China: Foreign Investment in the Coal Bed Methane Industry in China

Last Updated: 17 September 2008
Article by Tina Zhang

Coal Bed Methane ("CBM"), also known as coal mine gas, naturally exists as a gas absorbed in coal deposits. CBM has great potential in China as a clean source of energy. On the other hand, due to its flammable nature, it has also been fingered as a major culprit in coal mine accidents. Therefore, the proper extraction and utilisation of CBM prior to coal mining can bring both economic and safety benefits.

Methane is one of the six greenhouse gases defined in the Untied Nations Framework Convention on Climate Change. Comprehensive utilisation of CBM captured from coal mines, such as through power generation, is eligible under the Kyoto Protocol for carbon credits under the clean development mechanism ("CDM").

This article outlines Chinese government policy toward foreign investment in CBM. It explains how CBM investments in China must take the form of a joint venture, and how such a joint venture must be majority-held by Chinese partners if it wishes to seek CDM status for its projects.

Exploration and Exploitation of CBM

The Catalogue of Industries for Guiding Foreign Investment ("Investment Catalogue"), which sets forth restrictions on foreign investment in various industries, restricts the exploration and exploitation of CBM to equity joint ventures and cooperative joint ventures. Thus, foreign companies who seek to invest in exploration and exploitation of CBM in China are not entitled to carry out such operations with a wholly foreign owned enterprise, but have to cooperate with one or more Chinese partners by setting up a joint venture.

Currently, China United Coal Bed Methane Co., Ltd., an enterprise established in 1996 with the approval of the State Council, is the sole Chinese enterprise authorised to cooperate with foreign companies in the exploration and exploitation of CBM. However, the Circular of the Ministry of Commerce, the National Development and Reform Commission and the Ministry of Land and Resources on Relevant Issues Concerning Further Expansion of Foreign Cooperation on Coal Bed Methane Exploitation, which was issued on 17 October 2007, calls for the designation of other qualified domestic investment partners. The circular calls on the Ministry of Commerce, the National Development and Reform Commission ("NDRC") and other relevant authorities to jointly select other domestic enterprises to carry out pilot exploitation of CBM in cooperation with foreign companies within certain regions designated by the State Council. This policy should provide foreign companies in the future with more choices for selecting a local partner.

Utilisation of CBM – Power Generation

The Chinese government encourages the use of CBM, especially for power generation. But, just as for exploration and exploitation of CBM, the Investment Catalogue restricts foreign investment in the utilisation of CBM to joint ventures.

The Implementing Opinion on Power Generation by Utilising CBM, issued by the NDRC and effective as of 2 April 2007, sets forth incentives and guidelines for the use of CBM. It gives priority, in principle, for the use of power generated from CBM to the coal mining area, and allows companies that supply the power grid to purchase surplus energy. CBM power plants are not required to participate in tariff bidding, nor will they be subject to any peak load tasks. Further, the on-grid tariff for CBM power shall be determined by reference to the biomass power tariff set out in the Trial Measures on the Administration of Pricing and Allocation of Expenses in Relation to Electricity Generated Using Renewable Energy. This is comprised of the benchmark on-grid tariff for provincial desulfurised coal-fired generators in 2005 plus a subsidy tariff.

These favourable policies have led to greater interest among foreign companies in establishing CBM power plants by cooperating with local coal mining companies. However, investors who wish to seek CDM classification for their power plant should be aware that Chinese parties must be the majority shareholders in such joint ventures. Under the Kyoto Protocol, CBM power plants are eligible to apply for CDM status due to the reduction of methane emissions that result from the power generation process. However, in accordance with the Measures on the Operation and Management of CDM Projects, only domestic companies or Sino-foreign joint venture companies with Chinese parties as majority shareholders may apply for classification as a CDM project.

In sum, although the Chinese government has taken a position that encourages the production and use of CBM, its policies also demonstrate an interest in keeping domestic Chinese enterprises deeply involved in such projects.

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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