China is one of the biggest importers of oil and gas with a rapid increase over the years. In 2018, China replaced Japan and became the biggest importer of gas. China is one of the top 10 oil-producing countries in the world. For 2018, the nationwide production of oil reached 18.9 million tons, with a 1.2 per cent drop from the year before; and the total amount of gas hit 141.512 billion m³, which is a 6.4 per cent increase from the last year.
Every five years, the National Development and Reform Commission (NDRC) and the Energy Bureau organise a five-year plan for the development of oil and gas. The latest 'thirteenth five-year plan' explicitly stated that the development route will focus on 'oil stabilisation and gas increase' for the period of 2016 to 2020, that the gas industry will be greatly developed in an aim to increase the percentage of gas consumption in the primary energy consumption structure and that for oil consumption China will stick to economised exploitation and green development and maintain the basic stability of oil energy consumption. It is predicted that by 2030, gas will account for approximately 15 per cent of the energy consumption.
The Chinese government is promoting the reform of the oil and gas regime from the perspectives of, inter alia, relaxing market access restrictions, improving pipeline network construction and operation regime, implementing equal access to the infrastructure, forming a market-based pricing system and improving industry management and monitoring. In the oil and gas regime reform, the market will play a better role in resource allocation, and a modern oil and gas market system with fair competition, openness and order will be formed gradually.
According to China's latest foreign investment policy, namely the Special Management Measures for the Market Entry of Foreign Investment (Negative List) (2019 Version) and the Special Management Measures for the Market Entry of Foreign Investment in Pilot Free Trade Zones (Negative List) (2019 Version) jointly issued by the NDRC and the Ministry of Commerce dated 30 June 2019, the restriction that requires foreign investors to cooperate with Chinese entities in the area of oil and gas exploration and development has been lifted, marking China's full opening to foreign capital in this sector, as well as the reform and opening of the entire industry from upstream to downstream. As at the end of December 2018, there were 924 prospecting rights licences and 774 mining rights licences issued on oil and gas (coal bed methane and shale gas included), with a total coverage of over 3 million square kilometres. Among these licences, 45 of the prospecting rights licences and 37 of the mining rights licences involve foreign investment.
II LEGAL AND REGULATORY FRAMEWORK
i Domestic oil and gas legislation
The main legislation specific to upstream oil and gas in China includes but is not limited to: the Constitution, the Property Law, the Mineral Resources Law, the Oil and Gas Pipeline Protection Law, the Atmospheric Pollution Prevention and Treatment Law, the Safety Production Law, the Marine Environmental Protection Law, the Implementation Rules for Mineral Resources Law, the Management Measures on the Transfer of Prospecting and Mining Rights, the Management Measures on the Registration of Mineral Resources Exploration Zones, the Management Measures on the Registration of Mineral Resources Mining, the Rules on Foreign Cooperation in Exploiting Offshore Oil Resources, the Rules on Foreign Cooperation in Exploiting Onshore Oil Resources, the Management Rules on the Environmental Protection in Offshore Oil Exploration and Exploitation, the Regulation on the Safety Production of Offshore Oil and Several Opinions on Deepening the Reform of Oil and Gas Regime.
According to the Constitution and the Mineral Resources Law, as natural resources oil and gas belong to the state, and the State Council on behalf of the state exercises the ownership right over mineral resources. Geologically, all oil and gas that is inland and that occurring in the internal waters, territorial seas and continental shelf of the People's Republic of China and in all sea areas within the limits of national jurisdiction are owned by the state.2
Oil and gas are subject to the regulation of the mining industry rules, such as the Mineral Resources Law.
Foreign companies may choose to develop oil and gas in China by cooperating with Chinese counterparts. The Rules on Foreign Cooperation in Exploiting Offshore Oil Resources and the Rules on Foreign Cooperation in Exploiting Onshore Oil Resources are the main legislation governing foreign cooperation in oil and gas development matters. Foreign companies can cooperate with Chinese oil companies that have the exclusive rights over oil and gas development, which are the China National Petroleum and Natural Gas Corporation Group and the China National Petroleum and Chemicals Corporation Group for onshore oil and gas cooperation and the China National Offshore Oil Corporation for offshore oil and gas cooperation (each a 'Chinese Oil Company'). The investment ratio may be negotiated by the parties. The foreign contractor is required to establish a branch, a subsidiary or a representative organisation in China. The foreign contractor is allowed to ship abroad the oil and gas products due to it or purchased by it, and it is also entitled to transfer out of China its recovered investment, profit and other lawful earnings.
