China’s oil fields are drying up. The pressing need for the People’s Republic of China (China) to develop new energy sources is a key driving force for the shale gas fever that has swept across the country in recent years. China has identified several onshore shale gas regions, including the Northwest region, Qingzang region, the upper Yangzi (Yunnan, Guizhou and Guangxi) region, the mid and lower Yangzi and Southeast regions, and the East and Northeast regions. Since 2009, when China started shale gas exploration, the reserves being invested in these areas have reached 130 billion cubic metres (BCM) and about 200 wells have been drilled to date.
China is believed to have the world’s largest known shale gas reserves. It is estimated by the Ministry of Land Resources (MLR) that the reserves of shale gas in China amount to 885 trillion cubic feet (TCF) while the US Energy Information Administration puts China’s reserves at 1,275 TCF, which is even larger than the combined reserves of the USA and Canada.
According to China’s 12th Five-year Plan for Shale Gas (launched in March 2012, the Five-year Plan), China should be extracting 6.5 BCM of shale gas in order to meet at least 10 per cent of the country’s energy demands with shale gas by the end of 2015. Further, in a national meeting held in September 2014 to draw up the energy sector development blueprint for the next five years, it was proposed that the yearly output for shale gas should reach 30 BCM by the end of 2020.
To achieve these targets, China has accelerated the issuance of exploration licences for shale gas reserves. By the end of July 2014, 54 exploration licences were issued, covering an area of 170,000km2 with 400 exploration wells in total. In a recent shale gas and liquefied natural gas (LNG) industry development seminar, held in Huadian, a government official confirmed that China’s shale gas production reached 1.93 BCM in 2013 and could reach 1–1.5 BCM by the end of 2014 (the actual 2014 production has not been disclosed to public). The 6.5 BCM target in the Five-year Plan will probably therefore be achieved.
Shale gas history
The study of shale gas reserves in China only commenced in 2004, and a preliminary geological survey of the known shale deposits was carried out in 2005. From 2006 to 2007, the MLR analysed shale gas prospects in China, and during 2008 it conducted a comprehensive study of the comparative geological conditions in the US and China for shale gas deposits. The shale gas prospects in the upper Yangzi region were the focus of a follow-up study, and a number of areas in the region were earmarked for trial development. In 2009, a number of blocks were listed as priority shale gas development projects, but at the time, shale gas was not listed as a type of separate mineral in China. In May 2010, China saw its first successful hydraulic fracturing exercise using US fracturing technology.
It was only in December 2011 that shale gas was designated by the MLR as a separate mineral, distinct from conventional hydrocarbons and categorised as the 172nd mineral asset. Shale gas was then listed by the People’s Republic of China’s National Development and Reform Commission (NDRC) as one of the priorities in the Five-year Plan. The move signals that the exploration and exploitation of shale gas is exempt from the current restrictive legal regime that is in place for conventional hydrocarbons in China. This development has opened up shale gas exploration and production beyond the ‘big three,’ generally known as Sinopec, PetroChina and CNOOC, the three state-owned companies that dominate the Chinese oil and gas market.
Generally, the big three have previously been considered to lack experience in the unconventional hydrocarbon sector. However, during the 2008 crisis, their State-financed capital flow gave them the flexibility to expand globally and establish partnerships with other international oil companies, thus gaining the required technical expertise. Though their success in the shale gas fields at home has so far been moderate, there has been some progress. The Fuling shale gas field in Chongqing, Sichuan province, developed by PetroChina, has seen some exciting breakthroughs in the development of horizontal drilling and hydraulic fracturing technologies. Sinopec has announced new findings in the monitoring of microseisms and has finally worked out a comprehensive set of its own prospecting techniques for vertical and horizontal fracturing. PetroChina has reportedly made a significant breakthrough by successfully applying the horizontal drilling and hydraulic fracturing technologies to two pilot shale projects located in Sichuan and Yunnan provinces in Southwest China. CNOOC reported recently that it had obtained the basic skills required for drilling and completion and is capable of conducting the initial design of the necessary equipment. The achievements of Shaanxi Yanchang Petroleum Group are even more impressive; the group has successfully conducted trials for carbon dioxide fracturing, the very latest technique that has caught the attention of the leading shale gas players looking for a liquid-free fracturing solution.
