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The Role of law and policy in the offshore petroleum development of China Xin, Kelei 1993

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THE ROLE OF LAW AND POLICY IN THE OFFSHORE PETROLEUMDEVELOPMENT OF CHINAByXin KeleiB A , Beijing Normal University (1982)A THESIS SUBMITTED IN PARTIAL FULFILMENT OFTHE REQUIREMENTS FOR THE DEGREE OFMASTER OF LAWSinTHE FACULTY OF GRADUATE STUDIES(FACULTY OF LAW)We accept this thesis as conformingto the required standard.THE UNIVERSITY OF BRITISH COLUMBIAMarch 1993© Xin Kelei, 1993In presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, I agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. It is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission.(Signature)Department of^LAWThe University of British ColumbiaVancouver, CanadaDate^APRIL 20. 1993DE-6 (2/88)ii(Abstract)This thesis examines the legal and policy regimeapplicable to the petroleum activities on the continentalshelf of China. The distinguishing characteristics of thisregime are revealed by way of a comparative analysis of thesalient features of the offshore petroleum laws of China, theUnited Kingdom and Canada.The modern Chinese offshore petroleum law and policy isessentially the product of the development of the domesticpetroleum industry. The formulation of the contemporaryregime was greatly influenced by the petroleum policiesimplemented by previous governments of China. The thesistherefore examines the history of the development of themodern Chinese petroleum experience and the current situationof China's offshore oil and gas industry. This establishes acontext within which the presentation of the promulgation ofChina's offshore petroleum law and policy in the 1980s can beanalyzed.China opened its continental shelf for foreign oil andgas development somewhat later than other countries withoffshore petroleum resources. Accordingly, China had theopportunity to study the experiences of other states, and toadopt selectively elements from foreign regimes to theadvantage of its economic development. China's offshoreiiipetroleum law and policy displays not only unique Chinesecharacteristics but also incorporates features common to manyother offshore petroleum jurisdictions. The thesis identifiesthese special characteristics and common elements. The twotogether comprise the Chinese legal regime governing offshorehydrocarbon activities.The goal of the policy of opening the offshore area toforeign oil companies is the promotion of the development ofChina's economy while safeguarding its sovereignty andeconomic interests. The analysis of China's offshore law andpolicy indicates how the Chinese government intends to reachthis goal by means of law-making, and also how the interestsof foreign investors are protected and the benefits accruingare shared. Accordingly, special attention is paid to ananalysis of the Regulation of the People's Republic of Chinaon the Exploitation of Offshore Petroleum Resources inCooperation with Foreign Enterprises, and the Model PetroleumContract drafted by the China National Offshore OilCorporation.China's offshore petroleum law and policy wasformulated in the early 1980s. Since then, great changes havetaken place in the international petroleum industry. Thegovernment of China has accordingly seen the need to modifyits offshore petroleum policy from time to time. The thesisoffers some comments on the modification of China's policies.The thesis presents a comparative analysis of the oilivand gas laws of China, the United Kingdom and Canada,undertaken to show the differences in approach and substancebetween China and advanced oil producing countries in terms oflegislation governing the development of the petroleumindustry. Lacunae in the Chinese regime are also identified.The thesis concludes with some suggestions on howChina's offshore hydrocarbon law and policy should be improvedin order to better serve the future development of China'soffshore petroleum industry.TABLE OF CONTENTSAbstract^ iiTable of ContentsAcknowledgement^ viiiChapter One. The Evolution of China's Petroleum Lawand Policy^ 1I. Introduction 1II. Qing Dynasty's Petroleum Policy^ 81. Ownership of the Surface Land 152. Limitation of Investment 153. Conclusion^ 17III. Guomindang Government's Petroleum Law andPolicy^ 18A. The Provisional Regulations^ 201. Government Control 202. Banning Foreign Investment 22B. The Mining Law^ 251. Establishing State-run Oil Companies^272. Measures to Protect Petroleum Resources^283. Optimum Utilising Private and ForeignInvestment^ 294. Conclusion 30IV. The PRC Government's Petroleum Policy^34A. Petroleum Policy before the 1980s 371. State Monopoly^ 382. Self-reliance 40B. Petroleum Policy during the 1980s tothe Present^ 431. Establishment of New Management Mechanism 462. Participation of International OilCompanies 47V.^Conclusion^ 49Chapter Two. Policy and Laws Governing the Explorationof Offshore Petroleum Resources in China^51I.^China's Rational for Inviting Foreign Explorationof Its Offshore Petroleum^ 52A. Energy Crisis^ 54B. Requirement of Economic Reforms^ 56II. Main Provisions of PRC's First Mineral ResourcesLaw^ 60VviA. Sovereignty and Ownership of Offshore OilResources^ 67B. Legal Position of Relevant Enterprises^68C. Competent Authorities of the Chinese Governmentand Exclusive Management Entity^ 69D. Basic Cooperative Patterns with ForeignEnterprises^ 70E. Preferential Treatment to the Chinese Side^71F. Ownership of Information^ 72G. Other Requirement^ 73III. Taxation and Royalty 76A. Foreign Enterprises' Income Tax^ 79B. Consolidated Industrial and Commercial Tax^81C. Royalty Payment^ 82D. Exemption of CICT and the Customs Duties^85IV. Other Governing Laws 86V. Conclusion^ 93Chapter Three. China's National Offshore Oil Corporationand Its Model Petroleum Contract^96I. Two Marked Traits in the Cooperation 96II. Legal Nature of CNOOC^ 104III. Salient Features of Model Petroleum Contract^111A. General Feature 112B. Contract Term^ 114C. Contract Area 115D. Relinquishment of Contract Area^ 117E. Confidentiability 119F. Arbitration and Applicable Law 120G. Effectiveness and Termination 123H. Management Mechanism^ 125I. Features of Other Articles^ 129J. Conclusion^ 130Chapter Four. A Comparative Study of Offshore Oil andGas Law of the U.K., Canada and China^134I.^Oil and Gas Law in the U.K.^ 135A. The Licence System^ 136B. Financial Requirement 140C. State Participation 142D. Power of Secretary of State^ 148E. Conclusion^ 148II. Oil and Gas Law in Canada 151A. Lease System 152B. Legal Regime on Provincial Lands^157C. Legal Regime on Federal Lands 160D. East Coast Offshore Oil and Gas Development^163E. Conclusion^ 165vi iIII. Legal Comparisons of Practices in theOffshore Petroleum Industry^ 168A. Précis of China's Offshore Petroleum Law^168B. Comparison of Petroleum Law 172Chapter Five. Concluding Remarks^ 179I. Suggested Reform for China's OffshorePetroleum Law and Policy 179II. Conclusion^ 185Bibliography^ 187viiiAcknowledgementI would like to take this opportunity to thankProfessors Ian Townsend-Gault and Karen Mickelson for theiradvice and comments which were invaluable to this thesis.I also owe sincere thanks to my friends; Jude ThaddeusAmos, Anne Beveridge, Carla Ferstman, Jim Harris, ChristopherLee, Elizabeth Kirk, Lisette Ramcharan, Karen Webb, AllanSaroka and Peter Tyedmers, who study or work in the Faculty ofLaw, UBC for their kindness shown to me.This thesis is dedicated to my mother, Wei Hongying; mywife, Yan Reiwen and my son, Xin Qing for their enduring loveand support.1Chapter OneThe Evolution of China's Petroleum Law and PolicyI. IntroductionChina has been aware of the existence of petroleum withinits borders since the eleventh century BC. 1 It was, at onetime, the most advanced nation in the world as regards thedevelopment and utilization of crude oi1. 2 Although China'sA famous book named Yi Jing (Book of Change) writtenin West Zhou Dynasty of China (1066 - 711 BC) recorded theearly discovery of petroleum in China. See Shen Lisheng(edited), Zhong Guo Shi You Fa Zhan Shi (The History ofChina's Petroleum Development), Vol. 1 (Beijing, China:Petroleum Industry Publishing House, 1980) at 14.2 The detailed description on the discovery ofpetroleum and natural gas was first made by Ban Gu of HanDynasty (25BC-220AD) who recorded the petroleum reservoir inGansu Province. The hydrocarbon reservoir in Gansu Provinceand in Xinjiang Uygur Autonomous Region were described in someother historic chronical of dynasties which followed. Crudeoil was utilised in China a long time ago. The Chinese peopleused crude oil as fuel, illuminating material, lubricant andthe raw material to make Chinese ink. Crude oil also servedas a medicine to cure skin ulcers [the pharmaceutical value ofcrude oil were written down in the Pharmacopoeia of the SongDynasty (960-1127AD)]. When people forged steel in ancienttimes, crude oil was used as cooling medium. Crude oil wasused as a weapon as well as the key ingredient of gun power[in 578AD, when the Turks attacked Jiuquan City of GansuProvince, the local people burned down the enemy's militaryattacking appliances with burning crude oil and saved thecity. Gun power was invented by the Chinese people. In theSong Dynasty (the 11th century AD), the gun powder industry2modern petroleum industry dates from 1877, it was not untilthe 1960s that China became a major oil producing country inworld terms. The large scale development of its offshorepetroleum industry only began in the last decade.A vital part of China's general petroleum policy,policies and laws governing offshore hydrocarbon activitieswere implemented by the PRC government to control cooperationbetween Chinese and international oil industries. This was astep of historic proportions, taken by the Chinese governmentto challenge its traditional oil policy, and to open upwas very prosperous and three main recipes to make gun powdercontained oil products such as dense crude oil and asphalt.To serve the military purpose, the central government of theSong Dynasty then recovered a great amount of crude oil inShaanxi Province]. The Chinese people in Sichuan Provincealso have a long history of using natural gas. Sichuanprovince bears a rich natural gas reserve and the people therestarted burning natural gas to boil down salt from bittern inHan Dynasty (206BC-220AD) and kept doing so until recently[Sichuan Province is far away from the sea and thetransportation there is difficult. People in Sichuan Provincecould hardly acquire sea salt and had to drill wells forbittern in the underground and then boiled down bittern intorock salt. When people drilled bittern wells, they discoverednatural gas. It was, therefore, natural that the Sichuanpeople used natural gas as a fuel to make salt. In ancienttimes, natural gas wells were called fire wells in China].The Chinese people drilled wells to recover crude oil in the11th century and drilled natural gas wells in the 2nd centuryBC, much earlier than the earliest recorded uses of westerncountries (the American people believed the well drilled in1895 in Oil Creek near Titusville of Pennsylvania was thefirst oil well ever drilled in the world. It was 800 yearslater than that in China. Similarly, the English people werebelieved to be the first nation in the world to utilisenatural gas in 1669, which was over one thousands years laterthan the Chinese people). See Chen Cheng-siang, Zhong Guo De Shi You (Petroleum of China) (Hongkong: Tiandi Publishing Ltd,1979) at 15-25.3bright new prospects for the development of China's petroleumindustry.It has long been a desire of the Chinese government totap China's offshore oil resources. The Chinese governmenthas for some years hoped the development of its offshorepetroleum industry would help resolve China's energy crisisand also bring in much needed revenue. However, China doesnot have sufficient capacity to recover offshore petroleumresources on its own, particularly in the deep sea area.Bound by a conservative idealogy, the Chinese government hadat one time no intention to cooperate with foreign oilcompanies which alone had the necessary expertise, even ifthis meant forgoing offshore petroleum development.This attitude changed dramatically in the early 1980swhen the Chinese government decided to open the offshore areato foreign oil companies. But the reason for this change inpolicy, its permanence, and future direction, remain majorconcerns of the majority of oil companies which are interestedin China. The answers to these issues may be found by areview of China's past oil policies. 33. For a more detailed analysis of the rationale behindChina's interest in offshore oil, please see Chapter 2. intra.at 44-51.4The oil policies adopted by previous Chinese governmentswere the most important roots of China's present petroleumpolicy, and are hence of crucial importance in the presentcontext. Virtually all the policies formulated by eitherprevious or present Chinese governments relating to thepetroleum industry stemmed from common roots. This in turncan be explained by reference to China's history andconventions, and the character of its social economicdevelopment.China has been a country with a dominant centralisedstate power for thousands of years. A fundamental legislativeprinciple adopted by all the powerful central governmentswhich ruled China down the years provides that all profitablemines belong to the state, and the mining industry would berun directly by the government. These factors have given riseto two distinctive legal features which permeate the historyof the development of China's petroleum industry. First,since the beginning of the modern petroleum industry era inChina, ownership of petroleum resources is vested exclusivelyin the state. Second, the exploration and developmentactivities of the petroleum industry have been totallycontrolled by government. These two features havecharacterized the process of petroleum policy making of thenon-communist and the present Chinese governments and will be5important factors in assisting in understanding of legislativeconceptions relevant to China's petroleum industry.For such of its history, China has been a large scaleagricultural country, with a self-sufficient economy; itsgovernments were content that this should be so. Such socialand economic conditions tends to result in an inward lookingsociety. This was the case with China, which developed agovernment-sanctioned closed-door policy which rejectedforeign influence. This trend was marked particularly in thecase of the regimes in power before the late Qing Dynasty andafter the establishment of the People's Republic of China in1949 until the late 1970s. 4 This fundamental considerationwas the source of China's policy of self-reliance. The closed-door policy and the self-reliance policy dominated thedevelopment of China's petroleum industry for thirty years.Even today, the self-reliance policy remains the mostfavourite principle of the PRC government in running the4. In 1772 the British government sent George LordMacertner as an envoy of the British King to China to ask theChinese government to agree to establish trade relations withBritain. The request of the British government was rejectedby China. In a letter written by the Chinese emperor QianLong to the British King, the first paragraph read as follows:"The Heavenly Dynasty (China) is abundant in natural resourcesand produces everything. It does not need to exchange goodswith foreign countries to supply itself." Self-reliance actedas policy of the feudal dynasty was typically demonstrated inthis example. See Guo Tingyi, Jin Dai Zhong Guo Shi Gang (TheOutline of Recent Chinese History) (Hongkong: ChineseUniversity Pressing House, 1979) at 41.6country, and holds a decisive balance in China's presentpetroleum policy. 5 However, a conservative philosophy isrevealed by these policies.Historically, has China suffered frequent military,political and economic aggression from better developedwestern capitalist countries, largely due to its backwardeconomy. These events promoted the development of a mentalitywhich considered issues such as safeguarding sovereignty overnatural resources, protecting national economic interests andhandling foreign investment to be of paramount importance indeveloping China's petroleum law and policy. Regarding thosesubjects, the legislatures of pre-PRC governments made greatcontributions to solving the problem. In the 1980s, when thePRC government "opened China's door" again to the world, anddecided to invite international petroleum industries toparticipate in offshore oil activities, it had plenty ofexperience to assimilate from China's former petroleum law andpolicy in dealing with foreigners.5 . Another important factor accounting for the boastingof the chinese government of its self-reliance policy is thatMao Tsetung, Chairman of the Chinese Communist Party and thefounder of the PRC, was born from a traditional peasantfamily. Because self-reliance used to be an utmost targetpursued by most Chinese peasants for thousands of years,Chairman Mao's family background affected the formation of hisworld outlook. When Chairman Mao was in power, to greatextent, this idealogy generated the policy of the Chinesegovernment. Chairman Mao was a strong advocate of self-reliance policy.7The development of China's modern petroleum industry tookplace under three generations of governments: Qing Dynasty 6 ,Guomindang regime7, and the PRC. To develop China's petroleumindustry, these three Chinese governments implemented theirrespective petroleum policies in legislation. The Qinggovernment promulgated its law governing the recovery ofpetroleum in 1908. The Guomindang government promulgatedsimilar laws in 1929 and 1931 respectively. In 1982, thecurrent Chinese government promulgated its first petroleumlaw. Reflecting the continuous development of China'spetroleum industry, China's present petroleum regime is aresult of the evolution of the hydrocarbon laws and policieswhich were originally made by previous Chinese governmentssince the Qing Dynasty. The first law adopted by the Qinggovernment on the mining of petroleum was very simple, but itlaid down the principles influencing both the Guomindanggovernment and the PRC government in their individuallegislation regarding the petroleum industry. Along with thedevelopment of China's petroleum industry, China's petroleumlaw and policy grew more and more mature. In spite of theirdifferent political backgrounds, the later petroleum law hasalways been influenced by the previous one, as was China's6. The last feudalist dynasty of China, 1644 - 1911.7. Guomindang means National Party, which ruled mainlandChina between 1912 - 1949.8offshore petroleum law and policy.When a new government took over the petroleum industryfrom the previous one, it also inherited the former officialpetroleum policy and reformed the policy to serve itselfbetter. Ever since its establishment in China, the petroleumindustry has been controlled directly by the ruling classes ofthe country, and enjoyed priority in legislation. Althoughthe content differs, the petroleum law and policy of theChinese governments at various times shares a degree ofconsistency, and there are inner relationships and manyaspects in common among them. All the positive factors of theformer petroleum policies of China were retained in thatpromulgated by the PRC. The study of the evolution ofpetroleum law and policy established by previous Chinesegovernment will therefore be essential in analyzing thecurrent law and policy governing China's offshore petroleumindustry, which follows to a certain extent the basicprinciple of the former Chinese legislation.II. Qing Dynasty's Petroleum PolicyChina's modern petroleum industry was established in thelate Qing Dynasty, which decided that the nature of petroleumlaw and policy formulated in China would be thoroughly9different from that adopted by the western countries. Oilfields have never been owned privately in China, and privatelyowned oil companies could not survive there. It was aprinciple in China prevailing for more than thousands of yearsin the feudalist society that all profitable mines and themining industry belonged to the central government. By thetime the Qing government proclaimed its petroleum policy inthe early nineteenth century, its downfall was alreadyunavoidable. The rulers of Qing government hoped the miningindustry (including petroleum development) would soon bringhuge economic benefit to consolidate their political power.As a political administration serving the imperial family, thegovernment of the Qing Dynasty would naturally follow theexample of the previous dynasties and claim that both oilresources and related mining right were owned by the empire.In the mid-19th century, the Qing government launched aWesternization Movement 8 and began to attach importance to thedevelopment of industry and introduce law evolved in thewestern style into China. The Qing dynasty's petroleum policywas a product of this Movement.8. To introduce technique of capitalist production,initiated by open minded bureaucrat in the latter half of the19th century in order to preserve the feudal rule of the Qinggovernment.1 0Before the Qing Dynasty came to assume power, there hadbeen no civil or commercial laws governing China's industrialactivities. 9 The Qing government amended the industrialpolicy it had inherited to include the petroleum industry intothe law.The Qing dynasty had no distinct petroleum law. Thedevelopment of petroleum industry was governed by a lawentitled "The Official Regulations of Great Qing Dynasty onMining Affairs" (hereafter "the Qing Regulations") . 10According to the law, petroleum mining came under thejurisdiction of the Agriculture, Industry and CommerceMinistry. 11 Provincial mining affairs were governed by9. "Opening the statute books published in China sincethe dawn of history until Qing Dynasty, only penal codescould be found. If hundred over hundred kinds of written lawadopted in thousands of years of China's history wereclassified in the viewpoint of modern science of law, therewould be no civil and commercial law, which were consideredirrelevant compared to criminal law. That is an importantfeature of the Chinese legal system." Lin Jianhong, Fa Yu Zhong Guo She Hui (Law and Chinese Society) (Jinlin Province,China: Jilin Culture and History Publishing House, 1988) at206, (my translation).m -. PromulgatedEmperor on the 13th of(Completed CollectionsDynasty), Book 6,Publishing House, 1973under the imperial decree of GuangxuFebruary, 1908. Da Oing Fa Gui Da Ouanof Laws and Regulations of Great QingVol. 14 (Taibei, Taiwan: Kaozheng) at 3076.II .^Ibid. Article 2.11Provincial Mining Affair Management Investigation Bureau. 12The development of the petroleumhighly by the government of the QingRegulations classified all the mineraltypes. Petroleum was classed as Type C,same way as metallic minerals inindustry was valueddynasty. The Qingmaterial into threebeing treated in thethe law. 13 Suchclassification indicated that the exploitation of petroleumwas very profitable and should be a government a monopolyaccording to traditional Chinese political policy.Under the Qing Regulations, landlords enjoyed rights tothe surface of the land. Subsurface mineral deposits were the12. Ibid. Article 3.13. Ibid. Article 11.14 . In the Chinese feudal dynasties, which lasted forover a thousand years, all profitable mineral resources wererun exclusively by the central government. This was animportant traditional economic policy taken by all dynasties.Such a policy began with the Martial Emperor of the HanDynasty (156-89 BC). At that time, the government exclusivelypossessed the trade of salt and iron. Factually, all theprofitable mineral resources were monopolized by thegovernment. Profit from such monopolies were major income forthese dynasties. See Liu Xiuming, Xiong Cai Da Lue De Han WuDi (Martial Emperor with Rare Gifts and Bold Strategy in theHan Dynasty) (Shanghai: Shanghai People's Publishing House,1984) at 30-5.See also Saeki Tomi, "The Salt and Chinese History" VolV, N 11 Feb 1976 Shi Huo Monthly at 35. "Since the middle ageof the Tang Dynasty (618-907), the (Chinese) governmentstarted to monopolize the trade of tea, salt spirits, iron andperfume. Such monopolies lasted until the late Qing Dynasty."Because petroleum is a profitable mineral resources,according to China's traditional policy, the Qing governmentcertainly would not relinquish control over it.12property of the state, and unauthorized petroleum recovery wasnot allowed."The Qing Regulations provided that mining enterprisesmust apply for a licence to establish an oil company. Theholder of a license was required to pay royalty on productionto the government, and was also liable to taxation." TheQing government maintained an inflexible attitude in theenforcement of the state mining right, and stern punishmentwere prescribed for infringements of the law. 17 In this way,n ... Subsurface resources are vested in the State.Gold, silver, copper, iron, tin and other precious mineralsare not allowed to be recovered without governmentalpermission.... Mineral rights are vested in the State. State-run, private or Sino-foreign joint venture mining companiesshall hold licenses issued by the responsible Ministry beforecommencing mining." Ibid. Article 14.• Ibid. Article 6.• "Mining companies are not permitted to trade,exchange or mortgage mining properties privately. Any suchinfringement shall be punished under the law." Ibid. Article20."If the responsible authorities discover that a landownerhas sold minerals extracted from his land without governmentauthorization, the land shall be confiscated and the landownershall be charged with the theft and sale of public property."Ibid. Article 14.As for the punishment, "In Ming (Ming Dynasty) and Ch'ing(Qing Dynasty) Law....Goods are assessed in terms of ounces ofsilver. Most serious was theft of goods entrusted to theircare by supervisory or custodial officials. Theft of goodsworth one ounce of silver or less was punished with a beatingof 80 blows with the heavy stick and those worth 40 ouncesnominally with decapitation (commuted in Ch'ing-Qing law tothe exceptional punishment of punishment of penal servitudefor 5 years). Next in order of serious were theft of publicproperty by ordinary people...punishment started at a beatingof 70 blows with the heavy stick in respect of goods worth 1ounce of silver or less and ended with strangulation at 8013the Qing Regulations legislated the second legal basic rightof the government with respect to hydrocarbons; recovery ofpetroleum was the exclusive privilege of the state.The first well drilled using modern techniques waslocated in Taiwan Province and sunk in 1878. 18 As soon asounces." Geoffrey MacCormack, Traditional Chinese Penal Law(Edinburgh: Edinburgh University Press, 1990) at 211-2.18 At that time in North America, petroleum wasextensively recovered for the purpose of power generation.The following quote describes the level of the development ofthe petroleum industry before the 20th century, which nodoubt, stimulated the then Chinese government to search foroil resources."In the early nineteenth century, candles struggledagainst the gloom. More prosperous people could afford whaleoil, and New Bedford flourished. Rock oil, scooped up fromseepage, was famed for its medicinal properties but was tooexpensive to be used widely as an illuminant.Edwin L. Drade, a colonel by courtesy but a man blessedwith a simple, workable and original idea, brought more light.He copied the salt well driller's technique and deliberatelydrilled for rock oil which had polluted so many brine wells.It bubbled up by the barrel. And the kerosene lamp followed.It still illuminines more homes and huts around the world thanelectricity.The history of oil can be grouped conveniently around thenames of five men, who by design or accident marked after itsperiod. Drake in 1859 found how to get oil out of the earth,by John D Rockefeller found how to get money out oil. Almostin the beginning of kerosene era there was Rochefeller....Hebuilt a towering fortune on Kerosene lamp and on lubricants.When the kerosene age began to sputter out, in this century,around the end of the nineteenth century, his marked positionwas so massive and impregnable that his fortune continue tomushroom, almost effortless, in the era that followed spindletop in 1901....For a half century the history of oil was alsothe personal history of John D. Rochefeller....His firstinvestment in oil was made in 1862, only three years afterDrake's discovery; in 1865 he had organized his first oilcompany; in 1870 he amalgamated this with the Harkness andFlagler plants and formed Standard Oil." Harvey O'Connor, TheEmpire of Oil (New York: Monthly Review Press, 1962) at 8-9.14the oil discovery was made, the Qing government immediatelyput the oil field under official control. 