CONTENTS2 Company Profile3 Principal Financial Data and Indicators6 Changes in Share Capital and Shareholdings ofPrincipal Shareholders8 Chairman’s Statement11 Business Review and Prospects19 Management’s Discussion and Analysis29 Significant Events37 Connected Transactions41 Corporate Governance49 Report of the Board of Directors54 Report of the Board of Supervisors57 Directors, Supervisors, Senior Management and Employees70 Principal Wholly-owned, and Controlling Subsidiaries71 Financial Statements195 Corporate Information197 Documents for Inspection198 Confirmation from the Directors and Senior ManagementThis annual report includes forward-looking statements. All statements, other than statementsof historical facts, that address activities, events or developments that the Company expectsor anticipates will or may occur in the future (including but not limited to projections, targets,estimates and business plans) are forward-looking statements. The Company’s actual results ordevelopments may differ materially from those indicated by these forward-looking statements asa result of various factors and uncertainties. The Company makes the forward-looking statementsreferred to herein as at 22 March 2013 and unless required by regulatory authorities, the Companyundertakes no obligation to update these statements.
CHINA PETROLEUM & CHEMICAL CORPORATION2Annual Report 2012CompanyProfileCOMPANY PROFILEExploration and Production Refining Marketing and Distribution ChemicalsIMPORTANT NOTICE: THE BOARD OF DIRECTORS, THE BOARD OF SUPERVISORS, DIRECTORS, SUPERVISORS AND SENIORMANAGEMENT OF CHINA PETROLEUM & CHEMICAL CORPORATION (“SINOPEC CORP.”) WARRANT THAT THERE ARE NOMISREPRESENTATIONS, MISLEADING STATEMENTS CONTAINED IN OR MATERIAL OMISSIONS FROM THIS ANNUAL REPORT,AND JOINTLY AND SEVERALLY ACCEPT FULL RESPONSIBILITY FOR THE AUTHENTICITY, ACCURACY AND COMPLETENESS OFTHE INFORMATION CONTAINED IN THIS ANNUAL REPORT. THERE IS NO APPROPRIATION OF THE COMPANY’S FUNDS FOR NON-OPERATIONAL PURPOSE BY ANY CONTROLLING SHAREHOLDERS OR THEIR CONNECTED PERSONS, AND THERE IS NO VIOLATION OFDECISION-MAKING PROCEDURES IN PROVIDING EXTERNAL GUARANTEES. ALL DIRECTORS OF SINOPEC CORP. ATTENDED THE SIXTHMEETING OF THE FIFTH SESSION OF THE BOARD OF DIRECTORS OF SINOPEC CORP. MR. FU CHENGYU, CHAIRMAN OF THE BOARD, MR.WANG TIANPU, VICE CHAIRMAN AND PRESIDENT AND MR. WANG XINHUA, CHIEF FINANCIAL OFFICER AND HEAD OF THE FINANCIALDEPARTMENT WARRANT THE AUTHENTICITY AND COMPLETENESS OF THE FINANCIAL STATEMENTS CONTAINED IN THIS ANNUALREPORT. THE AUDIT COMMITTEE OF SINOPEC CORP. HAS REVIEWED THE ANNUAL RESULTS OF SINOPEC CORP. FOR THE YEAR ENDED31 DECEMBER 2012.THE ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 OF SINOPEC CORP. AND ITS SUBSIDIARIES(THE “COMPANY”) PREPARED IN ACCORDANCE WITH THE PRC ACCOUNTING STANDARDS FOR BUSINESS ENTERPRISES (“ASBE”)AND INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”) HAVE BEEN AUDITED BY KPMG HUAZHEN (SPECIAL GENERALPARTNERSHIP) AND KPMG CERTIFIED PUBLIC ACCOUNTANTS (“KPMG”) RESPECTIVELY AND BOTH FIRMS HAVE ISSUED STANDARDUNQUALIFIED AUDITOR’S REPORT.AS APPROVED BY THE SIXTH MEETING OF THE FIFTH SESSION OF THE BOARD OF DIRECTORS, THE BOARD RECOMMENDED A FINALCASH DIVIDEND OF RMB 0.20 PER SHARE FOR 2012, COMBINED WITH THE INTERIM CASH DIVIDEND OF RMB 0.10 PER SHARE, TOTALCASH DIVIDEND FOR 2012 WILL BE RMB 0.30 PER SHARE. THE BOARD ALSO PROPOSED THAT, BASED ON THE TOTAL NUMBER OFSHARES ON THE RECORD DATE, 2 BONUS SHARES FROM RETAINED EARNINGS AND 1 BONUS SHARE FROM CAPITAL RESERVE BEDISTRIBUTED FOR EACH 10 EXISTING SHARES HELD BY ALL SHAREHOLDERS. THE PROPOSAL SUBJECTS TO THE SHAREHOLDER’SAPPROVAL AT THE ANNUAL GENERAL MEETING.COMPANY PROFILESinopec Corp. is one of the largest integrated energy and chemical companies with upstream, midstream and downstream operations in China. Itsprincipal operations include: the exploration and production, pipeline transportation and sale of petroleum and natural gas; the sale, storage andtransportation of petroleum products, petrochemical products, synthetic fiber, fertilizer and other chemical products; import and export, as wellas import and export agency business of oil, natural gas, petroleum products, petrochemical and chemical products, and other commodities andtechnologies; and research, development and application of technologies and information.Adhering to its corporate mission of “Enterprise development, Contribution to the Country, Shareholder value creation, Social responsibility andEmployee wellbeing”, Sinopec Corp. implements strategies for resources, markets, integration, internationalization, differentiation and green low-carbondevelopment with a view to realize its vision of building a first class, global energy and petrochemical company.
3CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012PrincipalFinancialDataandIndicatorsPRINCIPAL FINANCIAL DATA AND INDICATORS1 FINANCIAL DATA AND INDICATORS PREPARED IN ACCORDANCE WITH CHINA ACCOUNTING STANDARDS FOR BUSINESS ENTERPRISES(1) Principal financial dataFor the years ended 31 December2012 2011 Change 2010Items RMB millions RMB millions % RMB millionsOperating income 2,786,045 2,505,683 11.2 1,913,182Operating profit 87,926 100,966 (12.9) 101,352Profit before taxation 90,107 102,638 (12.2) 102,178Net profit attributable to equity shareholders of the Company 63,496 71,697 (11.4) 70,713Net profit attributable to equity shareholders of the Companybefore extraordinary gain and loss 61,922 70,453 (12.1) 68,345Net cash flow from operating activities 143,462 151,181 (5.1) 171,262At 31 December2012 2011 Change 2010Items RMB millions RMB millions % RMB millionsTotal assets 1,247,271 1,130,053 10.4 985,389Total liabilities 696,670 620,528 12.3 532,707Total equity attributable to equity shareholders of the Company 513,374 474,399 8.2 421,127Total shares (10,000 shares) 8,682,029 8,670,256 0.1 8,670,253(2) Principal financial indicatorsFor the years ended 31 December2012 2011 Change 2010Items RMB RMB % RMBBasic earnings per share 0.731 0.827 (11.6) 0.816Diluted earnings per share 0.704 0.795 (11.4) 0.808Basic earnings per share based on latest total shares (note) 0.708 0.826 (14.3) 0.816Basic earnings per share (before extraordinary gain and loss) 0.713 0.813 (12.3) 0.788Weighted average return on net assets (%) 12.80 15.93 (3.13) 17.43percentagepointsWeighted average return (before extraordinary gain and loss) on net assets (%) 12.48 15.66 (3.18) 16.94percentagepointsNet cash flow from operating activities per share 1.653 1.744 (5.2) 1.975Note:Basic earnings per share based on the total shares in the last trading day before publication of annual results.At 31 December2012 2011 Change 2010Items RMB RMB % RMBNet assets attributable to equity shareholders of the Company per share 5.913 5.472 8.1 4.857Liabilities to assets ratio (%) 55.86 54.91 0.95 54.06percentagepoints
CHINA PETROLEUM & CHEMICAL CORPORATION4Annual Report 2012PrincipalFinancialDataandIndicatorsPRINCIPAL FINANCIAL DATA AND INDICATORS (CONTINUED)(3) Extraordinary items and corresponding amountsItems For the year ended 31 December2012 2011 2010(Income)/expensesRMB millionsGain on disposal of fixed assets (133) (754) (253)Donations 231 90 177Government grants (2,814) (1,400) (1,096)Gain on holding and disposal of various investments (69) (48) (71)Net profit of subsidiaries generated from a business combination involvingentities under common control before acquisition date — — (3,043)Other non-operating expenses, net 553 385 362Subtotal (2,232) (1,727) (3,924)Tax effect 558 432 220Total (1,674) (1,295) (3,704)Attributable to: Equity shareholders of the Company (1,574) (1,244) (2,368)Minority interests (100) (51) (1,336)(4) Significant changes of items in the financial statementsThe table below sets forth reasons for those changes where the fluctuation was more than 30% during the reporting period, or such changeswhich constituted 5% or more of total assets at the balance sheet date or more than 10% of profit before taxation:At 31 December Increase/(decrease)2012 2011 Amount Percentage Reasons for changeItems RMB millions RMB millions RMB millions (%)Cash at bank and on hand 10,864 25,197 (14,333) (56.88) Due to centralized management of funds, reduced position of cashAccounts receivable 81,395 58,721 22,674 38.61 Due to business scale growthConstruction in progress 168,977 111,311 57,666 51.81 Mainly due to production growth and increased capital expenditureIntangible assets 49,834 34,842 14,992 43.03 Please refer to Financial Statements under ASBE, Note 14Short-term loans 70,228 36,985 33,243 89.88 Due to adjustment to debt structure, and the increase in low costborrowings in USDTaxes payable 21,985 39,622 (17,637) (44.51) Please refer to Financial Statements under ASBE, Note 25Short-term debenturespayable30,000 — 30,000 N/A Issuance of RMB 30 billion short-term debentures in 2012Non-current liabilities duewithin one year15,754 43,388 (27,634) (63.69) Repayment of bonds due within one yearFinancial expenses 9,819 6,544 3,275 50.05 Decrease in exchange gains and increase in debts bearinginterestsImpairment losses 7,906 5,811 2,095 36.05 Please refer to Financial Statements under ASBE, Note 39Gain from changesin fair value206 1,423 (1,217) (85.52) Due to fair value change of the embedded derivatives of convertiblebonds issued by the CompanyInvestment income 1,540 4,186 (2,646) (63.21) Please refer to Financial Statements under ASBE, Note 41Non-operating income 4,573 3,411 1,162 34.07 Please refer to Financial Statements under ASBE, Note 42Non-operating expense 2,392 1,739 653 37.55 Please refer to Financial Statements under ASBE, Note 43
5CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012PrincipalFinancialDataandIndicators2 FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIALREPORTING STANDARDSUnit: RMB millionsFor the years ended 31 DecemberItems 2012 2011 2010 2009 2008Turnover, other operating revenues and other income 2,786,045 2,505,683 1,913,182 1,345,052 1,495,148Operating profit 98,662 105,530 104,974 90,669 38,551Profit before taxation 90,642 104,565 103,663 86,574 33,412Profit attributable to equity shareholders of the Company 63,879 73,225 71,782 63,129 31,180Basic earnings per share (RMB) 0.736 0.845 0.828 0.728 0.360Diluted earnings per share (RMB) 0.708 0.812 0.820 0.723 0.319Return on capital employed (%) 9.09 11.49 12.95 11.67 5.92Return on net assets (%) 12.50 15.50 17.11 16.63 9.44Net cash generated from operating activities per share (RMB) 1.640 1.737 1.965 1.909 0.997Unit: RMB millionsAs at 31 DecemberItems 2012 2011 2010 2009 2008Non-current assets 901,678 801,773 735,593 697,474 635,533Net current liabilities 148,358 101,485 76,177 114,442 126,570Non-current liabilities 205,284 192,944 208,380 177,526 156,263Non-controlling interests 37,122 35,016 31,432 25,991 22,324Total equity attributable to equity shareholders of the Company 510,914 472,328 419,604 379,515 330,376Net assets per share (RMB) 5.885 5.448 4.840 4.377 3.810Adjusted net assets per share (RMB) 5.764 5.339 4.747 4.299 3.7193 MAJOR DIFFERENCES BETWEEN THE AUDITED FINANCIAL STATEMENTS PREPARED UNDER ASBE AND IFRS PLEASE REFER TO PAGE 191 OFTHE REPORT.
