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.
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.
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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