PetroChina Requirements and design of FMIS modifications FMIS enhancement project

1. December 1999 PetroChinaRequirements and design of FMIS modificationsFMIS enhancement project

2. 1. Business requirements 3 2. Gap analysis 10 3. Overall approach and design principles 13 4. Business process overview 15 5. Overview of system changes 18 6. New data files and associated processes 24 7. System processes for consolidation and reporting 29 Appendix A - Report formats 32 Contents 2 System Design for FMIS Modification

3. Chapter 1 Business requirements

4. Business requirement overview To be able to do an IPO, PetroChina need to be able to produce certain key financial reports The FMIS system need to be able to produce the following reports: • Annual consolidation reports as required by China Finance Ministry based on the PRC GAAP for joint-stock company. • Quarterly consolidation of reports of the overall ListCo based on the IAS is required for publicly listed companies. • Disclosure items are also required by IAS and PRC GAAP for joint-stock company. • Some other information is required to support annual auditing. All the above reports (except the audit information) will need to be produced along the new PetroChina organization structure as described in the following page. The above reporting requirements are detailed in the next pages. To produce these reports, some changes to FMIS needs to be implemented.

5. North China Petr.Trade China O&G research institute PetroChina reporting structure Level 1 PetroChina PetroChina Level 2 Specialized Co/Business Group E&P Gas & Pipeline Downstream Level 3 Segment Oil&Gas E&P Natural gas (inc. gas pipeline) Refining & Marketing Petrochemicals & marketing Others Level 4 Type Refining Marketing R&D China oil HQ Beijing Level 5 Business Units E&P HuaBei G&P HuaBei Refinery HuaBei Level 6 Operations Units ... Oil field #1 Oil field #2 Oil field #3 ... ... ... ... Level 7 Suboperations Units District 1 District 2 District 3

6. Business requirements for PRC consolidation PRC GAAP consolidation report requires the following data: • Individual PRC GAAP reports of all entity involved in consolidation. • Balance sheet ( PRC GAAP) • Income statement • Cash flow statement • Internal transactions reports • Internal transaction list • Internal product sales or purchase report • Internal rendering of service report or internal service purchase report • Internal long-term equity investment report, capital structure report • Internal payable or receivables • Required information for internal transactions • Counterpart, transaction type, period, beginning balance, credit amount, debit amount, ending balance

7. Business requirements for IAS consolidation There are two types of changes that need to be made to comply with IAS • PRC consolidated financial statements with specific details • Individual PRC reports listed earlier • Ledger report • Transactions with different accounting treatment in IAS and PRC GAAP • Development costs - E&P segment specific • Cost of successful well ( succeeded in the period ) • Assets and depreciation ( straight line method vs UOP) and related tax credit • Assets class, accumulated depreciation amount based on reevaluated carrying amount by straight line method; depreciation amount based on un-reevaluated amount by unit of production method or straight line method ( depend on assets class ) • Deferred business initial cost ( pre-operation expenditures ) • Beginning balance, ending balance • Monthly revaluation of non-current monetary assets & liabilities ( foreign currency item) • Historical value ( calculated by exchange rate of occurring date ), reevaluated value of long-term loan( foreign currency), long-term deposit( foreign currency), other long-term monetary assets or liabilities.

