JY GAS LIMITED — Proxy Solicitation & Information Statement 2007

Jan 11, 2007

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in China Oil And Gas Group Limited, you should at once hand this circular and the enclosed form of proxy to the purchaser(s) or the transferee(s), or to the bank, licensed securities dealer or other agent through whom the sale or the transfer was effected for transmission to the purchaser(s) or the transferee(s).

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

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

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(incorporated in Bermuda with limited liability)
(Stock Code: 603)
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Discloseable Transaction: Proposed acquisition involving the issue of convertible note for the PRC natural gas stations business

A notice convening the special general meeting of China Oil And Gas Group Limited to be held at Regus, 2nd Floor, Shui On Centre, 6-8 Harbour Road, Wanchai, Hong Kong, on Thursday, 25 January 2007 (or any adjournment thereof) at 10:30 a.m. is set out on pages 23 to 24 of this circular. Form of proxy for use in the special general meeting is enclosed. Whether or not you propose to attend the meeting, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as possible and in any event not less than 48 hours before the time appointed for holding of the special general meeting or any adjourned meeting thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the special general meeting or any adjourned meeting thereof, should you so wish.

• For identification purposes only

8 January 2007

CONTENTS

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	5
Sale and Purchase Agreement . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	6
Effects of shareholding . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	11
Information of the Plentigreat Group . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	12
Information of the Company . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	14
Reasons for and benefits of the Acquisition with the	provision
of the Shareholder Loan . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	14
Financial effect of the Acquisition . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	15
Fund raising for the past 12 months . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	15
Listing Rules implications . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	16
The SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	16
Procedures to demand for a poll at general meeting	. . . . . . . . . . . . . . . . . . . . . .	17
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	17
Additional information . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	18
Appendix – General Information of the Company	. . . . . . . . . . . . . . . . . . . . .	19
Notice of SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	23

– i –

DEFINITIONS

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

• “Acquisition”

• the proposed acquisition by the Purchaser of the Sale Shares from the Vendor pursuant to the Sale and Purchase Agreement

• “Anhui Acquisition”

• the proposed acquisition of the natural gas stations business by the Company from Sino Vantage Management Limited under the sale and purchase agreement dated 15 December 2006, details of which are set out in the Anhui Acquisition Announcement

• “Anhui Acquisition Announcement”

• the announcement made by the Company on 28 December 2006 relating to the Anhui Acquisition

• “Anhui Consideration Shares”

• 400,000,000 new Shares to be issued by the Company to Sino Vantage Management Limited as part of the consideration for the Anhui Acquisition

• “Anhui Conversion Shares”

• 375,000,000 new Shares to be issued upon conversion of the Anhui Convertible Note, if fully exercised

• “Anhui Convertible Note”

• the convertible note to be issued by the Company in the principal amount of HK$90 million with an exercise price of HK$0.24 per Anhui Conversion Share as part of the consideration for the Anhui Acquisition

• “associates”

• has the meaning ascribed to it under the Listing Rules

• “Board”

• the board of Directors, including independent non-executive Directors

• “Business Day(s)”

• any day (excluding a Saturday) on which banks generally are open for business in Hong Kong

• “Company”

• China Oil And Gas Group Limited, a limited liability company incorporated in Bermuda, the Shares of which are listed on the Stock Exchange (stock code 603)

• “Completion”

• completion of the sale and purchase of Sale Shares under the Sale and Purchase Agreement

• “Completion Date”

the date on which the Completion takes place

• “connected person”

• has the meaning ascribed to it under the Listing Rules

– 1 –

DEFINITIONS

• “Consideration” consideration for the purchase by the Purchaser of the Sale Shares under the Sale and Purchase Agreement in the amount of HK$133 million to be satisfied by the Purchaser (i) as to HK$67 million in cash and (ii) as to HK$66 million by issue of the Convertible Note

• “Conversion Shares” 275,000,000 new Shares to be issued upon conversion of the Convertible Note, if fully exercised

• “Convertible Note” the Convertible Note to be issued by the Company in the principal amount of HK$66 million with an exercise price of HK$0.24 per Conversion Share

• “Director(s)” director(s) of the Company

• “Group” the Company and its subsidiaries

• “Hong Kong” the Hong Kong Special Administrative Region of the PRC

• “HK$” Hong Kong dollars, the lawful currency of Hong Kong

• “Independent Valuer” the independent valuer appointed by the Company for the purpose of preparing a valuation report on the fair market value of the Natural Gas Stations

• “Issue Date” the date of issue of the Convertible Note

• “Jiangsu Gas Co” Jiangsu Yong-Jie Natural Gas Company Limited ( ), a wholly foreign owned enterprise established in Nanjing of the PRC on 9 October 2006, which is wholly owned by Skytop

• “Last Trading Day” 11 December 2006, being the last trading day prior to the suspension of trading in the Shares

• “Latest Practicable Date” 5 January 2007, being the latest practicable date before the printing of this circular for ascertaining certain information

• “Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange

• “Long Stop Date”

• 31 March 2007

• “Maturity Date”

the day falling twenty four months from the Issue Date

– 2 –

DEFINITIONS

• “Mr. Lo” or “Guarantor” Mr. Lo Chung, the ultimate beneficial owner of the Vendor, who is the guarantor in respect of the Sale and Purchase Agreement

