Foreign Firms Can Finally Tap Into China's Oil and Gas Industry
China
will for the first time allow foreign companies to explore for and produce oil
and gas in the country, opening up the industry to firms other than state-run
energy giants as Beijing looks to boost domestic energy supplies.
The
long-awaited opening comes alongside Beijing's reshuffle in the so-called
"midstream" pipeline business, but experts say the policy relaxation
may not draw immediate interest from international drillers due to the overall
poor asset quality of China's hydrocarbon resources.
From
May 1, 2020, foreign firms registered in China with net assets no lower than
300 million yuan ($43m) will be allowed to take part in oil and gas exploration
and production, the Ministry of Natural Resources said at a media conference.
The
change will also apply to domestic companies that meet the same asset criteria.
"China
is accelerating the sector reform due to growing energy security
concerns," said Zhu Kunfeng, Beijing-based analyst with IHS Markit, "Vitalizing
the industry by diversifying the participants, including foreign and private
investors, is the focus of that reform."
China
now imports 70 percent of crude oil it refines and nearly half its natural gas
consumption, and state firms face an uphill battle boosting reserves and
production outside China amid growing geopolitical risks.
Previously,
international companies could enter the industry only via joint-ventures or
through cooperation with Chinese firms, mainly state-owned majors such as China
National Petroleum Company (CNPC), China Petrochemical Corp (Sinopec) or their
listed vehicles.
Mineral
resources mining permits will be valid for five years at initial registration
and can potentially be extended for another five years.
When
firms apply for extensions, the government will automatically cut the area of
the mining/exploration zones by 25 percent from the originally registered
level, the ministry added.
The
new rule on cutting the acreage size will effectively force state firms which
control most of the prospective oil and gas deposits to cede some of their
acreage, said a government official involved in the reform.
"Compared
to previous measures of exploration work commitment, the new rule makes the
acreage transfer more efficient and compulsory," said the official.
But
as global firms are becoming more disciplined in spending after the 2014 oil
crash and as other resource host nations such as India and Malaysia also try to
polish up terms to attract investment, the reform may not lure an immediate
flow of foreign investment.
Chinese
majors have also tapped most of the best assets onshore and offshore, with the
under-explored resources such as shale oil and shale gas costly to develop due
to complex geology.
"The
policy may come too late ... as the sweet spots are all taken," said a
Beijing-based industry adviser to a European oil and gas firm.
Rather,
domestic independent companies, such as oilfield service providers or firms
with some exploration experiences abroad may be drawn to the game, said IHS's
Zhu.
Also, as part of the reform, the ministry said licenses for all mineral resources will be awarded through competitive bidding and tender processes with the exception of rare-earth elements and radioactive mineral resources, where licenses will still be strictly controlled.