option schemes of the Company, further details of which are set
            out in note 29 to the financial statements. Share option benefits
            represent the fair value at grant date of share options issued
            under the share option schemes of the Company amortised to the
            income statement during the year disregarding whether the options
            have been exercised or not, and have been disclosed in accordance
            with HKFRS 2. No share options were exercised by the directors
            during the year.

      **    Fees and salaries, allowances and benefits in kind represent the
            gross amount (before Hong Kong individual salary tax) paid/
            payable to individual directors.

      ***   On April 1, 2005, Mr. Erwin Schurtenberger surrendered 1,150,000
            share options following his resignation as an independent
            non-executive director of the Company.

      Save as disclosed above, there was no arrangement under which a director
      waived or agreed to waive any remuneration during the year.


                                     F-41
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


12.   FIVE HIGHEST PAID EMPLOYEES

      The five highest paid employees during the year included three (2004:
      Nil, 2003: Nil) directors and two (2004: five, 2003: five) non-directors
      are as follows:

<TABLE>
<CAPTION>
                                                                2003          2004          2005
                                                        ------------  ------------  ------------
                                                             RMB'000       RMB'000       RMB'000
                                                          (Restated)    (Restated)
<S>                                                           <C>           <C>           <C>
      Basic salaries, allowances and benefits in kind*        18,600        20,509        15,843
      Bonus                                                    2,550         4,589           471
      Pension scheme contributions                             1,332         1,509           542
                                                        ------------  ------------  ------------

      Amount paid/payable during the year                     22,482        26,607        16,856

      Share option benefits**                                     --         1,107         4,975
                                                        ------------  ------------  ------------
                                                              22,482        27,714        21,831
                                                        ============  ============  ============

      Number of directors                                         --            --             3
      Number of employees                                          5             5             2
</TABLE>


      *Salaries, allowances and benefits in kind represent the gross amount
      (before Hong Kong individual salary tax) paid/payable to individual
      employees.

      **Share option benefits represent fair value at grant date of share
      options issued under the share option schemes of the Company amortised
      to the income statement during the year disregarding whether the options
      have been exercised or not, and have been disclosed in accordance with
      HKFRS2. No share options were exercised by the relevant employees during
      the year.

      The number of highest paid employees whose remuneration fell within the
      following bands is as follows:

                                                  Number of employees
                                            ------------------------------
                                                    2004         2005
                                                ------------  ------------
      Nil to HK$3,000,000                                  -             1
      HK$3,000,001- HK$3,500,000                           1             1
      HK$3,500,001- HK$4,000,000                           1             -
      HK$4,000,001- HK$4,500,000                           1             1
      HK$4,500,001- HK$5,000,000                           -             -
      HK$5,000,001- HK$5,500,000                           -             1
      HK$5,500,001- HK$6,000,000                           1             -
      HK$6,000,001- HK$8,000,000                           -             1
      HK$8,000,001- HK$8,500,000                           1             -
                                                ------------  ------------
                                                           5             5
                                                ============  ============

      During the year, share options were granted to certain of the five
      highest paid employees in respect of their services to the Group,
      further details of which are included in the disclosures in note 29 to
      the financial statements.


                                     F-42
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


13.   TAX

      (i)   Income tax

            The Company and its subsidiaries are subject to income taxes on an
            entity basis on profit arising in or derived from the tax
            jurisdictions in which they are domiciled and operated. The
            Company is not liable for profits tax in Hong Kong as it does not
            have any assessable income currently sourced from Hong Kong.

            The Company's subsidiary in the PRC, CNOOC China Limited, is a
            wholly foreign-owned enterprise. It is exempt from the 3% local
            surcharge and is subject to an enterprise income tax of 30% under
            the prevailing tax rules and regulations.

            The Company's subsidiary in Singapore, China Offshore Oil
            (Singapore) International Pte Ltd., is subject to income tax at
            rates of 10% and 20%, for its oil trading activities and other
            income generating activities, respectively. The Company's
            subsidiaries owning interests in oil and gas properties in
            Indonesia along the Malacca Strait are subject to corporate and
            dividend tax at the rate of 44%. The Company's subsidiaries owning
            interests in oil and gas properties in Indonesia acquired from
            Repsol YPF, S.A. are subject to corporate and dividend tax at the
            rate of 43.125% to 51.875%. All of the Company's other
            subsidiaries are not subject to any income taxes in their
            respective jurisdictions for the year presented.

            An analysis of the provision for tax in the consolidated income
            statement was as follows:


                                         2003           2004           2005
                                 ------------   ------------   ------------
                                      RMB'000        RMB'000        RMB'000
      Overseas income taxes
          - Current                   654,988        755,568        845,390
          - Deferred                 (179,134)      (170,118)        14,907
      PRC enterprise income tax
          - Current                 3,623,157      6,411,417      9,912,426
          - Deferred                  528,825        (66,041)       205,089
                                 ------------   ------------   ------------

      Tax charge for the year       4,627,836      6,930,826     10,977,812
                                 ============   ============   ============

      A reconciliation of the statutory PRC enterprise income tax rate to the
      effective income tax rate of the Group is as follows:

<TABLE>
<CAPTION>
                                                                       2003           2004           2005
                                                               ------------   ------------   ------------
                                                                          %              %              %
                                                                 (Restated)     (Restated)
<S>                                                                    <C>            <C>            <C>
      Statutory PRC enterprise income tax rate                         33.0           33.0           33.0
      Effect of tax exemption granted                                  (3.0)          (3.0)          (3.0)
      Effect of different tax rates for overseas subsidiaries          (0.1)           0.3            0.5
      Tax credit from government                                       (1.4)          (0.6)          (0.3)
      Tax effect on other permanent differences                         0.2            0.3            0.0
                                                               ------------   ------------   ------------
      Effective income tax rate                                        28.7           30.0           30.2
                                                               ============   ============   ============
</TABLE>


                                     F-43
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


13.   TAX (CONT'D)

      (i)   Income tax (cont'd)

            The tax effect of significant temporary differences of the Group
            was as follows:

<TABLE>
<CAPTION>
                                                                                     2003         2004         2005
                                                                               ----------   ----------   ----------
                                                                                  RMB'000      RMB'000      RMB'000

            <S>                                                                <C>          <C>           <C>
            Deferred tax assets
              - Provision for retirement and termination benefits                 114,758      112,150       98,696
              - Provision for dismantlement                                       775,725      926,834    1,248,498
              - Provision for impairment of property, plant and
                 equipment and write-off of unsuccessful
                 exploratory drillings                                            759,454      869,286      886,402
                                                                               ----------   ----------   ----------
                                                                                1,649,937    1,908,270    2,233,596
                                                                               ----------   ----------   ----------

            Deferred tax liabilities
              - Accelerated amortisation allowance for oil and gas properties  (7,433,133)  (8,596,768)  (9,061,512)
                                                                               ----------   ----------   ----------

            Net deferred tax liabilities                                       (5,783,196)  (6,688,498)  (6,827,916)
                                                                               ==========   ==========   ==========
</TABLE>


      As at December 31, 2005, there was no significant unrecognised deferred
      tax liability (2004: Nil) for taxes that would be payable on the
      unremitted earnings of certain of the Group's subsidiaries and
      associates as the Group had no liability to additional tax should such
      amounts be remitted.

      There are no income tax consequences attaching to the payment of
      dividends by the Company to its shareholders.

      (ii)  Other taxes

            The Company's PRC subsidiary pays the following other taxes:

            --    Production taxes equal to 5% of independent production and
                  production under production sharing contracts; and

            --    Business tax of 3% to 5% on other income.

14.   DIVIDENDS

      On August 30, 2005, the Board of Directors declared an interim dividend
      of HK$0.05 per share (2004: HK$0.03 per share), totaling
      HK$2,052,733,769 (equivalent to approximately RMB2,138,128,000) (2004:
      RMB1,306,451,000); and a special interim dividend of HK$0.05 per share
      (2004: HK$0.05 per share), totaling HK$2,052,733,769 (equivalent to
      approximately RMB2,138,128,000) (2004: RMB2,177,418,000). In addition,
      the Company paid a special interim dividend in 2004 of HK$0.06 per
      share, totaling HK$2,464,249,697 (equivalent to approximately
      RMB2,617,526,000) in place of its 2003 final dividend.


                                     F-44
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


14.   DIVIDENDS (CONT'D)

      The Board of Directors have recommended a final dividend of HK$0.10 per
      ordinary share, totaling HK$4,105,467,538 (approximately equivalent to
      RMB4,250,391,000) for the year ended December 31, 2005.

      The payment of future dividends will be determined by the Company's
      Board of Directors. The payment of dividends will depend upon, among
      other things, future earnings, capital requirements, financial
      conditions and general business conditions of the Company. The Company's
      ability to pay dividends will also depend on the cash flows determined
      by the dividends, if any, received by the Company from its subsidiaries
      and associates. As the controlling shareholder, CNOOC will be able to
      influence the Company's dividend policy.

      Cash dividends to the shareholders in Hong Kong will be paid in Hong
      Kong dollars. Cash dividends to the American Depositary Receipts ("ADR")
      holders will be paid to the depositary in Hong Kong dollars and will be
      converted by the depositary into United States dollars and paid to the
      holders of ADRs.

15.   EARNINGS PER SHARE

<TABLE>
<CAPTION>
                                                                                         2003              2004              2005
                                                                              ---------------   ---------------   ---------------
                                                                                      RMB'000           RMB'000           RMB'000
                                                                                   (Restated)        (Restated)
      <S>                                                                     <C>               <C>               <C>
      Earnings
      --------

      Net profit from ordinary activities attributable
               to shareholders for the year for the
               purpose of basic earnings per share                                 11,497,743        16,139,136        25,323,122
      Interest expense and losses recognised on the
               derivative component of
               convertible bonds                                                           --                --           537,469
      Net profit from ordinary activities attributable to
               shareholders for the year for the purpose
               of diluted earnings per share                                       11,497,743        16,139,136        25,860,591

      Shares (after Stock Split)

      Number of shares
      Weighted average number of ordinary
               shares for the purpose or basic earnings
               per share before effects of shares
               repurchased and  share options exercised                        41,070,828,275    41,070,828,275    41,052,375,275

       Effects of shares repurchased                                                       --       (10,587,616)               --
       Effects of shares options exercised                                                 --                --         2,124,707
                                                                              ---------------   ---------------   ---------------

       Weighted average number of ordinary shares for the
               purpose of basic earnings per share                             41,070,828,275    41,060,240,659    41,054,499,982
                                                                              ---------------   ---------------   ---------------

       Effect of dilutive potential ordinary shares
               under the shares option scheme                                      39,510,820        66,720,503        38,861,432

       Effect of dilutive potential ordinary shares for convertible bonds                  --        52,552,274     1,292,694,352
                                                                              ---------------   ---------------   ---------------

       Weighted average number of ordinary shares for the purpose of diluted
               earnings per share                                              41,110,339,095    41,179,513,436    42,386,055,766
                                                                              ===============   ===============   ===============
</TABLE>


                                     F-45
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


15.   EARNINGS PER SHARE (CONT'D)

      Net income per ADS for the three years ended December 31, 2005 has been
      computed by dividing net income by the number of ADS outstanding. Each
      ADS represented 100 shares.

      The calculation of basic earnings per share amounts is based on the net
      profit for the year and the weighted average number of ordinary shares
      in issue during the year.

      The calculation of diluted earnings per share amounts is based on the
      net profit for the year, adjusted to reflect the interest expense and
      losses recognised on the derivative component of the convertible bonds.
      The weighted average number of ordinary shares used in the calculation
      is the ordinary shares in issue during the year, as used in the basic
      earnings per share calculation, and the weighted average number of
      ordinary shares assumed to have been issued at no consideration on the
      deemed exercise or conversion of all the dilutive potential ordinary
      shares into ordinary shares.


