Oil and gas regulation in China: overview

A Q&A guide to oil and gas regulation in China.

The Q&A gives a high level overview of the domestic oil and gas sector, rights to oil and gas, health safety and the environment, sale and trade in oil and gas, tax and enforcement of regulation. It covers transfer of rights; transportation by pipeline; environmental impact assessments; decommissioning; waste regulations and proposals for reform.

This Q&A is part of the global guide to energy and natural resources. For a full list of content visit www.practicallaw.com/energy-guide.

Xiong Jin, Zhao Yan and Zhao George, King & Wood Mallesons
Contents

Domestic sector

1. What is the role of the domestic oil sector in your jurisdiction?

Domestic industrial production

China's key oil producing regions include:

  • Daqing in Heilongjiang Province.

  • The Yellow River delta in Shandong Province.

  • The Tarim Basin in Xinjiang Autonomous Region.

  • The Ordos Basin in Inner Mongolia Autonomous Region.

Major onshore gas fields are located in the central and western regions, including the Tarim Basin, the Ordos Basin and Sichuan Basin.

China continues to encourage development of technologically advanced exploration and development capabilities, and development of areas with complicated geological conditions or that require enhanced oil and gas recovery. China also continues to expand the exploration and development of unconventional oil and gas resources including coalbed methane (CBM) and shale gas.

China's oil transportation pipeline system has been extended to 70,000 kilometres and its natural gas pipelines have been extended to 48,000 kilometres.

Large refineries have been built in the Bohai gulf, Yangtze River delta and Pearl River delta. 95% of China's oil refineries with an annual capacity of ten million tonnes or more are self-designed and self-built. Major refined products include gasoline, diesel, aviation kerosene and aviation fuel. However, the most prevalent refined product in China is ethylene with an annual output exceeding 17 million tonnes in 2013.

The import/export market

In 2013, China's crude oil output reached 1.5 billion barrels, 3.42 billion barrels for refined oil, and more than 117.1 billion cubic metres for natural gas (of which 14.1 billion cubic metres is unconventional CBM). China imported 53 billion cubic metres of LNG in 2013, and exported 2.4 billion cubic meters of LNG in 2013.

Domestic market structure

The Chinese government owns all oil and gas resources in China. Exploration and exploitation rights of oil and gas resources are currently only granted to state-owned enterprises (SOEs) through set procedures (see Question 7).

China's domestic upstream oil production capacity reached 4.46 million barrels/day for 2013. China's domestic downstream refining capacity is 14 million barrels/day, of which 11 million barrels/day were produced by SOEs.

China's natural gas production from conventional and unconventional sources totalled 117 billion cubic meters in 2013.

Distribution of gasoline and natural gas is mostly controlled by the China National Petroleum Corporation (CNPC) and the China Petroleum & Chemical Corporation (SINOPEC). Private companies play a much more substantial role in the gas retail sector.

For the division between public and private ownership of oil and gas resources, see Question 7.

Government policy objectives

The central government policy on oil and gas is primarily described in the Whitepaper: China's Energy Policy 2012, describing China's energy development status, policies and targets. In addition to generally seeking to increase crude oil reserves, central government policy is to increase recovery efficiency of traditional oil fields and to gradually increase the proportion of energy consumption from gas. Central government policy is also focused on speeding up the development and utilisation of unconventional oil and gas resources, including coalbed methane, shale gas, shale oil and oil sand. In relation to the midstream, policy is focused on improving the construction of trunk networks for crude oil, refined oil products and natural gas, increasing the proportion of transportation that is done by pipeline (Chapter 5 of China's Energy Policy 2012).

In addition to the Whitepaper, further government policy can be found in the 12th Five-Year Plan for Energy Development, which contains guidelines, targets and major tasks, supporting measures, planning and implementation of energy development.

Regulatory approval from the State Council is no longer required for oil and gas development projects by companies possessing concession rights (Catalogue of Investment Projects Subject to the Approval of Government (2013)). Instead, project sponsors are only required to file the investment proposals with the relevant government institutions for a certificate.

Current regulatory trends

Conventional oil and gas. China's upstream conventional oil and gas market remains limited to private and foreign capital. A few major SOEs still dominate the sector. Foreign capital can only participate in the conventional upstream market by entering into production sharing contracts (PSCs) with those companies. Despite the Chinese government's declared intention to open up the conventional upstream market, limited progress has been made.

Shale gas. In 2011, the Ministry of Land and Resources (MLR) issued Announcement No. 30, giving shale gas a new legal classification as an "independent mining resource" not included in the category of "conventional natural gas". This new legal definition opens up new opportunities for private companies in the shale gas sector. The government's new policies also encourage foreign investment in the shale gas sector, but foreign capital can only participate in the upstream shale gas sector by forming joint ventures with Chinese firms.

The MLR had already organised two rounds of public bidding for shale gas blocks, whereby the winning bidders were granted exploration licences. In the second round of public bidding, two private enterprises were granted exploration rights.

Despite the government's efforts, development of shale gas resources in China remains in its infancy due to:

  • The general lack of experience in shale gas development.

  • Access and development problems associated with transportation networks.

  • Fairly high cost and risk of development.

For these reasons the third round of bidding originally scheduled for 2013 has also been delayed.

China's 12th Five-Year Plan for Shale Gas (2011 to 2015) set shale gas production targets at 230 billion cubic feet by 2015, and 2.1 to 3.5 trillion cubic feet by 2020. Accordingly, China's National Energy Administration (NEA) released the First Shale Gas Industrial Policy in October 2013 to speed up the development of China's shale gas industry. The Policy encourages private investment for infrastructure development, in addition to calling for Sino-foreign partnerships and private entities to engage in the exploration, development and production of shale gas. The first production sharing contract between a foreign and a state-owned gas enterprise was concluded between Royal Dutch Shell and China National Petroleum Corporation (CNPC), and approved in March 2013.

