China’s shale gas auction of 20 license blocks scheduled for 25 October will allow foreign-funded joint ventures to participate, provided that a Chinese partner holds a majority share in the venture.
It is the second such block tender opportunity offered by China and the first that will allow foreign companies to participate. The first shale gas exploration auction was held in June of last year and involved four blocks, of which two were awarded to a provincial coalbed methane developer and the state-owned China Petrochemical.
“The decision to allow foreign participation, albeit in a limited form, is a positive development towards openness, since there were widespread rumors prior to the official launch that only domestic players can take part,” said Shun Ling Yap, an oil and gas analyst with Business Monitor International. “It is further recognition by the government that the country needs foreign expertise and capital if it wishes to meet its ambitious shale gas production target of 6.5 Bcm by 2015.”
The Xinhua news agency has reported that China intends to produce 6.5 Bcm of shale gas by 2015, and that commercialization of shale gas production in the country can be expected during China's 5-year plan from 2016–20.
The cost of producing shale gas in China is less than that of importing fuel supplies, an HSBC Holdings official said yesterday at a conference Shanghai. The break-even price for shale supplies is estimated at USD 0.24/m³, and China’s average imported gas prices are currently as much as USD 0.41/m³.
Reuters reported last month that Exco Resources is teaming up with a Chinese partner and that it will take part in the shale tender next week.
Dow Jones Newswires reported last month that PetroChina has offered oil and gas blocks in the northwestern Xinjiang Uighur autonomous region to foreign companies for joint development. The blocks are in remote areas and range from 6000 km² to 15 000 km² in size.
As the Chinese economy continues to draw foreign investment, a recent article in the Dutch Fenedex Pressmagazine recommended company investigations in commercial transactions and due diligence for joint ventures or acquisitions. Key points of the article include:
- Whether a company exists or not can be checked online or by searching the local company registry. The associated bank account should be connected to the company.
- It is better to do business directly with the asset-heavy manufacturer rather than with an asset-light trader. Foreign companies should avoid doing business with Hong Kong-based trading companies, which are often a postal address without office and assets.
- Keep in mind that many Chinese companies have multiple sets of accounting books: one for the owners, one for tax authorities, and one for the foreign partner.
- Chinese companies are not accustomed to opening up to third parties and data rooms are rare in the country, so persuading local management to cooperate with a preliminary investigation is important.
- Foreign investors should try to understand whether preferential business policies have a basis in law or have been written in by an official. To avoid bureaucratic challenges from China’s court system, it is wise to include contracts with dispute resolution clauses.