Making and Maintaining Successful Energy Sector Investments in China

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1 Making and Maintaining Successful Energy Sector Investments in China Atlanta Beijing Brussels Chicago Cleveland Columbus Dallas Frankfurt Hong Kong Houston Irvine London Los Angeles Madrid Menlo Park Milan Mumbai Munich New Delhi New York Paris Pittsburgh San Francisco Shanghai Singapore Sydney Taipei Tokyo Washington INVESTMENT IN CHINA China is a country of superlatives. It is the world s most populous country, with the world s fastest growing economy and an equally expanding demand for energy. China hopes to maintain GDP growth of at least 7 percent through 2005 and expects its energy demands to increase by up to 5 percent annually through China is currently the world s second largest energy consumer, after the US, and the third largest consumer of petroleum products. Following China s accession to the WTO, various energy sector policy changes and reforms are planned which are expected to open China to ever-increasing foreign participation.

2 THE ENERGY SECTOR IN CHINA IS NOT REGULATED BY ANY SINGLE UNIFIED LAW OR SUBJECT TO A SINGLE REGULATOR. INSTEAD IT IS GOVERNED BY A PATCHWORK OF LEGISLATION AND IS SUBJECT TO VARIOUS FORMS OF REGULATORY SUPERVISION INCLUDING THE NPC, THE STATE COUNCIL, THE MINISTRY OF LAND AND NATURAL RESOURCES, THE STATE DEVELOPMENT REFORM COMMISSION, THE MINISTRY OF COMMERCE AND VARIOUS THE PEOPLE S REPUBLIC OF CHINA The National People s Congress (NPC) is the highest organ of state power in China. The NPC and its permanent body, the Standing Committee of the NPC, have the legislative power of the state. The NPC sits once a year and has the power to exercise all functions and powers as the highest organ of state power should exercise. The Standing Committee of the NPC has the power to enact laws or statutes other than those that should be enacted by the NPC. The State Council is the executive body of the NPC and is also the highest organ of state administration. The State Council may adopt administrative measures, enact administrative rules and regulations and issue decisions and orders in accordance with the Chinese Constitution. Administration of certain specialized functions of the government is also carried out by various Ministries that report to the State Council. Finally, local people s congresses of provinces, autonomous regions and the municipalities directly under the Central Government are the local organs of state power. These bodies also have powers to adopt and issue resolutions and local regulations under the supervision of the NPC. The energy sector in China is not regulated by any single unified law or subject to a single regulator. Instead it is governed by a patchwork of legislation and is subject to various forms of regulatory supervision including the NPC, the State Council, the Ministry of Land and Resources, the National Development and Reform Commission, the Ministry of Commerce and various local authorities. While the central government does appear committed to the development of the energy sector, strong co-operation among the various domestic players and regulatory bodies will be critical to driving forward any development plans. LOCAL AUTHORITIES.

3 The Chinese Constitution expressly permits foreign enterprises, other foreign economic organizations and individual foreigners to invest in China and to participate in various forms of economic co-operation with Chinese enterprises and other economic organizations. The Constitution promises that the lawful rights and interests of these foreigners will be protected by law. Particular legislation governing the exploration for and exploitation of oil and gas in China and the development of power projects expressly provides for participation by foreigners, subject to various restrictions and procedural requirements. OIL, GAS AND POWER INVESTMENT OPPORTUNITIES China s entry into the WTO has opened up the oil and gas sector to even greater foreign participation. The three main WTO-related changes that will directly affect China s oil and gas sector are the reduction of tariffs, the elimination of certain non-tariff barriers to trade and the opening of markets to foreign participation (retail, wholesale). Ancillary WTO reforms, such as the introduction of more transparent and streamlined approval processes, will also provide general benefits. China has agreed to eliminate quotas and licences on the import of refined petroleum products by 2004 and to increase quotas annually by 15 percent during the period leading up to UPSTREAM There is well-established precedent in China for foreign participation in the offshore E&P industry, dating back to Over 60% of China s offshore producing oil and gas properties have been developed under petroleum contracts with foreign parties, and onshore Chinese oil companies have sought to forge co-operative relationships with foreign oil companies as a means of sharing exploration costs. OVER 60 PERCENT OF CHINA S OFFSHORE PRODUCING OIL AND GAS PROPERTIES HAVE BEEN DEVELOPED UNDER PETROLEUM CONTRACTS WITH FOREIGN PARTIES, AND ONSHORE CHINESE OIL COMPANIES HAVE SOUGHT TO FORGE CO-OPERATIVE RELATIONSHIPS WITH FOREIGN OIL COMPANIES AS A MEANS OF SHARING EXPLORATION COSTS. MIDSTREAM Until recently, opportunities for foreign participation in gas pipeline systems were confined to offshore operations. However, following a revision confirmed in 2002 to the 1995 Investment Catalogue of Foreign Investment Industries, foreign investment in the construction and operation of oil and gas delivery pipelines is now encouraged subject to certain restrictions on foreign ownership percentages.

