China's Oil Products Market Begins to Open

The Procedures are divided into seven parts. Chapter I contains general provisions, Chapter II sets out the procedures for application and acceptance of application of operating permits for oil products (Oil Products Permits), Chapter III covers procedures and deadlines for examination of Oil Products Permits, Chapter IV addresses the issuance and modification of approval certificates for the operation of oil products, Chapter V covers general supervision and administration matters, Chapter VI provides for legal liabilities and Chapter VII deals with certain supplemental provisions.

Scope of the Procedures: Wholesale, Storage and Retail of Oil Products

The Procedures provide for three different regimes that apply depending on whether an enterprise is engaged in the wholesaling, storage or retailing of oil products. In particular, the supervision of wholesale operations, on the one hand, and storage and retail activities, on the other, have different approval regimes. Generally, the regime for the granting of operating permits for wholesaling of oil products is more tightly controlled, and overseen at a higher administrative level, than that for storage or retail of oil products. An interesting provision relates to oil designated as "special purpose oil", which is outside the scope of the Procedures; the Procedures simply provide that such special purpose oil "shall be used in accordance with the quantity and purpose for consumption and the scope of supply provided for by the state and must not be sold outside of the PRC" (Article 28).¹

The Supervisory Authorities: MOFCOM, the Provincial Government Commerce Authority and the Municipal Authority

The Procedures provide for an application and supervision procedure involving three levels of the PRC authorities: MOFCOM, the Provincial Government Commerce Authority² and the Municipal Authority³ (each individually a Supervisory Authority and together the Supervisory Authorities). MOFCOM has responsibility for supervising the Provincial Government Commerce Authority and the Provincial Government Commerce Authority itself has responsibility for supervising the Municipal Authority as set forth in the Procedures. Therefore, a clear chain of responsibility is intended to be implemented in order to allocate responsibility between PRC authorities.⁴

In Article 31, the Procedures provide a list of prohibited actions (such as abuse of power) by a Supervisory Authority that are subject to challenge by an interested party. If the challenge is successful, this could lead to the revocation or suspension of an Oil Products Permit granted by such Supervisory Authority.

Articles 32 and 33 of the Procedures set forth certain legal liabilities that Supervisory Authorities must take on. Article 32 provides a list of events whereby a Supervisory Authority may violate the terms of the Procedures, for example by failing to grant an Oil Products Permit to an enterprise that meets all requirements set forth in the Procedures. Essentially, the administrative authority at the next higher level may issue an order for rectification of the violation and administrative sanctions may also be imposed on personnel responsible for any such violation.

Wholesale Activities

Any enterprise seeking to apply to engage in the wholesale operation of oil products must submit an application for an Oil Products Permit to the relevant Provincial Government Commerce Authority of the place where such enterprise is located. These Provincial Government Commerce Authorities are given the wide responsibility of "formulating the development plans for petrol stations and storage industry within their own jurisdictions and for organizing and coordinating the supervision and administration of the business activities for oil products within their own areas of jurisdiction" (Article 3). The technical requirements that an applicant seeking to engage in the wholesale operation of oil products must meet are set forth in Article 7.

The Provincial Government Commerce Authority, after having examined an application for an Oil Products Permit, must submit a preliminary opinion and relevant application materials to MOFCOM. MOFCOM must then determine whether or not to grant an Oil Products Permit to the enterprise for the wholesale operation in question.

Storage and Retail Activities

In contrast, the application for Oil Products Permits for storage and retail activities is initially the responsibility of the Municipal Authorities. The relevant Municipal Authority will examine applications for storage and retail Oil Products Permits and then submit a preliminary opinion and the application materials to the Provincial Government Commerce Authority. The Provincial Government Commerce Authority must then determine whether or not to grant an Oil Products Permit to the enterprise for the storage or retail operation in question. The technical requirements that an applicant seeking such an operation permit must meet are set out in Article 8 (storage) and Article 9 (retail).⁵

Publication of Criteria for Applications and Submission of Application Materials

The Provincial Government Commerce Authorities and the Municipal Authorities are required to post in their office premises "the requirements, procedures and deadlines for the application of operating permits for oil products, the list of documents to be submitted, and the form of sample application document" (Article 10). If the applicant submits an application in accordance with such requirements, the application must then be accepted (Article 12). Thus, the Procedures seem designed to improve transparency and create a level playing field for enterprises seeking to apply for Oil Products Permits.

