JY GAS LIMITED - Proxy Solicitation & Information Statement 2010

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 or registered institution in securities, 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 accompanying form of proxy to the purchaser(s) or the transferee(s), or to the bank, licensed securities dealer or other agent through whom the sale or the transfer was effected for transmission to the purchaser(s) or the 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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(incorporated in Bermuda with limited liability) (Stock Code: 603)

CONTINUING CONNECTED TRANSACTIONS

(1) EXCLUSIVE STRATEGIC CO-OPERATION FRAMEWORK AGREEMENT WITH PETROCHINA CBM FOR THE PROVISION OF COALBED METHANE (2) PROVISION OF NATURAL GAS, PROPOSED REDUCTION OF SHARE PREMIUM AND NOTICE OF SPECIAL GENERAL MEETING

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

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A letter from the board of directors of the Company is set out from pages 7 to 23 of this circular. A letter from the independent board committee of the Company is set out on pages 24 to 25 of this circular. A letter from the independent financial adviser containing its advice to the independent board committee and the independent shareholders of the Company is set out from pages 26 to 44 of this circular.

A notice convening the special general meeting of the Company to be held at World Trade Centre Club Hong Kong, 38/F., World Trade Centre, 280 Gloucester Road, Causeway Bay, Hong Kong on Thursday, 4 March 2010 at 10:30 a.m. is set out from pages 50 to 52 of this circular. A form of proxy is enclosed with this circular. Whether or not you are able to attend the meeting in person, you are requested to complete and return the accompanying form of proxy to the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at Rooms 1806-1807, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time for holding the special general meeting or adjourned meeting (as the case may be). Completion and return of the form of proxy shall not preclude you from attending and voting in person at the special general meeting should you so wish and in such event, the proxy shall be deemed to be revoked.

For identification purposes only

1 February 2010

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
Letter from the	Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Letter from the	Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Letter from the	Independent Financial Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
Appendix I – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		45
Notice of SGM	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	50

– i –

DEFINITIONS

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

“Anhui Contract” (Natural Gas Sale Contract) dated 30 November 2004 entered into between PetroChina and Anhui Gaojia in relation to supply of natural gas by PetroChina or through its branch companies, which was subsequently amended by a supplemental agreement dated 30 November 2005 pursuant to which the rights and obligations under the contract was assigned to (Anhui China Oil Pipe Gaojia Oil Co., Limited*) (which was subsequently renamed as Anhui Oil)
“Anhui Gaojia”
(Anhui Gaojia Gas Co., Limited*), the
preceding party of the Anhui Contract whose principal business activity is investments and construction of natural gas stations and supply of natural gas
“Anhui Oil”
(Anhui China Oil & Gas Co., Limited*)
(formerly known as (Anhui Gaojia Gas Co., Limited*), a non-wholly owned subsidiary of the Company and a party to the Anhui Contract
“associates” has the meaning ascribed to it in the Listing Rules
“Board” the board of Directors
“Binzhou Contract”
(Natural Gas Purchasing Contract) dated 1
February 2002 entered into between PetroChina Natural Gas and Pipe and Binzhou Xinjiang pursuant to which PetroChina Natural Gas and Pipe agreed to supply natural gas to Binzhou Oil
“Binzhou Oil” (Binzhou China Oil & Gas Co., Ltd*), a non-wholly owned subsidiary of the Company and a party to the Binzhou Contract
“Binzhou Xinjiang” (Binzhou Xinjiang Gas Co., Ltd.*), which is the shareholder holding 20% equity interest in Binzhou Oil
“CBM” Coalbed Methane ( )
“CBM Caps”
the proposed maximum aggregate values of the CBM supply for each of the three years ending 31 December 2012
“CCNG Acquisition”
the acquisition of 49% equity interest in CCNG by CNPC (Hong Kong)

– 1 –

DEFINITIONS

“CCNG” China Oil And Gas Co., Ltd ( ), a sino-foreign equity joint venture established on 13 March 2002 in the PRC, as at the Latest Practicable Date, of which 49% equity interest is owned by CNPC (Hong Kong) and 51% equity interest is owned by the Company through Alta Financial Holdings Limited (15.23%) and Zhongda Industrial Group Inc. (35.77%) “CNPC” (China National Petroleum Corporation), a state-owned enterprise established under the laws of PRC and a controlling shareholder of PetroChina and CNPC (Hong Kong)

“CNPC Group” CNPC and its subsidiaries and affiliates “CNPC (Hong Kong)” CNPC (Hong Kong) Limited, a company incorporated with limited liability in Bermuda and the shares of which are listed on the Main Board of the Stock Exchange (stock code: 135)
“Company” China Oil And Gas Group Limited ( *), a limited liability company incorporated in Bermuda, the shares of which are listed on the Main Board of the Stock Exchange (stock code: 603)
“Continuing Connected the transactions contemplated in the Natural Gas Supply Transactions” Contracts and the Exclusive Strategic Co-Operation Framework Agreement
“connected persons” has the meaning ascribed to it under the Listing Rules
“controlling shareholder” has the meaning ascribed to it under the Listing Rules
“Director(s)” director(s) of the Company, including the independent non-executive Directors
“Effective Date” the date on which the Share Premium Reduction shall become effective, being (subject to compliance with Section 46(2) of the Companies Act of Bermuda) the next business day immediately following the date of passing of the special resolution to approve the Share Premium Reduction at the SGM
“Exclusive Strategic the exclusive strategic co-operation framework agreement dated Co-Operation 11 January 2010 entered into between CCNG and PetroChina Framework Agreement” CBM
“Group” the Company and its subsidiaries

– 2 –

DEFINITIONS

“Hong Kong”

the Hong Kong Special Administrative Region of the PRC

“Huimin Contract”
(Natural Gas Supply Contract) dated 23
December 2002 entered into between PetroChina and Huimin Oil pursuant to which PetroChina (or through its branch companies) agreed to supply natural gas to Huimin Oil

“Huimin Oil” (Huimin China Oil & Gas Co., Limited*), a non-wholly owned subsidiary of the Company and a party to the Huimin Contract

“Independent Board Committee”
the independent board committee of the Company comprising all the independent non-executive Directors of the Company, namely Mr. Li Yunlong, Mr. Shi Xun-zhi, Mr. Peng Long and Mr. Wang Guantiang, established for the purpose of, among other things, advising the Independent Shareholders in respect of the Continuing Connected Transactions, the Proposed Caps and the CBM Caps
“Independent Financial Adviser” or “Cinda”
Cinda International Capital Limited, a corporation licensed to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities as defined under the SFO and the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Continuing Connected Transactions, the Proposed Caps and the CBM Caps
“Independent Shareholders”
the Shareholders of the Company who are not interested in the Continuing Connected Transactions
“Jiangdu Contract”
(Natural Gas Supply Contract) dated 25
December 2008 entered into between PetroChina and Jiangdu Oil pursuant to which PetroChina (or through its branch companies) agreed to supply natural gas to Jiangdu Oil
“Jiangdu Oil” (Jiangdu China Oil & Gas Co., Limited*), a non-wholly owned subsidiary of the Company and a party to the Jiangdu Contract
“Latest Practicable Date” 28 January 2010, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information for inclusion in this circular
“Listing Rules”
the Rules Governing the Listing of Securities on the Stock Exchange

– 3 –

DEFINITIONS

“Liling Contract”

(Zhongwu Piped Natural Gas Supply and Transportation Contract*) dated 26 December 2001 entered into between PetroChina and (The Office of Liling Natural Gas Utilization Planning and Construction Lead Group) and by a (Liling City Natural Gas Utilization Project Agreement) dated 9 July 2002 entered into between Liling City People’s Government and Liling Oil, Liling Oil agreed to take up the rights and obligations of Liling Lead Group under the Liling Contract pursuant to which PetroChina (or through its branch companies) agreed to supply natural gas to Liling Oil

“Liling Oil”
(Liling China Oil & Gas Co., Ltd.*),
a non-wholly owned subsidiary of the Company and a party to the Liling Contract
“M[3] ” cubic meter
“Natural Gas Supply the Anhui Contract, the Liling Contract, the Qingyun Contract, Contracts” the Huimin Contract, the Xining Contract, the Binzhou Contract and the Jiangdu Contract
“PetroChina”
PetroChina Company Limited ( ), a joint stock limited company incorporated in the PRC, whose shares are listed on the Shanghai Stock Exchange and the Stock Exchange with American depository shares listed on the New York Stock Exchange. PetroChina is a non-wholly owned subsidiary of CNPC and the controlling shareholder of CNPC (Hong Kong) holding approximately 52.40% of the total issued share capital
“PetroChina CBM” PetroChina Coalbed Methane Co., Ltd.* ( ), a wholly-owned subsidiary of PetroChina and a
party to the Exclusive Strategic Co-Operation Framework Agreement
“PetroChina Group” PetroChina and its subsidiaries
“PetroChina Huabei” (PetroChina
Huabei Natural Gas Supply Branch Company*), a branch company of PetroChina Group
“PetroChina Huazhong” (PetroChina Huazhong Natural Gas Supply Branch Company*), a branch company of PetroChina Group

– 4 –

DEFINITIONS

“PetroChina Se-Ning-Lan”
- (PetroChina
Se-Ning-Lan Natural Gas Supply Branch Company*), a branch company of PetroChina Group
“PetroChina Natural Gas (PetroChina and Pipe” Natural Gas and Pipe Branch Company*), a branch company of
Natural Gas and Pipe Branch Company*), a branch company of PetroChina Group
“PetroChina West-to-East (PetroChina Gas Supply Company” West-to-East Gas Supply Branch Company*), a branch company of
West-to-East Gas Supply Branch Company*), a branch company of PetroChina Group
“PetroChina West-to-East (PetroChina Gas Supply Pipe West-to-East Gas Supply Pipe Branch Company*), a branch Company” company of PetroChina Group
“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
“Proposed Caps” the proposed maximum aggregate annual values of the natural gas supply pursuant to the Natural Gas Supply Contracts for each of the three years ending 31 December 2012
“Qingyun Contract” (Natural Gas Supply and Transportation Contract) dated 23 December 2002 entered into between PetroChina and Qingyun Oil pursuant to which PetroChina (or through its branch companies) agreed to supply natural gas to Qingyun Oil
“Qingyun Oil” (Qingyun China Oil & Gas Co., Limited*), a non-wholly owned subsidiary of the Company and a party to the Qingyun Contract
“RMB” Renminbi, the lawful currency of the PRC
“SGM”
a special general meeting of the Company to be held to approve, among other things, the Continuing Connected Transactions, the Proposed Caps, the CBM Caps and the Share Premium Reduction
“SFO” Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong)
“Share Premium Account” the share premium account of the Company

– 5 –

DEFINITIONS

“Share Premium the proposed reduction of the amount of HK$600,000,000 standing Reduction” to the credit of the Share Premium Account, as more particularly set out under the section headed “Share Premium Reduction and Offsetting Accumulated Losses” of this circular
“Shareholders” the holder(s) of shares of the Company “State Price” mandatory price of certain goods and services promulgated by the relevant government authorities of the PRC
“Stock Exchange” the Stock Exchange of Hong Kong Limited “subsidiaries” has the meaning ascribed to it in the Listing Rules “Xining Contract” (Natural Gas Purchasing Contract) dated 28 April 2001 entered into between PetroChina Se-Ling-Nan and Xining Oil pursuant to which PetroChina (or through its branch companies) agreed to supply natural gas to Xining Oil
“Xining Oil” (Xining China Oil & Gas Co., Limited*), a non-wholly owned subsidiary of the Company and a party to the Xining Contract
“%” per cent.

For the purpose of this circular, all amounts denominated in RMB have been translated (for information only) into HK$ using the exchange rate of RMB0.88: HK$1.00. No representation is made that any amounts in RMB or HK$ can be or could have been converted at the relevant rates at the above rates or any other rates at all.