• “Nanjing Gas Co” Nanjing Jie-Ning Natural Gas Company Limited ( ), a wholly foreign owned enterprise established in Nanjing of the PRC on 31 October 2006, which is wholly owned by Skytop

• “Natural Gas Stations” 4 gas stations to be invested and constructed by the PRC Companies in Nanjing

• “Placing” the placing of 360,000,000 new Shares by the Company, details of which are set out in the Placing Announcement

• “Placing Announcement” the announcement made by the Company on 27 December 2006 relating to the Placing

• “Plentigreat” Plentigreat Holdings Limited, a company incorporated in the British Virgin Islands with limited liability and has an authorized capital of US$50,000 divided into 50,000 shares of US$1.00 each

• “Plentigreat Group” Plentigreat, Skytop, Jiangsu Gas Co and Nanjing Gas Co

• “PRC”

• the People’s Republic of China which, for the purpose of this circular, excludes Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan

• “PRC Companies” collectively Jiangsu Gas Co and Nanjing Gas Co

• “Purchaser”

• All Praise Investments Limited, a company incorporated in the British Virgin Islands with limited liability, which is a wholly owned subsidiary of the Company

• “RMB”

• Renminbi, the lawful currency of the PRC

• “Sale and Purchase Agreement”

• the conditional agreement dated 11 December 2006 entered into between the Purchaser and the Vendor for the sale and purchase of the Sale Shares

– 3 –

DEFINITIONS

“Sale Shares” 8,000 shares of US$1.00 each in the share capital of Plentigreat beneficially owned by the Vendor, representing 80% of the existing issued share capital of Plentigreat as at the date of the Sale and Purchase Agreement “SFO” Securities and Futures Ordinance (Chapter 571, Laws of Hong Kong) “SGM” the special general meeting of the Company to be convened and held to approve the issue of the Convertible Note and the Conversion Shares “Shareholders” holders of Shares “Shareholder Loan” an interest-free shareholder loan of HK$15 million to be provided by the Purchaser and the Vendor to Plentigreat within 120 days after Completion in accordance with the respective shareholdings in the Plentigreat held by the Purchaser and the Vendor, which is repayable upon expiry of a term of 5 years from the date of advance “Shares” ordinary shares of HK$0.01 each in the share capital of the Company “Skytop” Skytop International Holdings Limited ( ), a private company incorporated in Hong Kong with limited liability on 14 July 2006 “Stock Exchange” The Stock Exchange of Hong Kong Limited “US$” United States dollars, the lawful currency of the United States of America “Vendor” New Stamina Investments Limited, a company incorporated in the British Virgin Islands with limited liability, the entire issued share capital of which is beneficially owned by Mr. Lo “%” per cent.

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LETTER FROM THE BOARD

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(incorporated in Bermuda with limited liability) (Stock Code: 603)

Executive Directors: Registered Office: Mr. Xu Tie-liang (Chairman) Clarendon House Mr. Qu Guo-hua (Chief Executive Officer) 2 Church Street Mr. Zeng Xiao Hamilton HM 11 Mr. Cheung Shing Bermuda

Independent Non-executive Directors: Mr. Cheung Man Yau, Timothy Mr. Shi Xun-zhi Mr. Peng Long

Head Office and Principal Place of Business in Hong Kong: Suite 2805, 28th Floor Sino Plaza 255-257 Gloucester Road Causeway Bay Hong Kong

8 January 2007

To the Shareholders

Dear Sir or Madam,

Discloseable Transaction:

Proposed acquisition involving the issue of convertible note for

the PRC natural gas stations business

INTRODUCTION

It was announced on 18 December 2006 that the Board intended to put forward a proposal to the Shareholders in relation to the Acquisition with the issue of the Convertible Note for the PRC Natural Gas Stations business.

The purpose of this circular is to provide you with further information regarding, among other things, (i) the Acquisition together with the issue of the Convertible Note, and (ii) information regarding the Plentigreat Group. Further, this circular contains a notice of SGM which shall be convened for the purpose of considering and, if thought fit, passing the resolution in relation to the issue of the Convertible Note and the Conversion Shares.

* For identification purposes only

– 5 –

LETTER FROM THE BOARD

SALE AND PURCHASE AGREEMENT

Date of the Sale and Purchase Agreement

11 December 2006 (after trading hours)

Parties

• (1) The Purchaser, a wholly owned subsidiary of the Company;

• (2) The Vendor, the entire issued share capital of which is beneficially owned by Mr. Lo; and

• (3) The Guarantor, Mr. Lo (to guarantee the Vendor’s performance of its obligations under the Sale and Purchase Agreement).

To the best knowledge of the Directors and having made all reasonable enquiries, the Vendor (being an investment holding company) and Mr. Lo, its ultimate beneficial owner, are third parties independent of the Company and connected persons of the Company. The Company was acquainted with the Vendor through its business network and there were no previous business dealings between the Company and the Vendor except the subscription by Mr. Lo of 34,000,000 new Shares (which represent 1.35% of existing issued share capital of the Company) out of the placing of 540,000,000 new Shares by the Company through its placing agent Guotai Junan Securities (Hong Kong) Limited in October 2006.