According to the division of responsibilities, the main regulatory agencies for upstream operations such as oil and gas prospecting and mining include:
- the NDRC, which is responsible for the approval of foreign cooperation on oil and gas projects (including the overall development plan for risk exploration and development blocks);
- the Department of Geological Exploration of the Ministry of Natural Resources (formerly the Department of Geological Exploration of the Ministry of Land and Resources), which is responsible for organising the drafting of strategies, policies and plans for energy and mineral resources, undertaking prospecting rights and mining rights management for oil, natural gas, coal bed methane and radioactive mineral resources, and reviewing and supervising foreign cooperation zones.
In addition to the above competent departments, the administrative authorities, such as environmental protection and production safety, will also implement environmental and safety management and regulation in the exploration and exploitation of oil and gas according to their respective functions.
China is the one of the contracting parties to international conventions such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), the Convention on the Delivery of Civil or Commercial Judicial Documents and Extrajudicial Documents to Foreign Countries (the Hague Convention) and the Convention on the Taking of Evidence Abroad in Civil or Commercial Matters.
Currently, China has signed a number of bilateral or multilateral investment treaties with countries such as Tunisia, Germany, the Philippines, Luxembourg, North Korea, Finland, Namibia, the Czech Republic, Spain, Portugal, Madagascar, the Republic of Equatorial Guinea, the Republic of Vanuatu, the Seychelles, Russia, Romania, Cuba, Switzerland, Colombia, Mexico, France, Costa Rica and the Republic of Korea. As for oil cooperation, China has signed bilateral agreements, cooperation agreements, memoranda of cooperation and framework agreements with countries such as Pakistan, Egypt, Ecuador, Iran and India.
China has currently signed three multilateral tax treaties, namely the Multilateral Tax Administration and Mutual Assistance Convention, the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, the latter two of which have not yet come into force. As of October 2017, China has signed double tax avoidance agreements with 103 countries, including the United States, Japan, France, the United Kingdom, Germany, Belgium, Canada, Malaysia, New Zealand, Singapore, Thailand, Switzerland, Spain, Brazil, South Korea and Cambodia.
Oil and gas are classified in China as mineral resources. For the exploration and exploitation of oil and gas, respective prospecting and mining licences must be legally obtained.
The prospecting right and mining right (collectively referred to as 'mining rights') in China are mainly obtained through administrative licensing. According to the Management Measures on the Registration of Mineral Resources Exploration Zones and the Management Measures on the Registration of Mineral Resources Mining, the application for exploration and exploitation of oil and gas resources must be approved and registered by the competent department of the State Council (the former competent department of China was the Ministry of Land and Resources, after reform in 2018 the current competent department being the Ministry of Natural Resources), and the licences shall be awarded accordingly.3 Only those qualified enterprises approved by the State Council can apply for oil and gas mining rights.4
The administrative licensing process for applying for a prospecting right certificate and mining right certificate is as follows.5 First, submit the application documents according to the list of documents published on the website of the Ministry of Natural Resources. If the application documents are complete, the exploration department will accept the application, inquire at the provincial natural resources agencies about the status of mining rights, consult with other departments and thereafter submit the application for joint review by the Ministry of Natural Resources. The Ministry will then decide whether the application will be approved and registered accordingly. For the exploration implementation plan or development and utilisation plan in some projects, expert review might also be anticipated. After the approval is awarded by the Ministry of Natural Resources, a written formal reply will be sent to the applicant from the government office within 10 working days of the date of the approval decision.
In June and July 2017, the Ministry of Finance and the Ministry of Land and Resources promulgated the Reform Plan for the Mining Rights Transfer Regime and the Interim Measures for the Administration of the Mining Rights Transfer Income Collection. In accordance with these, the transfer of the mining rights through public bidding, auction and other competitive ways is promoted.