8. Aging report of accounts receivable ( PRC GAAP ) Long-term equity investment ( PRC GAAP )Investee, stock type, share number of stock, share percentage, amount, remarks Long-term bond investment ( PRC GAAP )Bond type, par value, rate, purchased amount, due date, interest of this year, accumulated interest, remarks Other non-equity long-term investment ( PRC GAAP )Debtor, principal, rate, due date, interest income of current period, accumulated interest, remarks Long-term loan ( PRC GAAP )Loaner, amount, due date, rate, term(If foreign loan) Foreign currency amount, RMB amount by exchange rate of balance sheet date Bonds payable ( PRC GAAP )Bond name, par value, issued date, issued amount, due date, interest expense of current year, accumulated interest Related party transactions ( PRC GAAP & IAS)All data listed in internal transaction reports, only different entity name Income analysis report(IAS)Special deductions relating to exploration and production activities, Income not subject to tax; Expenses not deductible for tax purposes Movement of allowance for doubtful accountsBalance at beginning of period, Provision, Deductions,Balance at end of period Movements in allowance for diminution in value of inventoriesBalance at beginning of period; Provision; Deductions; Balance at end of period Movement report of PPE & accumulated depreciation Cost: Beginning balance, additions, disposals, ending balance; Accumulated depreciation: Beginning balance, charge for the year, disposals, ending balance Movement of allowance of investment value diminutionBeginning balance; Provision; Deductions; Ending balance Loans Analysis Report Director’s remuneration reportSalaries, allowances and other benefitsContribution to retirement benefit scheme Business requirements for disclosure purposes IAS and PRC GAAP requires the following items for disclosure purpose:

9. Business requirements for annual audit FMIS also need to produce certain information that is required to facilitate annual audit. The required information for accounts receivable, long-term equity investment, long-term non-equity investment has been listed in disclosure requirement. The only remaining items for annual audit are listed below: • Short-term investmentInvestment type, investee, security type, par value, historical cost, rate, due date, interest receivable or dividends receivable, premium /discount and its amortisation • Notes receivableNotes type, par value, rate, drawer, due date • Other receivableDebtor, amount, post due days • Assets revaluationAssets class, book value before revaluation, book value after revaluation • Short-term loanLoaner, amount, rate, due date • Notes payableOwner, par value, rate, due date

10. Chapter 2 Gap analysis

11. Changes in financial reporting process PetroChina needs to implement a large scale change in its financial reporting process. Current Future • Consolidation will be done by PetroChina accountants as part of the regular accounting process using FMIS • FMIS report will be compliant with PRC accounting standard for joint-stock company. • AS report is produced by Petrochina accountants using FMIS • Reporting structure for PetroChina will be separated from the old CNPC. New org structure will be put in place • New chart of accounts will be in effect • Consolidation is done by the auditors using spreadsheets and manual data collection and manipulation • FMIS report is not compliant with PRC accounting standard for joint-stock company. • IAS report is produced by the auditors using manual method • Reporting is done for the whole CNPC with the current org structure • Use current chart of accounts

12. Systems issues The following systems issues are identified as critical to the ability for PetroChina to be able to do consolidation and produce the required reports CONSOLIDATION PROCESS • REQUIREMENT • Reconciliation of transactions that occurs across different accounting entities. • Some detailed information need to be passed up the corporate reporting structure. • SYSTEM ISSUE • This is difficult to do with the current FMIS since FMIS treats each accounting entity as independent from other accounting entities. • This is not possible in the current FMIS since FMIS only transfer reports, not detailed information. REPORTING PROCESS • REQUIREMENT • IAS report have some different grouping of accounts compared to PRC reports • In the interim, CNPC requires reporting based on locations in addition to the “normal” reporting procedure along segment • Disclosure items need to be produced and rolled up • SYSTEM ISSUE • Current FMIS aggregates report up the hierarchy and it is not possible to see or reconstruct the individual accounts, therefore it is not possible to regroup accounts at higher level. • Currently FMIS reporting hierarchy follows a strict tree pattern with one entity reporting to only one parent. • Current FMIS can not produce this data nor roll it up

13. Chapter 3 Overall approach and design principles

14. Design principles / goals The following principles have been followed in creating the design for the new system: • The design has to be implementable prior to the IPO • Modified FMIS must be able to produce all required reports with minimal manual work • Avoid major changes in business process • Avoid major changes in FMIS which needs long development time and/or high risk of destabilizing FMIS • Marginal changes to FMIS is preferred to marginal change in business process • Changes in business process or FMIS should have minimal dependency on short-term improvement to IT infrastructure. • Due to current limitations in telecommunication, the amount of data that needs to be transferred should be minimized. • To ease transition, the modified FMIS need to have data compatibility with current FMIS

