##### Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

Commission File Number 1-15006



(PETRO CHINA COMPANY NAME)

(Exact name of Registrant as specified in its charter)

PetroChina Company Limited

(Translation of Registrants name into English)



The Peoples Republic of China

(Jurisdiction of incorporation or organization)



16 Andelu

Dongcheng District, Beijing, 100011

The Peoples Republic of China

(Address of principal executive offices)



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

|                                                                                              |  |                       |                                 | 
|--------------------------------------------------------------------------------------------- |  | --------------------- | ------------------------------- | 
|Title of                                                                                      |  | Name of each exchange |                                
|Each class                                                                                    |  | on which registered   |                                
|                                                                                              |  |                       |                                
|American Depositary Shares, each
    representing 100 H Shares, par value RMB 1.00 per share* |  |                       | New York Stock Exchange, Inc.   | 
|H Shares, par value RMB 1.00
    per share                                                    |  |                       | New York Stock Exchange, Inc.** | 















|                                                     |  |  |                 |    
|---------------------------------------------------- |  |  | --------------- | ---
|State-owned shares, par value
    RMB 1.00 per share |  |  | 157,922,077,818 |    
|H Shares, par value RMB 1.00
    per share           |  |  | 21,098,900,000  | ***



x o




o x




x o


12b-2




|                           |                      |                          | 
|-------------------------- | -------------------- | ------------------------ | 
|Large Accelerated Filer  x | Accelerated Filer  o | Non-Accelerated Filer  o | 



o x


12b-2


o x







| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| | * | PetroChinas H Shares are listed and traded on The Stock
    Exchange of Hong Kong Limited.

|    |                                                                                                 
|--- | ------------------------------------------------------------------------------------------------
|**  | Not for trading, but only in connection with the registration of
    American Depository Shares.
|*** | Includes 3,166,123,000 H Shares represented by American
    Depositary Shares.                  









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Table of Contents

|       |  |        |  |         |  |                                                           |  |                                                       |   |                                                                                                    |     |  |     |  | 
|------ |  | ------ |  | ------- |  | --------------------------------------------------------- |  | ----------------------------------------------------- | - | -------------------------------------------------------------------------------------------------- | --- |  | --- |  | 
|       |  |        |  |         |  |                                                           |  | Page                                                  |  
|       |  |        |  |         |  |                                                           |  |                                                       |  
|       |  |        |  |         |  |                                                           |  |                                                       |   | Certain Terms
    and Conventions                                                                  |     |  | 3   | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Forward-Looking
    Statements                                                                     |     |  | 6   | 
|Part I |  | Item 1 |  |        |  | Identity of Directors, Senior
    Management and Advisors |  |                                                       | 8 |                                                                                                   
|       |  |        |  | Item 2  |  |                                                          |  | Offer
    Statistics and Expected Timetable           |   |                                                                                                    | 8   | 
|       |  |        |  | Item 3  |  |                                                          |  | Key
    Information                                   |   |                                                                                                    | 8   | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Exchange
    Rates                                                                                 |     |  | 8   | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Selected
    Financial Data                                                                        |     |  | 9   | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Risk
    Factors                                                                                   |     |  | 13  | 
|       |  |        |  | Item 4  |  |                                                          |  | Information on
    the Company                        |   |                                                                                                    | 18  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Introduction                                                                                       |     |  | 18  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Exploration
    and Production                                                                     |     |  | 25  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Refining
    and Marketing                                                                         |     |  | 36  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Chemicals
    and Marketing                                                                        |     |  | 43  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Natural
    Gas and Pipeline                                                                       |     |  | 47  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Competition                                                                                        |     |  | 50  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Environmental
    Matters                                                                          |     |  | 51  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Legal
    Proceedings                                                                              |     |  | 52  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Properties                                                                                         |     |  | 53  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Regulatory
    Matters                                                                             |     |  | 53  | 
|       |  |        |  | Item 4A |  |                                                          |  | Unresolved
    Staff Comments                         |   |                                                                                                    | 60  | 
|       |  |        |  | Item 5  |  |                                                          |  | Operating and
    Financial Review and Prospects      |   |                                                                                                    | 61  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | General                                                                                            |     |  | 61  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Operating
    Results                                                                              |     |  | 69  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Liquidity
    and Capital Resources                                                                |     |  | 79  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Off-Balance
    Sheet Arrangements                                                                 |     |  | 85  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Long-Term
    Contractual Obligations and Other Commercial Commitments and
    Payment Obligations |     |  | 85  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Research
    and Development                                                                       |     |  | 86  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Trend
    Information                                                                              |     |  | 87  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Other
    Information                                                                              |     |  | 87  | 
|       |  |        |  | Item 6  |  |                                                          |  | Directors,
    Senior Management and Employees        |   |                                                                                                    | 93  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Directors,
    Senior Management and Supervisors                                                   |     |  | 93  | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Compensation                                                                                       |     |  | 100 | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Board
    Practices                                                                                |     |  | 101 | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Employees                                                                                          |     |  | 102 | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Share
    Ownership                                                                                |     |  | 103 | 
|       |  |        |  | Item 7  |  |                                                          |  | Major
    Shareholders and Related Party Transactions |   |                                                                                                    | 104 | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Major
    Shareholders                                                                             |     |  | 104 | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Related
    Party Transactions                                                                     |     |  | 104 | 
|       |  |        |  |         |  |                                                           |  |                                                       |   | Loans
    or Guarantees with Related Parties                                                       |     |  | 110 | 

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|                                                     |  |         |  |          |  |                                                      |  |                                                                            |     |                                                               |     |  |     | 
|---------------------------------------------------- |  | ------- |  | -------- |  | ---------------------------------------------------- |  | -------------------------------------------------------------------------- | --- | ------------------------------------------------------------- | --- |  | --- | 
|                                                     |  |         |  |          |  |                                                      |  | Page                                                                       |    
|                                                     |  |         |  |          |  |                                                      |  |                                                                            |    
|                                                     |  |         |  | Item 8   |  |                                                     |  | Financial
    Information                                                  |     |                                                               | 110 | 
|                                                     |  |         |  |          |  |                                                      |  |                                                                            |     | Financial
    Statements                                      |     |  | 110 | 
|                                                     |  |         |  |          |  |                                                      |  |                                                                            |     | Significant
    Changes                                       |     |  | 111 | 
|                                                     |  |         |  | Item 9   |  |                                                     |  | The Offer and
    Listing                                                  |     |                                                               | 112 | 
|                                                     |  |         |  |          |  |                                                      |  |                                                                            |     | Nature
    of the Trading Market and Market Price Information |     |  | 112 | 
|                                                     |  |         |  | Item 10  |  |                                                     |  | Additional
    Information                                                 |     |                                                               | 113 | 
|                                                     |  |         |  |          |  |                                                      |  |                                                                            |     | Memorandum
    and Articles of Association                    |     |  | 113 | 
|                                                     |  |         |  |          |  |                                                      |  |                                                                            |     | Material
    Contracts                                        |     |  | 118 | 
|                                                     |  |         |  |          |  |                                                      |  |                                                                            |     | Exchange
    Controls                                         |     |  | 119 | 
|                                                     |  |         |  |          |  |                                                      |  |                                                                            |     | Taxation                                                      |     |  | 119 | 
|                                                     |  |         |  |          |  |                                                      |  |                                                                            |     | Significant
    Differences in Corporate Governance Practices |     |  | 125 | 
|                                                     |  |         |  |          |  |                                                      |  |                                                                            |     | Documents
    on Display                                      |     |  | 125 | 
|                                                     |  |         |  | Item 11  |  |                                                     |  | Quantitative
    and Qualitative Disclosures About Market Risk             |     |                                                               | 126 | 
|                                                     |  |         |  | Item 12  |  |                                                     |  | Description of
    Securities Other Than Equity Securities                 |     |                                                               | 130 | 
|Part II                                              |  | Item 13 |  |         |  | Defaults,
    Dividends Arrearages and Delinquencies |  |                                                                            | 130 |                                                              
|                                                     |  |         |  | Item 14  |  |                                                     |  | Material
    Modifications to the Rights to Security Holders               |     |                                                               | 130 | 
|                                                     |  |         |  | Item 15  |  |                                                     |  | Controls and
    Procedures                                                |     |                                                               | 130 | 
|                                                     |  |         |  | Item 16A |  |                                                     |  | Audit
    Committee Financial Expert                                       |     |                                                               | 130 | 
|                                                     |  |         |  | Item 16B |  |                                                     |  | Code of
    Ethics                                                         |     |                                                               | 131 | 
|                                                     |  |         |  | Item 16C |  |                                                     |  | Principal
    Accountant Fees and Services                                 |     |                                                               | 131 | 
|                                                     |  |         |  | Item 16D |  |                                                     |  | Exemptions
    from Listing Standards for Audit Committees                 |     |                                                               | 132 | 
|                                                     |  |         |  | Item 16E |  |                                                     |  | Purchases of
    Equity Securities by the Issuer and Affiliated Purchasers |     |                                                               | 132 | 
|Part III                                             |  | Item 17 |  |         |  | Financial
    Statements                             |  |                                                                            | 132 |                                                              
|                                                     |  |         |  | Item 18  |  |                                                     |  | Financial
    Statements                                                   |     |                                                               | 132 | 
|                                                     |  |         |  | Item 19  |  |                                                     |  | Exhibits                                                                   |     |                                                               | 132 | 
|EX-1.1 ARTICLES OF ASSOCIATION                      
|EX-1.2 ARTICLES OF ASSOCIATION                      
|EX-4.1 MANAGEMENT PERFORMANCE CONTRACT              
|EX-4.2 CRUDE OIL MUTUAL SUPPLY FRAMEWORK AGREEMENT  
|EX-4.19 SHARE PURCHASE AGREEMENT                    
|EX-8.1 LIST OF SUBSIDIARIES                         
|EX-12.1 CERTIFICATION OF CEO REQUIRED BY SECTION 302
|EX-12.2 CERTIFICATION OF CFO REQUIRED BY SECTION 302
|EX-13.1 CERTIFICATION OF CEO REQUIRED BY SECTION 906
|EX-13.2 CERTIFICATION OF CFO REQUIRED BY SECTION 906



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CERTAIN TERMS AND CONVENTIONS

Conventions Which Apply to this Annual Report

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




    CNPC or CNPC group are to our parent,
    China National Petroleum Corporation and its affiliates and
    subsidiaries, excluding PetroChina, its subsidiaries and its
    interests in long-term investments, and where the context refers
    to any time prior to the establishment of CNPC, those entities
    and businesses which were contributed to CNPC upon its
    establishment.
    PetroChina, we, our,
    our company and us are to:


    PetroChina Company Limited, a joint stock company incorporated
    in the Peoples Republic of China with limited liability
    and its subsidiaries and branch companies, or
    the CNPC groups domestic crude oil and natural gas
    exploration and production, refining and marketing, chemicals
    and natural gas businesses that were transferred to us in the
    restructuring of the CNPC group in 1999.


    PRC or China are to the Peoples
    Republic of China, but do not apply to Hong Kong, Macau or
    Taiwan for purposes of this annual report.We publish our consolidated financial statements in Renminbi.
The audited consolidated financial statements included in this
annual report have been prepared as if the operations and
businesses transferred to us from CNPC were transferred as of
the earliest period presented or from the date of establishment
of the relevant unit, whichever is later, and conducted by us
throughout the period. In this annual report, IFRS refers to
International Financial Reporting Standards.

Conversion Table

|                           |  |                             |  |                                                                         
|-------------------------- |  | --------------------------- |  | ------------------------------------------------------------------------
|1 barrel-of-oil equivalent |  | = 1 barrel of crude oil     |  | = 6,000 cubic feet of natural
    gas                                   
|1 cubic meter              |  | = 35.315 cubic feet         |  |                                                                         
|1 ton of crude oil         |  | = 1 metric ton of crude oil |  | = 7.389 barrels of crude oil
    (assuming an API gravity of 34 degrees)

Certain Oil and Gas Terms






|              |  |                                                                                                                                                                                                                                            
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|acreage     |  | The total area, expressed in acres, over which an entity has
    interests in exploration or production. Net acreage is the
    entitys interest, expressed in acres, in the relevant
    exploration or production area.                 
|             
|API gravity |  | An indication of the density of crude oil or other liquid
    hydrocarbons as measured by a system recommended by the American
    Petroleum Institute (API), measured in degrees. The lower the
    API gravity, the heavier the compound.
|             
|condensate  |  | Light hydrocarbon substances produced with natural gas that
    condense into liquid at normal temperatures and pressures
    associated with surface production equipment.                                                                
|             
|crude oil   |  | Crude oil, including condensate and natural gas liquids.                                                                                                                                                                                   

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development cost
    
    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.finding cost
    
    For a given period, costs incurred in identifying areas that may
    warrant examination and in examining specific areas that are
    considered to have prospects of containing oil and gas reserves,
    including costs of drilling exploratory wells and
    exploratory-type stratigraphic test wells. Finding cost is also
    known as exploration cost.lifting cost
    
    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. Lifting cost is also known as
    production cost.natural gas liquids
    
    Hydrocarbons that can be extracted in liquid form together with
    natural gas production. Ethane and pentanes are the predominant
    components, with other heavier hydrocarbons also present in
    limited quantities.offshore
    
    Areas under water with a depth of five meters or greater.onshore
    
    Areas of land and areas under water with a depth of less than
    five meters.primary distillation capacity
    
    At a given point in time, the maximum volume of crude oil a
    refinery is able to process in its basic distilling units.proved developed reserves
    
    Reserves that can be expected to be recovered through existing
    wells with existing equipment and operating methods. Additional
    oil and gas expected to be obtained through the application of
    fluid injection or other improved recovery techniques for
    supplementing the natural forces and mechanisms of primary
    recovery are included as proved developed reserves
    only after testing by a pilot project or after the operation of
    an installed program has confirmed through production response
    that increased recovery will be achieved.proved reserves
    
    Estimated quantities of crude oil and natural gas which
    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.
    Prices include consideration of changes in existing prices
    provided only by contractual arrangements, but not of
    escalations based upon future conditions.proved undeveloped reserves
    
    Reserves that are expected to be recovered from new wells on
    undrilled acreage, or from existing wells where a relatively
    major expenditure is required for recompletion. Reserves on
    undrilled acreage shall be limited to those drilling units
    offsetting productive units that are reasonably certain of
    production when drilled. Proved reserves for other undrilled
    units can be claimed only where it can be demonstrated with
    certainty that there is

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continuity of production from the existing productive formation.
    Under no circumstances should estimates for proved undeveloped
    reserves be attributable to any acreage for which an application
    of fluid injection or other improved recovery technique is
    contemplated, unless such techniques have been proved effective
    by actual tests in the area and in the same reservoir.reserve-to-production ratio
    
    For any given well, field or country, the ratio of proved
    reserves to annual production of crude oil or, with respect to
    natural gas, to wellhead production excluding flared gas.sales gas
    
    Marketable production of gas on an as sold basis,
    excluding flared gas, injected gas and gas consumed in
    operations.water cut
    
    For a given oil region, the percentage that water constitutes of
    all fluids extracted from all wells in that region.References to:




    BOE is to barrels-of-oil equivalent,
    Mcf is to thousand cubic feet, and
    Bcf is to billion cubic feet.

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FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. These
forward-looking statements are, by their nature, subject to
significant risks and uncertainties. These forward-looking
statements include, without limitation, statements relating to:




    the amounts and nature of future exploration, development and
    other capital expenditures;
    future prices and demand for crude oil, natural gas, refined
    products and chemical products;
    development projects;
    exploration prospects;
    reserves potential;
    production of oil and gas and refined and chemical products;
    development and drilling potential;
    expansion and other development trends of the oil and gas
    industry;
    the planned development of our natural gas operations;
    the planned expansion of our refined product marketing network;
    the planned expansion of our natural gas infrastructure;
    the anticipated benefit from the acquisition of certain overseas
    assets from CNPC, our parent company;
    the plan to continue to pursue attractive business opportunities
    outside China;
    our future overall business development and economic performance;
    our anticipated financial and operating information regarding,
    and the future development and economic performance of, our
    business;
    our anticipated market risk exposure arising from future changes
    in interest rates, foreign exchange rates and commodity prices;
    and
    other prospects of our business and operations.The words anticipate, believe,
could, estimate, expect,
intend, may, plan,
seek, will and would and
similar expressions, as they related to us, are intended to
identify a number of these forward-looking statements.

By their nature, forward-looking statements involve risks and
uncertainties because they relate to events and depend on
circumstances that will occur in the future and are beyond our
control. The forward-looking statements reflect our current
views with respect to future events and are not a guarantee of
future performance. Actual results may differ materially from
information contained in the forward-looking statements as a
result of a number of factors, including, without limitation,
the risk factors set forth in this annual report and the
following:




    fluctuations in crude oil and natural gas prices;
    failure to achieve continued exploration success;
    failures or delays in achieving production from development
    projects;
    continued availability of capital and financing;
    acquisitions and other business opportunities that we may pursue;

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
    general economic, market and business conditions, including
    volatility in interest rates, changes in foreign exchange rates
    and volatility in commodity markets;
    liability for remedial actions under environmental regulations;
    impact of the PRCs entry into the World Trade Organization;
    the actions of competitors;
    wars and acts of terrorism or sabotage;
    changes in policies, laws or regulations of the PRC, including
    changes in applicable tax rates;
    the other changes in global economic and political conditions
    affecting the production, supply and demand and pricing of crude
    oil, refined products, petrochemical products and natural gas;
    and
    the other risk factors discussed in this annual report, and
    other factors beyond our control.You should not place undue reliance on any forward-looking
statement.

7



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##### Table of Contents

PART I





ITEM 1  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
AND ADVISORS

Not applicable. However, see Item 6 
Directors, Senior Management and Employees 
Directors, Senior Management and Supervisors.





ITEM 2  OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.





ITEM 3  KEY INFORMATION





Exchange Rates

The noon buying rate in New York City for cable transfers as
certified for customs purposes by the Federal Reserve Bank of
New York was US$1.00=RMB 7.7039 on May 7, 2007. The
following table sets forth the high and low noon buying rates
between Renminbi and U.S. dollars for each month during the
previous six months:

|                         |  |                  |        |     |  |  |        | 
|------------------------ |  | ---------------- | ------ | --- |  |  | ------ | 
|                         |  | Noon buying rate
|                         |  |                 
|                         |  | High             |        | Low
|                         |  |                  |        |    
|                         |  | (RMB per US$)   
|November 2006            |  |                  | 7.8750 |     |  |  | 7.8303 | 
|December 2006            |  |                  | 7.8350 |     |  |  | 7.8041 | 
|January 2007             |  |                  | 7.8127 |     |  |  | 7.7705 | 
|February 2007            |  |                  | 7.7632 |     |  |  | 7.7410 | 
|March 2007               |  |                  | 7.7454 |     |  |  | 7.7232 | 
|April 2007               |  |                  | 7.7345 |     |  |  | 7.7090 | 
|May 2007 (through May 7) |  |                  | 7.7065 |     |  |  | 7.7035 | 



|     |  |                          |        | 
|---- |  | ------------------------ | ------ | 
|     |  | Average noon buying rate
|     |  |                         
|     |  | (RMB per US$)           
|2002 |  |                          | 8.2772 | 
|2003 |  |                          | 8.2772 | 
|2004 |  |                          | 8.2768 | 
|2005 |  |                          | 8.1826 | 
|2006 |  |                          | 7.9725 | 

8



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##### Table of Contents

Selected Financial Data

Historical Financial Information

You should read the selected historical financial data set forth
below in conjunction with the consolidated financial statements
of PetroChina and their notes and Item 5 
Operating and Financial Review and Prospects included
elsewhere in this annual report. The selected historical income
statement and cashflow data for the years ended
December 31, 2004, 2005 and 2006 and the selected
historical balance sheet data as of December 31, 2005 and
2006 set forth below are derived from our audited consolidated
financial statements included elsewhere in this annual report.
The selected historical income statement data and cashflow data
for the years ended December 31, 2002 and 2003 and the
selected historical balance sheet data as of December 31,
2002, 2003 and 2004 set forth below are derived from our audited
financial statements, not included in this annual report. The
financial information included in this section may not
necessarily reflect our results of operations, financial
position and cash flows in the future.

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|                                                                  |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |          |          |  
|----------------------------------------------------------------- | ----------------------------------------------------------------------- | ---------------------------------- | ------- | ------- | -------- | ------- | ------- | ------- | -------- | ---- | ------- | -------- | -------- | - | ------- | -------- | -------- | - | ------- | -------- | -------- | -
|                                                                  |                                                                         | Year ended December 31,           
|                                                                  |                                                                         |                                   
|                                                                  |                                                                         | 2002(1)                            |         | 2003(1) |          | 2004(1) |         | 2005    |          | 2006
|                                                                  |                                                                         |                                    |         |         |          |         |         |         |          |     
|                                                                  |                                                                         | RMB                                |         | RMB     |          | RMB     |         | RMB     |          | RMB 
|                                                                  |                                                                         | (in millions, except for per share
|                                                                  |                                                                         | and per ADS data)                 
|Income Statement Data                                             |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|IFRS                                                              |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|Revenues                                                          |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|                                                                  | Sales and other operating revenues                                      |                                    |         | 249,386 |          |         |         | 310,431 |          |      |         | 397,354  |          |   |         | 552,229  |          |   |         | 688,978  |         
|                                                                  |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|Operating expenses                                                |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|                                                                  | Purchases, services and other                                           |                                    |         | (71,383 | )        |         |         | (89,741 | )        |      |         | (114,249 | )        |   |         | (200,321 | )        |   |         | (271,123 | )       
|                                                                  | Employee compensation costs                                             |                                    |         | (16,665 | )        |         |         | (20,044 | )        |      |         | (22,934  | )        |   |         | (29,675  | )        |   |         | (39,161  | )       
|                                                                  | Exploration expenses, including
    exploratory dry holes               |                                    |         | (8,203  | )        |         |         | (10,624 | )        |      |         | (12,090  | )        |   |         | (15,566  | )        |   |         | (18,822  | )       
|                                                                  | Depreciation, depletion and
    amortization                            |                                    |         | (37,680 | )        |         |         | (42,163 | )        |      |         | (48,362  | )        |   |         | (51,305  | )        |   |         | (61,388  | )       
|                                                                  | Selling, general and administrative
    expenses                        |                                    |         | (23,930 | )        |         |         | (25,982 | )        |      |         | (28,302  | )        |   |         | (36,538  | )        |   |         | (43,235  | )       
|                                                                  | Employee separation costs and
    shutting down of manufacturing assets |                                    |         | (2,121  | )        |         |         | (2,355  | )        |      |         | (220     | )        |   |         |         |          |   |         |         |         
|                                                                  | Taxes other than income taxes                                           |                                    |         | (15,366 | )        |         |         | (16,821 | )        |      |         | (19,943  | )        |   |         | (23,616  | )        |   |         | (56,666  | )       
|                                                                  | Revaluation loss of property, plant
    and equipment                   |                                    |         |        |          |         |         | (391    | )        |      |         |         |          |   |         |         |          |   |         |         |         
|                                                                  | Other expenses, net                                                     |                                    |         | (59     | )        |         |         | (598    | )        |      |         | (116     | )        |   |         | (3,037   | )        |   |         | (607     | )       
|                                                                  |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|                                                                  |                                                                         | Total operating expenses           |         |         | (175,407 | )       |         |         | (208,719 | )    |         |          | (246,216 | ) |         |          | (360,058 | ) |         |          | (491,002 | )
|                                                                  |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|Income from operations                                            |                                                                         |                                    | 73,979  |         |          |         | 101,712 |         |          |      | 151,138 |          |          |   | 192,171 |          |          |   | 197,976 |         
|                                                                  |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|Income from equity affiliates and
    jointly controlled entities |                                                                         |                                    | 169     |         |          |         | 933     |         |          |      | 1,621   |          |          |   | 2,401   |          |          |   | 2,277   |         
|Exchange gain (loss), net                                         |                                                                         |                                    | (430    | )       |          |         | (36     | )       |          |      | 8       |          |          |   | 88      |          |          |   | 74      |         
|Interest income                                                   |                                                                         |                                    | 663     |         |          |         | 973     |         |          |      | 1,373   |          |          |   | 1,924   |          |          |   | 2,066   |         
|Interest expense                                                  |                                                                         |                                    | (4,068  | )       |          |         | (2,889  | )       |          |      | (2,896  | )        |          |   | (2,762  | )        |          |   | (3,220  | )       
|                                                                  |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|Income before taxes                                               |                                                                         |                                    | 70,313  |         |          |         | 100,693 |         |          |      | 151,244 |          |          |   | 193,822 |          |          |   | 199,173 |         
|Income taxes                                                      |                                                                         |                                    | (22,939 | )       |          |         | (28,796 | )       |          |      | (43,598 | )        |          |   | (54,180 | )        |          |   | (49,776 | )       
|                                                                  |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|Income for this year                                              |                                                                         |                                    | 47,374  |         |          |         | 71,897  |         |          |      | 107,646 |          |          |   | 139,642 |          |          |   | 149,397 |         
|                                                                  |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|Attributable to:                                                  |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|Shareholders                                                      |                                                                         |                                    | 46,766  |         |          |         | 69,835  |         |          |      | 103,843 |          |          |   | 133,362 |          |          |   | 142,224 |         
|Minority shareholders                                             |                                                                         |                                    | 608     |         |          |         | 2,062   |         |          |      | 3,803   |          |          |   | 6,280   |          |          |   | 7,173   |         
|                                                                  |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|                                                                  |                                                                         |                                    | 47,374  |         |          |         | 71,897  |         |          |      | 107,646 |          |          |   | 139,642 |          |          |   | 149,397 |         
|                                                                  |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|Basic and diluted net income per
    share                        |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|                                                                  | Attributable to shareholders for
    this
    year(2)                   |                                    |         | 0.27    |          |         |         | 0.40    |          |      |         | 0.59     |          |   |         | 0.75     |          |   |         | 0.79     |         
|Basic and diluted net income per
    ADS(3)                       |                                                                         |                                    | 26.60   |         |          |         | 39.72   |         |          |      | 59.06   |          |          |   | 75.44   |          |          |   | 79.45   |         
|US GAAP                                                           |                                                                         |                                    |         |         |          |         |         |         |          |      |         |          |          |   |         |          |          |   |         |         
|Net income                                                        |                                                                         |                                    | 49,693  |         |          |         | 75,640  |         |          |      | 109,051 |          |          |   | 137,866 |          |          |   | 146,087 |         
|Basic and diluted net income per
    share(2)                     |                                                                         |                                    | 0.28    |         |          |         | 0.43    |         |          |      | 0.62    |          |          |   | 0.78    |          |          |   | 0.82    |         
|Basic and diluted net income per
    ADS(3)                       |                                                                         |                                    | 28.26   |         |          |         | 43.02   |         |          |      | 62.02   |          |          |   | 77.99   |          |          |   | 81.60   |         

10



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##### Table of Contents



|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |         |         | 
|-------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | -------------------------------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|                                                                                             |                                                                                              | As of December 31,                    
|                                                                                             |                                                                                              |                                       
|                                                                                             |                                                                                              | 2002(1)                                |         | 2003(1) |         | 2004(1) |         | 2005    |         | 2006
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |     
|                                                                                             |                                                                                              | RMB                                    |         | RMB     |         | RMB     |         | RMB     |         | RMB 
|                                                                                             |                                                                                              | (in millions, except for per share and
|                                                                                             |                                                                                              | per ADS data)                         
|Balance Sheet Data                                                                           |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|IFRS                                                                                         |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|Assets                                                                                       |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|Current assets                                                                               |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                             | Cash and cash equivalents                                                                    |                                        |         | 19,532  |         |         |         | 11,613  |         |      |         | 11,688  |         |  |         | 80,905  |         |  |         | 48,559  |        
|                                                                                             | Time deposits with maturities after
    three months but within 12 months                    |                                        |         | 2,621   |         |         |         | 2,648   |         |      |         | 1,425   |         |  |         | 1,691   |         |  |         | 3,012   |        
|                                                                                             | Investments in collateralized loans                                                          |                                        |         | 420     |         |         |         | 24,224  |         |      |         | 33,217  |         |  |         | 235     |         |  |         |        |        
|                                                                                             | Accounts receivable                                                                          |                                        |         | 6,544   |         |         |         | 4,115   |         |      |         | 3,842   |         |  |         | 4,630   |         |  |         | 8,488   |        
|                                                                                             | Inventories, at net book value                                                               |                                        |         | 29,352  |         |         |         | 30,064  |         |      |         | 47,377  |         |  |         | 62,733  |         |  |         | 76,038  |        
|                                                                                             | Prepaid expenses and other current
    assets                                                |                                        |         | 19,618  |         |         |         | 18,845  |         |      |         | 24,704  |         |  |         | 25,701  |         |  |         | 26,125  |        
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                             |                                                                                              | Total current assets                   |         |         | 78,087  |         |         |         | 91,509  |      |         |         | 122,253 |  |         |         | 175,895 |  |         |         | 162,222 | 
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|Non-current assets                                                                           |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                             | Property, plant and equipment, less
    accumulated depreciation, depletion and amortization |                                        |         | 404,135 |         |         |         | 442,311 |         |      |         | 485,612 |         |  |         | 563,890 |         |  |         | 645,337 |        
|                                                                                             | Long-term investments, at net book
    value                                                 |                                        |         | 6,055   |         |         |         | 9,405   |         |      |         | 11,504  |         |  |         | 13,608  |         |  |         | 35,010  |        
|                                                                                             | Prepaid operating lease rentals                                                              |                                        |         | 6,267   |         |         |         | 7,286   |         |      |         | 12,307  |         |  |         | 16,235  |         |  |         | 20,468  |        
|                                                                                             | Intangible and other assets                                                                  |                                        |         | 2,769   |         |         |         | 3,027   |         |      |         | 3,020   |         |  |         | 5,011   |         |  |         | 6,627   |        
|                                                                                             | Time deposits mature after one year                                                          |                                        |         | 3,498   |         |         |         | 3,485   |         |      |         | 3,751   |         |  |         | 3,428   |         |  |         | 2,499   |        
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                             | Total non-current assets                                                                     |                                        |         | 422,724 |         |         |         | 465,514 |         |      |         | 516,194 |         |  |         | 602,172 |         |  |         | 709,941 |        
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                             |                                                                                              | Total assets                           |         |         | 500,811 |         |         |         | 557,023 |      |         |         | 638,447 |  |         |         | 778,067 |  |         |         | 872,163 | 
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                            
|Liabilities and
    shareholders equity                                                    
|Current liabilities                                                                          |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                             | Short-term debt                                                                              |                                        |         | 23,185  |         |         |         | 34,328  |         |      |         | 34,937  |         |  |         | 28,689  |         |  |         | 35,763  |        
|                                                                                             | Accounts payable and accrued
    liabilities                                                 |                                        |         | 59,950  |         |         |         | 66,700  |         |      |         | 73,072  |         |  |         | 99,758  |         |  |         | 120,182 |        
|                                                                                             | Income tax payable                                                                           |                                        |         | 5,581   |         |         |         | 12,068  |         |      |         | 17,484  |         |  |         | 20,567  |         |  |         | 17,744  |        
|                                                                                             | Other taxes payable                                                                          |                                        |         | 5,767   |         |         |         | 9,251   |         |      |         | 5,032   |         |  |         | 4,824   |         |  |         | 6,190   |        
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                             |                                                                                              | Total current liabilities              |         |         | 94,483  |         |         |         | 122,347 |      |         |         | 130,525 |  |         |         | 153,838 |  |         |         | 179,879 | 
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|Non-current liabilities                                                                      |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                             | Long-term debt                                                                               |                                        |         | 68,894  |         |         |         | 51,601  |         |      |         | 44,648  |         |  |         | 44,570  |         |  |         | 35,634  |        
|                                                                                             | Other long-term obligations                                                                  |                                        |         | 1,707   |         |         |         | 2,010   |         |      |         | 2,481   |         |  |         | 1,046   |         |  |         | 995     |        
|                                                                                             | Assets disposal obligations                                                                  |                                        |         | 585     |         |         |         | 735     |         |      |         | 919     |         |  |         | 14,187  |         |  |         | 18,481  |        
|                                                                                             | Deferred taxes                                                                               |                                        |         | 10,832  |         |         |         | 13,436  |         |      |         | 16,902  |         |  |         | 20,759  |         |  |         | 19,583  |        
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                             |                                                                                              | Total non-current liabilities          |         |         | 82,018  |         |         |         | 67,782  |      |         |         | 64,950  |  |         |         | 80,562  |  |         |         | 74,693  | 
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                             |                                                                                              | Total liabilities                      |         |         | 176,501 |         |         |         | 190,129 |      |         |         | 195,475 |  |         |         | 234,400 |  |         |         | 254,572 | 
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|Equity                                                                                       |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|Shareholders equity                                                                         |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|Share capital                                                                                |                                                                                              |                                        | 175,824 |         |         |         | 175,824 |         |         |      | 175,824 |         |         |  | 179,021 |         |         |  | 179,021 |        
|Retained income                                                                              |                                                                                              |                                        | 57,358  |         |         |         | 88,152  |         |         |      | 143,115 |         |         |  | 203,812 |         |         |  | 264,092 |        
|Reserves                                                                                     |                                                                                              |                                        | 84,456  |         |         |         | 93,952  |         |         |      | 108,834 |         |         |  | 132,556 |         |         |  | 143,564 |        
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                             |                                                                                              |                                        | 317,638 |         |         |         | 357,928 |         |         |      | 427,773 |         |         |  | 515,389 |         |         |  | 586,677 |        
|Minority interest                                                                            |                                                                                              |                                        | 6,672   |         |         |         | 8,966   |         |         |      | 15,199  |         |         |  | 28,278  |         |         |  | 30,914  |        
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|Total equity                                                                                 |                                                                                              |                                        | 324,310 |         |         |         | 366,894 |         |         |      | 442,972 |         |         |  | 543,667 |         |         |  | 617,591 |        
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                             |                                                                                              | Total liabilities and equity           |         |         | 500,811 |         |         |         | 557,023 |      |         |         | 638,447 |  |         |         | 778,067 |  |         |         | 872,163 | 
|                                                                                             |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|Share capital, issued and
    outstanding, RMB 1.00 par value                                |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|                                                                                             | State-owned shares                                                                           |                                        |         | 158,242 |         |         |         | 158,242 |         |      |         | 158,242 |         |  |         | 157,922 |         |  |         | 157,922 |        
|                                                                                             | H shares and ADSs                                                                            |                                        |         | 17,582  |         |         |         | 17,582  |         |      |         | 17,582  |         |  |         | 21,099  |         |  |         | 21,099  |        
|US GAAP                                                                                      |                                                                                              |                                        |         |         |         |         |         |         |         |      |         |         |         |  |         |         |         |  |         |        
|Property, plant and equipment, less
    accumulated depreciation, depletion and amortization |                                                                                              |                                        | 353,932 |         |         |         | 413,383 |         |         |      | 452,017 |         |         |  | 537,106 |         |         |  | 622,668 |        
|Total assets                                                                                 |                                                                                              |                                        | 457,065 |         |         |         | 528,685 |         |         |      | 605,018 |         |         |  | 774,740 |         |         |  | 858,400 |        
|Shareholders equity                                                                         |                                                                                              |                                        | 284,426 |         |         |         | 330,520 |         |         |      | 405,573 |         |         |  | 510,141 |         |         |  | 574,470 |        

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##### Table of Contents



|                                              |  |                    |         |         |  |         |          |      |  |      |          |   |  |  |          |   |  |  |          |  
|--------------------------------------------- |  | ------------------ | ------- | ------- |  | ------- | -------- | ---- |  | ---- | -------- | - |  |  | -------- | - |  |  | -------- | -
|                                              |  | As of December 31,
|                                              |  |                   
|                                              |  | 2002(1)            |         | 2003(1) |  | 2004(1) |          | 2005 |  | 2006
|                                              |  |                    |         |         |  |         |          |      |  |     
|                                              |  | RMB                |         | RMB     |  | RMB     |          | RMB  |  | RMB 
|                                              |  | (in millions)     
|Other Financial Data                          |  |                    |         |         |  |         |          |      |  |      |          |   |  |  |          |   |  |  |          |  
|Dividend per share                            |  |                    | 0.12    |         |  |         | 0.18     |      |  |      | 0.26     |   |  |  | 0.34     |   |  |  | 0.36     |  
|Dividend per ADS                              |  |                    | 12.00   |         |  |         | 17.82    |      |  |      | 26.34    |   |  |  | 33.80    |   |  |  | 35.75    |  
|Capital expenditures                          |  |                    | (75,496 | )       |  |         | (86,373  | )    |  |      | (98,946  | ) |  |  | (124,801 | ) |  |  | (148,746 | )
|Cash Flow Data                                |  |                    |         |         |  |         |          |      |  |      |          |   |  |  |          |   |  |  |          |  
|IFRS                                          |  |                    |         |         |  |         |          |      |  |      |          |   |  |  |          |   |  |  |          |  
|Net cash provided by operating
    activities |  |                    | 98,989  |         |  |         | 139,570  |      |  |      | 141,691  |   |  |  | 203,885  |   |  |  | 198,102  |  
|Net cash used for investing
    activities    |  |                    | (73,732 | )       |  |         | (102,549 | )    |  |      | (102,276 | ) |  |  | (91,576  | ) |  |  | (158,451 | )
|Net cash used for financing
    activities    |  |                    | (26,488 | )       |  |         | (35,593  | )    |  |      | (39,586  | ) |  |  | (42,634  | ) |  |  | (71,739  | )








|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Certain financial data for these periods and as of these dates
    are derived from our audited consolidated financial statements,
    not included in this annual report, and were retroactively
    restated. In 2005, we retroactively restated our prior
    years consolidated financial statements to reflect the
    effect as if the refinery and petrochemical operations of
    Ningxia Dayuan Refinery and Petrochemical Company Limited, or
    Dayuan, Qingyang Refinery and Petrochemical Company Limited, or
    Qingyang, both of which we acquired from CNPC, and the
    operations of CNPC Exploration and Development Company Limited,
    or CNPC E&D, of which we acquired a 50% interest from China
    National Oil and Gas Exploration and Development Corporation, or
    CNODC, a wholly-owned subsidiary of CNPC, had always been
    combined since inception.
|   
|(2) | The basic and diluted income per share for the years ended
    December 31, 2002, 2003 and 2004 has been calculated by
    dividing the net profit by the number of 175,824 million
    shares issued and outstanding for the corresponding years. The
    basic and diluted income per share for the year ended
    December 31, 2005 was calculated by dividing the net profit
    by the weighted average number of 176,770 million shares
    issued and outstanding for the year presented. The basic and
    diluted income per share for the year ended December 31,
    2006 was calculated by dividing the net profit by the number of
    179,021 million shares issued and outstanding for the year
    presented.                                                                                                                                                               
|   
|(3) | The basic and diluted income per ADS for the years ended
    December 31, 2002, 2003 and 2004 has been calculated by
    dividing the net profit by the number of 175,824 million
    shares issued and outstanding for the corresponding years, each
    ADS representing 100 H shares. The basic and diluted income per
    ADS for the year ended December 31, 2005 has been
    calculated by dividing the net profit by the weighted average
    number of 176,770 million shares issued and outstanding for
    the year presented, each ADS representing 100 H shares. The
    basic and diluted income per ADS for the year ended
    December 31, 2006 has been calculated by dividing the net
    profit by the number of 179,021 million shares issued and
    outstanding for the year presented, each ADS representing 100 H
    shares.                                       

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Risk Factors

Our business is subject to various changing competitive,
economic and social conditions in the PRC. Such changing
conditions entail certain risks, which are described below.




    Our operations are affected by the volatility of prices for
    crude oil and refined products. We and China Petroleum and
    Chemical Corporation, or Sinopec, set our crude oil median
    prices monthly based on the Singapore trading prices for crude
    oil. In 2006, the PRC government, under its macro economic
    controls, introduced a new mechanism for determining the prices
    of refined products. Historically, international prices for
    crude oil and refined products have fluctuated widely in
    response to changes in many factors, such as global and regional
    economic and political developments and global and regional
    supply and demand for crude oil and refined products. We do not
    have, and will not have, control over the factors affecting
    international prices for crude oil and refined products. A
    decline in crude oil prices will reduce our crude oil revenues
    derived from external customers. If crude oil prices remain at a
    low level for a prolonged period, our company has to determine
    and estimate whether our oil and gas assets may suffer
    impairment losses and, if so, the amount of the impairment
    losses. An increase in crude oil prices may, however, increase
    the production costs of refined products. In addition, a decline
    in refined products prices will reduce our revenue derived from
    refining operations. An increase in the refined products prices,
    however, will increase the production costs of chemical products
    which use refined products as raw materials.
    The crude oil and natural gas reserve data in this annual report
    are only estimates. The reliability of reserve estimates depend
    on a number of factors, assumptions and variables, such as the
    quality and quantity of our technical and economic data and the
    prevailing oil and gas prices applicable to our production, many
    of which are beyond our control and may prove to be incorrect
    over time. Results of drilling, testing and production after the
    date of the estimates may require substantial upward or downward
    revisions in our reserve data. Our actual production, revenues
    and expenditures with respect to our reserves may differ
    materially from these estimates because of these revisions.
    Our proved crude oil reserves decreased gradually and modestly
    from 2001 to 2003 because the decrease in the crude oil reserves
    in our Daqing and Liaohe oil regions could not be offset by the
    increase in the crude oil reserves in our oil regions in
    northwestern China, such as the Xinjiang oil region, the
    Changqing oil and gas region and the Tarim oil region. Although
    our proved crude oil reserves increased slightly in 2004, 2005
    and 2006 compared to prior years, we cannot assure you that we
    will be able to increase or maintain our crude oil reserves in
    the future by our exploration activities in China. We are
    actively pursuing business opportunities outside China to
    supplement our domestic resources. For instance, in 2005 and
    2006, we acquired certain overseas crude oil and natural gas
    assets from CNPC. We cannot assure you, however, that we can
    successfully locate sufficient alternative sources of crude oil
    supply or at all due to the complexity of the international
    political, economic and other conditions. If we fail to obtain
    sufficient alternative sources of crude oil supply, our results
    of operations and financial condition may be materially and
    adversely affected.
    The United States Securities and Exchange Commission, or the
    SEC, as required by Section 404 of the Sarbanes-Oxley Act
    of 2002, adopted rules requiring every public company in the
    United States to include a management report on such
    companys internal control over financial reporting in its
    annual report, which contains managements assessment of
    the effectiveness of the companys internal control over
    financial reporting. In addition, an independent registered
    public accounting firm must attest to and report on
    managements assessment of the effectiveness of the
    companys internal control over financial reporting.
    Although our management concluded that our internal control over
    our financial reporting for the fiscal year ended
    December 31, 2006 was effective, we may discover other
    deficiencies in the course of our future evaluation of our
    internal control over our financial reporting and

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may be unable to remediate such deficiencies in a timely manner.
    Moreover, in future years, even if our management concludes that
    our internal control over financial reporting is effective, our
    independent registered public accounting firm may still be
    unable to attest to our managements assessment or may
    issue a report that concludes that our internal control over
    financial reporting is not effective. If we fail to maintain the
    adequacy of our internal control over financial reporting, we
    may not be able to conclude that we have effective internal
    control over financial reporting on an ongoing basis, in
    accordance with the Sarbanes-Oxley Act. Moreover, effective
    internal control is necessary for us to produce reliable
    financial reports and is important to prevent fraud. As a
    result, our failure to achieve and maintain effective internal
    control over financial reporting could result in the loss of
    investor confidence in the reliability of our financial
    statements, which in turn could harm our business and negatively
    impact the trading prices of our ADSs or H shares.
    Exploring for, producing and transporting crude oil and natural
    gas and producing and transporting refined products and chemical
    products involve many hazards. These hazards may result in:


    fires;
    explosions;
    spills;
    blow-outs; and
    other unexpected or dangerous conditions causing personal
    injuries or death, property damage, environmental damage and
    interruption of operations.

Some of our oil and natural gas fields are surrounded by
    residential areas or located in areas where natural disasters,
    such as earthquakes, floods and sandstorms, tend to occur more
    frequently than in other areas. As with many other companies
    around the world that conduct similar businesses, we have
    experienced accidents that have caused property damage and
    personal injuries and death.Significant operating hazards and natural disasters may cause
    partial interruptions to our operations and property and
    environmental damage that could have an adverse impact on our
    financial condition. On November 13, 2005, an explosion
    occurred at one of our branch companies in Jilin Province. The
    incident caused serious personal injuries and deaths, loss of
    property and water pollution of the Songhuajing River. The
    Chinese government completed its investigation of this accident
    in December 2006. As a result, our company paid a fine of RMB
    1 million in settlement of all liabilities arising from the
    accident.Except for limited insurance coverage for vehicles and certain
    assets that we consider to be subject to significant operating
    risks, we do not carry any other insurance for our property,
    facilities or equipment in respect of our business operations.
    We do not currently carry any third party liability insurance
    against claims relating to personal injury or death, property or
    environmental damage arising from accidents on our property or
    relating to our operations. We also do not currently carry any
    business interruption insurance. The limited insurance coverage
    of our assets exposes us to substantial risks and will not cover
    most losses.


    CNPC owns approximately 88.21% of our share capital. This
    ownership percentage enables CNPC to elect our entire board of
    directors without the concurrence of any of our other
    shareholders. Accordingly, CNPC is in a position to:


    control our policies, management and affairs;
    subject to applicable PRC laws and regulations and provisions of
    our articles of association, determine the timing and amount of
    dividend payments and adopt amendments to certain of the
    provisions of our articles of association; and

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
    otherwise determine the outcome of most corporate actions and,
    subject to the requirements of the Listing Rules of the Hong
    Kong Stock Exchange, cause our company to effect corporate
    transactions without the approval of minority shareholders.

CNPCs interests may sometimes conflict with those of some
    or all of our minority shareholders. We cannot assure you that
    CNPC, as controlling shareholder, will always vote its shares in
    a way that benefits our minority shareholders.


    In addition to its relationship with us as our controlling
    shareholder, CNPC by itself or through its affiliates also
    provides us with certain services and products necessary for our
    business activities, such as construction and technical
    services, production services and supply of material services.
    The interests of CNPC and its affiliates as providers of these
    services and products to us may conflict with our interests.
    Although we have entered into a Comprehensive Products and
    Services Agreement with CNPC and our transactions with CNPC over
    the past three years have been conducted on open, fair and
    competitive commercial terms, we have only limited leverage in
    negotiating with CNPC and its affiliates over the specific terms
    of the agreements for the future provision of these services and
    products.
    The eastern and southern regions of China have a higher demand
    for refined products and chemical products than the western and
    northern regions. Most of our refineries and chemical plants are
    located in the western and northern regions of China. We incur
    relatively higher transportation costs for delivery of our
    refined products and chemical products to certain areas of the
    eastern and southern regions from our refineries and chemical
    plants in western and northern China. While we continue to
    expand the sales of these products in the eastern and southern
    regions of China, we face strong competition from Sinopec and
    China National Offshore Oil Corp, or CNOOC. As a result, we
    expect that we will continue to encounter difficulty in
    increasing our sales of refined products and chemical products
    in these regions.
    We are currently expanding some of our refinery and
    petrochemical facilities and constructing several natural gas
    pipelines. In addition, we may commence offshore crude oil and
    natural gas exploration and production activities, which could
    require substantial capital expenditures and investments. We
    cannot assure you that the cash generated by our operations will
    be sufficient to fund these development plans or that our actual
    future capital expenditures and investments will not
    significantly exceed our current planned amounts. If either of
    these conditions arises, we may have to seek external financing
    to satisfy our capital needs. Under such circumstance, our
    inability to obtain sufficient funding for our development plans
    could adversely affect our business, financial condition and
    results of operations.
    We are also subject to a number of risks relating to the PRC and
    the PRC oil and gas industry. These risks are described as
    follows:


    Our operations, like those of other PRC oil and gas companies,
    are subject to extensive regulations and control by the PRC
    government. These regulations and control affect many material
    aspects of our operations, such as exploration and production
    licensing, industry-specific and product-specific taxes and fees
    and environmental and safety standards. As a result, we may face
    significant constraints on our ability to implement our business
    strategies, to develop or expand our business operations or to
    maximize our profitability. Our business may also be adversely
    affected by future changes in certain policies of the PRC
    government with respect to the oil and gas industry. For
    example, since March 26, 2006, we have been subject to a
    crude oil special gain levy imposed by the PRC government. As a
    result, we recorded an aggregate of
    RMB 28,914.0 million as such levy to the PRC
    government in relation to our domestic sales of crude oil in
    2006.
    Currently, the PRC government must approve the construction and
    major renovation of significant refining and petrochemical
    facilities as well as the construction of significant

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natural gas and refined product pipelines and storage
    facilities. We presently have several significant projects
    pending approval from the relevant government authorities and
    will need approvals from the relevant government authorities in
    connection with several other significant projects. We do not
    have control over the timing and outcome of the final project
    approvals.
    We receive most of our revenues in Renminbi. A portion of our
    Renminbi revenues must be converted into other currencies to
    meet our foreign currency obligations. The existing foreign
    exchange limitations under the PRC laws and regulations could
    affect our ability to obtain foreign exchange through debt
    financing, or to obtain foreign exchange for capital
    expenditures.
    Prior to 2005, our company performed capping or plugging on
    wellheads and surface facilities that could be salvaged for
    alternative use. For safety reasons, our company also performed
    capping or plugging on certain wells that were considered to be
    in areas with extensive human use at the time of the
    abandonment. Our company, however, did not perform capping or
    plugging on wells that were neither considered to be in areas
    with extensive human use nor could be salvaged for alternative
    use. Consequently, such wellheads and surface facilities were
    left at their original sites after the wells were retired.

The Environmental Protection Regulation for Oil and Gas
Exploration and Production Activities in Heilongjiang Province
and The Environmental Protection Regulation for Oil and
Gas Exploration and Production Activities in Gansu Provincewere issued in mid and late 2005. Based on our reading of
the new provincial regulations and in consultation with the
environmental administrative authorities in Heilongjiang and
Gansu provinces, we believe that such regulations only apply to
the oil and gas properties retired after these regulations were
issued in 2005. Accordingly, our company established standard
abandonment procedures, requesting that all of its branch and
subsidiary companies recognize asset retirement provisions for
their currently used oil and gas properties.Our company believes it had no obligation to adopt such
abandonment procedures prior to the issuance of the new
regulations in 2005. For the oil and gas properties that were
retired prior to the issuance of such regulations, the
activities required to retire these assets, at a level that
would be in compliance with the regulations and our internal
policy, have not been performed. The costs associated with these
activities have not been included in the asset retirement
obligations accrued during 2005. However, Heilongjiang Province
and Gansu Province could enact new regulations, amend the
current regulations or retroactively apply the relevant
requirements. If any of these regulations is determined to be
applicable to assets other than those that were retired
subsequent to the dates that these regulations were issued in
2005, we could be required to incur substantial costs associated
with such asset retirement obligations. In addition, we cannot
assure you that the provincial governments other than
Heilongjiang Province and Gansu Province will not enact new
regulations which will require our company to perform additional
asset retirement activities related to the assets retired before
the establishment of our companys internal policy and
areas in which these assets were or continue to be located.


    Because PRC laws, regulations and legal requirements dealing
    with economic matters are relatively new and continue to evolve,
    and because of the limited volume of published 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. We
    have included the Mandatory Provisions and certain additional
    requirements that are imposed by the Hong Kong Stock Exchange
    Listing Rules in our Articles of Association for the purpose of
    reducing the scope of difference between the Hong Kong Company
    Law and the PRC Company Law. However, because the PRC Company
    Law is different in certain important aspects from company laws
    in the United States, Hong Kong

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and other common law jurisdictions and because the PRC
    securities laws and regulations are still at an early stage of
    development, you may not enjoy shareholders protections
    that you may be entitled to in other jurisdictions.
    In addition to the adverse effect on our revenues, margins and
    profitability from any future fall in oil and natural gas
    prices, a prolonged period of low prices or other indicators
    would lead to a review for impairment of our oil and natural gas
    properties. This review would reflect managements view of
    long-term oil and natural gas prices. Such a review could result
    in a charge for impairment which could have a significant effect
    on our results of operations in the period in which it occurs.See also Item 4  Information on the
Company  Regulatory Matters,
Item 5  Operating and Financial Review and
Prospects, Item 8  Financial
Information and Item 11 
Quantitative and Qualitative Disclosures About Market Risk.

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ITEM 4  INFORMATION ON THE COMPANY





Introduction

History and Development of the Company



Overview of Our OperationsWe are one of the largest companies in China in terms of sales.
We are engaged in a broad range of petroleum and natural gas
related activities, including:




    the exploration, development, production and sale of crude oil
    and natural gas;
    the refining, transportation, storage and marketing of crude oil
    and petroleum products;
    the production and marketing of basic petrochemical products,
    derivative chemical products and other chemical
    products; and
    the transmission and storage of crude oil, refined products and
    natural gas as well as the sale of natural gas.We are Chinas largest producer of crude oil and natural
gas. Currently, substantially all of our crude oil and natural
gas reserves and production-related assets are located in China.
In the year ended December 31, 2006, we had total revenue
of RMB 688,978 million and net income of
RMB 142,224 million.

Our exploration, development and production activities commenced
in the early 1950s, when we conducted exploration activities in
the Yumen oil region in northwestern China. The discovery of
crude oil in 1959 in northeastern Chinas Daqing oil
region, one of the worlds largest oil regions in terms of
proved crude oil reserves, marked the beginning of our
large-scale upstream activities. Over the past four decades, we
have conducted crude oil and natural gas exploration activities
in many regions of China. As of December 31, 2006, we had
estimated proved reserves of approximately 11,618.0 million
barrels of crude oil and approximately 53,469.2 billion
cubic feet of natural gas. We believe that we hold production
licenses for a majority of Chinas proved crude oil
reserves and proved natural gas reserves. In the year ended
December 31, 2006, we produced 830.7 million barrels
of crude oil and 1,371.9 billion cubic feet of natural gas
for sale, representing an average production of
2.28 million barrels of crude oil and 3.76 billion
cubic feet of natural gas for sale per day. In 2006, we sold
832.8 million barrels of crude oil and 1,357 billion
cubic feet of natural gas. Approximately 83% of the crude oil we
sold in the year ended December 31, 2006 was supplied to
our refineries.

We commenced limited refining activities in the mid-1950s, when
we began producing gasoline and diesel at refineries in the
Yumen oil region. We now operate 26 refineries located in eight
provinces, four autonomous regions and one municipality. In
2006, our refineries processed approximately 785 million
barrels of crude oil or an average of 2.2 million barrels
per day. In the year ended December 31, 2006, we produced
approximately 68.3 million tons of gasoline, diesel and
kerosene and sold approximately 74.90 million tons of these
products. In the year ended December 31, 2006,
approximately 82% of the crude oil processed in our refineries
was provided by our exploration and production segment and
approximately 16% of the crude oil processed in our refineries
was imported. As of December 31, 2006, our retail
distribution network consisted of 16,624 service stations that
we own and operate, 282 service stations wholly owned by CNPC or
jointly owned by CNPC and third parties to which we provide
supervisory support and 1,301 franchise service stations.

Our chemicals operations commenced in the early 1950s, when we
began producing urea at our first petrochemical plant in Lanzhou
in northwestern China. In the early 1960s, we began producing
ethylene. We currently produce and sell a wide range of basic
and derivative petrochemical products and other chemical
products through 12 chemical plants and four chemical products
sales

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companies located in seven provinces and three autonomous
regions in China. Our other segments supply substantially all of
the hydrocarbon feedstock requirements of our chemicals
operations.

We are Chinas largest natural gas transporter and seller
in terms of sales volume. Our natural gas transmission and
marketing activities commenced in Sichuan in southwestern China
in the 1950s. In 2006, our sales of natural gas totaled
1,357 billion cubic feet, of which 1,200.5 billion
cubic feet was sold through our natural gas and pipeline
segment. As of December 31, 2006, we owned and operated
regional natural gas pipeline networks consisting of 20,590
kilometers of pipelines, of which 19,662 kilometers were
operated by our natural gas and pipeline segment. As of
December 31, 2006, we owned and operated a crude oil
pipeline network consisting of 9,620 kilometers of pipelines
with an average daily throughput of approximately
2.49 million barrels of crude oil. As of December 31,
2006, we also had a refined product pipeline network consisting
of 2,413 kilometers of pipelines with an average daily
throughput of approximately 37,300 tons of refined products.

We have increased our efforts to pursue attractive business
opportunities outside China as part of our business growth
strategy to utilize both domestic and international resources to
strengthen our competitiveness. In June 2005, we entered into a
capital contribution agreement with CNODC, Central Asia
Petroleum Company Limited and CNPC E&D, pursuant to which,
in December 2005, we acquired a 50% interest in CNPC E&D, a
subsidiary of CNODC, for a consideration of
RMB 20,741 million, which was paid to CNPC E&D as
a part of our capital contribution. Under this agreement, CNODC,
a wholly-owned subsidiary of CNPC, transferred certain of its
overseas oil and natural gas assets to CNPC E&D in November
2005. Following the completion of the transactions contemplated
by this agreement, each of CNODC and us obtained a 50% interest
in CNPC E&D and CNODC subsequently transferred its 50%
interest in CNPC E&D to CNPC, which resulted in CNPC holding
the 50% interest in CNPC E&D directly. We have the right to
appoint four of the seven directors of CNPC E&D, which
enables us to maintain effective control over CNPC E&D. We
also entered into a transfer agreement with CNPC E&D in
December 2005 to transfer all of our interest in PTRI, the
operating entity of our oil and natural gas assets in Indonesia,
as the remaining part of our capital contribution to CNPC
E&D for a consideration of RMB 579 million.

Following the completion of the acquisition of CNPC E&D
through capital contribution, we obtained a 50% interest in the
oil and natural gas assets held by CNPC E&D in twelve
countries, including, among others, Kazakhstan, Venezuela and
Peru. The consummation of the transactions described above has
significantly expanded our overseas operations, effectively
increased our oil and gas reserves and production volumes, and
streamlined our existing overseas business in Indonesia with the
acquired businesses.

In August 2006, CNPC E&D entered into an acquisition
agreement to acquire a 67% equity interest in PetroKazakhstan
Inc., or PKZ, from CNPC for a consideration of
US$2,735 million. This acquisition was consummated in
December 2006. This acquisition has streamlined our existing
exploration and development operations in Kazakhstan and
increased our oil and gas assets.

In 2006, we acquired a 100% interest in an exploration block in
Chad through CNPC E&D. This Chad Block covers an area of
220,000 square kilometers and a trap resource of more than
1,000 million barrels of crude oil and is currently one of
our most important overseas exploration blocks. The term
trap resource means the geological reserve estimated
on a non-filled-trap basis. It is equal to the trap area
multiplied by the unit reserve factor and then multiplied by the
filling percentage of the trap. The term unit reserve
factor means the geological serve within one unit area and
one unit depth.

In addition, we are currently assessing the feasibility of
making further investments in international oil and gas markets.

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In the year ended December 31, 2006, we imported
approximately 228.8 million barrels of crude oil, as
compared to 184.9 million and 175.1 million barrels of
crude oil in the years ended December 31, 2005 and 2004,
respectively.



AcquisitionsPursuant to our board resolutions dated October 26, 2005,
we made an offer to the holders of the A Shares of Jinzhou
Petrochemical Co., Ltd. or Jinzhou Petrochemical, to acquire at
the purchase price of RMB 4.25 per share 150 million
outstanding Jinzhou Petrochemical A Shares. As of
December 31, 2006, we acquired 141,497,463 Jinzhou
Petrochemical A Shares, representing 17.97% of the total share
capital of Jinzhou Petrochemical, for a total cash consideration
of approximately RMB 602 million. After the acquisition, we
owned 98.92% of the total share capital of Jinzhou
Petrochemical. Jinzhou Petrochemical was delisted from the
Shenzhen Stock Exchange on January 4, 2006 upon approval
from the China Securities Regulatory Commission.

Pursuant to our board resolutions dated October 26, 2005,
we made separate offers to the holders of the A Shares of Jilin
Chemical Industrial Company Limited, or Jilin Chemical, and the
holders of the H Shares of Jilin Chemical to acquire at the
purchase price of RMB 5.25 per share 200 million
outstanding A Shares, and at the purchase price of
HK$2.80 per Share 964.778 million outstanding H Shares
(including Jilin Chemical ADSs). As of December 31, 2006,
we paid an aggregate of RMB 3,799 million and acquired
189,357,726 A Shares and 961,495,999 H Shares (including ADSs)
of Jilin Chemical, representing 32.32% of the total issued and
outstanding shares of Jilin Chemical. Following the completion
of this acquisition, we owned 99.61% of the total share capital
of Jilin Chemical. Jilin Chemical H Shares, A Shares, and ADSs
were delisted from the Hong Kong Stock Exchange, the Shenzhen
Stock Exchange, and the New York Stock Exchange on
January 23, February 20 and February 15, 2006,
respectively.

Pursuant to our board resolutions dated October 26, 2005,
we made an offer to the holders of A Shares of Liaohe Jinma
Oilfield Co., Ltd. or Liaohe Jinma, to acquire at the purchase
price of RMB 8.80 per share 200 million issued
and outstanding Liaohe Jinma A Shares. As of December 31,
2006, we acquired 194,360,943 Liaohe Jinma A Shares,
representing 17.67% of the total share capital of Liaohe Jinma
for a total consideration of approximately RMB
1,713 million. Following the completion of this
acquisition, we owned 99.49% of the total share capital of
Liaohe Jinma. Upon the approval by China Securities Regulatory
Commission, Liaohe Jinma was delisted from the Shenzhen Stock
Exchange on January 4, 2006.

On December 6, 2005, we entered into two separate purchase
agreements with two wholly-owned subsidiaries of CNPC, Liaohe
Petroleum Exploration Bureau and China Petroleum Pipeline
Bureau, to acquire from the two companies a 15.56% equity
interest and a 20.17% equity interest, respectively, in
PetroChina Fuel Oil Company, or the Fuel Oil Company, a
55.43% subsidiary of our company, with a total cash
consideration of RMB 559 million. The Fuel Oil Company
principally engages in investing in and developing of fuel oil
in the upstream and downstream areas outside the PRC. Upon
completion of the above acquisitions, we increased our interest
in the Fuel Oil Company to 91.16%.



DisposalWe have gradually been transferring our import and export
businesses of crude oil and refined oil to PetroChina
International, our wholly-owned subsidiary. Accordingly, we
entered into an equity transfer agreement with CNPC on
March 17, 2007 to dispose of our entire equity interest in
China National United Oil Corporation, or China United Oil,
representing 70% of the registered capital of China United Oil,
for a cash consideration of approximately
RMB 1.01 billion. China United Oil, over which we have
no unilateral control, engages in the import, export and sale of
crude oil, refined oil and other petrochemical products. The
completion of the disposal is subject to certain
pre-conditions,
including approvals from our independent shareholders, CNPC and
the relevant

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regulatory authorities. Following the disposal, we will cease to
hold any equity interest in China United Oil and most of our
import, export and related international trade businesses will
be conducted through PetroChina International.



Our Corporate Organization and Shareholding
    StructurePetroChina was established as a joint stock company with limited
liability under the Company Law of the PRC on November 5,
1999 as part of a restructuring in which CNPC transferred to us
most of the assets and liabilities of CNPC relating to its
exploration and production, refining and marketing, chemicals
and natural gas businesses. CNPC retained the assets and
liabilities relating to its remaining businesses and operations,
including assets and liabilities relating to international
exploration and production and refining and pipeline operations.
CNPC is our primary provider of a wide range of services and
products. On April 7, 2000, PetroChina completed a global
offering of H shares and ADSs. In September 2005,
PetroChina completed a follow-on offering of over 3 billion
H Shares at the price of HK$6.00 per share. Currently,
CNPC owns an approximate 88.21% interest in PetroChina.

The following chart illustrates our corporate organization and
our shareholding structure:

(CHART)





(1)
    Indicates approximate shareholding.(2)
    Includes subsidiary companies and those branches without legal
    person status.(3)
    Represents enterprises directly administered and operated by
    such segment.(4)
    Includes PetroChina Planning & Engineering Institute,
    PetroChina Exploration & Development Research
    Institute, CNPC E&D, PetroChina Foreign Cooperation
    Administration Department, PetroChina International Co., Ltd.
    and Petrochemical Research Institute.

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The following chart illustrates our management structure:

(CHART)





(1)
    Includes subsidiary companies and those branches without legal
    person status.(2)
    Represents enterprises directly administered and operated by
    such segment.

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General Information

Our legal name is
(CHINESE TEXT), and
its English translation is PetroChina Company Limited. Our
headquarters are located at 16 Andelu, Dongcheng District,
Beijing, China, 100011, and our telephone number at this address
is (86-10) 8488-6270. Our website address is
www.petrochina.com.cn. The information on our website is not
part of this annual report.

Launch of New Logo

Effective December 26, 2004, we began using a new logo
(PETROCHINA COMPANY LOGO)
that is jointly owned by us and CNPC. We have applied for
trademark registration of the new logo with the State Trademark
Bureau of the PRC. This application is currently pending with
the State Trademark Bureau of the PRC. To date, we have
registered our new logo as a trademark in Hong Kong and Burma.
We are also in the process of registering the new logo in a
number of other countries.

23



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##### Table of Contents

(GAS AND OIL MAP)

24



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##### Table of Contents

Exploration and Production

We are engaged in crude oil and natural gas exploration,
development and production. Substantially all of our total
estimated proved crude oil and natural gas reserves are located
in China, principally in northeastern, northern, southwestern
and northwestern China. The Songliao basin, located in
Heilongjiang and Jilin provinces in northeastern China,
including the Daqing and Jilin oil regions, accounted for 42.8%
of our proved crude oil reserves as of December 31, 2006
and 43.9% of our crude oil production in 2006. We also have
significant crude oil reserves and operations in the area around
the Bohai Bay. The Bohai Bay basin includes the Liaohe, Dagang,
Huabei and Jidong oil regions and accounted for 19.2% of our
proved crude oil reserves as of December 31, 2006 and 20.8%
of our crude oil production in 2006. Our proved natural gas
reserves and production are generally concentrated in
northwestern and southwestern China, specifically in the Erdos,
Tarim and Sichuan basins. Our overseas proved crude oil reserves
and proved natural gas reserves accounted for 5.5% of our proved
crude oil reserves and 1.5% of our proved natural gas reserves
as of December 31, 2006 and our overseas oil production and
natural gas production accounted for 6.0% of our crude oil
production and 3.0% of our natural gas production in 2006.

We currently hold exploration licenses covering a total area of
approximately 446.4 million acres and production licenses
covering a total area of approximately 16.4 million acres.
In 2006, our exploration and production segment had income from
operations of RMB 219,860 million.

To further develop our crude oil and natural gas businesses, we
have applied to the Ministry of Land and Resources for oil and
gas exploration and production licenses covering the southern
part of the South China Sea to commence offshore crude oil and
natural gas exploration and production. We cannot assure you
that we will ultimately obtain these licenses or that we will
have sufficient capital to fund these activities.

Reserves

Our estimated proved reserves as of December 31, 2006
totaled approximately 11,618.0 million barrels of crude oil
and approximately 53,469.2 billion cubic feet of natural
gas. As of December 31, 2006, proved developed reserves
accounted for 79.1% and 42.2% of our total proved crude oil and
natural gas reserves, respectively. Total proved hydrocarbon
reserves on a
barrels-of-oil
equivalent basis increased by 5.0% from approximately
19,556.7 million
barrels-of-oil
equivalent as of the end of 2005 to approximately
20,529.4 million
barrels-of-oil
equivalent as of the end of 2006, taking account of our overseas
crude oil reserves of 642.5 million barrels and overseas
natural gas reserves of 795.6 billion cubic feet, totaling
775.1 barrels-of-oil
equivalent. Natural gas as a percentage of total proved
hydrocarbon reserves increased from 41.0% as of
December 31, 2005 to 43.4% as of December 31, 2006.

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##### Table of Contents

The following table sets forth our estimated proved reserves
(including proved developed reserves and proved undeveloped
reserves) and proved developed reserves of crude oil and natural
gas as of December 31, 2004, 2005 and 2006. We prepared our
reserve estimates as of December 31, 2004, 2005 and 2006,
on the basis of reports prepared by DeGolyer &
MacNaughton and Gaffney, Cline & Associates,
independent engineering consultants, in accordance with
Statement of Financial Accounting Standards No. 69, or
SFAS No. 69. Our reserve estimates include only crude
oil and natural gas which we believe can be reasonably produced
within the current terms of our production licenses. See
Regulatory Matters  Exploration Licenses and
Production Licenses for a discussion of our production
licenses. Also see Item 3  Key
Information  Risk Factors for a discussion of
the uncertainty inherent in the estimation of proved reserves.

|                                              |                                 |                       |          |                |   |                    |          |          |   |  |          |          |  
|--------------------------------------------- | ------------------------------- | --------------------- | -------- | -------------- | - | ------------------ | -------- | -------- | - |  | -------- | -------- | -
|                                              |                                 | Crude oil             |          | Natural gas(1) |   | Combined(1)       
|                                              |                                 |                       |          |                |   |                   
|                                              |                                 | (millions of barrels) |          | (Bcf)          |   | (BOE, in millions)
|Proved developed and undeveloped
    reserves |                                 |                       |          |                |   |                    |          |          |   |  |          |         
|Reserves as of December 31,
    2004          |                                 |                       | 11,501.2 |                |   |                    | 45,248.9 |          |   |  | 19,042.7 |         
|                                              | Revisions of previous estimates |                       |          | 156.8          |   |                    |          | 212.9    |   |  |          | 192.3    |  
|                                              | Extensions and discoveries      |                       |          | 605.5          |   |                    |          | 4,004.8  |   |  |          | 1,273.0  |  
|                                              | Improved recovery               |                       |          | 101.4          |   |                    |          |         |   |  |          | 101.4    |  
|                                              | Production for the year         |                       |          | (828.7         | ) |                    |          | (1,343.5 | ) |  |          | (1,052.7 | )
|Reserves as of December 31,
    2005          |                                 |                       | 11,536.2 |                |   |                    | 48,123.1 |          |   |  | 19,556.7 |         
|                                              | Revisions of previous estimates |                       |          | 196.1          |   |                    |          | 685.9    |   |  |          | 310.4    |  
|                                              | Extensions and discoveries      |                       |          | 635.3          |   |                    |          | 6,247.7  |   |  |          | 1,676.5  |  
|                                              | Improved recovery               |                       |          | 81.1           |   |                    |          |         |   |  |          | 81.1     |  
|                                              | Production for the year         |                       |          | (830.7         | ) |                    |          | (1,587.5 | ) |  |          | (1,095.3 | )
|Reserves as of December 31,
    2006          |                                 |                       | 11,618.0 |                |   |                    | 53,469.2 |          |   |  | 20,529.4 |         
|Proved developed
    reserves                 |                                 |                       |          |                |   |                    |          |          |   |  |          |         
|                                              | As of December 31, 2004         |                       |          | 9,067.9        |   |                    |          | 17,254.5 |   |  |          | 11,943.6 |  
|                                              | As of December 31, 2005         |                       |          | 9,194.8        |   |                    |          | 19,857.8 |   |  |          | 12,504.4 |  
|                                              | As of December 31, 2006         |                       |          | 9,185.2        |   |                    |          | 22,563.9 |   |  |          | 12,945.8 |  






|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(1) | Represents natural gas remaining after field separation for
    condensate removal and reduction for flared gas.

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##### Table of Contents

The following tables set forth our crude oil and natural gas
proved reserves and proved developed reserves by region as of
December 31, 2004, 2005 and 2006.

|                     |       |                       |         |          |           |  |           |             |  |  |           |           |  |             |         |         |           |  |         |          |  |  |         |         | 
|-------------------- | ----- | --------------------- | ------- | -------- | --------- |  | --------- | ----------- |  |  | --------- | --------- |  | ----------- | ------- | ------- | --------- |  | ------- | -------- |  |  | ------- | ------- | 
|                     |       | As of December 31,    |        
|                     |       |                       |        
|                     |       | 2004                  |         |          | 2005      |  |           | 2006        | 
|                     |       |                       |         |          |           |  |           |             | 
|                     |       | Proved                |         |          |           |  | Proved    |             |  |  |           | Proved    |  |             |        
|                     |       | developed             |         |          |           |  | developed |             |  |  |           | developed |  |             |        
|                     |       | and                   |         |          | Proved    |  |           | and         |  |  | Proved    |           |  | and         |         |         | Proved    | 
|                     |       | undeveloped           |         |          | developed |  |           | undeveloped |  |  | developed |           |  | undeveloped |         |         | developed | 
|                     |       |                       |         |          |           |  |           |             |  |  |           |           |  |             |         |         |           | 
|                     |       | (millions of barrels) |        
|Crude oil reserves   |       |                       |         |          |           |  |           |             |  |  |           |           |  |             |         |         |           |  |         |          |  |  |         |        
|Daqing               |       |                       | 4,615.0 |          |           |  | 4,122.3   |             |  |  | 4,396.9   |           |  |             | 3,863.9 |         |           |  | 4,200.3 |          |  |  | 3,516.0 |        
|Liaohe               |       |                       | 1,123.1 |          |           |  | 915.1     |             |  |  | 1,114.6   |           |  |             | 937.5   |         |           |  | 1,067.5 |          |  |  | 845.8   |        
|Xinjiang             |       |                       | 1,232.1 |          |           |  | 921.9     |             |  |  | 1,261.8   |           |  |             | 1,010.8 |         |           |  | 1,306.6 |          |  |  | 1,077.0 |        
|Changqing            |       |                       | 1,191.6 |          |           |  | 769.6     |             |  |  | 1,267.0   |           |  |             | 840.6   |         |           |  | 1,450.6 |          |  |  | 1,182.9 |        
|Jilin                |       |                       | 643.8   |          |           |  | 404.4     |             |  |  | 675.0     |           |  |             | 472.2   |         |           |  | 775.5   |          |  |  | 501.8   |        
|Dagang               |       |                       | 482.3   |          |           |  | 402.0     |             |  |  | 516.1     |           |  |             | 426.7   |         |           |  | 482.1   |          |  |  | 400.0   |        
|Tarim                |       |                       | 507.6   |          |           |  | 374.8     |             |  |  | 543.8     |           |  |             | 418.1   |         |           |  | 523.9   |          |  |  | 370.4   |        
|Huabei               |       |                       | 510.3   |          |           |  | 353.9     |             |  |  | 536.2     |           |  |             | 381.5   |         |           |  | 500.9   |          |  |  | 388.4   |        
|Qinghai              |       |                       | 226.1   |          |           |  | 181.2     |             |  |  | 243.0     |           |  |             | 185.5   |         |           |  | 227.9   |          |  |  | 187.2   |        
|Tuha                 |       |                       | 218.3   |          |           |  | 168.4     |             |  |  | 165.0     |           |  |             | 110.8   |         |           |  | 156.5   |          |  |  | 104.9   |        
|Sichuan              |       |                       | 8.6     |          |           |  | 5.3       |             |  |  | 8.0       |           |  |             | 5.5     |         |           |  | 11.7    |          |  |  | 5.4     |        
|Other
    regions(1) |       |                       | 742.4   |          |           |  | 449.0     |             |  |  | 808.8     |           |  |             | 541.7   |         |           |  | 914.5   |          |  |  | 605.4   |        
|                     |       |                       |         |          |           |  |           |             |  |  |           |           |  |             |         |         |           | 
|                     | Total |                       |         | 11,501.2 |           |  |           | 9,067.9     |  |  |           | 11,536.2  |  |             |         | 9,194.8 |           |  |         | 11,618.0 |  |  |         | 9,185.2 | 
|                     |       |                       |         |          |           |  |           |             |  |  |           |           |  |             |         |         |           | 

|                            |       |                    |          |           |  |             |         |           |  |             |          |           |  |  |         |          |  |  |          |          |  |  |         |          | 
|--------------------------- | ----- | ------------------ | -------- | --------- |  | ----------- | ------- | --------- |  | ----------- | -------- | --------- |  |  | ------- | -------- |  |  | -------- | -------- |  |  | ------- | -------- | 
|                            |       | As of December 31,
|                            |       |                   
|                            |       | 2004               |          | 2005      |  | 2006       
|                            |       |                    |          |           |  |            
|                            |       | Proved             |          |           |  | Proved      |         |           |  | Proved      |          |          
|                            |       | developed          |          |           |  | developed   |         |           |  | developed   |          |          
|                            |       | and                |          | Proved    |  | and         |         | Proved    |  | and         |          | Proved   
|                            |       | undeveloped        |          | developed |  | undeveloped |         | developed |  | undeveloped |          | developed
|                            |       |                    |          |           |  |             |         |           |  |             |          |          
|                            |       | (Bcf)             
|Natural gas
    reserves(2) |       |                    |          |           |  |             |         |           |  |             |          |           |  |  |         |          |  |  |          |          |  |  |         |         
|Sichuan                     |       |                    | 8,729.8  |           |  |             | 4,767.9 |           |  |             | 9,211.2  |           |  |  | 5,063.5 |          |  |  | 10,362.8 |          |  |  | 4,867.3 |         
|Changqing                   |       |                    | 14,932.7 |           |  |             | 4,091.3 |           |  |             | 15,765.6 |           |  |  | 4,089.8 |          |  |  | 17,846.1 |          |  |  | 4,559.7 |         
|Xinjiang                    |       |                    | 1,712.3  |           |  |             | 1,036.8 |           |  |             | 1,686.8  |           |  |  | 1,120.4 |          |  |  | 1,723.0  |          |  |  | 1,047.0 |         
|Daqing                      |       |                    | 1,060.6  |           |  |             | 879.4   |           |  |             | 1,936.8  |           |  |  | 813.3   |          |  |  | 1,894.6  |          |  |  | 740.2   |         
|Qinghai                     |       |                    | 4,603.6  |           |  |             | 1,583.4 |           |  |             | 4,534.1  |           |  |  | 1,528.0 |          |  |  | 4,467.0  |          |  |  | 1,584.0 |         
|Tarim                       |       |                    | 10,897.8 |           |  |             | 2,934.8 |           |  |             | 11,838.8 |           |  |  | 5,347.9 |          |  |  | 14,443.6 |          |  |  | 7,818.4 |         
|Liaohe                      |       |                    | 522.7    |           |  |             | 455.4   |           |  |             | 489.8    |           |  |  | 417.6   |          |  |  | 429.3    |          |  |  | 338.8   |         
|Tuha                        |       |                    | 705.3    |           |  |             | 427.8   |           |  |             | 677.4    |           |  |  | 367.8   |          |  |  | 640.5    |          |  |  | 401.8   |         
|Huabei                      |       |                    | 375.9    |           |  |             | 217.5   |           |  |             | 369.3    |           |  |  | 211.8   |          |  |  | 340.3    |          |  |  | 264.6   |         
|Dagang                      |       |                    | 599.5    |           |  |             | 186.8   |           |  |             | 586.9    |           |  |  | 207.8   |          |  |  | 275.0    |          |  |  | 189.7   |         
|Jilin                       |       |                    | 203.9    |           |  |             | 150.4   |           |  |             | 187.8    |           |  |  | 132.7   |          |  |  | 198.6    |          |  |  | 113.7   |         
|Other
    regions(1)        |       |                    | 904.8    |           |  |             | 523     |           |  |             | 838.6    |           |  |  | 557.2   |          |  |  | 848.4    |          |  |  | 638.7   |         
|                            |       |                    |          |           |  |             |         |           |  |             |          |           |  |  |         |          |  |  |          |          |  |  |         |         
|                            | Total |                    |          | 45,248.9  |  |             |         | 17,254.5  |  |             |          | 48,123.1  |  |  |         | 19,857.8 |  |  |          | 53,469.2 |  |  |         | 22,563.9 | 
|                            |       |                    |          |           |  |             |         |           |  |             |          |           |  |  |         |          |  |  |          |          |  |  |         |         






|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the Jidong and Yumen oil regions and our overseas oil
    and gas fields as a result of our acquisition of overseas assets.
|   
|(2) | Represents natural gas remaining after field separation for
    condensate removal and reduction for flared gas.                      

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##### Table of Contents

Exploration and Development

We are currently conducting exploration and development efforts
in 11 provinces, two municipalities under the direct
administration of the central government and three autonomous
regions in China. We believe that we have more extensive
experience in the exploration and development of crude oil and
natural gas than any of our principal competitors in China.
Since early 1950s, we have been working on developing
exploration and recovery technologies and methods tailored to
the specific geological conditions in China.