19 In point offact, no private oil companies were established during thetime of the Qing dynasty, and the all petroleum explorationand production was directly undertaken and managed by thegovernment. nTo maintain their feudalist dictatorship, the Chineseemperors banned trade between China and foreign countries forcenturies. When the door of China was forced open byimperialist powers in the nineteenth century, foreigninvestment was considered to be an economic encroachment uponChina's sovereignty. Once the Qing Dynasty's glory wasdestroyed by the aggression of the imperialist countries, thisgovernment abhorred intrusions of the foreign capital andwished to be able to restrict foreign investment by law. TheQing government had not sufficient military forces to repulsethe coming foreign invasion. It tried to repulse foreignintrusion into the economy by means of legislation. The Qingregulations restricted the activities of foreign investment inthe exploitation of petroleum. The mains rules were asW. Liu Keshu, Hu Xinnan, et al, Zhong Guo Shi You ZhiHistory of China's Petroleum Industry, Vol. 2 (Taibei, Taiwan:China Oil Ltd. Co., 1971) at 785.20 . Jiao Liren, Li Tianxiang, Shen Lisheng et al, DanqDai Zhong Guo De Shi You Gong Yie (China Today, PetroleumIndustry) (Beijing, China: China's Social Science PublishingHouse, 1988) at 6 - 7.15follows:1. Ownership of the Surface Land:Foreign companies were not allowed to become the ownerof land where petroleum resources were located. In accordancewith the Qing Regulations, foreign companies which jointlyventured with their Chinese equivalents to tap petroleumresources could only be granted a right to manage the miningbusiness, and such right should be terminated as soon as theresources were depleted. Under law, foreign companies wouldnot in any circumstances be allowed to own land from which theproduction oil was taking place. 212. Limitation of Investment:Foreign investments were limited to involvement inpetroleum production. Because of its military defeat in thenineteenth century, the Qing government was forced to signseveral unequal treaties with some imperialist countries.The contents of those unequal treaties contained theprovisions allowing the foreign corporations to come to Chinato extract mineral deposits. The Qing government had to21 . Supra, note 10. Article 9.16accommodate companies established in the countries of thesignatory powers, but wished to prevent any others from comingto China. The greater the number of foreign companiesestablishing in China , the greater the degree of humiliationexperienced by the Qing government. Furthermore, the Qinggovernment believed that foreign investors represented notonly the impairment of China's sovereignty, but alsoconstitute a threat to the political power of the Chinesegovernment. Therefore, resisting foreign investment, no matterhow inefficiently, was tantamount to the defence of thecountry in the eyes of the Qing government. In the eyes ofthe Chinese people, the Qing dynasty continues to bear thestigma of being the government which allowed foreign capitalto exploit China's mineral deposits. This was one of thereasons why, when the PRC government decided to "open thedoor" after seventy years of foreign exclusion and invitedforeign investment into China again, it dwelt at great lengthon provisions regarding national sovereignty in its offshorepetroleum code. The PRC government was going to protectitself from being criticised as following in the steps of theQing dynasty.The Qing Regulations provided that only nationals ofstates which had signed the relevant treaties with the Chinesegovernment were allowed to form a joint venture company withChinese people to tap the petroleum resources. Foreigners of17states which had not signed treaties with China or which didnot grant reciprocal rights to the Chinese people would not beallowed to exploit oil in China. Foreigners who did not abideby Chinese laws or foreigners who had a criminal record,foreign diplomats and foreign government employees, were notallowed to engage in oil mining. 223. ConclusionThe Qing dynasty conceived its petroleum policy and lawin the final years of its power. By that time, China had beenreduced to a semi-colonial country. The government was inpolitical and economic trouble both at home and abroad, withthe result that China's petroleum industry had no opportunityto develop.The Qing government's petroleum law was somehowrudimentary. It did not wield much influence to the furtherdevelopment of China's petroleum industry. In formulating itsmineral policy, the Qing government was motivated by thedesire for quick success and instant benefit; it was not thefirst, nor was to it to be the last government to adopt sucha short-sighted policy. Nevertheless, the Qing Regulations hadput forward the basic legislative principles in runningIbid. Article 10.18China's petroleum industry, which has constituted thegroundwork for future Chinese petroleum laws and policies.State ownership, state owned mining rights and safeguardingnational economic sovereignty were the elementary legalprinciples laid down by the Qing government in its petroleumpolicy.Ill. The Guomindang Government's Petroleum Law and PolicyChina's petroleum industry took its first step towardsdevelopment in the Qing Dynasty, but its foundation was laidunder the Guomindang regime. 23 The Guomindang governmenttook the development of the petroleum industry more seriouslythan had the Qing dynasty, and made further progress withlegislation.Compared with the law governing the petroleum industrypromulgated during the Qing Dynasty, the Guomindanggovernment's petroleum law was a completely ideal statute. Itwas designed more rigorously as regards contents and moreexplicitly as regards the purpose. It not only furtherdeveloped the legislative principles set down by the Qinggovernment regarding the development of China's petroleumindustry, but also established a series of new provisions to23. See supra, note 7.19protect the petroleum resources, utilise private investmentsand provided for state participation in the exploitation ofoil resources. A particularly estimable feature of theGuomindang government's oil law was the serious attentiongiven to maintaining China's long-range interests indeveloping its petroleum industry. In handling foreigninvestments, the law showed itself to be an independent aswell as a flexible political instrument of the Government.During Guomindang regime, China grew more expert informulating its petroleum policy.The Guomindang government successively promulgated twolaws governing China's petroleum industry. The first wasProvisional Regulations on the Exploration and Development ofKerosene (Petroleum) Mine (hereafter ProvisionalRegulations). 24 The second one was the Mining Law (hereafterMining Law) 25 , which was proclaimed two years after theProvisional Regulations. The Mining Law was the basiclegislation governing the petroleum industry during the entire24. Promulgated by the ROC government in June of 1928 atthe request of the Agriculture and Mining Ministry.Translation and Edition Division of National LegislativeCouncil of the ROC edited, Zhong Hua Min Guo Fa Gui Hui Bian(Compilation of Laws and Regulations of The Republic ofChina), Volume 8, Book 6 (Shanghai, China: Zhonghua (China)Publishing House, 1934) at 266.25. Adopted by the 88th meeting of National LegislativeCouncil of the ROC on the 10th of May, 1930 and promulgated bythe National Government on the 26th of May, 1930. Ibid. at243.20period of Guomindang regime. The following sections offer abrief analysis of the Provisional Regulations and Mining Lawrespectively.A. The Provisional RegulationsThe Provisional regulations were tentative measures takenby the Guomindang government to manage its petroleum industry,remained in force for only two years. These rules werepromulgated with the aim of obtaining maximum revenues for thegovernment from the hydrocarbon production activities.Two distinguishing features can be discerned in theProvisional Regulations; government control of activities, andthe prohibition of foreign investment. Each will be examinedin turn.1. Government ControlThe Guominndang government was not simply satisfied withmaintaining the mining right of exploiting oil resources; italso wished ensure complete and direct management of theactivities of the petroleum industry. The ProvisionalRegulations laid conspicuously emphasis on the government'sintention to control the petroleum industry and promulgated21measures to bring this about. For instance, the law subjectedoil companies to close official supervision. In thisrequirement can be seen a desire for a degree of control andinvolvement which presages the state-run oil companies,granted exclusive privileges by the government; suchcorporations were to be established worldwide in the decadesfollowing the end of the second world war.The Provisional Regulations required that only two typesof companies could apply for a license; those classified as anofficially supervised oil company, or a company participatingin a joint - ventured with the government. The government wasentitled to place officials within either sort of company toexercise supervision over all aspects of management. 26Furthermore, the law give government the right tonationalize any licensed private oil company at any time. Ifthis was considered necessary by Agriculture Mining Ministryconsidered necessary, nationalisation might be effected aftersubmitting a report to the central government on thesituation. 2726 . Provisional Regulations. Supra, note 24. Article 3.V. Ibid. Article 2.222. Banning Foreign InvestmentThe Provisional Regulations were drafted against thebackground of intensely national feelings as regards theinvolvement of foreign oil companies. Prohibiting foreigninvolvement of foreign oil involvement evidences theindependent political stand of the Guomindang government atthat time. This stance can be explained in several ways.First, the income from exploitation of petroleum was animportant financial resource of the Chinese government, whichdid not want foreign corporations to share this benefit.Second, there was a backlash against the policies of the Qinggovernment. Due to weak political and military power, the Qinggovernment had to accept the requirement by foreign countriesto allow foreign enterprises to operate petroleum and otherindustries in China. The humiliating behaviour of the Qinggovernment in the face of foreign demands now had a perhapsinevitable consequence. When the Guomindang government cameinto power, its first policy in this area was to prohibitforeign attempts to recover crude oil from China.To demonstrate its patriotism, the Guomindang governmentresorted to the extreme measures in dealing with foreign23capital in the petroleum industry. The ProvisionalRegulations ruled out the possibility of foreign investment inChina's petroleum industry. The law would penalize anyviolation of the provision. These measures were justified onthe ground that they were in the best interests of China.Furthermore, moving against 'foreign economic plundering'demonstrated the political strength of the Guomindanggovernment in contrast to the precursor of the Qing Dynastygovernment.This policy was not without its costs. Foreign capitalmight have been utilised to promote the development of China'spetroleum industry. But these consideration were overruled byreliance on the long-established principle of self-relianceand self-sufficiency. The Chinese people believed thatwithout foreign interference China could develop and wouldcontinue to meet all its economic needs on its own. Besides,foreign political and economic invasions were bitterlyresented by the Chinese people. These feeling influenced theactions of policy-makers accordingly. In the event, theclosed door policy isolated China from the outside world andgreatly hampered the progress of the Chinese society. 28m . There was another reason for the Chinese governments,especially the governments in the feudal dynasties, to adopta closed door policy. The past Chinese rulers were afraidthat the incoming foreign influence would encourage thedevelopment of the capitalist elements in the Chinese society.The success of capitalism in China would jeopardize thefeudalist dictatorship of the Chinese dynasties.24However, one result of these policies was that the Chinesepetroleum industry was a domestic one for many years, beforethe participation of foreign investors in the late 1970s. Therestriction was lifted - in appearance only - later, in theMining Law. 29The restrictions on foreign participation meant that oilcompanies were to use 100% Chinese funds. Borrowing fromabroad left the borrower open to confiscation of assets. Oilcompanies were not allowed to employ foreign staff, with theexception of technicians. The contract of the employment offoreign technician would be subject to the approval of theAgriculture and Mining Ministry."The Chinese petroleum industry expanded during Guomindangregime. Control of the sale of crude oil was a new concern ofthe government. The Guomindang government implemented a staterestriction on the sale of petroleum. The ProvisionalRegulations provided that the government had the preferentialright to purchase oil production. Contract for the sale ofoil between Chinese oil companies and foreign traders weresubject to the approval of the Agriculture and Mining29. In spite the relevant provision in the Mining Lawpromulgated later on regarding the permit of the participationof foreign shares in China's state-run mining companies,foreign involvement in petroleum industry in the Guomindang'sregime was not accepted in practice.M. Supra, note 26. Article 4.25Ministry. 31B. The Mining LawThe Mining Law proved to be of long duration and stillapplies in Taiwan.^The promulgation of the Mining Lawinvalidated the Provisional Regulations.^The leadingprovisions of Mining Law applicable to the petroleum industrywere as follows:(a) All petroleum deposits located within the territoryof the Republic of China were owned by the state. 32(b) The government enjoyed the preferential right topurchase produced petroleum, and the exportationof petroleum would be subject to the approval ofthe government.(c) The government would establish reserved oilrecovery zones if necessary.(d) All oil fields would be run directly by the state.In the event that the government felt that it was31^Ibid. Article 6.32 Mining Law. Article 2. Supra, note 25.26not necessary for the state to run a particular oilfield, a private oil companies might be allowed tolease that oil field. However, the lessee was notallowed to use foreign capital. 33(e) If a private oil company leased an oil field fromthe government, the lease term would be no longerthan twenty years. The term might be extended butrenewal would not be more than another twentyyears.(f) The government would organise state-run companiesto manage oil fields.^Private and foreigninterests34 should be allowed to participate thestate-run oil company. 35 State-run oil companieswould be in the charge of the Agriculture andMining Ministry. 36M . Ibid. Article 9.U . Foreign shares might be claimed in the state-runmining companies; but the percentage of foreign shares shallbe no more than 50%, the number of foreign directors should beno more than half of total number of directors and thechairman and general manager should be Chinese. Ibid. Article5 and 50.M . Ibid. Article 10 and 16.36. Ibid. Article 48.27The Mining Law had three major objective:1. Establishing State - Run Oil Companies.According to the Mining Law, petroleum industrialactivities would be for the most part be operated directly bythe state, and the government would rely on state-run oilcompanies as a principal means of recovering petroleum. Thepolicy had a number of advantages for the government. First,the government could control the petroleum industry throughstate-run oil companies and directly manipulate the wealthcreated to support the national economy. Second, thegovernment could access a pool of badly needed administrativemanagers and technicians trained in the oil companies, toassist with the development of other industries in China.Third, the government could readily adopt changes in policy asrequired by a given situation in order to better promote itsdevelopment of the oil industry. The most important advantageof this policy was that the petroleum could be available foruse in national defence. 3737. This was one of the factors which influenced thedevelopment of petroleum policy in the United Kingdom in theearly decades of this century.282. Measures to Protect Petroleum Resources.The Mining Law stipulated two provisions to protectpetroleum resources. The first was to set up reserved oilrecovery zones. The second was to provide a fixed lease termfor private oil companies during which they could recover oil.These two provisions would effectively protect thepetroleum resources and potentially increase the income of thegovernment. When the state had insufficient capabilities torecover the oil resources in a promising area, the governmentwas entitled to set up reserved zone to prevent the oildeposit from being damaged. The policy took the permanentinterests of the country into account, which marked asignificant difference from the former Chinese oil policy.The purpose of limiting the lease term of private oilcompanies was to preclude private enterprises from monopolythe oil resources, to exercise the government's positivedominion over the petroleum, and to ensure the maximumeconomic benefit to the state. Furthermore, since the lawprovided a limited lease term, private oil companies wereunder pressure to accelerate their exploration or productionof oil, which would also be of help to China's economy.293. Optimum Utilisation of Private and Foreign InvestmentThe Mining Law enabled Chinese oil companies toparticipate in the petroleum industry. In addition, the MiningLaw also allowed foreign capital to be invested in theindustry, thereby providing multiple economic forces todevelop the petroleum industry. The Guomindang government'spolicy regarding foreign investments in the petroleum industrywas to view foreign capital as a supplementary economic factorin support of the development of the industry. Foreigninvestors might participate in state-run oil companies undercertain limitations and become a share holders of China'sstate-run oil companies.The settled policy of the Guomindang government onforeign investment in the petroleum sector differed markedlyfrom that of the Qing dynasty. The Qing government was forcedto accept foreign investment, but the Guomindang governmentintended to utilize foreign capital in more focused way. Thepetroleum policy of the Guomindang government reflected anofficial desire to use foreign money to accelerate thedevelopment of China's petroleum industry. This considerationwas similar to that of PRC's when it issued an invitation toforeign investment many years later.30C. ConclusionThe Mining Law was to govern the development of China'spetroleum industry during the remaining years of theGuomindang regime. The law demonstrated an enhancedlegislative proficiency in the government of the developmentof China's petroleum industry from this point on. The MiningLaw was the vehicle whereby the Guomindang government broughtabout the promotion and development of the petroleum industryin China. The law laid down more concrete and pragmatic thanProvisional Regulations. The general principle of theGuomindang government's petroleum policy was to increase thenational economic forces and expand the strength of state-runoil companies to develop petroleum industry. This principlewas well expressed in the Mining Law.Notwithstanding the provisions of the Mining Lawregarding possibilities for private Chinese and foreignparticipation, control of the petroleum industry remainedfirmly in the grasp of the Guomindang government. The regimegave serious consideration to the petroleum industry sincepetroleum was a very important material for the development ofthe economy, and also for national defence, and hence domesticand foreign politics. The Guomindang government did not allow31private or foreign capital to develop the petroleum industryindependently of official control. Prior to the founding ofPRC, state run oil companies were the rule in China.The Guomindang government's petroleum policy underwenttwo stages of development. The first stage lasted until theWorld War Two. During this stage, the focus of policyremained on the economic value of the petroleum and thelegislative objective was to protect national economic benefitand increase government revenue. Except for the legislationitself, the government did not offer special assistance to thepetroleum industry. 38The second stage began at the breakout of World War Two.During this stage, the Guomindang government came to a fullrealisation of the importance of oil and gas to its militaryand politic affairs, and began to support its petroleumindustry wholeheartedly. The development of the petroleumindustry was now given top priority in the government'spetroleum policy.38 Between 1921-1929, some well known geologistssurveyed the Yumen area, but the geological reportsattributable to the surveys were then ignored by thegovernment. It was only after WWII that actual developmentbegan. In fact, the Yumen Oil Field was the biggestdevelopment by the Guomindang government. See supra, note 20at 10.32During the period of the Guomindang government, oilexploration had been limited, and had taken place mainly inGansu Province, Shaanxi Province and Sichuan Province, wherehistorical chronicles recorded oil discoveries in ancienttimes. The development of China's petroleum industry boomedduring World War Two. During the Resistance War AgainstJapan, petroleum could not be imported from abroad. TheChinese government was pressed to produce as much oil aspossible to meet national needs during the war. It wasagainst such a background that the Yumen Oil Field, thebiggest oil field discovered by the Guomindang government wasfound. 39 Between 1939 and 1948, the total oil output ofYumen Oil Field was 455 thousands tons, accounting for 72.3%of China's national oil production at that time.After World War Two, China not only had the Yumen OilField but also took over some oil storage facilities andseveral oil refineries from the Japanese in the northeast of39 Located in Gansu Province, Yumen Oil field wasdeveloped in 1940. It was not only the biggest oil field inthe Guomindang regime in China, but also one of the earliestdeveloped non marine facies oil field in the world. Thedevelopment of Yumen Oil Field greatly promoted thedevelopment of China's petroleum industry. Yumen Oil Fieldwas an important base of China's petroleum industry.Petroleum produced from Yumen Oil field forcefully supportedChina's economic construction. Many of China's well knowpetroleum engineers, geologists and other technical staffsobtained were trained in Yumen Oil field. See supra, note 20at 11. (my translation)33China and Taiwan. In the year following the war, the extentof China's petroleum industry broadened to an unprecedentedscale. This expanded industrial required a comprehensivepolicy to guide it. The Guomindang government's petroleumpolicy therefore began to stressed the protection of the newlyexpanded petroleum industry, and to encourage the productionof petrochemicals. The Guomindang government also wished todislodge imported oil product from the Chinese oil market.In 1945, the Guomindang government established China OilCorporation, which was the first national oil company inChina. 40 The policy and experience of the Guomindanggovernment anticipated the development of similar policies bythe other developing countries. The legislative experiencesof the Guomindang government in the development of thepetroleum industry constituted valuable legacy to the current40^u. ....over a long period of time, China's domestic oilmarket was controlled by foreign companies. Although thismarket was closed because of the breakout of Anti-Japanese War(World War Two), foreign oil companies wished to come backafter the war. After World War Two, the provisionalauthorities appointed by the Chinese government to reorganisethe Chinese petroleum industry strongly proposed that thefuture Chinese oil market should no longer be controlled byforeign companies and China's petroleum industry should betotally run by the Chinese government. This proposal wasaccepted by the Chinese government. Afterwards, the Chinesegovernment established China Oil Corporation as a national oilcompany. China Oil Corporation was founded in July 1, 1946.Since then, China's petroleum industry and its relevantaffairs in the Guomindang regime were in the charge of ChinaOil Corporation." ( China Oil Corporation ceased to exist inMainland China after the downfall of the Guomindanggovernment) Supra, note 19 at 10, (my translation).34Chinese government.Provisional Regulations and Mining Law were thereforeimportant legal documents for the study of the evolution ofChina's petroleum law and policy. After the Guomindanggovernment fled to Taiwan, mainland China did not promulgatea similar kind of law to govern its petroleum industry. Thepetroleum law formulated by the Guomindang government was wellconsidered. The Guomindang government's petroleum law wasevidence that China already had effective laws to protect andsupport its petroleum industry. Many of the legislativeprinciples expressed by the Mining Law were absorbed by thelegislators of the PRC government in the 1980s to developChina's petroleum industry.IV. The PRC Government's Petroleum PolicyThe idea that China is a country richly blessed with oilreserves was repeatedly suggested by many classic Chinesechronicles, which caused all the Chinese governments inhistory to truly believe that giant oil reservoirs werelocated somewhere in the national territory. Solving China'snational energy problem once and for all through the discoveryof huge crude oil reserves remained a dream for successiveChinese governments. The nationalization of China's petroleumindustry, the organization of a state-run oil company and the35plan of absorbing private and foreign investment used to bethe cardinal themes of petroleum laws and policies promulgatedby the Qing dynasty and the Guomindang government. Thefundamental purpose of all those petroleum policies was thediscovery of sufficient oil to meet the demand of China'seconomy.The PRC government's petroleum policy had the sametarget as the policies adopted by the two previous Chinesegovernments. With the beginning of the communist regime inBeijing in 1949, the oil industry in China entered a new stageof development. The new government was very conscious of theimportance of this particular field of industry and placedgreat emphasis on it in economic planning. After the foundingof the People's Republic of China, private and foreignenterprises disappeared from mainland China. The PRCgovernment had to rely only on state action alone to developthe petroleum industry. While the petroleum law and policy ofthe Qing dynasty and the Guomindang government centred on howto harness the state, private and foreign capital in thedevelopment of the petroleum industry, the PRC's petroleumpolicy was centred on how to develop the petroleum industry bythe state action alone. Because of its centralised politicalpower, stronger than that of the Guomindang government and theQing Dynasty, the PRC could mobilize all the active forces inChina to reach its goal, and was thus in a better position to36secure the development of China's petroleum industry. The PRCgovernment spared no efforts in the exploration for newsources of oil, and finally accomplished the purpose ofbuilding China into a major oil producing country.As regards legislation, any review of the PRCgovernment's petroleum policy must be divided into twohistorical periods. The first period covers from the 1950s tothe 1970s. During this period, China developed its petroleumindustry behind closed doors. The second period commenced inthe 1980s. Since then, China has opened its doors to theinvestment of international capital through the implementationof the policies of economic reform. This required adjustmentin petroleum policy. One result of this change in policy isthat the Chinese government decided to invite foreign oilcompanies to help it to exploit its offshore oil resources.To meet this goal, some laws related to the petroleum industryand oil and gas operation had to be enacted at the outset.Since then, the development of the PRC's petroleum industryhas been for the first time governed by a system oflegislation.The petroleum policy of the PRC will be examined in thetwo following sub-sections. The first concerns petroleumpolicy before the 1980s, and the second looks at thedevelopments since then.37A. Petroleum Policy before the 1980s:Before the 1980s, the PRC government's policy makingprocedure was quite different from that of western countries.The government's petroleum policy was not worked out throughparliament and did not assume the form of laws, acts orregulations. The PRC government's petroleum policy wasdecided by the politburo and delivered in the form ofadministrative orders. Since any decisions regarding China'spetroleum industry fell into the category of a state secret,it is rather difficult to trace the history of China'spetroleum policy during this time. In addition to pervasivesecrecy, the PRC government's policies were subject tofrequent change, which increases the difficulty of doingcomprehensive research on the topic. Understanding the PRC'spetroleum policy must proceed through examining China'spetroleum industrial activities.The PRC government was aware that petroleum was thelifeblood of China's national economy and national defence. Assoon as the PRC government unified mainland China, it placedthe development of the petroleum industry on the most urgentagenda and did its best to support petroleum exploration andproduction. On the orders of the government, huge amounts of38money and personnel were committed to the exploration anddevelopment of oil fields. This strong government support ofthe petroleum industry is the key to understanding the PRCgovernment's petroleum policy.There are two notable features in the PRC's petroleumpolicy before the 1980s:1. State Monopoly:The Communist Party established the PRC as a socialistcountry. The government's general economic policy was tonationalise all the private enterprises. In 1956, the PRCgovernment launched a political movement called the SocialistTransformation of the System of Ownership of the Means ofProduction", with the result that all the privateenterprises in mainland China were merged into state-runenterprises. Private capital as an economic force disappearedfrom China after this time. The objective of the petroleumlaws and policies in the Qing dynasty and the Quomindanggovernment - to monopolise the development of the petroleumindustry - was easily achieved by the PRC government.. In the name of this movement, the PRC government hadall the private enterprises annexed by the state-runenterprises. From then on , private enterprises were abolishedin mainland China.39At the same time, the Chinese government had fewdiplomatic relations with western countries. It wasimpossible for international oil companies to enter China andwork in the petroleum sector there.In July of 1955, the Chinese government established theMinistry of Petroleum Industry and upgrade the level of thepetroleum industry in China. Since then, China's petroleumindustry has been under the direct leadership of the centralgovernment. 