International oil and gas companies operating in the People's Republic of China ("PRC") should be aware of recent government charges that may affect their financial return from petroleum projects in China. This Alert summarizes these recent developments, focusing particularly on the new Mineral Resources Compensation Fee ("Compensation Fee").

In advance of the Compensation Fee, on September 30, 2011, the PRC State Council issued Decree No. 605 to launch a new resource tax scheme. The resource tax rate ranges from five percent to 10 percent based on the sales revenue from crude oil and natural gas. Prior to this decree, petroleum projects were subject to a royalty scheme based on oil and gas output.

Following the imposition of the resource tax, a new government charge was announced. The Ministry of Land and Resources ("MOLAR") issued a Notice of Collection of Mineral Resources Compensation Fee on Foreign-Invested Petroleum Projects ("Notice") on March 31, 2012. The Notice imposes the Compensation Fee on revenue from petroleum contracts entered on or after November 1, 2011. The foreign-invested petroleum projects subject to this Notice include conventional energy sources such as crude oil and natural gas as well as unconventional energy sources such as shale gas and coal bed methane. The Compensation Fee is assessed as one percent of the sales revenue from oil and gas production, which could be substantial for a typical oil and gas project during the production phase.

In fact, the Compensation Fee is not exactly a new charge—it was first introduced in 1994 pursuant to the Administrative Measures of Mineral Resources Compensation Fee ("Measures"). However, foreign-invested onshore and offshore petroleum projects were made exempt from its application then. Now, following release of the Notice, the Compensation Fee will be chargeable on the foreign-invested petroleum projects as well.

The Compensation Fee is imposed on the "mineral right holders" of petroleum contracts, which by law are the Chinese national oil companies ("NOCs"). Petroleum contracts signed before November 1, 2011 will be exempt from its application but will still be subject to the resource tax. The Compensation Fee is applicable only for a term of eight years, and it is unclear whether petroleum contracts signed after its expiration in 2020 will be subject to the Compensation Fee.

Although the Compensation Fee is not directly imposed on a foreign contractor, it is possible that the NOCs will request foreign contractors to contribute their share of the fee on the basis that the Compensation Fee is an additional cost of a petroleum project. Looking ahead, we would expect negotiations between a foreign contractor and a NOC to include a discussion of the parties' respective responsibilities for this new charge.

NOCs are able to apply for an exemption or a reduction of the Compensation Fee. The Measures set out a nonexclusive list of factors that would support an exemption or a reduction, including situations in which the mineral resource is located under water, buildings, or vital communication lines. Even if the basis for an exemption or reduction is not listed in the Measures, the MOLAR and the State Administration of Taxation retain discretion to grant a reduction or exemption.

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.