                                     F-46
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


16.   PROPERTY, PLANT AND EQUIPMENT, NET

      Movements in the property, plant and equipment of the Group are as
      follows:


<TABLE>
<CAPTION>
                                                                                          2005
                                                                 ---------------------------------------------------------
                                                                                               Vehicles and
                                                                 Oil and gas     Land and        office
                                                                  properties     buildings      equipment         Total
                                                                 ------------   ------------   ------------   ------------
                                                                    RMB'000        RMB'000        RMB'000        RMB'000
      <S>                                                        <C>            <C>            <C>            <C>
      Cost:
      At beginning of the year as previously reported              89,917,894        941,578        187,705     91,047,177
      Cumulative adjustment for the adoption of HKAS 16               666,907       (941,578)             -       (274,671)
                                                                 ------------   ------------   ------------   ------------

      At beginning of the year as restated                         90,584,801              -        187,705     90,772,506
      Additions                                                    17,500,195              -        146,226     17,646,421
      Acquisition (including prepayments)                                   -              -              -              -
      Transfer from prepayment to  intangible assets upon
          completion of acquisition                                (1,299,643)             -              -     (1,299,643)
      Purchase price adjustment                                      (152,993)             -              -       (152,993)
      Disposals and write-off                                               -              -        (14,511)       (14,511)
      Exchange realignment                                           (504,132)             -             (6)      (504,138)
                                                                 ------------   ------------   ------------   ------------

      End of year                                                 106,128,228              -        319,414    106,447,642
                                                                 ============   ============   ============   ============
      Accumulated depreciation, depletion and amortisation:
      At beginning of the year as previously reported             (33,414,136)      (132,455)       (43,889)   (33,590,480)
      Cumulative adjustment for the adoption of HKAS 16              (132,455)       132,455              -              -
                                                                 ------------   ------------   ------------   ------------
      At beginning of the year as restated                        (33,546,591)             -        (43,889)   (33,590,480)
      Depreciation provided during the year                        (6,176,784)             -        (57,248)    (6,234,032)
      Impairment recognised in  the income statement during the
          year                                                        (90,190)             -             --        (90,190)
      Disposals                                                             -              -          4,881          4,881
      Exchange realignment                                             87,346              -              -         87,346
                                                                 ------------   ------------   ------------   ------------

      End of year                                                 (39,726,219)             -        (96,256)   (39,822,475)
                                                                 ============   ============   ============   ============
      Net book value:
      Beginning of year as previously reported                     56,503,758        809,123        143,816     57,456,697
                                                                 ============   ============   ============   ============
       Beginning of the year as restated                           57,038,210              -        143,816     57,182,026
                                                                 ============   ============   ============   ============

      End of year                                                  66,402,009             --        223,158     66,625,167
                                                                 ============   ============   ============   ============
</TABLE>


                                     F-47
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


16.   PROPERTY, PLANT AND EQUIPMENT, NET (CONT'D)

<TABLE>
<CAPTION>
                                                                                       2004
                                                             ---------------------------------------------------------
                                                                                           Vehicles and
                                                              Oil and gas       Land and         office
                                                               properties      buildings      equipment          Total
                                                             ------------   ------------   ------------   ------------
                                                                  RMB'000        RMB'000        RMB'000        RMB'000
      <S>                                                    <C>               <C>            <C>         <C>
      Cost:
      At beginning of the year as previously reported          70,137,828        824,781        139,902     71,102,511
      Cumulative adjustment for the adoption of HKAS 16           550,110       (824,781)             -       (274,671)
                                                             ------------   ------------   ------------   ------------
      At beginning of the year as restated                     70,687,938              -        139,902     70,827,840
      Additions                                                12,962,164              -         47,977     13,010,141
      Acquisition (including prepayments)                       6,934,951              -              -      6,934,951
      Disposals and write-off                                          (3)             -           (174)          (177)
      Exchange realignment                                           (249)             -              -           (249)
                                                             ------------   ------------   ------------   ------------

      End of year                                              90,584,801              -        187,705     90,772,506
                                                             ============   ============   ============   ============

      Accumulated depreciation, depletion and amortisation:
      At beginning of year as previously reported             (27,839,105)      (106,401)       (33,204)   (27,978,710)
      Cumulative adjustment for the adoption of HKAS 16          (106,401)       106,401              -              -
                                                             ------------   ------------   ------------   ------------
      At beginning of the year as restated                    (27,945,506)             -        (33,204)   (27,978,710)
      Depreciation provided during the year                    (5,601,168)             -        (10,882)    (5,612,050)
      Disposals                                                         -              -              5              5
      Exchange realignment                                             83              -            192            275
                                                             ------------   ------------   ------------   ------------

      End of year                                             (33,546,591)             -        (43,889)   (33,590,480)
                                                             ============   ============   ============   ============

      Net book value:
      Beginning of the year as previously reported             42,298,723        718,380        106,698     43,123,801
                                                             ============   ============   ============   ============

      Beginning of the year as restated                        42,742,432              -        106,698     42,849,130
                                                             ============   ============   ============   ============
      End of year                                              57,038,210              -        143,816     57,182,026
                                                             ============   ============   ============   ============
</TABLE>

      Included in the current year additions was an amount of approximately
      RMB245,987,000 (2004: RMB244,686,000) in respect of interest capitalised
      in property, plant and equipment.


                                     F-48
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


17.   INTANGIBLE ASSETS

      During the year, the Company completed the acquisition of the NWS
      Project. Accordingly, the consideration allocated to the gas processing
      rights is recorded as an intangible asset and will be amortised upon the
      commercial production of the liquefied natural gas using the unit of
      production method.

18.   INVESTMENTS IN ASSOCIATES

      Investments in associates represent (1) a 30% equity interest of CNOOC
      China Limited in Shanghai Petroleum and Natural Gas Company Limited
      ("SPC"). SPC was incorporated on September 7, 1992 in the PRC with
      limited liability and is principally engaged in offshore petroleum
      exploration, development, production and sale in the South Yellow Sea
      and East China Sea areas. The issued and paid-up capital of SPC is
      RMB900 million; and (2) a 31.8% equity interest of CNOOC China Limited
      in CNOOC Finance Corporation Limited. CNOOC Finance Corporation Limited
      was incorporated on June 14, 2002 in the PRC with limited liability and
      is principally engaged in deposit-taking, transfer, settlement, loan,
      discounting and other financing services to CNOOC and its member
      entities. The issued and paid-up capital of CNOOC Finance Corporation
      Limited is RMB1,415 million.


                                   2004          2005
                           ------------  ------------
                                RMB'000      RMB' 000

      Share of net assets     1,327,109     1,401,839
                           ============  ============


                                     F-49
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


19.   ACCOUNTS RECEIVABLE, NET

      The Group's trading terms with its customers are mainly on credit,
      except for new customers, where payment in advance is normally required.
      The customers are required to make payment within 30 days after the
      delivery of oil and gas. Trade receivables are non-interest-bearing.

      As at December 31, 2005 and 2004, substantially all the accounts
      receivable were aged within six months.

20.   INVENTORIES AND SUPPLIES


                                                            2004           2005
                                                       ---------      ---------
                                                         RMB'000        RMB'000

      Materials and supplies                             879,300        969,915
      Oil in tanks                                       274,029        268,834
      Less: Provision for inventories obsolescence        (6,035)       (39,123)
                                                       ---------      ---------
                                                       1,147,294      1,199,626
                                                       =========      =========

21.   AVAILABLE-FOR-SALE FINANCIAL ASSETS (CURRENT) /SHORT TERM INVESTMENTS

      As at December 31, 2005 and 2004, available-for-sale financial asset
      mainly represented investments in liquidity funds and were stated at
      fair value at the balance sheet date. Details of the available-for-sale
      financial asset were as follows:

                                                   2004          2005
                                           ------------  ------------
                                                RMB'000       RMB'000
      Unlisted investments, at fair value
            Liquidity funds                   3,763,959    13,185,139
            Corporate bonds                   1,639,956       199,877
            Common stock                         40,198            --
                                           ------------  ------------

      Listed investments, at fair value
            Common stock                             --       461,919
                                           ------------  ------------
                                              5,444,113    13,846,935
                                           ============  ============

      The fair values of listed investments are based on quoted market prices.
      The fair values of unlisted investments are based on the prices quoted
      by fund managers. The directors believe that the estimated fair values
      quoted by fund managers, which are recorded in the consolidated balance
      sheet, and the related changes in fair values, which are recorded in the
      consolidated balance sheet or income statement, are reasonable, and that
      they are the most appropriate values at the balance sheet date.

      During the year, the gross gain of the Group's and the Company's
      available-for-sale investments recognised directly in equity amounted to
      RMB69,069,142 and RMB64,900,590.


                                     F-50
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


22.       ACCOUNTS PAYABLE

          As at December 31, 2005 and 2004, substantially all the accounts
          payable were aged within six months. The accounts payable are
          non-interest-bearing and are normally settled within six months.

23.       OTHER PAYABLES AND ACCRUED LIABILITIES

<TABLE>
<CAPTION>
                                                                 2004          2005
                                                         ------------  ------------
                                                              RMB'000       RMB'000

       <S>                                                        <C>           <C>
       Accrued payroll and welfare payable                    156,706       178,872
       Provision for retirement and termination benefits      292,128       239,591
       Accrued expenses                                     2,818,785     3,411,784
       Advances from customers                                 12,588        22,238
       Royalties payable                                      142,638       297,139
       Other payables                                         768,179     1,057,319
                                                         ------------  ------------

                                                            4,191,024     5,206,943
                                                         ============  ============
</TABLE>

      Other payables are non-interest-bearing and have an average term within
      six months. The fair value of the currency swaps of RMB4,725,000 (2004:
      RMB2,581,000) are included in the other payables of the Group.

24.   LONG TERM BANK LOANS

      As at December 31, 2005, the long term bank loans of the Group were used
      primarily to finance the development of oil and gas properties and to
      meet working capital requirements.

<TABLE>
<CAPTION>
                                                 Effective interest rate and final maturity              2004               2005
                                                 ----------------------------------------------     ---------          ---------
                                                                                                      RMB'000            RMB'000
      <S>                                        <C>                                                <C>                <C>
      US$ denominated bank loans                  Effective interest rate of 9.2% per annum with
                                                     maturities through to 2006                       827,650            812,759

      Japanese Yen denominated bank loans         Effective interest rate of 4.1% per annum with
                                                     maturities through to 2007                        61,925             37,307
                                                                                                    ---------          ---------
                                                                                                      889,575            850,066

      Less: Current portion of long term bank loans                                                   (24,364)          (825,674)
                                                                                                    ---------          ---------
                                                                                                      865,221             24,392
                                                                                                    =========          =========
</TABLE>

      As at December 31, 2005 and 2004, all the bank loans of the Group were
      unsecured and none of the outstanding borrowings were guaranteed by
      CNOOC.


                                     F-51
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


24.   LONG TERM BANK LOANS (CONT'D)

      The maturities of the long term bank loans are as follows:


<TABLE>
<CAPTION>
                                                                          2004           2005
                                                                  ------------   ------------
                                                                       RMB'000        RMB'000
<S>                                                                     <C>           <C>
       Balances due:
      - Within one year                                                 24,364        825,674
      - After one year but within two years                            846,471         24,392
      - After two years but within three years                          18,740              -
      - After three years but within four years                              -              -
      - After four years but within five years                               -              -
                                                                       889,575        850,066
                                                                  ------------   ------------

      Amount due within one year shown under current liabilities       (24,364)      (825,674)
                                                                  ------------   ------------
                                                                       865,211         24,392
                                                                  ============   ============
</TABLE>

      Supplemental information with respect to long term bank loans:

<TABLE>
<CAPTION>
                                                                   Maximum       Average       Weighted
                                                   Weighted         amount        amount        average
                                                    average    outstanding   outstanding  interest rate
                                      Balance interest rate     during the    during the     during the
      For the year ended          at year end   at year end           year         year*         year**
      December 31                     RMB'000                      RMB'000       RMB'000
      -------------------         -----------   -----------    -----------   -----------  -------------
      <S>                         <C>           <C>            <C>           <C>          <C>
      2005                            850,066          8.98%       889,575       869,821          8.89%
      2004                            889,575          8.81%       910,193       899,884          8.37%
</TABLE>

      *     The average amount outstanding is computed by dividing the total
            of outstanding principal balances as at January 1 and December 31
            by two.

      **    The weighted average interest rate is computed by dividing the
            total of weighted average interest rates as at January 1 and
            December 31 by two.


                                     F-52
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


25.   LONG TERM GUARANTEED NOTES

      Long term guaranteed notes comprised the following:

      (i)   The principal amount of US$500 million of 6.375% guaranteed notes
            due in 2012 issued by CNOOC Finance (2002) Limited, a wholly-owned
            subsidiary of the Company. The obligations of CNOOC Finance (2002)
            Limited in respect of the notes are unconditionally and
            irrevocably guaranteed by the Company.

      (ii)  The principal amount of US$200 million of 4.125% guaranteed notes
            due in 2013 and the principal amount of US$300 million of 5.500%
            guaranteed notes due in 2033 issued by CNOOC Finance (2003)
            Limited, a wholly-owned subsidiary of the Company. The obligations
            of CNOOC Finance (2003) Limited in respect of the notes are
            unconditionally and irrevocably guaranteed by the Company.

      (iii) The principal amount of US$1 billion zero coupon guaranteed
            convertible bonds due in 2009, unconditionally and irrevocably
            guaranteed by, and convertible into shares of the Company issued
            by CNOOC Finance (2004) Limited, a wholly-owned subsidiary of the
            Company, on December 15, 2004. The bonds are convertible from
            January 15, 2005 onwards at a price of HK$6.075 per share, subject
            to adjustment for, among other things, the subdivision or
            consolidation of shares, bond issues, rights issues, capital
            distribution and other dilutive events. The conversion price was
            adjusted to HK$5.97 per share on June 7, 2005 as a result of the
            declaration of the final and special final dividends for 2004 by
            the Company. Unless previously redeemed, converted or purchased
            and cancelled, the bonds will be redeemed on the maturity date at
            105.114% of the principal amount. CNOOC Finance (2004) Limited has
            an early redemption option at any time after December 15, 2007
            (subject to certain criteria) and a cash settlement option when
            the holders exercise their conversion right. The bondholders also
            have an early redemption option to require CNOOC Finance (2004) to
            redeem all or part of the bonds on December 15, 2007 at an early
            redemption amount of 103.038% of the principal amount.