For identification purposes only

– 6 –

LETTER FROM THE BOARD

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

Executive Directors: Mr. Xu Tie-liang (Chairman & Chief Executive Officer) Mr. Qu Guo-hua Mr. Cheung Shing

Registered office: Clarendon House 2 Church Street Hamilton HM11 Bermuda

Independent non-executive Directors: Mr. Li Yunlong Mr. Shi Xun-zhi Mr. Peng Long Mr. Wang Guangtian

Head office and Principal Place of business in Hong Kong: Suite 2805, 28th Floor Sino Plaza 255-257 Gloucester Road Causeway Bay Hong Kong 1 February 2010

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

(1) EXCLUSIVE STRATEGIC CO-OPERATION FRAMEWORK AGREEMENT WITH PETROCHINA CBM FOR THE PROVISION OF COALBED METHANE

(2) PROVISION OF NATURAL GAS, PROPOSED REDUCTION OF SHARE PREMIUM AND NOTICE OF SPECIAL GENERAL MEETING

INTRODUCTION

Reference is made to the announcement of the Company dated 11 January 2010 in respect of the Continuing Connected Transactions of the Company.

On 11 January 2010, the Company announced that the Exclusive Strategic Co-Operation Framework Agreement was entered into between CCNG and PetroChina CBM pursuant to which CCNG and PetroChina CBM agree to co-operate with each other in

* For identification purposes only

– 7 –

LETTER FROM THE BOARD

development and sale of CBM to be explored in the areas of DaLing-JiXian and BaoDe in Shanxi Province, the PRC for a term of 30 years and Petrochina CBM agrees to supply CBM to CCNG and/or its subsidiaries annually.

As PetroChina CBM is a wholly-owned subsidiary of PetroChina Group, accordingly PetroChina CBM is an associate of PetroChina and a connected person of the Company.

Reference is also made to the announcement of the Company dated 22 October 2009 in relation to the completion of the acquisition of 49% equity interest in CCNG.

As CCNG is a non wholly-owned subsidiary of the Company, upon completion of the CCNG Acquisition by CNPC (Hong Kong), CNPC (Hong Kong) and its associates are regarded as connected persons of the Company under the Listing Rules.

Upon completion of the CCNG Acquisition, CNPC (Hong Kong) becomes a connected person of the Company. CNPC indirectly owns approximately 52.40% of the issued share capital of CNPC (Hong Kong). CNPC and its subsidiaries (including PetroChina Group) are associates of CNPC (Hong Kong) and are therefore connected persons of the Company.

Each of the Natural Gas Supply Contracts therefore constitutes continuing connected transactions under Chapter 14A of the Listing Rules at the time when CNPC (Hong Kong) and its associates become connected persons of the Company. As such, all these contracts should be subject to the reporting, announcement and Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.

On 20 January 2010, the Board proposes to put forward to the Shareholders a proposal of the Share Premium Reduction pursuant to the laws of Bermuda and the bye-laws of the Company.

The purpose of this circular is to provide you with more information relating to (i) the Exclusive Strategic Co-Operation Framework Agreement and the CBM Caps; (ii) the Natural Gas Supply Contracts and their Proposed Caps; (iii) the Share Premium Reduction; (iv) the letter of advice from the Independent Board Committee and the letter of advice from the Independent Financial Adviser; and (v) to give you the notice of the SGM to be convened for the Shareholders to approve each of the Natural Gas Supply Contracts, the Exclusive Strategic Co-Operation Framework Agreement, the Proposed Caps, the CBM Caps and the Share Premium Reduction.

– 8 –

LETTER FROM THE BOARD

CONTINUING CONNECTED TRANSACTIONS

Exclusive Strategic Co-Operation Framework Agreement with PetroChina CBM for the provision of Coalbed Methane

Date

11 January 2010

Term

30 years from date of the Exclusive Strategic Co-Operation Framework Agreement

Parties

(1) CCNG; and
(2) PetroChina CBM, a wholly-owned subsidiary of PetroChina whose business scope is to engage in the development, investment and operation of CBM

Major terms

Pursuant to the Exclusive Strategic Co-Operation Framework Agreement, CCNG and PetroChina CBM agree to co-operate with each other in development and sale of CBM to be explored in the areas of DaLing-JiXian and BaoDe in Shanxi Province, the PRC for a term of 30 years and Petrochina CBM agrees to supply CBM to CCNG and/or subsidiaries annually. The payment to PetroChina CBM for the provision of CBM shall be settled on a monthly basis by way of cash.

The Exclusive Strategic Co-Operation Framework Agreement is subject to renewal upon mutual negotiations between the parties. CCNG and PetroChina CBM will co-operate in the following areas:

(1) CCNG will be responsible for the sale of CBM explored in the areas DaLing-JiXian and BaoDe to be explored by PetroChina CBM;
(2) CCNG will be responsible for collecting remaining CBM for sale in the course of exploration of CBM by PetroChina CBM in the above areas;
(3) CCNG will have the priority to replenish unsatisfied CBM sales of PetroChina CBM other than the areas mentioned above; and
(4) CCNG shall be the exclusive partner of PetroChina CBM in the above areas.

CCNG shall invest and construct in infrastructure and facilities of liquefied natural gas (“ LNG ”) and compressed natural gas (“ CNG ”) stations in preparation of sale of CBM in the fourth quarter of 2010. Pursuant to the Exclusive Strategic Co-Operation Framework

– 9 –

LETTER FROM THE BOARD

Agreement, the sale of CBM by PetroChina CBM to CCNG shall be at an initial price of RMB1.00 per M[3] in the normal exploration standard and at a price of RMB0.50 per M[3] under CCNG’s temporarily self-built pipeline networks.

As PetroChina CBM is a wholly-owned subsidiary of PetroChina Group, accordingly PetroChina CBM is an associate of PetroChina and a connected person of the Company. As such, the supply of CBM is a continuing connected transaction of the Company.

The following are the monetary amount of purchase of CBM pursuant to the Exclusive Strategic Co-Operation Framework Agreement for each of the three years ending 31 December 2012:

		CBM Caps	for the financial	years ending
CBM	Supply	2010	2011	2012
		(RMB million)	(RMB million)	(RMB million)
		40	1,300	4,100

Basis for determining the CBM Caps

The CBM Caps are estimated with reference to: (i) the estimated growth in population and consumption volume of end users in the provinces and districts where the Group will provide CBM to the end users for the coming years; and (ii) the selling price of CBM offered by PetroChina CBM. The Board is of the view that the CBM Caps are in line with the estimated development of the business of the Group, and are determined based on the principles of fairness and reasonableness.

Reasons for entering into the Exclusive Strategic Co-Operation Framework Agreement

CBM is a form of natural gas extracted from coal beds which has the capacity to substitute natural gas as alternative energy resources. To be best of the Directors’ knowledge and belief, under the exploration reserve area of DaLing-JiXian, 100 billion M[3] CBM has been confirmed. Its planned production capacity is designed to be 1 billion M[3] per year and 12 CBM production wells have already been built. Under the exploration reserve area of BaoDe, 50 billion M[3] CBM has been confirmed. Its planned production capacity is designed to be 500 million M[3] per year and 11 CBM wells have been built.

By entering into the Exclusive Strategic Co-Operation Framework Agreement, CCNG and PetroChina CBM can cooperate with each other to develop, strengthen and expand their LNG and CNG businesses and market shares in the PRC. The Board considers that the entering into of the Exclusive Strategic Co-Operation Framework Agreement not only strengthen the market position of the Group and is fair and reasonable and in the interests of the Company and the Shareholders as a whole, it also provides energy resources at a very low cost in the western part of PRC.

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LETTER FROM THE BOARD

The Directors are of the view that the Exclusive Strategic Cooperation Framework Agreement were arrived at after arm’s length negotiations between the parties and have been entered into on normal commercial terms and in the ordinary and usual course of business and are fair and reasonable and in the interests of the Shareholders and the Company as a whole.

PROVISION OF NATURAL GAS

(a) THE QINGYUN CONTRACT

Date

23 December 2002

Term

For a period of 20 consecutive years from 31 January 2003

Parties

(1) PetroChina as supplier; and
(2) Qingyun Oil, a non wholly-owned subsidiary of the Company.

Major terms

Pursuant to the Qingyun Contract, PetroChina agreed to supply to Qingyun Oil natural gas. Qingyun Oil needs to inform PetroChina on or before 20 December each year the estimated amount of natural gas to be consumed next year. A written agreement will be entered into between PetroChina and Qingyun Oil on an annual basis, setting out the maximum amount of natural gas to be provided by PetroChina and the price of natural gas per M[3] for that particular year. The annual written agreement will be supplemented to the Qingyun Contract.

As the natural gas is sold through a branch company of PetroChina Group, PetroChina Huabei, to Qingyun Oil, the annual written agreement is entered into between PetroChina Huabei and Qingyun Oil.

Pricing basis

The purchase price of natural gas (per M[3] ) paid by Qingyun Oil is determined with reference to:

(a) the applicable State Price for natural gas; and
(b) the piped gas transmission fee.

– 11 –

LETTER FROM THE BOARD

Pursuant to the annual written agreement dated 12 March 2009 entered into between Huabei Company and Qingyun Oil, for the year ended 31 December 2009 and the three months ending 31 March 2010, the average daily supply of natural gas to Qingyun Oil was 30,000M[3] . The purchase price is settled in cash on a monthly basis by Qingyun Oil.

(b) THE LILING CONTRACT

Date

26 December 2001

Term

For a period of 25 consecutive years effective from 1 August 2004

Parties

(1) PetroChina as supplier; and
(2) (The Office of Liling Natural Gas Utilization Planning and Construction Lead Group) (“ Liling Lead Group ”), a government division under (Liling City People’s Government). By a (Liling City Natural Gas Utilization Project Agreement*) dated 9 July 2002 entered into between Liling City People’s Government and Liling Oil, Liling Oil agreed to take up the rights and obligations of Liling Lead Group under the Liling Contract such that PetroChina could continue to supply natural gas to Liling Oil. Liling Oil is a non wholly-owned subsidiary of the Company.

Major terms

Pursuant to the Liling Contract, PetroChina agreed to supply to Liling Oil natural gas. Liling Oil needs to inform PetroChina on or before 15 December each year the estimated amount of natural gas to be consumed next year and a written agreement will be entered into between PetroChina and Liling Oil on an annual basis, setting out the maximum amount of natural gas to be provided and the price of natural gas per M[3] for that particular year. The annual written agreement will be supplemented to the Liling Contract.

As the natural gas is sold through a branch company of PetroChina Group, PetroChina Huazhong, to Liling Oil, the annual written agreement was entered into between PetroChina Huazhong and Liling Oil.

– 12 –

LETTER FROM THE BOARD

Pricing basis

The purchase price of natural gas (per M[3] ) paid by Liling Oil is determined with reference to:

(a) the applicable State Price for natural gas; and
(b) the piped gas transmission fee.

Pursuant to the annual written agreement dated 30 December 2008, during the year ended 31 December 2009, the supply of natural gas to Liling Oil for the year 2009 was 150 million M[3] . The purchase price is settled in cash on a monthly basis by Liling Oil.

As at the Latest Practicable Date, PetroChina Huazhong has not entered into an annual written agreement with Liling Oil for the year 2010 due to the reason that there are still uncertainties in the amount of natural gas for the coming months until a later stage and therefore the annual written agreement is still pending.

(c) THE HUIMIN CONTRACT

Date

23 December 2002

Term

For a period of 20 consecutive years from 31 January 2003

Parties

(1) PetroChina as supplier; and
(2) Huimin Oil, a non wholly-owned subsidiary of the Company.

Major terms

Pursuant to the Huimin Contract, PetroChina agreed to supply to Huimin Oil natural gas. Huimin Oil needs to inform PetroChina on or before 20 December each year the estimated amount of natural gas to be consumed next year and a written agreement will be entered into between PetroChina and Huimin Oil on an annual basis, setting out the maximum amount of natural gas to be provided and the price of natural gas per M[3] for that particular year. The annual written agreement will be supplemented to the Huimin Contract.

As the natural gas is sold through PetroChina Huabei to Huimin Oil, the annual written agreement is entered into between PetroChina Huabei and Huimin Oil on an annual basis.

– 13 –

LETTER FROM THE BOARD

Pricing basis

The purchase price of natural gas (per M[3] ) paid by Huimin Oil is determined with reference to:

(a) the applicable State Price for natural gas; and
(b) the piped gas transmission fee.

Pursuant to the annual written agreement dated 12 March 2009, during the year ended 31 December 2009 and for the three months ending 31 March 2010, the average daily supply of natural gas was 30,000 M[3] . The purchase price is settled in cash on a monthly basis by Huimin Oil.

(d) THE XINING CONTRACT

Date

28 April 2001

Term

For a period of 20 consecutive years from 28 June 2001

Parties

(1) PetroChina Natural Gas and Pipe as supplier; and
(2) Xining Oil, a non wholly-owned subsidiary of the Company.

