Oil and gas resources in China are owned by the state. Notably, a few state-owned enterprises have de facto control of most conventional oil and gas resources in China. 

Private and foreign investors now can also participate in oil and gas exploration and exploitation after 1 May 2020, thanks to the new policy entitled the Opinions of the Ministry of Natural Resources on Several Matters Concerning Promoting the Reform of Mineral Resources Administration (for Trial Implementation) implemented by the Ministry of Natural Resources on 1 May 2020 (the “2020 MNR Opinions”).

The Ministry of Natural Resources (MNR) and the National Development and Reform Commission (NDRC) are the two primary Chinese regulators exercising macro-control and administration over the domestic oil and natural gas industry. 

Other related matters, such as production safety and environmental protection involved in the process, are subject to the joint supervision and administration of the State Administration of Work Safety (SAWS) and the Ministry of Ecology and Environment (MEE). 

The Ministry of Commerce (MOFCOM) oversees import and export licences, among other regulatory functions. 

The following are the major regulatory roles and functions of those key regulators: 

• MNR (including its provincial and local counterparts) supervises and administers the upstream exploration and extraction of oil and gas resources, including the grant of exploration and mining (production) licences. 
• The NDRC has the authority to oversee downstream refinery specifications and the production scale and quota setting over resources allocation for each province. The NDRC and its National Energy Administration have the authority to formulate industrial standards related to petroleum and natural gas, new energy, and renewable resources and examine, approve and verify the investment in fixed energy assets. Together with MOFCOM, NDRC is also the authority to issue the so-called “Foreign Investment Access Special Administration Measures (Negative List)” (the “Negative List”), regulating industries that foreign investors are restricted or prohibited from investing (www.ndrc.gov.cn).
• The MEE and its provincial and local counterparts are responsible for issuing approvals for Environmental Impact Assessments (EIAs), a process which evaluates the likely environmental impact of proposed exploration, exploitation activities and related project constructions (www.mee.gov.cn).
• MOFCOM is responsible for quality control of oil and gas products and issuing import and export licences for crude and refined oil to companies. Together with the NDRC, MOFCOM is the authority to jointly promulgate the Negative List annually. Foreign investments into those restricted sectors must be approved by MOFCOM (www.mofcom.gov.cn). 
• SAWS is in charge of guiding and training for work safety in the energy sector (www.mem.gov.cn). 

The following national oil or gas companies are the main players dominating the Chinese petroleum industry:

• China National Petroleum Corporation (CNPC);
• China Petrochemical Corporation (SINOPEC); 
• China National Offshore Oil Corporation (CNOOC); 
• Sinochem Group Company Limited (SINOCHEM); and
• China Zhenhua Oil Co, Ltd.

The following primary laws and regulations established the (upstream) regulatory regime of the Chinese petroleum industry.

• The Mineral Resources Law and its Implementing Rules (2009 Amendment) establish the basic legal framework for exploration and production activities (including oil and gas development).
• The Regulation for Registering to Explore for Mineral Resources Using the Block System (2014 Revision) provides a block registration system for the exploration of mineral resources.
• Procedures for Administration of Registration of Mining of Mineral Resources (2014 Revision) provide detailed requirements for registration of mineral resources exploitation and the issuance of exploitation licences.
• The Measure for the Administration of Transfer of Exploration Right and Exploitation Right (2014 Amendment) regulates the transfer of exploration and exploitation rights.
• The Regulation on Sino-foreign Cooperation in the Exploitation of Continental Petroleum Resources (2013 Revision) serves as the basis for foreign companies to participate in the exploration and exploitation of onshore blocks in China through Production Sharing Contracts (PSCs).
• The Regulation on the Exploitation of Offshore Petroleum Resources in Cooperation with Foreign Enterprises (2013 Revision) serves as the basis for foreign companies to participate in the exploration and exploitation of offshore blocks in China through PSCs.
• The Measures for the administration of petroleum prices (for Trial Implementation) provide guidance on the pricing of petroleum production, wholesale and retail operations in China. 
• The Safe Production Law (2021 Amendment) regulates the production safety of the entities engaged in oil and gas production and business operations.
• The Environmental Protection Law of 2015 provides for environmental supervision, prevention of pollution and other issues related to oil and gas exploration and exploitation.
• The PRC Natural Resources Taxation Law of 2020 provides guidance on the income or profit tax regime for the Chinese oil and gas sector.

Oil and gas operations are further subject to local ESG regulatory regimes and provincial regulations promulgated on the provincial level. 

From May 2020, the oil and gas exploration and exploitation rights can be awarded to private enterprises by approval of the central MNR as a result of a licence application, bidding, auction, or listing for sale on a property right exchange or agreement.

Application of Licences

China has a licensing system in place for the exploration (which includes exploration and trial extraction) and extraction of mineral resources (including oil and gas). Private investors need to obtain a licence from the central MNR before the exploration of oil and gas. 

Applicants pay for exploration rights fees as part of the application, register exploration and converted extraction rights and obtain such licences upon approval. The licences usually have a limited period and cover a specified area.

Bidding, Auction, Listing for Sale 

For new exploration rights which fit in the following situations, the administrative department under the MNR shall grant such a right by means of invitation to bid, auction, and quotation: 

• it is an oilfield surveyed with the funds of the state and verified to be possible for mining; 
• it is an oilfield which has lost the mining right; 
• it is an oilfield which has lost the exploration right but is geologically available for exploration; 
• the hydrocarbons and related by-products can be extracted without survey as prescribed by the administrative department; or
• other circumstances prescribed by the MNR and the administrative department at the provincial level. 

Foreign investor applicants are subject to a separate market/industry entry/access regulatory regime (see 4.1 Foreign Investment Rules Applicable to Domestic Investments in Petroleum).

Process for Private Investors to Obtain An Upstream Licence

• File an application with the MNR and await approval (usually within 90 days) or to win in upstream licence bidding, auction or listing for sale on a property right exchange subject to at least 40 days of public notification;
• pay for exploration fees, and once operation converts to actual extraction (trial extraction is included with exploration activities), file proof of reserves and work plan with the MNR to receive the corresponding extraction licence; and
• register exploration rights received with the MNR before getting the actual licence. 

