By Miao Jing  King & Wood Mallesons’ Energy, Resources and Projects Group

The National Energy Administration (“NEA”) issued the Shale Gas Industry Policy (“Policy”) on October 22, 2013, which was made public on October 30, 2013. The Policy recommends certain reforms to encourage shale gas development in China. The key points are set out below.

i) Qualifications for shale gas companies

According to the Policy, shale gas exploration companies should be financially sound, have well-established accounting procedures, and be legal entities capable of independently assuming civil liabilities. Further, they should have properly qualified personnel for construction, project management, and safety evaluation. The Policy also states that shale gas exploration companies should be subject to the Ministry of Land and Resources’ technical specifications relating to shale gas, including the calculation of reserves, geological surveys, seismic prospecting, and drilling, etc. However, if no relevant specifications exist, the companies should be subject to oil and gas regulations. The NEA also suggests that foreign partners seeking access to China should have advanced shale gas technologies.

ii) “Exhibition / Demonstration areas”

The NEA recommends the establishment of additional shale gas “exhibition / demonstration areas” (示范区). The purpose of these areas is to develop and demonstrate China’s shale gas technology, and to lower development costs. Already existing examples include CNPC’s exploitation exhibition / demonstration areas in Sichuan and Yunnan, which have been hailed as a major breakthrough in China’s shale gas industry. It is not clear what incentives will be provided to encourage companies to develop exhibition / demonstration areas.

iii) Industrial technology

Regarding technology, the NEA encourages companies to adopt international standards, invent new technologies and exploration methods, and accelerate the research and manufacture of key equipment, in order to develop China’s shale gas industry. The NEA also proposes to formulate standards, procedures, and specifications for shale gas exploration and development technology.

iv) Marketing and transportation

The NEA suggests that the sale of shale gas should be open to all investors, the market should determine prices for direct purchases from manufacturers, and all gas sales transactions should be conducted on an arm’s length basis. The NEA also states that investment in certain types of infrastructure should be encouraged, such as natural gas pipelines and CNG / LNG facilities, particularly in areas which lack such infrastructure. Ultimately, all shale gas production and sales companies should have access to such infrastructure.

v) Energy efficiency and environmental protection

Regarding environmental matters, the NEA has a number of recommendations, including stronger enforcement of environmental regulations, a ban on direct emissions of waste gas, more efficient use of water and energy, and timely rehabilitation of land.

vi) Subsidies and incentives

The NEA calls for more financial support from the State for shale gas development and exploration. In particular, subsidies should be given directly to a shale gas production company according to the amount of its shale gas development and utilization, provided that certain conditions are met (such as the company submitting an annual report for approval). Local governments are also encouraged to provide subsidies to shale gas production companies, with the subsidy amount to be determined by local financial authorities (e.g. a local finance bureau / 财政局).

Mineral resource compensation fees (矿产资源补偿费) and mineral rights use fees (矿权使用费) should be reduced or waived for shale gas exploitation enterprises, and new incentive policies should be worked out in terms of VAT (增值税), resources tax (资源税), and CIT (企业所得税). Customs duties should be waived for equipment that cannot yet be produced within China.

vii) Conclusion

The suggested incentives / reforms set out in the Policy are aimed at improving the shale gas industry in China. Implementation would require the issuing of regulations by other government authorities such as NDRC, MLR and the State Taxation Administration. We will keep you updated as to any future developments and official interpretations of this policy.



Miao Jing