42 The Ministry of Petroleum Industry managed allthe oil fields in mainland China and the Chinese governmenthad empowered it to enjoy the right of searching for anddeveloping petroleum in China. China invested huge financialcapital43 and mobilised enormous human resources" to carryout the exploration for crude oil. With these investments,. Before 1955, China' petroleum industry was in thecharge of the Ministry of Fuel Industry. Supra, note 20, at23.43. China's petroleum industry steadfastly focused on theexploration. During the period of the First Five Year Plan(1953-1957), the Chinese government allocated RMB 1.9 billionYuan for the exploration of petroleum. The money made up oftwo third of the total state budget for the energy industry atthe same period. Chen, Cheng-siang, Zhong Guo De Shi You Zi Yuan Ji Oi Fa Zhan (Petroleum Resources and Their Developmentin China)^(Hongkong: the Chinese University of Hongkong,1968) at 7.44. For example, in 1952, according to the order ofChairman of the PRC government, a whole division of armysoldiers were transferred to be oil workers. So were many moreother army soldiers. Supra, note 20 at 2.40the development of China's petroleum industry then began totake off. During the following three decades, the Ministry ofPetroleum Industry in Beijing commanded the management of theproduction of every oil field within the borders of China.This policy meant that the governments of oil-producingprovinces had no right to participate in the exploitation ofoil deposits, nor could they exercise any control overoperations. This was an exclusively central governmentmonopoly.2. Self-reliance:China is a very large country with a huge population andno other country in the world could be relied upon to help itto solve its energy problems. The Chinese government had torely on itself to develop its petroleum industry.Since the Opium War of 1840, China was reduced to a semicolonial country. When the PRC government was set up, itdenounced all the unequal treaties signed by the overthrownChinese governments and abolished foreign concessions inChina. The PRC government made China a politicallyindependent country. In consequence, no foreign influencecould survive in the PRC's petroleum industry.41In the 1950s, western countries placed an economicembargo on the PRC government due to the Cold War policy ofthe U.S. government. As a result, China could not import anyadvanced equipment or technology from foreign countries. Inthe 1960s, China suffered from a similar action taken by theSoviet Union. In the face of this international economicpressure, China closed its doors to undertake economicreconstruction. The hostile policy of foreign countriesregarding the PRC was a crucial factor in the Chinesegovernment's adoption of their self-reliance policy.In practical term, China's self-reliance policy made agreat contribution to the development of its petroleumindustry. Almost all the large oil fields currently knownwere discovered and developed by Chinese geologists, engineersand other experts, without foreign assistance. In the 1950s,China discovered the Lenghu Oil Field in Qinghai Province andthe Karamayi Oil Field in the Xinjiang Uigur AutonomousRegion. Soon after, China discovered the Daqing Oil Field,which is the biggest oil field in northern China, and theHuabei Oil Field and Shengli Oil Fields in eastern China. Inthe 1963, China's petroleum industry achieved a significantgoal when the Chinese government proudly declared that crudeoil produced from China would meet its own basic demand.42The success created by the PRC government in thedevelopment of its petroleum industry was solely made due tostate decisions and actions. In the process of thedevelopment of the petroleum industry, the Chinese governmenttrained large numbers of technicians and manufactured all therequired oil rigs, equipment and even oil refinery complexes.The PRC government did its utmost to cultivate the petroleumindustry and it was eventually successful. The success ofChina's petroleum industry reinforced China's believe in itsself reliance policy with a result that this policy wasapplied nationwide to all the industries.State monopolization and self-reliance in the developmentof the petroleum industry were the hallmarks of China'spetroleum policy before the 1980s. Prior to the 1980s,China's petroleum policy played an important role in thedevelopment of its oil industry. However, China's priorpetroleum policy had its limitations. Firstly, as a result ofthe central government's monopolization of China's petroleumindustry, the provincial government had no role to play. Oneconsequence of this was that the local government economybarely benefitted from the prosperity of the petroleumindustry. Secondly, the total emphasis on self-reliance meantthat advanced foreign technology or management experience,which could improve China's petroleum industry, were not being43used. Finally, there was no petroleum law in the PRC before1980s. Without a petroleum law, China's petroleum industrycould not be legally protected and its development could notbe maintained at a permanent, steady and efficient level.Without a petroleum law, the Chinese public could notsupervise the government's petroleum policy and could notdefend their interests in the petroleum industry.B. Petroleum Policy During the 1980s to the Present:The essential difference between China's petroleumpolicy formulated prior to the economic reform of the 1980sand that formulated during and after that time was that thepetroleum industry was no longer 'off limits' to internationalpetroleum companies. This marked a significant new era forChina's petroleum industry.With the economic reform movement and open door policy,a dramatic change took place in China's oil and gas policy.The most significant change was that the Chinese governmentdecided to open its continental shelf to international oilcompanies for the exploitation of petroleum. For this purpose,the Chinese government proclaimed a series of laws,regulations and detailed policies to govern development ofChina's offshore petroleum resources by means of domestic-44foreign joint ventures. In 1982, China promulgatedRegulations of the People's Republic of China on theExploration of Offshore Petroleum Resources in Cooperationwith Foreign Enterprises. 45 In 1986, China promulgatedMineral Resources Laws of the People's Republic of China(hereafter Mineral Law)." The Ministry of PetroleumIndustry of China also promulgated a Provisional Method ofRegistration and Management on the Exploration andExploitation of Petroleum and Natural Gas in 1987. 47 Withthe introduction of this laws, the PRC government's petroleumpolicy began to take shape.The Mineral Law is the fundamental law governing thetapping of oil resources in China. 48 The only provisiontherein relevant directly to the petroleum industry is thereaffirmation that the ownership of mineral resources belongs°. Adopted at the regular session of the State Councilof the PRC on Jan. 12, 1982; promulgated by the State Councilof the PRC on Jan. 30, 1982.46. Adopted at the 15th Meeting of the Standing Committeeof the sixth National People's Congress, promulgated by theorder No. 36 of the President of the People's Republic ofChina on March 19, 1986 and effective as of October 1, 1986.47.Approved by the State Council of the PRC on Dec. 16,1987; promulgated by the Ministry of Petroleum Industry onDec. 24, 1987.48 "This Law must be observed in exploring andexploiting mineral resources within the territory of thePeople's Republic of China and in the sea areas under itsjurisdiction." Mineral Law, Article 2:45to the state. 49As a result of the general reform of China's economicpolicy, China's petroleum policy since the early 1980s becamemore complex. It can be divided into two parts. The firstpart applies to the onshore oil fields and all the otherpromising areas with good prospects of oil and natural gas.The policy for these areas remains the same as before: statemonopoly and self-reliance. The second part applies to theoffshore oil industry and the onshore frontier areas. Thesignificant difference initiated by this policy is theinvitation to foreign investors, and the possibility ofcooperation with international oil companies in theexploration and development of the petroleum industry inoffshore and frontier areas.The petroleum laws and policy promulgated by the PRCgovernment since the early 1980s were mainly designed togovern the Sino-foreign joint venture oil projects. Comparedwith the PRC government's petroleum policy prior to the 1980s,the present policy has two main difference:49. "Mineral resources shall be owned by the state. Thestate ownership of mineral resources, either near the earth'ssurface or underground, shall not change with the ownership orright to the use of the land which the mineral resources areattached to." Ibid. Article 3.461. The Establishment of New Management Mechanism:International oil companies are encouraged to participatein the development of the petroleum industry in the tensouthern provinces of China, but especially on China'scontinental shelf. To meet the new situation, the Ministry ofthe Petroleum Industry of the PRC was no longer the exclusivemanager of China's petroleum industry." In 1982, theChinese government established China National Offshore OilCorporation (CNOOC), with a mandate to cooperate with foreignoil companies. To date, the development of China's petroleumindustry has attracted dozens of international oilcompanies."". Since its establishment, the Ministry of PetroleumIndustry possessed two functions: the competent governmentauthorities and the managing organs of the petroleum industry.In 1989, the Ministry of the Petroleum Industry converted intoChina Oil and Natural Gas Corporation. The competentauthorities of the government over the petroleum industry isthe Ministry of Energy at present.51 . Up to the end of January of 1992, China NationalOffshore Oil Corporation has entered sixty six petroleumcontract and agreements with forty eight oil companies fromthirteen countries. Foreign investment for the explorationand development in China's offshore petroleum industry hasexceeded three billion U.S. dollars. The oil output fromChina's offshore oil industry will be over three million tonsin 1992. Sheng Zuren, " Zhong Guo Hai Yang Shi You ShengChan Ri Xin Yue Yi (China's Offshore Oil Production ChangesWith Each Passing Day)", People's Daily (overseas edition),Jan. 30, 1992.47Establishing a state-run oil corporation in Chinasymbolised a turning point in the PRC's petroleum policy.This indicated that the Chinese government was going to endits rigid traditional government monopoly in the management ofits petroleum industry and was ready to introduce fresh forcesto reform its petroleum industry. This was the first concretestep taken after the issuing of China's offshore petroleumlaw.2. The Participation of International Oil Companies:Since the establishment of relevant laws permittingforeign oil companies to participate in China's offshore oilindustry, self-reliance is no longer the only guidingprinciple of China's petroleum policy. The participation ofinternational oil industry in China's exploitation of oilresources has affected the development of China's petroleumindustry.The PRC government's earlier oil policy, which was madeand effected in an isolated environment, obstructed thefurther development of China's petroleum industry. Toaccelerate the modernization of this industry, China had toopen its door to foreign investment. The Chinese government48was anxious to quicken the pace of the development of China'spetroleum industry. It hoped that the utilization ofinternational capital, advanced technology and scientificexpertise could help it to achieve the purpose.To open China's offshore petroleum industry to foreigninvestment was but a start in the reform of China's petroleumpolicy. The PRC government dared not ventured to deviate toofar from the previous policy directions. 52 Because of theaforesaid reasons, the current China's petroleum policy hasthe following characteristics:(a) the state monopoly policy remains the basic policyas regards the development of major oil fieldslocated on mainland China, and(b) the joint venture policy is carried out in offshoreoil industry and onshore frontier area.In China's petroleum policy, self-reliance still remainsas the dominating principle. However, the requirement ofChina's economic reform has made the Chinese government adopt52 . At that time, a prevailing Chinese proverb was verypopular among the senior Chinese government leaders, e.g."feeling stones to go across the river (Mo Zhe Shi Tou GuoHe)". To go across the river means to reform China'seconomy. Stones here refer to policies. The Chinese policymakers do not know which policy is firm and reliable for itseconomic reform.49a more and more flexible policy to develop its petroleumindustry.V. ConclusionChina evolved into a major oil producing country in the1960s. The PRC government's accomplishment in the petroleumindustry finally achieved what all the previous Chinesegovernments had only hoped to do. To some extend, the successof the PRC government's petroleum policy owes much to itspredecessors' efforts and there is much in the PRCgovernment's petroleum policy that is comparable with thepolicies of the Qing dynasty and the Guomindang government.When compared to other countries, China's petroleum policiesare relatively unique. This is due, in large part to thereasons of historical convention, social economic development,domestic politics, international situations.A conclusion may be drawn from the study of the evolutionof China's petroleum law and policy. In China, the centralgovernment has closely controlled the development of thepetroleum industry and at all times, the petroleum industryremains a servant of the government's general economic policy.The question whether to employ foreign investments in itspetroleum industry has been a common theme of the last three50Chinese governments. Suffering many setbacks in the modernera, China keeps on improving its petroleum policy and law topromote the development of its petroleum industry. Thepetroleum policy formulated by the PRC government in the 1980smeant that the development of China's petroleum industry hadstarted on a new path. When China began to shift itsattentions to the outside world to develop its petroleumindustry, it symbolised a remarkable advancement for China inthe legislation of petroleum law.China has commenced to break through the orthodox policywhich hampered the development of its petroleum industry. Thecooperation between China and international oil companies inthe exploitation of petroleum resources will vitalise China'spetroleum industry and lead it to a new realm. The change inChina's petroleum policy has put China's petroleum industry tomove forward from a new starting point.51Chapter TwoPolicy and Laws Governing the Exploitation of OffshorePetroleum Resources in ChinaIn keeping with the current of the time, ten years ago,the Chinese government struck out on a new path to develop itspetroleum industry and opened its offshore territories tointernational petroleum companies. In order to attractforeign investment, the Chinese government promulgated itsoffshore petroleum law and other relevant laws applying tocooperative oil and gas activities in its offshore areas, andalmost every foreign oil company was lured by the excitinghydrocarbon exploration prospects in the large expanse ofChinese waters.China's offshore petroleum law was one of the moreimportant legislative acts promulgated during 1980s in China.This law reflected general principles and official stands ofthe Chinese government regarding foreign investments. Theestablishment of such a law enabled many foreign oil companiesto invest in China's offshore petroleum industry, whichgreatly promoted the development of this industry. In a way,China's offshore petroleum law pointed a new direction for the52Chinese government to develop its economy in future years.The study of China's offshore petroleum policy and lawpossesses a far reaching practical significance, going beyondhydrocarbons or even natural resources.This chapter attempts to identify and analyze the policyand laws relevant to oil and gas activities in the Chineseoffshore. To this end, the background, the legislativeprinciple, context, and salient rules will be considered.I. China's Rational for Inviting Foreign Exploitation of Its OffshorePetroleumIn the 1980s, a radical change of China's petroleumpolicy surprised the people who were interested in China'saffairs in the western part of the world. In 1974, China'sMinister of Foreign Trade stated that China "will never try toattract foreign capital to exploit domestic or foreign naturalresources in conjunction with other countries." 53 The aboveproclamation on behalf of the Chinese government impressedupon all the foreign legal experts on China's affairs at thattime that China would stick to its self reliance policy todevelop offshore petroleum industry.53 . Kevin Fountain, The Development of China's OffshoreOil ( The China Business Review, Jan-Feb, 1980).53However, before long, the Chinese government implementedan offshore petroleum policy which was comprehensivelydifferent from what it had pronounced. This fundamental changewas initiated in 1978. It was in this year that China beganto open its door to the foreign world. The Third PlenaryMeeting of the Eleventh Congress of the Central Committee ofthe Communist Party of China made a decision to terminate itsconcentration on mass political movement and focused itspolicy on the development of the economy. 54 In his governmentreport of 1982, the Chinese premier announced to the ForthMeeting of the Fifth People's Congress that the Chinesegovernment had decided to exploit offshore oil in cooperationwith foreign countries on the basis of mutual benefit. 55 Fromthen on, China's continental area was legally opened to theinternational oil industries for tapping petroleum resources.The major international oil companies welcomed China's newpetroleum policy, as is evidenced by the fact they rushed into54.The meeting was held during December 18-22, 1978 inBeijing, which was considered as a milestone of China'smodernization drive.^Between 1966 and 1976, led by MaoTsetung, Chairman of the Chinese Communist Party, a culturalrevolution took place in China. This cultural revolutionbrought the development of China's economy to a stand-stilland hurled the whole country into a political chaos.Following the death of Mao in 1976, new Chinese governmentleaders made a decision to end this cultural revolution and toshift the focus of the Chinese policies on the development ofeconomy.55. Supra, note 20 at 176.54China to make bids for the exploration rights in China'soffshore territories. Two questions arise at this point: whydid the Chinese government substantially alter its priorpetroleum policy and open its offshore area to foreign oilinvestments? Second, what was the objective of China'soffshore petroleum policy?Two reasons could be given for the promulgation ofChina's new offshore petroleum policy:A. Energy CrisisAt the time, it was little known that China was facing apotential energy crisis at the end of the 1970s. China's oiloutput was 100 million tons in 1978, 106 million tons in 1979and 105 million tons in 1980. No matter how hard thegovernment tried, its oil production hovered around 100million tons and refused to go up any further. Owing to the10 years of fundamental political movements in previous years,beginning with the Cultural Revolution, China had paid noattention to the exploration of oil, and the available oilreserves were being rapidly consumed. If China could notpromptly increase its proven oil reservoir on a large scale,it was very likely that the Chinese government would need toimport crude oil again. It was at this time that the Chinesegovernment initiated a large scale economic reform. Without55sufficient production of petroleum, China's new economicdevelopment plan would fail. The Chinese government need toexpand the exploration and search for new oil resources tosupport its newly made economic policy. Since offshore Chinawas considered to be a second Persian Gulf by geologists andthe vast stretches of Chinese waters seemed extremelypromising for oil discovery, the Chinese government expectedan immediate benefit from recovery of oil there, andeventually determined on the exploitation of offshore oildeposits. At the beginning of 1980, the Chinese governmentformulated three policies to develop China's petroleumindustry, the second one being to open its offshore area. 5656. In an officially published document named TheArrangement of National Economic Plan for 1979, China'sNational Planning Commission pointed out that the nationaleconomic plan for the petroleum industry was to strengthen thegeological survey to increase oil reserves. For thatobjective the Chinese government then declared a new policyfor the development of petroleum industry:1. Contracting one hundred million tons of crude oilproduction to the Ministry of Petroleum Industry every yeari.e. MOPI was only required to turn over one hundred milliontons of oil annually to the state and was allowed to sell theexcess of oil beyond the quota in the international oil marketand retain the income at its disposal for the exploration anddevelopment of oil. In the meantime, the government wouldcontinue to allocate fund from state budget to the petroleumindustry at the 1981's level.2. Opening offshore continental shelf to internationalpetroleum industries and inviting foreign bidders to exploreChina's offshore oil .3. Granting the right to MOPI to import advanced foreigntechnology and equipment and borrow loans from internationalbanks.Because those policies broke through the boundary of longlasting self-reliance rules governing the petroleum industry,it was named "three pieces of important policy" by China's oilcircles. See Ibid. at 59.56B. The Requirement of the Economic ReformsThe development of China's onshore petroleum forced theChinese government to develop its offshore oil reserves. Forthree decades since the founding of the PRC government, thepetroleum industry provided endless funds and valuable energyfor China's economic growth. The financial income turned overto the government from the petroleum industry gradually becamea substantial part of China's national revenue. The foreigncurrency earned by exporting oil and oil products stronglysupported China's modernization. The following are two tablesdemonstrating the importance of the petroleum industry toChina's finance.57Table 1:Percentage of State Revenue Contributed by the PetroleumIndustryPeriodContributed Revenuefrom Petroleum Industry(100 million Yuan)Percentage of StateRevenue^(^%)1953-1957 10.5 0.771958-1962 41.2 1.951963-1965 48.95 41966-1970 181.2 7.21971-1975 402.7 10.31976-1980 658.3 13.31981-1985 510.6 7.5Table 2:Percentage of State Exports Contributed by the PetroleumIndustryPeriodTotal Petroleum Exports(100 million US$)Percentageof StateExport (%)Total Amt Crude Oil Oil Product1961-1962 0.05 0.02 0.03 0.041963-1965 0.28 0.13 0.15 0.41966-1970 0.79 0.26 0.53 0.61971-1975 18.77 13.23 5.54 7.11976-1980 98.60 71.65 26.95 17.61981-1985 267.4 192.3 75.1 23.21 1961-1985 385.9 277.6 108.3 16.1^I(The above tables are cited from China Today, PetroleumIndustry, Vol.1, Chapter 5, pp 73)58To accomplish its plan for economic reform which was laiddown in the late 1970s, the Chinese government needed toexport more crude oil than before to increase its nationalrevenues. Moreover, the expanding economy kept on consuminggreat amounts of oil.Around the early 1970s, oil prices were skyrocketingbecause of the action taken by OPEC. Meanwhile, the U.K. andNorway had discovered tremendous oil reserves in the North Seaarea, which attracted the interest of international petroleumcompanies to all the other undeveloped continental shelf areasin the world. The vast offshore territory of China certainlybecame a place which the international oil capital yearnedfor. Such a favourable situation was no doubt a factorinfluencing the Chinese government. The urgent need for oiland available foreign currency for the development of itseconomy made the exploitation of China's offshore oilresources an imperative concern of the Chinese government.The Chinese government pinned its hopes on the discovery ofoffshore oil fields. As a result, there would probably be nosingle issue so important to China in the 1980s as thedevelopment of its offshore oil. The offshore oil industrybecame the biggest project of Sino-foreign joint venture inChina in that decade.59The Chinese government wished to be able to exploit itsoffshore oil as soon as possible, but it was short of thenecessary funds and the requisite subsea oil recoveryexpertise. International oil companies also wish to be ableto participate China's offshore oil industry. They have thefinancial funds, advanced equipment and expertise that Chinaneeded. The cooperative exploration of China's offshore oilresources would benefit both the Chinese government andinternational oil companies. It was therefore natural thatthe Chinese government would collaborate with foreign oilcompanies to tap its offshore oil resources.The need to develop the petroleum industry and economicreform plan compelled the Chinese government to deviate itstraditional state policy of self-reliance. Nevertheless, itdid not move too far away from this principle. The areasdesignated for the development of the petroleum industry atthat time were confined to the continental shelf.Against such a background, the Chinese government workedout its offshore petroleum policy. China's rationale toinvite foreign oil companies to explore its offshore petroleumresources was to absorb foreign capital and to use foreigntechnology in its petroleum industry so as to accelerate thedevelopment of China's economy. This was also the central60part of China's offshore petroleum policy and the legislativepurpose of China's new petroleum law.II. Main Provisions of PRC's First Mineral Resources LawThe decision made by the Chinese government to absorbforeign investments in order to develop China's offshore oilpetroleum industry required it to formulate a series ofrelevant laws. These include the fundamental law governingthe petroleum industry of offshore China - the Regulations ofthe People's Republic of China on the Exploitation of OffshorePetroleum Resources in Cooperation with Foreign Enterprises(referred to as 'the Regulations' hereafter). 57 This was thefirst marine mineral code established since the founding ofthe PRC.In a broad sense, the formulation of the Regulations wasintended to safeguard China's sovereignty over its petroleumresources, maintain its economic interests and define normsfor foreign investors in offshore China. The direct purpose ofthe Regulations was to maximize utilisation of foreign fundsand advanced technology in developing China's offshore oilindustry. The promulgation of the Regulations also met the57. Adopted at the regular session of the State Councilof the PRC on January 12, 1982; promulgated by the StateCouncil of the PRC on January 30, 1982.61requirements of foreign investors. They needed a firmcommitment from the Chinese government in proper legal form toprotect their interests before sinking their funds into oilventures.To serve the above legislative purposes, the Chinesegovernment has formulated three basic principles to giveeffect to the Regulations. The first principle is that ofpermanent sovereignty over natural resources, as pronounced bythe Charter of Economic Rights and Duties of States which wasadopted by the General Assembly of the United Nations onDecember 12, 1974. 5858. In order to promote the establishment of newinternational economic order based on equality, sovereignequality , interdependence, common interest and cooperationamong all nations, on December 12, 1974, the General Assemblyof the United Nations adopted Charter of Economic Rights andDuties of States. The article 2 of the said Charter provides:1. Every state has and shall freely exercise fullpermanent sovereignty, including possession, use and disposal,over all its wealth, natural resources and economicactivities.2. Each state has the right :(a). To regulate and exercise authorities over foreigninvestment within its national jurisdiction in accordance withits laws and regulations and in conformity with its nationalobjectives and priorities. No state shall be compelled togrant preferential treatment to foreign investment.