Raymond Industrial Limited - Proxy Solicitation & Information Statement 2011

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 you should take, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Kunlun Energy Company Limited (the “Company”), you should at once hand this circular to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or the transferee.

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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KUNLUN ENERGY COMPANY LIMITED
(incorporated in Bermuda with limited liability)
昆侖能源有限公司
(Stock Code: 00135)
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CONTINUING CONNECTED TRANSACTIONS

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

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A letter from the Board is set out on pages 6 to 28 of this circular and a letter from the Independent Board Committee, containing its recommendation to the Independent Shareholders of the Company, is set out on page 29 of this circular. A letter from the Independent Financial Adviser, First Shanghai Capital Limited, containing its advice to the Independent Board Committee and the Independent Shareholders in respect of the Fourth Supplemental Agreement and the Proposed Annual Caps is set out on pages 30 to 50 of this circular.

A notice of SGM to be held at the Harbour View Room III, 3/F., The Excelsior, Hong Kong, 281 Gloucester Road, Causeway Bay, Hong Kong on 1 December 2011 at 11:00 a.m., is set out on pages 58 to 59 of this circular. A proxy form for use by the shareholders of the Company at the SGM is enclosed with this circular. Whether or not you intend to attend and vote at the SGM in person, you are requested to complete the proxy form enclosed in accordance with the instructions printed thereon and return it to the principal office of the Company at 39th Floor, 118 Connaught Road West, Hong Kong as soon as practicable but in any event not later than 48 hours before the time for holding the SGM or adjourned meeting (as the case may be). Completion and return of the proxy form will not preclude you from attending and voting in person at the SGM should you so wish.

16 November 2011

	Pages
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FORM THE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
2. FOURTH SUPPLEMENTAL AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
3. CONTINUING CONNECTED TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . .	9
4. REASONS FOR, AND BENEFITS, OF THE EXISTING CONTINUING
CONNECTED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
5. INFORMATION ON THE GROUP AND OTHER PARTIES. . . . . . . . . . . . . . . . .	26
6. SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
7. RECOMMENDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
8. ADDITIONAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
LETTER FROM INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . . .	29
LETTER FROM FIRST SHANGHAI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	51
NOTICE OF THE SGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	58

– i –

DEFINITIONS

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

“associate(s)”
has the meaning ascribed to it under the Listing Rules
“Beckbury”
“Beijing Gas Pipeline Acquisition”
means Beckbury International Limited, a company incorporated with limited liability in the British Virgin Islands and a wholly-owned subsidiary of the Company the acquisition of 60% equity interest in PetroChina Beijing Gas Pipeline Co., Ltd. by the Company as disclosed in the announcement and circular of the Company dated 31 December 2010 and 19 February 2011 respectively
“Board”
means the board of directors of the Company
“CNPC”
means 中國石油天然氣集團公司 (China National Petroleum Corporation*), a State-owned enterprise established under the laws of the PRC
“CNPC Group”
means CNPC and its subsidiaries, but excluding members of the Group
“Company”
means Kunlun Energy Company Limited, a company incorporated with limited liability in Bermuda and the shares of which are listed on the Stock Exchange
“connected persons”
has the meaning ascribed to it under the Listing Rules
“Continuing Connected Transactions”
means the existing continuing connected transactions between the Group and the CNPC Group under the PSAs and the Master Agreement as set out in the paragraph headed “Continuing Connected Transactions” of this circular
“controlling shareholder” has the meaning ascribed to it under the Listing Rules
“Directors”
means directors of the Company

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DEFINITIONS

“Existing Caps”
means the existing maximum aggregate annual values of the Continuing Connected Transactions for each of the three years ending 31 December 2011 as set out in the announcements of the Company dated 6 March 2009, 19 May 2010 and 31 December 2010 and the circulars of the Company dated 9 March 2009, 25 May 2010 and 19 February 2011 and approved (where required) by the Independent Shareholders on 24 March 2009, 10 June 2010 and 11 March 2011
“First Supplemental Agreement”
means the agreement dated 14 November 2006 entered into between the Company and CNPC amending certain terms of, and renewing, the Master Agreement
“Fourth Supplemental Agreement”
means the agreement dated 14 November 2011 entered into between the Company and CNPC renewing the term of the Master Agreement for three years ending on 31 December 2014
“Group” means the Company and its subsidiaries
“Hafnium”
means Hafnium Limited, a company incorporated with limited liability in the British Virgin Islands and a wholly-owned subsidiary of the Company
“HK$” means Hong Kong dollars, the lawful currency of Hong Kong
“Independent Financial Adviser” or “First Shanghai”
means First Shanghai Capital Limited, a licensed corporation licensed to carry out type 6 (advising on corporate finance) regulated activity as defined under the SFO and the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions and the Proposed Annual Caps
“Independent Shareholders”
means the Shareholders other than CNPC and its associates (including PetroChina)

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DEFINITIONS

“Independent Board Committee”
“Karamay Oilfield”
“Latest Practicable Date”
“Leng Jiapu Entrustment Contract”
“Leng Jiapu Oilfield”
“Liaohe Contract”
“Listing Rules”
means the independent committee of the Board, comprising Dr. Lau Wah Sum, Mr. Li Kwok Sing Aubrey and Dr. Liu Xiao Feng, being all the independent non-executive Directors of the Company, established for the purpose of, among other things, advising the Independent Shareholders in respect of the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions and the Proposed Annual Caps
means an oilfield in Junggar basin in Xinjiang, the PRC, part of which is being developed by the Group pursuant to the Xinjiang Contract
11 November 2011, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein
means the entrustment contract dated 21 March 1998 entered into between Beckbury and the CNPC Group concerning the operation of the Liaohe Contract, as amended or supplemented from time to time
means the Leng Jiapu Oilfield in Liaohe, Liaoning Province, the PRC, part of which is being developed by the Group pursuant to the Liaohe Contract
means the Leng Jiapu Area Petroleum Contract dated 31 December 1997 entered into between CNPC and Beckbury, and where the context requires, includes the Leng Jiapu Entrustment Contract. All the rights and obligations (other than the supervisory functions related to CNPC’s role as representative of the PRC Government) of CNPC under the Liaohe Contract were novated to PetroChina on 8 October 2001
means The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited

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DEFINITIONS

“Master Agreement”
“Oil and Gas Products”
“PetroChina”
“PRC”
“PRC Oilfields”
“Proposed Annual Caps”
“PSAs”
“Rental Payments”
“RMB”
“Second Supplemental Agreement”

means the master agreement dated 19 November 2003 entered into between CNPC and the Company regarding provision by the CNPC Group to the Group, of a range of products and services from time to time, as amended and supplemented by the First Supplemental Agreement dated 14 November 2006, the Second Supplemental Agreement dated 25 March 2009 and the Third Supplemental Agreement dated 19 May 2010, where the context requires, as to be further amended and supplemented by the Fourth Supplemental Agreement

means such crude oil, natural gas, refined oil products, chemical products and other ancillary or similar products to be provided by the CNPC Group to the Group from time to time under the new category of additional products and services set out in the Second Supplemental Agreement
means 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 Depositary Receipts listed on the New York Stock Exchange. PetroChina is a non-wholly owned subsidiary of CNPC and the controlling shareholder of the Company holding approximately 50.67% of its total issued share capital
means the People’s Republic of China
means the Karamay Oilfield and the Leng Jiapu Oilfield
means the proposed annual caps for the Continuing Connected Transactions for each of the three years ending 31 December 2014
means the Xinjiang Contract and the Liaohe Contract
means the rental payments payable by the Group to the CNPC Group under the Master Agreement in respect of the properties leased from the CNPC Group
means Renminbi, the lawful currency of the PRC
means the agreement dated 25 March 2009 entered into between the Company and CNPC amending certain terms of, and renewing, the Master Agreement

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DEFINITIONS

“SFO”

means the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)

“SGM”

means a special general meeting of the Company proposed to be convened and held on 1 December 2011 for the Independent Shareholders to consider and, if deemed appropriate, approve, among other things, the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, and the Proposed Annual Caps for each relevant type of the Continuing Connected Transactions under Categories (a), (b), (d) and (e)

“Shares”

means ordinary shares of HK$0.01 each in the share capital of the Company
“Shareholders” means holders of the Shares
“Stock Exchange” means The Stock Exchange of Hong Kong Limited
“subsidiaries”
has the meaning ascribed to it under the Listing Rules
“substantial shareholder” has the meaning ascribed to it under the Listing Rules
“Third Supplemental Agreement” means the agreement dated 19 May 2010 entered into between the Company and CNPC amending certain terms of the Master Agreement
“Xinjiang Contract”
means the Xinjiang Oil Field Production Sharing Contract dated 1 July 1996 entered into between CNPC and Hafnium, as amended from time to time. All the rights and obligations (other than the supervisory functions related to CNPC’s role as representative of the PRC Government) of CNPC under this contract were novated to PetroChina on 8 October 2001
“%” per cent.

Notes:

(1) For the purpose of this circular, unless otherwise indicated, the exchange rate at RMB0.84475 = HK$1.00 has been used, where applicable, for purpose of illustration only and does not constitute a representation that any amount have been, could have been or may be exchanged.
(2) If there is any discrepancy or inconsistency between the Chinese names of the PRC entities and their English translations in this circular, the Chinese version shall prevail.
For identification purpose only

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LETTER FROM THE BOARD

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KUNLUN ENERGY COMPANY LIMITED (incorporated in Bermuda with limited liability) 昆侖能源有限公司

(Stock Code: 00135)

Directors:

Mr. Li Hualin (Chairman)

Mr. Zhang Bowen (President)
Mr. Cheng Cheng (Senior Vice President)
Dr. Lau Wah Sum, GBS, LLD, DBA, JP[#]

Registered office: Clarendon House Church Street Hamilton HM11 Bermuda

Mr. Li Kwok Sing Aubrey[#]
Dr. Liu Xiao Feng[#]
Independent Non-executive Directors

Principal office in Hong Kong: 39th Floor 118 Connaught Road West Hong Kong

16 November 2011

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

1. INTRODUCTION

Reference is made to the announcement of the Company dated 14 November 2011 in relation to the Continuing Connected Transactions and the Fourth Supplemental Agreement.

The Group and CNPC entered into (i) the Xinjiang Contract and the Liaohe Contract (together the PSAs) in 1996 and 1997 respectively and (ii) the Master Agreement in 2003, which was subsequently amended and supplemented pursuant to the First Supplemental Agreement in 2006, the Second Supplemental Agreement in 2009 and the Third Supplemental Agreement in 2010.

Under the PSAs, the Group procures from the CNPC Group on a continuing basis certain services and assistance. Whereas, the Master Agreement provides a framework for a range of products and services to be procured from the CNPC Group to the Group and vice versa including oil and gas products, general products and services, financial services and rental services from the CNPC Group. The Master Agreement will be expired on 31 December 2011.

In view of the expiration of the term of the Master Agreement on 31 December 2011, the Company announced in its announcement dated 14 November 2011 that it had entered into the conditional Fourth Supplemental Agreement with CNPC for the purpose of renewing the term of the Master Agreement for three years ending on 31 December 2014. The Fourth Supplemental Agreement is conditional upon the approval by the Independent Shareholders

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LETTER FROM THE BOARD

in relation to (i) the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder; (ii) the Continuing Connected Transactions under Categories (a), (b), (d) and (e); and (iii) the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014.

As at the Latest Practicable Date, CNPC, the ultimate controlling shareholder of the Company, was deemed to be interested in 2,811,841,342 Shares, representing approximately 56.68% of the issued share capital of the Company. To the best of the Directors’ knowledge, CNPC is entitled to control all voting rights in respect of its Shares as at the Latest Practicable Date, and is a controlling shareholder and a connected person to the Company. CNPC is a connected person of the Company and accordingly the Continuing Connected Transactions under the PSAs and the Master Agreement constitute continuing connected transactions of the Company. As the applicable percentage ratios based on the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) are greater than 5%, the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014 are subject to reporting, announcement and Independent Shareholders’ approval requirements.

An Independent Board Committee comprising all the independent non-executive Directors has been established to advise the Independent Shareholders, among other things, the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014. First Shanghai has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

CNPC and its associates (including PetroChina) are required to abstain from voting on the resolutions in connection with the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014.

The purposes of this circular, among other things, are:

(i) to provide you with further details of the Fourth Supplemental Agreement, the Continuing Connected Transactions and the Proposed Annual Caps;
(ii) to provide you a letter from the Independent Board Committee to the Independent Shareholders in respect of the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected

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LETTER FROM THE BOARD

Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014;

(iii) to provide you a letter of advice from First Shanghai containing its advice to the Independent Board Committee and the Independent Shareholders in respect of the entering into of Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014; and
(iv) to set out the notice of the SGM.

2. FOURTH SUPPLEMENTAL AGREEMENT

Agreement date : 14 November 2011 Parties : (1) The Company (2) CNPC Duration : Three years commencing from 1 January 2012 to 31 December 2014. The Parties agreed that subject to the applicable laws and regulations, including but not limited to the Listing Rules, the term of the Master Agreement can be further renewed upon agreement by the Parties in writing.

The Fourth Supplemental Agreement forms an integral part of the Master Agreement. Except as amended, modified or substituted by the provisions of the Fourth Supplemental Agreement, the remaining provisions of the Master Agreement and other related agreements executed pursuant to the Master Agreement (including the individual implementation agreements) shall remain in full force and effect. For details of the terms and conditions of the Master Agreement, please refer to the announcements of the Company dated 13 November 2006, 6 March 2009 and 19 May 2010 respectively and circulars of the Company dated 28 November 2006, 19 March 2009 and 25 May 2010 respectively. The terms of the Fourth Supplemental Agreement were negotiated on an arm’s length basis between the Group and the CNPC Group.