Four major government authorities regulate China’s shale gas sector: the National Energy Administration (NEA), the MLR, the NDRC and the Ministry of Finance (MOF).
The NEA is mainly responsible for high-level supervision of the energy sector. This includes developing plans and standards for unconventional gas exploration and launching industry policies and incentives to encourage the development of the unconventional gas industry. On July 31, 2013, the NEA approved the establishment of the Shale Gas Industry Standard Commission. The Commission is tasked to set technical standards and guidance for shale gas exploration and exploitation.
The MLR is responsible for the general administration of mineral issues, including organising the research and planning of potential shale gas production blocks, running tendering processes and seeing to the registration and issuing of exploration and exploitation licences.
The NDRC is involved in designing the pricing system for natural gas. For example, it sets the price for natural gas throughout the entire value chain, including production, transmission and consumption. However, according to the first Shale Gas Industry Policy (the Shale Gas Policy) introduced on October 30, 2013, the wellhead price of shale gas is no longer set by the NDRC.
The MOF is responsible for providing fiscal support to the shale gas players in the prospecting phase.
Current legal framework
The principles guiding China’s shale gas policies are set out in the Five-year Plan. The current legal framework for the exploration and exploitation of shale gas is based on the Notice Regarding the Strengthening of Shale Gas Exploration, Exploitation, Supervision and Administration, October 2012 (the Notice), circulated by the MLR following the Five-year Plan. The Notice serves as a guideline both to private enterprises and local government administrative authorities engaged in shale gas activities.
In the Notice, the MLR emphasises the strategic importance of shale gas as a clean energy source and urges better regulation for the market to ensure its healthy and sound development in the long run. The MLR, but not its local branches, shall be directly responsible for the administration and registration of shale gas exploration and exploitation rights. The exploration rights shall mainly be conferred by public bidding and licensing. All parties are encouraged to participate in exploration and exploitation activities as long as they are independent legal entities with sufficient funding. They must also hold licences for exploration of oil, gas or any other kind of gas minerals, or partner with holders of those licences. Foreign enterprises with shale gas mining and exploration technology are especially encouraged to create joint ventures to invest and actively participate in the industry to promote further growth.
To curb any potential speculative hoarding by shale gas exploration licence holders, all such licence holders are required to make commitments to the MLR regarding the investment amount, exploration plan, progress and so on. The MLR is responsible for supervising licence holders to ensure compliance with the operational plans and the MLR’s requirements.
Fines imposed by the MLR
Failure to meet the investment commitments will lead to fines imposed by the MLR.
It is reported that in November 2014, Sinopec was fined RMB 7.97 million by the MLR for its failure to spend about one-quarter of its RMB 591 million contracted investment on the Nanchuan shale block. Similarly, Henan Provincial Coal Seam Gas Development and Utilization was fined RMB 6.03 million for spending only half of its commitment on the Xiushan shale block. These two cases have shown that Chinese regulatory authorities are willing to implement disciplinary procedures applicable to oil and gas exploration and exploitation activities.
Natural resources laws and regulations
As the Notice includes no specific law or legislation that supplants the existing legal regime, it must currently be read in conjunction with the existing natural resources laws and regulations.
Although there have been reports that the NEA was in the process of drafting shale gas regulations, it has not announced when they will be made available for public consultation.
The Shale Gas Policy
The Shale Gas Policy issued pursuant to the Five-year Plan has the goal of promoting more rapid and healthy growth of the shale gas industry, increasing domestic shale gas supply, reducing carbon emissions and improving the safety of the energy supply.
In addition to the favourable policies that have been in place since the first half of 2013, the Shale Gas Policy has introduced a number of new supportive measures and incentives to encourage growth in the shale gas sector. Key measures and incentives include:
- Identifying the shale gas industry as one of the strategic developing industries that will enjoy tax incentives and financial supports set out in the 12th Five-year Plan for Strategic Emerging Industry.
- Setting up pilot zones to display and apply cutting-edge technologies and equipment and advanced management systems for shale gas exploration and exploitation.
- Encouraging hydrocarbon infrastructure (especially transmission pipelines, and compressed natural gas (CNG) and LNG facilities), development and opening up of investment opportunities throughout the shale gas value chain to all types of companies.
- Implementing stricter environment protection policies that require, for example: assessment of environmental impact before a shale gas project can be initiated; and a ban on exploration and exploitation activity in nature reserves, scenic areas, drinking water conservation areas or areas with geological hazards.