The Policy also calls for the implementation of new tax incentives, modelled on those used for the coalbed methane industry, to promote shale gas exploitation. Additionally, the Policy promises to expedite the land use approval process, encourage technological integration within shale gas pilot development zones, and grant preferential policy treatment in a variety of areas.

CBM. Under current Chinese law, PSC is the only legal structure available for domestic-foreign co-operation on CBM projects. Foreign entities can co-operate with select qualified Chinese enterprises (five SOEs) in the development of CBM projects. Under the old regime, PSCs signed for CBM projects must be approved by Ministry of Commerce (MOFCOM) for them to be legally binding. Thanks to the recent deregulation developments, that approval process was abolished. However, it was unclear under the new regime whether PSCs signed between a Chinese party and a foreign party or between two Chinese parties can be legally binding without the MOFCOM approval.

According to the Coalbed Methane (CBM) Industrial Policy released by the NEA in March 2013, two major CBM bases will be built in Shanxi and Inner Mongolia by 2015. The Chinese government also plans to build another three to five CBM production bases in the next five to ten years. The draft Policy aims to support the CBM industry's development by encouraging private and foreign investment for CBM exploration, development and infrastructure construction. It also provides for support from financial institutions in the form of financial services, credit support and assistance with bond issuance and initial public offerings to boost domestic project financing. The Policy requires companies to commit resources to the timely development of CBM reserves, and raises the minimum investment threshold in addition to fixing the development term. Companies that fail to meet investment targets or project deadlines can be stripped of the mining licence under the Policy.

In April 2014, London-based Green Dragon Gas Ltd (GDG) and China United Coalbed Methane Corporation (CUCMC) entered into a binding agreement through which the Chinese state would invest RMB350 million towards infrastructure and exploration, while revenues would be shared between GDG and CUCMC.

 
2. What is the role of the natural gas sector in your jurisdiction?
 
3. Are domestic energy requirements met by oil and gas production?

About 23.7% of domestic energy needs are satisfied by oil and gas (18.4% oil and 5.3% natural gas) (statistics for year 2012) (source: China Statistics Digest, see website: www.doc88.com/p-5778784810523.html).

Domestic oil production accounts for about 44.6% of China's oil consumption.

 
4. Are there specific government policies to encourage the exploration and production of unconventional gas or oil?

There is currently no answer content for this Question, as it was added to the guide after this article was written.

 

Regulation

Regulatory bodies

5. Who regulates the extraction of oil and gas?

The following authorities regulate extraction of oil and gas in China:

  • The National Development and Reform Commission (NDRC) has general authority to regulate all projects in China, including oil and gas projects. It examines and approves oil blocks available for Sino-foreign co-operation and development plans.

  • The Ministry of Land and Resources (MLR) is primarily charged with regulating oil and gas resources within China. It awards oil exploration/exploitation licences, regulates the transfer of licences and supervises compliance by licensors. It also approves geological survey qualifications and resources/reserves reports.

  • If there is foreign participation, the Ministry of Commerce (MOFCOM) has the authority to approve business structures and M&A transactions.

  • The Ministry of Environmental Protection is charged with administering environmental policy and legislation in China.

  • The State Administration of Work Safety is a separate regulatory authority regulating occupational health and safety matters.

See box, The regulatory authorities.

 

The regulatory regime

6. What is the regulatory regime for onshore and offshore oil and gas exploration and production?

Mineral resources including oil and gas belong to the state. Oil and gas exploration and exploitation are subject to government approval and registration. Applicants for oil/gas exploration rights and oil/gas exploitation must be enterprise legal persons. Exploration fees and exploitation fees must be paid yearly, based on the acreage covered by licences. Exploration licensees must fulfil the following requirements:

  • Minimum exploration investment, increased year-by-year (RMB2,000 per square kilometre for the first year of exploration, RMB5,000 for the second, and RMB10,000 for the third).

  • An exploration licensee must begin work within six months of the date of issue of the exploration licence.

Only the China National Petroleum Corporation (CNPC), China Petrochemical Corporation (SINOPEC) and China National Offshore Oil Corporation (CNOOC) (the "three barrels") are authorised to co-operate with foreign investors in onshore and offshore oil exploitation.

Under the current Chinese law, a production sharing contract (PSC) is the only legal structure permitted for domestic-foreign co-operation on conventional oil and gas and coalbed methane (CBM) development projects. Under the old regime, PSCs signed for those projects must be approved by MOFCOM for them to be legally binding. Thanks to the recent deregulation developments, the approval process was abolished but it is unclear whether PSCs signed between a Chinese party and a foreign party can be legally binding without the MOFCOM approval. It is also unclear if two Chinese companies can enter into PSCs for their joint development of oil, gas, CBM and shale gas projects.

Foreign investment in the exploration and development of oil, natural gas, coalbed methane, oil shale, oil sand and shale gas are all encouraged. However, they are limited to Sino-foreign equity/co-operative joint ventures or other forms of Sino-foreign co-operation (including PSC structures).

Foreign investment in the production and development of natural gas and downstream chemical products in some central/western regions are entitled to certain preferential treatments.

Key legislation regulating oil and gas exploration and development include the:

  • Mineral Resources Law and its Implementing Rules.

  • Measures for Registration Administration of Exploration Blocks of Mineral Resources.

  • Measures for Registration Administration of Mineral Resources Exploitation.

  • Measure for the Administration of Transfer of Exploration Right and Exploitation Right.

  • Regulations on Sino-Foreign Co-operative Exploitation of Onshore Petroleum Resources.