The following table sets forth the number of wells we drilled,
or in which we participated, and the results thereof, for the
periods indicated.

|     |  |                                      |  |        |       |  |          |  |       |        |  |  |           |  |  |        |       |  |        |  |     |         |  |  |           |  |  |       |     |  |  |  |       |  |  |  |        | 
|---- |  | ------------------------------------ |  | ------ | ----- |  | -------- |  | ----- | ------ |  |  | --------- |  |  | ------ | ----- |  | ------ |  | --- | ------- |  |  | --------- |  |  | ----- | --- |  |  |  | ----- |  |  |  | ------ | 
|Year |  |                                      |  | Daqing |       |  | Xinjiang |  |       | Liaohe |  |  | Changqing |  |  | Huabei |       |  | Dagang |  |     | Sichuan |  |  | Others(1) |  |  | Total |    
|     |  |                                      |  |        |       |  |          |  |       |        |  |  |           |  |  |        |       |  |        |  |     |         |  |  |           |  |  |       |    
|2004 |  | Net exploratory wells
    drilled(2) |  |        | 221   |  |          |  | 153   |        |  |  | 68        |  |  |        | 427   |  |        |  | 96  |         |  |  | 53        |  |  |       | 32  |  |  |  | 355   |  |  |  | 1,405  | 
|     |  | Crude oil                            |  |        | 85    |  |          |  | 85    |        |  |  | 40        |  |  |        | 201   |  |        |  | 49  |         |  |  | 32        |  |  |       | 4   |  |  |  | 172   |  |  |  | 668    | 
|     |  | Natural gas                          |  |        | 3     |  |          |  | 0     |        |  |  | 0         |  |  |        | 22    |  |        |  | 0   |         |  |  | 0         |  |  |       | 17  |  |  |  | 9     |  |  |  | 51     | 
|     |  | Dry(3)                               |  |        | 133   |  |          |  | 68    |        |  |  | 28        |  |  |        | 204   |  |        |  | 47  |         |  |  | 21        |  |  |       | 11  |  |  |  | 174   |  |  |  | 686    | 
|     |  | Net development wells
    drilled(2) |  |        | 2,857 |  |          |  | 1,440 |        |  |  | 622       |  |  |        | 1,675 |  |        |  | 224 |         |  |  | 188       |  |  |       | 76  |  |  |  | 1,463 |  |  |  | 8,545  | 
|     |  | Crude oil                            |  |        | 2,853 |  |          |  | 1,440 |        |  |  | 605       |  |  |        | 1,597 |  |        |  | 223 |         |  |  | 184       |  |  |       | 6   |  |  |  | 1,387 |  |  |  | 8,295  | 
|     |  | Natural gas                          |  |        | 4     |  |          |  | 0     |        |  |  | 13        |  |  |        | 46    |  |        |  | 1   |         |  |  | 3         |  |  |       | 56  |  |  |  | 73    |  |  |  | 196    | 
|     |  | Dry(3)                               |  |        | 0     |  |          |  | 0     |        |  |  | 4         |  |  |        | 32    |  |        |  | 0   |         |  |  | 1         |  |  |       | 14  |  |  |  | 3     |  |  |  | 54     | 
|2005 |  | Net exploratory wells
    drilled(2) |  |        | 250   |  |          |  | 191   |        |  |  | 71        |  |  |        | 456   |  |        |  | 83  |         |  |  | 39        |  |  |       | 58  |  |  |  | 360   |  |  |  | 1,508  | 
|     |  | Crude oil                            |  |        | 78    |  |          |  | 92    |        |  |  | 47        |  |  |        | 200   |  |        |  | 53  |         |  |  | 22        |  |  |       | 0   |  |  |  | 152   |  |  |  | 644    | 
|     |  | Natural gas                          |  |        | 6     |  |          |  | 1     |        |  |  | 0         |  |  |        | 24    |  |        |  | 0   |         |  |  | 0         |  |  |       | 30  |  |  |  | 15    |  |  |  | 76     | 
|     |  | Dry(3)                               |  |        | 166   |  |          |  | 98    |        |  |  | 24        |  |  |        | 232   |  |        |  | 30  |         |  |  | 17        |  |  |       | 28  |  |  |  | 193   |  |  |  | 788    | 
|     |  | Net development wells
    drilled(2) |  |        | 3,722 |  |          |  | 1,608 |        |  |  | 563       |  |  |        | 2,608 |  |        |  | 250 |         |  |  | 192       |  |  |       | 101 |  |  |  | 2,587 |  |  |  | 11,631 | 
|     |  | Crude oil                            |  |        | 3,712 |  |          |  | 1,604 |        |  |  | 549       |  |  |        | 2,364 |  |        |  | 248 |         |  |  | 188       |  |  |       | 6   |  |  |  | 2,495 |  |  |  | 11,166 | 
|     |  | Natural gas                          |  |        | 10    |  |          |  | 4     |        |  |  | 12        |  |  |        | 195   |  |        |  | 2   |         |  |  | 4         |  |  |       | 83  |  |  |  | 88    |  |  |  | 398    | 
|     |  | Dry(3)                               |  |        | 0     |  |          |  | 0     |        |  |  | 2         |  |  |        | 49    |  |        |  | 0   |         |  |  | 0         |  |  |       | 12  |  |  |  | 4     |  |  |  | 67     | 
|2006 |  | Net exploratory wells
    drilled(2) |  |        | 250   |  |          |  | 180   |        |  |  | 64        |  |  |        | 466   |  |        |  | 83  |         |  |  | 50        |  |  |       | 62  |  |  |  | 390   |  |  |  | 1,545  | 
|     |  | Crude oil                            |  |        | 73    |  |          |  | 88    |        |  |  | 35        |  |  |        | 203   |  |        |  | 49  |         |  |  | 21        |  |  |       |     |  |  |  | 114   |  |  |  | 583    | 
|     |  | Natural gas                          |  |        | 7     |  |          |  | 21    |        |  |  | 1         |  |  |        | 37    |  |        |  |     |         |  |  | 7         |  |  |       | 31  |  |  |  | 6     |  |  |  | 110    | 
|     |  | Dry(3)                               |  |        | 170   |  |          |  | 71    |        |  |  | 28        |  |  |        | 226   |  |        |  | 34  |         |  |  | 22        |  |  |       | 31  |  |  |  | 270   |  |  |  | 852    | 
|     |  | Net development wells
    drilled(2) |  |        | 4,183 |  |          |  | 1,605 |        |  |  | 713       |  |  |        | 2,023 |  |        |  | 330 |         |  |  | 179       |  |  |       | 57  |  |  |  | 2,361 |  |  |  | 11,451 | 
|     |  | Crude oil                            |  |        | 4,160 |  |          |  | 1,586 |        |  |  | 688       |  |  |        | 1,772 |  |        |  | 225 |         |  |  | 173       |  |  |       | 9   |  |  |  | 2,235 |  |  |  | 10,848 | 
|     |  | Natural gas                          |  |        | 23    |  |          |  | 8     |        |  |  | 14        |  |  |        | 216   |  |        |  | 105 |         |  |  | 6         |  |  |       | 40  |  |  |  | 123   |  |  |  | 535    | 
|     |  | Dry(3)                               |  |        | 0     |  |          |  | 11    |        |  |  | 11        |  |  |        | 35    |  |        |  | 0   |         |  |  | 0         |  |  |       | 8   |  |  |  | 3     |  |  |  | 68     | 






|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the Jilin, Tarim, Tuha, Qinghai, Jidong and Yumen oil
    regions.                                                      
|   
|(2) | Net wells refer to the wells after deducting
    interests of others. No third parties own any interests in any
    of our wells.
|   
|(3) | Dry wells are wells with insufficient reserves to
    sustain commercial production.                                             

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##### Table of Contents

Oil-and-Gas PropertiesThe following table sets forth our interests in developed and
undeveloped acreage by oil region and in productive crude oil
and natural gas wells as of December 31, 2006.

|                     |       |                                |        |             |  |             |       |             |  |           |       |             |  |  |         |         |  |  |       |         |  |  |         |         | 
|-------------------- | ----- | ------------------------------ | ------ | ----------- |  | ----------- | ----- | ----------- |  | --------- | ----- | ----------- |  |  | ------- | ------- |  |  | ----- | ------- |  |  | ------- | ------- | 
|                     |       | Acreage(1)(thousands of acres)
|                     |       |                               
|                     |       | Productive wells(1)            |        | Developed   |  | Undeveloped
|                     |       |                                |        |             |  |            
|Oil region           |       | Crude oil                      |        | Natural gas |  | Crude oil   |       | Natural gas |  | Crude oil |       | Natural gas
|                     |       |                                |        |             |  |             |       |             |  |           |       |            
|Daqing               |       |                                | 66,271 |             |  |             | 192   |             |  |           | 745.4 |             |  |  | 76.2    |         |  |  | 656.1 |         |  |  | 110.4   |        
|Liaohe               |       |                                | 19,924 |             |  |             | 640   |             |  |           | 191.0 |             |  |  | 35.8    |         |  |  | 94.6  |         |  |  | 4.7     |        
|Xinjiang             |       |                                | 21,422 |             |  |             | 81    |             |  |           | 328.1 |             |  |  | 44.5    |         |  |  | 98.2  |         |  |  | 25.6    |        
|Jilin                |       |                                | 21,453 |             |  |             | 53    |             |  |           | 307.9 |             |  |  | 20.9    |         |  |  | 315.9 |         |  |  | 19.5    |        
|Changqing            |       |                                | 18,563 |             |  |             | 1,007 |             |  |           | 452.6 |             |  |  | 1,536.6 |         |  |  | 304.3 |         |  |  | 1,801.5 |        
|Huabei               |       |                                | 7,032  |             |  |             | 91    |             |  |           | 140.0 |             |  |  | 12.6    |         |  |  | 60.8  |         |  |  | 3.5     |        
|Dagang               |       |                                | 4,735  |             |  |             | 62    |             |  |           | 106.2 |             |  |  | 24.9    |         |  |  | 61.1  |         |  |  | 19.8    |        
|Tuha                 |       |                                | 2,068  |             |  |             | 87    |             |  |           | 41.8  |             |  |  | 21.4    |         |  |  | 28.3  |         |  |  | 10.7    |        
|Tarim                |       |                                | 817    |             |  |             | 160   |             |  |           | 141.5 |             |  |  | 131.7   |         |  |  | 50.6  |         |  |  | 195.3   |        
|Sichuan              |       |                                | 414    |             |  |             | 1,423 |             |  |           | 358.5 |             |  |  | 414.6   |         |  |  | 17.6  |         |  |  | 264.5   |        
|Other
    regions(2) |       |                                | 4,871  |             |  |             | 291   |             |  |           | 79.4  |             |  |  | 43.0    |         |  |  | 36.6  |         |  |  | 28.5    |        
|                     |       |                                |        |             |  |             |       |             |  |           |       |             |  |  |         |         |  |  |       |         |  |  |         |        
|                     | Total |                                |        | 167,570     |  |             |       | 4,087       |  |           |       | 2,892.5     |  |  |         | 2,362.3 |  |  |       | 1,724.1 |  |  |         | 2,484.2 | 
|                     |       |                                |        |             |  |             |       |             |  |           |       |             |  |  |         |         |  |  |       |         |  |  |         |        






|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes all wells and acreage in which we have an interest. No
    third parties own any interests in any of our wells or acreage.
|   
|(2) | Represents the Qinghai, Jidong and Yumen oil regions.                                                                              



29



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##### Table of Contents

Production

The following table sets forth our historical average net daily
crude oil and natural gas production by region and our average
sales price for the periods ended December 31, 2004, 2005
and 2006.

|                                                                                |                  |                    |       |         |      |  |         |         |  |  |            |         |  |  |       |       |  
|------------------------------------------------------------------------------- | ---------------- | ------------------ | ----- | ------- | ---- |  | ------- | ------- |  |  | ---------- | ------- |  |  | ----- | ----- | -
|                                                                                |                  | For the year ended |       |         |     
|                                                                                |                  | December 31,       |       |         |     
|                                                                                |                  |                    |       |         | % of | 
|                                                                                |                  | 2004               |       |         | 2005 |  |         | 2006    |  |  | 2006 Total |        
|                                                                                |                  |                    |       |         |      |  |         |         |  |  |            |        
|Crude oil
    production(1)                                                     |                  |                    |       |         |      |  |         |         |  |  |            |         |  |  |       |      
|(thousands of barrels per day,
    except percentages or otherwise indicated)   |                  |                    |       |         |      |  |         |         |  |  |            |         |  |  |       |      
|Daqing                                                                          |                  |                    | 942.0 |         |      |  | 915.1   |         |  |  | 883.1      |         |  |  | 38.80 |      
|Liaohe                                                                          |                  |                    | 245.4 |         |      |  | 238.2   |         |  |  | 230.4      |         |  |  | 10.13 |      
|Xinjiang                                                                        |                  |                    | 227.1 |         |      |  | 238.8   |         |  |  | 244.2      |         |  |  | 10.73 |      
|Changqing                                                                       |                  |                    | 164.6 |         |      |  | 191.4   |         |  |  | 215.6      |         |  |  | 9.47  |      
|Tarim                                                                           |                  |                    | 109.9 |         |      |  | 122.8   |         |  |  | 123.9      |         |  |  | 5.44  |      
|Huabei                                                                          |                  |                    | 87.6  |         |      |  | 88.4    |         |  |  | 89.4       |         |  |  | 3.93  |      
|Jilin                                                                           |                  |                    | 102.6 |         |      |  | 112.1   |         |  |  | 115.6      |         |  |  | 5.08  |      
|Dagang                                                                          |                  |                    | 97.9  |         |      |  | 102.6   |         |  |  | 93.6       |         |  |  | 4.11  |      
|Tuha                                                                            |                  |                    | 48.4  |         |      |  | 45.2    |         |  |  | 44.4       |         |  |  | 1.95  |      
|Other(2)                                                                        |                  |                    | 199.1 |         |      |  | 200.0   |         |  |  | 235.7      |         |  |  | 10.36 |      
|                                                                                |                  |                    |       |         |      |  |         |         |  |  |            |        
|                                                                                | Total            |                    |       | 2,224.6 |      |  |         | 2,254.5 |  |  |            | 2,275.9 |  |  |       | 100.0 |  
|                                                                                |                  |                    |       |         |      |  |         |         |  |  |            |        
|Annual production (million barrels)                                             |                  |                    | 814.2 |         |      |  | 822.9   |         |  |  | 830.7      |         |  |  |       |      
|Average sales price                                                             |                  |                    |       |         |      |  |         |         |  |  |            |         |  |  |       |      
|                                                                                | (RMB per barrel) |                    |       | 279.1   |      |  |         | 396.2   |  |  |            | 476.8   |  |  |       |       |  
|                                                                                | (US$ per barrel) |                    |       | 33.72   |      |  |         | 48.37   |  |  |            | 59.81   |  |  |       |       |  
|Natural gas
    production(1)(3)                                                |                  |                    |       |         |      |  |         |         |  |  |            |         |  |  |       |      
|(millions of cubic feet per day,
    except percentages or otherwise indicated) |                  |                    |       |         |      |  |         |         |  |  |            |         |  |  |       |      
|Sichuan                                                                         |                  |                    | 905.7 |         |      |  | 1,107.9 |         |  |  | 1,233.9    |         |  |  | 32.8  |      
|Changqing                                                                       |                  |                    | 651.4 |         |      |  | 640.7   |         |  |  | 650.4      |         |  |  | 17.3  |      
|Daqing                                                                          |                  |                    | 135.4 |         |      |  | 133.8   |         |  |  | 138.0      |         |  |  | 3.7   |      
|Qinghai                                                                         |                  |                    | 145.5 |         |      |  | 172.8   |         |  |  | 200.7      |         |  |  | 5.3   |      
|Tuha                                                                            |                  |                    | 92.2  |         |      |  | 121.1   |         |  |  | 133.4      |         |  |  | 3.5   |      
|Xinjiang                                                                        |                  |                    | 95.7  |         |      |  | 109.8   |         |  |  | 114.2      |         |  |  | 3.0   |      
|Liaohe                                                                          |                  |                    | 58.7  |         |      |  | 56.0    |         |  |  | 52.8       |         |  |  | 1.4   |      
|Huabei                                                                          |                  |                    | 44.2  |         |      |  | 43.5    |         |  |  | 41.3       |         |  |  | 1.1   |      
|Tarim                                                                           |                  |                    | 89.2  |         |      |  | 479.5   |         |  |  | 1,015.7    |         |  |  | 27.0  |      
|Dagang                                                                          |                  |                    | 26.5  |         |      |  | 26.2    |         |  |  | 28.7       |         |  |  | 0.8   |      
|Other(4)                                                                        |                  |                    | 149.8 |         |      |  | 175.9   |         |  |  | 149.6      |         |  |  | 4.1   |      
|                                                                                |                  |                    |       |         |      |  |         |         |  |  |            |        
|                                                                                | Total            |                    |       | 2,394.3 |      |  |         | 3,067.2 |  |  |            | 3,758.7 |  |  |       | 100.0 | %
|                                                                                |                  |                    |       |         |      |  |         |         |  |  |            |        
|Annual production (Bcf)                                                         |                  |                    | 876.3 |         |      |  | 1,119.5 |         |  |  | 1,371.9    |         |  |  |       |      
|Average sales price                                                             |                  |                    |       |         |      |  |         |         |  |  |            |         |  |  |       |      
|                                                                                | (RMB per Mcf)    |                    |       | 21.11   |      |  |         | 23.35   |  |  |            | 27.6    |  |  |       |       |  
|                                                                                | (US$ per Mcf)    |                    |       | 2.55    |      |  |         | 2.85    |  |  |            | 3.46    |  |  |       |       |  






|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Production volumes for each region include our share of the
    production from all of our cooperative projects with foreign
    companies in that region.

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##### Table of Contents

(2)
    Represents production from the Qinghai, Jidong and Yumen oil
    regions, the Sichuan gas region and our share of overseas
    production as a result of our acquisition of overseas assets.(3)
    Represents production of natural gas for sale.(4)
    Represents production from the Jilin, Jidong and Yumen oil
    regions and our share of overseas production as a result of our
    acquisition of overseas assets.In 2006, we supplied approximately 83.2% of our total crude oil
sales to our refineries, 7.9% to Sinopecs refineries, 6.4%
to companies or entities outside China, and the remaining 2.5%
to regional refineries or other entities. We entered into a
crude oil mutual supply framework agreement with Sinopec on
January 29, 2007 for the supply of crude oil to each
others refineries in 2007. Under this agreement, we agreed
in principle to supply 52.46 million barrels of crude oil
to Sinopec, and Sinopec agreed in principle to supply to us
approximately 8.27 million barrels of crude oil in 2007 at
negotiated prices based on the Singapore market FOB prices for
crude oil. See Item 5  Operating and
Financial Review and Prospects  General 
Factors Affecting Results of Operations  Crude Oil
Prices for a detailed discussion of the crude oil premium
and discount calculation agreement and its supplemental
agreement. For the years ended December 31, 2004, 2005 and
2006, the average lifting costs of our crude oil and natural
production were US$4.60 per
barrel-of-oil
equivalent, US$5.28 per
barrel-of-oil
equivalent and US$6.74 per
barrel-of-oil
equivalent, respectively.

Principal Oil and Gas Regions



Daqing Oil RegionThe Daqing oil region, our largest oil and gas producing
property, is located in the Songliao basin and covers an area of
approximately one million acres. The successful discovery and
development of the oil fields in the Daqing oil region marked a
critical breakthrough in the history of both our company and the
PRC oil and gas industry. In terms of proved hydrocarbon
reserves and annual production, the Daqing oil region is the
largest oil region in China and one of the most prolific oil and
gas properties in the world. We commenced exploration activities
in the Daqing oil region in 1955 and discovered oil in the
region in 1959. Annual crude oil production volume in the Daqing
oil region reached one million barrels per day in 1976 and
remained relatively stable until 2002. In 2004, 2005 and 2006,
our crude oil production volume in the Daqing oil region was
942.0 thousand barrels per day, 915.1 thousand barrels per day
and 883.1 thousand barrels per day, respectively. As of
December 31, 2006, we produced crude oil from 20 fields in
the Daqing oil region.

As of December 31, 2006, our proved crude oil reserves in
the Daqing oil region were 4,200.3 million barrels,
representing 36.2% of our total proved crude oil reserves. The
proved crude oil reserves in our Daqing oil region have
gradually decreased since 1996 because the crude oil production
exceeded the crude oil reserve additions in our Daqing oil
region in each year since 1996. As of December 31, 2004,
2005 and 2006, the proved crude oil reserves in our Daqing oil
region were 4,615.0 million barrels, 4,396.9 million
barrels and 4,200.3 million barrels, respectively. As a
result, we decreased the crude oil production in our Daqing oil
region over past years, and plan to continue to decrease the
crude oil production in our Daqing oil region each year in the
next few years. In 2006, our oil fields in the Daqing oil region
produced an average of 883.1 thousand barrels of crude oil per
day, representing approximately 38.8% of our total daily crude
oil production. The crude oil production in our Daqing oil
region decreased by 3.5% from 334.0 million barrels in 2005
to 322.3 million barrels in 2006. In 2006, the crude oil
reserve-to-production
ratio of the Daqing oil region was 13.0 years, compared to
13.2 years in 2005.

The crude oil we produce in the Daqing oil region has an average
API gravity of 35.7 degrees. In 2006, the crude oil we produced
in the Daqing oil region had an average water cut of 90.44%,
increased from the average water cut of 89.78% in 2005.

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The crude oil in the Daqing oil region is primarily located in
large reservoirs with relatively moderate depths of
approximately 900 meters to 1,500 meters and with relatively
simple geological structures and most of the crude oil produced
at Daqing is medium viscosity oil. Crude oil produced using
enhanced recovery techniques accounted for 25.7%, 26.9% and
27.0% of our crude oil production from the Daqing oil region in
2004, 2005 and 2006, respectively.

Because our oil fields in the Daqing oil region are relatively
mature, the difficulty of extracting crude oil from these fields
has increased in recent years and is likely to continue to
increase gradually in the future. As a result, our lifting costs
at these fields increased by 33.5% from US$5.14 per barrel
for the year ended December 31, 2005 to US$6.86 per
barrel for the year ended December 31, 2006. However, we
have adopted a number of measures to contain the increase in our
lifting costs at these fields. Those measures include:




    terminating unprofitable or marginally profitable exploration
    and production activities;
    reducing expenditures on ancillary ground facilities in the
    outer areas of the Daqing oil region;
    increasing preventive maintenance to prolong the useful life of
    our production facilities; and
    applying new technologies to reduce energy consumption.Although we plan to continue to carry out these measures to
contain the increase in our lifting costs, we expect our lifting
costs at these fields will continue to increase gradually in the
future.

We have an extensive transportation infrastructure network to
transport crude oil produced in the Daqing oil region to
internal and external customers in northeastern China and
beyond. Crude oil pipelines link our oil fields in the Daqing
oil region to the port of Dalian and the port of Qinhuangdao in
Bohai Bay, providing efficient transportation for selling Daqing
crude oil. These crude oil pipelines have an aggregate length of
2,590 kilometers and an aggregate throughput capacity of
approximately 911 thousand barrels per day.

Daqings crude oil has a low sulfur and high paraffin
content. As many refineries in China, particularly those in
northeastern China, are configured to refine Daqing crude oil,
we have a stable market for the crude oil we produce in the
Daqing oil region. In 2006, we refined approximately 80.3% of
Daqing crude oil in our own refineries, exported approximately
1.2% and sold the remaining portion to Sinopec or local
refineries.



Liaohe Oil RegionThe Liaohe oil region is one of our three largest crude oil
producing properties and is located in the northern part of the
Bohai Bay basin. We began commercial production in the Liaohe
oil region in 1971. The Liaohe oil region covers a total area of
approximately 580,000 acres.

As of December 31, 2006, proved crude oil reserves in the
Liaohe oil region were 1,067.5 million barrels,
representing 9.2% of our total proved oil reserves. In 2006, our
oil fields in the Liaohe oil region produced an average of 230.4
thousand barrels of crude oil per day, representing
approximately 10.1% of our total daily crude oil production. In
2006, the crude oil
reserve-to-production
ratio in the Liaohe oil region was 12.7 years. In 2006, the
crude oil we produced in the Liaohe oil region had an average
API gravity of 26 degrees and an average water cut of 77.71%. We
have proved crude oil reserves in 37 fields in the Liaohe oil
region, all of which are currently in production. We produce
several varieties of crude oil in the Liaohe oil region, ranging
from light crude oil to heavy crude oil and high pour point
crude oil.

We have easy access to crude oil pipelines for Liaohe crude oil.
The pipelines linking Daqing to Dalian port and Qinhuangdao port
pass through the Liaohe oil region. In 2006, we sold about
approximately 89.7% of the crude oil we produced at the Liaohe
oil region to our own refineries.

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##### Table of Contents

Xinjiang Oil RegionThe Xinjiang oil region is one of our three largest crude oil
producing properties and is located in the Junggar basin in
northwestern China. We commenced our operations in the Xinjiang
oil region in 1951. The Xinjiang oil region covers a total area
of approximately 900 thousand acres.

As of December 31, 2006, our proved crude oil reserves in
the Xinjiang oil region were 1,306.6 million barrels,
representing 11.2% of our total proved crude oil reserves. In
2006, our oil fields in the Xinjiang oil region produced an
average of 244.2 thousand barrels of crude oil per day,
representing approximately 10.7% of our total crude oil
production. In 2006, the crude oil
reserve-to-production
ratio at the Xinjiang oil region was 14.7 years. In 2006,
the crude oil we produced in the Xinjiang oil region had an
average API gravity of 36.8 degrees and an average water cut of
72.6%.



Sichuan Gas RegionThe Sichuan gas region is the largest natural gas region in
China in terms of annual natural gas production. We began
natural gas exploration and production in Sichuan in the 1950s.
The Sichuan gas region covers a total area of approximately
2.3 million acres. The natural gas
reserve-to-production
ratio in the Sichuan gas region was approximately
23.0 years in 2006. As of December 31, 2006, we had 90
natural gas fields under development in the Sichuan gas region.

As of December 31, 2006, our proved natural gas reserves in
the Sichuan gas region were 10,362.8 billion cubic feet,
representing 19.4% of our total proved natural gas reserves and
an increase of 12.5% from 9,211.2 billion cubic feet as of
December 31, 2005. In 2006, our natural gas production for
sale in the Sichuan gas region reached 450.4 billion cubic
feet, representing 32.8% of our total natural gas production for
sale and an increase of 11.4% from 404.4 billion cubic feet
in 2005.

In 2002, we discovered and proved significant natural gas
reserves in Luojiazhai gas field in the Sichuan gas region. As
of December 31, 2006, Luojiazhai gas field had a total
proved natural gas reserve of 1,655.5 billion cubic feet.
Currently, Luojiazhai gas field is the largest gas field in the
Sichuan basin. We have developed a broad range of technologies
relating to natural gas exploration, production, pipeline
systems and marketing activities tailored to local conditions in
Sichuan.

In November 2002, we obtained approval from the State
Development Planning Commission, the predecessor of the National
Development and Reform Commission, to construct pipelines to
transmit natural gas produced in the Sichuan gas region to major
cities in central China. This is known as the Zhong County to
Wuhan City natural gas pipeline project. By the end of 2004, we
completed the construction and commenced the commercial
operation of the main line of the Zhong County to Wuhan City
natural gas pipeline and its Xiangfan branch pipeline and
Huangshi branch pipeline. In addition, we completed the
construction of the Xiangtan branch pipeline and commenced the
commercial operation of this branch pipeline in July 2005. As of
March 31, 2007, we had entered into take-or-pay contracts
with 27 customers in Hubei Province and Hunan Province,
including municipal governments and enterprises, to supply them
with natural gas through the main line and branch lines of the
Zhong County to Wuhan City natural gas pipeline. See
 Natural Gas and Pipeline  Expansion
of Our Natural Gas Transmission and Marketing Business for
a discussion of the Zhong County to Wuhan City natural gas
pipeline project.



Changqing Oil and Gas RegionThe Changqing oil and gas region covers parts of Shaanxi
Province and Gansu Province and the Ningxia and Inner Mongolia
Autonomous Regions. We commenced operations in the Changqing oil
and gas region in 1970. In 2006, we produced 78.7 million
barrels of crude oil in the Changqing oil and gas region.

In the early 1990s, we discovered the Changqing gas field, which
had total estimated proved natural gas reserves of
17,846.1 billion cubic feet as of December 31, 2006,
representing 33.4% of

33



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##### Table of Contents

our total proved natural gas reserves. In January 2001, we
discovered the Sulige gas field with total proved natural gas
reserves of 4,290.0 billion cubic feet. In 2006 we produced
237.4 billion cubic feet of natural gas for sale in the
Changqing oil and gas region, representing an increase of 1.5%
from 233.9 billion cubic feet in 2005. The establishment of
a natural gas pipeline from Shaanxi to Beijing in 1997 has
significantly expanded the range of target markets for natural
gas produced in the Changqing oil and gas region over the years.
In July 2005, we completed the construction and commenced
commercial operation of the second Shaanxi to Beijing natural
gas pipeline, with a designed annual throughput capacity of
423.8 billion cubic feet of natural gas. In 2006, we
transmitted 66.2 billion cubic feet of natural gas through
the second Shaanxi to Beijing natural gas pipeline. See
 Natural Gas and Pipeline  Expansion
of Our Natural Gas Transmission and Marketing Business for
a discussion of this additional Shaanxi to Beijing natural gas
pipeline project.



Tarim Oil and Gas RegionThe Tarim oil and gas region is located in the Tarim basin in
northwestern China with a total area of approximately 590
thousand acres. As of December 31, 2006, our proved crude
oil reserves in the Tarim oil region were 523.9 million
barrels. The Kela 2 natural gas field, which we discovered in
1998 in the Tarim oil and gas region, had estimated proved
natural gas reserves of approximately 6,973.7 billion cubic
feet as of December 31, 2006. As of December 31, 2006,
the proved natural gas reserves in the Tarim oil and gas region
reached 14,443.6 billion cubic feet, representing 27.0% of
our total proved natural gas reserves. Currently, the Kela 2
natural gas field is the largest natural gas field in China in
terms of proved natural gas reserves.

In 2006, we produced 370.7 billion cubic feet of natural
gas for sale in the Tarim oil and gas region. We have completed
the construction of the pipelines to deliver natural gas in the
Tarim oil and gas region to the central and eastern regions of
China where there is strong demand for natural gas transmitted
through our West to East natural gas pipeline project. See
 Natural Gas and Pipeline  Expansion
of Our Natural Gas Transmission and Marketing Business for
a discussion of our West to East natural gas pipeline project.
The commencement of the operation of this West to East natural
gas pipeline significantly increased our natural gas production
in the Tarim oil and gas region.

34



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##### Table of Contents

(REFINING AND MARKETING SEGMENT MAP)

35



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##### Table of Contents

Refining and Marketing

We engage in refining and marketing operations in China through
26 refineries, 22 regional sales and distribution branch
companies and one lubricants branch company. These operations
include the refining, transportation, storage and marketing of
crude oil, and the wholesale, retail and export of refined
products, including gasoline, diesel, kerosene and lubricant.

In 2006, our refining and marketing segment had loss from
operations of RMB 29,164 million.

The following sets forth the highlights of our refining and
marketing segment in 2006:




    as of December 31, 2006, our refineries annual
    primary distillation capacity totaled 935.8 million barrels
    of crude oil per year, or 2,563.9 thousand barrels per day;
    we processed 785 million barrels of crude oil, or
    2.20 million barrels per day;
    we produced approximately 68.30 million tons of gasoline,
    diesel and kerosene and sold approximately 74.9 million
    tons of these products;
    as of December 31, 2006, our retail distribution network
    consisted of:


    16,624 service stations owned and operated by us,
    282 service stations either wholly owned by CNPC or jointly
    owned by CNPC and third parties and to which we provide
    supervisory support, representing a significant decrease from
    last year, as a result of our taking ownership of or operating
    certain service stations previously owned by CNPC or jointly
    owned by CNPC and third parties, and
    1,301 franchise service stations owned and operated by third
    parties with which we have long-term refined product supply
    agreements, representing a significant decrease from last year,
    as a result of our termination of cooperation arrangements with
    certain franchise service stations that had demonstrated
    deficiencies in image, service or oil quality; and


    in 2006, our service stations, which are located throughout
    China, sold approximately 47.0 million tons of gasoline and
    diesel, representing 64.5% of the total of these products sold
    through our marketing operations.Refining

Our refineries are located in eight provinces, four autonomous
regions and one municipality in the northeastern, northwestern
and northern regions of China.

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##### Table of Contents

Refined ProductsWe produce a wide range of refined products at our refineries.
Some of the refined products are for our internal consumption
and used as raw materials in our petrochemical operation. The
table below sets forth production volume for our principal
refined products for each of the three years ended
December 31, 2004, 2005 and 2006.

|           |       |                         |          |          |  |      |          |          |  |  |          |          | 
|---------- | ----- | ----------------------- | -------- | -------- |  | ---- | -------- | -------- |  |  | -------- | -------- | 
|           |       | Year ended December 31,
|           |       |                        
|Product    |       | 2004                    |          | 2005     |  | 2006
|           |       |                         |          |          |  |     
|           |       | (in thousands of tons) 
|Diesel     |       |                         | 38,941.8 |          |  |      | 43,000.7 |          |  |  | 44,226.5 |         
|Gasoline   |       |                         | 20,606.1 |          |  |      | 21,414.6 |          |  |  | 22,027.2 |         
|Fuel oil   |       |                         | 4,290.2  |          |  |      | 3,816.3  |          |  |  | 3,491.4  |         
|Naphtha    |       |                         | 4,942.8  |          |  |      | 4,872.8  |          |  |  | 6,317.9  |         
|Asphalt    |       |                         | 1,946.8  |          |  |      | 1,484.7  |          |  |  | 1,605.7  |         
|Kerosene   |       |                         | 1,961.8  |          |  |      | 1,970.3  |          |  |  | 2,063.7  |         
|Lubricants |       |                         | 1,467.8  |          |  |      | 1,528.6  |          |  |  | 1,488.4  |         
|Paraffin   |       |                         | 1,140.0  |          |  |      | 1,139.3  |          |  |  | 1,051.8  |         
|           |       |                         |          |          |  |      |          |          |  |  |          |         
|           | Total |                         |          | 75,297.3 |  |      |          | 79,227.3 |  |  |          | 82,272.6 | 
|           |       |                         |          |          |  |      |          |          |  |  |          |         







| |               
| | --------------
| | Our Refineries



37



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refineries with secure supplies of crude oil and facilitate our
distribution of refined products to the domestic markets. In
each of the three years ended December 31, 2004, 2005 and
2006, our exploration and production operations supplied
approximately 84%, 89% and 82%, respectively, of the crude oil
processed in our refineries.

The table below sets forth certain operating statistics
regarding our refineries as of December 31, 2004, 2005 and
2006.

|                                                                   |       |                    |       |         |         |      |         |         |         |  |         |         |         | 
|------------------------------------------------------------------ | ----- | ------------------ | ----- | ------- | ------- | ---- | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|                                                                   |       | As of December 31,
|                                                                   |       |                   
|                                                                   |       | 2004               |       | 2005    |         | 2006
|                                                                   |       |                    |       |         |         |     
|Primary distillation
    capacity(1)(thousand barrels per
    day) |       |                    |       |         |         |      |         |         |         |  |         |        
|Lanzhou
    Petrochemical(2)                                       |       |                    | 212.6 |         |         |      | 212.6   |         |         |  | 212.6   |        
|Dalian Petrochemical                                               |       |                    | 212.6 |         |         |      | 212.6   |         |         |  | 415.0   |        
|Fushun Petrochemical                                               |       |                    | 186.2 |         |         |      | 186.2   |         |         |  | 186.2   |        
|Daqing Petrochemical                                               |       |                    | 121.5 |         |         |      | 121.5   |         |         |  | 121.5   |        
|Jinzhou
    Petrochemical(3)                                       |       |                    | 127.5 |         |         |      | 131.6   |         |         |  | 131.6   |        
|Jinxi Petrochemical                                                |       |                    | 131.6 |         |         |      | 131.6   |         |         |  | 131.6   |        
|Jilin
    Petrochemical(4)                                         |       |                    | 107.3 |         |         |      | 141.7   |         |         |  | 141.7   |        
|Urumqi Petrochemical                                               |       |                    | 101.2 |         |         |      | 101.2   |         |         |  | 101.2   |        
|Other refineries                                                   |       |                    | 982.8 |         |         |      | 1,098.2 |         |         |  | 1,122.5 |        
|                                                                   |       |                    |       |         |         |      |         |         |         |  |         |        
|                                                                   |       | Total              |       |         | 2,183.3 |      |         |         | 2,337.2 |  |         |         | 2,563.9 | 
|                                                                   |       |                    |       |         |         |      |         |         |         |  |         |        
|Refining throughput(thousand barrels per
    day)                  |       |                    |       |         |         |      |         |         |         |  |         |        
|Lanzhou
    Petrochemical(2)                                       |       |                    | 166.4 |         |         |      | 178.7   |         |         |  | 191.4   |        
|Dalian Petrochemical                                               |       |                    | 242.3 |         |         |      | 223.7   |         |         |  | 244.7   |        
|Fushun Petrochemical                                               |       |                    | 181.7 |         |         |      | 194.4   |         |         |  | 196.4   |        
|Daqing Petrochemical                                               |       |                    | 119.2 |         |         |      | 125.5   |         |         |  | 128.5   |        
|Jinzhou
    Petrochemical(3)                                       |       |                    | 120.8 |         |         |      | 127.9   |         |         |  | 137.8   |        
|Jinxi Petrochemical                                                |       |                    | 123.9 |         |         |      | 129.2   |         |         |  | 132.1   |        
|Jilin
    Petrochemical(4)                                         |       |                    | 129.6 |         |         |      | 138.0   |         |         |  | 146.5   |        
|Urumqi Petrochemical                                               |       |                    | 81.8  |         |         |      | 85.3    |         |         |  | 98.0    |        
|Other refineries                                                   |       |                    | 773.6 |         |         |      | 858.4   |         |         |  | 875.3   |        
|                                                                   |       |                    |       |         |         |      |         |         |         |  |         |        
|                                                                   | Total |                    |       | 1,939.3 |         |      |         | 2,061.1 |         |  |         | 2,150.8 |        
|                                                                   |       |                    |       |         |         |      |         |         |         |  |         |        
|Conversion
    equivalent(5)(percent)                              |       |                    |       |         |         |      |         |         |         |  |         |        
|Lanzhou
    Petrochemical(2)                                       |       |                    | 41.9  |         |         |      | 53.3    |         |         |  | 53.3    |        
|Dalian Petrochemical                                               |       |                    | 54.3  |         |         |      | 54.3    |         |         |  | 27.8    |        
|Fushun Petrochemical                                               |       |                    | 70.7  |         |         |      | 68.5    |         |         |  | 70.7    |        
|Daqing Petrochemical                                               |       |                    | 76.7  |         |         |      | 76.7    |         |         |  | 76.7    |        
|Jinzhou
    Petrochemical(3)                                       |       |                    | 63.5  |         |         |      | 84.6    |         |         |  | 84.6    |        
|Jinxi Petrochemical                                                |       |                    | 60.0  |         |         |      | 66.2    |         |         |  | 66.2    |        
|Jilin
    Petrochemical(4)                                         |       |                    | 75.5  |         |         |      | 61.4    |         |         |  | 61.4    |        
|Urumqi Petrochemical                                               |       |                    | 62.0  |         |         |      | 62.0    |         |         |  | 62.0    |        
|Average of other refineries                                        |       |                    | 53.7  |         |         |      | 50.5    |         |         |  | 51.8    |        






|    |                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the primary distillation capacity of crude oil and
    condensate.                                                       
|   
|(2) | Includes Lanzhou Refinery, which was merged into Lanzhou
    Petrochemical in October 2000 as part of our ongoing
    restructuring.

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(3)
    Includes a 1.08% minority interest held by unrelated third
    parties in Jinzhou Petrochemical Company Limited in the relevant
    periods.(4)
    Includes Jilin Chemical Industrial Company Limited, in which we
    held a 99.61% equity interest in the relevant periods. Data
    regarding the primary distillation capacity, refining throughput
    and conversion equivalent of Jilin Petrochemical includes a
    0.39% minority interest held by unrelated third parties in Jilin
    Chemical Industrial Company Limited in the relevant periods.(5)
    Stated in fluid catalytic cracking, delayed coking and
    hydrocracking equivalent/ topping (percentage by weight), based
    on 100% of balanced distillation capacity.In each of the three years ended December 31, 2004, 2005
and 2006, the average utilization rate of the primary
distillation capacity at our refineries was 93.2%, 95.5% and
95.9%, respectively. The average yield for our four principal
refined products (gasoline, kerosene, diesel and lubricants) at
our refineries was 65.6%, 66.7% and 65.7, respectively, in the
same periods. Yield represents the number of tons of
a refined product expressed as a percentage of the number of
tons of crude oil from which that product is processed. In each
of the three years ended December 31, 2004, 2005 and 2006,
the yield for all refined products at our refineries was 91.5%,
92.3% and 92.2%, respectively.

Dalian Petrochemical, Fushun Petrochemical and Lanzhou
Petrochemical were our leading refineries in terms of both
primary distillation capacity and throughput in 2006. They are
all located close to our major oil fields in the northeast and
northwest regions of China and produce a wide range of refined
products. Lanzhou Petrochemical has a strategic position in our
plan to expand our markets in refined product sales in the
southwestern and central regions of China. It is located in the
northwestern part of China, providing easy access to markets in
the southwestern and central regions in China. As of
December 31, 2006, these three refineries had an aggregate
primary distillation capacity of 297.0 million barrels per
year, or 813.8 thousand barrels per day, representing
approximately 31.7% of the total primary distillation capacity
of all our refineries as of the same date. In 2006, these three
refineries processed an aggregate of 230.9 million barrels
of crude oil, or 632.5 thousand barrels per day, representing
approximately 29.4% of our total throughput in the same period.

Marketing

We market a wide range of refined products, including gasoline,
diesel, kerosene and lubricants, through an extensive network of
sales personnel and independent distributors and a broad
wholesale and retail distribution system across China. As of
December 31, 2006, our marketing network consisted of:




    approximately 1,073 regional wholesale distribution outlets
    nationwide. Substantially all of these outlets are located in
    high demand areas such as economic centers across China,
    particularly in the coastal areas, along major railways and
    along the Yangtze River; and
    16,624 service stations owned and operated by us, 282 service
    stations wholly owned by CNPC or jointly owned by CNPC and third
    parties that exclusively sell refined products produced or
    supplied by us and to which we provide supervisory support under
    contractual arrangement, and 1,301 franchise service stations
    owned and operated by third parties.

39



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##### Table of Contents

In 2006, we sold approximately 72.9 million tons of
gasoline and diesel. The PRC government and other institutional
customers, including railway, transportation and fishery
operators, are our long-term purchasers of the gasoline and
diesel that we produce. We sell gasoline and diesel to these
customers at the ex-works median prices published by the PRC
government with an 8% floating range. See
 Regulatory Matters 
Pricing  Refined Products for a discussion of
refined product pricing. In 2006, sales of gasoline and diesel
to these customers accounted for approximately 3.3% and 14.4% of
our total sales of gasoline and diesel, respectively. The
following table sets forth our refined product sales volumes by
principal product category for each of the three years ended
December 31, 2004, 2005 and 2006.

|           |       |                         |          |          |  |      |          |          |  |  |          |          | 
|---------- | ----- | ----------------------- | -------- | -------- |  | ---- | -------- | -------- |  |  | -------- | -------- | 
|           |       | Year ended December 31,
|           |       |                        
|Product    |       | 2004                    |          | 2005     |  | 2006
|           |       |                         |          |          |  |     
|           |       | (in thousands of tons) 
|Diesel     |       |                         | 43,178.3 |          |  |      | 47,811.0 |          |  |  | 48,863.9 |         
|Gasoline   |       |                         | 21,714.2 |          |  |      | 26,161.6 |          |  |  | 23,993.2 |         
|Fuel oil   |       |                         | 5,747.4  |          |  |      | 6,409.6  |          |  |  | 8,711.2  |         
|Naphtha    |       |                         | 5,325.9  |          |  |      | 5,574.1  |          |  |  | 6,887.6  |         
|Kerosene   |       |                         | 2,116.2  |          |  |      | 2,008.0  |          |  |  | 2,047.4  |         
|Lubricants |       |                         | 1,974.0  |          |  |      | 2,181.6  |          |  |  | 2,044.4  |         
|Asphalt    |       |                         | 2,348.7  |          |  |      | 2,475.6  |          |  |  | 3,321.2  |         
|Paraffin   |       |                         | 1,138.1  |          |  |      | 1,160.3  |          |  |  | 1,104.3  |         
|           |       |                         |          |          |  |      |          |          |  |  |          |         
|           | Total |                         |          | 83,542.8 |  |      |          | 93,781.8 |  |  |          | 96,973.2 | 
|           |       |                         |          |          |  |      |          |          |  |  |          |         



| |                    
| | -------------------
| | Wholesale Marketing







| |                 
| | ----------------
| | Retail Marketing



40



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##### Table of Contents

We sell our refined products to service stations owned and
operated by CNPC. These service stations sell exclusively
refined products produced or supplied by us in accordance with
contractual arrangements between CNPC and us. Under these
contractual arrangements, we also provide supervisory support to
these service stations.

We currently operate a majority of our service stations under
the trade name of
(PETROCHINA COMPANY LOGO).
We intend to gradually adopt our new logo
(PETROCHINA COMPANY LOGO)
for all our service stations in the next few years.

Most of the service stations in our service station network are
concentrated in the northern, northeastern and northwestern
regions of China where we have a dominant wholesale market
position. However, the eastern and southern regions of China
have a higher demand for gasoline and diesel. We have made
significant efforts in recent years to expand our sales and
market share in those regions through expanding the number of
our service stations and storage facilities in those regions. As
part of our expansion initiatives, on May 14, 2004, we
entered into the Joint Venture Contract and the Articles of
Association with BP Global Investments Limited, a subsidiary of
BP Amoco p.l.c., to form BP PetroChina Petroleum Company
Limited in Guangdong Province. We and BP Global Investments
Limited hold 51% and 49% equity interests in BP PetroChina
Petroleum Company Limited, respectively. We expect that BP
PetroChina Petroleum Company Limited will build, acquire and
manage approximately 500 service stations in Guangdong Province
within three years from its establishment. As of
December 31, 2006, BP PetroChina Petroleum Company Limited
owned and operated 445 service stations in the Pearl River Delta
of Guangdong Province.

We invested a total of RMB 4,923 million in expanding our
service station network in 2006, of which 76.4% was invested in
the eastern and southern regions of China. In 2006, we sold
approximately 21,480 thousand tons of gasoline and diesel
through our owned and franchised service stations in these
regions, as compared to approximately 13,130 thousand tons and
approximately 17,490 thousand tons we sold in 2004 and 2005,
respectively.

In 2006, we acquired or constructed an aggregate of 902 service
stations that are owned and operated by us, of which 583 are in
the eastern and southern regions of China. We plan to further
increase our retail market share and improve the efficiency of
our retail operations, with a continued focus on the eastern and
southern regions of China. We plan to invest approximately
RMB 8,000 million in 2007 to expand our service
station network and storage infrastructure by adding
approximately 800 new service stations.

The following table sets forth the number of the service
stations in our marketing network as of December 31, 2006:

|                                                                           |       |  |        |        | 
|-------------------------------------------------------------------------- | ----- |  | ------ | ------ | 
|Owned and operated by
    us(1)                                            |       |  | 16,624 |       
|Wholly owned by CNPC or jointly
    owned by CNPC and third
    parties(2) |       |  | 282    |       
|Franchised                                                                 |       |  | 1,301  |       
|                                                                           | Total |  |        | 18,207 | 






|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 445 service stations owned and operated by BP
    PetroChina Petroleum Company Limited.                                                           
|   
|(2) | These service stations exclusively sell refined products
    produced or supplied by us. We also provide supervisory support
    to these service stations.



41



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##### Table of Contents

(CHEMICALS AND MARKETING SEGMENT MAP)

42



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##### Table of Contents

Chemicals and Marketing

Through 12 chemical plants and four chemical products sales
companies, we produce and market basic petrochemical products,
derivative petrochemical products, and other chemical products.
As of December 31, 2006, our chemicals and marketing
segment had income from operations of RMB 5,058 million.

Our chemical plants and sales companies are located in seven
provinces and three autonomous regions in China. Most of our
chemical plants are co-located with our refineries and are also
connected with the refineries by pipelines, providing additional
production flexibility and opportunities for cost
competitiveness. Our exploration and production, refining and
marketing, and natural gas and pipeline operations supply
substantially all of the hydrocarbon feedstock requirements for
our chemicals operations. We believe that the proximity of our
refineries to our chemical plants promotes efficiency in
production, secures feedstock supply and minimizes the risk of
production interruption. Our production capacity and our market
share in China for chemical products allow us to solidify our
dominant position in the northern and western regions of China.
In addition, our stable customer base in the eastern and
southern regions of China provides us with the opportunity to
expand our market share in these regions.

Our Chemical Products

The table below sets forth the production volumes of our
principal chemical products for each of the three years ended
December 31, 2004, 2005 and 2006.

|                              |                  |                                 |  |         |         |  |  |         |         |  |  |         |         | 
|----------------------------- | ---------------- | ------------------------------- |  | ------- | ------- |  |  | ------- | ------- |  |  | ------- | ------- | 
|                              |                  | Year ended December 31,         | 
|                              |                  |                                 | 
|                              |                  | 2004                            |  |         | 2005    |  |  | 2006    |        
|                              |                  |                                 |  |         |         |  |  |         |        
|                              |                  | (in thousand tons)              | 
|Basic petrochemicals          |                  |                                 |  |         |         |  |  |         |         |  |  |        
|                              | Propylene        |                                 |  | 1,969.1 |         |  |  | 2,493.5 |         |  |  | 2,671.2 |        
|                              | Ethylene         |                                 |  | 1,845.6 |         |  |  | 1,887.9 |         |  |  | 2,067.9 |        
|                              | Benzene          |                                 |  | 712.7   |         |  |  | 707.9   |         |  |  | 749.6   |        
|Derivative
    petrochemicals |                  |                                 |  |         |         |  |  |         |         |  |  |        
|                              | Synthetic resin  |                                 |  |         |         |  |  |         |         |  |  |         |        
|                              |                  | Polyethylene                    |  |         | 1,309.5 |  |  |         | 1,355.9 |  |  |         | 1,531.3 | 
|                              |                  | Polypropylene                   |  |         | 986.9   |  |  |         | 1,142.8 |  |  |         | 1,291.0 | 
|                              |                  | ABS                             |  |         | 228.1   |  |  |         | 223.0   |  |  |         | 223.0   | 
|                              |                  | Other synthetic resin products  |  |         | 27.6    |  |  |         | 35.2    |  |  |         | 15.8    | 
|                              | Synthetic fiber  |                                 |  |         |         |  |  |         |         |  |  |         |        
|                              |                  | Polyacrylic fiber               |  |         | 108.1   |  |  |         | 97.1    |  |  |         | 81.0    | 
|                              |                  | Terylene fiber                  |  |         | 94.3    |  |  |         | 86.2    |  |  |         | 53.3    | 
|                              |                  | Other synthetic fiber products  |  |         | 7.4     |  |  |         | 6.3     |  |  |         | 6.4     | 
|                              | Synthetic rubber |                                 |  |         |         |  |  |         |         |  |  |         |        
|                              |                  | Styrene butadiene rubber        |  |         | 190.2   |  |  |         | 194.4   |  |  |         | 212.9   | 
|                              |                  | Other synthetic rubber products |  |         | 95.6    |  |  |         | 87.0    |  |  |         | 99.1    | 
|                              | Intermediates    |                                 |  |         |         |  |  |         |         |  |  |         |        
|                              |                  | Alkylbenzene                    |  |         | 194.9   |  |  |         | 205.7   |  |  |         | 207.9   | 
|Other chemicals               |                  |                                 |  |         |         |  |  |         |         |  |  |        
|                              | Urea             |                                 |  | 3,652.3 |         |  |  | 3,577.6 |         |  |  | 3,576.3 |        
|                              | Ammonium nitrate |                                 |  | 32.0    |         |  |  | 5.4     |         |  |  |        |        



43



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##### Table of Contents

polyethylene. In 2001, we implemented a five-year plan to invest
RMB 10,000 million to upgrade our ethylene production
facilities at Daqing Petrochemical, Jilin Petrochemical,
Liaoyang Petrochemical, Dushanzi Petrochemical and Lanzhou
Petrochemical. As of December 31, 2006, we had completed
the upgrades of all ethylene projects included in such five-year
plan. In 2006, we also completed a new capacity-expansion
project at Jilin Petrochemical. As of December 31, 2006,
our annual ethylene production capacity was 2,630 thousand tons,
an increase of 780 thousand tons from the year ended
December 31, 2005. Our production volume of ethylene
increased by 9.5% from 1,887.9 thousand tons in 2005 to 2,067.9
thousand tons in 2006. We expect to complete the further
upgrading of the ethylene facilities at Liaoyang Petrochemical
prior to the end of 2007 and the upgrading of the ethylene
production facilities at Dushanzi Petrochemical by 2009. The
petrochemical ethylene projects at Fushun Petrochemical and
Sichuan Petrochemical have been approved by the National
Development and Reform Commission and we are currently in the
process of implementing these projects.

In 2006, the monthly average capacity utilization rate at our
ethylene production facilities was 95.1%. The cost of ethylene
production is an important component of our overall chemical
production costs. Reduction of energy consumption and raw
material loss is a key factor in reducing ethylene production
costs. We have implemented a series of measures to reduce energy
consumption. The average energy consumption of our ethylene
production facilities was 734.3, 751.5 and 748.4 kilograms of
standard oil per ton in 2004, 2005 and 2006, respectively. This
is significantly higher than the world average of 500 to 690
kilograms of standard oil per ton. We plan to continue to
implement measures to reduce our energy consumption.

In addition, high ethylene percentage loss has also contributed
to the relatively high cost of our ethylene production. In order
to reduce high ethylene percentage loss in our ethylene
production, we have implemented a series of measures at our
chemical plants in the past several years, such as improving our
process management of key units for ethylene production,
reducing unplanned temporary interruptions of our chemical
facilities and enhancing pyrolysis material composition and
production plans. As a result, the average ethylene percentage
loss at our chemical plants decreased from 0.57% in 2003 to
0.54% in 2004. The average ethylene percentage loss rate went up
to 0.61% in 2005, due to the significant losses resulting from
the trial of an upgraded ethylene production facility. In 2006,
our average ethylene percentage loss decreased to 0.55%. We
believe that our measures will enable us to further reduce the
cost of our ethylene production without incurring significant
capital expenditures.

We produce a number of synthetic resin products, including
polyethylene, polypropylene and ABS. As of December 31,
2006, our production capacities for polyethylene, polypropylene
and ABS were 2,212 thousand tons, 1,874 thousand tons and 220
thousand tons, respectively. In 2006, we produced 1,531 thousand
tons and 1,291 thousand tons of polyethylene and polypropylene,
respectively, which respectively increased by 12.9% and 13.0% as
compared with 2005. In 2006, we produced 223.0 thousand tons of
ABS that is consistent with our ABS production volume in 2005.
Currently, China imports significant volumes of these products
to meet the domestic demand due to an inadequate supply of
high-quality domestically produced polyethylene and
polypropylene. We intend to increase the production, and improve
the quality, of these products. We have built new production
facilities with new technology for the production of these
products in Daqing Petrochemical, Daqing Refining and Chemical,
Jilin Petrochemical, Lanzhou Petrochemical, Dalian Petrochemical
and other branch companies to meet this target.

Sales and Marketing

Our chemical products are distributed to a number of industries
that manufacture components used in a wide range of
applications, including automotive, construction, electronics,
medical manufacturing, printing, electrical appliances,
household products, insulation, packaging, paper, textile,
paint, footwear, agriculture and furniture industries.

44



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##### Table of Contents

The following table sets forth the sales volumes of our chemical
products by principal product category for each of the three
years ended December 31, 2004, 2005 and 2006.

|                              |                  |                          |  |         |         |  |  |         |         |  |  |         |         | 
|----------------------------- | ---------------- | ------------------------ |  | ------- | ------- |  |  | ------- | ------- |  |  | ------- | ------- | 
|                              |                  | Year ended December 31,  | 
|                              |                  |                          | 
|Product                       |                  | 2004                     |  |         | 2005    |  |  | 2006    |        
|                              |                  |                          |  |         |         |  |  |         |        
|                              |                  | (in thousands of tons)   | 
|Derivative
    petrochemicals |                  |                          |  |         |         |  |  |         |         |  |  |        
|                              | Synthetic resin  |                          |  |         |         |  |  |         |         |  |  |         |        
|                              |                  | Polyethylene             |  |         | 1,423.6 |  |  |         | 1,477.0 |  |  |         | 1,594.8 | 
|                              |                  | Polypropylene            |  |         | 793.3   |  |  |         | 972.3   |  |  |         | 1,069.6 | 
|                              |                  | ABS                      |  |         | 231.8   |  |  |         | 232.0   |  |  |         | 233.4   | 
|                              | Synthetic fiber  |                          |  |         |         |  |  |         |         |  |  |         |        
|                              |                  | Terylene fiber           |  |         | 103.6   |  |  |         | 103.3   |  |  |         | 59.4    | 
|                              |                  | Polyacrylic fiber        |  |         | 115.8   |  |  |         | 95.5    |  |  |         | 91.2    | 
|                              | Synthetic rubber |                          |  |         |         |  |  |         |         |  |  |         |        
|                              |                  | Butadiene styrene rubber |  |         | 187.8   |  |  |         | 202.2   |  |  |         | 203.4   | 
|                              | Intermediates    |                          |  |         |         |  |  |         |         |  |  |         |        
|                              |                  | Alkylbenzene             |  |         | 110.9   |  |  |         | 112.3   |  |  |         | 127.9   | 
|Other chemicals               |                  |                          |  |         |         |  |  |         |         |  |  |        
|                              | Urea             |                          |  | 3,662.8 |         |  |  | 3,413.8 |         |  |  | 3,570.6 |        
|                              | Ammonium nitrate |                          |  | 32.8    |         |  |  | 4.1     |         |  |  | 1.4     |        

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(NATURAL GAS AND PIPELINE SEGMENT MAP)

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##### Table of Contents

Natural Gas and Pipeline

We are Chinas largest natural gas transporter and seller
in terms of sales volume, with revenues of RMB
38,917 million and total sales volume of
1,357.0 billion cubic feet in 2006, of which
1,200.5 billion cubic feet was sold by our natural gas and
pipeline segment. In 2006, our natural gas and pipeline segment
generated income from operations of RMB 8,986 million. We
sell natural gas primarily to fertilizer and chemical companies,
commercial users and municipal utilities owned by local
governments.

The following table sets forth the length of our natural gas
pipelines as of December 31, 2004, 2005 and 2006 and the
volume of natural gas sold by us in each of the three years
ended December 31, 2004, 2005 and 2006.

|                                                                         |  |                           |        |  |      |  |         |      |  |  |         | 
|------------------------------------------------------------------------ |  | ------------------------- | ------ |  | ---- |  | ------- | ---- |  |  | ------- | 
|                                                                         |  | As of December 31 or year |       
|                                                                         |  | ended December 31,        |       
|                                                                         |  |                           |       
|                                                                         |  | 2004                      |        |  | 2005 |  |         | 2006 | 
|                                                                         |  |                           |        |  |      |  |         |      | 
|Length of natural gas pipelines
    used by our natural gas segment (km) |  |                           | 17,868 |  |      |  | 19,212  |      |  |  | 19,662  | 
|Total length of natural gas
    pipelines (km)                           |  |                           | 18,995 |  |      |  | 20,340  |      |  |  | 20,590  | 
|Volume of natural gas sold by our
    natural gas segment (Bcf)          |  |                           | 657.3  |  |      |  | 888.8   |      |  |  | 1,200.5 | 
|Total volume of natural gas
    sold(1)(Bcf)                             |  |                           | 781.4  |  |      |  | 1,052.2 |      |  |  | 1,357.0 | 






|    |                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Including both the natural gas sold to third parties and the
    natural gas sold within our company for the production of other
    products.



Our Principal Markets for Natural Gas










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natural gas pipeline and in 2004, we completed the construction
and commenced commercial operation of the mainlines of the West
to East natural gas pipeline and the Zhong County to Wuhan City
natural gas pipeline. These three pipelines link our Xinjiang,
Changqing, Sichuan and Qinghai gas fields with our natural gas
markets referred to above.

Each year, we must supply natural gas to customers subject to
the government-formulated guidance supply plan first as required
by the PRC government. We enter into natural gas supply
contracts with those customers on the basis of the amount of
natural gas to be supplied according to the guidance supply plan
for the following years supply.

We have entered into long-term take-or-pay contracts with 23
municipalities and enterprises in Qinghai Province, Gangsu
Province, Shanxi Province and Tianjin Municipality, 27
municipalities and enterprises in Hubei Province and Hunan
Province, 16 municipalities in Shandong Province and 50
municipalities and enterprises in Henan Province, Anhui
Province, Shanghai Municipality and other provinces located in
the Yangtze River Delta. Under these take-or-pay contracts, we
have agreed in principle to supply natural gas to these
customers in the next 20 to 25 years at prices determined
based on the ex-works prices published by the National
Development and Reform Commission, formerly the State
Development Planning Commission, supplemented by the pipeline
transportation tariffs. See  Regulatory
Matters  Pricing  Natural Gas for a
discussion of natural gas pricing.

Driven by environmental and efficiency concerns, the PRC
government is increasingly encouraging industrial and
residential use of natural gas to meet primary energy and
environmental protection needs. The PRC government has adopted a
number of laws and regulations to require municipal governments
to increase the use of clean energy, such as natural gas and
liquefied petroleum gas, to replace the use of raw coal. Several
municipal governments, including that of Beijing, have adopted
policies to facilitate natural gas consumption in order to
reduce the air pollution level. The PRC government has also
adopted a preferential value-added tax rate of 13% for natural
gas production as compared to a 17% value-added tax rate for
crude oil production.

We believe that these policies have had a positive effect on the
development and consumption of natural gas in many
municipalities that are our existing or potential markets for
natural gas. We believe that these favorable policies will
continue to benefit our natural gas business.

Natural Gas Transmission Infrastructure

As of December 31, 2006, our natural gas and pipeline
segment owned and operated approximately 19,662 kilometers of
natural gas pipelines in China, which represented the vast
majority of Chinas onshore natural gas pipelines. Our
existing natural gas pipelines form regional natural gas supply
networks in northwestern, southwestern, northern and central
China as well as the Yangtze River Delta. Our experience in the
design, construction management and operation of our existing
natural gas pipelines has enabled us to develop relatively
advanced technologies and skills in China in long distance
pipeline design, construction and automated operational
communications. We believe that we will continue to benefit from
those technologies and skills in the future expansion of our
natural gas pipeline networks and their ancillary facilities.

Expansion of Our Natural Gas Transmission and Marketing
Business

In October 2004, we completed the construction of the main line
of our West to East natural gas pipeline and commenced
commercial operation in December 2004. Our West to East natural
gas pipeline project is designed to link our natural gas fields
in Xinjiang and Changqing with Henan Province, Anhui Province,
Shanghai Municipality and other areas in the Yangtze River
Delta. The total length of the main line for the West to East
natural gas pipeline project is 3,786 kilometers. As of
December 31, 2006, we had invested RMB 37,717 million
in this project. We have completed the construction of two
connecting pipelines for the West to East natural gas pipeline
project, the Hebei to Nanjing pipeline and the Huaiyang to Wuhan
pipeline. The Hebei to Nanjing pipeline starts at Qingshan,
Jiangsu Province and ends at Anping, Hebei Province, with its
mainline having a length of

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886 kilometers. We completed the construction and commenced the
commercial operation of the main line of this pipeline in
January 2006. The Huaiyang to Wuhan pipeline starts at Huaiyang,
Anhui Province and ends at Wuhan, Hubei Province with a total
length of 455 kilometers. We completed the construction and
commenced the commercial operation of this pipeline in December
2006. We are currently constructing another connecting pipeline
for the West to East natural gas pipeline project, the Lanzhou
to Yinchuan pipeline. The Lanzhou to Yinchuan pipeline starts at
Lanzhou, Gansu Province and ends at Yinchuan, Ningxia Autonomous
Region with a total length of 402 kilometers. We expect to
complete the construction and commence commercial operation of
this pipeline in June 2007. As of March 31, 2007, we
entered into take-or-pay contracts with 50 subscribers and
distributors to supply them with natural gas through the West to
East natural gas pipeline. We believe that the successful
completion of this natural gas pipeline and associated storage
facilities will substantially enhance our ability to capitalize
on anticipated growth in demand for natural gas in these
regions. We are currently expanding the transmission capacity of
the West to East natural gas pipeline by upgrading the existing
10 gas compression stations and building additional 12 gas
compression stations to increase the capacity from
12 billion cubic meters to 17 billion cubic meters per
year.

The Zhong County to Wuhan City natural gas pipeline is designed
to link the Sichuan gas region with Wuhan City, the other areas
in Hubei province and Hunan Province, and has a designed annual
throughput capacity of 105.9 billion cubic feet of natural
gas. We commenced the construction of the pipeline in August
2003. In December 2004, we completed the construction and
commenced commercial operation of the main line of the Zhong
County to Wuhan City natural gas pipeline and its Xiangfan
branch pipeline and Huangshi branch pipeline. We completed the
construction and commenced commercial operation of the Xiangtan
branch line in July 2005. As of March 31, 2007, we had
entered into take-or-pay contracts with 27 customers in Hubei
Province and Hunan Province including municipal governments and
enterprises, to supply them with natural gas to be transmitted
through the main line and branch lines of the Zhong County to
Wuhan City pipeline.

We completed constructing the second natural gas pipeline from
Shaanxi to Beijing Municipality in July 2005. This second
Shaanxi to Beijing natural gas pipeline has a total length of
935 kilometers and can be used to deliver natural gas from our
Changqing oil and gas region to Shaanxi Province, Shanxi
Province, Hebei Province and Beijing Municipality with a
designed annual throughput capacity of 423.8 billion cubic
feet of natural gas. In 2006, we transmitted 66.2 billion
cubic feet of natural gas through the second Shaanxi to Beijing
natural gas pipeline.

Crude Oil and Refined Product Transportation and Storage
Infrastructure

We have an extensive network for the transportation, storage and
distribution of both crude oil and refined products, which
covers many regions of China. Our goal is to exploit and
optimize our existing infrastructure to further consolidate our
presence as the leading integrated oil and gas company in China.

In 2005, we completed the construction of a portion of the
Sino-Kazakhstan oil pipeline that lies within the territory of
the PRC. It starts at Ala Mountain Pass and ends at Dushanzi in
Xinjiang Autonomous Region with a total length of 246
kilometers. Commercial operation of the Sino-Kazakhstan oil
pipeline commenced in July 2006.

As of December 31, 2006, our crude oil transportation and
storage infrastructure consisted of:




    9,620 kilometers of crude oil pipelines with an average daily
    throughput of approximately 2.50 million barrels; and
    crude oil storage facilities with an aggregate storage capacity
    of approximately 17.2 million cubic meters.We deliver crude oil to customers through our pipeline and
storage facility network, through crude oil storage facilities
that we lease from third parties and by ships leased by
customers. In

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2006, approximately 86.7% of our crude oil production was
delivered to refineries through our crude oil pipeline network.
We believe that our crude oil pipeline network is sufficient for
our current and anticipated transportation needs. During the
past three years, we have not experienced any delays in
delivering crude oil due to pipeline capacity constraints.

Our transportation and storage infrastructure also includes:




    2,413 kilometers of refined product pipelines with an average
    daily throughput of approximately 37,000 tons; and
    refined product storage facilities with a total storage capacity
    of approximately 18.7 million cubic meters.Most of our refineries are located in the northeastern and
northwestern regions of China. Our ability to distribute
products through our own product distribution infrastructure to
the eastern and southern regions will provide us with greater
flexibility in supplying refined products to the domestic
markets across China. We plan to continue to enhance our product
distribution infrastructure in the northeastern, northwestern,
northern and southwestern regions where we already have a
significant market share, and to expand our product distribution
infrastructure in the eastern and southern regions by acquiring
and constructing transportation storage facilities and
distribution storage facilities in these regions.

Together with the expansion of our service stations, we expect
that our pipelines, primary storage and secondary distribution
storage facilities will significantly enhance our existing
distribution infrastructure for refined products. We believe
that our enhanced distribution infrastructure will help us
increase the sales of our refined products.





Competition

As an oil and gas company operating in a competitive industry,
we compete in each of our business segments in both China and
international markets for desirable business prospects and for
customers. Our principal competitors in China are Sinopec,
including its subsidiary China National Star Petroleum
Corporation, or CNSPC, and China National Offshore Oil
Corporation, or CNOOC.

Exploration and Production Operations

We are the largest onshore oil and gas company in China in terms
of proved crude oil and natural gas reserves as well as crude
oil and natural gas production and sales. However, we compete
with Sinopec for the acquisition of desirable crude oil and
natural gas prospects. We believe that our experience in crude
oil and natural gas exploration and production and our advanced
exploration and development technologies that are suitable for
diverse geological conditions in China will enable us to
maintain our dominant position in discovering and developing
crude oil and natural gas reserves in China.

Refining and Marketing and Chemicals and Marketing
Operations

We compete with Sinopec in our refining and marketing and
chemicals and marketing operations on the basis of price,
quality and customer service. Most of our refineries and
chemical plants are located in the northeastern, northwestern
and northern regions of China where we have the dominant market
share for refined products and chemical products. We also sell
our refined products and chemical products in the eastern,
southern, southwestern and central-southern regions of China,
where our products have a considerable market share. The eastern
and southern regions of China, where refined products and
chemical products are in higher demand, are important markets
for our refined products and chemical products. Sinopec has a
strong presence in the eastern and southern regions of China in
competition with us, and most of Sinopecs refineries,
chemical plants and distribution networks are located in these
regions in close proximity to these

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markets. Moreover, as the newly constructed facilities of CNOOC
commenced operation, the competition is further intensified. We
expect that we will continue to face competition from, among
other competitors, Sinopec in increasing our refined products
and chemical products sales in these regions. See
Item 3  Key Information  Risk
Factors.

We also face competition from imported refined products and
chemical products on the basis of price and quality. As a result
of Chinas entry into the WTO, we expect that competition
from foreign producers of refined products and chemical products
may increase as tariff and non-tariff barriers for imported
refined products and chemical products will be reduced or
eliminated over time, including the opening over time of retail
and wholesale markets in China for refined products and chemical
products to foreign competition. Our ability to compete with
foreign producers of refined products and chemical products will
depend on our ability to reduce our production costs and improve
the quality of our products. See Item 3 
Key Information  Risk Factors.

Natural Gas and Pipeline Operations

We are the largest supplier of natural gas in terms of volume of
natural gas supplied. Currently, we face very limited
competition in the supply of natural gas in Beijing
Municipality, Tianjin Municipality, Hebei Province, Shanghai
Municipality, Jiangsu Province, Zhejiang Province, Anhui
Province, Henan Province, Hubei Province, Hunan Province and the
northwestern regions of China, our existing principal markets
for natural gas. Currently, Sinopec has natural gas fields in
Sichuan Province and Chongqing Municipality and sells natural
gas to users in Sichuan and Chongqing. We, therefore, have
limited competition from Sinopec in our markets in Sichuan
Province and Chongqing Municipality. Further, we intend to
expand our markets for natural gas into the coastal regions in
eastern China where we may face competition from CNOOC and, to a
lesser extent, Sinopec. We believe that our dominant natural gas
resources base, our relatively advanced technologies and skills
in managing long distance pipelines will enable us to continue
to be a dominant player in the natural gas markets in China.





Environmental Matters

Together with other companies in the industries in which we
operate, we are subject to numerous national, regional and local
environmental laws and regulations concerning our oil and gas
exploration and production operations, petroleum and
petrochemical products and other activities. In particular,
these laws and regulations:




    require an environmental evaluation report to be submitted and
    approved prior to the commencement of exploration, production,
    refining and chemical projects;
    restrict the type, quantities, and concentration of various
    substances that can be released into the environment in
    connection with drilling and production activities;
    limit or prohibit drilling activities within protected areas and
    certain other areas; and
    impose penalties for pollution resulting from oil, natural gas
    and petrochemical operations, including criminal and civil
    liabilities for serious pollution.These laws and regulations may also restrict air emissions and
discharges to surface and subsurface water resulting from the
operation of natural gas processing plants, chemical plants,
refineries, pipeline systems and other facilities that we own.
In addition, our operations are subject to laws and regulations
relating to the generation, handling, storage, transportation,
disposal and treatment of solid waste materials.

We anticipate that the environmental laws and regulations to
which we are subject will become increasingly strict and are
therefore likely to have an increasing impact on our operations.
It is difficult, however, to predict accurately the effect of
future developments in such laws and regulations on our future
earnings and operations. Some risk of environmental costs and
liabilities is inherent in

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certain of our operations and products, as it is with other
companies engaged in similar businesses. We cannot assure you
that material costs and liabilities will not be incurred.
However, we do not currently expect any material adverse effect
on our financial condition or results of operations as a result
of compliance with such laws and regulations. We paid pollutant
discharge fees of approximately RMB 182 million, RMB
199 million and RMB 211 million in 2004, 2005 and
2006, respectively.

To meet future environmental obligations, we are engaged in a
continuous program to develop effective environmental protection
measures. This program includes research on:




    reducing sulphur levels in heavy fuel oil and diesel fuel;
    reducing olefin and benzene content in gasoline and the quantity
    of emissions and effluents from our refineries and petrochemical
    plants; and
    developing and installing monitoring systems at our pollutant
    discharge openings and developing environmental impact
    assessments for major projects.Our capital expenditures on environmental programs in 2004, 2005
and 2006 were approximately RMB 1,345 million, RMB
1,633 million and RMB 4,634 million, respectively.

On December 23, 2003, a gas blow-out incident occurred at
our Luojia No. 16H gas well located in Kaixian County,
Chongqing Municipality. The gas blow-out caused the leakage of a
large quantity of sulfurated hydrogen, resulting in injuries and
death to many residents living in the surrounding areas. The PRC
government investigated this gas blow-out and found CNPC, who
had provided drilling services to us for the Luojia No. 16H
gas well, liable. This incident has not had, and we do not
believe it will have, a material adverse effect on our results
of operations and financial condition. Because a number of our
production facilities are located in populated areas, we have
established a series of preventative measures to improve the
safety of our employees and surrounding residents and minimize
disruptions or other adverse effects on our business. These
measures include:




    providing each household in areas surrounding our production
    facilities with printed materials to explain and illustrate
    safety and protection knowledge and skills; and
    enhancing the implementation of various safety production
    measures we have adopted previously.We believe that these preventative measures have helped minimize
the possibility of similar incidents resulting in serious
casualties and environmental consequences. In addition, the
adoption of these preventative measures has not required
significant capital expenditures to date, and therefore, will
not have a material adverse effect on our results of operations
and financial condition.

On November 13, 2005, an explosion occurred at one of our
branch companies in Jilin Province. The Chinese government
completed the investigation of this accident in December 2006.
Based on the results of the investigation, our company paid a
fine of RMB 1 million in settlement of all liabilities
arised from the accident.

We have implemented the following measures to prevent future
occurrences of similar incidents:




    conducting environmental risk monitoring; and
    establishing preventive systems for emergency use at refinery
    and petrochemical enterprises.



Legal Proceedings

We are not involved in any judicial and arbitral proceedings,
the results of which, in the aggregate, would have a material
adverse impact on our financial condition.

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Properties

Under a restructuring agreement we entered into with CNPC on the
date of our establishment in 1999, CNPC undertook to us the
following:




    CNPC would use its best endeavors to obtain formal land use
    right licenses to replace the entitlement certificates in
    relation to the 28,649 parcels of land, which were leased or
    transferred to us from CNPC, within one year from August,
    September and October 1999 when the relevant entitlement
    certificates were issued;
    CNPC would complete, within one year from November 5, 1999,
    the necessary governmental procedures for the requisition of the
    collectively owned land on which 116 service stations owned by
    us are located; and
    CNPC would obtain individual building ownership certificates in
    our name for all of the 57,482 buildings transferred to us by
    CNPC, before November 5, 2000.As of December 31, 2006, CNPC obtained formal land use
right certificates for 27,494 of the 28,649 parcels of land and
ownership certificates for some buildings. The governmental
procedures for the above-mentioned service stations located on
collectively owned land have not been completed to date. Our
directors believe that the use of and the conduct of relevant
activities at the above-mentioned parcels of land, service
stations and buildings are not affected by the fact that the
relevant land use right certificates or building ownership
certificates have not been obtained or the fact that the
relevant governmental procedures have not been completed. Our
directors believe that this will not have any material adverse
effect on our results of operations and financial condition.

We own substantially all of the equipment and production
facilities relating to all our business activities. We hold
exploration and production licenses covering all of our
interests in developed and undeveloped acreage and oil and
natural gas wells. See   Exploration and
Production  Properties.





Regulatory Matters

Overview

Chinas oil and gas industry is subject to extensive
regulation by the PRC government with respect to a number of
aspects of exploration, production, transmission and marketing
of crude oil and natural gas as well as production,
transportation and marketing of refined products and chemical
products. The following central government authorities exercise
control over various aspects of Chinas oil and gas
industry:




    The Ministry of Land and Resources has the authority for
    granting, examining and approving oil and gas exploration and
    production licenses, the administration of registration and
    transfer of exploration and production licenses.
    The Ministry of Commerce:


    sets the import and export volume quotas for crude oil and
    refined products according to the overall supply and demand for
    crude oil and refined products in China as well as the WTO
    requirements for China;
    issues import and export licenses for crude oil and refined
    products to oil and gas companies that have obtained import and
    export quotas; and
    examines and approves production sharing contracts and
    Sino-foreign equity and cooperative joint venture contracts.

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
    The National Development and Reform Commission:


    has the industry administration and policy coordination
    authority over Chinas oil and gas industry;
    determines mandatory minimum volumes and applicable prices of
    natural gas to be supplied to certain fertilizer producers;
    publishes guidance prices for natural gas and retail median
    guidance prices for certain refined products, including gasoline
    and diesel;
    approves significant petroleum, natural gas, oil refinery and
    chemical projects set forth under the Catalogues of Investment
    Projects Approved by the Central Government; and
    approves Sino-foreign equity and cooperative projects exceeding
    certain capital amounts.Exploration Licenses and Production Licenses

The Mineral Resources Law authorizes the Ministry of Land and
Resources to exercise administrative authority over the
exploration and production of mineral resources within the PRC.
The Mineral Resources Law and its supplementary regulations
provide the basic legal framework under which exploration
licenses and production licenses are granted. The Ministry of
Land and Resources has the authority to issue exploration
licenses and production licenses. Applicants must be companies
approved by the State Council to engage in oil and gas
exploration and production activities.

Applicants for exploration licenses must first register with the
Ministry of Land and Resources blocks in which they intend to
engage in exploration activities. The holder of an exploration
license is obligated to make a progressively increasing annual
minimum exploration investment relating to the exploration
blocks in respect of which the license is issued. Investments
range from RMB 2,000 per square kilometer for the initial year
to RMB 5,000 per square kilometer for the second year, and to
RMB 10,000 per square kilometer for the third and subsequent
years. Additionally, the holder has to pay an annual exploration
license fee that starts at RMB 100 per square kilometer for each
of the first three years and increases by an additional RMB 100
per square kilometer per year for subsequent years up to a
maximum of RMB 500 per square kilometer. The maximum term of an
exploration license is seven years, subject to twice renewal
upon expiration of the original term, with each renewal being
for a two-year term. At the exploration stage, an applicant can
also apply for a progressive exploration and production license
that allows the holder to test and develop reserves not yet
fully proven. Upon the detection and confirmation of the
quantity of reserves in a certain block, the holder must apply
for a production license based on economic evaluation, market
conditions and development planning in order to shift into the
production phase in a timely fashion. In addition, the holder
needs to obtain the right to use that block of land. Generally,
the holder of a full production license must obtain a land use
rights certificate for industrial land use covering that block
of land.

The Ministry of Land and Resources issues production licenses to
applicants on the basis of the reserve reports approved by the
relevant authorities. Production license holders are required to
pay an annual production right usage fee of RMB 1,000 per square
kilometer. Administrative rules issued by the State Council
provide that the maximum term of a production license is
30 years. In accordance with a special approval from the
State Council, the Ministry of Land and Resources has issued
production licenses with terms coextensive with the projected
productive life of those reservoirs. Each of our production
licenses is renewable upon our application 40 days prior to
expiration. If oil and gas prices increase, the productive life
of our crude oil and natural gas reservoirs may be extended
beyond the current terms of the relevant production licenses.

Among the major PRC oil and gas companies, the exploration
licenses and production licenses held by PetroChina, Sinopec and
CNOOC account for the majority of mining rights in China. Among

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those companies, PetroChina and Sinopec primarily engage in
onshore exploration and production, while CNOOC primarily
engages in offshore exploration and production.

Pricing



Crude OilPetroChina and Sinopec set their crude oil median prices each
month based on the average Singapore market FOB prices for crude
oil of different grades in the previous month. In addition,
PetroChina and Sinopec negotiate a premium or discount to
reflect transportation costs, the differences in oil quality and
market supply and demand. The National Development and Reform
Commission will mediate if PetroChina and Sinopec cannot agree
on the amount of premium or discount.



Refined ProductsSince October 2001, PetroChina has set its retail prices within
an 8% floating range of the published retail median guidance
prices of gasoline and diesel published by the National
Development and Reform Commission (but after March 26,
2006, the price of diesel for fishing vessels has been set in
line with the retail base price published in the current year,
with no upward adjustment for the time being). These retail
median guidance prices of gasoline and diesel vary in each
provincial level distribution region. From October 2001 to early
2006, the National Development and Reform Commission published
the retail median guidance prices of gasoline and diesel from
time to time based on the weighted average FOB Singapore,
Rotterdam and New York trading prices for diesel and gasoline
plus transportation costs and taxes. Generally, adjustments were
made only if the weighted average prices fluctuate beyond 8% of
the previously published retail median guidance price. In 2006,
the PRC government, under its macro economic controls,
introduced a new mechanism for determining the prices of refined
products.

PetroChina sets the wholesale prices for its gasoline and diesel
on the basis of its retail prices and a discount to its retail
prices of at least 4.5% as required by the National Development
and Reform Commission.

In addition, the National Development and Reform Commission sets
the ex-works median prices for gasoline and diesel sold for
military use and national reserve. For other institutional
customers including airlines and railway operators, PetroChina
may charge on the basis of the ex-works median prices adjustment
within an upward or downward adjustment up to 8%.



Chemical ProductsPetroChina determines the prices of all of its chemical products.



Natural GasThe price of natural gas has two components: ex-works price and
pipeline transportation tariff.

Prior to December 26, 2005, ex-works prices varied
depending on whether or not the natural gas sold was within the
government-formulated natural gas supply plan. For natural gas
sold within the government-formulated supply plan, the National
Development and Reform Commission fixed ex-works prices
according to the nature of the customers. Most of these
customers were fertilizer producers. For natural gas sold to
customers not subject to the government-formulated supply plan,
the National Development and Reform Commission published median
guidance ex-works prices, and allowed natural gas producers to
adjust prices upward or downward by up to 10%.

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On December 26, 2005, the National Development and Reform
Commission reformed the mechanism for setting the ex-works
prices of domestic natural gas by changing the ex-works prices
to governmental guidance prices, and categorizing domestic
natural gas into two categories. On the basis of the ex-works
price set by the government, subject to the negations between
the seller and the buyer, the actual ex-works price of the first
category may float upward or downward up to 10%; while the
actual ex-works price of the second category may float upward up
to 10% and downward to any level. The price of the first
category will be adjusted to the same level as the second
category within three to five year. The National Development and
Reform Commission does not allow PetroChina and Sinopec to
charge different prices towards internal and external
enterprises.

PetroChina negotiates the actual ex-works price with natural gas
users within the benchmark price set by the government and the
adjustment range.

