China BlueChemical Ltd. - Proxy Solicitation & Information Statement 2008

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in China BlueChemical Ltd. (the ‘‘Company’’), you should at once hand this circular and the accompanying form of proxy to the purchaser(s) or the transferee(s) or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or the transferee(s).

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

This circular is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for any shares.

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(a joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 3983)

CONTINUING CONNECTED TRANSACTIONS

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

CIMB-GK Securities (HK) Limited

A letter from the board of directors of the Company is set out on pages 4 to 25 of this circular. A letter from the Independent Board Committee (as defined in this circular) containing its recommendation in respect of certain aspects of the continuing connected transactions is set out on page 26 of this circular. A letter from the Independent Financial Adviser (as defined in this circular) containing its advice to the Independent Board Committee and the Independent Shareholders in respect of certain aspects of the continuing connected transactions is set out on pages 27 to 44 of this circular.

A notice convening the extraordinary general meeting of the Company (the ‘‘Extraordinary General Meeting’’) to be held at Conference Room, 3rd Floor, CNOOC Office Building B, No. 98 Guanhai Road, Longhua District, Haikou, Hainan Province, the People’s Republic of China, at 10 a.m. on Tuesday, 30 December 2008 is set out at the end of this circular. There is a form of proxy for use at the Extraordinary General Meeting (or any adjournment thereof) accompanying to this circular. Whether or not you are able to attend the Extraordinary General Meeting, you are strongly urged to complete and sign the enclosed proxy form, in accordance with the instructions printed thereon, and to lodge them with the Office of the Secretary to the Board of Directors of the Company in the PRC (for holders of domestic shares or unlisted foreign shares) at No. 98 Guanhai Road, Longhua District, Haikou, Hainan Province, the People’s Republic of China or the Company’s H Share Registrar, Computershare Hong Kong Investor Services Limited (for holders of H shares), at 46th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, as soon as possible but in any event not later than 24 hours before the time fixed for the holding the Extraordinary General Meeting (or any adjournment thereof). Completion and return of the proxy form will not preclude you from attending and voting in person at the Extraordinary General Meeting (or any adjournment thereof) if you so wish.

For identification purpose only

14 November 2008

	Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . .	26
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER . . . . . . . . . . . . . . . . . .	27
APPENDIX I — GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	45
NOTICE OF THE EXTRAORDINARY GENERAL MEETING . . . . . . . . . . . . . . . . . . .	52

– i –

DEFINITIONS

In this circular, unless the context otherwise requires, the following expressions have the following meanings:

‘‘Associate(s)’’ has the meaning ascribed to it under the Listing Rules
‘‘Board’’ the board of Directors
‘‘CNOOC’’ 中國海洋石油總公司 (China National Offshore Oil Corporation*), a state-owned company established in China which is also the controlling shareholder of the Company holding approximately 59.41% of all of the shares of the Company in issue as at the date of this circular
‘‘CNOOC Finance’’ 中海石油財務有限責任公司 (CNOOC Finance Corporation Limited*), a company established in China which is a subsidiary of CNOOC
‘‘CNOOC Group’’ CNOOC and its Associates presented as a group, excluding the Group, CNOOC Limited (which is listed on the Stock Exchange) and COSL (which is listed on the Stock Exchange and on the Shanghai Stock Exchange) and Offshore Oil Engineering Co., Ltd. (which is listed on the Shanghai Stock Exchange)
‘‘CNOOC Jiantao’’
中海石油建滔化工有限公司 (CNOOC Kingboard Chemical Limited*), the equity interest of which is owned as to 60% by the Company and 40% by Hong Kong Kingboard
‘‘CNOOC Jiantao Methanol Plant’’
the Group’s existing methanol plant in Hainan Province of the PRC constructed through CNOOC Jiantao
‘‘CNOOC Limited’’ CNOOC Limited (中國海洋石油有限公司), a company listed on the Stock Exchange and the New York Stock Exchange and a subsidiary of CNOOC, and, except where the context otherwise requires, its subsidiaries
‘‘Company’’
中海石油化學股份有限公司 (China BlueChemical Ltd.*), a company incorporated in the PRC and a subsidiary of CNOOC, the H shares of the Company are listed on the Stock Exchange
‘‘continuing connected has the meaning ascribed to it under the Listing Rules transactions’’
‘‘controlling has the meaning ascribed to it under the Listing Rules shareholder’’

– 1 –

DEFINITIONS

‘‘COSL’’ China Oilfield Services Limited (中海油田服務股份有限公司), a company listed on the Stock Exchange and the Shanghai Stock Exchange and a subsidiary of CNOOC, and, except where context otherwise requires, its subsidiaries

‘‘Director(s)’’ director(s) of the Company
‘‘Extraordinary General the extraordinary general meeting of the Company proposed to Meeting’’ or ‘‘EGM’’ be convened for the Independent Shareholders to consider and, if thought fit, approve the transactions contemplated under the continuing connected transaction agreements and the Proposed Caps, and any adjournment thereof
‘‘Fudao Phase I’’ the Group’s urea plant in Hainan completed in 1996
‘‘Fudao Phase II’’ the Group’s urea plant in Hainan completed in 2003
‘‘Group’’ the Company and its subsidiaries from time to time
‘‘Hainan Basuo’’ 海南八所港務有限責任公司 (Hainan Basuo Port Limited*), the registered share capital of which is owned as to 72.5% by the Company
‘‘HK$’’ Hong Kong dollar, the lawful currency of Hong Kong
‘‘Hong Kong’’ the Hong Kong Special Administrative Region of the PRC
‘‘Hong Kong Kingboard Investments Limited (建滔投資有限公司), a Hong Kingboard’’ Kong incorporated subsidiary of Kingboard Chemical, which holds 40% equity interest in CNOOC Jiantao
‘‘Independent Board Committee’’
an independent committee of the Board comprising Mr. Tsui Yiu Wa, Alec, Mr. Zhang Xinzhi, Mr. Wu Xiaohua and Mr. Wang Wenshan, the independent non-executive Directors, formed for the purpose of advising the Independent Shareholders in respect of the continuing connected transactions
‘‘Independent Financial CIMB-GK Securities (HK) Limited, a corporation licensed to Adviser’’ or ‘‘CIMB’’ carry out type 1 (dealing in securities), type 4 (advising on securities) and type 6 (advising on corporate finance) regulated activities as defined under the SFO and the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the terms of certain aspects of the continuing connected transactions set out in this circular
‘‘Independent Shareholders other than those who have interest in the relevant Shareholders’’ continuing connected transactions

– 2 –

DEFINITIONS

‘‘Kingboard Chemical’’ Kingboard Chemical Holdings Limited, a company which is listed on the Stock Exchange ‘‘Latest Practicable 10 November 2008, being the latest practicable date prior to the Date’’ printing of this circular for the purpose of ascertaining certain information contained in this circular ‘‘Listing Date’’ 29 September 2006, the date on which dealings in the H shares of the Company commenced on the Stock Exchange ‘‘Listing Rules’’ the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited ‘‘PBOC’’ People’s Bank of China, being the central bank of the PRC ‘‘PRC’’ or ‘‘China’’ the People’s Republic of China, which for the purpose of this circular excludes Hong Kong, Macau and Taiwan ‘‘Proposed Cap(s)’’ the proposed maximum annual aggregate value(s) for each type of the continuing connected transactions of the Company not being exempt from independent shareholders’ approval requirements under the Listing Rules in respect of 2009 to 2011 ‘‘Prospectus’’ the Hong Kong prospectus of the Company dated 18 September 2006 ‘‘RMB’’ Renminbi, the lawful currency of the PRC ‘‘SFO’’ the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time ‘‘Shareholder(s)’’ shareholder(s) of the Company ‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited ‘‘Tianye Chemical’’ 中海石油天野化工股份有限公司 (CNOOC Tianye Chemical Limited*), formerly known as 內蒙古天野化工 (集團) 有限責任公司 (Inner Mongolia Tianye Chemical Industry Limited), the equity interest of which is owned as to 90% by the Company ‘‘%’’ per cent

For identification purpose only

– 3 –

LETTER FROM THE BOARD

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(a joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 3983)

Executive Directors: Mr. YANG Yexin Mr. FANG Yong Mr. CHEN Kai

Non-executive Director: Mr. WU Mengfei

Independent non-executive Directors:

Mr. TSUI Yiu Wa, Alec Mr. ZHANG Xinzhi Mr. WU Xiaohua

Registered Office:

No. 1 Zhu Jiang South Street Dongfang City Hainan Province The People’s Republic of China

Principal place of business in Hong Kong:

65/F., Bank of China Tower No. 1 Garden Road Central Hong Kong

Mr. WANG Wenshan

14 November 2008

To the Shareholders:

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

Reference is made to the Company’s announcement dated 5 November 2008 in relation to the continuing connected transactions.

In the listing application process, the Company has applied to the Stock Exchange for, and the Stock Exchange has granted, a waiver from compliance with announcement and (where applicable) independent shareholders’ approval requirements pursuant to Rule 14A.42(3) of the Listing Rules in respect of certain continuing connected transactions, subject to the annual value of such continuing connected transactions for each financial year not exceeding the relevant cap amounts as stated in the Prospectus. The Stock Exchange waiver generally will expire on 31 December 2008. Upon such expiration, the continuing connected transactions, if carried on by the Group from 1 January 2009 onwards, would be subject to reporting, announcement and/or independent shareholders’ approval requirements under the Listing Rules.

As those transactions will be continued and carried out in the ordinary and usual course of the Group’s business on normal commercial terms and on terms that are fair and reasonable as far as the Shareholders as a whole are concerned, the Directors considered

For identification purpose only

– 4 –

LETTER FROM THE BOARD

that it would not be practical to make disclosure and/or, if necessary, seek Independent Shareholders’ approval for each transaction every time as it arises. Therefore, for those continuing connected transactions that are expected by the Board to be subject to reporting and announcement requirements but exempt from the independent shareholders’ approval requirements, the Company made an announcement on 5 November 2008 on its plans for 2009 to 2011 with respect to those transactions to fulfil its announcement obligation. For the continuing connected transactions that are expected by the Board to be subject to also independent shareholders’ approval requirements, the Directors will convene an EGM to obtain the approval of Independent Shareholders on, among other things, (1) the entering into of the supplemental agreements in respect of certain continuing connected transactions agreements and (2) the Proposed Caps for certain types of continuing connected transactions.

The purpose of this circular is to provide you with (a) further information in relation to the terms of the supplemental agreements in respect of certain continuing connected transactions agreements and the Proposed Caps for certain types of continuing connected transactions; (b) the recommendation of the Independent Board Committee in respect of the entering into of the supplemental agreements in respect of certain continuing connected transactions agreements and the Proposed Caps for certain types of continuing connected transactions; (c) the advice from the Independent Financial Adviser in respect of the entering into of the supplemental agreements in respect of certain continuing connected transactions agreements and the Proposed Caps for certain types of continuing connected transactions; and (d) a notice to the Shareholders of the EGM convening for the purposes of considering and, if thought fit, approving the entering into of the supplemental agreements in respect of certain continuing connected transactions agreements and the Proposed Caps for certain types of continuing connected transactions.

INFORMATION RELATING TO CONNECTED PERSONS

CNOOC and its Associates

CNOOC is the controlling shareholder of the Company. CNOOC and its Associates (other than the Group) are the Company’s connected persons under Rule 14A.11 of the Listing Rules. CNOOC is one of largest state-owned oil companies in the PRC specializing in exploration of oil and gas in the PRC with its headquarter in Beijing. It is the largest offshore oil and gas producer in the PRC. Since its establishment, it has sustained continuous developments and had advanced from a company engaging only in exploitation of oil and gas to an integrated conglomerate with a complete production chain including upstream petroleum businesses (such as exploration, development, production and sales of oil and gas), downstream petroleum businesses (such as the natural gas, power generation, chemicals and fertilizer production), refining, natural gas and power generation, financial services, logistic services and new energies development.

– 5 –

LETTER FROM THE BOARD

COSL is a subsidiary of CNOOC and therefore an Associate of CNOOC under Rule 19A.04 of the Listing Rules. COSL is the Company’s connected person pursuant to Rule 14A.11(4) of the Listing Rules. COSL principally engages in the provision of oilfield services including drilling services, well services, marine support and transportation services, and geophysical services.

CNOOC Limited is a subsidiary of CNOOC and CNOOC China Limited is a whollyowned subsidiary of CNOOC Limited. Both CNOOC Limited and CNOOC China Limited are Associates of CNOOC pursuant to Rule 19A.04 of the Listing Rules and therefore connected persons of the Company under Rule 14A.11(4) of the Listing Rules. CNOOC Limited and its subsidiaries mainly engage in offshore oil and natural gas exploration, development, production and sales.

CNOOC Finance is a subsidiary of CNOOC and therefore an Associate of CNOOC under Rule 19A.04 of the Listing Rules. It is also the Company’s connected person pursuant to Rule 14A.11(4) of the Listing Rules. CNOOC Finance is a non-bank financial institution with the approval of the PBOC. It is subject to the supervision of China Banking Regulatory Commission. It has been providing financial services to members of the CNOOC Group (including the Company) as an intra-group service provider.

Hong Kong Kingboard and its Associates

CNOOC Jiantao is held as to 60% by the Company and as to 40% by Hong Kong Kingboard which is in turn a subsidiary of Kingboard Chemical. Hong Kong Kingboard is a substantial shareholder of CNOOC Jiantao, one of the Company’s subsidiaries, and therefore it and its Associates (including Kingboard Chemical which is the parent company of Hong Kong Kingboard) are connected persons of the Company according to Rules 1.01 and 14A.11(1) of the Listing Rules. The principal activities of Kingboard Chemical and its subsidiaries are the manufacturing of laminates, copper foil, glass fabric, glass yam, bleached kraft paper, printed circuit boards, chemicals, liquid crystal displays and magnetic products.

EXISTING CONTINUING CONNECTED TRANSACTIONS

The connected transactions agreements listed below refer to the existing continuing connected transactions that will be continued beyond 31 December 2008 and will not be qualified as de minimis transactions and thus will not be fully exempt from reporting, announcement and independent shareholders’ approval requirements under the Listing Rules.

Continuing connected transactions with CNOOC and its Associates

A1. Properties Leasing Agreement

The Group leases certain properties for general commercial business and ancillary uses from certain members of the CNOOC Group. The Company entered into a properties leasing agreement on 1 September 2006 with CNOOC (the ‘‘Properties Leasing Agreement’’) to ascertain the terms and conditions for the leases of such properties.

– 6 –

LETTER FROM THE BOARD

The term of the Properties Leasing Agreement shall expire on 31 December 2008 but may be renewed upon agreement provided that the requirements of the Listing Rules in relation to connected transactions are complied with.

