China BlueChemical Ltd. - Proxy Solicitation & Information Statement 2020

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 stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other independent professional adviser.

If you have sold or transferred all your shares in China BlueChemical Ltd., you should at once hand this circular, together with the enclosed forms of proxy and reply slips, to the purchaser(s) or transferee(s) or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or transferee(s).

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

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

(Stock Code: 3983)

PROPOSED APPOINTMENT OF NON-EXECUTIVE DIRECTOR CONTINUING CONNECTED TRANSACTIONS PROPOSED ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS AND

NOTICE OF THE SECOND EXTRAORDINARY GENERAL MEETING OF 2020

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

Halcyon Capital Limited

A letter from the Board is set out on pages 6 to 28 of this circular. A letter from the Independent Board Committee is set out on page 29 of this circular. A letter from the Independent Financial Adviser containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 30 to 56 of this circular.

Notice convening the EGM to be held at the Meeting Room 1401, Kaikang CNOOC Mansion, No. 15, Sanqu, Anzhenxili, Chaoyang District, Beijing, the PRC on Tuesday, 29 December 2020 at 9: 00 a.m. is set out on pages 60 to 62 of this circular.

Reply slip and proxy form for use at the EGM (or any adjournment thereof) are enclosed and are also published on the HKEXnews website (http://www.hkexnews.hk). Shareholders who intend to attend the EGM shall complete and return the corresponding reply slips in accordance with the instructions printed thereon before Wednesday, 9 December 2020. Whether or not you are able to attend the EGM, you are strongly advised to complete and sign the enclosed proxy form, in accordance with the instructions printed thereon, and to lodge them with the Company’s Secretary Office of the Board in China (for Domestic Shareholders) at Room 1707, Kaikang CNOOC Mansion, No. 15, Sanqu, Anzhenxili, Chaoyang District, Beijing, the PRC or the Company’s H Share Registrar, Computershare Hong Kong Investor Services Limited (for H Shareholders), at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event not less than 24 hours before the time appointed for the holding of the EGM (or any adjournment thereof) (i.e., 9: 00 a.m. on Monday, 28 December 2020). Completion and return of the proxy form will not preclude you from attending and voting in person at the EGM (or any adjournment thereof) should you so wish.

For identification purpose only

13 November 2020

CONTENTS

	Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . .	29
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER . . . . . . . . . . . . . . . . . .	30
APPENDIX — GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	57
NOTICE OF THE SECOND EXTRAORDINARY GENERAL MEETING
OF 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	60

– i –

DEFINITIONS

In this circular, the following words and expressions shall, unless the context otherwise requires, have the following respective meanings:

‘‘Board’’ the board of Directors
‘‘CBIRC’’ 中國銀行保險監督管理委員會 (China Banking and Insurance Regulatory Commission)
‘‘CNOOC’’ 中國海洋石油集團有限公司 (China National Offshore Oil Corporation*), a state-owned company established in China which is also the controlling Shareholder
‘‘CNOOC China 中海石油（中國）有限公司 (CNOOC China Limited*), a company Limited’’ established in China and a wholly-owned subsidiary of CNOOC Limited
‘‘CNOOC Finance’’ 中海石油財務有限責任公司 (CNOOC Finance Limited*), a company established in China and a wholly-owned subsidiary of CNOOC
‘‘CNOOC Fudao’’ 海洋石油富島有限公司 (CNOOC Fudao Limited*), a company established in the PRC and is currently a wholly-owned subsidiary of the Company
‘‘CNOOC Gas and 中海石油氣電集團有限責任公司 (CNOOC Gas and Power Group Power’’ Ltd.*), a company incorporated in the PRC and a subsidiary of CNOOC
‘‘CNOOC Group’’ CNOOC and its associates, excluding the Group
‘‘CNOOC Jiantao’’ 中海石油建滔化工有限公司 (CNOOC Kingboard Chemical Limited), a company established in China and the equity interest of which is owned as to 60% by the Company and 40% by 建滔投資有限公司 (Kingboard Investments Limited)
‘‘CNOOC Leasing’’ 中海油國際融資租賃有限公司 (CNOOC International Financial Leasing Limited*), a company incorporated in the PRC with limited liability and a wholly owned subsidiary of CNOOC
‘‘CNOOC Limited’’ 中國海洋石油有限公司 (CNOOC Limited*), a company listed on the Stock Exchange (Stock Code: 0883) and the New York Stock Exchange (Stock Code: CEO) and a subsidiary of CNOOC
‘‘CNOOC Tianye’’ 中海石油天野化工有限責任公司 (CNOOC Tianye Chemical Limited*), a company incorporated in the PRC and a non-wholly owned subsidiary of the Company

– 1 –

DEFINITIONS

‘‘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 which are listed on the Stock Exchange

‘‘Comprehensive the comprehensive services and product sales and purchase Services and Product framework agreement dated 23 October 2020 entered into Sales Agreement’’ between the Company and CNOOC
‘‘CPI’’
Consumer Price Index
‘‘Director(s)’’

director(s) of the Company

‘‘Dongfang 13-2 the Dongfang 13-2 gasfield group natural gas sale and purchase Gasfield Group agreement dated 3 November 2017 among the Company, Natural Gas Sale and CNOOC Fudao and CNOOC China Limited Purchase Agreement’’
‘‘EGM’’ the extraordinary general meeting of the Company to be held at 9: 00 a.m. on Tuesday, 29 December 2020 at the Meeting Room 1401, Kaikang CNOOC Mansion, No. 15, Sanqu, Anzhenxili, Chaoyang District, Beijing, the PRC to be convened, among other things, for the Independent Shareholders to consider and, if thought fit, approve the agreements in relation to certain continuing connected transactions, the Proposed Caps and the proposed appointment of non-executive Director, and any adjournment thereof
‘‘Finance Lease the finance lease framework agreement dated 23 October 2020 Agreement’’ entered into between the Company and CNOOC Leasing
‘‘Financial Services the financial services framework agreement dated 23 October Agreement’’ 2020 entered into between the Company and CNOOC Finance
‘‘Four Major Types of the four types of crude oil referred to in Dongfang 1-1 Offshore Crude Oil’’ Gasfield Natural Gas Sale and Purchase Agreement, Natural Gas Sale and Purchase Framework Agreement and Ledong Natural Gasfield Natural Gas Sale and Purchase Agreement entered into between the Company and CNOOC China Limited and Dongfang 1-1 Offshore Gasfield Natural Gas Sale and Purchase Agreement entered into between CNOOC China Limited and CNOOC Jiantao mean West Texas Intermediate Crude Oil (西德克薩斯中質原油), 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)
‘‘Fudao Phase I Urea the Company’s urea plant with a 520,000-tonne annual capacity Plant’’ in Hainan

– 2 –

DEFINITIONS

‘‘Fudao Phase II Urea the Company’s urea plant with an 800,000-tonne annual capacity Plant’’ in Hainan
‘‘Group’’ the Company and its subsidiaries from time to time
‘‘Hainan Phase I the Company’s methanol plant with a 600,000-tonne annual Methanol Plant’’ capacity in Hainan
‘‘Hainan Phase II the Company’s methanol plant with an 800,000-tonne annual Methanol Plant’’ capacity in Hainan
‘‘Hainan Plants’’ Fudao Phase I Urea Plant, Fudao Phase II Urea Plant, Hainan Phase I Methanol Plant and Hainan Phase II Methanol Plant
‘‘Hong Kong’’ the Hong Kong Special Administrative Region of the PRC
‘‘Independent Board an independent committee of the Board comprising Ms. Karen Committee’’ Lee Kit Ying, Mr. Eddie Lee Kwan Hung and Mr. Yu Changchun, the independent non-executive Directors, formed for the purpose of advising the Independent Shareholders in respect of the agreements in relation to certain continuing connected transactions, the Non-exempted Continuing Connected Transactions and the Proposed Caps
‘‘Independent Financial Halcyon Capital Limited, a corporation licensed to carry out Adviser’’ or ‘‘Halcyon type 6 (advising on corporate finance) regulated activity as Capital’’ defined under the SFO, the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the agreements in relation to certain continuing connected transactions, Non-exempted Continuing Connected Transactions and the Proposed Caps
‘‘Independent Shareholders other than those who have interest in the relevant Shareholders’’ Non-exempted Continuing Connected Transactions
‘‘Latest Practicable 10 November 2020, 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 Rules’’ the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited

– 3 –

DEFINITIONS

‘‘Natural Gas Sale and the five long-term agreements the Group has entered into with Purchase CNOOC China Limited, including (i) Dongfang 1-1 Offshore Agreements’’ Gasfield Natural Gas Sale and Purchase Agreement entered into between the Company and CNOOC China Limited dated 28 July 2003, (ii) Dongfang 1-1 Offshore Gasfield Natural Gas Sale and Purchase Agreement entered into between CNOOC Jiantao and CNOOC China Limited dated 10 March 2005, (iii) Natural Gas Sale and Purchase Framework Agreement entered into between the Company and CNOOC China Limited dated 1 September 2006 and Ledong Natural Gasfield Natural Gas Sale and Purchase Agreement entered into between the Company and CNOOC China Limited dated 26 March 2010 thereunder, (iv) the Dongfang 1-1 Gasfield Phase I Adjusted Project Natural Gas Sale and Purchase Framework Agreement entered into among the Company, CNOOC Fudao and CNOOC China Limited on 28 October 2014 and the Dongfang 1-1 Gasfield Phase I Adjusted Project Natural Gas Sale and Purchase Agreement entered into among the Company, CNOOC Fudao and CNOOC China Limited dated 18 May 2015 thereunder, and (v) Dongfang 13-2 Gasfield Group Natural Gas Sale and Purchase Agreement entered into among the Company, CNOOC Fudao and CNOOC China Limited dated 3 November 2017
‘‘Non-exempted the continuing connected transactions contemplated under (i) the Continuing Natural Gas Sale and Purchase Agreements, (ii) the Connected Comprehensive Services and Product Sales Agreement, (iii) the Transactions’’ Financial Services Agreement (with respect to deposits placed by the Group with CNOOC Finance), and (iv) the Finance Lease Agreement, which are subject to Independent Shareholders’ approval at the EGM
‘‘PBOC’’ 中國人民銀行 (the People’s Bank of China)
‘‘Platts Crude Oil Marketwire’’
Platts Crude Oil Marketwire is published by Platts which is a leading global provider of energy and metals information. Platts has been widely recognised by the crude oil industry due to the high accuracy and quick update of the information provided by it, and its fair and transparency as an independent information provider. So far, major oil companies and trading companies both in China and abroad have adopted the oil price information provided by Platts as the basis to conduct their business
‘‘PRC’’ or ‘‘China’’ the People’s Republic of China, which for the purpose of this circular excludes Hong Kong, the Macau Special Administrative Region and Taiwan

– 4 –

DEFINITIONS

‘‘Proposed Cap(s)’’ the proposed maximum annual aggregate value(s) for each type of the Non-exempted Continuing Connected Transactions of the Company for each year in the period commencing from 1 January 2021 to 31 December 2023
‘‘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)
‘‘Shareholder(s)’’ shareholder(s) of the Company
‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited
‘‘%’’ per cent

In addition, the terms ‘‘associate’’, ‘‘connected person’’, ‘‘connected transaction’’, ‘‘continuing connected transaction’’, ‘‘controlling shareholder’’, ‘‘substantial shareholder’’, ‘‘percentage ratio(s)’’ and ‘‘subsidiary’’ shall have the meanings ascribed to them under the Listing Rules.

The Chinese name(s) of the PRC entities have been translated into English in this circular for reference only. In the event of any discrepancies between the Chinese names of the PRC entities and their respective English translations, the Chinese version shall prevail.

– 5 –

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. Wang Weimin Mr. Hou Xiaofeng

Non-executive Directors:

Mr. Meng Jun Mr. Guo Xinjun

Independent non-executive Directors: Ms. Karen Lee Kit Ying Mr. Eddie Lee Kwan Hung Mr. Yu Changchun

Registered Office: No. 3 Park Third Road Basuo Town Dongfang City Hainan Province The PRC

Principal place of business in Hong Kong:

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

13 November 2020

To the Shareholders

Dear Sir or Madam,

PROPOSED APPOINTMENT OF NON-EXECUTIVE DIRECTOR CONTINUING CONNECTED TRANSACTIONS PROPOSED ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

AND

NOTICE OF THE SECOND EXTRAORDINARY GENERAL MEETING OF 2020

INTRODUCTION

We refer to the announcements both dated 23 October 2020 of the Company in relation to, among other things, the proposed appointment of non-executive director and the continuing connected transactions of the Company.

The purposes of this circular are:

(1) to provide the details of the proposed appointment of Mr. Liu Zhenyu as a non-executive Director;
For identification purpose only

– 6 –

LETTER FROM THE BOARD

(2) to provide details in respect of the Non-exempted Continuing Connected Transactions;
(3) to set out the recommendations from the Independent Board Committee in respect of the agreements in relation to certain continuing connected transactions, the Non-exempted Continuing Connected Transactions and the Proposed Caps;
(4) to set out the advice from Halcyon Capital in respect of the agreements in relation to certain continuing connected transactions, the Non-exempted Continuing Connected Transactions and the Proposed Caps;
(5) to provide the Shareholders with other information required under the Listing Rules; and
(6) to provide the Shareholders with the notice of the EGM.

I. PROPOSED APPOINTMENT OF NON-EXECUTIVE DIRECTOR

The Board proposed to appoint Mr. Liu Zhenyu (‘‘Mr. Liu’’) as a non-executive Director. Mr. Liu’s term of office as a non-executive Director will commence from the date on which his appointment is approved by the Shareholders and shall last until a new session of the Directors is approved by the Shareholders at the 2020 annual general meeting of the Company. The appointment of Mr. Liu is subject to the approval by the Shareholders at the EGM.

Biographical details of Mr. Liu are set out as below:

Liu Zhenyu, born in 1976, graduated from Tianjin Institute of Finance and Economics majoring in accounting in July 1998 and obtained his MBA degree from China European International Business School in October 2013. Mr. Liu served as an accountant of the finance department of China Offshore Oil Northern Drilling Company from July 1998 to December 2001, an accountant of the finance department of China Oilfield Services Limited and successively an accounting director of Indonesia office from January 2002 to December 2004, successively an accounting director, financial accounting manager and accounting manager of the finance department of China Oilfield Services Limited from December 2004 to January 2010, a general manager of the finance department of China Oilfield Services Limited from January 2010 to October 2016, and has served as a deputy general manager of the financial assets department of China National Offshore Oil Corporation since October 2016.

Subject to the approval of his appointment as a non-executive Director by the Shareholders at the EGM, Mr. Liu will enter into a service contract with the Company. The Board will be authorised by the Shareholders to determine his remuneration with reference to recommendation by the remuneration committee of the Board while taking into consideration of his qualifications, abilities, responsibilities and experience. After remuneration of Mr. Liu is fixed by the Board, the Company will make an announcement accordingly.

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LETTER FROM THE BOARD

Save as disclosed above, Mr. Liu did not hold any other directorships in any other listed companies in the past three years and he (i) had no relationship with any Directors, supervisors, senior management or substantial or controlling Shareholders of the Company; (ii) had no interest in any shares of the Company within the meaning of Part XV of the SFO; and (iii) held no other position with the Company or other members of the Group.

Save as disclosed in this circular, Mr. Liu has confirmed that there are no matters that need to be brought to the attention of the Shareholders, and there is no other information in relation to the proposed appointment of Mr. Liu as a non-executive Director that is required to be disclosed pursuant to Rule 13.51(2)(h) to (v) of the Listing Rules.

II. NON-EXEMPTED CONTINUING CONNECTED TRANSACTIONS

Summary of the Non-exempted Continuing Connected Transactions

Natural Gas Sale and Purchase Agreements

We refer to the Prospectus of the Company, the announcements of the Company dated 5 November 2008, 9 November 2011, 28 March 2012, 28 October 2014 and 3 November 2017 and the circulars of the Company dated 14 November 2008, 31 December 2008, 15 November 2011, 7 November 2014 and 13 November 2017 in relation to, among other things, the continuing connected transactions of the Company.