The National Development and Reform Commission sets the pipeline
transportation tariff for the natural gas transported by
pipelines constructed prior to 1991. For natural gas transported
by pipelines constructed after 1991, PetroChina submits to the
National Development and Reform Commission for examination and
approval proposed pipeline transmission tariffs based on the
capital investment made in the pipeline, the depreciation period
for the pipeline, the ability of end users to pay and
PetroChinas profit margin.

Production and Marketing



Crude OilEach year, the National Development and Reform Commission
publishes the projected target for the production and sale of
crude oil by PetroChina, Sinopec and CNOOC, based on the
domestic consumption estimates submitted by domestic producers,
including PetroChina, Sinopec and CNOOC, the production of these
companies as well as the forecast of international crude oil
prices. The actual production levels are determined by the
producers themselves and may vary from the submitted estimates.
Since January 1, 2007, qualified domestic producers are
permitted to engage in the sale and storage of crude oil.
Foreign companies are also allowed to establish and invest in
enterprises to conduct crude oil-related business.



Refined ProductsPreviously, only PetroChina, Sinopec and joint ventures
established by the two companies had the right to conduct
gasoline and diesel wholesale business. Other companies,
including foreign invested companies, were not allowed to engage
in wholesale of gasoline and diesel in Chinas domestic
market. In general, only domestic companies, including
Sino-foreign joint venture companies, were permitted to engage
in retail of gasoline and diesel. Since December 11, 2004,
wholly-owned foreign enterprises are permitted to conduct crude
oil retail business. Since January 1, 2007 when the
Measures on the Administration of the Refined Products Market
became effective, all entities meeting certain requirements are
allowed to submit applications to the Ministry of Commerce to
conduct gasoline and diesel wholesale, retail and storage
businesses.



Natural GasThe National Development and Reform Commission publishes in each
year the production targets for natural gas producers based on
the annual production target prepared on the basis of
consumption estimates submitted by all natural gas producers
such as PetroChina. The National Development and Reform
Commission also formulates the annual natural gas guidance
supply plan, which requires natural gas producers to distribute
a specified amount of natural gas to specified fertilizer
producers, municipal governments and enterprises. The actual
production levels of natural gas, except the amount supplied to
the fertilizer producers, are determined by the natural gas
producers.

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Foreign Investments



Cooperation in Exploration and Production with Foreign
    CompaniesCurrently, only CNPC and Sinopec have the right to cooperate
with foreign companies in onshore crude oil and natural gas
exploration and production in China. CNOOC has the right to
cooperate with foreign companies in offshore crude oil and
natural gas exploration and production in China.

Sino-foreign cooperation projects and foreign parties in onshore
oil and gas exploration and production in China are generally
selected through open bids and bilateral negotiations. Those
projects are generally conducted through production sharing
contracts. The Ministry of Commerce must approve those contracts.

As authorized by the Regulations of the PRC on Exploration of
Onshore Petroleum Resources in Cooperation with Foreign
Enterprises, CNPC has the right to enter into joint cooperation
arrangements with foreign oil and gas companies for onshore
crude oil and natural gas exploration and production. PetroChina
does not have the capacity to enter into production sharing
contracts directly with foreign oil and gas companies under
existing PRC law. Accordingly, CNPC will continue to enter into
production sharing contracts. After signing a production sharing
contract, CNPC will, subject to approval of the Ministry of
Commerce, assign to PetroChina most of its commercial and
operational rights and obligations under the production sharing
contract as required by the Non-competition Agreement between
CNPC and PetroChina. See Item 7  Major
Shareholders and Related Party Transactions  Contract
for the Transfer of Rights under Production Sharing
Contracts.



Transportation and RefiningPRC regulations permit foreign minority ownership in pipeline
transportation, oil storage facilities and oil jetties. There is
no express general restriction on foreign investment in
refineries and petrochemical facilities. However, construction
of new refinery or ethylene facilities, expansion of existing
refinery facilities and upgrading of existing ethylene
facilities by increasing annual production capacity of more than
200 thousand tons are subject to the approval of relevant
government authorities. The production of ethylene with an
annual production capacity exceeding 600 thousand tons must be
conducted by companies majority-owned by Chinese entities.
Furthermore, when appropriate, projects must receive necessary
approvals from relevant PRC government agencies. See
Item 3  Key Information  Risk
Factors.

Import and Export

Since January 1, 2004, the import of crude oil and refined
products by state-owned trading companies has been exempted from
import quota and licensing control. Non-state-owned trading
companies which are qualified to import crude oil and refine
products are subject to quotas. Both state-owned trading
companies and non-state-owned trading companies are permitted to
export crude oil and refined oil products subject to quotas. The
Ministry of Commerce has granted PetroChina the right to conduct
crude oil and refined product import and export business.

Capital Investment and Financing

Capital investments in exploration and production of crude oil
and natural gas made by Chinese oil and gas companies are
subject to approval by or filing with relevant government
authorities. The development of new oil field with an annual
production capacity equal to or exceeding one million tons and
new natural gas field with an annual production capacity equal
to or exceeding two billion cubic meters is required to be
approved by the National Development and Reform Commission. Any
other development project of crude oil and natural gas needs to
be filed with the National Development and Reform Commission.
Oil and gas companies need to obtain approval from the

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National Development and Reform Commission and the State
Administration of Foreign Exchange to borrow from foreign banks
and foreign governments in connection with those capital
investments.

Taxation, Fees and Royalty

PetroChina is subject to a variety of taxation, fees and
royalty. The table below sets forth the various taxation, fees
and royalty payable by PetroChina or by Sino-foreign oil and gas
exploration and development cooperative projects. Since
January 1, 2000, PetroChina and its wholly-owned
subsidiary, Daqing Oilfield Company Limited, and branch
companies have been taxed on a consolidated basis as approved by
the Ministry of Finance and the State Taxation Bureau.

|                      |  |                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--------------------- |  | -------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Tax item              |  | Tax base       |  | Tax Rate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                      |  |                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Enterprise income tax |  | Taxable income |  | Currently at a rate of 33%.
    However, our qualified branch companies in the west regions of
    the PRC are entitled to a rate of 15%. Tax concession or
    exemption enjoyed by any subsidiary or branch company continues
    to apply. Effective from January 1, 2008, PRC enterprises
    will be subject to new income tax rates. Its impact on our
    operating results and financial positions of future periods
    remains uncertain until more detailed regulations and measures
    are announced.                                                                                                                                                                                                         
|                     
|Value-added tax       |  | Revenue        |  | 13% for liquified natural gas,
    natural gas, liquified petroleum gas, agricultural film and
    fertilizers and 17% for other items. PetroChina charges
    value-added tax from its customers at the time of settlement on
    top of the selling prices of its products on behalf of the
    taxation authority. The value-added tax paid by PetroChina for
    purchasing materials to be consumed during the production
    process and for charges paid for drilling and other engineering
    services and labor is deducted from output value-added tax
    payable by PetroChina. Since March 14, 2006, the rebate of
    the value-added tax paid in connection with export of gasoline
    has been suspended.
|                     
|                      |  | Sales volume   |  | 5% for the Sino-foreign oil and gas
    exploration and development cooperative projects. However input
    value-added tax cannot be deducted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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|                                           |  |                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------------------------------------ |  | ------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Tax item                                   |  | Tax base                                   |  | Tax Rate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                           |  |                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Business tax                               |  | Revenue from transportation services       |  | 3%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                          
|Consumption tax                            |  | Aggregate volume sold or
    self-consumed |  | RMB 277.6 per ton for
    gasoline; since January 1, 1999, RMB 388.64 per
    ton for leaded gasoline.
    RMB 117.6 per ton for diesel.
    Since April 1, 2006, RMB 277 per ton for naphtha and
    levied at the rate of 30% of the taxable amount for the time
    being.
    Since April 1, 2006, RMB 256.4 per ton for
    solvent naphtha and levied at the rate of 30% of the taxable
    amount for the time being.
    Since April 1, 2006, RMB 225.2 per ton for
    lubricants and levied at the rate of 30% of the taxable amount
    for the time being.
    Since April 1, 2006, RMB 101.5 per ton for fuel
    oil and levied at the rate of 30% of the taxable amount for the
    time being.
    Since April 1, 2006, RMB 124.6 per ton for
    aviation kerosene and not levied for the time being.
|                                          
|Resource tax                               |  | Aggregate volume sold or
    self-consumed |  | Since July 1, 2005, resource
    tax applicable to crude oil of our company was adjusted upward
    from the original RMB 8 to 30 per ton to RMB 14
    to 30 per ton, and the resource tax for natural gas was
    adjusted from the original RMB 2 to 15 per thousand
    cubic meter to RMB 7 to 15 per thousand cubic
    meter.
    The actual applicable rate for each oil field may differ
    depending on the resource differences, volume of the exploration
    and production activities and costs required for the production
    at the particular oil field.                                                                                                                                                                                                                                           
|                                          
|Compensatory fee for mineral
    resources |  | Revenue                                    |  | 1% for crude oil and natural gas                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                          
|Crude oil special gain
    levy            |  | Sales amount above certain threshold       |  | Effective March 26, 2006,
    levied on the domestic crude oil sold at or above US$40/barrel,
    with a five-level progressive tax rates, varying from 20% to 40%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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|                            |  |                   |  |                                                                       
|--------------------------- |  | ----------------- |  | ----------------------------------------------------------------------
|Tax item                    |  | Tax base          |  | Tax Rate                                                              
|                            |  |                   |  |                                                                       
|                           
|Exploration license
    fee |  | Area              |  | RMB 100 to 500 per square
    kilometer per year                      
|                           
|Production license fee      |  | Area              |  | RMB 1,000 per square
    kilometer per year                           
|                           
|Royalty
    fee(1)          |  | Production volume |  | Progressive rate of 012.5%
    for crude oil and 03% for natural gas






|    |                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Payable only by Sino-foreign oil and gas exploration and
    development cooperative projects. The project entity of those
    cooperative projects is not subject to any other resource tax or
    fee.



Environmental Regulations









ITEM 4A  UNRESOLVED STAFF COMMENTS




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ITEM 5  OPERATING AND FINANCIAL REVIEW AND
PROSPECTS





General

You should read the following discussion together with our
consolidated financial statements and their notes included
elsewhere in this annual report. Our consolidated financial
statements have been prepared in accordance with IFRS, which
differ in many respects from US GAAP. Note 37 to our
consolidated financial statements included elsewhere in this
annual report and the section headed  Other
Information  US GAAP Reconciliation summarize
the significant differences between IFRS and US GAAP as they
relate to us.

Overview

We are engaged in a broad range of petroleum and natural gas
related activities, including:




    the exploration, development, production and sale of crude oil
    and natural gas;
    the refining, transportation, storage and marketing of crude oil
    and petroleum products;
    the production and marketing of basic petrochemical products,
    derivative chemical products and other chemical
    products; and
    the transmission and storage of crude oil, refined oil products
    and natural gas as well as the sale of natural gas.We are Chinas largest producer of crude oil and natural
gas and are one of the largest companies in China in terms of
sales. In the year ended December 31, 2006, we produced
approximately 830.7 million barrels of crude oil and
approximately 1,371.9 billion cubic feet of natural gas for
sale. Our refineries also processed approximately
785 million barrels of crude oil in the year ended
December 31, 2006. In the year ended December 31,
2006, we had total revenue of RMB 688,978 million and
net income of RMB 142,224 million.

Factors Affecting Results of Operations

Our results of operations and the
period-to-period
comparability of our financial results are affected by a number
of external factors, including changes in the prices of crude
oil, refined products, natural gas and chemical products,
decrease in our crude oil reserves in China and fluctuations in
exchange rates and interest rates.



Crude Oil PricesOur results of operations are substantially affected by crude
oil prices. Since March 2001, we and Sinopec have set our crude
oil median prices monthly based on the Singapore market FOB
prices for crude oil. Our actual realized crude oil prices
include a premium on, or discount from, the median prices which
primarily reflects transportation costs, differences in oil
quality and market supply and demand conditions.

Since September 1, 1999, the discounts and premiums applied
to our crude oil sales have been determined in accordance with a
crude oil premium or discount calculation agreement and its
supplemental agreement we entered into with Sinopec. These
agreements establish premiums or discounts which effect
adjustments to the benchmark prices. These agreements do not
obligate either party to purchase or sell any crude oil and is
thus subject to renegotiation. Under these agreements, the
National Development and Reform Commission, formerly the State
Development Planning Commission, will mediate if we cannot agree
with Sinopec on the premium or discount applicable to a
particular crude oil purchase. The table below sets forth the
median prices for our principal grades of crude oil in 2004,
2005 and 2006 and the negotiated premiums or discounts
applicable to those grades of crude oil since 2004.

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|                   |  |           |       |                                       |  |                    |       |           |  |      |     |      |  |      |     |  |  |  |       |   |  |  |       |   |  |  |       |  
|------------------ |  | --------- | ----- | ------------------------------------- |  | ------------------ | ----- | --------- |  | ---- | --- | ---- |  | ---- | --- |  |  |  | ----- | - |  |  | ----- | - |  |  | ----- | -
|                   |  |           |       | Median prices for principal grades of |  | Premium/(discount)
|                   |  |           |       | crude oil (RMB/barrel)                |  | (RMB/barrel)      
|                   |  |           |       |                                       |  |                   
|                   |  |           |       | Year 2004                             |  | Year 2005          |       | Year 2006 |  |     
|Grade of crude oil |  | Benchmark |       | average                               |  | average            |       | average   |  | 2004 |     | 2005 |  | 2006
|                   |  |           |       |                                       |  |                    |       |           |  |      |     |      |  |     
|Daqing             |  |           | Minas |                                       |  |                    | 300.7 |           |  |      | 430 |      |  |      | 513 |  |  |  | 0     |   |  |  | (4.4  | ) |  |  | (3.8  | )
|                   |  |           |       |                                       |  |                    |       |           |  |      |     |      |  |      |     |  |  |  |       |   |  |  |       |   |  |  |       |  
|Jidong             |  |           | Minas |                                       |  |                    | 300.7 |           |  |      | 430 |      |  |      | 513 |  |  |  | 0     |   |  |  | (4.4  | ) |  |  | (3.8  | )
|                   |  |           |       |                                       |  |                    |       |           |  |      |     |      |  |      |     |  |  |  |       |   |  |  |       |   |  |  |       |  
|Huabei             |  |           | Minas |                                       |  |                    | 300.7 |           |  |      | 430 |      |  |      | 513 |  |  |  | 1.3   |   |  |  | (3.0  | ) |  |  | (2.4  | )
|                   |  |           |       |                                       |  |                    |       |           |  |      |     |      |  |      |     |  |  |  |       |   |  |  |       |   |  |  |       |  
|Dagang             |  |           | Cinta |                                       |  |                    | 290.5 |           |  |      | 412 |      |  |      | 494 |  |  |  | 1.4   |   |  |  | (1.8  | ) |  |  | (2.5  | )
|                   |  |           |       |                                       |  |                    |       |           |  |      |     |      |  |      |     |  |  |  |       |   |  |  |       |   |  |  |       |  
|Tarim              |  |           | Minas |                                       |  |                    | 300.7 |           |  |      | 430 |      |  |      | 513 |  |  |  | (34.6 | ) |  |  | (34.9 | ) |  |  | (34.6 | )
|                   |  |           |       |                                       |  |                    |       |           |  |      |     |      |  |      |     |  |  |  |       |   |  |  |       |   |  |  |       |  
|Tuha               |  |           | Tapis |                                       |  |                    | 329.2 |           |  |      | 457 |      |  |      | 554 |  |  |  | (25.5 | ) |  |  |       |   |  |  | (29.0 | )
|                   |  |           |       |                                       |  |                    |       |           |  |      |     |      |  |      |     |  |  |  |       |   |  |  |       |   |  |  |       |  







| |                       
| | ----------------------
| | Refined Product Prices





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The following table sets forth the retail median prices for
90(#) gasoline and 0(#) diesel published by the State
Development Planning Commission or the National Development and
Reform Commission from January 2006 to March 2007 when such
adjustments were made.

|                 |  |           |       |  |           |  |       | 
|---------------- |  | --------- | ----- |  | --------- |  | ----- | 
|                 |  | 90(#)     |       |  | 0(#)      | 
|Date             |  | Gasoline  |       |  | Diesel    | 
|                 |  |           |       |  |           | 
|                 |  | (RMB/ton) |       |  | (RMB/ton) | 
|March 26, 2006   |  |           | 5,172 |  |           |  | 4,510 | 
|May 24, 2006     |  |           | 5,672 |  |           |  | 5,010 | 
|January 14, 2007 |  |           | 5,452 |  |           |  |      | 



| |                        
| | -----------------------
| | Chemical Product Prices





| |                   
| | ------------------
| | Natural Gas Prices















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Foreign Currency ExposureFor a discussion of the effect of exchange rate fluctuations on
our results of operations, please see
Item 11  Quantitative and Qualitative
Disclosures About Market Risk  Foreign Exchange Rate
Risk.



Interest Rate ExposureFor a discussion of the effect of interest rate changes on our
results of operations, please see Item 11 
Quantitative and Qualitative Disclosures About Market
Risk  Interest Rate Risk.

Critical Accounting Policies

The preparation of our consolidated financial statements
requires our management to select and apply significant
accounting policies, the application of which may require
management to make judgments and estimates that affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities as of the date of our
financial statements, and the reported amounts of revenue and
expenses during the reporting period. Notwithstanding the
presentation of our principal accounting policies in Note 3
to our consolidated financial statements included elsewhere in
this annual report, we have identified the accounting policies
below as most critical to our business operations and the
understanding of our financial condition and results of
operations presented in accordance with IFRS. Although these
estimates are based on our managements best knowledge of
current events and actions, actual results ultimately may differ
from those estimates.



Accounting of Oil and Gas Exploration and Production
    ActivitiesWe use successful efforts method of accounting, with specialized
accounting rules that are unique to the oil and gas industry,
for oil and gas exploration and production activities. Under
this method, geological and geophysical costs incurred are
expensed prior to the discovery of proved reserves. However, all
costs for developmental wells, support equipment and facilities,
and mineral interests in oil and gas properties are capitalized.
Costs of exploratory wells are capitalized as construction in
progress pending determination of whether the wells find proved
reserves. The costs of exploratory wells will be further
capitalized pending determination of whether the wells find
sufficient economically exploitable reserves. For exploratory
wells located in regions that do not require substantial capital
expenditures before the commencement of production, the
evaluation of the economic benefits of the reserves in such
wells will be completed within one year following the completion
of the exploration drilling. Where such evaluation indicates
that no economic benefits can be obtained, the relevant costs of
exploratory wells will be converted to dry hole exploration
expenses. The relevant costs will be capitalized if the
evaluation indicates that economic benefits can be obtained. For
wells that found economically viable reserves in areas where a
major capital expenditure would be required before production
can begin, the related well costs remain capitalized only if
additional drilling is under way or firmly planned. Otherwise
the well costs are expensed as dry holes. We have no costs of
unproved properties capitalized in oil and gas properties.



Oil and Gas ReservesThe estimation of the quantities of recoverable oil and gas
reserves in oil and gas fields is integral to effective
management of our exploration and production operations. Because
of the subjective judgments involved in developing and assessing
such information, engineering estimates of the quantities of
recoverable oil and gas reserves in oil and gas fields are
inherently imprecise and represent only approximate amounts.

Before estimated oil and gas reserves are designated as
proved, certain engineering criteria must be met in
accordance with industry standards and the regulations of the
United States Securities and Exchange Commission. Proved oil and
gas reserves are the estimated quantities of crude oil and
natural gas which geological and engineering data demonstrate
with reasonable

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certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions.
Therefore, these estimates do not include probable or possible
reserves. Our proved reserve estimates are updated annually by
independent, qualified and experienced oil and gas reserve
engineering firms in the United States. Our oil and gas reserve
engineering department has policies and procedures in place to
ensure that these estimates are consistent with these
authoritative guidelines. Among other factors as required by
authoritative guidelines, this estimation takes into account
recent information about each field, including production and
seismic information, estimated recoverable reserves of each
well, and oil and gas prices and operating costs as of the date
the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but
not on escalations based upon future conditions. Therefore, as
prices and cost levels change from year to year, the estimate of
proved reserves also changes. We have no costs of unproved
properties capitalized in oil and gas properties.

Despite the inherent imprecision in these engineering estimates,
estimated proved oil and gas reserve quantity has a direct
impact on certain amounts reported in the financials statements.
In addition to the capitalization of costs related to oil and
gas properties on the balance sheet discussed earlier, estimated
proved reserves also impact the calculation of depreciation,
depletion and amortization expenses of oil and gas properties.
The cost of oil and gas properties is amortized at the field
level on the unit of production method. Unit of production rates
are based on the total oil and gas reserves estimated to be
recoverable from existing facilities based on the current terms
of our production licenses. Our reserve estimates include only
crude oil and natural gas which management believes can be
reasonably produced within the current terms of the production
licenses that are granted by the Ministry of Land and Resources,
ranging from 30 years to 55 years from the effective
date of issuance in March 2000, renewable upon application
30 days prior to expiration. Consequently, the impact of
changes in estimated proved reserves is reflected prospectively
by amortizing the remaining book value of the oil and gas
property assets over the expected future production. If proved
reserve estimates are revised downward, earnings could be
affected by higher depreciation expense or an immediate
write-down of the propertys book value had the downward
revisions been significant See  Property, Plant
and Equipment below. Given our large number of producing
properties in our portfolio, and the estimated proved reserves,
it is unlikely that any changes in reserve estimates will have a
significant effect on prospective charges for depreciation,
depletion and amortization expenses.

In addition, due to the importance of these estimates to better
understanding the perceived value and future cash flows of a
companys oil and gas operations, we have also provided
supplemental disclosures of proved oil and gas
reserve estimates prepared in accordance with authoritative
guidelines elsewhere in this annual report.



Property, Plant and EquipmentWe record property, plant and equipment, including oil and gas
properties, initially at cost less accumulated depreciation,
depletion and amortization. Cost represents the purchase price
of the asset and other costs incurred to bring the asset into
existing use. Subsequent to their initial recognition, property,
plant and equipment are carried at revalued amount, being the
estimated fair value at the date of the revaluation less
accumulated depreciation and impairment losses. Revaluations are
performed by independent qualified valuers on a periodic basis
to ensure that the carrying amount does not differ materially
from that which would be determined using fair value at the
balance sheet date. Revaluation surpluses realized through the
depreciation or disposal of revalued assets are retained in the
revaluation reserve and will not be available to offset against
possible future revaluation losses. As disclosed in Note 18
to our consolidated financial statements included elsewhere in
this annual report, our property, plant and equipment, excluding
oil and gas reserves, were revalued as of June 30, 1999.
Subsequently, our refining and chemical production equipment and
oil and gas properties were revalued as of September 30,
2003 and our oil and gas properties as of March 31, 2006.

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Depreciation, depletion and amortization to write off the cost
or valuation of each asset, other than oil and gas properties,
to its residual value is calculated using the straight-line
method over the estimated useful life of such asset as follows:

|                    |  |            
|------------------- |  | -----------
|Buildings           |  | 20-40 years
|Plant and machinery |  | 10-25 years
|Motor vehicles      |  | 7-15 years 











| |                                    
| | -----------------------------------
| | Provision for Asset Decommissioning





| |                                  
| | ---------------------------------
| | Impairment of Accounts Receivable



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receivables. Accounts where there are indications that a
receivable may be impaired or not collectible, a provision would
be recorded based on best estimates to reduce the receivable
balance to the amount that is expected to be collected. Factors
considered in making a provision include the historical payment
and collection experience, debtors credit worthiness and
appropriate discount rates. The recording of provisions requires
the application of judgments about the ultimate resolution of
these accounts receivable. As a result, provisions are reviewed
at each balance sheet date and adjusted to reflect our current
best estimates.



Deferred Tax AssetsWe are required to exercise considerable judgment in making
provisions for deferred tax under the liability method. Under
this method, deferred tax is provided for temporary differences
arising between the tax bases of assets and liabilities and
their carrying values for financial reporting purposes.
Specifically, we must make estimates of projected capital
expenditures to be incurred and the resulting incremental timing
difference that such capital expenditures would generate for the
determination of the amount of temporary difference that will be
recovered. We use currently enacted tax rates to determine
deferred tax. If these rates change, we would have to adjust our
deferred tax in the period in which these changes happen through
the income statement.

The principal temporary differences arise from depreciation on
oil and gas properties and equipment and provision for
impairment of receivables, inventories, investments and
property, plant and equipment. Deferred tax assets relating to
the carry-forward of unused tax losses are recognized to the
extent that it is probable that future taxable income will be
available against which the unused tax losses can be utilized.



Revenue RecognitionSales are recognized upon delivery of products and customer
acceptance or performance of services, net of sales taxes and
discounts. Revenues are recognized only when we have transferred
to the buyer the significant risks and rewards of ownership of
the goods in the ordinary course of business, and when the
amount of revenue and the costs incurred or to be incurred in
respect of the transaction can be measured reliably and the
collectibility of the related receivables is reasonably assured.

We sell part of the natural gas produced by us under take-or-pay
contracts entered into with our customers. Customers who entered
into such a take-or-pay contract are required to take or pay for
the minimum amount of natural gas specified in the contract.
Revenues from the sale and transportation of natural gas under
take-or-pay contracts are recognized under the above accounting
policies. Any advance payment for natural gas that has not been
consumed will be recorded as deferred revenue until the natural
gas has been actually consumed.

We entered into a Crude Oil Mutual Supply Framework Agreement
with Sinopec, which can be characterized as a buy/sell contract,
and recognized the revenue derived from this agreement in our
consolidated statements of income. Since the transactions under
the agreement are separately invoiced and settled and cannot be
offset with each other, they were not treated as non-monetary
transactions as defined in APB Opinion No. 29
Accounting for Non-monetary transactions. In
February 2005, the U.S. Securities and Exchange Commission
issued a letter to the oil and gas industry requesting
additional disclosures regarding buy/sell contracts.
Accordingly, we have reviewed such transactions and estimated
that, if we are required to report the net amount of such
buy/sell contracts, our reported amount in the line items of
Sales and other operating revenues and
Purchase, services and other for the year ended
December 31, 2004, 2005 and 2006 would be reduced by RMB
2,217 million, RMB 1,384 million and RMB
2,119 million, respectively. No change will occur to our
net income as a result of this.

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##### Table of Contents

For detailed discussions of significant differences between IFRS
and US GAAP, see Note 37 to our consolidated financial
statements included elsewhere in this annual report and the
section headed  Other Information 
US GAAP Reconciliation below.

Acquisitions

In June 2005, we entered into a capital contribution agreement
with CNODC, Central Asia Petroleum Co., Ltd. and CNPC E&D,
whereby, in December 2005 we acquired a 50% interest in CNPC
E&D, a subsidiary of CNODC, for a consideration of RMB
20,741 million which was paid to CNPC E&D as our
capital contribution. Upon consummation of the transaction, we
obtained a 50% interest in certain overseas oil and gas assets
transferred by CNODC to CNPC E&D. We also entered into a
transfer agreement, pursuant to which, in December 2005, we
transferred all of our interest in PTRI to CNPC E&D for a
consideration of RMB 579 million. See
Item 4  Information on the
Company  Introduction  History and
Development of the Company  Overview of Our
Operations.

Upon completion of the acquisition and transfer, we obtained
control over CNPC E&D by having the right to appoint four of
the seven directors. Our investment in CNPC E&D and the
transfer of PTRI to CNPC E&D will be accounted for in a
manner similar to a uniting of interests since these
transactions are among entities under common control by CNPC.
Our consolidated financial statements will be restated as if
operations of PetroChina and CNPC E&D had always been
combined.

We plan to continue to pursue attractive opportunities outside
China as part of our business growth strategy to utilize both
domestic and international resources to strengthen our
competitiveness. As we continue to implement this strategy, we
expect that acquisitions of overseas assets will over time have
a material effect on our results of operations and financial
condition.

Pursuant to an acquisition agreement by and between our company
and CNPC dated March 28, 2005, we acquired the refinery and
petrochemical operations respectively owned by CNPCs
wholly-owned subsidiaries, Dayuan and Qingyang, from CNPC for
which we paid a cash consideration of RMB 9 million.

The acquisition is deemed a combination of entities under common
control since we and the refinery and petrochemical operations
of Dayuan and Qingyang are under the common control of CNPC. As
a result, we have accounted for the acquisition in a manner
similar to a uniting of interests, whereby the assets and
liabilities of the refinery and petrochemical operations
acquired are accounted for at historical cost to CNPC with net
liabilities of RMB 183 million as at the effective
date. Our prior years consolidated financial statements
were restated to give effect to the acquisition in these periods
as if the operations of our company and these operations had
always been combined in these periods. The difference between
the RMB 9 million acquisition price and the net liabilities
transferred from CNPC was adjusted against equity.

Pursuant to our board resolutions dated October 26, 2005,
we made an offer to the holders of the A Shares of Jinzhou
Petrochemical to acquire 150 million outstanding Jinzhou
Petrochemical A Shares at the purchase price of RMB
4.25 per share. As of December 31, 2006, we acquired
141,497,463 Jinzhou Petrochemical A Shares, representing 17.97%
of the total share capital of Jinzhou Petrochemical, for a total
cash consideration of approximately RMB 602 million. After
the acquisition, we own 98.92% of the total share capital of
Jinzhou Petrochemical. Jinzhou Petrochemical was delisted from
the Shenzhen Stock Exchange on January 4, 2006 upon
approval from the China Securities Regulatory Commission.

Pursuant to our board resolutions dated October 26, 2005,
we made separate offers to the holders of the A Shares of Jilin
Chemical and the holders of the H Shares of Jilin Chemical to
acquire 200 million outstanding A Shares at the purchase
price of RMB 5.25 per share, and 964.778 million
outstanding H Shares (including ADSs) at the purchase price of
HK$2.80 per Share.

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As of December 31, 2006, we paid an aggregate of RMB
3,799 million and acquired 189,357,726 A Shares and
961,495,999 H Shares (including ADSs) of Jilin Chemical,
representing 32.32% of the total issued and outstanding shares
of Jilin Chemical. Following the completion of this acquisition,
we owned 99.61% of the total share capital of Jilin Chemical.
Jilin Chemical H Shares, A Shares and ADSs were delisted from
the Hong Kong Stock Exchange, Shenzhen Stock Exchange and the
New York Stock Exchange on January 23, February 20 and
February 15, 2006, respectively.

Pursuant to our board resolutions dated October 26, 2005,
we made an offer to the holders of A Shares of Liaohe Jinma to
acquire 200 million issued and outstanding Liaohe Jinma A
Shares at the purchase price of RMB 8.80 per share. As of
December 31, 2006, we acquired 194,360,943 Liaohe Jinma A
Shares, representing 17.67% of the total share capital of Liaohe
Jinma for a total consideration of approximately RMB
1,713 million. Following the completion of this
acquisition, we own 99.49% of the total share capital of Liaohe
Jinma. Upon the approval by China Securities Regulatory
Commission, Liaohe Jinma was delisted from the Shenzhen Stock
Exchange on January 4, 2006.

On December 6, 2005, we entered into two separate purchase
agreements with two wholly-owned subsidiaries of CNPC, Liaohe
Petroleum Exploration Bureau and China Petroleum Pipeline
Bureau, to acquire from the two companies a 15.56% equity
interest and a 20.17% equity interest, respectively, in the Fuel
Oil Company, a 55.43% subsidiary of our company, with a
total cash consideration of RMB 559 million. The Fuel Oil
Company principally engages in investing in and developing of
fuel oil in the upstream and downstream areas outside the PRC.
Upon completion of the above acquisitions, we increased our
interest in the Fuel Oil Company to 91.16%.

In August 2006, CNPC E&D entered into an acquisition
agreement to acquire a 67% equity interest in PetroKazakhstan
Inc., or PKZ, from CNPC for a consideration of
US$2,735 million. This acquisition, completed in December
2006, has been accounted for in a manner similar to a pooling of
interests. This acquisition increased the level of our oil and
gas assets and streamlined our existing exploration and
development operations in Kazakhstan.

In 2006, we acquired a 100% interest in an exploration block in
Chad through CNPC E&D. This Chad Block covers an area of
220,000 square kilometers and a trap resource of more than
1,000 million barrels of crude oil and is currently one of
our most important overseas exploration blocks.





Operating Results

The following discussion is based on our historical results of
operations. As a result of the factors discussed above, such
results of operations may not be indicative of our future
operating performance.

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##### Table of Contents

Our income statement for each of the three years ended
December 31, 2004, 2005 and 2006 is summarized in the table
below.

|                                                                  |  |                         |          |                |  |                |          |   |  |  |          |  
|----------------------------------------------------------------- |  | ----------------------- | -------- | -------------- |  | -------------- | -------- | - |  |  | -------- | -
|                                                                  |  | Year ended December 31,
|                                                                  |  |                        
|                                                                  |  | 2004                    |          | 2005           |  | 2006          
|                                                                  |  |                         |          |                |  |               
|                                                                  |  | in million RMB          |          | in million RMB |  | in million RMB
|Total revenues                                                    |  |                         | 397,354  |                |  |                | 552,229  |   |  |  | 688,978  |  
|                                                                  |  |                         |          |                |  |                |          |   |  |  |          |  
|Operating expenses                                                |  |                         | (246,216 | )              |  |                | (360,058 | ) |  |  | (491,002 | )
|                                                                  |  |                         |          |                |  |                |          |   |  |  |          |  
|Income from operations                                            |  |                         | 151,138  |                |  |                | 192,171  |   |  |  | 192,976  |  
|                                                                  |  |                         |          |                |  |                |          |   |  |  |          |  
|Exchange gain (loss), net                                         |  |                         | 8        |                |  |                | 88       |   |  |  | 74       |  
|Interest expense, net                                             |  |                         | (1,523   | )              |  |                | (838     | ) |  |  | (1,154   | )
|Income from equity affiliates and
    jointly controlled entities |  |                         | 1,621    |                |  |                | 2,401    |   |  |  | 2,277    |  
|                                                                  |  |                         |          |                |  |                |          |   |  |  |          |  
|Income before income taxes                                        |  |                         | 151,244  |                |  |                | 193,822  |   |  |  | 199,173  |  
|Income taxes                                                      |  |                         | (43,598  | )              |  |                | (54,180  | ) |  |  | (49,776  | )
|(Income) loss attributable to
    minority interest               |  |                         | (3,803   | )              |  |                | (6,280   | ) |  |  | (7,173   | )
|                                                                  |  |                         |          |                |  |                |          |   |  |  |          |  
|Net income                                                        |  |                         | 103,843  |                |  |                | 133,362  |   |  |  | 142,224  |  
|                                                                  |  |                         |          |                |  |                |          |   |  |  |          |  



|                                           |  |                                       |          |   |      |      |          |      |  |  |      |   |  |      |           |   |  |  |      |  
|------------------------------------------ |  | ------------------------------------- | -------- | - | ---- | ---- | -------- | ---- |  |  | ---- | - |  | ---- | --------- | - |  |  | ---- | -
|                                           |  |                                       |          |   |      | 2005 |          |      |  |  | 2006 |  
|                                           |  |                                       |          |   |      | vs.  |          |      |  |  | vs.  |  
|                                           |  | 2004                                  |          |   | 2005 |      |          | 2004 |  |  | 2006 |   |  | 2005 |          
|                                           |  |                                       |          |   |      |      |          |      |  |  |      |   |  |      |          
|                                           |  | (RMB in millions, except percentages) |         
|Sales and other operating
    revenues     |  |                                       |          |   |      |      |          |      |  |  |      |   |  |      |           |   |  |  |      |  
|Exploration and production                 |  |                                       | 233,948  |   |      |      | 337,208  |      |  |  | 44.1 | % |  |      | 421,340   |   |  |  | 24.9 | %
|Refining and marketing                     |  |                                       | 296,427  |   |      |      | 428,494  |      |  |  | 44.6 | % |  |      | 543,299   |   |  |  | 26.8 | %
|Chemicals and marketing                    |  |                                       | 57,179   |   |      |      | 73,978   |      |  |  | 29.4 | % |  |      | 82,791    |   |  |  | 11.9 | %
|Natural gas and pipeline                   |  |                                       | 18,255   |   |      |      | 26,214   |      |  |  | 43.6 | % |  |      | 38,917    |   |  |  | 48.5 | %
|Other                                      |  |                                       | 0        |   |      |      | 0        |      |  |  |     |   |  |      | 1,080     |   |  |  |     |  
|Total                                      |  |                                       | 605,809  |   |      |      | 865,894  |      |  |  | 42.9 | % |  |      | 1,087,427 |   |  |  | 25.6 | %
|                                           |  |                                       |          |   |      |      |          |      |  |  |      |   |  |      |          
|Less intersegment sales                    |  |                                       | (208,455 | ) |      |      | (313,665 | )    |  |  | 50.5 | % |  |      | (398,449  | ) |  |  | 27.0 | %
|                                           |  |                                       |          |   |      |      |          |      |  |  |      |   |  |      |          
|Consolidated net sales from
    operations |  |                                       | 397,354  |   |      |      | 552,229  |      |  |  | 39.0 | % |  |      | 688,978   |   |  |  | 24.8 | %
|                                           |  |                                       |          |   |      |      |          |      |  |  |      |   |  |      |          

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The table below sets forth our operating profits by business
segment for each of the three years ended December 31,
2004, 2005 and 2006, as well as the percentage changes in
operating income for the periods shown. Other income from
operations shown below consists of research and development,
business services and infrastructure support to our operating
business segments.

|                                  |  |                                       |         |   |      |      |         |      |  |  |       |    |  |      |         |   |  |  |       |  
|--------------------------------- |  | ------------------------------------- | ------- | - | ---- | ---- | ------- | ---- |  |  | ----- | -- |  | ---- | ------- | - |  |  | ----- | -
|                                  |  |                                       |         |   |      | 2005 |         |      |  |  | 2006  |   
|                                  |  |                                       |         |   |      | vs.  |         |      |  |  | vs.   |   
|                                  |  | 2004                                  |         |   | 2005 |      |         | 2004 |  |  | 2006  |    |  | 2005 |        
|                                  |  |                                       |         |   |      |      |         |      |  |  |       |    |  |      |        
|                                  |  | (RMB in millions, except percentages) |        
|Income (loss) from
    operations |  |                                       |         |   |      |      |         |      |  |  |       |    |  |      |         |   |  |  |       |  
|Exploration and production        |  |                                       | 130,213 |   |      |      | 208,080 |      |  |  | 59.8  | %  |  |      | 219,860 |   |  |  | 5.7   | %
|Refining and marketing            |  |                                       | 11,891  |   |      |      | (19,810 | )    |  |  |      |    |  |      | (29,164 | ) |  |  |      |  
|Chemicals and marketing           |  |                                       | 7,655   |   |      |      | 3,276   |      |  |  | (57.2 | )% |  |      | 5,058   |   |  |  | 54.4  | %
|Natural gas and pipeline          |  |                                       | 2,535   |   |      |      | 3,183   |      |  |  | 25.6  | %  |  |      | 8,986   |   |  |  | 182.3 | %
|Other                             |  |                                       | (1,156  | ) |      |      | (2,558  | )    |  |  | 121.3 | %  |  |      | (6,764  | ) |  |  |      |  
|                                  |  |                                       |         |   |      |      |         |      |  |  |       |    |  |      |        
|Total                             |  |                                       | 151,138 |   |      |      | 192,171 |      |  |  | 27.1  | %  |  |      | 197,976 |   |  |  | 3.0   | %
|                                  |  |                                       |         |   |      |      |         |      |  |  |       |    |  |      |        

Year Ended December 31, 2006 Compared to Year Ended
December 31, 2005




| |                                  
| | ---------------------------------
| | Consolidated Results of Operation



| |         
| | --------
| | Overview



Total Revenue.


Operating Expenses.


Purchases, Services and Other Expenses.


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2006 as compared to 13.11 million tons of refined oil
products at an average price of RMB 2,883 in 2005; and
(iii) an increase in the lifting costs of oil and gas
operations and the processing costs of our refineries as a
result of the increases in prices of raw materials, fuel,
electricity and other production materials as well as our
expanded production scale. In addition, the increase in the
purchase expenses also resulted from an increase in the refined
product supply operation in 2006.

Employee Compensation Costs.Employee compensation costs
increased 32.0% from RMB 29,675 million for the year
ended December 31, 2005 to RMB 39,161 million for
the year ended December 31, 2006. This was primarily due to
an increase of RMB 7,278 million in the
employees salaries and benefits as a result of the
improvement of our operating results and the expansion of our
production scale and retail distribution network.

Depreciation, Depletion and Amortization. Depreciation,
depletion and amortization increased 19.7% from
RMB 51,305 million for the year ended
December 31, 2005 to RMB 61,388 million for the
year ended December 31, 2006. This was primarily due to an
increase of RMB 8,220 million in the provision for
depreciation, depletion and amortization that resulted from
increases in the average balance of fixed assets and the average
balance of oil and gas assets during 2006.

Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased 18.3% from
RMB 36,538 million for the year ended
December 31, 2005 to RMB 43,235 million for the
year ended December 31, 2006. This was primarily due to
(i) an increase of RMB 3,050 million in
transportation expenses that resulted from increases in railway
freights and marine fuel prices and an increase in the sales
volume of refined and petrochemical products, and (ii) an
increase of RMB 1,065 million in research and
development expenses as a result of intensified research and
development efforts.

Exploration Expenses. Exploration expenses increased
20.9% from RMB 15,566 million for the year ended
December 31, 2005 to RMB 18,822 million for the
year ended December 31, 2006. This increase was due
primarily to increased expenditures in exploration activities,
for the purpose of increasing our crude oil and gas reserves,
and an increase in the expensing of exploratory well costs.

Taxes other than Income Taxes. Taxes other than income
taxes increased 139.9% from RMB 23,616 million for the
year ended December 31, 2005 to
RMB 56,666 million for the year ended
December 31, 2006. The increase was primarily due to
(i) a recorded levy of RMB 28,914 million to the
PRC government as the PRC government commenced to impose a
special levy on petroleum exploration enterprises such as our
company from March 26, 2006; (2) an increase of
RMB 1,510 million in consumption tax as a result of
increased sales volume of gasoline and diesel and an expansion
of the scope of consumption tax in the PRC in 2006; and
(3) an increase of RMB 632 million in resource
tax as a result of an increase in resource tax rates in the
second half of 2005 and increased production volumes of crude
oil and natural gas.

Income from Operations. As a result of the factors
discussed above, income from operations increased 3.0% from
RMB 192,171 million for the year ended
December 31, 2005 to RMB 197,976 million for the
year ended December 31, 2006.

Net Exchange Gain. Net exchange gain decreased
15.9% from RMB 88 million for the year ended
December 31, 2005 to RMB 74 million for the year
ended December 31, 2006. The decrease in the net exchange
gain was primarily due to the appreciation of Renminbi against
both the United States Dollar and the Japanese Yen, offset by
the depreciation in Renminbi against both the Euro and the Pound
Sterling.

Net Interest Expense. Net interest expenses
increased 37.7% from RMB 838 million for the year
ended December 31, 2005 to RMB 1,154 million for
the year ended December 31, 2006. This increase was
primarily due to an increase of RMB 736 million in
accretion expense, recognized as interest expense, in relation
to asset retirement obligations.

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Income Before Income Taxes.Income before income
taxes increased by 2.8% from RMB 193,822 million for
the year ended December 31, 2005 to
RMB 199,173 million for the year ended
December 31, 2006.

Income Taxes. Income taxes decreased 8.1% from
RMB 54,180 million for the year ended
December 31, 2005 to RMB 49,776 million for the
year ended December 31, 2006. This decrease was primarily
due to the reversal of a tax liability of
RMB 4,401 million in relation to certain crude oil
sales that were exempted from income tax prior to the
establishment of our company in November 1999.

Net Income. As a result of the factors discussed
above, net income increased 6.6% from
RMB 133,362 million for the year ended
December 31, 2005 to RMB 142,224 million for the
year ended December 31, 2006.



Exploration and ProductionSales and Other Operating Revenue.Sales and other
operating revenue increased 24.9% from
RMB 337,208 million for the year ended
December 31, 2005 to RMB 421,340 million for the
year ended December 31, 2006. The increase was primarily
due to increases in the prices and sales volumes of crude oil
and natural gas. Our average realized selling price of crude oil
in 2006 was US$ 59.81 per barrel, representing an increase of
US$ 11.44 per barrel or 23.7% from US$ 48.37 per barrel in the
year ended December 31, 2005. In 2006, our exploration and
production segment sold 832.8 million barrels of crude oil
and 1,322.7 billion cubic feet of natural gas, representing
an increase of 5.6% and 26.0% from 2005, respectively.

Intersegment sales revenue increased 25.3% from
RMB 270,943 million for the year ended
December 31, 2005 to RMB 339,619 million for the
year ended December 31, 2006. This increase was mainly due
to an increase in the prices of crude oil and natural gas and an
increase in the intersegment sales volume. In 2006, our revenue
from sales of crude oil to Sinopec was
RMB 33,682 million, representing an increase of 21.9%
from 2005.

Operating Expenses.Operating expenses increased 56.0%
from RMB 129,128 million for the year ended
December 31, 2005 to RMB 201,480 million for the
year ended December 31, 2006. The increase was primarily
due to an increase of RMB 31,114 million in taxes
other than income taxes, an increase of
RMB 27,564 million in purchase expenses and an
increase of RMB 7,021 million in depreciation,
depletion and amortization.

Income from Operations. Income from operations increased
5.7% from RMB 208,080 million for the year ended
December 31, 2005 to RMB 219,860 million for the
year ended December 31, 2006.



Refining and MarketingSales and Other Operating Revenue. Sales and other
operating revenue increased 26.8% from
RMB 428,494 million for the year ended
December 31, 2005 to RMB 543,299 million for the
year ended December 31, 2006. The increase was due
primarily to increases in the selling prices and sales volume of
our key refined products.

Sales revenue from gasoline increased 9.4% from
RMB 110,438 million for the year ended
December 31, 2005 to RMB 120,771 million for the
year ended December 31, 2006, primarily due to a 19.3%
increase in our average realized selling price from
RMB 4,221 per ton for the year ended December 31, 2005
to RMB 5,034 per ton for the year ended December 31,
2006, partially offset by a 8.3% decrease in the sales volume
from 26.16 million tons for the year ended
December 31, 2005 to 23.99 million tons for the year
ended December 31, 2006.

Sales revenue from diesel increased 21.7% from
RMB 176,999 million for the year ended
December 31, 2005 to RMB 215,459 million for the
year ended December 31, 2006. The average

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realized selling price of diesel increased 19.1% from RMB
3,702 per ton for the year ended December 31, 2005 to
RMB 4,409 per ton for the year ended December 31,
2006, resulting in an increase in revenue by
RMB 34,544 million. The sales volume of diesel
increased 2.2% from 47.81 million tons for the year ended
December 31, 2005 to 48.86 million tons for the year
ended December 31, 2006, resulting in an increase in
revenue by RMB 3,916 million.

Sales revenue from kerosene increased 23.2% from
RMB 7,480 million for the year ended December 31,
2005 to RMB 9,219 million for the year ended
December 31, 2006.

Intersegment sales revenue increased 35.7% from
RMB 33,019 million for the year ended
December 31, 2005 to RMB 44,806 million for the
year ended December 31, 2006. This increase was primarily
due to increases in the selling prices and changes in
intersegment sales volume of key refined products.

Operating Expenses. Operating expenses increased 27.7%
from RMB 448,304 million for the year ended
December 31, 2005 to RMB 572,463 million for the
year ended December 31, 2006. This increase was primarily
due to an increase of RMB 80,650 million in purchase
expenses of crude oil, other feedstock and refined products from
external suppliers, and an increase of
RMB 2,784 million in the selling, general and
administrative expenses. In addition, the increase in our supply
of refined products in 2006 also contributed to the increase in
the operating expenses. In 2006, we purchased 775 million
barrels of crude oil, representing an increase of
31 million barrels as compared with 2005. The average
purchase price of crude oil in 2006 was RMB 494 per barrel,
representing an increase of RMB 85 per barrel as compared
with 2005. As a result, our expenses for purchased crude oil in
2006 were RMB 383,087 million, representing an
increase of RMB 78,731 million as compared with 2005.

Loss From Operations. Loss from operations amounted to
RMB 29,164 million for the year ended
December 31, 2006, compared to RMB 19,810 million
for the year ended December 31, 2005, primarily due to the
fact that the price increase for crude oil in the international
market exceeded that of refined products in the domestic market.



Chemicals and MarketingSales and Other Operating Revenue. Sales and other
operating revenue increased 11.9% from
RMB 73,978 million for the year ended
December 31, 2005 to RMB 82,791 million for the
year ended December 31, 2006, primarily due to increases in
the sales volumes and selling prices of certain chemical
products. The average realized selling prices of polyethylene,
polyester, styrene butadiene rubber and urea in 2006 increased
11%, 4%, 22% and 3%, respectively, from 2005. Our chemicals and
marketing segment sold 13,562 thousand tons of chemical products
for the year ended December 31, 2006, representing an
increase of 3.4% from the year ended December 31, 2005.

Operating Expenses. Operating expenses increased 9.9%
from RMB 70,702 million for the year ended
December 31, 2005 to RMB 77,733 million for the
year ended December 31, 2006. The increase was primarily
due to the increase in purchase expenses for direct materials.

Income from Operations. As a result of the factors
discussed above, income from operations increased 54.4% from
RMB 3,276 million for the year ended December 31,
2005 to RMB 5,058 million for the year ended
December 31, 2006.



Natural Gas and PipelineSales and Other Operating Revenue.Sales and other
operating revenue increased 48.5% from
RMB 26,214 million for the year ended
December 31, 2005 to RMB 38,917 million for the
year ended December 31, 2006. The increase was primarily
due to increases in the sales volume and selling prices of
natural gas, as well as increases in the transmission volume and
average transmission price of natural gas. Our natural gas and
pipeline segment sold 1,200.5 billion cubic

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##### Table of Contents

feet of natural gas in the year ended December 31, 2006,
representing an increase of 35.1% from the year ended
December 31, 2005. The selling price of natural gas in the
year ended December 31, 2006 was US$2.44 per thousand cubic
feet, representing an increase of 15.1% from the year ended
December 31, 2005. Our natural gas and pipeline segment
transmitted 1,123 billion cubic feet of natural gas in the
year ended December 31, 2006, representing an increase of
36.8% from the year ended December 31, 2005. The average
natural gas transmission price in the year ended
December 31, 2006 was US$1.2 per thousand cubic feet,
representing an increase of 24.7% from the year ended
December 31, 2005.

Operating Expenses. Operating expenses increased 30.0%
from RMB 23,031 million for the year ended
December 31, 2005 to RMB 29,931 million for the
year ended December 31, 2006 due primarily to (i) an
increase of RMB 5,155 million in purchase expenses of
natural gas primarily as a result of the increase of
312 billion cubic feet in the natural gas purchase volume,
as well as the increase of the average purchase price of natural
gas from US$1.8 per thousand cubic feet in 2005 to US$1.9 per
thousand cubic feet in 2006, and (ii) an increase of
RMB 785 million in depreciation expenses.

Income from Operations. As a result of the factors
discussed above, income from operations increased 182.3% from
RMB 3,183 million for the year ended December 31,
2005 to RMB 8,986 million for the year ended
December 31, 2006.

Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004



Consolidated Results of Operation

OverviewFor the year ended December 31, 2005, our total revenue was
RMB 552,229 million, representing an increase of 39.0%
from the year ended December 31, 2004. Our net income in
the year ended December 31, 2005 was
RMB 133,362 million, increased 28.4% from the year
ended December 31, 2004. Our basic and diluted earnings per
share for the year ended December 31, 2005 was
RMB 0.75, representing an increase of 27.1% from
RMB 0.59 for the year ended December 31, 2004.

Total Revenue.Total Revenue increased 39.0% from
RMB 397,354 million for the year ended
December 31, 2004 to 552,229 million for the year
ended December 31, 2005. The increase was primarily due to
the increases in the sales prices and sales volume of the
principal products, such as crude oil, gasoline and diesel, as
well as increases in the sales volume of natural gas. The
average realized selling price for crude oil increased 43.4%
from US$33.72 per barrel for the year ended December 31,
2004 to US$48.37 per barrel for the year ended December 31,
2005.

Operating Expenses.Operating expenses increased
46.2% from RMB 246,216 million for the year ended
December 31, 2004 to RMB 360,058 million for the
year ended December 31, 2005. This increase was due
primarily to (i) a 75.3% increase in purchases, services
and other expenses, (ii) a 29.4% increase in employee
compensation costs, (iii) a 28.8% increase in exploration
expenses, (iv) a 6.1% increase in depreciation, depletion
and amortization and (v) a 29.1% increase in selling
expenses and in general and administrative expenses.

Purchases, Services and Other Expenses.Purchases,
services and other expenses increased 75.3% from
RMB 114,249 million for the year ended
December 31, 2004 to RMB 200,321 million for the
year ended December 31, 2005. This increase was due
primarily to (i) increases in the processing volume at our
refineries and the increase of crude oil prices, as we purchased
157 million barrels of crude oil, 15.7 million tons of
refined products and 1,706 thousand tons of chemical products in
2005, as compared to 121.8 million barrels of crude oil,
12.0 million tons of refined products and 990 thousand tons
of chemical products in 2004; the average purchase price of the
crude oil in 2005 was RMB 423 per barrel, representing
a 30.6% increase from 2004, (ii) increases in the prices of
other raw materials such as water and electricity, and
(iii) the

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expansion of our production scale. The increase in our refined
product supply operation in 2005 also contributed to the
increase in purchase, services and other expenses.

Employee Compensation Costs.Employee compensation costs
increased 29.4% from RMB 22,934 million for the year
ended December 31, 2004 to RMB 29,675 million for
the year ended December 31, 2005. This increase was due
primarily to an increase of RMB 4,992 million in
salaries and other benefits with the improvement of our
operating results and an increase in labor costs as a result of
the expansion of our retail distribution network.

Depreciation, Depletion and Amortization.Depreciation,
depletion and amortization increased 6.1% from
RMB 48,362 million for the year ended
December 31, 2004 to RMB 51,305 million for the
year ended December 31, 2005. This increase was due
primarily to an increase of RMB 4,020 million in the
allocation of depreciation and depletion expenses as a result of
the increase in the average balance of the assets, and a
decrease of RMB 1,720 million in the depreciation
expenses as a result of fixed asset disposals and a decrease in
the provisions for impairment.

Selling, General and Administrative Expenses.Selling,
general and administrative expenses increased 29.1% from
RMB 28,302 million for the year ended
December 31, 2004 to RMB 36,538 million for the
year ended December 31, 2005. This increase was due
primarily to an increase of RMB 2,580 million in
transportation expenses as a result of our increased sales
volume of refined products and the increased railway
transportation price, as well as an increase of
RMB 720 million in repair expenses and lease expenses.

Exploration Expenses.Exploration expenses increased
28.8% from RMB 12,090 million for the year ended
December 31, 2004 to RMB 15,566 million for the
year ended December 31, 2005. This increase was due
primarily to increased expenditures in exploration activities
for the purpose of increasing our crude oil and gas reserves.

Taxes Other than Income Taxes.Taxes other than income
taxes increased 18.4% from RMB 19,943 million for the
year ended December 31, 2004 to RMB 23,616 million for
the year ended December 31, 2005. This increase was due
primarily to an increase of RMB 1,309 million in
consumption tax as a result of increased sales volume of
gasoline and diesel, an increase of RMB 951 million in
resources compensation fees as a result of increased revenues
from crude oil and natural gas, as well as an increase of
RMB 504 million in resources tax as a result of the
governments upward adjustment to the tax rate.

Income From Operations.As a result of the factors
discussed above, income from operations increased 27.1% from
RMB 151,138 million for the year ended
December 31, 2004 to RMB 192,171 million for the
year ended December 31, 2005.

Net Exchange Gain.Net exchange income increased
from RMB 8 million for the year ended
December 31, 2004 to RMB 88 million for the year
ended December 31, 2005. This increase was due primarily to
the appreciation of RMB in 2005.

Net Interest Expense.Net interest expense
decreased 45.0% from RMB 1,523 million for the year
ended December 31, 2004 to RMB 838 million for
the year ended December 31, 2005. This decrease was due
primarily to a decrease of RMB 134 million in the
interest expenses resulted from the decrease in the average
outstanding balance of interest-bearing debts and an increase of
RMB 551 million in the interest income as a result of
sufficient cashflow derived from operating activities.

Income Before Income Taxes.Income before income
taxes increased 28.2% from RMB 151,244 million for the
year ended December 31, 2004 to
RMB 193,822 million for the year ended
December 31, 2005.

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Income Taxes.Income taxes increased 24.3% from
RMB 43,598 million for the year ended
December 31, 2004 to RMB 54,180 million for the
year ended December 31, 2005, due primarily to the increase
in the taxable income.

Net Income.As a result of the factors discussed
above, net income increased 28.4% from
RMB 103,843 million for the year ended
December 31, 2004 to RMB 133,362 million for the
year ended December 31, 2005.



Exploration and ProductionSales and Other Operating Revenue.Sales and other
operating revenue increased 44.1% from
RMB 233,948 million for the year ended
December 31, 2004 to RMB 337,208 million for the
year ended December 31, 2005. This increase was due
primarily to increases in the price and sales volume of crude
oil, as well as an increase in sales volume of natural gas. Our
average realized selling price of crude oil for the year ended
December 31, 2005 was US$48.37 per barrel, representing an
increase of US$14.65 per barrel or 43.4% from US$33.72 per
barrel for the year ended December 31, 2004. In 2005, we
sold 788.8 million barrels of crude oil, representing an
increase of 21.5 million barrels as compared with 2004. Our
exploration and production segment sold 1,049.4 billion
cubic feet of natural gas in the year ended December 31,
2005, as compared to 810.4 billion cubic feet of natural
gas in the year ended December 31, 2004.

Intersegment sales increased 50.4% from
RMB 180,129 million for the year ended
December 31, 2004 to RMB 270,943 million for the
year ended December 31, 2005. This increase was due
primarily to an increase in the price of crude oil and an
increase of intersegment sales volume of crude oil and natural
gas. Sales of crude oil to Sinopec increased 14.9% from
24,053 million in 2004 to 27,640 million in 2005 as a
result of the increase in the price of crude oil.

Operating Expenses.Operating expenses increased 24.5%
from RMB 103,735 million for the year ended
December 31, 2004 to RMB 129,128 million for the
year ended December 31, 2005. This increase was due
primarily to (i) an increase of
RMB 13,543 million in purchase expenses, and
(ii) an increase of RMB 3,822 million in
exploration expenses resulting from the increase of the
investment in the hydrocarbon exploration for the purpose of
increasing hydrocarbon reserve, and (iii) an increase of
RMB 3,221 million in salaries and other benefits.

Income From Operations.As a result of the factors
discussed above, income from operations increased 59.8% from
RMB 130,213 million for the year ended
December 31, 2004 to RMB 208,080 million for the
year ended December 31, 2005.

Refining and Marketing

Sales and Other Operating Revenue. Sales and other
operating revenue increased 44.6% from RMB 296,427 million
for the year ended December 31, 2004 to RMB
428,494 million for the year ended December 31, 2005.
This increase was due primarily to increases in the prices and
the sales volumes of our products.

Sales revenue from gasoline increased 43.6% from RMB
76,919 million for the year ended December 31, 2004 to
RMB 110,438 million for the year ended December 31,
2005. The average realized selling price of gasoline increased
19.2% from RMB 3,542 per ton for the year ended
December 31, 2004 to RMB 4,221 per ton for the year
ended December 31, 2005, which contributed RMB
17,763 million to the increase of gasoline sales revenue.
We sold approximately 26,160 thousand tons of gasoline for
the year ended December 31, 2005, representing an increase
of 20.5% from approximately 21,710 thousand tons for the year
ended December 31, 2004, which contributed RMB
15,756 million to the increase of gasoline sales revenue.

Sales revenue from diesel increased 29.5% from RMB
136,649 million for the year ended December 31, 2004
to RMB 176,999 million for the year ended December 31,
2005. The average realized selling price of diesel increased
17.0% from RMB 3,165 per ton for the year ended

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December 31, 2004 to RMB 3,702 per ton for the year
ended December 31, 2005, which contributed RMB
25,674 million to the increase of diesel sales revenue.
Sales volume of diesel increased from 43,180 thousand tons for
the year ended December 31, 2004 to 47,810 thousand tons
for the year ended December 31, 2005, representing an
increase of 10.7%, which contributed
RMB 14,676 million to the increase of diesel sales
revenue.

Sales revenue from kerosene increased 27.2% from RMB
5,881 million for the year ended December 31, 2004 to
RMB 7,480 million for the year ended December 31, 2005.

Intersegment sales revenue increased 51.0% from RMB
21,862 million for the year ended December 31, 2004 to
RMB 33,019 million for the year ended December 31,
2005, due primarily to increases in the prices and intersegement
sales volume of our principal products.

Operating Expenses. Operating expenses increased 57.6%
from RMB 284,536 million for the year ended
December 31, 2004 to RMB 448,304 million for the year
ended December 31, 2005. This increase was due primarily to
(i) an increase of RMB 141,600 million in purchasing
crude oil and refined oil, and (ii) an increase of RMB
5,354 million in sales and administrative expenses. In
2005, we purchased 744 million barrels of crude oil,
representing an increase of 58 million barrels as compared
with 2004. The average purchase price of crude oil was RMB
409 per barrel, which was an increase of RMB 116 per
barrel as compared with 2004. As a result, our expenses for
purchased crude oil in 2005 were RMB 304,400 million,
representing an increase of RMB 103,200 million as compared
with 2004. In addition, the increase in our sales volume of
refined products in 2005 also contributed to the increase in the
operating expenses.

Loss From Operations. As a result of the factors
discussed above, in the year ended December 31, 2005 we
suffered a loss of RMB 19,810 million from operations while
in the year ended December 31, 2004 we realized an income
of RMB 11,891 million from operations, due primarily to the
fact that, in 2005, the price increase of crude oil exceeded
that of refined oil products in China.

Chemicals and Marketing

Sales and Other Operating Revenue. Sales and other
operating revenue increased 29.4% from RMB 57,179 million
for the year ended December 31, 2004 to RMB
73,978 million for the year ended December 31, 2005.
This increase was due primarily to increases in the prices and
sales volumes of chemical products. The average realized selling
prices of polyethylene, polyester, styrene butadiene rubber and
urea in 2005 increased 13.9%, 3.4%, 9.6% and 17.4%,
respectively, from 2004. Our chemicals and marketing segment
sold 13,113 thousand tons of chemical products for the year
ended December 31, 2005, representing an increase of 10.5%
from the year ended December 31, 2004.

Operating Expenses. Operating expenses increased 42.8%
from RMB 49,524 million for the year ended
December 31, 2004 to RMB 70,702 million for the year
ended December 31, 2005, due primarily to an increase of
RMB 11,892 million in the purchase expenses of direct
materials and an increase of RMB 782 million in the sales
and administrative expenses.

Income From Operations. As a result of the factors
discussed above, income from operations decreased 57.2% from RMB
7,655 million for the year ended December 31, 2004 to
RMB 3,276 million for the year ended December 31,
2005 due primarily to the increase in the prices of the raw
materials.

Natural Gas and Pipeline

Sales and Other Operating Revenue. Sales and other
operating revenue increased 43.6% from RMB 18,255 million
for the year ended December 31, 2004 to RMB
26,214 million for the year ended December 31, 2005,
due primarily to increases in the sales volume and selling price
of natural gas, as well as increases in the transmission volume
and transmission price of natural gas.

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Our natural gas and pipeline segment sold 888.81 billion
cubic feet natural gas in the year ended December 31, 2005,
representing an increase of 231.51 billion cubic feet from
657.3 billion cubic feet in the year ended December 31
2004, which resulted in an increase in sales revenue of
RMB 4,020 million. In 2005, our average realized
selling price of natural gas was US$2.12 per thousand cubic
feet, representing an increase of US$0.09 as compared with 2004.
The increase of RMB 2,848 million in our income from
pipeline transmission of natural gas in 2005 was attributable to
an increase in the pipeline transmission volume of natural gas
from 616.0 billion cubic feet in 2004 to 820.9 billion
cubic feet in 2005, and an increase in the transmission price of
natural gas from RMB 5.6 per thousand cubic feet in
2004 to RMB 7.7 per thousand cubic feet in 2005.

Operating Expenses. Operating expenses increased 46.5%
from RMB 15,720 million for the year ended
December 31, 2004 to RMB 23,031 million for the year
ended December 31, 2005, due primarily to (i) an
increase of RMB 3,479 million in purchase expenses of
natural gas primarily as a result of the increase of
235.1 billion cubic feet in the natural gas purchase
volume, as well as the increase of the average purchase price of
natural gas from RMB 14.6 per thousand cubic feet in 2004
to RMB 14.7 per thousand cubic feet in 2005, and
(ii) an increase of RMB 1,833 million in depreciation
expenses.

Income From Operations. As a result of the factors
discussed above, income from operations increased 25.6% from RMB
2,535 million for the year ended December 31, 2004 to
RMB 3,183 million for the year ended December 31,
2005.





Liquidity and Capital Resources

Our primary sources of funding include cash generated by
operating activities and short-term and long-term borrowings.
Our primary uses of funds were for operating activities,
acquisitions, capital expenditures, repayment of short-term and
long-term borrowings and distributions of dividends to
shareholders. Our payments to CNPC are limited to dividends and
payments for services provided to us by CNPC. In the year ended
December 31, 2006, we distributed as dividends 45% of our
reported net income. We expect that we will continue to
distribute as dividends approximately 40% to 50% of our reported
net income for all years. See Item 8 Financial
Information  Dividend Policy for a discussion
of factors which may affect the determination by our board of
directors of the appropriate level of dividends.

We finance a significant portion of our business operations with
short-term borrowings, including short-term debt obtained from
PRC State-owned banks. As of December 31, 2006, short-term
debt comprised approximately 5.2% of our capital employed as
compared to approximately 4.7% as of December 31, 2005. Our
financing ability may be limited by our financial condition, our
results of operations and the international and domestic capital
markets. Prior to accessing the international and domestic
capital markets, we must obtain approval from the relevant PRC
government authorities. In general, we must obtain PRC
government approval for any project involving significant
capital investment for our refining and marketing, chemicals and
marketing and natural gas and pipeline segments. For a more
detailed discussion of factors which may affect our ability to
satisfy our financing requirements, see
Item 3  Key Information  Risk
Factors.

We plan to fund the capital and related expenditures described
in this annual report principally through cash generated by
operating activities, short-term and long-term borrowings and
cash and cash equivalents. Net cash generated by operating
activities in the year ended December 31, 2006 was RMB
198,102 million. As of December 31, 2006, we had cash
and cash equivalents of RMB 48,559 million. While each
of the projects described in this annual report for which
significant capital expenditures will be required is important
to our future development, we do not believe that failure to
implement any one of these projects would have a material
adverse effect on our financial condition or results of
operations. If the price of crude oil undergoes a steep decline
in the future, it is likely that we would delay or reduce the
scale of the capital expenditures for our exploration and
production segment.

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Our shareholders approved at our shareholders meeting held
on May 28, 2003 the proposed issuances of our corporate
bonds in the principal amount of up to RMB 1,500 million
and RMB 4,000 million to PRC citizens and enterprises.
Upon the grant of PRC government approval, we issued a portion
of these corporate bonds in the principal amount of RMB
1,500 million in October 2003. We received RMB
1,500 million in net proceeds from this issuance. We used
the proceeds received from the issuance of these corporate bonds
for various crude oil and natural gas exploration projects in a
number of our oil and gas regions, as well as for upgrading
refining facilities in Daqing Petrochemical and constructing the
natural gas pipeline from Zhong County to Wuhan City. We issued
another portion of these corporate bonds in the principal amount
of RMB 2,000 million in October 2006. We received RMB
2,000 million in net proceeds from this issuance. We used
the proceeds received from the issuance of these corporate bonds
for various crude oil and natural gas exploration projects in a
number of our oil and gas regions, as well as for the
construction of supporting facilities to transmit natural gas
from our Southwest Oil and Gas Field to eastern China and
upgrading PTA (Pure Terephthalic Acid) and raw materials
facilities in Liaoyang PetroChemical. In addition, we consider
from time to time opportunities to fund our capital needs by
accessing the domestic equity capital markets.

We currently do not have any outstanding options, warrants or
other rights for any persons to require us to issue any common
stock at a price below its market value. We do not currently
intend to issue any such rights or to otherwise issue any common
stock for a price below its market value.

In addition, we did not have for the year ended
December 31, 2006, and do not currently have, any
transactions, arrangements or other relationships with
unconsolidated entities or other persons that are reasonably
likely to materially affect the liquidity or availability of or
requirements for our capital resources.

The table below sets forth our cash flows for each of the three
years ended December 31, 2004, 2005 and 2006 and our cash
equivalents at the end of each period.

|                                                   |  |                         |          |   |      |  |         |      |  |  |          |  
|-------------------------------------------------- |  | ----------------------- | -------- | - | ---- |  | ------- | ---- |  |  | -------- | -
|                                                   |  | Year Ended December 31, |         
|                                                   |  |                         |         
|                                                   |  | 2004                    |          |   | 2005 |  |         | 2006 | 
|                                                   |  |                         |          |   |      |  |         |      | 
|                                                   |  | (RMB in millions)       |         
|Net cash generated by operating
    activities     |  |                         | 141,691  |   |      |  | 203,885 |      |  |  | 198,102  |  
|Net cash used for investing
    activities         |  |                         | (102,276 | ) |      |  | (91,576 | )    |  |  | (158,451 | )
|Net cash used for financing
    activities         |  |                         | (39,586  | ) |      |  | (42,634 | )    |  |  | (71,739  | )
|Currency translation difference                    |  |                         | 246      |   |      |  | (458    | )    |  |  | (258     | )
|Cash and cash equivalents at the
    end of period |  |                         | 11,688   |   |      |  | 80,905  |      |  |  | 48,559   |  



Cash Generated by Operating Activities








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the year ended December 31, 2004, due primarily to an
increase of RMB 31,996 million in income for the year and
an increase of RMB 22,089 million in our accounts payable.

We had a working capital balance of RMB 22,057 million for
the year ended December 31, 2005, compared with the working
capital deficit of RMB 8,272 million for the year ended
December 31, 2004. This increase in working capital balance
was due primarily to (i) the increase in our cash and cash
equivalents as a result of a substantial increase of RMB
154,875 million in our sales revenue and (ii) an
increase of RMB 15,356 million in inventory, as a result of
the expansion of our sales and an increase in the purchase price.

Our notes and other receivables include notes receivable from
customers. Other receivables represent advances to employees,
non-trade related receivables from other companies, and
receivables from government agencies. Allowance for doubtful
accounts were primarily related to other receivables which we
estimated to be uncollectible. Our notes receivable do not
include past due customer amounts and, as a majority portion of
our notes receivable are approved by banks, we do not have
special arrangements with respect to extended payment terms on
notes receivable.

Cash Used for Financing Activities

Our net borrowings as of December 31, 2004, 2005 and 2006
were as follows:

|                                                                  |                                                                    |                   |        |        |        |  |        |        |         |   |        |        |        | 
|----------------------------------------------------------------- | ------------------------------------------------------------------ | ----------------- | ------ | ------ | ------ |  | ------ | ------ | ------- | - | ------ | ------ | ------ | 
|                                                                  |                                                                    | December 31,      |       
|                                                                  |                                                                    |                   |       
|                                                                  |                                                                    | 2004              |        |        | 2005   |  |        | 2006   |        
|                                                                  |                                                                    |                   |        |        |        |  |        |        |        
|                                                                  |                                                                    | (RMB in millions) |       
|Short-term debt (including current
    portion of long-term debt) |                                                                    |                   | 34,937 |        |        |  | 28,689 |        |         |   | 35,763 |       
|Long-term debt                                                    |                                                                    |                   | 44,648 |        |        |  | 44,570 |        |         |   | 35,634 |       
|                                                                  |                                                                    |                   |        |        |        |  |        |        |        
|                                                                  | Total debt                                                         |                   |        | 79,585 |        |  |        | 73,259 |         |   |        | 71,397 |       
|                                                                  |                                                                    |                   |        |        |        |  |        |        |        
|Less:                                                             |                                                                    |                   |        |        |        |  |        |        |         |   |        |       
|                                                                  | Cash and cash equivalents                                          |                   |        | 11,688 |        |  |        | 80,905 |         |   |        | 48,559 |       
|                                                                  | Time deposits with term exceeding
    three months within one year |                   |        | 1,425  |        |  |        | 1,691  |         |   |        | 3,012  |       
|                                                                  | Investments in Collateralized Loans                                |                   |        | 33,217 |        |  |        | 235    |         |   |        |       |       
|                                                                  | Time deposits exceeding one year                                   |                   |        | 3,751  |        |  |        | 3,428  |         |   |        | 2,499  |       
|                                                                  |                                                                    |                   |        |        |        |  |        |        |        
|                                                                  |                                                                    | Net debt          |        |        | 29,504 |  |        |        | (13,000 | ) |        |        | 17,327 | 
|                                                                  |                                                                    |                   |        |        |        |  |        |        |        









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December 31, 2004, 2005 and 2006 were
RMB 25,581 million, RMB 26,799 million and RMB
26,864 million, respectively. These debts were unsecured
with interest at below the prime rate as published by the
Peoples Bank of China. We also maintain a portion of our
deposits at China Petroleum Finance Company Limited at the same
deposit interest rate for commercial banks published by the
Peoples Bank of China.

Our net cash used for financing activities increased 68.3% from
RMB 42,634 million for the year ended December 31,
2005 to RMB 71,739 million for the year ended
December 31, 2006. This increase resulted primarily from
the following:




    an increase in the distribution of dividends leading to an
    increase of RMB 14,922 million in cash outflow; and
    our follow-on offering of H shares in 2005 leading to an
    increase of RMB 19,692 million in cash inflow while no such
    financing activity occurred in 2006.Our net cash used for financing activities increased 7.7% from
RMB 39,586 million for the year ended December 31,
2004 to RMB 42,634 million for the year ended
December 31, 2005. This increase resulted primarily from
the following:




    a decrease in new long-term debts leading to a decrease of RMB
    2,939 million in cash inflow;
    an increase in the repayment of short-term debts leading to an
    increase of RMB 10,667 million in cash
    outflow; and
    an increase in the distribution of dividends leading to an
    increase of RMB 19,339 million in cash outflow;These changes were offset primarily by the following:




    our follow-on offering of H shares leading to an increase of RMB
    19,692 million in cash inflow.
    an increase in new short-term debts leading to an increase of
    RMB 3,906 million in cash inflow; and
    a decrease in the repayment of long-term debts leading to a
    decrease of RMB 9,156 million in cash outflow.As at December 31, 2006, our debts consisted of RMB
359 million secured loans, most of which were secured by
our assets and time deposits with a term longer than one year.

Our debt to capital employed ratio (calculated by dividing
interest-bearing debts by the aggregate of interest-bearing
debts and shareholders equity) as of December 31,
2006 was 10.4%, as compared to 11.9% as of December 31,
2005.

Capital Expenditures and Investments

Our net cash used for investing activities includes capital
expenditures and investments, offset by proceeds from the sale
of assets and dividends received. The table below sets forth our
capital expenditures and investments (including non dry hole
exploration expenses) by business segment for each of the years
ended December 31, 2004, 2005 and 2006 as well as those
anticipated for the

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year ending December 31, 2007. Actual capital expenditures
and investments for periods after January 1, 2007 may
differ materially from the amounts indicated below.

|                           |       |           |        |         |      |  |         |           |  |  |             |         |  |           |       |       |         |  |         |           |  |  |       |       |  |  |         |         |  |  |       |       | 
|-------------------------- | ----- | --------- | ------ | ------- | ---- |  | ------- | --------- |  |  | ----------- | ------- |  | --------- | ----- | ----- | ------- |  | ------- | --------- |  |  | ----- | ----- |  |  | ------- | ------- |  |  | ----- | ----- | 
|                           |       |           |        |         |      |  |         | 2007      | 
|                           |       | 2004      |        |         | 2005 |  |         | 2006      |  |  | anticipated |        
|                           |       |           |        |         |      |  |         |           |  |  |             |        
|                           |       | (RMB in   |        |         |      |  | (RMB in |           |  |  |             | (RMB in |  |           |       |       | (RMB in |  |         |          
|                           |       | millions) |        |         | %    |  |         | millions) |  |  | %           |         |  | millions) |       |       | %       |  |         | millions) |  |  | %     |      
|Exploration and production |       |           | 70,217 |         |      |  | 66.06   |           |  |  | 92,233      |         |  |           | 68.92 |       |         |  | 114,520 |           |  |  | 72.44 |       |  |  | 127,200 |         |  |  | 64.34 |      
|Refining and marketing     |       |           | 17,684 |         |      |  | 16.64   |           |  |  | 16,454      |         |  |           | 12.30 |       |         |  | 19,206  |           |  |  | 12.15 |       |  |  | 28,000  |         |  |  | 14.16 |      
|Chemicals and marketing    |       |           | 4,319  |         |      |  | 4.06    |           |  |  | 13,569      |         |  |           | 10.14 |       |         |  | 10,681  |           |  |  | 6.76  |       |  |  | 16,000  |         |  |  | 8.09  |      
|Natural gas and pipeline   |       |           | 13,901 |         |      |  | 13.08   |           |  |  | 11,137      |         |  |           | 8.32  |       |         |  | 11,309  |           |  |  | 7.15  |       |  |  | 18,000  |         |  |  | 9.10  |      
|Corporate and other        |       |           | 174    |         |      |  | 0.16    |           |  |  | 427         |         |  |           | 0.32  |       |         |  | 2,358   |           |  |  | 1.50  |       |  |  | 8,500   |         |  |  | 4.31  |      
|                           |       |           |        |         |      |  |         |           |  |  |             |         |  |           |       |       |         |  |         |           |  |  |       |      
|                           | Total |           |        | 106,295 |      |  |         | 100.0     |  |  |             | 133,820 |  |           |       | 100.0 |         |  |         | 158,074   |  |  |       | 100.0 |  |  |         | 197,700 |  |  |       | 100.0 | 
|                           |       |           |        |         |      |  |         |           |  |  |             |         |  |           |       |       |         |  |         |           |  |  |       |      







| |                           
| | --------------------------
| | Exploration and Production







| |                       
| | ----------------------
| | Refining and Marketing



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RMB 19,206 million, respectively. The increase in 2006
is due primarily to an increase of RMB 4,034 million
in our investment in the construction of refining facilities. In
addition, we also increased the capital expenditures for safety
production protection for this segment in 2006.

Our anticipated capital expenditures for our refining and
marketing segment for the year ending December 31, 2007
amount to RMB 28,000 million, which include:




    approximately RMB 20,000 million for the construction and
    expansion of our refining facilities; and
    approximately RMB 8,000 million for the construction of our
    service stations and retail facilities for finished oil products.

Chemicals and MarketingOur capital expenditures for our chemicals and marketing segment
for each of the three years ended December 31, 2004, 2005
and 2006 were RMB 4,319 million, RMB 13,569 million
and RMB 10,681 million, respectively. Lower capital
expenditures in 2006 were primarily due to the completion and
commencement of commercial production of the upgrades and
expansion of the ethylene production facilities in Jilin
Petrochemical and Lanzhou Petrochemical in 2006.

Our anticipated capital expenditures for our chemicals and
marketing segment for the year ending December 31, 2007
amount to RMB 16,000 million, which mainly include capital
expenditures for the ethylene facilities in Dushanzi
Petrochemical and Fushun Petrochemical.



Natural Gas and PipelineOur capital expenditures for our natural gas and pipeline
segment for each of the three years ended December 31,
2004, 2005 and 2006 were RMB 13,901 million, RMB
11,137 million and RMB 11,309 million,
respectively.

Our anticipated capital expenditures for our natural gas and
pipeline segment for the year ending December 31, 2007
amount to approximately RMB 18,000 million, to be used for
increasing transmission capacity of the West-East Gas Pipeline,
the construction of underground natural gas storage facilities
and the construction of pipelines for crude oil and refined
products. See Item 4  Information on the
Company  Natural Gas and Pipeline 
Expansion of Our Natural Gas Transmission and Marketing
Business for a more detailed discussion of the expansion
plans of our natural gas and pipeline segment.



OtherOur non-segment-specific capital expenditures and investments
for each of the three years ended December 31, 2004, 2005
and 2006 were RMB 174 million, RMB 427 million and
RMB 2,358 million, respectively. Since we started from
January 1, 2006 to include capital expenditures and
investments for certain research and development activities,
which were previously included in the capital expenditures of
our four operational segments, in our non-segment-specific
capital expenditures, our expenditures for this category
increased significantly in 2006.

Our anticipated non-segment-specific capital expenditures and
investments for the year ending December 31, 2007 amount to
RMB 8,500 million. These planned capital expenditures and
investments mainly include capital expenditures for scientific
research activities and the construction of the ERP information
system.

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Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to investors.

All information that is not historical in nature disclosed under
Item 5  Operating and Financial Review and
Prospects  Long-Term Contractual Obligations and
Other Commercial Commitments and Payment Obligations is
deemed to be a forward looking statement. See
Forward  Looking Statements for
additional information.





