Foreign investors welcomed into shale gas market
November 07, 2013 | BY
clpstaffThe potential of China's shale gas market has yet to be realised. Recently released Guidelines encourage foreign investment, but without further details it is hard to assess the full impact
The National Energy Administration (NEA) released Guidelines for shale gas on October 22 that contains subsidies and fee waivers. The aim is to increase output of the fuel and improve China's energy security at the same time.
Shale gas has become a hot topic as this resource becomes an important part of energy policies. It is estimated that China holds 1,115 trillion cubic feet (tcf) of recoverable reserves of shale gas. This is more than the US, and China is looking to this resource to meet energy needs as economic growth continues.
“Overall, the Guidelines confirmed the plan of Chinese government to encourage the development of shale gas. The measures included in the Guidelines are good news to companies and investors that are interested in this sector,” said Mike Arruda, a partner at Jones Day who specialises in oil and gas.
Key developments
One of the most encouraging developments in the Guidelines calls for the shale gas market to use a market-oriented pricing mechanism instead of the previous government-guided price. This removes a layer of government control that discouraged investors.
The Guidelines have also reiterated some privileges and encouragement polices applicable to the industry, like the Rmb0.4 per cubic metre subsidy for shale gas development companies.
The Guidelines expressly encourage relevant entities to carry out a study of policies with respect to the deduction and exemption of mineral resources compensation fee and mineral licence fee, as well as the resources taxes, VAT and even income taxes.
“Details of these treatments are unclear. However, if shale gas privilege policies follow similar policies for other mineral resources, a shale gas company may be granted the equivalent of a tax holiday for one year, and a 50% tax deduction for years 2 to 3, and a 25% tax deduction for years 4 to 7,” said Arruda.
The Chinese government has not passed any official rules on the tax breaks and exemption of other charges. The main authority over taxes is the State Administration of Taxation (SAT) and the NEA cannot really request the SAT to develop these policies.
“While we are happy to see such an express request in the Guidelines, we need to bear in mind that NEA is only one governmental agency under the administration of the State Council,” said Arruda.
Local governments have been requested to subsidise shale gas producers under the Guidelines, but there is no information on how this may happen. It seems foreign-invested producers and domestic producers will both receive any potential subsidies, as the Guidelines do not differentiate between them.
“China needs the technology from other countries (especially the US) to develop shale gas more efficiently. It should offer same or even better treatment to foreign investors interested in shale gas development in China in order to attract more foreign investors to participate,” said Arruda.
According to an article from China Daily, there are only two Western oil companies working with Chinese partners to explore this fuel in the country. This number is expected to increase, but regulatory hurdles have proved challenging for foreign investors.
Missing technology
Article 9 of the Guidelines encourages shale gas exploration companies to partner with institutions and companies that possess advanced shale gas development technology. It also requests companies to cooperate with these institutions or companies either in the technology and research area or in exploration and production activities.
“A general expectation is for shale gas exploration companies to bring in the advanced shale gas exploration and development technology and experience in management of production from their international partners” said Arruda.
Article 9 shows that foreign investment into the shale gas area will be welcomed. The Guidelines are an encouraging sign that foreign investors will be welcomed into this space, but the difficulties with the regulatory regime will need to change as well.
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