  • Regulations on Sino-Foreign Co-operative Exploitation of Offshore Petroleum Resources.

  • Tentative Regulations on the Administration of Assignment and Transfer of Mining Rights.

  • Notice on the Relevant Matters Concerning Further Expansion of Foreign Co-operation on Coalbed Methane Development.

  • Circular on Strengthening the Prospecting, Exploitation, Supervision and Administration of the Shale Gas Resources.

  • Foreign Investment Industrial Guidance Catalogue (2013 edition) (National Development and Reform Commission).

  • The Catalogue of Priority Industries for Foreign Investment in the Central-Western Regions (2013 edition) (National Development and Reform Commission, Ministry of Commerce).

  • The Policy on the Utilisation of Natural Gas (National Development and Reform Commission).

  • The 12th Five-Year Plan for the Development and Utilisation of Coalbed Methane (National Development and Reform Commission).

 

Rights to oil and gas

Ownership

7. How are rights to oil and gas held?

All oil and gas resources in China belong to the state. The Ministry of Land and Resources (MLR) grants exploration and/or exploitation licences on behalf of the state through an application process, public bidding, or auction, depending on the circumstances.

One of the key requirements to obtain an oil exploration (or exploitation) licence is to first obtain approval from the State Council. The State Council's approval may be in the form of either:

  • Approval of the establishment of an oil company.

  • Approval of oil and gas exploration (or exploitation) operations.

Conventional oil and gas exploration and exploitation rights are only granted to qualified state-owned enterprises (SOEs). Private enterprises are still excluded from these rights. Foreign capital can partner with a small number of major SOE oil and gas companies (mostly the "three-barrels") in the upstream market using the production sharing contract (PSC) structure. Under the PSC structure, the Chinese partners hold the exploration and exploitation rights while the foreign partners serve as the operator managing the exploration, development and production of the venture. Conventional oil and gas PSCs entered into between SOEs and their foreign partners no longer require MOFCOM approval (see Question 4). Therefore, to date, the upstream exploration and production (E&P) market for conventional oil and gas is still dominated by major SOE oil and gas companies.

Similarly, foreign capital can only participate in the upstream coalbed methane (CBM) market by partnering up with select SOEs using a PSC structure. A CBM PSC must be filed (registered) with MOFCOM.

For upstream shale gas exploration and production, due to the recent reforms, private enterprises and foreign enterprises are allowed to participate in the public tendering process for shale gas exploration and exploitation rights. In addition, foreign investors could co-operate with Chinese SOEs in shale gas development through typical Sino-foreign joint venture structures.

Overall, from the perspective of foreign investors, foreign enterprises will not be granted exploration or exploitation licences unless in the field of shale gas development. For CBM and conventional oil and gas development, the PSC structure with qualified Chinese SOEs is the only possible co-operative structure.

 

Nature of oil and gas rights

8. What are the key features of the leases, licences or concessions which are issued under the regulatory regime?

Lease/licence/concession term

Oil and gas exploration licences are issued for terms of up to seven years. Extensions can be obtained for up to an additional two years.

Exploitation licence terms can vary based on the scale of the project, and can be up to 30 years. Extensions are obtainable.

Oil and gas mining rights can be leased to the lessee by the holder of the right. The lease of a mining right must accord with the conditions for transfer under the applicable law. During the period of lease of a mining right, the original mining right holder must continue to perform its statutory obligations as mining right holder and assume legal liabilities. Leases are subject to Ministry of Land and Resources (MLR) approvals.

Fees

Licensees must pay the exploration registration fee (RMB50 to RMB100) and the exploitation registration fee (RMB100 to RMB500).

Liability

An overdue fine of 0.2% per day from the date of due payment is imposed. If payment cannot be made within the prescribed time limit, the exploration or exploitation licence will be revoked.

Restrictions

The maximum acreage for each oil/gas exploration project is 2,500 basic unitary blocks (a basic unitary block is demarcated by longitude 1' x latitude 1').

An exploration licensee is prohibited from conducting exploitation activities before obtaining an exploitation licence.

The scope of fields, major minerals, exploitation methods and the name of the relevant enterprise must be in line with the exploitation licence.

 
9. How are such leases, licences or concessions awarded?

Only legal persons can apply for oil/gas exploration rights, and exploitation rights. Applicants for oil/gas exploration/exploitation rights must submit the required documents to the Ministry of Land and Resources (MLR) for approval. The MLR issues decisions within 40 days from the date of receipt of the application. If the MLR approves the application, the applicant must pay the associated exploration/exploitation fees for the first year (see Question 6) and the registration fee (see Question 8) within 30 days from the date of receipt of the approval notice to receive the licence.

Technically, exploration and exploitation rights can also be obtained through public bids. The MLR evaluates and determines the best candidate as the bid-winner. In practice, this rarely happens.

 

Transfer of rights

10. How are oil and gas rights transferred? Are there any restrictions on the disposal of interests?

All transfers of oil and gas interests are subject to Ministry of Land and Resources (MLR) approval. The MLR must notify both parties of its decision within 40 days from the date of receipt of the application. If approved, both parties must go through a modification of registration formality at the MLR within 60 days from the date of receipt of the approval notice. The transferee is then able to obtain the exploration/exploitation licence (Administrative Measures on the Transfer of Exploration Right and Exploitation Right).

Transferees must be legally qualified to own the relevant licence (see Question 4). Exploration licences cannot be transferred until the minimum exploration expenditure obligations are generally satisfied (see Question 4).

Exploitation licences are generally not transferable.