The Shale Gas Policy is viewed as another attempt by the Chinese government to encourage the development of the shale gas industry. However, detailed implementation rules are needed before the industry in China can advance significantly.
Ownership of land and mineral rights
As designated by the laws in China, the State owns the land in urban areas and certain land in rural areas, while the farmers collectively own the rural land not owned by the State. Individual and legal entities are allowed to carry out mining-related operations on land in China only after they have obtained land use rights (LUR). Rights are conferred through a licensing procedure, including a feasibility study of the proposed mining project, verification and approval by relevant government authorities at local or national level and, finally, registration. If the land on which the project is to be carried out was originally farming land, it first needs to be converted to ‘construction land’ before going through the application for the LUR. This is not always an easy task.
Mineral resources, either near the earth’s surface or deeper underground, belong exclusively to the State. The State ownership of the mineral resources is absolute, regardless of the ownership and use of the land on which they are sited and regardless of whether LUR have been granted to an entity for any purpose whatsoever.
In order to facilitate exploration and exploitation for shale gas, the MLR has proposed in its Notice Regarding the Strengthening of Shale Gas Exploration, Exploitation, Supervision and Administration to initiate a pilot scheme to grant provisional shale gas exploration and prospecting LUR by way of leasing State-owned land to the relevant entities. However, detailed guidelines for this are still being discussed and assessed by the relevant authorities.
Rights, licences and approvals
Generally speaking, both shale gas exploration and exploitation (collectively called ‘mining’) activities in China are subject to the MLR’s regulation. Exploration and exploitation rights are licensed separately and it is a precondition to obtain such mining licences before entering into the shale gas market.
Public bidding rounds
Shale gas exploration rights are mainly obtained through public bidding to ensure a competitive environment in the shale gas sector. The MLR has successfully launched two rounds of public bidding for such rights. The first was initiated in 2010 for four shale gas blocks, and only six State-owned enterprises were invited to participate. The second, held in September 2012, partly removed the obstacles for private and foreign investors set out in the first bidding round.
Each bidder was required to have a registered capital of more than RMB300 million and to possess oil, natural gas or other types of gas mineral exploration qualifications or to partner with an entity with such qualifications. International energy companies with developed advanced technologies and extensive experience were not allowed to participate directly in the tendering round. However, they were encouraged to form joint ventures with Chinese counterparties as the controlling shareholder, and to provide technology and services in the exploration and exploitation for shale gas. The winners of the bid could gain a three-year exploration permission in the designated block. This was timed from the issue of the exploration licence and could be further extended.
Although two rounds of bidding have been held, and various companies have entered into the industry, progress has been slower than expected. Many of the winners of the second round of bidding lack oil and gas exploration experience. In addition, the parcels offered in the second round of bidding were generally considered to be of poor quality. As a result, little profit could be generated from the exploration activities in the near term. This slow progress has caused a delay to the third round of public bidding, which was originally planned for the end of 2013 and might now be held in 2015.
Rights of licence holders
The holders of existing oil and natural gas exploration and prospecting licences in China are allowed to engage directly in exploration and prospecting for shale gas within their respective licensed oil and gas blocks. Firstly, though, they must apply to expand the exploration and prospecting scope of the licence or go through a mining right amendment procedure and submit an operational implementation plan.
Existing oil and natural gas mining licence holders’ rights may also be affected by the shale gas potential of their respective mining blocks. The MLR may amend the scope of the mining right by including shale gas exploration or prospecting if the licensed oil and gas block has a clear shale gas potential. If the shale gas potential of an oil and gas block is unclear, and the licence holder of the block has neither become fully involved in the oil and gas exploration nor engaged in shale gas exploration, the licence holder will be forced to quit the block and will not be allowed to conduct any further oil and gas mining activities within the block. The MLR will instead establish a shale gas exploration right on the block for public tender, in order to develop the shale gas potential.
To facilitate prospecting for shale gas, companies that have started exploration for shale gas within licensed shale gas blocks are permitted to apply for a provisional prospecting licence or to transfer part of the existing shale gas exploration blocks to shale gas prospecting sites. Firstly, though, the required application and registration procedures must be satisfied and approvals must be obtained.