26.   BALANCES WITH THE PARENT COMPANY

      As at December 31, 2005 and 2004, the balances with CNOOC were
      unsecured, interest-free and were repayable on demand.


27.   RELATED PARTY TRANSACTIONS

      The Group has entered into several agreements with CNOOC and its
      affiliates, which govern the provision of materials, utilities and
      ancillary services, the provision of technical services, the provision
      of research and development services, and various other commercial
      arrangements.

      In addition to the transactions and balances detailed elsewhere in these
      financial statements, the Group had the following material transactions
      with related parties during the year:


                                     F-53
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


27.   RELATED PARTY TRANSACTIONS (CONT'D)

<TABLE>
<CAPTION>
                                                                             2003          2004          2005
                                                                        ---------     ---------     ---------
                                                            Notes         RMB'000       RMB'000       RMB'000
      <S>                                                 <C>           <C>           <C>           <C>
      Materials, utilities and ancillary services                       1,018,066     1,295,598     2,995,772
      Technical services                                     (i)        3,828,282     6,362,206     6,651,240
      Research and development services                     (ii)           83,280         7,800         8,110
      Lease and property management services               (iii)           56,867        76,721        77,273
                                                            (iv)
      Included in:
         Exploration expenses                                             487,293       960,031       753,534
         Operating expenses                                             1,176,601     1,405,877     1,972,431
         Selling and administrative expenses                              191,349       326,004       337,816

      Capitalised under property, plant and equipment                   3,131,252     5,050,413     6,668,614
</TABLE>

      (i)   Materials, utilities and ancillary services

            CNOOC China Limited has entered into materials, utilities and
            ancillary services supply agreements with the affiliates of CNOOC.
            Under these agreements, the affiliates of CNOOC provide to CNOOC
            China Limited various materials, utilities and ancillary services.

            The materials, utilities and ancillary services are provided at:

            --    state-prescribed prices; or

            --    where there is no state-prescribed price, at market prices,
                  including the local or national market prices or the prices
                  at which CNOOC's affiliates previously provided the relevant
                  materials, utilities and ancillary services to independent
                  third parties; or

            --    where neither of the prices mentioned above is applicable,
                  at the cost to CNOOC's affiliates of providing the relevant
                  materials, utilities and services, including the cost of
                  sourcing or purchasing from third parties, plus a margin of
                  not more than 5% before any applicable taxes.

      (ii)  Technical services

            Various affiliates of CNOOC, including China Oilfield Services
            Limited and Offshore Oil Engineering Company Limited, provide the
            Group with technical services for the Group's offshore oil and gas
            production activities, including:

            --    offshore drilling;

            --    ship tugging, oil tanker transportation and security
                  services;

            --    well survey, well logging, well cementation and other
                  related technical services;

            --    collection of geophysical data, ocean geological
                  prospecting, and data processing;

            --    platform fabrication service and maintenance; and

            --    design, construction, installation and test of offshore and
                  onshore production facilities.

            The price for technical services was determined based on local
            market prices.


                                     F-54
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


27.   RELATED PARTY TRANSACTIONS (CONT'D)

      (iii) Research and development services

            The Group has revised the original research and development
            services agreement with China Offshore Oil Research Centre (the
            "Centre"), CNOOC's subsidiary, due to the restructuring of
            operations in 2003, and only pays the Centre for particular
            research and development services. These research and development
            services were determined at local market prices.

      (iv)  Lease and property management services

            The Group has entered into lease and property management services
            agreements with the affiliates of CNOOC for the leasing of various
            office, warehouse and residential premises. Lease charges reflect
            the fair and reasonable commercial market rent and management
            fees.

      (v)   Sale of crude oil, condensated oil and liquefied petroleum gas

            The Group sells crude oil, condensated oil and liquefied petroleum
            gas to CNOOC's affiliates which engage in the downstream petroleum
            business at the international market price. For the year ended
            December 31, 2005, the total sales amounted to approximately
            RMB26,576,247,000 (2004: RMB13,945,565,000).

            In the prior year, the Company, through its wholly-owned
            subsidiary, China Offshore Oil (Singapore) International Pte.,
            Ltd. imported oil into the PRC for trading, using CNOOC's import
            license. The total sales to its customers through such
            arrangements amounted to approximately RMB447 million while the
            commission paid by the third party customers to CNOOC amounted to
            approximately RMB2.7 million for the year ended December 31, 2004.
            No such trading by using CNOOC's import license occurred during
            the year.

      (vi)  Transactions with CNOOC Finance Corporation Limited

            The Company entered into a Framework Agreement with CNOOC Finance
            Corporation Limited ("CNOOC Finance") on April 8, 2004. Under the
            Framework Agreement, the Group utilises the financial services
            provided by CNOOC Finance, a 31.8% owned associate company of the
            Company that is also a subsidiary of CNOOC. Such services include
            placing of the Group's cash deposits with CNOOC Finance, and
            settlement services for transactions between the Group and other
            entities including CNOOC and its subsidiaries. Pursuant to the
            Framework Agreement, the financial services provided by CNOOC
            Finance also include provision of loan. The charges by CNOOC
            Finance for its financial services to the Group are based on the
            pricing policies of CNOOC Finance. Such pricing policies are
            subject to People's Bank of China guidelines, including the
            interest rates and foreign exchange rates, as well as guidelines
            published by PRC self-regulatory bodies, such as associations of
            finance companies. Based on these guidelines, CNOOC Finance has
            limited discretion in setting its prices.

            For the year ended December 31, 2005, the maximum outstanding
            balance for deposits (including interest received in respect of
            these deposits) placed with CNOOC Finance amounted to
            approximately RMB3,922,468,000 (2004: RMB5,300,381,000).


                                     F-55
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


28.   PROVISION FOR DISMANTLEMENT

      Provision for dismantlement represents the estimated costs of
      dismantling offshore oil platforms and abandoning oil and gas
      properties. The provision for dismantlement has been classified under
      long term liabilities. The associated cost is capitalised and the
      liability is discounted and an accretion expense is recognised using the
      credit-adjusted risk-free interest rate in effect when the liability is
      initially recognised. The current year's income statement charge
      represents the amortisation charge on the dismantlement liabilities
      capitalised in accordance with HKAS 37 and is included in the
      accumulated depreciation, depletion and amortisation in note 16.

      The details of the provision for dismantlement are as follows:


<TABLE>
<CAPTION>
                                                                   2004          2005
                                                           ------------  ------------
                                                                RMB'000       RMB'000

<S>                                                        <C>           <C>
      At beginning of year:                                   2,646,800     3,089,448
      Additions during the year and capitalised in oil
        and gas properties                                      322,941       873,270
      Increase in discounted amount of provisions arising
        from the passage of time                                119,707       198,945
                                                           ------------  ------------
      At the end of year                                      3,089,448     4,161,663
                                                           ============  ============
</TABLE>

29.   SHARE CAPITAL

      Shares (after subdivision of shares*)


<TABLE>
<CAPTION>
                                                                                       Issued
                                                                                share capital
                                                             Share capital         equivalent
                                       Number of Shares            HK$'000         of RMB'000
                                       ----------------   ----------------   ----------------
      <S>                              <C>                <C>                <C>
      Authorised:
      Ordinary shares of HK$0.02 each
      at December 31, 2005 and 2004      75,000,000,000          1,500,000
                                       ================   ================

      Issued and fully paid:
      Ordinary shares of HK$0.02 each
      As at January 1, 2004              41,070,828,275            821,417            876,978
      Repurchased and cancelled             (18,453,000)              (369)              (392)
                                       ----------------   ----------------   ----------------

      As at December 31, 2004            41,052,375,275            821,048            876,586
      Exercise of options                     2,300,100                 46                 49
                                       ----------------   ----------------   ----------------
      As at December 31, 2005            41,054,675,375            821,094            876,635
                                       ================   ================   ================
</TABLE>

      *     Adjustment has been made to take account of the subdivision of
            issued and unissued shares of HK$0.10 each into five shares of
            HK$0.02 each effective March 17, 2004.

      The repurchase of the Company's shares during the prior year was
      effected by the directors, pursuant to the mandate from shareholders
      received at the last annual general meeting.


                                     F-56
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


29.   SHARE CAPITAL (CONT'D)

      Share option schemes

      The Company has adopted the following share option schemes for the grant
      of options to the Company's Directors, senior management and other
      eligible grantees:

      1.    Pre-Global Offering Share Option Scheme (as defined below);
      2.    2001 Share Option Scheme (as defined below);
      3.    2002 Share Option Scheme (as defined below); and
      4.    2005 Share Option Scheme (as defined below).

      Under these share option schemes, the Remuneration Committee of the
      Company's Board of Directors will from time to time propose for the
      Board's approval for the recipient of and the number of shares
      underlying each option. The maximum aggregate number of shares
      (including those that could be substituted for under the Pre-Global
      Offering Share Option Scheme, the 2001 Share Option Scheme, the 2002
      Share Option Scheme and the 2005 Share Option Scheme) which may be
      granted shall not exceed 10% of the total issued share capital of the
      Company as at December 31, 2005, being the date on which the
      shareholders of the Company approved a new share option scheme,
      excluding shares issued upon exercise of options granted under these
      schemes from time to time.

      Pre-Global Offering Share Option Scheme
      On February 4, 2001, the Company adopted a pre-global offering share
      option scheme (the "Pre-Global Offering Share Option Scheme"). Pursuant
      to the Pre-Global Offering Share Option Scheme:

      1.    options for an aggregate of 23,100,000 shares have been granted;

      2.    the subscription price per share is HK$1.19; and

      3.    the period during which an option may be exercised is as follows:

            (a)   50% of the rights to exercise the options shall vest 18
                  months after the date of the grant; and

            (b)   50% of the rights to exercise the options shall vest 30
                  months after the date of the grant.

      The exercise periods for options granted under the Pre-Global Offering
      Share Option Scheme shall end not later than 10 years from March 12,
      2001. No further options may be granted under the Pre-Global Offering
      Share Option Scheme.

      2001 Share Option Scheme
      On February 4, 2001, the Company adopted a share option scheme (the
      "2001 Share Option Scheme") for the purposes of recognising the
      contribution that certain individuals had made to the Company and
      attracting and retaining the best available personnel to the Company.
      Pursuant to the 2001 Share Option Scheme:

      1.    options for an aggregate of 44,100,000 shares have been granted;

      2.    the subscription price per share is HK$1.232; and

      3.    the period during which an option may be exercised is as follows:

            (a)   one-third of the rights to exercise the options shall vest
                  on the first anniversary of the date of the grant;


                                     F-57
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


29.   SHARE CAPITAL (CONT'D)

      Share option schemes (cont'd)

      2001 Share Option Scheme (cont'd)

            (b)   one-third of the rights to exercise the options shall vest
                  on the second anniversary of the date of the grant; and

            (c)   one-third of the rights to exercise the options shall vest
                  on the third anniversary of the date of the grant.

      The exercise periods for options granted under the 2001 Share Option
      Scheme shall end not later than 10 years from August 27, 2001.

      In view of the amendments to the relevant provisions of the Rules
      Governing the Listing of Securities on The Stock Exchange of Hong Kong
      Limited (the "Listing Rules") regarding the requirements of share option
      schemes of a Hong Kong listed company effective on September 1, 2001, no
      further options will be granted under the 2001 Share Option Scheme.

      2002 Share Option Scheme
      In June 2002, the Company adopted a new share option scheme (the "2002
      Share Option Scheme").

      Under the 2002 Share Option Scheme, the Directors may, at their
      discretion, invite employees, including Executive Directors, of the
      Company or any of its subsidiaries, to take up options to subscribe for
      shares in the Company. The maximum number of shares which may be granted
      under the 2002 Share Option Scheme to any individual in any 12-month
      period up to the next grant shall not exceed 1% of the total issued
      share capital of the Company from time to time.

      According to the 2002 Share Option Scheme, the consideration payable by
      a participant for the grant of an option will be HK$1.00. The
      subscription price of a share payable by a participant upon the exercise
      of an option is determined by the Directors at their discretion at the
      date of grant, except that such price may not be set below a minimum
      price which is the highest of:

      1.    the nominal value of the share of the Company on the date of the
            grant of the option;

      2.    the average closing price of the shares on The Stock Exchange of
            Hong Kong Limited ("HKSE") as stated in the HKSE's quotations
            sheets for the five trading days immediately preceding the date of
            grant of the option; and

      3.    the closing price of the shares on the HKSE as stated in the
            HKSE's quotations sheets on the date of grant of the option.

