SNP.L Regulatory News (SNP)

CONTENTS

This annual report includes forward-looking statements. All statements, other than statements of historical facts, that address activities, events or developments that the Company expects or anticipates will or may occur in the future (including but not limited to projections, targets, reserve and other estimates and business plans) are forward-looking statements. The Company's actual results or developments may differ materially from those indicated by these forward-looking statements as a result of various factors and uncertainties. The Company makes the forward-looking statements referred to herein as at 23 March 2018 and unless required by regulatory authorities, the Company undertakes no obligation to update these statements.

COMPANY PROFILE

IMPORTANT NOTICE: THE BOARD OF DIRECTORS, THE BOARD OF SUPERVISORS, DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT OF SINOPEC CORP. WARRANT THAT THERE ARE NO FALSE REPRESENTATIONS, MISLEADING STATEMENTS OR MATERIAL OMISSIONS IN THIS ANNUAL REPORT, AND JOINTLY AND SEVERALLY ACCEPT FULL RESPONSIBILITY FOR THE AUTHENTICITY, ACCURACY AND COMPLETENESS OF THE INFORMATION CONTAINED IN THIS ANNUAL REPORT. THERE IS NO OCCUPANCY OF NON-OPERATING FUNDS BY THE CONTROLLING SHAREHOLDERS OF SINOPEC CORP. MR. JIAO FANGZHENG AND MR. MA YONGSHENG, DIRECTORS, MR. FAN GANG, INDEPENDENT NON-EXECUTIVE DIRECTOR, DID NOT ATTEND THE SEVENTEENTH MEETING OF THE SIXTH SESSION OF THE BOARD DUE TO OFFICIAL DUTIES. MR. JIAO FANGZHENG AUTHORISED MR. DAI HOULIANG, VICE CHAIRMAN AND PRESIDENT, MR. MA YONGSHENG AUTHORISED MR. LI YUNPENG, DIRECTOR, AND MR. FAN GANG AUTHORISED MR. TANG MIN, INDEPENDENT NON-EXECUTIVE DIRECTOR, TO VOTE ON THEIR BEHALVES IN RESPECT OF THE RESOLUTIONS PUT FORWARD AT THE MEETING. MR. DAI HOULIANG, VICE CHAIRMAN AND PRESIDENT, MR. WANG DEHUA, CHIEF FINANCIAL OFFICER AND HEAD OF THE FINACIAL DEPARTMENT OF SINOPEC CORP. WARRANT THE AUTHENTICITY AND COMPLETENESS OF THE FINANCIAL STATEMENTS CONTAINED IN THIS ANNUAL REPORT. THE AUDIT COMMITTEE OF SINOPEC CORP. HAS REVIEWED THE ANNUAL RESULTS OF SINOPEC CORP. FOR THE YEAR ENDED 31 DECEMBER 2017.

THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017 OF THE COMPANY PREPARED IN ACCORDANCE WITH THE PRC ACCOUNTING STANDARDS FOR BUSINESS ENTERPRISES (ASBE) AND INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) HAVE BEEN AUDITED BY PRICEWATERHOUSECOOPERS ZHONG TIAN LLP AND PRICEWATERHOUSECOOPERS RESPECTIVELY. BOTH FIRMS HAVE ISSUED STANDARD UNQUALIFIED AUDITOR'S REPORT.

AS APPROVED BY THE 17TH MEETING OF THE SIXTH SESSION OF THE BOARD OF DIRECTORS OF SINOPEC CORP., THE BOARD PROPOSED A FINAL CASH DIVIDEND OF RMB 0.40 (TAX INCLUSIVE) PER SHARE FOR 2017, COMBINING WITH THE INTERIM CASH DIVIDEND OF RMB 0.10 (TAX INCLUSIVE) PER SHARE, THE TOTAL CASH DIVIDEND FOR 2017 WILL BE RMB 0.50 (TAX INCLUSIVE) PER SHARE. THE DIVIDEND PROPOSAL IS SUBJECT TO THE SHAREHOLDERS' APPROVAL AT THE ANNUAL GENERAL MEETING FOR THE YEAR 2017.

COMPANY PROFILE

Sinopec Corp. is one of the largest integrated energy and chemical companies in China. Its principal operations include the exploration and production, pipeline transportation and sale of petroleum and natural gas; the production, sale, storage and transportation of refinery products, petrochemical products, coal chemical products, synthetic fibre, and other chemical products; the import and export, including an import and export agency business, of petroleum, natural gas, petroleum products, petrochemical and chemical products, and other commodities and technologies; and research, development and application of technologies and information.

DEFINITIONS:

In this report, unless the context otherwise requires, the following terms shall have the meaning set out below:

Sinopec Corp.: China Petroleum & Chemical Corporation;

Company: Sinopec Corp. and its subsidiaries;

China Petrochemical Corporation: our controlling shareholder, China Petrochemical Corporation;

Sinopec group: China Petrochemical Corporation and its subsidiaries;

Shanghai SECCO: Shanghai SECCO Petrochemical Company Limited;

Sichuan-to-East China Pipeline Co.: Sinopec Sichuan-to-East China Natural Gas Pipeline Co., Ltd;

RMC: Oil and Natural Gas Reserves Management Committee of the Company;

CSRC: China Securities Regulatory Commission.