The Group entered into five natural gas sale and purchase agreements with CNOOC China Limited, the summary of which are listed as follows:

(1) Dongfang 1-1 Offshore Gasfield Natural Gas Sale and Purchase Agreement between the Company and CNOOC China Limited dated 28 July 2003, under which CNOOC China Limited has committed to supply natural gas to the Company for Fudao Phase II Urea Plant at prices that are subject to adjustments on a quarterly basis by reference to the prices of Four Major Types of Crude Oil quoted on Platts Crude Oil Marketwire during the preceding quarter. The natural gas delivery period under this agreement is 20 years, commencing on 1 October 2003 and will expire on 30 September 2023.
(2) Dongfang 1-1 Offshore Gasfield Natural Gas Sale and Purchase Agreement between CNOOC Jiantao and CNOOC China Limited dated 10 March 2005, under which CNOOC China Limited has committed to supply natural gas to CNOOC Jiantao for Hainan Phase I 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 quoted on Platts Crude Oil Marketwire during the preceding month. The natural gas delivery period under this agreement is 20 years, commencing on 16 October 2006 and will expire on 15 October 2026.

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LETTER FROM THE BOARD

(3) Natural Gas Sale and Purchase Framework Agreement between the Company and CNOOC China Limited on 1 September 2006, under which CNOOC China Limited has committed to supply natural gas for the Company’s future plants. This agreement does not include the transactions conducted under the two pre-existing agreements mentioned above. Under this framework agreement, CNOOC China Limited will sell natural gas to the Company and/or the Company’s subsidiaries 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 quoted on Platts Crude Oil Marketwire) 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 the Company’s 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.

On 26 March 2010, the Company and CNOOC China Limited entered into the Ledong Natural Gasfield Natural Gas Sale and Purchase Agreement under the Natural Gas Sale and Purchase Framework Agreement dated 1 September 2006 pursuant to which CNOOC China Limited has agreed to supply natural gas to the Company for Hainan Phase II Methanol Plant at prices of natural gas that are subject to adjustments on a quarterly basis by reference to the prices of Four Major Types of Crude Oil quoted on Platts Crude Oil Marketwire during the preceding quarter. The natural gas delivery period under this agreement is 15 years, commencing on 1 January 2011 and will expire on 31 December 2025.

(4) Dongfang 1-1 Gasfield Phase I Adjusted Project Natural Gas Sale and Purchase Framework Agreement among the Company, CNOOC Fudao and CNOOC China Limited dated 28 October 2014 pursuant to which CNOOC China Limited has agreed to supply to the Group with natural gas as feedstock required mainly for Fudao Phase I Urea Plant. The natural gas delivery period under this framework agreement is nine years commencing on 1 August 2015.

On 18 May 2015, the Company, CNOOC Fudao and CNOOC China Limited entered into the Dongfang 1-1 Gasfield Phase I Adjusted Project Natural Gas Sale and Purchase Agreement under the Dongfang 1-1 Gasfield Phase I Adjusted Project Natural Gas Sale and Purchase Framework Agreement dated 28 October 2014 pursuant to which CNOOC China Limited has agreed to supply to the Company with natural gas as feedstock required mainly for Fudao Phase I Urea Plant. The natural gas delivery period under this agreement commenced on 8 April 2016 and will expire at the end of operation period of the gasfield, which is expected to be on or before 31 July 2024.

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LETTER FROM THE BOARD

(5) Dongfang 13-2 Gasfield Group Natural Gas Sale and Purchase Agreement among the Company, CNOOC Fudao and CNOOC China Limited dated 3 November 2017, pursuant to which CNOOC China Limited has agreed to supply to the Group with natural gas as feedstock required mainly for the Hainan Plants. The natural gas delivery period under this agreement is 20 years commencing on 15 November 2018.

As disclosed in the Prospectus of the Company, because the above-mentioned natural gas sale and purchase agreements (1) to (3) were entered into by the Company before its listing on 29 September 2006, the Company applied to the Stock Exchange at the time of its listing for, and the Stock Exchange has granted, a waiver from strict compliance with the independent shareholders’ approval requirement. The joint sponsors to the listing have also confirmed that they consider that a term of 20 years for each of the natural gas sale and purchase agreements (1) to (3) is appropriate.

As disclosed in the circulars of the Company dated 7 November 2014 and 13 November 2017, for the above-mentioned natural gas sale and purchase agreements (4) and (5), the Dongfang 1-1 Gasfield Phase I Adjusted Project Natural Gas Sale and Purchase Framework Agreement and Dongtang 13-2 Gasfield Group Natural Gas Sale and Purchase Agreement, Halcyon Capital, the then independent financial adviser of the Company, having considered the nature of the agreement and industrial practice, was of the opinion that it is reasonable for such agreements to be of a longer period than three year and it is in line with normal business practice for agreements of this type.

In order to ensure that the price of the natural gas under the above-mentioned natural gas sale and purchase agreements (1) to (3) is determined on a fair and reasonable basis and in accordance with the pricing principles, the Company has adopted the following procedures when determining the price of the natural gas to be supplied to its production facilities in Hainan:

a. the designated department of the Company would monitor and obtain the prevailing average prices of the Four Major Types of Crude Oil quoted on Platts Crude Oil Marketwire on a quarterly basis in the case of Fudao Phase I Urea Plant, Fudao Phase II Urea Plant and Hainan Phase II Methanol Plant, and on a monthly basis in the case of Hainan Phase I Methanol Plant;
b. based on the average prices of the Four Major Types of Crude Oil quoted on Platts Crude Oil Marketwire obtained, the designated department would calculate the natural gas price for the preceding quarter or month (as the case may be) in accordance with the pricing principles as set out in the relevant natural gas sale and purchase agreement;
c. the designated department would then submit the natural gas price so determined to senior management of the Company for approval upon which the Company would make payment to CNOOC China Limited in accordance with the terms and conditions as set out in the relevant natural gas sale and purchase agreements.

– 10 –

LETTER FROM THE BOARD

The transactions under the Dongfang 1-1 Gasfield Phase I Adjusted Project Natural Gas Sale and Purchase Framework Agreement has been conducted on normal commercial terms and conditions which is no less favourable than those offered to independent third parties by CNOOC China Limited, and has been priced in accordance with a benchmark price which is determined with reference to the exploration, development and production cost of the gasfield plus reasonable profit in principle as CNOOC China Limited is the sole supplier of natural gas in the region. The Company has checked the 2013 annual report of CNOOC Limited to ensure the benchmark price is comparable to the average realised price per thousand cubic feet of natural gas in 2013 as disclosed therein. The parties will negotiate for the adjustment of the benchmark price in August each year taking into consideration of the factors such as change of the pricing policy by the state pricing regulatory authorities, prices of domestic energy markets, domestic prices for natural gas and change in CPIs. The Company has checked the annual reports of CNOOC Limited for 2017 to 2019 to ensure the benchmark price after the adjustment is comparable to the average realised prices per thousand cubic feet of natural gas from 2017 to 2019 as disclosed therein. During the term commencing on 1 January 2021 and ending on 31 December 2023, the Company will also check average realized price per thousand cubic feet of natural gas disclosed in the latest annual reports of CNOOC Limited to ensure the reasonableness and fairness of the benchmark price after the adjustment.

The transactions under the Dongfang 13-2 Gasfield Group Natural Gas Sale and Purchase Agreement has been conducted on normal commercial terms and conditions which is no less favourable than those offered to independent third parties by CNOOC China Limited, and has been priced in accordance with a benchmark price which is determined with reference to the exploration, development and production cost of the gasfield plus reasonable profit in principle as CNOOC China Limited is the sole supplier of natural gas in the region.

In order to ensure the benchmark price of the Dongfang 13-2 Gasfield Group Natural Gas Sale and Purchase Agreement is determined on a fair and reasonable basis, the Company has checked the average realized prices per thousand cubic feet of natural gas disclosed in the annual reports of CNOOC Limited for 2014 to 2016, analysed the effect of different natural gas prices on the gross profit of the Company’s products, and the Financial Management Department of the Company has compared the benchmark price provided by CNOOC China Limited to another related company. In order to ensure the benchmark price after the adjustment of the Dongfang 13–2 Gasfield Group Natural Gas Sale and Purchase Agreement is determined on a fair and reasonable basis, the Company has checked the average realized prices per thousand cubic feet of natural gas disclosed in the annual reports of CNOOC Limited for 2017 to 2019, analysed the effect of different natural gas prices on the gross profit of the Company’s products, and the Financial Management Department of the Company has compared such price provided by CNOOC China Limited to another related company. During the term commencing on 1 January 2021 and ending on 31 December 2023, the Company will also check average realized price per thousand cubic feet of natural gas disclosed in the latest annual reports of CNOOC Limited to ensure the reasonableness and fairness of the benchmark price after the adjustment.

– 11 –

LETTER FROM THE BOARD

The price of natural gas will be adjusted based on the benchmark price on a quarterly basis if the average price of international crude oil (Dated Brent) or the average selling price of the Company’s urea or methanol of that quarter increases to certain thresholds, with the price of international crude oil (Dated Brent) and the selling price of the Company’s urea or methanol each contributing an agreed percentage in the adjustment of the natural gas price. Under the current adjustment mechanism, the price of natural gas will stay unchanged if none of the average price of international crude oil (Dated Brent) or the average selling price of the Company’s methanol or urea increases to certain thresholds, while the price of natural gas will increase if any of the average price of international crude oil (Dated Brent) or the average selling price of the Company’s methanol or urea increases to certain thresholds.

The adjustment mechanisms in the existing natural gas sale and purchase agreements of the Company as disclosed in this circular mainly refer to the prices of crude oil. However, due to fluctuation in international crude oil prices in recent years, in the Dongfang 13-2 Gasfield Group Natural Gas Sale and Purchase Agreement, the Company considers that a mechanism to adjust natural gas price with reference to various other factors in addition to oil price will alleviate the pressure of the Company when facing increasing oil price and secure a price more favourable for the Company, and in particular taking into account the selling price of the Company’s products would enable the Company to better control its cost.

In order to ensure the price of natural gas under the Dongfang 13-2 Gasfield Group Natural Gas Sale and Purchase Agreement is determined in accordance with the pricing principle, at the end of each quarter, the Financial Management Department is responsible for collecting the average price for international crude oil (Dated Brent) of that quarter while the Marketing Center is responsible for preparing the average selling price of the Company’s methanol and urea of that quarter. The Production Management Department will calculate the price of natural gas of that quarter in accordance with the price adjustment mechanism as set out in the Dongfang 13-2 Gasfield Group Natural Gas Sale and Purchase Agreement. The adjusted natural gas price then will be submitted to the senior management of the Company for final review and approval. In the case of any dispute on the natural gas price, the Production Management Department and the Financial Management Department are responsible for negotiating with CNOOC China Limited.

All the five natural gas sale and purchase agreements mentioned above will not expire this year, and their terms remain unchanged. As such, the Company will not seek the Independent Shareholders’ approval of the agreements.

– 12 –

LETTER FROM THE BOARD

Comprehensive Services and Product Sales Agreement

On 23 October 2020, the Company entered into the Comprehensive Services and Product Sales Agreement with CNOOC, pursuant to which:

a. the Group has agreed to provide services and supplies to CNOOC Group (including but not limited to provision of offices and facilities, labour services, technical training services, project management services, logistics management services, accommodation/catering services, port management, logistics assistance, transportation services and material supplies for utility system, dependent upon service locations and the facilities established);
b. CNOOC Group has agreed to provide services and supplies to the Group (including but not limited to engineering services, telecommunication and network services, construction services, management system/technology development services, equipment leasing, equipment maintenance, project management services, labour services, materials/equipment procurement services, transportation services, technical training services, catering, accommodation, medical, insurance services, conference services, consultancy services and logistics management services, dependent upon service locations and the facilities established); and
c. the Group has agreed to sell products (urea, phosphate fertiliser, methanol, potash, formaldehyde, ammonia, compound fertiliser, acrylonitrile, etc.) to CNOOC Group and CNOOC Group has agreed to sell products (potash, medicament and natural gas etc.) to the Group.

The term of the Comprehensive Services and Product Sales Agreement will commence on 1 January 2021 and will expire on 31 December 2023, but may be renewed upon agreement provided that the requirements of the Listing Rules in relation to connected transactions are complied with.

In order to facilitate effective internal control of the continuing connected transactions contemplated under the Comprehensive Services and Product Sales Agreement, the Company will divide, so far as practicable, such transactions into two categories, which are (i) the provision of services and supplies and sale of products by the Group to CNOOC Group and (ii) the provision of services and supplies and sale of products by CNOOC Group to the Group.

Nevertheless, when relevant government authorities publish a government-prescribed price in relation to the transactions contemplated under the Comprehensive Services and Product Sales Agreement during the term of the Comprehensive Services and Product Sales Agreement, the relevant prices shall be adjusted with reference to the government-prescribed price accordingly. As of the date of this circular, there are no government-prescribed prices currently in force for the above-mentioned services, supplies and products.

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LETTER FROM THE BOARD

Under the Comprehensive Services and Products Sales Agreement, the provision of services, supplies and products by the Group to CNOOC Group will be conducted on normal commercial terms and conditions which shall not be favourable than those offered to independent third parties by the Group, the provision of services, supplies and products by CNOOC Group to the Group will be conducted on normal commercial terms and conditions which shall not be less favourable than those offered to independent third parties by CNOOC Group, and the prices thereunder will be determined in accordance with the pricing principles set out in the Comprehensive Services and Product Sales Agreement as follows:

As to provision of services, supplies and products by the Group to CNOOC Group:
a. not lower than the prices charged by the Group to other comparable independent third party customers for the same type of services, supplies or products; or
b. with reference to the prices for the same type of services, supplies or products in the same areas charged on normal terms in the ordinary and usual course of its business by comparable independent third party service providers or suppliers; or
c. with reference to the prices for the same type of services, supplies or products in the adjacent areas charged on normal terms in the ordinary and usual course of its business by comparable independent third party providers or suppliers.
As to provision of services, supplies and products by CNOOC Group to the Group:
a. not higher than the prices charged by CNOOC Group to its associates (other than members of the Group) or other comparable independent third party customers (if any) for the same type of services, supplies or products; or
b. with reference to the prices for the same type of services, supplies or products in the same areas charged on normal terms in the ordinary and usual course of its business by comparable independent third party service providers or suppliers; or
c. with reference to the prices for the same type of services, supplies or products in the adjacent areas charged on normal terms in the ordinary and usual course of its business by comparable independent third party providers or suppliers.

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LETTER FROM THE BOARD

In order to ensure that the price of the Comprehensive Service and Product Sales Agreement with reference to provision of services and supplies and sales of products by the Group to the CNOOC Group is determined on a fair and reasonable basis and in accordance with the pricing principle, the Company has adopted the following procedures when determining the price of the services and supplies provided and the price of the products sold:

1. As for provision of services and supplies by the Group to CNOOC Group

Before entering into specific service or supply provision agreements with CNOOC Group, the designated department of the Group will evaluate and assess the scope of the relevant services or supplies requested and prepare a fee proposal based on detailed cost calculation referencing to cost of materials, products and labors, technical difficulties and expertise involved, as well as fee quotes of the Group to other independent third party customers and the fees charged by competitors of the Group in the market (if available) collected from regional data available in the market and market data gathered by the Group’s marketing team during on-site visits, which will be submitted to the senior management for approval. The senior management of the Company will determine the price of the Group’s services or supplies based on the market information collected by the Group’s marketing team with reference to the then marketing strategy of the Company, so as to ensure that the fees for the services or supplies that the Group will be charging CNOOC Group are competitive and comparable to those being offered to independent third party customers of the Group.

