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The press conference of China's Ministry of Natural Resources
(MNR) on the 9th January 2020 announced the (henceforth referred to
as "the opinions"), which will be effective from 1st May
2020. With "the opinions", China further opens its oil and
gas upstream, breaking the monopoly of oil and gas upstream by the
authorized national oil companies (NOCs). As the latest efforts for
China to reshape its oil and gas upstream, the policy update
encounters the unexpected oil price crash in March 2020 before its
implementation, bringing forth a lot of uncertainty, on whether the
changes will bring any success:
"The opinions" further strengthens China's signal to
open its oil and gas upstream for diversified participants, aiming
to attract non-NOCs into the game. "The opinions" does not
seem to be a surprise to the industry as it is coherent with the
upstream reform directions kicked off in 2017. However, the
accelerated reform agenda drives the non-NOCs to refresh their
views of China's oil and gas exploration and production
(E&P).
"The opinions" is unlikely to trigger an influx of
foreign investment in China's oil and gas exploration and
production in the short term. Most oil companies had
already shifted their priorities into surviving in lower oil price
environment, via select regional/country investments. The current
downward move in oil prices, all but closes the door for new growth
areas. However, it should be noted, that hesitation of foreign oil
companies in investing in China, is contributed by several other
factors, and not only commodity prices: the awareness of the
complexity from the unsuccessful pursuit of unconventionals in
China, the changed spending behavior and focuses for international
players, the timing of investment when China's on-going E&P
policy reform is unfinished, and most importantly, the availability
of attractive assets.
Further E&P policies can be expected in the three
key pillars of the reform: competitive acreage awarding mechanism,
exit mechanism, and a NOC-dominated competitive landscape with
diversified participants. The key objectives for China's
E&P reform have not been fully achieved yet - acreage awarding
mechanism is in piloting phase; acreage exit mechanism just takes a
small step forward, and the competitive landscape of diversified
participants needs more details to implement. <span/>While the reform directions are set,
current low oil prices bring considerable uncertainties in the pace
and depth of the reform.
The new policy from MNR: A welcome to foreign investors
"The opinions" focuses on three aspects of reform: mineral
rights awarding management, oil and gas exploration and production
management, and mineral reserve reporting management. Although all
minerals are under the scope of "the opinions", the oil and gas
E&P sector has the most significant and impactful changes.
Those changes include:
Opening China's oil and gas exploration and production
sector to non-NOCs, including foreign, private, or other
state-owned enterprises (SOEs). Companies registered in
China with net assets of 300 million Yuan (around $43 million) will
be allowed to take part in oil and gas E&P and own E&P
licenses, as long as they meet the safety, environmental
requirements and regulations, and have the technical capability in
oil and gas E&P.
Figure 1: Chinas oil and gas exploration and production legal
framework
The move in principle, provides considerably opening of China's
oil and gas E&P to foreign and domestic private investors,
breaking the monopoly by the authorized state oil companies under
China's current E&P legal framework. As a trial implementation
policy effective from May 2019, it heralds the modification of the
legal framework that have been implemented for decades. The new
Mineral Resources Law draft has been reported to be in the phase of
soliciting opinions from the public; removing the authorization
list is in the scope of change.
Applying competitive acreage awarding mechanism for
mineral rights, including open bidding, auction and
listing, limiting the agreement-based awards to only key national
projects or resources. For oil and gas exploration licenses, China
will continue to pilot in competitive license awards approach,
aiming to form the final E&P license awarding mechanism in a
steady way from the pilots.
MNR has been piloting in acreage awarding in last few years,
including open bidding, action and listing, in different regions
and for different resource types. The current acreage awarding
mechanism only allows the authorized state-owned oil companies to
have conventional exploration and production licenses; the
authorized companies can obtain the licenses by registering in MNR
with no or limited competition. To be in the game, foreign and
private companies must partner or form joint venture with the
authorized companies.
Figure 2: Piloting activities
In "the opinions", a guideline of the benchmarking acreage price
by area of square kilometers is provided. The benchmarking price
sets the floor of the price for auction and listing; it grows with
the increase of WTI oil prices. With the direction of competitive
acreage awarding set, the continued piloting efforts will
eventually lead to a formal policy on oil and gas awarding
mechanism in the future.
Figure 3: China oil and gas acreage benchmarking price
Merging the exploration and production license for oil
and gas. The owner of exploration license can start oil
and gas production by registering in respective natural resource
management department; the exploration license has to switch to a
production license within five years, if the project progresses
into production phase.
Under current regulations, production license, which is needed
for the project to progress into production operations, can only be
obtained by de-registering the exploration license. This creates
complications for unconventional projects, which do not have a
clear boundary between exploration and production. It demotivates
foreign oil companies to invest in China's unconventional
resources, facing the challenges to navigate through the system and
monetize the early investments at exploration phase. This change
reflects MNR's effort to optimize the regulatory framework to boost
the exploitation of unconventionals, which have been the key
resource type for growth.
Extending exploration license's term of validity from 3
years to 5 years. The exploration license can be extended
twice when it expires; each extension prolongs the license another
5 years, which is changed from the 2 years under current
regulation. However, 25% of the licensed area needs to be
relinquished, as required by "the opinions".
The 3 years of validity for exploration license has also been a
source of angst for foreign oil companies in the past, especially
for unconventional projects. It takes longer to assess the
potential of an unconventional acreage, which is different from
conventional resources. To minimize the risks, foreign oil
companies have been lobbying for regulatory changes to permit
rolling oilfield development programs (rolling-ODP), as exploration
activities cannot eliminate uncertainties sufficiently for
unconventional projects. Under rolling-ODP, the oil company can
develop the licensed acreage piece by piece with repetitive
mini-exploration and development cycles. The rolling-ODP concept
seems stretched for MNR at present - the change to 5 years of
exploration license is a compromised step towards investors'
interests.
The mandatory relinquishes of 25% licensed acreage for each
extension help to force the major NOCs, who control most of China's
oil and gas exploration acreages, to cede their acreages to the
hands of newcomers, and maximize the potential of the limited
prospects.