Finance Departments (Bureaus) of Provinces, Autonomous Regions, Directly-Administered Municipalities, and Cities under Separate Planning; State Administration of Taxation; Local Tax Bureaus; and the Finance Bureau of the Xinjiang Production and Construction Corps:

　　In accordance with Article 61 of the Implementation Regulations of the Enterprise Income Tax Law of the People’s Republic of China (Decree No. 512 of the State Council, hereinafter referred to as the “Implementation Regulations”), we hereby provide the following notice regarding the methods for accounting for expenses incurred and for depreciation, amortization, and depletion of related fixed assets by mineral resource oil-and-gas enterprises (hereinafter referred to as “oil-and-gas enterprises”) engaged in the exploration and extraction of petroleum and natural gas (including coalbed methane, the same below) prior to the commencement of commercial production:

　　1. The expenses and related fixed assets referred to in this notice pertain to the expenses and fixed assets incurred by oil and gas enterprises in acquiring mineral rights and in exploration and development activities prior to the commencement of commercial production.

　　The commercial production referred to in this notice refers to the stage in which an oil (or gas) field (well) has undergone exploration, development, stable production, and is commercially selling petroleum and natural gas.

　　II. Depreciation of Expenditures on Mining Rights

　　(1) Mining rights expenditures refer to all expenditures incurred by oil and gas enterprises in acquiring exploration rights, mining rights, land use rights, or maritime use rights within a mining area. These expenditures include fees paid for obtaining various mining rights, related intermediary fees, or other reasonable expenses directly attributable to mining rights.

　　(2) Mineral rights expenditures incurred by oil and gas enterprises prior to the commencement of commercial production may, in the year they are incurred, be deducted from the enterprise’s other oil (or gas) field revenues; alternatively, such expenditures may be deducted over a period of three years on a straight-line basis, starting from the month following the month in which the corresponding oil (or gas) field begins commercial production.

　　(3) If an oil and gas enterprise has not chosen to deduct its expenditures on mining rights in the period in which they were incurred, and if operations are terminated due to the failure to discover commercially viable oil (or gas) formations, the remaining unamortized portion of such expenditures may be deducted as a loss in the year the operations are terminated.

　　III. Regarding the Amortization of Exploration Expenses

　　(1) Exploration expenses refer to all expenditures incurred by oil and gas enterprises in conducting geological surveys, geophysical explorations, drilling operations, and other related activities aimed at identifying exploration areas or confirming oil and gas reserves.

　　(2) Exploration expenditures incurred by oil and gas enterprises prior to the commencement of commercial production (excluding drilling exploration expenditures expected to give rise to assets) may, in the year they are incurred, be deducted from the revenues generated by other oil (gas) fields of the same enterprise; alternatively, starting from the month following the month in which the corresponding oil (gas) field begins commercial production, such expenditures may be amortized over a period of 3 years using the straight-line method and deducted accordingly.

　　(3) If an oil and gas enterprise does not choose to deduct its exploration expenditures in the period in which they are incurred, and if operations are terminated due to the failure to discover commercially viable oil (or gas) formations, the remaining unamortized portion may be deducted as a loss in the year the operations are terminated.

　　(4) For drilling and exploration expenditures incurred by oil and gas enterprises, if it is determined that the well can be put into commercial production and the assets formed by such drilling and exploration expenditures meet the conditions stipulated in Article 57 of the Implementation Regulations, these drilling and exploration expenditures shall be capitalized as part of the cost of development assets and depreciation shall be provided for in accordance with the provisions of Article 4 of this Notice.

　　IV. Depreciation of Development Assets

　　(1) Development expenditures refer to all expenditures incurred by oil and gas enterprises in constructing or upgrading wells and related facilities for the purpose of acquiring oil and gas from proven reservoirs.

　　(2) Development expenditures incurred by oil and gas enterprises prior to the commencement of commercial production may, regardless of their specific use, be accumulated in full as the cost of development assets. Starting from the month following the month in which the corresponding oil (or gas) field begins commercial production, depreciation calculated using the straight-line method—with no residual value retained—may be deducted. The minimum depreciation period is 8 years.

　　(3) If an oil and gas enterprise ceases production at a particular oil (or gas) field, the remaining un-depreciated portion of its development assets may be deducted as a loss in the year the oil (or gas) field ceases production.

　　V. Oil and gas enterprises shall, in accordance with the provisions of this notice, select the methods and useful lives for amortization, depreciation, and depletion of relevant expenses and assets. Once determined, these choices may not be changed.

　　VI. After an oil (gas) field enters commercial production, oil and gas enterprises shall handle newly incurred mining rights, exploration expenditures, and development expenditures related to that oil (gas) field in accordance with the provisions of this notice.

　　7. This notice shall take effect from the date of its issuance. From the date on which the Implementation Regulations came into force to the date prior to the issuance of this notice, the treatment of expenses related to oil and gas enterprises’ mining rights, exploration, development, as well as the methods and useful lives for depreciation, amortization, and depletion of fixed assets, shall be governed by the provisions of this notice.

　　Prior to the date of implementation of the Implementation Regulations, expenses and fixed assets related to oil and gas enterprises’ mining rights, exploration, development, and other activities that have already been incurred and for which amortization or depreciation has already begun shall not be adjusted. For expenses that have not yet been fully amortized and for mining rights and related fixed assets that continue to be used, the remaining unamortized or un-depreciated balances may be handled in accordance with the provisions of this notice.

Ministry of Finance, State Administration of Taxation

April 12, 2009