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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,
2003

Commission File Number 1-15006



---

(PETRO CHINA COMPANY LOGO)

(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.** | 

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

None

(Title of Class)


Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)


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

|                                                 |  |  |                 |    
|------------------------------------------------ |  |  | --------------- | ---
|State-owned shares, par value RMB 1.00 per share |  |  | 158,241,758,000 |    
|H Shares, par value RMB 1.00 per share           |  |  | 17,582,418,000  | ***

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

Yes X    No

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

Item 17 
Item 18 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.

|    |                                                                              
|--- | -----------------------------------------------------------------------------
|*** | Include 2,364,849,100 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                                 |  |      | 16  | 
|        |  |         |  | Introduction                                                   |  |      | 16  | 
|        |  |         |  | Exploration and
    Production                                 |  |      | 22  | 
|        |  |         |  | Refining and
    Marketing                                     |  |      | 33  | 
|        |  |         |  | Chemicals and
    Marketing                                    |  |      | 40  | 
|        |  |         |  | Natural Gas and
    Pipeline                                   |  |      | 44  | 
|        |  |         |  | Competition                                                    |  |      | 48  | 
|        |  |         |  | Environmental
    Matters                                      |  |      | 49  | 
|        |  |         |  | Legal
    Proceedings                                          |  |      | 50  | 
|        |  |         |  | Properties                                                     |  |      | 50  | 
|        |  |         |  | Regulatory
    Matters                                         |  |      | 52  | 
|        |  | Item 5  |  | Operating and Financial
    Review and Prospects               |  |      | 59  | 
|        |  |         |  | General                                                        |  |      | 59  | 
|        |  |         |  | Operating
    Results                                          |  |      | 67  | 
|        |  |         |  | Liquidity and
    Capital Resources                            |  |      | 76  | 
|        |  |         |  | Research and
    Development                                   |  |      | 84  | 
|        |  |         |  | Trend
    Information                                          |  |      | 84  | 
|        |  |         |  | Other
    Information                                          |  |      | 85  | 
|        |  | Item 6  |  | Directors, Senior Management
    and Employees                 |  |      | 89  | 
|        |  |         |  | Directors,
    Senior Management and Supervisors               |  |      | 89  | 
|        |  |         |  | Compensation                                                   |  |      | 95  | 
|        |  |         |  | Board
    Practices                                            |  |      | 96  | 
|        |  |         |  | Employees                                                      |  |      | 98  | 
|        |  |         |  | Share
    Ownership                                            |  |      | 98  | 
|        |  | Item 7  |  | Major Shareholders and
    Related Party Transactions          |  |      | 99  | 
|        |  |         |  | Major
    Shareholders                                         |  |      | 99  | 
|        |  |         |  | Related Party
    Transactions                                 |  |      | 99  | 
|        |  | Item 8  |  | Financial Information                                          |  |      | 103 | 
|        |  | Item 9  |  | The Offer and Listing                                          |  |      | 105 | 
|        |  | Item 10 |  | Additional Information                                         |  |      | 106 | 
|        |  |         |  | Memorandum and
    Articles of Association                     |  |      | 106 | 
|        |  |         |  | Material
    Contracts                                         |  |      | 106 | 
|        |  |         |  | Exchange
    Controls                                          |  |      | 106 | 
|        |  |         |  | Taxation                                                       |  |      | 107 | 
|        |  |         |  | Documents on
    Display                                       |  |      | 108 | 
|        |  | Item 11 |  | Quantitative and Qualitative
    Disclosures About Market Risk |  |      | 109 | 
|        |  | Item 12 |  | Description of Securities
    Other Than Equity Securities     |  |      | 113 | 
|Part II |  | Item 13 |  | Defaults, Dividend
    Arrearages and Delinquencies            |  |      | 113 | 
|        |  | Item 14 |  | Material Modifications to
    the Rights to Security Holders   |  |      | 113 | 
|        |  | Item 15 |  | Controls and Procedures                                        |  |      | 113 | 
|        |  | Item 16 |  | [Reserved]                                                     |  |      | 113 | 

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|                                                   |  |          |  |                                                                     |  |      |     | 
|-------------------------------------------------- |  | -------- |  | ------------------------------------------------------------------- |  | ---- | --- | 
|                                                   |  |          |  |                                                                     |  | Page
|                                                   |  |          |  |                                                                     |  |     
|                                                   |  | Item 16A |  | Audit Committee Financial
    Expert                                |  |      | 113 | 
|                                                   |  | Item 16B |  | Code of Ethics                                                      |  |      | 113 | 
|                                                   |  | Item 16C |  | Principal Accountant Fees
    and Services                          |  |      | 114 | 
|                                                   |  | Item 16D |  | Exemptions from Listing
    Standards for Audit Committees          |  |      | 115 | 
|                                                   |  | Item 16E |  | Purchases of Equity
    Securities by the Issuer and its Affiliates |  |      | 115 | 
|Part III                                           |  | Item 17  |  | Financial Statements                                                |  |      | 115 | 
|                                                   |  | Item 18  |  | Financial Statements                                                |  |      | 115 | 
|                                                   |  | Item 19  |  | Exhibits                                                            |  |      | 115 | 
|                                                   |  |          |  | Consolidated Financial Statements                                   |  |      | F-1 | 
|EX-4.8 CRUDE OIL MUTUAL SUPPLY FRAMEWORK AGREEMENT
|EX-8.1 LIST OF MAJOR SUBSIDIARIES                 
|EX-12.1 CERTIFICATION OF CEO                      
|EX-12.2 CERTIFICATION OF CFO                      
|EX-13.1 CERTIFICATION OF CEO BY SECTION 1350      
|EX-13.2 CERTIFICATION OF CFO BY SECTION 1350      
|EX-16.2 CODE OF ETHICS                            



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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

Unless the context indicates otherwise, the
following terms have the meanings shown below:



|              |  |                                                                                                                                                                                                                                            
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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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|                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|day                               |  | When used with respect to production or capacity,
    means the total annual available production or capacity (after
    taking into account scheduled plant shutdowns) divided by 365.                                                                                                                                                                                                                                                                                                                                                                                         
|                                   
|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                                                                                                                                                                                                                                                                                                     

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|                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                              |  | 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 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 are to barrels-of-oil equivalent,
|
| |  | Mcf are to thousand cubic feet, and  
|
| |  | Bcf are 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 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;                                                                                                   
|
| |  | 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;                                                                                                                                 

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| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in policies, laws or regulations of the
    PRC;                                                                                                                                                     
|
| |  | 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.

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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

Translations of amounts in this annual report
from Renminbi into U.S. dollars and vice versa have been
made at the rate of RMB 8.2767 to US$1.00, which was the noon
buying rate in New York City on December 31, 2003 for
cable transfers in Renminbi per U.S. dollar as certified
for customs purposes by the Federal Reserve Bank of
New York. You should not construe these translations as
representations that the RMB amounts could be converted into
U.S. dollar amounts at that rate, or at all.

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 8.2766 on
June 24, 2004. 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$)   
|December 2003               |  |                  | 8.2772 |     |  |  | 8.2765 | 
|January 2004                |  |                  | 8.2772 |     |  |  | 8.2767 | 
|February 2004               |  |                  | 8.2773 |     |  |  | 8.2769 | 
|March 2004                  |  |                  | 8.2774 |     |  |  | 8.2767 | 
|April 2004                  |  |                  | 8.2772 |     |  |  | 8.2768 | 
|May 2004                    |  |                  | 8.2773 |     |  |  | 8.2768 | 
|June 2004 (through June 24) |  |                  | 8.2768 |     |  |  | 8.2766 | 

The following table sets forth the average noon
buying rates between Renminbi and U.S. dollars for each of
1999, 2000, 2001, 2002 and 2003, calculated by averaging the
noon buying rates on the last day of each month during the
relevant year:

|     |  |                          |        | 
|---- |  | ------------------------ | ------ | 
|     |  | Average noon buying rate
|     |  |                         
|     |  | (RMB per US$)           
|1999 |  |                          | 8.2784 | 
|2000 |  |                          | 8.2784 | 
|2001 |  |                          | 8.2770 | 
|2002 |  |                          | 8.2772 | 
|2003 |  |                          | 8.2772 | 

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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. In
2002, we retroactively restated our prior years
consolidated financial statements to reflect the effect as if
the operations of CNPCs refined products marketing
enterprises we acquired from CNPC had always been combined since
inception as a result of the application of the accounting
treatment to the acquisition discussed below. The selected
historical income statement and cashflow data for the years
ended December 31, 2001, 2002 and 2003 and the selected
historical balance sheet data as of December 31, 2002 and
2003 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 year ended December 31, 2000 and the selected
historical balance sheet data as of December 31, 2001 set
forth below are derived from our previously audited financial
statements, not included in this annual report. The selected
historical income statement data and cashflow data for the years
ended December 31, 1999 and the selected historical balance
sheet data as of December 31, 1999, 2000 set forth below
are derived from our previously unaudited 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.

We have prepared our consolidated financial
statements in accordance with IFRS. IFRS differ materially from
the generally accepted accounting principals in the U.S., or US
GAAP. For a discussion of significant differences between IFRS
and US GAAP, see Note 34 to our consolidated financial
statements included elsewhere in this annual report and
Item 5  Operating and Financial Review and
Prospects  Other Information  US GAAP
Reconciliation.

In accordance with an acquisition agreement
between CNPC and us dated September 26, 2002, we acquired
from CNPC the assets, liabilities and interests related to
CNPCs refined products marketing enterprises consisting
primarily of service stations and related facilities. Under
IFRS, the acquisition is a combination of entities under common
control since the CNPCs refined products marketing
enterprises and we 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 marketing enterprises acquired are accounted
for at historical cost to CNPC with net liabilities of RMB
2,956 million at the effective date. In 2002, 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 marketing enterprises had
always been combined in these periods. See
Item 5  Operating and Financial Review and
Prospects  General 
Acquisitions  Acquisition of Certain Refined Products
Marketing Enterprises from CNPC.

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|                                              |                                                                         |                                                      |        |         |          |      |        |         |          |      |        |         |          |   |        |         |          |   |        |         |          |   |        |         |         |  
|--------------------------------------------- | ----------------------------------------------------------------------- | ---------------------------------------------------- | ------ | ------- | -------- | ---- | ------ | ------- | -------- | ---- | ------ | ------- | -------- | - | ------ | ------- | -------- | - | ------ | ------- | -------- | - | ------ | ------- | ------- | -
|                                              |                                                                         |                                                     
|                                              |                                                                         | Year ended December 31,                             
|                                              |                                                                         |                                                     
|                                              |                                                                         | 1999(1)                                              |        | 2000(2) |          | 2001 |        | 2002    |          | 2003 |        | 2003   
|                                              |                                                                         |                                                      |        |         |          |      |        |         |          |      |        |        
|                                              |                                                                         | RMB                                                  |        | RMB     |          | RMB  |        | RMB     |          | RMB  |        | US$    
|                                              |                                                                         |                                                     
|                                              |                                                                         | (in millions, except for per share and per ADS data)
|Income Statement Data                         |                                                                         |                                                      |        |         |          |      |        |         |          |      |        |         |          |   |        |         |          |   |        |         |          |   |        |        
|IFRS                                          |                                                                         |                                                      |        |         |          |      |        |         |          |      |        |         |          |   |        |         |          |   |        |         |          |   |        |        
|Revenues                                      |                                                                         |                                                      |        |         |          |      |        |         |          |      |        |         |          |   |        |         |          |   |        |         |          |   |        |        
|                                              | Sales and other operating revenues                                      |                                                      |        | 181,671 |          |      |        | 245,279 |          |      |        | 241,320 |          |   |        | 244,424 |          |   |        | 303,779 |          |   |        | 36,703  |        
|                                              |                                                                         |                                                      |        |         |          |      |        |         |          |      |        |         |          |   |        |         |          |   |        |         |          |   |        |        
|Operating expenses                            |                                                                         |                                                      |        |         |          |      |        |         |          |      |        |         |          |   |        |         |          |   |        |         |          |   |        |        
|                                              | Purchases, services and other                                           |                                                      |        | (65,868 | )        |      |        | (64,251 | )        |      |        | (78,529 | )        |   |        | (71,690 | )        |   |        | (90,850 | )        |   |        | (10,977 | )      
|                                              | Employee compensation costs                                             |                                                      |        | (11,598 | )        |      |        | (15,129 | )        |      |        | (14,608 | )        |   |        | (16,248 | )        |   |        | (19,542 | )        |   |        | (2,361  | )      
|                                              | Exploration expenses, including exploratory dry
    holes               |                                                      |        | (7,344  | )        |      |        | (8,680  | )        |      |        | (7,344  | )        |   |        | (8,095  | )        |   |        | (10,577 | )        |   |        | (1,278  | )      
|                                              | Depreciation, depletion and amortization                                |                                                      |        | (23,706 | )        |      |        | (34,209 | )        |      |        | (33,615 | )        |   |        | (36,782 | )        |   |        | (40,531 | )        |   |        | (4,897  | )      
|                                              | Selling, general and administrative expenses                            |                                                      |        | (13,447 | )        |      |        | (17,621 | )        |      |        | (21,735 | )        |   |        | (22,474 | )        |   |        | (23,930 | )        |   |        | (2,891  | )      
|                                              | Employee separation costs and shutting down of
    manufacturing assets |                                                      |        |        |          |      |        | (6,579  | )        |      |        | (487    | )        |   |        | (2,121  | )        |   |        | (2,355  | )        |   |        | (285    | )      
|                                              | Revaluation loss                                                        |                                                      |        | (1,122  | )        |      |        |        |          |      |        |        |          |   |        |        |          |   |        | (391    | )        |   |        | (47     | )      
|                                              | Impairment loss on assets to be retained by CNPC                        |                                                      |        | (2,007  | )        |      |        |        |          |      |        |        |          |   |        |        |          |   |        |        |          |   |        |        |        
|                                              | Taxes other than income taxes                                           |                                                      |        | (10,293 | )        |      |        | (13,258 | )        |      |        | (13,951 | )        |   |        | (14,613 | )        |   |        | (15,879 | )        |   |        | (1,919  | )      
|                                              | Other income/(expenses), net                                            |                                                      |        | 201     |          |      |        | (119    | )        |      |        | 88      |          |   |        | (60     | )        |   |        | (538    | )        |   |        | (65     | )      
|                                              |                                                                         |                                                      |        |         |          |      |        |         |          |      |        |         |          |   |        |         |          |   |        |         |          |   |        |        
|                                              |                                                                         | Total operating expenses                             |        |         | (135,184 | )    |        |         | (159,846 | )    |        |         | (170,181 | ) |        |         | (172,083 | ) |        |         | (204,593 | ) |        |         | (24,720 | )
|                                              |                                                                         |                                                      |        |         |          |      |        |         |          |      |        |         |          |   |        |         |          |   |        |         |          |   |        |        
|Income from operations                        |                                                                         |                                                      | 46,487 |         |          |      | 85,433 |         |          |      | 71,139 |         |          |   | 72,341 |         |          |   | 99,186 |         |          |   | 11,983 |        
|                                              |                                                                         |                                                      |        |         |          |      |        |         |          |      |        |         |          |   |        |         |          |   |        |         |          |   |        |        
|                                              | Income from equity affiliates                                           |                                                      |        | 128     |          |      |        | 584     |          |      |        | 341     |          |   |        | 268     |          |   |        | 985     |          |   |        | 119     |        
|                                              | Exchange gain (loss), net                                               |                                                      |        | (2,233  | )        |      |        | 1,172   |          |      |        | 250     |          |   |        | (316    | )        |   |        | (180    | )        |   |        | (22     | )      
|                                              | Interest income                                                         |                                                      |        | 638     |          |      |        | 591     |          |      |        | 809     |          |   |        | 463     |          |   |        | 677     |          |   |        | 82      |        
|                                              | Interest expense                                                        |                                                      |        | (9,056  | )        |      |        | (6,286  | )        |      |        | (4,408  | )        |   |        | (3,516  | )        |   |        | (2,346  | )        |   |        | (283    | )      
|Income before income taxes                    |                                                                         |                                                      | 35,964 |         |          |      | 81,494 |         |          |      | 68,131 |         |          |   | 69,240 |         |          |   | 98,322 |         |          |   | 11,879 |        
|                                              | Income taxes                                                            |                                                      |        | (9,414  | )        |      |        | (27,014 | )        |      |        | (23,066 | )        |   |        | (22,231 | )        |   |        | (28,072 | )        |   |        | (3,391  | )      
|                                              | Income before minority interests                                        |                                                      |        | 26,550  |          |      |        | 54,480  |          |      |        | 45,065  |          |   |        | 47,009  |          |   |        | 70,250  |          |   |        | 8,488   |        
|                                              |                                                                         | (Income) loss applicable to minority interests       |        |         | (127     | )    |        |         | 165      |      |        |         | 404      |   |        |         | (99      | ) |        |         | (636     | ) |        |         | (77     | )
|                                              |                                                                         |                                                      |        |         |          |      |        |         |          |      |        |         |          |   |        |         |          |   |        |         |          |   |        |        
|Net income                                    |                                                                         |                                                      | 26,423 |         |          |      | 54,645 |         |          |      | 45,469 |         |          |   | 46,910 |         |          |   | 69,614 |         |          |   | 8,411  |        
|                                              |                                                                         |                                                      |        |         |          |      |        |         |          |      |        |         |          |   |        |         |          |   |        |         |          |   |        |        
|Basic and diluted net income per
    share(3) |                                                                         |                                                      | 0.17   |         |          |      | 0.32   |         |          |      | 0.26   |         |          |   | 0.27   |         |          |   | 0.40   |         |          |   | 0.05   |        
|Basic and diluted net income per ADS(4)       |                                                                         |                                                      | 16.51  |         |          |      | 31.84  |         |          |      | 25.86  |         |          |   | 26.68  |         |          |   | 39.59  |         |          |   | 4.78   |        
|US GAAP                                       |                                                                         |                                                      |        |         |          |      |        |         |          |      |        |         |          |   |        |         |          |   |        |         |          |   |        |        
|Net income                                    |                                                                         |                                                      | 30,409 |         |          |      | 60,236 |         |          |      | 50,934 |         |          |   | 49,837 |         |          |   | 75,419 |         |          |   | 9,112  |        
|Basic and diluted net income per
    share(3) |                                                                         |                                                      | 0.19   |         |          |      | 0.35   |         |          |      | 0.29   |         |          |   | 0.28   |         |          |   | 0.43   |         |          |   | 0.05   |        
|Basic and diluted net income per ADS(4)       |                                                                         |                                                      | 19.01  |         |          |      | 35.10  |         |          |      | 28.97  |         |          |   | 28.34  |         |          |   | 42.89  |         |          |   | 5.18   |        

|                   |                                                               |                                                      |  |         |        |         |  |        |        |      |  |        |        |  |  |        |        |  |  |        |        |  |  |       |        | 
|------------------ | ------------------------------------------------------------- | ---------------------------------------------------- |  | ------- | ------ | ------- |  | ------ | ------ | ---- |  | ------ | ------ |  |  | ------ | ------ |  |  | ------ | ------ |  |  | ----- | ------ | 
|                   |                                                               |                                                     
|                   |                                                               | As of December 31,                                  
|                   |                                                               |                                                     
|                   |                                                               | 1999(1)                                              |  | 2000(1) |        | 2001(2) |  | 2002   |        | 2003 |  | 2003  
|                   |                                                               |                                                      |  |         |        |         |  |        |        |      |  |       
|                   |                                                               | RMB                                                  |  | RMB     |        | RMB     |  | RMB    |        | RMB  |  | US$   
|                   |                                                               |                                                     
|                   |                                                               | (in millions, except for per share and per ADS data)
|Balance Sheet Data |                                                               |                                                      |  |         |        |         |  |        |        |      |  |        |        |  |  |        |        |  |  |        |        |  |  |      
|IFRS               |                                                               |                                                      |  |         |        |         |  |        |        |      |  |        |        |  |  |        |        |  |  |        |        |  |  |      
|Assets             |                                                               |                                                      |  |         |        |         |  |        |        |      |  |        |        |  |  |        |        |  |  |        |        |  |  |      
|Current assets     |                                                               |                                                      |  |         |        |         |  |        |        |      |  |        |        |  |  |        |        |  |  |        |        |  |  |      
|                   | Cash and cash equivalents                                     |                                                      |  | 18,090  |        |         |  | 18,085 |        |      |  | 11,127 |        |  |  | 9,977  |        |  |  | 11,231 |        |  |  | 1,357 |       
|                   | Time deposits with maturities over three months               |                                                      |  |        |        |         |  |       |        |      |  | 3,253  |        |  |  | 2,612  |        |  |  | 2,640  |        |  |  | 319   |       
|                   | Receivables under resale agreements                           |                                                      |  | 1,489   |        |         |  | 5,815  |        |      |  | 11,505 |        |  |  | 9,786  |        |  |  | 24,224 |        |  |  | 2,927 |       
|                   | Accounts receivable, less allowance for doubtful
    accounts |                                                      |  | 14,943  |        |         |  | 12,786 |        |      |  | 7,392  |        |  |  | 6,079  |        |  |  | 3,263  |        |  |  | 394   |       
|                   | Inventories, at net book value                                |                                                      |  | 18,396  |        |         |  | 32,499 |        |      |  | 28,313 |        |  |  | 28,441 |        |  |  | 28,872 |        |  |  | 3,488 |       
|                   | Prepaid expenses and other current assets                     |                                                      |  | 29,118  |        |         |  | 11,913 |        |      |  | 24,427 |        |  |  | 18,269 |        |  |  | 15,944 |        |  |  | 1,927 |       
|                   |                                                               |                                                      |  |         |        |         |  |        |        |      |  |        |        |  |  |        |        |  |  |        |        |  |  |      
|                   |                                                               | Total current assets                                 |  |         | 82,036 |         |  |        | 81,098 |      |  |        | 86,017 |  |  |        | 75,164 |  |  |        | 86,174 |  |  |       | 10,412 | 
|                   |                                                               |                                                      |  |         |        |         |  |        |        |      |  |        |        |  |  |        |        |  |  |        |        |  |  |      

10



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##### Table of Contents



|                                                                                             |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |        |        |        | 
|-------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ----------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------ | ------ | ------ | 
|                                                                                             |                                                                                              |                                                     
|                                                                                             |                                                                                              | As of December 31,                                  
|                                                                                             |                                                                                              |                                                     
|                                                                                             |                                                                                              | 1999(1)                                              |                   | 2000(1) |         | 2001(2) |         | 2002    |         | 2003    |         | 2003   
|                                                                                             |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |        
|                                                                                             |                                                                                              | RMB                                                  |                   | RMB     |         | RMB     |         | RMB     |         | RMB     |         | US$    
|                                                                                             |                                                                                              |                                                     
|                                                                                             |                                                                                              | (in millions, except for per share and per ADS data)
|Non-current assets                                                                           |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|                                                                                             | Property, plant and equipment, less accumulated
    depreciation, depletion and amortization |                                                      |                   | 327,348 |         |         |         | 343,319 |         |         |         | 366,970 |         |         |         | 397,798 |         |         |         | 433,419 |         |         |         | 52,366 |       
|                                                                                             | Long-term investments, at net book value                                                     |                                                      |                   | 3,845   |         |         |         | 4,948   |         |         |         | 5,530   |         |         |         | 5,680   |         |         |         | 7,410   |         |         |         | 895    |       
|                                                                                             | Intangible and other assets                                                                  |                                                      |                   | 2,017   |         |         |         | 2,681   |         |         |         | 4,148   |         |         |         | 4,507   |         |         |         | 4,732   |         |         |         | 572    |       
|                                                                                             |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|                                                                                             | Total non-current assets                                                                     |                                                      |                   | 333,210 |         |         |         | 350,948 |         |         |         | 376,648 |         |         |         | 407,985 |         |         |         | 445,561 |         |         |         | 53,833 |       
|                                                                                             |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|                                                                                             |                                                                                              | Total assets                                         |                   |         | 415,246 |         |         |         | 432,046 |         |         |         | 462,665 |         |         |         | 483,149 |         |         |         | 531,735 |         |         |        | 64,245 |       
|                                                                                             |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|Liabilities and shareholders
    equity                                                     |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|Current liabilities                                                                          |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|                                                                                             | Short-term debt                                                                              |                                                      |                   | 62,057  |         |         |         | 41,514  |         |         |         | 25,323  |         |         |         | 20,633  |         |         |         | 28,890  |         |         |         | 3,491  |       
|                                                                                             | Accounts payable and accrued liabilities                                                     |                                                      |                   | 47,707  |         |         |         | 39,550  |         |         |         | 53,210  |         |         |         | 57,793  |         |         |         | 64,180  |         |         |         | 7,754  |       
|                                                                                             | Income tax payable                                                                           |                                                      |                   | 1,133   |         |         |         | 9,399   |         |         |         | 5,672   |         |         |         | 5,412   |         |         |         | 12,043  |         |         |         | 1,455  |       
|                                                                                             | Other taxes payable                                                                          |                                                      |                   | 3,614   |         |         |         | 7,171   |         |         |         | 8,762   |         |         |         | 5,515   |         |         |         | 8,916   |         |         |         | 1,077  |       
|                                                                                             |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|                                                                                             |                                                                                              | Total current liabilities                            |                   |         | 114,511 |         |         |         | 97,634  |         |         |         | 92,967  |         |         |         | 89,353  |         |         |         | 114,029 |         |         |        | 13,777 |       
|                                                                                             |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|Non-current liabilities                                                                      |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|                                                                                             | Long-term debt                                                                               |                                                      |                   | 84,512  |         |         |         | 53,412  |         |         |         | 65,546  |         |         |         | 60,655  |         |         |         | 41,959  |         |         |         | 5,069  |       
|                                                                                             | Deferred credits and other long-term obligations                                             |                                                      |                   | 1,155   |         |         |         | 1,196   |         |         |         | 1,380   |         |         |         | 1,684   |         |         |         | 2,000   |         |         |         | 242    |       
|                                                                                             | Deferred income taxes                                                                        |                                                      |                   | 1,182   |         |         |         | 3,169   |         |         |         | 7,030   |         |         |         | 9,927   |         |         |         | 11,526  |         |         |         | 1,393  |       
|                                                                                             |                                                                                              | Total non-current liabilities                        |                   |         | 86,849  |         |         |         | 57,777  |         |         |         | 73,956  |         |         |         | 72,266  |         |         |         | 55,485  |         |         |        | 6,704  |       
|                                                                                             |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|                                                                                             |                                                                                              |                                                      | Total liabilities |         |         | 201,360 |         |         |         | 155,411 |         |         |         | 166,923 |         |         |         | 161,619 |         |         |         | 169,514 |         |        |        | 20,481 | 
|                                                                                             |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|Minority interest                                                                            |                                                                                              |                                                      | 4,200             |         |         |         | 4,989   |         |         |         | 5,136   |         |         |         | 4,854   |         |         |         | 5,608   |         |         |         | 678     |       
|Shareholders equity                                                                         |                                                                                              |                                                      | 209,686           |         |         |         | 271,646 |         |         |         | 290,606 |         |         |         | 316,676 |         |         |         | 356,613 |         |         |         | 43,086  |       
|                                                                                             |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|                                                                                             |                                                                                              | Total liabilities and shareholders equity           |                   |         | 415,246 |         |         |         | 432,046 |         |         |         | 462,665 |         |         |         | 483,149 |         |         |         | 531,735 |         |         |        | 64,245 |       
|                                                                                             |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|Share capital, issued and outstanding, RMB
    1.00 par value                                |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|                                                                                             | State-owned shares                                                                           |                                                      |                   | 160,000 |         |         |         | 158,242 |         |         |         | 158,242 |         |         |         | 158,242 |         |         |         | 158,242 |         |         |         | 19,119 |       
|                                                                                             | H shares and ADSs                                                                            |                                                      |                   |        |         |         |         | 17,582  |         |         |         | 17,582  |         |         |         | 17,582  |         |         |         | 17,582  |         |         |         | 2,124  |       
|US GAAP                                                                                      |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|Property, plant and equipment, less accumulated
    depreciation, depletion and amortization |                                                                                              |                                                      | 252,196           |         |         |         | 276,601 |         |         |         | 308,498 |         |         |         | 347,595 |         |         |         | 391,961 |         |         |         | 47,357  |       
|Total assets                                                                                 |                                                                                              |                                                      | 340,094           |         |         |         | 365,328 |         |         |         | 404,193 |         |         |         | 432,946 |         |         |         | 492,784 |         |         |         | 59,539  |       
|Shareholders equity                                                                         |                                                                                              |                                                      | 159,938           |         |         |         | 227,489 |         |         |         | 251,914 |         |         |         | 283,464 |         |         |         | 329,205 |         |         |         | 39,774  |       
|Other Financial Data                                                                         |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|Dividend per share                                                                           |                                                                                              |                                                      |                  |         |         |         | 0.14    |         |         |         | 0.12    |         |         |         | 0.12    |         |         |         | 0.18    |         |         |         | 0.02    |       
|Dividend per ADS                                                                             |                                                                                              |                                                      |                  |         |         |         | 14.14   |         |         |         | 11.98   |         |         |         | 12.00   |         |         |         | 17.82   |         |         |         | 2.15    |       
|Capital expenditures(5)                                                                      |                                                                                              |                                                      | (43,310           | )       |         |         | (60,130 | )       |         |         | (61,549 | )       |         |         | (73,726 | )       |         |         | (84,299 | )       |         |         | (10,185 | )     
|Cash Flow Data
    IFRS                                                                      |                                                                                              |                                                      |                   |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |       
|Net cash provided by operating activities                                                    |                                                                                              |                                                      | 53,658            |         |         |         | 103,309 |         |         |         | 84,439  |         |         |         | 98,341  |         |         |         | 138,820 |         |         |         | 16,772  |       
|Net cash used for investing
    activities(6)                                                |                                                                                              |                                                      | (40,622           | )       |         |         | (60,126 | )       |         |         | (61,491 | )       |         |         | (71,662 | )       |         |         | (97,797 | )       |         |         | (11,815 | )     
|Net cash used for financing
    activities(7)                                                |                                                                                              |                                                      | (10,359           | )       |         |         | (43,188 | )       |         |         | (29,906 | )       |         |         | (27,829 | )       |         |         | (39,769 | )       |         |         | (4,805  | )     



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Certain financial data for these periods and as
    of these dates are derived from our previously unaudited
    consolidated financial statements, not included in this annual
    report, and were retroactively restated in 2002. See the
    paragraphs preceding these table for a detailed description.                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(2) | Certain financial data for these periods and as
    of these dates are derived from our previously audited
    consolidated financial statements, not included in this annual
    report, and were retroactively restated in 2002. See the
    paragraphs preceding these tables for a detailed description.                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) | Historical income per share for the year ended
    December 31, 2001, 2002 and 2003 has been calculated by
    dividing the net profit by the number of 175,824 million
    shares issued and outstanding for the periods presented.
    Historical income per share for the year ended December 31,
    2000 has been calculated by dividing the net profit by the
    weighted average number of 171,630 million shares issued
    and outstanding for the period presented. Historical income per
    share for the year ended December 31, 1999 has been
    calculated by dividing the net profit by the
    160,000 million shares issued and outstanding upon our
    formation on November 5, 1999 for the period presented.
|   
|(4) | Historical income per ADS for the year ended
    December 31, 2001, 2002 and 2003 has been calculated by
    dividing the net profit by the number of 175,824 million
    shares issued and outstanding for the periods presented,
    assuming each ADS                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

11



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | representing 100 H shares. Historical income per
    ADS for the year ended December 31, 2000 has been
    calculated by dividing the net profit by the weighted average
    number of 171,630 million shares issued and outstanding for
    the period presented, assuming each ADS representing 100 H
    shares. Historical income per ADS for the year ended
    December 31, 1999 has been calculated by dividing the net
    profit by the 160,000 million shares issued and outstanding
    upon the completion of the global offering of our H shares for
    the period presented, assuming each ADS representing 100 H
    shares.
|   
|(5) | Excludes capital expenditures for assets retained
    by CNPC of RMB 111 million in 1999. We did not incur such
    capital expenditures after 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(6) | Includes capital expenditures for assets retained
    by CNPC of RMB 111 million in 1999. We did not incur such
    capital expenditures after 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(7) | Includes contributions from CNPC for assets
    retained by CNPC of RMB 111 million in 1999. CNPC did not
    make such contributions for such assets after 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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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. The PRC government publishes the retail median
    guidance prices for gasoline and diesel based on the FOB
    Singapore, Rotterdam and New York gasoline and diesel
    trading prices. 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. We expect continued
    volatility and uncertainty in international prices for crude oil
    and refined products. Declines in crude oil prices may adversely
    affect our business, results of operations and financial
    condition, our capital expenditure plans and the value of our
    proved reserves.
|
| |  | 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 in China have
    decreased gradually and modestly since 2001 because the decrease
    in the crude oil reserves in our Daqing and Liaohe oil regions
    cannot 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 we plan to actively pursue business
    opportunities outside China to supplement our domestic
    resources, we cannot assure you 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 are not successful in locating
    sufficient alternative sources of crude oil supply, our results
    of operations and financial condition may be materially and
    adversely affected.                                                                                                                                                                                                                                                                            
|
| |  | 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.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Except 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 90% 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          
|
| |  | 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 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. While we continue to expand the sales of these
    products in the eastern and southern regions of China, we face
    strong competition from Sinopec. In addition, we incur
    relatively higher transportation costs for delivery of our
    refined products and chemical products to certain areas of these
    regions from our refineries and chemical plants in western and
    northern China. 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 constructing and renovating
    several natural gas pipelines and plan to construct and renovate
    other natural gas pipelines. In addition, we may, subject to
    obtaining requisite licenses from the relevant authority,
    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                                                                                                                                                                                    

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| |   |                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 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.                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Currently, the PRC government must approve the
    construction and major renovation of significant refining and
    petrochemical facilities as well as the construction of
    significant 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | 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 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  Qualitative
and Quantitative Disclosures About Market Risk.

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ITEM 4  INFORMATION ON THE
COMPANY




Introduction

History and Development on the
Company



| |                           
| | --------------------------
| | Overview of Our Operations

We 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 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, 2003, we
had total revenue of RMB 303,779 million
(US$36,703 million) and net income of
RMB 69,614 million (US$8,411 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, 2003, we had estimated proved reserves of
approximately 10,919.3 million barrels of crude oil and
approximately 41,069.2 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, 2003, we produced
773.7 million barrels of crude oil and 690.3 billion
cubic feet of natural gas for sale, representing an average
production of 2.1 million barrels of crude oil and
1.9 billion cubic feet of sales natural gas per day. In
2003, we sold 725.7 million barrels of crude oil and
651.0 billion cubic feet of natural gas. Approximately 73%
of the crude oil we sold in the year ended December 31,
2003 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
23 refineries located in eight provinces,
three autonomous regions and one municipality. In
2003, our refineries processed approximately 621.2 million
barrels of crude oil or an average of 1.7 million barrels
per day. In the year ended December 31, 2003, we produced
approximately 52.8 million tons of gasoline, diesel and
kerosene and sold approximately 58.3 million tons of these
products. In the year ended December 31, 2003,
approximately 86% of the crude oil processed in our refineries
was supplied by our exploration and production operations and
approximately 13% of the crude oil processed in our refineries
was imported. As of December 31, 2003, our retail
distribution network consisted of 11,873 service stations
that we own and operate, 317 service stations wholly owned
by CNPC or jointly owned by CNPC and third parties to which we
provide supervisory support and 3,041 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 a wide range of
basic and derivative petrochemical products and other chemical
products at 11 chemical plants located in
five provinces and three autonomous

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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 2003, our sales of natural
gas totaled 651.0 billion cubic feet, of which
543.4 billion cubic feet was sold through our natural gas
and pipeline segment. As of December 31, 2003, we owned and
operated regional natural gas pipeline networks consisting of
15,144 kilometers of pipelines, of which 14,017 kilometers were
operated by our natural gas and pipeline segment. As of
December 31, 2003, we owned and operated a crude oil
pipeline network consisting of 9,141 kilometers of pipelines
with an average daily throughput of approximately
2.1 million barrels of crude oil. As of December 31,
2003, we also had a refined product pipeline network consisting
of 2,276 kilometers of pipelines with an average daily
throughput of approximately 24,849 tons of refined products.

We plan to continue 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 connection with this
objective, we established PetroChina International Limited, a
wholly owned subsidiary, to focus on international oil and gas
exploration and development. In April 2002, we acquired Devon
Energy Indonesia Limited from Devon Energy Corporation for a
price of RMB 2,068 million (US$250 million).
Devon Energy Indonesia Limited holds interests in a number of
crude oil and natural gas exploration and production projects in
Indonesia, including a 30% interest in an oil and gas production
sharing contract relating to the Jabung block located in
Sumatra, Indonesia. In April 2003, we acquired a 50% equity
interest in Amerada Hess Indonesia Holdings Limited, which holds
a 30% interest in the oil and gas production sharing contract
relating to the Jabung block, for a price of RMB 679
million (US$82 million). We used loans and cash generated
by our operations to fund these acquisitions. In connection with
these acquisitions, we have entered into several take-or-pay
agreements with a number of Singaporian customers to supply them
with natural gas produced in Indonesia. In the year ended
December 31, 2003, our revenue generated from our acquired
interests in these crude oil and natural gas exploration and
production companies in Indonesia was RMB 925 million
(US$112 million). As a result of our acquisition of a 50%
interest in Amerada Hess Indonesia Holdings Co. in April 2003,
as of December 31, 2003, we had a share of the reserves of
approximately 15.6 million barrels of crude oil and
approximately 75.6 billion cubic feet of natural gas in the
Jabung block, totaling approximately 28.2 million
barrel-of-oil equivalent. In 2003, our share of the production
in the Jabung block in 2003 as a result of our acquisition of
Amerada Hess Indonesia Holdings Co. was approximately
1.2 million barrels of crude oil and approximately
1.0 billion cubic feet of natural gas for sale, totalling
approximately 1.4 million barrels-of-oil equivalent.

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

In the year ended December 31, 2003, we
imported approximately 123.9 million barrels of crude oil,
as compared to 72.3 million and 56.9 million barrels of
crude oil in the years ended December 31, 2002 and 2001,
respectively. We plan to continue to increase the import volume
of crude oil in the future.



| |                                                          
| | ---------------------------------------------------------
| | Our Corporate Organization and Shareholding
    Structure

PetroChina 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, liabilities and
interests 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

17



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provider of a wide range of services and
products. On April 7, 2000, PetroChina completed a global
offering of H shares and ADSs. Currently, CNPC owns an
approximate 90% interest in PetroChina.


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

(CNPC CORPORATE ORGANIZATION CHART)




|    |                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Indicates approximate shareholding.                                                                                                                                                                                                                               
|   
|(2) | Includes subsidiary companies and branches
    without legal person status.                                                                                                                                                                                       
|   
|(3) | Represents enterprises directly administered by
    such segment.                                                                                                                                                                                                 
|   
|(4) | Includes PetroChina Planning &
    Engineering Institute, PetroChina Exploration &
    Development Research Institute, PetroChina International
    Limited, PetroChina International Co., Ltd and PetroChina
    Refining & Chemicals Technology Research Center.

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The following chart illustrates our management
structure:

(CHART)






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

19



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General Information

Our legal name is
(PETROCHINA COMPANY LOGO), 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.

20



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21



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Exploration and Production

We are engaged in crude oil and natural gas
exploration, development and production in China. 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 49.6% of our proved crude oil reserves as of
December 31, 2003 and 51.0% of our crude oil production in
2003. 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 20.3% of our proved crude oil reserves as of
December 31, 2003 and 21.5% of our crude oil
production in 2003. Our proved natural gas reserves and
production are generally concentrated in northwestern and
southwestern China, specifically in the Erdos, Tarim and Sichuan
basins.

We currently hold exploration licenses covering a
total area of approximately 426 million acres and
production licenses covering a total area of approximately
14.6 million acres. In 2003, our exploration and production
segment had income from operations of
RMB 92,370 million (US$11,160 million).

To further develop the crude oil and natural gas
industry in China, the PRC government has adopted a new policy
which encourages each PRC petroleum company to conduct
exploration and development activities both onshore and
offshore. 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 activities. We
cannot assure you that we will obtain these licenses eventually
or that we will have sufficient capital to fund these activities.

Reserves

Our estimated proved reserves as of
December 31, 2003 totaled approximately
10,919.3 million barrels of crude oil and approximately
41,069.2 billion cubic feet of natural gas. As of
December 31, 2003, proved developed reserves accounted for
81.4% and 32.6% of our total proved crude oil and natural gas
reserves, respectively. Total proved hydrocarbon reserves on a
barrels-of-oil equivalent basis increased by 2.1% from
approximately 17,406.4 million barrels-of-oil equivalent as
of the end of 2002 to approximately 17,764.2 million
barrels-of-oil equivalent as of the end of 2003. Natural gas as
a percentage of total proved hydrocarbon reserves increased from
37.2% as of December 31, 2002 to 38.5% as of
December 31, 2003.

In addition, as a result of our acquisition of
50% interests in Amerada Hess Indonesia Holdings Co. in April
2003, which holds 30% interest in the Jabung block in Indonesia,
as of December 31, 2003, we had a share of the reserves of
approximately 15.6 million barrels of crude oil and
approximately 75.6 billion cubic feet of natural gas in the
Jabung block, totaling approximately 28.2 million
barrel-of-oil equivalent.

The following table sets forth our estimated
proved reserves and proved developed reserves of crude oil and
natural gas as of December 31, 2001, 2002 and 2003. We
prepared our reserve estimates as of December 31, 2001,
2002 and 2003 on the basis of a report prepared by DeGolyer and
MacNaughton, 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

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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, 2001              |                                 |                       | 10,959.1 |                |   |                    | 36,102.6 |          |   |  | 16,976.2 |         
|                                              | Revisions of previous estimates |                       |          | 348.6          |   |                    |          | (224.2   | ) |  |          | 311.3    |  
|                                              | Extensions and discoveries      |                       |          | 329.7          |   |                    |          | 3,539.5  |   |  |          | 919.6    |  
|                                              | Improved recovery               |                       |          | 30.6           |   |                    |          | 0        |   |  |          | 30.6     |  
|                                              | Purchased reserves              |                       |          | 38.7           |   |                    |          | 192.6    |   |  |          | 70.8     |  
|                                              | Production for the year         |                       |          | (769.8         | ) |                    |          | (793.8   | ) |  |          | (902.1   | )
|Reserves as of December 31, 2002              |                                 |                       | 10,937.0 |                |   |                    | 38,816.8 |          |   |  | 17,406.4 |         
|                                              | Revisions of previous estimates |                       |          | 199.2          |   |                    |          | 277.6    |   |  |          | 245.4    |  
|                                              | Extensions and discoveries      |                       |          | 475.7          |   |                    |          | 2,853.3  |   |  |          | 951.3    |  
|                                              | Improved recovery               |                       |          | 81.2           |   |                    |          | 0        |   |  |          | 81.2     |  
|                                              | Purchased reserves(2)           |                       |          | 0              |   |                    |          | 0        |   |  |          | 0        |  
|                                              | Production for the year(3)      |                       |          | (773.7         | ) |                    |          | (878.5   | ) |  |          | (920.1   | )
|Reserves as of December 31, 2003              |                                 |                       | 10,919.3 |                |   |                    | 41,069.2 |          |   |  | 17,764.2 |         
|Proved developed reserves                     |                                 |                       |          |                |   |                    |          |          |   |  |          |         
|                                              | As of December 31, 2001         |                       |          | 9,308.8        |   |                    |          | 12,945.6 |   |  |          | 11,466.4 |  
|                                              | As of December 31, 2002         |                       |          | 9,198.1        |   |                    |          | 11,921.2 |   |  |          | 11,185.0 |  
|                                              | As of December 31, 2003(4)      |                       |          | 8,884.8        |   |                    |          | 13,373.7 |   |  |          | 11,113.7 |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents natural gas remaining after field
    separation for condensate removal and reduction for flared gas.                                                                                                                                                                                                                                                                           
|   
|(2) | Excludes our share of the reserves of
    approximately 16.8 million barrels of crude oil and
    approximately 76.6 billion cubic feet of natural gas in the
    Jabung block in Indonesia, totaling approximately
    29.6 million barrel-of-oil equivalent, as a result of our
    acquisition of 50% interests in Amerada Hess Indonesia Holdings
    Co. in April 2003.               
|   
|(3) | Excludes our share of the production of
    approximately 1.2 million barrels of crude oil and
    approximately 1.0 billion cubic feet of natural gas in the
    Jabung block in Indonesia, totaling approximately
    1.4 million barrels-of-oil equivalent, as a result of our
    acquisition of 50% interests in Amerada Hess Indonesia Holdings
    Co. in April 2003.               
|   
|(4) | Excludes our share of the proved developed
    reserves of approximately 4.1 million barrels of crude oil
    and approximately 21.3 billion cubic feet of natural gas in
    the Jabung block in Indonesia, totaling approximately
    7.7 million barrel-of-oil equivalent, as a result of our
    acquisition of 50% interests in Amerada Hess Indonesia Holdings
    Co. in April 2003.

23



---



##### 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, 2001, 2002 and 2003.

|                   |       |                       |         |           |  |             |         |           |  |             |         |           |  |  |         |         |  |  |         |          |  |  |         |         | 
|------------------ | ----- | --------------------- | ------- | --------- |  | ----------- | ------- | --------- |  | ----------- | ------- | --------- |  |  | ------- | ------- |  |  | ------- | -------- |  |  | ------- | ------- | 
|                   |       |                      
|                   |       | As of December 31,   
|                   |       |                      
|                   |       |                       |         |           |  |            
|                   |       | 2001                  |         | 2002      |  | 2003       
|                   |       |                       |         |           |  |            
|                   |       | 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             |       |                       | 5,349.8 |           |  |             | 5,029.1 |           |  |             | 5,073.8 |           |  |  | 4,729.6 |         |  |  | 4,832.3 |          |  |  | 4,407.7 |        
|Liaohe             |       |                       | 1,217.3 |           |  |             | 1,027.4 |           |  |             | 1,227.0 |           |  |  | 1,007.5 |         |  |  | 1,168.5 |          |  |  | 965.0   |        
|Xinjiang           |       |                       | 1,089.9 |           |  |             | 854.4   |           |  |             | 1,102.2 |           |  |  | 912.5   |         |  |  | 1,186.9 |          |  |  | 930.9   |        
|Changqing          |       |                       | 821.8   |           |  |             | 576.9   |           |  |             | 885.7   |           |  |  | 623.1   |         |  |  | 1,063.6 |          |  |  | 706.9   |        
|Jilin              |       |                       | 527.0   |           |  |             | 371.7   |           |  |             | 585.8   |           |  |  | 377.2   |         |  |  | 585.9   |          |  |  | 367.0   |        
|Dagang             |       |                       | 447.2   |           |  |             | 331.9   |           |  |             | 458.4   |           |  |  | 364.9   |         |  |  | 452.1   |          |  |  | 361.0   |        
|Tarim              |       |                       | 495.0   |           |  |             | 298.8   |           |  |             | 522.0   |           |  |  | 342.6   |         |  |  | 553.9   |          |  |  | 342.2   |        
|Huabei             |       |                       | 483.3   |           |  |             | 345.9   |           |  |             | 494.2   |           |  |  | 350.8   |         |  |  | 486.1   |          |  |  | 335.8   |        
|Qinghai            |       |                       | 229.9   |           |  |             | 186.6   |           |  |             | 240.6   |           |  |  | 192.7   |         |  |  | 229.7   |          |  |  | 182.8   |        
|Tuha               |       |                       | 199.9   |           |  |             | 188.0   |           |  |             | 208.7   |           |  |  | 189.9   |         |  |  | 206.9   |          |  |  | 169.2   |        
|Sichuan            |       |                       | 5.7     |           |  |             | 5.7     |           |  |             | 5.5     |           |  |  | 5.5     |         |  |  | 7.1     |          |  |  | 3.9     |        
|Other regions(1)   |       |                       | 92.5    |           |  |             | 92.5    |           |  |             | 133.1   |           |  |  | 101.9   |         |  |  | 146.3   |          |  |  | 112.4   |        
|                   |       |                       |         |           |  |             |         |           |  |             |         |           |  |  |         |         |  |  |         |          |  |  |         |        
|                   | Total |                       |         | 10,959.1  |  |             |         | 9,308.8   |  |             |         | 10,937.0  |  |  |         | 9,198.1 |  |  |         | 10,919.3 |  |  |         | 8,884.8 | 
|                   |       |                       |         |           |  |             |         |           |  |             |         |           |  |  |         |         |  |  |         |          |  |  |         |        

|                        |       |                    |          |           |  |             |         |           |  |             |          |           |  |  |         |          |  |  |          |          |  |  |         |          | 
|----------------------- | ----- | ------------------ | -------- | --------- |  | ----------- | ------- | --------- |  | ----------- | -------- | --------- |  |  | ------- | -------- |  |  | -------- | -------- |  |  | ------- | -------- | 
|                        |       |                   
|                        |       | As of December 31,
|                        |       |                   
|                        |       |                    |          |           |  |            
|                        |       | 2001               |          | 2002      |  | 2003       
|                        |       |                    |          |           |  |            
|                        |       | Proved             |          |           |  | Proved      |         |           |  | Proved      |          |          
|                        |       | developed          |          |           |  | developed   |         |           |  | developed   |          |          
|                        |       | and                |          | Proved    |  | and         |         | Proved    |  | and         |          | Proved   
|                        |       | undeveloped        |          | developed |  | undeveloped |         | developed |  | undeveloped |          | developed
|                        |       |                    |          |           |  |             |         |           |  |             |          |          
|                        |       |                    |          |           |  | (Bcf)       |         |           |  |             |          |          
|Natural gas reserves(2) |       |                    |          |           |  |             |         |           |  |             |          |           |  |  |         |          |  |  |          |          |  |  |         |         
|Sichuan                 |       |                    | 7,074.1  |           |  |             | 4,814.8 |           |  |             | 7,461.7  |           |  |  | 4,040.6 |          |  |  | 8,131.4  |          |  |  | 4,522.4 |         
|Changqing               |       |                    | 10,256.6 |           |  |             | 2,864.3 |           |  |             | 11,222.6 |           |  |  | 2,719.5 |          |  |  | 12,976.3 |          |  |  | 3,847.6 |         
|Xinjiang                |       |                    | 1,584.8  |           |  |             | 1,293.5 |           |  |             | 1,707.3  |           |  |  | 1,036.1 |          |  |  | 1,698.7  |          |  |  | 1,084.3 |         
|Daqing                  |       |                    | 1,551.7  |           |  |             | 1,374.2 |           |  |             | 1,324.8  |           |  |  | 1,171.9 |          |  |  | 1,122.9  |          |  |  | 946.5   |         
|Qinghai                 |       |                    | 2,946.8  |           |  |             | 487.0   |           |  |             | 3,416.1  |           |  |  | 837.2   |          |  |  | 3,379.7  |          |  |  | 889.9   |         
|Tarim                   |       |                    | 10,158.1 |           |  |             | 531.1   |           |  |             | 11,026.0 |           |  |  | 591.2   |          |  |  | 11,086.6 |          |  |  | 528.7   |         
|Liaohe                  |       |                    | 697.6    |           |  |             | 623.9   |           |  |             | 606.6    |           |  |  | 530.5   |          |  |  | 571.8    |          |  |  | 507.5   |         
|Tuha                    |       |                    | 583.1    |           |  |             | 329.3   |           |  |             | 621.2    |           |  |  | 338.4   |          |  |  | 711.6    |          |  |  | 430.1   |         
|Huabei                  |       |                    | 366.8    |           |  |             | 229.6   |           |  |             | 395.8    |           |  |  | 237.5   |          |  |  | 386.0    |          |  |  | 227.3   |         
|Dagang                  |       |                    | 719.9    |           |  |             | 276.6   |           |  |             | 655.4    |           |  |  | 252.4   |          |  |  | 609.5    |          |  |  | 201.9   |         
|Jilin                   |       |                    | 151.3    |           |  |             | 109.5   |           |  |             | 174.3    |           |  |  | 109.9   |          |  |  | 191.9    |          |  |  | 134.4   |         
|Other regions(1)        |       |                    | 11.9     |           |  |             | 11.9    |           |  |             | 204.9    |           |  |  | 55.9    |          |  |  | 202.8    |          |  |  | 53.1    |         
|                        |       |                    |          |           |  |             |         |           |  |             |          |           |  |  |         |          |  |  |          |          |  |  |         |         
|                        | Total |                    |          | 36,102.6  |  |             |         | 12,945.6  |  |             |          | 38,816.8  |  |  |         | 11,921.2 |  |  |          | 41,069.2 |  |  |         | 13,373.7 | 
|                        |       |                    |          |           |  |             |         |           |  |             |          |           |  |  |         |          |  |  |          |          |  |  |         |         



---



|    |                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the Jidong and Yumen oil regions and
    our oil and gas fields in Indonesia as a result of our
    acquisition of Devon Energy Indonesia Limited in April 2002.
|   
|(2) | Represents natural gas remaining after field
    separation for condensate removal and reduction for flared gas.                                                           

24



---



##### 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. In September 2002, the State
Development Planning Commission, the predecessor of the State
Development and Reform Commission, approved our proposal to
explore, in cooperation with foreign companies, fifteen
additional crude oil and natural gas fields with an aggregate
area of 75,071 kilometers located in Qaiddam basin, Erdos basin,
Sichuan basin and Xinjiang basin. 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 worked for nearly five decades
to develop 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
|     |  |                                      |  |        |       |          |  |        |       |           |  |        |     |        |  |         |       |           |  |      
|2001 |  | Net exploratory wells
    drilled(2) |  |        | 84    |          |  |        | 71    |           |  |        | 63  |        |  |         | 127   |           |  |       | 68  |  |  |  | 44  |  |  |  | 37 |  |  |  | 169   |  |  |  | 663   | 
|     |  | Crude oil                            |  |        | 33    |          |  |        | 45    |           |  |        | 34  |        |  |         | 55    |           |  |       | 38  |  |  |  | 32  |  |  |  | 4  |  |  |  | 83    |  |  |  | 324   | 
|     |  | Natural gas                          |  |        | 2     |          |  |        | 13    |           |  |        | 0   |        |  |         | 18    |           |  |       | 3   |  |  |  | 0   |  |  |  | 14 |  |  |  | 5     |  |  |  | 55    | 
|     |  | Dry(3)                               |  |        | 49    |          |  |        | 13    |           |  |        | 29  |        |  |         | 54    |           |  |       | 27  |  |  |  | 12  |  |  |  | 19 |  |  |  | 81    |  |  |  | 284   | 
|     |  | Net development wells
    drilled(2) |  |        | 2,406 |          |  |        | 1,140 |           |  |        | 733 |        |  |         | 1,168 |           |  |       | 287 |  |  |  | 208 |  |  |  | 23 |  |  |  | 983   |  |  |  | 6,948 | 
|     |  | Crude oil                            |  |        | 2,392 |          |  |        | 1,130 |           |  |        | 722 |        |  |         | 1,140 |           |  |       | 275 |  |  |  | 204 |  |  |  | 8  |  |  |  | 964   |  |  |  | 6,835 | 
|     |  | Natural gas                          |  |        | 5     |          |  |        | 4     |           |  |        | 11  |        |  |         | 10    |           |  |       | 2   |  |  |  | 1   |  |  |  | 11 |  |  |  | 18    |  |  |  | 62    | 
|     |  | Dry(3)                               |  |        | 9     |          |  |        | 6     |           |  |        | 0   |        |  |         | 18    |           |  |       | 10  |  |  |  | 3   |  |  |  | 4  |  |  |  | 1     |  |  |  | 51    | 
|2002 |  | Net exploratory wells
    drilled(2) |  |        | 67    |          |  |        | 84    |           |  |        | 61  |        |  |         | 170   |           |  |       | 67  |  |  |  | 30  |  |  |  | 28 |  |  |  | 149   |  |  |  | 656   | 
|     |  | Crude oil                            |  |        | 27    |          |  |        | 63    |           |  |        | 28  |        |  |         | 69    |           |  |       | 28  |  |  |  | 21  |  |  |  | 4  |  |  |  | 60    |  |  |  | 300   | 
|     |  | Natural gas                          |  |        | 1     |          |  |        | 3     |           |  |        | 0   |        |  |         | 10    |           |  |       | 4   |  |  |  | 0   |  |  |  | 7  |  |  |  | 11    |  |  |  | 36    | 
|     |  | Dry(3)                               |  |        | 39    |          |  |        | 18    |           |  |        | 33  |        |  |         | 91    |           |  |       | 35  |  |  |  | 9   |  |  |  | 17 |  |  |  | 78    |  |  |  | 320   | 
|     |  | Net development wells
    drilled(2) |  |        | 1,988 |          |  |        | 1,247 |           |  |        | 603 |        |  |         | 1,285 |           |  |       | 246 |  |  |  | 212 |  |  |  | 40 |  |  |  | 955   |  |  |  | 6,576 | 
|     |  | Crude oil                            |  |        | 1,975 |          |  |        | 1,235 |           |  |        | 583 |        |  |         | 1,197 |           |  |       | 238 |  |  |  | 205 |  |  |  | 13 |  |  |  | 926   |  |  |  | 6,372 | 
|     |  | Natural gas                          |  |        | 6     |          |  |        | 7     |           |  |        | 20  |        |  |         | 55    |           |  |       | 2   |  |  |  | 3   |  |  |  | 25 |  |  |  | 22    |  |  |  | 140   | 
|     |  | Dry(3)                               |  |        | 7     |          |  |        | 5     |           |  |        | 0   |        |  |         | 33    |           |  |       | 6   |  |  |  | 4   |  |  |  | 2  |  |  |  | 7     |  |  |  | 64    | 
|2003 |  | Net exploratory wells
    drilled(2) |  |        | 291   |          |  |        | 170   |           |  |        | 103 |        |  |         | 371   |           |  |       | 82  |  |  |  | 46  |  |  |  | 25 |  |  |  | 287   |  |  |  | 1,375 | 
|     |  | Crude oil                            |  |        | 140   |          |  |        | 115   |           |  |        | 57  |        |  |         | 128   |           |  |       | 49  |  |  |  | 25  |  |  |  | 0  |  |  |  | 99    |  |  |  | 613   | 
|     |  | Natural gas                          |  |        | 1     |          |  |        | 11    |           |  |        | 2   |        |  |         | 22    |           |  |       | 0   |  |  |  | 0   |  |  |  | 12 |  |  |  | 5     |  |  |  | 53    | 
|     |  | Dry(3)                               |  |        | 150   |          |  |        | 44    |           |  |        | 44  |        |  |         | 221   |           |  |       | 33  |  |  |  | 21  |  |  |  | 13 |  |  |  | 183   |  |  |  | 709   | 
|     |  | Net development wells
    drilled(2) |  |        | 2,986 |          |  |        | 1,363 |           |  |        | 547 |        |  |         | 1,677 |           |  |       | 244 |  |  |  | 202 |  |  |  | 61 |  |  |  | 1,192 |  |  |  | 8,272 | 
|     |  | Crude oil                            |  |        | 2,975 |          |  |        | 1,354 |           |  |        | 528 |        |  |         | 1,489 |           |  |       | 241 |  |  |  | 199 |  |  |  | 8  |  |  |  | 1,173 |  |  |  | 7,967 | 
|     |  | Natural gas                          |  |        | 4     |          |  |        | 4     |           |  |        | 8   |        |  |         | 134   |           |  |       | 0   |  |  |  | 3   |  |  |  | 36 |  |  |  | 17    |  |  |  | 206   | 
|     |  | Dry(3)                               |  |        | 7     |          |  |        | 5     |           |  |        | 11  |        |  |         | 54    |           |  |       | 3   |  |  |  | 0   |  |  |  | 17 |  |  |  | 2     |  |  |  | 99    | 



---



|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(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.                                             

25



---



##### Table of Contents





| |           
| | ----------
| | Properties

The 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, 2003.

|                 |       |                                |        |             |  |             |       |             |  |           |       |             |  |  |       |         |  |  |       |         |  |  |         |         | 
|---------------- | ----- | ------------------------------ | ------ | ----------- |  | ----------- | ----- | ----------- |  | --------- | ----- | ----------- |  |  | ----- | ------- |  |  | ----- | ------- |  |  | ------- | ------- | 
|                 |       |                               
|                 |       | 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           |       |                                | 35,859 |             |  |             | 124   |             |  |           | 602.4 |             |  |  | 27.1  |         |  |  | 558.6 |         |  |  | 93.7    |        
|Liaohe           |       |                                | 16,089 |             |  |             | 592   |             |  |           | 161.6 |             |  |  | 27.7  |         |  |  | 118.6 |         |  |  | 12.9    |        
|Xinjiang         |       |                                | 13,415 |             |  |             | 64    |             |  |           | 286.9 |             |  |  | 34.2  |         |  |  | 68.6  |         |  |  | 12.9    |        
|Jilin            |       |                                | 11,380 |             |  |             | 35    |             |  |           | 259.2 |             |  |  | 19.6  |         |  |  | 238.3 |         |  |  | 25.3    |        
|Changqing        |       |                                | 8,804  |             |  |             | 456   |             |  |           | 230.5 |             |  |  | 578.1 |         |  |  | 356.6 |         |  |  | 2,002.1 |        
|Huabei           |       |                                | 4,652  |             |  |             | 67    |             |  |           | 94.4  |             |  |  | 9.5   |         |  |  | 105.7 |         |  |  | 6.6     |        
|Dagang           |       |                                | 3,024  |             |  |             | 49    |             |  |           | 81.5  |             |  |  | 14.8  |         |  |  | 87.0  |         |  |  | 23.7    |        
|Tuha             |       |                                | 1,084  |             |  |             | 22    |             |  |           | 31.5  |             |  |  | 7.9   |         |  |  | 18.1  |         |  |  | 16.0    |        
|Tarim            |       |                                | 502    |             |  |             | 86    |             |  |           | 90.3  |             |  |  | 69.9  |         |  |  | 47.3  |         |  |  | 91.8    |        
|Sichuan          |       |                                | 382    |             |  |             | 1,055 |             |  |           | 273.8 |             |  |  | 331.0 |         |  |  | 17.6  |         |  |  | 118.1   |        
|Other regions(2) |       |                                | 2,519  |             |  |             | 124   |             |  |           | 61.0  |             |  |  | 11.0  |         |  |  | 18.4  |         |  |  | 26.2    |        
|                 |       |                                |        |             |  |             |       |             |  |           |       |             |  |  |       |         |  |  |       |         |  |  |         |        
|                 | Total |                                |        | 97,710      |  |             |       | 2,674       |  |           |       | 2,173.1     |  |  |       | 1,130.8 |  |  |       | 1,634.8 |  |  |         | 2,429.3 | 
|                 |       |                                |        |             |  |             |       |             |  |           |       |             |  |  |       |         |  |  |       |         |  |  |         |        



---



|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                              

Approximately 75.6% of our proved crude oil
reserves are concentrated in the Daqing, Liaohe and Xinjiang oil
regions and the Changqing oil and gas region, and approximately
86.6% of our proved natural gas reserves are concentrated in the
Changqing oil and gas region, the Tarim oil region, the Sichuan
gas region and the Qinghai oil region. We believe that the
Erdos, Junggar, Tarim and Songliao basins and Bohai Bay have the
highest potential for increasing our crude oil reserve base
through future exploration and development, and that the Tarim,
Erdos, Sichuan and Qaiddam basins have the highest potential for
increasing our natural gas reserve base through future
exploration and development.