Further, the term of the each of the individual implementation agreements that govern specific transactions between the Group and the CNPC Group entered into pursuant to the Master Agreement shall be extended for three years from the effective date of the Fourth

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LETTER FROM THE BOARD

Supplemental Agreement. If the term of an individual implementation agreement extends beyond 31 December 2014 (that is, the expiry date of the Master Agreement), the Company shall re-comply with the reporting, announcement and independent shareholders’ approval requirements under Rules 14A.45 to 14A.48 of the Listing Rules and/or any other applicable Listing Rules at the relevant time.

The effectiveness of the Fourth Supplemental Agreement is conditional upon the approval by the Independent Shareholders at the SGM in relation to (i) the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder; (ii) the Continuing Connected Transactions under Categories (a), (b), (d) and (e); and (iii) the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending on 31 December 2014, and shall become effective on 1 January 2012 and expire on 31 December 2014.

3. CONTINUING CONNECTED TRANSACTIONS

Reference is made to the announcement of the Company dated 14 November 2011 in relation to the Continuing Connected Transactions.

Under the PSAs, the Group procures from the CNPC Group on a continuing basis certain services and assistance such as personnel training, leasing of warehouses and terminal facilities and utilisation of transportation and communication facilities. The term of the Xinjiang Contract runs from 1 September 1996 to 31 August 2021 with an initial approved production period of 12 years, which was due to expire in August 2008. On 15 April 2008, the Company and CNPC, having obtained the approval of the State Council of the PRC, extended the production period of the Xinjiang Contract for eight years to expire on 31 August 2016. The terms of the Liaohe Contract runs from 1 March 1998 to 28 February 2018.

The Master Agreement provides a framework for the Group to procure a range of products and services from the CNPC Group in relation to its oil exploration and production projects. The Master Agreement was amended by the First Supplemental Agreement in 2006, by the Second Supplemental Agreement in 2009 and by the Third Supplemental Agreement in 2010. Pursuant to the Master Agreement, the range of products and services to be procured from the CNPC Group to the Group and vice versa include Oil and Gas Products, general products and services, financial services and rental services. The Master Agreement, as extended by the Second Supplemental Agreement, will expire on 31 December 2011.

Pursuant to the Master Agreement and the PSAs, members of the CNPC Group and members of the Group shall enter into individual implementation agreements in respect of each type of products or services setting out detailed terms and conditions for providing

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LETTER FROM THE BOARD

such products and services. The pricing shall always be subject to the Master Agreement and the PSAs and the payment terms, including the credit period and the settlement method, will be specified in each individual implementation agreement.

For further details of the Master Agreement and the PSAs, please refer to the paragraph
3.1.1 below.

3.1.1 Categories of Continuing Connected Transactions

(i) Category (a) – Provision of general products and services by the CNPC Group to the Group (other than Oil and Gas Products)

Nature of Transactions

The Group procures certain products and services from the CNPC Group under the PSAs and the Master Agreement.

The PSAs

Pursuant to the PSAs, the Group procures from the CNPC Group on a continuing basis certain services and assistance such as personnel training, leasing of warehouses and terminal facilities and utilization of transportation and communication facilities.

The Xinjiang Contract and the Liaohe Contract were approved by the Independent Shareholders at the special general meetings of the Company held on 28 August 1996 and 23 February 1998 respectively and details of these contracts were set out in the circulars to Shareholders dated 5 August 1996 and 6 February 1998 respectively. Their salient details are set out below.

(i) The Xinjiang Contract

Date: 1 July 1996, as amended and modified from time to time

Parties: (1) Hafnium, a wholly-owned subsidiary of the Company

(2) PetroChina, a non wholly-owned subsidiary of CNPC; and

CNPC only in respect of the supervisory functions as representative of the PRC Government

Duration: 25 years from 1 September 1996 to 31 August 2021

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LETTER FROM THE BOARD

Synopsis:

The Xinjiang Contract is an oil production sharing agreement in relation to the development and production of crude oil in the Karamay Oilfield, Xinjiang, the PRC. Pursuant to the Xinjiang Contract, the Group and the CNPC Group hold 54% and 46% participating interests respectively. The Group is entitled to 54% of the oil production from the contracted area in Karamay Oilfield.

The term of the Xinjiang Contract runs from 1 September 1996 to 31 August 2021 with an initial approved production period of 12 years which expired in August 2008. On 15 April 2008, the Company and CNPC, having obtained the approval of the State Council of the PRC, extended the production period of the Xinjiang Contract for eight years to expire on 31 August 2016. As the Xinjiang Contract has a term of 25 years ending 31 August 2021, the production period thereunder may further be extended to 31 August 2021 subject to the parties’ mutual agreement and the approval of the State Council of the PRC.

(ii) The Liaohe Contract

Date: 31 December 1997, as amended and modified from time to time

Parties: (1) Beckbury, a wholly-owned subsidiary of the Company

(2) PetroChina, a non wholly-owned subsidiary of CNPC; and

CNPC only in respect of the supervisory functions as representative of the PRC Government

Duration: 20 years from 1 March 1998 to 28 February 2018

Synopsis:

The Liaohe Contract is an oil production sharing agreement in relation to the development and production of crude oil in the Leng Jiapu Oilfield, Liaoning, the PRC. Pursuant to the Liaohe Contract, the Group and the CNPC Group hold 70% and 30% participating interests respectively. The Group is responsible for 70% of the operation cost incurred in connection with oil production in certain areas within the Leng Jiapu Oilfield as specified in the Liaohe Contract (the “ Liaohe Contract Area ”). The Group is entitled to 70% of the oil production generated from the Liaohe Contract Area.

In connection with the Liaohe Contract, the Group has also entered into the Leng Jiapu Entrustment Contract with the CNPC Group, whereby the CNPC Group was entrusted to be the operator under the Liaohe Contract. Pursuant to the Leng Jiapu Entrustment Contract, the Group pays the CNPC Group a support fee representing 30% of the aggregate salary and welfare expenses paid to the personnel of the joint development department. The joint development department

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LETTER FROM THE BOARD

was established pursuant to the Leng Jiapu Entrustment Contract and is responsible for carrying out the contractual responsibilities of the CNPC Group under the Leng Jiapu Entrustment Contract.

The Liaohe Contract has a term of more than three years and will expire on 28 February 2018.

The Master Agreement

Pursuant to the Master Agreement entered into between CNPC and the Company in 2003, the CNPC Group has agreed to provide the following products and services to the Group:

(i) equipment required for petroleum exploration and production;
(ii) materials, supplies and other products required for petroleum exploration and production;
(iii) engineering services including geological surveying, drilling, well cementing, logging, mud logging, well testing, downhole operations, oilfield construction (and installation), engineering and design, project management and supervision, equipment repairing and maintenance, equipment antiseptic testing, technical know-how (such as patent, know-how and software relating to the captioned services) and information services and other related or similar services;
(iv) production services including data management and filing services, asset leasing, environmental sanitation, repair and upgrade of equipment, transportation, maintenance of access road and other related or similar services; and
(v) logistics support services including procurement agency, quality inspection, storage and delivery and other related or similar services.

General principles, price and terms

The transactions under the Master Agreement are subject to the following general principles:

(i) the products and services shall be of good quality and the price of the products and services shall be fair and reasonable. The terms and conditions on which such products and services to be provided to the Group shall be no less favourable than those (i) offered by the CNPC Group to independent third parties; and (ii) offered by independent third parties to the Group, for similar products and services;

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LETTER FROM THE BOARD

(ii) the CNPC Group and the Group shall enter into individual implementation agreements in relation to each type of products and services setting out detailed terms and conditions for providing such products and services; and
(iii) the quality, price and other terms and conditions for the provision of the products and services by the CNPC Group to the Group shall be no less favourable than those offered by independent third parties to the Group.

Price determination

The pricing for such general products and services to be provided by the CNPC Group to the Group under the Master Agreement shall be based on the following general principles:

(i) the price (the “ Relevant Market Price ”) should not exceed the best price among all the prices offered by all the independent third parties in the relevant market in the ordinary course of business (the “ Best Local Price ”). If the CNPC Group provides the relevant products or services at a price lower than the Best Local Price to independent third parties in the relevant market, such lower price shall be the Relevant Market Price; and
(ii) in the absence of the Relevant Market Price, the price should not exceed the best price among all the prices as offered by all the independent third parties in the nearby market in the ordinary course of business (the “ Best International Price ”). If the CNPC Group provides the relevant products or services at a price lower than the Best International Price to independent third parties in the nearby market, such lower price shall be used.

Other rights and obligations

The Group retains the right to purchase such products or services from independent third parties where the products or services offered by such independent third parties are considered by the Group to be superior to those offered by the CNPC Group. So long as the CNPC Group is able to supply the products and services required by the Group in accordance with the Master Agreement, the CNPC Group may supply such products and services to other third parties.

Both parties shall procure that their respective subsidiaries shall enter into implementation agreements in accordance with the terms and conditions of the Master Agreement. As the implementation agreements executed pursuant to the Master Agreement are simply further elaborations on the provision of products and services under the Master Agreement, they do not constitute new categories of continuing connected transactions.

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LETTER FROM THE BOARD

The CNPC Group has agreed to compensate the Company for any loss arising from any breach by the CNPC Group of the Master Agreement or of any implementation agreement.

In addition, as disclosed in the announcement and circular of the Company dated 6 March 2009 and 9 March 2009 respectively, CNPC and the Company entered into the Second Supplemental Agreement pursuant to which the CNPC Group agreed to provide the following additional categories of products and services (other than the supply of Oil and Gas Products):

(i) amenities services, including but not limited to property management, staff canteen, training centres and guest houses;
(ii) social and ancillary services, including but not limited to security services, education, hospitals, public transport; and
(iii) financial services, including but not limited to loans and deposit services and the associated interest incomes and expenses, guarantees, entrustment services and other financial services.

Price determination

The pricing for the services to be provided by the CNPC Group to the Group under the Second Supplemental Agreement (i.e. items (i) to (iii) above) shall be based on the following:

(i) the price (the “ New Relevant Market Price ”) should not exceed the best price among all the prices as offered by all the independent third parties in the relevant market or nearby market in the ordinary course of business (“ Best Market Price ”). If the CNPC Group provides the relevant services at a price lower than the Best Market Price to independent third parties in such markets, such lower price shall be the New Relevant Market Price; and
(ii) in the absence of the New Relevant Market Price, the price shall be set at the agreed contractual price, being the aggregate value of the actual costs of all services to be provided under the Master Agreement which are required to be priced at agreed contractual prices during the relevant year plus an additional margin of not more than 3%. The Directors consider that such margin is reasonable to cover any administrative costs and handling charges incurred by the CNPC Group in providing such products and services.

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LETTER FROM THE BOARD

As disclosed in the announcement and circular of the Company dated 31 December 2010 and 19 February 2011 respectively, upon completion of the Beijing Gas Pipeline Acquisition by the Company, the following products and services which are being provided by the CNPC Group to PetroChina Beijing Gas Pipeline Co., Ltd will also be grouped under this category of Continuing Connected Transactions (i.e. Category (a)):

(i) agency service, which the CNPC Group acts as the agent for debt collection from customers on behalf of PetroChina Beijing Gas Pipeline Co., Ltd;
(ii) construction, repair and maintenance of pipelines services; and
(iii) financial services, including but not limited to loans and deposit services and the associated interest incomes and expenses, guarantees and entrustment services.

With respect to the Beijing Gas Pipeline Acquisition, approval from the Ministry of Commerce (“ MOFCOM ”) is the only outstanding condition precedent to completion of the transaction. The Company and PetroChina have submitted all the necessary documentation for the approval application and are still waiting for the response from MOFCOM. The Company understands from PetroChina, who is responsible for liaising with the relevant governmental authorities (including MOFCOM) regarding the approval process, that MOFCOM is in the process of reviewing the application.

(ii) Category (b) – Purchase of the Group’s Share of Crude Oil by the CNPC Group

Nature of Transactions

Pursuant to the PSAs, the Group has the right to sell and deliver its share of oil production from each of the PRC Oilfields to a destination of its choice, except for destinations which infringe the political interests of the PRC. However, given the transportation costs and prevailing oil prices, the likely purchaser of the entire share of oil production attributable to the Group from each of the PRC Oilfields is likely to be the CNPC Group.

Since entering into the PSAs, the Company has sold its entire share of oil production from the PRC Oilfields to the CNPC Group and the Board intends to continue this arrangement. There is no contractual obligation upon the CNPC Group to purchase the Group’s share of the oil production from the PRC Oilfields although, from a commercial perspective, the Board expects that the CNPC Group will continue to accept all deliveries.

Price Determination

The price of crude oil paid by the CNPC Group for the Group’s share of the oil production from the PRC Oilfields is determined by reference to the prevailing market price of similar grade crude oil in an arm’s length transaction with reference to the trend of the international oil prices.

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LETTER FROM THE BOARD

(iii) Category (c) – Rental Payments

Nature of Transactions

Under the First Supplemental Agreement, the CNPC Group agreed to lease properties to the Group. Currently, the Group leases certain offices and warehouses in Hong Kong and the PRC from the CNPC Group.

Price Determination

The Rental Payments for the properties to be leased from the CNPC Group should be fair and reasonable with reference to prevailing market prices. The terms and conditions on which properties are to be leased should be no less favourable than those (i) offered by the CNPC Group to independent third parties and (ii) offered by independent third parties to the Group, for similar properties. Tenancy agreements to be negotiated on an arm’s length basis will be entered into between the CNPC Group and the Group based on normal commercial terms.