CHINA PETROLEUM & CHEMICAL CORPORATION6Annual Report 2012ChangesInShareCapitalandShareholdingsofPrincipalShareholdersCHANGES IN SHARE CAPITAL AND SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERS1 CHANGES IN THE SHARE CAPITALUnit: ShareBefore change Increase/(decrease) After changeItems NumbersPercentage(%)New sharesissuedBonusissuedConversionfromreserve Others Sub-total NumberPercentage(%)RMB ordinary shares 69,922,074,436 80.65 — — — 117,724,450 117,724,450 70,039,798,886 80.67Domestically listed foreign shares — — — — — — — — —Overseas listed foreign shares 16,780,488,000 19.35 — — — — — 16,780,488,000 19.33Others — — — — — — — — —Total Shares 86,702,562,436 100 — — — 117,724,450 117,724,450 86,820,286,886 1002 NUMBER OF SHAREHOLDERS AND SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERSThe total number of shareholders of Sinopec Corp. as at 31 December 2012 was 732,218 including 725,663 holders of domestic A Shares and 6,555holders of overseas H Shares. As at 18 March 2013, the total number of shareholders of Sinopec Corp. was 699,189. Sinopec Corp. has compliedwith requirement for minimum public float under the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (“theHong Kong Listing Rules”). From the end of the reporting period to 28 Feb 2013, a total of 4,006 shares was converted from the RMB 23 billion Ashare convertible bond (“Sinopec CB”).(1) Shareholdings of top ten shareholdersThe shareholdings of top ten shareholders as at 31 December 2012 are listed as belowUnit: ShareNumber ofName of shareholdersNature ofShareholdersPercentage ofshareholdings%Totalnumber ofshares heldChanges ofshareholding1shares subjectto pledges orlock-upChina Petrochemical Corporation State-owned share 75.79 65,797,127,692 39,083,199 0HKSCC Nominees Limited 2H share 19.21 16,677,244,472 5,255,000 N/AGuotai Junan Securities Co., Ltd. A share 0.23 203,708,135 (53,042,722) 0PICC Life Insurance Company Limited-Bonus-PersonalInsurance Bonus A share 0.12 100,428,473 (42,695,067) 0China Securities Finance Co., Ltd. – refinancing collateralsecurities account A share 0.07 58,000,000 58,000,000 0China Life Insurance Co., Ltd. – dividends – personal bonus- 005 - l - FH002 Shanghai A share 0.06 55,612,746 (115,344,770) 0Bank of Communications – e 50 index securities investment funds A share 0.06 54,428,862 24,085,062 0Taikang Life Insurance Co., Ltd.-Bonus-PersonalBonus-019L-FH002 Shanghai A share 0.05 47,358,399 16,858,559 0Industrial and Commercial Bank of China – investment bankcore enterprise stock securities investment fund A share 0.05 44,225,356 44,225,356 0China Pacific Life Insurance Co., Ltd. – traditional – generalinsurance products A share 0.05 40,387,540 33,889,363 0Note 1 As compared with the number of shares at 31 December 2011.Note 2 Sinopec Century Bright Capital Investment Limited, overseas wholly-owned subsidiary of China Petrochemical Corporation, holds 425,500,000 H shares,accounting for 0.49% of the total share capital of Sinopec Corp., which is included in the total number of the shares held by HKSCC Nominees Limited.Statement on the connected person relationship or acting in concert among the above-mentioned shareholders:We are not aware of any connected person relationship or acting in concert among or between the above-mentioned top ten shareholders.
7CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012ChangesInShareCapitalandShareholdingsofPrincipalShareholders(2) Information disclosed by the shareholders of H Shares according to the Securities and Futures OrdinanceAs an approximateName of shareholders Capacity of interests heldNumber of shareinterests held orregarded as heldpercentage of SinopecCorp.’s issued sharecapital (H Share)(%)BlackRock, Inc. Interest of corporation controlled by 1,568,363,388(L) 9.3(L)the substantial shareholder 280,339,045(S) 1.7(S)JPMorgan Chase & Co. Beneficial owner 183,071,591(L) 1.1(L)66,018,825(S) 0.4(S)Investment manager 110,209,338(L) 0.7(L)Custodian corporation/approved 1,062,265,434(L) 6.3(L)lending agentTempleton Asset Management Ltd. Investment manager 1,006,669,203(L) 6.0(L)Government of Singapore Investment Investment manager 841,355,039(L) 5.0(L)Corporation Pte LtdCitigroup Inc. Interest of corporation controlled by 261,011,078(L) 1.6(L)the substantial shareholder 101,310,001(S) 0.6(S)Custodian corporation/approved 576,960,447(L) 3.4(L)lending agentPerson having a security interest inshares3,288,000(L) 0.02(L)Note: (L): Long position, (S): Short position3 ISSUANCE AND LISTING OF SECURITIES(1) Issuance of securities in last three yearsTypes of Issuing price Issued amount Approvedshares and derivative securities Issuing date (RMB Yuan/Bond) (Bond) Listing date amount for listingRMB23 Billion A share convertiblebond (“Sinopec CB”) 23 February 2011 100 230,000,000 7 March 2011 230,000,000(2) Changes in total number of shares andequity structure and the consequentchanges in asset-liabilities structureUp to 31 December 2012, a totalof 8,573,610 Sinopec CB had beenconverted into A shares of Sinopec Corp.,and a total of 117,759,112 shares hasbeen converted from Sinopec CB. As atthe end of the reporting period, therewere 221,426,390 Sinopec CB whichhad not been converted into sharesyet, accounting for 96.27% of the totalnumber of issued Sinopec CB. Theconversion of Sinopec CB had no materialimpact on the asset-liabilities structure ofthe Company.(3) Existing employee sharesDuring the reporting period, there wereno employee shares.4 CHANGES IN THE CONTROLLINGSHAREHOLDERS AND THE DE FACTOCONTROLLERThere was no change in the controllingshareholders and the de facto controller ofSinopec Corp. during the reporting period.(1) Controlling shareholderThe controlling shareholder ofSinopec Corp. is China PetrochemicalCorporation. Established in July 1998,China Petrochemical Corporation is astate-authorised investment organisationand a state-owned company. Itsregistered capital is RMB 231.6 billion,and the legal representative is Mr. FuChengyu. The organization code of ChinaPetrochemical Corporation is 10169286-X. Through re-organisation in 2000,China Petrochemical Corporation injectedits principal petroleum and petrochemicalbusinesses into Sinopec Corp. andretained certain petrochemical facilitiesand small-scale refineries. It provideswell-drilling services, well-logging services,downhole operation services, servicesin connection with manufacturing andmaintenance of production equipment,engineering construction, utility servicesincluding water and power and social services.Stock ownership of other listedcompanied directly held by ChinaPetrochemical CorporationNumberName ofCompanyof Shares(shares) PercentageChinaMerchantsEnergyShippingCo., Ltd 911,886,426 19.32%People’sDailyOnline 2,003,367 0.72%(2) Other than HKSCC Nominees Limited,there was no other legal person orshareholder to hold 10% or more ofshareholdings of Sinopec Corp.(3) Basic information of the de factocontrollerChina Petrochemical Corporation is thede facto controller of Sinopec Corp.(4) Diagram of the equity and controllingrelationship between Sinopec Corp. andits de facto controllerNote: Inclusive of 425,500,000 H sharesheld by Sinopec Century Bright CapitalInvestment Ltd. (overseas wholly-ownedsubsidiary of China PetrochemicalCorporation) under HKSCC NomineesLimited.
CHINA PETROLEUM & CHEMICAL CORPORATION8Annual Report 2012CHAIRMAN’S STATEMENTChairman’sStatementMr. Fu Chengyu, ChairmanDear shareholders,On behalf of the Board of Directors, I wouldlike to express my sincerest gratitude for theongoing trust and support you have shown theCompany this year.The world witnessed difficult macroeconomicconditions in 2012, as well as a complex andvolatile environment in the petroleum andpetrochemical markets. By planning ahead,the Company was able to respond proactivelyto market dynamics, while also strengtheningcorporate governance, increasing shareholderreturns and deepening internal reforms. Itsability to adapt to difficult market conditionsleaves the Company well positioned to build aleading energy and chemicals enterprise andachieve positive operating results. In 2012, theCompany’s total revenues and other operatingincome increased by 11.2% from the previousyear to RMB 2,786 billion. Profits attributableto equity shareholders of the Company underInternational Financial Reporting Standardsdecreased by 12.8% to RMB 63.9 billion, whilenet profits attributable to equity shareholdersof the Company, under China AccountingStandards for Business Enterprises, dropped by11.4% to RMB 63.5 billion.As part of the progress in our integratedbusiness in 2012, the upstream businesssuccessfully overcame a number of challengesthrough initiatives that we refer to as theFive Campaigns. Consequently, our oil andgas reserves and production increased, andwe achieved significant breakthroughs in theexploration and production of unconventional oiland gas. By expanding the scale of our refiningbusiness and improving the quality of our oilproducts, we have made major advances in ourcompetitiveness in this part of the business.Sinopec’s strong brand, comprehensivemarketing network, and efficient productdistribution system all contributed to steadygrowth in the volume of our oil product salesand the optimization of our sales structure,creating one-stop shopping for consumers. Ournon-fuel business grew rapidly, allowing us tobetter serve our customers. In order to mitigatethe impact from weak demand and declinedprice of chemical products, Sinopec combinedits research, production and marketing efforts inthe chemical business, allowing us to optimizeload of utilization for chemicals production andadjust the product mix, and ultimately improvethe quality of our customer service and promotecontinued loyalty. Strong performance in tradingand new technological applications helpedstrengthen development of the Company’sintegrated business. The progress we have madein the business has won recognition and supportfrom our shareholders and the public. Since thestart of the second half of 2012, Sinopec Corp.’sshare price has outperformed the market and itspeers both domestically and overseas, and, as aresult, shareholder returns and the value of theCompany have increased substantially.With these positive operational performance andstrong confidence in the future developmentof the Company from our executives, we aremore than happy to share these achievementswith our shareholders. Taking into accountthe Company’s profitability, shareholderexpectations and the need for future sustainabledevelopment, the Board of Directors proposeda final cash dividend of RMB 0.20 per share for2012, which, combined with the interim cashdividend of RMB 0.10 per share, brings the totalannual cash dividend for 2012 to RMB 0.30 pershare. The Board also proposed to distributed2 bonus shares from retained earnings plus 1bonus shares from capital reserve for every 10existing shares.Sinopec Corp. enhanced its corporate governancein 2012 through a number of initiatives. In May2012, the Board of Directors and the Board ofSupervisors underwent a smooth transition ofits membership and appointed managementteam members. The Board of Directors attachesgreat importance to the Company’s efforts incorporate social responsibility and has nowestablished the Corporate Social ResponsibilityCommittee. With a focus on shareholder returns,Sinopec Corp. has amended its Articles ofAssociation to clarify its dividend policy. We havealso enhanced our communication with investorsby refining our disclosure policies. With strongsupport from our Independent Directors andindependent shareholders, the renewal at thecontinuing connected transaction and relevantcaps were approved for the period from 2013 to2015. Meanwhile, Sinopec Corp. also improvedits internal control protocols to make its internalcontrols more effective and to increase itsoverall capabilities for risk management.
9CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012Chairman’sStatementSinopec Corp.’s development accelerated in2012, with particular progress in implementingstructural adjustments across the Company andgreat emphasis in carrying out green and low-carbon initiatives. Capital expenditures for theyear reached RMB 169.0 billion. Among which,expenditures for the upstream accounts for47%, with a target to expand its oil and gasreserves and production, expenditures for therefining accounts for 19%, which was spent incapacity expansion and upgrading the qualityof oil products, expenditures for the chemicalsegment accounts for 14%, predominantlyfor investments in product differentiation andexpenditures for marketing and distributionaccounts for 19%, principally for furtherimprovements in the sales network for refinedoil products.Sinopec Corp. played an active role in corporatesocial responsibility, paying close attention tosustainable development of the industry, societyand the environment. By implementing a greenand low-carbon strategy, Sinopec Corp. isfollowing a new path for corporate developmentcoupling industrialization with the constructionof resource-saving and environmentally friendlyenterprises. Despite expanding the scale of itsproduction, Sinopec Corp. has been able to lowerits energy consumption and reduce the dischargeof major pollutants. We have also continuouslyparticipated in activities that advance ourcorporate social responsibility, including povertyalleviation, educational sponsorship and SinopecCorp.’s Lifeline Express, while also taking careof our own employees and providing supportfor development of their careers. Sinopecrespects the rights of its stakeholders, such ascommunities, consumers, clients and suppliers,and seeks to foster harmonious developmentsof the entire society. During the past year,we joined the United Nations Global CompactLEAD and became one of the signatories of theUN’s Caring for Climate. In June 2012, Sinopecmade 10 voluntary commitments, including astrategy for sustainable development, duringthe United Nations Conference on SustainableDevelopment, also known as Rio+20. Sinopectakes various initiatives to deliver this pledge,and we announced our commitments inour Environmental Protection Report on 29November 2012.These successful developments can beattributed to the steady growth of the Chineseeconomy, yet is not possible without the interestand support of each and every shareholderand of the public and the unrivalled effortsof the Board of Directors, the SupervisoryCommittee, our management team and allSinopec Corp.’s employees. The results furthersubstantiate the Company’s strategy to useits resources, marketing, integration, globalreach, differentiation and green and low-carboninitiatives to build Sinopec into a leading energyand chemicals company.With a 30-year history of reforming, restructuringand developing, Sinopec’s integrated model hasgiven it a clear industry advantage in operationalscale and competitiveness and has created theconditions for future growth. Looking ahead,we see the simultaneous progress of China inindustrialization, informatization, urbanizationand agricultural modernization as providingmarket opportunities for Sinopec, along withsustained growth in demand for energy andchemical products. We recognize that the slowrecovery of the world economy, the increasein energy production and consumption andthe fiercer competition in the petrochemicalsmarket all pose new challenges for Sinopec andmake its development as a leading enterprisemore urgent. To maximize corporate value,the Board of Directors will continue to supportthe implementation of the existing corporatestrategy to make quality and efficiency thepriorities for development, with an acceleratedshift to an operational focus on low-carbondevelopment.In 2013, Sinopec Corp. will implement initiativesacross the Company to enhance the qualityand efficiency of its traditional businesses whilegrowing and developing new businesses. We willwork to target areas that need reform and useour resources to resolve organizational issuesthat might hinder the Company’s future growth.Sinopec Corp. will endeavor to improve itsmanagement capabilities, focusing on strategicplanning and value-based management. Weplace great importance on our green and low-carbon strategy across the entirety of SinopecCorp’s operations, and we will increase ourefforts to develop these initiatives and ensurethat we are contributing to an ecologicallyconscious civilization. Sinopec will remainfocused on achieving favorable returns forshareholders, engaging in activities to advancecorporate social responsibility and promotesustainable economic development of theCompany and of society.Based on market conditions and to meetSinopec Corp.’s development objectives, we haveallocated RMB 181.7 billion for CAPEX in 2013.The quality and efficiency of Sinopec Corp.’sgrowth forms the core of its investment thesisand dictates its investment principles—acquiringresources, ensuring supplies, supporting themajor businesses, adjusting product structure,optimizing projects and increasing returns, all topromote rapid development of the business.With the support of our shareholders and thededication of our employees, the Board ofDirectors strongly believes that Sinopec Corp.will make sustained progress throughout thebusiness and continue toward its goal ofbuilding a leading enterprise. By maintainingits superior performance and continuing withits controlled expansion, Sinopec will repay itsshareholders, contribute to society and help itsemployees prosper.We are fully prepared for the challenges ahead.It takes time to build a strong corporation,and with your support, we will strive to createa bright future for Sinopec Corp. and itsshareholders.Fu ChengyuChairmanBeijing, China22 March 2013
11CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012BusinessReviewandProspectsBUSINESS REVIEW AND PROSPECTSMr. Wang Tianpu, Vice Chairman and PresidentBUSINESS REVIEWThe year 2012 saw decelerated growth globally,a tepid recovery of the U.S. economy, aswell as the outbreak of European sovereigndebt crisis and a dramatic slowdown in thegrowth of the emerging markets. Chineseeconomy slowed down in the first half of theyear characterised by weak market demand.With the Chinese government introducing andstrengthening macroeconomic control andexpediting structural adjustments, the Chineseeconomy stabilized and then improved, witha GDP growth of 7.8% for the year. Based onanalysis and projection on macro economy andmarket trends, the Company achieved positiveresults through proactive response to marketchanges, expansion of resources and markets,management improvement and cost reductions.1 Market Review(1) Crude oil marketIn 2012, the price of international crudeoil fluctuated sharply within a widerange. In the first quarter, the spot priceof Platts Brent crude oil rose to USD128/barrel. The second quarter sawa dramatic slump to USD 90/barrel,after which the price rebounded rapidlyand fluctuated in an elevated range.The annual average spot price of PlattsBrent crude oil was USD 111.6/barrel,representing an increase of 0.3%from 2011.(2) Oil products marketIn 2012, the Chinese governmentmade eight timely price adjustmentsfor gasoline and diesel, following theinternational crude oil price trend, andgradually narrowed the gap betweenrealized prices and the prices basedon pricing formula, relieving losses inthe refining sector. The increase in thenumber of automobiles led to rapidgrowth in domestic demand for gasoline.The growth rate for diesel demanddeclined because of a slowdown in theeconomy. According to statistics, China’sapparent consumption of domestic oilproducts (including gasoline, diesel andkerosene) was 251 million tonnes in2012, representing an increase of 3.3%from 2011.
CHINA PETROLEUM & CHEMICAL CORPORATION12Annual Report 2012BusinessReviewandProspectsBUSINESS REVIEW AND PROSPECTS (CONTINUED)(3) Chemicals marketDemand for chemical products wassluggish globally in 2012. Combined withthe impact of low-cost chemical feedstockfrom the Middle East and North America,the price of chemical products droppedsharply. Domestic chemical productsmarket conditions generally followed thatof the international market. According tocompany statistics, domestic apparentconsumption of synthetic resin, syntheticfiber and synthetic rubber increased by1.9%, 11.7% and 5.3%, respectively,from the previous year. And domesticapparent consumption of ethyleneequivalent increased by 2.7% from 2011.2 Production and Operations(1) Exploration and productionIn 2012, the company realized growth inboth oil and gas reserve and production,and showed significant results inunconventional oil and gas resourcedevelopment through exploration activitiesconducted by the E&P segment in fivekey domestic regions. In exploration,the Company put more efforts tocomplete 2D seismic measurementsfor 23,436 kilometers and 3D seismicmeasurements for 11,813 squarekilometers, representing a growth of26% and 4%, respectively, year on year,and completed drilling exploration wellswith a total footage of 2,545 kilometers,an increase of 17% from the previousyear. The Company achieved more than100% replacement ratio of domestic oiland gas throughout the year. In crudeoil development, the Company expediteddevelopment activities in new blocks andenhanced recovery rates in old blocks.With respect to natural gas development,the Company sped up construction ofproduction capacity in Sichuan Basin,Ordos Basin and Dawan Block of PuguangGas Field. In terms of development forunconventional oil and gas resources, theCompany met its target of developingand building horizontal wells with acapacity of 1 billion cubic meters in OrdosBasin, which is mainly focusing on tightgas development. Moreover, the Companyofficially launched its first shale gas pilotproject with production capacity in Fuling.Summary of Operations for the Exploration and Production SegmentChange from2012 2011 20102011 to 2012(%)Oil and gas production (mmboe) 427.95 407.91 401.42 4.9Crude oil production (mmbbls) 328.28 321.73 327.85 2.0China 306.60 303.37 302.18 1.1Overseas 21.68 18.36 25.67 18.1Natural gas production (bcf) 598.01 517.07 441.39 15.7Change from31 December,201231 December,201131 December,2010the end of theprevious yearto the end ofthe reportingperiod (%)Proved reserves of crude oil and natural gas (mmboe) 3,964 3,966 3,963 (0.05)Proved reserves of crude oil (mmbbls) 2,843 2,848 2,888 (0.2)Proved reserves of natural gas (bcf) 6,730 6,709 6,447 0.3Notes:1. Includes 100% of production and reserves of SSI.2. For domestic production of crude oil, 1 tonne = 7.1 barrels; for production of natural gas, 1 cubic meter = 35.31 cubic feet; for production of crude oil abroad, 1tonne = 7.27 barrels.
13CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012BusinessReviewandProspects(2) RefiningIn 2012, in response to changing marketconditions, the Company moderatelyincreased its refinery throughput andadjusted its product mix, which resultedin higher production of well-receivedproducts, such as gasoline, jet fueland high-value-added products. TheCompany expedited upgrading of oilproducts quality, supplying oil productswith Beijing V standard in Beijing andsteadily advancing its green and low-carbon developments by improving theefficiency of energy consumption andoperations of its refineries, as well ascarrying out various measures for energyconservation and emission reduction.Major techno-economic indicatorsimproved significantly. The Companyconsolidated its sales of LPG and realizedsound profits from sales of asphalt andparaffin wax. For the whole year, thecompany processed 221 million tonnesof crude oil, an increase of 1.8% from2011, and produced 133 million tonnesof oil products, up by 3.9% from theprevious year.Summary of Operations for the Refining Segment Unit: million tonnesChange from2012 2011 20102011 to 2012(%)Refinery throughput 221.31 217.37 211.13 1.8Gasoline, diesel and kerosene production 132.96 128.00 124.38 3.9Gasoline 40.55 37.10 35.87 9.3Diesel 77.39 77.17 76.09 0.3Kerosene 15.01 13.73 12.42 9.3Light chemical feedstock 36.33 37.38 35.00 (2.8)Light products yield (%) 76.75 76.08 75.79 0.67 percentage pointsRefinery yield (%) 95.15 95.09 94.83 0.06 percentage pointsNote:1. Refinery throughput is converted at 1 tonne = 7.35 barrels;2. Includes 100% of production of joint ventures.(3) Marketing and DistributionIn 2012, the Company actively respondedto market changes, made adjustmentsto its operational tactics, and increasedmarket share for its superior serviceand product quality. Coordinated andoptimized logistics system combinedwith centralized procurement brought adrop in purchasing costs and logisticsexpenditures. In addition, imposition ofenhanced quality supervision and a strictexternal procurement system guaranteedthe quality of oil products. The totalsales volume of oil products was 173million tonnes in 2012, among which,domestic sales volume of oil productswas 159 million tonnes, up by 5.2%from 2011, and retail sales volume of oilproducts increased rapidly by 7.6% from2011. Meanwhile, the Company activelypromoted one-stop service stationsand specialty goods, and realized rapidgrowth in the non-fuel business.
CHINA PETROLEUM & CHEMICAL CORPORATION14Annual Report 2012BusinessReviewandProspectsBUSINESS REVIEW AND PROSPECTS (CONTINUED)(4) ChemicalsIn 2012, in response to changing demandin markets, the Company made timelyadjustments to facility utilization andproduction scheme, reduced ethyleneproduction by 4.5% against the previousyear. During the year, the Companycombined its production with marketanalysis and advancement in technology,optimized its product mix, activelydeveloped new products and specialmaterials, as well as increased the outputof high-value-added products. Throughoptimizing the feedstock mix, reducingthe cost of raw materials, keepingoperations with a low-inventory level, andcarrying out differentiated marketing, theCompany played a leading role in themarket, and realized a total sales volumeof chemical products of 54.35 milliontonnes, up by 7% over 2011.Summary of Operations, Chemicals Segment Unit: thousand tonnesChange from2012 2011 20102011 to 2012(%)Ethylene 9,452 9,894 9,059 (4.5)Synthetic resin 13,343 13,652 12,949 (2.3)Synthetic rubber 936 990 967 (5.5)Synthetic fiber monomer and polymer 8,950 9,380 8,864 (4.6)Synthetic fiber 1,339 1,388 1,393 (3.5)Note:Includes 100% of production of joint ventures.Summary of Operations, Marketing and Distribution SegmentChange from2012 2011 20102011 to 2012(%)Total sales volume of oil products (million tonnes) 173.15 162.32 149.23 6.7Total domestic sales volume of oil products (million tonnes) 158.99 151.16 140.49 5.2Including: Retail sales (million tonnes) 107.85 100.24 87.63 7.6Direct sales (million tonnes) 33.25 33.22 32.40 0.1Wholesale (million tonnes) 17.89 17.70 20.47 1.1Annual average throughput per station (tonne/station) 3,498 3,330 2,960 5.0Change from31 December201231 December201131 December2010the end of theprevious yearto the end ofthe reportingperiod (%)Total number of service stations under Sinopec brand 30,836 30,121 30,116 2.4Including: Number of company-operated service stations 30,823 30,106 29,601 2.4
15CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012BusinessReviewandProspects(5) Research and DevelopmentIn 2012, the Company actively executedinnovation-driven development strategiesand made continued technologicalbreakthroughs, bringing significantresults. In upstream, the Companyestablished its initial assessmentstandards for block selection with regardto shale gas reserves in South Chinaand continental shale oil in Easternareas. In refining, we achieved continuedsuccess with technical breakthroughs forcleaner oil products. Pilot plants usinga number of new technologies, includingselective gasoline hydrogenation, liquidphase diesel cyclical hydrogenationand ultra-deep diesel hydrogenationdesulfurization, were put into operation.In chemicals, new products such ashigh-melt-strength PP, Rare Earth–based Cis-1,4-polybutadiene rubberand carbon fiber were successfullydeveloped. In environmental protection,comprehensive rectification technologyfor refinery tail gas and integrateddesulfurization, denitration and dustremoval technology for catalytic crackingstack gas were commercialized. Bio-jetfuel technology based on waste cookingoil was put into trial production. The600 thousand tonnes/year DMTO pilotproject was recognized worldwide withleading technical indicators. The firstMTX engineering pilot plant was builtand put into operation. For the wholeyear, Sinopec filed 3,893 domestic andoverseas patent applications, with 1,451granted. The Company garnered TheNational Scientific Technology ProgressSpecial Award for its safe and efficientexploration technology and industrializedutilization of major ultra-deep sour gasfields, and the Gold Award of ChinaPatent was granted to the company forits ethylbenzene production method frombenzene and ethylene by alkylation and forits hydrofining method for caprolactam.(6) Health, Safety and EnvironmentIn 2012, the Company complied fullywith HSE accountability standards,improved its rectification of potentialhazards, enhanced its capabilities torespond to emergency, and realized safeand clean production. The Company paidmore efforts to implement a green, low-carbon development strategy, activelyexploited renewable energy such as bio-mass, further developed its electricvehicle charging business, optimized thestructure of its oil and gas resources,strengthened measures for environmentalprotection and treatment, implementedaccountability measures for pollutantsand CO2 emission reduction, improvedand adjusted its industrial structure,actively promoted the new green, low-carbon technology, expedited key energysaving and emission reduction projects,fully implemented its energy managementcontract, sped up construction of itsenergy management information systemand continued to perfect and implementa human-centered system for employees’welfare and health examinations.Compared with 2011, the Company’senergy intensity dropped by 2.2%,industrial water demand increased by0.37%, COD in waste water dischargedropped by 3.67% and sulfur dioxidedischarge fell by 3.75%, while theindustrial water recycling rate held steadyat about 95% and the treatment rate ondangerous chemicals and gaseous, liquidand solid wastes reached 100%. Formore detailed information, please referto the Company’s report on sustainabledevelopment.(7) Capital ExpendituresCapital expenditures of the Company wasRMB 168.968 billion in 2012, of whichRMB 79.071 billion was spent on theexploration and development segment,mainly for Shengli shallow water oilfiled,Northwest Tahe oil fields, Ordos oil andgas field, Northeast Sichuan naturalgas exploration and production projectand Shandong LNG project, resulting in6,183 thousand tonnes of newly builtannual production capacity for crudeoil and 4,663 million cubic meters ofnewly added annual production capacityfor natural gas. RMB 32.161 billionwas used in the refining segment,mainly for revamping and expansion ofrefining projects, as well as producingclean energy products. The Companybuilt and put into production a numberof projects for oil products qualityupgrading, including Sinopec ShanghaiPetrochemical and Jinling PetrochemicalCorp.; and successfully renovated anumber of refinery projects in Anqingand Maoming. Capital expenditure forthe marketing and distribution segmentwas RMB 31.723 billion, mainly forconstruction and acquisition of highquality service stations along highway,in the centre of cities and newly plannedurban areas. The Company acceleratedconstruction of oil product pipelines andwarehouses, improved its oil productsales network and promoted its non-fuelbusiness and value-added services suchas IC card. RMB 23.616 billion was usedin the chemical segment for mechanicalcompletion of the Wuhan ethyleneproject; to prepare for the production ofthe Yizheng 1,4-butylene glycol, Anqingacrylonitrile and Luoyang polypropyleneprojects; and to continue with theconstruction of the Hainan aromatics,Yanshan butyl rubber and Guangzhoupropylene projects. The corporate andothers spent RMB 2,397 million onpurchasing R&D equipmentand construction of information-technology projects.
CHINA PETROLEUM & CHEMICAL CORPORATION16Annual Report 2012BusinessReviewandProspectsBUSINESS REVIEW AND PROSPECTS (CONTINUED)BUSINESS PROSPECTS(1) Market AnalysisLooking into 2013, the world economy isexpected to recover slowly, with a trend oftepid growth persists under the complex andprecarious environment. While the Chineseeconomy is showing signs of stability andimprovements, its domestic petroleum andpetrochemical product markets are still underpressure from both domestic and overseasmacroeconomic conditions. Crude oil price isexpected to fluctuate within an elevated levelduring 2013. China’s policies to implementand expedite adjustments in its industrialstructure and to promote industrialization,urbanization, informatization, modernizationin agriculture and growth in domesticconsumer demand, as well as optimize thepricing mechanism for oil products andnatural gas will combined to create favorableconditions for the Company’s reform anddevelopment.(2) Production and OperationIn 2013, through safe and stable operationsand its market-oriented strategy, theCompany will emphasize the quality andefficiency of its development activities.Driven by improvements in managementand technical innovations, the Companywill strive to fully exploit its markets,optimize production and operations, takefull advantage of its existing assets, activelyreduce its costs and expenses and achievethe following targets:Exploration and Production Segment: Inexploration, aiming at findings of oil andgas resources, the Company will makemore efforts in exploring new blocks andfields, focus on major oil and gas blockswith potentials of additional reserve,and accelerate exploration activities forbreakthroughs. In development, with southernHubei and western Junggar as major targets,the Company is going to increase productionin West China. Meanwhile, Efforts in EastChina and Northeast China will be expeditedto create new areas with potential growth.The Company will conduct enhanced recoveryin mature blocks; apply new technologiesto increase recovery rates; strive for rapidgrowth in production and reserve of crudeoil; building up production capacity in anumber of blocks, such as Yuanba GasField; streamline logistic facilities, includingpipelines, LNG terminals and gas storagereservoirs; extend the value chain of naturalgas; increase market share; building upproduction capacities for the pilot projectof Fuling shale gas; conduct in-depthfundamental research in shale oil and pursuemajor breakthroughs. In 2013, the Companyplans to produce 46.43 million tonnes of crudeoil and 18.1 billion cubic meters of natural gas.Refining Segment: The Company will closelytrack and analyze oil price trend, optimizethe procurement and allocation of crude oiland reduce the purchasing cost of crudeoil; utilize newly added refinery capacityand increase refinery throughput; activelyupgrade the quality of oil products andsupply cleaner oil products to the market;coordinate production with sales, makingtimely adjustments to product mix andrefinery utilization to increase the productionof well received products and high-value-added products; take the advantage of itsconsolidated sales function and optimizethe marketing at for LPG, asphalt andparaffin wax. In 2013, the targets for refinerythroughput and oil products output areslated at 238 million tonnes and 145 milliontonnes respectively.Marketing Segment: The Company willseek to optimize its market monitoringsystem and enhance market analysis andforecasts to achieve maximum results.Besides increasing its total sales volume, theCompany will focus on the retail market andintroduce special services to expand retailoperations; promote standardized servicesto enhance customer loyalty; implementstrict quality controls over outsourced oilproducts; and actively promote its non-oilproduct business, expand the brand name ofEasyjoy online service, increase sales volumeand improve profitability. The target for totaldomestic sales of oil products is 165 milliontonnes for 2013.Chemicals Segment: the Company willfurther optimize the structure of rawmaterials, with a larger proportion oflight chemical feedstock to reduce costs;produce more well received, profitableand competitive products with the tacticsof “sales – oriented productions target,production – oriented supply volume andmarket promotion based on production”;integrate production, sales and research;make adjustments to product mix andpromote the R&D, production and sales ofnew products; emphasize market analysis,optimize marketing strategy and enhancecustomer service; and improve managementof the supply chain and carry out a lowinventory level tactics with the aim ofachieving 100% sales to production ratio.The company plans to produce 9.83 milliontonnes of ethylene in 2013.
17CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012BusinessReviewandProspectsResearch and Development: The Companywill continue implementing a developmentstrategy driven by innovation with the aimof making breakthroughs in unconventionaloil and gas exploration and development,including shale oil and gas, and in newstrategic technologies, including cleanand high-efficiency utilization of coal, bio-fuel and bio-chemicals, high-performancesynthetic materials and high-value-addedfine chemicals. It will also conduct researchon green, low-carbon, energy-conservingtechnology to enhance environmentalprotection and provide scientific andtechnological support for structuraladjustments to enhance sustainability.Sinopec will enhance and improve theexploration and development of oil andgas resources; increase the recovery rate;utilize core technology and specializedtechnology for lower grade and heavycrude oil processing, cleaner oil productproduction, large-scale aromatics and high-performance synthetic material projects;fully enhance supportive technologies; satisfythe requirements from its core businessfor development; and play a leading role intechnology and business development in thefuture through constant improvements in itscapabilities for basic research and originalinnovation.Capital Expenditures: In 2013, the Companywill continue to focus on quality andefficiency of development, enforce strictcontrols of its procedures for investmentmanagement and meticulously organizeengineering construction. Total capitalexpenditure for the year is budgeted at RMB181.7 billion. Among which, E&P segmentwill account for RMB 89.1 billion, mainly forexploration of oil and gas in Jiyang, Tarim,Junggar, Ordos and Sichuan Basins; forgrowth in proved reserves; and for buildingproduction capacities in key oil and gasfields. Capital expediting for the refiningsegment is RMB 33.8 billion, mainly forupgrading quality of oil products; revampingrefineries such as Anqing, Maoming andJiujiang; and building Guangdong Refinery& Chemical Project. Capital expediting forthe marketing and distribution segmentis RMB 27 billion, mainly for buildingand revamping service stations and foraccelerating construction of oil productpipelines, as well as streamline storage andtransportation facilities. Capital expeditingfor the chemicals segment is RMB 25.9billion, mainly for commencement of Wuhanethylene project and Hainan aromaticsproject; for accelerating the revamping ofFujian ethylene project; and for constructionof Maoming PP project. Corporate and otherscapital expenditures is expected to be RMB5.9 billion, mainly for scientific research andinformation-technology projects.In the new year, Sinopec Corp. will continueto enhance its overall strength, internationalcompetitiveness, and sustainability andstrive to achieve greater results in productionand operation.
19CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012MANAGEMENT’S DISCUSSION AND ANALYSISManagement’sDiscussionandAnalysis1 CONSOLIDATED RESULTS OF OPERATIONSIn 2012, the Company’s turnover and other operating revenues were RMB 2,786 billion, an increase of 11.2% compared with that of 2011. Theoperating profit was RMB 98.7 billion, representing a year on year decrease of 6.5%.The following table sets forth the main revenue and expenses from the Company’s consolidated financial statements:Years ended 31 December2012 2011 Change(RMB millions) (%)Turnover and other operating revenues 2,786,045 2,505,683 11.2Of which:Turnover 2,733,618 2,463,767 11.0Other operating revenues 52,427 41,916 25.1Operating expenses (2,687,383) (2,400,153) 12.0Of which:Purchased crude oil, products, and operating supplies and expenses (2,301,199) (2,027,646) 13.5Selling, general and administrative expenses (61,174) (58,960) 3.8Depreciation, depletion and amortization (70,456) (63,816) 10.4Exploration expenses (including dry holes) (15,533) (13,341) 16.4Personnel expenses (51,767) (45,428) 14.0Taxes other than income tax (188,483) (189,949) (0.8)Other operating income/(expenses), net 1,229 (1,013) —Operating profit 98,662 105,530 (6.5)Net finance costs (9,881) (5,285) 87.0Investment income and share of profits less losses from associates and jointly controlled entities 1,861 4,320 (56.9)Profit before taxation 90,642 104,565 (13.3)Tax expense (23,846) (26,120) (8.7)Profit for the year 66,796 78,445 (14.8)Attributable to:Equity shareholders of the Company 63,879 73,225 (12.8)Non-controlling interests 2,917 5,220 (44.1)(1) Turnover and other operating revenuesIn 2012, the Company’s turnover was RMB 2,733.6 billion, representing an increase of 11.0% over 2011. This was mainly attributable to theactive expansion of the markets and its increased sales volume and higher prices of oil products.The following table sets forth the external sales volume, average realized prices and respective rates of change of the Company’s major productsin 2012 and 2011:Sales volume(thousand tonnes)Average realized price(RMB/tonne, RMB/thousand cubic meters)Years ended 31 December Change (%) Years ended 31 December Change (%)2012 2011 2012 2011Crude oil 6,221 5,581 11.5 4,579 4,621 (0.9)Natural gas (million cubic meters) 14,431 12,310 17.2 1,281 1,274 0.5Gasoline 53,488 47,494 12.6 8,615 8,403 2.5Diesel 99,864 97,897 2.0 7,219 7,075 2.0Kerosene 18,760 16,570 13.2 6,416 6,193 3.6Basic chemical feedstock 23,387 20,944 11.7 6,740 6,915 (2.5)Monomer and polymer for synthetic fiber 6,943 6,585 5.4 8,238 9,880 (16.6)Synthetic resin 10,503 10,518 (0.1) 9,181 9,841 (6.7)Synthetic fiber 1,458 1,496 (2.5) 10,790 13,301 (18.9)Synthetic rubber 1,287 1,220 5.5 17,564 22,215 (20.9)Chemical fertilizer 1,193 951 25.4 2,052 2,186 (6.1)THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THECOMPANY’S AUDITED FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES. PARTS OF THEFOLLOWING CONCERNED FINANCIAL DATA WERE ABSTRACTED FROM THE COMPANY’S AUDITEDFINANCIAL STATEMENTS THAT HAVE BEEN PREPARED ACCORDING TO THE INTERNATIONALFINANCIAL REPORTING STANDARDS, UNLESS OTHERWISE STATED. THE PRICES IN THE FOLLOWINGDISCUSSION DO NOT INCLUDE VALUE-ADDED TAX.
CHINA PETROLEUM & CHEMICAL CORPORATION20Annual Report 2012MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)Management’sDiscussionandAnalysisMost of crude oil and a portion ofnatural gas produced by the Companywere internally used for refining andchemical production, with the remainingsold to other customers. In 2012, theturnover from crude oil, natural gas andother upstream products sold externallyamounted to RMB 53.7 billion, anincrease of 13.1% over 2011. The changewas mainly due to the increase in salesvolume of crude oil, natural gas andother upstream products compared withthat of 2011.In 2012, the Refining segment andMarketing and Distribution segment ofthe Company sold petroleum products(mainly consisting of oil products andother refined petroleum products),and achieved external sales revenue ofRMB 1,647 billion. This representedan increase of 8.0% over 2011, andaccounted for 59.1% of the Company’sturnover and other operating revenues.This was mainly due to the increase ofsales volume and prices of petroleumproducts. The sales revenue of gasoline,diesel and kerosene was RMB 1,302billion, representing an increase of9.0% over 2011, and accounting for79.1% of the total sales revenue ofpetroleum products. Turnover of otherrefined petroleum products was RMB345 billion, representing an increase of4.3% compared with 2011, accountingfor 20.9% of the total sales revenue ofpetroleum products.The Company’s external sales revenueof chemical products was RMB 356.2billion, representing a drop of 3.4%over 2011, accounting for 12.8% of itsturnover and other operating revenues.This was mainly due to the continuing lowdemand for chemical products as a resultof macroeconomic downturn, which led toa major drop in chemical product prices.(2) Operating expensesIn 2012, the Company’s operatingexpenses were RMB 2,687.4 billion,representing a growth of 12.0 %. Theoperating expenses mainly consisted ofthe following:Purchased crude oil, products andoperating supplies and expenses wereRMB 2,301.2 billion, representing anincrease of 13.5% over the same periodof 2011, accounting for 85.6 % of thetotal operating expenses, of which:Crude oil purchasing expenses were RMB880.7 billion, representing an increaseof 5.0 % over the same period of 2011.Throughput of crude oil purchasedexternally in 2012 was 168.61 milliontonnes (excluding the volume processedfor third parties), representing anincrease of 1.1% over the same periodof 2011. The average cost of crude oilpurchased externally was RMB 5,223 pertonne, representing an increase of 3.9 %over the same period of 2011.The Company’s other purchasingexpenses were RMB 1,420.5 billion,representing an increase of 19.5 %over the same period of 2011. This wasmainly due to the expansion of tradingbusiness, higher price of refined oilproducts and higher CPI comparing tothe same period of 2011.Selling, general and administrativeexpenses of the Company totaled RMB61.2 billion, representing an increaseof 3.8 % over the same period of 2011.This was mainly due to the increasein sales volume, labor cost and theincrease in sales expenses such as agentcommission, freight and miscellaneouscharges.Depreciation, depletion and amortizationexpenses of the Company were RMB70.5 billion, representing an increaseof 10.4 % as compared with 2011.This was mainly due to the increaseddepreciation expense as a result ofcontinuous investment in property, plantand equipment in recent years.Exploration expenses were RMB 15.5billion, representing an increase of 16.4% compared with 2011, mainly due tothe Company’s increasing investmentin exploration of blocks such as Ordos,Sichuan Basin, Junggar as well asunconventional oil and gas resources.Personnel expenses were RMB 51.8billion. Excluding the adjustment forsalary related surcharges and insurance,as well as the implementation ofemployee annual leave and recuperationpolicy, housing policy reform and pensionsystem, our personnel expenses increasedby 5 % over 2011, as the Companyimproved its remuneration policy andreasonably increased employees’ income,especially those of field workers.Taxes other than income tax were RMB188.5 billion, representing a decreaseof 0.8 % comparing with 2011. It wasmainly due to the decrease of specialoil income levy by RMB 8.3 billion ascompared with 2011 as the threshold ofspecial oil income levy was raised from 1November 2011. Meanwhile, price-basedresource taxation has been fully carriedout since 1 November 2011 and as aresult, resource tax increased by RMB 4.4billion comparing with the same periodof 2011.Other operating expenses (net amount)decreased by RMB 2.2 billion on a year-on-year basis.(3) Operating profit was RMB 98.7 billion,representing a decrease of 6.5 %comparing with the same period of 2011.(4) Net finance costs were RMB 9.9 billion,representing an increase of 87.0 % over2011. Of which: the interest expenseof the Company was RMB 11.2 billion,representing an increase of RMB 2.0billion over 2011; the gain of exchangedecreased by RMB 1.0 billion ascompared with 2011; for the convertiblebonds issued by the Company, loss fromfair value change at the end of the periodincreased by RMB 1.3 billion over thesame period of 2011.(5) Profit before taxation was RMB 90.6billion, representing a decrease of 13.3%as compared with the same periodof 2011.(6) Tax expense was RMB 23.8 billion,representing a decrease of RMB 2.3billion as compared with the same periodof 2011.(7) Profit attributable to non-controllinginterests of the Company was RMB 2.9billion, representing a decrease of RMB2.3 billion comparing with the sameperiod of 2011.(8) Profit attributable to equity shareholdersof the Company was RMB 63.9 billion,representing a decrease of 12.8%comparing with the same period of 2011.2 RESULTS OF SEGMENT OPERATIONSThe Company manages its operationsthrough four business segments, namelyexploration and production segment, refiningsegment, marketing and distribution segmentand chemicals segment, and the corporateand others. Unless otherwise specified, theinter-segment transactions have not beeneliminated from financial data discussedin this section. In addition, the operatingrevenue data of each segment include otheroperating revenues.
21CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012Management’sDiscussionandAnalysisThe following table shows the operating revenues by each segment, the contribution of external sales and inter-segment sales as a percentageof operating revenues before elimination of inter-segment sales, and the contribution of external sales as a percentage of consolidated operatingrevenues (i.e. after elimination of inter-segment sales) for the periods indicated.Operating revenuesAs a percentageof consolidatedoperating revenuebefore eliminationof inter-segment salesAs a percentageof consolidatedoperating revenueafter eliminationof inter-segment salesYear ended 31 December Year ended 31 December Year ended 31 December2012 2011 2012 2011 2012 2011RMB millions (%) (%) (%) (%)Exploration and Production SegmentExternal sales (note) 82,614 68,723 1.7 1.6 3.0 2.7Inter-segment sales 174,571 173,115 3.7 4.0Operating revenues 257,185 241,838 5.4 5.6Refining SegmentExternal sales (note) 199,525 196,217 4.2 4.5 7.2 7.8Inter-segment sales 1,071,387 1,015,855 22.7 23.3Operating revenues 1,270,912 1,212,072 26.9 27.8Marketing and Distribution SegmentExternal sales (note) 1,462,244 1,341,859 31.0 30.8 52.5 53.6Inter-segment sales 9,638 5,767 0.2 0.1Operating revenues 1,471,882 1,347,626 31.2 30.9Chemicals SegmentExternal sales (note) 363,738 375,287 7.7 8.6 13.1 15.0Inter-segment sales 48,226 45,203 1.0 1.0Operating revenues 411,964 420,490 8.7 9.6Corporate and OthersExternal sales (note) 677,924 523,597 14.4 12.0 24.2 20.9Inter-segment sales 635,046 610,585 13.4 14.1Operating revenues 1,312,970 1,134,182 27.8 26.1Operating revenue before eliminationof inter-segment sales 4,724,913 4,356,208 100.0 100.0Elimination of inter-segment sales (1,938,868) (1,850,525)Consolidated operating revenues 2,786,045 2,505,683 100.0 100.0Note: Other operating revenues are included.The following table sets forth the operating revenues, operating expenses and operating profit/(loss) by each segment before elimination of the inter-segment transactions for the periods indicated, and the change rate of 2012 compared to 2011.Year ended 31 December2012 2011 ChangeRMB millions (%)Exploration and Production SegmentOperating revenues 257,185 241,838 6.3Operating expenses 187,131 170,207 9.9Operating profit 70,054 71,631 (2.2)Refining SegmentOperating revenues 1,270,912 1,212,072 4.9Operating expenses 1,282,356 1,247,852 2.8Operating loss (11,444) (35,780) (68.0)Marketing and Distribution SegmentOperating revenues 1,471,882 1,347,626 9.2Operating expenses 1,429,230 1,302,930 9.7Operating profit 42,652 44,696 (4.6)Chemicals SegmentOperating revenues 411,964 420,490 (2.0)Operating expenses 410,786 393,758 4.3Operating profit 1,178 26,732 (95.6)Corporate and othersOperating revenues 1,312,970 1,134,182 15.8Operating expenses 1,315,413 1,136,822 15.7Operating loss (2,443) (2,640) (7.5)Elimination of inter-segment profits (1,335) 891 —
CHINA PETROLEUM & CHEMICAL CORPORATION22Annual Report 2012MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)Management’sDiscussionandAnalysis(1) Exploration and Production SegmentAlmost all of the crude oil and a smallportion of the natural gas produced bythe exploration and production segmentwere used for the Company’s refining andchemical operations. Most of the naturalgas and a small portion of crude oil weresold externally to other customers.In 2012, the operating revenues ofthis segment were RMB 257.2 billion,representing an increase of 6.3 % overthe same period of 2011. This wasmainly attributable to the increased salesvolume of crude oil and natural gas, of1.07 million tonnes and 2.1 billion cubicmeters, respectively.In 2012, this segment sold 44.06 milliontonnes of crude oil and 15.1 billioncubic meters of natural gas, representingincrease of 2.5 % and 16.3% respectivelycompared with the same period of 2011.The average realized price of crude oilwas RMB 4,491 per tonne, which was0.8 % lower than the price at the sameperiod of 2011. And the average realizedprice of natural gas was RMB 1,292 perthousand cubic meters, which was 0.6%higher than the price at the same periodof 2011.In 2012, the operating expenses ofthis segment were RMB 187.1 billion,representing an increase of 9.9 % overthe same period of 2011. The increasewas mainly due to the following:Depreciation, depletion and amortizationincreased by RMB 3.8 billion ascompared with the same period of 2011,mainly because of growth in oil and gasproperties resulting from investment; TheCompany made greater efforts to explorein Erdos, Sichuan Basin, Junggar andother areas for both conventional andunconventional oil and gas resources;therefore, exploration expenses increasedby RMB 2.2 billion comparing withthe same period of 2011; Personnelexpenses increased by RMB 2.7 billioncompared with 2011; Material salesincome increased, which made materialsales cost go up accordingly and otherbusiness expenditures increase by RMB7.7 billion as compared with the sameperiod of 2011.In 2012, lifting cost was RMB 786 pertonne, representing an increase of 6.4 %over 2011. This mainly attributed to theincreased cost of externally purchasedmaterials, fuels, power and labor aswell as the additional expenses onmaintenance for injection, production andtransfer system in existing oil fields.In 2012, the exploration and productionsegment made great efforts to increasereserve and enhance output. Theoperating profit was RMB 70.1 billion,representing a decrease of 2.2 % ascompared with 2011.(2) Refining SegmentBusiness activities of the refiningsegment include purchasing crude oilfrom the third parties, the explorationand production segment of the Company,as well as processing crude oil intorefined petroleum products. Gasoline,diesel and kerosene are sold internally tothe marketing and distribution segmentof the Company; part of the chemicalfeedstock is sold to the chemicalssegment of the Company; and otherrefined petroleum products are sold toboth domestic and overseas customers.In 2012, the operating revenues of thissegment totaled RMB 1,270.9 billion,representing an increase of 4.9 % overthe same period of 2011. This wasmainly attributable to the increased salesvolumes and the increased priceof products.The following table sets forth the sales volumes, average realized prices and the respective changes of the Company’s major refined oil productsof the segment in 2012 and 2011.Sales Volume (Thousand tonnes) Average realized price (RMB/tonne)Year ended 31 December Change Year ended 31 December Change2012 2011 (%) 2012 2011 (%)Gasoline 38,473 35,173 9.4 7,957 7,629 4.3Diesel 72,883 74,338 (2.0) 6,682 6,421 4.1Kerosene 10,262 9,538 7.6 6,379 6,038 5.6Chemical feedstock 34,431 35,783 (3.8) 5,983 5,774 3.6Other refined petroleum products 46,932 45,187 3.9 4,267 4,325 (1.3)In 2012, the sales revenues of gasoline wereRMB 306.1 billion, representing an increaseof 14.1 % over the same period of 2011.The sales revenues of diesel were RMB487.0 billion, representing an increase of2.0 % over the same period of 2011.The sales revenues of kerosene were RMB65.5 billion, representing an increase of13.7 % over the same period of 2011.The sales revenues of chemical feedstockwere RMB 206.0 billion, representing adecrease of 0.3% comparing with thesame period of 2011.The sales revenues of refined petroleumproducts other than gasoline, diesel,kerosene and chemical feedstock wereRMB 200.3 billion, representing anincrease of 2.5 % over the same periodof 2011.In 2012, this segment’s operatingexpenses were RMB 1,282.4 billion,representing an increase of 2.8 % overthe same period of 2011 and mainlyattributable to the increase in crude oilprice and refining throughput.In 2012, the average processing costfor crude oil was RMB 5,146 per tonne,representing an increase of 3.4 % over2011. Crude oil processed totaled212.10 million tonnes (excluding volumeprocessed for third parties), representingan increase of 0.9 % over 2011. The totalcosts of crude oil processed were RMB1,091.4 billion, representing an increaseof 4.3 % over 2011.
23CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012Management’sDiscussionandAnalysisIn 2012, refining margin was RMB 156.5per tonne, representing an increase ofRMB 121.8 per tonne compared with2011. This was mainly attributable tohigher product price. The governmentadjusted domestic oil products prices inline with crude oil price change, whilethe segment seized market opportunities,adjusted product mix and expanded salesvolume of value added products.In 2012, the unit refining cash operatingcost (defined as operating expensesless the processing cost of crude oiland refining feedstock, depreciation andamortization, taxes other than incometax and other operating expenses, anddivided by the throughput of crude oiland refining feedstock) was RMB 157.5per tonne, representing an increase ofRMB 8 per tonne over 2011. This wasmainly attributed to the cost increase inexternally purchased auxiliary materials,power and fuels.In 2012, the operating loss of thesegment totaled RMB 11.4 billion,representing a decrease in loss of RMB24.3 billion as compared with the sameperiod of 2011.(3) Marketing and Distribution SegmentThe business of marketing anddistribution segment includes purchasingrefined oil products from the refiningsegment and third parties, conductingwholesale and direct sales to domesticcustomers and retailing, distributing oilproducts through the segment’s retailand distribution network, as well asproviding related services.In 2012, the operating revenues of thissegment were RMB 1,471.9 billion,increased by 9.2 % over 2011. Of which:the sales revenues of gasoline totaledRMB 461.2 billion, which increased by15.5 % comparing with the same periodof 2011; the sales revenues of diesel andkerosene were RMB 727.0 billion andRMB 120.2 billion, and increased by 4.4% and 17.7 %, respectively, over 2011.The following table sets forth the sales volumes, average realized prices, and respective change rates of the four product categories in 2012 and2011, including detailed information of different sales channels for gasoline and diesel:Sales Volume (Thousand tonnes) Average realized price (RMB/tonne)Year ended 31 December Change Year ended 31 December Change2012 2011 (%) 2012 2011 (%)Gasoline 53,535 47,540 12.6 8,614 8,403 2.5Of which: Retail 45,477 40,380 12.6 8,744 8,509 2.8Direct sales 3,577 2,514 42.3 7,505 7,636 (1.7)Wholesale 4,481 4,647 (3.6) 8,182 7,889 3.7Diesel 100,790 98,508 2.3 7,213 7,072 2.0Of which: Retail 57,382 55,521 3.4 7,454 7,247 2.9Direct sales 32,355 31,998 1.1 6,882 6,853 0.4Wholesale 11,053 10,988 0.6 6,932 6,824 1.6Kerosene 18,741 16,493 13.6 6,416 6,192 3.6Fuel oil 29,690 26,560 11.8 4,622 4,486 3.0In 2012, the operating expenses of thesegment were RMB 1,429.2 billion,representing an increase of RMB 126.3billion or 9.7 % as compared with thatin 2011. This was mainly due to increaseof both volume and price of oil products.Thus, the purchase costs increased byRMB 120.1 billion or 9.6% as comparedwith 2011.In 2012, the segment’s marketing cashoperating cost (defined as the operatingexpenses less the purchase costs, taxesother than income tax, depreciationand amortization, and then divided bythe sales volume) were RMB 186.3 pertonne, representing an increase of 0.8 %compared with that of 2011.In 2012, the operating profit ofthis segment was RMB 42.7 billion,representing a decrease of 4.6 %comparing with 2011.(4) Chemicals SegmentThe business activities of the chemicalssegment include purchasing chemicalfeedstock from the refining segment andthird parties, producing, marketing anddistributing petrochemical and inorganicchemical products.In 2012, the operating revenues of thechemicals segment were RMB 412.0billion, representing a decrease of 2.0%as compared with that of 2011.Thiswas primarily due to the continuing lowdemand of chemical products as a resultof macroeconomic downturn, whichhad led to a major drop in chemicalproduct prices,The sales revenue generated fromthis segment’s six major categories ofchemical products (namely basic organicchemicals, synthetic resin, syntheticrubber, synthetic fiber monomer andpolymer, synthetic fiber and chemicalfertilizer) totaled approximately RMB393.9 billion, representing a decrease of2.1 % as compared with the same periodof 2011, and accounting for 95.6 % ofthe operating revenues of the segment.