 

Tax

11. What payments are payable by oil and gas interest holders to the government?

The following taxes are payable:

  • Value added tax (VAT) is levied at 5% on gross production of oil and gas. No input VAT credit is allowed for the calculation of VAT. Export of crude oil and natural gas is not eligible for a VAT refund. Local levies, including City Construction Tax (CCT), Educational Surcharge (ES) and Local Educational Surcharge (LES), are levied on the amount of VAT paid. The applicable rates of the local levies are as follows:

    • CCT: 7% for taxpayers located in cities; 5% for taxpayers located in towns and the country; 1% for taxpayers located in places other than cities, towns and the country;

    • ES: 3%;

    • LES: 2%;

    • for offshore oil production projects, the local levies total 6% of the amount of VAT paid; for onshore oil production projects, local levies total 10% or 12% of the amount of VAT paid, depending on the location of the project.

  • Resource tax is levied at 5% on the gross sales of oil and gas.

  • Enterprise income tax is levied at 25% on taxable income, which is the difference between assessable income and deductions/losses.

Customs duty and import VAT is generally levied on the importation of goods. The applicable duty rate varies depending on the category of goods imported while the import VAT rate is generally 17%. However, duty and VAT exemption may be available for certain prescribed goods imported by Sino-foreign co-operative production sharing contract (PSC) projects (see below).

During the period of the 12th Five-Year Plan (from 1 January 2011 to 31 December 2015), equipment, instruments, parts and accessories, and specialised tools imported (including imported leasing) by Sino-foreign PSC projects approved by the state for onshore oil and gas exploration and production within the prescribed import quota are exempt from customs duty and import VAT, if all the following conditions are satisfied:

  • The imported goods could not be manufactured domestically in China or the performance of the domestically manufactured goods could not meet the requirement (for oil and gas exploration and production).

  • The imported goods are used directly in oil and gas exploration and production, and prescribed in the appendix to the relevant circular (Caiguanshui [2011] No. 31, issued by the State Administration of Taxation (SAT), Ministry Of Finance (MOF) and General Administration of Customs (GAC) on 8 August 2011).

This exemption also applies to offshore oil and gas exploration and production projects, but under a separate circular (Caiguanshui [2011] No. 32), issued by the SAT, MOF and GAC on 8 August 20011.

For Sino-foreign co-operative PSC projects approved before 31 December 1994, import of the materials prescribed in the list (see above) continue to be exempt from customs duty and import VAT.

 
12. Does the government derive any other economic benefits from oil and gas exploration and production?

Special oil gain levy

A special oil gain levy, administered by the Ministry of Finance, is a kind of non-tax fiscal revenue of the central government. It is levied on all oil production enterprises (including Sino-foreign production sharing contract (PSC) projects) that sell crude oil produced in China, irrespective of whether the crude oil is sold inside or outside of China.

The special oil gain levy is charged at progressive rates, depending on the monthly weighted average of the selling price of crude oil of an enterprise. The levying threshold is US$55/barrel. The levy rates and quick calculation deductions are:

  • Crude oil price of US$55 to US$60 per barrel (inclusive): 20% levying rate; quick calculation deduction of US$0 per barrel.

  • US$60 to US$65 (inclusive): 25%: US$0.25.

  • US$65 to US$70 (inclusive): 30%: US$0.75.

  • US$70 to US$75 (inclusive): 35%: US$1.5.

  • Over US$75: 40%: US$2.5.

Mineral resources compensation fee

A mineral resources compensation fee is levied at 1% on the gross sales of oil and gas production for Sino-foreign PSC projects.

Petroleum royalties

Petroleum royalties are levied at progressive rates, which range from 2% to 12.5% for crude oil, and 1% to 3% for natural gas. They are paid in kind by all oil and gas production enterprises operating onshore and offshore in China. Petroleum royalties were replaced by resource tax from 1 November 2011 when the new resource tax regime became effective. However, for PSCs concluded before 1 November 2011, petroleum royalties still apply during the effective period of the PSC.

Signature bonus

The signature bonus, which is a lump-sum payment made by an oil and gas production enterprise to the state on signing of a PSC, is determined based on the volume of oil and gas resources and economic value of the oilfield, and specified in the relevant PSC.

Exploration bonuses

Exploration bonuses, which are determined based on the area covered by a PSC, are calculated and paid on an annual basis at RMB100 per square kilometre per year for the first three exploration years. For each subsequent exploration year, an extra RMB100 per square kilometre per year is added, up to a maximum of RMB500 per square kilometre per year for the seventh year and any extension. Exploitation bonuses are paid annually according to the acreage of the fields at a rate of RMB1,000 per square kilometre per year.

 
13. What taxes and duties apply on import and export of oil and gas?

The applicable taxes and duties are:

  • Import duty for oil (in 2014: RMB85 per tonne of general tariff or no duty in the case of most-favoured-nation status).

  • Export duty for oil in 2014: 5% (formula: duty-paid value x 5%).

  • Import duty for gas: 0%.

  • Import VAT for oil: 17% (formula: (duty-paid value + import duty) x 17%).

  • Import VAT for gas: 13%.

  • Export VAT may vary depending on the exporter's status and other factors.

 

Transportation by pipeline

14. What regulatory requirements apply to the construction and operation of oil and gas pipelines?

Generally, pipeline design and construction is subject to review based on criteria related to the requirements for safety, environmental protection, optimal land use and economic feasibility. Nationwide pipelines must be consistent with the national energy plan and the overall land use planning. An environment impact assessment must be obtained before construction (Law on the Protection of Oil and Gas Pipelines 2010).