Assets to be acquired

The Sale Shares, representing 80% of the entire issued share capital of Plentigreat. Plentigreat is wholly owned by the Vendor.

Consideration

The Consideration shall be HK$133 million which was agreed between the parties to the Sale and Purchase Agreement based on arm’s length negotiation which was made with reference to the fair market value of the Natural Gas Stations as at 11 December 2006 of not less than HK$185 million to be confirmed by the Independent Valuer. A refundable interest-free deposit of HK$5 million was paid by the Purchaser to the Vendor upon signing of the Sale and Purchase Agreement. Upon Completion, (i) cash consideration of HK$62 million shall be paid by the Purchaser to the Vendor and (ii) the sum of HK$66 million shall be satisfied by the issue of the Convertible Note to the Vendor at an exercise price of HK$0.24 per Conversion Share. The issue of the Convertible Note and the Conversion Shares shall be subject to the Shareholders’ approval at the SGM.

The exercise price of HK$0.24 per Conversion Share represents:

• (a) a discount of approximately 27.27% to the closing price of HK$0.33 per Share as quoted on the Stock Exchange on the Last Trading Day;

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LETTER FROM THE BOARD

• (b) a discount of approximately 8.33% to the 5-day average closing price of approximately HK$0.2618 per Share as quoted on the Stock Exchange for the last five trading days up to and including the Last Trading Day;

• (c) a premium of approximately 5.17% to the 10-day average closing price of approximately HK$0.2282 per Share as quoted on the Stock Exchange for the last ten trading days up to and including the Last Trading Day; and

• (d) a discount of approximately 66.67% to the closing price of HK$0.72 per Share as quoted on the Stock Exchange on the Latest Practicable Date.

Based on the closing price of HK$0.72 per Share as quoted on the Stock Exchange on the Latest Practicable Date, the value of the Conversion Shares would amount to HK$198 million. The Conversion Shares represent approximately 10.91% and 9.84% of the Company’s existing share capital and enlarged share capital assuming the full conversion of the Convertible Note respectively.

An application will be made to the listing committee of the Stock Exchange for the listing of and permission to deal in the Conversion Shares which will rank pari passu in all respects with the existing Shares.

The basis in respect of the exercise price of the Conversion Shares was determined between the Company and the Vendor after arm’s length negotiations with reference to the Company’s recent share price performance, i.e. the 5-day average closing price and the 10-day average closing price per Share, at the time when the Sale and Purchase Agreement was entered into between the Purchaser and the Vendor. To avoid any distortion, the Company considers that 5-day average closing price and 10-day average closing price should be more appropriate and more reliable reference points compared with than a single day closing price.

As at the Latest Practicable Date, the Company has no outstanding options, warrants or convertible instruments to subscribe for any Shares.

The Convertible Note

The terms of the Convertible Note have been negotiated on arm’s length basis and the principal terms of which are summarized below:

Principal Amount

HK$66 million.

Interest

The Convertible Note will bear an interest at the rate of one per cent. (1%) per annum on the outstanding principal amount of the Convertible Note from the Issue Date to the Maturity Date, which is determined with reference to the prime lending rate as quoted by The Hongkong and Shanghai Banking Corporation Limited. The interest

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LETTER FROM THE BOARD

will, subject as provided herein, be payable by the Company every six calendar months in arrears on the dates falling every six calendar months after the Issue Date. The first interest payment shall be made on the date falling six calendar months after the Issue Date.

Interest shall accrue on a day to day basis and shall be calculated on the basis of the actual number of days elapsed and a 365-day calendar year on the outstanding principal amount of the Convertible Note.

Maturity

2 years from the Issue Date.

Denomination

In multiple of HK$1,000,000.

Form

Registered form only.

Conversion Price

HK$0.24 per Conversion Share, which is subject to adjustment for sub-division or consolidation of Shares, bonus issues, rights issues, capitalization of profits or reserves or capital distributions in cash or specie.

The overriding principle as set out in the Stock Exchange’s letter dated 5 September 2006 is that no adjustment to the exercise price or number of shares should be to the advantage of share option scheme participants without prior Shareholders’ approval. The adjustment will be made to the conversion price if and only if there is an event of subdivision or consolidation of Shares, bonus issues, rights issues, capitalization of profits or reserves or capital distributions in cash or specie.

Conversion

The holder of the Convertible Note may convert the whole or any part of the principal amount of the Convertible Note outstanding into Conversion Shares at the price of HK$0.24 per Conversion Share from time to time after the expiry of a period of six calendar months from the Issue Date and prior to the Maturity Date provided that an integral multiple of HK$1,000,000 be converted at any time and save that if the outstanding principal amount of the Convertible Note is less than HK$1,000,000, the whole (but not part only) of the outstanding principal amount of the Convertible Note must be converted.

The Conversion Shares will be issued upon conversion of the Convertible Note. An application will be made to the listing committee of the Stock Exchange for the listing of and permission to deal in the Conversion Shares.

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LETTER FROM THE BOARD

Conversion Period

The holder of the Convertible Note shall have the rights at any time and from time to time, during a period commencing after the expiry of a period of six months after the Issue Date and ending on the Maturity Date, to convert the whole or any part of the outstanding principal amount into the Conversion Shares, subject to the terms and conditions set out in the Convertible Note.

