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Operator: Welcome and thank you very much for attending Sinopec'sThird Quarter Results Conference Call. Sinopec is hosting this conference callfrom Beijing and reporting the results are Mr. Dai Houliang, CFO, Mr. Chen Ge,Secretary of the Board of Directors, Mr. Liu Yun, Deputy CFO as well as the headsof certain operations. Before we begin this presentation I would like to remindeverybody of Sinopec's Safe Harbor policy, namely that certain statements madeduring the course of our discussion today may constitute forward-lookingstatements that are based on the management's current expectations and beliefs,which are subject to a number of risks and uncertainties that could causeactual results to differ materially, including risks that may be beyond theCompany's control. Any forward-looking statements made are valid as of todayand Sinopec takes no obligation to update these statements. I would now like to turn the conference over to Mr. Dai. Mr.Dai, you may begin.
Dai Houliang: Ladies and gentlemen, good morning, welcome to Sinopec's thirdquarter 2007 results announcement conference call. We have listed our results,our slides and the webcast. Please refer to these results and the webcast. To save more time I would like to ask Mr. Wang Jiming, theInterpreter of Sinopec, to deliver the third quarter 2007 results in English.Mr. Wang, now please go ahead.
Wang Jiming: Good morning ladies and gentlemen, welcome to Sinopec'sthird quarter 2007 results conference call. During the first three quarters of2007 China's economy maintained rapid growth with GDP up by 11.5% and demandfor petroleum and petrochemical products increased at a good momentum. In Q3 '07, despite the pressure from surging internationalcrude price on our production operation, the Company's strategic production managementand synergized production and marketing, certainly pushed forward keyconstruction projects, focused strong result conservation and emissionreduction, ensured safe production and market supply and achieved very goodoperating results. According to the International Accounting Standard, duringthe first three quarters our revenue totaled CNY875.218 billion, up 13.62% yearon year. EBIT amounted to CNY74.065 billion, up 38.28% year on year. Profit attributed to shareholders reached CNY49.818 billion.EPS was CNY0.575, up 43.21% year on year. As of September 30, 2007 ourshort-term and long-term debt totaled CNY109.725 billion, down CNY4.716 billionthan that of the year beginning. Equity attributed to shareholders were CNY298.907 billion,up 13.72% than the year beginning. During the first three quarters of 2007 cashflows from the operating activities of CNY98.486 billion. Cash flow used in investing activities was CNY69.158billion. Cash and cash equivalent ending balance was CNY8.343 billion, up byCNY1.664 billion than the year beginning. For the Upstream during the past three quarters with astrong crude price, we expedited capacity using and developed low used reservesto steadily build up oil and gas output. Construction of the national key project, the Sichuan toEast China Gas Transmission project was kicked off smoothly. We produced 30.69million tons of crude oil and 5.976 BCM of natural gas, up by 2.23% and 11.74%year on year respectively. For the first three quarters crude realized price averagedCNY2955.57 per ton, down by 12.76% year on year. Gas realized price averagedCNY809.94 per thousand cubic meters, up 7.89% year on year. Lifting cost wasCNY557.91 per ton, up by 18.62% year on year. EBIT was CNY37.265 billion, downby 29.15% year on year. In the Refining segment the Company made efforts to re-adaptstructure and optimize the resource allocation, procurement and constructing toincrease production and ensure market supply. Crude processed was CNY115.8 million tons, up 6.53% year onyear. Refined product output was CNY68.83 million tons, up by 6.33%. Impactedby the tight control of the refined product price, refining margin in the firstthree quarters was CNY194 per ton. EBIT was CNY214 million. In marketing segments, the Company actively sourcedhydrocarbon resources and brought to ensure stable and orderly supply todomestic market. Really focused on our modern logistic system including productpipeline to well-organized distribution and transportation of oil products, theMarketing was further optimized. For the first three quarters total sales volume and Retailvolume reached 88.57 million tons and 55.82 million tons, up by 6.63% and 4.55%respectively. By end of September Retail side totaled 28,980 in which 28,280were self performed and operated. Annualized throughput per self-operated station averaged2,632 tons, up by 2.57%. In the first three quarters EBIT of the Marketingsegment was CNY26.026 billion, up by 26.49%. In Chemical segment safe and stable operation and highutilization were achieved with increased output on major products and highvalue added products. The Company leveraged on the specialized offering ofchemical products sales company to further sharpen other competitive edge tominimize market in China. For the first three quarters output of ethylene andsynthetic resins were 4.887 million tons and 7.207 million tons, up by 7.79%and 14.6% respectively. In the first three quarters EBIT of the Chemicalsegment was CNY11.097 billion, up by 8.32%. CapEx in the first three quarters totaled CNY59.91 billion,in which E&P was CNY30.807 billion. Refining was CNY12.178 billion.Chemical was CNY7.207 billion. Marketing and Distribution was CNY7.948 billion.Corporate and Others was CNY1.77 billion. That's all for the briefings on the first three quartersresults. Now, Mr. Dai Houliang and his colleagues would be happy to take yourquestions. Thank you very much.
