Client AlertChina - EnergyRecent Development in China’s Shale GasIndustryA NEW CIRCULAR AND A NEW SUBSIDYOn 26 October 2012, the Ministry of Land and Resources ("MLR") issued theCircular on Exploration, Exploitation and Administration of Shale Gas 1 (the"Shale Gas Circular"). It is the first regulation to clarify general issues for theshale gas industry, including how exploration and exploitation rights aregranted, the qualifications necessary for these rights, and actions availablewhen exploration or exploitation of shale gas overlaps with that of other energyresources. The Shale Gas Circular will remain effective for five (5) years.In November, the Ministry of Finance and National Energy Bureau offeredanother boost to the shale gas industry by introducing a subsidy for shale gasexploitation. It is the first detailed national financial incentive to be offered forthe shale gas industry and will also be valid for five (5) years.BACKGROUNDD e c e m b e r 2 0 1 2In December 2011, shale gas was reclassified as an "independent miningresource", signaling the opening of the sector to private companies. Afterfurther policy development 2 , in September 2012 the MLR launched a secondround of bidding for shale gas exploration rights. For the first time, privatecompanies and foreign-invested joint ventures ("JVs") were allowed toparticipate in bidding for shale gas blocks.1 Circular on Exploration, Exploitation and Administration of Shale Gas (Guo Tu Zi Fa  No.159), issued by MLR on 26 October 2012 and effective from the same day2 The National Development and Reform Commission ("NDRC"), its Energy Bureau, the MLR andthe Ministry of Finance jointly promulgated the Development Plan for Shale Gas (2011-2015) on13 March 2012. Please refer to GLN's May 2012 Client Alert.AlgiersT e l . +213 (0 )21 2 3 9 4 9 4g ln .a lg ie rs@g id e . c o mBeijingT e l . +86 1 0 6 5 9 7 4 5 1 1g ln .b e i j in g @g id e .c o mBrusselsT e l . +32 (0)2 2 3 1 1 1 4 0g ln .b ru s s e ls @g id e .c o mBucharestT e l . +40 2 1 2 2 3 0 3 1 0g ln .b u c h a res t@g id e . c o mBudapestT e l . +36 1 4 1 1 7 4 00g ln .b u d a p e s t @g id e .c o mCasablancaT e l . +212 (0 )5 2 2 2 7 4 6 2 8g ln .c a s a b l a n c a @g id e .c o mHanoiT e l . +84 4 3 9 4 6 2 3 5 0g ln .h a n o i@g id e . c o mHo Chi Minh CityT e l . +84 8 3 8 2 3 8 5 9 9g ln .h c m c @g id e .c o mHong KongT e l . +852 2 5 3 6 9 1 1 0g ln .h o n g k o n g @g id e . c o mIstanbulT e l . +90 2 1 2 3 8 5 0 4 0 0g ln . is tanbu l@g id e .c o mKyivT e l . +380 4 4 2 0 6 0 9 8 0g ln .k y iv @g id e .c o mLondonT e l . +44 (0)20 7 3 8 2 5 5 0 0g ln . lo n d o n @g id e .c o mMoscowT e l . +7 4 9 5 2 5 8 3 1 0 0g ln .mosco w @g id e .c o mNew YorkT e l . +1 2 1 2 4 0 3 6 7 0 0g ln .n e wyork @g id e .c o mParisT e l . +33 (0)1 4 0 7 5 6 0 0 0i n fo @g id e .c o mSaint PetersburgT e l . +7 8 1 2 3 0 3 6 9 0 firstname.lastname@example.orgShanghaiT e l . +86 2 1 5 3 0 6 8 8 9 9g ln .s h a n g h a i @g id e .c o mTunisT e l . +216 7 1 8 9 1 9 9 3t u n is @g ln -a .c o mWarsawT e l . +48 2 2 3 4 4 0 0 0 0g ln .w a rsa w @g id e .c o m
4.NATIONAL FINANCIAL SUBSIDYOn 1 November 2012, the Ministry of Finance and National Energy Bureau jointly issued the Policy for the Subsidyon Shale Gas Exploitation and Use 4 , which provides a national subsidy for shale gas exploitation.Calculation of the subsidyFrom 2012 to 2015, the central government will offer RMB 0.4 per cubic meter of shale gas produced. Localgovernments may also provide their own subsidies for shale gas exploitation. The national subsidy will becalculated according to the following formula:Qualifying for the subsidySubsidy= Exploited quantity (in cubic meters) × RMB 0.4To qualify for the subsidy, companies must have successfully produced shale gas for energy use and haveequipment that can accurately indicate the amount of shale gas produced. The subsidy is intended to encourageshale gas exploitation and reduce demand for natural gas. However, for the time being, as few companies ownprojects at exploitation phase, only Sinopec and Petrochina are expected to be eligible for the subsidy.Applying for the subsidyTiming / phaseJanuary - File applicationwith local finance bureauand local energy bureauFebruary - Reportforwarded to Ministry ofFinance and NationalEnergy BureauFinal review and disclosureby Ministry of Finance andNational Energy BureauProcess• Enterprises must submit an application for the subsidy by the end of Januaryeach year.