China Launches Second Bidding Round for Shale Gas Projects

On September 10, 2012, China's Ministry of Land and Resources ("MOLAR") announced on its official web site that it is now inviting tenders for its second shale gas bidding round. The bid will be open from September 10 to 14, 2012, and a deadline for tender submissions has been set for the morning of October 25, 2012. The auction closely follows, beginning at 9:30 a.m. on the same day.

This second bidding round has been much anticipated by the industry since the first bidding round last summer. This time, 20 blocks are put out for the auction. The new areas being offered cover a total area of 20,002 square kilometers, spanning eight provinces including Guizhou (five blocks), Chongqing (three blocks), Hunan (five blocks), Hubei (two blocks), Henan (two blocks), Anhui (one block), Jiangxi (one block), and Zhejiang (one block). Among these blocks, 11 blocks are larger than 1,000 square kilometers. Hefeng Shale Gas Block in Hubei is the largest block, covering an area of about 2,306 square kilometers.

Similar to the previous bid round, each bidder is required to have a registered capital of more than 300 million RMB and must possess oil and gas exploration qualifications or partner with an entity with such qualifications. The bidder must be an independent Chinese legal entity. And, "no consortium is allowed to bid for the projects," stated the announcement.

What is different from the first bidding round is that both pure domestic enterprises and Chinese-controlled foreign joint ventures have been invited to participate. Previously, only state-owned domestic enterprises—such as CNPC, Sinopec, and Henan CBM—were invited to bid for the projects. The recent inclusion of foreign joint ventures signals that privately owned foreign-invested enterprises may participate in the bidding if they meet other qualification requirements. Every bidder is allowed to bid for a maximum of two blocks.

The announcement states that the bidding process will begin with a preliminary review, followed by a detailed review at a later stage. Again, the criteria to select a winner is not published. Based on the bid of the winners in the last round, bidders who promised to drill the most wells with the largest capital investment were selected. Each of the two winners in the last round entered into a Transfer Agreement of Shale Gas Exploration Permit with the MOLAR ("Transfer Agreement"). The content of such Transfer Agreement was not released to the public. However, in accordance with PRC regulations, an exploration permit is valid for three years and may be extended under certain circumstances. Presumably, these bid winners will have the right to further explore and develop the projects if a shale gas discovery is made during the term of the exploration permit.

Although the announcement on September 10 is silent as to what will happen once the bid winners have been selected, it is likely that the second round will follow the same procedures as the first round, and each winner will also be entitled to enter into a Transfer Agreement with the Government.

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Michael Arruda
Hong Kong

Joanne Du
Hong Kong

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