(b). To regulate and supervise the activities oftransnational cooperation and confirm with its nationaljurisdiction and take measures to ensure that such activitiescomply with its laws, rules and regulations and conform withits economic and social policies. Transnational corporationshall not intervene in the internal affairs of a host state.Every state should, with full regard for its sovereign right,co-operate with other state in the exercise of the right setforth in this subparagraph. Year Book of the United Nations Vol 28 (New York: United Nations 1974) at 381.62China has a history of being invaded and being oppressedby imperialist countries. In the past, due to the weaknessand incompetence of the corrupt Qing dynasty, the Chinesegovernment was forced to sign many treaties which humiliatedthe nation and forfeited its sovereignty to western countries.Because of damage to its national sovereignty, China changedfrom an independent country into a semi colonial country.During this phase, the Chinese nation was not treated withequality by other nations. The Chinese people witnessed howimperialists bullied China politically and economically. Theissue of sovereignty remained a key political concern amongthe Chinese people. Because of the failure to defend China'ssovereignty, the Qing dynasty was overthrown by the Chineserevolution. 59 In World War Two, the entire Chinese nationwas engaged in the Resistance War against Japan to defendChina's sovereignty. the Anti-Japanese War lasted forfourteen years. 60 These incidents of modern Chinese historywere still fresh in the memory of the Chinese people. As aresult, in their dealings with foreign countries, the Chinesepeople have a strong emotional need to safeguard theirW  After Opium War between China and Britain in 1840,the Qing government was forced to give up Hongkong to theU.K.. After Sino-Japanese War in 1895, China lost TaiwanIsland. The Qing Dynasty was overthrown by the 1911Revolution in China.60 . The resistance War against Japan in China started onseptember 18, 1931 and ended on August 15, 1945. The durationof the war was 14 years.63sovereignty. Therefore, to convince the Chinese people thatthe invitation of foreign investments to China would notdamage China's interests, the Chinese government has to firmlyexpress its attitude in the Regulations to safeguard China'spermanent sovereignty over its natural resources during itscooperation with foreign enterprises to jointly recoverpetroleum deposits.The issue of sovereignty is a common concern among hostcountries which invite foreign investors to tap their naturalresources. China is a developing country that shares thecommon economic problems of fellow third world countries. Toaid their economic construction, many other developingcountries had already begun soliciting foreign investment longbefore China. These countries have accumulated certainexperiences in handling foreign investment and in defendingtheir sovereignty. If the Chinese government is determined tofollow the examples of other developing countries to absorbforeign investments, it must assimilate their beneficialexperiences and respect the favourable international practice.The acceptance of doctrine of permanent state sovereignty overnatural resources settled the issue of sovereignty concerninghost countries in their cooperation with foreign companies todevelop their industries. It was a detailed lesson China onhow to defend its sovereignty in a new situation. By theadoption of the principle of permanent state sovereignty over64natural resources, the concerns of the Chinese governmentregarding the sovereignty issue would be solved. Therefore,in establishing the Regulations, the above doctrine is thefirst principle to be observed.The second principle is the rule of self reliance.When expounding on China's policy regarding theinvitation of foreign investment to China, the Chinese premierin his government report said: "connecting China withinternational market, expanding foreign trade, invitingadvanced technology, utilizing foreign capital and developingall types of international economic and technical cooperationshall help China to overcome its shortcomings and build up itscapacity of self-reliance." 61 Self-reliance is a product ofChina's thousands of years of social economy and also anunforgettable lesson the Chinese government learned frombitter past experience. For centuries, the Chinese peoplesuffered from the economic plunder of imperialist countries.They neither trusted nor wanted to rely on the help of foreigncountries to tap its natural resources. Cooperation withforeign enterprises to explore China's offshore petroleum61 Zhao Ziyang (former Chinese premier), "Adhere to theOpen Policy and Strengthen our Capacities of Self-reliance" inthe Government Report addressed to the 4th plenary meeting ofthe 5th People's Conference of the PRC on the 30th of Novemberand the 1st of December of 1981. (1981) No. 441 Xin Hua YueKan (Xinhua Monthly) at 18.65resources symbolized a turning point of China's traditionalpolicy and challenged China's inveterate conception of self-reliance.In the early stages of China's offshore petroleum policy,the Chinese government questioned the feasibility of thispolicy. However the Chinese government still used the policyas a tentative step in developing its petroleum industry. TheChinese government continue to debate the invitation offoreign oil companies to take part in its offshore petroleumindustry. There is a vivid figurative description of China'soffshore oil policy: - "walking on two legs". "One leg"refers to the cooperation with foreign oil companies, "anotherleg" refers to the China's own force. For these reasons, theactivities of the foreign oil companies would be restrained toa limited sphere. Economic reform and opening up to foreigninvestments has been a strong current in today's China, butthe mainstay of China's general petroleum policy still remainsself-reliance and the Chinese government would not deviatefrom it too much in its offshore petroleum policy.The third principle is the principle of mutual benefit.At the early phase of the official decision to absorbforeign investment to develop China's offshore oil industry,the Chinese government had set the tone for the joint venture.66In March of 1978, the central committee of the ChineseCommunist Party and the State Council of the PRC authorizedthe Ministry for Petroleum Industry to establish commercialrelations with foreign oil companies and create conditions toconduct cooperation with them. The MOPI was instructed towork with foreign partners on the basis of "independence,self-reliance , equality and mutual benefit" .62The aim of foreign investors in offshore China was tomake profit. The real bargain between the Chinese governmentand foreign investors lies in the exchange of oil resourcesfor financial investment and technology. The Chinesegovernment had to legislate in the Regulations to protect thelegal right of foreign enterprises to obtain their deservedprofits. Without the concrete provisions to ensure thejustifiable right and interests of international oilcompanies, the plan of the Chinese government to inviteforeign oil capital would not be able to come into being. Toencourage foreign investors to develop China's offshorepetroleum industry is another important objective of theRegulations. The regulations are required for thecoordination of respective interests between China and foreignoil companies. So long as international oil companies couldbe certain that their interests in China's offshore petroleumindustry would be protected, the prospect of tapping the vastU. Supra, note 20 at 173.67oil reserves off China's coast would become the catalyst forincreased cooperation between the Chinese government and majorinternational oil companies. It was critical for theRegulations to handle economic benefits between China andforeign investors.The Regulations mainly cover the following aspects:A. Sovereignty and Ownership of Offshore Oil Resources.The Regulations provide that all petroleum resources ininternational waters, the territorial sea and continentalshelf of the People's Republic of China and in all sea areaswithin the limits of national jurisdiction over marineresources of the PRC are owned by China. In the abovementioned marine area, all buildings and structures set up andvessels operating to exploit petroleum as well as thecorresponding on-shore oil (gas) terminals and bases, shall beunder the Jurisdiction of the PRC. 63These provisions confirmed China's sovereignty over itsoffshore petroleum resources and made all petroleum activitiesconducted in offshore China to comply with Chinese laws.0 . The Regulations. Supra, note 57. Article 2.68B. The Legal Position of Relevant Enterprises.The Regulations provide that, on the premise ofsafeguarding national sovereignty and economic interests,foreign enterprises are allowed to participate in thecooperative exploitation of offshore petroleum resources ofthe PRC.The investment of foreign enterprises participating inthe cooperative exploitation of offshore petroleum resources,the profit due to them and their other legitimate rights andinterests are protected by the Chinese government inaccordance with the law. Meanwhile, all activities for thecooperative exploitation of offshore petroleum resources inChina shall be subject to the laws, decrees and relevantprovisions of China. All persons and enterprises taking partin petroleum operations shall be subject to the laws of Chinaand shall accept inspection and supervision by the competentChinese government authorities concerned."64 . Ibid. Article 1 and 3.69C. The Competent Authorities of the Chinese Government andthe Exclusive Management EntityThe Ministry of Petroleum Industry shall be the competentauthority in charge of the exploitation of offshore petroleumresources in cooperation with foreign enterprises. 65 It shalldetermine the forms of cooperation, demarcate areas ofcooperation, work out a plan for the exploitation of offshoreoil in cooperation with foreign enterprises in accordance withlong term state economic plans, formulate operation andmanagement policies for cooperative exploitation of offshoreoil and examine and approve the overall development programfor offshore oil (gas) fields.As a state corporation, China National Offshore OilCorporation (CNOOC) has an exclusive right to explore for,develop, produce and market the petroleum within the zones ofcooperation with foreign enterprises. Authorised by theChinese government, CNOOC is entitled to call for bids andsign petroleum contracts to cooperate with foreign enterprisesto exploit petroleum resources in the designated zones,a. The competent government authorities in charge ofoffshore oil industry is now the Ministry of Energy. Theformer Ministry of Petroleum Industry has converted into ChinaNational Oil and Gas Corporation.70surfaces areas and cooperative blocks.The petroleum contracts and all documents signed by CNOOCfor other technology and funds provided by the foreignenterprises are subject to approval by the Foreign InvestmentCommission of the PRC. 66D. Basic Cooperative Patterns with Foreign EnterprisesUnless otherwise specified by the Ministry of PetroleumIndustry or in a petroleum contract, the cooperation betweenChina and foreign oil companies generally assumed thefollowing forms:(a) the foreign contractor shall be responsible forexploitation operation and bear all explorationrisk.(b) after a commercial oil (gas) field is discovered,both the foreign contractor and CNOOC shall providethe investment for its cooperative development andthe foreign contractor shall be responsible for the66 . The function of Foreign Investment Commission of thePRC has been performed by the Ministry of Foreign EconomicRelation and Trade of the PRC (MOFERT). Supra, note 63.Article 4,5 and 6.71development operations and productions.(c) CNOOC shall take over the production operationwhen conditions permit as provided in the petroleumcontract.(d) the foreign contractor may recover its investmentand expenses and receive remuneration out of thepetroleum produced in accordance with theprovisions of the petroleum contract. 67After the foreign contractor's investment has beencompensated as provided, the ownership of all assets purchasedor built by the foreign contractor to exploit offshore oilshall belong to CNO0C. 68E. Preferential Treatment to the Chinese SideForeign contractors shall give preference to employmentof Chinese personnel, utilization of Chinese engineeringdesign and Chinese services and purchase of Chinese madefacilities.67. Ibid. Article 7.m. Ibid. Article 22.72In petroleum operation, the foreign contractor shall givepreference to the employment of Chinese personnel.Provided the terms are competitive, engineering designcorporations of China shall have priority in entering intosub-contracts.Chinese service includes geophysical prospecting, welldrilling, diving, aircrafts, ships and oil bases. 69F. The Ownership of InformationForeign contractors are required to provide information,reports and data obtained during the operation.According to state sovereignty and internationalpractice, in carrying out the petroleum contract, foreigncontractors shall promptly and accurately report to CNOOC onthe situation of petroleum operations and acquire complete andaccurate data, records,samples, vouchers and other data withrespect to various aspects of the petroleum operations andregularly submit to CNOOC necessary data and samples as wellas various technological, economic, financial and619. Ibid. Article 22, 12, 18, 20 and 21.73administrative reports.The ownership of all the data, records, samples, vouchersand other original data obtained in the course of performingthe petroleum operations shall vest in CNOOC. The utilizationand transfer, donation, exchange, sale and publication of theaforementioned information and their export and transmissionfrom China shall be subject to the Provision for the Controlof Data promulgated by the Ministry of petroleum Industry. 70G. Other RequirementsAll Chinese enterprises and foreign enterprisesparticipating in the cooperative exploration of offshorepetroleum resources shall pay taxes in accordance with the lawand shall pay mining royalties. All employees of enterprisesshall pay income tax.The foreign contractor shall open a bank account inChina.Operators and sub-contractors shall comply with therelevant laws and provisions on environmental protection andsafety in China.n . Ibid. Article 13 and 23.74Any dispute arising between foreign and Chineseenterprises during cooperative exploitation of offshorepetroleum resources shall be settled through friendlyconsultations. Otherwise arbitration may apply to the disputeby the arbitration body of the PRC or another arbitration bodyagreed to by the parties to the petroleum contract. 71The Regulations are the legal foundation for thecooperation between China and foreign enterprises in theexploitation of oil in offshore China. They have full controlover the key issues in offshore oil explorative anddevelopmental operations. The Regulations has following majorcharacteristics.First, it outlined the cooperative method between Chinaand foreign investors. Foreign investors' only right grantedin the Regulations is to be able to obtain certain amount ofcrude oil after successful exploration, development andproduction of oil fields in China. Before having a successfulcommercial investment in offshore China, foreign oil companieshave to take all the financial risks. The legal right offoreign investors will be protected by the Regulations, buttheir activities shall comply with laws of China.71. Ibid. Article 8, 11 and 24.75Second, it is specified that the objective of cooperationbetween China and foreign investors is to develop China'snational economy. The aim of the Chinese government to openits offshore areas to international oil industries was toexpand China's capacity to develop its own economy andintroduce advanced foreign technology. China wishes to makethe best use of foreign funds and learn the requiredtechnology as soon as possible so that China will be able tocommand the exploitation of its offshore oil independently.Many provisions of the Regulations are stipulated to servethis purpose.When a spokesman for the China National Offshore OilCorporation officially talked to the press regarding theRegulations, he made a conclusive remark on the essence of thelaw:"the Regulations have clearly provided that China enjoythe ownership and the jurisdictional right over thepetroleum resources. The oil resources and the oilproduction produced from the contract areas belong toChina. The location and the size of contract area and thecooperative partners shall be decided by China. Whenoffshore oil fields go on stream, the fixed assets shallbelong to China after foreign investors recover theinvestment. According to the provisions of the modelpetroleum contract, China shall take over the operation assoon as the conditions permit. All the important issuesin the cooperation such as oil field developing plan shallbe subject to the approval of the Chinese government. TheChinese government is entitled to participate in andsupervise all the activities of cooperation. Petroleumbases must be located in China. Under the competitiveconditions, China's goods, materials and services shall be76given priorities to be purchased and hired. Theinformation and data obtained from the cooperation shallnot be allowed to transfer, disclose, publish or sellwithout the permission of the Chinese government. In thisway, China's sovereignty and interests shall not beinfringed by the cooperative exploitation of offshorepetroleum. "f4The above was a precise summary of the Regulations.Ill. Taxation and RoyaltyThe Chinese laws regarding taxation, royalty and customsduties which govern petroleum activities in offshore China areimportant components of China's offshore policy and law.Because those laws directly affect the net income of theChinese government and the profit of foreign oil companies,both parties treat those laws seriously. The Chinesegovernment expected to increase state revenue by levying moretax from the offshore oil activities. The foreign oilcompanies' investment policy in China was also affected byChina's taxation laws. To balance China's own financialinterests with those of foreign investors' is difficult.Under the provisions of the Regulation, foreignenterprises operating in offshore China shall pay tax to theChinese government according to the law.n. People's Daily, February 19, 1982.77The detailed laws regarding tax payment and royalties arealso the concern of all the foreign investors in offshoreChina in the oil business.To effectively handle the tax and royalty matters relatedto offshore oil industry, the Chinese government establishedthe Offshore Oil Taxation Bureau in 1982. The headquarters ofthis bureau are based in Beijing and its branches have beenset up in those areas where the China National Offshore OilCorporation has established regional corporations, namelyShanghai, Tianjin, Guangzhou and Zhanjiang. Foreignenterprises shall pay their tax and royalties directly orthrough CNOOC to the Offshore Oil Taxation Bureau.There are four relevant laws in China regarding thetaxation and royalty payment of offshore oil activities.(a) Foreign Investment Enterprise and ForeignEnterprise Tax Law of the People's Republic ofChina. ThAdopted by the National Congress of the PRC on April9, 1991 and effective from July 1, 1991.78(b) The Regulations on the Payment of Royalty for theExploitation of Offshore Petroleum Resources. 76(c) The Consolidated Industrial and Commercial TaxRegulations of the PRC. 75(d) Rules Concerning the Levy and Exemption of CustomsDuties and Consolidated Industrial and CommercialTax on Imports and Exports for the Chinese-ForeignCo-operative Exploitation of Offshore Petroleum. 76The following is the brief examination of laws regardingthe foreign enterprises' income tax, foreign oil companies'royalty and the custom duties on imports and exports of Sino-foreign co-operative exploration of offshore petroleum.A. Approved by the State Council of the PRC on December5, 1988 and promulgated on January 1, 1989 under the DecreeNo. 1 of the Financial Ministry of the PRC.75 . Adopted in draft form by the Standing Committee ofthe National People's Congress on September 11, 1958 andpromulgated on September 13, 1958. The law came into effecton the date of promulgation.n. Approved on February 28, 1982 by the State Council andpromulgated on April 1, 1982 by the General Administration ofCustoms and the Ministry of Finance of the PRC.79A. The Foreign Enterprises' Income TaxUnder Foreign Investment Enterprise and ForeignEnterprise Tax Law (FIEFETL), all the foreign operators andcontractors engaged in the exploration and development ofnatural resources on the Chinese continental shelf within theboundary of Chinese territory shall be taxpayers. 77The rate of the income tax shall be 30% of the taxableincome plus the local income tax at the rate of 3% of theamount of taxable income. 78Where enterprises engage in the cooperative explorationof petroleum, revenue shall be deemed to be derived when the77. The term "foreign enterprise", as used in this law,refers to foreign companies, enterprises and other economicorganizations that have establishments or sites in the PRCengaged in production or business operations, or that do nothave such establishments or sites but nevertheless deriveincome from sources inside the PRC. FIEFETL. Supra, note 73.Article 2.As used in the preceding paragraph, the term"establishments or sites" primarily includes managementestablishments, - branches, offices, factories, places ofextraction of natural resources, sites for contracted projectssuch as construction, installation, assembly or explorationprojects, and sites for the furnishing of services (includingconsultancy services) for engineering and other projects.Implementing Rules of FIEFETL. Ibid. Article 3.M . Ibid. Article 5.80share of crude oil is received. The amount of the revenue soderived shall be calculated on the basis of a price that isadjusted periodically by reference to the international marketprice of crude oil of the same quality . 79The geophysical prospecting and exploration expensesincurred by foreign oil companies operating in offshore Chinamay be amortised in other contract areas owned by the same oilcompanies or in the future if the said companies terminatedtheir operation for reasons such as the quantity of oil (gas)reserves. 80n . Ibid. Implementina Rules. Article 14.80 . "Reasonable geophysical prospecting and explorationexpenses incurred by enterprises engaged in the exploitationof petroleum may be amortized by stages against the revenuederived from the oil (gas) fields that have already gone intocommercial operation. The amortization period may not beshorter than one year." "If enterprise engaged in theexploration of petroleum have two or more contract areas, andoperations in one or more of such areas are terminated forreasons such as the quantity of oil (gas) reserves, thereasonable geophysical prospecting and exploration expensesalready incurred for such areas may by accumulated and treatedas a capital expenditure, and amortized against the productionrevenue from the other areas." "If a foreign petroleumcompany terminates its operations in a contract area forreasons such as the quantity of oil (gas) reserves, and thecompany neither has successive contracts for exploitation ofpetroleum (gas) nor maintain in the People's Republic of Chinaan operation and management establishment for the exploitationof petroleum (gas), such company shall be allowed to amortizeits reasonable geophysical prospecting and explorationexpenses with respect to the closed contract area against theproduction revenue the company earns from contract areassubsequently in its possession up to 10 years from the date oftermination of the contract. The tax authorities must reviewand confirm the above situation and issue a certificate." theImplementing Rules of FIEFETL. Ibid. Article 48, 49 and 50.81Before the promulgation of the FIEETL, the enterprisesoperating in offshore China were governed by The Income TaxLaw of the PRC Concerning Joint Ventures with Chinese andForeign Investment. 81 As for the foreign oil companiesengaged in the offshore China oil industry, the new law wasmore flexibly formulated than the previous one. The provisionsregarding the amortization of geophysical prospecting andexploration expenses was an example.B. The Consolidated Industrial and Commercial TaxAccording to the Consolidated Industrial and CommercialTax Regulations of the PRC (CICTR) and the Model PetroleumContract prepared by CNOOC, 5% of the annual gross productionof each oil field shall be used for payment of theconsolidated industrial and commercial tax. The tax shall bepaid in kind to the relevant authorities of the Chinesegovernment through CNOOC. 82 The CICT levied from crude oilproduced by offshore oil fields is at the tax rate for "otherindustrial products" under the law. There is another tax ratem . Adopted at the Third Session of the Fifth NationalPeople's Congress, promulgated on September 10, 1980 andrepealed at July 1, 1991.82 .^CICTR.^Supra, note 75. Article 2.^The ModelPetroleum Contract of CNOOC. Article the production of mineral oil in accordance with thislaw. m 5% of CICT applied to offshore oil production is alenient taxation policy for the cooperation of exploitingoffshore oil between China and foreign oil companies.Besides, most offshore oil subcontractor services aresubject to pay such tax at the rate of 3%. 84"Basically, the CICT is a type of cascading turnover taxassessment on gross receipts arising from the sale ortransfer of products. Tax liabilities arises at each levelin distribution system and the tax is paid by the selleror transferor. In case of crude oil, the tax would be paidby the producer upon production. The tax is alsoapplicable to purchases of foreign goods or imports." 85C. Royalty PaymentThe Finance Ministry of the PRC promulgated theRegulations on the Payment of Royalty for the Exploitation ofOffshore Petroleum Resources ( Royalty Regulations) on July 1,1989, which was the first law governing foreign oil companiesoperating in China's offshore oil industry regarding royalty83 . According to the CICTR, the tax rate for mineral oilshall be 20%. See Ibid. the Table of Tax Rate for the TaxableItems attached to CICTR.Ibid. Table of Tax Rate for Service Trades.85 . Michael J. Moser (edited), Foreign Trade, Investmentand the Law in the People's Republic of China (London: OxfordUniversity Press, 1984) at 201.83payments.According to the previous policy, foreign oil companiesshould pay royalty to the Chinese government at the rate of12.5% from the oil production for their annual output abovethe portion of 100 million tons . 86 The Royalty Regulationsadopted a new method to levy royalties from foreign oilcompanies.Under the Royalty Regulations, royalty shall be exemptedon the portion of the annual gross production of crude oil notexceeding one million metric tons; royalty rates for theportion of annual gross production of crude oil exceeding onemillion metric tons to one million and five hundred thousandmetric tons shall be 4%, for the portion exceeding one millionand five hundred tons to two million tons shall be 6%, for theportion exceeding two million tons to three million tons shallbe 8%, for the portion exceeding three million tons to fourmillion tons shall be 10%, and for the portion exceeding fourmillion tons shall be 12.5%. The royalty rate for natural gasshall be zero for the annual gross production of natural gasnot exceeding two billion cubic meters, 1% for the productionexceeding two billion cubic meters to three point five cubicSee the Model Petroleum Contract of CNOOC preparedfor the first and second round of international bidding,Article 13 (Beijing, China: China National Offshore OilCorporation, 1982).84meters, 2% for the production exceeding three point fivebillion cubic meters to five hundred cubic meters and 3% forthe production exceeding five hundred cubic meters. 87Royalty for both crude oil and natural gas shall be paidin kind and be collected and administered by the taxauthorities. Royalty for the cooperative oil and / or gasfield with Chinese and foreign participation shall be firstwithheld by the operator of such oil / or gas field and handedover to CNOOC which will be responsible for the payment of theroyalty. 88In the past, the provisions regarding royalties werestipulated in the Model Petroleum Contract of CNOOC with afixed rate of 12.5%. This rate would not be able to encouragethe development of small or medium sized oil field. Theroyalty Regulations used a way of sliding scale to calculatethe rate of royalty, which showed that the Chinese governmentbecame more flexible in formulating its offshore petroleumpolicy.87. The Royalty Regulations. Article 3.m . Ibid. Article 4 and 5.85D The Exemption of CICT and Customs DutiesAccording to Rules Concerning the Levy and Exemption ofCustoms Duties and Consolidated Industrial and Commercial Taxon Imports and Exports for the Chinese- Foreign CooperativeExploitation of offshore petroleum (Customs Duties Rules), thefollowing imported goods shall be exempt from duties andtaxes:(a) machinery, equipment, spare parts and materialsverified and approved for the direct use inexploration and development.