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, 2001, 2002 and 2003.

|                                                                              |  |                    |         |      |  |      |         |            |  |  |       |  |  |  |      |  
|----------------------------------------------------------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---------- |  |  | ----- |  |  |  | ---- | -
|                                                                              |  |                    |         |     
|                                                                              |  | For the year ended |         |     
|                                                                              |  | December 31,       |         |     
|                                                                              |  |                    |         | % of
|                                                                              |  | 2001               |         | 2002 |  | 2003 |         | 2003 total
|                                                                              |  |                    |         |      |  |      |         |           
|Crude oil production(1)                                                       |  |                    |         |      |  |      |         |            |  |  |       |  |  |  |      |  
|(thousands of barrels per day, except percentages
    or otherwise indicated) |  |                    |         |      |  |      |         |            |  |  |       |  |  |  |      |  
|Daqing                                                                        |  |                    | 1,048.4 |      |  |      | 1,020.5 |            |  |  | 985.3 |  |  |  | 46.5 | %
|Liaohe                                                                        |  |                    | 265.6   |      |  |      | 259.1   |            |  |  | 253.6 |  |  |  | 12.0 |  
|Xinjiang                                                                      |  |                    | 198.4   |      |  |      | 206.0   |            |  |  | 217.2 |  |  |  | 10.2 |  
|Changqing                                                                     |  |                    | 105.9   |      |  |      | 124.2   |            |  |  | 142.8 |  |  |  | 6.7  |  
|Tarim                                                                         |  |                    | 96.7    |      |  |      | 102.7   |            |  |  | 107.5 |  |  |  | 5.1  |  
|Huabei                                                                        |  |                    | 91.6    |      |  |      | 89.0    |            |  |  | 88.4  |  |  |  | 4.2  |  

26



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##### Table of Contents



|                                                                                |                  |                    |       |         |  |      |       |            |  |  |       |         |  |  |      |       |  
|------------------------------------------------------------------------------- | ---------------- | ------------------ | ----- | ------- |  | ---- | ----- | ---------- |  |  | ----- | ------- |  |  | ---- | ----- | -
|                                                                                |                  |                    |       |        
|                                                                                |                  | For the year ended |       |        
|                                                                                |                  | December 31,       |       |        
|                                                                                |                  |                    |       | % of   
|                                                                                |                  | 2001               |       | 2002    |  | 2003 |       | 2003 total
|                                                                                |                  |                    |       |         |  |      |       |           
|Jilin                                                                           |                  |                    | 82.3  |         |  |      | 90.4  |            |  |  | 96.7  |         |  |  | 4.5  |      
|Dagang                                                                          |                  |                    | 79.5  |         |  |      | 79.2  |            |  |  | 84.7  |         |  |  | 4.0  |      
|Tuha                                                                            |                  |                    | 55.0  |         |  |      | 54.1  |            |  |  | 50.7  |         |  |  | 2.4  |      
|Other(2)                                                                        |                  |                    | 68.3  |         |  |      | 83.8  |            |  |  | 92.9  |         |  |  | 4.4  |      
|                                                                                |                  |                    |       |         |  |      |       |            |  |  |       |         |  |  |      |      
|                                                                                | Total            |                    |       | 2,091.8 |  |      |       | 2,109.1    |  |  |       | 2,119.8 |  |  |      | 100.0 | %
|                                                                                |                  |                    |       |         |  |      |       |            |  |  |       |         |  |  |      |      
|Annual production (million barrels)                                             |                  |                    | 763.5 |         |  |      | 769.8 |            |  |  | 773.7 |         |  |  |      |      
|Average sales price                                                             |                  |                    |       |         |  |      |       |            |  |  |       |         |  |  |      |      
|                                                                                | (RMB per barrel) |                    |       | 195.37  |  |      |       | 186.08     |  |  |       | 225.2   |  |  |      |       |  
|                                                                                | (US$ per barrel) |                    |       | 23.61   |  |      |       | 22.48      |  |  |       | 27.2    |  |  |      |       |  
|Natural gas
    production(1)(3)                                                |                  |                    |       |         |  |      |       |            |  |  |       |         |  |  |      |      
|(millions of cubic feet per day, except
    percentages or otherwise indicated) |                  |                    |       |         |  |      |       |            |  |  |       |         |  |  |      |      
|Sichuan                                                                         |                  |                    | 774.6 |         |  |      | 808.2 |            |  |  | 849.0 |         |  |  | 44.9 |      
|Changqing                                                                       |                  |                    | 299.1 |         |  |      | 335.7 |            |  |  | 440.3 |         |  |  | 23.3 |      
|Daqing                                                                          |                  |                    | 137.4 |         |  |      | 137.7 |            |  |  | 136.2 |         |  |  | 7.2  |      
|Qinghai                                                                         |                  |                    | 45.9  |         |  |      | 92.3  |            |  |  | 122.5 |         |  |  | 6.5  |      
|Tuha                                                                            |                  |                    | 74.0  |         |  |      | 69.8  |            |  |  | 82.6  |         |  |  | 4.4  |      
|Xinjiang                                                                        |                  |                    | 51.2  |         |  |      | 53.3  |            |  |  | 75.9  |         |  |  | 4.0  |      
|Liaohe                                                                          |                  |                    | 64.8  |         |  |      | 56.0  |            |  |  | 57.6  |         |  |  | 3.0  |      
|Huabei                                                                          |                  |                    | 36.9  |         |  |      | 42.1  |            |  |  | 45.8  |         |  |  | 2.4  |      
|Tarim                                                                           |                  |                    | 20.6  |         |  |      | 24.6  |            |  |  | 34.7  |         |  |  | 1.8  |      
|Dagang                                                                          |                  |                    | 32.6  |         |  |      | 30.6  |            |  |  | 27.8  |         |  |  | 1.5  |      
|Other(4)                                                                        |                  |                    | 6.7   |         |  |      | 7.2   |            |  |  | 18.8  |         |  |  | 1.0  |      
|                                                                                |                  |                    |       |         |  |      |       |            |  |  |       |         |  |  |      |      
|                                                                                | Total            |                    |       | 1,543.7 |  |      |       | 1,657.5    |  |  |       | 1,891.2 |  |  |      | 100.0 | %
|                                                                                |                  |                    |       |         |  |      |       |            |  |  |       |         |  |  |      |      
|Annual production (Bcf)                                                         |                  |                    | 563.5 |         |  |      | 605.0 |            |  |  | 690.3 |         |  |  |      |      
|Average sales price                                                             |                  |                    |       |         |  |      |       |            |  |  |       |         |  |  |      |      
|                                                                                | (RMB per Mcf)    |                    |       | 18.41   |  |      |       | 19.20      |  |  |       | 19.37   |  |  |      |       |  
|                                                                                | (US$ per Mcf)    |                    |       | 2.22    |  |      |       | 2.32       |  |  |       | 2.34    |  |  |      |       |  



---



|    |                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Production volumes for each region include our
    share of the production from all of our cooperative projects
    with foreign companies in that region.                                                                                                       
|   
|(2) | Represents production from the Qinghai, Jidong
    and Yumen oil regions, the Sichuan gas region and our share of
    production from the oil and gas fields in Indonesia as a result
    of our acquisition of Devon Energy Indonesia Limited in
    April 2002.
|   
|(3) | Represents production of natural gas for sale.                                                                                                                                                                                                                   
|   
|(4) | Represents production from the Jilin, Jidong and
    Yumen oil regions and our share of production the oil and gas
    fields in Indonesia as a result of our acquisition of Devon
    Energy Indonesia Limited in April 2002.                                   

In 2003, we supplied approximately 73%, 15%, 4%
and 4% of our total crude oil sales to our refineries,
Sinopecs refineries, regional refineries controlled by
unrelated third parties in China and companies or entities
outside China, respectively. We entered into a crude oil mutual
supply framework agreement with Sinopec on February 26,
2004 for the supply of crude oil to each others

27



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##### Table of Contents



refineries in 2004. Under this agreement, we
agreed in principle to supply 84.6 million barrels to
89.8 million barrels of crude oil to Sinopec, and Sinopec
agreed in principle to supply to us approximately
7.9 million barrels of crude oil in 2004 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, 2001, 2002 and 2003, the average
lifting costs of our crude oil and natural production were
US$4.38 per barrel-of-oil equivalent, US$4.34 per barrel-of-oil
equivalent and US$4.39 per barrel-of-oil equivalent,
respectively.


Principal Oil and Gas Regions



| |                  
| | -----------------
| | Daqing Oil Region

The 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 has remained relatively stable for
the past 27 years. As of December 31, 2003, we
produced crude oil from 20 fields in the Daqing oil region.

As of December 31, 2003, our proved crude
oil reserves in the Daqing oil region were 4,832.3 million
barrels, representing 44.3% 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, 2001, 2002 and 2003, the proved crude oil
reserves in our Daqing oil region were 5,349.8 million
barrels, 5,073.8 million barrels and 4,832.3 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 2003, our oil fields
in the Daqing oil region produced an average of
985.3 thousand barrels of crude oil per day, representing
approximately 46.5% of our total daily crude oil production. The
crude oil production in our Daqing oil region decreased by 3.5%
from 372.5 million barrels in 2002 to 359.6 million
barrels in 2003. In 2003, the crude oil reserve-to-production
ratio of the Daqing oil region was 13.4 years, compared to
13.6 years in 2002.

The crude oil we produce in the Daqing oil region
has an average API gravity of 35.7 degrees. In 2003, the
crude oil we produced in the Daqing oil region had an average
water cut of 88.4%, increasing from 87.9% in 2002.

Because 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, lifting costs in
the Daqing oil region are relatively low among our oil regions.
Crude oil produced using enhanced recovery techniques accounted
for 18.5%, 22.6%, and 25.1% of our crude oil production
from the Daqing oil region in 2001, 2002 and 2003, 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 2.99% from US$3.68 per
barrel for the year ended December 31, 2002 to US$3.79 per
barrel for the year ended

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December 31, 2003. 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
900 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 2003, we refined approximately
64.1% of Daqing crude oil in our own refineries, exported
approximately 7.4% and sold the remaining portion to Sinopec or
local refineries.



| |                  
| | -----------------
| | Liaohe Oil Region

The Liaohe oil region is our second largest crude
oil producing property 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. The Liaohe oil region
is Chinas third largest oil region in terms of production
in 2003.

As of December 31, 2003, proved crude oil
reserves in the Liaohe oil region were 1,168.5 million
barrels, representing 10.7% of our total proved oil reserves. In
2003, our oil fields in the Liaohe oil region produced an
average of 253.6 thousand barrels of crude oil per day,
representing approximately 12.0% of our total daily crude oil
production. In 2003, the crude oil reserve-to-production ratio
in the Liaohe oil region was 12.6 years. In 2003, the crude
oil we produced in the Liaohe oil region had an average API
gravity of 26 degrees and an average water cut of 72.7%. We
have proved crude oil reserves in 36 fields in the Liaohe
oil region, including 37 fields 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
2003, we sold about approximately 77.8% of the crude oil we
produced at the Liaohe oil region to our own refineries.



| |                    
| | -------------------
| | Xinjiang Oil Region

The Xinjiang oil region 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 900,000 acres. As of
December 31, 2003, our proved crude oil reserves in the
Xinjiang oil region were 1,186.9 million barrels,
representing 10.9% of our total proved crude oil reserves. In
2003, our oil fields in the Xinjiang oil region produced an
average of 217.2 thousand barrels of crude oil per day,
representing approximately 10.2% of our total crude oil
production. In 2003, the crude oil reserve-to-production ratio
at the Xinjiang oil region was 15.0 years. In 2003, the

29



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##### Table of Contents



crude oil we produced in the Xinjiang oil region
had an average API gravity of 36.8 degrees and an average
water cut of 71.4%.




| |                   
| | ------------------
| | Sichuan Gas Region

The 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
26.2 years in 2003. As of December 31, 2003, we had
90 natural gas fields under development in the Sichuan gas
region.

As of December 31, 2003, our proved natural
gas reserves in the Sichuan gas region were 8,131.4 billion
cubic feet, representing 19.8% of our total proved natural gas
reserves and an increase of 9.0% from 7,461.7 billion cubic
feet as of December 31, 2002. In 2003, our natural gas
production for sale in the Sichuan gas region reached
309.9 billion cubic feet, representing 44.9% of our total
natural gas production and an increase of 5.1% from
295.0 billion cubic feet in 2002.

We have increased our efforts in developing
natural gas reserves in the Sichuan gas region in the past few
years. In 2002, we discovered and proved significant natural gas
reserves in Luojiazhai gas field in the Sichuan gas region. As
of December 31, 2003, Luojiazhai gas field had a total
proved natural gas reserve of 1,143.5 billion cubic feet.
Currently, Luojiazhai gas field is the largest gas field in the
Sichuan basin. In addition, 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. We intend to continue to increase our
natural gas reserves, annual natural gas production and revenues
in the Sichuan gas region by adopting advanced technologies.

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. 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 Region

The 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 2003, we produced
52.1 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 12,976.3 billion cubic feet as of December 31,
2003, representing 31.5% of our total proved natural gas
reserves. In January 2001, we discovered the Sugeli oil field
with total proved natural gas reserves of 2,500.2 billion
cubic feet. In 2003 we produced 160.7 billion cubic feet of
natural gas for sale in the Changqing oil and gas region,
representing an increase of 31.2% from 122.5 billion cubic
feet in 2002. 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 the seven years following the
establishment of the pipeline, we significantly increased daily
natural gas production for sale in the Changqing oil and gas
region. We are constructing an additional natural gas pipeline
from Shaanxi to Beijing and expect to complete the construction
of this pipeline in 2005. This pipeline is designed to have an
annual throughput capacity of 423.8 billion cubic feet of
natural gas upon its completion. See  Natural
Gas and Pipeline  Expansion of Our Natural Gas
Transmission and Marketing Business for a discussion of
the additional Shaanxi to Beijing natural gas pipeline project.

30



---



##### Table of Contents





| |                         
| | ------------------------
| | Tarim Oil and Gas Region

The Tarim oil and gas region is located in the
Tarim basin in northwestern China with a total area of
approximately 590,000 thousand acres. As of December 31,
2003, our proved crude oil reserves in the Tarim oil region were
553.9 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
6,321.9 billion cubic feet as of December 31, 2003. As
of December 31, 2003, the proved natural gas reserves in
the Tarim oil and gas region reached 11,086.6 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 2003, we produced 12.7 billion cubic feet
of natural gas for sale in the Tarim oil and gas region. We are
in the process of constructing 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
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.
We plan to significantly increase our natural gas production in
the Tarim oil and gas region after the commencement of the
operation of this West to East natural gas pipeline.

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##### Table of Contents





(MAP)

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##### Table of Contents






Refining and Marketing

We engage in refining and marketing operations in
China through 23 refineries and 19 regional sales and
distribution branch companies and one lubricants branch company.
These operations include crude oil refining and the
transportation, storage and marketing of refined products,
including gasoline, diesel, kerosene and lubricant, in
wholesale, retail and export markets. In 2003, our refining and
marketing segment had income from operations of
RMB 5,035 million (US$608 million).

The following sets forth the highlights of our
refining and marketing segment in 2003:



| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | as of December 31, 2003, our
    refineries annual primary distillation capacity totaled
    726.3 million barrels of crude oil per year, or
    1,989.9 thousand barrels per day;
|
| |  | we processed 621.2 million barrels of crude
    oil, or 1.7 million barrels per day;                                                                                               
|
| |  | we produced approximately 52.8 million tons
    of gasoline, diesel and kerosene and sold approximately
    58.3 million tons of these products;                                   
|
| |  | as of December 31, 2003, our retail
    distribution network consisted of:                                                                                                         



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 11,873 service stations owned and operated
    by us,                                                                                           
|
| |  | 317 service stations wholly owned by CNPC or
    jointly owned by CNPC and third parties and to which we provide
    supervisory support, and   
|
| |  | 3,041 franchise service stations owned and
    operated by third parties with which we have long-term refined
    product supply agreements; and



| |   |                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | in 2003, our service stations, which are located
    throughout China, sold approximately 22.3 million tons of
    gasoline and diesel, representing 39.4% of the total of these
    products sold through our marketing operations.

Refining

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



| |                 
| | ----------------
| | Refined Products

We produce a wide range of refined products at
our refineries. Some of our refined products are consumed
internally as feedstocks for our chemical operations. The table
below sets forth production volume for our principal refined
products for each of the three years ended December 31,
2001, 2002 and 2003.

|           |       |                         |          |          |  |      |          |          |  |  |          |          | 
|---------- | ----- | ----------------------- | -------- | -------- |  | ---- | -------- | -------- |  |  | -------- | -------- | 
|           |       |                        
|           |       | Year ended December 31,
|           |       |                        
|Product    |       | 2001                    |          | 2002     |  | 2003
|           |       |                         |          |          |  |     
|           |       |                        
|           |       | (in thousands of tons) 
|Diesel     |       |                         | 28,080.9 |          |  |      | 29,229.2 |          |  |  | 32,778.3 |         
|Gasoline   |       |                         | 16,563.4 |          |  |      | 16,646.4 |          |  |  | 18,255.4 |         
|Fuel oil   |       |                         | 6,582.2  |          |  |      | 6,176.8  |          |  |  | 4,546.1  |         
|Naphtha    |       |                         | 3,453.3  |          |  |      | 3,066.0  |          |  |  | 3,602.8  |         
|Asphalt    |       |                         | 1,406.8  |          |  |      | 1,653.5  |          |  |  | 1,870.5  |         
|Kerosene   |       |                         | 1,893.6  |          |  |      | 1,774.7  |          |  |  | 1,759.3  |         
|Lubricants |       |                         | 1,197.2  |          |  |      | 1,358.9  |          |  |  | 1,192.5  |         
|Paraffin   |       |                         | 857.6    |          |  |      | 856.4    |          |  |  | 984.9    |         
|           |       |                         |          |          |  |      |          |          |  |  |          |         
|           | Total |                         |          | 60,035.0 |  |      |          | 60,761.9 |  |  |          | 64,989.8 | 
|           |       |                         |          |          |  |      |          |          |  |  |          |         

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We generally adjust our product mix to reflect
market demand and to focus on the production of high margin
products. This has resulted in an overall modest increase in the
production of lighter refined products which generally are
higher margin products, such as gasoline. We have decreased our
production of low margin products, such as fuel oil.
Nevertheless, our production volume of lubricants, a high margin
product, decreased 12.2% from 1,358.9 thousand tons in 2002
to 1,192.5 thousand tons in 2003, due primarily to the
shutting down of inefficient lubricant production facilities in
Jilin Petrochemical and Dagang Petrochemical and the maintenance
of lubricant production facilities in Daqing Refinery and Daqing
Petrochemical.

In recent years, we have made significant capital
investments in facility expansions and upgrades to improve
product quality to meet evolving market demand and environmental
requirements in China. In each of the three years ended
December 31, 2001, 2002 and 2003, our capital expenditures
for our refining and marketing segment were
RMB 11,416 million, RMB 11,327 million, and
RMB 13,915 (US$1,681 million), respectively. These
capital expenditures were incurred primarily in connection with
our refining facility upgrades and expansion of our refined
product retail marketing network and storage infrastructure. In
addition, we have also focused on enhancing our processing
technologies and methods. These efforts have enabled us to
improve the quality of refined products at our refineries,
particularly that of gasoline and diesel. We believe that our
refined products generally meet product specification and
environmental protection requirements as set by the PRC
government, including the specification limiting the olefin and
sulfur content in gasoline.



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

Most of our refineries are strategically located
close to our crude oil storage facilities, along our crude oil
and refined product transmission pipelines and/or railways.
These systems provide our 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, 2001, 2002 and 2003, our exploration and
production operations supplied approximately 95%, 94% and 86%,
respectively, of the crude oil processed in our refineries.

The table below sets forth certain operating
statistics regarding our refineries as of December 31,
2001, 2002 and 2003.

|                                                               |       |                    |       |         |  |      |       |         |  |  |       |         | 
|-------------------------------------------------------------- | ----- | ------------------ | ----- | ------- |  | ---- | ----- | ------- |  |  | ----- | ------- | 
|                                                               |       |                   
|                                                               |       | As of December 31,
|                                                               |       |                   
|                                                               |       | 2001               |       | 2002    |  | 2003
|                                                               |       |                    |       |         |  |     
|Primary distillation
    capacity(1)(thousand barrels per day) |       |                    |       |         |  |      |       |         |  |  |       |        
|Lanzhou Petrochemical(2)                                       |       |                    | 151.8 |         |  |      | 151.8 |         |  |  | 222.7 |        
|Dalian Petrochemical                                           |       |                    | 178.1 |         |  |      | 212.6 |         |  |  | 212.6 |        
|Fushun Petrochemical                                           |       |                    | 162.0 |         |  |      | 162.0 |         |  |  | 162.0 |        
|Daqing Petrochemical                                           |       |                    | 121.5 |         |  |      | 121.5 |         |  |  | 121.5 |        
|Jinzhou Petrochemical(3)                                       |       |                    | 113.3 |         |  |      | 113.3 |         |  |  | 113.3 |        
|Jinxi Petrochemical                                            |       |                    | 111.3 |         |  |      | 111.3 |         |  |  | 111.3 |        
|Jilin Petrochemical(4)                                         |       |                    | 101.2 |         |  |      | 101.2 |         |  |  | 101.2 |        
|Urumqi Petrochemical                                           |       |                    | 101.2 |         |  |      | 101.2 |         |  |  | 101.2 |        
|Other refineries                                               |       |                    | 911.1 |         |  |      | 911.1 |         |  |  | 844.1 |        
|                                                               |       |                    |       |         |  |      |       |         |  |  |       |        
|                                                               | Total |                    |       | 1,951.5 |  |      |       | 1,986.0 |  |  |       | 1,989.9 | 
|                                                               |       |                    |       |         |  |      |       |         |  |  |       |        
|Refining throughput(thousand barrels per day)                  |       |                    |       |         |  |      |       |         |  |  |       |        
|Lanzhou Petrochemical(2)                                       |       |                    | 128.8 |         |  |      | 128.6 |         |  |  | 140.5 |        
|Dalian Petrochemical                                           |       |                    | 121.6 |         |  |      | 136.6 |         |  |  | 187.7 |        
|Fushun Petrochemical                                           |       |                    | 168.3 |         |  |      | 166.3 |         |  |  | 172.2 |        
|Daqing Petrochemical                                           |       |                    | 108.9 |         |  |      | 108.2 |         |  |  | 115.5 |        

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|                                      |       |                    |       |         |  |      |       |         |  |  |       |         | 
|------------------------------------- | ----- | ------------------ | ----- | ------- |  | ---- | ----- | ------- |  |  | ----- | ------- | 
|                                      |       |                   
|                                      |       | As of December 31,
|                                      |       |                   
|                                      |       | 2001               |       | 2002    |  | 2003
|                                      |       |                    |       |         |  |     
|Jinzhou Petrochemical(3)              |       |                    | 93.9  |         |  |      | 101.3 |         |  |  | 105.7 |        
|Jinxi Petrochemical                   |       |                    | 104.1 |         |  |      | 97.2  |         |  |  | 108.2 |        
|Jilin Petrochemical(4)                |       |                    | 87.9  |         |  |      | 92.3  |         |  |  | 114.6 |        
|Urumqi Petrochemical                  |       |                    | 71.7  |         |  |      | 71.7  |         |  |  | 72.7  |        
|Other refineries                      |       |                    | 667.9 |         |  |      | 656.7 |         |  |  | 685.0 |        
|                                      |       |                    |       |         |  |      |       |         |  |  |       |        
|                                      | Total |                    |       | 1,553.1 |  |      |       | 1,558.9 |  |  |       | 1,702.1 | 
|                                      |       |                    |       |         |  |      |       |         |  |  |       |        
|Conversion
    equivalent(5)(percent) |       |                    |       |         |  |      |       |         |  |  |       |        
|Lanzhou Petrochemical(2)              |       |                    | 31.3  |         |  |      | 31.3  |         |  |  | 41.9  |        
|Dalian Petrochemical                  |       |                    | 37.5  |         |  |      | 54.3  |         |  |  | 54.3  |        
|Fushun Petrochemical                  |       |                    | 78.6  |         |  |      | 66.9  |         |  |  | 70.7  |        
|Daqing Petrochemical                  |       |                    | 72.7  |         |  |      | 61.0  |         |  |  | 61.0  |        
|Jinzhou Petrochemical(3)              |       |                    | 63.4  |         |  |      | 62.5  |         |  |  | 72.7  |        
|Jinxi Petrochemical                   |       |                    | 69.1  |         |  |      | 67.3  |         |  |  | 70.9  |        
|Jilin Petrochemical(4)                |       |                    | 47.6  |         |  |      | 54.0  |         |  |  | 69.8  |        
|Urumqi Petrochemical                  |       |                    | 48.0  |         |  |      | 50.0  |         |  |  | 50.0  |        
|Average of other refineries           |       |                    | 43.9  |         |  |      | 43.7  |         |  |  | 39.5  |        



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 at our ongoing
    restructuring.                                                                                                                                                                                                                                                                           
|   
|(3) | Includes a 19.05% 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 67.29% equity interest in the
    relevant periods. Data regarding the primary distillation
    capacity, refining throughput and conversion equivalent of Jilin
    Petrochemical includes a 32.71% 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, 2001, 2002 and 2003, the average utilization
rate of the primary distillation capacity at our refineries was
80.3%, 79.1% and 85.6%, respectively. We plan to increase the
utilization rate of the primary distillation capacity at our
refineries by continuing shutting down inefficient refining
units and facilities. The average yield for our four principal
refined products (gasoline, kerosene, diesel and lubricants) at
our refineries was 62.2%, 63.7% and 64.2%, 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, 2001, 2002 and 2003,
the yield for all refined products at our refineries was 91.4%,
91.3% and 91.4%, respectively.

Dalian Petrochemical, Fushun Petrochemical,
Lanzhou Petrochemical and Daqing Petrochemical were our leading
refineries in terms of both primary distillation capacity and
throughput in 2003. 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. In October 2000,
Lanzhou Refinery was consolidated into Lanzhou Petrochemical as
part of our ongoing restructuring. 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 southwestern and central regions in China.
In 2002, we increased the primary distillation capacity at

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Dalian Petrochemical by 34.5 thousand barrels per
day. In 2002 and 2003, we increased the throughput of Dalian
Petrochemical by 15.0 thousand barrels per day and
51.1 thousand barrels per day, respectively. We expect its
throughput to continue to increase in the future. As of
December 31, 2003, these four refineries had an aggregate
primary distillation capacity of 262.4 million barrels per
year, or 718.8 thousand barrels per day, representing
approximately 36.1% of the total primary distillation capacity
of all our refineries as of the same date. In 2003, these four
refineries processed 224.8 million barrels of crude oil or
615.9 thousand barrels per day in the aggregate,
representing approximately 36.2% 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, 2003, our marketing
network consisted of:



| |   |                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | approximately 790 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                                                                                            
|
| |  | 11,873 service stations owned and operated
    by us, 317 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
    3,041 franchise service stations owned and operated by
    third parties.

In September 2002, we acquired from CNPC all of
the assets and liabilities of 686 refined products marketing
enterprises. These assets consist primarily of 2,994 service
stations and 478 storage facilities located in more than 500
counties in 15 provinces and autonomous regions in the PRC. We
believe that the addition of these service stations and storage
facilities has provided us with an important platform to further
expand and develop our refined product sales and distribution
network and develop our retail distribution channels.

In 2003, we sold approximately 56.6 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 those
customers at the ex-factory 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 2003, sales of gasoline and diesel
to these customers accounted for approximately 3% and 11% 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, 2001, 2002 and 2003.

|         |  |                         |          |         |  |         |          |  |  |  |          | 
|-------- |  | ----------------------- | -------- | ------- |  | ------- | -------- |  |  |  | -------- | 
|         |  |                        
|         |  | Year ended December 31,
|         |  |                        
|Product  |  | 2001(1)                 |          | 2002(1) |  | 2003(1)
|         |  |                         |          |         |  |        
|         |  |                        
|         |  | (in thousands of tons) 
|Diesel   |  |                         | 31,548.4 |         |  |         | 33,167.1 |  |  |  | 36,680.7 | 
|Gasoline |  |                         | 18,170.2 |         |  |         | 19,001.3 |  |  |  | 19,872.5 | 
|Fuel oil |  |                         | 4,785.0  |         |  |         | 4,327.8  |  |  |  | 5,748.7  | 
|Naphtha  |  |                         | 4,333.2  |         |  |         | 4,142.5  |  |  |  | 4,836.2  | 
|Kerosene |  |                         | 1,931.7  |         |  |         | 1,884.5  |  |  |  | 1,789.1  | 

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|           |       |                         |         |          |  |         |         |          |  |  |         |          | 
|---------- | ----- | ----------------------- | ------- | -------- |  | ------- | ------- | -------- |  |  | ------- | -------- | 
|           |       |                        
|           |       | Year ended December 31,
|           |       |                        
|Product    |       | 2001(1)                 |         | 2002(1)  |  | 2003(1)
|           |       |                         |         |          |  |        
|           |       |                        
|           |       | (in thousands of tons) 
|Lubricants |       |                         | 1,979.4 |          |  |         | 1,997.0 |          |  |  | 1,774.5 |         
|Asphalt    |       |                         | 921.9   |          |  |         | 1,344.0 |          |  |  | 1,711.3 |         
|Paraffin   |       |                         | 806.5   |          |  |         | 868.7   |          |  |  | 1,055.5 |         
|           |       |                         |         |          |  |         |         |          |  |  |         |         
|           | Total |                         |         | 64,476.3 |  |         |         | 66,732.9 |  |  |         | 73,468.5 | 
|           |       |                         |         |          |  |         |         |          |  |  |         |         



---



|    |                                                                                                 
|--- | ------------------------------------------------------------------------------------------------
|(1) | Includes sales volume of the 2,994 service
    stations we acquired from CNPC in September 2002.



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

We sell refined products both directly and
through independent distributors into various wholesale markets,
as well as the utility, commercial, petrochemical, aviation,
agricultural, fishery and transportation companies in China. We
sold approximately 56.6 million tons of gasoline and diesel
through our wholesale operations in 2003, including transfers to
our retail operations. We sold approximately 2.9 million
tons of gasoline and diesel through our wholesale operations to
Sinopec in 2003, representing approximately 5.1% of our total
sales of these products in the same period. In 2003, we sold
approximately 16.9 million tons of our other principal
refined products.

Until 1998, the refined product distribution
system in China was divided on a geographic basis into
provincial, municipal and county levels. Our wholesale
distribution system was established on the basis of this
three-tier system. As a result, our wholesale distribution
structure created inefficiencies in our marketing operations. In
addition, the unnecessary distribution layers increased
distribution costs. As part of the restructuring of the CNPC
group in 1999, we completed the implementation of a plan to
consolidate our wholesale operations and reduce distribution
layers and the number of wholesale outlets. In 2001, we
completed a series of initiatives to change the business scope,
adjust business functions or shut down operations in respect of
558 county level outlets. In addition, we merged 18 municipal
level outlets in 2001. In 2002, we continued these initiatives
by integrating our markets in Shandong Province and Anhui
Province, enhancing our logistics system and shutting down a
number of inefficient oil storage facilities. In 2003, we
further consolidated our wholesale operations. We expect that
the implementation of this plan will continue to increase the
overall efficiency of our marketing operations.



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

In 2003, we sold approximately 22.3 million
tons of gasoline and diesel through our service station network,
accounting for 39.4% of the total of these products sold through
our marketing operations in the same period. Average daily sales
volumes of gasoline and diesel at our service station network
were approximately 3.6 tons, 3.9 tons and 4.0 tons per
service station for the years ended December 31, 2001,
2002, and 2003, respectively, although these numbers vary
significantly by geographic region. The weighted average sales
volume of gasoline and diesel per business day at our service
station network in 2003 was 4.9 tons per service station.

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 operate a majority of our service stations
under the tradename of PetroChina. We are still in
the process of gradually converting the tradename of the
existing service stations in our service station network from
CNPC to PetroChina. We intend to use
PetroChina as the tradename for the service stations
to be acquired or constructed by us in the future.

37



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##### Table of Contents



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, in 2001, we
commenced negotiations with BP Amoco p.l.c. with the purposes of
establishing a Sino-foreign equity joint venture to engage in
the development and operation of service stations in Guangdong
Province. 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.

We invested a total of
RMB 7,380 million in expanding our service station
network in 2003, of which 47.6% was invested in the eastern and
southern regions of China. In 2003, we sold approximately
9,915.9 thousand tons of gasoline and diesel through our
owned and franchised service stations in those regions, as
compared to approximately 6,630 thousand tons and 8,280 thousand
tons we sold in 2001 and 2002, respectively.

In 2003, we acquired or constructed an aggregate
of 1,200 service stations that are owned and operated by
us, of which 463 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
currently plan to invest approximately RMB 11,000 million
for the period between 2004 to 2005 to expand our service
station network by way of acquisition, joint venture, new
construction and franchising from or with CNPC or other third
parties. We currently intend to add approximately 5,500 new
service stations, including approximately 1,100 franchised
service stations, into our service station network between 2004
to 2005.

The following table sets forth the number of the
service stations in our marketing network as of
December 31, 2003:

|                                                                       |       |  |        |        | 
|---------------------------------------------------------------------- | ----- |  | ------ | ------ | 
|Owned and operated by us(1)                                            |       |  | 11,873 |       
|Wholly owned by CNPC or jointly owned by CNPC and
    third parties(2) |       |  | 317    |       
|Franchised                                                             |       |  | 3,041  |       
|                                                                       |       |  |        |       
|                                                                       | Total |  |        | 15,231 | 
|                                                                       |       |  |        |       



---



|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 377 service stations operated by
    the joint venture established by BP Amoco p.l.c. and us.                                                     
|   
|(2) | These service stations exclusively sell refined
    products produced or supplied by us. We also provide supervisory
    support to these service stations.

In order to improve the efficiency and
profitability of our existing service station network, we
standardize the interior and exterior of our service stations,
our service procedures, staff uniforms and the product quality
of all our service stations. We are in the process of promoting
the use of pre-paid gasoline/ diesel filling cards at our
service stations. We have equipped 422 service stations
located in 13 municipalities with facilities that allow
customers to purchase gasoline or diesel with their pre-paid
filling cards. In addition to selling gasoline and diesel, we
have gradually increased the sale of lubricants and other
non-fuel products at our service stations.

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(MAP)

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##### Table of Contents






Chemicals and Marketing

Through 11 chemical plants, we produce basic
petrochemical products, derivative petrochemical products, and
other chemical products. In 2003, our chemicals and marketing
segment had income from operations of RMB 1,041 million
(US$126 million).

Our chemical plants are located in
five 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 natural gas 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, 2001, 2002 and 2003.

|                          |                  |                                 |  |         |         |      |  |         |         |  |  |         |         | 
|------------------------- | ---------------- | ------------------------------- |  | ------- | ------- | ---- |  | ------- | ------- |  |  | ------- | ------- | 
|                          |                  |                                
|                          |                  | Year ended December 31,        
|                          |                  |                                
|                          |                  | 2001                            |  | 2002    |         | 2003
|                          |                  |                                 |  |         |         |     
|                          |                  |                                
|                          |                  | (in thousands of tons)         
|Basic petrochemicals      |                  |                                 |  |         |         |      |  |         |         |  |  |        
|                          | Propylene        |                                 |  | 1,177.4 |         |      |  | 1,523.9 |         |  |  | 1,833.7 |        
|                          | Ethylene         |                                 |  | 1,571.2 |         |      |  | 1,582.0 |         |  |  | 1,817.9 |        
|                          | Benzene          |                                 |  | 215.7   |         |      |  | 558.7   |         |  |  | 683.8   |        
|Derivative petrochemicals |                  |                                 |  |         |         |      |  |         |         |  |  |        
|                          | Synthetic resin  |                                 |  |         |         |      |  |         |         |  |  |         |        
|                          |                  | Polyethylene                    |  |         | 1,028.5 |      |  |         | 1,014.4 |  |  |         | 1,208.0 | 
|                          |                  | Polypropylene                   |  |         | 622.4   |      |  |         | 759.0   |  |  |         | 917.1   | 
|                          |                  | ABS                             |  |         | 201.5   |      |  |         | 166.7   |  |  |         | 208.7   | 
|                          |                  | Other synthetic resin products  |  |         | 224.6   |      |  |         | 27.3    |  |  |         | 35.1    | 
|                          | Synthetic fiber  |                                 |  |         |         |      |  |         |         |  |  |         |        
|                          |                  | Terylene fiber                  |  |         | 177.5   |      |  |         | 173.0   |  |  |         | 116.6   | 
|                          |                  | Polyacrylic fiber               |  |         | 81.2    |      |  |         | 78.6    |  |  |         | 83.7    | 
|                          |                  | Other synthetic fiber products  |  |         | 70.2    |      |  |         | 15.5    |  |  |         | 11.4    | 
|                          | Synthetic rubber |                                 |  |         |         |      |  |         |         |  |  |         |        
|                          |                  | Butadiene styrene rubber        |  |         | 128.0   |      |  |         | 134.9   |  |  |         | 147.3   | 
|                          |                  | Other synthetic rubber products |  |         | 115.0   |      |  |         | 79.1    |  |  |         | 98.8    | 
|                          | Intermediates    |                                 |  |         |         |      |  |         |         |  |  |         |        
|                          |                  | Alkylbenzene                    |  |         | 130.0   |      |  |         | 175.3   |  |  |         | 204.7   | 
|Other chemicals           |                  |                                 |  |         |         |      |  |         |         |  |  |        
|                          | Urea             |                                 |  | 3,068.1 |         |      |  | 3,411.2 |         |  |  | 3,579.6 |        
|                          | Ammonium nitrate |                                 |  | 129.2   |         |      |  | 143.2   |         |  |  | 46.5    |        

We are one of the major producers of ethylene in
China. We use the bulk of the ethylene we produce as a principal
feedstock for the production of many chemical products, such as
polyethylene. In 2001, we implemented a five-year plan to invest
RMB 10,000 million (US$1,208 million) to upgrade our
ethylene production facilities at Daqing Petrochemical, Jilin

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Petrochemical, Fushun Petrochemical, Liaoyang
Petrochemical, Dushanzi Petrochemical and Lanzhou Petrochemical.
Once these upgrade projects are completed, we expect our total
annual ethylene production capacity to reach 1,850 thousand tons
by the end of 2005. As of December 31, 2003, we had
invested approximately RMB 3,537 million
(US$427 million) for these upgrade projects. As of
December 31, 2003, we had a total ethylene production
capacity of 1,730 thousand tons per year, as compared
to 1,655 thousand tons of ethylene production capacity
as of December 31, 2002. In 2003, the production volume of
ethylene increased 14.9% to 1,817.9 thousand tons from
1,582.0 thousand tons in 2002 as a result of the upgrade of
our ethylene production facilities.


In 2003, the monthly average capacity utilization
rate at our ethylene production facilities was 105.1%. 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. After we implemented a series of measures in
2002 and 2003 to reduce energy consumption, the average energy
consumption of our ethylene production facilities decreased from
817.2 kilograms of standard oil per ton in 2001 to 794.6
kilograms in 2002 and to 754.1 kilograms in 2003. However,
this is still 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 relative 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 two 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 1.04% in
2001 to 0.83% in 2002 and to 0.57% in 2003. We believe that
these measures will enable us to continue to 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, 2003, our production capacities for
polyethylene, polypropylene and ABS were 1,194.5 thousand
tons, 913.5 thousand tons and 220 thousand tons,
respectively. In 2003, we produced 1,208.0 thousand tons,
917.1 thousand tons and 208.7 thousand tons of
polyethylene, polypropylene and ABS, respectively. Currently,
China imports significant volumes of these products to meet the
domestic demand due to an inadequate supply of high-quality
domestically produced polyethylene, polypropylene and ABS. We
intend to increase the production, and improve the quality, of
these products. We are currently building new production
facilities with new technology for the production of these
products in Daqing Petrochemical Company, Daqing Refining and
Chemical Company, Lanzhou Petrochemical Company and other branch
companies. The production volume of ABS decreased 17% from 201.5
thousand tons in 2001 to 166.7 thousand tons in 2002. This
decrease was due primarily to the termination of the lease for a
major ABS production line at Daqing Petrochemical Company in
2002. Since then, we have implemented a number of measures to
upgrade our ABS production facilities at our petrochemical
companies in order to replace the lost ABS production capacity
at Daqing Petrochemical Company. In 2003, Jilin Petrochemical
Company increased its ABS production capacity to
170.0 thousand tons per year by upgrading its ABS
production facilities. Primarily as a result of this, the
production volume of ABC increased 25.2% to 208.7 thousand tons
in 2003.

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.

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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, 2001, 2002 and 2003.

|                          |                  |                          |  |         |         |      |  |         |         |  |  |         |         | 
|------------------------- | ---------------- | ------------------------ |  | ------- | ------- | ---- |  | ------- | ------- |  |  | ------- | ------- | 
|                          |                  |                         
|                          |                  | Year ended December 31, 
|                          |                  |                         
|Product                   |                  | 2001                     |  | 2002    |         | 2003
|                          |                  |                          |  |         |         |     
|                          |                  |                         
|                          |                  | (in thousands of tons)  
|Derivative petrochemicals |                  |                          |  |         |         |      |  |         |         |  |  |        
|                          | Synthetic resin  |                          |  |         |         |      |  |         |         |  |  |         |        
|                          |                  | Polyolefin Polyethylene  |  |         | 1,016.2 |      |  |         | 1,008.3 |  |  |         | 1,205.0 | 
|                          |                  | Polypropylene            |  |         | 597.8   |      |  |         | 589.2   |  |  |         | 717.2   | 
|                          |                  | ABS                      |  |         | 174.5   |      |  |         | 210.5   |  |  |         | 204.5   | 
|                          | Synthetic fiber  |                          |  |         |         |      |  |         |         |  |  |         |        
|                          |                  | Terylene fiber           |  |         | 183.4   |      |  |         | 172.2   |  |  |         | 132.9   | 
|                          |                  | Polyacrylic fiber        |  |         | 105.6   |      |  |         | 84.9    |  |  |         | 81.2    | 
|                          | Synthetic rubber |                          |  |         |         |      |  |         |         |  |  |         |        
|                          |                  | Butadiene styrene rubber |  |         | 128.5   |      |  |         | 136.5   |  |  |         | 144.7   | 
|                          | Intermediates    |                          |  |         |         |      |  |         |         |  |  |         |        
|                          |                  | Alkylbenzene             |  |         | 115.8   |      |  |         | 135.3   |  |  |         | 110.1   | 
|Other chemicals           |                  |                          |  |         |         |      |  |         |         |  |  |        
|                          | Urea             |                          |  | 3,419.7 |         |      |  | 2,967.5 |         |  |  | 3,766.8 |        
|                          | Ammonium nitrate |                          |  | 168.1   |         |      |  | 145.5   |         |  |  | 51.1    |        

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Natural Gas and Pipeline

We are Chinas largest natural gas
transporter and seller in terms of sales volume, with revenues
of RMB 15,067 million (US$1,820 million) and total
sales volume of 651.0 billion cubic feet in 2003, of which
543.4 billion cubic feet was sold by our natural gas and
pipeline segment. In 2003, our natural gas and pipeline segment
had income from operations of RMB 1,922 million
(US$232 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, 2001, 2002 and
2003 and the volume of natural gas sold by us in each of the
three years ended December 31, 2001, 2002 and 2003.

|                                                                         |  |                           |        |      |  |      |        |  |  |  |        | 
|------------------------------------------------------------------------ |  | ------------------------- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                                                                         |  |                          
|                                                                         |  | As of December 31 or year
|                                                                         |  | ended December 31,       
|                                                                         |  |                          
|                                                                         |  | 2001                      |        | 2002 |  | 2003
|                                                                         |  |                           |        |      |  |     
|Length of natural gas pipelines used by our
    natural gas segment (km) |  |                           | 11,826 |      |  |      | 12,299 |  |  |  | 14,017 | 
|Total length of natural gas pipelines (km)                               |  |                           | 12,918 |      |  |      | 13,391 |  |  |  | 15,144 | 
|Volume of natural gas sold by our natural gas
    segment (Bcf)          |  |                           | 442.2  |      |  |      | 486.3  |  |  |  | 543.4  | 
|Total volume of natural gas
    sold(1)(Bcf)                             |  |                           | 529.8  |      |  |      | 588.4  |  |  |  | 651.0  | 



---



|    |                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the aggregate volume of natural gas
    sold by our natural gas and pipeline segment and our exploration
    and production segment, including the sales to our natural gas
    and pipeline segment by our exploration and production segment.

Currently, natural gas consumption in China
represents 2.5% of Chinas total primary energy
consumption. The PRC government has forecast that natural gas
consumption in China will represent 7.9% of Chinas total
primary energy consumption in 2010. We believe this growth will
provide us with the opportunity to expand our natural gas
business.

In addition, we also conduct the operation of
crude oil and refined product transmission and storage
infrastructure in the natural gas and pipeline segment.

Our Principal Markets for Natural
Gas

In 2003, 56.9%, 21.0%, 18.4%, 3.5% and 0.2% of
our natural gas sales were to the southwestern, northern,
northwestern, northeastern and eastern regions of the PRC,
respectively.

Currently, Sichuan Province and Chongqing
Municipality in southwest China are two of our principal markets
for natural gas. We sold 276.2 billion cubic feet of
natural gas to Sichuan Province and Chongqing Municipality in
2003, as compared to 262.6 billion cubic feet in 2002,
representing approximately 42.4% of our total natural gas sales
in 2003. We supply natural gas to Sichuan Province and Chongqing
Municipality from our exploration and production operations in
the Sichuan oil region. Our natural gas pipelines in these areas
are well developed, consisting of a natural gas transmission
network with a total length of approximately
6,469 kilometers. As these areas lack adequate supply of
alternative energy resources, such as coal, we believe that we
can further expand our natural gas sales as energy demand
increases in these areas.

Beijing Municipality, Tianjin Municipality, Hebei
Province and Shandong Province in northern China have high
energy consumption levels. These areas are also important
markets for our natural gas transmission and marketing business.
We sold an aggregate of 122.2 billion cubic feet of natural
gas to these areas in 2003, as compared to 97.7 billion
cubic feet in 2002. Our natural gas sales to Beijing
Municipality increased 18.2% from 70.3 billion cubic feet
in 2002 to 83.1 billion cubic feet in 2003. We supply
natural gas to Beijing Municipality, Tianjin Municipality and
Hebei Province primarily from the Changqing oil region through
the Shaanxi to Beijing natural gas pipeline, which is one of

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our natural gas trunk pipelines, and from the
Huabei and Dagang oil regions. Currently, we have
1,797 kilometers of natural gas pipelines in these areas.


Henan Province, Anhui Province, Shanghai
Municipality and other provinces and cities in the Yangtze River
Delta, Wuhan City and other regions in Hubei Province, Hunan
Province, Lanzhou City and other areas in Gansu Province,
Qinghai Province and Shanxi Province are also natural gas
markets we are developing. We have commenced the construction of
several pipelines linking our natural gas fields to those
regions. We believe that upon completion of the construction of
those pipelines, we will be able to increase our market share in
those regions.

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 14 municipalities and enterprises in Qinghai
Province, Gangsu Province, Shanxi Province and Tianjin
Municipality, 27 municipalities and enterprises in Hubei
Province and Hunan Province, seven municipalities in
Shandong Province and 25 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-factory 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.

In 2003, we sold 461.3 billion cubic feet,
or 84.9% of the natural gas sales volume of our natural gas and
pipeline segment, to customers not subject to the
government-formulated guidance supply plan, such as commercial
end users and municipal utilities, representing a 14.9% increase
over 2002. We believe that sales volume of our natural gas to
customers not subject to the government-formulated guidance
supply plan as a percentage of our total sales will continue to
increase. See  Regulatory Matters 
Pricing  Natural Gas for a discussion of the
government-formulated guidance supply plan.

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 impact 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, 2003, our natural gas and
pipeline segment owned and operated approximately 14,017
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 southwestern and northern China. 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

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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 September 2001, we completed the construction
of a natural gas pipeline from Sebei, Qinghai Province, to
Xining City, Qinghai Province and Lanzhou City, Gansu Province,
of which the total length of the main line is approximately
930 kilometers. The capital investment for this project was
RMB 2,220 million, which was funded by cash generated by
our operations.

In March 2002, we completed the construction, and
commenced the operation, of a natural gas pipeline from Cangzhou
City to Zibo City with a total length of 213.5 kilometers. We
own a 70% interest in this project. An unrelated natural gas
company in Shandong Province holds the remaining interest in
this project.

In 2003, we continued our efforts in expanding
our natural gas transmission and marketing business. We are
currently in the process of constructing the West to East
natural gas pipeline and the Zhong Country to Wuhan City natural
gas pipeline.

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 expected to be approximately 3,800
kilometers. In December 2001, the State Development Planning
Commission, the predecessor of the National Development and
Reform Commission, approved the feasibility study report for the
West to East natural gas pipeline project. As of
December 31, 2003, we had invested RMB 21,324 million
in this project, accounting for 46% of the total expected
investment of the project. We have completed the construction of
the eastern part of the pipeline from Jingbian to Shanghai
Municipality and commenced trial operation in October 2003. The
total length of the main line for the eastern part is
1,483.7 kilometers. We are accelerating the construction of
the western part of the pipeline and expect to commence the
operation of the western part from Lunnan to Jingbian in January
2005. As of May 31, 2004, we had entered into take-or-pay
contracts with 25 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.

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. As of May 31, 2004, we had
entered into take-or-pay contracts with 27 municipalities and
enterprises in Hubei Province and Hunan Province to supply them
with natural gas to be transmitted through this pipeline.

In addition, we are in the process of
constructing an additional natural gas pipeline from Shaanxi to
Beijing Municipality with a total length of 860 kilometers. This
second line of the Shaanxi to Beijing natural gas pipeline will
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. We have completed
the preliminary design of the pipeline and commenced the
construction of controlling engineering projects.

We plan to develop certain of our natural gas
pipeline and storage projects, including the West to East
natural gas pipeline project, jointly with foreign natural gas
companies to attract foreign capital and learn advanced
technologies and management skills from them. We believe that
these projects will assist us in developing our existing natural
gas resources and expanding our natural gas markets.

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On July 4, 2002, we, Sinopec and an
international investment consortium, which consists of six
multinational energy companies including Shell International Gas
Limited, OAO Gazprom and ExxonMobil China Gas Pipeline Limited,
entered into a West to East Joint Venture Framework Agreement.
This agreement contemplates a number of structural and operation
principles relating to the West to East project.

Currently, we are not conducting substantive
negotiations with the international investment consortium and
Sinopec relating to the establishment of the joint venture, nor
do we have a timetable for the establishment of the joint
venture.

Crude Oil and Refined Product Transportation
and Storage Infrastructure

In order to improve management effectiveness,
operating efficiency and safety of our crude oil and refined
product transportation and storage businesses, we transferred
the pipeline operations and some storage infrastructure related
to the pipeline operations for our crude oil and refined
products from the refining and marketing segment to the natural
gas segment in January 2001, which was then renamed the natural
gas and pipeline segment. See Item 5 
Operating and Financial Review and Prospects 
General  Overview.

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.

As of December 31, 2003, our crude oil
transportation and storage infrastructure consisted of:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | 9,141 kilometers of crude oil pipelines with an
    average daily throughput of approximately 2.1 million
    barrels; and
|
| |  | crude oil storage facilities with an aggregate
    storage capacity of approximately 14.8 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 2003, approximately 65.8% of our crude oil
production was delivered to our 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 our ability to deliver crude oil due to pipeline
capacity constraints.

Our transportation and storage infrastructure
also includes:



| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | 2,276 kilometers of refined product pipelines
    with an average daily throughput of approximately
    24,849 tons; and
|
| |  | refined product storage facilities with a total
    storage capacity of approximately 15.9 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.

In October 2002, we completed the construction,
and commenced the operation, of a refined product pipeline from
Lanzhou, Gansu Province, to Chengdu, Sichuan Province and
Chongqing Municipality. This pipeline connects Lanzhou
Petrochemical Company directly with the southwestern

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region of China. In this region, there is a lack
of crude oil resources and refining capacity, which has resulted
in the demand for refined products significantly exceeding
supply. This pipeline has a total length of 1,250 kilometers and
a throughput capacity of five million tons of refined products
per year. Currently, this pipeline is the longest refined
product pipeline in China.


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 technologies that are suitable for diverse
geological conditions in China will enable us to maintain our
dominant position in discovering and acquiring desirable crude
oil and natural gas prospects in China.

Refining and Marketing and Chemicals and
Marketing Operations

We compete directly 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 markets. 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.

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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 and the
northwestern regions of China, our existing principal markets
for natural gas. Currently, Sinopec has natural gas fields in
Sichuan Province and sells natural gas to users in that
province. We, therefore, have limited competition from Sinopec
in our markets in Sichuan Province. 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 on certain
    lands lying within protected areas; and                                                                                   
|
| |  | impose criminal and civil liabilities for
    pollution resulting from oil, natural gas and petrochemical
    operations.                                                      

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 may be
subject to laws and regulations relating to the generation,
handling, storage, transportation, disposal and treatment of
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 impossible, 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 certain of
our operations and products, as it is with other companies
engaged in similar businesses, and there can be no assurance
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 113 million and RMB
113 million and RMB
155 million (US$19 million) in 2001, 2002 and
2003, 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 facilities and developing environmental impact assessments
    for major projects.           

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Our capital expenditures on environmental
programs in 2001, 2002 and 2003 totaled approximately RMB
1,205 million, RMB 1,363 million and RMB
1,076 million (US$130 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. Theses 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 will
help minimize the possibility of similar incidents resulting in
serious casualties and environmental consequences. In addition,
we believe that adoption of these preventative measures will not
require significant capital expenditures, and therefore, will
not have a material adverse effect on our results of operations
and financial condition.




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.




Properties

Under a restructuring agreement we entered into
with CNPC on March 10, 2000 in connection with the
restructuring of the CNPC group and the establishment of our
company, CNPC has undertaken to us the following:



| |   |                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | CNPC will use its best endeavours 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 us from CNPC, within one year from
    August, September and October 1999 when the relevant entitlement
    certificates were issued;
|
| |  | 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 us are located; and                                                                                                                             
|
| |  | CNPC will obtain individual building ownership
    certificates in our name for all of the 57,482 buildings
    transferred to the Company by CNPC, before November 5, 2000.                                                                                                                                                                           

As of December 31, 2003, CNPC obtained
formal land use right certificates for 24,046 of the 28,649
parcels of land and some of the building ownership certificates.
The necessary governmental procedures for the above-mentioned
service stations located on collectively owned land have not
been completed to date. Our directors 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. Our directors believe that these will
not have any material adverse effect on our results of
operations and financial condition.

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

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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, which was established
    in March 2003 to consolidate the authorities and functions of
    the former State Economic and Trade Commission and the former
    Ministry of Foreign Trade and Economic Cooperation:    



| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | has the industry administration and policy
    coordination authority over Chinas oil and gas industry;                                                                                                 
|
| |  | sets import and export quotas for crude oil and
    refined products on the basis of overall supply and demand for
    crude oil and refined products in China as well as 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.                                                                              



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The National Development and Reform Commission,
    which was established in March 2003 to replace the former State
    Development Planning Commission:



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 investment and finance projects
    exceeding certain capital expenditure amounts; 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 10,000 per square kilometer for the
third and subsequent

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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 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. The progressive
exploration and production license has a maximum term of
15 years. Upon the reserves becoming proved for a block,
the holder must apply for a full production license in order to
begin production. In addition, the holder needs to obtain the
right to use that block of land. Generally, the holder of a full
production license must either obtain a land use rights
certificate for industrial land use covering that block of land
or lease such land from the relevant land administrative
authorities.


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. However, in accordance with
a special approval from the State Council, the Ministry of Land
and Resources has issued production licenses effective March
2000 to PetroChina for all of its crude oil and natural gas
reservoirs with terms coextensive with the projected productive
life of those reservoirs, ranging up to 55 years.
Production licenses to be issued to us in the future will be
subject to the 30-year maximum unless we obtain additional
special approvals from the State Council. Each of our production
licenses is renewable upon our application 30 days prior to
expiration. Oil and gas price increases may extend the
productive life of our crude oil and natural gas reservoirs
beyond the current terms of the relevant production licenses.

PetroChina and Sinopec have exploration licenses
and production licenses for the exploration and production of
onshore crude oil and natural gas in China. CNOOC and Sinopec
(through its subsidiary CNSPC) have exploration licenses and
production licenses for the exploration and production of
offshore crude oil and natural gas in China.