Other rights and obligations

The Group reserves its rights to rent properties from independent third parties where the rental terms offered by such independent third parties are considered by the Group to be more favourable than those offered by the CNPC Group. Both parties shall procure that their respective branch companies, subsidiaries and controlled entities shall enter into tenancy agreements in accordance with the terms and conditions of the First Supplemental Agreement. As the tenancy agreements executed, and to be executed pursuant to the First Supplemental Agreement, are simply further elaborations on the rental of properties contemplated by the First Supplemental Agreement, they do not constitute new categories of continuing connected transactions.

(iv) Category (d) – Purchase of Oil and Gas Products

Nature of Transactions

Pursuant to the Second Supplemental Agreement, the scope of products and services to be provided by the CNPC Group under the Master Agreement was expanded whereby the CNPC Group agreed to supply, amongst others, the Oil and Gas Products to the Group. The Second Supplemental Agreement constitutes an amendment to and forms part of the Master Agreement. Unless otherwise amended or substituted by the provisions in the Second Supplemental Agreement, the remaining provisions of the Master Agreement and other related agreements executed pursuant to the Master Agreement (including the implementation agreements) shall remain in full force and effect.

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LETTER FROM THE BOARD

Purchase of Oil and Gas Products and other services by the Group

The price for the products and services to be provided to the Group under the Second Supplemental Agreement shall be fair and reasonable. The terms and conditions on which such products and services are to be provided to the Group shall be no less favourable than those (i) offered by the CNPC Group to independent third parties and (ii) offered by independent third parties to the Group, for similar products and services.

The CNPC Group and the Group shall enter into individual implementation agreements in respect of each purchase of such products and services, which shall be negotiated on an arm’s length basis and on normal commercial terms. Each agreement shall set out the major terms and conditions for the provision of products and services.

Price Determination

The pricing for the Oil and Gas Products to be provided by the CNPC Group to the Group shall be based on the following general principles:

(i) the price (the “ Relevant Market Price ”) should not exceed the best price among all the prices offered by all the independent third parties in the relevant market in the ordinary course of business (the “ Best Local Price ”). If the CNPC Group provides the relevant products at a price lower than the Best Local Price to independent third parties in the relevant market, such lower price shall be the Relevant Market Price; and
(ii) in the absence of the Relevant Market Price, the price should not exceed the best price among all the prices as offered by all the independent third parties in the nearby market in the ordinary course of business (the “ Best International Price ”). If the CNPC Group provides the relevant products at a price lower than the Best International Price to independent third parties in the nearby market, such lower price shall be used.

As disclosed in the announcement and circular of the Company dated 31 December 2010 and 19 February 2011 respectively, upon completion of the Beijing Gas Pipeline Acquisition, the purchase of the natural gas by PetroChina Beijing Gas Pipeline Co., Ltd from the CNPC Group will also be grouped under this category of Continuing Connected Transactions (i.e. Category (d)).

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LETTER FROM THE BOARD

(v) Category (e) – Provision of general products and services by the Group to the CNPC Group

Nature of Transactions

The Company and the CNPC Group entered into the Third Supplemental Agreement in order to extend the scope of the co-operation between the Company and the CNPC Group and to cater for the needs of both parties. Under the Third Supplemental Agreement, the Group agreed to provide the following products and services to the CNPC Group:

(i) supply of crude oil, natural gas, refined oil products, chemical products and other ancillary or similar products;
(ii) engineering services including construction (including installation) of pipelines, gas-stations and other similar facilities, engineering and design, project management and supervision, equipment repairing and maintenance, equipment antiseptic testing, technical know-how (such as patent, know-how and software relating to the captioned services) and information services and other related or similar services;
(iii) lease services including leasing of certain offices, commercial building, warehouses and other related or similar services;
(iv) production services including data management and filing services, asset leasing, environmental sanitation, repair and upgrade of equipment, transportation, maintenance of access roads and other related or similar services; and
(v) logistics support services including procurement agency, quality inspection, storage and delivery and other related or similar services.

General principles, price and terms

The transactions under the Third Supplemental Agreement shall be carried out with reference to the general principles under the Master Agreement, for avoidance of doubt, both parties agree the following:

(i) the products and services shall be of good quality and the price of the products and services shall be fair and reasonable. The terms and conditions on which such products and services to be provided to the CNPC Group shall be no less favourable than those (a) offered by the Group to independent third parties; and (b) offered by independent third parties to the CNPC Group for similar products and services;
(ii) the CNPC Group and the Group shall enter into individual implementation agreements in relation to each type of products and services setting out detailed terms and conditions for providing such products and services; and

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(iii) the quality, price and other terms and conditions for the provision of the products and services by the Group to the CNPC Group shall be no less favourable than those offered by independent third parties to the Group.

Price Determination

The pricing for such general products and services to be provided under the Third Supplemental Agreement shall be based on the following general principles:

(i) the price (the “ New Relevant Market Price ”) shall not exceed the best price among all the prices as offered by all the independent third parties in the relevant market or nearby market in the ordinary course of business (“ Best Market Price ”). If the Group provides the relevant products or services at a price lower than the Best Market Price to independent third parties in such markets, such lower price shall be the New Relevant Market Price; and
(ii) in the absence of the New Relevant Market Price, the price shall be set at the agreed contractual price, being the aggregate value of the actual costs of all products and services to be provided under the Master Agreement which are required to be priced at agreed contractual prices during the relevant year plus an additional margin of not more than 3%. The Directors consider that such margin is reasonable to cover any administrative costs and handling charges incurred by the Group in providing such products and services.

Other rights and obligations

The CNPC Group retains the right to purchase such products or services from independent third parties where the products or services offered by such independent third parties are considered by the CNPC Group to be superior to those offered by the Group. CNPC has agreed to compensate the Company for any loss arising from the breach of the Third Supplemental Agreement or of any implementation agreement by any member of the CNPC Group.

As disclosed in the announcement and circular of the Company dated 31 December 2010 and 19 February 2011 respectively, upon completion of the Beijing Gas Pipeline Acquisition, the following products and services which are being provided by PetroChina Beijing Gas Pipeline Co., Ltd to the CNPC Group will also be grouped under this category of Continuing Connected Transactions (i.e. Category (e)):

(i) transportation of natural gas; and
(ii) leasing services, including leasing of certain offices, commercial building, etc.

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LETTER FROM THE BOARD

3.1.2 Proposed Annual Caps

The announcements of the Company dated 6 March 2009, 17 May 2010 and 31 December 2010 and circulars of the Company dated 9 March 2009, 25 May 2010 and 19 February 2011 set out the Existing Caps for each category of the Continuing Connected Transactions for each of the three years ending 31 December 2011, which were approved (where required) by the Independent Shareholders at special general meetings of the Company held on 24 March 2009, 10 June 2010 and 11 March 2011. The Existing Caps for the Continuing Connected Transactions approved will be expired on 31 December 2011. Accordingly, the Board proposes the following Proposed Annual Caps for Categories (a) to (e) of the Continuing Connected Transactions listed below which will serve as the maximum annual value of the Continuing Connected Transactions for each of the three years ending 31 December 2014 and proposes to seek the approval of the Independent Shareholders at the SGM for each category of the Continuing Connected Transactions (other than the Rental Payments (i.e. Category (c)) and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014:

			Proposed Annual	Proposed Annual	Caps
			Year ending	Year ending	Year ending
Category of Continuing			31 December	31 December	31	December
Connected Transactions		Historical Amounts	2012	2013		2014
(a)	Provision of products and	For each of the two	HK$15,291	HK$12,241	HK$12,521
	services by the CNPC Group	years ended 31	million	million		million
	to the Group under the	December 2010 and
	PSAs, the Master Agreement,	the six months
	and for the avoidance of	ended 30 June 2011,
	doubt including those under	approximately
	the Second Supplemental	HK$1,033 million,
	Agreement but excluding the	HK$1,871 million
	Oil and Gas Products	and HK$1,718
		million respectively
		(Note 1)
(b)	Purchase of the Group’s	For each of the two	HK$5,222	HK$5,991		HK$6,873
	share of crude oil by the	years ended 31	million	million		million
	CNPC Group under the PSAs	December 2010 and
		the six months
		ended 30 June 2011,
		approximately
		HK$2,080 million,
		HK$2,823 million
		and HK$2,020
		million respectively
(c)	Rental Payments under the	For each of the two	HK$20	HK$24		HK$28
	Master Agreement (Note 2)	years ended 31	million	million		million
		December 2010 and	(Note 3)	(Note 3)		(Note 3)
		the six months
		ended 30 June 2011,
		approximately HK$6
		million, HK$7
		million and HK$5
		million respectively

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LETTER FROM THE BOARD

Proposed Annual Caps
Year ending Year ending Year ending
Category of Continuing 31 December 31 December 31 December Connected Transactions Historical Amounts 2012 2013 2014 (d) Purchase of Oil and Gas For each of the two HK$15,498 HK$24,822 HK$40,282 Products by the Group under years ended 31 million million million the Second Supplemental December 2010 and Agreement the six months ended 30 June 2011, approximately HK$972 million, HK$1,795 million and HK$1,785 million respectively (Note 4)
(e) Provision of products and For each of the two HK$6,525 HK$8,896 HK$14,071 services by the Group to the years ended 31 million million million CNPC Group under the Third December 2010 and Supplemental Agreement the six months ended 30 June 2011, approximately nil, HK$431 million and HK$600 million respectively (Note 5)

Notes:

The historical amounts for each of the two years ended 31 December 2010 and the six months ended 30 June 2011 for the provision of general products and services (excluding Oil and Gas Products) by the CNPC Group to the Group under the PSAs, Master Agreement, and for the avoidance of doubt, including those under the Second Supplemental Agreement but excluding Oil and Gas Products (without taking into account the provision of products and services by the CNPC Group to PetroChina Beijing Gas Pipeline Co., Ltd. and its subsidiary before the Beijing Gas Pipeline Acquisition). The historical amounts for each of the two years ended 31 December 2010 and the nine months ended 30 September 2011 for the provision of general products and services by CNPC Group to PetroChina Beijing Gas Pipeline Co., Ltd. and its subsidiary were HK$1,180 million, HK$997 million and HK$876 million respectively.
As the relevant percentage ratios (other than the profit ratio) of the Proposed Annual Caps for the Rental Payments are, on an annual basis, less than 5%, the Continuing Connected Transactions and the Proposed Annual Caps in respect of the Rental Payments (i.e. Category (c)) are exempt from the Independent Shareholders’ approval requirement pursuant to Listing Rule 14A.34.
These Proposed Annual Caps are not subject to Independent Shareholders’ approval at the SGM.
The historical amounts for each of the two years ended 31 December 2010 and the six months ended 30 June 2011 for the purchase of Oil and Gas Products by the Group under the Second Supplemental Agreement (without taking into account the purchase of gas by PetroChina Beijing Gas Pipeline Co., Ltd and its subsidiary before the Beijing Gas Pipeline Acquisition). The historical amounts for each of the two years ended 31 December 2010 and the nine months ended 30 September 2011 for the purchase of gas by PetroChina Beijing Gas Pipeline Co., Ltd. and its subsidiary were HK$130 million, HK$217 million and HK$258 million respectively.
The historical amounts for each of the two years ended 31 December 2010 and the six months ended 30 June 2011 for the provision of products and services by the Group to the CNPC Group under the Third Supplemental Agreement (without taking into account the provision of products and services by PetroChina Beijing Gas Pipeline Co., Ltd. and its subsidiary before the Beijing Gas Pipeline Acquisition). The historical amounts for each of the two years ended 31 December 2010 and the nine

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months ended 30 September 2011 for the provision of products and services by PetroChina Beijing Gas Pipeline Co., Ltd. and its subsidiary to the CNPC Group were HK$4 million, HK$4 million and nil respectively.

As disclosed in the Company’s 2010 Annual Report, the Company is in the process of implementing its “gas in substitution of oil” strategy, transforming its core business from crude oil to natural gas. The natural gas segment has been under rapid development over the past two years, with several natural gas projects under way, including the Beijing Gas Pipeline Acquisition and the construction of two LNG terminals, and is expected to become the major growing segment of the Company in the future. The Group’s natural gas segment currently comprises natural gas sales, liquefied natural gas (“ LNG ”) processing plants, LNG terminals and natural gas pipelines.

With the completion of the Beijing Gas Pipeline Acquisition, the annual expenditure/ revenue incurred by PetroChina Beijing Gas Pipeline Co., Ltd. for using the products and services from the CNPC Group/providing products and services to the CNPC Group will be aggregated with the relevant Proposed Annual Caps. Therefore, the annual expenditure to be incurred by PetroChina Beijing Gas Pipeline Co., Ltd. for using the products and services provided by the CNPC Group will increase the annual cap figures for the existing Continuing Connected Transactions regarding the provision of products and services by the CNPC Group to the Group (i.e. Categories (a) and (d)) under the Master Agreement and the PSAs. Further, the annual revenue to be generated by PetroChina Beijing Gas Pipeline Co., Ltd. for providing products and services to the CNPC Group will increase the annual cap figures for the existing Continuing Connected Transactions regarding the provision of products and services by the Group to the CNPC Group (i.e. Category (e)) under the Master Agreement.

The Group has two LNG Terminals. The LNG terminal in Jiangsu has commenced operation and has a transmission capacity of 3.5 million tonne/annum. Another LNG terminal in Dalian has a transmission capacity of 3 million tonne/annum and is currently undergoing trial operation. These two LNG terminals primarily provide loading, unloading, storage and re-gasification services to the CNPC Group.

The CNPC Group is the largest natural gas supplier in the PRC. As the natural gas distribution projects of the Company require abundant natural gas and natural gas-related services for continual operation, the Board considers that it is essential for the Group to secure certain products and services (including the Oil and Gas Products, natural gas and natural gas-related services) from the CNPC Group in the future.

