When the new Board took over the management of the Company in November 2005, it was faced with the task of rectifying a situation whereby the high gearing ratio of the existing business was besieged with declining operation resulting from ever increasing competitive environment. The focus of managerial action and resources were devoted to rationalise the inefficient operations and investments. During the past eighteen months, we have implemented stringent internal control measure, stabilized the business relationship with our PRC venture partners and recuperated the poor cash flow position to a reasonably healthy one. More importantly, we have tapped the investment opportunities in the upstream oil businesses. In January 2007, the Group entered into an agreement with an independent third party, pursuant to which the Group acquired the exploitation rights together with the ownership title of an oilfield in Utah, the United States. The Group became the first Chinese listed company acquiring an oil and gas asset in the United States. Grassy Trails is an oil field with proven production of over 600,000 barrels of golden sweet crude since inception in 1960s. An independent American petroleum engineering company was engaged by the Group to undertake an Oil Initial in Place (“OIP”) report for Grassy Trails. In accordance with the professional standard and practice as stipulated by the American Society of Petroleum Engineers, the report confirms the total remaining reserves of 1,004,481 barrels of crude in the defined property.

On the other hand, in August 2007, the Group has entered into a legally binding cooperation agreement setting out the principal framework in relation to the oil exploration project in Shaanxi Province, the PRC. An independent OIP report has revealed a preliminary contingent resources of 60.87 million tonnes of crude, together with a positive surprise of 96.93 million tonnes equivalent of natural gas within the defined property. This is the first move of the Group to go into the upstream oil business in the PRC, we strongly believe that this Shaanxi oil field will become a growth engine of the Group. This investment also enables the Group to have a more balanced geographical portfolio of oil assets. The oil pipeline in Xinjiang is operated by our subsidiary Xinjiang Xingmei Oil-pipeline Co. Ltd. (“Xinjiang Xingmei”), which the Group and China Petroleum and Chemical Corporation own as to 80% and 20% of its equity interest respectively. As already disclosed in the financial statements of interim report for the year 2007, there were bank loan and contingent liabilities of RMB454 million and RMB269 million respectively as at 30 June 2007, while all of these amounts were arising from Xinjiang Xingmei. In the past one and half years, the management has stabilized Xinjiang Xingmei's cash flow situation and received positive response from bankers while negotiating on the proposed loan restructuring.

However, in order to have the loss making business disposed of, the Group has entered into a disposal agreement with the Group’s controlling shareholder on 7 September 2007, which will acquire the Group’s entire interest in Xinjiang Xingmei. The details of the transaction were disclosed in the announcement dated 11 September 2007. It is our belief that the disposal is in our shareholders’ interest. The benefits are three-fold. First of all, the disposal will help the Group to cut losses and financial cost substantially, especially amid a rising interest rate cycle in the PRC. Secondly, new revenue generated from incoming project will not be diluted. The earning prospect of the Group will be able to turnaround in a timely manner. Finally, the Group is able to quarantine itself from any possible contingent liabilities as well as litigation arising from the captioned bank loans. The disposal will also enable us to refocus our management and financial resources on existing upstream business in Grassy Trails, in the United States and other potential investment opportunities in the oil and gas prospects in the PRC. The natural gas pipeline network is operated by our subsidiary Lejion Gas Co. Ltd. (“Lejion Gas”), which the Group owns as to 72% of its equity interest. Last year, Lejion Gas entered into a short term contracting agreement with the local government that the business of sale of piped natural gas would be operated by the local government while Lejion could focus its resources to the business of refilling stations where natural gas and LPG for vehicle use are supplied. This reallocation of resources has brought improvement to the sales of natural gas at refilling stations.

OUTLOOK It has been nearly two years since the existing Board admitted to the management of the Company in November 2005. During the past two years, despite a lot of challenge, we were able to put in place a very strong management team, at both the Board and operational levels. The Group is pleased to have shareholders support for approving the acquisition in Utah this June, 2007. The oil exploitation operation in Grassy Trails has commenced since August. Re-work of five prevailing wells in the first phase has almost completed smoothly. Four of them are online with better than expected production. With Brent crude price breaking USD80 per barrel recently, the Board might adopt a more aggressive approach to develop the Grassy Trails oil field to take advantage of the recent hike. The Group is confident that production in Grassy Trails will be lifted to a satisfactory level. Contribution of Grassy Trails might be mediocre in fiscal year 2007, however, a more promising production will be seen in 2008 after the horizontal-kick-out drilling is adopted.

In addition to the oil field in the United States, the Group has been aggressively developing oil exploration and exploitation operation in the PRC. The Group has a team of very strong local expertises in the PRC who provide competitive edge for the Group to acquire domestic oil field investment. Initial independent report has confirmed that the oil field in Xun Yi, Shaanxi will be a lucrative investment. On top of the preliminary contingent resources of over 60 million tonnes of crude, an unexpected 96 million tonnes equivalent of natural gas in the area turns out to be a positive surprise. It might take another few months to seek for shareholders’ approval for Shaanxi project and preparation of the oil field development plan. Drilling of the first test well might take place in early March, 2008. The Group has now assembled a diversified asset portfolio, combining both short term and long term growth opportunities. Our strategy is to become a leading independent oil and gas player in the Greater China region with a portfolio of quality assets and to grow the business by developing these assets efficiently.