By King & Wood Mallesons Oil & Gas Team
The Catalogue of Industries for Guiding Foreign Investment (2015 Revisions) (NRDC & MOFCOM Order No. 22) (《外商投资产业指导目录（2015年修订）》〔国家发展和改革委员会、商务部令第22号〕) (“2015 Catalogue”), issued by the National Development & Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”), takes effect April 10, 2015, and revises some investment categories affecting the oil & gas sector. Among these revised categories are those affecting investments involving enhanced oil recovery technology (“EOR”), as well as seismic companies, drilling contractors and well service providers. In addition, other changes appear to further clarify that investments into shale and other unconventional oil & gas projects are governed by the same rules and restrictions as those applying to conventional oil & gas investments.
Generally speaking, the Catalogue provides guidance to foreign investors with respect to China’s view on investments in different industries. The Catalogue does so, in part, by dividing industries among four categories, namely “encouraged”, “restricted”, “prohibited” and by implication, “permitted”. Each such category carries with it certain rules or restrictions governing investors in such category. In addition, the Catalogue often sets forth sector-specific rules or restrictions that apply specifically to such sector within the category. A commonly encountered restriction is one requiring foreign investments be made only by way of a Sino-foreign joint venture arrangement (whether equity or contractual joint venture).
Lifting of JV restrictions on EOR, seismic, drilling and well service providers
According to the 2011 version of the Catalogue (NDRC & MOFCOM Order No. 12), investments involving enhanced oil recovery technology, geophysical prospecting and well drilling and services were designated as “encouraged” but were subject to the restriction that such investments could only be made by way of Sino-foreign joint ventures.
When the 2015 Catalogue takes effect, foreign investments involving these sectors, more precisely: (i) technology for development and application of enhanced oil recovery (提高原油采收率及相关新技术的开发应用); and (ii) technology for development and application of geophysical prospecting, drilling, well logging, mud logging, and down-hole operations) (物探、钻井、测井、录井、井下作业等石油勘探开发新技术的开发与应用), no longer require a Chinese partner. Thus, foreign investors in these sectors may, if desired, invest by way of wholly foreign-owned enterprises.
Consolidation of conventional and unconventional oil & gas investments
A second notable revision in the 2015 Catalogue affecting the oil & gas sector regards unconventional oil & gas investments.
The 2011 version of the Catalogue listed as separate sectors (i) oil and gas (石油、天然气), (ii) coal-bed methane (煤层气), (iii) low permeability oil and gas reservoir (field) (低渗透油气藏 (田)), (iv) oil shale, oil sands, heavy oil, super heavy oil and other unconventional oil resources (油页岩、油砂、重油、超重油等非常规石油资源), and (v) shale gas, deep water natural gas hydrate and other unconventional natural gas (页岩气、海底天然气水合物等非常规天然气资源). These separate sectors led to some concern over the implementation of projects that overlapped such sectors.
The 2015 Catalogue helpfully does away with these distinctions, deleting the latter four sectors and clarifying that the oil and gas sector includes shale, oil sands, coal-bed methane, and other unconventional oil and gas sources (石油、天然气(含油页岩、油砂、页岩气、煤层气等非常规油气)). Although other legislation exists that could give rise to the application of different rules based on the nature of the oil & gas reservoir, the 2015 Catalogue revisions are an important step towards clarifying that, unless expressly provided otherwise, oil and gas laws and regulations of general application in China, apply regardless of the oil & gas source matrix and viscosity.
Such clarifications are helpful in avoiding issues that might otherwise have arisen, for example, in fields with complex, unclear or variable geology.
The KWM Oil & Gas Team consists of international legal professionals experienced in the oil and gas industry, one of whom was previously a petroleum engineer. The KWM Oil & Gas Team provides support to the entire commercial value chain including mergers and acquisitions, post-acquisition operations, upstream, midstream, and downstream.