Chen Ge: Operator, please can we have the first question?
Operator: (Operator Instructions) The first question is from PrashantGokhale from Credit Suisse. Please go ahead.
Prashant Gokhale: Good morning sir, thank you for the presentation, just aquick question. There have been press reports recently about diesel shortagesin China. Could you tell us if these diesel shortages are because ofproduction constraints or because demand is exceptionally strong? Thank you.
Dai Houliang: Overall speaking, the supply of the diesel in China isstable. There may be some particular situation in certain specific regions as aresult of a number of factors. First of all, the demand for diesel is growing and becauseof the impact of natural gas the transportation, in the transportation channelthere have been some force major factors happening. But, overall speaking, we believe the supply of diesel inChina is stable and steady. Thank you.
Prashant Gokhale: Yes. Then could I just ask an additional question? When yousay that because of natural gas, what do you exactly mean by that? How is that,how does that impact diesel demand, if you could just explain?
Dai Houliang: To be specific, impacted by the hurricane in the pastperiod, there are some impacts, negative impacts inflicted our specific retailstations. And so, we have some, encountered some force major factors in thosespecific retail stations because of the hurricane and some weather conditions.
Prashant Gokhale: Thank you sir. Thank you very much.
Operator: Thank you. The next question is from Upin Lau (ph) of INET.Please go ahead.
Upin Lau: My question is currently given the high cost and the lowretail price there are some retail stations who are reluctant to sell thediesel. What kind of impact does this have to your refining segment?
Dai Houliang: Because of the international oil price hike in 3Q and thetight control by the state government for the oil product price in China, thereare some retail stations in China, who now stop to sell certain gas productsbecause of those reasons. And this inflicted certain impact of pressure on Sinopec'ssupply to the market. There are some impacts on our Refining segment, whichcould be fully demonstrated by the figures from our 4Q to 3Q results and inEBIT figures. But for the Chemical segment, as you asked, there are no bigimpacts on our Chemical segments.
Upin Lau: Were there any negative impacts on your high-end segment? Doyou have a certain solution?
Dai Houliang: On the technical side, we will try to lower our purchasecost and in the meantime to minimizing the pressure on our Refining segment. Onthe market side we will try our utmost to fulfill our social responsibility asa big company to supply the market.
Operator: (Operator Instructions) The next question is from FlorenceTan (ph) of ICIS. Please go ahead. Please go ahead Miss Tan.
Florence Tan: Hello?
Dai Houliang: Hello.
Florence Tan: Hi. Can you hear me?
Dai Houliang: Yes.
Florence Tan: I have three questions from ICIS. What will be the timeschedule for the production time for Xinhau Refinery project? Second question, given the current higher international oilprice, what impact it will have on your 4Q EBIT and earning growth? And third question, with regard to the Guangdong Refineryand Chemical project will Shell quite or not?