(b) parts, components and materials verified andapproved as necessary imports for manufacturingmachinery and equipment in China for theexploitation of offshore petroleum.(c) machinery and other engineering equipment,temporarily imported for exploration of petroleumand guaranteed to be re-exported by foreigncontractors.86In addition to the above, crude oil received by foreigncontractors in accordance with provisions of petroleumcontracts shall be exempt from duties when it is exported.China National Offshore Oil Corporation has beenempowered to approve the importation of goods listed byCustoms Duties Rules to be exempt from duties and taxes forthe exploitation of offshore petroleum.IV. Other Relevant LawsBesides the above mentioned laws, to facilitate thecooperation between China and foreign oil companies, China hasalso promulgated some other relevant laws such as:(a) The Law of the Territorial Sea and the ContiguousZone of the People's Republic of China. 89(b) Marine Environment Protection Law of the People'sRepublic of China."N. Adopted in the 24th meeting of the Standing Committeeof the 7th People's Congress of the People's Republic of Chinaon February 25, 1992.N. Adopted at the 24th meeting of the Standing Committeeof the 5th National People's congress and promulgated by theorder No 9 of the Standing Committee of the National People's87(c) The Regulations of the People's Republic of Chinaon the Environment Protection and ManagementConcerning the Exploitation of Offshore PetroleumResources. 91(d) Marine Traffic Safety Law of the People's Republicof China . 92(e) Provisional Regulations for Foreign Control of thePeople's Republic of China. 93(f) Rules Governing Control over Inward and OutwardOcean Vessels, Goods for Purpose of Chinese-Foreign Cooperative Exploration of OffshorePetroleum and Personal Effects Belonging tocongress on August, 1982 and effective as of March 1, 1983.91 . Promulgated by the State Council of the People'sRepublic of China on December 29, 1983.92 . Adopted at the 7th meeting of the Standing Committeeof the 6th National People's Congress, promulgated by OrderNo. 7 of the President of the People's Republic of China onSeptember 2, 1983 and effective as of January 1, 1984.93 . Adopted at the Regular Session of the State councilon december 5, 1980 and promulgated by the State Council onDecember 18, 1980.88Personnel Working in China."The legislative measures taken by the Chinese governmentnot only provide solid legal protection and support to thecooperation between China and foreign oil companies in theexploitation of offshore oil activities in China, but alsostrongly promote the development of China's offshore oilindustry. The establishment of those governing laws whichapply to China's offshore petroleum industry demonstrated thatChina has had relatively comprehensive offshore petroleumlegislations.Among the offshore oil related laws listed in thissection, the most significant ones are The Laws of theTerritorial Sea and the Contiguous Zone of the PRC(Territorial Waters Law hereafter), the Marine EnvironmentProtection Law of the PRC ( Environment Law hereafter) and theRegulations of the PRC on the Environment Protection andManagement concerning the Exploitation of the PetroleumResources ( Environment Regulations hereafter).The Territorial Waters Law has demarcated the boundary ofthe Chinese territorial waters and explicitly pointed outthrough the legislation that Diaoyu Islands, Xisha Islands and94. Promulgated by General Administration of Customs ofthe People's Republic of China on June 1, 1984.89Nansha Islands are the territory of China."Japan and Korea have territorial disputes with China overthe Diaoyu Islands and the demarcation of the continentalshelf in the Yellow and East China Sea. Some southeast Asiancountries such as Vietnam, the Philippines, Malaysia,Indonesia and Brunei have a territorial dispute over the Xisha(Paracel) and Nansha (Spratly) Islands in the South China Sea.Before the promulgation of the Territorial Waters Law, inspite of the provisions of the Regulations regarding China'ssovereignty over its petroleum resources, the identificationand the extent of China's continental shelf was a majorproblem concerning China's jurisdiction over its offshoreresources, which hampered the development of China's offshoreoil industry. The provisions of the Territorial Waters Lawhas clearly defined the boundary of China's territorial seaand its contiguous zone and declared the firm stand of theChinese government to safeguard its marine sovereignty.To be more effective in tapping China's offshorepetroleum resources, the Chinese government has to attachimportance to environmental protection while exploiting the95 . "The territorial land of the People's Republic ofChina comprises the mainland of the People's Republic of Chinaand its offshore islands, Taiwan and all its attached islandsincluding Diaoyu Islands, the Pinghu Islands, Dongsha Islands,Xisha Islands, Zhongsha Islands, Nansha Islands and all otherislands which belong to the People's republic of China." TheTerritorial Law. Supra, note 89. Article 2.90oil reserves. It is critical to avoid marine pollution causedby offshore oil industrial operations carried out in China.The promulgations of the Environmental Law and theEnvironmental Regulations were vital measures to serve theabove purpose. In particular, the Environmental Regulationwas formulated for the offshore oil industry under theprovision of the Environmental Law. It stipulated in detailregarding the issue of environmental protection related to theoffshore petroleum industry.There are three prominent characteristics of theEnvironmental Regulations:(1) To safeguard China's sovereigntyUnder article 2 of the Environmental Regulations, "theseregulations apply to the enterprises, managing units,operators and individuals who are engaged in the explorationand development of petroleum in the offshore areas under thejurisdiction of the People's Republic of China and the fixedand movable platforms and other facilities used by them."This provision indicates that the execution of theEnvironmental Regulations is to exercise China's jurisdictionwithin its territorial waters.91(2) In conformity with the United Nations Convention onthe Law of the SeaThe United Nations Convention on the Law of the Sea(Conventions hereafter) provides that States have theobligation to protect and preserve the marine environment. 96Part XII of the Conventions requires all coastal statesto establish national laws to protect maritime environment andprevent its internal sea from being polluted. 97The establishment of the Environmental Regulations isalso meant to address China's international obligations.(3) Paying attention to preventing marine pollution.When marine pollution produces a serious consequence, itwill take a long time and huge amount of money to wipe it out.Therefore, the Environment Regulations give full expressionwith respect to prevention.96 . Official Text of the United Nations Convention on theLaw of the Sea, article 192 (New York: United Nations) at 70.97 .^"States shall adopted laws and regulations toprevent, reduce and control pollution of the marineenvironment arising from activities in the area under takenby vessels, installations, structures and other devices flyingtheir flag or their of their registry or operating under theirauthority, as the case may be." Ibid. article 209 at 74.92The Environmental Regulations provided that " whenenterprises and operators work out an Overall DevelopmentProgramme to develop an oil (gas) field, they shall at thesame time prepare a Report evaluating its potential effect onthe marine environment. This Report shall be submitted forapproval by the Ministry for Protection of Urban and RuralConstruction and Environment. " 98 According to theEnvironmental Regulations, this Report should be prepared indetail on how to prevent the damage caused by the offshorepetroleum activities to natural marine environment, to marineresources and to other marine development activities." TheEnvironmental Regulations also require that offshore petroleumoperators have contingent capacities to prevent and controloil pollution in offshore areas and have a contingent planprepared for dealing with the pollution incidents which occuras a consequence of their activities. looThe Environmental Regulations put forward concrete legalprotective measures in China's offshore oil development area.It is an indispensable law governing the offshore oilactivities in China.". The Regulations of the PRC on Environment Protectionand Management Concerning the Exploitation of OffshorePetroleum Resources. Supra, note 91. Article 4.99 . Article 6. Ibid.um . Article 6. Ibid.93V. ConclusionChina's offshore petroleum industry plays an importantrole in the modernization of China's economy. Thepromulgation of the laws governing the cooperative offshorepetroleum activities between China and its foreign partnersprovided protection to the investors. Without these laws,foreign enterprises would not go to offshore China. Normally,it is not difficult to adopt a petroleum law with the mostfavourable terms on the government's side and imposing all themost severe conditions on the oil companies. However, sincethe petroleum law is formulated to bring adequate income tothe government as the result of petroleum operations, theterms of the law should be made acceptable to the oilcompanies. To enable foreign oil companies to be in offshoreChina, the Chinese government has stipulated provisions in thelaw to look after the interests of the foreign enterprises.In legislating the relevant laws, China consulted thehistorical experiences, the prevailing international practiceand the economic situation. Its offshore petroleum laws weremade according to the principle of international laws andChina's national condition. Among the relevant laws, theRegulations of the People's Republic of China on theCooperation with Foreign Enterprises to Exploitation of94Offshore Petroleum Resources is the commanding statutegoverning the development of China's offshore petroleumindustry. It stipulated in detail the scope of activity forforeign oil companies and the cooperative patterns betweenChina and international enterprises in offshore China. Allthe rest of the laws have created adequate conditions tofurther develop China's offshore petroleum industry. Thelegislative focus of the Chinese government was to protect itsinterest with respect to sovereignty, territory, economy,environment, taxation and economy. It is a collective featureof China's offshore petroleum laws that the Chinese governmenttries to maximize the potential benefit due to it in theoffshore oil activities.Most of the Chinese laws governing offshore activitieswere adopted between 1982 and 1985. At that time,international oil prices were very firm and the geophysicalsurvey conducted in 1979 and 1980 in the vast untapped Chinasea predicted a promising prospect. The situation made plentyof international oil companies eager to go to China to recoveroil. In the meantime, the Chinese government also wished tobecome rich overnight by opening its offshore areas. Such anenvironment affected the formulation of China's offshorepetroleum law. Certain provisions of the Regulations weregenerally criticised by foreign investors as being ratherharsh for foreign enterprises. For example, foreign oil95companies have to pay all the exploration costs and undertakethe risk. But in the event that the exploration succeed, theChinese side shall share the benefit. The downfall of oilprices happened in the middle of the 1980s was a tough testfor China's offshore petroleum laws. It is likely that theChinese government might take some measures to furtherencourage foreign investments in the offshore oil business.However, judging from the conditions producing these laws, theChinese government will keep its present offshore petroleumlaws both intact and valid as long as its door is open tointernational oil companies.96Chapter Three.China National Offshore Oil Corporation and its ModelPetroleum ContractI. Two Marked Traits in the CooperationThe cooperation between China and international oilcompanies in the exploitation of China's offshore petroleumresources has two legal characteristics under current Chineselaws. One is that the activities of offshore oil industry inChina are in the charge of China National offshore OilCorporation. Another is that all the operations of foreignoil companies in offshore China are bound by the modelpetroleum contract prepared CNOOC.A prevailing international practice contributed to theformation of these two characteristics.As early as in 1962, the United Nations General Assemblyadopted the following resolution:"the right of people and nations to permanent sovereigntyover their natural wealth and resources must be exercisedin the interest of their national development and the97well-being of the people of the State concerned .... theexploration, development and disposition of suchresources, as well as import of the foreign capitalrequired for those purposes, should be in conformity withthe rules and conditions which the peoples and nationsconsider to be necessary or desirable with regard to theauthorization, restriction or prohibition of suchactivities .... international co-operation for theeconomic development of developing countries, whether inthe form of public or private capital investments,exchange of goods and services, technical assistance, orexchanges of scientific information, shall be such as tofurther their independent national development and bebased upon respect for their sovereignty over theirnatural wealth and resources. u101This resolution is the famous doctrine of permanentsovereignty over natural resources, which has ensured that thepetroleum resources of underdeveloped countries are theirs.This is an essential precondition to all current cooperationbetween resource rich countries and international oilcompanies. This doctrine helped many oil producing countriesto enact new petroleum legislations and reformed traditionalcooperative models adopted between oil producing countries andinternational oil companies in the past. 102101. Resolution No.1803 (XVII) adopted by the UnitedNations General Assembly on December 14, 1962.102. " Up until 1945 (and for nearly two decadesthereafter) the global environment worked to the advantage ofthe major multinationals. The structure of the industry, thesubstantial resources of the companies, which includedcapital, technology, and control over markets and sources ofsupply, and the power wielded by their home governmentsenabled them to acquire, and to maintain, dominance in theinternational petroleum system and give them an overwhelminglystronger bargaining position in relation to the governmentswith which they had dealings.... While efforts were exerted torevise existing arrangements through negotiations, the end offifties and the early sixties witnessed developments which98Later, the same principles were reaffirmed in theDeclaration adopted at the Sixth Special Session of the UNGeneral assembly (May 1974) and in the Charter of EconomicRights and Duties of States (December 1974).It was not accidental that the Chinese government chosethe 1980s to open its offshore areas. At that time, theinternational climate was much more favourable to oilproducing countries. The doctrine of permanent sovereigntyover natural resources was recognised as a basic principle ofa new international economic order. 103 It demonstrated ingeneral to the Chinese government how to protect its nationalinterests while dealing with foreign investment in thedevelopment of China's petroleum industry. By complying withushered in major transformations in the global environment forpetroleum development." See Kamal Hossain, Law and policy inPetroleum Development (New York: Nichols Publishing Company,1979) at 12-4:103 . " Under the impact of major developments,significant changes had been taking place in relations betweengovernments and transnational oil companies. The doctrine ofpermanent sovereignty over natural resources propounded in theUN General Assembly in the sixties gained heightened relevancein the context of the post-1973 global energy situation. Thedoctrine was recognised as a basic principle of a newinternational economic order by Declaration adopted as theSixth Special Session of the UN General Assembly (May 1974)and in the Charter of Economic Rights and Duties of States(December 1974). Implicit in such recognition was thedetermination of governments to secure effective control overtheir resources, leading to fundamental policy reappraisalsnot only in the established oil-producing (OPEC) countries,but in the new producing countries, such as Britain andNorway." Ibid. at xi:99international practice and by following in the steps of fellowoil producing countries, China was likely to obtain a successin the development of its petroleum industry without anysubstantial loss. The cooperative arrangement which Chinaconducted with foreign oil companies to develop its offshorepetroleum industry seemed to be worthwhile.Although self-reliance remained a guiding principle whichthe Chinese government used to formulate its petroleum policy,there has been another philosophy which in recent years hasbeen advocated by radical Chinese government leaders to defythe traditional convention. This philosophy is known as"making foreign things serve China." 104 Whenever theChinese government wished to revise its old foreign policy,the philosophy would be used as an argument. As theapplication by other oil producing countries of the doctrineof permanent state sovereignty over the natural resources wasexactly in line with the revised Chinese petroleum policy, theChinese government absorbed all the useful essence from thatdoctrine in its offshore petroleum law.It has been a universal trend in some oil producingcountries that the greatest emphasis is placed on thesovereignty of the state over its petroleum resources. To"4. This is a popular proverb in China. The proverbused to be frequently quoted by Mao Tse-tung, late chairman ofthe Chinese Communist Party.100achieve this goal, many oil producing countries, take twomeasures:(a) The establishment of national oil companies, and(b) The adoption of new types of petroleum contractssuch as joint venture, or service or productionsharing agreements. 105By establishing national oil companies, oil producingcountries exercise effective control over their petroleumresources. National oil companies not only allow resourcecountries to prevent their sovereignty and economic interestfrom being infringed, but also enable them to receive theutmost financial returns to which they are due.With petroleum activities being controlled by nationaloil companies, the new petroleum contracts proved to bereliable instruments to facilitate the resource country'sobjectives. Supported by the doctrine of state sovereigntyover the natural resources, the new types of petroleumcontracts which were represented by joint venture agreements," The urge in the producing countries to excisecontrol over the development of their petroleum resources andto reduce the market power of majors, as well as dependence onthem, let them (a) to establish national oil companies (b) togrant exploration rights to new entrants in the field undernew types of petroleum development arrangements" Supra, note102 at 15.105101replaced the old style concession agreement, which hadpreviously existed. The new contracts put the producingcountries in a superior position to negotiate with foreignparties and enabled them to derive greater benefit to servethe development of their economy. Unlike the old concessionagreements, the new types of petroleum contracts normallyresult in foreign oil companies' enjoying fewer rights andhaving greater obligations than in the past. Generally, thenew type of petroleum contract requires that foreign oilcompany supplies the initial investment, the needed technicalknowledge and the necessary equipment in exchange for theright to participate in the exploitation of oil resources inthe host countries. 106By using national oil companies and the new type ofpetroleum contracts, countries are able to dominate thecooperative petroleum activities and their interests.For the above reason, the establishment of a Chinesenational offshore oil corporation and the preparation of a106. " The joint venture agreement pioneered as a newform of petroleum development arrangement by ENI, the ItalianState Oil Corporation, was a response to the need felt bygovernments to share in the ownership and control overoperations.... It is noteworthy, however, that althoughownership of any petroleum discovered was joint and theoperating companies was jointly owned, the entire risk capitalfor exploration was to be furnished by the foreign partner. Inthe event that no commercial discovery was made, the loss wasto be exclusively borne by the foreign partner." Ibid. at121.102model petroleum contract were two top priority task which hadto occur before cooperation between China and foreign oilcompanies could take place in offshore oil activities.The Regulations 107 provide that China National OffshoreOil Corporation (hereafter referred to as CNOOC ) has theexclusive and overall responsibility for the exploration ofthe offshore petroleum resources of the People's Republic ofChina. In addition, CNOOC shall, by means of calling forbids and by means of signing petroleum contracts, cooperatewith foreign enterprises to exploit petroleum resources in theidentified offshore areas .108The Regulations also provided that CNOOC shall enter intopetroleum contract so as to cooperate with foreign enterprisesin the exploitation of offshore petroleum resources. Thecontract stipulates that the foreign enterprise shall providethe investment to carry out the initial exploration, beresponsible for exploration operations and bear allexploration risks. In addition, the contract provides thatafter a commercial oil (gas) field is discovered, both theforeign companies and CNOOC shall jointly make the investmentfor its cooperative development, and the foreign companies107. Regulations of the People's Republic of China on theExploitation of Offshore Petroleum Resources in Cooperationwith Foreign Enterprises. Supra, note 57.108. Ibid. Article 5 and 6.103shall be responsible for all development operations andproduction until CNOOC takes over the production operationswhen conditions as set out in the petroleum contract are met.The foreign contractor, in accordance with the provisions ofthe petroleum contract, may recover its investment and receiveremuneration out of the petroleum produced. 109In the offshore cooperation between China and foreign oilcompanies, CNOOC is the incarnation of the Chinese government.When foreign enterprises negotiate with CNOOC, they arefactually dealing with the Chinese government and vice visa.Without the agreement and the cooperation of CNOOC, foreignoil companies will not be able to take any action in China'soffshore. According to the Regulationm, the petroleumcontract formulated for China's offshore petroleum industry isa model contract. This contract is the most direct andeffective law governing the activities of foreign oilcompanies which have won the right to explore for oil inoffshore China. Almost all the most important provisionsprovided by China's offshore petroleum policy and laws, arecontained in specific concrete articles and clauses in themodel petroleum contract. 111109^Ibid. article 7.110 .^Ibid." The model contract is being used by the Chineseused as a basic legal framework. Because of its applicabilityto all foreign oil companies involved in offshore oil104II. Legal Nature of CNOOCIn the cooperative efforts between China and foreign oilcompanies, CNOOC occupies a vital position. Therefore, anunderstanding of the legal nature of CNOOC is important.CNOOC was created on 15 February 1982. Headquartered inBeijing, CNOOC has four regional subsidiary corporations. TheBohai Oil Corporation, based in Tanggu, is responsible for thepetroleum operation in the Bohai Gulf. The East Offshore OilCorporation, based in Shanghai, is responsible for theoperations in the East China Sea and the South Yellow Sea.The operation in the South China Sea to the east of 113 °10'longitude, is the responsibility of the Nanhai East OilCorporation, based in Guangdong. The operations in thewestern part of the South China Sea are the responsibility ofthe Nanhai West Oil Corporation which is located in Zhanjiang.Petroleum contracts between CNOOC and foreign oil companiesare negotiated and signed in Beijing and carried out byCNOOC's subsidiaries respectively.exploration, the contract function is similarlegislative enactment."^Loretta D. Rich,Interests in China" (1983) 6 Loyola ofInternational and Comparative Law Journal, 119to that of a"American OilLos Angelesat 130.105The function of CNOOC is to implement the policy of theChinese government regarding the cooperation withinternational oil companies. This includes calling fortenders, deciding the bidding blocks, signing petroleumcontracts, forming joint venture service companies,participating in the management of the operation andsupervising the activities of foreign oil companies in China.All the important plans or proposals concerning theimplementation of petroleum contracts are subject to theexamination and approval of CNOOC. According to theRegulations 112 : CNOOC is a"state corporation with the qualification of a juridicalperson which has the exclusive right to explore, develop,produce and market petroleum with the zone of cooperationswith foreign enterprises." 113Most of the officials of CNOOC, previously worked for theMinistry of Petroleum Industry of the PRC and hold officialgovernment titles. The organizational structure of CNOOC isbased on that of other Chinese ministries. In the genealogyof China's central government, CNOOC's position is equal tothat of a ministry and is under the direct leadership of theState Council of the PRC. It has the same power as other1U. Supra, note 107.113 . Ibid. Article 5.106ministries. At the level of the central government, it isentitled to communicate with all the other ministries anddiscuss their actions as equals. The presidents of CNOOC'sregional corporations have the same official status asprovincial governors. Under the Regulations 114, theoperations of CNOOC will receive special consideration fromboth the central and provincial governments. CNOOC is trulyan arm of the central Chinese government.Although CNOOC has authority in the government, the legalnature of CNOOC has become a fundamental question in the mindsof many executives of foreign oil companies. 115 To ensurethat their petroleum contracts signed with CNOOC are secure,international oil companies hope to see that CNOOC is legallyrecognised as a representative of the Chinese government or,alternatively, is acting under the express mandate of thegovernment. The power conferred on China National OffshoreOil Corporation under Chinese law gives foreigners theimpression that CNOOC represents the Chinese government. If1%. Ibid.115. "In addition to these issues concerning particularterms, there is more fundamental question in the minds of manyexecutives. This involves the mandate of CNOOC. AlthoughMinistry of Petroleum officials have stated more than oncethat CNOOC has the full power to sign contracts and to fulfilobligations under the contracts, some oil companies are uneasywith the absence of an official statute that defines CNOOC'sauthority. Executives have reportedly reexpressed the viewthat they would consider a contract with the Chinesegovernment more secure." Chris Brown, "Tough Terms forOffshore Oil", The China Business Review, July 1982 at 37.107CNOOC were acting on behalf of the Chinese government, theagreements concluded between CNOOC and foreign oil companieswould be backed by the Chinese government. Therefore, thelegal status of CNOOC is of great relevance to foreign oilcompanies. So far, however, some foreign oil companies havebeen unable to define the legal position of CNOOC underChinese law, nor have they found the guarantees for enforcingtheir petroleum contracts. 116China's legislation permitting the exploration anddevelopment of its offshore petroleum resources is made up oftwo parts. One part is the offshore petroleum law whichprotects China's sovereignty over its petroleum resources onthe continental shelf, while the other part is theinternational petroleum contract which is signed between theChinese and foreign parties. When foreign oil companies aresigning petroleum contracts with CNOOC, they generally havethe mistaken belief that they are actually dealing with theChinese government directly. In this way, they believe thatthe petroleum contract signed by CNOOC could be ranked as astate contract which, in nature, could be considered as a116. vw .... Ambiguity is another feature in Chineselegislation.... questions arise as to the ability of CNOOC andits subsidiaries to assume legal liability and the extent ofsuch liability in case of litigation. Some oil companies haveeven expressed uneasiness about CNOOC's power to sign contractand to fulfil contractual obligations." Paul C. Yuan,"China's Offshore Oil Development Policy and Legislation: AnOverall Analysis" (1988) Vo13, No2 International Journal ofEstuarine and Coastal Law 101 at 135.108quasi-international treaty.