Global Traditional Energy Resources

China has seven prospective shale gas basins: the Sichuan, Tarim, Junggar, Songliao, Yangtze Platform, Jianghan, and Subei.¹ In 2013, the U.S. Energy Information Administration (“EIA”) estimated China’s technically recoverable shale gas reserves to be approximately 1,115 trillion cubic feet (Tcf), the largest in the world.² Estimates have varied, however, and in 2012, China’s Ministry of Land and Resources (“MLR”) estimated technically recoverable reserves to be 883 Tcf.³ In 2016, MLR announced that China’s recoverable shale gas reserves—those that can be commercially produced—rose by 109 billion cubic meters (bcm) in 2015, bringing China’s total shale gas reserves to 130 bcm.⁴ In 2017, China’s shale industry reportedly reached nearly 600 wells and 9 bcm of production, with output expected to nearly double to 17 bcm by 2020.⁵ 

USEIA Report at XX-1.

In January 2017，the National Development and Reform Commission (NDRC) and National Energy Administration (NEA) announced the 13th Five-Year Plan for Energy Development, a guideline for promoting an “energy revolution” in China.⁶ The 13th Five-Year Plan focuses on emissions cuts, renewable energy development, and improved energy industry efficiency.⁷ Under the 13th Five-Year Plan, China aims at increasing proven shale gas reserve by 1 trillion cubic meters (tcm), thereby achieving proven reserve of 1.5 tcm, and producing 30 bcm of shale gas production volume by 2020.⁸ However, analysts have predicted that China will miss such 2020 output target by a wide margin.⁹

Energy security is the main driving force for China’s strong push towards shale gas development, as the country currently remains dependent upon natural gas imports (36.6% of China’s natural gas was imported in 2016).¹⁰ Additionally, China faces increasing environmental constraints, including greenhouse gas emission reduction requirements (including commitments under the COP21 Paris Protocol) and the broader shift from coal to gas for power generation.¹¹ While shale operators will not encounter a powerful, independent environmental movement in China, Chinese citizens are increasingly willing to voice their concerns over environmental issues, including those relating to potential shale gas development.¹²

Commercial exploration and production developments have been underway in China since June 2011, when MLR conducted China’s first round of shale gas bidding.¹³ No foreign entity was allowed to participate.¹⁴ On December 31, 2011, China’s State Council approved changing the legal status of shale gas from a “natural resource” to an “independent mining resource.”¹⁵ Because “natural resources” are subject to China’s restrictive Mineral Resources Law, which only allows state or state-approved companies to apply for exploration and production rights, the move expanded private companies’ access to shale resources.¹⁶ Shortly thereafter, in January 2012, revisions to China’s Foreign Investment and Industry Guidance Catalogue took effect, officially “encouraging” foreign investments in the exploration and development of shale resources via joint venture with a Chinese partner, entitling foreign investors to certain tax and administrative benefits.¹⁷ Consistent with these developments, China’s second round of shale gas bidding in September 2012 allowed bids from Chinese domestic companies or Sino-foreign joint ventures controlled by the Chinese partner, though no such ventures were formed in time to submit a bid.¹⁸ China’s first large-scale commercial shale gas production operation commenced in March 2014.¹⁹ Although subsequent bid rounds have been discussed and postponed at various points since 2013, in 2016, China shifted away from a long-awaited national shale gas licensing round, choosing instead to allow individual provinces to tender acreage on their own.²⁰

Since 2011, several large, multinational oil and gas operators have partnered with Chinese companies to pursue shale exploration and development in China.²¹ To date, such arrangements have used one of two vehicles: joint ventures or production sharing contracts (“PSCs”).²² Although, at times, there have been signals that the Chinese government and operators, respectively, might prefer certain of these arrangements over the other,²³ both arrangements continue to be valid vehicles for foreign investment in Chinese shale opportunities.²⁴

Notably, these arrangements, coupled with China’s heavy investment in joint ventures in U.S. shale plays, have helped overcome one of the primary obstacles to China’s shale development—a lack of technical expertise.²⁵ Although many multinational operators have exited China in recent years, the per-well cost of shale gas drilling in China decreased 23% from 2013 to 2015.²⁶ Chinese National Oil Companies (NOC) have developed their own understanding of the country’s unique geology (China’s shale reserves are deeper, more scattered, and in more mountainous terrain than those in the United States²⁷), relying on their own service arms to get more experience and progress in completion techniques and technology.²⁸ The Chinese NOCs have adopted a pad-based drilling, fracturing and production process, which has helped to save drilling time and reduce costs when combined with indigenous technologies and drilling and completion techniques.²⁹ Today, China manufactures key hydraulic fracturing equipment such as trucks, pumps, and proppants, and has developed an oilfield services industry that rivals the rest of the globe.³⁰