Chinese oil and gas exploration licences are usually issued for up to seven years with possible extensions. Due to Covid-19, the MNR encourages applicants to apply online through its official website at www.mnr.gov.cn/fw/ywtb/. Extensions of up to three months can also be granted to applicants for delays caused by the pandemic.

Prerequisite Qualifications

• The applicant for oil and gas exploration rights must be the entity funding the exploration activities and be a company with an independent legal status. 
• All companies incorporated in China with net assets value of at least CNY300 million can apply for an oil and gas exploration licence and later convert to an extraction licence. 
• There is no longer a distinction between domestic and foreign applicants. 

Other Relevant Permits Required for Operations

• There is a Pollutant Discharge Permit system in China. An entity must discharge pollutants in accordance with the requirements of the Pollutant Discharge Permit, and pollutants cannot be discharged without a proper permit.
• For solid waste, waste water and exhaust gas, the following permits are required. 
1. Pollutant Discharge Permit for Solid Waste: entities that generate industrial solid wastes must obtain this  permit.
2. Water Pollutant Discharge Permit: companies or other operators that directly or indirectly discharge industrial waste water into water bodies must obtain a Water Pollutant Discharge Permit, which sets out the requirements for the type, concentration, total amount and discharge destination of the discharged water pollutants.
3. Air Pollutant Discharge Permit: companies that discharge industrial waste gas or harmful air pollutants (as specified in the List of Toxic and Hazardous Air Pollutants) must obtain an Air Pollutant Discharge Permit. 

Oil and Gas Registration Fee

• Exploration registration fee is usually based on a scale of the underlying oilfield:
1. Small Field typically CNY200 (Crude Oil <100,000 t/y; Natural Gas < 100,000,000 m³/y);
2. Medium Field typically CNY300 (Crude Oil 100,000~<500,000 t/y; Natural Gas < 100,000,000~<500,000,000 m³/y); and
3. Large Field typically CNY500 (Crude Oil ≥500,000 t/y; Natural Gas ≥500,000,000 m³/y).

Exploration Rights Use Fee/Extraction Rights Use Fee

An oil and gas exploration rights or extraction rights-holder are also subject to an exploration rights use fee and an extraction rights use fee to the government, taking into consideration the economic condition, geological environment and labour reality of the oil-producing province.

• Exploration rights fee:
1. one to three years, typically at the annual rate of CNY100/km²; and
2. four years onwards, the annual rate is typically increased by CNY100/km² per year (up to CNY500/km²).
• Depending on location, extraction fees typically range from CNY1,000‒3,000/km². Around certain grassland areas, such as Inner Mongolia, there is a grassland make-whole fee of up to CNY4000 for each well drilled.

Special Oil Gain Levy

A special oil gain levy, administered by the Ministry of Finance, is a non-tax fiscal revenue of the central government. It is levied on all oil production enterprises that sell crude oil produced in China, whether sold inside or outside 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 set at a certain price per barrel, adjusted every year (eg, in recent years, at about USD65/barrel). The levy rates and quick calculation deductions are as follows:

Crude Oil Price (USD per barrel) / Levy Rate / Quick Calculation Deduction (USD per barrel) –

USD65 to USD70 (inclusive) / 20% / USD0;

USD70 to USD75 (inclusive) / 25% / USD0.25;

USD75 to USD80 (inclusive) / 30% / USD0.75;

USD80 to USD85 (inclusive) / 35%       / USD1.50; and

Over USD85 / 40% / USD2.50.

Signature Bonus

For foreign capitals participating in the oil and gas industry through PSC with major Chinese oil and gas entities, a signature bonus paid to the state is prescribed in the PSC. The bonus is usually determined by the volume of oil and gas resources and the economic value of the field.

Resource Tax

Oil and gas extraction rights holders must pay resource tax on their sales amount derived from oil and gas sales. The resource tax rates vary for different types of taxable oil and gas, eg, the resource tax rate is 6% for crude oil, natural gas and shale gas, while the rate is 1‒2% for coalbed methane. There is also exemption or reduction of resource tax on the applicable situation (Resource Tax Law of the People′s Republic of China).

Income Tax

Income tax is payable on the profits for the sale of oil and gas at the rate of 25%.

Taxes and duties on importing and exporting oil and gas may vary based on any bilateral tax treaties between China and the relevant foreign country.

Value-Added Tax (VAT)

VAT is levied on the import and export of oil and gas at the following rates:

• for crude or processed oil: 13%; and
• for natural gas and petroleum liquefied gas: 9%.

Consumption Tax

Consumption tax is levied on the import of processed oil, and the rates vary for the different kinds of processed oils. For example, the consumption tax rate for fuel oil is CNY1.2 per litre. The import of crude oil and natural gas is not subject to consumption tax, as is the export of any oil and gas.

Customs Duty

Customs duty is due on the import of processed oil and the rates are different for different kinds of processed oils. For example, the customs duty rate for fuel oil is 1% in 2022. The import of crude oil and natural gas is exempt from customs duty, as is the export of any oil and gas.

Local Levies

Local levies, including Urban Maintenance and Construction Tax (UMCT), Educational Surcharge (ES) and Local Educational Surcharge (LES), are levied on the amount of VAT paid (local levies do not apply to import VAT). The applicable rates of the local levies are as follows:

• UMCT – 7% for taxpayers located in cities, 5% for taxpayers located in towns and the country and 1% for taxpayers located in places other than cities, towns and the country;
• ES – 3%; and 
• LES – 2%.

As explained in 1.3 National Oil or Gas Company, certain national oil companies had de facto control over the petroleum industry (upstream, midstream and downstream) until the 2020 MNR Opinion, which (legally) allows private and foreign capital to have access to those licences exclusively held by national oil and gas companies. 

In practice, because most oil field blocks were already granted to those Chinese state-owned oil majors, Chinese private and international oil companies usually partner up with the Chinese oil majors to access those blocks.

Chinese PSCs generally require that Chinese personnel, materials and services be given preferential rights during a project’s procurement process. Operators should also include Chinese employee statistics in specific work plans. 

Requirements for Development Plans

Once the licence holder finds proven oil or gas reserves of a certain scale calculated with a combination of factors such as quantity, scale and economic returns, extraction can begin after: 

• filing reports to the MNR;
• signs an extraction rights grant contract with the MNR; and
• registers its extraction rights within five (5) years (in practice, an oil and gas operation wants to receive extraction rights if sales of crude product are contemplated).