CHINA PETROLEUM & CHEMICAL CORPORATION24Annual Report 2012MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)Management’sDiscussionandAnalysisThe following table sets forth the sales volume, average realized price and respective changes of each of the segment’s six categories of chemicalproducts in 2012 and 2011.Sales Volume (Thousand tonnes) Average realized price (RMB/tonne)Year ended 31 December Change Year ended 31 December Change2012 2011 (%) 2012 2011 (%)Basic organic chemicals 29,873 27,335 9.3 6,667 6,746 (1.2)Synthetic fiber monomer and polymer 6,972 6,631 5.1 8,231 9,866 (16.6)Synthetic resin 10,507 10,524 (0.2) 9,182 9,841 (6.7)Synthetic fiber 1,458 1,496 (2.5) 10,790 13,301 (18.9)Synthetic rubber 1,289 1,220 5.7 17,553 22,215 (21.0)Chemical fertilizer 1,232 960 28.3 2,044 2,187 (6.5)In 2012, the operating expenses of thechemicals segment were RMB 410.8billion, representing an increase of 4.3 %over 2011. This was mainly attributableto the increase in trade volume and thechange in inventory. Thus raw materialcosts increased by RMB 17.3 billion or4.9% over 2011.In 2012, the operating profit ofthis segment was RMB 1.2 billion,representing a decrease of RMB 25.5billion or 95.6% comparing with 2011.This was mainly due to the sharp drop inproduct price as compared to thatof 2011.(5) Corporate and OthersThe business activities of the corporateand others mainly consisted of importand export business activities of theCompany’s subsidiaries, research anddevelopment activities of the Company,and managerial activities of theheadquarters.In 2012, the operating revenuesgenerated from corporate and otherswere RMB 1,313.0 billion, representingan increase of 15.8 % over the sameperiod of 2011. This mainly resultedfrom the increased trade volume of crudeoil and refined oil products. Among totaloperating revenues, RMB 1,309.1 billionwas achieved by specialized companiessuch as trading companies.In 2012, the operating expense of thecorporate and others was RMB 1,315.4billion, representing an increase of15.7 % over the same period of 2011,RMB 1,307.7 billion of this was fromspecialized companies such as tradingcompanies.In 2012, the operating loss from thecorporate and others was RMB 2.4billion. However, specialized companiessuch as trading companies realizedoperation income of RMB 1.4 billion.3 ASSETS, LIABILITIES, EQUITY AND CASH FLOWSThe major funding source of the Company is the operating activities and short-term & long-term loans, and the major use of funds includesoperating expense, capital expenditures, and repayment of the short-term and long-term debts.(1) Assets, liabilities and equity Unit: RMB millionsAt 31 December At 31 December Amount of2012 2011 ChangeTotal assets 1,266,693 1,144,528 122,165Current assets 365,015 342,755 22,260Non-current assets 901,678 801,773 99,905Total liabilities 718,657 637,184 81,473Current liabilities 513,373 444,240 69,133Non-current liabilities 205,284 192,944 12,340Total equity attributable to equity shareholders of the Company 510,914 472,328 38,586Share capital 86,820 86,702 118Reserves 424,094 385,626 38,468Non-controlling interests 37,122 35,016 2,106Total equity 548,036 507,344 40,692
25CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012Management’sDiscussionandAnalysisAs at 31 December 2012, the Company’stotal assets were RMB 1,266.7 billion,representing an increase of RMB 122.2billion compared with that at the end oflast year:Current assets were RMB 365.0 billion,representing an increase of RMB 22.3billion compared with that at the end of2011. This was mainly attributable tothe facts that the inventory increasedby RMB 14.8 billion as a result of therise in prices of crude oil and other rawmaterials and, the net account receivableincreased by RMB 22.7 billion due toenlarged operation scale and increasedproduct price.Non-current assets were RMB 901.7billion, representing an increase of RMB99.9 billion as compared with that atthe end of 2011. This was mainly dueto the implementation of each plannedinvestment; of which,property, plant andequipment (net) increased by RMB 23.0billion, construction in progress increasedby RMB 57.7 billion and the Company’sinterests in associates and jointly controlledentities increased by RMB 4.5 billion.The Company’s total liabilities were RMB718.7 billion, representing an increase ofRMB 81.5 billion compared with that atthe end of 2011, of which:Current liabilities were RMB 513.4billion, which representing an increase ofRMB 69.1 billion as compared with thatat the end of 2011. This was mainly dueto two reasons: firstly, accounts payablewere increased by RMB 38.6 billion asa result of increase in the prices of theraw materials such as crude oil and theenlarged scale of production; secondly,in order to reduce financing cost, thecompany borrowed low-cost short-termloans in US dollar and increased itsborrowings from China PetrochemicalCorporation and its subsidiaries by RMB30.8 billion.Non-current liabilities were 205.3 billion,representing an increase of RMB 12.3billion compared with that at the end oflast year. This was also mainly due to tworeasons: the long-term debts increasedby RMB 7.6 billion; while the provisionsincreased by RMB 3.2 billion because ofthe future dismantlement cost of oil andgas properties provided during the year.Total equity attributable to equityshareholders of the Company was RMB510.9 billion, representing an increase ofRMB 38.6 billion compared with that atthe end of 2011, which was mainly dueto the increase of reserves.(2) Cash FlowThe following table sets forth the major items on the consolidated cash flow statements for the 2012 and 2011.Unit: RMB millionsYear ended 31 DecemberMajor items of cash flows 2012 2011Net cash generated from operating activities 142,380 150,622Net cash used in investing activities (162,197) (140,449)Net cash generated from/(used in) financing activities 5,628 (2,516)(Decrease)/increase of cash and cash equivalents (14,189) 7,657In 2012, the net cash generated fromoperating activities of the company was142.4 billion, representing a decrease ofRMB 8.2 billion as compared with 2011.This was mainly attributable to the factthat the pre-tax profit in current perioddecreased as compared with the sameperiod of 2011.In 2012, the net cash used in investingactivities was RMB 162.2 billion,representing an increase of RMB 21.7billion over 2011, which was mainlybecause of an investment increase asplanned to accelerate the development ofthe Company.In 2012, the net cash inflow generatedfrom the Company’s financing activitieswas RMB 5.6 billion, representing anincrease of RMB 8.1 billion over thesame period of 2011. This was mainlyfrom: a) the issuance of bonds in thecurrent period, new bank loans and etc.were RMB 41.8 billion, representing anincrease of RMB 16.2 billion in cashinflow as compared with 2011; b) thedividends, interests, etc paid in thecurrent period were RMB 36.2 billion,representing an increase of RMB 8.1 billionin cash outflow as compared with 2011.(3) Contingent LiabilitiesPlease refer to “key guarantee and itsperformance” under “Significant Events”.(4) Capital ExpendituresPlease refer to “Capital Expenditure”in the section of “Business Review andProspects” in this report.(5) Research & development expensesand expenditures on environmentalprotectionResearch & development expensesrefer to the expenses recognized asexpenditures when they occur. In 2012,the expenditure for the research &development was RMB 5.84 billion.The environmental protectionexpenditures refer to the standard sewageand sundries clearing expenses paid bythe Company, exclusive of capitalizationexpenses on pollution dischargeequipment. In 2012, the Company’senvironmental protection expenditureswere RMB 4.81 billion.
CHINA PETROLEUM & CHEMICAL CORPORATION26Annual Report 2012MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)Management’sDiscussionandAnalysis(6) Measurement of fair values of derivatives and relevant systemThe Company established and completed a decision-making mechanism, business procedure and internal control relevant to financial instrumentaccounting and information disclosure.Items relevant to measurement of fair values Unit: RMB millionsItemsBeginningof the yearProfits andlosses fromvariation offair values inthe current yearAccumulatedvariation of fairvalues recordedas equityDecrement ofwithdrawalof thecurrent year End of the yearFinancial assetsOf which: 1. Derivative financial assets 54 246 — — 1872. Available-for-sale financial assets 255 — 26 — 833. Cash flow hedging 837 — — — 1,006Subtotal of financial assets 1,146 246 26 — 1,276Financial liabilities (3,569) (62) (151) — (3,684)Totals (2,423) 184 (125) — (2,408)Information concerning financial assets and liabilities held in foreign currencies; Unit: RMB millionsItemsBeginningof the yearProfits andlosses fromvariation offair values ofthe current yearAccumulatedvariation of fairvalues recordedinto equityDecrement ofwithdrawalof thecurrent year End of the yearFinancial assetsOf which: 1. Derivative financial assets 54 246 — — 1872. Loans and receivables 111,391 — — — 50,0223. Available-for-sale financial assets 41 — 26 — 704. Held-to-maturity investments — — — — —5. Cash flow hedging 837 — — — 1,006Subtotal of financial assets 112,323 246 26 — 51,285Financial liabilities (151,707) (43) (151) — (201,745)Note: The financial assets and liabilities held by the Company in foreign currencies were mostly those held by its overseas subsidies, which were recognised in theirfunctional currencies.4 ANALYSIS OF FINANCIAL STATEMENTS PREPARED UNDER ASBEThe major differences between the Company’s financial statements prepared under ASBE and IFRS are set out in Section C of the financialstatements of the Company from Page 191 of this report.Under ABSE, the operating income and operating profit or loss by reportable segments were as follows:Year ended 31 December2012 2011RMB millions RMB millionsOperating incomeExploration and Production Segment 257,185 241,838Refining Segment 1,270,912 1,212,072Marketing and Distribution Segment 1,471,882 1,347,626Chemicals Segment 411,964 420,490Others 1,312,970 1,134,182Elimination of inter-segment sales (1,938,868) (1,850,525)Consolidated operating income 2,786,045 2,505,683Operating profit/(loss)Exploration and Production Segment 69,466 71,221Refining Segment (11,947) (37,608)Marketing and Distribution Segment 41,950 45,068Chemicals Segment 367 25,292Others (2,502) (2,963)Elimination of inter-segment sales (1,335) 891Financial expenses, gain/(loss) from changes in fair value and investment income (8,073) (935)Consolidated operating profit 87,926 100,966Net profit attributable to equity shareholders of the Company 63,496 71,697Operating profit: In 2012, the operating profit of the Company was RMB 87.9 billion, representing a decrease of RMB 13.0 billion as compared with2011. This was mainly due to the decrease in product prices as demand for chemical products continued to be weak.Net profit: In 2012, the net profit attributed to the equity shareholders of the Company was RMB 63.5 billion, representing a decrease of RMB 8.2billion or 11.4% comparing with the same period of 2011.
27CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012Management’sDiscussionandAnalysis(2) Financial data prepared under ASBEAs at 31 As at 31December of 2012 December of 2011 ChangesRMB millions RMB millionsTotal assets 1,247,271 1,130,053 117,218Long-term liabilities 203,561 191,455 12,106Shareholders’ equity 550,601 509,525 41,076Analysis of changes:Total assets: at the end of 2012, the Company’s total assets were RMB 1,247.3 billion, representing an increase of RMB 117.2 billion comparedwith that at the end of 2011. This was mainly due to the facts that : a) inventory increased by RMB 14.8 billion because of the increase in theprices of crude oil and other raw materials; b) net accounts receivable increased by RMB 22.7 billion resulting from the expansion of operationscale and increased product prices; c) as a result of the implementation of each planned investment, fixed asset increased by RMB 23.0 billion,construction in progress increased by RMB 57.7 billion and long term equity investment increased by RMB 4.6 billion.Long-term liabilities: at the end of 2012, the Company’s long-term liabilities were RMB 203.6 billion, representing an increase of RMB 12.1billion compared with that at the end of 2011. This was mainly attributable the facts that: a) the long-term debts and debentures payable wereincreased by 7.7 billion as the issuance of corporate bonds and the transferred amount due within one year were less as compared with that of2011; b) the provisions increased by RMB 3.2 billion due to the future dismantlement cost of oil and gas properties provided during the year.Shareholders’ equity: At the end of 2012, the shareholders’ equity of the Company was RMB 550.6 billion, representing an increase of RMB 41.1billion as compared with that at the end of 2011. This was mainly attributable to the income achieved by the Company.(3) The results of the principal operations by segmentsIncrease/ Increase/SegmentOperationincome(RMB millions)Operationcost(RMB millions)Gross profitmargin(%) (Note)(decrease) ofoperationincome on ayear-on-yearbasis (%)Increase ofoperation coston ayear-on-yearbasis (%)(decrease) ofgross profitmargin on ayear-on-yearbasis (%)Exploration and Production 257,185 115,178 39.7 6.3 19.5 (2.4)Refining 1,270,912 1,113,327 1.0 4.9 2.5 2.4Marketing and Distribution 1,471,882 1,380,666 6.0 9.2 9.8 (0.5)Chemicals 411,964 394,037 4.1 (2.0) 5.1 (6.3)Others 1,312,970 1,306,560 0.5 15.8 15.7 0.1Elimination of inter-segment sales (1,938,868) (1,937,533) Not applicable Not applicable Not applicable Not applicableTotal 2,786,045 2,372,235 8.1 11.2 13.3 (0.8)Note: Gross profit margin = (operation income – operation cost, tax and surcharges)/operation income.
29CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012SignificantEventsSIGNIFICANT EVENTS1 MAJOR PROJECTS(1) Wuhan Ethylene ProjectThe project mainly includes 800,000tonnes per annum (“tpa”) ethylene unitsand downstream auxiliary utility units. Itis expected to be put into operation inthe first half of 2013.(2) Shandong Liquefied Natural Gas (LNG)ProjectShandong LNG project mainly includesthe constructions of a jetty with a3-million-tpa terminal, and the auxiliarytransportation pipeline for natural gas.It is expected to be put into operationin 2014.(3) Pilot Natural Gas Project (1.7 billioncubic meters per annum), Yuanba GasFieldA purification plant and its auxiliaryfacilities are to be built. The productioncapacity of the newly-built natural gaspurification plant will be 1.7 billion cubicmeters per annum. The construction isexpected to be completed in 2014.(4) Guangdong Refining and PetrochemicalIntegration ProjectThe project mainly includes theconstructions of a 15,000,000 tparefinery, 1,000,000 tpa ethylene unit, and300,000-tonne jetty. It is expected to beput into operation in 2016.2 ISSUANCE OF CONVERTIBLE BONDSThe credit ratings of China PetrochemicalCorporation, the guarantor of the Sinopec CBby Moody and Standard & Poors were Aa3and A+ respectively. No material fluctuationwas noted on profitability, asset and creditrating conditions.At the end of the reporting period, theliability to asset ratio of Sinopec Corp. was56.73 %. The ratio was kept stable andthere was no material change in structure.The credit ratings of Sinopec Corp. byMoody and Standard & Poors were Aa3 andA+ respectively in 2012. Domestic long-termcredit rating of Sinopec Crop. remained asAAA. Sinopec Corp. has strong capabilityof financing and repayment, additionally ithas been granted sufficient credit limits bydomestic commercial banks. Sinopec Corp.plans to primarily use its own funds to repaythe debts due and the accrued interests.In the event of any shortfalls, SinopecCorp. will seek to finance the repaymentof the principal and accrued interests in atimely manner via new bank loans or directfinancing in capital markets.(1) ISSURANCE OF RMB 23 BILLION ASHARE CONVERTIBLE BONDSA Share convertible bonds of RMB 23billion were issued by Sinopec Corp. on23 February 2011 (hereby referred toas “Sinopec CB”, code : 110015). Thepar value and issuance price of SinopecCB are both RMB 100. Sinopec CB wereissued with a term of six years withannual interest rate of 0.5%, 0.7%, 1.0%,1.3%, 1.8% and 2.0%, respectively.The initial conversion price was RMB9.73 per share. It was listed on theShanghai Stock Exchange on 7 March2011. For further details, please referto the “Announcement of issuance ofA Share Convertible Bonds by SinopecCorp.” and the “Announcement of theListing of A Share Convertible Bonds bySinopec Corp.” published on the websitesof the Shanghai Stock Exchange andSinopec Corp. The proceeds were usedin the following projects: Wuhan ethyleneproject, Anqing Refinery RevampingProject, Shijiazhuang Refinery RevampingProject, Yulin-Jinan Natural Gas PipelineProject and Rizhao-Yizheng Crude OilPipeline Project. On 1 March 2013,Sinopec Corp. paid in full the accruedinterests of Sinopec CB for the secondinterest payment year.On 20 June 2011 and 19 September2011, the conversion price of Sinopec CBwas adjusted to RMB 9.60 per share andRMB 9.50 per share respectively due tothe then-dividend payment declaration.Sinopec Corp. held the secondextraordinary general meeting for theyear 2011 on 15 December 2011. Duringthe meeting, the proposal of a downwardadjustment to the conversion price ofSinopec CB was approved. Conversionprice of Sinopec CB was adjusted fromRMB 9.50 per share to RMB 7.28 pershare effective from 27 December 2011.On 28 May 2012 and 17 September2012, the conversion price of Sinopec CBwas adjusted to RMB 7.08 per share andRMB 6.98 per share respectively due tothe then-dividend payment declaration.As of 31 December 2012, our A sharesincreased by 117,759,112 shares asa result of the exercise of conversionrights by some Sinopec CB holders, withan outstanding bonds balance of RMB22,142,639,000.
CHINA PETROLEUM & CHEMICAL CORPORATION30Annual Report 2012SignificantEventsSIGNIFICANT EVENTS (CONTINUED)Top ten holders of Sinopec CB and number of Sinopec CB heldName of bond holders Number of bonds heldClearing Participant’s Special Account for Collateral Bond Repurchase (Industrial and Commercial Bank of China) 23,036,370Clearing Participant’s Special Account for Collateral Bond Repurchase (China Construction Bank) 17,916,270Clearing Participant’s Special Account for Collateral Bond Repurchase (Agricultural Bank of China) 14,474,660Clearing Participant’s Special Account for Collateral Bond Repurchase (Bank of China) 7,961,030Sunshine Life Insurance Company Ltd. -Dividend-paying Insurance 7,944,470Clearing Participant’s Special Account for Collateral Bond Repurchase (Bank of Communications)） 6,560,630China Life Insurance Company Ltd. -Dividend-individual dividend-005L-FH002 Shanghai 6,351,180MERRILL LYNCH INTERNATIONAL 5,967,040Clearing Participant’s Special Account for Collateral Bond Repurchase (China Merchants Bank Limited by Share Ltd) 5,475,740UBS AG 5,153,450Use of proceeds Unit: RMB millionsTotal proceeds 22,889.38Note 1Total proceeds used during this reporting period 5,432.38Total cumulative proceeds used 22,603.36In line withProjects CommittedPlannedInvestmentAny changesin projectsActual proceedsused ReturnsOn scheduleor notexpectedreturn or notWuhan 800,000 tpa ethylene project 11,289.38 No 11,289.38 — Yes N/AAnqing Refinery Revamping project 3,000 No 2,999.73 — No N/AShijiazhuang Refinery Revamping project 3,200 No 2,914.25 — Yes N/AYulin-Jinan natural gas pipeline project 3,300 No 3,300 Note 2 Yes Note 2Rizhao-Yizheng crude oil pipeline projects 2,100 No 2,100 Note 3 Yes Note 3Total 22,889.38 — 22,603.36 — — —Statements on the failure to achieve planned schedule Anqing Refinery Revamping project was originally expected to be put into operation in the end of 2012. Due toand expected returns the detailed design lagged behind the schedule, and the influence of rain and snow in the first half year of 2012on the construction site of civil works, it’s expected to be put into operation in the first half of 2013.Statements on the reasons and procedures of changes Not applicableNote 1: The issuance costs of RMB 110.62 million (including the commissions for underwriters and other costs for the intermediary agencies) were deducted.Note 2: The Company’s committed financial benefits are estimated after-tax financial internal rate of return. The business life of Yulin-Jinan natural gas pipeline projectis 20 years. This project has been put into operation since the first half of 2012, and the operating period is too short to determine whether this projectachieved the estimated after-tax financial internal rate of return as committed for the entire operating period of the project. The net cash flow generated duringcurrent period met the estimated net cash flow target as stated in the project budget.Note 3: The Company’s committed financial benefits are estimated after-tax internal rate of return. The business life of Rizhao-Yizheng crude oil pipeline project is20 years. This project was put into operation at the end of 2011, and the operating period is too short to determine whether this committed project achievedthe estimated after-tax financial internal rate of return as committed for the entire operating period of the project. The net cash flow generated during currentperiod did not meet the estimated net cash flow target as stated in the project budget.Continuous Supervision by SponsorGoldman Sachs Gao Hua Securities Company LimitedSuite 1807-1819, 18th Floor, Winland International Center, 7 Finance Street, Xicheng District, BeijingSponsor representatives: JIN Lei, ZHANG YiPlease refer to the 2012 Annual Continuous Supervision Report on China Petroleum & Chemical Corporation for the details of the opinion issuedby the sponsor.