The construction of trans-provincial oil/gas pipeline networks with an annual transportation capacity of 500 million cubic metres or more must be approved by the National Development and Reform Commission (NDRC). Other oil/gas pipeline network projects must be approved by the provincial counterpart of the NDRC (State Council's Decision on the Reform of the Investment Regime). The qualifications of the enterprises and personnel engaged in the design, installation, use and inspection of pipelines must be accredited by the General Administration for Quality Supervision, Inspection and Quarantine, or its local counterpart as the case may be (Item 249, Directory of the Projects subject to Administrative Approval according to the State Council's Decision).

Depending on the business to be conducted, the following qualification certificates may be required:

  • The Urban Gas Enterprise Qualification Certificate.

  • The Professional Pipelines Construction Contractor Qualification Certificate.

  • The Installation, Alteration, Repair and Maintenance Licence of Special Equipment.

  • The Safety Production Licence.

  • The Measurement Assurance System Accreditation Certificate.

For oil and gas transportation using cross-border pipelines, the regulations and requirements set out in Measures of the Customs of the People's Republic of China for the Administration and Supervision of the Pipeline Transportation of Imported Energy (2011) must be followed.

 
15. Is there a system of third party access to pipelines and other infrastructure?

Private capital is encouraged to work with state-owned oil companies on the construction of oil/gas trunk pipelines and oil/gas branch pipelines in various ways (NEA's Implementing Opinions Encouraging and Guiding Further Expansion of Private Capital Investments in the Field of Energy). However, there is no clear regulation on third party access. Specific regulations indicate that a particular licence for access to pipelines would be needed. According to Article 18(4) of the Measures for the Administration of Fuel Gas in Urban Areas, gas supply enterprises are prohibited from supplying fuel gas for business to any units that do not have a Qualification Certificate of Urban Fuel Gas Enterprise.

In February 2014, the National Energy Administration released a notice called Measures for the Supervision of Opening up Oil and Gas Pipeline Facilities in a Fair Manner (for Trial Implementation) (effective date yet unknown), which requires fair and open access to midstream firms' pipeline networks for third parties.

Effective implementation of the regime can be challenging.

 

Health, safety and the environment

Health and safety

16. What is the health and safety regime for oil and gas exploration and extraction, and transportation by pipeline?

The major laws and regulations on safety for oil and gas production include the:

  • Safety Production Law.

  • Offshore Oil Safety Production Regulations.

  • Detail Rules on Offshore Oil Safety Management.

  • Provisional Regulations on the Supervision and Administration of Oil and Gas Pipelines Safety.

  • Safety Rules for Coalbed Methane Surface Mining (for trial implementation) (2013 amendment).

  • Health, Safety and Environment Management System for Oil and Gas Industries.

Where applicable, internal documents of the key state-owned oil companies should also be referred to, for example, CNPC's Guidelines on Health, Safety and Environment Management System for Oil and Gas Drilling and CNOOC's Requirements for Offshore Oil Operations Safety Training.

Offshore oil extraction

Before geophysical prospecting and/or well drilling, the operator/contractor of offshore oil operation facilities must complete a filing procedure with the local authority in charge of offshore oil safety. The local authority must examine the submitted documents and, if necessary, conduct an on-site investigation.

Life-saving and fire-fighting equipment and hazardous items on the (offshore) oil facilities must be stored and managed according to legal requirements; and where applicable, stand-by vessels and helicopters must be maintained according to legal requirements.

Labour protection, safety training and anti-hydrogen sulphide safeguard measures must be arranged according to legal requirements.

A contingency plan must be established and filed with the local authority and updated according to (offshore) operation conditions; in the case of accidents, a reporting mechanism must be followed and contingency measures must be taken.

Workers have a right to stop and evacuate in the case of emergencies (Article 47, Safety Production Law).

Workers have a duty to report any potential safety hazard to the management (Article 51, Safety Production Law).

Coalbed methane (CBM) surface mining

The surface mining of CBM and related design, drilling, cementation, survey, fracture, extraction, transmission and compression activities must comply with relevant laws, regulations and standards. The person in charge, the full-time production safety managers and the special operation personnel must obtain relevant qualification certificates. Other operational personnel must receive safety training. A contingency plan must be established. In the case of an accident, a rescue must be organised and the accident must be reported in a timely manner to the safety authority.

Transportation

Onshore pipelines must be constructed, checked and accepted in accordance with the national standards (Standards for the Construction and Acceptance of Long Distance Oil/Gas Pipelines (GB 50369 – 2006)).

A similar advance filing requirement to that stated above applies to the service of seabed pipelines.

 

Environmental impact assessments (EIAs)

17. Is an EIA required before extracting or processing onshore or offshore oil and gas?

An environmental assessment is required by law for any construction project that has an impact on the environment. In particular, an environmental impact report must be prepared for any oil/gas/coalbed methane (CBM) extractions, crude oil processing, gas processing and construction of oil or gas pipelines. Although the related law is not clear, an assessment most likely requires an external body, due to qualification requirements (Law on the Environmental Impact Assessment and the Directory of Construction Projects under Classified Administration for Environment Protection).

 
18. What are the different stages of the EIA?

An EIA includes the following stages:

  • Preparing the environmental impact report. If the project involves conservation of water and soil, a plan for the conservation of water and soil approved by the authority in charge of water is required.

  • If there is significant impact on the environment, public opinions must be solicited through, for example, a hearing.

  • Submission of the environmental impact report to the competent environmental protection authority for examination and approval.

  • Notification to the construction unit by the authority of its decision within 60 days from the date of receipt of the environmental impact report.

In practice, it usually takes two months for an agency to prepare the environmental impact assessment report and it takes another three to five months for the authority to make its decision (Law on the Environmental Impact Assessment).

 

Environmental permits

19. Is there a permit regime for environmental damage or emissions produced during the extraction or processing of oil and gas?