Based on the above, the Board projects that the Proposed Annual Caps will increase considerably in the following years.

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LETTER FROM THE BOARD

3.1.3 Basis of determination of the Proposed Annual Caps

(i) Category (a) – Provision of general products and services by the CNPC Group to the Group (other than Oil and Gas Products)

The Proposed Annual Caps for the provision of general products and services by the CNPC Group to the Group under the PSAs and the Master Agreement but excluding the Oil and Gas Products have been determined on the basis that the Continuing Connected Transactions under this Category (a) will continue to be entered into on terms and conditions set out in the relevant implementation agreements and in the ordinary and usual course of business of the Group and on normal commercial terms, Existing Caps of the relevant categories of Continuing Connected Transactions as approved by the Independent Shareholders previously, and with reference to the historical level of products and services charges paid by the Group to the CNPC Group under the PSAs and the Master Agreement and the relevant pricing principles, the inflation rate, the development and production progress of the PRC Oilfields, the number of oil exploration and production projects that the Group will be involved in the three years ending 31 December 2014, the expected growth of the Group in light of the restructuring of the Company and the diversification into natural gas downstream distribution and application business, the transaction figures for the continuing transactions between PetroChina Beijing Gas Pipeline Co., Ltd. and the CNPC Group, the estimated annual figures for the provision of products and services by the CNPC Group to PetroChina Beijing Gas Pipeline Co., Ltd. and its subsidiary after the completion of the Beijing Gas Pipeline Acquisition and the appreciation of RMB against HK$.

(ii) Category (b) – Purchase of the Group’s Share of Crude Oil by the CNPC Group

The Proposed Annual Caps for the purchase of the Group’s share of crude oil by the CNPC Group under the PSAs have been determined on the basis that the Continuing Connected Transactions under this Category (b) will continue to be entered into on terms and conditions set out in the relevant implementation agreements and in the ordinary and usual course of business of the Group and on normal commercial terms, and with reference to the historical level of purchase price of the Group’s share of crude oil paid by the CNPC Group to the Group, the prevailing market price of similar grade crude oil with reference to the trend of the international oil prices and the production progress of the PRC Oilfields in the three years ending 31 December 2014, and the appreciation of RMB against HK$.

(iii) Category (c) – Rental Payments

The Proposed Annual Caps for the Rental Payments have been determined on the basis that the Continuing Connected Transactions under this Category (c) will continue to be entered into on terms and conditions set out in the relevant implementation agreements and in the ordinary and usual course of business of the Group and on normal commercial terms, and with reference to the historical level of Rental Payments paid by the Group to the CNPC Group, the Group’s office, commercial and storage space needs for its future business development in light of the recent acquisitions and other future potential acquisitions, the pricing principles set out in the Master Agreement, the inflation rate, and the appreciation of RMB against HK$.

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LETTER FROM THE BOARD

(iv) Category (d) – Purchase of Oil and Gas Products

The Proposed Annual Caps for the purchase of Oil and Gas Products by the Group from the CNPC Group have been determined on the basis that the Continuing Connected Transactions under this Category (d) will continue to be entered into on terms and conditions set out in the relevant implementation agreements and in the ordinary and usual course of business of the Group and on normal commercial terms, and with reference to the historical amount of Oil and Gas Products purchased by the Group, the relevant pricing principles set out in the Master Agreement, the transaction figures for the continuing transactions between PetroChina Beijing Gas Pipeline Co., Ltd. and the CNPC Group, the estimated annual figures for the purchase of gas by PetroChina Beijing Gas Pipeline Co., Ltd. and its subsidiary from the CNPC Group after the completion of the Beijing Gas Pipeline Acquisition, and the appreciation of RMB against HK$. Further, it is the Group’s plan to further venture into and expand its business in the city gas, vehicle fuel gas and related businesses through organic growth of the subsidiaries of the Group and through possible acquisitions of potential suitable target companies. Accordingly, based on such expansion plans, the Company projects that its demands for Oil and Gas Products would increase considerably in the following years.

(v) Category (e) – Provision of general products and services by the Group to the CNPC Group

With the expansion of natural gas downstream distribution and application business through subsidiaries, the provision of products and services by the Company’s subsidiaries to the CNPC Group is expected to continue. The Proposed Annual Caps for the Continuing Connected Transactions under this Category (e) have been determined on the basis that the Continuing Connected Transactions under this Category (e) will continue to be entered into on terms and conditions set out in the relevant implementation agreements and in the ordinary and usual course of business of the Group and on normal commercial terms, and with reference to the historical level of products and services provided by the Group to the CNPC Group, the expected growth of the Group in light of the restructuring of the Company and the diversification into natural gas downstream distribution and application business, projected price increases (including natural gas price increases), the transaction figures for the continuing transactions between PetroChina Beijing Gas Pipeline Co., Ltd. and the CNPC Group, the estimated annual figures for the provision of products and services by PetroChina Beijing Gas Pipeline Co., Ltd. and its subsidiary to the CNPC Group after the Beijing Gas Pipeline Acquisition, the inflation rate, and the appreciation of RMB against HK$.

The Board is of the view that the Proposed Annual Caps for each category of the Continuing Connected Transactions are in line with the estimated development of the business of the Group, and are determined based on the principles of fairness and reasonableness.

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LETTER FROM THE BOARD

3.2 Requirements of the Listing Rules

Save as disclosed in relation to the interest of Mr. Li Hualin in this circular, none of the Directors has a material interest in the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions and the Proposed Annual Caps for the Continuing Connected Transactions. According to the articles of association of the Company, the Directors may vote and be counted in the quorum in the resolution involving any proposal concerning any other company in which the Directors of the Company are interested as an officer or executive. Therefore, Mr. Li Hualin is not required to abstain from voting in the board meeting of the Company concerning the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions and the Proposed Annual Caps for the Continuing Connected Transactions.

Details of the Continuing Connected Transactions have been and will be included in the annual report and accounts of the Company in accordance with Listing Rules 14A.45 and 14A.46. In the event that the PSAs or the Master Agreement are renewed or the terms thereof are materially varied, the Company will re-comply with the reporting, announcement and Independent Shareholders’ approval pursuant to Listing Rules 14A.45 to 14A.48.

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LETTER FROM THE BOARD

CNPC and its associates (including PetroChina) are required to abstain from voting on the resolutions in connection with the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for each relevant type of the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014.

4. REASONS FOR, AND BENEFITS, OF THE EXISTING CONTINUING CONNECTED TRANSACTIONS

The Company is an enterprise whose business operations primarily focus on investing in petroleum up-stream business as well as other petroleum-related businesses that generate stable income. CNPC, on the other hand, is an enterprise whose business operations cover a broad spectrum of upstream and downstream activities, domestic marketing and international trade, technical services, and equipment manufacturing and supply. CNPC is a major producer and supplier of petrochemical products. CNPC is also involved in the provision of operational services and technical support in such areas as geophysical prospecting, well-drilling, logging, well-testing, downhole operations, oilfield surface facilities construction, pipeline construction, refining and petrochemical projects, and manufacturing and supply of petroleum equipment.

In view of the strengths and scope of CNPC’s business activities and the strong favourable support that such Continuing Connected Transactions would bring to the Company’s business activities, the Board considers it to be beneficial to the Company to continue to carry out the Continuing Connected Transactions with the CNPC Group as these transactions have facilitated and are expected to continue to facilitate the operation and growth of the Group’s business. The Board also notes the long smooth cooperation history between the Company and CNPC in relation to such transactions.

Further, the Continuing Connected Transactions will be entered into in the ordinary and usual course of business on normal commercial terms that are fair and reasonable, and in the interests of the Company and the Shareholders as a whole.

5. INFORMATION ON THE GROUP AND OTHER PARTIES

(a) Information on the Group

The Company is an investment holding company. The principal activities of the Group are the exploration and production of crude oil and natural gas in the PRC, the Republic of Kazakhstan, the Sultanate of Oman, Peru, the Kingdom of Thailand, the Azerbaijan Republic and the Republic of Indonesia. The Group is also engaged in the sale of vehicle fuel gas, city gas and related natural gas businesses in the PRC as well as the pipeline business in Bohai and Tianjin through its joint venture entities.

(b) Information on CNPC

CNPC is the controlling shareholder of the Company. CNPC is a petroleum and petrochemical conglomerate that was formed in the wake of the restructuring launched by the State Council to restructure the predecessor of CNPC, China National Petroleum

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LETTER FROM THE BOARD

Company（中國石油天然氣集團公司）. CNPC is also a state-authorised investment corporation and state-owned enterprise. CNPC is an integrated energy corporation with businesses covering oil and gas exploration and development, refining and petrochemical, oil product marketing, oil and gas storage and transportation, oil trading, engineering and technical services and petroleum equipment manufacturing.

(c) Information on PetroChina

PetroChina and its subsidiaries are mainly engaged in petroleum and natural gas-related activities, including (i) the exploration, development, production and sale of crude oil and natural gas; (ii) the refining, transportation, storage and marketing of crude oil and petroleum products; (iii) the production and sale of basic petrochemical products, derivative chemical products and other petrochemical products; and (iv) the transmission of natural gas, crude oil and refined products, and the sale of natural gas.

6. SGM

The notice convening the SGM to be held at Harbour View Room III 3/F., The Excelsior, Hong Kong, 281 Gloucester Road, Causeway Bay, Hong Kong on 1 December 2011 at 11:00 a.m., at which ordinary resolutions will be proposed for the Independent Shareholders to consider, and if think fit, to approve, among other things:

(1) the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder;
(2) the Continuing Connected Transactions under Categories (a), (b), (d) and (e); and
(3) the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e),

is set out on pages 58 to 59 of this circular.

A proxy form for use at the SGM is enclosed. If you intend to appoint proxy to attend the SGM, you are requested to complete the proxy form and return it to the Company’s principal office at 39th Floor, 118 Connaught Road West, Hong Kong not less than 48 hours before the time appointed for holding the SGM or adjourned meeting (as the case may be). Completion and return of the proxy form will not preclude you from attending and voting at the SGM if you so wish.

7. RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee set out on page 29 of this circular which contains its recommendation to the Independent Shareholders in relation to the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014. Your attention is also drawn to the letter of advice from First Shanghai set out on pages 30 to 50 of this circular which contains its advice to the Independent Board Committee and the Independent Shareholders in relation to the Fourth Supplemental Agreement and the

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transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014, and the principal factors and reasons taken into account in arriving at its recommendation.

The Independent Board Committee, having taken into account the advice of First Shanghai, is of the opinion that the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014 are fair and reasonable and are in the interests of the Company and the Shareholders as a whole, and that the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) are fair and reasonable. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the ordinary resolutions in respect of the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014 to be proposed at the SGM.

8. ADDITIONAL INFORMATION

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

By Order of the Board Li Hualin Chairman

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LETTER FROM INDEPENDENT BOARD COMMITTEE

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KUNLUN ENERGY COMPANY LIMITED
(incorporated in Bermuda with limited liability)
昆侖能源有限公司
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(Stock Code: 00135)
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16 November 2011

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular dated 16 November 2011 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 as members of the Independent Board Committee to advise the Independent Shareholders in respect of the (1) the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, (2) the Continuing Connected Transactions under Categories (a), (b), (d) and (e), and (3) Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014, details of which are set out in the section headed “Letter from the Board” in the Circular to the Shareholders. First Shanghai has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders on the same matters. A copy of the letter from First Shanghai containing its advice is set out in the section headed “Letter from First Shanghai” of the Circular.

Having taken into account the advice of First Shanghai, we consider that (1) the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, (2) the Continuing Connected Transaction under Categories (a), (b), (d) and (e); and (3) the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014 are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM to approve the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e), and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014 as set out in the notice of the SGM to be held on 1 December 2011.

Lau Wah Sum

Yours faithfully, Independent Board Committee Li Kwok Sing Aubrey Independent non-executive Directors

Liu Xiao Feng

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LETTER FROM FIRST SHANGHAI

Set out below is the text of a letter received from First Shanghai, the Independent Financial Adviser, to the Independent Board Committee and the Independent Shareholders in respect of the Fourth Supplemental Agreement and the Proposed Annual Caps prepared for the purpose of inclusion in this circular.

==> picture [92 x 39] intentionally omitted <==

FIRST SHANGHAI CAPITAL LIMITED

19th Floor, Wing On House 71 Des Voeux Road Central Hong Kong

16 November 2011

To the Independent Board Committee and the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our engagement to act as the independent financial adviser of the Company to advise the Independent Board Committee and the Independent Shareholders in respect of the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the renewal of the respect annual caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014, details of which are set out in the letter from the Board in the circular of the Company dated 16 November 2011 (the “Letter from the Board”) to the Shareholders (the “Circular”), of which this letter forms part. Unless the context otherwise requires, terms used in this letter shall have the same meanings as those defined in the Circular.

Under the PSAs, the Group procures from the CNPC Group on a continuing basis certain services and assistance. Whereas, the Master Agreement provides a framework for a range of products and services from the CNPC Group in relation to its oil exploration and production projects. The Master Agreement was amended by the First Supplemental Agreement in 2006, by the Second Supplemental Agreement in 2009 and by the Third Supplemental Agreement in 2010. Pursuant to the Master Agreement, the range of products and services to be procured from the CNPC Group to the Group and vice versa including

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LETTER FROM FIRST SHANGHAI

Oil and Gas Products, general products and services, financial services and rental services. The Master Agreement, as extended by the Second Supplemental Agreement, will expire on 31 December 2011.