      On February 24, 2003, the Board of Directors approved to grant options
      in respect of 42,050,000 shares to the Company's Directors and senior
      management under the 2002 Share Option Scheme. The exercise price for
      such options is HK$2.108 per share. The closing market price immediately
      before the date on which such options were granted was HK$2.11 per
      share. Such options granted under the 2002 Share Option Scheme may be
      exercised, in whole or in part, in accordance with the following vesting
      schedule:

      1.    one-third of the rights to exercise the options shall vest on the
            first anniversary of the date of the grant;

      2.    one-third of the rights to exercise the options shall vest on the
            second anniversary of the date of the grant; and

      3.    one-third of the rights to exercise the options shall vest on the
            third anniversary of the date of the grant.


                                     F-58
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


29.   SHARE CAPITAL (CONT'D)

      Share option schemes (cont'd)

      2002 Share Option Scheme (cont'd)

      The exercise period for the above options granted under the 2002 Share
      Option Scheme shall end not later than 10 years from February 24, 2003.

      On February 5, 2004, the Board of Directors approved a grant of options
      in respect of 50,700,000 shares to the Company's Directors and senior
      management under the 2002 Share Option Scheme. The exercise price for
      such options is HK$3.152 per share. The closing market price immediately
      before the date on which such options were granted was HK$3.146 per
      share. Such options granted under the 2002 Share Option Scheme may be
      exercised, in whole or in part, in accordance with the following vesting
      schedule:

      1.    one-third of the rights to exercise the options shall vest on the
            first anniversary of the date of the grant;

      2.    one-third of the rights to exercise the options shall vest on the
            second anniversary of the date of the grant; and

      3.    one-third of the rights to exercise the options shall vest on the
            third anniversary of the date of the grant.

      The exercise period for the above options granted under the 2002 Share
      Option Scheme shall end not later than 10 years from February 5, 2004.

      On August 31, 2005, the Board of Directors approved a grant of options
      in respect of 65,870,000 shares to the Company's Directors and senior
      management under the 2002 Share Option Scheme. The exercise price of
      such options is HK$5.62 per share. The closing market price immediately
      before the date on which such options were granted was HK$5.75 per
      share. Such options granted under the 2002 Share Option Scheme may be
      exercised, in whole or in part, in accordance with the following vesting
      schedule:

      1.    one-third of the rights to exercise the options shall vest on the
            first anniversary of the date of the grant;

      2.    one-third of the rights to exercise the options shall vest on the
            second anniversary of the date of the grant; and

      3.    one-third of the rights to exercise the options shall vest on the
            third anniversary of the date of the grant.

      The exercise period for the above options granted under the 2002 Share
      Option Scheme shall end not later than 10 years from August 31, 2005.

      2005 Share Option Scheme
      The Company had undertaken a review of the 2002 Share Option Scheme in
      2005 and noted that certain provisions could be clarified and improved.
      Accordingly, the Board had proposed, and on December 31, 2005, the
      Company adopted a new share option scheme ("2005 Share Option Scheme")
      and terminated the 2002 Share Option Scheme. Upon termination of the
      2002 Share Option Scheme, no further options may be granted under the
      2002 Share Option Scheme, but in all other respects the provisions of
      the 2002 Share Option Scheme shall remain in force. The outstanding
      options under the 2002 Share Option Scheme shall continue to be subject
      to the provisions of the 2002 Share Option Scheme, and the adoption of
      the 2005 Share Option Scheme will not in any way affect the terms of the
      exercise of such outstanding options.


                                     F-59
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


29.   SHARE CAPITAL (CONT'D)

      Share option schemes (cont'd)

      2005 Share Option Scheme (cont'd)

      Under the 2005 Share Option Scheme, the Board of the Company will have
      the authority to grant options to subscribe for shares to the Directors,
      officers and employees of the Company and its subsidiaries, and any
      other persons who in sole discretion of the Board have contributed or
      will contribute to the Group. Unless approved by the shareholders, the
      total number of shares issued and to be issued upon exercise of the
      options granted to each individual (including exercised and unexercised
      options) under the 2005 Share Option Scheme or any other share option
      scheme adopted by the Company, in any 12 months period, must not exceed
      1% of the shares in issue.

      According to the 2005 Share Option Scheme, the consideration payable by
      a participant for the grant of an option will be HK$1.00. The
      subscription price of a share payable by a participant upon the exercise
      of an option will be determined by the Directors at their discretion at
      the date of the grant, except that such price may not be set below a
      minimum price which is the highest of:

      1.    the nominal value of the share of the Company on the date of the
            grant of the option;

      2.    the average closing price of the shares on the HKSE as stated in
            the HKSE's quotations sheets for the five trading days immediately
            preceding the date of the grant of the option; and

      3.    the closing price of the shares on the HKSE as stated in the
            HKSE's quotations sheet on the date of the grant of the option.

      The period within which the options must be exercised, as well as any
      minimum holding period or performance targets which apply to the
      options, will be specified by the Board of the Company at the time of
      grant. The exercise period for options granted under the 2005 Share
      Option Scheme shall end not later than 10 years from the date of the
      grant of the option. During the year, no options have been granted or
      exercised under the 2005 Share Option Scheme.


                                     F-60
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


29.   SHARE CAPITAL (CONT'D)

      Share option schemes (cont'd)

      During the year ended December 31, 2005, the movements in the options
      granted under all of the above share option schemes were as follows:

<TABLE>
<CAPTION>


                                              Number of share options
                            -----------------------------------------------------------------------------------------------------

                                             Granted     Exercised    Forfeited       Expired       At 31
Name of category        At  January 1,        during        during       during        during    December       Date of grant of
of participant                    2005      the year      the year     the year      the year        2005       share options

----------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>               <C>           <C>           <C>            <C>        <C>             <C>
Executive Directors
  Chengyu Fu                 1,750,000            --           --            --           --    1,750,000       March 12, 2001
                             1,750,000            --           --            --           --    1,750,000       August 27, 2001
                             1,150,000            --           --            --           --    1,150,000       February 24, 2003
                             2,500,000            --           --            --           --    2,500,000       February 5, 2004
                                    --     3,500,000           --            --           --    3,500,000       August 31, 2005
Han Luo                      1,400,000            --           --            --           --    1,400,000       March 12, 2001
                             1,150,000            --           --            --           --    1,150,000       August 27, 2001
                             1,150,000            --           --            --           --    1,150,000       February 24, 2003
                             1,150,000            --           --            --           --    1,150,000       February 5, 2004
                                    --     1,610,000           --            --           --    1,610,000       August 31, 2005
Shouwei Zhou                 1,400,000            --           --            --           --    1,400,000       March 12, 2001
                             1,750,000            --           --            --           --    1,750,000       August 27, 2001
                             1,750,000            --           --            --           --    1,750,000       February 24, 2003
                             1,750,000            --           --            --           --    1,750,000       February 5, 2004
                                    --     2,450,000           --            --           --    2,450,000       August 31, 2005
Longsheng Jiang *            1,400,000            --           --            --           --    1,400,000       March 12, 2001
                             1,150,000            --           --            --           --    1,150,000       August 27, 2001
                             1,150,000            --           --       383,300           --      766,700       February 24, 2003
                             1,150,000            --           --       766,700           --      383,300       February 5, 2004
                                    --     1,610,000           --     1,610,000           --           --       August 31, 2005
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                                  Price of         Weighted average
                                                                                 Company's           price of the
                                                                                    shares         Company's shares
                                                                          ----------------------------------------------
                                                                   Exercise    Immediately    Immediately
                                                                      price     before the     before the
Name of category         Exercise period of                        of share     grant date       exercise    At exercise
of participant           share options**                            options     of options           date           date
                                                                        HK$            HK$            HK$            HK$
------------------------------------------------------------------------------------------------------------------------
<S>                      <C>                                       <C>          <C>           <C>            <C>
Executive Directors
  Chengyu Fu             March 12, 2001 to March 12, 2011              1.19           1.23             --             --
                         August 27, 2001 to August 27, 2011           1.232           1.46             --             --
                         February 24, 2003 to February 24, 2013       2.108           2.09             --             --
                         February 5, 2004 to February 5, 2014         3.152           3.13             --             --
                         August 31, 2005 to August 31, 2015            5.62           5.75             --             --
Han Luo                  March 12, 2001 to March 12, 2011              1.19           1.23             --             --
                         August 27, 2001 to August 27, 2011           1.232           1.46             --             --
                         February 24, 2003 to February 24, 2013       2.108           2.09             --             --
                         February 5, 2004 to February 5, 2014         3.152           3.13             --             --
                         August 31, 2005 to August 31, 2015            5.62           5.75             --             --
Shouwei Zhou             March 12, 2001 to March 12, 2011              1.19           1.23             --             --
                         August 27, 2001 to August 27, 2011           1.232           1.46             --             --
                         February 24, 2003 to February 24, 2013       2.108           2.09             --             --
                         February 5, 2004 to February 5, 2014         3.152           3.13             --             --
                         August 31, 2005 to August 31, 2015            5.62           5.75             --             --
Longsheng Jiang *        March 12, 2001 to March 12, 2011              1.19           1.23             --             --
                         August 27, 2001 to August 27, 2011           1.232           1.46             --             --
                         February 24, 2003 to February 24, 2013       2.108           2.09             --             --
                         February 5, 2004 to February 5, 2014         3.152           3.13             --             --
                         August 31, 2005 to August  31, 2015           5.62           5.75             --             --
------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                     F-61
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


29.   SHARE CAPITAL (CONT'D)

Share option schemes (cont'd)

<TABLE>
<CAPTION>


                                                                 Number of share options
                                              -------------------------------------------------------------------------------------

                                                   Granted    Exercised    Forfeited     Expired        At 31
Name of category                At January 1,       during       during       during      during     December    Date of grant of
of participant                           2005     the year     the year     the year    the year         2005    share options

-----------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>             <C>           <C>          <C>          <C>         <C>          <C>
Xinghe Cao                                 --      800,000           --           --          --      800,000    August 31, 2005
Zhenfang Wu                                --      800,000           --           --          --      800,000    August 31, 2005
Guangqi Wu                                 --    1,610,000           --           --          --    1,610,000    August 31, 2005
Hua Yang                            1,150,000           --           --           --          --    1,150,000    March 12, 2001
                                    1,150,000           --           --           --          --    1,150,000    August 27, 2001
                                    1,150,000           --           --           --          --    1,150,000    February 24, 2003
                                    1,150,000           --           --           --          --    1,150,000    February 5, 2004
                                           --    1,610,000           --           --          --    1,610,000    August 31, 2005

-----------------------------------------------------------------------------------------------------------------------------------
Non-executive Directors
  Chiu Sung Hong                    1,150,000           --           --           --          --    1,150,000    February 5, 2004
  Evert Henkes                      1,150,000           --           --           --          --    1,150,000    February 5, 2004
  Kenneth S Courtis                 1,150,000           --           --           --          --    1,150,000    February 5, 2004
  Erwin Schurtenberger*             1,150,000           --           --    1,150,000          --           --    February 5,2004
Other Employees
In aggregate                        6,550,000           --           --    1,700,000          --    4,850,000    March 12, 2001
                                   22,650,000           --    1,150,000    2,350,000          --   19,150,000    August 27, 2001
                                   26,500,000           --      766,700    3,733,400          --   21,999,900    February 24,2003
                                   35,850,000           --      383,400    4,683,200          --   30,783,400    February 5,2004
                                           --   51,880,000           --    2,380,000          --   49,500,000    August 31, 2005
-----------------------------------------------------------------------------------------------------------------------------------
Total                             124,250,000   65,870,000    2,300,100   18,756,600          --  169,063,300
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                                        Price of        Weighted average
                                                                                       Company's          price of the
                                                                                          shares        Company's shares
                                                                                 --------------------------------------------
                                                                         Exercise    Immediately    Immediately
                                                                            price     before the     before the   At exercise
Name of category                Exercise period of                       of share     grant date       exercise       date of
of participant                  share options**                           options     of options           date       options
                                                                              HK$            HK$            HK$           HK$
-----------------------------------------------------------------------------------------------------------------------------
<S>                             <C>                                      <C>         <C>            <C>           <C>
Xinghe Cao                      August 31, 2005 to August 31, 2015           5.62          5.75              --            --
Zhenfang Wu                     August 31, 2005 to August 31, 2015           5.62          5.75              --            --
Guangqi Wu                      August 31, 2005 to August 31, 2015           5.62          5.75              --            --
Hua Yang                        March 12, 2001 to March 12, 2011             1.19          1.23              --            --
                                August 27, 2001 to August 27, 2011          1.232          1.46              --            --
                                February 24 2003 to February 24, 2013       2.108          2.09              --            --
                                February 5 2004 to February 5, 2014         3.152          3.13              --            --
                                August 31, 2005 to August 31, 2015           5.62          5.75              --            --

-----------------------------------------------------------------------------------------------------------------------------
Non-executive Directors
  Chiu Sung Hong                February 5, 2004 to February 5, 2014        3.152           3.13             --            --
  Evert Henkes                  February 5, 2004 to February 5, 2014        3.152           3.13             --            --
  Kenneth S Courtis             February 5, 2004 to February 5, 2014        3.152           3.13             --            --
  Erwin Schurtenberger*         February 5, 2004 to February 5, 2014        3.152           3.13             --            --
Other Employees
In aggregate                    March 12, 2001 to March 12, 2011             1.19           1.23             --            --
                                August 27, 2001 to August 27, 2011          1.232           1.46           4.03          4.05
                                February 24, 2003 to February 24, 2013      2.108           2.09           4.16          4.19
                                February 5, 2004 to February 5, 2014        3.152           3.13           3.85          3.93
                                August 31, 2005 to August 31, 2015           5.62           5.75             --            --
-----------------------------------------------------------------------------------------------------------------------------
Total
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


*     Mr. Erwin Schurtenberger resigned as an Independent Non-executive
      Director of the Company on April 1, 2005 and Mr. Jiang Longsheng retired
      as an Executive Director of the Company on June 1, 2005.

