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
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.
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We have set out some examples of how the MERCP Act impacts resource exploration and production, and what you need to do.
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