15. Chapter 4 Business process overview

16. LEGEND Ledgers Reports Modified report/consldtn system Consolidation entry Consolidation file Data flow diagram of rollup process IAS PRC HQ Corp Level 1 Different segment, different location Notes: Lgr+ = ledger report plus some other special reports. Elim IAS Segment Level 3 IAS IAS Lgr+ IAS IAS Lgr+ PRC PRC Same segment, different location Elim Elim Location Level 5 Elim PRC IAS Lgr+ IAS Lgr+ Elim Same segment, same location Elim IAS Elim IAS Different segment, same location Lgr Lgr Lgr Lgr Segment B Segment A

17. Roll up and consolidation process chart Level 5 Level 3 Level 1 1.1 Enter transactions for Level 6 HO 3.1 Receive BU segment PRC report and IAS file 4.1 Receive PRCreport and segment IAS file 1.2 Create reports for Level 6 HO ledgers 3.2 Enter same-segment, different-locations elimination entries 4.2 Receive different-segment, same-location elimination files 1.3 Receive reports & import data from level 7 (district) 1.4 Import reports from level 6 HO ledgers 4.3 Enter different-segment, different-location elimination entries 2.1 Receive PRC report from BU Location segments 1.5 Enter same- segment, same-location elimination entries 3.3 Produce bus. group PRC report and IAS adjusted report 4.4 Enter IAS adjustments (corporate level) 2.2 Enter different-segment same-location elimination entries 1.6 Determine IAS adjustments 1.7 Produce BU segment PRC report 3.4 Send business group PRC report and IAS file to corp 4.5 Produce corporate PRC reports and IAS reports 2.3 Produce Location PRC report 1.9 Send PRC BU segment report and IAS file to Beijing Business group Finance 1.8 Produce IAS adjustment file (IAS file) 1.10 Send PRC report to Location HO finance 2.4 Send different-segment, same-location elimination file to Beijing H.Q. Segment Finance (Beijing) Corp Finance BU Location Location HO Finance

18. Chapter 5 Overview of system changes

19. Data flow diagram - Transaction system Some changes are required in the FMIS Transaction system to collect required data from all accounting entities Ledger reports file F1 Internal transaction data file F2 Disclosure & IAS supporting data file Existing functionality New functionality P2 Produce internal transactions data file P4 Produce special disclosure items report Produce Ledger report Transaction DB T1 Special disclosure items Enter accounting entries to FMIS P1 For internal transactions, enter customer/ supplier code P3 Enter special disclosure & IAS support data

20. New or modified functionalities - Transaction system Changes to FMIS Transaction system is summarized in the following list: New data file F1 - Internal transaction data file F2 - Disclosure & IAS supporting data file New tables T1 - Special disclosure items New system processes P1- Internal transaction data entry P2 - Internal transaction file export P3 - Special disclosure items & IAS supporting data entry P4 - Special disclosure items & IAS supporting file export

21. Data flow diagram - Reporting system Some major changes are required in the FMIS Reporting system F2 Disclosure & IAS supporting data file F4 IAS adjustment entry file Ledger report files F3 Elimination data file F1 Internal transaction data file Existing functionality P14 Export disclosures & IAS supporting data P12 Export IAS adjustment New functionality P15 Print IAS reports P15 Print PRC reports P16 Export /print consolidated ledger report P8 Export Elimination entries P13 Export remaining internal transaction Aggregated Reports Consolidated Ledger Report T5 Consolidation account pair Aggregation IAS adjustment info reports P7 Elimination process Internal transaction & elimination reports &queries P5 Query, view, print T3 IAS adj P9 Query IAS adjustment data Analyze info and determine required IAS adjustment T2 Elimination Lower level Reports T4 Internal Transaction Analyze info and determine required elimination IAS adjustment entries Elimination Entries P20 Import disclosure /IAS support data P10 Enter IAS adjustments P6 Enter elimination entries P19 Import internal transaction P17 Import IAS adjustments P18 Import elimination entries Ledger report files F4 IAS adjustment entry file F3 Elimination data file F1 Internal transaction data file F2 Disclosure & IAS supporting data file