Shale gas mining licence holders are not allowed to commence shale gas activities until an agreement is filed with the MLR, signed by the licence holder and guaranteeing the safety of shale gas operations. The local MLR office will be responsible for supervising shale gas activities and making sure that the licence holder complies with its commitments and operational plans as well as with the MLR’s other relevant regulations.
Establishment of a local entity
Historically, the energy sector in China has been highly controlled and regulated by the State, and mining licences have never been issued directly to any foreign incorporated companies.
Under the current regulatory framework, applicants for shale gas exploration licences must be PRC-incorporated companies, either in the form of a fully domestic enterprise, or a joint venture, with the Chinese party as its controlling shareholder. In terms of shale gas prospecting, the holders of shale gas prospecting licences intending to commence prospecting activities must establish a project company in the region where the shale gas block to be explored is located. This is intended to boost the economic development of the local area. At this stage, there are no further requirements detailing how such companies should be structured and organised.
In terms of the investment proportion, there is generally no requirement for a mandatory equity or participating interest to be held by the State in an exploration or production company involved in hydrocarbon activities. However, natural gas-related licences have, in practice, been issued only to a handful of State-owned companies. According to the Foreign Investment Industry Guidance Catalogue, effective from January 30, 2012, foreign investments in the exploration and development of shale gas and shale liquids now fall within the encouraged category of the catalogue. This allows foreign investors to set up joint ventures with their Chinese partners and to enjoy certain administrative and tax benefits. In practice, as has been shown in the past two rounds of public tendering, the joint venture bidders have been required to have a Chinese partner holding a controlling stake within the entity.
In terms of the form of investment, foreign investors are required to participate in the onshore oil and gas market by partnering with Sinopec or PetroChina. Both parties must enter into a cooperative agreement based on a standard Production Sharing Agreement (PSA) provided by the Ministry of Commerce (MOFCOM). The final PSA should also be subject to the approval of MOFCOM. However, it is not yet clear whether it will be mandatory for foreign investors wishing to participate in the Chinese shale gas market to enter into PSAs with their Chinese partners as well. Although there is no detailed regulation in place, it seems that the PSA is a method that is favoured by the Chinese government. In April 2013, the government approved the first PSA relating to shale gas between PetroChina and Royal Dutch Shell, under which both sides agreed to explore and produce unconventional gas in southwest China’s Sichuan province.
In May 2013, the State Council and the NEA issued a new policy to remove the requirement for government approval with respect to certain new energy exploration and development projects in China. MOFCOM’s approval would no longer be required for PSAs entered into by Chinese and foreign companies for conventional oil and gas and coal-bed methane projects in China, if they meet certain thresholds. It remains unclear whether the new policy will apply to shale gas projects. However, based on our informal discussions with NEA and MOFCOM officials, it is likely that the shale gas regulatory regime will follow suit.
Taxes, duties, royalties and incentives
According to the Shale Gas Policy, all legitimate holders of shale gas exploration and development licences are entitled to enjoy complete or partial exemption from exploitation royalties. With respect to any imported shale gas equipment (including the associated technologies and for self-use only) that are not available or cannot be produced in China, the importer can apply for an exemption from customs duties.
The State financial subsidies introduced by the Subsidy Policies for the Development and Use of Shale Gas will remain in place. Between 2012 and 2015, the central government will offer RMB0.4/m3 in financial subsidies to companies that have successfully developed shale gas prospects and installed properly calibrated meters so that they are able to measure accurately the amount of shale gas produced. Further, the Shale Gas Policy encourages financial support for shale gas companies from local governments, which have discretion on the level of financial subsidies they wish to offer to the shale gas development companies.
As the shale gas industry is categorised as one of the strategic emerging industries, shale gas companies are now eligible for additional tax incentives, financial subsidies and financial support introduced by the 12th Five-year Plan for Strategic Emerging Industry. According to the Tentative Measures for the Management of Special Funds for the development of Strategic Emerging Industries, a special fund is financed by a central budget to support start-up venture capitals, cooperation between industry and academics, technological development and regional development of strategic emerging industries.
The Shale Gas Policy further provides that more industryspecific tax benefits (for example, resource tax, value-added tax and income tax) shall be formulated and adopted in order to encourage shale gas exploration and exploitation. However, details of the proposed new tax incentives have not been made available to the public. Some market insiders believe that the Chinese government will borrow ideas from the existing tax incentive policies for coal-bed methane because the Five-year Plan has stipulated that financial support policies for the shale gas industry should be implemented by reference to the policies for the coal-bed methane industry.