2. As for sale of products by the Group to CNOOC Group

The Company has set up the Sales and Pricing Committee, which comprises senior management and executives from the Marketing Center, the Financial Management Department, the Audit Department and the Capital Operation Department of the Company, to determine the price of products for sale. The Marketing Center of the Company will gather market information, such as the recent market trend and the prices charged by competitors of the Group in the market collected from regional data quoted on specialized websites of industrial market information and available in the market and market data gathered by the Group’s marketing team during on-site visits, and propose the selling price for the products to be sold taking into consideration the selling price proposed by the local marketing team and market information gathered. The proposed selling price will then be reported to the Sales and Pricing Committee which will review the rationales and basis for determining the proposed price before approving the price. The Sales and Pricing Committee will determine the selling price of the Group’s products based on the market information collected by the Group’s marketing team with reference to the then operations, marketing strategies, production and manufacturing costs, and operating profits of the Company. The specific product sales agreements will then be entered into at the approved price.

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LETTER FROM THE BOARD

In order to ensure that the price of the Comprehensive Services and Product Sales Agreement with respect to provision of services and supplies and sale of products by CNOOC Group to the Group is determined on a fair and reasonable basis and in accordance with the pricing principle, the Company has set up the Procurement Management Committee, which comprises senior management and executives from the Procurement Department and Disciplinary Inspection Committee of the Company, to determine the supplier of services, supplies and products. The following procedures have been adopted when determining the suppliers of the services, supplies and products:

The Procurement Management Committee is responsible for carrying out tendering process to assess the quality and price of services, supplies and products, qualification of suppliers, and terms offered by no less than three suppliers to make sure the conditions offered by CNOOC Group in the separate agreements under the Comprehensive Services and Product Sales Agreement are no less favorable to the Group than those offered by independent third parties to the Group (if practicable). If the above-mentioned tendering process is not available due to the exclusivity of certain services, supplies or products in certain places, requirements of government authorities or other reasons, the Procurement Management Committee will negotiate with suppliers of services, supplies or products to make sure the pricing principles set out in the Comprehensive Services and Product Sales Agreement are fulfilled.

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

Financial Services Agreement

The Group utilizes from time to time financial services provided by CNOOC Finance and, therefore, entered into the Financial Services Agreement with CNOOC Finance on 23 October 2020, pursuant to which CNOOC Finance will provide to the Group a range of financial services that the Group may require, including the following:

provision of financing services to the Group, including but not limited to loans;
deposit services;
notes acceptance and discounting services;
arrangement of entrustment loans between the Company and its subsidiaries or among its subsidiaries;

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LETTER FROM THE BOARD

transfer and settlement services, including transfer and settlement for transactions between the Company and its subsidiaries and for transactions between the Group and CNOOC Group; and
other financial services permitted by the CBIRC to the Group.

The term of the Financial Services Agreement will commence on 1 January 2021 and expire on 31 December 2023 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 Financial Services Agreement will be conducted on normal commercial terms and conditions and will be priced in accordance with the following principles:

provision of loans to the Group: the interest rates for such loans are determined in accordance with the loan prime rate (LPR) promulgated by the National Interbank Funding Center as authorized by the PBOC from time to time, and with appropriate discount to the comparable loan interest rate provided by major financing banks of the Company.
provision of deposit services: the interest rates for such deposits are determined in accordance with the deposit benchmark interest rates for relevant financial institutions as promulgated by the PBOC from time to time, and shall be no less than the comparable deposit interest rate offered by major financing banks of the Company.
notes acceptance and discounting services: in providing note acceptance services to the Group, CNOOC Finance will charge service fees that are calculated in accordance with the par value, and the fee rates are determined with appropriate discount to the comparable rate provided by major financing banks of the Company; in providing note discounting services to the Group by CNOOC Finance, the interest rates are determined by reference to the latest notes market quote, and with applicable discount to the comparable interest rate provided by major financing banks of the Company.
arrangement of entrustment loans: the annual service fees are to be calculated based on the outstanding principal of the loans, and the aggregate amount of service fees and loan interest together shall not exceed the interest for securing a loan of the same term directly from independent third party financial institutions by the Company and/or its subsidiaries; and if there are standard rates promulgated by the PBOC or other competent regulatory authorities, the service fees shall be determined with reference to the standard rates promulgated by the PBOC or other competent regulatory authorities and with appropriate discount to the comparable standards provided by major financing banks of the Company.

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LETTER FROM THE BOARD

transfer and settlement services in RMB: no service fee will be charged (relevant services in other currencies shall adopt principle 6 as set out below); and
other financial services: service fees shall be determined with reference to the relevant standard charging rate promulgated by the PBOC or other competent regulatory authorities, and with appropriate discount to the comparable service fees provided by major financing banks of the Company.

In order to effectively implement the deposit services under the Financial Services Agreement, the Capital Operation Department of the Group will obtain the rates and terms offered by CNOOC Finance and other major and independent PRC commercial banks and deposit benchmark interest rate by the PBOC from time to time and at least quarterly to make sure the rates and terms provided by CNOOC Finance are in compliance with the above-mentioned principles set out in the Financial Services Agreement.

Pursuant to the Financial Service Agreement entered into between the Company and CNOOC Finance, the Company shall be entitled to 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, and CNOOC Finance shall not be entitled to have any such offset right in this circumstance.

Finance Lease Agreement

On 23 October 2020, the Company entered into the Finance Lease Agreement with CNOOC Leasing, pursuant to which:

a. CNOOC Leasing agrees to provide finance lease services to the Group when the Group so requires, by means including but not limited to (1) the Group selling its production facility/equipment to CNOOC Leasing, leasing them back from CNOOC Leasing for its own use and repurchasing them at the end of the lease period; or (2) CNOOC Leasing purchasing production facility/equipment in accordance with the Group’s choice of the suppliers and the facility/equipment, leasing them to the Group for its use and selling them to the Group at the end of the lease period; and
b. the Group agrees to pay lease rent (principal plus lease interest) and commission fees to CNOOC Leasing for provision of the finance lease service.

The term of the Finance Lease Agreement will commence on 1 January 2021 and expire on 31 December 2023, 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 contemplated under the Finance Lease Agreement will be conducted on normal commercial terms and conditions which shall not be less favourable than those provided to independent third parties by CNOOC Leasing, and the principal amount, the lease interest rate and commission fees shall be determined in accordance with the following principles:

a. principal amount: for scenario 1 above, the principal amount shall be determined with reference to the net book value of such production facility/equipment or the appraised value of such production facility/equipment to be prepared by an independent valuer, and shall not be less favorable than that provided by an independent third party financial institution to the Group; for scenario 2, the principal amount shall be determined based on the purchase price of such production facility/equipment, and shall not be less favorable than that provided by an independent third party financial institution to the Group; and
b. lease interest and commission fees: the consolidated rate of lease interest plus commission fees during the lease period shall not be higher than the available loan interest rate quoted from the PRC commercial banks for the corresponding period.

The Capital Operation Department of the Company are responsible for gathering quotes from independent finance lease companies or major and independent PRC commercial banks and assessing the qualifications and terms offered to make sure the terms offered in the specific finance lease agreement by CNOOC Leasing are no less favorable to the Group than those offered by independent third parties. The results will be submitted to senior management of the Company for final approval.

The Group may, from time to time when the situation requires, enter into separate agreements which will set out the specific terms and conditions of obtaining such finance lease services according to the principles laid down by the Finance Lease Agreement.

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LETTER FROM THE BOARD

Historical Transaction Figures and the Proposed Annual Caps with respect to Non-exempted Continuing Connected Transactions

Set out below are the historical amounts of the Non-exempted Continuing Connected Transactions of the Company for the two previous financial years ended 31 December 2019 and the nine months ended 30 September 2020 and the approved annual caps for the three years ending 31 December 2020:

							Nine months
							ended	Year ended
	Year ended	31	December	Year ended 31		December	30 September	31 December
Category of the Non-exempted	2018			2019			2020	2020
Continuing Connected	Actual	Approved cap		Actual	Approved cap		Actual	Approved cap
Transactions	amount			amount			amount
				Amounts in RMB’000
Natural Gas Sale and
Purchase Agreements:
Purchase of natural gas by	2,333,978		2,922,470	2,446,715		2,945,741	1,837,747	2,967,467
the Group from CNOOC
China Limited (Note 1)
Comprehensive Services and
Product Sales Agreement:
Provision of services and	181,897		304,247	430,613		498,525	334,137	691,638
supplies and sale of
products by CNOOC
Group to the Group
(Note 2)
Provision of services and	564,898		1,426,892	504,550		1,624,386	344,873	2,065,922
supplies and sale of
products by the Group to
CNOOC Group (Note 3)
Financial Services Agreement:
Deposits placed by the Group	399,941		400,000	399,857		400,000	399,498	400,000
with CNOOC Finance
Finance Lease Agreement:
Provision of finance leasing	1,396,118		1,473,000	1,140,235		1,579,000	1,098,092	1,579,000
services by CNOOC
Leasing to the Group
(Note 4)

Notes:

The difference between the actual transaction amount and the approved annual caps from 2018 to 2020 was because the proposed annual caps for the three financial years ending on 31 December 2020 were determined based on theoretical maximum amount of gas consumption on a full-year running basis without considering non-scheduled stops in each production plant of the Company in Hainan.
The difference between the actual transaction amount and the approved annual caps from 2018 to 2020 was mainly caused by the reduced procurement by the Group of potash from CNOOC Group due to availability of more favourable price provided by third parties.

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LETTER FROM THE BOARD

The difference between the actual transaction amount and the approved annual caps from 2018 to 2020 was mainly caused by (1) the change in accounting treatment from the full amount method to the net amount method for the company that was expected to undertake the primary potash sales business; (2) the decrease in price of methanol due to unfavorable market conditions; and (3) the decrease in liquid ammonia sales volumes as compared to the expected sales volumes.
The difference between the actual transaction amount and the approved annual caps from 2018 to 2020 was mainly caused by the change in the term of the finance lease agreements from three years to one year in 2019, and the principal amount of finance lease is lower than expected.

The table below set out the proposed annual caps for the Non-exempted Continuing Connected Transactions:

		Year ending	Year ending	Year ending	Year ending
Category of the Non-exempted		31 December	31 December	31	December
Continuing Connected Transactions		2021	2022		2023
		(Note 1)	(Note 1)		(Note 1)
		Amounts in RMB’000
Natural Gas Sale and Purchase
Agreements:
Purchase of natural gas by the Group	Proposed Caps	2,814,157	2,879,788		2,945,829
from CNOOC China Limited	(Note 2)
(Note 4)
Comprehensive Services and Product
Sales Agreement: (Note 5)
Provision of services and supplies and	Proposed Caps	893,208	900,221		915,437
sale of products by CNOOC Group	(Note 2)
to the Group (Note 6)
Provision of services and supplies and	Proposed Caps	766,115	795,696		810,356
sale of products by the Group to	(Note 2)
CNOOC Group (Note 7)
Financial Services Agreement:
(Note 8)
Deposits placed by the Group with	Proposed Caps	400,000	400,000		400,000
CNOOC Finance (Note 9)	(Note 2 and 3)
Finance Lease Agreement:
Provision of finance leasing services by	Proposed Caps	1,104,000	1,108,000		1,108,000
CNOOC Leasing to the Group	(Note 2)
(Note 10)

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LETTER FROM THE BOARD

Notes:

In respect of all Non-exempted Continuing Connected Transactions of the Company, the Directors have estimated the annual transaction figures for the coming three financial years ending on 31 December 2023 on the following basis:
(a) the continuing connected transactions continuing to be entered into on the terms and conditions set out in the relevant agreements;
(b) the continuing connected transactions continuing to be entered into in the ordinary and usual course of business of the Group and upon normal commercial terms;
(c) reference being made to the historical amounts for the two financial years ended 31 December 2019 and the nine months ended 30 September 2020; and
(d) no material adverse changes to the state of the PRC economy, the business expansion of the Group, the level of prices and demand for the Group’s products and the materials and services needed by the Group for its operation and development.
The Proposed Caps are subject to Independent Shareholders’ approval at the EGM.
These caps refer to the maximum daily balance during the relevant period.
Natural Gas Sale and Purchase Agreements: The determination of the annual caps is mainly based on: (1) the estimated price of natural gas to be supplied for Hainan Plants; (2) the theoretical maximum amount of gas consumption based on the highest possible operation days of each production plant of the Group in Hainan; and (3) a 3% buffer for fluctuation in relevant commodity prices, future operation needs of the Company and possible market changes.
Comprehensive Services and Product Sales Agreement: In order to facilitate effective internal control of the continuing connected transactions contemplated under the Comprehensive Services and Product Sales Agreement, the Company will divide, so far as practicable, such transactions into two categories, which are (i) the provision of services and supplies and sale of products by CNOOC Group to the Group, and (ii) the provision of services and supplies and sale of products by the Group to CNOOC Group.
Comprehensive Services and Product Sales Agreement (Provision of services and supplies and sale of products by CNOOC Group to the Group): The determination of the annual caps is mainly based on the following aspects: (1) expected increase in the procurement demand of services, supplies and products by the Group from CNOOC Group as the Group has reached an agreement with the CNOOC Gas and Power in relation to CNOOC Gas and Power’s provision of gas for CNOOC Tianye in the winter by way of transition to ensure the continuous production of CNOOC Tianye in winter; (2) the amount of potash the Group expects to purchase from CNOOC Group; and (3) a 5% buffer for fluctuation in relevant commodity prices, future operation needs of the Company and possible market change.
Comprehensive Services and Product Sales Agreement (Provision of services and supplies and sale of products by the Group to CNOOC Group): The determination of the annual caps is mainly based on (1) the estimated amount of sales of methanol, urea, phosphate fertiliser, compound fertiliser and logistics support to CNOOC Group by the Group; and (2) a 5% buffer for fluctuation in relevant commodity prices, future operation needs of the Company and possible market change.

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LETTER FROM THE BOARD

Financial Services Agreement: 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 where security over the Group’s assets is required to be created in favour of CNOOC Finance; and (2) loans where no security over the assets of the Group is required to be created in favour of CNOOC Finance. As no type (1) loan had been obtained since 2012 and the Group does not anticipate that any type (1) loan will be granted by CNOOC Finance to the Group in the future, all loans granted by CNOOC Finance to the Group (which were previously referred to as the transactions in respect of the provision of loans to the Company) now do not require any security over the Group’s assets. Therefore, these transaction contemplated thereunder constitute financial assistance provided by CNOOC Group to the Group which will be fully exempt from reporting, announcement and Independent Shareholders’ approval requirements under Rule 14A.90 of the Listing Rules. If any loan to be granted by CNOOC Finance to the Group in the future requires any security over the Group’s assets to be given in respect of such loan, the Group will duly comply with the Listing Rules and make the relevant disclosures as appropriate.

As the applicable percentage ratios for the transactions in respect of the notes acceptance and discounting services, arrangement of entrustment loans between the Company and its subsidiaries or among its subsidiaries, transfer and settlement services and other financial services contemplated under the Financial Services Agreement are less than 0.1%, these transactions are accordingly qualified under Rule 14A.76 of the Listing Rules as de minimis transactions and are exempt from reporting, announcement and Independent Shareholders’ approval requirements. Historically, the Company has used notes acceptance service offered by CNOOC Finance for free.

Financial Services Agreement (Deposits placed by the Group with CNOOC Finance): The determination of the annual caps is mainly based on data of historical transactions.
Finance Lease Agreement: The determination of the annual caps, being the maximum principal amount outstanding plus lease interest and commission fees accrued under the finance leases for each respective financial year, is mainly based on potential demand for finance lease services by the Group from CNOOC Leasing for its daily operation and development and with reference to the mode of the finance lease business. According to International Financial Reporting Standard 16, the Group has elected not to recognise right-of-use assets and lease liabilities for leases that have a lease term of 12 months or less. The Group recognises the lease payments associated with those leases as an expense in profit or loss on a straightline basis over the lease term. Therefore, no right-of-use asset will be recognised in respect of transactions contemplated under the Finance Lease Agreement.