The state must implement the pollutant emission licence administration system in accordance with the provisions of the law. Enterprises, public institutions and other producers and business operators must only discharge pollutants according to the pollutant emission licence and must not discharge pollutants without obtaining the pollutant emission licence (Article 45, Environmental Protection Law of the People's Republic of China). However, the permit regime has not yet been consolidated under one law, although China has been seeking public opinions on its Draft Regulations on the Administration of Pollutant Emission Permits. The major permit provisions applicable to different types of pollutants are as follows.

Water pollutants

China has implemented a total amount control policy on key water pollutant emissions and local governments allocate quotas to pollutant discharging entities. Enterprises and individuals cannot discharge industrial wastewater until they have obtained an emission permit from the environmental protection authority (Article 10, Rules for Implementation of the Law of the People's Republic of China on Prevention and Control of Water Pollution). Enterprises, public institutions and industrial and commercial sole proprietors engaging in industrial, construction, catering, medical and other activities ("Drainage entities") must apply to the Competent Departments of Urban Drainage for a permit before discharging sewage into urban drainage facilities (Article 21, Regulations on Urban Drainage and Sewage Treatment). In addition, the drain outlet must be established according to legal requirements. If an outlet is to be established on a river or lake, an approval by the authority in charge of water/river basins must be obtained. Enterprises and individuals that directly discharge pollutant into the water must pay a sewage charge in accordance with the type and amount of the pollutants, as well as the standard charge.

Additionally, there are separate requirements and standards for offshore emissions. Enterprises that discharge land-sourced pollutants into the sea must file a report with the local environmental protection authority and submit technical documents on the control of sea pollution. For emissions of oily sewage from fixed or movable platforms or other offshore units, the related national standards must also be met, in particular:

  • Standards on the Emission of Pollutants from Vessels (GB3552-83).

  • Standards on the Emission of Oily Sewage Generated by the Offshore Oil Development Industry (GB4914-85).

Atmospheric pollutants

Enterprises emitting pollutants into the atmosphere must file a report with the local environmental protection authority with information regarding its pollutant emission facility, processing facility, and the usual type, amount and density of the pollutant. Sulfur dioxide and acid rain pollution control regions approved by the State Council, and regions failing to achieve the atmospheric quality standard, may be defined as a key atmospheric pollutant emission amount control region by the State Council or provincial governments. The local government of such key pollution control regions must verify the enterprises' pollutant emission amounts and issue permits for the emission of key atmospheric pollutants. The discharging enterprises must adhere to the emission conditions stated in the permit (Article 12 and 15, Law of the People's Republic of China on the Prevention and Control of Atmospheric Pollution).

 

Environmental concerns

20. Are there any specific government policies and/or incentives aimed at meeting the environmental concerns associated with the exploration and production of oil and gas?

There is currently no answer content for this Question, as it was added to the guide after this article was written.

 

Waste

21. What are the regulations on the disposal of waste products resulting from oil or gas extraction or processing?

Enterprises that generate waste from oil/gas extraction or processing must provide information on the type, amount, whereabouts, storage and disposal of the waste to the local environmental protection authority. Enterprises must reuse industrial waste to the extent possible in the particular economic and technical situation. If the waste cannot be reused, it must be properly stored or treated so that it is harmless. The applicable national environmental protection standards on the construction of waste storage and disposal facilities must be followed. If the enterprise is terminated, the pollution control measures suitable for waste storage and disposal facilities must be taken in advance (Article 32, 33 and 35, Law of the People's Republic of China on Prevention and Control of Environmental Pollution by Solid Waste).

If hazardous wastes (in particular, oil sludge, bottom sludge and other waste mineral oil generated in oil extraction or processing) is generated, the enterprise must formulate an appropriate hazardous wastes management scheme and file it with the local environmental protection authority. Hazardous waste must be disposed in accordance with national specifications, otherwise, the local authority must designate a third party to dispose it and the related expenses must be borne by the enterprise generating the waste. A licence for hazardous wastes disposal must be obtained from the competent environmental protection authority (Article 53 and 57, Law of the People's Republic of China on Prevention and Control of Environmental Pollution by Solid Waste).

The relevant laws and regulations include the:

  • Law on Environmental Protection.

  • Law on the Prevention and Control of Environmental Pollution by Solid Wastes.

  • Law on the Prevention and Control of Atmospheric Pollution.

  • Law on the Prevention and Control of Water Pollution.

  • Regulations on the Administration of Environmental Protection of Construction Projects.

  • National Directory of Hazardous Wastes 2008.

  • Technical Specifications for Pollution Control of Waste Mineral Oil Recovery, Recycling and Reuse.

 

Flares and vents

22. Are flare and vent regulations in place?

Emission of natural gas is subject to the approval of the local environmental protection authority. In principle, flammable gas should be recycled, and in the case of a breakdown of the recycling device, the flammable gas must be fully burned or other measures must be taken in order to reduce the atmospheric pollution. If sulphurous gas is discharged, a desulphurisation device must be used or other desulphurisation measures must be taken (Articles 37 and 38, Law on the Prevention and Control of Atmospheric Pollution). The location of a releasing flare must be in the direction of the wind with a minimum frequency in the whole year and upwind of the working field (Article 120, Safety Specifications on Ground Mining of Coalbed Methane (Trial)).

For offshore testing, the oil and gas must be fully burned through the burner (Article 15, Regulations on the Administration of Environmental Protection in Offshore Oil Exploration and Development).

Some local regulations on environmental protection in onshore oil exploration and development include similar requirements for flaring and recycling gas (for example, Article 14, Shandong Provincial Regulations on Environmental Protection in Onshore Oil Exploration and Development). Reference may also be made to technical specifications adopted by the state oil companies.