Hong Kong Stock Exchange: The Stock Exchange of Hong Kong Limited

Hong Kong Listing Rules: Listing Rules of the Hong Kong Stock Exchange

Conversion:

For domestic production of crude oil, 1 tonne = 7.1 barrels;

For overseas production of crude oil: 2017, 1 tonne = 7.21 barrels; 2016, 1 tonne = 7.20 barrels; 2015, 1 tonne = 7.21 barrels;

For production of natural gas, 1 cubic meter = 35.31 cubic feet;

Refinery throughput is converted at 1 tonne = 7.35 barrels.

PRINCIPAL FINANCIAL DATA AND INDICATORS

1 FINANCIAL DATA AND INDICATORS PREPARED IN ACCORDANCE WITH ASBE

(1) Principal financial data

(2) Principal financial indicators

(3) Extraordinary items and corresponding amounts

(4) Items measured by fair values

Unit: RMB million

(5) Significant changes of items in the financial statements

The table below sets forth reasons for those changes where the fluctuation was more than 30% during the reporting period:

2 FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH IFRS

Unit: RMB million

Unit: RMB million

3 MAJOR DIFFERENCES BETWEEN THE AUDITED FINANCIAL STATEMENTS PREPARED UNDER ASBE AND IFRS PLEASE REFER TO PAGE 206 OF THE REPORT.

CHANGES IN SHARE CAPITAL AND SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERS

1 CHANGES IN THE SHARE CAPITAL

There is no change on the number and nature of shares of Sinopec Corp. during the reporting period

2 NUMBER OF SHAREHOLDERS AND THEIR SHAREHOLDINGS

As of 31 December 2017, the total number of shareholders of Sinopec Corp. was 508,659 including 502,590 holders of domestic A shares and 6,069 holders of overseas H shares. As of 28 February 2018, the total number of shareholders of Sinopec Corp. was 496,137. Sinopec Corp. has complied with requirement for minimum public float under the Hong Kong Listing Rules.

(1) Shareholdings of top ten shareholders

The shareholdings of top ten shareholders as of 31 December 2017 are listed as below:

Unit: Share

Note 1: As compared with the number of shares held as of 31 December 2016.

Note 2: Sinopec Century Bright Capital Investment Limited, an overseas wholly-owned subsidiary of China Petrochemical Corporation, holds 553,150,000 H shares, accounting for 0.46% of the total issued share capital of Sinopec Crop. Those shareholdings are included in the total number of the shares held by HKSCC Nominees Limited.

Statement on the connected relationship or acting in concert among the above-mentioned shareholders:

We are not aware of any connected relationship or acting in concert among or between the above-mentioned shareholders.

(2) Information disclosed by the shareholders of H shares in accordance with the Securities and Futures Ordinance (SFO)

(L): Long position, (S): Short position

3 ISSUANCE AND LISTING OF SECURITIES

(1) Issuance of securities in reporting period

There is no issuance of shares of Sinopec Corp. during the reporting period

(2) Existing employee shares

As at the end of the reporting period, there were no employee shares.

4 CHANGES IN THE CONTROLLING SHAREHOLDERS AND THE DE FACTO CONTROLLER

There was no change in the controlling shareholder and the de facto controller of Sinopec Corp. during the reporting period.

(1) Controlling shareholder

The controlling shareholder of Sinopec Corp. is China Petrochemical Corporation. Established in July 1998, China Petrochemical Corporation is a state-authorised investment organisation and a state-owned enterprise. The legal representative is Mr. Wang Yupu. Through re-organisation in 2000, China Petrochemical Corporation injected its principal petroleum and petrochemical businesses into Sinopec Corp. and retained certain petrochemical facilities. It provides well-drilling services, well-logging services, downhole operation services, services in connection with manufacturing and maintenance of production equipment, engineering construction, utility services including water and power and social services.

Shares of other listed companies directly held by China Petrochemical Corporation

(2) Other than HKSCC Nominees Limited, there was no other legal person shareholder holding 10% or more of the total issued share capital of Sinopec Corp.

(3) Basic information of the de facto controller

China Petrochemical Corporation is the de facto controller of Sinopec Corp.

(4) Diagram of the equity and controlling relationship between Sinopec Corp. and its de facto controller

http://www.rns-pdf.londonstockexchange.com/rns/8737I_-2018-3-26.pdf

*: Inclusive of 553,150,000 H shares held by Sinopec Century Bright Capital Investment Ltd. (overseas wholly-owned subsidiary of China Petrochemical Corporation) through HKSCC Nominees Limited.

Board's Statement

Dear Shareholders and Friends:

On behalf of the Board of Directors, I would like to express my sincere gratitude to our shareholders and the wider community for their interest and support.

In 2017, international oil prices fluctuated and showed upward movement in the midst of a complex and changeable global political and economic environment. Domestic demand for natural gas and chemicals remained robust as the Chinese economy maintained its steady growth. Competition in the domestic refined oil market was fierce. As it made major decisions, the Board of Directors (the "Board") focused on steady and firm improvement, and adhered to its overarching strategies of promoting value-oriented growth, innovation-driven development, integrated resource allocation, openness to cooperation, and green and low-carbon development. With an emphasis on delivering returns to shareholders, we continued to focus on supply-side structural reform and stepped up our efforts to enhance the Company's efficiency, profitability and corporate governance.