If a Provincial Government Commerce Authority or Municipal Authority deems the application materials incomplete or not in compliance with the Procedures, the relevant authority shall inform the applicant on the spot or within five working days of receipt of the relevant application of all details required to be supplemented or corrected (Article 11). This again should help ensure efficiency and transparency in the application process. Also, interestingly, a failure to inform the applicant within the five-day period will result in the application being deemed accepted, and such acceptance is backdated to the date of receipt of the application materials by the relevant Supervisory Authority. If the applicant is informed within the required period and the applicant corrects or supplements the application as requested, then the application must also be accepted (Article 12).

Acceptance of an Application

Acceptance of an application for an Oil Products Permit results in the issuance of a written and dated approval affixed with the stamp of the relevant issuing Supervisory Authority. A written document must also be issued if the application is rejected, stating the reasons for such rejection. In the latter case, the relevant Supervisory Authority must also inform the applicant of its right to apply for administrative review or initiate administrative proceedings in accordance with PRC law (Article 12). Therefore, an applicant should know exactly what must be done to obtain an Oil Products Permit.

Consideration of Accepted Applications

All applications for both wholesale and storage/retail Oil Products Permits must be considered (and a preliminary opinion and application materials submitted to the next higher level Supervisory Authority) within twenty working days from the acknowledged date of the application (Articles 14, 15 and 16). MOFCOM and/or the Provincial Government Commerce Authority, as applicable, then has a further 20 working days to complete the examination and verification of the application and determine whether to issue an appropriate approval certificate (wholesale certificate, storage certificate and/or retail certificate as applicable, each a Certificate) or provide written notice of the decision not to issue a Certificate and the reasons for such decision. In relation to applications for storage and retail Oil Products Permits, in the event that the Provincial Government Commerce Authority does not make a decision within 20 working days, such period may be extended for a further 10 working days upon the approval of the head of the Provincial Government Commerce Authority. In such case the applicant must be notified of the reasons for such extension (Article 16). However, such an extension period is not provided for in the case of applications for wholesale Oil Products Permits. There are also provisions in the Procedures that allow for hearings relating to storage/retail applications if the Provincial Government Commerce Authority determines that these are necessary (Article 17).

Issuance of Oil Products Permits and Modification of Certificates

Despite the fact that only wholesale Certificates are actually issued by MOFCOM (storage Certificates and retail Certificates are issued by the Provincial Government Commerce Authority), MOFCOM is responsible for printing all Certificates (Article 19). Presumably therefore, the printed storage and retail Certificates will be sent by MOFCOM to the Provincial Government Commerce Authority for formal "issuance" to the applicant. The Procedures also contain provisions concerning the modification of Certificates that have already been issued, as a result of a change in circumstances for the enterprise (Articles 20 and 21) or the authority of the relevant Supervisory Authority (Article 22).

It is also worth noting that Oil Products Permits are granted to specific enterprises and that the benefit of an Oil Products Permit will not extend to all companies within the enterprise's group. Therefore, each time an oil products operating enterprise wants to extend the benefit of its Oil Products Permit to any of its branches or sub-branches, the application formalities must be completed separately (Article 18). Similarly, in the event of the winding-up or the termination of the operations of an oil products operating enterprise, such enterprise must complete the formalities for the suspension or cancellation of the Oil Products Permit with the Supervisory Authority that issued the Oil Products Permit (Article 18).

Supervision

The Procedures provide for obligations on MOFCOM and the Provincial Government Commerce Authority to strengthen supervision and inspection of the oil products market at the next lower level and to promptly correct any acts in violation of the Procedures (Article 23). Each Supervisory Authority is also required to strengthen the supervision and inspection of the oil products market within their own jurisdictions and investigate and sanction any acts by enterprises that are in violation of the Procedures (Article 24). This demonstrates again that the Procedures purport to implement a chain of responsibility designed to ensure accountability and improve efficiency.