Major terms

Pursuant to the Xining Contract, PetroChina Natural Gas and Pipe agreed to supply to Xining Oil natural gas. Xining Oil needs to inform PetroChina Natural Gas and Pipe on or before 15 November each year the estimated amount of natural gas to be consumed next year and a written agreement will be entered into between PetroChina Natural Gas and Pipe and Xining Oil on an annual basis, setting out the maximum amount of natural gas to be provided and the price of natural gas per M[3] for that particular year. The supplemental agreement will be supplemented to the Xiling Contract.

As the natural gas is sold through a branch company of PetroChina Group, PetroChina Se-Ning-Lan, to Xining Oil, the annual written agreement is entered into between PetroChina Se-Ning-Lan and Xining Oil.

– 14 –

LETTER FROM THE BOARD

Pricing basis

The purchase price of natural gas (per M[3] ) paid by Xining Oil is determined with reference to:

(a) the applicable State Price for natural gas; and
(b) the piped gas transmission fee.

Pursuant to the annual written agreement dated 4 December 2008, during the year ended 31 December 2009, the supply of natural gas to Xining for the year 2009 is 631 million M[3] . The purchase price is settled in cash on a monthly basis by Xining Oil.

As at the Latest Practicable Date, PetroChina Se-Ning-Lan has not entered into annual written agreement for the year 2010 with Xining Oil due to the reason there are still uncertainties in the amount of supply of natural gas for the coming months until a later stage and therefore the written agreement is still pending.

(e) THE BINZHOU CONTRACT

Date

1 February 2002

Term

For a period of 20 consecutive years from 1 July 2002

Parties

(1) PetroChina Natural Gas and Pipe as supplier; and
(2) Binzhou Xinjiang. Binzhou Xinjiang is a company established in the PRC whose principal activities are provision of natural gas.

By an authorization letter dated 30 November 2007 issued by Binzhou Xinjiang, Binzhou Xinjiang authorized Binzhou Oil to sign the annual written agreement with PetroChina Huebei to purchase natural gas. Binzhou Oil is a non wholly-owned subsidiary of the Company.

Major terms

Pursuant to the Binzhou Contract, PetroChina Natural Gas and Pipe agreed to supply to Binzhou Oil natural gas. Binzhou Oil needs to inform PetroChina Natural Gas and Pipe on or before 15 October each year the estimated amount of natural gas to be consumed next year and a written agreement will be entered into between PetroChina Natural Gas and Pipe and Binzhou Oil on an annual basis, setting out the

– 15 –

LETTER FROM THE BOARD

maximum amount of natural gas to be provided and the price of natural gas per M[3] for that particular year. The annual written agreement will be supplemented to the Binzhou Contract.

As the natural gas is sold through a branch company of PetroChina Group, PetroChina Huabei, to Binzhou Oil, the annual written agreement is entered into between PetroChina Huabei and Binzhou Oil on an annual basis.

Pricing basis

The purchase price of natural gas (per M[3] ) paid by Binzhou Oil is determined with reference to:

(a) the applicable State Price for natural gas; and
(b) the piped gas transmission fee.

Pursuant to the annual written agreement dated 12 March 2009, during the year ended 31 December 2009, the average daily supply of natural gas to Binzhou Oil for the year 2009 is 170,000 M[3] and for the three months ending 31 March 2010 is 210,000 M[3] . The purchase price is settled in cash on a monthly basis by Binzhou Oil.

(f) THE ANHUI CONTRACT

Date

29 December 2004

Term

From 1 January 2006 to 31 December 2023

Parties

(1) PetroChina as supplier; and
(2) Anhui Gaojia

Pursuant to a supplemental agreement dated 30 November 2005 entered into among others, PetroChina, Anhui Gaojia and (Anhui China Oil And Gas Co., Ltd*) (now known as Anhui Oil), it was agreed among the parties that the rights and obligations of Anhui Gaojia under the Anhui Contract was assigned to Anhui Oil. Anhui Oil is a non wholly-owned subsidiary of the Company.

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LETTER FROM THE BOARD

Major terms

Pursuant to the Anhui Contract, PetroChina agreed to supply to Anhui Oil natural gas annually. It was agreed that the actual sale of natural gas was conducted by two branch companies of PetroChina Group, PetroChina West-to-East Gas Supply Company and PetroChina West-to-East Gas Supply Pipe Company, to Anhui Oil. Pursuant to the Anhui Contract, the annual maximum amount of natural gas to be supplied to Anhui Oil is 42 million M[3] . The purchase price is settled in cash on a monthly basis by Anhui Oil.

No annual written agreement was required to be entered into with PetroChina West-to-East Gas Supply Company and PetroChina West-to-East Gas Supply Pipe Company pursuant to the Anhui Contract.

Pricing basis

The purchase price of natural gas (per M[3] ) paid by Anhui Oil is determined with reference to:

(a) the applicable State Price for natural gas; and
(b) the piped gas transmission fee.

(g) THE JIANGDU CONTRACT

Date

25 December 2008

Term

From 1 January 2010 to 31 December 2023

Parties

(1) PetroChina as supplier; and
(2) Jiangdu Oil. Jiangdu Oil is a non wholly-owned subsidiary of the Company.

Major terms

Pursuant to the Jiangdu Contract, PetroChina agreed to supply to Jiangdu Oil natural gas annually. It was agreed that the actual sale of natural gas was conducted by two branch companies of PetroChina Group, PetroChina West-to-East Gas Supply Company and PetroChina West-to-East Gas Supply Pipe Company, to Jiangdu Oil. Pursuant to the Jiangdu Contract, the annual maximum amount of natural gas to be supplied to Jiangdu Oil for the year 2009 was 50 million M[3] and thereafter 100 million M[3] annually. The purchase price is settled in cash on a monthly basis by Jiangdu Oil.

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LETTER FROM THE BOARD

No annual written agreement was required to be entered into with PetroChina West-to-East Gas Supply Company and PetroChina West-to-East Gas Supply Pipe Company.

REASONS FOR, AND BENEFITS OF THE NATURAL GAS SUPPLY CONTRACTS

PetroChina Group is the largest wholesale natural gas supplier in the PRC. The principal activities of the Group are to construct gas pipelines and supply natural gas to the end users in various provinces and districts in the PRC. The supply of natural gas by PetroChina Group is vital to the continuous development of the Group as the main business scope of the Group is to provide natural gas to the end users in various provinces and districts in the PRC. The Natural Gas Supply Contracts were entered into at different times between PetroChina Group and various subsidiaries of the Group since 2001 and these Natural Gas Supply Contracts become the Continuing Connected Transactions of the Group by virtue of the completion of the CCNG Acquisition.

The purchase price of natural gas from PetroChina Group and piped gas transmission fee is determined with reference to the State Price announced by the government authorities from time to time. In any event, the purchase price of natural gas and piped gas transmission fee is under control by government authorities in the PRC.

The Directors are of the view that the Natural Gas Supply Contracts were arrived at after arm’s length negotiations between the parties and have been entered into on normal commercial terms and in the ordinary and usual course of business, and are fair and reasonable as far as the Independent Shareholders are concerned. The terms under the Natural Gas Supply Contracts are not less favourable than the terms provided by PetroChina Group to its other customers and the Proposed Caps are fair and reasonable and the Directors are of the view that the terms are in the interests of the Shareholders and the Company as a whole.

PROPOSED CAPS

The following are the monetary amount of purchase of natural gas pursuant to the Natural Gas Supply Contracts for the year 2009 and the Proposed Caps in respect of the supply of natural gas pursuant to the Natural Gas Supply Contracts for each of the three years ending 31 December 2012:

	The amount of
Natural Gas	consumption	Proposed Caps	for the financial	years ending
Supply Contracts	for year 2009	2010	2011	2012
	(RMB million)	(RMB million)	(RMB million)	(RMB million)
Qingyun Contract	15	27	37	49
Liling Contract	258	360	446	565
Huimin Contract	19	30	41	55
Xining Contract	592	872	995	1,291
Binzhou Contract	97	134	276	552
Anhui Contract	56	67	80	97
Jiangdu Contract	Note	240	288	346

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LETTER FROM THE BOARD

Note: natural gas was not supplied to Jiangdu Gas in 2009.

The above Proposed Caps are estimated with reference to: (i) the historical amount of natural gas purchased by the Group since 2001; (ii) the estimated growth in population and consumption volume of end users in the provinces and districts where the Group provide natural gas to the end users for the coming years; (iii) the anticipated State Price and piped gas transmission fee for the coming years after taking into account the estimated demand and supply of natural gas. The Board is of the view that the Proposed Caps are in line with the estimated development of the business of the Group, and are determined based on the principles of fairness and reasonableness.

GENERAL INFORMATION

1. The Group

The principal activities of the Company is investment holding. The Group is principally engaged in selling and distribution of natural gas downstream business.

2. PetroChina Group

PetroChina Group is principally engaged in petroleum and natural gas-related activities, including: (a) the exploration, development, production and sale of crude oil and natural gas; (b) the refining, transportation, storage and marketing of crude oil and petroleum products; (c) the production and sale of basic petrochemical products, derivative chemical products and other petrochemical products; and (d) the transmission of natural gas and crude oil, and the sale of natural gas.

3. CCNG

CCNG is a non wholly-owned subsidiary of the Company. Its business operation include city gas pipeline and infrastructure design and construction, technical support, gas selling and distribution, city gas management, vehicle modification for gas application, natural gas stations, and production of LNG.

4. PetroChina Natural Gas and Pipe

PetroChina Natural Gas and Pipe is principally engaged in provision of natural gas.

5. PetroChina Huazhong

PetroChina Huazhong is principally engaged in provision of natural gas.

6. PetroChina Huabei

PetroChina Huabei is principally engaged in provision of natural gas.

7. PetroChina Se-Ning-Lan

PetroChina Se-Ning-Lan is principally engaged in provision of natural gas.

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LETTER FROM THE BOARD

8. PetroChina West-to-East Gas Supply Company

PetroChina West-to-East Gas Supply Company is principally engaged in provision of natural gas.

9. PetroChina West-to-East Gas Supply Pipe Company

PetroChina West-to-East Gas Supply Pipe Company is principally engaged in provision of natural gas.

LISTING RULES’ IMPLICATIONS

Upon completion of the CCNG Acquisition, CNPC (Hong Kong) becomes a connected person of the Company. CNPC indirectly owns approximately 52.40% of the issued share capital of the CNPC (Hong Kong). Accordingly, CNPC and its subsidiaries (including PetroChina Group) are associates of CNPC (Hong Kong) and are therefore connected persons of the Company.

As PetroChina CBM is a wholly-owned subsidiary of PetroChina Group, accordingly PetroChina CBM is an associate of PetroChina and a connected person of the Company.

As natural gas and CBM are supplied by PetroChina Group, the Proposed Caps and the CBM Caps are required to be aggregated pursuant to Chapter 14A of the Listing Rules.

As the relevant percentage ratios (other than profits ratio) of the Proposed Caps and the CBM Caps for each of the three years ending 31 December 2012 exceeds 2.5% and the consideration exceeds HK$10 million on an annual basis, the Continuing Connected Transactions, the Proposed Caps and the CBM Caps are subject to the reporting, announcement and Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules. Given the duration of the Natural Gas Supply Contracts and the supply of CBM under the Exclusive Co-Operation Framework Agreement exceed 3 years, the Company has appointed Cinda as the Independent Financial Adviser to give opinion on why the longer periods for the respective agreements are needed and to confirm that it is normal business practice for these types of agreements to be of such duration in accordance with the requirement under Rule 14A.35 of the Listing Rules, which are set out in the section “Letter from the Independent Financial Adviser” of this circular.

Each of CNPC (Hong Kong), PetroChina CBM and their respective associates (should they have any shareholding in the Company) will be abstained from voting at the SGM on the resolutions in connection with the Continuing Connected Transactions, the Proposed Caps and the CBM Caps. To the best of the knowledge of the Directors information and belief after having made reasonable enquiries, each of CNPC (Hong Kong), PetroChina CBM and their respective associates does not have any interest in the Shares of the Company.