The licence holder must also submit a developed plan upon registration of the extraction right. The development plan should include the following key terms:

• condition and level of the mineral resources;
• present situation and forecast of demand for crude products;
• determination of major construction schemes;
• facilities for processing and tailings; and
• environmental protection plans, etc. 

Requirements for Government Approvals

The registration authority reviews the development plans from the following key aspects:

• the scale of mine construction;
• mining programmes;
• reasonableness of the recoverable reserves;
• ore dressing and processing facilities;
• reasonableness of environmental protection plan, including soil and water conservation and land reclamation; and
• labour safety, etc.

Depending on the content and the construction stage of the project, approval from other government departments may be necessary:

• NDRC, for national security-related approvals; 
• MNR, for urban and rural planning; 
• MEE, for ecological environment protection assessments and plans;
• the Ministry of Water Resources (MWR), for water conservancy; and
• MNR, for forestry and grassland protection-related approvals, etc.

Rights to Appeal Denials of Approval

Individual and corporate applicants of denials of approval can apply for reconsideration through the Chinese administrative review process. Challenges must generally be filed within 60 days with the relevant regulator. 

The Chinese administrative review process for the oil and gas sector can cover both procedural and content review with respect to an applicant’s case. After such review, an applicant can file administrative litigation against the regulator in front of the Chinese State Council (which can review both procedural and content issues such as licence denial, suspension or fines) or a relevant Chinese court (which can only review procedural issues), but not both.  Administrative litigation against a regulator is time-consuming and subject to higher authority’s dismissal.

In practice, such appeal is hardly practical.

Exploration Periods, Production Periods and Extensions

The exploration licence for petroleum and/or gas is valid for up seven (7) years. If there is a need to extend, the licensee shall file for an extension of the licence with the licensing authorities within 30 days prior to the expiration. The extension of an exploration licence shall not exceed two (2) years each time.

The validity of an exploration or extraction licence is determined according to the construction scale of an oilfield:

• for a large-sized oilfield, the licence may be valid for a maximum term of 30 years;
• for a medium-sized one, the licence may be valid for a maximum term of 20 years; and
• for a small-sized one, the licence may be valid for a maximum term of ten years. 

Size is determined by the following standards:

• large-sized: for oil, more than 100 million tonnes, and for gas, more than 30 billion cubic metres;
• medium-sized: for oil, from 10‒100 million tonnes, and for gas, from 5‒30 billion cubic metres; and
• small-sized: for oil, less than 10 million tonnes, and for gas, less than 5 billion cubic metres.

Minimum Work Programmes

The exploration licensee is required to begin work within six (6) months of the date of issue of the exploration licence and meet a minimum expenditure for exploration according to the following schedule:

• CNY2,000 per square kilometre for the first year of exploration;
• CNY5,000 per square kilometre for the second year of exploration; and
• CNY10,000 per square kilometre each year thereafter, starting with the third year of exploration.

Such a requirement can be prorated if the exploration word is interrupted due to force majeure. Any exceeding expenditure surplus can be applied to the expenditure for the following year. 

Liability and Risk Regime

Exploration beyond the approved limits of the exploration blocks may result in a fine of up to CNY100,000. And the mineral products extracted outside the limit are subject to confiscation.

Failure to report any circumstances change or to meet the minimum work programmes, refusing to accept official examination or supervision, or employing deception may result in a fine of up to CNY50,000 and/or even the revocation of the licence.

Criminal responsibility may be imposed if serious destruction is caused to the mineral resources.

Lease and sale of the upstream licences are strictly regulated under the Notice of the Ministry of Natural Resources on Amending the Relevant Provisions of the Mineral Right Trading Rules (2018). Such mining rights, however, cannot be used as collateral for mortgages. 

Relinquishment Requirements/Withdrawal, Termination and Abandonment Rights and Obligations

If the exploration licensee rescinds the exploration project for some reason, it needs to submit to the licensing authorities a report on the completion or termination of the exploration project. Forms for reporting the input of capital and relevant documents of proof are also required to terminate the licence. 

If the production licence is expired or suspended, the licensee must send an application to the original licence issuing organ to cancel the licence within 30 days as of the day when the decision is made for the suspension or closure of the mining licence.

The licensee must also complete works regarding labour safety for production, water and soil conservancy, land recovery and environmental protection, or pay in full the cost for the land recovery or the environmental protection. 

Domestic Supply Requirements and Terms

MOFCOM and its local counterparts regulate the domestic supply of oil and gas and provide goals and guidance for oil and gas companies regarding the domestic supply requirements. The local authorities are responsible for making sure that the goals are met.

Export Rights

Quota and export licences are required for companies to export crude or refined oil. Natural gas, on the other hand, is not exportable due to the unmet domestic demand.

There is a huge drop in the oil export quota in 2022. The first batch of domestic refined oil export quotas for 2022 totalled 17.5 million tons, 12 million tons (about 41%) lower than the 29.5 million tons last year.

In practice, only seven state-owned oil companies obtained the exporting quotas.

Minimum Conditions of the Transfer

Exploration and extraction rights can be transferred under the following circumstances:

• for exploration and survey rights ‒ expiry of two years from the date of issuance, or the discovery of mineral resources, and the fulfilment of minimum input; for mining rights ‒ expiry of one year of going into mining production;
• there is no dispute over the ownership of the right; and
• full payment of the relevant fees and taxes.

The original extraction rights-holder may also transfer the right as a result of the mining company’s significant structural changes (merger, sale of assets, etc).

Government Approval Process

MNR (including its provincial and local counterparts) is the governing agency. 

The transferor may apply for approval of the transfer of oil/gas exploration rights or extraction rights by submitting the following documents: 

• a letter of application for transfer;
• the transfer contract concluded between the transferor and the transferee;
• testimonial documents of human quality of the transferee;
• proof of conditions of transfer listed above; and
• a report on mineral resources exploration and survey or exploitation.

MNR (including its provincial and local counterparts) must notify both parties of its decision within 40 days from the date of receipt of the application. If approved, both parties must modify the registration formality within 60 days from the date of receipt of the approval notice. The contract for the transfer becomes effective after the approval is granted. The amended licence can then be issued to the transferee after paying the fee (Articles 4 and 10, Administrative Measures on the Transfer of Exploration Right and Exploitation Right).