In view of the expiration of the term of the Master Agreement on 31 December 2011, the Company and CNPC entered into the Fourth Supplemental Agreement on 14 November 2011 for the purpose of renewing the term of the Master Agreement for the three years ending 31 December 2014. The effectiveness of the Fourth Supplemental Agreement is conditional upon the approval by the Independent Shareholders at the SGM in relation to (i) the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder; (ii) the Continuing Connected Transactions under the Categories (a), (b), (d) and (e); and (iii) the renewal of the respective annual caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending on 31 December 2014, and shall become effective on 1 January 2012 and expire on 31 December 2014.

As at the Latest Practicable Date, CNPC, the ultimate controlling shareholder of the Company, was deemed to be interested in 2,811,841,342 Shares, representing approximately 56.68% of the issued share capital of the Company. To the best of the Directors’ knowledge, CPNC is entitled to control all voting rights in respect of its Shares as at the Latest Practicable Date, and is a controlling shareholder and a connected person to the Company. CNPC is a connected person of the Company and accordingly the Continuing Connected Transactions under the PSAs and the Master Agreement constitute continuing connected transactions of the Company. As the applicable percentage ratios based on the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) are greater than 5%, the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014 are subject to reporting, announcement and Independent Shareholders’ approval requirements.

The Independent Board Committee, comprising all the independent non-executive Directors, namely Dr. Lau Wah Sum, Mr. Li Kwok Sing Aubrey and Dr. Liu Xiao Feng, has been established to advise the Independent Shareholders, among other things, the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014. We, First Shanghai Capital Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the above.

BASIS OF OPINION

In putting forth our opinion and recommendation, we have relied on the accuracy of the information and representations included in the Circular and provided to us by the Company, the Directors and senior management of the Company (the “Management”), and have assumed that all such information and representations made or referred to in the

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LETTER FROM FIRST SHANGHAI

Circular and provided to us by the Management were true at the time they were made and continued to be true up to the time of the holding of the SGM. We have also assumed that all statements of belief, opinion and intention made in the Circular were reasonably made after due enquiry. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided by us by the Management and have been advised that no material facts have been withheld or omitted from the information provided and referred to in the Circular. We consider that we have reviewed sufficient information to reach an informed view and to justify reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our advice. We have not, however, conducted any independent verification of the information included in the Circular and provided to us by the Management nor have we conducted any form of investigation into the business, affairs or future prospects of the Group or the CNPC Group.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion in respect of the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014, we have taken into consideration the following principal factors and reasons:

1. Reasons for the entering into of the Fourth Supplemental Agreement, the Continuing Connected Transactions and the Proposed Annual Caps

As stated in the Letter from the Board, the Directors noted the long and smooth cooperation history between the Group and the CNPC Group regarding the Continuing Connected Transactions. With reference to the Letter of the Board, the Company is an enterprise whose business operations primarily focus on investing in petroleum up-stream business as well as other petroleum-related businesses that generate stable income. The principal activities of the Group are the exploration and production of crude oil and natural gas in the PRC, the Republic of Kazakhstan, the Sultanate of Oman, Peru, the Kingdom of Thailand, the Azerbaijan Republic and the Republic of Indonesia. The Group is also engaged in the sale of vehicle fuel gas, city gas and related natural gas businesses in the PRC as well as the pipeline business in Bohai and Tianjin through its joint venture entities. CNPC is a petroleum and petrochemical conglomerate that was formed in the wake of the restructuring launched by the State Council to restructure the predecessor of CNPC, China National Petroleum Company（中國石油天然氣集團公司）. CNPC is also a state-authorised investment corporation and state-owned enterprise. CNPC is an enterprise whose business operations cover a broad spectrum of upstream and downstream activities, domestic marketing and international trade, technical services, and equipment manufacturing and supply. It is also involved in the provision of operational services and technical support in such areas as geophysical prospecting, well-drilling, logging, well-testing, downhole operations, oilfield surface facilities construction, pipeline construction, refining and petroleum projects, and manufacturing and supply of petroleum equipment.

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From our discussion with the Management, we further understand that a substantial number of personnel engaging in the supply of products and services to the Company relating to the exploration, development, production, storage and transportation of crude oil are employees of the CNPC Group and the Group does not currently have sufficient requisite manpower, expertise and facilities to act as the sole operator of the PRC Oilfields and other overseas oilfields without the assistance from the CNPC Group and any other third parties. In addition, the natural gas distribution projects of the Company require abundant natural gas and natural gas-related services for continual operation and therefore the Group will continue to purchase natural gas and natural gas-related services from the CNPC Group in the future. As further advised by the Management, the Group also purchases oil and gas from the CNPC Group for trading purposes. Since CNPC is an integrated energy corporation with businesses covering oil and gas exploration and development, refining and petrochemical, oil product marketing, oil and gas storage and transportation, oil trading, engineering and technical services and petroleum equipment manufacturing and it is the largest natural gas supplier in the PRC, the Management considered that it is essential for the Group to secure certain products and services (including the Oil and Gas Products) from the CNPC Group in the future.

Furthermore, we also noted from the Annual Report 2010 of the Company that out of the Group’s total turnover of approximately HK$9,068 million for the year ended 31 December 2010, approximately HK$2,823 million was attributable to the sales of crude oil to the CNPC Group. In this respect, the Management advised us that the CNPC 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 CNPC for securing a stable source of revenue for the Group.

Having taken into account the strengths and scope of CNPC’s business activities and the strong favourable support that the Continuing Connected Transactions would bring to the Company’s business activities, we concur with the Management that it is beneficial to the Company to carry out the Continuing Connected Transactions with the CNPC Group as these transactions have facilitated and will continue to facilitate the Group’s business operations, the Continuing Connected Transactions are conducted in the ordinary and usual course of business of the Company and are in the interests of the Company and the Shareholders as a whole.

2. Basis of price determination

(i) Category (a) – Provision of general products and services from the CNPC Group to the Group (other than Oil and Gas Products)

The Master Agreement

Pursuant to the Master Agreement entered into between CNPC and the Company in 2003, the CNPC Group has agreed to provide the following products and services to the Group:

(i) equipment required for petroleum exploration and production;

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LETTER FROM FIRST SHANGHAI

(ii) materials, supplies and other products required for petroleum exploration and production;
(iii) engineering services including geological surveying, drilling, well cementing, logging, mud logging, well testing, downhole operations, oilfield construction (and installation), engineering and design, project management and supervision, equipment repairing and maintenance, equipment antiseptic testing, technical know-how (such as patent, know-how and software relating to the captioned services) and information services and other related or similar services;
(iv) production services including data management and filing services, asset leasing, environmental sanitation, repair and upgrade of equipment, transportation, maintenance of access road and other related or similar services; and
(v) logistics support services including procurement agency, quality inspection, storage and delivery and other related or similar services.

General principles, price and terms

The transactions under the Master Agreement are subject to the following general principles:

(i) the products and services shall be of good quality and the price of the products and services shall be fair and reasonable. The terms and conditions on which such products and services to be provided to the Group shall be no less favourable than those (i) offered by the CNPC Group to independent third parties; (ii) offered by independent third parties to the Group, for similar products and services;
(ii) the CNPC Group and the Group shall enter into individual implementation agreements in relation to each type of products and services setting out detailed terms and conditions for providing such products and services; and
(iii) the quality, price and other terms and conditions for the provision of the products and services by the CNPC Group to the Group shall be no less favourable than those offered by independent third parties to the Group.

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Price determination

The pricing for such general products and services to be provided by the CNPC Group to the Group under the Master Agreement shall be based on the following general principles:

(i) the price (the “ Relevant Market Price ”) should not exceed the best price among all the prices offered by all the independent third parties in the relevant market in the ordinary course of business (the “ Best Local Price ”). If the CNPC Group provides the relevant products or services at a price lower than the Best Local Price to independent third parties in the relevant market, such lower price shall be the Relevant Market Price; and
(ii) in the absence of the Relevant Market Price, the price should not exceed the best price among all the prices as offered by all the independent third parties in the nearby market in the ordinary course of business (the “ Best International Price ”). If the CNPC Group provides the relevant products or services at a price lower than the Best International Price to independent third parties in the nearby market, such lower price shall be used.

(i) amenities services, including but not limited to property management, staff canteen, training centres and guest houses;
(ii) social and ancillary services, including but not limited to security services, education, hospitals, public transport; and
(iii) financial services, including but not limited to loans and deposit services and the associated interest incomes and expenses, guarantees, entrustment services and other financial services.

Price determination

The pricing for the services to be provided by the CNPC Group to the Group under the Second Supplemental Agreement (i.e. items (i) to (iii) above) shall be based on the following:

(i) the price (the “ New Relevant Market Price ”) should not exceed the best price among all the prices as offered by all the independent third parties in the relevant market or nearby market in the ordinary course of business (“ Best Market Price ”). If the CNPC Group provides the

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LETTER FROM FIRST SHANGHAI

relevant services at a price lower than the Best Market Price to independent third parties in such markets, such lower price shall be the New Relevant Market Price; and

(ii) in the absence of the New Relevant Market Price, the price shall be set at the agreed contractual price (“Agreed Contractual Price”), being the aggregate value of the actual costs of all services to be provided under the Master Agreement which are required to be priced at agreed contractual prices during the relevant year plus an additional margin of not more than 3%. The Directors consider that such margin is reasonable to cover any administrative costs and handling charges incurred by the CNPC Group in providing such products and services.

As disclosed in the announcement and circular of the Company dated 31 December 2010 and 19 February 2011 respectively, upon completion of the Beijing Gas Pipeline Acquisition by the Company, the following products and services which are being provided by the CNPC Group to PetroChina Beijing Gas Pipeline Co., Ltd. will also be grouped under this category of Continuing Connected Transactions (i.e. Category (a)):

(i) agency service, which the CNPC Group acts as the agent for debt collection from customers on behalf of PetroChina Beijing Gas Pipeline Co., Ltd;
(ii) construction, repair and maintenance of pipelines services; and
(iii) financial services, including but not limited to loans and deposit services and the associated interest incomes and expenses, guarantees and entrustment services.

From our discussion with the Management, the Management advised that the Group agreed to offer the aforesaid terms and conditions to the CNPC Group in order to maintain the long and smooth co-operation history between the Group and the CNPC Group. The CNPC Group is the largest natural gas supplier in the PRC. The Management considered that the pricing terms of the Master Agreement are generally on normal commercial terms, only when there is an absence of New Relevant Market Price, the price shall be set at the Agreed Contractual Price, which the Management considered is reasonable to cover the administrative costs and handling charges incurred by the Group in providing such products and services. The Management confirmed that for each of the two years ended 31 December 2010 and the six months ended 30 June 2011, the Company has not experienced situation in which there is an absence of New Relevant Market Price.

We have reviewed the Master Agreement and noted that the Group retains the right to purchase the products or services from independent third parties where the products or services offered by such independent third parties are considered by the Group to be superior to those offered by the CNPC Group.

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LETTER FROM FIRST SHANGHAI

We have reviewed the relevant agreements, relevant supporting documents and the letter containing the findings and conclusions in respect of the Continuing Connected Transactions for the year ended 31 December 2010 issued by the independent auditors of the Company, PricewaterhouseCoopers, and discussed with the Management the pricing terms under this category.

Having considered that: (i) the pricing terms of this category should not exceed the Best Local Price or the Best Market Price; (ii) in the absence of the Relevant Market Price, the price should not exceed the Best International Price; (iii) in the absence of New Relevant Market Price, the price shall be set at the Agreed Contractual Price; (iv) for each of the two years ended 31 December 2010 and the six months ended 30 June 2011, the Company has not experienced situation in which there is an absence of New Relevant Market Price, and even if that is the case, the Agreed Contractual Price shall be enough to cover the administrative costs and handling charges incurred by the Group in providing such products and services; (v) the Agreed Contractual Price were determined based on arm’s length negotiation and it applied to all the products and services provided by both the Group to the CNPC Group as well as the CNPC Group to the Group; and (vi) the Group retains the right to purchase the products or services from independent third parties where the products or services offered by such independent third parties are considered by the Group to be superior to those offered by the CNPC Group, we consider that the pricing terms for this category are on normal commercial terms and are fair and reasonable.

(ii) Category (b) – Purchase of the Group’s Share of Crude Oil by the CNPC Group

Price Determination

We have reviewed the PSAs, the relevant supporting documents (among others, the announcements published by the National Development and Reform Commission) and the letter containing the findings and conclusions in respect of the Continuing Connected Transactions for the year ended 31 December 2010 issued by the independent auditors of the Company, PricewaterhouseCoopers, and discussed with the Management the pricing terms of the PSAs. From our

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LETTER FROM FIRST SHANGHAI

discussion with the Management, we understand that the pricing terms of crude oil are determined with reference to the relevant standard of charges published by the PRC Government from time to time.

Having considered that the pricing term of this category are determined: (i) by reference to the prevailing market price of similar grade crude oil in arm’s length transaction with reference to the trend of the international oil prices; and (ii) based on the pricing terms of crude oil are determined with reference to the relevant standard of charges published by the PRC Government from time to time, we consider that the pricing terms for this category are on normal commercial terms and are fair and reasonable.

(iii) Category (d) – Purchase of Oil and Gas Products

Pursuant to the Second Supplemental Agreement, the scope of products and services to be provided by CNPC Group under the Master Agreement was expanded whereby the CNPC Group agreed to supply, amongst others, the Oil and Gas Products to the Group. The Second Supplemental Agreement constitutes an amendment to and forms part of the Master Agreement. Unless otherwise amended or substituted by the provisions in the Second Supplemental Agreement, the remaining provisions of the Master Agreement and other related agreements executed pursuant to the Master Agreement (including the implementation agreements) shall remain in full force and effect.