Ranking

The Conversion Shares will rank pari passu in all respects among themselves and with all other Shares in issue on the date of such allotment and issue.

Transferability

The Convertible Note is freely transferable, provided that the holder of the Convertible Note must inform the Company of each transfer or assignment made by it. The Company undertakes to notify the Stock Exchange if any of the Convertible Note is transferred to a connected person.

Events of Default

The Convertible Note contains an event of default provision which provides that on the occurrence of certain events of default (e.g. repayment overdue, insolvency, liquidation and suspension of trading on the Stock Exchange for a continuous period of 30 trading days due to the default of the Company) specified in the Convertible Note, the holder of the Convertible Note shall be entitled to demand for immediate repayment of the principal amount outstanding under the Convertible Note.

Conditions precedent

Completion shall be conditional upon fulfillment of the following conditions:

• (i) the Purchaser being, in its absolute discretion, satisfied with the result of the valuation report on the Natural Gas Stations, prepared by the Independent Valuer, which must confirm that the fair market value of the Natural Gas Stations as at 11 December 2006 shall not be less than HK$185 million;

• (ii) the legal opinion to be issued by a firm of PRC lawyers acceptable to the Purchaser covering such legal matters, including the legality and validity of the establishment and operations of the Plentigreat Group and the Natural Gas Stations, in such form and substance to the satisfaction of the Purchaser having been obtained;

• (iii) the passing of the relevant resolution at the SGM by the Shareholders for approving the issue of the Convertible Note and the Conversion Shares;

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LETTER FROM THE BOARD

• (iv) the granting of listing approval in connection with the issue of the Conversion Shares;

• (v) the representations, warranties and undertakings given by the Vendor and the Guarantor under the Sale and Purchase Agreement remaining true and accurate and not misleading in all material aspects at Completion; and

• (vi) the Purchaser, having satisfied, at its absolute discretion, with the results of due diligence exercise conducted by the Purchaser on the Plentigreat Group and the Natural Gas Stations project.

The Vendor and the Purchaser shall use their respective best endeavours to procure that the above conditions precedent shall be satisfied on or before the Long Stop Date (or such other date as the parties may agree in writing). As at the Latest Practicable Date, the condition precedent (vi) has been fulfilled while the other conditions precedent are yet to be fulfilled. However, if any of the conditions precedent is not satisfied by the Purchaser on or before the Long Stop Date, the Sale and Purchase Agreement shall be deemed terminated absolutely in which event the parties shall be released from all their respective obligations and liabilities under the Sale and Purchase Agreement, and the deposit already paid to the Vendor together with interest earned thereon (if any) shall be returned to the Purchaser forthwith, other than any liabilities arising from any antecedent breach of the Sale and Purchase Agreement, and any rights or remedies which shall have accrued shall not be prejudiced or affected.

Completion

Subject to the satisfaction of the conditions precedent, Completion shall take place on the third Business Day immediately after the date on which all the conditions precedent are satisfied. It is expected that Completion will take place on or before 1 February 2007.

Further, under the Sale and Purchase Agreement, the Purchaser undertakes with Plentigreat that within 120 days after Completion, the Purchaser and the Vendor shall advance the Shareholder Loan to Plentigreat, which will be used as capital contribution in the sum of HK$15 million to Jiangsu Gas Co and Nanjing Gas Co for the construction of the Natural Gas Stations and their operation, in accordance with the respective shareholdings in Plentigreat held by the Purchaser and the Vendor.

The funding of the Consideration shall be made out of the Company’s internal resources. The Board considers that the cost of the Acquisition should not create material adverse strain on the Company’s financial resources, and therefore, should not affect its normal business operations.

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LETTER FROM THE BOARD

EFFECTS OF SHAREHOLDING

The effects of the Acquisition, the Placing and the Anhui Acquisition on the shareholding of the Company are as follows:

Substantial Shareholder (Note 1) Sino Vantage Management Limited (Note2) Sub-totals for the shareholdings held by Sino Advance Holdings Limited and Sino Vantage Management Limited (Note 3) Mr. Lo The Vendor (Note 4) Other public Shareholders Total public float TOTAL	As at the Latest Practicable Date 321,018,300 – 321,018,300 34,000,000 – 2,164,657,913 2,198,657,913	Approximate percentage (%) 12.74 – 12.74 1.35 – 85.91 87.26	Immediately after completion of the Acquisition and assuming the Convertible Note is converted in full into Conversion Shares 321,018,300 – 321,018,300 34,000,000 275,000,000 2,164,657,913 2,473,657,913	Approximate percentage (%) 11.49 – 11.49 1.22 9.84 77.45 88.51	After Placing 321,018,300 – 321,018,300 34,000,000 275,000,000 2,524,657,913 2,833,657,913	Approximate percentage (%) 10.18 – 10.18 1.07 8.72 80.03 89.82	Immediately after completion of the Anhui Acquisition and issue of the Anhui Consideration Shares but assuming no Anhui Convertible Note is converted 321,018,300 400,000,000 721,018,300 34,000,000 275,000,000 2,524,657,913 2,833,657,913	Approximate percentage (%) 9.03 11.25 20.28 0.96 7.74 71.02 79.72	Upon completion of the Anhui Acquisition and issue of the Anhui Consideration Shares and assuming the Anhui Convertible Note is converted in full into the Anhui Conversion Shares 321,018,300 775,000,000 1,096,018,300 34,000,000 275,000,000 2,524,657,913 2,833,657,913	Approximate percentage (%) 8.17 19.72 27.89 0.86 7.00 64.25 72.11
	2,519,676,213	100.00	2,794,676,213	100.00	3,154,676,213	100.00	3,554,676,213	100.00	3,929,676,213	100.00