Foreign currency and Central Bank requirements
China maintains a tight foreign exchange control system. All foreign-invested enterprises (FIEs) are required to register with the local State Administration of Foreign Exchange (SAFE) authorities in the area in which they are registered. An FIE can only borrow up to the mandatory limit, which is the balance between its total investment and registered capital. It should be noted that there are separate rules governing the total investment to registered capital ratio and the minimum registered capital requirement.
An FIE must register its foreign debts, either in foreign currency or offshore renminbi, with the relevant SAFE authorities that monitor the cross-border flow of funds. An FIE will also be required to satisfy certain conditions in order to remit its after-tax profits as dividends to its offshore shareholders. These conditions include paying up its registered capital in accordance with an approved timetable, making up any losses incurred in previous years of operation and allocating a certain proportion of its after-tax profits to the FIE’s own statutory enterprise funds. At the point of remittance, the FIE must submit the requisite documents to designated banks that can operate foreign exchange activities. The banks will review the documents. Upon being satisfied that the relevant requirements have been met, they will facilitate the payment of dividends to the offshore shareholders either by using the foreign currency that the FIE has in its accounts or allowing the FIE to purchase foreign currency with its RMB income.
Under the enterprise income tax law, repatriation of profits by foreign investors is subject to withholding tax at a rate of 10 per cent in China, unless a preferential tax rate is available under a reciprocal tax treaty.
Environmental protection and socio-economic development
The development of the shale gas industry in China has partly been stalled by environmental concerns.
Although using shale gas could help reduce greenhouse emissions, hydraulic fracturing uses a large amount of chemically treated water that is injected through seams of rock at high pressure to force the gas inside to seep out so it can be collected. If the process is not managed properly, it can cause serious contamination to waterways, which would be disastrous for drought-plagued China. The fracturing process also produces noise, traffic and surface disruptions and may create problems for farmers or other residents living near the site. According to experts, shale gas in China contains high levels of non-hydrocarbon gases, particularly hydrogen sulphide. This is a toxic and corrosive pollutant, which could lead to air pollution and corrode drilling equipment unless strict emission standards and advanced drilling and gas purifying technologies are implemented.
Under current resources legislation, applicants for natural gas exploration and prospecting licences are required to submit an environmental assessment report to the MLR for approval. This must be prepared by a qualified third-party environment assessment institution. However, since there has not yet been any national standard for dealing with environmental issues, it may not be possible to carry out effective and accurate environmental assessments. It is reported that the Ministry of Environmental Protection might commence a study for the drafting of a Shale Gas Environmental Assessment Standard. The work is expected to continue for at least three years.
Domestic supply and exportation of hydrocarbons
China is still a net importer of hydrocarbons. Its rapid economic growth and the strong demand for clean energy are making it increasingly thirsty for natural gas.
In order to meet the demand for hydrocarbons, the NDRC, MLR and NEA jointly issued a development plan for China’s shale gas. This Five-year Plan for Shale Gas lays out an overall target and four milestones to be achieved between 2011 and 2015 including:
- completion of a nationwide shale gas survey and appraisal
- production output to reach 6.5 BCM per year
- development of suitable methods, technologies and equipment for China’s shale gas survey, appraisal, exploration and production
- establishment of technical standards, rules and policies regulating activities in relation to China’s shale gas development, such as reserve survey, appraisal and certification, test and analysis, exploration and production, and environmental measurements.
The Five-year Plan was intended to establish a foundation for China’s shale gas development from 2016 to 2020. Building on the results of the Five-year Plan, the government was expecting to increase and encourage greater investments in shale gas reserves to achieve a total shale gas output of 60–100 BCM by 2020. However, this expectation has since been adjusted downwards to around 30 BCM by 2020 because of the technical and geographical difficulties facing the industry.
Although the expected output of shale gas has been adjusted downwards, the Chinese government still appears to be confident in the long-term development of the shale gas industry. In April 2014, the NDRC issued an official guideline regarding guaranteeing the long-term supply of natural gas. This indicated that China would enhance its policy support for the supply of natural gas, especially shale gas. According to the guideline, the total natural gas supply capacity is expected to reach 400–420 BCM by 2020, and third-party access to natural gas pipelines and LNG receiving and storage facilities will be further promoted by policy reform.