Administration

There are no fees payable for Oil Products Permits, or for the subsequent supervision and administration of Oil Product Permits that have been issued (Article 25). In the event that any fees are charged in violation of the Procedures, then the next higher level Supervisory Authority is entitled to issue an order for the refund of such fees and impose administrative sanctions on any personnel who are responsible for the charging of these fees (Article 33).

MOFCOM and the Provincial Government Commerce Authority must each publicly post the list of oil products enterprises to which Oil Products Permits have been granted and a list of any Oil Products Permits that have been changed or cancelled (Article 26). The Procedures also prohibit any Certificate being forged or purchased, sold, leased, loaned or otherwise transferred in any way (Article 27), although sanctions for contravention of this Article are not specified in the Procedures (as they are for other contraventions).

Prohibited Acts by Oil Products Enterprises

Oil products enterprises are prohibited from carrying out certain acts as set out in Article 29. These include operating without an Oil Products Permit or with an Oil Products Permit that is not in compliance with the Procedures or that is beyond the scope of operations permitted by the Oil Products Permit.

As one would expect, enterprises engaging in the retail of oil products are required to purchase oil products from enterprises qualified for the wholesale operation of oil products and, on the same basis, any enterprise engaged in retail is prohibited from selling oil products for and on behalf of any unit not qualified for wholesale. Similarly, there is also a prohibition on any enterprise engaged in wholesale from selling oil products to enterprises not qualified for retail. Furthermore, enterprises engaging in the storage of oil products for other enterprises are required to inspect and prove the legal source of such oil products before accepting them for storage (Article 30).

In addition, in the event of an oil products enterprise committing any of the prohibited acts set forth in Article 34 (such as alteration, reselling at a profit, leasing, lending or otherwise illegally transferring any Certificate or the selling of smuggled oil products), the relevant Supervisory Authority must impose administrative sanctions in accordance with PRC law, including, where the contravention is serious, the suspension or termination of a Certificate.

An oil products operating enterprise must also not conceal information or provide false or misleading information when applying for an Oil Products Permit, otherwise the application shall be rejected and the applicant shall be given a warning (Article 35).

Finally, there is a prohibition on any enterprise engaging in any business for oil products without the permission of the relevant Supervisory Authority. If such unauthorized activity occurs, the relevant Supervisory Authority must stop the activity in question and shall impose administrative sanctions on the enterprise (Article 36).

Conclusion

The Procedures go some way to setting out a detailed procedure for the administration and supervision of the petrol, kerosene and diesel industries in the PRC. Upon efficient operation of the Procedures by the relevant Supervisory Authorities and strict enforcement of the provisions designed to prevent such matters as the illegal charging of fees and the improper granting of Oil Products Permits, the Procedures should improve transparency and create a level playing field for oil products operators in the PRC.

The authors would like to thank Y.W. Chung of the firm's Hong Kong office and Dazhi Yang of the Beijing office for their contributions to this article.

Endnotes

1 None of the key terms with respect to "special purpose oil" are specifically defined in the Procedures. It will be interesting to see how broad or narrow the interpretations given to the term will be as MOFCOM develops its interpretation of the Procedures.

2 Defined as "the administrative authorities of the people's government in charge of commerce for provinces, autonomous regions, municipalities directly under the central government and cities directly under central planning" (Article 3).

3 Defined as "the administrative authority in charge of commerce of the people's government at the level of cities (cities with districts, same hereinafter)" (Article 6).

4 In this commentary the phrases "next higher level" and "next lower level" are used to refer to situations where such supervision is to be exercised by the higher-level authority.

5 It should be noted that a separate regime applies for petrol stations serving "rural villages and selling diesel only" in respect of which the relevant Provincial Government Commerce Authority "shall formulate its own requirements and administrative procedures according to relevant local conditions" (Article 9).