Pricing



| |          
| | ---------
| | Crude Oil

PetroChina 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 Products

Prior to October 2001, PetroChina set its retail
prices based on the published retail median guidance prices of
gasoline and diesel published by the State Development Planning
Commission, the predecessor of the National Development and
Reform Commission, with an allowable upward or downward
adjustment of up to 5%. Since October 2001, PetroChina has set
its retail prices within an 8% floating range of the published
retail median guidance prices of gasoline and diesel. These
retail median guidance prices of gasoline and diesel vary in
each provincial level distribution region. Since October 2001,
the National Development and Reform Commission has 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 will be
made only if the weighted average prices fluctuate beyond 8% of
the previously published retail median guidance price.

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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 5.5% as required by
the National Development and Reform Commission.

In addition, the National Development and Reform
Commission sets the ex-factory median prices for gasoline and
diesel sold to the PRC government and other institutional
customers, including airlines and railway operators. These
ex-factory median prices are calculated with reference to the
average FOB Singapore, Rotterdam and New York trading
prices for gasoline and diesel in the previous month. PetroChina
may set the prices it charges its customers on the basis of the
ex-factory median prices set by the National Development and
Reform Commission, which may be adjusted upward or downward up
to 8%.



| |                  
| | -----------------
| | Chemical Products

PetroChina determines the prices of all of its
chemical products.



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

The price of natural gas has two components:



| |   |                                
| | - | -------------------------------
| |  | ex-factory price; and          
|
| |  | pipeline transportation tariff.

Prior to January 2002, our natural gas price was
comprised of wellhead price, pipeline transportation tariff and
purification fee. In January 2002, the State Development
Planning Commission, the predecessor of the National Development
and Reform Commission, merged the purification fee into the
wellhead price to establish a unified natural gas ex-factory
price.

Ex-factory prices vary depending on whether or
not the natural gas sold is within the government-formulated
natural gas supply plan. For natural gas sold within the
government-formulated supply plan, the National Development and
Reform Commission fixes ex-factory prices according to the
nature of the customers. Most of these customers are fertilizer
producers.

For natural gas sold above the
government-formulated natural gas supply plan, the National
Development and Reform Commission publishes the median guidance
ex-factory price with permissible upward or downward adjustments
of 10% by the natural gas producer.

PetroChina negotiates the actual ex-factory price
with commercial natural gas users and municipal governments
within 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 the
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 Oil

Each 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 capacity
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.

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| |                 
| | ----------------
| | Refined Products

Currently, only PetroChina, Sinopec and joint
ventures established by the two companies have the right to
conduct gasoline and diesel wholesale business. Other companies,
including foreign invested companies, may not engage in
wholesale of gasoline and diesel in Chinas domestic
market. In general, only domestic companies, including
Sino-foreign joint venture companies, are permitted to engage in
retail of gasoline and diesel. See Item 3 
Key Information  Risk Factors for a discussion
of the likely impact on the distribution of refined products in
China after Chinas admission to the WTO.



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

The 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. The actual production levels of natural
gas, except the amount supplied to the fertilizer producers, are
determined by the natural gas producers.

Foreign Investments



| |                                                                     
| | --------------------------------------------------------------------
| | Cooperation in Exploration and Production
    with Foreign Companies

Currently, 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 and
Sinopec (through its subsidiary CNSPC) have 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 Refining

The PRC 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,
the construction of refineries with an annual capacity of five
million tons or less must receive special approval and the
production of ethylene and PVC resins with annual production
capacity exceeding 600,000 tons must be conducted by companies
majority-owned by Chinese persons. Furthermore, when
appropriate, projects must receive necessary approvals from
relevant PRC government agencies. See
Item 3  Key Information  Risk
Factors.

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Import and Export

The import and export of crude oil and the export
of refined products is subject to quota and licensing control in
China. Currently, there are eighteen companies licensed to
import crude oil and three licensed to export crude oil and
refined products. The import of refined products was subject to
quota and licensing control until the end of 2003. Since
September 1, 2003, the export of refined products in the
form of processing trade has been exempted from export
licensing, and since January 1, 2004, the import of refined
products has been exempted from import quota and licensing
control. The Ministry of Commerce sets import and export quotas
for crude oil and refined products by taking into account the
supply and demand in China as well as the WTO requirements for
China. The Ministry of Commerce is also responsible for issuing
import and export licenses for products subject to quotas. Upon
receiving quota allocation, refining companies or enterprises
can import crude oil through State-authorized import companies.
See Item 3  Key Information 
Risk Factors for a discussion of the expected opening of
domestic markets to foreign competition in China.

The PRC government authorities have granted
PetroChina the right to conduct crude oil and refined product
import and export business. PetroChina holds quota to import and
export crude oil and refined products, and conducts import and
export of crude oil and refined products through its affiliate,
China National United Oil Corporation which holds relevant
import and export licenses.

Capital Investment and Financing

Capital investments in exploration and production
of crude oil and natural gas made by Chinese oil and gas
companies are not subject to government approval. However, oil
and gas companies must obtain prior approval from the relevant
government authorities for capital investments in other
projects. They must obtain prior approval from the National
Development and Reform Commission for capital investments in any
projects if the amount of capital involved exceeds RMB
50 million. Oil and gas companies need to obtain approval
from the 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 subsidiaries 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                                                                                                                                                                                                                                 
|                     |  |                |  |                                                                                                                                                                                                                                          
|Corporate income tax |  | Taxable income |  | Generally 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.

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|                                           |  |                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------------------------------------------ |  | -------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Tax item                                   |  | Tax base                               |  | Tax Rate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                           |  |                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Value-added tax                            |  | Revenue                                |  | 13% for liquified natural gas, natural 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 are deducted from value-added tax
    payable by PetroChina. 11% of the value-added tax paid in
    connection with export of gasoline is subject to rebate.
|                                           |  | Sales volume                           |  | 5% for the Sino-foreign oil and gas exploration
    and development cooperative projects. However input value-added
    tax cannot be deducted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|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
    All consumption taxes paid in connection with export of gasoline
    are subject to a full rebate.                                                                                                                                                                                                                                                                                                                                                                                                           
|Resource tax                               |  | Aggregate volume sold or self-consumed |  | RMB 8 to 30 per ton for crude oil
    RMB 2 to 15 per thousand cubic meter for natural gas
    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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|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.

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The PRC Highway Law, as amended on
October 31, 1999, provides that the PRC government shall
collect funds for highway maintenance by imposing fuel taxes.
The State Council will formulate specific implementation methods
and procedures for the imposition of fuel tax. The State Council
has not yet announced or published any specific rate,
implementation method or procedure for the imposition of the tax.

Environmental Regulations

China has adopted extensive environmental laws
and regulations that affect the operation of the oil and gas
industry. There are national and local standards applicable to
emissions control, discharges to surface and subsurface water,
and the generation, handling, storage, transportation, treatment
and disposal of waste materials.

The environmental regulations require a company,
such as us, to register or file an environmental impact report
with the relevant environmental bureau for approval before it
undertakes any construction of a new production facility or any
major expansion or renovation of an existing production
facility. The new facility or the expanded or renovated facility
will not be permitted to operate unless the relevant
environmental bureau has inspected to its satisfaction that
environmental equipment that satisfies the environmental
protection requirements has been installed for the facility. A
company that wishes to discharge pollutants, whether it is in
the form of emission, water or materials, must submit a
pollutant discharge declaration statement detailing the amount,
type, location and method of treatment. After reviewing the
pollutant discharge declaration, the relevant environmental
bureau will determine the amount of discharge allowable under
the law and will issue a pollutant discharge license for that
amount of discharge subject to the payment of discharge fees. If
a company discharges more than is permitted in the pollutant
discharge license, the relevant environmental bureau can fine
the company up to several times the discharge fees payable by
the offending company for its allowable discharge, or require
the offending company to close its operation to remedy the
problem.

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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 material respects from US GAAP.
Note 34 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.

In accordance with an acquisition agreement
between CNPC and us dated September 26, 2002, we acquired
from CNPC the assets, liabilities and interests related to
CNPCs refined products marketing enterprises consisting
primarily of service stations and related facilities for
RMB 3,200 million. Under IFRS, the acquisition is a
combination of entities under common control since the
CNPCs refined products marketing enterprises and us 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 marketing
enterprises acquired are accounted for at historical cost to
CNPC with net liabilities of RMB 2,956 million at the
effective date. Our prior years consolidated financial
statements were restated in 2002 to give effect to the
acquisition in such periods as if the operations of our company
and these marketing enterprises have always been combined in
such periods. The difference between RMB 3,200 million paid
and the net liabilities transferred from CNPC has been adjusted
against equity. See  Acquisition of Certain
Refined Products Marketing Enterprises from CNPC.

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 products and natural gas as well as 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, 2003, we
produced approximately 773.7 million barrels of crude oil
and approximately 690.3 billion cubic feet of natural gas
for sale. Our refineries also processed approximately
621.2 million barrels of crude oil in the year ended
December 31, 2003. In the year ended December 31,
2003, we had total revenue of RMB 303,779 million
(US$36,703 million) and net income of
RMB 69,614 million (US$8,411 million).

Effective January 1, 2001, our pipeline
operations were transferred from the refining and marketing
segment to the natural gas segment, which was subsequently
renamed as the natural gas and pipeline segment. Accordingly,
our results of operations, together with the corresponding
assets and liabilities, of certain pipeline operations are
reclassified from the refining and marketing segment to the
natural gas and pipeline segment to reflect the changes in the
manner under which these operations are managed.

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

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products, natural gas and chemical products,
decrease in our crude oil reserves in China and fluctuations in
exchange rates and interest rates.




| |                 
| | ----------------
| | Crude Oil Prices

Our results of operations are substantially
influenced by crude oil prices. From June 1998 to March 2001,
the PRC government published benchmark prices for crude oil in
China which were adjusted on a monthly basis to equal Singapore
market FOB prices for similar grades of crude oil, supplemented
by an amount equal to the customs duty payable on the import of
crude oil. Since March 2001, the PRC government has ceased
publishing benchmark prices for crude oil in China and 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.

Prior to September 1, 1999, the premiums and
discounts applied to our crude oil sales were largely determined
through negotiations between CNPC and Sinopec, our largest
customer. Since September 1, 1999, these discounts and
premiums have been determined in accordance with a crude oil
premium and discount calculation agreement and its supplemental
agreement we entered into with Sinopec. These agreements
establish premiums and 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 State 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 2001, 2002 and 2003 and the
negotiated premiums and discounts applicable to those grades of
crude oil since June 2000.

|          |  |           |       |                                    |  |                    |       |           |  |            |       |               |  |               |       |               |  |  |                |  |  |  |                  |   |  |  |                |   |  |  |                |  
|--------- |  | --------- | ----- | ---------------------------------- |  | ------------------ | ----- | --------- |  | ---------- | ----- | ------------- |  | ------------- | ----- | ------------- |  |  | -------------- |  |  |  | ---------------- | - |  |  | -------------- | - |  |  | -------------- | -
|          |  |           |       |                                    |  |                   
|          |  |           |       | Median prices for principal grades |  | Premium/(discount)
|          |  |           |       | of crude oil (RMB/barrel)          |  | (RMB/barrel)      
|          |  |           |       |                                    |  |                   
|Grade of  |  |           |       | Year 2001                          |  | Year 2002          |       | Year 2003 |  | June 2000- |       | July 2001-    |  | January 2002- |       | Since January
|crude oil |  | Benchmark |       | average                            |  | average            |       | average   |  | June 2001  |       | December 2001 |  | December 2002 |       | 2003         
|          |  |           |       |                                    |  |                    |       |           |  |            |       |               |  |               |       |              
|Daqing    |  |           | Minas |                                    |  |                    | 209.0 |           |  |            | 198.7 |               |  |               | 240.8 |               |  |  | (3.8)  0      |  |  |  | 0  2.8          |   |  |  | 0  5.6        |   |  |  | (3.8)  0      |  
|          |  |           |       |                                    |  |                    |       |           |  |            |       |               |  |               |       |               |  |  |                |  |  |  |                  |   |  |  |                |   |  |  |                |  
|Jidong    |  |           | Minas |                                    |  |                    | 209.0 |           |  |            | 198.7 |               |  |               | 240.8 |               |  |  | (3.8)  0      |  |  |  | 0  2.8          |   |  |  | 0  5.6        |   |  |  | (3.8)  0      |  
|          |  |           |       |                                    |  |                    |       |           |  |            |       |               |  |               |       |               |  |  |                |  |  |  |                  |   |  |  |                |   |  |  |                |  
|Huabei    |  |           | Minas |                                    |  |                    | 209.0 |           |  |            | 198.7 |               |  |               | 240.8 |               |  |  | (3.8)  0      |  |  |  | 0  2.8          |   |  |  | 1.4  6.9      |   |  |  | (2.4)  1.4    |  
|          |  |           |       |                                    |  |                    |       |           |  |            |       |               |  |               |       |               |  |  |                |  |  |  |                  |   |  |  |                |   |  |  |                |  
|Dagang    |  |           | Cinta |                                    |  |                    | 199.3 |           |  |            | 192.6 |               |  |               | 237.0 |               |  |  | (3.8)  0      |  |  |  | 0  3.0          |   |  |  | 1.4  5.6      |   |  |  | 1.4            |  
|          |  |           |       |                                    |  |                    |       |           |  |            |       |               |  |               |       |               |  |  |                |  |  |  |                  |   |  |  |                |   |  |  |                |  
|Tarim     |  |           | Minas |                                    |  |                    | 209.0 |           |  |            | 198.7 |               |  |               | 240.8 |               |  |  | (26.4)  (22.6 |  |  |  | ) (29.4)  (22.6 | ) |  |  | (34.8          | ) |  |  | (34.8)  (31.0 | )
|          |  |           |       |                                    |  |                    |       |           |  |            |       |               |  |               |       |               |  |  |                |  |  |  |                  |   |  |  |                |   |  |  |                |  
|Tuha      |  |           | Tapis |                                    |  |                    | 233.8 |           |  |            | 203.9 |               |  |               | 247.0 |               |  |  | (31.0)  (27.2 |  |  |  | ) (27.2)  (25.0 | ) |  |  | (27.2)  (21.5 | ) |  |  | (27.2          | )
|          |  |           |       |                                    |  |                    |       |           |  |            |       |               |  |               |       |               |  |  |                |  |  |  |                  |   |  |  |                |   |  |  |                |  

In 2003, the median prices for our principal
grades of crude oil and crude oil produced in our Daqing oil
region were RMB 238.4 per barrel and
RMB 240.8 per barrel, respectively.

Increases or decreases in the price of crude oil
in China have a significant impact on the revenue from our
exploration and production segment. In the year ended
December 31, 2003, our average realized selling price for
crude oil was RMB 225 (US$27.20) per barrel, increased
by 21.0% from RMB 186 (US$22.48) per barrel in the year
ended December 31, 2002. As a result, the revenue from our
exploration and production segment increased 20.3% from RMB
147,308 million in the year ended December 31, 2002 to
RMB 177,271 million (US$21,418 million) in the year
ended December 31, 2003. See Item 4 
Information on the Company  Regulatory
Matters  Pricing for a more detailed discussion
of current PRC crude oil pricing regulations.



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

Until June 5, 1998, the State Development
Planning Commission, the predecessor of the State Development
and Reform Commission, set wholesale and retail prices for our
major refined products (gasoline, diesel and kerosene). However,
during the first six months of 1998, due to then prevailing

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market conditions and increased smuggling of
refined products, actual wholesale prices in the refined
products market were lower than the wholesale prices set by the
PRC government. In June 1998, the State Development Planning
Commission pegged the prices of refined products of gasoline and
diesel to the FOB Singapore trading prices, supplemented by
transportation costs, customs duties, insurance charges, taxes
and retail margins. Prior to October 2001, the State Development
Planning Commission published from time to time retail median
gasoline and diesel guidance prices for major cities and
provinces. Once published, the retail median prices remained
unchanged until either we or Sinopec requested an adjustment and
demonstrated that the cumulative change of the FOB Singapore
gasoline or diesel trading price from the then applicable retail
median guidance price exceeded 5%. Since October 2001, the State
Development Planning Commission or the State Development and
Reform Commission has adjusted such retail median prices from
time to time to reflect the FOB Singapore, Rotterdam and
New York trading prices for gasoline and diesel,
supplemented by transportation costs and taxes. See
Item 4  Information on the
Company  Regulatory Matters  Pricing
for a more detailed discussion of current PRC refined products
pricing regulations.


Prior to October 2001, based on the published
median gasoline and diesel guidance prices, we and Sinopec set
our respective retail prices with an allowable upward or
downward adjustment of up to 5% in individual markets. Since
October 2001, we and Sinopec have set our retail prices within
an 8% floating range of the published median gasoline and diesel
guidance prices. We determine the prices of other refined
products with reference to the published median guidance prices
of gasoline and diesel. Our retail prices may differ from those
of Sinopec within a given market. Our average realized selling
prices tend to be higher in the western and northern regions of
China, where we dominate the market, as compared to our average
realized selling prices in the eastern and southern regions,
where Sinopec has a stronger presence.

The following table sets forth the retail median
prices for 90(#) gasoline and 0(#) diesel published by the State
Development Planning Commission or the State Development and
Reform Commission from January 2003 to December 2003 when such
adjustments were made.

|                 |  |           |       |             |  |  |       | 
|---------------- |  | --------- | ----- | ----------- |  |  | ----- | 
|                 |  | 90(#)     |       |            
|Date             |  | Gasoline  |       | 0(#) Diesel
|                 |  |           |       |            
|                 |  | (RMB/ton) |       | (RMB/ton)  
|January 1, 2003  |  |           | 3,542 |             |  |  | 3,220 | 
|February 1, 2003 |  |           | 3,732 |             |  |  | 3,390 | 
|May 10, 2003     |  |           | 3,442 |             |  |  | 3,130 | 
|July 1, 2003     |  |           | 3,532 |             |  |  | 3,130 | 
|December 6, 2003 |  |           | 3,732 |             |  |  | 3,310 | 



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

We determine and set the prices of all chemical
products produced by our chemicals business segment.



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

Prior to January 2002, our natural gas price was
comprised of wellhead price, pipeline transportation tariff and
purification fee. Since January 2002, the State Development
Planning Commission, the predecessor of the State Development
and Reform Commission, has merged the purification fee into the
wellhead price to establish a unified natural gas ex-factory
price. As a result of the price merger, our natural gas price is
comprised of the following two components:



| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Ex-factory Price.We
    set our ex-factory price within a 10% floating range of the
    median ex-factory price published by the National Development
    and Reform Commission, except for

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | natural gas sold within the PRC governments
    natural gas supply plan, which must be sold at prices determined
    by the National Development and Reform Commission; and                                                                                                                                                                                                                                                                   
|
| |  | Pipeline Transportation
    Tariff.The National Development and
    Reform Commission sets the pipeline transportation tariff for
    natural gas transported by pipelines constructed prior to 1991.
    For natural gas transported by pipelines constructed after 1991,
    we prepare a tariff schedule based on our actual cost plus a
    profit margin and submit it to the National Development and
    Reform Commission for approval.

We sell our natural gas at prices which exceed
our production and transportation costs.

The results of operations of these segments will
be impacted to the extent that our prices do not vary to reflect
increases or decreases in our costs. See
Item 4  Information on the
Company  Regulatory Matters  Pricing
for a further discussion of these pricing controls.



| |                          
| | -------------------------
| | Foreign Currency Exposure

For 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 Exposure

For 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.

Oil and Gas
Accounting

We 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 seismic 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.

Oil and Gas
Reserves

The 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.

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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, natural gas and natural gas liquids
which geological and engineering data demonstrate with
reasonable 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 an independent, qualified and experienced oil and
gas reserve engineering firm 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 effected 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.

We did not incur and do not anticipate to incur
any material dismantlement, restoration or abandonment cost
given the nature of our onshore producing activities and current
PRC regulations governing such activities.

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 Equipment

We 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 regular basis to ensure that the carrying
amount does not differ materially from that which would be
determined using fair value at

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the balance sheet date. Revaluation surpluses
pertaining to revalued assets depreciated or disposed of are
retained in the revaluation reserve and will not be available to
offset against possible future revaluation losses. As disclosed
in Note 16 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 was revalued as of September 30, 2003.


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 live of such
asset as follows:

|                             |  |            
|---------------------------- |  | -----------
|Land and buildings           |  | 25-50 years
|Plant and machinery          |  | 10-15 years
|Equipment and motor vehicles |  | 3-16 years 

We do not provide depreciation for construction
in progress until it is completed and ready for use.

The useful lives of non-oil-and-gas properties
are estimated at the time these purchases are made after
considering future changes, business developments and our
strategies. Estimated production lives for oil aid gas
properties are also made after considering the specific factors
discussed under  Oil and Gas Reserves
above, Should there be unexpected adverse changes in these
circumstances or events, which include, among others, declines
in projected operating results and negative industry or economic
trends we would be required to assess the need to shorten the
useful lives and/or make impairment provisions.

In performing this impairment assessment, we
review internal and external sources of information to identify
indications of these unexpected adverse changes. The sources
utilized to identify indications of impairment are often
subjective in nature and require us to use judgment in applying
such information to our businesses. Our interpretation of this
information has a direct impact on whether an impairment
assessment is performed as at any given balance sheet date. Such
information is particularly significant as it relates to our oil
and gas properties. If an indication of impairment is
identified, the recoverable amount of each cash generating unit
is estimated, which is the higher of its net selling price and
its value in use, which is the estimated net present value of
future cash flows to be derived from the continuing use of the
asset and from its ultimate disposal. To the extent the carrying
amount of a cash generating unit exceeds the recoverable amount,
an impairment loss is recognized in the income statement.

Depending on our assessment of the overall
materiality of the asset under review and complexity of deriving
reasonable estimates of the recoverable value, we may perform
such assessment utilizing internal resources or we may engage
external advisors to advise us in making this assessment.
Regardless of the resources utilized, we are required to make
many assumptions in making this assessment, including our
utilization of such asset, plans to continue to produce and
develop proved and associated probable or possible reserves, the
cash flows to be generated based on assumptions for future
commodity prices and development costs, appropriate market
discount rates and the projected market and regulatory
conditions. Changes in any of these assumptions could result in
a material change to future estimates of the recoverable value
of any asset.

Impairment of Accounts
Receivable

Accounts receivables are stated at cost less
provision for impairment. 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,

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provisions are reviewed at each balance sheet
date and adjusted to reflect our current best estimates.


Deferred Tax
Assets

We are required to exercise considerable judgment
in making provisions for deferred tax under the liability
method. Under this method, deferred income 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 income 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
allowances 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
Recognition

Sales are recognized upon delivery of products
and customer acceptance, if any, 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, and when the amount of
revenue and the costs incurred or to be incurred in respect of
the transaction can be measured reliably.

In addition to the above significant accounting
policies and estimates, in connection with the preparation and
reconciliation of our financial statements in accordance with
US GAAP, we believe the following additional accounting
estimate is also critical.

One-time
Remedial Payments for Staff Housing

As disclosed in Note 34(c) to our
consolidated financial statements included elsewhere in this
annual report, certain of our employees who joined the workforce
prior to December 31, 1998 and have housing conditions
below local standards are to be reimbursed for such differences.
These one-time remedial payments have been borne or are to be
borne by our State-owned shareholder, CNPC. Under IFRS, such
direct payments to employees or reimbursements will not be
recorded in our consolidated income statement. US GAAP contain
no such exemption but require this principal shareholders
action on our behalf to be recorded in the consolidated income
statement. During the year ended December 31, 2002, we and
CNPC completed the process of estimating the amounts payable to
qualified employees at the level of the affected business units
as a whole. We have reflected this best available estimate of
such payments in determining our net income for the year ended
December 31, 2002, under US GAAP. Since this amount is
borne by our State-owned shareholder, a corresponding amount has
been included as an addition to the other reserves in our
shareholders equity. The estimation process of such
payments down to level of the individual employees is still on
going. Actual results may differ from these estimates at the
time when more information becomes available.

For detailed discussions of significant
differences between IFRS and US GAAP, see Note 34 to our
consolidated financial statements included elsewhere in this
annual report and the section headed
  Other Information  US GAAP
Reconciliation below.

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The Restructuring of the CNPC Group

Effective as of November 5, 1999, CNPC
transferred to us its domestic assets and operations relating to:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | the exploration, development and production of
    crude oil and natural gas;               
|
| |  | the refining, transportation, storage and
    marketing of crude oil and petroleum products;
|
| |  | the production and marketing of
    chemicals; and                                          
|
| |  | the transmission, marketing and sale of natural
    gas.                                    

CNPC retained the remaining assets and
operations. As part of this restructuring, we have made
arrangements with CNPC for the provision to us of certain
essential products and services. In addition, we effected
transactions to transfer a portion of the debt obligations of
the subsidiaries of our predecessor to CNPC, resulting in a
decrease in debt of RMB 30,500 million, primarily long-term
debt, and a corresponding increase in owners equity as of
September 30, 1999.

In addition, as part of this restructuring and
our formation, a valuation of the contributed fixed assets on
the asset class level by business segment, excluding oil and gas
reserves, was carried out as of June 30, 1999 as required
by the applicable PRC regulations. The revaluation was performed
in order to determine the fair value of such contributed fixed
assets and establish amounts for share capital and capital
reserve.

Acquisitions



| |                                    
| | -----------------------------------
| | Acquisitions of Overseas
    Assets

In April 2002, we acquired Devon Energy Indonesia
Limited from Devon Energy Corporation for a price of
RMB 2,068 million (US$250 million). Devon Energy
Indonesia Limited holds interests in a number of crude oil and
natural gas exploration and production project in Indonesia,
including a 30% interest in an oil and gas production sharing
contract relating to the Jabung block located in Sumatra,
Indonesia. In April 2003, we acquired a 50% equity interest in
Amerada Hess Indonesia Holdings Limited, which holds a 30%
interest in the oil and gas production sharing contract relating
to the Jabung block, for a price of RMB 679 million
(US$82 million).

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.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Acquisition of Certain Refined Products
    Marketing Enterprises from CNPC

In accordance with an acquisition agreement
between CNPC and us dated September 26, 2002, we acquired
from CNPC the assets, liabilities and interests related to
CNPCs refined products marketing enterprises consisting
primarily of service stations and related facilities for
RMB 3,200 million. The acquisition price was
determined on the basis of independent valuation and appraisals
of the assets and liabilities of these marketing enterprises
under applicable rules and regulations promulgated in the PRC.
Of the RMB 3,200 million in purchase price, RMB 430
million was paid in cash, RMB 1,124 million was set off
against receivables from CNPC, and the remaining balance of
RMB 1,646 million was included as payables to CNPC as of
December 31, 2003.

Under IFRS, the acquisition is a combination of
entities under common control since the CNPCs refined
products marketing enterprises and us 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 marketing enterprises
acquired are accounted for at historical cost to CNPC with net
liabilities of RMB 2,956 million at the effective date. Our
prior years consolidated financial statements were
restated in 2002 to give effect to the acquisition in these
periods as if the

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operations of our company and these marketing
enterprises have always been combined in these periods. The
difference between RMB 3,200 million paid and the net
liabilities transferred from CNPC has been adjusted against
equity.





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.

Our income statement for each of the three years
ended December 31, 2001, 2002 and 2003 is summarized in the
table below.

|                                               |  |                         |          |      |  |      |          |      |  |  |          |   |  |  |         |  
|---------------------------------------------- |  | ----------------------- | -------- | ---- |  | ---- | -------- | ---- |  |  | -------- | - |  |  | ------- | -
|                                               |  |                        
|                                               |  | Year ended December 31,
|                                               |  |                        
|                                               |  | 2001                    |          | 2002 |  | 2003 |          | 2003
|                                               |  |                         |          |      |  |      |          |     
|                                               |  | RMB                     |          | RMB  |  | RMB  |          | US$ 
|Total revenues                                 |  |                         | 241,320  |      |  |      | 244,424  |      |  |  | 303,779  |   |  |  | 36,703  |  
|                                               |  |                         |          |      |  |      |          |      |  |  |          |   |  |  |         |  
|Operating expenses                             |  |                         | (170,181 | )    |  |      | (172,083 | )    |  |  | (204,593 | ) |  |  | (24,720 | )
|                                               |  |                         |          |      |  |      |          |      |  |  |          |   |  |  |         |  
|Income from operations                         |  |                         | 71,139   |      |  |      | 72,341   |      |  |  | 99,186   |   |  |  | 11,983  |  
|                                               |  |                         |          |      |  |      |          |      |  |  |          |   |  |  |         |  
|Exchange gain (loss), net                      |  |                         | 250      |      |  |      | (316     | )    |  |  | (180     | ) |  |  | (22     | )
|Interest expense, net                          |  |                         | (3,599   | )    |  |      | (3,053   | )    |  |  | (1,669   | ) |  |  | (201    | )
|Income from equity affiliates                  |  |                         | 341      |      |  |      | 268      |      |  |  | 985      |   |  |  | 119     |  
|Income before income taxes                     |  |                         | 68,131   |      |  |      | 69,240   |      |  |  | 98,322   |   |  |  | 11,879  |  
|Income taxes                                   |  |                         | (23,066  | )    |  |      | (22,231  | )    |  |  | (28,072  | ) |  |  | (3,391  | )
|(Income) loss applicable to minority interests |  |                         | 404      |      |  |      | (99      | )    |  |  | (636     | ) |  |  | (77     | )
|                                               |  |                         |          |      |  |      |          |      |  |  |          |   |  |  |         |  
|Net income                                     |  |                         | 45,469   |      |  |      | 46,910   |      |  |  | 69,614   |   |  |  | 8,411   |  
|                                               |  |                         |          |      |  |      |          |      |  |  |          |   |  |  |         |  

The table below sets forth our revenues by
business segment for each of the three years ended
December 31, 2001, 2002 and 2003 as well as the percentage
changes in revenues for the periods shown.

|                                       |  |                                       |          |      |  |      |          |      |  |      |      |    |  |  |          |   |  |  |       |  
|-------------------------------------- |  | ------------------------------------- | -------- | ---- |  | ---- | -------- | ---- |  | ---- | ---- | -- |  |  | -------- | - |  |  | ----- | -
|                                       |  |                                       |          |      |  | 2002 |          |      |  | 2003
|                                       |  |                                       |          |      |  | vs.  |          |      |  | vs. 
|                                       |  | 2001                                  |          | 2002 |  | 2001 |          | 2003 |  | 2002
|                                       |  |                                       |          |      |  |      |          |      |  |     
|                                       |  |                                      
|                                       |  | (RMB in millions, except percentages)
|Sales and other operating revenues     |  |                                       |          |      |  |      |          |      |  |      |      |    |  |  |          |   |  |  |       |  
|Exploration and production             |  |                                       | 148,277  |      |  |      | 147,308  |      |  |      | (0.7 | )% |  |  | 177,271  |   |  |  | 20.3  | %
|Refining and marketing                 |  |                                       | 171,961  |      |  |      | 174,621  |      |  |      | 1.5  |    |  |  | 223,584  |   |  |  | 28.0  |  
|Chemicals and marketing                |  |                                       | 31,776   |      |  |      | 29,661   |      |  |      | (6.7 | )  |  |  | 39,211   |   |  |  | 32.2  |  
|Natural gas and pipeline               |  |                                       | 11,321   |      |  |      | 12,733   |      |  |      | 12.5 |    |  |  | 15,067   |   |  |  | 18.3  |  
|Other                                  |  |                                       |         |      |  |      |         |      |  |      |     |    |  |  |         |   |  |  |      |  
|                                       |  |                                       |          |      |  |      |          |      |  |      |      |    |  |  |          |   |  |  |       |  
|Total                                  |  |                                       | 363,335  |      |  |      | 364,323  |      |  |      | 0.3  | %  |  |  | 455,133  |   |  |  | 24.9  | %
|                                       |  |                                       |          |      |  |      |          |      |  |      |      |    |  |  |          |   |  |  |       |  
|Less intersegment sales                |  |                                       | (122,015 | )    |  |      | (119,899 | )    |  |      | (1.7 | )  |  |  | (151,354 | ) |  |  | (26.2 | )
|                                       |  |                                       |          |      |  |      |          |      |  |      |      |    |  |  |          |   |  |  |       |  
|Consolidated net sales from operations |  |                                       | 241,320  |      |  |      | 244,424  |      |  |      | 1.3  | %  |  |  | 303,779  |   |  |  | 24.3  | %
|                                       |  |                                       |          |      |  |      |          |      |  |      |      |    |  |  |          |   |  |  |       |  

The table below sets forth our operating income
by business segment for each of the three years ended
December 31, 2001, 2002 and 2003, as well as the percentage
changes in operating

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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.


|                              |  |                                       |        |      |  |      |        |      |  |      |       |    |  |  |        |   |  |  |       |  
|----------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ----- | -- |  |  | ------ | - |  |  | ----- | -
|                              |  |                                       |        |      |  | 2002 |        |      |  | 2003
|                              |  |                                       |        |      |  | vs.  |        |      |  | vs. 
|                              |  | 2001                                  |        | 2002 |  | 2001 |        | 2003 |  | 2002
|                              |  |                                       |        |      |  |      |        |      |  |     
|                              |  |                                      
|                              |  | (RMB in millions, except percentages)
|Income (loss) from operations |  |                                       |        |      |  |      |        |      |  |      |       |    |  |  |        |   |  |  |       |  
|Exploration and production    |  |                                       | 76,932 |      |  |      | 72,139 |      |  |      | (6.2  | )% |  |  | 92,370 |   |  |  | 28.0  | %
|Refining and marketing        |  |                                       | (3,324 | )    |  |      | 2,818  |      |  |      | 184.8 |    |  |  | 5,035  |   |  |  | 78.7  |  
|Chemicals and marketing       |  |                                       | (2,374 | )    |  |      | (3,162 | )    |  |      | (33.2 | )  |  |  | 1,041  |   |  |  | 132.9 |  
|Natural gas and pipeline      |  |                                       | 722    |      |  |      | 1,552  |      |  |      | 115.0 |    |  |  | 1,922  |   |  |  | 23.8  |  
|Other                         |  |                                       | (817   | )    |  |      | (1,006 | )    |  |      | (23.1 | )  |  |  | (1,182 | ) |  |  | (17.5 | )
|                              |  |                                       |        |      |  |      |        |      |  |      |       |    |  |  |        |   |  |  |       |  
|Total                         |  |                                       | 71,139 |      |  |      | 72,341 |      |  |      | 1.7   | %  |  |  | 99,186 |   |  |  | 37.1  | %
|                              |  |                                       |        |      |  |      |        |      |  |      |       |    |  |  |        |   |  |  |       |  

Year Ended December 31, 2003 Compared to
Year Ended December 31, 2002



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



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

For the year ended December 31, 2003, our
total revenue was RMB 303,779 million
(US$36,703 million), representing an increase of 24.3% from
the year ended December 31, 2002. Our net income in the
year ended December, 2003 was RMB 69,614 million
(US$8,411 million), increased by 48.4% from the year ended
December 31, 2002. For the first time since our initial
public offering in April 2000, we realized profits in each of
our exploration and production, refining and marketing,
chemicals and marketing, and natural gas and pipeline segments.
Our basic and diluted earnings per share for the year ended
December 31, 2003 was RMB 0.40, representing an
increase of 48.1% from RMB 0.27 for the year ended
December 31, 2002.

Total
Revenue.Total Revenue increased
24.3% from RMB 244,424 million for the year ended
December 31, 2002 to RMB 303,779 million
(US$36,703 million) for the year ended December 31,
2003. The increase was due primarily to increases in our
realized selling prices of crude oil, gasoline, diesel and
chemical products, as well as increases in the sales volume of
refined products, chemical products and natural gas. The average
realized selling price for crude oil increased 21.0% from
US$22.48 per barrel for the year ended December 31,
2002 to US$27.20 per barrel for the year ended
December 31, 2003.

Operating
Expenses.Operating expenses
increased 18.9% from RMB 172,083 million for the year ended
December 31, 2002 to RMB 204,593 million
(US$24,720 million) for the year ended December 31,
2003. This increase was due primarily to a 26.7% increase in
purchases, services and other expenses, a 20.3% increase in
employee compensation costs, a 30.7% increase in exploration
expenses, a 11.0% increase in expenses relating to workforce
reduction and the shutting down of manufacturing facilities and
units and a 10.2% increase in depreciation, depletion and
amortization.

Purchases, Services and Other
Expenses.Purchases, services and
other expenses increased 26.7% from RMB 71,690 million for
the year ended December 31, 2002 to RMB 90,850 million
(US$10,977 million) for the year ended December 31,
2003. This increase was due primarily to a RMB 14,380
million increase in the cost of refined product raw materials as
a result of increases in the prices and purchase volume of crude
oil and a RMB 1,490 million increase in the cost of
chemicals raw materials as a result of increases in the prices
of principal refined products. In 2003, our refining and
marketing segment purchased 89.0 million barrels of crude
oil, as compared to 39.8 million barrels in 2002. The
average realized prices of our gasoline and diesel increased by
17.6% and 14.7%, respectively, in 2003.

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Employee Compensation
Costs.Employee compensation costs
increased 20.3% from RMB 16,248 million for the year
ended December 31, 2002 to RMB 19,542 million
(US$2,361 million) for the year ended December 31,
2003. This increase resulted primarily from an increase of
RMB 2,262 million in salaries and other benefits and
an increase of RMB 326 million in employee
compensation costs as a result of the expansion of our retail
distribution network in 2003.

Exploration Expenses.Exploration expenses increased 30.7%
from RMB 8,095 million for the year ended December 31,
2002 to RMB 10,577 million (US$1,278 million) for the year
ended December 31, 2003. This increase was due primarily to
increased expenditures in exploration activities for the purpose
of increasing our oil and gas reserves.

Depreciation, Depletion and
Amortization.Depreciation, depletion
and amortization increased 10.2% from RMB 36,782 million
for the year ended December 31, 2002 to RMB
40,531 million (US$4,897 million) for the year ended
December 31, 2003. This increase was due primarily to an
increase of RMB 2,420 million in current depreciation,
depletion and amortization expenses relating to the newly
acquired assets.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses increased 6.5% from RMB
22,474 million for the year ended December 31, 2002 to
RMB 23,930 million (US$2,891 million) for the
year ended December 31, 2003. This increase was due
primarily to an increase of RMB 1,150 million in
impairment of accounts receivable.

Expenses Relating to Workforce Reduction and
the Shutting Down of Manufacturing Facilities and
Units.We did not lay off any
employees for the year ended December 31, 2003, but we shut
down some low efficiency manufacturing facilities and units of
our refining and marketing segment and our chemicals and
marketing segment. Consequently, expenses relating to work force
reduction and the shutting down of manufacturing facilities and
units for the year ended December 31, 2003 consisted only
of the costs for shutting down of manufacturing facilities and
units of RMB 2,355 million (US$285 million),
representing an increase of 11.0% from RMB 2,121 million
for the year ended December 31, 2002.

Taxes Other than Income
Taxes.Taxes other than income taxes
increased 8.7% from RMB 14,613 million for the year
ended December 31, 2002 to RMB 15,879 million
(US$1,919 million) for the year ended December 31,
2003. This increase was due primarily to an increase of
RMB 679 million in consumption tax and surcharges as a
result of increased production volume of gasoline and diesel and
an increase of RMB 214 million in resources compensation
fees as a result of increased revenues for crude oil and natural
gas.

Income From
Operations.As a result of the
factors discussed above, income from operations increased 37.1%
from RMB 72,341 million for the year ended
December 31, 2002 to RMB 99,186 million
(US$11,983 million) for the year ended December 31, 2003.

Net Exchange
Loss.Net exchange loss decreased
43.0% from RMB 316 million for the year ended
December 31, 2002 to RMB 180 million
(US$22 million) for the year ended December 31, 2003.
This decrease was due primarily to a decrease in the average
proportion of foreign exchange borrowings and an adjustment in
the currency mix of foreign exchange borrowings by repaying some
of the foreign debts denominated in foreign currencies with
relatively high exchange rate risk, such as Euro and British
Sterling.

Net Interest
Expense.Net interest expense
decreased 45.3% from RMB 3,053 million for the year ended
December 31, 2002 to RMB 1,669 million (US$201
million) for the year ended December 31, 2003. This
decrease was due primarily to a decrease in the average
proportion of interest-bearing debts and decreases in the
average interest rates.

Income Before Income
Taxes.Income before income taxes
increased 42.0% from RMB 69,240 million for the year
ended December 31, 2002 to RMB 98,322 million
(US$11,879 million) for the year ended December 31,
2003.

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Income Taxes.Income Taxes increased 26.3% from RMB 22,231 million for
the year ended December 31, 2002 to RMB 28,072 million
(US$3,391 million) for the year ended December 31, 2003,
due primarily to an increase in income before income taxes.

Net Income.As a result of the factors discussed above, net income increased
48.4% from RMB 46,910 million for the year ended
December 31, 2002 to RMB 69,614 million (US$8,411
million) for the year ended December 31, 2003.



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

Sales and Other Operating
Revenue.Sales and other operating
revenue increased 20.3% from RMB 147,308 million for
the year ended December 31, 2002 to
RMB 177,271 million (US$21,418 million) for the
year ended December 31, 2003. This increase resulted
primarily from an increase in the average realized selling price
of crude oil and an increase in sales volume of natural gas by
our exploration and production segment in 2003. Our average
realized selling price of crude oil for the year ended
December 31, 2003 was US$27.20 per barrel,
representing an increase of 21.0% from US$22.48 per barrel
for the year ended December 31, 2002. Our exploration and
production segment sold 651.0 billion cubic feet of natural
gas for the year ended December 31, 2003, as compared to
588.4 billion cubic feet of natural gas for the year ended
December 31, 2002.

Intersegment sales increased 21.4% from
RMB 106,266 million for the year ended December 31,
2002 to RMB 128,963 million (US$15,581 million)
for the year ended December 31, 2003. Similarly, this
increase resulted primarily from an increase in the average
selling price of crude oil and an increase of sales volume of
natural gas in 2003.

Sales of crude oil to Sinopec increased 9.8% from
RMB 22,778 million for the year ended December 31,
2002 to RMB 25,008 million (US$3,021 million) for the
year ended December 31, 2003. This increase was due
primarily to an increase in the average selling prices of crude
oil.

Operating Expenses.Operating expenses increased 12.9% from RMB 75,169 million
for the year ended December 31, 2002 to RMB 84,901
million (US$10,258 million) for the year ended December 31,
2003. This increase was due primarily to (i) an increase of
RMB 2,482 million in exploration expenses as a result of
increased expenditures in exploration activities for the purpose
of improving recovery of oil and gas reserves, (ii) an
increase of RMB 2,758 million in depletion of oil and gas
property as a result of newly acquired assets, (iii) an
increase of RMB 1,421 million in salaries and other
benefits and (iv) an increase of RMB 1,383 million in
impairment of receivables.

Income From
Operations.As a result of the factors
discussed above, income from operations increased 28.0% from RMB
72,139 million for the year ended December 31, 2002 to
RMB 92,370 million (US$11,160 million) for the
year ended December 31, 2003.



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

Sales and Other Operating
Revenue.Sales and other operating
revenue increased 28.0% from RMB 174,621 million for the
year ended December 31, 2002 to RMB 223,584 million
(US$27,014 million) for the year ended December 31,
2003. This increase was due primarily to increases in the
selling prices and the sales volumes of our principal refined
products.

Sales revenue from gasoline increased 23.0% from
RMB 48,834 million for the year ended December 31,
2002 to RMB 60,073 million (US$7,258 million) for the
year ended December 31, 2003 due primarily to increases in
the selling prices and the sales volume of gasoline. The average
realized selling price of gasoline increased 17.6% from RMB
2,570 per ton for the year ended December 31, 2002 to
RMB 3,023 (US$365.24) per ton for the year ended
December 31, 2003. We sold 19.9 million tons of
gasoline for the year ended December 31, 2003, representing
an increase of 4.6% from 19.0 million tons for the year
ended December 31, 2002.

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Sales revenue from diesel increased 26.9% from
RMB 79,081 million for the year ended December 31,
2002 to RMB 100,336 million (US$12,123 million) for
the year ended December 31, 2003 due primarily to increases
in the selling prices and the sales volume of diesel. The
average realized selling price of diesel increased 14.7% from
RMB 2,384 per ton for the year ended December 31, 2002
to RMB 2,735 (US$330.45) per ton for the year ended
December 31, 2003. We sold 36.7 million tons of diesel
for the year ended December 31, 2003, representing an
increase of 10.5% from 33.2 million tons for the year ended
December 31, 2002.

Sales revenue from kerosene increased 6.8% from
RMB 3,864 million for the year ended December 31, 2002
to RMB 4,125 million (US$498 million) for the year
ended December 31, 2003 due primarily to increases in the
selling price of Kerosene despite a slight decrease of the sales
volume of kerosene in 2003. The average realized selling price
of kerosene increased 12.5% from RMB 2,050 per ton for
the year ended December 31, 2002 to RMB 2,306
(US$278.6) per ton for the year ended December 31, 2003.

Intersegment sales revenue increased 68.9% from
RMB 9,988 million for the year ended December 31, 2002
to RMB 16,867 million (US$2,038 million) for the year
ended December 31, 2003 due primarily to increases in the
selling prices and the sales volumes of our principal refined
products.

Operating Expenses.Operating expenses increased 27.2% from RMB 171,803 million
for the year ended December 31, 2002 to RMB
218,549 million (US$26,405 million) for the year ended
December 31, 2003. This increase was due primarily to
increases in purchase prices of crude oil and refined products
from third parties, as well as an increase in the purchase
volume of crude oil from third parties. Our crude oil purchase
expenses increased by RMB 36,330 million
(US$4,389 million) in 2003, of which
RMB 26,480 million (US$3,199 million) was due to
the increase in crude oil purchase prices and
RMB 9,850 million (US$1,190 million) was due to
the increase in crude oil purchase volume. Although our purchase
volume of refined products from third parties decreased slightly
in 2003, our total purchase expenses of refined products from
third parties increased by RMB 1,850 million
(US$224 million) in the same period due primarily to
increases in purchase prices.

Income From
Operations.As a result of the factors
discussed above, income from operations increased 78.7% from RMB
2,818 million for the year ended December 31, 2002 to
RMB 5,035 million (US$608 million) for the year
ended December 31, 2003.



| |                        
| | -----------------------
| | Chemicals and Marketing

Sales and Other Operating
Revenue.Sales and other operating
revenue increased 32.2% from RMB 29,661 million for the
year ended December 31, 2002 to RMB 39,211 million
(US$4,738 million) for the year ended December 31,
2003, due primarily to increases in the selling prices and sales
volumes of chemical products. The average realized selling
prices of synthetic resin, synthetic fibres, rubber and urea
were RMB 5,938, RMB 8,959, RMB 8,753 and
RMB 1,093, respectively, for the year ended
December 31, 2003, representing increases of 14.1%, 15.4%,
32.5% and 6.7%, respectively, from the year ended
December 31, 2002. Our chemicals and marketing segment sold
10,880 thousand tons of chemical products for the year
ended December 31, 2003, representing an increase of 18.26%
from the year ended December 31, 2002.

Operating Expenses.Operating expenses increased 16.3% from RMB 32,823 million
for the year ended December 31, 2002 to RMB
38,170 million (US$4,612 million) for the year ended
December 31, 2003, due primarily to an increase of RMB
5,855 million (US$707 million) in the purchase
expenses of direct materials.

Income (Loss) From
Operations.As a result of the factors
discussed above, we recorded income from operations of RMB
1,041 million (US$126 million) for the year ended
December 31, 2003. We recorded a loss of
RMB 3,162 million for the year ended December 31,
2002.

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| |                         
| | ------------------------
| | Natural Gas and Pipeline

Sales and Other Operating
Revenue.Sales and other operating
revenue increased 18.3% from RMB 12,733 million for the
year ended December 31, 2002 to RMB 15,067 million
(US$1,820 million) for the year ended December 31,
2003, due primarily to increases in the sales volume of natural
gas and the pipeline transmission prices and volume and the
addition of the results of a refined product pipeline. Our
natural gas and pipeline segment sold 543.4 billion cubic
feet natural gas in the year ended December 31, 2003,
representing an increase of 11.7% from 486.3 billion cubic
feet in the year ended December 31 2002, which
resulted in an increase of RMB 937 million
(US$113 million). The increase of
RMB 1,241 million (US$151 million) in our income
from pipeline transmission of natural gas, crude oil and refined
products in 2003 was attributable to (i) a
RMB 686 million (US$83 million) increase due to
increases in crude oil and natural gas transmission prices and
(ii) a RMB 456 million (US$55 million)
increase due to the addition of the results of the
Lanzhou  Chengdu  Chongqing refined
product pipeline.

Operating Expenses.Operating expenses increased 17.6% from
RMB 11,181 million for the year ended
December 31, 2002 to RMB 13,145 million
(US$1,588 million) for the year ended December 31,
2003, due primarily to (i) an increase of
RMB 1,402 million (US$169 million) in purchase
expenses of natural gas primarily as a result of the increase of
1.6 billion cubic feet in the natural gas purchase volume
and (ii) an increase of RMB 330 million
(US$40 million) in depreciation expenses.

Income From
Operations.As a result of the factors
discussed above, income from operations increased 23.8% from RMB
1,552 million for the year ended December 31, 2002 to
RMB 1,922 million (US$232 million) for the year
ended December 31, 2003.

Year Ended December 31, 2002 Compared to
Year Ended December 31, 2001



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

Total
Revenue.Total Revenue increased
1.3% from RMB 241,320 million for the year ended
December 31, 2001 to RMB 244,424 million for the year
ended December 31, 2002. This increase was due primarily to
an increase in sales volume of products such as crude oil,
natural gas, gasoline and diesel and an increase in the
comprehensive selling price of natural gas, which was partially
offset by a decrease in our average realized selling prices of
crude oil, gasoline and diesel. The sales volume of our crude
oil, natural gas, gasoline and diesel increased by 2.6%, 11.1%,
4.6% and 5.1%, respectively, in 2002.

Operating
Expenses.Operating expenses
increased 1.1% from RMB 170,181 million for the year ended
December 31, 2001 to RMB 172,083 million for the year
ended December 31, 2002. This increase was due primarily to
increases in exploration expenses of 10.2%, employee
compensation costs of 11.2% and depreciation, depletion and
amortization of 9.4%. In addition, the increase in operating
expenses was also caused by expenses we incurred of
RMB 2,121 million in 2002 in connection with the
shutting down of certain inefficient manufacturing assets. We
did not incur similar expenses in 2001. These operating expense
increases were offset in part by a decrease in purchases,
services and other expenses of 8.7% and a reduction in various
other costs resulting from the effective implementation of our
cost reduction measures and our streamlined management.

Purchases, Services and Other
Expenses.Purchases, services and
other expenses decreased 8.7% from RMB 78,529 million for
the year ended December 31, 2001 to RMB 71,690 million
for the year ended December 31, 2002. This decrease was due
primarily to a 6.4% decrease in the cost of refined products raw
materials as a result of a decline in the price of crude oil and
a decrease in the cost of chemicals raw materials due to price
declines.

Employee Compensation
Costs.Employee compensation costs
increased 11.2% from RMB 14,608 million for the year
ended December 31, 2001 to RMB 16,248 million for the
year

72



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##### Table of Contents



ended December 31, 2002. This increase was
due primarily to (i) an increase of RMB 1,021 million
in bonuses for meeting or exceeding cost reduction and
production targets and (ii) an increase of RMB
119 million in employee compensation costs as a result of
increased labor for the expansion of the selling and retailing
network for the refining and marketing segment.


Depreciation, Depletion and
Amortization.Depreciation, depletion
and amortization increased 9.4% from RMB 33,615 million for
the year ended December 31, 2001 to RMB 36,782 million
for the year ended December 31, 2002. This increase was due
primarily to an increase of RMB 494 million in current
depreciation, depletion and amortization expenses relating to
the newly acquired assets and an increase of RMB
1,753 million in the impairment provision for inefficient
plants and equipment held for use by our chemicals and marketing
segment and our refining and marketing segment.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses increased 3.4% from RMB
21,735 million for the year ended December 31, 2001 to
RMB 22,474 million for the year ended
December 31, 2002. The increase was due primarily to an
increase of RMB 691 million in our transportation costs
resulting from increased sales volume in refined products and
increased selling, general and administrative expenses resulting
from an increase in maintenance expenses associated with
upgrading of our service stations.

Expenses Relating to Workforce Reduction and
the Shutting Down of Manufacturing Facilities and
Units.Expenses relating to workforce
reduction and the shutting down of manufacturing facilities and
units for the year ended December 31, 2001, consisted only
of the work force reduction of RMB 487 million. We did not
lay off any employees for the year ended December 31, 2002,
but shut down some manufacturing facilities and units of the
refining and marketing segment and the chemicals and marketing
segment. Consequently, expenses relating to work force reduction
and the shutting down of manufacturing facilities and units for
the year ended December 31, 2002, consisted only of the
costs for shutting down of manufacturing assets of
RMB 2,121 million.

Taxes Other than Income
Taxes.Taxes other than income taxes
increased 4.7% from RMB 13,951 million for the year
ended December 31, 2001 to RMB 14,613 million for the
year ended December 31, 2002. This increase was due
primarily to an increase in consumption tax resulting from an
increase in the sales volume of gasoline and diesel and an
increase in urban construction and education surcharges as a
result of increases in VAT and consumption tax in 2002.

Income from
Operations.As a result of the
factors discussed above, income from operations increased 1.7%
from RMB 71,139 million for the year ended
December 31, 2001 to RMB 72,341 million for the
year ended December 31, 2002.

Net Exchange Gain
(Loss).Net exchange gain (loss)
decreased from a net gain of RMB 250 million for the
year ended December 31, 2001 to a net loss of RMB
316 million (US$38 million) for the year ended
December 31, 2002. This decrease was due primarily to an
increase in exchange rate loss for borrowings in foreign
currencies as a result of a relatively large appreciation of
foreign exchange rates in 2002, particularly with respect to the
Japanese Yen, British Sterling and Euro.

Net Interest
Expense.Net interest expense
decreased 15.2% from RMB 3,599 million for the year ended
December 31, 2001 to RMB 3,053 million for the year
ended December 31, 2002. This decrease was due primarily to
the decline of market interest rates as well as a decrease in
the average outstanding balance of debts in 2002.

Income Before Income
Taxes.Income before income taxes
increased 1.6% from RMB 68,131 million for the year
ended December 31, 2001 to RMB 69,240 million for the
year ended December 31, 2002.

Income Taxes.Income Taxes decreased 3.6% from RMB 23,066 million for the
year ended December 31, 2001 to RMB 22,231 million for
the year ended December 31, 2002. This decrease

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was due primarily to the tax reductions of RMB
2,377 million enjoyed by us in 2002 under the preferential
tax treatment policy promulgated by the Chinese government in
order to encourage development of western Chinas economy
which, however, was offset in part by an increase of RMB
511 million in expenses other than tax deductible expenses
and the tax settlement for previous years.


Net Income.As a result of the factors discussed above, net income increased
3.2% from RMB 45,469 million for the year ended
December 31, 2001 to RMB 46,910 million for the year
ended December 31, 2002.



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

Sales and Other Operating
Revenue.Sales and other operating
revenue decreased 0.7% from RMB 148,277 million for the
year ended December 31, 2001 to RMB 147,308 million
for the year ended December 31, 2002. This decrease was due
primarily to a decrease in the average realized price of our
crude oil from US$23.61 per barrel for the year ended
December 31, 2001 to US$22.48 per barrel for the year
ended December 31, 2002, which, however, was offset in part
by the increase in sales revenue resulting from the inclusion
into this segment of the small refineries in Tarim, Changqing
and Xinan oil fields or gas fields in 2002.

Intersegment sales decreased 4.0% from RMB
110,738 million for the year ended December 31, 2001
to RMB 106,266 million for the year ended December 31,
2002. This decrease was due primarily to a 4.5% decrease in the
price and a 2.3% decrease in sales volume of crude oil sold to
our other business segments.

Sales of crude oil to Sinopec increased 6.9% from
RMB 21,299 million for the year ended December 31,
2001 to RMB 22,778 million for the year ended
December 31, 2002. This increase was due primarily to an
increase in the sales volume to Sinopec and was offset in part
by the decrease of our average realized selling price of our
crude oil sold to Sinopec.

Operating Expenses.Operating expenses increased 5.4% from RMB 71,345 million
for the year ended December 31, 2001 to RMB
75,169 million for the year ended December 31, 2002.
This increase was due primarily to (i) increases in
purchases, services and other expenses by RMB 1,091 million
and exploration expenses by RMB 752 million as a result of
the inclusion of the small refineries in Tarim, Changqing and
Xinan oil fields or gas fields into this segment for
administrative purposes in 2002 and (ii) an increase in
employee compensation costs by 13.1% as a result of increases in
bonuses for meeting or exceeding cost reduction and production
targets.

Income From
Operations.As a result of the factors
discussed above, income from operations decreased 6.2% from RMB
76,932 million for the year ended December 31, 2001 to
RMB 72,139 million for the year ended
December 31, 2002.



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

Sales and Other Operating
Revenue.Sales and other operating
revenue increased 1.5% from RMB 171,961 million for the
year ended December 31, 2001 to RMB 174,621 million
for the year ended December 31, 2002. This increase was due
primarily to an increase in the sales volume of principal
refined products such as gasoline by 4.6%, diesel by 5.1% and
lubricant oil by 1.0% in 2002, which was offset in part by
decreases in the average realized selling prices of gasoline,
diesel and kerosene and a decrease in the sales volume of
kerosene in 2002.

Sales revenue from gasoline increased 3.7% from
RMB 47,079 million for the year ended December 31,
2001 to RMB 48,834 million for the year ended
December 31, 2002. This increase was due primarily to a
4.6% increase in the sales volume of gasoline from
18.2 million tons for the year ended December 31, 2001
to 19.0 million tons for the year ended December 31,
2002. The average realized selling price of gasoline decreased
0.8% from RMB 2,591 per ton for the year ended
December 31, 2001 to RMB 2,570 per ton for the year ended
December 31, 2002.

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Sales revenue from diesel increased 3.3% from RMB
76,534 million for the year ended December 31, 2001 to
RMB 79,081 million for the year ended December 31,
2002. This increase was due primarily to a 5.1% increase in the
sales volume of diesel from 31.6 million tons for the year
ended December 31, 2001 to 33.2 million tons for the
year ended December 31, 2002. The average realized selling
price of diesel decreased 1.7%, from RMB 2,426 per ton in
the year ended December 31, 2001 to RMB 2,384 per ton
for the year ended December 31, 2002.

Sales revenue from kerosene decreased 12.6% from
RMB 4,423 million for the year ended December 31, 2001
to RMB 3,864 million for the year ended December 31,
2002. This decrease was due primarily to a decrease in sales
volume of kerosene from 1.93 million tons for the year
ended December 31, 2001 to 1.88 million tons for the
year ended December 31, 2002. The average realized selling
price of kerosene decreased 10.5%, from RMB 2,290 per ton
in the year ended December 31, 2001 to RMB 2,050 per ton
for the year ended December 31, 2002.

Intersegment sales revenue increased 18.4% from
RMB 8,436 million for the year ended December 31, 2001
to RMB 9,988 million for the year ended December 31,
2002. This increase was due primarily to a 43.2% increase in the
sales volume of naphtha and liquefied gas to our other segments
in 2002.

Operating Expenses.Operating expenses decreased 2.0% from RMB 175,285 million
for the year ended December 31, 2001 to RMB
171,803 million for the year ended December 31, 2002.
This decrease was due primarily to (i) the decline of raw
material purchase prices, (ii) a 1.5% decrease in
processing volume as a result of the exclusion from this segment
of the small refineries in Tarim, Changqing and Xinan oil fields
or gas fields for administrative purposes in 2002 and
(iii) the decline of processing losses and maintenance
expenses arising from management improvements in production,
operations and equipment management as well as the active
implementation of technical renovations and energy-savings
measures for installations. The effect of these declines and
decreases on operating expenses was partially offset by an
increase in 2002 of RMB 369 million in the impairment
provision for inefficient plants and equipment held for use by
our refining and marketing segment.

