By Miao Jing King & Wood Mallesons’ M&A Group
A recent State Council opinion[i] (the “Opinion”) offers detailed suggestions to policy-makers for encouraging the development of China’s coalbed methane (CBM) industry. Although the Opinion does not contain binding rules, it does list recommendations for future CBM policies and regulations and may provide valuable insights to CBM investors as to what may be coming.
Published by the Central Government on September 22, 2013, the Opinion covers a range of topics, from subsidies to coordination with coal mine operators. Highlights of these topics are discussed below.
(a) Increasing Government Financial Support for the CBM industry
The State Council recommends increasing government subsidies for CBM, from the current level of RMB 0.2 per cubic meter, to a level jointly determined by the MOF[ii], the NDRC[iii] and the NEA[iv]. The State Council further recommends additional government support for certain aspects of the industry to encourage: (i) the reorganization or shutdown of small coal mines and outdated production facilities, (ii) the merger and acquisition of coal mines, (iii) the control and utilization of CBM, (iv) improved coal mine safety, (v) upgrades to transportation and distribution facilities, and (vi) the installation of new equipment.
(b) Preferential Tax Treatment for CBM
The Opinion also recommends preferential VAT[v] and CIT[vi] policies for the CBM industry based on existing VAT policies for other natural resources. For example, VAT is currently fully refundable for certain kinds of (non-CBM) methane-based power generation.[vii] It is expected that similar preferential treatment will be made available for CBM power generation.
The recommended CIT reforms would increase the range of CBM-related equipment categories that are subject to preferential taxation.[viii] The current rule allows for a CIT discount equal to 10% of total expenditures on equipment within the specified categories (including any tax incurred on the purchases).[ix]
(c) Lifting Price Restrictions
The State Council reiterates that gas price restrictions for CBM must be lifted, that suppliers and customers be free to determine the price for CBM that does not enter a public pipeline, and that any CBM entering such pipelines not be priced lower than natural gas of the same calorific value.[x]
(d) Increased grid accessibility and pricing for CBM power generators
Further recommendations include simplifying and accelerating the authorization process for permitting enterprises that use CBM to generate power for their own use to sell excess power to the grid at a reasonable profit. This practice is currently subject to restrictions by various government agencies.
The Opinion also suggests that the benchmark feed-in price[xi] applicable to CBM-based power be increased. Currently, the price in a given province is determined by reference to the benchmark feed-in price applicable to power generated by desulfurized fuel coal in that province (plus any applicable subsidies).[xii]
(e) Mining vs. CBM Prioritization
The State Council recommends introducing a mechanism to coordinate the exploration and exploitation of CBM and coal to address the issue of overlapping mineral rights. The recommendations suggest that, for any area where a coal mine will be built within five years, coal development will be prioritized (with the proviso that any captured CBM should also be utilized in an “effective way”). Otherwise, for areas where no coal mine is scheduled for development within five years, preference will be given to CBM exploitation.
(f) More stringent development progress requirements
The State Council suggests that authorities consider increasing the minimum investment requirements (“minimum input (最低勘探投入)”[xiii]) for CBM exploration, and establishing timelines for the submission of reserves reports. Should an enterprise fail to sufficiently develop or invest in CBM exploration over time, the authorities would consider reducing the scope of the mining area. For Sino-foreign CBM development, the Opinion encouraged contracts to be “statutorily” terminated if the exploration / development activities are not performed according to the contract. This could be an indication that the State Council is suggesting that new laws be enacted, or existing laws be more aggressively utilized, to allow governmental authorities to step in and terminate such contracts.
(g) Additional points
The Opinion also discusses the advancement of scientific and technical innovation, the importance of strictly enforcing performance appraisals of development and utilization, the role of local policies in supporting the industry, and the supervision and implementation of reforms.
The 2011 Twelfth Five-Year Plan for CBM Development and Utilization[xiv] forecasts that CBM development will reach 30 billion cubic meters in 2015. Official statistics suggest that CBM development was only 12.5 billion cubic meters in 2012. This Opinion is the most recent attempt to accelerate China’s progress towards meeting its stated goal.
[i] “Opinions of the General Office of the State Council on Further Accelerating the Extraction and Utilization of CBM / Coal Mine Gas” (国务院办公厅关于进一步加快煤层气(煤矿瓦斯)抽采利用的意见) (Guo Ban Fa  No. 93), September 14, 2013.
