China's increase of oil and gas demand has been driving the increase of the world demand of oil and gas over the last 10 years. In 2018, China become the world's largest importer of crude and natural gas liquid (NGL) and in 2019, China was the world's sixth largest oil producer. For 2019, the nationwide production of oil reached 191 million tons, a rise from the previous year, ending a consecutive drop since 2016; and the total amount of gas hit 150.884 billion m³, marking the ninth year in a row with the production exceeding 100 billion m³. China aims to stabilise oil development and expand the gas industry with an aim to protect the environment and reduce reliance on coal. It is predicted that by 2030, gas will account for approximately 15 per cent of the energy consumption in China.
China's oil and gas market (both upstream and downstream) has been dominated by three national oil companies (NOC): Sinopec, China National Petroleum Corporation (CNPC), and China National Offshore Oil Corporation (CNOOC). Given that the global crude oil and NGL production has been, during the last 10 years, exceeding the total demand, that the Trump administration had been producing trade disputes, and in particular most recently that the covid-19 pandemic had posed material adverse impact on the world economy, the oil price has been going downward. Like international oil companies, the NOCs also encountered loss in the first half of 2020. However, Sinopec and CNPC remained among the top five companies on the latest Fortune 500 list by revenue.
In December 2019, China had set up a national pipeline company that will take over control of all transportation and pipelines from the three NOCs and provide transportation services for all market players. This is a part of China's effort to promote infrastructure building and loosen control over the upstream and downstream market by allowing more foreign and private players into the field.
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 National Development and Reform Commission (NDRC), which is responsible for the approval of foreign cooperation on oil and gas projects (including the risk exploration and development blocks);
- the Ministry of Natural Resources, which is responsible for, inter alia, drafting of management policy of mining rights, and administering the registration of transfer and approval of mining rights of oil and gas and other resources; and
- the National Energy Administration, which is responsible, inter alia, for formulating plans and policies on national petroleum and natural gas reserves and implementing these, monitoring the changes in supply and demand in domestic and foreign markets, proposing and organising the implementation of national petroleum and natural gas reserve ordering, rotation and use, approving or examining petroleum and natural gas reserve facility projects within the prescribed authority, and supervising and administering commercial petroleum and natural gas reserves.
- 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 last one of which has not yet come into force. As of April 2020, China has signed double tax avoidance agreements with 107 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 if all terms and conditions are satisfied.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, submitting 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 involved. 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 from 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 licence is valid for a maximum of 20 years; and 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) (2020 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 or 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) (2020 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.
According to the Foreign Investment Law of the People's Republic of China, which comes into effect from 1 January 2020, the management of foreign investment in the areas beyond the negative list shall be implemented in accordance with the principle of equality between domestic and foreign investment.9 In light of the provisions of the Foreign Investment Law, it is predictable that foreign and domestic investors in the gas and oil area will compete fairly from then on.
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.10 The station price of 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.11 Pricing policies including the price ladder for residential usage and seasonal variable pricing can be applied.12
V ASSIGNMENTS OF INTERESTS
The transfer of mining rights involves the transfer of prospecting rights and mining rights. Pursuant to Article 6 of the Mineral Resources Law, the transfer of prospecting rights and mining rights shall be approved by the competent government authorities in accordance with the law. Prospecting rights and mining rights 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; and
- 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 licence 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,13 it will obtain the exploration licence or the mining licence to become the prospecting or mining right holder.14
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.
Value added tax
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 cent15 has been adjusted to 13 per cent and 9 per cent,16 respectively.17
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.18
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,19 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 between 100 yuan and 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.20
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.21
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.22 The Law on Resource Tax of the People's Republic of China was passed on 26 August 2019 and has entered into force on 1 September 2020, which will change the scope and ratio of the above-described resource tax incentives to the following23:
Exemptions: (1) the crude oil and natural gas used for heating in the process of exploiting crude oil and transporting crude oil within the scope of oil fields shall be exempt from resource tax; (2) the coal (coal-bed) gas extracted by a coal mining enterprise for work safety shall be exempt from resource tax.
Reductions: (1) the crude oil and natural gas exploited from low-abundance oil and gas fields shall enjoy a reduction of 20 per cent of resource tax; (2) high-sulphur natural gas, tertiary oil recovery and the crude oil and natural gas exploited from deep-water oil and gas fields shall enjoy a reduction of 30 per cent of resource tax; (3) heavy oil and high pour-point oil shall enjoy a reduction of 40 per cent of resource tax; (4) mineral products exploited from mines at the stage of exhaustion shall enjoy a reduction of 30 per cent of resource tax.
