By：Xiong Jin, Luo Hai, Li Siyan, King & Wood Mallesons
On 30 June 2019, the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) jointly issued the Special Administrative Measures (Negative List) for Foreign Investment Access (2019 Edition) (“2019 Negative List”), the Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (2019 Edition) (“2019 FTZ Negative List”) and the Catalogue of Encouraged Industries for Foreign Investment (2019 Edition) (“2019 Encouraged Catalogue”) for the purposes of further promoting the reform and opening-up of the service industry, relaxing the restrictions on the access to the mining, agricultural and manufacturing industries, and continuing to facilitate Free Trade Zones’ role of the opening-up test field . These new policies will take effect on and from 30 July 2019.
Notably, the restriction that “the exploration and development of oil and natural gas (including coalbed methane but excluding oil shale, oil sands and shale gas, etc.) are limited to Sino-foreign joint venture and cooperation” has been removed from the 2019 Negative List. In addition, the 2019 Encouraged Catalogue contains the encouragement policy (prescribed in the Catalogue of Priority Industries for Foreign Investment in Central and Western China (2017 Revision) as well) for the development and utilization of coalbed methane (“CBM”). Therefore, foreign investors are entitled to preferential import tariffs for their CBM development and utilization in Shanxi and Inner Mongolia[1], and also to a reduced enterprise income tax rate of 15% for their CBM development and utilization in Inner Mongolia[2]. These are undoubtedly good news for foreign investors seeking investment opportunities in China’s CBM industry.
Till now, foreign investors were largely restricted on (large-scale) CBM exploitation in China. In principle, they were only allowed to carry out (large-scale) CBM exploitation under the production sharing contracts (“PSCs”) structure jointly with very few Chinese state-owned enterprises qualified to cooperate with foreign investors exclusively[3]. According to relevant regulations[4], under a typical PSC structure, foreign contractor shall solely fund the exploration at their own risks, whilst the Chinese partners shall apply for the mineral rights for CBM exploration and exploitation. Once development of the CBM resources proves to be commercially feasible, foreign contractors and Chinese partners shall jointly fund the development, whilst operations for the exploration and exploitation stage can be undertaken jointly by both parties, solely by one party, or by a third party contractor. Foreign contractors may recover its investment and expenses and receive returns from the CBM production in accordance with the PSC. Foreign contractors may transport their share of CBM production abroad or sell it in domestic market in China pursuant to the terms of the PSC and applicable regulations. If sold in China, the CBM production is usually purchased by the Chinese partners or sold to a third party through entities established by foreign contractors in China. The foreign party may lawfully remit their recovered investment, profits and other legitimate proceeds abroad. The PSCs used to be approved by MOFCOM for them to take legal effect and are now only required to be filed with MOFCOM since 2013[5].
The 2007 Catalogue of Industries for Guiding Foreign Investment and the 2018 Negative List still stated that “the exploration and development of oil and natural gas (including coalbed methane but excluding oil shale, oil sands and shale gas, etc.) are limited to Sino-foreign joint venture and cooperation”. The policies were relaxed to some extent in 2007 – for coal mining blocks with coal mining licenses, holders of the licenses are permitted to cooperate with foreign parties with respect to the ground drilling and underground recovery of associated CBM in the course of coal mining. Such cooperation does not fall into the scope of the regulated regime of cooperation with foreign parties in CBM mining activities[6]. Therefore, in theory, foreign investors may exploit CBM resources jointly with Chinese holders of CBM mineral rights through the establishment of Sino-foreign equity or contractual joint ventures. However, the aforementioned regulations related to Sino-foreign cooperation in the CBM development (limited to the PSC structure) remains unchanged, and only China United Coalbed Methane Co., Ltd. is actually granted with CMB mineral right (and none of the coal mining enterprises with coal mining license is granted with any separate CBM mineral rights). As a result, in practice there has been no successful cases where the (large-scale) CBM exploitation is conducted in a way other than PSCs.