The content of prospecting and mining licences mainly includes information on the mining rights holder, the address, the name of mining area, the type of enterprise, the validity period, the type of mine, the mining and prospecting mode, the volume of production, the total area and the location.
The oil and gas prospecting rights licences are valid for a maximum of seven years. The validity period of the mining right licence is determined according to the scale of the mine. For large-scale mining projects, the mining right licence is valid for a maximum of 30 years; for medium-scale ones, the mining right license is valid for a maximum of 20 years; for small-scale ones, the mining right licence is valid for a maximum of 10 years. Where rolling exploration and development is involved, the mining right licence is valid for a maximum of 15 years.
Exploration and mining licences can be revoked6 in the following cases:
- failure to submit annual reports, or refusal to cooperate in case of supervision or inspection, or falsification, and the circumstances are serious;
- failure to pay the due fees on time, and no remedy even after the extended time limit prescribed by the authority;
- in the event of no registration of the alteration of the mining licence or its cancellation, and no remedy even after the extended time limit prescribed by the authority; and
- the unauthorised transfer of the prospecting rights or the mining rights and the circumstances are serious.7
The exploration licence can also be revoked if the following acts are committed and no remedy even after the extended time limit prescribed by the authority: (1) the minimum prospecting investment has not been made; (2) no prospecting operation for six months after receiving the prospecting right licence or the prospecting operation has been unreasonably stopped for six months.
IV PRODUCTION RESTRICTIONS
Generally speaking, after the release of the Special Management Measures on Foreign Investment Access (Negative List) (2019 edition), which removed the previous requirement of foreign investment in the sole form of cooperation with domestic enterprises, there is no restriction on oil and gas production in China. For oil and gas obtained by a foreign investor, there is no legal restriction on exportation to foreign countries subject to sanctions of embargo.8
For foreign investors willing to sell oil and gas in China, according to the Special Management Measures on Foreign Investment Access (Negative List) (2019 edition), the previous requirement for a controlling stake of a Chinese party on the business of building or operation of an urban gas pipelines is also removed. This means that theoretically no more restriction is prescribed in terms of the distribution of oil and gas. Notwithstanding the negative list above, as no precedents are yet known given the short term after the release thereof, further complementary legislative measures are expected for its implementation in practice.
In terms of sales price, oil and gas pricing is regulated by the NDRC by means of macro-controls. The price of crude oil is subject to market regulation. The pricing of refined oil products will be determined subject to the government-guided price or government direct pricing in different cases.9 The station price of the natural gas shall refer to the government-guided pricing with a maximum ceiling price, for which both the purchaser and the seller can negotiate and determine the specific price lower than the maximum price set by the state.10 Pricing policies including the price ladder for residential usage and seasonal variable pricing can be applied.11
V ASSIGNMENTS OF INTERESTS
The transfer of mining rights involves the transfer of prospecting right and mining right. Pursuant to Article 6 of the Mineral Resources Law, the transfer of prospecting right and mining right shall be approved by the competent government authorities in accordance with the law. Prospecting right and mining right may not be transferred unless:
- after the completion of the specified minimum exploration investment, the prospecting right holders can transfer the exploration rights to others with due approval;
- if a mining enterprise that has acquired mining rights needs to change its mining rights because of mergers, divisions, joint ventures or cooperative operations with others, or because of the sale of corporate assets and other changes in the assets of the enterprise, the mining rights can be transferred to others with due approval.
The government has no pre-emptive right in terms of transfer of mining rights. Only the prospective right holder priority is stipulated by law, that is, the prospecting right holder has the privilege right to carry out the specified exploration operations within the designated exploration operation area and has the right of first refusal to obtain the mining rights of the mineral resources in the exploration operation area.
Currently no government approval is required for the change of shareholders of a holder of a mining licence. According to current legal precedents, if the mining rights licence holder shown on the mining rights licence does not change, no prior governmental approval similar to mining right transfer is needed for the share transfer of the license holder.