The rent and property management fee for each lease are agreed by the relevant parties taking into account such factors as the location and the state of the properties and shall not be higher than the market rental rates and property management rates of similar properties.

A2. COSL Transportation Agreement

The Group has been utilizing ocean-going transportation services provided by COSL for the Group’s products including those produced by CNOOC Jiantao Methanol Plant, as COSL operates a fleet of vessels that are readily available to provide the Group with oceangoing transportation services at competitive rates. To regulate the provision of such services, the Company and COSL entered into a transportation services framework agreement on 1 September 2006 (the ‘‘COSL Transportation Agreement’’), under which COSL may provide transportation services to the Group.

The term of the COSL Transportation Agreement commenced on 1 September 2006 and will expire on 31 December 2008, but may be renewed upon agreement provided that the requirements of the Listing Rules in relation to connected transactions are complied with.

The transactions under the COSL Transportation Agreement are being conducted on normal commercial terms and conditions which shall not be less favorable than those offered to third parties and priced in accordance with the following pricing principles:

(i) price prescribed by the PRC Government;
(ii) where there is no government-prescribed price but there is a government guidance price, at a price not higher than the guidance price set by the PRC Government;
(iii) where there is neither a government-prescribed price nor a government guidance price, the market price; and
(iv) where none of the above is applicable, the price will be agreed between the relevant parties based on the cost plus a margin of up to 10% on cost.

The margin of 10% was determined on the basis of arm’s length negotiations between the Company and COSL and was expected to reflect reasonable profits for COSL in providing the relevant services under the COSL Transportation Agreement.

The Group may, from time to time when the situation requires, enter into separate agreements which will set out the specific scope of services, terms and conditions of providing such services according to the principles laid down by the COSL Transportation Agreement.

– 7 –

LETTER FROM THE BOARD

A3. Natural Gas Sale and Purchase Agreements

CNOOC Limited and its subsidiaries mainly engage in offshore oil and natural gas exploration, development, production and sales. The Group sources natural gas pipelined from gasfields operated by CNOOC Limited as the principal raw material. Such gasfields are situated near the Group’s Hainan production facilities. For that purpose, the Company entered into three long-term agreements with CNOOC China Limited, a wholly-owned subsidiary of CNOOC Limited:

(1) Dongfang 1-1 Offshore Gasfields Natural Gas Sale and Purchase Agreement between CNOOC China Limited and the Company dated 28 July 2003, under which CNOOC China Limited has committed to supply natural gas to the Company for Fudao Phase II at prices that are subject to adjustments on a quarterly basis by reference to the prices of four major types of crude oil in the international markets during the preceding quarter. The term of this agreement commenced on 1 October 2003 and will expire on 30 September 2023.
(2) Dongfang 1-1 Offshore Gasfields Natural Gas Sale and Purchase Agreement between CNOOC China Limited and CNOOC Jiantao dated 10 March 2005, under which CNOOC China Limited has committed to supply natural gas to CNOOC Jiantao for CNOOC Jiantao Methanol Plant at prices that are subject to adjustments on a monthly basis by reference to the prices of four major types of crude oil in the international markets during the preceding month. The term of this agreement is of 20 years commencing on 15 October 2006 although the earliest time CNOOC China Limited may provide natural gas to CNOOC Jiantao Methanol Plant is 9 May 2006.
(3) a natural gas sale and purchase framework agreement between the Company and CNOOC China Limited dated 1 September 2006 which does not include the transactions conducted under the two agreements mentioned above. The framework agreement was intended to cover purchases of natural gas from CNOOC China Limited for the Group’s future plants. Under this framework agreement, CNOOC China Limited will sell natural gas to the Group at a price which is determined on a fair and reasonable basis (including by reference to the prices of four major types of crude oil in the international markets) and in accordance with normal commercial customs. The term of the agreement is of 20 years commencing on the date of the agreement. CNOOC China Limited and the Company or its relevant subsidiaries will enter into separate agreements which will set out the specific terms and conditions for natural gas sales and purchases according to the principles laid down by this framework agreement.

The three above-mentioned agreements are collectively referred to as the ‘‘Natural Gas Sale and Purchase Agreements’’.

– 8 –

LETTER FROM THE BOARD

The four types of crude oil referred to in the Natural Gas Sale and Purchase Agreements are: West Texas Intermediate Crude Oil (西德薩斯中質原油), Tapis Crude Oil (塔皮斯原油), Brent Crude Oil (混合布倫特原油) and Minas Crude Oil (米納斯原油). The reference prices of these four types of crude oil are provided by Platts Crude Oil Marketwire.

A4. Comprehensive Services and Product Sales Agreement

The Company entered into a comprehensive services and product sales framework agreement with CNOOC on 1 September 2006 (the ‘‘Comprehensive Services and Product Sales Agreement’’), pursuant to which:

(a) the CNOOC Group may provide services and supplies that the Group may require for the Group’s business operation and production (such as telecommunication and computer network services, enterprise resources planning and office automation services, construction of production facilities and related construction project management and supervision, machines and vehicle rental and maintenance, production equipment rental and repair, transportation services, community services including catering, hospital and schooling, and training);
(b) the Group may provide to the CNOOC Group services and supplies (such as machines and vehicle rental, transportation services, business management services and catering); and
(c) the Group may sell to the CNOOC Group products produced by the Group (such as urea and methanol).

The term of the Comprehensive Services and Product Sales Agreement commenced on 1 September 2006 and will expire on 31 December 2008, but may be renewed upon agreement provided that the requirements of the Listing Rules in relation to connected transactions are complied with.

The transactions under the Comprehensive Services and Product Sales Agreement will be conducted on normal commercial terms and conditions which shall not be less favorable than those offered to third parties and priced in accordance with the following pricing principles:

(i) price prescribed by the PRC Government;
(ii) where there is no government-prescribed price but there is a government guidance price, at a price not higher than the guidance price set by the PRC Government;
(iii) where there is neither a government-prescribed price nor a government guidance price, the market price; and
(iv) where none of the above is applicable, the price will be agreed between the relevant parties based on the cost plus a margin of up to 10% on cost.

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LETTER FROM THE BOARD

The margin of 10% was determined on the basis of arm’s length negotiations between the Company and CNOOC and was expected to reflect reasonable profits for the two parties in selling the subject matters under the Comprehensive Services and Product Sales Agreement.

A5. Financial Services Agreement

The Group utilizes from time to time financial services provided by CNOOC Finance and therefore entered into a financial services framework agreement with CNOOC Finance on 1 September 2006 (the ‘‘Financial Services Agreement’’), pursuant to which CNOOC Finance will provide to the Group a range of financial services that the Group may require, including the following:

(a) provision of loans to the Group, which do not include entrustment loans referred to in Category (c2);
(b) deposit services;
(c1) bank notes discounting services;
(c2) arrangement of entrustment loans between the Company and its subsidiaries; and
(c3) settlement services which include settlement for transactions between the Company and its subsidiaries and for transactions between the Group and the CNOOC Group.

The term of the Financial Services Agreement commenced on the date of the agreement and expired one year after the Listing Date in respect of Category (b) services and will expire on 31 December 2008 in respect of other services, but may be renewed upon agreement provided that the requirements of the Listing Rules in relation to connected transactions are complied with. On 18 September 2007, the Company and CNOOC Finance entered into a supplemental agreement to the Financial Services Agreement to revise the expiration of the term in respect of Category (b) to 31 December 2008.

The fees and charges payable by the Group to CNOOC Finance under the Financial Services Agreement are determined on the following basis:

(a) provision of loans to the Group: the interest rates for such loans are determined in accordance with the standard rates promulgated by the PBOC from time to time, and may be reduced where the relevant laws and regulations allow;
(b) deposit services: the interest rates for such deposits are determined in accordance with the standard rates promulgated by the PBOC from time to time;

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LETTER FROM THE BOARD

(c1) bank notes discounting services: the interest rates for discounting services are determined in accordance with the standard rates promulgated by the PBOC from time to time less discounts set out in the specific agreements; and the interest for bank notes discounting is borne by the relevant parties presenting the notes;
(c2) arrangement of entrustment loans between the Company and its subsidiaries: the annual service fee payable by the Group is set at a rate, such that the aggregate amount of service fee and loan interest together will not exceed the interest for securing a loan of the same term directly from independent commercial banks; and
(c3) settlement services: no service fee is charged.

Under the Financial Services Agreement, the Group shall have a unilateral right of set-off such that, in the event of any misuse or default by CNOOC Finance in respect of amounts deposited with it by the Group, the Group will be able to offset the amount due to the Group from CNOOC Finance against the amount outstanding from the Group to CNOOC Finance. CNOOC Finance shall not have any offset right.

The Board believes that CNOOC Finance, with its credit ratings, asset size, banking credits and corporate governance practice, will be able to fulfil its obligations under the Financial Services Agreement. As CNOOC Finance is regulated by the PBOC and the China Banking Regulatory Commission, the Board also believes that, in such misuse or default situations, the Group will still be able to recover in full all outstanding amount due to the Group from CNOOC Finance even if such amount exceeds the amount due from the Group to CNOOC Finance for the Group to exercise the set-off right.

CNOOC Finance and the Group may, from time to time when the situation requires, enter into separate agreements which will set out the specific scope of services, terms and conditions of providing such financial services according to the principles laid down by the Financial Services Agreement.

Continuing connected transactions with Hong Kong Kingboard and its Associates

B1. Kingboard Product Sales and Services Agreement

The Company entered into with Hong Kong Kingboard a product sales and related services framework agreement on 22 August 2006 (the ‘‘Kingboard Product Sales and Services Agreement’’), pursuant to which the Company agreed to sell products produced by the Group and to provide related services such as transportation services to Hong Kong Kingboard and its Associates.

The term of Kingboard Product Sales and Services Agreement commenced on 22 August 2006 and will expire on 31 December 2008 but may be renewed upon agreement provided that the requirements of the Listing Rules in relation to connected transactions are complied with.

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LETTER FROM THE BOARD

The transactions under the Kingboard Product Sales and Services Agreement will be conducted on normal commercial terms and conditions which shall not be less favorable than those offered to third parties and priced in accordance with the following pricing principles:

(i) price prescribed by the PRC Government;
(ii) where there is no government-prescribed price but there is a government guidance price, at a price not higher than the guidance price set by the PRC Government;
(iii) where there is neither a government-prescribed price nor a government guidance price, the market price; and
(iv) where none of the above is applicable, the price will be agreed between the relevant parties based on the cost plus a margin of up to 15% on cost.

The margin of 15% was determined on the basis of arm’s length negotiations between the Company and Hong Kong Kingboard and was expected to reflect reasonable profits for the Group in providing the relevant products and services under the Kingboard Product Sales and Services Agreement.

Hong Kong Kingboard (and/or its Associates) and the Group may, from time to time when the situation requires, enter into separate agreements which will set out the specific products and scope of services, terms and conditions of selling products or providing services according to the principles laid down by the Kingboard Product Sales and Services Agreement.

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LETTER FROM THE BOARD

HISTORICAL TRANSACTION FIGURES WITH RESPECT TO EXISTING CONTINUING CONNECTED TRANSACTIONS

Set out below are (a) the historical amounts of each category of the existing continuing connected transactions for the two previous financial years ended 31 December 2006 and 2007 and the six months ended 30 June 2008; and (b) the caps for the two previous financial years ended 31 December 2006 and 2007 and the year ending 31 December 2008.

			Amounts in RMB’000	Amounts in RMB’000
			Year ended	Year ended
Category of existing continuing			31 December	31 December
connected transactions			2006	2007	2008
A1.	Properties Leasing Agreement:	Actual	1,895	2,639	1,455
	Leases of properties by the				(for the six
	Group from the CNOOC Group			months ended
				30	June 2008)
A2.	COSL Transportation	Actual	7,177	21,188	8,430
	Agreement: Provision of				(for the six
	transportation services by COSL			months ended
	to the Group			30	June 2008)
		Cap (Note 1)	13,000	45,000	48,000
				(for the whole
				year of 2008)
A3.	Natural Gas Sale and Purchase	Actual	416,861	539,954	356,176
	Agreements: Purchase of natural				(for the six
	gas by the Group from CNOOC			months ended
	China Limited			30	June 2008)
		Cap (Note 1)	510,300	657,090	1,046,640
				(for the whole
				year of 2008)
A4.	Comprehensive Services and
	Product Sales Agreement:
A4(a).	Provision of services and	Actual	129,358	99,684	32,106
	supplies by the CNOOC Group				(for the six
	to the Group			months ended
				30	June 2008)
		Cap (Note 1)	278,520	102,300	74,800
				(for the whole
				year of 2008)

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LETTER FROM THE BOARD

			Amounts in RMB’000	Amounts in RMB’000	Amounts in RMB’000
			Year ended	Year ended
Category of existing continuing			31 December	31 December
connected transactions			2006	2007		2008
A4(b).	Provision of services and	Actual	903	3,542		3,142
	supplies by the Group to the					(for the six
	CNOOC Group				months ended
					30	June 2008)
		Cap (Note 2)	4,400	4,400		20,000
					(for the whole
					year of 2008)
A4(c).	Sale of products by the Group to	Actual (Note 3)	14,360	28,432		15,473
	the CNOOC Group					(for the six
					months ended
					30	June 2008)
		Cap (Note 3)				107,000
					(for the whole
					year of 2008)
A5.	Financial Services Agreement:
	(Note 4)
A5(a).	Loans granted by CNOOC	Actual (Note 5)	62,298	63,346		0
	Finance to the Group					(for the six
					months ended
					30	June 2008)
		Cap (Note 5)	400,000	500,000		600,000
					(for the whole
					year of 2008)
A5(b).	Deposits placed by the Group	Actual (Note 5)	293,839
	with CNOOC Finance		(within one	calendar year
			from the Listing Date)
					228,503
				(from 29 September 2007 to
				30	June 2008)
		Cap (Note 6)	300,000
			(applicable for one

calendar year from the Listing Date)

228,788 (from 29 September 2007 to 31 December 2008)

– 14 –

LETTER FROM THE BOARD

			Amounts in RMB’000	Amounts in RMB’000
			Year ended	Year ended
Category of existing continuing			31 December	31 December
connected transactions			2006	2007	2008
B1.	Kingboard Product Sales and	Actual	117,834	252,374	190,926
	Services Agreement: Sale of				(for the six
	products and provision of			months ended
	services by the Group to Hong			30	June 2008)
	Kong Kingboard and/or its
	Associates	Cap (Note 1)	220,000	730,000	730,000
				(for the whole
				year of 2008)

Notes:

These caps are part of the Stock Exchange waiver mentioned above.
These caps for 2006 and 2007 are part of the Stock Exchange waiver mentioned above. The Company announced on 20 August 2008 that due to the additional services offered and rendered by Hainan Basuo to the CNOOC Group, the Company has revised the annual cap of this category for the year ending 31 December 2008 from RMB3,300,000 to RMB20,000,000. This type of continuing connected transactions were conducted with the annual transaction amounts within the threshold of 2.5% of the applicable percentage ratios and are accordingly qualified under Rule 14A.34(1) of the Listing Rules and are exempt from independent shareholders’ approval requirements.
As of the latest practical date of the Prospectus (11 September 2006), the Group had not sold its products to the CNOOC Group and therefore the Company did not set out caps or forecast transaction figures in the Prospectus. This type of continuing connected transactions were conducted with the annual transaction amounts within the threshold of 2.5% of the applicable percentage ratios and are accordingly qualified under Rule 14A.34(1) of the Listing Rules and are exempt from independent shareholders’ approval requirements. This type of transactions had been further announced by the Company on 11 April 2007. The cap for 2008 (RMB107,000,000) is within the threshold of 2.5% for each of the applicable percentage ratios.
Bank notes discounting services (Category A5(c1)), arrangement of entrustment loans (Category A5 (c2)) and settlement services (Category A5(c3)) were conducted with annual transaction amounts within the threshold of 0.1% of the applicable percentage ratios and are accordingly qualified under Rule 14A.33(3) of the Listing Rules as de minimis transactions that are exempt from reporting, announcement and independent shareholders’ approval requirements.
These actual and cap figures refer to the maximum daily outstanding balance after listing of the Company during the relevant period.
The cap figure of RMB300,000,000 was part of the Stock Exchange waiver as mentioned above and was applicable for one calendar year from the Listing Date. On 25 September 2007, the Company announced that the Group will continue to place deposits with CNOOC Finance with a maximum daily outstanding balance of RMB228,788,000 during the period from 29 September 2007 to 31 December 2008. Pursuant to Rule 14A.34(1) of the Listing Rules, as each of the percentage ratios applicable to such cap is less than 2.5%, such provision of deposits services by CNOOC Finance to the Group shall be exempt from independent shareholders’ approval requirements.