Over the past year, under the leadership of our management, the entire staff focused on optimisation, cost reduction, market expansion, structural adjustment, reform, foundation building, and risk management. As a result, our operating results were better than expected, and we met all performance targets for the year. In our upstream business, we emphasized high-efficiency exploration activities and cost-effective development. Our crude oil reserve replacement ratio reached 116%. At the same time, we worked hard to ensure a stable gas supply for the winter season, with gas production and sales volume hitting record highs. Taking advantage of our integrated value chain, which extends from refining to marketing and distribution, we actively responded to competitive market conditions. We achieved satisfactory results and further strengthened our competitive advantage. In our chemical operations, we adopted a customer-focused approach and enhanced the adjustments in our product and feedstock mix. Both the sales volume and profitability of the chemicals segment reached record highs.

In accordance with IFRS, the Company's turnover and other operating revenues reached RMB 2.36 trillion in 2017, up by 22.2% from the previous year. Profit attributable to equity shareholders of the Company was RMB 51.244 billion. Basic earnings per share were RMB 0.423, up by 9.9% from year on year. Taking into account the Company's profitability, cash position, shareholder return and future business development, the Board proposed a final dividend of RMB 0.40 per share, which combined with the interim dividend of RMB 0.10 per share, brought the full-year dividend to RMB 0.50 per share, up by 100.8% from the previous year.

During the three years of the sixth session of the Board, the global economy recovered slowly, and China's economy entered a "new normal" phase. International oil prices fluctuated at low levels, with heavy repercussions for the upstream sector. At the same time, competition in the refined oil market intensified, with the government introducing a series of far-reaching policies in the oil and petrochemical industries. In the face of a complex and challenging operating environment, the Board emphasised on its principles of innovation, coordination, green development, openness and shared growth. We formulated our five major development strategies, 13th Five-Year Development Plan and Three-Year Rolling Development Program, taking advantage of our integrated value chain to accelerate the Company's transformation and structural adjustments, eventually we achieved excellent operating performance. At the same time, we made outstanding progress in our corporate governance, corporate development, reforms and adjustments, and technological innovation, as well as in the fulfillment of our social responsibilities.

Over the past three years, we consistently enhanced the composition and operation of the Board and the Supervisory Committee. The effort of confirming the role of the Chinese Communist Party in the Company's corporate governance facilitated a better corporate governance mechanism featuring scientific decision-making and effective implementation and supervision.

We focused on improving product quality, enhancing our efficiency and upgrading our businesses, thus driving the Company's sustainable development. In our upstream business, we implemented a low-cost strategy to address the challenge of low oil prices, focused on high-efficiency exploration and development, and enlarged our proved reserves to lay a stronger foundation for sustainable development. We also developed our natural gas business as a new driver for profit growth. We built up the production capacity of the Fuling shale gas field to 10 billion cubic meters per year, laying a solid resource foundation for promoting natural gas consumption in the Yangtze River Economic Belt. Moreover, we made continuous efforts to drive development of four world-class regional refining centers, sharpening our competitive edge. We took a market-driven approach to our refining and chemicals operations, vigorously promoting structural adjustments and increasing the production of high-value-added products to develop these businesses into our profit growth drivers. We actively coped with market competition, leading to steady growth in the sales volume of our refined oil products and the sustained rapid development of our non-fuel operations. We achieved record-breaking performance in various key operating indicators of the chemicals segment. As we continued to deepen our reform programs, the Company brought in new investors for the Sichuan-to-East China Pipeline Co., and introduced RMB 22.8 billion. The mixed-ownership reform of Sinopec Marketing Company went smoothly, and we successfully introduced a flattened organisation structure in upstream enterprises. With an emphasis on innovation, we enhanced our mechanisms for commecializing scientific and technological achievements and focused on the development of core technologies in our key businesses. Technological innovations have become a pillar of our development. The Company won eight National Technology Invention Awards and five National Science and Technology Progress Awards, remaining a leading domestic company in the number of invention patents granted. Moreover, we capitalised on the opportunities created by the Belt and Road Initiative by investing in refining and chemical projects, and increasing our trade volumes.

We actively fulfilled our social responsibilities, and green and low-carbon development strategy. We successfully concluded the Clear Water, Blue Sky environmental project while smoothly implemented the Efficiency Doubling Plan. Our major pollutant emissions were lower than government criterias. Meanwhile, we made further achievements in our partnership assistance and targeted poverty alleviation programs. For the period of 2016 through 2017, we donated an aggregate amount of RMB 284 million to these causes. The Company actively participated in social and philanthropic activities. The Lifeline Express hospital train has provided free cataract surgeries for more than 40,000 impoverished people and is widely acclaimed throughout the country.

Over the past three years, the Company's turnover and total assets have grown steadily. Our businesses have expanded rapidly, and our overall performance has continued to improve. In accordance with IFRS, the Company's total assets increased by 9.9% and our shareholders' equity increased by 22.4% compared with 2014. In addition, we delivered good returns to our shareholders, with total dividends declared for the three-year period amounting to RMB 108.8 billion.

These achievements are the product of the joint efforts of the Board, the management and the entire staff, reflecting their hard work and their determination to reform. The support of our shareholders and the wider community has also been indispensable. In accordance with regulatory requirements, the terms of office of the current Board of Directors and the Supervisory Committee will soon expire. Mr. Jiang Xiaoming and Mr. Andrew Y. Yan will step down as directors. They have demonstrated dedication and diligence throughout their terms of office and have made outstanding contribution to the Company's decision-making, standardised operations, reforms and development. On behalf of the Board, I would also like to express my heartfelt gratitude to all independent directors and supervisors for their hard work and contribution.