Income (Loss) From
Operations.As a result of the factors
discussed above, income (loss) from operations increased from a
loss of RMB 3,324 million for the year ended
December 31, 2001 to a gain of RMB 2,818 million for
the year ended December 31, 2002.



| |                        
| | -----------------------
| | Chemicals and Marketing

Sales and Other Operating
Revenue.Sales and other operating
revenue decreased 6.7% from RMB 31,776 million for the year
ended December 31, 2001 to RMB 29,661 million for the
year ended December 31, 2002. This decrease was due
primarily to a 12.7% decrease in the sales volume of chemical
products.

Operating Expenses.Operating expenses decreased 3.9% from RMB 34,150 million
for the year ended December 31, 2001 to RMB
32,823 million for the year ended December 31, 2002.
This decrease was due primarily to (i) an 11.9% decrease in
purchases, services and other expenses as a result of the
decrease in sales volume, (ii) a reduction of costs
resulting from the effective implementation of various cost
reduction and efficiency improvement measures as well as
streamlined management and (iii) a 21.9% decrease in
selling and administrative expenses as a result of a decrease in
the provision for impairment of receivables in 2002 as compared
to 2001. The effect of such decreases and reduction on operating
expenses was partially offset by an increase in 2002 of RMB
1,384 million in the impairment provision for inefficient
plants and equipment held for use by our chemicals and marketing
segment.

Income (Loss) From
Operations.As a result of the factors
discussed above, loss from operations increased 33.2% from RMB
2,374 million for the year ended December 31, 2001 to
RMB 3,162 million for the year ended December 31,
2002.

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| |                         
| | ------------------------
| | Natural Gas and Pipeline

Sales and Other Operating
Revenue.Sales and other operating
revenue increased 12.5% from RMB 11,321 million for the
year ended December 31, 2001 to RMB 12,733 million for
the year ended December 31, 2002. This increase was due
primarily to increases in the price at which we sold natural gas
and a 10.0% increase in the sales volume of our natural gas as a
result of our efforts in optimizing our natural gas sales
structure in 2002.

Operating Expenses.Operating expenses increased 5.5% from RMB 10,599 million
for the year ended December 31, 2001 to RMB
11,181 million for the year ended December 31, 2002.
This increase was due primarily to an 8.4% increase in the costs
of purchasing natural gas resulting from an increase in the
sales volume of natural gas, which was partially offset by a
decrease of 1.5% in the price at which we purchased natural gas
from our exploration and production segment.

Income From
Operations.As a result of the factors
discussed above, income from operations increased 115.0% from
RMB 722 million for the year ended December 31, 2001
to RMB 1,552 million for the year ended December 31,
2002.




Liquidity and Capital Resources

Our primary sources of funding include cash
generated by operating activities, short-term and long-term
borrowings and cash and cash equivalents. Historically, our
primary uses of funds were for operating activities, 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, 2003, 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,
2003, short-term debt comprised approximately 6.7% of our
capital employed as compared to approximately 5.1% as of
December 31, 2002. Our ability to obtain adequate financing
to satisfy our capital expenditure and debt servicing
requirements may be limited by our financial condition and our
results of operations and the liquidity of international and
domestic capital markets. Prior to accessing international and
domestic capital markets, we must obtain approval from various
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, 2003
was RMB 138,820 million (US$16,772 million). As of
December 31, 2003, we had cash and cash equivalents of
RMB 11,231 million (US$1,357 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.

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

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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 the net proceeds from this
issuance. We intend to use 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. However, the issuance of the
remaining portion of these corporate bonds will be subject to
market conditions. We cannot assure you that we will complete
the issuance of the remaining portion of these corporate bonds
in accordance with the terms approved by our shareholders.
However, we do not believe failure to complete the issuance of
the remaining portion of these corporate bonds would have a
material adverse effect on our financial condition. In addition,
we consider from time to time opportunities to fund our capital
needs by accessing into domestic equity capital markets.


In the year ended December 31, 2001, we
reduced our workforce by 19,800 employees. We had provided for
expenses in the aggregate amount of RMB 1,035 million in
the year ended December 31, 2000 for the reduction of
13,900 employees and incurred expenses in the aggregate amount
of RMB 487 million in the year ended December 31, 2001
in connection with the reduction of additional 6,020 employees.
We believe that our workforce reduction has a positive effect on
our financial condition and results of operations in the long
run.

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, 2003, 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, 2001, 2002 and
2003 and our cash equivalents at the end of each period.

|                                                         |  |                         |         |      |  |      |         |   |  |  |         |  
|-------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                                                         |  |                        
|                                                         |  | Year ended December 31,
|                                                         |  |                        
|                                                         |  | 2001                    |         | 2002 |  | 2003
|                                                         |  |                         |         |      |  |     
|                                                         |  |                        
|                                                         |  | (RMB in millions)      
|Net cash generated by operating activities               |  |                         | 84,439  |      |  |      | 98,341  |   |  |  | 138,820 |  
|Net cash used for investing activities                   |  |                         | (61,491 | )    |  |      | (71,662 | ) |  |  | (97,797 | )
|Net cash provided by (used for) financing
    activities |  |                         | (29,906 | )    |  |      | (27,829 | ) |  |  | (39,769 | )
|Cash and cash equivalents at the end of period           |  |                         | 11,127  |      |  |      | 9,977   |   |  |  | 11,231  |  

Our cash and cash equivalents increased by RMB
1,254 million from RMB 9,977 million as of
December 31, 2002 to RMB 11,231 million
(US$1,357 million) as of December 31, 2003,
representing a 12.6% increase over 2002.

Cash Generated by Operating
Activities

Our net cash generated by operating activities
increased 41.2% from RMB 98,341 million for the year
ended December 31, 2002 to RMB 138,820 million
(US$16,772 million) for the year ended December 31,
2003. This increase was due primarily to an increase of
RMB 60,171 million in sales revenue and an increase of
RMB 1,370 million (US$166 million) in collection
of accounts receivable.

We had a working capital deficit of
RMB 14,189 million as of December 31, 2002 and
RMB 27,855 million (US$3,365 million) as of
December 31, 2003. This increase in working capital deficit
primarily reflected an increase in long-term borrowings due
within a year from RMB 6,143 million as of
December 31, 2002 to RMB 19,672 million
(US$2,377 million) as of December 31, 2003.

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We have continued to implement our centralized
cash management system. This system has the following principal
components:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | requiring our subsidiaries and branches to remit
    their sales revenues to bank accounts designated by our
    headquarters;
|
| |  | utilizing excess bank deposits to reduce bank
    borrowings; and                                                             
|
| |  | centralizing and simplifying internal clearing
    and settlement procedures.                                                 

The implementation of this centralized cash
management system has allowed us to maintain our short
receivable collection cycle.

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 Provided by (Used for) Financing
Activities

Our net borrowings as of December 31, 2001,
2002 and 2003 were as follows:

|                                                                  |                                                |                   |        |        |        |      |        |        |        |  |        |        |        | 
|----------------------------------------------------------------- | ---------------------------------------------- | ----------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ |  | ------ | ------ | ------ | 
|                                                                  |                                                |                  
|                                                                  |                                                | December 31,     
|                                                                  |                                                |                  
|                                                                  |                                                | 2001              |        | 2002   |        | 2003
|                                                                  |                                                |                   |        |        |        |     
|                                                                  |                                                |                  
|                                                                  |                                                | (RMB in millions)
|Short-term debt (including current portion of
    long-term debt) |                                                |                   | 25,323 |        |        |      | 20,633 |        |        |  | 28,890 |       
|Long-term debt                                                    |                                                |                   | 65,546 |        |        |      | 60,655 |        |        |  | 41,959 |       
|                                                                  | Total debt                                     |                   |        | 90,869 |        |      |        | 81,288 |        |  |        | 70,849 |       
|Less:                                                             |                                                |                   |        |        |        |      |        |        |        |  |        |       
|                                                                  | Cash and cash equivalents                      |                   |        | 11,127 |        |      |        | 9,977  |        |  |        | 11,231 |       
|                                                                  | Time deposits with term exceeding three months |                   |        | 3,253  |        |      |        | 2,612  |        |  |        | 2,640  |       
|                                                                  | Receivables under resale agreements            |                   |        | 11,505 |        |      |        | 9,786  |        |  |        | 24,224 |       
|                                                                  |                                                | Net debt          |        |        | 64,984 |      |        |        | 58,913 |  |        |        | 32,754 | 

See Note 21 to our consolidated financial
statements included elsewhere in this annual report for
information regarding the maturity profile of debt, currency and
interest rate structure.

The debts which were guaranteed by CNPC amounted
to RMB 1,697 million, RMB 939 million and
RMB 853 million (US$103 million) as of
December 31, 2001, 2002 and 2003, respectively. As of
December 31, 2000, we had repaid all short-term debts
guaranteed by CNPC. CNPC and ourselves have undertaken to the
Hong Kong Stock Exchange that we will continue to, on a best
endeavor basis, approach each lender with respect to these
guaranteed debts with a view toward obtaining the unconditional
release of such guarantees.

Of the total debts outstanding as of
December 31, 2003, approximately 24.0% were fixed-rate
loans and approximately 76.0% were floating-rate loans. Of the
total debts outstanding as of December 31, 2003,
approximately 82.0% were denominated in Renminbi, approximately
16.0% were denominated in the U.S. dollar and approximately
2.0% were denominated in other major foreign currencies.

The amount of short-term debts owed to related
parties as of December 31, 2001, 2002 and 2003 were RMB
1,268 million, RMB 570 million and RMB
610 million (US$74 million), respectively. The amount
of long-term debts owed to related parties as of
December 31, 2001, 2002 and 2003 were RMB
20,753 million, RMB 24,132 million and RMB
24,578 million (US$2,970 million), respectively.

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Our debts included short-term and long-term debts
owed to China Petroleum Finance Company Limited of RMB
22,021 million, RMB 24,702 million and RMB
25,188 million (US$3,043 million) as of
December 31, 2001, 2002 and 2003, respectively. These debts
were unsecured with interest bearing 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 an interest rate of 0.72%.

Our net cash used for financing activities
increased 42.9% from RMB 27,829 million for the year ended
December 31, 2002 to RMB 39,769 million
(US$4,805 million) for the year ended December 31,
2003. This increase resulted primarily from the following:



| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | an increase in the distribution of dividends
    leading to an increase of RMB 12,028 million in cash
    outflow;
|
| |  | a decrease in new long-term loans leading to a
    decrease of RMB 7,062 million in cash inflow; and              
|
| |  | a decrease in new short-term loans leading to a
    decrease of RMB 3,600 million in cash inflow;                 

This increase was offset primarily by the
following:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | a decrease in the repayment of long-term loans
    leading to a decrease of RMB 5,993 million in cash outflow;
    and
|
| |  | a decrease in the repayment of short-term loans
    leading to a decrease of RMB 4,177 million in cash outflow.       

Our net cash used for financing activities
decreased 7.0% from RMB 29,906 million for the year ended
December 31, 2001 to RMB 27,829 million for the year
ended December 31, 2002. This decrease resulted primarily
from the following:



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | a decrease in the distribution of dividends
    leading to a decrease of RMB 9,049 million in cash outflow;    
|
| |  | an increase in new short-term loans leading to an
    increase of RMB 3,779 million in cash inflow; and        
|
| |  | a decrease in the repayment of short-term loans
    leading to a decrease of RMB 1,852 million in cash outflow;

This decrease was offset primarily by the
following:



| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a decrease in new long-term loans leading to a
    decrease of RMB 11,370 million in cash inflow;                                                                                                                                  
|
| |  | a sum of RMB 430 million cash payment made
    in 2002 as part of the purchase price for the acquisition of
    refined products marketing enterprises from CNPC leading to an
    increase of RMB 430 million in cash outflow; and
|
| |  | an increase in the repayment of long-term loans
    leading to an increase of RMB 252 million in cash outflow.                                                                                                                     

As at December 31, 2003, our loans of RMB
170 million were secured loans (including financing leases
and bank loans), of which RMB 114 million of banks loans
were secured by our plants and equipment in the aggregate value
of RMB 152 million. We consider financing leases as secured
debts. As at December 31, 2003, the debts incurred by us by
way of financing leases amounted to RMB 56 million. The net
book value of the properties, plant and equipment under
financing leases was RMB 240 million.

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Our debt to equity ratio (calculated by dividing
interest-bearing debts by the aggregate of interest-bearing
debts and shareholders equity) as of December 31,
2003 was 16.6%, as compared to 20.4% as of December 31,
2002.

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, 2001, 2002
and 2003 as well as those anticipated for the year ending
December 31, 2004. Actual capital expenditures and
investments for periods after January 1, 2004 may differ
materially from the amounts indicated below.

|                           |       |           |        |        |  |           |      |             |  |           |        |        |  |           |      |       |  |  |        |        |  |  |      |       |  |  |        |        |  |  |      |       | 
|-------------------------- | ----- | --------- | ------ | ------ |  | --------- | ---- | ----------- |  | --------- | ------ | ------ |  | --------- | ---- | ----- |  |  | ------ | ------ |  |  | ---- | ----- |  |  | ------ | ------ |  |  | ---- | ----- | 
|                           |       |           |        |        |  |           |      |             |  |           |        |        |  |          
|                           |       |           |        |        |  |           |      | 2004       
|                           |       | 2001      |        | 2002   |  | 2003      |      | anticipated
|                           |       |           |        |        |  |           |      |            
|                           |       |           |        |        |  |           |      |             |  |           |        |       
|                           |       | (RMB in   |        |        |  | (RMB in   |      |             |  | (RMB in   |        |        |  | (RMB in   |      | %    
|                           |       | millions) |        | %      |  | millions) |      | %           |  | millions) |        | %      |  | millions) |      |      
|Exploration and production |       |           | 45,115 |        |  |           | 68.9 |             |  |           | 50,646 |        |  |           | 64.7 |       |  |  | 58,699 |        |  |  | 65.1 |       |  |  | 56,900 |        |  |  | 62.9 |      
|Refining and marketing     |       |           | 11,416 |        |  |           | 17.4 |             |  |           | 11,327 |        |  |           | 14.5 |       |  |  | 13,915 |        |  |  | 15.4 |       |  |  | 10,100 |        |  |  | 11.1 |      
|Chemicals and marketing    |       |           | 4,062  |        |  |           | 6.2  |             |  |           | 3,175  |        |  |           | 4.1  |       |  |  | 3,903  |        |  |  | 4.3  |       |  |  | 5,500  |        |  |  | 6.1  |      
|Natural gas and pipeline   |       |           | 4,557  |        |  |           | 7.0  |             |  |           | 13,013 |        |  |           | 16.6 |       |  |  | 13,530 |        |  |  | 15   |       |  |  | 17,400 |        |  |  | 19.2 |      
|Corporate and other        |       |           | 321    |        |  |           | 0.5  |             |  |           | 133    |        |  |           | 0.2  |       |  |  | 138    |        |  |  | 0.2  |       |  |  | 600    |        |  |  | 0.7  |      
|                           |       |           |        |        |  |           |      |             |  |           |        |        |  |           |      |       |  |  |        |        |  |  |      |       |  |  |        |        |  |  |      |      
|                           | Total |           |        | 65,471 |  |           |      | 100.0       |  |           |        | 78,294 |  |           |      | 100.0 |  |  |        | 90,185 |  |  |      | 100.0 |  |  |        | 90,500 |  |  |      | 100.0 | 
|                           |       |           |        |        |  |           |      |             |  |           |        |        |  |           |      |       |  |  |        |        |  |  |      |       |  |  |        |        |  |  |      |      

Our capital expenditures and investments
increased 15.2% from RMB 78,294 million for the year ended
December 31, 2002 to RMB 90,185 million
(US$10,896 million) for the year ended December 31,
2003. This increase was due primarily to an increase of RMB
8,053 million (US$973 million) in capital expenditures
and investments in exploration activities and an increase of
RMB 2,588 million (US$313 million) in capital
expenditures and investments in constructing our sales network
of refined products. Taking into account the exclusion of the
investments relating to the non-dry hole exploration expenses,
our capital expenditures for the years ended 2001, 2002 and 2003
would have been RMB 61,549 million, RMB 73,726 million
and RMB 84,299 million (US$10,185 million),
respectively.

As of December 31, 2003, the capital
expenditures contracted for at the balance sheet date but not
recognized in our consolidated financial statements were
approximately RMB 11,145 million
(US$1,347 million).

On July 4, 2002, we entered into a Joint
Venture Framework Agreement with a group of international energy
companies, or the International Consortium, to form a pipeline
contractual joint venture for the development, construction and
operation of the West to East natural gas pipelines.

The International Consortium includes six
international energy companies, including Shell International
Gas Limited, or Shell, OAO Gazprom, or Gazprom, and ExxonMobil
China Gas Pipeline Limited, or ExxonMobil. Shell, Gazprom and
ExxonMobil lead the International Consortium and will hold equal
interest in the pipeline contractual joint venture.

We, the International Consortium and Sinopec will
hold 50%, 45% and 5%, respectively, of the equity interests in
the pipeline contractual joint venture. The term of the
cooperation for the West to East natural gas pipeline project is
45 years.

We expect that a total amount of RMB
27,300 million will be required for the development and
production of natural gas fields to provide natural gas to the
West to East gas pipelines for 45 years. We and the
International Consortium will be responsible for financing the
development and production of natural gas fields based on our
respective interests in each of the upstream projects. We
anticipate that the pipeline joint venture will require a total
investment of approximately RMB 46,300 million, 35% of
which is expected to be provided by us, Sinopec and the
International

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Consortium in the form of equity capital in
proportion to our respective interests in the pipeline joint
venture, and 65% of which is expected to be provided by way of
debt financing. Our equity investment in the pipeline joint
venture is estimated at approximately
RMB 8,100 million. At present, the total amount of
investment in a sales joint venture to be established in
connection with the West to East natural gas pipeline project
has not yet been determined.


Our expected total equity investment in the
upstream projects and the pipeline contractual joint venture is
approximately RMB 22,600 million.

Exploration &
Production

A majority of our capital expenditures and
investments relate to our exploration and production segment.
Our capital expenditures and investments for the segment for the
year ended December 31, 2003 totaled RMB
58,699 million (US$7,092 million), including
RMB 15,136 million for exploration activities and RMB
39,587 million for development activities. Our capital
expenditures and investments for the year ended
December 31, 2002, totaled RMB 50,646 million,
including RMB 10,704 million for exploration activities and
RMB 35,558 million for development activities. The increase
in our capital expenditures and investments from the year ended
December 31, 2002 to the year ended December 31, 2003
was due primarily to increased capital expenditures for
exploration activities in our Changqing oil and gas region and
our Xinjiang, Daqing and Yumen oil regions. Taking into account
the exclusion of the investments relating to the non-dry hole
exploration expenses, the capital expenditures of our
exploration and production segment for the years ended
December 31, 2001, 2002 and 2003 would have been RMB
41,193 million, RMB 46,078 million and
RMB 52,813 million (US$6,381 million),
respectively.

Our anticipated capital expenditures and
investments for our exploration and production segment for the
year ending December 31, 2004 amount to
RMB 56,900 million. Approximately
RMB 14,700 million is expected to be used for
exploration activities and approximately
RMB 42,200 million for development activities. We plan
to focus our exploration efforts in the Tarim, Erdos, Junggar,
Songliao and Bohai Bay basins.



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

Our capital expenditures for our refining and
marketing segment for each of the three years ended
December 31, 2001, 2002 and 2003 were
RMB 11,416 million, RMB 11,327 million and
RMB 13,915 million (US$1,681 million),
respectively. The increase in 2003 due primarily to an increase
in capital expenditures in the construction of our sales network
of refined products.

Our anticipated capital expenditures for our
refining and marketing segment for the year ending
December 31, 2004 amount to RMB 10,100 million,
which include:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | approximately RMB 4,600 million for the
    construction and expansion of refining facilities; and  
|
| |  | approximately RMB 5,500 million for the
    construction of service stations and storage facilities.



| |                        
| | -----------------------
| | Chemicals and Marketing

Our capital expenditures for our chemicals and
marketing segment for each of the three years ended
December 31, 2001, 2002 and 2003 were
RMB 4,062 million, RMB 3,175 million and
RMB 3,903 million (US$472 million), respectively.
The increase in 2003 was due primarily to increases in the
capital expenditures for expanding the capacity and upgrading
the ethylene installations of Daqing Petrochemical, as well as
the commencement of constructing several new projects, such as
upgrading Jilin Petrochemicals facilities for producing
organosilicon polymer and butanol/octanol.

Our anticipated capital expenditures for our
chemicals and marketing segment for the year ending
December 31, 2004 amount to RMB 5,500 million,
which include the capital expenditures for

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expanding the capacity and upgrading the ethylene
installations of Daqing Petrochemical, Jilin Petrochemical and
Lanzhou Petrochemical, the capital expenditures and investments
for expanding the production capacities of chemical fertilizers
at Daqing petrochemical, Ningxia Petrochemical and Urumqi
Petrochemical, and the capital expenditures for the PTA project
at Liaoyang Petrochemical.




| |                         
| | ------------------------
| | Natural Gas and Pipeline

Our capital expenditures for our natural gas and
pipeline segment increased 4.0% from
RMB 13,013 million for the year ended
December 31, 2002 to RMB 13,530 million
(US$1,635 million) for the year ended December 31,
2003. This increase resulted primarily from increased capital
expenditures for the West to East natural gas pipeline project,
the Zhong County to Wuhan natural gas pipeline and the second
Shaanxi-Beijing natural gas pipeline.

Our anticipated capital expenditures for our
natural gas and pipeline segment for the year ending
December 31, 2004 amount to approximately
RMB 17,400 million. Of this amount, approximately
RMB 13,400 million is expected to be invested in the
West to East natural gas pipeline project, the Zhong County to
Wuhan natural gas pipeline and the second Shaanxi-Beijing
natural gas pipeline. We currently expect to invest
approximately RMB 4,000 million in natural gas storage
infrastructure projects, other natural gas pipelines and the
pipelines for the transmission of 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.



| |                    
| | -------------------
| | Corporate and Other

Our non-segment-specific capital expenditures and
investments for each of the three years ended December 31,
2001, 2002 and 2003 were RMB 321 million and
RMB 133 million and RMB 138 million
(US$17 million), respectively. Our non segment-specific
capital expenditures and investments related primarily to
purchase of non-segment-specific equipment and research and
development activities.

Our anticipated non-segment-specific capital
expenditures and investments for the year ending
December 31, 2004 amount to RMB 600 million.
These planned capital expenditures and investments relate
primarily to the construction work of various segments for their
mutual benefits.

The Restructuring of Our Long-Term
Investments

In 2002, we entered into a number of transactions
to streamline our long-term investments and to focus our
resources on our core business activities. We entered into a
share transfer agreement with each of Xian Feitian Science,
Industrial and Trading Group Company Limited, or Xian
Feitian, and Wuhan Luzhou Enterprise (Group) Company Limited, or
Wuhan Luzhou, on May 23, 2002. Under the share transfer
agreements, we transferred 27% and 8.90% of the state-owned
legal person shares in Petroleum Long Champ (Group) Co., Ltd.,
or Long Champ, to Xian Feitian and Wuhan Luzhou,
respectively. The share transfer agreements were approved by the
Ministry of Finance and became effective on December 31,
2002. We ceased having any interest in Long Champ upon
completion of the share transfers.

We entered into a share transfer agreement with
China Electronic Information Industrial Group Company, or China
Electronic, on July 12, 2002. Under the share transfer
agreement, we transferred 51.60% of the state-owned legal person
shares in Gansu Tristar Petrochemical (Group) Co., Ltd., or
Tristar, to China Electronic. On July 25, 2002, the
Ministry of Finance granted its approval to the transfer of the
state-owned legal person shares in Tristar and the share
transfer agreement became effective. We ceased having any
interest in Tristar upon completion of the share transfer.

We have used the entire proceeds received from
the transfer of shares in Long Champ and cash provided by our
cash and cash equivalents to purchase Long Champs equity
interest in three

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crude oil pipeline transmission enterprises. We
have used the entire proceeds received from the transfer of
shares in Tristar and cash provided by our cash and cash
equivalents to purchase certain Tristars refining and
chemical assets or businesses. We believe that the purchase of
these assets and businesses did not have a material adverse
impact on our financial condition or results of operations.





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.




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, 2003.

|                                   |  |                       |         |           |  |           |        |           |  |         |        |  |  |  |        |  |  |  |        | 
|---------------------------------- |  | --------------------- | ------- | --------- |  | --------- | ------ | --------- |  | ------- | ------ |  |  |  | ------ |  |  |  | ------ | 
|                                   |  |                      
|                                   |  | 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                     |  |                       | 61,614  |           |  |           | 19,672 |           |  |         | 25,497 |  |  |  | 9,777  |  |  |  | 6,668  | 
|Capital lease obligations          |  |                       | 56      |           |  |           | 39     |           |  |         | 17     |  |  |  | 0      |  |  |  | 0      | 
|Operating leases                   |  |                       | 96,941  |           |  |           | 2,552  |           |  |         | 4,842  |  |  |  | 4,771  |  |  |  | 84,776 | 
|Capital commitments                |  |                       | 11,145  |           |  |           | 9,579  |           |  |         | 1,564  |  |  |  | 2      |  |  |  | 0      | 
|Unconditional purchase obligations |  |                       | 1,210   |           |  |           | 1,191  |           |  |         | 19     |  |  |  | 0      |  |  |  | 0      | 
|Other long-term obligations        |  |                       | 0       |           |  |           | 0      |           |  |         | 0      |  |  |  | 0      |  |  |  | 0      | 
|Total contractual cash obligations |  |                       | 170,966 |           |  |           | 33,033 |           |  |         | 31,939 |  |  |  | 14,550 |  |  |  | 91,444 | 

|                             |  |                                            |       |           |  |           |       |           |  |         |     |  |  |  |    |  |  |  |   | 
|---------------------------- |  | ------------------------------------------ | ----- | --------- |  | --------- | ----- | --------- |  | ------- | --- |  |  |  | -- |  |  |  | - | 
|                             |  |                                           
|                             |  | 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 millions)                         
|Lines of credit              |  |                                            | 2,918 |           |  |           | 2,918 |           |  |         | 0   |  |  |  | 0  |  |  |  | 0 | 
|Standby letters of credit    |  |                                            | 0     |           |  |           | 0     |           |  |         | 0   |  |  |  | 0  |  |  |  | 0 | 
|Guarantees                   |  |                                            | 448   |           |  |           | 74    |           |  |         | 285 |  |  |  | 89 |  |  |  | 0 | 
|Total commercial commitments |  |                                            | 3,366 |           |  |           | 2,992 |           |  |         | 285 |  |  |  | 89 |  |  |  | 0 | 

The table below sets forth the estimated annual
payments we are obligated to make with respect to our
exploration and production licenses to the Ministry of Land and
Resources.

|                    |  |                   |     | 
|------------------- |  | ----------------- | --- | 
|Year                |  | Annual payment   
|                    |  |                  
|                    |  | (RMB in millions)
|2004                |  |                   | 515 | 
|2005                |  |                   | 618 | 
|2006                |  |                   | 681 | 
|2007 and thereafter |  |                   | 712 | 

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Research and Development

We have a research and development management
department, directly under which there are three research
institutions. Except for our subsidiaries and branch companies
in our marketing operation, each of our subsidiaries and branch
companies has its own research and development department and
technology centers. Our research and development department is
responsible for coordinating research and development activities
conducted by the research institutions and the relevant
departments and technology centers of our subsidiaries and
branch companies. These departments and technology centers of
our subsidiaries and branch companies focus on developing
specific technology for their respective subsidiaries or branch
companies independently or in cooperation with our research and
development department. As of December 31, 2003, we had
22,217 employees engaged in research and development
functions.

In 2003, we applied for 390 patents and 43
trademarks in China. We obtained patent rights for 92 patents in
the same period.

In each of the three years ended
December 31, 2001, 2002 and 2003, our total expenditures
for research and development were approximately
RMB 1,896 million, RMB 1,806 million and
RMB 2,411 million (US$291 million), respectively.

Exploration and Production

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 sedimentary
basins with continental formation. We have developed effective
exploration and production techniques and methods that are
suitable for these geological conditions. 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     
|
| |  | monitoring of the environment.                                  

Refining and Chemicals

In order to coordinate and combine our research
and development efforts with respect to our refining and
chemicals businesses, we established PetroChina Refining &
Chemicals Technology Research Center in July 2003, which is
designed to carry out research and development of advanced
refining and chemicals manufacturing techniques and implement
the application of new technologies. We are in the process of
establishing four research and development bases in Daqing,
Liaoyang, Lanzhou and Jilin as part of this research center.
Currently, the four bases are in their preliminary forms.




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

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 General  Factors
Affecting Results of Operations above for a detailed
discussion of other trend information.


Decrease in Crude Oil Reserves in
China

A significant portion of our revenue is derived
from sales of crude oil. However, our proved crude oil reserves
in China decreased gradually and modestly from approximately
11,031.8 million barrels as of December 31, 2000 to
approximately 10,919.3 million barrels as of
December 31,2003. If we are not successful in locating
sufficient reserves additions or alternative sources of crude
oil supply, our proved crude oil reserves in China will continue
to decrease. This will have a material adverse effect on our
results of operations and financial condition.




Other Information

Inflation

Inflation or deflation has not had a significant
impact on our results of operations for the year ended
December 31, 2003.

Non-Exchange Traded Contracts

We did not engage for the year ended
December 31, 2003, 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 31 to our consolidated financial statements
included elsewhere in this annual report.

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:



| |                                                 
| | ------------------------------------------------
| | Revaluation of Property, Plant and
    Equipment

As described in Note 16 to our consolidated
financial statements, the property, plant and equipment,
excluding oil and gas reserves, transferred to us 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. As at September 30,
2003, a revaluation of our 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 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.

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With respect to the RMB 872 million
revaluation gain resulting from the 2003 revaluation,
RMB 98 million were related to property, plant and
equipment that in 1999 experienced revaluation loss, and were
credited to the income statement. The remaining
RMB 774 million was credited to the revaluation
reserve in the shareholders equity.

With respect to the RMB 1,257 million
revaluation loss resulting from the 2003 revaluation,
RMB 768 million were related to property, plant and
equipment that in 1999 experienced revaluation gain. The
remaining RMB 489 million were charged to the income
statement.

The depreciation charge, which includes
impairment charge, on the revaluation surplus was
RMB 8,305 million in 2001, RMB 8,157 million
in 2002 and RMB 8,053 million in 2003.

The depreciation charge on the revaluation loss
was RMB 112 million in 2001, RMB 112 million
in 2002 and RMB 144 million in 2003.

The loss on disposal of property, plant and
equipment, which includes shut down of manufacturing assets, was
RMB 53 million in 2001, RMB 224 million in
2002 and RMB 451 million in 2003.

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.



| |                           
| | --------------------------
| | Related Party Transactions

We have disclosed in Note 30 to our
consolidated financial statements included elsewhere in this
annual report transactions with significant customers and in
Notes 13, 15, 20, 21 and 31 to our consolidated financial
statements transactions and balances with our immediate parent,
CNPC, and related companies. CNPC is owned by the PRC
government, which also owns a significant portion of the
productive assets in the PRC. IFRS exempts state controlled
enterprises from disclosing transactions with other state
controlled enterprises. IFRS also excludes from related parties
government departments and agencies to the extent that such
dealings are in the normal course of business. US GAAP contains
no similar exemptions but requires disclosure of material
related party transactions. We believe that we have provided
meaningful disclosures of related party transactions through the
major customer disclosures in Note 30 to our consolidated
financial statements included elsewhere in this annual report
and the transactions with the CNPC Group disclosed in
Note 31 to our consolidated financial statements. Although
the majority of our activities are conducted with the PRC
government authorities and its affiliates and other state
controlled enterprises, none individually constitutes a major
customer or supplier other than those disclosed.



| |                                                 
| | ------------------------------------------------
| | One-time Remedial Payments for Staff
    Housing

The Ministry of Finance of the PRC issued several
public notices and regulations during 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 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 our formation
took place in November 1999. As such, the one-time remedial
housing payments payable to our eligible employees have been
born or are to be borne by CNPC, our principal shareholder.

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Under IFRS, such direct payments to employees or
reimbursements will not be recorded through our consolidated
income statement. US GAAP contains no such exemption but
requires this principal shareholders action on our behalf
to be recorded in the consolidated income statement. In the last
quarter of year 2002, we and CNPC completed the process of
estimating the amount that are payable to our qualified
employees. This amount, RMB 2,553 million, was reflected in
determining our net income 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 our shareholders equity.



| |                                        
| | ---------------------------------------
| | Recent US Accounting
    Pronouncements

Issued in January 2003 and revised in December
2003, FIN 46-R, Consolidation of Variable Interest
Entities, provides guidance on the identification of and
financial reporting for entities over which control is achieved
through means other than voting rights. This interpretation
requires existing unconsolidated variable interest entities to
be consolidated by their primary beneficiaries if the entities
do not effectively disperse risks among parties involved. The
interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that
date. It is effective no later than the end of the first
reporting period ended after March 15, 2004 for variable
interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The
adoption of the provisions of FIN 46-R is not expected to
have a material effect on our consolidated financial statements.

Quantitative
Disclosure Relating to US GAAP and IFRS

Year Ended
December 31, 2003 Compared to Year Ended December 31,
2002

Net income.Net
income under US GAAP increased 51.3% from RMB 49,837
million for the year ended December 31, 2002 to
RMB 75,419 million (US$9,112 million) for the year ended
December 31, 2003. This increase was due primarily to
(i) the increase of RMB 22,704 million (US$2,743
million) in the increase of net income under IFRS as discussed
in Item 5  Operating and Financial Review
and Prospects  Operating Results and
(ii) the decrease in the year ended December 31, 2003
of RMB 2,553 million (US$308 million) in one-time
remedial payments for staff housing.

Shareholders
equity.Shareholders equity
under US GAAP increased 16.1% from RMB 283,464 million
as of December 31, 2002 to RMB 329,205 million
(US$39,775 million) as of December 31, 2003. This increase
was due primarily to the net profit under US GAAP for the
year of RMB 75,419 million (US$9,112 million), which was
partially offset by the payment of (i) the final dividend
for the year ended December 31, 2002 of RMB 12,299
million (US$1,486 million) and (ii) the interim dividend
for the year ended December 31, 2003 of RMB 17,379
million (US$2,100 million).

Year Ended
December 31, 2002 Compared to Year Ended December 31,
2001

Net income.Net
income under US GAAP decreased 2.2% from RMB 50,934
million for the year ended December 31, 2001 to
RMB 49,837 million for the year ended December 31,
2002. This decrease was due primarily to the increase of
RMB 1,441 million in the increase of net income under IFRS
as discussed in Item 5  Operating and
Financial Review and Prospects  Operating
Results, which was partially offset by the increase of
RMB 2,553 million in one-time remedial payments for staff
housing in the year ended December 31, 2002.

Information Technology Systems

Our information technology systems were largely
developed for use by individual departments, subsidiaries,
branches, plants or oilfields on a stand-alone basis and are in
need of further

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development. As a result, our information
technology system lacked integrated application systems to
process and control different categories of technical, operating
and financial data.


In 2000, we retained PricewaterhouseCoopers
Consultant (Shanghai) Limited, a former affiliate of
PricewaterhouseCoopers, our independent accountants, to assist
us in formulating our information technology system strategic
plan. This strategic plan covers development strategies in the
areas of the construction of our information technology
infrastructure, upstream and downstream professional application
system, enterprise resource planning, management information
system, corporate structure system and electronic business
system. From 2001 to the sale by PricewaterhouseCoopers of
PricewaterhouseCoopers Consultant (Shanghai) Limited to
International Business Machines Corporation in 2002, we retained
PricewaterhouseCoopers Consultant (Shanghai) Limited again to
assist us in upgrading such strategic plan.

In June 2000, we began to use our newly upgraded
financial information management system after the satisfactory
evaluation of this system by independent system experts. The
implementation of this system has improved the level of
integration of our information technology systems to ensure the
timeliness, completeness and reliability of our consolidated
financial and operating data. The implementation of this new
financial management information system has assisted us in:



| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | implementing stricter internal control processes,
    and ensuring the timeliness, completeness, and reliability of
    financial data on an IFRS basis; and                               
|
| |  | producing relevant key performance indicator
    data, giving our management timely access to financial and
    non-financial information, and improving our information sharing
    level.

On June 12, 2001, we established a joint
venture with CNPC, Hutchison Whampoa Limited and other investors
to operate a business to business online trading platform for
oil and gas products. The total registered capital of this joint
venture is US$15 million. We, CNPC and Hutchison Whampoa
Limited each owns a 44%, 26% and 26% interest in this joint
venture, respectively. The joint ventures e-commerce
website www.energyahead.com was launched on
July 6, 2001 and offers a neutral and collaborative
transaction platform that is intended to serve PRC and
international petrochemical enterprises.

Environmental Expenses and Capital
Expenditures

We paid pollutant discharge fees of approximately
RMB 113 million, RMB 113 million and
RMB 155 million (US$19 million), respectively, in
2001, 2002 and 2003. Our capital expenditures on environmental
programs in 2001, 2002 and 2003 were approximately RMB
1,205 million, RMB 1,363 million and
RMB 1,076 million (US$130 million), respectively.
There were no material environmental liabilities accrued as of
December 31, 2003.

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ITEM 6  DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES



Directors, Senior Management and
Supervisors


Our board of directors consists of thirteen
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, renewable upon
re-election and re-appointment. 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, renewable
upon re-election and re-appointment. 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 elected by and serve 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      |  |     | 57 |          |  | Chairman of the board of directors                        |  |  | May 18, 2004      | 
|Jiang Jiemin   |  |     | 48 |          |  | Vice Chairman of the board of directors and
    President |  |  | May 18, 2004      | 
|Ren Chuanjun   |  |     | 59 |          |  | Vice Chairman of the board of directors                   |  |  | November 19, 2002 | 
|Su Shulin      |  |     | 41 |          |  | Director and Senior Vice President                        |  |  | November 19, 2002 | 
|Duan Wende     |  |     | 52 |          |  | Director and Vice President                               |  |  | May 18, 2004      | 
|Wang Fucheng   |  |     | 53 |          |  | Director and Vice President                               |  |  | May 28, 2003      | 
|Zheng Hu       |  |     | 57 |          |  | Director                                                  |  |  | May 28, 2003      | 
|Zhou Jiping    |  |     | 52 |          |  | Director                                                  |  |  | May 18, 2004      | 
|Gong Huazhang  |  |     | 57 |          |  | Director                                                  |  |  | November 19, 2002 | 
|Zou Haifeng    |  |     | 57 |          |  | Director                                                  |  |  | November 19, 2002 | 
|Chee-Chen Tung |  |     | 61 |          |  | Independent non-executive director                        |  |  | November 19, 2002 | 
|Liu Hongru     |  |     | 73 |          |  | Independent non-executive director                        |  |  | November 19, 2002 | 
|Franco Bernabè |  |     | 55 |          |  | Independent non-executive director                        |  |  | May 28, 2003      | 
|Li Huaiqi      |  |     | 54 |          |  | Secretary to the board of directors                       |  |  |                   | 
|Wang Guoliang  |  |     | 51 |          |  | Chief Financial Officer                                   |  |  |                   | 
|Liu Baohe      |  |     | 57 |          |  | Vice President                                            |  |  |                   | 
|Jia Chengzao   |  |     | 55 |          |  | Chief Geologist                                           |  |  |                   | 
|Li Kecheng     |  |     | 60 |          |  | Chairman of Supervisory Committee                         |  |  |                   | 
|Wen Qingshan   |  |     | 45 |          |  | Supervisor                                                |  |  |                   | 
|Sun Xianfeng   |  |     | 51 |          |  | Supervisor                                                |  |  |                   | 
|Xu Fengli      |  |     | 56 |          |  | Supervisor                                                |  |  |                   | 
|Sun Chongren   |  |     | 53 |          |  | Supervisor                                                |  |  |                   | 
|Zhang Youcai   |  |     | 62 |          |  | Independent supervisor                                    |  |  |                   | 
|Wu Zhipan      |  |     | 47 |          |  | Independent supervisor                                    |  |  |                   | 



---



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

Directors

Chen Geng,aged 57, is Chairman of the board
of directors of PetroChina and President of CNPC. Mr. Chen
is a senior economist. Mr. Chen graduated from Beijing
Economics Institute (currently Capital University of Economics
and Business), majoring in Labor Economics, and has over
30 years experience in Chinas oil and gas
industry. From October 1983, Mr. Chen was Deputy Director
of Changqing Petroleum Exploration Bureau. From April 1985, he
was Deputy Director of the Labour Department under the Ministry
of Petroleum Industry. From August 1988, he was Director of the
Labour Bureau of CNPC. From December 1993, he was Assistant
President of CNPC. From September 1997, he was Vice President of
CNPC and from March 1998, he was Deputy Director of the
State Petroleum and Chemical Industry Bureau. In
February 2001, Mr. Chen was appointed as a Vice
President of CNPC. He has been a director of PetroChina since
June 8, 2001 and was President of PetroChina from
December 3, 2002 to May 2004. He was appointed as
President of CNPC in April 2004 and Chairman of the board of
directors of PetroChina in May 2004.

Jiang Jiemin,aged 48, is a Vice Chairman
of the board of directors of PetroChina and President of
PetroChina. Mr. Jiang is a Vice President of CNPC.
Mr. Jiang is a senior economist. Mr. Jiang graduated
from the University of Shandong in industrial economics
management. He has

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almost 30 years experience in Chinas
oil and gas industry. Mr. Jiang was a Deputy Director of
Shengli Petroleum Administration Bureau from March, 1993 and
Director of Qinghai Petroleum Administration Bureau from
November 1994. Mr. Jiang was an Assistant President of CNPC
and the Head of the Preparation Committee of the Restructuring
and Listing of CNPC from February 1999 to November 1999
when he was appointed a director and Vice President of
PetroChina. In June 2000, Mr. Jiang became a Vice Governor
of Qinghai Province, a position he held until April 2004
when he was appointed as a Vice President of CNPC.
Mr. Jiang has been a Vice Chairman and President of
PetroChina since May 2004.


Ren Chuanjun,aged 59, is a Vice Chairman of the
board of directors of PetroChina. Mr. Ren is a Vice
President of CNPC. Mr. Ren is a senior economist.
Mr. Ren graduated from Hefei Industry University and has
over 30 years experience in Chinas oil and gas
and chemical fibers industries. Mr. Ren became a Deputy
General Manager and General Manager of China Yizheng Fiber
Industrial United Corporation in 1983. From 1994, he worked as a
Vice Minister of China National Textile Council as well as a
Vice Chairman of the board of directors of Yizheng Fiber United
Corporation and Yizheng Fiber Company Limited. Mr. Ren
acted as a Vice President of CNPC from April 1998. Mr. Ren
worked as Senior Vice President of PetroChina from
November 5, 1999 to November 2002. He has been a director
of PetroChina since November 5, 1999 and a Vice Chairman of
PetroChina since December 3, 2002.

Su Shulin,aged 41, is a director and Senior
Vice President of PetroChina. Mr. Su is a senior engineer.
Mr. Su graduated from Daqing Petroleum Institute and
received a masters degree at Harbin Institute of
Technology. Mr. Su has many years experience in
Chinas oil and gas industry. Since 1996, Mr. Su had
worked as a Director Assistant, Director of the First Oil and
Natural Gas Development Department, a Standing Deputy Director
and Director of Daqing Petroleum Administration Bureau until
November 5, 1999 when he was appointed as a Vice President
of PetroChina and General Manger and Chairman of Daqing Oilfield
Company, a subsidiary of PetroChina. Mr. Su held his
positions as General Manager and Chairman of Daqing Oilfield
Company until December 2003. Mr. Su has been a
director of PetroChina since November 19, 2002 and Senior
Vice President of PetroChina since December 3, 2002.

Duan Wende,aged 52, is a director and a Vice
President of PetroChina. Mr. Duan is a Vice President of
CNPC. Mr. Duan is a senior engineer. He graduated from the
University of Nankai, majoring in economics management and
pursued post masters degree studies at the Postgraduate
School of the Chinese Academy of Social Sciences in investment
economics while working. He has over 30 years experience
in Chinas petrochemical industry. From April 1975 to June
1999, he held a number of positions, including the Deputy
Factory Manager of Fushun Factory No. 628 and a chemical
fibres factory, Commander of Command Office of Fushun
Petrochemical Corporation ethylene project, Deputy Factory
Manager of an ethylene petrochemical factory, the Factory
Manager of an acrylic fibres petrochemical factory and a
detergent factory. From May 1999, Mr. Duan was Deputy
Manager of Fushun Petrochemical Corporation and from October
1999, Mr. Duan was Manager of Fushun Petrochemical Branch
Company. From October 1999, he was General Manager of
Fushun Petrochemical Branch Company. He has been an Assistant
President of CNPC since August 2001. He has been a director and
Vice President of PetroChina since May 2004 and March 2002,
respectively, and a Vice President of CNPC since December 2003.

Wang Fucheng,aged 53, is a director and Vice
President of PetroChina. Mr. Wang is a senior economist.
Mr. Wang graduated from the Shandong Normal University and
has over 30 years experience in Chinas oil and
gas industry. Mr. Wang worked in the Shengli Oil Field,
Zhongyuan Oil Field and Liaohe Oil Field. From 1986 to 1999,
Mr. Wang worked as Senior Executive of the Shengli Oil
Field, Deputy Director of the Liaohe Oil Exploration Bureau,
Director of the Liaohe Oil Exploration Bureau and General
Manager of the Branch Office of Liaohe Oil Field. Mr. Wang
has been a director of PetroChina since June 30, 2000 and a
Vice President of PetroChina since July 12, 2000.

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Zheng Hu,aged 57, is a director of
PetroChina and a Vice President of CNPC. Mr. Zheng is a
senior engineer. He graduated from the Beijing Petroleum
Institute and has over 30 years experience in
Chinas oil and gas industry. From 1990 to 1992,
Mr. Zheng acted as vice director of Beijing Petroleum
Managers Training Institute. From 1992 to 1999, Mr. Zheng
worked as Deputy General Manager and General Manager of China
Petroleum Technology & Development Corporation, as
Deputy General Manager and General Manager of China Petroleum
Materials and Equipment (Group) Corporation, Director of
Personnel and Labour Department of CNPC. He has been a director
of PetroChina since June 30, 2000 and a Vice President of
CNPC since August 2000.

Zhou Jiping,aged 52, is a director of
PetroChina and a Vice President of CNPC. Mr. Zhou is a
senior engineer, and holds a masters degree in marine
geologic structure from the Nanhai Marine Research Institute of
the China Academy of Sciences. He has over 30 years
experience in Chinas oil and gas industry. Mr. Zhou
was the Exploration Manager of the Exploration and Development
Department of China National Offshore Oil Corporation, Manager
of the Overseas Department of the International Cooperation
Bureau of CNPC, President of China National Oil & Gas
Exploration and Development Corporation in Vanuatu and President
of China National Oil & Gas Exploration and Development
Corporation in Papua New Guinea. Mr. Zhou has also worked
as Vice Director of the International Exploration and
Development Cooperation Bureau of CNPC, Vice President of China
National Oil & Gas Exploration and Development Corporation
from November 1996. He has been President of China National Oil
& Gas Exploration and Development Corporation and
concurrently Deputy Director of the International Exploration
and Development Cooperation Bureau of CNPC since December 1997,
President of China National Oil & Gas Exploration and
Development Corporation since October 1998, Assistant to the
President of CNPC and concurrently President of China National
Oil & Gas Exploration and Development Corporation since
August 2001 and Vice President of CNPC since December 2003.
Mr. Zhou has been a director of PetroChina since May
2004.

Gong Huazhang,aged 57, is a director of
PetroChina. Mr. Gong is General Accountant of CNPC.
Mr. Gong is a senior accountant. Mr. Gong graduated
from Yangzhou Business School and has over 30 years
experience in Chinas oil and gas industry. Mr. Gong
worked as Chief Accountant, Deputy Director and Director of the
Finance Bureau of CNPC from 1991. Mr. Gong has been
Director of the Finance and Assets Department of CNPC since
October 1998 and has been General Accountant of CNPC since
February 1999. Mr. Gong has been a director of PetroChina
since November 5, 1999.

Zou Haifeng,aged 57,is a director of
PetroChina. Mr. Zou is a Deputy Manager of Jilin
Petrochemical Branch Company and the Chairman of the Supervisory
Committee of Jilin Chemical Industrial Company Limited.
Mr. Zou is a senior engineer. Mr. Zou graduated from
Northeastern Industry Institute and has nearly
30 years experience in the petrochemical industry.
Since 1994, Mr. Zou has been a Deputy Manager of Jilin
Petrochemical Group Corporation and a Director and Deputy
Manager of Jilin Chemical Industrial Company Limited.
Mr. Zou has been a Deputy Manager of Jilin Petrochemical
Branch Company, a subsidiary of PetroChina since July, 1999 and
a director of PetroChina since November 5, 1999.

Independent Non-executive Directors

Chee-Chen Tung,aged 61, is an independent
non-executive director of PetroChina. Mr. Tung is Chairman
and Chief Executive Officer of Orient Overseas (International)
Limited (OOIL). 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. Mr. Tung served as Chairman of Hong Kong
Shipowners Association between 1993 and 1995. From 1999 to
2001, Mr. Tung served as Chairman of the Hong Kong General
Chamber of Commerce, an independent non-executive Director of
Zhejiang Expressway Company Limited, Zhejiang First Bank, Bank
of China (Hong Kong) Limited, Global China Group Holdings
Ltd., Yongxiang Bank and Cathay Pacific Airways, a member of the

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Hong Kong Port Development Board.
Mr. Tung is also Chairman of the Institute for Shipboard
Education Foundation, Chairman of the Court and a member of the
Council of the International Academics Center of the Hong Kong
Polytechnic University, a member of the Board of Trustees of the
University of Pittsburgh, and a member of the Board of Visitors
of the School of Foreign Service, Georgetown University.
Mr. Tung has been an independent non-executive director of
PetroChina since November 5, 1999.


Liu Hongru,aged 73, is an independent
non-executive director of PetroChina. Mr. Liu graduated
from the Economics Department of the University of Moscow in
1959 with an associate doctors degree. Mr. Liu worked
as a Vice Governor of the Agricultural Bank of China, a Vice
Governor of the Peoples Bank of China, a Deputy Director
of the State Economic Restructuring Committee and Chairman of
China Securities Regulatory Commission. Mr. Liu is
currently a Deputy Director of the Economic Committee under the
Chinese Peoples Political Consultative Conference, and
concurrently serves as a Vice President of China Finance and
Banking Society, a Vice President of China National Debt
Association and Director of Shanghai Finance and Law Research
Institute. Mr. Liu is also a professor at each of Beijing
University, the Graduate School of Peoples Bank of China
and the City University of Hong Kong. Mr. Liu served as an
independent supervisor of PetroChina from December 1999 to
November 2002. Mr. Liu has been an independent
non-executive director of PetroChina since November 19,
2002.

Franco Bernabè,aged 55, is an independent
non-executive director of PetroChina. Mr. Bernabè is
the Chairman of the Franco Bernabe Group and Vice Chairman of
H3G, a mobile telephone company which owns a third generation
mobile licence in Italy. He is also Chairman of Kelyan, an
internet professional services company of the Franco Bernabe
Group. Mr. Bernabè is a member of the board of FIAT
and the TNT Post Group. He serves in the Executive Committee of
Confindustria, the Italian Confederation of Industry, in the
Board of the Peres Centre for Peace and in the International
Board of the World Economic Forum. He also serves as a special
representative of the Italian government for the reconstruction
of the Balkan region. Mr. Bernabè joined ENI in 1983
to become the 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. Bernabe was the head of economic studies at FIAT.
He was also 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 PetroChina since June 30, 2000.

Secretary to the Board of Directors

Li Huaiqi,aged 54, is the secretary to the
board of directors of PetroChina. Mr. Li is a senior
economist. He has over 30 years experience in
Chinas oil and gas industry. Mr. Li worked with
Daqing, Liaohe, Nanhai and Huabei oil and gas companies. From
1992 to 1996, Mr. Li worked as Deputy Director of Foreign
Affairs Bureau and Chairman of the Foreign Service Company of
CNPC and as Director of Foreign Affairs Bureau of CNPC. In 1999,
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
PetroChina since August 29, 2001.

Other Senior Management Personnel

Wang Guoliang,aged 51, is Chief Financial
Officer of PetroChina. Mr. Wang has a masters degree
and is a senior accountant. He graduated from Heilongjiang
Business College and Hebei University. He has over
20 years experience in Chinas oil and gas
industry. Mr. Wang worked as a Vice President of CNPC
Finance Co., Ltd. from 1995 to 1997 and as a Deputy General
Manager and General Accountant of China National Oil &
Gas Exploration and Exploitation Corporation from

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1998 to November 5, 1999 when he was
appointed as Chief Financial Officer of PetroChina. He was also
General Manager of PetroChinas Financial Department from
November 1999 to March 2002.


Liu Baohe,aged 57, is a Vice President of
PetroChina. Mr. Liu is a senior engineer of professor
grade. Mr. Liu graduated from Beijing Petroleum Institute
and has over 30 years experience in Chinas oil
and gas industry. From 1994 to 1997, Mr. Liu worked as Vice
Director and Director of the Exploration and Production Bureau
of CNPC. Mr. Liu was Director of the Department of Oil and
Gas Exploitation of CNPC from 1998 to 1999. From 1999 to August
2001, Mr. Liu worked as Deputy General Manager of the
exploration and production segment of PetroChina. From September
2001, Mr. Liu was a Vice President of PetroChina. From
September 2001 to December 2002, he was also General Manager of
the Exploration and Production Branch Company of PetroChina.

Jia Chengzao,aged 55, is Chief Geologist of
PetroChina. Mr. Jia is a doctor degree holder and a senior
engineer. He graduated from Nanjing University and has over
25 years experience in Chinas oil and
geological industry. From 1994, Mr. Jia held several senior
management positions at Tarim Oil Exploration and Exploitation
Headquarters, including Deputy Chief Geologist, Chief Geologist
and Deputy Commander. Since 1998, he has been a Vice Director of
the Oil Exploration and Exploitation Scientific Research
Institute of CNPC. From 1999, Mr. Jia worked as a Deputy
General Manager of China Petroleum Tarim Oil Field Branch
Company and a Vice Director of China Oil Exploration and
Exploitation Research Institute. Mr. Jia has been Chief
Geologist of PetroChina since July 2000. Since December 2002,
Mr. Jia has also been Director of China Oil Exploration and
Exploitation Research Institute.

Supervisors

Li Kecheng,aged 60, is Chairman of
PetroChinas supervisory committee. Mr. Li is a senior
engineer. Mr. Li graduated from Beijing Science and
Technology University and has over 30 years
experience in Chinas oil and gas industry. From 1986 to
1992, Mr. Li was the head of the Petroleum Pipeline Bureau
and a senior executive of the Northeastern Oil Transmission
Administration Bureau. Since November 1992, Mr. Li has been
taking several senior administrative positions at CNPC.
Mr. Li has been Chairman of PetroChinas supervisory
committee since November 5, 1999.

Wen Qingshan,aged 45, is a supervisor of
PetroChina. Mr. Wen is a senior accountant. Mr. Wen
graduated from Jilin Yanbian University. He served as Deputy
Chief Accountant of the Finance and Assets Department of CNPC
from November 1998 to May 1999, when he was appointed as a
Deputy Director of the Finance and Assets Department of CNPC.
Mr. Wen has been Director of the Finance and Assets
Department of CNPC since May 2002. Mr. Wen has been a
supervisor of PetroChina since November 19, 2002.

Sun Xianfeng,aged 51, is a supervisor of PetroChina. Mr. Sun
graduated from Huadong Petroleum Institute in September 1977.
Mr. Sun worked as Deputy Director of the Supervisory Bureau
of CNPC from November 1996, before being 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 has
been Deputy Director of the Audit Department of CNPC since
October 2000, and has worked concurrently as Director of the
Audit Services Center of CNPC since December 2000. Mr. Sun
has been a supervisor of PetroChina since May 2004.

Xu Fengli,aged 56, is a supervisor of PetroChina. Mr. Xu is a
senior accountant. Mr. Xu graduated from Xian
Petroleum Institute in July 1985. Mr. Xu has been Chief
Accountant of Fushun Petrochemical Corporation since
November 1995, Deputy Director of Finance and Assets
Department of CNPC since November 1998, Deputy General Manager
of the Finance Department of PetroChina since December 1999 and
Director of the Administrative Office of the Supervisory
Committee of PetroChina since October 2003. Mr. Xu has been
a supervisor of PetroChina since May 2004.

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Sun Chongren,aged 53, is a supervisor of
PetroChina and an employee representative of PetroChinas
supervisory committee. Mr. Sun graduated from Huadong
Petroleum Institute and has 30 years experience in
Chinas oil and gas industry. Mr. Sun has been working
at Liaohe Petroleum Administration Bureau for 30 years.
Since 1996, he has been a senior executive and Chairman of the
workers union of Liaohe Petroleum Administration Bureau.
Mr. Sun has been a supervisor of PetroChina since
November 5, 1999.

Zhang Youcai,aged 62, is an independent
supervisor of PetroChina. Mr. Zhang is a professor.
Mr. Zhang graduated from Nanjing Industrial University and
has over 30 years experience in enterprise management
and financing. Mr. Zhang worked as Chief Manager of Nantong
Fertilizer Factory, Deputy Director of Nantong Municipal
Industrial Bureau, Vice Chairman of Nantong Municipal
Development and Planning Committee and Vice Mayor of Nantong
city, until his appointment as Mayor of Nantong city in April
1984. Mr. Zhang was a Vice Minister of the Ministry of
Finance from December 1989 to July 2002. He also served as
General Director of the State Asset Administration Bureau from
May 1994 to July 1998. Mr. Zhang has been an independent
supervisor of PetroChina since November 19, 2002.

Wu Zhipan,aged 47, is an independent
supervisor of PetroChina. Mr. Wu acquired a Doctor in Laws
from Beijing University School of Law in 1988, and was a
visiting scholar at Harvard Law School from 1991 to 1992.
Mr. Wu is a Vice President of Beijing University. He is
concurrently an expert consultant of the Supreme Peoples
Court, an arbitrator on the Arbitrator Panel of the China
International Economic and Trade Arbitration Commission and a
Director of China and Economic Law Society. Mr. Wu is the
author of a number of legal publications and has rich experience
in law practice. Mr. Wu has been an independent supervisor
of PetroChina since December 3, 1999.




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. Most of our senior management members have entered into
performance contracts with us. Under this system, the senior
management members compensation system has three
components, namely, basic 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      |  |              
|               |  | % Basic |    | appreciation |  | % Performance
|               |  | salary  |    | rights       |  | bonus        
|               |  |         |    |              |  |              
|Chairman       |  |         | 30 |              |  |               | 70 |  |  |  | 0  | 
|President      |  |         | 25 |              |  |               | 60 |  |  |  | 15 | 
|Vice President |  |         | 25 |              |  |               | 60 |  |  |  | 15 | 
|Department GM  |  |         | 25 |              |  |               | 50 |  |  |  | 25 | 

We have granted stock appreciation rights to 300
persons, including members of the board of directors and the
supervisory committee, president, vice presidents and
departmental managers, general managers and deputy general
managers of specialized companies and local subsidiaries. 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 that
is calculated on the basis of the price of our H shares. In
2003, none of the directors and senior

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management exercised any of the stock
appreciation rights granted to them. Since companies are not
permitted to repurchase and hold their own shares for offering
stock options under current PRC law, we expect to calculate our
book gains and losses on the basis of share prices and in
accordance with stock appreciation rights measures and make cash
payment of such compensations.


Directors and Supervisors
Compensation

Our directors and supervisors, who hold senior
management positions or are otherwise employed by us, receive
compensation in the form of salaries, housing allowances, other
allowances and benefits in kind, including our contribution to
the pension plans for these directors and supervisors.

The aggregate amount of salaries, housing
allowances, other allowances and benefits in kind paid by us to
the five highest paid individuals of PetroChina during the year
ended December 31, 2003 was RMB 1,143,116. We paid
RMB 39,087 as our contribution to the pension plans in
respect of those individuals in the year ended December 31,
2003.