– 15 –

LETTER FROM THE BOARD

FUTURE PLANS WITH RESPECT TO EXISTING CONTINUING CONNECTED TRANSACTIONS

A1. Properties Leasing Agreement

The Group will continue to lease properties from the CNOOC Group under the terms and conditions of the Properties Leasing Agreement. Therefore the Company entered into a supplemental agreement to the Properties Leasing Agreement on 5 November 2008, under which the term of Properties Leasing Agreement will be extended to commence on 1 January 2009 and expire on 31 December 2011 but may be renewed upon agreement provided that the requirements of the Listing Rules in relation to connected transactions are complied with.

As the business expansion requires, the Company intends to lease more properties from members of the CNOOC Group for the Group’s office use in Beijing. The proposed rental in respect of such additional properties for the financial years 2009, 2010 and 2011 are RMB10,430,000, RMB12,830,000 and RMB12,830,000 respectively. The new lease agreements, when entered into, will be subject to the terms and conditions of the Properties Leasing Agreement.

The continuing connected transactions under the Properties Leasing Agreement will be conducted with the annual transaction amounts within the threshold of 2.5% of the applicable percentage ratios. Such transactions are accordingly qualified under Rule 14A.34(1) of the Listing Rules and they, together with the entering into of the supplemental agreement and the above-mentioned new leases, are exempt from independent shareholders’ approval requirements.

A2. COSL Transportation Agreement

The Group will continue to use the transportation services of COSL under the terms and conditions of the COSL Transportation Agreement and therefore the Company entered into a supplemental agreement to the COSL Transportation Agreement on 5 November 2008 (such supplemental agreement will become effective upon approval of the Independent Shareholders), under which the term of the COSL Transportation Agreement will be extended to commence on 1 January 2009 and expire on 31 December 2011 but may be renewed upon agreement provided that the requirements of the Listing Rules in relation to connected transactions are complied with. As the continuing connected transactions under the COSL Transportation Agreement are expected to be subject to reporting, announcement and independent shareholders’ approval requirements under the Listing Rules, the entering into of the supplemental agreement will also be subject to the approval of the Independent Shareholders at the EGM.

A3. Natural Gas Sale and Purchase Agreements

The Group will continue to purchase natural gas under the Natural Gas Sale and Purchase Agreements.

– 16 –

LETTER FROM THE BOARD

A4. Comprehensive Services and Product Sales Agreement

The Group will continue to enter into transactions with the CNOOC Group under the terms and conditions of the Comprehensive Services and Product Sales Agreement. Therefore the Company entered into a supplemental agreement to the Comprehensive Services and Product Sales Agreement on 5 November 2008 (such supplemental agreement will become effective upon approval of the Independent Shareholders), under which the term of the Comprehensive Services and Product Sales Agreement will be extended to commence on 1 January 2009 and expire on 31 December 2011 but may be renewed upon agreement provided that the requirements of the Listing Rules in relation to connected transactions are complied with.

Further, the Company also proposes to add a new category — purchases of products by the Group from the CNOOC Group — in the supplemental agreement to the Comprehensive Services and Product Sales Agreement. This category of continuing connected transactions will be conducted with the annual transaction amounts within the threshold of 0.1% of the applicable percentage ratios and are accordingly qualified under Rule 14A.33(3) of the Listing Rules as de minimis transactions exempt from reporting, announcement and independent shareholders’ approval requirements.

As certain continuing connected transactions under the Comprehensive Services and Product Sales Agreement are expected to be subject to reporting, announcement and independent shareholders’ approval requirements under the Listing Rules, the entering into of the supplemental agreement will also be subject to the approval of the Independent Shareholders at the EGM.

A5. Financial Services Agreement

The Group will continue with the financial transactions with CNOOC Finance under the terms and conditions of the Financial Services Agreement. Therefore the Company entered into a supplemental agreement to the Financial Services Agreement on 3 November 2008 (such supplemental agreement will become effective upon approval of the Independent Shareholders), under which the term of the Financial Services Agreement will be extended to commence on 1 January 2009 and expire on 31 December 2011 but may be renewed upon agreement provided that the requirements of the Listing Rules in relation to connected transactions are complied with. As the continuing connected transactions under the Financial Services Agreement categorized as A5(a) and A5(b) are expected to be subject to reporting, announcement and independent shareholders’ approval requirements under the Listing Rules, the entering into of the supplemental agreement will also be subject to the approval of the Independent Shareholders at the EGM. The other continuing connected transactions under the same agreement categorized as A5(c1), A5(c2) and A5(c3) will be conducted with the annual transaction amounts within the threshold of 0.1% of the applicable percentage ratios and are accordingly qualified under Rule 14A.33(3) of the Listing Rules as de minimis transactions exempt from reporting, announcement and independent shareholders’ approval requirements.

– 17 –

LETTER FROM THE BOARD

B1. Kingboard Product Sales and Services Agreement

The Group will continue to enter into transactions with Hong Kong Kingboard and its Associates under the terms and conditions of the Kingboard Product Sales and Services Agreement. Therefore the Company entered into a supplemental agreement to the Kingboard Product Sales and Services Agreement on 5 November 2008 (such supplemental agreement will become effective upon approval of the Independent Shareholders), under which the term of the Kingboard Product Sales and Services Agreement will be extended to commence on 1 January 2009 and expire on 31 December 2011 but may be renewed upon agreement provided that the requirements of the Listing Rules in relation to connected transactions are complied with. As the continuing connected transactions under the Kingboard Product Sales and Services Agreement are expected to be subject to reporting, announcement and independent shareholders’ approval requirements under the Listing Rules, the entering into of the supplemental agreement will also be subject to the approval of the Independent Shareholders at the EGM.

PROPOSED CAPS IN RELATION TO EXISTING CONTINUING CONNECTED TRANSACTIONS

The table below set out the caps for the continuing connected transactions:

			Amounts in RMB’000	Amounts in RMB’000	Amounts in RMB’000
			Year ending	Year ending	Year ending
			31 December	31 December	31	December
Category of continuing connected transactions			2009	2010		2011
			(Note 1)	(Note 1)		(Note 1)
A1.	Properties Leasing Agreement:	Caps (Note 2)	13,325	15,845		15,845
	Leases of properties by the Group
	from the CNOOC Group (Note 5)
A2.	COSL Transportation Agreement:	Proposed Caps	50,400	67,200		117,600
	Provision of transportation	(Note 3)
	services by COSL to the Group
	(Note 6)
A3.	Natural Gas Sale and Purchase	Proposed Caps	1,138,011	1,540,198		2,544,416
	Agreements: Purchase of natural	(Note 3)
	gas by the Group from CNOOC
	China Limited (Note 7)
A4.	Comprehensive Services and
	Product Sales Agreement:
A4(a).	Provision of services and supplies	Proposed Caps	285,970	318,899		338,872
	by the CNOOC Group to the	(Note 3)
	Group (Note 8)
A4(b).	Provision of services and supplies	Proposed Caps	114,503	196,229		286,415
	by the Group to the CNOOC	(Note 3)
	Group (Note 9)

– 18 –

LETTER FROM THE BOARD

Amounts in RMB’000

			Year ending	Year ending	Year ending
			31 December	31 December	31 December
Category of continuing connected transactions			2009	2010	2011
			(Note 1)	(Note 1)	(Note 1)
A4(c).	Sale of products by the Group to	Proposed Caps	395,563	426,147	447,147
	the CNOOC Group (Note 10)	(Note 3)
A5.	Financial Services Agreement:
A5(a).	Loans granted by CNOOC	Proposed Caps	600,000	600,000	600,000
	Finance to the Group (Note 11)	(Notes 3 and 4)
A5(b).	Deposits placed by the Group with	Proposed Caps	400,000	500,000	500,000
	CNOOC Finance (Note 12)	(Notes 3 and 4)
B1.	Kingboard Product Sales and	Proposed Caps	630,000	877,800	1,597,400
	Services Agreement: Sale of	(Note 3)
	products and provision of services
	by the Group to Hong Kong
	Kingboard and/or its Associates
	(Note 13)

Notes:

In respect of all continuing connected transactions, the Directors have estimated the annual transaction figures for the coming three financial years ending 31 December 2011 on the following basis:
(a) the continuing connected transactions will continue to be entered into on the terms and conditions set out in the relevant agreements (as may be supplemented);
(b) the continuing connected transactions will continue to be entered into in the ordinary and usual course of business of the Group and on normal commercial terms;
(c) references have been made to the historical amounts for the two financial years ended 31 December 2006 and 31 December 2007 and the six months ended 30 June 2008 as well as the estimated amounts for the year ending 31 December 2008; and
(d) there will not be any material adverse changes to the state of the PRC economy and the level of prices and demand for the Group’s products and the materials and services needed by the Group for its operation.
These figures refer to continuing connected transactions which are expected to be exempt from independent shareholders’ approval requirements under Rule 14A.34(1) of the Listing Rules because the applicable percentage ratios are expected to be kept at below 2.5%. The caps refer to the maximum annual transaction figures within which each relevant type of transactions will be conducted in the corresponding year. If the actual transaction amount exceeds the cap but is within the threshold of 2.5% of the applicable percentage ratios, the Company will make an announcement pursuant to Rule 14A.35(3) of the Listing Rules. If the actual transaction amount is expected to exceed the threshold of 2.5% of the applicable percentage ratios, the Company will seek prior approval of independent shareholders under Rule 14A.35(4) of the Listing Rules.

– 19 –

LETTER FROM THE BOARD

The proposed caps for Category A1 transactions are the sums of the expected rental expenses of the existing leases that will be renewed and the expected rental expenses of the new leases.

The Proposed Caps are subject to Independent Shareholders’ approval at the EGM.
These Proposed Caps refer to the maximum daily outstanding balance during the relevant period.
A1. Properties Leasing Agreement: The expected increase in annual rental expenditure for the leases subject to the Properties Leasing Agreement is mainly due to the proposed leasing of new offices in Beijing. Due to the expansion of the Group’s business, part of the Group’s management functions will move their offices to Beijing. The aggregate floor area of such offices in Beijing is substantially larger than the offices leased from the CNOOC Group in 2006 to 2008 to justify the increase in the overall rental expenditure of the Group under the Properties Leasing Agreement (as may be supplemented) for the years 2009 to 2011.
A2. COSL Transportation Agreement: When the Group’s new methanol plant in Hainan Province (with an annual designed production capacity of 800,000 tonnes of methanol) is expected to commence production in 2010 and to reach its full productivity in 2011, transportation expenditure will significantly increase by then.
A3. Natural Gas Sale and Purchase Agreements: The proposed increase in the Proposed Caps compared with historical transaction figures is mainly due to the following reasons: (1) the price of natural gas to be supplied for Fudao Phase II and CNOOC Jiantao Methanol Plant is expected to increase; (2) as the Ledong 15-1 and Ledong 22-1 gasfields of CNOOC Limited will commence production at the end of 2008, the amount of natural gas supplied to Fudao Phase I, Fudao Phase II and CNOOC Jiantao Methanol Plant will significantly rise and (3) when the Group’s Hainan 800,000-tonne methanol plant commences production in 2010, its demand for natural gas will grow considerably.
A4(a). Comprehensive Services and Product Sales Agreement: Provision of services and supplies by the CNOOC Group to the Group: In view of the construction of the Group’s Hainan methanol plant, the extension of the deepwater seaport owned and operated by Hainan Basuo and construction of the polyxymethylene production facility of Tianye Chemical, the Group’s demand for the construction services from the CNOOC Group is expected to significantly increase from 2009 to 2011. The demand for human resources and networking services required by the Group from the CNOOC Group is also expected to rise.
A4(b). Comprehensive Services and Product Sales Agreement: Provision of services and supplies by the Group to the CNOOC Group: The demand for the provision of services and supplies to be provided by the Group is expected to significantly increase due to the commencement of the construction of certain chemical products manufacturing plants to be operated by the CNOOC Group. In addition, after the Group’s Hainan methanol plant commences operation and after Hainan Basuo’s port extension project has completed, the Group’s provision of services and supplies from the CNOOC Group will also rise accordingly.
A4(c). Comprehensive Services and Product Sales Agreement: Sale of products by the Group to the CNOOC Group: The increase in the Proposed Caps compared with historical transaction figures is mainly due to the following reasons: (1) the expected increase in demand for methanol with the commencement in production of the above-mentioned new chemical products plants operated by the CNOOC Group; and (2) the reconstruction expected to be completed in 2009 with respect of a PRC entity (in which CNOOC currently has an equity interest of less than 30%) such that CNOOC will hold more than 30% of its equity interest and therefore the existing transactions between the Group and such entity will then become continuing connected transactions.