In 2018, the global economy will continue to recover. While China's economic development model will shift from high-speed growth to high-quality development, domestic demand for oil and chemical products will remain robust. This year is an important link between the preceding and the following for carrying out the Company's 13th Five-year Development Plan. In view of the new requirements in the new era, the Company will adhere to an underlying principle of progressing at a steady pace and under a new development model that makes quality and efficiency our top priorities. We will deepen supply-side structural reforms and enhance our corporate governance with China's characteristics. We will also strive diligently to improve our production and operational standards, reinforce our management and ensure the Company's sustainable development.

In our upstream operations, we will pursue opportunities for high-efficiency exploration and cost-effective development, maintain the stability of our oil output, increase our gas supplies and reduce costs. At the same time, we will optimize our resource structure and drive the rapid development of the natural-gas business. In the refining, we will further optimize structure and implement a lean management model, optimise refining layout, and increase concentration ratio. We will continue to revamp our refining projects and upgrade our refined oil products. In the oil products marketing business, we will coordinate efforts to enhance market development and efficiency and expand our domestic and overseas businesses. In addition, we will strengthen our network and logistics system, accelerate the development of our non-fuel operations, and intensify efforts to boost our sales volume and profitability. In the chemicals business, we will improve quality and profitability and focus on transformation and development. We emphasise on the high end of our value chain, with more attention on the development of fine chemicals, bio-chemicals and new materials. In 2018, the capital expenditure of the Company will be RMB 117 billion.

Looking ahead, the petroleum and chemical sectors are set to undergo significant and profound transformation. China's economy will see remarkable progress in its move towards high-quality development. Both opportunities and challenges lie ahead of us. It is our mission to build Sinopec Corp. into a world-class energy and chemical company and to drive its sustainable growth. We will adjust to overall market trends, adapt as our development warrants, and optimize our strategies and planning. In addition, we will adhere to our corporate strategy of reform, management, innovation and development, stressing the importance of quality development in our core businesses and accelerating the development of new businesses. We will strengthen efforts to make reforms that improve the Company's quality, efficiency and dynamism, and that enable sustainable and high-quality development.

The Board has nominated an exceptional group of new members to join it. They include outstanding managers and leading experts in the academic, macro-economic, corporate management and petrochemical fields. Drawing on their far-ranging professional backgrounds and extensive work experience, they will share their insights with and add vitality to the Board, thus enhancing the Board's decision-making capabilities. The new session of the Board will help the Company keep pace with overall market trends through their comprehensive view of our businesses and their pragmatic approach to market developments. We will redouble our efforts to develop Sinopec Corp. into a world-class energy and chemical company and to build a better community, delivering superior operating results to our shareholders and giving back to society and our employees.

Dai Houliang

Vice Chairman & President

Beijing, China

23 March 2018

Business Review and Prospects

BUSINESS REVIEW

In 2017, global economy recovered gradually, while China maintained stable and favourable economic growth with gross domestic product (GDP) up by 6.9%. International oil prices fluctuated and climbed from the low level, and domestic natural gas demand increased rapidly. With fast development of independent refineries, domestic oil products market witnessed strong competition. Demand for chemicals grew steadily, and China's environmental regulations became more stringent. The Company actively addressed market changes through a focus on the improvement of assets quality and profitability, as well as operation upgrades. We pressed ahead with measures for specialised business development, market-oriented operation and overall coordination. Following the supply-side structural reform, we focused on optimisation, cost reduction, market expansion, structural adjustment, reform promotion, foundation building and risk management, coordinating all aspects of our work, which helped deliver solid operating results.

http://www.rns-pdf.londonstockexchange.com/rns/8737I_1-2018-3-26.pdf

1 MARKET REVIEW

(1) Crude Oil & Natural Gas Market

In 2017, international crude oil prices fluctuated at low level among the first three quarters, and rapidly went up in the 4th quarter. The average spot price of Platt's Brent for the year was USD 54.19 per barrel, up by 23.9% from the previous year. Along with the adjustments of China's energy structure, domestic demand for natural gas became robust. Domestic apparent consumption of natural gas reached 237.3 billion cubic meters, up by 15.3% year on year.

(2) Refined Oil Products Market

In 2017, domestic demand for refined oil products maintained its growth while market supply was in surplus. According to the statistics, apparent consumption of refined oil products (including gasoline, diesel and kerosene) was 306 million tonnes, up by 6.6% from the previous year, with gasoline up by 10.1% and kerosene up by 11.7%, and diesel made a turnaround, up by 2.9%. Prices for domestic refined oil products were adjusted in line with international oil prices trend. In 2017, the government made 17 times of price adjustments with 11 increases and 6 decreases.

(3) Chemical Products Market

In 2017, domestic demand for chemicals grew fast. According to our statistics, domestic consumption of ethylene equivalent was up by 11.3% from the previous year, and the apparent consumption of synthetic resin, synthetic fibre and synthetic rubber rose by 8.6%, 5.0% and 6.4%, respectively. Domestic average chemical product prices increased compared with the previous year, in line with movements of international chemical product prices.