An evaluation must also be carried out in transferring mineral exploration and mining rights formed by state-contributed exploration and survey.

Retained Liabilities of Transferor

The rights and obligations of a person with a mineral exploration right or a mining right are transferred with the transfer of the mineral exploration or mining rights. There would be no retained liabilities of the transferor. 

Oil and gas exploration and/or extraction rights can be leased or mortgaged if the transfer conditions are met, and the lease or mortgage agreement must be approved by the issuing agency. 

Minimum Requirements for Transferee

A transferee of exploration right must meet the qualifications of an oil and gas exploration right applicant prescribed in the Measures for Area Registration Administration of Mineral Resources Exploration and Survey or the Measures for the Registration Administration of Mineral Resources Exploitation.

Special Requirements for Transfer of Operatorship

Although not prescribed in the statutes, it is recommended that approval is obtained if there is a change of control in the company that has the oil and gas exploration or extraction rights.

There is currently no legal restriction on the production rates of oil and gas extraction. 

Private Investment in Midstream Operations

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. 

Notably, a separate national pipeline network company, PipeChina, was incorporated in December 2019 and played a central role in providing open access to the third party in the midstream gas sector. PipeChina shall, without discrimination, provide oil and gas transportation, storage, gasification, loading and unloading, and transhipment services to qualified private investors and shall not delay or refuse to sign service contracts with qualified private investors without justified reasons.

Government Approvals

There is a basic difference in the regulatory treatment between an intra-state pipeline system and an interstate pipeline system.

Generally, pipeline design and construction are subject to review based on the requirements for safety, environmental protection, optimal land use and economic feasibility. Nationwide pipelines must be consistent with the national energy and land-use plans. An EIA must be obtained before construction (Law on the Protection of Oil and Gas Pipelines 2010).

Trans-province and transboundary network projects (autonomous regions or municipalities directly under the Chinese government, excluding gathering and transportation pipeline networks in oil fields) are subject to the approval of the competent investment department under the State Council. Further, the transboundary projects must be submitted to the State Council for registration. Oil pipeline network projects (excluding gathering and transportation pipeline networks in oil fields) other than those mentioned above are subject to the approval of local governments (Circular of the State Council on Promulgating the Catalogue of Investment Projects Subject to the Approval of Governments (2016 Version)).

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 (2018 Second Amendment) must be followed.

The qualifications of the enterprises and personnel engaged in the design, installation, use and inspection of pipelines must be accredited by the State Administration for Market Regulation 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).

Private Investment Used in Downstream Operations

The downstream oil sector, including refineries, petrochemical production and gasoline retail businesses, is still dominated by the NOCs, although it is generally open to both private and foreign investment, subject to ordinary permitting procedures. 

From 2019, the approval of qualification for wholesale, storage and operation of refined oil products has been gradually cancelled, and the approval right of qualification for retail and operation of refined oil products delegated to the local governments. Further, in the Special Administrative Measures (Negative List) for the Access of Foreign Investment (2019), it has also deleted the restrictions whereby the construction and operation of gas, heat, and water supply and drainage pipeline networks in cities with a population of more than 500,000 shall be controlled by the Chinese parties.

While the downstream oil sector, including refineries, petrochemical production and gasoline retail businesses, is still dominated by the NOCs, it is generally open to both private and foreign investment, subject to ordinary permit procedures. 

The storage and domestic trading of crude oil, storage and domestic wholesale of refined oil products were previously subject to similar specific business permits but have been gradually liberalised since 2019 (Decision of the Ministry of Commerce to Repeal Some Rules (2020)).

In terms of the retail business of refined oil, a refined oil business licence issued by the local government is required. There are certain requirements for applicants to obtain such a business permit, including a certain amount of registered capital, long-term supply agreements, and stable sales channels and facilities. Foreign-invested enterprises may also apply for such permits.

In addition, trading of oil and gas requires safety permits under, eg, the hazardous material regulatory regime. The trading and sale of gas or liquefied natural gas (LNG) as a type of burning fuel requires a fuel gas business permit.

Midstream/downstream licences are granted upon application to the competent authority by the interested party. The major licences mainly include the following types.

Gas Business Licence

The state shall implement the licence system for gas operation. Enterprises engaged in gas operation shall meet the following conditions: 

• to meet the requirements of the gas development plan; 
• there are gas sources and gas facilities that meet national standards; 
• there is a fixed business premises, a perfect safety management system and a sound business case; 
• the main responsible person of the enterprise, the safety production manager and the operation, maintenance and repair personnel are trained and qualified by professional training; and
• other conditions under the laws. 

If the conditions mentioned in the preceding paragraph are in accordance with the provisions of the preceding paragraph, the gas management licence shall be issued by the gas management department of the local government at or above the county level (Article 15, Regulation on the Administration of Urban Gas 2016).

Special Equipment Production Licence

Special equipment production units shall have the following conditions and shall be responsible for the supervision and administration of the management department to engage in production activities: 

• technical personnel adapted to production; 
• equipment, facilities and workplaces adapted to production; and 
• sound quality assurance, safety management, and job responsibility (Article 18, Special Equipment Safety Law).

Work Safety Licence

Before production, an enterprise shall apply for the work safety licence to the department in charge of the issuance and administration of work safety licences and satisfy the following conditions specified in Article 6: 

• establish the responsibility system for work safety;
• formulate internal work safety regulations and operating rules; 
• set up administrative institutes for work safety and install full-time work safety administrative personnel; and
• appoint a qualified major person(s)-in-charge and work safety administrative personnel, etc (Article 6, Regulation on Work Safety Permits 2014).

The department in charge of the issuance and administration of work safety licences shall complete its review process within 45 days from the day of receipt of an application and issue work safety licences to those found upon review to satisfy the work safety conditions specified in the present Regulation (Article 7, Regulation on Work Safety Permits 2014).

Storage/Wholesale Licence

The storage and domestic trading of crude oil, storage and domestic wholesale of refined oil products were previously subject to similar specific business permits but have been gradually liberalised since 2019 (Decision of the Ministry of Commerce to Repeal Some Rules (2020)).

Refined Oil Retail Licence

A specific refined oil retail licence business permit issued by the local government is required. There are certain requirements for applicants to obtain such a business permit, including a certain amount of registered capital, long-term supply agreements, and stable sales channels and facilities. Foreign-invested enterprises may also apply for permits.