The transfer of prospecting and mining rights is subject to the conditions stipulated by law. The transfer of prospecting rights shall meet the following conditions: (1) two years have passed from the date of issuance of the exploration licence, or mineral resources are discovered for further exploration or exploitation in the survey area; (2) completion of the minimum survey investment; (3) the prospecting rights are undisputed; (4) the prospecting loyalties have been paid; and (5) other conditions as may be stipulated by the competent department of geology and mineral resources under the State Council.
For the transfer of mining right, the following conditions must be met: (1) the mining enterprise has mined for at least one year; (2) the mining rights are undisputed; (3) the mining loyalties have been paid; and (4) other conditions as may be stipulated by the competent department of geology and mineral resources under the State Council.
After the transferee pays the relevant fees and loyalties in accordance with the laws and regulations,12 it will obtain the exploration licence or the mining licence to become the prospecting or mining right holder.13
i Summary of the tax regime applicable to upstream oil and gas operators
In the current Chinese oil and gas resource tax system, the main types of taxes and fees applicable include value added tax, resource tax, environmental protection tax and prospecting and mining loyalties.
As of 1 April 2019, for the taxpayer of value-added tax on the taxable sales behaviour of oil and gas resource or its importation, the original applicable tax rate of 16 per cent and 10 per cent14 has been adjusted to 13 per cent and 9 per cent15 respectively. 16
The entity undertaking oil and gas production in Chinese territory and jurisdictional waters should pay resource tax. The resource tax rate is 6 per cent.17
Environmental protection tax
In the process of oil and gas exploitation, the entity that directly discharges taxable pollutants (including atmosphere, water, solid waste and noise pollution) shall pay environmental protection tax in accordance with the Environmental Protection Tax Law, which came into effect on 1 January 2018. A form of tax rates is attached to the law for reference,18 which provides a tax rate based on different pollutants.
Prospecting and mining royalties
Prospecting licence and mining licence holders are eligible taxpayers. The prospecting royalty is calculated and paid annually on the basis of block area. From the first to third prospecting years, it shall be 100 yuan–500 yuan per square kilometre per year. The mining royalties are paid annually on the basis of the mining area, with a rate of 1,000 yuan per square kilometre per year.19
Oil and gas exploration and development enterprises need to pay corporate income tax and may also need to pay land use, sea use and other taxes and fees that are normal taxes and fees for the operation of an enterprise in accordance with relevant laws and regulations.
Special oil gains
Enterprises that independently exploit and sell the crude oil in China and enterprises that exploit and sell crude oil in the form of equity or contractual joint venture in China shall pay special petroleum proceeds, which are levied on the excessive returns obtained by the petroleum exploitation enterprises from their sales of domestic crude oil when the price thereof exceeds US$40 per barrel. The ratio for the collection of special petroleum proceeds shall be determined on the basis of the monthly weighted average price of the crude oil sold by the petroleum exploitation enterprises and vary from 20 per cent to 40 per cent.20
ii Tax incentives applicable to oil and gas operators
According to the existing preferential tax policies, oil and gas exploration developers enjoy the following tax incentives.
Resource tax incentive
Oil and natural gas used for heating in the transportation of heavy oil within the oilfield are exempt from resource tax. For taxable types, such as heavy oil, high-condensation oil, high-sulphur natural gas, tertiary oil recovery, low-abundance oil and gas fields and deep-water oil and gas fields, shale gas, and mineral resources under buildings, railways and water bodies mined through the cut and fill mining method, tax incentives ranging from 20 per cent to 50 per cent are applied respectively.21
Environmental protection tax incentive
If the concentration index of air pollutants or the water pollutants emitted by the miners is lower than the national and local standards by 30 per cent or 50 per cent, they will enjoy the preferential tax incentive on environmental protection tax, which shall be reduced by 75 per cent and 50 per cent respectively.22
Prospecting and mining royalty incentive
Remission of prospecting and minding royalties may apply to certain activities in the west, remote and poor areas and the seas in China determined by the State Council, including prospecting and mining for deficient mineral resources, and substitute resources, by large and medium-sized mining enterprises or by applying new technologies and technics, etc.23
VII ENVIRONMENTAL IMPACT AND DECOMMISSIONING
The most important law is the Environmental Protection Law (revised in 2014), which came into effect on 1 January 2015. The law set up the basic principles of 'Protection Priority, Prevention First, Integrated Governance, Public Participation, Damage Responsibility'. Meanwhile, it also clearly stipulates the basic requirements of environmental protection for the enterprise polluters in the process of production and operation, such as rational development, the protection of biodiversity and ecological security when developing and utilising natural resources. The Marine Environmental Protection Law, further stipulates that effective measures should be taken during offshore oil exploration and development and oil transportation so as to avoid oil pollution and other environmental pollution accidents.24 Regarding different types of pollutants, China also has in place the Atmospheric Pollution Prevention and Treatment Law, the Law on Prevention and Control of Water Pollution and the Law on Prevention and Control of Environmental Pollution by Solid Waste. The Environmental Impact Assessment Law and the Clean Production Promotion Law have established an environmental impact assessment system and a clean production promotion system. In addition, many rules are also set up at the ministerial and local levels.