The 2019 Negative List removes the restriction on CBM exploration and development (limited to Sino-foreign joint venture and cooperation). Theoretically speaking, investment in the CBM industry is open to all domestic enterprises, wholly foreign-owned enterprises or Sino-foreign equity or contractual joint ventures[7]. On the other hand, as the Foreign Investment Law will take effect on 1 January 2020, the existing foreign-invested enterprises (including wholly foreign-owned enterprises and Sino-foreign equity or contractual joint ventures) should be transformed into limited liability companies as prescribed by the Company Law or other forms of entities under relevant Chinese legislation within the 5-year transitional period since 1 January 2020[8]. That said, upon the effectiveness of the 2019 Negative List and the Foreign Investment Law, foreign investors may invest in the CBM industry and apply for the CBM mineral rights by establishing limited liability companies (in the form of Sino-foreign joint ventures or wholly foreign-owned enterprises).
According to the prevailing laws, the Ministry of Natural Resources (“MNR”, formerly the Ministry of Land and Resources) is the (sole) authority to grant the CBM mineral rights. In 2017, the MNR launched a pilot program in Shanxi, Fujian, Jiangxi, Hubei, Guizhou and Xinjiang provinces (“Pilot Provinces”) to delegate the authority of approving and issuing the CBM exploration and exploitation licenses (excluding any approval and registration of exploitation licenses for CBM mines with a large reserves or above[9]) to the Departments of Natural Resources of the Pilot Provinces [10]. It is reported that the Departments of Natural Resources of Shanxi and Guizhou issued the CBM exploration licenses to 山西省平遥煤化（集团）有限责任公司 (Shanxi Pingyao Coal Chemical (Group) Co., Ltd.) and 贵州水矿奥瑞安清洁能源有限公司 (Guizhou Water Mineral Aoruian Clean Energy Co., Ltd.) in February and April 2019 respectively.
It is worth noting that no existing legislation expressly imposes restrictions on wholly foreign-owned enterprises for their application for the CBM mineral rights. Therefore, the adoption and official implementation of the Administrative Measures on the Mineral Rights Transfer (Draft) will provide legal basis for foreign-invested enterprises seeking to apply for the mineral rights[11]. However, as the MNR (or Department of Natural Resources) still has (or have) the discretion on granting of CBM mineral rights, it remains to be seen whether the authorities will grant the mineral rights to foreign-invested enterprises (especially to wholly foreign-owned limited liability companies after the implementation of the 2019 Negative List).
The 2019 Negative List delivers clear message to the market that the Chinese government encourages foreign investors to participate in the development of oil and gas resources, including CBM. To achieve such purpose in a meaningful way, a timely reform of the regulatory regimes concerning PSCs and the granting of CBM mineral rights should indeed be put as a priority item on the reform agenda of the relevant Chinese government authorities.
[1] According to the Promoting Foreign Investment by Further Expanding the Scope of Encouraged Industries – Head of the NDRC Meeting the Press Regarding the Catalogue of Encouraged Industries for Foreign Investment (2019 Edition) (“NDRC Meeting the Press Regarding 2019 Encouraged Catalogue”) issued by the NDRC on 30 June 2019, the import of self-used equipment for encouraged foreign investment projects are entitiled to the exemption from tariffs within the total investment amount. See http://www.ndrc.gov.cn/xwzx/xwfb/201906/t20190630_940566.html.
[2] According to the NDRC Meeting the Press Regarding 2019 Encouraged Catalogue, eligible foreign-invested enterprises in encouraged industries in western region are entitled to a reduced enterprise income tax rate of 15%. According to the Announcement of the State Administration of Taxation on Issues Relating to Enterprise Income Tax Pertaining to Implementation of the Catalogue of Encouraged Industries in Western Region, enterprises entitled to such preferential tax treatment shall be those whose main business falls within the encouraged industries stipulated in the Catalogue of Encouraged Industries in Western Region and whose income from the main business in the current year constitutes 70% or more of their total revenue. According to the Catalogue of Encouraged Industries in Western Region issued in August 2014, Inner Mongolia Autonomous Region is deemed as the Western region while Shanxi is not.
[3] In October 2007, the MOFCOM, the NDRC and the Ministry of Land and Resources jointly issued the Circular on Relevant Issues Concerning Further Expansion of Foreign Cooperation on Coalbed Methane Exploitation (“Circular No.94”), deciding to select, apart from China United Coalbed Methane Co., Ltd., certain number of enterprises (large state-owned coal mining enterprises as well as oil and gas corporations are particularly encouraged) to carry out pilot CBM exploitation in cooperation with foreign enterprises within regions designated by the State Council. The approved pilot enterprises are: China National Petroleum Corporation, China Petrochemical Corporation and Henan Coalbed Methane Development and Utilization Co., Ltd. See the Notice on the Approval of China National Petroleum Corporation and the Other Two Corporations to Conduct the Pilot Sino-foreign Cooperation in the Exploration of Coalbed Methane (dated 30 November 2010, Shang Zi Han No.984 [2010]).