22. New data file F1 - Internal transaction data file F2 - Disclosure & IAS supporting data file F3 - Elimination data file F4 - IAS adjustment entry file New data tables T2 - Elimination entry table T3 - IAS adjustment entry table T4 - Internal transaction table T5 - Consolidation account pair table New system processes P5 - Query info for elimination P6 - Enter elimination entries P7 - Elimination process P8 - Export elimination P9 - Query info for IAS adjustment P10 - Enter IAS adjustments P11 - IAS adjustment process P12 - Export IAS adjustments P13 - Export remaining internal transactions P14 - Export disclosure & IAS support data P15 - Print IAS report P16 - Print / Export PRC report P17 - Import IAS adjustments P18 - Import elimination entries P19 - Import internal transactions P20 - Import disclosure / AIS support data New or modified functionalities - Reporting system The changes to the FMIS Reporting system is shown in the following list:

23. Required new / modified reports In addition to the system changes, the following reports must be developed and produced IAS report & disclosure requirement IAS income statement definition IAS balance sheet definition IAS cash flow statement definition Statement of owner's equity Note 4 Employee compensation costs Note 5 interest expense Note 6 Income before income taxes Note 7 Income taxes Note 8 Cash and cash equivalents Note 9 Accounts receivable Note 10 Inventories Note 11 Prepaid expenses and other current assets Note 12 Property, plant, and equipment Note 13 Investments Note 14 Intangible and other assets Note 15 Accounts payable and accrued liabilities Note 16 Debt Note 17 Deferred income taxes Note 22, 23, 24 PRC report & disclosure requirement PRC Income statement report modification PRC Balance sheet modification PRC Cash flow statement modification Internal transaction report Aging report of accounts receivable Long-term equity investment report Long-term bond investment report Other long-term investment report Long-term loan report Bonds payable report Related party transaction report Auditing required reports Short-term investment report Notes receivable report Other receivable report Short-term loan report Notes payable report

24. Chapter 6 New data files and associated processes

25. FILE FORMAT & TABLE STRUCTUREF1/T4 Internal transaction data TABLE STRUCTURE F5 - Consolidation Account pair Source entity code Period Account code Counterpart code End Bal Beg bal Movement Source acct code Counterpart acct code debit debit debit credit credit credit F1 - Internal transaction data file and associated processes The internal transaction data file is a key input to the consolidation process. P1. Modification to voucher entry in transaction system need to be done. Currently the transaction table has a field to record customer/vendor codethat is only used for A/R or A/P. The system needs to be modified to make the customer/vendor code applicable for all internal transaction types. The system should make customer/vendor code entry mandatory for all internal transactions. P2. When counterpart codes of all internal transactions have been recorded, transaction system will be able to export data of internal transactions and transfer the data up to the higher levels. P5. The reporting system must have facilities for users to query, view and print the internal transaction data and the elimination entries. This report is the key input for the users in the elimination process. Users create elimination entries based on the information contained in the internal transaction table. To facilitate the creation of this report, table T5 -(Account pairs) is needed to record the account “pairs” for the offseting accounts. This process must also be able to print elimination report which compares the internal transactions with the elimination entries that has been done. The elimination report must be reported to the higher level as a control report to ensure that eliminations are done properly at the level where it is performed. P13. As part of the consolidation process, the system will filter the internal transactions and roll up the internal transactions information that has not been eliminated by ignoring all the internal transactions within the accounting entity and its lower entities, and roll up the remaining internal transactions without aggregation. Internal transaction data file P13 Export remaining internal transaction T2 Elimination Internal transaction reports &queries P5 Query, view, print T5 Account pairs T4 Internal Transaction Import internal transactions Reporting system F1 Internal transaction data file P2 Produce internal transactions data file Transaction DB P1 For internal transactions, enter customer/ supplier code Transaction System