**    The share options are only exercisable by the relevant grantees upon the
      vesting of such share options. The vesting of the Company's share
      options is by stage and the details are disclosed above.


                                     F-62
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


29.   SHARE CAPITAL (CONT'D)

Share option schemes (cont'd)

The fair value of the share options granted during the year was
HK$103,811,616.

The fair value of equity-settled share options granted during the year was
estimated as at the date of grant, using the Black-Scholes model, taking into
account the terms and conditions upon which the options were granted.

The following table lists the assumptions to the model used for the year ended
December 31, 2005:

Dividend yield                                                              2%
Expected volatility                                                        31%
Risk-free interest rate                                                  4.57%
Expected life of option                                                5 years
Weighted average share price                                           HK$5.62

The expected life of the options is based on the historical data and is not
necessarily indicative of the exercise patterns that may occur. The expected
volatility reflects the assumption that the historical volatility is
indicative of future trends, which may also not necessarily be the actual
outcome. No other feature of the options granted was incorporated into the
measurement of fair value. Any changes to the above assumptions may affect the
estimation of the fair value of the option.

2,300,100 share options granted under the 2002 Share Option Scheme and the
2001 Share Option Scheme have been exercised since the respective dates of
grant and up to the date when the Board of Directors approved the financial
statements. On April 1, 2005, Mr. Erwin Schurtengberger surrendered 1,150,000
share options following his resignation as an independent non-executive
director of the Company. The weighted average closing price of the shares
immediately on the day before the exercise of the options was HK$4.04.

The share options exercised during the year resulted in the issue of 2,300,100
ordinary shares of the Company and new share capital of RMB49,000 and share
premium of RMB4,451,000.

The total number of options exercisable as of December 31, 2005 was
70,416,522. No share options had been cancelled during the year ended December
31, 2005.

At the balance sheet date, the Company had 169,063,300 share options
outstanding under these share options schemes which represented approximately
0.4% of the Company's shares in issues as at that date. The exercise in full
of the remaining share options would, under the present capital structure of
the Company, result in the issue of 169,063,300 additional ordinary shares of
the Company and additional share capital of RMB3,517,531 and share premium of
RMB602,823,748.


                                     F-63
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


30.   RESERVES

      According to the laws and regulations of the PRC and the articles of
      association of CNOOC China Limited, CNOOC China Limited is required to
      provide for certain statutory funds, namely, the general reserve fund
      and staff and workers' bonus and welfare funds, which are appropriated
      from net profit (after making good losses from previous years), but
      before dividend distribution.

      CNOOC China Limited is required to allocate at least 10% of its net
      profit as reported in accordance with the generally accepted accounting
      principles in the PRC ("PRC GAAP") to the general reserve fund until the
      balance of such fund has reached 50% of its registered capital. The
      general reserve fund can only be used, upon approval by the relevant
      authority, to offset against accumulated losses or to increase capital.

      Appropriation to the staff and workers' bonus and welfare funds, which
      is determined at the discretion of CNOOC China Limited's directors, is
      expensed as incurred under Hong Kong GAAP. The staff and workers' bonus
      and welfare funds can only be used for special bonuses or collective
      welfare of employees, and assets acquired through this fund shall not be
      taken as assets of CNOOC China Limited.

      As at December 31, 2005, the general reserve fund appropriated amounted
      to RMB6,681,974,000 (2004: RMB4,413,610,000), representing approximately
      44.5% (2004: 29.4%) of the total registered capital of CNOOC China
      Limited.

      Included in retained earnings is an amount of RMB1,146,530,000 (2004:
      RMB877,109,000), being the retained earnings attributable to associates.

      The Company's ability to distribute dividends will largely depends on
      the dividends it receives from its subsidiaries. The dividends
      distributable by the Company's subsidiaries to the Company are
      determined in accordance with the relevant accounting principle required
      by the local authorities. As of December 31, 2005, the aggregate amount
      of the subsidiaries' retained earnings available for distributions to
      the Company amounted to approximately RMB30,275,453,000 (2004:
      RMB16,652,414,000).


31.   RETIREMENT AND TERMINATION BENEFITS

      All the Group's full-time employees in the PRC are covered by a
      government regulated pension, and are entitled to an annual pension. The
      PRC government is responsible for the pension liabilities to these
      retired employees. The Group is required to make annual contributions to
      the government-regulated pension at rates ranging from 9% to 22% of the
      employees' basic salaries.

      The Company is required to make contributions to a defined contribution
      mandatory provident fund at a rate of 5% of the basic salaries of all
      full-time employees in Hong Kong. The related pension costs are expensed
      as incurred.


                                     F-64
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


31.   RETIREMENT AND TERMINATION BENEFITS (CONT'D)

      The Group provides retirement and termination benefits for all local
      employees in Indonesia in accordance with Indonesian labour law, and
      provides employee benefits to expatriate staff in accordance with the
      relevant employment contracts. The Group has adopted an accounting
      policy to record liabilities for the retirement and termination
      benefits.


32.   NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

      (a)   Reconciliation of profit before tax to cash generated from
            operations

<TABLE>
<CAPTION>
                                                                                    2003           2004           2005
                                                                            ------------   ------------   ------------
                                                                                 RMB'000        RMB'000        RMB'000
                                                                              (Restated)     (Restated)
<S>                                                                           <C>            <C>            <C>
Profit before tax                                                             16,125,579     23,069,962     36,300,934

Adjustments for:
      Interest income                                                           (183,576)      (206,872)      (359,294)
      Finance costs                                                              354,940        441,825      1,100,532
      Exchange losses/(gains), net                                                 6,746        (29,269)      (287,027)
      Share of profit of associates                                             (220,263)      (344,469)      (307,075)
      Investments income                                                        (123,483)       (72,438)      (247,893)
      (Reversal) of/provision for inventory obsolescence                           8,745         (2,710)        33,088
      Depreciation, depletion and amortisation                                 4,642,753      5,455,062      5,964,740
      Loss on disposals and write-off of property, plant and equipment            39,818        155,876        141,574
      Dismantlement                                                              167,326        201,637        252,857
      Amortisation of discount of long term guaranteed notes                      11,276         15,634         41,959
      Impairment losses related to property, plant and equipment                      --             --         90,190
      Equity-settled share option expenses                                        37,747         46,642         29,123
                                                                            ------------   ------------   ------------

 Operating cash flows before movements in working capital                     20,867,608     28,730,880     42,753,708

      Increase in accounts receivable                                         (1,185,304)       (27,466)    (1,001,296)
      Increase in inventories and supplies                                      (129,678)       (96,307)      (108,405)
      Decrease/(increase)in other current assets                                 312,559        267,168       (342,087)
      Increase in amounts due from related companies                            (302,993)      (417,091)      (925,824)
      Increase/(decrease)in an amount due to the parent company                 (105,785)       205,407        118,422
      Increase in accounts payable, other payables and accrued liabilities     1,448,645      1,318,415        677,522
      Decrease in other taxes payable                                             (4,772)       (12,447)       (24,900)
      (Decrease)/increase in amounts due to related companies                    242,631       (262,798)       548,508
                                                                            ------------   ------------   ------------

 Cash generated from operations                                               21,142,911     29,705,761     41,695,648
                                                                            ============   ============   ============
</TABLE>


                                     F-65
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


32.   NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (CONT'D)

      (b)   Acquisitions

<TABLE>
<CAPTION>
                                                                    2003           2004           2005
                                                            ------------   ------------   ------------
                                                                 RMB'000        RMB'000        RMB'000
<S>                                                            <C>            <C>            <C>
      Acquisitions
      Net assets acquired:
      Property, plant and equipment, net                       1,579,726      4,686,857      3,129,662
      Intangible assets                                               --             --      1,299,643
      Accounts receivable                                             --            453             --
      Other current assets                                         8,959         66,744             --
      Inventories and supplies                                   122,777             --             --
      Cash and bank balances                                      17,580             --             --
      Accounts payable                                            (8,294)       (81,547)            --
      Other payables and accrued liabilities                     (47,983)            --             --
      Tax payable                                                     --             --             --
      Deferred tax liabilities                                        --     (1,141,461)            --
                                                            ------------   ------------   ------------

                                                               1,672,765      3,531,046      4,429,305

      Prepayment for NWS Project                                      --      4,693,809             --
      Prepayment for Tangguh Project                           2,445,715             --             --
      Acquisition of interests of MEG                                 --             --      1,017,000
                                                            ------------   ------------   ------------
                                                               4,118,480      8,224,855      5,446,305
                                                            ============   ============   ============

      Satisfied by:
      Prepayment made in 2004                                         --      2,445,715      4,582,298
      Cash paid (including cash calls for Tangguh Project)     4,118,480      5,779,140             --
      Cash paid for the interests of MEG                              --             --      1,017,000
      Tax refund from the NWS Project                                                         (152,993)
                                                            ------------   ------------   ------------
                                                               4,118,480      8,224,855      5,446,305
                                                            ============   ============   ============
</TABLE>

An analysis of the net outflow of cash and cash equivalents in respect of the
acquisitions is as follows:

<TABLE>
<CAPTION>
                                                               2003           2004          2005
                                                       ------------   ------------  ------------
                                                            RMB'000        RMB'000       RMB'000
<S>                                                       <C>            <C>           <C>
      Cash
      Cash consideration                                  4,118,480      5,779,140     1,017,000
      Cash and bank balances acquired                       (17,580)            --            --
      Cash received for tax refund of the NWS project            --             --      (152,993)
                                                       ------------   ------------  ------------
      Net outflow of cash and cash equivalents            4,100,900      5,779,140       864,007
                                                       ============   ============  ============
</TABLE>

      Further details of the acquisition of the NWS Project and MEG Project
      are included in note 4 to the financial statements. The purchase price
      allocations for NWS Project are still preliminary pending the
      confirmation of the tax basis of the underlying assets.

      The interest in MEG has been included under long term available-for-sale
      financial assets.

33.   CONTINGENT LIABILITIES

      As of December 2005 and 2004, there were no material contingent
      liabilities not provided for in the financial statements.


                                     F-66
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


34.   COMMITMENTS

      (i)   Capital commitments

            As at December 31, 2005, the Group and the Company had the
            following capital commitments, principally for the construction
            and purchase of property, plant and equipment:

                                                  2004          2005
                                           -----------   -----------
                                               RMB'000       RMB'000

      Contracted for                         9,568,971     7,511,100
      Authorised, but not contracted for    20,331,504    23,736,582

            As at December 31, 2005, the Group had unutilised banking
            facilities amounting, to approximately RMB33,450,791,000 (2004:
            RMB20,662,120,000).

      (ii)  Operating lease commitments

            (a)   Office properties

                  The Group leases certain of its office properties under
                  operating lease arrangements, leases properties are
                  negotiated for terms ranging from 10 months to 3 years.

                  As at December 31, 2005, the Group had total minimum lease
                  payments under non-cancelable operating leases falling due
                  as follows:

                                                      2004          2005
                                              ------------  ------------
                                                   RMB'000       RMB'000
      Commitments due:
      - Within one year                             24,824       157,181
      - After one year but within two years            549        22,351
      - After two year but within five years            --        23,972
                                              ------------  ------------
                                                    25,373       203,504
                                              ============  ============

            (b)   Plant and equipment

                  The Group leases certain of its plant and equipment under
                  operating lease arrangements for a term of 10 years.

                  As at December 31, 2005, the Group had total minimum lease
                  payments under non-cancelable operating lease falling due as
                  follows:

                                                      2004          2005
                                              ------------  ------------
                                                   RMB'000       RMB'000
      Commitments due:
      - Within one year                            149,360       183,137
      - After one year but within two years        597,442       183,137
      - After two year but within five years     1,834,023     1,006,289
                                              ------------  ------------
                                                 2,580,825     1,372,563
                                              ============  ============


                                     F-67
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


34.   COMMITMENTS (CONT'D)

      (iii) Financial instruments

            (a)   Currency swap contracts

                  As at December 31, 2005, the Group had a currency swap
                  contract with a financial institution to sell United States
                  dollars in exchange for Japanese Yen in order to hedge
                  against future repayments of certain Japanese Yen
                  denominated loans. The hedged Japanese Yen loans bore
                  interest at a fixed rate of 4.5% per annum. The interest
                  stipulated in the swap contract for the United States
                  dollars was the floating LIBOR rate.