The aggregate amount of salaries or other
compensation, housing allowances, other allowances and benefits
in kind paid by us to our directors, who hold senior management
positions or are otherwise employed by us, during the year ended
December 31, 2003 was RMB 894,134.

Save as disclosed, no other payments have been
paid or are payable, in respect of the year ended
December 31, 2003, by us or any of our subsidiaries to our
directors. In addition, we have no service contracts with our
directors that provide for benefits to our directors upon the
termination of their employment with us.

In 2003, we paid RMB 33,991 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, 2003 was RMB 354,915.




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

The current members of our audit committee are
Mr. Franco Bernabè, as chairman of the committee,
Mr. Chee-Chen Tung and Mr. Gong Huazhang. The
audit committees major responsibilities include:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | supervising the compliance and effectiveness of
    material financial policies, financial reporting processes,
    significant rules and systems in place and substantial operating
    activities;   
|
| |  | reviewing audit plans, critical accounting
    policies, and audit reports compiled by our internal audit
    department and carrying out any audit initiatives proposed by
    the board of directors;
|
| |  | reviewing, observing and questioning our external
    auditors work; and                                                                                                                              
|
| |  | monitoring related party transactions and
    ensuring that all such transactions are in compliance with our
    stated policies and other applicable laws and regulations.                            

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Investment and Development Committee

The current members of our investment and
development committee are Ren Chuanjun, as chairman of the
committee, and Su Shulin. 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 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.

Evaluation and Remuneration
Committee

The current members of our evaluation and
remuneration committee are Liu Hongru, as chairman of the
committee, Mr. Zheng Hu and Mr. Zou Haifeng. The
evaluation and remuneration committees major
responsibilities include:



| |   |                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | reviewing the current standing of
    President-appointed Senior Vice President, Vice Presidents,
    Chief Financial Officer and other senior management personnel
    and making recommendations for such review to the board of
    directors;
|
| |  | managing and conducting performance evaluations
    for our President and reporting the results of such evaluations
    to the board of directors;                                                                                               
|
| |  | monitoring performance evaluations conducted by
    our President for Senior Vice President, Vice Presidents, Chief
    Financial Officer and other senior management personnel; and                                                             
|
| |  | studying our incentive plan, compensation plan
    and stock appreciation rights plan, supervising and evaluating
    the implementation of these plans and making recommendations for
    further improvements to 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. Zhou Jiping and Mr. Wang Fucheng. The
health, safety and environment committees major
responsibilities include:



| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | supervise the implementation of our health,
    safety and environment plan;                                                                                                                                                                            
|
| |  | make recommendations and proposals to the board
    of directors or our President regarding significant issues
    affecting us in the areas of health, safety or the
    environment; and                                                              
|
| |  | investigate any major accidents relating to us,
    our property or our employees or other affiliates and supervise
    the conduct and progress of those involved in the investigation,
    clean-up or other efforts relating to such major accidents.

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Employees

As of December 31, 2001, 2002 and 2003, we
had 422,554, 419,598 and 417,229 employees, respectively. The
table below sets forth the number of our employees by business
segment as of December 31, 2003.

|                           |       |           |         |            |  |  |      |       |  
|-------------------------- | ----- | --------- | ------- | ---------- |  |  | ---- | ----- | -
|                           |       | Employees |         | % of total
|                           |       |           |         |           
|Exploration and production |       |           | 234,733 |            |  |  | 56.2 | %    
|Refining and marketing     |       |           | 111,655 |            |  |  | 26.8 |      
|Chemicals and marketing    |       |           | 57,722  |            |  |  | 13.8 |      
|Natural gas and pipeline   |       |           | 10,342  |            |  |  | 2.5  |      
|Other(1)                   |       |           | 2,777   |            |  |  | 0.7  |      
|                           |       |           |         |            |  |  |      |      
|                           | Total |           |         | 417,229    |  |  |      | 100.0 | %
|                           |       |           |         |            |  |  |      |      




|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Including headquarters management, PetroChina
    Planning & Engineering Institute and PetroChina
    Exploration & Development Research Institute.

Our employees participate in various retirement
benefit plans organized by municipal and provincial governments
whereby we are required to make monthly insurance contributions
to these plans at rates ranging from 16% to 22% of the
employees salary. Expenses incurred by us in connection
with the retirement benefit plans were approximately RMB
1,893 million, RMB 2,109 million and
RMB 2,193 million (US$265 million), respectively,
for the three years ended December 31, 2001, 2002 and 2003,
respectively.

In 2003, we have not experienced any strikes,
work stoppages, labour disputes or actions which affected the
operation of any of our businesses. We consider our relationship
with our employees to be good.




Share Ownership

Director Zou Haifeng currently has 3,550 A shares
of Jilin Chemical Industrial Stock Company, a subsidiary of
PetroChina. Other 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 momentary 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,
2003, CNPC owned 158,241,758,000 State-owned shares,
representing approximately 90% 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. 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, 2003, BP p.l.c.
beneficially owned 3,516,484,000 H shares, representing 2% of
the total outstanding share capital of PetroChina, or 20% of the
H shares of PetroChina. In January 2004, BP p.l.c.
sold all of the H shares it beneficially owned.

As of December 31, 2003, 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 1,245,100 ADSs and
2,273,063,000 H shares, representing 13.63% of the
H shares of PetroChina.




Related Party Transactions

We enter into the following transactions with
CNPC and other members of the CNPC group. All of these
transactions constitute connected transactions for us under the
Listing Rules of the Hong Kong Stock Exchange.

Comprehensive Products and Services
Agreement

We entered into a Comprehensive Products and
Services Agreement with CNPC for the provision by us to the CNPC
group and by the CNPC group to us 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.



| |                                                           
| | ----------------------------------------------------------
| | Products and Services Provided by Us to the
    CNPC Group

Under the Comprehensive Products and Services
Agreement, a limited range of products and services are to be
provided by us to the CNPC group including those relating to
refined products, chemical products, natural gas, crude oil,
supply of water, electricity, gas, heating, quantifying and
measuring, 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.

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| |                                                           
| | ----------------------------------------------------------
| | Products and Services Provided by the CNPC
    Group to Us

The products and services provided by the CNPC
group to us are more numerous, both in terms of quantity and
variety, than those provided by us to the CNPC group. They have
therefore been grouped together and categorized according to the
following types of products and services:



| |   |                                     
| | - | ------------------------------------
| |  | construction and technical services,
|
| |  | production services,                
|
| |  | supply of material services,        
|
| |  | social services,                    
|
| |  | ancillary services, and             
|
| |  | financial services.                 

We envisage that from time to time and as
required, individual Product and Service Implementation
Agreements will be entered into between the relevant service
companies and affiliates of the CNPC group or us, as
appropriate, providing the relevant products or services and the
relevant members of the CNPC group or us, as appropriate,
requiring such products or services.

Land Use Rights Leasing Contract

We entered into a Land Use Rights Leasing
Contract with CNPC under which CNPC has leased a total of 42,476
parcels of land in connection with and for the purposes of all
aspects of our business and operations covering an aggregate
area of approximately 1,145 million square meters located
throughout the PRC to members of PetroChina for a term of
50 years at an annual fee of RMB 2,000 million. The
total fee payable for the lease of all such property may, after
the expiration of 10 years from the date of the land use
rights leasing contract, be adjusted (to reflect market
conditions prevailing at such time of adjustment, including
current market prices, inflation or deflation and such other
pertinent factors as may be reasonably considered in negotiating
and agreeing to any such adjustment) by agreement between CNPC
and us. 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, both
parties will share proportionately on a reasonable basis any
additional amount of such taxes payable and fees payable as a
result of changes in policies of the PRC government after the
date of the contract.

Buildings Leasing Contract

We entered into the Buildings Leasing Contract
with CNPC under which CNPC has leased a total of 191 buildings
covering an aggregate area of 269,770 square meters located
throughout the PRC to us.

191 buildings were leased at a price of RMB
145 per square meter per year, that is, at an aggregate
annual fee of RMB 39,116,650, for a term of 20 years.
We are responsible for the payment of any governmental, legal or
other administrative taxes and maintenance charge required to be
paid in connection with those buildings.

Supplemental Buildings Leasing
Agreement

On September 26, 2002, we entered into a
Supplemental Buildings Leasing Agreement with CNPC, under which
CNPC agreed to lease to us an additional 404 buildings covering
an aggregate area of 442,730 square meters.

We pay RMB 157,439,540 annually for the
additional 404 buildings. We are responsible for the payment of
any governmental, legal or other administrative taxes and
maintenance charge required

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to be paid in connection with those buildings.
This Supplemental Buildings Leasing Agreement will expire at the
same time as the above-mentioned Buildings Leasing Contract.


Intellectual Property Licensing
Contracts

We entered into three Intellectual Property
Licensing Agreements with CNPC, including a Trademark Licensing
Contract, a Patent and Know-how Licensing Contract and a
Computer Software Licensing Contract. In these Licensing
Contracts, CNPC has granted us exclusive rights to use certain
trademarks (including the CNPC trademark), patents,
know-hows of CNPC and computer software of CNPC (as more
particularly detailed in those three contracts) at no cost.
These intellectual property rights relate to the assets and
businesses of CNPC that were transferred to us in the
restructuring of the CNPC group.

Contract for the Transfer of Rights Under
Production Sharing Contracts

Immediately prior to the restructuring of the
CNPC group, CNPC had 23 production sharing contracts with a
number of international oil companies. As part of the
restructuring of the CNPC group, CNPC transferred to us most of
its commercial and operational rights and obligations under
those contracts, except the rights and obligations relating to
CNPCs supervisory functions, under the Contract for the
Transfer of Rights under Production Sharing Contracts.

Guarantee of Debts Contract

As part of the restructuring of the CNPC group,
all of CNPCs debts relating to assets transferred to us in
the restructuring of the CNPC group were also transferred to,
and assumed by, us.

We entered into a Guarantee of Debts Contract
with CNPC, under which CNPC has agreed to guarantee certain of
our debts totalling approximately RMB 63,889 million
(including principal and interest) as of September 30, 1999
at no cost to us. As of December 31, 2003, bank loans
guaranteed by CNPC and its subsidiaries were
RMB 853 million.

Deposits with CP Finance

The Group had deposits placed with China
Petroleum Finance Company Limited, or CP Finance, a
subsidiary of CNPC and a non-bank financial institution approved
by the Peoples Bank of China, amounting to
RMB 1,239 million, RMB 2,861 million and
RMB 2,331 million (US$282 million) as of
December 31, 2001, 2002 and 2003 respectively. The deposits
yield interest at prevailing saving deposit rates.

Related Party Transactions with
CNPC (HK)

As part of the restructuring of CNPC and in
preparation for our listing on HKSE, and as disclosed in our
prospectus dated March 27, 2000, CNPC entered into the
Contract for the Transfer of Rights under Production Sharing
Contracts with us 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 Xinjiang Oil Field Production
Sharing Contract dated July 1, 1996, entered into between
CNPC and Hafnium Limited, or the Xinjiang Contract, and the Leng
Jiapu Area Petroleum Contract dated December 30, 1997,
entered into between CNPC and Beckbury International Limited, or
the Liaohe Contract, were novated to us.

CNPC (Hong Kong) Limited, or CNPC (HK) is a
57.5% owned subsidiary of CNPC. CNPC is our controlling
shareholder which holds approximately 90% of our issued share
capital. Upon the effective novation by CNPC to us of its
interests in the Xinjiang Contract and the Liaohe Contract,
certain transactions under the Xinjiang Contract and the Liaohe
Contract constitute connected transactions between us and
CNPC (HK).

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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Production and development cost
    sharing between us and CNPC (HK). We and
    CNPC (HK) share the oil and natural gas produced from the
    Karamay Oilfield, as to 46% by us and 54% by CNPC (HK), and
    from the Leng Jiapu Oilfield, as to 30% by us and 70% by
    CNPC (HK). CNPC (HK) is responsible for 100% of the
    development costs in respect of the Karamay Oilfield. We are
    responsible for 30% and CNPC (HK) is responsible for 70% of
    the development costs in respect of the Leng Jiapu Oilfield.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (2) Provision of assistance by us to
    CNPC (HK). We are required to provide assistance to
    CNPC (HK), for among other things: (i) leasing
    warehouses, terminal facilities, barges, pipelines and land;
    (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) is required to pay an annual
    assistance fee of US$50,000 for each of the Karamay Oilfield and
    the Leng Jiapu Oilfield. The amount of such fee was determined
    after negotiations, and taking into account the actual
    circumstances and conditions, including the scope of the
    projects and the level of demand for such assistance. This fee
    is accounted for as operating costs and shared by us and
    CNPC (HK) in accordance with 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 us an amount of US$50,000 annually for
    training of our personnel for each of the Karamay Oilfield and
    the Leng Jiapu Oilfield. The amount of such fee was determined
    after negotiations, and taking 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 us. CNPC (HK) has the right to
    deliver its share of oil production from each 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 purchaser of the oil
    production attributable to CNPC (HK) from each of the
    Karamay Oilfield and the Leng Jiapu Oilfield is likely to be
    CNPC or its affiliates, including us, which will purchase oil
    produced in the Karamay Oilfield and the Leng Jiapu Oilfield at
    the market price. Since the entering into of the Xinjiang
    Contract and the Liaohe Contract, CNPC (HK) has sold all of
    its share of the oil production to CNPC or its affiliates,
    including us. As far as the board of directors is aware,
    CNPC (HK) intends to continue with this arrangement. There
    is no contractual obligation upon us to purchase oil production
    from the Karamay Oilfield and the Leng Jiapu Oilfield although,
    from a commercial perspective, we intend to continue to make
    such purchases. 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 with reference to the prevailing
    price in arms length transactions of crude oil of a
    similar quality in the primary world markets, adjusted to take
    into account the terms of transportation, payment and other
    terms.

In the opinion of our independent non-executive
directors, the related party transactions described above have
been:



| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) conducted on normal commercial terms and
    entered into in our ordinary and usual course of
    business; and                                                                                                
|
| | (ii) entered into: (a) in accordance
    with the terms of the Xinjiang Contract and the Liaohe Contract;
    or (b) on terms no less favourable than the terms available
    to or from independent third parties.

The waiver in respect of the related party
transactions between us and CNPC (HK) granted by the HKSE
expired on December 31, 2003. Since the related party
transactions are ongoing transactions, we applied on
November 25, 2003, and obtained a new related party
transactions

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waiver granted by the HKSE on January 2,
2004, for the period from January 1, 2004 to
December 31, 2006.


Loans or Guarantees with Related
Parties

As of December 31, 2003, the aggregate
outstanding loans or guarantees made by PetroChina for the
benefit of related parties was RMB 448 million
(US$54 million), the largest outstanding amount of which
was RMB 240 million. The average interest rate on
these loans is 5.58%.

As of December 31, 2003, PetroChina had
unsecured short-term and long-term loans from CP Finance in
an aggregate amount of RMB 25,188 million
(US$3,043 million). The average interest rate on these
loans is 4.23%.




ITEM 8  FINANCIAL
INFORMATION

Financial Statements

See pages F-1 to F-58 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;                                      
|
| |  | allocations to the statutory common welfare
    fund; and                              
|
| |  | allocations to a discretionary common reserve
    fund if approved by our 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. 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.

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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 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.

An interim dividend of RMB 0.098841 (US$0.0119)
per H share (inclusive of applicable tax) for the six
months ended June 30, 2003 was paid to our shareholders on
October 8, 2003. On May 18, 2004, our shareholders
approved the payment of a final dividend of RMB 0.079324
(US$0.0096) per H share (inclusive of applicable tax) for
the year ended December 31, 2003. The final dividend was
calculated on the basis of 45% of our net income for the year
ended December 31, 2003. The final dividend was paid on
June 2, 2004.

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. Prior to these listings, there was no public
market for our equity securities. 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, 2003, there were
17,582,418,000 H shares issued and outstanding. As of
December 31, 2003, there were 176 registered holders
of American depositary receipts evidencing 23,648,491 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 since
listing in 2000 and for each month in 2004 (through
June 24, 2004) are set forth below.

|     |                        |           |  |           |  |      |  |      |  |  |  |       |  |  |  |       | 
|---- | ---------------------- | --------- |  | --------- |  | ---- |  | ---- |  |  |  | ----- |  |  |  | ----- | 
|     |                        |           |  |          
|     |                        | Price per |  | Price per
|     |                        | H share   |  | ADS      
|     |                        |           |  |          
|     |                        | High      |  | Low       |  | High |  | Low 
|     |                        |           |  |           |  |      |  |     
|     |                        |           |  |          
|     |                        | (HK$)     |  | (US$)    
|2000 |                        |           |  |           |  |      |  |      |  |  |  |       |  |  |  |      
|     | Second quarter         |           |  | 1.78      |  |      |  | 1.11 |  |  |  | 22.56 |  |  |  | 14.25 | 
|     | Third quarter          |           |  | 2.05      |  |      |  | 1.49 |  |  |  | 26.19 |  |  |  | 19.38 | 
|     | Fourth quarter         |           |  | 1.75      |  |      |  | 1.30 |  |  |  | 23.00 |  |  |  | 15.94 | 
|2001 |                        |           |  |           |  |      |  |      |  |  |  |       |  |  |  |      
|     | First quarter          |           |  | 1.48      |  |      |  | 1.26 |  |  |  | 18.73 |  |  |  | 16.55 | 
|     | Second quarter         |           |  | 1.84      |  |      |  | 1.35 |  |  |  | 23.60 |  |  |  | 17.40 | 
|     | Third quarter          |           |  | 1.67      |  |      |  | 1.43 |  |  |  | 21.15 |  |  |  | 18.43 | 
|     | Fourth quarter         |           |  | 1.48      |  |      |  | 1.29 |  |  |  | 19.30 |  |  |  | 16.80 | 
|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 |                        |           |  |           |  |      |  |      |  |  |  |       |  |  |  |      
|     | January                |           |  | 4.85      |  |      |  | 3.80 |  |  |  | 63.70 |  |  |  | 47.53 | 
|     | February               |           |  | 4.20      |  |      |  | 3.75 |  |  |  | 54.13 |  |  |  | 47.89 | 
|     | March                  |           |  | 4.23      |  |      |  | 3.78 |  |  |  | 54.21 |  |  |  | 48.90 | 
|     | April                  |           |  | 4.00      |  |      |  | 3.40 |  |  |  | 50.96 |  |  |  | 43.15 | 
|     | May                    |           |  | 3.75      |  |      |  | 3.20 |  |  |  | 47.71 |  |  |  | 41.63 | 
|     | June (through June 24) |           |  | 3.80      |  |      |  | 3.38 |  |  |  | 48.24 |  |  |  | 43.39 | 

The closing prices per H share and per ADS on
June 24, 2004 were HK$3.58 and US$45.27, respectively.

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ITEM 10  ADDITIONAL
INFORMATION



Memorandum and Articles of
Association


We filed our articles of association with the
Commission as an exhibit to the Registration Statement on
Form F-1 (Registration No. 333-11566) under the
Securities Act, as declared effective on March 29, 2000, in
connection with the global offering. A summary of our articles
of association is contained in that Registration Statement. We
hereby incorporate by reference the section Description of
Share Capital from that Registration Statement. We also
filed our amended articles of association with the Commission as
an exhibit to our Annual Report on Form 20-F for the fiscal
year ended December 31, 2001 (File No. 1-15006). We
hereby incorporate by reference the relevant exhibit to that
Annual Report.




Material Contracts

Incorporated by reference to our Registration
Statement on Form F-1 (Registration No. 333-11566) and
our Annual Reports on Form 20-F for the fiscal years ended
December 31, 1999 (File No. 1-15006),
December 31, 2000 (File No. 1-15006),
December 31, 2001 (File No. 1-15006) and
December 31, 2002 (File No. 1-15006), to which our
material contracts were filed as exhibits. For information
regarding certain material contracts, see
Item 7  Major Shareholders and Related
Party Transactions  Related Party Transactions
and the material contracts that we have filed with the
Commission as exhibits to this annual report.




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.

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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
tax consequences of the ownership of H shares or ADSs
purchased in connection with the global offering and held by the
investor as capital assets.

Dividends and Individual Investors

Under 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 Enterprises

According 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 Treaties

If 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;           

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| |   |                        
| | - | -----------------------
| |  | France;                
|
| |  | Germany;               
|
| |  | Japan;                 
|
| |  | Malaysia;              
|
| |  | Singapore;             
|
| |  | 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 Gains

The 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 Considerations

Under 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.




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
450 Fifth Street, NW, 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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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, 2001, 2002 and
2003. 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 and materials.
Foreign currency payments for imported equipment represented
9.7%, 12.2% and 15.5% of our total payments for equipment in
2001, 2002 and 2003, respectively. Foreign currency payments for
imported materials represented 9.9%, 7.7% and 10.8% of our total
payments for materials in 2001, 2002 and 2003, 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, 2001, 2002 and 2003, respectively.

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December 31, 2003

|                             |                       |                                                  |        |        |  |      |        |            |  |      |       |            |  |       |       |          |  |            |       |       |  |  |       |       |  |  |        |        |  |  |      |        |  |  |        |        | 
|---------------------------- | --------------------- | ------------------------------------------------ | ------ | ------ |  | ---- | ------ | ---------- |  | ---- | ----- | ---------- |  | ----- | ----- | -------- |  | ---------- | ----- | ----- |  |  | ----- | ----- |  |  | ------ | ------ |  |  | ---- | ------ |  |  | ------ | ------ | 
|                             |                       |                                                  |        |        |  |      |        | Percentage |  |     
|                             |                       | Expected maturity date                           |        |        |  |      |        | to total   |  |     
|                             |                       |                                                  |        |        |  |      |        | long-term  |  |     
|                             |                       | 2004                                             |        | 2005   |  | 2006 |        | 2007       |  | 2008 |       | Thereafter |  | Total |       | debt (%) |  | Fair value
|                             |                       |                                                  |        |        |  |      |        |            |  |      |       |            |  |       |       |          |  |           
|                             |                       |                                                 
|                             |                       | (RMB equivalent in millions, except percentages)
|Long Term Debt               |                       |                                                  |        |        |  |      |        |            |  |      |       |            |  |       |       |          |  |            |       |       |  |  |       |       |  |  |        |        |  |  |      |        |  |  |        |       
|Loan in RMB                  |                       |                                                  |        |        |  |      |        |            |  |      |       |            |  |       |       |          |  |            |       |       |  |  |       |       |  |  |        |        |  |  |      |        |  |  |        |       
|                             | Fixed rate            |                                                  |        | 43     |  |      |        | 39         |  |      |       | 5          |  |       |       |         |  |            |       |      |  |  |       | 3     |  |  |        | 90     |  |  |      | 0.15%  |  |  |        | 88     | 
|                             | Average interest rate |                                                  |        | 2.06%  |  |      |        | 4.81%      |  |      |       | 4.44%      |  |       |       |         |  |            |       |      |  |  |       | 2.03% |  |  |        |        |  |  |      |        |  |  |        |        | 
|                             | Variable rate(1)      |                                                  |        | 16,686 |  |      |        | 12,448     |  |      |       | 6,366      |  |       |       | 3,720    |  |            |       | 3,720 |  |  |       | 3,000 |  |  |        | 45,940 |  |  |      | 74.55% |  |  |        | 45,940 | 
|                             | Average interest rate |                                                  |        | 5.05%  |  |      |        | 5.08%      |  |      |       | 5.12%      |  |       |       | 5.18%    |  |            |       | 5.10% |  |  |       | 4.65% |  |  |        |        |  |  |      |        |  |  |        |        | 
|Loan in Euro                 |                       |                                                  |        |        |  |      |        |            |  |      |       |            |  |       |       |          |  |            |       |       |  |  |       |       |  |  |        |        |  |  |      |        |  |  |        |       
|                             | Fixed rate            |                                                  |        | 43     |  |      |        | 39         |  |      |       | 34         |  |       |       | 16       |  |            |       | 16    |  |  |       | 233   |  |  |        | 381    |  |  |      | 0.62%  |  |  |        | 319    | 
|                             | Average interest rate |                                                  |        | 6.08%  |  |      |        | 5.47%      |  |      |       | 5.33%      |  |       |       | 2.11%    |  |            |       | 2.11% |  |  |       | 2.10% |  |  |        |        |  |  |      |        |  |  |        |        | 
|                             | Variable rate         |                                                  |        |       |  |      |        |           |  |      |       |           |  |       |       |         |  |            |       |      |  |  |       |      |  |  |        | 0      |  |  |      | 0.00%  |  |  |        | 0      | 
|                             | Average interest rate |                                                  |        |       |  |      |        |           |  |      |       |           |  |       |       |         |  |            |       |      |  |  |       |      |  |  |        |        |  |  |      |        |  |  |        |        | 
|Loan in United States Dollar |                       |                                                  |        |        |  |      |        |            |  |      |       |            |  |       |       |          |  |            |       |       |  |  |       |       |  |  |        |        |  |  |      |        |  |  |        |       
|                             | Fixed rate            |                                                  |        | 596    |  |      |        | 582        |  |      |       | 531        |  |       |       | 349      |  |            |       | 257   |  |  |       | 1,152 |  |  |        | 3,467  |  |  |      | 5.62%  |  |  |        | 3,253  | 
|                             | Average interest rate |                                                  |        | 6.05%  |  |      |        | 6.03%      |  |      |       | 5.97%      |  |       |       | 5.65%    |  |            |       | 5.34% |  |  |       | 3.06% |  |  |        |        |  |  |      |        |  |  |        |        | 
|                             | Variable rate         |                                                  |        | 1,997  |  |      |        | 4,754      |  |      |       | 111        |  |       |       | 116      |  |            |       | 121   |  |  |       | 755   |  |  |        | 7,854  |  |  |      | 12.75% |  |  |        | 7,854  | 
|                             | Average interest rate |                                                  |        | 1.16%  |  |      |        | 1.45%      |  |      |       | 2.33%      |  |       |       | 2.36%    |  |            |       | 2.38% |  |  |       | 2.32% |  |  |        |        |  |  |      |        |  |  |        |        | 
|Loan in British Pound        |                       |                                                  |        |        |  |      |        |            |  |      |       |            |  |       |       |          |  |            |       |       |  |  |       |       |  |  |        |        |  |  |      |        |  |  |        |       
|                             | Fixed rate            |                                                  |        | 143    |  |      |        | 142        |  |      |       | 122        |  |       |       | 47       |  |            |       |      |  |  |       |      |  |  |        | 454    |  |  |      | 0.74%  |  |  |        | 432    | 
|                             | Average interest rate |                                                  |        | 2.85%  |  |      |        | 2.85%      |  |      |       | 2.85%      |  |       |       | 2.85%    |  |            |       |      |  |  |       |      |  |  |        |        |  |  |      |        |  |  |        |        | 
|Loan in Japanese Yen         |                       |                                                  |        |        |  |      |        |            |  |      |       |            |  |       |       |          |  |            |       |       |  |  |       |       |  |  |        |        |  |  |      |        |  |  |        |       
|                             | Fixed rate            |                                                  |        | 164    |  |      |        | 162        |  |      |       | 162        |  |       |       | 42       |  |            |       | 23    |  |  |       | 25    |  |  |        | 578    |  |  |      | 0.94%  |  |  |        | 628    | 
|                             | Average interest rate |                                                  |        | 4.50%  |  |      |        | 4.49%      |  |      |       | 4.49%      |  |       |       | 4.35%    |  |            |       | 3.56% |  |  |       | 2.68% |  |  |        |        |  |  |      |        |  |  |        |        | 
|                             | Variable rate         |                                                  |        |       |  |      |        |           |  |      |       |           |  |       |       |         |  |            |       |      |  |  |       |      |  |  |        | 0      |  |  |      | 0.00%  |  |  |        | 0      | 
|                             | Average interest rate |                                                  |        |       |  |      |        |           |  |      |       |           |  |       |       |         |  |            |       |      |  |  |       |      |  |  |        |        |  |  |      |        |  |  |        |        | 
|Debenture in RMB             |                       |                                                  |        |        |  |      |        |            |  |      |       |            |  |       |       |          |  |            |       |       |  |  |       |       |  |  |        |        |  |  |      |        |  |  |        |       
|                             | Fixed rate            |                                                  |        |       |  |      |        |           |  |      |       |           |  |       |       | 1,350    |  |            |       |      |  |  |       | 1,500 |  |  |        | 2,850  |  |  |      | 4.63%  |  |  |        | 2,640  | 
|                             | Average interest rate |                                                  |        |       |  |      |        |           |  |      |       |           |  |       |       | 4.50%    |  |            |       |      |  |  |       | 4.11% |  |  |        |        |  |  |      |        |  |  |        |        | 
|                             |                       |                                                  |        |        |  |      |        |            |  |      |       |            |  |       |       |          |  |            |       |       |  |  |       |       |  |  |        |        |  |  |      |        |  |  |        |       
|Total                        |                       |                                                  | 19,672 |        |  |      | 18,166 |            |  |      | 7,331 |            |  |       | 5,640 |          |  |            | 4,137 |       |  |  | 6,668 |       |  |  | 61,614 |        |  |  | 100% |        |  |  | 61,154 |       
|                             |                       |                                                  |        |        |  |      |        |            |  |      |       |            |  |       |       |          |  |            |       |       |  |  |       |       |  |  |        |        |  |  |      |        |  |  |        |       

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December 31, 2002

|                             |                       |                                                  |       |            |   |      |        |        |   |      |        |            |   |       |       |       |   |       |       |       |   |  |       |       |   |  |        |        |  |  |     |       |   |  |        |        | 
|---------------------------- | --------------------- | ------------------------------------------------ | ----- | ---------- | - | ---- | ------ | ------ | - | ---- | ------ | ---------- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | - |  | ----- | ----- | - |  | ------ | ------ |  |  | --- | ----- | - |  | ------ | ------ | 
|                             |                       |                                                  |       | Percentage |   |     
|                             |                       | Expected maturity date                           |       | to total   |   |     
|                             |                       |                                                  |       | long-term  |   | Fair
|Long term debt               |                       | 2003                                             |       | 2004       |   | 2005 |        | 2006   |   | 2007 |        | Thereafter |   | Total |       | debt  |   | value
|                             |                       |                                                  |       |            |   |      |        |        |   |      |        |            |   |       |       |       |   |      
|                             |                       |                                                  |       |            |   |      |        |        |   |      |        |            |   |       |       | %     |   |      
|                             |                       |                                                 
|                             |                       | (RMB equivalent in millions, except percentages)
|Loan in RMB                  |                       |                                                  |       |            |   |      |        |        |   |      |        |            |   |       |       |       |   |       |       |       |   |  |       |       |   |  |        |        |  |  |     |       |   |  |        |       
|                             | Fixed rate            |                                                  |       | 127        |   |      |        | 80     |   |      |        | 1          |   |       |       |      |   |       |       | 1     |   |  |       | 2     |   |  |        | 211    |  |  |     | 0.32  | % |  |        | 207    | 
|                             | Average interest rate |                                                  |       | 4.71       | % |      |        | 3.46   | % |      |        | 6.94       | % |       |       |      |   |       |       | 7.00  | % |  |       |      |   |  |        |        |  |  |     |       |   |  |        |        | 
|                             | Variable rate(1)      |                                                  |       | 3,798      |   |      |        | 16,087 |   |      |        | 13,033     |   |       |       | 6,366 |   |       |       | 3,720 |   |  |       | 6,521 |   |  |        | 49,525 |  |  |     | 74.20 | % |  |        | 49,525 | 
|                             | Average interest rate |                                                  |       | 5.18       | % |      |        | 5.02   | % |      |        | 5.15       | % |       |       | 5.20  | % |       |       | 5.31  | % |  |       | 5.01  | % |  |        |        |  |  |     |       |   |  |        |        | 
|Loan in Euro                 |                       |                                                  |       |            |   |      |        |        |   |      |        |            |   |       |       |       |   |       |       |       |   |  |       |       |   |  |        |        |  |  |     |       |   |  |        |       
|                             | Fixed rate            |                                                  |       | 107        |   |      |        | 36     |   |      |        | 30         |   |       |       | 30    |   |       |       | 15    |   |  |       | 201   |   |  |        | 419    |  |  |     | 0.63  | % |  |        | 328    | 
|                             | Average interest rate |                                                  |       | 3.74       | % |      |        | 5.80   | % |      |        | 5.16       | % |       |       | 5.16  | % |       |       | 2.13  | % |  |       | 2.11  | % |  |        |        |  |  |     |       |   |  |        |        | 
|                             | Variable rate         |                                                  |       | 22         |   |      |        | 22     |   |      |        |           |   |       |       |      |   |       |       |      |   |  |       |      |   |  |        | 44     |  |  |     | 0.07  | % |  |        | 44     | 
|                             | Average interest rate |                                                  |       | 1.99       | % |      |        | 2.01   | % |      |        |           |   |       |       |      |   |       |       |      |   |  |       |      |   |  |        |        |  |  |     |       |   |  |        |        | 
|Loan in United States Dollar |                       |                                                  |       |            |   |      |        |        |   |      |        |            |   |       |       |       |   |       |       |       |   |  |       |       |   |  |        |        |  |  |     |       |   |  |        |       
|                             | Fixed rate            |                                                  |       | 1,037      |   |      |        | 873    |   |      |        | 869        |   |       |       | 741   |   |       |       | 496   |   |  |       | 1,403 |   |  |        | 5,419  |  |  |     | 8.12  | % |  |        | 5,137  | 
|                             | Average interest rate |                                                  |       | 6.51       | % |      |        | 6.43   | % |      |        | 6.43       | % |       |       | 6.23  | % |       |       | 6.01  | % |  |       | 3.39  | % |  |        |        |  |  |     |       |   |  |        |        | 
|                             | Variable rate         |                                                  |       | 372        |   |      |        | 2,071  |   |      |        | 2,018      |   |       |       | 2,208 |   |       |       | 185   |   |  |       | 575   |   |  |        | 7,429  |  |  |     | 11.13 | % |  |        | 7,429  | 
|                             | Average interest rate |                                                  |       | 4.31       | % |      |        | 1.61   | % |      |        | 1.45       | % |       |       | 2.08  | % |       |       | 3.86  | % |  |       | 2.71  | % |  |        |        |  |  |     |       |   |  |        |        | 
|Loan in British Pound        |                       |                                                  |       |            |   |      |        |        |   |      |        |            |   |       |       |       |   |       |       |       |   |  |       |       |   |  |        |        |  |  |     |       |   |  |        |       
|                             | Fixed rate            |                                                  |       | 216        |   |      |        | 210    |   |      |        | 210        |   |       |       | 209   |   |       |       | 129   |   |  |       | 348   |   |  |        | 1,322  |  |  |     | 1.98  | % |  |        | 1,288  | 
|                             | Average interest rate |                                                  |       | 3.79       | % |      |        | 3.82   | % |      |        | 3.82       | % |       |       | 3.82  | % |       |       | 4.41  | % |  |       | 5.17  | % |  |        |        |  |  |     |       |   |  |        |        | 
|Loan in Japanese Yen         |                       |                                                  |       |            |   |      |        |        |   |      |        |            |   |       |       |       |   |       |       |       |   |  |       |       |   |  |        |        |  |  |     |       |   |  |        |       
|                             | Fixed rate            |                                                  |       | 147        |   |      |        | 146    |   |      |        | 146        |   |       |       | 146   |   |       |       | 39    |   |  |       | 51    |   |  |        | 675    |  |  |     | 1.01  | % |  |        | 743    | 
|                             | Average interest rate |                                                  |       | 4.59       | % |      |        | 4.59   | % |      |        | 4.59       | % |       |       | 4.59  | % |       |       | 4.30  | % |  |       | 3.55  | % |  |        |        |  |  |     |       |   |  |        |        | 
|                             | Variable rate         |                                                  |       | 17         |   |      |        | 16     |   |      |        | 15         |   |       |       |      |   |       |       |      |   |  |       |      |   |  |        | 48     |  |  |     | 0.07  | % |  |        | 48     | 
|                             | Average interest rate |                                                  |       | 3.61       | % |      |        | 3.58   | % |      |        | 1.97       | % |       |       |      |   |       |       |      |   |  |       |      |   |  |        |        |  |  |     |       |   |  |        |        | 
|Debenture in RMB             |                       |                                                  |       |            |   |      |        |        |   |      |        |            |   |       |       |       |   |       |       |       |   |  |       |       |   |  |        |        |  |  |     |       |   |  |        |       
|                             | Fixed rate            |                                                  |       | 300        |   |      |        |       |   |      |        |           |   |       |       |      |   |       |       | 1,350 |   |  |       |      |   |  |        | 1,650  |  |  |     | 2.47  | % |  |        | 1,646  | 
|                             | Average interest rate |                                                  |       | 9.00       | % |      |        |       |   |      |        |           |   |       |       |      |   |       |       | 4.50  | % |  |       |      |   |  |        |        |  |  |     |       |   |  |        |        | 
|                             |                       |                                                  |       |            |   |      |        |        |   |      |        |            |   |       |       |       |   |       |       |       |   |  |       |       |   |  |        |        |  |  |     |       |   |  |        |       
|Total                        |                       |                                                  | 6,143 |            |   |      | 19,541 |        |   |      | 16,322 |            |   |       | 9,700 |       |   |       | 5,935 |       |   |  | 9,101 |       |   |  | 66,742 |        |  |  | 100 | %     |   |  | 66,395 |       
|                             |                       |                                                  |       |            |   |      |        |        |   |      |        |            |   |       |       |       |   |       |       |       |   |  |       |       |   |  |        |        |  |  |     |       |   |  |        |       

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December 31, 2001

|                             |                       |                                                  |       |            |   |      |       |       |   |      |        |            |   |       |        |       |   |       |       |       |   |  |        |       |   |  |        |        |  |  |     |       |   |  |        |        | 
|---------------------------- | --------------------- | ------------------------------------------------ | ----- | ---------- | - | ---- | ----- | ----- | - | ---- | ------ | ---------- | - | ----- | ------ | ----- | - | ----- | ----- | ----- | - |  | ------ | ----- | - |  | ------ | ------ |  |  | --- | ----- | - |  | ------ | ------ | 
|                             |                       |                                                  |       | Percentage |   |     
|                             |                       | Expected maturity date                           |       | to total   |   |     
|                             |                       |                                                  |       | long-term  |   | Fair
|Long term debt               |                       | 2002                                             |       | 2003       |   | 2004 |       | 2005  |   | 2006 |        | Thereafter |   | Total |        | debt  |   | value
|                             |                       |                                                  |       |            |   |      |       |       |   |      |        |            |   |       |        |       |   |      
|                             |                       |                                                  |       |            |   |      |       |       |   |      |        |            |   |       |        | %     |   |      
|                             |                       |                                                 
|                             |                       | (RMB equivalent in millions, except percentages)
|Loan in RMB                  |                       |                                                  |       |            |   |      |       |       |   |      |        |            |   |       |        |       |   |       |       |       |   |  |        |       |   |  |        |        |  |  |     |       |   |  |        |       
|                             | Fixed rate            |                                                  |       | 1,642      |   |      |       | 760   |   |      |        | 536        |   |       |        | 812   |   |       |       | 210   |   |  |        | 334   |   |  |        | 4,294  |  |  |     | 6.09  | % |  |        | 4,263  | 
|                             | Average interest rate |                                                  |       | 5.90       | % |      |       | 5.67  | % |      |        | 5.63       | % |       |        | 5.82  | % |       |       | 5.94  | % |  |        | 5.95  | % |  |        |        |  |  |     |       |   |  |        |        | 
|                             | Variable rate(1)      |                                                  |       | 1,389      |   |      |       | 3,220 |   |      |        | 18,136     |   |       |        | 9,768 |   |       |       | 6,366 |   |  |        | 7,742 |   |  |        | 46,621 |  |  |     | 66.14 | % |  |        | 46,621 | 
|                             | Average interest rate |                                                  |       | 5.70       | % |      |       | 5.94  | % |      |        | 5.50       | % |       |        | 5.72  | % |       |       | 5.70  | % |  |        | 5.63  | % |  |        |        |  |  |     |       |   |  |        |        | 
|Loan in Euro                 |                       |                                                  |       |            |   |      |       |       |   |      |        |            |   |       |        |       |   |       |       |       |   |  |        |       |   |  |        |        |  |  |     |       |   |  |        |       
|                             | Fixed rate            |                                                  |       | 119        |   |      |       | 79    |   |      |        | 22         |   |       |        | 17    |   |       |       | 71    |   |  |        | 446   |   |  |        | 754    |  |  |     | 1.07  | % |  |        | 724    | 
|                             | Average interest rate |                                                  |       | 3.94       | % |      |       | 3.81  | % |      |        | 7.18       | % |       |        | 6.70  | % |       |       | 3.34  | % |  |        | 4.92  | % |  |        |        |  |  |     |       |   |  |        |        | 
|                             | Variable rate         |                                                  |       |           |   |      |       | 19    |   |      |        | 19         |   |       |        |      |   |       |       |      |   |  |        |      |   |  |        | 38     |  |  |     | 0.05  | % |  |        | 38     | 
|                             | Average interest rate |                                                  |       |           |   |      |       | 5.31  | % |      |        | 5.31       | % |       |        |      |   |       |       |      |   |  |        |      |   |  |        |        |  |  |     |       |   |  |        |        | 
|Loan in United States Dollar |                       |                                                  |       |            |   |      |       |       |   |      |        |            |   |       |        |       |   |       |       |       |   |  |        |       |   |  |        |        |  |  |     |       |   |  |        |       
|                             | Fixed rate            |                                                  |       | 1,044      |   |      |       | 1,071 |   |      |        | 930        |   |       |        | 927   |   |       |       | 798   |   |  |        | 3,572 |   |  |        | 8,342  |  |  |     | 11.83 | % |  |        | 8,422  | 
|                             | Average interest rate |                                                  |       | 6.67       | % |      |       | 6.59  | % |      |        | 6.58       | % |       |        | 6.58  | % |       |       | 6.43  | % |  |        | 6.05  | % |  |        |        |  |  |     |       |   |  |        |        | 
|                             | Variable rate         |                                                  |       | 535        |   |      |       | 398   |   |      |        | 2,078      |   |       |        | 1,998 |   |       |       | 169   |   |  |        | 1,308 |   |  |        | 6,486  |  |  |     | 9.20  | % |  |        | 6,486  | 
|                             | Average interest rate |                                                  |       | 4.20       | % |      |       | 4.51  | % |      |        | 2.16       | % |       |        | 2.09  | % |       |       | 6.08  | % |  |        | 5.83  | % |  |        |        |  |  |     |       |   |  |        |        | 
|Loan in British Pound        |                       |                                                  |       |            |   |      |       |       |   |      |        |            |   |       |        |       |   |       |       |       |   |  |        |       |   |  |        |        |  |  |     |       |   |  |        |       
|                             | Fixed rate            |                                                  |       | 195        |   |      |       | 195   |   |      |        | 195        |   |       |        | 195   |   |       |       | 179   |   |  |        | 432   |   |  |        | 1,391  |  |  |     | 1.97  | % |  |        | 1,320  | 
|                             | Average interest rate |                                                  |       | 3.79       | % |      |       | 3.79  | % |      |        | 3.79       | % |       |        | 3.79  | % |       |       | 3.87  | % |  |        | 4.97  | % |  |        |        |  |  |     |       |   |  |        |        | 
|Loan in Japanese Yen         |                       |                                                  |       |            |   |      |       |       |   |      |        |            |   |       |        |       |   |       |       |       |   |  |        |       |   |  |        |        |  |  |     |       |   |  |        |       
|                             | Fixed rate            |                                                  |       | 133        |   |      |       | 133   |   |      |        | 133        |   |       |        | 133   |   |       |       | 133   |   |  |        | 71    |   |  |        | 736    |  |  |     | 1.05  | % |  |        | 827    | 
|                             | Average interest rate |                                                  |       | 4.70       | % |      |       | 4.70  | % |      |        | 4.70       | % |       |        | 4.70  | % |       |       | 4.70  | % |  |        | 4.56  | % |  |        |        |  |  |     |       |   |  |        |        | 
|                             | Variable rate         |                                                  |       | 12         |   |      |       | 15    |   |      |        | 15         |   |       |        | 14    |   |       |       |      |   |  |        | 125   |   |  |        | 181    |  |  |     | 0.26  | % |  |        | 181    | 
|                             | Average interest rate |                                                  |       | 5.17       | % |      |       | 1.88  | % |      |        | 1.88       | % |       |        | 1.88  | % |       |       |      |   |  |        | 5.17  | % |  |        |        |  |  |     |       |   |  |        |        | 
|Debenture in RMB             |                       |                                                  |       |            |   |      |       |       |   |      |        |            |   |       |        |       |   |       |       |       |   |  |        |       |   |  |        |        |  |  |     |       |   |  |        |       
|                             | Fixed rate            |                                                  |       |           |   |      |       | 300   |   |      |        |           |   |       |        |      |   |       |       |      |   |  |        | 1,350 |   |  |        | 1,650  |  |  |     | 2.34  | % |  |        | 1,604  | 
|                             | Average interest rate |                                                  |       |           |   |      |       | 9.00  | % |      |        |           |   |       |        |      |   |       |       |      |   |  |        | 4.50  | % |  |        |        |  |  |     |       |   |  |        |        | 
|                             |                       |                                                  |       |            |   |      |       |       |   |      |        |            |   |       |        |       |   |       |       |       |   |  |        |       |   |  |        |        |  |  |     |       |   |  |        |       
|Total                        |                       |                                                  | 5,069 |            |   |      | 6,190 |       |   |      | 22,064 |            |   |       | 13,864 |       |   |       | 7,926 |       |   |  | 15,380 |       |   |  | 70,493 |        |  |  | 100 | %     |   |  | 70,486 |       
|                             |                       |                                                  |       |            |   |      |       |       |   |      |        |            |   |       |        |       |   |       |       |       |   |  |        |       |   |  |        |        |  |  |     |       |   |  |        |       



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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, 2001, 2002 and 2003.
    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, 2001, 2002 and 2003, respectively.

Commodity Price Risk

We are engaged in a broad range of petroleum
related activities. The hydrocarbon commodity markets are
influenced by global as well as regional supply and demand
conditions. The PRC government currently publishes prices for
onshore crude oil, gasoline and diesel according to
international benchmark prices. A decline in prices of crude oil
and refined products could adversely affect our financial
performance. We historically have not used commodity derivative
instruments to

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hedge the potential price fluctuations of crude
oil and other refined products. Therefore, during 2001, 2002 and
2003, we were exposed to the general price fluctuations of
broadly traded oil and gas commodities.





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

Our 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-14(c)) as of the end of the period
covered by this annual report, have concluded that, as of such
date, PetroChinas disclosure controls and procedures were
effective to ensure that material information relating to
PetroChina was made known to them by others within PetroChina
particularly during the period in which this annual report was
being presented.

There were no significant changes in
PetroChinas internal controls or in other factors that
could significantly affect these controls subsequent to the date
of our Chairman and our Chief Financial Officer completed their
evaluation, nor were there any significant deficiencies or
material weaknesses in PetroChinas internal controls
requiring corrective actions.

There were no changes in our internal control
over financial reporting that occurred during the year ended
December 31, 2003 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.




ITEM 16  [Reserved]



ITEM 16A  AUDIT COMMITTEE FINANCIAL
EXPERT

Our audit committee members are
Messrs. Franco Bernabé, Chee-Chen Tung and Gong
Huazhang. See Item 6  Directors, Senior
Management and Employees. Our board of directors has
determined that Gong Huazhang is qualified as a financial
expert, as defined in Item 16A of Form 20-F.
Mr. Gong is the General Accountant of CNPC, our controlling
shareholder.




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. We
have included this Code of

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Ethics as Exhibit 16.2 to this annual
report. This Code of Ethics is 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.   

We have not adopted a Code of Ethics that applies
to employees other than our Chief Executive Officer, Chief
Financial Officer, Chief Accounting Officer, other executives
and senior officers.




ITEM 16C  PRINCIPAL ACCOUNTANT FEES
AND SERVICES

PricewaterhouseCoopers has served as
PetroChinas independent public accountants for each of the
fiscal years in the three-year period ended December 31,
2003, 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 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 to PetroChina for each of the years ended
December 31, 2002 and 2003.

|                   |  |               |    |      |  |      |    |      |  |  |    |  |  |  |   | 
|------------------ |  | ------------- | -- | ---- |  | ---- | -- | ---- |  |  | -- |  |  |  | - | 
|                   |  |              
|                   |  | December 31, 
|                   |  |              
|                   |  | 2002          |    | 2002 |  | 2003 |    | 2003
|                   |  |               |    |      |  |      |    |     
|                   |  | RMB           |    | US$  |  | RMB  |    | US$ 
|                   |  |              
|                   |  | (in millions)
|Audit fees         |  |               | 75 |      |  |      | 9  |      |  |  | 44 |  |  |  | 5 | 
|Audit-related fees |  |               | 6  |      |  |      | 1  |      |  |  | 0  |  |  |  | 0 | 
|Tax fees           |  |               | 0  |      |  |      | 0  |      |  |  | 0  |  |  |  | 0 | 
|Other fees         |  |               | 0  |      |  |      | 0  |      |  |  | 0  |  |  |  | 0 | 
|                   |  |               |    |      |  |      |    |      |  |  |    |  |  |  |   | 
|Total              |  |               | 81 |      |  |      | 10 |      |  |  | 44 |  |  |  | 5 | 
|                   |  |               |    |      |  |      |    |      |  |  |    |  |  |  |   | 

Audit fees consist of fees billed for the annual
audit services and other audit services, which are those
services that only the external auditor reasonably can provide,
and include the group audit, statutory audits, and assistance
with and review of documents filed with the Commission.

All other fees include fees billed for training,
consultation on system for research management, feasibility
study and preliminary design of an advanced refining and
chemical planning and operational information system, and
consultation for general program relating to technology
development.



| |                                                         
| | --------------------------------------------------------
| | Audit Committee Pre-approved Policies and
    Procedures

Currently, all non-audit services to be provided
by our independent public accountants, PricewaterhouseCoopers,
must be approved by our audit committee.

During 2003, services relating to all
audit-related fees provided to us by PricewaterhouseCoopers were
approved by our audit committee in accordance with the de
minimis exception to the pre-approval requirement provided
by paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X.

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ITEM 16D  EXEMPTIONS FROM LISTING
STANDARDS FOR AUDIT COMMITTEES

Not applicable.




ITEM 16E  PURCHASES OF EQUITY
SECURITIES BY THE ISSUER AND ITS AFFILIATES

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-58 following 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)                                                                                        
|        | 4.1  |                         |  | 2003 Performance Contract between Chen Geng and
    PetroChina (English translation)(2)                                                                   
|        | 4.2  |                         |  | 2003 Performance Contract between Su Shulin and
    PetroChina (English translation)(2)                                                                   
|        | 4.3  |                         |  | 2003 Performance Contract between Wang Fucheng
    and PetroChina (English translation)(2)                                                                
|        | 4.4  |                         |  | 2003 Performance Contract between Wang Guoliang
    and PetroChina (English translation)(2)                                                               
|        | 4.5  |                         |  | 2003 Performance Contract between Liu Baohe and
    PetroChina (English translation)(2)                                                                   
|        | 4.6  |                         |  | 2003 Performance Contract between Duan Wende and
    PetroChina (English translation)(2)                                                                  
|        | 4.7  |                         |  | 2003 Performance Contract between Jia Chengzao
    and PetroChina (English translation)(2)                                                                
|        | 4.8  |                         |  | Crude Oil Mutual Supply Framework Agreement,
    dated February 26, 2004, between China Petrochemical
    Corporation and PetroChina (English translation)
|        | 8.1  |                         |  | List of major subsidiaries                                                                                                                                
|        | 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.

115



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|        |      |                         |  |               
|------- | ---- | ----------------------- |  | --------------
|Exhibit |      |                        
|Number  |      | Description of Exhibits
|        |      |                        
|        | 16.2 |                         |  | Code of Ethics



---



|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to our Annual Report on
    Form 20-F for the fiscal year ended December 31, 2001
    (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, 2002
    (File No. 1-15006) filed with the Commission.

116



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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 HUAIQI                               
| |                                             
| | Name: Li Huaiqi                             
| | Title:   Secretary to Board of
    Directors

Date: June 28, 2004


117



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##### Table of Contents



INDEX OF FINANCIAL STATEMENTS

|                                                    |                                                                                                                                      |      |  |      | 
|--------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ---- |  | ---- | 
|                                                    |                                                                                                                                      | Page
|                                                    |                                                                                                                                      |     
|PetroChina Company Limited and its
    Subsidiaries |                                                                                                                                      |      |  |     
|                                                    | Consolidated Financial Statements                                                                                                    |      |  |      | 
|                                                    | Report of Independent
    Auditors                                                                                                   |      |  | F-2  | 
|                                                    | Consolidated Statements of
    Income for each of the three years in the period ended
    December 31, 2003                          |      |  | F-3  | 
|                                                    | Consolidated Balance Sheets
    as of December 31, 2002 and 2003                                                                     |      |  | F-4  | 
|                                                    | Consolidated Statements of
    Cash Flows for each of the three years in the period ended
    December 31, 2003                      |      |  | F-5  | 
|                                                    | Consolidated Statements of
    Changes in Shareholders Equity for each of the three years
    in the period ended December 31, 2003 |      |  | F-7  | 
|                                                    | Notes to the Consolidated
    Financial Statements                                                                                   |      |  | F-8  | 
|                                                    | Supplementary Petroleum
    Data (unaudited)                                                                                         |      |  | F-53 | 

F-1



---



##### Table of Contents






Report of Independent Auditors

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

In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
income, of cash flows and of changes in equity present fairly,
in all material respects, the consolidated financial position of
PetroChina Company Limited (the Company) and its
subsidiaries (the Group) at December 31, 2002
and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2003, in conformity with International
Financial Reporting Standards. These financial statements are
the responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
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 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 the
opinion expressed above.

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, 2003 and the determination of consolidated
shareholders equity at December 31, 2002 and 2003 to
the extent summarized in Note 34 to the consolidated financial
statements.



| |                             
| | ----------------------------
| | PricewaterhouseCoopers      
| | Certified Public Accountants
|
| | Hong Kong, March 24, 2004   

F-2



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##### Table of Contents



PETROCHINA COMPANY LIMITED



CONSOLIDATED STATEMENTS OF INCOME


For the Years Ended December 31, 2001, 2002
and 2003


(Amounts in millions except for per share
data)


|                                                   |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |         |  
|-------------------------------------------------- | ------------------------------------------------------------------- | ---- | -- | ----------------------- |  | ---- | -------- | ------- | - | ---- | -------- | ------- | - |  | -------- | ------- | - |  | ------- | ------- | -
|                                                   |                                                                     |      |    |                        
|                                                   |                                                                     |      |    | Year Ended December 31,
|                                                   |                                                                     |      |    |                        
|                                                   |                                                                     | Note |    | 2001                    |  | 2002 |          | 2003    |   | 2003
|                                                   |                                                                     |      |    |                         |  |      |          |         |   |     
|                                                   |                                                                     |      |    | RMB                     |  | RMB  |          | RMB     |   | US$ 
|REVENUES                                           |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|                                                   | Sales and other operating revenues                                  |      |    |                         |  |      |          | 241,320 |   |      |          | 244,424 |   |  |          | 303,779 |   |  |         | 36,703  |  
|                                                   |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|OPERATING EXPENSES                                 |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|                                                   | Purchases, services and other                                       |      |    |                         |  |      |          | (78,529 | ) |      |          | (71,690 | ) |  |          | (90,850 | ) |  |         | (10,977 | )
|                                                   | Employee compensation costs                                         |      |    | 4                       |  |      |          | (14,608 | ) |      |          | (16,248 | ) |  |          | (19,542 | ) |  |         | (2,361  | )
|                                                   | Exploration expenses, including exploratory dry
    holes           |      |    |                         |  |      |          | (7,344  | ) |      |          | (8,095  | ) |  |          | (10,577 | ) |  |         | (1,278  | )
|                                                   | Depreciation, depletion and amortization                            |      |    |                         |  |      |          | (33,615 | ) |      |          | (36,782 | ) |  |          | (40,531 | ) |  |         | (4,897  | )
|                                                   | Selling, general and administrative expenses                        |      |    |                         |  |      |          | (21,735 | ) |      |          | (22,474 | ) |  |          | (23,930 | ) |  |         | (2,891  | )
|                                                   | Employee separation costs and shut down of
    manufacturing assets |      |    | 5                       |  |      |          | (487    | ) |      |          | (2,121  | ) |  |          | (2,355  | ) |  |         | (285    | )
|                                                   | Taxes other than income taxes                                       |      |    |                         |  |      |          | (13,951 | ) |      |          | (14,613 | ) |  |          | (15,879 | ) |  |         | (1,919  | )
|                                                   | Revaluation loss of property, plant and equipment                   |      |    | 16                      |  |      |          |        |   |      |          |        |   |  |          | (391    | ) |  |         | (47     | )
|                                                   | Other income/(expense), net                                         |      |    |                         |  |      |          | 88      |   |      |          | (60     | ) |  |          | (538    | ) |  |         | (65     | )
|                                                   |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|TOTAL OPERATING EXPENSES                           |                                                                     |      |    |                         |  |      | (170,181 | )       |   |      | (172,083 | )       |   |  | (204,593 | )       |   |  | (24,720 | )      
|                                                   |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|INCOME FROM OPERATIONS                             |                                                                     |      |    |                         |  |      | 71,139   |         |   |      | 72,341   |         |   |  | 99,186   |         |   |  | 11,983  |        
|                                                   |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|FINANCE COSTS                                      |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|                                                   | Exchange gain                                                       |      |    |                         |  |      |          | 390     |   |      |          | 133     |   |  |          | 53      |   |  |         | 6       |  
|                                                   | Exchange loss                                                       |      |    |                         |  |      |          | (140    | ) |      |          | (449    | ) |  |          | (233    | ) |  |         | (28     | )
|                                                   | Interest income                                                     |      |    |                         |  |      |          | 809     |   |      |          | 463     |   |  |          | 677     |   |  |         | 82      |  
|                                                   | Interest expense                                                    |      |    | 6                       |  |      |          | (4,408  | ) |      |          | (3,516  | ) |  |          | (2,346  | ) |  |         | (283    | )
|                                                   |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|TOTAL FINANCE COSTS                                |                                                                     |      |    |                         |  |      | (3,349   | )       |   |      | (3,369   | )       |   |  | (1,849   | )       |   |  | (223    | )      
|                                                   |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|INCOME FROM EQUITY AFFILIATES                      |                                                                     |      | 17 |                         |  |      | 341      |         |   |      | 268      |         |   |  | 985      |         |   |  | 119     |        
|                                                   |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|INCOME BEFORE INCOME TAXES                         |                                                                     |      |    |                         |  |      | 68,131   |         |   |      | 69,240   |         |   |  | 98,322   |         |   |  | 11,879  |        
|INCOME TAXES                                       |                                                                     |      | 7  |                         |  |      | (23,066  | )       |   |      | (22,231  | )       |   |  | (28,072  | )       |   |  | (3,391  | )      
|                                                   |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|INCOME BEFORE MINORITY INTERESTS                   |                                                                     |      |    |                         |  |      | 45,065   |         |   |      | 47,009   |         |   |  | 70,250   |         |   |  | 8,488   |        
|LOSS/(INCOME) APPLICABLE TO MINORITY
    INTERESTS |                                                                     |      |    |                         |  |      | 404      |         |   |      | (99      | )       |   |  | (636     | )       |   |  | (77     | )      
|                                                   |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|NET INCOME                                         |                                                                     |      |    |                         |  |      | 45,469   |         |   |      | 46,910   |         |   |  | 69,614   |         |   |  | 8,411   |        
|                                                   |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|BASIC AND DILUTED NET INCOME PER
    SHARE         |                                                                     |      | 8  |                         |  |      | 0.26     |         |   |      | 0.27     |         |   |  | 0.40     |         |   |  | 0.05    |        
|                                                   |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        
|NUMBER OF SHARES                                   |                                                                     |      | 8  |                         |  |      | 175,824  |         |   |      | 175,824  |         |   |  | 175,824  |         |   |  | 175,824 |        
|                                                   |                                                                     |      |    |                         |  |      |          |         |   |      |          |         |   |  |          |         |   |  |         |        

The accompanying notes are an integral part of
these financial statements.