Purchase of Oil and Gas Products and other services by the Group

Price Determination

The pricing for the Oil and Gas Products to be provided by the CNPC Group to the Group shall be based on the following general principles:

(i) the price (the “ Relevant Market Price ”) should not exceed the best price among all the prices offered by all the independent third parties in the relevant market in the ordinary course of business (the “ Best Local Price ”). If the CNPC Group provides the relevant products at a price lower than the Best Local Price to independent third parties in the relevant market, such lower price shall be the Relevant Market Price; and

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LETTER FROM FIRST SHANGHAI

(ii) in the absence of the Relevant Market Price, the price should not exceed the best price among all the prices as offered by all the independent third parties in the nearby market in the ordinary course of business (the “ Best International Price ”). If the CNPC Group provides the relevant products at a price lower than the Best International Price to independent third parties in the nearby market, such lower price shall be used.

As disclosed in the announcement and circular of the Company dated 31 December 2010 and 19 February 2011 respectively, upon completion of the Beijing Gas Pipeline Acquisition, the purchase of the natural gas by PetroChina Beijing Gas Pipeline Co., Ltd. from the CNPC Group will also be grouped under this category of Continuing Connected Transactions (i.e. Category (d)).

We have reviewed the relevant agreements, relevant supporting documents (among others, the announcements published by the National Development and Reform Commission) and the letter containing the findings and conclusions in respect of the Continuing Connected Transactions for the year ended 31 December 2010 issued by the independent auditors of the Company, PricewaterhouseCoopers, and discussed with the Management the pricing terms of this category. From our discussion with the Management, we understand that the pricing terms of this category are generally determined with reference to the relevant standard of charges published by the PRC Government from time to time or the Best International Price.

Having considered that: (i) the pricing terms of this category are generally determined with reference to the relevant standard of charges published by the PRC Government from time to time or the Best International Price; and (ii) the CNPC Group is the largest gas supplier in the PRC and it would be crucial for the Group to maintain good connection with the CNPC Group judging from their existing business relationship, we consider that the pricing terms for this category are on normal commercial terms and are fair and reasonable.

(iv) Category (e) – Provision of general products and services by the Group to the CNPC Group

The Company and the CNPC Group entered into the Third Supplemental Agreement in order to extend the scope of the co-operation between the Company and the CNPC Group and to cater for the needs of both parties. Pursuant to the Third Supplemental Agreement, the Group agreed to provide the following products and services to the CNPC Group:

(i) supply of crude oil, natural gas, refined oil products, chemical products and other ancillary or similar products;
(ii) engineering services including construction (including installation) of pipelines, gas-stations and other similar facilities, engineering and design, project management and supervision, equipment repairing and maintenance,

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equipment antiseptic testing, technical know-how (such as patent, know-how and software relating to the captioned services) and information services and other related or similar services;

(iii) leasing services including leasing of certain offices, commercial building, warehouses and other related or similar services;
(iv) production services including data management and filing services, asset leasing, environmental sanitation, repair and upgrade of equipment, transportation, maintenance of access roads and other related or similar services; and
(v) logistics support services including procurement agency, quality inspection, storage and delivery and other related or similar services.

General principles, price and terms

The transactions under the Third Supplemental Agreement shall be carried out with reference to the general principles under the Master Agreement, for avoidance of doubts, both parties agree the following:

(i) the products and services shall be of good quality and the price of the products and services shall be fair and reasonable. The terms and conditions on which such products and services to be provided to the CNPC Group shall be no less favourable than those (a) offered by the Group to independent third parties; and (b) offered by independent third parties to the CNPC Group for similar products and services;
(ii) the CNPC Group and the Group shall enter into individual implementation agreements in relation to each type of products and services setting out detailed terms and conditions for providing such products and services; and
(iii) the quality, price and other terms and conditions for the provision of the products and services by the Group to the CNPC Group shall be no less favourable than those offered by independent third parties to the Group.

Price Determination

The pricing for such general products and services to be provided under the Third Supplemental Agreement shall be based on the following general principles:

(i) the price (the “ New Relevant Market Price ”) shall not exceed the best price among all the prices as offered by all the independent third parties in the relevant market or nearby market in the ordinary course of business (“ Best Market Price ”). If the Group provides the relevant

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products or services at a price lower than the Best Market Price to independent third parties in such markets, such lower price shall be the New Relevant Market Price; and

(ii) in the absence of the New Relevant Market Price, the price shall be set at the agreed contractual price (“ Agreed Contractual Price ”), being the aggregate value of the actual costs of all products and services to be provided under the Master Agreement which are required to be priced at agreed contractual prices during the relevant year plus an additional margin of not more than 3%. The Directors consider that such margin is reasonable to cover any administrative costs and handling charges incurred by the Group in providing such products and services.

As disclosed in the announcement and circular of the Company dated 31 December 2010 and 19 February 2011 respectively, upon completion of the Beijing Gas Pipeline Acquisition, the following products and services which are being provided by PetroChina Beijing Gas Pipeline Co., Ltd. to the CNPC Group will also be grouped under this category of Continuing Connected Transactions (i.e. Category (e)):

(i) transportation of natural gas; and
(ii) leasing services, including leasing of certain offices, commercial building, etc.

From our discussion with the Management, we understand that the pricing terms of this category are determined with reference to the relevant standard of charges published by the PRC Government from time to time or the Best Market Price. Furthermore, the CNPC Group is the largest natural gas supplier in the PRC and the Management advised that the Group agreed to offer the aforesaid terms and conditions to the CNPC Group in order to maintain the long and smooth co-operation history between the Group and the CNPC. The Management considered that the pricing terms of the Master Agreement are generally on normal commercial terms, only when there is an absence of New Relevant Market Price, the price shall be set at the Agreed Contractual Price, which the Management considered is reasonable to cover the administrative costs and handling charges incurred by the Group in providing such products and services. The Management confirmed that for each of the two years ended 31 December 2010 and the six months ended 30 June 2011, the Company has not experienced situation in which there is an absence of New Relevant Market Price.

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LETTER FROM FIRST SHANGHAI

We have reviewed the relevant agreements, the relevant supporting documents (among others, the announcements published by the National Development and Reform Commission) and the letter containing the findings and conclusions in respect of the Continuing Connected Transactions for the year ended 31 December 2010 issued by the independent auditors of the Company, PricewaterhouseCoopers, and discussed with the Management the pricing terms of this category.

Having considered that: (i) the pricing terms of this category are determined with reference to the relevant standard of charges published by the PRC Government from time to time or the Best Market Price; (ii) for each of the two years ended 31 December 2010 and the six months ended 30 June 2011, the Company has not experienced situation in which there is an absence of New Relevant Market Price; (iii) the Agreed Contractual Price were determined based on arm’s length negotiation and applied to all the products and services provided by both the Group to the CNPC Group as well as the CNPC Group to the Group; and (iv) the CNPC Group is the largest natural gas supplier in the PRC and it would be crucial for the Group to maintain good connection with the CNPC Group judging from their existing business relationship, we consider that the pricing terms for this category are on normal commercial terms and are fair and reasonable.

3. Proposed Annual Caps of the Continuing Connected Transactions

The table below shows (i) the historical transaction amounts of the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the two years ended 31 December 2010 and the six months ended 30 June 2011; and (ii) the Proposed Annual Caps of the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014:

			Proposed Annual Caps	Proposed Annual Caps
Category of			Year ending	Year ending	Year ending
Continuing Connected		Historical	31 December	31 December	31 December
Transactions		Amounts	2012	2013	2014
(a)	Provision of	For each of the two	HK$15,291	HK$12,241	HK$12,521
	products and	years ended 31	million	million	million
	services by the	December 2010
	CNPC Group to	and the six months
	the Group under	ended 30 June
	the PSAs, the	2011,
	Master Agreement,	approximately
	and for the	HK$1,033 million,
	avoidance of doubt	HK$1,871 million
	including those	and HK$1,718
	under the Second	million respectively
	Supplemental
	Agreement but
	excluding the Oil
	and Gas Products

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LETTER FROM FIRST SHANGHAI

			Proposed Annual Caps	Proposed Annual Caps
Category of			Year ending	Year ending	Year ending
Continuing Connected		Historical	31 December	31 December	31 December
Transactions		Amounts	2012	2013	2014
(b)	Purchase of the	For each of the two	HK$5,222	HK$5,991	HK$6,873
	Group’s share of	years ended 31	million	million	million
	crude oil by the	December 2010
	CNPC Group under	and the six months
	the PSAs	ended 30 June
		2011,
		approximately
		HK$2,080 million,
		HK$2,823 million
		and HK$2,020
		million respectively
(d)	Purchase of Oil	For each of the two	HK$15,498	HK$24,822	HK$40,282
	and Gas Products	years ended 31	million	million	million
	by the Group under	December 2010
	the Second	and the six months
	Supplemental	ended 30 June
	Agreement	2011,
		approximately
		HK$972 million,
		HK$1,795 million
		and HK$1,785
		million respectively
(e)	Provision of	For each of the two	HK$6,525	HK$8,896	HK$14,071
	products and	years ended 31	million	million	million
	services by the	December 2010
	Group to the	and the six months
	CNPC Group under	ended 30 June
	the Third	2011,
	Supplemental	approximately nil,
	Agreement	HK$431 million
		and HK$600
		million respectively

Category (a) – Provision of general products and services by the CNPC Group to the Group (other than Oil and Gas Products)

As calculated from the table above, the Proposed Annual Caps for Category (a) for each of the three years ending 31 December 2014 increase by approximately 345.0%, -19.9% and 2.3% as compared with the annualised amount for the year ending 31 December 2011 based on the amount for the six months ended 30 June 2011, the Proposed Annual Caps for the year ending 31 December 2012 and the Proposed Annual Caps for the year ending 31 December 2013.

As advised by the Management, the Proposed Annual Caps for Category (a) for each of the three years ending 31 December 2014 are determined based on the followings:

(i) the historical amount of provision of general products and services by CNPC Group to the Group (other than Oil and Gas Products) purchased by the Group and the historical growth rate. According to the annual reports of the

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LETTER FROM FIRST SHANGHAI

Company, the provision of general products and services by CNPC Group to the Group (other than Oil and Gas Products) by the Group from CNPC Group for each of the two years ended 31 December 2010 and the six months ended 30 June 2011 were approximately HK$1,033 million, HK$1,871 million and HK$1,718 million respectively, which represent a compound annual growth rate of approximately 82.4% for the two years ended 31 December 2010 and the annualised amount for the six months ended 31 June 2011;

(ii) the expected growth of businesses of the Group. According to the Interim Report 2011 of the Company (“ Interim Report 2011 ”), the Group listed the LNG business as the prior development project and will identify more investment opportunities that are in line with the Group’s direction in the natural gas business area. As stated in the Letter from the Board, it is the Group’s plan to further venture into and expand its business in the city gas, vehicle gas and related businesses through organic growth of the subsidiaries of the Group. As advised by the Management, based on the Group’s natural gas business development plan, the Group intends to increase its transmission, storage capacity, processing capacity and natural gas sales capacity (“ Production Capacity ”) through construction of CNG stations, LNG stations, LNG processing plants and natural gas distribution pipelines as well as further development of the Group’s existing LNG Terminals. With the Group’s natural gas business development plan, the expected amount under this category is expected to increase considerably in the following years;
(iii) the inflation rate. The Company has assumed an inflation rate of approximately 6% for each of the three years ending 31 December 2014. Based on data obtained from National Bureau of Statistics of China, the average inflation rate in the PRC is approximately 5.7% for the nine months ended 30 September 2011 and hit approximately 6.5% in July 2011; and
(iv) the potential appreciation of RMB against HK$. The Company has assumed that the appreciation rate of RMB against HK$ will be approximately 3.5% for each of the three years ending 31 December 2014. Based on data obtained from Bloomberg, the average exchange rate of HK$/RMB for the year ended 31 December 2010 and the nine months ended 30 September 2011 is approximately 1.148 and 1.190 respectively, representing an appreciation of approximately 3.7%.

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LETTER FROM FIRST SHANGHAI

rate of the PRC is in line with our founding as set out in (iii) above; and (2) obtained historical data regarding the exchange rate on RMB against HK$ from Bloomberg and noted that the Company’s assumption on the appreciation rate of RMB against HK$ is in line with our founding as set out in (iv) above.

After taking into account the above factors, we are of the view that the Proposed Annual Caps in relation to Category (a) – the provision of general products and services by the CNPC Group to the Group (other than Oil and Gas Products) are reasonably determined so far as the Independent Shareholders are concerned.

Category (b) – Purchase of the Group’s Share of Crude Oil by the CNPC Group

As calculated from the table above, the Proposed Annual Caps for Category (b) for each of the three years ending 31 December 2014 increase by approximately 29.3%, 14.7% and 14.7% as compared with the annualised amount for the year ending 31 December 2011 based on the amount for the six months ended 30 June 2011, the Proposed Annual Caps for the year ending 31 December 2012 and the Proposed Annual Caps for the year ending 31 December 2013.

As advised by the Management, the Proposed Annual Caps for Category (b) for each of the three years ending 31 December 2014 are determined based on the followings:

(i) the historical level of price of the Group’s share of crude oil paid by the CNPC Group to the Group. According to the annual reports of the Company, the sales volume of crude oil of the Group for the each of the two years ended 31 December 2010 and six months ended 30 June 2011 were 16.20 million barrels, 16.38 million barrels and 8.37 million barrels respectively. The Management estimates that the sales volume in each of the three years ending 31 December 2014 will remain approximately the same as the historical level. Such estimation is consistent with the historical sales of crude oil by the Group to the CNPC Group;
(ii) the prevailing market price of similar grade crude oil with reference to the trend of the international oil prices. We noted that the price of crude oil has been highly volatile in the recent years. Based on data obtained from Bloomberg, average price of brent crude oil increased from approximately US$85.7 per barrel for the year ended 31 December 2010 to approximately US$110.2 per barrel for the six months ended 30 June 2011, representing an increase of approximately 28.6%;
(iii) the inflation rate. The Company has assumed an inflation rate of approximately 6% for each of the three years ending 31 December 2014. Based on data obtained from National Bureau of Statistics of China, the average inflation rate in the PRC is approximately 5.7% for the nine months ended 30 September 2011 and hit approximately 6.5% in July 2011; and

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LETTER FROM FIRST SHANGHAI

(iv) the potential appreciation of RMB against HK$. The Company has assumed that the appreciation rate of RMB against HK$ will be approximately 3.5% for each of the three years ending 31 December 2014. Based on data obtained from Bloomberg, the average exchange rate of HK$/RMB for the year ended 31 December 2010 and the nine months ended 30 September 2011 is approximately 1.148 and 1.190 respectively, representing an appreciation of approximately 3.7%.