Transportation

Pipeline owner and its customers:

• A national pipeline network company, PipeChina, was incorporated in December 2019 and started operation in the fourth quarter of 2020. PipeChina has taken possession of all the major oil and gas pipeline assets and some LNG receiving terminals developed by the three-barrels in restructuring agreements among large Chinese state-owned enterprises and other parties in October 2020. Other provincial oil and gas companies are still investing in pipeline constructions, but the skeleton of the pipeline network is still expected to be constructed by PipeChina. 
• LNG receiving terminals in China are owned by PipeChina, the state-owned oil majors and other project developers typically associated with regional gas companies.
• Currently, the price of natural gas pipeline transportation is subject to the principle of “one price for one enterprise‟, and the price is determined by the government under the principle of “permitted cost plus reasonable income‟. Pipeline transportation prices are checked and adjusted every three years.

Gas Price

Gas resources mainly include domestic onshore gas, domestic offshore gas, imported LNG and imported pipeline gas. The natural gas price paid by end-users includes:

• resource costs;
• pipeline transmission fees; and
• gas distribution fees.

The prices of domestic offshore gas, domestic unconventional gas and imported LNG gas can be freely negotiated and determined by the parties (however, local governments and gas companies may still set prices for pipeline natural gas based on the sales price of the gate station in practice).

Currently, the price of natural gas pipeline transportation is subject to the principle of “one price for one enterprise‟, which is determined by the government under the principle of “permitted cost plus reasonable income‟. Pipeline transportation prices are checked and adjusted every three years.

Gasoline Price

The gasoline retail price is subject to a hard cap set by NDRC and adjusted every ten business days.

Midstream refining is subject to consumption tax, VAT and local levies, income tax, etc. 

Downstream sales are mainly subject to VAT, local levies, income tax, etc. 

Midstream and downstream pipeline transportation is governed by PipeChina, mainly comprised of CNPC, SINOPEC and CNOOC and their respective subsidiaries. There is no specific applicable income or profits tax regime. 

Measures to calculate the VAT on Oil-Gas Field Enterprises can be found in the Pilot Implementing Measures, which substituted the earlier Administrative Measures for the Value Added Tax on Oil-Gas Field Enterprises, issued by the Ministry of Finance and the State Administration of Taxation. Some important measures are set below: 

• Article 3 stipulates that oil-gas field enterprises shall pay VAT for providing productive labour services for crude oil and natural gas production;
• Articles 5 and 11 stipulate that the VAT rate for the productive labour services provided by oil-gas field enterprises shall be 17%, now reduced to 13% (of that, 3% VAT should be paid where the productive labour services are rendered); and
• Article 9 stipulates that the input VAT on the productive labour services received by an oil-gas field enterprise from another oil-gas field enterprise could be credited against the output VAT. 

National oil companies have priority rights on supplements within the pipeline capacity. As mentioned in 3.3 Issuing Midstream/Downstream Licences, pipelines owned by national oil companies (PetroChina, SINOPEC, CNOOC) are transferred to PipeChina (established in 2019), which are still entitled to access to the pipelines. 

There is no midstream and downstream local content requirement under Chinese law, but it may be required as contractual market practice.

As a matter of market reality, the state-owned national oil majors wholly own or otherwise control midstream facilities. So local content requirements are arguably not relevant.

The standard model of the Midstream/Downstream Licence will normally state the following items:

• the entity that applies for the licence;
• the address of the licensee;
• the legal representative of the licensee;
• the validity period of the licence; and
• the detailed type of business that the licensee is authorised to carry out. 

According to the Pipelines Protection Law and Land Management Law, a private investor shall submit the pipeline construction plan to the competent urban and rural planning department of the local people′s government at or above the county level. For the purpose of the public interest, the surface or land the pipeline is designed to build may be condemned based on the pipeline construction plan. 

Fair and reasonable compensation shall be given for the expropriation of land, and the standard shall be determined by the local people′s government at or above the county level.

Third parties may, with certain exceptions, have access to the pipelines of crude oil, refined oil and natural gas, LNG receiving stations, underground gas storage, as well as their supporting infrastructure. 

In May 2019, China introduced the Measures for Regulation of Fair and Open Access to Oil and Gas Pipeline Facilities. This Regulation emphasised that operators of oil and gas pipelines and facilities within China are obliged to grant third-party users “fair and open access” to their facilities and provide new principles and policies to support this access. Conditions and the process for access, metering and price-related requirements are also provided in this new regulation. It is expected to provide a more integrated and detailed legal framework to support the further development of a fair and open access regime.

In line with the above national measures, PipeChina later established its own rules for access to its facilities in PipeChina Interim Measures for the Fair and Open Management of Oil and Gas Pipeline Network Facilities in 2020. The user must, among other technical standards, fulfil the following requirements: 

• being a PRC entity;
• the operation of the entity complies with national laws and regulations, local government regulations and relevant industrial policies;
• has acquired oil and gas-related administrative approvals and safety operation certification; and
• has a good contractual performance record, sound financial position and credit record.

The standard Terminal Use Agreement (TUA) for receiving terminals is mostly in line with internationally common practice. The remaining capacity information is published on PipeChina’s website on a quarterly basis. 

Typical TUAs contain the following key provisions:

• minimum usage fee/fixed charge and usage-based charge scheme;
• annual terminal usage plan and adjustment;
• LNG tanker specification;
• LNG specifications and off-spec LNG treatment;
• storage and regasification services; and
• allotted laytime and demurrage.

After the abolition of the Measures on the Administration of the Crude Oil Market and the Measures on the Administration of the Product Oil Market, except for the approval for the retail sales of product oil products by the local government, approvals for the wholesale and storage of petroleum products are exempted. However, the wholesale and storage operators shall comply with the laws and regulations on registration, land resources, planning and construction, oil quality, safety, environmental protection, fire control, taxation, traffic, meteorology and metering, and meet the relevant standards.

China adopts parallel administrations on the import of crude and product oil by state trading enterprises (enterprises/institutions licensed by the state to import certain types of goods subject to the state trading administration) and non-state trading enterprises. 