Notes:

1. Sino Advance Holdings Limited is wholly and benefically owned by Mr. Xu Tie-liang, the chairman of the Company.

2. Sino Vantage Management Limited is wholly and benefically owned by Mr. Xu Tie-liang, the chairman of the Company. The change in shareholding in the Company held by Sino Vantage Management Limited relates to the Anhui Acquisition, further details of which have been disclosed in the Anhui Acquisition Announcement dated 28 December 2006.

3. The sub-total amount of shareholdings in the Company reflects the aggregate shareholdings in the Company of Sino Advance Holdings Limited and Sino Vantage Management Limited as both companies are wholly and benefically owned by Mr. Xu Tie-liang, the chairman of the Company.

4. The Vendor is wholly and beneficially owned by Mr. Lo (who has an interest in 34,000,000 Shares which represents 1.35% shareholding in the Company as at the Latest Practicable Date), a third party independent of and not connected with the Company’s connected persons and their respective associates. He is not acting in concert with Mr. Xu Tie-liang and he does not hold any position in the management of the Company. As at the Latest Practicable Date, the Vendor does not hold more than 10% Shares. Accordingly, the Vendor is a public Shareholder.

– 11 –

LETTER FROM THE BOARD

After completion of the Acquisition and the Anhui Acquisition, there will not be any change in the composition of the Board.

INFORMATION OF THE PLENTIGREAT GROUP

Plentigreat, a company incorporated in the British Virgin Islands on 6 June 2006, is an investment holding company currently wholly owned by the Vendor.

Based on the information provided by the Vendor, the share capital of Plentigreat is wholly owned by the Vendor. The Vendor and its ultimate beneficial owner, Mr. Lo, are independent of and not connected with any of the Directors, chief executives or substantial shareholders of the Company or any of its subsidiaries or any of their respective associates.

Plentigreat has not commenced any operations other than the investment in Skytop (a wholly-owned subsidiary of Plentigreat). Save for the paid up capital of US$10,000 (HK$78,000) (equivalent to the aggregate par value of the total issued shares of Plentigreat) and its interest in 1 share of HK$1.00 each in Skytop, representing the entire issued share capital of Skytop, Plentigreat does not have any material assets or liabilities as at the date of the Sale and Purchase Agreement. As at the date of Sale and Purchase Agreement, the consolidated net asset value of Plentigreat (including its investment cost in Skytop) amounted to US$10,000 (HK$78,000).

To the best knowledge of the Directors and having made all reasonable enquiries, Skytop is an investment holding company incorporated in Hong Kong on 14 July 2006 and has not commenced any significant business operation.

The Plentigreat Group, which consists of Plentigreat and all its subsidiaries, namely, Skytop, Jiangsu Gas Co and Nanjing Gas Co, is principally engaged in investment and construction of Natural Gas Stations and supply of natural gas in Nanjing of the PRC through their two operating subsidiaries Jiangsu Gas Co and Nanjing Gas Co which, however, has not commenced any significant business operations. Jiangsu Gas Co and Nanjing Gas Co have obtained approval from the relevant government authority to invest in, construct and operate Natural Gas Stations in Nanjing. Jiangsu Gas Co and Nanjing Gas Co have the respective 30 and 50 years of operation permits to engage in the Natural Gas Stations business under their respective approvals. No PRC regulatory approvals are required for change in shareholdings in Plentigreat as a result of the Acquisition given there are no PRC laws currently regulating the change in the shareholding of the foreign shareholder of the PRC wholly owned enterprises or the equity joint ventures.

As all of the members of the Plentigreat Group were recently incorporated and have not commenced any business operations, no audited or unaudited financial statements have been prepared other than disclosed above. Based on information disclosed by the Vendor to the Company, no members of the Plentigreat Group have recorded any net profit or loss (both before and after taxation and extraordinary items) nor incurred any material liability prior to the date of the Sale and Purchase Agreement.

As at the Latest Practicable Date, Plentigreat has a total unaudited consolidated net assets of US$10,000 (HK$78,000). There were no audited financial statements prepared under generally accepted accounting principles in Hong Kong nor in the PRC for the Plentigreat Group since its incorporation.

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LETTER FROM THE BOARD

No shareholder agreement between the Company and the Vendor is necessary since the Company considers that there will be sufficient protection for the Company given that the Company will obtain control over Plentigreat in the term of its 80% controlling shareholding in Plentigreat. The Purchaser can nominate two directors to the board of Plentigreat whereas the Vendor can nominate one director to the board of Plentigreat.

Jiangsu Gas Co and Nanjing Gas Co are established on 9 October 2006 and 31 October 2006 respectively. They are wholly foreign owned enterprises and are wholly owned by the Vendor.

The Plentigreat Group will become a major natural gas stations operator in Nanjing. As far as the Natural Gas Stations are concerned, the Company plans to set up 4 natural gas stations in Nanjing.

