China's Office of the National Energy Leading Group (ONELG) recently released its fifth draft Energy Law for public comment. The new law reveals key insights into the issues that the Chinese Government will, in the coming years, place at the top of its policy agenda concerning cleaner energy production.

The draft law specifically requires Chinese oil companies to build up their own Government-managed reserves to supplement existing reserves. China's state-owned oil producers have been irritated by the proposed measures because the costs of building up the required reserves will be borne by the oil companies themselves.

The balance sheets of China's oil refiners have already been hit by the nation's state-mandated price ceilings on refined oil. The ceilings are well below the market price of crude oil, which China's refiners have to purchase as inputs.

The Government will continue to control the ultimate price of energy. ONELG has explained that energy pricing should reflect "the scarcity of resources and the cost of damage to the environment".

In November 2007, the Chinese Government raised the retail prices of petrol, diesel oil and aviation kerosene by around ten per cent to encourage refiners to release more product to ease a wave of nation-wide fuel shortages.

The draft law establishes a new energy department under the direct control of the State Council (China's cabinet) to oversee relevant industries. The department would not have ministry-level status, but it is expected that it would unify the management of the country's energy industry, with smaller independent departments to be established for overseeing specific sectors.

The proposed new department is expected to exercise stronger control over market entry and pricing than the energy division that is now part of the National Development and Reform Commission. ONELG recently announced the establishment of an expert-led advisory commission that will assist with energy-related policies, planning and other energy issues.

The draft law makes little mention of specific measures for tackling climate change. However, it does call for China to adjust its energy use to help protect the environment.

The draft also suggests that, among other penalties, enterprises that over-exploit energy resources would face a fine of up to five times their illegal gains.

Peter Corne, Managing Director of Eversheds' Shanghai office commented: "The draft Energy Law is another significant step in China's progress towards cleaner energy production. Whilst it lacks detail on how China will uphold its commitment to raise energy efficiency and reduce carbon emissions, it lays down a useful basis for further developments in this area."

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