SIM Report: Northeast Asia, Issue 4

CHINA: GOVERNMENT ALLOWS FOREIGN, DOMESTIC OIL AND GAS EXPLORATION

Beijing on 9 January announced it will allow foreign businesses to engage in oil and gas exploration in China. Foreign businesses officially registered as an entity in the country with net assets totalling RMB300 million (USD43m) and more will be allowed to secure oil and gas exploration rights. This is effective as of 1 May. Previously, foreign companies could only explore for and produce oil and gas in conjunction with Chinese businesses, including state-owned enterprises (SOEs). Mineral mining licences will be valid for five years, with extensions comprising of five-year periods. When companies put in an application for renewal of exploration rights, the area of exploration of their originally registered zone will be decreased by 25 per cent. This rule will oblige SOEs, which run most of the resource deposits, to cede a portion of their acreage. This is likely to encourage investors, as it means that the state’s monopoly in the sector can be broken up.

The measure follows on previous ones the Chinese government has taken to open up China’s oil and gas sector, including a withdrawal of curbs on foreign investment. Such measures are aimed at boosting the country’s energy security, as it currently imports around 50 per cent of its natural gas consumption and almost 70 per cent of its crude oil. Additional measures, including adjustments to policies and regulations for operation of oilfields, exploration information management, transfer and sales, and exploration and production rights bidding.
 
Allowing greater foreign stakes in the Chinese O&G market, especially in the upstream side, should boost domestic energy supplies; however, this development comes against the backdrop of the recent signing of ‘Phase 1’ of the US-China trade deal, which will see China increase its procurement of US energy resources by USD18.5 billion in 2020 and USD33.9 bn in 2021. This procurement is unlikely to have a significant impact on foreign and domestic energy firms’ interests, as China has not been a large buyer from the US and this is unlikely to change until tariffs are removed. Levies are unlikely to be removed until the signing of a ‘Phase 2’ trade deal, which may not happen until after the potential beginning of US President Donald Trump’s second tenure as of November 2020.
 
In the three to six-month outlook, the increased access is unlikely to draw much overseas interest, due to the mostly mediocre quality of the country’s hydrocarbon resources. Furthermore, large Chinese firms have already exploited many of the prime assets offshore and onshore, and the remaining shale gas and oil is difficult to develop due to geological complexities. There is a moderate likelihood, however, that foreign oil and gas companies already operating in China will increase their investments. They may do so, for example, by assuming complete ownership of businesses previously partly owned with Chinese partners in a joint venture. Companies with existing interests include US firm ConocoPhillips and Anglo-Dutch firm Royal Dutch Shell. In the long-term, the improved access is also likely to benefit international companies weighing market entry and reduce China’s current heavy reliance on other countries to meet domestic energy consumption. This will be especially important as major oil exporters such as Iran are facing increased security and political risks, including sanctions.

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