2 PRODUCTION & OPERATIONS REVIEW

(1) Exploration and Production

In 2017, faced with low oil prices, we constantly strengthened measures to increase proved reserves and rein in development costs, which helped achieving better results. We gave priority to high-efficiency exploration activities and made new discoveries in the Xinjiang Tahe Basin and the Sichuan Basin. The Company's newly added proved reserve reached 462.73 million barrels of oil equivalent, with crude oil reserve replacement ratio reaching 116.0%. In crude oil development, we constantly adopted a profit-oriented approach, deepened structural adjustment, focused on cost control, reduced natural decline rate and ensured steady production. In natural gas development, we actively pushed forward capacity building in Hangjinqi of Nei Mongol and Dongpo of west Sichuan, and completed 10 bcm(billion cubic meter) per year shale gas capacity building in Fuling. The Company's production of oil and gas was 448.79 million barrels of oil equivalent, with domestic crude production down by 3.2% from the previous year and natural gas production up by 19.1%.

Summary of Operations for the Exploration and Production Segment

Summary of Reserves of Crude Oil and Natural Gas

Exploration and Production Activities

Unit: Square kilometers

(2) Refining

In 2017, with the market-oriented approach, we optimised product mix to produce more gasoline and jet fuel, and the production volume of high-value-added products have been further increased, with the diesel-to-gasoline ratio further declined to 1.17. The Company actively promoted refined oil products quality upgrading, the GB V standard diesel quality upgrading completed, and advanced the refined oil products quality upgrading of GB VI standard. We adapted to market changes by taking full advantages of our integrated business, and moderately increasing export volume of refined oil products. We comprehensively optimised our production plans to ensure safe and reliable operations. The advantages of centralised marketing took full play, and profitability of LPG, asphalt and other products were further improved. In 2017, the Company processed 239 million tonnes of crude, up by 1.3% from the previous year, and produced 151 million tonnes of refined oil products, with gasoline up by 1.2% and kerosene up by 5.5% from the previous year.

Summary of Operations for the Refining Segment Unit: million tonnes

Note: Includes 100% of the production of domestic joint ventures.

(3) Marketing and Distribution

In 2017, confronted with stronger competition, the Company brought our advantages in integrated business and distribution network into full play, optimised internal and external resources, intensified market efforts and achieved sustained growth in both total sales volume and retail scale. We innovated operational models, optimised layout of service stations, and expedited revamping of storage and transportation facilities of refined oil products to further improve our distribution network. In addition, we proactively promoted and cultivated vehicle natural gas business. In 2017, the total sales volume of oil products was 199 million tonnes, of which domestic sales accounted for 178 million tonnes, up by 2.9% year on year. We strengthened self-owned brand development and marketing, and non-fuel business maintained its rapid growth with increased scale and profits.

Summary of Operations for the Marketing and Distribution Segment

(4) Chemicals

In 2017, the Company continued the "basic and high-end" chemical business development concept to promote effective supply. We fine-tuned chemical feedstock mix to lower costs, optimised product mix and increased high-value-added products production based on the customer demand. We optimised production and operation based on market conditions and intensified dynamic modelling and monitoring of profit to increase profitability. Ethylene output was 11.61 million tonnes, up by 5.0% from the previous year. The Company intensified its efforts to enhance research and development, production, marketing and sales of new high-value-added products. Our differential ratio of synthetic fibre reached 89.0% and the specialty and new products as a percentage of synthetic resin reached 63%. By fully exerting our network advantage, implementing precision marketing and further expanding the market, our full-year chemical sales volume increased by 12.2% from the previous year to 78.5 million tonnes, marking a historic record.

Summary of Operations for the Chemicals Segment Unit: thousand tonnes

Note: Includes 100% of the production of domestic joint ventures.

(5) Research and Development

In 2017, the Company pushed ahead with its innovation-driven strategy, deepened reform of R&D mechanism, and accomplished notable results driven by R&D progresses. In upstream business, further breakthroughs in geological evaluation and exploration technologies of deep carbonate and deep shale gas reservoirs underpinned the growing resources base of Shunbei oilfield and south Sichuan as well as discoveries of new formations in Sichuan Basin. We improved development technologies for Tahe fractured-vuggy carbonate reservoir, bringing down the natural decline rate. In refining, our demonstration unit of fluidised bed residue hydro-treating achieved long-cycle operation at its full capacity, and we completed the industrial test of super solid-acid C5 and C6 isomerisation technology. In chemicals, the syngas to ethylene glycol demonstration unit ran smoothly, and we accomplished commercial production of low-volatility polypropylene for automobile use and high-transparency & low-extraction polypropylene. Our on-line trading platform developed rapidly, as a result of the integration of IT application and industrialisation. In 2017, the Company filed 5,876 patent applications at home and abroad, 3,640 patents granted. The Company also won two first prizes and one second prize in the National Scientific and Technological Progress Awards, two second prizes in the National Technology and Innovation Awards, and eight excellent patent awards in China's Patent Award competition.

(6) Health, Safety and the Environment

In 2017, the Company pressed ahead the formation of a long-term safe production scheme, strengthened safety measures at basic levels to control risks and remove potential hazards in all aspects. We promoted on-site safety supervision and management to continuously improve our safety management level. The Company actively implemented its green and low-carbon strategy to integrate energy conservation, emissions cutting and carbon reduction. We comprehensively strengthened environmental risk and air pollution control, steadily pushed forward our "Efficiency Doubling Plan", continuously consolidated our carbon asset management, and accomplished all emissions reduction targets. For more detailed information, please refer to our Communication on Progress for Sustainable Development.