4 DOWNSTREAM Retail distribution is planned to be opened to foreign investors during 2003, without any geographical, quantitative and ownership restrictions, and the western oil-majors have all geared up to take advantage of the market liberalization by taking preliminary steps to put retail joint ventures in place. Wholesale distribution of petroleum will also be opened to foreign participation by 2005, without any geographical, quantitative or ownership restrictions. However, state-owned enterprises will retain exclusive trading rights for imported crude oil and refined products. CHINA S ELECTRICTY SECTOR IS TODAY THE MOST EXCITING PROSPECT IN THE WORLDWIDE ELECTRICITY INDUSTRY. THE BROAD STROKES OF THE NEW ELECTRICITY MARKET REVEAL A LANDSCAPE DOMINATED BY THE FIVE NEW GENCOS (EACH WITH MORE THAN 30 GW OF CAPACITY) AND TWO NEW GRIDCOS THAT HAVE INHERITED SPC S ASSETS, REGULATED BY A NEWLY FORMED ELECTRICITY COMMISSION. POWER With an electricity demand growth rate anticipated at 7-9 percent per year until 2010 to match China s economic ascent, reports announcing planned increases in Chinese generating capacity of around 33 percent in the same period, and numerous opportunities to acquire interests in ongoing generation projects, China s electricity sector is today the most exciting prospect in the worldwide electricity industry. On 29 December 2002 the State Power Corporation (SPC), which until then had owned around 50 percent of China s generating capacity and 90 percent of its electrical transmission and distribution infrastructure, was dismantled as part of a large-scale reform of the industry. The broad strokes of the new electricity market reveal a landscape dominated by the five new gencos (each with more than 30 GW of capacity) and two new gridcos that have inherited SPC s assets, regulated by a newly formed electricity commission. The full picture is still to be revealed. Having experimented with competitive power markets in certain local grids, the Chinese authorities have still to set out how the reformed market will operate. Some reports speak of a fully competitive generation market by 2010 with dispatch solely a function of price, others that competition would only be applied to part of the industry, still others that some foreign invested generation projects would be subsidized. The Chinese power market is thus currently one of enormous potential opportunity, but is also fraught with uncertainty.

5 INVESTMENT PROTECTION AND DISPUTE RESOLUTION Despite the best-laid plans it is sometimes the case that an investment in China may encounter difficulties. Whilst much of our practice focuses on making successful, well-protected investments we have also had extensive experience of assisting clients in taking steps to protect, maintain or even withdraw their investment in particular projects. A key component of this service is our long-standing and close relationships with Chinese government and regulatory bodies at all levels. If disputes cannot be avoided we will advise on the best options to resolve them quickly and in ways which are least damaging to existing and potential relationships. If the matter has to go to litigation or arbitration we are experienced in representing clients in arbitrations before the China International Economic and Trade Arbitration Commission (CIETAC) and other international arbitral bodies as well as advising on litigation before Chinese courts at all levels. Members of our disputes resolution team include laywers who are PRC ex-judges (including a judge of the Shanghai Higher People s Court) and officers/ex-officials of CIETAC, the ICC, the Arbitration Institute of the Stockholm Chamber of Commerce and the American Arbitration Association. We also regularly advise on and conduct various forms of Alternative Dispute Resolution (ADR) including mediation, early neutral evaluation, adjudication and minitrials, with a view to securing the best value-for-money solution to complex disputes. WHILST MUCH OF OUR PRACTICE FOCUSES ON MAKING SUCCESSFUL, WELL-PROTECTED INVESTMENTS WE HAVE ALSO HAD EXTENSIVE EXPERIENCE OF ASSISTING CLIENTS IN TAKING STEPS TO PROTECT, MAINTAIN OR EVEN WITHDRAW THEIR INVESTMENT IN PARTICULAR PROJECTS.