Measures to Ensure Compliance with the Listing Rules

The Company has established comprehensive internal control system and adopted various internal control rules, including connected transaction management measures, sales and pricing management measures and procurement and tender administration measures, to ensure that the continuing connected transactions are conducted in accordance with the executed agreements. Before entering into a specific connected transaction agreement, the designated department of the Group will review and assess whether the rates and terms set out in the specific agreement are consistent with the executed framework agreement to ensure that the interests of the Shareholders as a whole are taken into account and protected. The Company has set up the Audit Department to audit and assess the operation of the internal control management system of the Company and report to the audit committee of the Board and the Board

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LETTER FROM THE BOARD

in connection to the status of the internal control of the Company (including the implementation status of connected transactions) regularly. The audit committee of the Board and the supervisory committee of the Company will also regularly conduct assessment on the internal control system of the Company and its subsidiaries in order to ensure the effectiveness of the internal control system of the Group, including internal control measures in respect of connected transactions management. Furthermore, the audit committee of the Board convenes meetings twice a year to discuss and assess the implementation of connected transactions. In addition, the Company’s external auditors shall conduct an interim review and a year-end audit on the Company’s internal control measures, including connected transactions.

Reasons for and Benefits of the Non-exempted Continuing Connected Transactions

As mentioned in the announcement of the Company dated 23 October 2020, the Non-exempted Connected Continuing Transactions were or will be 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 CNOOC Group, it is desirable for the Group to seek supports and maintain business relationships with CNOOC Group, and the transactions contemplated thereunder will secure stable and reliable supply of raw material and services for the Company’s production and expand the financing channels of the Company and lower its financing cost.

The Non-exempted Continuing Connected Transactions are or will be entered into in the ordinary and usual course of business of the Group and on normal commercial terms. The Directors are of the view that it is in the interests of the Company and the Shareholders as a whole to carry out the Non-exempted Continuing Connected Transactions as those transactions have facilitated and will continue to facilitate the operation of the Group’s business. The Directors are of the view that the terms and the Proposed Caps of those transactions as described above are fair and reasonable and in the interests of the Group and the Shareholders as a whole.

Listing Rules Implications

CNOOC is the controlling shareholder of the Company. Therefore, CNOOC and its associates (other than the Group) are the Company’s connected persons under Rule 14A.07 of the Listing Rules. Given CNOOC Limited, CNOOC Finance and CNOOC Leasing are all subsidiaries of CNOOC and CNOOC China Limited is a wholly-owned subsidiary of CNOOC Limited, all of them are associates of CNOOC and therefore shall be deemed as connected persons of the Company under Rule 14A.07 of the Listing Rules.

As the highest applicable percentage in respect of the Proposed Caps of each of the Non-exempted Continuing Connected Transactions exceeds 5%, these Non-exempted Continuing Connected Transactions are subject to reporting, announcement and Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.

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LETTER FROM THE BOARD

As the highest applicable percentage ratios in respect of the Proposed Caps for the transactions for deposits placed by the Group with CNOOC Finance contemplated under the Financial Services Agreement and the transactions contemplated under the Finance Lease Agreement are more than 5% but less than 25%, the transactions contemplated thereunder also constitute disclosable transactions to the Company under Chapter 14 of the Listing Rules and is therefore subject to announcement requirement under Chapter 14 of the Listing Rules.

Information of the Parties Involved

Information on the Group

The Group mainly engages in the developments, production and sales of fertilisers (including urea, phosphate fertiliser and compound fertiliser) and chemical products (primarily methanol and polyformaldehyde).

Information on CNOOC and its associates

CNOOC is the controlling shareholder of the Company and is one of largest state-owned oil companies in the PRC specializing in exploration of oil and gas in the PRC with its headquarters 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 prominent main business and a complete production chain including upstream petroleum businesses (such as exploration, development, production and sales of oil and gas), downstream petroleum businesses (such as refining, petrochemicals, use of natural gas, power generation, the manufacturing and sale of fertilisers and chemicals) and financial services.

CNOOC Limited is a subsidiary of CNOOC. CNOOC Limited and its subsidiaries principally engage in exploration, development, production and sales of offshore oil and natural gas.

CNOOC China Limited is a subsidiary of CNOOC Limited and principally engages in exploration, development, production and sales of offshore petroleum in the PRC.

CNOOC Finance is a subsidiary of CNOOC and a non-bank financial institution with the approval of the PBOC. It is subject to the supervision of the CBIRC. It has been providing financial services to members of CNOOC Group (including the Group) as an intra-group service provider.

CNOOC Leasing is a wholly-owned subsidiary of CNOOC and principally engages in finance leasing and leasing, purchasing leasing assets from vendors abroad, salvage value disposal and maintenance of the leasing assets, lease transaction consultation and guarantee.

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LETTER FROM THE BOARD

Board Confirmation

The Board (including the independent non-executive Directors) are of the view that the Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement and the Financial Services Agreement are arrived at after arm’s length negotiations by each party and entered into in the course of normal business of the Group and are of the view that the Non-exempted Continuing Connected Transactions and the Proposed Caps are on normal commercial terms and fair and reasonable and are also in the interest of the Company and the Shareholders as a whole.

Due to their respective position in CNOOC, Mr. Meng Jun and Mr. Guo Xinjun have all abstained from voting on the Board resolutions approving the Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement, the Financial Services Agreement, the Non-exempted Continuing Connected Transactions and the Proposed Caps in accordance with Rule 13.44 of the Listing Rules. Save as disclosed above, none of the Directors has any material interest in the Non-exempted Continuing Connected Transactions (including the Proposed Caps).

III. RECOMMENDATION

Based on the relevant information disclosed herein, the Directors (including the independent non-executive Directors) believe that (1) the Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement, the Financial Services Agreement and the Non-exempted Continuing Connected Transactions are entered into in the ordinary and usual course of business of the Group and on normal commercial terms, and (2) the terms thereof together with the Proposed Caps are fair and reasonable and are in the interests of the Group and the Shareholders as a whole. Accordingly, the Directors recommend the Independent Shareholders to vote in favour of the relevant resolutions to be proposed at the EGM.

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 Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement, the Financial Services Agreement and the Non-exempted Continuing Connected Transactions, and (2) the Proposed Caps. The Company has also appointed Halcyon Capital as the Independent Financial Adviser to advise the Independent Board Committee in relation to the Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement, the Financial Services Agreement, the Non-exempted Continuing Connected Transactions and the Proposed Caps.

The letter of advice from Halcyon Capital to the Independent Board Committee and the Independent Shareholders is set out on pages 30 to 56 of this circular.

Your attention is drawn to the letter from the Independent Board Committee which is set out on page 29 of this circular. The Independent Board Committee, having taken into account the advice of the Independent Financial Adviser, considers that (1) the Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement, the Financial Services Agreement and the Non-exempted Continuing Connected Transactions

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LETTER FROM THE BOARD

are entered into in the ordinary and usual course of business of the Group and on normal commercial terms, and (2) the terms thereof together with the Proposed Caps are fair and reasonable and are in the interests of the Group 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 EGM.

The Directors consider that the resolutions mentioned above (including the Non-exempted Continuing Connected Transactions and the proposed appointment of non-executive Director) are in the best 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 EGM.

IV. EGM

The Company will convene an EGM to obtain the approval of, among other things:

the appointment of Mr. Liu Zhenyu as a non-executive Director by the Shareholders;
the continuing connected transactions contemplated under the Natural Gas Sale and Purchase Agreements entered into with CNOOC China Limited and the proposed annual caps for 2021 to 2023 for such transactions by the Independent Shareholders;
the Comprehensive Services and Product Sales Agreement entered into between the Company and CNOOC, the continuing connected transactions contemplated thereunder, and the proposed annual caps for 2021 to 2023 for such transactions by the Independent Shareholders;
the Financial Services Agreement entered into between the Company and CNOOC Finance, the continuing connected transactions contemplated thereunder with respect to deposits placed by the Group with CNOOC Finance, and the proposed annual caps for 2021 to 2023 for such transactions by the Independent Shareholders; and
the Finance Lease Agreement entered into between the Company and CNOOC Leasing, the continuing connected transactions contemplated thereunder, and the proposed annual caps for 2021 to 2023 for such transactions by the Independent Shareholders.

At the EGM, CNOOC and its associates will abstain from voting with respect to the Non-exempted Continuing Connected Transactions. As at the Latest Practicable Date, the voting rights attached to 2,738,999,512 domestic shares of the Company were controlled by CNOOC and such number of Shares represented approximately 59.41% of the issued share capital of the Company.

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LETTER FROM THE BOARD

The notice of the EGM to be held at 9: 00 a.m. on Tuesday, 29 December 2020 is set out on pages 60 to 62 of this circular. A reply slip and a form of proxy for use at the EGM are also enclosed.

Whether or not you are able to attend the EGM, you are strongly advised to complete and sign the enclosed form of proxy, in accordance with the instructions printed thereon, and to lodge them with the Company’s Secretary Office of the Board in China (for holders of domestic shares or unlisted foreign shares) at Room 1707, Kaikang CNOOC Mansion, No. 15, Sanqu, Anzhenxili, Chaoyang District, Beijing, the PRC or the Company’s H Share Registrar, Computershare Hong Kong Investor Services Limited (for holders of H shares), at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event not less than 24 hours before the time appointed for the holding of the EGM (or any adjournment thereof) (i.e., by 9: 00 a.m. on Monday, 28 December 2020. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM (or any adjournment thereof) should you so wish.

V. A POLL AT EXTRAORDINARY GENERAL MEETING

In accordance with the requirement of Rule 13.39(4) of the Listing Rules, all resolutions to be considered, and if thought fit, to be passed at the EGM, shall be passed by way of a poll.

VI. OTHER INFORMATION

Your attention is drawn to the letter from Halcyon Capital which contains its advice to the Independent Board Committee and the Independent Shareholders, the letter from the Independent Board Committee which sets out its recommendation to the Independent Shareholders, the additional information set out in the appendix to this circular and the notice of the EGM dated 13 November 2020.

By Order of the Board China BlueChemical Ltd.* Wu Xiaoxia Company Secretary

For identification purpose only

– 28 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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

(Stock Code: 3983)

13 November 2020

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular dated 13 November 2020 (the ‘‘Circular’’) despatched to the shareholders of the China BlueChemical Ltd. 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 Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement, the Financial Services Agreement and the Non-exempted Continuing Connected Transactions, and (2) the Proposed Caps. Halcyon Capital Limited has been appointed as the Independent Financial Adviser to advise the Independent Board Committee on those aspects of the above agreements, the Non-exempted Continuing Connected Transactions and the Proposed Caps.

We wish to draw your attention to the letter from the Board set out on pages 6 to 28 of the Circular and the letter from Halcyon Capital containing its advice to us set out on pages 30 to 56 of the Circular.

Having considered the advice given by Halcyon Capital Limited, we are of the opinion that (1) the Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement, the Financial Services Agreement and the Non-exempted Continuing Connected Transactions are entered into in the ordinary and usual course of business of the Group and on normal commercial terms, and (2) the terms thereof together with the Proposed Caps are fair and reasonable and are in the interests of the Group 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 EGM to approve the above agreements, the Non-exempted Continuing Connected Transactions and the Proposed Caps for each relevant type of the Non-exempted Continuing Connected Transactions.

Yours faithfully,

Karen Lee Kit Ying, Eddie Lee Kwan Hung and Yu Changchun Members of Independent Board Committee

For identification purposes only

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the full text of the letter of advice from Halcyon Capital Limited to the Independent Board Committee and the Independent Shareholders which has been prepared for the purpose of the inclusion in this circular.

Halcyon Capital Limited 11/F, 8 Wyndham Street, Central, Hong Kong

13 November 2020

To the Independent Board Committee and the Independent Shareholders

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS AND PROPOSED ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment as the independent financial adviser to the Independent Board Committee and the Independent Shareholders with respect to (i) the Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement and the Financial Services Agreement (with respect to provision of deposit services by CNOOC Finance to the Group); (ii) the Non-exempted Continuing Connected Transactions; and (iii) the relevant Proposed Caps, details of which are set out in the letter from the Board (the ‘‘Board Letter’’) contained in the circular of the Company dated 13 November 2020 (the ‘‘Circular’’), of which this letter forms part. Terms used in this letter shall have the same respective meanings as defined in the Circular unless the context otherwise requires.

As at the Latest Practicable Date, CNOOC was a controlling Shareholder within the meaning of the Listing Rules. Accordingly, CNOOC and its associates (other than the Group) are the connected persons of the Company under Rule 14A.07 of the Listing Rules. CNOOC Limited, CNOOC Leasing and CNOOC Finance are all subsidiaries of CNOOC and CNOOC China Limited is a wholly owned subsidiary of CNOOC Limited. All of them are associates of CNOOC and therefore are connected persons of the Company under Chapter 14A of the Listing Rules. As the highest applicable percentage ratios (as defined under Rule 14.07 of the Listing Rules) in respect of the Proposed Caps of the Non-exempted Continuing Connected Transactions exceed 5% and the respective Proposed Caps exceeds HK$10,000,000, the Non-exempted Continuing Connected Transactions are subject to the requirements of reporting, announcement and Independent Shareholders’ approval under Chapter 14A of the Listing Rules. CNOOC and its associates will abstain from voting at the EGM with respect to the Non-exempted Continuing Connected Transactions.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Independent Board Committee comprising all independent non-executive Directors, namely Ms. Karen Lee Kit Ying, Mr. Eddie Lee Kwan Hung and Mr. Yu Changchun, has been established to advise the Independent Shareholders as to whether the entering into of the Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement, the Financial Services Agreement (with respect to provision of deposit services by CNOOC Finance to the Group) and the Non-exempted Continuing Connected Transactions are on normal commercial terms and in the ordinary and usual course of business of the Group, and together with the Proposed Caps are fair and reasonable and in the interests of the Group and the Independent Shareholders as a whole and how to vote on the relevant resolutions in the EGM. In our capacity as the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, our role is to provide the Independent Board Committee and the Independent Shareholders with an independent opinion and recommendation in this regard.

BASIS OF OUR OPINION

Except for being appointed as the independent financial adviser to the then independent board committee and independent shareholders of the Company for one engagement (details of which have been set out in the letter from the independent financial adviser contained in the circular of the Company dated 27 November 2019), we have no other relationships with or interests in the Company and any other parties in the past two years that could reasonably be regarded as relevant to our independence. Apart from the normal professional fees paid to us in connection with our appointments, no arrangements exist whereby we had received any fees or benefits from the Company or any other party to the transactions, and therefore we consider such relationship would not affect our independence. We are hence independent from the Company pursuant to Rule 13.84 of the Listing Rules to act as the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in connection with the Non-exempted Continuing Connected Transactions.

In formulating our opinion and recommendation, we have relied on the information, financial information and facts included in the Circular and supplied to us, and the representations expressed by the Directors and/or management of the Group, and have assumed that all such information, financial information, facts and any representations made to us, or referred to in the Circular, for which they are fully responsible, in all material aspects, were true, accurate and complete as at the time they were made and as at the date hereof, have been properly extracted from the relevant underlying accounting records (in the case of financial information) and made after due and careful inquiry by the Directors and/or the management of the Group. The Directors and/or the management of the Group have confirmed that, having made all reasonable enquiries and to the best of their knowledge and belief, all relevant information has been supplied to us and that no material facts have been omitted from the information supplied and representations expressed to us. We have also relied on certain information available to the public and have assumed such information to be accurate and reliable. We have no reason to doubt the completeness, truth or accuracy of the information and representations provided and we are not aware of any facts or circumstances which would render such information provided and representations made to us untrue, inaccurate or misleading.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Our review and analyses were based upon, among others, the information provided by the Group including the Circular, the Natural Gas Sale and Purchase Agreements, the Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement, the Financial Services Agreement and certain published information from the public domain.

We have also discussed with the Directors and/or the management of the Group with respect to the terms of and the reasons for the Non-exempted Continuing Connected Transactions (including the relevant Proposed Caps), and considered that we have reviewed sufficient information to reach an informed view and to justify reliance on the information provided and to provide a reasonable basis for our opinion. We have not, however, conducted any independent verification of the information included in the Circular and supplied to us by the Directors and/or the management of the Group nor have we conducted any form of in-depth investigation into the businesses, affairs, financial position, profitability or prospects of the Group, CNOOC and each of their respective associates, and the parties involved in the Non-exempted Continuing Connected Transactions.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion in respect of the Non-exempted Continuing Connected Transactions, we have considered the following principal factors and reasons:

I. Background and reasons for entering into of the Non-exempted Continuing Connected Transactions

The Group is principally engaged in the development, production and sales of fertilisers (including urea, phosphate and compound fertilisers) and chemical products (primarily methanol and polyformaldehyde).