F-3



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##### Table of Contents



PETROCHINA COMPANY LIMITED



CONSOLIDATED BALANCE SHEETS


As of December 31, 2002 and
2003


(Amounts in millions)


|                                                                                             |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |       | 
|-------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ---- | -- | --------------- |  | ---- | ------- | ------ |  |  | ------- | ------ |  |  | ------ | ----- | 
|                                                                                             |                                                                       |      |    |                
|                                                                                             |                                                                       |      |    | At December 31,
|                                                                                             |                                                                       |      |    |                
|                                                                                             |                                                                       | Note |    | 2002            |  | 2003 |         | 2003  
|                                                                                             |                                                                       |      |    |                 |  |      |         |       
|                                                                                             |                                                                       |      |    | RMB             |  | RMB  |         | US$   
|ASSETS                                                                                       |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|Current assets                                                                               |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|                                                                                             | Cash and cash equivalents                                             |      |    | 10              |  |      |         | 9,977  |  |  |         | 11,231 |  |  |        | 1,357 | 
|                                                                                             | Time deposits with maturities over three months                       |      |    |                 |  |      |         | 2,612  |  |  |         | 2,640  |  |  |        | 319   | 
|                                                                                             | Receivables under resale agreements                                   |      |    | 11              |  |      |         | 9,786  |  |  |         | 24,224 |  |  |        | 2,927 | 
|                                                                                             | Notes receivable                                                      |      |    | 12              |  |      |         | 2,540  |  |  |         | 2,416  |  |  |        | 292   | 
|                                                                                             | Accounts receivable, less allowance for
    impairment of receivables |      |    | 13              |  |      |         | 6,079  |  |  |         | 3,263  |  |  |        | 394   | 
|                                                                                             | Inventories                                                           |      |    | 14              |  |      |         | 28,441 |  |  |         | 28,872 |  |  |        | 3,488 | 
|                                                                                             | Prepaid expenses and other current assets                             |      |    | 15              |  |      |         | 15,729 |  |  |         | 13,528 |  |  |        | 1,635 | 
|                                                                                             |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|TOTAL CURRENT ASSETS                                                                         |                                                                       |      |    |                 |  |      | 75,164  |        |  |  | 86,174  |        |  |  | 10,412 |      
|Property, plant and equipment, less accumulated
    depreciation, depletion and amortization |                                                                       |      | 16 |                 |  |      | 397,798 |        |  |  | 433,419 |        |  |  | 52,366 |      
|Investments in equity affiliates                                                             |                                                                       |      | 17 |                 |  |      | 4,145   |        |  |  | 5,571   |        |  |  | 673    |      
|Available-for-sale investments                                                               |                                                                       |      | 18 |                 |  |      | 1,535   |        |  |  | 1,839   |        |  |  | 222    |      
|Intangible and other assets                                                                  |                                                                       |      | 19 |                 |  |      | 4,507   |        |  |  | 4,732   |        |  |  | 572    |      
|                                                                                             |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|TOTAL ASSETS                                                                                 |                                                                       |      |    |                 |  |      | 483,149 |        |  |  | 531,735 |        |  |  | 64,245 |      
|                                                                                             |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                     |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|Current liabilities                                                                          |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|                                                                                             | Short-term debt                                                       |      |    | 21              |  |      |         | 20,633 |  |  |         | 28,890 |  |  |        | 3,491 | 
|                                                                                             | Accounts payable and accrued liabilities                              |      |    | 20              |  |      |         | 57,793 |  |  |         | 64,180 |  |  |        | 7,754 | 
|                                                                                             | Income tax payable                                                    |      |    |                 |  |      |         | 5,412  |  |  |         | 12,043 |  |  |        | 1,455 | 
|                                                                                             | Other taxes payable                                                   |      |    |                 |  |      |         | 5,515  |  |  |         | 8,916  |  |  |        | 1,077 | 
|                                                                                             |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|TOTAL CURRENT LIABILITIES                                                                    |                                                                       |      |    |                 |  |      | 89,353  |        |  |  | 114,029 |        |  |  | 13,777 |      
|Long-term debt                                                                               |                                                                       |      | 21 |                 |  |      | 60,655  |        |  |  | 41,959  |        |  |  | 5,069  |      
|Deferred credits and other long-term obligations                                             |                                                                       |      |    |                 |  |      | 1,684   |        |  |  | 2,000   |        |  |  | 242    |      
|Deferred income taxes                                                                        |                                                                       |      | 22 |                 |  |      | 9,927   |        |  |  | 11,526  |        |  |  | 1,393  |      
|                                                                                             |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|TOTAL LIABILITIES                                                                            |                                                                       |      |    |                 |  |      | 161,619 |        |  |  | 169,514 |        |  |  | 20,481 |      
|                                                                                             |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|MINORITY INTERESTS                                                                           |                                                                       |      |    |                 |  |      | 4,854   |        |  |  | 5,608   |        |  |  | 678    |      
|                                                                                             |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|SHAREHOLDERS EQUITY                                                                         |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|State-owned shares                                                                           |                                                                       |      | 23 |                 |  |      | 158,242 |        |  |  | 158,242 |        |  |  | 19,119 |      
|H shares                                                                                     |                                                                       |      | 23 |                 |  |      | 17,582  |        |  |  | 17,582  |        |  |  | 2,124  |      
|                                                                                             |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|Share capital, issued and outstanding, RMB 1.00
    par value                                |                                                                       |      |    |                 |  |      | 175,824 |        |  |  | 175,824 |        |  |  | 21,243 |      
|Retained earnings                                                                            |                                                                       |      |    |                 |  |      | 59,004  |        |  |  | 89,577  |        |  |  | 10,823 |      
|Capital reserve                                                                              |                                                                       |      | 24 |                 |  |      | (28,557 | )      |  |  | (28,557 | )      |  |  | (3,450 | )    
|Revaluation reserve                                                                          |                                                                       |      | 24 |                 |  |      | 79,945  |        |  |  | 79,946  |        |  |  | 9,659  |      
|Statutory common reserve fund                                                                |                                                                       |      | 24 |                 |  |      | 20,128  |        |  |  | 26,370  |        |  |  | 3,186  |      
|Statutory common welfare fund                                                                |                                                                       |      | 24 |                 |  |      | 13,532  |        |  |  | 16,653  |        |  |  | 2,012  |      
|Other reserves                                                                               |                                                                       |      | 24 |                 |  |      | (3,200  | )      |  |  | (3,200  | )      |  |  | (387   | )    
|                                                                                             |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|SHAREHOLDERS EQUITY                                                                         |                                                                       |      |    |                 |  |      | 316,676 |        |  |  | 356,613 |        |  |  | 43,086 |      
|                                                                                             |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      
|TOTAL LIABILITIES AND SHAREHOLDERS
    EQUITY                                               |                                                                       |      |    |                 |  |      | 483,149 |        |  |  | 531,735 |        |  |  | 64,245 |      
|                                                                                             |                                                                       |      |    |                 |  |      |         |        |  |  |         |        |  |  |        |      

The accompanying notes are an integral part of
these financial statements.

F-4



---



##### Table of Contents



PETROCHINA COMPANY LIMITED



CONSOLIDATED STATEMENTS OF CASH
FLOWS


For the Years Ended December 31, 2001, 2002
and 2003


(Amounts in millions)


|                                              |                             |                                                                        |  |                         |        |      |         |         |        |      |         |         |        |   |         |         |        |   |        |        |       |  
|--------------------------------------------- | --------------------------- | ---------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | ------- | ------- | ------ | ---- | ------- | ------- | ------ | - | ------- | ------- | ------ | - | ------ | ------ | ----- | -
|                                              |                             |                                                                        |  |                        
|                                              |                             |                                                                        |  | Year Ended December 31,
|                                              |                             |                                                                        |  |                        
|                                              |                             | Note                                                                   |  | 2001                    |        | 2002 |         | 2003    |        | 2003
|                                              |                             |                                                                        |  |                         |        |      |         |         |        |     
|                                              |                             |                                                                        |  | RMB                     |        | RMB  |         | RMB     |        | US$ 
|CASH FLOWS FROM OPERATING ACTIVITIES          |                             |                                                                        |  |                         |        |      |         |         |        |      |         |         |        |   |         |         |        |   |        |       
|                                              | Net income                  |                                                                        |  |                         |        |      |         | 45,469  |        |      |         | 46,910  |        |   |         | 69,614  |        |   |        | 8,411  |      
|                                              | Adjustments for:            |                                                                        |  |                         |        |      |         |         |        |      |         |         |        |   |         |         |        |   |        |        |      
|                                              |                             | (loss)/ Income applicable to minority interests                        |  |                         |        |      |         |         | (404   | )    |         |         | 99     |   |         |         | 636    |   |        |        | 77    |  
|                                              |                             | Income taxes                                                           |  |                         | 7      |      |         |         | 23,066 |      |         |         | 22,231 |   |         |         | 28,072 |   |        |        | 3,391 |  
|                                              |                             | Depreciation, depletion and amortization                               |  |                         |        |      |         |         | 33,615 |      |         |         | 36,782 |   |         |         | 40,531 |   |        |        | 4,897 |  
|                                              |                             | Provision for shut down of manufacturing assets                        |  |                         | 5      |      |         |         |       |      |         |         | 2,121  |   |         |         | 2,355  |   |        |        | 285   |  
|                                              |                             | Dry hole cost                                                          |  |                         |        |      |         |         | 3,422  |      |         |         | 3,527  |   |         |         | 4,691  |   |        |        | 567   |  
|                                              |                             | Income from equity affiliates                                          |  |                         | 17     |      |         |         | (341   | )    |         |         | (268   | ) |         |         | (985   | ) |        |        | (119  | )
|                                              |                             | Impairment of receivables                                              |  |                         | 13, 15 |      |         |         | 1,347  |      |         |         | 284    |   |         |         | 1,434  |   |        |        | 173   |  
|                                              |                             | Write down in inventories, net                                         |  |                         | 14     |      |         |         | (614   | )    |         |         | (122   | ) |         |         | 136    |   |        |        | 16    |  
|                                              |                             | Impairment of available-for-sale investments                           |  |                         | 18     |      |         |         | 34     |      |         |         | 4      |   |         |         | 158    |   |        |        | 19    |  
|                                              |                             | Loss on disposal of property, plant and equipment                      |  |                         |        |      |         |         | 288    |      |         |         | 647    |   |         |         | 1,048  |   |        |        | 127   |  
|                                              |                             | Loss on disposal of available-for-sale investments                     |  |                         |        |      |         |         | 20     |      |         |         | 21     |   |         |         | 21     |   |        |        | 3     |  
|                                              |                             | Loss on disposal of intangible and other assets                        |  |                         |        |      |         |         | 13     |      |         |         | 17     |   |         |         | 143    |   |        |        | 17    |  
|                                              |                             | Revaluation loss of property, plant and equipment                      |  |                         | 16     |      |         |         |       |      |         |         |       |   |         |         | 391    |   |        |        | 47    |  
|                                              |                             | Dividend income                                                        |  |                         | 18     |      |         |         | (123   | )    |         |         | (60    | ) |         |         | (69    | ) |        |        | (8    | )
|                                              |                             | Interest income                                                        |  |                         |        |      |         |         | (809   | )    |         |         | (463   | ) |         |         | (677   | ) |        |        | (82   | )
|                                              |                             | Interest expense                                                       |  |                         | 6      |      |         |         | 4,408  |      |         |         | 3,516  |   |         |         | 2,346  |   |        |        | 283   |  
|                                              | Changes in working capital: |                                                                        |  |                         |        |      |         |         |        |      |         |         |        |   |         |         |        |   |        |        |      
|                                              |                             |  accounts receivable and prepaid
    expense and other current assets |  |                         |        |      |         |         | (8,467 | )    |         |         | 4,554  |   |         |         | 3,612  |   |        |        | 436   |  
|                                              |                             |  inventories                                                          |  |                         |        |      |         |         | 4,800  |      |         |         | 157    |   |         |         | (567   | ) |        |        | (69   | )
|                                              |                             |  accounts payables and accrued
    liabilities                        |  |                         |        |      |         |         | 5,519  |      |         |         | 2,047  |   |         |         | 8,738  |   |        |        | 1,056 |  
|                                              |                             |                                                                        |  |                         |        |      |         |         |        |      |         |         |        |   |         |         |        |   |        |       
|CASH GENERATED FROM OPERATIONS                |                             |                                                                        |  |                         |        |      | 111,243 |         |        |      | 122,004 |         |        |   | 161,628 |         |        |   | 19,527 |       
|                                              | Interest received           |                                                                        |  |                         |        |      |         | 809     |        |      |         | 463     |        |   |         | 677     |        |   |        | 82     |      
|                                              | Interest paid               |                                                                        |  |                         |        |      |         | (4,720  | )      |      |         | (4,564  | )      |   |         | (3,769  | )      |   |        | (455   | )    
|                                              | Income taxes paid           |                                                                        |  |                         |        |      |         | (22,893 | )      |      |         | (19,562 | )      |   |         | (19,716 | )      |   |        | (2,382 | )    
|                                              |                             |                                                                        |  |                         |        |      |         |         |        |      |         |         |        |   |         |         |        |   |        |       
|NET CASH PROVIDED BY OPERATING
    ACTIVITIES |                             |                                                                        |  |                         |        |      | 84,439  |         |        |      | 98,341  |         |        |   | 138,820 |         |        |   | 16,772 |       
|                                              |                             |                                                                        |  |                         |        |      |         |         |        |      |         |         |        |   |         |         |        |   |        |       

The accompanying notes are an integral part of
these financial statements.

F-5



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##### Table of Contents



PETROCHINA COMPANY LIMITED

CONSOLIDATED STATEMENTS OF CASH
FLOWS  (continued)

For the Years Ended December 31, 2001, 2002
and 2003


(Amounts in millions)


|                                                  |                                                                             |      |    |                         |  |      |         |         |   |      |         |         |   |  |         |         |   |  |         |        |  
|------------------------------------------------- | --------------------------------------------------------------------------- | ---- | -- | ----------------------- |  | ---- | ------- | ------- | - | ---- | ------- | ------- | - |  | ------- | ------- | - |  | ------- | ------ | -
|                                                  |                                                                             |      |    |                        
|                                                  |                                                                             |      |    | Year Ended December 31,
|                                                  |                                                                             |      |    |                        
|                                                  |                                                                             | Note |    | 2001                    |  | 2002 |         | 2003    |   | 2003
|                                                  |                                                                             |      |    |                         |  |      |         |         |   |     
|                                                  |                                                                             |      |    | RMB                     |  | RMB  |         | RMB     |   | US$ 
|CASH FLOWS FROM INVESTING ACTIVITIES              |                                                                             |      |    |                         |  |      |         |         |   |      |         |         |   |  |         |         |   |  |         |       
|                                                  | Capital expenditures                                                        |      |    |                         |  |      |         | (51,486 | ) |      |         | (70,699 | ) |  |         | (81,109 | ) |  |         | (9,800 | )
|                                                  | Acquisition of subsidiaries                                                 |      |    | 29                      |  |      |         |        |   |      |         | (2,150  | ) |  |         |        |   |  |         |       |  
|                                                  | Acquisition of equity affiliates                                            |      |    |                         |  |      |         | (942    | ) |      |         | (1,119  | ) |  |         | (1,044  | ) |  |         | (126   | )
|                                                  | Repayment of capital by equity affiliates                                   |      |    |                         |  |      |         | 275     |   |      |         | 301     |   |  |         | 336     |   |  |         | 41     |  
|                                                  | Acquisition of available-for-sale investments                               |      |    |                         |  |      |         | (176    | ) |      |         | (231    | ) |  |         | (722    | ) |  |         | (87    | )
|                                                  | (Acquisition)/ Disposal of receivables under
    resale agreements          |      |    |                         |  |      |         | (5,690  | ) |      |         | 1,719   |   |  |         | (14,438 | ) |  |         | (1,744 | )
|                                                  | Acquisition of intangible assets                                            |      |    |                         |  |      |         | (412    | ) |      |         | (666    | ) |  |         | (473    | ) |  |         | (57    | )
|                                                  | Acquisition of other non-current assets                                     |      |    |                         |  |      |         | (1,605  | ) |      |         | (386    | ) |  |         | (783    | ) |  |         | (95    | )
|                                                  | Proceeds from disposal of property, plant and
    equipment                 |      |    |                         |  |      |         | 1,110   |   |      |         | 497     |   |  |         | 202     |   |  |         | 24     |  
|                                                  | Proceeds from disposal of equity affiliates                                 |      |    |                         |  |      |         | 295     |   |      |         | 243     |   |  |         | 23      |   |  |         | 3      |  
|                                                  | Proceeds from disposal of available-for-sale
    investments                |      |    |                         |  |      |         | 99      |   |      |         | 97      |   |  |         | 87      |   |  |         | 11     |  
|                                                  | Dividends received                                                          |      |    |                         |  |      |         | 294     |   |      |         | 91      |   |  |         | 152     |   |  |         | 18     |  
|                                                  | (Increase)/ Decrease in time deposits with
    maturities over three months |      |    |                         |  |      |         | (3,253  | ) |      |         | 641     |   |  |         | (28     | ) |  |         | (3     | )
|                                                  |                                                                             |      |    |                         |  |      |         |         |   |      |         |         |   |  |         |         |   |  |         |       
|NET CASH USED FOR INVESTING
    ACTIVITIES        |                                                                             |      |    |                         |  |      | (61,491 | )       |   |      | (71,662 | )       |   |  | (97,797 | )       |   |  | (11,815 | )     
|                                                  |                                                                             |      |    |                         |  |      |         |         |   |      |         |         |   |  |         |         |   |  |         |       
|CASH FLOWS FROM FINANCING ACTIVITIES              |                                                                             |      |    |                         |  |      |         |         |   |      |         |         |   |  |         |         |   |  |         |       
|                                                  | Increase in short-term debt                                                 |      |    |                         |  |      |         | 24,949  |   |      |         | 28,728  |   |  |         | 25,128  |   |  |         | 3,036  |  
|                                                  | Repayments of short-term debt                                               |      |    |                         |  |      |         | (36,402 | ) |      |         | (34,550 | ) |  |         | (30,373 | ) |  |         | (3,670 | )
|                                                  | Increase in long-term debt                                                  |      |    |                         |  |      |         | 21,255  |   |      |         | 9,885   |   |  |         | 2,823   |   |  |         | 341    |  
|                                                  | Repayments of long-term debt                                                |      |    |                         |  |      |         | (13,692 | ) |      |         | (13,944 | ) |  |         | (7,951  | ) |  |         | (961   | )
|                                                  | Principal payment on capital lease obligations                              |      |    |                         |  |      |         | (167    | ) |      |         | (104    | ) |  |         | (66     | ) |  |         | (8     | )
|                                                  | Dividends paid to minority interests                                        |      |    |                         |  |      |         | (60     | ) |      |         | (135    | ) |  |         | (85     | ) |  |         | (10    | )
|                                                  | Capital contribution from minority interests                                |      |    |                         |  |      |         | 592     |   |      |         | 57      |   |  |         | 287     |   |  |         | 35     |  
|                                                  | Contribution from CNPC to marketing enterprises                             |      |    | 24                      |  |      |         | 134     |   |      |         | 10      |   |  |         |        |   |  |         |       |  
|                                                  | Dividends paid                                                              |      |    | 9                       |  |      |         | (26,699 | ) |      |         | (17,650 | ) |  |         | (29,678 | ) |  |         | (3,585 | )
|                                                  | Change in deferred credits and other long-term
    obligations              |      |    |                         |  |      |         | 184     |   |      |         | 304     |   |  |         | 316     |   |  |         | 38     |  
|                                                  | Cash payment for acquisition of CNPC marketing
    enterprises              |      |    | 2                       |  |      |         |        |   |      |         | (430    | ) |  |         | (170    | ) |  |         | (21    | )
|                                                  |                                                                             |      |    |                         |  |      |         |         |   |      |         |         |   |  |         |         |   |  |         |       
|NET CASH USED FOR FINANCING
    ACTIVITIES        |                                                                             |      |    |                         |  |      | (29,906 | )       |   |      | (27,829 | )       |   |  | (39,769 | )       |   |  | (4,805  | )     
|                                                  |                                                                             |      |    |                         |  |      |         |         |   |      |         |         |   |  |         |         |   |  |         |       
|(Increase)/ Decrease in cash and cash equivalents |                                                                             |      |    |                         |  |      | (6,958  | )       |   |      | (1,150  | )       |   |  | 1,254   |         |   |  | 152     |       
|Cash and cash equivalents at beginning of year    |                                                                             |      | 10 |                         |  |      | 18,085  |         |   |      | 11,127  |         |   |  | 9,977   |         |   |  | 1,205   |       
|                                                  |                                                                             |      |    |                         |  |      |         |         |   |      |         |         |   |  |         |         |   |  |         |       
|Cash and cash equivalents at end of year          |                                                                             |      | 10 |                         |  |      | 11,127  |         |   |      | 9,977   |         |   |  | 11,231  |         |   |  | 1,357   |       
|                                                  |                                                                             |      |    |                         |  |      |         |         |   |      |         |         |   |  |         |         |   |  |         |       

The accompanying notes are an integral part of
these financial statements.

F-6



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##### Table of Contents



PETROCHINA COMPANY LIMITED



CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY


For the Years Ended December 31, 2001, 2002
and 2003


(Amounts in millions)


|                                                                                                              |  |           |         |          |  |           |         |       |  |  |        |   |  |  |         |  
|------------------------------------------------------------------------------------------------------------- |  | --------- | ------- | -------- |  | --------- | ------- | ----- |  |  | ------ | - |  |  | ------- | -
|                                                                                                              |  | Share     |         |          |  |           |         |      
|                                                                                                              |  | Capital   |         | Retained |  | Reserves  |         |      
|                                                                                                              |  | (Note 23) |         | Earnings |  | (Note 24) |         | Total
|                                                                                                              |  |           |         |          |  |           |         |      
|                                                                                                              |  | RMB       |         | RMB      |  | RMB       |         | RMB  
|Balance at January 1, 2001                                                                                    |  |           | 175,824 |          |  |           | 29,279  |       |  |  | 66,543 |   |  |  | 271,646 |  
|Net income for the year ended December 31,
    2001                                                           |  |           |        |          |  |           | 45,469  |       |  |  |       |   |  |  | 45,469  |  
|Premium arising from issue of shares by an equity
    affiliate                                               |  |           |        |          |  |           |        |       |  |  | 56     |   |  |  | 56      |  
|Transfer to reserves                                                                                          |  |           |        |          |  |           | (12,442 | )     |  |  | 12,442 |   |  |  |        |  
|Final dividend for 2000 (Note 9)                                                                              |  |           |        |          |  |           | (14,473 | )     |  |  |       |   |  |  | (14,473 | )
|Interim dividend for 2001 (Note 9)                                                                            |  |           |        |          |  |           | (12,226 | )     |  |  |       |   |  |  | (12,226 | )
|Contribution from CNPC to marketing enterprises                                                               |  |           |        |          |  |           |        |       |  |  | 134    |   |  |  | 134     |  
|                                                                                                              |  |           |         |          |  |           |         |       |  |  |        |   |  |  |         |  
|Balance at December 31, 2001.                                                                                 |  |           | 175,824 |          |  |           | 35,607  |       |  |  | 79,175 |   |  |  | 290,606 |  
|                                                                                                              |  |           |         |          |  |           |         |       |  |  |        |   |  |  |         |  
|Net income for the year ended December 31,
    2002                                                           |  |           |        |          |  |           | 46,910  |       |  |  |       |   |  |  | 46,910  |  
|Transfer to reserves (Note 24)                                                                                |  |           |        |          |  |           | (5,863  | )     |  |  | 5,863  |   |  |  |        |  
|Final dividend for 2001 (Note 9)                                                                              |  |           |        |          |  |           | (8,839  | )     |  |  |       |   |  |  | (8,839  | )
|Interim dividend for 2002 (Note 9)                                                                            |  |           |        |          |  |           | (8,811  | )     |  |  |       |   |  |  | (8,811  | )
|Contribution from CNPC to marketing enterprises
    (Note 2)                                                  |  |           |        |          |  |           |        |       |  |  | 10     |   |  |  | 10      |  
|Payment to CNPC for acquisition of marketing
    enterprises (Note 2)                                         |  |           |        |          |  |           |        |       |  |  | (3,200 | ) |  |  | (3,200  | )
|                                                                                                              |  |           |         |          |  |           |         |       |  |  |        |   |  |  |         |  
|Balance at December 31, 2002                                                                                  |  |           | 175,824 |          |  |           | 59,004  |       |  |  | 81,848 |   |  |  | 316,676 |  
|                                                                                                              |  |           |         |          |  |           |         |       |  |  |        |   |  |  |         |  
|Net income for the year ended December 31,
    2003                                                           |  |           |        |          |  |           | 69,614  |       |  |  |       |   |  |  | 69,614  |  
|Revaluation surplus of property, plant and
    equipment,
    net of tax                                      |  |           |        |          |  |           |        |       |  |  | 527    |   |  |  | 527     |  
|Revaluation loss offset against previous
    revaluation surplus of property, plant and equipment, net of tax |  |           |        |          |  |           |        |       |  |  | (526   | ) |  |  | (526    | )
|Transfer to reserves (Note 24)                                                                                |  |           |        |          |  |           | (9,363  | )     |  |  | 9,363  |   |  |  |        |  
|Final dividend for 2002 (Note 9)                                                                              |  |           |        |          |  |           | (12,299 | )     |  |  |       |   |  |  | (12,299 | )
|Interim dividend for 2003 (Note 9)                                                                            |  |           |        |          |  |           | (17,379 | )     |  |  |       |   |  |  | (17,379 | )
|                                                                                                              |  |           |         |          |  |           |         |       |  |  |        |   |  |  |         |  
|Balance at December 31, 2003                                                                                  |  |           | 175,824 |          |  |           | 89,577  |       |  |  | 91,212 |   |  |  | 356,613 |  
|                                                                                                              |  |           |         |          |  |           |         |       |  |  |        |   |  |  |         |  
|Balance at December 31, 2003 in US$                                                                           |  |           | 21,243  |          |  |           | 10,823  |       |  |  | 11,020 |   |  |  | 43,086  |  
|                                                                                                              |  |           |         |          |  |           |         |       |  |  |        |   |  |  |         |  

The accompanying notes are an integral part of
these financial statements.

F-7



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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) prior to the listing of the
Companys shares on the New York Stock Exchange and The
Stock Exchange of Hong Kong Limited. The Company and its
subsidiaries are collectively referred to as the
Group.

China National Petroleum Company (the predecessor
of CNPC) was established in 1988 to take over the onshore oil
and gas exploration and production entities formerly under the
administration of the Ministry of Petroleum Industry and in 1998
the State Council approved a comprehensive restructuring plan
for Chinas oil and gas industry to form CNPC.

In accordance with the restructuring agreement
between CNPC and the Company effective as of November 5,
1999, the Company issued 160,000 shares in exchange for the
assets and liabilities transferred to the Company by CNPC. The
160,000 shares were the initial registered capital of the
Company with a par value of RMB 1.00 per share.

CNPC transferred to the Company certain assets,
liabilities and interests in China related to (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. CNPC retained
certain chemical production facilities and certain other assets,
liabilities and interests relating to its remaining business and
operations, as well as certain domestic and all foreign
subsidiaries and joint ventures.

2     BASIS OF
PREPARATION

The consolidated financial statements have been
prepared in accordance with International Financial Reporting
Standards (IFRS) issued by the International
Accounting Standard Board (IASB). This basis of
accounting differs from the accounting principles generally
accepted in the United States of America
(US GAAP) (Note 34). The statements are
prepared on the historical cost convention as modified by the
revaluation of certain property, plant and equipment.

The preparation of financial statements in
conformity with generally accepted accounting principles
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 date of the financial
statements 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 ultimately may differ from those
estimates.

In September 2002, the Company acquired from CNPC
the assets, liabilities and interests related to CNPCs
refined products marketing enterprises comprising primarily of
service stations and related facilities for RMB 3,200. The
Company has accounted for the acquisition in a manner similar to
a uniting of interests, whereby the assets and liabilities of
the marketing enterprises acquired were accounted for at
historical cost to CNPC, and the consolidated financial
statements were restated in the prior year to give effect to the
acquisition with all periods presented as if the operations of
the Company and these marketing enterprises had always been
combined. The difference between the RMB 3,200 acquisition
price and the net liabilities transferred from CNPC was adjusted
against equity.

F-8



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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)


The consolidated financial statements are
expressed in Renminbi (RMB), the national currency
of the PRC. Solely for the convenience of the reader, the
December 31, 2003, financial statements have been
translated into United States dollars at the noon buying rate in
New York City on December 31, 2003, for cable transfers in
Renminbi as certified for customs purposes by the Federal
Reserve Bank of New York of US$1.00 = RMB 8.2767.
No representation is made that the Renminbi amounts could have
been, or could be, converted into United States dollars at that
rate or at any other certain rate on December 31, 2003, or
at any other date.

3     SUMMARY OF
PRINCIPAL ACCOUNTING POLICIES

(a) Basis
of consolidation

The 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. 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. The excess of the cost of
acquisition over the fair value of the net assets of the
subsidiary acquired is recorded as goodwill. Intercompany
transactions, balances and unrealized gains on transactions
between group companies are eliminated; unrealized losses are
also eliminated unless cost cannot be recovered. 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 35.

(b) Investments
in equity affiliates

Investments in equity affiliates are accounted
for by the equity method. Under this method the Groups
share of the post-acquisition profits or losses of equity
affiliates is recognized in the income statement 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. Equity affiliates are
entities in which the Group generally has between 20% and 50% of
the voting rights, or over which the Group has significant
influence, but which it does not control. 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 (net of accumulated amortization) on
acquisition. When the Groups share of losses in an equity
affiliate equals or exceeds its interest in the equity
affiliates, the Group does not recognize further losses, unless
the Group has incurred obligations or made payments on behalf of
the equity affiliates.

A listing of the Groups principal equity
affiliates is shown in Note 17.

(c) Foreign
currencies

Items included in the financial statements of
each entity in the Group are measured using the currency that
best reflects the economic substance of the underlying events
and circumstances relevant to that entity. Substantially all
assets and operations of the Group are located in the PRC, and
the measurement currency is RMB. The Group also owns certain
crude oil and natural gas

F-9



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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 and production operations in
Indonesia and the measurement currency for these operations is
US dollars. The consolidated financial statements are
presented in RMB, which is the measurement currency of the
parent and most of the consolidated entities.

Foreign currency transactions of the Group are
accounted for at the exchange rates prevailing at the date of
the transactions; gains and losses resulting from the settlement
of such transactions and from the translation of monetary assets
and liabilities denominated in foreign currencies are recognized
in the consolidated income statement. Monetary assets and
liabilities are translated at balance sheet date exchange rates.

Income statement and cash flows of foreign
entities are translated into the Groups reporting currency
at average exchange rates for the year and their balance sheets
are translated at the exchange rates at year end. Currency
translation differences are recognized in shareholders
equity.

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

(d) Financial
instruments

Financial instruments carried at the balance
sheet date include cash and bank balances, investments,
receivables, payables, leases and debts. Where necessary the
particular recognition methods adopted are disclosed in the
individual policy statements associated with each item.

The Group did not hold any derivative financial
instruments in any of the years presented.

(e) Investments

The Group classified its investments into the
following categories: trading, held-to-maturity 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 trading investments and
included in current assets; during the year the Group did not
hold any investments in this category. 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; during the year the Group did not hold
any investments in this category. Investments intended to be
held for an indefinite period of time, which may be sold in
response to needs for liquidity or changes in interest rates,
are classified as available-for-sale; these are included in
non-current assets unless management has the express intention
of holding the investment for less than twelve months from the
balance sheet date or unless they will need to be sold to raise
operating capital, in which case they are included in current
assets. Management determines the appropriate classification of
its investments at the time of the purchase and re-evaluates
such designation on a regular basis.

All purchases and sales of investments are
recognized on the effective acquisition or sale date. Cost of
purchase includes transaction costs. Available-for-sale
investments are not subsequently fair-valued because they do not
have quoted market prices in active markets and whose fair
values cannot be reliably measured. These investments are
carried at cost, and are subject to review for impairments.

F-10



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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)


(f) Property,
plant and equipment

Property, plant and equipment, including oil and
gas properties (Note 3(g)), 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 amount. Revaluations are performed by
independent qualified valuers on a regular basis. As disclosed
in Note 16, property, plant and equipment, excluding oil and gas
reserves, were revalued in full as of June 30, 1999 prior
to the restructuring referred in Note 1.

In the intervening years between independent
revaluations, the directors review the carrying values of the
property, plant and equipment and adjustment is made where these
are materially different from fair value. As at
September 30, 2003, an exercise was undertaken by
independent qualified valuers, resulting in minor adjustments to
the carrying values, as described in Note 16. 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
valuations in respect of the same asset and are thereafter
charged to the income statement. All other decreases in
valuation are charged to the income statement. Any subsequent
increases are credited to the income statement up to the amount
previously charged.

Revaluation surpluses pertaining to revalued
assets depreciated or disposed of are retained in the
revaluation reserve and will not be available for offsetting
against possible future revaluation losses.

Depreciation, depletion and amortization to write
off the cost or valuation of each asset, other than oil and gas
properties, 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, depletion and amortization purposes:

|                             |  |  |             | 
|---------------------------- |  |  | ----------- | 
|Buildings                    |  |  | 25-40 years | 
|Plant and machinery          |  |  | 10-15 years | 
|Equipment and motor vehicles |  |  | 3-16 years  | 

No depreciation is provided for construction in
progress until they are completed and ready for use.

Property, plant and equipment, including oil and
gas properties (Note 3(g)), are reviewed for possible
impairment by evaluating whether the carrying amount of a cash
generating unit exceeds the higher of its net selling price and
its value in use, which is the estimated net present value of
future cash flows to be derived from the continuing use of the
assets in the cash generating unit and from their ultimate
disposal.

Gains and losses on disposal of property, plant
and equipment are determined by reference to their carrying
amount and are taken into account in determining net income.

Interest and other costs on debts to finance the
construction of property, plant and equipment are capitalized
during the period of time that is required to complete and
prepare the property for its intended use. Costs for planned
major maintenance activities, primarily related to refinery
turnarounds, are expensed as incurred except for costs of
components that result in improvements and betterments which are
capitalized as part of property, plant and equipment and
depreciated over their useful lives.

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)


(g) Oil
and gas properties

The successful efforts method of accounting is
used for oil and gas exploration and production activities.
Under this method, all costs for development wells, support
equipment and facilities, and proved 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. Proved
oil and gas reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids 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 on escalations based upon future
conditions. Costs of wells with proved reserves remain
capitalized. All other exploratory wells and geological and
geophysical costs are expensed. The Group has no 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
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 reserve estimates include
only crude oil and natural gas which management believes can be
reasonably produced within the current terms of these production
licenses. The Group did not incur and does not anticipate to
incur any material dismantlement, restoration or abandonment
cost given the nature of its onshore producing activities and
current PRC regulations governing such activities.

(h) Intangible
assets

Expenditure on acquired patents, trademarks,
technical know-how and licenses is capitalized and amortized
using the straight-line method over their useful lives,
generally over 14 to 20 years. Intangible assets are not
revalued. The Group does not capitalize internally generated
intangible assets. The carrying amount of each intangible asset
is reviewed annually and adjusted for impairment where it is
considered necessary. An impairment loss is recognized whenever
the carrying amount of an asset exceeds its recoverable amount.
The impairment loss is recognized in the consolidated income
statement. The recoverable amount is measured as the higher of
net selling price and value in use, which is the present value
of estimated future cash flows to be derived from continuing use
of the asset and from its ultimate disposal.

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)


(i) Leases

Leases 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 leases 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 lease 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 leased term.

Leases of assets under which all of the risks and
benefits of ownership are effectively retained by the lessor are
classified as operating leases. Payments made under operating
leases are expensed on a straight-line basis over the lease term.

(j) Related
parties

Related parties are corporations in which CNPC is
a major shareholder and is able to control or exercise
significant influence.

(k) Inventories

Inventories 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 labor, other direct costs and
related production overheads, but excludes interest expense. Net
realizable value is the estimate of the selling price in the
ordinary course of business, less the cost of completion and
selling expenses.

(l) Trade
receivables

Trade receivables are carried at original invoice
amount less provision made for impairment of these receivables.
Such provision for impairment of trade receivables 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 carrying amount and the recoverable
amount, being the present value of expected cash flows,
discounted at the market rate of interest for similar borrowers.

(m) Cash
and cash equivalents

Cash and cash equivalents are carried in the
balance sheet at cost and comprise cash in hand and investments
with maturities of three months or less from the time of
purchase.

(n) Debts

Debts are recognized initially at the proceeds
received, 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
income statement over the period of the debts, except for the
portion eligible for capitalization.

(o) Taxation

Approval was obtained from the State
Administration for Taxation to report taxable income on a
consolidated basis commencing from the formation of the Company.

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)


Deferred income tax is provided, using the
liability method, for temporary differences arising between the
tax bases of assets and liabilities and their carrying values
for financial reporting purposes. Currently enacted tax rates
are used to determine deferred income tax.

The principal temporary differences arise from
depreciation on oil and gas properties and equipment and
allowances 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 which
are not income taxes. Taxes other than income taxes,
which form part of the operating expenses, primarily comprise
consumption tax, resource tax, urban construction tax, education
surcharges and business tax.

(p) Revenue
recognition

Sales are recognized upon delivery of products
and customer acceptance, if any, 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, and when the amount of
revenue and the costs incurred or to be incurred in respect of
the transaction can be measured reliably.

(q) Provisions

Provisions 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.

(r) Research
and development expenses

Research 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 1,896, RMB 1,806 and
RMB 2,411 for the years ended December 31, 2001, 2002
and 2003, respectively.

(s) Retirement
benefit plans

The Group contributes to various employee
retirement benefit plans organized by 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 municipal and
provincial governments undertake to assume the retirement
benefit obligations of existing and future retired employees of
the Group. Contributions to these plans are charged to expense
as incurred.

(t) Share
appreciation rights

Compensation under the share appreciation rights
is measured as the amount by which the quoted market price of
the Companys H Shares exceeds the grant price.
Compensation is accrued as a charge to compensation expense over
the vesting service period. The compensation accrued during a
vesting service period is adjusted in subsequent periods for
changes, either upward or downward to the grant price, in the
quoted market price of the Companys shares. The amount of
compensation and the effect of subsequent changes are included
in the employee compensation cost of the profit and loss
account; the related liability is included in the salaries and
welfare payable.

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)


(u) New
accounting developments

In December 2003, the IASB issued amendments to
thirteen existing IFRS standards under its Improvements
Project. The amendments will become effective on
January 1, 2005. The Group has not adopted these revised
standards and does not expect the adoption of these revised
standards would have a material effect on the results of
operation and the financial position of the Group.

4     EMPLOYEE
COMPENSATION COSTS

|                         |  |                         |        |      |  |      |        |  |  |  |        | 
|------------------------ |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                         |  |                        
|                         |  | Year Ended December 31,
|                         |  |                        
|                         |  | 2001                    |        | 2002 |  | 2003
|                         |  |                         |        |      |  |     
|                         |  | RMB                     |        | RMB  |  | RMB 
|Wages and salaries       |  |                         | 9,625  |      |  |      | 10,631 |  |  |  | 12,893 | 
|Social security costs(i) |  |                         | 4,983  |      |  |      | 5,617  |  |  |  | 6,649  | 
|                         |  |                         |        |      |  |      |        |  |  |  |        | 
|                         |  |                         | 14,608 |      |  |      | 16,248 |  |  |  | 19,542 | 
|                         |  |                         |        |      |  |      |        |  |  |  |        | 



---



| |     |                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) | Social security costs represent contributions to
    funds for staff welfare organized by the municipal and
    provincial governments including contribution to the retirement
    benefit plans (Note 25).

5     EMPLOYEE
SEPARATION COSTS AND SHUT DOWN OF MANUFACTURING ASSETS

During the year ended December 31, 2001, the
Group recorded a direct charge of RMB 487 for the
separation of 6,020 employees under a group-wide productivity
improvement initiative carried out since 2000.

During the years ended December 31, 2002 and
2003, the Group provided RMB 2,121 and RMB 2,355
respectively for the shut down of certain less efficient
operating facilities in the refining and chemical manufacturing
plants. The charges represented the net book value of the
facilities.

|                    |  |              |       |      |  |  |       | 
|------------------- |  | ------------ | ----- | ---- |  |  | ----- | 
|                    |  |             
|                    |  | Year Ended  
|                    |  | December 31,
|                    |  |             
|                    |  | 2002         |       | 2003
|                    |  |              |       |     
|                    |  | RMB          |       | RMB 
|Refining facilities |  |              | 1,179 |      |  |  | 1,596 | 
|Chemical facilities |  |              | 942   |      |  |  | 759   | 
|                    |  |              |       |      |  |  |       | 
|                    |  |              | 2,121 |      |  |  | 2,355 | 
|                    |  |              |       |      |  |  |       | 

There were no employee termination or relocation
costs relating to the shut down of these manufacturing
equipment. Estimated salvage values are expected to approximate
the estimated cost of dismantlement.

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)


6     INTEREST
EXPENSE

|                          |                  |                         |       |       |  |      |       |       |  |  |        |       | 
|------------------------- | ---------------- | ----------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ------ | ----- | 
|                          |                  |                        
|                          |                  | Year Ended December 31,
|                          |                  |                        
|                          |                  | 2001                    |       | 2002  |  | 2003
|                          |                  |                         |       |       |  |     
|                          |                  | RMB                     |       | RMB   |  | RMB 
|Interest on               |                  |                         |       |       |  |      |       |       |  |  |        |      
|                          |  loans          |                         |       | 5,034 |  |      |       | 4,402 |  |  |        | 3,662 | 
|                          |  capital leases |                         |       | 27    |  |      |       | 10    |  |  |        | 4     | 
|Less: amounts capitalized |                  |                         | (653  | )     |  |      | (896  | )     |  |  | (1,320 | )    
|                          |                  |                         |       |       |  |      |       |       |  |  |        |      
|                          |                  |                         | 4,408 |       |  |      | 3,516 |       |  |  | 2,346  |      
|                          |                  |                         |       |       |  |      |       |       |  |  |        |      

Amounts capitalized are debt costs related to
funds borrowed specifically for the purpose of acquiring
qualifying assets. Interest rates on such capitalized debts
ranged 5.43% in 2001, 5.02% to 5.43% in 2002 and 5.02% in 2003.

7     INCOME
TAXES

|                                  |  |                         |        |      |  |      |        |  |  |  |        | 
|--------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                                  |  |                        
|                                  |  | Year Ended December 31,
|                                  |  |                        
|                                  |  | 2001                    |        | 2002 |  | 2003
|                                  |  |                         |        |      |  |     
|                                  |  | RMB                     |        | RMB  |  | RMB 
|Current tax                       |  |                         | 19,166 |      |  |      | 19,289 |  |  |  | 26,347 | 
|Deferred tax (Note 22)            |  |                         | 3,861  |      |  |      | 2,897  |  |  |  | 1,594  | 
|Share of tax of equity affiliates |  |                         | 39     |      |  |      | 45     |  |  |  | 131    | 
|                                  |  |                         |        |      |  |      |        |  |  |  |        | 
|                                  |  |                         | 23,066 |      |  |      | 22,231 |  |  |  | 28,072 | 
|                                  |  |                         |        |      |  |      |        |  |  |  |        | 

In accordance with the relevant PRC income tax
rules and regulations, the enacted PRC income tax rate
applicable to the Group is principally 33% (2002: 33%; 2001:
33%). The Group in the last quarter of year 2002 obtained
approvals from several provincial and local tax authorities
whereby a portion of the taxable income of the Groups
qualifying operations in these locales through 2010 are assessed
income tax at a reduced rate of 15% instead of the statutory
rate of 33%.

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

|                                         |  |                         |        |      |  |      |        |   |  |  |        |  
|---------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                         |  |                        
|                                         |  | Year Ended December 31,
|                                         |  |                        
|                                         |  | 2001                    |        | 2002 |  | 2003
|                                         |  |                         |        |      |  |     
|                                         |  | RMB                     |        | RMB  |  | RMB 
|Income before income taxes               |  |                         | 68,131 |      |  |      | 69,240 |   |  |  | 98,322 |  
|                                         |  |                         |        |      |  |      |        |   |  |  |        |  
|Tax calculated at a tax rate of 33%      |  |                         | 22,483 |      |  |      | 22,849 |   |  |  | 32,446 |  
|Prior year tax return adjustment         |  |                         |       |      |  |      | 618    |   |  |  | 419    |  
|Effect of preferential tax rate          |  |                         |       |      |  |      | (2,377 | ) |  |  | (5,190 | )
|Income not subject to tax                |  |                         | (140   | )    |  |      | (93    | ) |  |  | (566   | )
|Expenses not deductible for tax purposes |  |                         | 723    |      |  |      | 1,234  |   |  |  | 963    |  
|                                         |  |                         |        |      |  |      |        |   |  |  |        |  
|Tax charge                               |  |                         | 23,066 |      |  |      | 22,231 |   |  |  | 28,072 |  
|                                         |  |                         |        |      |  |      |        |   |  |  |        |  

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)


8     BASIC AND
DILUTED NET INCOME PER SHARE

Basic and diluted net income per share for the
years ended December 31, 2001, 2002 and 2003 have been
computed by dividing net income by the number of
175,824 shares issued and outstanding for the respective
years.

There are no dilutive potential ordinary shares.

9     DIVIDENDS

|                                      |  |                         |        |      |  |      |        |  |  |  |        | 
|------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                                      |  |                        
|                                      |  | Year Ended December 31,
|                                      |  |                        
|                                      |  | 2001                    |        | 2002 |  | 2003
|                                      |  |                         |        |      |  |     
|                                      |  | RMB                     |        | RMB  |  | RMB 
|Final dividend for 2000 (Note (i))    |  |                         | 14,473 |      |  |      |       |  |  |  |       | 
|Interim dividend for 2001 (Note (ii)) |  |                         | 12,226 |      |  |      |       |  |  |  |       | 
|Final dividend for 2001 (Note (iii))  |  |                         |       |      |  |      | 8,839  |  |  |  |       | 
|Interim dividend for 2002 (Note (iv)) |  |                         |       |      |  |      | 8,811  |  |  |  |       | 
|Final dividend for 2002 (Note (v))    |  |                         |       |      |  |      |       |  |  |  | 12,299 | 
|Interim dividend for 2003 (Note (vi)) |  |                         |       |      |  |      |       |  |  |  | 17,379 | 
|                                      |  |                         |        |      |  |      |        |  |  |  |        | 
|                                      |  |                         | 26,699 |      |  |      | 17,650 |  |  |  | 29,678 | 
|                                      |  |                         |        |      |  |      |        |  |  |  |        | 




|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   | A final dividend in respect of 2000 of
    RMB 0.082315 per share amounting to a total of
    RMB 14,473 was paid on June 22, 2001, and was
    accounted for in shareholders equity as an appropriation
    of retained earnings in the year ended December 31, 2001.                                                                                                                                                                                                         
|     
|(ii)  | An interim dividend in respect of 2001 of
    RMB 0.069535 per share amounting to RMB 12,226 was
    paid on October 8, 2001, and was accounted for in
    shareholders equity as an appropriation of retained
    earnings in the year ended December 31, 2001.                                                                                                                                                                                                               
|     
|(iii) | A final dividend in respect of 2001 of
    RMB 0.050272 per share amounting to a total of
    RMB 8,839 was paid on June 21, 2002, and was accounted
    for in shareholders equity as an appropriation of retained
    earnings in the year ended December 31, 2002.                                                                                                                                                                                                          
|     
|(iv)  | An interim dividend in respect of 2002 of
    RMB 0.050113 per share amounting to RMB 8,811 was paid
    on October 8, 2002, and was accounted for in
    shareholders equity as an appropriation of retained
    earnings in the year ended December 31, 2002.                                                                                                                                                                                                                
|     
|(v)   | A final dividend in respect of 2002 of
    RMB 0.069951 per share amounting to a total of
    RMB 12,299 was paid on June 12, 2003, and was
    accounted for in shareholders equity as an appropriation
    of retained earnings in the year ended December 31, 2003.                                                                                                                                                                                                         
|     
|(vi)  | As authorized by shareholders in the Annual
    General Meeting on May 28, 2003, the Board of Directors, in
    a meeting held on August 27, 2003, resolved to distribute
    an interim dividend in respect of 2003 of RMB 0.098841 per
    share amounting to a total of RMB 17,379. The interim
    dividend was paid on October 8, 2003, and was accounted for
    in shareholders equity as an appropriation of retained
    earnings in the year ended December 31, 2003.
|     
|(vii) | At the meeting on March 24, 2004, the Board
    of Directors proposed a final dividend in respect of 2003 of
    RMB 0.079324 per share amounting to a total of
    RMB 13,947. These financial statements do not reflect this
    dividend payable, which will be accounted for in
    shareholders equity as an appropriation of retained
    earnings in the year ending December 31, 2004.                                                                                 

F-17



---



##### 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)


10     CASH AND CASH
EQUIVALENTS

|                         |  |                 |       |      |  |  |        | 
|------------------------ |  | --------------- | ----- | ---- |  |  | ------ | 
|                         |  |                
|                         |  | At December 31,
|                         |  |                
|                         |  | 2002            |       | 2003
|                         |  |                 |       |     
|                         |  | RMB             |       | RMB 
|Cash at bank and in hand |  |                 | 9,977 |      |  |  | 11,231 | 
|                         |  |                 |       |      |  |  |        | 

The weighted average effective interest rates on
bank deposits were 1.22% and 1.30% for the years ended
December 31, 2002 and 2003, respectively.

11     RECEIVABLES
UNDER RESALE AGREEMENTS

Securities purchased under agreements to resell
(resale agreements) are recorded as receivables
under resale agreements. The difference between purchase and
resell prices is treated as interest income and accrued over the
life of resale agreements using the effective yield method.

Resale agreements are accounted for as
collateralized financing transactions and are recorded at their
contractual amounts plus interest accrued. The underlying
collaterals are principally the PRC government bonds.

12     NOTES
RECEIVABLE

Notes receivable represent mainly the bills of
acceptance issued by banks for sales of goods and products. All
notes receivable are due within one year.

13     ACCOUNTS
RECEIVABLE

|                                             |                            |                 |        |      |  |  |        |     | 
|-------------------------------------------- | -------------------------- | --------------- | ------ | ---- |  |  | ------ | --- | 
|                                             |                            |                
|                                             |                            | At December 31,
|                                             |                            |                
|                                             |                            | 2002            |        | 2003
|                                             |                            |                 |        |     
|                                             |                            | RMB             |        | RMB 
|Accounts receivable due from third parties   |                            |                 | 11,504 |      |  |  | 8,263  |    
|Less: Impairment provision                   |                            |                 | (6,356 | )    |  |  | (5,872 | )  
|                                             |                            |                 |        |      |  |  |        |    
|                                             |                            |                 | 5,148  |      |  |  | 2,391  |    
|Accounts receivable due from related parties |                            |                 |        |      |  |  |        |    
|                                             |  Fellow CNPC subsidiaries |                 |        | 789  |  |  |        | 592 | 
|                                             |  Equity affiliates        |                 |        | 142  |  |  |        | 280 | 
|                                             |                            |                 |        |      |  |  |        |    
|                                             |                            |                 | 6,079  |      |  |  | 3,263  |    
|                                             |                            |                 |        |      |  |  |        |    

Movement in allowance for impairment of
receivables are as follows:

|                                     |  |                         |       |      |  |      |       |   |  |  |       |  
|------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                     |  |                        
|                                     |  | Year Ended December 31,
|                                     |  |                        
|                                     |  | 2001                    |       | 2002 |  | 2003
|                                     |  |                         |       |      |  |     
|                                     |  | RMB                     |       | RMB  |  | RMB 
|Balance at beginning of year         |  |                         | 6,000 |      |  |      | 6,663 |   |  |  | 6,356 |  
|Provision/(Write back)               |  |                         | 1,367 |      |  |      | (45   | ) |  |  | 210   |  
|Amount written off against provision |  |                         | (704  | )    |  |      | (262  | ) |  |  | (694  | )
|                                     |  |                         |       |      |  |      |       |   |  |  |       |  
|Balance at end of year               |  |                         | 6,663 |      |  |      | 6,356 |   |  |  | 5,872 |  
|                                     |  |                         |       |      |  |      |       |   |  |  |       |  

Amounts due from related parties are interest
free, unsecured and repayable in accordance with normal
commercial terms.

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)


14     INVENTORIES

|                                  |  |                 |        |      |  |  |        |  
|--------------------------------- |  | --------------- | ------ | ---- |  |  | ------ | -
|                                  |  |                
|                                  |  | At December 31,
|                                  |  |                
|                                  |  | 2002            |        | 2003
|                                  |  |                 |        |     
|                                  |  | RMB             |        | RMB 
|Crude oil and other raw materials |  |                 | 8,987  |      |  |  | 9,553  |  
|Work in progress                  |  |                 | 3,787  |      |  |  | 3,652  |  
|Finished goods                    |  |                 | 16,253 |      |  |  | 16,367 |  
|Spare parts and consumables       |  |                 | 67     |      |  |  | 66     |  
|                                  |  |                 |        |      |  |  |        |  
|                                  |  |                 | 29,094 |      |  |  | 29,638 |  
|Less: Write down in inventories   |  |                 | (653   | )    |  |  | (766   | )
|                                  |  |                 |        |      |  |  |        |  
|                                  |  |                 | 28,441 |      |  |  | 28,872 |  
|                                  |  |                 |        |      |  |  |        |  

Movements in allowance for write down in
inventories, which relate primarily to oil and chemical
products, are as follows:

|                                     |  |                         |       |      |  |      |      |   |  |  |     |  
|------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ---- | - |  |  | --- | -
|                                     |  |                        
|                                     |  | Year Ended December 31,
|                                     |  |                        
|                                     |  | 2001                    |       | 2002 |  | 2003
|                                     |  |                         |       |      |  |     
|                                     |  | RMB                     |       | RMB  |  | RMB 
|Balance at beginning of year         |  |                         | 1,521 |      |  |      | 800  |   |  |  | 653 |  
|Provision/ (Write back)              |  |                         | (614  | )    |  |      | (122 | ) |  |  | 136 |  
|Amount written off against provision |  |                         | (107  | )    |  |      | (25  | ) |  |  | (23 | )
|                                     |  |                         |       |      |  |      |      |   |  |  |     |  
|Balance at end of year               |  |                         | 800   |      |  |      | 653  |   |  |  | 766 |  
|                                     |  |                         |       |      |  |      |      |   |  |  |     |  

Cost of inventory (approximates cost of goods
sold) recognized as expense amounted to RMB 125,534,
RMB 112,986 and RMB 134,935 for the years ended
December 31, 2001, 2002 and 2003, respectively.

Inventories of the Group carried at net
realizable value amounted to RMB 2,780 and RMB 2,249
at December 31, 2002 and 2003, respectively.

15     PREPAID
EXPENSES AND OTHER CURRENT ASSETS

|                                          |  |                 |        |      |  |  |        |  
|----------------------------------------- |  | --------------- | ------ | ---- |  |  | ------ | -
|                                          |  |                
|                                          |  | At December 31,
|                                          |  |                
|                                          |  | 2002            |        | 2003
|                                          |  |                 |        |     
|                                          |  | RMB             |        | RMB 
|Other receivables                         |  |                 | 9,626  |      |  |  | 10,173 |  
|Less: Impairment provision                |  |                 | (5,313 | )    |  |  | (6,283 | )
|                                          |  |                 |        |      |  |  |        |  
|                                          |  |                 | 4,313  |      |  |  | 3,890  |  
|Amounts due from CNPC                     |  |                 | 2,135  |      |  |  | 2,038  |  
|Amounts due from fellow CNPC subsidiaries |  |                 | 5,419  |      |  |  | 2,705  |  
|Advances to suppliers                     |  |                 | 3,209  |      |  |  | 4,105  |  
|Prepaid expenses                          |  |                 | 123    |      |  |  | 103    |  
|Other current assets                      |  |                 | 530    |      |  |  | 687    |  
|                                          |  |                 |        |      |  |  |        |  
|                                          |  |                 | 15,729 |      |  |  | 13,528 |  
|                                          |  |                 |        |      |  |  |        |  

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)


Other receivables consist primarily of taxes
other than income taxes refund receivables, subsidies
receivable, and receivables for the sale of materials and scrap.

Amounts due from CNPC and fellow CNPC
subsidiaries are interest free, unsecured and repayable in
accordance with normal commercial terms.