[ii] Ministry of Finance.
[iii] National Development and Reform Commission.
[iv] National Energy Administration.
[v] Value-added tax.
[vi] Corporate income tax.
[vii] For example, VAT would be fully refundable for a power generation project substantially dependent on methane (沼气) that is obtained from garbage and other waste products. Reference can be made to the “Circular of the MOF and the State Taxation Administration on the VAT Policy applicable to Products Obtained from Comprehensive Utilization of Resources” (财政部国家税务总局关于资源综合利用及其他产品增值税政策的通知) (Cai Shui  No. 156), the “Supplemental Circular of the MOF and the State Taxation Administration on the VAT Policy applicable to Products Obtained from Comprehensive Utilization of Resources” (财政部国家税务总局关于资源综合利用及其他产品增值税政策的补充的通知) (Cai Shui  No. 163), and the “Circular of the MOF and the State Taxation Administration on the Adjustment and Improvement of the VAT Policy applicable to Products Obtained from and Labor Services relating to Comprehensive Utilization of Resources” (财政部国家税务总局关于调整完善资源综合利用产品及劳务增值税政策的通知) (Cai Shui  No. 115) for details.
[viii] This would be accomplished by amending the “Directory of Dedicated Equipment for Safety in Production that Enjoy Preferential Corporate Income Tax” (安全生产专用设备企业所得税优惠目录) jointly issued by the MOF, State Taxation Administration and State Administration of Work Safety (Cai Shui  No. 118). This would likely involve the cooperation of the Ministry of Finance, State Administration of Taxation, and the State Administration of Work Safety.
[ix] Currently, 10% of the annual cost for purchasing such equipment (specifically, total of price and tax shown on the invoice) can be deducted from the CIT amount payable in that particular year. See the “Circular of MOF and the State Taxation Administration on Issues relating to the Implementation of the Directory of Dedicated Equipment for Environmental Protection Purposes that Enjoy Preferential CIT, the Directory of Dedicated Equipment for Energy Saving and Water Saving Purposes that Enjoy Preferential CIT, and the Directory of Dedicated Equipment for Safety in Production Purposes that Enjoy Preferential CIT” (财政部 国家税务总局关于执行环境保护专用设备企业所得税优惠目录 节能节水专用设备企业所得税优惠目录和安全生产专用设备企业所得税优惠目录有关问题的通知), (Cai Shui  No. 48) for details.
[x] NDRC made similar requirements in 2006 under its Circular on the Administration of CBM Pricing (国家发展改革委关于煤层气价格管理的通知) (Fa Gai Jia Ge (2007) No. 826, effective as of April 20, 2006), however, in some regions of China, current practice keeps CBM prices lower than the price of natural gas with the same calorific value.
[xi] Where “price” is understood to mean the payment made to the enterprise by the grid operator.
[xii] See the “Opinion of NDRC on the Implementation of CBM / Coal Mine Gas -based Power Generation” (国家发展改革委印发关于利用煤层气（煤矿瓦斯）发电工作实施意见的通知) (Fa Gai Neng Yuan  No. 721) and the “Trial Measures of NDRC on the Administration of Pricing and Expenses Apportionment of Renewable Resources-based Power Generation” (国家发展改革委关于印发《可再生能源发电价格和费用分摊管理试行办法》) (Fa Gai Jia Ge  No. 7) for details. See also related Circulars on feed-in price for CBM-based power generation issued by the provincial People’s Government.
[xiii] Upon obtaining an exploration license, the licensee must invest a certain amount of money to carry out exploration works on a yearly basis. In particular, RMB2,000 per square kilometer must be invested for the first exploration year, RMB5,000 per square kilometer for the second exploration year, and RMB10,000 per square kilometer for every subsequent exploration year thereafter. See Article 17 of the “Administrative Measures for Registration of Exploration Blocks of Mineral Resources” (矿产资源勘查区块登记管理办法) (also known as the State Council Decree No. 240) issued by the State Council on December 2, 1998, effective as of the same day.
[xiv] The “Circular of the NDRC on Issuance of the Twelfth Five-Year Plan for CBM / Coal Mine Gas Development and Utilization” (国家发展改革委关于印发煤层气（煤矿瓦斯）开发利用“十二五”规划的通知) (Fa Gai Neng Yuan  No. 3041) issued by the NDRC on November 26, 2011.