Crude oil export requires export quota approval by the MOFCOM and export licences. In practice, only four state-owned oil companies can apply for refined oil-exporting quotas: 

• PetroChina;
• Sinopec;
• CNOOC; and
• Sinochem

The State Council approved the Several Measures on Supporting the Opening up and Development of the Whole Oil and Gas Industry in the China (Zhejiang) Pilot Free Trade Zone on 26 March 2020, allowing the Zhejiang Pilot Free Trade Zone to carry out refined oil exports to an appropriate extent. This allows existing eligible refining and chemical integration enterprises in the Pilot Zone to pioneer non-state exports of refined oil, subject to an annual export quota.

The MOFCOM regularly publishes a list of names of the state trading enterprises. Other enterprises may become a non-state trading enterprises if the following conditions are fulfilled: 

• have a foreign trade business qualification;
• meet the requirements published by the MOFCOM for dealing with commodities that are subject to the state trading administration; and
• register with the MOFCOM (Trial Measures for the State Trading Administration of the Import of Crude Oil, Product Oil, and Fertilizer).

In order to import crude oil, both state and non-state trading enterprises must apply to the MOFCOM for an import license. However, the import licences for non-state trading enterprises are limited to an import quantity permitted by the state. 

For gas, there is no restriction on the import/export quota and the right to trade. China has not yet exported natural gas due to its own shortage of natural gas.

The downstream operations and relevant licences can be transferred between private owners. 

As the power of approving retail licences is authorised by the local government, the transfer of the licences shall follow the local regulations. Where a retail outlet is transferred, the transferee retail outlet intending to continue to engage in the retail operation of refined oil products shall apply for a retail licence from the municipal commerce department in accordance with the provisions, and the operator of the transferred retail outlet shall return the retail licence to the issuing authority.

As for the midstream, like LNG terminals, it is common to have a restriction against the assignment of rights or obligations without written consent under the TUA.

Until 2020, foreign investors were restricted from participating in the exploration and extraction of oil and gas in China. The only way to participate was to enter into PSCs with those state-owned Chinese oil majors, who were legally permitted to apply for and hold the exploration and extraction licences for the benefit of all the parties to the PSCs.

The Negative List of 2020 removed the restriction so that foreign investments in petroleum are encouraged. 

Foreign investments into the upstream sector of petroleum are further regulated by laws and regulations promulgated or administered by the MNR.

As for the exploration rights, pursuant to the 2020 MNR Opinions, domestic (private) and wholly-foreign owned enterprises registered within China with net assets value of no less than CNY300 million are eligible to apply for oil and gas exploration and extraction licences. 

As of 2019, the restrictions on foreign investment in midstream and downstream have been largely lifted. Several precedents exist in wholly foreign-operated midstream and downstream projects, such as refineries and retail gas stations. However, as the midstream pipeline network in China has been consolidated under the control of PipeChina, the participation of foreign capital in pipeline investment is unlikely, if not impossible (although there are no outright statutory nor regulatory prohibitions).

Currently, there is no sanction in place with respect to investing in oil and gas assets in foreign jurisdictions or conducting business in the oil and gas sector with foreign counterparties, governments or jurisdictions. 

However, certain sanctions are applicable to foreign entities that have been put on the “unreliable entity list” for the purpose of national security. According to Article 10 of the Provisions on the Unreliable Entity List issued by MOFCOM in 2020, foreign entities listed are restricted or prohibited from engaging in China-related import and export activities, including investing in China.

Principal environment laws:

• Environmental Protection Law 2014 (effective from 1 January 2015);
• Law on Environmental Impact Assessment 2018 (2018 EIA Law);
• Law on Promotion of Cleaner Production 2012 (2012 Cleaner Production Law);
• Circular Economy Promotion Law 2018 (2018 Circular Economy Promotion Law);
• Law on Environmental Protection Tax 2018 (2018 Environmental Protection Tax Law);
• Administrative Measures for Pollutant Emission Permitting (for trial implementation) 2019 (2019 MEE Pollutant Emission Permitting Measures);
• Regulation on the Administration of Pollution Emission Permitting 2021 (2021 Pollutant Permitting Regulation);
• Emergency Response Law 2007 (2007 Emergency Response Law); and
• Regulations on the Administration of Construction Project Environmental Protection 1998 (last amended in 2017).

Laws in specialised areas:

• Law on the Prevention and Control of Atmospheric Pollution 2018 (2018 Air Pollution Prevention Law);
• Law on Prevention and Control of Water Pollution 2017 (2017 Water Pollution Prevention Law, with effect from 1 January 2018);
• Law on Prevention and Control of Soil Pollution 2018 (2018 Soil Pollution Prevention Law, with effect from 1 January 2019);
• Marine Environment Protection Law 2017 (2017 Marine Environment Protection Law);
• Solid Waste Pollution Prevention and Control Law 2020 (2020 Solid Waste Pollution Law);
• Water Law 2016;
• Grassland Law 2013 (revised in 2021);
• Forestry Law of the PRC 2019 (2019 Forestry Law, with effect from 1 July 2020);
• Regulations on the Control over Safety of Dangerous Chemicals 2002 (last amended in 2013); and
• Regulations of the PRC on the Administration of Environmental Protection in the Exploration and Development Offshore Petroleum 1983.

Environmental Regulators

• National Development and Reform Commission (NDRC). The main environmental activities of the NDRC include strategies for sustainable development and climate change and co-ordinating energy saving and emissions reduction (https://en.ndrc.gov.cn).
• Ministry of Ecology and Environment (MEE). The MEE is responsible for national environmental policy and coordinating and supervising major environmental projects, and it is involved in a broad range of ecological issues such as biodiversity and greenhouse gas emissions. Before April 2018, the predecessor regulator of the MEE was the dismantled Ministry of Environmental Protection (MEP) (https://english.mee.gov.cn).
• Ministry of Natural Resources (MNR). The MNR was established in April 2018 to consolidate the administration of China’s national natural resources from various other agencies (http://www.mnr.gov.cn).
• Ministry of Emergency Management (MEM). The MEM was established in April 2018 in charge of safety production, disaster management and emergency relief (https://www.mem.gov.cn).
• MWR. The main responsibilities of the MWR include the rational development and use of water resources and drafting or promulgating various water-related legislation (http://www.mwr.gov.cn/english).
• Ministry of Agriculture, Fisheries Bureau. The Bureau is responsible for preventing any fishery calamity caused by pollution and relieving the damage so caused (http://www.yyj.moa.gov.cn).