Enforcement regime in judicial and arbitral alternatives
The Contract Law of China provides that ‘parties to a foreign related contract may choose the applicable law for the resolution of their disputes, unless the law provides otherwise’.
If a foreign company wishes to enter into a joint venture with a Chinese company related to assets situated outside Chinese territory, the Chinese party would face no particular restriction under Chinese law. It would be free to choose English, New York or any other applicable law to govern these arrangements between the parties. However, there are restrictions as to choice of law in relation to investments in China. The most important of these is that certain types of contract must be governed by PRC law. These include Chinese/foreign joint-venture contracts to be performed in China and Chinese/foreign contracts for the joint exploration and development of natural resources in China. On this basis, it is very likely that the main contractual arrangements a foreign investor may enter into to invest in upstream projects in China (including the PSA) will have to be governed by PRC law. In practice, even if this were not the legal position, the bargaining power of the Chinese parties may well be such that they would insist on it in any case.
Arbitration proceedings and judgments
There is a large degree of scepticism on the part of foreign investors about the ability of the Chinese courts to resolve disputes effectively and about their impartiality when hearing disputes between foreign companies and Chinese companies, especially State-owned ones. The standards differ significantly for the different courts in China. Although the predictability and consistency of court judgments seem to be improving, foreign investors generally prefer to provide for disputes to be resolved by arbitration. Additionally, depending on the Chinese entity and court involved, it is sometimes difficult to enforce a Chinese court judgment. Similarly, while it is theoretically possible to enforce foreign judgments in China (which has reciprocal enforcement of judgment conventions with certain jurisdictions), in practice it is very difficult to persuade a Chinese court to enforce a foreign court judgment against a Chinese party.
Arbitration proceedings in China are governed by the Chinese Arbitration Law 1994, provisions of the Civil Procedure Law 1991 and numerous interpretations, minutes, regulations, replies and notices. The Arbitration Law 1994 is not based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law although it is comparable in its scope. Foreign-related arbitration awards and domestic awards are subject to different rules of enforcement. The court will examine even the substantive issues in dispute when reviewing a domestic award. Where the China International Economic and Trade Arbitration Commission (CIETAC) arbitration rules are adopted, the tribunal may be expected to arrive at its conclusion by reference not only to the governing law of the dispute but also to international practice and concepts of fairness and reasonableness.
Foreign arbitration institutions
The position of foreign arbitration institutions in China is anomalous. For example, the International Chamber of Commerce (ICC) is not an ‘arbitration commission’ for the purposes of the Arbitration Law 1994. There is therefore some doubt about the enforceability of awards published in ICC arbitrations conducted in China. In addition, there are presently disagreements between the CIETAC commission in Beijing and the sub-commissions in Shanghai and Shenzhen, resulting in CIETAC Beijing opening new offices in Shanghai and Shenzhen. Accordingly, there are now rival CIETAC bodies operating in the same cities. These developments have led to uncertainty, including questions about the enforceability of awards either from the new offices or from the original sub-commissions.
An offshore arbitration is generally the best option for foreign investors if PRC law does not govern the relevant agreement. It is similarly preferred if PRC law governs the agreement, but the dispute has an international element – for example, if one party to the dispute is a foreign entity. China is a signatory to the New York Convention, although it has exercised the reciprocity and commerciality reservations. It has also extended the application of the New York Convention to Hong Kong and Macau. However, Chinese courts may hold offshore arbitration invalid if the dispute is not sufficiently ‘foreign-related’.
Problems and appeals
There is no appeal mechanism against a refusal by the Intermediate People’s Court’s decision not to enforce an award. However, there exists an internal court system for reviewing decisions relating to the refusal to enforce a foreign award, which goes all the way up to the Supreme People’s Court. There appears to be no formal right of representation during the stages of the internal review process, but there is no objection to lodging directly with the Supreme People’s Court a full set of the documents submitted at the Intermediate People’s Court. Furthermore, the Supreme People’s Court is open to informal discussion. However, this internal review is thought to be limited to awards issued in foreign institutional arbitrations and not ad hoc arbitrations.