Dai Houliang: Let me first address your first question. With regard to theXinhau Refinery project everything is now on track according to our schedule.By the end of this year and the 4Q 2008 some key equipment will be constructedand completed. And, we expect to have the commissioning of the project by the 2Qnext year. And with regard to the impact of the high international oilprice on our Refining segment, I believe everyone in the public could give somecertain analysis. With regard to the Guangzhou Nansha project, currently it isstill in a preliminary period and the front-end negotiation discussion. So far,we are not aware of any information that Shell is intending to quit.
Florence Tan: Thank you.
Operator: Thank you. The next question is from Lawrence Lo of BOCI.Please go ahead.
Lawrence Lo: I'm from BOCI. I have three questions. Firstly that withregard to the Refining segment for the first three few quarters what is the mixor proportion of the processing amount of your low grade crude as a total amongyour total throughput? A second question is on the cash operating cost for yourthird quarter. How much it changed as against of last year? And third question, given the last year's performance therewas a quite big loss from the first quarter to third quarter. Will you begranted subsidies this year as you were in the last year?
Dai Houliang: With regard to your first question, currently the crudethroughput proportion for the height of high acid and the low-grade crudeamount for 60% of our total crude throughput. But for the really low quality orlow grade crude the proportion is simply 20% of the total. So, from the first quarter to the third quarter the figuresof our crude processing could be list as follows. For the 1Q 56, 2Q -- sorry,$56 per barrel as the price assumption, and 2Q $62, 3Q $68. On the one hand we have tried to minimize our purchase cost.On the other, we try to increase the volume of the crude processing for the lowgrade crude, which fully sharpen our competitiveness in refining segment. Besides, about one-third of our products are fully in linewith the market price internationally. For example, the Napa, its price is nowfully in line with the in Singapore market price, which also keeping up ourcompetitiveness in the Refining segment. With regard to the Government subsidy, I cannot give you aspecific answer, because it is the business of the Government.
Lawrence Lo: Thank you.
Operator: (Operator Instructions) The next question is from Calvin Coof Coleman. Please go ahead.
Calvin Co: Could you please shed some light on the gas transmissionproject from Sichuan to Guangzhou in terms of it’s volume, the CapEx and timeto go?
Dai Houliang: Are you asking the project from the Sichuan to East China?The gentlemen found the company?
Calvin Co: I'm enquiring about currently do you have any intention tofirst study the gas project from Sichuan to Guangdong?
Dai Houliang: After we discovered Puguang gas field, we also located somegood process reserves in the other regions of Sichuan Province. Currently theCompany is still planning for the front-end study. I believe this is quite muchunder the public attention. We would thank you for the attention. And if we locatesome specific reserves for the accurate information we will try to disclose ona timely basis.
Calvin Co: Thank you.
Operator: (Operator Instructions) Next question is from PrashantGokhale from Credit Suisse. Please go ahead.
Prashant Gokhale: Two questions on the Sichuan gas, could you tell us how muchof the Sichuan gas, the Puguang gas are you planning to sell in Sichuan? And isthere any specific plan to sell a part of that gas in Sichuan? And the second question is how much gas do you expect to usein your own refineries and your own petrochemical plants to substitute forrefinery fuel and chemical plant fuel?
Dai Houliang: With regard to your first question, a large amount of thenatural gas from the Puguang will be mainly supplied to the East of China wherethere are quite the large demands for natural gas. But there are some portionsof gas that will be reserved for Sichuan province to develop its own chemicalindustry and supply the local market. For Sinopec, we will reserve about 1billion cubic meters natural gas from Puguang to substitute our fuels andchemicals feed stock. Thank you.
Prashant Gokhale: Thank you. I also had one other question if I may.
Dai Houliang: Okay, please.
Prashant Gokhale: Okay. There's a lot of talk about Sinopec buying theoverseas assets from the parent. Could you give us a comment? And I understandthat if you're doing it you can't tell me. But would you at least give us thethinking behind -- what management is thinking in terms of the overseas assetsand what your maybe your priorities are and what your timeline is on this?
Dai Houliang: With regard to the purchase of overseas assets of the parentcompany, Sinopec Corp has the first right of refusal to purchase the overseasassets of the parent. But currently, we have no concrete plan or proposal onthat.