– 20 –

LETTER FROM THE BOARD

A5(a). Financial Services Agreement: Loans granted by CNOOC Finance to the Group: In view of PBOC’s liquidity regulation policies over domestic banks in the PRC, it is very important for the Group to be able to secure timely and sufficient financings from CNOOC Finance. There are two types of loans granted by CNOOC Finance to the Group: (1) loans as part of the Group’s project financing where security over the Group’s assets will be created in favour of CNOOC Finance and (2) loans to finance the Group’s working capital where no security over the assets of the Group will be created in favour of CNOOC Finance.

For type (1), the Company estimates that the loans granted by CNOOC Finance to finance the construction of the Group’s Hainan methanol plant will be approximately RMB600 million for the three financial years of 2009, 2010 and 2011. As described on page 103 of the Prospectus, the funding for the construction would be from borrowings and cash generated from the Group’s operating activities, and not from the proceeds of the Company’s global offering conducted in September 2006. Further, the Board initially contemplated that construction could commence in early 2007 and mass production would start in 2008. However, as the necessary governmental approvals and permits were not obtained in 2007, the earliest time when debt financing for the construction (including financing from CNOOC Finance) is required will be after 2008.

For type (2), such loans constitute financial assistance provided by CNOOC Finance which will be fully exempted from reporting, announcement and independent shareholders’ approval requirements under Rule 14A.65(4) of the Listing Rules. Therefore, the Proposed Caps only refer to type (1) loans.

A5(b). Financial Services Agreement: Deposits placed by the Group with CNOOC Finance: As part of its plans to develop its business, the Company will establish subsidiaries and joint venture companies in different locations of China and will continue to acquire suitable PRC entities. With the expected addition of new members to the Group, the Company proposes to increase the annual maximum daily deposits balances in order to achieve a more efficient accounts settlement mechanism and capital management.
B1. Kingboard Product Sales and Services Agreement: Sale of products and provision of services by the Group to Hong Kong Kingboard and/or its Associates: Sale of products to Hong Kong Kingboard and/or its Associates will significantly increase from 2010 with the commencement of production of the Hainan methanol plant.

REASONS AND BENEFITS OF THE EXISTING CONTINUING CONNECTED TRANSACTIONS

As mentioned in the Prospectus, the existing continuing connected transaction agreements were entered into for the business needs and benefits of the Group. The Company is one of the major subsidiaries of CNOOC which is one of the largest petroleum companies in China. In view of the extensive resources and experience of the CNOOC Group, it is desirable for the Group to seek supports and maintain business relationships with the CNOOC Group.

Hong Kong Kingboard is the business partner of the Company with respect to CNOOC Jiantao. It, together with its parent company Kingboard Chemical and its other Associates, also maintains close business relationship with the Group in terms of product sale and purchase. It is beneficial for the Group to enter into commercial arrangements and transactions with Hong Kong Kingboard and its Associates.

– 21 –

LETTER FROM THE BOARD

The existing continuing connected transactions are or will be entered into in the ordinary and usual course of business of the Group on normal commercial terms and the Board is of the general view that it is in the interests of the Company and the Shareholders as a whole to carry on the existing continuing connected transactions as those transactions have facilitated and will continue to facilitate the operation of the Group’s business. The executive Directors and non-executive Directors are of the view that the terms and caps of those transactions are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

With respect to the continuing connected transactions that are exempt from independent shareholders’ approval requirements under the Listing Rules (Categories A1 and A5(c1), (c2) and (c3) transactions), the Directors (including the independent nonexecutive Directors) are of the opinion that such transactions have been entered into, and will be carried out, in the ordinary and usual course of the Group’s business, on an arm’s length basis and on normal commercial terms, and that the terms (and, for Category A1 transactions, the annual caps) are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

INFORMATION RELATING TO THE GROUP

The Group’s current core business is the production and sale of urea (the most commonly used nitrogenous fertilizer in the PRC) and chemical products (primarily methanol).

EGM

The Board will convene an EGM to obtain the approval of Independent Shareholders for, among other things:

(1) the entering into of the supplemental agreements in relation to (a) the COSL Transportation Agreement, (b) the Comprehensive Services and Product Sales Agreement, (c) the Financial Services Agreement and (d) the Kingboard Product Sales and Services Agreement; and
(2) the Proposed Caps for each relevant type of continuing connected transactions under Categories A2, A3, A4(a), A4(b), A4(c), A5(a), A5(b) and B1.

At the EGM, CNOOC and its Associates will abstain from voting with respect to continuing connected transactions with the CNOOC Group and, if Hong Kong Kingboard and its Associates control any voting rights in the Company, they will abstain from voting with respect to continuing connected transactions with Hong Kong Kingboard and its Associates. As at the Latest Practicable Date, the voting rights attached to 2,738,999,512 domestic shares were controlled by CNOOC and its Associates and such number of shares represented approximately 59.41% of the issued share capital of the Company. As at the Latest Practicable Date, the Board was not aware that Hong Kong Kingboard and its Associates held any shares in the Company.

– 22 –

LETTER FROM THE BOARD

For the purpose of the EGM, the Board has established the Independent Board Committee to consider and advise the Independent Shareholders with respect to (1) the entering into of the supplemental agreements in relation to (a) the COSL Transportation Agreement, (b) the Comprehensive Services and Product Sales Agreement with respect to transactions under Categories A4(a), A4(b) and A4(c), (c) the Financial Services Agreement with respect to transactions under Categories A5(a) and A5(b) and (d) the Kingboard Product Sales and Services Agreement and (2) the Proposed Caps for each relevant type of continuing connected transactions under Categories A2, A3, A4(a), A4(b), A4(c), A5(a), A5 (b) and B1. The Company has also appointed the Independent Financial Adviser to advise the Independent Board Committee on those aspects of the continuing connected transactions.

Whether you are able to attend the Extraordinary General Meeting, please complete and return the reply slip in accordance with the instructions printed thereon on or before Tuesday, 9 December 2008. Shareholders who intend to appoint a proxy to attend the Extraordinary General Meeting shall complete and return the enclosed proxy form in accordance with the instructions printed thereon, and to lodge them with the Office of the Secretary to the Board of Directors of the Company in the PRC (for holders of domestic shares or unlisted foreign shares) at No. 98 Guanhai Road, Longhua District, Haikou, Hainan Province, the People’s Republic of China or the Company’s H Share Registrar, Computershare Hong Kong Investor Services Limited (for holders of H shares), at 46th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, as soon as possible but in any event not less than 24 hours before the time fixed for holding of the Extraordinary General Meeting or any adjournment thereof (as the case may be). Completion and return of the proxy form will not preclude you from attending the Extraordinary General Meeting or any adjournment thereof (as the case may be) and voting in person if you so wish.

Upon approval of the continuing connected transactions which require independent shareholders’ approval, the Company will comply with the requirements specified under Rules 14A.35(1), 14A.35(2), 14A.37 to 14A.40 of the Listing Rules in respect of the conduct of such continuing connected transactions.

PROCEDURES TO DEMAND A POLL AT GENERAL MEETING

Pursuant to Article 78 of the Articles of Association of the Company, at any general meeting of shareholders a resolution shall be decided on a show of hands unless a poll is (before or after any vote by show of hands) demanded: (1) by the chairman of the meeting;

(2) by at least 2 shareholders present in person or by proxy who are entitled to vote; or
(3) by one or more shareholders present in person or by proxy and representing 10% or more of all shares carrying the right to vote at the meeting singly or in aggregate.

– 23 –

LETTER FROM THE BOARD

Unless a poll be so demanded, a declaration by the chairman that a resolution has been passed on a show of hands and a record of such in the minutes of the meeting shall be conclusive evidence of the fact that such resolution has been passed. There is no need to provide evidence on the number of proportion of the votes in favour of or against such resolution. The demand for a poll may be withdrawn by the person who makes such demand.

RECOMMENDATIONS

Based on the relevant information disclosed herein, the Directors believe that (1) the terms of the supplemental agreements in relation to (a) the COSL Transportation Agreement, (b) the Comprehensive Services and Product Sales Agreement with respect to transactions under Categories A4(a), A4(b) and A4(c), (c) the Financial Services Agreement with respect to transactions under Categories A5(a) and A5(b) and (d) the Kingboard Product Sales and Services Agreement and (2) the Proposed Caps for each relevant type of continuing connected transactions under Categories A2, A3, A4(a), A4(b), A4(c), A5(a), A5 (b) and B1 are fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the resolutions to be proposed at the Extraordinary General Meeting to approve the above agreements and the Proposed Caps for each relevant type of continuing connected transactions under Categories A2, A3, A4(a), A4(b), A4(c), A5(a), A5(b) and B1.

Your attention is drawn to the letter from the Independent Board Committee which is set out on page 26 of this circular. The Independent Board Committee, having taken into account the advice of the Independent Financial Adviser which is set out on pages 27 to 44 of this circular, considers that (1) the terms of the supplemental agreements in relation to (a) the COSL Transportation Agreement, (b) the Comprehensive Services and Product Sales Agreement with respect to transactions under Categories A4(a), A4(b) and A4(c), (c) the Financial Services Agreement with respect to transactions under Categories A5(a) and A5 (b) and (d) the Kingboard Product Sales and Services Agreement and (2) the Proposed Caps for each relevant type of continuing connected transactions under Categories A2, A3, A4 (a), A4(b), A4(c), A5(a), A5(b) and B1 are fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the relevant resolutions to be proposed at the Extraordinary General Meeting.

– 24 –

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

A letter of recommendation from the Independent Board Committee is set out on page 26 of this circular, which contains its recommendation to the Independent Shareholders, and the letter of advice from the Independent Financial Adviser is set out on pages 27 to 44 of this circular, which contains its advice to the Independent Board Committee and the Independent Shareholders. Your attention is also drawn to the general information set out in the appendix to this circular.

By Order of the Board China BlueChemical Ltd.* Wu Mengfei Chairman

For identification purpose only

– 25 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [279 x 34] intentionally omitted <==

(a joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 3983)

14 November 2008

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular dated 14 November 2008 (the ‘‘Circular’’) despatched to the Shareholders of which this letter forms part. Unless the context otherwise requires, terms and expressions defined in the Circular shall have the same meanings in this letter.

We have been appointed as members of the Independent Board Committee to advise the Independent Shareholders on the fairness and reasonableness with respect to (1) the supplemental agreements in relation to (a) the COSL Transportation Agreement, (b) the Comprehensive Services and Product Sales Agreement with respect to transactions under Categories A4(a), A4(b) and A4 (c), (c) the Financial Services Agreement with respect to transactions under Categories A5(a) and A5(b) and (d) the Kingboard Product Sales and Services Agreement and (2) the Proposed Caps for each relevant type of continuing connected transactions under Categories A2, A3, A4(a), A4(b), A4(c), A5(a), A5(b) and B1. CIMB has been appointed as the Independent Financial Adviser to advise the Independent Board Committee on those aspects of the continuing connected transactions.

We wish to draw your attention to the letter from the Board set out on pages 4 to 25 of the Circular and the letter from CIMB containing its advice to us set out on pages 27 to 44 of the Circular.

Having considered the advice given by CIMB, we are of the opinion that (1) the terms of the supplemental agreements in relation to (a) the COSL Transportation Agreement, (b) the Comprehensive Services and Product Sales Agreement with respect to transactions under Categories A4(a), A4(b) and A4(c), (c) the Financial Services Agreement with respect to transactions under Categories A5(a) and A5(b) and (d) the Kingboard Product Sales and Services Agreement and (2) the Proposed Caps for each relevant type of continuing connected transactions under Categories A2, A3, A4(a), A4(b), A4(c), A5(a), A5(b) and B1 are fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the Extraordinary General Meeting to approve the above agreements and the Proposed Caps for each relevant type of continuing connected transactions under Categories A2, A3, A4(a), A4(b), A4(c), A5(a), A5(b) and B1.

Your faithfully,

Tsui Yiu Wa, Alec, Zhang Xinzhi, Wu Xiaohua and Wang Wenshan Members of Independent Board Committee

For identification purpose only

– 26 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the full text of a letter of advice from CIMB to the Independent Board Committee and the Independent Shareholders in relation to the terms of certain aspects of the continuing connected transactions prepared for the purpose of inclusion in this circular.

CIMB-GK Securities (HK) Limited

25/F Central Tower 28 Queen’s Road Central Hong Kong

14 November 2008

To the Independent Board Committee and the Independent Shareholders of China BlueChemical Ltd.

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our engagement as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in relation to (i) the terms of each of the Supplemental Agreements in respect of certain existing categories of continuing connected transactions; and (ii) the Proposed Caps, details of which are contained in a circular of the Company (the ‘‘Circular’’) to the Shareholders dated 14 November 2008, of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as those defined in the Circular unless the context otherwise requires.

An independent board committee comprising Mr. Tsui Yiu Wa, Alec, Mr. Zhang Xinzhi, Mr. Wu Xiaohua and Mr. Wang Wenshan, being the independent non-executive Directors, has been formed to advise the Independent Shareholders in relation to (i) the entering into of the Supplemental Agreements; and (ii) the Proposed Caps.

BASIS OF OUR OPINION

In formulating our recommendation, we consider that we have reviewed sufficient and relevant information and documents and have taken reasonable steps as required under Rule 13.80 of the Listing Rules including the notes thereto to reach an informed view and to provide a reasonable basis for our recommendation. We have relied on the information and facts contained or referred to in the Circular, the information provided by the Company and our review of the relevant public information. We have also assumed that the information, facts and representations contained or referred to in the Circular were true and accurate at the time they were made and up to the date of the EGM. We have not, however, conducted an independent verification of the information nor have we conducted any form of in-depth investigation into the businesses and affairs or the prospects of the Company, CNOOC, or Hong Kong Kingboard, or any of their respective subsidiaries (as defined in the Listing Rules) or Associates. We have no reason to doubt the truth, accuracy and

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

completeness of the information, facts and representations provided and represented to us by the Company. We have also been advised by the Company and believe that no material facts have been omitted from the Circular.

PRINCIPAL FACTORS CONSIDERED

In arriving at our opinion, we have considered the following principal factors and reasons:

(I) Background

As stated in the Prospectus, the Stock Exchange granted the Company a waiver from compliance with announcement and independent shareholders’ approval requirements pursuant to Rule 14A.42(3) in respect of certain existing continuing connected transactions for a period expiring on 31 December 2008 or for one calendar year following the Listing Date. Therefore, as stated in the Letter from the Board, if the Group intends to continue with those existing continuing connected transactions from 1 January 2009 onwards, such continuing connected transactions would be subject to reporting, announcement and/or independent shareholders’ approval requirements under the Listing Rules.

