China: Before you invest in China’s shale gas assets

Last Updated: 30 March 2014
Article by Xiong Jin

In recent years, China's shale gas industry has attracted great interest from both domestic investors – state-owned or otherwise – and major offshore players, thanks to a broad range of initiatives and preferential policies promulgated by the central government with a view to encouraging investment.

Notwithstanding these encouraging developments, the regulatory regime for the shale gas industry is still in its early stages,and development has been slow. The regime also poses unique challenges for foreign investors. This article discusses regulatory developments, potential pitfalls and some structural options.

On 31 December 2011, the State Council approved the change of shale gas from a "natural resource" to an "independent mining resource", which is now subject to the Mineral Resources Law and specific legislation. Until now, the only specific legislation was the Circular on Strengthening the Prospecting, Exploitation, Supervision and Administration of the Shale Gas Resources.

Under the new regime, the Ministry of Land and Resources (MLAR) is in charge of administration of shale gas resources, and exploration licences are granted through public tendering. The significance of these developments is that private and foreign investors, subject to certain conditions, are now permitted to invest in this resource. Prior to this change, foreign investors were only allowed to partner with a handful of Chinese state-owned oil and gas companies.

The circular breaks the previous "monopolised" regime by allowing qualified Chinese companies to participate in the public tendering processes whereby shale gas exploration licences are granted to winning bidders for selected gas blocks. Although foreign investors possessing technical know-how have been "encouraged" to participate in the tendering process, they were only able to do so by partnering with qualified Chinese bidders (at least that was the case in the two previous rounds), and their wholly owned Chinese subsidiaries are not qualified bidders either. It is unclear whether such restrictions will be removed in future tendering rounds.

Exploring the structure matrix

The circular otherwise does not adequately address other key considerations relevant to the development of shale gas, in particular on how the existing common foreign investment structures can be used for the so-called "Sino-foreign co-operation" on the joint development of shale gas, as further discussed below.

If foreign investors do not want to participate in the tendering process, or simply prefer to co-operate with Chinese companies that are already winning bidders granted shale gas exploration licences, three key structures commonly known to foreign investors can be considered: Sino-foreign equity joint ventures (EJVs); Sino-foreign contractual joint ventures (CJVs) and production sharing contracts (PSCs).

Each structure has its own pros and cons, depending on the commercial objectives a foreign investor wants to achieve. Such considerations range from a party's contribution form (cash or in kind), transferability and evaluation issue of the shale gas exploration licence, application and transfer of the shale gas exploitation licence, and future mid-stream or downstream arrangements.

Joint venture structures

While EJV and CJV structures are identical on many aspects, the CJV structure generally allows greater flexibility for the parties to structure their commercial arrangements under Chinese law.

Under the current legal regime, shale gas exploration licences cannot be transferred to a Sino-foreign joint venture (EJV or CJV) until the Chinese partner has adequately delivered on its exploration commitments made to the MLAR.

This means that the Chinese licence holder cannot transfer the licence to an EJV as equity contribution before then. But it may provide "contractual access" to the licensed block as a co-operative condition under a CJV structure – without the need to transfer the licence to the joint venture – while committing to transfer the exploitation licence to the joint venture once it is granted, subject to appropriate evaluation. The downside of this approach is that the foreign party will not have ownership on the licence (hence no proprietary interest), but is arguably no worse than it would end up under an EJV structure.

If an EJV structure is used, the parties will have to use the EJV to engage in exploration business which will then contract with the Chinese licence holder for those exploration works committed to the MLAR. However, such contractual arrangements can be easily accommodated under a CJV structure.

Further complications may arise during the exploitation stage as the current legal regime is not clear on whether the Chinese partner or the Sino-foreign joint venture should be entitled to apply for the exploitation licence. The MLAR and its local counterparts have discretion in this respect. Putting aside those legal uncertainties, the commercial reality is that the Chinese partner will want to control the application process and secure the licence solely under its name, and then request the foreign partner to pay for its equity portion of the licence once it is properly evaluated. It is important to understand that, as with transfer of any state-owned assets, such evaluation result must be approved by the relevant Stateowned Assets Supervision and Administration Commission with jurisdiction, if the Chinese licence holder is state-owned.

PSC structure

Historically, the PSC structure was established by the regulations on Sino-Foreign Co-operative Exploitation of Onshore Petroleum Resources, whereby certain state-owned oil and gas companies were granted exclusive rights to co-operate with foreign Investors. While the circular says that Sino-foreign co-operation on shale gas will be subject to those same regulations by "reference", it is unclear how such references can be made.

A further complication comes from a recent development whereby the Ministry of Commerce (MOFCOM) has abolished the previous requirement that PSCs be approved by the ministry (in Beijing) before they can take legal effect. Under the new regime, PSCs only need to be filed with the ministry through their relevant local counterparts. It remains to be tested if a foreign party can use such a contract structure to get its investment both into and out of China without a MOFCOM approval.

One possible approach is for the foreign investor to establish a Chinese subsidiary that can then co-operate with the Chinese exploration licence holder under a PSC structure. It is arguable that due to the fact that two Chinese companies signed a contract under Chinese law, the contract – in substance a PSC – should not be subject to the existing regulations restricting foreign investment into conventional and unconventional gas resources.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.