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.24
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.25
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.26 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.27
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 in 2018 and revised in 2019 by the 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.28 For the dumping of marine waste involved in offshore oil exploration and development, the corresponding waste discharge permit should also be obtained.29 A revision on the Law on the Prevention and Control of Environment Pollution by Solid Waste was adopted on 29 April 2020 and will come into force on 1 September 2020, which provides that an entity that produces industrial solid wastes shall also obtain a discharge permit and specific implementation measures and steps for licensing solid waste discharge are to be specified by the State Council.30
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.31
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.32
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.33
VIII FOREIGN INVESTMENT CONSIDERATIONS
In 2020, the Chinese oil and gas market became more open to foreign investors, with no restriction on the access of the general market. The new Special Management Measures on Foreign Investment Access (Negative List) (2020 edition), which entered into effect on 23 July 2020 totally removed the special restrictions on investment in the oil and gas sector. Therefore, foreign investors are now treated equally as domestic investors in the oil and gas sector. However, the new Foreign Investment Law of the People's Republic of China (the Foreign Investment Law), which came into effect on 1 January 2020, formally adopted the national security review system. Even though the law does not stipulate details of how the national security system will function, the 2011 Notice of the General Office of the State Council on Launching the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors provides a hint, under which the oil and gas sector could be deemed as an 'important' sector to national security and therefore subjected to national security review if the foreign investor is going to acquire actual control over the business through the transaction.
The new Foreign Investment Law makes the principle of national treatment extend beyond market access and to operation, which means all foreign-invested enterprises will be governed by the same company law and partnership law that apply to domestic entities. To help foreign investors adapt to the changes, the new Foreign Investment Law provides a five-year transmission period after it comes into force, during which such existing foreign companies may continue in their present form. However, the foreign companies that are established after 1 January 2020 need to incorporate in accordance with the company law. This is an essential change to foreign companies, especially to the Sino-foreign joint ventures, as there were significant differences between the provisions of the three previous foreign investment laws and the subsequent company law regarding corporate governance structures, particularly with respect to shareholder meetings and the authority of the board of directors for Sino-foreign joint ventures.
The new Foreign Investment Law proposes the establishment of a foreign investment information reporting system for the first time. Under this requirement, the Measures for Reporting of Information on Foreign Investment (the Measures) was implemented on 1 January 2020. These Measures nullified the Interim Administrative Measures for the Record Filing of the Incorporation and Change of Foreign Invested Enterprise and substituted the documentation filing system for the reporting system and eliminated the front office role of the Ministry of Commerce (MOFCOM). However, foreign investors are still requested to report certain information to MOFCOM via the enterprise register system that is administrated by the State Administration for Market Regulation, the same system for the company registration, as follows:
- an initial report, to be submitted at the time a foreign company is first set up or when a domestic company is first acquired and converted into a foreign company, which covers the basic information about a foreign company;
- a report on change, covering any change of information reported in the initial report.
- a deregistration report, covering the information about deregistration of a foreign company or conversion of a foreign company into a domestic company; and
- an annual report, to be submitted annually between 1 January and 30 June, which covers the basic information about a foreign company, including its investors and actual controller, and operational information, assets and liabilities, etc.
The new Foreign Investment Law also makes the direct participation of a Chinese individual become possible. Before the law, a Chinese individual investor cannot directly act as a joint venture partner to set up a joint venture with foreign investors in a greenfield project. The Implementing Regulations of Foreign Investment Law were the first to make a breakthrough of the rules by expressly allowing Chinese individuals to set up a foreign company or invest a new project with foreign investors.
However, all the new rules above do not change the requirement that foreign companies that establish representative offices in China for cooperation in the development of oil and natural gas must firstly obtain approval from the 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 the 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
Article 21 of the Foreign Investment Law stipulates that foreign investors may freely remit into or out of China their capital contributions, profits, capital gains, income from asset disposal, intellectual property royalties, lawfully acquired compensation, and indemnity or liquidation income in renminbi or any foreign currency within the territory of China. However, this provision is subject to China's current foreign exchange regulation and in practice, 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 Open and competition
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.