 

Decommissioning

23. What are the decommissioning obligations and liabilities that arise?

Generally, an enterprise must apply to the authority for decommissioning, submitting documents as required. The enterprise must also complete any work regarding labour safety, conservation of water and soil, land rehabilitation and environmental protection or pay up the related expenses for land rehabilitation and environmental protection (Articles 32 and 33, Implementing Rules for the PRC Mineral Resources Law).

In an offshore operation, the operator/contractor must report to the local COOOSO by supplying the required documents 30 days before the proposed decommissioning/abandonment. A post-decommissioning/abandonment report must also be followed. In addition, the related regulations adopt different requirements for permanent and temporary decommissioning/abandonment (section 9, Chapter 3 of the Detail Rules on Offshore Oil Safety Management).

 

Sale and trade

24. How is trade in oil and gas usually completed?

Domestic trade

Sale of crude oil and product oil (including gasoline, kerosene, diesel oil, ethanol gasoline and biodiesel) are subject to licensing. The applicant must submit an application and supporting documents to MOFCOM for approval. The applicant must meet the requirements for business status and facilities, registered capital, and related certificates. The applicant becomes entitled to engage in the related business on receiving one of the following (Measures on the Administration of the Crude Oil Market and the Measures on the Administration of the Product Oil Market):

  • Approval Certificate for Operating Crude Oil Sales.

  • Approval Certificate for Operating Product Oil Wholesale.

  • Approval Certificate for Operating Product Oil Retail.

Foreign invested enterprises are also allowed to apply for these licences.

International trade

China adopts parallel administrations on the import of crude oil and product oil by state trading enterprises (enterprises/institutions licensed by the state to engage in the importation of certain types of goods that are subject to the state trading administration) and non-state trading enterprises. MOFCOM regularly publishes a list of names of the state trading enterprises. Other enterprises may become a non-state trading enterprise if the following conditions are fulfilled (Trial Measures for the State Trading Administration of the Import of Crude Oil, Product Oil, and Fertiliser):

  • Having a foreign trade business qualification.

  • Meeting the requirements published by MOFCOM for dealing with commodities that are subject to the state trading administration.

  • Registering with MOFCOM.

In order to import crude oil, both state trading enterprises and non-state trading enterprises must apply to MOFCOM for an import licence. However, the import licences for non-state trading enterprises are limited to an import quantity permitted by the state. For instance, the permissible total quantity of crude oil allowed to be imported by non-state trading enterprises in 2013 is 29.1 million tonnes (MOFCOM's Public Notice No. 67, 2012, see website: www.mofcom.gov.cn/aarticle/b/c/201210/20121008384083.html).

For gas, there is no restriction on the import/export quota and the right to trade.

In addition to import and export, crude oil and gas are subject to the Administration of Quality Supervision Inspection and Quarantine (AQSIQ) and a certificate of inspection of goods inwards or outwards is required for the import or export.

 
25. Are oil and gas prices regulated?

Enterprises determine crude oil prices by referring to international market prices. Refined oil is subject to governmental guidance or government pricing, in particular:

  • The governmental guidance price applies to the retail and wholesale of gasoline and diesel, as well as sale of gasoline and diesel to wholesale business, railway customers and transportation customers.

  • Government (regulated) pricing applies to the supply of gasoline and diesel oil for state reserve or Xinjiang Production and Construction Corps as well as the factory price of aviation gasoline and aviation diesel.

The pricing of gasoline and diesel must be adjusted every ten business days, and the adjustment comes into force at 12pm on the release date.

The pricing regime is regulated by the National Development and Reform Commission (NDRC) and its provincial counterparts (Trial Measures for the Administration of Oil Prices).

The natural gas price is determined at gas station supply stage, by governmental guidance, while the prices of shale gas, coalbed gas, coal gas, and liquefied natural gas (LNG) are determined freely by suppliers and consumers (Circular of the National Development and Reform Commission on the Adjustment of Natural Gas Prices).

 

Enforcement of regulation

26. What are the regulator's enforcement powers?

Orders

The environmental regulators can order rectifications to be made for any non-compliance within a prescribed time period. If the rectifications are not made within the required time period, the regulators can order the entities involved to stop production and business.

Fines and penalties

Fines or penalties are usually imposed by the environmental regulators where rectifications are not made by the entities involved within a prescribed time period. Fines or penalties can also be imposed on the entities involved with a concurrent order to rectify, depending on the specific circumstances.

Other

In addition to orders and fines, environmental regulators can also impose other administrative penalties on the entities involved and the personnel responsible for violation of relevant regulations.

Legal liabilities and the corresponding sanctions vary depending on the regulations concerned. Generally, administrative penalties include:

  • Warnings.

  • Fines.

  • Forfeiture of illegal earnings or illegal property.

  • Orders to rectify the non-compliance, or stop production and business.

  • Suspension or withdrawal of permits or licences.

  • Administrative detention.

  • Other administrative punishments as stipulated by law or administrative regulations such as Article 8 of the Law on Administrative Penalties.

 
27. Is there a right of appeal against the regulator's decisions?

Individuals, legal persons and other organisations that consider certain specific administrative acts to infringe on their lawful rights or interests can apply for administrative reconsideration. This must generally be within 60 days of the date when they become aware of such administrative acts (unless there are force majeure or other legal reasons for an extension).

Individuals, legal persons and other organisations can apply for administrative reconsideration if they (Law on Administrative Reconsideration):

  • Refuse to accept decisions made by administrative bodies that impose administrative penalties on them.

  • Refuse to accept decisions made by administrative bodies that impose compulsory administrative measures on them, including restrictions on the freedom of persons.

  • Refuse to accept decisions made by administrative bodies concerning alterations, suspensions or revocations of documents such as permits, licences and qualification certificates.