Set out below is a summary of the supplemental agreements (collectively referred to as the ‘‘Supplemental Agreements’’) entered into between the Group and its relevant connected persons (as defined in the Listing Rules) and the respective nature of the continuing connected transactions contemplated thereunder, which are subject to Independent Shareholders’ approval at the EGM pursuant to the Listing Rules.

Nature of the relevant continuing connected transactions Supplemental agreement Category contemplated thereunder the supplemental agreement to A2 Provision of transportation the COSL Transportation services by COSL to the Group Agreement entered into between the Group and COSL on 5 November 2008 the supplemental agreement to A4(a) Provision of services and supplies the Comprehensive Services by the CNOOC Group to the and Product Sales Agreement Group entered into between the Group and CNOOC on 5 November A4(b) Provision of services and supplies 2008 by the Group to the CNOOC Group A4(c) Sale of products by the Group to the CNOOC Group

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Supplemental agreement

Nature of the relevant continuing connected transactions
Category contemplated thereunder

the supplemental agreement to the Financial Services Agreement entered into between the Group and CNOOC Finance on 3 November 2008

A5(a)

Provision of loans by CNOOC Finance to the Group, which does not include entrustment loans referred to in Category A5(c2) as set out in the Circular
A5(b) Provision of deposits services by CNOOC Finance to the Group

the supplemental agreement to the Kingboard Product Sales and Services Agreement entered into between the Group and Hong Kong Kingboard on 5 November 2008

B1
Sale of methanol products by the Group to Hong Kong Kingboard and/or its Associates

Details of the aforesaid agreements and the continuing connected transactions contemplated thereunder are set out in the Letter from the Board.

In addition, the proposed caps of certain categories of continuing connected transactions, including the above mentioned Categories A2, A4(a), A4(b), A4(c), A5(a), A5(b) and B1, and the proposed cap of the continuing connected transactions in relation to the provision of natural gas by the CNOOC Group to the Group for its manufacturing purpose, which are classified as Category A3 in the Circular and regulated by the Natural Gas Sale and Purchase Agreements (collectively referred to as the ‘‘Continuing Connected Transactions’’), will be subject to the Independent Shareholders’ approval at the EGM pursuant to the Listing Rules as well.

(II) Reasons for and benefits of the entering into of the Supplemental Agreements

As stated in the Company’s annual report for the financial year ended 31 December 2007, the Group is a large-scale and modernized enterprise engaged in the development, production and sales of mineral fertilizers and chemical products and its products mainly include urea and methanol. The Group also engages in businesses including, among others, port operations and provision of transportation services.

We note from the Prospectus that the Group, as one of the major subsidiaries of CNOOC, has established long term working relationship with the CNOOC Group. We have reviewed public information in respect of the background of CNOOC and note that CNOOC, as one of the largest state-owned oil companies in China and the largest offshore oil and gas producer, is an integrated corporation with extensive business sectors including but not limited to oil and gas exploitation, technical services, natural

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

gas and power generation, financial services, logistics services and new energies development. In this regard, we concur with the view of the management of the Company that it is desirable for the Group to continue to maintain its working relationship with and to seek supports from the CNOOC Group as such cooperation is expected to benefit the Group from leveraging on the CNOOC Group’s extensive resources and experience in the petroleum industry for the future business development of the Group.

As stated in the Letter from the Board, Hong Kong Kingboard is the business partner of the Company by holding 40% interests in CNOOC Jiantao, which is principally engaged in manufacturing and sale of methanol products. As advised by the Company, Kingboard Chemical, together with its subsidiaries including Hong Kong Kingboard, is principally engaged in manufacturing of laminates, copper foil, glass fabric, glass yarn, bleached kraft paper, printed circuit boards, chemicals, liquid crystal displays and magnetic products. We note from the Prospectus that the Group has established its business relationship with Hong Kong Kingboard and its Associates since September 2006 by selling the Group’s methanol products to Hong Kong Kingboard and its Associates. The Company is of the view that the cooperation with Hong Kong Kingboard helps the Group to expand its revenue base.

In respect of the background of CNOOC Finance, we have reviewed information relating to CNOOC Finance provided by the Company, including, among others, its latest management accounts as at 31 August 2008, the credit ratings rated by international rating agencies, current ratio and capital adequacy ratio. We have also reviewed information sourced from public domains in respect of the regulation on finance companies of enterprise groups in the PRC and note that such finance companies are subject to supervision and administration by the China Banking Regulatory Commission and the regulation on finance companies is more stringent than that on commercial banks in certain respects, for example the capital adequacy ratio for finance companies of enterprise groups shall not be lower than 10% whereas such threshold for commercial banks is 8%. We have also reviewed the undertaking made by CNOOC as required by the aforesaid regulation, pursuant to which CNOOC has undertaken to inject capital to CNOOC Finance under the situation where CNOOC Finance has difficulties in meeting its payment obligation.

Besides, the Financial Services Agreement provides that the Group shall have a setoff right such that, in the event of any misuse or default by CNOOC Finance in respect of deposit placed with it by the Group, the Group will be able to offset the amounts due to the Group or its subsidiaries from CNOOC Finance against the amounts outstanding from the Group or its subsidiaries to CNOOC Finance, while CNOOC Finance shall not have such setoff right. We have reviewed the annual report of CNOOC for the year ended 31 December 2007 and note the total assets and the net assets of CNOOC as at 31 December 2007 amounted to approximately RMB309 billion and approximately RMB228 billion, respectively. The Directors are of the view that the risk profile of CNOOC Finance, as a financial services provider, is not greater than that of independent commercial banks in China. The Directors also consider that CNOOC Finance is in a better position to provide the Group with a more efficient and

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

orderly financial service platform than independent commercial banks as CNOOC Finance, as a group finance company, is more familiar with the business and transaction pattern of the CNOOC Group and the Group and helps the Group to reduce relevant transaction costs. Having considered the aforesaid, we concur with the view of the Directors that the risk profile of CNOOC Finance is not greater than that of independent commercial banks in China.

Our view

Given the nature of the relevant continuing connected transactions as stated under the section headed ‘‘Background’’ above and our discussion with the Company in relation thereto, we concur with the view of the management of the Company that the entering into of the Supplemental Agreements between the Group and its relevant connected persons (as defined in the Listing Rules) is for the business purpose of the Group and falls within the ordinary and usual course of business of the Group and is in the interests of the Group and the Shareholders as a whole.

(III) Major terms of the Supplemental Agreements

Common major terms of the Supplemental Agreements

As stated in the Letter from the Board, the relevant continuing connected transactions will continue to be conducted between the Group and its relevant connected persons (as defined in the Listing Rules) on the terms and conditions as set out in the relevant agreements (as may be supplemented) and on normal commercial terms.

We have reviewed the existing agreements and the Supplemental Agreements and understand that the major terms, namely the pricing principles which are elaborated below, of the Supplemental Agreements are essentially identical to those of the relevant existing agreements, except the extension of the respective term of each agreement for an additional three-year period from 1 January 2009 to 31 December 2011.

We note that the relevant agreements are on non-exclusive basis and allow the Group to engage independent third parties for similar services and/or products as the Group thinks appropriate and/or if the terms are more favorable to the Group. Besides, we are advised by the Company that in consideration of the long term good relationship between the Group and the CNOOC Group as well as the support provided by the latter, each party to the Comprehensive Services and Product Sales Agreement and the corresponding supplemental agreement agrees to be obliged to purchase products and/or services from the other party provided that the terms offered by the other party are no less favourable than the terms offered by independent third parties.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Pricing principles of the continuing connected transactions contemplated under the Supplemental Agreements

A2 the supplemental agreement to the COSL Transportation Agreement

Pursuant to the supplemental agreement to the COSL Transportation Agreement, COSL will continue with the provision of ocean-going transportation services to the Group for the transportation of its products.

As stipulated in the COSL Transportation Agreement, the continuing connected transactions contemplated thereunder will be conducted on normal commercial terms and conditions which shall not be less favorable than those offered to independent third parties and priced in accordance with the following pricing principles:

(i) price prescribed by the PRC government;
(ii) where there is no government-prescribed price but there is a government guidance price, at a price not higher than the guidance price set by the PRC government;
(iii) where there is neither a government-prescribed price nor a government guidance price, the market price; and
(iv) where none of the above is applicable, the price will be agreed between the relevant parties based on the cost plus a margin of up to 10% on cost.

As advised by the Company, as at the Latest Practicable Date, the transportation services regulated by the supplemental agreement to the COSL Transportation Agreement are not subject to any PRC government prescribed or guidance price. However, the Company considers it prudent to provide pricing principles (i) and (ii) in the agreement.

We have discussed with the Company in respect of the pricing practice of ocean-going transportation service in China and are advised by the Company that freight rates charged by carriers depend on factors including, among others, category of goods, goods status and sea routes, and the Company considers it impracticable for it to obtain comparable quotations for comparison purpose. In view of the lack of government regulated or guided price for ocean-going transportation services and the impracticality of obtaining comparable market rates, we concur with the view of the management of the Company that the ‘‘cost plus’’ pricing principle should be adopted.

As stated above, under the circumstances where no relevant market prices are available, the Company adopts a margin of up to 10% on cost when determining the prices payable by the Group to COSL, which, as stated in the Letter from the Board, was determined on the basis of arm’s length negotiations between the

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Company and COSL and was expected to reflect reasonable profits for COSL in providing the relevant transportation services under the supplemental agreement to the COSL Transportation Agreement. Based on our review of the annual report of COSL for the financial year ended 31 December 2007 which stated that the operating profit margin of the marine support and transportation services sector of COSL was 31.6% for the year of 2007 and in consideration of COSL’s experience and reliability in shipping services, we consider the up to 10% margin on cost to be charged by COSL not unreasonable.

A4 the supplemental agreement to the Comprehensive Services and Product Sales Agreement

Pursuant to the supplemental agreement to the Comprehensive Services and Product Sales Agreement, among others, the Group will continue to provide the CNOOC Group with services and supplies, such as machines and vehicle rental, transportation services, project management services and logistics services; and the CNOOC Group will continue to provide the Group with services and supplies that are necessary for the Group’s business operation and production, such as telecommunication and computer network services, enterprise resources planning and office automation services, construction of production facilities and related construction project management and supervision, machines and vehicle rental and maintenance, production equipment rental and repair, transportation services and community services.

As stipulated in the Comprehensive Services and Product Sales Agreement, the continuing connected transactions contemplated thereunder will be conducted on normal commercial terms and conditions which shall not be less favorable than those offered to independent third parties and priced in accordance with the following pricing principles:

(i) price prescribed by the PRC government;
(ii) where there is no government-prescribed price but there is a government guidance price, at a price not higher than the guidance price set by the PRC government;
(iii) where there is neither a government-prescribed price nor a government guidance price, the market price; and
(iv) where none of the above is applicable, the price will be agreed between the relevant parties based on the cost plus a margin of up to 10% on cost.

As advised by the Company, the Company considers it prudent to provide pricing principles (i) and (ii) in the agreement in consideration of the comprehensive scope of services and supplies to be provided by relevant parties under the supplemental agreement to the Comprehensive Services and Product Sales Agreement.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We have reviewed procedures regarding internal control over procurement and bid invitation of the Company and discussed with the Company in relation thereto. We are advised by the Company that as the services and/or supplies provided by the CNOOC Group to the Group and vice versa under the Comprehensive Services and Product Sales Agreement are of a comprehensive range and there are no comparable services/supplies of similar nature conducted between the Group and independent third parties available for comparison purpose, it is reasonable to set the relevant services and/or supplies charges under the supplemental agreement to the Comprehensive Services and Product Sales Agreement by reference to the cost plus a margin.

As stated in the Letter from the Board, under such circumstances, the Company adopts a margin of up to 10% on cost. We understand that such margin, which is the same as the margin for the Comprehensive Services and Product Sales Agreement as disclosed in the Prospectus, was determined on the basis of arm’s length negotiations between the Company and the CNOOC Group upon the listing of the Company and was expected to reflect reasonable profits for the two parties in selling the subject matters under the supplemental agreement to the Comprehensive Services and Product Sales Agreement. Having considered the above, in particular that the same pricing mechanism applies to services and/or supplies provided by the CNOOC Group to the Group and vice versa, we concur with the view of the Company that such terms are fair and reasonable and on normal commercial terms.

To justify the pricing principle (iii) above in relation to the supply of products, such as methanol, by the Group to the CNOOC Group, we have reviewed supporting documents provided by the Company in relation to the historical transactions (i) contemplated under the Comprehensive Services and Product Sales Agreement; and (ii) conducted with independent third parties on a sample basis, and note that the prices of methanol products charged by the Group to the CNOOC Group were no less than those offered by the Group to its independent third parties.

Having considered the above, we concur with the view of the management of the Company that the pricing principle under the supplemental agreement to the Comprehensive Services and Product Sales Agreement is reasonable so far as the Independent Shareholders are concerned.

A5 the supplemental agreement to the Financial Services Agreement

Pursuant to the supplemental agreement to the Financial Services Agreement, the Group will continue to utilize financial services provided by CNOOC Finance, which include, among others, provision of loans and deposit services to the Group.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As stipulated in the Financial Services Agreement, the fees and charges payable by the Company to CNOOC Finance for the loan and deposit services shall be determined on the following basis:

Category Nature of the services Pricing principle A5(a) Loans from CNOOC The interest rates for such loans are Finance determined in accordance with the standard rates promulgated by the PBOC (‘‘PBOC Rate’’) from time to time, and may be reduced where the relevant laws and regulations allow A5(b) Deposits with CNOOC The interest rates for such deposits are Finance determined in accordance with the PBOC Rate from time to time

Based on our discussion with the management of the Company and our review of the supporting documents provided by the Company in relation to the historical transaction records of Category A5(a) and Category A5(b) on a sample basis, we note that interest rate offered by CNOOC Finance to the Group for a specific loan was determined annually by reference to the PBOC Rate during the same period with a downward adjustment, and the interest rate offered by CNOOC Finance for the deposits placed by the Group was also in line with the PBOC Rate during the same period.

We are also advised by the Company that the interest rates for the loans or the deposits offered by CNOOC Finance to the Group pursuant to the supplemental agreement to the Finance Services Agreement will be no less favorable than those offered by independent third parties.

Having considered the above, we concur with the view of the management of the Company that the pricing principle under the supplemental agreement to the Financial Services Agreement is reasonable so far as the Independent Shareholders are concerned.