Long-Term Contractual Obligations and Other Commercial

Commitments and Payment Obligations

The tables below set forth certain information in connection
with our long-term contractual obligations and other commercial
commitments outstanding as of December 31, 2006.

|                                   |  |                       |           |           |        |  |          |           |       |  |           |  |  |         |          |  |  |  |          | 
|---------------------------------- |  | --------------------- | --------- | --------- | ------ |  | -------- | --------- | ----- |  | --------- |  |  | ------- | -------- |  |  |  | -------- | 
|                                   |  | Payment due by period |          
|                                   |  |                       |          
|                                   |  |                       |           | Less than |        |  |          |           | After | 
|Contractual obligations            |  | Total                 |           |           | 1 year |  |          | 1-3 years |       |  | 3-5 years |  |  | 5 years |         
|                                   |  |                       |           |           |        |  |          |           |       |  |           |  |  |         |         
|                                   |  | (RMB in millions)     |          
|Long-term debt                     |  |                       | 56,241    |           |        |  | 20,607   |           |       |  | 18,211    |  |  |         | 4,035    |  |  |  | 13,388   | 
|Capital lease obligations          |  |                       | 0         |           |        |  | 0        |           |       |  | 0         |  |  |         | 0        |  |  |  | 0        | 
|Operating leases                   |  |                       | 94,780    |           |        |  | 3,099    |           |       |  | 5,463     |  |  |         | 6,142    |  |  |  | 80,076   | 
|Capital commitments                |  |                       | 9,193     |           |        |  | 4,871    |           |       |  | 4,315     |  |  |         | 3        |  |  |  | 4        | 
|Unconditional purchase obligations |  |                       | 1,412.1   |           |        |  | 1,063.2  |           |       |  | 274.1     |  |  |         | 28.4     |  |  |  | 46.4     | 
|Other long-term obligations        |  |                       | 0         |           |        |  | 0        |           |       |  | 0         |  |  |         | 0        |  |  |  | 0        | 
|Total contractual cash obligations |  |                       | 161,626.1 |           |        |  | 29,640.2 |           |       |  | 28,263.1  |  |  |         | 10,208.4 |  |  |  | 93,514.4 | 

|                             |  |                                            |     |  |           |  |    |           |  |      |           |  |  |         |    |  |  |  |    | 
|---------------------------- |  | ------------------------------------------ | --- |  | --------- |  | -- | --------- |  | ---- | --------- |  |  | ------- | -- |  |  |  | -- | 
|                             |  | Amount of commitment expiration per period |    
|                             |  |                                            |    
|                             |  | Total                                      |     |  |          
|                             |  | amounts                                    |     |  | Less than |  |    |           |  | Over |          
|Other commercial commitments |  | committed                                  |     |  | 1 year    |  |    | 1-3 years |  |      | 3-5 years |  |  | 5 years |   
|                             |  |                                            |     |  |           |  |    |           |  |      |           |  |  |         |   
|                             |  | (RMB in million)                           |    
|Lines of credit              |  |                                            | 0   |  |           |  | 0  |           |  |      | 0         |  |  |         | 0  |  |  |  | 0  | 
|Standby letters of credit    |  |                                            | 0   |  |           |  | 0  |           |  |      | 0         |  |  |         | 0  |  |  |  | 0  | 
|Guarantees                   |  |                                            | 203 |  |           |  | 87 |           |  |      | 49        |  |  |         | 22 |  |  |  | 45 | 
|Total commercial commitments |  |                                            | 203 |  |           |  | 87 |           |  |      | 49        |  |  |         | 22 |  |  |  | 45 | 



|     |  |                   |     | 
|---- |  | ----------------- | --- | 
|Year |  | Annual payment   
|     |  |                  
|     |  | (RMB in millions)
|2007 |  |                   | 750 | 
|2008 |  |                   | 780 | 
|2009 |  |                   | 800 | 
|2010 |  |                   | 850 | 
|2011 |  |                   | 900 | 

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We sell a substantial portion of our natural gas under long-term
take-or-pay contracts. Under these contracts, the customers are
required to take or pay, and we are obligated to deliver,
minimum quantities of natural gas annually.

As of December 31, 2006, our future minimum delivery
commitments under such take-or-pay contracts are as follows:

|                    |  |             |        | 
|------------------- |  | ----------- | ------ | 
|                    |  | Quantities 
|                    |  |            
|                    |  | (billion of
|                    |  | cubic feet)
|2007                |  |             | 720    | 
|2008                |  |             | 885    | 
|2009                |  |             | 943    | 
|2010                |  |             | 1,002  | 
|2011                |  |             | 1,050  | 
|2012 and thereafter |  |             | 10,460 | 



| |                                         
| | ----------------------------------------
| | Oil-and-Gas Assets Retirement Obligation

The
Environmental Protection Regulation for Oil and Gas Exploration
and Production Activities in Heilongjiang Province The Environmental Protection Regulation for Oil and Gas
Exploration and Production Activities in Gansu Province,





Research and Development








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##### Table of Contents

Exploration and Production

Most of Chinas major oil and gas fields are characterized
by a broad range of geological conditions, and a majority of
Chinas oil and gas fields are in continental sedimentary
basins with complex structures. Our research and development
efforts with respect to our exploration and production business
focus on:




    geological structures of crude oil and natural gas reserves;
    oil and gas exploration and development;
    oil and gas production and pipeline transportation; and
    energy conservation and environment protection.Refining and Chemicals

In order to organize and coordinate our research and development
activities related to our refining and chemicals businesses, we
established PetroChina Refining & Chemicals Technology
Research Center in July 2003. In order to enhance our
competitiveness and develop core technologies, we have
integrated the resources of our down-stream scientific research
and development. In April 2006, we expanded PetroChina
Refining & Chemicals Technology Research Center and
renamed it to PetroChemical Research Institute to carry out our
research and development of technologies for refining and
chemicals. In the meantime, we have integrated the research and
development resources of our local petrochemical companies, and
established four research and development centers in Lanzhou
Petrochemical, Daqing Petrochemical, Jilin Petrochemical and
Liaoyang Petrochemical.





Trend Information

Streamlining of Production Facilities

We plan to continue to streamline our production facilities
within the next several years to further improve our operating
efficiency and competitiveness by consolidating or shutting down
some of our production facilities. We do not believe that the
implementation of such plans will have a material adverse impact
on our financial position, although we believe that it could
have a material adverse effect on our results of operations
because we would be required under our accounting policies to
recognize in our income statement any impairment loss or
impairment provision associated with shutting down our
production facilities. See  General 
Critical Accounting Policies and
 General  Factors Affecting Results
of Operations above for a detailed discussion of other
trend information.





Other Information

Inflation

Inflation or deflation has not had a significant impact on our
results of operations for the year ended December 31, 2006.

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Non-Exchange Traded Contracts

We did not engage for the year ended December 31, 2006, and
do not currently engage, to a material extent, in any trading
activities involving commodity contracts that are accounted for
at fair value but for which a lack of market price quotations
makes it necessary to apply fair value estimation techniques.

Related Party Transactions

For a discussion of related party transactions, see
Item 7  Major Shareholders and Related
Party Transactions  Related Party Transactions
and Note 35 to our consolidated financial statements
included elsewhere in this annual report.

Recent IFRS

As we prepared our consolidated financial statements in
accordance with IFRS, any adoption of new standards or amendment
or interpretation to existing standards, when effective, may
affect our consolidated results of operation, consolidated
financial position and consolidated cash flows.

The following standard and interpretations to existing
standards, which are relevant to our operations, have been
published and are mandatory for accounting periods beginning on
or after May 1, 2006. We did not adopt such standard or
interpretations as of December 31, 2006:

The IFRS 7, Financial Instruments: Disclosures, and the
complementary Amendment to IAS 1, Presentation of Financial
Statements  Capital Disclosures, introduces new
disclosures relating to financial instruments. We do not expect
this standard to have any impact on the classification or
valuation of our financial instruments.

The IFRIC Interpretation 10, Interim Financial Reporting
and Impairment, prohibits impairment losses, recognized in an
interim period, relating to goodwill, investments in equity
instruments and investments in financial assets carried at cost
to be reversed at a subsequent balance sheet date. We will adopt
IFRIC Interpretation 10 from January 1, 2007, but do not
expect it will have any impact on our consolidated financial
statements.

US GAAP Reconciliation

We prepared our consolidated financial statements in accordance
with IFRS. This basis of accounting may differ from US GAAP.
Such differences involve methods for measuring the amounts shown
in the financial statements, as well as additional disclosures
required by US GAAP.

A summary of the principal differences and additional
disclosures applicable to us is set out below:

Acquisition of PKZ

As described in Note 19 to the consolidated financial
statements included elsewhere in this annual report, we acquired
a 67% equity interest in PKZ from CNPC International limited
(CNPCI), a subsidiary of CNPC, for a consideration of RMB
21,376 million. The acquisition was completed on
December 28, 2006, when we paid the consideration for the
acquisition to CNPCI. As both CNPCI and our company are under
common control by CPNC, our acquisition of the 67% equity
interest in PKZ has been accounted for in a manner similar to
pooling of interest under US GAAP accounting and the US GAAP
financial data reflects the acquisition since PKZ was first
acquired by CNPCI on October 26, 2005.

On December 15, 2006, PKZ paid to CNPCI a dividend of
RMB 3,044 million and was recorded as a deemed
distribution to CNPCI.

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##### Table of Contents

Revaluation of Property, Plant and EquipmentAs described in Note 18 to the consolidated financial
statements, the property, plant and equipment, excluding oil and
gas reserves, transferred to our company by CNPC were appraised
as of June 30, 1999, as required by the relevant PRC
regulations, by a firm of independent valuers registered in the
PRC, China Enterprise Appraisal. In September 2003, our
companys refining and chemical production equipment was
revalued by a firm of independent valuers registered in the PRC,
China United Assets Appraiser Co., Ltd, on a depreciated
replacement cost basis. In March 2006, our companys oil
and gas properties were revalued by two independent valuers,
China United Assets Appraiser Co., Ltd and China Enterprise
Appraisals, on a depreciated replacement cost basis.

The June 1999 revaluation resulted in RMB 80,549 million in
excess of the prior carrying value and a revaluation loss of RMB
1,122 million on certain property, plant and equipment.

The September 2003 revaluation resulted in RMB 872 million
in excess of the carrying value of certain property, plant and
equipment immediately prior to the revaluation and a revaluation
loss of RMB 1,257 million.

The March 2006 revaluation did not result in significant
differences from the carrying value of our oil and gas
properties.

The depreciation charge, which includes impairment charge, on
the revaluation surplus from January 1, 2006 to
December 31, 2006 was RMB 3,828 million, from
January 1, 2005 to December 31, 2005 was RMB
6,528 million, and from January 1, 2004 to
December 31, 2004 was RMB 8,170 million.

The depreciation charge, which includes impairment charge, on
the revaluation loss from January 1, 2006 to
December 31, 2006 was RMB Nil, from January 1,
2005 to December 31, 2005 was RMB 149 million, and
from January 1, 2004 to December 31, 2004 was RMB
830 million.

The loss on disposal of revalued property, plant and equipment,
which includes shut down of manufacturing assets, from
January 1, 2006 to December 31, 2006 was RMB
287 million, from January 1, 2005 to December 31,
2005 was RMB 432 million, and from January 1, 2004 to
December 31, 2004 was RMB 523 million.

For purposes of reconciling to the US GAAP financial data, the
effect of the revaluation, the related depreciation charges and
loss on disposal is reversed. A deferred tax asset relating to
the reversal of the effect of revaluation in 1999 is
established, together with a corresponding increase in the
shareholders equity. Under a special approval granted by
the Ministry of Finance, the effect of the revaluation in 1999
is available as additional depreciation base for purposes of
determining taxable income.



One-time Compensatory Payments for Staff HousingThe Ministry of Finance of the PRC issued several public notices
and regulations during the years ended December 31, 2000
and 2001 with respect to the one-time compensatory payments for
staff housing payable to certain employees who joined the
workforce prior to December 31, 1998 and have housing
conditions below local standards as determined in accordance
with government regulations and guidelines. These Ministry of
Finance notices and regulations also provided that the portion
of remedial payments attributable to the periods prior to a
restructuring of the employer enterprise from a wholly
state-owned status to a less than wholly state-owned status is
to be borne by the state shareholder of the enterprise.

The restructuring that resulted in the formation of CNPC group
took place in November 1999. As such, the one-time compensatory
housing payments payable to the eligible employees of our
company are to be borne by the state shareholder of our company.

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Under IFRS, such direct payments to employees or reimbursements
will not be recorded through the consolidated profit and loss
account of CNPC. US GAAP contains no such exemption but requires
this principal shareholders action on behalf of our
company to be recorded in the consolidated profit and loss
account. In the last quarter of year 2002, our company and CNPC
completed the process of estimating the amount payable to
qualified employees of our company. This amount, RMB
2,553 million, was reflected in determining net income of
CNPC for the year ended December 31, 2002, under US GAAP.
Since this amount is borne by CNPC, a corresponding amount has
been included as an addition to the other reserves in the
shareholders equity of our company. There were no
significant changes in this estimate during 2005 and 2006.



Minority InterestIn accordance with the revised IAS 1, Presentation of
Financial Statements and IAS 27, Consolidated
and Separate Financial Statements, minority interest
becomes part of the profit for the year and total equity of our
company, whereas under US GAAP, it is respectively excluded from
the net income and shareholders equity of our company. In
addition, the reconciling item also includes the impact of
minority interests share of the revaluation gain and loss,
on the property, plant and equipment of non-wholly owned
subsidiaries and minority interest arising as a result of the
acquisition of 67% equity interest in PKZ through a non-wholly
owned subsidiary of our company, to net income and
shareholders equity under US GAAP.



Purchase from Minority Interest of Listed
    SubsidiariesAs described in Note 39 to the consolidated financial
statements, our company acquired certain outstanding A shares
from the minority interest of Jinzhou Petrochemical Company
Limited (JPCL) and Liaohe Jinma Oilfield Company
Limited (LJOCL) and certain A shares and H shares
(including ADSs) from the minority interest of Jilin Chemical
Industrial Company Limited (JCC). Under IFRS, our
company applies a policy of treating transactions with minority
interest as transactions with equity participants of our
company. Therefore, the assets and liabilities of JPCL, LJOCL
and JCC additionally acquired by our company from minority
interest were recorded by our company at cost. The difference
between the companys purchase cost and the book value of
the interests in JPCL and LJOCL acquired by our company from
minority interest was recorded in equity. Under US GAAP, the
acquisition of additional minority interest is accounted for
under purchase method. Assets and liabilities additionally
acquired were restated to fair value and the difference of
purchase cost over fair value of the minority interest acquired
and identified intangible assets was recorded as goodwill.
Additional depreciation charge for the assets restated to fair
value was recorded.



Recent US Accounting PronouncementsIn September 2005, the Emerging Issues Task Force
(EITF) reached consensus on Issue
No. 04-13,
Accounting for Purchases and Sales of Inventory with the
Same Counterparty
(EITF 04-13)
which requires two or more inventory purchase and sales
transactions with the same counterparty that are entered into in
contemplation of one another to be combined for purposes of
applying Opinion 29, Accounting for Nonmonetary
Transactions. The Task Force also agreed that an entity
should disclose the amount of revenue and costs (or gains and
losses) associated with inventory exchanges recognized at fair
value. EITF 04-13
should be applied to new arrangements entered into, or
modifications or renegotiations of existing arrangements,
beginning in the first interim or annual reporting period
beginning after March 15, 2006 and early application is
permitted in periods for which financial statements have not
been issued. Our company did not early adopt
EITF 04-13 and
does not expect the adoption of
EITF 04-13 to have
a material impact on our financial position or results of
operations.

In June 2006, EITF issued
No. 06-3,
How Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement
(EITF 06-3).

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EITF 06-3 requires
disclosure of the presentation of taxes on either a gross or a
net basis as an accounting policy decision. The provisions of
EITF 06-3 are
effective for interim and annual reporting periods beginning
after December 15, 2006, and early application is
permitted. Our company did not early adopt
EITF 06-3 and does
not expect the adoption of
EITF 06-3 to have
a material impact on the presentation of our financial
statements.

In July 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes  an Interpretation of
FASB Statement No. 109 (FIN 48).
FIN 48 prescribes a comprehensive model for recognizing,
measuring, presenting and disclosing in the financial statements
uncertain tax positions that an enterprise has taken or expects
to take in its tax returns. The provisions of FIN 48 are
effective for fiscal years beginning after December 15,
2006. Earlier adoption is permitted as of the beginning of an
enterprises fiscal year, provided the enterprise has not
yet issued financial statements, including financial statements
for any interim period, for that fiscal year. The cumulative
effect of applying the provisions of this Interpretation should
be reported as an adjustment to the opening balance of retained
earnings for that fiscal year. Our company is currently
evaluating the impact of adopting FIN 48.

In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (FAS157), which defines fair
value, establishes guidelines for measuring fair value and
expands disclosures regarding fair value measurements.
FAS 157 does not require any new fair value measurements
but rather eliminates inconsistencies in guidance found in
various prior accounting pronouncements. FAS 157 will be
effective for fiscal years beginning after November 15,
2007, and all interim periods within those fiscal years. Earlier
application is permitted if the entity has not issued interim or
annual financial statements for that fiscal year. Our company is
currently evaluating the impact of adopting FAS 157 but
does not expected the adoption of which to have a material
effect on our companys consolidated financial position and
results of operations.

In September 2006, the U.S. Securities and Exchange
Commission (SEC) released SAB No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108
provides interpretive guidance on the SECs views on the
consideration of effects of prior year misstatements in
quantifying current year misstatements for the purpose of
determining whether the current years financial statements
are materially misstated. The provisions of SAB 108 are
effective for fiscal years ending after November 15, 2006.
The application of SAB 108 did not have any material effect
on our companys consolidated financial position, and
results of operations.



Quantitative Disclosure Relating to US GAAP and
    IFRS

Year Ended December 31, 2006 Compared to Year Ended
    December 31, 2005Net income. Net income under US GAAP increased 6.0% from
RMB 137,866 million for the year ended December 31,
2005 to RMB 146,087 million for the year ended
December 31, 2006. This increase was due primarily to an
increase of RMB 9,755 million in the net income under
IFRS as discussed in Item 5  Operating and
Financial Review and Prospects  Operating
Results.

Shareholders equity. Shareholders equity
under US GAAP increased 12.6% from RMB 510,141 million
as of December 31, 2005 to RMB 574,470 million as of
December 31, 2006. This increase was due primarily to the
net income of RMB 146,087 million under US GAAP, which was
partially offset by the payment of (i) the final dividend
of RMB 32,282 million for the year of 2005 and
(ii) the interim dividend of RMB 36,307 million for
the year of 2006.



Year Ended December 31, 2005 Compared to Year Ended
    December 31, 2004Net income. Net income under US GAAP increased 26.4% from
RMB 109,051 million for the year ended December 31,
2004 to RMB 137,866 million for the year ended
December 31, 2005.

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##### Table of Contents

This increase was due primarily to an increase of RMB
31,996 million in the net income under IFRS as discussed in
Item 5  Operating and Financial Review and
Prospects  Operating Results.

Shareholders equity. Shareholders equity
under US GAAP increased 25.8% from RMB 405,573 million
as of December 31, 2004 to RMB 510,141 million as of
December 31, 2005. This increase was due primarily to the
net income of RMB 137,866 million under US GAAP, which was
partially offset by the payment of (i) the final dividend
of RMB 25,936 million for the year of 2004 and
(ii) the interim dividend of RMB 27,731 million for
the year of 2005.

Environmental Expenses and Capital Expenditures

We paid pollutant discharge fees of approximately RMB
182 million, RMB 199 million and
RMB 211 million respectively, in 2004, 2005 and 2006.
Our capital expenditures on environmental programs in 2004, 2005
and 2006 were approximately RMB 1,345 million, RMB
1,633 million and RMB 4,634 million, respectively. On
November 13, 2005, an explosion occurred at our branch
company in Jilin Province. The Chinese government completed its
investigation of this accident in December 2006, and we paid a
fine of RMB 1 million in settlement of all liabilities
arising from the accident.

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##### Table of Contents

ITEM 6  DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES





Directors, Senior Management and Supervisors

Our board of directors currently consists of twelve directors,
three of whom are independent non-executive directors. The
directors are elected at a meeting of our shareholders for a
term of three years. The directors may be re-elected and
re-appointed upon the expiration of his/her term of office. The
functions and duties conferred on the board of directors include:




    convening shareholders meetings and reporting its work to
    the shareholders meetings;
    implementing the resolutions of the shareholders meetings;
    determining our business plans and investment plans;
    formulating our annual budget and final accounts;
    formulating our proposals for dividend and bonus distributions
    and for the increase or reduction of capital; and
    exercising other powers, functions and duties as conferred by
    our articles of association.Seven of the directors are currently affiliated with CNPC or an
affiliate of CNPC.

The PRC Company Law requires a joint stock company with limited
liability to establish a supervisory committee. This requirement
is reflected in our articles of association. The supervisory
committee is responsible for monitoring our financial matters
and overseeing the actions of our board of directors and our
management personnel. The supervisory committee consists of
seven supervisors, six of whom are elected, including four
shareholders representatives and two independent supervisors,
and may be removed, by the shareholders in a general meeting and
one of whom is an employees representative who is elected
by our staff, and may be removed, by our staff. Three of our
supervisors are affiliated with CNPC. The term of office of our
supervisors is three years. The supervisors may be re-elected
and re-appointed upon the expiration of his/her term of office.
An elected supervisor cannot concurrently hold the position of a
director, manager or financial controller. The functions and
powers conferred on the supervisory committee include:




    attending board meetings;
    examining our financial affairs;
    examining balance sheets, profit and loss accounts, business
    reports, dividend distribution proposals and other financial
    information proposed at shareholders general meetings by
    the directors from time to time; and
    overseeing the actions of our board of directors and our senior
    management personnel in carrying out their duties.In the event that any action of our directors adversely affects
our interests, supervisors shall confer with or initiate legal
proceedings against such directors on our behalf. A resolution
proposed at any meeting of the supervisory committee shall be
adopted only if it is approved by two-thirds or more of our
supervisors.

Our senior management is appointed by and serves at the
discretion of our board of directors.

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The following table sets forth certain information concerning
our current directors, supervisors and executive officers.

|               |  |     |    |  |          |                                                           |                     |  |                  | 
|-------------- |  | --- | -- |  | -------- | --------------------------------------------------------- | ------------------- |  | ---------------- | 
|Name           |  | Age |    |  | Position |                                                           | Date of election(1) | 
|               |  |     |    |  |          |                                                           |                     | 
|Chen Geng      |  |     | 60 |  |          | Chairman of the board of directors                        |                     |  | May 18, 2004     | 
|Jiang Jiemin   |  |     | 51 |  |          | Vice Chairman of the board of
    directors and President |                     |  | May 18, 2004     | 
|Duan Wende     |  |     | 55 |  |          | Director and Senior Vice President                        |                     |  | May 18, 2004     | 
|Zheng Hu       |  |     | 60 |  |          | Director                                                  |                     |  | May 26, 2006     | 
|Zhou Jiping    |  |     | 54 |  |          | Director                                                  |                     |  | May 18, 2004     | 
|Wang Yilin     |  |     | 50 |  |          | Director                                                  |                     |  | November 8, 2005 | 
|Zeng Yukang    |  |     | 56 |  |          | Director                                                  |                     |  | November 8, 2005 | 
|Gong Huazhang  |  |     | 60 |  |          | Director                                                  |                     |  | November 8, 2005 | 
|Jiang Fan      |  |     | 43 |  |          | Director                                                  |                     |  | November 8, 2005 | 
|Chee-Chen Tung |  |     | 64 |  |          | Independent non-executive director                        |                     |  | November 8, 2005 | 
|Liu Hongru     |  |     | 76 |  |          | Independent non-executive director                        |                     |  | November 8, 2005 | 
|Franco Bernabè |  |     | 58 |  |          | Independent non-executive director                        |                     |  | May 26, 2006     | 
|Li Huaiqi      |  |     | 57 |  |          | Secretary to the board of directors                       |                     |  |                  | 
|Wang Guoliang  |  |     | 54 |  |          | Chief Financial Officer                                   |                     |  |                  | 
|Liao Yongyuan  |  |     | 44 |  |          | Vice President                                            |                     |  |                  | 
|Jia Chengzao   |  |     | 58 |  |          | Vice President                                            |                     |  |                  | 
|Hu Wenrui      |  |     | 57 |  |          | Vice President                                            |                     |  |                  | 
|Wang Fucheng   |  |     | 56 |  |          | Chairman of the supervisory
    committee                 |                     |  |                  | 
|Wen Qingshan   |  |     | 48 |  |          | Supervisor                                                |                     |  |                  | 
|Sun Xianfeng   |  |     | 54 |  |          | Supervisor                                                |                     |  |                  | 
|Xu Fengli      |  |     | 59 |  |          | Supervisor                                                |                     |  |                  | 
|Qin Gang       |  |     | 53 |  |          | Supervisor                                                |                     |  |                  | 
|Li Yongwu      |  |     | 62 |  |          | Independent supervisor                                    |                     |  |                  | 
|Wu Zhipan      |  |     | 50 |  |          | Independent supervisor                                    |                     |  |                  | 






|    |                    
|--- | -------------------
|(1) | For directors only.

Directors


Chen Geng,


Jiang Jiemin,


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Shengli Petroleum Administration Bureau in March 1993, Senior
Executive of the Qinghai Petroleum Administration Bureau in June
1994 and Director of Qinghai Petroleum Administration Bureau in
November 1994, and Assistant to the General Manager and Team
Leader for the Restructuring and Listing Preparatory Team of
CNPC in February 1999, and a Director and Vice President of our
company in November 1999. Mr Jiang was appointed Deputy
Provincial Governor of the Qinghai Province since June 2000, was
made a member of the provincial party committee of the Qinghai
Province and Deputy Provincial Governor of Qinghai in November
2000, and the deputy secretary of the provincial party committee
of Qinghai Province and Deputy Provincial Governor of Qinghai in
June 2003. Mr Jiang became the Vice Chairman and President of
our company in May 2004 and the General Manager of CNPC in
November 2006.

Duan Wende,aged 55, is a Director and Senior Vice
President of our company. He is a senior engineer and holds a
masters degree. He has over 35 years of working
experience in Chinas petrochemical industry. From April
1975, Mr Duan was the Deputy Factory Manager of Fushun Chemical
Fibers Factory, the Commander of the Fushun Ethylene Project
Command Division, Deputy Factory Manager of the ethylene
factory, the Factory Manager of the acrylic fibers factory and
the Factory Manager of the detergent factory. He was made Deputy
Manager of Fushun Petrochemical Corporation in May 1997 and
Manager in May 1999. He was made General Manager of PetroChina
Fushun Petrochemical Company in October 1999. He had been an
Assistant to the General Manager of CNPC since August 2001. He
had been a Vice President of our company since March 2002. He
has been a Director of our company since May 2004. He has been a
Senior Vice President of our company since November 2005.

Zheng Hu,aged 60, is a Director of our company
and a Deputy General Manager of CNPC. Mr Zheng is a senior
engineer and holds a college degree. He has nearly 40 years
of working experience in Chinas oil and gas industry. From
May 1990, Mr Zheng was the Vice Chancellor of Beijing Petroleum
Managers Training Institute. From July 1992, Mr Zheng worked as
Deputy General Manager of China Petroleum Materials and
Equipment (Group) Corporation and concurrently as General
Manager of China Petroleum Technology Development Corporation.
Mr Zheng was appointed Director of Personnel and Labour
Department of CNPC in September 1999. He has been a Director of
our company since June 2000, and a Deputy General Manager of
CNPC since August 2000.

Zhou Jiping,aged 54, is a Director of our company
and a Deputy General Manager of CNPC. Mr Zhou is a senior
engineer and holds a masters degree. He has over
35 years of working experience in Chinas oil and gas
industry. In November 1996, he was appointed Deputy Director of
the International Exploration and Development Cooperation Bureau
of China National Petroleum Corporation and Deputy General
Manager of China National Oil & Gas Exploration and
Development Corporation. In December 1997, he was appointed
General Manager of China National Oil & Gas Exploration
and Development Corporation and Deputy Director of the
International Exploration and Development Cooperation Bureau of
China National Petroleum Corporation. Since August 2001, he was
Assistant to the General Manager of CNPC and General Manager of
China National Oil & Gas Exploration and Development
Corporation. Since December 2003, Mr Zhou has been a Deputy
General Manager of CNPC. Mr Zhou was appointed a Director of our
company in May 2004.

Wang Yilin,aged 50, is a Director of our company
and a Deputy General Manager and the Safety Director of CNPC. Mr
Wang is a senior engineer and holds a doctors degree. He
has nearly 25 years of working experience in Chinas
oil and gas industry. Mr Wang had been the Deputy Director and
Chief Exploration Geologist of Xinjiang Petroleum Administration
Bureau since June 1996. He was appointed as the General Manager
of the Xinjiang Oilfield Branch of our company in September
1999. He had been the Senior Executive of Xinjiang Petroleum
Administration Bureau and the General Manager of the Xinjiang
Oilfield Branch of our company since June 2001. From July 2003
onwards, he had been the Assistant to General Manager of CNPC,
Senior Executive of Xinjiang Petroleum Administration Bureau and
the General Manager of Xinjiang Oilfield Branch of our company
concurrently. In December 2003, he was appointed Deputy General
Manager of CNPC and

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Senior Executive of Xinjiang Petroleum Administration Bureau and
the General Manager of Xinjiang Oilfield Branch of our company
concurrently. From May 2004, he ceased to work as the Senior
Executive of Xinjiang Petroleum Administration Bureau and the
General Manager of the Xinjiang Oilfield Branch of our company.
From July 2004 onwards, he had also worked as the Safety
Director of CNPC. He has been a Director of our company since
November 2005.

Zeng Yukang,aged 56, is a Director of our company
and a Deputy General Manager of CNPC. Mr Zeng is a senior
economist and holds a college degree. He has nearly
40 years of working experience in Chinas oil and gas
industry. Mr Zeng had been the Senior Executive of the
Exploration and Development Institute of Daqing Petroleum
Administration Bureau since December 1996. From February 2000
onwards, he was appointed as the Standing Deputy Director of
Daqing Petroleum Administration Bureau. Since March 2001, he had
been the Director of Daqing Petroleum Administration Bureau.
Since November 2002, he had been the Assistant to the General
Manager of CNPC. From September 2005 onwards, he has been a
Deputy General Manager of CNPC. He has been a Director of our
company since November 2005.

Gong Huazhang,aged 60, is a Director of our
company and the General Accountant of CNPC. Mr Gong is a senior
accountant and has over 40 years of working experience in
Chinas oil and gas industry. Mr Gong worked as Chief
Accountant, Deputy Director and Director of the Finance Bureau
of China National Petroleum Corporation from 1991. He had been
the Director of Finance and Assets Department of CNPC since
October 1998 and has been the General Accountant of CNPC since
February 1999. Mr Gong has been a Director of our company since
November 1999.

Jiang Fan,aged 43, is a Director of our company
and the General Manager of Dalian Petrochemical Company. Mr
Jiang is a senior engineer and holds a masters degree. He
has over 20 years of working experience in Chinas
petrochemical industry. Mr Jiang was appointed as the Deputy
Manager of Dalian Petrochemical Company since December 1996. In
September 1999, he was appointed as the Deputy General Manager
of Dalian Petrochemical Company. In February 2002, he became the
General Manager of Petrochina Dalian Petrochemical Company. Mr
Jiang has been a Director of our company since November 2005.

Independent Non-executive Directors

Chee-Chen Tung,aged 64, is an independent
non-executive Director of our company. Mr Tung is the Chairman
and Chief Executive Officer of Orient Overseas (International)
Limited. He was educated at the University of Liverpool,
England, where he received his Bachelor of Science degree. He
later acquired a Masters degree in Mechanical Engineering
at the Massachusetts Institute of Technology in the United
States. He served as Chairman of the Hong Kong Shipowners
Association between 1993 and 1995. From 1999 to 2001, he was the
Chairman of the Hong Kong General Chamber of Commerce. He is an
independent non-executive director of Zhejiang Expressway Co.,
Ltd., BOC Hong Kong (Holdings) Limited, Sing Tao News
Corporation Limited, Wing Hang Bank Limited and Cathay Pacific
Airways Limited, and a member of the Hong Kong Port Development
Board. Mr Tung is also the Chairman of the Institute for
Shipboard Education Foundation, the Chairman of the Advisory
Council of the Hong Kong Polytechnic University and is a member
of the Board of Trustees of the International Academic Center of
the University of Pittsburgh and the School of Foreign Service
of Georgetown University. Mr Tung has been an independent
non-executive Director of our company since November 5,
1999.

Liu Hongru,aged 76, is an independent
non-executive Director of our company. Mr Liu graduated from the
Faculty of Economics of the University of Moscow in 1959 with an
associate Doctorates degree. Mr Liu worked as Vice
Governor of the Agricultural Bank of China, Vice-Governor of the
Peoples Bank of China, Deputy Director of the State
Economic Restructuring Committee, and the Chairman of the China
Securities Regulatory Commission. Mr Liu is currently the
Chairman of the China Foundation for Development of Financial
Education and the Chairman of the Capital Market Research
Institute. Mr Liu is also a professor at the Peking University,
the

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Postgraduate School of the Peoples Bank of China and the
City University of Hong Kong. Mr Liu serves as an independent
non-executive director or non-executive director in three listed
companies in Hong Kong, and possesses the accounting or
financial management qualification required under the Listing
Rules. Mr Liu was appointed as an independent Supervisor of our
company in December 1999. Upon his resignation from this post,
he has been an independent non-executive Director of our company
since November 19, 2002.

Franco Bernabè, aged 58, is an independent
non-executive Director of our company. Mr Bernabè is
the Chairman of the Franco Bernabè Group and Vice Chairman
of H3G. He is also a Vice Chairman of Rothschild Europe. He is a
former CEO of ENI and of Telecom Italia. He has also served as a
special representative of the Italian government for the
reconstruction of the Balkan region. Mr Bernabè joined ENI
in 1983 to become an assistant to the chairman; in 1986 he
became director for development, planning and control; and
between 1992 and 1998 was the Chief Executive Officer of ENI. Mr
Bernabè led the restructuring program of the ENI Group,
making it one of the worlds most profitable oil companies.
Between 1998 and 1999, Mr Bernabè was the Chief Executive
Officer of Telecom Italia. Prior to his joining ENI, Mr
Bernabè was the head of economic studies at FIAT. Mr
Bernabè was a senior economist at the OECD Department of
Economics and Statistics in Paris. Earlier he was a professor of
economic politics at the School of Industrial Administration,
Turin University. Mr Bernabè has been an independent
non-executive Director of our company since June 30, 2000.

Secretary to the Board of Directors

Li Huaiqi,aged 57, is the Secretary to the Board
of Directors of our company. Mr Li is a senior economist. He has
over 35 years of working experience in Chinas oil and
gas industry. Mr Li once worked in the Daqing Oilfield, the
Liaohe Oilfield and the Huabei Oilfield and in the Nanhai
Petroleum Company. From June 1992, Mr Li worked as Deputy
Director and Director of the Foreign Affairs Bureau of China
National Petroleum Corporation successively. From October 1998,
Mr Li was appointed as Director of the International
Co-operation Department (Foreign Affairs Bureau) of CNPC. Mr Li
has been the Secretary to the Board of Directors of our company
since August 2001.

Other Senior Management Personnel

Wang Guoliang,aged 54, is Chief Financial Officer
of our company. Mr Wang is a senior accountant and holds a
masters degree. Mr Wang has 25 years of working
experience in Chinas oil and gas industry. Mr Wang worked
as the Vice President of China Petroleum Finance Company Limited
from October 1995. From November 1997, he was the Deputy General
Manager and General Accountant of China National Oil &
Gas Exploration and Exploitation Corporation. Mr Wang had been
the Chief Financial Officer of our company since November 1999.
From November 1999 to March 2002, he was also the General
Manager of our companys Finance Department.

Liao Yongyuan,aged 44, is the Vice President of
our company. Mr Liao is a masters degree holder and a
senior engineer. He has nearly 25 years of working
experience in Chinas oil and gas industry. He was Deputy
Director of the New Zone Exploration and Development Department
of China National Petroleum Corporation from June 1996, the
Standing Deputy Commander and then Commander of Tarim Petroleum
Exploration and Development Headquarters from November 1996. He
was the General Manager of Tarim Oilfield Branch Company from
September 1999, and also Deputy Director of Gansu Provincial
Economic and Trade Committee from October 2001. He has worked as
the Assistant to the General Manager of CNPC since January 2004
and has been concurrently the Head of Coordination Team for Oil
Enterprises in Sichuan and Chongqing and Director of Sichuan
Petroleum Administration since April 2004. He has been a Vice
President of our company since November 2005.

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Jia Chengzao,aged 58, is a Vice President of our
company. Mr Jia is a Doctorate degree holder, a senior engineer
and a fellow of the Chinese Academy of Sciences. He has over
25 years of working experience in Chinas oil and
geological industry. From August 1994, Mr Jia worked as the
Deputy Chief Geologist, the Chief Geologist and Deputy Commander
of the Tarim Petroleum Exploration and Development Headquarters.
From February 1998 to July 2000, he worked as a Vice President
of the China Oil Exploration and Exploitation Scientific
Research Institute of CNPC. From September 1999, Mr Jia
worked as the Deputy General Manager of the Tarim Oilfield
Branch of our company. He has been the Chief Geologist of our
company from July 2000. Mr Jia also served as the President of
the China Oil Exploration and Exploitation Research Institute
from December 2002 to October 2006. Mr Jia has been a Vice
President of our company since November 2005.

Hu Wenrui,aged 57, is a Vice President of our
company. Mr Hu is a senior engineer and has over 35 years
of working experience in Chinas oil and gas industry. From
April 1984, Mr Hu was Manager of Changqing Oilfield No. 2
Oil Extraction Plant. He had been Deputy Director of Changqing
Petroleum Exploration Bureau since April 1989, Standing Deputy
Director since November 1996, and eventually Director of
Changqing Petroleum Exploration Bureau since April 1999. From
September 1999, he was the General Manager of Changqing Oilfield
Branch Company. He has been the General Manager of our
companys Exploration and Production Branch since December
2002. Mr Hu has been a Vice President of our company since
November 2005.

Supervisors

Wang Fucheng,aged 56, is the Chairman of the
Supervisory Committee. Mr Wang is a senior economist and holds a
bachelors degree. Mr Wang has over 40 years of
working experience in Chinas oil and gas industry. From
August 1986, Mr Wang worked as Senior Executive of the Shengli
Petroleum Administration Bureau. Since December 1992, Mr Wang
had worked as Senior Executive of the Liaohe Petroleum
Administration Bureau. Since November 1997, Mr Wang had worked
as Director of the Liaohe Petroleum Administration Bureau. Since
October 1999, Mr Wang had been the General Manager of the
Liaohe Oilfield Branch of our company. Mr Wang was appointed as
a Director of our company in June 2000 and was appointed as the
Vice President of our company in July 2000. Prior to the
appointment as Supervisor of our company, Mr Wang resigned
from his office as Director of our company. Mr Wang has been the
Chairman of the Supervisory Committee of our company since
November 2005.

Wen Qingshan,aged 48, is a Supervisor of our
company and the Director of the Finance and Assets Department of
CNPC. Mr Wen is a senior accountant and holds a masters
degree. He was the Deputy Chief Accountant of the Finance and
Assets Department of CNPC from November 1998, Deputy Director of
the Finance and Assets Department of CNPC from May 1999 and
Director of the Finance and Assets Department of CNPC from May
2002. He has been a Supervisor of our company since November
2002.

Sun Xianfeng,aged 54, is a Supervisor of our
company and the Director of the Audit Department and the Audit
Services Centre of CNPC. Mr Sun holds a college degree. Mr Sun
worked as Deputy Director of the Supervisory Bureau of China
National Petroleum Corporation from November 1996, and was
transferred to the Eighth Office of the State Council Compliance
Inspectors General Office (Supervisory Committee of
Central Enterprises Working Commission) as its temporary head in
June 1998. He had been the Deputy Director of the Audit
Department of CNPC from October 2000 and has been the Director
of the Audit Services Centre from December 2000. He had been the
Director of the Audit Department of CNPC and the Director of the
Audit Service Centre from April 2004. He has been a Supervisor
of our company since May 2004.

Xu Fengli,aged 59, is a Supervisor and General
Manager of the Audit Department of our company. Mr Xu is a
senior accountant and has nearly 35 years of work
experience in Chinas petrochemical industry. Mr Xu was
appointed as the Chief Accountant of Fushun Petrochemical
Corporation in November 1995, Deputy Director of the Finance and
Assets Department of CNPC in

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November 1998, Deputy General Manager of the Finance Department
of our company in December 1999, and Director of the
Administrative Office of the Supervisory Committee of our
company in October 2003. He has been a Supervisor of our company
since May 2004 and the General Manager of the Audit Department
of our company since November 2005.

Qin Gang,aged 53, is an employee representative
of our companys Supervisory Committee and a Senior
Executive of Tarim Oilfield Branch of our company. Mr Qin is a
senior engineer and has nearly 35 years of experience in
Chinas oil and gas industry. Mr Qin had acted as a
Deputy Commander of Tarim Petroleum Exploration and Development
Headquarters since November 1997 and a Deputy General Manager of
Tarim Oilfield Company since September 1999. From June 2000, Mr
Qin worked as the Senior Executive of Tarim Southwest Company
concurrently. Since July 2002, Mr Qin has worked as an executive
and the Chairman of Labour Union of PetroChina Tarim Oilfield
Company. Mr Qin has been a Supervisor of our company since
November 2005.

Li Yongwu,aged 62, is an independent Supervisor
of our company. Mr Li is a senior engineer and holds a
bachelors degree. In June 1991, Mr Li was appointed
as the Director of Tianjin Chemicals Bureau. In July 1993, he
was appointed as the Director of Tianjin Economic Committee. He
was elected as the Vice Minister of the PRC Ministry of Chemical
Industry in April 1995. He became Director of the States
Petroleum and Chemical Industry Bureau since March 1998. In
April 2001, he was appointed as a Deputy Director of the Liaison
Office of the Central Government at the Special Administrative
Region of Macau. In December 2004, he was appointed as the Vice
President of China Petroleum and Petrochemical Industry
Association. In May 2005, he became the Chairman of China
Petroleum and Petrochemical Industry Association. Mr Li has
been an Independent Supervisor of our company since November
2005. In 2003, he was elected as a standing member of the Tenth
Chinese Peoples Consultative Conference.

Wu Zhipan,aged 50, is an independent Supervisor
of our company. Mr Wu is a holder of doctors degree. Mr Wu
is currently the Vice Chancellor of the Peking University. He is
also an expert consultant of the Supreme Peoples Court of
the PRC, an arbitrator of the Arbitration Panel of China
International Economic and Trade Arbitration Commission and
President of the China Economic Law Research Societies. Mr Wu
has been an independent Supervisor of our company since December
1999.

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Compensation

Senior Management Compensation System

Our senior management compensation system links our senior
management members financial interests, including those of
our executive directors and our supervisors, with our results of
operations and the performance of our shares. All of our senior
management members have entered into performance contracts with
us. Under this system, the senior management members
compensation has three components, namely, fixed salaries,
performance bonuses and stock appreciation rights. The variable
components in their compensation account for approximately 70%
to 75% of our senior management officers total potential
compensation, including up to 25% forming the performance bonus
component and approximately 50% to 70% forming the stock
appreciation rights component. Variable compensation rewards are
linked to the attainment of specific performance targets, such
as net income, return on capital and cost reduction targets. The
chart below sets forth the components of the total potential
compensation for key officers.

|               |  |         |    |         |              |  |    |               |  |  |    | 
|-------------- |  | ------- | -- | ------- | ------------ |  | -- | ------------- |  |  | -- | 
|               |  |         |    | % Stock |              |  |   
|               |  | % Fixed |    |         | appreciation |  |    | % Performance | 
|               |  | salary  |    |         | rights       |  |    | bonus         | 
|               |  |         |    |         |              |  |    |               | 
|Chairman       |  |         | 30 |         |              |  | 70 |               |  |  | 0  | 
|President      |  |         | 25 |         |              |  | 60 |               |  |  | 15 | 
|Vice President |  |         | 25 |         |              |  | 60 |               |  |  | 15 | 
|Department GM  |  |         | 25 |         |              |  | 50 |               |  |  | 25 | 



Directors and Supervisors Compensation










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In 2006, we paid RMB 162,830 as our contribution to the pension
plans in respect of our directors and supervisors, who hold
senior management positions or are otherwise employed by us. The
aggregate amount of salaries or other compensation, housing
allowances, other allowances and benefits in kind paid by us to
our supervisors, who hold senior management positions or are
otherwise employed by us, during the year ended
December 31, 2006 was RMB 714,423.





Board Practices

Our board of directors has four principal committees: an audit
committee, an investment and development committee, an
evaluation and remuneration committee and a health, safety and
environment committee.

Audit Committee

Our audit committee is currently composed of three non-executive
independent directors, Mr. Franco Bernabè,
Mr. Chee-Chen Tung and Mr. Liu Hongru, and one
non-executive director, Mr. Gong Huazhang. Mr. Franco
Bernabè serves as the chairman of the committee. Under our
audit committee charter, the chairman of the committee must be
an independent director and all resolutions of the committee
must be approved by independent directors. The audit
committees major responsibilities include:




    supervising the integrity of financial reporting process to
    ensure fair, transparent and true financial disclosure;
    evaluating the effectiveness of the internal control and risk
    management framework;
    inspecting and supervising the effectiveness of the internal
    audit functions;
    reviewing and supervising the engagement and work of external
    auditors, including evaluating the performance of external
    auditors annually and raising proposals together with the
    supervisory committee to the shareholders meetings with
    respect to the engagement, re-engagement and dismissal of
    external auditors and the compensation of such external auditors;
    receiving, keeping and dealing with complaints regarding
    accounting, internal control or auditing matters.
    receiving and dealing with anonymous submissions and complaints
    by employees regarding accounting or auditing matters, and
    keeping such submission and complaints confidential, and other
    duties provided in the Listing Rules from time to time.Investment and Development Committee

The current members of our investment and development committee
are Mr. Zhou Jiping and Mr. Wang Yilin, as member of
the committee. The former chairman of the investment and
development committee, Mr. Su Shulin, resigned as a
Director of our company in November 2006. The investment and
development committees major responsibilities include:




    studying strategic action plans as proposed by our President and
    making recommendations to the board of directors;
    studying the annual investment budget and the adjustment
    proposal regarding the investment plan as proposed by our
    President and making recommendations to the board of
    directors; and
    reviewing preliminary feasibility studies and feasibility
    studies for material investment projects requiring approval of
    the board of directors and making recommendations to the board
    of directors.

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Evaluation and Remuneration Committee

The current members of our evaluation and remuneration committee
are Mr. Liu Hongru, as chairman of the committee,
Mr. Zheng Hu and Mr. Chee-Chen Tung, as member of the
committee. The evaluation and remuneration committees
major responsibilities include:




    managing the performance evaluations for our President and
    submitting report to our board and monitoring performance
    evaluations led by our President for Senior Vice President, Vice
    Presidents, Chief Financial Officer and other senior management
    personnel;
    studying our incentive plan, compensation plan and stock
    appreciation rights plan, supervising and evaluating the
    implementation of these plans and making recommendations for
    improvements to and perfection of such plans.Health, Safety and Environment Committee

The current members of our health, safety and environment
committee are Duan Wende, as chairman of the committee,
Mr. Zeng Yukang and Mr. Jiang Fan, as member of the
committee. The health, safety and environment committees
major responsibilities include:




    supervising the effective implementation of our Health, Safety
    and Environmental Protection Plan;
    making recommendations to the board of directors and our
    President for major decisions with respect of health, safety and
    environmental protection;
    inquiring the occurrence of and responsibilities for material
    accidents and supervising the remedial measures of material
    accidents.



Employees

As of December 31, 2004, 2005 and 2006, we had 424,175,
439,220 and 446,290 employees, respectively. The table below
sets forth the number of our employees by business segment as of
December 31, 2006.

|                           |       |           |         |            |  |  |       |       |  
|-------------------------- | ----- | --------- | ------- | ---------- |  |  | ----- | ----- | -
|                           |       | Employees |         | % of total
|                           |       |           |         |           
|Exploration and production |       |           | 247,442 |            |  |  | 55.44 |      
|Refining and marketing     |       |           | 118,504 |            |  |  | 26.55 |      
|Chemicals and marketing    |       |           | 61,152  |            |  |  | 13.70 |      
|Natural gas and pipeline   |       |           | 15,496  |            |  |  | 3.47  |      
|Other(1)                   |       |           | 3,696   |            |  |  | 0.84  |      
|                           |       |           |         |            |  |  |       |      
|                           | Total |           |         | 446,290    |  |  |       | 100.0 | %
|                           |       |           |         |            |  |  |       |      






|    |                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Including the numbers of employees of the management of our
    headquarters, specialized companies, PetroChina
    Exploration & Development Research Institute,
    PetroChina Planning & Engineering Institute, Petrochemical
    Research Institute and other units.



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In 2006, we have not experienced any strikes, work stoppages,
labor disputes or actions which affected the operation of any of
our businesses. We consider our relationship with our employees
to be good.





Share Ownership

Our directors, senior officers and supervisors do not have share
ownership in PetroChina or any of PetroChinas affiliates.
We have granted stock appreciation rights relating to our H
shares to our directors, senior officers and supervisors. Upon
exercise of these stock appreciation rights, members of the
senior management will not receive any of our shares, but will,
by way of stock appreciation rights, receive a monetary sum
which is calculated on the basis of the price of our H shares.
Because the relevant PRC laws limit the ownership of the H
shares of a company incorporated under the PRC laws to only
non-PRC nationals, and companies are not permitted to repurchase
and hold their own shares for offering stock appreciation rights
under current PRC law, our directors, senior officers and
supervisors do not hold our H shares under the stock options
granted to them. Instead, we expect to calculate the book gains
and losses on the basis of share prices and in accordance with
our stock appreciation rights granting criteria to be finalized,
and make cash payments of such compensation to our directors,
senior officers and supervisors.

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ITEM 7  MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS





Major Shareholders

Prior to the restructuring of the CNPC group in November 1999,
CNPC was one of the largest companies in the PRC in terms of
sales. As part of the restructuring of the CNPC group, CNPC
transferred to PetroChina substantially all its businesses and
assets in China relating to the exploration and production of
crude oil and natural gas, refining and marketing, chemicals and
natural gas sales and transmission. Since the restructuring of
the CNPC group, CNPC has engaged in crude oil and natural gas
exploration and production business activities outside the PRC
and limited chemicals production and retail of refined products.
CNPCs primary business activities relate to the provision
of various services and products to PetroChina.

PetroChina was established on November 5, 1999 with CNPC as
its sole promoter. As of December 31, 2006, CNPC owned
157,922,077,818 State-owned shares, representing approximately
88.21% of the share capital of PetroChina, and, accordingly,
CNPC is our controlling shareholder.

The shares held by CNPC are state-owned shares in the share
capital of PetroChina. However, CNPC has identical voting rights
as holders of H shares. Holders of state-owned shares and H
shares are deemed to be shareholders of different classes for
certain matters which may have effect on their respective
interest.

As of December 31, 2006, Warren E. Buffett, Berkshire
Hathaway Inc., OBH, Inc., National Indemnity Company, GEICO
Corporation and Government Employees Insurance Company, as a
group as defined under
Rule 13d-1(b)(1)(ii)(J)
of the Securities Exchange Act of 1934, as amended, collectively
owned 2,347,761,000 H shares, representing approximately 1.311%
of the total outstanding share capital of PetroChina, or
approximately 11.13% of the H shares of PetroChina.





Related Party Transactions

As of December 31, 2006, CNPC directly owns an aggregate of
approximately 88.21% of the shares of our company and therefore
transactions between our company and CNPC constitute related
party transactions between our company and CNPC under the Rules
Governing the Listing of Securities on The Stock Exchange of
Hong Kong Limited, or the Listing Rules. As of December 31,
2006, CNPC (Hong Kong) Limited, or CNPC (HK), is a 51.99% owned
subsidiary of CNPC. Therefore, transactions between our company
and CNPC (HK) constitute related party transactions between
our company and CNPC (HK) under the Listing Rules. As
Beijing Gas Group Co., Ltd., or Beijing Gas, and China Railway
Materials and Suppliers Corporation, or CRMSC, are respectively
a substantial shareholder (as defined under the Listing Rules)
of Beijing Huayou Gas Corporation Limited and PetroChina and
CRMSC Oil Marketing Company Limited, both of which are our
companys subsidiaries, pursuant to the Listing Rules, the
transactions between our company and Beijing Gas and CRMSC
respectively constitute related party transactions of our
company. Moreover, CNPC and our company each holds 50% interest
in CNPC E&D; according to the Listing Rules, CNPC E&D is
a connected person of our company. On December 28, 2006,
our company acquired 67% equity interest in PKZ through CNPC
E&D. Pursuant to the Listing Rules, any subsidiaries of a
connected person of our company will also be treated as
connected person(s) of our company. Therefore, transactions
between our company and (i) CNPC E&D and (ii) PKZ
constitute related party transactions of our company under the
Listing Rules.

One-off Related Party Transactions



Acquisition of a 67% interest in PKZPursuant to an acquisition agreement dated August 23, 2006
entered into between Pervinage Holding B.V. (a wholly-owned
subsidiary of CNPC E&D) and 819 Luxembourg S. a r. l. (an
indirect wholly-owned subsidiary of CNPC), CNPC E&D has
acquired from CNPC the 67% equity interest

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indirectly held by CNPC in PKZ for a cash consideration of
RMB 21,376 million. The acquisition was completed on
December 28, 2006. As CNPC is the controlling shareholder
of our company, and as CNPC and our company each holds 50%
interest in CNPC E&D, CNPC and CNPC E&D are both
connected persons of our company. The acquisition constitutes a
related party transaction for our company under the Listing
Rules. Details of the transaction were announced by our company
on August 23, 2006.

Continuing Related Party Transactions

Continuing Related Party
Transactions with CNPC

Our company and CNPC continue to carry out certain existing
continuing related party transactions. We obtained independent
shareholders approval at the general meeting held on
November 8, 2005 for a renewal of the existing continuing
related party transactions and the new continuing related party
transactions; in addition, at the same general meeting we
proposed the new caps for existing continuing related party
transactions and the new continuing related party transactions
from January 1, 2006 to December 31, 2008. We further
sought independent shareholders approval at the general
meeting held on November 1, 2006 for a renewal of the caps
for the existing continuing related party transactions for
January 1, 2006 to December 31, 2008, which were
previously approved by independent shareholders at the general
meeting held on November 8, 2005.

Our company and CNPC will continue to carry out the existing
continuing related party transactions referred to in the
following agreements:

Comprehensive
Products and Services Agreement, First Supplemental
Comprehensive Agreement and Second Supplemental Comprehensive
Agreement

Our company and CNPC continue to implement the Comprehensive
Products and Services Agreement (Comprehensive
Agreement) entered into on March 10, 2000 for the
provision (i) by our company to CNPC and (ii) by CNPC
Group to our company, of a range of products and services which
may be required and requested from time to time by either party
and/or its subsidiary companies and affiliates. The
Comprehensive Agreement has been amended by the First
Supplemental Comprehensive Agreement and the Second Supplemental
Comprehensive Agreement.

The term of the Comprehensive Agreement was initially ten years
starting from the date when our companys business license
was issued. This term has been amended by the Second
Supplemental Comprehensive Agreement to three years commencing
from January 1, 2006.

During the term of the Comprehensive Agreement, termination of
the product and service implementation agreements described
below may be effected from time to time by the parties to the
product and service implementation agreements providing at least
six months written notice of termination in relation to
any one or more categories of products or services. Further, in
respect of any products or services already contracted to be
provided, termination may not take place until after such
products and services have been provided.

Under the Comprehensive Products and Services Agreement,
products and services to be provided by our company to CNPC
Group include such products as refined products, chemical
products, natural gas, crude oil and such services as relating
to the supply of water, electricity, gas and heating,
quantifying and measuring and quality inspection and other
products and services as may be requested by the CNPC Group for
its own consumption, use or sale from time to time.

More products and services are to be provided by CNPC to our
company, both in terms of quantity and variety, than those to be
provided by our company to CNPC. Products and services to

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be provided by CNPC to our company have been grouped together
and categorized according to the following types of products and
services:




    Construction and technical services,
    Production services,
    Supply of materials services,
    Social services,
    Ancillary services, and
    Financial services.The First Supplemental Comprehensive Agreement dated
June 9, 2005 was entered principally to amend the
definitions of state-prescribed price and
market price in the Comprehensive Agreement in view
of the characteristics of overseas business and to amend the
term of the Comprehensive Agreement to three years. The First
Supplemental Comprehensive Agreement took effect on
December 19, 2005.

The Second Supplemental Comprehensive Agreement entered into by
CNPC and our company on September 1, 2005 provides for
certain new continuing related party transactions between our
company and certain companies in which both our company and CNPC
are shareholders, and where CNPC and/or its subsidiaries and/or
affiliates (individually or together) is/are entitled to
exercise, or control the exercise of, 10% or more of the voting
power at any general meeting of such company.

The Second Supplemental Comprehensive Agreement took effect on
January 1, 2006.



Product and Service Implementation AgreementsAccording to the current arrangements, from time to time and as
required, individual product and service implementation
agreements may be entered into between the relevant service
companies and affiliates of CNPC Group or our company providing
the relevant products or services, as appropriate, and the
relevant members of our company or CNPC Group, requiring such
products or services, as appropriate.

Each product and service implementation agreement will set out
the specific products and services requested by the relevant
party and any detailed technical and other specifications which
may be relevant to those products or services. The product and
service implementation agreements may only contain provisions
which are in all material respects consistent with the binding
principles and guidelines and terms and conditions in accordance
with which such products and services are required to be
provided as contained in the Comprehensive Agreement.

As the product and service implementation agreements are simply
further elaborations on the provision of products and services
as contemplated by the Comprehensive Agreement, they do not as
such constitute new categories of related party transactions.



Land Use Rights Leasing ContractOur company and CNPC continue to implement the Land Use Rights
Leasing Contract entered into on March 10, 2000 under which
CNPC has leased a total of 42,476 parcels of land in connection
with all aspects of the operations and business of our company
covering an aggregate area of approximately 1,145 million
square meters, located throughout the PRC, to our company for a
term of 50 years at an annual fee of
RMB 2 billion. The total fee payable for the lease of
all such property may, after the expiration of ten years from
the effective date of the Land Use Rights Leasing Contract, be
adjusted (to reflect market conditions prevalent at such time of
adjustment,

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including the then prevailing marketing prices, inflation or
deflation, as applicable, and such other factors considered as
important by both parties in negotiating and agreeing to any
such adjustment) by agreement between our company and CNPC. In
addition, any governmental, legal or other administrative taxes
and fees required to be paid in connection with the leased
properties will be borne by CNPC. However, any additional amount
of such taxes payable as a result of changes in the PRC
government policies after the effective date of the contract
shall be shared proportionately on a reasonable basis between
CNPC and our company.



Buildings Leasing Contract and Buildings Supplementary
    Leasing AgreementOur company and CNPC continue to implement the Buildings Leasing
Contract entered into on March 10, 2000 in which CNPC has
leased to our company a total of 191 buildings covering an
aggregate of area of 269,770 square meters, located throughout
the PRC for the use by our company for its business operations
including the exploration, development and production of crude
oil, the refining of crude oil and petroleum products, and the
production and sale of chemicals. The 191 buildings were leased
at a price of RMB 145 per square meter per year, that is,
an aggregate annual fee of RMB 39,116,650 for a term of
20 years. Our company is responsible for the payment of any
governmental, legal or other administrative taxes and
maintenance charges in connection with these 191 buildings. The
Building Leasing Contract sets forth the details of the
buildings leased to our company by other member companies within
CNPC group.

Further to the Buildings Leasing Contract mentioned above, our
company entered into a Supplemental Buildings Leasing Agreement
(the Supplemental Buildings Agreement) with CNPC on
September 26, 2002 under which CNPC agrees to lease to our
company an additional 404 buildings covering an aggregate of
442,730 square meters. The increase in the number of units being
leased in the Supplemental Buildings Agreement is primarily
attributed to the expansion of our companys operations
mainly in the areas such as oil and natural gas exploration, the
West-East Gas Pipeline Project and the construction of the
northeast refineries and chemical operation base. The total rent
payable under the Supplemental Buildings Agreement amounts to
RMB 157,439,540 per annum. Our company and CNPC will, based
on changes in their production and operations, and changes in
the market price, adjust the sizes and quantities of buildings
leased under the Buildings Leasing Contract as well as the
Supplemental Buildings Agreement every three years. The
Supplemental Buildings Agreement became effective on
January 1, 2003 and will expire at the same time as the
Buildings Leasing Contract. The terms and conditions of the
Buildings Leasing Contract will, to the extent not contradictory
to the Supplemental Buildings Agreement, remain in full force.



Intellectual Property Licensing ContractsOur company and CNPC continue to implement the three
intellectual property licensing contracts entered into on
March 10, 2000, being the Trademark Licensing Contract, the
Patent and Know-how Licensing Contract and the Computer Software
Licensing Contract. Pursuant to these licensing contracts, CNPC
has granted our company the exclusive right to use certain
trademarks, patents, know-how and computer software of CNPC at
no cost. These intellectual property rights relate to the assets
and businesses of CNPC which were transferred to our company
pursuant to the restructuring.



Contract for the Transfer of Rights under Production
    Sharing ContractsOur company and CNPC continue to implement the Contract for the
Transfer of Rights under Production Sharing Contracts dated
March 10, 2000. As part of the restructuring, CNPC
transferred to our company relevant rights and obligations under
23 Production Sharing Contracts entered into with a number of
international oil and natural gas companies, except for the
rights and obligations relating to CNPCs supervisory
functions.

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Guarantee of Debts ContractOur company and CNPC continue to implement the Guarantee of
Debts Contract entered into on March 10, 2000, pursuant to
which all of the debts of CNPC relating to the assets
transferred to our company in the restructuring were also
transferred to, and assumed by, our company.

In the Guarantee of Debts Contract, CNPC has agreed to guarantee
certain debts of our company at no cost. As of December 31,
2006, the total amount guaranteed was RMB 597 million.

As each of the applicable percentage ratio(s) (other than the
profits ratio) in respect of the Trademark Licensing Contract,
the Patent and Know-how Licensing Contract, the Computer
Software Licensing Contract, the Contract for the Transfer of
Rights under Production Sharing Contracts and the Guarantee of
Debts Contract is less than 0.1%, these transactions are
exempted from the reporting, announcement and independent
shareholders approval requirements under Chapter 14A
of the Listing Rules. The Directors believe that these
continuing transactions had been entered into in the ordinary
course of business for the benefits of our company, and are in
the interests of the shareholders as a whole.



New Continuing Related Party Transactions with CNPC
    E&DThe following new continuing related party transactions arose as
a result of the completion of the acquisition of the 67% equity
interest in PKZ on December 28, 2006, which was set forth
on the announcement dated August 23, 2006:




    the provision of production services by CNPC Group to our
    company;
    the provision of construction and technical services such as
    exploration technology services by CNPC Group to our company;
    the provision of materials supply services by CNPC Group to our
    company.

Continuing Related Party Transactions with CNPC
    (HK)As part of the restructuring of CNPC and in preparation for the
listing of our company on HKSE, and as disclosed in our
companys prospectus dated March 27, 2000, CNPC and
our company entered into the Contract for the Transfer of Rights
under Production Sharing Contracts whereby the relevant rights
and obligations (other than the supervisory functions related to
CNPCs role as representative of the PRC government) of
CNPC under certain contracts, including the Blocks 9-1 to 9-5 of
the Xinjiang Karamay Oilfield Petroleum Contract dated
July 1, 1996, entered into between CNPC and Hafnium Limited
(Xinjiang Contract), and the Leng Jiapu Area
Petroleum Contract dated December 30, 1997, entered into
between CNPC and Beckbury International Limited (Liaohe
Contract), were novated to our company.

CNPC (HK) is a 51.99% owned subsidiary of CNPC. CNPC is
also our companys controlling shareholder which holds
approximately 88.21% of the issued share capital of our company.
Upon the effective novation by CNPC to our company of the above
interest in the PRC Oil Production Sharing Contracts (the
Xinjiang Contract and the Liaohe Contract), certain transactions
pursuant to the PRC Oil Production Sharing Contracts constitute
continuing related party transactions between our company and
CNPC (HK).

Summary of the major terms and conditions of these continuing
related party transactions under the Xinjiang Contract and the
Liaohe Contract are as follows:



(1) Production and development cost sharing between
    our company and CNPC (HK):For both Leng Jiapu Oilfield
    and blocks 9-1 to 9-5 of the Karamay Oilfield, our company and
    CNPC (HK) share the development costs for these oilfields
    as to 46% by our company and 54% by CNPC (HK), and share the oil
    and natural gas produced from these oilfields, as to 30% by our
    company and 70% by CNPC (HK).

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(2) Provision of assistance by our company to CNPC
    (HK):Our company shall provide assistance to CNPC (HK),
    including: (i) leasing warehouses, terminal facilities,
    barges, pipeline and land, etc.; (ii) obtaining approvals
    necessary for the conduct of the petroleum operations; and
    (iii) obtaining office space, office supplies,
    transportation and communication facilities. For such
    assistance, CNPC (HK) will pay an annual assistance fee of
    US$50,000 to each of blocks
    9-1 to
    9-5 of the Karamay
    Oilfield and the Leng Jiapu Oilfield. The amount of such fee was
    determined after negotiations, and has taken into account the
    actual circumstances and conditions, including the scope of the
    projects and the level of demand for such assistance. This fee
    shall be accounted for as operating costs and shared by our
    company and CNPC (HK) in accordance with the procedures
    described in the Xinjiang Contract and the Liaohe Contract.(3) Payment of training fees:In the course
    of development and operations of each oilfield, CNPC
    (HK) shall pay our company an amount of US$50,000 annually
    for the training of personnel carried out by our company for
    each of the blocks 9-1 to 9-5 of the Karamay Oilfield and the
    Leng Jiapu Oilfield. The amount of such fee was determined after
    negotiations, and has taken into account the actual
    circumstances and conditions, including the scope of the
    projects and the level of demand for training.(4) Sale of crude oil by CNPC (HK) to our
    company:CNPC (HK) has the right to deliver its
    share of oil production from each of blocks 9-1 to 9-5 of the
    Karamay Oilfield and the Leng Jiapu Oilfield to a destination of
    its choice, except for destinations which infringe on the
    political interests of the PRC. However, given the
    transportation costs and the prevailing oil prices, the only
    likely purchaser of the oil production attributable to CNPC
    (HK) from each of blocks
    9-1 to
    9-5 of the Karamay
    Oilfield and the Leng Jiapu Oilfield is CNPC or its affiliates,
    including our company, which will accept delivery of oil
    produced in blocks 9-1
    to 9-5 of the Karamay
    Oilfield and the Leng Jiapu Oilfield at the market price. Since
    the signing of the PRC Oil Production Sharing Contracts,
    CNPC (HK) has sold all of its share of the oil production
    to CNPC or its affiliates, including our company. As far as the
    Board of Directors is aware, CNPC (HK) intends to continue
    with this arrangement. There is no contractual obligation upon
    our company to purchase oil produced from blocks
    9-1 to
    9-5 of the Karamay
    Oilfield and the Leng Jiapu Oilfield, although, from a
    commercial perspective, our company intends to continue to
    accept part of the deliveries. The price of various grades of
    crude oil sold shall be set either with reference to the price
    approved by the relevant PRC authorities, or as determined with
    reference to the prevailing fair market price for transactions
    of crude oil of a similar quality in the major oil markets. This
    will be adjusted to take into account the terms of
    transportation, payment and other terms.The waiver in respect of the above continuing related party
    transactions between our company and CNPC (HK) granted by
    the HKSE expired on December 31, 2006. Our company made an
    announcement on August 23, 2006 in respect of the reporting
    and announcement obligations for these continuing related party
    transaction for the period from January 1, 2007 to
    December 31, 2008.

Continuing Related Party Transactions with CRMSC and
    Beijing GasOur company entered into a Products and Services Agreement with
Beijing Gas on September 1, 2005. Pursuant to the
agreement, our company shall continuously provide products and
services to Beijing Gas, including the provision of natural gas
and natural gas related transmission services. The agreement was
effective from January 1, 2006.

On September 1, 2005, our company entered into the CRMSC
Products and Services Agreement with CRMSC. Under the CRMSC
Products and Services Agreement, products and services to be
continuously provided by our company to CRMSC include, among
other things, refined products (such as gasoline, diesel and
other petroleum products). The term of the CRMSC Products and
Services Agreement is three years commencing from
January 1, 2006.

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During the term of the CRMSC Products and Services Agreement,
the product and service implementation agreements may be
terminated from time to time by the contracting parties
providing at least six months written notice of
termination in relation to any one or more categories of
products or services. Further, in respect of any products or
services already contracted to be provided, termination may not
take place until after such products and services have been
provided.





Loans or Guarantees with Related Parties

As of December 31, 2006, we had unsecured short-term and
long-term loans from CP Finance in an aggregate amount of
RMB 27,184 million. The average annual interest rate
on these loans is 4.98%.





ITEM 8  FINANCIAL INFORMATION





Financial Statements

See pages F-1 to F-78 following Item 19.

Dividend Policy

Our board of directors will declare dividends, if any, in
Renminbi with respect to H shares on a per share basis and will
pay such dividends in HK dollars. Any final dividend for a
financial year shall be subject to shareholders approval.
The Bank of New York will convert the HK dollar dividend
payments and distribute them to holders of ADSs in U.S. dollars,
less expenses of conversion. The holders of the H shares will
share proportionately on a per share basis in all dividends and
other distributions declared by our board of directors.

The declaration of dividends is subject to the discretion of our
board of directors. Our board of directors will take into
account factors including the following:




    general business conditions;
    our financial results;
    capital requirements;
    contractual restrictions on the payment of dividends by us to
    our shareholders or by our subsidiaries to us;
    our shareholders interests;
    the effect on our debt ratings; and
    other factors our board of directors may deem relevant.We may only distribute dividends after we have made allowance
for:




    recovery of losses, if any;
    allocations to the statutory common reserve fund; and
    allocations to a discretionary common reserve fund if approved
    by our shareholders.The allocation to the statutory funds is 10% of our net income
determined in accordance with PRC accounting rules. Under PRC
law, our distributable earnings will be equal to our net income
determined in accordance with PRC accounting rules or IFRS,
whichever is lower, less allocations to the statutory and
discretionary funds.

Subject to the above and to ensure that our dividend policy is
consistent with that of major international oil and gas
companies, we currently expect that we will distribute as
dividends

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approximately 40% to 50% of our reported net income for all
years commencing on or after January 1, 2000. We believe
that our dividend policy strikes a balance between two important
goals:




    providing our shareholders with a competitive return on
    investment; and
    assuring sufficient reinvestment of profits to enable us to
    achieve our strategic objectives.A dividend of RMB 0.202806 per H share (inclusive of
applicable tax) for the six months ended June 30, 2006 was
paid to our shareholders on September 26, 2006. The board
of directors proposed to distribute the final dividend of
RMB 0.154699 per H share (inclusive of applicable tax)
which was calculated on the basis of the balance between 45% of
our net income for the year ended December 31, 2006 and the
interim dividend for 2006 which was paid on September 26,
2006. The final dividend to be paid is subject to approval by
the annual shareholders general meeting to be held on
May 16, 2007. The final dividend will be paid around
June 1, 2007.





Significant Changes

None.

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ITEM 9  THE OFFER AND LISTING





Nature of the Trading Market and Market Price Information

Our ADSs, each representing 100 H shares, par value RMB
1.00 per H share, have been listed and traded on the New
York Stock Exchange since April 6, 2000 under the symbol
PTR. Our H shares have been listed and traded
on the Hong Kong Stock Exchange since April 7, 2000. In
September 2005, our company issued an additional 3,196,801,818 H
shares. CNPC also sold 319,680,182 state-owned shares it
held concurrently with our Companys issue of new H shares
in September 2005. The New York Stock Exchange and the Hong Kong
Stock Exchange are the principal trading markets for our ADSs
and H shares, respectively.

As of December 31, 2006, there were 21,098,900,000 H shares
issued and outstanding. As of December 31, 2006, there were
303 registered holders of American depositary receipts
evidencing 31,661,230 ADSs. The depositary of the ADSs is The
Bank of New York.

The high and low closing sale prices of the H shares on the Hong
Kong Stock Exchange and of the ADSs on the New York Stock
Exchange for each quarterly period from 2002 through 2007
(through April 30, 2007) are set forth below.

|     |                |           |  |       |               |  |  |       |  |  |     |        |  |  |  |        | 
|---- | -------------- | --------- |  | ----- | ------------- |  |  | ----- |  |  | --- | ------ |  |  |  | ------ | 
|     |                | Price per |  |       |              
|     |                | H share   |  |       | Price per ADS | 
|     |                |           |  |       |               | 
|     |                | High      |  |       | Low           |  |  | High  |  |  | Low |       
|     |                |           |  |       |               |  |  |       |  |  |     |       
|     |                | (HK$)     |  |       | (US$)         | 
|2002 |                |           |  |       |               |  |  |       |  |  |     |        |  |  |  |       
|     | First quarter  |           |  | 1.62  |               |  |  | 1.39  |  |  |     | 21.07  |  |  |  | 18.03  | 
|     | Second quarter |           |  | 1.75  |               |  |  | 1.52  |  |  |     | 22.40  |  |  |  | 19.23  | 
|     | Third quarter  |           |  | 1.72  |               |  |  | 1.53  |  |  |     | 21.72  |  |  |  | 19.25  | 
|     | Fourth quarter |           |  | 1.57  |               |  |  | 1.44  |  |  |     | 20.75  |  |  |  | 18.40  | 
|2003 |                |           |  |       |               |  |  |       |  |  |     |        |  |  |  |       
|     | First quarter  |           |  | 1.70  |               |  |  | 1.55  |  |  |     | 21.61  |  |  |  | 19.10  | 
|     | Second quarter |           |  | 2.38  |               |  |  | 1.62  |  |  |     | 30.82  |  |  |  | 20.94  | 
|     | Third quarter  |           |  | 2.80  |               |  |  | 2.15  |  |  |     | 35.89  |  |  |  | 27.67  | 
|     | Fourth quarter |           |  | 4.45  |               |  |  | 2.60  |  |  |     | 57.05  |  |  |  | 33.75  | 
|2004 |                |           |  |       |               |  |  |       |  |  |     |        |  |  |  |       
|     | First quarter  |           |  | 4.85  |               |  |  | 3.75  |  |  |     | 63.70  |  |  |  | 47.53  | 
|     | Second quarter |           |  | 4.00  |               |  |  | 3.20  |  |  |     | 50.96  |  |  |  | 41.63  | 
|     | Third quarter  |           |  | 4.175 |               |  |  | 3.60  |  |  |     | 53.76  |  |  |  | 45.98  | 
|     | Fourth quarter |           |  | 4.375 |               |  |  | 4.075 |  |  |     | 56.60  |  |  |  | 52.22  | 
|2005 |                |           |  |       |               |  |  |       |  |  |     |        |  |  |  |       
|     | First quarter  |           |  | 5.10  |               |  |  | 4.025 |  |  |     | 65.36  |  |  |  | 51.65  | 
|     | Second quarter |           |  | 5.85  |               |  |  | 4.675 |  |  |     | 74.65  |  |  |  | 59.71  | 
|     | Third quarter  |           |  | 7.35  |               |  |  | 5.90  |  |  |     | 94.50  |  |  |  | 74.95  | 
|     | Fourth quarter |           |  | 6.50  |               |  |  | 5.65  |  |  |     | 83.70  |  |  |  | 72.70  | 
|2006 |                |           |  |       |               |  |  |       |  |  |     |        |  |  |  |       
|     | First quarter  |           |  | 8.10  |               |  |  | 6.35  |  |  |     | 104.95 |  |  |  | 83.50  | 
|     | Second quarter |           |  | 9.55  |               |  |  | 7.10  |  |  |     | 122.75 |  |  |  | 90.63  | 
|     | Third quarter  |           |  | 9.09  |               |  |  | 8.17  |  |  |     | 117.20 |  |  |  | 104.60 | 
|     | Fourth quarter |           |  | 11.12 |               |  |  | 8.12  |  |  |     | 142.12 |  |  |  | 104.95 | 
|2006 |                |           |  |       |               |  |  |       |  |  |     |        |  |  |  |       
|     | November       |           |  | 9.90  |               |  |  | 8.66  |  |  |     | 128.10 |  |  |  | 110.74 | 
|     | December       |           |  | 11.12 |               |  |  | 9.91  |  |  |     | 142.12 |  |  |  | 128.10 | 
|2007 |                |           |  |       |               |  |  |       |  |  |     |        |  |  |  |       
|     | January        |           |  | 11.08 |               |  |  | 9.39  |  |  |     | 137.90 |  |  |  | 120.75 | 
|     | February       |           |  | 9.73  |               |  |  | 9.11  |  |  |     | 124.70 |  |  |  | 114.25 | 
|     | March          |           |  | 9.27  |               |  |  | 8.57  |  |  |     | 118.40 |  |  |  | 109.55 | 
|     | April          |           |  | 9.26  |               |  |  | 8.90  |  |  |     | 118.80 |  |  |  | 112.14 | 



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ITEM 10  ADDITIONAL INFORMATION





Memorandum and Articles of Association

Our Articles of Association Currently in Effect

The following is a summary based on the significant provisions
of our articles of association currently in effect, which is
filed with the Commission as an exhibit to this annual report on
Form 20-F. We
hereby incorporate by reference the relevant exhibit to this
annual report.



Enforceability of Shareholders RightsOur articles of association provide that all differences or
claims




    between a holder of H shares and us;
    between a holder of H shares and any of our directors,
    supervisors, general managers, deputy general managers or other
    senior officers; or
    between a holder of H shares and a holder of State-owned shares,
    arising from any provision of the articles of association, any
    right or obligation conferred or imposed by the PRC Company Law
    or any other relevant law or administrative regulation which
    concerns our affairs must, with certain exceptions, be referred
    to arbitration at either the China International Economic and
    Trade Arbitration Commission in the PRC or the Hong Kong
    International Arbitration Center. Our articles of association
    provide that such arbitration will be final and conclusive.

Restrictions on Transferability and the Share
    RegisterThe articles of association provide that PRC investors are not
entitled to be registered as holders of H shares.

As provided in the articles of association, we may refuse to
register a transfer of H shares unless:




    any relevant transfer fee is paid;
    the instrument of transfer is accompanied by the share
    certificates to which it relates, or such other evidence is
    given as may be reasonably necessary to show the right of the
    transferor to make the transfer;
    the instrument of transfer is in respect of one class of shares
    only; and
    the transfer is conducted in accordance with the laws and
    administrative regulations of or required by the securities
    exchanges on which the shares are listed.We are required to keep a register of our shareholders which
shall be comprised of various parts, including one part which is
to be maintained in Hong Kong in relation to H shares to be
listed on the Hong Kong Stock Exchange.



DividendsWe may distribute dividends twice a year, with the final
dividend for any financial year being subject to the approval of
the shareholders by way of an ordinary resolution. The articles
of association allow for distribution of dividends in the form
of cash or shares.

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Dividends may only be distributed, however, after allowance has
been made for:




    recovery of losses, if any;
    allocations to the statutory common reserve fund;
    allocations to the statutory common welfare fund; and
    allocations to a discretionary common reserve fund if approved
    by the shareholders.The minimum and maximum aggregate allocations to the statutory
funds are 15% and 20%, respectively, of our net income
determined in accordance with PRC accounting rules.

The articles of association require us to appoint on behalf of
the holders of H shares a receiving agent which is registered as
a trust corporation under the Trustee Ordinance of Hong Kong to
receive dividends declared by us in respect of the H shares on
behalf of such shareholders. The articles of association require
that cash dividends in respect of H shares be declared in
Renminbi and paid by us in HK dollars.



Voting Rights and Shareholders MeetingsOur board of directors will convene a shareholders annual
general meeting once every year and within six months from
the end of the preceding financial year. Our board will convene
an extraordinary general meeting within two months of the
occurrence of any one of the following events:




    where the number of directors is less than the number stipulated
    in the PRC Company law or two-thirds of the number specified in
    our articles of association;
    where our unrecovered losses reach one-third of the total amount
    of our share capital;
    where shareholders holding 10% or more of our issued and
    outstanding voting shares request in writing the convening of an
    extraordinary general meeting; or
    where our board deems necessary or our board of supervisors so
    request.Meetings of a special class of shareholders must be called in
certain enumerated situations when the rights of the holders of
such class of shares may be modified or adversely affected, as
discussed below. Resolutions proposed by shareholders holding 5%
or more of the total number of voting shares will be included in
the agenda for the relevant annual general meeting if they are
matters which fall within the scope of the functions and powers
of shareholders in general meeting.

All shareholders meetings must be convened by our board by
written notice given to shareholders not less than 45 days
before the meeting. Based on the written replies received by us
20 days before a shareholders meeting, we will
calculate the number of voting shares represented by
shareholders who have indicated that they intend to attend the
meeting. Where the number of voting shares represented by those
shareholders amount to more than one-half of our total voting
shares, we may convene the shareholders general meeting,
regardless of the number of shareholders who actually attend.
Otherwise, we will, within five days, inform the shareholders
again of the motions to be considered and the date and venue of
the meeting by way of public announcement. After the
announcement is made, the shareholders meeting may be
convened. The accidental omission by us to give notice of a
meeting to, or the non-receipt of notice of a meeting by, a
shareholder will not invalidate the proceedings at that
shareholders meeting.

Shareholders at meetings have the rights, among other things, to
approve or reject our profit distribution plans, the annual
budget, the financial statements, an increase or decrease in
share capital, the issuance of debentures, the merger or
liquidation of PetroChina and any amendment to our articles of
association. In addition, the rights of a class of shareholders
may not be modified or abrogated, unless approved by a special
resolution of all shareholders at a general shareholders
meeting and by a special resolution of shareholders of that
class of shares at a separate meeting.

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Our articles of association enumerate, without limitation,
certain amendments which would be deemed to be a modification or
abrogation of the rights of a class of shareholders, including
increasing or decreasing the number of shares of a class
disproportionate to increases or decreases of other classes of
shares, removing or reducing rights to receive dividends in a
particular currency or creating shares with voting or equity
rights superior to shares of such class.

Each H share is entitled to one vote on all matters submitted to
a vote of our shareholders at all shareholders meetings,
except for meetings of a special class of shareholders where
only holders of shares of the affected class are entitled to
vote on the basis of one vote per share of the affected class.
When any shareholder is required to abstain from voting on any
particular resolution or restricted to voting only for or
against any particular resolution under the Listing Rules, any
votes cast by or on behalf of such shareholder in contravention
of such requirement or restriction shall not be counted.

Shareholders are entitled to attend and vote at meetings either
in person or by proxy. Proxies must be in writing and deposited
at our legal address, or such other place as is specified in the
meeting notice, not less than 24 hours before the time for
holding the meeting at which the proxy proposes to vote or the
time appointed for the passing of the relevant resolutions. When
the instrument appointing a proxy is executed by the
shareholders
attorney-in-fact, such
proxy when deposited must be accompanied by a notarially
certified copy of the relevant power of attorney or other
authority under which the proxy was executed.

Except for those actions discussed below which require
supermajority votes, resolutions of the shareholders are passed
by a simple majority of the voting shares held by shareholders
who are present in person or by proxy. Special resolutions must
be passed by more than two-thirds of the voting rights
represented held by shareholders who are present in person or by
proxy.