Movements in allowance for impairment of other
receivables are as follows:

|                                     |  |                         |       |      |  |      |       |   |  |  |       |  
|------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                     |  |                        
|                                     |  | Year Ended December 31,
|                                     |  |                        
|                                     |  | 2001                    |       | 2002 |  | 2003
|                                     |  |                         |       |      |  |     
|                                     |  | RMB                     |       | RMB  |  | RMB 
|Balance at beginning of year         |  |                         | 5,525 |      |  |      | 5,074 |   |  |  | 5,313 |  
|Provision/(Write back)               |  |                         | (20   | )    |  |      | 329   |   |  |  | 1,224 |  
|Amount written off against provision |  |                         | (431  | )    |  |      | (90   | ) |  |  | (254  | )
|                                     |  |                         |       |      |  |      |       |   |  |  |       |  
|Balance at end of year               |  |                         | 5,074 |      |  |      | 5,313 |   |  |  | 6,283 |  
|                                     |  |                         |       |      |  |      |       |   |  |  |       |  

16     PROPERTY,
PLANT AND EQUIPMENT

|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|---------------------------------------------------------------------------------------------------------------------- |  | --------- | ------- | ----------- |  | --------- | -------- | -------- |  | ----- | ------- | ------------ |  | ----- | ------ | - |  |  | ------ | - |  |  | ------- | - |  |  | -------- | -
|Year Ended                                                                                                             |  |           |         | Oil and Gas |  | Plant and |          | Motor    |  |       |         | Construction |  |      
|December 31, 2002                                                                                                      |  | Buildings |         | Property    |  | Equipment |          | Vehicles |  | Other |         | in Progress  |  | Total
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |      
|                                                                                                                       |  | RMB       |         | RMB         |  | RMB       |          | RMB      |  | RMB   |         | RMB          |  | RMB  
|Cost or valuation                                                                                                      |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|At beginning of the year                                                                                               |  |           | 49,732  |             |  |           | 305,099  |          |  |       | 193,190 |              |  |       | 6,877  |   |  |  | 5,113  |   |  |  | 26,593  |   |  |  | 586,604  |  
|Additions                                                                                                              |  |           | 1,514   |             |  |           | 401      |          |  |       | 654     |              |  |       | 123    |   |  |  | 165    |   |  |  | 67,739  |   |  |  | 70,596   |  
|Acquisition (Note 29)                                                                                                  |  |           | 240     |             |  |           | 1,709    |          |  |       | 1,891   |              |  |       | 92     |   |  |  | 71     |   |  |  |        |   |  |  | 4,003    |  
|Transfers                                                                                                              |  |           | 5,381   |             |  |           | 39,332   |          |  |       | 18,106  |              |  |       | 690    |   |  |  | 229    |   |  |  | (63,738 | ) |  |  |         |  
|Disposals or write off                                                                                                 |  |           | (1,533  | )           |  |           | (8,543   | )        |  |       | (7,920  | )            |  |       | (398   | ) |  |  | (306   | ) |  |  |        |   |  |  | (18,700  | )
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|At end of the year                                                                                                     |  |           | 55,334  |             |  |           | 337,998  |          |  |       | 205,921 |              |  |       | 7,384  |   |  |  | 5,272  |   |  |  | 30,594  |   |  |  | 642,503  |  
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|Accumulated depreciation                                                                                               |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|At beginning of the year                                                                                               |  |           | (9,949  | )           |  |           | (124,612 | )        |  |       | (80,388 | )            |  |       | (3,264 | ) |  |  | (1,421 | ) |  |  |        |   |  |  | (219,634 | )
|Charge for the year                                                                                                    |  |           | (1,684  | )           |  |           | (18,302  | )        |  |       | (14,864 | )            |  |       | (685   | ) |  |  | (571   | ) |  |  |        |   |  |  | (36,106  | )
|Acquisition (Note 29)                                                                                                  |  |           | (55     | )           |  |           |         |          |  |       | (748    | )            |  |       | (33    | ) |  |  | (37    | ) |  |  |        |   |  |  | (873     | )
|Disposals or write off                                                                                                 |  |           | 530     |             |  |           | 5,261    |          |  |       | 5,538   |              |  |       | 333    |   |  |  | 246    |   |  |  |        |   |  |  | 11,908   |  
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|At end of the year                                                                                                     |  |           | (11,158 | )           |  |           | (137,653 | )        |  |       | (90,462 | )            |  |       | (3,649 | ) |  |  | (1,783 | ) |  |  |        |   |  |  | (244,705 | )
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|Net book value                                                                                                         |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|At end of the year                                                                                                     |  |           | 44,176  |             |  |           | 200,345  |          |  |       | 115,459 |              |  |       | 3,735  |   |  |  | 3,489  |   |  |  | 30,594  |   |  |  | 397,798  |  
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|Carrying value of the property, plant and
    equipment had they been stated at cost less accumulated
    depreciation |  |           | 39,065  |             |  |           | 179,713  |          |  |       | 92,383  |              |  |       | 3,102  |   |  |  | 2,738  |   |  |  | 30,594  |   |  |  | 347,595  |  
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  

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)


|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|---------------------------------------------------------------------------------------------------------------------- |  | --------- | ------- | ----------- |  | --------- | -------- | -------- |  | ----- | ------- | ------------ |  | ----- | ------ | - |  |  | ------ | - |  |  | ------- | - |  |  | -------- | -
|Year Ended                                                                                                             |  |           |         | Oil and Gas |  | Plant and |          | Motor    |  |       |         | Construction |  |      
|December 31, 2003                                                                                                      |  | Buildings |         | Property    |  | Equipment |          | Vehicles |  | Other |         | in Progress  |  | Total
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |      
|                                                                                                                       |  | RMB       |         | RMB         |  | RMB       |          | RMB      |  | RMB   |         | RMB          |  | RMB  
|Cost or valuation                                                                                                      |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|At beginning of the year                                                                                               |  |           | 55,334  |             |  |           | 337,998  |          |  |       | 205,921 |              |  |       | 7,384  |   |  |  | 5,272  |   |  |  | 30,594  |   |  |  | 642,503  |  
|Additions                                                                                                              |  |           | 1,133   |             |  |           | 289      |          |  |       | 952     |              |  |       | 142    |   |  |  | 73     |   |  |  | 81,710  |   |  |  | 84,299   |  
|Revaluation surplus                                                                                                    |  |           |        |             |  |           |         |          |  |       | (1,568  | )            |  |       |       |   |  |  |       |   |  |  |        |   |  |  | (1,568   | )
|Revaluation loss                                                                                                       |  |           |        |             |  |           |         |          |  |       | (2,133  | )            |  |       |       |   |  |  |       |   |  |  |        |   |  |  | (2,133   | )
|Transfers                                                                                                              |  |           | 6,743   |             |  |           | 43,308   |          |  |       | 27,834  |              |  |       | 804    |   |  |  | 354    |   |  |  | (79,043 | ) |  |  |         |  
|Disposals or write off                                                                                                 |  |           | (1,738  | )           |  |           | (12,785  | )        |  |       | (8,285  | )            |  |       | (537   | ) |  |  | (249   | ) |  |  |        |   |  |  | (23,594  | )
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|At end of the year                                                                                                     |  |           | 61,472  |             |  |           | 368,810  |          |  |       | 222,721 |              |  |       | 7,793  |   |  |  | 5,450  |   |  |  | 33,261  |   |  |  | 699,507  |  
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|Accumulated depreciation                                                                                               |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|At beginning of the year                                                                                               |  |           | (11,158 | )           |  |           | (137,653 | )        |  |       | (90,462 | )            |  |       | (3,649 | ) |  |  | (1,783 | ) |  |  |        |   |  |  | (244,705 | )
|Charge for the year                                                                                                    |  |           | (2,146  | )           |  |           | (21,060  | )        |  |       | (15,120 | )            |  |       | (731   | ) |  |  | (586   | ) |  |  |        |   |  |  | (39,643  | )
|Revaluation surplus                                                                                                    |  |           |        |             |  |           |         |          |  |       | 2,440   |              |  |       |       |   |  |  |       |   |  |  |        |   |  |  | 2,440    |  
|Revaluation loss                                                                                                       |  |           |        |             |  |           |         |          |  |       | 876     |              |  |       |       |   |  |  |       |   |  |  |        |   |  |  | 876      |  
|Disposals or write off                                                                                                 |  |           | 1,474   |             |  |           | 7,871    |          |  |       | 5,007   |              |  |       | 416    |   |  |  | 176    |   |  |  |        |   |  |  | 14,944   |  
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|At end of the year                                                                                                     |  |           | (11,830 | )           |  |           | (150,842 | )        |  |       | (97,259 | )            |  |       | (3,964 | ) |  |  | (2,193 | ) |  |  |        |   |  |  | (266,088 | )
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|Net book value                                                                                                         |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|At end of the year                                                                                                     |  |           | 49,642  |             |  |           | 217,968  |          |  |       | 125,462 |              |  |       | 3,829  |   |  |  | 3,257  |   |  |  | 33,261  |   |  |  | 433,419  |  
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  
|Carrying value of the property, plant and
    equipment had they been stated at cost less accumulated
    depreciation |  |           | 44,773  |             |  |           | 203,025  |          |  |       | 104,976 |              |  |       | 3,304  |   |  |  | 2,622  |   |  |  | 33,261  |   |  |  | 391,961  |  
|                                                                                                                       |  |           |         |             |  |           |          |          |  |       |         |              |  |       |        |   |  |  |        |   |  |  |         |   |  |  |          |  

Property, plant and equipment under capital
leases at the end of year are as follows:

|                         |  |                 |      |      |  |  |     |  
|------------------------ |  | --------------- | ---- | ---- |  |  | --- | -
|                         |  |                
|                         |  | At December 31,
|                         |  |                
|                         |  | 2002            |      | 2003
|                         |  |                 |      |     
|                         |  | RMB             |      | RMB 
|Refining and Marketing   |  |                 | 88   |      |  |  | 94  |  
|Chemicals and Marketing  |  |                 | 431  |      |  |  | 221 |  
|Accumulated depreciation |  |                 | (120 | )    |  |  | (75 | )
|                         |  |                 |      |      |  |  |     |  
|                         |  |                 | 399  |      |  |  | 240 |  
|                         |  |                 |      |      |  |  |     |  

All capital leases are related to plant and
equipment and generally contain purchase options at the end of
the lease terms.

Depreciation expenses on property, plant and
equipment are as follows:

|                           |  |                         |        |      |  |      |        |  |  |  |        | 
|-------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                           |  |                        
|                           |  | Year Ended December 31,
|                           |  |                        
|                           |  | 2001                    |        | 2002 |  | 2003
|                           |  |                         |        |      |  |     
|                           |  | RMB                     |        | RMB  |  | RMB 
|Owned assets               |  |                         | 33,056 |      |  |      | 36,079 |  |  |  | 39,622 | 
|Assets under capital lease |  |                         | 22     |      |  |      | 27     |  |  |  | 21     | 

F-21



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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)


The depreciation charge of the Group for the year
ended December 31, 2003 included RMB 1,487 (2002:
RMB 1,753; 2001: Nil) relating to impairment provision for
plant and equipment held for use. Of this amount, RMB 863
(2002: RMB 1,384) was related to the Chemicals and
Marketing segment and RMB 624 (2002: RMB 369) was for
the Refining and Marketing segment.

Repair and maintenance costs were RMB 4,334,
RMB 5,060 and RMB 4,721 for the years ended
December 31, 2001, 2002 and 2003, respectively.

Bank debts are secured on property, plant and
equipment at net book value of RMB 426 and RMB 152 at
December 31, 2002 and 2003, respectively.

A valuation of the Groups property, plant
and equipment, excluding oil and gas reserves, was carried out
during 1999 by independent valuers. The valuation was based on
depreciated replacement costs.

As at September 30, 2003, a revaluation of
the Groups refining and chemical production equipment was
undertaken by a firm of independent valuers, China United Assets
Appraiser Co., Ltd, in the PRC on a depreciated replacement cost
basis.

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

The September 2003 revaluation resulted in a RMB
872 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.

With respect to the RMB 872 revaluation gain
resulting from the 2003 revaluation, RMB 98 were related to
property, plant and equipment that in 1999 experienced
revaluation loss, and were credited to the income statement. The
remaining RMB 774 was credited to the revaluation reserve
in the shareholders equity.

With respect to the RMB 1,257 revaluation
loss resulting from the 2003 revaluation, RMB 768 were
related to property, plant and equipment that in 1999
experienced revaluation gain. The remaining RMB 489 were
charged to the income statement.

17     INVESTMENTS IN
EQUITY AFFILIATES

Principal affiliates accounted for under the
equity method are:

|                                                |  |                |     |               |  |              |        |                      |  |  |      |  |  |                                                              
|----------------------------------------------- |  | -------------- | --- | ------------- |  | ------------ | ------ | -------------------- |  |  | ---- |  |  | -------------------------------------------------------------
|                                                |  |                |     |               |  | Attributable |        |                     
|                                                |  | Country of     |     | Paid-         |  | Equity       |        |                     
|                                                |  | Incorporation  |     | up/Registered |  | Interest     |        |                     
|Company Name                                    |  | and Operations |     | Capital       |  | Held (%)     |        | Principal Activities
|                                                |  |                |     |               |  |              |        |                     
|Dalian West Pacific Petrochemical
    Co., Ltd. |  |                | PRC |               |  |              | USD258 |                      |  |  | 28.4 |  |  | Production and sale of refined and petrochemical
    products

Share of income of equity affiliates included in
the statements of income of the Group was RMB 341,
RMB 268 and RMB 985 for the year ended
December 31, 2001, 2002 and 2003, respectively.

F-22



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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)


Share of net profit/(loss) of equity affiliates
included in retained earnings of the Group was RMB 584
(2002: RMB (136)) at December 31, 2003. Dividends
received and receivable from equity affiliates were RMB 134
(2002: RMB 99) in 2003.

18     AVAILABLE-FOR-SALE
INVESTMENTS

|                                        |  |                 |       |      |  |  |       |  
|--------------------------------------- |  | --------------- | ----- | ---- |  |  | ----- | -
|                                        |  |                
|                                        |  | At December 31,
|                                        |  |                
|                                        |  | 2002            |       | 2003
|                                        |  |                 |       |     
|                                        |  | RMB             |       | RMB 
|Unlisted available-for-sale investments |  |                 | 2,195 |      |  |  | 2,652 |  
|Less: Impairment provision              |  |                 | (660  | )    |  |  | (813  | )
|                                        |  |                 |       |      |  |  |       |  
|                                        |  |                 | 1,535 |      |  |  | 1,839 |  
|                                        |  |                 |       |      |  |  |       |  

Available-for-sale investments, comprising
principally unlisted equity securities, are classified as
non-current assets, unless they are expected to be realized
within twelve months of the balance sheet date or unless they
will need to be sold to raise operating capital.

Dividend income from available-for-sale
investments was RMB 123, RMB 60 and RMB 69 for
the years ended December 31, 2001, 2002 and 2003,
respectively.

Movements in provision for impairment of
available-for-sale investments are as follows:

|                                     |  |                         |     |      |  |      |     |   |  |  |     |  
|------------------------------------ |  | ----------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                     |  |                        
|                                     |  | Year Ended December 31,
|                                     |  |                        
|                                     |  | 2001                    |     | 2002 |  | 2003
|                                     |  |                         |     |      |  |     
|                                     |  | RMB                     |     | RMB  |  | RMB 
|Balance at beginning of year         |  |                         | 631 |      |  |      | 665 |   |  |  | 660 |  
|Provision                            |  |                         | 34  |      |  |      | 4   |   |  |  | 158 |  
|Amount written off against provision |  |                         |    |      |  |      | (9  | ) |  |  | (5  | )
|                                     |  |                         |     |      |  |      |     |   |  |  |     |  
|Balance at end of year               |  |                         | 665 |      |  |      | 660 |   |  |  | 813 |  
|                                     |  |                         |     |      |  |      |     |   |  |  |     |  

19     INTANGIBLE AND
OTHER ASSETS

Intangible and other assets consist of the
following:

|                   |  |                 |       |              |  |     |        |      |  |              |       |     |  |  |       |  |  |  |        |   |  |  |       | 
|------------------ |  | --------------- | ----- | ------------ |  | --- | ------ | ---- |  | ------------ | ----- | --- |  |  | ----- |  |  |  | ------ | - |  |  | ----- | 
|                   |  |                
|                   |  | At December 31,
|                   |  |                
|                   |  |                 |       |             
|                   |  | 2002            |       | 2003        
|                   |  |                 |       |             
|                   |  |                 |       | Accumulated  |  |     |        |      |  | Accumulated  |       |    
|                   |  | Cost            |       | Amortization |  | Net |        | Cost |  | Amortization |       | Net
|                   |  |                 |       |              |  |     |        |      |  |              |       |    
|                   |  | RMB             |       | RMB          |  | RMB |        | RMB  |  | RMB          |       | RMB
|Patents            |  |                 | 2,591 |              |  |     | (1,006 | )    |  |              | 1,585 |     |  |  | 2,845 |  |  |  | (1,293 | ) |  |  | 1,552 | 
|Technical know-how |  |                 | 637   |              |  |     | (232   | )    |  |              | 405   |     |  |  | 649   |  |  |  | (213   | ) |  |  | 436   | 
|                   |  |                 |       |              |  |     |        |      |  |              |       |     |  |  |       |  |  |  |        |   |  |  |       | 
|Intangible assets  |  |                 | 3,228 |              |  |     | (1,238 | )    |  |              | 1,990 |     |  |  | 3,494 |  |  |  | (1,506 | ) |  |  | 1,988 | 
|                   |  |                 |       |              |  |     |        |      |  |              |       |     |  |  |       |  |  |  |        |   |  |  |       | 
|Other assets       |  |                 |       |              |  |     |        |      |  |              | 2,517 |     |  |  |       |  |  |  |        |   |  |  | 2,744 | 
|                   |  |                 |       |              |  |     |        |      |  |              |       |     |  |  |       |  |  |  |        |   |  |  |       | 
|                   |  |                 |       |              |  |     |        |      |  |              | 4,507 |     |  |  |       |  |  |  |        |   |  |  | 4,732 | 
|                   |  |                 |       |              |  |     |        |      |  |              |       |     |  |  |       |  |  |  |        |   |  |  |       | 

Amortization on intangible assets was
RMB 537, RMB 676 and RMB 888 for the years ended
December 31, 2001, 2002 and 2003, respectively.

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)


Patents principally represent expenditure
incurred in acquiring processes and techniques that are
generally protected by relevant government authorities.
Technical know-how amounts are attributable to operational
technology acquired in connection with purchase of equipment.
The technical know-how costs are included as part of the
purchase price by contracts and are distinguishable.

Other assets primarily consist of long-term
prepaid expenses to service providers.

20     ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES

|                                                               |                            |                 |        |        |  |  |        |        | 
|-------------------------------------------------------------- | -------------------------- | --------------- | ------ | ------ |  |  | ------ | ------ | 
|                                                               |                            |                
|                                                               |                            | At December 31,
|                                                               |                            |                
|                                                               |                            | 2002            |        | 2003  
|                                                               |                            |                 |        |       
|                                                               |                            | RMB             |        | RMB   
|Trade payables                                                 |                            |                 | 8,153  |        |  |  | 10,150 |       
|Advances from customers                                        |                            |                 | 4,690  |        |  |  | 6,861  |       
|Salaries and welfare payable                                   |                            |                 | 3,915  |        |  |  | 5,413  |       
|Accrued expenses                                               |                            |                 | 8      |        |  |  | 5      |       
|Dividends payable by subsidiaries to minority
    shareholders |                            |                 | 34     |        |  |  | 118    |       
|Interest payable                                               |                            |                 | 233    |        |  |  | 130    |       
|Construction fee and equipment cost payables                   |                            |                 | 12,521 |        |  |  | 13,760 |       
|Payable to Sinopec                                             |                            |                 | 539    |        |  |  | 610    |       
|Advances from Sinopec                                          |                            |                 | 80     |        |  |  | 233    |       
|One-time employee housing remedial payment payable             |                            |                 | 2,470  |        |  |  | 2,270  |       
|Other payables                                                 |                            |                 | 10,588 |        |  |  | 10,628 |       
|Amounts due to related parties                                 |                            |                 |        |        |  |  |        |       
|                                                               |  CNPC                     |                 |        | 1,702  |  |  |        | 1,531  | 
|                                                               |  Fellow CNPC subsidiaries |                 |        | 11,581 |  |  |        | 11,880 | 
|                                                               |  Equity affiliates        |                 |        | 1,279  |  |  |        | 591    | 
|                                                               |                            |                 |        |        |  |  |        |       
|                                                               |                            |                 | 57,793 |        |  |  | 64,180 |       
|                                                               |                            |                 |        |        |  |  |        |       

Other payables consist primarily of customer
deposits.

Amounts due to related parties are interest-free,
unsecured and repayable in accordance with normal commercial
terms.

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)


21     DEBT

(a) Short-term
debt

|                                    |             |                 |        |        |  |  |        |       | 
|----------------------------------- | ----------- | --------------- | ------ | ------ |  |  | ------ | ----- | 
|                                    |             |                
|                                    |             | At December 31,
|                                    |             |                
|                                    |             | 2002            |        | 2003  
|                                    |             |                 |        |       
|                                    |             | RMB             |        | RMB   
|Bank loans                          |             |                 |        |        |  |  |        |      
|                                    |  secured   |                 |        | 274    |  |  |        | 114   | 
|                                    |  unsecured |                 |        | 13,576 |  |  |        | 8,450 | 
|Loans from fellow CNPC subsidiaries |             |                 | 570    |        |  |  | 610    |      
|Other                               |             |                 | 4      |        |  |  | 5      |      
|                                    |             |                 |        |        |  |  |        |      
|                                    |             |                 | 14,424 |        |  |  | 9,179  |      
|Current portion of long-term debt   |             |                 | 6,209  |        |  |  | 19,711 |      
|                                    |             |                 |        |        |  |  |        |      
|                                    |             |                 | 20,633 |        |  |  | 28,890 |      
|                                    |             |                 |        |        |  |  |        |      

(b) Long-term
debt

|                                                                                                     |  |                                                                                                                                              |  |                 |  |       
|---------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- |  | ------
|                                                                                                     |  |                                                                                                                                              |  |                
|                                                                                                     |  |                                                                                                                                              |  | At December 31,
|                                                                                                     |  |                                                                                                                                              |  |                
|                                                                                                     |  | Interest Rate and Final Maturity                                                                                                             |  | 2002            |  | 2003  
|                                                                                                     |  |                                                                                                                                              |  |                 |  |       
|                                                                                                     |  |                                                                                                                                              |  | RMB             |  | RMB   
|Renminbi-denominated loans:                                                                          |  |                                                                                                                                              |  |                
|Bank loans for the development of oil fields and
    construction of refining plants                 |  | Majority variable interest rates ranging from
    interest free to 6.03% per annum as of December 31, 2003,
    with maturities through 2010 |  | 23,580          |  | 20,327
|Bank loans for working capital                                                                       |  | Majority variable interest rates ranging from
    interest free to 5.94% per annum as of December 31, 2003,
    with maturities through 2005 |  | 6,189           |  | 6,073 
|Loans from related parties for the development of
    oil fields and construction of refining plants |  | Floating interest rates ranging from 4.61% to
    5.18% per annum as of December 31, 2003, with maturities
    through 2032                  |  | 15,956          |  | 15,620
|Working capital loans from related parties                                                           |  | Floating interest rate at 5.02% per annum as of
    December 31, 2003, with maturity through 2004                                            |  | 4,000           |  | 4,000 
|Working capital loans                                                                                |  | Fixed interest rates at 6.32% per annum with no
    fixed repayment term                                                                     |  | 11              |  | 10    
|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           |  | 1,350 
|Corporate debenture for the construction of
    refining plants                                      |  | Fixed interest rate at 9.00% per annum with
    maturities through 2003                                                                      |  | 300             |  |      
|Corporate debenture issued in October, 2003, for
    the development of oil and gas properties       |  | Fixed interest rate at 4.11% per annum with
    maturities through 2013                                                                      |  |                |  | 1,500 

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)


|                                                                                                     |  |                                                                                                                             |  |                 |  |      
|---------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | --------------- |  | -----
|                                                                                                     |  |                                                                                                                             |  |                
|                                                                                                     |  |                                                                                                                             |  | At December 31,
|                                                                                                     |  |                                                                                                                             |  |                
|                                                                                                     |  | Interest Rate and Final Maturity                                                                                            |  | 2002            |  | 2003 
|                                                                                                     |  |                                                                                                                             |  |                 |  |      
|                                                                                                     |  |                                                                                                                             |  | RMB             |  | RMB  
|US Dollar-denominated loans:                                                                         |  |                                                                                                                             |  |                
|Bank loans for the development of oil fields and
    construction of refining plants                 |  | Fixed interest rates ranging from interest free
    to 8.66% per annum with maturities through 2038                         |  | 4,801           |  | 2,881
|Bank loans for the development of oil fields and
    construction of refining plants                 |  | Floating interest rates ranging from 1.47% to
    6.61% per annum as of December 31, 2003, with maturities
    through 2015 |  | 1,763           |  | 1,403
|Bank loans for acquisition of overseas oil and
    gas properties                                    |  | Floating interest rate at LIBOR plus 0.60% per
    annum as of December 31, 2003, with maturities through 2005              |  | 1,490           |  | 1,493
|Loans from related parties for the development of
    oil fields and construction of refining plants |  | Floating interest rate at LIBOR minus 0.25% per
    annum as of December 31, 2003, with maturities through 2005             |  | 3,633           |  | 3,633
|Loans from related parties for acquisition of
    overseas oil and gas properties                    |  | Floating interest rate at LIBOR plus 0.40% per
    annum as of December 31, 2003, with maturities through 2005              |  |                |  | 608  
|Loans from related parties for working capital                                                       |  | Floating interest rate at LIBOR plus 0.40% per
    annum as of December 31, 2003, with maturities through 2005              |  | 543             |  | 717  
|Loans for the development of oil fields and
    construction of refining plants                      |  | Fixed interest rate at 1.55% per annum with
    maturities through 2022                                                     |  | 618             |  | 586  
|Japanese Yen-denominated
    loans:                                                                  |  |                                                                                                                             |  |                
|Bank loans for the development of oil fields and
    construction of refining plants                 |  | Fixed interest rates ranging from 2.70% to 5.30%
    per annum with maturities through 2010                                 |  | 723             |  | 578  
|Euro-denominated
    loans:                                                                          |  |                                                                                                                             |  |                
|Bank loans for the development of oil fields and
    construction of refining plants                 |  | Fixed interest rates ranging from 2.00% to 8.50%
    per annum with maturities through 2023                                 |  | 463             |  | 381  
|British Pound-denominated
    loans:                                                                 |  |                                                                                                                             |  |                
|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                                                     |  | 538             |  | 454  

F-26



---



##### 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       |  | 2002            |  | 2003    
|                                                                                |  |                                        |  |                 |  |         
|                                                                                |  |                                        |  | RMB             |  | RMB     
|Loans for the development of oil fields and
    construction of refining plants |  | Fixed interest rate at 5.17% per annum |  | 784             |  |        
|                                                                                |  |                                        |  |                 |  |         
|                                                                                |  |                                        |  | 66,742          |  | 61,614  
|Capital lease obligations                                                       |  |                                        |  | 122             |  | 56      
|                                                                                |  |                                        |  |                 |  |         
|Total long-term debt                                                            |  |                                        |  | 66,864          |  | 61,670  
|Less: current portion of long-term debt                                         |  |                                        |  | (6,209)         |  | (19,711)
|                                                                                |  |                                        |  |                 |  |         
|                                                                                |  |                                        |  | 60,655          |  | 41,959  
|                                                                                |  |                                        |  |                 |  |         

For loans denominated in RMB with floating rates,
the rates are re-set annually on the respective anniversary
dates based on rates announced by the Peoples Bank of
China. For loans denominated in currencies other than RMB with
floating rates, the rates are re-set quarterly or semi-annually
as stipulated in the respective agreements. Other loans
represent loans from independent third parties other than banks
with interest rates ranging from interest 1.55% to 6.32% per
annum. Interest free loans amounted to RMB 353 and
RMB 215 at December 31, 2002 and 2003, respectively.
Interest free loans were treated as government assistance and no
imputation of interest expense on such loans was recognized in
the Groups consolidated financial statements.

Debts of RMB 939 and RMB 853 were guaranteed
by CNPC and its subsidiaries at December 31, 2002 and 2003,
respectively.

The Groups debts include secured
liabilities (leases and bank debts) totalling RMB 398 and
RMB 170, respectively, at December 31, 2002, and 2003.
Bank debts are secured over certain of the Groups
property, plant and equipment (Note 16). Lease liabilities
are effectively secured as the rights to the leased assets
revert to the lessor in the event of default.

|                                           |                              |                 |        |        |   |  |        |        |  
|------------------------------------------ | ---------------------------- | --------------- | ------ | ------ | - |  | ------ | ------ | -
|                                           |                              |                
|                                           |                              | At December 31,
|                                           |                              |                
|                                           |                              | 2002            |        | 2003  
|                                           |                              |                 |        |       
|                                           |                              | RMB             |        | RMB   
|Total debt:                                |                              |                 |        |        |   |  |        |       
|                                           |  at fixed rates             |                 |        | 24,056 |   |  |        | 17,024 |  
|                                           |  at variable rates          |                 |        | 57,232 |   |  |        | 53,825 |  
|                                           |                              |                 |        |        |   |  |        |       
|                                           |                              |                 | 81,288 |        |   |  | 70,849 |       
|                                           |                              |                 |        |        |   |  |        |       
|Weighted average effective interest rates: |                              |                 |        |        |   |  |        |       
|                                           |  bank loans                 |                 |        | 4.92   | % |  |        | 4.77   | %
|                                           |  loans from related parties |                 |        | 4.33   | % |  |        | 4.23   | %
|                                           |  loans from third parties   |                 |        | 3.58   | % |  |        | 1.64   | %
|                                           |  corporate debentures       |                 |        | 5.32   | % |  |        | 4.30   | %
|                                           |  capital lease obligations  |                 |        | 3.38   | % |  |        | 3.22   | %

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)


The carrying amounts and fair values of long-term
debt (excluding capital lease obligations) are as follows:

|                           |  |                  |        |      |  |  |        | 
|-------------------------- |  | ---------------- | ------ | ---- |  |  | ------ | 
|                           |  |                 
|                           |  | Carrying amounts
|                           |  | At December 31, 
|                           |  |                 
|                           |  | 2002             |        | 2003
|                           |  |                  |        |     
|                           |  | RMB              |        | RMB 
|Bank loans                 |  |                  | 39,547 |      |  |  | 33,590 | 
|Loans from related parties |  |                  | 24,132 |      |  |  | 24,578 | 
|Corporate debentures       |  |                  | 1,650  |      |  |  | 2,850  | 
|Other                      |  |                  | 1,413  |      |  |  | 596    | 
|                           |  |                  |        |      |  |  |        | 
|                           |  |                  | 66,742 |      |  |  | 61,614 | 
|                           |  |                  |        |      |  |  |        | 

|                           |  |                 |        |      |  |  |        | 
|-------------------------- |  | --------------- | ------ | ---- |  |  | ------ | 
|                           |  |                
|                           |  | Fair values    
|                           |  | At December 31,
|                           |  |                
|                           |  | 2002            |        | 2003
|                           |  |                 |        |     
|                           |  | RMB             |        | RMB 
|Bank loans                 |  |                 | 39,413 |      |  |  | 33,514 | 
|Loans from related parties |  |                 | 24,133 |      |  |  | 24,578 | 
|Corporate debentures       |  |                 | 1,646  |      |  |  | 2,640  | 
|Other                      |  |                 | 1,203  |      |  |  | 422    | 
|                           |  |                 |        |      |  |  |        | 
|                           |  |                 | 66,395 |      |  |  | 61,154 | 
|                           |  |                 |        |      |  |  |        | 

The fair values are based on discounted cash
flows using applicable discount rates based upon the prevailing
market rates of interest available to the Group for financial
instruments with substantially the same terms and
characteristics at the balance sheet dates. Such discount rates
ranged from 0.43% to 6.66% per annum as of December 31,
2003 depending on the type of the debt. The carrying amounts of
short-term debt and capital lease obligations approximate their
fair value.

Maturities of long-term debt (excluding capital
lease obligations) at the dates indicated below are as follows:

|            |  |                 |        |      |  |  |        | 
|----------- |  | --------------- | ------ | ---- |  |  | ------ | 
|            |  |                
|            |  | At December 31,
|            |  |                
|            |  | 2002            |        | 2003
|            |  |                 |        |     
|            |  | RMB             |        | RMB 
|First year  |  |                 | 6,143  |      |  |  | 19,672 | 
|Second year |  |                 | 19,541 |      |  |  | 18,166 | 
|Third year  |  |                 | 16,322 |      |  |  | 7,331  | 
|Fourth year |  |                 | 9,700  |      |  |  | 5,640  | 
|Fifth year  |  |                 | 5,935  |      |  |  | 4,137  | 
|Thereafter  |  |                 | 9,101  |      |  |  | 6,668  | 
|            |  |                 |        |      |  |  |        | 
|            |  |                 | 66,742 |      |  |  | 61,614 | 
|            |  |                 |        |      |  |  |        | 

F-28



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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)


Future minimum payments on capital lease
obligations at the dates indicated below are as follows:

|                                                        |  |                 |     |      |  |  |    |  
|------------------------------------------------------- |  | --------------- | --- | ---- |  |  | -- | -
|                                                        |  |                
|                                                        |  | At December 31,
|                                                        |  |                
|                                                        |  | 2002            |     | 2003
|                                                        |  |                 |     |     
|                                                        |  | RMB             |     | RMB 
|First year                                              |  |                 | 70  |      |  |  | 41 |  
|Second year                                             |  |                 | 41  |      |  |  | 17 |  
|Third year                                              |  |                 | 17  |      |  |  |   |  
|Fourth year                                             |  |                 |    |      |  |  |   |  
|                                                        |  |                 |     |      |  |  |    |  
|                                                        |  |                 | 128 |      |  |  | 58 |  
|Future finance charges on capital lease
    obligations |  |                 | (6  | )    |  |  | (2 | )
|                                                        |  |                 |     |      |  |  |    |  
|Present value of capital lease obligations              |  |                 | 122 |      |  |  | 56 |  
|                                                        |  |                 |     |      |  |  |    |  

The present value of capital lease obligations
can be analyzed as follows:

|            |  |  |     |  |  |  |    | 
|----------- |  |  | --- |  |  |  | -- | 
|First year  |  |  | 66  |  |  |  | 39 | 
|Second year |  |  | 39  |  |  |  | 17 | 
|Third year  |  |  | 17  |  |  |  |   | 
|Fourth year |  |  |    |  |  |  |   | 
|            |  |  |     |  |  |  |    | 
|            |  |  | 122 |  |  |  | 56 | 
|            |  |  |     |  |  |  |    | 

22     DEFERRED
INCOME TAXES

Deferred income taxes are calculated on temporary
differences under the liability method using a principal tax
rate of 33%.

The movements in the deferred income tax account
are as follows:

|                                 |                              |                        |       |      |  |      |       |   |  |  |        |   | 
|-------------------------------- | ---------------------------- | ---------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ------ | - | 
|                                 |                              |                       
|                                 |                              | Year Ended December 31
|                                 |                              |                       
|                                 |                              | 2001                   |       | 2002 |  | 2003
|                                 |                              |                        |       |      |  |     
|                                 |                              | RMB                    |       | RMB  |  | RMB 
|At beginning of year             |                              |                        | 3,169 |      |  |      | 7,030 |   |  |  | 9,927  |  
|Income statement charge (Note 7) |                              |                        | 3,861 |      |  |      | 2,897 |   |  |  | 1,594  |  
|Charged to equity                |                              |                        |       |      |  |      |       |   |  |  |        |  
|                                 |  net surplus on revaluation |                        |       |     |  |      |       |  |  |  |        | 5 | 
|                                 |                              |                        |       |      |  |      |       |   |  |  |        |  
|At end of year                   |                              |                        | 7,030 |      |  |      | 9,927 |   |  |  | 11,526 |  
|                                 |                              |                        |       |      |  |      |       |   |  |  |        |  

F-29



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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)


Deferred tax balances are attributable to the
following items:

|                               |             |                                                                          |        |      |        |  |        |  |        | 
|------------------------------ | ----------- | ------------------------------------------------------------------------ | ------ | ---- | ------ |  | ------ |  | ------ | 
|                               |             |                                                                         
|                               |             | At December 31,                                                         
|                               |             |                                                                         
|                               |             | 2002                                                                     |        | 2003
|                               |             |                                                                          |        |     
|                               |             | RMB                                                                      |        | RMB 
|Deferred tax assets            |             |                                                                          |        |      |        |  |        | 
|                               | Current     |                                                                          |        |      |        |  |        |  |       
|                               |             | Provisions, primarily for receivables and
    inventories                |        |      | 3,568  |  |        |  | 4,015  | 
|                               |             | Tax losses of subsidiaries                                               |        |      | 111    |  |        |  | 39     | 
|                               | Non current |                                                                          |        |      |        |  |        |  |       
|                               |             | Shut down of manufacturing assets and impairment
    of long-term assets |        |      | 613    |  |        |  | 1,039  | 
|                               |             | Other                                                                    |        |      | 182    |  |        |  | 579    | 
|                               |             |                                                                          |        |      |        |  |        | 
|Total deferred tax assets      |             |                                                                          | 4,474  |      |        |  | 5,672  | 
|                               |             |                                                                          |        |      |        |  |        | 
|Deferred tax liabilities       |             |                                                                          |        |      |        |  |        | 
|                               | Current     |                                                                          |        |      |        |  |        |  |       
|                               |             | Sales (Note (i))                                                         |        |      | 4,401  |  |        |  | 4,401  | 
|                               | Non current |                                                                          |        |      |        |  |        |  |       
|                               |             | Accelerated tax depreciation                                             |        |      | 10,000 |  |        |  | 12,519 | 
|                               |             | Other                                                                    |        |      |       |  |        |  | 278    | 
|                               |             |                                                                          |        |      |        |  |        | 
|Total deferred tax liabilities |             |                                                                          | 14,401 |      |        |  | 17,198 | 
|                               |             |                                                                          |        |      |        |  |        | 
|Net deferred tax liabilities   |             |                                                                          | 9,927  |      |        |  | 11,526 | 
|                               |             |                                                                          |        |      |        |  |        | 




|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)  | Prior to the formation of the Company in November
    1999, certain crude oil sales were exempted from income tax.
    Upon formation of the Company, such exemption ceased to be
    available. A portion of the previously exempted items may become
    taxable at a later date in certain circumstances at the
    discretion of the tax authorities.                                                                                                                                                                                                                                           
|    
|(ii) | The Group has unrecognized tax losses of
    RMB 1,789 (2002: RMB 1,748) arising from subsidiaries
    which file separate tax returns and the Group has not recognized
    a deferred tax asset for these tax losses subject to further
    improvement of their operations. In accordance with PRC tax law,
    tax losses may be carried forward by the subsidiaries against
    future taxable income for a period of five years, accordingly
    the tax losses will expire between 2005 and 2007. Deferred tax
    assets have been recognized for other deductible temporary
    differences.

23     SHARE
CAPITAL

|                                   |                    |                 |         |         |  |  |         |         | 
|---------------------------------- | ------------------ | --------------- | ------- | ------- |  |  | ------- | ------- | 
|                                   |                    |                
|                                   |                    | At December 31,
|                                   |                    |                
|                                   |                    | 2002            |         | 2003   
|                                   |                    |                 |         |        
|                                   |                    | RMB             |         | RMB    
|Registered, issued and fully paid: |                    |                 |         |         |  |  |         |        
|                                   | State-owned shares |                 |         | 158,242 |  |  |         | 158,242 | 
|                                   | H shares           |                 |         | 17,582  |  |  |         | 17,582  | 
|                                   |                    |                 |         |         |  |  |         |        
|                                   |                    |                 | 175,824 |         |  |  | 175,824 |        
|                                   |                    |                 |         |         |  |  |         |        

F-30



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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, 1999, the registered
capital of the Company was RMB 160,000 consisting of
160 billion state-owned shares of RMB 1.00 each. Such
shares were issued to CNPC, credited as fully paid in
consideration for the transfer of the relevant assets and
liabilities by CNPC in 1999.

On April 7, 2000, the Company completed a
global initial public offering (Global Offering)
pursuant to which 17,582,418,000 shares of RMB 1.00 each,
representing 13,447,897,000 H shares and 41,345,210 American
Depositary Shares (ADSs, each representing
100 H shares), were issued at prices of HK$1.28 per H
share and US$16.44 per ADS, respectively, for which the net
proceeds to the Company were approximately
RMB 20 billion. The shares issued pursuant to the
Global Offering rank equally with existing shares. The
H shares and ADSs are listed on The Stock Exchange of Hong
Kong Limited and the New York Stock Exchange respectively.

The 17,582,418,000 H shares issued by the
Company comprise 15,824,176,000 shares offered by the Company,
and 1,758,242,000 shares offered by CNPC pursuant to an approval
from China Securities Regulatory Commission to convert the
state-owned shares owned by CNPC.

Shareholders rights are governed by the PRC
Company Law that requires an increase in registered capital to
be approved by the shareholders in general meeting and the
relevant PRC Government and regulatory authorities.

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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)


24     RESERVES

|                                                                                                  |         |             |         |      |  |  |         |      |  
|------------------------------------------------------------------------------------------------- | ------- | ----------- | ------- | ---- |  |  | ------- | ---- | -
|                                                                                                  |         |            
|                                                                                                  |         | Year Ended 
|                                                                                                  |         | December 31
|                                                                                                  |         |            
|                                                                                                  |         | 2002        |         | 2003
|                                                                                                  |         |             |         |     
|                                                                                                  |         | RMB         |         | RMB 
|Revaluation Reserve                                                                               |         |             |         |      |  |  |         |     
|Beginning balance                                                                                 |         |             | 79,945  |      |  |  | 79,945  |     
|Revaluation surplus of property, plant and
    equipment (Note e)                                 |         |             |         |      |  |  |         |     
|                                                                                                  |  gross |             |         |     |  |  |         | 774  |  
|                                                                                                  |  tax   |             |         |     |  |  |         | (247 | )
|Revaluation loss offset against previous
    revaluation surplus of property, plant and equipment |         |             |         |      |  |  |         |     
|                                                                                                  |  gross |             |         |     |  |  |         | (768 | )
|                                                                                                  |  tax   |             |         |     |  |  |         | 242  |  
|                                                                                                  |         |             |         |      |  |  |         |     
|Ending balance                                                                                    |         |             | 79,945  |      |  |  | 79,946  |     
|Capital Reserve                                                                                   |         |             |         |      |  |  |         |     
|Beginning balance                                                                                 |         |             | (28,567 | )    |  |  | (28,557 | )   
|Contribution from CNPC to marketing enterprises                                                   |         |             | 10      |      |  |  |        |     
|                                                                                                  |         |             |         |      |  |  |         |     
|Ending balance                                                                                    |         |             | (28,557 | )    |  |  | (28,557 | )   
|Statutory Common Reserve Fund
    (Note a)                                                        |         |             |         |      |  |  |         |     
|Beginning balance                                                                                 |         |             | 16,219  |      |  |  | 20,128  |     
|Transfer from retained earnings                                                                   |         |             | 3,909   |      |  |  | 6,242   |     
|                                                                                                  |         |             |         |      |  |  |         |     
|Ending balance                                                                                    |         |             | 20,128  |      |  |  | 26,370  |     
|Statutory Common Welfare Fund
    (Note b)                                                        |         |             |         |      |  |  |         |     
|Beginning balance                                                                                 |         |             | 11,578  |      |  |  | 13,532  |     
|Transfer from retained earnings                                                                   |         |             | 1,954   |      |  |  | 3,121   |     
|                                                                                                  |         |             |         |      |  |  |         |     
|Ending balance                                                                                    |         |             | 13,532  |      |  |  | 16,653  |     
|Other Reserves                                                                                    |         |             |         |      |  |  |         |     
|Beginning balance                                                                                 |         |             |        |      |  |  | (3,200  | )   
|Payment to CNPC for acquisition of marketing
    enterprises (Note 2)                             |         |             | (3,200  | )    |  |  |        |     
|                                                                                                  |         |             |         |      |  |  |         |     
|Ending balance                                                                                    |         |             | (3,200  | )    |  |  | (3,200  | )   
|                                                                                                  |         |             |         |      |  |  |         |     
|                                                                                                  |         |             | 81,848  |      |  |  | 91,212  |     
|                                                                                                  |         |             |         |      |  |  |         |     




|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Pursuant to PRC regulations and the
    Companys Articles of Association, the Company is required
    to transfer 10% of its net income, as determined under the PRC
    accounting regulations, to statutory common reserve fund until
    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 statutory common 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 a resolution of
    shareholders general meeting, the Company may convert its
    statutory common reserve fund into share capital and issue bonus
    shares to existing                     

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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)


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% of the registered
capital.



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | Pursuant to the PRC regulations and the
    Companys Articles of Association, the Company is required
    to transfer 5% to 10% of its net income, as determined under the
    PRC accounting regulations, to the statutory common welfare
    fund. This fund can only be used to provide common facilities,
    of which the Group retains the titles, and other collective
    benefits to the Companys employees. This fund is
    non-distributable other than in liquidation. The directors have
    proposed to transfer 5% (2002: 5%) of the net income, as
    determined under the PRC accounting regulations, for the year
    ended December 31, 2003 to the statutory common welfare
    fund.
|   
|(c) |  | The Companys distributable reserve is the
    retained earnings computed under the PRC accounting regulations,
    which amounted to RMB 59,104 (2002: RMB 37,374) as of
    December 31, 2003. The distributable reserve computed under
    the PRC accounting regulations at December 31, 2003 has
    been arrived at after the accrual for the proposed final
    dividend in respect of year 2003 of RMB 13,947
    (Note 9 (vii)).                                                                                                                                                                                                                                                                    
|   
|(d) |  | As of December 31, 2003, revaluation surplus
    relating to depreciation and disposals amounted to approximately
    RMB 38,064 (2002: RMB 29,560).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(e) |  | The revaluation surplus recognized during the
    restructuring was partially utilized to offset against the
    revaluation loss on the same assets arising in 2003
    (Note 16). Additional valuation surplus arising in 2003 was
    credited to the revaluation reserve.                                                                                                                                                                                                                                                                                                                                                                                                                                

25     PENSIONS

The Group participates in various retirement
benefit plans organized by 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. The Group
currently has no additional obligations for the payment of
retirement and other post-retirement benefits of employees other
than the monthly contributions described above. Expenses
incurred by the Group in connection with the retirement benefit
plans were RMB 1,893, RMB 2,109 and RMB 2,193,
respectively, for the years ended December 31, 2001, 2002
and 2003.

26     FINANCIAL
INSTRUMENTS

The 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
risk

The 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. No
other financial assets carry a significant exposure to credit
risk.

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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)


The Group has no significant concentration of
credit risk. Cash is placed with state-owned banks and financial
institutions.

(b) Interest
rate risk

The Group is exposed to the risk arising from
changing interest rates. A detail analysis of the Groups
debts, together with their respective interest rates and
maturity dates, are included in Note 21.

(c) Foreign
exchange rate risk

Renminbi is not a freely convertible currency.
Future exchange rates of Renminbi could vary significantly from
the current or historical exchange rates as a result of controls
that could be imposed by the PRC government. The exchange rates
of Renminbi are affected by changes in PRC government policies.
The exchange rates of Renminbi are also affected by economic
developments and political changes domestically and
internationally, and supply and demand for Renminbi. The
official exchange rate for the conversion of Renminbi to US
Dollars has generally been stable recently. As Renminbi is the
measurement currency of the Company and most of its consolidated
entities, the fluctuation of exchange rates of Renminbi may have
positive or negative impacts on the results of operations of the
Group. Because prices for the Groups crude oil and refined
products are set generally with reference to
US Dollar-denominated international prices, a devaluation
of Renminbi against US Dollar may not have a negative
impact on the Groups revenue, but may increase the cost
incurred by the Group to acquire imported materials and
equipment as well as the foreign currency-denominated
obligations of the Group. On the other hand, an appreciation of
Renminbi against US Dollar may decrease the Groups
revenue, but the cost for acquiring imported materials and
equipment may be reduced. The results of operations and the
financial condition of the Group also may be affected by
fluctuations in exchange rates against Renminbi of a number of
other foreign currencies other than US Dollar.

(d) Commodity
price risk

The Group is engaged in a broad range of
petroleum related activities. The hydrocarbon commodity markets
are influenced by global as well as regional supply and demand
conditions. The PRC government currently publishes prices for
onshore crude oil, gasoline and diesel according to
international benchmark prices. A decline in prices of crude oil
and refined products could adversely affect its financial
performance. The Group historically has not used commodity
derivative instruments to hedge the potential price fluctuations
of crude oil and other refined products. Therefore, during 2003
and 2002, the Group was exposed to the general price
fluctuations of broadly traded oil and gas commodities.

(e) Fair
values

The carrying amounts of the following financial
assets and financial liabilities approximate their fair value:
cash, short-term investments, trade receivables and payables,
other receivables and payables, lease obligations, short-term
debt and floating rate long-term debt. The fair value of the
fixed rate long-term debt is likely to be different from their
carrying amounts. As the majority of the debts are at variable
rates, the difference between fair value and carrying amounts is
likely to be immaterial.

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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)


27     CONTINGENT
LIABILITIES

(a) Bank
and other guarantees

At December 31, 2003, the Group had
contingent liabilities in respect of bank and other guarantees
and other matters arising in the ordinary course of business
from which it is anticipated that no material liabilities will
arise.

|                                        |  |                 |     |      |  |  |     | 
|--------------------------------------- |  | --------------- | --- | ---- |  |  | --- | 
|                                        |  |                
|                                        |  | At December 31,
|                                        |  |                
|                                        |  | 2002            |     | 2003
|                                        |  |                 |     |     
|                                        |  | RMB             |     | RMB 
|Guarantee of debts of equity affiliates |  |                 | 962 |      |  |  | 448 | 
|                                        |  |                 |     |      |  |  |     | 

(b) Environmental
liabilities

CNPC and the Group have operated in China for
many years and certain environmental problems have developed.
China has adopted extensive environmental laws and regulations
that affect the operation of the oil and gas industry. The
outcome of environmental liabilities under proposed or future
environmental legislation cannot reasonably be estimated at
present, and could be material. Under existing legislation,
however, management believes that there are no probable
liabilities, except for the amounts which have already been
reflected in the financial statements, that will have a material
adverse effect on the financial position of the Group.

(c) Legal
contingencies

The Group is the named defendant in certain
insignificant lawsuits as well as the named party in other
proceedings arising in the ordinary course of business. While
the outcomes of such contingencies, lawsuits or other
proceedings cannot be determined at present, management believes
that any resulting liabilities will not have a material adverse
effect on the financial position of the Group.

(d) Leasing
of roads, land and buildings

According to the Restructuring Agreement entered
into between the Company and CNPC in 1999 upon the formation of
the Company, CNPC has undertaken to the Company the following:



| |   |                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;
|
| |  | 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, 2003, CNPC has obtained
formal land use right certificates in relation to 24,046 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

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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)


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
insurance

Except 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.

(f) Cost
reduction measures

The Group may further streamline its production
facilities within the next several years to further improve the
operating efficiency and competitiveness of the Group.
Management has not approved all significant actions to be taken
to complete such plans. Management does not believe such plans
will have a material adverse impact on the Groups
financial position, but may have a material adverse effect on
the Groups results of operations.

(g) Other

In December 2003, a gas blow-out incident
occurred at one of the gas wells of the Group. The blow-out
caused the leakage of a large quantity of sulfurated hydrogen,
causing injuries and death to many residents living in the
surrounding area. As a result of an investigation conducted by
the PRC government, CNPC, which provided drilling services for
the well, was held liable for this blow-out. The incident has
not had, and the Company does not believe it will have, a
material adverse effect on the results of operations and
financial position of the Group.

28     COMMITMENTS

(a) Operating
lease commitments

Operating 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,
2002 and 2003 under non-cancelable operating leases are as
follows:

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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)


|            |  |                 |        |      |  |  |        | 
|----------- |  | --------------- | ------ | ---- |  |  | ------ | 
|            |  |                
|            |  | At December 31,
|            |  |                
|            |  | 2002            |        | 2003
|            |  |                 |        |     
|            |  | RMB             |        | RMB 
|First year  |  |                 | 2,403  |      |  |  | 2,552  | 
|Second year |  |                 | 2,265  |      |  |  | 2,433  | 
|Third year  |  |                 | 2,255  |      |  |  | 2,409  | 
|Fourth year |  |                 | 2,246  |      |  |  | 2,391  | 
|Fifth year  |  |                 | 2,248  |      |  |  | 2,380  | 
|Thereafter  |  |                 | 86,682 |      |  |  | 84,776 | 
|            |  |                 |        |      |  |  |        | 
|            |  |                 | 98,099 |      |  |  | 96,941 | 
|            |  |                 |        |      |  |  |        | 

Operating lease expenses for land and buildings
and equipment were RMB 2,928, RMB 2,942 and
RMB 2,991 for the years ended December 31, 2001, 2002
and 2003 respectively.

(b) Capital
commitments

|                                                                                                                                   |                        |                 |       |       |  |  |        |        | 
|---------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | --------------- | ----- | ----- |  |  | ------ | ------ | 
|                                                                                                                                   |                        |                
|                                                                                                                                   |                        | At December 31,
|                                                                                                                                   |                        |                
|                                                                                                                                   |                        | 2002            |       | 2003 
|                                                                                                                                   |                        |                 |       |      
|                                                                                                                                   |                        | RMB             |       | RMB  
|Capital expenditure contracted for at the balance
    sheet date but not recognized in the financial statements is as
    follows: |                        |                 |       |       |  |  |        |       
|                                                                                                                                   | Oil and gas properties |                 |       | 180   |  |  |        | 896    | 
|                                                                                                                                   | Plant and equipment    |                 |       | 2,898 |  |  |        | 10,055 | 
|                                                                                                                                   | Other                  |                 |       | 198   |  |  |        | 194    | 
|                                                                                                                                   |                        |                 |       |       |  |  |        |       
|                                                                                                                                   |                        |                 | 3,276 |       |  |  | 11,145 |       
|                                                                                                                                   |                        |                 |       |       |  |  |        |       

(c) Exploration
and production licenses

The 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 130, RMB 202 and RMB 296 for
the years ended December 31, 2001, 2002 and 2003
respectively.

Estimated annual payments in the future are as
follows:

|                    |  |     |     | 
|------------------- |  | --- | --- | 
|                    |  | RMB
|                    |  |    
|2004                |  |     | 515 | 
|2005                |  |     | 618 | 
|2006                |  |     | 681 | 
|2007                |  |     | 712 | 
|2008 and thereafter |  |     | 712 | 

(d) Dividends

Dividends received from the Company are likely to
be one of the principal sources of funding for CNPC. Subject to
the relevant provisions of the PRC Company Law and the Articles
of Association of the Company, CNPC, as the major shareholder of
the Company, may seek to influence 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)


determination of the amount of dividends paid by
the Company with a view to satisfying its cash flow requirements
including those relating to its obligations to provide
supplementary social services to its employees and a limited
number of third parties. The Ministry of Finance has committed
to provide subsidies to enable CNPC to fund a portion of future
operating shortfalls arising out of CNPCs obligations to
provide social services. The directors believe that these
subsidies will substantially reduce CNPCs reliance on
dividends from the Company.

29     ACQUISITION

On April 22, 2002 the Group acquired all of
the share capital of PetroChina International Indonesia Limited
(formerly Devon Energy Indonesia Ltd.) ( Devon) for
RMB 2,068. This company is engaged in the exploration and
production of crude oil and natural gas in Indonesia. The
acquired business contributed turnover of RMB 632 and
operating profit of RMB 132 to the Group for the year ended
December 31, 2002.

In addition, the Group increased its equity
interests in PetroChina Tarim Oil (Gas) Transportation Limited
(Tashu) and Jilian (Jilin) Petrochemicals Limited
(Jilian) respectively by 53.1% in November and 35%
in December 2002 for a total consideration of RMB 472, and
the two entities became the subsidiaries of the Company at the
respective dates of acquisitions. The acquired businesses did
not contribute significant turnover and operating profit to the
Group for the year ended December 31, 2002.

Other than for land and buildings, the fair value
of the net assets approximated the book value of the net assets
acquired, and no plant closure provisions or other restructuring
provisions were required.

The assets and liabilities arising from the
acquisitions at the respective dates of acquisitions were as
follows:

|                                         |  |       |        |        |  |       |       |       |  |  |       |   |  |  |        |  
|---------------------------------------- |  | ----- | ------ | ------ |  | ----- | ----- | ----- |  |  | ----- | - |  |  | ------ | -
|                                         |  | Devon |        | Jilian |  | Tashu |       | Total
|                                         |  |       |        |        |  |       |       |      
|                                         |  | RMB   |        | RMB    |  | RMB   |       | RMB  
|Assets                                   |  |       | 2,145  |        |  |       | 1,050 |       |  |  | 897   |   |  |  | 4,092  |  
|Liabilities                              |  |       | (77    | )      |  |       | (664  | )     |  |  | (262  | ) |  |  | (1,003 | )
|                                         |  |       |        |        |  |       |       |       |  |  |       |   |  |  |        |  
|                                         |  |       | 2,068  |        |  |       | 386   |       |  |  | 635   |   |  |  | 3,089  |  
|Equity interest acquired                 |  |       | 100.0% |        |  |       | 35.0% |       |  |  | 53.1% |   |  |  |        |  
|Fair value of net assets acquired        |  |       | 2,068  |        |  |       | 135   |       |  |  | 337   |   |  |  | 2,540  |  
|Less: Cash and cash equivalents acquired |  |       | (64    | )      |  |       | (8    | )     |  |  | (264  | ) |  |  | (336   | )
|Consideration not yet settled            |  |       |       |        |  |       | (54   | )     |  |  |      |   |  |  | (54    | )
|                                         |  |       |        |        |  |       |       |       |  |  |       |   |  |  |        |  
|Cash outflow on acquisition              |  |       | 2,004  |        |  |       | 73    |       |  |  | 73    |   |  |  | 2,150  |  
|                                         |  |       |        |        |  |       |       |       |  |  |       |   |  |  |        |  

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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)


30     MAJOR
CUSTOMERS

The Groups major customers are as follows:

|        |  |                         |        |         |  |         |    |         |  |         |        |         |  |  |    |  |  |  |        |  |  |  |    | 
|------- |  | ----------------------- | ------ | ------- |  | ------- | -- | ------- |  | ------- | ------ | ------- |  |  | -- |  |  |  | ------ |  |  |  | -- | 
|        |  |                        
|        |  | Year Ended December 31,
|        |  |                        
|        |  |                         |        |         |  |        
|        |  | 2001                    |        | 2002    |  | 2003   
|        |  |                         |        |         |  |        
|        |  |                         |        | % to    |  |         |    | % to    |  |         |        | % to   
|        |  |                         |        | Total   |  |         |    | Total   |  |         |        | Total  
|        |  | Revenue                 |        | Revenue |  | Revenue |    | Revenue |  | Revenue |        | Revenue
|        |  |                         |        |         |  |         |    |         |  |         |        |        
|        |  | RMB                     |        | %       |  | RMB     |    | %       |  | RMB     |        | %      
|Sinopec |  |                         | 26,046 |         |  |         | 11 |         |  |         | 26,497 |         |  |  | 11 |  |  |  | 35,932 |  |  |  | 12 | 
|CNPC    |  |                         | 8,769  |         |  |         | 4  |         |  |         | 7,772  |         |  |  | 3  |  |  |  | 9,323  |  |  |  | 3  | 
|        |  |                         |        |         |  |         |    |         |  |         |        |         |  |  |    |  |  |  |        |  |  |  |    | 
|        |  |                         | 34,815 |         |  |         | 15 |         |  |         | 34,269 |         |  |  | 14 |  |  |  | 45,255 |  |  |  | 15 | 
|        |  |                         |        |         |  |         |    |         |  |         |        |         |  |  |    |  |  |  |        |  |  |  |    | 

31     RELATED PARTY
TRANSACTIONS

The Group is part of a larger group of companies
under CNPC and has extensive transactions and relationships with
members of the CNPC group. Because of these relationships, it is
possible that the terms of these transactions are not the same
as those that would result from transactions among wholly
unrelated parties. Related parties refer to corporations in
which CNPC is a major shareholder and is able to control or
exercise significant influence.

CNPC itself is a state-owned enterprise. In
accordance with a specific exemption in IAS 24 Related
Party Disclosure, the Group does not accumulate or
disclose transactions with other state-owned enterprises as
related party transactions, other than those with other CNPC
group companies and significant customers as described in
Note 30.

The majority of the Groups business
activities are conducted with state-owned enterprises. Sale of
certain products to these state-owned enterprises are at
state-prescribed prices. The Group considers that these sales
are activities in the ordinary course of business and has not
accumulated or disclosed such related party transactions.