(7) Capital Expenditures

In 2017, focusing on quality and profitability of investment, the Company continuously optimised its investment projects. Total capital expenditures were RMB 99.384 billion. Capital expenditures for the exploration and production segment were RMB 31.344 billion, mainly for Fuling shale gas and Hangjinqi natural gas field development projects, Shengli and Northwest crude development projects, LNG terminals in Tianjin, Wen-23 gas storage and phase I of Xinjiang gas pipeline, as well as overseas projects. Capital expenditures for the refining segment were RMB 21.075 billion, mainly for Zhongke Refining and Petrochemical project, adjustments in the product mix of Zhenhai and Maoming refineries, and gasoline and diesel GB VI quality upgrading projects. Capital expenditures for the marketing and distribution segment were RMB 21.539 billion, mainly for construction of service stations and refined oil product pipelines, depots and storage facilities. Capital expenditures for the chemicals segment were RMB 23.028 billion, mainly for Zhongke Refining and Petrochemical project, phase II of Hainan high-efficiency and environment-friendly aromatics project, Gulei and Zhong'an projects, acquisition of interest in Shanghai SECCO, as well as projects regarding resource comprehensive utilisation and product structure adjustments. Capital expenditures for the corporate and others segment were RMB 2.398 billion, mainly for R&D facilities and information technology application projects.

BUSINESS PROSPECTS

(1) Market Outlook

Looking ahead to 2018, we expect world economy continuing to recover, and China's economy would maintain steady growth. Meanwhile, the constant stream of reform measures by Chinese government to revitalise its substantial economy, the further development of the Belt and Road Initiative, the synergic development of Beijing-Tianjin-Hebei and the growth along Yangtze River Economic Belt will bring up demand for refined oil products and petrochemicals. Natural gas as clean energy will see rapid growth with structural adjustment of domestic energy mix. International oil price in 2018 is expected to maintain its stabilising momentum.

(2) Operations

In 2018, the Company will persist with our objective of progressing at a steady pace to continually focus on growth stabilisation, adhere to the principle of quality first and profitability prioritised. The Company will deepen the supply-side structural reform as main direction to further implement the operation objectives of reform, management, innovation and development, to fully improve operational performance. We will undertake the following work during the year:

Exploration and Production: We will maintain high-efficiency exploration and profitable production activities to continually increase proved reserve and expand resource base. In oil development, we will enhance refined reservoir characterisation, deepen the structural adjustments of mature fields, control natural decline rate, lower operational cost and improve economic recovery rate. In natural gas development, we will keep advancing key projects for capacity construction, optimise production and marketing operations, and promote the coordinated development along the value chain. In 2018, we plan to produce 290 million barrels of crude oil, of which overseas production will account for 41 million barrels. We plan to produce 974.1 billion cubic feet of natural gas.

Refining: We will comprehensively optimise our production plans along with market changes to consolidate the competitive advantage of refining business. We will continue to adjust our product structure by further lowering the diesel-to-gasoline ratio and increasing the production of naphtha and jet fuel. The quality upgrading of GB VI standard refined oil products will complete on time with strengthened coordination. We will fine-tune crude oil procurement and resource allocation to reduce procurement cost. We will optimise our marketing mechanism to enlarge the trading volume of other refined oil products. In 2018, we plan to process 239 million tonnes of crude and produce 152 million tonnes of refined oil products.

Marketing and Distribution: We will intensify our marketing strategy of balancing profits and volume by optimising resources allocation and operational efficiency. We will put effort to expand markets and our business scale. We will further improve our marketing network to reinforce existing advantages. We will accelerate the construction of oil products export infrastructure and amplify the profitability of overseas oil products marketing. We will deepen the integration of fuel and non-fuel business, so to create a new mode of coordinating oil products retailing, non-fuel products marketing and third-party vendors cooperation, and thus step up the growth of non-fuel business. In 2018, we plan to sell 179 million tonnes of oil products in the domestic market.

Chemicals: We will further optimise feedstock mix and product slate. The constant feedstock optimisation would further lower feedstock costs. We will put more efforts on optimising product mix, enhancing the dynamic evaluation and monitoring of profitability of facilities and product chains, increasing more popular and profitable products production and advancing the R&D, production and sales of high-end chemicals. We will step up research on the industrial chain and optimise the rapid response mechanism combining production, marketing and research. Internal and external resources will be fully tapped to actively expand sales volume and market share. Meanwhile, refined marketing and tailor-made services will be adopted to provide our customers with full process solutions and value-added services. In 2018, we plan to produce 11.6 million tonnes of ethylene.

Research and Development: We will continue to deeply implement our strategy of development driven by innovation and reform of mechanisms for technological innovation. We will accelerate key technical breakthroughs, reinforce research on leading technologies, and step up the commercial application of technological achievements to highlight the prominent role of technologies. In key technical breakthroughs, focus will be given to new discoveries of oil and gas resources, low-cost development of oil and gas resources, high-efficiency conversion of heavy crude, refined oil products quality upgrading, cost reduction and efficiency enhancement of chemical business, new products development of high-value-added materials, energy conservation and environmental protection. In leading technologies, priorities lie in the basic and prospective research of ultra-deep and deepwater oil and gas exploration and production, molecular-level intelligent refining and new energies. In innovative development, the Company plans to establish a joint R&D centre for cutting-edge technologies to facilitate the innovation from basic research to commercialisation. Meanwhile, the integration of information technologies and industrialisation will carry on by further enhancing integration of information systems and the application of intelligent pipeline management systems.