The following decisions must be adopted by special resolution:




    an increase or reduction of our share capital or the issue of
    shares of any class, warrants and other similar securities;
    the issue of our debentures;
    our division, merger, dissolution and liquidation;
    amendments to our articles of association; and
    any other matters considered by the shareholders in a general
    meeting and which they have resolved by way of an ordinary
    resolution to be of a nature which may have a material impact on
    us and should be adopted by special resolution.All other actions taken by the shareholders, including the
appointment and removal of our directors and independent
auditors and the declaration of normal dividend payments or
stock distributions, will be decided by an ordinary resolution
of the shareholders.

In addition, certain amendments to the articles of association
require the approval and consent of the relevant PRC authorities.

Any shareholder resolution which is in violation of any laws or
regulations of the PRC or the articles of association will be
null and void.



Board of DirectorsDirectors will be elected by shareholders at a general meeting.
Because the shares do not have cumulative voting rights, a
holder of a majority of our shares is able to elect all of the
directors. Directors are elected for a term of three years.

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Meetings of the board of directors shall be held at least four
times every year and shall be convened by the Chairman of the
board of directors, who shall notify all directors 14 days
before each meeting.

Our board of directors is accountable to the shareholders in
general meetings and exercises the following functions and
powers to:



(a) be responsible for the convening of shareholders
    meetings and reporting on its work to the shareholders at such
    meetings;(b) implement the resolutions passed by the shareholders in
    general meetings;(c) determine our business plans and investment proposals;(d) formulate our annual preliminary and final budgets;(e) formulate our profit distribution proposal and loss
    recovery proposals;(f) formulate proposals for the increase or reduction of
    our registered capital and the issuance of our debentures;(g) draw up plans for our merger, division or dissolution;(h) decide on our internal management structure;(i) appoint or remove our president and to appoint or
    remove the vice presidents and other senior officers, including
    the financial controller, based on the recommendation of the
    general manager, and to decide on their remuneration;(j) formulate our basic management system;(k) formulate proposals for any amendment of our articles
    of association; and(l) exercise any other powers conferred by the shareholders
    in general meetings.Except for items (f), (g) and (k), which require the
affirmative vote of more than two-thirds of all of our
directors, resolutions on any other items may be approved by the
affirmative vote of a simple majority of our directors.

A director shall abstain from voting on any resolutions of the
board of directors if he/she or any of his/her associates is
interested therein, and he/she shall not be counted in the
quorum of the directors for such meetings. The board of
directors shall transact its businesses by convening a board
meeting instead of by circulation of papers. If an independent
non-executive director or any of its associates does not have
any significant interest in the matters to be resolved in a
board meeting, he/she shall attend the board meeting. For
purpose of this paragraph, the associate herein has the same
meaning ascribed to it in the Listing Rules. If any listing
rules of other stock exchanges on which our stocks listed have
stricter stipulations on the abstention of voting by directors,
then such stipulations shall be followed.

In addition to obligations imposed by laws, administrative
regulations or the listing rules of the stock exchanges on which
our H shares are listed, the articles of association place on
each of our directors, supervisors, president, vice presidents
and any other senior officers a duty to each shareholder, in the
exercise of our functions and powers entrusted to such person:




    not to cause us to exceed the scope of business stipulated in
    our business license;
    to act honestly in our best interests;
    not to expropriate our property in any way, including, without
    limitation, usurpation of opportunities which benefit
    us; and

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
    not to expropriate the individual rights of shareholders,
    including, without limitation, rights to distributions and
    voting rights, save and except according to a restructuring
    which has been submitted to the shareholders for their approval
    in accordance with the articles of association.Our articles of association further place on each of our
directors, supervisors, president, vice presidents and senior
officers:




    a duty, in the exercise of such persons powers and
    discharge of such persons duties, to exercise the care,
    diligence and skill that a reasonably prudent person would
    exercise in comparable circumstances;
    a fiduciary obligation, in the exercise of our powers entrusted
    to him or her, not to place himself or herself in a position
    where his or her duty to us and his or her interests may
    conflict; and
    a duty not to direct a person or entity related or connected to
    a director, supervisor, president, vice president or senior
    officer in certain relationships enumerated in the articles of
    association to act in a manner which such director, supervisor,
    president, vice president or senior officer is prohibited from
    doing.Subject to compliance with all relevant laws and administrative
regulations, the shareholders in a general meeting may by
ordinary resolution remove any director before the expiration of
his term of office. Subject to certain qualifications, a
director, supervisor, president, vice president or other senior
officer may be relieved of liability for a specific breach of
his or her duties by the informed consent of shareholders in a
general meeting.

Board of Supervisors

The board of supervisors is composed of seven members appointed
to monitor our financial matters:




    to verify financial reports and other financial information
    which have been prepared by the board and which are proposed to
    be presented at shareholders meetings, and
    to oversee our directors, president, vice presidents and other
    senior officers in order to prevent such persons from abusing
    their authority or infringing upon our interest.The rights of the board of supervisors are generally limited to
investigating and reporting to shareholders and management on
our affairs and to calling shareholders extraordinary
general meetings.

One member of the board of supervisors will be an employee
representative appointed by our employees. The remaining members
will be appointed by the shareholders in a general meeting. One
member of the board of supervisors shall be the chairman. A
member of the board of supervisors may not be a director, the
president, a vice president or the chief financial officer. The
term of office of each member of the board of supervisors is
three years, including the term of office of the chairman of the
board of supervisors, both of which terms of office are
renewable upon re-election and re-appointment. Reasonable
expenses incurred by the board of supervisors in carrying out
its duties will be paid by us.

The board of supervisors is accountable, and will report, to the
shareholders in the shareholders general meetings.



Restrictions on Large or Controlling ShareholdersOur articles of association provide that, in addition to any
obligation imposed by laws and administrative regulations or
required by the listing rules of the stock exchanges on which our

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H shares are listed, a controlling shareholder shall not
exercise his voting rights in a manner prejudicial to the
interests of the shareholders generally or of some part of the
shareholders:




    to relieve a director or supervisor from his or her duty to act
    honestly in our best interests;
    to approve the expropriation by a director or supervisor of our
    assets in any way, including, without limitation, opportunities
    which may benefit us; or
    to approve the expropriation by a director or supervisor of the
    individual rights of other shareholders, including, without
    limitation, rights to distributions and voting rights, except
    according to a restructuring of our company which has been
    submitted for approval by the shareholders in a general meeting
    in accordance with our articles of association.A controlling shareholder, however, will not be precluded by our
articles of association or any laws and administrative
regulations or the listing rules of the stock exchanges on which
our H shares are listed from voting on these matters.

A controlling shareholder is defined by our articles of
association as any person who acting alone or in concert with
others:




    is in a position to elect more than one-half of the board of
    directors;
    has the power to exercise, or to control the exercise of, 30% or
    more of our voting rights;
    holds 30% or more of our issued and outstanding shares; or
    has de facto control of us in any other way.Amended Articles of Association Pending for Approval

In November 2006, our shareholders approved our amended articles
of association at the annual general meeting of shareholders,
which is subject to the applicable regulatory approval and
filing before they become effective. Accordingly, we are still
governed by our current articles of association in effect. We
expect the approval for our amended articles of association to
be granted in due course.

The amended articles of association purports to expand our
business scope to allow us to operate convenient stores in
service stations and provide related services.



Share Capital StructureUpon the completion of our companys global initial public
offering, the aggregate number of common shares of our company
was 175,824,176,000, of which the promoter CNPC held
158,241,758,000 shares, representing 90% of our total share
capital at the time, and H shareholders held
17,582,418,000 shares, representing 10% of our total share
capital at the time.

On September 15, 2005, our company issued 3,196,801,818 new
shares. Concurrently CNPC sold 319,680,182 state-owned
shares it held. Following these transactions, the share capital
structure of our company changed to the following: the number of
common shares is 179,020,977,818, of which CNPC holds
157,922,077,818 shares, representing 88.21% of the total
share capital, and H shareholders hold
21,098,900,000 shares, representing 11.79% of the total
share capital.





Material Contracts

The following contracts, not being contracts in the ordinary
course of business, have been entered into by our company and/or
its subsidiaries within the two years preceding the date of this
annual report and are or may be material.

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
    Share Purchase Agreement in respect of the shares of
    PetroKazakhstan, dated August 23, 2006, between Pervinage
    Holding B.V. (a wholly-owned subsidiary of CNPC E&D) and 819
    Luxembourg S. a r. l. (an indirect wholly-owned subsidiary of
    CNPC);
    Capital Contribution Agreement, dated June 9, 2005, among
    China National Oil and Gas Exploration and Development
    Corporation, Central Asia Petroleum Company Limited, Zhong You
    Kan Tan Kai Fa Company Limited and our company (English
    Translation); and
    Transfer Agreement, dated June 9, 2005, between Zhong You
    Kan Tan Kai Fa Company Limited and our company (English
    Translation).



Exchange Controls

The Renminbi currently is not a freely convertible currency. We
receive most of our revenues in Renminbi. A portion of our
Renminbi revenues must be converted into other currencies to
meet our foreign currency obligations. We have substantial
requirements for foreign currency, including:




    debt service on foreign currency-denominated debt;
    purchases of imported equipment and materials; and
    payment of any dividends declared in respect of the H shares.Under the existing foreign exchange regulations in China, we may
undertake current account foreign exchange transactions,
including the payment of dividends, without prior approval from
the State Administration of Foreign Exchange by producing
commercial documents evidencing such transactions, provided that
they are processed through Chinese banks licensed to engage in
foreign exchange transactions. The PRC government has stated
publicly that it intends to make the Renminbi freely convertible
in the future. However, uncertainty exists as to whether the PRC
government may restrict access to foreign currency for current
account transactions if foreign currency becomes scarce in the
PRC.

Foreign exchange transactions under the capital account,
including principal payments with respect to foreign
currency-denominated obligations, continue to be subject to
limitations and require the prior approval of the State
Administration of Foreign Exchange. These limitations could
affect our ability to obtain foreign exchange through debt
financing, or to obtain foreign exchange for capital
expenditures.

We have been, and will continue to be, affected by changes in
exchange rates in connection with our ability to meet our
foreign currency obligations and will be affected by such
changes in connection with our ability to pay dividends on the H
shares in Hong Kong dollars and on ADSs in US dollars. We
believe that we have or will be able to obtain sufficient
foreign exchange to continue to satisfy these obligations. We do
not engage in any financial contract or other arrangement to
hedge our currency exposure.

We are not aware of any other PRC laws, decrees or regulations
that restrict the export or import of capital or that affect the
remittance of dividends, interest or other payments to
non-resident holders.





Taxation

The following discussion addresses the main PRC and United
States tax consequences of the ownership of H shares or ADSs
purchased held by the investor as capital assets.

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PRC Taxation



Dividends and Individual InvestorsUnder the Provisional Regulations of China Concerning Questions
of Taxation on Enterprises Experimenting with the Share System
(the Provisional Regulations) and other applicable
tax laws and regulations, dividends paid by PRC companies on
shares experimenting with the share system to individuals are
generally subject to a PRC withholding tax of 20%. However, on
July 21, 1993, the PRC State Administration of Taxation
issued the Notice Concerning the Taxation of Gains on Transfer
and Dividends from Shares (Equities) Received by Foreign
Investment Enterprises, Foreign Enterprises and Foreign
Individuals (the Tax Notice). Under the Tax Notice,
dividends paid by a PRC company to foreign persons with respect
to shares listed on an overseas stock exchange (Overseas
Shares), including the H shares and ADSs, are not subject
to PRC withholding tax for the time being.

The Individual Income Tax Law of the PRC was amended effective
January 1, 1994 and states that it supersedes any
contradictory prior administrative regulation concerning
individual income tax. The amended Individual Income Tax Law can
be interpreted as providing that all foreign individuals are
subject to the 20% withholding tax on dividends paid by a PRC
company on its Overseas Shares unless specifically exempted by
the financial authority of the State Council of the PRC.
However, in a letter dated July 26, 1994 to the former
State Commission for Restructuring the Economic System, the
former State Council Securities Committee and the China
Securities Regulatory Commission, the PRC State Administration
of Taxation restated the exemption. In the event that the letter
is withdrawn, a 20% tax may be withheld on dividends paid to
you, subject to reduction by an applicable tax treaty between
China and the country where you reside. To date, the relevant
tax authorities have not collected withholding tax from dividend
payments on such shares exempted under the Tax Notice.



Dividends and Foreign EnterprisesAccording to the Provisional Regulations and other applicable
tax laws and regulations, dividends paid by PRC companies to
foreign enterprises are ordinarily subject to a PRC withholding
tax levied at a flat rate of 20%. However, according to the Tax
Notice, a foreign enterprise with no permanent establishment in
China receiving dividends paid on Overseas Shares will
temporarily not be subject to the 20% withholding tax. If such
withholding tax becomes applicable in the future, such rate may
still be reduced under relevant tax treaties, if applicable.



Tax TreatiesIf you are a resident or citizen of a country that has entered
into a double-taxation treaty with the PRC, you may be entitled
to a reduction in the amount of tax withheld, if any, imposed on
the payment of dividends. The PRC currently has such treaties
with a number of countries, including but not limited to:




    the United States;
    Australia;
    Canada;
    France;
    Germany;
    Japan;
    Malaysia;
    Singapore;

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
    the United Kingdom; and
    the Netherlands.Under each one of such treaties, the rate of withholding tax
imposed by Chinas taxation authorities is generally
reduced. For example, under the double taxation treaty between
China and the United States, China may tax dividends paid by us
to an eligible U.S. holder up to a maximum of 10% of their
gross amount. Under the treaty, an eligible U.S. holder is
a person who, by reason of domicile, residence, place or head
office, place of incorporation or any other criterion of similar
nature is subject to taxation in the United States, as
applicable under the treatys treaty shopping
provisions.



Capital GainsThe Tax Notice provides that gains realized by foreign
enterprises upon the sale of Overseas Shares which are not held
by entities established by such enterprises in the PRC and gains
realized by foreign individuals upon the sale of Overseas Shares
are not subject to withholding tax for the time being. However,
as far as individuals are concerned, the Individual Income Tax
Law of the PRC, as amended on October 31, 1993 and
effective on January 1, 1994, provides for a capital gains
tax of 20% on individuals. On January 28, 1994, the
Provisions for Implementing the Individual Income Tax Law of the
PRC was promulgated which provides that the measures to levy
individual income tax on the gains realized on the sale of
shares will be made in the future by the Ministry of Finance and
subject to the approval of the State Council. On June 20,
1994, February 9, 1996 and March 30, 1998, the
Ministry of Finance and the State Administration of Taxation
issued notices providing that temporarily no capital gains tax
will be imposed on gains from the sale of shares by individuals.
However, it is uncertain whether the above exemption for foreign
enterprises and foreign individuals will continue to apply or be
renewed in the future. If such exemption does not apply or is
not renewed, and the Tax Notice is found not to apply, as a
holder of H shares or ADSs you may be subject to a 20% tax on
capital gains, unless reduced by an applicable double taxation
treaty.



Additional PRC Tax ConsiderationsUnder the Provisional Regulations of the Peoples Republic
of China Concerning the Stamp Duty, a stamp duty is not imposed
by the PRC on the transfer of shares, such as the H shares or
ADSs, of PRC publicly traded companies that take place outside
of China.

United States Federal Income Taxation

The following is a general discussion of the material United
States federal income tax consequences of purchasing, owning and
disposing of the H shares or ADSs if you are a U.S. holder,
as defined below, and hold the H shares or ADSs as capital
assets within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended, or the Code. This discussion
does not address all of the tax consequences relating to the
purchase, ownership and disposition of the H shares or ADSs, and
does not take into account U.S. holders who may be subject
to special rules including:




    tax-exempt entities;
    certain insurance companies;
    broker-dealers;
    traders in securities that elect to mark to market;
    U.S. holders liable for alternative minimum tax;
    U.S. holders that own 10% or more of our voting stock;

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
    U.S. holders that hold the H shares or ADSs as part of a
    straddle or a hedging or conversion transaction; or
    U.S. holders whose functional currency is not the
    U.S. dollar.This discussion is based on the Code, its legislative history,
final, temporary and proposed United States Treasury regulations
promulgated thereunder, published rulings and court decisions as
in effect on the date hereof, all of which are subject to
change, or changes in interpretation, possibly with retroactive
effect. In addition, this discussion is based in part upon
representations of the depositary and the assumption that each
obligation in the deposit agreement and any related agreements
will be performed according to its terms.

You are a U.S. holder if you are:




    a citizen or resident of the United States for United States
    federal income tax purposes;
    a corporation, or other entity treated as a corporation for
    United States federal income tax purposes, created or organized
    under the laws of the United States or any political subdivision
    thereof;
    an estate the income of which is subject to United States
    federal income tax without regard to its source; or
    a trust:


    subject to the primary supervision of a United States court and
    the control of one or more United States persons; or
    that has elected to be treated as a United States person under
    applicable United States Treasury regulations.If a partnership holds the H shares or ADSs, the tax treatment
of a partner generally will depend on the status of the partner
and the activities of the partnership. If you are a partner of a
partnership that holds the H shares or ADSs, we urge you to
consult your tax advisors regarding the consequences of the
purchase, ownership and disposition of the H shares or ADSs.

This discussion does not address any aspects of United States
taxation other than federal income taxation.

We urge you to consult your tax advisors regarding the United
States federal, state, local and non-United States tax
consequences of the purchase, ownership and disposition of the
H shares or ADSs.

In general, if you hold ADRs evidencing ADSs, you will be
treated as the owner of the H shares represented by the
ADSs. The following discussion assumes that we are not a passive
foreign investment company, or PFIC, as discussed under
PFIC Rules below.



Distributions on the H Shares or ADSsThe gross amount of any distribution (without reduction for any
PRC tax withheld) we make on the H shares or ADSs out of our
current or accumulated earnings and profits (as determined for
United States federal income tax purposes) will be includible in
your gross income as dividend income when the distribution is
actually or constructively received by you, in the case of the
H shares, or by the depositary in the case of ADSs. Subject
to certain limitations, dividends paid to non-corporate
U.S. holders, including individuals, may be eligible for a
reduced rate of taxation if we are deemed to be a
qualified foreign corporation for United
States federal income tax purposes. A qualified foreign
corporation includes:




    a foreign corporation that is eligible for the benefits of a
    comprehensive income tax treaty with the United States that
    includes an exchange of information program; or

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
    a foreign corporation if its stock with respect to which a
    dividend is paid (or ADSs backed by such stock) is readily
    tradable on an established securities market within the United
    States,but does not include an otherwise qualified foreign corporation
that is a PFIC. We believe that we will be a qualified foreign
corporation so long as we are not a PFIC and we are considered
eligible for the benefits of the Agreement between the
Government of the United States of America and the Government of
the Peoples Republic of China for the Avoidance of Double
Taxation and the Prevention of Tax Evasion with Respect to Taxes
on Income, or the Treaty. Our status as a qualified foreign
corporation, however, may change.

Distributions that exceed our current and accumulated earnings
and profits will be treated as a return of capital to you to the
extent of your basis in the H shares or ADSs and thereafter as
capital gain. Any dividend will not be eligible for the
dividends-received deduction generally allowed to United States
corporations in respect of dividends received from United States
corporations. The amount of any distribution of property other
than cash will be the fair market value of such property on the
date of such distribution.

If we make a distribution paid in HK dollars, you will be
considered to receive the U.S. dollar value of the
distribution determined at the spot HK dollar/ U.S. dollar
rate on the date such distribution is received by you or by the
depositary, regardless of whether you or the depositary convert
the distribution into U.S. dollars. Any gain or loss
resulting from currency exchange fluctuations during the period
from the date the dividend payment is includible in your income
to the date you or the depositary convert the distribution into
U.S. dollars will be treated as United States source
ordinary income or loss for foreign tax credit limitation
purposes.

Subject to various limitations, any PRC tax withheld from
distributions in accordance with PRC law, as limited by the
Treaty, will be deductible or creditable against your United
States federal income tax liability. For foreign tax credit
limitation purposes, dividends paid on the H shares or ADSs will
be foreign source income, and for taxable years beginning on or
before December 31, 2006, generally will be treated as
passive income or, in the case of some
U.S. holders, financial services income. For
taxable years beginning after December 31, 2006, such
dividends generally will be treated as passive category
income or, in the case of some U.S. holders,
general category income. You may not be able to
claim a foreign tax credit (and instead may claim a deduction)
for non-United States taxes imposed on dividends paid on the H
Shares or ADSs if you (i) have held the H Shares or ADSs
for less than a specified minimum period during which you are
not protected from risk of loss with respect to such shares, or
(ii) are obligated to make payments related to the
dividends (for example, pursuant to a short sale).



Sale, Exchange or Other DispositionUpon a sale, exchange or other disposition of the H shares or
ADSs, you will recognize a capital gain or loss for United
States federal income tax purposes in an amount equal to the
difference between the U.S. dollar value of the amount
realized and your tax basis, determined in U.S. dollars, in
such H shares or ADSs. Any gain or loss will generally be United
States source gain or loss for foreign tax credit limitation
purposes. Capital gain of certain non-corporate
U.S. holders, including individuals, is generally taxed at
a maximum rate of 15% where the property has been held more than
one year. Your ability to deduct capital losses is subject to
limitations.

If you are paid in a currency other than U.S. dollars, any
gain or loss resulting from currency exchange fluctuations
during the period from the date of the payment resulting from
sale, exchange or other disposition to the date you convert the
payment into U.S. dollars will be treated as United States
source ordinary income or loss for foreign tax credit limitation
purposes.

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##### Table of Contents

PFIC RulesIn general, a foreign corporation is a PFIC for any taxable year
in which, after applying relevant look-through rules with
respect to the income and assets of subsidiaries:




    75% or more of its gross income consists of passive income, such
    as dividends, interest, rents and royalties; or
    50% or more of the average quarterly value of its assets
    consists of assets that produce, or are held for the production
    of, passive income.We believe that we will not meet either of the PFIC tests in the
current or subsequent taxable years and therefore will not be
treated as a PFIC for such periods. However, there can be no
assurance that we will not be a PFIC in the current or
subsequent taxable years.

If we were a PFIC in any taxable year that you held the
H shares or ADSs, you generally would be subject to special
rules with respect to excess distributions made by
us on the H shares or ADSs and with respect to gain from
your disposition of the H shares or ADSs. An excess
distribution generally is defined as the excess of the
distributions you receive with respect to the H shares or
ADSs in any taxable year over 125% of the average annual
distributions you have received from us during the shorter of
the three preceding years, or your holding period for the
H shares or ADSs. Generally, you would be required to
allocate any excess distribution or gain from the disposition of
the H shares or ADSs ratably over your holding period for
the H shares or ADSs. The portion of the excess
distribution or gain allocated to a prior taxable year, other
than a year prior to the first year in which we became a PFIC,
would be taxed at the highest United States federal income tax
rate on ordinary income in effect for such taxable year, and you
would be subject to an interest charge on the resulting tax
liability, determined as if the tax liability had been due with
respect to such particular taxable years. The portion of the
excess distribution or gain that is not allocated to prior
taxable years, together with the portion allocated to the years
prior to the first year in which we became a PFIC, would be
included in your gross income for the taxable year of the excess
distribution or disposition and taxed as ordinary income.

The foregoing rules with respect to excess distributions and
dispositions may be avoided or reduced if you are eligible for
and timely make a valid
mark-to-market
election. If your H shares or ADSs were treated as shares
regularly traded on a qualified exchange for United
States federal income tax purposes and a valid
mark-to-market election
was made, in calculating your taxable income for each taxable
year you generally would be required to take into account as
ordinary income or loss the difference, if any, between the fair
market value and the adjusted tax basis of your H shares or
ADSs at the end of your taxable year. However, the amount of
loss you would be allowed is limited to the extent of the net
amount of previously included income as a result of the
mark-to-market
election. The New York Stock Exchange on which the ADSs are
traded is a qualified exchange for United States federal income
tax purposes.

Alternatively, a timely election to treat us as a qualified
electing fund under Section 1295 of the Code could be made
to avoid the foregoing rules with respect to excess
distributions and dispositions. You should be aware, however,
that if we become a PFIC, we do not intend to satisfy record
keeping requirements that would permit you to make a qualified
electing fund election.

If you own the H shares or ADSs during any year that we are
a PFIC, you must file Internal Revenue Service, or IRS,
Form 8621. We encourage you to consult your own tax advisor
concerning the United States federal income tax consequences of
holding the H shares or ADSs that would arise if we were
considered a PFIC.



Backup Withholding and Information ReportingIn general, information reporting requirements will apply to
dividends in respect of the H shares or ADSs or the
proceeds of the sale, exchange, or redemption of the
H shares or ADSs paid within

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the United States, and in some cases, outside of the United
States, other than to various exempt recipients, including
corporations. In addition, you may, under some circumstances, be
subject to backup withholding with respect to
dividends paid on the H shares or ADSs or the proceeds of
any sale, exchange or transfer of the H shares or ADSs,
unless you




    are a corporation or fall within various other exempt
    categories, and, when required, demonstrate this fact; or
    provide a correct taxpayer identification number on a properly
    completed IRS
    Form W-9 or a
    substitute form, certify that you are exempt from backup
    withholding and otherwise comply with applicable requirements of
    the backup withholding rules.Any amount withheld under the backup withholding rules generally
will be creditable against your United States federal income tax
liability provided that you furnish the required information to
the IRS in a timely manner. If you do not provide a correct
taxpayer identification number you may be subject to penalties
imposed by the IRS.





Significant Differences in Corporate Governance Practices

We have filed a summary of the significant differences in our
corporate governance practices for purposes of
Section 303A.11 of the New York Stock Exchange Listed
Company Manual with the Commission as an exhibit to this annual
report on
Form 20-F and have
disclosed the same on our website, www.petrochina.com.cn,
which may be accessed as follows:



1.
    From our main web page, first click on Investor
    Relations.2.
    Next, click on Corporate Governance Structure.3.
    Finally, click on Significant Differences In Corporate
    Governance Practices For Purposes Of Section 303A.11 of The
    New York Stock Exchange Listed Company Manual.



Documents on Display

You may read and copy documents referred to in this annual
report on
Form 20-F that
have been filed with the U.S. Securities and Exchange
Commission at the Commissions public reference room
located at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for
further information on the public reference rooms and their copy
charges.

The Commission allows us to incorporate by reference
the information we file with the Commission. This means that we
can disclose important information to you by referring you to
another document filed separately with the Commission. The
information incorporated by reference is considered to be part
of this annual report on
Form 20-F.

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##### Table of Contents

ITEM 11  QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

In the normal course of business, we hold or issue various
financial instruments which expose us to interest rate and
foreign exchange rate risks. Additionally, our operations are
affected by certain commodity price movements. We historically
have not used derivative instruments for hedging or trading
purposes. Such activities are subject to policies approved by
our senior management. Substantially all of the financial
instruments we hold are for purposes other than trading. We
regard an effective market risk management system as an
important element of our treasury function and are currently
enhancing our systems. A primary objective of our market risk
management is to implement certain methodologies to better
measure and monitor risk exposures.

The following discussions and tables, which constitute
forward-looking statements that involve risks and
uncertainties, summarize our market-sensitive financial
instruments including fair value, maturity and contract terms.
Such discussions address market risk only and do not present
other risks which we face in the normal course of business.

Interest Rate Risk

Our interest risk exposure arises from changing interest rates.
The tables below provide information about our financial
instruments including various debt obligations that are
sensitive to changes in interest rates. The tables present
principal cash flows and related weighted-average interest rates
at expected maturity dates. Weighted-average variable rates are
based on effective rates as of December 31, 2004, 2005 and
2006. The information is presented in Renminbi equivalents, our
reporting currency.

Foreign Exchange Rate Risk

We conduct our business primarily in Renminbi. However, a
portion of our RMB revenues are converted into other
currencies to meet foreign currency financial instrument
obligations and to pay for imported equipment, crude oil and
other materials. Foreign currency payments for imported
equipment represented 18.6%, 29.1% and 33.6% of our total
payments for equipment in 2004, 2005 and 2006 respectively.
Foreign currency payments for imported crude oil and other
materials represented 9.6%, 3.4% and 5.5% of our total payments
for materials in 2004, 2005 and 2006 respectively.

The Renminbi is not a freely convertible currency. Limitation in
foreign exchange transactions imposed by the PRC government
could cause future exchange rates to vary significantly from
current or historical exchange rates. The tables below provide
information about our financial instruments including foreign
currency denominated debt instruments that are sensitive to
foreign currency exchange rates. The tables below summarize such
information by presenting principal cash flows and related
weighted-average interest rates at expected maturity dates in
RMB equivalents, using the exchange rates in effect as of
December 31, 2004, 2005 and 2006, respectively.

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December 31, 2006

|                                  |                       |                                                  |  |            |           |  |  |        |  |  |      |       |  |      |  |       |            |  |  |       |  |  |          |        |  |       |  |        |  |  |  |         |  |  |  |        | 
|--------------------------------- | --------------------- | ------------------------------------------------ |  | ---------- | --------- |  |  | ------ |  |  | ---- | ----- |  | ---- |  | ----- | ---------- |  |  | ----- |  |  | -------- | ------ |  | ----- |  | ------ |  |  |  | ------- |  |  |  | ------ | 
|                                  |                       |                                                  |  | Percentage |           |  | 
|                                  |                       | Expected maturity date                           |  |            | to total  |  |  |       
|                                  |                       |                                                  |  |            | long-term |  |  | Fair   | 
|                                  |                       | 2007                                             |  |            | 2008      |  |  | 2009   |  |  | 2010 |       |  | 2011 |  |       | Thereafter |  |  | Total |  |  | debt (%) |        |  | value | 
|                                  |                       |                                                  |  |            |           |  |  |        |  |  |      |       |  |      |  |       |            |  |  |       |  |  |          |        |  |       | 
|                                  |                       | (RMB equivalent in millions, except percentages) | 
|Long term debt                    |                       |                                                  |  |            |           |  |  |        |  |  |      |       |  |      |  |       |            |  |  |       |  |  |          |        |  |       |  |        |  |  |  |         |  |  |  |       
|Loan in RMB                       |                       |                                                  |  |            |           |  |  |        |  |  |      |       |  |      |  |       |            |  |  |       |  |  |          |        |  |       |  |        |  |  |  |         |  |  |  |       
|                                  | Fixed rate            |                                                  |  | 62         |           |  |  | 272    |  |  |      |       |  |      |  |       |            |  |  | 1     |  |  |          |        |  |       |  | 335    |  |  |  | 0.60%   |  |  |  | 320    | 
|                                  | Average interest rate |                                                  |  | 4.45%      |           |  |  | 3.83%  |  |  |      |      |  |      |  |      |            |  |  |      |  |  |          |       |  |       |  |       |  |  |  |        |  |  |  |       | 
|                                  | Variable
    rate(1)  |                                                  |  | 13,740     |           |  |  | 7,280  |  |  |      | 5,220 |  |      |  | 1,142 |            |  |  |       |  |  |          | 7,590  |  |       |  | 34,972 |  |  |  | 62.17%  |  |  |  | 34,972 | 
|                                  | Average interest rate |                                                  |  | 5.21%      |           |  |  | 5.35%  |  |  |      | 4.64% |  |      |  | 5.01% |            |  |  |      |  |  |          | 5.07%  |  |       |  |       |  |  |  |        |  |  |  |       | 
|Loan in Euro                      |                       |                                                  |  |            |           |  |  |        |  |  |      |       |  |      |  |       |            |  |  |       |  |  |          |        |  |       |  |        |  |  |  |         |  |  |  |       
|                                  | Fixed rate            |                                                  |  | 17         |           |  |  | 16     |  |  |      | 16    |  |      |  | 16    |            |  |  | 16    |  |  |          | 176    |  |       |  | 257    |  |  |  | 0.46%   |  |  |  | 214    | 
|                                  | Average interest rate |                                                  |  | 2.12%      |           |  |  | 2.12%  |  |  |      | 2.12% |  |      |  | 2.12% |            |  |  | 2.12% |  |  |          | 2.11%  |  |       |  |       |  |  |  |        |  |  |  |       | 
|                                  | Variable rate         |                                                  |  |           |           |  |  |       |  |  |      |      |  |      |  |      |            |  |  |      |  |  |          |       |  |       |  |       |  |  |  |        |  |  |  |       | 
|                                  | Average interest rate |                                                  |  |           |           |  |  |       |  |  |      |      |  |      |  |      |            |  |  |      |  |  |          |       |  |       |  |        |  |  |  |         |  |  |  |        | 
|Loan in United States Dollar      |                       |                                                  |  |            |           |  |  |        |  |  |      |       |  |      |  |       |            |  |  |       |  |  |          |        |  |       |  |        |  |  |  |         |  |  |  |       
|                                  | Fixed rate            |                                                  |  | 568        |           |  |  | 146    |  |  |      | 73    |  |      |  | 41    |            |  |  | 41    |  |  |          | 562    |  |       |  | 1,431  |  |  |  | 2.55%   |  |  |  | 1,200  | 
|                                  | Average interest rate |                                                  |  | 7.69%      |           |  |  | 5.12%  |  |  |      | 3.96% |  |      |  | 1.43% |            |  |  | 1.43% |  |  |          | 1.39%  |  |       |  |       |  |  |  |        |  |  |  |       | 
|                                  | Variable rate         |                                                  |  | 4,541      |           |  |  | 4,042  |  |  |      | 706   |  |      |  | 297   |            |  |  | 82    |  |  |          | 3,217  |  |       |  | 12,885 |  |  |  | 22.91%  |  |  |  | 12,885 | 
|                                  | Average interest rate |                                                  |  | 5.68%      |           |  |  | 6.81%  |  |  |      | 5.95% |  |      |  | 5.79% |            |  |  | 4.72% |  |  |          | 5.77%  |  |       |  |       |  |  |  |        |  |  |  |       | 
|Loan in British Pound             |                       |                                                  |  |            |           |  |  |        |  |  |      |       |  |      |  |       |            |  |  |       |  |  |          |        |  |       |  |        |  |  |  |         |  |  |  |       
|                                  | Fixed rate            |                                                  |  | 49         |           |  |  |       |  |  |      |      |  |      |  |      |            |  |  |      |  |  |          |       |  |       |  | 49     |  |  |  | 0.09%   |  |  |  | 47     | 
|                                  | Average interest rate |                                                  |  | 2.85%      |           |  |  |       |  |  |      |      |  |      |  |      |            |  |  |      |  |  |          |       |  |       |  |       |  |  |  |        |  |  |  |       | 
|Loan in Japanese Yen              |                       |                                                  |  |            |           |  |  |        |  |  |      |       |  |      |  |       |            |  |  |       |  |  |          |        |  |       |  |        |  |  |  |         |  |  |  |       
|                                  | Fixed rate            |                                                  |  | 37         |           |  |  | 21     |  |  |      | 9     |  |      |  | 8     |            |  |  |       |  |  |          |        |  |       |  | 75     |  |  |  | 0.13%   |  |  |  | 78     | 
|                                  | Average interest rate |                                                  |  | 4.25%      |           |  |  | 3.40%  |  |  |      | 2.42% |  |      |  | 2.42% |            |  |  |      |  |  |          |       |  |       |  |       |  |  |  |        |  |  |  |       | 
|                                  | Variable rate         |                                                  |  |           |           |  |  |       |  |  |      |      |  |      |  |      |            |  |  |      |  |  |          |       |  |       |  |       |  |  |  |        |  |  |  |       | 
|                                  | Average interest rate |                                                  |  |           |           |  |  |       |  |  |      |      |  |      |  |      |            |  |  |      |  |  |          |       |  |       |  |       |  |  |  |        |  |  |  |       | 
|Debenture in United States Dollar |                       |                                                  |  |            |           |  |  |        |  |  |      |       |  |      |  |       |            |  |  |       |  |  |          |        |  |       |  |        |  |  |  |         |  |  |  |       
|                                  | Fixed Rate            |                                                  |  | 205        |           |  |  | 20     |  |  |      |      |  |      |  |      |            |  |  | 781   |  |  |          | 343    |  |       |  | 1,349  |  |  |  | 2.40%   |  |  |  | 1,403  | 
|                                  | Average interest rate |                                                  |  | 13.48%     |           |  |  | 15.00% |  |  |      |      |  |      |  |      |            |  |  | 9.50% |  |  |          | 3.00%  |  |       |  |       |  |  |  |        |  |  |  |       | 
|Debenture in RMB                  |                       |                                                  |  |            |           |  |  |        |  |  |      |       |  |      |  |       |            |  |  |       |  |  |          |        |  |       |  |        |  |  |  |         |  |  |  |       
|                                  | Fixed rate            |                                                  |  | 1,388      |           |  |  |       |  |  |      |      |  |      |  |      |            |  |  | 2,000 |  |  |          | 1,500  |  |       |  | 4,888  |  |  |  | 8.69%   |  |  |  | 4,449  | 
|                                  | Average interest rate |                                                  |  | 4.49%      |           |  |  |       |  |  |      |      |  |      |  |      |            |  |  | 3.76% |  |  |          | 4.11%  |  |       |  |       |  |  |  |        |  |  |  |       | 
|                                  |                       |                                                  |  |            |           |  |  |        |  |  |      |       |  |      |  |       |            |  |  |       |  |  |          |        |  |       | 
|                                  | Total                 |                                                  |  | 20,607     |           |  |  | 11,797 |  |  |      | 6,024 |  |      |  | 1,504 |            |  |  | 2,921 |  |  |          | 13,388 |  |       |  | 56,241 |  |  |  | 100.00% |  |  |  | 55,568 | 
|                                  |                       |                                                  |  |            |           |  |  |        |  |  |      |       |  |      |  |       |            |  |  |       |  |  |          |        |  |       | 

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December 31, 2005

|                                  |                       |                                                  |        |            |           |  |        |        |  |  |        |       |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |        | 
|--------------------------------- | --------------------- | ------------------------------------------------ | ------ | ---------- | --------- |  | ------ | ------ |  |  | ------ | ----- |  | ---- | ----- | ----- | ---------- |  | ----- | ----- |  |  | -------- | ----- |  | ----- | ------ | ------ |  |  | ---- | ------ |  |  | ------ | ------ | 
|                                  |                       |                                                  |        | Percentage |           |  |       
|                                  |                       | Expected maturity date                           |        |            | to total  |  |        |       
|                                  |                       |                                                  |        |            | long-term |  |        | Fair   | 
|                                  |                       | 2006                                             |        |            | 2007      |  |        | 2008   |  |  | 2009   |       |  | 2010 |       |       | Thereafter |  |       | Total |  |  | debt (%) |       |  | value |       
|                                  |                       |                                                  |        |            |           |  |        |        |  |  |        |       |  |      |       |       |            |  |       |       |  |  |          |       |  |       |       
|                                  |                       | (RMB equivalent in millions, except percentages) |       
|Long term debt                    |                       |                                                  |        |            |           |  |        |        |  |  |        |       |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|Loan in RMB                       |                       |                                                  |        |            |           |  |        |        |  |  |        |       |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|                                  | Fixed rate            |                                                  |        |           |           |  |        | 66     |  |  |        | 274   |  |      |       |      |            |  |       |      |  |  |          | 1     |  |       |        | 341    |  |  |      | 0.57%  |  |  |        | 323    | 
|                                  | Average interest rate |                                                  |        | 1.53%      |           |  |        | 4.18%  |  |  |        | 3.80% |  |      |       |      |            |  |       |      |  |  |          |      |  |       |        |        |  |  |      |        |  |  |        |        | 
|                                  | Variable
    rate(1)  |                                                  |        | 9,128      |           |  |        | 13,740 |  |  |        | 6,390 |  |      |       | 100   |            |  |       | 911   |  |  |          | 6,000 |  |       |        | 36,269 |  |  |      | 60.54% |  |  |        | 36,269 | 
|                                  | Average interest rate |                                                  |        | 5.18%      |           |  |        | 5.08%  |  |  |        | 5.12% |  |      |       | 5.51% |            |  |       | 4.77% |  |  |          | 4.90% |  |       |        |        |  |  |      |        |  |  |        |        | 
|Loan in Euro                      |                       |                                                  |        |            |           |  |        |        |  |  |        |       |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|                                  | Fixed rate            |                                                  |        | 16         |           |  |        | 16     |  |  |        | 16    |  |      |       | 16    |            |  |       | 15    |  |  |          | 177   |  |       |        | 256    |  |  |      | 0.43%  |  |  |        | 221    | 
|                                  | Average interest rate |                                                  |        | 2.11%      |           |  |        | 2.11%  |  |  |        | 2.11% |  |      |       | 2.11% |            |  |       | 2.11% |  |  |          | 2.11% |  |       |        |        |  |  |      |        |  |  |        |        | 
|                                  | Variable rate         |                                                  |        |           |           |  |        |       |  |  |        |      |  |      |       |      |            |  |       |      |  |  |          |      |  |       |        |       |  |  |      |       |  |  |        |       | 
|                                  | Average interest rate |                                                  |        |           |           |  |        |       |  |  |        |      |  |      |       |      |            |  |       |      |  |  |          |      |  |       |        |        |  |  |      |        |  |  |        |        | 
|Loan in United States Dollar      |                       |                                                  |        |            |           |  |        |        |  |  |        |       |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|                                  | Fixed rate            |                                                  |        | 409        |           |  |        | 621    |  |  |        | 142   |  |      |       | 74    |            |  |       | 43    |  |  |          | 624   |  |       |        | 1,913  |  |  |      | 3.19%  |  |  |        | 1,633  | 
|                                  | Average interest rate |                                                  |        | 6.26%      |           |  |        | 7.56%  |  |  |        | 5.02% |  |      |       | 3.92% |            |  |       | 1.43% |  |  |          | 1.39% |  |       |        |        |  |  |      |        |  |  |        |        | 
|                                  | Variable rate         |                                                  |        | 5,508      |           |  |        | 2,497  |  |  |        | 4,371 |  |      |       | 2,293 |            |  |       | 79    |  |  |          | 1,649 |  |       |        | 16,397 |  |  |      | 27.38% |  |  |        | 16,397 | 
|                                  | Average interest rate |                                                  |        | 5.60%      |           |  |        | 5.42%  |  |  |        | 5.99% |  |      |       | 5.37% |            |  |       | 2.69% |  |  |          | 4.69% |  |       |        |        |  |  |      |        |  |  |        |        | 
|Loan in British Pound             |                       |                                                  |        |            |           |  |        |        |  |  |        |       |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|                                  | Fixed rate            |                                                  |        | 116        |           |  |        | 44     |  |  |        |      |  |      |       |      |            |  |       |      |  |  |          |      |  |       |        | 160    |  |  |      | 0.27%  |  |  |        | 156    | 
|                                  | Average interest rate |                                                  |        | 2.85%      |           |  |        | 2.85%  |  |  |        |      |  |      |       |      |            |  |       |      |  |  |          |      |  |       |        |        |  |  |      |        |  |  |        |        | 
|Loan in Japanese Yen              |                       |                                                  |        |            |           |  |        |        |  |  |        |       |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|                                  | Fixed rate            |                                                  |        | 148        |           |  |        | 39     |  |  |        | 21    |  |      |       | 9     |            |  |       | 9     |  |  |          |      |  |       |        | 226    |  |  |      | 0.38%  |  |  |        | 242    | 
|                                  | Average interest rate |                                                  |        | 4.74%      |           |  |        | 4.84%  |  |  |        | 4.48% |  |      |       | 5.02% |            |  |       | 5.02% |  |  |          |      |  |       |        |        |  |  |      |        |  |  |        |        | 
|                                  | Variable rate         |                                                  |        |           |           |  |        |       |  |  |        |      |  |      |       |      |            |  |       |      |  |  |          |      |  |       |        |       |  |  |      |       |  |  |        |       | 
|                                  | Average interest rate |                                                  |        |           |           |  |        |       |  |  |        |      |  |      |       |      |            |  |       |      |  |  |          |      |  |       |        |        |  |  |      |        |  |  |        |        | 
|Debenture in United States Dollar |                       |                                                  |        |            |           |  |        |        |  |  |        |       |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|                                  | Fixed rate            |                                                  |        |           |           |  |        |       |  |  |        | 179   |  |      |       |      |            |  |       |      |  |  |          | 1,304 |  |       |        | 1,483  |  |  |      | 2.48%  |  |  |        | 1,509  | 
|                                  | Average interest rate |                                                  |        |           |           |  |        |       |  |  |        | 15%   |  |      |       |      |            |  |       |      |  |  |          | 8.25% |  |       |        |        |  |  |      |        |  |  |        |        | 
|Debenture in RMB                  |                       |                                                  |        |            |           |  |        |        |  |  |        |       |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|                                  | Fixed rate            |                                                  |        |           |           |  |        | 1,350  |  |  |        |      |  |      |       |      |            |  |       |      |  |  |          | 1,500 |  |       |        | 2,850  |  |  |      | 4.76%  |  |  |        | 2,664  | 
|                                  | Average interest rate |                                                  |        |           |           |  |        |       |  |  |        |      |  |      |       |      |            |  |       |      |  |  |          | 4.11% |  |       |        |        |  |  |      |        |  |  |        |        | 
|                                  |                       |                                                  |        |            |           |  |        |        |  |  |        |       |  |      |       |       |            |  |       |       |  |  |          |       |  |       |       
|Total                             |                       |                                                  | 15,325 |            |           |  | 18,373 |        |  |  | 11,393 |       |  |      | 2,492 |       |            |  | 1,057 |       |  |  | 11,255   |       |  |       | 59,895 |        |  |  | 100% |        |  |  | 59,414 |       
|                                  |                       |                                                  |        |            |           |  |        |        |  |  |        |       |  |      |       |       |            |  |       |       |  |  |          |       |  |       |       

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##### Table of Contents

December 31, 2004

|                             |                       |                                                  |        |            |           |  |        |       |  |  |        |        |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |        | 
|---------------------------- | --------------------- | ------------------------------------------------ | ------ | ---------- | --------- |  | ------ | ----- |  |  | ------ | ------ |  | ---- | ----- | ----- | ---------- |  | ----- | ----- |  |  | -------- | ----- |  | ----- | ------ | ------ |  |  | ---- | ------ |  |  | ------ | ------ | 
|                             |                       |                                                  |        | Percentage |           |  |       
|                             |                       | Expected maturity date                           |        |            | to total  |  |        |      
|                             |                       |                                                  |        |            | long-term |  |        | Fair  | 
|                             |                       | 2005                                             |        |            | 2006      |  |        | 2007  |  |  | 2008   |        |  | 2009 |       |       | Thereafter |  |       | Total |  |  | debt (%) |       |  | value |       
|                             |                       |                                                  |        |            |           |  |        |       |  |  |        |        |  |      |       |       |            |  |       |       |  |  |          |       |  |       |       
|                             |                       | (RMB equivalent in millions, except percentages) |       
|Long term debt               |                       |                                                  |        |            |           |  |        |       |  |  |        |        |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|Loan in RMB                  |                       |                                                  |        |            |           |  |        |       |  |  |        |        |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|                             | Fixed rate            |                                                  |        | 1,021      |           |  |        | 221   |  |  |        | 100    |  |      |       | 200   |            |  |       |      |  |  |          | 1     |  |       |        | 1,543  |  |  |      | 2.43%  |  |  |        | 1,529  | 
|                             | Average interest rate |                                                  |        | 4.57%      |           |  |        | 4.32% |  |  |        | 4.25%  |  |      |       | 3.60% |            |  |       |      |  |  |          | 6.10% |  |       |        |        |  |  |      |        |  |  |        |        | 
|                             | Variable
    rate(1)  |                                                  |        | 12,234     |           |  |        | 6,366 |  |  |        | 13,718 |  |      |       | 4,440 |            |  |       | 100   |  |  |          | 4,500 |  |       |        | 41,358 |  |  |      | 65.01% |  |  |        | 41,358 | 
|                             | Average interest rate |                                                  |        | 5.08%      |           |  |        | 5.12% |  |  |        | 4.85%  |  |      |       | 5.03% |            |  |       | 5.18% |  |  |          | 4.62% |  |       |        |        |  |  |      |        |  |  |        |        | 
|Loan in Euro                 |                       |                                                  |        |            |           |  |        |       |  |  |        |        |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|                             | Fixed rate            |                                                  |        | 36         |           |  |        | 35    |  |  |        | 17     |  |      |       | 17    |            |  |       | 17    |  |  |          | 238   |  |       |        | 360    |  |  |      | 0.57%  |  |  |        | 302    | 
|                             | Average interest rate |                                                  |        | 5.47%      |           |  |        | 5.42% |  |  |        | 2.13%  |  |      |       | 2.13% |            |  |       | 2.13% |  |  |          | 2.01% |  |       |        |        |  |  |      |        |  |  |        |        | 
|                             | Variable rate         |                                                  |        |           |           |  |        |      |  |  |        |       |  |      |       |      |            |  |       |      |  |  |          |      |  |       |        |       |  |  |      |       |  |  |        |       | 
|                             | Average interest rate |                                                  |        |           |           |  |        |      |  |  |        |       |  |      |       |      |            |  |       |      |  |  |          |      |  |       |        |        |  |  |      |        |  |  |        |        | 
|Loan in United States Dollar |                       |                                                  |        |            |           |  |        |       |  |  |        |        |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|                             | Fixed rate            |                                                  |        | 480        |           |  |        | 406   |  |  |        | 586    |  |      |       | 169   |            |  |       | 103   |  |  |          | 693   |  |       |        | 2,437  |  |  |      | 3.83%  |  |  |        | 2,172  | 
|                             | Average interest rate |                                                  |        | 6.46%      |           |  |        | 6.29% |  |  |        | 7.57%  |  |      |       | 5.48% |            |  |       | 4.50% |  |  |          | 1.57% |  |       |        |        |  |  |      |        |  |  |        |        | 
|                             | Variable rate         |                                                  |        | 4,868      |           |  |        | 2,817 |  |  |        | 2,442  |  |      |       | 960   |            |  |       | 2,725 |  |  |          | 482   |  |       |        | 14,294 |  |  |      | 22.47% |  |  |        | 14,294 | 
|                             | Average interest rate |                                                  |        | 3.78%      |           |  |        | 4.43% |  |  |        | 3.41%  |  |      |       | 3.19% |            |  |       | 3.41% |  |  |          | 2.10% |  |       |        |        |  |  |      |        |  |  |        |        | 
|Loan in British Pound        |                       |                                                  |        |            |           |  |        |       |  |  |        |        |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|                             | Fixed rate            |                                                  |        | 154        |           |  |        | 133   |  |  |        | 51     |  |      |       |      |            |  |       |      |  |  |          |      |  |       |        | 338    |  |  |      | 0.53%  |  |  |        | 326    | 
|                             | Average interest rate |                                                  |        | 2.85%      |           |  |        | 2.85% |  |  |        | 2.85%  |  |      |       |      |            |  |       |      |  |  |          |      |  |       |        |        |  |  |      |        |  |  |        |        | 
|Loan in Japanese Yen         |                       |                                                  |        |            |           |  |        |       |  |  |        |        |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|                             | Fixed rate            |                                                  |        | 170        |           |  |        | 167   |  |  |        | 43     |  |      |       | 24    |            |  |       | 9     |  |  |          | 17    |  |       |        | 430    |  |  |      | 0.68%  |  |  |        | 463    | 
|                             | Average interest rate |                                                  |        | 4.63%      |           |  |        | 4.62% |  |  |        | 4.84%  |  |      |       | 4.45% |            |  |       | 5.02% |  |  |          | 5.02% |  |       |        |        |  |  |      |        |  |  |        |        | 
|                             | Variable rate         |                                                  |        |           |           |  |        |      |  |  |        |       |  |      |       |      |            |  |       |      |  |  |          |      |  |       |        |       |  |  |      |       |  |  |        |       | 
|                             | Average interest rate |                                                  |        |           |           |  |        |      |  |  |        |       |  |      |       |      |            |  |       |      |  |  |          |      |  |       |        |        |  |  |      |        |  |  |        |        | 
|Debenture in RMB             |                       |                                                  |        |            |           |  |        |       |  |  |        |        |  |      |       |       |            |  |       |       |  |  |          |       |  |       |        |        |  |  |      |        |  |  |        |       
|                             | Fixed rate            |                                                  |        |           |           |  |        |      |  |  |        | 1,350  |  |      |       |      |            |  |       |      |  |  |          | 1,500 |  |       |        | 2,850  |  |  |      | 4.48%  |  |  |        | 2,632  | 
|                             | Average interest rate |                                                  |        |           |           |  |        |      |  |  |        | 4.50%  |  |      |       |      |            |  |       |      |  |  |          | 4.11% |  |       |        |        |  |  |      |        |  |  |        |        | 
|                             |                       |                                                  |        |            |           |  |        |       |  |  |        |        |  |      |       |       |            |  |       |       |  |  |          |       |  |       |       
|Total                        |                       |                                                  | 18,963 |            |           |  | 10,145 |       |  |  | 18,307 |        |  |      | 5,810 |       |            |  | 2,954 |       |  |  | 7,431    |       |  |       | 63,610 |        |  |  | 100% |        |  |  | 63,076 |       
|                             |                       |                                                  |        |            |           |  |        |       |  |  |        |        |  |      |       |       |            |  |       |       |  |  |          |       |  |       |       






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Due to the declining interest rates in recent years in China,
    the PRC government has implemented a program to adjust interest
    rates on certain fixed RMB loans periodically to reflect the
    market rates in effect published by the Peoples Bank of
    China, or the PBOC, from time to time. As a result, these
    previously fixed RMB loans are categorized as variable rate
    loans as of December 31, 2004, 2005 and 2006. The newly
    adjusted rates usually become effective one year after the
    announcement by the PBOC. The average interest rates on these
    loans are calculated based on the then effective rates as of
    December 31, 2004, 2005 and 2006, respectively.

Commodity Price Risk




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##### Table of Contents

ITEM 12  DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES

Not applicable.





PART II





ITEM 13  DEFAULTS, DIVIDENDS ARREARAGES AND
DELINQUENCIES

None.





ITEM 14  MATERIAL MODIFICATIONS TO THE RIGHTS

TO SECURITY HOLDERS

None.





ITEM 15  CONTROLS AND PROCEDURES



Evaluation of the Management on Disclosure Controls and
    ProceduresOur Chairman, who performs the functions of Chief Executive
Officer, and our Chief Financial Officer, after evaluating the
effectiveness of PetroChinas disclosure controls and
procedures (as defined in the United States Exchange Act
Rules 13a-15(e)
and 15d(e)) as of the end of the period covered by this annual
report, have concluded that, as of such date, our companys
disclosure controls and procedures were effective to ensure that
material information required to be disclosed in the reports
that we file and furnish under the Exchange Act is recorded,
processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules
and regulations.



Managements Report on Internal Control over
    Financial ReportingOur companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as defined in Exchange Act
Rules 13a-15(f).
Under the supervision and with the participation of our
companys management, including our principal executive
officer and principal financial officer, our company evaluated
the effectiveness of the its internal control over financial
reporting based on criteria established in the framework in
Internal Control  Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, our companys
management has concluded that its internal control over
financial reporting was effective as of December 31, 2006.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies and procedures may deteriorate.

Our independent registered public accounting firm,
PricewaterhouseCoopers (Certified Public Accountants, Hong
Kong), has audited managements assessment of the
effectiveness of our companys internal control over
financial reporting as of December 31, 2006, as stated in
their report which is included elsewhere in this annual report.





ITEM 16A  AUDIT COMMITTEE FINANCIAL EXPERT

Our audit committee is composed of three non-executive
independent directors, Messrs. Franco Bernabè,
Chee-Chen Tung and Liu Hongru, and one non-executive director,
Gong Huazhang. See Item 6  Directors,
Senior Management and Employees  Board
Practices  Audit Committee. Our board of
directors has determined that Liu Hongru, our non-executive
independent director is

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##### Table of Contents

qualified as a financial expert, as defined in
Item 16A of
Form 20-F. In June
2006, with the consent of the audit committee, we retained COSO
Chairman, Dr. Larry E Rittenberg, as the financial advisor
to our audit committee to give assistance with relevant work.





ITEM 16B  CODE OF ETHICS

We have adopted a Code of Ethics that applies to our Chief
Executive Officer, Chief Financial Officer, Chief Accounting
Officer, other executives and senior officers and a separate
Code of Ethics that applies to all of our employees. We have
included these two Codes of Ethics as Exhibit 16.1 and
Exhibit 16.2 to this annual report.

These two Codes of Ethics are also posted on our website,
www.petrochina.com.cn,and may be accessed as follows:



1.
    From our main web page, first click on Investor
    Relations.2.
    Next, click on Corporate Governance Structure.3.
    Finally, click on Code of Ethics for Senior
    Management or Code of Ethics for Employees of
    PetroChina Company Limited.



ITEM 16C  PRINCIPAL ACCOUNTANT FEES AND
SERVICES

PricewaterhouseCoopers (Certified Public Accountants, Hong Kong)
has served as PetroChinas independent public accountants
for each of the fiscal years in the three-year period ended
December 31, 2006, for which audited financial statements
appear in this annual report on
Form 20-F. The
auditors are elected annually at the annual general meeting of
PetroChina.

The offices of PricewaterhouseCoopers (Certified Public
Accountants, Hong Kong) are located at Princes Building,
22nd Floor, Central, Hong Kong.

The following table presents the aggregate fees for professional
audit services and other services rendered by
PricewaterhouseCoopers (Certified Public Accountants, Hong Kong)
to PetroChina for each of the years ended December 31, 2005
and 2006.

|                   |  |               |    |      |  |  |     |  
|------------------ |  | ------------- | -- | ---- |  |  | --- | -
|                   |  | December 31, 
|                   |  |              
|                   |  | 2005          |    | 2006
|                   |  |               |    |     
|                   |  | RMB           |    | RMB 
|                   |  | (in millions)
|Audit fees         |  |               | 50 |      |  |  | 140 |  
|Audit-related fees |  |               |   |      |  |  |    |  
|Tax fees           |  |               |   | *    |  |  |    | *
|All other fees     |  |               |   |      |  |  | 25  |  
|                   |  |               |    |      |  |  |     |  
|Total              |  |               | 50 |      |  |  | 165 |  
|                   |  |               |    |      |  |  |     |  







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Audit Committee Pre-approved Policies and
    ProceduresCurrently, all non-audit services to be provided by our
independent public accountants, PricewaterhouseCoopers
(Certified Public Accountants, Hong Kong), must be approved by
our audit committee.

During 2006, services relating to all audit-related fees
provided to us by PricewaterhouseCoopers (Certified Public
Accountants, Hong Kong) were approved by our audit committee in
accordance with the de minimisexception to the
pre-approval requirement provided by paragraph (c)(7)(i)(C)
of Rule 2-01 of
Regulation S-X.





ITEM 16D  EXEMPTIONS FROM LISTING STANDARDS FOR
AUDIT COMMITTEES

Not applicable.





ITEM 16E  PURCHASES OF EQUITY SECURITIES BY THE
ISSUER AND AFFILIATED PURCHASERS

Not applicable.





PART III





ITEM 17  FINANCIAL STATEMENTS

We have elected to provide the financial statements and related
information specified in Item 18 in lieu of Item 17.





ITEM 18  FINANCIAL STATEMENTS

See page F-1 to
F-78following
Item 19.





ITEM 19  EXHIBITS

(a) See Item 18 for a list of the financial statements
as part of this annual report.

(b) Exhibits to this annual report.

|        |  |                                                                                                                                                                                                                                                                           
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                           
|Number  |  | Description of Exhibits                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                           
|1.1     |  | Articles of Association (as
    amended) (English translation)                                                                                                                                                                                                            
|1.2     |  | Articles of Association (as amended
    and pending for approval of SASAC) (English translation)                                                                                                                                                                          
|4.1     |  | Form of 2007 Management Performance
    Contract (English Translation)                                                                                                                                                                                                    
|4.2     |  | Crude Oil Mutual Supply Framework
    Agreement, dated January 29, 2007, between China Petroleum
    and Chemical Corporation and PetroChina (English translation)                                                                                                        
|4.3     |  | Second Supplemental Agreement to
    Comprehensive products and Services Agreement, dated
    September 1, 2005, between CNPC and PetroChina (English
    translation)(1)                                                                                                 
|4.4     |  | Capital Contribution Agreement,
    dated June 9, 2005, among China National Oil and Gas
    Exploration and Development Corporation, Central Asia Petroleum
    Company Limited, Zhong You Kan Tan Kai Fa Company Limited and
    PetroChina (English
    Translation)(2)
|4.5     |  | Transfer Agreement, dated
    June 9, 2005, between Zhong You Kan Tan Kai Fa Company
    Limited and PetroChina (English
    Translation)(2)                                                                                                                              

132



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|        |  |                                                                                                                                                                                                                                                                              
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                              
|Number  |  | Description of Exhibits                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                              
|4.6     |  | Supplementary Agreement to
    Comprehensive Products and Services Agreement, dated
    June 9, 2005, between CNPC and PetroChina (English
    Translation)(2)                                                                                                               
|4.7     |  | Form of Non-competition Agreement
    between CNPC and PetroChina (together with English
    translation)(3)                                                                                                                                                                 
|4.8     |  | Form of Comprehensive Products and
    Services Agreement between CNPC and PetroChina (together with
    English
    translation)(3)                                                                                                                                         
|4.9     |  | Form of Land Use Rights Leasing
    Contract between CNPC and PetroChina (together with English
    translation)(3)                                                                                                                                                          
|4.10    |  | Form of Buildings Leasing Contract
    between CNPC and PetroChina (together with English
    translation)(3)                                                                                                                                                                
|4.11    |  | Form of Trademark Licensing
    Contract between CNPC and PetroChina (together with English
    translation)(3)                                                                                                                                                              
|4.12    |  | Form of Patent and Know-how
    Licensing Contract between CNPC and PetroChina (together with
    English
    translation)(3)                                                                                                                                                
|4.13    |  | Form of Computer Software Licensing
    Contract between CNPC and PetroChina (together with English
    translation)(3)                                                                                                                                                      
|4.14    |  | Form of Contract for Transfer of
    Rights under Production Sharing Contracts between CNPC and
    PetroChina (together with English
    translation)(3)                                                                                                                    
|4.15    |  | Form of Guarantee of Debts Contract
    between CNPC and PetroChina (together with English
    translation)(3)                                                                                                                                                               
|4.16    |  | Form of Contract for the
    Supervision of Certain Sales Enterprises between CNPC and
    PetroChina (together with English
    translation)(3)                                                                                                                             
|4.17    |  | Form of Agreement for Transfer of
    Rights and Interests under the Crude Oil Premium and Discount
    Calculation Agreement between China Petrochemical Corporation,
    CNPC and PetroChina (together with English
    translation)(3)                                    
|4.18    |  | Form of Agreement for the Transfer
    of Rights and Interests under the Retainer Contracts relating to
    Oil Exploration and Exploitation in Lengjiapu Area, Liaohe Oil
    Region and No. 9.1-9.5 Areas, Karamay Oil Field (together
    with English
    translation)(3)
|4.19    |  | Share Purchase Agreement in respect
    of the shares of PetroKazakhstan, dated August 23, 2006,
    between Pervinage Holding B.V. (a wholly-owned subsidiary of
    CNPC E&D) and 819 Luxembourg S. a r. l. (an indirect
    wholly-owned subsidiary of CNPC)              
|8.1     |  | List of major subsidiaries                                                                                                                                                                                                                                                   
|10.1    |  | Significant Differences in
    Corporate Governance Practices for Purposes of
    Section 303A.11 of the New York Exchange Listed Company
    Manual(2)                                                                                                                      
|12.1    |  | Certification of Chief Executive
    Officer required by Section 302 of the Sarbanes-Oxley Act
    of 2002                                                                                                                                                                   
|12.2    |  | Certification of Chief Financial
    Officer required by Section 302 of the Sarbanes-Oxley Act
    of 2002                                                                                                                                                                   
|13.1    |  | Certification of Chief Executive
    Officer required by 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                    
|13.2    |  | Certification of Chief Financial
    Officer required by 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                    
|16.1    |  | Code of Ethics for Senior
    Management(2)                                                                                                                                                                                                                                  
|16.2    |  | Code of Ethics for
    Employees(2)                                                                                                                                                                                                                                          

133



---



##### Table of Contents

(1)
    Incorporated by reference to our annual report on Form 20-F
    for the fiscal year ended December 31, 2005 (File No.
    1-15006) filed with the Commission.(2)
    Incorporated by reference to our annual report on
    Form 20-F for the
    fiscal year ended December 31, 2004 (File
    No. 1-15006) filed
    with the Commission.(3)
    Incorporated by reference to our Registration Statement on
    Form F-1 (File
    No. 333-11566)
    filed with the Commission, as declared effective on
    March 29, 2000.

134



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##### Table of Contents

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.



PETROCHINA COMPANY LIMITED/s/ LI HUAIQIName: Li HuaiqiTitle:
    Secretary to Board of DirectorsDate: May 11, 2007

135



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##### Table of Contents

INDEX OF FINANCIAL STATEMENTS

|                                                    |                                                                                                                        |      |  |      | 
|--------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ---- |  | ---- | 
|                                                    |                                                                                                                        | Page
|                                                    |                                                                                                                        |     
|PetroChina Company Limited and
    its Subsidiaries |                                                                                                                        |      |  |     
|                                                    | Consolidated Financial
    Statements                                                                                  |      |  |      | 
|                                                    | Managements
    Report on Internal Control Over Financial Reporting                                                   |      |  | F-2  | 
|                                                    | Report of
    Independent Registered Public Accounting Firm                                                            |      |  | F-3  | 
|                                                    | Consolidated
    Statements of Income for each of the three years in the period
    ended December 31, 2006            |      |  | F-5  | 
|                                                    | Consolidated
    Balance Sheets as of December 31, 2005 and 2006                                                       |      |  | F-6  | 
|                                                    | Consolidated
    Statements of Cash Flows for each of the three years in the
    period ended December 31, 2006        |      |  | F-7  | 
|                                                    | Consolidated
    Statements of Changes in Equity for each of the three years in
    the period ended December 31, 2006 |      |  | F-9  | 
|                                                    | Notes to the
    Consolidated Financial Statements                                                                     |      |  | F-11 | 
|                                                    | Supplementary
    information on Oil and Gas Producing Activities
    (unaudited)                                      |      |  | F-73 | 

F-1



---



##### Table of Contents

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING

The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as defined in Exchange Act
Rules 13a-15(f).
Under the supervision and with the participation of the
Companys management, including our principal executive
officer and principal financial officer, the Company evaluated
the effectiveness of the its internal control over financial
reporting based on criteria established in the framework in
Internal Control-integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, the Companys
management has concluded that its internal control over
financial reporting was effective as of December 31, 2006.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies and procedures may deteriorate.

The Companys independent registered public accounting
firm, PricewaterhouseCoopers (Certified Public Accountants, Hong
Kong), has audited managements assessment of the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, as stated in
their report which is included herein.

F-2



---



##### Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of PetroChina Company
Limited:

We have completed an integrated audit of PetroChina Company
Limiteds 2006 consolidated financial statements and of its
internal control over financial reporting as of
December 31, 2006 and audits of its 2005 and 2004
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated statements of
income, consolidated balance sheets and the related consolidated
statements of cash flows and of changes in equity
(consolidated financial statements) present fairly,
in all material respects, the consolidated financial position of
PetroChina Company Limited (the Company) and its
subsidiaries (collectively referred to as the Group)
at December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2006 in conformity with
International Financial Reporting Standards. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits. We conducted our audits of these consolidated financial
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

International Financial Reporting Standards vary in certain
significant respects from accounting principles generally
accepted in the United States. The application of the latter
would have affected the determination of consolidated net income
for each of the three years in the period ended
December 31, 2006 and the determination of consolidated
equity at December 31, 2006 and 2005 to the extent
summarized in Note 37 to the consolidated financial
statements.

Internal control over financial reporting

Also, in our opinion, managements assessment, included in
the accompanying Managements Report on Internal Control
Over Financial Reporting, that the Company maintained effective
internal control over financial reporting as of
December 31, 2006 based on criteria established in
Internal Control  Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control 
Integrated Frameworkissued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we

F-3



---



##### Table of Contents

consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.



PricewaterhouseCoopersCertified Public AccountantsHong Kong, May 10, 2007

F-4



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2004, 2005 and 2006

(Amounts in millions except for per share data)

|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |          |         |  |          |          |         | 
|----------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------- | -- | ----------------------- | ---- |  | -------- | -------- | ------- | --- | -------- | -------- | ------- |  | -------- | -------- | ------- | 
|                                                                                                                        |                                                           |                                   |    | Year Ended December 31, |     
|                                                                                                                        |                                                           |                                   |    |                         |     
|                                                                                                                        |                                                           | Notes                             |    |                         | 2004 |  |          | 2005     |         |     | 2006     |         
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|                                                                                                                        |                                                           |                                   |    | RMB                     |      |  | RMB      |          |         | RMB |         
|REVENUES                                                                                                                |                                                           |                                   |    |                         |      |  |          |          |         |     |          |          |         |  |          |         
|                                                                                                                        | Sales and other operating revenues                        |                                   |    |                         |      |  |          | 397,354  |         |     |          | 552,229  |         |  |          | 688,978  |        
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|OPERATING EXPENSES                                                                                                      |                                                           |                                   |    |                         |      |  |          |          |         |     |          |          |         |  |          |         
|                                                                                                                        | Purchases, services and other                             |                                   |    |                         |      |  |          | (114,249 | )       |     |          | (200,321 | )       |  |          | (271,123 | )      
|                                                                                                                        | Employee compensation costs                               |                                   |    | 5                       |      |  |          | (22,934  | )       |     |          | (29,675  | )       |  |          | (39,161  | )      
|                                                                                                                        | Exploration expenses, including
    exploratory dry holes |                                   |    |                         |      |  |          | (12,090  | )       |     |          | (15,566  | )       |  |          | (18,822  | )      
|                                                                                                                        | Depreciation, depletion and
    amortization              |                                   |    |                         |      |  |          | (48,362  | )       |     |          | (51,305  | )       |  |          | (61,388  | )      
|                                                                                                                        | Selling, general and administrative
    expenses          |                                   |    |                         |      |  |          | (28,302  | )       |     |          | (36,538  | )       |  |          | (43,235  | )      
|                                                                                                                        | Shut down of manufacturing assets                         |                                   |    | 6                       |      |  |          | (220     | )       |     |          |         |         |  |          |         |        
|                                                                                                                        | Taxes other than income taxes                             |                                   |    | 7                       |      |  |          | (19,943  | )       |     |          | (23,616  | )       |  |          | (56,666  | )      
|                                                                                                                        | Other expense, net                                        |                                   |    |                         |      |  |          | (116     | )       |     |          | (3,037   | )       |  |          | (607     | )      
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|TOTAL OPERATING
    EXPENSES                                                                                            |                                                           |                                   |    |                         |      |  | (246,216 | )        |         |     | (360,058 | )        |         |  | (491,002 | )       
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|INCOME FROM OPERATIONS                                                                                                  |                                                           |                                   |    |                         |      |  | 151,138  |          |         |     | 192,171  |          |         |  | 197,976  |         
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|FINANCE COSTS                                                                                                           |                                                           |                                   |    |                         |      |  |          |          |         |     |          |          |         |  |          |         
|                                                                                                                        | Exchange gain                                             |                                   |    |                         |      |  |          | 225      |         |     |          | 942      |         |  |          | 1,830    |        
|                                                                                                                        | Exchange loss                                             |                                   |    |                         |      |  |          | (217     | )       |     |          | (854     | )       |  |          | (1,756   | )      
|                                                                                                                        | Interest income                                           |                                   |    |                         |      |  |          | 1,373    |         |     |          | 1,924    |         |  |          | 2,066    |        
|                                                                                                                        | Interest expense                                          |                                   |    | 8                       |      |  |          | (2,896   | )       |     |          | (2,762   | )       |  |          | (3,220   | )      
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|TOTAL NET FINANCE
    COSTS                                                                                             |                                                           |                                   |    |                         |      |  | (1,515   | )        |         |     | (750     | )        |         |  | (1,080   | )       
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|INCOME FROM EQUITY AFFILIATES
    AND JOINTLY CONTROLLED ENTITIES                                                       |                                                           |                                   | 19 |                         |      |  | 1,621    |          |         |     | 2,401    |          |         |  | 2,277    |         
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|INCOME BEFORE INCOME
    TAXES                                                                                          |                                                           |                                   |    |                         |      |  | 151,244  |          |         |     | 193,822  |          |         |  | 199,173  |         
|INCOME TAXES                                                                                                            |                                                           |                                   | 9  |                         |      |  | (43,598  | )        |         |     | (54,180  | )        |         |  | (49,776  | )       
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|INCOME FOR THE YEAR                                                                                                     |                                                           |                                   |    |                         |      |  | 107,646  |          |         |     | 139,642  |          |         |  | 149,397  |         
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|ATTRIBUTABLE TO:                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |          |         |  |          |         
|                                                                                                                        |                                                           | EQUITY HOLDERS OF THE
    COMPANY |    |                         |      |  |          |          | 103,843 |     |          |          | 133,362 |  |          |          | 142,224 | 
|                                                                                                                        |                                                           | MINORITY INTEREST                 |    |                         |      |  |          |          | 3,803   |     |          |          | 6,280   |  |          |          | 7,173   | 
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|                                                                                                                        |                                                           |                                   |    |                         |      |  | 107,646  |          |         |     | 139,642  |          |         |  | 149,397  |         
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|BASIC AND DILUTED NET INCOME PER
    SHARE FOR INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
    DURING THE YEAR |                                                           |                                   | 10 |                         |      |  | 0.59     |          |         |     | 0.75     |          |         |  | 0.79     |         
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|NUMBER OF SHARES                                                                                                        |                                                           |                                   | 10 |                         |      |  | 175,824  |          |         |     | 179,021  |          |         |  | 179,021  |         
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|DIVIDENDS ATTRIBUTABLE TO EQUITY
    HOLDERS OF THE COMPANY:                                                            |                                                           |                                   |    |                         |      |  |          |          |         |     |          |          |         |  |          |         
|                                                                                                                        | Interim dividends declared during
    the year            |                                   |    | 11                      |      |  |          | 20,381   |         |     |          | 27,731   |         |  |          | 36,307   |        
|                                                                                                                        | Final dividends proposed after the
    balance sheet date |                                   |    | 11                      |      |  |          | 25,936   |         |     |          | 32,282   |         |  |          | 27,694   |        
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         
|                                                                                                                        |                                                           |                                   |    |                         |      |  | 46,317   |          |         |     | 60,013   |          |         |  | 64,001   |         
|                                                                                                                        |                                                           |                                   |    |                         |      |  |          |          |         |     |          |         



F-5



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##### Table of Contents

PETROCHINA COMPANY LIMITED

CONSOLIDATED BALANCE SHEETS

As of December 31, 2005 and 2006

(Amounts in millions)

|                                                                                             |  |       |    |                 |      |  |         |      |  |  |         |  
|-------------------------------------------------------------------------------------------- |  | ----- | -- | --------------- | ---- |  | ------- | ---- |  |  | ------- | -
|                                                                                             |  |       |    | At December 31, |     
|                                                                                             |  |       |    |                 |     
|                                                                                             |  | Notes |    |                 | 2005 |  |         | 2006 | 
|                                                                                             |  |       |    |                 |      |  |         |      | 
|                                                                                             |  |       |    | RMB             |      |  | RMB     |     
|ASSETS                                                                                      
|Current assets                                                                               |  |       |    |                 |      |  |         |      |  |  |         |  
|Cash and cash equivalents                                                                    |  |       | 12 |                 |      |  | 80,905  |      |  |  | 48,559  |  
|Time deposits with maturities over
    three months but within one year                      |  |       |    |                 |      |  | 1,691   |      |  |  | 3,012   |  
|Investments in collateralized loans                                                          |  |       | 13 |                 |      |  | 235     |      |  |  |        |  
|Notes receivable                                                                             |  |       | 14 |                 |      |  | 3,028   |      |  |  | 2,844   |  
|Accounts receivable, less provision
    for impairment of accounts receivables               |  |       | 15 |                 |      |  | 4,630   |      |  |  | 8,488   |  
|Inventories                                                                                  |  |       | 16 |                 |      |  | 62,733  |      |  |  | 76,038  |  
|Prepaid expenses and other current
    assets                                                |  |       | 17 |                 |      |  | 22,673  |      |  |  | 23,281  |  
|                                                                                             |  |       |    |                 |      |  |         |      | 
|TOTAL CURRENT ASSETS                                                                         |  |       |    |                 |      |  | 175,895 |      |  |  | 162,222 |  
|Property, plant and equipment, less
    accumulated depreciation, depletion and amortization |  |       | 18 |                 |      |  | 563,890 |      |  |  | 645,337 |  
|Investments in equity affiliates
    and jointly controlled entities                         |  |       | 19 |                 |      |  | 12,378  |      |  |  | 32,956  |  
|Available-for-sale investments                                                               |  |       | 20 |                 |      |  | 1,230   |      |  |  | 2,054   |  
|Advance operating lease payments                                                             |  |       | 21 |                 |      |  | 16,235  |      |  |  | 20,468  |  
|Intangible and other assets                                                                  |  |       | 22 |                 |      |  | 5,011   |      |  |  | 6,627   |  
|Time deposits with maturities over
    one year                                              |  |       |    |                 |      |  | 3,428   |      |  |  | 2,499   |  
|                                                                                             |  |       |    |                 |      |  |         |      | 
|TOTAL ASSETS                                                                                 |  |       |    |                 |      |  | 778,067 |      |  |  | 872,163 |  
|                                                                                             |  |       |    |                 |      |  |         |      | 
|                                                                                            
|LIABILITIES AND
    SHAREHOLDERS EQUITY                                                    
|Current liabilities                                                                          |  |       |    |                 |      |  |         |      |  |  |         |  
|Short-term debts                                                                             |  |       | 24 |                 |      |  | 28,689  |      |  |  | 35,763  |  
|Accounts payable and accrued
    liabilities                                                 |  |       | 23 |                 |      |  | 99,758  |      |  |  | 120,182 |  
|Income tax payable                                                                           |  |       |    |                 |      |  | 20,567  |      |  |  | 17,744  |  
|Other taxes payable                                                                          |  |       |    |                 |      |  | 4,824   |      |  |  | 6,190   |  
|                                                                                             |  |       |    |                 |      |  |         |      | 
|TOTAL CURRENT
    LIABILITIES                                                                |  |       |    |                 |      |  | 153,838 |      |  |  | 179,879 |  
|Long-term debts                                                                              |  |       | 24 |                 |      |  | 44,570  |      |  |  | 35,634  |  
|Other long-term obligations                                                                  |  |       |    |                 |      |  | 1,046   |      |  |  | 995     |  
|Asset retirement obligations                                                                 |  |       | 25 |                 |      |  | 14,187  |      |  |  | 18,481  |  
|Deferred taxes                                                                               |  |       | 26 |                 |      |  | 20,759  |      |  |  | 19,583  |  
|                                                                                             |  |       |    |                 |      |  |         |      | 
|TOTAL LIABILITIES                                                                            |  |       |    |                 |      |  | 234,400 |      |  |  | 254,572 |  
|EQUITY ATTRIBUTABLE TO EQUITY
    HOLDERS OF THE COMPANY:                                    |  |       |    |                 |      |  |         |      |  |  |         |  
|State-owned shares                                                                           |  |       | 27 |                 |      |  | 157,922 |      |  |  | 157,922 |  
|H shares                                                                                     |  |       | 27 |                 |      |  | 21,099  |      |  |  | 21,099  |  
|                                                                                             |  |       |    |                 |      |  |         |      | 
|Share capital, issued and
    outstanding, RMB 1.00 Par value                                |  |       | 27 |                 |      |  | 179,021 |      |  |  | 179,021 |  
|Retained earnings                                                                            |  |       |    |                 |      |  | 203,812 |      |  |  | 264,092 |  
|Capital reserve                                                                              |  |       | 28 |                 |      |  | (8,881  | )    |  |  | (8,881  | )
|Revaluation reserve                                                                          |  |       | 28 |                 |      |  | 79,946  |      |  |  | 79,946  |  
|Statutory common reserve fund                                                                |  |       | 28 |                 |      |  | 48,736  |      |  |  | 89,928  |  
|Statutory common welfare fund                                                                |  |       | 28 |                 |      |  | 27,837  |      |  |  |        |  
|Currency translation differences                                                             |  |       | 28 |                 |      |  | (379    | )    |  |  | (570    | )
|Other reserves                                                                               |  |       | 28 |                 |      |  | (14,703 | )    |  |  | (16,859 | )
|MINORITY INTEREST                                                                            |  |       |    |                 |      |  | 28,278  |      |  |  | 30,914  |  
|                                                                                             |  |       |    |                 |      |  |         |      | 
|TOTAL EQUITY                                                                                 |  |       |    |                 |      |  | 543,667 |      |  |  | 617,591 |  
|                                                                                             |  |       |    |                 |      |  |         |      | 
|TOTAL LIABILITIES AND
    EQUITY                                                             |  |       |    |                 |      |  | 778,067 |      |  |  | 872,163 |  
|                                                                                             |  |       |    |                 |      |  |         |      | 