As advised by the management of the Group, the Group has established long-term business relationships with CNOOC Group, including the supply of natural gas by CNOOC China Limited as principal raw material to the Group’s production facilities of urea and methanol, namely Fudao Phase I Urea Plant, Fudao Phase II Urea Plant, Hainan Phase I Methanol Plant and Hainan Phase II Methanol Plant, and the provision of services and supplies and sale of products between the Group and CNOOC Group.

As set out in the Board Letter, the following existing Natural Gas Sale and Purchase Agreements, with natural gas delivery period ranging from 9 to 20 years, will not expire this year and the terms of the supply of natural gas by CNOOC China Limited remain unchanged:

(i) Dongfang 1-1 Offshore Gasfield Natural Gas Sale and Purchase Agreement entered into between the Company and CNOOC China Limited dated 28 July 2003 for Fudao Phase II Urea Plant;
(ii) Dongfang 1-1 Offshore Gasfield Natural Gas Sale and Purchase Agreement entered into between CNOOC Jiantao and CNOOC China Limited dated 10 March 2005 for Hainan Phase I Methanol Plant;

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(iii) Ledong Natural Gasfield Natural Gas Sale and Purchase Agreement entered into between the Company and CNOOC China Limited dated 26 March 2010 under Natural Gas Sale and Purchase Framework Agreement dated 1 September 2006 for Hainan Phase II Methanol Plant;
(iv) Dongfang 1-1 Gasfield Phase I Adjusted Natural Gas Sales and Purchase Agreement entered into among the Company, CNOOC Fudao and CNOOC China Limited dated 18 May 2015 under Dongfang 1-1 Gasfield Phase I Adjusted Project Natural Gas Sale and Purchase Framework Agreement dated 28 October 2014 mainly for Fudao Phase I Urea Plant; and
(v) Dongfang 13-2 Gasfield Group Natural Gas Sale and Purchase Agreement entered into among the Company, CNOOC Fudao and CNOOC China Limited dated 3 November 2017 mainly for the Hainan Plants.

The Company entered into the Comprehensive Services and Product Sales Agreement with CNOOC on 23 October 2020 to continue the provision of services and supplies and sale of products between the Group and CNOOC Group commencing from 1 January 2021 to 31 December 2023.

The Group also enjoys the discretion and flexibility to utilise from time to time the financial services provided by CNOOC Finance and therefore the Company entered into the Financial Services Agreement with CNOOC Finance on 23 October 2020, pursuant to which CNOOC Finance will provide to the Group a range of financial services that the Group may require.

Furthermore, in order to broaden the Group’s funding platform and source for its future development funding needs and allow the Group with the flexibility to select appropriate service provider for its financing arrangement to raise funds at lower costs, the Company entered into the Finance Lease Agreement with CNOOC Leasing on 23 October 2020 to continue the existing finance lease arrangements with CNOOC Leasing.

CNOOC is one of the largest state-owned oil companies in the PRC and an integrated conglomerate with various business sectors covering oil and gas exploitation, technical services, natural gas and power generation, financial services, logistics services and new energies development. CNOOC Limited and its subsidiaries (including CNOOC China Limited) are principally engaged in exploration, development, production and sales of offshore oil and natural gas in the PRC.

Having taken into account the aforesaid, we concur with the Directors’ view that it is desirable for the Group to continue its business relationship with and to seek supports from CNOOC Group as such cooperation is expected to benefit the Group for its business development from leveraging on CNOOC Group’s extensive resources and experience in various business sectors and the entering into of the Non-exempted Continuing Connected Transactions is in the ordinary and usual course of business of the Group.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

II. Principal Terms of the Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement and Financial Services Agreement

Comprehensive Services and Product Sales Agreement

Principal terms of the Comprehensive Services and Product Sales Agreement are set out as below:

(a) the Group has agreed to provide to CNOOC Group services and supplies (including but not limited to provision of offices and facilities, labour services, technical training services, project management services, logistics management services, accommodation/catering services, port management, logistics assistance, transportation services and material supplies for utility system), dependent upon service locations and the facilities established by the Group or CNOOC Group;
(b) CNOOC Group has agreed to provide services and supplies to the Group (including but not limited to engineering services, telecommunication and network services, construction services, management system/technology development services, equipment leasing, equipment maintenance, project management services, labour services, materials/equipment procurement services, transportation services, technical training services, catering, accommodation, medical, insurance services, conference services, consultancy services and logistics management services), dependent upon service locations and the facilities established by the Group or CNOOC Group; and
(c) the Group has agreed to sell products (urea, phosphate fertiliser, methanol, potash, formaldehyde, ammonia, compound fertiliser, acrylonitrile, etc.) to CNOOC Group and CNOOC Group has agreed to sell products (potash, medicament and natural gas etc.) to the Group.

The transactions under the Comprehensive Services and Products Sales Agreement will be conducted on normal commercial terms and conditions. As to the provision of services, supplies and products by the Group to CNOOC Group, the terms of the transactions shall not be more favourable to CNOOC Group than those offered to independent third parties by the Group, whereas with respect to the provision of services, supplies and products by CNOOC Group to the Group, the terms of the transactions shall not be less favourable to the Group than those

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

offered to third parties by CNOOC Group. All transactions will be priced in accordance with the pricing principles set out in the Comprehensive Services and Product Sales Agreement as follows:

(i) As to provision of services, supplies and products by the Group to CNOOC Group, to be priced:
i. not lower than the prices charged by the Group to other comparable independent third party customers for the same type of services, supplies or products; or
ii. with reference to the prices for the same type of services, supplies or products in the same areas charged on normal terms in the ordinary and usual course of its business by comparable independent third party service providers or suppliers; or
iii. with reference to the prices for the same type of services, supplies or products in the adjacent areas charged on normal terms in the ordinary and usual course of its business by comparable independent third party providers or suppliers.
(ii) As to provision of services, supplies and products by CNOOC Group to the Group, to be priced:
i. not higher than the prices charged by CNOOC Group to its associates (other than members of the Group) or other comparable independent third party customers (if any) for the same type of services, supplies or products; or
ii. with reference to the prices for the same type of services, supplies or products in the same areas charged on normal terms in the ordinary and usual course of its business by comparable independent third party service providers or suppliers; or
iii. with reference to the prices for the same type of services, supplies or products in the adjacent areas charged on normal terms in the ordinary and usual course of its business by comparable independent third party providers or suppliers.

As discussed with the management of the Group, despite there are no government-prescribed prices currently in force for the above-mentioned services, supplies and products as at the date of this letter, we understand that when relevant government authorities publish a government-prescribed price in relation to the transactions contemplated under the Comprehensive Services and Product Sales Agreement during the term of the Comprehensive Services and Product Sales Agreement, the relevant prices shall be adjusted with reference to the government-prescribed price accordingly.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

In order to ensure that the price with respect to transactions under Comprehensive Service and Product Sales Agreement is determined on a fair and reasonable basis and in accordance with the pricing principles, the Company has adopted the procedures as disclosed in the section headed ‘‘IV. Internal Control Measures for the Non-Exempted Continuing Connected Transactions’’ below in this letter. We have reviewed the Comprehensive Services and Product Sales Agreement and the relevant internal control policies of the Group. As for the provision of services and supplies and sale of products by the Group to CNOOC Group, we have also reviewed (i) the relevant agreements entered into between the Group and CNOOC Group; (ii) the relevant agreements entered into between the Group and independent customers; (iii) the relevant invoices issued by the Group to CNOOC Group; (iv) the relevant invoices issued by the Group to the independent customers; (v) the relevant price setting analysis and approval records of the Group; (vi) the relevant confirmations for pricing issued by the Group; and (vii) the relevant pricing information issued by National Bureau of Statistics of China and noted that the prices charged by the Group were conducted in accordance with the pricing principles. Furthermore, with respect to the provision of services and supplies and sale of products by CNOOC Group to the Group, we have also reviewed (i) the relevant documents in relation to the tenders conducted in 2019 and 2020 requiring a minimum of three qualified bidders for a valid tender; (ii) the relevant agreements entered into between the Group and CNOOC Group; (iii) the relevant agreements entered into between the Group and independent service providers or suppliers; (iv) the relevant invoices issued by CNOOC Group to the Group; (v) the relevant invoices issued by the independent service providers or suppliers to the Group; (vi) the relevant invoices issued by CNOOC Group to other comparable independent third party customers; and (vii) the relevant pricing information issued by National Bureau of Statistics of China and noted that the prices charged by CNOOC Group were conducted in accordance with the pricing principles.

Taking into account the above, we are of the view that the terms of the Comprehensive Services and Product Sales Agreement are fair and reasonable so far as the Company and the Independent Shareholders are concerned.

Financial Services Agreement

Principal terms of the Financial Services Agreement are set out as below:

CNOOC Finance will provide to the Group a range of financial services that the Group may require, including the following:

i. provision of financing services to the Group, including but not limited to loans;
ii. deposit services;
iii. notes acceptance and discounting services;

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

iv. arrangement of entrustment loans between the Company and its subsidiaries or among its subsidiaries;
v. transfer and settlement services, including transfer and settlement for transactions between the Company and its subsidiaries and for transactions between the Group and CNOOC Group; and
vi. other financial services permitted by the CBIRC to the Group.

The transactions contemplated under the Financial Services Agreement will be conducted on normal commercial terms and conditions and will be priced in accordance with the following principles:

(i) provision of loans to the Group: the interest rates for such loans are determined in accordance with the loan prime rate (LPR) promulgated by the National Interbank Funding Center as authorised by the PBOC from time to time, and with appropriate discount to the comparable loan interest rate provided by major financing banks of the Company;
(ii) provision of deposit services: the interest rates for such deposits are determined in accordance with the deposit benchmark interest rates for relevant financial institutions as promulgated by the PBOC from time to time, and shall be no less than the comparable deposit interest rate offered by major financing banks of the Company;
(iii) notes acceptance and discounting services: in providing notes acceptance services to the Group, CNOOC Finance will charge service fees that are calculated in accordance with the par value, and the fee rates are determined with appropriate discount to the comparable rate provided by major financing banks of the Company; in providing note discounting services to the Group by CNOOC Finance, the interest rates are determined by reference to the latest notes market quote, and with applicable discount to the comparable interest rate provided by major financing banks of the Company;
(iv) arrangement of entrustment loans: the annual service fees are to be calculated based on the outstanding principal of the loans, and the aggregate amount of service fees and loan interest together shall not exceed the interest for securing a loan of the same term directly from independent third party financial institutions by the Company and/or its subsidiaries; and if there are standard rates promulgated by the PBOC or other competent regulatory authorities, the service fees shall be determined with reference to the standard rates promulgated by the PBOC or other competent regulatory authorities and with appropriate discount to the comparable standards provided by major financing banks of the Company;

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(v) transfer and settlement services in RMB: no service fee will be charged (relevant services in other currencies shall adopt principle (vi) as set out below); and
(vi) other financial services: service fees shall be determined with reference to the relevant standard charging rate promulgated by the PBOC or other competent regulatory authorities, and with appropriate discount to the comparable service fees provided by major financing banks of the Company.

Pursuant to the Financial Services Agreement entered into between the Company and CNOOC Finance, the Company shall be entitled to 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, and CNOOC Finance shall not be entitled to have any such offset right in this circumstance.

As advised by the management of the Group, there was no loan where security over the Group’s asset is required to be created in favour of CNOOC Finance had been obtained since 2012 and therefore, loan transactions contemplated under the Financial Services Agreement constitute financial assistance provided by CNOOC Group to the Group which will be fully exempt from reporting, announcement and Independent Shareholder’s approval requirements under Rule 14A.90 of the Listing Rules. Also, as the applicable percentage ratios for the transactions in respect of the notes acceptance and discounting services, arrangement of entrustment loans between the Company and its subsidiaries or among its subsidiaries, transfer and settlement services and other financial services contemplated under the Financial Services Agreement were less than 0.1%, these transactions are accordingly qualified under Rule 14A.76 of the Listing Rules as de minimis transactions and are exempt from reporting, announcement and Independent Shareholders’ approval requirements.

In order to ensure the rates and terms with respect to the provision of deposit services by CNOOC Finance to the Group under the Financial Services Agreement is determined on a fair and reasonable basis and in accordance with the pricing principles, the Company has adopted the procedures as disclosed in the section headed ‘‘IV. Internal Control Measures for the Non-Exempted Continuing Connected Transactions’’ below in this letter. We have reviewed the Financial Services Agreement and as discussed with the management of the Group, understood that the Group has placed demand deposits in CNOOC Finance in the past. We have further reviewed the Group’s comparison record and noted that the interest rate offered by

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

CNOOC Finance was no less favourable than (i) the benchmark rate promulgated by the PBOC; and (ii) interest rates offered by other major and independent PRC commercial banks.

In consideration of the foregoing, we are of the view that the terms of the Financial Services Agreement (with respect to provision of deposit services) are fair and reasonable so far as the Company and the Independent Shareholders are concerned.

Finance Lease Agreement

Principal terms of the Finance Lease Agreement are set out as below:

(a) CNOOC Leasing has agreed to provide finance lease services to the Group when the Group so requires, by means including but not limited to (1) the Group selling its production facility/equipment to CNOOC Leasing, leasing them back from CNOOC Leasing for its own use and repurchasing them at the end of the lease period; or (2) CNOOC Leasing purchasing production facility/equipment in accordance with the Group’s choice of the suppliers and the facility/equipment, leasing them to the Group for its use and selling them to the Group at the end of the lease period; and
(b) the Group agrees to pay lease rent (principal plus lease interest) and commission fees to CNOOC Leasing for the provision of the finance lease service.

The transactions contemplated under the Finance Lease Agreement will be conducted on normal commercial terms and conditions which shall not be less favourable than those provided to independent third parties by CNOOC Leasing, and the principal amount, the lease interest and commission fees shall be determined in accordance with the following principles:

(i) principal amount: for scenario (1) above, the principal amount shall be determined with reference to the net book value of such production facility/equipment or the appraised value of such production facility/equipment to be prepared by an independent valuer, and shall not be less favourable than that provided by an independent third party financial institution to the Group; for scenario (2), the principal amount shall be determined based on the purchase price of such production facility/equipment, and shall not be less favourable than that provided by an independent third party financial institution to the Group; and
(ii) lease interest and commission fees: the consolidated rate of lease interest plus commission fees during the lease period shall not be higher than the available loan interest rates quoted from the PRC commercial banks for the corresponding period.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

In order to ensure the rates and terms with respect to the provision of finance lease services by CNOOC Leasing to the Group under the Finance Lease Agreement is determined on a fair and reasonable basis and in accordance with the pricing principles, the Company has adopted the procedures as disclosed in the section headed ‘‘IV. Internal Control Measures for the Non-Exempted Continuing Connected Transactions’’ below in this letter. We have reviewed the Finance Lease Agreement and as discussed with the management of the Group, and understood that before entering into any individual finance lease agreement with CNOOC Leasing under the Finance Lease Agreement, the Company will seek for quotations from independent finance lease service companies and major and independent PRC commercial banks, and compare offers for the same assets classes to make sure the method of determination of the principal amount and consolidated rate of lease interest plus commission fees provided by CNOOC Leasing are not less favourable than those provided by other independent financial institutions to the Group. As advised by the management of the Group, after obtaining quotations from independent financial institutions, the Group had not entered into any agreement with independent third party in relation to finance lease due to the fact that the terms offered by CNOOC Leasing were more favorable.

We have further reviewed (i) sample copies of the individual finance lease agreements entered into by the Group and CNOOC Leasing and (ii) sample copies of the relevant invoices issued from CNOOC Leasing for periodic principal repayments and charges of lease interests and commission fees according to the repayment schedule, and we noted that the principal amounts were determined by reference to the carrying amounts of the fixed assets, and the lease interests and commission fees were determined at rates lower than the rates offered by PRC commercial banks and third party finance lease service providers for the relevant lease periods.