Capital Expenditures: In 2018, we will devote attention to the quality and profitability of investments, and constantly optimise our investment projects. Capital expenditures for the year are budgeted at RMB 117 billion. The exploration and production segment will account for expenditures of RMB 48.5 billion, mainly for the shale gas development in southwest China, the natural gas project in north China and crude capacity building in northwest China, as well as natural gas pipelines and storage projects, and overseas oil and gas projects. The refining segment will account for RMB 28.8 billion, mainly for Zhongke Refining and Petrochemical Project, the structural adjustments of refining business in Zhenhai, Maoming and Tianjin subsidiaries, and the quality upgrading of GB VI standard gasoline and diesel. The marketing and distribution segment will account for RMB 18.5 billion, mainly for construction of depots and storage facilities, pipelines and service stations. The chemicals segment will account for RMB 17.7 billion, mainly for Zhongke Refining and Petrochemical Project, the high-efficiency and phase II of Hainan high-efficiency and environmental-friendly aromatics project, the integrated refining and petrochemical project in Gulei and the resource utilisation and structural adjustment projects in Zhenhai, Yangzi, Jinling, Maoming and Wuhan subsidiaries. The corporate and others segment will account for RMB 3.5 billion, mainly for R&D facilities and information technology projects.

MANAGEMENT'S DISCUSSION AND ANALYSIS

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S AUDITED FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES. PARTS OF THE FOLLOWING FINANCIAL DATA WERE ABSTRACTED FROM THE COMPANY'S AUDITED FINANCIAL STATEMENTS THAT HAVE BEEN PREPARED ACCORDING TO THE IFRS, UNLESS OTHERWISE STATED. THE PRICES IN THE FOLLOWING DISCUSSION DO NOT INCLUDE VALUE-ADDED TAX.

1 CONSOLIDATED RESULTS OF OPERATIONS

In 2017, the Company's turnover and other operating revenues were RMB 2,360.2 billion, increased by 22.2% compared with that of 2016. The profit before taxation was RMB 86.7 billion, representing a year on year increase of 8.2%.

The following table sets forth the main revenue and expenses from the Company's consolidated financial statements:

(1) Turnover and other operating revenues

In 2017, the Company's turnover was RMB 2,300.5 billion, representing an increase of 22.4% over 2016. This was mainly attributed to the increase in crude oil prices. Meanwhile, major petroleum and petrochemical products prices and sales volume also increased as a result of the Company's efforts in seizing opportunities to expand the market and sales volume.

The following table sets forth the external sales volume, average realised prices and respective rates of change of the Company's major products in 2017 and 2016:

Most crude oil and a small portion of natural gas produced by the Company were internally used for refining and chemical production, with the remaining sold to external customers. In 2017, the turnover from crude oil, natural gas and other upstream products sold externally amounted to RMB 69.2 billion, an increase of 45.8% over 2016. The change was mainly due to the increase in crude oil prices and sales volume of natural gas in 2017.

In 2017, petroleum products (mainly consisting of refined oil products and other refined petroleum products) sold by Refining Segment and Marketing and Distribution Segment achieved external sales revenues of RMB 1,324.4 billion, accounting for 56.1% of the Company's turnover and other operating revenues, representing an increase of 17.2% over 2016, mainly due to the increase in various refined oil products' prices. The sales revenue of gasoline, diesel and kerosene was RMB 1120.4 billion, representing an increase of 14.8% over 2016, and accounting for 84.6% of the total sales revenue of petroleum products. Turnover of other refined petroleum products was RMB 204.0 billion, representing an increase of 31.8% compared with 2016, accounting for 15.4% of the total sales revenue of petroleum products.

Chemical products sold by Chemicals Segment achieved external sales revenue of RMB 373.8 billion, representing an increase of 31.5% over 2016, accounting for 15.8% of the Company's total turnover and other operating revenues. This was mainly due to the increase in price and sales volume of chemical products.

(2) Operating expenses

In 2017, the Company's operating expenses were RMB 2,288.7 billion, increased by 23.5% compared with 2016, and it is mainly due to the increase in prices of crude oil and other related petroleum and chemical products. The operating expenses mainly consisted of the following:

Purchased crude oil, products and operating supplies and expenses were RMB 1,770.7 billion, representing an increase of 28.3% over the same period of 2016, accounting for 77.4% of the total operating expenses, of which:

Crude oil purchasing expenses were RMB 497.1 billion, representing an increase of 33.0% over the same period of 2016. Throughput of crude oil purchased externally in 2017 was 211.03 million tonnes (excluding the volume processed for third parties), representing an increase of 4.3% over the same period of 2016. The average cost of crude oil purchased externally was RMB 2,655 per tonne, representing an increase by 27.4% over 2016.

The Company's purchasing expenses of refined oil products were RMB 300.5 billion, representing an increase of 23.3% over the same period of 2016. This was mainly due to the increase in prices of externally purchased refined oil products, which were in line with the increase in prices of crude oil.

The Company's purchasing expense related to trading activities were RMB 503.9 billion, representing an increase of 27.7% over the same period of 2016. This was mainly due to the increase in prices of externally purchased crude oil and refined oil products in the trading business.