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LETTER FROM THE BOARD

PROPOSED REDUCTION OF SHARE PREMIUM AND OFFSETTING ACCUMULATED LOSSES

The Board proposes to put forward to the Shareholders a proposal of the Share Premium Reduction pursuant to the laws of Bermuda and the bye-laws of the Company. As at 30 June 2009, based on the unaudited consolidated financial statements of the Company as at that date, the total amount standing to the credit of the Share Premium Account and the accumulated losses of the Company were approximately HK$1,968,998,000 and HK$507,018,000 respectively. It is proposed that the amount of HK$600,000,000 standing to the credit of the Share Premium Account be cancelled, with part of the credit arising therefrom being applied towards offsetting the entire amount of the accumulated losses of the Company as at the Effective Date and the remaining balance being credited to the contributed surplus account of the Company.

Upon the Share Premium Reduction becoming effective, all the accumulated losses of the Company will be eliminated.

Conditions of the Share Premium Reduction

The Share Premium Reduction is conditional upon, inter alia, the following being fulfilled:

(1) the passing of a special resolution approving the Share Premium Reduction by the Shareholders at the SGM;
(2) compliance with section 46(2) of the Companies Act 1981 of Bermuda, including the publication of a notice of the Share Premium Reduction in an appointed newspaper in Bermuda on a date not more than thirty days and not less than fifteen days before the Effective Date; and
(3) the Directors being satisfied that on the Effective Date, there are no reasonable grounds for believing that the Company is, or after the Effective Date will be, unable to pay its liabilities as they become due.

Financial Effect of the Share Premium Reduction

The implementation of the Share Premium Reduction does not involve any reduction in the authorized or issued share capital of the Company nor does it involve any reduction in the nominal value of the Shares or the trading arrangements concerning the Shares.

The implementation of the Share Premium Reduction will not, in itself, affect the underlying assets, business operations, management or financial position of the Company or the proportionate interests of the Shareholders, other than related expenses incurred which are immaterial. Save for the aforesaid expenses, the Directors consider that the Share Premium Reduction will not cause any loss in the Shareholders’ funds of the Company and will not have a material adverse effect on the financial position of the Company.

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LETTER FROM THE BOARD

Reasons for the Share Premium Reduction

The Directors consider that it would be inappropriate for the Company to pay dividends while the Group has accumulated losses. The Share Premium Reduction will allow the Group to eliminate the accumulated losses of the Company and bring the Company to a position that permits the payment of dividends if and when the Company’s financial position allows and the Directors consider appropriate. In view of the current financial position of the Company, the Directors consider that the Share Premium Reduction is beneficial to the Company and its Shareholders as a whole.

SGM

A notice convening the SGM to be held at World Trade Centre Club Hong Kong, 38/F., World Trade Centre, 280 Gloucester Road, Causeway Bay, Hong Kong, on Thursday, 4 March 2010 is set out on pages 50 to 52 of this circular. The SGM will be held for the purpose of considering and, if thought fit, approving the Continuing Connected Transactions, the Proposed Caps, the CBM Caps and the Share Premium Reduction.

A form of proxy for use at the SGM is enclosed. Whether or not you are able to attend the SGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar, Computershare Hong Kong Investors Services Limited at Rooms 1806-1807, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not later than 48 hours before the time appointed for holding the SGM or for any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the SGM or any adjourned meeting should you so wish and in such event, the proxy shall be deemed to be revoked.

GENERAL

An Independent Board Committee comprising Mr. Li Yunlong, Mr. Shi Xun-zhi, Mr. Peng Long and Mr. Wang Guangtian (all being the independent non-executive Directors) has been established to advise the Independent Shareholders as to (i) whether the terms of the Natural Gas Supply Contracts and the Exclusive Strategic Co-Operation Framework Agreement are fair and reasonable so far as the Independent Shareholders are concerned; (ii) whether the terms of the Natural Gas Supply Contracts and the Exclusive Strategic Co-Operation Framework Agreement are in the interests of the Company and the Shareholders as a whole; (iii) whether the Proposed Caps and CBM Caps are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee set out on pages 24 to 25 of this circular which contains its recommendation to the Independent Shareholders in relation to the Continuing Connected Transactions, the Proposed Caps and the CBM Caps; (ii) the letter of advice from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders set out on pages 26 to 44 of this circular in connection with the Continuing Connected Transactions, the Proposed Caps and the CBM Caps and the principal factors and reasons considered by them in arriving at their advice.

The Directors consider that the proposed Share Premium Reduction and the transfer of the credit therefrom to the contributed surplus account of the Company are in the interests of the Group and the Shareholders as a whole, and accordingly recommend the Shareholders to vote in favour of the relevant resolution to be proposed at the SGM.

ADDITIONAL INFORMATION

Your attention is drawn to the general information set out in the Appendix I to this circular.

Yours faithfully, For and on behalf of the Board China Oil And Gas Group Limited Xu Tie-liang Chairman

– 23 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [196 x 47] intentionally omitted <==

==> picture [7 x 5] intentionally omitted <==

----- Start of picture text -----

----- End of picture text -----*

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

1 February 2010

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS (1) EXCLUSIVE STRATEGIC CO-OPERATION FRAMEWORK AGREEMENT WITH PETROCHINA CBM FOR THE PROVISION OF COALBED METHANE (2) PROVISION OF NATURAL GAS

We refer to the circular dated 1 February 2010 of the Company (the “ Circular ”) of which this letter forms part. Terms defined in the Circular shall have the same meanings herein unless the context otherwise requires.

We have been appointed to form the Independent Board Committee to consider and to advise the Independent Shareholders as to whether, in our opinion, the terms of the Continuing Connected Transactions, the Proposed Caps and the CBM Caps are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned, and the Continuing Connected Transactions are in the interests of the Shareholders as a whole. Cinda has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the terms of the Continuing Connected Transactions and their respective Proposed Caps and the CBM Caps.

We wish to draw your attention to the “Letter from the Board” set out on pages 7 to 23 of the Circular which contains, inter alia, information of the Natural Gas Supply Contracts and the Exclusive Strategic Co-Operation Framework Agreement and the respective Proposed Caps and the CBM Caps, as well as the “Letter from the Independent Financial Adviser” set out on pages 26 to 44 of the Circular which contains its advice in respect of the terms of the Natural Gas Supply Contracts, the Exclusive Strategic Co-Operation Framework Agreement, the respective Proposed Caps and the CBM Caps.

Having taken into account the advice of Cinda, we consider that the terms of the Continuing Connected Transactions and their respective Proposed Caps and the CBM Caps are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Independent

* For identification purposes only

– 24 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM in respect of the Continuing Connected Transactions.

Yours faithfully, For and on behalf of Independent Board Committee Mr. Li Yunlong Mr. Shi Xun-zhi Mr. Peng Long Mr. Wang Guangtian Independent non-executive Directors

– 25 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the full text of a letter of advice from Cinda to the Independent Board Committee and the Independent Shareholders for the purpose of inclusion in this circular:

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==> picture [29 x 16] intentionally omitted <==

45th Floor, COSCO Tower 183 Queen’s Road Central Hong Kong

1 February 2010

To the Independent Board Committee and the Independent Shareholders of China Oil And Gas Group Limited

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS (1) EXCLUSIVE STRATEGIC CO-OPERATION FRAMEWORK AGREEMENT WITH PETROCHINA CBM FOR THE PROVISION OF COALBED METHANE (2) PROVISION OF NATURAL GAS

INTRODUCTION

We refer to our engagement as the independent financial adviser to the Independent Board Committee and the Independent Shareholders on the terms of the Continuing Connected Transactions and their respective Proposed Caps and the CBM Caps, details of which are contained in the letter from the Board (the “ Letter from the Board ”) contained in the circular (the “ Circular ”) of the Company to the Shareholders dated 1 February 2010, of which this letter forms part. Terms used in this letter have the same meanings as defined in the Circular unless the context otherwise requires.

On 11 January 2010, CCNG entered into the Exclusive Strategic Co-Operation Framework Agreement with PetroChina CBM pursuant to which CCNG and PetroChina CBM agree to co-operate with each other in development and sale of CBM to be explored in the areas of DaLing-JiXian and BaoDe in Shanxi Province, the PRC for a term of 30 years and Petrochina CBM agrees to supply CBM to CCNG and/or its subsidiaries annually. As PetroChina CBM is a wholly-owned subsidiary of PetroChina Group, accordingly PetroChina CBM is an associate of PetroChina and a connected person of the Company.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Certain subsidiaries of the Group have, since 2001, entered into the Natural Gas Supply Contracts (being the Qingyun Contract, the Liling Contract, the Huimin Contract, the Xining Contract, the Binzhou Contract, the Anhui Contract and the Jiangdu Contract) with PetroChina or its branch companies pursuant to which natural gas was supplied to various subsidiaries of the Group by PetroChina Group. In this connection, each of the Natural Gas Supply Contracts therefore constitutes continuing connected transactions under Chapter 14A of the Listing Rules at the time when CNPC (Hong Kong) and its associates become connected persons of the Company.

As the relevant percentage ratios (other than profits ratio) of the Proposed Caps and the CBM Caps for each of the three years ending 31 December 2012 exceeds 2.5% and the consideration exceeds HK$10 million on an annual basis, the Continuing Connected Transactions, the Proposed Caps and the CBM Caps are subject to the reporting, announcement and Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules. Each of CNPC (Hong Kong), PetroChina CBM and their respective associates (should they have any shareholding in the Company) will be abstained from voting at the SGM on the resolutions in connection with the Continuing Connected Transactions, the Proposed Caps and the CBM Caps.

The Independent Board Committee comprising Mr. Li Yunlong, Mr. Shi Xun-zhi, Mr. Peng Long and Mr. Wang Guangtian, all being independent non-executive Directors, has been formed to advise the Independent Shareholders in respect of the terms of the Continuing Connected Transactions and their respective Proposed Caps and the CBM Caps. We, Cinda International Capital Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard. Furthermore, under Rule 14A.35(1) of the Listing Rules, we are required to explain why contract periods exceeding three years are required for the Exclusive Strategic Co-Operation Framework Agreement and the Natural Gas Supply Contracts, and to confirm that it is normal business practice for these Exclusive Strategic Co-Operation Framework Agreement and Natural Gas Supply Contracts to be of such duration.

BASIS OF OUR ADVICE

In arriving at our recommendation, we have relied on the information and facts provided by the Company and have assumed that any representations made to us are true, accurate and complete. We have also relied on the statements, information, opinions and representations contained in the Circular and the information and representations provided to us by the Directors and management of the Company. We have assumed that all information, representations and opinions contained or referred to in the Circular and all information, representations and opinions which have been provided by the Directors and management of the Company are true and accurate at the time they were made and will continue to be accurate at the date of the despatch of the Circular.

The Directors jointly and severally accept full responsibility for the accuracy of the information contained in the Circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, opinions expressed in the Circular have been arrived at after due and careful consideration and there are no other facts not contained in the Circular the omission of which would make any such statement contained in the Circular

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

misleading. We consider that we have been provided with sufficient information on which to form a reasonable basis for our opinion. We have no reason to suspect that any relevant information has been withheld, nor are we aware of any fact or circumstance which would render the information provided and representations and opinions made to us untrue, inaccurate or misleading. Having made all reasonable enquiries, the Directors have further confirmed that, to the best of their knowledge, they believe that no material facts have been omitted from the information provided and referred to in the Circular. We have not, however, carried out any independent verification of the information provided by the Directors and management of the Company, nor have we conducted an independent investigation into the business and affairs of the Group, CNPC Group and PetroChina Group.

(I) CONTINUING CONNECTED TRANSACTIONS – EXCLUSIVE STRATEGIC CO-OPERATION FRAMEWORK AGREEMENT WITH PETROCHINA CBM FOR THE PROVISION OF COALBED METHANE

(A) Background

Pursuant to the Exclusive Strategic Co-Operation Framework Agreement entered into between CCNG and PetroChina CBM dated 11 January 2010, CCNG and PetroChina CBM agree to co-operate with each other in development and sale of CBM to be explored in the areas of DaLing-JiXian and BaoDe in Shanxi Province, the PRC for a term of 30 years and Petrochina CBM agrees to supply CBM to CCNG and/or its subsidiaries annually.

(B) Principal factors taken into account

In arriving at our opinion on the continuing connected transactions contemplated under the Exclusive Strategic Co-Operation Framework Agreement and the CBM Caps, we have taken into consideration the following principal factors and reasons:

1. Information of the Group, CCNG, PetroChina Group and PetroChina CBM

The principal activities of the Company is investment holding. The Group is principally engaged in investments in natural gas and energy related business.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

PetroChina CBM, a wholly-owned subsidiary of PetroChina whose business scope is to engage in the development, investment and operation of CBM.