F-6



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##### Table of Contents

PETROCHINA COMPANY LIMITED





CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2004, 2005 and 2006

(Amounts in millions)

|                                              |                                                    |                                                                                    |  |                         |        |  |         |         |         |     |         |         |         |   |         |         |         |  
|--------------------------------------------- | -------------------------------------------------- | ---------------------------------------------------------------------------------- |  | ----------------------- | ------ |  | ------- | ------- | ------- | --- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                              |                                                    |                                                                                    |  | Year Ended December 31, |       
|                                              |                                                    |                                                                                    |  |                         |       
|                                              |                                                    | Notes                                                                              |  |                         | 2004   |  |         | 2005    |         |     | 2006    |        
|                                              |                                                    |                                                                                    |  |                         |        |  |         |         |         |     |         |        
|                                              |                                                    |                                                                                    |  | RMB                     |        |  | RMB     |         |         | RMB |        
|CASH FLOWS FROM OPERATING
    ACTIVITIES      |                                                    |                                                                                    |  |                         |        |  |         |         |         |     |         |         |         |   |         |        
|                                              | Net income                                         |                                                                                    |  |                         |        |  |         | 107,646 |         |     |         | 139,642 |         |   |         | 149,397 |        
|                                              | Adjustments for:                                   |                                                                                    |  |                         |        |  |         |         |         |     |         |         |         |   |         |         |        
|                                              |                                                    | Income taxes                                                                       |  |                         | 9      |  |         |         | 43,598  |     |         |         | 54,180  |   |         |         | 49,776  |  
|                                              |                                                    | Depreciation, depletion and
    amortization                                       |  |                         |        |  |         |         | 48,362  |     |         |         | 51,305  |   |         |         | 61,388  |  
|                                              |                                                    | Provision for shut down of
    manufacturing assets                                |  |                         | 6      |  |         |         | 220     |     |         |         |        |   |         |         |        |  
|                                              |                                                    | Dry hole costs                                                                     |  |                         |        |  |         |         | 4,741   |     |         |         | 6,547   |   |         |         | 9,494   |  
|                                              |                                                    | Income from equity affiliates and
    jointly controlled entities                  |  |                         | 19     |  |         |         | (1,621  | )   |         |         | (2,401  | ) |         |         | (2,277  | )
|                                              |                                                    | Provision for impairment of
    receivables, net                                   |  |                         | 15, 17 |  |         |         | 676     |     |         |         | (455    | ) |         |         | (316    | )
|                                              |                                                    | Write down in inventories, net                                                     |  |                         | 16     |  |         |         | 147     |     |         |         | (139    | ) |         |         | 140     |  
|                                              |                                                    | Impairment of available-for-sale
    investments, net                              |  |                         | 20     |  |         |         | 26      |     |         |         | (23     | ) |         |         | 32      |  
|                                              |                                                    | Loss on disposal of property, plant
    and equipment                              |  |                         |        |  |         |         | 2,818   |     |         |         | 2,026   |   |         |         | 1,753   |  
|                                              |                                                    | Loss/(Profit) on disposal of equity
    affiliates and jointly controlled entities |  |                         |        |  |         |         | 33      |     |         |         | 2       |   |         |         | (10     | )
|                                              |                                                    | Loss/(Profit) on disposal of
    available-for-sale investments                    |  |                         |        |  |         |         | 6       |     |         |         | 27      |   |         |         | (3      | )
|                                              |                                                    | Loss on disposal of intangible and
    other assets                                |  |                         |        |  |         |         | 50      |     |         |         | 106     |   |         |         | 192     |  
|                                              |                                                    | Dividend income                                                                    |  |                         | 20     |  |         |         | (113    | )   |         |         | (109    | ) |         |         | (208    | )
|                                              |                                                    | Interest income                                                                    |  |                         |        |  |         |         | (1,373  | )   |         |         | (1,924  | ) |         |         | (2,066  | )
|                                              |                                                    | Interest expense                                                                   |  |                         | 8      |  |         |         | 2,896   |     |         |         | 2,762   |   |         |         | 3,220   |  
|                                              | Advance payments on long-term
    operating leases |                                                                                    |  |                         |        |  |         | (5,624  | )       |     |         | (5,170  | )       |   |         | (5,694  | )      
|                                              | Changes in working capital:                        |                                                                                    |  |                         |        |  |         |         |         |     |         |         |         |   |         |         |        
|                                              |                                                    |  accounts receivable and
    prepaid expenses and other current assets            |  |                         |        |  |         |         | (6,195  | )   |         |         | 165     |   |         |         | (3,115  | )
|                                              |                                                    |  inventories                                                                      |  |                         |        |  |         |         | (17,460 | )   |         |         | (15,896 | ) |         |         | (13,445 | )
|                                              |                                                    |  accounts payable and
    accrued liabilities                                     |  |                         |        |  |         |         | 398     |     |         |         | 22,089  |   |         |         | 5,346   |  
|                                              |                                                    |                                                                                    |  |                         |        |  |         |         |         |     |         |        
|CASH GENERATED FROM
    OPERATIONS            |                                                    |                                                                                    |  |                         |        |  | 179,231 |         |         |     | 252,734 |         |         |   | 253,604 |        
|                                              | Interest received                                  |                                                                                    |  |                         |        |  |         | 1,373   |         |     |         | 1,917   |         |   |         | 1,993   |        
|                                              | Interest paid                                      |                                                                                    |  |                         |        |  |         | (3,998  | )       |     |         | (3,628  | )       |   |         | (3,700  | )      
|                                              | Income taxes paid                                  |                                                                                    |  |                         |        |  |         | (34,915 | )       |     |         | (47,138 | )       |   |         | (53,795 | )      
|                                              |                                                    |                                                                                    |  |                         |        |  |         |         |         |     |         |        
|NET CASH PROVIDED BY OPERATING
    ACTIVITIES |                                                    |                                                                                    |  |                         |        |  | 141,691 |         |         |     | 203,885 |         |         |   | 198,102 |        
|                                              |                                                    |                                                                                    |  |                         |        |  |         |         |         |     |         |        



F-7



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##### Table of Contents

PETROCHINA COMPANY LIMITED

CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)

For the Years Ended December 31, 2004, 2005 and 2006

(Amounts in millions)

|                                           |                                                                                                                         |       |  |                         |      |  |          |         |   |     |         |          |   |  |          |          |  
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------- | ----- |  | ----------------------- | ---- |  | -------- | ------- | - | --- | ------- | -------- | - |  | -------- | -------- | -
|                                           |                                                                                                                         |       |  | Year Ended December 31, |     
|                                           |                                                                                                                         |       |  |                         |     
|                                           |                                                                                                                         | Notes |  |                         | 2004 |  |          | 2005    |   |     | 2006    |         
|                                           |                                                                                                                         |       |  |                         |      |  |          |         |   |     |         |         
|                                           |                                                                                                                         |       |  | RMB                     |      |  | RMB      |         |   | RMB |        
|CASH FLOWS FROM INVESTING
    ACTIVITIES   |                                                                                                                         |       |  |                         |      |  |          |         |   |     |         |          |   |  |          |         
|                                           | Capital expenditures                                                                                                    |       |  |                         |      |  |          | (94,045 | ) |     |         | (119,227 | ) |  |          | (130,409 | )
|                                           | Acquisition of equity affiliates
    and jointly controlled entities                                                    |       |  |                         |      |  |          | (1,000  | ) |     |         | (2,334   | ) |  |          | (22,549  | )
|                                           | Acquisition of available-for-sale
    investments                                                                       |       |  |                         |      |  |          | (476    | ) |     |         | (782     | ) |  |          | (62      | )
|                                           | Net (acquisition)/proceeds of
    investments in collateralized loans with maturities not greater
    than three months |       |  |                         |      |  |          | (8,049  | ) |     |         | 26,896   |   |  |          | 235      |  
|                                           | Acquisition of investments in
    collateralized loans with maturities over three months                                |       |  |                         |      |  |          | (8,301  | ) |     |         | (443     | ) |  |          |         |  
|                                           | Acquisition of intangible assets                                                                                        |       |  |                         |      |  |          | (531    | ) |     |         | (1,600   | ) |  |          | (1,358   | )
|                                           | Acquisition of other non-current
    assets                                                                             |       |  |                         |      |  |          | (280    | ) |     |         | (1,133   | ) |  |          | (1,706   | )
|                                           | Return of capital to minority
    interest due to liquidation of subsidiaries                                           |       |  |                         |      |  |          |        |   |     |         | (935     | ) |  |          |         |  
|                                           | Purchase from minority interest of
    listed subsidiaries                                                              |       |  | 38                      |      |  |          |        |   |     |         | (2,019   | ) |  |          | (4,095   | )
|                                           | Other purchase from minority
    interest                                                                               |       |  |                         |      |  |          |        |   |     |         | (376     | ) |  |          | (640     | )
|                                           | Proceeds from sale of investments
    in collateralized loans with maturities over three months                         |       |  |                         |      |  |          | 7,357   |   |     |         | 6,529    |   |  |          |         |  
|                                           | Repayment of capital by equity
    affiliates and jointly controlled entities                                           |       |  |                         |      |  |          | 272     |   |     |         | 115      |   |  |          | 99       |  
|                                           | Proceeds from disposal of property,
    plant and equipment                                                             |       |  |                         |      |  |          | 873     |   |     |         | 898      |   |  |          | 346      |  
|                                           | Proceeds from disposal of equity
    affiliates and jointly controlled entities                                         |       |  |                         |      |  |          | 27      |   |     |         | 1,102    |   |  |          | 69       |  
|                                           | Proceeds from disposal of
    available-for-sale investments                                                            |       |  |                         |      |  |          | 83      |   |     |         | 976      |   |  |          | 4        |  
|                                           | Proceeds from disposal of
    intangible and other non-current assets                                                   |       |  |                         |      |  |          | 37      |   |     |         | 22       |   |  |          | 2        |  
|                                           | Dividends received                                                                                                      |       |  |                         |      |  |          | 800     |   |     |         | 678      |   |  |          | 2,099    |  
|                                           | Decrease/(Increase) in time
    deposits with maturities over three months                                              |       |  |                         |      |  |          | 957     |   |     |         | 57       |   |  |          | (486     | )
|                                           |                                                                                                                         |       |  |                         |      |  |          |         |   |     |         |         
|NET CASH USED FOR INVESTING
    ACTIVITIES |                                                                                                                         |       |  |                         |      |  | (102,276 | )       |   |     | (91,576 | )        |   |  | (158,451 | )       
|                                           |                                                                                                                         |       |  |                         |      |  |          |         |   |     |         |         
|CASH FLOWS FROM FINANCING
    ACTIVITIES   |                                                                                                                         |       |  |                         |      |  |          |         |   |     |         |          |   |  |          |         
|                                           | Repayments of short-term debts                                                                                          |       |  |                         |      |  |          | (23,862 | ) |     |         | (34,529  | ) |  |          | (28,349  | )
|                                           | Repayments of long-term debts                                                                                           |       |  |                         |      |  |          | (28,331 | ) |     |         | (19,175  | ) |  |          | (17,587  | )
|                                           | Principal payment on capital lease
    obligations                                                                      |       |  |                         |      |  |          | (35     | ) |     |         | (21      | ) |  |          |         |  
|                                           | Dividends paid to minority interest                                                                                     |       |  |                         |      |  |          | (736    | ) |     |         | (1,486   | ) |  |          | (3,033   | )
|                                           | Cash payment for acquisition of
    CNPC marketing enterprises                                                          |       |  |                         |      |  |          | (1,476  | ) |     |         |         |   |  |          |         |  
|                                           | Dividends paid to equity holders of
    the Company                                                                     |       |  | 11                      |      |  |          | (34,328 | ) |     |         | (53,667  | ) |  |          | (68,589  | )
|                                           | Increase in short-term debts                                                                                            |       |  |                         |      |  |          | 28,113  |   |     |         | 32,019   |   |  |          | 30,183   |  
|                                           | Increase in long-term debts                                                                                             |       |  |                         |      |  |          | 18,453  |   |     |         | 15,514   |   |  |          | 14,195   |  
|                                           | Capital contribution from minority
    interest                                                                         |       |  |                         |      |  |          | 2,145   |   |     |         | 454      |   |  |          | 1,492    |  
|                                           | Change in other long-term
    obligations                                                                               |       |  |                         |      |  |          | 471     |   |     |         | (1,435   | ) |  |          | (51      | )
|                                           | Issuance of H shares                                                                                                    |       |  | 27                      |      |  |          |        |   |     |         | 19,692   |   |  |          |         |  
|                                           |                                                                                                                         |       |  |                         |      |  |          |         |   |     |         |         
|NET CASH USED FOR FINANCING
    ACTIVITIES |                                                                                                                         |       |  |                         |      |  | (39,586  | )       |   |     | (42,634 | )        |   |  | (71,739  | )       
|                                           |                                                                                                                         |       |  |                         |      |  |          |         |   |     |         |         
|TRANSLATION OF FOREIGN
    CURRENCY        |                                                                                                                         |       |  |                         |      |  | 246      |         |   |     | (458    | )        |   |  | (258     | )       
|                                           |                                                                                                                         |       |  |                         |      |  |          |         |   |     |         |         
|                                           | Increase/(Decrease) in cash and
    cash equivalents                                                                    |       |  |                         |      |  |          | 75      |   |     |         | 69,217   |   |  |          | (32,346  | )
|                                           | Cash and cash equivalents at
    beginning of the year                                                                  |       |  | 12                      |      |  |          | 11,613  |   |     |         | 11,688   |   |  |          | 80,905   |  
|                                           |                                                                                                                         |       |  |                         |      |  |          |         |   |     |         |         
|                                           | Cash and cash equivalents at end of
    the year                                                                        |       |  | 12                      |      |  |          | 11,688  |   |     |         | 80,905   |   |  |          | 48,559   |  
|                                           |                                                                                                                         |       |  |                         |      |  |          |         |   |     |         |         



F-8



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##### Table of Contents

PETROCHINA COMPANY LIMITED





CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Years Ended December 31, 2004, 2005 and 2006

(Amounts in millions)

|                                                    |  |                                |         |  |          |  |         |          |  |          |          |  |       |          |         |   |        |  |        |   |  |  |         |  
|--------------------------------------------------- |  | ------------------------------ | ------- |  | -------- |  | ------- | -------- |  | -------- | -------- |  | ----- | -------- | ------- | - | ------ |  | ------ | - |  |  | ------- | -
|                                                    |  | Attributable to equity holders |         |  |          |  |        
|                                                    |  | of the Company                 |         |  |          |  |        
|                                                    |  |                                |         |  |          |  |        
|                                                    |  | Share                          |         |  | Retained |  |         |          |  | Minority |          |  | Total |         
|                                                    |  | Capital                        |         |  | Earnings |  |         | Reserves |  |          | Subtotal |  |       | interest |         |   | equity | 
|                                                    |  |                                |         |  |          |  |         |          |  |          |          |  |       |          |         |   |        | 
|                                                    |  | RMB                            |         |  | RMB      |  |         | RMB      |  |          | RMB      |  |       | RMB      |         |   | RMB    | 
|Balance at January 1, 2004                          |  |                                | 175,824 |  |          |  | 88,152  |          |  |          | 93,952   |  |       |          | 357,928 |   |        |  | 8,966  |   |  |  | 366,894 |  
|                                                    |  |                                |         |  |          |  |         |          |  |          |          |  |       |          |         |   |        | 
|Currency translation differences                    |  |                                |        |  |          |  |        |          |  |          | 330      |  |       |          | 330     |   |        |  | 677    |   |  |  | 1,007   |  
|                                                    |  |                                |         |  |          |  |         |          |  |          |          |  |       |          |         |   |        | 
|Net income recognized directly in
    equity        |  |                                |        |  |          |  |        |          |  |          | 330      |  |       |          | 330     |   |        |  | 677    |   |  |  | 1,007   |  
|Net income for the year ended
    December 31, 2004 |  |                                |        |  |          |  | 103,843 |          |  |          |         |  |       |          | 103,843 |   |        |  | 3,803  |   |  |  | 107,646 |  
|                                                    |  |                                |         |  |          |  |         |          |  |          |          |  |       |          |         |   |        | 
|Total recognized income for 2004                    |  |                                |        |  |          |  | 103,843 |          |  |          | 330      |  |       |          | 104,173 |   |        |  | 4,480  |   |  |  | 108,653 |  
|                                                    |  |                                |         |  |          |  |         |          |  |          |          |  |       |          |         |   |        | 
|Transfer to reserves (Note 28)                      |  |                                |        |  |          |  | (14,552 | )        |  |          | 14,552   |  |       |          |        |   |        |  |       |   |  |  |        |  
|Final dividends for 2003
    (Note 11)              |  |                                |        |  |          |  | (13,947 | )        |  |          |         |  |       |          | (13,947 | ) |        |  |       |   |  |  | (13,947 | )
|Interim dividends for 2004
    (Note 11)            |  |                                |        |  |          |  | (20,381 | )        |  |          |         |  |       |          | (20,381 | ) |        |  |       |   |  |  | (20,381 | )
|Dividends to minority interest                      |  |                                |        |  |          |  |        |          |  |          |         |  |       |          |        |   |        |  | (656   | ) |  |  | (656    | )
|Other movements of minority interest                |  |                                |        |  |          |  |        |          |  |          |         |  |       |          |        |   |        |  | 2,409  |   |  |  | 2,409   |  
|                                                    |  |                                |         |  |          |  |         |          |  |          |          |  |       |          |         |   |        | 
|Balance at December 31, 2004                        |  |                                | 175,824 |  |          |  | 143,115 |          |  |          | 108,834  |  |       |          | 427,773 |   |        |  | 15,199 |   |  |  | 442,972 |  
|                                                    |  |                                |         |  |          |  |         |          |  |          |          |  |       |          |         |   |        | 



F-9



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##### Table of Contents

PETROCHINA COMPANY LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITY  (Continued)

For the Years Ended December 31, 2004, 2005 and 2006

(Amounts in millions)

|                                                                                              |  |                                |         |  |          |  |         |          |  |          |          |   |       |          |         |   |        |  |        |   |  |  |         |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- |  | -------- |  | ------- | -------- |  | -------- | -------- | - | ----- | -------- | ------- | - | ------ |  | ------ | - |  |  | ------- | -
|                                                                                              |  | Attributable to equity holders |         |  |          |  |        
|                                                                                              |  | of the Company                 |         |  |          |  |        
|                                                                                              |  |                                |         |  |          |  |        
|                                                                                              |  | Share                          |         |  | Retained |  |         |          |  | Minority |          |   | Total |         
|                                                                                              |  | Capital                        |         |  | Earnings |  |         | Reserves |  |          | Subtotal |   |       | interest |         |   | Equity | 
|                                                                                              |  |                                |         |  |          |  |         |          |  |          |          |   |       |          |         |   |        | 
|                                                                                              |  | RMB                            |         |  | RMB      |  |         | RMB      |  |          | RMB      |   |       | RMB      |         |   | RMB    | 
|Currency translation differences                                                              |  |                                |        |  |          |  |        |          |  |          | (268     | ) |       |          | (268    | ) |        |  | (465   | ) |  |  | (733    | )
|                                                                                              |  |                                |         |  |          |  |         |          |  |          |          |   |       |          |         |   |        | 
|Net loss recognized directly in
    equity                                                    |  |                                |        |  |          |  |        |          |  |          | (268     | ) |       |          | (268    | ) |        |  | (465   | ) |  |  | (733    | )
|Net income for the year ended
    December 31, 2005                                           |  |                                |        |  |          |  | 133,362 |          |  |          |         |   |       |          | 133,362 |   |        |  | 6,280  |   |  |  | 139,642 |  
|                                                                                              |  |                                |         |  |          |  |         |          |  |          |          |   |       |          |         |   |        | 
|Total recognized income/(loss) for
    2005                                                   |  |                                |        |  |          |  | 133,362 |          |  |          | (268     | ) |       |          | 133,094 |   |        |  | 5,815  |   |  |  | 138,909 |  
|                                                                                              |  |                                |         |  |          |  |         |          |  |          |          |   |       |          |         |   |        | 
|Issue of H shares
    (Note 27 and 28)                                                        |  |                                | 3,197   |  |          |  |        |          |  |          | 16,495   |   |       |          | 19,692  |   |        |  |       |   |  |  | 19,692  |  
|Transfer to reserves (Note 28)                                                                |  |                                |        |  |          |  | (18,998 | )        |  |          | 18,998   |   |       |          |        |   |        |  |       |   |  |  |        |  
|Final dividends for 2004
    (Note 11)                                                        |  |                                |        |  |          |  | (25,936 | )        |  |          |         |   |       |          | (25,936 | ) |        |  |       |   |  |  | (25,936 | )
|Interim dividends for 2005
    (Note 11)                                                      |  |                                |        |  |          |  | (27,731 | )        |  |          |         |   |       |          | (27,731 | ) |        |  |       |   |  |  | (27,731 | )
|Payment to CNPC for the acquisition
    of the refinery and petrochemical businesses (Note 2) |  |                                |        |  |          |  |        |          |  |          | (9       | ) |       |          | (9      | ) |        |  |       |   |  |  | (9      | )
|Dividends to minority interest                                                                |  |                                |        |  |          |  |        |          |  |          |         |   |       |          |        |   |        |  | (1,568 | ) |  |  | (1,568  | )
|Return of capital to minority
    interest due to liquidations of subsidiaries                |  |                                |        |  |          |  |        |          |  |          |         |   |       |          |        |   |        |  | (935   | ) |  |  | (935    | )
|Purchase from minority interest of
    listed subsidiaries (Note 38)                          |  |                                |        |  |          |  |        |          |  |          | (1,438   | ) |       |          | (1,438  | ) |        |  | (581   | ) |  |  | (2,019  | )
|Other movement in minority interest                                                           |  |                                |        |  |          |  |        |          |  |          |         |   |       |          |        |   |        |  | 242    |   |  |  | 242     |  
|Capital contribution to CNPC
    Exploration and Development Company Limited (Note 2)         |  |                                |        |  |          |  |        |          |  |          | (10,056  | ) |       |          | (10,056 | ) |        |  | 10,106 |   |  |  | 50      |  
|                                                                                              |  |                                |         |  |          |  |         |          |  |          |          |   |       |          |         |   |        | 
|Balance at December 31, 2005                                                                  |  |                                | 179,021 |  |          |  | 203,812 |          |  |          | 132,556  |   |       |          | 515,389 |   |        |  | 28,278 |   |  |  | 543,667 |  
|                                                                                              |  |                                |         |  |          |  |         |          |  |          |          |   |       |          |         |   |        | 
|Currency translation differences                                                              |  |                                |        |  |          |  |        |          |  |          | (191     | ) |       |          | (191    | ) |        |  | (204   | ) |  |  | (395    | )
|                                                                                              |  |                                |         |  |          |  |         |          |  |          |          |   |       |          |         |   |        | 
|Net loss recognized directly in
    equity                                                    |  |                                |        |  |          |  |        |          |  |          | (191     | ) |       |          | (191    | ) |        |  | (204   | ) |  |  | (395    | )
|Net income for the year ended
    December 31, 2006                                           |  |                                |        |  |          |  | 142,224 |          |  |          |         |   |       |          | 142,224 |   |        |  | 7,173  |   |  |  | 149,397 |  
|                                                                                              |  |                                |         |  |          |  |         |          |  |          |          |   |       |          |         |   |        | 
|Total recognized income/(loss) for
    2006                                                   |  |                                |        |  |          |  | 142,224 |          |  |          | (191     | ) |       |          | 142,033 |   |        |  | 6,969  |   |  |  | 149,002 |  
|                                                                                              |  |                                |         |  |          |  |         |          |  |          |          |   |       |          |         |   |        | 
|Transfer to reserves (Note 28)                                                                |  |                                |        |  |          |  | (13,355 | )        |  |          | 13,355   |   |       |          |        |   |        |  |       |   |  |  |        |  
|Final dividends for 2005
    (Note 11)                                                        |  |                                |        |  |          |  | (32,282 | )        |  |          |         |   |       |          | (32,282 | ) |        |  |       |   |  |  | (32,282 | )
|Interim dividends for 2006
    (Note 11)                                                      |  |                                |        |  |          |  | (36,307 | )        |  |          |         |   |       |          | (36,307 | ) |        |  |       |   |  |  | (36,307 | )
|Dividends to minority interest                                                                |  |                                |        |  |          |  |        |          |  |          |         |   |       |          |        |   |        |  | (3,000 | ) |  |  | (3,000  | )
|Purchase from minority interest of
    subsidiaries (Note 38)                                 |  |                                |        |  |          |  |        |          |  |          | (2,156   | ) |       |          | (2,156  | ) |        |  | (2,579 | ) |  |  | (4,735  | )
|Other movement of minority interest                                                           |  |                                |        |  |          |  |        |          |  |          |         |   |       |          |        |   |        |  | (246   | ) |  |  | (246    | )
|Minority interest paid-in capital                                                             |  |                                |        |  |          |  |        |          |  |          |         |   |       |          |        |   |        |  | 1,492  |   |  |  | 1,492   |  
|                                                                                              |  |                                |         |  |          |  |         |          |  |          |          |   |       |          |         |   |        | 
|Balance at December 31, 2006                                                                  |  |                                | 179,021 |  |          |  | 264,092 |          |  |          | 143,564  |   |       |          | 586,677 |   |        |  | 30,914 |   |  |  | 617,591 |  
|                                                                                              |  |                                |         |  |          |  |         |          |  |          |          |   |       |          |         |   |        | 
|Balance at December 31, 2006
    in US$                                                       |  |                                | 22,939  |  |          |  | 33,840  |          |  |          | 18,396   |   |       |          | 75,175  |   |        |  | 3,961  |   |  |  | 79,137  |  
|                                                                                              |  |                                |         |  |          |  |         |          |  |          |          |   |       |          |         |   |        | 



F-10



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##### Table of Contents

PETROCHINA COMPANY LIMITED





NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions except for per share data or unless
otherwise stated)

1     ORGANIZATION AND PRINCIPAL
ACTIVITIES

PetroChina Company Limited (the Company) was
established in the Peoples Republic of China (the
PRC or China) on November 5, 1999
as a joint stock company with limited liability as a result of a
group restructuring (the Restructuring) of China
National Petroleum Corporation (CNPC) in preparation
for the listing of the Companys shares in Hong Kong and in
the United States of America in 2000 (See Note 27). The
Company and its subsidiaries are collectively referred to as the
Group.

The Group is principally engaged in (i) the exploration,
development and production of crude oil and natural gas,
(ii) the refining, transportation, storage and marketing of
crude oil and petroleum products, (iii) the production and
sale of chemicals, and (iv) the transmission, marketing and
sale of natural gas (See Note 36).

2     BASIS OF PREPARATION

The consolidated financial statements of the Group (comprising
the consolidated statements of income, consolidated balance
sheets, consolidated statements of cash flows and the
consolidated statements of changes in equity of the Group ) have
been prepared in accordance with the International Financial
Reporting Standards (IFRS) issued by the
International Accounting Standards Board (IASB). The
consolidated financial statements of the Group have been
prepared under the historical cost convention except as
disclosed in the accounting policies below.

The preparation of financial statements in conformity with IFRS
requires the use of estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the balance sheet date and
the reported amounts of revenues and expenses during the
reporting period. Although these estimates are based on
managements best knowledge of current events and actions,
actual results may ultimately differ from those estimates. The
areas involving a higher degree of judgement or complexity, or
areas where assumptions and estimates are significant to the
consolidated financial statements are disclosed in Note 4.

In 2006, the Group adopted the following amendments and
interpretations to existing standards which are relevant to its
operations. The adoption of these amendments and interpretations
did not result currently in changes to the Groups
accounting policies. In summary:



(a) Amendments and interpretations to existing
    standards effective in 2006


    International Accounting Standard (IAS) No 39 (IAS
    39) and IFRS 4 (Amendment), Financial Guarantee
    Contracts; and
    International Financial Reporting Interpretations Committee
    (IFRIC) Interpretation 4, Determining whether
    an Arrangement contains a Lease;

(b) Interpretations to existing standards early
    adopted by the Group


    IFRIC Interpretation 8, Scope of IFRS 2 (effective for
    annual periods beginning on or after May 1, 2006)The following amendments and interpretations are mandatory for
accounting periods beginning on or after January 1, 2006
but are not relevant to the Groups operations:




    IAS 19 (Amendment), Employee Benefits: Actuarial Gains and
    Losses, Group Plans and Disclosures;

F-11



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)




    IAS 21 (Amendment), Net Investment in a Foreign Operation;
    IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast
    Intragroup Transactions;
    IAS 39 (Amendment), The Fair Value Option;
    IFRIC Interpretation 5, Rights to Interests arising from
    Decommissioning, Restoration and Environmental Rehabilitation
    Funds; and
    IFRIC Interpretation 6, Liabilities arising from
    Participating in a Specific Market  Waste Electrical
    and Electronic Equipment.In accordance with the acquisition agreement between the Company
and CNPC dated March 28, 2005, the Company acquired the
refining and petrochemical businesses owned by CNPCs
wholly-owned subsidiaries, Ningxia Dayuan Refinery and
Petrochemical Company Limited (Dayuan) and Qingyang
Refinery and Petrochemical Company Limited
(Qingyang) with a total consideration of Renminbi 9
(RMB, the national currency of the PRC).

The acquisition was a combination of businesses under common
control since the Company and CNPCs refinery and
petrochemical businesses owned by Dayuan and Qingyang are under
the common control of CNPC. As a result, the Company accounted
for the acquisition in a manner similar to a uniting of
interests, whereby the assets and liabilities acquired are
accounted for at historical cost to CNPC (net liabilities of RMB
183 at the effective date). The consolidated financial
statements have been restated to give effect to the acquisition
with all periods presented as if the operations of the Group and
these refinery and petrochemical businesses have always been
combined. The difference between RMB 9 payable and the net
liabilities transferred from CNPC have been adjusted against
equity.

In August 2005 the shareholders of the Company approved the
acquisition and transfer agreements relating to the
Companys acquisition of a 50% ownership interest in CNPC
Exploration and Development Company Limited (CNPC
E&D). CNPC E&D was formed in 2005 and was wholly
owned by China National Oil and Gas Exploration and Development
Corporation (CNODC, wholly owned by CNPC) and one of
its subsidiaries. Under the terms of the related agreements,
CNODC transferred certain oil and gas exploration operations
into CNPC E&D and the Company contributed to CNPC E&D
its wholly-owned subsidiary, PetroChina International Limited
(PTRI), and cash amounting to approximately RMB
20,162, which is the difference between the cash contribution of
RMB 20,741 payable by the Company according to the acquisition
agreement and cash consideration of RMB 579 for PTRI receivable
by the Company.

The terms of the agreements grant the Company the right to
appoint four of the seven directors of CNPC E&D and enable
the Company to maintain effective control over CNPC E&D.

Similar to the acquisition of the refinery and petrochemical
businesses from CNPC described above,the investment in CNPC
E&D and related transactions have been accounted for in a
manner similar to uniting of interests as all entities involved
are under common control by CNPC. The consolidated financial
statements of the Company have been restated as if the
operations of the Company and CNPC E&D have always been
combined. The payment was made directly to CNPC E&D,
therefore the difference between RMB 20,162 paid and the net
assets of RMB 35,551 at the effective date acquired (including
RMB 20,162 contributed by the Company and RMB 50 for the
contributed paid-in capital by CNODC and its subsidiary) have
been adjusted against equity.

F-12



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

3     SUMMARY OF PRINCIPAL
ACCOUNTING POLICIES



(a) Basis of consolidationThe consolidated financial statements include the financial
statements of the Company and its subsidiaries. Subsidiaries are
those entities in which the Group has an interest of more than
one half of the voting rights or otherwise has power to govern
the financial and operating policies.

Subsidiaries are consolidated from the date on which control is
transferred to the Group and are no longer consolidated from the
date that control ceases. Other than the business combination
under common control for which the accounting policy is
disclosed in Note 2, the purchase method of accounting is
used to account for the acquisition of subsidiaries. The cost of
an acquisition is measured as the fair value of the assets given
up, shares issued or liabilities undertaken at the date of
acquisition plus costs directly attributable to the acquisition.
Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured
initially at their fair values at the acquisition date,
irrespective of the extent of any minority interest. The excess
of the cost of acquisition over the fair value of the
Groups share of the identifiable net assets of the
subsidiary acquired is recorded as goodwill. If the cost of
acquisition is less than the fair value of the identifiable net
assets of subsidiary acquired, the difference is recognized
directly in the consolidated statements of income. Intercompany
transactions, balances and unrealized gains on transactions
between group companies are eliminated; unrealized losses are
also eliminated but considered an impairment indicator of the
asset transferred. Where necessary, accounting policies of
subsidiaries have been changed to ensure consistency with the
policies adopted by the Group.

A listing of the Groups principal subsidiaries is set out
in Note 38.



(b) Investments in equity affiliatesEquity affiliates are entities over which the Group has
significant influence but not control, generally accompanying a
shareholding of between 20% and 50% of the voting rights.
Investments in equity affiliates are accounted for by the equity
method in the consolidated financial statements of the Group and
are initially recognized at cost. Under this method the
Groups share of the post-acquisition income or losses of
equity affiliates is recognized in the consolidated statements
of income and its share of post-acquisition movements in
reserves is recognized in reserves. The cumulative
post-acquisition movements are adjusted against the cost of the
investment. When the Groups share of losses in an equity
affiliate equals or exceeds its interest in the equity
affiliate, including any other unsecured receivables, the Group
does not recognise further losses, unless it has incurred
obligations or made payments on behalf of the equity affiliate.
Unrealized gains on transactions between the Group and its
equity affiliates are eliminated to the extent of the
Groups interest in the equity affiliates; unrealized
losses are also eliminated unless the transaction provides
evidence of an impairment of the asset transferred. The
Groups investment in equity affiliates includes goodwill
identified on acquisition, net of any accumulated loss and is
tested for impairment as part of the overall balance. Goodwill
represents the excess of the cost of an acquisition over the
fair value of the Groups share of the net identifiable
assets of the acquired associate at the date of acquisition.

A listing of the Groups principal equity affiliates is
shown in Note 19.

F-13



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



(c) Investments in jointly controlled entitiesJointly controlled entities are those over which the Group has
contractual arrangements to jointly share control with one or
more parties. The Groups interest in joint ventures is
accounted for by the equity method of accounting
(Note 3(b)) in the consolidated financial statements.

A listing of the Groups principal jointly controlled
entities is shown in Note 19.



(d) Transactions with minority interestThe Group applies a policy of treating transactions with
minority interest as transactions with equity participants of
the Group. Gains and losses resulting from the disposals to
minority interest are recorded in equity. The differences
between any consideration paid and the relevant share of the
carrying value of net assets of the subsidiary acquired,
resulting from the purchase from minority interest, are recorded
in equity.



(e) Foreign currenciesItems included in the financial statements of each entity in the
Group are measured using the currency of the primary economic
environment in which the entity operates (the functional
currency). Most assets and operations of the Group are
located in the PRC, and the functional currency of the Company
and most of the consolidated subsidiaries is RMB. For the
majority of the overseas oil and gas exploration and production
operations, the functional currency is United States Dollar. The
consolidated financial statements and the balance sheet of the
Company are presented in RMB which is the presentation currency
of the Company and most of the consolidated subsidiaries.

Foreign currency transactions of the Group are accounted for at
the exchange rates prevailing at the date of the transactions;
monetary assets and liabilities denominated in foreign
currencies are translated at balance sheet date exchange rates;
gains and losses resulting from the settlement of such
transactions and from the translation of monetary assets and
liabilities are recognized in the consolidated statements of
income. Statements of income and cash flows of the Groups
entities that have a functional currency different from the
Groups presentation currency are translated into the
Groups presentation currency at average exchange rates for
the year and their balance sheets are translated at the exchange
rates at the balance sheet date. Currency translation
differences are recognized in shareholders equity.

The Group did not enter into material hedge contracts during any
of the years presented. No foreign currency exchange gains or
losses were capitalized in any of the years presented.



(f) Financial instrumentsFinancial instruments carried at the balance sheet date include
cash and cash equivalents, investments (including
available-for-sale investments and time deposits), receivables,
payables, lease obligations and debts. Where necessary, the
particular recognition methods adopted are disclosed in the
individual policy statements associated with each item.

Derivatives are initially recognized at fair value on the date a
derivative contract is entered into with subsequent changes in
the fair value recognized in the consolidated statements of
income. The Group did not hold any derivative financial
instruments for hedging or risk management purposes in any of
the years presented.

F-14



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



(g) InvestmentsThe Group classifies its investments into the following
categories: at fair value through income or loss,
held-to-maturity, loans
and receivables and available-for-sale.

Investments that are acquired principally for the purpose of
generating a profit from short-term fluctuations in price are
classified as investments at fair value through income or loss
and included in current assets. The Group did not hold any
investments in this category in any of the years presented.

Investments with fixed maturity that the management has the
intent and ability to hold to maturity are classified as
held-to-maturity and
are included in current assets if their respective maturity
dates are twelve months or less from balance sheet date, or in
non-current assets if their respective maturity dates are more
than twelve months from balance sheet date; the Group did not
hold any investments in this category in any of the years
presented.

Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. They are included in current assets, except for those
with maturities greater than 12 months from the balance
sheet date. These are classified as non-current assets. Loans
and receivables are initially recorded at fair value and
subsequently at amortized cost.

Available-for-sale investments are non-derivatives that are
either designated in this category or not classified in any
other categories; these are included in non-current assets
unless management intends to dispose of the investment within
twelve months of the balance sheet date. Management determines
the appropriate classification of the investments at the time of
the purchase and
re-evaluates such
designation on a regular basis.

Regular purchases and sales of available-for-sale investments
are recognized on settlement date, the date that the asset is
delivered to or by the Group (the effective acquisition or sale
date). Available-for-sale investments are initially recognized
at fair value plus transaction costs. Available-for-sale
investments are derecognized when the rights to receive cash
flows from the investments have expired or have been transferred
and the Group has transferred substantially all risks and
rewards of ownership in the investment. Available-for-sale
investments are measured at fair value except where there are no
quoted market prices in active markets and the fair values
cannot be reliably measured using valuation techniques.
Available-for-sale investments carried at cost are subject to
review for impairment.



(h)
    Property, plant and equipmentProperty, plant and equipment, including oil and gas properties
(Note 3(i)), are initially recorded at cost less
accumulated depreciation, depletion and amortization. Cost
represents the purchase price of the asset and other costs
incurred to bring the asset into existing use. Subsequent to
their initial recognition, property, plant and equipment are
carried at revalued amounts. Revaluations are performed by
independent qualified valuers periodically.

In the intervening years between independent revaluations, the
directors review the carrying values of the property, plant and
equipment and adjustment is made where the carrying value
differs from fair value.

Increases in the carrying amount arising on revaluation are
credited to the revaluation reserve. Decreases in valuation of
property, plant and equipment are first offset against increases
from earlier revaluations in respect of the same asset and are
thereafter charged to the consolidated statements of income. All
other decreases in valuation are charged to the consolidated
statements of income.

F-15



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

Any subsequent increases are credited to the consolidated
statements of income up to the amount previously charged.

Revaluation surpluses realized through the depreciation or
disposal of revalued assets are retained in the revaluation
reserve and will not be available for offsetting against
possible future revaluation losses.

Depreciation, to write off the cost or valuation of each asset,
other than oil and gas properties (Note 3(i)), to their
residual values over their estimated useful lives is calculated
using the straight-line method.

The Group uses the following useful lives for depreciation
purposes:

|                    |  |            
|------------------- |  | -----------
|Buildings           |  | 20-40 years
|Plant and equipment |  | 10-25 years
|Motor vehicles      |  | 7-15 years 













|    |                       
|--- | ----------------------
|(i) | Oil and gas properties



F-16



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

viability within one year of completion of drilling. The related
well costs are expensed as dry holes if it is determined that
such economic viability is not attained. Otherwise, the related
well costs are reclassified to oil and gas properties and
subject to impairment review (Note 3(h)). For wells that
are found to have economically viable reserves in areas where
major capital expenditure would be required before production
can begin, the related well costs remain capitalized only if
additional drilling is under way or firmly planned. Otherwise
the well costs are expensed as dry holes. The Group does not
have any costs of unproved properties capitalized in oil and gas
properties.

The Ministry of Land and Resources in China issues production
licenses to applicants on the basis of the reserve reports
approved by relevant authorities. Administrative rules issued by
the State Council provide that the maximum term of a production
license is 30 years. However, in accordance with a special
approval from the State Council, the Ministry of Land and
Resources has issued production licenses effective from March
2000 to the Group for all of its crude oil and natural gas
reservoirs with terms coextensive with the projected production
life of those reservoirs, ranging up to 55 years.
Production licenses to be issued to the Group in the future will
be subject to the
30-year maximum unless
additional special approvals can be obtained from the State
Council. Each of the Groups production licenses is
renewable upon application by the Group 30 days prior to
expiration. Future oil and gas price increases may extend the
productive lives of crude oil and natural gas reservoirs beyond
the current terms of the relevant production licenses. Payments
on such licenses are made annually and are expensed as incurred.

The cost of oil and gas properties is amortized at the field
level on the unit of production method. Unit of production rates
are based on oil and gas reserves estimated to be recoverable
from existing facilities based on the current terms of the
Groups production licenses. The Groups oil and gas
reserves estimates include only crude oil and natural gas which
management believes can be reasonably produced within the
current terms of these production licenses.



(j)
    Intangible assetsExpenditure on acquired patents, trademarks, technical know-how
and licenses is capitalized at historical cost and amortized
using the straight-line method over their useful lives,
generally over 10 years. Intangible assets are not
revalued. The carrying amount of each intangible asset is
reviewed annually and adjusted for impairment whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable. An impairment loss is recognized whenever
the carrying amount of an asset exceeds its recoverable amount
and is recognized in the consolidated statements of income. The
recoverable amount is measured as the higher of fair value less
costs to sell and value in use which is the present value of
estimated future cash flows to be derived from continuing use of
the asset.



(k) LeasesLeases of property, plant and equipment where the Group assumes
substantially all the benefits and risks of ownership are
classified as capital leases. Capital leases are capitalized at
the inception of the lease at the lower of the fair value of the
leased property and the estimated present value of the
underlying lease payments. Each lease payment is allocated
between the liability and finance charges so as to achieve a
constant rate on the finance balance outstanding. Property,
plant and equipment acquired under capital leases are generally
depreciated over the useful life of the asset as the Group
usually obtains ownership of such leased assets by the end of
the lease term.

Leases of assets under which a significant portion of the risks
and benefits of ownership are effectively retained by the lessor
are classified as operating leases. Payments made under operating

F-17



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

leases (net of any incentives received from the lessor) are
expensed on a straight-line basis over the lease term. Payments
made to the PRCs land authorities to secure land use
rights are treated as operating leases. Land use rights are
generally obtained through advance lump-sum payments and the
terms for use range up to 50 years.



(l) Related partiesRelated parties include CNPC and its subsidiaries, other
state-controlled enterprises and their subsidiaries directly or
indirectly controlled by the PRC government, corporations in
which the Company is able to control or exercise significant
influence, key management personnel of the Company and CNPC and
their close family members.

Transactions with related parties do not include those done in
the ordinary course of business with terms consistently applied
to all public and private entities and where there is no choice
of supplier such as electricity, telecommunications, postal
service and local government retirement funds.



(m) InventoriesInventories are oil products, chemical products and materials
and supplies which are stated at the lower of cost and net
realizable value. Cost is determined by the weighted average
cost method. The cost of finished goods comprises raw materials,
direct labour, other direct costs and related production
overheads, but excludes debt cost. Net realizable value is the
estimate of the selling price in the ordinary course of
business, less the cost of completion and selling expenses.



(n) Accounts receivableAccounts receivable are recognized initially at fair value and
subsequently measured at amortized cost using the effective
interest method, less provision made for impairment of these
receivables. Such provision for impairment of accounts
receivable is established if there is objective evidence that
the Group will not be able to collect all amounts due according
to the original terms of the receivables. The amount of the
provision is the difference between the assets carrying
amount and the present value of expected cash flows, discounted
at the market rate of interest for similar borrowers.



(o) Cash and cash equivalentsCash and cash equivalents comprise cash in hand, deposits held
with banks and highly liquid investments with original
maturities of three months or less from the time of purchase.



(p) DebtsDebts are recognized initially at the fair value, net of
transaction costs incurred. In subsequent periods, debts are
stated at amortized cost using the effective yield method. Any
difference between proceeds (net of transaction costs) and the
redemption value is recognized in the consolidated statements of
income over the terms of the debts, except for the portion
eligible for capitalization.

Debts are classified as current liabilities unless the Group has
an unconditional right to defer settlement of the liability for
at least 12 months after the balance sheet date.

F-18



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



(q) TaxationThe Company has obtained approval from the State Administration
for Taxation to report taxable income on a consolidated basis.

Deferred tax is provided in full, using the liability method,
for temporary differences arising between the tax bases of
assets and liabilities and their carrying values in the
financial statements. However, deferred tax is not accounted for
if it arises from initial recognition of an asset or liability
in a transaction other than a business combination that at the
time of the transaction affects neither accounting nor taxable
income or loss. Currently enacted tax rates are used to
determine deferred tax.

The principal temporary differences arise from depreciation on
oil and gas properties and equipment and provision for
impairment of receivables, inventories, investments and
property, plant and equipment. Deferred tax assets relating to
the carryforward of unused tax losses are recognized to the
extent that it is probable that future taxable income will be
available against which the unused tax losses can be utilized.

The Group also incurs various other taxes and levies that are
not income taxes. Taxes other than income taxes,
which form part of the operating expenses, primarily comprise a
special levy on domestic sales of crude oil (See Note 7),
consumption tax, resource tax, urban construction tax, education
surcharges and business tax.



(r) Revenue recognitionSales are recognized upon delivery of products and customer
acceptance or performance of services, net of sales taxes and
discounts. Revenues are recognized only when the Group has
transferred to the buyer the significant risks and rewards of
ownership of the goods in the ordinary course of the
Groups activities, and when the amount of revenue and the
costs incurred or to be incurred in respect of the transaction
can be measured reliably and collectability of the related
receivables is reasonably assured.

The Group markets a portion of its natural gas production under
take-or-pay contracts. Customers under the take-or-pay contracts
are required to take or pay for the minimum natural gas
deliveries specified in the contract clauses. Revenue
recognition for natural gas sales and transmission tariff under
the take-or-pay contracts follows the accounting policies
described in this note. Payments received from customers for
natural gas not yet taken are recorded as deferred revenues
until actual deliveries take place.

The Group reports gross the revenue under take-or-pay contracts
in the consolidated statements of income. As a result of a
communication to the oil and gas industry issued by the US
Securities and Exchange Commission in February 2005 requesting
additional disclosures regarding buy/sell contracts, the Group
reviewed such contracts and estimated that, if buy/sell
contracts were reported net, both Sales and other
operating revenues and Purchase, services and
other for the years ended December 31, 2004, 2005 and
2006 would be reduced by RMB 2,217, RMB 1,384 and RMB 2,119,
respectively, with no impact on net income.



(s) ProvisionsProvisions are recognized when the Group has a present legal or
constructive obligation as a result of past events, it is
probable that an outflow of resources will be required to settle
the obligation, and a reliable estimate of the amount can be
made.

F-19



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

Provision for future decommissioning and restoration is
recognized in full on the installation of oil and gas
properties. The amount recognized is the present value of the
estimated future expenditure determined in accordance with local
conditions and requirements. A corresponding addition to the
related oil and gas properties of an amount equivalent to the
provision is also created. This is subsequently depreciated as
part of the costs of the oil and gas properties. Any change in
the present value of the estimated expenditure other than the
one due to passage of time which is regarded as interest cost,
is reflected as an adjustment to the provision and oil and gas
properties.



(t) Research and developmentResearch expenditure incurred is recognized as an expense. Costs
incurred on development projects are recognized as intangible
assets to the extent that such expenditure is expected to
generate future economic benefits. Research and development
expenses were RMB 2,977, RMB 3,195 and RMB 4,260 for the
years ended December 31, 2004, 2005 and 2006, respectively.



(u) Retirement benefit plansThe Group contributes to various employee retirement benefit
plans organised by Chinese municipal and provincial governments
under which it is required to make monthly contributions to
these plans at rates prescribed by the related municipal and
provincial governments. The Chinese municipal and provincial
governments undertake to assume the retirement benefit
obligations of existing and future retired Chinese employees of
the Group. Contributions to these plans are charged to expense
as incurred. The Group currently has no additional material
obligations outstanding for the payment of retirement and other
post-retirement benefits of employees in China or overseas other
than the monthly contributions described above.



(v) Share-based compensation  Share
    appreciation rightsCompensation under the share appreciation rights is measured
based on the fair value of the liability incurred and is
expensed over the vesting period. The liability is remeasured at
each balance sheet date to its fair value until settlement with
all changes included in employee compensation cost in the
consolidated statements of income; the related liability is
included in the salaries and welfare payable. The Group does not
have any other share-based compensation.



(w) New accounting developments(1) New standards and interpretations to existing standards
that are not yet effective and have not been early adopted by
the Group

The following new standard and interpretations to existing
standards have been published that are mandatory for accounting
periods beginning on or after May 1, 2006 or later periods
but that the Group has not early adopted:




    IFRS 7, Financial Instruments: Disclosures, and the
    complementary Amendment to IAS 1, Presentation of Financial
    Statements  Capital DisclosuresIFRS 7 introduces new disclosures relating to financial
instruments. The Group does not expect the standard to have any
impact on the classification and valuation of the Groups
financial instruments.




    IFRIC Interpretation 10, Interim Financial Reporting and
    Impairment (effective for annual periods beginning on or after
    November 1, 2006)

F-20



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

IFRIC Interpretation 10 prohibits the impairment losses
recognized in an interim period on goodwill, investments in
equity instruments and investments in financial assets carried
at cost to be reversed at a subsequent balance sheet date. The
Group will apply IFRIC Interpretation 10 from January 1,
2007, but it is not expected to have any impact on the
consolidated financial statements.

(2) Interpretations to existing standards that are not yet
effective and not relevant for the Groups operations

The following interpretations to existing standards have been
published that are mandatory for accounting periods beginning on
or after May 1, 2006 or later periods but are not relevant
for the Groups operations:




    IFRIC Interpretation 7, Applying the Restatement Approach
    under IAS 29, Financial Reporting in Hyperinflationary
    Economies (effective from March 1, 2006)
    IFRIC Interpretation 9, Reassessment of Embedded
    Derivatives (effective for annual periods beginning on or after
    June 1, 2006)

(x) Convenience translationThe consolidated financial statements are expressed in RMB.
Solely for the convenience of the reader, the December 31,
2006, the consolidated financial statements have been translated
into United States dollars at the noon buying rate in New York
City on December 31, 2006 for cable transfer in RMB as
certified for customs purposes by the Federal Reserve Bank of
New York of US$1.00 = RMB 7.8041. No representation is
made that the RMB amounts could have been, or could be,
converted into United States dollars at that rate or at any
other certain rate on December 31, 2006, or at any other
date.



4
    CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTSEstimates and judgements are continually evaluated and are based
on historical experience and other factors, including
expectations of future events that are believed to be reasonable
under the circumstances.

The matters described below are considered to be the most
critical in understanding the judgements that are involved in
preparing the Groups consolidated financial statements.



(a) Estimation of oil and natural gas reservesOil and nature gas reserves are key elements in the Groups
investment decision-making process. They are also an important
element in testing for impairment. Changes in proved oil and
natural gas reserves, particularly proved developed reserves,
will affect
unit-of-production
depreciation, depletion and amortization charges to the
consolidated statement of income. Proved reserve estimates are
subject to revision, either upward or downward, based on new
information, such as from development drilling and production
activities or from changes in economic factors, including
product prices, contract terms or development plans. In general,
changes in the technical maturity of oil and natural gas
reserves resulting from new information becoming available from
development and production activities have tended to be the most
significant cause of annual revisions. Changes to the
Groups estimates of proved reserves, particularly proved
developed reserves, affect the amount of depreciation, depletion
and amortization recorded in the Groups consolidated
financial statements for property, plant and equipment related
to oil and gas production activities. A reduction

F-21



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

in proved developed reserves will increase depreciation,
depletion and amortization charges (assuming constant
production) and reduce net income.



(b) Estimated impairment of property, plant and
    equipmentProperty, plant and equipment, including oil and gas properties,
are reviewed for possible impairment when events or changes in
circumstances indicate that the carrying amount may not be
recoverable. Determination as to whether and how much an asset
is impaired involves management estimates and judgements such as
future prices of crude oil, refined products and chemical
products and production profile. However, the impairment reviews
and calculations are based on assumptions that are consistent
with the Groups business plan. These assumptions also
include those relative to the pricing regulations by the
regulatory agencies in China that the policies will not restrict
the profit margins of refined products to levels that will be
insufficient to recover the carrying cost of the related
production assets. Favorable changes to some assumptions may
avoid the need to impair any assets in these years, whereas
unfavourable changes may cause the assets to become impaired.



(c) Estimation of asset retirement obligationsProvisions are recognized for the future decommissioning and
restoration of oil and gas properties. The amounts of the
provisions recognized are the present values of the estimated
future expenditures. The estimation of the future expenditures
is based on current local conditions and requirements, including
legal requirements, technology, price level, etc In addition to
these factors, the present values of these estimated future
expenditures are also impacted by the estimation of the economic
life of oil and gas properties. Changes in any of these
estimates will impact the operating results and the financial
position of the Group over the remaining economic life of oil
and gas properties.



5
    EMPLOYEE COMPENSATION COSTS

|                             |  |                         |        |  |      |  |        |      |  |  |        | 
|---------------------------- |  | ----------------------- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                             |  | Year Ended December 31, |       
|                             |  |                         |       
|                             |  | 2004                    |        |  | 2005 |  |        | 2006 | 
|                             |  |                         |        |  |      |  |        |      | 
|                             |  | RMB                     |        |  | RMB  |  |        | RMB  | 
|Wages and salaries           |  |                         | 15,449 |  |      |  | 19,351 |      |  |  | 26,629 | 
|Social security
    costs(i) |  |                         | 7,485  |  |      |  | 10,324 |      |  |  | 12,532 | 
|                             |  |                         |        |  |      |  |        |      | 
|                             |  |                         | 22,934 |  |      |  | 29,675 |      |  |  | 39,161 | 
|                             |  |                         |        |  |      |  |        |      | 






|    |                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | Social security costs mainly represent contributions to funds
    for staff welfare organized by the PRC municipal and provincial
    governments including contribution to the retirement benefit
    plans (See Note 29).

F-22



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



6
    SHUT DOWN OF MANUFACTURING ASSETSDuring the years ended December 31, 2004, 2005 and 2006,
the Group provided RMB 220, RMB Nil and RMB Nil
respectively for the shut down of certain less efficient
operating facilities in the refining and chemical manufacturing
plants.

The charge of RMB 220 provided for in the year ended
December 31, 2004 represented the net book value of the
refining facilities (RMB 192) and chemical facilities
(RMB 28).

There were no employee termination or relocation costs relating
to the shut down of these manufacturing equipments.



7
    TAXES OTHER THAN INCOME TAXESTaxes other than income taxes include RMB Nil, RMB Nil
and RMB 28,914 for the year ended December 31, 2004,
2005 and 2006 of special levy which is paid or payable on the
portion of income realized by petroleum exploration enterprises
from the sales of domestic crude oil at prices higher than a
specific level. This levy was imposed by the PRC government
and became effective from March 26, 2006.



8
    INTEREST EXPENSE

|                            |                  |                         |        |       |      |  |        |       |  |  |        |       | 
|--------------------------- | ---------------- | ----------------------- | ------ | ----- | ---- |  | ------ | ----- |  |  | ------ | ----- | 
|                            |                  | Year Ended December 31, |       
|                            |                  |                         |       
|                            |                  | 2004                    |        |       | 2005 |  |        | 2006  | 
|                            |                  |                         |        |       |      |  |        |       | 
|                            |                  | RMB                     |        |       | RMB  |  |        | RMB   | 
|Interest on                 |                  |                         |        |       |      |  |        |       |  |  |        |      
|                            |  loans          |                         |        | 3,846 |      |  |        | 3,766 |  |  |        | 3,739 | 
|                            |  capital leases |                         |        | 2     |      |  |        | 1     |  |  |        |      | 
|Accretion expense (Note 25) |                  |                         | 54     |       |      |  | 60     |       |  |  | 796    |      
|Less: amounts capitalized   |                  |                         | (1,006 | )     |      |  | (1,065 | )     |  |  | (1,315 | )    
|                            |                  |                         |        |       |      |  |        |       | 
|                            |                  |                         | 2,896  |       |      |  | 2,762  |       |  |  | 3,220  |      
|                            |                  |                         |        |       |      |  |        |       | 





|  |             
|- | ------------
|9 | INCOME TAXES

|                         |  |                         |        |  |      |  |        |      |  |  |        |  
|------------------------ |  | ----------------------- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | -
|                         |  | Year Ended December 31, |       
|                         |  |                         |       
|                         |  | 2004                    |        |  | 2005 |  |        | 2006 | 
|                         |  |                         |        |  |      |  |        |      | 
|                         |  | RMB                     |        |  | RMB  |  |        | RMB  | 
|Current taxes            |  |                         | 40,331 |  |      |  | 50,221 |      |  |  | 50,972 |  
|Deferred taxes (Note 26) |  |                         | 3,267  |  |      |  | 3,959  |      |  |  | (1,196 | )
|                         |  |                         |        |  |      |  |        |      | 
|                         |  |                         | 43,598 |  |      |  | 54,180 |      |  |  | 49,776 |  
|                         |  |                         |        |  |      |  |        |      | 



F-23



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

The tax on the Groups income before income taxes differs
from the theoretical amount that would arise using the statutory
tax rate in the PRC applicable to the Group as follows:

|                                                                                                                                                                                                        |  |                         |         |   |      |  |         |      |  |  |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- |  | ------- | ---- |  |  | ------- | -
|                                                                                                                                                                                                        |  | Year Ended December 31, |        
|                                                                                                                                                                                                        |  |                         |        
|                                                                                                                                                                                                        |  | 2004                    |         |   | 2005 |  |         | 2006 | 
|                                                                                                                                                                                                        |  |                         |         |   |      |  |         |      | 
|                                                                                                                                                                                                        |  | RMB                     |         |   | RMB  |  |         | RMB  | 
|Income before income taxes                                                                                                                                                                              |  |                         | 151,244 |   |      |  | 193,822 |      |  |  | 199,173 |  
|                                                                                                                                                                                                        |  |                         |         |   |      |  |         |      | 
|Tax calculated at a tax rate of 33%                                                                                                                                                                     |  |                         | 49,911  |   |      |  | 63,961  |      |  |  | 65,727  |  
|Prior year tax return adjustment                                                                                                                                                                        |  |                         | 27      |   |      |  | 364     |      |  |  | 243     |  
|Effect of preferential tax rate                                                                                                                                                                         |  |                         | (6,886  | ) |      |  | (10,744 | )    |  |  | (14,169 | )
|Tax effect of income not subject to
    tax                                                                                                                                                             |  |                         | (913    | ) |      |  | (427    | )    |  |  | (1,602  | )
|Tax effect of expenses not
    deductible for tax purposes                                                                                                                                              |  |                         | 2,428   |   |      |  | 1,026   |      |  |  | 2,466   |  
|Effect of income taxes from
    international operations in excess of taxes at the PRC statutory
    rate                                                                                               |  |                         |        |   |      |  |        |      |  |  | 1,512   |  
|Reversal of a tax liability in an
    amount of RMB 4,401 million in relation to certain crude
    oil sales that were exempted from tax prior to the establishment
    of the company in November 1999 |  |                         |        |   |      |  |        |      |  |  | (4,401  | )
|Utilization of previously
    unrecognized tax loss of subsidiaries                                                                                                                                     |  |                         | (969    | ) |      |  |        |      |  |  |        |  
|                                                                                                                                                                                                        |  |                         |         |   |      |  |         |      | 
|Tax charge                                                                                                                                                                                              |  |                         | 43,598  |   |      |  | 54,180  |      |  |  | 49,776  |  
|                                                                                                                                                                                                        |  |                         |         |   |      |  |         |      | 



|   |                                       
|-- | --------------------------------------
|10 | BASIC AND DILUTED NET INCOME PER SHARE









F-24



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



11
    DIVIDENDS ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY

|                                                                                         |  |                         |        |  |      |  |        |      |  |  |        | 
|---------------------------------------------------------------------------------------- |  | ----------------------- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                                                                                         |  | Year Ended December 31, |       
|                                                                                         |  |                         |       
|                                                                                         |  | 2004                    |        |  | 2005 |  |        | 2006 | 
|                                                                                         |  |                         |        |  |      |  |        |      | 
|                                                                                         |  | RMB                     |        |  | RMB  |  |        | RMB  | 
|Final dividends attributable to
    equity holders of the Company for 2003 (Note (i))    |  |                         | 13,947 |  |      |  |       |      |  |  |       | 
|Interim dividends attributable to
    equity holders of the Company for 2004 (Note (ii)) |  |                         | 20,381 |  |      |  |       |      |  |  |       | 
|Final dividends attributable to
    equity holders of the Company for 2004 (Note (iii))  |  |                         |       |  |      |  | 25,936 |      |  |  |       | 
|Interim dividends attributable to
    equity holders of the Company for 2005 (Note (iv)) |  |                         |       |  |      |  | 27,731 |      |  |  |       | 
|Final dividends attributable to
    equity holders of the Company for 2005 (Note (v))    |  |                         |       |  |      |  |       |      |  |  | 32,282 | 
|Interim dividends attributable to
    equity holders of the Company for 2006 (Note (vi)) |  |                         |       |  |      |  |       |      |  |  | 36,307 | 
|                                                                                         |  |                         |        |  |      |  |        |      | 
|                                                                                         |  |                         | 34,328 |  |      |  | 53,667 |      |  |  | 68,589 | 
|                                                                                         |  |                         |        |  |      |  |        |      | 






|      |                                                                                                                                                                                                                                                                                                                
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   | Final dividends attributable to equity holders of the Company in
    respect of 2003 of RMB 0.079324 per share amounting to
    a total of RMB 13,947 were paid on June 2, 2004, and
    were accounted for in equity as an appropriation of retained
    earnings in the year ended December 31, 2004.        
|     
|(ii)  | Interim dividends attributable to equity holders of the Company
    in respect of 2004 of RMB 0.115919 per share amounting
    to a total of RMB 20,381 were paid on October 8, 2004,
    and were accounted for in equity as an appropriation of retained
    earnings in the year ended December 31, 2004.   
|     
|(iii) | Final dividends attributable to equity holders of the Company in
    respect of 2004 of RMB 0.147511 per share amounting to
    a total of RMB 25,936 were paid on June 10, 2005, and
    were accounted for in equity as an appropriation of retained
    earnings in the year ended December 31, 2005.       
|     
|(iv)  | Interim dividends attributable to equity holders of the Company
    in respect of 2005 of RMB 0.157719 per share amounting
    to a total of RMB 27,731 were paid on September 30,
    2005, and were accounted for in equity as an appropriation of
    retained earnings in the year ended December 31, 2005.
|     
|(v)   | Final dividends attributable to equity holders of the Company in
    respect of 2005 of RMB 0.180325 per share amounting to
    a total of RMB 32,282 were paid on June 9, 2006, and
    were accounted for in equity as an appropriation of retained
    earnings in the year ended December 31, 2006.        
|     
|(vi)  | Interim dividends attributable to equity holders of the Company
    in respect of 2006 of RMB 0.202806 per share amounting
    to a total of RMB 36,307 were paid on September 26,
    2006 and were accounted for in equity as an appropriation of
    retained earnings in the year ended December 31, 2006. 
|     
|(vii) | At the meeting on March 19, 2007, the Board of Directors
    proposed final dividends attributable to equity holders of the
    Company in respect of 2006 of RMB 0.154699 per share
    amounting to a total of RMB 27,694. These consolidated
    financial statements do not reflect this dividend          

F-25



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



payable as the final dividends were proposed after the balance
    sheet date and will be accounted for in equity as an
    appropriation of retained earnings in the year ending
    December 31, 2007 when approved at the forthcoming annual
    general meeting.

12
    CASH AND CASH EQUIVALENTSThe weighted average effective interest rate on bank deposits
was 1.97% and 1.95% for the years ended December 31, 2005
and 2006, respectively.



13
    INVESTMENTS IN COLLATERALIZED LOANSSecurities, in the form of loans collateralized by principally
PRC government bonds, purchased by the Group are recorded as
investments in collateralized loans. These securities have terms
ranging from 3 days to 182 days. The difference
between the purchase price and the amount that the Group is
expected to receive upon the maturity of these securities is
accounted as interest income and accrued over the lives of the
corresponding securities using the effective yield method.
Investments in collateralized loans are accounted for as
collateralized financing transactions and are recorded at their
contractual amounts plus interest accrued.



14
    NOTES RECEIVABLENotes receivable represent mainly the bills of acceptance issued
by banks for sale of goods and products. All notes receivable
are due within one year.



15
    ACCOUNTS RECEIVABLE

|                                                  |  |              |        |   |      |  |        |  
|------------------------------------------------- |  | ------------ | ------ | - | ---- |  | ------ | -
|                                                  |  | At           |       
|                                                  |  | December 31, |       
|                                                  |  |              |       
|                                                  |  | 2005         |        |   | 2006 | 
|                                                  |  |              |        |   |      | 
|                                                  |  | RMB          |        |   | RMB  | 
|Accounts receivable due from third
    parties    |  |              | 6,483  |   |      |  | 9,498  |  
|Accounts receivable due from
    related parties  |  |              | 2,145  |   |      |  | 2,247  |  
|Less: Provision for impairment of
    receivables |  |              | (3,998 | ) |      |  | (3,257 | )
|                                                  |  |              |        |   |      | 
|                                                  |  |              | 4,630  |   |      |  | 8,488  |  
|                                                  |  |              |        |   |      | 



|                                     |  |              |       |   |      |  |       |      |  |  |       |  
|------------------------------------ |  | ------------ | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                                     |  | Year Ended   |      
|                                     |  | December 31, |      
|                                     |  |              |      
|                                     |  | 2004         |       |   | 2005 |  |       | 2006 | 
|                                     |  |              |       |   |      |  |       |      | 
|                                     |  | RMB          |       |   | RMB  |  |       | RMB  | 
|Balance at beginning of the year     |  |              | 5,952 |   |      |  | 4,848 |      |  |  | 3,998 |  
|Provision/(Write back)               |  |              | (408  | ) |      |  | (333  | )    |  |  | (126  | )
|Amount written off against provision |  |              | (696  | ) |      |  | (517  | )    |  |  | (615  | )
|                                     |  |              |       |   |      |  |       |      | 
|Balance at end of the year           |  |              | 4,848 |   |      |  | 3,998 |      |  |  | 3,257 |  
|                                     |  |              |       |   |      |  |       |      | 



F-26



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



16
    INVENTORIES

|                                  |  |              |        |   |      |  |        |  
|--------------------------------- |  | ------------ | ------ | - | ---- |  | ------ | -
|                                  |  | At           |       
|                                  |  | December 31, |       
|                                  |  |              |       
|                                  |  | 2005         |        |   | 2006 | 
|                                  |  |              |        |   |      | 
|                                  |  | RMB          |        |   | RMB  | 
|Crude oil and other raw materials |  |              | 22,396 |   |      |  | 24,143 |  
|Work in progress                  |  |              | 5,933  |   |      |  | 5,493  |  
|Finished goods                    |  |              | 35,131 |   |      |  | 47,263 |  
|Spare parts and consumables       |  |              | 43     |   |      |  | 41     |  
|                                  |  |              |        |   |      | 
|                                  |  |              | 63,503 |   |      |  | 76,940 |  
|Less: Write down in inventories   |  |              | (770   | ) |      |  | (902   | )
|                                  |  |              |        |   |      | 
|                                  |  |              | 62,733 |   |      |  | 76,038 |  
|                                  |  |              |        |   |      | 



|                                     |  |              |     |   |      |  |      |      |  |  |     |  
|------------------------------------ |  | ------------ | --- | - | ---- |  | ---- | ---- |  |  | --- | -
|                                     |  | Year Ended   |    
|                                     |  | December 31, |    
|                                     |  |              |    
|                                     |  | 2004         |     |   | 2005 |  |      | 2006 | 
|                                     |  |              |     |   |      |  |      |      | 
|                                     |  | RMB          |     |   | RMB  |  |      | RMB  | 
|Balance at beginning of the year     |  |              | 803 |   |      |  | 926  |      |  |  | 770 |  
|Provision /(Write back)              |  |              | 147 |   |      |  | (139 | )    |  |  | 140 |  
|Amount written off against provision |  |              | (24 | ) |      |  | (17  | )    |  |  | (8  | )
|                                     |  |              |     |   |      |  |      |      | 
|Balance at end of the year           |  |              | 926 |   |      |  | 770  |      |  |  | 902 |  
|                                     |  |              |     |   |      |  |      |      | 







|   |                                          
|-- | -----------------------------------------
|17 | PREPAID EXPENSES AND OTHER CURRENT ASSETS

|                                                        |  |              |        |   |      |  |        |  
|------------------------------------------------------- |  | ------------ | ------ | - | ---- |  | ------ | -
|                                                        |  | At           |       
|                                                        |  | December 31, |       
|                                                        |  |              |       
|                                                        |  | 2005         |        |   | 2006 | 
|                                                        |  |              |        |   |      | 
|                                                        |  | RMB          |        |   | RMB  | 
|Other receivables                                       |  |              | 9,404  |   |      |  | 7,083  |  
|Amounts due from related parties                        |  |              | 13,524 |   |      |  | 15,925 |  
|Less: Provision for impairment of
    these receivables |  |              | (6,814 | ) |      |  | (6,506 | )
|                                                        |  |              |        |   |      | 
|                                                        |  |              | 16,114 |   |      |  | 16,502 |  
|Advances to suppliers                                   |  |              | 5,819  |   |      |  | 6,087  |  
|Prepaid expenses                                        |  |              | 279    |   |      |  | 326    |  
|Other current assets                                    |  |              | 461    |   |      |  | 366    |  
|                                                        |  |              |        |   |      | 
|                                                        |  |              | 22,673 |   |      |  | 23,281 |  
|                                                        |  |              |        |   |      | 

F-27



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

Other receivables consist primarily of taxes other than income
taxes refund receivables, subsidies receivable, and receivables
for the sale of materials and scrap.

Except for loans to related parties (Note 34 (g)), amounts
due from related parties are interest free, unsecured and with
no fixed terms of repayment.

Movements in provision for impairment of these receivables are
as follows:

|                                     |  |              |       |   |      |  |       |      |  |  |       |  
|------------------------------------ |  | ------------ | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                                     |  | Year Ended   |      
|                                     |  | December 31, |      
|                                     |  |              |      
|                                     |  | 2004         |       |   | 2005 |  |       | 2006 | 
|                                     |  |              |       |   |      |  |       |      | 
|                                     |  | RMB          |       |   | RMB  |  |       | RMB  | 
|Balance at beginning of the year     |  |              | 6,365 |   |      |  | 7,255 |      |  |  | 6,814 |  
|Provision/(Write back)               |  |              | 1,084 |   |      |  | (122  | )    |  |  | (190  | )
|Amount written off against provision |  |              | (194  | ) |      |  | (319  | )    |  |  | (118  | )
|                                     |  |              |       |   |      |  |       |      | 
|Balance at end of the year           |  |              | 7,255 |   |      |  | 6,814 |      |  |  | 6,506 |  
|                                     |  |              |       |   |      |  |       |      | 



|   |                              
|-- | -----------------------------
|18 | PROPERTY, PLANT AND EQUIPMENT

|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       |  |  |          |   |  |  |          |  
|---------------------------------------------------------------------------------------------------------------------- |  | --------- | ------- | ----------- | ---------- |  | --------- | --------- |  | ----- | -------- | - |  | ----- | ------------ | - | ----------- |  | ------ | ----- |  |  | -------- | - |  |  | -------- | -
|Year Ended                                                                                                             |  |           |         | Oil and Gas |            |  | Plant and |           |  | Motor |          |   |  |       | Construction |   |             | 
|December 31, 2005                                                                                                      |  | Buildings |         |             | Properties |  |           | Equipment |  |       | Vehicles |   |  | Other |              |   | in Progress |  |        | Total | 
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 
|                                                                                                                       |  | RMB       |         |             | RMB        |  |           | RMB       |  |       | RMB      |   |  | RMB   |              |   | RMB         |  |        | RMB   | 
|Cost or valuation                                                                                                      |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       |  |  |          |   |  |  |          |  
|At beginning of the year                                                                                               |  |           | 64,824  |             |            |  | 428,577   |           |  |       | 250,840  |   |  |       | 9,397        |   |             |  | 6,705  |       |  |  | 39,137   |   |  |  | 799,480  |  
|Additions                                                                                                              |  |           | 1,394   |             |            |  | 14,308    |           |  |       | 1,292    |   |  |       | 1,744        |   |             |  | 122    |       |  |  | 119,199  |   |  |  | 138,059  |  
|Transfers                                                                                                              |  |           | 7,661   |             |            |  | 67,223    |           |  |       | 27,451   |   |  |       |             |   |             |  | 362    |       |  |  | (102,697 | ) |  |  |         |  
|Disposals or write off                                                                                                 |  |           | (714    | )           |            |  | (11,817   | )         |  |       | (2,152   | ) |  |       | (286         | ) |             |  | (95    | )     |  |  |         |   |  |  | (15,064  | )
|Currency translation differences                                                                                       |  |           | (32     | )           |            |  | (659      | )         |  |       | (67      | ) |  |       | (26          | ) |             |  | (43    | )     |  |  | (42      | ) |  |  | (869     | )
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 
|At end of the year                                                                                                     |  |           | 73,133  |             |            |  | 497,632   |           |  |       | 277,364  |   |  |       | 10,829       |   |             |  | 7,051  |       |  |  | 55,597   |   |  |  | 921,606  |  
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 
|Accumulated depreciation and
    impairment                                                                            |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       |  |  |          |   |  |  |          |  
|At beginning of the year                                                                                               |  |           | (12,905 | )           |            |  | (180,926  | )         |  |       | (112,000 | ) |  |       | (4,810       | ) |             |  | (3,025 | )     |  |  | (202     | ) |  |  | (313,868 | )
|Charge for the year                                                                                                    |  |           | (3,454  | )           |            |  | (25,819   | )         |  |       | (18,234  | ) |  |       | (955         | ) |             |  | (749   | )     |  |  |         |   |  |  | (49,211  | )
|Disposals or write off                                                                                                 |  |           | 329     |             |            |  | 3,054     |           |  |       | 1,279    |   |  |       | 200          |   |             |  | 76     |       |  |  | 104      |   |  |  | 5,042    |  
|Currency translation differences                                                                                       |  |           | 1       |             |            |  | 275       |           |  |       | 23       |   |  |       | 10           |   |             |  | 12     |       |  |  |         |   |  |  | 321      |  
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 
|At end of the year                                                                                                     |  |           | (16,029 | )           |            |  | (203,416  | )         |  |       | (128,932 | ) |  |       | (5,555       | ) |             |  | (3,686 | )     |  |  | (98      | ) |  |  | (357,716 | )
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 
|Net book value                                                                                                         |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       |  |  |          |   |  |  |          |  
|At end of the year                                                                                                     |  |           | 57,104  |             |            |  | 294,216   |           |  |       | 148,432  |   |  |       | 5,274        |   |             |  | 3,365  |       |  |  | 55,499   |   |  |  | 563,890  |  
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 
|Carrying value of the property,
    plant and equipment had they been stated at cost less
    accumulated depreciation |  |           | 52,779  |             |            |  | 289,820   |           |  |       | 131,411  |   |  |       | 4,787        |   |             |  | 2,810  |       |  |  | 55,499   |   |  |  | 537,106  |  
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 

F-28



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       |  |  |          |   |  |  |           |  
|---------------------------------------------------------------------------------------------------------------------- |  | --------- | ------- | ----------- | ---------- |  | --------- | --------- |  | ----- | -------- | - |  | ----- | ------------ | - | ----------- |  | ------ | ----- |  |  | -------- | - |  |  | --------- | -
|Year Ended                                                                                                             |  |           |         | Oil and Gas |            |  | Plant and |           |  | Motor |          |   |  |       | Construction |   |             | 
|December 31, 2006                                                                                                      |  | Buildings |         |             | Properties |  |           | Equipment |  |       | Vehicles |   |  | Other |              |   | in Progress |  |        | Total | 
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 
|                                                                                                                       |  | RMB       |         |             | RMB        |  |           | RMB       |  |       | RMB      |   |  | RMB   |              |   | RMB         |  |        | RMB   | 
|Cost or valuation                                                                                                      |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       |  |  |          |   |  |  |           |  
|At beginning of the year                                                                                               |  |           | 73,133  |             |            |  | 497,632   |           |  |       | 277,364  |   |  |       | 10,829       |   |             |  | 7,051  |       |  |  | 55,597   |   |  |  | 921,606   |  
|Additions                                                                                                              |  |           | 516     |             |            |  | 4,080     |           |  |       | 656      |   |  |       | 1,597        |   |             |  | 20     |       |  |  | 145,361  |   |  |  | 152,230   |  
|Transfers                                                                                                              |  |           | 7,156   |             |            |  | 85,178    |           |  |       | 33,621   |   |  |       |             |   |             |  | 989    |       |  |  | (126,944 | ) |  |  |          |  
|Disposals or write off                                                                                                 |  |           | (723    | )           |            |  | (11,420   | )         |  |       | (3,756   | ) |  |       | (297         | ) |             |  | (102   | )     |  |  |         |   |  |  | (16,298   | )
|Currency translation differences                                                                                       |  |           | 61      |             |            |  | (149      | )         |  |       | (50      | ) |  |       | (17          | ) |             |  | 18     |       |  |  | (122     | ) |  |  | (259      | )
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 
|At end of the year                                                                                                     |  |           | 80,143  |             |            |  | 575,321   |           |  |       | 307,835  |   |  |       | 12,112       |   |             |  | 7,976  |       |  |  | 73,892   |   |  |  | 1,057,279 |  
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 
|Accumulated depreciation and
    impairment                                                                            |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       |  |  |          |   |  |  |           |  
|At beginning of the year                                                                                               |  |           | (16,029 | )           |            |  | (203,416  | )         |  |       | (128,932 | ) |  |       | (5,555       | ) |             |  | (3,686 | )     |  |  | (98      | ) |  |  | (357,716  | )
|Charge for the year                                                                                                    |  |           | (3,643  | )           |            |  | (31,540   | )         |  |       | (21,431  | ) |  |       | (1,107       | ) |             |  | (755   | )     |  |  | (199     | ) |  |  | (58,675   | )
|Disposals or write off                                                                                                 |  |           | 418     |             |            |  | 1,186     |           |  |       | 2,544    |   |  |       | 126          |   |             |  | 67     |       |  |  |         |   |  |  | 4,341     |  
|Currency translation differences                                                                                       |  |           | (19     | )           |            |  | 93        |           |  |       | 35       |   |  |       | 6            |   |             |  | (7     | )     |  |  |         |   |  |  | 108       |  
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 
|At end of the year                                                                                                     |  |           | (19,273 | )           |            |  | (233,677  | )         |  |       | (147,784 | ) |  |       | (6,530       | ) |             |  | (4,381 | )     |  |  | (297     | ) |  |  | (411,942  | )
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 
|Net book value                                                                                                         |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       |  |  |          |   |  |  |           |  
|At end of the year                                                                                                     |  |           | 60,870  |             |            |  | 341,644   |           |  |       | 160,051  |   |  |       | 5,582        |   |             |  | 3,595  |       |  |  | 73,595   |   |  |  | 645,337   |  
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 
|Carrying value of the property,
    plant and equipment had they been stated at cost less
    accumulated depreciation |  |           | 57,204  |             |            |  | 338,007   |           |  |       | 145,571  |   |  |       | 5,171        |   |             |  | 3,120  |       |  |  | 73,595   |   |  |  | 622,668   |  
|                                                                                                                       |  |           |         |             |            |  |           |           |  |       |          |   |  |       |              |   |             |  |        |       | 





F-29



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

Buildings owned by the Group are on leased land. The net book
values of the buildings owned by the Group can be analyzed by
the following categories of lease terms:

|                                          |  |                 |        |  |      |  |        | 
|----------------------------------------- |  | --------------- | ------ |  | ---- |  | ------ | 
|                                          |  | At December 31, |       
|                                          |  |                 |       
|                                          |  | 2005            |        |  | 2006 | 
|                                          |  |                 |        |  |      | 
|                                          |  | RMB             |        |  | RMB  | 
|Short-term lease (less than
    10 years) |  |                 | 336    |  |      |  | 363    | 
|Medium-term lease (10 to
    50 years)    |  |                 | 56,768 |  |      |  | 60,507 | 
|                                          |  |                 |        |  |      | 
|                                          |  |                 | 57,104 |  |      |  | 60,870 | 
|                                          |  |                 |        |  |      | 





|                           |  |              |     |   |      |  |     |  
|-------------------------- |  | ------------ | --- | - | ---- |  | --- | -
|                           |  | At           |    
|                           |  | December 31, |    
|                           |  |              |    
|                           |  | 2005         |     |   | 2006 | 
|                           |  |              |     |   |      | 
|                           |  | RMB          |     |   | RMB  | 
|Exploration and Production |  |              | 45  |   |      |  | 45  |  
|Refining and Marketing     |  |              |    |   |      |  |    |  
|Chemicals and Marketing    |  |              |    |   |      |  |    |  
|Accumulated depreciation   |  |              | (12 | ) |      |  | (18 | )
|                           |  |              |     |   |      | 
|                           |  |              | 33  |   |      |  | 27  |  
|                           |  |              |     |   |      | 





|                                                                                                     |  |                         |        |   |      |  |        |      |  |  |        |  
|---------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- |  | ------ | ---- |  |  | ------ | -
|                                                                                                     |  | Year Ended December 31, |       
|                                                                                                     |  |                         |       
|                                                                                                     |  | 2004                    |        |   | 2005 |  |        | 2006 | 
|                                                                                                     |  |                         |        |   |      |  |        |      | 
|                                                                                                     |  | RMB                     |        |   | RMB  |  |        | RMB  | 
|Beginning balance at January 1                                                                       |  |                         | 4,335  |   |      |  | 5,751  |      |  |  | 8,296  |  
|Additions to capitalized
    exploratory well costs pending the determination of proved
    reserves |  |                         | 10,913 |   |      |  | 16,181 |      |  |  | 19,076 |  
|Reclassified to wells, facilities,
    and equipment based on the determination of proved reserves   |  |                         | (4,756 | ) |      |  | (7,089 | )    |  |  | (8,880 | )
|Capitalized exploratory well costs
    charged to expense                                            |  |                         | (4,741 | ) |      |  | (6,547 | )    |  |  | (9,494 | )
|                                                                                                     |  |                         |        |   |      |  |        |      | 
|Ending balance at December 31                                                                        |  |                         | 5,751  |   |      |  | 8,296  |      |  |  | 8,998  |  
|                                                                                                     |  |                         |        |   |      |  |        |      | 
|Number of wells at year end                                                                          |  |                         | 783    |   |      |  | 993    |      |  |  | 869    |  
|                                                                                                     |  |                         |        |   |      |  |        |      | 

F-30



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

The following table provides an aging of capitalized exploratory
well costs based on the date the drilling was completed.

|                       |  |                 |       |  |      |  |       | 
|---------------------- |  | --------------- | ----- |  | ---- |  | ----- | 
|                       |  | At December 31, |      
|                       |  |                 |      
|                       |  | 2005            |       |  | 2006 | 
|                       |  |                 |       |  |      | 
|                       |  | RMB             |       |  | RMB  | 
|One year or less       |  |                 | 8,023 |  |      |  | 8,359 | 
|Over one year          |  |                 | 273   |  |      |  | 639   | 
|                       |  |                 |       |  |      | 
|Balance at December 31 |  |                 | 8,296 |  |      |  | 8,998 | 
|                       |  |                 |       |  |      | 





















|                           |  |                         |        |  |      |  |        |      |  |  |        | 
|-------------------------- |  | ----------------------- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                           |  | Year Ended December 31, |       
|                           |  |                         |       
|                           |  | 2004                    |        |  | 2005 |  |        | 2006 | 
|                           |  |                         |        |  |      |  |        |      | 
|                           |  | RMB                     |        |  | RMB  |  |        | RMB  | 
|Owned assets               |  |                         | 46,988 |  |      |  | 49,198 |      |  |  | 58,669 | 
|Assets under capital lease |  |                         | 23     |  |      |  | 13     |      |  |  | 6      | 
|                           |  |                         |        |  |      |  |        |      | 
|                           |  |                         | 47,011 |  |      |  | 49,211 |      |  |  | 58,675 | 
|                           |  |                         |        |  |      |  |        |      | 

F-31



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



19
    INVESTMENTS IN EQUITY AFFILIATES AND JOINTLY CONTROLLED
    ENTITIESThe Groups interests in its principal equity affiliates
and jointly controlled entities (all of which are unlisted),
together with its share of their respective assets, liabilities,
revenues, and incomes, were as follows:

|                                                |  |               |        |  |        |  |        |             |  |  |         |  |          |        |        |         |        |  |       |       |  |  |           |  |  |  |          | 
|----------------------------------------------- |  | ------------- | ------ |  | ------ |  | ------ | ----------- |  |  | ------- |  | -------- | ------ | ------ | ------- | ------ |  | ----- | ----- |  |  | --------- |  |  |  | -------- | 
|                                                |  | Country of    |        |  |        |  |        |             |  |  |         |  | Interest |        |        | Type of |       
|Name                                            |  | Incorporation |        |  | Assets |  |        | Liabilities |  |  | Revenue |  |          | Income |        |         | Held % |  |       | Share | 
|                                                |  |               |        |  |        |  |        |             |  |  |         |  |          |        |        |         |        |  |       |       | 
|At December 31,2005                             |  |               |        |  |        |  |        |             |  |  |         |  |          |        |        |         |        |  |       |       |  |  |           |  |  |  |          | 
|Dalian West Pacific Petrochemical
    Co., Ltd. |  |               | PRC    |  |        |  | 3,114  |             |  |  | 2,233   |  |          |        | 8,563  |         |        |  | 135   |       |  |  | 28.4      |  |  |  | ordinary | 
|China Marine Bunker (PetroChina)
    Co., Ltd.  |  |               | PRC    |  |        |  | 3,210  |             |  |  | 2,098   |  |          |        | 14,021 |         |        |  | 127   |       |  |  | 50.0      |  |  |  | ordinary | 
|Other                                           |  |               |        |  |        |  | 19,832 |             |  |  | 9,447   |  |          |        | 30,579 |         |        |  | 2,139 |       |  |  | 20.0-70.0 |  |  |  | ordinary | 
|                                                |  |               |        |  |        |  |        |             |  |  |         |  |          |        |        |         |        |  |       |       | 
|                                                |  |               |        |  |        |  | 26,156 |             |  |  | 13,778  |  |          |        | 53,163 |         |        |  | 2,401 |       |  |  |           |  |  |  |          | 
|                                                |  |               |        |  |        |  |        |             |  |  |         |  |          |        |        |         |        |  |       |       | 
|At December 31,2006                             |  |               |        |  |        |  |        |             |  |  |         |  |          |        |        |         |        |  |       |       |  |  |           |  |  |  |          | 
|Dalian West Pacific Petrochemical
    Co., Ltd. |  |               | PRC    |  |        |  | 3,410  |             |  |  | 2,608   |  |          |        | 10,188 |         |        |  | 6     |       |  |  | 28.4      |  |  |  | ordinary | 
|China Marine Bunker (PetroChina)
    Co., Ltd.  |  |               | PRC    |  |        |  | 3,388  |             |  |  | 2,098   |  |          |        | 19,003 |         |        |  | 139   |       |  |  | 50.0      |  |  |  | ordinary | 
|PetroKazakhstan Inc.                            |  |               | Canada |  |        |  | 22,642 |             |  |  | 1,240   |  |          |        | 144    |         |        |  | 43    |       |  |  | 67.0      |  |  |  | ordinary | 
|Other                                           |  |               |        |  |        |  | 26,995 |             |  |  | 17,533  |  |          |        | 40,903 |         |        |  | 2,089 |       |  |  | 20.0-70.0 |  |  |  | ordinary | 
|                                                |  |               |        |  |        |  |        |             |  |  |         |  |          |        |        |         |        |  |       |       | 
|                                                |  |               |        |  |        |  | 56,435 |             |  |  | 23,479  |  |          |        | 70,238 |         |        |  | 2,277 |       |  |  |           |  |  |  |          | 
|                                                |  |               |        |  |        |  |        |             |  |  |         |  |          |        |        |         |        |  |       |       | 









|   |                               
|-- | ------------------------------
|20 | AVAILABLE-FOR-SALE INVESTMENTS

|                                            |  |                 |       |   |      |  |       |  
|------------------------------------------- |  | --------------- | ----- | - | ---- |  | ----- | -
|                                            |  | At December 31, |      
|                                            |  |                 |      
|                                            |  | 2005            |       |   | 2006 | 
|                                            |  |                 |       |   |      | 
|                                            |  | RMB             |       |   | RMB  | 
|Unlisted available-for-sale
    investments |  |                 | 1,907 |   |      |  | 2,562 |  
|Less: Impairment provision                  |  |                 | (677  | ) |      |  | (508  | )
|                                            |  |                 |       |   |      | 
|                                            |  |                 | 1,230 |   |      |  | 2,054 |  
|                                            |  |                 |       |   |      | 

F-32



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

Available-for-sale investments comprise principally unlisted
equity securities.

