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MLR Issues Notice Encouraging Growth in China Shale Gas Development

By Robert Bradford Farrar, Greater China Practice

LawFlash/Client Alert

  • published on:

    11/29/2012
  • by:

    Greater China Practice

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Notice shows further commitment to rapid industry growth and provides general guidelines for developing shale gas resources in the country.

The Ministry of Land and Resources (国土资源部)(MLR) of the People's Republic of China issued the "Notice Regarding the Strengthening of Shale Gas Exploration, Exploitation, Supervision, and Administration" (国土资源部关于加强页岩气资源勘查开采和监督管理有关工作的通知) (the Notice) on October 26. The Notice, which will remain valid for five years from issuance, is directed to all provinces, autonomous regions, municipalities, and governmental entities related to natural resource management in China. It promotes rapid development of the unconventional gas industry within China for purposes of meeting the country's natural resource requirements and encourages continued overall economic growth.

Background

Historically, the energy sector in China has been highly controlled and regulated by the state. Along with the MLR, the National Development and Reform Commission (国家发展与改革委员会)(NDRC), the Ministry of Commerce (商务部)(MOFCOM), and the National Energy Administration (国家能源局)(NEA) are all actively involved in shaping energy policy with respect to foreign interests in China. In order to enter the market, foreign interests must partner with state-owned enterprises by way of production-sharing contracts, and they typically assume a disproportionate amount of the risk associated with exploration and exploitation of resources. Presently, the shale gas market is still in its infancy in China. The majority of activity in the sector has involved exploration and geological assessment of potential resource deposits by domestic companies and several large international petroleum companies.

The Notice

The Notice provides a 19-point strategy that serves as a guideline to private enterprises and local governmental administrative authorities engaged in shale gas activity in China. The strategy will be referenced in conjunction with existing natural resources laws and regulations. As is typical of administrative notices of this type, the content of the Notice includes no specific law or legislation that supplants the existing legal regime and uses aspirational language to provide a framework for the development of the industry.

The Notice proclaims a complete "opening of the market" to encourage the exploration and exploitation of unconventional gas resources through the development of advanced extraction technology, support through government policy, and standardization of operational protocol. The strategy for shale gas development seeks to identify and assess shale gas resources, encourage research related to shale gas mining technology (particularly with cooperation from international interests), and give full latitude and priority to local enterprises seeking to develop the industry.

Parties are instructed to apply to the MLR for shale gas exploration rights in order to launch the initial development of the sector. Applicants should possess the ability to fund projects and have oil, gas, or mineral exploration ability; applicants without such experience may seek to participate in the development of the sector through cooperation with other entities that have the geological exploration experience. The Notice specifically encourages private enterprises and foreign enterprises with shale gas mining and exploration technology to create joint venture partnerships to invest and actively participate in the industry to promote growth.

Primary guidelines are provided for holders of existing licenses to begin shale gas exploration or exploitation work on their respective license blocks. Holders of existing oil and gas licenses may engage in the exploration and exploitation of shale gas within the boundaries of such licenses, but only after formally expanding their scope of exploration or exploitation through license amendment and by submitting an operations implementation plan.

The Notice sets forth rudimentary guidelines based primarily upon the shale gas potential of the block. In instances where an oil and gas exploration block has shale gas potential, the MLR will arrange to amend mineral rights to include shale gas. In instances where the shale gas potential of an oil and gas block is not clear but the license holder has yet to engage in shale gas exploration activities, the license holder must obtain a license for shale gas exploration from the MLR in accordance with applicable law and refrain from further oil and gas development activities. Companies already engaged in the exploration or mining of shale gas must submit applications to the MLR to amend licenses within three months of the date of issuance of the Notice. Companies are also permitted to engage in testing for deposits or transitions of existing blocks to shale gas activities if they satisfy the government procedures and approval. Applicants may not commence shale gas activities until an agreement signed by the license holder guaranteeing the safety of shale gas operations is on file with the MLR. Local MLR offices will be responsible for supervising shale gas activities and making sure that they comport with operational plans and MLR requirements. Notably, the Notice also allows authorized shale gas industry companies to receive reduced or waived application fees, exploration right fees, and mineral resources fees.

Implications

Although the Notice does not provide the breadth of detail that would completely clarify the legal structure under which companies engaged in shale gas development in China may operate, it does show a concerted effort by the government to encourage and support the industry's growth. The Notice follows an announcement made by the Ministry of Finance (财政部) earlier this month offering a subsidy of 0.4 yuan (approximately 0.06 U.S. dollars) per cubic meter of shale gas produced in order to incentivize development and help China meet its target annual production goal of 6.5 billion cubic meters by 2015 and 60 to 100 billion cubic meters by 2020.

It is likely that government policy regarding shale gas development will continue to mature in the coming months in order to keep pace with this rapidly growing industry and to support the country's efforts in obtaining advanced shale gas exploitation technology. Obtaining such technology will allow China to rely on domestic companies to develop the resource within its own borders.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis attorneys:

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Brad Farrar