Prashant Gokhale: Thank you. Thank you very much.
Operator: (Operator Instructions) Next question is from Henik Fung ofHSBC. Please go ahead.
Henik Fung: Compared with the upstream business, the crude realization,in 3Q 2006 and 3Q 2007 there is no big differential. But for the EBIT of the 3Q2007 E&P business, we witnessed that there was quite a noticeable drop inthe EBIT by 16% to 17%. Is there any reason behind this?
Dai Houliang: The reason is mainly because of the price adjustment thatSinopec's crude is relative. As we disclosed in our annual report in 2006, wehave readjusted our crude grade that Sinopec is relative to crude ever sincethe August last year. Sinopec's Shaanxi oilfield used to be relative to theSimta (ph) oil price. But, ever since the August last year, the Sinopec sellcrude is relative to the Dooley. So, mainly because of the changes arising fromthe pricing correlation mechanism.
Operator: (Operator Instructions) The next question is from FlorenceTan of ICIS. Please go ahead.
Florence Tan: I have two questions. The first question is that is theCompany still following or following up the MTO project in Dazhou of SichuanProvince? Second is your specific -- do you have specific proposals orplans to develop biodiesel?
Dai Houliang: With regard to the MTO project you mentioned about,currently Sinopec is still doing a preliminary period work for this project.And the MTO R&D capability is now -- of Sinopec is now under the pilotplanned period. So now we are studying the feasibility of the MTO project. With regard to the biodiesel development, Sinopec is nowdeveloping certain pilot plant scale projects in its affiliates on biodiesel.These facilities now demonstrate quite good performance, and for the stepforward we would like to identify the economic viability and feasibility forthese kind of fuels to replace the conventional fuels.
Florence Tan: I would like to add one more question about MTO project inDazhou. Currently, Chinese government does not allow the natural gas to beutilized in heavy chemical projects. Will this policy have any impact on yourproject in Dazhou?
Dai Houliang: On broad base there is no such category that Chinesegovernment limited or encourage the natural gas based chemical projects. Theydo have certain encouraging laws; some certain laws to encourage natural gasbased chemical projects. And they do have certain laws that does not encouragethe natural gas chemical projects.
Operator: (Operator Instructions) There are no further questions. Wehave a question from Yung Wei of Wothai Chun Ann (ph) Securities. Please goahead.
Yung Wei: I'd like to ask a question about special oil income levy.For the first half how much is the special income levy and what will be thefigure for the 3Q?
Dai Houliang: In terms of the special oil levy income CNY7.1 billion from theJanuary to September.
Yung Wei: And currently the international oil price went up to ahistorical high. What do you think of the future price trajectory for theinternational oil?
Dai Houliang: I'd like to first address your last question. The specialoil income levy was CNY3.5 billion in the third quarter. And With regard to thequestion on international oil price, this is a hot topic under globalattention. So, to be honest that in September we have worked togetherwith about 30 agencies to analyze the international oil price trend. The resultas the average weighted price was about US$70 in September. But just a month past,now we witnessed today it is already close to US$95 a barrel. So from the supply/demand side we think that current oilprice hike is supposed to be too much inflated should be dropped to its normallevel. But the current price is justified by certain other reasons such as thepolitical, the financial and the regional factors. It's really hard for us totell the fortune what will happen tomorrow. Thank you.
Operator: (Operator Instructions) Thank you. There are no furtherquestions at this time.
Chen Ge: Operator, thank you very much. We are now going to closethis teleconference. To access the replay of the conference call, please call852-3006-8101. The access code will be 558553. You can also listen to thewebcast replay on the company's website at www.sinopec.com, starting at 9.00 amon October 31 Hong Kong time. Thank you again for your interest in Sinopec. Please feelfree to contact either Sinopec directly or (inaudible) if you have additionalquestions. Good day or good night depending on where you are, everyone.
Dai Houliang: Thank you for your attention. On behalf of Sinopec, I'd liketo thank you all for expressions of support and concern for Sinopec.