China's National Energy Administration's
("NEA") Regulation of National Oil Reserves (Draft)
(征求意见稿)) was issued on
May 31, 2016. Ten years in the making, this proposed regulation
signals the first time that the Chinese government may require
enterprises to maintain a 10 percent reserve of crude oil and
refined crude products for use in national emergencies. The public
comment period for the draft regulation expired in June 2016.
China historically has required only government agencies, such
as the NEA, to maintain oil reserves (primarily crude) for national
emergencies. These national oil reserves are managed by designated
national oil companies, such as CNPC, Sinopec, CNOOC, and Sinochem,
but funded by the central government.
Scope of Potential Changes
If adopted, the 2016 draft regulation would require that all
Chinese companies engaged in either refining, sales to
retailersof refined products, or the
import or export of crude oil to maintain a 10 percent reserve for
national emergencies at all times. Although ownership of the crude
and crude products would technically remain with the subject
company, the government would have the right to access these
reserves under certain emergency situations.
Subject to the NEA's approval, a company may deviate from
this minimum amount as a result of supply and demand fluctuations
or force majeure events (e.g., natural disaster). For example, in
case of force majeure events, the draft regulation indicates that
if a company fails to comply with the minimum reserve requirements,
it must report to the NEA in a timely manner, and the NEA may
adjust such minimum reserve requirement at its discretion.
Presumably, such adjustment may include the postponed deadline for
replenishment or a lesser amount of crude or crude products to be
Each affected company must periodically report the amount and
calculation method of its oil reserves to the NEA with the
understanding that the NEA would reserve the right to request
further reporting during an emergency.
The 2016 draft regulation contemplates that a newly established
company will have to comply with such reserve requirement upon its
establishment, while an existing company will have three years to
come into compliance with the new requirement.
Use of Company Reserves Before Government Reserves
It is worth noting that the draft regulation prioritizes the use
of such company reserves over the use of reserves held by the
government. When a company subject to the regulation is ordered by
the NEA to provide access to its oil reserves for national use, the
2016 draft regulation requires that the company must do so without
excuse, and that it must replenish such reserves within a specified
period of time.
Certain details of the draft regulation are not yet apparent.
For example, it is not clear whether the contemplated reserve
obligation will be imposed on foreign-owned Chinese enterprises,
how and when the 10 percent reserve requirement would be calculated
or measured, whether and how companies would keep such reserves
separate from other inventory, how and when to rotate or replace
such reserves, how often and on what basis companies would need to
report their compliance to the NEA, and how companies would be
compensated for a national use of the reserves. We will continue to
monitor the situation to see how these issues may be addressed.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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