Dividend income from available-for-sale investments was RMB 113,
RMB 109 and RMB 208 for the years ended December 31, 2004,
2005 and 2006, respectively.

Available-for-sale investments of RMB 1,003 and RMB 1
were disposed of with a loss of RMB 27 and a profit of
RMB 3 incurred for the years ended December 31, 2005
and 2006, respectively.

Movements in provision for impairment of available-for-sale
investments are as follows:

|                                     |  |                         |     |   |      |  |     |      |  |  |      |  
|------------------------------------ |  | ----------------------- | --- | - | ---- |  | --- | ---- |  |  | ---- | -
|                                     |  | Year Ended December 31, |    
|                                     |  |                         |    
|                                     |  | 2004                    |     |   | 2005 |  |     | 2006 | 
|                                     |  |                         |     |   |      |  |     |      | 
|                                     |  | RMB                     |     |   | RMB  |  |     | RMB  | 
|Balance at beginning of the year     |  |                         | 813 |   |      |  | 755 |      |  |  | 677  |  
|Provision/ (Write back)              |  |                         | 26  |   |      |  | (23 | )    |  |  | 32   |  
|Amount written off against provision |  |                         | (84 | ) |      |  | (55 | )    |  |  | (201 | )
|                                     |  |                         |     |   |      |  |     |      | 
|Balance at end of the year           |  |                         | 755 |   |      |  | 677 |      |  |  | 508  |  
|                                     |  |                         |     |   |      |  |     |      | 



|   |                                 
|-- | --------------------------------
|21 | ADVANCE OPERATING LEASE PAYMENTS

|                       |  |              |        |  |      |  |        | 
|---------------------- |  | ------------ | ------ |  | ---- |  | ------ | 
|                       |  | At           |       
|                       |  | December 31, |       
|                       |  |              |       
|                       |  | 2005         |        |  | 2006 | 
|                       |  |              |        |  |      | 
|                       |  | RMB          |        |  | RMB  | 
|Land use rights        |  |              | 9,786  |  |      |  | 12,184 | 
|Advance lease payments |  |              | 6,449  |  |      |  | 8,284  | 
|                       |  |              |        |  |      | 
|                       |  |              | 16,235 |  |      |  | 20,468 | 
|                       |  |              |        |  |      | 

sub-leased




|   |                            
|-- | ---------------------------
|22 | INTANGIBLE AND OTHER ASSETS



|                   |  |                 |       |             |              |  |        |     |  |  |             |  |  |              |       |  |     |  |        |   |  |  |       | 
|------------------ |  | --------------- | ----- | ----------- | ------------ |  | ------ | --- |  |  | ----------- |  |  | ------------ | ----- |  | --- |  | ------ | - |  |  | ----- | 
|                   |  | At December 31, |      
|                   |  |                 |      
|                   |  | 2005            |       |             | 2006         | 
|                   |  |                 |       |             |              | 
|                   |  |                 |       | Accumulated |              |  |        |     |  |  | Accumulated |  |  |             
|                   |  | Cost            |       |             | Amortization |  |        | Net |  |  | Cost        |  |  | Amortization |       |  | Net | 
|                   |  |                 |       |             |              |  |        |     |  |  |             |  |  |              |       |  |     | 
|                   |  | RMB             |       |             | RMB          |  |        | RMB |  |  | RMB         |  |  | RMB          |       |  | RMB | 
|Patents            |  |                 | 2,166 |             |              |  | (1,140 | )   |  |  | 1,026       |  |  |              | 2,325 |  |     |  | (1,109 | ) |  |  | 1,216 | 
|Technical know-how |  |                 | 325   |             |              |  | (209   | )   |  |  | 116         |  |  |              | 276   |  |     |  | (103   | ) |  |  | 173   | 
|Other              |  |                 | 2,664 |             |              |  | (684   | )   |  |  | 1,980       |  |  |              | 3,369 |  |     |  | (1,041 | ) |  |  | 2,328 | 
|                   |  |                 |       |             |              |  |        |     |  |  |             |  |  |              |       |  |     | 
|Intangible assets  |  |                 | 5,155 |             |              |  | (2,033 | )   |  |  | 3,122       |  |  |              | 5,970 |  |     |  | (2,253 | ) |  |  | 3,717 | 
|                   |  |                 |       |             |              |  |        |     |  |  |             |  |  |              |       |  |     | 
|Other assets       |  |                 |       |             |              |  |        |     |  |  | 1,889       |  |  |              |       |  |     |  |        |   |  |  | 2,910 | 
|                   |  |                 |       |             |              |  |        |     |  |  |             |  |  |              |       |  |     | 
|                   |  |                 |       |             |              |  |        |     |  |  | 5,011       |  |  |              |       |  |     |  |        |   |  |  | 6,627 | 
|                   |  |                 |       |             |              |  |        |     |  |  |             |  |  |              |       |  |     | 

F-33



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

Amortization on intangible and other assets was RMB 755,
RMB 888 and RMB 1,250 for the years ended
December 31, 2004, 2005 and 2006, respectively.

Patents principally represent expenditure incurred in acquiring
processes and techniques that are generally protected by
relevant government authorities. Identifiable technical know-how
are amounts attributable to operational technology acquired in
connection with purchase of equipment.



23
    ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

|                                                               |  |              |        |  |      |  |         | 
|-------------------------------------------------------------- |  | ------------ | ------ |  | ---- |  | ------- | 
|                                                               |  | At           |       
|                                                               |  | December 31, |       
|                                                               |  |              |       
|                                                               |  | 2005         |        |  | 2006 | 
|                                                               |  |              |        |  |      | 
|                                                               |  | RMB          |        |  | RMB  | 
|Trade payable                                                  |  |              | 13,749 |  |      |  | 22,490  | 
|Advances from customers                                        |  |              | 7,698  |  |      |  | 9,310   | 
|Salaries and welfare payable                                   |  |              | 7,353  |  |      |  | 8,844   | 
|Accrued expenses                                               |  |              | 4      |  |      |  | 10      | 
|Dividends payable by subsidiaries
    to minority shareholders |  |              | 93     |  |      |  | 60      | 
|Interest payable                                               |  |              | 27     |  |      |  | 3       | 
|Construction fee and equipment cost
    payables               |  |              | 16,420 |  |      |  | 28,349  | 
|One-time employee housing remedial
    payment payable         |  |              | 1,174  |  |      |  | 933     | 
|Other payables                                                 |  |              | 12,158 |  |      |  | 14,910  | 
|Amounts due to related parties                                 |  |              | 41,082 |  |      |  | 35,273  | 
|                                                               |  |              |        |  |      | 
|                                                               |  |              | 99,758 |  |      |  | 120,182 | 
|                                                               |  |              |        |  |      | 







|   |      
|-- | -----
|24 | DEBTS



| |                         
| | ------------------------
| | (a) Short-term
    debts

|                                   |             |              |        |        |      |  |        |        | 
|---------------------------------- | ----------- | ------------ | ------ | ------ | ---- |  | ------ | ------ | 
|                                   |             | At           |       
|                                   |             | December 31, |       
|                                   |             |              |       
|                                   |             | 2005         |        |        | 2006 | 
|                                   |             |              |        |        |      | 
|                                   |             | RMB          |        |        | RMB  | 
|Bank loans                         |             |              |        |        |      |  |        |       
|                                   |  secured   |              |        | 34     |      |  |        | 23     | 
|                                   |  unsecured |              |        | 12,753 |      |  |        | 14,812 | 
|Loans from fellow CNPC subsidiary  |             |              | 520    |        |      |  | 320    |       
|Other                              |             |              | 57     |        |      |  | 1      |       
|                                   |             |              |        |        |      | 
|                                   |             |              | 13,364 |        |      |  | 15,156 |       
|Current portion of long-term debts |             |              | 15,325 |        |      |  | 20,607 |       
|                                   |             |              |        |        |      | 
|                                   |             |              | 28,689 |        |      |  | 35,763 |       
|                                   |             |              |        |        |      | 

F-34



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



(b) Long-term debts

|                                                                                                                |  |                                                                                                                                                    |  |                 |  |       
|--------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- |  | ------
|                                                                                                                |  |                                                                                                                                                    |  | At December 31,
|                                                                                                                |  |                                                                                                                                                    |  |                
|                                                                                                                |  | Interest Rate and Final Maturity                                                                                                                   |  | 2005            |  | 2006  
|                                                                                                                |  |                                                                                                                                                    |  |                 |  |       
|                                                                                                                |  |                                                                                                                                                    |  | RMB             |  | RMB   
|Renminbi  denominated
    debts:                                                                               |  |                                                                                                                                                    |  |                
|Bank loans for the development of
    oil fields and construction of refining plants                            |  | Majority floating interest rates
    ranging from 5.18% to 6.16% per annum as of December 31,
    2006, with maturities through 2022               |  | 9,778           |  | 8,390 
|Bank loans for working capital                                                                                  |  | Floating interest rate at 5.18% per
    annum as of December 31, 2006, with maturities through 2007                                                |  | 6,030           |  | 6,000 
|Loans from fellow CNPC subsidiary
    for the development of oil fields and construction of refining
    plants |  | Floating interest rates ranging
    from 4.46% to 5.18% per annum as of December 31, 2006, with
    maturities through 2032                        |  | 16,462          |  | 16,782
|Working capital loans from fellow
    CNPC subsidiary                                                           |  | Majority floating interest rates at
    4.61% per annum as of December 31, 2006, with maturities
    through 2008                                  |  | 4,335           |  | 4,130 
|Working capital loans                                                                                           |  | Fixed interest rates at 6.32% per
    annum with no fixed repayment term                                                                           |  | 5               |  | 5     
|Corporate debenture for the
    development of oil fields and construction of refining plants                   |  | Fixed interest rate at 4.50% per
    annum with maturities through 2007                                                                            |  | 1,350           |  | 1,365 
|Corporate debenture for the
    development of oil and gas properties                                           |  | Fixed interest rates ranging from
    3.76% to 4.11% per annum with maturities through 2013                                                        |  | 1,500           |  | 3,523 
|US Dollar 
    denominated debts:                                                                              |  |                                                                                                                                                    |  |                
|Bank loans for the development of
    oil fields and construction of refining plants                            |  | Fixed interest rates ranging from
    free to 9.00% per annum with maturities through 2038                                                         |  | 1,404           |  | 969   
|Bank loans for the development of
    oil fields and construction of refining plants                            |  | Floating interest rates ranging
    from 4.72% to 6.17% per annum as of December 31, 2006, with
    maturities through 2014                        |  | 6,751           |  | 3,589 
|Bank loans for working capital                                                                                  |  | Floating interest rates ranging
    from LIBOR plus 0.40% to LIBOR plus 5.00% per annum as of
    December 31, 2006 with maturities through 2008   |  | 1,362           |  | 1,326 
|Bank loans for acquisition of
    overseas oil and gas properties                                               |  | Floating interest rate at LIBOR
    plus 0.55% per annum as of December 31, 2006, with
    maturities through 2009                                 |  | 1,614           |  | 1,368 
|Loans from fellow CNPC subsidiary
    for the development of oil fields and construction of refining
    plants |  | Floating interest rates ranging
    from LIBOR minus 0.25% to LIBOR plus 0.50% per annum as of
    December 31, 2006, with maturities through 2020 |  | 2,852           |  | 4,481 

F-35



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

|                                                                                              |                                              |                                                                                                                                                   |  |                 |          |        |         
|--------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | -------- | ------ | --------
|                                                                                              |                                              |                                                                                                                                                   |  | At December 31,
|                                                                                              |                                              |                                                                                                                                                   |  |                
|                                                                                              |                                              | Interest Rate and Final Maturity                                                                                                                  |  | 2005            |          | 2006  
|                                                                                              |                                              |                                                                                                                                                   |  |                 |          |       
|                                                                                              |                                              |                                                                                                                                                   |  | RMB             |          | RMB   
|Loans from fellow CNPC subsidiary
    for acquisition of overseas oil and gas properties      |                                              | Floating interest rate at LIBOR
    plus 0.40% per annum as of December 31, 2006, with
    maturities through 2006                                |  | 593             |          |      
|Loans from fellow CNPC subsidiary
    for working capital                                     |                                              | Floating interest rates ranging
    from LIBOR plus 0.50% to LIBOR plus 0.69% per annum as of
    December 31, 2006, with maturities through 2008 |  | 2,557           |          | 1,471 
|Loans for the development of oil
    fields and construction of refining plants               |                                              | Fixed interest rate at 1.55% per
    annum with maturities through 2022                                                                           |  | 509             |          | 462   
|Loans for working capital                                                                     |                                              | Floating interest rate at LIBOR
    plus 0.35% per annum as of December 31, 2006, with
    maturities through 2008                                |  | 668             |          | 650   
|Corporate debenture for the
    development of oil fields and construction of refining plants |                                              | Fixed interest rate at 3.00% per
    annum with maturities through 2019                                                                           |  | 347             |          | 353   
|Corporate debenture for the
    development of oil and gas properties                         |                                              | Fixed interest rate at 9.50% per
    annum with maturities through 2011                                                                           |  | 844             |          | 817   
|Corporate debenture for the
    development of oil and gas properties                         |                                              | Fixed interest rate at 15.00% per
    annum with maturities through 2008                                                                          |  | 292             |          | 179   
|Japanese Yen 
    denominated debts:                                                         |                                              |                                                                                                                                                   |  |                
|Bank loans for the development of
    oil fields and construction of refining plants          |                                              | Fixed interest rates ranging from
    2.42% to 5.30% per annum with maturities through 2010                                                       |  | 226             |          | 75    
|Euro  denominated
    debts:                                                                 |                                              |                                                                                                                                                   |  |                
|Bank loans for the development of
    oil fields and construction of refining plants          |                                              | Fixed interest rates ranging from
    2.00% to 2.30% per annum with maturities through 2023                                                       |  | 256             |          | 257   
|British Pound 
    denominated debts:                                                        |                                              |                                                                                                                                                   |  |                
|Bank loans for the development of
    oil fields and construction of refining plants          |                                              | Fixed interest rate at 2.85% per
    annum with maturities through 2007                                                                           |  | 160             |          | 49    
|                                                                                              |                                              |                                                                                                                                                   |  |                 |          |       
|Total long-term debts                                                                         |                                              |                                                                                                                                                   |  | 59,895          |          | 56,241
|                                                                                              |                                              |                                                                                                                                                   |  |                 |          |       
|                                                                                              | Less: Current portion of long-term
    debts |                                                                                                                                                   |  |                 | (15,325) |        | (20,607)
|                                                                                              |                                              |                                                                                                                                                   |  |                 |          |       
|                                                                                              |                                              |                                                                                                                                                   |  | 44,570          |          | 35,634
|                                                                                              |                                              |                                                                                                                                                   |  |                 |          |       



F-36



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

from independent third parties other than banks. Interest free
loans amounted to RMB 110 and RMB 68 at December 31, 2005
and 2006, respectively.

Debts of RMB 674 and RMB 597 were guaranteed by CNPC and its
subsidiaries at December 31, 2005 and 2006, respectively.

The Groups debts include secured liabilities (bank debts)
totalling RMB 1,108 and RMB 359 at December 31, 2005 and
2006, respectively. These bank debts are secured mostly over
certain of the Groups properties and time deposits with
maturities over one year.

|                                               |                                         |                 |        |        |      |  |        |        | 
|---------------------------------------------- | --------------------------------------- | --------------- | ------ | ------ | ---- |  | ------ | ------ | 
|                                               |                                         | At December 31, |       
|                                               |                                         |                 |       
|                                               |                                         | 2005            |        |        | 2006 | 
|                                               |                                         |                 |        |        |      | 
|                                               |                                         | RMB             |        |        | RMB  | 
|Total debts:                                   |                                         |                 |        |        |      |  |        |       
|                                               |  interest free                         |                 |        | 110    |      |  |        | 68     | 
|                                               |  at fixed rates                        |                 |        | 19,640 |      |  |        | 20,850 | 
|                                               |  at floating rates                     |                 |        | 53,509 |      |  |        | 50,479 | 
|                                               |                                         |                 |        |        |      | 
|                                               |                                         |                 | 73,259 |        |      |  | 71,397 |       
|                                               |                                         |                 |        |        |      | 
|Weighted average effective interest
    rates: |                                         |                 |        |        |      |  |        |       
|                                               |  bank loans                            |                 |        | 5.26%  |      |  |        | 5.51%  | 
|                                               |  loans from fellow CNPC
    subsidiary |                 |        | 4.90%  |      |  |        | 4.98%  | 
|                                               |  other loans                           |                 |        | 3.38%  |      |  |        | 3.93%  | 
|                                               |  corporate debentures                  |                 |        | 5.86%  |      |  |        | 5.04%  | 



|                                  |  |                  |        |  |      |  |        | 
|--------------------------------- |  | ---------------- | ------ |  | ---- |  | ------ | 
|                                  |  | Carrying Amounts |       
|                                  |  | At December 31,  |       
|                                  |  |                  |       
|                                  |  | 2005             |        |  | 2006 | 
|                                  |  |                  |        |  |      | 
|                                  |  | RMB              |        |  | RMB  | 
|Bank loans                        |  |                  | 27,581 |  |      |  | 22,023 | 
|Loans from fellow CNPC subsidiary |  |                  | 26,799 |  |      |  | 26,864 | 
|Corporate debentures              |  |                  | 4,333  |  |      |  | 6,237  | 
|Other                             |  |                  | 1,182  |  |      |  | 1,117  | 
|                                  |  |                  |        |  |      | 
|                                  |  |                  | 59,895 |  |      |  | 56,241 | 
|                                  |  |                  |        |  |      | 

|                                  |  |                |        |  |      |  |        | 
|--------------------------------- |  | -------------- | ------ |  | ---- |  | ------ | 
|                                  |  | Fair Values At |       
|                                  |  | December 31,   |       
|                                  |  |                |       
|                                  |  | 2005           |        |  | 2006 | 
|                                  |  |                |        |  |      | 
|                                  |  | RMB            |        |  | RMB  | 
|Bank loans                        |  |                | 27,397 |  |      |  | 21,858 | 
|Loans from fellow CNPC subsidiary |  |                | 26,795 |  |      |  | 26,861 | 
|Corporate debentures              |  |                | 4,173  |  |      |  | 5,852  | 
|Other                             |  |                | 1,049  |  |      |  | 997    | 
|                                  |  |                |        |  |      | 
|                                  |  |                | 59,414 |  |      |  | 55,568 | 
|                                  |  |                |        |  |      | 



F-37



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

substantially the same terms and characteristics at the balance
sheet dates. Such discount rates ranged from 0.13% to 7.45% and
0.53% to 6.54% per annum as of December 31, 2005 and
2006, respectively depending on the type of the debts. The
carrying amounts of short-term debts approximate their fair
value.

Maturities of long-term debts at the dates indicated below are
as follows:

|            |  |                 |        |  |      |  |        | 
|----------- |  | --------------- | ------ |  | ---- |  | ------ | 
|            |  | At December 31, |       
|            |  |                 |       
|            |  | 2005            |        |  | 2006 | 
|            |  |                 |        |  |      | 
|            |  | RMB             |        |  | RMB  | 
|First year  |  |                 | 15,325 |  |      |  | 20,607 | 
|Second year |  |                 | 18,373 |  |      |  | 11,797 | 
|Third year  |  |                 | 11,393 |  |      |  | 6,024  | 
|Fourth year |  |                 | 2,492  |  |      |  | 1,504  | 
|Fifth year  |  |                 | 1,057  |  |      |  | 2,921  | 
|Thereafter  |  |                 | 11,255 |  |      |  | 13,388 | 
|            |  |                 |        |  |      | 
|            |  |                 | 59,895 |  |      |  | 56,241 | 
|            |  |                 |        |  |      | 



|   |                             
|-- | ----------------------------
|25 | ASSET RETIREMENT OBLIGATIONS

|                                 |  |                         |     |  |      |  |        |      |  |  |        |  
|-------------------------------- |  | ----------------------- | --- |  | ---- |  | ------ | ---- |  |  | ------ | -
|                                 |  | Year Ended December 31, |    
|                                 |  |                         |    
|                                 |  | 2004                    |     |  | 2005 |  |        | 2006 | 
|                                 |  |                         |     |  |      |  |        |      | 
|                                 |  | RMB                     |     |  | RMB  |  |        | RMB  | 
|At beginning of the year         |  |                         | 735 |  |      |  | 919    |      |  |  | 14,187 |  
|Liabilities incurred             |  |                         | 48  |  |      |  | 13,258 |      |  |  | 3,589  |  
|Liabilities settled              |  |                         |    |  |      |  | (1     | )    |  |  | (105   | )
|Accretion expense (Note 8)       |  |                         | 54  |  |      |  | 60     |      |  |  | 796    |  
|Currency translation differences |  |                         | 82  |  |      |  | (49    | )    |  |  | 14     |  
|                                 |  |                         |     |  |      |  |        |      | 
|At end of the year               |  |                         | 919 |  |      |  | 14,187 |      |  |  | 18,481 |  
|                                 |  |                         |     |  |      |  |        |      | 









F-38



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

in the two provinces where the new regulations were enacted and
is constructively obligated to take abandonment measures for its
retired oil and gas properties located in all other provinces in
China.

The Group does not have any assets that are legally restricted
for purposes of setting asset retirement obligations.



26
    DEFERRED TAXESDeferred taxes are calculated on temporary differences under the
liability method using a principal tax rate of 33%.

The movements in the deferred tax liabilities are as follows:

|                                              |                                       |                         |        |     |      |  |        |      |   |  |        |    | 
|--------------------------------------------- | ------------------------------------- | ----------------------- | ------ | --- | ---- |  | ------ | ---- | - |  | ------ | -- | 
|                                              |                                       | Year Ended December 31, |       
|                                              |                                       |                         |       
|                                              |                                       | 2004                    |        |     | 2005 |  |        | 2006 |  
|                                              |                                       |                         |        |     |      |  |        |      |  
|                                              |                                       | RMB                     |        |     | RMB  |  |        | RMB  |  
|At beginning of the year                      |                                       |                         | 13,436 |     |      |  | 16,902 |      |   |  | 20,759 |   
|Income statement charge/(credit)
    (Note 9) |                                       |                         | 3,267  |     |      |  | 3,959  |      |   |  | (1,196 | ) 
|Charged to/(credit) equity                    |                                       |                         |        |     |      |  |        |      |   |  |        |   
|                                              |  currency translation
    difference |                         |        | 199 |      |  |        | (102 | ) |  |        | 20 | 
|                                              |                                       |                         |        |     |      |  |        |      |  
|At end of the year                            |                                       |                         | 16,902 |     |      |  | 20,759 |      |   |  | 19,583 |   
|                                              |                                       |                         |        |     |      |  |        |      |  



|                               |              |                                                                          |         |   |        |   |         |   |        |  
|------------------------------ | ------------ | ------------------------------------------------------------------------ | ------- | - | ------ | - | ------- | - | ------ | -
|                               |              | At December 31,                                                          |        
|                               |              |                                                                          |        
|                               |              | 2005                                                                     |         |   | 2006   |  
|                               |              |                                                                          |         |   |        |  
|                               |              | RMB                                                                      |         |   | RMB    |  
|Deferred tax assets            |              |                                                                          |         |   |        |   |         |  
|                               | Current:     |                                                                          |         |   |        |   |         |   |       
|                               |              | Provisions, primarily for
    receivables and inventories                |         |   | (4,767 | ) |         |   | (7,107 | )
|                               |              | Tax losses of subsidiaries                                               |         |   | (1,014 | ) |         |   | (2,175 | )
|                               | Non current: |                                                                          |         |   |        |   |         |   |       
|                               |              | Shut down of manufacturing assets
    and impairment of long-term assets |         |   | (4,022 | ) |         |   | (4,342 | )
|                               |              | Other                                                                    |         |   | (796   | ) |         |   | (457   | )
|                               |              |                                                                          |         |   |        |  
|Total deferred tax assets      |              |                                                                          | (10,599 | ) |        |   | (14,081 | )
|                               |              |                                                                          |         |   |        |  
|Deferred tax liabilities       |              |                                                                          |         |   |        |   |         |  
|                               | Current:     |                                                                          |         |   |        |   |         |   |       
|                               |              | Sales                                                                    |         |   | 4,401  |   |         |   |       |  
|                               | Non current: |                                                                          |         |   |        |   |         |   |       
|                               |              | Accelerated tax depreciation                                             |         |   | 26,615 |   |         |   | 33,398 |  
|                               |              | Other                                                                    |         |   | 342    |   |         |   | 266    |  
|                               |              |                                                                          |         |   |        |  
|Total deferred tax liabilities |              |                                                                          | 31,358  |   |        |   | 33,664  |  
|                               |              |                                                                          |         |   |        |  
|Net deferred tax liabilities   |              |                                                                          | 20,759  |   |        |   | 19,583  |  
|                               |              |                                                                          |         |   |        |  



F-39



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



27
    SHARE CAPITAL

|                                   |                    |                 |         |         |      |  |         |         | 
|---------------------------------- | ------------------ | --------------- | ------- | ------- | ---- |  | ------- | ------- | 
|                                   |                    | At December 31, |        
|                                   |                    |                 |        
|                                   |                    | 2005            |         |         | 2006 | 
|                                   |                    |                 |         |         |      | 
|                                   |                    | RMB             |         |         | RMB  | 
|Registered, issued and fully paid: |                    |                 |         |         |      |  |         |        
|                                   | State-owned shares |                 |         | 157,922 |      |  |         | 157,922 | 
|                                   | H shares           |                 |         | 21,099  |      |  |         | 21,099  | 
|                                   |                    |                 |         |         |      | 
|                                   |                    |                 | 179,021 |         |      |  | 179,021 |        
|                                   |                    |                 |         |         |      | 

|                                           |  |                         |         |  |      |  |         |      |  |  |         | 
|------------------------------------------ |  | ----------------------- | ------- |  | ---- |  | ------- | ---- |  |  | ------- | 
|                                           |  | Year Ended December 31, |        
|                                           |  |                         |        
|Number of Shares of the Company (millions) |  | 2004                    |         |  | 2005 |  |         | 2006 | 
|                                           |  |                         |         |  |      |  |         |      | 
|                                           |  | RMB                     |         |  | RMB  |  |         | RMB  | 
|Beginning balance                          |  |                         | 175,824 |  |      |  | 175,824 |      |  |  | 179,021 | 
|Issue of shares                            |  |                         |        |  |      |  | 3,197   |      |  |  |        | 
|                                           |  |                         |         |  |      |  |         |      | 
|Ending balance                             |  |                         | 175,824 |  |      |  | 179,021 |      |  |  | 179,021 | 
|                                           |  |                         |         |  |      |  |         |      | 











F-40



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



28
    RESERVES

|                                                                                   |  |              |         |   |      |  |         |  
|---------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- |  | ------- | -
|                                                                                   |  | Year Ended   |        
|                                                                                   |  | December 31, |        
|                                                                                   |  |              |        
|                                                                                   |  | 2005         |         |   | 2006 | 
|                                                                                   |  |              |         |   |      | 
|                                                                                   |  | RMB          |         |   | RMB  | 
|Revaluation Reserve                                                                |  |              |         |   |      |  |         |  
|Beginning balance                                                                  |  |              | 79,946  |   |      |  | 79,946  |  
|                                                                                   |  |              |         |   |      | 
|Ending balance                                                                     |  |              | 79,946  |   |      |  | 79,946  |  
|Capital Reserve                                                                    |  |              |         |   |      |  |         |  
|Beginning balance                                                                  |  |              | (25,376 | ) |      |  | (8,881  | )
|Issue of shares (Note 27)                                                          |  |              | 16,495  |   |      |  |        |  
|                                                                                   |  |              |         |   |      | 
|Ending balance                                                                     |  |              | (8,881  | ) |      |  | (8,881  | )
|Statutory Common Reserve Fund(Note a)                                              |  |              |         |   |      |  |         |  
|Beginning balance                                                                  |  |              | 36,071  |   |      |  | 48,736  |  
|Transfer from retained earnings                                                    |  |              | 12,665  |   |      |  | 13,355  |  
|Transfer from Statutory Common
    Welfare Fund                                    |  |              |        |   |      |  | 27,837  |  
|                                                                                   |  |              |         |   |      | 
|Ending balance                                                                     |  |              | 48,736  |   |      |  | 89,928  |  
|Statutory Common Welfare Fund(Note b)                                              |  |              |         |   |      |  |         |  
|Beginning balance                                                                  |  |              | 21,504  |   |      |  | 27,837  |  
|Transfer from retained earnings                                                    |  |              | 6,333   |   |      |  |        |  
|Transfer to Statutory Common
    Reserve Fund                                      |  |              |        |   |      |  | (27,837 | )
|                                                                                   |  |              |         |   |      | 
|Ending balance                                                                     |  |              | 27,837  |   |      |  |        |  
|Currency translation
    differences                                               |  |              |         |   |      |  |         |  
|Beginning balance                                                                  |  |              | (111    | ) |      |  | (379    | )
|Currency translation adjustments                                                   |  |              | (268    | ) |      |  | (191    | )
|                                                                                   |  |              |         |   |      | 
|Ending balance                                                                     |  |              | (379    | ) |      |  | (570    | )
|Other Reserves                                                                     |  |              |         |   |      |  |         |  
|Beginning balance                                                                  |  |              | (3,200  | ) |      |  | (14,703 | )
|Payment to CNPC for the acquisition
    of the refinery and petrochemical business |  |              | (9      | ) |      |  |        |  
|Purchase from minority interest of
    subsidiaries (Note 38)                      |  |              | (1,438  | ) |      |  | (2,156  | )
|Paid-in capital to CNPC E&D
    (Note 2)                                           |  |              | (10,056 | ) |      |  |        |  
|                                                                                   |  |              |         |   |      | 
|Ending balance                                                                     |  |              | (14,703 | ) |      |  | (16,859 | )
|                                                                                   |  |              |         |   |      | 
|                                                                                   |  |              | 132,556 |   |      |  | 143,564 |  
|                                                                                   |  |              |         |   |      | 




|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Pursuant to the PRC regulations and the Companys Articles
    of Association, the Company is required to transfer 10% of its
    net profit, as determined under the PRC accounting regulations,
    to a Statutory Common Reserve Fund (Reserve Fund).
    Appropriation to the Reserve Fund may be ceased when the fund
    aggregates to 50% of the Companys registered capital. The
    transfer to this reserve must be made before distribution of
    dividends to shareholders.
|   
|    |  | The Reserve Fund shall only be used to make good previous
    years losses, to expand the Companys production
    operations, or to increase the capital of the Company. Upon
    approval by                                                                                                                                                                                                                                                                                            

F-41



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



a resolution of shareholders general meeting, the Company
    may convert its Reserve Fund into share capital and issue bonus
    shares to existing shareholders in proportion to their original
    shareholdings or to increase the nominal value of each share
    currently held by them, provided that the balance of the Reserve
    Fund after such issue is not less than 25% Companys of the
    registered capital.(b)
    
    Pursuant to the Company Law of the PRC revised on
    October 27, 2005 and carried out as of January 1,
    2006, the Company is required to cease to draw the statutory
    common welfare from January 1, 2006. In accordance with the
    Circular on Accounting Treatment Following the Implementation of
    Company Law issued by the Ministry of Finance of the
    PRC on March 15, 2006, the Company transferred the
    statutory common welfare fund balance as at the
    December 31, 2005 into the Reserve Fund.(c)
    
    According to the Companys Articles of Association, the
    distributable reserve is the lower of the retained earnings
    computed under PRC accounting regulations and IFRS. As of
    December 31, 2006, the Companys distributable reserve
    amounted to RMB 205,379 million which was computed under
    IFRS.(d)
    
    As of December 31, 2006, revaluation surplus realized
    through the depreciation or disposal of revalued assets amounted
    to approximately RMB 53,717 and RMB 57,832 as of
    December 31, 2005 and 2006, respectively.

29
    PENSIONSThe Group participates in various employee retirement benefit
plans organized by PRC municipal and provincial governments
under which it is required to make monthly contributions to
these plans at rates ranging from 16% to 22% of the
employees basic salary for the relevant periods. Expenses
incurred by the Group in connection with the retirement benefit
plans were RMB 2,476, RMB 3,104 and RMB 4,645, for the
years ended December 31, 2004, 2005 and 2006, respectively.



30
    FINANCIAL INSTRUMENTSThe Group holds or issues various financial instruments which
expose it to credit, interest rate, foreign exchange rate and
fair value risks. In addition, the Groups operations are
affected by certain commodity price movements. The Group
historically has not used derivative instruments for hedging or
trading purposes. Such activities are subject to policies
approved by the Groups senior management. Substantially
all of the financial instruments the Group holds is for purposes
other than trading. The Group regards an effective market risk
system as an important element of the Groups treasury
function and is continuously enhancing its systems. A primary
objective is to implement certain methodologies to better
measure and monitor risk exposures.



(a)
    Credit riskThe carrying amounts of accounts receivable included in the
balance sheet represent the Groups maximum exposure to
credit risk in relation to its financial assets. Majority of
cash and time deposits are placed with state-owned banks and
financial institutions. No other financial assets carry a
significant exposure to credit risk. The Group has no
significant concentration of credit risk.

F-42



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



(b)
    Interest rate riskThe Group is exposed to the risk arising from changing interest
rates. A detailed analysis of the Groups debts, together
with their respective interest rates and maturity dates, are
included in Note 24.



(c)
    Foreign exchange rate riskFrom July 21, 2005, the PRC government reformed the
Renminbi exchange rate regime and implemented a regulated
floating exchange rate regime based on market supply and demand
with reference to a basket of currencies. However, Renminbi is
still regulated in capital projects. The exchange rates of
Renminbi are affected by domestic and international economic
developments and political changes, and supply and demand for
Renminbi. Future exchange rates of Renminbi against other
currencies could vary significantly from the current exchange
rates. As Renminbi is the functional currency of the Company and
most of its consolidated subsidiaries, the fluctuation of the
exchange rate of Renminbi may have positive or negative impacts
on the results of operations of the Group. An appreciation of
Renminbi against United States Dollar may decrease the
Groups turnover, but the cost of acquiring imported
materials and equipment may be reduced. A devaluation of
Renminbi against United States Dollar may not have a negative
impact on the Groups turnover but may increase the cost
for acquiring imported materials and equipment as well as the
debt obligations denominated in foreign currencies of the Group.



(d)
    Commodity price riskThe Group is engaged in a wide range of petroleum-related
activities. The oil and gas markets are affected by global and
regional demands and supplies. Prices of onshore crude oil are
determined with reference to the prices of crude oil on the
international markets. A decline in the prices of crude oil and
refined products could adversely affect the Groups
financial position. The Group historically has not used
commodity derivative instruments to hedge against potential
price fluctuations of crude oil and refined products. Therefore,
the Group is exposed to the general price fluctuations of
broadly traded oil and gas commodities in 2007 and thereafter.



(e)
    Fair valuesThe carrying amounts of the following financial assets and
financial liabilities approximate their fair value as all of
them are in short-term in nature: cash and cash equivalents,
short-term investments (comprising investments in collateralized
loans and time deposits with maturities over three months but
within one year), accounts receivable and trade payable, other
receivables and payables, lease obligations, short-term debts
and floating rate long-term debts. The fair value of the fixed
rate long-term debts is likely to be different from their
carrying amounts. As the majority of the debts are at floating
rates, the fair value of these debts approximate their carrying
amounts. Analysis of the fair value and carrying amounts of
long-term debts are presented in Note 24.

F-43



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

31  CONTINGENT LIABILITIES



(a)
    Bank and other guaranteesAt December 31, 2006, the Group had contingent liabilities
in respect of guarantees made to China Petroleum Finance Company
Limited (CP Finance), a subsidiary of CNPC, and a
State-controlled bank from which it is anticipated that no
material liabilities will arise.

|                                                 |                         |                 |     |     |      |  |     |     | 
|------------------------------------------------ | ----------------------- | --------------- | --- | --- | ---- |  | --- | --- | 
|                                                 |                         | At December 31, |    
|                                                 |                         |                 |    
|                                                 |                         | 2005            |     |     | 2006 | 
|                                                 |                         |                 |     |     |      | 
|                                                 |                         | RMB             |     |     | RMB  | 
|Guarantee of debts of equity
    affiliates from |                         |                 |     |     |      |  |     |    
|                                                 | CP Finance              |                 |     | 187 |      |  |     | 162 | 
|Guarantee of debts of third party
    from       |                         |                 |     |     |      |  |     |    
|                                                 | a State-controlled bank |                 |     |    |      |  |     | 41  | 
|                                                 |                         |                 |     |     |      | 
|                                                 |                         |                 | 187 |     |      |  | 203 |    
|                                                 |                         |                 |     |     |      | 



|    |                          
|--- | -------------------------
|(b) | Environmental liabilities







|    |                    
|--- | -------------------
|(c) | Legal contingencies





|    |                                     
|--- | ------------------------------------
|(d) | Leasing of roads, land and buildings





| |   |                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | CNPC will use its best endeavors to obtain formal land use right
    certificates to replace the entitlement certificates in relation
    to the 28,649 parcels of land which were leased or transferred
    to the Company from CNPC, within one year from August, September
    and October 1999 when the relevant entitlement certificates were
    issued;

F-44



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)




    CNPC will complete, within one year from November 5, 1999,
    the necessary governmental procedures for the requisition of the
    collectively-owned land on which 116 service stations owned by
    the Company are located; and
    CNPC will obtain individual building ownership certificates in
    the name of the Company for all of the 57,482 buildings
    transferred to the Company by CNPC, before November 5, 2000.As at December 31, 2006, CNPC obtained formal land use
right certificates in relation to 27,494 out of the
above-mentioned 28,649 parcels of land, some building ownership
certificates for the above-mentioned buildings, but has
completed none of the necessary governmental procedures for the
above-mentioned service stations located on collectively-owned
land. The Directors of the Company confirm that the use of and
the conduct of relevant activities at the above-mentioned
parcels of land, service stations and buildings are not affected
by the fact that the relevant land use right certificates or
individual building ownership certificates have not been
obtained or the fact that the relevant governmental procedures
have not been completed. In managements opinion, the
outcome of the above events will not have a material adverse
effect on the results of operations or the financial position of
the Group.



(e)
    Group insuranceExcept for limited insurance coverage for vehicles and certain
assets subject to significant operating risks, the Group does
not carry any other insurance for property, facilities or
equipment with respect to its business operations. In addition,
the Group does not carry any third-party liability insurance
against claims relating to personal injury, property and
environmental damages or business interruption insurance since
such insurance coverage is not customary in China. While the
effect of under-insurance on future incidents cannot be
reasonably assessed at present, management believes that it may
have a material impact on the operating results but will not
have a material adverse effect on the financial position of the
Group.



32
    COMMITMENTS

(a) Operating lease commitmentsOperating lease commitments of the Group are mainly for leasing
of land and buildings and equipment. Leases range from one to
fifty years and usually do not contain renewal options. Future
minimum lease payments as of December 31, 2005 and 2006
under non-cancelable operating leases are as follows:

|            |  |                 |        |  |      |  |        | 
|----------- |  | --------------- | ------ |  | ---- |  | ------ | 
|            |  | At December 31, |       
|            |  |                 |       
|            |  | 2005            |        |  | 2006 | 
|            |  |                 |        |  |      | 
|            |  | RMB             |        |  | RMB  | 
|First year  |  |                 | 3,208  |  |      |  | 3,099  | 
|Second year |  |                 | 2,595  |  |      |  | 2,749  | 
|Third year  |  |                 | 2,558  |  |      |  | 2,714  | 
|Fourth year |  |                 | 2,437  |  |      |  | 3,040  | 
|Fifth year  |  |                 | 2,926  |  |      |  | 3,102  | 
|Thereafter  |  |                 | 81,266 |  |      |  | 80,076 | 
|            |  |                 |        |  |      | 
|            |  |                 | 94,990 |  |      |  | 94,780 | 
|            |  |                 |        |  |      | 

F-45



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

Operating lease expenses for land and buildings and equipment
were RMB 3,873, RMB 4,850 and RMB 5,378 for the years ended
December 31, 2004, 2005 and 2006, respectively.



(b) Capital commitments

|                                |                        |              |        |        |      |  |       |       | 
|------------------------------- | ---------------------- | ------------ | ------ | ------ | ---- |  | ----- | ----- | 
|                                |                        | At           |       
|                                |                        | December 31, |       
|                                |                        |              |       
|                                |                        | 2005         |        |        | 2006 | 
|                                |                        |              |        |        |      | 
|                                |                        | RMB          |        |        | RMB  | 
|Contracted but not provided for |                        |              |        |        |      |  |       |      
|                                | Oil and gas properties |              |        | 847    |      |  |       | 273   | 
|                                | Plant and equipment    |              |        | 12,496 |      |  |       | 8,658 | 
|                                | Other                  |              |        | 22     |      |  |       | 262   | 
|                                |                        |              |        |        |      | 
|                                |                        |              | 13,365 |        |      |  | 9,193 |      
|                                |                        |              |        |        |      | 



| |                                             
| | --------------------------------------------
| | (c) Long-term natural gas supply commitments





|                    |  |                         |       | 
|------------------- |  | ----------------------- | ----- | 
|                    |  | At December 31,        
|                    |  | 2005                   
|                    |  | Quantities             
|                    |  |                        
|                    |  | (billion of cubic feet)
|2006                |  |                         | 451   | 
|2007                |  |                         | 583   | 
|2008                |  |                         | 639   | 
|2009                |  |                         | 704   | 
|2010                |  |                         | 583   | 
|2011 and thereafter |  |                         | 5,528 | 
|                    |  |                         |       | 
|                    |  |                         | 8,488 | 
|                    |  |                         |       | 

|                    |  |                         |        | 
|------------------- |  | ----------------------- | ------ | 
|                    |  | At December 31,        
|                    |  | 2006                   
|                    |  | Quantities             
|                    |  |                        
|                    |  | (billion of cubic feet)
|2007                |  |                         | 720    | 
|2008                |  |                         | 885    | 
|2009                |  |                         | 943    | 
|2010                |  |                         | 1,002  | 
|2011                |  |                         | 1,050  | 
|2012 and thereafter |  |                         | 10,460 | 
|                    |  |                         |        | 
|                    |  |                         | 15,060 | 
|                    |  |                         |        | 

F-46



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



(d) Exploration and production licensesThe Company is obligated to make annual payments with respect to
its exploration and production licenses to the Ministry of Land
and Resources. Payments incurred were approximately RMB 444, RMB
534 and RMB 662 for the years ended December 31, 2004, 2005
and 2006, respectively.

Estimated annual payments for the next five years are as follows:

|     |  |                 |     | 
|---- |  | --------------- | --- | 
|     |  | At December 31,
|     |  | 2005           
|     |  |                
|     |  | RMB            
|2006 |  |                 | 681 | 
|2007 |  |                 | 712 | 
|2008 |  |                 | 712 | 
|2009 |  |                 | 712 | 
|2010 |  |                 | 850 | 

|     |  |                 |     | 
|---- |  | --------------- | --- | 
|     |  | At December 31,
|     |  | 2006           
|     |  |                
|     |  | RMB            
|2007 |  |                 | 750 | 
|2008 |  |                 | 780 | 
|2009 |  |                 | 800 | 
|2010 |  |                 | 850 | 
|2011 |  |                 | 900 | 



|   |                
|-- | ---------------
|33 | MAJOR CUSTOMERS



|        |  |                         |        |       |         |  |    |         |       |  |         |  |  |         |    |  |         |  |        |  |  |  |    | 
|------- |  | ----------------------- | ------ | ----- | ------- |  | -- | ------- | ----- |  | ------- |  |  | ------- | -- |  | ------- |  | ------ |  |  |  | -- | 
|        |  | Year Ended December 31, |       
|        |  |                         |       
|        |  | 2004                    |        |       | 2005    |  |    | 2006    |      
|        |  |                         |        |       |         |  |    |         |      
|        |  |                         |        | % to  |         |  |    |         | % to  |  |         |  |  | % to    |   
|        |  |                         |        | Total |         |  |    |         | Total |  |         |  |  | Total   |   
|        |  | Revenue                 |        |       | Revenue |  |    | Revenue |       |  | Revenue |  |  | Revenue |    |  | Revenue | 
|        |  |                         |        |       |         |  |    |         |       |  |         |  |  |         |    |  |         | 
|        |  | RMB                     |        |       | %       |  |    | RMB     |       |  | %       |  |  | RMB     |    |  | %       | 
|Sinopec |  |                         | 36,977 |       |         |  | 9  |         |       |  | 35,848  |  |  |         | 6  |  |         |  | 44,028 |  |  |  | 6  | 
|CNPC    |  |                         | 10,720 |       |         |  | 3  |         |       |  | 19,823  |  |  |         | 4  |  |         |  | 27,714 |  |  |  | 4  | 
|        |  |                         |        |       |         |  |    |         |       |  |         |  |  |         |    |  |         | 
|        |  |                         | 47,697 |       |         |  | 12 |         |       |  | 55,671  |  |  |         | 10 |  |         |  | 71,742 |  |  |  | 10 | 
|        |  |                         |        |       |         |  |    |         |       |  |         |  |  |         |    |  |         | 



|   |                           
|-- | --------------------------
|34 | RELATED PARTY TRANSACTIONS





F-47



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

of the CNPC Group are not the same as those that would result
from transactions with other related parties or wholly unrelated
parties.

As a result of the restructuring of CNPC to form the Company in
1999, the Company and CNPC entered into a Comprehensive Products
and Services Agreement for a range of products and services
which may be required and requested by either party; a Land Use
Rights Leasing Contract under which CNPC leases 42,476 parcels
of land located throughout the PRC to the Company; and a
Buildings Leasing Contract under which CNPC leases 191 buildings
located throughout the PRC to the Company.

The term of the current Comprehensive Products and Services
Agreement were amended in 2005 and the agreement is effective
through December 31, 2008. The products and services to be
provided by the CNPC Group to the Company under the
Comprehensive Products and Services Agreement include
construction and technical services, production services, supply
of material services, social services, ancillary services and
financial services. The products and services are provided in
accordance with (1) state-prescribed prices; or
(2) where there is no state-prescribed price, relevant
market prices; or (3) where neither (1) nor
(2) is applicable, actual cost incurred; or the agreed
contractual price, being the actual cost plus a margin of no
more than 15% for certain construction and technical services,
and 3% for all other types of services.

The Land Use Rights Leasing Contract provides for the lease of
an aggregate area of approximately 1,145 million square
meters of land located throughout the PRC to business units of
the Group for a term of 50 years at an annual fee of RMB
2,000. The total fee payable for the lease of all such property
may, after every 10 years, be adjusted by agreement between
the Company and CNPC.

Under the Buildings Leasing Contract, 191 buildings covering an
aggregate area of 269,770 square meters located throughout
the PRC are leased at an aggregate annual fee of RMB 39 for a
term of 20 years. The Company also entered into a
Supplemental Buildings Leasing Agreement with CNPC in September
2002 to lease an additional 404 buildings covering approximately
442,730 square meters at an annual rental of RMB 157. The
Supplemental Buildings Leasing Agreement will expire at the same
time as the Buildings Leasing Agreement.

In addition to the related party information shown elsewhere in
the financial statements, the following is a summary of
significant related party transactions entered into in the
ordinary course of business between the Group and its related
parties during the years and balances arising from related party
transactions at the end of the years indicated below:



(a) Bank deposits

|                      |                                                             |      |  |              |      |  |        |        |  |  |        |        | 
|--------------------- | ----------------------------------------------------------- | ---- |  | ------------ | ---- |  | ------ | ------ |  |  | ------ | ------ | 
|                      |                                                             |      |  | At           |     
|                      |                                                             |      |  | December 31, |     
|                      |                                                             |      |  |              |     
|                      |                                                             | Note |  |              | 2005 |  |        | 2006   | 
|                      |                                                             |      |  |              |      |  |        |        | 
|                      |                                                             |      |  | RMB          |      |  | RMB    |       
|Bank deposits balance |                                                             |      |  |              |      |  |        |        |  |  |        |       
|                      | CP Finance                                                  |      |  | (i)          |      |  |        | 24,356 |  |  |        | 8,937  | 
|                      | State-controlled banks and other
    financial institutions |      |  |              |      |  |        | 55,139 |  |  |        | 37,744 | 
|                      |                                                             |      |  |              |      |  |        |        | 
|                      |                                                             |      |  |              |      |  | 79,495 |        |  |  | 46,681 |       
|                      |                                                             |      |  |              |      |  |        |        | 

F-48



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

|                                   |                                                             |      |  |              |      |  |     |      |  |     |       |       |  |  |       |       | 
|---------------------------------- | ----------------------------------------------------------- | ---- |  | ------------ | ---- |  | --- | ---- |  | --- | ----- | ----- |  |  | ----- | ----- | 
|                                   |                                                             |      |  | Year Ended   |     
|                                   |                                                             |      |  | December 31, |     
|                                   |                                                             |      |  |              |     
|                                   |                                                             | Note |  |              | 2004 |  |     | 2005 |  |     | 2006  |      
|                                   |                                                             |      |  |              |      |  |     |      |  |     |       |      
|                                   |                                                             |      |  | RMB          |      |  | RMB |      |  | RMB |      
|Interest income from bank deposits |                                                             |      |  |              |      |  |     |      |  |     |       |       |  |  |       |      
|                                   | CP Finance                                                  |      |  | (i)          |      |  |     | 29   |  |     |       | 33    |  |  |       | 81    | 
|                                   | State-controlled banks and other
    financial institutions |      |  |              |      |  |     | 132  |  |     |       | 1,582 |  |  |       | 1,804 | 
|                                   |                                                             |      |  |              |      |  |     |      |  |     |       |      
|                                   |                                                             |      |  |              |      |  | 161 |      |  |     | 1,615 |       |  |  | 1,885 |      
|                                   |                                                             |      |  |              |      |  |     |      |  |     |       |      






| |     |                                                                                                                                                                                                                    
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) | CP Finance is a subsidiary of CNPC and a non-bank financial
    institution, established with the approval from the
    Peoples Bank of China. The deposits yield interest at
    prevailing saving deposit rates.



| |                                
| | -------------------------------
| | (b) Sales of goods and services

|                                                      |                     |                         |         |        |      |  |         |        |  |  |         |        | 
|----------------------------------------------------- | ------------------- | ----------------------- | ------- | ------ | ---- |  | ------- | ------ |  |  | ------- | ------ | 
|                                                      |                     | Year Ended December 31, |        
|                                                      |                     |                         |        
|                                                      |                     | 2004                    |         |        | 2005 |  |         | 2006   | 
|                                                      |                     |                         |         |        |      |  |         |        | 
|                                                      |                     | RMB                     |         |        | RMB  |  |         | RMB    | 
|Sales of goods                                        |                     |                         |         |        |      |  |         |        |  |  |         |       
|Equity affiliates and jointly
    controlled entities |                     |                         |         |        |      |  |         |        |  |  |         |       
|                                                      |  Crude Oil         |                         |         | 2,597  |      |  |         | 883    |  |  |         | 5,023  | 
|                                                      |  Refined Products  |                         |         | 6,397  |      |  |         | 9,766  |  |  |         | 19,779 | 
|                                                      |  Chemical Products |                         |         | 153    |      |  |         | 308    |  |  |         | 90     | 
|Fellow subsidiaries (CNPC Group)                      |                     |                         |         |        |      |  |         |        |  |  |         |       
|                                                      |  Crude Oil         |                         |         | 100    |      |  |         | 155    |  |  |         | 1,546  | 
|                                                      |  Refined Products  |                         |         | 5,720  |      |  |         | 12,364 |  |  |         | 16,847 | 
|                                                      |  Chemical Products |                         |         | 2,927  |      |  |         | 4,805  |  |  |         | 5,691  | 
|                                                      |  Natural Gas       |                         |         | 737    |      |  |         | 820    |  |  |         | 1,346  | 
|                                                      |  Other             |                         |         | 320    |      |  |         | 650    |  |  |         | 277    | 
|Other state-controlled enterprises                    |                     |                         |         |        |      |  |         |        |  |  |         |       
|                                                      |  Crude Oil         |                         |         | 34,212 |      |  |         | 37,168 |  |  |         | 39,632 | 
|                                                      |  Refined Products  |                         |         | 61,138 |      |  |         | 86,505 |  |  |         | 68,370 | 
|                                                      |  Chemical Products |                         |         | 14,155 |      |  |         | 18,275 |  |  |         | 8,979  | 
|                                                      |  Natural Gas       |                         |         | 5,093  |      |  |         | 8,127  |  |  |         | 7,713  | 
|                                                      |                     |                         |         |        |      |  |         |        | 
|                                                      |                     |                         | 133,549 |        |      |  | 179,826 |        |  |  | 175,293 |       
|                                                      |                     |                         |         |        |      |  |         |        | 



F-49



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

|                                   |  |              |       |  |      |  |       |      |  |  |       | 
|---------------------------------- |  | ------------ | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                                   |  | Year Ended   |      
|                                   |  | December 31, |      
|                                   |  |              |      
|                                   |  | 2004         |       |  | 2005 |  |       | 2006 | 
|                                   |  |              |       |  |      |  |       |      | 
|                                   |  | RMB          |       |  | RMB  |  |       | RMB  | 
|Sales of services                  |  |              |       |  |      |  |       |      |  |  |       | 
|Fellow subsidiaries (CNPC Group)   |  |              | 916   |  |      |  | 1,029 |      |  |  | 2,007 | 
|Other state-controlled enterprises |  |              | 3,047 |  |      |  | 3,592 |      |  |  | 7,761 | 
|                                   |  |              |       |  |      |  |       |      | 
|                                   |  |              | 3,963 |  |      |  | 4,621 |      |  |  | 9,768 | 
|                                   |  |              |       |  |      |  |       |      | 





| |                                    
| | -----------------------------------
| | (c) Purchases of goods and services

|                                                      |                                                         |                                                 |     |                         |       |  |         |        |        |     |         |        |        |  |         |        |        | 
|----------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------------- | --- | ----------------------- | ----- |  | ------- | ------ | ------ | --- | ------- | ------ | ------ |  | ------- | ------ | ------ | 
|                                                      |                                                         |                                                 |     | Year Ended December 31, |      
|                                                      |                                                         |                                                 |     |                         |      
|                                                      |                                                         | Notes                                           |     |                         | 2004  |  |         | 2005   |        |     | 2006    |       
|                                                      |                                                         |                                                 |     |                         |       |  |         |        |        |     |         |       
|                                                      |                                                         |                                                 |     | RMB                     |       |  | RMB     |        |        | RMB |        
|Purchases of goods                                    |                                                         |                                                 | (i) |                         |       |  |         |        |        |     |         |        |        |  |         |       
|Equity affiliates and jointly
    controlled entities |                                                         |                                                 |     |                         |       |  | 2,185   |        |        |     | 4,220   |        |        |  | 9,868   |       
|Other state-controlled enterprises                    |                                                         |                                                 |     |                         |       |  | 36,048  |        |        |     | 59,719  |        |        |  | 50,995  |       
|                                                     
|Purchases of services                                 |                                                         |                                                 |     |                         |       |  |         |        |        |     |         |        |        |  |         |       
|Equity affiliates and jointly
    controlled entities |                                                         |                                                 |     |                         |       |  | 29      |        |        |     | 43      |        |        |  | 126     |       
|Fellow subsidiaries (CNPC Group)                      |                                                         |                                                 |     |                         |       |  |         |        |        |     |         |        |        |  |         |       
|                                                      |  Fees paid for
    construction and technical services |                                                 |     | (ii)                    |       |  |         |        |        |     |         |        |        |  |         |        |       
|                                                      |                                                         |  exploration and
    development services      |     |                         | (iii) |  |         |        | 30,058 |     |         |        | 39,653 |  |         |        | 50,485 | 
|                                                      |                                                         |  other construction and
    technical services |     |                         | (iv)  |  |         |        | 18,673 |     |         |        | 25,010 |  |         |        | 32,256 | 
|                                                      |  Fees for production
    services                      |                                                 |     | (v)                     |       |  |         | 16,313 |        |     |         | 23,344 |        |  |         | 32,730 |       
|                                                      |  Social service charges                                |                                                 |     | (vi)                    |       |  |         | 1,289  |        |     |         | 2,153  |        |  |         | 2,301  |       
|                                                      |  Ancillary service
    charges                         |                                                 |     | (vii)                   |       |  |         | 1,717  |        |     |         | 2,345  |        |  |         | 2,458  |       
|                                                      |  Commission expense and
    other charges              |                                                 |     | (viii)                  |       |  |         | 884    |        |     |         | 1,612  |        |  |         | 1,241  |       
|                                                      | Other state-controlled enterprises                      |                                                 |     | (ix)                    |       |  |         | 4,752  |        |     |         | 6,390  |        |  |         | 7,703  |       
|                                                      |                                                         |                                                 |     |                         |       |  |         |        |        |     |         |       
|                                                      |                                                         |                                                 |     |                         |       |  | 111,948 |        |        |     | 164,489 |        |        |  | 190,163 |       
|                                                      |                                                         |                                                 |     |                         |       |  |         |        |        |     |         |       






| |       |                                                                                                                                                                                                                                                                                                                                      
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | Purchases of goods principally represent the purchases of raw
    materials, spare parts and low cost consumables at market prices.                                                                                                                                                                                                  
|
| | (ii)  | Under the Comprehensive Products and Services Agreement entered
    into between CNPC and the Company, certain construction and
    technical services provided by CNPC are charged at cost plus an
    additional margin of no more than 15%, including exploration and
    development services and oilfield construction services.
|
| | (iii) | Direct costs for exploration and development services comprise
    geophysical survey, drilling, well cementing, logging and well
    testing.                                                                                                                                                                                       
|
| | (iv)  | The fees paid for other construction and technical services
    comprise fees for construction of refineries and chemical plants
    and technical services in connection with oil and gas                                                                                                                                           

F-50



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



exploration and production activities such as oilfield
    construction, technology research, engineering and design, etc(v)
    The fees paid for production services comprise fees for the
    repair of machinery, supply of water, electricity and gas at the
    state-prescribed prices, provision of services such as
    communications, transportation, fire fighting, asset leasing,
    environmental protection and sanitation, maintenance of roads,
    manufacture of replacement parts and machinery at cost or market
    prices.(vi)
    These represent expenditures for social welfare and support
    services which are charged at cost.(vii)
    Ancillary service charges represent mainly fees for property
    management, the provision of training centres, guesthouses,
    canteens, public shower rooms, etc., at market prices.(viii)
    CNPC purchases materials on behalf of the Company and charges
    commission thereon. The commission is calculated at rates
    ranging from 1% to 5% of the goods purchased.(ix)
    Purchases of services from other state-controlled enterprises
    principally represent the purchases of the construction and
    technical services at market prices.

(d) Purchases of assets

|                    |                                                       |                         |       |       |      |  |        |       |  |  |       |       | 
|------------------- | ----------------------------------------------------- | ----------------------- | ----- | ----- | ---- |  | ------ | ----- |  |  | ----- | ----- | 
|                    |                                                       | Year Ended December 31, |      
|                    |                                                       |                         |      
|                    |                                                       | 2004                    |       |       | 2005 |  |        | 2006  | 
|                    |                                                       |                         |       |       |      |  |        |       | 
|                    |                                                       | RMB                     |       |       | RMB  |  |        | RMB   | 
|Purchases of assets |                                                       |                         |       |       |      |  |        |       |  |  |       |      
|                    | Equity affiliates and jointly
    controlled entities |                         |       | 9     |      |  |        | 11    |  |  |       | 2     | 
|                    | Fellow subsidiaries (CNPC Group)                      |                         |       | 4,018 |      |  |        | 5,870 |  |  |       | 1,795 | 
|                    | Other state-controlled enterprises                    |                         |       | 3,480 |      |  |        | 6,813 |  |  |       | 6,617 | 
|                    |                                                       |                         |       |       |      |  |        |       | 
|                    |                                                       |                         | 7,507 |       |      |  | 12,694 |       |  |  | 8,414 |      
|                    |                                                       |                         |       |       |      |  |        |       | 



F-51



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



(e) Year-end balances arising from sales/ purchases
    of goods/ services/assets

|                                                                                       |                                                         |              |        |        |      |  |        |        |  
|-------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------ | ------ | ------ | ---- |  | ------ | ------ | -
|                                                                                       |                                                         | At           |       
|                                                                                       |                                                         | December 31, |       
|                                                                                       |                                                         |              |       
|                                                                                       |                                                         | 2005         |        |        | 2006 | 
|                                                                                       |                                                         |              |        |        |      | 
|                                                                                       |                                                         | RMB          |        |        | RMB  | 
|Accounts receivable from related
    parties at the end of the year                    |                                                         |              |        |        |      |  |        |       
|                                                                                       |  Equity affiliates and
    jointly controlled entities |              |        | 12     |      |  |        | 82     |  
|                                                                                       |  Fellow subsidiaries
    (CNPC Group)                  |              |        | 337    |      |  |        | 599    |  
|                                                                                       |  Other state-controlled
    enterprises                |              |        | 1,796  |      |  |        | 1,566  |  
|                                                                                       |                                                         |              |        |        |      | 
|                                                                                       |                                                         |              | 2,145  |        |      |  | 2,247  |       
|Less: Provision for impairment of
    accounts receivable                              |                                                         |              |        |        |      |  |        |       
|                                                                                       |  Equity affiliates and
    jointly controlled entities |              |        |       |      |  |        | (5     | )
|                                                                                       |  Fellow subsidiaries
    (CNPC Group)                  |              |        | (246   | )    |  |        | (232   | )
|                                                                                       |  Other state-controlled
    enterprises                |              |        | (924   | )    |  |        | (861   | )
|                                                                                       |                                                         |              |        |        |      | 
|                                                                                       |                                                         |              | (1,170 | )      |      |  | (1,098 | )     
|                                                                                       |                                                         |              |        |        |      | 
|                                                                                       |                                                         |              | 975    |        |      |  | 1,149  |       
|                                                                                       |                                                         |              |        |        |      | 
|Prepayments and other receivables
    from related parties at the end of the year      |                                                         |              |        |        |      |  |        |       
|                                                                                       |  Equity affiliates and
    jointly controlled entities |              |        | 3,634  |      |  |        | 4,307  |  
|                                                                                       |  Parent (CNPC)                                         |              |        | 103    |      |  |        | 196    |  
|                                                                                       |  Fellow subsidiaries
    (CNPC Group)                  |              |        | 7,430  |      |  |        | 7,220  |  
|                                                                                       |  Other state-controlled
    enterprises                |              |        | 2,357  |      |  |        | 4,202  |  
|                                                                                       |                                                         |              |        |        |      | 
|                                                                                       |                                                         |              | 13,524 |        |      |  | 15,925 |       
|Less: Provision for impairment of
    other receivables                                |                                                         |              |        |        |      |  |        |       
|                                                                                       |  Equity affiliates and
    jointly controlled entities |              |        | (240   | )    |  |        | (212   | )
|                                                                                       |  Fellow subsidiaries
    (CNPC Group)                  |              |        | (70    | )    |  |        | (4     | )
|                                                                                       |  Other state-controlled
    enterprises                |              |        | (330   | )    |  |        | (299   | )
|                                                                                       |                                                         |              |        |        |      | 
|                                                                                       |                                                         |              | (640   | )      |      |  | (515   | )     
|                                                                                       |                                                         |              |        |        |      | 
|                                                                                       |                                                         |              | 12,884 |        |      |  | 15,410 |       
|                                                                                       |                                                         |              |        |        |      | 
|Accounts payable and accrued
    liabilities to related parties at the end of the year |                                                         |              |        |        |      |  |        |       
|                                                                                       |  Equity affiliates and
    jointly controlled entities |              |        | 3,118  |      |  |        | 1,444  |  
|                                                                                       |  Parent (CNPC)                                         |              |        | 2,516  |      |  |        | 2,321  |  
|                                                                                       |  Fellow subsidiaries
    (CNPC Group)                  |              |        | 20,285 |      |  |        | 26,046 |  
|                                                                                       |  Other state-controlled
    enterprises                |              |        | 15,163 |      |  |        | 5,462  |  
|                                                                                       |                                                         |              |        |        |      | 
|                                                                                       |                                                         |              | 41,082 |        |      |  | 35,273 |       
|                                                                                       |                                                         |              |        |        |      | 

F-52



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

|                                                                                                                                           |                                                         |              |     |     |      |  |     |      |   |  |     |     |  
|------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------- | ------------ | --- | --- | ---- |  | --- | ---- | - |  | --- | --- | -
|                                                                                                                                           |                                                         | Year Ended   |    
|                                                                                                                                           |                                                         | December 31, |    
|                                                                                                                                           |                                                         |              |    
|                                                                                                                                           |                                                         | 2004         |     |     | 2005 |  |     | 2006 |  
|                                                                                                                                           |                                                         |              |     |     |      |  |     |      |  
|                                                                                                                                           |                                                         | RMB          |     |     | RMB  |  |     | RMB  |  
|Provision for impairment of
    accounts receivable from related parties charged to the
    consolidated statements of income              |                                                         |              |     |     |      |  |     |      |   |  |     |    
|                                                                                                                                           |  Equity affiliates and
    jointly controlled entities |              |     |    |      |  |     |     |   |  |     | 5   |  
|                                                                                                                                           |  Fellow subsidiaries
    (CNPC Group)                  |              |     | 42  |      |  |     | 24   |   |  |     | (11 | )
|                                                                                                                                           |  Other state-controlled
    enterprises                |              |     | (36 | )    |  |     | (62  | ) |  |     | (52 | )
|                                                                                                                                           |                                                         |              |     |     |      |  |     |      |  
|                                                                                                                                           |                                                         |              | 6   |     |      |  | (38 | )    |   |  | (58 | )  
|                                                                                                                                           |                                                         |              |     |     |      |  |     |      |  
|Provision for impairment of
    prepayment and other receivables from related parties charged to
    the consolidated statements of income |                                                         |              |     |     |      |  |     |      |   |  |     |    
|                                                                                                                                           |  Equity affiliates and
    jointly controlled entities |              |     | 49  |      |  |     | (55  | ) |  |     | (20 | )
|                                                                                                                                           |  Fellow subsidiaries
    (CNPC Group)                  |              |     | 47  |      |  |     | 55   |   |  |     | (32 | )
|                                                                                                                                           |  Other state-controlled
    enterprises                |              |     | 82  |      |  |     | (35  | ) |  |     | 12  |  
|                                                                                                                                           |                                                         |              |     |     |      |  |     |      |  
|                                                                                                                                           |                                                         |              | 178 |     |      |  | (35 | )    |   |  | (40 | )  
|                                                                                                                                           |                                                         |              |     |     |      |  |     |      |  



| |           
| | ----------
| | (f) Leases

|                                                             |                                          |       |    |              |      |  |       |       |  |     |       |       |  |  |       |       | 
|------------------------------------------------------------ | ---------------------------------------- | ----- | -- | ------------ | ---- |  | ----- | ----- |  | --- | ----- | ----- |  |  | ----- | ----- | 
|                                                             |                                          |       |    | Year Ended   |     
|                                                             |                                          |       |    | December 31, |     
|                                                             |                                          |       |    |              |     
|                                                             |                                          | Notes |    |              | 2004 |  |       | 2005  |  |     | 2006  |      
|                                                             |                                          |       |    |              |      |  |       |       |  |     |       |      
|                                                             |                                          |       |    | RMB          |      |  | RMB   |       |  | RMB |      
|Advance operating lease payments
    paid to related parties |                                          |       | (i | )            |      |  |       |       |  |     |       |       |  |  |       |      
|                                                             |  Parent (CNPC)                          |       |    |              |      |  |       | 186   |  |     |       | 232   |  |  |       |      | 
|                                                             |  Other state-controlled
    enterprises |       |    |              |      |  |       | 15    |  |     |       | 33    |  |  |       | 49    | 
|                                                             |                                          |       |    |              |      |  |       |       |  |     |       |      
|                                                             |                                          |       |    |              |      |  | 201   |       |  |     | 265   |       |  |  | 49    |      
|                                                             |                                          |       |    |              |      |  |       |       |  |     |       |      
|Other operating lease payments paid
    to related parties   |                                          |       |    |              |      |  |       |       |  |     |       |       |  |  |       |      
|                                                             |  Parent (CNPC)                          |       |    | (ii          | )    |  |       | 2,106 |  |     |       | 2,192 |  |  |       | 2,276 | 
|                                                             |  Other state-controlled
    enterprises |       |    |              |      |  |       | 5     |  |     |       | 5     |  |  |       | 16    | 
|                                                             |                                          |       |    |              |      |  |       |       |  |     |       |      
|                                                             |                                          |       |    |              |      |  | 2,111 |       |  |     | 2,197 |       |  |  | 2,292 |      
|                                                             |                                          |       |    |              |      |  |       |       |  |     |       |      






| |      |                                                                                                                                                                                                                   
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)  | Advance operating lease payments principally represent the
    advance payment paid for the long-term operating lease of land
    and gas stations at prices prescribed by local governments or
    market prices.
|
| | (ii) | Other operating lease payments to CNPC principally represent the
    rental paid for the operating lease of land and buildings at the
    prices prescribed in the Land Use Rights                                

F-53



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



Leasing Contract, the Buildings Leasing Contract and
    Supplemental Buildings Leasing Agreement with CNPC.

|                                               |                                          |              |   |   |      |  |   |   | 
|---------------------------------------------- | ---------------------------------------- | ------------ | - | - | ---- |  | - | - | 
|                                               |                                          | At           |  
|                                               |                                          | December 31, |  
|                                               |                                          |              |  
|                                               |                                          | 2005         |   |   | 2006 | 
|                                               |                                          |              |   |   |      | 
|                                               |                                          | RMB          |   |   | RMB  | 
|Operating lease payable to related
    parties |                                          |              |   |   |      |  |   |  
|                                               |  Parent (CNPC)                          |              |   | 2 |      |  |   |  | 
|                                               |  Other state-controlled
    enterprises |              |   | 1 |      |  |   | 7 | 
|                                               |                                          |              |   |   |      | 
|                                               |                                          |              | 3 |   |      |  | 7 |  
|                                               |                                          |              |   |   |      | 



| |          
| | ---------
| | (g) Loans

|                            |                            |                         |  |        |      |  |  |       |   |  |  |       |  
|--------------------------- | -------------------------- | ----------------------- |  | ------ | ---- |  |  | ----- | - |  |  | ----- | -
|                            |                            | Year Ended December 31, | 
|                            |                            |                         | 
|Loans to related parties    |                            | 2004                    |  |        | 2005 |  |  | 2006  |  
|                            |                            |                         |  |        |      |  |  |       |  
|                            |                            | RMB                     |  |        | RMB  |  |  | RMB   |  
|Loans to equity affiliates: |                            |                         |  |        |      |  |  |       |   |  |  |      
|                            | Beginning of the year      |                         |  | 1,718  |      |  |  | 569   |   |  |  | 1,640 |  
|                            | Loans advanced during year |                         |  | 235    |      |  |  | 1,392 |   |  |  | 1,034 |  
|                            | Loans repayments received  |                         |  | (1,384 | )    |  |  | (321  | ) |  |  | (884  | )
|                            | Interest charged           |                         |  | 41     |      |  |  | 29    |   |  |  | 154   |  
|                            | Interest received          |                         |  | (41    | )    |  |  | (29   | ) |  |  | (144  | )
|                            |                            |                         |  |        |      |  |  |       |  
|                            | End of the year            |                         |  | 569    |      |  |  | 1,640 |   |  |  | 1,800 |  
|                            |                            |                         |  |        |      |  |  |       |  



F-54



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

The loans to related parties are mainly with interest rates
ranging from 5.26% to 8.54% and 9.07% to 9.36% per annum as
of December 31, 2005 and 2006, respectively.

|                                                                        |                           |       |      |                         |      |  |     |         |   |     |      |         |   |  |  |         |  
|----------------------------------------------------------------------- | ------------------------- | ----- | ---- | ----------------------- | ---- |  | --- | ------- | - | --- | ---- | ------- | - |  |  | ------- | -
|                                                                        |                           |       |      | Year Ended December 31, |     
|                                                                        |                           |       |      |                         |     
|Loans from related parties                                              |                           | Notes |      |                         | 2004 |  |     | 2005    |   |     | 2006 |        
|                                                                        |                           |       |      |                         |      |  |     |         |   |     |      |        
|                                                                        |                           |       |      | RMB                     |      |  | RMB |         |   | RMB |     
|Loans from CP Finance:                                                  |                           |       | (i   | )                       |      |  |     |         |   |     |      |         |   |  |  |        
|                                                                        | Beginning of the year     |       |      |                         |      |  |     | 29,575  |   |     |      | 29,932  |   |  |  | 27,319  |  
|                                                                        | Loan received during year |       |      |                         |      |  |     | 12,003  |   |     |      | 10,187  |   |  |  | 7,408   |  
|                                                                        | Loan repayments paid      |       |      |                         |      |  |     | (11,646 | ) |     |      | (12,803 | ) |  |  | (7,565  | )
|                                                                        | Interest charged          |       |      |                         |      |  |     | 1,234   |   |     |      | 1,297   |   |  |  | 1,327   |  
|                                                                        | Interest paid             |       |      |                         |      |  |     | (1,234  | ) |     |      | (1,294  | ) |  |  | (1,305  | )
|                                                                        |                           |       |      |                         |      |  |     |         |   |     |      |        
|                                                                        | End of the year           |       |      |                         |      |  |     | 29,932  |   |     |      | 27,319  |   |  |  | 27,184  |  
|                                                                        |                           |       |      |                         |      |  |     |         |   |     |      |        
|Loans from state-controlled banks
    and other financial institutions: |                           |       | (ii  | )                       |      |  |     |         |   |     |      |         |   |  |  |        
|                                                                        | Beginning of the year     |       |      |                         |      |  |     | 38,341  |   |     |      | 36,562  |   |  |  | 31,178  |  
|                                                                        | Loan received during year |       |      |                         |      |  |     | 24,990  |   |     |      | 24,715  |   |  |  | 28,457  |  
|                                                                        | Loan repayments paid      |       |      |                         |      |  |     | (26,739 | ) |     |      | (30,105 | ) |  |  | (26,797 | )
|                                                                        | Interest charged          |       |      |                         |      |  |     | 1,847   |   |     |      | 1,670   |   |  |  | 1,598   |  
|                                                                        | Interest paid             |       |      |                         |      |  |     | (1,877  | ) |     |      | (1,664  | ) |  |  | (1,626  | )
|                                                                        |                           |       |      |                         |      |  |     |         |   |     |      |        
|                                                                        | End of the year           |       |      |                         |      |  |     | 36,562  |   |     |      | 31,178  |   |  |  | 32,810  |  
|                                                                        |                           |       |      |                         |      |  |     |         |   |     |      |        
|Loans from other related parties:                                       |                           |       | (iii | )                       |      |  |     |         |   |     |      |         |   |  |  |        
|                                                                        | Beginning of the year     |       |      |                         |      |  |     | 13      |   |     |      | 16      |   |  |  | 62      |  
|                                                                        | Loan received during year |       |      |                         |      |  |     | 5       |   |     |      | 51      |   |  |  |        |  
|                                                                        | Loan repayments paid      |       |      |                         |      |  |     | (2      | ) |     |      | (5      | ) |  |  | (57     | )
|                                                                        | Interest charged          |       |      |                         |      |  |     |        |   |     |      | 1       |   |  |  | 2       |  
|                                                                        | Interest paid             |       |      |                         |      |  |     |        |   |     |      | (1      | ) |  |  | (2      | )
|                                                                        |                           |       |      |                         |      |  |     |         |   |     |      |        
|                                                                        | End of the year           |       |      |                         |      |  |     | 16      |   |     |      | 62      |   |  |  | 5       |  
|                                                                        |                           |       |      |                         |      |  |     |         |   |     |      |        






| |       |                                                                                                                                                                                                                                                      
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | The loans from CP Finance are mainly with interest rates ranging
    from 4.45% to 5.70% and 4.46% to 6.06% per annum as of
    December 31, 2005 and 2006, respectively with maturities
    through 2032.                                           
|
| | (ii)  | The loans from state-controlled banks and other financial
    institutions are mainly with interest rates ranging from zero to
    8.66% and zero to 8.66% per annum as of December 31,
    2005 and 2006, respectively with maturities through 2038.
|
| | (iii) | The loans from other related parties are mainly with interest
    rates at 6.32% and 6.32% per annum as of December 31,
    2005 and 2006, respectively and with no fixed repayment term.                                                            



F-55



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

The guaranteed loans amounted to RMB 674 and RMB 597 at
December 31, 2005 and 2006, respectively. All these
guaranteed loans are from non-related parties, long-term and
guaranteed by CNPC.