^Therefore, when any disputehappened regarding a petroleum contract, not only the Chineselaw, but also international law could potentially be applied.In addition, it was believed that if CNOOC incurred a debt,the relevant department of the Chinese government would beliable for the debt. However, this is an entirely mistakenopinion.CNOOC has a dual nature. Internally, it is a powerfulgovernment organisation in charge of China's offshore oilindustry. For example, all the important acts and decreesregarding the offshore oil activities were basically draftedby CNOOC and then rubber stamped by the Chinese legislature.Externally, however, the legal status of CNOOC is only anenterprise as a legal person. 117 Except for the Regulation,descriptions regarding CNOOC's legal position cannot be foundin any other Chinese law.In accordance with the Chinese law:" A legal person shall have the following qualifications:(1) establishment in accordance with the law; (2)Possession of the necessary property or funds; (3)Possession of its own name, organization and premises; and(4) ability to independently bear civil liability." 118W. Supra, note 107. Article 5.118  General Principles of the Civil Law of the People'sRepublic of China, Chapter III, Article 37, (Adopted at theFourth Session of the Sixth National People's Congress,109CNOOC was established under the Regulations and itsregistered capital was 8,281.08 million Yuan of RMB in1990 119, and it therefore meets the first two requirementsfor being a legal person. In the public, CNOOC has nodifference from other state run companies in China whendealing with foreign oil companies."A legal person shall be an organization that has capacityfor civil right and capacity for civil conduct andindependently enjoys civil rights and assumes civilobligations in accordance with the law.u uoIn the cooperation between CNOOC and foreign oilcompanies, CNOOC has to be responsible for its own behaviour.The Chinese government has no responsibility for CNOOC'saction. CNOOC's debt liability is limited to its registeredcapital and the competent authorities of the Chinesegovernment will not undertake any responsibility for CNOOC'sdebt. There is another provision of the Chinese lawindicating the legal position of CNOOC."Contract for .... Chinese - foreign cooperativeexploitation and development of natural resources to bepromulgated by Order No.37 of the President of the PRC onApril 12, 1986 and effective as of January 1, 1987.)119 .^China National offshore Oil Corporation, AnnualReport of 1990, Consolidated Balance Sheet at 29.1n. Supra, note 118. Article 36 and 48.110performed within the territory of the People's Republic ofChina shall be governed by the law of the People'srepublic of China. utnThis further demonstrates that CNOOC does not have thecapacity of a government ministry. Therefore, a petroleumcontract signed by CNOOC is not a quasi-international treatyand is not subject to international law.In the joint development of China's offshore oilresources with foreign oil companies, CNOOC is an enterprisehaving the qualification of a body corporate which bearslimited liability. This is its legal nature.Under the Chinese law, foreign oil companies willundertake the financial risk in the exploration stage duringthe contract term. When they are to sign petroleum contractsin China, they should know that they are not signing thecontract with the Chinese government.121. Law of the People's Republic of China on EconomicContracts Involving Foreign Interest, Article 5, (adopted atthe Tenth Session of the Standing Committee of the SixthNational People's Congress , promulgated by Order No. 22 ofthe President of the People's Republic of china on March 21,1985, and effective as of July 1, 1985).111Ill. Salient Features of Model Petroleum ContractThe model petroleum contract of CNOOC is a gateway forforeign oil companies to exploit China's offshore petroleumresources.According to the legal procedure provided for in China,any foreign oil companies interested in China's offshore oilare required to bid for their qualification. The winningbidders then shall be able to acquire a chance to negotiateand sign petroleum contracts with CNOOC. The blocks will notbe awarded to foreign oil companies unless they have signed apetroleum contract with CNOOC, and the signed contract isapproved by Chinese government. For all the foreigninvestors, this petroleum contract is a licence of concessionfor being entitled to enter offshore China for oil. Thepetroleum contract prepared for foreign investors is a modelcontract which allows limited room for contractors to bargain.The model petroleum contract is an integral part ofChina's open door policy and determines the fate of foreigninvestors in offshore China. The intent of this session is topresent a brief analysis on the dominant features of China'smodel petroleum contract (hereafter referred to as Contract).112A. General Feature:Under the provision of the Contract:(a) In the exploration period, Contractor shall raiseand pay all the funds needed, be responsible foroperation and undertake total exploration risk. 122(b) In the event that any oil (gas) field is discoveredwithin the Contract Area, the development costshall be shared by CNOOC and Contractor inproportion to their participation interests. CNOOCshall participate fifty one of the share andContractor forty nine. 123(c) Contractor may recover its investment and cost andreceive profit. 124122. CNOOC, Model Petroleum Contract for the Third Roundof Bidding, Article. 2.4.123.Ibid. Article 12.1.1, Ibid. Article 13.113The oil produced from oil fields within Contract Areashall be allocated in the following sequence:(a) Payment of government taxes and royalty. 125(b) Recovery of production operation cost from theportion of "Cost Recovery Oil" .126(c) Recovery of exploration cost and uncoveredproduction operation cost from the proportion of"Cost Recovery Oil" .127(d) Share of remainder oil.^After the payment ofgovernment taxes, royalty and the recovery of theabove mentioned cost, the remainder oil shall bedivided into two portions. One portion belong toCNOOC as "Share Oil Of China Side". anotherportion shall be "Allocable Remainder Oil". The"Allocable Remainder Oil" shall be shared by CNOOCand Contractor in proportion to their respectiveparticipating interest. 128125• Ibid. Article 13.2.1. and• Ibid. Article. Ibid. Article 13.2.2.in. Ibid. Article., 13.2.3 and Contract Term:The exploration period of Contract shall be seven years,beginning on the date of commencement of the implementation ofContract. This exploration period is normally divided intothree phases. The first phase shall be three years. Thesecond and third phases shall be two years respectively. 129Subject to the approval of CNOOC, the exploration periodmay be extended to a reasonable period. u°In the event a commercial oil (gas) field is discoveredwithin the Contract Area, the production period shall befifteen years 131There is no specific time table for the developmentperiod, but the development period of any oil (gas) fieldwithin the Contract Area shall begin on the date of approvalof the Overall Development Program (ODP) of the said oil (gas)field by the responsible authorities of the Chinese governmentand end on the date of the entire completion of the129. Ibid. Article. 4.1.130. Ibid. Article. 4.3.131. Ibid. Article 4.3.115Development Operation set forth in the ODP. 132In any event, the term of Contract shall not be beyondthirty years. 133CNOOC does not wish the term of the Contract to be ableto extend without limitation. Thirty years is an absolutedeadline. Even if there are several oil (gas) fields onstream within the Contract Area, the Contract can not be validfor over thirty years.C. Contract Area:The Contract is different from conventional commercialcontracts entered in China. It deals with China's naturalresources and grants the concessions to foreign oil companiesfor the exploitation of petroleum. The objective of foreignoil companies to invest in offshore China is to acquire somepromising blocks to drill for oil. As long as the Contract issigned between CNOOC and a foreign oil company, that companyis entitled to enter the concession to carry out the operationof oil industry. In this sense, the Contract in fact is anequivalent to a licence of concession which is awarded to132. Ibid. Article 4.6.133. Ibid. Article 4.7.116foreign oil companies by the Chinese government. To sign apetroleum contract with CNOOC is the first legal step forforeign oil companies to start their petroleum activities inoffshore China.CNOOC is empowered by the Chinese government to awardContract Areas to foreign oil companies which have won the bidto work in China's offshore petroleum industry. As a statecompany, CNOOC functions as the official representative of theChinese government in the activities of offshore oilexploitation. It is up to CNOOC to pick out qualified foreignpartners to sign Contract and decided the location and thesize of Contract Areas.The Contract area is composed of basic blocks, which aredesignated in accordance with every ten minute of longitude.The size of each basic block is about three hundred squarekilometres. However, the size of those blocks which arelocated in shallow water and which possess better geologicalexploration prospects is smaller than that of other blocks.The Contract provides that no right is granted in favourof the Contractor to the surface area, subsea, sea bed,subsoil or any natural resources or aquatic resources otherthan petroleum existing there, and no right is granted to theContractor for anything left on sea-bed within the Contract117Area. 134D. Relinquishment of Contract Area:(a) At the period of the first phase of the explorationperiod, Contractor shall relinquish twenty fivepercent of the Contract Area. 135(b) At the expiration of the second phase ofexploration period, the Contractor shall relinquishanother twenty five percent of the remainingContract Area after deducting the Development Areaand/or Production Area. 136(c) At the expiration of the last phase of explorationperiod, Contractor shall relinquish the remainingContract area except any Development Area and/orProduction Area. 137(d) At the expiration of the Production Period, any oil(gas) field within^the^Contract Area^shall^be134. Ibid. Article 2.135. Ibid. Article Ibid. Article Ibid. Article to CNOOC. 138The Contract also provides that the relinquished areashall be made up of as few rectangles as possible so as tofacilitate exploration operations.Well known Doctrine of Relinquishment is applied here inContract. 139 The provisions regarding of relinquishment ofexplored Contract Area are critical clauses to the Chinesegovernment. These provisions mean to maintain the sovereigntyover the exploration area and the mineral resources for theChinese government. The Contractors may be awarded a largeblock of offshore area at the starting stage of exploration,but it is not appropriate for them to hold that large blockfor a long period. The Chinese government requires foreign138 . Ibid. Article^" The interest of the government in this phase (exploration phase) is clearly to secure rapid and thoroughexploration. This phase may, perhaps, be regarded as the mostcritical, since the future development is premised uponsuccess of this phase. An area in which there has been a gooddeal of innovation is that involving legal mechanisms designedto ensure more rapid and thorough exploration....Governmenthave an interest in resuming, within a relatively short time,control over area where companies have carried out initialexploration operations and have not made any discovery, orhave decided not to conduct further exploration: the more so,since there is evidence that subsequent exploration in areaabandoned by a company, has led to significant discoveriesbeing made. The mechanisms by which this interest is securedare relinquishment or area-reduction provisions, which may becontained in the general legislation or in the agreement, orboth." Supra, note 102 at 112-3.119oil companies to relinquish part of exploration areas on theexpiration of each contracted exploration period in order toavoid the waste of mining area, to strengthen its negotiationposition and to safeguard its national sovereignty. In theconsideration of the Chinese government, the provision of AreaRelinquishment was very important. If the Contractor wasawarded long exploration period in a large block, new oilcompanies would have no opportunities to enter the occupiedarea to explore for oil. It was not acceptable to the Chinesegovernment to allow any foreign oil companies to monopolise abroad area for oil exploration.E. ConfidentiabilityThe Contract and all documents, information, data andreports related to the Petroleum Operation within the ContractArea shall be kept confidential. Confidential period shall bedetermined by CNOOC in accordance with relevant Chinese lawsand regulations . 140The Contract provides time limits for two kinds ofconfidentialities.10. Supra, note 122. Article 22.120If the responsible authorities of the Chinese governmentdecide to award new acreage in sea to a new foreign oilcompanies, CNOOC may furnish:(a) the original information and data held by CNOOC forover two years,(b) the interpretation of original information and dataheld by CNOOC for over five years to the thirdparties. U0F. Arbitration and Applicable Law:According to the provisions of the Law of the People'sRepublic of China on Economic Contracts Involving ForeignInterest 142 , the Contract is governed by Chinese law. Thisis a legislative principle that the Chinese government willalways adhere to. As for the arbitration the Chinesegovernment took a flexible manner.uo . Ibid. Article 22.2.(a) and (b).142 . Supra, note 121.121On the subject of arbitration, the Contract provides:(a) Any dispute on the performance or interpretationof the Contract shall be settled amicably throughconsultation .143(b) A dispute which has not settled throughconsultation shall be referred to arbitrationconducted by the China International Economic andTrade Arbitration Commission according toarbitration proceeding rules. 144(c) If the parties fail to reach an agreement onarbitration under Chinese rules, an ad hocarbitration tribunal shall be established. Thearbitration tribunal shall consist of threearbitrators. Each parties shall appoint anarbitrator and the third arbitrator shall beappointed by the two arbitrators. If the twoarbitrators fail to appoint the third arbitrator,the third arbitrator shall be appointed by theArbitration Institute of the Stockholm Chamber of143. Supra, note 122, Article 26.1.144. Ibid. Article 145(d) The third arbitrator shall be a citizen of acountry which has diplomatic relations with Chinaand the home country of the Contractor and shallhave no economic interest or relationship with theparties. The arbitration tribunal shall conductthe arbitration in accordance with the arbitrationrules of the United Nations Commission onInternational Trade Law (UNCITRAL) of 1976. Theplace of arbitration shall be determined by theparties through consultation or by the wishes ofmajority of arbitrators.On the subject of applicable law, the Contract provides:(a) The validity, interpretation and implementation ofthe Contract shall be governed by the laws of thePeople's Republic of China. If there are norelevant provisions in Chinese laws to interpretof the Contract for the implementation, theprinciples of applicable laws widely used inpetroleum resources countries which are acceptableto the parties shall be applicable. 146145. Ibid. Article 26.2.2. and . Ibid. Article 28.1.123(b) If a material change occurs to the Contractor'seconomic benefits after the effective date of theContract due to the promulgation of new laws,decrees, rules and regulations or any amendment tothe applicable laws, decrees, rules and regulationsmade by the government of the PRC, the Partiesshall consult promptly and make necessary revisionand adjustment to relevant provisions of theContract in order to maintain the Contractor'snormal economic benefits.It might be the first time since the founding of the PRCthat China's competent authorities gave up their normal standthat anything happening in China must apply Chinese laws orlegal procedure. This action has set an example for thefuture similar cooperation between China and foreigncountries.G. Effectiveness and Termination:The signed Contract shall be approved by the Ministry ofForeign Economic Relations and Trade of PRC. The date of suchapproval shall be the effective date of the Contract. 147747. Ibid. Article 2.7.124The Contractor can terminate Contract under the followingconditions:(a) After the expiration of the first or secondexploration period and prior to the explorationperiod without discovering any commercial oil (gas)field. 148(b) [1]^If there is only one oil (gas) field inproduction within the Contract Area, the Contractshall be terminated on the termination of theproduction of such field. [2] If there are morethan two commercial oil (gas) fields inproduction, contract shall be terminated ontermination of production period of the field withthe latest termination date. 149(c) At the end of the last day of the thirtieth yearfrom the date of commencement of Contract.148^Ibid. Article 6.3. and^Ibid. Article Management MechanismThe Contract contains elements of a joint management,which can be demonstrated by the management mechanism of theoperation in the exploration and development of China'soffshore petroleum resources.According to Article 7.1 of the Contract, CNOOC and theContractor shall establish the Joint Management Committee(JMC) within forty-five days from the date of commencement ofimplementation of the Contract.The establishment of the JMC is an outstanding feature ofContract. By setting up the JMC, CNOOC will reach threegoals.(a) To put the operation of the Contractor under thedirect supervision of Chinese authorities.(b) To learn management experiences on offshorepetroleum industrial operation from foreignpartners.126(c) To conduct direct management with the Contractorover the Contract.The JMC is formed by an equal number of representatives(one to three) appointed by CNOOC and the Contractor. 15°The function of the JMC is as follows:(a) Review and examine the work program and budgetproposed by the operator.(b) Determine the commerciality of each trap on which apetroleum discovery has been made in accordancewith the operator's appraisal report and report itsdecision to CNOOC for confirmation.(c) Review and adopt the Overall Development Programand budget for each oil (gas) field.(d) Approve or confirm substantial^items ofprocurement and expenditure.(e) Determine and announce the date of commercialproduction of each oil (gas) field within theIbid. Article 7.1.127Contract Area.(f) Determine the type and scope of information anddata provided to any third party and affiliate inrelation to the petroleum industry of the PRC inaccordance with the Provision of Ministry ofPetroleum industry of the PRC for the Control ofData Concerning the Exploitation of OffshorePetroleum Resources in Cooperation with ForeignEnterprises.(g) Demarcate boundaries of Development Area andProduction Area of each oil (gas) field.(h) Review and approve plans for transfer ofproduction operation.(i) Review and approve the insurance program proposedby operator and emergence procedures on safety anenvironmental protection.(j) Review and approve personnel training programs.(k) Discuss, review, decide and approve other mattersthat have been proposed by either party to theContract or submitted by expert groups or the128operator.(1) Review and examine matters required to be submittedto relevant authorities of the Chinese governmentand / or CNOOC.In offshore China, foreign oil companies have been notgiven a free hand to carry out their operation. The JointManagement Committee is an entity ruling the operation andactivities of foreign Contractors. Nearly every step taken bythe Contractor regarding the exploitation operation shall besubject to the approval, review and examination of JMC. TheJMC informs CNOOC about how the Contract is being implementedand therefore CNOOC can take quick action should any problemsarise. JMC is a standing unit. By working with their foreigncolleagues daily, the Chinese members can learn differentexperience in managing offshore petroleum industry directlyand immediately. The Chinese government has jointly venturedwith foreign oil companies in the exploitation of its offshorepetroleum resources. After the discovery of an oil (gas)field, CNOOC claims 51 percent of interest. CNOOC also feelsimportant to participate in the direct management in everyaspect since the beginning of the implementation of theContract. The Contract provisions regarding the JMC are setup for this purpose. The Chinese government won't allow theforeign Contractor to be able to do anything alone within the129Contract Area. China's sovereignty over natural resourcesenables the Chinese government to require foreign oilcompanies to agree to the establishment of the JMC. It is aspecial method worked out to maintain China's economicinterests.I. Features of Other ArticlesThere are some other special articles provided in theContract in China's favour. For example:(a) all assets purchased, installed and constructedunder the work program and budget for each oil(gas) field within the Contract Area shall be ownedby CNOOC at the expiration of production period;(b) if conditions permit, CNOOC may take over theproduction operation of oil (gas) field withinContract Area;(c) The overall Development Program of any oil (gas)field within Contract Area shall be subject to theapproval of Chinese government;130(d) CNOOC shall have the right to assign professionalrepresentatives to the operator's administrativeand technical department which are related to thepetroleum operation;(e) the Contractor has to give preference to theemployment of Chinese personnel, goods andservices;(f) the ownership of all the data, records, samples,vouchers and other original data obtained in thecourse of performing the petroleum operation shallvest in CNOOC.Besides, the Contractor shall pay CNOOC a nonrecoverablesignature bonus of one million U.S. dollars. 151J. ConclusionIn Chinese history, both sea area and mineral resourcesused to be forbidden fields to foreign countries. When theChinese government decided to open its offshore to foreigners151^Ibid.^Article 17.1, 8.7, 11.4, 7.5, 15, 17 and30.5.131for the exploitation of oil resources, its first concern wasto safeguard China's national sovereignty. Therefore, thedoctrine of sovereignty is given a full expression in theContract.In drafting the Contract, the general objective of theChinese government regarding the cooperation with foreignforce to exploit China's offshore petroleum resources was toutilize foreign capital, technology and experience to serveChina. The emphasis should be given on the utilization offoreigners. There are two fundamental doctrines runningthrough Contract:(a) doctrine of safeguarding sovereignty,(b) doctrine of utilizing foreign investment. Almostall the questions arising from the interpretationof Contract can find answers from using these twodoctrines.The Contract is not simply a lease of concession, nor ajoint venture agreement nor a production sharing petroleumcontract which created by southeast Asian countries such asIndonesia or Malaysia. It is a Chinese style creation. Theformation of the Contract has absorbed advantages fromprevailing international petroleum agreements to date.132Several conclusions can be made from Contract.In the first place, it is a risk contract. Contractorshall solely undertake all the exploration risk.In the second place, it is a joint management contract.CNOOC and the Contractor shall jointly manage theContract from the beginning to the end.In the third place, it is a joint venture contract. CNOOCand Contractor shall pool their investments in theproduction period.In the fourth place, it is a production sharing contract.CNOOC and Contractor shall recover their investment costand share the remainder oil .In summary, the Contract is a combination of a riskpetroleum contract, a joint venture petroleum contract and aproduction sharing petroleum contract. It is a legal creationthat the Chinese government has been practising in itsoffshore petroleum industry. 152 To maintain China's national152. " The model contract incorporates aspects of theIndonesian, British, Brazilian, and Norwegian contract models.It contains elements of a joint venture and a productionsharing agreement." See supra, note 111 at 130:133economic interests and to make best of foreign capital toserve China's economic construction are fixed generalgovernment policies of China. These policies have been wellreflected by the Contract.Having studied and summarized the petroleum contractmodels of other host countries with petroleum resources, Chinaestablished its model petroleum contract. It is a cruciallegal instrument governing the activities of foreignenterprises working in offshore China for oil. In its morethan ten years of practice, the Contract has madecontributions to the development of China's offshore oilindustry. 153 Although it will undergo repeated modificationto meet changes according to the situation of China'spetroleum industry, the current Contract will remain alandmark to show the foundation of China's legal framework incooperation with foreign enterprises in the exploitation ofoffshore petroleum resources.153 . See supra, note 51.134Chapter FourA Comparative Study of the Offshore Oil and Gas Laws of theU.K., Canada and China"Oil companies from all over the world have crossed theseas to search for oil off the Chinese coastline. Seismicsurveys are presently spider-webbing over 1,100,000 km2 ofocean space. Speculation on what kind of productioncontract the oil companies will eventually sign has beenunbridled. Attention has been focused upon the Brazilian,Indonesia, Algerian, and Norwegian "Models" as possibleways China may contract with the international oilcompanies."^ What Kind of Contract Will China Accept ? 154More than ten years have elapsed since the Chinesegovernment officially commenced its cooperation with foreignoil companies in 1982. It may now be the appropriate time forthe Chinese government to reexamine its offshore petroleum lawand policy. The factors that have been most influential inshaping the development of this branch of law and policy inChina are:(a) the urgent need for economic reform; and154. China Business Review, Jan-Feb (New York: U.S.-SinoBusiness Council, 1980) at 24-5.135(b) China's distinct historical tradition and socialbackground.In addition to these factors, worldwide practices and thelegislative experiences of other states have also influencedChinese policy. Petroleum is the foremost source of energy inthe world. To promote the development of the petroleumindustry, many countries have promulgated exclusive petroleumlaws to regulate oil exploration and production. A briefcomparative study of the offshore oil legislation and practiceof other important oil-producing countries may yield valuableinsights which can be used to evaluate the effectiveness ofthe Chinese offshore petroleum law and policy and to suggestpossible legislative changes.Three petroleum regimes of those of the U.K., Canada andChina will be studied in this chapter:I. Oil and Gas Law in the U.K.Until the 1970s, the U.K. was a country poor in oil. Inthe mid-1950s, it developed some small onshore oil fields. In1974, the annual oil output of U.K. was only 88 thousands136tons. 155 With the exploration and development of the NorthSea oil fields, however, the U.K. became a major oil-producingcountry. The success of the British state was one of thefactors which encouraged the Chinese government to embark uponthe recovery of petroleum resources in its offshore area. TheChinese government takes a continuing interest in the practiceof the British offshore oil and gas industry. Any adjustmentin British offshore petroleum policy usually attracts theattention of the Chinese government. Oil and gas law in theU.K. has set a precedent which could be studied by the Chinesegovernment in formulating its own petroleum law. It is nosurprise, therefore, that the contents of China's offshorepetroleum laws are substantially similar to those of theUnited Kingdom.155 . Qian Jinxi et al, Er Ci Shi Jie Da Zhan Hou De ShiYou Di Li (Petroleum Geography After War World Two) (China:Tianjing People's Publishing House, 1981) at 122.137A. The License SystemBritish petroleum law rests is based on the Petroleum(Production) Act 1934 and the Continental Shelf Act 1964. 156The basic provision of oil and gas law in the U. K. is thatall the petroleum resources located within the boundaries ofthe U.K. and its continental shelf are owned by the Crown.Under U.K. law," The property in petroleum existing in its naturalcondition in strata in Great Britain is hereby vested inHis Majesty, and His Majesty shall have the exclusiveright of searching and boring for and getting suchpetroleum157 Any rights exercisable by the UnitedKingdom outside territorial waters with respect to the seabed and subsoil and their natural resources, except so faras they are exercisable in relation to coal, are herebyvested in Her Majesty." 158The above statutes provide that the Crown is the owner of156. "The main elements of United Kingdom law on theproduction of oil and gas are to be found in the Petroleum(Production) Act 1934, the Continental Shelf Act 1964, theMineral Workings (Offshore Installations) Act 1971, the OilTaxation Act 1975 and the Petroleum and Submarine Pipe-linesAct 1975, and in the Petroleum (Production) Regulations 1976made under the first of these statutes." T. Daintith at al,ed., United Kingdom Oil and Gas Law (London: Oyez PublishingLtd, 1977) at 1.157•^Petroleum (Production) Act 1934, Article 1.Statutes of U.K., 24 & 25 Geo 5, c 36.