In consideration of the foregoing, we are of the view that the terms of the Finance Lease Agreement are fair and reasonable so far as the Company and the Independent Shareholders are concerned.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

III. Basis of the Relevant Proposed Caps

Set out below are the Proposed Caps in respect of the relevant Non-exempted Continuing Connected Transactions for each of the three financial years ending 31 December 2023:

	Year ending	Year ending	Year ending
Category of the Non-exempted Continuing	31 December	31 December	31 December
Connected Transactions	2021	2022	2023
	Amounts in RMB’000
Proposed Caps in respect of the purchase of
natural gas by the Group from CNOOC
China Limited under the Natural Gas Sale
and Purchase Agreements (the ‘‘Natural Gas
Caps’’)	2,814,157	2,879,788	2,945,829
Approximate increase as compared with
previous year		2.3%	2.3%
Proposed Caps in respect of the provision of
services and supplies and sales of products
by the Group to CNOOC Group under the
Comprehensive Services and Product Sales
Agreement (the ‘‘Group’s Sales & Services
Caps’’)	766,115	795,696	810,356
Approximate increase as compared with
previous year		3.9%	1.8%
Proposed Caps in respect of the provision of
services and supplies and sales of products
by CNOOC Group to the Group under the
Comprehensive Services and Product Sales
Agreement (the ‘‘CNOOC Group’s Sales &
Services Caps’’)	893,208	900,221	915,437
Approximate increase as compared with
previous year		0.8%	1.7%
Proposed Caps in respect of the deposits to be
placed by the Group with CNOOC Finance
under the Financial Services Agreement (the
‘‘Deposit Caps’’)	400,000	400,000	400,000
Approximate increase/(decrease) as compared
with previous year		Nil	Nil
Proposed Caps in respect of the provision of
finance lease services by CNOOC Leasing to
the Group under the Finance Lease
Agreement (the ‘‘Finance Lease Caps’’)	1,104,000	1,108,000	1,108,000
Approximate increase as compared with
previous year		0.4%	Nil

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As set out in the Board Letter, in determining the Proposed Caps for each of the Non-exempted Continuing Connected Transactions, the Directors have estimated the annual transaction figures for the coming three financial years ending 31 December 2023 on the following basis:

(a) the Non-exempted Continuing Connected Transactions continuing to be entered into on the terms and conditions set out in the relevant agreements;
(b) the Non-exempted Continuing Connected Transactions continuing to be entered into in the ordinary and usual course of business of the Group and upon normal commercial terms;
(c) reference being made to the historical amounts for the two financial years ended 31 December 2019 and the nine months ended 30 September 2020; and
(d) no material adverse changes to the state of the PRC economy, the business expansion of the Group, the level of prices and demand for the Group’s products and the materials and services needed by the Group for its operation and development.

We noted that (i) the Natural Gas Caps for each of the three financial years ending 31 December 2021, 2022 and 2023 of approximately RMB2,814.2 million, RMB2,879.8 million and RMB2,945.8 million respectively, representing a decrease of approximately 5.2% comparing to the annual cap for the financial year ending 31 December 2020, an increase of approximately 2.3% comparing to the Natural Gas Cap for financial year ending 31 December 2021 and an increase of approximately 2.3% comparing to the Natural Gas Cap for the financial year ending 31 December 2022; (ii) the Group’s Sales & Services Caps for each of the three financial years ending 31 December 2021, 2022 and 2023 of approximately RMB766.1 million, RMB795.7 million and RMB810.4 million respectively, representing a decrease of approximately 62.9% comparing to the annual cap for the financial year ending 31 December 2020, an increase of approximately 3.9% comparing to the Group’s Sales & Services Cap for the financial year ending 31 December 2021 and an increase of approximately 1.8% comparing to the Group’s Sales & Services Caps for the financial year ending 31 December 2022 respectively; (iii) the CNOOC Group’s Sales & Services Caps for each of the three financial years ending 31 December 2021, 2022 and 2023 of approximately RMB893.2 million, RMB900.2 million and RMB915.4 million respectively, representing an increase of approximately 29.1% comparing to the annual cap for the financial year ending 31 December 2020, an increase of approximately 0.8% comparing to the CNOOC Group’s Sales & Services Cap for the financial year ending 31 December 2021 and an increase of approximately 1.7% comparing to the CNOOC Group’s Sales & Services Cap for the financial year ending 31 December 2022 respectively; (iv) the Deposit Caps for each of the three financial years ending 31 December 2021, 2022 and 2023 are all set as approximately RMB400.0 million, representing no change comparing to the annual cap for the financial year ending 31 December 2020; and (v) the Finance Lease Caps for each of the three financial years ending 31 December 2021, 2022 and 2023 of approximately RMB1,104.0 million,

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

RMB1,108.0 million and RMB1,108.0 million respectively, representing a decrease of approximately 30.1% comparing to the annual cap for the financial year ending 31 December 2020, an increase of approximately 0.4% comparing to the Finance Lease Cap for the financial year ending 31 December 2021 and no change comparing to the Finance Lease Cap for the financial year ending 31 December 2022 respectively.

Natural Gas Caps of the Natural Gas Sale and Purchase Agreements

Set out below are the historical amounts of the purchase of natural gas from CNOOC China Limited for the two financial years ended 31 December 2019 and nine months ended 30 September 2020.

				Nine months
		Year ended	Year ended	ended
		31 December	31 December	30 September
		2018	2019	2020
		Amounts in RMB’000
Purchase of natural gas by	Actual	2,333,978	2,446,715	1,837,747
the Group from CNOOC	amounts
China Limited
Approximate increase as			4.8%
compared with previous
year

As advised by the management of the Group, the historical actual amounts of the Group’s purchase of natural gas from CNOOC China Limited increased by approximately 4.8% during the year ended 31 December 2019 as compared to that of the year ended 31 December 2018, which was mainly due to the increase in procurement amount of natural gas while average unit price remained generally stable. During the nine months ended 30 September 2020, the average unit price of natural gas decreased and the Company’s purchase of natural gas from CNOOC China Limited amounted to approximately RMB1,837.7 million. We understood from the management of the Group that the Natural Gas Cap for the year ending 31 December 2021 is reduced by approximately 5.2% as compared to that of the annual cap for the year ending 31 December 2020 after taking into account the difference between the historical actual natural gas price and the estimated average natural gas price from the approved annual caps from 2018 to 2020.

In assessing the reasonableness of the Natural Gas Caps of the Natural Gas Sale and Purchase Agreement, we have discussed with the management of the Company and understand that the Group has taken into account of the following principal factors in determining such Natural Gas Caps: (i) the Group’s estimated average price of natural gas to be supplied for Hainan Plants in coming three financial years after taking into account the historical average natural gas prices and the Group’s estimation on the growth of natural gas prices in the coming three financial years; (ii) the Group’s estimated maximum demand for natural gas consumption for production of Hainan Plants; and (iii) a buffer of 3% in consideration of the possibility of fluctuation in natural gas price and/or gas volume in the coming three financial years.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As discussed with the management of the Group, the Group’s demand for natural gas is expected to increase in the coming three years as the Group will endeavor to strengthen its production management and continue to improve the operation and utilisation rates of the Hainan Plants. Together with the estimation on the growth of natural gas prices, the estimated purchase of natural gas by the Group from CNOOC China Limited for the financial year ending 31 December 2021 is expected to increase as compared to the expected actual amount of that for the financial year ending 31 December 2020. The implied growth rates of the Natural Gas Caps for each of the two financial years ending 31 December 2023 are determined with reference to the estimated production volumes of the Hainan Plants and natural gas prices in accordance with the future production plan provided by the management of the Group (the ‘‘Production Plan’’) with reference to the discussion between the Group and CNOOC China Limited in respect of the supply of natural gas by CNOOC China Limited in 2022 to 2023 in additional to the factors as mentioned above.

We have reviewed the relevant calculation of the Natural Gas Caps and the Production Plan and noted that such Natural Gas Caps were based on the Group’s estimated unit price and consumption demand of natural gas for the production of Hainan Plants. We have also reviewed invoices provided by the Company for supply of natural gas by CNOOC China Limited to the Group on a sample basis, the pricing principles stipulated in the Natural Gas Sale and Purchase Agreements, historical average purchase prices of natural gas and price trends of urea and methanol, Four Major Types of Crude Oil and changes in the PRC consumer price indices since 2018 and consider that the estimated natural gas price used for the calculation of relevant cap amounts is reasonable. We also understood from management of the Group that the estimated demand for natural gas adopted by the Company for the calculation of the relevant cap amounts is mainly determined by reference to the historical natural gas volume consumed by the Hainan Plants and the volume stipulated in the Natural Gas Sale and Purchase Agreements. In addition, in view of the natural gas price is affected by the fluctuation of the average selling price of the Group’s urea or methanol and average crude oil price, we have reviewed the historical trend of prices and consider a 3% buffer factored in the calculation of the Natural Gas Caps of natural gas purchase is reasonable.

Taking into account the above, we consider that the Natural Gas Caps in respect of the Natural Gas Sale and Purchase Agreements are fair and reasonable so far as the Company and the Independent Shareholders are concerned.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Group’s Sales & Services Caps of the Comprehensive Services and Product Sales Agreement

Set out below are the historical amounts of the provision of services and supplies and sales of products to CNOOC Group for the two financial years ended 31 December 2019 and the nine months ended 30 September 2020.

				Nine months
		Year ended	Year ended	ended
		31 December	31 December	30 September
		2018	2019	2020
		Amounts in RMB’000
Provision of services and	Actual	564,898	504,550	344,873
supplies and sales of	amounts
products by the Group to
CNOOC Group
Approximate decrease as			(10.7%)
compared with previous
year

As discussed with the management of the Group, the historical amount of the Group’s provision of services and supplies and sales of products decreased by approximately 10.7% for the financial year ended 31 December 2019 as compared to the financial year ended 31 December 2018, which was mainly attributed to (i) a decrease in selling price of the Group’s methanol as a result of sluggish methanol markets. Based on our independent research on the website of National Bureau of Statistics of China, we noted that the Group’s price drop in selling price of methanol is in line with overall price trend of methanol in the PRC market during 2019; (ii) a lower-than-expected sales amount of liquefied ammonia products to CNOOC Group because one of CNOOC Group’s production facilities, which was expected to procure liquefied ammonia from the Group for its production process has yet to commence operation; and (iii) a lower-than-expected sales amount of potash products to CNOOC Group because such sales amount is recognised on a net basis instead of a gross basis. During the nine months ended 30 September 2020, the Company’s provision of services and supplies and sales of products to CNOOC Group amounted to approximately RMB344.9 million, which was lower-than-expected mainly as a result of the sales of potash products to CNOOC Group being recognised on a net basis instead of a gross basis. As advised by the management of the Group, the sales of potash products to CNOOC Group was expected to be recognised on a gross basis at the time when the Company set its annual caps for the three years ending 31 December 2020. However, after discussing with its auditors in late 2017, the sale of potash products to CNOOC Group was recognised on a net basis since 2018 as the Group was regarded as an agent because the Group had no control on potash products before they were transferred to CNOOC Group.

In assessing the reasonableness of the Group’s Sales & Services Caps of the Comprehensive Services and Product Sales Agreement, we have reviewed the calculation of the Group’s Sales & Services Caps and understand that the Group’s

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Sales & Services Caps were arrived at based on the estimated demand for the relevant services, supplies and products from CNOOC Group in accordance with CNOOC Group’s business operation and plan. Furthermore, the Company also considered the historical amount of the Group’s provision of services and supplies and sales of products in determining the Group’s Sales & Services Cap for the financial year ending 31 December 2021.

As discussed with management of the Group, the estimated sales of methanol and urea products to CNOOC Group accounts for the first and second largest portions amongst the Group’s Sales & Services Caps of different types of transactions under the Comprehensive Services and Product Sales Agreement (with respect to provision of services and supplies and sale of products by the Group to CNOOC Group), where the estimated values of (i) methanol products account for approximately 32.2%, 32.7% and 34.8%; and (ii) urea products account for approximately 21.9%, 21.1% and 20.7% of the Group’s Sales & Services Caps for each of the three financial years ending 31 December 2021, 2022 and 2023, respectively. We have reviewed the relevant calculation of the Group’s expected sales of methanol and urea products to CNOOC Group for the coming three financial years and noted that such sales amounts are determined with reference to (i) the Group’s estimated average prices of methanol and urea products to be sold to CNOOC Group after taking into account their historical prices; and (ii) the Group’s estimated demands of methanol and urea from CNOOC Group.

The estimated sales of compound fertiliser products from the Group for each of the three financial years ending 31 December 2021, 2022 and 2023 amount to approximately 15.7%, 15.2% and 14.9% of the Group’s Sales & Services Caps, respectively. As advised by the management of the Group, the Group is expected to commence selling compound fertilisers to CNOOC Group in 2021 because a member of CNOOC Group has been awarded a fertiliser reserve project from the Economic and Trade Department of National Development and Reform Commission and Economic Construction Department of Ministry of Finance for reservation of certain amount of fertilisers during 2021 to 2024. We have reviewed the notification letter of award for the aforesaid project and the relevant calculation of the cap amounts for the coming three financial years and noted that the sale of compound fertilisers is expected to remain stable during 2021 to 2023. In addition, we have also reviewed the compound fertiliser sales invoices of the Group with independent third party customers and consider the expected selling price set for the supply of compound fertilisers to CNOOC Group is comparable.

Furthermore, we have discussed with the management of the Company and understood that the Group’s Sales & Services Caps for the years ending 31 December 2022 and 2023 are generally stable as compared to the Group’s Sales & Services Cap for the year ending 31 December 2021, mainly attributable to the following factors: (i) the volumes and unit prices of products and services to be provided by the Group to CNOOC Group are estimated to be generally stable; and (ii) a buffer of 5% in consideration of the possibility of fluctuation in the relevant prices and/or demand from the Group in relation thereto in 2021 to 2023. In addition, we have reviewed contracts and invoices for some products and services on sampling basis, and taken

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

into account their possible fluctuation in prices and demands as a result of various factors such as changes in business operation and plan of both the Group and CNOOC Group in the coming years. Therefore, we consider that a 5% buffer is reasonable.

Taking into account of the foregoing, we consider the Group’s Sales & Services Caps in respect of the Comprehensive Services and Product Sales Agreement are fair and reasonable so far as the Company and the Independent Shareholders concerned.

CNOOC Group’s Sales & Services Caps of the Comprehensive Services and Product Sales Agreement

Set out below are the historical amounts of the provision of services and supplies and sales of products to the Group for the two financial years ended 31 December 2019 and the nine months ended 30 September 2020.

				Nine months
		Year ended	Year ended	ended
		31 December	31 December	30 September
		2018	2019	2020
		Amounts in RMB’000
Provision of services and	Actual	181,897	430,613	334,137
supplies and sales of	amounts
products by CNOOC
Group to the Group
Approximate increase as			136.7%
compared with previous
year

As discussed with the management of the Group, the historical amount of CNOOC Group’s provision of services and supplies and sales of products increased by approximately 136.7% for the financial year ended 31 December 2019 as compared to the financial year ended 31 December 2018, which was mainly attributed to the procurement of (i) natural gas from CNOOC Group for the manufacturing operations of CNOOC Tianye’s production facilities in Inner Mongolia; and (ii) potash from CNOOC Group for both manufacturing and trading purposes. We further understood from the management of the Group that historically CNOOC Tianye used natural gas from an independent sole natural gas producer in Inner Mongolia (the ‘‘Independent Producer’’) as its main raw material for production. Occasionally, CNOOC Tianye was not able to obtain sufficient natural gas to meet the manufacturing operations of its production facilities in Inner Mongolia during the winter months because of the tight supply of natural gas in Inner Mongolia in winter due to high demand for heating. In the first quarter of 2019, after discussions among the Group, CNOOC Group and the Independent Producer, the Independent Producer agreed to supply a stable amount of natural gas to the Group through CNOOC Group under the condition that CNOOC Group also supplies natural gas to the Independent Producer in southern China during the winter months (the ‘‘Natural Gas Transit Arrangement’’). During the nine months ended 30 September 2020, CNOOC Group’s provision of services and supplies and

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

sales of products to the Group amounted to approximately RMB334.1 million, of which approximately 69.1% were attributed to the procurement of natural gas and potash from CNOOC Group, which was within the Group’s expectation.