Globally, China is also a party to a series of international conventions in terms of environmental protection, including the Convention on Biological Diversity, the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal, the United Nations Framework Convention on Climate Change, the Kyoto Protocol, the Montreal Protocol on Substances that Deplete the Ozone Layer and the Vienna Convention for the Protection of the Ozone Layer.
The key environmental approvals and licences currently required for oil and gas exploration and development activities in China are as follows.
i Environmental impact assessment
According to the Environmental Impact Assessment Law effective on 1 September 2016 and amended on 29 December 2018, for both onshore, coastal and offshore construction projects an environmental impact assessment is required, and the environmental impact reports shall be submitted to the competent environmental protection administrative department for approval, without which the construction of the project cannot be started.25
ii Discharge permit
According to the Law on the Prevention and Control of Water Pollution, the Law on the Prevention and Control of Atmospheric Pollution and Measures for Pollutant Discharge Permitting Administration (For Trial Implementation) issued by the Ministry of Environment Protection (now Ministry of Ecology and Environment), oil and gas enterprises that directly or indirectly discharge industrial waste water, industrial waste gas and other toxic and hazardous atmospheric pollutants shall obtain a discharge permit.26 For the dumping of marine waste involved in offshore oil exploration and development, the corresponding waste discharge permit should also be obtained.27
iii Water permit
According to the Regulation on the Administration of Water Permits and Water Resource Fees (Revised in 2017), which came into force on 1 March 2017, only when the water permit application is approved by the water administrative department of the corresponding government at or above the county level, should the entity undertaking oil and gas exploration and development construct water intake projects or facilities to take water for use of production and operation accordingly.28
iv Summary of legal requirements with respect to decommissioning
A mining enterprise is the responsible entity for the restoration of the geological environment of the mine. When the mining right applicant applies for a mining licence, the applicant shall prepare a mine geological environment protection and recovery plan.29
Enterprises raise funds to finance the restoration work. Since 21 May 2018, the original 'restoration of mine geological environment recovery deposit' has been cancelled and replaced by 'mine geological environment recovery fund'. In accordance with the principle of meeting actual needs, the mining enterprise can use the fund independently and specifically for the purpose of environmental recovery in accordance with the budget, the engineering implementation plan and the schedule identified based on the mine's geological environment protection and land recovery plan. Mining enterprises need to set up fund accounts in their bank accounts, which can independently reflect the status of withdrawal transactions. The withdrawal and use of the funds and the implementation of mine geological environment protection and recovery plans shall be included in the exploration and mining information disclosure system.30
VIII FOREIGN INVESTMENT CONSIDERATIONS
With the publishing of the Special Management Measures on Foreign Investment Access (Negative List) (2019 edition) on 30 June 2019, which started entering into effect from 30 July 2019, foreign companies now are free to engage in oil and natural gas exploration and development as well as the investment in the construction and operation of urban gas pipe networks, heating power pipe networks and water supply and sewage pipe networks in a city with more than 500,000 residents.
According to the Interim Administrative Measures for the Record-filing of the Incorporation and Change of Foreign-invested Enterprises (revised in 2018), the establishment of a foreign invested company that does not involve the implementation of special access administrative measures prescribed by the state shall file and submit the recording-filing information to the local market regulation administrations (the record-filing institutions).