[4] See Articles 5 and 6 of Circular No.94, and also the Regulations of the People’s Republic of China on Sino-foreign Cooperation in Exploitation of Onshore Petroleum Resources (Revised in 2013).
[5] After the issuance of the Regulations of the People’s Republic of China on Sino-foreign Cooperation in Exploitation of Onshore Petroleum Resources (Revised in 2013) on 18 July 2013, the PSCs are no longer required to be approved by MOFCOM but only filed with MOFCOM by the Chinese party.
[6] See Article 8 of Document No.94.
[7] The Negative List for Foreign Investments Access is the basis for China’s system of pre-access national treatment plus negative list administration. Foreign investments not covered by the Negative List should be provided with national treatment, and should be administrated based on the principle of equal treatment of the domestic investments and foreign investments.
[8] Article 42 of the Foreign Investment Law provides: “Foreign-invested enterprises established in accordance with the Law of the People’s Republic of China on Sino-Foreign Equity Joint Ventures, the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises, and the Law of the People’s Republic of China on Sino-Foreign Contractual Joint Ventures before the implementation of this Law may continue keeping their original organizational forms for up to five years after the implementation of this Law. The specific implementation measures shall be prescribed by the State Council.”
[9] The CBM reserves are not classified in the Standard for the Classification of Mineral Resource Reserves released in April 2000 by the former Ministry of Land and Resources. According to the Standard for the Classification of Mineral Resource Reserves, natural gas reserves at or exceeding 30 billion cubic meters shall be deemed as of a “large” size. Whether the standard for natural gas is also applicable to CBM remains to be clarified by competent authorities.
[10] In June 2017, the General Office of the CPC Central Committee and the General Office of the State Council circulated the Reform Plan for the Mineral Rights Transfer System (“Reform Plan”). One of the focuses of the Reform Plan is to delegate the approval authority to lower-level competent departments. Relevant policy was expected to be issued and further improved in 2018 and rolled out nationwide in 2019. To put the Reform Plan into place, the Ministry of Land and Resources released the Decision on Delegating Provincial Departments of Natural Resources of Shanxi and Other Five Provinces to Implement the Approval and Registration on the Exploration and Mining of Some Mineral Resources Previously Implemented by the Ministry of Land and Resources (“Decision No.75”, valid for 5 years) in June 2017. In order to promote and implement the Reform Plan across the country, the MNR announced the Administrative Measures on the Mineral Rights Transfer (Draft) in March 2019 to solicit public comments and planned to extend the delegated authority for approving mineral rights from the Pilot Provinces as outlined in Decision No.75 to nationwide. Article 15 of the Draft provides: “The Ministry of Natural Resources are responsible for the approval of: (i) the exploration rights for 7 mineral resources – petroleum, hydrocarbon natural gas, shale gas, gas hydrate, radioactive minerals, tungsten and rare earth; (ii) exploitation rights for petroleum, hydrocarbon natural gas, shale gas, gas hydrate, radioactive minerals, tungsten rare earth, and coal with reserves exceeding 1 billion tons as well as for coal-bed methane, gold, iron, copper, aluminum, tin, antimony, molybdenum, phosphorus and potassium mines that have large resource reserves; and (iii) the exploration and exploitation rights in respect of the waters in the jurisdiction of the People’s Republic of China and outside the jurisdictions of coastal provinces, autonomous regions and municipalities directly under the Central Government. Provincial Departments of Natural Resources will take up the role of approving other exploration and exploitation rights previously undertaken by the Ministry of Natural Resources.”
[11] Article 16 of the Administrative Measures on the Mineral Rights Transfer (Draft) provides: “Foreign investors seeking to explore and exploit mineral resources and the mineral resources in national planning mining areas or other mining areas of great value to national economy shall file with competent authorities in accordance with the provisions of this Measures.”