State Oil Company Privatization

1. November 8, 2002 State Oil Company Privatization Aegis Energy�s Perspectives on Best Practices

2. November 8, 2002 Chinese Petroleum Corp. 2 CONTENTS Privatization Motivations 3 Privatization Goals 4 Privatization Methods 5 Best Practices: Restructuring 6 Best Practices: Promoting Competition 7 Best Practices: Political Risks 8 Best Practices: Process 9 Selected Privatization Synopsis

3. November 8, 2002 Chinese Petroleum Corp. 3 Privatization Benefits The global trend toward petroleum-sector privatization is driven by the recognition that market-based economies are better suited to maximizing societal wealth than nationalized industries and planned economies Industry privatization and deregulation are necessary steps toward free market competition Eliminates conflicts of interests resulting from state ownership: political versus economic objectives Promotes efficiency gains through the introduction of competition Benefits Raising revenue for the pursuit of other public policies through divestiture of government owned enterprises Raising external investment capital for the energy sector Establishing the basis for growth in taxable income Efficient allocation of resources (labor, natural resources, and capital) The promotion of efficiency and productivity gains The ultimate benefit of a privatization and industry de-regulation program should be the creation of an energy-sector which maximizes the value of a country�s energy resources through free market discipline

4. November 8, 2002 Chinese Petroleum Corp. 4 Privatization Goals Maximizing the value of the government�s investment An enterprise�s value is best expressed at the present value future expected cash flows discounted at a rate commensurate to their risk The risk of future cash flows is priced in global capital markets Industry sector risks Political risks Privatization allows a formerly state-owned enterprise obtain financing at competitive terms in international capital markets The primary goals of a privatization program 1 maximizing future expected cash flows 2 minimizing the risk of these cash flows in global capital markets 3 ensuring a competitive marketplace

5. November 8, 2002 Chinese Petroleum Corp. 5 Privatization Methods Alternative methods of transferring ownership and control of petroleum assets from the public to private sector Sale of assets The direct sale of state-held assets or companies in the M&A (mergers and acquisitions) markets Upstream: exploration and development rights, reserves Downstream: refineries, pipelines, terminals, and retail locations De facto importation of buyer expertise enhances the likelihood for success of the privatized company Two alternatives: competitive auction negotiated transaction Government maintains complete control of process Initial and secondary public offerings Selling shares to a large number of domestic and international shareholders The capacity of financial markets to absorb shares must be assessed domestic and foreign markets (e.g. American Depository Receipts) IPO may be followed with numerous secondary offerings Creates broad company ownership and may allow for employee participation Reduces mispricing risk through a gradual market introduction that increases liquidity over time Hybrid approach Direct sale of a controlling interest to a strategic investor, followed by restructuring Subsequent offerings in public equity markets A government�s preferred privatization method is dependent on the specific motivations as well as political constraints

6. November 8, 2002 Chinese Petroleum Corp. 6 Best Practices: Restructuring A state-owned enterprise must have the managerial and physical asset bases to compete in a privatized market. Restructuring is a necessary step before privatization to ensure the financial viability and managerial competence of the privatized enterprise Managerial Restructuring Restrict the government�s direct participation in management Prepare financial reports to International or U.S. GAAP standards financial transparency basis for management accountability Promote a corporate culture that fosters entrepreneurial risk taking and rewards individuals based upon performance Adopt industry best practices eliminate governmental patronage benchmark performance against public companies (e.g. staffing, compensation, training, etc.) Develop and promote core competencies that enable the company to compete with the industry�s leaders Asset Restructuring Eliminate non-core assets and businesses Rationalize non-performing assets International Diversification Diversify through foreign acquisitions and alliances Gain international experience and access to outside expertise and practices To compete In a global market, a company�s performance must be commensurate with that of the competition

7. November 8, 2002 Chinese Petroleum Corp. 7 Best Practices: Promoting Competition For privatization to be successful, a state-owned enterprise must demonstrate that it can perform in an open, competitive market Eliminate Monopolistic Controls Abolish governmental price controls and establish global market-based crude oil and refined product pricing Address excessive market concentration establish anti-trust measures to ensure adequate competition force divestitures when needed split state-owned enterprise into multiple companies if necessary Eliminate barriers to external competition eliminate import duties and tariffs eliminate ownership restrictions on petroleum assets allow access to distribution infrastructure (e.g. pipelines and terminals) Divorce state-owned resource base from state-owned enterprise open licensing of exploration of development rights to competitive bidding Establish regulatory agency and policy for natural monopolies (e.g. pipelines) A state-owned enterprises performance cannot be predicated on the maintenance of monopolistic returns

8. November 8, 2002 Chinese Petroleum Corp. 8 Best Practices: Political Risks The government must have a credible regulatory and legal framework Currency Exchange and Transferability Clear Central Bank policies on exchange rates and inflation Removal of restrictions on repatriation of earnings Tax Policy Petroleum excise taxes and royalties Corporate income taxes Regulatory Policy Environmental, Health, and Safety Law Energy Price Controls, Energy Regulatory Framework Wages and Pensions Legal Remedy Contract Law and Enforcement The government must establish a credible premise of the country�s future policies to reduce the political and regulatory uncertainty to investors

9. November 8, 2002 Chinese Petroleum Corp. 9 Best Practices: Process Government�s motivations for privatization must be transparent and its policy toward privatization must be both clear and credible The Government�s privatization intentions must be clear and credible Establish finite timeframe for privatization Definitively declare the Government�s intentions Divest, or maintain, controlling interest Retention of �golden shares� which would require governmental approval of such actions as a change in control Demonstrate political ability and will to implement privatization plans Transparent, open process Avoids allegations and appearance of misconduct Informs and prepares stakeholders through transition investment community employees public Regardless of the method chosen the government�s intentions must be clear, credible, and transparent

10. November 8, 2002 Chinese Petroleum Corp. 10 Selected Privatization Synopsis

11. November 8, 2002 Chinese Petroleum Corp. 11 Selected Privatization Synopsis

12. November 8, 2002 Chinese Petroleum Corp. 12 Selected Privatization Synopsis

13. November 8, 2002 Chinese Petroleum Corp. 13 Selected Privatization Synopsis

14. November 8, 2002 Chinese Petroleum Corp. 14 Selected Privatization Synopsis

15. November 8, 2002 Chinese Petroleum Corp. 15 Selected Privatization Synopsis

16. November 8, 2002 Chinese Petroleum Corp. 16 Selected Privatization Synopsis

17. November 8, 2002 Chinese Petroleum Corp. 17 Selected Privatization Synopsis

18. November 8, 2002 Chinese Petroleum Corp. 18 Selected Privatization Synopsis