According to Article 8 of Interim Administrative Measures for the Record-filing of the Incorporation and Change of Foreign-invested Enterprises (Revised in 2018), the record-filing information includes:
- application materials for the prior approval of the name of foreign-invested enterprises or business licences of foreign-invested enterprises;
- a letter of commitment regarding the record-filing of the incorporation by foreign-invested enterprises signed by all investors (or all initiators) of foreign-invested enterprises or their authorised representatives, or letter of commitment regarding the record-filing of the change of foreign-invested enterprises signed by all investors (or all initiators) of foreign-invested enterprises or their authorised representatives;
- the certification of the relevant documents testifying that all investors (or the board of directors of foreign-invested companies limited by shares) or foreign-invested enterprises designate representatives or jointly entrusted agents, including the power of attorney and the identification certificates of the trustee;
- the certification of the relevant documents testifying that the investors of foreign-invested enterprises or legal representatives entrust another party to sign the relevant documents on their behalf, including a power of attorney and the identification certificates of the trustee (if no other party has been entrusted to sign the relevant documents, there is no need to provide them);
- investors' subject qualification certification or natural person identity certification (if the change does not involve the basic information of the investors, there is no need to provide this);
- natural person identity certification of legal representatives (if the change does not involve a change of legal representatives, there is no need to provide this);
- share chart of the final actual controllers of a foreign-invested enterprise (not applicable, in the case that no final actual controller of a foreign-invested enterprise is involved in any changes); and
- if a foreign investor pays with the equities of an overseas company, a certificate for outbound investment by an enterprise shall be provided by the domestic enterprise which obtains the equities of the overseas company.
Where the original of an above-mentioned document is made in a foreign language, the Chinese translation version shall also be uploaded and submitted; the foreign-invested enterprise or its investors shall ensure that the content of the translated version is consistent with that of the original.
The record-filing institutions shall then verify the completeness and accuracy of the filled-in information in the form and will check whether the reporting matters fall within the scope of the record-filing. And after receiving full and accurate information, the record-filing institutions shall complete the record-filing within three business days.
Foreign companies that establish representative offices in China for cooperation in the development of oil and natural gas must firstly obtain approval from relevant competent departments of the state council. Within 90 days of obtaining approval, the foreign company shall apply to the competent local authority for registration and submit relevant approval documents. The local competent authority shall, within 15 days of the date of accepting the application, make a decision on whether or not to approve the registration and issue a registration certificate and a representative certificate to the applicant within five days of the date of the decision.
ii Capital, labour and content restrictions
China pursues a foreign exchange control policy. After a foreign-invested enterprise is legally established, it shall register in the foreign exchange bureau, and all its subsequent capital changes such as capital increase, capital reduction and equity transfer shall be subject to modification of registered information in the foreign exchange bureau. It also requires that the capital of foreign-invested enterprises in foreign currency and the yuan exchanged from it should be used within the business scope of the enterprise and shall conform to the authenticity and self-use principle.
At present, there is no restrictive requirement for the proportion of Chinese and foreign employees in enterprises. Generally speaking, foreign employees employed by enterprises need to obtain Z visas before arrival (or be otherwise processed based on a mutual visa exemption agreement) and the foreigner employment permit and the residence permit after the arrival.
For joint ventures and cooperative enterprises engaged in offshore oil exploration, their foreign employees do not need to obtain the foreigner employment permit. The foreigner's work permit for offshore oil operation in the People's Republic of China will suffice.
Raw material restrictions
China does not have any restrictions regarding the raw material (equipment) involved in the exploration and development of oil and gas. On the contrary, China provides tax reduction, exemption or other tax incentives in accordance with laws and regulations for imported equipment and materials used for the implementation of petroleum contracts.
China has promulgated the Law against Unfair Competition, Interim Provisions of the State Administration for Industry and Commerce on Prohibition of Commercial Bribery and other regulations to govern commercial bribery. In addition, the Criminal Law of the People's Republic of China provides a chapter on 'embezzlement and bribery crimes' and criminal liability will be investigated against corruption and bribery (inclusive of commercial bribery). Since 12 February 2006, the United Nations Convention against Corruption has entered into force in China, further expanding and clarifying the scope of commercial bribery, and facilitating the integration of China's anti-corruption battle along with the rest of the world.