After taking into account the above factors, we are of the view that the Proposed Annual Caps in relation to Category (b) – the purchase of the Group’s Share of Crude Oil by the CNPC Group are reasonably determined so far as the Independent Shareholders are concerned.

Category (d) – Purchase of Oil and Gas Products

As calculated from the table above, the Proposed Annual Caps for Category (d) for each of the three years ending 31 December 2014 increase by approximately 334.1%, 60.2% and 62.3% as compared with the annualised amount for the year ending 31 December 2011 based on the amount for the six months ended 30 June 2011, the Proposed Annual Caps for the year ending 31 December 2012 and the Proposed Annual Caps for the year ending 31 December 2013.

As advised by the Management, the Proposed Annual Caps for Category (d) for each of the three years ending 31 December 2014 are determined based on the followings:

(i) the historical amount of Oil and Gas Products purchased by the Group and historical growth rate. According to the annual reports of the Company, the purchase of Oil and Gas Products by the Group from CNPC Group for each of the two years ended 31 December 2010 and the six months ended 30 June 2011 were approximately HK$972 million, HK$1,795 million and HK$1,785 million respectively, which represent a compound annual growth rate of approximately 91.6% for the two years ended 31 December 2010 and the annualised amount for the six months ended 31 June 2011;
(ii) the expected growth of businesses of the Group. As mentioned in Category (a) – provision of general products and services by the CNPC Group to the Group (other than Oil and Gas Products) above, the Group intends to increase its Production Capacity. According to the Annual Report 2010 of the Company and Interim Report 2011, the number of LNG stations increased from 10 stations in 31 December 2010 to 62 stations in 30 June 2011 and the number of CNG stations increased from 141 stations in 31 December 2010 to 189 stations in 30 June 2011. Accordingly, based on such rapid development, the Company projects that its demands for Oil and Gas Products would increase considerably in the following years; furthermore, as stated in the Letter of the Board, with the completion of the Beijing Gas Pipeline Acquisition, the annual expenditure for using the products from CNPC Group will be aggregated with the Proposed Annual Caps under this

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LETTER FROM FIRST SHANGHAI

category. Therefore, the annual expenditure for using products from the CNPC Group will increase the annual cap figures for the existing Continuing Connected Transactions regarding this category under the Master Agreement.

(iii) the inflation rate. The Company has assumed an inflation rate of approximately 6% for each of the three years ending 31 December 2014. Based on data obtained from National Bureau of Statistics of China, the average inflation rate in the PRC is approximately 5.7% for the nine months ended 30 September 2011 and hit approximately 6.5% in July 2011; and
(iv) the potential appreciation of RMB against HK$. The Company has assumed that the appreciation rate of RMB against HK$ will be approximately 3.5% for each of the three years ending 31 December 2014. Based on data obtained from Bloomberg, the average exchange rate of HK$/RMB for the year ended 31 December 2010 and the nine months ended 30 September 2011 is approximately 1.148 and 1.190 respectively, representing an appreciation of approximately 3.7%.

To access the fairness and reasonableness of the Proposed Annual Caps for this category, we have reviewed and discussed with the Management the construction schedule of the facilities and the natural gas business development plan in relation to the increase in the Group’s Production Capacity. We noted that the expected purchase of natural gas products is substantially increased with the construction of CNG stations, LNG stations and LNG processing plants in the year ending 31 December 2012, furthermore with the commencement of operation of the Group’s LNG terminals, the expected purchase of natural gas products will increase even more. Furthermore, with the completion of the Beijing Gas Pipeline Acquisition, the annual expenditure for using products from the CNPC Group will increase the annual cap figures for the existing Continuing Connected Transactions regarding this category under the Master Agreement. Also we obtained: (1) historical data regarding the inflation rate of the PRC from National Bureau of Statistics of China and noted that the Company’s assumption on inflation rate of the PRC is in line with our founding as set out in (iii) above; and (2) obtained historical data regarding the exchange rate on RMB against HK$ from Bloomberg and noted that the Company’s assumption on the appreciation rate of RMB against HK$ is in line with our founding as set out in (iv) above.

After taking into account the above factors, we are of the view that the Proposed Annual Caps in relation to Category (d) – the purchase of Oil and Gas Products are reasonably determined so far as the Independent Shareholders are concerned.

Category (e) – Provision of general products and services by the Group to the CNPC Group

As calculated from the table above, the Proposed Annual Caps for category (e) for each of the three years ending 31 December 2014 increase by approximately 443.8%, 36.3% and 58.2% as compared with the annualised amount for the year ending 31

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LETTER FROM FIRST SHANGHAI

December 2011 based on the amount for the six months ended 30 June 2011, the Proposed Annual Caps for the year ending 31 December 2012 and the Proposed Annual Caps for the year ending 31 December 2013.

As advised by the Management, the Proposed Annual Caps for Category (e) for each of the three years ending 31 December 2014 are determined based on the followings:

(i) the historical amount for the provision of general products and services by the Group to the CNPC Group and the historical growth rate. According to the annual reports of the Company, the historical amount for the provision of general products and services by the Group to the CNPC Group for each of the two years ended 31 December 2010 and the six months ended 30 June 2011 were approximately Nil, HK$431 million and HK$600 million respectively, which represent an annual growth rate of approximately 178.4% for the year ended 31 December 2011 and the annualised amount for the six months ended 31 June 2011;
(ii) the expected growth of businesses of the Group. As mentioned in Category (a) – provision of general products and services by the CNPC Group to the Group (other than Oil and Gas Products) above, the Group intends to increase its Production Capacity which will increase the Group’s capability in providing services to the CNPC Group. As stated in the Letter of the Board, the LNG terminal in Jiangsu has commenced operation and it has a transmission capacity of 3.5 million tonne/annum; and another LNG terminal in Dalian has a transmission capacity of 3 million tonne/annum and is currently under trial operation, these two terminals primarily provide loading, unloading, storage and re-gasification services to the CNPC Group;
(iii) the inflation rate. The Company has assumed an inflation rate of approximately 6% for each of the three years ending 31 December 2014. Based on data obtained from National Bureau of Statistics of China, the average inflation rate in the PRC is approximately 5.7% for the nine months ended 30 September 2011 and hit approximately 6.5% in July 2011; and
(iv) the potential appreciation of RMB against HK$. The Company has assumed that the appreciation rate of RMB against HK$ will be approximately 3.5% for each of the three years ending 31 December 2014. Based on data obtained from Bloomberg, the average exchange rate of HK$/RMB for the year ended 31 December 2010 and the nine months ended 30 September 2011 is approximately 1.148 and 1.190 respectively, representing an appreciation of approximately 3.7%.

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LETTER FROM FIRST SHANGHAI

and the commencement of operation of the Group’s two LNG terminals, the Group’s Production Capacity will be substantially increased, and hence the Group’s capability in providing services to the CNPC Group will also be substantially increased. The Management expected that the total provision of products and services by the Group to the CNPC Group will be substantially increased. Also we obtained: (1) historical data regarding the inflation rate of the PRC from National Bureau of Statistics of China and noted that the Company’s assumption on inflation rate of the PRC is in line with our founding as set out in (iii) above; and (2) obtained historical data regarding the exchange rate on RMB against HK$ from Bloomberg and noted that the Company’s assumption on the appreciation rate of RMB against HK$ is in line with our founding as set out in (iv) above.

After taking into account the above factors, we are of the view that the Proposed Annual Caps in relation to Category (e) – the provision of general products and services by the Group to the CNPC Group are reasonably determined so far as the Independent Shareholders are concerned.

4. Listing Rules implications

Under the Listing Rules, each year, the independent non-executive directors of the Company (“Independent Non-Executive Directors”) must review the transactions under the PSAs and Master Agreement (as amended) and confirm in the Company’s annual report and accounts that the same have been entered into:

(1) in the ordinary and usual course of business of the Company;
(2) either on normal commercial terms or, if there are not sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the Company than terms available to or from (as appropriate) Independent Third Parties; and
(3) on terms that are fair and reasonable and in the interests of the Shareholders as a whole.

The Company will also be required to comply with all other continuing obligations under the Listing Rules, including confirmation from its auditor that the Proposed Annual Caps have not been exceeded. In addition, in respect of the written agreements to be entered into, to the extent that the terms are materially different from those of the existing written agreement, the Company shall re-comply with the reporting, announcement and independent shareholders’ approval requirements under Rules 14A.45 to 14A.48 of the Listing Rules and/ or any other applicable Listing Rules at the relevant time.

With the stipulation of the above requirements for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) pursuant to the Listing Rules, we are of the view that there adequate measures in place to monitor the transactions contemplated under the Continuing Connected Transactions (including the Proposed Annual Caps) and hence the interest of the Independent Shareholders would be safeguarded.

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LETTER FROM FIRST SHANGHAI

RECOMMENDATION

Having considered the above, we are of the opinion that the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, the Continuing Connected Transactions under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014 are fair and reasonable and are in the interests of the Company and the Shareholders as a whole. We also consider that the Proposed Annual Caps of Continuing Connected Transactions under Categories (a), (b), (d) and (e) are are fair and reasonable. Accordingly, we would advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolutions in respect of the Fourth Supplemental Agreement, the Continuing Connected Transactions and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for each of the three years ending 31 December 2014 to be proposed at the SGM, and we also recommend the Independent Shareholders to vote in favour of the relevant resolutions to approve the aforesaid matters at the SGM.

Yours faithfully, For and on behalf of First Shanghai Capital Limited

Eric Lee Fanny Lee Managing Director Managing Director

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GENERAL INFORMATION

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes the particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief, the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. DIRECTORS’ INTERESTS

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) are required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which any such Director and chief executive of the Company is taken or deemed to have under such provisions of the SFO); or which (b) are required, pursuant to section 352 of the SFO, to be entered in the register maintained by the Company; or which (c) are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, to be notified to the Company and the Stock Exchange are set out below.

2.1 Ordinary Shares of HK$0.01 Each of the Company

		Capacity and	Percentage
	Number of	Nature of	of Issued
Name	Shares	Interests	Shares
Li Hualin(1)	14,000,000	Beneficial owner	0.28%
Li Kwok Sing Aubrey(1)	1,000,000	Beneficial owner	0.02%

Notes:

(1) The interests held by Mr. Li Hualin and Mr. Li Kwok Sing Aubrey, represent long position in the Shares of the Company.

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GENERAL INFORMATION

2.2 Share Options

Shares options were granted to the Directors, chief executives and employees of the Company under the executive share option scheme approved by the Board on 3 June 2002, details of which are set out below:

						Outstanding	Outstanding
			Outstanding				at the
				at	Number	Share	Latest
			Exercise	1 January	of	Options	Practicable
Name	Date of Grant	Exercise Period	Price	2011	Granted	Exercised	Date
			HK$	’000	’000	’000	’000
Directors
Li Hualin	8 January 2007	8 April 2007 –	4.186	25,000	–	–	25,000
		7 January 2012
	26 May 2008	26 August 2008 –	4.240	3,200	–	–	3,200
		25 May 2013
	26 March 2009	26 June 2009 –	3.250	3,200	–	–	3,200
		25 March 2014
	26 March 2010	26 June 2010 –	10.320	3,200	–	–	3,200
		25 March 2015
	18 March 2011	18 June 2011 –	11.730	–	3,200	–	3,200
		17 March 2016
Zhang Bowen	8 January 2007	8 April 2007 –	4.186	20,000	–	–	20,000
		7 January 2012
	26 May 2008	26 August 2008 –	4.240	2,400	–	–	2,400
		25 May 2013
	26 March 2009	26 June 2009 –	3.250	2,400	–	–	2,400
		25 March 2014
	26 March 2010	26 June 2010 –	10.320	2,400	–	–	2,400
		25 March 2015
	18 March 2011	18 June 2011 –	11.730	–	2,400	–	2,400
		17 March 2016
Cheng Cheng	8 January 2007	8 April 2007 –	4.186	10,000	–	–	10,000
		7 January 2012
	26 May 2008	26 August 2008 –	4.240	1,500	–	–	1,500
		25 May 2013
	26 March 2009	26 June 2009 –	3.250	1,500	–	–	1,500
		25 March 2014
	26 March 2010	26 June 2010 –	10.320	1,500	–	–	1,500
		25 March 2015
	18 March 2011	18 June 2011 –	11.730	–	1,500	–	1,500
		17 March 2016

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GENERAL INFORMATION

Name Date of Grant Exercise Period Exercise Price Outstanding at 1 January 2011 HK$ ’000 Lau Wah Sum 26 March 2010 26 June 2010 – 25 March 2015 10.320 400 Li Kwok Sing Aubrey 26 March 2010 26 June 2010 – 25 March 2015 10.320 400 Liu Xiao Feng 26 March 2010 26 June 2010 – 25 March 2015 10.320 400 77,500 - - - - - - - Employees 8 January 2007 8 April 2007 – 7 January 2012 4.186 25,000 14 September 2007 14 December 2007 – 13 September 2012 4.480 20,000 26 May 2008 26 August 2008 – 25 May 2013 4.240 7,000 26 March 2009 26 June 2009 – 25 March 2014 3.250 7,000 26 March 2010 26 June 2010 – 25 March 2015 10.320 7,000 18 March 2011 18 June 2011 – 17 March 2016 11.730 – 66,000 - - - - - - - ------------------------- 143,500	Number of Granted Share Options Exercised Outstanding at the Latest Practicable Date ’000 ’000 ’000 – – 400 – – 400 – – 400 7,100 – 84,600 - - - - - - - - - - - - - - - - - - - - - – (7,094) 17,906 – – 20,000 – – 7,000 – – 7,000 – – 7,000 7,000 – 7,000 7,000 (7,094) 65,906 - - - - - - - ------------------------- - - - - - - - ------------------------- - - - - - - - ------------------------- 14,100 (7,094) 150,506	Number of Granted Share Options Exercised Outstanding at the Latest Practicable Date ’000 ’000 ’000 – – 400 – – 400 – – 400 7,100 – 84,600 - - - - - - - - - - - - - - - - - - - - - – (7,094) 17,906 – – 20,000 – – 7,000 – – 7,000 – – 7,000 7,000 – 7,000 7,000 (7,094) 65,906 - - - - - - - ------------------------- - - - - - - - ------------------------- - - - - - - - ------------------------- 14,100 (7,094) 150,506
		84,600 - - - - - - - 17,906 20,000 7,000 7,000 7,000 7,000
		65,906 - - - - - - - ------------------------- 150,506

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, pursuant to section 352 of the SFO, to be entered in the register maintained by the Company; or which (c) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules, to be notified to the Company or the Stock Exchange, and none of the Directors, nor their spouse or children under the age of 18,

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GENERAL INFORMATION

had any right to subscribe for securities of the Company, or had exercised any such right since 31 December 2010 (being the date of the Company’s latest published audited accounts).