The Company's other purchasing expenses were RMB 469.2 billion, representing an increase of 27.6% over the same period of 2016. This was mainly due to the increase in prices of externally purchased oil related products in line with the increase in prices of crude oil.

Selling, general and administrative expenses were RMB 65.0 billion, representing an increase of 1.0% over 2016.

Depreciation, depletion and amortisation were RMB 115.3 billion, representing an increase of RMB 6.9 billion and 6.4% as compared with 2016. That was mainly due to the depreciation, depletion and amortisation of the Exploration & Development Segment, which increased by RMB 4.9 billion over 2016.

Exploration expenses were RMB 11.1 billion, representing an increase of 0.5% year on year.

Personnel expenses were RMB 74.9 billion, representing an increase of 17.2% over 2016. That was mainly because the Company promoted the reform of employment system, transferred some labours into contracted employees, which increased salary and other expenses. To implement the requirement of deepening the reform as required by the Central government, the Company handed over parts of its subsidiaries' social insurance to local government, and paid relevant fees according to the local government's requirements. As the Company improved its profit in 2017, income of employee was increased accordingly in line with its incentive mechanism.

Taxes other than income tax were RMB 235.3 billion, representing an increase of 1.4% compared with 2016.

Other operating (expense)/income, net were RMB 16.6 billion, increased by RMB 22.2 billion over the same period of 2016. That was mainly due to the non-operating income from capital injection of Sichuan-to-East China Pipeline Co.

(3) Operating profit was RMB 71.5 billion, representing a decrease of 7.4% compared with 2016. After eliminating the impact of capital injection of Sichuan-to-East China Pipeline Co. in 2016 and acquisition of interest in Shanghai SECCO in 2017, operating profit increased by 19.2% year on year.

(4) Net finance costs were RMB 1.6 billion, representing a decrease of 76.4% over 2016, of which: interest expense decreased by RMB 2.1 billion over 2016 as a result of significant reduction in interest bearing debt; net income from foreign exchange was RMB 0.3 billion, increased by RMB 0.9 billion as compared with 2016; interest income increased by RMB 2.0 billion as a result of increased cash reserve as compared with the same period of 2016.

(5) Profit before taxation was RMB 86.7 billion, after eliminating the impact of capital injection of the Sichuan-to-East China Pipeline Co. in 2016 and acquisition of interest in Shanghai SECCO in 2017, it represents an increase of 38.9% compared with 2016.

(6) Tax expense was RMB 16.3 billion, representing a decrease of 21.4% year on year. That was mainly due to the increase in exempt investment income.

(7) Profit attributable to non-controlling interests was RMB 19.2 billion, representing an increase of RMB 6.4 billion compared with 2016.

(8) Profit attributable to owners of the Company was RMB 51.2 billion, representing an increase of 9.8% year on year.

2 RESULTS OF SEGMENT OPERATIONS

The Company manages its operations through four business segments, namely exploration and production segment, refining segment, marketing and distribution segment and chemicals segment, and corporate and others. Unless otherwise specified, the inter-segment transactions have not been eliminated from financial data discussed in this section. In addition, the operating revenue data of each segment include other operating revenues.

The following table shows the operating revenues by each segment, the contribution of external sales and inter-segment sales as a percentage of operating revenues before elimination of inter-segment sales, and the contribution of external sales as a percentage of consolidated operating revenues (i.e. after elimination of inter-segment sales) for the periods indicated.

*: Other operating revenues are included.

The following table sets forth the operating revenues, operating expenses and operating profit by each segment before elimination of the inter-segment transactions for the periods indicated, and the percentage change of 2017 compared to 2016.

(1) Exploration and Production Segment

Most crude oil and a small portion of the natural gas produced by the exploration and production segment were used for the Company's refining and chemical production. Most of the natural gas and a small portion of crude oil were sold externally to other customers.

In 2017, the operating revenues of this segment were RMB 157.5 billion, representing an increase of 35.9% over 2016. This was mainly attributed to the rise of realised price of crude oil and natural gas as well as expansion of LNG business.

In 2017, the segment sold 35.31 million tonnes of crude oil, representing a decrease of 2.9% over 2016. Natural gas sales volume was 24.48 bcm, representing an increase of 19.1% over 2016. Regased LNG sales volume was 4.82 bcm, representing an increase of 118.9% over 2016. LNG sales volume was 2.283 million tonnes, representing an increase of 43.7% over 2016. Average realised prices of crude oil, natural gas, regased LNG, and LNG were RMB 2,341 per tonne, RMB 1,296 per thousand cubic meters, RMB 1,742 per thousand cubic meters, and RMB 3,056 per tonne, representing increase of 35.0%, 2.3%, 2.0%, and 24.0% respectively over 2016.

In 2017, the operating expenses of this segment were RMB 203.4 billion, representing an increase of 33.3% over 2016. That was mainly due to the following:

‧ Depreciation, depletion and amortisation increased by RMB 4.9 billion year on year;

‧ Impairment loss increased by RMB 2.0 billion year on year;

‧ Personnel expenses increased by 1.7 billion year on year;

‧ Resource Tax increased by RMB 1.0 billion year on year, as a result of increase in crude oil price;

‧ Procurement cost increased by RMB 15.1 billion year on year, as a result of expansion of LNG business;