26. FILE FORMAT & TABLE STRUCTURE F2/T1 Disclosures and IAS supporting data Business entity code Disclosure code User-defined num1(number) User-defined num2 (number) … num6 User-defined char1 (char.) User-defined char2(char) …. char6 (char) F2 - Disclosure and IAS support data file and associated processes This file is designed to collect non-ledger data for PRC & IAS disclosures and supporting data for user to do IAS adjustment. P3 The disclosure data and IAS supporting data will be recorded to the special disclosure table (T1). This purpose of this table is to collect data that can not be derived from account balances, e.g. UOP vs straight line depreciation in IAS adjustment. Although different disclosure types are required for different transaction types, the system will use the same table to store the data. Each field in the table has different meaning for different disclosure type. The disclosure types are pre-defined by PetroChina headquarter and clear instructions to the accounting entities need to be given about which disclosure types must be filled out by each accounting entity. FMIS should be enhanced to “understand” the different disclosure type and for each disclosure type, the system needs to be able to display a special input screen for the disclosure type to prevent wrong entry to be made to the disclosure database. P4 All recorded disclosure data and IAS support data will be exported to a file and sent up. The file is then imported to reporting system (P20) and stored in the report database. P9 Users review the IAS supporting data in reporting system to produce the IAS adjustment entries. P14 All details of disclosure and IAS supporting data received from lower level in reporting system will be exported and sent up to higher level without aggregation. Disclosure & IAS supporting data files REPORTING SYSTEM P14 Export disclosures & IAS supporting data P9 Query IAS adjustment data IAS adjustment info reports Lower level Reports P20 Import disclosure & IAS support F2 Disclosure & IAS supporting data files TRANSACTION SYSTEM P4 Produce special disclosure items report T1 Special disclosure items P3 Enter special disclosure & IAS support data

27. FILE FORMAT - F3 - Elimination data TABLE STRUCTURE - T2 Elimination Business entity code Account code Description Period Credit amount Debit amount F3 - Elimination data file and associated processes Elimination entries are input and rolled up in consolidation in different level. P6 This function lets users enter elimination entries to the elimination table. The entries will be checked and posted if approved. If the entries are not approved, user can modify it prior to posting. P8 The elimination entries will be used in consolidation at the various levels (See 7. System processes for consolidation and reporting). To allow elimination at higher levels, F3 file will be exported and sent up to higher level without any aggregation. Note: the business entity code in this table refers to the business entity which create the elimination entry. F3 Elimination data file REPORTING SYSTEM P8 Export Elimination entries P5 Query, view, print Internal transaction reports &queries T2 Elimination Analyze info and determine required elimination P6 Enter Elimination Entries Import Elimination Entries Elimination Entries F3 Elimination data file

28. F3 /T2 IAS Adjustment Entries FILE FORMAT & TABLE STRUCTURE Business entity code Account code Description Period Credit amount Debit amount F4 - IAS adjustment entry file and associated processes The IAS adjustment file collects data to fulfill IAS adjustment in different level and roll it up to the corporate level P10. The user creates IAS adjustment entries based on analysis of IAS adjustment supporting data and then inputs the data to IAS adjustment entry table (T3) in the reporting system. The entries will be checked by approver and if they are correct, they will be posted to disable further change. If they are not, it will be modified and rechecked. P12. IAS adjustment entries are exported and rolled up without aggregation to the higher levels. The entries will be used in IAS reporting, basically on the highest levels in the corporation on the original level F4 IAS adj. data file REPORTING SYSTEM IAS reporting process P12 Export IAS adj. entries IAS adjustment info reports Analyze info and determine required IAS adjustment T3 IAS adj. P10 Enter IAS adj. Entries IAS adj. Entries F4 IAS adj. data file