The time limit for starting enforcement proceedings in China is very short, being only six months for companies and 12 months for individuals from the date of the award.
Regulation on the operation of hydrocarbon infrastructure
Over 80 per cent of China’s oil and gas pipelines are owned and operated by PetroChina, and third-party gas producers have no ready and low-cost access to these pipelines. This is one of the key areas that the Shale Gas Policy is tasked to address.
On February 13, 2014, the NEA published the Measures for Regulation of Fair and Open Access to Oil and Gas Pipeline Networks (the NEA Measures). These will be effective for a trial period of five years. The NEA Measures aim to grant thirdparty producers access to oil and gas pipelines when there is ‘excess capacity’. However, the conditions for access are still subject to the operator’s discretion and the NEA Measures have not made it clear how excess capacity is to be defined.
On February 28, 2014, the NDRC also published the Management Measures for Natural Gas Infrastructure Construction and Operation (the NDRC Measures). These encourage State-owned companies, private companies and foreign companies to invest in the natural gas infrastructure sector and to liberalise the market further by promoting fair competition.
The NEA Measures and the NDRC Measures echo the requirements under the Shale Gas Policy, which push for the liberalisation of the shale gas market and have received a positive response from the market. In May 2014, Sinopec announced plans to promote private investment in shale gas transportation. In August 2014, the China National Petroleum Corporation (CNPC) was reported to have set the basic principles for opening up its pipeline infrastructure to the market, with pipeline capacity contracted on a ‘first come, first served’ basis. However, some commentators remain sceptical about the near-term effects of these measures and call for more detailed guidelines on how the measures should be implemented in practice.
The progress of shale gas production in China has been slow despite China having potentially one of the world’s largest shale gas reserves, increasing support from the central government and continuously improving drilling techniques and equipment. The main reason for such disappointing progress is that most of the exploitable shale gas blocks in China are located in the geographically complex remote mountainous regions in the north-west, where water shortage is a barrier to commercial production of the shale gas, and in the south-west, where the high population density compounds the difficulties for commercial production of shale gas.
Helping shale gas developers overcome these difficulties requires further reform in the industry, clear guidelines for effective implementation of tax incentives, and effective financial support measures. These are in addition to continuous development of suitable drilling techniques and equipment. Only then will the shale gas development goal set out in the Five-year Plan be achievable.
Role of central Chinese government
The Chinese central government has shown its willingness to:
- increase support for the innovation and improvement of shale gas technology
- classify shale gas technology research and development as a significant national project
- promote the shale gas exploration project
- encourage the establishment of a shale gas research and development centre
- encourage international cooperation and exchanges.
The central government will also be working on improving shale gas infrastructure, with solutions that depend on the location of the reserves. For reserves close to the existing natural gas pipeline network, the government will encourage transportation pipeline construction at the shale gas production fields and the connection of these pipelines to the existing natural gas pipeline network. For reserves far from existing natural gas pipeline networks, or new wells (production output of which is ramping up), the government will encourage the construction of small-scale LNG or CNG facilities to capture the gas produced to avoid flaring the gas. The construction of transmission pipelines will take into account the production phase of the relevant shale gas wells.
Many city gas companies are looking at setting up LNG logistic hubs, building and owning LNG refill stations or providing LNG bunkering services to commercial shipping and fishing boats at Chinese ports. To capitalise on these trends, LNG equipment manufacturers will need to invest further in improving product quality and innovation.
Role of provincial governments
In addition to the efforts made by central government, the shale gas industry may see more vigorous promotion from the provincial governments of the shale-rich provinces. They will be the driving force behind favourable local policies to help the shale gas developers accelerate their development progress in the shale prospects. For them, success in shale gas development will push up the local GDP growth and help to meet local energy demands. So far, Sichuan, Chongqing and Guizhou have released their own shale gas development plans. Hunan has released its local technical standards for shale gas drilling.
Some provincial governments are seeking delegated powers to allow them to issue exploration licences at a provincial level to shale gas companies for exploration activities in their own regions. For example, it was reported that Hunan has applied to the MLR for permission to issue exploration licences for five shale gas blocks in Changde, Shimen, Lianyuan, Zhangjiajie and Cili. Although the MLR has not officially confirmed the report or the speculation about the new licensing policy, the application from Hunan provincial government has demonstrated a need for further derogation in the current shale gas regulatory regime.