While other obstacles remain, such as overcoming the typically long distances between China’s shale resources and end-use markets and a lack of water resources in many potentially prolific shale areas,³¹ the Chinese government has taken a variety of measures to incentivize shale development, as well as related energy infrastructure. For example, in November 2012, China’s Ministry of Finance and its National Energy Administration (“NEA”) announced a subsidy for shale gas production from 2012 through 2015.³² In October 2013, the NEA issued a policy document that not only identified shale gas development as a new national strategic industry, but also announced new financial support for shale gas exploration and extraction in the form of additional subsidies and various tax incentives.³³ More recently, as commercial production has increased, China has begun to scale back these incentives. On April 29, 2015, China’s Ministry of Finance announced that it would renew its subsidies for shale gas developers, but at a lower rate—0.3 yuan per cubic meter.³⁴ In addition, it stated that the subsidy would be further reduced for the 2019 to 2020 period.³⁵ In April 2018, the Chinese government cut the resource tax on shale gas by 30% for a three-year period to stimulate shale gas production.³⁶ Current subsidies for shale gas are approximately at $0.048 (0.3 yuan) per cubic meter, although there are plans to lower them to $0.032 (0.2 yuan).³⁷

Recognizing that inadequate natural gas pipeline infrastructure has the potential to hinder shale gas development, in February 2014, China’s National Development and Reform Commission (“NDRC”) issued a new policy relating to “the development and operations of natural gas infrastructure.”³⁸ Among other things, the policy requires that pipeline operators “provide unused pipeline capacity to new customers on a fair and nondiscriminatory basis.”³⁹ Other, more recent actions have been aimed at increasing investment in China’s energy infrastructure more broadly. For example, in its 2015 Foreign Investment Industrial Guidance Catalogue, China has “encouraged” foreign investment in the construction and operation of power grids.⁴⁰ The 13th Five-Year Plan further sets the goal of constructing 40,000 kilometers (km) of new natural gas pipeline, achieving a total of 1.04 million km.⁴¹

While some remain skeptical that China can produce a shale “boom” on the scale of that seen in the United States, in part because the technology developed in the United States does not always translate well to China’s geology,⁴² the scale of China’s current commercial production has made others more optimistic. For example, BP’s 2017 Energy Outlook projects that China will emerge as the second largest shale gas supplier by 2035.⁴³

Statutory and Regulatory Framework

Pursuant to China’s Mineral Resources Law, all natural resources in China belong to the state.⁴⁴ The Ministry of Land and Resources regulates mineral rights for oil and natural gas; manages the system of mineral licenses, exploration and production registration; sets technological standards for exploration and production; and regulates the geological survey industry.⁴⁵ The MLR is also responsible for shale gas tenders.⁴⁶ Because shale gas is an “independent mining resource,” China’s regulations governing conventional petroleum resources—“natural resources” under Chinese law—do not apply.⁴⁷ In the absence of shale-specific regulations, foreign investment in the shale exploration industry has proceeded via joint ventures and PSCs,⁴⁸ as described above. Pursuant to the PRC Regulation on the Administration of Geological Survey Qualifications, the MLR has authority to issue exploration licenses lasting three years.⁴⁹ Terms relating to the production of shale resources remain less clear; there are no regulations in place to govern the development of the blocks awarded licenses in China’s first two bid rounds.⁵⁰ While the 12th Five-Year Plan noted that such regulations were necessary, no such comprehensive regulatory approach has been announced to-date.⁵¹ According to the 13th Five-Year Plan, China intends to promote natural gas market reform, including by improving its legal and policy systems to establish such a comprehensive regulatory regime.⁵²

Other governmental bodies relevant to the exploration and production of shale gas in China include the National Energy Administration (“NEA”), the Ministry of Environmental Protection, the National Development and Reform Commission, and the Ministry of Commerce.⁵³ The NEA is responsible for formulating energy development plans and industrial policies.⁵⁴ For example, the NEA published the first policy on shale gas in October 2013, as described above.⁵⁵ In September 2016, NEA published the “Shale Gas Development Plan (2016-2020),” setting forth primary shale gas development goals and strategies including advancing fracking technology and techniques, continuing exploration activities, improving market conditions and competition, strengthening institutional and policy support and enhancing environmental protection.⁵⁶

The Ministry of Commerce monitors the energy market and reviews and approves any major foreign investment projects or establishment of foreign firms in China.⁵⁷ Additionally, the Chinese government has promulgated regulations that govern foreign investment and participation in the petroleum industry.⁵⁸

The Ministry of Environmental Protection (“MEP”) was created in 2008, and “is primarily engaged in the development of China’s environmental policies, plans, and legislation.”⁵⁹ Achieving compliance with these national efforts is left to local authorities.⁶⁰ The MEP’s role is largely limited to “inspecting, investigating, and advising local governments when violations of environmental laws occur.”⁶¹ Thus, while documents such as the 12th Five-Year Plan have made general calls considering the environmental risks associated with shale gas development, absent clear environmental regulations and associated enforcement efforts, such statements will likely remain “aspirational.”⁶² In general, China lacks comprehensive legal instruments capable of addressing the potential environmental hazards of shale gas extraction and has weak enforcement of environmental laws and regulations.⁶³