^Ibid. at 221.. Continental Shelf Act 1964, Article 1. Statutes ofU.K., 1964, c.29. Ibid. at 231.138petroleum resources located in the territory of the Kingdomand that it exercises sovereignty rights over the resources ofthe continental shelf in accordance with international laws.Only the Crown may give permission for the exploration anddevelopment of petroleum. Otherwise, such activities violatethe exclusive proprietary rights of the Crown. Because theexploration and development of petroleum in Britain are mainlyundertaken by private enterprises, a system of licenses wasdeveloped as the legal vehicle to govern the industrialactivities aimed at tapping state-owned petroleum resources.Thus, in the U.K. only license holders are entitled todrill for petroleum. Petroleum licenses are granted by theSecretary of State for Energy. According to the Petroleum(Production) Act 1934," section 2-(1) The [Secretary of State], on behalf of HisMajesty, shall have power to grant to such persons as [he]thinks fit licenses to search and bore for and getpetroleum. (2) Any such licence shall be granted for suchcondition (whether by royalty or otherwise) as the[Secretary of State] with the consent of Treasury maydetermine, and upon such other terms and conditions as the[Secretary of State] thinks fit 6-(1) The [Secretaryof state] shall, before granting any license under thisAct, make regulations prescribing---- (a) the manner inwhich and the person by whom applications for licencesunder this Act may be made; (b) the fees to be paid on anysuch application; (c) the condition as to the size andshape of areas in respect of which license may be granted;(d) model clauses which shall, unless [he] thinks fit tomodify or exclude them in any particular case, beincorporated in any such license." 159159. Ibid. at 221-223.139Petroleum licenses are an integral part of U.K. oil andgas law. They have a dual nature. On the one hand, they areconsensual contracts. When licensees reach agreements withthe Crown, they have the right to explore and developpetroleum in a assigned block during a fixed term. In return,by way of consideration, they have to pay royalties and taxesto the government. On the other hand, these petroleumlicenses are different from common commercial leases sincethey derive their authority directly from U.K. legislation andthe British government sets their terms. 150 The Secretaryof State grants petroleum licences on behalf of Parliament.Thus, while the Secretary of State exercises power to regulatepetroleum activities, the licensees's rights and obligationsare also governed by the license provisions set by the Britishgovernment as compulsory regulations. In addition, theBritish parliament can, by legislation, unilaterally alter theterms of existing seaward and landward petroleum productionuo 11 .... the license arrangements retain a stronglyregulatory flavour, both by reason of the formal rules for theissue of licenses laid down at the instigation of Parliament,and by reason of the contents of the licences themselves,which must normally accord with model clauses regulating suchmatters as working methods, safety, pollution and training,and reserving to the Minister considerable powers of directionof the licensee's activities. Indeed, with the unilateralalteration of clauses in existing licenses by the Petroleumand Submarine Pipe-lines Act 1975 one might be tempted to saythat the contractual character of the licences was purefiction." Ibid. at 26.140licenses. 161 There are of course political limits on theexercise of these rights.To summarize, in Britain, the government uses the systemof petroleum licenses to control the exploration anddevelopment of petroleum resources. The license system is acombination of both contract and governmental regulation.B. Financial RequirementThe non-exclusive U.K. exploration license includes thepossibility of drilling wells to a depth of 1,000 ft (330meters).The surface of the blocks in the exclusive productionlicenses is 100 sq miles (250 km 2). Duration of the licenseis 40 years. After 6 years, 50% of the area must berelinquished. The work obligation is negotiated before thelicense is granted.The financial aspects of this legislation include thepayment of a fixed-initial bonus of 200 pounds sterling for161. Petroleum and Submarine Pipe-lines Act 1975, Article18. Statutes of U.K., 1975, c74. Ibid. at 304-6.141each of the first ten blocs and 5 pounds 162 for eachsubsequent bloc. The surface duties amount to 25 pounds--perkm2 for the first six years, and 40 pounds for the seventhyear; each following year the surface duty increases by 25pounds to a maximum of 29 pounds per km 2 after seventeenyears. The royalty is fixed at 12.5% of the initial well headprice based on the sale price. The corporation income tax is40% of the taxable income. An investment-credit of 30% existsfor fixed assets and intangible drilling expenditures. 163The production of the British offshore petroleum industryhas brought tremendous benefits to Britain, and maintenance ofoil income remains a constant concern of the government. Inorder to attract more international oil companies to operatein its offshore petroleum industry, the taxes levied by theBritish government are not very high. The U.K. is the oldestand most seasoned capitalist country in the world; itsgovernment has expertise in manoeuvring economic incentives tomotivate international petroleum companies. The Chinesegovernment has been most impressed by the way in which Britishpetroleum tax policy has contributed toward the development ofoffshore resources. The tax rates in China from the offshore162. Pounds referred in this section means English poundssterling.163 ^A P H V Meurs, Petroleum Economics and OffshoreMining Legislation (Amsterdam-London-New York: ElsevierPublishing Company, 1971) at 172.142petroleum industry are therefore structured similarly to thosein the U.K..C. State ParticipationIn its offshore petroleum industry, the Britishgovernment asks oil companies to bid for the grant ofpetroleum licences. Before 1976, during the first to fourthround of license bidding, no state participation wasofficially required. British state corporations such as BGC(British Gas Corporation) and NCB (National Coal Board) mightform consortia with other oil corporations to bid forpetroleum licences. The British government encouraged theparticipation of the State corporations but its policy was oneof " voluntary participation". 1"After 1977, starting with its 5th round of bidding forpetroleum licenses, the British government required oilinvestors in offshore oil areas to accept 51% state164. "Such participation was on a formally equal footingwith private enterprise, though in the informal publishedcriteria for the allocation of licenses, in the 1965 and 1969rounds, the participation of the NBC and BGC in the licenseconsortium was made first a desideratum and, in certain of the1969 allocations, an essential prerequisite for the grant ofthe license. These provisions induced certain privateoperators, among whom Gulf and Conoco were notable examples,to cooperate extensively with the State corporations." Supra,note 156 at 16.143participation. 165 This shift in policy put the activities ofinternational oil companies under strict governmental controland supervision. This enabled the British government to fullyutilise foreign investment and gain access to foreign advancedtechnology and experience, while maintaining its sovereigntyover its national resources. The most significant advantagefor the U.K. in implementing a state participation policy wasthat it guaranteed governmental control over a large part ofcrude oil produced from the North Sea oil fields.In fact, even before 1977, the British government haddirectly participated in the development of the petroleumindustry in various ways. Even before the exploitation of itscontinental shelf, the British government, in its role as a50% "sleeping partner" in British Petroleum Plc (BP), sharedthe enormous profit of that giant private company. 166 Atthe early stage of its offshore petroleum industry, theBritish government encouraged the two British state165• " The Government's announced aim was to ensuremajority BNOC participation in existing licences coveringfields with had been or would be proven commercial Withregard to future licences, ....such licenses will be grantedonly on the basis that BNOC or one of its subsidiaries (orpossibly BGC) is from the outset a co-licensee with at leasta 51 per cent interest." Ibid. at 16-17.166 This is not to say that there was no Stateparticipation in exploration and production activities priorto 1975. BP may be left to one side,   the government'sshareholding in the firm has never dropped far below 50 percent and confers a right of veto over Board decisions, .... "Ibid. at 16.144corporations, BGC and NCB, to form a consortium with foreignoil companies to join the offshore petroleum activity in theU.K.. As soon as the brilliant prospects of offshore oilresources were apparent, the British government organised anational oil corporation and required its direct participationin the industry through legislation.Under the Petroleum and Submarine Pipe-lines Act 1975,the British government established the British National OilCorporation (BNOC). 767 The aim of the British government insetting up BNOC were:(a) to secure for Britain the full benefit of its oil;(b) to acquire information and expertise throughparticipation in the councils of the oilcompanies;(c) to secure national use of oil extracted in theU.K.. 168Subject to certain provisions of the Petroleum andSubmarine Pipeline Act 1975, BNOC could act as the agent ofthe Crown. The British government pinned great hopes on BNOC,lu. Ibid at 284.168 . Ibid. at 17.145and the Act empowered itH .... to perform for the government the servicesconnected with petroleum at request.... to do anythingrequired for the purpose of giving effect to agreementsentered into by the Secretary of State with a view tosecuring participation by the government of the U.K., orby the Corporation, in activities connected with petroleumbeneath controlled waters U 169However, the British policy for participating in itsoffshore petroleum industry did not provided the expectedeconomic benefits. On the contrary, the state oil corporationgrew to become a financial burden on the British government'sbudget. As a result, in the mid-1980s, the British governmentreduced its support to the state oil corporation. Inpractice, the British government eventually changed its policyof direct state participation in the offshore petroleumindustry.Under the Oil and Pipeline Act 1985, the role that BNOCplayed was greatly reduced. m It could no longer beregarded as a servant or as an agent of Crown. 11" The new169. See Petroleum and Submarine Pipe-line Act 1975, 2-(1). Ibid. at 289.170. Oil and Pipeline Act 1985, Statute of U.K. 1985, c.62. Great Britain, Public General Act, 56-57 (London: theCouncil of Law Reporting, 1985) at 1879.. Under the Act, "The Agency shall have power (a) toenter into agreement for the carrying out on behalf of theCrown of activities with respect to petroleum, pipelines andstorage installation held by or on behalf of the Crown; (b) toenter into such participation agreements as the Secretary ofState may determine." Ibid. at 1880.146act stipulated that BNOC should not enjoy any status,privilege or immunity of the Crown. It was not to be exemptfrom any tax, duty, rate, levy or other charge whatsoever,whether general or local. 172In 1988, the British government sold its BP shares, andBNOC was taken over by BP. Presently, the British governmentpursues a privatization policy regarding state runenterprises. State participation in the offshore petroleumindustry is not part of current British government policy.With less government interference in the British offshorepetroleum industry, the development of the industry tends tobe more vigorous. Privatization may prove to be a sensiblepolicy if it leads to greater innovation on the part of oilcompanies and increased economic benefits to the state.At present, State participation has become a policycommonly adopted by most oil producing countries , includingChina. Many countries regard state participation as a meansof safeguarding state sovereignty and as an effective methodof protecting their economic interests." 3 The flexibleln. Ibid. at 1880."3. " In recent years the trend is toward greaterparticipation of the state in petroleum resource developmentand that solely because the producer countries have perceivedthe need of controlling this critical resource in order tostrengthen its economic and strategic position in the worldarena. The concept of direct state participation in thedevelopment of petroleum resources has been widely accepted147manner of the British government in dealing with stateparticipation in the offshore petroleum industry can be usedas a different example for other countries in formulatingtheir petroleum laws. The current Chinese offshore petroleumlaw was formulated ten years ago under the influence of theold political mode, and state participation has beenconsidered a decisive principle in China's offshore petroleumlaw. In China, just as in Britain, the economic interests andthe oil income from the offshore petroleum industry havebecome the primary concern of the government. Given thepositive British legal experience in its offshore petroleumindustry, it might be a useful exercise for the Chinesegovernment to reexamine its state participation policy inorder to accelerate the development of its offshore petroleumindustry and to attract foreign oil companies.and implemented in many parts of the world, and bothdeveloping and developed countries have enacted laws and actsthat assure them of direct participation in the management ofpetroleum operations, including the power of determining therate, price, and distribution of production sharing, or fullstate participation. Even the United States which hastraditionally favoured the concession system is now beginningto explore options whereby the government would have anoperating interest. The degree of success achieved by varioussystems as adopted by different countries varies greatly, andthis in large measure 'reflects the petroleum potential andthe bargaining strengths of the countries involved." Paul C.Yuan, "China's Offshore Petroleum Resources Law--A Criticaland Interpretative Analysis" (1982) Vol.16 No.2 TheInternational Lawyer 647 at 653."The establishment of Statoil in Norway, and that ofBritish National Oil Corporation, are in part influenced bythe need to develop national capacities to deal moreeffectively with the multinational oil companies." Supra,note 102 at 65.148D. The Power of Secretary of StateThe Secretary of State has enormous powers over oilactivities in the U.K.. He is entitled to grant petroleumlicenses to oil companies, modify provisions of model clausesof the licences and he can empower the State oil companies toact as agents of the Crown or the government. All importantgovernment polices regarding the petroleum industry in theU.K. must be shaped with the prior consent of the Secretary ofState. The Secretary of the State acts as the representativeof the Crown interest to control and supervise the developmentof the petroleum industry in the U.K.. This is anotherspecial feature of the legal system of the U.K.E. ConclusionThe U. K. is a common law country. It was the earliestcountry in the world to become industrialised and to beengaged in the exploitation of offshore petroleum resources.In the long process of developing its industry, the Britishgovernment accumulated abundant legal experiences which havebeen applied in establishing its petroleum legal system andpolicy.149In sum, the petroleum law of the U.K. has the followingfeatures:(a) A petroleum license is used to be the contractualagreement as well as the law governing thepetroleum activities.(b) There is less government interference ( no stateparticipation).(c) The discretion of the Secretary of State plays aninfluential role.(d) Financial income from the petroleum industryremains as a major incentive to the government toadjust its petroleum policy frequently.Generally speaking, economic goals drive adjustments tothe petroleum law in the U.K.. The British government isgood at deploying its tangible economic interest tostimulate foreign oil companies to invest in its offshoreoil industry. The British government has underscored theimportance of the taxation, royalty, and other financialincomes, which have been engendered by the development of itspetroleum industry and have provided huge financial support to150that country. The most outstanding feature of the British oiland gas law is that profits from the petroleum industry arethe paramount objective of the government policy.Britain has accumulated experience over a long period oftime in enacting and applying petroleum laws. It hasdeveloped these laws smoothly and flexibly in various nationaland international circumstances. From 1934 to the presenttime, the British Parliament has promulgated several statutesto regulate the petroleum industry according to changes in thefactors affecting the development of the offshore petroleumindustry. Although the British petroleum law has the mainobjective, as is the case in other states, of safeguarding itssovereignty and economic benefit, the British government hasscarcely stuck to a fixed pattern in its cooperation withinternational oil companies. The British government's adeptlegal experiences have rejuvenated its petroleum industry andgreatly benefited the country.When the British government decided to tap the petroleumresources in the North Sea, it encountered the same difficultyas the Chinese government. The British government was alsoshort of capital and advanced technical expertise. However,it established effective oil and gas laws to meet therequirements of offshore industrial development. The U.K. oiland gas law helped to attract foreign investments and turned151the U.K. into an important oil producing country. The recentwealth of the U.K. has been mainly brought about by theoffshore petroleum industry. China is a country with a longcoastline and a vast continental shelf. To reform itseconomy, the Chinese government wishes to develop its offshorepetroleum industry. The legal experience of the Britishgovernment regarding the offshore petroleum industry is worthstudying by the Chinese government.II. Oil and Gas Law In CanadaCanada is an important oil producing country in northAmerica, whose oil reserves rank highly in the world. InCanada, proven oil reserves have been discovered mainly in thewestern provinces, Yukon Territory, Northwest Territories andthe eastern offshore area. Alberta is an important oilprovince and 85% of Canada's oil output is produced there. 174Both Canada and U.K. are common law countries, but theiroil and gas laws are fundamentally different. In Canada, theownership of oil resources remains a tough legal issue.Proprietors at various levels are all given exclusive rightsto tap the country's petroleum resources. Therefore, thecommon law and the statutes in Canada governing petroleum174. Supra, note 155 at 114.152activities are more intricate than those in U.K.. As far aspetroleum activities on Canadian lands are concerned, thegoverning laws have been significantly influenced by U.S.law. 175 On the continental shelf, the ownership of petroleumresources belongs to the federal government; the Canadianoffshore petroleum industry is governed by Canadian federalstatutes. According to the relevant agreements, petroleumactivities carried out in the offshore area are managed by theCanadian government and the adjacent coastal provincialgovernments jointly.Canadian petroleum law contrasts with that of the U.K.and China. It provides an alternative model that is worthy ofstudy by the Chinese government.A. Lease SystemUnlike the British oil and gas law, the mineral rightsfor petroleum in Canada are not exclusively vested in theCrown. In Canada, the mineral right is enjoyed by thelandlord, regardless of the landowner's title in Crown land or175 . " Canadian oil and gas law has been significantlyinfluenced by U.S. law. The reason is that basic industrydocuments, particularly the freehold oil and gas lease, weredeveloped first in the U.S. and subjected to U.S. juridicalinterpretation." A. R. Lucas and C. D. Hunt, Oil and Gas Lawin Canada. (Toronto Calgary Vancouver: Carswell, 1990) at 1.153in private land. In Canada, anyone who wishes to possess theownership of petroleum resources has to meet two conditions:(a) to have the mineral right;(b) to have the capacity to extract crude oil from theoil trap in the ground.This difference in the legal practice between Canadaand U.K. has explained the nature of the Canadian oil and gaslaws and explains why that the fundamental legal vehiclegoverning the Canadian petroleum industry is the lease systemrather than the license system.The lease system was the result of private ownership. Atcommon law in Canada, the ownership of petroleum resourceslocated in private land is determined by the rule ofcapture. 176 This rule was an active factor in the formationof Canadian oil and gas law. Originally, the petroleum176. "The rule of capture may be stated as follows:There is no liability for capturing oil and gas that drainsfrom another's lands. The owner of a tract of land acquirestitle to the oil and gas that he produces from wells drilledthereon, though it may be proved that part of such oil and gasmigrated from adjoining lands. The rule of capture is unusualas a rule of law because it is a rule of nonliability. Itgives a mineral owner the shield of positive legal principleas he develops oil and gas resources from his lands." John S.Lowe, Oil and Gas Law. (St. Paul, Minn: West Publishing Co.,1988) at 9.154industry in Canada was governed by private law. 117 Landlordsnot only own the surface right of the land, but also theunderground mineral resources. Since crude oil, a migratorymineral, can flow underneath the land surface, the ownershipof the petroleum resources in the strata does not explicitlybelong to the landlord who has title to land through which oilresources flow. The rule of capture was defined to mean thatthe petroleum resources should be owned by the land owners whocould physically possess it.To obtain the mineral right, an oil developer had tonegotiate or bargain with the landlord to sign a lease. Thelease between an oil developer and a landlord was essentiallythe law governing the petroleum industry on the private landin the early times of Canada. Current Canadian oil and gaslaw is an extension of such private leases.Oil companies must have two kinds of leases in handbefore they are legally permitted to embark upon a prospectiveundertaking. One of them is an oil and gas lease, the otheris a surface lease.177 "Originally, oil and gas was almost entirely aprivate law field. Questions of ownership and rights undervarious industry agreements were the dominant concerns. Morerecently, however, and particularly in the last 15 years,public law issues in oil and gas law have become increasinglyimportant." Supra, note 175, at 2.155The oil and gas lease is not a tenancy lease. It merelyoffers an exclusive right to recover subsurface oilresources. 173 The lease is a critical legal instrument bywhich the landlord grants the mineral right to oil developersto carry out oil activities. If oil and gas are owned insitu, an oil and gas lease will turn oil developers into richmen overnight.Apart from an oil and gas lease, oil companies also needto sign surface leases with the landlords in order to enterthe leased land.In Canada, surface rights and mineral rights areseparately vested in the hands of landowners. 179 The purposeof the statutes which protect the surface rights is to createa new interest for landowners. The operators of the petroleumindustry have to pay compensation to the landowners for theright to enter the land where the mineral might be located.The surface right allows oil companies to use transportationand install the equipment to develop the oil production. To178^"At common law, neither a life tenant nor aremainderman can develop oil and gas." Ibid. at 106.179. "Historically, grants of mineral interests normallycarried with them surface rights to the extent reasonablynecessary to permit the mineral owner to enter, win, work andremove the minerals. However, the western provinces have bystatue removed this surface right facet of the mineralestate." Ibid. at 86.156acquire surface rights, oil companies have to negotiate withlandowners or their agents to reach agreement. The consent ofthe landowners is another indispensable condition for oilcompanies to start their work according to the law. 180 Tohave a surface lease is another important legal procedure foroil companies to go through.Both the oil and gas lease and the surface lease governthe activities of oil companies. Without these legalinstruments, oil companies are not allowed to start theirwork. An oil and gas lease represents the commercial interestbetween the landowner and the oil company. The normalcontents of a lease include the lease term, minimum workcommitment, royalty, rent and etc. Since the creation of thelease is subject to negotiation between the oil company andthe landowners, the terms of a lease can be reached in aflexible way according to the specific situation. Anoutstanding contrast between a Canadian oil and gas lease anda British oil and gas license is that the Canadian leaseoffers more flexibility to cover the commercial interests ofthe relevant parties. The oil and gas lease has become afeature of the Canadian oil and gas law. Petroleum activitiesin Canada are highly commercialized.180 . Ibid. at 90.157In the final analysis, the Canadian petroleum industry isbased on private commercial activities and multiple ownership.The rule of capture reflects the capitalist doctrine of freecompetition. Private land ownership lays down a legalfoundation for the Canadian petroleum industry. These twofactors, capture and ownership, constitute the legal frameworkfor Canadian oil and gas law. The purpose of Canadian oil andgas law is to promote private petroleum activities. The oiland gas lease system is a key to understanding the developmentof the Canadian petroleum industry. It is also the core ofCanadian oil and gas law, reflecting the typical commercialdeal in the capitalist world.B. Legal Regime on the Provincial Crown LandsCrown lands in Canada are owned by the governments ateither the federal or provincial level. Both federal andprovincial statutes have provisions governing the petroleumindustry. In order to have an overall analysis of oil and gaslaw in Canada, a study of statues enacted respectively byrelevant provinces and federal Canada to protect Crowninterests in the development of the petroleum industry will behelpful.158In Canada, the provinces have mining laws that differwidely. A lease offered by a province is called a "CrownLease". Currently, all the western provinces use a two-stagetenure system to govern the oil activities in Crown lands.In the first stage, the oil developers have to apply foran exploration license. When the exploration leads to acommercial discovery, the licensee will be entitled to applyfor an oil and gas lease. The exploration licence onlygrants the license holder the right to conduct the geophysicalexploration for petroleum. The production rights forpetroleum resources are subject to the oil and gas lease.In Alberta, the term for an exploration licence is two tofive years depending upon whether the location applied for isin the plains, northern or foothills area. 181 The term of anoil and gas lease is 5 years. 182In Saskatchewan, the exploration permit is for threeyears but may be extended for another two years, subject tothe approval of the minister responsible. There is anotherexploration permit in Saskatchewan known as the drillingreservation, the term of which is one year. The term of an181. Ibid. at 15.182. Ibid. at 14-7.159oil and gas lease in Saskatchewan is five years. When anexploration permittee applies for an oil and gas lease, he hasto relinquish forty to sixty per cent of permitted areas. 183In British Columbia, geophysical permits are classifiedas Class A. B. C. or D., depending upon the accessibility andthe terrain of the location. The term of a geophysical permitis seven years. A qualified applicant may obtain an oil andgas lease lasting five to ten years. 1114In Manitoba, oil companies have to apply for anexploration reservation, the term of which is three years.The term of an oil and gas lease in Manitoba is five years.Subject to an extension penalty, such a lease may be extendedfor a longer term.As representatives of the Crown interests, ministers ofall the above mentioned provincial governments have the rightto grant exploration licences or oil and gas leases toqualified applicants. In the normal sequence of events, oilcompanies have to first complete their work commitment for theexploration. They will then be able to apply for oil and gasleases.10 . Ibid. at 17-9.1M . Ibid. at 19-21.160The advantage of the two stage tenure system in thewestern provinces in Canada is that it inspires oil companiesto accelerate their work and create more opportunities toincrease revenue to the local government. Generally speaking,the terms for exploration licences or oil and gas leases inthe western provinces are not too long. Such a restrictedtime limit will press oil companies to work hard to look foroil and do their best to produce as much oil as they possibleso as to create more royalties, land rent and tax revenue forthe provincial governments. The entire purpose of theprovincial system governing the petroleum industry in Crownlands is to extract the largest financial gains for thegovernments concerned.C. Legal Regimes on Federal LandThe objective of the Canadian federal government'spetroleum policy is 11 to have energy policies ensuring thebest management of our resources for the general welfare ofCanadians.