2.3 Competing Business

Save as disclosed below, as at the Latest Practicable Date, none of the Directors and their respective associates had any interest in a businesses 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 were a controlling shareholder):

Name of Nature of Name of director company Nature of interest competing business Mr Li Hualin PetroChina Vice-President, Exploration, Company Secretary development and and authorised production and representative marketing of crude oil and natural gas

As the Board of Directors is independent of the board of the above entity, the Company has therefore been capable of carrying on its businesses independently of, and at arm’s length from, the above business.

2.4 Additional Disclosure of Interest

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

Save as disclosed herein, none of the Directors, directly or indirectly, has had any interest in any assets which had since 31 December 2010 (being the date to which the latest published audited financial statements of the Company were made up) been acquired or disposed of by or leased to any member of the Group, or were proposed to be acquired or disposed of by or leased to any member of the Group.

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GENERAL INFORMATION

3. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, the register of substantial shareholders maintained under section 336 of the SFO, showed 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.

	Number of Shares	Number of Shares	Percentage of the total number of
Name	Direct Interest	Indirect Interest	Shares in issue
Sun World Limited (“Sun World”)(1)	2,513,917,342 (L)	–	50.67%
PetroChina Hong Kong (BVI) Ltd.	–	2,513,917,342 (L)	50.67%
(“PetroChina (BVI)”)(1)
PetroChina Hong Kong Ltd.	–	2,513,917,342 (L)	50.67%
(“PetroChina Hong Kong”)(1)
PetroChina Company Limited(1)	–	2,513,917,342 (L)	50.67%
China National Oil and Gas	–	297,924,000 (L)	6.01%
Exploration and Development
Corporation (“CNODC”)(2)
CNPC International Ltd.	–	297,924,000 (L)	6.01%
(“CNPCI”)(2)
Fairy King Investments Ltd.	297,924,000 (L)	–	6.01%
China National Petroleum Corporation	–	2,811,841,342 (L)	56.68%
(“CNPC”)(1)(2)

Notes:

(1) Sun World is a wholly-owned subsidiary of PetroChina (BVI), which in turn is wholly owned by PetroChina Hong Kong. PetroChina Hong Kong is wholly owned by PetroChina, which is in turn owned as to 86.35% by CNPC. Accordingly, CNPC is deemed to have interest in the 2,513,917,342 shares held by Sun World. Mr. Li Hualin, the Chairman of the Company and Mr. Zhang Bowen, the President of the Company are also directors of Sun World, which is a substantial shareholder of the Company (within the meaning of Part XV of the SFO).
(2) Fairy King Investments Ltd. is a wholly-owned subsidiary of CNPCI, which in turn is wholly owned by CNODC, which is in turn owned as to 100.00% by CNPC. Accordingly, CNPC is deemed to have interest in the 297,924,000 shares held by Fairy King Investments Ltd.

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 interest or short position in the Shares or underlying Shares of the Company which would fall to be disclosed to the Company under Divisions 2 and 3 of Part XV of the SFO.

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 was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group, or any options in respect of such capital.

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GENERAL INFORMATION

4. SERVICE CONTRACT

As at the Latest Practicable Date, none of the Directors or proposed directors had any existing service contract or proposed service contract with the Company or any of its subsidiaries (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation)).

5. MATERIAL ADVERSE CHANGE

The Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2010 (being the date to which the latest published financial statements of the Company have been made up) and up to the Latest Practicable Date.

6. QUALIFICATION AND CONSENT OF EXPERTS

First Shanghai is a licensed corporation licensed to carry out Type 6 (advising on corporate finance) regulated activity as defined under the SFO.

First Shanghai has given and has not withdrawn its written consent to the issue of this circular with its letter included in the form and context in which it is included.

As at the Latest Practicable Date, First Shanghai did not have any shareholding in any member of the Group nor did they have any right (whether legally enforceable or not) to subscribe for securities in any member of the Group.

First Shanghai did not, directly or indirectly, have any interest in any assets which had since 31 December 2010 (being the date to which the latest published audited financial statements of the Company 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.

7. MISCELLANEOUS

(a) The company secretary of the Company is Mr. Lau Hak Woon. Mr. Lau Hak Woon is a member of Hong Kong Institute of Certified Public Accountants in Hong Kong, fellow member of The Chartered Association of Certified Accountants in UK and Certified Management Accountant of the Society of Management Accountants of Ontario in Canada.
(b) The registered office of the Company is at Clarendon House, Church Street, Hamilton HM11, Bermuda.
(c) The Hong Kong branch share registrar and transfer office of the Company is Tricor Secretaries Limited at 26/F., Tesbury Centre, 28 Queen’s Road East, Hong Kong.
(d) All references to times in this circular refer to Hong Kong times.

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GENERAL INFORMATION

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

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during business hours at the principal place of business of the Company in Hong Kong at 39th Floor, 118 Connaught Road West, Hong Kong from the date of this circular up to and including 30 November 2011:

(i) the Master Agreement, the First Supplemental Agreement, the Second Supplemental Agreement and the Third Supplemental Agreement;
(ii) the Fourth Supplemental Agreement;
(iii) the Leng Jiapu Entrustment Contract,
(iv) the Liaohe Contract;
(v) the Xinjiang Contract;
(vi) the “Letter from the Independent Board Committee” as set out in this circular;
(vii) the “Letter from First Shanghai” as set out in this circular; and
(viii) this circular.

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NOTICE OF THE SGM

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KUNLUN ENERGY COMPANY LIMITED
(incorporated in Bermuda with limited liability)
昆侖能源有限公司
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(Stock Code: 00135)

NOTICE OF SGM

NOTICE IS HEREBY GIVEN that the SGM of Kunlun Energy Company Limited (the “ Company ”) will be convened at the Harbour View Room III, 3/F., The Excelsior, Hong Kong, 281 Gloucester Road, Causeway Bay, Hong Kong on 1 December 2011, Thursday at 11:00 a.m. for the purpose of considering and, if thought fit, passing with or without modifications, the following resolutions as ordinary resolutions.

Unless otherwise indicated, capitalized terms used in this notice and the following resolutions shall have the same meanings as those defined in the circular of the Company dated 16 November 2011 relating to, amongst other things, the Fourth Supplemental Agreement and the Proposed Annual Caps (the “ Circular ”).

“ THAT :
(a) the entering into of the Fourth Supplemental Agreement and the transactions contemplated thereunder, details of which are more particularly described in the Circular, be and is hereby approved, ratified and confirmed; and
(b) the Board be and is hereby authorised to implement the transactions under the Fourth Supplemental Agreement.
(a) the Continuing Connected Transactions under Categories (a), (b), (d) and (e) as set out in the “Letter from the Board” in the Circular be and are hereby approved; and
(b) the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for the three financial years commencing on 1 January 2012 to 31 December 2014 as set out in the “Letter from the Board” in the Circular be and are hereby approved; and
(c) any one director (if execution under the common seal of the Company is required, any two directors) of the Company be and is/are hereby authorised for and on behalf of the Company to sign, and where required, to affix the common seal of the Company to any documents, instruments or agreements, and to do any acts and things deemed by him to be necessary or expedient in

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NOTICE OF THE SGM

order to give effect to and implement the Continuing Connected Transaction under Categories (a), (b), (d) and (e) and the Proposed Annual Caps for the Continuing Connected Transactions under Categories (a), (b), (d) and (e) for the three financial years commencing from 1 January 2012 to 31 December 2014.

By Order of the Board Lau Hak Woon Company Secretary

Hong Kong, 16 November 2011

Notes:

A member entitled to attend and vote at the meeting is entitled to appoint one or more proxies to attend and vote in his/her stead. A proxy need not be a member of the Company. Completion and return of the proxy form will not preclude a member from attending and voting in person at the meeting or any adjourned meeting should he so wish.
To be valid, the proxy form, together with a power of attorney or other authority (if any) under which it is signed or a notarially certified copy of such power of attorney or authority, must be deposited at the Company’s principal office at 39th Floor, 118 Connaught Road West, Hong Kong not less than 48 hours before the time appointed for holding the meeting or adjourned meeting (as the case may be). The proxy form must be completed strictly in accordance with the instructions set out therein.
CNPC and its associates (including PetroChina) will abstain from voting in respect of all the resolutions set out above.
Unless otherwise defined, terms used in this notice shall have the same meanings as those defined in the Circular.

As at the date of this notice, the board of directors of the Company comprises Mr. Li Hualin as the Chairman and Executive Director, Mr. Zhang Bowen as the President and Executive Director and Mr. Cheng Cheng as the Senior Vice President and Executive Director, and Dr. Lau Wah Sum, Mr. Li Kwok Sing Aubrey and Dr. Liu Xiao Feng as Independent Non-Executive Directors.

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AI assistant

Raymond Industrial Limited — Proxy Solicitation & Information Statement 2011

49052_rns_2011-11-16_ea696c34-2fcb-4dea-b774-95b2bea94cf6.pdf

CONTINUING CONNECTED TRANSACTIONS

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

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

KUNLUN ENERGY COMPANY LIMITED (incorporated in Bermuda with limited liability) 昆侖能源有限公司

(Stock Code: 00135)

Independent Non-executive Directors

To the Shareholders

CONTINUING CONNECTED TRANSACTIONS

1. INTRODUCTION

LETTER FROM THE BOARD

2. FOURTH SUPPLEMENTAL AGREEMENT

3. CONTINUING CONNECTED TRANSACTIONS

3.1.1 Categories of Continuing Connected Transactions

Nature of Transactions

The PSAs

LETTER FROM THE BOARD

Synopsis:

(ii) The Liaohe Contract

Synopsis:

The Master Agreement

Price determination

Other rights and obligations

Price determination

(ii) Category (b) – Purchase of the Group’s Share of Crude Oil by the CNPC Group

Nature of Transactions

Price Determination

(iii) Category (c) – Rental Payments

Nature of Transactions

Price Determination

Other rights and obligations

(iv) Category (d) – Purchase of Oil and Gas Products

Nature of Transactions

LETTER FROM THE BOARD

Purchase of Oil and Gas Products and other services by the Group

Price Determination

(v) Category (e) – Provision of general products and services by the Group to the CNPC Group

Nature of Transactions

General principles, price and terms

Price Determination

Other rights and obligations

3.1.2 Proposed Annual Caps

LETTER FROM THE BOARD

LETTER FROM THE BOARD

3.1.3 Basis of determination of the Proposed Annual Caps

(i) Category (a) – Provision of general products and services by the CNPC Group to the Group (other than Oil and Gas Products)

(ii) Category (b) – Purchase of the Group’s Share of Crude Oil by the CNPC Group

(iii) Category (c) – Rental Payments

(iv) Category (d) – Purchase of Oil and Gas Products

(v) Category (e) – Provision of general products and services by the Group to the CNPC Group

3.2 Requirements of the Listing Rules

4. REASONS FOR, AND BENEFITS, OF THE EXISTING CONTINUING CONNECTED TRANSACTIONS

5. INFORMATION ON THE GROUP AND OTHER PARTIES

(a) Information on the Group

(b) Information on CNPC

(c) Information on PetroChina

6. SGM

7. RECOMMENDATION

8. ADDITIONAL INFORMATION

CONTINUING CONNECTED TRANSACTIONS

FIRST SHANGHAI CAPITAL LIMITED

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM FIRST SHANGHAI

BASIS OF OPINION

LETTER FROM FIRST SHANGHAI

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Reasons for the entering into of the Fourth Supplemental Agreement, the Continuing Connected Transactions and the Proposed Annual Caps

LETTER FROM FIRST SHANGHAI

2. Basis of price determination

(i) Category (a) – Provision of general products and services from the CNPC Group to the Group (other than Oil and Gas Products)

LETTER FROM FIRST SHANGHAI

General principles, price and terms

Raymond Industrial Limited Proxy Solicitation & Information Statement 2011