In 2008, exploration and production of the Group maintained sustainable, effective and sound momentum. The newly added proven geological oil reserves were 299 million tons and the geological reserves of natural gas were 133.1 billion cubic meters. Crude output reached 41.80 million tons and gas output arrived at 8.3 billion cubic meters, both hitting historical highs. The newly added crude oil production capacity was 5.8 million tonnes per year and the newly added capacity of natural gas was 1.33 billion cubic meters.

Oil and Gas Exploration Stabilize production in the east—The exploration in the east was mainly made in the hidden oil and gas reservoirs. The exploration and development have been more combined to guarantee stable reserves growth. The Group carefully explored the oil-bearing belts of the mature oilfi elds such as Dongying sag and Miyang sag. The proven geological oil reserves in the east were 160 million tons and have realized stable growth. The exploration in the “three news” (new belt, new layer and new type oil reservoir) achieved new discoveries. The Qingdong-12 well in the Qingdong sag was for the first time drilled high-yield oil flow, marking a new chapter for exploration in Shengli beach oilfi eld. Successes were also achieved in the primary drillings of such key wells as Shao X14 well in Gaoyou sag, Yaoshen-2 well in Songnan basin and Xinshen-2 well in Jinhu sag. New discoveries were found in the new layers of the mature belts and in the new type of oilfields, paving the way for the growth of new reserves.

Accelerate exploration in the west— The exploration in the west has put emphasis on the Tahe region and has been accelerated. The exploration area of the Aiding region has been enlarged, making the newly added proven oil reserves exceed 110 million tonnes. Great progress was made in exploring Yuqi region and its Yuqi-5 well and Yuqi-3 well were both found high-yield commercial oil fl ow in the Ordovician layer. Besides, the Pai-22 well in Chepaizi region and the Honghe-26 well in Zhenjing block were successfully drilled and have formed the new reserves and production blocks.Develop the southern region—The exploration in the south focused on natural gas exploration in the Sichuan basin where the preliminary exploration in the northeast has been strengthened. Breakthrough was made in the exploration of Nanjiang region where the Jinxi-1 well was found commercial gas flow, indicating the piedmont tectonic belt of the Micang Mountain would promise favorable reservoirs. The Yuanba-2 well in the Yuanba region also found high-yield gas flow. New progress was made in deep exploration of the western Sichuan region. The Xin-10 well in Xinchang region, through utilizing 3-d-3 seismic exploration, was found high-yield industrial gas flow and promised reserves capacity of 100 billion cubic meters.

Meanwhile, through strengthening research, the new recognition and progress were made in such fields as the offshore exploration, the prospective marine research and the unconventional exploration.

Oilfields Development The building of production capacity in new blocks has been smoothly advanced. Taking all factors, including geology, oil reservoir, drilling, oil production, field engineering and economic evaluation, into consideration, the Group aimed at realizing “maximum recovery ratio, maximum economic interest” in expanding its production capacity and has optimized the scheme of building its production capacity.Through popularizing the horizontal well technology across the new blocks, the Group in 2008 drilled 500 horizontal wells, a year-on-year increase of 148 wells than 2007, accounting for 17.1 percent of the total added. Meanwhile, in accordance with the complicated geological characteristics in new blocks, the Group has timely supervised and analyzed the blocks and accordingly adjusted its exploration plans. As a result, the exploration of 28 blocks, including Bin 80, Cha 9 and Miqian 33 blocks, was suspended or postponed, while the expanding reserves exploration in another 33 blocks, including Lin 17-30, Luo 53 and Wen 15 blocks, were newly added. Consequently, the production capacity per 10,000-meter drilling footage increased from 10,100 tons to 10,700 tons and the new blocks’ newly-added production capacity for the full year reached 3.49 million tons, taking up 60 percent of the total added.

The capability of the mature oilfields in steady production was strengthened. In accordance with the characteristics of residual oil in different oil reservoirs and at different development phases, the Group has optimized well pattern on the ground, optimized production intervals vertically and implemented classified management. Through diversifying layer series and rebuilding injectionproduction well pattern, the Group has boosted recovery ratio of ultra-high-water and medium-high permeability reservoirs. Through infilling the well pattern, moderating relationship among water quality, well spacing, formation energy and effective injection, the Group realized integrated and synchronous optimization and adjustment of its facilities, hence improved development of low permeability reservoirs. Through actively leveraging methods in developing viscous oil reservoirs, reinforcing steam injection, utilizing steam-flooding and prolonging production cycle, the yield of the mature oilfi elds was increased. In accordance with the characteristic of large controllable reserves held by shallow-sea Chengdao oilfi eld, the Group modulated the diversifi cation and the infi lling and thus boosted the drilling speed. The Group also intensified water injection into fracture and vug hydrocarbon reservoirs, playing a role in renewing energy and slowing down the degression. The mature blocks in 2008 newly added 14.02 million tons of recoverable reserves and the recovery ratio increased by 0.25 percentage points.

Gasfields Development According to the changes of gas reservoirs, the Group timely optimized and adjusted Puguang Gasfield’s major development plan, cut development of 12 wells and realized 100% success ratio in well drilling. The preparatory work for developing Puguang Gasfield went smoothly and the major projects have been completed. It is expected that the Puguang Gasfield can come onstream in 2009. The Group, utilizing the horizontal well technology, has further matured Dawan development plan for boosting output of the single well and the overall effi ciency of the gasfi eld. In the new plan, the drillings will all adopt the horizontal well technology and the number of the development wells will decrease from 25 to 15 while the daily output of single well aims to increase from 400,000 cubic meters to 860,000 cubic meters. The annual natural gas output is expected to boost from 3.3 billion cubic meters to 3.7 billion cubic meters. The building of production capacity in Songnan Gasfield progressed smoothly. All wells were horizontally developed. There were 13 designed wells and the Yaoping-7 well was found open-flow capacity of 1.67 million cubic meters per day and was able to produce 310,000 cubic meters per day. The trunk pipeline for outward supplies was built and has started operation.