As a result of the Restructuring (Note 1),
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 (Note 27(d)) 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 Comprehensive Products and
Services Agreement is 10 years commencing from
November 5, 1999. 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 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

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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)


property may, after the expiration of
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 Building 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
entities controlled by CNPC during the periods indicated below:

|                                                  |                                                 |       |    |                         |   |      |        |        |  |  |        |        |  |  |        |        | 
|------------------------------------------------- | ----------------------------------------------- | ----- | -- | ----------------------- | - | ---- | ------ | ------ |  |  | ------ | ------ |  |  | ------ | ------ | 
|                                                  |                                                 |       |    |                        
|                                                  |                                                 | Notes |    | Year Ended December 31,
|                                                  |                                                 |       |    |                        
|                                                  |                                                 |       |    | 2001                    |   | 2002 |        | 2003  
|                                                  |                                                 |       |    |                         |   |      |        |       
|                                                  |                                                 |       |    | RMB                     |   | RMB  |        | RMB   
|Sale of goods                                     |                                                 |       | (a | )                       |   |      | 8,769  |        |  |  | 7,772  |        |  |  | 9,323  |       
|Fees paid for construction and technical services |                                                 |       | (b | )                       |   |      |        |        |  |  |        |        |  |  |        |       
|                                                  |  Exploration and development services          |       |    | (c                      | ) |      |        | 20,570 |  |  |        | 21,781 |  |  |        | 25,180 | 
|                                                  |  Other construction and technical
    services |       |    | (d                      | ) |      |        | 14,592 |  |  |        | 16,324 |  |  |        | 15,688 | 
|Fees for production services                      |                                                 |       | (e | )                       |   |      | 15,581 |        |  |  | 15,743 |        |  |  | 16,042 |       
|Social services charge                            |                                                 |       | (f | )                       |   |      | 1,261  |        |  |  | 1,243  |        |  |  | 1,326  |       
|Ancillary service charges                         |                                                 |       | (g | )                       |   |      | 2,087  |        |  |  | 1,713  |        |  |  | 1,683  |       
|Interest income                                   |                                                 |       | (h | )                       |   |      | 26     |        |  |  | 25     |        |  |  | 30     |       
|Interest expense                                  |                                                 |       | (i | )                       |   |      | 1,112  |        |  |  | 1,086  |        |  |  | 1,052  |       
|Rental expense                                    |                                                 |       | (j | )                       |   |      | 1,968  |        |  |  | 1,916  |        |  |  | 2,001  |       
|Commission expense and other charges              |                                                 |       | (k | )                       |   |      | 977    |        |  |  | 936    |        |  |  | 971    |       




Notes:


|    |                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Represents sale of crude oil, refined and
    chemical products conducted principally at market prices.                                                                                                                                                                                                                                
|   
|(b) | 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 cost of no more than 15%, including
    exploration and development services and oilfield construction
    services.
|   
|(c) | Direct costs for exploration and development
    services comprise geophysical survey, drilling, well cementing,
    logging, and well testing.                                                                                                                                                                                        
|   
|(d) | 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 exploration and production activities such as
    oilfield construction, technology research, engineering and
    design, etc.          
|   
|(e) | The fees paid for production services comprise
    fees for the repair of machinery, supply of water, electricity
    and gas, provision of services such as communications,
    transportation, fire fighting,                                                                                                                        

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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)




|    |                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | asset leasing, environmental protection and
    sanitation, maintenance of roads, manufacture of replacement
    parts and machinery.                                                                                                                                                                                                                                                    
|   
|(f) | These represent expenditures for social welfare
    and support services which are charged at cost.                                                                                                                                                                                                                                                                                      
|   
|(g) | Ancillary service charges represent mainly fees
    for property management, the provision of training centers,
    guesthouses, canteens, public shower rooms, etc.                                                                                                                                                                                                                     
|   
|(h) | The Group had deposits placed with China
    Petroleum Finance Company Limited (CP Finance),
    a subsidiary of CNPC and a non-bank financial institution
    approved by the Peoples Bank of China, amounting to
    RMB 1,239, RMB 2,861 and RMB 2,331 as of
    December 31, 2001, 2002 and 2003 respectively. The deposits
    yield interest at prevailing saving deposit rates.
|   
|(i) | The Group had unsecured short-term and long-term
    loans from CP Finance amounting to RMB 22,021,
    RMB 24,702 and RMB 25,188 as of December 31,
    2001, 2002 and 2003 respectively, included under loans from
    related parties. The loans were interest bearing at market rates.                                                                                               
|   
|(j) | Rental expenses are calculated in accordance with
    the lease agreements entered into between the Company and CNPC.                                                                                                                                                                                                                                                                    
|   
|(k) | 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.                                                                                                                                                                                                            
|   
|(l) | The Group had a 4.73%, 4.73% and 7.5% equity
    interest in CP Finance at a book value of RMB 94,
    RMB 94 and RMB 299 as of December 31, 2001, 2002
    and 2003 respectively.                                                                                                                                                                                                       

32     EMOLUMENTS OF
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

Details of the directors and
supervisors emoluments are as follows:

|                                          |  |                         |       |         |  |         |       |  |  |  |       | 
|----------------------------------------- |  | ----------------------- | ----- | ------- |  | ------- | ----- |  |  |  | ----- | 
|                                          |  |                        
|                                          |  | Year Ended December 31,
|                                          |  |                        
|                                          |  | 2001                    |       | 2002    |  | 2003   
|                                          |  |                         |       |         |  |        
|                                          |  | RMB000                 |       | RMB000 |  | RMB000
|Fee for directors and supervisors         |  |                         | 170   |         |  |         | 128   |  |  |  | 83    | 
|Salaries, allowances and other benefits   |  |                         | 1,104 |         |  |         | 1,042 |  |  |  | 1,377 | 
|Contribution to retirement benefit scheme |  |                         | 23    |         |  |         | 25    |  |  |  | 34    | 
|                                          |  |                         |       |         |  |         |       |  |  |  |       | 
|                                          |  |                         | 1,297 |         |  |         | 1,195 |  |  |  | 1,494 | 
|                                          |  |                         |       |         |  |         |       |  |  |  |       | 

The emoluments of the directors and supervisors
fall within the following bands (including directors and
supervisors whose term expired during the year):

|            |  |                         |    |        |  |        |    |  |  |  |    | 
|----------- |  | ----------------------- | -- | ------ |  | ------ | -- |  |  |  | -- | 
|            |  |                        
|            |  | Year Ended December 31,
|            |  |                        
|            |  | 2001                    |    | 2002   |  | 2003  
|            |  |                         |    |        |  |       
|            |  | Number                  |    | Number |  | Number
|Nil  RMB 1 |  |                         | 12 |        |  |        | 23 |  |  |  | 19 | 
|            |  |                         |    |        |  |        |    |  |  |  |    | 

Fee for directors and supervisors disclosed above
included RMB 62 thousand for the year ended
December 31, 2003, (RMB 108 thousand in 2001 and RMB
66 thousand in 2002) paid to independent non-executive directors.

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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)


None of the directors and supervisors has waived
their remuneration during the periods indicated above.

The five highest paid individuals in the Group
for each of the periods indicated above were also directors or
supervisors and their emoluments are reflected in the analysis
presented above.

The Company has adopted a share option scheme
which is a share appreciation right arrangement payable in cash
to the recipients upon exercise of the rights which became
effective on the initial public offering of the H shares of the
Company on April 7, 2000. The directors, supervisors and
senior executives of the Company are eligible for the scheme.
87,000,000 units of share appreciation rights were granted to
senior executives. 35,000,000 units were granted to the
directors and supervisors; of these 35,000,000 units, 33,130,000
units are outstanding, net of subsequent forfeiture of 1,870,000
units by a former independent director.

The rights can be exercised on or after
April 8, 2003, the third anniversary of the grant, up to
April 7, 2008. The exercise price is the price as at the
initial public offering being HK$1.28 per share or approximately
RMB 1.36 per share.

As at December 31, 2003, none of the holders
of the stock appreciation rights has exercised the rights. The
liability for the units awarded under the scheme has been
calculated based on the difference between the exercise price
and the market price of the shares and amounted to approximately
RMB 406 (2002: RMB 34) at December 31, 2003.

33     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 transmission of natural gas, crude oil and refined
products, and the sale of natural gas.

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 segments of the Group.

Substantially all 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 in
April 2002 the Group acquired all the share capital of Devon
Energy Indonesia Ltd., a company engaging in the exploration and
production of crude oil and natural gas in Indonesia. In April
2003, the Group acquired for RMB 679 a 50% interest in
Amerada Hess Indonesia Holdings Co., which has a 30% interest in
one of the oil and gas concessions that the Group acquired in
2002.

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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)


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, 2001, 2002 and 2003 is presented below:

Primary reporting format  business
segments

|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|------------------------------------------------------------------------ |  | ----------- | -------- | --------- |  | --------- | ------- | ----------- |  | ----- | ------ | ----- |  |  | ------ | - |  |  | ------ | - |  |  | -------- | -
|                                                                         |  | Exploration |          | Refining  |  | Chemicals |         | Natural Gas |  |       |        |      
|                                                                         |  | and         |          | and       |  | and       |         | and         |  |       |        |      
|Year Ended December 31, 2001                                             |  | Production  |          | Marketing |  | Marketing |         | Pipeline    |  | Other |        | Total
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |      
|                                                                         |  | RMB         |          | RMB       |  | RMB       |         | RMB         |  | RMB   |        | RMB  
|Sales and other operating revenues (including
    inter-segment)         |  |             | 148,277  |           |  |           | 171,961 |             |  |       | 31,776 |       |  |  | 11,321 |   |  |  |       |   |  |  | 363,335  |  
|Less: Inter-segment sales                                                |  |             | (110,738 | )         |  |           | (8,436  | )           |  |       | (462   | )     |  |  | (2,379 | ) |  |  |       |   |  |  | (122,015 | )
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Total sales and other operating revenues from
    external customers     |  |             | 37,539   |           |  |           | 163,525 |             |  |       | 31,314 |       |  |  | 8,942  |   |  |  |       |   |  |  | 241,320  |  
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Depreciation, depletion and amortization                                 |  |             | (21,419  | )         |  |           | (5,804  | )           |  |       | (5,171 | )     |  |  | (1,113 | ) |  |  | (108   | ) |  |  | (33,615  | )
|Segment result                                                           |  |             | 81,679   |           |  |           | 10,214  |             |  |       | 129    |       |  |  | 1,142  |   |  |  | (378   | ) |  |  | 92,786   |  
|Other costs                                                              |  |             | (4,747   | )         |  |           | (13,538 | )           |  |       | (2,503 | )     |  |  | (420   | ) |  |  | (439   | ) |  |  | (21,647  | )
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Income/(loss) from operations                                            |  |             | 76,932   |           |  |           | (3,324  | )           |  |       | (2,374 | )     |  |  | 722    |   |  |  | (817   | ) |  |  | 71,139   |  
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Finance costs                                                            |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | (3,349   | )
|Equity in income/(loss) of affiliates accounted
    for by equity method |  |             | 162      |           |  |           | 38      |             |  |       | 29     |       |  |  | (9     | ) |  |  | 121    |   |  |  | 341      |  
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Income before income taxes                                               |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | 68,131   |  
|Income taxes                                                             |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | (23,066  | )
|Minority interests                                                       |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | 404      |  
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Net income                                                               |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | 45,469   |  
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Interest income                                                          |  |             | 1,893    |           |  |           | 1,191   |             |  |       | 493    |       |  |  | 104    |   |  |  | 4,955  |   |  |  | 8,636    |  
|Less:                                                                    |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Inter-segment interest income                                            |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | (7,827   | )
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Interest income from external sources                                    |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | 809      |  
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Interest expense                                                         |  |             | (2,896   | )         |  |           | (2,667  | )           |  |       | (1,991 | )     |  |  | (310   | ) |  |  | (4,371 | ) |  |  | (12,235  | )
|Less:                                                                    |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Inter-segment interest expense                                           |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | 7,827    |  
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Interest expense to external sources                                     |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | (4,408   | )
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  

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)


|                                      |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |       |  |  |         |     |  |  |          |        | 
|------------------------------------- | ----------------------------------- | ----------- | ------- | --------- |  | --------- | ------- | ----------- |  | ----- | ------ | ----- |  |  | ------ | ----- |  |  | ------- | --- |  |  | -------- | ------ | 
|                                      |                                     | Exploration |         | Refining  |  | Chemicals |         | Natural Gas |  |       |        |      
|                                      |                                     | and         |         | and       |  | and       |         | and         |  |       |        |      
|Year Ended December 31, 2001          |                                     | Production  |         | Marketing |  | Marketing |         | Pipeline    |  | Other |        | Total
|                                      |                                     |             |         |           |  |           |         |             |  |       |        |      
|                                      |                                     | RMB         |         | RMB       |  | RMB       |         | RMB         |  | RMB   |        | RMB  
|Segment assets                        |                                     |             | 268,955 |           |  |           | 118,154 |             |  |       | 73,341 |       |  |  | 22,370 |       |  |  | 412,684 |     |  |  | 895,504  |       
|Elimination of inter-segment balances |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |       |  |  |         |     |  |  | (436,922 | )     
|Investments in equity affiliates      |                                     |             | 1,194   |           |  |           | 1,080   |             |  |       | 590    |       |  |  | 627    |       |  |  | 592     |     |  |  | 4,083    |       
|                                      |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |       |  |  |         |     |  |  |          |       
|Total assets                          |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |       |  |  |         |     |  |  | 462,665  |       
|                                      |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |       |  |  |         |     |  |  |          |       
|Segment capital expenditure           |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |       |  |  |         |     |  |  |          |       
|                                      |  for property, plant and equipment |             |         | 41,193    |  |           |         | 11,416      |  |       |        | 4,062 |  |  |        | 4,557 |  |  |         | 321 |  |  |          | 61,549 | 
|Segment liabilities                   |                                     |             | 84,369  |           |  |           | 70,182  |             |  |       | 49,526 |       |  |  | 11,547 |       |  |  | 115,097 |     |  |  | 330,721  |       
|Other liabilities                     |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |       |  |  |         |     |  |  | 21,564   |       
|Elimination of inter-segment balances |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |       |  |  |         |     |  |  | (185,362 | )     
|                                      |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |       |  |  |         |     |  |  |          |       
|Total liabilities                     |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |       |  |  |         |     |  |  | 166,923  |       
|                                      |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |       |  |  |         |     |  |  |          |       

|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|------------------------------------------------------------------------ |  | ----------- | -------- | --------- |  | --------- | ------- | ----------- |  | ----- | ------ | ----- |  |  | ------ | - |  |  | ------ | - |  |  | -------- | -
|                                                                         |  | Exploration |          | Refining  |  | Chemicals |         | Natural Gas |  |       |        |      
|                                                                         |  | and         |          | and       |  | and       |         | and         |  |       |        |      
|Year Ended December 31, 2002                                             |  | Production  |          | Marketing |  | Marketing |         | Pipeline    |  | Other |        | Total
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |      
|                                                                         |  | RMB         |          | RMB       |  | RMB       |         | RMB         |  | RMB   |        | RMB  
|Sales and other operating revenues (including
    intersegment)          |  |             | 147,308  |           |  |           | 174,621 |             |  |       | 29,661 |       |  |  | 12,733 |   |  |  |       |   |  |  | 364,323  |  
|Less: Intersegment sales                                                 |  |             | (106,266 | )         |  |           | (9,988  | )           |  |       | (1,093 | )     |  |  | (2,552 | ) |  |  |       |   |  |  | (119,899 | )
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Total sales and other operating revenues from
    external customers     |  |             | 41,042   |           |  |           | 164,633 |             |  |       | 28,568 |       |  |  | 10,181 |   |  |  |       |   |  |  | 244,424  |  
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Depreciation, depletion and amortization                                 |  |             | (21,972  | )         |  |           | (7,144  | )           |  |       | (6,336 | )     |  |  | (1,213 | ) |  |  | (117   | ) |  |  | (36,782  | )
|Segment result                                                           |  |             | 76,943   |           |  |           | 17,815  |             |  |       | (1,217 | )     |  |  | 1,796  |   |  |  | (462   | ) |  |  | 94,875   |  
|Other costs                                                              |  |             | (4,804   | )         |  |           | (14,997 | )           |  |       | (1,945 | )     |  |  | (244   | ) |  |  | (544   | ) |  |  | (22,534  | )
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Income/(loss) from operations                                            |  |             | 72,139   |           |  |           | 2,818   |             |  |       | (3,162 | )     |  |  | 1,552  |   |  |  | (1,006 | ) |  |  | 72,341   |  
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Finance costs                                                            |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | (3,369   | )
|Equity in income/(loss) of affiliates accounted
    for by equity method |  |             | (38      | )         |  |           | 12      |             |  |       | (8     | )     |  |  | 71     |   |  |  | 231    |   |  |  | 268      |  
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Income before income taxes                                               |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | 69,240   |  
|Income taxes                                                             |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | (22,231  | )
|Minority interests                                                       |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | (99      | )
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  
|Net income                                                               |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  | 46,910   |  
|                                                                         |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |        |   |  |  |          |  

F-44



---



##### 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, 2002              |                                     | Production  |         | Marketing |  | Marketing |         | Pipeline    |  | Other |        | Total
|                                          |                                     |             |         |           |  |           |         |             |  |       |        |      
|                                          |                                     | RMB         |         | RMB       |  | RMB       |         | RMB         |  | RMB   |        | RMB  
|Interest income (including intersegment)  |                                     |             | 1,942   |           |  |           | 1,061   |             |  |       | 1,136  |       |  |  | 109    |        |  |  | 4,499   |     |  |  | 8,747    |       
|Less: Intersegment interest income        |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | (8,284   | )     
|                                          |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Interest income from external sources     |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | 463      |       
|                                          |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Interest expense (including intersegment) |                                     |             | (2,979  | )         |  |           | (2,516  | )           |  |       | (1,810 | )     |  |  | (263   | )      |  |  | (4,232  | )   |  |  | (11,800  | )     
|Less: Intersegment interest expense       |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | 8,284    |       
|                                          |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Interest expense to external sources      |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | (3,516   | )     
|                                          |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Segment assets                            |                                     |             | 289,277 |           |  |           | 113,751 |             |  |       | 64,169 |       |  |  | 33,740 |        |  |  | 427,709 |     |  |  | 928,646  |       
|Elimination of intersegment balances      |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | (449,642 | )     
|Investments in equity affiliates          |                                     |             | 1,422   |           |  |           | 1,774   |             |  |       | 178    |       |  |  | 6      |        |  |  | 765     |     |  |  | 4,145    |       
|                                          |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Total assets                              |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | 483,149  |       
|                                          |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Segment capital expenditure               |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|                                          |  for property, plant and equipment |             |         | 46,078    |  |           |         | 11,327      |  |       |        | 3,175 |  |  |        | 13,013 |  |  |         | 133 |  |  |          | 73,726 | 
|Segment liabilities                       |                                     |             | 89,663  |           |  |           | 68,701  |             |  |       | 44,318 |       |  |  | 22,488 |        |  |  | 113,236 |     |  |  | 338,406  |       
|Other liabilities                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | 20,927   |       
|Elimination of intersegment balances      |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | (197,714 | )     
|                                          |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Total liabilities                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | 161,619  |       
|                                          |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       

|                                                                     |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |   |  |  |  |          |  
|-------------------------------------------------------------------- |  | ----------- | -------- | --------- |  | --------- | ------- | ----------- |  | ----- | ------ | ----- |  |  | ------ | - |  |  | - |  |  |  | -------- | -
|                                                                     |  | Exploration |          | Refining  |  | Chemicals |         | Natural Gas |  |       |        |      
|                                                                     |  | and         |          | and       |  | and       |         | and         |  |       |        |      
|Year Ended December 31, 2003                                         |  | Production  |          | Marketing |  | Marketing |         | Pipeline    |  | Other |        | Total
|                                                                     |  |             |          |           |  |           |         |             |  |       |        |      
|                                                                     |  | RMB         |          | RMB       |  | RMB       |         | RMB         |  | RMB   |        | RMB  
|Sales and other operating revenues (including
    intersegment)      |  |             | 177,271  |           |  |           | 223,584 |             |  |       | 39,211 |       |  |  | 15,067 |   |  |  |  |  |  |  | 455,133  |  
|Less: Intersegment sales                                             |  |             | (128,963 | )         |  |           | (16,867 | )           |  |       | (2,263 | )     |  |  | (3,261 | ) |  |  |  |  |  |  | (151,354 | )
|                                                                     |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |   |  |  |  |          |  
|Total sales and other operating revenues from
    external customers |  |             | 48,308   |           |  |           | 206,717 |             |  |       | 36,948 |       |  |  | 11,806 |   |  |  |  |  |  |  | 303,779  |  
|                                                                     |  |             |          |           |  |           |         |             |  |       |        |       |  |  |        |   |  |  |   |  |  |  |          |  

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)


|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |        | 
|------------------------------------------------------------------------ | ----------------------------------- | ----------- | ------- | --------- |  | --------- | ------- | ----------- |  | ----- | ------ | ----- |  |  | ------ | ------ |  |  | ------- | --- |  |  | -------- | ------ | 
|                                                                         |                                     | Exploration |         | Refining  |  | Chemicals |         | Natural Gas |  |       |        |      
|                                                                         |                                     | and         |         | and       |  | and       |         | and         |  |       |        |      
|Year Ended December 31, 2003                                             |                                     | Production  |         | Marketing |  | Marketing |         | Pipeline    |  | Other |        | Total
|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |      
|                                                                         |                                     | RMB         |         | RMB       |  | RMB       |         | RMB         |  | RMB   |        | RMB  
|Depreciation, depletion and Amortization                                 |                                     |             | (25,486 | )         |  |           | (7,601  | )           |  |       | (5,795 | )     |  |  | (1,543 | )      |  |  | (106    | )   |  |  | (40,531  | )     
|Segment result                                                           |                                     |             | 98,819  |           |  |           | 20,679  |             |  |       | 2,621  |       |  |  | 2,248  |        |  |  | (713    | )   |  |  | 123,654  |       
|Other costs                                                              |                                     |             | (6,449  | )         |  |           | (15,644 | )           |  |       | (1,580 | )     |  |  | (326   | )      |  |  | (469    | )   |  |  | (24,468  | )     
|Income/(loss) from operations                                            |                                     |             | 92,370  |           |  |           | 5,035   |             |  |       | 1,041  |       |  |  | 1,922  |        |  |  | (1,182  | )   |  |  | 99,186   |       
|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Finance costs                                                            |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | (1,849   | )     
|Equity in income/(loss) of affiliates accounted
    for by equity method |                                     |             | (33     | )         |  |           | 104     |             |  |       | 42     |       |  |  | 13     |        |  |  | 859     |     |  |  | 985      |       
|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Income before income taxes                                               |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | 98,322   |       
|Income taxes                                                             |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | (28,072  | )     
|Minority interests                                                       |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | (636     | )     
|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Net income                                                               |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | 69,614   |       
|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Interest income (including intersegment)                                 |                                     |             | 2,222   |           |  |           | 552     |             |  |       | 446    |       |  |  | 117    |        |  |  | 4,403   |     |  |  | 7,740    |       
|Less: Intersegment interest income                                       |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | (7,063   | )     
|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Interest income from external sources                                    |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | 677      |       
|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Interest expense (including intersegment)                                |                                     |             | (2,537  | )         |  |           | (1,686  | )           |  |       | (843   | )     |  |  | (356   | )      |  |  | (3,987  | )   |  |  | (9,409   | )     
|Less: Intersegment interest expense                                      |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | 7,063    |       
|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Interest expense to external sources                                     |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | (2,346   | )     
|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Segment assets                                                           |                                     |             | 310,431 |           |  |           | 117,652 |             |  |       | 55,595 |       |  |  | 46,450 |        |  |  | 451,949 |     |  |  | 982,077  |       
|Elimination of intersegment balances                                     |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | (455,913 | )     
|Investments in equity affiliates                                         |                                     |             | 1,184   |           |  |           | 1,889   |             |  |       | 232    |       |  |  | 41     |        |  |  | 2,225   |     |  |  | 5,571    |       
|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Total assets                                                             |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | 531,735  |       
|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Segment capital expenditure                                              |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|                                                                         |  for property, plant and equipment |             |         | 52,813    |  |           |         | 13,915      |  |       |        | 3,903 |  |  |        | 13,530 |  |  |         | 138 |  |  |          | 84,299 | 
|Segment liabilities                                                      |                                     |             | 86,050  |           |  |           | 58,372  |             |  |       | 17,634 |       |  |  | 33,535 |        |  |  | 104,326 |     |  |  | 299,917  |       
|Other liabilities                                                        |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | 32,548   |       
|Elimination of intersegment balances                                     |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | (162,951 | )     
|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       
|Total liabilities                                                        |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  | 169,514  |       
|                                                                         |                                     |             |         |           |  |           |         |             |  |       |        |       |  |  |        |        |  |  |         |     |  |  |          |       

F-46



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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)




---

|           |                                                                                                                                                                      
|---------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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)/income.



|           |                                                                                                                                                                                                                                                                                                                                 
|---------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note (c)  | Segment results for the year ended
    December 31, 2001 included the effect of employee
    separation costs (Note 5); the segment results for the
    years ended December 31, 2002 and 2003 included impairment
    provision for property, plant and equipment (Note 16) and
    shut down of manufacturing assets (Note 5).



|           |                                                                                                                  
|---------- | -----------------------------------------------------------------------------------------------------------------
|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 current accounts and investments.

Secondary reporting format 
geographical segments

|                                   |  |         |         |              |  |             |         |      |  |      |         |      |  |  |         |  |  |  |        |  |  |  |        | 
|---------------------------------- |  | ------- | ------- | ------------ |  | ----------- | ------- | ---- |  | ---- | ------- | ---- |  |  | ------- |  |  |  | ------ |  |  |  | ------ | 
|                                   |  |         |         |              |  |             |         |      |  |     
|                                   |  |         |         |              |  | Capital    
|                                   |  | Revenue |         | Total assets |  | expenditure
|                                   |  |         |         |              |  |            
|Year Ended December 31,            |  | 2002    |         | 2003         |  | 2002        |         | 2003 |  | 2002 |         | 2003
|                                   |  |         |         |              |  |             |         |      |  |      |         |     
|                                   |  | RMB     |         | RMB          |  | RMB         |         | RMB  |  | RMB  |         | RMB 
|PRC                                |  |         | 243,792 |              |  |             | 302,854 |      |  |      | 480,873 |      |  |  | 529,209 |  |  |  | 71,774 |  |  |  | 83,645 | 
|Other (Exploration and Production) |  |         | 632     |              |  |             | 925     |      |  |      | 2,276   |      |  |  | 2,526   |  |  |  | 1,952  |  |  |  | 654    | 
|                                   |  |         |         |              |  |             |         |      |  |      |         |      |  |  |         |  |  |  |        |  |  |  |        | 
|                                   |  |         | 244,424 |              |  |             | 303,779 |      |  |      | 483,149 |      |  |  | 531,735 |  |  |  | 73,726 |  |  |  | 84,299 | 
|                                   |  |         |         |              |  |             |         |      |  |      |         |      |  |  |         |  |  |  |        |  |  |  |        | 

34     SIGNIFICANT
DIFFERENCES BETWEEN IFRS AND US GAAP

The consolidated financial statements have been
prepared in accordance with International Financial Reporting
Standards (IFRS), which may differ in certain material respects
from the accounting principles generally accepted in the United
States of America (US GAAP). Such differences involve methods
for measuring the amounts shown in the financial statements, as
well as additional disclosures required by US GAAP.

F-47



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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)


Effect on net income of significant differences
between IFRS and US GAAP is as follows:

|                                                               |                                                                            |                         |        |        |   |      |        |        |   |  |        |        |   |  |       |      |  
|-------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------- | ------ | ------ | - | ---- | ------ | ------ | - |  | ------ | ------ | - |  | ----- | ---- | -
|                                                               |                                                                            |                        
|                                                               |                                                                            | Year Ended December 31,
|                                                               |                                                                            |                        
|                                                               |                                                                            | 2001                    |        | 2002   |   | 2003 |        | 2003  
|                                                               |                                                                            |                         |        |        |   |      |        |       
|                                                               |                                                                            | RMB                     |        | RMB    |   | RMB  |        | US$   
|Net income under IFRS                                          |                                                                            |                         | 45,469 |        |   |      | 46,910 |        |   |  | 69,614 |        |   |  | 8,411 |     
|US GAAP adjustments:                                           |                                                                            |                         |        |        |   |      |        |        |   |  |        |        |   |  |       |     
|                                                               | Reversal of revaluation loss of property, plant
    and equipment          |                         |        |       |   |      |        |       |   |  |        | 391    |   |  |       | 47   |  
|                                                               | Depreciation charges on property, plant and
    equipment revaluation gain |                         |        | 8,305  |   |      |        | 8,157  |   |  |        | 8,053  |   |  |       | 973  |  
|                                                               | Depreciation charges on property, plant and
    equipment revaluation loss |                         |        | (112   | ) |      |        | (112   | ) |  |        | (144   | ) |  |       | (17  | )
|                                                               | Loss on disposal of property, plant and equipment                          |                         |        | 53     |   |      |        | 224    |   |  |        | 451    |   |  |       | 54   |  
|                                                               | Income tax effect                                                          |                         |        | (2,721 | ) |      |        | (2,729 | ) |  |        | (2,886 | ) |  |       | (349 | )
|                                                               | Minority interests                                                         |                         |        | (60    | ) |      |        | (60    | ) |  |        | (60    | ) |  |       | (7   | )
|                                                               | One-time remedial payments for staff housing                               |                         |        |       |   |      |        | (2,553 | ) |  |        |       |   |  |       |     |  
|                                                               |                                                                            |                         |        |        |   |      |        |        |   |  |        |        |   |  |       |     
|Net income under US GAAP                                       |                                                                            |                         | 50,934 |        |   |      | 49,837 |        |   |  | 75,419 |        |   |  | 9,112 |     
|                                                               |                                                                            |                         |        |        |   |      |        |        |   |  |        |        |   |  |       |     
|Basic and diluted net income per share under US
    GAAP (RMB) |                                                                            |                         | 0.29   |        |   |      | 0.28   |        |   |  | 0.43   |        |   |  | 0.05  |     
|                                                               |                                                                            |                         |        |        |   |      |        |        |   |  |        |        |   |  |       |     

Effect on shareholders equity of
significant differences between IFRS and US GAAP is as
follows:

|                                   |                                                                                                                                                                      |                 |         |         |   |      |         |         |   |  |        |        |  
|---------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------- | ------- | ------- | - | ---- | ------- | ------- | - |  | ------ | ------ | -
|                                   |                                                                                                                                                                      |                
|                                   |                                                                                                                                                                      | At December 31,
|                                   |                                                                                                                                                                      |                
|                                   |                                                                                                                                                                      | 2002            |         | 2003    |   | 2003
|                                   |                                                                                                                                                                      |                 |         |         |   |     
|                                   |                                                                                                                                                                      | RMB             |         | RMB     |   | US$ 
|Shareholders equity under IFRS    |                                                                                                                                                                      |                 | 316,676 |         |   |      | 356,613 |         |   |  | 43,086 |       
|US GAAP adjustments:               |                                                                                                                                                                      |                 |         |         |   |      |         |         |   |  |        |       
|                                   | Reversal of property, plant and equipment
    revaluation gain                                                                                                       |                 |         | (80,549 | ) |      |         | (80,555 | ) |  |        | (9,733 | )
|                                   | Depreciation charges on property, plant and
    equipment revaluation gain                                                                                           |                 |         | 29,220  |   |      |         | 37,273  |   |  |        | 4,503  |  
|                                   | Reversal of property, plant and equipment
    revaluation loss                                                                                                       |                 |         | 1,122   |   |      |         | 1,513   |   |  |        | 183    |  
|                                   | Depreciation charges on property, plant and
    equipment revaluation loss                                                                                           |                 |         | (336    | ) |      |         | (480    | ) |  |        | (58    | )
|                                   | Loss on disposal of property, plant and equipment                                                                                                                    |                 |         | 340     |   |      |         | 791     |   |  |        | 96     |  
|                                   | Deferred tax assets on revaluation                                                                                                                                   |                 |         | 16,567  |   |      |         | 13,686  |   |  |        | 1,653  |  
|                                   | Minority interests                                                                                                                                                   |                 |         | 424     |   |      |         | 364     |   |  |        | 44     |  
|                                   | 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  | ) |  |        | (308   | )
|                                   | 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   |   |  |        | 308    |  
|                                   |                                                                                                                                                                      |                 |         |         |   |      |         |         |   |  |        |       
|Shareholders equity under US GAAP |                                                                                                                                                                      |                 | 283,464 |         |   |      | 329,205 |         |   |  | 39,774 |       
|                                   |                                                                                                                                                                      |                 |         |         |   |      |         |         |   |  |        |       

F-48



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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, 2001, 2002
and 2003 are as follows:

|                                                                  |  |                         |         |      |  |      |         |      |  |  |         |   |  |  |        |  
|----------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | ---- |  |  | ------- | - |  |  | ------ | -
|                                                                  |  |                        
|                                                                  |  | Year Ended December 31,
|                                                                  |  |                        
|                                                                  |  | 2001                    |         | 2002 |  | 2003 |         | 2003
|                                                                  |  |                         |         |      |  |      |         |     
|                                                                  |  | RMB                     |         | RMB  |  | RMB  |         | US$ 
|Balance at beginning of year                                      |  |                         | 227,489 |      |  |      | 251,914 |      |  |  | 283,464 |   |  |  | 34,248 |  
|Net profit for the year                                           |  |                         | 50,934  |      |  |      | 49,837  |      |  |  | 75,419  |   |  |  | 9,112  |  
|Final dividend for year 2000                                      |  |                         | (14,473 | )    |  |      |        |      |  |  |        |   |  |  |       |  
|Interim dividend for year 2001                                    |  |                         | (12,226 | )    |  |      |        |      |  |  |        |   |  |  |       |  
|Premium arising from issue of shares by an equity
    affiliate   |  |                         | 56      |      |  |      |        |      |  |  |        |   |  |  |       |  
|Contribution from CNPC to marketing enterprises                   |  |                         | 134     |      |  |      | 10      |      |  |  |        |   |  |  |       |  
|Final dividend for year 2001                                      |  |                         |        |      |  |      | (8,839  | )    |  |  |        |   |  |  |       |  
|Interim dividend for year 2002                                    |  |                         |        |      |  |      | (8,811  | )    |  |  |        |   |  |  |       |  
|Final dividend for year 2002                                      |  |                         |        |      |  |      |        |      |  |  | (12,299 | ) |  |  | (1,486 | )
|Interim dividend for year 2003                                    |  |                         |        |      |  |      |        |      |  |  | (17,379 | ) |  |  | (2,100 | )
|Payment to CNPC for acquisition of marketing
    enterprises      |  |                         |        |      |  |      | (3,200  | )    |  |  |        |   |  |  |       |  
|Contribution from CNPC for one-time remedial
    staffing housing |  |                         |        |      |  |      | 2,553   |      |  |  |        |   |  |  |       |  
|                                                                  |  |                         |         |      |  |      |         |      |  |  |         |   |  |  |        |  
|Balance at end of year                                            |  |                         | 251,914 |      |  |      | 283,464 |      |  |  | 329,205 |   |  |  | 39,774 |  
|                                                                  |  |                         |         |      |  |      |         |      |  |  |         |   |  |  |        |  

In preparing the summary of differences between
IFRS and US GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities, and the estimates of revenues and expenses.
Accounting estimates have been employed in these financial
statements to determine reported amounts, including
realizability, useful lives of tangible and intangible assets,
income taxes and other areas. Actual results could differ from
those estimates.

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

(a) Revaluation
of property, plant and equipment



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As described in Note 16, the property, plant and
    equipment, excluding oil and gas reserves, transferred to the
    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. 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 June 1999 revaluation resulted in RMB 80,549
    in excess of the prior carrying value and a revaluation loss of
    RMB 1,122 on certain property, plant and equipment.                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | The September 2003 revaluation resulted in a
    RMB 872 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.                                                                                                                                                                                                                                                                                                                                                                              

F-49



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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)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | With respect to the RMB 872 revaluation gain
    resulting from the 2003 revaluation, RMB 98 were related to
    property, plant and equipment that in 1999 experienced
    revaluation loss, and were credited to the income statement. The
    remaining RMB 774 was credited to the revaluation reserve
    in the shareholders equity.                                                                                                                                                                                                                    
|
| | With respect to the RMB 1,257 revaluation loss
    resulting from the 2003 revaluation, RMB 768 were related
    to property, plant and equipment that in 1999 experienced
    revaluation gain. The remaining RMB 489 were charged to the
    income statement.                                                                                                                                                                                                                                                                                               
|
| | The depreciation charge, which includes
    impairment charge, on the revaluation surplus from
    January 1, 2001 to December 31, 2001 was
    RMB 8,305, from January 1, 2002 to December 31,
    2002 was RMB 8,157, and from January 1, 2003 to
    December 31, 2003 was RMB 8,053.                                                                                                                                                                                                                                                                       
|
| | The depreciation charge on the revaluation loss
    from January 1, 2001 to December 31, 2001 was
    RMB 112, from January 1, 2002 to December 31,
    2002 was RMB 112, and from January 1, 2003 to
    December 31, 2003 was RMB 144.                                                                                                                                                                                                                                                                                                                       
|
| | The loss on disposal of property, plant and
    equipment, which includes shut down of manufacturing assets,
    from January 1, 2001 to December 31, 2001 was
    RMB 53, from January 1, 2002 to December 31, 2002
    was RMB 224, and from January 1, 2003 to
    December 31, 2003 was RMB 451.                                                                                                                                                                                                                                                           
|
| | 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.

(b) Related
party transactions



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Group has disclosed in Note 30
    transactions with significant customers and in Notes 13,
    15, 20, 21 and 31 transactions and balances with its immediate
    parent, CNPC, and related companies. CNPC is owned by the PRC
    government, which also owns a significant portion of the
    productive assets in the PRC. IFRS exempts state controlled
    enterprises from disclosing transactions with other state
    controlled enterprises. IFRS also excludes from related parties
    government departments and agencies to the extent that such
    dealings are in the normal course of business. US GAAP contains
    no similar exemptions but requires disclosure of material
    related party transactions. The Group believes that it has
    provided meaningful disclosures of related party transactions
    through the major customer disclosures in Note 30 and the
    transactions with the CNPC Group disclosed in Note 31.
    Although the majority of the Groups activities are
    conducted with the PRC government authorities and its affiliates
    and other state controlled enterprises, none individually
    constitutes a major customer or supplier other than those
    disclosed.

(c) One-time
remedial payments for staff housing



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Ministry of Finance of the PRC issued several
    public notices and regulations during the year ended
    December 31, 2000 and in January 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

F-50



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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)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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 Group.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Under IFRS, such direct payments to employees or
    reimbursements will not be recorded through the consolidated
    income statement 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
    income statement. In the last quarter of year 2002, the Group
    and CNPC completed the process of estimating the amount that are
    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
    shareholders equity of the Group.

(d) Recent
US accounting pronouncements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Issued in January 2003 and revised in December
    2003, FIN 46-R, Consolidation of Variable Interest
    Entities, provides guidance on the identification of and
    financial reporting for entities over which control is achieved
    through means other than voting rights. This Interpretation
    requires existing unconsolidated variable interest entities to
    be consolidated by their primary beneficiaries if the entities
    do not effectively disperse risks among parties involved. The
    Interpretation applies immediately to variable interest entities
    created after January 31, 2003, and to variable interest
    entities in which an enterprise obtains an interest after that
    date. It is effective no later than the end of the first
    reporting period ending after March 15, 2004 for variable
    interest entities in which an enterprise holds a variable
    interest that it acquired before February 1, 2003. The
    adoption of the provisions of FIN 46-R is not expected to
    have a material effect on the consolidated financial statements
    of the Group.

35     PRINCIPAL
SUBSIDIARIES

|                                       |  |                |     |         |  |         |        |              |  |                      |     |  |  |  |        |  |  |                                                                                                               
|-------------------------------------- |  | -------------- | --- | ------- |  | ------- | ------ | ------------ |  | -------------------- | --- |  |  |  | ------ |  |  | --------------------------------------------------------------------------------------------------------------
|                                       |  | Country of     |     |         |  | Type of |        | Attributable |  |                     
|                                       |  | Incorporation  |     | Paid-up |  | Legal   |        | Equity       |  |                     
|Company Name                           |  | and Operations |     | Capital |  | Entity  |        | Interest     |  | Principal Activities
|                                       |  |                |     |         |  |         |        |              |  |                     
|                                       |  |                |     | RMB     |  |         |        | %            |  |                     
|*Daqing Oilfield Company Limited       |  |                | PRC |         |  |         | 47,500 |              |  |                      | phi |  |  |  | 100.00 |  |  | Exploration, production and the sale of crude oil
    and natural gas; production and sale of refined products
|*Jinzhou Petrochemical Company Limited |  |                | PRC |         |  |         | 788    |              |  |                      | psi |  |  |  | 80.95  |  |  | Production and sale of oil and chemical products                                                              

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PETROCHINA COMPANY LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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


|                                           |  |                        |         |         |        |         |          |              |     |                      |     |  |        |  |        |                                                                            |  |                                                                                  
|------------------------------------------ |  | ---------------------- | ------- | ------- | ------ | ------- | -------- | ------------ | --- | -------------------- | --- |  | ------ |  | ------ | -------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------
|                                           |  | Country of             |         |         |        | Type of |          | Attributable |     |                     
|                                           |  | Incorporation          |         | Paid-up |        | Legal   |          | Equity       |     |                     
|Company Name                               |  | and Operations         |         | Capital |        | Entity  |          | Interest     |     | Principal Activities
|                                           |  |                        |         |         |        |         |          |              |     |                     
|                                           |  |                        |         | RMB     |        |         |          | %            |     |                     
|*Jilin Chemical Industrial Company Limited |  |                        | PRC     |         |        |         | 3,561    |              |     |                      | psi |  |        |  | 67.29  |                                                                            |  | Production and sale of chemical products                                         
|Daqing Yu Shu Lin Oilfield Company Limited |  |                        | PRC     |         |        |         | 1,272    |              |     |                      | phi |  |        |  | 88.16  |                                                                            |  | Exploration and production of crude oil and
    natural gas                      
|*Liaohe Jinma Oilfield Company Limited     |  |                        | PRC     |         |        |         | 1,100    |              |     |                      | psi |  |        |  | 81.82  |                                                                            |  | Exploration, production, transportation and sale
    of crude oil and natural gas
|*PetroChina International Limited          |  | British Virgin Islands |         |         | USD0.9 |         |          |              | phi |                      |     |  | 100.00 |  |        | Exploration and production of crude oil and
    natural gas outside of PRC
|PetroChina International Indonesia Limited |  |                        | Bahamas |         |        |         | USD0.005 |              |     |                      | phi |  |        |  | 100.00 |                                                                            |  | Exploration and production of crude oil and
    natural gas in Indonesia         




|      |                                            
|----- | -------------------------------------------
|phi  | Limited liability company.                 
|     
|psi  | Joint stock company with limited liability.



|    |                                                                       
|--- | ----------------------------------------------------------------------
|*  | Subsidiaries directly held by the Company as of
    December 31, 2003.

36     APPROVAL OF
FINANCIAL STATEMENTS

The financial statements were approved by the
board of directors on March 24, 2004 and will be submitted
to the shareholders for approval at the annual general meeting
to be held on May 18, 2004.

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PETROCHINA COMPANY LIMITED



SUPPLEMENTARY INFORMATION ON OIL AND GAS
EXPLORATION


AND PRODUCTION ACTIVITIES
(UNAUDITED)


(Amounts in millions unless otherwise
stated)


Results of Operations

|                                                                                   |                        |                         |         |         |  |      |         |         |  |  |         |         | 
|---------------------------------------------------------------------------------- | ---------------------- | ----------------------- | ------- | ------- |  | ---- | ------- | ------- |  |  | ------- | ------- | 
|                                                                                   |                        |                        
|                                                                                   |                        | Year Ended December 31,
|                                                                                   |                        |                        
|                                                                                   |                        | 2001                    |         | 2002    |  | 2003
|                                                                                   |                        |                         |         |         |  |     
|                                                                                   |                        | RMB                     |         | RMB     |  | RMB 
|Sales and other operating revenues                                                 |                        |                         |         |         |  |      |         |         |  |  |         |        
|                                                                                   | Sales to third parties |                         |         | 37,539  |  |      |         | 41,042  |  |  |         | 48,308  | 
|                                                                                   | Intersegment sales     |                         |         | 110,738 |  |      |         | 106,266 |  |  |         | 128,963 | 
|                                                                                   |                        |                         |         |         |  |      |         |         |  |  |         |        
|                                                                                   |                        |                         | 148,277 |         |  |      | 147,308 |         |  |  | 177,271 |        
|Production costs excluding taxes                                                   |                        |                         | (29,224 | )       |  |      | (29,913 | )       |  |  | (30,691 | )      
|Exploration expenses                                                               |                        |                         | (7,344  | )       |  |      | (8,095  | )       |  |  | (10,577 | )      
|Depreciation, depletion and amortization                                           |                        |                         | (18,423 | )       |  |      | (18,302 | )       |  |  | (21,060 | )      
|Taxes other than income taxes                                                      |                        |                         | (4,921  | )       |  |      | (5,299  | )       |  |  | (5,524  | )      
|                                                                                   |                        |                         |         |         |  |      |         |         |  |  |         |        
|Income before income taxes                                                         |                        |                         | 88,365  |         |  |      | 85,699  |         |  |  | 109,419 |        
|Income taxes                                                                       |                        |                         | (29,160 | )       |  |      | (25,958 | )       |  |  | (32,376 | )      
|                                                                                   |                        |                         |         |         |  |      |         |         |  |  |         |        
|Results of operations from producing activities                                    |                        |                         | 59,205  |         |  |      | 59,741  |         |  |  | 77,043  |        
|                                                                                   |                        |                         |         |         |  |      |         |         |  |  |         |        
|Income from equity affiliates results of
    operations from producing activities |                        |                         | 178     |         |  |      | 132     |         |  |  | 324     |        
|                                                                                   |                        |                         |         |         |  |      |         |         |  |  |         |        

Capitalized Costs

|                                                         |  |                         |          |      |  |      |          |   |  |  |          |  
|-------------------------------------------------------- |  | ----------------------- | -------- | ---- |  | ---- | -------- | - |  |  | -------- | -
|                                                         |  |                        
|                                                         |  | Year Ended December 31,
|                                                         |  |                        
|                                                         |  | 2001                    |          | 2002 |  | 2003
|                                                         |  |                         |          |      |  |     
|                                                         |  | RMB                     |          | RMB  |  | RMB 
|Property costs                                           |  |                         |         |      |  |      |         |   |  |  |         |  
|Producing assets                                         |  |                         | 212,526  |      |  |      | 236,856  |   |  |  | 262,638  |  
|Support facilities                                       |  |                         | 92,573   |      |  |      | 101,142  |   |  |  | 106,172  |  
|Construction-in-progress                                 |  |                         | 9,755    |      |  |      | 7,895    |   |  |  | 10,485   |  
|                                                         |  |                         |          |      |  |      |          |   |  |  |          |  
|Total capitalized costs                                  |  |                         | 314,854  |      |  |      | 345,893  |   |  |  | 379,295  |  
|Accumulated depreciation, depletion and
    amortization |  |                         | (124,612 | )    |  |      | (137,653 | ) |  |  | (150,842 | )
|                                                         |  |                         |          |      |  |      |          |   |  |  |          |  
|Net capitalized costs                                    |  |                         | 190,242  |      |  |      | 208,240  |   |  |  | 228,453  |  
|                                                         |  |                         |          |      |  |      |          |   |  |  |          |  
|Share of equity affiliates net capitalized
    costs    |  |                         | 813      |      |  |      | 815      |   |  |  | 1,604    |  
|                                                         |  |                         |          |      |  |      |          |   |  |  |          |  

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PETROCHINA COMPANY LIMITED


SUPPLEMENTARY INFORMATION ON OIL AND GAS
EXPLORATION

AND PRODUCTION ACTIVITIES
(UNAUDITED)  (Continued)


(Amounts in millions unless otherwise
stated)


Costs Incurred in Property Acquisitions,
Exploration and Development Activities

|                                                                                            |  |                         |        |      |  |      |        |  |  |  |        | 
|------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                                                                                            |  |                        
|                                                                                            |  | Year Ended December 31,
|                                                                                            |  |                        
|                                                                                            |  | 2001                    |        | 2002 |  | 2003
|                                                                                            |  |                         |        |      |  |     
|                                                                                            |  | RMB                     |        | RMB  |  | RMB 
|Property acquisition costs                                                                  |  |                         |       |      |  |      |       |  |  |  |       | 
|Exploration costs                                                                           |  |                         | 10,146 |      |  |      | 10,704 |  |  |  | 15,137 | 
|Development costs                                                                           |  |                         | 29,445 |      |  |      | 35,558 |  |  |  | 39,587 | 
|                                                                                            |  |                         |        |      |  |      |        |  |  |  |        | 
|Total                                                                                       |  |                         | 39,591 |      |  |      | 46,262 |  |  |  | 54,724 | 
|                                                                                            |  |                         |        |      |  |      |        |  |  |  |        | 
|Share of equity affiliates costs of
    property acquisition, exploration, and development |  |                         | 303    |      |  |      | 228    |  |  |  | 592    | 
|                                                                                            |  |                         |        |      |  |      |        |  |  |  |        | 

Proved Reserve Estimates

Oil and gas proved reserves cannot be measured
exactly. Reserve estimates are based on many factors related to
reservoir performance that require evaluation by the engineers
interpreting the available data, as well as price and other
economic factors. The reliability of these estimates at any
point in time depends on both the quality and quantity of the
technical and economic data, and the production performance of
the reservoirs as well as engineering judgment. Consequently,
reserve estimates are subject to revision as additional data
become available during the producing life of a reservoir. When
a commercial reservoir is discovered, proved reserves are
initially determined based on limited data from the first well
or wells. Subsequent data may better define the extent of the
reservoir and additional production performance, well tests and
engineering studies will likely improve the reliability of the
reserve estimate. The evolution of technology may also result in
the application of improved recovery techniques such as
supplemental or enhanced recovery projects, or both, which have
the potential to increase reserves beyond those envisioned
during the early years of a reservoirs producing life.

Proved oil and gas reserves are the estimated
quantities of crude oil, natural gas and natural gas liquids
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 on
escalations based upon future conditions. Proved developed
reserves are those reserves, which can be expected to be
recovered through existing wells with existing equipment and
operating methods. Proved undeveloped reserves are those
reserves, which are expected to be recovered from new wells on
undrilled acreage, or from existing wells where relatively major
expenditure is required.

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
March 2000 to the Group for all of its crude oil and natural gas
reservoirs with terms coextensive with the projected productive
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.

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PETROCHINA COMPANY LIMITED


SUPPLEMENTARY INFORMATION ON OIL AND GAS
EXPLORATION

AND PRODUCTION 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,
2001, 2002 and 2003 were based on a report prepared by DeGolyer
and MacNaughton, 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, 2001   |                         |                                 | 11,032       |  |      |   | 32,533 | 
|                                 |                               | Changes resulting from: |                                 |              |  |      |   |        |  |      
|                                 |                               |                         | Revisions of previous estimates |              |  | 189  |   |        |  | 488   |  
|                                 |                               |                         | Improved recovery               |              |  | 141  |   |        |  | 36    |  
|                                 |                               |                         | Extensions and discoveries      |              |  | 360  |   |        |  | 3,773 |  
|                                 |                               |                         | Production                      |              |  | (763 | ) |        |  | (727  | )
|                                 |                               |                         |                                 |              |  |      |   |       
|                                 | Reserves at December 31, 2001 |                         |                                 | 10,959       |  |      |   | 36,103 | 
|                                 |                               |                         |                                 |              |  |      |   |       
|                                 |                               | Changes resulting from: |                                 |              |  |      |   |        |  |      
|                                 |                               |                         | Revisions of previous estimates |              |  | 349  |   |        |  | (225  | )
|                                 |                               |                         | Improved recovery               |              |  | 31   |   |        |  |      |  
|                                 |                               |                         | Extensions and discoveries      |              |  | 330  |   |        |  | 3,540 |  
|                                 |                               |                         | Purchases of Minerals in Place  |              |  | 38   |   |        |  | 193   |  
|                                 |                               |                         | Production                      |              |  | (770 | ) |        |  | (794  | )
|                                 |                               |                         |                                 |              |  |      |   |       
|                                 | Reserves at December 31, 2002 |                         |                                 | 10,937       |  |      |   | 38,817 | 
|                                 |                               |                         |                                 |              |  |      |   |       
|                                 |                               | Changes resulting from: |                                 |              |  |      |   |        |  |      
|                                 |                               |                         | Revisions of previous estimates |              |  | 199  |   |        |  | 278   |  
|                                 |                               |                         | Improved recovery               |              |  | 81   |   |        |  |      |  
|                                 |                               |                         | Extensions and discoveries      |              |  | 476  |   |        |  | 2,853 |  
|                                 |                               |                         | Purchases of Minerals in Place  |              |  |     |   |        |  |      |  
|                                 |                               |                         | Production                      |              |  | (774 | ) |        |  | (879  | )
|                                 |                               |                         |                                 |              |  |      |   |       
|                                 | Reserves at December 31, 2003 |                         |                                 | 10,919       |  |      |   | 41,069 | 
|                                 |                               |                         |                                 |              |  |      |   |       

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PETROCHINA COMPANY LIMITED


SUPPLEMENTARY INFORMATION ON OIL AND GAS
EXPLORATION

AND PRODUCTION 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, 2001 |               |  | 9,309        |  |  |  | 12,946 | 
|                                                                  | December 31, 2002 |               |  | 9,198        |  |  |  | 11,921 | 
|                                                                  | December 31, 2003 |               |  | 8,885        |  |  |  | 13,374 | 
|Proportional interest in proved reserves of
    equity affiliates |                   |               |  |              |  |  |  |       
|                                                                  | December 31, 2001 |               |  | 62           |  |  |  | 1      | 
|                                                                  | December 31, 2002 |               |  | 62           |  |  |  | 2      | 
|                                                                  | December 31, 2003 |               |  | 78           |  |  |  | 78     | 

At December 31, 2003, 10,886 million
barrels of crude oil and condensate and 40,877 billion
cubic feet of natural gas proved developed and undeveloped
reserves are located within China, and 33 million barrels
of crude oil and condensate and 193 billion cubic feet of
natural gas proved developed and undeveloped reserves are
located in Indonesia.

Standardized Measure

The following disclosures concerning the
standardized measure of future cash flows from proved oil and
gas reserves are presented in accordance with the US Statement
of Financial Accounting Standards No. 69. The amounts shown
are based on prices and costs at the end of each period,
currently enacted tax rates and a 10 percent annual
discount factor. Since prices and costs do not remain static,
and no price or cost changes have been considered, the results
are not necessarily indicative of the fair market value of
estimated proved reserves, but they do provide a common
benchmark which may enhance the users ability to project
future cash flows.

The standardized measure of discounted future net
cash flows related to proved oil and gas reserves at the end of
each of the three years in the period ended December 31,
2001, 2002 and 2003 is as follows (in millions of RMB):

|                                                             |  |  |           |  
|------------------------------------------------------------ |  |  | --------- | -
|At December 31, 2001                                         |  |  |           |  
|Future cash inflows                                          |  |  | 2,049,110 |  
|Future production costs                                      |  |  | (695,859  | )
|Future development costs                                     |  |  | (50,996   | )
|Future income tax expense                                    |  |  | (422,453  | )
|                                                             |  |  |           |  
|Future net cash flows                                        |  |  | 879,802   |  
|Discount at 10% for estimated timing of cash flows           |  |  | (473,803  | )
|                                                             |  |  |           |  
|Standardized measure of discounted future net
    cash flows |  |  | 405,999   |  
|                                                             |  |  |           |  

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##### Table of Contents



PETROCHINA COMPANY LIMITED


SUPPLEMENTARY INFORMATION ON OIL AND GAS
EXPLORATION

AND PRODUCTION ACTIVITIES
(UNAUDITED)  (Continued)


(Amounts in millions unless otherwise
stated)


|                                                                                         |                      |  |           |       | 
|---------------------------------------------------------------------------------------- | -------------------- |  | --------- | ----- | 
|At December 31, 2002                                                                     |                      |  |           |      
|Future cash inflows                                                                      |                      |  | 2,710,152 |      
|Future production costs                                                                  |                      |  | (745,866  | )    
|Future development costs                                                                 |                      |  | (73,344   | )    
|Future income tax expense                                                                |                      |  | (562,289  | )    
|                                                                                         |                      |  |           |      
|Future net cash flows                                                                    |                      |  | 1,328,653 |      
|Discount at 10% for estimated timing of cash flows                                       |                      |  | (713,267  | )    
|                                                                                         |                      |  |           |      
|Standardized measure of discounted future net
    cash flows                             |                      |  | 615,386   |      
|                                                                                         |                      |  |           |      
|At December 31, 2003                                                                     |                      |  |           |      
|Future cash inflows                                                                      |                      |  | 2,991,193 |      
|Future production costs                                                                  |                      |  | (765,111  | )    
|Future development costs                                                                 |                      |  | (88,556   | )    
|Future income tax expense                                                                |                      |  | (635,169  | )    
|                                                                                         |                      |  |           |      
|Future net cash flows                                                                    |                      |  | 1,502,357 |      
|Discount at 10% for estimated timing of cash flows                                       |                      |  | (807,037  | )    
|                                                                                         |                      |  |           |      
|Standardized measure of discounted future net
    cash flows                             |                      |  | 695,320   |      
|                                                                                         |                      |  |           |      
|Share of equity affiliates standardized
    measure of discounted future net cash flows |                      |  |           |      
|                                                                                         | At December 31, 2001 |  |           | 2,013 | 
|                                                                                         | At December 31, 2002 |  |           | 2,612 | 
|                                                                                         | At December 31, 2003 |  |           | 3,744 | 

Future net cash flows were estimated using
period-end prices and costs, and currently enacted tax rates.

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##### Table of Contents



PETROCHINA COMPANY LIMITED


SUPPLEMENTARY INFORMATION ON OIL AND GAS
EXPLORATION

AND PRODUCTION 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 in the
period ended December 31, 2001, 2002 and 2003 are as
follows:

|                                                                    |                                                                          |                         |  |          |   |      |  |          |   |  |  |          |  
|------------------------------------------------------------------- | ------------------------------------------------------------------------ | ----------------------- |  | -------- | - | ---- |  | -------- | - |  |  | -------- | -
|                                                                    |                                                                          |                        
|                                                                    |                                                                          | Year Ended December 31,
|                                                                    |                                                                          |                        
|                                                                    |                                                                          | 2001                    |  | 2002     |   | 2003
|                                                                    |                                                                          |                         |  |          |   |     
|                                                                    |                                                                          | RMB                     |  | RMB      |   | RMB 
|CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED
    FUTURE CASH FLOWS |                                                                          |                         |  |          |   |      |  |          |   |  |  |         
|                                                                    | Beginning of year                                                        |                         |  | 738,887  |   |      |  | 405,999  |   |  |  | 615,386  |  
|                                                                    | Sales and transfers of oil and gas produced, net
    of production costs |                         |  | (119,053 | ) |      |  | (116,977 | ) |  |  | (146,580 | )
|                                                                    | Net changes in prices and production costs and
    other                 |                         |  | (539,088 | ) |      |  | 259,016  |   |  |  | 90,150   |  
|                                                                    | Extensions, discoveries and improved recovery                            |                         |  | 43,916   |   |      |  | 53,024   |   |  |  | 65,150   |  
|                                                                    | Development costs incurred                                               |                         |  | 31,518   |   |      |  | (1,983   | ) |  |  | 1,730    |  
|                                                                    | Revisions of previous quantity estimates                                 |                         |  | 10,472   |   |      |  | 17,364   |   |  |  | 15,520   |  
|                                                                    | Accretion of discount                                                    |                         |  | 106,653  |   |      |  | 60,095   |   |  |  | 87,580   |  
|                                                                    | Purchases of Minerals in Place                                           |                         |  |         |   |      |  | 2,351    |   |  |  |         |  
|                                                                    | Net change in income taxes                                               |                         |  | 132,694  |   |      |  | (63,503  | ) |  |  | (33,616  | )
|                                                                    |                                                                          |                         |  |          |   |      |  |          |   |  |  |         
|                                                                    | End of year                                                              |                         |  | 405,999  |   |      |  | 615,386  |   |  |  | 695,320  |  
|                                                                    |                                                                          |                         |  |          |   |      |  |          |   |  |  |         

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EXHIBIT INDEX

|        |      |                         |  |                                                                                                                                                           
|------- | ---- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                        
|Number  |      | Description of Exhibits
|        |      |                        
|        | 1.1  |                         |  | Articles of Association (as amended) (English
    translation). (1)                                                                                       
|        | 4.1  |                         |  | 2003 Performance Contract between Chen Geng and
    PetroChina (English translation)(2)                                                                   
|        | 4.2  |                         |  | 2003 Performance Contract between Su Shulin and
    PetroChina (English translation)(2)                                                                   
|        | 4.3  |                         |  | 2003 Performance Contract between Wang Fucheng
    and PetroChina (English translation)(2)                                                                
|        | 4.4  |                         |  | 2003 Performance Contract between Wang Guoliang
    and PetroChina (English translation)(2)                                                               
|        | 4.5  |                         |  | 2003 Performance Contract between Liu Baohe and
    PetroChina (English translation)(2)                                                                   
|        | 4.6  |                         |  | 2003 Performance Contract between Duan Wende and
    PetroChina (English translation)(2)                                                                  
|        | 4.7  |                         |  | 2003 Performance Contract between Jia Chengzao
    and PetroChina (English translation)(2)                                                                
|        | 4.8  |                         |  | Crude Oil Mutual Supply Framework Agreement,
    dated February 26, 2004, between China Petrochemical
    Corporation and PetroChina (English translation)
|        | 8.1  |                         |  | List of major subsidiaries                                                                                                                                
|        | 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.
|        | 16.2 |                         |  | Code of Ethics                                                                                                                                            



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|    |                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to our Annual Report on
    Form 20-F for the fiscal year ended December 31, 2001
    (File No. 1-15006) filed with the U.S. Securities and
    Exchange Commission.
|   
|(2) | Incorporated by reference to our Annual Report on
    Form 20-F for the fiscal year ended December 31, 2002
    (File No. 1-15006) filed with the Commission.