In assessing the reasonableness of the CNOOC Group’s Sales & Services Caps of the Comprehensive Services and Product Sales Agreement, we have reviewed the calculation of the CNOOC Group’s Sales & Services Caps and understand that the CNOOC Group’s Sales & Services Caps were arrived at based on the estimated demand for the relevant products and services from the Group in accordance with the Group’s business operation and plan. Furthermore, the Company also considered the historical amount of the Group’s provision of services and supplies and sales of products in determining the CNOOC Group’s Sales & Services Cap for the financial year ending 31 December 2021.

As discussed with management of the Group, the estimated procurement of natural gas from CNOOC Group accounts for the largest portion amongst the CNOOC Group’s Sales & Services Caps of different types of transactions under the Comprehensive Services and Product Sales Agreement (with respect to provision of services and supplies and sale of products by CNOOC Group to the Group), where the estimated values account for approximately 38.8%, 38.5% and 37.9% of the CNOOC Group’s Sales & Services Caps, for each of the three financial years ending 31 December 2021, 2022 and 2023, respectively. We understood from the management of the Group that the estimated amount of natural gas to be procured by the Group is determined with reference to (i) the Group’s estimated average price of natural gas to be procured from CNOOC Group after taking into account the historical natural gas prices and the Group’s estimation on the growth of natural gas prices in the coming years; and (ii) the Group’s estimated demand for natural gas consumption, mainly for the manufacturing operations of CNOOC Tianye’s production facilities in Inner Mongolia during winter months. Taking into account the above, we concur with the Directors’ view that being able to secure natural gas supply from CNOOC Group during winter months is crucial to the Group’s business operation in Inner Mongolia given the tight natural gas supply for the manufacturing operations in Inner Mongolia in winter historically.

The estimated procurement of potash from CNOOC Group for each of the three financial years ending 31 December 2021, 2022 and 2023 amount to approximately 27.9%, 27.2% and 27.0% of the CNOOC Group’s Sales & Services Caps, respectively. We understood from the management of the Group that the estimated procurement of potash from CNOOC Group under the Comprehensive Services and Product Sales Agreement is determined with reference to (i) the Group’s estimated average price of potash to be procured from CNOOC Group after taking into account its historical prices; and (ii) the Group’s estimated procurement amount of potash for both manufacturing and trading purposes.

Furthermore, we have discussed with the management of the Company and understood that the CNOOC Group’s Sales & Services Caps for the years ending 31 December 2022 and 2023 are generally stable as compared to the CNOOC Group’s

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Sales & Services Cap for the year ending 31 December 2021, mainly attributable to the following factors: (i) the volumes and unit prices of products and services to be provided by CNOOC Group to the Group are estimated to be generally stable; and (ii) a buffer of 5% in consideration of the possibility of fluctuation in the relevant prices and/or demand from CNOOC Group in relation thereto in 2021 and 2023. In addition, we have reviewed contracts and invoices for some products and services on sampling basis, and taken into account their possible fluctuation in prices and demands as a result of various factors such as changes in business operation and plan of both the Group and CNOOC Group in the coming years. Therefore, we consider that a 5% buffer is reasonable.

Taking into account of the foregoing, we consider the CNOOC Group’s Sales & Services Caps in respect of the Comprehensive Services and Product Sales Agreement are fair and reasonable so far as the Company and the Independent Shareholders concerned.

Deposit Caps of the Financial Services Agreement

Set out below are the maximum daily balance of the Group’s deposits placed with CNOOC Finance for the two financial years ended 31 December 2019 and nine months ended 30 September 2020.

				Nine months
		Year ended	Year ended	ended
		31 December	31 December	30 September
		2018	2019	2020
		Amounts in RMB’000
Deposits placed by the	Actual	399,941	399,857	399,498
Group with CNOOC	Amounts
Finance
Approximate decrease as			(0.02)%
compared with previous
year

As discussed with the management of the Group, the historical maximum daily balance of deposits placed with CNOOC Finance remained stable during the years ended 31 December 2018 and 2019, amounted to approximately RMB399.94 million and RMB399.85 million, respectively. The utilisation rate of historical annual caps of each of the two years ended 31 December 2018 and 2019 equals to approximately 99.99% and 99.96%, respectively. During the nine months ended 30 September 2020, the Group’s maximum daily deposit placed with CNOOC Finance amounted to approximately RMB399.5 million, which was in line with the historical maximum amount in the past. According to the management of the Group, the high utilisation rate of the deposit services was due to (i) the higher interest rates offered by CNOOC Finance than the rates offered by major and independent PRC commercial banks; and (ii) the Group’s entitlement to 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

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

CNOOC Finance against the amount outstanding from the Group to CNOOC Finance, and CNOOC Finance shall not be entitled to have any such offset right in this circumstance. We have checked the Group’s quarterly record of comparing the rates of deposit services offered by CNOOC Finance and major and independent PRC commercial banks, and noted that the rates offered by CNOOC Finance were no less favourable than those offered by major and independent PRC commercial banks.

In assessing the reasonableness of the Deposit Caps of the Financial Services Agreement, we have discussed with the management of the Group and noted that the Deposit Caps were determined mainly based on the amount of deposits historically made by the Group with CNOOC Finance. We have reviewed the interim report of the Company for the six months ended 30 June 2020 and noted that the Group had cash and cash equivalents of approximately RMB1,003.0 million and time deposits with original maturity over three months of RMB5,500 million as at 30 June 2020. In addition, we note that the Deposit Caps for each of the three years ending 31 December 2023 represents less than 3.5% of the Group’s total current assets as at 30 June 2020. We consider the Deposit Caps are reasonable compared with the financial positions of the Group as mentioned above.

Finance Lease Caps of the Finance Lease Agreement

Set out below are the value of the provision of finance lease services provided by CNOOC Leasing for the two financial years ended 31 December 2019 and nine months ended 30 September 2020.

				Nine months
		Year ended	Year ended	ended
		31 December	31 December	30 September
		2018	2019	2020
		Amounts in RMB’000
Provision of finance lease	Actual	1,396,118	1,140,235	1,098,092
services by CNOOC	Amounts
Leasing to the Group
Approximate decrease as			(18.3)%
compared with previous
year

As discussed with the management of the Group, the provision of finance lease services by CNOOC Leasing amounts decreased by approximately 18.3% from approximately RMB1,396.1 million for the financial year ended 31 December 2018 to approximately RMB1,140.2 million for the financial year ended 31 December 2019, and the lease interest plus commission fee were approximately 3.8 to 4.5% per annum varying based on the benchmark interest rate of the People’s Bank of China. As further advised by the management of the Group, the decrease in the use of the finance lease services was due to the decline in principal amount of finance leases. In 2020, the Group entered into an existing finance lease agreement for one year term which will

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

expire in 2021. Based on the proposed repayment plan prepared by the Group, we noted that other than renewing the existing finance lease agreement, the Group is expected to enter into another finance lease agreement in 2021.

In assessing the reasonableness of the Finance Lease Caps of the Finance Lease Agreement, we have discussed with the management of the Group and noted that the Finance Lease Caps were determined mainly based on (i) potential demand for finance lease services by the Group from CNOOC Leasing for its daily operation and development; (ii) the expected maximum principal amount outstanding plus lease interest and commission fees accrued under each finance leasing transaction for each respective financial year; (iii) the Group’s proposed repayment plan for its finance leasing transactions from CNOOC Leasing; and (iv) estimated fluctuation in interest rates. As advised by the management of the Group, the relevant Finance Lease Caps were arrived at based on the estimated financial needs of the Company’s relevant subsidiaries and the consolidated rate of lease interest plus commission fees to be lower than the loan interest rate quoted from the PRC commercial banks for the corresponding period.

We have reviewed (i) the Finance Lease Agreement and the historical and existing finance lease agreements; (ii) the proposed repayment plan of the Group’s finance leasing transactions from CNOOC Leasing, showing the principal amount outstanding plus lease interest and commission fees accrued under each respective finance leasing transaction for each of the three financial years ending 31 December 2023; and (iii) the relevant calculation of the Finance Lease Caps, and noted that the Finance Lease Caps has been made reference to the financial positions (including the borrowing level) and net assets value of available production assets of the Company’s relevant subsidiaries as shown on their respective financial statements as at 31 December 2019 and 30 June 2020 and expected lease interest and commission fees has taken into account the recent interest rates as quoted from the website of People’s Bank of China and the lease interest and commission fee of the existing finance lease agreement, we consider the Finance Lease Caps in respect of the Finance Lease Agreement are fair and reasonable so far as the Company and the Independent Shareholders concerned.

Based on the foregoing review and analyses, we consider that each of the Proposed Caps was made by the Directors after due and careful consideration and therefore, we concur with the view of the Directors that the basis for determining the relevant Proposed Caps are fair and reasonable so far as the Company and the Independent Shareholders are concerned.

Given that the Proposed Caps relate to future events and do not represent a forecast of transaction amounts to be incurred as a result of the relevant Non-exempted Continuing Connected Transactions, we express no opinion as to how closely the actual transaction amounts of each of the Non-exempted Continuing Connected Transactions correspond with the Proposed Caps as discussed above.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

IV. Internal Control Measures for the Non-exempted Continuing Connected Transactions

As stated in the Board Letter, the Company has established internal control system and adopted various internal control rules, including connected transaction management measures, sales and pricing management measures and procurement and tender administration measures, to ensure that the continuing connected transactions are conducted in accordance with the executed agreements. The Company has set up the Audit Department to audit and assess the operation of the internal control management system of the Company and report to the audit committee of the Board and the Board in connection to the status of the internal control of the Company (including the implementation status of connected transactions) regularly. Before entering into a specific connected transaction agreement, the designated department(s) of the Group will review and assess whether the rates and terms set out in the specific agreement are consistent with the executed framework agreement to ensure that the interests of the Shareholders as a whole are taken into account and protected.

For the Non-exempted Continuing Connected Transactions regarding the purchase of natural gas from CNOOC China Limited, to ensure the fairness and reasonableness of the pricing, it is the Group’s policy to (1) perform monthly or quarterly review (as the case may be) on the pricing calculation of natural gas, with reference to market prices of Four Major Types of Crude Oil obtained from Platts Crude Oil Marketwire, (2) perform annual review on benchmark price adjustments with reference to factors such as adjustment policy by the state pricing regulatory authorities to natural gas pricing, prices of domestic energy markets, domestic prices for natural gas and changes in CPIs; or (3) perform quarter review on benchmark price adjustments with reference to the factors including the average crude oil price (Dated Brent) and the Group’s average selling price of urea or methanol of that quarter.

Regarding the provision of the services and supplies, and sales of products by the Group to CNOOC Group, the prices for services, supplies or products being offered to CNOOC Group will be determined based on the comparable market prices of the same type of services or supplies or products. In order to ensure the prices (1) for provision of services and supplies to CNOOC Group, before entering into specific service or supply provision agreements with CNOOC Group, the designated department of the Group will evaluate and assess the scope of the relevant services or supplies requested and prepare a fee proposal based on detailed cost calculation referencing to cost of materials, products and labors, technical difficulties and expertise involved, as well as fee quotes of the Group to other independent third party customers and the fees charged by competitors of the Group in the market (if available) collected from regional data available in the market and market data gathered by the Group’s marketing team during on-site visits, which will be submitted to the senior management for approval. The senior management of the Company will determine the price of the Group’s services or supplies based on the market information collected by the Group’s marketing team with reference to the then marketing strategy of the Company, so as to ensure that the fees for the services or supplies that the Group will be charging CNOOC Group are competitive and comparable to those being offered to

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independent third party customers of the Group; and (2) for sale of products to CNOOC Group, the Company has set up the Sales and Pricing Committee, which comprises senior management and executives from the Marketing Center, the Finance Management Department, the Audit Department and the Capital Operation Department of the Company, to determine the price of products for sale. The Marketing Center of the Company will gather market information, such as the recent market trend and the prices charged by competitors of the Group in the market collected from regional data quoted on specialised websites of industrial market information and available in the market and market data gathered by the Group’s marketing team during on-site visits, and propose the selling price for the products to be sold by the Group taking into consideration the selling price proposed by the local marketing team and market information gathered. The proposed selling price will then be reported to the Sales and Pricing Committee which will review the rationales and basis for determining the proposed price before approving the price. The Sales and Pricing Committee will determine the selling price of the Group’s products based on the market information collected by the Group’s marketing team with reference to the then operations, marketing strategies, production and manufacturing costs, and operating profits of the Company. The specific product sales agreements will then be entered into at the approved price.

Regarding the provision of the services and supplies, and sales of products by CNOOC Group to the Group, the prices for services, supplies or products being offered to the Group will be determined with reference to the comparable market prices of the same type of services or supplies or products. In order to ensure the prices of the Comprehensive Services and Product Sales Agreement with respect to provision of services and supplies and sale of products by CNOOC Group to the Group is determined on a fair and reasonable basis and in accordance with the pricing principles, the Company has set up the Procurement Management Committee, which comprises senior management and executives from the Procurement Department and Disciplinary Inspection Committee of the Company, to determine the supplier of services, supplies and products. When determining the price for provision of services, supplies or products to the Group, the Procurement Management Committee is responsible for carrying out tendering process to assess the quality and price of services, supplies and products, qualification of suppliers, and terms offered by no less than three suppliers to make sure the conditions offered by CNOOC Group in the separate agreements under the Comprehensive Services and Product Sales Agreement are no less favorable to the Group than those offered by independent third parties to the Group (if practicable). If the abovementioned tendering process is not available due to the exclusivity of certain services, supplies or products in certain places, requirements of government authorities or other reasons, the Procurement Management Committee will negotiate with suppliers of services, supplies or products to make sure the pricing principles set out in the Comprehensive Services and Product Sales Agreement are fulfilled.

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For deposit services provided by the CNOOC Finance, the Capital Operation Department of the Group will obtain the rates and terms offered by CNOOC Finance and other major and independent PRC commercial banks and deposit benchmark interest rate promulgated by the PBOC from time to time and at least quarterly to make sure the interest rates for such deposits provided by CNOOC Finance are determined in accordance with the deposit benchmark interest rates for relevant financial institutions as promulgated by the PBOC from time to time, and are no less than those provided by other and major independent PRC commercial banks.

For finance lease services provided by the CNOOC Leasing, before entering the individual finance lease agreement, the Group will perform procedures to compare the principal amount against the latest net book value or appraised value of such fixed assets to be prepared by an independent valuer. The Capital Operation Department of the Group will gather quotations from independent finance lease service companies and major and independent PRC commercial banks, and will assess the qualifications and terms offered to make sure the terms (including principal amount and consolidate lease interest and commission fees) offered in the specific finance lease agreement by CNOOC Leasing are not less favourable to the Group than those provided by other independent third parties. The results will be submitted to senior management of the Company for final approval.

We have reviewed the internal control policy of the Group and discussed with the management of the Company to understand the procedures. With respect to different type of Non-exempted Continuing Connected Transactions, we have also reviewed sample documents provided by the Company (including relevant invoices, agreements, tender documents, price review and analysis documents) on random selection basis under the Non-exempted Continuing Connected Transactions and noted that they were in line with the pricing principles as described above.