29. Chapter 7 System processes for consolidation and reporting

30. P9 - Elimination process and PRC reporting The elimination process is a major step to produce consolidated PRC-compliant financial reports. The elimination process involves two steps: 1) Elimination entry preparation - includes step P6 & P8. This step has been described earlier in this document 2) Perform the elimination of internal transactions - step P7 The result of the elimination process is a Ledger report adjusted by eliminating the effect of internal transactions. Elimination entry record definition is: (account code, entry description, period, credit amount, debit amount) To perform the elimination of the internal transactions, system perform the following calculations: Consolidated balance of one ledger report item = aggregated balance of the ledger report item+(-) total credit amount of all elimination entries for the item-(+) total debit amount of all elimination entries for the item Consolidated debit amount of one ledger report item = aggregated debit amount of the ledger report item+ total debit amount of all elimination entries for the item Consolidated credit amount of one report item = aggregated credit amount of the report item + total credit amount of all elimination entries for the item The resulting consolidated ledger report is ready for PRC-compliant reporting. The PRC reports are created by producing the report with the prepared PRC report definitions against the eliminated ledger report. After the PRC report is created, it is recommended that the PRC report be stored in a permanent table for long-term record and archive. F3 Elimination data file F1 Internal transaction data file REPORTING SYSTEM P8 Export Elimination entries P13 Export remaining internal transaction Aggregated Ledger reports Consolidated Ledger Report P5 Query, view, print Internal transaction reports &queries P7 Elimination process Analyze info and determine required elimination T4 Internal Transaction T2 Elimination Elimination entries P6 Enter elimination entries F3 Elimination data file F1 Internal transaction data file

31. P11 - IAS reporting process IAS reporting process is performed by applying IAS adjustment entries to the consolidated ledger report IAS reporting involves three steps: 1. IAS adjustment entries preparation - steps P9, P10, P12. This has been discussed earlier in this document. The adjustment entries contain these fields: account code, period, adjustment description, credit amount and debit amount. 2. Apply IAS adjustments to the Consolidated Ledger report and create temporary IAS adjusted ledger report. This is done by the system through the following calculations: Adjusted balance of one report item ( or account) =Consolidated balance of the report item( or account)+(-) Total credit amount of all adjustment entries-(+) Total debit amount of all adjustment entries; Adjusted debit amount of one report item(account) =Consolidated debit amount of the report item(account)+ Total debit amount of all adjustment entries; Adjusted credit amount of one report item(account) =Consolidated credit amount of the report item(account)+ Total credit amount of all adjustment entries 3. Produce the IAS report from the IAS adjusted temporary ledger report. This is done by creating the reports using the IAS adjusted temporary ledger report as the source. After the IAS report is created, it is recommended that the report be stored for long-term record and archive. F4 IAS adjustment data file REPORTING SYSTEM Consolidated Ledger Reports P15 Print IAS reports IAS adjustment info reports P9 Query IAS adjustment data P12 Export IAS adjustment Analyze info and determine required IAS adjustment T3 IAS adj Lower level reports P10 Enter IAS adjustments IAS adjustment entries F2 Disclosure & IAS supporting data file F4 IAS adjustment data file

32. Appendix A Report Formats

33. List of Reports • Elimination and adjustment entry report A-1 • IAS adjustment report A-5 • Receivable aging report A-6 • Notes receivable A-7 • Other receivable A-8 • Long-term equity investment report A-9 • Short term investment report A-10 • Long term bond investment A-11 • Other non-equity long-term investment A-12 • Notes payable report A-13 • Short/Long term loan report A-14 • Bonds payable report A-15 • Related party transaction A-16