B1 the supplemental agreement to the Kingboard Product Sales and Services Agreement

Pursuant to the supplemental agreement to the Kingboard Product Sales and Services Agreement, the Group will continue to sell its products and/or services to Hong Kong Kingboard and/or its Associates.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As stipulated in the Kingboard Product Sales and Services Agreement, the continuing connected transactions contemplated thereunder will be conducted on normal commercial terms and conditions which shall not be less favorable than those offered to independent third parties and priced in accordance with the following pricing principles:

(i) price prescribed by the PRC government;
(ii) where there is no government-prescribed price but there is a government guidance price, at a price not higher than the guidance price set by the PRC government;
(iii) where there is neither a government-prescribed price nor a government guidance price, the market price; and
(iv) where none of the above is applicable, the price will be agreed between the relevant parties based on the cost plus a margin of up to 15% on cost.

As advised by the Company, as at the Latest Practicable Date, methanol products provided by the Company to Hong Kong Kingboard pursuant to the supplemental agreement to the Kingboard Product Sales and Services Agreement are not subject to any PRC government prescribed or guidance price, but the Company considers it prudent to provide pricing principles (i) and (ii) in the agreement.

We are also advised by the Company that the pricing principle (iv) is not appropriate as the market of methanol products is active. However, in case that no market prices are available, the Company provides pricing principle (iv) and adopts a margin of up to 15% on cost which, as stated in the Letter from the Board, was determined on the basis of arm’s length negotiations between the Company and Hong Kong Kingboard and was expected to reflect reasonable profits for the Group in providing the relevant products under the Kingboard Product Sales and Services Agreement.

To justify the pricing principle (iii) above, we have reviewed supporting documents provided by the Company in relation to the historical transactions (i) contemplated under the Kingboard Product Sales and Services Agreement; and (ii) conducted with independent third parties on a sample basis, and note that the prices of methanol products charged by the Group to Hong Kong Kingboard were no less than those offered by the Group to its independent third parties.

Having considered the above, we concur with the view of the management of the Company that the pricing principle under the supplemental agreement to the Kingboard Product Sales and Services Agreement is reasonable so far as the Independent Shareholders are concerned.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Our view

Having considered the above, we are of the view that the major terms, including the pricing principles, of the Supplemental Agreements are on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Group and the Shareholders as a whole.

(IV) Proposed Caps

Set out below are the details of (i) the actual transaction amount of each of the Continuing Connected Transactions for each of the two years ended 31 December 2007 and the six months ended 30 June 2008; (ii) the existing annual cap amounts for the year ending 31 December 2008; and (iii) the Proposed Caps for each of the three years ending 31 December 2011:

		Historical figures	Historical figures	Historical figures	Historical figures
					for the six		Existing annual
						months	cap amounts for
		for the year ended				ended	the year ending	Proposed Caps for		the
Category		31 December				30 June	31 December	year	ending 31 December
		2006		2007		2008	2008	2009	2010	2011
		RMB’000	RMB’000			RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
A2.	COSL Transportation Agreement:
	Provision of transportation services
	by COSL to the Group	7,177		21,188		8,430	48,000	50,400	67,200	117,600
A3.	Natural Gas Sale and Purchase
	Agreements:
	Purchase of natural gas by the
	Group from CNOOC China
	Limited	416,861		539,954		356,176	1,046,640	1,138,011	1,540,198	2,544,416
A4.	Comprehensive Services and Product
	Sales Agreement:
A4(a).	Provision of services and supplies
	by the CNOOC Group to the
	Group	129,358		99,684		32,106	74,800	285,970	318,899	338,872
A4(b).	Provision of services and supplies
	by the Group to the CNOOC
	Group	903		3,542		3,142	20,000	114,503	196,229	286,415
A4(c).	Sale of products by the Group to
	the CNOOC Group	14,360		28,432		15,473	107,000	395,563	426,147	447,147
A5.	Financial Services Agreement:
A5(a).	Loans granted by CNOOC Finance
	to the Group (Note 1)	62,298		63,346		0	600,000	600,000	600,000	600,000
A5(b).	Deposits placed by the Group with	293,839				228,503	228,788	400,000	500,000	500,000
	CNOOC Finance (Note 1)	(within one				(from 29	(from 29
		calendar year		September 2007			September 2007
		from the Listing		to 30	June 2008)		to 31 December
			Date)				2008) (Note 2)
B1.	Kingboard Product Sales and
	Services Agreement:
	Sale of products and provision of
	services by the Group to Hong
	Kong Kingboard and/or its
	Associates	117,834		252,374		190,926	730,000	630,000	877,800	1,597,400

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Notes:

The respective proposed cap amounts and transaction amounts of Categories A5(a) and A5(b) refer to the maximum daily outstanding balance during the relevant period.
As stated in the Letter from the Board, the Stock Exchange granted a waiver to the Company in respect of the cap amount of RMB300 million relating to Category A5(b) for one calendar year from the Listing Date. On 25 September 2007, the Company announced that the Group would continue to place deposits with CNOOC Finance with a maximum daily outstanding balance of RMB228,788,000 for the period from 29 September 2007 to 31 December 2008.

As stated in the Letter from the Board, the Directors have determined the Proposed Caps of the Continuing Connected Transactions for each of the three years ending 31 December 2011 based on the following factors:

(a) references have been made to the historical amounts for each of the two financial years ended 31 December 2007 and the six months ended 30 June 2008 as well as the estimated transaction amounts for the year ending 31 December 2008; and
(b) there will not be any material adverse changes to the state of the PRC economy, the level of prices of and demands for the Group’s products, and the materials and services needed by the Group for its business operations.

Besides, we are advised by the Company that the Company also takes into account the expected business/projects development of the Group for the three years ending 31 December 2011 when determining the Proposed Caps.

Details of the basis of the determination and the analysis of the Proposed Caps are set out below:

A2 Proposed cap for the continuing connected transactions contemplated under the supplemental agreement to the COSL Transportation Agreement (‘‘COSL Transportation Cap’’)

As advised by the Company, most of the methanol produced by the Group is sold outside the Hainan Province, where the Group’s manufacturing facilities are located at, through ship transportation provided by COSL.

We note that the COSL Transportation Cap for each of the three years ending 31 December 2011 represents a significant increase as compared with the historical transaction amounts for each of the two years ended 31 December 2007 and the six months ended 30 June 2008.

In assessing the reasonableness of the COSL Transportation Cap, we have discussed with the management of the Company and understand that the COSL Transportation Cap is determined based on the following principal factors: (i) the Group’s estimates on the average freight rate and the average annual transportation volume to be provided by COSL for each of the three year ending 31 December 2011;

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(ii) the Group’s estimates on the increase of the transportation services to be provided by COSL arising from the Group’s 800,000-ton-methanol plant project which is anticipated to commence the trial production in late 2010 and the mass production in 2011; (iii) the Group’s estimates on the increase of the transportation expenditure relating to CNOOC Jiantao as the financial results of CNOOC Jiantao has been and will be fully consolidated into the Group’s accounts, instead of on a proportional basis, since May 2008; and (iv) a buffer of 5% in consideration of the possibility of fluctuation of freight rate and/or transportation volume to be provided by COSL to the Group.

We have reviewed the documents provided by the Company in relation to the historical freight rates charged by COSL to the Group and the details of the relevant cap calculation, and consider the Group’s cap calculation is justifiable.

Given the above, we consider the increase in the COSL Transportation Cap for each of the three years ending 31 December 2011 is fair and reasonable.

A3 Proposed cap for the continuing connected transactions contemplated under the Natural Gas Sale and Purchase Agreements (‘‘Natural Gas Sale and Purchase Cap’’)

We note that the Natural Gas Sale and Purchase Cap for each of the three years ending 31 December 2011 represents a significant increase as compared with the historical transaction amounts for each of the two years ended 31 December 2007 and the six months ended 30 June 2008.

In assessing the reasonableness of the Natural Gas Sale and Purchase Cap, we have discussed with the management of the Company and understand that the Group has taken into account the following principal factors when determining the Natural Gas Sale and Purchase Cap: (i) the Group’s estimates on the average natural gas price in the three years ending 31 December 2011, which, as advised by the Company, is mainly based on the historical average natural gas price as well as the Group’s estimates on the year-on-year growth of the natural gas price in the coming three years; (ii) the Group’s estimates on the annual supply of natural gas to be provided by the CNOOC Group in the coming three years; (iii) the Group’s estimates on the increase of the Group’s demand for natural gas for its manufacturing of methanol products in 2010 and 2011 in consideration that the Group’s 800,000-ton-methanol plant project is expected to commence its trial production in late 2010; (iv) the Group’s estimates on the increase of the supply of natural gas to be provided by the CNOOC Group upon the expected commencement of the production of Ledong gas fields operated by the CNOOC Group at the end of 2008; (v) the Group’s estimates on the increase of the use of natural gas relating to CNOOC Jiantao as the financial results of CNOOC Jiantao has been and will be fully consolidated into the Group’s accounts, instead of on a proportional basis, since May 2008; and (vi) a buffer of 5% in consideration of the possibility of fluctuation in natural gas price and/or gas volume to be provided by the CNOOC Group to the Group.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We have reviewed the documents in relation to the historical natural gas prices charged by the CNOOC Group to the Group and the backgrounds of the above mentioned projects and the estimated usage of natural gas in relation thereto, and consider the Group’s cap calculation is justifiable.

Given the above, we consider the increase in the Natural Gas Sale and Purchase Cap for each of the three years ending 31 December 2011 is fair and reasonable.

A4(a) Proposed cap for the continuing connected transactions in relation to provision of services and supplies by the CNOOC Group to the Group contemplated under the supplemental agreement to the Comprehensive Services and Product Sales Agreement (‘‘Provision of Services and Supplies by the CNOOC Group Cap’’)

We note that the Provision of Services and Supplies by the CNOOC Group Cap for each of the three years ending 31 December 2011 represents a significant increase as compared with the historical transaction amounts for each of the two years ended 31 December 2007 and the six months ended 30 June 2008.

In assessing the reasonableness of the Provision of Services and Supplies by the CNOOC Group Cap, we have discussed with the management of the Company and understand that such increase is mainly attributable to the following factors: (i) the Group’s estimates on the increase of demand for engineering services and certain raw materials for its power generation to be provided by the CNOOC Group upon the expected commencement of the trial production of the Group’s 800,000-ton-methonal project in late 2010; (ii) the Group’s estimates on the increase of demand for engineering services to be provided by the CNOOC Group for the Group’s expansion project of Hainan Basuo port in the coming three years; (iii) the Group’s estimates on the increase of demand for engineering, inspection and maintenance services to be provided by the CNOOC Group for the Group’s construction of a polyoxymethylene production facility of Tianye Chemical in the coming three years; (iv) the Group’s estimates on the increase of demand for human resources and computer network services to be provided by the CNOOC Group for the business expansion of the Group in the coming three years; and (v) a buffer of 5% in consideration of the possibility of fluctuation in service charges and/or service demand in relation thereto in the coming three years.

We have reviewed the documents in relation to the backgrounds of the above mentioned projects operated by the Group as well as the details of the relevant cap calculation and consider the Group’s cap calculation is justifiable.

Given the above, we consider the increase in the Provision of Services and Supplies by the CNOOC Group Cap for each of the three years ending 31 December 2011 is fair and reasonable.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

A4(b) Proposed cap for the continuing connected transactions in relation to provision of services and supplies by the Group to the CNOOC Group contemplated under the supplemental agreement to the Comprehensive Services and Product Sales Agreement (‘‘Provision of Services and Supplies by the Group Cap’’)

We note that the Provision of Services and Supplies by the Group Cap for each of the three years ending 31 December 2011 represents a significant increase as compared with the historical transaction amounts for each of the two years ended 31 December 2007 and the six months ended 30 June 2008.

In assessing the reasonableness of the Provision of Services and Supplies by the Group Cap, we have discussed with the management of the Company and understand that such increase is mainly attributable to the following factors: (i) the expected increase of demand from the CNOOC Group for the services and supplies to be provided by the Group, including, among others, facilities inspection and maintenance, logistics, and project management services relating to the CNOOC Group’s several chemical plants projects, which are located in the Hainan Province and will be under on-going construction or commence production in 2009, respectively; (ii) the Group’s estimates on the increase of demand from the CNOOC Group for berth services to be provided by the Group upon completion of the Group’s expansion project of Hainan Basuo port; and (iii) a buffer of 5% in consideration of the possibility of fluctuation in the relevant service charges and/or service demand in relation thereto in the coming three years.

We have reviewed the documents in relation to the backgrounds of the above mentioned projects operated by the CNOOC Group and the Group, respectively, and the details of the relevant cap calculation. Based on our review, we understand that the significant increase of the Provision of Services and Supplies by the Group Cap as compared with the relevant historical transaction amounts is mainly attributable to the above mentioned projects, and consider the Group’s cap calculation is justifiable.

Given the above, we consider the increase in the Provision of Services and Supplies by the Group Cap for each of the three years ending 31 December 2011 is fair and reasonable.

A4(c) Proposed cap for the continuing connected transactions in relation to sale of products by the Group to the CNOOC Group contemplated under the supplemental agreement to the Comprehensive Services and Product Sales Agreement (‘‘Sale of Products by the Group Cap’’)

We note that the Sale of Products by the Group Cap for each of the three years ending 31 December 2011 represents a significant increase as compared with the historical transaction amounts for each of the two years ended 31 December 2007 and the six months ended 30 June 2008.

In assessing the reasonableness of the Sale of Products by the Group Cap, we have discussed with the management of the Company and understand that such increase is mainly attributable to the following factors: (i) the expected increase of demand from

– 41 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

the CNOOC Group for products, including, among others, methanol, to be provided by the Group upon the commencement of the production of the CNOOC Group’s several chemical plants projects, which are located in the Hainan Province; (ii) the Group’s estimates that certain existing transactions conducted between the Group and a PRC entity will constitute continuing connected transactions under the Listing Rules upon completion of the restructuring of the PRC entity which is expected to occur in early 2009; and (iii) a buffer of 5% in consideration of the possibility of fluctuation in prices and/or demand from the CNOOC Group in relation thereto in the coming three years.

We have reviewed the documents provided by the Company in relation to the background of the above mentioned projects operated by the CNOOC Group and the PRC entity and the details of the relevant cap calculation. Based on our review, we understand that the significant increase of the Sale of Products by the Group Cap as compared with the relevant historical transaction amounts is mainly attributable to the above mentioned projects and the PRC entity effect, and consider the Group’s cap calculation is justifiable.

Given the above, we consider the Sale of Products by the Group Cap for each of the three years ending 31 December 2011 is fair and reasonable.

A5(a) Proposed cap for the continuing connected transactions in relation to loans to be granted by CNOOC Finance to the Group contemplated under the supplemental agreement to the Financial Services Agreement (‘‘Loan Cap’’)

As stated in the Letter from the Board, the Loan Cap hereof only refers to the loan to be granted by CNOOC Finance as part of the Group’s project financing which shall be secured by the pledge of the Group’s assets in favor of CNOOC Finance.