In addition, pursuant to Rules 14A.55 to 14A.59 of the Listing Rules, the Non-exempted Continuing Connected Transactions are subject to the following annual review requirements:

(a) the independent non-executive Directors must review the Non-exempted Continuing Connected Transactions every year and confirm in the annual report whether the Non-exempted Continuing Connected Transactions have been entered into:
(i) in the ordinary and usual course of business of the Group;
(ii) on normal commercial terms or better; and
(iii) according to the agreements governing them on terms that are fair and reasonable and in the interests of the Shareholders as a whole;

– 54 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(b) the Company must engage its auditors to report on the Non-exempted Continuing Connected Transactions every year. The auditors of the Company must provide a letter to the Board confirming whether anything has come to their attention that causes them to believe that the Non-exempted Continuing Connected Transactions:
(i) have not been approved by the Board;
(ii) were not, in all material respects, in accordance with the pricing policies of the Group if the Non-exempted Continuing Connected Transactions involve the provision of goods or services by the Group;
(iii) were not entered into, in all material respects, in accordance with the relevant agreement governing the Non-exempted Continuing Connected Transactions; and
(iv) have exceeded the caps;
(c) the Company must provide a copy of the auditors’ letter to the Stock Exchange at least 10 business days before the bulk printing of its annual report;
(d) the Company must allow, and ensure that the counterparties to the Non-exempted Continuing Connected Transactions allow, the Company’s auditors sufficient access to their records for the purpose of the reporting on the Non-exempted Continuing Connected Transactions; and
(e) the Company must promptly notify the Stock Exchange and publish an announcement if the independent non-executive Directors and/or the Company’s auditors cannot confirm the matters as required. The Stock Exchange may require the Company to re-comply with the announcement and the Shareholders’ approval requirement and may impose additional conditions.

Taking into account the above-mentioned internal control measures and reporting requirements attached to the Non-exempted Continuing Connected Transactions, in particular, (i) the restriction of the value of the Non-exempted Continuing Connected Transactions by way of the Proposed Caps; and (ii) the on-going review by the independent non-executive Directors and auditors of the Company of the Non-exempted Continuing Connected Transactions, we are of the view that appropriate measures thereof exist to monitor the conduct of the Non-exempted Continuing Connected Transactions and assist to safeguard the interests of the Independent Shareholders.

– 55 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

RECOMMENDATION

Having considered the above principal factors and reasons, we consider (i) the entering into of the Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement, the Financial Services Agreement (with respect to provision of deposit services by CNOOC Finance to the Group) and the Non-exempted Continuing Connected Transactions is in the ordinary and usual course of business of the Group and on normal commercial terms; and (ii) together with the Proposed Caps are fair and reasonable and in the interests of the Group and the Independent Shareholders as a whole. Accordingly, 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 Comprehensive Services and Product Sales Agreement, the Finance Lease Agreement, the Financial Services Agreement (with respect to provision of deposit services by CNOOC Finance to the Group), the Non-exempted Continuing Connected Transactions and the Proposed Caps.

Yours faithfully, For and on behalf of Halcyon Capital Limited Terry Chu Managing Director

Mr. Terry Chu is a person licensed under the SFO to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO and regarded as a responsible officer of Halcyon Capital Limited and has over 20 years of experience in corporate finance industry.

– 56 –

APPENDIX

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 and confirm that, having made all reasonable enquiries, to the best of their knowledge and belief, the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

DISCLOSURE OF INTERESTS

As at the Latest Practicable Date, none of the Directors, supervisors, the chief executive or their associates of the Company had interests or short positions 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 to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO); or which are required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or which are required, 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, except that the associate of Ms. Liu Lijie, a supervisor of the Company, held 196,000 H shares of the Company.

Save for Mr. Meng Jun and Mr. Guo Xinjun, the Directors, and Mr. Liu Zhenyu, proposed to be appointed as a non-executive Director, concurrently serving as directors and/or management members of CNOOC, as at the Latest Practicable Date, none of the Directors, any proposed Director was a director or an employee of any shareholders of the Company or a company which has interest or short position in shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO.

SERVICE CONTRACTS OF THE DIRECTORS

No Director or supervisor of the Company had or proposed to enter into any service contract with members of the Group, which is not terminable by the relevant member of the Group within one year without payment of compensation (other than statutory compensation).

COMPETING INTEREST

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

– 57 –

APPENDIX

GENERAL INFORMATION

EXPERT STATEMENTS

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

Name Qualification Halcyon Capital Licensed corporation to carry out type 6 (advising on Limited corporate finance) regulated activity as defined under the SFO

The above-mentioned expert has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and/or references to its name in the form and context in which it appears.

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

NO MATERIAL INTERESTS

As at the Latest Practicable Date, none of the Directors, the supervisors of the Company, the proposed Directors, the proposed supervisors of the Company and the above-mentioned expert had any direct or indirect interest in any assets which have been, since 31 December 2019 (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.

NO 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 2019, 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 Company and its subsidiaries was engaged in any material litigation or arbitration and there was no litigation or claim of material importance known to the Directors to be pending or threatened by or against the Company and its subsidiaries.

– 58 –

APPENDIX

GENERAL INFORMATION

MISCELLANEOUS

(i) The company secretary of the Company is Ms. Wu Xiaoxia. Ms. Wu Xiaoxia is also the chief financial officer and a vice president of the Company.
(ii) The registered office and the principal place of business of the Company is No. 3, Park Third Road, Basuo Town, 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 Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong. The H Share registrar of the Company in Hong Kong is Computershare Hong Kong Investor Services Limited, whose registered office is at 17M Floor, Hopewell Center, 183 Queen’s Road East, Wanchai, Hong Kong.
(iii) The English language text of this document shall prevail over the Chinese language text.

DOCUMENTS 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 public holidays) from the date of the circular:

(i) the letter from the Independent Board Committee dated 13 November 2020, the text of which is set out on page 29 of this circular;
(ii) the letter from the Independent Financial Adviser dated 13 November 2020, the text of which is set out on pages 30 to 56 of this circular;
(iii) the consent letter dated 13 November 2020 signed by the Independent Financial Adviser in relation to the issue of this circular;
(iv) The Natural Gas Sale and Purchase Agreements entered into with CNOOC China Limited;
(v) the Comprehensive Services and Product Sales Agreement entered into between the Company and CNOOC dated 23 October 2020;
(vi) the Financial Services Agreement entered into between the Company and CNOOC Finance dated 23 October 2020; and
(vii) the Finance Lease Agreement entered into between the Company and CNOOC Leasing dated 23 October 2020.

– 59 –

NOTICE OF THE SECOND EXTRAORDINARY GENERAL MEETING OF 2020

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

(Stock Code: 3983)

NOTICE OF THE SECOND EXTRAORDINARY GENERAL MEETING OF 2020

NOTICE IS HEREBY GIVEN that the extraordinary general meeting (the ‘‘EGM’’) of China BlueChemical Ltd. (the ‘‘Company’’) will be held at the Meeting Room 1401, Kaikang CNOOC Mansion, No. 15, Sanqu, Anzhenxili, Chaoyang District, Beijing, the PRC, on Tuesday, 29 December 2020 at 9: 00 a.m. 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 13 November 2020 (the ‘‘Circular’’). The EGM is for the purposes of considering and, if thought fit, passing the following resolutions:

By way of ordinary resolutions:

‘‘THAT:

To consider and approve the appointment of Mr. Liu Zhenyu as a non-executive director of the Company, to authorise the Chairman of the Company to sign the relevant service contract on behalf of the Company with Mr. Liu Zhenyu, and to authorise the Board to determine his remuneration based on the recommendation by the remuneration committee of the Board.
To consider and approve the transactions under the Natural Gas Sale and Purchase Agreements and the proposed annual caps for such transactions for the three financial years commencing on 1 January 2021 and ending on 31 December 2023 as set out in the Circular; and the Board is hereby authorized to take such actions as are necessary to implement the transactions under the Natural Gas Sale and Purchase Agreements and the proposed annual caps for such transactions.
To consider and approve the entering into of the Comprehensive Services and Product Sales Agreement dated 23 October 2020 between the Company and CNOOC and the transactions thereunder, details of which are set out in the Circular; and the Board is hereby authorized to take such actions as are necessary to implement the Comprehensive Services and Product Sales Agreement and the transactions thereunder.
To consider and approve the proposed annual caps for the transactions under the Comprehensive Services and Product Sales Agreement for the three financial years commencing on 1 January 2021 and ending on 31 December 2023 as set out in the Circular; and the Board is hereby authorized to take such actions as are necessary to implement the proposed annual caps for the transactions under the Comprehensive Services and Product Sales Agreement.

– 60 –

NOTICE OF THE SECOND EXTRAORDINARY GENERAL MEETING OF 2020

To consider and approve the entering into of the Financial Services Agreement between the Company and CNOOC Finance dated 23 October 2020, and the transactions thereunder with respect to deposits placed by the Group with CNOOC Finance, details of which are set out in the Circular; and the Board is hereby authorized to take such actions as are necessary to implement the Financial Services Agreement and the transactions thereunder with respect to deposits placed by the Group with CNOOC Finance.
To consider and approve the proposed annual caps for the transactions with respect to deposits placed by the Group with CNOOC Finance under the Financial Services Agreement for the three financial years commencing on 1 January 2021 and ending on 31 December 2023 as set out in the Circular; and the Board is hereby authorized to take such actions as are necessary to implement the proposed annual caps for the transactions with respect to deposits placed by the Group with CNOOC Finance under the Financial Services Agreement.
To consider and approve the entering into of the Finance Lease Agreement between the Company and CNOOC Leasing dated 23 October 2020 and the transactions thereunder, details of which are set out in the Circular; and the Board is hereby authorized to take such actions as are necessary to implement the Finance Lease Agreement and the transactions thereunder.
To consider and approve the proposed annual caps for the transactions under the Finance Lease Agreement for the three financial years commencing on 1 January 2021 and ending on 31 December 2023 as set out in the Circular; and the Board is hereby authorized to take such actions as are necessary to implement the proposed annual caps for the transactions under the Finance Lease Agreement.’’

By Order of the Board China BlueChemical Ltd.* Wu Xiaoxia Company Secretary

Beijing, the PRC 13 November 2020

As at the date of this notice, the executive directors of the Company are Mr. Wang Weimin and Mr. Hou Xiaofeng, the non-executive directors of the Company are Mr. Meng Jun and Mr. Guo Xinjun, and the independent non-executive directors of the Company are Ms. Karen Lee Kit Ying, Mr. Eddie Lee Kwan Hung and Mr. Yu Changchun.

Notes:

In order to determine the list of shareholders who are entitled to attend and vote at the EGM, the register of members will be closed from 29 November 2020 to 29 December 2020 (both days inclusive), during which no transfer of shares will be effected. In order to qualify for attendance at the EGM, all instruments of transfer, accompanied by the relevant H share certificates, must be lodged with the Hong Kong share registrar for H Shares, Computershare Hong Kong Investor Services Limited at Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, not later than 4: 30 p.m. on 27 November 2020. Shareholders of the Company whose names appear on the register of members of the Company on 29 December 2020 are entitled to attend the EGM.
For identification purposes only

– 61 –

NOTICE OF THE SECOND EXTRAORDINARY GENERAL MEETING OF 2020

A shareholder entitled to attend and vote at the EGM may appoint one or more proxies to attend and vote in his/her stead. A proxy need not be a shareholder of the Company. Where a shareholder has appointed more than one proxy to attend the EGM, such proxies may only vote on a poll.

The instrument appointing a proxy must be in writing under the hand of a shareholder or his/her 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 notarised.

In order to be valid, in respect of holders of the domestic shares or unlisted foreign shares of the Company, the proxy form together with the power of attorney or other authorisation document (if any) must be deposited at the Company’s Secretary Office of the Board in China (Address: Room 1707, Kaikang CNOOC Mansion, No. 15, Sanqu, Anzhenxili, Chaoyang District, Beijing, the PRC) not less than 24 hours (i.e., by 9: 00 a.m., Monday, 28 December 2020) before the time fixed for holding the EGM. In respect of the Company’s H Shares, the said documents together must be lodged at the Company’s H Share Registrar within the abovementioned period by holders of H Shares. The H Share Registrar of the Company is Computershare Hong Kong Investor Services Limited, whose address is 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong. Completion and return of the proxy form will not preclude a shareholder from attending and voting in person at the EGM if he/she so wishes.

Shareholders who intend to attend the EGM in person or by proxy should return the reply slip in person, by post or by fax to the Company’s Secretary Office of the Board in China (for holders of the domestic shares or unlisted foreign shares of the Company) or Computershare Hong Kong Investor Services Limited (for holders of H Shares) on or before Wednesday, 9 December 2020. The Company’s Secretary Office of the Board in China is Room 1707, Kaikang CNOOC Mansion, No. 15, Sanqu, Anzhenxili, Chaoyang District, Beijing, the PRC (Tel: 0086-010-84527250, Fax: 0086-010-84527254, Post code: 100029). The address of Computershare Hong Kong Investor Services Limited is 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.
Shareholders or their proxies must present proof of their identities upon attending the EGM.
The EGM is expected to last not more than one day. Shareholder or proxies attending the EGM are responsible for their own transportation and accommodation expenses.

– 62 –

AI assistant

China BlueChemical Ltd. — Proxy Solicitation & Information Statement 2020

50936_rns_2020-11-13_1246a567-5d2a-40bc-a6be-ec70aef21f96.pdf

(Stock Code: 3983)

PROPOSED APPOINTMENT OF NON-EXECUTIVE DIRECTOR CONTINUING CONNECTED TRANSACTIONS PROPOSED ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS AND

Halcyon Capital Limited

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

(Stock Code: 3983)

PROPOSED APPOINTMENT OF NON-EXECUTIVE DIRECTOR CONTINUING CONNECTED TRANSACTIONS PROPOSED ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

AND

NOTICE OF THE SECOND EXTRAORDINARY GENERAL MEETING OF 2020

INTRODUCTION

I. PROPOSED APPOINTMENT OF NON-EXECUTIVE DIRECTOR

LETTER FROM THE BOARD

II. NON-EXEMPTED CONTINUING CONNECTED TRANSACTIONS

Summary of the Non-exempted Continuing Connected Transactions

Natural Gas Sale and Purchase Agreements

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Comprehensive Services and Product Sales Agreement

LETTER FROM THE BOARD

LETTER FROM THE BOARD

1. As for provision of services and supplies by the Group to CNOOC Group

2. As for sale of products by the Group to CNOOC Group

LETTER FROM THE BOARD

Financial Services Agreement

Finance Lease Agreement

Historical Transaction Figures and the Proposed Annual Caps with respect to Non-exempted Continuing Connected Transactions

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Measures to Ensure Compliance with the Listing Rules

LETTER FROM THE BOARD

Reasons for and Benefits of the Non-exempted Continuing Connected Transactions

Listing Rules Implications

Information of the Parties Involved

Information on the Group

Information on CNOOC and its associates

Board Confirmation

III. RECOMMENDATION

LETTER FROM THE BOARD

IV. EGM

V. A POLL AT EXTRAORDINARY GENERAL MEETING

VI. OTHER INFORMATION

(Stock Code: 3983)

CONTINUING CONNECTED TRANSACTIONS

Yours faithfully,

CONTINUING CONNECTED TRANSACTIONS AND PROPOSED ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

BASIS OF OUR OPINION

PRINCIPAL FACTORS AND REASONS CONSIDERED

Comprehensive Services and Product Sales Agreement

Financial Services Agreement

Finance Lease Agreement

III. Basis of the Relevant Proposed Caps

Natural Gas Caps of the Natural Gas Sale and Purchase Agreements

Deposit Caps of the Financial Services Agreement

Finance Lease Caps of the Finance Lease Agreement

IV. Internal Control Measures for the Non-exempted Continuing Connected Transactions

RECOMMENDATION

RESPONSIBILITY STATEMENT

DISCLOSURE OF INTERESTS

SERVICE CONTRACTS OF THE DIRECTORS

COMPETING INTEREST

EXPERT STATEMENTS

NO MATERIAL INTERESTS

NO MATERIAL ADVERSE CHANGE

MATERIAL LITIGATION

MISCELLANEOUS

DOCUMENTS FOR INSPECTION

(Stock Code: 3983)

NOTICE OF THE SECOND EXTRAORDINARY GENERAL MEETING OF 2020

By way of ordinary resolutions:

‘‘THAT:

Notes:

More from China BlueChemical Ltd.

China BlueChemical Ltd. Proxy Solicitation & Information Statement 2020