2. Reasons for and benefits of entering into the Exclusive Strategic Co-Operation Framework Agreement

As stated in the Letter from the Board, CBM is a form of natural gas extracted from coal beds which has the capacity to substitute natural gas as alterative energy resources. To be best of the Directors’ knowledge and belief, under the exploration reserve area of DaLing-JiXian, 100 billion M[3] CBM has been confirmed. Its planned production capacity is designed to be 1 billion M[3] per year and 12 CBM production wells have already been built. Under the exploration reserve area of BaoDe, 50 billion M[3] CBM has been confirmed. Its planned production capacity is designed to be 500 million M[3] per year and 11 CBM wells have been built. Given CCNG shall be the exclusive partner of PetroChina CBM in the above areas pursuant to the Exclusive Strategic Co-Operation Framework Agreement, we are of the view that the entering into of the Exclusive Strategic Co-Operation Framework Agreement will provide a secured and reliable source of CBM to CCNG.

The Board considers that the entering into of the Exclusive Strategic Co-Operation Framework Agreement not only strengthen the market position of the Group and is in the interest of the Company and its Shareholders as a whole, it also provides energy resources at a very low cost in the western part of the PRC.

There has been a long and smooth co-operation history between the Group and the PetroChina Group regarding provision of natural gas by the PetroChina Group. We consider that the Exclusive Strategic Co-Operation Framework Agreement extends the co-operation between parties to the areas in relation to CBM supply, and expands their liquefied natural gas (“ LNG ”) and compressed natural gas (“ CNG ”) businesses and market shares in the PRC.

Considering the confirmed CBM in the exploration reserve areas of DaLing-JiXian and BaoDe as stated above and the long and smooth co-operation history between the Group and the PetroChina Group, we concur with the Directors that the entering into of the Exclusive Strategic Co-Operation Framework Agreement (i) allows CCNG and PetroChina to cooperate with each other to develop, strengthen and expand their LNG and CNG businesses and market shares in the PRC; and (ii) would strengthen the market position of the Group. Besides, given the business nature of each of the Group, CCNG and PetroChina Group, we consider that the transactions contemplated under the Exclusive Strategic Co-Operation Framework Agreement are in line with the principal business of each of the Group, CCNG and PetroChina Group and the entering into of the Exclusive Strategic Co-Operation Framework Agreement is in the ordinary and usual course of business of the Group and in the interests of the Company and the Independent Shareholders as a whole.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

3. Principal terms of the Exclusive Strategic Co-Operation Framework Agreement

The Exclusive Strategic Co-Operation Framework Agreement is subject to renewal upon mutual negotiations between the parties. CCNG and PetroChina CBM will co-operate in the following areas:

(1) CCNG will be responsible for the sale of CBM explored in the areas DaLing-JiXian and BaoDe to be explored by PetroChina CBM;
(2) CCNG will be responsible for collecting remaining CBM for sale in the course of exploration of CBM by PetroChina CBM in the above areas;
(3) CCNG will have the priority to replenish unsatisfied CBM sales of PetroChina CBM other than the areas mentioned above; and
(4) CCNG shall be the exclusive partner of PetroChina CBM in the above areas.

CCNG shall invest and construct in infrastructure and facilities of LNG and CNG stations in preparation of sale of CBM in the fourth quarter of 2010.

(a) Pricing basis of the Exclusive Strategic Co-Operation Framework Agreement

Pursuant to the Exclusive Strategic Co-Operation Framework Agreement, the sale of CBM by PetroChina CBM to CCNG shall be at an initial price of RMB1.00 per M[3] in the normal exploration standard and at a price of RMB0.50 per M[3] under CCNG’s temporarily self-built pipeline networks.

As advised by the management of the Company, the CBM business is new to CCNG and PetroChina CBM is the first supplier of CCNG for CBM. As such, no historical order was available between CCNG and its independent suppliers. To assess the fairness and reasonableness of the prices under the Exclusive Strategic Co-Operation Framework Agreement, we have therefore enquired the management of the Company about the pricing basis for the CBM transactions entered into between PetroChina CBM and its other customers, and we are given to understand that PetroChina CBM supplies CBM in three areas of Shanxi Province, the PRC (including DaLing-JiXian and BaoDe under the Exclusive Strategic Co-Operation Framework Agreement), and the prices of CBM sold by PetroChina CBM to all its customers in Shanxi are unified i.e. same pricing policy as set out in the Exclusive Strategic Co-Operation Framework Agreement. In addition, we have also, on the best effort basis, conducted a search of companies listed on the Stock Exchange and tried to find out the listed companies in Hong Kong which (i) have entered into similar CBM supply transactions or entered into transactions in relation to supply/sale of methane in the PRC, and (ii) have

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

made relevant announcements for such transactions. However, we have only identified one company which has announced similar CBM transactions with prices disclosed, which was announced by The Hong Kong and China Gas Company Limited on 31 December 2008 in relation to the supply of CBM by a connected person to a non-wholly owned subsidiary of The Hong Kong and China Gas Company Limited in two phases (“ CBM Comparable Contracts ”). The table below summaries the major terms of the CBM Comparable Contracts:

		Term	Pricing
Contract	for	30 years commencing	During the trial period, the
phase	I	from the expiry of a	price of CBM will be
		three-month trial	RMB0.766 per M3.
		period	Thereafter, the price of
			CBM will subject to a
			minimum price of
			RMB0.851 per M3
Contract	for	30 years commencing	During the trial period, the
phase	II	from the expiry of a	price of CBM will be
		three-month trial	RMB0.766 per M3 plus a
		period	pipeline charge of
			RMB0.041 per M3.
			Thereafter, the price of
			CBM will subject to a
			minimum price of
			RMB0.851 per M3 plus a
			pipeline charge of
			RMB0.041 per M3

We noted from the table above that the prices of CBM under the CBM Comparable Contracts are comparable to the prices of CBM under the Exclusive Strategic Co-Operation Framework Agreement.

Taken into account that (i) the pricing of CBM supplied by PetroChina CBM to all its customers in Shanxi Province (including the Group) are the same; and (ii) the prices of CBM under the Exclusive Strategic Co-Operation Framework Agreement are comparable to the CBM Comparable Contracts identified, we are of the view that the prices of CBM under Exclusive Strategic Co-Operation Framework Agreement are on normal commercial terms and are fair and reasonable.

(b) Term of the Exclusive Strategic Co-Operation Framework Agreement

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

years and Petrochina CBM agrees to supply CBM to CCNG and/or its subsidiaries annually. Under Rule 14A.35(1) of the Listing Rules, we are required to explain why the term exceeding three years are required for the Exclusive Strategic Co-Operation Framework Agreement, and to confirm that it is normal business practice for the Exclusive Strategic Co-Operation Framework Agreement to be of such duration.

In arriving at our opinion in relation to the term of the Exclusive Strategic Co-Operation Framework Agreement, we have discussed with the management of the Company the rationale for the duration of the Exclusive Strategic Co-Operation Framework Agreement and have taken into consideration the following principal factors and reasons:

(i) Given the sale of CBM is a new business to CCNG, it is sensible for CCNG to secure a stable upstream CBM supply to its best efforts;
(ii) Long-term business cooperation with the PetroChina Group, which is one of the major CBM producers/suppliers in the PRC, will benefit the business development of CCNG and the overall CBM and related businesses of the Group;
(iii) Based on the confirmed CBM reserve of 100 billion M[3] CBM and 50 billion M[3] under the exploration reserve area of DaLing-JiXian and BaoDe respectively, and the planned production capacity of 1 billion M[3] for DaLing-JiXian exploration area and 500 million M[3] per year for BaoDe exploration area, it is estimated that each of the above exploration areas can supply CBM for more than 50 years, as the exclusive partner of PetroChina CBM in these areas, the term of 30 years’ cooperation provides exclusivity for CCNG to enjoy the CBM supply explored from these areas for a longer period and secure the stable source of CBM for a longer period;
(iv) We have made reference to the term of the CBM Comparable Contracts as disclosed in the paragraph headed “Pricing basis of the Exclusive Strategic Co-Operation Framework Agreement” above, and we noted that the contract periods of the CBM Comparable Contracts were also in the term of 30 years; and
(v) After discussion with the management of the Company and review of the contract terms, it is believed that the terms and conditions of the Exclusive Strategic Co-Operation Framework Agreement were determined after arm’s length negotiation.

Having considered the above, we are of the view that term of 30 years for the Exclusive Strategic Co-Operation Framework Agreement is appropriate and it is normal business practice for contracts of this type to be of such duration.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

4. The CBM Caps

The following are the monetary amount of purchase of CBM pursuant to the Exclusive Strategic Co-Operation Framework Agreement for each of the three years ending 31 December 2012:

			CBM Caps for
		the financial years ending
		2010	2011	2012
		(RMB	(RMB	(RMB
		million)	million)	million)
CBM	Supply	40	1,300	4,100

The Board is of the view that the CBM Caps are in line with the estimated development of the business of the Group, and are determined based on the principles of fairness and reasonableness.

In assessing the fairness and reasonableness of the CBM Caps, we have discussed with the management of the Company and understood that in arriving the CBM Caps, they have taken into consideration of (i) the estimated growth in population and consumption volume of end users in the provinces and districts where the Group will provide CBM to the end users for the coming years; and (ii) the selling price of CBM offered by PetroChina CBM.

To assess the fairness and reasonableness of the CBM Caps, we have reviewed the schedule prepared by the Company for the forecasted prices and consumption of CBM for the period from 1 January 2010 to 31 December 2012. From the schedule provided, we noted that the forecasted prices of CBM for each of the years 2010 to 2012 is RMB1.00 per M[3] , which is based on the price of CBM per M[3] in the normal exploration standard as set out in the Exclusive Strategic Co-Operation Framework Agreement. We have also discussed with the management of the Company about the bases in arriving at the forecasted consumption of CBM under the Exclusive Strategic Co-Operation Framework Agreement, as advised by the management of the Company, the forecasted CBM consumption for determination of the CBM Caps for the years 2010 to 2012 are principally based on the projected CBM output for the coming years as provided by PetroChina CBM, and also considered the estimated growth in population and consumption volume of end users in the relevant provinces and districts for the coming years.

With the improving PRC economy and increasing demand of cleaner-burning energy resources, the management estimated that the population and CBM consumption of end users will increase. Taking into account that (i) the forecasted prices of CBM for each of the years 2010 to 2012 is based on the price of CBM in the normal exploration standard as set out in the Exclusive Strategic Co-Operation Framework Agreement; and (ii) the forecasted CBM consumption was estimated with reference to the projected CBM output in the coming years as

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

provided by PetroChina CBM and the expected increase in population and consumption of CBM from end users, we are of the view that the basis for determining the CBM Caps under the Exclusive Strategic Co-Operation Framework Agreement for the three years ending 31 December 2012 are fair and reasonable so far as the Company and the Independent Shareholders are concerned.

(C) RECOMMENDATION

Having taken into account the principal factors and reasons referred to the above, we are of the opinion that the transactions contemplated under the Exclusive Strategic Co-operation Framework Agreement (including the CBM Caps) are in the interests of the Company and the Shareholders as a whole, on normal commercial terms and in the ordinary course of business of the Group and are fair and reasonable so far as the Company and the Independent Shareholders are concerned. Accordingly, we would advise the Independent Shareholders and recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the ordinary resolution(s) to be proposed at the SGM to approve the Exclusive Strategic Co-Operation Framework Agreement and the CBM Caps.

(II) CONTINUING CONNECTED TRANSACTIONS – NATURAL GAS SUPPLY CONTRACTS

(A) Background

Since 2001, certain subsidiaries of the Group have, entered into the Natural Gas Supply Contracts (being the Qingyun Contract, the Liling Contract, the Huimin Contract, the Xining Contract, the Binzhou Contract, the Anhui Contract and the Jiangdu Contract) with PetroChina or its branch companies pursuant to which natural gas was supplied to various subsidiaries of the Group by PetroChina Group.

As a result of the CCNG Acquisition, CNPC (Hong Kong) becomes a connected person of the Company. Accordingly, CNPC (the controlling shareholder of CNPC (Hong Kong)) and its subsidiaries (including PetroChina Group) are associates of CNPC (Hong Kong) and therefore become connected persons of the Company after the CCNG Acquisition. As such, each of the Natural Gas Supply Contracts previously entered into between subsidiaries of the Group and the PetroChina Group then becomes continuing connected transactions of the Company at the time when CNPC and its associates become connected persons of the Company.