Environmental Impact Assessment (EIA)

An EIA process must be completed before the construction of an oil or gas project begins. A private investor must prepare the EIA report, statement, or registration forms according to the classified list in EIA Law. Companies exploiting oil or natural gas must prepare the EIA report or statement depending on the specific circumstances of the project. EIA reports must be prepared for projects for:

• crude oil processing;
• natural gas processing;
• shale oil and other refined crude oil;
• coal-to-liquid;
• bio-to-liquid; and 
• other petroleum production.

The EIA documents (including EIA reports, statements and registration forms) must then be submitted for approval to the environmental administration department of the central or local government.

Before approving the EIA reports or statements, the environmental administration department must solicit opinions from the:

• administrative departments responsible for oceanic administration, maritime affairs and fishery;
• environmental protection department of the armed forces; and
• public opinion if there is a significant impact on the environment.

The environmental administration department must decide whether to approve the EIA report or statement within 60 days from the date of receiving the EIA report or within 30 days from the date of receiving the EIA statement.

During the operation of oil or gas projects, if any solid waste, waste water or exhaust gas is to be discharged, a Pollutant Discharge Permit must be obtained in advance. The operator must also comply with the national pollution discharge standard and pay environmental protection tax.

Offshore Exploration and Extraction

Offshore, the operator must provide safety training and anti-hydrogen sulphide safeguard measures for labours. Fire-fighting equipment and hazardous items must be managed according to the highest standards. Stand-by vessels and helicopters may be required for dangerous projects. 

The local authority would also require the operator to prepare a contingency plan for safety accidents, subject to updates according to the current condition of the offshore operation. Any accident must be reported promptly to the local authority.

The operators of offshore oil projects in China, or fixed platforms or mobile platforms and other related facilities must comply with a series of environmental protection requirements, including:

• insurance;
• financial guarantee;
• waste management; and
• fisheries protection.

In an offshore operation, generally, the operator shall submit a written application to the state competent administrative authority of marine affairs for disposal of facilities 90 working days prior to the cessation of production and decommissioning of infrastructure and shall not decommission infrastructure until the approval documents are obtained. Prior to the decommissioning of infrastructure, the operators shall prepare an implementation plan for the disposal of facilities and submit it to the state competent administrative authority of energy for filing. 

Please note that the Environmental Protection Technical Requirements for the Disposal of Offshore Oil and Gas Production Facilities (Draft for Comment), released on 30 November 2021, is the latest legislative development in the field of decommissioning, which provides general and technical requirements for decommissioning of offshore oil and gas infrastructure, technical points for ecological EIA, environmental protection measures and decommissioning plans, etc.

Climate Change Laws

The climate change laws for lowering greenhouse gas emissions and scaling up energy efficiency and clean energy mainly include:

• Law on Prevention and Control of Atmospheric Pollution (2018 Amendment);
• Renewable Energy Law;
• Energy Conservation Law;
• Cleaner Production Promotion Law;
• Circular Economy Promotion Law;
• Electric Power Law; etc.

Carbon Tax Regime

China has not introduced a carbon tax regime, but an environmental protection tax has been imposed on certain types of greenhouse gas, such as nitrogen oxides.

Carbon Trading Regime

There are also regulations for trial implementation in relation to carbon emission trading and emission reporting verification, mainly including:

• Measures for the Administration of Carbon Emissions Trading of 2020;
• Guidelines for Verification of Corporate Greenhouse Gas Emission Reports of 2021;
• Rules for the Administration of Registration of Carbon Emissions of 2021;
• Rules for the Administration of Trading of Carbon Emissions of 2021; and
• Rules for the Administration of Settlement of Carbon Emissions of 2021.

The main products of carbon emissions trading are emission quotas and Chinese Certified Emissions Reductions (CCER). The trading parties are the key emission entities and the agencies and individuals specified under the trading rules. The trading agencies are those qualified by the department in charge of carbon emission trading under the State Council (currently the MEE). The specific trading rules are made by the trading agencies and must be reported to and filed with the MEE. 

The key regulatory authorities include the MEE and environmental departments at provincial, regional and municipal levels. Nationwide trading of carbon emissions allowances officially launched on 16 July 2021 at the Shanghai Environment and Energy Exchange, with limited trading products and limited market participants.

Specific Rules in the Oil and Gas Industry

In terms of the oil and gas industry, the Emission Standard of Air Pollutants for Onshore Oil and Gas Exploitation and Production Industry is China’s first pollution emission standard for the oil and gas industry, which took effect on 1 January 2021 for new facilities and 1 January 2023 for existing facilities respectively. 

The Standards stipulated the requirements for the control, monitoring, supervision and administration of the emission of volatile organic compounds (VOCs) of onshore oil and natural gas exploitation enterprises and sulphur dioxide of sulphur recovery equipment of natural gas purification plants, and also the requirements on the co-ordinated control of the emission of greenhouse gas methane. 

As noted in 1.1 System of Petroleum Ownership, only the central government (through MNR) has control of petroleum resources. The exploration and extraction licences can only be issued by MNR without delegation to their provincial and local counterparts.

The provincial and local counterparts of NDRC do have the power and authority to approve certain infrastructure projects, depending on whether a given project is on their annual catalogue list.

Also, the ecological and environmental departments of the local government have the right to set local restrictions and any prohibitions on oil and gas development within the realm of national standards pursuant to the Environment Law. However, the extent of enforcement of those laws and regulations is very much “policy” driven.

Shale Gas

China′s shale gas resources rank second in the world, and the government has established multiple pilot regions for shale gas exploration and extraction, such as in the Sichuan Basin. Both domestic and foreign capitals may obtain such rights through the official bidding process.

The Chinese government has also introduced a series of shale gas supportive industry policies and development plans since 2009, including:

• the 12th Five-Year Plan for Natural Gas and the Shale Gas Development Plan (2011–15);
• industry policies include financial and tax policy, technology research and development (R&D) support policy, resource management policy, shale gas price policy, pipeline network policy and international co-operation policy; and
• provincial officials in Sichuan, Chongqing and Guizhou have released shale gas development plans.

A subsidy is granted for shale gas production. Nevertheless, the Chinese state-owned oil majors are the only shale gas explorer and producers in China due to technical difficulties and the geological nature of the Chinese shale gas fields. 

