China is reforming and liberating its hydrocarbon sector to encourage foreign investment and to boost domestic gas supply. This process is ongoing and is expected to continue into the medium term.

As part of the reform, in June 2019 the government removed the requirement for foreign companies to form joint venture partnerships with National Oil Companies (NOCs) for conventional projects. However, it is currently uncertain how this will be implemented in practice.

Future of hydrocarbons in China

Additionally, subsidies to boost domestic unconventional gas supply have been replaced and extended in 2019, under a new model, which is designed to reward companies that annually increase unconventional gas production. Following the recent withdrawal of major international players from unconventional opportunities and the pace at which the new investor-friendly legislation has been introduced, later fiscal and regulatory adjustments may be required to further encourage foreign investment.
China offers production sharing agreements (PSAs) to foreign companies and mining licenses (concession regime) to domestic companies.

Previously for PSAs, foreign companies were required to enter into joint-venture partnerships with one of China’s national petroleum companies. It is currently uncertain how this will change with the reforms. If a discovery is made, the national company may acquire a working interest of up to 51% in the asset. A signature bonus and annual license fees are payable, and 5% production tax is payable on gross production. Contracts signed prior to 2011 are subject to a 0-12.5% royalty based on production, hydrocarbon type, and terrain. A 6% resource tax replaced royalty payments for contracts signed after 2011. The cost recovery limit varies between 60-80% depending on terrain and the remaining profit oil share is negotiable. Licensees may acquire a share of between 30-100% of the remaining profit oil depending on the resource type, production, and terrain. A windfall tax (the special oil gain levy) applies when the selling price is US$65 per barrel (bbl) or over. The rate varies between 20-40%. Additional taxes including corporate income tax, environmental tax, consumption tax, and local levies are also applicable.

Future licensing opportunities within the country include onshore provincial unconventional licensing opportunities and periodic CNOOC-hosted offshore licensing opportunities. The most recent licensing opportunity is the 2019 Offshore Licensing Round, which offers a total of 15 blocks: eight exploration areas, six development areas, and one area in the Strategic Cooperation Zone.

Regime Flow Chart – Production Sharing Agreements

Source: GlobalData © GlobalData