                  The details are as follows:

<TABLE>
<CAPTION>
                                      2004                               2005
                          ------------------------------      --------------------------
                                                Weighted                        Weighted
                            Notional             average       Notional          average
                            contract         contractual       contract      contractual
                              amount       exchange rate         amount    exchange rate
                           (JPY'000)           (JPY/US$)      (JPY'000)        (JPY/US$)
      Year
      <S>                  <C>             <C>                <C>          <C>
      2005                   271,470               95.00             --               --
      2006                   271,470               95.00        271,470            95.00
      2007                   271,470               95.00        271,470            95.00
</TABLE>

            (b)   Fair value of financial instruments

                  The carrying value of cash and cash equivalents, time
                  deposits, available-for-sale investments, accounts
                  receivables, other current assets, accounts payable and
                  other payables approximated to fair value due to the short
                  maturity of these instruments.

                  The estimated fair value of long term bank loans based on
                  current market interest rates was approximately
                  RMB868,886,000 as at December 31, 2005 (2004:
                  RMB967,770,000).

                  The estimated fair value of long term guaranteed notes based
                  on current market interest rates was approximately RMB
                  16,592,412,000 as at December 31, 2005 (2004:
                  RMB16,428,934,000).


                                     F-68
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


35.   CONCENTRATION OF RISKS

      (a)   Credit risk

            The carrying amount of cash and cash equivalents, time deposits,
            liquidity funds and bond investments, accounts receivable and
            other receivables, and due from related parties and other current
            assets except for prepayments represents our maximum exposure to
            credit risk in relation to financial assets.

            The majority of the Group's accounts receivable is related to
            sales of oil and natural gas to third party customers. The Group
            performs ongoing credit evaluations of the customers' financial
            condition and generally do not require collateral on accounts
            receivable. The Group maintains a provision for doubtful accounts
            and actual losses have been within management's expectation.

            No other financial assets carry a significant exposure to credit
            risk.

      (b)   Currency risk

            Substantially all of the Group's oil and gas sales are denominated
            in Renminbi and US dollars. In the past decade, the PRC
            government's policy of maintaining a stable exchange rate and
            China's ample foreign reserves has contributed to the stability of
            the Renminbi. Starting from July 21, 2005, China reformed the
            exchange rate regime by moving into a managed floating exchange
            rate regime based on market supply and demand with reference to a
            basket of currencies. Renminbi would no longer be pegged to the US
            dollar. From that day to December 31, 2005, Renminbi has
            appreciated by approximately 2.5% against US dollars.

            The appreciation of Renminbi against US dollars may have the
            following impact on the Group. On one hand, since the benchmark
            oil and gas prices are usually in US dollars, the Group's oil and
            gas sales may decrease due to the depreciation of US dollars
            against Renminbi. On the other hand, the depreciation of US
            dollars against Renminbi will also decrease the Group's costs for
            imported equipment and materials, most of which are denominated in
            US dollars. In addition, the debt repayment by the Group will
            decrease since more than 99% of the Group's debts are also
            denominated in U.S. dollars.

            As of the end of 2005, the balance of the yen-denominated loans
            was only RMB37,307,000. Since the Group has hedged the yen loans
            against foreign currency swaps, the Group does not expect any
            exchange risk relating to Japanese yen in the future.

      (c)   Interest rate risk

            As of the end of 2005, the interest rates for all balance of our
            debts were fixed. The term of the weighted average balance was
            approximately 8 years. The average interest rate payable by the
            Group is favorable under the environment of interest rate hike.

      (d)   Business risk

            The major operations are conducted in the PRC, Indonesia and
            Australia and accordingly are subject to special considerations
            and significant risks not typically associated with investments in
            equity securities of the United States of America and Western
            European companies. These include risks associated with, among
            others, the oil and gas industry, the political, economic and
            legal environments, influence of the national authorities over
            price setting and competition in the industry.


                                     F-69
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


35.   CONCENTRATION OF RISKS (CONT'D)

      (e)   Concentration of customers

            A substantial portion of the oil and gas sales of the Group is
            made to a small number of customers on an open account basis.
            Details of the sales to these customers are as follows:

<TABLE>
<CAPTION>
                                                  2003          2004          2005
                                              ------------   -----------   -----------
                                                   RMB'000       RMB'000       RMB'000

      <S>                                     <C>            <C>           <C>
      China Petroleum & Chemical Corporation     6,975,069    10,634,066    15,625,736
      PetroChina Company Limited                 1,446,169     1,944,709     1,776,199
      Castle Peak Power Company Limited            841,285     1,070,436     1,107,314
</TABLE>

36.   ADDITIONAL FINANCIAL INFORMATION

      As at December 31, 2005, net current assets and total assets less
      current liabilities of the Group amounted to approximately
      RMB30,805,199,000 and RMB101,148,848,000 (2004: RMB24,890,362,000 and
      RMB83,399,497,000 (restated)), respectively.

37.   SUBSEQUENT EVENT

      On January 8, 2006, the Company signed a definitive agreement with South
      Atlantic Petroleum Limited ("SAPETRO") to acquire a 45% working interest
      in an offshore oil mining license 130 "OML 130" in Nigeria for a cash
      consideration of US$2.268 billion, subject to adjustment. Conditional
      on, among other things, the approval of the Nigerian National Petroleum
      Corporation ("NNPC") and the PRC government, the transaction is expected
      to be completed in the first half of 2006.

      On January 27, 2006, CNOOC Africa Limited, a wholly-owned subsidiary of
      the Company, signed an agreement to acquire from AERD Projects Nigeria
      Limited a 35% of right to Oil Prospecting Licence 229 "OPL229" in
      Nigeria for US$ 60 million in cash, subject to adjustments.

38.   SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP

      (a)   Net profit and net equity

            (i)   Short term investments

                  In 2003, according to Hong Kong GAAP, available-for-sale
                  investments in marketable securities were measured at fair
                  value and related unrealised holding gains and losses are
                  included in the current period's earnings. According to US
                  GAAP, such investments are also measured at fair value and
                  classified in accordance with Statement of Financial
                  Accounting Standards ("SFAS") No.115. Under US GAAP, related
                  unrealised gains and losses on available-for-sale securities
                  were excluded from the current period's earnings and
                  included in other comprehensive income.



                                     F-70
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


38.   SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)

      (a)   Net profit and net equity (continued)


            (ii)  Impairment of long-lived assets

                  Under Hong Kong GAAP, impairment charges are recognised when
                  a long-lived asset's carrying amount exceeds the higher of
                  an asset's fair value less costs to sell and value in use,
                  which incorporates discounting the asset's estimated future
                  cash flows.

                  Under US GAAP, long-lived assets are assessed for possible
                  impairment in accordance with SFAS No.144, "Accounting for
                  the impairment or disposal of long-lived assets". SFAS No.
                  144 requires the Group to (a) recognise an impairment loss
                  only if the carrying amount of a long-lived asset is not
                  recoverable from its undiscounted cash flows and (b) measure
                  an impairment loss as the difference between the carrying
                  amount and fair value of the asset. SFAS No. 144 requires
                  that a long-lived asset to be abandoned, exchanged for a
                  similar productive asset, or distributed to owners in a
                  spin-off be considered as held and used until it is disposed
                  of.

                  SFAS No. 144 also requires the Group to assess the need for
                  an impairment of capitalised costs of proved oil and gas
                  properties and the costs of wells and related equipment and
                  facilities on a property-by-property basis. If an impairment
                  is indicated based on undiscounted expected future cash
                  flows, then an impairment is recognised to the extent that
                  net capitalised costs exceed the estimated fair value of the
                  property. Fair value of the property is estimated by the
                  Group using the present value of future cash flows. The
                  impairment was determined based on the difference between
                  the carrying value of the assets and the present value of
                  future cash flows. It is reasonably possible that a change
                  in reserve or price estimates could occur in the near term
                  and adversely impact management's estimate of future cash
                  flows and consequently the carrying value of properties.

                  In addition, under Hong Kong GAAP, a subsequent increase in
                  the recoverable amount of an asset (other than goodwill and
                  available-for-sale equity investments) is reversed to the
                  income statement to the extent that an impairment loss on
                  the same asset was previously recognised as an expense when
                  the circumstances and events that led to the write-down or
                  write-off cease to exist. The reversal is reduced by the
                  amount that would have been recognised as depreciation had
                  the write-down or write-off not occurred. Under US GAAP, an
                  impairment loss establishes a new cost basis for the
                  impaired asset and the new cost basis should not be adjusted
                  subsequently other than for further impairment losses.

                  For the year ended December 31, 2005, an impairment of
                  approximately RMB90,190,000 was recognised under Hong Kong
                  GAAP and US GAAP.

            (iii) Acquisition of CNOOC Finance

                  Under HK GAAP, the Company adopted the purchase method to
                  account for the acquisition of 31.8% equity interest in
                  CNOOC Finance in December 2003. Under the purchase method,
                  the acquired results are included in the consolidated
                  results of operations of the Company from the date of the
                  acquisition.

                  As the Company and CNOOC Finance are under common control of
                  CNOOC, under US GAAP, the acquisition is considered to be a
                  transfer of businesses under common control and the acquired
                  assets and liabilities are accounted at historical cost in a
                  manner similar to the pooling of interests method.
                  Accordingly, the consolidated financial statements for all
                  periods presented have been retroactively restated as if the
                  current structure and operations had been in existence since
                  inception. The cash consideration paid by the Company is
                  treated as an equity transaction in the year of the
                  acquisition for US GAAP purpose.


                                     F-71
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)

38.   SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)

      (a)   Net profit and net equity (continued)

            (iv)  Accounting for convertible bonds

                  With effect from January 1, 2005, under HKAS 32 Financial
                  Instruments: Disclosure and Presentation, financial
                  instruments with cash settlement options and other
                  derivative components will need to be bifurcated into a debt
                  component and a derivative component. The derivative
                  component is marked to market at each balance sheet date and
                  the differences will be charged/credited to the income
                  statement. The debt component is stated at amortised cost.
                  The requirements of HKAS 32 have been applied
                  retrospectively with comparative amounts restated.

                  Under US GAAP, convertible bonds are subject to different
                  rules on the bifurcation of the debt and derivative
                  components. However, there is no significant difference on
                  the accounting treatment adopted under HK GAAP and US GAAP
                  for the Group's convertible bonds.

            (v)   Provision for dismantlement

                  HK GAAP requires the provision for dismantlement to be
                  recorded for a present obligation whether that obligation is
                  legal or constructive. The associated cost is capitalized
                  and the liability is discounted and accretion expense is
                  recognised using the credit-adjusted risk-free interest rate
                  in effect when the liability is initially recognised.

                  Prior to 2003, the Company accrued for dismantlement costs
                  on a unit-of-production basis under SFAS No.19, "Financial
                  accounting and reporting by oil and gas producing companies"
                  under US GAAP. The Company adopted SFAS No.143 "Accounting
                  for asset retirement obligations" on January 1, 2003. SFAS
                  No.143 requires that the fair value of a liability for an
                  asset retirement obligation be recognised in the period in
                  which it is incurred if a reasonable estimate of fair value
                  can be made. The associated asset retirement costs are
                  capitalised as part of the carrying amount of long-lived
                  asset. The liability is discounted and accretion expense is
                  recognised using the credit-adjusted risk-free interest rate
                  in effect when the liability is initially recognised. The
                  impact of the adoption of SFAS No.143 is included in the
                  cumulative effect of change in accounting policy for
                  dismantlement liabilities below.