“ 185 Because of the Arab oil embargo in the 1970s,the Canadian federal government attaches importance to thedevelopment of its own petroleum industry.U15 . Ibid. at 43-4.161Petroleum activity on federal lands is subject to theCanada Petroleum Resources Act (CPRA) and the Oil and GasProduction and Conservation Act (OGPCA). 1  The Canada Oiland Gas Lands Administration (COGLA) is the managing organ forthe federal Crown petroleum interest.Three kinds of tenure are effected in the federal landsto govern the petroleum industry.(a) Exploration Licence (EL):The terms and conditions of an EL may be agreedbetween the minister and the interest owner. Theperiod of an EL may not exceed nine years. 787(b) Significant Discovery Licence (SDL):Subject to the preliminary discovery of the firstexploration well by the EL holder and thedeclaration of the minister, an EL holder may applyfor a SDL. The term of a SDL is not specificallyprovided by the Law.186. Ibid. at 51.187. Ibid. at 54.162(c) Production Licence (PL):When an EL and SDL holder makes a commercialdiscovery, he is entitled to a PL. The grant of aPL is also subject to the declaration by theminister as to the existence of the commercialdiscovery. The term of a PL is twenty-five yearsbut an extension will be granted as long aspetroleum is being produced commercially. 188The EL and SDL permit oil companies to carry out thepetroleum exploration on federal lands. The PL allows an oilcompany to have title to the petroleum produced in thelicensed area.Under OCPCA, a PL and a share therein can only be held bya company incorporated in Canada, a Canadian citizen or apermanent resident of Canada. Canadian ownership of the ownercannot be less than 50 per cent. 189188 . Ibid. At 55.189^Ibid. at 56.163D. East Coast Offshore Oil and Gas DevelopmentThe east coast of Canada lies adjacent to the EuropeanNorth Sea area. The success of the petroleum industry in theNorth Sea stimulated the Canadian government to exploit itsoffshore petroleum resources. However, the long-standingjurisdictional dispute between the federal and provincialgovernments prevented the Canadian government from seizing thebest chance.It was not until the March 1984 that the question ofownership was finally decided by the Supreme Court of Canada,stating that rights over offshore resources were vested in thefederal government .190To manage the Canadian offshore petroleum industry, thefederal government has reached two critical agreements withthe relevant provincial governments, e.g.[1] the Atlantic Accord of 1985 and[2] the Nova Scotia Accord of 1986.1543 . Constane D. Hunt, The Offshore Petroleum Regimes of Canada and Australia (Calgary: Institute of Resources Law,1989) at 11-2.164These two Accords were designed to create managementframeworks between the federal government and the Newfoundlandand between the federal government and Nova Scotiarespectively. The contents of these Accords include(a) the establishment of funds to promote thedevelopment of the offshore petroleum industry, and(b) the distribution of royalties, revenues and taxesaccumulated from the petroleum activities betweenfederal government and the two provinces.Canadian-Newfoundland Offshore Petroleum Board (CNOPB)and the Canadian-Nova Scotia Offshore Petroleum Board (CNSOPB)are two policy-making organizations to be responsible for thepetroleum industry in the Canadian offshore area.The purpose of the Canadian offshore petroleum developingplan was to promote the development of the economy of the eastcoast area and to increase the employment opportunities. TheCanadian federal government and the Provincial governments ofNewfoundland and Nova Scotia all place their hopes in thedevelopment of the offshore petroleum industry. They expectedthat the development of the Canadian offshore petroleumindustry would bring prosperity and economic benefit.165However, the long lasting legal dispute over the sovereigntyof the territorial waters meant that Canada missed the bestopportunity to develop its offshore industry. The downturn inworld oil prices in the middle 1980s caused a recession in theoffshore petroleum industry worldwide. So far there has beenno striking achievement made by the Canadian offshore oilindustry.E. ConclusionIn general, oil and gas law in Canada has the followingfeatures:(a) The lease system is the basic legal vehicle forfacilitating the development of the petroleumindustry.(b) The relevant provinces have independent laws togovern the industry within their territories.(c) The right of the federal government to manage thepetroleum industry is confined to federal land andthe Canadian offshore area.166(d) There are no state run oil companies.In Canada, land titles decide crude oil mineral rights.Since lands are respectively owned by private landlords,provincial governments and the federal government, mineralrights of the petroleum resource vest in the hands of theseland owners. To defend and coordinate the interests ofvarious proprietors related to the petroleum industry, oildevelopers and the Canadian people, the Canadian legislaturesat different levels promulgated a large number of statutes,which complicated Canadian oil and gas laws.There are two significant features in Canadian oil andgas law.First, the prevailing lease system in Canada covers thecommercial interest between oil companies and landlords. Inthe Canadian petroleum industry, every petroleum leaserepresents a concrete law governing a related petroleumdevelopment project. Since the petroleum lease is establishedthrough negotiation, the lease holders have tried their bestto protect their interests in the lease. Besides, theCanadian government has interfered little with privatecommercial interest in the petroleum industry. The practiceof the oil and gas lease system exhibits the flexibility of167the Canadian oil and gas law.Second, the Canadian government uses the federal andprovincial laws to maintain the public interest. m TheCanadian oil and gas law emphasizes environmental protection,tax income and other benefits relevant to the public in thedevelopment of its petroleum industry. However, because ofthe two levels of legislative power in Canada, the complicatedlegal procedure, as well as the substantive law remains to bean obstruction to the efficient development of the petroleumindustry. As a result, Canadian oil and gas law does notsound appealing to foreign investors. 192191 . For example, the rule of capture encouraged oildevelopers to exploit the oil resources wildly and resulted inthe damage to the Canadian ecological environment and thenatural structure of the oil field. To balance the public andprivate interests regarding the petroleum industry, theCanadian legislatures promulgated regulations to restrict therule of capture in term of well space, pooling, welllicensing, production rate and so on. In this way, theCanadian petroleum industry will be developed to the advantageof the public. See supra, note 175 at 199-207.The territorial disputes over the Canadian offshoreareas between the federal government and the coastal provincesare examples of the inefficiency of the Canadian petroleumindustry. 11 ....the uncertain status in Canadian law ofintergovernmental agreements means that the provisions ofAccords are unlikely, in law, to prevent the federalgovernment from amending the enabling statues withoutconsulting the two provinces.... The issue of jurisdictionover territorial sea off Newfoundland is unresolved in theface of dormant appeal of the Newfoundland Reference; afederal decision to alter either regime on its own wouldundoubtedly bring the legal issues to fore again....Prior tothe Accords, the existence of two sets of governinglegislation administered by two levels of government sometimescreated an almost untenable situation for offshore operators."Supra, note 190 at 43-57.192168Canada has vast land and huge resources with a relativelysmall population and its economic environment is entirelydifferent from that of China. It is not as anxious as Chinato absorb foreign investment to develop the petroleum industryso as to enable the economy to flourish. The petroleum policyof the Canadian government demonstrates a lack of enthusiasmin attracting foreign investment to develop its petroleumindustry. Current Canadian oil and gas law seems to favourdomestic oil enterprises to exploit its petroleum resources.Ill. Legal Comparisons of Practices in the Offshore PetroleumIndustryA. Précis of China's Offshore Petroleum LawChina's offshore petroleum industry is a domain whereforeign oil companies function as top players. The major taskof China's offshore petroleum law and policy is to control thecooperation between China and foreign oil companies.China's offshore petroleum law and policy are marked byseveral outstanding features:169(a) Legal frame:Foreign Investment Enterprise and ForeignEnterprise Tax Law of the PRC (FIEFETL) 193 andRegulations of the PRC on the Exploration ofOffshore Petroleum Resources in Cooperation withForeign Enterprises (Regulations)194 are twostatutes directly governing China's offshorepetroleum industry.China National Offshore Oil Corporation, a statecompany, has an exclusive right to run China'soffshore petroleum industry.A model petroleum contract formulated by ChinaNational Offshore Oil Corporation is a concretelegal instrument binding the operation of foreignoil companies working in offshore China.(b) Legal features:There are three main legal features: risky foreigninvestments, the oil production sharing model, and10 . Supra, note 73.194 . Supra, note 57.170joint management.Foreign investments in offshore China for theexploitation of petroleum resources are riskyventures. The investors will bear the risksassociated with exploration.With regards to the oil production sharing model,when a commercial oil field is discovered, theChinese government is entitled to participate in upto 51% of shares.The Model petroleum contract calls for theestablishment of a Joint Management Commission(JMC) composed of representatives from CNOOC andthe foreign company. The JMC will be chaired by aCNOOC representative and has the power to determinethe commercial discovery of a oil field, approvemajor expenditures and decide other importantissues. 195(c) Other legal regulations:.The exploration term for foreign petroleumcontract holders will be seven years, production195. See supra, note 150.171term will be fifteen years and the entire contractterm will be no more than thirty years.Foreign oil companies are required to transfer toChina the advanced technology which was used inoffshore petroleum activities in China and givepreference to the utilization of Chineseengineering designs, Chinese made facilities andthe Chinese services.Foreign oil companies will propose an "X" factor,based on which the profits produced from thecontracted field will be split between CNOOC andthe foreign contractors. 196196. The formula to split the oil output in China'soffshore petroleum industry between foreign oil companies andthe Chinese side is rather difficult. Among the output, 17.5%goes to the government (royalty and tax), 50% goes to the costrecovery. The remaining 32.5% will be divided into twoportions by an "X" factor. One portion goes to CNOOC directlyas share oil. Another portion will be split between CNOOC andforeign contractors by 51% and 49% respectively. Thenegotiation on the "X" factor is a crucial condition toentering the petroleum contract. See supra, note 122, article13.172B. Comparison of Petroleum LawsChina is a socialist country with a long unique legaltradition. The laws of China are different in nature fromthose of the U.K. and Canada. Nevertheless, to narrow theeconomic gap between China and these countries, the Chinesegovernment must understand the western legal tradition andlearn from their advanced experience in legal practice. Abrief comparative study of laws governing the development ofthe offshore petroleum industry in the U.K., Canada and Chinamight be able to extend constructive suggestions to theChinese government in developing its own offshore petroleumlaws and policy.The characteristics of the development of the Chineseeconomy are similar in many respects to those of other thirdworld countries. Therefore, the Chinese government adoptedthe model comparable to those of the developing oil producingcountries to tap its own petroleum resources. The legislativepurpose of China's offshore petroleum law is to encourageforeign oil companies to invest in offshore petroleum industryso as to be able to obtain capital and technology. SinceChina's offshore petroleum industry was late to develop, theChinese government lacked the necessary experience to manage173the industry. Compared to the U.K. and Canada, China wasrelatively unsophisticated in establishing its offshorepetroleum law. It is not enough for China to simply haveforeign investment and advanced technology introduced todevelop its offshore petroleum industry. The Chinesegovernment also needs to grasp the knowledge of legalpractices applied in the development of offshore petroleumindustry in all the developed countries including the U.K. andCanada, which will accelerate the speed of modernization ofChina's offshore petroleum industry.There are abundant similarities between the oil and gaslaw in the U.K. and offshore China. The fundamental reasonfor the similarities is that the titles of the offshorepetroleum resources in these two countries are both owned bythe state.(1) Both the statutes enacted in the U.K. and Chinaunderscore the country's respective sovereigntyover their petroleum resources.(2) The governments of both the U.K. and Chinadirectly control the exploitation of theirrespective offshore petroleum resources.^InBritain, foreign oil companies are required toapply for licenses from the government in order to174acquire blocks in offshore area. In China, foreignoil companies must enter into model petroleumcontracts in order to obtain the right to operatein the offshore areas. The petroleum license ofthe U.K. and the Chinese model petroleum contractserve the same purpose, namely, they govern thepetroleum activities of foreign oil companies.There are certain fundamental differences between oil andgas laws in the U.K. and China. The most conspicuousdifference is that the British government's control in theoffshore petroleum industry is far more flexible than that ofthe Chinese government. British petroleum law aims toincrease government revenue from the petroleum industry.China's offshore petroleum law aims to enhance the entirelevel of China's economy and asks for foreign investors tomake as much of a contribution as possible. This contrastbetween China and the U.K. demonstrates the differentcharacteristics of their social economic structures. As asocialist country, the Chinese government exercises a planningeconomy. Traditional Chinese politics translated into theestablishment of China's comparatively rigid offshorepetroleum law and policy.Canadian and Chinese petroleum laws belong to sharplydifferent systems. The two countries share few commonalities175in their respective legal practice with regards to thepetroleum industry. In Canada, the basic legal instrumentsgoverning the activities of oil companies are leases, whichoffer oil developers leverage to negotiate with petroleumresource owners. Both at common law and in accordance withthe statutes of Canada, there are much fewer restrictions andrequirements for foreign oil companies than in China. TheCanadian federal government attaches much importance to theinterests of the local people. Through the law and policygoverning its offshore petroleum industry, the Canadiangovernment has made efforts to increase local employmentopportunities in the industry so as to prosper the localeconomy, which is a worthy example for the Chinese government.In China, all the benefits of the offshore petroleum industrybelong exclusively to the central government. The Chinesegovernment should take more of the provincial and localeconomic interests into account. However, in terms of thegeneral public interest such as environmental and resourcesprotection, both the Canadian and Chinese governments haveshown due concerns respectively in their oil and gas laws.There is one weakness in the establishment of the oil and gaslaw in Canada. Since both provincial and federal governmentsin Canada have the legislative right, there is much disorderwith regards to jurisdiction and applicability of laws.176The common law and statutes of Canada governing thepetroleum industry bear close semblance to those of theU.S.A.. Large portions of the Canadian petroleum laws wasenacted to cover litigation arising from legal interests.Foreign investors who intend to exploit petroleum resources inCanada must take serious steps to avoid pitfalls. In China,the likelihood of comparable litigation is far less. Thetarget of China's offshore petroleum law is clearly focused onthe immediate concerns of foreign petroleum-exploitingcompanies and the Chinese government. Compared to the oil andgas law of Canada, Chinese offshore petroleum law is moreefficient in attracting investment from foreign oil companies.In summation, the comparison of the legal practices inthe U.K., Canada and China regarding the petroleum industryshows that the Chinese government has a long way to go inimproving its offshore petroleum law and policy. Being asocialist country, China has long been used to relying onadministrative orders to run its petroleum industry, thusaccounting for the backward state of its economy. 197 This197 . ” .... Another notable example is the review of theaccident of Bohai No2. drilling rig. The accident happened inNovember 25, 1979. A drilling rig named Bohai No 2 which wasowned by the Offshore Oil Exploration Bureau of the Ministryof the Petroleum Industry capsized in the Bohai Gulf. Seventytwo crew members on the rig were killed. The economic lossarising directly from the accident was 37.35 million ChineseYuan. The reason of this accident was that the leaders of theMinistry of Petroleum Industry ignored the regulations and177ideological position affected the establishment of China'soffshore petroleum law. In China's offshore petroleumindustry, the government exercises strict restrictions andfrequent interferences even in minute matters. As well, thelegislation of China's offshore petroleum law is based on theself reliance, which reflects a negative political stand inChina. The petroleum laws of the U.K. and Canada are centredmainly on economic interests. These laws pay less attentionto detail. It is in China's best interest that the Chinesegovernment should prioritize economic interests in theformulation of its offshore petroleum law and policy.Through the comparative study of oil and gas laws in theU.K. and Canada a common point can be discovered. Theeconomic interests in the petroleum industry are the focus offorcefully issue orders to the operation.... According to theuncompleted statistics, between 1975 and 1979 before theaccident of Bohai No.2, there were 1043 accidents in theworking scope of the Offshore Oil Exploration Bureau. Morethan thirty accidents were serious and major, killing 105people and heavily injuring 114. The Chinese procuratorialauthorities never paid any attention to those accidents"(Before 1982, there was no China National Offshore OilCorporation. Offshore petroleum industry then was in thecharge of Offshore Oil Exploration Bureau). Zhang Xin, ZhongGuo Fa Zhi De Xian Zhuang Yu Gai Ge  (China's Legal System andIts Reform) (Hongkong: Mingbao Pressing House, 1988) at 202(my translation)." The legal uncertainty is in fact a reflection ofpolicy fluctuations which are inherent to Chinese politics.There is no separation of legislative, judicial and executivepowers in China, nor a mechanism of "check and balance" tokeep the government machinery healthy and sound. In China,the Communist Party controls the state machinery and wieldsabsolute leadership over all spheres of government activities.Supra, note 116 at 135.178oil and gas legislation in these countries. In the U.K., itis apparent that the British Parliament continually revisesits oil and gas law in accordance with the current situationof its petroleum economy. In Canada, despite the complicatedlegal frame work, the profit-oriented petroleum lease systemstimulates the development of the petroleum industry.Economic interests remain the essence of the petroleum laws inboth the U.K. and Canada and continue to determine them.In the process of China's economic reform the Chinesegovernment cannot avoid emulating the western countries in thearea of industrialization. Very soon, the economic and legalproblems encountered by western countries will be met by theChinese government. At present, the Chinese government isfacing the task of re-examining its laws and policies. Itwill be a shortcut for the Chinese government in thisexamination to adopt the useful parts of western legalpractices into Chinese laws.179Chapter FiveConcluding RemarksI. Suggested Reform for China's Offshore Petroleum Law andPolicyFor a long period of time, the Chinese government'sgeneral policy was founded on the principle of self-reliance,and this dominated policy on offshore petroleum law. Based onpast performance, the Chinese government might have appearedto have been opposed to the profound involvement of foreignoil companies in its oil and gas industry. However, theoffshore petroleum industry has been considered an exception.The development of this industry requires huge investment andrelies on advanced technology; the Chinese government, unableto supply either, was therefore dependent on external factors.Without foreign investment, China could not have developed itsoffshore petroleum industry. As far as offshore petroleum lawand policy is concerned, the legislative principle of thegovernment is to utilise foreign capital and expertise. TheChinese government hoped that the development of its offshorepetroleum industry could give a huge impetus to the180development of the economy. Having been isolated from theoutside world for over thirty years 198, the Chinesegovernment lacks the legal experience to cooperate withforeign countries to develop its industry. The emerging legalregime for offshore petroleum needed to be tested in practiceas circumstance changed and amended to meet the developmentalneeds of this industry.The following proposals are therefore made.(a) Revision of the basic government policy:Shifting government stand from self-reliance to amore flexible policy. The self-reliance policy is aconservative policy, designed for an isolatedagricultural country. This policy hinders thefurther progress of China's offshore petroleumindustry and constitutes a hindrance to theabsorption of necessary foreign assistance.China's offshore petroleum resources are so large,it is impossible to implement a self-reliance198 . The People's Republic of China was founded in 1949.Since then, the Chinese government has had no significantcontact with the western countries. China promulgated itsregulations on the cooperation with foreign enterprises in theexploitation of offshore petroleum resources in 1982, whichsymbolised China's formal invitation to foreign enterprises toits offshore petroleum industry, that is, over thirty yearshad passed.181policy in order to exploit them. The effectiveexploration of these resources would necessarilycall for the attraction of foreign capital,technology and experience. To modernize itsoffshore petroleum industry, China needs extensivecooperation with the rest of the world in manyaspects. The more China's offshore petroleumindustry links with international petroleumindustries, the narrower the economic gap betweenChina and the industrialised countries will be. Onthis point, China should study the offshorepetroleum policy of the British government.(b) Reformation of the pattern of cooperation withforeign oil companies:So far,^China has one model petroleumcontract,which limits the cooperative patternbetween China and foreign oil companies. China'smodel petroleum contract was designed to invitemajor international oil companies and demands arelatively heavy work commitment. The interestedforeign oil companies have little choice but toenter into such petroleum contracts if they wantto develop the offshore petroleum industry inChina. China could take more flexible measures182to encourage more foreign^investors into itsoffshore petroleum industry.^China NationalOffshore Oil Corporation might prepare differentvarieties of model contracts for^interestedforeign oil companies. In the new modelpetroleum contracts, foreign oil companies mightbe allowed to choose a proper pattern according totheir capacities to cooperate with China. In thisway, not only large international oil companiesbut smaller companies too could come to work inChina's offshore petroleum industry.(c) Underscoring the economic interests:To a certain extent, China's model petroleumcontract lacks flexibility. Since the leadingobjective of China's offshore petroleum law is topromote the country's economic interests, China'smodel petroleum contract might be modified in away to underscore such a goal. China's modelpetroleum contract combines certaincharacteristics of both the British petroleumlicense and the Canadian petroleum lease. However,legal instruments for oil in the U.K. and Canadahighlight the economic interests of the state.China might increase the provisions in its model183petroleum contract to pay more attention to itseconomic interest and reduce some concerns of lessimportance. This will be a way to turn China'smodel petroleum contract into a more effective andcommercial one.(d) Taking consideration of provincial interests:Under the present political power structure, thenational offshore petroleum industry is under thedirect control of the central government. All therevenue which derives from the industry thereforebenefits the central government and the relevantprovincial governments have no share in it. If theChinese central government allows provincialgovernments to participate in the development ofits offshore petroleum industry and allows them toshare the benefits, the development of China'soffshore petroleum industry will become a commonconcern of the governments at two levels and gainmore political support. The participation ofChina's provincial governments in the offshorepetroleum industry may increase local income andemployment opportunities, which will also promoteChina's economic reform as a whole. The centralChinese government might establish a law to allow184provincial governments to form oil companies andbid for the concessions in competition againstforeign oil companies. The bidding provincial oilcompanies could therefore enjoy more rights thanthe foreign ones. They might issue stocks orsecurities and transfer the investment risk andbenefit to shareholders. After having had the co-operation with foreign oil companies for more thanten years, China has mastered the technology todevelop its offshore petroleum industry. WhatChina currently mostly needs is financialinvestment. The financial participation ofprovincial governments might provide a new sourceof capital. At present, China's coastal provincessuch as Guangdong Province and Fujian Province havestrong economies. It would therefore not bedifficult for those provincial governments to raisefunds to invest in China's offshore petroleumindustry. The policy initiative, however, remainsin the hands of the central Chinese government. Ifthe provincial governments could be mobilised bythe central Chinese government throughlegislation, the provincial investments in thedevelopment of the offshore petroleum industrycould become significant constructive factors.185II. ConclusionWithout a solid economic base, China will be unable toachieve an influential and stable political power base withinthe world community. To catch up with the economic level ofthe developed countries the Chinese government is endeavouringto industrialize China. Since the late 1970's, the Chinesegovernment has been pursuing an extensive economic reformprogramme. The reform of China's economy is bound to evokecorresponding reforms within Chinese legal system.In China's current reformed economy, the development ofChina's offshore petroleum industry continues to attractprimary attention. During the last decade, the first trancheof large scale foreign investments in the Chinese offshorepetroleum industry was made. Both the Chinese government andforeign investors are anxiously expecting the successfuloutcome of these efforts. However, that success depends to agreat extent on the existence and administration of aneffective offshore petroleum law; this is as important asadequate financial investment and advanced technology.To promote the development of China's offshore petroleumindustry, the Chinese government has to seriously review its186past experiences and incorporate the beneficial aspects offoreign legal practices. The constantly changing new economicsituation always requires that the Chinese government reviewits offshore petroleum law from time to time. A soundoffshore petroleum law is the foundation for a brilliantfuture for the development of China's offshore petroleumindustry and will result in long-lasting benefit for theeconomy.187Bibliography1. 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