6 THE JONES DAY DIFFERENCE Making and maintaining successful energy sector investments in this fast-evolving country requires legal advisers with a combination of skills. Jones Day offers this combination with a unique mix of energy sector knowledge and Chinese legal experience: Genuine energy sector know-how Our China energy practice lawyers are committed sector specialists, the majority having spent time in-house with oil, gas or power companies (such as BP, Exxon, Sinopec, Mobil and Enel) with an unparalleled understanding of their chosen area of business. Specialist China sector skills Jones Day s offices in Beijing, Hong Kong, Shanghai and Taipei enable us to offer a unique coverage of Greater China. Our China energy practice team is able to draft and negotiate in English and Chinese and is supported by a professional translation team. Jones Day has a strong energy project investment, development and finance practice in China. We are presently involved in one of the largest gas development projects underway in China, the US$900 million Guangdong LNG Terminal & Trunkline Project, where we are acting for the project sponsors (including BP and CNOOC) in the development and financing of the project. We have also advised clients such as El Paso, the CP Group and Entergy Corporation on power-plant developments in China. Members of our China power practice team have also acted in connection with the Laibin B project. JONES DAY S GREATER CHINA ENERGY PROJECT INVESTMENT, DEVELOPMENT AND FINANCE PRACTICE Jones Day has been active in the China market for more than 20 years, assisting clients in making and maintaining their investment objectives. Jones Day has one of the largest and most experienced teams of lawyers working in Greater China today, with fully staffed offices in Beijing, Hong Kong, Shanghai and Taipei. Our practice in China focuses on foreign direct investment, including the establishment of joint ventures and wholly owned foreign enterprises, mergers and acquisitions and the disposing of and restructuring of state and foreignowned assets. Jones Day has represented a large number of multinational clients in structuring and implementing their China projects, including many Fortune 500 companies. All of our senior lawyers have significant experience in negotiating and structuring such deals and in preparing all relevant documentation. It is also important to keep in close contact with all levels of government when conducting significant business deals in China. Our firm has maintained close ties with the Chinese government for almost three decades, perhaps most notably in our role as outside counsel to the Chinese Embassy in Washington D.C. since the 1970s. Our lawyers work closely with lawyers in other practice areas (including finance, corporate, construction, securities, tax and dispute resolution) as part of globally integrated teams. We offer a full range of legal services for oil, gas and power projects, acting for a broad range of clients that include: corporations, governments, agencies and regulators, multilateral agencies and banks and financial institutions.

7 Jones Day s global reach and substantial legal resources across Asia allow us to provide creative, comprehensive and effective legal solutions throughout the region in all of the critical energy project competencies, including: Project structuring, development and operation Upstream, midstream and downstream oil and gas (including LNG and shipping) Power generation, transmission, distribution, trading and supply Mergers, acquisitions and joint ventures Market restructuring, deregulation and privatization Corporate, project and structured financing Construction contracting Domestic and international dispute resolution JONES DAY WORLDWIDE Jones Day is one of the largest leading law firms with more than 2,000 lawyers in 29 locations around the globe. We represent more than half of the Fortune 500 companies. In addition to our United States and European networks we have nine offices in Asia, including Beijing, Hong Kong, Singapore, Shanghai, Sydney, Taipei, Tokyo, New Delhi and Mumbai. Jones Day consistently ranks among the top law firms in published league tables and in reputable publications. Our excellence in serving our clients has not gone unnoticed: World #1 in Mergers and Acquisitions: Thomson Financial ranked Jones Day #1 globally for number of completed deals in 2002, as it was for 2001 and Client Service: Jones Day ranked at the top of BTI Consulting Group s client service survey of Fortune 1000 corporate counsel for 2001 and No. 1 in Oil, Gas & Energy: Jones Day ranked No. 1 in Financier Worldwide s January/February 2003 Oil, Gas & Energy Review. World #1 in Litigation and Dispute Resolution: Chambers and Partners ranked Jones Day as having the best litigation practice among all international law firms (June 2002). The American Lawyer also selected Jones Day s Litigation Group as the Litigation Department of the Year (The American Lawyer, January 2002). Project Finance Leader: The American Lawyer and the Infrastructure Journal ranked Jones Day as one of the world s leading project finance law firms for Asia Pacific Legal /2003: clients recognize the firm s energy market experience and its Chinese law capability. ADDITIONAL INFORMATION For additional information regarding our China energy practice please contact your principal Jones Day representative or any of the lawyers listed in this brochure. General messages may be sent to counsel@jonesday.com. We invite you to visit our Web site at

8 LAWYER CONTACTS Beijing Johnson Tan 3511 China World Tower 11 No. 1 Jianguomenwai Avenue Beijing People s Republic of China Tel.: Fax: jtan@jonesday.com Hong Kong Peter Roberts 31 st Floor, Edinburgh Tower The Landmark 15 Queen s Road Central Hong Kong Tel.: Fax: peterroberts@jonesday.com Shanghai Winston Zhao 30 th Floor, Shanghai Kerry Centre 1515 Nanjing Road West Shanghai People s Republic of China Tel.: Fax: wzhao@jonesday.com Taipei Jack Huang 8 th Floor 2 Tun Hwa South Road, Section 2 Taipei, Taiwan Tel.: Fax: jhuang@jonesday.com Legal Minds. Global Intelligence. SM 2003 Jones Day. All rights reserved. Printed in U.S.A.