• The application must include last year's exploitation quantity, as well astechnical construction and exploitation statistics.• After the preliminary review, the local finance bureau and local energybureau will forward the application to the provincial finance bureau andenergy bureau.• The provincial authorities will then forward the application to the Ministry ofFinance and National Energy Bureau after they review it by the end ofFebruary.• The Ministry of Finance and National Energy Bureau will review theapplication and make a preliminary decision.• Their preliminary decisions will be listed on their websites for one week tosolicit public opinions.• If no one objects to the subsidy during the disclosure period, the Ministry ofFinance and National Energy Bureau will issue the subsidy.GLN COMMENTUnlike the traditional production sharing contract ("PSC") regime widely used in the conventional gas industry, theShale Gas Circular provides a new legal regime that allows foreign investors to participate directly in the shale gasindustry through JVs, which may obtain exploration rights. Pursuant to the Shale Gas Circular, shale gasexploration/exploitation criteria have been standardized so that companies, especially foreign investors, have aclearer idea of whether they are qualified to enter the industry, the conditions by which they can do so and how tosuitably structure their projects.However, stricter conditions may still be imposed for a particular bidding round.4 Policy for the Subsidy on Shale Gas Exploitation and Use (Cai Jian  No. 847), issued by the Ministry of Finance and National EnergyBureau on 1 November 2012 and effective from the same day.
5.More detailed rules will moreover need to be issued to clarify the remaining legal ambiguities, such as the criteriaand procedures for re-granting shale gas mining rights for overlapping blocks, other preferential treatments, andadditional guidance on foreign investment in shale gas exploration or exploitation.GLN will closely follow any legal and practical developments in the shale gas industry. Meanwhile, please contactus should you have any questions regarding energy laws in China. BeijingUnit 01-03, Floor 9, Tower B,Parkview Green TowerNo. 9, Dong Da Qiao RoadChaoyang DistrictBeijing 100020 - ChinaTel. +86 10 6597 4511ContactsThomas Urlacherurlacher@gide.comLi Huali.email@example.comZheng Yuzheng@gide.comShanghaiSuite 2008, Shui-On Plaza333 Huai Hai Zhong RoadShanghai 200021 - ChinaTel. +86 21 5306 8899ContactsAntoine de la Gatinaisgatinais@gide.comFan Jiannianfan@gide.comHong KongSuites 1517-1519, Jardine House1 Connaught PlaceCentral, Hong Kong SARTel. +852 2536 9110ContactsRebecca Sillisilli@gide.comBalbir Bindrabindra@gide.comSamuel Chauchau@gide.comColin Mercermercer@gide.comParis26, cours Albert 1 er75008 Paris - FranceTel. +33 (0)1 40 75 60 00ContactsCharles-Henri Legerleger@gide.comGuillaume Rougier-Brierrerougier@gide.comStéphane Vernayvernay@gide.comDavid Boitoutboitout@gide.comYou can also find this Client Alert and our other newsletters on our website in the News/Publications section.This Client Alert is a free, periodical electronic publication edited by the law firm Gide Loyrette Nouel (the "Law Firm"), and published for Gide Loyrette Nouel’s clients and business associates. TheClient Alert is strictly limited to personal use by its addressees and is intended to provide non-exhaustive, general legal information. The Client Alert is not intended to be and should not be construedas providing legal advice. The addressee is solely liable for any use of the information contained herein and the Law Firm shall not be held responsible for any damages, direct, indirect or otherwise,arising from the use of the information by the addressee. In accordance with the French Data Protection Act, you may request access to, rectification of, or deletion of your personal data processed byour Communications Department (firstname.lastname@example.org).