Opinions of the Ministry of Natural Resources on Several Matters Concerning Promoting the Reform of Mineral Resources Administration (for Trial Implementation) (implemented from 1 May 2020, hereinafter Opinion) published by the Ministry of Natural Resources on 31 December 2019 is a milestone to opening-up the Chinese oil and gas market. Opinion lifts restrictions on the exploration and extraction market and welcomes all companies, including foreign invested companies that registered in PRC with a capital no less than 300 million yuan to invest in this business. This is a historical reformation because now all qualified private and foreign-owned enterprises may enter into China's oil and gas exploration and extraction market, which was traditionally controlled by SINOPEC, PetroChina and CNOOC. Meanwhile, the Opinion integrates the exploration and extraction activities that allow the investor who has obtained the exploration licence to extract the oil or gas it found under the licence after reporting to the relevant competent natural resource authority without prior extraction licence. However, under this scenario, the investor still needs to negotiate an assignment contract and register to the competent authority within five years after it reporting to the authority.
China has stated its intention to establish an open and competitive domestic oil and gas market; for instance, the Opinion also encourages the full adoption of competitive methods in assigning the mining rights. This is being seen as the foundation to establish a fully competitive oil and gas market.
ii Pandemic and tensions between China and the West
This year, 2020, has been a challenging time for many industries, including oil and gas. At the beginning of the year, the spread of the covid-19 pandemic and the plumed global oil price have disrupted the Chinese oil and gas market. Compared to the same period in 2019, the domestic petroleum demand dropped 40 to 50 per cent in February, but after the slowing down of the pandemic, domestic demand has slowly recovered to a normal level. However, as the pandemic struck globally, and lockdown and travel bans still exist in many countries, so the demands in particular sectors such as jet fuel are still to be influenced. On the other hand, the pandemic-induced demand declines affected the natural gas market less. Although some experts see the pandemic as a brief shock to the oil and gas market and believe it would not influence future development of the market, it still hit the global market hard, and it can be predicted that its influence shall be seen to last, at least, to 2021.
The oil and gas market is also facing challenges due to the tensions between China and the West, especially the United States. China's overseas investment in unconventional oil and gas projects has also been affected by the tensions. 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 a chemical project in West Virginia; however, in September 2018, with the increasing tension between the two countries, China declared the cancellation of this investment. With the acceleration of the tensions, not only the outbound investment but also the trade and foreign direct investment could also be influenced. For instance, US LNG exports to China collapsed in 2019, the total volume of the exports being only 10.6bcf, only about 10 per cent of the 2017 export volume. However, on the other hand, other countries like Russia are taking this opportunity to expand oil and gas cooperation with China, the world's largest oil and gas import country. In 2019, Russia has overturned the US in LNG exports to China. However, as domestic demands still exist, we believe China shall continue to explore various opportunities in the oil and gas market.
1 Jihong Wang is a senior partner, Ying Liu is a partner, Anjing Wu and Yibai Xu are senior associates and Huiqi Zhao is an associate 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 Foreign Investment Law of the People's Republic of China, Article 28.
10 Notice of the State Council on Implementing the Price and Tax Reform of Refined Oil.
11 Notice of the National Development and Reform Commission on Adjusting the Natural Gas Prices.
12 Measures for the Administration of Natural Gas Infrastructure Construction and Operation, Article 24.
13 Management Measures on the Transfer of Prospecting Right and Mining Right, Articles 5 and 6.
14 Management Measures on the Transfer of Prospecting Right and Mining Right, Article 10.
15 Interim Regulation of the People's Republic of China on Value Added Tax, Article 2.
16 Notice of the Ministry of Finance and the State Administration of Taxation on Adjusting Value Added Tax Rates, Paragraph 1.
17 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.
18 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 has entered 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.
19 Environmental Protection Tax Law, Article 8.
20 Measures on the Administration of the Use of the Use Fees and Payments for Mine Prospecting and Exploiting Rights, Article 5.
21 Decision of the State Council on the Collection of Special Petroleum Proceeds; Notice of the Ministry of Finance on Issuing the Measures for the Administration of the Collection of Special Petroleum Proceeds.
22 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.
23 Law on Resource Tax of the People's Republic of China, Article 6.
24 Environmental Protection Tax Law, Article 13.
25 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.
26 Marine Environmental Protection Law, Article 50.
27 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.
28 Water Pollution Prevention and Control Law, Article 21; Atmospheric Pollution Prevention and Control Law, Article 19.
29 Regulations of the People's Republic of China on the Control over Dumping Wastes into the Sea Waters, Articles 6 and 9.
30 Law on the Prevention and Control of Environment Pollution by Solid Waste (revised in 2020), Article 39.
31 Regulation on the Administration of the Licence for Water Drawing and the Levy of Water Resource Fees, Articles 21 and 23.
32 Provisions on the Protection of the Geologic Environment of Mines, Articles 12 and 13.
33 Provisions on the Protection of the Geologic Environment of Mines, Article 18 Section 2.