China's National Energy Administration's ("NEA") Regulation of National Oil Reserves (Draft)(国家石油储备条例 (征求意见稿)) wasissued on May 31, 2016. Ten years in the making, this proposed regulation signals the first time that the Chinese government may require enterprises to maintain a 10 percent reserve of crude oil and refined crude products for use in national emergencies. The public comment period for the draft regulation expired in June 2016.
China historically has required only government agencies, such as the NEA, to maintain oil reserves (primarily crude) for national emergencies. These national oil reserves are managed by designated national oil companies, such as CNPC, Sinopec, CNOOC, and Sinochem, but funded by the central government.
Scope of Potential Changes
If adopted, the 2016 draft regulation would require that all Chinese companies engaged in either refining, sales to retailers of refined products, or the import or export of crude oil to maintain a 10 percent reserve for national emergencies at all times. Although ownership of the crude and crude products would technically remain with the subject company, the government would have the right to access these reserves under certain emergency situations.
Subject to the NEA's approval, a company may deviate from this minimum amount as a result of supply and demand fluctuations or force majeure events (e.g., natural disaster). For example, in case of force majeure events, the draft regulation indicates that if a company fails to comply with the minimum reserve requirements, it must report to the NEA in a timely manner, and the NEA may adjust such minimum reserve requirement at its discretion. Presumably, such adjustment may include the postponed deadline for replenishment or a lesser amount of crude or crude products to be reserved.
Each affected company must periodically report the amount and calculation method of its oil reserves to the NEA with the understanding that the NEA would reserve the right to request further reporting during an emergency.
The 2016 draft regulation contemplates that a newly established company will have to comply with such reserve requirement upon its establishment, while an existing company will have three years to come into compliance with the new requirement.
Use of Company Reserves Before Government Reserves
It is worth noting that the draft regulation prioritizes the use of such company reserves over the use of reserves held by the government. When a company subject to the regulation is ordered by the NEA to provide access to its oil reserves for national use, the 2016 draft regulation requires that the company must do so without excuse, and that it must replenish such reserves within a specified period of time.
Certain details of the draft regulation are not yet apparent. For example, it is not clear whether the contemplated reserve obligation will be imposed on foreign-owned Chinese enterprises, how and when the 10 percent reserve requirement would be calculated or measured, whether and how companies would keep such reserves separate from other inventory, how and when to rotate or replace such reserves, how often and on what basis companies would need to report their compliance to the NEA, and how companies would be compensated for a national use of the reserves. We will continue to monitor the situation to see how these issues may be addressed.