Chinese Government Lifts Restrictions for Foreign Companies to Acquire Oil & Gas Blocks

Chinese Government Lifts Restrictions for Foreign Companies to Acquire Oil & Gas Blocks

Chinese Government Lifts Restrictions For Foreign Companies To Acquire Oil & Gas Blocks

The Chinese Government announced the lifting of a series of restrictions on foreign investment on June 30, 2019, with the new policies becoming effective July 30, 2019. Two of the key oil & gas restrictions lifted are foreign direct investment in the upstream oil & gas sector and the city gas distribution sector. Here we focus on the changes to the upstream oil & gas sector, which allows foreign companies to operate fully owned entities to hold oil & gas blocks in China.

Chinese NOCs

The Chinese domestic upstream oil & gas sector is dominated by the four Chinese National Oil Company (NOCs) — China National Petroleum Corp (CNPC), China Petroleum & Chemical Corp (Sinopec), China National Offshore Oil Corp (CNOOC), and Shaanxi Yanchang Petroleum Group (Yanchang). Access to oil & gas blocks for local companies and international companies is strictly through entering into a production sharing contract joint venture with any of these four companies.

Fig .1 NOC held acreage

Declining Production and Increasing Demand

The latest policy of allowing international companies to directly participate in the upstream sector is an attempt by the Chinese Government to arrest falling domestic production and cut reliance on imported oil & gas. China’s domestic oil production peaked in 2015 with total production of 215 million tons but slipped below 200 million tons from 2016 to 189 million tons in 2018. The decrease in oil production is due to the low oil prices, leading to the closing of some marginal non-profitable oil fields, and the aging oil fields in the Songliao and onshore Bohai Gulf basins in the Northeastern part of China. On the other hand, China’s domestic gas production has been increasing steadily from 30.3 Bcm in 2011 to 161.2 Bcm in 2018, and demand for gas for electricity generation is projected to increase tremendously. In the same period of time, China’s demand for and reliance upon imported oil & gas continues to grow with the country becoming the world’s biggest importer of crude oil in 2017 and the biggest gas importer in 2018. In 2018, China’s total oil consumption was 625 million tons, 440 million tons of which were imported and indicated 69.8% reliance on imported oil. As for gas consumption, China’s reliance on imported gas stands at 45.3% with total gas consumption of 277.6 Bcm, 125.4 Bcm of which were imported.

Challenges for Foreign Companies 

Despite this latest policy of allowing foreign entities to directly participate in China’s upstream sector, there are still challenges to overcome before foreign companies will be able to invest.

At the time of the announcement, there was no known process for foreign oil & gas companies to obtain licences directly from the government, and there was no mention of how this process could be managed. Whereas, it used to be only the four Chinese NOCs that could secure conventional oil & gas licences, the Chinese Government had used Xinjiang Province as test bed for open tender, to open up the sector allowing non-NOC Chinese companies to secure oil & gas licences through two separate petroleum acreage releases in 2015 and 2017. The Government used different methods in each of the acreages release. The oil & gas work program commitment method was used in 2015 and the “Rules on the Assignment of State-owned Land Use Right by Bidding, Auction and Quotation” implemented by the Chinese Government in 2006 was used in 2017. While the international oil & gas companies will be familiar with the working mechanism of the bidding through work program commitment, the Chinese rules on assignment of state-owned land use bidding method will require further understanding.

China has a long history of oil & gas exploration and production which made the country the sixth biggest oil producing country in 2018 with production of approximately 3,980,650 bo/d. The major producing basins are already taken up by the four NOCs which means access to oil & gas blocks is limited. According to the Chinese oil & gas law, exploration licenses are issued for terms of up to seven years with extensions obtainable for up to an additional two years. However, the NOCs are able to extend their exploration licences extensively leading to the current situation where oil & gas blocks are being tied up. In response to this, in 2017 the Chinese Government implemented policies to impose more stringent checking and guideline processes towards the relinquishment of exploration licences by the NOCs for licences that did not meet the minimum investment requirement. On this basis, there were 924 exploration licenses (including coal bed methane and shale gas exploration blocks) covering a total of 3,094,600 sq km at the end of 2018 compared to 941 exploration licenses covering a total of 3,284,600 sq km at the end of 2017.

The Tarim Basin in Xinjiang Province is one area where strong governance had been carried out whereby the NOCs have been relinquishing oil & gas areas. Figure 2 shows the current blocks held by the NOCs as of 2017/2018 and Figure 3 shows the known NOC relinquished areas since 2015.

Fig .2 Current Tarim Basin acreage

Fig .3 Tarim Basin acreage relinquished since 2015

 

Access to upstream oil & gas data is a challenge that E&P companies face all over the world. In China’s context, the Government has very strict control of information to the point that certain upstream data are classified as state secrets. This generates two areas of challenge.

  • Data are required by IOCs to make investment screenings before committing
  • The understanding and handling of data by IOCs when operating as a company in China.