We note that the Loan Cap for each of the three years ending 31 December 2011 is the same as that of 2008. We have discussed with the management of the Company in respect of the basis for the determination of the Loan Cap and understand that the Loan Cap is based on the Company’s estimates on the capital expenditure for the construction of the Group’s 800,000-ton-methanol plant project in the Hainan Province, which is expected to be approximately RMB600 million in the coming three years.

Given the above, we consider the Loan Cap for each of the three years ending 31 December 2011 is fair and reasonable.

A5(b) Proposed cap for the continuing connected transactions in relation to deposits to be placed by the Group with CNOOC Finance contemplated under the supplemental agreement to the Financial Services Agreement (‘‘Deposit Cap’’)

We note that the Group assumes an increase of approximately 75% when determining the Deposit Cap for the year of 2009 as compared with that for the period from 29 September 2007 to 31 December 2008. As advised by the Company, such increase is mainly attributable to the expected increase of daily deposits balances to be

– 42 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

placed with CNOOC Finance by new subsidiaries and/or joint venture companies of the Company, which will be incorporated in the PRC as part of the Company’s business development plan.

Given the above, we consider the Deposit Cap for each of the three years ending 31 December 2011 is fair and reasonable.

B1 Proposed cap for the continuing connected transactions in relation to sale of methanol products by the Group to Hong Kong Kingboard and/or its Associates contemplated under the supplemental agreement to the Kingboard Product Sales and Services Agreement (‘‘Kingboard Cap’’)

In assessing the reasonableness of the Kingboard Cap, we have discussed with the management of the Company in respect of the basis adopted by the Company for the determination of the relevant cap amounts for each of the three years ending 31 December 2011, and understand that the Kingboard Cap is mainly attributable to the following factors: (i) the Group’s estimates on the average methanol price in the coming three years; (ii) the Group’s estimates on the sales volume of methanol products to Hong Kong Kingboard for the coming three years; (iii) the Group’s estimates on the increase of its sale of methanol products to Hong Kong Kingboard upon the expected commencement of the trial production in late 2010 and the mass production in 2011 of the Group’s 800,000-ton-methanol plant project; (iv) the Group’s estimates on the increase of the sale of methanol products by CNOOC Jiantao to Hong Kong Kingboard as the financial results of CNOOC Jiantao has been and will be fully consolidated into the Group’s accounts, instead of on a proportional basis, since May 2008; and (v) a buffer of 5% in consideration of the possibility of fluctuation of price of methanol and/or sales volume to be provided by the Group to Hong Kong Kingboard in the coming three years.

We have reviewed the documents provided by the Company in relation to the historical methanol prices charged by the Group to Hong Kong Kingboard and/or its Associates, public information in respect of the market price of methanol and the details of the relevant cap calculation, and consider the Group’s cap calculation is justifiable.

Given the above, we consider the Kingboard Cap for each of the three years ending 31 December 2011 is fair and reasonable.

Our view

Having considered the above, we are of the view that the basis adopted by the management of the Company in determining the Proposed Caps of the Continuing Connected Transactions is fair and reasonable so far as the Company and the Independent Shareholders are concerned.

– 43 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

However, Shareholders should note that the Proposed Caps relate to future events and do not represent a forecast of transaction amounts to be incurred as a result of each of the Continuing Connected Transactions. Consequently, we express no opinion as to how closely the actual transaction amounts of each of the Continuing Connected Transactions correspond with the Proposed Caps as discussed above.

RECOMMENDATION

Having considered the principal factors and reasons referred to in the above, we consider that (i) the entering into of the Supplemental Agreements is in the ordinary and usual course of business of the Group and the terms of the Supplemental Agreements are on normal commercial terms or on terms no less favorable to the Company than terms available to or from (as appropriate) independent third parties, and hence the entering into of the Supplemental Agreements is in the interests of the Group and the Shareholders as a whole; and (ii) the Proposed Caps are fair and reasonable so far as the Company and the Independent Shareholders are concerned, and we advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the entering into of the Supplemental Agreements and the Proposed Caps.

Yours faithfully, For and on behalf of CIMB-GK Securities (HK) Limited Alex Lau Heidi Cheng Director Director Head of Corporate Finance

– 44 –

APPENDIX I

GENERAL INFORMATION

RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts, the omission of which would make any statement herein misleading.

SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date were as follows:

Par value per share (RMB) Authorised: 4,610,000,000 Shares authorised as at the Latest Practicable Date 1.00 Issued and fully paid: 2,738,999,512 Domestic Shares: State-owned shares 1.00 75,000,366 Domestic Shares: Other legal person shares 1.00 25,000,122 Unlisted Foreign Shares 1.00 1,771,000,000 H Shares 1.00 4,610,000,000 Shares issued as at the Latest Practicable Date 1.00	RMB 4,610,000,000
	2,738,999,512 75,000,366 25,000,122 1,771,000,000
	4,610,000,000

– 45 –

APPENDIX I

GENERAL INFORMATION

DISCLOSURE OF INTERESTS

(a) Directors and chief executive

As at the Latest Practicable Date, the interests or short positions of the Directors, supervisors or chief executive of the Company in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were required: (i) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 & 8 of Part XV of the SFO (including interests and short positions which were taken or deemed to have under such provisions of the SFO); or (ii) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) pursuant to Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, to be notified to the Company and the Stock Exchange are as follows:

		Number of		Approximate	Approximate
		share		percentage of the	percentage of the
		appreciation	Class of	relevant class of	Company’s total
Name of Director	Capacity	rights granted	shares	shares in issue	issued shares
				(%)	(%)
Wu Mengfei	Beneficial owner	1,053,000(L)	H shares	0.06(L)	0.02(L)
		(note 1)
Yang Yexin	Beneficial owner	891,000(L)	H shares	0.05(L)	0.02(L)
		(note 2)
Fang Yong	Beneficial owner	681,000(L)	H shares	0.04(L)	0.01(L)
		(note 3)
Chen Kai	Beneficial owner	681,000(L)	H shares	0.04(L)	0.01(L)
		(note 4)

Notes:

(L) denotes long position.
(1) These shares represent interests in share appreciation rights of the Company, of which 263,250 share appreciation rights are exercisable in each of following four periods: (i) 25 February 2010 to 30 June 2010; (ii) 1 January 2011 to 30 June 2011; (iii) 1 January 2012 to 30 June 2012; and (iv) 1 January 2013 to 25 February 2013.
(2) These shares represent interests in share appreciation rights of the Company, of which 222,750 share appreciation rights are exercisable in each of following four periods: (i) 25 February 2010 to 30 June 2010; (ii) 1 January 2011 to 30 June 2011; (iii) 1 January 2012 to 30 June 2012; and (iv) 1 January 2013 to 25 February 2013.
(3) These shares represent interests in share appreciation rights of the Company, of which 170,250 share appreciation rights are exercisable in each of following four periods: (i) 25 February 2010 to 30 June 2010; (ii) 1 January 2011 to 30 June 2011; (iii) 1 January 2012 to 30 June 2012; and (iv) 1 January 2013 to 25 February 2013.
(4) These shares represent interests in share appreciation rights of the Company, of which 170,250 share appreciation rights are exercisable in each of following four periods: (i) 25 February 2010 to 30 June 2010; (ii) 1 January 2011 to 30 June 2011; (iii) 1 January 2012 to 30 June 2012; and (iv) 1 January 2013 to 25 February 2013.

– 46 –

APPENDIX I

GENERAL INFORMATION

(b) Substantial shareholders

(i) Substantial shareholders’ interests in shares or underlying shares of the Company:

As at the Latest Practicable Date, according to the register of interests kept by the Company under section 336 of the SFO and so far as was known to the Directors, supervisors and chief executive of the Company, the following persons (other than a Director, supervisor or chief executive of the Company) had an interest or short position in the shares of the Company and underlying shares which would fall to be disclosed to the Company under the provisions of Divisions 2 & 3 of Part XV of the SFO:

				Approximate	Approximate
Name of		Number of shares		percentage of the	percentage of the
Substantial		and nature of	Class of	relevant class of	Company’s total
Shareholder	Capacity	interests	shares	shares in issue	issued shares
				(%)	(%)
CNOOC (note 1)	Beneficial owner; security	2,813,999,878(L)	Domestic	100(L)	61.04(L)
	interests in shares through a	(note 2)	shares
	controlled corporation
Commonwealth	Interests of controlled	213,580,000(L)	H shares	12.06(L)	4.63(L)
Bank of Australia	corporations	(note 3)
Merrill Lynch & Co.,	Interests of controlled	123,022,103(L)	H shares	6.95(L)	2.67(L)
Inc.	corporations	(note 4)
Hang Seng Bank	Trustee (other than a bare	125,334,000(L)	H shares	7.07(L)	2.72(L)
Trustee	trustee)	(note 5)
International
Limited

Notes:

(L) denotes long position.
(1) The non-executive Director, Mr. Wu Mengfei, is the chief financial officer of CNOOC. One of the supervisors of the Company, Mr. Yin Jihong, is also the chairman of the supervisory committee of CNOOC.
(2) Out of the 2,813,999,878 Domestic shares, 2,738,999,512 shares are held as beneficial owner and 75,000,366 shares are held as having security interests in shares through a controlled corporation, CNOOC Finance Corporation Limited.
(3) These shares are held by a series of controlled corporations of Commonwealth Bank of Australia. The controlled corporations that directly hold shares of the Company are First State Investments (Hong Kong) Ltd, First State Investment Management (UK) Limited, First State Investments International Ltd and First State Investments (Singapore).
(4) These shares are held by a series of controlled corporations of Merrill Lynch & Co, Ltd. The controlled corporations that directly hold shares of the Company are Merrill Lynch International, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Blackrock Inc. (on behalf of discretionary clients).
(5) These shares are held by Hang Seng Bank Trustee International Limited, which are also deemed to be interested by each of Value Partners Limited, Value Partners Group Limited, Cheah Capital Management Limited, Cheah Company Limited, Mr. Cheah Cheng Hye and Ms. To Hau Yin.

– 47 –

APPENDIX I

GENERAL INFORMATION

Save as disclosed above and so far as the Directors are aware, as at the Latest Practicable Date, no other person had an interest or short position in the Company’s shares or underlying shares which would fall to be disclosed to the Company and the Stock Exchange under Divisions 2 & 3 of Part XV of the SFO.

(ii) Substantial shareholders’ interests in shares/underlying shares of other members of the Group

As at the Latest Practicable Date, so far as the Directors, supervisors or chief executive of the Company are aware, each of the following persons, directly or indirectly, was interested in 10% or more of the nominal value of any class of share capital (including any option in respect of such capital) carrying rights to vote in all circumstances at general meetings of any other member of the Group:

		Percentage of
Name of subsidiary	Name of shareholder	shareholding
CNOOC Kingboard	Kingboard Investment Limited*	40%
Chemical Limited (中海石
油建滔化工有限公司)
CNOOC Jincheng Coal	State-owned Assets Supervision	25%
Chemical Industry Co.,	and Administration
Ltd. (中海石油晉城煤化工	Commission of Jincheng City*
產業有限公司)
Hainan Basuo Port Limited	Hainan Development Holding	27.5%
(海南八所港務有限責任	Co., Ltd.* (海南省發展控股有
公司)	限公司)
Shanghai Qionghua Trading	Shanghai Shenxin Property Co.,	49%
Co., Ltd. (上海瓊化經貿有	Ltd.* (上海申信房地產有限
限公司)	公司)
CNOOC Tianye Chemical	Huhhot Jinchuang Investment	10%
Limited (中海石油天野化	Holdings Limited* (呼和浩特金
工股份有限公司)	創投資控股有限公司)
Inner Mongolia Hong Feng	Baotou Huafa Plastic Products	29.4%
Packaging Co., Ltd. (內蒙	Factory* (包頭華髮塑料製品廠)
古鴻豐包裝有限責任公司)
China Basuo Ocean	China Ocean Shipping Tally Co.*	16%
Shipping Tally Co., Ltd.	(中國外輪理貨總公司)
(八所中理外輪理貨有限
公司)

For identification purpose only

– 48 –

APPENDIX I

GENERAL INFORMATION

Save as disclosed above and so far as the Directors, supervisors or chief executive of the Company are aware, as at the Latest Practicable Date, no other person was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group.

SERVICE CONTRACTS OF THE DIRECTORS

Each of the Directors and supervisors of the Company has entered into a service contract with the Company. No Director or supervisor of the Company has entered into any service contract with the Company, which is not terminable by the Company within one year without payment of compensation (other than statutory compensation).

COMPETING INTEREST

As at the Latest Practicable Date, none of the Directors or their respective associates has any interest in other business which competes or is likely to compete with the business of the Group.

EXPERT STATEMENTS

This circular includes statement(s), opinion(s) or advice(s) made by the following expert:

Name	Qualification
CIMB-GK Securities	Licensed corporation to carry out type 1 (dealing in
(HK) Limited	securities), type 4 (advising on securities) and type 6
	(advising on corporate finance) regulated activities under
	the SFO

The above expert has given and has not withdrawn its written consent to the issue of this circular with its statements and references to its name included in the form and context in which it respectively included.

NO MATERIAL INTERESTS

As at the Latest Practicable Date, the above expert did not have any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, none of the Directors, the supervisors of the Company and the above expert had any interest in any assets which have been, since 31 December 2007 (being the date to which the latest published audited accounts of the Company were made up), acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

As at the Latest Practicable Date, none of the Directors and the supervisors of the Company was materially interested in any contract or arrangement subsisting at the date of this circular which was significant in relation to the business of the Group.

– 49 –

APPENDIX I

GENERAL INFORMATION

MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2007, the date to which the latest published consolidated audited accounts of the Group had been made up.

MATERIAL LITIGATION

As at the Latest Practicable Date, none of the members of the Group was engaged in any litigation or claims of material importance and no litigation or claims of material importance was known to the Directors to be pending or threatened against any members of the Group.

MATERIAL CONTRACTS

The particulars of all material contracts (not being contracts entered into in the ordinary course of business) entered into by any member of the Group within the two years immediately preceding the issue of this circular are set out as follows:

(i) Co-operation agreement dated 15 May 2008 entered among the Company, 湖北省宜昌地質勘探大隊 (Yichang Geological Exploration League of Hubei Province) and 宜昌宏和礦業開發有限公司 (Yichang Honghe Mineral Development Company Limited) related to establishment of China BlueChem Yichang Mining Ltd.; and
(ii) Jincheng agreement dated 18 September 2007 entered into between the Company and 晉城市人民政府國有資產監督管理委員會 (Stated-owned Assets Supervision and Administration Committee of the municipal government of Jincheng City*) related to establishment of CNOOC Jincheng Coal Chemical Industry Co., Ltd..