(h) Key management compensation

|                                              |                                 |                         |       |       |         |  |       |         |  |  |       |       | 
|--------------------------------------------- | ------------------------------- | ----------------------- | ----- | ----- | ------- |  | ----- | ------- |  |  | ----- | ----- | 
|                                              |                                 | Year Ended December 31, |      
|                                              |                                 |                         |      
|                                              |                                 | 2004                    |       |       | 2005    |  |       | 2006    | 
|                                              |                                 |                         |       |       |         |  |       |         | 
|                                              |                                 | RMB000                 |       |       | RMB000 |  |       | RMB000 | 
|Fee for key management personnel              |                                 |                         |       |       |         |  |       |         |  |  |       |      
|                                              |  Directors and
    supervisors |                         |       | 120   |         |  |       | 897     |  |  |       | 1,473 | 
|Salaries, allowances and other
    benefits   |                                 |                         |       |       |         |  |       |         |  |  |       |      
|                                              |  Directors and
    supervisors |                         |       | 2,012 |         |  |       | 4,031   |  |  |       | 3,937 | 
|                                              |  Other key management          |                         |       | 1,330 |         |  |       | 2,207   |  |  |       | 2,447 | 
|Contribution to retirement benefit
    scheme |                                 |                         |       |       |         |  |       |         |  |  |       |      
|                                              |  Directors and
    supervisors |                         |       | 43    |         |  |       | 57      |  |  |       | 165   | 
|                                              |  Other key management          |                         |       | 31    |         |  |       | 37      |  |  |       | 133   | 
|                                              |                                 |                         |       |       |         |  |       |         | 
|                                              |                                 |                         | 3,536 |       |         |  | 7,229 |         |  |  | 8,155 |      
|                                              |                                 |                         |       |       |         |  |       |         | 





| |                           
| | --------------------------
| | (i) Contingent liabilities





| |                         
| | ------------------------
| | (j) Collateral for debts



F-56



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



35
    EMOLUMENTS OF DIRECTORS AND SUPERVISORSDetails of the emoluments of directors and supervisors for the
years ended December 31, 2004, 2005 and 2006 are as follows:

|                             |                          |               |     |              |                |  |       |               |  |  |         |    |  |         |       |     |         |  |       |     |  |  |     |     | 
|---------------------------- | ------------------------ | ------------- | --- | ------------ | -------------- |  | ----- | ------------- |  |  | ------- | -- |  | ------- | ----- | --- | ------- |  | ----- | --- |  |  | --- | --- | 
|                             |                          | 2006          |     |              | 2005           |  |       | 2004          | 
|                             |                          |               |     |              |                |  |       |               | 
|                             |                          |               |     | Contribution |                |  |       |               |  |  |        
|                             |                          | Fee for       |     |              | Salaries,      |  |       | to retirement |  |  |         |    |  |         |      
|                             |                          | directors and |     |              | allowances and |  |       | benefit       |  |  |         |    |  |         |      
|Name                         |                          | supervisors   |     |              | other benefits |  |       | scheme        |  |  | Total   |    |  | Total   |       |     | Total   | 
|                             |                          |               |     |              |                |  |       |               |  |  |         |    |  |         |       |     |         | 
|                             |                          | RMB000       |     |              | RMB000        |  |       | RMB000       |  |  | RMB000 |    |  | RMB000 |       |     | RMB000 | 
|Chairman:                    |                          |               |     |              |                |  |       |               |  |  |         |    |  |         |       |     |         |  |       |     |  |  |     |    
|                             | Mr. Chen Geng            |               |     |             |                |  |       | 770           |  |  |         | 27 |  |         |       | 797 |         |  |       | 790 |  |  |     | 389 | 
|Vice Chairman:               |                          |               |     |              |                |  |       |               |  |  |         |    |  |         |       |     |         |  |       |     |  |  |     |    
|                             | Mr. Jiang Jiemin         |               |     |             |                |  |       | 695           |  |  |         | 27 |  |         |       | 722 |         |  |       | 625 |  |  |     | 130 | 
|Executive directors:         |                          |               |     |              |                |  |       |               |  |  |         |    |  |         |       |     |         |  |       |     |  |  |     |    
|                             | Mr. Su
    Shulin(iii)   |               |     |             |                |  |       | 657           |  |  |         | 27 |  |         |       | 684 |         |  |       | 686 |  |  |     | 352 | 
|                             | Mr. Duan Wende           |               |     |             |                |  |       | 657           |  |  |         | 27 |  |         |       | 684 |         |  |       | 686 |  |  |     | 222 | 
|                             | Mr. Wang
    Fucheng(ii) |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       |    |  |  |     | 300 | 
|                             |                          |               |     |              |                |  |       |               |  |  |         |    |  |         |       |     |         | 
|                             |                          |               |     |              |                |  | 1,314 |               |  |  | 54      |    |  |         | 1,368 |     |         |  | 1,372 |     |  |  | 874 |    
|                             |                          |               |     |              |                |  |       |               |  |  |         |    |  |         |       |     |         | 
|Non-executive
    directors: |                          |               |     |              |                |  |       |               |  |  |         |    |  |         |       |     |         |  |       |     |  |  |     |    
|                             | Mr. Zheng Hu             |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       |    |  |  |     |    | 
|                             | Mr. Zhou Jiping          |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       |    |  |  |     |    | 
|                             | Mr. Wang Yilin           |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       |    |  |  |     |    | 
|                             | Mr. Zeng Yukang          |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       |    |  |  |     |    | 
|                             | Mr. Gong Huazhang        |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       |    |  |  |     |    | 
|                             | Mr. Jiang Fan            |               |     |             |                |  |       | 444           |  |  |         | 17 |  |         |       | 461 |         |  |       | 33  |  |  |     |    | 
|                             | Mr. Chee-chen Tung       |               |     | 275          |                |  |       |              |  |  |         |   |  |         |       | 275 |         |  |       | 275 |  |  |     | 29  | 
|                             | Mr. Liu Hongru           |               |     | 279          |                |  |       |              |  |  |         |   |  |         |       | 279 |         |  |       | 274 |  |  |     | 33  | 
|                             | Mr. Franco Bernabè       |               |     | 259          |                |  |       |              |  |  |         |   |  |         |       | 259 |         |  |       | 279 |  |  |     | 33  | 
|                             | Mr. Ren
    Chuanjun(ii) |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       |    |  |  |     |    | 
|                             | Mr. Zou
    Haifeng(ii)  |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       | 283 |  |  |     | 238 | 
|                             | Mr. Ma
    Fucai(i)      |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       |    |  |  |     |    | 
|                             | Mr. Wu
    Yaowen(i)     |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       |    |  |  |     |    | 
|                             |                          |               |     |              |                |  |       |               |  |  |         |    |  |         |       |     |         | 
|                             |                          |               | 813 |              |                |  | 444   |               |  |  | 17      |    |  |         | 1274  |     |         |  | 1,144 |     |  |  | 333 |    
|                             |                          |               |     |              |                |  |       |               |  |  |         |    |  |         |       |     |         | 
|Supervisors:                 |                          |               |     |              |                |  |       |               |  |  |         |    |  |         |       |     |         |  |       |     |  |  |     |    
|                             | Mr. Wang Fucheng         |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       | 530 |  |  |     |    | 
|                             | Mr. Wen Qingshan         |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       |    |  |  |     |    | 
|                             | Mr. Sun Xianfeng         |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       |    |  |  |     |    | 
|                             | Mr. Xu Fengli            |               |     |             |                |  |       | 432           |  |  |         | 27 |  |         |       | 459 |         |  |       | 374 |  |  |     | 153 | 
|                             | Mr. Qin Gang             |               |     |             |                |  |       | 282           |  |  |         | 13 |  |         |       | 295 |         |  |       |    |  |  |     |    | 
|                             | Mr. Li Yongwu            |               |     | 330          |                |  |       |              |  |  |         |   |  |         |       | 330 |         |  |       | 12  |  |  |     |    | 
|                             | Mr. Wu Zhipan            |               |     | 330          |                |  |       |              |  |  |         |   |  |         |       | 330 |         |  |       | 57  |  |  |     | 12  | 
|                             | Mr. Li
    Kecheng(ii)   |               |     |             |                |  |       |              |  |  |         |   |  |         |       |    |         |  |       |    |  |  |     |    | 

F-57



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

|                         |  |               |       |              |                |  |       |               |  |  |         |  |  |         |       |  |         |  |       |  |  |  |       | 
|------------------------ |  | ------------- | ----- | ------------ | -------------- |  | ----- | ------------- |  |  | ------- |  |  | ------- | ----- |  | ------- |  | ----- |  |  |  | ----- | 
|                         |  | 2006          |       |              | 2005           |  |       | 2004          | 
|                         |  |               |       |              |                |  |       |               | 
|                         |  |               |       | Contribution |                |  |       |               |  |  |        
|                         |  | Fee for       |       |              | Salaries,      |  |       | to retirement |  |  |         |  |  |         |      
|                         |  | directors and |       |              | allowances and |  |       | benefit       |  |  |         |  |  |         |      
|Name                     |  | supervisors   |       |              | other benefits |  |       | scheme        |  |  | Total   |  |  | Total   |       |  | Total   | 
|                         |  |               |       |              |                |  |       |               |  |  |         |  |  |         |       |  |         | 
|                         |  | RMB000       |       |              | RMB000        |  |       | RMB000       |  |  | RMB000 |  |  | RMB000 |       |  | RMB000 | 
|Mr. Sun
    Chongren(ii) |  |               |      |              |                |  |      |               |  |  |        |  |  |         |      |  |         |  | 81    |  |  |  | 272   | 
|Mr. Zhang
    Youcai(ii) |  |               |      |              |                |  |      |               |  |  |        |  |  |         |      |  |         |  |      |  |  |  | 12    | 
|Mr. Bai
    Xinhe(i)     |  |               |      |              |                |  |      |               |  |  |        |  |  |         |      |  |         |  |      |  |  |  |      | 
|Mr. Chen
    Weizhang(i) |  |               |      |              |                |  |      |               |  |  |        |  |  |         |      |  |         |  |      |  |  |  |      | 
|                         |  |               |       |              |                |  |       |               |  |  |         |  |  |         |       |  |         | 
|                         |  |               | 660   |              |                |  | 714   |               |  |  | 40      |  |  |         | 1,414 |  |         |  | 1,054 |  |  |  | 449   | 
|                         |  |               |       |              |                |  |       |               |  |  |         |  |  |         |       |  |         | 
|                         |  |               | 1,473 |              |                |  | 3,937 |               |  |  | 165     |  |  |         | 5,575 |  |         |  | 4,985 |  |  |  | 2,175 | 
|                         |  |               |       |              |                |  |       |               |  |  |         |  |  |         |       |  |         | 






|    |                                                       
|--- | ------------------------------------------------------
|(i) | No longer a director or supervisor since May 18, 2004.



|     |                                                           
|---- | ----------------------------------------------------------
|(ii) | No longer a director or supervisor since November 8, 2005.



|      |                                             
|----- | --------------------------------------------
|(iii) | No longer a director since November 24, 2006



|                |  |        |    |  |        |  |    |        |  |  |    | 
|--------------- |  | ------ | -- |  | ------ |  | -- | ------ |  |  | -- | 
|                |  | 2006   |    |  | 2005   |  |    | 2004   | 
|                |  |        |    |  |        |  |    |        | 
|                |  | Number |    |  | Number |  |    | Number | 
|RMB Nil  RMB 1 |  |        | 20 |  |        |  | 25 |        |  |  | 24 | 
|                |  |        |    |  |        |  |    |        | 













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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

As at December 31, 2006, none of the holders of the share
appreciation rights had exercised the rights. The liability for
the units awarded under the scheme has been calculated based on
fair value of the liability incurred and is expensed over the
vesting period. The liability is remeasured at each balance
sheet date to its fair value and amounted to approximately RMB
630 and RMB 1,167 at December 31, 2005 and 2006
respectively.

36  SEGMENT INFORMATION

The Group is engaged in a broad range of petroleum related
activities through its four major business segments: Exploration
and Production, Refining and Marketing, Chemicals and Marketing
and Natural Gas and Pipeline.

The Exploration and Production segment is engaged in the
exploration, development, production and sales of crude oil and
natural gas.

The Refining and Marketing segment is engaged in the refining,
transportation, storage and marketing of crude oil and petroleum
products.

The Chemicals and Marketing segment is engaged in the production
and sale of basic petrochemical products, derivative
petrochemical products, and other chemical products.

The Natural Gas and Pipeline segment is engaged in the sale of
natural gas and the transmission of natural gas, crude oil and
refined products.

In addition to these four major business segments, the Other
segment includes the assets, income and expenses relating to
cash management, financing activities, the corporate centre,
research and development, and other business services to the
operating business segments of the Group.

Most assets and operations of the Group are located in the PRC,
which is considered as one geographic location in an economic
environment with similar risks and returns. In addition to its
operations in the PRC, the Group also has oversea operations
through subsidiaries engaging in the exploration and production
of crude oil and natural gas.

The accounting policies of the operating segments are the same
as those described in Note 3  Summary of
Principal Accounting Policies.

Operating segment information for the years ended
December 31, 2004, 2005 and 2006 is presented below:

Primary reporting format  business segments

|                                                                     |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |   |  |  |  |          |  
|-------------------------------------------------------------------- |  | ----------- | -------- | - | --------- |  | ------- | --------- |  |  | ----------- | - |  | ----- | ------ | - | ----- |  | - |  |  |  | -------- | -
|                                                                     |  | Exploration |          |   | Refining  |  |         | Chemicals |  |  | Natural Gas |   |  |       |        |  
|                                                                     |  | and         |          |   | and       |  |         | and       |  |  | and         |   |  |       |        |  
|Year Ended December 31, 2004                                         |  | Production  |          |   | Marketing |  |         | Marketing |  |  | Pipeline    |   |  | Other |        |   | Total | 
|                                                                     |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|                                                                     |  | RMB         |          |   | RMB       |  |         | RMB       |  |  | RMB         |   |  | RMB   |        |   | RMB   | 
|Sales and other operating revenues
    (including intersegment)      |  |             | 233,948  |   |           |  | 296,427 |           |  |  | 57,179      |   |  |       | 18,255 |   |       |  |  |  |  |  | 605,809  |  
|Less: Intersegment sales                                             |  |             | (180,129 | ) |           |  | (21,862 | )         |  |  | (2,679      | ) |  |       | (3,785 | ) |       |  |  |  |  |  | (208,455 | )
|                                                                     |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Total sales and other operating
    revenues from external customers |  |             | 53,819   |   |           |  | 274,565 |           |  |  | 54,500      |   |  |       | 14,470 |   |       |  |  |  |  |  | 397,354  |  
|                                                                     |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 

F-59



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  |           |  
|------------------------------------------------------------------------------------------------------------ |  | ----------- | ------- | - | --------- |  | ------- | --------- |  |  | ----------- | - |  | ----- | ------ | - | ----- |  | ------- | - |  |  | --------- | -
|                                                                                                             |  | Exploration |         |   | Refining  |  |         | Chemicals |  |  | Natural Gas |   |  |       |        |  
|                                                                                                             |  | and         |         |   | and       |  |         | and       |  |  | and         |   |  |       |        |  
|Year Ended December 31, 2004                                                                                 |  | Production  |         |   | Marketing |  |         | Marketing |  |  | Pipeline    |   |  | Other |        |   | Total | 
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|                                                                                                             |  | RMB         |         |   | RMB       |  |         | RMB       |  |  | RMB         |   |  | RMB   |        |   | RMB   | 
|Depreciation, depletion and
    amortization                                                                 |  |             | (30,915 | ) |           |  | (8,957  | )         |  |  | (5,741      | ) |  |       | (2,645 | ) |       |  | (104    | ) |  |  | (48,362   | )
|Segment result                                                                                               |  |             | 138,129 |   |           |  | 28,445  |           |  |  | 11,025      |   |  |       | 2,475  |   |       |  | (518    | ) |  |  | 179,556   |  
|Other costs                                                                                                  |  |             | (7,916  | ) |           |  | (16,554 | )         |  |  | (3,370      | ) |  |       | 60     |   |       |  | (638    | ) |  |  | (28,418   | )
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Income/(loss) from operations                                                                                |  |             | 130,213 |   |           |  | 11,891  |           |  |  | 7,655       |   |  |       | 2,535  |   |       |  | (1,156  | ) |  |  | 151,138   |  
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Finance costs                                                                                                |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (1,515    | )
|Equity in income of equity
    affiliates and jointly controlled entities accounted for by
    equity method |  |             | 225     |   |           |  | 75      |           |  |  | 211         |   |  |       | 16     |   |       |  | 1,094   |   |  |  | 1,621     |  
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Income before income taxes                                                                                   |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 151,244   |  
|Income taxes                                                                                                 |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (43,598   | )
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Income for the year                                                                                          |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 107,646   |  
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Interest income (including
    intersegment)                                                                 |  |             | 2,598   |   |           |  | 895     |           |  |  | 205         |   |  |       | 27     |   |       |  | 4,723   |   |  |  | 8,448     |  
|Less: Intersegment interest income                                                                           |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (7,075    | )
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Interest income from external
    sources                                                                    |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 1,373     |  
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Interest expense (including
    intersegment)                                                                |  |             | (3,096  | ) |           |  | (1,777  | )         |  |  | (502        | ) |  |       | (693   | ) |       |  | (3,903  | ) |  |  | (9,971    | )
|Less: Intersegment interest expense                                                                          |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 7,075     |  
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Interest expense to external sources                                                                         |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (2,896    | )
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Segment assets                                                                                               |  |             | 364,477 |   |           |  | 142,480 |           |  |  | 55,568      |   |  |       | 61,631 |   |       |  | 507,164 |   |  |  | 1,131,320 |  
|Elimination of intersegment balances                                                                         |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (502,771  | )
|Investments in equity affiliates
    and jointly controlled entities                                         |  |             | 3,352   |   |           |  | 2,862   |           |  |  | 280         |   |  |       | 192    |   |       |  | 3,212   |   |  |  | 9,898     |  
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Total assets                                                                                                 |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 638,447   |  
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Segment capital expenditure-for
    property, plant and equipment                                            |  |             | 62,868  |   |           |  | 17,684  |           |  |  | 4,319       |   |  |       | 13,901 |   |       |  | 174     |   |  |  | 98,946    |  
|Segment liabilities                                                                                          |  |             | 109,602 |   |           |  | 75,664  |           |  |  | 18,484      |   |  |       | 35,385 |   |       |  | 99,711  |   |  |  | 338,846   |  
|Other liabilities                                                                                            |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 39,440    |  
|Elimination of intersegment balances                                                                         |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (182,811  | )
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Total liabilities                                                                                            |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 195,475   |  
|                                                                                                             |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 

F-60



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  |           |  
|------------------------------------------------------------------------------------------------- |  | ----------- | -------- | - | --------- |  | ------- | --------- |  |  | ----------- | - |  | ----- | ------ | - | ----- |  | ------- | - |  |  | --------- | -
|                                                                                                  |  | Exploration |          |   | Refining  |  |         | Chemicals |  |  | Natural Gas |   |  |       |        |  
|                                                                                                  |  | and         |          |   | and       |  |         | and       |  |  | and         |   |  |       |        |  
|Year Ended December 31, 2005                                                                      |  | Production  |          |   | Marketing |  |         | Marketing |  |  | Pipeline    |   |  | Other |        |   | Total | 
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|                                                                                                  |  | RMB         |          |   | RMB       |  |         | RMB       |  |  | RMB         |   |  | RMB   |        |   | RMB   | 
|Sales and other operating revenues
    (including intersegment)                                   |  |             | 337,208  |   |           |  | 428,494 |           |  |  | 73,978      |   |  |       | 26,214 |   |       |  |        |   |  |  | 865,894   |  
|Less: Intersegment sales                                                                          |  |             | (270,943 | ) |           |  | (33,019 | )         |  |  | (4,754      | ) |  |       | (4,949 | ) |       |  |        |   |  |  | (313,665  | )
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Total sales and other operating
    revenues from external customers                              |  |             | 66,265   |   |           |  | 395,475 |           |  |  | 69,224      |   |  |       | 21,265 |   |       |  |        |   |  |  | 552,229   |  
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Depreciation, depletion and
    amortization                                                      |  |             | (30,896  | ) |           |  | (8,964  | )         |  |  | (6,869      | ) |  |       | (4,478 | ) |       |  | (98     | ) |  |  | (51,305   | )
|Segment result                                                                                    |  |             | 220,452  |   |           |  | 2,116   |           |  |  | 6,896       |   |  |       | 3,639  |   |       |  | (1,357  | ) |  |  | 231,746   |  
|Other costs                                                                                       |  |             | (12,372  | ) |           |  | (21,926 | )         |  |  | (3,620      | ) |  |       | (456   | ) |       |  | (1,201  | ) |  |  | (39,575   | )
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Income/(loss) from operations                                                                     |  |             | 208,080  |   |           |  | (19,810 | )         |  |  | 3,276       |   |  |       | 3,183  |   |       |  | (2,558  | ) |  |  | 192,171   |  
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Finance costs                                                                                     |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (750      | )
|Equity in income of affiliates and
    jointly controlled entities accounted for by equity method |  |             | 1,851    |   |           |  | 165     |           |  |  | 15          |   |  |       |       |   |       |  | 370     |   |  |  | 2,401     |  
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Income before income taxes                                                                        |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 193,822   |  
|Income taxes                                                                                      |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (54,180   | )
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Income for the year                                                                               |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 139,642   |  
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Interest income (including
    intersegment)                                                      |  |             | 3,912    |   |           |  | 998     |           |  |  | 387         |   |  |       | 100    |   |       |  | 5,763   |   |  |  | 11,160    |  
|Less: Intersegment interest income                                                                |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (9,236    | )
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Interest income from external
    sources                                                         |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 1,924     |  
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Interest expense (including
    intersegment)                                                     |  |             | (3,631   | ) |           |  | (2,659  | )         |  |  | (636        | ) |  |       | (1,105 | ) |       |  | (3,967  | ) |  |  | (11,998   | )
|Less: Intersegment interest expense                                                               |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 9,236     |  
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Interest expense to external sources                                                              |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (2,762    | )
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Segment assets                                                                                    |  |             | 460,814  |   |           |  | 207,724 |           |  |  | 76,439      |   |  |       | 69,232 |   |       |  | 631,696 |   |  |  | 1,445,905 |  
|Elimination of intersegment balances                                                              |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (680,216  | )
|Investments in equity affiliates
    and jointly controlled entities                              |  |             | 5,470    |   |           |  | 4,531   |           |  |  | 250         |   |  |       |       |   |       |  | 2,127   |   |  |  | 12,378    |  
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Total assets                                                                                      |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 778,067   |  
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 

F-61



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

|                                                                   |  |             |         |  |           |  |        |           |  |  |             |  |  |       |        |  |       |  |         |  |  |  |          |  
|------------------------------------------------------------------ |  | ----------- | ------- |  | --------- |  | ------ | --------- |  |  | ----------- |  |  | ----- | ------ |  | ----- |  | ------- |  |  |  | -------- | -
|                                                                   |  | Exploration |         |  | Refining  |  |        | Chemicals |  |  | Natural Gas |  |  |       |        | 
|                                                                   |  | and         |         |  | and       |  |        | and       |  |  | and         |  |  |       |        | 
|Year Ended December 31, 2005                                       |  | Production  |         |  | Marketing |  |        | Marketing |  |  | Pipeline    |  |  | Other |        |  | Total | 
|                                                                   |  |             |         |  |           |  |        |           |  |  |             |  |  |       |        |  |       | 
|                                                                   |  | RMB         |         |  | RMB       |  |        | RMB       |  |  | RMB         |  |  | RMB   |        |  | RMB   | 
|Segment capital expenditure- for
    property, plant and equipment |  |             | 83,214  |  |           |  | 16,454 |           |  |  | 13,569      |  |  |       | 11,137 |  |       |  | 427     |  |  |  | 124,801  |  
|Segment liabilities                                                |  |             | 146,616 |  |           |  | 97,918 |           |  |  | 30,559      |  |  |       | 40,847 |  |       |  | 161,753 |  |  |  | 477,693  |  
|Other liabilities                                                  |  |             |         |  |           |  |        |           |  |  |             |  |  |       |        |  |       |  |         |  |  |  | 47,731   |  
|Elimination of intersegment balances                               |  |             |         |  |           |  |        |           |  |  |             |  |  |       |        |  |       |  |         |  |  |  | (291,024 | )
|                                                                   |  |             |         |  |           |  |        |           |  |  |             |  |  |       |        |  |       | 
|Total liabilities                                                  |  |             |         |  |           |  |        |           |  |  |             |  |  |       |        |  |       |  |         |  |  |  | 234,400  |  
|                                                                   |  |             |         |  |           |  |        |           |  |  |             |  |  |       |        |  |       | 

|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |        |   |  |  |           |  
|------------------------------------------------------------------------------------------------- |  | ----------- | -------- | - | --------- |  | ------- | --------- |  |  | ----------- | - |  | ----- | ------ | - | ----- |  | ------ | - |  |  | --------- | -
|                                                                                                  |  | Exploration |          |   | Refining  |  |         | Chemicals |  |  | Natural Gas |   |  |       |        |  
|                                                                                                  |  | and         |          |   | and       |  |         | and       |  |  | and         |   |  |       |        |  
|Year Ended December 31, 2006                                                                      |  | Production  |          |   | Marketing |  |         | Marketing |  |  | Pipeline    |   |  | Other |        |   | Total | 
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|                                                                                                  |  | RMB         |          |   | RMB       |  |         | RMB       |  |  | RMB         |   |  | RMB   |        |   | RMB   | 
|Sales and other operating revenues
    (including intersegment)                                   |  |             | 421,340  |   |           |  | 543,299 |           |  |  | 82,791      |   |  |       | 38,917 |   |       |  | 1,080  |   |  |  | 1,087,427 |  
|Less: Intersegment sales                                                                          |  |             | (339,619 | ) |           |  | (44,806 | )         |  |  | (7,983      | ) |  |       | (5,617 | ) |       |  | (424   | ) |  |  | (398,449  | )
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Total sales and other operating
    revenues from external customers                              |  |             | 81,721   |   |           |  | 498,493 |           |  |  | 74,808      |   |  |       | 33,300 |   |       |  | 656    |   |  |  | 688,978   |  
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Depreciation, depletion and
    amortization                                                      |  |             | (37,080  | ) |           |  | (12,080 | )         |  |  | (6,417      | ) |  |       | (5,263 | ) |       |  | (548   | ) |  |  | (61,388   | )
|Segment result                                                                                    |  |             | 232,404  |   |           |  | (5,206  | )         |  |  | 8,208       |   |  |       | 9,470  |   |       |  | (3,058 | ) |  |  | 241,818   |  
|Other costs                                                                                       |  |             | (12,544  | ) |           |  | (23,958 | )         |  |  | (3,150      | ) |  |       | (484   | ) |       |  | (3,706 | ) |  |  | (43,842   | )
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Income/(loss) from operations                                                                     |  |             | 219,860  |   |           |  | (29,164 | )         |  |  | 5,058       |   |  |       | 8,986  |   |       |  | (6,764 | ) |  |  | 197,976   |  
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Finance costs                                                                                     |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |        |   |  |  | (1,080    | )
|Equity in income of affiliates and
    jointly controlled entities accounted for by equity method |  |             | 1,889    |   |           |  | 333     |           |  |  | 38          |   |  |       | 1      |   |       |  | 16     |   |  |  | 2,277     |  
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Income before income taxes                                                                        |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |        |   |  |  | 199,173   |  
|Income taxes                                                                                      |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |        |   |  |  | (49,776   | )
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Income for the year                                                                               |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |        |   |  |  | 149,397   |  
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Interest income (including
    intersegment)                                                      |  |             | 4,853    |   |           |  | 1,471   |           |  |  | 634         |   |  |       | 157    |   |       |  | 7,171  |   |  |  | 14,286    |  
|Less: Intersegment interest income                                                                |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |        |   |  |  | (12,220   | )
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Interest income from external
    sources                                                         |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |        |   |  |  | 2,066     |  
|                                                                                                  |  |             |          |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 

F-62



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

|                                                                     |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  |           |  
|-------------------------------------------------------------------- |  | ----------- | ------- | - | --------- |  | ------- | --------- |  |  | ----------- | - |  | ----- | ------ | - | ----- |  | ------- | - |  |  | --------- | -
|                                                                     |  | Exploration |         |   | Refining  |  |         | Chemicals |  |  | Natural Gas |   |  |       |        |  
|                                                                     |  | and         |         |   | and       |  |         | and       |  |  | and         |   |  |       |        |  
|Year Ended December 31, 2006                                         |  | Production  |         |   | Marketing |  |         | Marketing |  |  | Pipeline    |   |  | Other |        |   | Total | 
|                                                                     |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|                                                                     |  | RMB         |         |   | RMB       |  |         | RMB       |  |  | RMB         |   |  | RMB   |        |   | RMB   | 
|Interest expense (including
    intersegment)                        |  |             | (5,043  | ) |           |  | (3,790  | )         |  |  | (679        | ) |  |       | (1,614 | ) |       |  | (4,314  | ) |  |  | (15,440   | )
|Less: Intersegment interest expense                                  |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 12,220    |  
|                                                                     |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Interest expense to external sources                                 |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (3,220    | )
|                                                                     |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Segment assets                                                       |  |             | 507,073 |   |           |  | 248,027 |           |  |  | 81,032      |   |  |       | 75,433 |   |       |  | 729,079 |   |  |  | 1,640,644 |  
|Elimination of intersegment balances                                 |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (801,437  | )
|Investments in equity affiliates
    and jointly controlled entities |  |             | 27,127  |   |           |  | 5,587   |           |  |  | 153         |   |  |       | 20     |   |       |  | 69      |   |  |  | 32,956    |  
|                                                                     |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Total assets                                                         |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 872,163   |  
|                                                                     |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Segment capital expenditure- for
    property, plant and equipment   |  |             | 105,192 |   |           |  | 19,206  |           |  |  | 10,681      |   |  |       | 11,309 |   |       |  | 2,358   |   |  |  | 148,746   |  
|Segment liabilities                                                  |  |             | 185,185 |   |           |  | 115,352 |           |  |  | 28,024      |   |  |       | 43,644 |   |       |  | 171,059 |   |  |  | 543,264   |  
|Other liabilities                                                    |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 62,021    |  
|Elimination of intersegment balances                                 |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | (350,713  | )
|                                                                     |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 
|Total liabilities                                                    |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       |  |         |   |  |  | 254,572   |  
|                                                                     |  |             |         |   |           |  |         |           |  |  |             |   |  |       |        |   |       | 




|           |                                                                                                                                                             
|---------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note (a)  | Intersegment sales are conducted principally at market price.                                                                                               
|          
|Note (b)  | Segment result is income from operations before other costs.
    Other costs include selling, general and administrative expenses
    and other net expense.



|           |                                                                                                                                                                                                
|---------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note (c)  | Segment results for the years ended December 31, 2004, 2005
    and 2006 included impairment of property, plant and equipment
    (Note 18) and shut down of manufacturing assets
    (Note 6).



|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note (d)  | Other liabilities mainly include income tax payable, other taxes
    payable and deferred taxation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|          
|Note (e)  | Elimination of intersegment balances represents elimination of
    intersegment accounts and investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|          
|Note (f)  | Effective January 1, 2006, the results of operations,
    together with the corresponding assets and liabilities, of
    certain research and development activities of the Group are
    reclassified from the Exploration and Production segment, the
    Refining and Marketing segment, the Chemicals and Marketing
    segment and the Natural Gas and Pipeline segment to the Other
    segment to reflect the changes in the manner under which these
    activities are managed. The results of operations, together with
    the corresponding assets and liabilities, of these research and
    development activities were included in the previously reported
    segments in the segment information for the year ended
    December 31, 2005. Selected financial data of these
    research and development activities

F-63



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



as of December 31, 2005 and 2006 and for the year ended
    December 31, 2005 and 2006 are as follows:

|                                                                         |  |             |        |           |  |           |      |             |  |       |      |   |  |  |     |   |  |  |        |  
|------------------------------------------------------------------------ |  | ----------- | ------ | --------- |  | --------- | ---- | ----------- |  | ----- | ---- | - |  |  | --- | - |  |  | ------ | -
|                                                                         |  | Exploration |        | Refining  |  | Chemicals |      | Natural Gas |  |      
|                                                                         |  | and         |        | and       |  | and       |      | and         |  |      
|Year Ended December 31, 2005                                             |  | Production  |        | Marketing |  | Marketing |      | Pipeline    |  | Total
|                                                                         |  |             |        |           |  |           |      |             |  |      
|                                                                         |  | RMB         |        | RMB       |  | RMB       |      | RMB         |  | RMB  
|Sales and other operating revenues
    (including intersegment)          |  |             | 558    |           |  |           | 4    |             |  |       | 40   |   |  |  |    |   |  |  | 602    |  
|Sales and other operating revenues
    from external customers           |  |             | 28     |           |  |           |     |             |  |       | 37   |   |  |  |    |   |  |  | 65     |  
|Depreciation, depletion and
    amortization                             |  |             | (310   | )         |  |           | (18  | )           |  |       | (30  | ) |  |  | (3  | ) |  |  | (361   | )
|Segment result                                                           |  |             | (543   | )         |  |           | (63  | )           |  |       | (96  | ) |  |  | (14 | ) |  |  | (716   | )
|Other costs                                                              |  |             | (523   | )         |  |           | (103 | )           |  |       | (72  | ) |  |  | (31 | ) |  |  | (729   | )
|Loss from operations                                                     |  |             | (1,066 | )         |  |           | (166 | )           |  |       | (168 | ) |  |  | (45 | ) |  |  | (1,445 | )
|Share of profit of equity
    affiliates and jointly controlled entities |  |             |       |           |  |           |     |             |  |       |     |   |  |  |    |   |  |  |       |  
|Interest income                                                          |  |             |       |           |  |           |     |             |  |       |     |   |  |  |    |   |  |  |       |  
|Interest expense                                                         |  |             |       |           |  |           | (1   | )           |  |       |     |   |  |  |    |   |  |  | (1     | )
|Segment assets                                                           |  |             | 2,050  |           |  |           | 251  |             |  |       | 295  |   |  |  | 51  |   |  |  | 2,647  |  
|Segment liabilities                                                      |  |             | 995    |           |  |           | 249  |             |  |       | 128  |   |  |  | 13  |   |  |  | 1,385  |  

|                                                                         |  |             |        |           |  |           |      |             |  |       |      |   |  |  |     |   |  |  |        |  
|------------------------------------------------------------------------ |  | ----------- | ------ | --------- |  | --------- | ---- | ----------- |  | ----- | ---- | - |  |  | --- | - |  |  | ------ | -
|                                                                         |  | Exploration |        | Refining  |  | Chemicals |      | Natural Gas |  |      
|                                                                         |  | and         |        | and       |  | and       |      | and         |  |      
|Year ended December 31, 2006                                             |  | Production  |        | Marketing |  | Marketing |      | Pipeline    |  | Total
|                                                                         |  |             |        |           |  |           |      |             |  |      
|                                                                         |  | RMB         |        | RMB       |  | RMB       |      | RMB         |  | RMB  
|Sales and other operating revenues
    (including intersegment)          |  |             | 543    |           |  |           |     |             |  |       | 39   |   |  |  |    |   |  |  | 582    |  
|Sales and other operating revenues
    from external customers           |  |             | 21     |           |  |           |     |             |  |       | 29   |   |  |  |    |   |  |  | 50     |  
|Depreciation, depletion and
    amortization                             |  |             | (295   | )         |  |           | (26  | )           |  |       | (64  | ) |  |  | (6  | ) |  |  | (391   | )
|Segment result                                                           |  |             | (714   | )         |  |           | (88  | )           |  |       | (162 | ) |  |  | (21 | ) |  |  | (985   | )
|Other costs                                                              |  |             | (664   | )         |  |           | (96  | )           |  |       | (81  | ) |  |  | (42 | ) |  |  | (883   | )
|Loss from operations                                                     |  |             | (1,378 | )         |  |           | (184 | )           |  |       | (243 | ) |  |  | (63 | ) |  |  | (1,868 | )
|Share of profit of equity
    affiliates and jointly controlled entities |  |             | 3      |           |  |           |     |             |  |       |     |   |  |  |    |   |  |  | 3      |  
|Interest income                                                          |  |             |       |           |  |           |     |             |  |       |     |   |  |  |    |   |  |  |       |  
|Interest expense                                                         |  |             | (15    | )         |  |           |     |             |  |       |     |   |  |  |    |   |  |  | (15    | )
|Segment assets                                                           |  |             | 2,163  |           |  |           | 272  |             |  |       | 374  |   |  |  | 52  |   |  |  | 2,861  |  
|Segment liabilities                                                      |  |             | 1,183  |           |  |           | 320  |             |  |       | 164  |   |  |  | 21  |   |  |  | 1,688  |  

F-64



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

Secondary reporting format  geographical
segments

|                                   |  |         |         |  |              |         |         |             |  |  |         |  |  |      |         |  |      |  |         |  |  |  |         | 
|---------------------------------- |  | ------- | ------- |  | ------------ | ------- | ------- | ----------- |  |  | ------- |  |  | ---- | ------- |  | ---- |  | ------- |  |  |  | ------- | 
|                                   |  |         |         |  |              | Capital |        
|                                   |  | Revenue |         |  | Total assets |         |         | expenditure | 
|                                   |  |         |         |  |              |         |         |             | 
|Year Ended December 31,            |  | 2005    |         |  | 2006         |         |         | 2005        |  |  | 2006    |  |  | 2005 |         |  | 2006 | 
|                                   |  |         |         |  |              |         |         |             |  |  |         |  |  |      |         |  |      | 
|                                   |  | RMB     |         |  | RMB          |         |         | RMB         |  |  | RMB     |  |  | RMB  |         |  | RMB  | 
|PRC                                |  |         | 531,520 |  |              |         | 665,267 |             |  |  | 717,934 |  |  |      | 811,919 |  |      |  | 119,505 |  |  |  | 142,371 | 
|Other (Exploration and Production) |  |         | 20,709  |  |              |         | 23,711  |             |  |  | 60,133  |  |  |      | 60,244  |  |      |  | 5,296   |  |  |  | 6,375   | 
|                                   |  |         |         |  |              |         |         |             |  |  |         |  |  |      |         |  |      | 
|                                   |  |         | 552,229 |  |              |         | 688,978 |             |  |  | 778,067 |  |  |      | 872,163 |  |      |  | 124,801 |  |  |  | 148,746 | 
|                                   |  |         |         |  |              |         |         |             |  |  |         |  |  |      |         |  |      | 

37  SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US
GAAP






|                                                               |                                                                            |                                                                                                                            |         |        |      |  |         |        |   |  |         |        |       |   |        |        |     |  
|-------------------------------------------------------------- | -------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ------- | ------ | ---- |  | ------- | ------ | - |  | ------- | ------ | ----- | - | ------ | ------ | --- | -
|                                                               |                                                                            | Year Ended December 31,                                                                                                    |        
|                                                               |                                                                            |                                                                                                                            |        
|                                                               |                                                                            | 2004                                                                                                                       |         |        | 2005 |  |         | 2006   |   |  | 2006    |       
|                                                               |                                                                            |                                                                                                                            |         |        |      |  |         |        |   |  |         |       
|                                                               |                                                                            | RMB                                                                                                                        |         |        | RMB  |  |         | RMB    |   |  | US$     |       
|Income for the year under IFRS                                 |                                                                            |                                                                                                                            | 107,646 |        |      |  | 139,642 |        |   |  | 149,397 |        |       |   | 19,143 |       
|US GAAP adjustments:                                           |                                                                            |                                                                                                                            |         |        |      |  |         |        |   |  |         |        |       |   |        |       
|                                                               |                                                                            | Share of income of jointly
    controlled entities                                                                         |         |        |     |  |         |        | 2 |  |         |        | 2,735 |   |        |        | 350 |  
|                                                               | Depreciation charges on property,
    plant and equipment revaluation gain |                                                                                                                            |         | 8,170  |      |  |         | 6,528  |   |  |         | 3,828  |       |   |        | 491    |    
|                                                               | Depreciation charges on property,
    plant and equipment revaluation loss |                                                                                                                            |         | (830   | )    |  |         | (149   | ) |  |         |       |       |   |        |       |    
|                                                               | Loss on disposal of revalued
    property, plant and equipment             |                                                                                                                            |         | 523    |      |  |         | 432    |   |  |         | 287    |       |   |        | 37     |    
|                                                               | Income tax effect                                                          |                                                                                                                            |         | (2,595 | )    |  |         | (2,248 | ) |  |         | (1,358 | )     |   |        | (174   | )  
|                                                               | Minority interest                                                          |                                                                                                                            |         | (3,863 | )    |  |         | (6,341 | ) |  |         | (8,600 | )     |   |        | (1,102 | )  
|                                                               |                                                                            | Depreciation charges on property,
    plant and equipment arising from purchase from minority interest
    of subsidiaries |         |        |     |  |         |        |  |  |         |        | (202  | ) |        |        | (26 | )
|                                                               |                                                                            |                                                                                                                            |         |        |      |  |         |        |   |  |         |       
|Net income under US GAAP                                       |                                                                            |                                                                                                                            | 109,051 |        |      |  | 137,866 |        |   |  | 146,087 |        |       |   | 18,719 |       
|                                                               |                                                                            |                                                                                                                            |         |        |      |  |         |        |   |  |         |       
|Basic and diluted net income per
    share under US GAAP (RMB) |                                                                            |                                                                                                                            | 0.62    |        |      |  | 0.78    |        |   |  | 0.82    |        |       |   | 0.10   |       
|                                                               |                                                                            |                                                                                                                            |         |        |      |  |         |        |   |  |         |       

F-65



---



##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

Effect on equity of significant differences between IFRS and US
GAAP is as follows:

|                                       |                                                                                                                                                                      |                 |         |         |      |  |         |         |   |  |        |         |  
|-------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------- | ------- | ------- | ---- |  | ------- | ------- | - |  | ------ | ------- | -
|                                       |                                                                                                                                                                      | At December 31, |        
|                                       |                                                                                                                                                                      |                 |        
|                                       |                                                                                                                                                                      | 2005            |         |         | 2006 |  |         | 2006    |  
|                                       |                                                                                                                                                                      |                 |         |         |      |  |         |         |  
|                                       |                                                                                                                                                                      | RMB             |         |         | RMB  |  |         | US$     |  
|Equity under IFRS                      |                                                                                                                                                                      |                 | 543,667 |         |      |  | 617,591 |         |   |  | 79,137 |        
|US GAAP adjustments:                   |                                                                                                                                                                      |                 |         |         |      |  |         |         |   |  |       |        
|                                       | Acquisition of PetroKazakhstan
    Inc.                                                                                                                              |                 |         | 22,129  |      |  |         | 22,129  |   |  |        | 2,836   |  
|                                       | Share of income of jointly
    controlled entities                                                                                                                   |                 |         | 2       |      |  |         | 2,737   |   |  |        | 351     |  
|                                       | Deemed distribution to CNPC
    International Limited                                                                                                                |                 |         |        |      |  |         | (3,044  | ) |  |        | (390    | )
|                                       | Payment for the acquisition of
    PetroKazakhstan Inc.                                                                                                              |                 |         |        |      |  |         | (21,376 | ) |  |        | (2,739  | )
|                                       | Reversal of property, plant and
    equipment revaluation gain                                                                                                       |                 |         | (80,555 | )    |  |         | (80,555 | ) |  |        | (10,322 | )
|                                       | Depreciation charges on property,
    plant and equipment revaluation gain                                                                                           |                 |         | 51,971  |      |  |         | 55,799  |   |  |        | 7,150   |  
|                                       | Reversal of property, plant and
    equipment revaluation loss                                                                                                       |                 |         | 1,513   |      |  |         | 1,513   |   |  |        | 194     |  
|                                       | Depreciation charges on property,
    plant and equipment revaluation loss                                                                                           |                 |         | (1,459  | )    |  |         | (1,459  | ) |  |        | (187    | )
|                                       | Loss on disposal of revalued
    property, plant and equipment                                                                                                       |                 |         | 1,746   |      |  |         | 2,033   |   |  |        | 261     |  
|                                       | Deferred tax assets on revaluation                                                                                                                                   |                 |         | 8,843   |      |  |         | 7,485   |   |  |        | 959     |  
|                                       | Minority interest                                                                                                                                                    |                 |         | (39,100 | )    |  |         | (30,953 | ) |  |        | (3,966  | )
|                                       | Effect on the retained earnings
    from the one-time remedial payments for staff housing borne by
    the state shareholder of the Company                          |                 |         | (2,553  | )    |  |         | (2,553  | ) |  |        | (327    | )
|                                       | Effect on the other reserves of the
    shareholders equity from the one-time remedial payments
    for staff housing borne by the state shareholder of the Company |                 |         | 2,553   |      |  |         | 2,553   |   |  |        | 327     |  
|                                       | Purchase from minority interest of
    subsidiaries (Note 38)                                                                                                        |                 |         | 1,438   |      |  |         | 3,594   |   |  |        | 461     |  
|                                       | Depreciation charges on property,
    plant and equipment arising from purchase from minority interest
    of subsidiaries                                           |                 |         |        |      |  |         | (202    | ) |  |        | (26     | )
|                                       | Currency translation differences                                                                                                                                     |                 |         | (54     | )    |  |         | (822    | ) |  |        | (108    | )
|                                       |                                                                                                                                                                      |                 |         |         |      |  |         |         |  
|Shareholders equity under US
    GAAP |                                                                                                                                                                      |                 | 510,141 |         |      |  | 574,470 |         |   |  | 73,611 |        
|                                       |                                                                                                                                                                      |                 |         |         |      |  |         |         |  

F-66



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

Changes in shareholders equity under US GAAP for each of
the years ended December 31, 2004, 2005 and 2006 are as
follows:

|                                                                                      |                            |                         |         |         |      |  |         |         |  |  |         |         |  |  |        |        | 
|------------------------------------------------------------------------------------- | -------------------------- | ----------------------- | ------- | ------- | ---- |  | ------- | ------- |  |  | ------- | ------- |  |  | ------ | ------ | 
|                                                                                      |                            | Year Ended December 31, |        
|                                                                                      |                            |                         |        
|                                                                                      |                            | 2004                    |         |         | 2005 |  |         | 2006    |  |  | 2006    |        
|                                                                                      |                            |                         |         |         |      |  |         |         |  |  |         |        
|                                                                                      |                            | RMB                     |         |         | RMB  |  |         | RMB     |  |  | US$     |        
|Balance at beginning of the year                                                      |                            |                         | 330,520 |         |      |  | 405,573 |         |  |  | 510,141 |         |  |  | 65,368 |       
|Net income for the year                                                               |                            |                         | 109,051 |         |      |  | 137,866 |         |  |  | 146,087 |         |  |  | 18,719 |       
|Acquisition of PetroKazakhstan
    Inc.                                               |                            |                         |        |         |      |  | 11,064  |         |  |  |        |         |  |  |       |       
|Deemed distribution to CNPC
    International Limited                                 |                            |                         |        |         |      |  |        |         |  |  | (1,522  | )       |  |  | (195   | )     
|Payment for the acquisition of
    PetroKazakhstan Inc.                               |                            |                         |        |         |      |  |        |         |  |  | (10,688 | )       |  |  | (1,370 | )     
|Final dividends for year 2003                                                         |                            |                         | (13,947 | )       |      |  |        |         |  |  |        |         |  |  |       |       
|Interim dividends for year 2004                                                       |                            |                         | (20,381 | )       |      |  |        |         |  |  |        |         |  |  |       |       
|Final dividends for year 2004                                                         |                            |                         |        |         |      |  | (25,936 | )       |  |  |        |         |  |  |       |       
|Interim dividends for year 2005                                                       |                            |                         |        |         |      |  | (27,731 | )       |  |  |        |         |  |  |       |       
|Final dividends for year 2005                                                         |                            |                         |        |         |      |  |        |         |  |  | (32,282 | )       |  |  | (4,136 | )     
|Interim dividends for year 2006                                                       |                            |                         |        |         |      |  |        |         |  |  | (36,307 | )       |  |  | (4,652 | )     
|Payment to CNPC for acquisition of
    refinery and petrochemical businesses (Note 2) |                            |                         |        |         |      |  | (9      | )       |  |  |        |         |  |  |       |       
|Issue of H shares (Notes 27
    and 28)                                               |                            |                         |        |         |      |  | 19,692  |         |  |  |        |         |  |  |       |       
|Capital contribution to CNPC
    E&D (Note 2)                                         |                            |                         |        |         |      |  | (10,056 | )       |  |  |        |         |  |  |       |       
|Currency translation differences                                                      |                            |                         | 330     |         |      |  | (322    | )       |  |  | (959    | )       |  |  | (123   | )     
|                                                                                      |                            |                         |         |         |      |  |         |         |  |  |         |        
|                                                                                      | Balance at end of the year |                         |         | 405,573 |      |  |         | 510,141 |  |  |         | 574,470 |  |  |        | 73,611 | 
|                                                                                      |                            |                         |         |         |      |  |         |         |  |  |         |        







|    |                                    
|--- | -----------------------------------
|(a) | Acquisition of PetroKazakhstan Inc.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As described in Note 19 to the consolidated financial
    statements of the Group, the Group acquired a 67% equity
    interest in PetroKazakhstan Inc. from CNPC International Limited
    (CNPCI), a subsidiary of CNPC, effective on December 28,
    2006 for RMB 21,376. As both CNPCI and the Group are under
    common control by CPNC, the acquisition of the 67% equity
    interest in PetroKazakhstan Inc. has been accounted for in a
    manner similar to pooling of interests under US GAAP
    accounting and the US GAAP financial data reflects the
    acquisition of the 67% equity interest in PetroKazakhstan Inc.
    since PetroKazakhstan Inc. was first acquired by CNPCI on
    October 26, 2005.

F-67



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



On December 15, 2006, PetroKazakhstan Inc. paid to CNPCI a
    dividend amount to RMB 3,044 and was recorded as a deemed
    distribution to CNPCI.The purchase consideration for the acquisition of the 67% equity
    interest in PetroKazakhstan Inc. was paid by the Group to CNPCI
    on December 28, 2006.

(b)
    Revaluation of property, plant and equipment

As described in note 18, the property, plant and equipment,
    excluding oil and gas reserves, transferred to the Company by
    CNPC were appraised during 1999 by a firm of independent valuers
    on a depreciated replacement cost basis. The 1999 revaluation
    resulted in RMB 80,549 in excess of the carrying value
    immediately prior to the revaluation and a revaluation loss of
    RMB 1,122 on certain property, plant and equipment.As at September 30, 2003, a revaluation of the Groups
    refining and chemical production equipment was undertaken by a
    firm of independent valuers registered in the PRC, China United
    Assets Appraiser Co., Ltd, on a depreciated replacement cost
    basis. The September 2003 revaluation resulted in RMB 872 in
    excess of the carrying value immediately prior to the
    revaluation and a revaluation loss of RMB 1,257 on certain
    property, plant and equipment.As at March 31, 2006, a revaluation of the Groups oil
    and gas properties was undertaken by independent valuers, China
    United Assets Appraiser Co., Ltd and China Enterprise
    Appraisals, on a depreciated replacement cost basis. The
    revaluation did not result in significant difference from their
    carrying value.The depreciation charge, which includes impairment charge, on
    the revaluation surplus from January 1, 2006 to
    December 31, 2006 was RMB 3,828 and from January 1,
    2005 to December 31, 2005 was RMB 6,528, respectively.The depreciation charge, which includes impairment charge, on
    the revaluation loss from January 1, 2006 to
    December 31, 2006 was Nil, and from January 1, 2005 to
    December 31, 2005 was RMB 149.The loss on disposal of revalued property, plant and equipment
    from January 1, 2006 to December 31, 2006 was RMB 287,
    and from January 1, 2005 to December 31, 2005 was
    RMB 432 which includes shut down of manufacturing assets.For purposes of reconciling to the US GAAP financial data, the
    effect of the revaluation, the related depreciation charges and
    loss on disposal was reversed. A deferred tax asset relating to
    the reversal of the effect of revaluation in 1999 was
    established, together with a corresponding increase in the
    equity. Under a special approval granted by the Ministry of
    Finance, the effect of the revaluation in 1999 is available as
    additional depreciation base for purposes of determining taxable
    income.

(c)
    One-time remedial payments for staff housing

The Ministry of Finance of the PRC issued several public notices
    and regulations during the years ended December 31, 2000
    and 2001 with respect to the one-time remedial payments for
    staff housing payable to certain employees who joined the
    workforce prior to December 31, 1998 and have housing
    conditions below local standards as determined in accordance
    with government regulations and guidelines. These Ministry of
    Finance notices and regulations also provided that the portion
    of remedial payments attributable to the periods prior to a
    restructuring

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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



of the employer enterprise from a wholly state-owned status to a
    less than wholly state-owned status is to be borne by the state
    shareholder of the enterprise.The restructuring that resulted in the formation of the Group
    took place in November 1999. As such, the one-time remedial
    housing payments payable to the eligible employees of the Group
    are to be borne by the state shareholder of the Company.Under IFRS, such direct payments to employees or reimbursements
    will not be recorded through the consolidated statements of
    income of the Group. US GAAP contains no such exemption but
    requires this principal shareholders action on behalf of
    the Company to be recorded in the consolidated statements of
    income. In the last quarter of year 2002, the Group and CNPC
    completed the process of estimating the amount payable to
    qualified employees of the Group. This amount, RMB 2,553, was
    reflected in determining net income of the Group for the year
    ended December 31, 2002, under US GAAP. Since this amount
    is borne by CNPC, a corresponding amount has been included as an
    addition to the other reserves in the equity of the Group. There
    were no significant changes in this estimate during 2005 and
    2006.

(d)
    Minority interest

In accordance with the revised IFRS 1 Presentation of
    Financial Statementsand IAS 27 Consolidated
    and Separate Financial Statements, minority interest
    becomes part of the profit for the year and total equity of the
    Group, respectively, whereas under US GAAP, it is respectively
    excluded from the net income and equity of the Group.This reconciling item includes the impact of minority
    interests share of the revaluation gain and loss, on the
    property, plant and equipment of non-wholly owned subsidiaries
    and the impact of minority interest arising from the acquisition
    of the 67% equity interest in PetroKazakhstan Inc. by a
    non-wholly owned subsidiary of the Group to net income and
    equity under US GAAP.

(e)
    Purchase from minority interest of listed
    subsidiaries

As described in note 38, the Company acquired certain
    outstanding A shares from the minority interest of Jinzhou
    Petrochemical Company Limited (JPCL) and Liaohe
    Jinma Oilfield Company Limited (LJOCL) and certain A
    shares and H shares (including ADSs) from the minority
    interest of Jilin Chemical Industrial Company Limited
    (JCIC). Under IFRS, the Company applies a policy of
    treating transactions with minority interest as transactions
    with equity participants of the Group. Therefore, the assets and
    liabilities of JPCL, LJOCL and JCIC additionally acquired by the
    Company from minority interest were recorded by the Company at
    cost. The difference between the Companys purchase cost
    and the book value of the interests in JPCL LJOCL and JCIC
    acquired by the Company from minority interest was recorded in
    equity. Under US GAAP, the acquisition of additional minority
    interest is accounted for under purchase method. Assets and
    liabilities additionally acquired were restated to fair value
    and the difference of purchase cost over fair value of the
    minority interest acquired and identified intangible assets was
    recorded as goodwill. Additional depreciation charges were
    provided for the assets which were restated to fair value.

(f)
    Recent US accounting pronouncements

In September 2005, the Emerging Issues Task Force
    (EITF) reached consensus on Issue
    No. 04-13,
    Accounting for Purchases and Sales of Inventory with
    the Same Counterparty(EITF 04-13)
    which requires two or more inventory purchase and sales
    transactions with the

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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



same counterparty that are entered into in contemplation of one
    another should be combined for purposes of applying
    Opinion 29, Accounting for Nonmonetary
    Transactions. The Task Force also agreed that an entity
    should disclose the amount of revenue and costs (or gains and
    losses) associated with inventory exchanges recognized at fair
    value. This Issue should be applied to new arrangements entered
    into, or modifications or renegotiations of existing
    arrangements, beginning in the first interim or annual reporting
    period beginning after March 15, 2006 and early application
    is permitted in periods for which financial statements have not
    been issued. The Group did not early adopt
    EITF 04-13 and
    does not expect the adoption of
    EITF 04-13 to have
    a material impact on the Groups financial position or
    results of operations.In June 2006, EITF issued
    No. 06-3,
    How Sales Taxes Collected from Customers and Remitted
    to Governmental Authorities Should Be Presented in the Income
    Statement(EITF 06-3).
    EITF 06-3 requires
    disclosure of the presentation of taxes on either a gross or a
    net basis as an accounting policy decision. The provisions of
    EITF 06-3 are
    effective for interim and annual reporting periods beginning
    after December 15, 2006, and early application is
    permitted. The Group did not early adopt
    EITF 06-3 and does
    not expect the adoption of
    EITF 06-3 to have
    a material impact on the presentation of the Groups
    financial statements.In July 2006, the Financial Accounting Standards Board
    (FASB) issued Interpretation No. 48, Accounting
    for Uncertainty in Income Taxes  an Interpretation of
    FASB Statement No. 109 (FIN 48).
    FIN 48 prescribes a comprehensive model for recognising,
    measuring, presenting and disclosing in the financial statements
    uncertain tax positions that the Group has taken or expects to
    take in its tax returns. The provisions of FIN 48 are
    effective for fiscal years beginning after December 15,
    2006. Earlier adoption is permitted as of the beginning of an
    enterprises fiscal year, provided the enterprise has not
    yet issued financial statements, including financial statements
    for any interim period, for that fiscal year. The cumulative
    effect of applying the provisions of this Interpretation should
    be reported as an adjustment to the opening balance of retained
    earnings for that fiscal year. The Group is currently evaluating
    the impact of adopting FIN 48.In September 2006, the FASB issued Statement of Financial
    Accounting Standards No. 157, Fair Value
    Measurements(FAS157), which defines fair
    value, establishes guidelines for measuring fair value and
    expands disclosures regarding fair value measurements.
    FAS 157 does not require any new fair value measurements
    but rather eliminates inconsistencies in guidance found in
    various prior accounting pronouncements. FAS 157 will be
    effective for fiscal years beginning after November 15,
    2007, and all interim periods within those fiscal years. Earlier
    application is permitted if the entity has not issued interim or
    annual financial statements for that fiscal year. The Group is
    currently evaluating the impact of adopting FAS 157 but
    does not expected to have a material effect on the Groups
    consolidated financial position and results of operations.In September 2006, the U.S. Securities and Exchange
    Commission (SEC) released SAB No. 108,
    Considering the Effects of Prior Year Misstatements when
    Quantifying Misstatements in Current Year Financial
    Statements (SAB 108). SAB 108
    provides interpretive guidance on the SECs views on the
    consideration of effects of prior year misstatements in
    quantifying current year misstatements for the purpose of
    determining whether the current years financial statements
    are materially misstated. The provisions of SAB 108 are
    effective for fiscal years ending after November 15, 2006.
    The application of SAB 108 did not have any material effect
    on the Groups consolidated financial position, and results
    of operations.

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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)

38  PRINCIPAL SUBSIDIARIES

|                                                      |  |               |     |     |         |  |         |        |   |              |          |  |  |            |        |  |  |                                                                                                               
|----------------------------------------------------- |  | ------------- | --- | --- | ------- |  | ------- | ------ | - | ------------ | -------- |  |  | ---------- | ------ |  |  | --------------------------------------------------------------------------------------------------------------
|                                                      |  | Country       |     |     |         |  | Type of |        |   | Attributable |          |  | 
|                                                      |  | of            |     |     | Paid-up |  |         | Legal  |   |              | Equity   |  |  | Principal 
|Company Name                                          |  | Incorporation |     |     | Capital |  |         | Entity |   |              | Interest |  |  | Activities
|                                                      |  |               |     |     |         |  |         |        |   |              |          |  |  |           
|                                                      |  |               |     | RMB |         |  |         |        | % |              |          | 
|*Daqing Oilfield Company Limited                      |  |               | PRC |     |         |  | 47,500  |        |   |              | PHI      |  |  |            | 100.00 |  |  | Exploration, production and sale of
    crude oil and natural gas; production and sale of refined
    products
|                                                     
|*Jinzhou Petrochemical Company
    Limited (i)        |  |               | PRC |     |         |  | 788     |        |   |              | PSI      |  |  |            | 98.92  |  |  | Production and sale of oil and
    chemical products                                                          
|                                                     
|*Jilin Chemical Industrial Company
    Limited (ii)   |  |               | PRC |     |         |  | 3,561   |        |   |              | PSI      |  |  |            | 99.61  |  |  | Production and sale of chemical
    products                                                                  
|                                                     
|Daqing Yu Shu Lin Oilfield Company
    Limited        |  |               | PRC |     |         |  | 1,272   |        |   |              | PHI      |  |  |            | 88.16  |  |  | Exploration and production and sale
    of crude oil and natural gas                                          
|                                                     
|*Liaohe Jinma Oilfield Company
    Limited (iii)      |  |               | PRC |     |         |  | 1,100   |        |   |              | PSI      |  |  |            | 99.49  |  |  | Exploration, production,
    transportation and sale of crude oil and natural gas                             
|                                                     
|*CNPC Exploration and Development
    Company Limited |  |               | PRC |     |         |  | 100     |        |   |              | PHI      |  |  |            | 50.00  |  |  | Exploration and production and sale
    of crude oil and natural gas outside of the PRC                       




|      |                                            
|----- | -------------------------------------------
|PHI  | Limited liability company.                 
|     
|PSI  | Joint stock company with limited liability.



|    |                                                                      
|--- | ---------------------------------------------------------------------
|*  | Subsidiaries directly held by the Company as of
    December 31, 2006



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | Pursuant to the resolution passed at the Board of
    Directors meeting held on October 26, 2005, the
    Company offered to acquire all of the 150,000,000 outstanding A
    shares of Jinzhou Petrochemical Company Limited
    (JPCL) from minority shareholders at RMB
    4.25 per share. As at December 31, 2006, the Company
    had paid a total cash consideration of RMB 602 and acquired
    141,497,463 A shares, representing approximately 17.97% of the
    total issued shares of JPCL. Upon this acquisition, the Company
    owns 98.92% of the outstanding shares of JPCL. The excess of the
    cost of purchase over the carrying value of the underlying
    assets and liabilities acquired was recorded in equity. As
    approved by China Securities Regulatory Commission, JPCL was
    delisted from the Shenzhen Stock Exchange on January 4,
    2006.

F-71



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##### Table of Contents

PETROCHINA COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Amounts in millions except for per share data or unless
otherwise stated)



(ii)
    Pursuant to the resolution passed by the Board of
    Directors meeting held on October 26, 2005, the
    Company offered to acquire all the 200,000,000 outstanding A
    shares and 964,778,000 H shares (including ADS) of Jilin
    Chemical Industrial Company Limited (JCIC) from
    minority shareholders at RMB 5.25 per A share and
    HK$2.80 per H share respectively. As at December 31,
    2006, the Company had paid a total cash consideration of RMB
    3,799 and acquired 189,357,726 A shares and 961,495,999 H shares
    (including ADS), representing approximately 32.32% of the total
    issued shares of JCIC. Upon this acquisition, the Company owns
    99.61% of the outstanding shares of JCIC. The excess of the cost
    of purchase over the carrying value of the underlying assets and
    liabilities acquired was recorded in equity. JCIC was delisted
    from the Stock Exchange of Hong Kong Limited and the New York
    Stock Exchange on January 23, 2006 and February 15,
    2006, respectively. As approved by China Securities Regulatory
    Commission, JCIC was delisted from the Shenzhen Stock Exchange
    on February 20, 2006.(iii)
    Pursuant to the resolution passed by the Board of
    Directors meeting held on October 26, 2005, the
    Company offered to acquire all of the 200,000,000 outstanding A
    shares of Liaohe Jinma Oilfield Company Limited
    (LJOCL) from minority shareholders at RMB
    8.80 per share. As at December 31, 2006, the Company
    had paid a total cash consideration of RMB 1,713 and acquired
    194,360,943 A shares, representing approximately 17.67% of the
    total issued shares of LJOCL. Upon this acquisition, the Company
    owns 99.49% of the outstanding shares of LJOCL. The excess of
    the cost of purchase over the carrying value of the underlying
    assets and liabilities acquired was recorded in equity. As
    approved by China Securities Regulatory Commission, LJOCL was
    delisted from the Shenzhen Stock Exchange on January 4,
    2006.The acquisitions of interests from minority shareholders of the
above non-wholly owned principal subsidiaries and another non-
wholly owned subsidiary in the year ended December 31, 2005
and 2006 resulted in a total adjustment to equity of RMB 1,438
and RMB 2,156, respectively.

39  EVENTS AFTER BALANCE SHEET DATE

On March 16, 2007, the corporate income tax law was passed
at the Fifth Session of Tenth National Peoples Congress of
PRC whereby all enterprises with operations in the PRC will be
subject to the same statutory income tax rate. The Group will
evaluate the impact of the new tax law on the operating results
and the financial position of the Group when the new tax law is
implemented.

40  APPROVAL OF FINANCIAL STATEMENTS

The financial statements were approved by the Board of Directors
on March 19, 2007 and will be submitted to the shareholders
for approval at the annual general meeting to be held on
May 16, 2007.

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##### Table of Contents

PETROCHINA COMPANY LIMITED





SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING

ACTIVITIES (UNAUDITED)

(Amounts in millions unless otherwise stated)

In accordance with US Statement of Financial Accounting Standard
No. 69, Disclosures about Oil and Gas Producing
Activities, this section provides supplemental information
on oil and gas exploration and producing activities of the
Company and its subsidiaries (the Group) and also
the Groups investments that are accounted for using the
equity method.

Results of Operations

|                                                                                                                        |                        |                         |         |         |      |  |         |         |  |  |         |         | 
|----------------------------------------------------------------------------------------------------------------------- | ---------------------- | ----------------------- | ------- | ------- | ---- |  | ------- | ------- |  |  | ------- | ------- | 
|                                                                                                                        |                        | Year Ended December 31, |        
|                                                                                                                        |                        |                         |        
|                                                                                                                        |                        | 2004                    |         |         | 2005 |  |         | 2006    | 
|                                                                                                                        |                        |                         |         |         |      |  |         |         | 
|                                                                                                                        |                        | RMB                     |         |         | RMB  |  |         | RMB     | 
|Sales and other operating revenues                                                                                      |                        |                         |         |         |      |  |         |         |  |  |         |        
|                                                                                                                        | Sales to third parties |                         |         | 53,819  |      |  |         | 66,265  |  |  |         | 81,721  | 
|                                                                                                                        | Intersegment sales     |                         |         | 176,894 |      |  |         | 261,558 |  |  |         | 313,654 | 
|                                                                                                                        |                        |                         |         |         |      |  |         |         | 
|                                                                                                                        |                        |                         | 230,713 |         |      |  | 327,823 |         |  |  | 395,375 |        
|Production costs excluding taxes                                                                                        |                        |                         | (34,821 | )       |      |  | (41,713 | )       |  |  | (54,800 | )      
|Exploration expenses                                                                                                    |                        |                         | (12,090 | )       |      |  | (15,566 | )       |  |  | (18,822 | )      
|Depreciation, depletion and
    amortization                                                                            |                        |                         | (26,287 | )       |      |  | (25,819 | )       |  |  | (31,540 | )      
|Taxes other than income taxes                                                                                           |                        |                         | (7,712  | )       |      |  | (10,239 | )       |  |  | (41,354 | )      
|Accretion expense                                                                                                       |                        |                         | (54     | )       |      |  | (60     | )       |  |  | (796    | )      
|                                                                                                                        |                        |                         |         |         |      |  |         |         | 
|Income before income taxes                                                                                              |                        |                         | 149,749 |         |      |  | 234,426 |         |  |  | 248,063 |        
|Income taxes                                                                                                            |                        |                         | (42,089 | )       |      |  | (64,816 | )       |  |  | (65,554 | )      
|                                                                                                                        |                        |                         |         |         |      |  |         |         | 
|Results of operations from
    producing activities                                                                     |                        |                         | 107,660 |         |      |  | 169,610 |         |  |  | 182,509 |        
|                                                                                                                        |                        |                         |         |         |      |  |         |         | 
|Income from equity affiliates
    and jointly controlled entities results of operations from
    producing activities |                        |                         | 767     |         |      |  | 1,880   |         |  |  | 4,424   |        
|                                                                                                                        |                        |                         |         |         |      |  |         |         | 

Capitalized Costs


|                                                                                       |  |                         |          |   |      |  |          |      |  |  |          |  
|-------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- |  | -------- | ---- |  |  | -------- | -
|                                                                                       |  | Year Ended December 31, |         
|                                                                                       |  |                         |         
|                                                                                       |  | 2004                    |          |   | 2005 |  |          | 2006 | 
|                                                                                       |  |                         |          |   |      |  |          |      | 
|                                                                                       |  | RMB                     |          |   | RMB  |  |          | RMB  | 
|Property costs                                                                         |  |                         |         |   |      |  |         |      |  |  |         |  
|Producing assets                                                                       |  |                         | 303,784  |   |      |  | 359,539  |      |  |  | 425,172  |  
|Support facilities                                                                     |  |                         | 124,793  |   |      |  | 138,093  |      |  |  | 150,149  |  
|Construction-in-progress                                                               |  |                         | 15,856   |   |      |  | 19,394   |      |  |  | 25,461   |  
|                                                                                       |  |                         |          |   |      |  |          |      | 
|Total capitalized costs                                                                |  |                         | 444,433  |   |      |  | 517,026  |      |  |  | 600,782  |  
|Accumulated depreciation, depletion
    and amortization                               |  |                         | (180,926 | ) |      |  | (203,416 | )    |  |  | (233,677 | )
|                                                                                       |  |                         |          |   |      |  |          |      | 
|Net capitalized costs                                                                  |  |                         | 263,507  |   |      |  | 313,610  |      |  |  | 367,105  |  
|                                                                                       |  |                         |          |   |      |  |          |      | 
|Share of equity affiliates
    and jointly controlled entities net capitalized costs |  |                         | 1,632    |   |      |  | 20,597   |      |  |  | 25,136   |  
|                                                                                       |  |                         |          |   |      |  |          |      | 

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##### Table of Contents

PETROCHINA COMPANY LIMITED

SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING

ACTIVITIES (UNAUDITED)  (Continued)

(Amounts in millions unless otherwise stated)

Costs Incurred in Property Acquisitions, Exploration and
Development Activities

|                                                                                                                                 |  |                         |        |  |      |  |        |      |  |  |         | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ |  | ---- |  | ------ | ---- |  |  | ------- | 
|                                                                                                                                 |  | Year Ended December 31, |       
|                                                                                                                                 |  |                         |       
|                                                                                                                                 |  | 2004                    |        |  | 2005 |  |        | 2006 | 
|                                                                                                                                 |  |                         |        |  |      |  |        |      | 
|                                                                                                                                 |  | RMB                     |        |  | RMB  |  |        | RMB  | 
|Property acquisition costs                                                                                                       |  |                         |       |  |      |  |       |      |  |  |        | 
|Exploration costs                                                                                                                |  |                         | 18,338 |  |      |  | 25,335 |      |  |  | 30,567  | 
|Development costs                                                                                                                |  |                         | 47,508 |  |      |  | 72,551 |      |  |  | 79,902  | 
|                                                                                                                                 |  |                         |        |  |      |  |        |      | 
|Total                                                                                                                            |  |                         | 65,846 |  |      |  | 97,886 |      |  |  | 110,469 | 
|                                                                                                                                 |  |                         |        |  |      |  |        |      | 
|Share of equity affiliates
    and jointly controlled entities costs of property
    acquisition, exploration, and development |  |                         | 1,143  |  |      |  | 2,590  |      |  |  | 4,371   | 
|                                                                                                                                 |  |                         |        |  |      |  |        |      | 

Proved Reserve Estimates






30-year


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##### Table of Contents

PETROCHINA COMPANY LIMITED

SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING

ACTIVITIES (UNAUDITED)  (Continued)

(Amounts in millions unless otherwise stated)

Oil and gas price increases may extend the productive lives of
crude oil and natural gas reservoirs beyond the current terms of
the relevant production licenses.

Proved reserve estimates as of December 31, 2004, 2005 and
2006 were based on reports prepared by DeGolyer and MacNaughton,
and Gaffney, Cline & Associates, independent
engineering consultants. These reserve estimates were prepared
for each oil and gas region (as opposed to individual fields
within a region) and adjusted for the estimated effects of using
prices and costs prevailing at the end of the period. The
Companys reserve estimates include only crude oil and
natural gas, which the Company believes can be reasonably
produced within the current terms of production licenses.

Estimated quantities of net proved oil and condensate and
natural gas reserves and of changes in net quantities of proved
developed and undeveloped reserves for each of the period
indicated are as follows:

|                                 |                               |                         |                                 |              |  |      |   |        |  |        |  
|-------------------------------- | ----------------------------- | ----------------------- | ------------------------------- | ------------ |  | ---- | - | ------ |  | ------ | -
|                                 |                               | Crude Oil and           |                                 |             
|                                 |                               | Condensate              |                                 | Natural Gas 
|                                 |                               |                         |                                 |             
|                                 |                               | (millions of            |                                 | (billions of
|                                 |                               | barrels)                |                                 | cubic feet) 
|Proved developed and undeveloped |                               |                         |                                 |              |  |      |   |       
|                                 | Reserves at January 1, 2004   |                         |                                 | 11,495       |  |      |   | 41,787 | 
|                                 |                               | Changes resulting from: |                                 |              |  |      |   |        |  |       
|                                 |                               |                         | Revisions of previous estimates |              |  | 141  |   |        |  | 83     |  
|                                 |                               |                         | Improved recovery               |              |  | 109  |   |        |  | 43     |  
|                                 |                               |                         | Extensions and discoveries      |              |  | 573  |   |        |  | 4,405  |  
|                                 |                               |                         | Production                      |              |  | (817 | ) |        |  | (1,069 | )
|                                 |                               |                         |                                 |              |  |      |   |       
|                                 | Reserves at December 31, 2004 |                         |                                 | 11,501       |  |      |   | 45,249 | 
|                                 |                               |                         |                                 |              |  |      |   |       
|                                 |                               | Changes resulting from: |                                 |              |  |      |   |        |  |       
|                                 |                               |                         | Revisions of previous estimates |              |  | 157  |   |        |  | 213    |  
|                                 |                               |                         | Improved recovery               |              |  | 101  |   |        |  |       |  
|                                 |                               |                         | Extensions and discoveries      |              |  | 606  |   |        |  | 4,005  |  
|                                 |                               |                         | Production                      |              |  | (829 | ) |        |  | (1,344 | )
|                                 |                               |                         |                                 |              |  |      |   |       
|                                 | Reserves at December 31, 2005 |                         |                                 | 11,536       |  |      |   | 48,123 | 
|                                 |                               |                         |                                 |              |  |      |   |       
|                                 |                               | Changes resulting from: |                                 |              |  |      |   |        |  |       
|                                 |                               |                         | Revisions of previous estimates |              |  | 197  |   |        |  | 686    |  
|                                 |                               |                         | Improved recovery               |              |  | 81   |   |        |  |       |  
|                                 |                               |                         | Extensions and discoveries      |              |  | 635  |   |        |  | 6,248  |  
|                                 |                               |                         | Production                      |              |  | (831 | ) |        |  | (1,588 | )
|                                 |                               |                         |                                 |              |  |      |   |       
|                                 | Reserves at December 31, 2006 |                         |                                 | 11,618       |  |      |   | 53,469 | 
|                                 |                               |                         |                                 |              |  |      |   |       

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##### Table of Contents

PETROCHINA COMPANY LIMITED

SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING

ACTIVITIES (UNAUDITED)  (Continued)

(Amounts in millions unless otherwise stated)

|                                                                                                  |                   |               |  |              |  |  |  |        | 
|------------------------------------------------------------------------------------------------- | ----------------- | ------------- |  | ------------ |  |  |  | ------ | 
|                                                                                                  |                   | Crude Oil and |  |             
|                                                                                                  |                   | Condensate    |  | Natural Gas 
|                                                                                                  |                   |               |  |             
|                                                                                                  |                   | (millions of  |  | (billions of
|                                                                                                  |                   | barrels)      |  | cubic feet) 
|Proved developed reserves at:                                                                     |                   |               |  |              |  |  |  |       
|                                                                                                  | December 31, 2004 |               |  | 9,068        |  |  |  | 17,255 | 
|                                                                                                  | December 31, 2005 |               |  | 9,195        |  |  |  | 19,858 | 
|                                                                                                  | December 31, 2006 |               |  | 9,185        |  |  |  | 22,564 | 
|Proportional interest in proved
    reserves of equity affiliates and jointly controlled entities |                   |               |  |              |  |  |  |       
|                                                                                                  | December 31, 2004 |               |  | 439          |  |  |  | 100    | 
|                                                                                                  | December 31, 2005 |               |  | 631          |  |  |  | 145    | 
|                                                                                                  | December 31, 2006 |               |  | 543          |  |  |  | 105    | 



Standardized Measure


Disclosures about Oil and Gas
Producing Activities.




|                                                             |  |  |            |  
|------------------------------------------------------------ |  |  | ---------- | -
|At December 31, 2004                                         |  |  |            |  
|Future cash inflows from sales of
    oil and gas            |  |  | 4,046,151  |  
|Future production costs                                      |  |  | (912,881   | )
|Future development costs                                     |  |  | (106,332   | )
|Future income tax expense                                    |  |  | (934,068   | )
|                                                             |  |  |            |  
|Future net cash flows                                        |  |  | 2,092,870  |  
|Discount at 10% for estimated
    timing of cash flows       |  |  | (1,092,412 | )
|                                                             |  |  |            |  
|Standardized measure of discounted
    future net cash flows |  |  | 1,000,458  |  
|                                                             |  |  |            |  

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##### Table of Contents

PETROCHINA COMPANY LIMITED

SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING

ACTIVITIES (UNAUDITED)  (Continued)

(Amounts in millions unless otherwise stated)

|                                                                                                                              |                      |  |            |        | 
|----------------------------------------------------------------------------------------------------------------------------- | -------------------- |  | ---------- | ------ | 
|At December 31, 2005                                                                                                          |                      |  |            |       
|Future cash inflows from sales of
    oil and gas                                                                             |                      |  | 5,337,329  |       
|Future production costs                                                                                                       |                      |  | (1,043,358 | )     
|Future development costs                                                                                                      |                      |  | (156,575   | )     
|Future income tax expense                                                                                                     |                      |  | (1,279,133 | )     
|                                                                                                                              |                      |  |            |       
|Future net cash flows                                                                                                         |                      |  | 2,858,263  |       
|Discount at 10% for estimated
    timing of cash flows                                                                        |                      |  | (1,472,069 | )     
|                                                                                                                              |                      |  |            |       
|Standardized measure of discounted
    future net cash flows                                                                  |                      |  | 1,386,194  |       
|                                                                                                                              |                      |  |            |       
|At December 31, 2006                                                                                                          |                      |  |            |       
|Future cash inflows from sales of
    oil and gas                                                                             |                      |  | 5,611,306  |       
|Future production costs                                                                                                       |                      |  | (1,620,761 | )     
|Future development costs                                                                                                      |                      |  | (296,175   | )     
|Future income tax expense                                                                                                     |                      |  | (1,202,980 | )     
|                                                                                                                              |                      |  |            |       
|Future net cash flows                                                                                                         |                      |  | 2,491,390  |       
|Discount at 10% for estimated
    timing of cash flows                                                                        |                      |  | (1,336,045 | )     
|                                                                                                                              |                      |  |            |       
|Standardized measure of discounted
    future net cash flows                                                                  |                      |  | 1,155,345  |       
|                                                                                                                              |                      |  |            |       
|Share of equity affiliates
    and jointly controlled entities standardized measure of
    discounted future net cash flows |                      |  |            |       
|                                                                                                                              | At December 31, 2004 |  |            | 10,851 | 
|                                                                                                                              | At December 31, 2005 |  |            | 31,703 | 
|                                                                                                                              | At December 31, 2006 |  |            | 59,825 | 



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##### Table of Contents

PETROCHINA COMPANY LIMITED

SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING

ACTIVITIES (UNAUDITED)  (Continued)

(Amounts in millions unless otherwise stated)

Changes in the standardized measure of discounted net cash flows
for the Group for each of the three years ended
December 31, 2004, 2005 and 2006 are as follows:

|                                                                    |                                                                          |                         |  |           |      |  |  |           |   |  |  |           |  
|------------------------------------------------------------------- | ------------------------------------------------------------------------ | ----------------------- |  | --------- | ---- |  |  | --------- | - |  |  | --------- | -
|                                                                    |                                                                          | Year Ended December 31, | 
|                                                                    |                                                                          |                         | 
|                                                                    |                                                                          | 2004                    |  |           | 2005 |  |  | 2006      |  
|                                                                    |                                                                          |                         |  |           |      |  |  |           |  
|                                                                    |                                                                          | RMB                     |  |           | RMB  |  |  | RMB       |  
|CHANGES IN STANDARDISED MEASURE
    OF DISCOUNTED FUTURE CASH FLOWS |                                                                          |                         |  |           |      |  |  |           |   |  |  |          
|                                                                    | Beginning of year                                                        |                         |  | 715,114   |      |  |  | 1,000,458 |   |  |  | 1,386,194 |  
|                                                                    | Sales and transfers of oil and gas
    produced, net of production costs |                         |  | (187,020  | )    |  |  | (274,921  | ) |  |  | (328,001  | )
|                                                                    | Net changes in prices and
    production costs and other                 |                         |  | 366,417   |      |  |  | 523,089   |   |  |  | (317,593  | )
|                                                                    | Extensions, discoveries and
    improved recovery                        |                         |  | 119,790   |      |  |  | 157,343   |   |  |  | 166,249   |  
|                                                                    | Development costs incurred                                               |                         |  | 14,829    |      |  |  | (11,282   | ) |  |  | (47,551   | )
|                                                                    | Revisions of previous quantity
    estimates                             |                         |  | 13,420    |      |  |  | 21,678    |   |  |  | 32,306    |  
|                                                                    | Accretion of discount                                                    |                         |  | 101,787   |      |  |  | 144,709   |   |  |  | 200,771   |  
|                                                                    | Net change in income taxes                                               |                         |  | (143,879  | )    |  |  | (174,880  | ) |  |  | 62,970    |  
|                                                                    |                                                                          |                         |  |           |      |  |  |           |  
|                                                                    | End of year                                                              |                         |  | 1,000,458 |      |  |  | 1,386,194 |   |  |  | 1,155,345 |  
|                                                                    |                                                                          |                         |  |           |      |  |  |           |  

F-78