Shareholding structure of the Plentigreat Group as at the Latest Practicable Date, and immediately upon the Completion

1. As at the Latest Practicable Date

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The Vendor
100%
Plentigreat
100%
Skytop
100% 100%
Jiangsu Gas Co Nanjing Gas Co
Gas Station 1 Gas Station 3
Gas Station 2 Gas Station 4
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LETTER FROM THE BOARD

2. Immediately upon Completion

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The Purchaser The Vendor
80% 20%
Plentigreat
100%
Skytop
100% 100%
Jiangsu Gas Co Nanjing Gas Co
Gas Station 1 Gas Station 3
Gas Station 2 Gas Station 4
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INFORMATION OF THE COMPANY

The Company is principally engaged in investment in the natural gas business, energy related business, and information technology.

REASONS FOR AND BENEFITS OF THE ACQUISITION WITH THE PROVISION OF THE SHAREHOLDER LOAN

The Company will focus its efforts on seeking more investment opportunities in the energy sector, especially in natural gas and natural gas related investments.

Since the approvals from the relevant PRC government have been obtained, the Plentigreat Group will be able to operate natural gas stations to supply natural gas in Nanjing. The Directors are of the view that the Acquisition will enable the Company to capture the business opportunities to become a major natural gas stations operator to supply natural gas in Nanjing.

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LETTER FROM THE BOARD

Nanjing with a population of approximately 6.4 million is one of the most populated and busy cities in China. Nanjing of a size about 6,598 km[2] is the capital city of Jiangsu with convenient traffic to Beijing, Shanghai and Anhui. Nanjing is rapidly growing and developing, GDP of which has been doubled in 5 years, achieved RMB241 billion in 2005, where information technology, chemical and petroleum, electricity, steel, and automobile are the major industries of Nanjing accounting for almost 70% of the city’s total GDP.

The Company is interested in the natural gas investments in Nanjing since it is considered to have great growth potential with strong GDP. Furthermore, increasing concerns over pollution and environmental protection following the rapidly growing economy in recent years have advocated that there should be placed more environmental controls on the industries in Nanjing where natural gas industry is highly regarded and encouraged due to its clean and affordable nature as an alternative energy to coal and petroleum.

The Directors (including the independent non-executive Directors) are of the view that the transactions contemplated under the Sale and Purchase Agreement are entered into on normal commercial terms and are in the ordinary course of business of the Group and the terms of the Sale and Purchase Agreement were negotiated on an arm’s length basis, which the Directors consider to be fair and reasonable and in the interests of the Group and Shareholders as a whole.

FINANCIAL EFFECT OF THE ACQUISITION

After Completion, Plentigreat will become an 80% indirectly owned subsidiary of the Company, and will be consolidated into the Group’s accounts.

After Completion, the Vendor’s proportion of the Shareholder Loan being HK$3 million will be recognized as a liability due to the Vendor, and a goodwill of approximately HK$133 million arisen from the Acquisition will be recognized in accordance with the Group’s accounting policy consistently applied, which has been discussed with, and reviewed by, the Company’s auditors.

Since the construction of the Natural Gas Stations will be commenced after Completion and the provision of the Shareholders Loan, there is no other effect on the earnings, assets and liabilities of the Group save for the above.

FUND RAISING FOR THE PAST 12 MONTHS

The Company has completed the placing of 540,000,000 new Shares in October 2006 pursuant to the resolution passed by the Shareholders at the Company’s special general meeting held on 16 October 2006 which generated HK$64 million for general working capital for the Group and for finance investments in, and/or acquisition of suitable natural gas projects identified (the intended use of which remains unchanged as at the Latest Practicable Date).

The Company entered into a placing agreement with its placing agent on 21 December 2006 pursuant to which 360,000,000 new Shares will be placed by the placing agent on behalf of the Company. After completion of the Placing, HK$103.1 million will be generated

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LETTER FROM THE BOARD

for general working capital for the Group and for finance investments in, and/or acquisition of suitable natural gas projects identified, further details of which are set out in the Placing Announcement.

Further, upon completion of the Anhui Acquisition, the Company will issue the Anhui Consideration Shares as well as the Anhui Convertible Note. Upon full exercise of the Anhui Convertible Note (if any), the Anhui Conversion Shares will be issued by the Company.

Save as disclosed above, the Company has not conducted any fund raising activity in the 12-month period prior to the Latest Practicable Date.

LISTING RULES IMPLICATIONS

The Acquisition constitutes a discloseable transaction for the Company under Rule 14.06(2) of the Listing Rules. The SGM will be held to consider and, if thought fit, pass the resolution to approve the issue of the Convertible Note and the Conversion Shares in which none of the Shareholders, other than Mr. Lo and his associates holding 34,000,000 Shares, representing approximately 1.35% of the issued share capital of the Company as at the Latest Practicable Date, are required to abstain from voting.

The Company will make an application to the Stock Exchange for the listing of, and permission to deal in the Conversion Shares.

THE SGM

Given the Acquisition involves the issue of the Convertible Note as part of the Consideration, which have potential dilution effect on the shareholding of the Shareholders in the Company, the Company considers that it would be appropriate that the Shareholders should have an opportunity to express their voting wishes on the issue of Convertible Note. As a result, instead of issuing the Convertible Note under the general mandate, the Directors decided to hold the SGM and let the Shareholders to vote on such issue.