MISCELLANEOUS

(i) The joint company secretaries of the Company are Mr. Quan Changsheng and Mr. Lee Tze Leung, Raymond. Mr. Quan is a Vice President and Chief Financial Officer of the Company. He is a PRC qualified accountant. Mr. Lee is an associate member of the Hong Kong Institute of Certified Public Accountants (HKICPA) and a fellow member of the Association of Chartered Certified Accountants (ACCA) of the United Kingdom.
(ii) The qualified accountant of the Company appointed pursuant to Rule 3.24 of the Listing Rules is Mr. Lee Tze Leung, Raymond.
(iii) The registered office and the principal place of business of the Company is No. 1 Zhu Jiang South Street, Dongfang City, Hainan Province, the PRC. The Hong Kong H Share Registrar and H Share transfer office of the Company is Computershare Hong Kong Investor Services Limited situated at 46th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.
For identification purpose only

– 50 –

APPENDIX I

GENERAL INFORMATION

(iv) The English language text of this document shall prevail over the Chinese language text.

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the Company’s representative office in Hong Kong at 65/F., Bank of China Tower, No. 1 Garden Road, Central, Hong Kong for a period of 14 days (excluding Saturdays) from the date of the circular:

(i) the memorandum and articles of association of the Company;
(ii) each of the contracts set out under the paragraph headed ‘‘Material Contracts’’ in this Appendix;
(iii) the letter from the Independent Board Committee dated 14 November 2008, the text of which is set out on page 26 of this circular;
(iv) the letter from the Independent Financial Adviser dated 14 November 2008, the text of which is set out on pages 27 to 44 of this circular;
(v) Properties Leasing Agreement dated 1 September 2006 between the Company and CNOOC and the supplemental agreement dated 5 November 2008 to extend the term of the Properties Leasing Agreement;
(vi) COSL Transportation Agreement dated 1 September 2006 between the Company and COSL and the supplemental agreement dated 5 November 2008 to extend the term of the COSL Transportation Agreement;
(vii) Comprehensive Services and Product Sales Agreement dated 1 September 2006 between the Company and CNOOC and the supplemental agreement dated 5 November 2008 to extend the term of the Comprehensive Services and Product Sales Agreement;
(viii)Financial Services Agreement dated 1 September 2006 between the Group and CNOOC Finance and the supplemental agreements dated 18 September 2007 and 3 November 2008 respectively to extend the term of the Financial Services Agreement; and
(ix) Kingboard Product Sales and Services Agreement dated on 22 August 2006 between the Company and the Hong Kong Kingboard and the supplemental agreement dated 5 November 2008 to extend the term of the Kingboard Product Sales and Services Agreement.

– 51 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

==> picture [279 x 34] intentionally omitted <==

(a joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 3983)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the ‘‘EGM’’) of China BlueChemical Ltd. (the ‘‘Company’’) will be held at Conference Room, 3rd Floor, CNOOC Office Building B, No. 98 Guanhai Road, Longhua District, Haikou, Hainan Province, the People’s Republic of China on Tuesday, 30 December 2008 at 10 a.m., for the purpose of considering and, if thought fit, passing, with or without modifications, the following resolutions:

Unless otherwise indicated, capitalized terms used in this notice and the following resolutions shall have the same meanings as those defined in the circular of the Company dated 14 November 2008 relating to, among other things, the continuing connected transactions of the Company (the ‘‘Continuing Connected Transactions Circular’’):

ORDINARY RESOLUTIONS

‘‘THAT:

(a) the entering into of the supplemental agreement in relation to the COSL Transportation Agreement in relation to the provision of transportation services by COSL to the Group, details of which are more particularly described in the Continuing Connected Transactions Circular, be and is hereby approved, ratified and confirmed; and
(b) the Board be and is hereby authorised to implement the transactions under the COSL Transportation Agreement and its supplemental agreement.
(a) the Proposed Caps for the transactions under the COSL Transportation Agreement for the three financial years commencing on 1 January 2009 and ending on 31 December 2011 as set out in the Continuing Connected Transactions Circular be and are hereby approved, ratified and confirmed; and
(b) the Board be and is hereby authorised to take such actions as are necessary to implement the Proposed Caps.
(a) the Proposed Caps for the transactions under the Natural Gas Sale and Purchase Agreements for the three financial years commencing on 1 January 2009 and ending on 31 December 2011 as set out in the Continuing Connected Transactions Circular be and are hereby approved, ratified and confirmed; and
For identification purpose only

– 52 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

(b) the Board be and is hereby authorised to take such actions as are necessary to implement the Proposed Caps.
(a) the entering into of the supplemental agreement in relation to the Comprehensive Services and Product Sales Agreement in relation to the provision of services by CNOOC Group to the Company and the provision of services by the Company to CNOOC Group, details of which are more particularly described in the Continuing Connected Transactions Circular, be and is hereby approved, ratified and confirmed; and
(b) the Board be and is hereby authorised to implement the transactions under the Comprehensive Services and Product Sales Agreement and its supplemental agreement.
(a) the Proposed Caps for the transactions under Category A4(a) of the Comprehensive Services and Product Sales Agreement for the three financial years commencing on 1 January 2009 and ending on 31 December 2011 as set out in the Continuing Connected Transactions Circular be and are hereby approved, ratified and confirmed; and
(b) the Board be and is hereby authorised to take such actions as are necessary to implement the Proposed Caps.
(a) the Proposed Caps for the transactions under Category A4(b) of the Comprehensive Services and Product Sales Agreement for the three financial years commencing on 1 January 2009 and ending on 31 December 2011 as set out in the Continuing Connected Transactions Circular be and are hereby approved, ratified and confirmed; and
(b) the Board be and is hereby authorised to take such actions as are necessary to implement the Proposed Caps.
(a) the Proposed Caps for the transactions under Category A4(c) of the Comprehensive Services and Product Sales Agreement for the three financial years commencing on 1 January 2009 and ending on 31 December 2011 as set out in the Continuing Connected Transactions Circular be and are hereby approved, ratified and confirmed; and
(b) the Board be and is hereby authorised to take such actions as are necessary to implement the Proposed Caps.
(a) the entering into of the supplemental agreement in relation to the Financial Services Agreement in relation to the financial transactions between CNOOC Finance and the Group, details of which are more particularly described in the Continuing Connected Transactions Circular, be and is hereby approved, ratified and confirmed; and

– 53 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

(b) the Board be and is hereby authorised to implement the transactions under the Financial Services Agreement and its supplemental agreement.
(a) the Proposed Caps for the transactions under Category A5(a) of the Financial Services Agreement for the three financial years commencing on 1 January 2009 and ending on 31 December 2011 as set out in the Continuing Connected Transactions Circular be and are hereby approved, ratified and confirmed; and
(b) the Board be and is hereby authorised to take such actions as are necessary to implement the Proposed Caps.
(a) the Proposed Caps for the transactions under Category A5(b) of the Financial Services Agreement for the three financial years commencing on 1 January 2009 and ending on 31 December 2011 as set out in the Continuing Connected Transactions Circular be and are hereby approved, ratified and confirmed; and
(b) the Board be and is hereby authorised to take such actions as are necessary to implement the Proposed Caps.
(a) the entering into of the supplemental agreement in relation to the Kingboard Product Sales and Services Agreement in relation to the provision of services and products by the Group to Hong Kong Kingboard and its Associates, details of which are more particularly described in the Continuing Connected Transactions Circular, be and is hereby approved, ratified and confirmed; and
(b) the Board be and is hereby authorised to implement the transactions under the Kingboard Product Sales and Services Agreement and its supplemental agreement.
(a) the Proposed Caps for the transactions under the Kingboard Product Sales and Services Agreement for the three financial years commencing on 1 January 2009 and ending on 31 December 2011 as set out in the Continuing Connected Transactions Circular be and are hereby approved, ratified and confirmed; and
(b) the Board be and is hereby authorised to take such actions as are necessary to implement the Proposed Caps.

By order of the Board China BlueChemical Ltd.* Wu Mengfei

Chairman

Hong Kong, 14 November 2008

For identification purpose only

– 54 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

Notes:

(A) The Company’s registers of members will be closed from Saturday, 29 November 2008 to Tuesday, 30 December 2008, both days inclusive, during which period no transfer of shares will be effected. Shareholders of the Company whose names appear on the registers of members of the Company before the close of business hours on Friday, 28 November 2008 are entitled to attend the EGM and to vote in the meeting.

In order to qualify to attend and vote in the meeting, holders of H shares of the Company whose transfers have not been registered shall deposit the transfer documents together with the relevant share certificates at the H share registrar of the Company, Computershare Hong Kong Investor Services Limited at or before 4: 00 p.m. on Friday, 28 November 2008.

The address of the H share registrar of the Company is:

Computershare Hong Kong Investor Services Limited 46th Floor, Hopewell Centre 183 Queen’s Road East Wanchai Hong Kong

(B) Shareholders who intend to attend the meeting in person or by proxy should return the reply slip in person, by post or by fax to the Office of the Secretary to the Board of Directors of the Company (for holders of domestic shares or unlisted foreign shares) or Computershare Hong Kong Investor Services Limited (for holders of H Shares) at least 20 days before the EGM, being Tuesday, 9 December 2008. The Company’s Office of the Secretary to the Board of Directors of the Company is No. 98 Guanhai Road, Longhua District, Haikou, Hainan Province, the People’s Republic of China (Tel: 0086-898-6852-3256, Fax: 0086-898-6852-3259, Post code: 570105). The address of Computershare Hong Kong Investor Services Limited is 46th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.
(C) A shareholder entitled to attend and vote at the meeting may appoint one or more proxies to attend and vote in his stead. A proxy need not be a shareholder of the Company. Where a shareholder has appointed more than one proxy to attend the meeting, such proxies may only vote on a poll.
(D) The instrument appointing a proxy must be in writing under the hand of a shareholder or his attorney duly authorised in writing. If the shareholder is a corporation, that instrument must be either under its common seal or under the hand of its attorney or duly authorised attorney(s). If that instrument is signed by an attorney of the shareholder, the power of attorney authorising that attorney to sign or other authorisation document must be notarized.
(E) To be valid, the proxy form together with the power of attorney or other authorisation document (if any) must be deposited at the Office of the Secretary to the Board of Directors of the Company (Address: No. 98 Guanhai Road, Longhua District,

– 55 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

Haikou, Hainan Province, the People’s Republic of China) (in respect of holders of domestic shares or unlisted foreign shares) not less than 24 hours before the time fixed for holding the meeting. In order to be valid, the said documents together must be lodged with the Company’s H share registrar within the abovementioned period by holders of H shares. Completion and return of the proxy form will not preclude a shareholder from attending and voting in person at the meeting if she/he so wishes. The H share registrar of the Company is Computershare Hong Kong Investor Services Limited, whose address is 46th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.

(F) Shareholders or their proxies must present proof of their identities upon attending the EGM. Should a proxy be appointed, the proxy must also present copies of his/her Proxy Form, or copies of appointing instrument and power of attorney, if applicable.
(G) The EGM is expected to last not more than one day. Shareholders or proxies attending the EGM are responsible for their own transportation and accommodation expenses.

As at the date of this notice, the executive directors of the Company are Mr. Yang Yexin, Mr. Fang Yong and Mr. Chen Kai, the non-executive director is Mr. Wu Mengfei, and the independent non-executive directors are Mr. Tsui Yiu Wa, Alec, Mr. Zhang Xinzhi, Mr. Wu Xiaohua and Mr. Wang Wenshan.

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AI assistant

China BlueChemical Ltd. — Proxy Solicitation & Information Statement 2008

50936_rns_2008-11-13_a9729689-8182-4d66-8ede-e7f18ecfc0e1.pdf

CONTINUING CONNECTED TRANSACTIONS

CIMB-GK Securities (HK) Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM THE BOARD

INFORMATION RELATING TO CONNECTED PERSONS

CNOOC and its Associates

LETTER FROM THE BOARD

Hong Kong Kingboard and its Associates

EXISTING CONTINUING CONNECTED TRANSACTIONS

Continuing connected transactions with CNOOC and its Associates

A1. Properties Leasing Agreement

A2. COSL Transportation Agreement

LETTER FROM THE BOARD

A4. Comprehensive Services and Product Sales Agreement

LETTER FROM THE BOARD

A5. Financial Services Agreement

Continuing connected transactions with Hong Kong Kingboard and its Associates

LETTER FROM THE BOARD

HISTORICAL TRANSACTION FIGURES WITH RESPECT TO EXISTING CONTINUING CONNECTED TRANSACTIONS

LETTER FROM THE BOARD

LETTER FROM THE BOARD

FUTURE PLANS WITH RESPECT TO EXISTING CONTINUING CONNECTED TRANSACTIONS

A1. Properties Leasing Agreement

A2. COSL Transportation Agreement

A3. Natural Gas Sale and Purchase Agreements

A4. Comprehensive Services and Product Sales Agreement

A5. Financial Services Agreement

B1. Kingboard Product Sales and Services Agreement

PROPOSED CAPS IN RELATION TO EXISTING CONTINUING CONNECTED TRANSACTIONS

LETTER FROM THE BOARD

Amounts in RMB’000

LETTER FROM THE BOARD

LETTER FROM THE BOARD

REASONS AND BENEFITS OF THE EXISTING CONTINUING CONNECTED TRANSACTIONS

LETTER FROM THE BOARD

INFORMATION RELATING TO THE GROUP

EGM

LETTER FROM THE BOARD

PROCEDURES TO DEMAND A POLL AT GENERAL MEETING

LETTER FROM THE BOARD

RECOMMENDATIONS

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

To the Independent Shareholders

CONTINUING CONNECTED TRANSACTIONS

Your faithfully,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

BASIS OF OUR OPINION

PRINCIPAL FACTORS CONSIDERED

(I) Background

Supplemental agreement

(II) Reasons for and benefits of the entering into of the Supplemental Agreements

Our view

(III) Major terms of the Supplemental Agreements

Common major terms of the Supplemental Agreements

Pricing principles of the continuing connected transactions contemplated under the Supplemental Agreements

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

A5 the supplemental agreement to the Financial Services Agreement

B1 the supplemental agreement to the Kingboard Product Sales and Services Agreement

Our view

(IV) Proposed Caps

Our view

RECOMMENDATION

RESPONSIBILITY STATEMENT

SHARE CAPITAL

DISCLOSURE OF INTERESTS

(a) Directors and chief executive

(b) Substantial shareholders

SERVICE CONTRACTS OF THE DIRECTORS

COMPETING INTEREST

China BlueChemical Ltd. Proxy Solicitation & Information Statement 2008