China is increasingly making efforts to diversify its energy sources to address environmental concerns and the diminishing supplies of traditional energy sources. As a consequence, the regulatory landscape, both now and for the foreseeable future, is anchored in China’s ambitious economic restructuring agenda. Top priority is being placed on environmental goals and the deployment of cleaner energy and this is creating a number of opportunities for investors. We investigate China’s energy plans.
China is believed to have the world’s largest known shale gas reserves, with an estimated 885 trillion cubic feet. China has set ambitious targets to extract 6.5 BCM of shale gas per year to meet 10% of the country’s energy demands.
To achieve these targets, China has accelerated the issuance of exploration licences for shale gas reserves. Both the licencing regime and the PSC regime apply to shale gas exploration and exploitation by foreign investors.
Foreign companies can partner with Chinese companies holding an exploration licence for a shale gas block or they can establish a joint venture with a Chinese partner to bid for the licences directly.
The Foreign Investment Industrial Guidance Catalogue (2015) “FIIGC” sets out ‘encouraged’, ‘restricted’ and ‘prohibited’ activities and sectors. Projects that are encouraged benefit from simpler approval procedures and can also benefit from customs incentives. This means that foreign investment in shale gas will receive certain tax and administrative benefits.
Aside from attempting to open up the shale gas market, the FIIGC also released more general restrictions on foreign investment in the energy sector. The construction and operation of power grids, for instance, has moved from the ‘restricted category’ to the ‘encouraged category’. This trend towards opening up the energy industry to private and foreign investors is in line with the major SOE ownership reform since 2013.
Renewable energy sources
China has had a dramatic response to climate change in recent years. Last year, the State Council released the Energy Development Strategy Action Plan for 2014 to 2020. The Plan lists the future strategies for an efficient, clean, safe and sustainable energy system. According to the Plan, the annual primary energy consumption is to be capped at 4.8 billion tonnes of standard coal by 2020. The Plan also sets out 10% of energy is to be supplied by natural gas and at most 62% from coal by 2020.
The construction and operation of power stations using renewable energy is now an ‘encouraged’ activity under the FIIGC. Incentives include favourable loans with financial discounts for renewable energy projects and tax incentives.
These reforms have been paying off with huge investments being made in renewable energy sources.
The NDRC approved a nuclear project in March 2015. This marks the official re-launch of nuclear projects in China. The State Council’s mid and long term development plan has set the target for installed nuclear power capacity of 58,000,000kW and 30,000,000kW to be under construction by 2020. The industry is expecting a large wave of investment into nuclear power in the near future.
Future opportunities for investors
The energy sector and the regulatory environment in China are changing fast. The development of green energy and the economic restructuring plan are having a profound influence on the domestic energy market. The demands of the various stakeholders are contributing to innovation in the industry, while also adding complexity to the reform process.
With reforms in the regulatory regime and the restructuring of the market and opportunities for investors, it is vital to keep a close eye on energy regulation in China.
Who are the regulators?
- Ministry of Land and Resources (the MLR): Responsible for the supervision and administration of any exploration or exploitation of mineral resources. Crucially, the MLR has the authority to grant any licences required for exploration and production in China. It also plays a role in the examination and approval of energy blocks that might be open to foreign investment
- The National Development and Reform Commission (the NDRC): Produces and implements policies for the oil and gas sector and takes responsibility for approving certain investment projects
- The National Energy Administration (the NEA): Has a broad range of duties ranging from drafting energy strategies and proposing reform advice, to approving overall development plans for a specific oil or gas project
- The Ministry of Commerce (or MOFCOM): Previously in charge of reviewing and approving any production sharing contracts (PSCs). Recent changes have abolished the approvals process, and instead records must now be filed with MOFCOM