(B) Principal factors taken into account

In arriving at our opinion on the continuing connected transactions contemplated under the Natural Gas Supply Contracts and the Proposed Caps, we have taken into consideration the following principal factors and reasons:

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

1. Information of the parties to the Natural Gas Supply Contracts

As set out in the Letter from the Board, following Natural Gas Supply Contracts were entered into between PetroChina Group and various subsidiaries of the Group since 2001:

Natural Gas Supply Contracts

Date Parties

Qingyun 23 December 2002 Contract
(1) PetroChina (a non-wholly owned subsidiary of CNPC and the controlling shareholder of CNPC (Hong Kong)) as supplier; and
(2) Qingyun Oil (a non-wholly owned subsidiary of the Company whose principal activities are trading of natural gas and gas pipeline construction).
Liling 26 December 2001 (1) PetroChina as supplier; and Contract

(2)

3.
Huimin
Contract
23 December 2002
(1)

(2)

4.
Xining
Contract
28 April 2001
(1)

(2)

(The
Office
of
Liling
Natural
Gas
Utilization Planning and Construction Lead
Group)
(“Liling
Lead
Group”),
a
government division under
(Liling City People’s Government). By a
(Liling
City
Natural Gas Utilization Project Agreement*)
dated
9
July
2002
entered
into
between
Liling City People’s Government and Liling
Oil, Liling Oil agreed to take up the rights
and obligations of Liling Lead Group under
the
Liling
Contract
such
that
PetroChina
could
continue
to
supply
natural
gas
to
Liling Oil. Liling Oil is a non wholly-owned
subsidiary of the Company.
PetroChina as supplier; and
Huimin Oil, a non-wholly owned subsidiary
of the Company whose principal activities
are trading of natural gas and gas pipeline
construction.
PetroChina Natural Gas and Pipe as supplier,
whose principal activities is provision of
natural gas; and
Xining Oil, a non-wholly owned subsidiary
of the Company whose principal activities
are
trading
of
natural
gas,
gas
pipeline
construction and operation of natural gas
stations.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Natural Gas Supply Contracts Date Parties 5. Binzhou 1 February 2002 (1) PetroChina Natural Gas and Pipe as supplier; Contract and (2) Binzhou Xinjiang, a company established in the PRC whose principal activities are provision of natural gas. 6. Anhui 29 December 2004 (1) PetroChina as supplier; and Contract (2) Anhui Gaojia. 7. Jiangdu 25 December 2008 (1) PetroChina as supplier; and Contract (2) Jiangdu Oil, a non-wholly owned subsidiary of the Company whose principal activities are trading of natural gas and gas pipeline construction.

Please refer to section headed “Provision of Natural Gas” in the Letter from the Board for details of each of the Natural Gas Supply Contracts.

2. Reasons for and benefits of entering into the Natural Gas Supply Contracts

As set out in the Letter from the Board, PetroChina Group is the largest wholesale natural gas supplier in the PRC. The principal activities of the Group are to construct gas pipelines and supply natural gas to the end users in various provinces and districts in the PRC. The supply of natural gas by PetroChina Group is vital to the continuous development of the Group as the main business scope of the Group is to provide natural gas to the end users in various provinces and districts in the PRC. The Natural Gas Supply Contracts were entered into at different times between PetroChina Group and various subsidiaries of the Group since 2001 and these Natural Gas Supply Contracts become continuing connected transactions of the Group by virtue of the completion of the CCNG Acquisition.

In light of the above, we noted that there has been a long and smooth co-operation history between the Group and the PetroChina Group in relation to the provision of natural gas by the PetroChina Group. We also noted that the Company is an enterprise whose business operations primarily focus on investing in natural gas and energy related business, where the supply of natural gas by PetroChina Group is vital to the continuous development of the Group. Thus, the PetroChina Group has been regarded as a valuable business partner of the Group and it is important for the Group to maintain and continue its business relationship with the PetroChina Group to secure a stable supply of natural gas for provision to the end users in various provinces and districts in the PRC.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Having taken into account (a) the business activities of the Group and the PetroChina Group; (b) the long co-operation history between the Group and the PetroChina Group; and (c) PetroChina Group is the largest wholesale natural gas supplier in the PRC and the supply of natural gas by PetroChina Group is vital to the continuous development of the Group, we consider that the transactions contemplated under the Natural Gas Supply Contracts are in line with the principal business of the Group and the entering into of the Natural Gas Supply Contracts are in the ordinary and usual course of business of the Group and in the interests of the Company and the Independent Shareholders as a whole.

3. Principal terms of the Natural Gas Supply Contracts

The Natural Gas Supply Contracts were entered into between various members of the Group and various branch/members of the PetroChina Group at different times. The Natural Gas Supply Contracts set out the framework and general terms of the transactions in relation to the provision of natural gas by the PetroChina Group. The table below summarises the major terms of each of the Natural Gas Supply Contracts.

Natural Gas Supply Contracts Term Major terms 1. Qingyun Contract 20 consecutive years PetroChina agreed to supply to Qingyun from 31 January 2003 Oil natural gas. Qingyun Oil needs to inform PetroChina on or before 20 December each year the estimated amount of natural gas to be consumed next year. A written agreement will be entered into between PetroChina and Qingyun Oil on an annual basis, setting out the maximum amount of natural gas to be provided by PetroChina and the price of natural gas per M[3] for that particular year. Pursuant to the annual written agreement dated 12 March 2009 entered into between Huabei Company and Qingyun Oil, for the year ended 31 December 2009 and the three months ending 31 March 2010, the average daily supply of natural gas to Qingyun Oil was 30,000 M[3] .

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

	Natural Gas
	Supply
	Contracts	Term	Major terms
2.	Liling Contract	25 consecutive years	PetroChina agreed to supply to Liling Oil
		from 1 August 2004	natural gas. Liling Oil needs to inform
			PetroChina on or before 15 December
			each year the estimated amount of natural
			gas to be consumed next year and a
			written agreement will be entered into
			between PetroChina and Liling Oil on an
			annual basis, setting out the maximum
			amount of natural gas to be provided and
			the price of natural gas per M3 for that
			particular year. Pursuant to the annual
			written agreement dated 30 December
			2008, during the year ending 31
			December 2009, the supply of natural gas
			to Liling Oil for the year 2009 was 150
			million M3.
3.	Huimin Contract	20 consecutive years	PetroChina agreed to supply to Huimin
		from 31 January 2003	Oil natural gas. Huimin Oil needs to
			inform PetroChina on or before 20
			December each year the estimated amount
			of natural gas to be consumed next year
			and a written agreement will be entered
			into between PetroChina and Huimin Oil
			on an annual basis, setting out the
			maximum amount of natural gas to be
			provided and the price of natural gas per
			M3 for that particular year. Pursuant to
			the annual written agreement dated 12
			March 2009, during the year ending 31
			December 2009 and for the three months
			ending 31 March 2010, the average daily
			supply of natural gas was 30,000 M3.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

	Natural Gas
	Supply
	Contracts	Term	Major terms
4.	Xining Contract	20 consecutive years	PetroChina Natural Gas and Pipe agreed
		from 28 June 2001	to supply to Xining Oil natural gas.
			Xining Oil needs to inform PetroChina
			Natural Gas and Pipe on or before 15
			November each year the estimated
			amount of natural gas to be consumed
			next year and a written agreement will be
			entered into between PetroChina Natural
			Gas and Pipe and Xining Oil on an
			annual basis, setting out the maximum
			amount of natural gas to be provided and
			the price of natural gas per M3 for that
			particular year. Pursuant to the annual
			written agreement dated 4 December
			2008, during the year ended 31 December
			2009, the supply of natural gas to Xining
			for the year 2009 is 631 million M3.
5.	Binzhou Contract	20 consecutive years	PetroChina Natural Gas and Pipe agreed
		from 1 July 2002	to supply to Binzhou Oil natural gas.
			Binzhou Oil needs to inform PetroChina
			Natural Gas and Pipe on or before 15
			October each year the estimated amount
			of natural gas to be consumed next year
			and a written agreement will be entered
			into between PetroChina Natural Gas and
			Pipe and Binzhou Oil on an annual basis,
			setting out the maximum amount of
			natural gas to be provided and the price
			of natural gas per M3 for that particular
			year. Pursuant to the annual written
			agreement dated 12 March 2009, during
			the year ending 31 December 2009, the
			average daily supply of natural gas to
			Binzhou Oil for the year 2009 is 170,000
			M3 and for the three months ending 31
			March 2010 is 210,000 M3.
6.	Anhui Contract	From 1 January 2006	PetroChina agreed to supply to Anhui Oil
		to 31 December 2023	natural gas annually. It was agreed in the
			Anhui Contract that the actual sale of
			natural gas was conducted by PetroChina
			West-to-East Gas Supply Company and
			PetroChina West-to-East Gas Supply Pipe
			Company, to Anhui Oil. Pursuant to the
			Anhui Contract, the annual maximum
			amount of natural gas to be supplied to
			Anhui Oil is 42 million M3.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Natural Gas Supply Contracts

Term

Major terms

Jiangdu Contract From 1 January 2010 to 31 December 2023
PetroChina agreed to supply to Jiangdu Oil natural gas annually. It was agreed that the actual sale of natural gas was conducted by PetroChina West-to-East Gas Supply Company and PetroChina West-to-East Gas Supply Pipe Company, to Jiangdu Oil. Pursuant to the Jiangdu Contract, the annual maximum amount of natural gas to be supplied to Jiangdu Oil for the year 2009 was 50 million M[3] and thereafter 100 million M[3] annually.

(c) Pricing basis of the Natural Gas Supply Contracts

As set out in the Letter from the Board, the purchase price of natural gas paid by the subsidiaries of the Group under each of the Natural Gas Supply Contracts are determined with reference to: (a) the applicable State Price for natural gas; and (b) the piped gas transmission fee.

In this regard, we have discussed with the Company and we are given to understand that the purchase price of natural gas from PetroChina Group and piped gas transmission fee is determined with reference to the State Price announced by the government authorities from time to time. In any event, the purchase price of natural gas and piped gas transmission fee is under control by the government authorities in the PRC.

Having taken into account that the purchase prices of natural gas under each of the Natural Gas Supply Contracts are determined with reference to the government-prescribed prices, we consider the purchase prices of natural gas under the Natural Gas Supply Contracts are determined on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned.

(d) Term of the Natural Gas Supply Contracts

As set out in the paragraph headed “Principal terms of the Natural Gas Supply Contracts” above, each of the Natural Gas Supply Contracts were entered into with contract periods more than three years and ranged from 14 years to 25 years. Pursuant to Rule 14A.35(1) of the Listing Rules, we are required to explain why the contract periods exceeding three years are required for the Natural Gas Supply Contracts, and to confirm that it is normal business practice for these Natural Gas Supply Contracts to be of such duration.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

In arriving at our opinion in relation to the contract periods of the Natural Gas Supply Contracts, we have discussed with the management of the Company the rationale for the duration of the Natural Gas Supply Contracts and have taken into consideration the following principal factors and reasons:

(i) It is sensible for Qingyun Oil, Liling Oil, Huimin Oil, Xining Oil, Binzhou Oil, Anhui Oil and Jiangdu Oil, whose principal activities are trading of natural gas and gas pipeline construction, to secure a stable upstream natural gas supply to its best efforts;
(ii) The supply of natural gas by PetroChina Group is vital to the continuous development of the Group as the main business scope of the Group is to provide natural gas to the end users in various provinces and districts in the PRC. Given PetroChina Group is the largest wholesale natural gas supplier in the PRC, long-term business cooperation with the PetroChina Group will benefit the business development of the Group and the overall natural gas business of the Group;
(iii) Through such long-term agreements, the Group would be able to secure a stable source of natural gas, which is a key product for the Group, to provide to the end users in various provinces and districts, and to avoid unnecessary disruption to the Group’s operation, and
(iv) References have been made to the contract terms of similar natural gas or LNG supply contracts entered by certain companies listed on the Stock Exchange, and we noted that the contract terms of such comparable contracts are around 15 to 25 years. In light of the above, we consider that the contract periods of the Natural Gas Supply Contracts are comparable to the contract periods of similar transactions. The table below sets out the relevant details of similar supply contracts identified:

Company Name (Stock Code) Description of contracts Term of contracts China BlueChemical Pursuant to a long-term commenced on 1 October 2003 Ltd. (03983) agreement dated 28 July 2003, and will expire on (“ BlueChemical ”) the connected parties have 30 September 2023 committed to supply natural gas (approximately 20 years) to BlueChemical or its subsidiaries/associates BlueChemical (03983) Pursuant to a long-term 20 years commencing on agreement dated 10 March 15 October 2006 2005, the connected parties have committed to supply natural gas to BlueChemical or its subsidiaries/associates

– 41 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Company Name (Stock Code)

(Stock Code) Description of contracts Term of contracts CNOOC Limited Pursuant to the comprehensive As set out in the circular of (00883) (“ CNOOC ”) framework agreements dated 8 CNOOC dated 10 December December 2005, CNOOC and 2005, under the comprehensive its connected parties agreed the framework agreements, member mutual supply of a range of of CNOOC group may enter products and services, including into separate and definitive long term sales of natural gas agreements from time to time and LNG with connected parties for a term of 15 to 20 years for sales contracts in relation to natural gas, and with a term of around 25 years for the sales contacts in relation to the LNG.