The SGM will be held to consider and, if thought fit, pass the resolution to approve the issue of the Convertible Note and the Conversion Shares.

Notice of the SGM is set out on pages 23 to 24 of this circular. The SGM will be held at Regus, 2nd Floor, Shui On Centre, 6-8 Harbour Road, Wanchai, Hong Kong on Thursday, 25 January 2007 at 10:30 a.m. (or any adjournment thereof). To the best knowledge, information and belief of the Directors, and having made all reasonable enquiries, the Vendor and Mr. Lo, its ultimate beneficial owner, are the third parties independent of the Company and connected persons of the Company. The Directors are of the view and confirm that the substantial Shareholder does not have any interest in the transactions mentioned in this circular which is different from the interest of the other Shareholders. None of the Shareholders, other than Mr. Lo and his associates holding 34,000,000 Shares, representing approximately 1.35% of the issued share capital of the Company as at the Latest Practicable Date, are required to abstain from voting for the approval of the issue of the Convertible Note and the Conversion Shares at the SGM. The voting will be taken by poll.

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LETTER FROM THE BOARD

Form of proxy for use at the SGM is enclosed in this circular. Whether or not you are able to attend the SGM in person, you are requested to complete and return the form of proxy in accordance with the instructions printed thereon as soon as possible but in any event not later than 48 hours before the time appointed for holding of the SGM. Completion of the form of proxy will not preclude you from attending and voting at the SGM or any adjourned meeting thereof should you so wish.

PROCEDURES TO DEMAND FOR A POLL AT GENERAL MEETING

Pursuant to Bye-law 66 of the Company, a resolution put to the vote of a general meeting shall be decided on a show of hands unless a poll is required by the rules of the designated stock exchange or (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:

• (i) by the chairman of such meeting;

• (ii) by at least three Shareholders present in person or by a duly authorized corporate representative or by proxy for the time being entitled to vote at the meeting;

• (iii) by a Shareholder or Shareholders present in person or by a duly authorized corporate representative or by proxy and representing not less than one-tenth of the total voting rights of all the Shareholders having the right to vote at the meeting;

• (iv) by a Shareholder or Shareholders present in person or by a duly authorized corporate representative or by proxy and holding Shares in the Company conferring a right to vote at the meeting being Shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all Shares conferring that right; or

• (v) if required by the rules of the designated stock exchange, by any Director or Directors who, individually or collectively, hold proxies in respect of Shares representing five per cent. (5%) or more of the total voting rights at such meeting.

RECOMMENDATION

The Directors (including the independent non-executive Directors) consider that the terms of the Convertible Note are fair and reasonable, and the issue of Convertible Note and the Conversion Shares are in the best interests of the Company and its Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the ordinary resolution to be proposed at the SGM.

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LETTER FROM THE BOARD

ADDITIONAL INFORMATION

Your attention is also drawn to the additional information set out in the appendix to this circular.

By Order of the Board China Oil And Gas Group Limited Xu Tie-liang Chairman

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GENERAL INFORMATION OF THE COMPANY

APPENDIX

1. RESPONSIBILITY STATEMENT

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

2. SHARE CAPITAL

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

Authorized 125,000,000,000 shares of HK$0.01 each	HK$ 1,250,000,000
Issue and fully paid or credited as full paid: 2,519,676,213 shares of HK$0.01 each 25,196,762 Conversion Shares to be issued (assuming the Convertible Note is converted in full) 275,000,000 shares of HK$0.01 each 2,750,000
2,794,676,213	27,946,762

All of the Shares in issue rank pari passu in all aspects, including all rights as to dividend, voting and interest in capital, among themselves and with all other Shares in issue on the date of issue.

The Conversion Shares (assuming the Convertible Note is converted in full) shall rank pari passu with all the Shares in issue in all aspects, including all rights as to dividend, voting and interest in capital, among themselves and with all other Shares in issue on the date of issue.

3. DISCLOSURE OF INTERESTS

(a) Interests of Directors and chief executive of the Company

As at the Latest Practicable Date, the interests and short positions of the Directors or chief executive of the Company in the shares, underlying shares and debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which is required to be (i) 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 the Directors or chief executive of the Company was taken or deemed to have under such provisions of

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GENERAL INFORMATION OF THE COMPANY

APPENDIX

the SFO); or (ii) entered in the register kept by the Company pursuant to section 352 of the SFO; or (iii) notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies were as follows:

Long position in the shares of the Company:

									Total
									interests
									(including
							Total interest	Interests in	underlying
						Number of	as % of the	underlying	shares) as %
					Nature of	ordinary	issued share	shares (share	of issued
				Capacity	interest	shares held	capital	options)	share capital
Mr.	Xu	Tie-liang	(Note)	Beneficial	Corporate	321,018,300	12.74%	Nil	12.74%
				Owner

Note: The 321,018,300 Shares are held by Sino Advance Holdings Limited, a company wholly and beneficially owned by Mr. Xu Tie-liang, the chairman of the Company.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or chief executive of the Company has an interest or short position in any shares, underlying shares and debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which is required to be (i) 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 the Directors or chief executive of the Company was taken or deemed to have under such provisions of the SFO); or (ii) entered in the register kept by the Company pursuant to section 352 of the SFO; or (iii) notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies.