                                     F-72
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


38.   SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)

(a)   Net profit and net equity (continued)

The effects on net profit of the above significant differences between Hong
Kong GAAP and US GAAP are summarised below:

<TABLE>
<CAPTION>
                                                                                                  Net Profit
                                                                               ----------------------------------------------
                                                                                     2003                2004            2005
                                                                               ----------          ----------      ----------
                                                                                  RMB'000             RMB'000         RMB'000
                                                                               (Restated)          (Restated)

     <S>                                                                       <C>                 <C>             <C>
     As reported under Hong Kong GAAP                                          11,497,743          16,139,136      25,323,122

     Impact of U.S GAAP adjustments:
     -    Equity accounting for the results of CNOOC Finance                       30,913                   -               -
     -    Unrealised holding gains from available-for-sale
             investments in marketable securities                                 (21,503)             25,228               -
     -    Realised holding gains from available-for-sale
             marketable securities                                                 27,088               2,972               -
     -    Other                                                                     9,156               9,156          20,036
                                                                               ----------          ----------      ----------

     Income before cumulative effect of change in accounting policy            11,543,397          16,176,492      25,343,158

     Cumulative effect of change in accounting policy for dismantlement
         liabilities                                                              436,112                   -               -
                                                                               ----------          ----------      ----------

     Net profit under US GAAP                                                  11,979,509          16,176,492      25,343,158
                                                                               ==========          ==========      ==========

     Net profit per share under US GAAP

     -Basic
       Before cumulative effect of change in accounting policy for
         dismantlement liabilities
       Cumulative effect of change in accounting policy for
         dismantlement liabilities                                                RMB0.28             RMB0.39         RMB0.62

                                                                                  RMB0.01                   -               -
                                                                               ----------          ----------      ----------

                                                                                  RMB0.29             RMB0.39         RMB0.62
                                                                               ==========          ==========      ==========

     -Diluted
       Before cumulative effect of change in accounting policy for
         dismantlement liabilities                                                RMB0.28             RMB0.39         RMB0.61
       Cumulative effect of change in accounting policy for dismantlement
          liabilities                                                             RMB0.01                   -               -
                                                                               ----------          ----------      ----------

                                                                                  RMB0.29             RMB0.39         RMB0.61
                                                                               ==========          ==========      ==========
</TABLE>

     There are no significant differences between Hong Kong GAAP and US GAAP
     that affect net equity.


                                     F-73
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


38.   SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)

(b)   Comprehensive income

      According to SFAS No. 130, "Reporting comprehensive income", the Group
      is required to include a statement of other comprehensive income for
      revenues and expenses, gains and losses which under US GAAP are included
      in comprehensive income and excluded from net income.


<TABLE>
<CAPTION>
                                                                 2003           2004           2005
                                                              RMB'000        RMB'000        RMB'000
                                                         ------------------------------------------
      <S>                                                <C>              <C>            <C>
      Net income under US GAAP                             11,979,509     16,176,492     25,343,158
      Other comprehensive income:
       Foreign currency translation adjustments                36,243        (42,301)      (493,289)
       Unrealised gains /(losses) on available-for-sale
           investments/Short term investments                  21,503        (25,228)        69,069
       Less: Reclassification adjustment for gains
           included in net income                             (27,088)        (2,972)       (20,036)
                                                         ------------------------------------------
      Comprehensive income under US GAAP                   12,010,167     16,105,991     24,898,902
                                                         ------------------------------------------
</TABLE>

      Roll forward of accumulated other comprehensive income components are as
      follows:

<TABLE>
<CAPTION>
                                                                  Unrealised
                                                      Foreign       gains on    Accumulated
                                                     currency      available          other
                                                  translation      -for-sale  comprehensive
                                                  adjustments    investments         income
                                                      RMB'000        RMB'000        RMB'000
                                                  ------------------------------------------
      <S>                                         <C>            <C>          <C>
      Balance at  January 1, 2003                     (13,596)        53,821         40,225
      Reversal of current year's realised gains            --        (27,088)       (27,088)
      Current year's change                            36,243         21,503         57,746

                                                   -----------------------------------------

      Balance at  January 1, 2004                      22,647         48,236         70,883
      Reversal of current year's realised gains            --         (2,972)        (2,972)
      Current year's change                           (42,301)       (25,228)       (67,529)

                                                   -----------------------------------------

      Balance at  December 31, 2004                   (19,654)        20,036            382
      Reversal of current year realised gains              --        (20,036)       (20,036)
      Current year's change                          (493,289)        69,069       (424,220)

                                                   -----------------------------------------

      Balance at  December 31, 2005                  (512,943)        69,069       (443,874)
                                                   -----------------------------------------
</TABLE>


                                     F-74
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


38.   SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)

      (c)   Use of estimates in the preparation of financial statements

            The preparation of financial statements in conformity with
            accounting principles generally accepted in the United States of
            America requires management to make estimates and assumptions that
            affect the reported amounts of assets and liabilities and
            disclosure of contingent assets and liabilities at the date of the
            financial statements, and the reported amounts of revenues and
            expenses during the reporting period. The most significant
            estimates pertain to proved oil and gas reserve volumes and the
            future development, provision for dismantlement as well as
            estimates relating to certain oil and gas revenues and expenses.
            Actual amounts could differ from those estimates and assumptions.

      (d)   Segment reporting

            The Group's segment information is based on the segmental
            operating results regularly reviewed by the Group's chief
            operating decision maker. The accounting policies used are the
            same as those used in the preparation of the Group's consolidated
            Hong Kong GAAP financial statements.

      (e)   Impact of Recently Issued Accounting Standards

            In December 2004, the Financial Accounting Standards Board
            ("FASB") issued SFAS No.153, "Exchange of Non-monetary Asset an
            amendment of APB Opinion No.29".This Statement, which address the
            measurement of exchange of non-monetary assets, is effective
            prospectively for non-monetary asset exchanges occurring in fiscal
            periods beginning after June 15, 2005. The adoption of this
            Statement is not expected to impact the Company's consolidated
            financial position or results of operations.

            In December 2004, the FASB issued Statement No. 123 (revised
            2004), "Share Based Payment" (FAS No.123R), which replaces FAS
            No.123 and superseded APB Opinion No.25, "Accounting For Stock
            Issued to Employees". FAS No.123R requires all share-based
            payments to employees, including grants of employee stock options,
            to be recognised in the financial statement based on their fair
            values beginning with the first interim period after June 15,
            2005, with early adoption encouraged. Under the SEC's rule, FAS
            No.123R is now effective for the Company beginning January 1,
            2006, The proforma disclosures previously permitted under FAS No
            123 no longer will be an alternative to financial statement
            recognition. The Company believes the adoption of the FAS No. 123R
            will have no material impact on its consolidated financial
            statement as the Company currently accounts for the stock options
            under the fair value recognition provision of FAS No. 123.

            In 2005, the FASB has finalized an amendment to statement No.19,
            "Financial Accounting and Reporting by Oil and Gas Producing
            Companies" ("FAS No. 19") that change the way oil and gas
            producers account for deferred exploratory drilling costs. The new
            standard would relax the one-year limitation, so long as oil and
            gas reserves have been discovered and an enterprise "is making
            sufficient progress assessing the reserves and the economic and
            operating viability of the project." We believe the adoption of
            amendment to FAS No. 19 will have no material impact on its
            consolidated financial position or results of operations.


                                     F-75
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS
          (All amounts expressed in Renminbi unless otherwise stated)


38.   SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)

      (e)   Impact of Recently Issued Accounting Standards (continued)

            In March 2005, the FASB issued FASB Interpretation Number 47("FIN
            No.47"), "Accounting for conditional asset retirement
            obligations". The interpretation clarifies the requirement to
            record abandonment liabilities stemming from legal obligations
            when the retirement depends on a conditional future event. FIN
            No.47 requires that the uncertainty about the timing or method of
            settlement of a conditional retirement obligation be factored into
            the measurement of the liability when sufficient information
            exists. FIN No.47 is effective for fiscal years ending after
            December 15, 2005 and application of the interpretation did not
            change how abandonment obligations are currently calculated by the
            Company.

            In May 2005, the FASB issued FAS No. 154, i(degree)Accounting
            Changes and Error Corrections,i+/- a replacement of APB Opinion
            No. 20, i(degree)Accounting Changesi+/- and FAS No. 3,
            i(degree)Reporting Accounting Changes in Interim Financial
            Statementsi+/- (i(degree)FAS No. 154i+/-). FAS No.154 changes the
            requirements for the accounting for, and reporting of, a change in
            accounting principle. Previously, voluntary changes in accounting
            principles were generally required to be recognised by way of a
            cumulative effect adjustment within net income during the period
            of the change. FAS No. 154 requires retrospective application to
            prior periodsi- financial statements, unless it is impracticable
            to determine either the period-specific effects or the cumulative
            effect of the change. FAS No. 154 is effective for accounting
            changes made in fiscal years beginning after December 15, 2005;
            however, the statement does not change the transition provisions
            of any existing accounting pronouncements. The Company does not
            believe adoption of FAS No. 154 will have a material effect on its
            financial position, cash flows or results of operations.

            In February 2006, the FASB issued FAS No. 155 "Accounting for
            Certain Hybrid Financial Instruments, an amendment of FASB
            Statements No. 133 and 140" ("FAS No.155"). FAS No. 155 clarifies
            certain issues relating to embedded derivatives and beneficial
            interests in securitized financial assets, including permitting
            fair value measurement for any hybrid financial instrument that
            contains an embedded derivative, eliminating the prohibition on a
            qualifying special-purpose entity from holding certain derivative
            instruments, and providing clarification that concentrations of
            credit risk in the form of subordination are not embedded
            derivatives. The provisions of FAS No. 155 are effective for all
            financial instruments acquired or issued after fiscal years
            beginning after September 15, 2006. The Company does not believe
            adoption of FAS No. 155 will have a material effect on its
            financial position, cash flows or results of operations.


                                     F-76
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
   SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
          (All amounts expressed in Renminbi unless otherwise stated)


The following disclosures are included in accordance with the United States
Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and
Gas Producing Activities". The disclosures are categorized by the geographical
areas in which the Group conducts oil and gas activities. Except for PRC and
Indonesia, the information on the other geographical areas, such as Australia,
Myanmar and Morocco, etc., are combined in the following disclosures as
"Others", among which all the other projects are still in exploration or joint
study stage except that the North West Shelf Project in Australia is in
development stage.

(a)   Reserve quantity information

      Crude oil and natural gas reserve estimates are determined through
      analysis of geological and engineering data which appear, with
      reasonable certainty, to be recoverable at commercial rates in the
      future from known oil and natural gas reservoirs under existing economic
      and operating conditions.

      Estimates of crude oil and natural gas reserves have been made by
      independent engineers. The Group's net proved reserves consist of its
      percentage interest in reserves, comprised of a 100% interest in its
      independent oil and gas properties and its participating interest in the
      properties covered under the production sharing contracts in PRC, less
      (a) an adjustment for the Group's share of royalties payable by the
      Group to the PRC government and the Group's participating interest in
      share oil payable to the PRC government under the production sharing
      contracts, and less (b) an adjustment for production allocable to
      foreign partners under the PRC production sharing contracts as
      reimbursement for exploration expenses attributable to the Group's
      participating interest, and plus (a) its participating interest in the
      properties in Australia, and (b) the participating interest in the
      properties covered under the production sharing contracts in Indonesia
      less an adjustment of share oil attributable to the Indonesian
      government and the domestic market obligation.

      Proved developed and undeveloped reserves (net of royalties and PRC
      government share oil):

<TABLE>
<CAPTION>
                                           PRC                     Indonesia                 Others                         Total
                                      Oil  Natural gas          Oil  Natural gas          Oil Natural gas          Oil  Natural gas
                                   (mmbls)        (bcf)      (mmbls)        (bcf)     (mmbls)       (bcf)      (mmbls)       (bcf)
                               ---------------------------------------------------------------------------------------------------
<S>                            <C>         <C>              <C>      <C>            <C>       <C>          <C>           <C>
December 31, 2002                   1,287        3,333          138          215           --          --       1,425        3,548
 Purchase of reserves                  53          142           --           --           --          --          53          142
 Discoveries and extensions           114          506            1            2           --          --         115          508
 Production                           (97)         (69)         (15)         (37)          --          --        (112)        (106)
 Revisions of prior estimates         (24)          42          (21)          20           --          --         (45)          62
                               ---------------------------------------------------------------------------------------------------

December 31, 2003                   1,333        3,954          103          200           --          --       1,436        4,154
 Purchase of reserves                   6          161           --           --           --          --           6          161
 Discoveries and extensions           129          414            4          157           --          --         133          571
 Production                          (106)        (103)         (11)         (31)          --          --        (117)        (134)
 Revisions of prior estimates          (8)        (101)           5           (5)          --          --          (3)        (106)
                               ---------------------------------------------------------------------------------------------------

December 31, 2004                   1,354        4,325          101          321           --          --       1,455        4,646
 Purchase of reserves                  --           --           --           --           25         603          25          603
 Discoveries and extensions           133          314           --           17           --          --         133          331
Production                           (122)        (108)          (9)         (34)          --          --        (131)        (142)
Revisions of prior estimates           (7)          --          (19)          (7)          --          --         (26)          (7)
                               ---------------------------------------------------------------------------------------------------

December 31, 2005                   1,358        4,531           73          297           25         603       1,456        5,431
                               ===================================================================================================
</TABLE>


(a)   Reserve quantity information (cont'd)


                                     F-77
<PAGE>
                      CNOOC LIMITED AND ITS SUBSIDIARIES
   SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
          (All amounts expressed in Renminbi unless otherwise stated)



      Proved developed reserves:

<TABLE>
<CAPTION>
                           PRC                 Indonesia             Others                 Total
                        Oil  Natural gas     Oil Natural gas       Oil  Natural gas      Oil Natural gas
                    (mmbls)        (bcf) (mmbls)       (bcf)   (mmbls)         (bcf) (mmbls)       (bcf)
                  ---------------------------------------------------------------------------------------
 <S>              <C>        <C>         <C>     <C>           <C>      <C>     <C>    <C>        <C>
 December 31, 2003      459        2,054      91         135        --           --      550       2,189
 December 31, 2004      617        2,134      85         138        --           --      702       2,272
 December 31, 2005      644        2,098      63         155        14          378      721       2,631
                  =======================================================================================
</TABLE>


(b)   Results of operations

<TABLE>
<CAPTION>
                                                2003                                                   2004

                          PRC           Indonesia     Others      Total         PRC           Indonesia    Others      Total

                          RMB'000       RMB'000       RMB'000     RMB'000       RMB'000       RMB'000      RMB'000     RMB'000
                         ---------------------------------------------------------------------------------------------------------
<S>                      <C>           <C>            <C>         <C>           <C>           <C>          <C>         <C>
Net sales to customers   23,644,659     4,472,172            --   28,116,831    32,723,277     4,162,742          --   36,886,019

Operating expenses       (2,903,094)   (1,609,715)           --   (4,512,809)   (3,643,182)   (1,427,162)         --   (5,070,344)

Production taxes         (1,238,598)           --            --   (1,238,598)   (1,725,674)           --          --   (1,725,674)

Exploration                (764,165)      (83,907)           --     (848,072)   (1,202,203)     (113,957)         --   (1,316,160)

Accretion expense           (93,246)           --            --      (93,246)     (119,707)           --          --     (119,707)

Depreciation,
depletion and
amortisation
(including
dismantlement)           (3,700,349)   (1,109,730)           --   (4,810,079)   (4,670,988)     (985,711)         --   (5,656,699)
                         ---------------------------------------------------------------------------------------------------------

                         14,945,207     1,668,820            --   16,614,027    21,361,523     1,635,912          --   22,997,435

Income tax expenses      (4,483,562)     (719,695)           --   (5,203,257)   (6,408,457)     (705,487)         --   (7,113,944)
                         ---------------------------------------------------------------------------------------------------------

Result of operations     10,461,645       949,125            --   11,410,770    14,953,066       930,425          --   15,883,491
                         =========================================================================================================
</TABLE>


<TABLE>
<CAPTION>
                                                 2005

                         PRC           Indonesia       Others     Total

                         RMB'000       RMB'000         RMB'000    RMB'000
                        -------------------------------------------------------
<S>                      <C>           <C>             <C>        <C>
Net sales to customers   48,778,934     4,638,735            --    53,417,669

Operating expenses       (4,507,915)   (1,426,683)           --    (5,934,598)

Production taxes         (2,596,543)           --            --    (2,596,543)

Exploration              (1,169,067)      (77,842)      (46,779)   (1,293,688)

Accretion expense          (198,945)           --            --      (198,945)

Depreciation,
depletion and
amortisation
(including
dismantlement)           (5,360,745)     (856,775)           --    (6,217,520)
                        -------------------------------------------------------

                         34,945,719     2,277,435       (46,779)   37,176,375

Income tax expenses     (10,483,716)     (995,885)           --   (11,479,601)
                        -------------------------------------------------------

Result of operations     24,462,003     1,281,550       (46,779)   25,696,774
                        =======================================================
</TABLE>

(c)   Capitalised costs

<TABLE>
<CAPTION>
                                              2003                                                      2004
                           PRC       Indonesia        Others         Total            PRC      Indonesia        Others     Total
                       RMB'000        RMB'000        RMB'000       RMB'000        RMB'000        RMB'000        RMB'000    RMB'000
                  -----------------------------------------------------------------------------------------------------------------
<S>                    <C>              <C>             <C>          <C>            <C>            <C>             <C>
Proved oil and gas
  Properties        57,537,676      9,440,843        --    66,978,519     70,931,798     10,100,116             --       81,031,914

Unproved oil and gas
  Properties           713,594             --        --       713,594        437,513      4,696,237             --        5,133,750

Accumulated
depreciation,
depletion and
amortization       (25,740,836)    (2,098,269)       --   (27,839,105)   (30,462,658)    (3,083,933)            --     (33,546,591)
                  -----------------------------------------------------------------------------------------------------------------

Net capitalised
  costs             32,510,434      7,342,574        --    39,853,008     40,906,653     11,712,420             --       52,619,073
                     ==============================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                      2005
                              PRC      Indonesia         Others         Total
                          RMB'000        RMB'000        RMB'000       RMB'000
                      ---------------------------------------------------------
<S>                    <C>            <C>             <C>         <C>
Proved oil and gas
  Properties           85,960,339     11,241,345      3,129,662   100,331,346

Unproved oil and gas
  Properties              267,432      5,529,450             --     5,796,882

Accumulated
depreciation,
depletion and
amortization          (35,875,926)    (3,850,293)            --   (39,726,219)
                      ---------------------------------------------------------

Net capitalised costs  50,351,845     12,920,502      3,129,662    66,402,009
                      =========================================================
</TABLE>


                                     F-78
<PAGE>

                      CNOOC LIMITED AND ITS SUBSIDIARIES
   SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
          (All amounts expressed in Renminbi unless otherwise stated)


(d)   Costs incurred


<TABLE>
<CAPTION>
                                              2003                                                      2004
                             PRC   Indonesia      Others       Total         PRC   Indonesia      Others       Total
                         RMB'000     RMB'000     RMB'000     RMB'000     RMB'000     RMB'000     RMB'000     RMB'000
                      -----------------------------------------------------------------------------------------------
<S>                   <C>          <C>           <C>      <C>         <C>          <C>           <C>      <C>
Acquisition costs      1,579,726          --          --   1,579,726          --   3,531,046          --   3,531,046
Exploration costs      1,225,926     102,067          --   1,327,993   1,806,556     137,361          --   1,943,917
Development costs*     7,489,472     512,064          --   8,001,536  11,693,183     645,501          --  12,338,684
                       ----------------------------------------------------------------------------------------------
Total costs incurred  10,295,124     614,131          --  10,909,255  13,499,739   4,313,908          --  17,813,647
                      ===============================================================================================

<CAPTION>
                                                            2005
                                 PRC               Indonesia     Others**    Total
                                 RMB'000             RMB'000     RMB'000     RMB'000
                                 -------------       -----------------------------------
<S>                                 <C>            <C>         <C>        <C>
Acquisition costs                           --            --   4,546,285   4,546,285
Exploration costs                    1,878,931       111,219      46,779   2,036,929
Development costs*                  14,423,266     2,328,200          --  16,751,466
                                  ------------------------------------------------------
Total costs incurred                16,302,197     2,439,419   4,593,064  23,334,680
                                  ======================================================
</TABLE>

      *     The development costs include estimated future dismantlement costs
            of dismantling offshore oil platforms and gas properties.

      **    The amounts include prepayments made in 2004 for the NWS Project
            of RMB 4,693,809,000 and a tax refund of RMB152,993,000 related to
            the acquisition of the NWS Project received in 2005.

(e)   Standardised measure of discounted future net cash flows and changes
      therein

      In calculating the standardised measure of discounted future net cash
      flows, year-end constant price and cost assumptions were applied to the
      Group's estimated annual future production from proven reserves to
      determine future cash inflows. Year end average realised oil prices used
      in the estimation of proved reserves and calculation of the standardised
      measure were US$48 as at December 31, 2005 (2004: US$32; 2003: US$30).
      Future development costs are estimated based upon constant price
      assumptions and assume the continuation of existing economic, operating
      and regulatory conditions. Future income taxes are calculated by
      applying the year-end statutory rate to estimate future pre-tax cash
      flows after provision for the tax cost of the oil and natural gas
      properties based upon existing laws and regulations. The discount was
      computed by application of a 10% discount factor to the estimated future
      net cash flows.

      Management believes that this information does not represent the fair
      market value of the oil and natural gas reserves or the present value of
      estimated cash flows since no economic value is attributed to potential
      reserves, the use of a 10% discount rate is arbitrary, and prices change
      constantly from year-end levels.


                                     F-79
<PAGE>

                      CNOOC LIMITED AND ITS SUBSIDIARIES
   SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
          (All amounts expressed in Renminbi unless otherwise stated)


(e)   Standardised measure of discounted future net cash flows and changes
      therein (cont'd)

      Present value of estimated future net cash flows:

<TABLE>
<CAPTION>
                                             2003                                                      2004
                  Notes  PRC          Indonesia     Others          Total         PRC          Indonesia      Others        Total
                         RMB'000      RMB'000       RMB'000       RMB'000         RMB'000      RMB'000        RMB'000       RMB'000
                     --------------------------------------------------------------------------------------------------------------
<S>              <C>  <C>            <C>                <C>   <C>             <C>            <C>                  <C>   <C>
Future cash
  inflows        (1)  422,329,692    30,135,721          --   452,465,413     467,336,822     37,198,784           --   504,535,606
Future
  production
  Costs              (106,854,167)  (17,532,095)         --  (124,386,262)   (115,267,250)   (20,472,914)          --  (135,740,164)
Future
  development
  Costs          (2)  (52,917,280)   (4,114,091)         --   (57,031,371)    (60,319,348)    (6,709,341)          --   (67,028,689)
Future income
  taxes               (72,124,755)   (3,346,547)         --   (75,471,302)    (78,717,296)    (4,001,019)          --   (82,718,315)
                     ---------------------------------------------------------------------------------------------------------------

Future net
  cash flows     (3)  190,433,490     5,142,988          --   195,576,478     213,032,928      6,015,510           --   219,048,438
10% discount
  factor              (84,550,531)   (1,226,300)         --   (85,776,831)    (91,755,987)    (1,905,679)          --   (93,661,666)
                     ---------------------------------------------------------------------------------------------------------------


Standardised measure  105,882,959     3,916,688          --   109,799,647     121,276,941      4,109,831           --   125,386,772
                     ===============================================================================================================


<CAPTION>
                                                    2005
                            PRC          Indonesia       Others          Total
                            RMB'000      RMB'000         RMB'000         RMB'000
                     ---------------------------------------------------------------
<S>                    <C>              <C>              <C>           <C>
Future cash inflows     661,693,176      40,919,470      21,855,452     724,468,098
Future production
Costs                  (156,122,249)    (19,370,535)     (3,742,250)   (179,235,034)
Future development
Costs                   (69,918,424)     (7,481,211)     (4,497,517)    (81,897,152)
Future income taxes    (119,326,469)     (5,678,110)     (2,759,755)   (127,764,334)
                     ---------------------------------------------------------------

Future net cash flows   316,326,034       8,389,614      10,855,930     335,571,578
10% discount factor    (128,177,514)     (2,494,083)     (5,472,748)   (136,144,345)
                     ---------------------------------------------------------------


Standardised measure    188,148,520       5,895,531       5,383,182     199,427,233
                     ===============================================================
</TABLE>

(1)   Future cash flows consist of the Group's 100% interest in the
      independent oil and gas properties and the Group's participating
      interest in the properties under production sharing contracts in PRC
      less (a) an adjustment for the royalties payable to the PRC government
      and share oil payable to the PRC government under production sharing
      contracts and (b) an adjustment for production allocable to foreign
      partners under the PRC production sharing contracts for exploration
      costs attributable to the Group's participating interest, plus (a) its
      participating interest in the properties in Australia, and (b) the
      participating interest in the properties covered under the production
      sharing contracts in Indonesia, less an adjustment of share oil
      attributable to Indonesian government and the domestic market
      obligation.

(2)   Future development costs include the estimated costs of drilling future
      development wells and building the production platforms.

(3)   Future net cash flows have been prepared taking into consideration
      estimated future dismantlement costs of dismantling offshore oil
      platforms and gas properties.

      Changes in the standardised measure of discounted future net cash flows:

<TABLE>
<CAPTION>
                                                                      2003            2004            2005
                                                                   RMB'000         RMB'000         RMB'000
                                                              ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>
Standardised measure, beginning of year                        100,141,049     109,799,647     125,386,772
Sales of production, net of royalties and production costs     (22,345,781)    (30,090,001)    (44,886,528)
Net change in prices, net of royalties and production costs     22,321,949      17,826,421      99,412,030
Extensions discoveries and improved recovery,
  net of related future costs                                   13,790,936      20,772,271      26,693,961
Change in estimated future development costs                   (14,673,054)    (21,766,234)    (18,500,061)
Development costs incurred during the year                       7,718,863      11,768,916      15,592,789
Revisions in quantity estimates                                 (2,942,902)     (1,954,130)     (3,087,240)
Accretion of discount                                           13,428,654      14,202,072     17, 132,630
Net change in income taxes                                      (6,290,099)     (5,515,547)    (29,228,637)
Purchase of properties                                           5,363,142       2,352,004       8,981,882
Changes in timing and other                                     (6,713,110)      7,991,353       1,929,635
                                                              ------------    ------------    ------------

Standardised measure, end of year                              109,799,647     125,386,772     199,427,233
                                                              ============    ============    ============
</TABLE>

                                     F-80