  • Refuse to accept decisions made by administrative bodies concerning the right of ownership in, or the right to the use of, natural resources.

  • Consider that administrative bodies infringe on their lawful decision-making operational power.

  • Consider that administrative bodies infringe on their lawful property rights.

  • Consider that administrative bodies illegally raise funds, collect money or things of value, apportion expenses or illegally require them to perform other duties.

  • Consider that administrative bodies fail to deal with their applications for documents such as permits, licences and qualification certificates, or their applications for examination and approval and registration of their affairs, in accordance with the law, even though the applications meet the requirements as prescribed by law.

  • Apply to administrative bodies requesting them to perform their statutory duties to protect their personal or property rights, but the bodies fail to do so in accordance with law.

  • Apply to administrative bodies requesting that they pay, in accordance with the law, pensions for the disabled or for the families of the deceased, social insurance money or the guaranteed minimum for living expenses, but the bodies fail to do so in accordance with the law.

  • Consider that other specific administrative acts taken by administrative bodies infringe on their lawful rights or interests.

 

Reform

28. Are there plans for changes to the legal and regulatory framework?

It is expected that the state will implement the Energy Law and the administrative regulations on oil reserve and protection of offshore oil/gas pipelines, and will further push forward deregulation of the oil/gas industry with a view to opening up the industry to private investors.

Improving the performance of China's state sector is a key goal for China's new leadership, which laid out its plans in a major blueprint designed for major SOE ownership reform (the "hybrid ownership reform") announced in November 2013. As a result, private investors (industry players and private equity (PE) funds) are invited to invest in or with state-owned companies, including those centrally administered SOEs (which include the major SOE oil and gas companies currently dominating the whole value chain of the oil and gas industry). For example, the China Petroleum & Chemical Corporation (SINOPEC) has been in discussions with 25 investors proposing to sell nearly 30% of its sales and marketing unit for US$17.5 billion (a notable injection of private capital into China's largest oil refiner).

Further legal and regulatory reform is expected in the coming years, with a view to opening up the upstream, mid-stream and downstream business of China's oil and gas industry to private and foreign capital. China's oil and gas sector will benefit immensely by further opening up and implementing market-oriented reforms.

In relation to shale gas, the MLR is expected to grant further exploration licences through further rounds of public bidding, despite the fact that shale gas developers face major challenges in funding, and technical and environmental issues.

In the area of coalbed methane (CBM), it appears that major regulatory reform in the short term is unlikely, considering that major SOE oil and gas companies already control most of the resources.

 

The regulatory authorities

National Development and Reform Commission

Address. No. 38 Yue Tan Nan Jie, Xi Cheng District, Beijing (100824)
T +86 10 6850 2000
E ndrc@ndrc.gov.cn
W www.sdpc.gov.cn

Main responsibilities. Proposes plans to balance the total production of oil, gas and important oil products. Determines the key upstream development projects, and examines and approves the blocks for Sino-Foreign co-operation and the development plan. Determines and promulgates prices and price policy on crude oil, gas, pipeline transportation and product oil.

Ministry of Commerce

Address. No. 2 Dong Chang An Jie, Beijing (100731)
T +86 10 6519 7962/6519 7875
F +86 10 6519 7829
E wz_office@mofcom.gov.cn
W www.mofcom.gov.cn

Main responsibilities. Administers and oversees nationwide foreign investment examinations and approvals. Examines and approves major contracts on foreign investment projects. Supervises and inspects the compliance of foreign invested enterprises with laws, regulations and corporate documents. Works with other government authorities on the promulgation of the Catalogue of Industries for Guiding Foreign Investment.

Ministry of Land and Resources

Address. No. 64 Fu Nei Da Jie, Xi Cheng District, Beijing (100812)
T +86 10 6655 8748
F +86 10 6655 8747
W www.mlr.gov.cn

Main responsibilities. Responsible for the planning, administration, protection and rational utilisation of natural resources such as land, mineral and marine resources in China. Organises the survey and evaluation of mineral and marine resources. Supervises the examination, approval, registration and licensing of the rights to explore and exploit mineral resources. Manages mineral reserves and geological data, and oversees geological exploration work and the qualifications of geological exploration organisations.

National Energy Administration

Address. No. 38 Yue Tan Nan Jie, Xi Cheng District, Beijing (100824)
W www.nea.gov.cn

Main responsibilities. Proposes energy development strategy and industrial policy. Administers the oil/gas, coal, power, new energy and renewable energy industries and formulates industrial standards. Proposes state oil-reserve planning and monitors the change of supply and demand in international oil markets. Carries out international energy co-operation by negotiating and entering into contracts with foreign energy administrations and international energy organisations. Examines and approves major overseas investments in the energy sector.

State Administration of Work Safety

Address. No. 21, He Ping Li BeiJie, Dong Cheng District, Beijing (100713)
T +86 10 6446 3366
W www.chinasafety.gov.cn

Main responsibilities. Supervises and inspects safety production and occupational health status of the onshore and offshore oil/gas industry, awards occupational health and safety permits, participates in investigation and management of grave accidents and emergency rescue.



Online resources

W www.lawinfochina.com or http://en.pkulaw.cn

Description. These websites are maintained by Peking University and provide English translations of laws and regulations as well as other legal information.

W http://law.npc.gov.cn

Description. This website is maintained by the Standing Committee of the National People's Congress and provides laws and regulations, primarily in Chinese.

W www.fdi.gov.cn/pub/FDI_EN/default.htm

Description. This website is maintained by the Ministry of Commerce and provides information regarding investment in China.

W www.gov.cn

Description. This website is maintained by the central government and provides laws, regulations and other official documents, primarily in Chinese.


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