Since 2013, China has vigorously carried out an anti-corruption campaign. The Supervision Law was promulgated on 20 March 2018 along with the establishment of the National Supervision Commission of the People's Republic of China, which is responsible for anti-corruption work against all public servants.
IX CURRENT DEVELOPMENTS
i Opening and reform
China has devoted huge efforts in the opening and reforming of the whole industry chain of its oil and gas business and operation as a part of its current focus of economic development – optimising the business environment and promoting the formation of a new pattern of comprehensive market opening. Official documents like the Notice of the General Office of the State Council on Issuing the Program of Action for the Energy Development Strategy (2014–2020), the Outline of the 13th Five-Year Plan for the National Economic and Social Development and the Several Opinions on Deepening the Reform of Oil and Gas Regime all emphasise that in the 13th Five-Year Plan during the period from 2016 to 2020, reform of the oil and gas regime will be deepened in terms of the market entrance, improvement of the pipeline network construction and operation mechanism, fair access to infrastructure, market pricing and improvement of industry management and supervision, aiming at facilitating the decisive role that the market plays in resource allocation.
On 27 February 2019, the State Council published the Decision on the Cancellation and Delegation of a Batch of Administrative Licensing Items, in which the overall reviewing and approving of Sino-foreign cooperative oil (gas) field exploration plans has been cancelled and replaced by record filing. Between March and May a series of regulations that are related to the border opening of oil and gas pipeline facilities as well as creating a fair playground for all market parties in the access of the pipeline facilities were published including the Opinions on Reform and Implementation of Operation Mechanism of Petroleum and Natural Gas Pipeline Network, in which the plan to separate the pipeline operation and the exploration and sales of oil and gas by establishing a professional oil and gas pipeline company and separating these businesses from the nationally owned oil and gas giant, Sinopec Group. The publishing of the Special Management Measures on Foreign Investment Access (Negative List) (2019 edition) on 30 June 2019, which shall be in effect from 30 July 2019, is been treated as the sign of all-round opening of the oil and gas business in China.
On 15 March 2019, the Ministry of Natural Resources announced a new Regulation – Regulation on the Assignment of Mining Right – for public opinion. This new regulation, which is expected to be officially published in the near future, shall bring significant improvement to the regulation of the assignment of the mining right. For instance, the new Regulation clarifies that, other than in very few exceptions, the mining right must be assigned through a public method such as bid invitation, auction and listing, and the right to approval exploration and mining of oil and gas being directly under the authority of Ministry of Natural Resources.
ii Booming market of oil and gas and shadows of the trade war
China is in the process of energy transformation, during which cleaner and more environmentally friendly energy such as that from oil and gas resources (gas in particular), compared with traditional coal resources, is gradually becoming one of the most important energy sources in this period. Since 2016, the clean heating in winter and the industrial and civil 'coal converting to gas' project in the northern part of China has gradually become one of the national policies.
The success of the US shale gas revolution has shown China the potential of alternative resources. Therefore, in the past two years and at least in the following decade, the exploration and development of alternative resources will become a new focus in China's oil and gas industry. As per the estimation of various agencies such as the China Geological Survey Bureau, the United Nations Conference on Trade and Development (UNCTAD), and the US Energy Information Administration (EIA), the alternative resource is abundant in China, which was also confirmed by Yu Haifeng, the director of the Geological Exploration Department of the Ministry of Natural Resources at the press conference in August 2017 that, after years of exploration and exploitation practices, a major breakthrough has been achieved in the exploration and exploitation of shale gas in China. Meanwhile, since last year, with the escalating of the trade tension between the US and China, the amount of LNG imported from the US has gone down dramatically. Besides, China's overseas investment in unconventional oil and gas projects has also been affected by the trade war. In November 2017, during President Trump's visit to China, China National Energy Investment Group agreed to invest US$83.7 billion into the exploitation of shale gas and chemical project in West Virginia; however, in September 2018, with the increasing tension between the two countries, China declared the cancellation of this investment.
1 Jihong Wang is senior partner, Ying Liu is senior associate, Anjing Wu, Yibai Xu, Huiqi Zhao and Guanli Huang are associates at Zhong Lun Law Firm.