International oil majors (Shell, BP, etc) have been interested in participating in the shale gas development opportunities in China and successfully won a number of blocks through the public tendering process. However, it would appear that foreign participating operations and developments were hampered by the lack of water resources nearby and other environmental limitations. The geological difficulties and technology issues also create great challenges. 

Coalbed Methane

Thanks to the Negative List (2019 Edition), effective from 30 July 2019, foreign investment into the development of coalbed methane (CBM) no longer requires the co-operation with select qualified Chinese enterprises. The policy allows domestic and foreign capitals equal access to all the mineral rights related to CBM. 

In order to promote and encourage the development of CBM, China has given preferential policies of taxation and subsidies to the industry through the CBM Industrial Policy released by the NEA in March 2013. For example, the equipment, instruments, accessories and special tools used in CBM exploration and development are exempted from import duties and VAT. The policy of levying VAT first or withdrawing VAT for the general taxpayers of CBM extraction and production enterprises shall be implemented.

In terms of private and foreign investment for CBM exploration, development and infrastructure construction, relevant laws and policies include: 

• Regulation of the People′s Republic of China on the Exploitation of Offshore Petroleum Resources in Cooperation with Foreign Enterprises (2013 Revision);
• Notice of the MOFCOM; and
• NDRC and the Ministry of Land and Resources on Issues Concerning Further Expanding the Cooperation with Foreign Parties in Mining Coalbed Methane. 

Despite the released restrictions and promotions of private and foreign investments, currently, the primary CBM regions are still dominated by state-owned enterprises. Private and foreign capitals can hardly enter the market without partnering with the top barrels. 

The other challenge is that those major coal mines with the greatest CMB potential are mostly owned or controlled by state-owned enterprises. Any holders of CBM licences must work with those coal mines to be able to explore and extract the resources.

Hydraulic Fracturing

Policies in respect of managing the environmental risk of hydraulic fracturing include: 

• Policy on Pollution Prevention and Control Technologies of Petroleum and Natural Gas Exploitation Industry; and
• Policy on Shale Gas Industry.

There is no specific regulation on administrative consenting and EIAs relating to hydraulic fracturing. Oil and gas enterprises are subject to the strict technical demonstration and approval process regarding the construction design and technical measures in relation to fracturing.

Preferential measures for unconventional gas or oil are mainly tax relief policies. The shale gas resource tax (at a prescribed tax rate of 6%) can be reduced by 30% (Notice on Reducing Resource Tax on Shale Gas, from 1 April 2018 to 31 March 2021). Shale oil produced from kerogen shale can enjoy a 70% VAT refund policy (Catalogue of VAT Concessions for Comprehensive Utilisation of Resources Products and Services).

Most of the LNG receiving terminals are owned and operated by PipeChina and the state-owned Chinese oil majors. However, there is a growing appetite for developing further new receiving terminals owned in whole or part by non-state-owned entities. 

The primary authority for approval of new receiving terminals is the NDRC. Previously, the submission of an application for NDRC approval was required to be accompanied by certain “pre-approval documents‟. As of 2019, NDRC would accept and review applications for new LNG receiving and storage terminal facilities without the pre-approval documents submitted at the same time. The statutory timeline for NDRC approval is set out under the Measures for the Administration of the Confirmation and Recordation of Enterprises′ Investment Projects (2017). 

Imports

There is no restriction on the import of natural gas, and a series of encouraging policies are set out in the Several Opinions of the State Council on Promoting the Co-ordinated and Stable Development of Natural Gas and other regulations. Nevertheless, the importer still needs to secure the receiving terminal, pipeline and regasification capacity. The largest LNG terminal operator in China is PipeChina. Some gas companies opt to build their own receiving terminals to gain a strategic advantage in the LNG value chain, but most LNG importers either use PipeChina’s receiving terminal or pipelines for transit or both. Therefore, compliance with PipeChina’s commercial terms, technical standards and product specifications are required for LNG import in China. 

Exports

China has not yet exported natural gas due to its own shortage of natural gas.

As of mid-2022, the prevailing pricing system for LNG and natural gas in China is still volume-based. However, the transition toward a heat-value-based pricing system is undergoing. 

Due to the improvement of fuel efficiency and the transition toward an electronic or natural gas-powered transportation system, domestic natural gas exploration and production and LNG imports are expected to grow exponentially. New projects in respect of LNG receiving, storage, and regasification will substantially increase the overall capacity after 2025. 

Scaling-up carbon capture, utilisation and storage (CCUS) are essential tools to achieve the energy transition goal. Using CCUS to improve the oil and gas production efficiency has been on the agenda of every Chinese NOC. For example, Sinopec’s 100mn mtpa CO² CCUS project entered into production stage in early 2022. In addition, CCUS may also play a significant role in the policy initiatives to transit toward green hydrogen production.

There are also pioneer programmes across the country to use existing natural gas pipeline networks to transit the mixture of natural gas and up to 20% hydrogen. The trial does not require modification of any existing facility. The technical standard for long-distance pure hydrogen pipeline is still in the drafting stage.

During the Fourteenth Five-Year Plan period, China accelerated its green and low-carbon energy transformation. China pledges to reach the carbon dioxide emissions peak by 2030 and achieve carbon neutrality by 2060. The total installed capacity of wind and solar power aims to reach 1.2 billion kilowatts or more by 2030. 

The world’s major oil companies have successively announced net zero (or close to zero) strategies, and the Chinese oil and gas companies are also increasing investments into new energy to embrace energy transition. 

Most notably, the 2020 MNR Opinions have profoundly influenced the upstream sector. Among other changes, it provided equal market entry for domestic and foreign investors to obtain mineral rights. Further, to reflect operational reality, the statute also combined prospecting and exploitation rights into a single exploration (with trial extraction) right in the Chinese oil and gas sector. 

For midstream, the 2019 Measures for Regulation of Fair and Open Access to Oil and Gas Pipeline Facilities stated that oil and gas pipeline facility operators should provide services to all qualified users in a fair and non-discriminatory manner.

For downstream, China has gradually liberalised the control of crude and product oil in recent years. Since the State Council issued the Opinions of the General Office of the State Council on Accelerating the Development of Circulation Industry and Promoting Consumer Spending in 2019, wholesale, storage and operation of refined oil products are no longer subject to approval. The approval right of qualification for retail and operation of refined oil products are delegated to the local governments.