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China relaxes demands on foreign investment

Overseas players will no longer need to team up with Chinese national oil companies

Foreign players investing in China's upstream oil and gas sector will no longer have to seek local partners for co-operation and joint investment after the National Development & Reform Commission (NDRC) and the Ministry of Finance decided to relax restrictions.

A joint statement issued by the two bodies means foreign companies will now be allowed to go it alone in China to explore and develop oil and gas reserves.

Under the previous rules they always had to work with one of the country’s top three state-owned oil companies — China National Petroleum Corporation (CNPC), Sinopec and China National Offshore Oil Corporation (CNOOC).

It is not yet clear if the Ministry of Natural Resources will allow foreign companies to participate in future upstream licensing rounds or just approach it for access to data rooms for direct negotiations.

CNOOC already offers a number of offshore blocks in China for foreign investment.

However, current investments have to come under production sharing contracts in which the foreign companies foot the bill during the exploration period and allow CNOOC to participate with a 51% working interest in the event of commercial discoveries.

CNPC offered some onshore blocks in the Tarim basin in the country’s northwest in the early 1990s.

However, all the foreign companies, including ExxonMobil, that took on acreage left Tarim following a lack of drilling success.

CNPC later took a different approach by offering onshore blocks with geological complexity to foreign companies through direct negotiations.

These blocks included acreage that CNPC found challenging to develop because they held either sour or tight gas.

In recent years, CNPC and Sinopec have also offered shale acreage to foreign companies, though with limited success, and most foreign players have withdrawn after fulfilling their exploration commitments.

UK supermajor BP in April was the latest foreign explorer to exit China's shale gas play, highlighting the difficulties overseas players have had in making profitable investments in the sector.

With basins in eastern China having been extensively explored, blocks likely to be offered in future licensing rounds will be mostly located in the north-west and south-west, including the Tarim, Jungar, Turpan-Hami, Sichuan, Qaidam and Ordos basins, where there may be more potential even in areas not yet licensed by the state companies.

These basins are the major hot spots for the Chinese national oil companies eager to make significant finds.

The current policy relaxation on foreign investment in China’s upstream sector follows a similar decision made by the NDRC last year to open the upstream industry to domestic private participants in order introduce more funding to boost oil and gas exploration.

China has forged a number of symbolic upstream reforms in the past five years to lay the groundwork for full market opening, including three rounds of onshore block tenders offering around a dozen blocks in Xinjiang under a pilot programme.

By the end of 2017, the Ministry of Natural Resources had issued 941 exploration licences to Chinese companies — almost all to CNPC, CNOOC and Sinopec — covering 3.3 million square kilometres, and 762 development licences covering 163,000 square kilometres.

Of the total exploration licences, 33 were issued to Sino-foreign joint ventures.

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