Foreign, private firms to gain wider access to oil, gas sectors

China will fully open its oil and gas exploration and mining market to qualified foreign and private enterprises, so that the industry will become further vitalized, under a pilot guideline released on Thursday by the Ministry of Natural Resources.

Domestic companies and foreign ones registered in China with net assets of at least 300 million yuan ($43.16 million) will be eligible to apply for oil and gas prospecting and mining permits.

Previously, foreign companies could enter the industry only through joint ventures or other cooperative arrangements with Chinese companies, mainly State-owned giants.

The guideline, which takes effect on May 1, says that to explore and extract oil and gas a company must meet certain criteria covering safety, environmental protection and technology.

It will also promote "competitive" transfers of prospecting and mining rights through public bidding, auctions and listings, except in special circumstances that allow the rights to be transferred through agreements.

After oil or gas is found, the holder of the prospecting rights must register the resources with the authorities. At that point, extraction may begin. The signing of a mining authorization contract must be completed within five years.

Analysts said the guideline aims to bring more players into the sector to stimulate the vitality of the upstream market for oil and gas, which is currently dominated by large State-owned enterprises.

"The opening-up of the market will attract more players to oil and gas prospecting and mining. It will energize the market and increase oil and gas production," said Zhao Xu, an expert at the School of Economics and Management at China University of Petroleum in Beijing.

China has developed an increasing appetite for oil and gas as its economy grows, but because many of its easily exploitable resources have already been detected and tapped, it takes greater investment and involves greater risks to discover and tap the remaining resources, she said.

The opening of the upstream oil and gas market, and the adoption of competitive mining rights transfers, will ensure open and fair competition among all eligible market entities and facilitate the allocation of prospecting and mining rights to the most suitable players, she said.

Lin Boqiang, head of the China Institute for Studies in Energy Policy at Xiamen University, said the pilot guideline reflects China's push to bring diverse investors and other players into the oil and gas industry as part of the market-oriented reform of the sector. The guideline will have significant influence as time passes, he said.

"In the long term, with more market players and with fair competition, the cost of oil and gas exploration and mining will be reduced and efficiency will be raised. It will become economical and feasible, then, to find and extract resources that are too expensive to make use of right now. And it will increase the oil and gas supply."

However, he said, detail-oriented follow-up policies and down-to-earth implementation are needed to encourage private and foreign companies to take part, because oil and gas exploration and mining is a risky business that requires heavy, long-term investment and technology development. While returns can be lucrative, the cost of getting there is substantial.

Zhao also raised concerns about private Chinese companies' lack of funds and advanced technology, especially compared with foreign entities and the State-owned giants.

She suggested they get into the industry through cooperation with others, including joint ventures.