The near-term scenario (3-5 years), with the lifting of the restrictions, is that we may see different forms of partnerships between NOCs and IOCs, where contractual terms are not just based on the current PSC terms of an IOC undertaking 100% of exploration cost and an NOC having the rights to back in for 51% stake in any discoveries during the development and production phase. An open attitude by the NOCs will be required to facilitate the different form of partnerships so that IOCs can bring financial capital and advanced technological skills/equipment to advance oil & gas exploration and production in China, with the main target areas being unconventional and deepwater hydrocarbons. This will also help the IOCs to overcome the issue of accessibility to the most prospective areas held by the NOCs and accessibility to data. We are already starting to see flexibility adopted by the NOCs with the recent partnership of CNOOC and CNPC in the Beibuwan Basin where CNOOC signed two offshore PSCs with CNPC on PSC terms negotiated by both parties.

The lifting of the restriction for direct entry to the upstream oil & gas sector is welcoming news as it allows E&P companies to have direct access to the biggest oil & gas consuming country in the world with a ready market. At the time of the implementation of the policy on July 30, 2019, we have yet to see IOCs rushing into China to seek investment in the sector. It is highly likely that with the challenges pertaining to just the upstream sector discussed here, that direct IOC investment is still many years away. There are also challenges that need to be addressed in the midstream and the downstream sectors. The Chinese Government is set to make major policy changes in the midstream sector with regards to a single government pipeline company taking control of the country’s network and allowing access to all companies taking control away from the NOC monopolies.

Contact: chester.chua@drillinginfo.com

China Reforms Domestic Upstream Business

China Reforms Domestic Upstream Business

As part of the objective to enhance oil and gas exploration and exploitation investment, the Chinese Government has been seeking to reform the sector since 2011 with 2017 a breakthrough year. The upstream industry has traditionally been under the hold of the four Chinese National Oil Companies (NOCs), namely CNPC, Sinopec, CNOOC and Yanchang Petroleum with CNPC as the largest holder of acreage in the country. Both local and foreign oil companies that want access to resources must proceed by entering into a Production Sharing Contract Agreement with the NOCs through private negotiation or in the case of CNOOC through a public tender.
Reform started in 2011 with a shale gas tender round of four blocks, the first time the Chinese Government had allowed licences to be held by companies other than the NOCs. In the tender round, the government allowed two province-owned companies to participate and one of the non-NOCs, Henan Coal Bed Methane Development Co Ltd, was awarded the Yuqianxiangxiusan Shale Gas Block. A second tender round followed quickly in 2012 offering 20 shale gas blocks of which 19 were awarded, surprisingly none of which went to the NOC’s. Two possible reasons for this were firstly that the blocks offered were not within the confines of known sedimentary basins thus posing higher risk and secondly the optimism for shale gas had driven non-traditional oil and gas companies to bid more aggressively for the tendered blocks.

Second shale gas round awards and Yuqianxiangxiusan & Guizhou Zhenan

Second shale gas round awards and Yuqianxiangxiusan & Guizhou Zhenan


Following the success in 2012 there were plans to quickly make more blocks available for a third shale gas tender round in 2013 but this did not materialize. In 2014, at the end of the initial exploration period of 3 years for the shale gas blocks awarded in 2011, the Chinese government announced that Sinopec and Henan Coal Bed Methane had been penalized and fined for not fulfilling their commitments. At the time there was no known strict enforcement for fulfilling commitments or making relinquishments by the government. This was another step by the government to reform and enforce more stringent monitoring and action and resulted in more than 100 exploration blocks being surrendered by the NOCs between 2014-2017.
With the experience from the shale gas tender rounds, the government launched the first open oil and gas tender round in 2015 in Xinjiang Province. The tender allowed Chinese companies, other than the NOCs, that fulfilled the conditions of being a China registered company (excluding Hong Kong, Macau and Taiwan), with equity of at least RMB 1 billion (~US$ 156.2 million), in a healthy financial position and with the ability to undertake civil liabilities to participate in the tender. A point to note is that companies were to bid as individual entities, thereby eliminating bidding by joint ventures. The blocks offered were in smaller unexplored sedimentary basins and were blocks relinquished by the NOCs. The round was not hugely successful due to the downturn of the industry in 2015 attracting 13 companies to submit bids for the six blocks. Eventually only four blocks were awarded with one dropped before the tender and a second as a result of attracting less than three qualifying bids.

The Chinese Government pushed ahead with the upstream reform in 2017 by offering tender blocks in oil and gas, coal bed methane and shale gas in the same year, further cementing its drive to enhance oil and gas exploration and exploitation investment.

The coal bed methane tender round comprised ten blocks and generated a committed investment of RMB 107.3 million (~US$ 16.8 million) for the initial three-year exploration period. This is the first time that coal bed methane tender blocks have been offered.

The Guizhou Zhenan Shale Gas tender was carried out through competitive cash bidding and won by a Guizhou Province government-owned company with a winning bid of RMB 1.29 billion (~US$ 201.4 million). It is the first competitive cash tender carried out by the Government with the 730 sq km block surrounding the Anye 1 shale gas discovery which was drilled by the China Geological Survey, as a stratigraphic reference well, in 2015/2016 and flowed approximately 3.5 MMcfg/d following fracture stimulation.

The oil and gas tender round once again focused on Xinjiang Province where five blocks were offered. For this round, the initial exploration period for the blocks was revised to five years compared to three years for prior rounds.

Current shale gas blocks by operator

Current shale gas blocks by operator


With the reform breakthrough in 2017, we can see that the Chinese Government is committed to change in opening up the industry. However, there is still a long way to go before the Chinese upstream oil and gas industry is fully opened to the market, especially for direct foreign investment.

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