2 See the Rules on Foreign Cooperation in Exploiting Offshore Oil Resources, and the Rules on Foreign Cooperation in Exploiting Onshore Oil Resources.
3 Management Measures on the Registration of Mineral Resources Exploration Zones, Article 4.
4 Management Measures on the Registration of Mineral Resources Exploration Zones, Article 6; Management Measures on the Registration of Mineral Resources Mining, Article 5.
5 Guidance for New Application of Prospecting Right (oil and gas), Paragraph 11; Guidance for New Application of Mining Right (oil and gas), Paragraph 11.
6 Management Measures on the Registration of Mineral Resources Exploration Zones, Articles 29, 30, 31; Management Measures on the Registration of Mineral Resources Mining, Articles 18, 21, 22.
7 Management Measures on the Transfer of Prospecting and Mining Rights, Article 14.
8 Special Management Measures on Foreign Investment Access (Negative List) (2019 edition)
9 Notice of the State Council on Implementing the Price and Tax Reform of Refined Oil.
10 Notice of the National Development and Reform Commission on Adjusting the Natural Gas Prices.
11 Measures for the Administration of Natural Gas Infrastructure Construction and Operation, Article 24.
12 Management Measures on the Transfer of Prospecting Right and Mining Right, Articles 5 and 6.
13 Management Measures on the Transfer of Prospecting Right and Mining Right, Article 10.
14 Interim Regulation of the People's Republic of China on Value Added Tax, Article 2.
15 Notice of the Ministry of Finance and the State Administration of Taxation on Adjusting Value-added Tax Rates, Paragraph 1.
16 Announcement of the Ministry of Finance, the State of Taxation Administration and the General Administration of Customs on Relevant Policies for Deepening the Value-Added Tax Reform, Articles 1–3.
17 Interim Regulations on Resource Tax of the People's Republic of China (Revised in 2011) and Notice of the Ministry of Finance and the State Administration of Taxation on Adjusting the Relevant Policies for Resource Tax on Crude Oil and Natural Gas, Paragraph 1. Law on Resource Tax of the People's Republic of China was passed on 26 August 2019 and will enter into force on 1 September 2020, replacing Interim Regulations on Resource Tax of the People's Republic of China. The resource tax rate for oil and gas production will remain at 6 per cent.
18 Environmental Protection Tax Law, Article 8.
19 Measures on the Administration of the Use of the Use Fees and Payments for Mine Prospecting and Exploiting Rights, Article 5.
20 Decision of the State Council on the Collect of Special Petroleum Proceeds; Notice of the Ministry of Finance on Issuing the Measures for the Administration of the Collection of Special Petroleum Proceeds.
21 Notice of the Ministry of Finance and the State Administration of Taxation on Adjusting Relevant Policies Regarding Oil and Natural Gas Resource Tax, Paragraph 2.
22 Environmental Protection Tax Law, Article 13.
23 Notice of the Ministry of Land and Resources and the Ministry of Finance on Issuing the Measures for the Deduction and Exemption of Charges for Using the Mineral Prospecting Right and Mining Right, Article 3.
24 Marine Environmental Protection Law, Article 50.
25 Law of the People's Republic of China on Environmental Impact Assessment, Article 25; Marine Environmental Protection Law, Article 43; Administrative Regulation on the Prevention and Treatment of the Pollution and Damage to the Marine Environment by Marine Engineering Construction Projects, Article 8; Administrative Regulation on the Prevention and Control of Pollution Damages to the Marine Environment by Coastal Engineering Construction Projects of the People's Republic of China, Article 7.
26 Water Pollution Prevention and Control Law, Article 21; Atmospheric Pollution Prevention and Control Law, Article 19.
27 Regulations of the People's Republic of China on the Control over Dumping Wastes into the Sea Waters, Articles 6 and 9.
28 Regulation on the Administration of the Licence for Water Drawing and the Levy of Water Resource Fees, Articles 21 and 23.
29 Provisions on the Protection of the Geologic Environment of Mines, Articles 12 and 13.
30 Provisions on the Protection of the Geologic Environment of Mines, Article 18 Section 2.