Key Take Away This Week:
- China lifts foreign investment bans in several critical energy sectors which used to be controlled by state-owned monopolies. A key sector embracing foreign investment liberation is oil & gas
- The opening in the energy sector is a fraction of Beijing’s border effort to liberate more industries for foreign involvement. But observers remain cautious of the practical implication of such changes.
- For those interested in the Chinese market, the foreign investment catalog is critical but only one of the many policy elements needed to take into consideration in an investment decision
- Download the list of 2019 Foreign Investment Catalog Energy Sectors (Part-1: Fossil Fuels) here:
China has further widened the list of energy businesses opened to foreign investment, by the release of the new edition of Foreign Investment Catalogs (FI Catalog) in the past June.
The new catalog, an eighth edition, lifted eight general business areas that used to ban/restrict foreign involvement and added 67 items into a list that welcomes foreign entry. Simply put, foreign capital is limited in fewer sectors and encouraged in more. The change marks Beijing’s continuous effort to scrap restriction upon foreign companies and provide stronger leverages, as previous FI catalogs had been doing the same–the negative list is shortening, while the promoted areas are growing in China.
Albeit a continuation of a tidal change, the 2019 FI Catalog may still stand out for reasons related to the current international politics and economics situations:
- a new law pledged to protect foreign investment: the catalog came after China’s introduction of a new foreign investment law that is, as FT put it, “rushed through.” The new legal codification serves as Beijing’s rare response regarding concerns raised by foreign companies over unloved playing fields and other issues in the Chinese market. But its effects in practices remain to be seen, most observers believe.
- U.S-China trade war: the catalog also came against the backdrop of an alleged foreign manufacturers “exodus,” of which Beijing denied the existence. Whatever the reality is, the effect of the US-China trade war has kicked in.
- liberation of highly sensitive sectors: what attracts the most media attention are the opening of finance, upstream oil & gas as well as downstream fueling network, all of which in the past were strictly state-owned and opened only to a handful of (even domestic) players.
What is Foreign Investment Catalog
For those who have limited experience dealing with the FI catalog: it serves as a guide to what Beijing wants in the way of foreign goods in China. (For those familiar with the setup, please skip this section.)
For foreign companies interested in set up their business ventures in China and invest into certain area, one of the first thing they need to know is the catalog, which show whether certain business scopes fall into the “prohibited” category, whether it is only allowed under special permits and regulations, or whether it enjoys policy leverages like tax exemptions, cheaper land use, and etc.
Since 2002, China has released eight editions of catalogs. Initially, there are three categories of “prohibited,” “restricted,” and “encouraged,” with whatever falling out from the trio “allowed.” But that changed after some reform in 2017, when the regulators began to deliver an “encouraged” list and a “negative list” with the latter combining limited and prohibited sectors.
Basically, the catalogues encompasses:
- the National FI Encouraged List
- the Regional FI Encouraged list for 22 Central and Western Provinces (attached in the national list)
- the National FI Negative List
- the FI Encouraged List for 11 Free-Trade Zone (FTZs )
- the FI Negative List for 11 Free-Trade Zone (FTZs)
For those who is interested to know what are included in the negative list, this review from foreign investment consultancy 1421 is a good source. This review from Dezan Shira & Associates details all the major changes in the 2019 catalogs compared to the last versions.
Chinese Oil & Gas Value Chain Fully Opened Up
What change in the energy sector in the new edition? What are the currently encouraged industries and the “negative” list of energy business for foreign investment?
We have summarized current FI Catalog’s arrangements regarding clean power and fossil fuel sectors (provincial encouraged sectors included). Download here the fossil fuel list including oil & gas, and coal sectors.
The most significant change is from the oil and gas industry. Conventional oil & gas’ exploration and production is now encouraged for foreign investment. Whereas, previously, they are required to set up joint ventures with Chinese players or to form product share contracts (PSCs) for such activities.
Meanwhile, the former restriction on city gas network operation has been lifted, too. Although the new national “encouraged list” does not include city gas business, 16 out of the 22 western and central provinces prompts foreign investment into their urban gas and heating supply network.
What is interesting is the unconventional gas sector: the E&P of shale gas is—to my surprise—not included in the “encouraged” list, but the “equipment manufacturing for shale gas development” is included in the 2019 national encouraged catalog. To compare, the coal-bed methane (CBM) value chain is full-frontal embracing foreign participation.
Separately, carbon capture, utilization and storage (CCUS) has been added into the encouraged list. You could argue that it shows Beijing’s intention to promote the sector, but the slow progress of the industry could be the explanation, too.
Why the Big Move on Oil & Gas Upstream?
The liberation follows China’s current step to reform the oil & gas sector. In my eyes, that is the key driver behind these specific FI entries.
Similar moves have taken place in the downstream. Last year, NDRC and the MoC delivered a 2018 Negative list, which deleted the previous restriction on downstream oil & gas business—fueling station operation. Formerly, foreign companies are required to join forces with Chinese players (majority shareholder) to build and operate the downstream network with more than 30 branches.
Supermajors like BP and Shell have always longed for downstream business in China. Since the ban lifted, BP announced a plan to build 1000 stations in the country in five years, and Shell expects the number of oil & gas stations in China would reach 3500 by 2025, almost tripling from now.
Then at the end of last year, Shell became the first foreign oil company to secure a license to trade commercial fuels in China’s domestic wholesale market.
Liberation in the upstream is a second step, in that sense. But it is worthy of taking note: the conventional oil and gas blocks have been occupied by incumbents, with the majority of the E&P blocks already granted to the four national oil companies.
Certainly, most energy companies familiar with the Chinese reality know very well: the FI catalog change is just a “teaser.” There are still sets of approval conditions and procedures that companies need to secure from relevant authorities for market entry, and there is a lot of market reality one needs to take into account.