(b) Directors’ interests in competing business

As at the Latest Practicable Date, none of the Directors or the controlling shareholders of the Company and their respective associates has any interest in a business, apart from the business of the Company, which competes or may compete with the business of the Company or has any other conflict of interest with the Company which would be required to be disclosed under Rule 8.10 of the Listing Rules.

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GENERAL INFORMATION OF THE COMPANY

APPENDIX

(c) Substantial shareholders’ and other shareholders’ interests

As at the Latest Practicable Date, save as disclosed below, so far as is known to the Directors or chief executive of the Company, no other person has an interest or short position in the shares and 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 or were required to be notified to the Company and the Stock Exchange pursuant to section 324 of the SFO, or, who is, directly or indirectly, interested in 10 per cent. or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company.

Long position in the shares of the Company:

			Approximate
			percentage of
			total issued
			share capital
	Class of	Number of	of the
Name of Shareholder	Shares	Shares held	Company
Sino Advance Holdings Limited
(Note)	Ordinary	321,018,300	12.74%

Note: Sino Advance Holdings Limited is wholly and benefically owned by Mr. Xu Tie-liang, the chairman of the Company.

4. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors entered or proposed to enter into any service contract with the Company which is not determinable by the Company within one year without payment of compensation other than statutory compensation.

5. LITIGATION

As at the Latest Practicable Date, neither the Company nor any of its subsidiaries is engaged in any litigation or claim of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened by or against the Company or any of its subsidiaries.

6. MISCELLANEOUS

• (a) The registered office of the Company is situated at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda;

• (b) The head office and principal place of business of the Company in Hong Kong is Suite 2805, 28th Floor, Sino Plaza, 255-257 Gloucester Road, Causeway Bay, Hong Kong;

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GENERAL INFORMATION OF THE COMPANY

APPENDIX

• (c) The company secretary of the Company in Hong Kong is Miss Chan Yuen Ying Stella who is an associate member of the Hong Kong Institute of Company Secretaries and the Institute of Chartered Secretaries and Administrators;

• (d) The qualified accountant of the Company is Mr. To Kwan, CPA Australia, HKICPA;

• (e) The Company’s Hong Kong branch share registrar is Computershare Hong Kong Investor Services Limited at 46/F., Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong; and

• (f) The English text of this circular shall prevail over the Chinese text in the case of any inconsistency.

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NOTICE OF SGM

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(incorporated in Bermuda with limited liability) (Stock Code: 603)

NOTICE OF SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that a special general meeting of China Oil And Gas Group Limited (the “Company”) will be held at Regus, 2nd Floor, Shui On Centre, 6-8 Harbour Road, Wanchai, Hong Kong on Thursday, 25 January 2007 for the purpose of considering and, if thought fit, passing, with or without amendments, the following resolution as an ordinary resolution of the Company:

ORDINARY RESOLUTION

“ THAT conditional upon the Listing Committee of The Stock Exchange of Hong Kong Limited approving the listing of, and granting permission to deal in, the Conversion Shares (as defined in the circular dated 8 January 2007 dispatched to shareholders of the Company (the “Circular”)):

• (a) the creation and issue of the Convertible Note (as defined in the Circular, copy of which marked “A” has been initialled by the chairman of this meeting for the purpose of identification) pursuant to the Sale and Purchase Agreement (as defined in the Circular); and the allotment and issue to the holders of the Convertible Note, upon exercise of the conversion right attaching to the Convertible Note, of shares in the capital of the Company in accordance with the terms and conditions of the Convertible Note, be and hereby approved; and

• (b) the directors of the Company be and are hereby authorized to issue the Convertible Note and/or shares in the capital of the Company upon conversion of the Convertible Note in accordance with the terms and conditions of the Convertible Note.”

By Order of the Board China Oil And Gas Group Limited Xu Tie-liang Chairman

Hong Kong, 8 January 2007

* For identification purposes only

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NOTICE OF SGM

Notes:

1. A member entitled to attend and vote at the above meeting may appoint one or, if he is the holder of two or more shares, more than one proxy to attend and, on a poll, vote on his behalf and such proxy need not be a member of the Company. A form of proxy for use at the meeting is enclosed with the circular of the Company dated 8 January 2007.

2. In order to be valid, the form of proxy, together with any power of attorney or authority, if any, under which it is signed or a certified copy of that power of attorney or authority, must be deposited at the Company’s branch registrar in Hong Kong, Computershare Hong Kong Investor Services Limited of 46/F., Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, not less than 48 hours before the time appointed for holding the meeting or any adjournment thereof.

3. Completion and return of the form of proxy will not preclude a shareholder of the Company from attending and voting in person at the meeting convened or any adjournment thereof and in such event, the authority of the proxy shall be deemed to be revoked.

4. As at the date of this notice, the board of directors (the “Directors”) of the Company comprised seven Directors, including four executive Directors, namely, Mr. Xu Tie-liang, Mr. Qu Guo-hua, Mr. Zeng Xiao and Mr. Cheung Shing, and three independent non-executive Directors, namely, Mr. Cheung Man Yau, Timothy, Mr. Shi Xun-zhi and Mr. Peng Long.

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