(v) After discussion with management of the Company and review of the terms of the Natural Gas Supply Contracts, it is believed that the terms and conditions of the Natural Gas Supply Contracts were determined after arm’s length negotiation.

Having considered the above, we believe the terms of 14 years to 25 years for the Natural Gas Supply Contracts are appropriate and it is normal business practice for contracts of this type to be of such duration.

4. The Proposed Caps

As stated in the Letter from the Board, the amount of consumption under the Natural Gas Contracts for the year 2009 and the Proposed Caps in respect of the Natural Gas Supply Contracts for each of the three years ending 31 December 2012 are as follows:

		The amount
	Natural Gas	of	Proposed Caps	for the financial	years ending
	Supply	consumption
	Contracts	for year 2009	2010	2011	2012
		(RMB million)	(RMB million)	(RMB million)	(RMB million)
1.	Qingyun Contract	15	27	37	49
2.	Liling Contract	258	360	446	565
3.	Huimin Contract	19	30	41	55
4.	Xining Contract	592	872	995	1,291
5.	Binzhou Contract	97	134	276	552
6.	Anhui Contract	56	67	80	97
7.	Jiangdu Contract	Note	240	288	346

Note: natural gas was not supplied to Jiangdu Oil in 2009.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As stated in the Letter from the Board, the above Proposed Caps are estimated with reference to: (i) the historical amount of natural gas purchased by the Group since 2001; (ii) the estimated growth in population and consumption volume of the end users in the provinces and districts where the Group provide natural gas to the end users for the coming years; and (iii) the anticipated State Price and piped gas transmission fee for the coming years after taking into account the estimated demand and supply of natural gas.

To assess the fairness and reasonableness of the Proposed Caps, we have discussed with the management of the Company and reviewed the schedule (the “ Schedule ”) prepared by the Company in relation to (i) the prices and consumption of natural gas under each of the Natural Gas Supply Contracts since 2007 (except the Jiangdu Contract as no natural gas was supplied to Jiangdu Oil in 2009) and (ii) the forecasted prices and consumption of natural gas under each of the Natural Gas Supply Contracts for the period from 1 January 2010 to 31 December 2012. From the Schedule provided, we noted that the Group’s forecasted prices of natural gas under each of the Natural Gas Supply Contracts are mainly based on the historical natural gas prices for the year 2009 as well as the Group’s estimates of 20% year-on-year growth of the natural gas prices for the years 2010 to the year 2012. To this end, we have reviewed the historical price changes of the Natural Gas Supply Contracts since 2007 (except the Jiangdu Contract as no natural gas was supplied to Jiangdu Oil in 2009) and we noted that the historical compound annual growth rate (“ CAGR ”) of the natural gas prices under the Natural Gas Supply Contracts were ranged from approximately -15.3% to 37.7% (in which the CAGR of the natural gas prices under the Qingyun Contract was exceptionally low at -15.3%, while the others were ranged from approximately 2.6% to 37.7%). Considering the Group’s estimates of 20% year-on-year growth of natural gas prices is fall within the range of the historical CAGR of natural gas prices under the Natural Gas Supply Contracts, we are of the view that the projected price increase and the forecasted natural gas prices for determination of the Proposed Caps are acceptable.

In addition, to assess the forecasted consumption as provided in the Schedule for determination of the Proposed Caps, we have discussed with the management of the Company and reviewed the historical changes of natural gas consumption under the Natural Gas Supply Contracts since 2007. We noted that the forecasted consumption under the Natural Gas Supply Contracts for years 2010 to 2012 are increased with a CAGR ranging from 0% to 69% with an average CAGR of approximately 15.2%. We also noted that the historical CAGR of natural gas consumption under the Natural Gas Supply Contracts were ranged from approximately -53.1% to 365.8% with an average CAGR of approximately 96.3% (in which the CAGR of consumption under the Anhui Contract was exceptionally low at -53.1%, while the others were ranged from approximately 16.5% to 365.8%). In light of the above, we consider the growth rate of the forecasted consumption for the three years ending 2012 are fall within the historical CAGR of natural gas consumption during 2007 to 2009 and the forecasted consumption

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

with average CAGR of approximately 15.2% for years 2010 to 2012 is reasonable as compared with the historical average CARG of approximately 96.3% during the period from 2007 to 2009.

Having considered that (i) the Proposed Caps for the Qingyun Contract, the Liling Contract, the Huimin Contract, the Xining Contract, the Binzhou Contract and the Anhui Contract have taken into account of the historical natural gas prices in 2009 as well as the Group’s estimates on the year-on-year growth of the natural gas price in the coming three years; and (ii) the increase of the forecasted consumption for determination of the Proposed Caps are fall within the historical CAGR of natural gas consumption during 2007 to 2009, we are of the view that the basis for determining the Proposed Caps under the Qingyun Contract, the Liling Contract, the Huimin Contract, the Xining Contract, the Binzhou Contract and the Anhui Contract for the three years ending 2012 are fair and reasonable so far as the Company and the Independent Shareholders are concerned.

In connection with the Proposed Caps of the Jiangdu Contract which entered in December 2008, we are advised that no natural gas was supplied to Jiangdu Oil in 2009. We noted from the Schedule that the forecasted consumption under the Jiangdu Contract for the years 2010 to 2012 are based on the annual maximum amount of natural gas to be supplied to Jiangdu for the years 2010 to 2012 as stated in the Jiangdu Contract. Considering that the consumption of natural gas in the year 2009 under each of the Natural Gas Supply Contracts (except the Jiangdu Contract which was commenced in the year 2010) have reached/ were close to the annual maximum amount of the respective annual written agreement, we consider that it is reasonable for the Company to determine the Proposed Caps for the Jiangdu Contract based on the annual maximum amounts as stated in the Jiangdu Contract and the Proposed Caps under the Jiangdu Contract for the three years ending 2012 are fair and reasonable so far as the Company and the Independent Shareholders are concerned.

(C) RECOMMENDATION

Having taken into account the principal factors and reasons referred to the above, we are of the opinion that the transactions contemplated under Natural Gas Supply Contracts (including the respective Proposed Caps) are in the interests of the Company and the Shareholders as a whole, on normal commercial terms and in the ordinary course of business of the Group and are fair and reasonable so far as the Company and the Independent Shareholders are concerned. Accordingly, we would advise the Independent Shareholders and recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM to approve Natural Gas Supply Contracts and the Proposed Caps.

Yours faithfully, For and on behalf of

Cinda International Capital Limited Robert Siu Executive Director

– 44 –

GENERAL INFORMATION

APPENDIX I

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. DISCLOSURE OF INTERESTS

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

As at the Latest Practicable Date, the interests or short positions of the Directors and 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 (a) 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 or short positions which any such Director and chief executive of the Company is taken or deemed to have under such provisions of the SFO); or which (b) were required to be entered into the register maintained by the Company, pursuant to Section 352 of the SFO; or which (c) were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules are set out below:

				Approximate
Name of		Long Position/	Number of	percentage of
Director	Capacity	Short Position	Shares held	shareholding
Xu Tie-liang	Interest in a	Long Position	171,018,300	3.83%
	controlled		(Notes 1, 3)
	corporation
	Interest in a	Long Position	425,000,000	9.53%
	controlled		(Notes 2, 3)
	corporation

Notes:

These 171,018,300 ordinary shares of the Company are held through Sino Advance Holdings Limited (“Sino Advance”), a company incorporated in the British Virgin Islands with limited liability which is wholly and beneficially owned by Mr. Xu Tie-liang.
These 425,000,000 ordinary shares of the Company are held through Sino Vantage Management Limited (“Sino Vantage”), a company incorporated in the British Virgin Islands with limited liability which is wholly and beneficially owned by Mr. Xu Tie-liang.
An aggregate of 500,000,000 ordinary shares of the Company were placed out by Sino Advance and Sino Vantage, which was completed on 28 January 2010. As at the Latest Practicable Date, the subscription of 500,000,000 shares (as to 150,000,000 shares by Sino Advance and 350,000,000 by Sino Vantage) has not yet completed. Details of the transaction have been disclosed in the Company’s announcement dated 26 January 2010.

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GENERAL INFORMATION

APPENDIX I

Save as disclosed above, as at the Latest Practicable Date, none of the Directors, the chief executive of the Company nor their associates, had any other interests or short positions in the Shares, underlying Shares and debentures of the Company or any associated corporations (within the meaning of Part XV of the SFO) which (a) 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 or short positions which any such Director or the chief executive of the Company is taken or deemed to have under such provisions of the SFO); or which (b) were required to be entered into the register maintained by the Company, pursuant to Section 352 of the SFO; or which (c) were required to be notified to the Company or the Stock Exchange, pursuant to the Model Code for Securities Transaction by Directors of Listed Companies contained in the Listing Rules.

(b) Persons who have interests or short positions which are discloseable under Divisions 2 and 3 of Part XV of the SFO

As at the Latest Practicable Date, the register of substantial shareholders maintained under Section 336 of the SFO, shows that the Company has been notified of the following interests, being 5% or more of the Company’s issued share capital. These interests are in addition to those disclosed above in respect of the Directors and the chief executive of the Company.

				Approximate
Name of		Long Position/	Number of	percentage of
Shareholder	Capacity	Short Position	Shares held	shareholding
Sino Advance	Beneficial	Long Position	171,018,300	3.83%
	owner		(Notes 1, 5)
Sino Vantage	Beneficial	Long Position	425,000,000	9.53%
	owner		(Notes 2, 5)
New Stamina	Beneficial	Long Position	275,000,000	7.20%
Investments	owner		(Note 3)
Limited
Lo Chung	Interest in a	Long Position	275,000,000	7.20%
	controlled		(Note 3)
	corporation
	Family Interest	Long Position	16,000,000	0.42%
			(Note 4)

Notes:

Sino Advance is a company incorporated in the British Virgin Islands with limited liability which is wholly and beneficially owned by Mr. Xu Tie-liang. Hence, Mr. Xu is deemed to be interested in 171,018,300 ordinary shares of the Company owned by Sino Advance.

– 46 –

GENERAL INFORMATION

APPENDIX I

Sino Vantage is a company incorporated in the British Virgin Islands with limited liability which is wholly and beneficially owned by Mr. Xu Tie-liang. Hence, Mr. Xu is deemed to be interested in 425,000,000 ordinary shares of the Company owned by Sino Vantage.
New Stamina is a company incorporated in the British Virgin Islands with limited liability which is wholly and beneficially owned by Mr. Lo Chung. Hence, Mr. Lo Chung is deemed to be interested in 275,000,000 ordinary shares owned by New Stamina.
These 16,000,000 ordinary shares are held by the spouse of Mr. Lo Chung, and therefore, Mr. Lo Chung is deemed to be interested in these shares.
An aggregate of 500,000,000 ordinary shares of the Company were placed out by Sino Advance and Sino Vantage, which was completed on 28 January 2010. As at the Latest Practicable Date, the subscription of 500,000,000 shares (as to 150,000,000 shares by Sino Advance and 350,000,000 by Sino Vantage) has not yet completed. Details of the transaction have been disclosed in the Company’s announcement dated 26 January 2010.

Save as disclosed above, as at the Latest Practicable Date, the Directors and the chief executive of the Company were not aware of any person (other than a Director or chief executive of the Company) who had any other interests or short positions in the Shares or underlying Shares and debentures of the Company which would fall to be disclosed to the Company under Divisions 2 and 3 of Part XV of the SFO.

3. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors or proposed Directors had any existing service contract or proposed service contract with any member of Group which will not expire or is not determinable by the Company within one (1) year without payment of compensation (other than statutory compensation).

4. DIRECTORS’ INTERESTS IN THE GROUP’S ASSETS OR CONTRACTS OR ARRANGEMENTS SIGNIFICANT TO THE GROUP

As at the Latest Practicable Date, none of the Directors, directly or indirectly, had any interest in any assets which had since 31 December 2008 (being the date to which the latest published audited financial statements of the Group were made up) been 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.

There was no contract or arrangement subsisting as at the Latest Practicable Date in which any of the Directors were materially interested and which was significant to the business of the Group.

5. COMPETING BUSINESS INTEREST OF DIRECTORS

As at the Latest Practicable Date, none of the Directors and their respective associates had any interest in a business which competes or may compete with the businesses of the Group (as would be required to be disclosed under Rule 8.10 of the Listing Rules if each of them is a controlling shareholder of the Company).

– 47 –

GENERAL INFORMATION

APPENDIX I

6. EXPERTS AND CONSENTS

The following is the qualifications of the expert who has been named in this circular or have given opinion or advice contained in this circular:

Name

Qualification

Cinda a licensed corporation to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO

As at the Latest Practicable Date, Cinda is not beneficially interested in the share capital of any member of the Group nor has any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

Cinda has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and references to its name and letter in the form and context in which they appear.

The letter and recommendation given by Cinda are given as of the date of this circular for incorporation herein.

Cinda has, or has had, no direct or indirect interest in any assets which have been acquired or disposed of by, or leased to, any member of the Group or are proposed to be acquired of by, or leased to, any member of the Group since 31 December 2008, the date to which the latest published audited financial statement of the Group was made up.

7. 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.

8. MATERIAL ADVERSE CHANGE

Save as disclosed in this circular, the Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2008, the date to which the latest published audited accounts of the company were made up.

9. DOCUMENTS FOR INSPECTION

Copies of the following documents will be available for inspection at the principal place of business of the Company in Hong Kong at Suite 2805, 28th Floor, Sino Plaza, 255-257 Gloucester Road, Causeway Bay, Hong Kong during normal business hours on any weekday (except public holidays) for a period of 14 days from the date hereof:

(a) the Natural Gas Supply Contracts;
(b) the Exclusive Strategic Co-Operation Framework Agreement;

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GENERAL INFORMATION

APPENDIX I

(c) the letter from the Independent Board Committee as set out on pages 24 to 25 of this circular;
(d) the letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, the text of which is set out from pages 26 to 44 of this circular;
(e) the written consent referred to in the paragraph headed “Consent of Expert” in this appendix; and
(f) this circular.

– 49 –

NOTICE OF SGM

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==> picture [7 x 5] intentionally omitted <==

----- Start of picture text -----

----- End of picture text -----*

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

NOTICE OF SPECIAL GENERAL MEETING

NOTICE IS HEREBY given that the Special General Meeting (the “ SGM ”) of the Company will be held at World Trade Centre Club Hong Kong, 38/F., World Trade Centre, 280 Gloucester Road, Causeway Bay, Hong Kong at 10:30 a.m. on 4 March 2010 for the purpose of considering and, if thought fit, passing the following resolutions:

ORDINARY RESOLUTIONS

“ THAT :

the Exclusive Strategic Co-Operation Framework Agreement (as defined in the circular of the Company dated 1 February 2010 (the “ Circular ”), a copy of which has been produced to the SGM marked “1” and signed by the chairman of the SGM for the purpose of identification), and the terms and conditions thereof and its proposed cap amounts and the transaction contemplated thereunder and the implementation thereof be and are hereby approved and confirmed;
the Qingyun Contract (as defined in the Circular, a copy of which has been produced to the SGM marked “2” and signed by the chairman of the SGM for the purpose of identification), and the terms and conditions thereof and its proposed cap amounts and the transaction contemplated thereunder and the implementation thereof be and are hereby approved and confirmed;
the Liling Contract (as defined in the Circular, a copy of which has been produced to the SGM marked “3” and signed by the chairman of the SGM for the purpose of identification), and the terms and conditions thereof and its proposed cap amounts and the transaction contemplated thereunder and the implementation thereof be and are hereby approved and confirmed;
the Huimin Contract (as defined in the Circular, a copy of which has been produced to the SGM marked “4” and signed by the chairman of the SGM for the purpose of identification), and the terms and conditions thereof and its proposed cap amounts and the transaction contemplated thereunder and the implementation thereof be and are hereby approved and confirmed;

* For identification purposes only

– 50 –

NOTICE OF SGM

the Xining Contract (as defined in the Circular, a copy of which has been produced to the SGM marked “5” and signed by the chairman of the SGM for the purpose of identification), and the terms and conditions thereof and its proposed cap amounts and the transaction contemplated thereunder and the implementation thereof be and are hereby approved and confirmed;
the Binzhou Contract (as defined in the Circular, a copy of which has been produced to the SGM marked “6” and signed by the chairman of the SGM for the purpose of identification), and the terms and conditions thereof and its proposed cap amounts and the transaction contemplated thereunder and the implementation thereof be and are hereby approved and confirmed;
the Anhui Contract (as defined in the Circular, a copy of which has been produced to the SGM marked “7” and signed by the chairman of the SGM for the purpose of identification), and the terms and conditions thereof and its proposed cap amounts and the transaction contemplated thereunder and the implementation thereof be and are hereby approved and confirmed;
the Jiangdu Contract (as defined in the Circular, a copy of which has been produced to the SGM marked “8” and signed by the chairman of the SGM for the purpose of identification), and the terms and conditions thereof and its proposed cap amounts and the transaction contemplated thereunder and the implementation thereof be and are hereby approved and confirmed; and
any one of the directors be authorised for and on behalf of the Company, among other things, to sign, execute, perfect, deliver or to authorise the singing, executing, perfecting and delivering all such documents and deeds, to do or authorise doing all such acts, matters and things as the may in their discretion consider necessary, expedient or desirable to give effect to and implement the Exclusive Strategic Co-Operation Framework Agreement, the Qingyun Contract, the Liling Contract, the Huimin Contract, the Xining Contract, the Binzhou Contract, the Anhui Contract and the Jiangdu Contract (together the “ CCT Agreements ”) and to waive compliance from or make and agree such variations of a non-material nature to any of the terms of the CCT Agreements as they may in their discretion consider to be desirable and in the interests of the Company and all the directors’ acts as aforesaid be hereby approved, ratified and confirmed.

SPECIAL RESOLUTION

“ THAT conditional upon compliance by the Company with all statutory requirements under Section 46(2) of the Companies Act of Bermuda, and with effect from the business day immediately following the day of passing this resolution:

– 51 –

NOTICE OF SGM

(A) the amount of HK$600,000,000 standing to the credit of the share premium account of the Company be cancelled, with part of the credit arising therefrom applied towards offsetting the entire amount of the accumulated losses of the Company and the remaining balance credited to the contributed surplus account of the Company;
(B) the directors of the Company be and are hereby authorized generally to carry out all acts and things which they may consider appropriate, necessary or desirable to give effect to or to implement the foregoing.”

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

Hong Kong, 1 February 2010

Head office and principal place of business in Hong Kong : Suite 2805, 28th Floor Sino Plaza 255-257 Gloucester Road Causeway Bay Hong Kong

Notes:

Any member entitled to attend and vote at a meeting of the Company shall be entitled to appoint another person as his proxy to attend and vote instead of him. A proxy needs not be a member.
The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney duly authorised in writing or, if the appointor is a corporation, either under its seal or under the hand of an officer, attorney or other person authorised to sign the same.
The instrument appointing a proxy and the power of attorney or other authority (if any) under which it is signed, or a certified copy of such power or authority, shall be delivered to Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at Rooms 1806-1807, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong not less than forty-eight (48) hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote.
Delivery of an instrument appointing a proxy shall not preclude a member from attending and voting in person at the meeting convened and in such event, the instrument appointing a proxy shall be deemed to be revoked.
Where there are joint holders of any share any one of such joint holder may vote, either in person or by proxy, in respect of such share as if he were solely entitled thereto, but if more than one of such joint holders be present at any meeting the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the register in respect of the joint holding.
As at the date of this notice, the board of directors of the Company comprises three executive Directors, namely Mr. Xu Tie-liang (Chairman and Chief Executive Officer), Mr. Qu Guo-hua and Mr. Cheung Shing; and four independent non-executive Directors, namely Mr. Li Yunlong, Mr. Shi Xun-zhi, Mr. Peng Long and Mr. Wang Guangtian.

– 52 –

AI assistant

JY GAS LIMITED — Proxy Solicitation & Information Statement 2010

49905_rns_2010-01-29_eed599fa-f8bd-48ba-8503-b250b35a6a10.pdf

CONTINUING CONNECTED TRANSACTIONS

(1) EXCLUSIVE STRATEGIC CO-OPERATION FRAMEWORK AGREEMENT WITH PETROCHINA CBM FOR THE PROVISION OF COALBED METHANE (2) PROVISION OF NATURAL GAS, PROPOSED REDUCTION OF SHARE PREMIUM AND NOTICE OF SPECIAL GENERAL MEETING

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

CONTINUING CONNECTED TRANSACTIONS

(2) PROVISION OF NATURAL GAS, PROPOSED REDUCTION OF SHARE PREMIUM AND NOTICE OF SPECIAL GENERAL MEETING

INTRODUCTION

CONTINUING CONNECTED TRANSACTIONS

Parties

Major terms

Basis for determining the CBM Caps

Reasons for entering into the Exclusive Strategic Co-Operation Framework Agreement

PROVISION OF NATURAL GAS

(a) THE QINGYUN CONTRACT

Parties

Major terms

Pricing basis

(b) THE LILING CONTRACT

Parties

Major terms

(c) THE HUIMIN CONTRACT

Parties

Major terms

(d) THE XINING CONTRACT

Major terms

(e) THE BINZHOU CONTRACT

Parties

Major terms

Pricing basis

(f) THE ANHUI CONTRACT

Parties

Major terms

Pricing basis

(g) THE JIANGDU CONTRACT

Parties

Major terms

REASONS FOR, AND BENEFITS OF THE NATURAL GAS SUPPLY CONTRACTS

PROPOSED CAPS

GENERAL INFORMATION

1. The Group

2. PetroChina Group

3. CCNG

4. PetroChina Natural Gas and Pipe

5. PetroChina Huazhong

6. PetroChina Huabei

7. PetroChina Se-Ning-Lan

8. PetroChina West-to-East Gas Supply Company

9. PetroChina West-to-East Gas Supply Pipe Company

LISTING RULES’ IMPLICATIONS

PROPOSED REDUCTION OF SHARE PREMIUM AND OFFSETTING ACCUMULATED LOSSES

Conditions of the Share Premium Reduction

Financial Effect of the Share Premium Reduction

Reasons for the Share Premium Reduction

SGM

GENERAL

RECOMMENDATION

ADDITIONAL INFORMATION

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

CONTINUING CONNECTED TRANSACTIONS (1) EXCLUSIVE STRATEGIC CO-OPERATION FRAMEWORK AGREEMENT WITH PETROCHINA CBM FOR THE PROVISION OF COALBED METHANE (2) PROVISION OF NATURAL GAS

CONTINUING CONNECTED TRANSACTIONS (1) EXCLUSIVE STRATEGIC CO-OPERATION FRAMEWORK AGREEMENT WITH PETROCHINA CBM FOR THE PROVISION OF COALBED METHANE (2) PROVISION OF NATURAL GAS

INTRODUCTION

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

BASIS OF OUR ADVICE

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(I) CONTINUING CONNECTED TRANSACTIONS – EXCLUSIVE STRATEGIC CO-OPERATION FRAMEWORK AGREEMENT WITH PETROCHINA CBM FOR THE PROVISION OF COALBED METHANE

(A) Background

(B) Principal factors taken into account

1. Information of the Group, CCNG, PetroChina Group and PetroChina CBM

(b) Term of the Exclusive Strategic Co-Operation Framework Agreement

4. The CBM Caps

(C) RECOMMENDATION

(II) CONTINUING CONNECTED TRANSACTIONS – NATURAL GAS SUPPLY CONTRACTS

JY GAS LIMITED Proxy Solicitation & Information Statement 2010